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Judgment - ex tempore

1. By its Third Further Amended Interlocutory Process filed on 24 November 2016 the Plaintiff, The Dominion Insurance Company of Australia Limited (Subject to Scheme of Arrangement) ("Company") seeks orders convening a meeting of creditors of the Company to approve a modified scheme of arrangement between the Company and its creditors, orders providing for the dispatch of information to those creditors, and orders in a common form providing for the conduct of the meeting.
2. The background to the application reflects a scheme of arrangement which has continued, now, over many years, involving significant complexities. The present scheme administrator, Mr Weston, took up his position after the death of the earlier scheme administrator. The history of the matter is set out in the affidavits of Mr Weston dated 30 April 2013, 18 November 2016 and 15 February 2017 which are relied on in this application. The history of the Company's administration has also been reviewed and the terms of the existing scheme in respect of the Company set out, in considerable detail, in the judgment of Brereton J in Re Dominion Insurance Company of Australia Limited (Subject to Scheme of Arrangement) [2013] NSWSC 898; (2013) 276 FLR 338. I will not repeat the observations his Honour has already made in respect to the history of the matter or the terms of the scheme as it presently subsists.
3. Difficulties have emerged in respect of the administration of the scheme, in its present form, which are summarised in Mr Weston's evidence in support of the application, and in the terms of a proposed explanatory statement which is proposed to be sent to creditors in respect of the meeting to approve a further scheme. Those difficulties reflect the complexity of the original scheme; the passage of time; and the fact that Mr Weston, when appointed as scheme administrator, was provided with relatively limited material as to matters arising in the complex steps involved in the administration of the scheme. The particular difficulties which now exist, as identified in the proposed explanatory statement, include the fact that the present scheme provides for creditors identified as Class B creditors (who are broadly speaking creditors with insurance arrangements with the Company) to receive the full amount of their admitted claims against the Company, and does not contain any mechanism to provide for the position where such creditors cannot be identified or located. Not surprisingly, given the time for which the scheme has been in place, there are now many creditors falling within that category which no longer exist, because, for example, they have been deregistered, or which are no longer identifiable, and there are also persons who, in the past, have been provided with payments under the scheme and have not deposited those payments, creating an inference that they were not at the address to which those payments were sent. The draft explanatory statement rightly points to the difficulties which Mr Weston will face in concluding the scheme where dividends cannot be paid to persons who are Class B creditors, where Mr Weston is unable to locate a current address for them, and where the present scheme does not provide a power to exclude them when they cannot be identified or located. The potential difficulty is obvious, that the scheme simply cannot be brought to completion if persons cannot either be paid or excluded from it when they cannot be paid.
4. The draft explanatory statement also points to the difficulty which arises so far as the current scheme is a relatively complex structure involving a combined fund and two separate funds, from which payments are to be made, but Mr Weston was not provided with information from which it can be determined which parts of the funds he holds are held in the particular funds, or to allocate payments in respect of the scheme between those funds. A third difficulty is that, for reasons which are presently unclear, the scheme was structured so as to be of indefinite duration, and it is difficult to see the utility of the continuance of the scheme, once all payments contemplated by it have been made.
5. Mr Weston has formed the view, which seems to me to be plainly reasonable, that the preferable course is for the Company to enter into a new scheme of arrangement which is capable of being implemented, given the information presently available to him, and which will provide for the scheme to terminate after it has been implemented. The new scheme also makes other changes, including a change as to priority between Class A and Class B creditors, which appears to be directed to addressing developments in the time that has passed. The change in priority is, as Mr Glasson, who appears for the Company, points out, likely to be of limited practical significance, where Mr Weston's present anticipation is that all creditors in both classes will be paid in full. That change may well be justified, as a practical matter, because the existing scheme contemplated a top up by reinsurers, in respect of Class B creditors who ranked in priority first but were to be paid second, and such an arrangement is likely to be very difficult to implement, in respect of the reinsurers, given the number of years that have now passed since the arrangement was implemented. In any event, as I have noted, that change may well be of limited practical significance, where questions of priority have lesser weight where the amounts available are likely to be sufficient to meet the claims of both classes of creditors. The other significant change to be made is to introduce, in respect of Class B creditors, a provision for exclusion of creditors, particularly where they cannot be located, which did not exist in the earlier scheme, but which is now likely to be practically necessary, given the matters to which I have referred above.
6. The approach which Mr Weston proposes to adopt, of convening a new scheme meeting to consider the new scheme, reflects a recognition that the Court lacks the power, once a scheme has been approved, to implement variations of the kind that are now sought to be made. That limitation to the Court's power was recognised, for example, In Re Forklift Sales (SA) Pty Ltd (1972) 3 SASR 21, to which Brereton J in turn referred, with approval, in Re Dominion Insurance Company of Australia Limited (Subject to Scheme of Arrangement) above at [20]. The proper course, where a scheme needs to be amended after it has been voted on by members and approved by the Court is, as Brereton J noted in that case, that which Mr Weston proposes to adopt, to submit a new scheme containing the relevant amendments, initially to the Court so that a meeting of creditors can be approved, then to creditors for their approval, and then to have that scheme placed before the Court for final approval at a second court hearing in the usual way.
7. The task which the Court faces in this application is to determine whether the new scheme, which is sought to be introduced in replacement for the existing scheme, is one that can properly be submitted to creditors for their approval. Mr Glasson draws attention to the helpful decision of Lindgren J in Re NRG London Reinsurance Company Ltd and NRG Victory Australia Limited and the Corporations Act 2001 [2006] FCA 872; (2006) 58 ACSR 674, where his Honour set out the matters which would be relevant in such an application. The first is that all reasonable steps have been taken or will be taken to identify scheme creditors and bring the proposed schemes to their attention. Mr Weston sets out, at some length, the steps which have been taken, at least since his appointment, to identify scheme creditors. It is plain that a significant amount of the necessary work would also have been undertaken prior to Mr Weston's appointment, although he has incomplete records in that regard. Mr Glasson fairly points out that the extent of "reasonable steps" is a question of judgment, and it is possible that additional steps could be taken to identify, or possibly identify, additional creditors. As Mr Glasson points out, it is possible that steps could be taken to determine whether a creditor who has not responded to correspondence has died, and seek to identify his or her executors and, given the time that has passed, possibly the beneficiaries, of that creditor. It seems to me, however, that creditors considering the new scheme might well take the view that, given the time that has passed, and the efforts that have been taken to identify creditors to date, the likely return from such inquiries would not be supported by the costs and delay that would be incurred in making them. It is relevant that the continuance of a scheme over an extended period will itself cause erosion of the value to be distributed. In those circumstances, it seems to me that creditors might well take the view, acting fairly and reasonably at a scheme meeting, that the steps which have been taken to date are sufficient, and that no further steps could sensibly be taken in the relevant circumstances. I am satisfied of that matter, so far as the Court needs to form that view to order that the meeting be convened.
8. Second, the Court will consider whether the explanatory statement for the proposed scheme provides an adequate description of its effect and otherwise complies with s 412 of the Corporations Act 2001 (Cth). The explanatory statement that is proposed to be delivered to creditors seems to me to provide a clear explanation of the difficulties which presently exist in the implementation of the scheme, and the changes which are proposed to be made between the existing scheme and the new scheme, and complies with that requirement.
9. Third, the Court should be satisfied that the manner in which the proposed new scheme will operate is not so clearly unfair and unreasonable that it should not be allowed to go forward for consideration. It seems to me that that requirement is satisfied, where the changes sought to be made to the existing scheme reflect the difficulties of implementation of the scheme in its present form. In particular, so far as the new scheme would introduce a provision for exclusion of creditors in Class B who could not be located, that is an extension of a provision in the existing scheme in respect of Class A creditors, and it seems to me that there is nothing clearly unfair or unreasonable about it, particularly given the time for which the existing scheme has been on foot.
10. Fourth, the Court will give consideration to whether there can be a single meeting of all of the scheme creditors of the scheme company, as distinct from meetings of classes of scheme creditors. In NRG London Reinsurance Company Ltd, Lindgren J gave a typically lucid explanation of the circumstances in which the Court would order separate classes of creditors and pointed to the fact that courts have historically been reluctant to order separate classes of creditors, and would generally only do so where there is no community of interest, such that the creditors can consult with each other so as to determine whether the scheme should be approved: see also, for example, Re Hills Motorway Ltd [2002] NSWSC 897; (2002) 43 ACSR 101; Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; (2006) 57 ACSR 791 at [63]. It seems to me that it is appropriate to convene a meeting of one class of creditors in this case, notwithstanding that Class A creditors are trade creditors and Class B creditors are insurance creditors, where the whole of the relevant arrangements of the companies are subject to the present scheme, the scheme has already been in place for a considerable period, creditors have already received significant distributions under the scheme, and it is contemplated that creditors in both classes are likely to be paid in full. It does not seem to me that there is anything disclosed by the present evidence to suggest that scheme creditors could not consult with each other, in order to determine whether to approve the scheme, or that any issues arising from different views of classes of creditors could not be addressed by the usual and desirable practice of maintaining records of the voting of each class of creditor, so that any issues as to different views taken by those classes of creditors, or different percentages of creditors in those classes approving the relevant scheme, may be drawn to the Court's attention at the second scheme meeting.
11. As Lindgren J noted in Re NRG London Reinsurance Company Ltd above, the Court will also have regard to the way in which the value of scheme creditors' claims are determined for the purposes of voting, and whether that is fair and reasonable. It does not seem to me that any issue arises in respect to this scheme causing difficulty in that respect.
12. The Court will consider whether the proposed scheme complies with the requirements of other provisions of the Corporations Act, including the requirement under s 411(2) of the Act that fourteen days' notice of the hearing of the application has been given to the Australian Securities and Investments Commission ("ASIC") and that it has had a reasonable opportunity to examine the proposed schemes and explanatory memorandum and to make submissions to the Court in respect of it. The Company has provided the relevant materials, including the proposed explanatory statement, to ASIC which has confirmed that it has had a reasonable opportunity to examine them and does not seek to be heard in respect of the application today. ASIC has consistent with its usual practice, reserved its position in respect of the second hearing.
13. Finally, Lindgren J drew attention to the desirability of the Australian Prudential Regulation Authority ("APRA") having had a reasonable opportunity to examine the documents. In this case, the relevant documents have not yet been provided to APRA, although that is perhaps not surprising where the existing scheme has been in place for many years, the changes that are sought to be made are directed to the practical implementation of the existing arrangements, and the insurer has not been conducting an insurance business for many years. Having said that, Mr Weston fairly recognises that it is likely to be desirable that APRA have an opportunity to review these documents, even if it is unlikely that it will take a different view from the view that ASIC has taken in this respect, where it is not apparent that the changes proposed would have any prudential or other regulatory implications. In those circumstances, the Court should deliver judgment, as I have done, addressing the issues of principle which arise in respect of the application, but the making of orders will be deferred until APRA has had an opportunity to review the relevant material and consider its position.
14. I am satisfied, having regard to the evidence that has been led in this application, that the new scheme is one which can properly be put to creditors for their approval. I am satisfied that the Court could, on the material before it, properly approve the sending of an explanatory statement, together with the material which is proposed to be sent with it, in or substantially in the form of the documents which have been put before the Court. The process which is proposed to be adopted for sending material to creditors reflects the provision in s 412(2) of the Corporations Act, for dealing with creditors who have admitted claims in amounts of greater than $200, who will be sent a copy of the explanatory statement, or less than $200, who will be provided with information as to how to obtain the copy of the explanatory statement if they wish to do so. That course is both contemplated by s 412 of the Corporations Act, and is sensible in avoiding waste of costs of dispatching material to creditors with claims in modest amounts, who may be less likely to wish to read that material in full.
15. An order is also properly sought under s 411(7) of the Corporations Act which would permit Mr Weston to be appointed to administer the new scheme, if it is approved by members and approved by the Court at the second Court hearing. That order is necessary, since Mr Weston may have existing claims against the Company, by way of remuneration, such that he would not be entitled to be appointed, without leave of the Court, as scheme administrator of the new scheme. The Courts have, in many cases involving, for example, the retirement of liquidators, recognised the advantage to be gained by familiarity in matters of this kind, and that advantage is substantial in this case where this scheme has a long history and substantial complexities. Accordingly, I would grant leave under s 411(7) of the Act for Mr Weston to be appointed to administer the new scheme, if it is ultimately approved and entered into, to avoid the waste of costs which arise if a new scheme administrator were to be appointed to that scheme.
16. In these circumstances, I can indicate that, absent any developments of substance between now and any relisting of the matter, the Court would order the proposed meeting of the creditors of the Company, approve the explanatory statement for dispatch to creditors, and make the other orders in the form sought by the Company. However, I will defer making those orders until relevant information has been provided to APRA and it has had an opportunity to indicate its position. The only orders which I need make at this stage are therefore:
17. Grant leave to the Plaintiff to approach the Associate to Black J in chambers, advising of the outcome of any communications with the Australian Prudential Regulation Authority, and submitting orders to be made in Chambers.
18. List the matter for further directions at 9.30am, 22 March 2017 before Black J.
19. The exhibits may be returned, on condition that they be retained by Mr Weston or his legal representatives pending the completion of the present scheme or any new scheme which may be approved.