Australia: Channel Nine and potential insolvency: still the one

On 17 October 2012, Nine Entertainment announced that it had reached an agreement with representatives of its senior and junior lenders with respect to a restructuring of its financing arrangements. Prior to the announcement, recent business press had been dominated by reports of Nine Entertainment's potential insolvency.

From the information at hand it appears that, but for the agreement of the three major stakeholders (senior lenders, junior lenders and the company itself), an insolvency appointment would have been the likely outcome. Given the protracted negotiations, it is timely to consider what influenced the parties' decision-making, as well as what might have occurred if the parties failed to reach an agreement.


Over the past few years, Nine Entertainment's original financiers sold their debt to hedge funds. Oaktree Capital and Apollo Global Management (both international hedge funds) are now calling the shots on behalf of the senior lenders.

The junior (or mezzanine) lenders are led by Goldman Sachs.

It was reported that recent negotiations reached a stalemate as the senior lenders refused to agree to a restructure that would allow the junior lenders to share in the equity of the company as part of a proposed debt for equity swap. The senior lenders argued that as the junior debt was out of the money (on the seniors' valuations) they had no right to share in the equity. The junior lenders disagreed and were willing to accept a proposal brokered with the company's owners (CVC Asia Pacific) allowing them to take a $150 million equity stake as part of the debt for equity swap (the face value of the junior debt is $1 billion).

Ultimately, a concession by the senior lenders offering the junior lenders a reported $100 million equity stake was enough to get a deal done. It now seems that the restructure will be effected through a Scheme of Arrangement.

Given their debt ranks first, there was little doubt that the senior lenders were in a superior bargaining position. Despite this, according to the reports, the junior lenders did have some leverage based on an assumption that, as part of any Scheme required to effect the restructure, junior lender consent would be required. It would seem likely that the junior lenders' position was backed by valuations of the company obtained by them, providing that the value of the company breaks in the mezzanine debt (ie. their debt is in the money).

Implementation of a scheme of arrangement

A Scheme is a procedure under the Corporations Act 2001 (Cth) allowing a company to come to a binding arrangement with its creditors, members or both in order to implement a restructure of the company. It is a court-driven process requiring court approval at two stages.

The most recent high-profile creditors' Scheme was the restructure of the Centro Group.

Under a creditors' Scheme, the company's obligations to creditors are deferred, rearranged or extinguished pursuant to the terms of the Scheme. A feature is that, if approved, the Scheme is binding on all relevant creditors even if individual creditors vote against the proposal.

There are various steps required in order to implement a Scheme as set out in section 411 of the Act. These can be summarised as follows:

  1. A proposal must be developed and an explanatory statement prepared. At this point the applicant must assign creditors into particular classes.
  2. An application is made to court for an order convening the meetings of creditors to consider the Scheme.
  3. Once the necessary majority of creditors have approved the Scheme (in each relevant class) an application is made to court to approve the Scheme (section 411(6) of the Act).
  4. The Scheme becomes binding on all parties to it when the court orders the Scheme be approved (section 411(4) of the Act).

Implicit in the approval process of a Scheme, is the requirement that a special resolution in favour of the Scheme is passed by each "class" of creditors of the company (see sections 411(1) and 411(4) of the Act). The term "class" is not defined in the Act, however it has been the subject of significant judicial interpretation. It has been held that "we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest" (Sovereign Life Assurance Co v Dodd [1892] 2 QB 573, 583). Further, in Re Bond Corporation Holdings Ltd (1991) 5 ACSR 304, Justice Owen noted that (at 316):

"in determining classes of creditors, the court must balance the danger of a compromise being forced on dissenting creditors by a majority, against the danger of a minority of creditors having the power to veto the scheme. The court must be satisfied that the result of a meeting is likely to reflect properly the views of the creditors concerned. In approaching its task, the court must identify the legal character of the rights and obligations of the creditors against the company and must assess the way in which those rights and obligations will be affected in the implementation of the scheme. Creditors whose legal rights and obligations (so understood) are so dissimilar to those of other creditors that it would be impossible for them to consult together with a view to their common interest must be treated as a separate class."

More recently Justice Finkelstein in Re Opes Prime Stockbroking Ltd (2009) 258 ALR 362, considered the relevant authorities (including Sovereign) and held (at 380 [64]) that "there is a distinction between a creditor's interest and his rights. It is the difference in rights, not interests, that are relevant to determining whether or not separate classes exist, and it is the extent of the difference that will determine whether separate classes are required."

Thus, on the face of the above authorities, senior and junior lenders of Nine Entertainment would be considered to be separate classes of creditors for the purpose of voting on a Scheme.

Based on this assumption, it is likely that a Scheme will require the approval of the junior lenders by special resolution: that is, a majority of the junior lenders who hold at least 75% of the junior debt must vote in favour of it. Without the junior lenders' support for the debt for equity swap the senior lenders would have been required to prove to a court that the junior lenders have no economic interest in the company in order to ensure the Scheme was approved (see below).

What would have happened if the parties could not agree?

If the parties did not reach an agreement regarding the debt for equity swap it would appear that the directors of Nine Entertainment would have had no choice but to appoint an administrator to the company pursuant to section 436A of the Act given the looming debt maturity. An appointment would have been made by the directors of the company in order to potentially shield them from trading the company while insolvent and therefore minimise the risk of personal liability under section 588G of the Act. If the directors had gone down that path it would likely have prompted the senior lenders to appoint a receiver.

Alternatively, the secured lenders could have stuck to their guns, rolled the dice and attempted to get a Scheme up in spite of the junior lenders' protestations.

There would have been scope for the senior lenders to try and effect a restructure through a deed of company arrangement (DOCA). The junior creditors (as secured creditors) would, however, only be bound by a DOCA if they voted in favour of it. If the DOCA offered no upside for the junior lenders, it can be assumed that they would not have voted in favour of it, meaning their debt in the company would not have been extinguished and would remain attached to the company even after it came out of the DOCA.

That said, there is often scope in well drafted intercreditor agreements for a majority of creditors to approve the release of security as part of an enforcement. In circumstances where it is reported that Oaktree Capital and Apollo Global Management and Goldman Sachs control 75% and 80% of the senior and junior debt respectively, they could have conceivably approved a release of security so as to allow a DOCA to be utilised to compromise the senior and junior's rights.

Could the senior lenders get a Scheme approved without junior lender consent?

Much has been said regarding the destruction of value that may have stemmed from the insolvency and/or forced sale of Nine Entertainment. Further, questions have been asked regarding the ability of Nine Entertainment to maintain certain contracts (including lucrative sporting broadcast rights) which could be susceptible to termination upon insolvency. Accordingly, a Scheme appears to be a viable option (assuming it will not trigger termination rights).

While it is apparent that that the junior lenders will support a Scheme, it is arguable that a Scheme could get up without junior lender approval, if the senior lenders are able to convince a court that the junior lenders' debt is out of the money.

In re Tea Corporation Ltd [1904] 1 Ch 12 held that the dissent of ordinary shareholders would not stop a Scheme being sanctioned because although those shareholders had a technical interest as shareholders, they had no "economic interest" in the company, because the assets were insufficient to generate a return to them in the liquidation of the company.

This reasoning has been followed in subsequent UK and Australian cases.

Obiter comments by the UK High Court in In re MyTravel Group Plc [2004] EWHC 2741 (Ch) made reference to a "notional" winding up as the basis for assessing the economic interest and therefore the right of certain creditors to be consulted in relation to a Scheme. In MyTravel this involved one group of creditors (bondholders) being excluded from the voting process of a Scheme altogether as they stood to receive nothing if the alternative to the scheme occurred: a winding up.

In the matter of Bluebrook Ltd and others [2009] EWJC 2114 (Ch) (IMO Car Wash) considered the rights of senior and mezzanine lenders with respect to Schemes involving the IMO Group. The Schemes involved transferring the assets of the group to a new company with some of the senior debt novated across. The mezzanine debt was to remain with the old group on the justification that it was out of the money. Accordingly, the mezzanine lenders were not required to be party to the Schemes as their legal rights were not impacted by the Schemes.

The mezzanine lenders challenged the Schemes on the basis of unfairness; that is, on their valuations, value broke within the mezzanine debt so that they did have an economic interest.

After an assessment of the valuations put forward by the senior and mezzanine lenders, the court accepted the senior lenders' valuation (which valued the company according to its present value on a going concern basis) and found that, given the mezzanine lenders had no economic interest in the group, the overall restructuring (via the Schemes) was not unfair. While IMO Car Wash did not consider a situation where a class of creditors voted against a Scheme, the principles enunciated by it, particularly as regards a party's economic interest, are compelling.

In the Australian context, Justice Finkelstein in Opes cited Tea Corporation in consideration of a restructure involving a Scheme. The restructure involved the transfer of assets and liabilities of several companies to another. It was held that if the restructure affected members of the transferring company by diminishing the value of their interest in the company, their consent to the Scheme would be required. However, because the members had no economic interest in the restructure (given the company was insolvent) such consent was not required.

Following the reasoning of the above cases, junior lenders that wish to challenge any Scheme on the ground of fairness must show that they have an economic interest in the company in order to be successful. Whether that economic interest is to be assessed using a notional winding up as the basis for assessment (as in MyTravel) or through some other valuation method remains to be seen.

Whether or not the above principles would be applied in the context of Nine Entertainment should the junior creditors not consent to a Scheme is yet to be determined. However, if the senior lenders to Nine Entertainment are able to prove that, on their valuations, the junior lenders are out of the money and such valuations are accepted by the court, it is conceivable that a court may approve the Scheme in the absence of junior lender approval on the basis that the junior lenders have no economic interest in the company.


What the protracted negotiations surrounding Nine Entertainment have demonstrated is the importance of an interested party being able to assert they have an economic interest in the company. It is clear that the junior and senior lenders both considered they had an economic interest presumably based on valuations obtained by them. What is not clear, however, is what valuation methodology a court will accept in any future dispute of this kind and whether or not, consistent with the above line of authority, a court will approve a Scheme without the approval of junior lenders who are demonstrably out of the money.

On the second point, what remains to be seen is whether the principles relating to out of the money creditors will be extended from the position in IMO Car Wash. In IMO Car Wash, a challenge to Schemes by out of the money creditors whose legal rights were not affected by the Schemes (and therefore were not required to vote in respect of the Schemes) was disallowed. What has been left open is whether a court will sanction a Scheme where out of the money creditors vote against it based on the principles concerning a party's economic interest in the company.

In any event, the IMO Car Wash judgment is helpful in that Justice Mann took the time to consider the various valuation techniques put forward by the parties to support their positions and took a view as to the appropriate valuation methodology in the circumstances. While the case has been cited in Australia (see Re Centro Properties Ltd [2011] NSWSC 1171 for example) a meaningful consideration of the valuation issues canvassed in the case is yet to occur.

Until there is more clarity around the valuation issues, interested parties will have more scope to delay negotiations and deals, and assert leverage off the back of their own valuations.

While valuations are often subjective, greater certainty around the valuation techniques accepted by courts will enable interested parties to better position themselves in negotiations and potentially minimise the discrepancy between opposing positions. This should assist parties to reach agreements and, hopefully, reduce deals being concluded at the eleventh hour as we saw with Nine Entertainment.

As it currently stands, the face-off between junior and senior lenders was not surprising.

The announced agreement between the relevant parties is a win for Nine Entertainment. However, uncertainty around the appropriate valuation methodology to be adopted remains, potentially hampering future negotiations of this type.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.