In Twinza Oil Limited (Receivers and Managers Appointed), in the matter of Twinza Oil Limited (Receivers and Managers Appointed) (No 2) [2025] FCA 1325, the Federal Court of Australia dismissed an application to approve a creditors' scheme of arrangement. The Court concluded that the scheme company had failed to discharge its onus of proving that objecting shareholders had no real economic interest in the company.

Key takeaways

1. The Federal Court declined to approve a creditors' scheme of arrangement by Twinza Oil Limited (Twinza).
2. The scheme was supported by all senior lenders, and proceeded on that basis that the ordinary and preference shares were worthless.
3. Objecting shareholders argued they had a real economic interest in the company. They said they should have been treated as a separate class and allowed to vote as such.
4. The Court found Twinza did not discharge its onus to prove that the objectors had no real economic interest due to deficiencies in valuation evidence.
5. The Court did not need to decide a secondary statutory construction challenge as to whether the proposed cancellation of preference shares would fall within the statutory power to compromise subordinate claims.
6. Proponents of creditors' schemes should exercise caution when seeking to compromise shareholder rights without a separate members' scheme.

The case highlights that the Court makes the final determination on schemes. It is not merely a rubber stamp.  This decision underscores the importance of robust, transparent, and court-ready expert evidence. The judgment provides guidance on the admissibility and weight of expert evidence. This is particularly relevant where proprietary models or layered expert reports are involved.

Background

Twinza is an Australian public company operating the Pasca A offshore gas project in Papua New Guinea.  Twinza was in severe financial distress, with senior debt (approximately USD 351 million at the scheme meeting date) which Twinza said exceeded the value of its assets. Receivers and managers had been appointed by the senior lenders. The senior lenders proposed a debt-for-equity restructure to be implemented via a creditors' scheme of arrangement.

Overview of proposed scheme

The scheme was intended to avoid winding up and allow Twinza to continue the Pasca A project. The scheme's key features included:

• Release of up to 92% of senior debt, reducing it to USD 30 million.
• Convert tranches of senior debt into equity, giving senior lenders 85% of post-scheme ordinary shares.
• Cancel all convertible redeemable preference shares and replace them with ordinary shares (10% of post-scheme equity).
• Dilute existing ordinary shareholders to 5% of post-scheme equity.
• Amend facility agreement to reduce the interest rate, remove a subset of senior lenders, remove the existing fee structure and associated amendments

Convening hearing

At the convening hearing on 6 August 2025, a major shareholder and founder (WM Clough) objected to the convening of the scheme meeting based on class composition, arguing that shareholders should be entitled to vote.  The Court refused WM Clough's application for an adjournment, noting that any remaining class issues could be addressed at the approval hearing: Twinza Oil Limited (Receivers and Managers Appointed), in the matter of Twinza Oil Limited (Receivers and Managers Appointed) [2025] FCA 939.

Takeovers panel application 

On 20 August 2025, WM Clough applied to the Takeovers Panel. It argued that the scheme would dilute the voting power of ordinary shareholders from 100% to 5%. It would also transfer control to senior lenders without giving shareholders an opportunity to participate or vote. WM Clough sought an order requiring Twinza to obtain shareholder approval for the proposed issue of shares to senior lenders. The Panel declined to conduct proceedings. It noted that the Court was the more appropriate forum for challenging the scheme and the expert's report: Twinza Oil Limited (Receivers and Managers Appointed) [2025] ATP 30. ASIC and the Panel both indicated that the issue of class (and so the underlying question of economic interest) falls to be determined by the Court.

General meeting injunction

WM Clough also issued a notice for a general meeting to remove and replace certain directors. The general meeting was to be held on 17 September 2025. On 27 August 2025, the Receivers obtained orders that they were justified in causing Twinza to bring proceedings. They sought a declaration that any decision of the directors to postpone the general meeting called by WM Clough was valid and effective. They also sought to injunct WM Clough from conducting a general meeting: White, in the matter of Twinza Oil Limited [2025] FCA 1054.

On 12 September 2025, the Court granted an injunction against WM Clough restraining the conduct of any general meeting called by WM Clough or its servants or agents pending the outcome of the approval hearing or further order: Twinza Oil Ltd (Receivers and Managers Appointed) v WM Clough Pty Ltd as trustee for the WM Clough Family Trust [2025] FCA 1165.

Scheme meeting

The scheme meeting was held on 12 September 2025. All senior lenders present voted to agree to the scheme. All procedural requirements were met.

Objections to scheme approval

The objectors (including WM Clough and other ordinary shareholders and preference shareholders) raised two main challenges at the approval hearing held on 17 October 2025:

1. Real economic interest: They argued they had a real economic interest in the company and should have been entitled to vote on the scheme as a separate class.
2. Statutory construction: The preference shareholders contended that the scheme could not extinguish their rights as preference shareholders without a separate members' scheme of arrangement.

The objectors provided expert critiques of the Twinza's valuation evidence, challenging the conclusion that shareholders had no economic interest because value broke in the senior debt.

Decision

In declining to approve the scheme the Court found that Twinza failed to prove that the objectors had no economic interest in the company.

The key issue was the reliability and transparency of the valuation evidence. This primarily consisted of the Independent Expert's Report (IER) and supporting underlying technical reports.

Twinza relied on the IER that accompanied the notice of scheme meeting, which was approved for distribution to scheme creditors at the convening hearing, to prove that shareholders had no economic interest. The IER valued Twinza's assets at USD 180-250 million (against its debt at the time of USD 324 million). This valuation assumed the scheme did not proceed and Twinza was to be wound up within six months. The IER also stated that Twinza's total debt was likely to hinder it from securing finance or attracting investment for the project. The IER relied on a technical specialist report, which in turn relied on a third party's technical report. The objectors relied on reports challenging the methodology and transparency of the IER and the underlying technical reports.

At the outset, the Court indicated that, in common with all court applications, the usual rules of evidence and standards of proof must be met. There then remains an evaluative task of assessing whether and to what extent the opinion assists the Court.

The Court held that even though it was carefully drafted and readily comprehensible, the IER failed to provide a transparent and reliable basis for concluding that shareholders had no economic interest. Analytical gaps and a lack of transparency undermined the reliability of the IER and underlying technical report. The Court identified deficiencies in the IER, including:

• Lack of clear linkage between cash flow projections and the ultimate valuation. There was a gap between the data and the opinion. This meant the Court could not test the accuracy of the conclusion or understand how it was reached.
• The IER relied on a technical report in relation to the gas field, which in turn relied on an undisclosed and inadequately explained confidential proprietary model.
• Sensitivity of the valuation to certain assumptions recommended by the technical experts (e.g. as to capital expenditure timing and costing contingencies) that were themselves not sufficiently justified.
• The possibility that relatively minor adjustments could materially affect whether shareholders had an economic interest.

As a result, the Court was not satisfied that the objectors' interests in the company's assets were merely "theoretical or fanciful". It declined to approve the scheme.

The Court emphasised that while all procedural requirements were satisfied in relation to the scheme and it enjoyed creditor support, shareholders with a real economic interest must be given the opportunity to vote.

The Court was not persuaded that the dilution and cancellation of shares could proceed without shareholder involvement. This was given the unresolved doubts about the valuation.

The secondary statutory construction challenge concerned whether a creditors' scheme can cancel preference shareholder rights under s 411(5A) and s 563A of the Corporations Act 2001 (Cth) (Corporations Act). The objectors argued that where a member has a subordinate claim against the company, all that can be compromised by a creditors' scheme is the subordinate claim of the member. It cannot compromise their status or rights as a member. They argued that their right to convert their preference shares into ordinary shares, or to have their shares redeemed by Twinza, are subordinate claims. It is only those claims that can be compromised by the scheme, and not their rights as members of the company.

This issue was not determined, as it was unnecessary considering the primary finding. However, in canvassing the parties' arguments on this issue, the Court noted that great care must be taken when considering the scope of the statutory provisions. This is to ensure that the cancellation of preference shares is permitted by s 411(5A) and s 563A of the Corporations Act without a separate members' meeting.

Comment

This case reinforces the importance of thorough and transparent expert evidence in scheme applications. Courts will scrutinise valuation evidence carefully, particularly where shareholder rights are being substantially affected without their participation.

Key practical takeaways include:

• Expert reports must provide clear linkage between underlying data and conclusions.
• Proprietary models should be adequately explained and justified.
• Sensitivity analysis should address key assumptions that could materially affect outcomes.
• Where valuation evidence is reliant on assumptions, the reasonableness of the assumptions must themselves be proved through admissible evidence, whether as facts, or through documentary or opinion evidence. Accordingly, interlocking expert evidence may be required, and a flaw in the technical evidence may render the valuation evidence itself unpersuasive.
• Where shareholders may have an economic interest, careful consideration should be given to whether a separate members' scheme is required.
• The scope of creditors' schemes to affect member rights remains an area requiring careful legal analysis.

This decision serves as a reminder that scheme approval is not automatic, even where creditors support the proposal and procedural requirements are met. The Court retains discretion to ensure that all affected parties' interests are properly considered.

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