TGIF 9 June 2023 – Australian schemes done quickly, inexpensively and efficiently

In this week’s TGIF, we consider the recent case of Vita Group Ltd, in the matter of Vita Group Ltd [2023] FCA 400, in which his Honour Justice Jackman outlined practical changes to the way schemes of arrangement should be implemented through the Federal Court to make them simpler, faster and more cost efficient. 

Key takeaways

• On the initiative of Justice Jackman, the Federal Court of Australia (the Court) is simplifying the scheme of arrangement process by clearing away more than a decade of encrusted practice and case law.
  
  
• A new practice note is in the making, which is expected to draw on observations made by Jackman J in Vita Group Ltd, in the matter of Vita Group Ltd [2023] FCA 400 (Vita Group) relating to improving the efficiency of scheme of arrangement applications the Court.
  
  
• The changes also promise to help make the process more accessible and streamlined not only for M&A but also for restructuring a company’s debts, which has been an Australian reform objective for the last couple of years taking inspiration from reforms in Singapore and the UK.

Schemes of arrangement

Schemes of arrangement are a familiar part of Australian M&A transactions and, less frequently, debt restructuring strategies. Over the years, a large body of law and practice has grown around the process, reducing its efficiency. 

Various reforms to the scheme process have been proposed, particularly over the last couple of years, focused around papers released by Treasury on helping companies restructure (2021)[1] and on improving the interplay between courts and the Takeovers Panel in (2022).[2] These were followed, in September 2022, by the general corporate insolvency inquiry.

This week’s TGIF case concerns a scheme application, by Vita Group Ltd (the Company), which was considered by Justice Jackman who was recently appointed to the Federal Court of Australia in February 2023.

Whilst the proposed scheme was largely conventional, Jackman J took the opportunity in a case management hearing in March to outline how the parties might approach the first and second court hearings. The transcript of that hearing has since been widely circulated.

Jackman J has formalised the views he shared during the case management hearing in the Vita Group judgment. His Honour’s comments were directed at:

• addressing the considerable criticism in recent years from practitioners involved in corporate control transactions in Australia, particularly in relation to the significant volume of evidence and other materials required to be prepared and delivered to the Court; and
  
  
• upholding the Court’s obligation under section 37M of the Federal Court of Australia Act 1976 (Cth) – the ‘overarching purpose’ to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible.  His Honour emphasised that this principle was equally applicable to scheme of arrangement applications.

A fresh start?

The effect of the case management hearing was that, in the words of Jackman J, “the legal representatives for Vita and the Bidder … made a fresh start to the approach taken to the preparation of evidence for members’ schemes of arrangement”.

This declaration of a fresh start was prompted by observations by Jackman J that:

• the practice of providing a lengthy exhibit to a solicitor’s affidavit containing all the correspondence between a plaintiff’s solicitors and ASIC concerning the draft explanatory statement is wasteful and any necessary disclosures should be made by way of written or oral submissions;
  
  
• given that any independent expert report is not an opinion under the Evidence Act 1995 (Cth), there is no need for a separate affidavit from the independent expert verifying the report. Jackman J noted the position may be different in some creditors’ schemes where the expert’s report is also used to prove impending insolvency and the likelihood of solvency post-implementation;
  
  
• the short formal affidavit to accompany an originating process need not go beyond annexing a recent ASIC search, if so directed by the Court;
  
  
• rule 3.2 of the Federal Court (Corporations) Rules 2000 (Cth) does not require an affidavit from both a proposed chairperson and alternative chairperson and that rule may be satisfied by either the main affidavit or in a separate affidavit relied upon at the first court hearing;
  
  
• a more appropriate means of publishing the notice of hearing is by way of ASX announcement or, for unlisted companies, on a company’s website, rather than publishing such a notice in an Australian newspaper;
  
  
• it is generally sufficient for the main affidavit to indicate in a single sentence the percentage value of any break fee payable by reference to the value of the company’s shares;
  
  
• nothing in Part 5.1 of the Corporations Act 2001 (Cth) requires a scheme company to seek the Court’s approval for its communications with shareholders and others between the first court hearing and the scheme meeting unless a supplementary explanatory statement is required. This overturns a line of authorities that started with Re Centro Retail Ltd [2011] NSWSC 1321 in which Barrett J had held that the Court should approve any proposal to shareholders for later supplementation of an approved explanatory statement; and
  
  
• the orders made during the first court hearing did not require the plaintiff to give evidence of the plan for dispatch of the explanatory statement or other materials in circumstances where these documents were approved at the first court hearing. 

Despite these observations, Jackman J noted that, in other cases, there may well be the need for further evidence in order for a plaintiff to discharge its responsibility to bring to the Court’s attention all matters relevant to its discretion in granting the orders sought.

Where to next?

The decision signals what is likely to be the beginning of changes to scheme of arrangement applications making them simpler, faster and more cost efficient.

It is possible that the changes will alleviate the need for more significant reforms, which may have taken inspiration reforms in Singapore and the UK, or any adjustments to the Takeovers Panel’s role. However, if the changes result in a greater interest in the use of schemes for restructuring purposes, this may add impetus to changes targeted at making creditors’ schemes easier to implement.

We anticipate any changes will gain further traction with the introduction of a new practice note concerning scheme of arrangement applications, which has been foreshadowed by the Court and which will almost certainly draw on observations made by Jackman J in Vita Group.