FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd

FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd - [2010] FCA 33 - FCA 2010 case summary — Zoe

[9]

7 At the hearing on 29 January ASIC did not formally oppose or support CSR's application for orders convening the Scheme meeting nevertheless, it made detailed oral and written submissions concerning factors that the Court should consider in addressing the issue. At the hearing much was said about the proper role of the Court at the first hearing. Different views were put as to the extent to which the Court should consider the details of a scheme, and the issues on which it was necessary for the Court to be satisfied before making orders for convening a meeting. In my respectful view the applicable principles are those summarised by Emmett J in Re Central Pacific Minerals NL at [8] - [11]: Those principles require that the Court will not convene a meeting unless the arrangement proposed is of such a nature and is cast in such terms that, if the arrangement receives approval by the statutory majority at the relevant meeting, the Court will be likely to approve the arrangement on the hearing of any application that is unopposed. At the stage of convening a meeting, the Court will give consideration to compliance with such preliminary matters as are relevant to the holding of the meeting. Of paramount importance at that stage is the need to ensure that there will be sufficient disclosure, to those who will be affected by the arrangement, of its details and effect. The Court will also need to be satisfied, at that stage, that there has been reasonable opportunity for the Commission to examine the terms of the arrangement. In exercising its discretion whether to convene a meeting, the Court will have regard to such matters as the acceptability of the documentation of the proposed arrangement, the commercial viability and morality of the arrangement, the likely acceptability of the arrangement, the bona fides of the proposals, whether the proposals could be achieved by another method and any objections or submissions by the Commission. It is always the practice of the Court, at the first stage, to go through the proposed arrangement, to raise matters as to the drafting of the documentation, to ascertain whether the arrangement complies with the substantive requirements of the law and to ensure that the arrangement, if given effect, will not involve any unfair or oppressive result. In considering whether to convene a meeting, the Court will take into account questions of public policy as well as commercial morality. The Court will have regard to the interests of parties who will be bound by the arrangement and who might be careless of their own best interests. While security holders of a company may be considered to be better judges than the Court could be of what is to their commercial advantage, that does not extend to the technical or mechanical aspects of an arrangement. Security holders are likely to be influenced largely by their understanding of the broad economic consequences of an arrangement. However, they are entitled to rely on the Court's approval as a sufficient safeguard against defects at the technical or mechanical level. Accordingly, for the purposes of protecting the interests of security holders who have not agreed to an arrangement and yet will be bound by it, the Court will ordinarily seek to ensure that the terms of the arrangement would be enforceable by all persons bound by it against those who are seeking to implement it or obtain benefits from it. The Court will also seek to ensure that the arrangement does not, without sufficient reason, include provisions that may create inroads upon or modify the benefits that a security holder bound by it might legitimately expect to obtain under it. The mere fact that the Court has convened a meeting does not, however, necessarily mean that the Court will approve the arrangement, even if the arrangement is unopposed at the third stage.

[13]

(a) is fair and reasonable to the company's shareholders as a whole; and (b) does not materially prejudice the company's ability to pay its creditors; and (c) is approved by shareholders under s 256C. As the written submissions for the plaintiff point out, a creditor who disagrees with a proposed capital reduction under s 256B would be entitled to commence proceedings to restrain it or to have it declared unlawful. 12 While correct, these submissions ignore the very important fact that while the proposed capital reduction may not formally be part of the Scheme, it is a condition precedent to the Scheme that the CSR shareholders pass the "Capital Reduction Resolution". That Resolution is to be put to shareholders at a general meeting of CSR to be held immediately following the Scheme meeting. If the resolution is not passed the Scheme will not take effect. 13 In the written submissions made on behalf of AICF much was made of the need to ensure that the proposed capital reduction did not breach s 256B. In particular AICF submitted that "creditor" within the section includes persons who have been exposed to asbestos but (as yet) show no manifestation of disease and persons who have not yet been exposed to asbestos but will be exposed to it in the future. I do not propose to pursue that line of analysis. I accept CSR's submission that to do so would be "to re-create a statutory regime of court approval for capital reductions that has been expressly abrogated by Parliament". 14 This does not, however, preclude consideration of the effect of a proposed capital reduction which, as a matter of substance if not form, is part of a Pt 5.1 scheme of arrangement. Given that nexus, it is entirely appropriate for the Court to consider the impact of the proposed capital reduction on asbestos claimants. While I do not believe that the issue is one that arises under s 256B, I am satisfied that as a matter of public policy, commercial morality and fair disclosure to shareholders it should be considered in the context of the Scheme.

[16]

17 ASIC's general practice is not to appear at a first court hearing unless it has concerns about an aspect of the scheme. In its written submissions ASIC has expressed concerns about the effect of the proposed capital reduction on asbestos claimants: ASIC's concern arises because the proposed scheme of arrangement will split the assets of CSR, in circumstances where only the assets of New CSR would be available to meet current and future asbestos liabilities of CSR. In its financial statements for the half year ended 30 September 2009 CSR has recognised a provision of A$446.8 million for current and future asbestos liabilities. This comprises 10% of CSR's total assets as at 30 September 2009 but, based on the pro forma balance sheet produced by CSR as at 30 September 2009, would comprise 18% of New CSR's assets at that date. As a general proposition asbestos claims raise difficult issues for ASIC and the Court in considering applications under s.411 of the Act. The distinguishing features of such claims compared with other claims of creditors are: i. Their extraordinary long term nature (generally in the period of 20 to 50 years); ii. The number and spread of such claims; iii The fact that at any given point in time persons can be "affected" by exposure to asbestos at a significant time in the past but they will not manifest symptoms for some time into the future; iv. The concomitant uncertainty surrounding their estimation; and v. The social costs that they impose especially if for some reason the party that is legally responsible for their occurrence does not have the means to pay. The nature of the uncertainty involved is illustrated by considering the provisions made for asbestos claims in CSR's accounts for the period of 4.5 years from 31 March 2005 to 30 September 2009. They increased from A$318.4m at the start of the period to A$446.8m at the end. This occurred even though CSR's asbestos activities apparently ceased in Australia in the 1970's and the USA in 1966 and notwithstanding that in those 4.5 years A$150.4 million in claims payments and costs were made. These were amounts that should have been encompassed by the 30 March 2005 provision.

[25]

27 There can be no doubt that, as the Grant Samuel report acknowledges, any reduction of a company's capital reduces its capacity to meet the claims of creditors. In itself that does not indicate any unfairness or conflict with public policy. Nor, as a practical matter, does it necessarily pose a material risk to creditors. In oral submissions however, Mr Meagher SC, who appeared for AICF, drew my attention not only to the conclusion quoted in [23] but also to the following passage in the penultimate paragraph of the Grant Samuel report: The ability of New CSR to continue to pay its creditors, including asbestos related claims in the future will depend on future economic conditions and future decisions by the board of New CSR. There is also a risk that payments for asbestos related claims will increase in the future. As is the case with CSR prior to the Proposed Demerger, there can be no guarantee that New CSR will be able to continue to pay its creditors, including future asbestos related claims or that the payment of future asbestos related claims will not have a material adverse impact on New CSR. 28 There is, of course, never any guarantee that a company will be able to pay its future creditors. This is equally true of CSR before the demerger as of New CSR after demerger. Nevertheless, I do not accept that the position of future asbestos claimants is to be equated with every category of current and future creditor of New CSR. Their interest arises not from some future dealing with CSR but from their involuntary exposure to asbestos products supplied by CSR before demerger even if, in some cases, exposure does not occur until after demerger. 29 Whether New CSR is likely to be able to meet the claims of future asbestos claimants is of interest not only to those claimants but also to shareholders in CSR who are being asked to approve the Scheme and the proposed capital reduction. The effect of those claims on the ongoing business of New CSR is a necessary matter for disclosure to the shareholders. Before making orders convening the Scheme meeting the Court must be clearly satisfied that there has been proper disclosure in the explanatory statement. 30 It would appear that between 17 December 2009 and the first court hearing on 29 January 2010 there was an active conversation between CSR, ASIC and ACIF and their respective expert advisors. It is not for the Court to adjudicate between the expert advisors and determine whose is the better view. The critical issue that emerges from a review of the reports is that there is considerable uncertainty as to the conclusions about New CSR's provision for asbestos claimants after demerger. As Mr Beech-Jones SC who appeared for ASIC observed, the significance of the expert material, in particular the Ernst & Young reports, is that it teases out the uncertainties and limitations in the reports relied on by CSR. It is the dispute that is significant not the resolution of it.

[26]

31 It is not possible to give detailed analysis of the confidential reports, however, the flavour of the debate is reflected in submissions made on behalf of those commissioning the various reports. For example, the written submissions for ASIC contain 12 pages of detailed analysis of the actuarial material concerning asbestos liabilities and financial stress testing. The submissions analyse the CSR actuarial material including the expert reports and advice provided by Taylor Fry and Navigant, the expert reviews of that material by KPMG and Ernst & Young as well as the response of the CSR advisers. The submissions set out ASIC's conclusions in relation to the actuarial material as follows: First it is self evident that there is considerable uncertainty surrounding any process of actuarially assessing future asbestos liabilities. Notwithstanding that CSR ceased involvement in asbestos related activities in 1977 both [Taylor Fry] and Navigant have continually being [sic] revising their central estimates upwards from 2004 based on new information that emerges. Second, as described above, there are limitations on the scope of the actuarial assessments which have the potential to under estimate the overall valuations. Third, within the actuarial assessments there are significant matters of judgement over which reasonable minds may differ and which have considerable potential to adversely and materially affect the valuations. This is exemplified by the differences in professional opinion between KPMG and Taylor Fry in relation to both the central estimate and the 95th percentile estimate of the Australian liabilities. Fourth, ASIC submits that in determining this application the Court need not embark upon the task of determining which expert is "correct" or to be preferred. Instead it should note the differences of professional opinion but, in the context of determining the application based on the approach outlined above, it should afford significant weight to the views expressed by KPMG at least so far as they affect the 95th percentile estimate provided by [Taylor Fry]. KPMG have significant expertise in the area and they have provided a detailed rationale for their opinion on these issues. Their views at least so far as they affect the 95th percentile estimates are supported by [Ernst & Young] and, in some limited respects, by Finity.

[28]

33 CSR's submissions in reply make the following comments about the submissions made by ASIC: In its written and oral submissions, ASIC … sought to stress the uncertainties and limitations inherent in actuarial analyses of future events. Such a submission should not be taken too far. By definition, any assessment of possible future events involves uncertainty and any attempt to actuarially assess such events will be subject to limitations. As the Court noted in argument, such uncertainties and limitations are equally applicable to CSR in its current structure as they are to CSR post-demerger. Provided that the advice provided to the CSR Board has been shown to be reasonable, the fact that the advice is subject to uncertainties does not warrant a conclusion that the advice should be rejected or lacks persuasive force. Further, … the doubts and uncertainties and the differences between the actuarial experts are of no relevance in circumstances where CSR's analysis has taken account of the full range of actuarial opinion. Cash outflows associated with the asbestos-related claims have been projected having regard to all "reasonable hypotheses". Further, no party has sought to demonstrate a flaw in the other principal aspects of that analysis, namely the projection and "stress testing" of future cash inflows from CSR's de-merged business operations. That aspect of the analysis has been reviewed by PWC. It has also been reviewed on behalf of ASIC by [Ernst & Young] without unfavourable comment. In the light of the above, and as there is no correlation between risks attending the projected business cash inflows and the risks of under-estimation of the asbestos related cash outflows, the analysis provides a very high level of comfort that asbestos claims will be met. ASIC's submissions should be read with this in mind. Its submissions are open to the criticisms that: · they fail to reflect the conclusions of their own expert; · they place undue focus on limitations and uncertainties that no actuary (including KPMG) can avoid without regard to the conclusions ultimately stated by the experts; · they overstate the significance of the limitations and uncertainties … 34 In addition to these criticisms CSR made detailed submissions in tabular form responding to the submissions made by AICF. Those submissions confirm that there is a genuine dispute between the experts as to the appropriate way to assess New CSR's ability to meet future asbestos claims. The submissions made on behalf of James Hardie echoed the submissions of ASIC and AICF as well as making some additional criticisms of the provision made for New CSR to meet future asbestos claims.

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