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[2019] FCA 2186
Federal Court of Australia
2019-12-23
Gleeson J
Original judgment source is linked above.
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Counsel for the Plaintiff: IM Jackman SC with IJM Ahmed
Solicitor for the Plaintiff: King & Wood Mallesons
Counsel for the Defendant: MA Izzo SC and JS Burnett
Solicitor for the Defendant: Dentons Australia Limited
ORDERS NSD 2043 of 2019 IN THE MATTER OF TIGER RESOURCES LIMITED (ACN 077 110 304) BETWEEN: TIGER RESOURCES LIMITED (ACN 077 110 304) Plaintiff
AND INTERNATIONAL FINANCE CORPORATION Defendant
JUDGE: GLEESON J DATE OF ORDER: 23 december 2019
GLEESON J: 1 On 9 December 2019, the plaintiff (Tiger) filed an originating process seeking orders pursuant to s 411 of the Corporations Act 2001 (Cth) (Act) for the convening of a meeting of three creditors of Tiger Resources, being Taurus Mining Finance Fund LP (Taurus), QMetco Limited (QMetco) and International Finance Corporation (IFC) (collectively, scheme creditors) to consider a creditors' scheme of arrangement (scheme) and, if the Court thinks fit, approving the scheme. 2 On 20 December 2019, I heard Tiger's application for orders to convene a meeting of the scheme creditors (first court hearing). The application was opposed by IFC, which also applied for an order that the proceeding be permanently stayed by interlocutory process dated 18 December 2019. In the light of its stay application, IFC was ordered to be added as a defendant to the proceeding pursuant to r 2.13(3) of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules). 3 Taurus and QMetco have signified their respective intentions to support the proposed scheme. They did not appear at the first court hearing. 4 By letter dated 12 December 2019, the Australian Securities and Investments Commission (ASIC) wrote to the directors of Tiger, expressing concern that members of Tiger would not have any opportunity to vote on the proposed scheme. ASIC noted that the issue of shares under the scheme would result in acquisitions that would, absent an exception in s 611 of the Act or ASIC relief, be prohibited under s 606(1) of the Act. Subsequently, by letter dated 19 December 2019, ASIC stated that, based on the responses and actions taken by Tiger and the information available to it, ASIC did not seek to raise any further concerns in this regard at this time. ASIC referred to certain matters including the absence of any residual equity value and the ability of the Court to take into account the interests of members at a second court hearing, and concluded that in circumstances such as this, it may be appropriate for the protections of Chapter 6 of the Act to be displaced to a degree, to reflect the fact that the members' shares have no residual equity value. 5 ASIC did not attend Court to oppose the initial application or to propose any variation to the orders sought by Tiger. In those circumstances, I am satisfied that ASIC's concerns do not require further attention at this stage of the proceeding.
Background 6 Tiger is a public company listed on the Australian Securities Exchange (ASX) and is the ultimate holding company of entities incorporated in foreign jurisdictions, being the Democratic Republic of Congo (DRC), the British Virgin Islands and South Africa (collectively, Tiger group). 7 The main operating company within the Tiger group of companies is Société d'Exploitation de Kipoi S.A (SEK), a company incorporated in the DRC. Tiger owns SEK as to 95%, with the remaining 5% interest held by the government of the DRC. 8 SEK owns and operates the Kipoi Copper Project located in the Katanga Copper Belt in the DRC. Tiger, through SEK or other subsidiaries, also holds a 95% interest in the Lupoto Copper Project and a 100% interest in the La Patience Copper Permit, both of which are also located in the DRC. 9 Trading in Tiger shares on the ASX was voluntarily suspended on 22 February 2017. On 28 November 2019, Tiger announced to the ASX that it will be de-listed on 3 February 2020 under the ASX's long term suspended entity policy. 10 As at 5 December 2019, Tiger had a total issued share capital of 2,249,303,779 ordinary shares. Taurus holds approximately 13.01% of Tiger's shares and IFC holds approximately 12.02% of Tiger's shares. The top 20 shareholders currently hold approximately 79.83% of the total issued share capital. 11 On 6 December 2019, Tiger announced to the ASX its determination to progress the proposed scheme of arrangement.
Financial position of Tiger 12 The financial position of Tiger has been in jeopardy for some time.
Borrowings from scheme creditors 13 SEK has secured borrowings from each of the scheme creditors. Tiger and other members of the Tiger group guarantee those borrowings. The borrowings are on a "senior" basis and "super senior" basis. Tranche A of SEK's debt comprises the senior facility, whereas Tranches D and E of SEK's debt comprises the super senior facility. Tranches D and E relevantly have priority over Tranche A. 14 Tranche A is a loan facility provided by each of the scheme creditors. By that facility, as at 30 November 2019: (1) QMetco was owed approximately US$20,306,000 comprising principal and interest; (2) Taurus was owed approximately US$144,855,000 comprising principal and interest; and (3) IFC was owed approximately US$55,932,000 comprising principal and interest. 15 Tranche D is a loan facility provided by Taurus pursuant to which approximately US$13,731,000 of principal and interest was outstanding as at 30 November 2019. 16 Tranche E is a loan facility provided by QMetco pursuant to which approximately US$12,191,000 of principal and interest was outstanding as at 30 November 2019. 17 As Tiger is the guarantor of the relevant debts, it follows that the scheme creditors are also contingent creditors of Tiger so as to be capable of being the subject of any scheme of arrangement: Edwards and Others v Attorney General and Another [2004] NSWCA 272; (2004) 60 NSWLR 667 at [67] (Young CJ in Eq, Spigelman CJ and Mason P agreeing). 18 Tiger also had a AU$50,000 credit card facility with ANZ which was secured against a cash deposit of AU$50,000. In addition, as at 30 November 2019, SEK had additional unsecured debt facilities, which were: (1) a US$6.046 million overdraft facility from Rawbank SA, a DRC bank; and (2) a US$5.0 million overdraft facility and a $6.968 million amortising term from Banque Commerciale du Congo, also a DRC bank.
Solvency 19 Tiger's independent expert evidence is that it will be insolvent if the scheme does not proceed. 20 Tiger noted the evidence of Chief Financial Officer, Ian Goldberg, as to Tiger's cash flow position in the period to the week commencing 30 March 2020. In particular, Tiger presently forecasts material negative cash balances in the week commencing 17 February 2020 (approximately US$5.5 million), increasing in subsequent weeks commencing 2 March 2020 (approximately US$8.4 million), 13 March 2020 (approximately US$13 million) and 30 March 2020 (approximately US$22.3 million). 21 Mr Goldberg also gave evidence of the endeavours that Tiger is making and will continue to make during the interim period up to mid-February 2020 to seek to attract further finance. Mr Goldberg's evidence is that the approval and implementation of the scheme during that period of time is key to Tiger's ability to attract further finance. New finance is necessary to fund working capital, the "Capital Works Program" and the "Further Exploration", outlined in further detail in the draft explanatory statement. Mr Goldberg stated that he is not confident of attracting any further finance without the reduction of the secured debt owed by Tiger and its subsidiaries.
Proposed scheme 22 The proposed scheme is between Tiger and the scheme creditors. 23 Neither the ANZ credit card facility nor the unsecured debt facilities will be compromised under the proposed scheme. 24 In summary, the proposed scheme will involve the compromise of the Tranche A debt such that the scheme creditors will receive equity in Tiger in return for compromising part of their Tranche A debt. Relevantly, before the scheme, the scheme creditors will hold Tranche A debts totalling $221.1 million and after the scheme they will hold Tranche A debts totalling $70 million. In return, after the scheme, they will hold 99.24% of the issued capital in Tiger. 25 All of the scheme creditors will be treated in the same manner under the scheme in respect of their Tranche A debts. The maturity date for the remaining Tranche A debt will be extended from 31 January 2024 to 31 December 2025, and the amortisation scheme will be removed. 26 In addition, the Tranche D and Tranche E debts held by Taurus and QMetco will be altered so as to extend the maturity period in respect of those debts to 31 December 2024. 27 Tiger summarised the effect of the proposed scheme on the relevant debts within the company as follows: Secured Debt owed by SEK Before scheme After scheme implementation As at 30 Nov 2019 USD million Approx USD million Tranche A 221.1 70 Tranche D 13.7 Approx 13.7 plus any additional interest Tranche E 12.2 Approx 13.7 plus any additional drawing and interest
28 As part of the implementation of the proposed scheme, SEK (together with the other subsidiaries of Tiger) will sign a deed poll agreeing to be bound by the scheme. The execution of this deed poll is a condition precedent to the scheme. Further, SEK will enter into a deed (through the scheme administrator) by which certain of its Tranche A debts will be assumed by Tiger (assumed debt). The assumed debt will subsequently form the subject of the compromise. 29 A condition precedent to the scheme, introduced shortly before the first court hearing, is that the High Court of England grants a recognition order in respect of the scheme under Art 17(2)(b) of Sch 1 to the Cross-Border Insolvency Regulations 2006 (England and Wales). Accordingly, IFC accepts that it will have an opportunity to appeal from an approval of the scheme following a second court hearing.
Reasons given for propounding scheme 30 Tiger submitted that the creditors' consideration of the proposed scheme represents their best opportunity to avoid the otherwise deleterious effects of an insolvency, which includes the costs and expenses of insolvency procedures in respect of Tiger and each of its subsidiaries in their applicable jurisdictions and the attendant reductions in the forecast proceeds which are available to the scheme creditors for realisation in such insolvency procedures. 31 The managing director and chief executive officer of Tiger, Caroline Keats, identified the following reasons for the scheme: (1) to reduce total secured debt to a sustainable level by reference to the Tiger group's current business performance; (2) to enable Tiger and other members of the Tiger group to continue to trade and operate; (3) to reduce the Tiger group's ongoing debt servicing obligations under the relevant financing documents; (4) to prevent breaches and events of default under the financing documents from occurring; and (5) to recapitalise the group to enable the group to be in a position to obtain funding for its "Capital Works Program" and "Further Exploration" as defined in the explanatory statement and the future working capital requirements of the group.
Evidence 32 Tiger read the following affidavits in support of the application: (1) affidavit of Ms Keats, affirmed 17 December 2019; (2) affidavit of Mr Goldberg, CFO and company secretary of Tiger, affirmed 17 December 2019; (3) affidavit of Sherif Andrawes, partner of BDO Corporate Finance (BDO), sworn 17 December 2019; (4) affidavit of Adam Myers, partner of BDO, sworn 19 December 2019; and (5) affidavits of Daniel John Natale, partner of King & Wood Mallesons, Tiger's solicitor, affirmed 9 and 20 December 2019. 33 Tiger also tendered two side letters in relation to the provision of debt funding to SEK: dated respectively 17 April 2019 and 14 August 2019. 34 IFC read an affidavit of David McIntosh, partner of Dentons Australia Limited, IFC's solicitor, affirmed 18 December 2019. 35 IFC also tendered an extract from the Companies Act 2005 (UK), containing provisions analogous to s 411 of the Act.
Directors 36 A letter from Ms Keats, included in the explanatory statement, states the view of Tiger's independent board committee that the proposed scheme will maximise the overall return for the scheme creditors.
Independent expert 37 BDO prepared an independent expert report dated 19 December 2019. Tiger summarised the effect of the report as follows: (1) If the scheme is not implemented, the Tiger group will be insolvent. In this circumstance, there will be approximately between US$85 million and US$173 million available for distribution to the scheme creditors. Because the Tranche D and Tranche E debts have priority, those debts will be paid in full. In respect of the Tranche A debts, there will be a shortfall. The expected shortfall on the secured debts is between approximately US$72 million and US$160 million. This means that the scheme creditors will recoup between 35% and 71% of their debts. The expected dividend to shareholders would be nil. (2) If the scheme is implemented, the Tiger group would not appear to be insolvent. The expected dividend that would be paid to the scheme creditors will be between approximately US$75 million and US$96 million. Accordingly, the scheme creditors will recoup between 78% and 100% of their debts. The expected dividend to shareholders would remain at nil.
Stay application 38 IFC accepted the Court's power to approve a scheme even if the effect will be to modify or discharge obligations under a contract which stipulates that it is to be governed by the law of another forum: Re Bulong Nickel Pty Ltd [2002] WASC 226; (2002) 26 WAR 466 at [15]; Re Glencore Nickel Pty Ltd [2003] WASC 18; (2003) 44 ACSR 210 at [39]-[40]; In the matter of BIS Finance Pty Limited; In the matter of Artsonig Pty Limited [2017] NSWSC 1713 at [37]. 39 However, IFC contended that this proceeding should be permanently stayed because it is brought in contravention of an exclusive jurisdiction clause in favour of the courts of England or, alternatively, on forum non conveniens grounds. 40 In Australian Health & Nutrition Association Ltd v Hive Marketing Group Pty Ltd [2019] NSWCA 61; (2019) 99 NSWLR 419 at [76], Bell P explained the traditional support of the common law courts for exclusive jurisdiction clauses "by manifesting a strong disposition towards the enforcement of such clauses whilst never accepting that private parties can 'oust' the court's jurisdiction by such agreements". 41 The relevant provision is cl 8.05(b) of the "Common Terms Agreement", which provides: …the parties agree that the courts of England shall have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including any dispute regarding non-contractual obligations and any dispute regarding the existence, validity or termination of this Agreement or the consequences of its nullity) (a "Dispute") and, for such purposes, irrevocably submit to the jurisdiction of such courts… 42 IFC identified the relevant dispute as concerning how the relevant debt should be restructured. For its part, Tiger did not dispute that but for IFC's agreement to its restructuring proposal, the scheme would be unnecessary as SEK could complete the restructure consensually. 43 Tiger acknowledged that the relevant financing agreements contain an exclusive jurisdiction clause but argued that, as a matter of construction, the clause did not apply to the proposed scheme because the proceeding will not settle a "dispute arising out of or in connection with" the agreements between the parties. 44 There is limited authority on this issue. In In the Matter of Rodenstock GmbH [2012] BCC 459; [2011] EWHC 1104 (Ch), the UK Companies Court considered an exclusive jurisdiction clause, set out at [5] in the following terms: The courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement) (a "Dispute"). 45 The Court considered whether the clause provided a connection with the English court's jurisdiction to sanction a proposed scheme, concluding, at [66]: It would not in my view be right to treat the senior lenders' choice of English jurisdiction for the purpose of resolving disputes under or in connection with the existing senior facilities agreement as involving a deliberate decision voluntarily to subject themselves to the English court's scheme jurisdiction. 46 IFC relied on Re Apcoa Parking Holdings GmbH and others [2015] 4 All ER 572 (Apcoa), in which a choice of law and jurisdiction was changed from Germany to England. The new clause was described as providing for "the exclusive jurisdiction of the court of England to settle any dispute arising out of the Agreement including a dispute relating to the existence, validity or termination of this Agreement". It was submitted that the court should not place reliance upon the clause in the absence of an express reference to the court's scheme jurisdiction. The argument was that the relevant scheme was not concerned with the resolution of a dispute "arising out of" the relevant agreement; the proposed scheme arose because some of the contracting parties were unwilling voluntarily to agree to replace existing loan facilities with new and restructured ones. The dispute, if there was one, was said to relate to the proposal of the schemes and not out of the existing agreements. 47 At [235], the Court noted that this contention was not pressed in argument. However, the Court commented: …in my judgment, although not optimally clear, the changed clause is to be read in the context of the change of governing law to English law to which it was supplemental; and construed in context, and the objective intentions of the parties, it is sufficient to connote exclusive jurisdiction in respect of schemes under English law for the compromise of creditors' rights and any dispute in respect of them. 48 IFC argued that the Court's approach in Apcoa is consistent with the natural meaning of the words and is supported by the principle that the courts will give jurisdiction clauses a liberal construction: Global Partners Fund Limited v Babcock & Brown Limited (in liq) and Ors [2010] NSWCA 196; (2010) 79 ACSR 383 at [60]-[62]. 49 Accepting that the exclusive jurisdiction clause is to be construed liberally and accepting the breadth of the words "arising out of or in connection with", I am not persuaded that it should be read as an agreement to confer exclusive jurisdiction on the English courts in relation to the proposed scheme of arrangement between Tiger and its creditors. IFC's argument was directed solely to the language of the clause, without consideration of the other factors that bear on a proper construction of a commercial contract: cf. Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35]. In particular, I am not persuaded that the proceeding is properly characterised as the settlement of a dispute between contracting parties, within the meaning of the exclusive jurisdiction clause, where the proceeding ultimately seeks the Court's approval of an arrangement based upon Tiger's satisfaction of the requirements for approval. 50 Nor am I persuaded that the Court is a "clearly inappropriate forum" for the propounding of the proposed scheme. To the contrary, it is prima facie the most appropriate forum for resolving issues concerning the insolvency or potential insolvency of Tiger as an Australian company. In particular, the fact that SEK, the principal debtor, has no direct connection to the jurisdiction does not affect the position where Tiger has significant liabilities under its guarantee which it seeks to reduce by means of the scheme.
Application to convene scheme meeting 51 Tiger seeks an order for the convening of a scheme meeting under s 411(1) of the Act. 52 Section 411(1) provides: (1) Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings. 53 Section 411(2) provides relevantly that the Court must not make an order pursuant to an application under s 411(1) unless the following two matters are satisfied: (a) 14 days notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and (b) the Court is satisfied that ASIC has had a reasonable opportunity: (i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement. 54 The evidence demonstrates that each of these two matters has been satisfied in this case.
Jurisdiction 55 On its face, s 411(1) may be exercised where a compromise or arrangement is proposed between a Pt 5.1 body and its creditors or any class of them. 56 Tiger is a Pt 5.1 body as it is a company registered under the Act. 57 Tiger contends that the proposed scheme is a "compromise or arrangement" proposed between it and a class of its creditors, the relevant class being the holders of Tranche A, Tranche D and/or Tranche E debts. 58 IFC disputed that the proposed scheme is a "compromise or arrangement" within the meaning of s 411(1) and, further, that the proposed scheme is between Tiger and a class of its creditors. IFC contended that these issues must be determined for the Court to be satisfied of its jurisdiction to convene the scheme meeting. 59 In Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 (Marlborough Gold Mines) at 505, the High Court described an application for leave to summon meetings as "in the nature of an interlocutory proceeding and… 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". 60 In First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116; (2017) 320 FLR 78 (First Pacific) at [40], Bathurst CJ (Beazley P and Leeming JA agreeing) noted that "[w]hat has been repeatedly emphasised is the limited function of the Court on the hearing of summons to convene a meeting under s 411 or its earlier equivalents". 61 In Marlborough Gold Mines, the High Court considered an argument that the existence of power to approve the scheme pursuant to s 411(4)(b) is a necessary legal foundation of the decision to order the convening of the meeting. The Court concluded at 504 that "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… s 411(1) does not require the judge to make a final determination of the question whether the arrangement is one which falls within the scope of the section". 62 In In the Application of United Medical Protection Limited [2007] FCA 631, Finkelstein J said (at [8]-[9]): [8] For a long time the practice has been to leave it to the company to decide whether there should be meetings of classes of members or classes of creditors. If meetings were wrongly convened that was dealt with at the hearing to approve the scheme. In England there was a practice note to that effect: Practice Note [1934] WN 142. In Victoria see Nordic Bank Plc v International Harvester Australia Ltd [1983] VicRp 89; [1983] 2 VR 298, 303. [9] The practice was strongly criticised by Chadwick LJ in Re Hawk Insurance Co Ltd [2001] EWCA Civ 241; [2001] 2 BCLC 480. With respect, I agree with his criticism. In my view the judge hearing the application for meetings should at least consider the question of classes. In some cases, when notice can be given of what is proposed, any dispute could be resolved at the first hearing. If notice is impossible, and I accept that in many cases it may be either impossible or impracticable to give notice, the judge should still form a preliminary view on the issue notwithstanding that his or her view might change at the hearing of the application for approval. That is also what Chadwick LJ had in mind in Re Hawk Insurance Co Ltd. 63 IFC contended that class constitution is properly and necessarily considered at the first court hearing, citing In the matter of Opes Prime Stockbroking Limited [2009] FCA 813; (2009) 179 FCR 20, another decision of Finkelstein J. His Honour again referred to changing practice in England regarding the approach to the first court hearing, and said, at [19]-[20]: [19] A new practice statement was published in [2002] 1 WLR 1345. Under the new practice the applicant for a scheme meeting must draw to the attention of the court as soon as possible any issue that may arise about the constitution of the meetings or which might otherwise affect the conduct of the meetings. If appropriate, notice must be given to any person affected by the proposed scheme so they may apply to be heard at the convening application. I adopted this practice in In the Application of United Medical Protection Limited [2007] FCA 631. [20] 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, 862. 64 More recently, in First Pacific at [40]-[41], Bathurst J cited Finkelstein J's observations with apparent approval, saying: [40] …In respect of class constitution, a number of cases have emphasised that the position reached on class constitution upon the hearing of the initial application under s 411(1) of the Corporations Act will not preclude debate at the approval hearing under s 411(4)(b)… [41] That is not to say that the question of class constitution should not be considered at the initial hearing. As Barrett J pointed in Re MAC Services Group supra at [19], the question is properly addressed at the first court hearing and if a class-creating problem is flagged the court will deal with it as best it can on the material then before it: see also Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813 at [17]-[20]; Re United Medical Protection Ltd [2007] FCA 631 at [8]-[10]; and in relation to the United Kingdom position Re T & N Ltd (No 4) [2007] 1 All ER 851; [2006] EWHC 1447 (Ch) at [18]-[19]. 65 Having regard to the authorities above, I do not accept that the Court is required to make final decisions on the two issues referred to above in order to satisfy myself of the Court's power to convene a meeting. Rather, I am required to satisfy myself that what is proposed is, on its face, a "compromise or arrangement" between a Pt 5.1 body and its creditors "or any class of them".
Compromise or arrangement 66 In Fowler v Lindholm, in the matter of Opes Prime Stockbroking Ltd [2009] FCAFC 125; (2009) 178 FCR 563 at [67]-[68], the Full Court stated: [67] A purported scheme of arrangement must involve some arrangement in a sense that is to be construed liberally. No narrow interpretation should be given to the expressions "compromise" or "arrangement". An arrangement within the meaning of s 411 connotes some element of give and take. A proposal that conferred no benefit on creditors and constituted the mere confiscation of interests would not be an arrangement within the meaning of s 411. An arrangement must involve some bargain giving benefit to both sides. However, there is no reason to construe the term in s 411 as restricting in any way the nature of the bargain that might be made between company and creditors (Re Sonodyne International Ltd (1994) 15 ASCR 494 at 497-8), subject only to the additional requirement that the arrangement must be within the power of the company and not in contravention of the Corporations Act. [68] A scheme of arrangement between a company and its creditors or a class of creditors is no more than a proposal to vary or modify the company's obligations in relation to its debts and liabilities owed to the creditors or class of creditors. There is nothing to prevent the company from posing, as part of the arrangement, a term to the effect that, in consideration of what the company has provided under the scheme, the creditors will discharge not only the debts and liabilities of the company, but also the liabilities of, for example, sureties for the same debts and liabilities of the company. 67 IFC relied on the passage above to contend that a "compromise" or "arrangement" must vary or modify the scheme proponent's obligations in relation to its debts and liabilities owed to the relevant creditors. It argued that the proposed scheme did not satisfy this description because no debt owed by Tiger is being compromised; rather, what is proposed is a rearrangement of debts owed by SEK to the scheme creditors. Tiger's guarantee of SEK's borrowings will remain in place to guarantee the $70 million under Tranche A and the entirety of the debts under Tranches D and E that is being retained. 68 Further, IFC contended the scheme involved nothing more than a confiscation of rights, lacking the requisite "give and take" because, on the expert evidence, equity in Tiger is worthless. 69 IFC also argued that the assumption of SEK's debt by Tiger under the proposed scheme could not confer on the scheme the character of an "arrangement" because that debt obligation did not exist before the scheme is implemented. 70 Tiger argued that the arrangement in the present case is of a familiar kind, involving the conversion of part of the debt of the company (the assumed debt) into equity. Alternatively, the terms by which the scheme achieves a substantial reduction of Tiger's obligations under the guarantee in return for the issue of shares constitutes the scheme as an arrangement. 71 I am satisfied that the proposed scheme is an "arrangement" within the meaning of s 411(1) of the Act in that it involves an adjustment of Tiger's currently existing obligations under its guarantee by the substantial reduction of the amount of the obligation. I do not accept that the proposed share issue is valueless, particularly having regard to the stated intention of Taurus and QMetco, recorded in the explanatory statement, to continue to support Tiger following implementation of the scheme and to consider exercising any right of compulsory acquisition of minority holdings in Tiger which may arise following implementation of the scheme. 72 In In the Matter of T&N Limited and Others v In the Matter of the Companies Act 1985 [2006] EWHC 1447 (Ch) (Re T&N) at [53], Richards J stated: [53] In my judgment it is not a necessary element of an arrangement for the purposes of section 425 that it should alter the rights existing between the company and the creditors or members with whom it is made. No doubt in most cases it will alter those rights. But, provided that the context and content of the scheme are such as properly to constitute an arrangement between the company and the members or creditors concerned, it will fall within section 425. It is, as Nourse J observed, neither necessary nor desirable to attempt a definition of arrangement. The legislature has not done so. To insist on an alteration of rights, or a termination of rights as in the case of schemes to effect takeovers or mergers, is to impose a restriction which is neither warranted by the statutory language nor justified by the courts' approach over many years to give the term its widest meaning. Nor is an arrangement necessarily outside the section, because its effect is to alter the rights of creditors against another party or because such alteration could be achieved by a scheme of arrangement with that other party. 73 If I am wrong that the scheme involves the alteration of Tiger's obligations to the scheme creditors, then in my view, the reduction in the amount of that obligation justifies a conclusion that the proposed scheme is an "arrangement".
Class 74 Tiger proposes that the scheme creditors will vote as a single class. This will produce the result that the scheme will meet the voting thresholds under the Act. 75 IFC proposes that the Tranche A creditors vote as a separate class. As they hold just over 25% of the Tranche A debt, the scheme will fail to meet the voting thresholds on this scenario. 76 Tiger alternatively proposes that the votes that are cast will be tagged (a very simple exercise where there are only three scheme creditors), so that it will be possible for the Court to consider the issue of appropriate class constitution at the second court hearing. 77 IFC submits that the class constitution issue should be determined now.
Case law 78 The test for the constitution of classes in the context of a scheme of arrangement involves grouping together for the purposes of voting those persons "whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest": Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583. 79 In Healthscope Limited, in the matter of Healthscope Limited [2019] FCA 542, at [118]-[120], Beach J observed relevantly: [118] [T]he "impossible...to consult together with a view to their common interest" criterion requires a commercial evaluative judgment to be made of the transactions, circumstances and consequences said to justify the delineation, in the context of the particular scheme and its effect overall. Moreover, if the asserted discriminating feature can be dealt with at the second court hearing, there is less of a need to be definitive at the first court hearing in terms of class definition except in a clear class… [120] [O]ne option is not to order separate meetings but to leave the matter to the second court hearing approval stage… 80 In First Pacific at [80], Bathurst CJ summarised the applicable test for determining the constitution of classes as involving three steps: The test seems to me to involve three questions. First, what are the rights which existing creditors (or members) have against the company and to what extent are they different. Second, to what extent are those rights differently affected by the scheme. Third, does the difference in rights or different treatment of rights make it impossible for the creditors (or members) in question to consider the scheme as one class. 81 In Re Bond Corporation Holdings Ltd (1991) 5 ACSR 304, Owen J stated: The task of the court is to ensure that a meeting is constituted by persons having a similarity of interest so that there is a reasonable likelihood that the result, whatever the result might be, will be fairly representative of the views of those concerned. 82 The test does not require that creditors be treated equally, but rather that there be a "community of interest" between them: Hills Motorway [2002] NSWSC 897 at [12]. 83 Where a determination of the class question in favour of IFC will be determinative of the outcome of the scheme, it is self-evident that caution is warranted in reaching a conclusion that there are two classes of creditor in this case. 84 In Re T&N, Richards J noted at [87]: [87] In considering the rights of creditors which are to be affected by the scheme, it is essential to identify the correct comparator. In the case of rights against an insolvent company, where the scheme is proposed as an alternative to an insolvent liquidation, it is their rights as creditors in an insolvent liquidation of the company: In re Hawk Insurance Co Ltd [2001] 2 BCLC 480. Those rights may be very different from the creditors' rights against a company which is solvent and will continue in business. In the latter case the creditors' rights against the company as a continuing entity are the appropriate comparator: In re British Aviation Insurance Co Ltd [2005] 1 BCLC 665.
Consideration 85 In this case, it is relevant to consider the rights of the Tranche A, D and E creditors under the proposed scheme by reference to their respective rights on an insolvent liquidation. 86 The scheme creditors are each lenders in respect of the Tranche A debt. That is the tranche of debt that will be partly compromised under the proposed scheme. 87 However, there is a distinction between the scheme creditors in that Taurus and QMetco also hold Tranche D and E debts respectively. 88 If the scheme were to become effective, each of the scheme creditors will have a proportionate part of their Tranche A debt compromised and will receive equity in Tiger. In this sense, they will each be treated in the same manner. Taurus and QMetco will retain their existing Tranche D and Tranche E debts (which IFC has never held). 89 By contrast, if the scheme does not become effective with the result that Tiger will be insolvent, Taurus and QMetco will be paid out their Tranche D and Tranche E debts in full: there would be no compromise of the Tranche D and E debts. By contrast, there would not be enough funds to pay out the Tranche A debts. It follows that the scheme creditors would face a compromise in respect of their Tranche A debt. 90 Tiger submitted that comparison of these circumstances reveals that there is not such a difference in rights between the scheme creditors so as to make it impossible for them to consult with one another. Under both the scheme and insolvency scenarios, the Tranche D and E debts will be recognised in full. Under both the scheme and insolvency scenarios, the Tranche A debts of all scheme creditors will be compromised. According to Tiger, what is significant is that the way in which the Tranche A debt is treated in either a scheme or insolvency scenario is precisely the same for each of the scheme creditors. This feature not only establishes that it is possible for the scheme creditors to consult with one another, but that it makes fundamental sense for them to do so given they are confronted with the same scenarios. 91 Tiger argued that the present case bears similarities to In the matter of Boart Longyear Ltd [2017] NSWSC 567; (2017) 121 ACSR 328, in which Black J (whose decision was affirmed on appeal in First Pacific) held that there was a single class of creditors for the purpose of the relevant scheme. Tiger noted the following matters highlighted by his Honour, all of which apply in this case: (1) There were multiple forms of debt, with their own individual terms. This did not prevent creditors holding those forms of debt from consulting with one another. (2) The issuer of the relevant debts was the same entity and the guarantors were the same. (3) The creditors were all faced with the common and imminent issue of the insolvency of the scheme company. (4) There was security held over a common pool of assets. 92 IFC argues that there are two critical differences in the rights or treatment of rights of the Tranche A creditors on the one hand, and the Tranche D and E creditors on the other, making it impossible for the two sets of creditors to consult together with a view to their common interest. Those differences are: (1) Tranche A creditors are in an inferior security position to Tranche D and E creditors. IFC contended that this different priority position is reason in itself for requiring separate classes, citing Primacon Holdings GmbH v Credit Agricole [2011] EWHC 3746 at [48]; Apcoa at [26] and [58]; In the Matter of Mytravel Group Plc; Fidelity Investments International Plc v Mytravel Group Plc [2004] EWCA Civ 1734 at [5], [29] and [33] and In the matter of PHS Group PLC [2014] EWHC 4849 (CH) at [6]-[7]. (2) Tranche A creditors have their debt substantially reduced, whereas Tranche D and E creditors suffer no reduction in the size of their debt. In contrast, on an insolvency, the Tranche A creditors can prove for the entirety of their debt. On the evidence of the independent expert, Tranche A creditors are better off in a winding up than under the scheme, whereas Tranche D and E creditors will be repaid in full in either scenario. 93 As to the different priority position, Tiger argued that there is no general principle that creditors with different priorities are automatically in different classes. In this case, the difference was said not to be significant because it was agreed between the scheme creditors when Tranches D and E were advanced. 94 As to the comparative position of the creditors, Tiger's position was not entirely clear. As I understood it, the argument was that all creditors had a common interest in the question of their different positions in a winding up versus the scheme. However, that common interest arises from their respective positions as Tranche A creditors, and not from the positions of the scheme creditors who are Tranche D and E creditors. 95 In Re HIH Casualty and General Insurance Limited & Ors [2006] NSWSC 485; (2006) 57 ACSR 791, Barrett J considered a scheme to substitute creditors' rights of participation in the winding up of a company with rights of participation in assets created by the scheme. The scheme contained a provision (cl 22) by which claims of certain creditors would be treated differently to how they would be in the winding up. On an application for orders approving the scheme under s 411(2)(b), his Honour considered (at [63] and following) whether the absence of any separate resolution passed at a meeting of the creditors having claims of the kind dealt with by cl 22 would cause the court to lack jurisdiction to grant approval. 96 At [71]-[75], Barrett J concluded: [71] In the present case, there is differential treatment under the scheme as between creditors with claims of the kind dealt with by clause 22 and creditors with claims not affected by that clause. The question is whether the differential treatment is of such a kind and will have such an effect, as regards creditors' rights, that affected creditors cannot view their interests as coinciding with the interests of other creditors in such a way as to cause both groups to be capable of deliberating together as a single and cohesive body. [72] At one level, the two groups were and are able to deliberate together in the way I have described. The perceived advantages of the scheme in putting into place an alternative form of insolvent administration of a more streamlined and efficient kind will be enjoyed by both groups alike. At another and more immediate level, however, the affected group is compelled, in effect, to cede to the unaffected group (potentially, at least) part of the available fund that the affected group would have enjoyed in the absence of the scheme. This is because clause 22.4 impinges upon the rights of the affected group but does not in any way touch the rights of the unaffected group. … [74] … Creditors of the first kind are, quite simply, subjected by the scheme to a risk of discriminatory diminution that is not visited upon creditors of the second kind. Their rights are changed and their position prejudiced accordingly. The effect of the Australian scheme will be to create a mechanism by which, as a matter of rights, the second group may be enriched at the expense of the first, at least when the winding up regime is viewed as the norm or default position. [75] I am satisfied that the differential treatment provided for in clause 22 of the scheme - or, more precisely, the mechanism for reduction of recognisable claims created by clause 22.4 - is such as to destroy community of interest between the two groups of creditors in such a way that, having regard to their respective rights, each could not, in company with the other so as to make up a like-minded whole, consult together to decide whether the scheme promoted their common good. 97 To use the language of Barrett J, I am doubtful that Tranche A creditors can view their interests as coinciding with the interests of Tranche D and Tranche E creditors because the rights of the latter are substantially the same whether under the scheme or on a liquidation, while the Tranche A creditors must consider the significantly different impacts of their different rights under either scenario. Tranche A creditors must balance the prospect of an insolvency, which would appear to give them a better financial return, against the future prospects of the company following implementation of a scheme (including the prospective value of the shares to be issued under the scheme). As senior counsel for Tiger, Mr Jackman SC, put it, the real question is how to deal with the shortfall on Tranche A. 98 In contrast, Tranche D and E creditors have the promise of full repayment on either scenario. The three tranches of creditors have nothing to talk about so far as priorities are concerned, because those are already established or in relation to the share issue. Rather, the Tranche D and E creditors must balance the prospect of an insolvency and earlier repayment, against a scheme which delays payment but also gives them significant benefits: in the case of Taurus, a 64.97% shareholding in Tiger and, in the case of QMetco, the prospect of rights under a further $18 million super priority loan. 99 IFC also contended that the Tranche D and E creditors would receive additional entitlements under scheme by the scheme administrator's entry into the "Amending Financing Documents". Tiger contended that the "Amending Financing Documents" merely restated existing rights. By reference to the two side letters, I accept Tiger's contention. 100 In conclusion, my preliminary view is that the Tranche A creditors do form a separate class from the Tranche D and Tranche E creditors. However, I am not persuaded that it is necessary to reach a final conclusion on the matter in order to be satisfied as to the Court's jurisdiction to order the convening of the scheme meeting. Further, I am not persuaded that the position is so clear that it is inappropriate to leave the question for final determination at a second court hearing in circumstances where I do not expect that approach to be productive of significant additional cost because there is not a large number of affected parties. It may be that the matters identified at [91] provide a sufficient basis for a conclusion that there is a single class of creditors.
Other matters 101 Typically, at a first court hearing the Court satisfies itself as to jurisdictional matters and that the proposed scheme "is of such a nature and cast in such terms that, if it receives the statutory majority at the... meeting the court would be likely to approve it on the hearing of a petition which is unopposed": FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ (Hutley and Samuels JJA agreeing).
Explanatory statement booklet will provide proper disclosure to scheme creditors 102 As part of this consideration, the Court satisfies itself that the scheme booklet will provide proper disclosure to its addressees: Orion Telecommunications Limited, in the matter of Orion Telecommunications Limited [2007] FCA 1389 at [5]. 103 The factual information in the scheme booklet was verified by Ms Keats' affidavit. IFC did not complain that the scheme booklet was misleading or deceptive or that there was any material omission from the scheme booklet. 104 On that basis, I am satisfied that there is prima facie evidence that the scheme booklet will provide proper disclosure to the scheme creditors.
Is scheme bona fide and properly proposed? 105 Tiger submitted that the proposed scheme is a genuine scheme to effect a reorganisation of Tiger's affairs. 106 IFC argued that the scheme lacks bona fides because there is no evident purpose in including the Tranche D and E creditors in the scheme other than to swamp the vote in the proposed single class. 107 On its face, the purpose of the scheme is to facilitate Tiger's return to viability, by the reduction of its liabilities under its guarantee. The scheme creditors receive something in return for the reduction in debt, namely equity. I am satisfied that this is sufficient to demonstrate the bona fides of the proposed scheme.
Other procedural requirements have been met 108 I am satisfied that the prescribed disclosure requirements in Pt 2 of Sch 8 of the Corporations Regulations 2001 (Cth) have been met. 109 The other procedural requirements under the Corporations Rules are substantially met. To the extent necessary, I will dispense with the requirement for compliance with rr 3.2(a) and (b) of the Corporations Rules pursuant to r 1.34 of the Federal Court Rules 2011.
Conclusion 110 I am satisfied that the jurisdictional requirements for the orders sought are met. The appropriate course is to make the orders sought on the basis that the proposed scheme is of such a nature and is cast in such terms that, if it were to receive the expected requisite statutory majority, the Court would be likely to approve the scheme on the hearing of an unopposed application. I certify that the preceding one hundred and ten (110) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.
Australian Health & Nutrition Association Ltd
Hive Marketing Group Pty Ltd
[2002] WASC 226
[2003] WASC 18
(2019) 99 NSWLR 419
(1993) 177 CLR 485
(2004) 60 NSWLR 667
(2014) 251 CLR 640
(2017) 320 FLR 78
(2009) 178 FCR 563
(2009) 179 FCR 20
(2002) 26 WAR 466