Scheme Of Arrangement Rejected By The Court: Creditors' Schemes And The Impact On Ordinary Shareholders

In brief

• In a rare example, the Federal Court recently refused to approve a creditors' scheme of arrangement after concluding that the scheme company, Twinza Oil, had failed to discharge its onus of proving that ordinary and preference shareholders had no economic interest in the proposed scheme. The scheme involved a debt for equity swap, under which certain senior lenders of Twinza Oil would hold 85% of ordinary shares and preference and ordinary shareholders would be diluted to 10% and 5% (respectively) without a shareholder vote.
• The Takeovers Panel had previously declined to conduct proceedings, confirming its position that where a company is in receivership or administration, the Panel is unlikely to conduct proceedings if no equity value remains in the shares. The Panel considered that the Court was the more appropriate forum to question the valuation of the company's assets in the independent expert's report and the potential classes for the scheme.
• The case highlights the risks of leaving the question of classes for the scheme to be determined at the second Court hearing, with this question often likely to determine the success or failure of the scheme. The outcome of the second Court hearing in this case indicates that very detailed and transparent expert evidence is required for a company to discharge its onus of proving that objectors have no economic interest in a scheme.

Background facts

Twinza Oil Limited (Twinza) is an Australian unlisted public company which has been pursuing the Pasca A offshore gas project in Papua New Guinea. It does not have the funds to continue progressing FEED and receivers and managers were appointed in February 2025 by certain senior lenders. As at 31 May 2025, Twinza owed US$324 million, an amount which exceeds its assets by between US$55 million and US$128 million (based on the independent expert's report). A creditors' scheme was proposed to restructure Twinza's debt and equity as an alternative to a winding up, and with the expectation that the scheme would enable Twinza to continue to pursue the project.

The effect of the proposed scheme was that senior debt would be reduced to approximately US$30 million, with certain senior lenders to receive 85% of the post-implementation ordinary shares. The remaining 15% would go to convertible redeemable preference share holders and ordinary shareholders. The scheme would have no effect on employees or ordinary trade creditors.

Without the scheme, the independent expert opined that on a wind-up within six months, senior lenders would likely recover 55-78% of their debt and unsecured creditors and ordinary shareholders would receive nothing.

First Court hearing

Twoentities linked to Twinza's founder, and which were substantial shareholders, holders of preference shares and creditors, sought an adjournment of the first Court hearing.¹ The adjournment was sought on the basis that the entities were members of classes entitled to vote at separate scheme meetings given the proposed dilution of the ordinary shareholders' interest from 100% to 5% and the stripping of preference shares of their 'preference' status and replacement with ordinary shares. The entities submitted that the question of class should be determined before orders were made to convene the scheme meeting. Twinza resisted and the Court declined the adjournment, noting that any delay would have a significant financial impact given the 35% per annum default rate on the principal debt and that any concerns as to potential classes could, in the circumstances, be dealt with at the second Court hearing.

Accordingly, the scheme meeting was convened and the scheme was approved by 100% of the relevant class of senior creditors.

Panel proceedings

Prior to the second Court hearing, WM Clough had also applied to the Panel seeking an order to require Twinza to obtain shareholder approval for the proposed issue of shares to certain senior lenders under the proposed scheme on the basis that the dilution of ordinary shareholders from 100% to 5%, and delivery of control to certain senior lenders, would be contrary to the principles in section 602 of the Corporations Act.

The Panel declined to conduct proceedings and noted that the Court would be the more appropriate forum for WM Clough to raise its concerns given no equity value remains in Twinza's shares.²

ASIC's position generally and the second Court hearing

As a general (and longstanding) rule, in cases where there is no equity value left, a creditors' scheme is free to proceed without the need for a separate vote of shareholders.³ If the company is subject to Chapter 6 of the Corporations Act and a debt for equity swap will result in a creditor acquiring voting power in excess of 20%, ASIC's position has been that shareholder approval will generally be required where there is still some residual equity value left (despite the schemes exception set out in item 17 of section 611).⁴ Where no equity value remains, no separate vote is required but shareholders must be given sufficient information about the control proposal and be informed of their rights in relation to the scheme. In these circumstances, ASIC is usually comfortable on the basis that the Court is entitled to take into account the interests of shareholders at the second Court hearing and ASIC will consider providing a 'no objection' letter.⁵

At the second Court hearing, objectors who between them held ordinary shares and preference shares, challenged the scheme, including on the basis that they had an economic interest in it such that they should have been entitled to vote at the scheme meeting. Banks-Smith J ultimately held that Twinza had failed to discharge its onus of proving that the objectors had no economic interest in the scheme and accordingly did not approve the scheme.⁶ While her Honour acknowledged that the independent expert's report was not specifically prepared for the purposes of evidence at the hearing (and was in the customary form for a scheme), she identified a number of issues, including:

• the report did not adequately demonstrate the linkage between forecast cash flows and the conclusions regarding valuation, thereby creating a gap between the data and the opinion;
• the technical report on which it relied contained undisclosed proprietary models and unsupported adjustments; and
• a report lodged by the receivers with ASIC had valued the assets of Twinza at between US$458 million and US$528 million, which while not necessarily accurate or the subject of independent scrutiny, did indicate that there was potential for higher values to be assessed.

Key take-aways

The decision highlights both the Panel and the Court's preference to defer to the oversight of the Court in the scheme process itself in the context of issues relating to the interests of shareholders under a creditors' scheme. Consistent with prior Panel matters, the Panel noted its general reluctance to conduct proceedings once the Court has commenced its scrutiny of a scheme. This seems appropriate here given the issues in dispute, but should be contrasted with the Panel's role in the recent Mayne Pharma matter, where the Panel did conduct proceedings in relation to issues in a scheme after the Court had made orders at the first Court hearing (and had heard a related material adverse change dispute).⁷

The case also highlights the risk of leaving the question of scheme classes to the second Court hearing. Twinza resisted the adjournment of the first Court hearing for what appeared to be sound reasons (primarily the significant financial impacts of a delay), but were cautioned by the Court of the risk that the scheme may fail where the class issue is only fully dealt with at the second Court hearing. That risk eventuated for Twinza.

Finally, the case is a reminder that the Court is not simply a rubber stamp in schemes of arrangement. The Court's refusal to approve the scheme indicates that very detailed and transparent expert evidence, which must meet the Court's rules of evidence, is required for a company to discharge its onus of proving that objectors have no economic interest in a creditors' scheme.

Footnotes

1 Twinza Oil Limited (Receivers and Managers Appointed), in the matter of Twinza Oil Limited (Receivers and Managers Appointed) [2025] FCA 939.

2 Twinza Oil Limited (Receivers and Managers Appointed) [2025] ATP 30 at [26]-[27] and [32].

3 Re Brownfields Guild Pottery Society [1898] WN 80, Re Tea Corporation Ltd [1904] 1 Ch 12.

4 See ASIC, Corporate Finance Update, Issue 1, June 2020.

5 As above.

6 Twinza Oil Limited (Receivers and Managers Appointed), in the matter of Twinza Oil Limited (Receivers and Managers Appointed) (No 2) [2025] FCA 1325.

7 See MAC disputes, the Takeovers Panel and FIRB – reflections on Mayne Pharma's battle with Cosette