Reported Decision : (2006) 24 ACLC 569 New South Wales Supreme Court CITATION : Re HIH Casualty & General Insurance Ltd & Ors [2006] NSWSC 504 HEARING DATE(S) : 27/04/06, 22/05/06, 26/05/06 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J EX TEMPORE JUDGMENT DATE : 05/26/2006 DECISION : Scheme of arrangement approved subject to alterations. Costs awarded to creditor granted leave to be heard without becoming a party. CATCHWORDS : CORPORATIONS - arrangements and reconstructions - companies in liquidation - proposed compromise or arrangement with creditors - application for approval of compromise or arrangement subject to alteration - court's jurisdiction to impose alterations after compromise or arrangement agreed to by creditors - PROCEDURE - costs - whether costs order should be made in favour of non-party granted leave to be heard - important role played by that creditor in the proceedings LEGISLATION CITED : Corporations Act 2001 (Cth), s.411(4)(a), 411(4)(b), 411(6) Re HIH Casualty and General Insurance Limited [2006] NSWSC 6 Re HIH Casualty and General Insurance Limited [2006] NSWSC 485 CASES CITED : Re Investorinfo Ltd (2005) 26 ACLC 44 Re Pan Pharmaceuticals Ltd (2004) 48 ACSR 681 Re V&M Diagnostic Services Pty Ltd (1985) 9 ACLR 663 HIH Casualty & General Insurance Limited, FAI General Insurance Company Limited, CIC Insurance Limited, World Marine & General Insurances Pty Limited, FAI Traders Insurance Co Limited, FAI Reinsurances Pty Limited, FAI Insurances Limited, HIH Underwriting and Insurance (Aust) Pty Limited - First Plaintiffs PARTIES : Anthony Gregory McGrath and Christopher John Honey - Second Plaintiffs Amaca Pty Limited, Amaba Pty Limited, Gordian Runoff Limited - Entities granted leave under rule 2.13 of the Supreme Court (Corporations) Rules 1999 to be heard without becoming parties FILE NUMBER(S) : SC 6708/04 Mr M.B. Oakes SC/Mr A.P. Ryan, solicitor - Plaintiffs COUNSEL : Mr J.A.C. Potts - Amaca Pty Limited and Amaba Pty Limited Ms L.E. Johnson, solicitor - Gordian Runoff Limited Blake Dawson Waldron - Plaintiffs SOLICITORS : Eakin McCaffery Cox - Amaca Pty Limited and Amaba Pty Limited Mallesons Stephen Jaques - Gordian Runoff Limited IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY 26 MAY 2006 6708/04 - HIH CASUALTY & GENERAL INSURANCE LTD & ORS JUDGMENT 1 Following delivery of my judgment this morning (see Re HIH Casualty & General Insurance Limited [2006] NSWSC 485), in which I indicated that the court would not grant approval under s.411(4)(b) of the Corporations Act 2001 (Cth), the plaintiffs have varied their approach. They now seek, in respect of the Australian scheme (as it was agreed to at each meeting of creditors), an order under s.411(4)(b) that that scheme be approved subject to two alterations. The first and most significant alteration entails the omission of clause 22.4. The second alteration entails substitution of a very slightly different form of deed as Annexure 5. 2 The plaintiffs have pressed that application this afternoon. There was no objection to their doing so by either Gordian Runoff Ltd or Amaca Pty Ltd and Amaba Pty Ltd, all of which have been present by their legal representatives both this morning and this afternoon. Nor did any of those companies oppose the making of orders under s.411(4)(b) subject to the alterations I have mentioned. 3 The much more significant aspect, as I have indicated, is that involving clause 22.4 which, as I observed in my earlier judgment, not only produced a separate class of creditors but also was not the subject of explanation in the explanatory statement, so that that explanatory statement suffered from a deficiency by way of material omission or non-disclosure. 4 In the earlier judgment, I expressed several opinions relevant to this renewed application as it relates to clause 22.4. I made it clear at paragraph [77] that clauses 22.1 to 22.3 of the Australian scheme are not class-creating and that the class difficulty results solely from the operation and effect of clause 22.4. Elimination of clause 22.4 will resolve that issue and cause the scheme to be one between each company and the whole of its creditors without distinction among classes of creditors. The scheme in its amended form will then, as it were, fit within the processes involving a meeting of the creditors as an undissected whole that were in fact adopted. 5 At paragraph [95] of the earlier judgment, I observed that both creditors affected by the potentially adverse operation of clause 22.4 and the remaining creditors who stood to derive concomitant advantages made their decisions in the absence of relevant explanation of clause 22.4 and its implications. Just as creditors in the first group proceeded to attend or not attend and to vote or not vote without the means of appreciating the disadvantages for them, so creditors in the second group proceeded to attend or not attend and to vote or not vote without the means of appreciating the particular benefit or advantage for them. As I said at paragraph [95], it may therefore be safely inferred that the second group has shown itself to be content with a regime that does not produce the advantage to it which is the by-product of the prejudicial effect of clause 22.4 on the first group. 6 I am therefore content to proceed on the footing that the results of voting at the meetings may be regarded as applicable to and as having validity in relation to a compromise or arrangement that does not include clause 22.4. 7 At paragraph [103] of the earlier judgment, I said that in all respects, other than those involving the class creating effect of clause 22.4 and the deficiency in the explanatory statement in relation to clause 22.4, it would have been appropriate to proceed to grant approval under s.411(4)(b). 8 At paragraph [38] of the earlier judgment, I commented on an aspect of s.411(4) which, in my opinion, requires correspondence between the terms agreed to by creditors at their meeting and the terms presented to the court for approval. I should, in the present context, amplify upon that. The need for the correspondence I have mentioned arises in this way. Section 411(4) describes the circumstances in which, in a case of the present kind, a compromise or arrangement is binding on the creditors, the liquidators and the contributories. Two conditions must be satisfied. Under s.411(4)(a), "the compromise or arrangement" must have been agreed to by the requisite majority at the relevant meeting of creditors. Under s.411(4)(b) "it"– that is, in my view, the compromise or arrangement agreed to at the meeting – must have been approved by the court. But s.411(6) makes it clear that the court may approve the result of the meeting's decision "subject to such alterations or conditions as it thinks just". The clear implication there is that, when the court is presented with a compromise or arrangement in the terms agreed to at the meeting of creditors, it has a discretion to impose an alteration in granting its approval; so that, where it does so, it is the compromise or arrangement as so altered that the statute causes to be binding. 9 In the present case, the court is now asked to impose an alteration by way of omission of clause 22.4 and a second alteration by way of substitution of a slightly different form of Annexure 5. The question posed by s.411(6) is, accordingly, whether the court considers it just to impose those alterations. 10 The history of s.411(6) and the principles that courts have developed in relation to it were referred to by Gyles J in Re Investorinfo Ltd (2005) 26 ACLC 44. I quote paragraphs [6] and [7] of his Honour's judgment: "[6] Section 411(6) of the Act provides that: The Court may grant its approval to a compromise or arrangement subject to such alterations … as it thinks just. The provision first appeared in the Uniform Companies Acts adopted by the Australian states and territories in the late 1950s and early 1960s. It does not appear in s 206 of the English Companies Act 1948. I was referred by counsel to authorities that satisfied me that this provision confers on the Court the necessary jurisdiction to accede to the application to amend and accordingly made the orders sought. I record my reasons for doing so. [7] The following propositions emerge from the cases on s 411(6) and its predecessors, s 315(6) of the Companies Code and s 181(3) of the Uniform Companies Acts: - (1) If the alteration is of a minor kind which does not really affect the details of the scheme, then the Court has power to approve the scheme as amended: Re Adelaide Air Conditioning and Domestic Engineers Ltd (In Liq [1972] 6 SASR 603 at 605 (Zelling J); Re H Craig Pty Ltd (1971-73) CLC 40-026 (Mitchell J); Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [21] (Barrett J). - (2) The discretion under the section has to be exercised at the time the scheme is approved and cannot be exercised once the approval order has been made: Re BTS Bearings and Transmission Supplies Pty Ltd (1983) 8 ACLR 287 (Needham J). - (3) The discretion under the section may be exercised to omit wording in a scheme which is not appropriate for inclusion in a scheme: Re Homemaker Retail Management Ltd (2001) 187 ALR 520 (Barrett J). - (4) The discretion under the section may be exercised, with the consent of the creditors at the scheme meeting and a priority creditor, to omit a priority creditor from the definition of "creditor" in the scheme, thereby maintaining the priority of the omitted priority creditor: Re V & M Diagnostic Services Pty Ltd (1985) 9 ACLR 663 (Cohen J). - (5) The discretion may be exercised where the amendment improves the smooth working of the scheme without affecting its substance: Re Evandale Estates Ltd 1962 VSC unreported (Adam J), noted in WE Paterson & HH Ednie, Australian Company Law, 2nd edn, Butterworths, Sydney, 1971- at para 181/43; Re H Craig Pty Ltd (1971-73) CLC 40-026 (Mitchell J); Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [21] (Barrett J)." 11 Of the cases mentioned by Gyles J, none is on all fours with the present. But there is some similarity with Re V&M Diagnostic Services Pty Ltd (1985) 9 ACLR 663, in that the amendment there imposed by the court affected a change in the creditor rights that would arise under the scheme. 12 In the present case, the alteration sought, so far as it concerns clause 22.4, although changing creditor rights, would have the effect of putting the scheme into a form that is consistent not only with the procedures with respect to meetings and voting that were in fact adopted and the resultant expressions of will, but also with the regime which was described in the explanatory statement. That being so, I am satisfied that it is just to impose the amendment sought in relation to clause 22.4 and to make orders to the effect that, in the case of each company, the Australian scheme, as agreed to at the meeting of creditors, be approved subject to alteration by the omission therefrom of clause 22.4. 13 I turn now to the second alteration. Annexure 5 to the Australian scheme is the form of the so-called FSCS deed. FSCS is a statutory authority or government body in the United Kingdom which it is contemplated will become party to that deed for particular purposes related to the administration of assets and processing of claims in that country. As it has transpired, discussions with the FSCS have produced a form of deed which differs slightly from that originally proposed. I am satisfied that the changes are in no sense material and that the scheme may be approved, subject to alteration by way of substitution of the slightly different form of deed as Annexure 5. That alteration would be within the first category referred to by Gyles J, that is, an alteration "of a minor kind which does not really affect the details of the scheme". In that instance also, therefore, it will be appropriate to make orders to the effect that the Australian scheme, as agreed to at the meeting of creditors, be approved subject to alteration by the substitution of the slightly different form of deed. 14 I have discussed with counsel this afternoon the appropriate form of the order and, that having been settled, I will make the orders in chambers upon the short minutes being delivered to my associate later today. 15 The remaining matter concerns costs. Ms Johnson has appeared again today for Gordian Runoff Ltd, the creditor which, in exercise of leave to be heard without becoming a party, made submissions on clause 22.4 and its implications. It is fair to say, I think, that the submissions made by Ms Johnson on behalf of Gordian at the approval hearing were central to the identification of the class-creating and non-disclosure difficulties concerning clause 22.4. In the absence of those submissions, the point would not have been appreciated and a scheme that suffered from defects might well have been approved by the court. 16 In those circumstances I am satisfied that this is an exceptional case in which costs should be allowed to a non-party. The position is, in general terms, similar to that I considered in my costs judgment following the making of the s 411(1) orders in this matter (see Re HIH Casualty and General Insurance Limited [2006] NSWSC 6) and is distinguishable from the circumstances of the Pan Pharmaceuticals case which I earlier considered: see Re Pan Pharmaceuticals Ltd (2004) 48 ACSR 681. 17 I order that the costs of Gordian Runoff Ltd of and incidental to these proceedings be paid by the plaintiffs, such costs to be expenses in the windings-up of the corporate plaintiffs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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