Employers Mutual Indemnity (Workers' Compensation) Limited v JST Transport Services Pty Limited

CATCHWORDS : CORPORATIONS - arrangements and reconstructions - Part 5.1 scheme of arrangement between company and creditors - where scheme will cause liquidators to become first scheme administrators and provide for such administrators to be remunerated - where form of proxy made available to creditors contemplates that chairman of meeting may be appointed proxy - where earlier order requires one of liquidators to be chairman - whether prohibition on casting of positive proxy vote by person who will derive remuneration out of company's assets should be relaxed

Corporations Act 2001 (Cth), s.411(1) LEGISLATION CITED : Corporations Regulations 2001 (Cth), regs 5.6.33, 5.6.34 Supreme Court (Corporations) Rules 1999, rule 2.15

Employers Mutual Indemnity (Workers' Compensation) Limited v JST Transport Services Pty Limited (1997) 23 ACSR 197 CASES CITED : Re HIH Casualty and General Insurance Ltd (2005) 56 ACSR 295 Re Mercantile Mutual Insurance (Australia) Limited (2002) 43 ACSR 128

HIH Casualty & General Insurance Limited, FAI General Insurance Company Limited, CIC Insurance Limited, World Marine & General Insurances Pty Limited, FAI Traders Insurance Company Pty Limited, FAI Reinsurances Pty Limited, FAI Insurances Limited, HIH Underwriting and Insurance (Australia) Pty Limited - First Plaintiffs PARTIES : Anthony Gregory McGrath and Alexander Robert Mackay Macintosh - Second Plaintiffs Australian Securities and Investments Commission - Leave granted to appear by counsel as amicus curiae Amaca Pty Limited, Amaba Pty Limited, Hazelwood Power, La Trobe Power Partnership, Perisher Blue Pty Limited - Entities granted leave under rule 2.13 of the Supreme Court (Corporations) Rules 1999 to be heard without becoming parties

COUNSEL : Mr M.B. Oakes SC/Mr A.P. Ryan, Solicitor - First and Second Plaintiffs

Blake Dawson Waldron - First and Second Plaintiffs Kim Turner - Australian Securities and Investments Commission SOLICITORS : Eakin McCaffery Cox - Amaca Pty Limited and Amaba Pty Limited Mallesons Stephen Jaques - Hazelwood Power, La Trobe Power Partnership Dibbs Abbott Stillman - Perisher Blue Pty Limited

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

6708/04 RE HIH CASUALTY AND GENERAL INSURANCE LIMITED & ORS

1 On 22 November 2005, the court made orders under s.411(1) of the Corporations Act 2001 (Cth) for the convening of meetings of creditors of the first plaintiffs, which are HIH Casualty and General Insurance Limited and certain other members of the HIH group (see Re HIH Casualty and General Insurance Ltd (2005) 56 ACSR 295). The purpose of each meeting is to consider and, if thought fit, to agree to a scheme of arrangement between each such company and its creditors. The meetings are to be held on 29 March 2006. 2 The plaintiffs, by their liquidators, have today approached the court seeking a further order in connection with the meetings. The order sought is that regulations 5.6.33(1) and 5.6.34(e) of the Corporations Regulations 2001 (Cth) not apply to the meetings to be held on 29 March. Those two regulations are made to apply to such meetings by rule 2.15 of the Supreme Court (Corporations) Rules 1999: " Meetings ordered by the Court

Subject to the Corporations Act, these Rules and any direction of the Court to the contrary, regulations 5.6.12 to 5.6.36A of the Corporations Regulations apply to meetings ordered by the Court." 3 It can thus be seen that rule 2.15 causes to apply to meetings of creditors convened pursuant to s.411(1) the whole of regulations 5.6.12 to 5.6.36A subject to, among other things, any contrary direction of the court. It is thus clear that the court may decide that some part of regulations 5.6.12 to 5.6.36A should not apply to such a meeting and, by order, direct that that part not apply. Indeed, the orders made on 22 November 2005 included an order pursuant to rule 2.15 causing the provision in regulation 5.6.29(1) not to apply. 4 The regulations the operation of which the plaintiffs now wish to see excluded concern proxy voting at meetings. Leaving aside regulations 5.6.33(2) and (3) which are inapplicable here, the effect of regulation 5.6.33(1) is to preclude the holder of a proxy from voting in favour of any resolution which would directly or indirectly place that holder, or the holder's partner or employer, "in a position to receive any remuneration out of assets of the company except as a creditor rateably with the other creditors of the company". The full text of regulation 5.6.33 is as follows: " Voting by proxy if financially interested

(1) Subject to subregulations (2) and (3), a person acting under: (a) a general proxy; or (b) a special proxy; must not vote in favour of any resolution which would directly or indirectly place: (c) the person; or (d) the person's partner; or (e) the person's employer; in a position to receive any remuneration out of assets of the company except as a creditor rateably with the other creditors of the company.

(2) If a person holds a special proxy to vote for an application to the Court in favour of his or her appointment as liquidator, he or she may use the proxy and vote accordingly.

(3) If a person holds a special proxy to vote: (a) in favour of his or her appointment as the administrator of a company under administration or of a deed of company arrangement; or (b) against the termination of his or her appointment as the administrator of a company under administration or of a deed of company arrangement; he or she may use the proxy and vote accordingly." 5 The proposed scheme of arrangement to be considered by the meetings of creditors on 29 March provides for the appointment of officials known as "scheme administrators". They will perform functions set out in the scheme. By clause 4.1 of the scheme, the existing liquidators, Mr McGrath and Mr Honey, will automatically become the first scheme administrators when the scheme becomes effective. The scheme contains, as one might expect, provisions for the remuneration of the scheme administrators under a system which causes the creditors' committee provided for in the scheme to have the function of approving or ratifying such remuneration. 6 The perceived difficulty arising from regulation 5.6.33 comes from the fact that the form of proxy which has been made available for creditors' use in accordance with the court's orders of 22 November 2006 provides creditors with an opportunity to appoint the chairman of the meeting as the creditor's proxy, while the orders specify that Mr McGrath, or in his absence Mr Honey, shall be the chairman. They, as I have said, are the present liquidators and will be the first scheme administrators, if the scheme becomes effective. 7 The apprehension is that a vote at one of the meetings in support of the proposition that the scheme be agreed to will be a vote in favour of the creation of the regime which includes provisions for the remuneration of the scheme administrators, and that Mr McGrath, or in his absence Mr Honey, will be precluded from casting any such vote as proxy because the resolution is properly characterised as one which will directly or indirectly place him, and no doubt his partners, in a position to receive scheme administrators' remuneration out of the assets of the company except as a creditor rateably with the other creditors of the company. 8 On one view, it might be thought that the inclusion in the scheme of provisions for the fixing of the scheme administrators' remuneration removes and separates that matter in such a way that a decision to agree to the scheme in the first place is not within regulation 5.6.33(1). But the contrary view, that is, that the scheme itself may be regarded relevantly as the source of remuneration, is, at least by analogy, supported by the decision of Branson J in Employers Mutual Indemnity (Workers' Compensation) Limited v JST Transport Services Pty Limited (1997) 23 ACSR 197 at p.201. The approach her Honour took there is one of sufficient cogency to warrant the conclusion that the plaintiffs' apprehension is well-founded. 9 Mr Honey deposes, in his affidavit of 22 March, that forms of proxy have, in each case, been received appointing the chairman of the meeting as proxy. He further says that almost all of the received forms of proxy direct the chairman to vote in favour of the proposed schemes of arrangements, or direct the chairman to vote at his discretion. He says that it is expected that further such proxies will be received before the meetings. 10 It is thus clear that, as things stand, the effect of regulation 5.6.33(1), construed in the way I have described, will be to preclude voting by Mr McGrath, or, as the case may be, Mr Honey in exercise of the proxies to which Mr Honey's affidavit refers and further proxies in the same form yet to be received. That, of course, will frustrate the expressed wishes of those creditors who have seen fit to appoint a proxy by use of the form settled and authorised for the purpose. That of itself is, to my mind, a powerful reason for thinking that the regulation 5.6.33 prohibition should be relaxed in this case. 11 Another important consideration is that, unlike probably the vast majority of meetings governed by regulations 5.6.12 to 5.6.36A, these meetings of creditors have been convened in accordance with orders of the court in circumstances where the result of the meeting, assuming it to be a positive result, will not of itself carry the scheme of arrangement into effect. The scheme will not become effective unless there is also an order of the court approving the scheme. 12 It follows that the procedures adopted in relation to the meetings and any concerns that creditors may have about voting or other matters related to the meetings will be able to be brought before the court, if and when an application for approval of the scheme is made. There is thus, in this case, a safeguard which is missing from the vast majority of cases to which I have referred. 13 Mr Oakes SC has also drawn my attention to the legislative history. I quote from his written outline of submissions: "Although a rule similar to Regulation 5.6.33 has been in various versions of companies regulations for many years, it has not been a feature in New South Wales in relation to Court ordered meetings for schemes of arrangement. Regulation 5.6.33 gets its operation in relation to Court ordered meetings for schemes of arrangement via Rule 2.15 of the Supreme Court (Corporations) Rules 1999. These took effect on 1 March 2000. Prior to that, the Court rules governing company matters were to be found in Part 80A of the Supreme Court Rules, where there was no equivalent important of Regulation 5.6.33. Part 80A operated in relation to matters commenced during the period 31 January 1994 to the end of February 2000: see Rule 2. Prior to that, Part 80 of the Supreme Court Rules governed matters under the Companies (New South Wales) Code and by operation of Rule 1A, the Corporations Law. Part 80 operated in relation to matters commenced during the period 1 July 1982 to 30 January 1994. Part 80 contained Rule 64, which imported Regulations 84-99 of the prevailing companies regulations to Court ordered meetings. The equivalent regulation to Regulation 5.6.33 was Regulation 105 of the Companies Regulations 1982, which was not imported by Rule 64. In fact, the whole of the proxy section, Regulations 100 to 108, was not imported. It may be inferred that the draftspersons of Part 80 and Part 80A intended the proxy procedure to be governed by Court orders and the common law of proxies. This history has only been researched back to the commencement of Part 80 of the Supreme Court Rules, but it can be said that during the period 1 July 1982 to the end of February 2000, there was no equivalent to Regulation 5.6.33 covering Court ordered scheme meetings in New South Wales. On 23 June 1993 the Harmer Report recommendations became operative as Part 5.3A of the Corporations Law and conventional creditors' schemes in practice became extra curial via the DOCA procedure. On 23 June 1993 Regulation 5.6.33 was amended by inserting the carve out for directed proxies in sub-regulation 5.6.33(3)." 14 It is thus clear that, for many years, creditors' schemes were promulgated in circumstances where no such constraint as is imposed by regulation 5.6.33 applied. 15 Mr Oakes has also drawn my attention to the decision of Conti J in Re Mercantile Mutual Insurance (Australia) Limited (2002) 43 ACSR 128, where, for good reasons applicable to that case, many of the provisions in regulations 5.6.12 to 5.6.36A (including regulation 5.6.33) were dispensed with. 16 In the present case, and having regard to the legislative history, I am satisfied that the two particular considerations to which I have referred deserve particular weight and warrant exclusion of the operation of regulation 5.6.33. Those considerations are, first, that the court should allow matters to go forward in such a way as does not frustrate the wishes of persons who have chosen to lodge proxies which are in the form previously settled and authorised and accordingly appoint the chairman, and, second, that, should it be thought by any creditor in due course that the ability of the chairman to vote as proxy on the proposed resolution for approval of the scheme has been productive of any untoward consequence, then that creditor may bring that matter before the court at the s.411(4)(b) hearing. 17 I should note, in conclusion, that notice of this application was given to ASIC and to the creditors who were given leave to be heard upon the s.411(1) application, that is to say, AMACA Pty Ltd and AMABA Pty Ltd, Hazelwood Power Partnership and Latrobe Power Partnership, and Perisher Blue Pty Ltd. Mr Oakes has mentioned the appearances of ASIC, AMACA and AMABA. ASIC does not object to the making of the order sought. The position of AMACA and AMABA is that they neither consent nor oppose. Perisher Blue has indicated a like attitude. There is no information before the court about the attitude of Hazelwood Power and Latrobe Power, but they were on notice of the hearing. The matter has been called and there has been no appearance by them. 18 I make the following order: "Subregulations 5.6.33(1) and 5.6.34(e) of the Corporations Regulations 2001 do not apply to the meetings referred to in Order 1 of the orders made herein on 22 November 2005". **********

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