FEDERAL COURT OF AUSTRALIA CSR Limited, in the matter of CSR Limited [2010] FCAFC 34 Citation: CSR Limited, in the matter of CSR Limited [2010] FCAFC 34 Appeal from: CSR Limited, in the matter of CSR Limited [2010] FCA 33 Parties: CSR LIMITED ACN 000 001 276 File number: NSD 127 of 2010 Judges: KEANE CJ, FINKELSTEIN AND JACOBSON JJ Date of judgment: 23 April 2010 Catchwords: CORPORATIONS LAW – application pursuant to s 411 Corporations Act 2001 (Cth) for orders convening meeting of shareholders to approve scheme of arrangement and approving explanatory statement – proposed capital reduction condition precedent to scheme – risk that capital reduction will prejudice ability of CSR to meet asbestos liabilities – whether primary judge erred in dismissing application Legislation: Corporations Act 2001 (Cth) ss 256B, 411, 1324 Cases cited: Attorney-General (Cth) v Alinta Limited (2008) 233 CLR 542 cited Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 applied Carr v Western Australia (2007) 232 CLR 138 applied Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 cited In the matter of Opes Prime Stockbroking Ltd [2009] FCA 813 applied Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355 cited Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 applied Re Avram Investments Pty Ltd (1992) 10 ACLC 1747 discussed Re BAT Industries Plc (unreported, 1998 WL 1076712) cited Re Central Pacific Minerals NL [2002] FCA 239 applied Re Hawke Insurance Co Ltd [2002] BCC 300; [2001] 2 BCLC 480; [2001] EWCA Civ 241 cited Re Foundation Healthcare Limited (2002) 42 ACSR 252 considered Re National Bank Ltd [1966] 1 WLR 819 cited Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349 considered Re Mascot Home Furnishings Pty Ltd (in liquidation) [1970] VR 593 discussed Re T & N Ltd [2006] EWHC 1447 (Ch) considered Re Telewest Communications plc [2004] BCC 342 cited St George Bank Ltd v Commissioner of Taxation [2009] FCAFC 62 cited Date of hearing: 29 and 30 March 2010 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 90 Counsel for the Applicant: NJ Young QC, DFC Thomas and CG Button Solicitor for the Applicant: Freehills Counsel for the Attorney-General for the State of New South Wales MB Oakes SC and M Izzo Solicitor for the Attorney-General for the State of New South Wales Crown Solicitor Counsel for the Australian Securities and Investments Commission: R Beech-Jones SC and J Emmett Solicitor for the Australian Securities and Investments Commission: Australian Securities and Investments Commission Counsel for James Hardie 117 Pty Ltd ACN 116 110 948 and James Hardie Industries SE (formerly James Hardie Industries NV) ABN 49 097 829 895: RM Foreman Solicitor for James Hardie 117 Pty Ltd ACN 116 110 948 and James Hardie Industries SE (formerly James Hardie Industries NV) ABN 49 097 829 895: Johnson Winter & Slattery Counsel for the Asbestos Injuries Compensation Fund Limited ACN 117 363 461: AJ Meagher SC Solicitor for the Asbestos Injuries Compensation Fund Limited ACN 117 363 461: Johnson Winter & Slattery IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 127 of 2010 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA IN THE MATTER OF CSR LIMITED ACN 000 001 276 CSR LIMITED ACN 000 001 276 Applicant JUDGES: KEANE CJ, FINKELSTEIN AND JACOBSON JJ DATE OF ORDER: 23 APRIL 2010 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Leave to appeal be granted. 2. The appeal be allowed and the order of Stone J dated 3 February 2010 be set aside. 3. Pursuant to subsection 411(1) of the Corporations Act 2001 (Cth), a meeting of the ordinary shareholders of CSR Limited be convened at a date and time to be determined by a single judge of the Court. 4. The proceedings be remitted to a single judge of the Court. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 127 of 2010 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA IN THE MATTER OF CSR LIMITED ACN 000 001 276 CSR LIMITED ACN 000 001 276 Applicant JUDGES: KEANE CJ, FINKELSTEIN AND JACOBSON JJ DATE: 23 April 2010 PLACE: SYDNEY REASONS FOR JUDGMENT KEANE CJ and JACOBSON J: 1 On 8 October 2009 CSR Limited (CSR) commenced proceedings seeking orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) for the convening of a meeting of its shareholders to consider a scheme of arrangement (the scheme) and for the approval of the explanatory statement in which the scheme is summarised. 2 The scheme which CSR proposes involves the demerger of CSR's sugar and renewable energy business to facilitate the creation of two listed companies – "Sucrogen", a company carrying on sugar and renewable energy business in Australia and New Zealand, and "New CSR", a company selling building products with an investment in aluminium production. The demerger is to be implemented by way of a reduction in the capital of CSR and a scheme of arrangement between CSR and its existing shareholders. The proposal was unanimously supported by the directors of CSR. 3 CSR's proposal aroused concerns in the Australian Securities and Investments Commission (ASIC), the Attorney-General for the State of New South Wales, James Hardie Industries SE and James Hardie 117 Pty Ltd (the James Hardie parties) and the Asbestos Injuries Compensation Fund Limited and associated companies (the Fund), that the demerger could prejudice the prospects of recovery of damages from CSR by persons injured as a result of their exposure to asbestos by CSR. They were given leave to intervene in the proceedings commenced by CSR. 4 On 3 February 2010, after hearing the applicant and the interveners, the learned primary judge dismissed CSR's application on the basis that she could not be satisfied that the scheme was "consistent with commercial morality" or that it "would not involve an unfair or oppressive result" and that the explanatory statement could not provide adequate disclosure to CSR shareholders of New CSR's ability to meet future liabilities. CSR now applies for leave to appeal against this decision contending that the learned primary judge had no sufficient grounds to refuse to order a meeting of shareholders or to refuse to approve the explanatory statement. 5 Leave to appeal is necessary because the judgment below was interlocutory (cf Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504-505). Generally speaking, leave to appeal will be granted where there is a reasonably arguable case that the decision below is affected by appellable error, and a grant of leave is necessary to remedy a substantial injustice (Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 399). Even though the judgment below is interlocutory, in the sense that it is not determinative of substantive legal rights of the parties, it is, in a practical sense, a conclusive adverse determination of CSR's attempted demerger on the terms currently proposed. In these circumstances, the Court considered that the convenient course was to reserve the question whether leave should be granted pending consideration of the merits of CSR's challenge to the decision of the learned primary judge. 6 Before discussing the reasons for decision of the learned primary judge in more detail, we shall set out the principal statutory provisions and the factual background from which the issues arise. Relevant provisions of the Act 7 Section 411 of the Act envisages three steps: first, the calling of a meeting of either creditors or members depending on whose rights are to be rearranged; second, a vote by those persons; and third, a further application to the court for approval of the rearrangement. Section 411(1) and (2) relevantly provide: Administration of compromises etc. (1) Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings. … (2) The Court must not make an order pursuant to an application under subsection (1) … unless: (a) 14 days notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and (b) the Court is satisfied that ASIC has had a reasonable opportunity: (i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement. 8 It is convenient to note here that s 411(2) contains a statement of the circumstances in which the first meeting must not be ordered. Section 411 contains no statement of the criteria which must be satisfied before a meeting is ordered, but it is clear that the court has a discretion to exercise in relation to whether the first meeting should be ordered: Re Hawke Insurance Co Ltd [2002] BCC 300 at 306 [21]; [2001] 2 BCLC 480; [2001] EWCA Civ 241. 9 The content of the draft explanatory statement which must be provided to creditors or members is addressed in s 411(3) as follows: (3) In subsection (2), draft explanatory statement, in relation to a proposed compromise or arrangement between a body and its creditors or any class of them or between a body and its members or any class of them, means a statement: (a) explaining the effect of the proposed compromise or arrangement and, in particular, stating any material interests of the directors of the body, whether as directors, as members or creditors of the body or otherwise, and the effect on those interests of the proposed compromise or arrangement in so far as that effect is different from the effect on the like interests of other persons; and (b) setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member of the body whether or not to agree to the proposed compromise or arrangement, being information that is within the knowledge of the directors of the body and has not previously been disclosed to the creditors or members of the body. 10 The binding effect of an arrangement is provided for by s 411(4) relevantly as follows: (4) A compromise or arrangement is binding on the creditors, or on a class of creditors, or on the members, or on a class of members, as the case may be, of the body and on the body or, if the body is in the course of being wound up, on the liquidator and contributories of the body, if, and only if: (a) at a meeting convened in accordance with an order of the Court under subsection (1) …: (i) in the case of a compromise or arrangement between a body and its creditors or a class of creditors—the compromise or arrangement is agreed to by a majority in number of the creditors, or of the creditors included in that class of creditors, present and voting, either in person or by proxy, being a majority whose debts or claims against the company amount in the aggregate to at least 75% of the total amount of the debts and claims of the creditors present and voting in person or by proxy, or of the creditors included in that class present and voting in person or by proxy, as the case may be; and (ii) in the case of a compromise or arrangement between a body and its members or a class of members—a resolution in favour of the compromise or arrangement is: (A) unless the Court orders otherwise—passed by a majority in number of the members, or members in that class, present and voting (either in person or by proxy); and (B) if the body has a share capital—passed by 75% of the votes cast on the resolution; and (b) it is approved by order of the Court. 11 The discretionary nature of the Court's powers under s 411(4)(b) is apparent from s 411(6) and (17) which provide respectively: (6) The Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as it thinks just. … (17) The Court must not approve a compromise or arrangement under this section unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b). 12 The applicant and the interveners accept the statement of the principles which should guide the judicial exercise of the discretion conferred by s 411(1), contained in the following passage from the decision of Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 at [8] – [11]. [T]he Court will not convene a meeting unless the arrangement proposed is of such a nature and is cast in such terms that, if the arrangement receives approval by the statutory majority at the relevant meeting, the Court will be likely to approve the arrangement on the hearing of any application that is unopposed. At the stage of convening a meeting, the Court will give consideration to compliance with such preliminary matters as are relevant to the holding of the meeting. Of paramount importance at that stage is the need to ensure that there will be sufficient disclosure, to those who will be affected by the arrangement, of its details and effect. The Court will also need to be satisfied, at that stage, that there has been reasonable opportunity for the Commission to examine the terms of the arrangement. In exercising its discretion whether to convene a meeting, the Court will have regard to such matters as the acceptability of the documentation of the proposed arrangement, the commercial viability and morality of the arrangement, the likely acceptability of the arrangement, the bona fides of the proposals, whether the proposals could be achieved by another method and any objections or submissions by the Commission. It is always the practice of the Court, at the first stage, to go through the proposed arrangement, to raise matters as to the drafting of the documentation, to ascertain whether the arrangement complies with the substantive requirements of the law and to ensure that the arrangement, if given effect, will not involve any unfair or oppressive result. In considering whether to convene a meeting, the Court will take into account questions of public policy as well as commercial morality. The Court will have regard to the interests of parties who will be bound by the arrangement and who might be careless of their own best interests. While security holders of a company may be considered to be better judges than the Court could be of what is to their commercial advantage, that does not extend to the technical or mechanical aspects of an arrangement. Security holders are likely to be influenced largely by their understanding of the broad economic consequences of an arrangement. However, they are entitled to rely on the Court's approval as a sufficient safeguard against defects at the technical or mechanical level. Accordingly, for the purposes of protecting the interests of security holders who have not agreed to an arrangement and yet will be bound by it, the Court will ordinarily seek to ensure that the terms of the arrangement would be enforceable by all persons bound by it against those who are seeking to implement it or obtain benefits from it. The Court will also seek to ensure that the arrangement does not, without sufficient reason, include provisions that may create inroads upon or modify the benefits that a security holder bound by it might legitimately expect to obtain under it. The mere fact that the Court has convened a meeting does not, however, necessarily mean that the Court will approve the arrangement, even if the arrangement is unopposed at the third stage. 13 The applicant and the interveners are at odds, however, over the content of public policy and commercial morality which relevantly inform the exercise of the discretion conferred by s 411(1) of the Act in the circumstances of this case. 14 It is necessary to observe that the argument presented by CSR in this Court was quite different from that presented to the learned primary judge. Before the learned primary judge, CSR emphasised that the capital reduction which is regulated by s 256B of the Act does not require Court approval and is not itself an element of the scheme for which approval is sought under s 411 of the Act. At the forefront of CSR's argument before the learned primary judge was the contention that the reduction of capital proposed for CSR is not an element of the scheme itself, and is therefore irrelevant to the question whether the first meeting should be ordered under s 411. That contention was not pressed in argument in this Court. That is hardly surprising because the terms of the Explanatory Statement make it clear that for the demerger to proceed, the Capital Reduction Resolution must be approved at a General Meeting of shareholders which has been convened and is to take place immediately after the Scheme Meeting. If the General Meeting does not approve the capital reduction, the demerger will not proceed. In these circumstances, the learned primary judge was clearly correct to observe that the proposed capital reduction is "a condition precedent to the Scheme that the CSR shareholders pass the 'Capital Reduction Resolution'" (at [12]) and to focus upon the impact of the reduction of capital upon CSR's ability to meet its liabilities to asbestos claimants. 15 In the argument advanced on behalf of CSR in this Court, CSR was content to embrace the issue posed by s 256B as relevant to the exercise of the discretion conferred by s 411(1) of the Act and to contend that the reduction of capital associated with the scheme amply conforms with the requirements of s 256B. It is, therefore, convenient to note here that s 256B(1) is relevantly in the following terms: Company may make reduction not otherwise authorised (1) A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction: (a) is fair and reasonable to the company's shareholders as a whole; and (b) does not materially prejudice the company's ability to pay its creditors; and (c) is approved by shareholders under section 256C. A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction. 16 It may also be noted here that, while a capital reduction effected pursuant to s 256B of the Act does not require the approval of the Court, a person who may be affected by a proposed capital reduction may vindicate its interest in opposing the reduction of capital under s 256B(1)(b) by proceedings to restrain it or to have it declared unlawful pursuant to s 1324 of the Act. 17 In a proceeding under s 1324, s 1324(1B) of the Act requires the company to discharge the onus of showing that a capital reduction would not materially prejudice its ability to pay its creditors. Section 1324(1B) of the Act provides that: If the ground relied on in an application for an injunction is conduct or proposed conduct of a company or other person that it is alleged constitutes, or would constitute: (a) a contravention of paragraph 256B(1) (a) or (b), section 257A or paragraph 260A(1)(a); or (b) a contravention of a provision of this Act involving the insolvency of the company because of: (i) the company making a reduction of its share capital to which Division 1 of Part 2J.1 applies; or (ii) the company buying back its shares; or (iii) the company giving financial assistance to which Part 2J.3 applies; the Court must assume that the conduct constitutes, or would constitute, a contravention of that paragraph, section or provision unless the company or person proves otherwise. The factual background 18 Persons who might be adversely affected by any diminution in CSR's ability to satisfy claims for asbestos related injury may be divided into three categories: 1. persons who are suffering symptoms of asbestos-related disease, whether or not they have brought proceedings against CSR; 2. persons who have been exposed to asbestos but in whom there has not yet been any manifestation of asbestos-related disease; and 3. persons who may be exposed to asbestos in the future but who have not yet been exposed. 19 In its financial statements for the half year ended 30 September 2009 CSR made a provision of A$446.8 million for current and future asbestos liabilities. This comprises 10 per cent of CSR's total assets as at 30 September 2009, but, based on the pro forma balance sheet produced by CSR as at 30 September 2009, would comprise 18 per cent of New CSR's assets at that date. 20 The provision made in CSR's accounts of $446.8 million is intended to represent the net present value of the actuarially-calculated future liabilities of CSR to victims of exposure to asbestos. CSR's annual exposure is estimated to be in the order of $30 million to $50 million (with the highest future estimates being $60 million to $70 million for one or two years). It is expected that these annual amounts will taper off to nil over the next 40 years. CSR ceased its involvement with asbestos related products in 1977. 21 Accounts reflecting the position of New CSR, that is with the sugar assets notionally removed, showed a company with total assets as at September 2009 of $2.466 billion, net assets of $888.7 million and earnings before interest and tax of $105 million for the half year and $243.4 million for the year to March 2010. A worst case assessment of the present value of CSR's total liability to asbestos claims is put by CSR's advisers at $661 million; and the worst case estimate by KPMG Actuaries on behalf of the Fund is $896.5 million. While these amounts exceed the provision made by CSR in its accounts, CSR emphasises that this value represents liabilities which will be satisfied over many years. CSR contends that the evidence is to the effect that the cash flow of New CSR will be sufficient to satisfy these liabilities as they come home over time without recourse to asset realisation. It is important to note that CSR's evidence in this regard is not challenged by the interveners save that on the worst case scenarios addressed by KPMG Actuaries, there may be a breach of CSR's covenants with its banks in relation to the maintenance of debt levels. To this particular challenge CSR counters that any such breach of covenants would be minor and could be cured, either by cutting other costs by $6 million, or by raising $20 million in equity. Accordingly, it is said to be most unlikely that the breaches of bank covenants postulated by KPMG Actuaries might in fact lead to a disruption to CSR's finances so as to impede the payment of CSR's creditors, including asbestos victims. And, in any event, CSR says that if asset realisation were to become necessary there are ample assets from which the liabilities could be met. 22 The principal argument of the interveners, at least as it was developed in this Court, was that although the projections adopted by CSR are reasonable in the light of the actuarial assessments, the risk that these projections and assessments may be wrong is not a risk which should be borne by asbestos claimants. It is said that this risk is not fanciful because the actuarial estimates are inherently uncertain: over the last five years, CSR's Australian actuary, Taylor Fry, has increased its estimate of CSR's liabilities in Australia by 57.2 per cent and its US actuary, Navigant, has increased its estimate of the US liabilities by 89.1 per cent. 23 Before the learned primary judge, ASIC summarised its concerns in relation to the scheme as follows: As a general proposition asbestos claims raise difficult issues for ASIC and the Court in considering applications under s 411 of the Act. The distinguishing feature of such claims compared with other claims of creditors are: i. Their extraordinary long term nature (generally in the period of 20 to 50 years); ii. The number and spread of such claims; iii The fact that at any given point in time persons can be 'affected' by exposure to asbestos at a significant time in the past but they will not manifest symptoms for some time into the future; iv. The concomitant uncertainty surrounding their estimation; and v. The social costs that they impose especially if for some reason the party that is legally responsible for their occurrence does not have the means to pay. The nature of the uncertainty involved is illustrated by considering the provisions made for asbestos claims in CSR's accounts for the period of 4.5 years from 31 March 2005 to 30 September 2009. They increased from A$318.4m at the start of the period to A$446.8m at the end. This occurred even though CSR's asbestos activities apparently ceased in Australia in the 1970's and the USA in 1966 and notwithstanding that in those 4.5 years A$150.4 million in claims payments and costs were made. These were amounts that should have been encompassed by the 30 March 2005 provision. [footnotes omitted] 24 The learned primary judge summarised ASIC's submissions as follows (at [18]): … the members of CSR had a legitimate interest in the disclosure of information about the company's provision for asbestos claims, the degree of confidence that those claims could be met and the effect of those claims on the ongoing business of New CSR including its ability to pay dividends. Despite the concerns expressed above ASIC stated that it is "currently content" as to the form of disclosure in the explanatory statement concerning asbestos claims and the ability of New CSR to meet those claims. This statement does not address the fairness and policy issues to which Emmett J referred in Re Central Pacific Minerals; see above at [7]. However ASIC did submit that it "would be contrary to public policy to allow a material reduction in the assets available to meet future asbestos claims arising from past business activities which cannot be shown to have no prejudicial effect". 25 The nature and extent of the risk posed to potential claimants against CSR were the subject of numerous expert reports which were considered by the learned primary judge. The decision of the learned primary judge 26 The learned primary judge was not disposed to accept a submission by ASIC that the Court has to be satisfied that asbestos claimants would be no worse off after the demerger than before in order to order the meeting of shareholders. Her Honour summarised that submission in the following passage (at [25]): The objectors and ASIC submitted that the Court should dismiss the plaintiff's application unless clearly satisfied that the asbestos claimants would be no worse off after the demerger than before. That formulation draws on a comment made by Lindgren J in Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd [2006] FCA 1849, (2006) ACLC 208. His Honour was considering the interests of asbestos claimants in connection with a scheme of arrangement which provided for all property of Stork ICM to be vested in Stork FSA. The property in question included ICM's contractual right to require insurers to indemnify it in respect of sums which it was, or might become, liable to pay to asbestos claimants as workers' compensation or common law damages. At [111] of his reasons his Honour said that in the course of the hearing he had indicated to the parties: That I should not make the orders sought unless I was clearly satisfied that the potential claimants would be no worse off if the order were made than they would be otherwise. 27 Her Honour adopted an approach more favourable to CSR in respect of the question whether the first meeting of shareholders should be ordered under s 411(1) of the Act. Her Honour said, at [26]: The standard adopted by Lindgren J requires the plaintiff to prove a negative. That standard should be considered in context. The issue in Stork was the insurance indemnity which, I venture to suggest, lent itself more to such proof than the complex actuarial debate that is involved here. Be that as it may, I have, with great respect, some reservations about whether the Court's discretion under s 411 extends so far especially in light of the principles articulated by Emmett J in Re Central Pacific Minerals … In particular, I am inclined to the view that unless the Court is satisfied that the Scheme is not consistent with public policy and commercial morality or does not provide adequate disclosure it should make the orders sought at the first hearing. 28 The learned primary judge was understandably concerned by the uncertainty attending the ability of New CSR to meet all CSR's asbestos-related liabilities. In this regard, her Honour said (at [24]): It is clear from the above that CSR's provision for 'known and probable asbestos claims' does not take into account claims that 'cannot be reliably measured'. It would seem to follow that the 'future asbestos related claims' referred to in the passage quoted above also fails to take into account such claims. Yet it is the very uncertainty raised by such claims that is at the heart of the objections to the capital reduction. 29 One of the reports commissioned by CSR was by Grant Samuel. In relation to that report the learned primary judge said, at [22] – [23]: The Grant Samuel Report states that approximately 95 % of CSR's total earnings are generated in Australia. The report analysed the contribution of the business operations of CSR to its Gross Assets as at 30 September 2009 and to its reported EBIT for the year ended 31 March 2009. The contribution of the building products, the aluminium and the property operations was 56% and 75% respectively. Following a detailed financial analysis including the advantages and disadvantages of the proposed demerger the report concludes that the proposed demerger (including the capital reduction) is in the best interests of CSR shareholders and will not materially prejudice 'existing CSR creditors'. In relation to CSR's liability for asbestos claims the report makes the point that following the proposed demerger the liability for asbestos claims will remain with New CSR which will not have access to the assets and cash flow of the sugar business to assist in meeting the claims. The report notes that CSR has made provision of $446.8 million in its balance sheet 'for all known and probable future asbestos claims but not for such claims as could not presently be reliably measured'. The report concludes that: On the basis of the analysis undertaken by or on behalf of CSR, it would not be unreasonable for the directors of CSR to conclude that the Proposed Demerger will not have a material adverse impact on New CSR's ability to continue to pay its creditors, including future asbestos related claims in Australia and the United States (subject to the limitations set out in the Scheme Booklet). 30 Her Honour did not seek to resolve the competing expert views as to the extent of the risk that New CSR might not be able to meet its liabilities to asbestos claimants. The learned primary judge noted that even the Grant Samuel report relied on by CSR acknowledged a risk that New CSR might not be able to meet future asbestos-related claims (at [27-28]): There can be no doubt that, as the Grant Samuel report acknowledges, any reduction of a company's capital reduces its capacity to meet the claims of creditors. In itself that does not indicate any unfairness or conflict with public policy. Nor, as a practical matter, does it necessarily pose a material risk to creditors. In oral submissions however, Mr Meagher SC, who appeared for AICF, drew my attention not only to the conclusion quoted in [23] but also to the following passage in the penultimate paragraph of the Grant Samuel report: The ability of New CSR to continue to pay its creditors, including asbestos related claims in the future will depend on future economic conditions and future decisions by the board of New CSR. There is also a risk that payments for asbestos related claims will increase in the future. As is the case with CSR prior to the Proposed Demerger, there can be no guarantee that New CSR will be able to continue to pay its creditors, including future asbestos related claims or that the payment of future asbestos related claims will not have a material adverse impact on New CSR. There is, of course, never any guarantee that a company will be able to pay its future creditors. This is equally true of CSR before the demerger as of New CSR after demerger. Nevertheless, I do not accept that the position of future asbestos claimants is to be equated with every category of current and future creditor of New CSR. Their interest arises not from some future dealing with CSR but from their involuntary exposure to asbestos products supplied by CSR before demerger even if, in some cases, exposure does not occur until after demerger. 31 Her Honour concluded (at [35]-[36]): In summary, the expert evidence presented by CSR, ASIC, and the other intervening parties brings into sharp relief the inherent uncertainty involved in any actuarial estimate of future asbestos-related claims and in particular the limitations and qualifications expressed in the actuarial reports relied on by CSR. In addition, specific issues raised by the experts retained by ASIC and AICF point to particular limitations in the material supplied by CSR's experts in relation to future asbestos claims that cannot be reliably estimated at this time. The starting point in considering whether these flaws should lead to my not being satisfied that the provisions made in respect of asbestos-related claims following demerger are consistent with public policy or commercial morality must be: (a) that New CSR will be the repository of all CSR's liabilities in respect of asbestos-related claims both present and future; and (b) that it will suffer a significant reduction in the capital available to meet such claims. The significance of those two factors increases with the uncertainty of the actuarial estimates and other expert opinion and is such that I cannot be satisfied that the provisions made are consistent with commercial morality or that the Scheme, if given effect, would not involve an unfair or oppressive result. Moreover, these same issues lead me to conclude that the material in the explanatory statement cannot provide adequate disclosure to CSR shareholders of New CSR's ability to meet these future liabilities. For both these reasons I have concluded that I should decline to make the orders for convening the Scheme meeting. In the circumstances, it is not necessary that I should consider the aspects of the Scheme that might otherwise be addressed at the first hearing. The arguments in this Court 32 CSR launches a three-pronged attack on the conclusion of the learned primary judge. First, it is argued that her Honour erred in proceeding on the evident assumption that CSR's projections and actuarial estimates did not encompass the category of claims in the future by persons who have not yet been adversely affected by exposure to asbestos: in this regard it is said that the actuarial estimates did not omit that category of claims. 33 Secondly, it is said that the learned primary judge acted on a broad view of "public policy" or "commercial morality" without articulating the particular aspects of public policy or commercial morality relevant to the discretion in s 411(1) of the Act which informed her conclusions in the circumstances of this case. 34 Thirdly, it is said that the only consideration which might justify a negative exercise of the discretion in s 411(1) of the Act in the circumstances of this case is the concern that the present or future creditors, including all categories of asbestos claimants, would be materially prejudiced in terms of their ability to recover from New CSR by the reduction of capital associated with the demerger. CSR argues that the evidence before the Court negatives any material prejudice to New CSR's ability to pay all its creditors. 35 On CSR's behalf, it is accepted that where a proposed scheme warrants characterisation as blatantly "unfair" or "oppressive", "contrary to public policy" or "contrary to commercial morality", the discretion conferred by s 411(1) of the Act would be properly exercised by refusing to order that a meeting be convened. It is said, however, that the learned primary judge could not have been satisfied that the proposed scheme was blatantly "unfair" or "oppressive", "contrary to public policy" or "contrary to commercial morality" in any sense relevant to s 411(1) of the Act. The only considerations of "public policy" or "commercial morality" which are relevant for the purpose of s 411(1) of the Act are those which find a basis in the terms of the Act or its underlying purpose (cf International Air Transport Association v Ansett Australian Holdings Ltd (2008) 234 CLR 151 at [75], [78] and [93]). 36 In this Court CSR argues that the significance of s 256B of the Act for the outcome of this case is that it is an explicit and exhaustive statement of the policy of the Act in relation to the protection of creditors who may be affected by a company's proposal to reduce its capital. In such a case the issue raised by s 256B(1)(b) is whether the proposed reduction will "materially prejudice" the company's ability to pay its creditors. It is, so it is said, inconsistent with this nuanced expression of public policy to discern in the Act a policy which would lead to the discretion conferred by s 411(1) of the Act being exercised with an eye to conferring greater protection on persons who are no more than potential creditors of the company than is available to creditors under s 256B of the Act or to protect claimants against a risk of non-payment which is not material but only theoretical. 37 CSR argues that the expert evidence adduced by the interveners did not suggest that the predictions and assessments propounded by CSR and its experts were spurious or illusory exercises. It is not suggested that the uncertainties to which reference has been made were such as to make reasonable and responsible assessments impossible. Further, the interveners' challenge to the assessments propounded by CSR did not go so far as to suggest a reasonable possibility that the totality of CSR's assets and cash flow might not be sufficient to enable CSR to meet in full its liabilities to asbestos claimants. 38 The Fund argues that CSR's burden of proof is not satisfied merely by showing that its projections and actuarial assessments represent reasonable projections and assessments: it must go further and show that the view that creditors would be exposed to a real and not fanciful risk by the demerger cannot reasonably be entertained. This, so it is said, CSR has not done. 39 The Fund also argues that a company's ability to pay its creditors is "materially prejudiced" if the company is unable to pay its debts from its cash flow but is obliged to have recourse to the sale of its assets or to raise capital. 40 The James Hardie parties emphasised the qualification in the CSR's accounts in relation to its provision for future asbestos related liabilities to the effect that the provision reflected the value of foreseeable liabilities. 41 On behalf of the State of New South Wales, it is submitted that the discretion conferred by s 411(1) is unfettered save by considerations derived from the subject matter, scope and purpose of the legislation (cf Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492 at 504-505; R v Australian Broadcasting Tribunal; Ex parte 2HD Pty Ltd (1979) 144 CLR 45 at 49; see also Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194 at 219). CSR was content to accept this approach, arguing that the subject matter, scope and purpose of the Act, and specifically ss 256B(1), 256B(6) and 1324 afford a clear indication that, in a case such as the present, the only consideration which might warrant refusal to call the first meeting under s 411(1) was whether the reduction of capital associated with the demerger would materially prejudice the ability of New CSR to pay its creditors including all asbestos claimants. 42 It may also be noted that CSR refused to accept the suggestion of the New South Wales' Government that Sucrogen be procured to execute a deed poll assuming a contingent liability for the full amount of New CSR's asbestos liabilities. It may be accepted that for Sucrogen to accept such a liability would be inconsistent with the commercial motivations for the demerger, but CSR's attitude does little to allay the concern that the risk of non-payment by New CSR is a material, as opposed to a merely theoretical, risk. 43 We turn now to discuss the arguments joined between CSR, the Fund and the James Hardie parties. Material prejudice to New CSR's ability to pay claimants 44 The contention put by the Fund that a company's ability to pay its creditors is materially prejudiced if it chooses to resort to asset sales rather than cash flow must be rejected. First, the text of s 256B(1)(b) draws no such distinction. Further, in discourse concerned with the ability of a company to pay its debts it is well settled that ability to pay one's debts is a matter of objective measure of capacity rather than a subjective question of choice and is to be determined by reference to all one's resources whether income or assets. 45 In relation to the questionof "material prejudice" to a company's ability to pay its creditors, the text of the Act and the explanatory memorandum which accompanied the Bill which introduced s 256B into the Act are not particularly helpful. In cl 12.23 it said: "Whether prejudice is 'material' will be a question of judgment to be determined in light of all relevant circumstances". One is, we think, on safe ground, however, in treating "material prejudice" to a company's ability to pay its creditors as relating to the creation of a material as opposed to theoretical increase, in the likelihood that the reduction in capital will result in a reduced ability to pay creditors. 46 The argument advanced on behalf of the Fund went as far as to contend that CSR's burden of proof required it to exclude the possibility of a reasonable judgment that New CSR might not be able to pay all its creditors including asbestos claimants if the demerger were to be implemented. The short answer to this argument is that the expert opinion adduced including the evidence adduced by the interveners, does not contain any suggestion that one may reasonably predict that CSR will not be able to pay all its creditors, in the event of the demerger proceeding, even in scenarios of extraordinary stress. Importantly, none of the evidence adduced, including the evidence of the interveners' experts, suggests that the exercises of projection and assessment proposed on CSR's behalf are spurious or illusory because the assumptions on which they proceed are too uncertain to afford a sound basis for a conclusion that is not only reasonable but responsible having full regard to the interests of asbestos claimants and other creditors. The scope of the actuarial assessments 47 The soundness of the assumptions which underlie the actuarial predictions as to asbestos liability and the projections as to New CSR's future success are a cause for concern; but in the forensic context as it was fought before the learned primary judge, it was largely accepted by the experts on both sides that the exercises of prediction and projection were exercises which could reasonably and responsibly be undertaken. The exercises of prediction and projection were not so obvious with uncertainty that one can be confident that CSR could not discharge the onus of proof cast upon it by s 1324(1B) of the Act. 48 A further answer to the Fund's argument rests upon a stable understanding of the content of the public policy or commercial morality relevantly engaged by the proposed scheme. If the relevant public policy is that reflected in the most expansive reading of s 256B(1)(b) of the Act, then it would be no valid objection to the scheme that a theoretical risk of non-payment, falling short of material prejudice to the prospects of non-payment, arises from, or is increased by, the implementation of the scheme. On the other hand, if the relevant public policy is that any increase in the level of risk of non-payment is unacceptable, however unlikely the prospect of that risk coming home in a material way, then the learned primary judge's decision could be sustainable on the basis stated by her Honour. In our respectful opinion, the former view should be accepted and the latter rejected. The former view derives support from the language of s 256B(1)(b) and s 1324 of the Act. The latter view draws no support from the text of the Act. 49 The learned primary judge did not find that the implementation of the demerger would increase, in a material rather than in some abstract sense, the risk that creditors of New CSR will not be paid. Like the learned primary judge, we are unable to conclude that it is more likely than not that persons with asbestos-related claims would be unable to satisfy those claims against New CSR if the demerger were to be implemented. 50 The learned primary judge refused to call the meeting of shareholders on the basis that there was a risk that the demerger will diminish the prospects of recovery by innocent persons injured by wrongful conduct on the part of CSR. The question is whether this risk was sufficient to engage public policy or commercial morality to deny all possibility of the scheme proceeding to the first meeting. To a consideration of that question we now turn. Commercial morality and public policy 51 The particular content of "commercial morality" and "public policy" relevant to the exercise of the discretion in s 411(1) of the Act is to be discerned from the text and subject matter of the Act: Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [69]-[70]; Attorney-General (Cth) v Alinta Limited (2008) 233 CLR 542 at [147]. 52 It may be accepted that, in a broad sense, it is the policy of the Act that a company must use its capital for business purposes and not return it to shareholders. In St George Bank Ltd v Commissioner of Taxation [2009] FCAFC 62 at [88], Perram J described this obligation as arising from the circumstance that: Whereas a company has a legal personality separate from its members and its liabilities are not those of its members, the liabilities of a partnership are indistinguishable from the liabilities of the partners comprising it. In the case of a trust, the trust has no separate existence — what exists is the trustee and its liabilities are its alone although it has a right of indemnity out of the trust assets. No question therefore arises in the case of a partnership or of a trust of creditors being prejudiced by the removal of wealth from the undertaking embodied in them. No distribution of capital by a partnership to its partners can erase their liability to creditors and a trustee remains just as exposed to creditors even if it has disposed of all of the trust assets and even though its indemnity out of those assets be insufficient. The existence of a separate legal personality in a company, by contrast, makes necessary that those contributing their capital to the constituted venture do not withdraw it in a way which prejudices creditors. It is because the existence of the corporate veil presents the opportunity for injustice to be visited upon creditors that those standing behind the company are required to maintain their capital in it. The quid pro quo, therefore, of the granting of separate legal personality to a company is the concomitant obligation to ensure that the capital advanced by its members remains in play. 53 But it is also clear that the Act does not pursue this policy in a single-minded way: s 256B expressly contemplated that reductions of capital may occur for the benefit of shareholders in certain circumstances. The courts, in striving to give effect to the purpose of legislation, must bear in mind that the legislation strikes a balance of policy considerations, and that the courts must take instruction from the text of the legislation in this regard. As Gleeson CJ said in Carr v Western Australia (2007) 232 CLR 138 at 143 [5] – [7]: Another general consideration relevant to statutory construction is one to which I referred in Nicholls v The Queen [(2005) 219 CLR 196 at 207 [8]]. It was also discussed, in relation to a similar legislative scheme, in Kelly v The Queen [(2004) 218 CLR 216 at 225-232 [22]-[40]]. It concerns the matter of purposive construction. In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act is to be preferred to a construction that would not promote that purpose or object. As to federal legislation, that approach is required by s 15AA of the Acts Interpretation Act 1901 (Cth). It is also required by corresponding State legislation, including, so far as presently relevant, s 18 of the Interpretation Act 1984 (WA). That general rule of interpretation, however, may be of little assistance where a statutory provision strikes a balance between competing interests, and the problem of interpretation is that there is uncertainty as to how far the provision goes in seeking to achieve the underlying purpose or object of the Act. Legislation rarely pursues a single purpose at all costs. Where the problem is one of doubt about the extent to which the legislation pursues a purpose, stating the purpose is unlikely to solve the problem. For a court to construe the legislation as though it pursued the purpose to the fullest possible extent may be contrary to the manifest intention of the legislation and a purported exercise of judicial power for a legislative purpose. To take an example removed from the present case, it may be said that the underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose. Interpretation of income tax legislation commonly raises questions as to how far the legislation goes in pursuit of the purpose of raising revenue. In some cases, there may be found in the text, or in the relevant extrinsic materials, an indication of a more specific purpose which helps to answer the question. In other cases, there may be no available indication of a more specific purpose. Ultimately, it is the text, construed according to such principles of interpretation as provide rational assistance in the circumstances of the particular case, that is controlling. As explained in Kelly and Nicholls, the general purpose of legislation of the kind here in issue is reasonably clear; but it reflects a political compromise. The competing interests and forces at work in achieving that compromise are well known. The question then is not: what was the purpose or object underlying the legislation? The question is: how far does the legislation go in pursuit of that purpose or object? These observations by Gleeson CJ were referred to with approval by Hayne, Heydon, Crennan and Kiefel JJ in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27. 54 For the purposes of the present case, the terms of ss 256B(1)(b), s 1324 and s 1324(1B) of the Act provide clear guidance as to how far the Act goes in its insistence upon the policy that the capital of a company must be preserved. The "public policy" or "commercial morality" which informs s 256B and its analogues is concerned with the interests of shareholders and creditors. This was explained by Professor Ford: "So long as the reduction will not prejudice creditors or shareholders the court is not concerned with any ulterior purpose for which the reduction is being made…" (Ford, Company Law, (1974) p 159). 55 If persons who have unliquidated claims for damages for negligence against CSR sought to invoke s 256B(1)(b) to restrain the reduction of capital in proceedings under s 1324 of the Act, CSR would indeed be confronted with the burden of "proving a negative". It would fall to CSR in such proceedings to prove, on the balance of probabilities, that the reduction of capital "does not materially prejudice the company's ability to pay its creditors". The very availability of such proceedings to test this question suggests that the application for an order for convening the first meeting to consider the scheme may not have been an ideal vehicle for the resolution of the issue. 56 As to the argument advanced on behalf of the James Hardie parties, the reports prepared by CSR's actuaries purport to quantify the present value of CSR's future long term exposure to asbestos claimants. There is nothing in these reports which suggests that any category of asbestos claimant has not been included in their actuarial assessment. There is, accordingly, force in CSR's argument that the learned primary judge erred in treating the disclaimer in the Grant Samuel report as indicating that the assessments made on behalf of CSR did not include persons who have not yet contracted an asbestos related disease as a result of exposure for which CSR is responsible. On the other hand, this important question could have been resolved beyond the possibility of doubt by cross-examination of the relevant authors. That did not occur in the proceedings before the learned primary judge. To say this is in no way to level a criticism at her Honour: the case was conducted before her in accordance with the wishes of the applicant and the interveners. To say this is, however, to recognise that an application for the convening of the first meeting of shareholders under s 411(1) of the Act is not an ideal occasion to attempt to resolve such issues. Section 411(1) of the Act 57 In Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504-505, speaking of s 411 of the Corporations Law which preceded the Act, Mason CJ, Brennan, Dawson, Toohey and Gaurdron JJ said: It is certainly the case that "the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the … meeting the court would be likely to approve it on the hearing of a petition which is unopposed". No doubt at the s 411(1) stage, when the Court decides whether it will grant leave to summon a meeting or meetings, the Court should be alive to the difficulties which may arise subsequently when it is called upon to decide whether the arrangement should be approved. But it is going too far to say that the grant of leave to summon meetings under s 411(1) necessarily amounts to a determination that the proposed arrangement is one which falls within the scope of the section. The application for leave to summon meetings is in the nature of an interlocutory proceeding and is a preliminary to the final determination which is to be made when the matter comes back to the Court for approval after the holding of the meetings which have been directed. (Footnotes omitted.) See also Re Advance Bank Ltd (1996) 22 ACSR 513 at 519. 58 Reference may also be made to the observations of French J (as his Honour then was) in Re Foundation Healthcare Limited ((2002) 42 ACSR 252 at [36], [44]): It is however important to bear in mind that, by granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to 'introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage': Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). The Court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the Court. … That question is to be answered when the scheme returns to the Court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. (Emphasis added.) 59 This reference does not attempt to distil an accurate statement of the content of what is "unfair" or "contrary to public policy" so far as the discretionary considerations which inform the exercise of the power conferred by s 411(1) of the Act are concerned. Adverbs such as "blatantly" to modify "unfair" or "contrary to public policy", do serve, however, to emphasise that the inquiry under s 411(1) is not intended to resolve difficult questions on which reasonable minds may differ. 60 The courts have not previously considered it necessary, at the application stage, under s 411(1) of the Act or its analogues, to examine in any great detail a proposed compromise or arrangement. As was noted by Finkelstein J in In the matter of Opes Prime Stockbroking Limited [2009] FCA 813 (Opes Prime) at [17]:. For example, in England the practice note reported in [1934] WN 142 affirmed that it was for the company to decide whether creditors should be divided into classes for voting purposes, taking the risk that the correct decision was made, which would only be discovered at the approval hearing. In UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634 Lord Millett, sitting as a non-permanent judge of the Court of Final Appeal in Hong Kong, said this practice was a sound one. It has been applied to other issues relating to jurisdiction. 61 It may be accepted that these observations cannot be taken to mean that a court would exercise its discretion under s 411(1) of the Act in favour of setting in train a process which is clearly bound to fail: it has long been recognised that a clear want of utility in putting in train the processes of s 411 is a good reason to decline to order the convening of the first meeting. Thus, in Re Hawk Insurance Co Ltd, Chadwick LJ said ([2002] BCC 300 at 306 [21]; [2001] 2 BCLC 480; [2001] EWCA Civ 241): In my view an applicant is entitled to feel aggrieved if, in the absence of opposition from any creditor, the court holds, at the third stage and on its own motion, that the order which it made at the first stage was pointless. It is, to my mind, no answer to say that that is a risk which the applicant must accept. It may be inevitable that an applicant must accept the risk that a dissentient creditor will persuade the court at the third stage that the order which it made at the first stage (without hearing that creditor) was the wrong order. But that is not to say that the applicant must be required to accept that, when exercising what is plainly a judicial discretion at the first stage, the court will not address the question whether the order which it makes serves any useful purpose; or that, if it has addressed that question at the first stage, it will change its mind, of its own motion, at the third stage. 62 A new Practice Note, in terms different from that initially referred to by Finkelstein J in Opes Prime,has now been issued for England and Wales. The approach outlined in the new Practice Note was applied by Finkelstein J in Opes Prime at [19]–[20]. His Honour said: A new practice statement was published in [2002] 1 WLR 1345 […] I adopted this practice in In the Application of United Medical Protection Ltd [2007] FCA 631. The purpose of the new practice is to avoid the waste of costs and court time which would result if it were not until the approval hearing that it was determined that classes were wrongly constituted. In England it has been said that this underlying purpose means that if other issues which go to the jurisdiction of the court to approve a scheme (as in Re Savoy Hotel Ltd [1981] 1 Ch 351), or issues which would lead the court unquestionably to refuse the scheme, should also be dealt with at the convening application: Re T & N Ltd (No 3) [2007] 1 All ER 851 at 862. 63 In a Report given in December 2009 entitled "Members' Schemes of Arrangement", the Corporation and Markets Advisory Committee ("CAMAC") referred in some detail to the role of the Court and ASIC in the review of scheme documents and the calling of scheme meetings. CAMAC did not suggest that there ought to be a departure from the current practice. 64 In our respectful opinion, the discretion to make an order under s 411(1) of the Act may properly be exercised in the negative where the making of the order would be futile because the scheme as proposed is unlikely to be finally approved. The Court should not promote the waste of resources and the raising of false hopes or the creation of unnecessary concern and anxiety by promoting a process which will clearly not proceed to consummation under s 411(4)(b). But that having been said it must be recognised that there are other procedural opportunities which are more appropriate for the resolution of the issues which the learned primary judge held to be fatal to CSR's attempt to put the s 411 process in train in this case. 65 At the hearing of the appeal, counsel for CSR and the Fund pressed the Court with arguments calculated to persuade the Court to make findings of fact on difficult issues in circumstances where the learned primary judge had not been pressed to make such findings and where the absence of cross-examination of the proponents of competing views denied the Court a full opportunity to make such findings. The hearing before the learned primary judge was an interlocutory hearing ill-suited to the kind of in-depth investigation which both sides sought to press on this Court. We are respectfully of the opinion that the key to the determination of the appeal lies in understanding that whether or not the scheme should ultimately be approved by the Court is a question not amenable to resolution in the negative on an application for an order concerning a meeting of shareholders. 66 It was not, in our respectful opinion, open to the learned primary judge to refuse an order for convening a meeting of shareholders on the ground that the scheme was bound to be ultimately rejected by the Court. Her Honour did not conclude that the demerger would increase the risk of non-payment of creditors of New CSR, including asbestos claimants in a material rather than abstract way. The Act contemplates that a reduction in capital may occur notwithstanding that it may involve an increase in the abstract risk to those with claims against the company. The learned primary judge would have been acting within the bounds of a proper exercise of discretion to refuse the order if she was able to find that CSR could not negative a material risk that New CSR would be unable to pay its debts in consequences of the reduction in capital. But her Honour made no such finding, and in our respectful opinion on the materials before her, could not have made such a finding. 67 There being no sufficient basis for concluding that the scheme could not ultimately be approved, the discretion should have been exercised to allow the shareholders to vote on the proposal and the objectors to mount, if they choose to do so, a better informed and more focused challenge to the reduction of capital by the means open to them, either pursuant to s 1324 of the Act, or by way of opposition on the application for final approval under s 411(4)(b) of the Act. Conclusion 68 This Court should be circumspect in expressing its conclusions on matters which might be litigated either at the application for final approval of the scheme or in proceedings pursuant to s 1324 of the Act. It is sufficient, we think, for present purposes to say that: (a) the consideration that the reduction in capital would increase the risk of non-payment of New CSR's creditors in a theoretical rather than a material way is not a consideration which would warrant blocking the demerger as a matter of public policy or commercial morality by refusing to order the first meeting; and (b) the prospect that the reduction in capital associated with the demerger of CSR may materially prejudice the ability of New CSR to pay all its creditors including asbestos claimants is not so clear as to warrant the conclusion that the scheme could never be approved and justify the order made below on this basis. 69 For these reasons we consider that error on the part of the learned primary judge has been demonstrated. Orders 70 The Court orders that: 1. Leave to appeal be granted. 2. The appeal be allowed and the order of Stone J dated 3 February 2010 be set aside. 3. Pursuant to subsection 411(1) of the Corporations Act 2001 (Cth), a meeting of the ordinary shareholders of CSR Limited be convened at a date and time to be determined by a single judge of the Court. 4. The proceedings be remitted to a single judge of the Court. I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Keane and Justice Jacobson. Associate: Dated: 22 April 2010 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 127 of 2010 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA IN THE MATTER OF CSR LIMITED ACN 000 001 276 CSR LIMITED ACN 000 001 276 Applicant JUDGES: KEANE CJ, FINKELSTEIN AND JACOBSON JJ DATE: 23 April 2010 PLACE: SYDNEY REASONS FOR JUDGMENT FINKELSTEIN J: 71 This is an important case so I would like to add a few words of my own to what has been said by the Chief Justice and Jacobson J, with whom I largely agree. I will confine myself to three issues. 72 The first topic concerns the appropriate practice as regards an application to convene a scheme meeting. The function of the court on the convening application is "emphatically not" to consider the merits or fairness of the proposed scheme: Re Telewest Communications plc [2004] BCC 342, 348. It is largely to decide whether there should be one or more meetings and to decide the manner in which that meeting, or those meetings, should be summoned and conducted. 73 Nonetheless, it seems now to be accepted that there are occasions on which the court is justified in considering, on the convening application, whether the scheme is one which, if approved by the requisite majority, would be sanctioned by the court. Necessarily, the occasions on which it will be appropriate to take that course are few. The current practice is to have disputes about classes determined before the meeting. Issues that go to the jurisdiction of the court to approve the scheme may also be raised at the convening hearing. So also might an issue which could lead the court to refuse to sanction the scheme. What is not clear regarding this last category is how immediately apparent the issue must be. 74 In Re T & N Ltd [2006] EWHC 1447 (Ch), David Richards J said at [19] that the issue must be such as would "unquestionably" lead to a refusal. In Re Foundation Healthcare Limited (2002) 42 ACSR 252 at 265 French J (as he then was) said that "a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further". In Re Central Pacific Minerals NL [2002] FCA 239 at [8], Emmett J said that the court will not convene a meeting unless the proposal is likely to be approved if it were unopposed. This does not represent a uniform approach. Some reconsideration is appropriate. 75 In Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349; (2000) 33 ACSR 595 Santow J drew a distinction between two lines of Australian authority regarding the proper approach of the court at the convening stage (at [32]-[40]). The first approach, which his Honour favoured, suggests the court should generally confine itself to ensuring that certain procedural and substantive requirements are met (for example, that there will be adequate disclosure), with limited consideration of issues of fairness. This was the approach adopted in Re Foundation Healthcare. The alternative approach (similar to that adopted in Re Central Pacific) is to look to the merits of the scheme to determine whether it is likely that the court will approve the arrangement when it comes back for approval. 76 In my view, the test propounded in Re T & N and, subject to one qualification, in Re Foundation Healthcare, should be applied. Such an approach properly reflects the two stage nature of the scheme hearing process, where convening hearings often take place on limited notice, and where issues and objectors regarding a scheme may only emerge after the scheme meeting. As such, instead of saving costs and court time, hearing the merits at the convening stage may achieve the opposite. Thus an enquiry into the merits at the convening stage will only be warranted if there is a clear indication that the scheme will not be approved. The indication may appear from the terms of the scheme. Or it may arise out of an incontrovertible fact (which is the basis upon which I would qualify what is said in Re Foundation Healthcare). 77 In Re NRMA, Santow J observed that the two approaches he had identified may not be that different in practice, because "if there were a significant aspect of unfairness it will almost certainly have disclosure implications and may in some cases portend illegality." The relationship between the court's enquiries into (i) the adequacy of disclosure and (ii) the fairness of the scheme is potentially problematic. Deficient disclosure should ideally be identified before the scheme meeting rather than after it. On the other hand, an enquiry into adequacy of disclosure should not be used as a 'backdoor' method of raising an argument, at the convening stage, about the merits of the scheme as a whole. Accordingly, when considering disclosure regarding a contentious issue which fundamentally concerns the fairness of the scheme, a court should first determine whether the disclosure can be made in a way which does not require a final resolution of the issue at hand. For example, in many cases it will be sufficient for a statement in the scheme booklet to be appropriately qualified or by the addition of a competing view. If that is not possible, it is I think preferable for a court to defer resolution of the contentious issue to the approval hearing (meaning that the applicant effectively bears the risk of the scheme not being approved due to inadequate disclosure). 78 In the case at hand, for example, there are several reasons why it was not appropriate for the merits of the scheme to be considered at the convening hearing. First, the relevant material consisted almost exclusively of the opinions of expert actuaries. The actuaries were of differing opinions as regards how best to assess the value of the claims on CSR by a select group of creditors, who might compendiously be referred to as asbestos victims. It is obvious that the disputes between the actuaries were of some complexity and would require close analysis to resolve. Second, on one view, resolving the differences might require a judge to form a view on the strength of the competing views put forward. That is the kind of exercise where the judge might be assisted by questioning of the experts. Third, this case was fundamentally concerned with the fairness of the scheme as a whole rather than disclosure per se. ASIC, for example, did not raise any concerns regarding the disclosure, but did raise concerns about the effect of the scheme. Fourth, if the ruling had gone the other way (as it will in this appeal), it is possible that the opponents will seek to reargue their case at the approval hearing if the scheme is passed by the members. 79 The second topic is the role of public policy and commercial morality in the approval of a scheme. The background to this issue is the role of the court at the approval hearing. The duties of the court are: (1) to ensure that the resolution approving the scheme was passed by the requisite majority as required by s 411(4) at duly convened meetings; and (2) to decide as a matter of discretion whether the scheme should be confirmed, if necessary subject to any variations or conditions. 80 The manner in which the court is to approach the exercise of its discretion is laid down in the classic statement of Bowen LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213, 248. There Bowen LJ said that: "A reasonable compromise must be a compromise which can, by reasonable people conversing with the subject, be regarded as beneficial to those on both sides who are making it". He added, to explain that: "… I have no doubt at all that it would be improper for the Court to allow an arrangement to be forced on any class of creditors, if the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of that class as such". In the same case, Fry LJ (at 247) added that: "[T]he Court … must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it". See also Re English Scottish and Australian Chartered Bank [1893] 3 Ch 385; Re Dorman Long and Co Ltd [1934] 1 Ch 635. These principles have consistently been applied by courts in both England and Australia. 81 The interests to be taken into account in considering the merits of a scheme are not, as these cases might suggest, confined to those of the "contracting" parties, that is, the members or creditors who are to be bound by the scheme. In Re National Bank Ltd [1966] 1 WLR 819, 829 Plowman J said that it is not only the interests of the class which is to be bound that must be considered but the court also must look to see if "some [other] blot is found in the scheme". In Re BAT Industries Plc (unreported, 1998 WL 1076712), Neuberger J (as the Master of the Rolls then was), said that it is open to the court to take into account the legitimate interests of third parties in relation to a proposed scheme even if not members of the company. In that case a scheme was propounded between one of the world's largest tobacco manufacturers and its members which had the potential, so it was said, of adversely affecting persons who had potential claims against the company of in aggregate amounts of several billions of dollars. Neuberger J said it was proper to take the interests of these potential claimants into account. 82 There has crept into Australian jurisprudence the view that a court will not confirm a scheme if it is contrary to "public policy" or is not consistent with "commercial morality". A consideration of what is contrary to "public policy" cannot extend beyond considering the interests of members, creditors and persons who in the future might deal with the scheme company or invest in its shares. Their interests are, however, adequately protected by an inquiry whether the scheme is fair or reasonable. So, considerations of public policy seem to add nothing to existing principles. 83 The concept of commercial morality was raised in a scheme case in Re Mascot Home Furnishings Pty Ltd (in liquidation) [1970] VR 593. Two companies were in liquidation. Schemes of arrangement were proposed the effect of which were that for a pecuniary consideration the creditors of the companies would assign their debts and the members would transfer their shares to a third party. The third party would then be able to divert part of its income to each so-called "loss company", thereby reducing the incidence of income tax on that income. The objective was not illegal. Gillard J refused to approve the schemes. He did so because the schemes were not conducive to commercial morality nor in the interest of the public at large. Other judges soon followed suit. 84 There is a real problem with "commercial morality" being applied to discretionary decision-making. It suggests the existence of a fixed set of standards by which the community assesses conduct to be legitimate or acceptable. Putting to one side the obvious difficulty which confronts a judge in attempting to discover what are the relevant community standards, the fact is that many so-called standards, when they exist, are not fixed. They are constantly changing. 85 For instance, while selling a tax loss company was commercially immoral in 1970, it had become a legitimate enterprise by the early 1990s. For example, in Re Avram Investments Pty Ltd (1992) 10 ACLC 1747 Heerey J considered a proposed scheme which was designed to allow the proprietors of a hopelessly insolvent company to carry on business to take advantage of tax losses. Notwithstanding this, Heerey J said "I do not see that any questions of commercial morality or public policy are involved" (at 1750). 86 In my opinion, notions of commercial morality should be jettisoned from the matters to be considered in approving a scheme. It is dangerous to bring to decision-making an ill-defined and largely subjective set of criteria purporting to represent the views of the community when, in reality, no one can be sure of that. 87 The last topic concerns the merits of the proposed scheme. The joint judgment has already set out in detail the facts and arguments relating to the scheme's merits and, in particular, whether it would materially prejudice CSR's ability to pay its creditors. I wish to make a few further observations. 88 First, on appeal, counsel for CSR indicated they were content to argue the case on the basis that the proposed scheme and its related capital reduction would not materially prejudice CSR's ability to pay its creditors, including all past, present and future asbestos claimants. In other words, the argument on the appeal became a proxy for an attack, not on the scheme proper, but on the related reduction of capital. Having regard to the structure of the arrangement, particularly the interdependence of the scheme and the reduction of capital, it was inevitable that this approach be adopted. To do otherwise would be to take "a blinkered, narrow and uncommercial approach [and] ignore the fact that the scheme which is sought to be sanctioned is the first and necessary stage of a larger process": Re BAT Industries Plc (Neuberger J). 89 Second, as the joint judgment explains, much of the debate in this matter centred on CSR's ability to pay creditors in a scenario which can fairly be supposed to be a 'worst case.' It is important to put this worst case into proper perspective. It involves a most unlikely coincidence of events. First, it involves a 51 per cent reduction in the new CSR's earnings. Second, it involves extremely high levels of asbestos liabilities emerging in both Australia and the US. The likelihood of such liabilities each occurring in their own right was estimated to be 5 per cent or less; the likelihood of both occurring is potentially much lower. The risks identified are more theoretical than practical. It is not appropriate to refuse the scheme on a merely theoretical fear of adverse consequences. In any event, on the material before the court, it appears that the company would be able to pay all creditors should the worst eventuate. 90 I agree in the orders proposed by the Chief Justice and Jacobson J. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 22 April 2010