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.