FEDERAL COURT OF AUSTRALIA PAYCE Consolidated Limited; In the Matter of PAYCE Consolidated Limited (No 1) [2016] FCA 1412 File number: NSD 1575 of 2016 Judge: FOSTER J Date of Judgment: 23 September 2016 Date of Orders: 23 September 2016 Date of Publication of Reasons: 24 November 2016 Catchwords: CORPORATIONS – whether, pursuant to s 411(1) of the Corporations Act 2001 (Cth), the Court should order that a meeting of the ordinary shareholders of the plaintiff and a meeting of the preference shareholders of the plaintiff be convened for the purpose of considering two inter-dependent schemes of arrangement propounded by the plaintiff whereby all of the ordinary shares issued by the plaintiff are to be acquired by a bidder and all of the preference shares issued by the plaintiff are to be the subject of a reduction of capital and consequential cancellation Legislation: Corporations Act 2001 (Cth), ss 256B, 256C, 260B, 411(1), 1319, Pt 2J.1, Pt 2G.2 Federal Court (Corporations) Rules 2000 (Cth), r 2.15 Corporations Regulations (Cth), reg 5.6.13 Cases cited: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 Re Abacus Funds Management Ltd (2006) 24 ACLC 211 Re Aston Resources Ltd [2012] FCA 229 Re Central Pacific Minerals NL [2002] FCA 239 Re Centrebet International Ltd [2011] FCA 870 Re CSR Ltd (2010) 183 FCR 358 Re Hills Motorway Ltd (2002) 43 ACSR 101 Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 Re Village Roadshow Ltd (2003) 176 FLR 436 Village Roadshow Ltd v Boswell Film GmbH (2004) 182 FLR 37 Date of hearing: 23 September 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 49 Counsel for the Plaintiff: Mr RA Dick SC Solicitor for the Plaintiff: Addisons Counsel for Bellawest Pty Ltd and Lanox Pty Ltd: Mr PM Wood ORDERS NSD 1575 of 2016 IN THE MATTER OF PAYCE CONSOLIDATED LIMITED (ACN 001 566 310) PAYCE CONSOLIDATED LIMITED (ACN 001 566 310) Plaintiff JUDGE: FOSTER J DATE OF ORDER: 23 SEPTEMBER 2016 THE COURT ORDERS THAT: 1. Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act): (a) The plaintiff, PAYCE Consolidated Limited (ACN 001 566 310) (Payce), convene: (i) A meeting (Ordinary Scheme Meeting) of the holders of ordinary shares in Payce (Ordinary Shareholders) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between Payce and its Ordinary Shareholders (Ordinary Scheme), being the scheme contained in Annexure B to the draft explanatory statement (Explanatory Booklet) which is exhibited at Exhibit BHB13 to the Affidavit of Brian Hilton Bailison affirmed on 22 September 2016; and (ii) A meeting (Preference Scheme Meeting) of the holders of preference shares in Payce (Preference Shareholders) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between Payce and its Preference Shareholders (Preference Scheme), being the scheme contained in Annexure E to the Explanatory Booklet, (together, the Scheme Meetings) (b) The Scheme Meetings be held on Monday 31 October 2016 at 'Pulse', 9 The Crescent, Wentworth Point NSW 2127, with the Ordinary Scheme Meeting commencing at 10.30 am and the Preference Scheme Meeting commencing at 11.00 am, or as soon as reasonably possible after the conclusion of the General Meeting to be held in between the Ordinary Scheme Meeting and Preference Scheme Meeting. 2. Pursuant to s 1319 of the Act: (a) Payce may determine, that for the purposes of the Scheme Meetings, all the ordinary shares and preference shares in Payce be taken to be held by the person, persons or bodies corporate who held them as at 7.00 pm on 29 October 2016, in accordance with the register held and maintained in respect of Payce; (b) Payce may determine that only the proxy forms in relation to each Scheme Meeting received by Payce by no later than 48 hours before that relevant Scheme Meeting are valid; (c) Christopher Ian Gabriel, or failing him, Brian Hilton Bailison, act as Chairperson of the Scheme Meetings. (d) The Chairperson appointed to the Scheme Meetings have power to adjourn the Scheme Meeting in his absolute discretion. (e) All voting at the Scheme Meetings to be by poll as declared by the Chairperson, except for procedural motions. 3. Pursuant to s 411(1) of the Act, the Explanatory Booklet be approved for distribution to Ordinary Shareholders and Preference Shareholders. 4. The plaintiff be dispensed from compliance with: (a) Rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth), except insofar as that rule applies reg 5.6.13 of the Corporations Regulations 2001 (Cth) to the Scheme Meetings; and (b) Replaceable rules (within the meaning of s 135 of the Act) which appear in Pt 2G.2 of the Act, to the extent that a replaceable rule in that Part is displaced or modified by the plaintiff's constitution. 5. Notice of the hearing of an application pursuant to s 411(4)(b) of the Act for orders approving the Schemes be published, substantially in the form of Annexure "A" to this Order in The Australian newspaper, such advertisement to be published not less than 14 days before the date appointed for the Scheme Meetings, and that Payce otherwise be exempted from compliance with r 3.4 of the Federal Court (Corporations) Rules 2000 (Cth). 6. Notice of the Scheme Meetings be published, substantially in the form of Annexure "B" to this Order in The Australian newspaper, such advertisement to be published not less than 21 days before the date appointed for the Scheme Meetings. 7. Pursuant to s 411(12) of the Act, the plaintiff be exempted from compliance with s 411(11) of the Act in relation to the Ordinary Scheme and the Preference Scheme. 8. The proceeding be stood over to 10.15 am on 3 November 2016 before Foster J for the hearing of any application to approve the Ordinary Scheme and the Preference Scheme. 9. Liberty to apply be granted on two (2) days' notice. 10. These orders be entered forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. Annexure A Notice of hearing to approve compromise or arrangement TO all the creditors and members of PAYCE Consolidated Limited (ACN 001 566 310). TAKE NOTICE that at 10.15 am on 3 November 2016, the Federal Court of Australia at Queens Square, Sydney, New South Wales will hear an application by PAYCE Consolidated Limited seeking the approval of a compromise or arrangement between the above-named company and its members as proposed by the resolutions to be put to meetings of the members of the company to be held on 31 October 2016 at 'Pulse', 9 The Crescent, Wentworth Point NSW 2127 commencing at 10.30 am. If you wish to oppose the approvals of the compromise or arrangement, you must file and serve on the plaintiff a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on the plaintiff at its address for service at least 1 day before the date fixed for the hearing of the application. The address for service of the plaintiff is Addisons, Level 12, 60 Carrington Street, Sydney NSW 2000. Name of person giving notice or of person's legal practitioner: Rick Narev (solicitor for the plaintiff). Annexure B Notice of Scheme Meetings NOTICE TO ALL THE MEMBERS OF PAYCE CONSOLIDATED LIMITED (ACN 001 566 310) ("PAYCE") NOTICE IS GIVEN that by order of the Federal Court of Australia dated 23 September 2016, pursuant to section 411(1) of the Corporations Act 2001 (Cth), PAYCE has been given approval to convene: a) a meeting ("Ordinary Scheme Meeting") of the holders of ordinary shares in PAYCE ("Ordinary Shareholders") for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between PAYCE and its Ordinary Shareholders; and b) a meeting ("Preference Scheme Meeting") of the holders of preference shares in PAYCE ("Preference Shareholders") for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between PAYCE and its Preference Shareholders. (together, the "Scheme Meetings") The Scheme Meetings are to be held on 31 October 2016 at 'Pulse', 9 The Crescent, Wentworth Point NSW 2127 commencing with the Ordinary Scheme Meeting 10.30 am. A copy of the explanatory booklet in respect of the Ordinary Scheme and the Preference Scheme (including the terms of each of those schemes) can be obtained by anyone entitled to attend the Scheme Meetings from the ASX website (www.asx.com.au) (trading symbol on the ASX is "PAY"), PAYCE's website (www.payce.com.au) or by contacting Boardroom on 1300 737 760 REASONS FOR JUDGMENT FOSTER J: 1 By its Originating Process filed on 16 September 2016, the plaintiff, PAYCE Consolidated Limited (ACN 001 566 310) (PCL) sought orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) convening a meeting of holders of its ordinary shares (ordinary shareholders) and a meeting of the holders of preference shares issued by it (preference shareholders) for the purpose of considering two proposed interdependent schemes of arrangement and, if the schemes are endorsed by the ordinary shareholders and by the preference shareholders, orders approving those schemes. The plaintiff also sought directions pursuant to s 1319 of the Act as to the manner in which the meetings are to be conducted. 2 On 23 September 2016, I made orders convening the two meetings as sought. These are my reasons for making those orders. 3 I shall refer to the two schemes in question as "the ordinary scheme" and "the preference scheme" respectively and to the two meetings as "the ordinary scheme meeting" and "the preference scheme meeting" respectively. 4 PCL is a public company which has its registered office in Sydney. It is listed on the Australian Securities Exchange (ASX) and is engaged in the development and sale of residential, retail and commercial property in Sydney and in Queensland. 5 PCL is the holding company of an Australian property group whose business model focusses on medium to long term medium density apartment and mixed use (retail/commercial) products and urban renewal products in Sydney and Queensland. As at 30 August 2016, PCL's market capitalisation was approximately $188.5 million. Overview of the Schemes The Ordinary Scheme 6 Under the ordinary scheme, all of the ordinary shares in PCL (other than those held by certain shareholders who are to be excluded from voting at the scheme meetings and whom I shall call "the non-participating shareholders") will be transferred to Bellawest Pty Limited (Bellawest) in exchange for consideration comprising either $12.60 in cash for each ordinary share held as at the Record Date (as defined in the scheme documentation) or one (1) Bellawest Note for each ordinary share held as at that date. Ordinary shareholders (other than Ineligible Foreign Shareholders (as defined in the scheme documentation)) may elect whether to receive cash consideration or Bellawest Notes. Ineligible Foreign Shareholders are entitled to receive cash consideration only. The non-participating shareholders as defined in the scheme documentation are Bellawest and Lanox Pty Ltd (Lanox). 7 The Bellawest Notes are to be issued by Bellawest pursuant to the Bellawest Note Trust Deed. Australian Executor Trustees Ltd has been appointed as trustee under the Bellawest Note Trust Deed. The Bellawest Notes are to be unsecured and will rank equally with each other and with all other unsecured creditors of Bellawest. The face value of each Bellawest Note is $12.60, the interest rate is 6.5% per annum and all outstanding Bellawest Notes will be redeemed on the maturity date which is the last day of the Quarter, two years from the Issue Date. The Issue Date is the same date as the Ordinary Scheme Implementation Date (as defined in the scheme documentation). 8 Bellawest was incorporated on 1 June 2016 as a special purpose vehicle to facilitate the acquisition of ordinary shares under the ordinary scheme. It is an Australian investment holding company. Bellawest has not undertaken any other activity since its incorporation. Bellawest is indirectly wholly owned by Lanox as trustee for the Brian Boyd No 2 Trust. Lanox is, in turn, wholly owned by Brian Boyd. Brian Boyd is the Executive Chairman and Managing Director of PCL. If approved, the ordinary scheme will vest control of PCL in Bellawest which, in effect, will hold the ordinary shares in PCL in the interests of Brian Boyd and his family. 9 If the schemes are implemented, the cash component of the Ordinary Scheme Consideration (as defined in the scheme documentation) will be funded by a loan made to Bellawest by Payce Finance Pty Ltd (Payce Finance). Payce Finance is a subsidiary of PCL. The maximum loan amount under the loan agreement is $120 million. The loan will be made on or before the last business day before the Ordinary Scheme Implementation Date. The term of the loan is to be three years with an interest rate of 6% per annum. One of the substantial shareholders in PCL, Hurlcla Pty Ltd (Hurlcla) has provided a binding undertaking to Bellawest, Lanox and PCL that, if both schemes are implemented, Hurlcla will elect to take no less than 2,580,000 Bellawest Notes as Ordinary Scheme Consideration (as defined in the scheme documentation). Hurlcla is a company controlled by Brian Boyd's brother, Gary Boyd. As a result of this undertaking, the maximum amount to be advanced under the loan agreement between Payce Finance and Bellawest ($120 million) will be sufficient to meet all cash consideration that will become payable under the ordinary scheme, assuming that all ordinary shareholders elect to receive cash consideration. 10 Because the provision of the loan to which I have referred at [9] above by Payce Finance to Bellawest comprises financial assistance to Bellawest to acquire shares in PCL (PCL being the ultimate holding company of Payce Finance), shareholder approval of that financial assistance will be sought from the ordinary shareholders of Payce Finance pursuant to s 260B(1) of the Act and from the shareholders of PCL pursuant to s 260B(2) of the Act. I shall refer to these resolutions as "the financial assistance resolutions". The Preference Scheme 11 Under the preference scheme, all of the preference shares in PCL will be cancelled by means of a capital reduction. The holders of preference shares in PCL will be entitled to receive for each preference share held as at the Record Date: (a) $1.00; plus (b) One (1) unsecured note issued by PCL with a face value representing a principal amount of $6.50 per note, a four year maturity and an attached coupon of 7.5% per annum (PCL Note); plus (c) An additional cash amount calculated to reflect the pro-rata amount of any dividend accrued and unpaid on each preference share up to the Preference Scheme Implementation Date (as defined in the scheme documentation). 12 The formula for calculating the additional cash amount referred to [11(c)] above is set out in cl 5.2 of the preference scheme. That formula uses the dividend rate under the terms of the preference shares (currently 7%) and calculates the dividend payable for the period since the last dividend payment date up to (but excluding) the Preference Scheme Implementation Date. The minimum additional cash amount payable per preference share will be $Nil and the maximum will be $0.13125 per preference share. 13 The preference scheme involves a capital reduction. Thus, the provisions of Pt 2J.1 of the Act apply. Insofar as it relates to the preference shares, the capital reduction is a selective reduction (see s 256B(2)). Pursuant to s 256C(2)(a), a selective reduction of capital must be approved by a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction. The terms of the preference shares are set out in the schedule to the offer document relating to an equal buy-back of ordinary shares released by PCL to ASX on 4 May 2015. Pursuant to those terms, preference shareholders will be entitled to vote on the special resolution to approve the selective capital reduction at the general meeting. However, in accordance with s 256C(2)(a), any votes cast in favour of the resolution by a preference shareholder will be disregarded (see Re Village Roadshow Ltd (2003) 176 FLR 436 at 444–445 [32]; and on appeal Village Roadshow Ltd v Boswell Film GmbH (2004) 182 FLR 37 at 42–44 [15]–[18] and 48 [34]–[35]). 14 Because preference shareholders are not otherwise entitled under the terms of the preference shares to vote at a general meeting, preference shareholders will not be entitled to vote in respect of the financial assistance resolution being propounded pursuant to s 260B(2) of the Act. As already mentioned, the capital reduction in the present case involves the cancellation of all preference shares. Therefore, the reduction must also be approved by a special resolution passed at the meeting of preference shareholders whose shares are to be cancelled (s 256C). 15 The ordinary scheme and the preference scheme are inter-conditional. The Scheme Implementation Deed 16 On 1 July 2016, PCL, Bellawest and Lanox entered into a Scheme Implementation Deed (SID). The SID was subsequently amended and restated on 26 August 2016. The amendment provided for the preference scheme which had not been included in the original SID. 17 The SID provides: (a) For PCL to propose the ordinary scheme and the preference scheme and for Bellawest to assist PCL to do so (cl 2(a) and cl 2(b)); (b) That the parties thereto agree to implement both schemes and also the subsequent cancellation of the preference shares subject to satisfaction or waiver of various conditions precedent (cl 2(c) and cll 3.1–3.4); (c) For various conditions precedent including the approval by the Court of both schemes, shareholder approval of the financial assistance resolution, shareholder approval of the capital reduction resolution and shareholder approval of the cancellation resolution, all in accordance with the requirements of the Act; and (d) For Lanox to guarantee the obligations of Bellawest. Relevant Principles 18 In Re CSR Ltd (2010) 183 FCR 358 (CSR), at 362–365 [7]–[12], Keane CJ and Jacobson J, in their joint judgment, discussed s 411 of the Act and explained the relevant principles which guide the Court when considering applications of the present kind. At 362 [7], their Honours said that s 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. At 362–363 [8], their Honours said: 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 Hawk Insurance Company Ltd [2001] 2 BCLC 480 at [21]. (Emphasis in original.) 19 At 363 [9], their Honours noted that the content of the draft explanatory statement which must be provided to the creditors or members (as the case may be) is addressed in s 411(3) of the Act. At 363 [10], their Honours observed that the binding effect of the arrangement proposed to the Court is provided for by s 411(4). 20 At 363–364 [11], their Honours continued: 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). 21 At 364–365 [12], their Honours quoted with apparent approval the statements of principle made by Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 at [8]–[11]. In that case, at [8]–[11], Emmett J said: Those principles require that the 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. 22 Chief Justice Keane and Jacobson J returned to s 411(1) of the Act at 375–377 [57]–[62] where their Honours said: Section 411(1) of the Act In Australian Securities Commission v Marlborough Gold Mines Ltd 177 CLR 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 Australia Ltd (1997) 136 FLR 281 at 286-287. Reference may also be made to the observations of French J (as his Honour then was) in Re Foundation Healthcare Ltd (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.) 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. 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 Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 (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. 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 ([2001] 2 BCLC 480 at [21]): 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. 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. 23 Finally, at 377 [64], their Honours made the following remarks: 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. 24 Justice Finkelstein added some observations of his own in respect of the basis upon which the Court should exercise its discretion to convene a meeting for the purpose of allowing creditors or members to consider a scheme or arrangement. At 379–380 [72]–[78], his Honour said: 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 at 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. 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. In Re T & N Ltd [2007] 1 All ER 851, David Richards J said at [19] that the issue must be such as would "unquestionably" lead to a refusal. In Re Foundation Healthcare Ltd (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. In Re NRMA Ltd (No 1) (2000) 156 FLR 349 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. 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). 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). 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. 25 Thus, the Court will not ordinarily summon a meeting unless the proposed scheme of arrangement is of such a nature and is cast in such terms that, if it receives the statutory majority at the meeting, the Court will be likely to approve it on the hearing of an application for approval that is unopposed. At the first Court hearing, the Court will generally not be concerned with whether final approval should be given to the scheme but rather will focus upon the question of whether the scheme is one which is adequately explained to those who have a financial interest in it and whether there is any obvious flaw in the scheme such that it would be inappropriate for it to be submitted for consideration (Re Abacus Funds Management Ltd (2006) 24 ACLC 211 at 214 [23]). 26 Importantly, the Court is not required to be satisfied that no better scheme could have been proposed. The question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed to be of benefit to members or creditors (Re Centrebet International Ltd [2011] FCA 870 at [29] per Emmett J). Ultimately, the question is for the members or creditors themselves (FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ). 27 It is now settled that the appropriate occasion upon which the Court is required to address the questions posed by s 411(17) of the Act is at the second or confirmation hearing when the Court's approval of the scheme is sought (Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 at 370–371 [25]–[27] per Barrett J). This is also the view of the Australian Securities and Investments Commission (ASIC) in respect of its position under s 411(17)(b) of the Act. Implementation of the Schemes 28 The ordinary scheme will be implemented in the following manner: (a) Bellawest must deposit the cash consideration into a trust account operated by PCL as trustee for the ordinary shareholders of PCL by no later than the business day before the Ordinary Scheme Implementation Date (cl 5.5(a) of the ordinary scheme); (b) On the Ordinary Scheme Implementation Date, and subject to the obligation referred to in subpar (a) being complied with, PCL must pay or procure the payment from the trust account to each ordinary shareholder, the cash consideration (cl 5.5(b)); (c) Bellawest must, on the Ordinary Scheme Implementation Date, issue the Bellawest Notes to each ordinary shareholder who has elected to receive some or part of the ordinary scheme consideration in the form of Bellawest Notes (cl 5.6(a)); (d) In the case of ordinary shares held in joint names, any cash consideration payable to the joint holders in any Bellawest Notes must be issued to the joint holders (cl 5.7); and (e) Ineligible Foreign Shareholders are not entitled to receive any Bellawest Notes and must receive cash consideration (cl 5.8). 29 The preference scheme will be implemented in the following manner: (a) PCL must deposit the cash component of the preference scheme consideration into a trust account operated by PCL as trustee for the preference shareholders of PCL by no later than the business day before the Preference Scheme Implementation Date (cl 5.3(a) of the preference scheme); (b) On the Preference Scheme Implementation Date, and subject to the obligation referred to in subpar (a) above being complied with, PCL must pay or procure the payment from the trust account to each preference shareholder, the cash consideration (cl 5.3(b)); (c) PCL must, on the Preference Scheme Implementation Date, issue to each preference shareholder, one (1) PCL Note for each preference share held by that shareholder as at the Record Date (cl 5.4(a)); (d) In the case of preference shares held in joint names, the cash proportion of the preference scheme consideration is payable to the joint holders and the PCL Notes must be issued to the joint holders (cl 5.5); and (e) Ineligible Foreign Shareholders are not entitled to receive any PCL Notes and PCL must instead pay the cash component plus a cash amount equal to the face value of the PCL Note to those shareholders (cl 5.6). 30 The obligations of Bellawest under the ordinary scheme are supported by a deed poll given by Bellawest in favour of ordinary shareholders of PCL. Lanox is also a party to that deed poll and undertakes to provide or procure the provision of the ordinary scheme consideration to each ordinary shareholder (cl 3.1). 31 The independent directors of PCL unanimously recommend that, in the absence of a superior proposal, PCL shareholders vote in favour of both schemes at the proposed scheme meetings. 32 In addition, Grant Thornton Corporate Finance Pty Ltd, as independent expert, has prepared a report in which that organisation values the ordinary shares and the preference shares in PCL and opines that both schemes are in the best interests of PCL's shareholders. In that report, ordinary shares in PCL were valued in the range $10.53–$12.82 per share and the preference shares were valued at $7.50 per share. 33 Brian Boyd, Bellawest and Lanox are excluded from voting at either meeting. Brian Boyd's wife, Mrs Colleen Boyd, has a relevant interest in 27,844 ordinary shares and in 2,586,339 preference shares in PCL. Persons in the same position as Mrs Boyd (ie persons who hold both ordinary shares and preference shares in PCL) are entitled to vote at both meetings. It was submitted on behalf of both PCL and Bellawest at the hearing before me that this circumstance is not class creating. PCL submitted that the relevant question is whether there is a community of interest such that the rights and entitlements of the different shareholders viewed in the totality of the scheme's context are so dissimilar as to make it impossible for them to consult together with a view to their common interest (see Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104 per Barrett J). 34 Senior Counsel who appeared for PCL went on to submit that the mere fact that certain persons hold both ordinary and preference shares in PCL did not mean that those persons were in a separate class. He argued that the consideration payable under each scheme does not exceed the valuation range for the ordinary shares or the preference shares as assessed by Grant Thornton Corporate Finance Pty Ltd. For this reason, no collateral benefit arises (see Re Aston Resources Ltd [2012] FCA 229 at [21]–[28] per Jacobson J. At the first hearing, I accepted these submissions but reserved the question for further consideration at the second hearing. 35 In addition, it was submitted on behalf of PCL and Bellawest that the Court could revisit this issue at the second hearing and take into account the circumstances then in play in relation to the question of approval. In order to permit this course, PCL offered to tag the votes at the scheme meetings and to make such submissions at the second Court hearing as may be required in light of the way in which votes were cast at each of the scheme meetings. That offer was accepted. Some Other Features of the Schemes 36 I was satisfied that the key elements of the schemes were explained in the scheme booklet. 37 I was also satisfied that the risk that the schemes will not be performed by the relevant actors was satisfactorily addressed in the scheme documentation. 38 Clause 8 of the SID constitutes an exclusivity provision which includes a "no shop" and a "no talk" restriction. 39 The no talk restriction is expressly subject to a fiduciary and statutory duty carve out (cl 8.2(b) of the SID). The no shop restriction is not expressed to be subject to such a carve out. 40 It was submitted on behalf of PCL that the exclusivity restrictions in the form appearing in the SID are commonplace. This submission is correct. It was also submitted on behalf of PCL that the fiduciary and statutory duty carve out was not required to be made applicable to the no shop restriction. That submission was amply supported by authority and I accepted it. 41 I was satisfied that these exclusivity provisions are of a type that are commonly approved by the Court and are adequately disclosed in the scheme booklet. 42 Clause 9.2 of the SID provides for the payment by Bellawest to PCL of Target Transaction Costs in the amount of $350,000 if for any reason the schemes do not become effective on or before the End Date. Given that it is Bellawest which is to pay this fee to PCL (and not the other way around), the amount of the Target Transaction Costs does not constitute a break fee. In any event, this agreement is adequately disclosed in the scheme booklet. 43 There is a deemed warranty provision in the ordinary scheme (cl 8.2) whereby the ordinary shareholders warrant that their shares will be free from encumbrances as at the relevant date. The existence of such a warranty has been adequately disclosed in the scheme booklet. Such clauses are permissible and are now commonplace. 44 I have already addressed the entitlements of the Ineligible Foreign Shareholders at [6], [28] and [29] above. Sufficient disclosure as to the circumstances of those shareholders has been made in the scheme booklet. Again, arrangements of the kind embodied in the two schemes in respect of such shareholders are commonplace and have regularly been approved by the Court. 45 The evidence disclosed that PCL has a relatively high number of "missing" ordinary shareholders, according to the records kept by the share registry responsible for communications with PCL's ordinary shareholders. Apparently, 128 out of 294 shareholders listed on the share register of PCL have a "returned mail flag" against their names in the share registry system. This is 43.5% of the shareholders by number. However, those shareholders hold only 138,323 ordinary shares out of an issued capital of 19,839,827 shares. In the case of preference shareholders, there is one missing preference shareholder out of a total of 34 preference shareholders and that missing preference shareholder holds only 450 preference shares out of a total of 9,905,398 preference shares. 46 Notwithstanding that the proportion of shares held by missing shareholders is very small indeed, I formed the view that an appropriate notice should be published in The Australian newspaper in order to provide some further assurance that notice of the scheme meetings might come to the attention of the missing shareholders. 47 By letter dated 22 September 2016 to PCL, ASIC stated that it did not currently propose to appear to make submissions or intervene to oppose the schemes at the first hearing and that the position may change if further information becomes available. In that letter, ASIC also stated that it would not provide a statement under s 411(17)(b) of the Act until the second Court hearing in relation to the proposed schemes. In fact, ASIC did not seek to appear at the first Court hearing held on 23 September 2016. Conclusions 48 In light of all of the above matters, the evidence tendered at the first hearing and the submissions made on behalf of PCL and Bellawest (both in writing and orally), I made the orders which I made on 23 September 2016. 49 Included within the orders which I made on 23 September 2016 were orders dispensing with the requirements of r 2.15 of the Federal Court (Corporations) Rules 2000 (Cth), except insofar as that rule applies reg 5.6.13 of the Corporations Regulations (Cth) to the scheme meetings and also dispensing with replaceable rules which appear in Pt 2G.2 of the Act, to the extent that a replaceable rule in that Part is displaced or modified by the plaintiff's constitution. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster. Associate: Dated: 24 November 2016