First Pacific Advisors LLC v Boart Longyear Ltd

Solicitors: Gilbert + Tobin (Applicant) Ashurst Australia (Respondents) Arnold Bloch Leibler (Ares Management LP and Ascribe Investments LLC) Minter Ellison (Centerbridge Partners LP) File Number(s): 2017/143375 Publication restriction: Nil Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity - Corporations List Citation: [2017] NSWSC 567 Date of Decision: 10 May 2017 Before: Black J File Number(s): 2017/122411

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] HEADNOTE [This headnote is not to be read as part of the judgment] The applicant, First Pacific Advisors LLC, sought leave to appeal against an order made under s 411 of the Corporations Act 2001 (Cth) convening meetings of creditors of the respondents, Boart Longyear Limited (BLY) and several associated companies, to consider and if thought fit, agree to two schemes of arrangement proposed for the respondents. BLY defaulted on certain loans and was likely to become insolvent absent some form of debt restructuring. BLY entered into a Restructuring Support Agreement with several of its creditors. BLY then proposed two interdependent schemes of arrangement. The Unsecured Creditors Scheme related to unsecured debt to the value of US$294 million and provided for a debt-for-equity swap and for that debt to be partly reinstated under subordinated notes. The Secured Creditors Scheme related to over US$204 million in senior secured notes and over US$250 million owed to affiliates of Centerbridge Partners LP ("Centerbridge") under two term loans. The applicant held 29.07% of the secured notes and opposed an order to convene a meeting of creditors to consider the Secured Creditors Scheme. The applicant submitted that separate class meetings of secured creditors should be ordered, namely, secured note holders in one class and Centerbridge as the term loan holder in the other class. The applicant contended that aspects of the Secured Creditors Scheme amounted to differences in the treatment of the secured notes debt and the term loan debt. This included an amendment to the secured notes debt to permit payment of interest in kind for a period, in place of the existing obligation to pay interest in cash, where no such amendment was made to the term loan debt which already provided for interest in kind and a waiver in change of control rights, where the waiver was for the benefit of Centerbridge. The applicant also pointed to several associated transactions which were conditions precedent to the schemes including the provision of a new US$75 million lending facility by Centerbridge and two other creditors, Ares Management LP ("Ares") and Ascribe II Investments LLC ("Ascribe") to BLY; a reduction of the interest rate payable under the term loan debts in consideration of the issue of shares to Centerbridge so that it will hold 56% of shares in BLY (before the issue of warrants to certain unsecured creditors); allocations of shares to Ares and Ascribe; and the grant of new rights to nominate directors for election to the BLY board to Centerbridge, Ares and Ascribe. The primary judge did not accept the respondents' submission that aspects of the associated transactions were not relevant to whether separate classes of creditors were required because they were not implemented by the schemes, where they were closely connected with the schemes and Centerbridge's participation in them. However, the primary judge held that the differences were not so great as to give rise to an inability of the secured note holders and Centerbridge to consult together with a view to their common interest. The primary judge accepted that the amendment effected by the scheme which permitted payment of interest in kind gave rise to a difference in legal rights but was not satisfied that this matter, alone or combined with other matters, would give rise to an inability of the secured note holders and Centerbridge as the term loan holder to consult with a view to their common interest. The applicants sought leave to appeal against the decision. The respondents filed a notice of contention arguing that the primary judge erred in holding that the rights conferred on Centerbridge by associated transactions were relevant to class composition as they were conditions precedent to the schemes, and it rather should have been held those rights were not class-creating as they were not created by the schemes. The issues on appeal were:

1. Whether the primary judge misapplied the test for the composition of separate classes; and
2. Whether the primary judge erred in failing to hold that the differences in rights between the secured note holders and the term loan holders made it impossible for these creditors to consult together with a view to their common interest; and
3. Whether the primary judge erred in holding that the rights conferred by associated transactions were relevant to the question of class composition. The Court held (Bathurst CJ; Beazley P and Leeming JA agreeing), granting the applicant leave to appeal but dismissing the appeal: Leave to Appeal (i) The position reached on class constitution upon the hearing of the initial application under s 411 will not preclude debate at the approval hearing. This is because in most cases creditors or members affected by the schemes would not have the opportunity to make submissions at the first court hearing as they would have no notification of that hearing: [40] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). Re MAC Services Group Ltd (2010) 80 ACSR 390; [2010] NSWSC 1316; Re Orica Ltd [2010] VSC 231; F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; [1993] HCA 15; Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813; Re United Medical Protection Ltd [2007] FCA 631; Re T & N Ltd (No 4) [2007] 1 All ER 851; [2006] EWHC 1447 (Ch) applied. (ii) The fact that the decision of the primary judge may be reviewed by him or another judge who hears the application under s 411(4)(b), either at the insistence of the present applicant or another creditor, would normally provide a powerful case for refusing leave to appeal. However in the present case the matter was fully argued before the primary judge. Further, the effect of refusing leave on both the applicant and other creditors would be that the applicant would need to seek a stay or injunction at the price of an undertaking as to damages in an indeterminate amount, and other creditors entitled to vote at the meeting would also be left in a state of uncertainty as to a matter critical to the jurisdiction of the Court to approve the scheme. In these circumstances leave to appeal should be granted: [42]-[43], [47] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). Class composition (iii) The test in determining class composition involves three questions. First, what are the rights which existing creditors (or members) have against the company and to what extent are they different. Second, to what extent are those rights differently affected by the scheme. Third, does the difference in rights or different treatment of rights make it impossible for the creditors (or members) in question to consider the scheme as one class: [80] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). Sovereign Life Assurance Company v Dodd [1892] 2 QB 573; Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813; UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634; Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 followed. (iv) In considering whether any difference in rights or different treatment of rights would make it impossible for creditors to consult together as a class, the context in which the scheme is propounded is of importance. The relevant rights of creditors to be compared against the terms of the scheme are those which arise in an insolvent liquidation: [82]-[86] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). Re Telewest Communications PLC [2004] BCC 342; [2004] EWHC 924 (Ch); Re T & N Ltd (No 4) [2007] 1 All ER 851; [2006] EWHC 1447 (Ch); Re APCOA Parking Holdings GmbH and others (No 2) [2015] 4 All ER 572; [2014] EWHC 3849 (Ch) followed. (v) What is to be considered is not a single right but a bundle of rights held by each creditor either under the existing loan agreements or under the proposed scheme. It is necessary to ask in the context of the time of the comparison what the bundle effectively contains: [85] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). Re Cortefiel SA [2012] EWHC 2998 (Ch) followed. (vi) The question of whether the associated transactions form part of the scheme does not have any particular significance in the present case where it was accepted that the waiver of the change of control clause formed part of the scheme. The purpose and effect of the waiver was to give effect to the grant of additional equity to Centerbridge and needs to be considered in that context: [91] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). (vii) The fact that the change of control clause is in both the secured note facility and the term loan agreements is not determinative of the issue. Although the rights in each agreement are the same, it is appropriate to have regard to the differential effect the waiver has on both groups of creditors. However, the difference does not result in the two groups of creditors being unable to consult together with a view to their common interest. The right to call up loans is of limited benefit having regard to the fact that the respondents would be unable to repay and would in all probability be placed into liquidation, in which case both groups of creditors would receive a significantly less amount than on the implementation of the scheme. The grant of additional equity to Centerbridge does not affect the position: [92]-[94] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). It is correct that the respective creditors' right to payment of interest are different and are treated differently by the scheme. However in the context of imminent liquidation as the only alternative, the adjustments made, whether more favourable to the term loan creditors or otherwise, is not such as to prevent the two groups of creditors consulting together on the scheme: [99] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). In the context of the present case taking into account the company's financial position, the real rights of the creditors and the rights provided for by the scheme are not so dissimilar as to require separate class meetings: [101] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA). Re Cortefiel SA [2012] EWHC 2998 (Ch) applied.

Judgment

1. BATHURST CJ: Boart Longyear Ltd (BLY) and its associated companies are in, what might euphemistically be described as, a parlous financial position. Absent reaching some arrangement with their creditors, the companies would appear to be insolvent and likely to go into liquidation or some other form of insolvency administration.
2. A significant proportion of the liabilities of BLY and its associated companies (the Group) are liabilities incurred under various forms of financial accommodation granted to the Group. The first is an amount owing to note holders (the secured note holders) under a secured indenture. A draft explanatory statement, prepared in connection with the proposed scheme of arrangement the subject of these proceedings (the Secured Creditors' Scheme), states that the total amount owing under that facility is US$204,750,000 consisting of a principal amount of $195,000,000 and accrued interest of $9,750,000. Of these secured notes 29.07% are held by the applicant, First Pacific Advisors LLC (First Pacific) and 50.8% by companies associated with Centerbridge Partners LP (Centerbridge), Ares Management LP (Ares) and Ascribe II Investments LLC (Ascribe). The balance is held by note holders who have not been identified.
3. In addition, the companies in the Group owe money under two term loan agreements: Term Loan A and Term Loan B. As at 1 April 2017 the amount owing by the companies under Term Loan A was principal in the sum of US$85,000,000 and accrued interest of US$28,495,174, the amounts totalling $113,495,174. The amount owing under Term Loan B as at 1 April 2017 was US$105,000,000 together with accrued interest in an amount of US$32,209,356, the amounts totalling US$137,209,356. The principal sums in respect of each of Term Loan A and Term Loan B agreements were secured over the same assets as the secured notes. However, a significant proportion of the interest in respect of these loans is unsecured.
4. The sole holders of the debt under Term Loan A and Term Loan B were companies associated with Centerbridge.
5. In addition the companies in the Group were indebted to unsecured note holders (the 7% scheme creditors) in an amount of US$293,940,000 comprising US$284,000,000 principal and accrued interest of US$9,940,000. Of these notes 45.5% were held by interests associated with Ascribe, 42.9% by interests associated with Ares and the balance by unidentified creditors.
6. BLY is a publicly listed company. Centerbridge holds 48.9% of the shares on issue.
7. BLY has propounded two creditor schemes under s 411 of the Corporations Act 2001 (Cth). The first, the subject of these proceedings, is in respect of the secured creditors, namely the holders of the secured notes and the holders of the debt the subject of Term Loans A and B. The second is in respect of the 7% scheme creditors (the Unsecured Creditors' Scheme).
8. The schemes are complex but their effect as set out in the draft Explanatory Memoranda may be summarised for present purposes as follows.

A The Secured Creditors' Scheme

1. The amendment to the secured notes given effect to by the Secured Creditors' Scheme includes: first, a variation in the rate of interest payable from 10% payable in cash to, at the option of the company, either 12% payable in kind (capitalised) or 10% in cash up to 31 December 2018 and thereafter payable at a rate of 10% in cash for the period from 31 December 2016; second, an extension of the maturity date to 31 December 2022; third, waiver of rights from any change of control event arising from the implementation of the scheme and consummation of the transactions contemplated by it; and fourth, a secured debt cap of not less than US$420,000,000.
2. The amendments to Term Loans A and B effected by the scheme involve a similar variation to the change in control provision to that provided for in respect of the secured notes and an extension of the maturity date to 31 December 2022. It should also be noted that it is a provision of the Unsecured Creditors' Scheme that all future and existing unsecured interest would have priority to the unsecured notes.
3. Clause 7.5 of the draft scheme sets out the manner in which those amendments are to be effected. It is unnecessary to set the details out in this judgment.

B The Unsecured Creditors' Scheme

1. This scheme involves: first, the release of $205,940,000 of principal and accrued interest owing to the unsecured note holders pursuant to the unsecured indenture; second, the issue of 42% of the ordinary equity of BLY post the implementation of the recapitalisation transactions referred to below; third, variation of the terms on which interest on the remaining US$88,000,000 principal of unsecured notes was payable; and fourth, the issue of warrants entitling the note holders to subscribe for shares in BLY during the exercise period of the warrants.

C The recapitalisation transactions

1. The Secured Creditors' Scheme is also subject to agreements described as a Subscription Deed and Subsequent Term Loan Amendments being duly executed and delivered by the second court date. The agreements form part of a recapitalisation of the group involving the following steps: 1. Pursuant to the term of the Unsecured Creditors' Scheme, shares comprising 42% of the ordinary shares in BLY will be issued to the 7% scheme creditors. The transaction will initially dilute the shareholding of Centerbridge in the company to 3.7% of the ordinary shares and momentarily give Ares and Ascribe a controlling interest in the company. 2. Centerbridge will then convert its convertible preference shares in the company into ordinary shares. 3. The Term Loan A and Term Loan B agreements will be further amended such that the current interest rate of 12% is reduced to 10% payable in kind (capitalised) until December 2018 and thereafter 8% payable in kind. 4. By the Subscription Deed, in exchange for the reduction in interest, BLY will issue to the holders of Term Loan A and Term Loan B debt (the Term Loan A and Term Loan B Creditors), shares comprising 52.4% of the ordinary shares in the capital of the company such that interests associated with Centerbridge will hold a total of 56% of the shares immediately following completion of the contemplated transactions.
2. The net effect on the shareholding in BLY will be that Centerbridge will hold 56% of the ordinary shares, Ascribe 19.2%, Ares 18%, unidentified note holders 4.8% and previous shareholders other than Centerbridge 2%.
3. The Explanatory Memorandum to the Unsecured Creditors' Scheme also refers to an agreement to grant what were described as "once-only" director appointment rights pursuant to Director Nomination Agreement. Under those agreements, Ares was entitled to nominate one person to stand for election to the Board of BLY, Ascribe would be entitled to nominate one person to stand for election to that Board and Ares and Ascribe would be entitled to jointly nominate one person to stand for election to the BLY Board. The Centerbridge interests would be entitled to nominate five persons to stand for election to the Board, one of whom would serve as chairman.
4. The schemes are conditional on the execution of these agreements.
5. Centerbridge, Ares and Ascribe have bound themselves to vote in favour of the schemes and to the extent necessary execute the relevant documents. It should be noted that the effect of these agreements was that creditors who support the schemes hold approximately 77.9% by value of the debt held by creditors who are entitled to vote at the meeting of creditors to agree to the Secured Creditors' Scheme, if those creditors are treated as a single class, rather than the Term Loan creditors being treated as a separate class. That percentage includes the unsecured component of interest accruing to the Term Loan creditors, however, even if that is excluded, it appears that Centerbridge, Ares and Ascribe would still have more than 75% of the secured debt held by creditors in the class. In addition, 88.5% by value of the debt the subject of the 7% of the unsecured notes have agreed to vote in favour of the Unsecured Creditors' Scheme.
6. In an expert's report prepared by KordaMentha Restructuring in relation to the proposed scheme, the authors have expressed the view that the enterprise value of BLY was $266.6 million compared to the amount owing under its Finance Facilities of $779.6 million. They expressed the opinion that if the schemes are not implemented the Australian Group Companies would likely be placed into external administration and other Group Companies may seek protection from their creditors in their respective jurisdictions. They also stated that if the scheme was implemented the estimated return on the secured notes was 61c in the dollar compared to 22.1c on liquidation, the return to the holder of the Term Loan A debt was 47.2c in the dollar compared to 32.6c on liquidation, the return to the holder of the Term Loan B debt was 64.3c in the dollar compared to 35.4c on liquidation, whilst the unsecured notes were worthless in either scenario.

The primary judgment

1. On 10 May 2017 the primary judge made orders convening meetings for the purpose of considering and, if thought fit, agreeing to the Secured Creditors' Scheme and the Unsecured Creditors' Scheme respectively. The applicant appeared on the applications to convene the meeting and made submissions in opposition to the meeting being convened, principally on the ground that it was inappropriate for the secured note holders and Centerbridge as holders of Term Loan A and Term Loan B debts to vote as a single class. The primary judge noted that if the secured note holders were treated as a separate class from the Term Loan creditors, the applicant had sufficient voting power to block the scheme. He also noted that if they were treated as a single class, Centerbridge, Ares and Ascribe would at least be able to satisfy the value test in s 411(4)(a)(i) of the Corporations Act.
2. The primary judge, after a careful review of the authorities, rejected the proposition that a "relatively narrow degree of differentiation" necessarily requires that separate classes be ordered. He stated that that depended upon the question, emphasised by the case law, whether any such differentiation in rights was such that creditors cannot consult together as to their common interest.
3. The primary judge noted the applicant's submission that secured note holders should not be in the same class as the Term Loan A and Term Loan B Creditors as there were significant differences in the rights attributable to each facility in terms of priority, types of interest and maturity dates prior to and following the entry into the scheme and, second, that Centerbridge as holder of the Term Loan debt is to be issued a majority shareholding in BLY and receive other benefits conditional on the scheme proceeding that are not available to secured note holders. He noted that the applicant submitted in those circumstances there was no prospect that the secured creditors could consult together with a view to their common interest.
4. The primary judge accepted that in principle separate classes could be required notwithstanding that all creditors were better off by virtue of the scheme where one group suffered a significant diminution in its legal rights and the others did not.
5. The primary judge pointed to what he described as common features of the secured notes and the Term Loan agreements, including the fact that the issuer and guarantor to the facility were the same and each of the creditors faced a common and imminent issue, namely, the insolvency of BLY. He also noted that each of the creditors were parties to security arrangements over common assets, which would mean on insolvency they would have to negotiate arrangements between themselves. He stated that those matters were relevant, as a matter of context, to the ability of the respective creditors to consult with respect to their common interests.
6. The primary judge rejected the submission that the secured note holders were "different form[s] of creditor" because of the fact that the whole of the interest due to the secured note holders was secured whereas part of the interest under the Term Loan agreements was not. He pointed to the fact that each of them was a secured creditor as to a substantial debt, albeit a portion of the term loan debt was unsecured. He also rejected the submission that the fact that the unsecured Term Loan debt would take priority over the holders of the unsecured notes did not create any difference in legal rights between the secured note holders on the one hand and the Term Loan creditor on the other, but was rather a matter to which holders of senior unsecured notes would have regard in determining whether to approve the Unsecured Creditors' Scheme.
7. The primary judge also noted that the scheme had a common legal effect on the secured note holders and the Term Loan creditor to the extent that it extended the maturity date of each facility to a common date. He accepted that the effect was to require the secured note holders to extend their maturity date for a longer period compared to the Term Loan creditors. However, he accepted that this was of little significance because unless the schemes were implemented BLY would be the subject of insolvency proceedings before the debts were repayable at either maturity. He also said he was not satisfied that the different periods of extension of the maturity dates were such as to bring about, either alone or in conjunction with other matters, any inability on the part of the respective creditors to negotiate as to their common interest.
8. The primary judge also referred to the alteration in the interest rates payable under the secured notes to which I have referred at [9] above. He stated that he was satisfied that the change in the payment of interest on the secured note debt but not the Term Loan debt involved a difference in legal rights as far as the respective lenders were concerned. However, he stated with hesitation that he was not satisfied that this gave rise to any inability of the respective creditors to consult together in their common interest faced by them in respect of BLY's insolvency and the security interests over common assets shared by them. He stated that the extent of their common interest outweighed their difference in the legal rights, such that the latter did not preclude the possibility of consultation.
9. The primary judge also concluded that the change of control provisions did not lead to a requirement for separate classes. He noted the submission that it was introduced for the sole purpose of benefiting Centerbridge. He stated that that submission may describe the commercial impact of the waiver of the rights, and concluded that both the secured note holders and Centerbridge as the Term Loan creditor had an interest in the matter, although the interest was opposed in commercial terms.
10. The primary judge accepted the waiver of the change of control right was potentially disadvantageous to the secured note holders and to the commercial advantage of Centerbridge as it removed the secured note holders' ability to require repayment on a change of legal control. However he concluded the change of control provision did not, alone or together with other matters, create separate classes because it did not involve a different effect on the legal rights of members of those classes.
11. The primary judge rejected the submission that the rights conferred by the Subscription Agreement and the Director Nomination Agreement were not class creating as they were conditions precedent of the scheme rather than forming part of it, noting that those arrangements were plainly closely connected with Centerbridge's participation in the schemes. However he concluded that Centerbridge's right to additional equity and Ares and Ascribe's right to exchange debt for equity under the Unsecured Creditors' Scheme were not such as to prevent consultation between secured note holders as a group or between the secured note holders on the one hand and Centerbridge as the Term Loan creditor on the other. His Honour recognised that the allocation of additional equity might reinforce the difference in the commercial interests of the parties. However, he stated that the common interests, particularly the common exposure to the risk of insolvency and the fact that the creditors shared security over the same assets, outweighed the differences, particularly given the real uncertainty as to the value of the equity in BLY such that consultation could properly occur.
12. The primary judge also accepted that the right conferred on Centerbridge under the Director Nomination Agreement was likely to be of practical significance. However he concluded that the right was not so different in kind or so different in its magnitude to warrant a different result from that reached by Jacobson J in Re Nine Entertainment Group Ltd (No 1) (2012) 211 FCR 439; [2012] FCA 1464, namely, that creditors' right to appoint directors, giving rise to board control, did not make it impossible to consult with other scheme creditors.
13. The applicant has sought leave to appeal from the decision.

Leave to appeal

1. BLY opposed leave to appeal being granted.
2. Senior counsel for BLY submitted that no question of principle was involved. He submitted that the primary judge correctly applied the test in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 and considered all relevant authorities on the question. He referred to the applicant's written submissions which he said recognised (at par 19 and 19) that the question was one of degree. He also referred to the criticism in those submissions (at par [20]), that the judge failed to determine the degree of similarity or dissimilarity of respective creditors' existing rights and new rights, and submitted that this involved no question of principle.
3. Senior counsel for BLY also pointed to the fact that the appeal was from an interlocutory judgment and that no substantial injustice to the applicant resulted from the decision. He submitted that the judgment did not deal with the class issue in a final way, submitting that the conclusion was that it was not so clear that the position as to classes was unsustainable so as to prevent the matter going forward to the meeting. He pointed out that notice had not been given to all creditors, submitting there were a number of secured note holders who were not associated with any of the parties to the proceedings. He submitted the primary judge, in par [74] of his judgment, made it clear that he was approaching the matter on a preliminary basis.
4. Senior counsel for BLY accepted that if leave was refused and the scheme approved by members and at the second hearing, it will be necessary for the applicant to seek a stay of the orders or injunction restraining the implementation of the scheme. He submitted that would apply to any creditor who wished to challenge the scheme. Similar submissions were made by counsel for Ares and Ascribe.
5. Senior counsel for the applicant submitted that the case below was conducted on the basis that the parties put forward all relevant issues to the Court and did so in order to obtain a final decision on a matter critical to the implementation of the scheme. He submitted it was not a fair reading of the judgment of the primary judge that he merely reached a conclusion that he was not persuaded on a preliminary basis that the classes were wrong.
6. Senior counsel for the applicant also submitted that if leave was refused his client would be placed in an entirely disadvantageous position as the price of either obtaining a stay or injunction would be an undertaking as to damages in an indeterminate amount.

Consideration

1. In my opinion leave should be granted.
2. It is correct, as pointed out by BLY, that the task of the Court at the first hearing is to determine whether the scheme is of such a nature and in such terms that if it obtained the statutory majority the Court would be likely to approve it on an unopposed subsequent hearing: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. It is also correct that a grant of leave to convene a meeting does not necessarily amount to a determination that the proposed arrangement is one which falls within the scope of the section: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; [1993] HCA 15 at 504-505.
3. What has been repeatedly emphasised is the limited function of the Court on the hearing of a summons to convene a meeting under s 411 or its earlier equivalents. In respect of class constitution, a number of cases have emphasised that the position reached on class constitution upon the hearing of the initial application under s 411(1) of the Corporations Act will not preclude debate at the approval hearing under s 411(4)(b): see Re MAC Services Group Ltd (2010) 80 ACSR 390; [2010] NSWSC 1316 at [20]; Re Orica Ltd [2010] VSC 231 at [7]-[8]. That is understandable as in most cases creditors (or members) affected by the scheme would not have the opportunity to make submissions at the first court hearing as they would have no notification of that hearing: Re MAC Services Group supra at [20].
4. That is not to say that the question of class constitution should not be considered at the initial hearing. As Barrett J pointed in Re MAC Services Group supra at [19], the question is properly addressed at the first court hearing and if a class-creating problem is flagged the court will deal with it as best it can on the material then before it: see also Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813 at [17]-[20]; Re United Medical Protection Ltd [2007] FCA 631 at [8]-[10]; and in relation to the United Kingdom position Re T & N Ltd (No 4) [2007] 1 All ER 851; [2006] EWHC 1447 (Ch) at [18]-[19]. It was not suggested the primary judge erred in adopting this approach.
5. The fact that the decision of the primary judge may be reviewed by him or another judge who hears the application under s 411(4)(b), either at the insistence of the present applicant or another creditor, would normally provide a powerful case for refusing leave to appeal. However, in the present case the matter was fully argued before the primary judge by BLY, the applicant and the other creditors who appeared both on the appeal and in the Court below.
6. It is relevant also to consider the effect of refusing leave on both the applicant and other creditors. As to the applicant, unless it is able to convince the primary judge or another judge at first instance that the original decision was erroneous, it would need to seek a stay or injunction restraining implementation of the scheme at the price of what was correctly described as an undertaking as to damages in an indeterminate amount. Other creditors entitled to vote at the meeting would also be left in a state of uncertainty as to a matter critical to the jurisdiction of the Court to approve the scheme.
7. Further, there is nothing to suggest that the Court does not have available to it all material necessary to determine the class issue.
8. I should add that I do not regard par [74] of the judgment of the primary judge as expressing merely a preliminary view on the class question. This paragraph is in the following terms: "[74] 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."
9. The question expressly left open was not whether the conclusion on the class issue was preliminary but rather the weight which would ultimately be given to the votes of Ares, Ascribe and Centerbridge.
10. In these circumstances leave to appeal should be granted.

The appeal

1. Senior counsel for the applicant, referring to the experts' report of KordaMentha, submitted that under the present structure of BLY, the outstanding principal under the Term Loan debt is approximately 75% of the total debt under those loans. He also submitted that of that indebtedness approximately $60 million or 25% thereof was unsecured interest. In reply he accepted that a proposition may not be correct and was content to proceed on the basis that a substantial portion was unsecured.
2. He also pointed to the fact, referring to the Explanatory Statement that interests associated with Centerbridge, Ares and Ascribe held 50.8% of the secured notes, while the applicant held 29.1%. He pointed out that the total indebtedness under the notes excluding interest amounted to $195,000,000.
3. He also pointed to the fact that at the present time Centerbridge held just under 50% of the equity capital of the company and the right to appoint four of the nine directors. He pointed out that the effect of the change of control provisions in the secured note holders agreement was that if Centerbridge moved to gain legal control of the company at the general meeting, the note holders would be entitled to demand immediate repayment of the loan.
4. Senior counsel for the applicant also submitted that in an insolvency administration based on the KordaMentha calculations, the Term Loan holders would get no dividend in respect of the unsecured interest owed to them.
5. Senior counsel for the applicant submitted that the estimated return on secured debt in the KordaMentha report (see [18] above) placed no value on Centerbridge gaining control of the company. He referred to a report prepared by KPMG for shareholders of the company, noting that on their assumptions there was some value in the equity.
6. Senior counsel for the applicant referred to the Restructuring Support Agreement between BLY, Boart Longyear Management Pty Ltd, the companies associated with Centerbridge which held the Term Loans and Ares and Ascribe, pointing out that that agreement bound each of Centerbridge, Ares and Ascribe to vote in favour of the scheme (see cl 7.1 and Schedule 2 of the Restructuring Support Agreement and the announcement to ASX of 3 April 2017 summarising the agreement.) He pointed to the fact that the arrangement contemplated by that Agreement included the grant of additional equity to Centerbridge, describing that as an essential part of the arrangement.
7. Senior counsel submitted this showed that at the very centre of the scheme is that one subset of what is said to be a single class can exchange debt for equity which was not given to other entities in that class. He also referred to the fact that the term sheet, which was Schedule 2 to the Restructuring Support Agreement, showed that part of the same arrangement was that Centerbridge would be entitled to appoint a majority to the board.
8. In his submissions in reply he described the arrangement as being a three-way arrangement including the provision of equity to the unsecured note holders, Ares and Ascribe who together held 88.4% of the notes. He submitted the only entities not entitled to equity were the note holders other than Centerbridge, Ares and Ascribe, who held 49.2% of the secured notes.
9. In that context senior counsel for the applicant submitted that the appeal reduced to two essential issues, first, what he described as the equity issue, namely the grant of equity, waiver of change of control and director nomination and, second, the interest issue.
10. Senior counsel for the applicant described the arrangement between BLY and the secured note holders as involving the note holders, in order to get a slightly higher interest rate to lose interest for a period, extending the term of their loans and critically giving up individually and collectively, their rights in respect of a change of control.
11. Senior counsel for the applicant criticised the judgment of the primary judge for having what he described as a "parcelling-out atmosphere" in dealing with each point separately. He submitted that what had to be looked at was the whole package. He submitted that in some areas, the interests of the parties were diametrically opposed. For example, he pointed to the question of the waiver of rights and stated that the interests of the parties were diametrically opposed on the question of whether that waiver was appropriate as part of the overall benefits of avoiding insolvency.
12. Senior counsel for the applicant referred to Sovereign Life supra. He submitted the judgment of Lord Esher in that case ([1892] 2 QB 573 at 580) indicated the appropriate approach was first to identify different rights then consider a different set of facts arising from those rights and ask whether they could rationally affect the mind and judgment of the holders in different ways. If so, he submitted, there must be a separate class.
13. Senior counsel for the applicant placed particular reliance on the decision of Templeman J (as his Lordship then was) in Re Hellenic & General Trust Ltd [1976] 1 WLR 123. That case involved a members scheme of arrangement where all the shares in the company had been cancelled and new shares issued to a company Hambros Ltd which would pay the shareholders 48p for the loss of their shares. The majority shareholder prior to the proposal was a wholly owned subsidiary (M.I.T.) of Hambros which voted on the scheme. In declining to approve the scheme Templeman J made the following remarks (at 126): "Vendors consulting together with a view to their common interest in an offer made by a purchaser would look askance at the presence among them of a wholly owned subsidiary of the purchaser. … …Hambros are the purchasers making an offer. When the vendors meet to discuss and vote whether or not to accept the offer, it is incongruous that the loudest voice in theory and the most significant vote in practice should come from the wholly owned subsidiary of the purchaser. No one can be both vendor and a purchaser and in my judgment, for the purpose of the class meetings in the present case, M.I.T. was in the camp of the purchaser…"
14. He submitted that what was said by Templeman J was correctly explained by Lord Millett in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634 at [21]-[23]. He submitted the latter case demonstrated there can be cases where there are similar rights at the outset but the differential treatment may arise from what occurs under the scheme (in this case the effect of the waiver of the change of control provision) and require that there be separate classes.
15. He submitted in the present case the transaction was a control transaction and Centerbridge goes from less than legal control to legal control as a result of the secured note holders giving up a valuable right. On that question he submitted the secured note holders' interests were diametrically opposed to that of Centerbridge.
16. Senior counsel for the applicant distinguished the present case from cases such as Re Jax Marine Pty Ltd [1967] 1 NSWR 145 stating that the different interests held by one creditor compared to another in that case was not an interest arising under the scheme. He submitted that the decision of Adam J in Re Chevron (Sydney) Ltd [1963] VR 249 fell into the same category. By contrast, he submitted that Centerbridge's rights to receive equity and to control the board were rights conferred by the scheme itself.
17. Senior counsel for the applicant also referred to the decision of Barrett J (as his Honour then was) in Re HIH Casualty and General Insurance Ltd (2006) 200 FLR 243; [2006] NSWSC 485, a case where the effect of the scheme was that whilst some creditors would receive more than the expected distribution on winding-up, others would receive less. In that context his Honour made the following remarks: "[71] In the present case, there is differential treatment under the scheme as between creditors with claims of the kind dealt with by clause 22 and creditors with claims not affected by that clause. The question is whether the differential treatment is of such a kind and will have such an effect, as regards creditors' rights, that affected creditors cannot view their interests as coinciding with the interests of other creditors in such a way as to cause both groups to be capable of deliberating together as a single and cohesive body. [72] At one level, the two groups were and are able to deliberate together in the way I have described. The perceived advantages of the scheme in putting into place an alternative form of insolvent administration of a more streamlined and efficient kind will be enjoyed by both groups alike. At another and more immediate level, however, the affected group is compelled, in effect, to cede to the unaffected group (potentially, at least) part of the available fund that the affected group would have enjoyed in the absence of the scheme. This is because clause 22.4 impinges upon the rights of the affected group but does not in any way touch the rights of the unaffected group. … [74] This example illustrates the unavoidable reality that, when it came to a decision whether to accept the scheme's regime of administration of claims and assets rather than continue with the statutory regime applicable to winding up, creditors with claims of the kind contemplated by clause 22 could not have seen their interests as coinciding with the interests of creditors whose claims were not so affected. Creditors of the first kind are, quite simply, subjected by the scheme to a risk of discriminatory diminution that is not visited upon creditors of the second kind. Their rights are changed and their position prejudiced accordingly. The effect of the Australian scheme will be to create a mechanism by which, as a matter of rights, the second group may be enriched at the expense of the first, at least when the winding up regime is viewed as the norm or default position. [75] I am satisfied that the differential treatment provided for in clause 22 of the scheme - or, more precisely, the mechanism for reduction of recognisable claims created by clause 22.4 - is such as to destroy community of interest between the two groups of creditors in such a way that, having regard to their respective rights, each could not, in company with the other so as to make up a like-minded whole, consult together to decide whether the scheme promoted their common good."
18. In that context senior counsel for the applicant also referred to Re Opes Prime supra at [67]-[69].
19. In relation to the Director Nomination Agreement, senior counsel for the applicant sought to distinguish the decision of Jacobson J in Re Nine Entertainment Group supra where his Honour held that a once only power to appoint directors conferred on two creditors did not require those creditors to form a separate class as it was not impossible for them to consult with other creditors ((2012) 211 FCR 439 at [55]-[62]). He submitted that in that case each creditor received cash and equity and in those circumstances a once only right which could be superseded by a resolution passed at an extraordinary general meeting meant the respective rights of creditors were not so dissimilar as to require a general meeting.
20. In relation to the question of interest, senior counsel for the applicant referred to par [51] of the judgment of the primary judge in which his Honour concluded that the change in the secured note holders right to receive payments in cash to an option to the company to pay interest in kind to December 2018, whilst giving rise to a difference in legal rights from those of the holders of the Term Loan debt did not lead to the conclusion that separate classes were required. He submitted his Honour's conclusion was incorrect as the difference in legal rights, coupled with the other matters to which he had referred, made it impossible for the members to consult together.
21. Senior counsel for the respondents referred to the KordaMentha report and their calculation of the estimated return to creditors if the scheme was implemented, compared to the return in liquidation. He contrasted that to the position with which Barrett J dealt with in Re HIH Insurance supra. He referred to the table in the expert's report showing the different securities held by secured creditors and the Term Loan holders and the different priorities on which they were held submitting that it demonstrated that the creditors who are parties to the proceedings along with other creditors would be required to negotiate on insolvency on the manner of realisation of the securities and distribution of the proceeds.
22. Senior counsel for the respondents submitted, referring to Re Chevron (Sydney) Ltd supra, that the mere fact that creditors have a motivation to vote in a particular way did not mean they could not form part of the same class. He submitted Re Hellenic & General Trust Ltd supra was a takeover case, that it was plainly correct as the acquirer already held (through a subsidiary) 53% of the share capital which could not appropriately be taken into account in considering the scheme. He referred to Re Kumarina Resources Ltd [2013] FCA 549 where Gilmour J distinguished Re Hellenic & General Trust on the basis that unlike that case the scheme before him treated all shareholders equally and any additional benefit to one of them came from outside the scheme: [2013] FCA 549 at [42]-[44].
23. It was also submitted by senior counsel for the respondents that it was incorrect to say the primary judge embarked on a balancing exercise. He submitted the primary judge took the approach of identifying whether there were any differences in legal rights arising before or after the scheme and whether these differences made common consultation impossible. He stated the primary judge took into account that there was a strong common interest in avoiding insolvency and viewed all the considerations alone or in combination to determine whether it was not possible for the parties to consult together.
24. He submitted the mere fact Centerbridge was entitled to equity does not mean the parties could not consult. He pointed to the fact that the secured note holders apart from Centerbridge were not equity holders. He submitted that there was no exchange of debt for equity in relation to the secured note holders, only in relation to the unsecured, although he accepted Centerbridge obtained equity in return for reducing the interest loan rate on the Term Loan debts. He submitted the fact there was added motivation for Centerbridge to vote in favour of the scheme did not destroy the ability of members of the class to vote together.
25. Senior counsel for BLY also submitted it was incorrect to suggest there was presently a fetter on Centerbridge appointing more than four of nine directors. He referred to the Recapitalization Implementation Agreement dated 23 October 2014 (the RIA) which was tendered on the appeal without objection. This was an agreement between BLY and three of its associated companies and the Centerbridge associate, CCP II Dutch Acquisition - E2 B.V. (the investor). The RIA involved the investor subscribing for 41,325,378 shares in BLY, and BLY purchasing on market up to $105,000,000 of existing secured notes funded by Term Loan B. Clause 4.10 of the RIA provided as follows: "4.10 Governance Matters (a) The Investor will have the right, exercisable by notice in writing to the Company, to appoint at any time and from time to time, and the Company will cause to be appointed as a Director: (i) from and after the First Closing until the Final Closing, one (1) nominee to the Board; (ii) from and after the Final Closing, and for so long as the Investor, together with each of its Affiliates and Related Funds, holds a Relevant Interest in not less than 10.0% and not more than 19.9% of the Shares, one (1) nominee to the Board; and (iii) from and after the Final Closing and for so long as the Investor, together with each of its Affiliates and Related Funds, holds a Relevant Interest in not less than 19.9% of the Shares, a number of nominees to the Board equal to (A) a fraction, the numerator of which is the Relevant Interest of the Investor, together with each of its Affiliates and Related Funds, in Shares held by each of them, and the denominator of which is the total issued Shares (including such Shares that would be issued and outstanding if all Preference Shares were converted into Shares in accordance with their terms) multiplied by (B) the total number Directors on the Board, in each case as of such time, rounded to the nearest whole number (each, an 'Investor Nominee'), provided that the number of Investor Nominees entitled to be appointed by the Investor pursuant to this clause 4.10(a)(iii) may not equal or exceed half of the total number of Directors at any time. For the avoidance of doubt, nothing in this Agreement prevents the Investor or its Affiliates or Related Funds from exercising any nomination rights for the appointment of Directors that it may have according to Law. Prior to the Final Closing, the Company will procure the resignation of a number of Directors to the extent required such that sufficient vacancies exist on the Board to permit the appointments contemplated by this clause 4.1(a) at the Final Closing. (b) From and after the Final Closing and for so long as the Investor, together with each of its Affiliates and Related Funds, holds a Relevant Interest in not less than 40% of the Shares, the Investor shall be entitled to nominate, subject to the approval of a majority of the Board, which of the Directors shall serve from time to time as the Chairman of the Board."
26. Senior counsel for the respondents submitted there was no fetter on Centerbridge nominating and voting for the approval of additional directors, apart from the ones which it was entitled to appoint pursuant to cl 4.10 of the RIA. He further submitted the Director Nomination Agreement did not take the matter any further. He submitted the 49% shareholding in BLY already held by Centerbridge gave it de facto control and irrespective of the Director Nomination Agreement it was empowered to propose a resolution under s 249N of the Corporations Act to appoint or remove directors and secure its passage at the next general meeting.
27. Senior counsel for BLY submitted the position was not affected by the fact that the Unsecured Creditors' Scheme provided for the unsecured portion of the Term Loan A and Term Loan B interest to take priority over the unsecured note debt. He submitted that did not differentiate in any way between the secured note holders and the Term Loan creditors. He acknowledged commercially it was advantageous to the Term Loan creditors but submitted that the question of whether it was appropriate or fair was a matter to be considered at the second court hearing.
28. In relation to interest he submitted the different rights currently held by the secured note holders and the Term Loan creditors are irrelevant because of the inability of the company to pay interest. He submitted that all interest was either capitalised or capable of being capitalised at the option of the company up to 31 December 2018 and the question for all the secured scheme creditors was whether this was a price worth paying to avoid insolvency.
29. In relation to the waiver of the change in control provision, senior counsel for the respondents submitted that there was no difference in legal rights as the rights were waived for both the secured note holders and the Term Loan creditors. Further he submitted that in an insolvency context the right to accelerate repayment of debt is of no value.

Consideration

1. In the well-known passage from the judgment of Bowen LJ in Sovereign Life supra, his Lordship described the identification of a class in the following terms (at 583): "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."
2. The test relates to the difference in the rights of relevant creditors as distinct from their commercial financial interest. In Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813, Finkelstein J explained the application of the test in the following terms (at [66]): "The application of the relevant test involves a comparison of the rights creditors have in the absence of the scheme and any new rights that are established under the scheme: Re T & N Ltd (No 3) [2007] 1 All ER at 882. Once those differences are identified the question whether they form separate classes must be assessed with the following factors in mind. First, when creditors are broken up into classes, each class is given power to veto the scheme and that is a process that undermines the basic approach of decision by majority: Nordic Bank plc v International Harvester Australia Ltd [1983] 2 VR 298 at 301. Second, there is a built-in safeguard against majority oppression in that the court is not bound by the decision of the meeting. Thus, it is necessary to ensure that there is no oppression by the minority. Third, practical considerations are relevant. If a judge is too assiduous in identifying classes, it is possible to end up with any number of classes. In the end, schemes of arrangement are propounded in a business context. The judge should adopt a practical business-like approach to the issue, as would the creditors if they were to decide the matter."
3. In UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin supra, Lord Millett NPJ with whom the other members of the Hong Kong Court of Final Appeal agreed, after reviewing both English and Australian authority summarised the relevant principles as follows (at [27]): "…(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."
4. The test seems to me to involve three questions. First, what are the rights which existing creditors (or members) have against the company and to what extent are they different. Second, to what extent are those rights differently affected by the scheme. Third, does the difference in rights or different treatment of rights make it impossible for the creditors (or members) in question to consider the scheme as one class.
5. That approach is consistent with authority. In Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 there was a question as to whether foreign shareholders constituted a separate class by reason of the fact they would receive cash for their shares rather than an issue of shares in the new company. In determining that this did not make it necessary for the foreign shareholders to vote as a separate class, Barrett J made the following remarks (at [12]): "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." See also Re HIH Insurance supra at [71].
6. In considering whether any difference in rights or different treatment of rights would make it impossible for creditors to consult together as a class, the context in which the scheme is propounded is of importance. In the present case on the material before the Court and the material available to creditors for the purpose of considering the scheme, the only alternative is insolvency. In that context the remarks by David Richards J (as his Lordship then was) in Re Telewest Communications PLC [2004] BCC 342; [2004] EWHC 924 (Ch) at [29] are apposite: "… 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 bondholders 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."
7. In Re T & N Ltd (No 4) [2007] 1 All ER 851; [2006] EWHC 1447 (Ch), David Richards J elaborated on what he said in Re Telewest supra making the following remarks (at [87]): "[87] In considering the rights of creditors which are to be affected by the scheme, it is essential to identify the correct comparator. In the case of rights against an insolvent company, where the scheme is proposed as an alternative to an insolvent liquidation, it is their rights as creditors in an insolvent liquidation of the company: In re Hawk Insurance Co Ltd [2001] 2 BCLC 480. Those rights may be very different from the creditors' rights against a company which is solvent and will continue in business. In the latter case the creditors' rights against the company as a continuing entity are the appropriate comparator: In re British Aviation Insurance Co Ltd [2005] 1 BCLC 665.
8. In Re APCOA Parking Holdings GmbH and others (No 2) [2015] 4 All ER 572; [2014] EWHC 3849 (Ch), Hildyard J quoted the above passage and continued (at [109]): "It is necessary to consider in this context (a) whether the imminent prospect of insolvency is sufficiently established to warrant that being the correct comparator, (b) what would be the legal rights that the various creditors would have in an insolvency but for the Schemes, and (c) the commercial value of those rights with and without the Schemes as best can be estimated by reference to the likely outcome in a liquidation."
9. Consideration was also given to this issue in Re Cortefiel SA [2012] EWHC 2998 (Ch) where Norris J (at [6]) stated that when assessing similarity or dissimilarity it was important to consider the rights in context. His Lordship emphasised that what is to be considered is not a single right but a bundle of rights held by each creditor either under the existing loan agreements or under the proposed scheme. He stated that it was necessary to ask in the context of the time of the comparison what the bundle effectively contained. His Lordship's conclusion was in the following terms: "[13] In short, if one looks at the scheme as a whole and assesses what are the real rights of the lenders given the company's impending parlous financial state and prospective breach of covenant and compares them with the rights which are afforded by the scheme, I am satisfied that the classes as suggested are properly constituted and I accordingly grant the order sought."
10. There is nothing inconsistent in his approach with the approach taken by the Australian authorities, provided that if the relevant context discloses that there are alternatives to liquidation such as, for example, another recapitalisation proposal or a Deed of Company Arrangement, that would be required to be taken into account. No such alternatives have been suggested in the present case and it is not a matter for the Court to speculate on whether they might exist: Re NRMA Insurance Ltd (2000) 156 FLR 349; [2000] NSWSC 82 at [29]; Centro Properties Ltd v PricewaterhouseCoopers (2011) 86 ACSR 584; [2011] NSWSC 1465 at [28]-[31].
11. In the present case as I pointed out the KordaMentha report opines that both the secured note holders as well as the Term Loan creditors would be better off financially under the scheme compared to the position in liquidation. Indeed, on their calculations the secured note holders' position is improved to a greater extent than that of the Term Loan creditors.
12. As KordaMentha has concluded that unsecured note holders will get no return in a liquidation, if they are correct, it follows that the shares in the company are worthless on that scenario. Further, having regard to their estimate of the enterprise value of BLY ($266.6 million) compared to the calculation of outstanding secured debt at scheme implementation ($445.1 million), the question of whether the shares would have any value post implementation of the scheme is at best speculative.
13. It is true as senior counsel for the applicant has pointed out, that the KPMG report dated 1 May 2017 prepared for shareholders not associated with BLY (that is, shareholders other than Centerbridge, Ares and Ascribe), who on KPMG's calculation will hold 2% of the issued capital if the scheme is fully implemented, does ascribe some value to the shares. However, the report agrees that the shares would be worthless in a liquidation whilst the value they ascribe to them post-recapitalisation is in the range of US$.0011 to US$.0045. In this context KPMG assess the transaction to be both fair and reasonable to those non-associated shareholders.
14. The case essentially involves two issues. First, the equity issue involving the waiver of the change of control clause, the subsequent grant of equity to Centerbridge and the Director Nomination Agreement and, second, the interest issue.
15. So far as the first issue is concerned it does not seem to me that the question of whether the Subscription Agreement forms part of the scheme has any particular significance in the present case. It was accepted that the waiver of the change of control clause formed part of the scheme. The purpose and effect of the waiver was to give effect to the grant of additional equity to Centerbridge and needs to be considered in that context.
16. Nor do I think the fact that the change of control is in both the secured note facility and the Term Loan agreements is determinative of the issue. Although the rights in each agreement are the same, it is appropriate in my opinion to have regard to the differential effect the waiver has on both groups of creditors. Each loses the right to call up their loans on a change of control but Centerbridge gets the benefit of being able to move to legal control of BLY.
17. However, I do not think that the difference results in the two groups of creditors being unable, in the particular circumstances of the present case, to consult together with a view to their common interest. The right to call up loans, which is held by both parties, is of limited benefit having regard to the fact that BLY would be unable to pay and would in all probability be placed into liquidation, in which case both groups of creditors would receive a significantly less amount than on the implementation of the scheme. It does not seem to me the parties would be unable to consult on this issue.
18. The critical question is whether the grant of additional equity to Centerbridge affects the position. I do not think it does. First, it is relevant that unlike Centerbridge, the secured note holders which are not associated with that company are not the holders of any equity. Second, it is relevant in considering the significance of the issue of equity that Centerbridge, whilst not having legal control has de facto control of the general meeting by virtue of its 48.9% holding. This holding would not in the normal course be sufficient for it to control the composition of the Board. Clause 4.10 of the RIA does not prohibit Centerbridge from exercising any right it may have by virtue of its current shareholding. Further it does not seem to be the case on the evidence that Centerbridge, even on KPMG's most optimistic assessment of the value of the shares, obtains any significant financial advantage by the grant of equity in consideration of the reduction in interest of 2% for the first two years and thereafter 4% compared to the position of the other secured note holders.
19. The position may be contrasted with the two cases on which the applicant placed particular reliance. In Re Hellenic & General Trust Ltd supra the minority equity holders were compelled to give up their equity in exchange for cash. It is evident from the amount paid to the minority shareholders for their shares (48p per share) that the shares had significant value. In the circumstances it was clearly inappropriate for a subsidiary of the acquirer to vote at the meeting. By contrast in the present case the applicant has no equity interest, the shares have limited value and the calling up of the loans and the consequent insolvency of the company will produce a far more detrimental result to all parties than the implementation of the scheme including the grant of equity.
20. By contrast to the position in Re HIH Insurance supra, creditors in each suggested class in the present case receive a significantly better outcome than they would in liquidation.
21. In these circumstances I do not think the waiver of the change of control clause, coupled with the consequential grant of additional equity to Centerbridge, leads to the conclusion that the rights of the respective groups of creditors or the effect of the scheme on those rights are so dissimilar that they could not consult in a common meeting.
22. I do not think that the Director Nomination Agreement affects the position. If it is accepted that the grant of equity does not prevent the respective creditors from voting as a single class, the Director Nomination Agreement cannot further affect the position. The RIA does not prohibit Centerbridge from exercising its legal rights to appoint directors and once it has control it could exercise its right to call a meeting to appoint or remove directors, at which it would have the requisite majority.
23. So far as the question of interest is concerned, it is correct that the respective creditors' right to payment of interest are different and are treated differently by the scheme. However in the context of imminent liquidation as the only alternative, it does not seem to me that the adjustments made, whether more favourable to the Term Loan creditors or otherwise, is such to prevent the two groups of creditors consulting together on the scheme.
24. Further I do not think the fact that as part of the arrangement the Term Loan creditors obtain priority over the unsecured note holders in respect of the unsecured portion of their interest affects the position. This change occurs as a result of an arrangement forming part of the Unsecured Creditors' Scheme. Although the Secured Creditors' Scheme is conditional upon approval of the Unsecured Creditors' Scheme, the arrangement, whilst conferring a potential benefit on Centerbridge, is not done at the expense of the secured note holders. In these circumstances it does not seem to me this matter prevents consideration of the scheme at a separate meeting.
25. It is of course necessary to consider the matters to which I have referred to at [91]-[100] above together to see whether the combined effect on the rights of the respective creditors leads to the conclusion that their existing rights and the rights conferred by the scheme are so dissimilar as to require separate class meetings. I have done so and it is my opinion, in the context of the present case taking into account the company's financial position, that the real rights of the creditors and the rights provided for by the scheme are not so dissimilar to require separate class meetings: see Re Cortefiel SA supra at [13].
26. There are two other matters I should mention. It was suggested during the hearing that Centerbridge would seek to value its debt for the purpose of the scheme creditors' meeting with reference to both the secured and unsecured portion of it. It will of course be initially a matter for the Chairperson of the meeting to determine at what value the Term Loan creditors' debts should be admitted. It may be relevant to the ultimate approval of the scheme whether or not the value of the Term Loan creditors' debt was calculated by reference to both the secured and unsecured portion. It is not necessary to say anything further about this matter at the present time.
27. The other matter is this. Some of the matters raised by the appellant may well be said to go to the fairness of the scheme rather than to the particular class issues. Nothing in this judgment should be taken as expressing a view one way or the other on the fairness of the scheme.

Conclusion

1. In the result, I would grant leave to appeal but dismiss the appeal. The applicant should pay the respondents' costs of the appeal. It does not seem to me that any order for costs should be made in favour of Ares Management LP, Ascribe II Investments LLC or Centerbridge Partners LP. Their interests seem to me to be adequately represented by the respondents.
2. In the result I would make the following orders: 1. Grant the applicant leave to appeal. 2. Direct the applicant to file a Notice of Appeal in the form of the draft notice of appeal contained at tab 2 in volume 1 of the white book within 7 days. 3. Dismiss the appeal. 4. Order that the appellant pay the respondents' costs of the appeal.
3. BEAZLEY P: I have had the advantage of reading in draft the reasons of the Chief Justice. I agree with his Honour's reasons and proposed orders.
4. LEEMING JA: I agree with Bathurst CJ.

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: 26 May 2017