(A "company" as defined by s.9 is, of course, a "Part 5.1 body" as so defined).
113 Section 411(1) goes on to say that an application for an order for the convening of the meeting (or meetings) of creditors that is a central feature of the statutory machinery may be made by "the body or any creditor or member of the body, or, in the case of a body being wound up, of the liquidator". The necessary conditions to which s.411(4) refers (after the words "if, and only if") include a condition that, "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 in a particular way at a meeting or meetings of creditors convened in accordance with an order under s.411(1).
114 I mention these aspects of the statutory language because they show that, while s.411 contemplates and makes provision with respect to a compromise or arrangement between a Part 5.1 body and its creditors (or a class of creditors), it does not, in the case of a compromise or arrangement of that type involving a body in the course of being wound up, cause the compromise or arrangement to be binding on the body itself. In such a case, the compromise or arrangement is binding on the body's creditors (or the relevant class of its creditors) and on the liquidator and the contributories. This is the clear effect of the word "or" appearing after "and on the body" and before "if the body is in the course of being wound up, on the liquidator and contributories of the body".
115 It was submitted by both Mr Oakes SC for the liquidators and Mr Rares SC for ASIC that "or", in that particular context, must mean "and", so that the compromise or arrangement is binding on the creditors (or class of creditors), the body itself, the liquidator and the contributories. Mr Rares said that if the body itself were not bound, creditors' claims intended to be affected and changed by an arrangement involving a company in the course of winding up would, upon any termination of the winding up, re-assert themselves as claims against the company in their original and unmodified form.
116 This aspect of s.411 dealing with creditors of a body in the course of winding up is a direct descendant of s.2 of the Joint Stock Companies Arrangement Act 1870 (Eng):
"Where any compromise or arrangement shall be proposed between a company, which is, at the time of the passing of this act or afterwards, in the course of being wound up, either voluntarily or by or under the supervision of the Court, under the Companies acts, 1862 and 1867, or either of them, and the creditors of such company, or any class of such creditors, it shall be lawful for the Court, in addition to any other of its powers on the application in a summary way of any creditor or the liquidator, to order that a meeting of such creditors or class of creditors shall be summoned in such manner as the Court shall direct, and if a majority in number representing three-fourths in value of such creditors or class of creditors present either in person or by proxy at such meeting shall agree to any arrangement or compromise, such arrangement or compromise shall, if sanctioned by an order of the Court, be binding in all such creditors or class of creditors, as the case may be, and also on the liquidator and contributories of the said company."
117 Under this provision, the binding force of a compromise or arrangement extended only to "all such creditors or class of creditors, as the case may be, and also on the liquidator and contributories of the said company". There was no suggestion that "the said company" was itself in any way bound.
118 I am satisfied that the present s.411 applies, in the case of a company being wound up, in the way that the original provision of 1870 applied. The general concept is one of a compromise or arrangement between the body and its creditors or a class of them but that compromise or arrangement, if it becomes binding at all, binds the creditors (or class), the liquidator and the contributories. I am also satisfied that omission of reference to the company (or body) itself is not an error made in 1870 and not recognised since.
119 When winding up begins, creditors are denied the rights they would otherwise have to sue for their debts. They obtain instead a right to participate in a distribution in the winding up. The concept is elucidated in Motor Terms Co Pty Ltd v Liberty Insurance Ltd (1967) 116 CLR 177, particularly in the judgment of Kitto J at pp.180-181. It derives from the old law of bankruptcy: see Re Higginson & Dean; ex parte Attorney-General [1899] 1 QB 325 at p.333. Commencement of winding up marks the point at which a special regime of collection and administration of assets begins. The liquidator presides over that process. The persons interested in the estate administered by the liquidator are the creditors and the contributories. Each such group has a right to see the administration duly and properly conducted and to receive, in satisfaction of rights that existed against the company, the distribution required by the statutory provisions. The process is one of administration of assets according to a statutory scheme, not one in which rights against the company itself are pursued or enforced. If that process is terminated, the creditors revert to their original rights.
120 It follows, in my opinion, that a compromise or arrangement under s.411 which is described as one "between" a company being wound up and the creditors of that company can, because of the effect s.411(4) causes it to have, modify the basis upon which creditors participate in the winding up. Because it becomes binding on the creditors, the liquidator and the contributories, such a compromise or arrangement takes effect among the official whose duty it is to conduct the administration of assets and the two groups of persons having rights under that administration. The company or body, as an entity, is extraneous to the administration.
121 The capacity of a compromise or arrangement under s.411 to alter creditors' rights of participation under a winding up already in progress has been recognised in decided cases. An example is Re Trix Ltd [1970] 1 WLR 1421 where it was observed that the proper way to distribute assets among creditors in a winding up otherwise than strictly in accordance with the statutory order was by scheme of arrangement under the equivalent of s.411 which bound all creditors. The decision of the English Court of Appeal in Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 1590 and that of the Privy Council in Kempe v Ambassador Insurance Co [1998] 1 WLR 271 reflect the same thinking, as do some recent decisions of this court: eg, Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209; Re Switch Telecommunications Pty Ltd; Ex parte Sherman (2000) 157 FLR 158; Re Wily (as liquidator of Wire Lagoon Pty Ltd) (2003) 48 ACSR 86; Re Dean-Willcocks; Alpha Telecom (Aust) Pty Ltd (2004) 208 ALR 414 (see also Re Austcorp Tiles Pty Ltd (1991) 10 ACLC 62 and Mentha v GE Capital Ltd (1997) 154 ALR 565 at p.571).
122 The observations in these cases were concerned with the rights of creditors only. They recognise that creditors' rights of participation under a winding up may be varied as among the creditors themselves. An arrangement voted upon by creditors alone and made binding under s.411 could not enlarge the rights of creditors at the expense of contributories. If there were any such incursion upon the rights of members, the arrangement proposed would be one between the company and its members, as well as between the company and its creditors, and a meeting of members would also be required: see Re Tea Corporation Ltd [1904] 1 Ch 12.
123 There is no suggestion here of any incursion upon the rights of members. I therefore proceed on the basis that the procedures the liquidators have chosen to invoke are, in the abstract, capable of producing results of the kind they contemplate, namely, modification of creditors' rights of participation in the winding up. Because the scheme in contemplation involves the rights of creditors rather than members, it may be that limits upon the reach of Australian legislation produce the consequence that not all creditors will be effectively bound, even though Australian statute law declares them to be bound. That binding force might well not affect a debt cognisable in a foreign court (New Zealand Loan and Mercantile Agency Co Ltd v Morrison [1898] AC 349) or a debt the discharge of which is governed by a foreign law (Re Bulong Nickel Pty Ltd (2002) 42 ACSR 52; Re Glencore Nickel Pty Ltd (2003) 44 ACSR 210). Indeed, the Australian winding up itself might not, in the eyes of the law administered by a foreign court, cause a creditor's debt to be relegated in favour of the rights of participation in the winding up referred to in Motor Terms Co Pty Ltd v Liberty Insurance Ltd (above): see the discussion by Powell J in Fiske v Sterling Investment Co Pty Ltd (1977) 3 ACLR 158. These, however, are not matters that should deter the court from making an order for the convening of a meeting of creditors to consider such a scheme, if a case for the making of such an order is otherwise shown. Any such difficulties will be mitigated to some extent by the circumstance that, in relation to certain of the companies, the scheme will not become operative according to its terms unless it becomes binding under the Companies Act 1985 by virtue of an order of the English court (see paragraph [17] above).
Limits upon the scope of s.411 arrangements
124 It is axiomatic that an arrangement under s.411 cannot achieve ends that are unlawful and that an arrangement directed towards such ends will not be approved by the court. In Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 458, the High Court held that s.411 provides no authority for approving an arrangement containing a provision which is inconsistent with the express or implied provisions of the corporations legislation. The court quoted with apparent approval an observation of Smith J in Re International Harvester Co of Australia Pty Ltd [1953] VR 669 at p.674:
"But however widely the language of s 153 may be construed, it cannot, of course, operate to enable a company to escape from compliance with those provisions of the Act which, either expressly or by implication, lay down a special and exclusive procedure for effecting certain kinds of alterations to the memorandum."
125 Citing Re Australian Mutual Investment & Building Co Ltd (1899) 9 BC (NSW) 62 and Re Northumberland Insurance Co Ltd (No 3) (1977) 3 ACLR 15, Young J said in Re Theatre Freeholds Ltd (1996) 20 ACSR 729:
"No scheme of arrangement can be confirmed unless the scheme is lawful."
126 Case law contains expressions of disapproval of the use of a s.411 scheme to impose a regime of creditor rights different from that which would apply in a winding up: see, for example, Re Brian Cassidy Electrical Industries Pty Ltd (1984) 9 ACLR 140. Those reservations do not arise here. They have been expressed in contexts where the company was not already in the course of being wound up and the aim of the scheme was to forestall winding up. The concern centres on the undesirability of using a s.411 scheme to maintain in operation (and to avoid winding up of) companies that are insolvent. The situation is clearly distinguishable from the present case where winding up on the grounds of insolvency has already been ordered by the court and is in progress.
The special position of s.562A
127 The scheme as proposed by the liquidators has an operation that is inconsistent with the Corporations Act priority provisions. For reasons I have stated, that is, as a general matter, unobjectionable. But enough has been said to this point to make it clear that the proposed scheme also envisages a modified operation of s.562A. That raises a special consideration: it makes it necessary to consider the effect of s.562A(7):
"This section has effect despite any agreement to the contrary."
128 Section 562A shares such a privative clause with s.562 which is concerned with a similar subject: see s.562(3) (predecessor versions included like privative clauses: see Companies Act 1936 (NSW), s.297(5)(c); Companies Act 1961 (NSW), s.292(7); Companies (New South Wales) Code, s.447(3)). Section 562 is derived from United Kingdom legislation, the Third Party (Rights Against Insurers) Act 1930. That Act was introduced to ensure that, where a person insured against liability to another person became insolvent, the proceeds of the insurance should pass to that other person in satisfaction of a proper claim upon the insured in respect of the insured liability, rather than becoming part of the fund of assets for the insured's creditors generally. A predecessor of s.562 was held to apply to contracts of reinsurance held by insurers in the same way as it applied to contracts of insurance held by any company exposed to risk of claims (Re Dominion Insurance Company of Australia Ltd [1980] 1 NSWLR 271; Re Saltergate Insurance Co Ltd [1984] 3 NSWLR 389; Re Palmdale Insurance Ltd [1986] VR 439) but, as was explained by the Australian law Reform Commission in its General Insolvency Report (Harmer Report), problems arose in applying the section in those cases. These included difficulties in identifying third party claimants entitled to the benefit of particular reinsurance and the perceived inequity of persons whose contracts of insurance were backed by reinsurance, being the only persons able to benefit.
129 The provision within each of s.562 and s.562A saying that the section has effect despite any agreement to the contrary was probably inspired by the United Kingdom Act of 1930. Section 1(3) of that Act declared that any provision of the relevant contract of insurance (that is, the contract by which the insured which later became insolvent was covered in respect of a relevant third party claim) that purported "to avoid the contract or to alter the rights of the parties thereunder [ie, insurer and insured] upon the happening to the insured of" an insolvency event triggering the Act in favour of the third party was "of no effect". The aim of that provision was to make ineffective any contractual attempt by insurer and insured to abolish or curtail the benefits of the insurance which, in the case of the insured's insolvency, would accrue to the persons whose claims against the insured were covered by the insurance. Cases confirming this are summarised in the recent judgments in the English Court of Appeal in Freakley v Centre Reinsurance International Company [2005] EWCA Civ 115 (11 February 2005).
130 Unlike the United Kingdom provision, the privative clauses in s.562 and s.562A do not, in terms, concentrate on preserving the effects of the relevant contract of insurance or reinsurance. They are expressed to preserve the effect of the sections themselves. In the case of s.562A, this can only mean that the section as a whole is to operate according to its terms even if some attempt is made by "agreement" to displace that operation. The relevant operation is, of course, one which requires certain assets available to a liquidator in a winding up to be applied towards certain liabilities cognisable in the winding up and to define the way in which the persons to whom those liabilities are owed are to participate in the application of those assets. In providing that s.562A is to "have effect" despite any agreement to the contrary, s.562A(7) is, in my opinion, saying that no agreement - whether between a liquidator and a creditor or among creditors or between the company and its reinsurer - can be effective to require assets of the kind with which s.562A is concerned to be applied in a winding up otherwise than in the way s.562A stipulates. As a corollary, a person having rights under the section to have the particular assets applied in the specified way is "incapable of contracting himself out of them" (Josephson v Walker (1914) 18 CLR 691 at p.700 per Isaacs J).
131 A s.411 arrangement does not have contractual force and does not amount to or embody an "agreement". There is some controversy as to whether it is the order of the court under s.411(4)(b) or the statute itself that is the source of the binding force of a s.411 scheme. The differing views are expressed, at appellate level, in the decision of the Full Court of the Supreme Court of Western Australia in Caratti v Hillman [1974] WAR 92 and the decision of the Privy Council in Kempe v Ambassador Insurance Co (above). The differences were canvassed by Austin J in Ray Brooks Pty Ltd v New South Wales Grains Board (No 2) (2002) 171 FLR 350 at p.367. It is not necessary in the present proceedings to seek to resolve the matter. It is sufficient to note the description of the purpose of a predecessor of s.411 given by Street J in Re Norfolk Island & Byron Bay Whaling Co Ltd [1970] 1 NSWR 221:
"The section is intended to provide machinery (i) for overcoming the impossibility or impracticability of obtaining the individual consent of every member of the class intended to be bound thereby, and (ii) for preventing, in appropriate circumstances, a minority of class members frustrating a beneficial scheme. As Younger J said in 1917 of the corresponding English section, in terms later quoted by Astbury J in Re Anglo-Continental Supply Co Ltd [1922] 2 Ch 723, at 731: 'Its purpose is strictly limited; it does not confer powers; its only effect at any time is to supply, by recourse to the procedure thereby prescribed, the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity.' It is, perhaps, also appropriate to recall what Bowen LJ said of the earlier similar English provision, namely, that it was a section 'which is constantly utilized, and often, I think, very carelessly and unjustly' ( Sovereign Life Assurance Co v Dodd [1892] 2 QB 573, at 584)."
132 Because, as Astbury J observed in Re Anglo Continental Supply Co Ltd [1922] 2 Ch 723 at p.731, part of the purpose of s.411 is "to supply … the absence of that individual agreement by every member of the class to be bound by the scheme which would otherwise be necessary to give it validity", such a scheme has an operation that is not contractual but puts the persons concerned into the positions they would have occupied had all of them, by means of individual assents, become party to a contract embodying the terms of the scheme binding on them by virtue of the section.
133 In declaring that s.562A as a whole "has effect despite any requirement to the contrary", s.562A(7) says nothing explicitly about whether a s.411 arrangement may displace or modify the effect of s.562A. One would expect that a provision of the Corporations Act obviously intended to be preserved from the contrary inroads of an "agreement" should also be preserved from contrary inroads of a set of provisions given by statute a force and effect akin to those of an "agreement", so that the case is one in which a provision of the Corporations Act itself precludes a scheme by which it is sought to put such a set of provisions into effect. If that impression is correct, the reasoning in Australian Securities Commission v Marlborough Mines (above) means that an arrangement of the kind in question is beyond the scope of s.411 and the court lacks jurisdiction under ss.411(1) and 411(4) in relation to it. If, on the other hand, it is possible, as a matter of jurisdiction, for the court to entertain such an arrangement, the circumstance that the scheme, if it becomes binding upon the liquidator, the creditors and the contributories, will achieve a result that the statute does not allow those persons to achieve by agreement will lead to the exercise of the s.411(4) discretion against approval of the arrangement if and when application is made for an approving order.
Is the scheme consistent with s.116(3) of the Insurance Act?
134 Inconsistency with s.116(3) is found in the part of clause 32.5 which causes Fund 1 (which I assume, for the moment, to consist of assets that are "assets in Australia" for the purposes of s.116(3)) to bear the "Fund 1 Costs" before being applied towards satisfaction of the Fund 1 Liabilities. "Fund 1 Costs" are part of the "Scheme Costs" which, in turn, include costs and expenses incurred by the liquidators after the Effective Date, costs and expenses incurred by the Scheme Administrators in carrying out the scheme and any sum the company or the Scheme Administrators are obliged to pay by reason of obligations imposed by the scheme (clause 64.2). The full definition of "Fund 1 Costs" is set out at paragraph [37] above.
135 In New Cap Reinsurance, it was held by Windeyer J and confirmed by all members of the Court of Appeal that the effect of s.116(3) is to create in creditors at the commencement of the winding up a right to have their claims dealt with in a manner complying with s.116(3). The section thus operates upon assets in Australia at the time of winding up. The scheme, if it becomes effective, will provide that those assets form Fund 1. Windeyer J said (at [41]) that, having regard to s.116(3), there was no basis on which the liquidator's expenses of winding up should be borne by the assets in Australia; also that there was no reason why those costs should be borne rateably by the assets in Australia and the assets other than assets in Australia. As his Honour noted, the costs and expenses involved in one collection may be substantially more than those involved in another collection. In his view, it is a matter for the liquidator to charge costs fairly against the two funds having regard to the work involved in collecting the assets in Australia and the assets outside Australia and in paying the liabilities having regard to a fair apportionment and spread of the general costs of the winding up. His Honour added:
"Whether or not a rateable apportionment would be a proper apportionment is for the liquidators to determine in due course " [emphasis added].
136 The principle upon which Windeyer J relied is that recognised by Dixon J in Re Universal Distributing Co Ltd (1933) 48 CLR 171, namely, that where property is assembled and applied by a liquidator so as to constitute a fund to meet a preferred claim before being available to be applied towards other claims, the expenses attendant upon realisation of the fund must be borne by it. Although s.116(3) does not cause any claims to be preferred, it does direct that a distinct fund be assembled and applied, so that the principle is applicable. The principle is concerned with costs actually incurred, viewed in the context of the actual circumstances of incurring. The matter cannot be determined by a priori rules of calculation and dissection. I respectfully agree with Windeyer J that the principle of fair apportionment may be taken to apply for the purposes of s.116(3). I do not agree with the proponents of the scheme that the rules fixed in advance by the definition of "Fund 1 Costs" reflect a correct or permissible application of the principle. In that way, the scheme seeks to modify the operation of s.116(3) in an impermissible manner.
137 I move to a second aspect of the application of s.116(3). As noted at paragraph [33] above, clauses 32.1 and 32.2 have the effect that particular assets are to be treated as Australian Assets if two conditions are satisfied in relation to them: first, that they are "assets in Australia" within the meaning of s.116(3) of the Insurance Act; and, second, that they are determined by the Scheme Administrators to be Australian Assets in accordance with directives in the scheme itself. The first directive is that "principles of private international law" are to be applied by the administrators and are to take precedence over the other directives of which there are three. Each says that certain "proceeds of reinsurance" are (or are not) to be Australian Assets.
138 One might question the directives, both as to their reliability and as to their utility. Assume that a scheme company wrote professional indemnity insurance business in Country X and, in connection with and for the purposes of that part of its activities, obtained reinsurance from a reinsurer incorporated and having its principal operations and central management and control in Country X, with the contract of reinsurance being negotiated and concluded in Country X and containing express statements that the contract is to be governed by and construed in accordance with the law of Country X, that the parties submit to the exclusive jurisdiction of the courts of Country X and that all payments are to be made in Country X and in the currency of Country X. Assume also that the reinsurer conducts a branch business in Australia but the scheme company concerned has never had any business dealings with it in Australia.
139 What would the principles of private international law say about the location of the chose in action thus owned by the scheme company in the form of a contractual obligation owed by the reinsurer? Australian principles of private international law would regard a combination of residence of the reinsurer in Country X (New York Insurance Co v Public Trustee [1924] 2 Ch 101) and the stipulation of County X as the place in which the sum concerned was recoverable (F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139) and as the place in which the contractual obligation was to be performed (Kwok Chi Leung Karl v Commissioner of Estate Duty [1988] 1 WLR 1035) as leading to the conclusion that the chose in action was situated in Country X. And as was recognised in New Cap Reinsurance both by Windeyer J at first instance (paragraphs [30] and [31]) and by Ipp JA in the Court of Appeal (at paragraphs [122] to [129]), such a conclusion would apply for the purposes of s.116(3).
140 This effect of private international law is something to which the administrators would have to accord precedence in applying clauses 32.1 and 32.2. The apparently contrary directive in clause 32.2(b) (which would cause the chose in action to be regarded as an Australian asset) would not have effect because of the paramountcy afforded to principles of private international law. What, then, is the value of that and the other specific directives? If principles of private international law are always to be the overriding determinant, one may ask rhetorically whether the specific directives are, at best, superfluous and, more worryingly, likely to be productive of error.
141 There was no occasion in the New Cap Reinsurance litigation for the judgments either at first instance or on appeal to address the meaning of "assets in Australia" for the purposes of s.116(3). Nor does there appear to be judicial guidance elsewhere. It seems likely that the matter is to be addressed by reference to principles of private international law as clauses 32.1 and 32.2 contemplate. But no useful purpose is, to my mind, served by including in the scheme anything beyond the statement that Australian Assets are those assets which are "assets in Australia" for the purposes of s.116(3). Anything more creates possibilities of distortion.
142 The scheme provisions with respect to identification of "Australian Liabilities" raise similar issues. In this case, a measure of guidance is provided by the judgments in New Cap Reinsurance.
143 Clause 32.4 requires the administrators to classify and treat as "Australian Liabilities" those Established Scheme Claims which fall within any of four classes: first, "liabilities to indemnify insured persons against losses occurring in Australia" (clause 32.4(a)); second, liabilities "which are to be satisfied in Australia" (clause 32.4(b)); third, liabilities "which otherwise are liabilities in Australia within the meaning of s.31(4) of the Insurance Act" (clause 32.4(c)); and, fourth, liabilities "for which there should be assets in Australia available to meet them" (clause 32.4(d)).
144 Except for the third class (which consists of liabilities designated liabilities in Australia by a provision of the legislation), these classes are constituted and described in ways derived from observations of members of the Court of Appeal in New Cap Reinsurance. The court considered the question whether s.31(4) of the Insurance Act contained an exhaustive statement of what constitutes "assets in Australia" for the purposes of s.116(3). Ipp JA (at [119] and [120]) answered that question in the affirmative. Hodgson JA (at [27] and [28]) and Bryson JA (at [236]) answered it in the negative.
145 Hodgson JA, after an analytical dissection of the statutory provisions in point form, said (at [26] to [28]):
"26 Three points emerge from this analysis:
1. Great importance is placed on where the liability is to be satisfied. If it must be in Australia, this is sufficient, except in the case of the first anomaly, and categories 1.3 and 2.3.
2. Great importance is also placed on where the triggering event is to occur. If it must be in Australia, this is sufficient, except in the case of the second anomaly, and categories 1.3 and 2.3.
3. No independent significance is placed on where a triggering event actually occurs, or where a liability would in fact be paid, except where payment in Australia or outside Australia is specifically required by the contract.