Issue 1 - s 231 of the Act
31 The starting point for consideration of the opponents' submission is that s 411 of the Act does not authorise the approval of a scheme that contains a provision which is inconsistent with another provision of the Act. This submission must be accepted: see Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 and 502.
32 The next steps in the argument are, however, more difficult to sustain. They turn upon the interaction between s 231 and s 411 of the Act. The substance of the argument is that s 231 of the Act requires the agreement of a person to become a member and that s 231 is not subject to an exception found in the express terms of s 411.
33 Mr Sheahan SC accepts that his proposition is a large one. If it is correct, it would exclude from the purview of s 411 not only debt for equity swaps, but also schemes under which a shareholder exchanges equity in one company for equity in another.
34 It is true, as Lockhart J held in Re Hunter Resources Limited (1992) 34 FCR 418 at 425, that the predecessor of the present s 231 requires the agreement or assent of a person to become a member of a company. His Honour held that a reduction of capital which had the practical effect of compelling shareholders in the company to become shareholders in a different company was contrary to the equivalent provision of s 231.
35 However, his Honour went on to say at 426 that if the company wished to achieve that objective, it should invoke the provisions of the law concerning schemes of arrangement or takeover schemes which have special provisions designed to protect the interests of minority shareholders.
36 It is to be noted that in making that statement, Lockhart J appears to have assumed that s 411 can be invoked, notwithstanding his view that s 231 requires agreement for a person to become a member, at least in the sense of assenting to do so.
37 In my opinion, this assumption is borne out by a long line of authority dating back over 120 years.
38 The seminal authority is the decision of North J in Re Empire Mining Company (1890) 44 Ch D 402. It seems to me that this case is authority for the proposition that the power of the Court to approve a scheme of arrangement between a company and its creditors confers jurisdiction on the Court to deprive dissenting debenture holders of their security and to require them to accept shares in the company in full satisfaction of their claims as creditors.
39 Mr Sheahan submitted that the principle for which the decision in Re Empire Mining stands cannot be stated so widely. This is because the agreement under which the debentures were issued contained express provision for the cancellation of the debentures and the allotment in substitution for them of shares in the company.
40 However, in my opinion, later authorities indicate that the limitation on the scope of the principle for which Mr Sheahan contends cannot be maintained.
41 Indeed, in Re Alabama, New Orleans, Texas and Pacific Junction Railway Company (1890) 1 Ch 213 at 223, North J said:
Again, Mr. Justice Chitty, in In re North Western, &c., Company, and I myself in In re Empire Mining Company, held that debenture-holders could be compelled to give up their debentures in exchange for fully paid-up shares. (Citations omitted.)
42 Moreover, the qualification to which Mr Sheahan referred in his careful analysis of the case law is one which is so far-reaching that it is difficult to see how it could be justified. The essence of a scheme is that it involves a compromise or arrangement between a company and its creditors or members. A compromise entails the resolution of a dispute. Section 411 confers jurisdiction on the Court to approve it, provided the statutory majorities are achieved. Of course, the effect of the Court's approval is to bind dissenting creditors or members.
43 Thus to read into the principles stated in Re Empire Mining that the Court's power is subject to a qualification that creditors may only be compelled to give up their debentures in exchange for shares if they have agreed to do so, would be antithetical to the nature of schemes of arrangement. A scheme which requires the consent of all creditors is not a scheme of arrangement at all.
44 Importantly, the broad proposition for which Re Empire Mining seems to me to stand was endorsed without qualification by the High Court in Isles v Daily Mail Newspaper Ltd (1912) 14 CLR 193 at 199 per Griffith CJ and at 209 per Isaacs J.
45 Mr Sheahan sought to read a qualification into the statements of principle expressed by their Honours in Isles, because the terms on which the debentures were issued suggested that the element of compulsion may not have been present in the arrangement under which the debenture holders were required to exchange the debentures for fully paid shares in the new company.
46 However, the principle stated by Griffith CJ at 199, does not seem to me to bear out that submission. Isaacs J put it even more succinctly at 205, by stating:
The mere fact that the substituted right is a paid up share instead of a debenture is no valid objection: In Re Empire Mining Co… (Citation omitted)
47 In my view the principle stated by Isaacs J (and by Griffith CJ) is quite clear and cannot be read down in the manner suggested by the opponents. Nor was there any qualification in the principle stated, to the same effect, by the Full Court of the Supreme Court of Victoria, in Re City of Melbourne Bank (in liq) (1897) 19 ALT 80 at 283.
48 There may be some tension between the statement in Re City of Melbourne Bank that it would be open to a creditor to renounce its entitlement to shares and the practical considerations to which Lockhart J pointed in Re Hunter at 426. The same may be said of the remarks of North J in Re Empire Mining at 410 that the debenture holders need not take up the shares.
49 But I do not consider that it is necessary to resolve that question. The short answer to the essential question of construction is that a compromise or arrangement between a company and its creditors, under which the creditors receive shares in the company in substitution for their debts, is one which falls within s 411.
50 Section 231 must be read subject to s 411. To do otherwise would be to emasculate the broad scope of s 411. There is nothing in s 231 to suggest that it is an exhaustive definition of the circumstances in which a person is a member. Authorities of over 100 years standing, including a decision of the High Court of Australia, suggest otherwise.
51 So too do more recent Australian authorities: see Re Crusader Limited [1995] 1 Qd R 117 at 128 - 129 per Thomas J. It is true that his Honour said at 129 that on the facts of the case there was sufficient assent or agreement on the part of the note holders to satisfy the requirements of the predecessor of s 231. But his Honour went on to express a preference for the view that Re Empire Mining and later authorities support the view that a scheme under which debenture holders exchange their security for paid up shares in a new company, can be approved under s 411, provided that they are not an evasion of some requirement of the law: see also the decision of Santow J in Re Advance Bank Australia Limited (No 2) (1997) 22 ACSR 513 at 529-530.
52 The only authority which seems to me to lend support to Mr Sheahan's submission is the decision of Heenan J in Re Bulong Nickel Pty Ltd (2002) 42 ACSR 52, at [4]. However, with respect to the learned judge, the authorities to which he referred, namely, Re Empire Mining, Re Alabama Railway and Re Crusader, seem to me to stand for the opposite of the proposition stated in the last sentence of [4] of his Honour's reasons.