- Australian Securities Commission v Marlborough Gold Mines Ltd

Supreme Court of NSW|2017-05-05|Before: Black J

Affidavit evidence

The Plaintiffs rely on the first affidavit of Mr Fabrizio Rasetti dated 21 April 2017. Mr Rasetti is the company secretary of BLY, a director and company secretary of BLM and other entities within the Boart Longyear Group ("BLY Group"), and is also Senior Vice President and General Counsel of BLY. That affidavit was also read in support of the earlier application under s 411(16) of the Corporations Act and refers to the structure of the proposed schemes of arrangement, the background to the schemes and correspondence between the legal representatives of First Pacific and BLY in respect of the schemes.
The Plaintiffs also rely on a second affidavit of Mr Rasetti dated 4 May 2017, which provides further information as to the directors and officers of the scheme companies and shares on issue by BLY and refers to the steps which have been taken to verify the explanatory statements for the Unsecured Creditors Scheme and the Secured Creditors Scheme. That affidavit also elaborates on the background to the schemes, the terms of the RSA, the Plaintiffs' financial position and the views reached by KordaMentha in their independent expert's report included in the explanatory statements for the schemes. That affidavit also refers to the implementation steps which would be required for the Unsecured Creditors Scheme and the Secured Creditors Scheme and to a proposed timetable for meetings. It is likely that some amendment to that timetable will be required, both by reason of the fact that it has been necessary to reserve judgment in this matter, and to accommodate the possibility that a second hearing in respect of a scheme may be contested and sufficient hearing time will need to be allowed in case that occurs.
By an affidavit dated 2 May 2017, Mr Paul Denaro, who is an experienced United States legal practitioner, sets out the structure for the issue of the 10% secured notes, the 7% unsecured notes and the manner in which they are held by a nominee for the clearing system, the Depository Trust Company (US) but beneficial owners of the notes are treated as persons entitled to vote in respect of a reorganisation plan under the United States Bankruptcy Code. I reach the same result under Australian law for the reasons noted below.
By affidavit dated 2 May 2017, Mr James Daloia, who is director of solicitation and disbursements at Prime Clerk LLC, a United States information agent, sets out the way in which scheme creditors hold the relevant debt, the manner in which records are maintained by the Depository Trust Company and registered participants under United States practice, and the process which would be adopted for distribution of documents and information to scheme creditors under United States practice, so that the ultimate beneficial owners of the secured and unsecured notes would receive the documents relating to the schemes and would be afforded the opportunity to vote at scheme meetings. Mr Daloia also sets out the role which would be played by Prime Clerk in tabulating votes submitted in respect of the scheme meetings.
An affidavit of Mr Scott Kershaw dated 3 May 2017 confirms that he holds the opinions set out in KordaMentha's independent expert's report dated 1 May 2017, which will be included in the explanatory statements for the schemes. That report expresses the view that the BLY Group would be solvent after the implementation of the proposed schemes, but would be insolvent from 1 April 2017 if it was required to pay the interest due on the SSN debt on that date; that the amount owing under the BLY Group's finance facilities exceeds its enterprise value by more than US$500 million, as matters stand; and that the implied value for beneficiaries after implementation of the schemes is significantly higher for SSN holders and Centerbridge (as the TLA and TLB holder) than on a winding up. KordaMentha express the view that unsecured scheme creditors and subordinate claims holders would likely receive no recovery in either a winding up or under the schemes. They also express the view that, if the schemes are not implemented, the Australian companies in the BLY Group would likely be placed in external administration and other companies would seek bankruptcy protection in their respective jurisdictions.
Mr Kershaw's affidavit also refers to changes made to that report, at the request of the solicitors for the Plaintiffs, to substitute a concept of "implied value" for the term "expected dividend" which had previously been used in respect of the position if the scheme was implemented. The use of the term "implied value" seems to me to be preferable, in circumstances that the term "expected dividend" may well have been understood as indicating that an amount would be paid out if the schemes were implemented, which will not in fact occur. Mr Kershaw also confirms his consent to act as scheme administrator of the Unsecured Creditors Scheme and the Secured Creditors Scheme. By her affidavit dated 3 May 2017, Ms Jenny Nettleton of KordaMentha confirms that she has also been involved in the preparation of KordaMentha's independent expert's report and also confirms her consent to act as scheme administrator.
The Plaintiffs also rely on an affidavit dated 4 May 2017 of Mr Marcus Derwin, who is a senior managing director of FTI Consulting and has substantial experience in corporate financing and restructuring. Mr Derwin consents to act as chair of the proposed meetings of creditors in respect of the Secured Creditors Scheme and the Unsecured Creditors Scheme. The Plaintiffs also rely on the affidavit dated 2 May 2017 of Mr Michael McCreadie, who is also an experienced restructuring practitioner and consents to his proposed appointment as alternate chair of the two scheme meetings.
The Plaintiffs rely on a first affidavit dated 3 May 2017 of Ms Camilla Clemente, who is a solicitor with the Plaintiffs' solicitors, which refers to consultation with the Australian Securities and Investments Commission ("ASIC") and correspondence with First Pacific's legal advisers in respect of the schemes. The Plaintiffs also rely on a further affidavit of Ms Clemente dated 4 May 2017 which refers to further correspondence with ASIC and to several minor amendments made to the draft explanatory statements.
The Plaintiffs also rely on an affidavit of Ms Sarah Dulhunty, a partner with their solicitors' firm, dated 4 May 2017, which exhibited, subject to a non-publication order, a draft independent expert's report prepared by KPMG in respect of whether the proposed recapitalisation, including the schemes, was fair and reasonable for the shareholders of BLY. Ms Dulhunty noted that that independent expert's report had not yet been released on ASX because it was not yet complete, was confidential and a reasonable person would not expect it to be disclosed. I have had regard to that report although it will not be necessary to refer to its detail for the purposes of this judgment.
By a further affidavit dated 5 May 2017, Mr Dennis Dunne, who is a partner in the firm that is United States counsel for the Plaintiffs, referred to a number of amendments to be made to the Fourth Supplemental Indenture, which is relevant to the Unsecured Creditors Scheme, and the First Supplemental Indenture, which is relevant to the Secured Creditors Scheme. Those amendments were properly brought to the Court's attention but are not material for the purposes of this judgment.
First Pacific in turn relies on an affidavit of Mr Abhijeet Patwardhan dated 2 May 2017. Mr Patwardhan referred to First Pacific's communications with the restructuring advisers to the Plaintiffs and to its unsuccessful attempts to be included in negotiations with other major creditors when a restructuring proposal for the BLY Group was formulated, to its receipt of a balance sheet restructuring proposal from BLY on 13 February 2017 and to subsequent counterproposals put by First Pacific to BLY but not accepted by it. Those matters are relevant as background to the present application, but the Court's role in determining whether to convene scheme meetings or approve a scheme is not directed to securing individual creditors an opportunity to participate in negotiations with scheme companies or the scheme proponents. Mr Patwardhan also indicated that, if the Court convened the meetings sought by the Plaintiffs in connection with the proposed schemes: "First Pacific does not intend to vote in favour of the Proposed Scheme as proposed."
First Pacific also relies on an affidavit dated 2 May 2017 of Mr David Clee, a partner in the firm of solicitors representing it in Australia, which exhibited, on a confidential basis, a presentation prepared by BLY's financial advisers dated 20 January 2017 which referred to base case, upside and downside forecast financial results for the BLY Group in 2021. That evidence is directed, broadly, to the question whether equity in BLY may have value, at least by 2021.

The applicable legal principles

Mr Jackman points to well-established principles as to the circumstances in which the Court will order the convening of a scheme meeting and approve a draft explanatory statement, to which I will refer below: Re Amcom Telecommunications Ltd [2015] FCA 341 at [12]; Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]. Mr Jackman rightly submits that "the court will not ordinarily summon a meeting unless the 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": F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. Mr Jackman also refers to the observation of French J in Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44], cited with apparent approval by the Full Federal Court in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [58] that: "It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530 ; 107 ALR 359 ; 7 ACSR 231 ; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). … The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
Mr Hutley, who appears with Ms Wong and Ms McGovern for First Pacific, points out that the Court has a discretion as to whether to convene the scheme meetings at the first hearing, which is to be exercised by reference, inter alia, to the likelihood or otherwise of the Court's approval of the schemes being given, upon the statutory majorities at the meetings being achieved. In Re Central Pacific Minerals NL [2002] FCA 239 at [9], Emmett J (as his Honour then was) observed that: "In exercising its discretion whether to convene a meeting, the Court will have regard to such matters as the acceptability of the documentation of the proposed arrangement, the commercial viability and morality of the arrangement, the likely acceptability of the arrangement, the bona fides of the proposals, whether the proposals could be achieved by another method and any objections or submissions by the Commission. It is always the practice of the Court, at the first stage, to go through the proposed arrangement, to raise matters as to the drafting of the documentation, to ascertain whether the arrangement complies with the substantive requirements of the law and to ensure that the arrangement, if given effect, will not involve any unfair or oppressive result."
Mr Hutley also points out that the Court scrutinises the "machinery" of the proposed scheme at the first hearing to satisfy itself that it does not contain any defects at that level: Re Price Mitchell Pty Ltd [1984] 2 NSWLR 273 at 277; Re Central Pacific Minerals NL above at [10]-[11]. Mr Hutley also draws attention to the observations of McLelland J in Re Price Mitchell Pty Ltd above at 277 that: "Those creditors who agree to a scheme are likely to be influenced largely by their perception of the broad economic consequences of the scheme, with particular reference to what proportion of their debts are seen as recoverable under a scheme as compared with a winding up, and perhaps to pay little attention to the technical or machinery aspects. It cannot be assumed that creditors will seek advice on, or fully appreciate the implications of, what they may well regard as the minutiae of a scheme, as opposed to its dominant commercial elements. They may rely on the approval of the court as a sufficient safeguard against defects at the technical or machinery level. For that reason, as well as for the purpose of protecting the interests of creditors who have not agreed to the scheme and yet will be bound by it, the court will ordinarily seek to ensure... that the scheme does not without sufficient reason include provisions which may create inroads upon, or modify, the benefits which a creditor bound by it might legitimately expect to obtain under it."
In Re Homemaker Retail Management Ltd [2001] NSWSC 1058; (2001) 40 ACSR 116 at [16], Barrett J referred to those observations and noted that, where the Court is on notice of an apparent machinery provision which is capable of altering the "dominant commercial elements" of a scheme, the Court should at least consider whether the material which has been placed before those voting on the scheme has sufficiently brought this aspect to their attention. I will address issues as to disclosure in respect of the schemes below.
Mr Jackman also emphasises, and I accept, that the Court's role, in ordering a scheme meeting and approving a scheme, is not to consider whether a better scheme could have been proposed; the Court does not choose among the available means of achieving a particular economic objective or seek to direct a plaintiff to use one such means by refusing other means on discretionary grounds; and the Court's function is to consider only the scheme put forward to it and not speculate what other compromises or arrangements might have been devised: Nicron Resources Ltd v Catto (1992) 8 ACSR 219 at 236; Centro Properties Ltd v PricewaterhouseCoopers [2011] NSWSC 1465; (2011) 86 ACSR 584 at [28]-[31]. That is of some significance in the present matter, since at least First Pacific plainly takes the view that a better and fairer scheme could have been proposed which would be more advantageous to its interests.

Identification of creditors

Mr Jackman also draws attention to an issue concerning the identification of creditors for the purposes of the schemes, where the notes issued under the Secured Notes Indenture and the Unsecured Notes Indenture are issued in a "global" form that is characteristic of United States debt market issues (Denaro [9], [12]). I am satisfied, for the reasons put by Mr Jackman in submissions, which I need not repeat, that the ultimate beneficial owners of the notes are properly treated as the scheme creditors for the purposes of the scheme. That is consistent with the approach adopted in the United Kingdom in Re Castle Holdco 4 Ltd [2009] EWHC 3919 (Ch) and in Re Gallery Capital SA (EWHC, unreported, 21 April 2010), which treated the ultimate beneficial holders as contingent creditors so far as they had the right (as creditors here also have) to be issued with definitive or certificated securities in the case of an event of default, and is also consistent with the approach adopted, by somewhat different reasoning, by McLure J in Re Glencore Nickel Pty Ltd [2003] WASC 18; (2003) 44 ACSR 210.

The test for whether separate class meetings should be ordered

The most controversial issue in this application was the constitution of the relevant class or classes in respect of the Secured Creditors Scheme. The practical significance of that issue was self-evident. If SSN holders are treated as a separate class from TLA and TLB holders, then First Pacific has a sufficient percentage interest in the SSN debt to block the scheme at that separate scheme meeting. Equally, if the SSN holders and TLA and TLB holders are treated as a single class, then Centerbridge, Ares and Ascribe, which have committed to supporting to the scheme under the RSA, appear to have a sufficient interest in the SSN debt and TLA and TLB debt at least to satisfy the value test at a scheme meeting. The constitution of classes in the Secured Creditors Scheme would therefore have a potentially significant impact on the prospects of the scheme, subject to the important issue (which would likely only arise if a single scheme meeting is ordered and First Pacific does not have a blocking stake) of the Court's discretion whether to approve a scheme at a second court hearing, to which I will refer below.
The question of the constitution of classes needs to be approached in the context of the statutory framework for schemes of arrangement under s 411 of the Corporations Act. Section 411(4)(a)(i) of the Corporations Act has the effect that a compromise or arrangement cannot become binding on a class of a company's creditors unless it has been agreed to by the requisite majority of creditors included in that class present and voting, either in person or by proxy. In Sovereign Life Assurance Co v Dodd [1892] 2 QB 573, Lord Esher MR observed (at 579-580) that: "The Act says that the persons to be summoned to the meeting (all of whom, be it said in passing, are creditors) are persons who can be divided into different classes - classes which the Act of Parliament recognises, though it does not define them. This, therefore, must be done: they must be divided into different classes. What is the reason for such a course? It is because the creditors composing the different classes have different interests; and, therefore, if we find a different state of facts existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes."
Bowen LJ in turn observed (at 582-583), in a passage on which Mr Hutley relied, that the statute: "… makes the majority of the creditors or of a class of creditors bind the minority; it exercises a most formidable compulsion upon dissentient, or would-be dissentient, creditors; and it therefore requires to be construed with care, so as not to place in the hands of some of the creditors the means and opportunity of forcing dissentients to do that which it is unreasonable to require them to do, or of making a mere jest of the interests of the minority." His Lordship also observed, in the often-cited test on which all parties relied, that: "It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to 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."
That approach treats the question whether creditors' rights are "so dissimilar as to make it impossible for them to consult together with a view to their common interest" as a strong indicator whether a single or separate classes are required, to avoid the risk of "confiscation and injustice" to which his Honour refers. It was common ground that this test is directed to differences in the rights of the relevant creditors against the scheme company as distinct from their commercial or financial interests: Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148-149; Re Opes Prime Stockbroking Ltd (No 2) [2009] FCA 813; (2009) 179 FCR 20 at [64].
In UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] HKCU 1184; 3 HKLRD 634 at [27], Lord Millett, sitting in the Court of Final Appeal of the Hong Kong Special Administrative Region, summarised the applicable principles as follows: "(1) It is the responsibility of the company putting forward the Scheme to decide whether to summon a single meeting or more than one meeting. If the meeting or meetings are improperly constituted, objection should be taken on the application for sanction and the company bears the risk that the application will be dismissed. (2) Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting. (3) The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings. (4) The question is whether the rights which are to be released or varied under the Scheme or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class. (5) The Court has no jurisdiction to sanction a Scheme which does not have the approval of the requisite majority of creditors voting at meetings properly constituted in accordance with these principles. Even if it has jurisdiction to sanction a Scheme, however, the Court is not bound to do so. (6) The Court will decline to sanction a Scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question."
In Re Hills Motorway Ltd [2002] NSWSC 897; (2002) 43 ACSR 101 at [12], Barrett J in turn observed that: "The test is thus not one of identical treatment. It is one of community of interest. The Court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest, or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail."
In Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; (2006) 57 ACSR 791; 200 FLR 243 at [70], Barrett J referred to the observations of Lord Millett in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin above and noted that: "The real question is as to the effect of the scheme on legal rights and whether the scheme creates differences in rights such as to make consultation in the common interest impossible. This concentration on legal rights - or, as Lord Millett put it, on the 'similarity or dissimilarity of their rights against the company and the way in which those rights are affected by the scheme' - is fundamental". His Honour also observed (at [71]) that: "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." His Honour there declined (at [75]) to order that scheme meetings be convened on the basis of a single class of creditors where he was satisfied that the differing rights afforded to classes of creditors was 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."
In Re Opes Prime Stockbroking Ltd (No 2) above, Finkelstein J referred (at [64]) to Sovereign Life Assurance Co v Dodd above and observed that Bowen LJ's observations made clear, and later cases confirmed, that: "… there is a distinction between a creditor's interest and his rights. It is the difference in rights, not interests, that are relevant to determining whether or not separate classes exist, and it is the extent of the difference that will determine whether separate classes are required." His Honour also observed (at [66]) that "schemes of arrangement are propounded in a business context" and the Court should "adopt a practical business-like approach to the issue, as would the creditors if they were to decide the matter" and (at [71]) that: "…the existence of separate commercial or other interests is not relevant to the class issue. This is not to suggest that different interests are irrelevant. The existence of different interests may be a factor that can be taken into account if the court comes to decide whether it should approve the schemes."
In Re Aston Resources Ltd [2012] FCA 229 at [33], Jacobson J summarised the position as follows: "The essential question is how the scheme affects the legal rights of all members. It does not involve an inquiry into the commercial motivations of members for voting in favour of or against the scheme. The test, that has been stated, of whether the interests of persons represented at a meeting of the class are not so dissimilar as to prevent those persons meeting and voting in one class involves an assessment of the legal character of the rights and obligations of the members against the company, and also how those rights will be affected by the implementation of the scheme."
Mr Jackman noted, and it also appears to be common ground that, creditors with different rights which are treated differently, but in proportion to their existing rights, can still form a single class: Re Foster's Group Ltd (No 2) [2011] VSC 547 at [37]; Re Wattyl Ltd [2010] FCA 854 at [17]; T Damien and A Rich, Schemes, Takeovers and Himalayan Peaks (3rd ed, 2013), pp 293-294. There is, as will emerge below, an issue between the parties as to whether such proportionate treatment exists in this case.
Mr Jackman also submits, and I understand it also to be broadly common ground, that, in a creditors' scheme concerning an insolvent entity, the appropriate comparator is the position of the creditors in an insolvent liquidation, when comparing creditors' existing rights, the rights that creditors would acquire under the scheme (if approved) and the rights that they would have if it were not. In Re Telewest Communications plc [2004] EWHC 924 (Ch); All ER (D) 276, Richards J observed at [29] that, in a case of pending insolvency: "… the relevant rights of creditors to be compared against the terms of the scheme are those which arise in an insolvent liquidation. Strictly speaking, because the company is not in liquidation, the legal rights of the bond holders are defined by the terms attached to the bonds. However, the reality is that they will not be able to enforce those rights and that in the absence of the scheme or other arrangement their rights against the company will be those arising in an insolvent liquidation." That observation was approved by Norris J in Re Cortefiel SA [2012] EWHC 2998 at [6]. Mr Hutley relies on that decision for the further proposition, which I accept, that it is only when considering existing rights that the court should consider an insolvent liquidation and that, in considering new rights, the relevant comparison must be the position of the scheme company after the proposed restructuring takes place. Mr Jackman also submits, and I also accept, that such rights must be considered in context and as a whole, comparing the bundle of rights held by one creditor as compared to the bundle of rights held by another creditor under the existing loan agreements on the one hand and the scheme on the other: Re Cortefiel SA above at [6].
First Pacific also submits that a relatively narrow degree of differentiation in rights both before and after the scheme will be sufficient to require separate classes, and Mr Hutley refers to Primacom Holding GmbH v Credit Agricole [2011] EWHC 3746 (Ch); [2013] BCC. 201 at [48], [72] where Hildyard J observed, in relation to a creditors' scheme, that: "classes which reflect the priorities and in respect of which not dissimilar rights from those presently enjoyed are to be conferred are a good and firm starting point in determining the composition of the classes." First Pacific points out that separate creditor meetings were there convened for super senior hedging scheme creditors, senior scheme creditors, mezzanine scheme creditors and existing mezzanine scheme creditors, where the rights of mezzanine and existing mezzanine scheme creditors were similar prior to the scheme but would differ following the scheme. First Pacific also submits that, unless like is treated as like, it is improbable that there will be sufficient similarity in post-scheme rights for a single class of creditors to be convened. I do not regard that case as authority that, as First Pacific submitted, a "relatively narrow degree of differentiation" necessarily requires separate classes to be ordered. That will depend upon the question, emphasised by the case law, whether any such differentiation in rights is such that creditors cannot consult together as to their common interests.
Mr Jackman also emphasised the recognition in the case law, plainly relevant here, that a separation of creditors into classes gives each class the opportunity to veto a scheme, and that undermines the concept of decision by large majority, and should only occur if there are dissimilar interests related to the company and the scheme to be protected: Nordic Bank PLC v International Harvester Australia Ltd [1983] 2 VR 298 at 301; Re Cashcard Australia Ltd [2004] FCA 223; (2004) 48 ACSR 738 at [6]; Re Opes Prime Stockbroking Ltd (No 2) above at [66]; Re Nine Entertainment Group Ltd [2012] FCA 1464; (2012) 211 FCR 439 at [55]. Mr Hutley rightly points out that, conversely, if the rights granted by a scheme to a group of creditors are too dissimilar, then requiring those creditors to constitute a single class may result in the oppression of the minority by the majority: UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin above at [26]; Re HIH Casualty and General Insurance Ltd above at [74]-[75].

Areas of commonality and difference as to the treatment of the SSN debt and the TLA and TLB debt

First Pacific submits that SSN holders should not be in the same class as TLA and TLB creditors because, first, there are significant differences in the rights attributable to the SSN Indenture and the TLA and the TLB facilities in respect of priority, types of interest and maturity dates, prior to and following the entry into the Secured Creditors Scheme; and, second, Centerbridge as the holder of the TLA and TLB debt is to be issued a majority shareholding in BLY and to receive other benefits, conditional upon the scheme proceeding, that are not available to SSN holders. First Pacific submits that, having regard to these dissimilarities in rights, there is no prospect that the SSN holders and Centerbridge as the TLA and TLB holder can consult together with a view to their common interests. In oral submissions, Mr Hutley emphasised the fact that commonality of interest must be determined by reference to commercial reality (T51). He also fairly recognised that mere contrariety of interest did not necessarily prevent the possibility of consultation, but suggested that the test was rather whether there was "commercial impossibility because of conflict, disparity of rights and disparity of treatment of rights" (T53).
On the other hand, Mr Jackman submitted that, although there are some differences in the rights of the SSN holders and Centerbridge as the TLA and TLB holder, those differences were not such as to make it impossible for the secured scheme creditors to consult together with a view to their common interests. Mr Wood, who appears for Ares and Ascribe, similarly emphasised that the issue for the Court, in determining relevant classes, is not merely the existence of any differentiation between the legal rights of scheme participants, but whether that difference would prevent consultation between those parties as to their common interests and that, so far as present rights are concerned, that must have regard to the pending insolvency of the BLY Group (T49).
Mr Jackman also submitted that the question whether separate classes were required should depend upon whether all members of the class would be better off if the scheme proceeds, in the sense that the companies would avoid a winding up. Mr Hutley responds, and I accept, that the determination whether separate classes are required at least potentially requires a closer analysis of the differences in rights of creditors inter se, and that separate classes could, in principle, be required, notwithstanding that all creditors were better off by reason of a scheme, where one group of creditors suffered a significant diminution in its legal rights and others did not. I will address below whether the position in this case is such as to require separate classes on that basis.
There are several common features in respect of the 10% Secured Notes Indenture and the TLA and TLB Securities Agreements. The issuer of the debt under each of the facilities is BLM and the Australian guarantors of the facilities are the same entities within the BLY Group. The SSN holders and Centerbridge as the TLA and TLB holder face a common and imminent issue as to the insolvency of the Plaintiffs. The SSN holders and Centerbridge as the TLA and TLB holder are also each party to complex security arrangements over common assets, which will give rise to significant difficulties in any insolvency of the BLY Group, such that the SSN holders and Centerbridge as the TLA and TLB holder would likely have to negotiate arrangements between themselves to allow the realisation of the securities in an insolvency. These matters seem to me at least relevant, as a matter of context, to the ability of the SSN holders and Centerbridge as the TLA and TLB holder to consult at a scheme meeting in respect of their common interests. There is substantial force in Mr Jackman's submission that these matters tend towards the treatment of the three groups of secured scheme creditors as a single class, since any consultation undertaken in separate class meetings would be unable to address the issues arising from the overlap of the security held by the SSN holders on the one hand and Centerbridge as the TLA and TLB holder on the other.
First Pacific refers to several differences as between the existing rights and new rights to be granted under the Secured Creditors Scheme and associated arrangements as between SSN holders on the one hand and Centerbridge as the TLA and TLB holder on the other. First Pacific points out that the whole of the interest due to SSN holders is presently secured, whereas part of the interest due to Centerbridge as the TLA and TLB holder is presently unsecured. In oral submissions, Mr Hutley submitted that, so far as holders of the SSNs were fully secured, and holders of the TLAs and TLBs were not secured as to accrued interest, then they were "different form[s] of creditor". I do not accept that submission, so far as each of them is a secured creditor as to a substantial debt, albeit that a portion of the debt owed to the TLA and TLB holders is not secured. First Pacific also points to the fact that Centerbridge as the TLA and TLB holder will obtain priority over debts owing under the senior unsecured notes as a result of the Unsecured Creditors Scheme. Mr Jackman responds, and I accept, that that will be a matter to which holders of senior unsecured notes will have regard in determining whether to approve the Unsecured Creditors Scheme, but does not create any relevant difference of legal rights as between SSN holders on the one hand and Centerbridge as the TLA and TLB holder on the other.
The Secured Creditors Scheme also has a common legal effect on the rights of SSN holders and Centerbridge as TLA and TLB holder to the extent that it extends the maturity of these debts to a common date, in the case of the SSNs from 1 October 2018 to 31 December 2022 and in the case of the TLAs and TLBs from 4 January 2021 to 31 December 2022. On the other hand, Mr Hutley points out that maturity dates of TLA and TLB debt will not be significantly extended (or at least will be extended for a lesser period) under the scheme, as they were previously extended to 3 January 2021 with the consent of Centerbridge to 3 January 2021, whereas holders of SSNs will be required to extend the maturity dates of their notes for the longer period from 1 October 2018 to 31 December 2022 under the scheme. Mr Jackman responds, and I accept, that the different maturity dates which presently exist for the SSN debt and the TLA and TLB debt are of little significance in creating any distinction between the interest of SSN holders and TLA and TLB holders, where, unless the schemes are implemented, the Plaintiffs will likely or inevitably be subject of insolvency proceedings long before those debts are repayable at either maturity.
I do not regard this matter as giving rise to any significant difference of legal rights. The present position is that neither SSN holders nor TLA or TLB creditors would have any real prospect of recovering the value of their notes on maturity, whether in 2018 or 2021, because the BLY companies are presently insolvent or close to insolvency; and the schemes bring about a common extension of the maturity date of both the SSNs and the TLAs and TLBs to 31 December 2022. I am also not satisfied that the different periods of the extension are material in the present case, so as to bring about, alone or in connection with other matters, any inability of the SSN holders and the TLA and TLB holders to consult as to their common interests.
There is also a difference of treatment between the SSN holders and Centerbridge as the TLA and TLB holder in the Secured Creditors Scheme, which alters the current interest rate under the SSNs from 10% payable in cash by introducing the alternative of payment of interest at a 12% rate in kind until December 2018 at BLY's option, with retrospective effect to January 2017. There is no corresponding change in respect of the TLAs or TLBs under the Secured Creditors Scheme, under which interest was already payable in kind to Centerbridge, although the subsequent term loan amendment involving Centerbridge will reduce the interest rate payable under the TLAs and TLBs in exchange for the very substantial share issue to the Centerbridge entities. Mr Hutley submits that holders of SSNs are thereby required to provide additional liquidity to BLY in the form of foregone cash payments. Mr Jackman responds that the practical significance of the change in an obligation to pay interest on the SSN debt from an obligation to pay interest in cash to payment of interest in kind is of lesser significance, where BLM does not presently have the capacity to pay interest on the SSN debt as is evident from the fact that it failed to do so on 1 April 2017. It seems to me that here is a potential practical significance to that difference in rights, once the schemes are implemented, so far as BLM would potentially then have the capacity to pay interest after its solvency was restored by the scheme, but would not be required to do so in cash in respect of the SSN debt until December 2018.
I am satisfied that the change in payment of interest on the SSN debt from cash to an option to pay interest in kind to December 2018, with retrospective effect to January 2017, involves a difference in legal rights so far as the SSN holders and Centerbridge as the holder of the TLAs and TLBs are concerned, where that change will be made in respect of the SSN debt but not the TLA and TLB debt, where the interest was already payable in kind. However, with hesitation, I am not satisfied that that matter, alone or combined with other matters, gives rise to any inability of the holders of the SSNs and Centerbridge as the holder of the TLAs and TLBs to consult together in a common interest, to address the common issues which they face in respect of the BLY Group's insolvency and the security interests over common assets that are shared between them. It seems to me that the extent of their common interests here outweighs the difference in this legal right, so that the latter does not exclude the possibility of such consultation.
The Secured Creditors Scheme also provides for an amendment to the terms of the SSN and TLA and TLB debt including a waiver of rights arising from any change of control event. The change of control rights have the same effect across the SSN Indenture and the TLA and the TLB facilities. Mr Jackman points out that that waiver is limited to events occurring as a result of the implementation of the restructuring, although its practical effect is heightened by the fact that the restructuring will confer legal control upon the Centerbridge entities, and there will be no further occasion for the application of the change of control provision unless Centerbridge later wishes to surrender that control to a third party. Mr Hutley accepted that SSN holders and TLA and TLB creditors were each required to waive their "change of control" right, but submitted that that operated unequally where it was, in substance, to the advantage of Centerbridge and to the possible disadvantage of SSN holders. Mr Hutley put particular emphasis on this matter in the course of oral submissions, and submitted that the waiver of the change of control provisions is introduced into the Secured Creditors Scheme for the sole purpose of benefiting Centerbridge in its position as the sole TLA and TLB holder, and amounts to an "essential means of affording a benefit to [Centerbridge] namely, control of the companies" (T58). That submission may well fairly describe the commercial impact of the waiver of the rights, so far as it operates differently upon SSN holders and Centerbridge as the TLA and TLB holder. Mr Hutley also submitted that only the SSN holders have any real interest in determining whether the waiver should be granted. I do not accept the latter submission. Both the SSN holders and Centerbridge as the TLA and TLB holder have an interest in that question, although that interest is opposed in commercial terms.
In oral submissions, Mr Hutley submitted that, although the waiver of the control right was in common between the SSN holders and the TLA and TLB holders and that the legal effect of that waiver would be the same as between the SSN holders and the TLA and TLB holders, it required a separate class for the SSN holders because it would operate, in practical or commercial terms, differently for the two groups and that: "The position of TLA and TLB, because of its sole beneficiary of the exercise for variation of those rights, puts [it] objectively in a position where its interest is to sacrifice [the SSN holders'] rights in respect of the securities because it in effect comes to this, as a pretending entrepreneurial interest. It's effecting a takeover, SSN [holders] are just [creditors]." (T63)
I recognise that the waiver of change of control rights is potentially disadvantageous to the SSN holders and to the commercial advantage of Centerbridge, since it removes SSN holders' ability to require repayment of the SSN debt on the change of legal control arising from the issue of shares to Centerbridge as contemplated by the Subscription Agreement, which will allow Centerbridge to obtain legal control of BLY. However, Mr Jackman submits, and I accept, that the different commercial impacts of the change of control rights on the SSN holders and Centerbridge as the TLA and TLB holder do not, alone or together with other matters, create separate classes, because they do not involve a different effect on the legal rights of members of those classes. The case law to which I have referred above emphasises that the Court should have regard, in determining classes, to differentiation in legal rights, and the common waiver of control rights is not of that character, even where it operates to Centerbridge's commercial advantage and the possible disadvantage of SSN holders.
Mr Jackman also recognises other differences, of lesser significance between the changes made by the Secured Creditors Scheme to the Secured Notes Indenture and the TLA and TLB facilities. I have had regard to those changes, but they do not seem to me to have the capacity, alone or in connection with other matters, to require different classes. I did not understand Mr Hutley to contend to the contrary in respect of those other differences.

Additional equity and director nomination rights

Arrangements between the BLY Group and the Centerbridge entities that are partly outside the schemes, but conditions precedent to it, confer additional rights on Centerbridge, Ares and Aspire. These matters could potentially raise a question whether Centerbridge, Ares and Aspire should be separated into a separate class of SSN holders from First Pacific and other SSN holders, in addition to the question whether SSN holders on the one hand and Centerbridge as the TLA and TLB holder should meet as separate classes to which the parties directed their attention.
Under the Subscription Agreement, Centerbridge obtains a right to additional equity in consideration of a reduction of interest payable under the TLA and TLB facilities. Under the Unsecured Creditors Scheme, Ares and Ascribe also receive additional equity in exchange for debt. Under the Director Nomination Agreement, Centerbridge obtains a once only right to nominate an additional director for election to the board of BLY, in addition to the four directors as to which it already has such a nomination right, and Ares and Aspire also each obtain a once only right to nominate a director to BLY's board. Mr Jackman points out that these arrangements are disclosed in the explanatory statement for the Secured Creditors Scheme, and that disclosure is reinforced by a table which will now be included in that explanatory statement addressing, inter alia, these matters and by an additional paragraph included in the "no" case in the explanatory statements, to which I will refer below. The existence of such disclosure will be relevant to the consideration of this issue at the second Court hearing.
Mr Jackman submits that these rights are not class creating because they are not created by the schemes. That submission obviously cannot extend to the shares to be issued to Ares and Aspire under the Unsecured Creditors Scheme. I do not accept that submission in respect of the Subscription Agreement and the Director Nomination Agreement, where those arrangements are conditions precedent to the schemes and they are plainly closely connected with Centerbridge's participation in the schemes. That position is reinforced by, although it does not depend upon, the fact that these rights were initially treated as components of the schemes when the schemes were announced to ASX. I also do not accept the submission made by Mr Jackman that this matter is less significant because further steps, outside the schemes, must occur for additional equity to be issued to the Centerbridge affiliates, including a decision by the directors of BLY to issue the shares and shareholder approval of the issue, where the issue of the securities is a condition precedent to the schemes which will not proceed unless it occurs.
Mr Hutley's oral submissions made clear that First Pacific's emphasis on the commercial benefits to Centerbridge arising from the issue of equity was directed to Centerbridge's commercial incentives to vote in a particular way at a scheme meeting. Mr Hutley submitted that Centerbridge was: "incentivised into reducing as far as possible our benefits, that is the [SSN holders'] benefits. They must be. They have very conflicting interests, that is, the interest to sacrifice [First Pacific], those who are SSN holders." (T71)
Mr Hutley also submitted that the shares in BLY that would be issued to Centerbridge, Ares and Ascribe had an option value given the prospect of improved performance of BLY following a restructuring, whereas Mr Jackman submitted their value was merely speculative. That question depended, in part, on a possible difference in the views taken by KordaMentha in the independent expert's report to be included in the explanatory statements for the Secured Creditors Scheme and the Unsecured Creditors Scheme and by KPMG in a confidential draft report as to the shareholders scheme, as to the potential value of BLY if the schemes are implemented. It is not possible, on the evidence as it stands, to determine which view is to be preferred, to the extent they may differ, and both views may reasonably be open. I do not consider it necessary to determine that question, where the value of the equity that Centerbridge, Ares and Aspire (and other unsecured noteholders) obtain will plainly depend on the future performance of the BLY Group and has a high degree of uncertainty, and given my conclusion below that the right to that equity does not prevent consultation as to the common interests of the parties to the Secured Creditors Scheme.
It seems to me that Centerbridge's right to additional equity arising under the Subscription Agreement and Ares' and Ascribe's right to equity in exchange for debt under the Unsecured Creditors Scheme are not such as to prevent consultation between the SSN holders as a group (a position which First Pacific did not, I think, advance) or between the SSN holders on the one hand and Centerbridge as the TLA and TLB holder on the other as to their common interests. I recognise that the allocation of additional equity to Centerbridge, Ares and Ascribe may reinforce the difference in the commercial interests of the parties in such a consultation. However, the interests that the SSN holders and Centerbridge as the TLA and TLB holder have in common, including their common exposure to the risk of insolvency and the fact that they share security over the same assets, again seem to me to outweigh these differences, particularly given the real uncertainty as to the value of equity in BLY even if the schemes are implemented, such that consultation as to their common interests can properly occur.
First Pacific also submits that the intrinsic value to BLY of the interest rate concession given by Centerbridge, under the TLA and TLB facilities, is questionable by reason of several matters, including the fact that accrued payment of interest in kind on the TLA and TLB loans is not secured. It does not seem to me that this supports any submission that separate classes are required. This is a matter to which secured and unsecured creditors may have regard at the meetings where they consider whether to approve the schemes, having regard to all the information before them, and this matter may, to the extent necessary, be considered by the Court in the exercise of its discretion at a second court hearing.
Mr Hutley submits, and I accept, that the right conferred on the Centerbridge entities under the Director Nomination Agreement to nominate an additional director is likely to be of practical significance. That right will allow Centerbridge control of BLY's board, on the present number of directors, if Centerbridge's nominee directors vote together. It seems to me that, as Mr Hutley also submits, this right in this case may be of greater practical significance than that considered by Jacobson J in Re Nine Entertainment Group Ltd above at [58]-[65], particularly when combined with the fact that Centerbridge will obtain legal control of the BLY Group following the transaction. However, it does not seem to me that the right is different in kind or so different in its magnitude as to warrant a different result from that reached by Jacobson J in that case, namely that certain creditors' right to appoint directors under a new constitution, giving rise to board control, did not make it impossible for them to consult with other scheme creditors. The same result follows so far as Ares and Ascribe are each allowed a right to nominate one director to the BLY board.

Wider matters relevant to whether a separate class meeting should be ordered

I now turn to several wider matters relevant to whether the differences to which I have referred above, whether of legal rights or commercial interests, would make it impossible for SSN holders and Centerbridge as TLA and TLB holder to consult as to their common interests. First Pacific submits that the structure of the classes proposed by the Plaintiffs gives no option to SSN holders to determine whether they wish to continue their loans to the Plaintiffs for the next four years, where there has already been a default under the SSN Indenture, or to receive the liquidation value of their notes. It does not seem to me that a submission at this level of generality assists in determining the matter, and this submission in any event somewhat oversimplifies the position. As I have noted above, if First Pacific obtains the separate class for which it contends, then it has the capacity to veto the scheme, and it appears to propose to do so. If the separate class is not ordered, then Centerbridge, Ares and Ascribe will have the majority of value at a meeting of the secured scheme creditors; may or may not have a majority in numbers, depending upon the number of other creditors who attend; and the Court will have a discretion at the second hearing to determine whether to approve the scheme, any exercise of which may well give significant weight to the views expressed by SSN holders not aligned with First Pacific on the one hand or Centerbridge, Ares and Ascribe on the other.
I recognise that, as matters stand, there may be little likelihood that any consultation between at least First Pacific as one SSN holder and Centerbridge, Ares and Ascribe as other SSN holders and Centerbridge as the TLA and TLB holder will result in agreement, where First Pacific has made clear, in its affidavit evidence, that it will not support the Secured Creditors Scheme, apparently without regard to such consultation; and Centerbridge, Ascribe and Ares have committed themselves by the RSA to supporting the schemes, also apparently without regard to such consultation. However, it seems to me that any lack of efficacy of consultation between those parties will result, not from any difference in their legal rights that would prevent such consultation, but from the fact that their commercial interests, as reflected in First Pacific's stated position and Centerbridge's, Ares' and Ascribe's commitments made in the RSA, are opposed.
I also recognise that there is no certainty that other SSN holders, other than First Pacific, Centerbridge, Ares and Ascribe, will attend a meeting in respect of the Secured Creditors Scheme, whether convened as a single meeting of SSN holders or a meeting together with Centerbridge as the TLA and TLB holder. Nonetheless, the prospect of meaningful discussion at the scheme meeting for the Secured Creditors Scheme and change of voting intentions is open, at least in respect of secured creditors who have not already committed themselves to positions. The voting arrangements for the Secured Creditors Scheme contemplate the lodgement of a Voting Proof of Debt Form with the US information agent by a specified time and date, and permit lodgement of a vote by proxy with the US information agent by that specified time, but do not require voting in that manner. Importantly, those arrangements also permit secured creditors to vote by attorney or corporate representative at the scheme meeting presently proposed for 30 May 2017, where such discussion could take place.
It seems to me that there are plainly matters that would properly be discussed at the scheme meeting for the Secured Creditors Scheme, particularly if creditors other than First Pacific, Centerbridge, Ares and Ascribe attend it, including whether the benefit of avoiding an insolvency of the BLY Group warrants the benefits that are given to the Centerbridge entities, Ares and Ascribe, but not to other SSN holders, as the price of that scheme. The decision of SSN holders not aligned with First Pacific, Centerbridge, Ares or Ascribe as to that question is likely to be promoted by a single meeting between the SSN holders and Centerbridge as the TLA and TLB holder, where there are significant common issues including the need to address the consequences of insolvency and shared security. If other SSN holders or their representatives attend such a meeting, then each of Ares, Ascribe and Centerbridge on the one hand and First Pacific on the other can seek to persuade them to their respective points of view. Any view taken by unaligned SSN holders in that respect may have substantial weight at a second court hearing.

Collateral benefits

Mr Jackman rightly recognises that the fact that affiliates of Centerbridge will obtain a controlling shareholding in BLY, under the arrangements associated with the schemes, and that the Centerbridge entities, Ares and Ascribe will obtain a right to nominate directors to BLY's board, raises questions as to whether those entities are receiving a collateral benefit as a result of the overall recapitalisation of the BLY Group, and that that matter would be taken into account at a second court hearing: Re Aston Resources Ltd above at [35]; Re David Jones Ltd (No 2) [2014] FCA 720; (2014) 101 ACSR 381 at [33]. Mr Wood similarly submitted that so far as benefits obtained by the other parties were outside the scheme, and were properly characterised as matters affecting their interests in respect of the scheme, rather than their rights, then they were properly to be addressed at the second hearing as a matter of fairness, relying on Re Aston Resources Ltd above.
First Pacific submits that collateral benefits conferred on a creditor, including in this case the issue of equity to Centerbridge and the conferral of director nomination rights on Centerbridge (and also Ares and Ascribe) may require those creditors to be treated as a separate class for voting purposes from those who receive no such benefit. The authorities on which First Pacific relies for that proposition do not seem to me to support it. In the first of those cases, Re Macquarie Private Capital A Ltd [2008] NSWSC 323; (2008) 26 ACLC 366 at [16], Barrett J held that no separate class was required because there was no indication that the relevant party would be receiving any special benefit, and did not have to address the extent to which any such "special benefit" might constitute a difference in legal rights, as distinct from a commercial interest, so as to require the creation of a separate class. The decision in Re Sylvastate Ltd [2011] FCA 211 at [22] involved a finding that there was no material difference in the interests of a shareholder from that of other shareholders, not a finding that any such difference required a separate class to be convened. The decision in Re iSOFT Group Ltd [2011] FCA 680 at [19] noted a proposal by the scheme proponent that a separate class meeting be held, to address an issue of a collateral benefit, rather than requiring such a meeting. That decision is not authority as to whether such a meeting is required in that situation, as Jacobson J noted in Re Aston Resources Ltd above at [30]. In my view, these cases do not support any requirement for a separate scheme meeting in respect of a collateral benefit that is of commercial character, and that matter should be left for consideration by the Court at the second hearing, in exercising its discretion whether to approve a scheme.
First Pacific alternatively submits that Centerbridge, Ares and Ascribe are receiving benefits in connection with the schemes which render it unfair and inappropriate for them to be permitted to vote on the Secured Creditors' Scheme. First Pacific points out, and I accept, that there are several cases in which creditors have not voted, by reason of additional benefits that they were receiving that were not available to other creditors: for example, Re Eastern Star Gas Ltd [2011] FCA 1225. Perhaps not surprisingly, Centerbridge, Ares and Ascribe do not volunteer to refrain from voting on the Secured Creditors Scheme, so as to allow First Pacific the practical power to veto that scheme. I do not regard it as necessary or appropriate to exclude any creditor from voting on the Secured Creditor Scheme at this point, where steps can be taken to tag the votes of interested creditors, and they can be disregarded or given lesser weight at a second scheme hearing as appropriate. I also do not accept First Pacific's submission that, absent agreement from Centerbridge, Ares and Ascribe not to vote at a single scheme meeting in respect of the Secured Creditors Scheme, the Court should exercise its discretion to refuse to order the meeting to be convened, rather than to exercise a discretion whether to approve the schemes at the second court hearing. By that time, importantly, the Court may have additional information available to it, including the attitude of other secured creditors not aligned with First Pacific on the one hand or Centerbridge, Ares or Ascribe on the other in respect of the Secured Creditors Scheme.
Mr Hutley also submits that all of the amendments to the TLA and TLB facilities could have been achieved by agreement between Centerbridge and the Plaintiffs, without the need for those amendments to be approved by creditors voting on the Secured Creditors Scheme. In oral submissions, Mr Hutley also pointed to steps that had been taken to extract transactions which were originally included in the announcement of the scheme made by the BLY Group to ASX into separate agreements which are treated as conditions precedent to the schemes (T52). It is difficult to avoid an impression that the Secured Creditors Scheme may have been structured so as to seek to create a commonality of rights between the SSN holders and Centerbridge as the TLA and TLB holder, so as to support the creation of a single class. In particular, steps that may well have been capable of implementation under the RSA between the Plaintiffs, Centerbridge and Ares and Ascribe have been included in the Secured Creditors Scheme, in a manner that may support the creation of a single class. However, the Court must consider that scheme which is put before it, not the different scheme which would exist if the matters which could have been addressed between Centerbridge, Ares and Ascribe and the Plaintiffs had been addressed outside the scheme. To the extent that this involves an issue of structuring of the scheme so as to bring about a particular legal result, it seems to me that that is matter to be addressed at the second court hearing.
First Pacific also submitted that the fact that BLY had negotiated with Centerbridge, Ares and Ascribe as to the terms of the restructuring, and not (or at least not initially) with First Pacific required that separate classes be established. No authority for that proposition was identified, and it seems to me to be inconsistent with the emphasis upon differentiation in legal rights of the persons affected by schemes, to which I have referred above. I do not accept that submission.
Finally, First Pacific submitted that, if the scheme meetings were to proceed in the form proposed by the Plaintiffs, then the votes of creditors affiliated with Centerbridge, Ares and Ascribe should be tagged, to assist the Court at the second hearing to determine whether it is appropriate to exercise its discretion to discount or disregard those votes. It seems to me that that course is plainly necessary in the relevant circumstances.
I have therefore concluded, although with hesitation, that a single class meeting should be held in respect of the SSN holders and Centerbridge as the TLA and TLB holder. As I have noted above, there are plainly some differences in rights, and substantial differences in commercial interests, between First Pacific on the one hand and Centerbridge, Ares and Ascribe on the other. On balance, those matters are not such that they cannot consult together with a view to their common interests, including the very substantial common interest which they have in addressing the risks of BLY's insolvency and how those risks are increased by the fact that they share security, as between the SSN holders and Centerbridge as the TLA and TLB holder, in respect of the same assets. The votes of Ares, Ascribe and the Centerbridge entities should be tagged at that meeting. I expressly leave open the question whether, at the second hearing, the Court may be satisfied that the votes of some or all of Ares, Ascribe or Centerbridge should be disregarded or given lesser weight in determining whether to approve the Secured Creditors Scheme.

Other matters relevant to the approval of the schemes

The Court must be satisfied, at a first court hearing in respect of a scheme, that the Plaintiffs are Part 5.1 bodies, which is uncontroversial in this case. The Court must also be satisfied that the proposed schemes are an arrangement within the meaning of s 411 of the Corporations Act and that the schemes are bona fide and properly proposed. It is uncontroversial in this application that the relevant schemes are "arrangements" within s 411 of the Corporations Act. First Pacific submits that the structure and form of the Secured Creditor Scheme are unfair and oppressive to SSN holders. I have addressed the structure and form of that scheme above and I do not consider that the matters raised by First Pacific are such that the Court could not approve the proposed scheme at a second hearing. In those circumstances, it is preferable that those matters be deferred to a second hearing.

Adequacy of disclosure in the explanatory statements

The Court must also be satisfied, at the first court hearing, that the scheme booklets will provide proper disclosure to creditors. Mr Jackman recognises that ss 411 and 412 of the Corporations Act require disclosure of information concerning the effect of the schemes and information that is material to a creditor's decision whether or not to agree to it. I am satisfied that the explanatory statements generally contain the necessary information, subject to the matters noted below, although it must be recognised that they are very complex documents, by reason of the complexity of the proposed arrangements.
First Pacific originally submitted, with substantial force, that the initial draft explanatory statement for the Secured Creditors Scheme did not provide any, or any readily comprehensible, analysis of the differences in outcomes for secured creditors which would receive equity under the scheme, principally Centerbridge, Ares and Ascribe, and those SSN holders which would not receive such equity. First Pacific also submitted, with substantial force, that the sections of the draft explanatory statement dealing with reasons that secured creditors may consider voting for and against the scheme did not adequately disclose the fact that the benefits provided to Centerbridge may provide a reason for SSN holders not to support the scheme. In the course of the hearing, and by supplementary submissions by leave, the Plaintiffs proposed an amendment to the explanatory statement for the Secured Creditors Scheme to include a table (to be inserted as paragraph 3.10 of the explanatory statement for the Secured Creditors Scheme) comparing key terms of the SSN, TLA and TLB debts before and after the recapitalisation transactions; identifying alterations to the maturity date of the SSN, TLA and TLB debts, the variation of the change of control trigger, the call schedule, the treatment and priority of security, the interest rate and manner of payment, interest payments date, and the provision of a guarantee; and also drawing attention to the issue of shares to Centerbridge and the director nomination agreements. It seems to me that that disclosure of those matters in a summary form is appropriate to allow secured creditors to identify the changes effected by very complex documents. The Plaintiffs fairly accepted that a corresponding summary of matters relating to the Unsecured Creditors Scheme should be included in the explanatory statement for that scheme.
A criticism was also fairly raised by First Pacific as to the adequacy of the "no" case in the explanatory statement for the Secured Creditors Scheme in its original form. In the course of the hearing, and by supplementary submissions by leave, the Plaintiffs proposed an amendment to the explanatory statement to introduce an additional lengthy paragraph in the "no" case in respect of the scheme, identifying the possibility that secured creditors may consider voting against the scheme if they formed the view that the benefits conferred on Centerbridge entities by the transactions were disproportionate to those conferred on other secured creditors by those transactions. That "no" case also makes clear an important factual matter, that Centerbridge holds all of the TLA and TLB debt, and refers to changes in the shareholding in BLY held by Centerbridge in connection with the schemes. A similar disclosure is to be also made in the explanatory statement for the Unsecured Creditors Scheme.
First Pacific also contended that the explanatory statement for the Secured Creditors Scheme should annex copies of the subsequent term loan amendments and Subscription Agreement, which stand outside that scheme. The explanatory statements provide explanations of those transactions; those explanations must provide fair and proper disclosure of the material terms of such transactions, and BLY would be exposed to liability if they had not done so; and its seems to me that no useful purpose would be served by adding additional documents to the already overwhelming bulk of the explanatory statement for the Secured Creditors Scheme. First Pacific also referred to a reference in the draft explanatory statement to a "dividend" if the scheme was put into effect, and submitted that that was misleading, where no dividend would actually be paid if the schemes were implemented. It seems to me that that language, whether or not it was prompted by the approach adopted in the Corporations Regulations 2001 (Cth), was potentially misleading but the alternative term "implied value" which is now to be used addresses that issue.
By supplementary submissions as to the additional disclosure proposed by BLY in the explanatory statement, made by leave on 6 May 2017, First Pacific also submitted that any disclosure that treated the SSN holders and the TLA and TLB holders as in the same class could never be adequate. That submission depends upon First Pacific's submission as to classes, which I have addressed above, and cannot be accepted where I have not found that separate classes are required. First Pacific also submitted that the disclosures proposed in the explanatory statement for the Secured Creditors Scheme failed to provide a detailed and balanced assessment of the reasons why each of the different categories of creditor may consider voting for or against the Secured Creditors Scheme. BLY fairly responds that the purpose of the additional information to be included in the explanatory statement is to identify the additional benefits that Centerbridge receives, to allow creditors to assess whether that affects their decision-making, and not to go further to address the position of each supposed category of creditor. It seems to me that the explanatory statement, as now amended, does provide disclosure of the information that would be relevant to influencing a creditor's decision and judgment whether to vote one way rather than another, and fairly alerts creditors to the differences in treatment of the various loan instruments and the possibility that the treatment of Centerbridge (and to a lesser extent, Ares and Ascribe) may be a matter to which a creditor may have regard in forming its voting intention.
First Pacific submits that the explanatory statement should also provide detailed information about Centerbridge and its future intentions with respect to the Plaintiffs. This submission was derivative of First Pacific's submissions as to waiver of change of control rights, which I have addressed above, and depended on the proposition that SSN holders would only waive their change of control right if they were satisfied that Centerbridge's plans for the business would increase their ultimate returns as a fully secured creditor. BLY responds that information as to Centerbridge's intention is not necessary, particularly where KordaMentha's independent expert's report has concluded that secured creditors will receive a better return on a recapitalisation than under a winding up, and that view was not qualified by reference to Centerbridge's intentions. It seems to me that the explanatory statement provides sufficient information as to the future prospects of the business, particularly by reference to the information contained in the KordaMentha report.
First Pacific submits that sections 8 and 9 of the explanatory statement, directed to reasons why secured creditors may consider voting for or against the secured Creditor Scheme, focus on the broad advantages and disadvantages of proceeding with the restructuring, rather than on the specific implications of the transaction for the existing and future rights of TLA and TLB holders as against SSN holders. First Pacific elaborated on this submission by repeating its earlier submissions as to how the interests of SSN holders and TLA and TLB holders differ, by way of matters such as the holding of equity, the change of control waiver, the treatment of cash interest, maturity dates and interest rates. BLY responds that, so far as First Pacific points to particular aspects of the transaction, including the proposed equity issue, the benefit to Centerbridge of the change of control waiver, the position as to interest and maturity dates, those matters are already disclosed in the explanatory statement. It seems to me that the explanatory statement's focus on the issues surrounding the restructuring is justified given the nature of the transaction, and that the particular issues to which First Pacific refers are sufficiently disclosed by the summary table and the detailed information as to the scope of the amendments to the financing documents, to allow creditors to make an informed assessment of the decision they have to make.
First Pacific submits, and I accept, that the initial form of the additional description in the "no" case of the increase in Centerbridge's shareholding from 48.9% to 56% was potentially misleading, by omitting reference to the intervening step under the schemes, by which Centerbridge's interest would be diluted from 48.9% to 3.7%, before being increased from that percentage to 56% by the Subscription Agreement. BLY did not accept that the "no" case needed to include reference to the manner in which Centerbridge's 56% stake would arise. However, without prejudice to that submission, it proposed to amend the disclosure to extend to that matter. That amendment seems to me to be appropriate. First Pacific also submits that the additional paragraph included in the "no" case does not seek to make an assessment of the value of the benefits conferred on Centerbridge, including a controlling equity stake in BLY. BLY fairly points out that the position, supported by KordaMentha's independent expert's report, is that the equity that Centerbridge will receive has little or no value, given BLY's financial position. It seems to me that that paragraph sufficiently alerts creditors to the issue of benefits to Centerbridge under the scheme and need not go further, given the information as to the value of the BLY Group and its equity contained elsewhere in the explanatory statement and in the KordaMentha report.
I should note, for completeness, that I considered whether the disclosure in the "no" case needs to make explicit that creditors could choose to vote against the scheme, if they form the view that the benefits conferred on the Centerbridge entities, or indeed Ares and Ascribe, are disproportionate, on the basis that a more favourable scheme may or may not then be proposed, at the risk of the insolvency of the Plaintiffs if such a proposal does not emerge or does not emerge quickly enough. I do not consider it necessary to require such a disclosure, where that possibility and its risks are likely to be self-evident to the relevant creditors. I also note, again for completeness, that there is reference in the explanatory statement for the Unsecured Creditors' Scheme to the rights available to shareholders in BLY under Australian law. That explanatory statement also discloses the possibility that, pursuant to agreements reached with Centerbridge, BLY may be redomiciled outside Australia. I had raised, in the course of oral submissions, whether further disclosure needed to be made as to any impact of that matter on shareholder rights, so far as the legal protections available to shareholders may differ within national legal systems. I have ultimately formed the view that no further disclosure is necessary, where it would be self-evident to creditors that the position of shareholders under, for example, Delaware law, and the position of shareholders under Australian law may differ.

Whether ASIC had a reasonable opportunity to examine the terms of the schemes and compliance with Corporations Rules

The Court must be satisfied that ASIC has had a reasonable opportunity to examine the terms of the schemes and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date. By letter dated 3 May 2017, ASIC confirmed that it had had 14 days of notice of the hearing of the application in accordance with s 411(2)(a) of the Corporations Act and had a reasonable opportunity to examine the terms of the proposed schemes in accordance with s 411(2)(b) of the Act and that it did not propose to appear to make submissions, or intervene to oppose the schemes, at the first court hearing. ASIC reserved its position as to whether it would provide a statement under s 411(17)(b) of the Corporations Act to the second court hearing, in accordance with its usual practice. I am therefore satisfied of this matter.
The Court must be satisfied, at the first court hearing, that the procedural requirements of the Supreme Court (Corporations) Rules have been met and that there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved. I am satisfied that the operation of rule 2.15 of the Supreme Court (Corporations) Rules is properly excluded or varied, as the orders contemplate, where the scheme meetings will take place in accordance with orders of the Court and the result of the meeting will not take effect without a further order of the Court approving the schemes. The requirements of rule 3.2 of the Supreme Court (Corporations Rules) in respect of consents to act as chairman and alternative chairman and as to the appointment of Mr Kershaw and Ms Nettleton of KordaMentha as scheme administrators are satisfied. There is evidence of verification of factual information contained in the explanatory statements for the schemes (Rasetti 4.5.17 [24]-[45]) and that matter was not controversial in this application.

Treatment of subordinate creditors in the Unsecured Creditors Scheme and other matters

The Unsecured Creditors Scheme releases the claims of subordinate claimants within the meaning of s 563A(2) of the Corporations Act, except to the extent of the net proceeds of any policy of insurance that would respond to such a claim. Mr Jackman points out that, by s 411(5A) of the Corporations Act, those claimants are bound by the scheme, although they have not voted on it at a meeting convened under s 411(1) of the Corporations Act. As Mr Jackman points out, the purpose of that section was considered by Gleeson J in Re Atlas Iron Ltd above at [41]-[46] and, although this matter is addressed in detail in Mr Jackman's submissions, it does not require detailed consideration in this judgment. It appears the Plaintiffs have not identified any particular subordinate claim holder or any circumstances which might be expected to give rise to such a claim. I am satisfied that, to the extent that such claims may exist, such an order may properly be made in this case, to avoid the result that subordinated shareholder claims which would not be recoverable on the insolvency of companies within the BLY Group would continue beyond implementation of the scheme and potentially rank ahead of equity issued to higher ranking creditors in exchange for their claims.
Mr Jackman also points out that the RSA contains "no shop" and "no talk" obligations, notification and matching rights and a modest break fee of A$1 million payable in circumstances including a failure by creditors to approve the proposed schemes. The circumstances in which the break fee was agreed is addressed in Mr Rasetti's second affidavit, and that fee is relatively small, having regard to the total debt owing under the facilities and would not operate as any real disincentive to voting down the schemes, if creditors are otherwise inclined to do so. These matters are familiar in schemes and are addressed in some detail in Mr Jackman's submissions. I do not see those matters as any reason not to convene the scheme meetings.
Mr Jackman also refers to deeds poll which it is proposed will be executed, by the time of the second court hearing, to bind several third parties, including the trustee under the Secured Notes Indenture and the agent under the TLA and TLB facilities to the steps required to execute the schemes. Those matters seem to me to be sufficient to allow the Court to be satisfied as to the Plaintiffs' ability to implement the schemes, if they are approved by creditors and approved by the Court at the second court hearing. It also does not seem to me that the proposed appointment of Mr Kershaw and Ms Nettleton as scheme administrators compromises the independence which is required for their independent expert's report, for the reasons noted by Gleeson J in Re Atlas Iron Ltd at [61].
The schemes also provide for mutual releases between creditors entitled to vote on the schemes, obligors in respect of the debt which are members of the BLY Group, past and present directors and officers of the obligors who have executed a deed poll and other scheme creditors. I accept that, in principle, a scheme of arrangement can provide for releases of third parties, where creditors receive something in return for the benefit conferred on the third party: Fowler v Lindholm [2009] FACFC 125; (2009) 178 FCR 563 at [69]; Bacnet Pty Ltd v Lift Capital Partners Pty Ltd (in liq) [2010] FCAFC 36; (2010) 183 FCR 384 at [136]ff. The releases do not extend to a release by any company of its directors and officers and therefore do not give rise to a contravention of s 199A of the Corporations Act, and do not extend to fraud or wilful misconduct, or reckless, grossly negligent or dishonest conduct. To the extent that these provisions may raise issues at a second hearing, including so far as they seek to affect the position as between First Pacific on the one hand and Centerbridge, Ares and Ascribe on the other, those issues should be left to that hearing.
I have referred above to the evidence that is led as to the manner in which notices of meeting and the explanatory statements will be sent to scheme creditors, by a process that is commonly adopted in the United States, as described in Mr Daloia's affidavit to which I have also referred above. I am satisfied that that is the only practical manner of addressing the fact that the identity of some scheme creditors is not presently known to the Plaintiffs or the Depository Trust Company. As Mr Jackman points out, the procedures proposed to be adopted in that respect and the procedures for voting at the proposed scheme meetings will have some similarity with those adopted in Re Glencore Nickel Pty Ltd above.

Orders

I make orders in accordance with the short minutes of order initialled by me and placed in the file, substantially in the form submitted to my Associate on 9 May 2017.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 May 2017

Re Jax Marine Pty Ltd [1967] 1 NSWR 145 - Re Macquarie Private Capital A Ltd [2008] NSWSC 323; (2008) 26 ACLC 366 - Re Nine Entertainment Group Ltd [2012] FCA 1464; (2012) 211 FCR 439 - Re Opes Prime Stockbroking Ltd (No 2) [2009] FCA 813; (2009) 179 FCR 20 - Re Price Mitchell Pty Ltd [1984] 2 NSWLR 273 - Re Sylvastate Ltd [2011] FCA 211 - Re Telewest Communications plc [2004] EWHC 924 (Ch); All ER (D) 276 - Re Wattyl Ltd [2010] FCA 854 - Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 - UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] HKCU 1184; 3 HKLRD 634 Texts Cited: - T Damien and A Rich, Schemes, Takeovers and Himalayan Peaks (3rd ed, 2013) Category: Principal judgment Parties: Boart Longyear Limited (First Plaintiff) Boart Longyear Management Pty Limited (Second Plaintiff) Boart Longyear Australia Pty Limited (Third Plaintiff) Votraint No. 1609 Pty Limited (Fourth Plaintiff) Representation: Counsel: I M Jackman SC/M A Izzo (Plaintiffs) M Oakes SC (Centerbridge Partners LP) N C Hutley SC/T L Wong/L McGovern (First Pacific Advisors LLC) P M Wood (Ares Management LP and Ascribe II Investments LLC)

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