Gordian's concerns about the operation and effect of clause 22
44 It is the contention of Gordian that clause 22 prejudicially affects scheme creditors of a particular scheme company having claims under policies of insurance involving co-ordinate liabilities of that scheme company and some other insurer or insurers. The prejudice is said to arise in several ways.
45 The primary concern was explained by Ms Johnson by way of an example. Assume that a particular risk is insured by four co-insurers, being a scheme company (say, FAI), A, B and C, with each bearing separately 25% of the liability. From the perspective of FAI, that insurance gives rise to a "Common Liability". Assume the insured incurs a loss of $16 million to which the policy is responsive and that the insured accordingly claims against all four insurers. Assume further that the insured obtains a judgment against A for $4 million and settles the claims against B and C for $1 million each. The first step in applying clause 22 is to note that the "percentile participation" of the three co-insurers (A, B and C) is 75%. The total of "Final Co-Insurer Judgments" and "Final Settlements" is the aggregate of the insured's recoveries from A, B and C, that is, $6 million. Pursuant to clause 22.4(a), one divides the $6 million by 75%. The result is $8 million. Pursuant to clause 22.4(b), one then multiplies that result by FAI's percentile participation (which is 25%) to produce a result of $2 million. By force of clause 22.4, $2 million is then the maximum that the scheme creditor in question is entitled to claim against FAI for the purpose of the regime of proof and distribution provided for under the scheme. In the winding up of FAI, however, that insured would have had a provable claim for the full $4 million.
46 The second point Ms Johnson made is that clause 22.4 does not reduce claims only because of future events referable to co-insurers. It also effects reduction, immediately upon the scheme's becoming effective, by reason of judgments, settlements and other events pre-dating the scheme. Thus, in the example already quoted, the particular creditor (insured) has today a claim against FAI in the amount of $4 million even though the events involving A, B and C have already occurred; but immediately the Australian scheme takes effect that claim will be reduced to $2 million by operation of clause 22.4.
47 A third matter upon which discussion of clause 22.4 focussed attention (and about which Gordian complains) is the operation of the scheme provisions concerning set-off in a case within clause 22. There were submissions on behalf of Gordian that statutory provisions with respect to set-off may have pre-empted the scheme provisions. Those scheme provisions are contained in clause 13:
"13. Set-off
13.1 A Scheme Creditor may rely on any right of set-off of a Liability owed by a Scheme Company upon which it could have relied if that Scheme Company were being wound up in Australia and the order that the Scheme Company be wound up had been made on the Record Date.
13.2 A Scheme Company may rely on any right of set-off against a Liability upon which it could have relied if that Scheme Company were being wound up in Australia and the order that the Scheme Company be wound up had been made on the Record Date.
13.3 Furthermore, in determining the amount of an Established Scheme Claim after the Estimation Date, the Scheme Administrators or Scheme Adjudicator (as the case may be) shall allow a reduction for an estimate made by the Scheme Administrators or the Scheme Adjudicator (as the case may be) of the value of any amounts to which the Scheme Company may be or become entitled from the Scheme Creditor, which for any reason do not bear a certain value.
13.4 For the avoidance of doubt:
(a) no Liability which has been assigned to a person after the Record Date or which was assigned to a person prior to that date but after the person had notice of the fact that the Scheme Company is insolvent may be applied in extinguishing or reducing any liability of that person to a Scheme Company; and
(b) no liability of a Scheme Creditor to a Scheme Company which arises out of an obligation incurred by such Scheme Creditor after the Record Date may be extinguished or reduced by any Liability which such Scheme Creditor has against a Scheme Company.
13.5 In determining any Set-off in relation to a Liability, where the amount set-off is expressed in a currency other than that of the relevant Liability, the amount set-off shall, in the absence of agreement otherwise between the Scheme Creditor and a Scheme Company, be converted, for the purpose of Set-off, into the currency in which the relevant Liability was incurred using the Relevant Rate of Exchange as the Record Date. If the Liability is extinguished by Set-off leaving a balance payable to a Scheme Company, the balance shall be payable to a Scheme Company in the currency in which the amount set-off was incurred."
48 It may be accepted that clause 13 has the same effect as s.553C of the Corporations Act. Section 553C operates, in a case to which it applies, to fix the amount for which a creditor may prove in a winding up (or to eliminate the right to prove). It does so by reference to the claims by and against the creditor as at the date made relevant by s.554, that is, the date which is, under Division 1A of Part 5.6, the date on which the winding up is taken to have begun. The approach the scheme will implement, if it becomes effective, is to cause the rights created by the scheme to replace creditors' rights to prove in and receive a dividend from the winding up. This is expressly provided in clause 6.2.
49 It follows that, if the Australian scheme becomes effective, s.553C will never operate to define a net amount for which a creditor may prove in the winding up (or a net amount owed by the scheme company to the creditor). This is because the creditor's rights in respect of the creditor's debt or claim will have become the rights created by the scheme; and those rights will prevail to the exclusion of rights of proof and dividend rights under the winding up. Ascertainment of the sum for which the creditor may prove in the winding up will therefore never become a live issue, so far as actual participation in available assets is concerned. Gordian's concern that the scheme will bind creditors "to the extent they remain a creditor after the automatic set off in s.553C was applied" (to quote the words in Ms Johnson's outline of submissions) is therefore not well placed.
50 What might be termed the "gross amount" of the respective claims in the case of a person with a claim against a scheme company which also has a claim against the person will accordingly be taken into account under clause 13. And that clause will have effect, according to its terms, to produce a net amount either cognisable as a liability of the scheme company under the scheme or representing a debt to the scheme company.
51 The set-off issue arose in the course of submissions on clause 22.4 because of an apprehension that set-off may have affected a claim of the clause 22.4 kind before the scheme became operative. For the reasons stated, I am satisfied that this cannot be so and that, in the example quoted at paragraph [45] above, the unreduced claim of $4 million would be subjected to clause 22.4 even though the creditor in question was also indebted to the company. It is the amount produced by clause 22.4 (i.e, the amount of $2 million in Ms Johnson's example) that would be taken into account when the set-off provisions in clause 13.1 were applied.
52 The correctness of the position I have just outlined is reinforced by the opening words of clause 22.4, "Notwithstanding any other provision of The Australian Scheme …". These make it clear that the operation of clauses 13 is subordinate to that of clause 22.4, so that, when set-off under clause 13 is effected, it is any reduced amount produced by clause 22.4 that is taken into account in the set-off, rather than the "gross" amount. Again, an example was given in Ms Johnson's submissions. Let it be assumed that there is a claim for "Common Liability" of $10 against the relevant company and that company has a claim of $5 against the creditor. Apart from the scheme and having regard to s.553C, the creditor could prove for $5. But if clause 22.4 reduces the $10 claim to $8, the extent of participation under the scheme is only $3, being the reduced claim of $8 against which is set-off the company's claim of $5.
53 This, in Ms Johnson's submission, again illustrates the prejudicial effect of clause 22.4 upon creditors whose claims are such as to attract the operation of the clause.
54 A fourth concern voiced on behalf of Gordian in relation to clause 22 is that a stay of proceedings against a co-insurer reduces the amount claimable by a scheme creditor within the contemplation of the clause. The outline of submissions says:
"This is because the numerator in the formula in clause 22.4 adds up the amounts of settlements and final judgments against the co-insureds but the denominator includes the percentage participation of those co-insurers plus the co-insurer against whom a claim was stayed. This means that the formula treats the scheme creditor as having a settlement of zero with the co-insurer against whom the proceedings were stayed."
55 The submissions add that this is a real and substantial concern particularly in light of the fact that not only HIH companies but also NewCap companies are in liquidation, so that a statutory stay operates in relation to proceedings against them.
56 The plaintiffs seek to address this last matter by asking the court to allow, pursuant to s.411(6), an amendment of the scheme. Under the foreshadowed amendment, clause 22.4 would be altered so that the category of scheme creditor to which it applied was confined to "a Scheme Creditor which has obtained a Final Co-Insurer Judgment or a Final Settlement". The italicised words would be added. In addition, clause 22.4(a) would be changed so that, instead of referring to "any occurrence referred to in clause 22.1", it referred to "any occurrence referred to in clause 22.1(a) and/or (b)".
57 Gordian's position is that this would not solve the problem. My own view is that, in its amended form, clause 22.4 would not operate in the perceived detrimental way where a relevant judgment affecting a co-insurer was a default judgment.
58 I come next to a fifth concern expressed by Gordian in relation to clause 22, namely, that its notification regime requires disclosure of matters (ie, the details of settlements of litigation) which are, as a commercial matter, very often made the subject of contractual obligations of confidentiality. Two situations are again relevant: first, where a settlement has already been agreed by and implemented by means of a contract imposing obligations of non-disclosure; and, second, where settlement negotiations arise in the future in circumstances in which acceptance of such obligations might, as a commercial matter, be expected as an unexceptionable incident of the contract. In the first case, the concern is that the scheme will purport to require acts constituting breach of the antecedent contract. In the second, the existence of the requirement under the scheme might prejudice the ability to achieve a settlement that would otherwise be attainable.
59 The sixth and final matter raised by Gordian concerns a situation where a particular settlement relates to both Common Liabilities and claims that are not Common Liabilities and entails an agreed overall sum which is not apportioned or allocated in such a way as to make it possible to say how much of it relates to the Common Liability. In that situation, it is said, the way in which the clause 22.4 formula is to be applied is uncertain.
Assessment of Gordian's concerns
60 Although, for reasons stated, I am not satisfied that all of Gordian's expressed concerns about clause 22 are well-placed, it is clear that a creditor within the purview of that clause may, under the scheme, come to occupy a position less advantageous to the creditor than that which the creditor would have occupied under the statutory provisions with respect to winding up. The matters referred to at paragraphs [45], [46] and [52] above seem to me to leave no doubt about that. Nor did the plaintiffs seek to make any submission to the contrary.
61 The regime the scheme will create is one under which all creditors' debts and claims will be recognised at their nominal or face value in the alternative administration, unless they are debts or claims affected by clause 22.4. Even with the amendments proposed by the plaintiffs (see paragraph [56] above), creditors having debts or claims of the kind with which clause 22.4 deals may, depending entirely on events over which neither they nor the relevant scheme company have any control or influence, suffer diminution of those debts and claims so that they participate on a reduced basis in the alternative administration.
62 As I have said, this raises two questions: first, as to the sufficiency of disclosure and information in relation to clause 22 and its effect; and, second, as to whether creditors with claims of the kind with which that clause is concerned constitute, for the purposes of the scheme, a class of creditors distinct from all other creditors. I shall consider these questions in reverse order, before turning to the separate question concerning confidentiality obligations.
The class question
63 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). This is the effect of s.411(4)(a)(i). It follows that if, in the present case, creditors having claims of the kind dealt with by clause 22 constitute a class of creditors, the absence of any separate resolution passed at a meeting of that class agreeing to the scheme will cause the court to lack jurisdiction to approve of the compromise or arrangement under s.411(4)(b).
64 The question whether classes of creditors exist is to be addressed by reference to community of interest or lack of it. In Sovereign Life Assurance Co v Dodd [1892] 2 QB 573, Lord Esher MR said (at pp.579-80):
"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.'
65 To similar effect was the observation of Bowen LJ (at p.583) that "class":
"… 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.'"
66 These observations caused me to say in Re Hills Motorway Ltd (above) at p.104:
"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."