Fowler v Lindholm, in the matter of Opes Prime Stockbroking Limited

IN THE MATTER OF OPES PRIME STOCKBROKING LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) OPES PRIME STOCKBROKING LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 086 294 028) LEVERAGED CAPITAL PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 097 720 495) HAWKSWOOD INVESTMENTS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 098 040 683) OPES PRIME GROUP LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 120 372 223) BETWEEN: ROBERT FOWLER

AND: JOHN ROSS LINDHOLM, ADRIAN LAWRENCE BROWN and PETER DAMIEN MCCLUSKEY

MERRILL LYNCH INTERNATIONAL and MERRILL LYNCH INTERNATIONAL (AUSTRALIA) LIMITED

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED and ANZ NOMINEES LIMITED

THE COURT: 1 On 4 August 2009, a judge of the Court made orders pursuant to s 411(4)(b) of the Corporations Act 2001 (Cth) (the Corporations Act) approving schemes of arrangement (the Schemes) between four related companies, which are members of the Opes Prime Group and their respective creditors (Scheme Creditors). The companies are Opes Prime Stockbroking Limited (Opes Stockbroking), Leveraged Capital Pty Ltd (Leveraged Capital), Opes Prime Group Limited (Opes Group) and Hawkswood Investments Pty Limited (Hawkswood Investments). 2 The appellant, Mr Robert Fowler, is a creditor of one or other of those four companies (together the Scheme Companies). Mr Fowler claims that the Court did not have power to make the orders approving the Schemes because they contain provisions whereby he and other creditors of the Scheme Companies are required to release claims that they have against the second and third respondents, Merrill Lynch International and Merrill Lynch International (Australia) Limited (together Merrill Lynch) and Australia and New Zealand Banking Group Limited and ANZ Nominees (together ANZ) and are required to indemnify Merrill Lynch and ANZ in respect of claims that might be made by other parties. Mr Fowler also says that, even if the Court had power to approve the Schemes, the exercise of the discretion to do so miscarried because of other provisions in the Schemes whereby legal costs and other payments to litigation funders are to be paid out of the proposed scheme fund in priority to proposed distributions to other creditors such as Mr Fowler. 3 It is desirable to say something about the background circumstances that led to the making of the orders of 4 August 2009.

BACKGROUND OF THE SCHEMES 4 Until 27 March 2008 the Opes Prime Group was engaged in providing stockbroking services to institutional and private clients, predominantly in the form of securities lending and equity financing. Opes Stockbroking held a financial services licence and operated as a full market participant of the Australian Securities Exchange. 5 The Opes Prime Group was based in Melbourne and also maintained offices in Sydney and Singapore. Opes Stockbroking and Leveraged Capital also entered into securities lending arrangements with various financiers, pursuant to which Opes Stockbroking and Leveraged Capital transferred the securities they received from their clients to the financiers. Pursuant to those arrangements, the financiers provided Opes Stockbroking and Leveraged Capital with cash, collateral and other securities. The financiers included ANZ and Merrill Lynch. On 27 March 2008 the first respondents, Messrs John Lindholm, Peter McCluskey and Adrian Brown of Ferrier Hodgson, were appointed as administrators of the Scheme Companies. Later that day, Messrs Salvatore Algeri and Christopher Campbell of Deloitte Touche Tohmatsu (the Receivers) were appointed by ANZ as receivers and managers in control of the whole of the assets and undertakings of each of the Scheme Companies. 6 On 2 May 2008, the creditors of Hawkswood Investments and Opes Group resolved to wind up those companies and to appoint Messrs Lindholm, McCluskey and Brown as liquidators (the Liquidators). On 15 October 2008 the creditors of Opes Stockbroking and Leveraged Capital resolved to wind up those companies and to appoint Messrs Lindholm, McCluskey and Brown as liquidators. Green Frog Nominees Pty Ltd is a wholly owned subsidiary of Opes Stockbroking. On 21 May 2008, Green Frog was placed into creditors' voluntary winding up and Messrs Colin Nicol and Peter Anderson of McGrathNicol were appointed as liquidators. Green Frog's sole purpose was to hold securities as nominee for third parties. Green Frog owns no assets other than the securities registered in its name and held on behalf of third parties. 7 A number of claims had been made or foreshadowed in relation to the affairs of the Scheme Companies. First, the Australian Securities and Investments Commission (the Commission), had foreshadowed claims against ANZ and Merrill Lynch, Opes Stockbroking and the directors of Opes Stockbroking. Second, some creditors of the Scheme Companies had commenced legal proceedings against Merrill Lynch and ANZ and the Sceme Companies. In those proceedings, the creditors made claims against Scheme Companies for, amongst other things, misleading and deceptive conduct. Creditors have also made claims for redelivery of securities held by Green Frog. Third, the Liquidators foreshadowed claims against ANZ and the Receivers and against Merrill Lynch.

THE MEDIATION 8 All of those claims and foreshadowed claims were the subject of a mediation between the Liquidators, ANZ, Merrill Lynch and the Commission. The mediation resulted in an agreement between those parties to propose the Schemes in order to achieve a global settlement of all Opes-related claims and proceedings against ANZ and Merrill Lynch and other parties, and their respective related entities, in exchange for ANZ and Merrill Lynch paying $226 million in cash and the receivers and Merrill Lynch releasing cash and assets of the Scheme Companies, having an estimated realisable value of $27 million. Those are to be provided to the Liquidators for distribution to Scheme Creditors in accordance with the Schemes. If the Schemes proceed, all of the claims by Scheme Creditors, including the legal proceedings just referred to, and the claims foreshadowed by the Liquidators, will be released and disposed of. Further, the Commission has agreed to provide a release to ANZ and Merrill Lynch in relation to certain of its foreshadowed claims. 9 Pursuant to the accord reached at the mediation, a settlement agreement was entered into on 6 March 2009 (the Settlement Agreement). The parties were ANZ, Merrill Lynch, the Scheme Companies, the Liquidators and the Receivers. The Settlement Agreement recited the making of the claims outlined above and the reaching of accord at the mediation. It recites that the parties had agreed upon a basis for final resolution of the claims, but without admissions of liability on the part of ANZ or Merrill Lynch. 10 The Settlement Agreement outlined a proposed scheme of arrangement for each of the four Scheme Companies. It contemplated that the Liquidators would act as administrators of the proposed schemes, that the assets and liabilities of the Scheme Companies would, to the extent possible, be pooled and that the Liquidators would establish a scheme fund consisting of sums to be contributed by ANZ and Merrill Lynch, the net assets of the Scheme Companies, the securities held by Merrill Lynch and Green Frog, and other recoveries by the Liquidators in the liquidations of the Scheme Companies. 11 The Settlement Agreement provided for the manner in which the scheme fund would be applied by the Liquidators. In particular, the fund was to be applied first to the Liquidators' costs of the voluntary administration of the Scheme Companies, then in the payment of the sum of $8 million towards client legal costs incurred in the claims by creditors referred to above. The balance was to be applied in accordance with s 556 of the Corporations Act, and otherwise on a pari passu basis. 12 The Settlement Agreement contemplated that a more formal agreement would be entered into by the parties and on 1 May 2009 an implementation agreement was entered into involving the same parties as were parties to the Settlement Agreement, including the liquidators of Green Frog (the Implementation Agreement). The recitals in the Implementation Agreement set out the background briefly referred to above. 13 By the Implementation Agreement, a binding obligation was imposed upon ANZ and Merrill Lynch to pay a sum of $226 million (the Cash Settlement Sum) in immediately available funds to an interest-bearing account nominated by the Liquidators. That sum was to be held by the Liquidators in escrow in the interest-bearing account until released in accordance with a proposed scheme release and indemnity deed (the Scheme Release and Indemnity Deed). The Scheme Release and Indemnity Deed, which is a basic issue in the proceeding, will be returned to later. The Implementation Agreement also provided that, in the event that the Schemes ceased to be effective for any reason prior to the proposed Release Date, the Liquidators were to return the Cash Settlement Sum to ANZ and Merrill Lynch. A similar regime was provided for in relation to the securities held by Merrill Lynch and Green Frog. The Implementation Agreement contained other machinery provisions requiring the parties to give effect to the Schemes and the steps to be taken by them in a cooperative fashion to ensure that the Schemes would be put before creditors, and then the Court, if the creditors agreed to the Schemes.

CREDITORS ADVISED NOT TO SUE 14 Mr Fowler drew attention specifically to one of many circulars to creditors sent by the Liquidators. Mr Fowler drew attention to the circular as constituting an exhortation to investors not to embark upon litigation. That question is of some significance in relation to the second issue that is of importance in the proceeding, namely, the fund that has been set aside to pay litigation costs incurred by some investors and to reimburse certain litigation funders. 15 On 30 May 2008, the Liquidators, who were then the administrators of the Scheme Companies, forwarded a report on the progress of discussions with various parties. The Liquidators said that they were confident that the key parties would participate in a mediation process, the object of which would be to seek to formulate a global commercial solution to the multitude of claims that had arisen, which might arise as a result of the collapse of the Opes Prime Group. 16 The circular asserted that it was in the interests of all creditors that protracted litigation be avoided. It stated that a number of creditors had contacted the Liquidators about contemplated class actions and had asked whether they ought to subscribe to such actions. The circular pointed out that creditors should obtain their own independent legal advice as to the merits of subscription to any litigation process. However, the circular said that, as a general proposition, the Liquidators were of the view that it was likely to be unhelpful to the mediation process if investor creditors were to subscribe to any process whereby part of their litigation proceeds would be assigned to, or withheld by, an external party, such as a litigation funder or a solicitor. The circular went on to say that if any investor had already subscribed to a litigation process, such as a proposed class action funded by a third party, it was recommended that the investor seek urgent independent legal advice as to whether any legal documentation that had been signed contained a termination or cooling off entitlement and, if so, whether that entitlement should be exercised in the light of the information contained in the circular. 17 The circular also advised that legal advice should be obtained as to whether a decision not to participate in such a litigation process at the present time might prejudice an investor's ability to do so at a later time. The circular ended by saying that, if the proposed mediation was not successful, the Scheme Companies were likely to be placed into liquidation at the earliest possible opportunity, and investor creditors would then need to form a view as to whether they should commence proceedings against ANZ or Merrill Lynch, either individually or as part of a class action.

THE EXPLANATORY STATEMENT 18 On 1 July 2009 the primary judge made orders that each of the Scheme Companies convene meetings of each class of creditors identified in the order. Those orders were made after considerable disputation between various parties who opposed the making of orders and, indeed, the final form of the orders and the Scheme reflected changes that were negotiated following the proposal that was originally put to the Court. 19 Significantly, two classes of creditors for each of the Scheme Companies were formulated. The first class consisted of all Scheme Creditors who may have a claim against parties described as Released Parties (Merrill Lynch and ANZ) being claims arising out of a transaction involving marketable securities with one of the Scheme Companies or with Green Frog. That class of creditor was referred to as Client Creditors. All other Scheme Creditors who were not Client Creditors were described as Trade and Other Creditors. 20 The explanatory statement that accompanied the notice of meetings (the Explanatory Statement) described the proposed schemes in some detail. It provided that, if the Schemes are approved by Scheme Creditors and by the Court, and various conditions precedent are satisfied or waived, the following will be the effect of the Schemes: (1) All of the assets and liabilities of the Scheme Companies will be transferred to Opes Group to be distributed to Scheme Creditors from the Release Date in accordance with the Schemes. (2) ANZ and Merrill Lynch will be obliged to pay $226 million, and Merrill Lynch and Green Frog will be obliged to transfer certain withheld securities and other Green Frog assets to the liquidators to be distributed to Scheme Creditors on the Release Date in accordance with the Schemes. (3) Each Scheme Creditor would be invited to submit a final scheme proof form to have the claims of that Scheme Creditor against the Scheme Companies determined by agreement with the scheme administrators or, failing agreement, in accordance with a process provided for in the Scheme involving determination of any dispute by a panel of scheme valuers. (4) On and from the Release Date, ANZ and Merrill Lynch, Green Frog, the Green Frog liquidators and the Receivers would be released from all claims in any way relating to the Scheme Companies by the Liquidators, the Scheme Companies or the Scheme Creditors. 21 The Schemes were to be implemented in addition to, and not in replacement of, the liquidations of the Scheme Companies. The liquidations were to continue. Importantly, any recoveries by the Liquidators would become part of the scheme assets available for distribution under the Schemes. Scheme Creditors were not to be entitled, however, to any additional or separate distributions out of the liquidations. All entitlements to distributions were to be determined in accordance with the Schemes. 22 The Explanatory Statement recognised that, following approval of the Schemes by orders of the Court, there was a theoretical possibility that a Scheme Creditor might appeal from those orders. That theoretical possibility has turned out to be fact. To address that possibility, the Schemes were to provide that, until the Release Date, as defined: · the Cash Settlement Sum, the withheld securities, and the Green Frog assets were to be held in escrow by the Liquidators; · the releases of Merrill Lynch and ANZ and the Receivers, and the Liquidators and their respective related entities would not take effect; · the Liquidators' release of its claims against ANZ and Merrill Lynch would not take effect; and · none of the Liquidators, the scheme administrators or Opes Group would make any payments or distributions to Scheme Creditors out of the scheme assets. The Release Date was defined as the latest of the following: · the date that is 28 days after the date on which the Schemes become effective, or the first date after such longer period as the Court is permitted to determine; · the date of the disposal of all appeals; and · the date of the expiration of any stay ordered in connection with any such appeals. 23 The Explanatory Statement also pointed to the possibility that a Scheme Creditor might propose a modification to the terms of the Schemes or the proposed Scheme Release and Indemnity Deed prior to the passing of a resolution to approve the Schemes. That possibility also became fact. The Explanatory Statement went on to say that, although it is permissible for a Scheme Creditor to propose a modification and for the scheme meeting to consider a resolution to approve the modification, Scheme Creditors should be aware that the consequences of modifying the terms of the Schemes or the Scheme Release and Indemnity Deed would be that, if the modification is material, it may give rise to a basis that might not otherwise exist, first, for the Court to refuse to approve the modified schemes and second, for ANZ and Merrill Lynch and the Receivers and Green Frog to refuse to provide the scheme consideration, consisting of the Cash Settlement Sum and the withheld securities, upon such modified schemes becoming effective. 24 The Explanatory Statement pointed out that it was a requirement of the Implementation Agreement that the Schemes be governed by an instrument substantially in the form set out in schedule 2 to the Implementation Agreement, as amended or modified by the Court pursuant to section 411(6) of the Corporations Act. That requirement may not be satisfied if the terms of the Schemes or the Scheme Release and Indemnity Deed were modified by the Scheme Creditors. 25 The Explanatory Statement stated that ANZ and Merrill Lynch had informed the Liquidators that they were not prepared to contribute anything more to the Schemes than the scheme consideration as provided for in the Implementation Agreement. They also informed the Liquidators that, if the Schemes do not receive the requisite approval of the Scheme Creditors or the Court substantially in their current form, they would vigorously defend the proceedings against them by any of the Scheme Creditors that had been foreshadowed, and any proceeding commenced by the Liquidators against them as well as any other proceeding relating to the collapse of the Opes Prime Group. 26 The Explanatory Statement then went on to state in more detail the effects of the Schemes. As contemplated by the Settlement Agreement, the assets and liabilities of the Scheme Companies were to be amalgamated by the transfer of the assets and liabilities of each of the Scheme Companies to Opes Group, and all inter-company debts and claims between the Scheme Companies were to be extinguished. ANZ and Merrill Lynch and the Receivers were obliged to transfer or release the scheme consideration, consisting of the Cash Settlement Sum and the withheld securities, within a timeframe specified in the Schemes. As contemplated by the Settlement Agreement and the Implementation Agreement, the Cash Settlement Sum and the withheld securities and the Green Frog assets were to be held in escrow by the Liquidators until the Release Date. 27 The Explanatory Statement pointed out that, if the Schemes proceed, the winding up of the Scheme Companies was to continue and the appointment of the Liquidators as liquidators would not be affected. The Liquidators were to be appointed as scheme administrators to administer the Schemes in accordance with their terms. Scheme Creditors were to be entitled to have their scheme claims against the Scheme Companies established in accordance with the process provided for in the Schemes. The scheme administrators were to distribute the scheme assets, including the consideration coming from ANZ and Merrill Lynch, to the Scheme Creditors who established claims in accordance with the terms of the Schemes. Again, it was stated that the Scheme Creditors would not be entitled to receive any distribution of scheme assets except out of the Schemes. Scheme Creditors who established proprietary claims in respect of securities held by any of the Scheme Companies or by Merrill Lynch would be eligible to elect for the redelivery of securities in accordance with the Schemes. However, none of Merrill Lynch or ANZ or their related entities or the Receivers would receive any distribution under the Schemes. 28 The explanatory memorandum then described in more detail the proposed release of ANZ and Merrill Lynch and the Receivers and Green Frog. As has been said, that is a critical aspect of the issue presently before the Court. Under the Schemes, and under the Scheme Release and Indemnity Deed, ANZ, Merrill Lynch, Green Frog, the Green Frog liquidators and the Receivers were to be released from all claims, causes of action and liabilities arising from, related to or connected with the Scheme Companies, including the winding up of the Scheme Companies. The precise terms and releases to be provided in connection with the Schemes are set out in the Scheme Release and Indemnity Deed, which was to be an annexure to the Schemes, and the terms of which were set out in an appendix to the Explanatory Statement. The Schemes provided for the appointment of the Liquidators as attorneys of Scheme Creditors for the purposes of execution of the Scheme Release and Indemnity Deed. 29 The Explanatory Statement pointed out that the Scheme Release and Indemnity Deed would not provide for releases in favour of financial advisors or any other persons unless they are related entities of ANZ and Merrill Lynch and other Released Parties. Accordingly, Scheme Creditors could continue to make claims, against financial advisors and any other persons not released under the Schemes, in relation to losses suffered as a consequence of the collapse of the Scheme Companies. However, a Scheme Creditor would be required to indemnify ANZ and Merrill Lynch and the other Released Parties and their related entities against any loss or liability arising if the Scheme Creditor, or any person to whom the Scheme Creditor transferred claims, made such a third party claim up to what was described as the Indemnity Limit. The Indemnity Limit was to be to the aggregate of the amounts that the Scheme Creditor actually receives under the Schemes, and the net amount that the Scheme Creditor, or person to whom the Scheme Creditor has transferred claims, actually recovers from those third parties. 30 The Explanatory Statement then pointed out that, if the Schemes proceed, a Scheme Creditor's claims against the Scheme Companies would be replaced with the Scheme Creditor's entitlement under the Schemes, which was essentially to prove a debt and receive a dividend distribution in respect of that proven debt. On and from the Release Date the Scheme Creditors were to be prohibited from commencing, or procuring any third party to commence, any legal proceeding or other claim against ANZ or Merrill Lynch or any other Released Party. Under the Schemes, the Scheme Creditors authorised the Liquidators to obtain orders dismissing or discontinuing any such proceedings on their behalf. The Explanatory Statement said, therefore, that it was expected that all Opes Prime related proceedings would be dismissed or discontinued shortly after the Release Date. 31 Next the Explanatory Statement pointed out that the Schemes prohibit the commencement or continuance of any recovery proceedings by Scheme Creditors against the Scheme Companies, except to the extent that the relevant Scheme Company failed to perform any obligation to make a payment to a Scheme Creditor or redeliver scheme securities under the provisions of the Schemes. The Explanatory Statement also dealt in detail with the procedure for the payment of dividends under the Schemes. Once all claims of Scheme Creditors have been finally agreed or determined in accordance with the Schemes, the scheme administrators are to send each Scheme Creditor a notice setting out the details of that Scheme Creditor's established scheme claims, established proprietary claims and established costs amount, if any. 32 Scheme Creditors with established proprietary claims would then be entitled to elect to take redelivery of their scheme securities in accordance with the procedures summarised elsewhere in the Explanatory Statement. Once all elections for the redelivery of scheme securities had been finalised, the scheme administrators are to make an interim or final dividend payment to each Scheme Creditor in respect of the total established scheme claim amount and pay each Scheme Creditor a pari passu distribution in respect of the Established Costs Amount of that Scheme Creditor. The second issue that is raised in this appeal relates to the Established Costs Amount. Finally, the scheme administrators are to redeliver the scheme securities to Scheme Creditors in accordance with the Schemes. 33 Under the Schemes, dividends and other distributions are to be made to Scheme Creditors out of several funds, as follows: · First, an insurance proceeds fund in respect of insurance proceeds relating to established scheme claims for a particular Scheme Creditor; that is of no present particular relevance. · Second, a scheme securities pool consisting of the securities held by a scheme company or released to the Liquidators. · Third, a general scheme fund: each Scheme Creditor will be entitled to a pari passu dividend out of the general scheme fund in respect of the Total Established Scheme Claim Amount; dividends from the general scheme fund are to be paid on a pari passu basis after the payment of all pre-scheme costs and the payment of all outstanding scheme costs and other claims that would have had priority for repayment in the liquidations of the Scheme Companies under s 556 of the Corporations Act. 34 In addition, the Schemes provide for a priority payment of $1 million out of the general scheme fund to Comprehensive Legal Funding LLC (CLF), a litigation funder, as a consequence of the Imobilari Settlement Agreement and for a priority payment of $2.5 million out of the general scheme fund to IMF Australia Limited (IMF), another litigation funder, as a consequence of the IMF Settlement Agreement. The Explanatory Statement described those proposals in more detail. 35 As at the date of the Explanatory Statement, the Liquidators were aware of a number of proceedings commenced by Scheme Creditors against Merrill Lynch and ANZ. A list of the proceedings was set out in an appendix to the Explanatory Statement. As has been said, the Explanatory Statement pointed out that ANZ and Merrill Lynch would be released from those claims. The Explanatory Statement then referred to one of the proceedings described as the "Imobilari representative proceeding", which is a class action funded by CLF. The Imobilari Settlement Agreement has the effect that, upon the Schemes becoming operative, a payment will be made to CLF of $1 million as a priority payment under the Schemes. Subject to receipt of that payment of $1 million, CLF will make no claims against any of the parties represented by it in the class action that it has begun. In consideration of the finalisation and discontinuance of that representative proceeding, the parties represented by CLF will accept the dividend that they will receive under the Schemes. The Explanatory Statement asserted that that would have the effect of placing those Scheme Creditors, who were part of the Imobilari representative proceeding, into a similar position to other Scheme Creditors in terms of their entitlement to receive and retain dividends under the schemes. 36 The Explanatory Statement then referred to other Opes Prime client proceedings in which the relevant claimants were funded by IMF. The Explanatory Statement observed that it was arguable that, under the funding agreement entered into with IMF by certain claimants, a portion of any distribution paid to those claimants under the Schemes must be paid to IMF. The Explanatory Statement stated that the Liquidators had formed the opinion that the existence of the proceedings funded by IMF made, or may have made, some contribution to the decision of ANZ and Merrill Lynch to establish or augment the amount of the scheme consideration provided by them under the Schemes for distribution to Scheme Creditors. The Liquidators also considered that it would be unfair if individual-funded Scheme Creditors were left to face the risk of having to pay a portion of the distribution received under the Schemes to IMF. They considered that it would be preferable for IMF to receive payment by way of a priority distribution directly from the scheme assets in lieu of any entitlements under the relevant funding agreements, so long as IMF was prepared to accept a reasonably modest sum. 37 The Liquidators therefore entered into an agreement with IMF, pursuant to which, upon the Schemes becoming operative, a payment of $2.5 million will be made to IMF as a priority payment under the Schemes and, subject to receipt of that payment, IMF will make no claims under, or in respect of, any litigation funding agreement in relation to a securities claim or a proceeding arising out of the dealings of the Opes Prime Group. The effect of that arrangement was to place those Scheme Creditors who are funded by IMF into a similar position to other Scheme Creditors in terms of their entitlement to receive and retain dividends under the Schemes. 38 The payment of $1 million to be made to CLF and the payment of $2.5 million to be made to IMF under the Schemes reflect the relative value of the total claims of Scheme Creditors funded by CLF and IMF respectively.

THE SCHEME MEETINGS 39 The meetings convened by the orders of 1 July were to be held on 24 July 2009 and the meetings were duly convened and held. Significantly, at the meetings of Opes Stockbroking, as had been foreshadowed as a possibility in the Explanatory Statement, amendments were proposed to the Schemes. 40 Clause 6.5 of the proposed Scheme Release and Indemnity Deed imposed an obligation on each Scheme Creditor to indemnify each of the Released Parties against any loss or liability to the extent arising from, related to or connected with third party claims. Third party claim was defined as a claim brought by a person against any of the Released Parties in connection with a claim by that Scheme Creditor, or a claim by any transferee of a claim of that Scheme Creditor, in respect of any matter that was the subject of the release effected by the deed. Under clause 6.6, a Scheme Creditor's total liability was to be limited to, and was not to exceed, an amount equal to the aggregate of two amounts, as follows: · the amounts actually received by the Scheme Creditor under the Schemes; and · the proceeds actually received by the Scheme Creditor in respect of any third party claims. A resolution was proposed that the Scheme Release and Indemnity Deed be amended to reduce a Scheme Creditor's total liability by deleting from clause 6.6 the reference to the amount of the proceeds actually received by the Scheme Creditor in respect of any third party claims. 41 The second and third resolutions related to the preferential payments to IMF and CLF and to the proposed reimbursement of legal costs to those Scheme Creditors who had incurred legal costs. That is the sum of $8 million referred to earlier. 42 The resolutions for the amendment of the Schemes were put to the meetings and rejected. The votes in favour were less than 20%, from which it follows that the votes against the amendments exceeded 80%. There is, however, no way of telling, as Mr Fowler points out, the particular interest that the creditors who cast votes had in relation to the indemnity to the Released parties, the priority payments to IMF and CLF and legal costs. After the proposed amendments were rejected, the resolutions for the approval of the Schemes were put to the Scheme Creditors who attended the meetings. At each meeting of each class, the resolutions were passed by significant majorities; certainly majorities that satisfied the requirements of s 411(4). The precise details of the votes were recorded by the primary judge in his reasons of 4 August 2009. Votes were cast against the resolutions, although those votes represented only a very small proportion of the total votes cast. The effect of the resolutions of 24 July 2009 was to agree to the Schemes in precisely the form in which they were propounded by the Liquidators at the hearing on 1 July 2009.

IMPLEMENTATION OF THE SCHEMES AND THE APPEAL 43 Following the passing of the resolutions, the Liquidators then applied to the Court for orders approving the Schemes, pursuant to s 411(4)(b) of the Corporations Act. That application was listed for hearing before the primary judge on 4 August 2009. On the day before, his Honour published considered reasons for making the orders of 1 July 2009, by which meetings were convened for the purpose of considering the Schemes and the forms that were put to the Scheme Creditors. 44 The primary judge gave reasons on 4 August 2009 for making the orders of that day approving the Schemes. Since that time, further relevant steps have been taken in furtherance of the Schemes. A copy of the orders of the Court of 4 August 2009 was lodged with the Commission, as a result of which the Schemes became effective and 4 August 2009 became the effective date in relation to the Schemes. On the same day, the Scheme Release and Indemnity Deed was executed by the Liquidators and the others parties. The Liquidators executed the Scheme Release and Indemnity Deed as attorney of each of the Scheme Creditors under the power conferred by the Schemes. Next, on 11 August 2009, the Cash Settlement Sum was deposited by ANZ and Merrill Lynch into an account in the name of the Liquidators to be held by the Liquidators in escrow pending the occurrence of the Release Date in relation to the Schemes. 45 On 13 August 2009 notices were despatched to all Scheme Creditors inviting them to file proofs of debt. A number of Scheme Creditors have since completed and returned their proofs of debt to the Liquidators. Mr Fowler is one of those Scheme Creditors who has done so. On 18 August 2009 Merrill Lynch transferred the withheld securities to the Liquidators to be held by them in escrow pending the occurrence of the Release Date. A number of proceedings have subsequently been discontinued. On 20 August 2009 the inaugural meeting of the committee of the creditors committee established under the Schemes was held and various resolutions were passed at that meeting. Finally, steps have been taken to effect the transfer of securities held by Green Frog to the Liquidators. 46 The Liquidators believe that, absent any delays occasioned by this appeal, an interim dividend representing a substantial part of the settlement proceeds received from ANZ and Merrill Lynch will be paid to Scheme Creditors by the end of December 2009. However, in the light of the filing by Mr Fowler of an application for leave to appeal from the orders of 4 August 2009, the Release Date has been deferred. 47 While an application for orders under s 411(1) of the Corporations Act is normally made ex parte, several different opposing parties were given leave to appear and be heard as to whether or not orders should be made convening meetings of creditors of the Scheme Companies. Several opposing parties also appeared on the hearing of the application for approval on 4 August 2009. At each stage, the Commission was given leave to appear and be heard. 48 Mr Fowler was not a party, in any formal sense, to the initial application pursuant to which orders were made on 1 July 2009. Nor was he a party on the subsequent application pursuant to which orders were made on 4 August 2009 under s 411(4) approving the Schemes. However, it is common ground that the contentions that he now wishes to agitate were advanced on behalf of other opponents of the Schemes at the hearings before the primary judge. Senior counsel now appearing for Mr Fowler appeared for parties in the same interest as Mr Fowler on those hearings. 49 Mr Fowler applied for leave to appeal from the orders of 4 August 2009 on the basis that, while those orders were final orders, leave to appeal is required because he was not formally a party to the proceeding in which the orders were made. None of the respondents opposed the grant of leave. Having regard to the significance of the issues raised, the Court, having heard full argument of the issues on the appeal, granted leave for Mr Fowler to file a notice of appeal joining as respondents, the Liquidators, who propounded the Schemes, Merrill Lynch and ANZ. 50 The Court has evidence before it, which was not challenged, that unless the application for leave to appeal and any appeal were expedited, there would be a real likelihood that, if the application and appeal were unsuccessful, the Scheme Creditors would be prejudiced by not being paid the interim dividend by the end of December 2009 and may not be paid until some months into 2010. For that reason, the Liquidators sought expedition of the application for leave to appeal and any appeal if leave is granted. 51 Having regard to the extreme urgency with which the appeal was prepared and brought on for hearing, the Court yesterday formally granted leave and then ordered that the appeal be dismissed with costs. The proceeding was stood over to today to enable the Court to deliver oral reasons as a matter of urgency to enable parties to assess their respective positions. 52 As foreshadowed, there are two bases upon which Mr Fowler seeks to impugn the orders made on 4 August 2009 approving the Schemes. While the notice of appeal, which has gone through several editions, suggests otherwise, senior counsel for Mr Fowler acknowledged that, if he succeeded on the first basis, namely, lack of power, the only appropriate order on appeal would be for the appeal to be upheld and the orders of 4 August 2009 set aside. However, in relation to the second attack on the Schemes concerning the priority payments, Mr Fowler contended that the appropriate order, if he were successful, would be for the orders of 4 August 2009 to be varied so as to approve the Schemes subject to alterations that would remove the provisions for priority payments of legal costs and to litigation funders, as contemplated by s 411(6) of the Corporations Act.

THE STATUTORY PROVISIONS 53 Before addressing the two bases upon which Mr Fowler seeks to impugn the approval of the Schemes, it is necessary to say something about the relevant provisions of Part 5.1 of the Corporations Act and other relevant provisions. 54 Under s 411(1), where a compromise or arrangement is proposed between a company and its creditors or any class of them, the Court may, on the application, in the case of a company being wound up, of the liquidator of the company, order a meeting or meetings of the creditors or class of creditors to be convened. Where the Court makes such an order, the Court may approve the explanatory statement required by s 412(1)(a) to accompany notices of the meeting or meetings. Under s 412, where a meeting is convened under s 411, there must be sent, with every notice convening the meeting that is sent to a creditor, an explanatory statement explaining the effect of the compromise or arrangement and setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors of the company and has not previously been disclosed to the creditors. At the hearing on 1 July 2009, the primary judge approved the Explanatory Statement described in some detail above. 55 The pivotal provision of s 411 is s 411(4), which provides that a compromise or arrangement is binding on the creditors, or on a class of creditors and on the company or, if the company is in the course of being wound up, on the liquidators and contributories of the company if, and only if, at a meeting convened in accordance with an order of the Court under s 411(1) the compromise or arrangement is agreed to by a majority in number of the creditors present and voting, being a majority whose debts or claims against the company amount in the aggregate to at least 75% of the total amount of the debts and claims of the creditors present and voting, or of the creditors included in that class present and voting, and the compromise or arrangement is then approved by order of the Court. Under s 411(6) the Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as the Court thinks fit. 56 Subdivision D of Division 6 of Part 5.6 of the Corporations Act deals with the payment of debts and claims proved in a winding up. Under s 555, except as otherwise provided by the Corporations Act, all debts and claims proved in the winding up rank equally. However, if the property of the company is insufficient to meet them in full, they must be paid proportionately. Section 556 provides for the payment of certain debts and claims in priority to all other unsecured debts and claims. For example, priority is given to expenses properly incurred by a relevant authority in preserving, realising or getting in property of the company and the costs in respect of an application for a winding up order. Section 556(1) sets out various other debts and claims that must be paid in priority to other debts and claims. The detail is not presently relevant.

POWER OF THE COURT TO APPROVE A SCHEME INVOLVING A RELEASE OF THIRD PARTIES 57 Mr Fowler contends that the effect of the Schemes is to confiscate the property of certain creditors, being claims that those creditors have against Merrill Lynch and ANZ, which are solvent and would be well able to meet such claims. He contends that releases of, and indemnities in favour of, Merrill Lynch and ANZ, in so far as they are effected by the Schemes, do not fall within s 411 of the Corporations Act. He says that a scheme may not bind a person who is a creditor of a company on account of that person's claim against a third party other than as a creditor of the company. All parties agreed that there was no binding authority that determined this issue, although there are a number of cases that have expressed views one way or the other that may cast some light on the resolution of the question. 58 Mr Fowler's argument developed so that, ultimately, it appeared to involve a number of steps. First, the authorities (including those relied on by the primary judge) indicated that inclusion in a scheme of a provision affecting a creditor's rights as against a third party did not mean that such a provision had binding effect by reason of the scheme and its approval by the Court. That is because, under s 411(4) and its predecessors, the binding effect relates only to the compromise or arrangement under s 411(1), being the compromise or arrangement between the company and its creditors. That is to say, a scheme can only bind a creditor in his or her capacity as a creditor and in no other capacity. 59 Mr Fowler contends that the decision of the primary judge represents a radical change because it is to the effect that the Scheme itself binds a dissentient creditor to the provision affecting the creditor's rights against a third party provided there is a sufficient nexus between the subject matter of the provision and the relationship between the company and the creditor. The fact that the Scheme does so by means of a provision that constitutes the Liquidators as the creditor's agent for the purpose of executing a deed is immaterial. He says that the effect is to replace an "objective" test of an arrangement between the company and its creditors in the capacity only or solely as creditors, with a "subjective" test of judicially determined "sufficient nexus". Such a radical change, he argues, raises questions of high policy and principle and should not be effected through a judicial decision but be left to the legislature. 60 Thus, Mr Fowler says, a scheme of arrangement or compromise under s 411 cannot affect interests other than interests of creditors qua creditor. While every compromise or arrangement is a bargain, not every bargain can be fairly described as a compromise or arrangement with creditors. It is necessary to consider whether a transaction is really and in substance of the nature of a compromise or arrangement with creditors (Isles v The Daily Mail Newspaper Limited (1912) 14 CLR 193 at 197). He says that the present Schemes effectively require some creditors to become contributories to the Scheme Companies through the contribution of the release of their causes of action against Merrill Lynch and ANZ. By doing so, he says, creditors are made debtors. The only arrangements that the Court has jurisdiction to sanction are those between debtor and creditor. Mr Fowler says that, as a matter of policy, s 411 does not authorise the Court to approve a scheme of arrangement purporting to be between a company and its creditors, the effect of which is to extinguish a right or confiscate property belonging to a creditor in some capacity other than the creditor's capacity as a creditor of the company. 61 Mr Fowler says that, when s 411 refers to an arrangement between a company and its creditors, the section speaks of a proposal, emanating either from the company or a creditor of the company, that some transaction between the company and the creditors should take place which, when agreed to by the majority referred to in s 411(4), at a meeting ordered by the Court and approved by the Court, subject to such alterations or conditions as the Court thinks just, will, to some extent, alter or modify the relationship between the company and its creditors in their capacity as creditors (see Bridges v Hershon [1968] 3 NSWR 47 at 55). Thus, Mr Fowler says, a scheme of arrangement between a company and its creditors can affect those creditors only in their capacity as creditors of the company (Re Buildmat (Australia) Pty Ltd (1981) 5 ACLR 689). 62 Secondly, Mr Fowler says, s 411 should not be given such an expansive effect as would follow from approval of the Schemes according to their terms. As a matter of policy, a non-debtor should not be the beneficiary of a release under a scheme of arrangement between the debtor and creditors. Mr Fowler points out that the desired effect of releasing Merrill Lynch and ANZ from claims by creditors of the Scheme Companies could be achieved by Merrill Lynch and ANZ propounding schemes with a class of their own creditors, being creditors whose claims arise out of dealings with the Scheme Companies. In such a case, of course, Merrill Lynch and ANZ would then be required to submit to the discipline of such schemes. He says that a compromise or arrangement should not be approved in respect of a company if the result desired from the compromise or arrangement can be achieved under another express power in the Corporations Act (Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485). In the present case, Mr Fowler says, the express power of the Corporations Act is s 411 itself. 63 Further, he points to the requirement to provide information under s 411(3)(b) that is confined to information within the knowledge of the directors of the company. In the present circumstances, that will be a limitation to knowledge of the directors of Scheme Companies or the Liquidators. There was no requirement for Merrill Lynch or ANZ to provide information to the Liquidators in connection with the Explanatory Statement required to be given to creditors with the notice of meeting. 64 Mr Fowler says that the failure of the Liquidators, as propounders of the Schemes, to make further inquiry as to the claims that creditors have against Merrill Lynch and ANZ, is an unusual and inapposite response of fiduciaries to claims held by certain of their beneficiaries. He says that the want of enquiry and understanding on the part of the Liquidators may constitute a fraud on their power to propound a scheme. If it should be found that the bargain was tainted with fraud, the arrangement would not be binding on non-assenting creditors. 65 For example, a bargain with some of the creditors to give them some particular benefit would be a fraud on the power, he says. If the majority of creditors were willing to give a debtor a discharge on the basis of a payment that was wholly disproportionate to the debtor's assets, that would be a fraud such that it would not bind non-assenting creditors. An arrangement made by the majority for motives of kindness and generosity to the debtor is as much outside the ambit of the power as if it were done to defraud the minority. Mr Fowler says that the indifference on the part of the Liquidators to the claims that creditors may have against Merrill Lynch and ANZ is a reason to decline to confirm or approve a scheme (see Isles v The Daily Mail Newspaper Limited at 204). 66 Doubtless there are limitations on the extent to which a scheme of arrangement purporting to be between a company and its creditors or a class of its creditors can purport to affect property of the creditor that has no connection with the company or the relationship of creditor and debtor between the creditor and the company. The mere fact that a person or entity is a creditor of a company would not, of itself, justify an arrangement between that person or entity on the one hand and the company on the other whereby property of the person or entity were confiscated without any benefit to the person or entity. Such an arrangement would not be approved by the Court pursuant to s 411(4)(b). 67 A purported scheme of arrangement must involve some arrangement in a sense that is to be construed liberally. No narrow interpretation should be given to the expressions "compromise" or "arrangement". An arrangement within the meaning of s 411 connotes some element of give and take. A proposal that conferred no benefit on creditors and constituted the mere confiscation of interests would not be an arrangement within the meaning of s 411. An arrangement must involve some bargain giving benefit to both sides. However, there is no reason to construe the term in s 411 as restricting in any way the nature of the bargain that might be made between company and creditors (Re Sonodyne International Ltd (1994) 15 ASCR 494 at 497-8), subject only to the additional requirement that the arrangement must be within the power of the company and not in contravention of the Corporations Act. 68 A scheme of arrangement between a company and its creditors or a class of creditors is no more than a proposal to vary or modify the company's obligations in relation to its debts and liabilities owed to the creditors or class of creditors. There is nothing to prevent the company from posing, as part of the arrangement, a term to the effect that, in consideration of what the company has provided under the scheme, the creditors will discharge not only the debts and liabilities of the company, but also the liabilities of, for example, sureties for the same debts and liabilities of the company. 69 It is permissible to incorporate in a scheme of arrangement an involvement or participation by an outsider, being a person or entity who is not a party to the scheme as a company or creditor (see Re Glendale Land Development Ltd (In liquidation) (1982) 1 ACLC 540). Such arrangements are commonplace in relation to schemes involving takeovers. A scheme of arrangement made between a company and its creditors under s 411 binds only the company and the creditors. Nevertheless, there is no reason why a bargain might not be struck between a company and creditors whereby the creditors are bound to enter into an arrangement with third parties. So long as there is some element of give and take, such that the creditors receive something in return for the benefit conferred on a third party, there is no reason in principle why that term could not be part of a scheme of arrangement as contemplated by s 411. 70 Questions of fairness, of course, are different. The contention advanced by Mr Fowler is that terms such as are presently in issue, being the requirement for creditors to give a release and indemnity to Merrill Lynch and ANZ, take the purported Schemes outside the concept of a scheme of arrangement that can be made binding on creditors who do not vote in favour of it, by the operation of s 411. 71 It is quite clear that the creditors of the Scheme Companies will receive significant benefit as a consequence of the release and indemnity in favour of Merrill Lynch and ANZ. Merrill Lynch and ANZ are contributing very substantial sums of money into the Scheme Fund in order to rid themselves of claims by the creditors and the Liquidators. The fund that they are providing is not apportioned between claims of Liquidators and the claims of creditors. While it may be difficult to do so, an apportionment would not be impossible and it is clear enough that some significant part of the sum of $226 million being provided by Merrill Lynch and ANZ represents contributions for the release of the claims by the creditors. Without that release and indemnity, the sum to be provided by Merrill Lynch and ANZ would be reduced in a not insignificant way. 72 There is simply no textual basis for the claim that a scheme cannot include a provision affecting the rights of a creditor against a third party and no basis for a gloss to that effect. All that is required is a compromise or arrangement between the company and its creditors. These Schemes are clearly between the Scheme Companies and their creditors. 73 There is also no principled basis for a restrictive approach. Provisions of s 411 are intended to provide a flexible mechanism to facilitate compromises and arrangements between insolvent companies and their creditors as an alternative to liquidation. If there is an adequate nexus between a release or indemnity, on the one hand, and the relationship between the creditor and the company, as creditor and debtor, on the other hand, there is no reason in principle why a scheme could not validly incorporate a release and indemnity such as is provided for in the Schemes. The claims against Merrill Lynch and ANZ that are released and are the subject of the indemnity arise out of dealings with the Scheme Companies. Thus, the claims of creditors against the Scheme Companies and the claims against Merrill Lynch and ANZ substantially overlap. The arrangement involves a settlement of claims that are significantly interrelated. Without the release, there could be no compromise or arrangement. 74 The primary judge concluded that the Court had power to approve the Schemes containing the provisions for release and indemnity. His Honour was correct in that conclusion.

LITIGATION FUNDERS AND LITIGATION COSTS 75 The Schemes involve the payment of a total of $11.5 million to litigation funders and for legal fees incurred by some creditors who have commenced proceedings against Merrill Lynch and ANZ. That aspect of the Schemes caused the primary judge some concern. The Liquidators considered that the justification for making those payments was that the bringing of the claims against Merrill Lynch and ANZ contributed to their decision to contribute the Cash Settlement sum of $226 million and to return to the Liquidators the assets still in the possession of the Receivers. The Liquidators say that, by paying the sum of $11.5 million to some creditors and the litigation funders, those creditors who have commenced proceedings and incurred expense will be put in the same position as all the creditors. 76 The primary judge recognised that the effect of the proposal was that money in the possession of the scheme administrators will not be distributed pari passu and that some creditors will receive an advantage at the expense of others. That is a departure from the method of distribution for an insolvent company under s 555. Ultimately, however, his Honour was satisfied that what is proposed is reasonable in all the circumstances. His Honour considered that, while the sum involved is not small, it is, in reality, only a small proportion of the funds available for distribution among creditors. If the amount were divided between creditors, each creditor would receive an additional 1.9 cents in the dollar, which represents an additional 5% of the interim dividend. 77 Mr Fowler contended that the proposed disbursement of the sum of $11.5 million in the manner proposed, involved a distribution that is unfair. His says that it is impermissible for the propounders of the Schemes to buy the votes of a particular group by giving preferential payment to them. Ultimately, however, it is a matter of the exercise of discretion. Mr Fowler did not point to any miscarriage in the exercise of discretion by the primary judge other than to assert that the proposed payments are unfair. His Honour considered that it was clear from the voting at the meetings that the creditors preferred to take what they would get out of the Schemes rather than face the uncertain risks and hazards of litigation. The requisite majority of the creditors accepted the payments, although, as Mr Fowler pointed out, it may be difficult to determine how many of those who do not actually benefit from the payments voted in favour of the Schemes. 78 There is no rule of law that requires that a fund to be distributed under a scheme of arrangement be distributed pari passu. Subdivision D of Division 6 of Part 5.6 contemplates priority in relation to certain costs and expenses. A possible characterisation of the payments totalling $11.5 million is that they are legitimate costs of the Schemes in that they contributed to the securing of funds from Merrill Lynch and ANZ that are now available to effect the compromise between the Scheme Companies and the creditors. The Liquidators concluded that the effect is simply to put those creditors who have incurred those costs in the same position as the creditors who did not incur those costs and who therefore did not contribute to the raising of the funds from Merrill Lynch and ANZ. That is a legitimate view. Whether and to what extent the commencement of proceedings by creditors compelled Merrill Lynch and ANZ to contribute the funds may be difficult to determine. However, it was a legitimate approach for the Liquidators to adopt. 79 It would doubtless be possible that another judge might take a different view. However, there is no basis upon which it can be said that the primary judge erred in the exercise of the discretion to approve the Schemes in the sense that his Honour failed to have regard to the appropriate principle. It was open to his Honour to conclude that, in the light of the majority of creditors who voted in favour of the Schemes, an intelligent and honest creditor, properly informed, acting alone, might approve the Schemes. That was the appropriate test of fairness and reasonableness (Re NRMA (2000) 34 ACSR 261). The reasonableness and fairness of a scheme is best judged by the creditors. There was no miscarriage of the exercise of discretion by the primary judge in accepting that contention from the Liquidators, as propounders of the Schemes, that the Schemes are fair to all creditors. There was no error on the part of the primary judge in failing to approve the Schemes without amendments, as contended by Mr Fowler. 80 It follows that Mr Fowler has not made out any basis upon which the Full Court should interfere with the exercise of discretion by the primary judge.

COSTS 81 The Liquidators, Merrill Lynch and ANZ asked for their costs of the application for leave and of the appeal. The Commission, while it was given leave to appear and be heard, did not ask for its costs. 82 Mr Fowler resisted an order for costs on the basis that the matter was of some considerable importance and that the aspect of the Schemes involving release and indemnities in favour of Merrill Lynch and ANZ was a novel and important issue for resolution. He says that, in those circumstances, there should be no order for the costs of the appeal. While such considerations may be appropriate to the exercise of discretion at first instance, there is no basis for departing from the usual order as to costs when the orders of the primary judge have been challenged without success. Accordingly, it is appropriate to order that Mr Fowler pay the costs of the other parties, other than the Commission. I certify that the preceding eighty-two (82) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Emmett, Gordon & Jagot.

Associate: Dated: 4 September 2009 Counsel for the Appellant: Mr CA Sweeney QC with Mr LW Maher

Solicitor for the Appellant: John M Barbouttis Solicitors

Counsel for the First Respondents: Mr C Scerri QC with Mr R Strong

Solicitor for the First Respondents: Mallesons Stephen Jaques

Counsel for ANZ Bank: Mr T Bathurst QC with Ms P Neskovcin

Solicitor for ANZ Bank: Allens Arthur Robinson

Counsel for Merrill Lynch: Mr N Hutley SC with Mr MH O'Bryan

Solicitor for Merrill Lynch: Blake Dawson

Counsel for Australian Securities and Investments Commission: Mr J Peters SC with Mr T Boston

Solicitor for Australian Securities and Investments Commission: Australian Securities and Investments Commission