Section 600A(1)(c)
24 Section 600A(1)(c)(i) provides that, before the Court can exercise its discretion to grant any relief under s 600A, the Court must be satisfied that the passing of the proposed resolution or the failure to pass it, as the case may be, was contrary to the interests of the creditors as a whole.
25 In DSG Holdings Australia Pty Ltd v Helenic Pty Ltd (2014) 86 NSWLR 293 (DSG), Leeming JA (with whom Meagher JA and Bergin CJ in Eq agreed) said (at 312-314 [83]-[95]):
… The argument at first instance and in this Court turned upon the third precondition, in s 600A(1)(c), to the availability of power under s 600A(2).
84 Section 600A(2) thereby confers a discretionary power upon the Court, only if the Court is first satisfied of either of the two matters in s 600A(1)(c). The first step involves an evaluative exercise of broadly worded language: "contrary to the interests of the creditors as a whole" and "unreasonable prejudice to the interests of creditors". The second step involves the exercise of a discretion.
85 The state of satisfaction in s 600A(1) is jurisdictional, for in its absence there is no power available under s 600A(2); Barrick Australia Ltd v Williams [2009] NSWCA 275; 74 NSWLR 733 at [26]. Although that state of satisfaction involves the making of multi-faceted value judgments, it is a question of objective fact: cf Singer v Berghouse (1994) 181 CLR 201 at 211. Strictly speaking, it is not discretionary - either the Court is satisfied, or it is not: Foley v Ellis [2008] NSWCA 288 at [3]; Finch v Telstra Super Pty Ltd [2010] HCA 36; 242 CLR 254 at [29].
86 These considerations inform what is required when an appeal by way of rehearing is brought from the exercise of power under s 600A(2). Very little attention was given to this in submissions in this Court, nor did the reasoning of the primary judge disclose separate consideration of the s 600A(2) discretion. Strictly, it might be thought that the jurisdictional finding pursuant to s 600A(1) is reviewable in accordance with the principles reflected in Warren v Coombes (1979) 142 CLR 531, while review of the exercise of discretionary power pursuant to s 600A(2) is subject to the principles in House v The King (1936) 55 CLR 499. However, here as elsewhere, it is unlikely that anything will turn on this (see eg Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 at [40]). The amended notice of appeal was drafted and the hearing proceeded on the basis that appellate intervention was restricted to review of discretionary decisions, because of the obvious link with the discretionary power conferred by s 600A(2): see DAO v The Queen [2011] NSWCCA 63; 81 NSWLR 568 at [93]; Andrew v Andrew [2012] NSWCA 308; 81 NSWLR 656 at [6] and [42] and Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [22]. I will proceed on that basis, although it will be clear from what follows that if Warren v Coombes applied, the outcome and essential reasoning would remain the same.
The terms of s 600A(1)
87 The following propositions flow directly from the terms of s 600A(1). First, there are two possibilities by which the passing of a resolution can engage the subsection: (i) that it is contrary to the interests of creditors as a whole, or (ii) that the prejudice or likely prejudice to the interests of creditor dissentients is unreasonable having regard to certain factors. It follows immediately that there may be prejudice to the interests of the class of creditors who voted against the resolution but which falls short of unreasonable prejudice. In that event the curial power to override the decision of the meeting will not be enlivened. As Martin CJ said in Ravenswood Resort Pty Ltd (in liq) v Kammal [2006] WASCA 217; 60 ACSR 507 at [27], mere prejudice to those voting against the resolution is not sufficient. The same point was made by Austin J in Portinex at [137]:
"Pt 5.3A clearly contemplates that the wish of an individual creditor may be overridden, and permits related creditors to take part in the decision to do so, subject to s 600A."
88 Secondly, the onus lies upon the applicant to make out the elements of s 600A: Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 at 548; Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; 45 ACSR 612 at [308]; TNT Building Trades Pty Limited v Benelong Developments Pty Limited (administrators appointed) [2012] NSWSC 766; 91 ACSR 17 at [11].
89 Thirdly, the provision applies to creditors who were creditors when the resolution was passed. Barrett J regarded this as "plain" in Hoath v Comcen Pty Ltd [2005] NSWSC 477; 53 ACSR 708 at [18], and the primary judge agreed at [175]-[176]. As much was, rightly, common ground between the parties. (That said, as noted above, relevant to the exercise of discretion for which DSG and Bicheno apply under s 447A is the fact that the numerical majority of creditors who voted on 2 September 2013 are no longer, in 2014, creditors who will be bound by the varied proposal which DSG and Bicheno wish to have RAPL execute.)
90 Fourthly, the section focusses on "the interests of the creditors". The "interests of the creditors" twice used in s 600A(1)(c) is to be construed as identical in substance to the "creditors' interests" required to be addressed in the opinions required by s 438A to be formed by an administrator, and the s 439A statement by an administrator to creditors. The purpose of that investigation and the report to creditors is to permit them to make an informed choice. Where (as will usually be the case) the company is found to be insolvent, the choice is likely to be between winding up or accepting a compromise on the basis of which the steps in the deed of company arrangement may be implemented.
91 Fifthly, "the interests of creditors" falls to be construed in such a way as would best promote the express object of Pt 5.3A (the effect of s 5C(2) and (3) is that the purposive construction required by the form s 15AA of the Acts Interpretation Act 1901 (Cth) took prior to 27 June 2011 applies, but nothing material turns on the difference for present purposes). The express object of Pt 5.3A is contained in s 435A:
"435A Object of Part
The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company."
92 The section is to be construed harmoniously with other related provisions in the Act. In particular, a deed of company arrangement may be terminated pursuant to s 445D(1)(f) if it is "oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more [creditors of the company]" or "contrary to the interests of the creditors of the company as a whole". That section repeats the interests of the creditors as a whole, but introduces a category of oppression or unfair prejudice to or unfair discrimination against any particular creditor or group of creditors.
The interests of creditors as creditors
93 Sixthly, and consistently with all of the foregoing, and critical to the resolution of these proceedings, it has been said that it is the interests of creditors as creditors to which regard must be had.
94 Lindgren J, whose views command great weight in a matter of this nature, said in Federal Commissioner of Taxation v Wellnora Pty Ltd [2007] FCA 1234; 163 FCR 232 at [211]:
"It is the interests of the company's creditors as creditors with which an administrator must be concerned. Accordingly, if it appeared to an administrator that a proposed DOCA would be in the interests of certain creditors in a different capacity, such as the capacity of directors, it would be impermissible for the administrator to support the proposed DOCA by reference to those interests."
(Emphasis in original)
95 Lindgren J's statement of principle also reflects the legislative recognition that the creditors can and must vote in a single class, in contradistinction with what occurs in a creditors' scheme of arrangement. The uniting characteristic they share is the debt owed to them by the company. The only relevant interest they have at the meeting is the timing and magnitude and risk attending to their having some of their debts being repaid, and, in some cases, the desirability of continuing to provide goods or services to the company.
26 At 315-316 [99]-[102], his Honour also said:
99 It does not follow from the foregoing that the examination of prejudice is limited to a comparison of the expected returns under the proposed deed of company arrangement as opposed to winding up. A trading outcome may be preferable for the creditors as a whole, which is something which would further the first purpose stated in s 435A. In order to achieve that outcome, it is well recognised that it may be necessary to permit some differentiation. In Re Cancol Ltd [1996] 1 BCLC 100 at 119, Knox J said there was no unfair prejudice in an arrangement which gave different creditors a differential outcome, in circumstances where the distinction appeared to be "a realistic and commercially sensible one".
100 The position was summarised by Lightman J in IRC v Wimbledon Football Club Ltd [2005] 1 BCLC 66 at [18]:
"[18]… [D]epending on the circumstances, differential treatment may be necessary to ensure fairness (see Cazaly Irving Holdings Ltd v Cancol Ltd [1996] BPIR 252 at 269-270 and Sea Voyager Maritime Inc v Bielecki [1999] 1 BCLC 133 at 148-149, 154, [1999] 1 All ER 628 at 642-643, 647); and (I would add) ... differential treatment may be necessary to secure the continuation of the company's business which underlies the arrangement: (consider Re Business City Express Ltd [1997] 2 BCLC 510)."
101 That accords with the differently worded Australian requirement for "unreasonable prejudice", and is consistent with this Court's concern in Khoury v Zambena Pty Ltd at [74] with the absence of any "rational explanation for the different treatment of participating creditors" and the acknowledgement in [105] that "an arrangement under Part 5.3A may discriminate between creditors or classes of creditors; but nevertheless it ought to deal fairly with the interests of creditors of the insolvent company".
102 There may be difficult cases where the risks and delay are large, but so too is the potential for a greater return. There may also be difficult cases where there is little to choose between a deed of company arrangement and winding up: Grocon Constructors Pty Ltd v Kimberley Securities Ltd [2009] NSWSC 541; 72 ACSR 305 at [84]. However, most commonly difficulties will arise when regard is had to the divergent interests some but not all creditors have in continuing to maintain a trading relationship with the company. In such cases the qualitative analysis entailed by the statutory requirement of unreasonable prejudice may require a process of weighing and balancing many competing, and indeed incommensurate, considerations: cf Ravenswood at [28]-[30]. However, contrary to the tenor of the submissions of Bicheno and DSG, I would not read those paragraphs of Ravenswood to mean that a lengthy, wide-ranging examination is called for in every case under s 600A(1)(c)(ii). It cannot invariably be necessary to examine the consequences which the passage of the resolution would have on the other creditors, or the liquidator, or the public interest, although that is not to say that those matters are always foreign to the assessment of unreasonableness. But there will be cases, of which the present is one, where the financial disadvantage to the creditors voting against the proposal is so substantial, and certain, that it amounts to prejudice which is unreasonable.
27 I agree with his Honour's exposition of s 600A(1)(c) and s 600A(2) of the Act and propose to apply his Honour's observations in the present case.
28 As submitted by the defendants, the dividend payable under the scenarios being compared, while frequently central to the Court's consideration, is not always the sole or most important consideration.
29 In Ravenswood Resort Pty Ltd (In Liq) v Kammal (2006) 60 ACSR 507 (Ravenswood) at 514 [28], Martin CJ in the WA Court of Appeal (with whom McLure and Buss JJA agreed), said (in respect of s 600A(1)(c)(ii)):
But in addition to taking account of those two specified factors, the court must, before exercising the powers conferred by the section, arrive at the conclusion that the prejudice which has been suffered or is reasonably likely to be suffered, is "unreasonable". Two conclusions seem to me to flow from the adoption of that criterion by the legislature. The first is that the evaluation of prejudice, to be undertaken by the court, is a qualitative process in which the nature, degree and extent of the prejudice is to be weighed and its significance assessed by the court. The second conclusion and which is related to the first, is that the process of qualitative evaluation which I have described, will also require the court to take into account any other matter that is relevant to the qualitative evaluation of whether or not the prejudice is unreasonable. This will require the court to identify the consequences which the passage of the resolution would have on parties or interests other than those of the related creditor or creditors and the creditor voting against the proposed resolution, including creditors generally, the liquidator, and the public interest, and then to qualitatively weigh and evaluate those interests and to assess the extent to which consideration of those other interests might ameliorate or negate the conclusion that the prejudice which has been or is likely to be suffered by the opposing creditor is properly characterised as unreasonable.
30 But the exercise described in Ravenswood does not need to be elaborate or wide-ranging.
31 Consideration of the requirements of s 600A(1)(c)(ii) will only be necessary if the Court is not satisfied of the matters set out in s 600A(1)(c)(i).