Courts grant interim relief to Boart Longyear in Australia and the US in connection with its proposed schemes

By public announcement to the Australian Stock Exchange dated 3 April 2017, Boart informed the market of its intention to propose two interdependent creditors' schemes of arrangement (Schemes) as part of a series of transactions designed to de-lever the company and provide it with additional funding and certainty going forward (Announcement).

In that context, Boart also announced that it had entered into a Restructuring Support Agreement with a significant number of the affected creditors who agreed to support the Schemes (RSA).

The application for an order pursuant to s 411(16) was heard before the application for an order convening the scheme meetings had been filed and before the scheme documents were in final form.  Nevertheless, Boart sought protection under s411(16) of the Corporations Act 2001 (Cth) (the Act) to prevent any creditor from commencing or continuing proceedings against the company until further order.  Relevantly, Boart had failed to pay interest of $US 20 million to its bondholders which was due on 1 April 2017 and was concerned about the prospect of individual creditor action in respect of the unpaid interest. 

Application of s411(16) of the Act considered and clarified

Section 411(16) is in the following terms:

[Court may restrain further proceedings]

Where….a compromise or arrangement has been proposed between the body and its creditors or any class of them, the Court may, in addition to exercising any of its other powers, on the application in a summary way of the body or of any member or creditor of the body, restrain further proceedings in any action or other civil proceeding against the body except by leave of the Court and subject to such terms as the Court imposes.

Black J clarified a number of important aspects as to the operation of s 411(16) which had been the subject of earlier conflicting decisions.

Wider view of "proceedings" confirmed

Firstly, his Honour confirmed that the phrase "further proceedings" in s 411(16) does not limit the relief to proceedings against the company which have already been commenced but extends to all proceedings whether commenced or not.  In doing so, his Honour followed the decision of McLure J in Re Glencore Nickel Pty Ltd [2003] WASC 18 and noted that such a view was consistent with the language of the section, the purpose of section 411(16) in promoting the orderly and efficient consideration of schemes and the trend in modern international insolvency practice to recognise the risks of multiple proceedings which do not involve any form of collective resolution of claims against a company that is in financial difficulty.

Requirement that a compromise or arrangement had been "proposed"

Secondly, his Honour clarified that the section does not require that all steps of the scheme have been completed before relief can be granted.  Rather, the fact that the Announcement (which was detailed and outlined the substance of the proposed schemes) had been made, the draft scheme documents had been provided to ASIC for review and it was readily possible to determine the details of the schemes from the explanatory materials was sufficient to meet the requirement of the section that a scheme had been proposed.

Matters relevant to the discretion of the Court

In deciding to grant the relief sought, his Honour had regard to the following matters:

• The risk of preferential payments
• The potential for frustration of the scheme procedure brought about by individual creditor action leading to company failure before creditors could consider the schemes
• The allegation made by a particular noteholder that Boart was engaging in insolvent trading
• Evidence of substantial creditor support for the Schemes as indicated by the RSA
• The potential for a better return to creditors under the Schemes than upon a winding up.

Terms of order made

In granting the relief, his Honour made an order restraining proceedings against Boart (whether or not such action or proceedings has already been commenced) without the leave of the Court and subject to such terms as the Court imposes, with liberty to apply granted to any interested party.

Authorisation of foreign representative and ancillary Chapter 15 Relief granted

Since Boart has substantial assets and operations in the US, the debt is denominated in US dollars and the relevant holders of that debt are US based, it was determined that in order for the interim relief to be effective, it was necessary for cross border recognition of the relief order to be obtained.

In the Australian proceedings, Black J also ordered that the Boart general counsel and company secretary be authorised as a "foreign representative" of proceedings pursuant to the terms of the Cross Border Insolvency Act 2008 (Cth) for the purposes of making an application under Chapter 15 of the US Bankruptcy Code to recognise the relief provided in Australia and to extend it to certain US based subsidiaries of Boart which were guarantors of the notes issued by it.

That relief was successfully obtained in New York a short time after the Australian orders were made.

Impact going forward and need for reform to creditor schemes legislation

This decision is a very useful precedent for companies which are considering using a creditors scheme of arrangement process to restructure their affairs.  Comfort can be obtained that, notwithstanding the relatively long lead time necessary to obtain an outcome under a scheme, interim protection from creditors is available in certain circumstances and that protection will generally be recognised by the courts of other countries under Model Law principles.

Notwithstanding its value as a precedent, the decision will not stop calls for law reform to Australian creditor schemes legislation to introduce an automatic stay to protect companies which are proposing creditors' schemes of arrangement.  This is the approach recently adopted by Singapore in introducing its modified scheme of arrangement procedure.

Authors: James Marshall and Camilla Clemente