Corporations - Scheme of arrangement - Approval of scheme agreed by statutory majority of creditors in number and value voting - Effect of choice of foreign law clause in contract creating indebtedness - Section 411 allows approval of scheme which varies rights of creditors notwithstanding choice of foreign law clause - Scheme approved

Corporations Act 2001, s 411

For ASIC by leave : Australian Securities & Investment Commission

Akai Pty Ltd v People's Insurance (1996) 188 CLR 418

Blair v Curran [1939] HCA 23; (1939) 62 CLR 464

Chamberlain v Deputy Comissioner of Taxation [1988] HCA 21; (1988) 164 CLR 502

Freehold Land Investments Ltd v Queensland Estates Pty Ltd [1970] HCA 31; (1970) 123 CLR 418

In Re Angelo & Continental Supply [1922] 2 Ch 723

John Pfeiffer Pty Ltd v Rogerson [2000] HCA 36; (2000) 203 CLR 503

McKain v Miller [1991] HCA 56; (1991) 174 CLR 1

Port of Melbourne Authority v Anshun Pty Ltd (No 2) [1981] HCA 45; (1981) 147 CLR 589

Rahim v Crawther (1996) 17 WAR 559

Re Norfolk Island Byron Bay Whaling Co (1970) 1 NSWR 221

1 EM HEENAN J: On 17 May 2002 I made orders under s 411 of the Corporations Act 2001 to convene meetings of certain creditors of Bulong Nickel Pty Ltd and Bulong Operations Pty Ltd to consider, and if thought fit, to agree to a scheme of arrangement which the companies then proposed. My reasons setting out the background of the events which led to the proposed schemes of arrangement, the details of the schemes and factors likely to be material to the consideration of the proposed schemes by the respective creditors were published on 27 May last and have since been reported as Re Bulong Nickel Pty Ltd (2001) 42 ACSR 52.

2 The meetings of creditors of the two Bulong companies to consider the proposed scheme of arrangement were held on 20 June 2002 and the scheme was approved by the statutory majority of creditors of the two applicant companies. The results of those meetings have now been reported to the Court and the Court has been called upon to consider whether or not final approval to the scheme of arrangement should be given. In addition to considering whether the formal requirements for the two meetings of creditors have been properly observed, the question of whether adequate notice of the meetings was given to the various creditors and whether the meetings were properly conducted and resulted in resolutions, by the requisite majorities, to approve the schemes are all matters that the Court has addressed. However, importantly, as explained in my previous reasons for decision when ordering the meetings of creditors to be held, the issue of whether or not s 411 of the Corporations Act empowers the Court to approve a scheme which would have the effect of modifying the rights of parties to a contract governed by a foreign legal system, in this case the law of the State of New York, remained an important issue for consideration on this application for final approval.

3 These matters were considered by me on 28 June when the results of the meetings to consider the schemes of arrangements were reported to the Court and the Court was called upon to grant or refuse final approval to the scheme. For brief reasons which I then gave, I concluded that the scheme should be approved and made orders to that effect. At the same time I gave short reasons for my decision, indicating that fuller reasons would be provided later. These are now my final reasons and they incorporate, and should replace, the shorter reasons which I gave orally at the end of the hearing on 28 June last.

4 The evidence shows that all the creditors/note holders under the debenture were served with notice of the scheme meetings and with the explanatory memorandum except for two creditors. However, those two particular creditors voted at the scheme meetings so service upon them of the notice of meetings and the scheme papers can be safely assumed.

5 Some additional materials were provided to the creditors. These are described in the affidavit of Adrian Christopher Griffin sworn 17 June. These comprised a letter from Bulong Operations Pty Ltd and Bulong Nickel Pty Ltd dated 13 June providing supplementary information about more recent nickel production at the Bulong plant for April 2002 and additional costs incurred during May. The information, essentially, was to bring up to date results of the operations as set out in the earlier explanatory memorandum. That letter was accompanied by a letter from Behre Dolbear Australia Pty Ltd dated 13 June also reporting upon production shortfalls during April and May 2002 and the effect of these upon ongoing production estimates. Also provided to the note holders was a supplementary report from PPB Consulting Services Pty Ltd dated 13 June commenting on the cash flow effects of the diminished production figures for April and May 2002. I am satisfied that these three documents are all relevant materials and are supplementary to information contained in the explanatory memorandum and I approve of their despatch to the creditors along with the explanatory memorandum. It is well established that new material information which emerges after a notice of a meeting of creditors to consider a proposed scheme has been despatched, should be brought to the attention of the creditors attending - Re GIO Australia Holdings Ltd (1999) 33 ASCR 283; Cleary v Australian Co-op Foods Pty Ltd (No 3) (1999) 32 ASCR 701 and Re MB Group PLC [1989] BCLC 672 at 680. In order to allow the creditors/note holders further time to consider these supplementary materials, the ballot deadline was extended from 5 pm New York City time 17 June 2002 to 5 pm New York City time on Wednesday 19 June 2002. I am satisfied that no prejudice to the conduct of the meetings to consider the proposed scheme has been caused by this extension of the ballot deadline. In fact, the evidence discloses that the voting results would have been even more favourable in support of the scheme if only the proxies received by the initial deadline had been counted at the meeting.

6 The scheme meetings were held at level 1, 16 Ord Street, West Perth, Western Australia on 20 June 2002 at 11.15 am (Bulong Operations Pty Ltd) and 11.25 am (Bulong Nickel Pty Ltd). The minutes of those meetings are annexed to the affidavit of Adrian Christopher Griffin sworn 20 June 2002. That affidavit and the minutes reveal that:

(a) Bulong Operations Pty Ltd had received a ballot (proxy) from 33 registered holders of notes as listed in the minutes of its meeting, and

(b) Bulong Nickel Pty Ltd had received a ballot (proxy) form from 33 persons registered as holders of notes as listed in the minutes of that meeting,

(c) With respect to Bulong Operations Pty Ltd, 26 ballots had been received from note holders voting in favour of the scheme of arrangement and two ballots had been received from note holders voting against the scheme of arrangement. This represented approval of the scheme by more than 90 per cent of the note holders (by number) and over 95 per cent of the note holders (by value of note holding) attending the meeting. The chairman declared that the motion to approve the scheme of arrangement had been carried by the requisite majority of note holders.

(d) With respect to the meeting of creditors of Bulong Nickel Pty Ltd, the chairman confirmed that 25 ballots had been received from note holders voting in favour of the scheme of arrangement and two ballots had been received from note holders voting against the scheme of arrangement. This represented approval of the scheme by more than 90 per cent of the note holders (by number) and over 95 per cent of the note holders (by value of note holding) attending the meeting. The chairman declared that the motion to approve the scheme of arrangement had been carried by the requisite majority of note holders.

7 At the hearing in May, which resulted in orders being made by the Court to convene the meetings of creditors to consider the proposed scheme, ASIC expressly reserved its position as to whether or not it would be necessary for the Court to take into account the extrinsic interests of Barclays Bank PLC when determining the significance of support for resolutions approving the scheme of arrangement by the creditors, if and when they were approved at the proposed meetings (see pars 28 and 29 of the reasons for decision of 27 May 2002). However, in the light of the voting results, ASIC has decided that no submissions are necessary in relation to the significance of any extrinsic interests at Barclays Bank PLC.

8 The results of the meetings of creditors can be summarised in this way:

(a) Of the $US185,000,000 representing the total value of notes issued, $US171,325,000 (or 92.6 per cent) voted in favour of the scheme of arrangement for Bulong Operations Pty Ltd, with only $US2,000,000 (or 1.1 per cent) voting against the scheme. For the scheme for Bulong Nickel Pty Ltd $US164,560,000 (or 89 per cent) voted in favour, with only $US2,000,000 (or 1.1 per cent) voting against the scheme;

(b) Of the 34 registered note holders, 26 (or 76.5 per cent) voted in favour of the Bulong Operations Scheme with only 2 (or 5.9 per cent) voting against the scheme. For the Bulong Nickel scheme 25 (or 73.5 per cent) voted in favour of the scheme with only 2 (or 5.9 per cent) voting against the scheme, and

(c) Removing Barclays Bank PLC (who represents $US100,015,000 from the equation), $US71,310,000 of the remaining $US84,985,000 of notes (or 97.3 per cent) were voted in favour of the Bulong Operations scheme, with only $US2,000,000 (or 2.7 per cent) voting against the scheme. For the Bulong Nickel scheme, $US64,545,000 of the remaining $US84,985,000 notes (or 75.9 per cent) were voted in favour of the scheme, with only $US2,000,000 (or 2.7 per cent) voted against the scheme.

9 These figures reveal a small difference with respect to the scheme for Bulong Nickel Pty Ltd. The evidence is that this is due to the fact that one note holder, who supported the Bulong Operations scheme, only sent a ballot (proxy) for the Bulong Operations Pty Ltd meeting prior to the ballot deadline of 5 pm New York City time on 19 June 2002. A ballot for the Bulong Nickel Pty Ltd meeting was received from that same note holder by HSBC Bank USA, on behalf of Bulong Nickel Pty Ltd after the ballot deadline and, as a result, was not counted in the vote for the Bulong Nickel scheme. Had it been counted, the number of voters and the value of the notes held by the majority would have been slightly greater. It is clear, therefore, that the resolutions at each of the two meetings of creditors to approve the scheme were agreed to by a majority in number of creditors present and voting either in person or by proxy, being a majority whose debts amount in the aggregate to at least 75 per cent of the total amount of the debts and claims of the creditors included in the particular class present and voting in person or by proxy. Accordingly, the requirements of s 411(4)(a) have been fulfilled.

10 It therefore remains to consider whether or not the scheme should be approved by the Court in the form agreed by the creditors or be subject to any alterations or conditions as might be thought just - s 411(6). The final approval of the scheme was, as is to be expected, supported by counsel for the applicants. It was also supported by counsel for ASIC. I am satisfied that there is only one matter which requires further consideration on the question of whether or not the Court can, or should, approve the scheme. This is the issue referred to in my reasons for decision of 27 May last, concerning the extent to which s 411 of the Corporations Act 2001 can apply, if at all, to a contract determining the rights of foreign creditors which stipulates that the contract and the rights of the parties are to be determined by reference to a foreign system of law - in this case the law of the State of New York (see par 45 to par 54 of the previous reasons). Detailed written submissions in support of the amplitude of s 411 to authorise a scheme which would have the effect of modifying the rights of the parties under a contract which stipulated that it was governed by a foreign system of law, were filed for the applicants and by ASIC. These submissions acknowledge, in my opinion correctly, that the general rule of the English conflict of laws is that the discharge of a contract or debt depends upon the law applicable to the contract and that this rule extends to the extension or modification of obligations arising from the contract - Jacobs J v Credit Lyonnais (1884) 12 QBD 589 CA; Mount Albert Borough Council v Australian Assurance Society Ltd [1938] AC 224 (PC) and Adams v National Bank of Greece and Athens [1961] AC 255 - see also Dicey & Morris "The Conflict of Laws", 13th ed, Vol 2, r 178 and r 164. That is in accord with the decisions which I discussed in my earlier reasons and, in particular Wanganui-Rangitikei Electric Power Board v Australian Mutual Provident Society [1934] HCA 3; (1934) 50 CLR 581; Barcelo v Electrolytic Zinc Co of Australasia [1932] HCA 52; (1932) 48 CLR 391 per Dixon J at 425 - 426; McClelland v Trustees Executor & Agency Co Ltd [1936] HCA 45; (1936) 55 CLR 483; Mynott v Barnard [1939] HCA 13; (1939) 62 CLR 68 and Kay's Leasing Corporation Pty Ltd v Fletcher [1964] HCA 79; (1964) 116 CLR 124. No challenge to this rule was made in the submissions nor, I am satisfied, is any warranted from a re-examination of the authorities.

11 While this rule can be regarded as applying to the mutual rights and duties of the parties to contracts which, by their terms provide for the application of a foreign system of law in a manner which the court of the forum will enforce, it is clear that different rules apply in the case of bankruptcy or insolvency of a party to such a contract or in relation to schemes of arrangements which have the effect, short of general administration and insolvency, of modifying the rights of creditors under a scheme of arrangement or analogous form of compromise, in order to prevent or rationalise an actual or impending insolvency for that party. So, in Dicey & Morris, r 164 is formulated as follows:

"A discharge from any debt or liability under an English bankruptcy is a discharge therefrom in England, irrespective of the law applicable to the contract or debt."

12 This is acknowledged to be an exception to the general rule because an order of discharge under an English bankruptcy releases the debtor from all debts provable in bankruptcy and these debts are not limited to those which are governed by English law. Similar considerations apply in relation to a voluntary arrangement such as a scheme or arrangement or composition between creditors - Ellis v M'Henry (1871) LR 6 CP 228, especially at 235 - 236.

13 The applicants and ASIC are united in their submissions to the Court that Pt 5.1, including s 411 of the Corporations Act 2001 should be characterised as a statute regarding companies and their reconstruction allied with, or related with this sphere of insolvency. This approach, so the submissions go, gives proper recognition to the scope or Pt 5(1) of the Act and results in the rejection of any approach which would see a compromise or scheme of arrangement propounded under those provisions as being any form of a mechanism for the mere variation of the terms of a contract by the parties to it, or as some form of substitute for the need for unanimous agreement to a variation of terms unless the contract itself provides for some alternative mechanism of variation. I have no doubt that this is the proper approach in relation to the application of laws dealing with bankruptcy and insolvency and, indeed, this has long been recognised. They take their effect from the applicable legislation and not from the agreement of the parties to individual contracts. Indeed, the purpose of the legislation relating to bankruptcy and insolvency is not to vary or modify the terms of particular contracts between a debtor and his creditors, but to recognise both in the interests of the debtor and his creditors, that the available assets of the debtor should be brought under administration, pooled and distributed rateably to the various creditors according to their class of priority and the amount of their claims. This rateable distribution of the available assets of the debtor (in cases of bankruptcy or insolvency) exhibits a concern by the Parliament to provide for a situation where it is impossible for the debtor to discharge all his existing legal obligations in full and, where it is in the public interest as well as the interests of creditors, both local and foreign, that there should be an ordered distribution of assets available for the satisfaction of claims. The jurisdiction of a court of bankruptcy or insolvency under the legislation arises from the presence of the debtor within the jurisdiction, the trading of the debtor within the jurisdiction, or the existence of property of the debtor within the jurisdiction. Once the jurisdiction is established the consequences of the insolvency, including any orders made by the court exercising jurisdiction in insolvency, will govern the rights, obligations and property of the insolvent debtor wherever situate. The function performed by the courts under legislation with respect to bankruptcy and insolvency can, therefore, be seen as fulfilling a far wider and greater public interest than simply adjudicating upon the rights and liabilities existing between the debtor and one or more of his privies under a contract imposing mutual obligations between them. Such legislation addresses, as well, the interests of other creditors, including those who may be recognised to have priority of access to some, or all, of the property of the debtor, those of the general commercial community within which the debtor has been carrying on business, and the public need for investigation and supervision of the insolvent debtor to ensure that the administration of his affairs is actually undertaken in a manner which ensures equality between creditors according to their degree and priority. Other associated purposes such as investigating the extent of the property of the insolvent, both locally and in foreign places, and investigating, and if warranted setting aside, preferential or fraudulent transactions are associated subsidiary purposes.

14 There can be no doubt of the jurisdiction of this Court to consider, and if thought appropriate to approve, a compromise or scheme of arrangement in relation to these two Bulong companies. The basis for this jurisdiction was examined in my earlier reasons for decision in par 36. It comes directly from the Corporations Act. I consider that Pt 5.1 of the Act in s 411 should be characterised as a law dealing with corporations in financial difficulty, or on the brink of insolvency, and authorising schemes of arrangement or reconstruction which are designed to modify the obligations of the company, its members or its creditors, so as to encourage economic survival of the corporation as part of a scheme of insolvency which will, as far as possible, secure an acceptable treatment to creditors of comparable degree. The ensuing modification of the obligations of the company and/or its creditors is secured, not by a general status of insolvency and the application of the laws relating to a company in insolvency but, rather, by a means which commends itself to a majority in number and in value of the creditors or members of the company concerned. The premise is that these are, for good reason, presumed to act in their own self-interests when considering whether or not to approve a proposed compromise or scheme. Such a scheme, if approved by the requisite majority of creditors or members, and complying with the other requirements of s 411, will still require the approval of the Court.

15 I am satisfied that a proper characterisation of Pt 5.1 and s 411 of the Act is to treat it as a law relating to insolvency of corporations and, as such, to recognise that it accommodates the rights and interests not only of the company concerned, its members and creditors but also the interests of the community in which it has been conducting business and incurring obligations. This characterisation leads to the conclusion that the compulsory variation of the rights between the company and some of its creditors or members, if so approved in accordance with the legislation, is a discharge or variation of those contractual rights in accordance with the law of the forum which, because of its association with insolvency, will be effective notwithstanding that some, or even all, of the obligations between the company debtor and its creditors are governed by a foreign system of law. In this respect it is significant to note that Ellis v M'Henry (supra) was itself a case dealing with a composition with creditors. See also Phillip R Wood "Principles of International Insolvency" (1995); Phillip St J Smart "Cross Border Insolvency" (1998) 2nd ed at 257 and Sykes & Pryles "Australian Private International Law", 3rd ed at 791. It follows that I am satisfied that s 411 confers on this Court a power to approve a compromise or arrangement even if the effect of the scheme of arrangement will be to modify or discharge obligations existing between the company concerned and third parties under a contract which stipulates that it is to be governed by a foreign system of law.

16 This issue has arisen starkly in the present case because the only creditors affected by the scheme are those who are parties to, or governed by, the Indenture of 17 December 1998 under which Bulong Operations issued its secured notes all of which were guaranteed by Bulong Nickel. In other words, there are no creditors affected by this proposed compromise or scheme of arrangement other than those who are parties to the Indenture which stipulated that it was to be governed by the law of the State of New York. This is a result which is the product of the terms of the scheme of arrangement itself and the commercial exigencies which have led to it. To my mind it provides no basis for circumscribing the power of a court or limiting the breadth of the application of s 411 simply because the terms of the particular scheme are restricted to parties whose contractual rights are governed by an instrument which stipulates that it is to be governed by the terms of a foreign law.

17 It was also submitted, on behalf of the applicants and by ASIC, that the provisions of the scheme, if approved, may not be binding upon a dissentient or non-participating note holder who seeks to enforce rights under the terms of the Indenture in a court within the State of New York or elsewhere in the United States. It is unnecessary and undesirable to embark on an examination of whether or not an order made by this Court approving the scheme under s 411 would be binding upon such a litigant in a foreign court. To do so would be to address a difficult issue as to the grounds upon which an order of an Australian court approving a compromise or scheme of arrangement under s 411 of the Corporations Act 2001 will be recognised by a foreign court - an outcome which is likely to depend, at least to some extent, on the content of the law of the foreign jurisdiction in which proceedings to enforce the original obligation may be commenced. No benefit or certainty could possibly come from addressing that question in the abstract in the present situation.

18 However, the parties have submitted that the mutual rights and obligations of the companies and the note holders, as provided for by the scheme of arrangement if approved, would take effect by reason of the order of this Court approving the scheme, rather than by mutual consensual agreement - Bond Corporation Ltd v The State of Western Australia (No 2) (1992) 7 WAR 61 at 67. One consequence of this is that any foreign judgment, which disregards the terms of the scheme of arrangement, if approved, would not be enforceable within Australia - Vervaeke v Smith [1983] 1 AC 145; ED & F Man (Sugar) Ltd v Yarni Haryanto (No 2) [1991] 1 Lloyd's Rep 429 at 436 and Dicey & Morris (supra) Vol 1, r 44. While this consideration evidently provides some reassurance for the applicants, and indeed some confidence that the applicant's assets in Australia should be secure from claims which attempt to ignore the effect of this scheme, if approved, that does not appear to me to be any reason to approve the scheme. The only proper foundation for doing so, is I am satisfied, a conclusion that on its proper interpretation s 411 authorises a scheme which will modify rights under a contract between the companies and others which, by its terms, provides for the rights of the parties to that contract to be determined by a foreign law. For reasons which I have endeavoured to explain, I am satisfied that s 411, with its association with insolvency and company reconstruction, does authorise the modification of contractual rights governed by a different system of law, and that its effect in this regard is an acknowledged exception to the general rule of conflicts of law that the discharge or modifications of rights under a contract are governed by the law which governs the contract.

19 Upon being satisfied that the Court has power to approve this scheme under s 411, and that the scheme meetings have been conducted in accordance with the orders of the Court, and the provisions of the legislation, I am satisfied that this scheme should be approved.