Restructuring note issues: identifying the ultimate beneficiary

Recent Australian decisions have applied the ultimate beneficiary test for determining who is a creditor for the purposes of voting on a creditors’ scheme that seeks to restructure corporate bonds.

Many large companies undergoing restructuring have one or more classes of debt securities on issue. Debt securities can be structured in a myriad of ways, including through indirect holding mechanisms. This can pose challenges for restructuring as it may be difficult to determine exactly which parties are characterised as ‘creditors’ entitled to vote on a restructuring plan. This note considers several recent decisions in Australia that have held that the ultimate beneficiary of the debt securities should have the voting right.

Before discussing the restructuring of note issues, it is important to clarify what we are considering. The Corporations Act refers to notes as unsecured debentures. A debenture is a debt security that is issued by a company and is regulated by Ch 2L (for retail debentures) and by Ch 6D (for the issue of securities). The term bond is a broad term that is popular in the US and refers to what in Australia would be secured debentures, but is often generally used (particularly in movies and TV shows) to refer to corporate debt securities as a broad category of investors (hence the term ‘bondholders’ to refer to holders of the company’s debt). In the discussion below I will use the terms bonds and notes interchangeably to refer to debt securities, although in the cases discussed the debt securities were secured.

There is a short video produced by ASIC explaining how debentures work here.

How are notes held?

Debt securities such as notes and other bonds can be held in different ways. The traditional way to invest in such securities was to acquire individual certificated paper instruments. It was also possible to invest in securities in bearer form (where there was no individual registered owner of the particular bond). In modern times, paper securities have largely given way to electronic book entry holdings. These may be held directly by particular investors or indirectly through intermediaries (such as banks and brokerage firms). An investor may hold a ‘definitive instrument’ representing their investment (either in paper or electronic form). Alternatively, the investor may hold an interest in a security issued in ‘global form’ and held through one or more intermediaries, which is now the most common form for issuing notes and other bonds.

For example, rather than issue individual notes to investors (who may be based in multiple jurisdictions around the world), a corporate borrower (the issuer of the notes) may issue a single note to an International Central Securities Depository (‘ICSD’), who will hold the note on behalf of its participants, which will usually include banks and securities brokers.

Participants in the ICSD will usually be holding the interests in the global note on trust for their clients or on their own behalf (for proprietary trading or hedging purposes). The clients of the ICSD participants may in turn also hold those interests on their own behalf or on behalf of clients. It is common for the issuer of the bonds to have no direct relationship with the ultimate investor, nor will the issuer usually be aware of their identity.

While particular bond holdings have their own individual features, there will always be an investor who is the ultimate beneficiary of the bonds, which may be a participant in the ICSD or one of their clients, even if the ICSD (or its nominee) is the registered holder of the securities. Major ICSD providers include Depository Trust Company (DTC) (commonly used for issuers of corporate debt into the US capital markets); Euroclear (for Eurozone securities); Clearstream (for international capital markets) and in Australia, Austraclear.

The restructuring of bond issues has given rise to issues as to who the appropriate creditor for voting purposes in a creditors’ scheme meeting. Is the registered holder with the ICSD? Is it their client, or the ultimate beneficiary? Several English cases have considered this issue, and these decisions have now been recently applied in Australia.

English cases

In Re Castle HoldCo 4 Ltd [2009] EWHC 3919 (Ch), the court held that the appropriate creditors to vote on a scheme proposal were the ultimate beneficiaries of notes issued in global form (i.e. the investors) rather than the registered owners of the securities.

The scheme proposal included two classes of note holders: senior secured floating rate notes (which also included ‘payment in kind’ PIK notes) and senior notes, with each class of creditors having security over different assets with the group of companies. The scheme involved debt for equity swaps and the issue of new debt so as to help repay the most senior debt (a revolving secured loan facility), with floating rate note holders to receive new equity as well as participating in new debt to recapitalise the business. The senior note holders received equity but did not participate in the new debt issue.

The terms of the note issues provided that the issuer would treat the securities depository (or its nominee) as the absolute owner of the notes for all purposes, but also provided a mechanism whereby an investor could request to become a direct creditor of the issuer (Castle HoldCo 4). On default, definitive securities were to be issued to the investors (as beneficial owners of the securities) where a participant requested.
Justice Norris held:

23 When the Scheme of arrangement comes to be considered, it ought obviously to be considered by those who have an economic interest in the debt, that is to say, by the ultimate beneficial owner or principal…
24 … I accept, that the ultimate beneficial owners may therefore be properly regarded as contingent creditors of the company and indeed of each of the subsidiaries who have provided a guarantee.

In that case, the scheme proponents established a procedure to inform investors of the scheme details (through the participants and their clients) and to enable them to vote. The securities depositories (and their nominees) undertook not to vote in the scheme meeting to avoid any double counting of votes. The court therefore held that the ultimate beneficiaries were the appropriate creditors to vote on the scheme.

Subsequently, Norris J applied this ruling in Re Gallery Capital SA (21.4.10, unreported), 2010 WL 4777509. His Honour stated:

8…It is the ultimate beneficial owners of the Old Notes, held by account-holders on their own account or for others, who are required to vote, for it is their economic interests that are affected by the schemes.

9 I am satisfied that they indeed are the people who are to vote as class members at the class meeting and that the arrangements made, with respect to the completion, on the instructions of the underlying beneficial owners, of the account-holder letters are satisfactory.

10 I am also satisfied that each of those ultimate beneficial owners is a contingent creditor entitled to vote. It is true that at present the direct rights of action are vested in the holder of the global note, but the terms of the global note are such that, in certain events (one of which is not at the option of Gallery), definitive notes can be issued directly to the ultimate beneficial owners.

11 I am therefore satisfied that they are “contingent creditors” for the purposes of a scheme of arrangement, and I am satisfied that as contingent creditors they will under the present arrangements be able to cast their votes in relation to the schemes.

Subsequently Hildyard J held that this approach is ‘both logical and justified’: Re Cooperative Bank plc [2013] EWHC 4072 at [38] (Ch).

Recent Australian cases

Boart Longyear

In Re Boart Longyear Ltd [2017] NSWSC 567, the court allowed a creditors’ meeting to be convened to consider multiple scheme proposals. The first scheme involved holders of senior unsecured notes as well as holders of equity claims subordinated under s563A. The second scheme involved holders of senior secured notes as well creditors holding Term Loan A (senior debt) and Term Loan B (subordinated debt). The notes were held in ‘global’ form by the DTC. The court held (at [29]) that the ultimate beneficial owners were the appropriate creditors, applying the decisions in Castle HoldCo 4 and Re Gallery.

BIS Finance

In Re BIS Finance Pty Ltd [2017] NSWSC 1713, the court gave orders for the convening of creditor meetings in respect of two creditors’ schemes of arrangement involving two companies in the BIS Industries group (BIS Finance P/L and Artsonig P/L). BIS Finance sought to propose a scheme with three classes of senior lenders and hedge counterparties. Artsonig sought to propose a scheme with its creditors who held PIK notes. ‘Payment in kind’ notes are bonds that provide for non cash interest, such as by capitalising interest or issuing equity equivalent to interest). The PIK notes were issued by Artsonig to the DTC, and were held in global form.

The DTC held the notes through a subsidiary (Cede & Co) on behalf of its participants (banks and securities brokers), who themselves held the notes either on their own behalf or on behalf of their investors (who themselves hold the notes on their own account or on behalf of further clients and so on). In such a case, while the legal owner was the DTC, the ultimate beneficiary was the investors who purchased the notes or interests in the notes. The terms of the trust deed (the ‘Senior PIK Toggle Notes Indenture 2014’) provided that on a default definitive instruments would be issued to individual investors upon request.

The court held that the appropriate creditors were the ultimate beneficiaries of the note issue (i.e. the investors) rather than DTC or Cede & Co (at 40):

the terms of the PIK Indenture are such that the ultimate beneficial holders of the PIK notes are contingent creditors of Artsonig on that basis. I am satisfied that the ultimate beneficial owners of the notes are therefore properly treated as the scheme creditors for the purposes of the schemes.


The findings in the Boart and BIS cases are consistent with English decisions and with the position in the United States with respect to voting on reorganisation plans in Ch 11 (see e.g. Re Southland Corp 124 B.R. 211 (Bankr. N.D. Tex. 1991). These decisions provide a sensible result that gives voting rights to those with an economic interest in the outcome of the scheme. However, each of these cases involved bond issues that allowed for either the transfer of the bond to the ultimate beneficiaries on default or for the generation of a definitive instrument on default. If a bond issue does not allow for this, it may be difficult to determine who the ultimate beneficiary is.

It seems clear that complex bond restructuring using creditors schemes of arrangement will increase in the near future, as post GFC note issues get into distress and with foreign special situation funds increasingly active in the Australian market. It will be interesting to see bond restructuring techniques adopted in the UK market continue to filter into the restructuring efforts for Australian companies.

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