Ray Brooks v NSW Grains Board

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2078/02 RAY BROOKS PTY LTD V NEW SOUTH WALES GRAINS BOARD (SUBJECT TO SCHEME OF ARRANGEMENT) & ANOR JUDGMENT 1 HIS HONOUR: The Grain Marketing Act 1991 (NSW) established an authority to improve the marketing of coarse grains and oilseeds in New South Wales, called the New South Wales Grains Board ("the Grains Board"). By the year 2000 the Grains Board's financial position had substantially deteriorated. Its day-to-day grain marketing and related functions were sold to Grainco Australia Ltd, in a transaction effectuated by a deed dated 30 October 2000, which provided for contractual obligations of the Grains Board to be performed by Grainco, subject to a contract review process. On 10 November 2000 Mr Murray Smith, a chartered accountant, was appointed administrator of the Grains Board under s 31 of the Act. 2 Subsequently Grainco did not accept some of the Grains Board's obligations under sales contracts, leading to possible liability of the Grains Board for damages for non-performance of those contracts. Additionally the Grains Board's funding arrangements proved to be insufficient to meet its continuing liabilities. After making an assessment that there was a deficiency of assets to meet liabilities in excess of $150 million, Mr Smith filed an application with the Court for the winding up of the Grains Board on 9 February 2001. As an alternative to liquidation, he also developed a compromise scheme ("the Grains Board Scheme") that would be likely, in his opinion, to result in a more attractive return to creditors than would be available in liquidation. 3 It is unnecessary for the purposes of this judgment to set out the terms of the Grains Board Scheme in detail. Creditors were divided into three classes. 801 creditors were in the class of Unsecured Creditors (including 621 Interstate Farmers), 2295 were Farmer Creditors (essentially growers who supplied grain that was grown and harvested in New South Wales to the Grains Board as grain pool participants in 1999/2000), and there were three secured creditors in the class of Lenders. The scheme involved the Lenders making a loan, the Farmer Creditors being paid in full and the Unsecured Creditors receiving a dividend expected to be 50 to 55 cents in the dollar. The rights of creditors were to be extinguished. 4 The scheme was propounded under s 80 of the Grain Marketing Act. Part 7 of the Act, which includes s 80, makes provisions for the winding up of the Board and arrangements with creditors. It sets up a procedure for a compromise or arrangement between the Board and its creditors. Section 80 provides in part as follows: "(1) If a compromise or arrangement is proposed between the Board and its creditors or any class of them, the Court may, on the application in a summary way of the Board or any creditor of the Board, or, in the case of the Board being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors to be convened in such manner, and to be held in such place or places within the State, as the Court directs. If the Court makes such an order, the Court may approve the explanatory statement required by section 81 (1) (a) to accompany notices of the meeting or meetings. (2) A compromise or arrangement is binding on the creditors, or on a class of creditors of the Board and, if the Board is being wound up, on the liquidator, if, and only if: (a) at a meeting convened in accordance with an order of the Court under subsection (1), the compromise or arrangement is agreed to by a majority in number of the creditors, or of the creditors included in that class of creditors, present and voting, either in person or by proxy, being a majority whose debts or claims against the Board amount in aggregate to not less than 75 per cent of the total amount of the debts and claims of the creditors present and voting in person or by proxy, or of the creditors included in that class present and voting in person or by proxy, as the case may be, and (b) it is approved by order of the Court." 5 Section 80 is closely modelled on the provision that is now s 411 of the Corporations Act 2001 (Cth), so far as s 411 relates to creditor schemes of arrangement. Creditor schemes of arrangement for companies are no longer common, because of the introduction in 1992 of the voluntary administration regime found in Part 5.3A of the Corporations Act. Consequently the Grains Board Scheme was akin to an "old-fashioned" creditor scheme of arrangement. 6 Mr Smith and the Grains Board took proceedings in this Court for approval of the Grains Board Scheme under s 80. At a hearing on 20 August 2001, Santow J made orders for the convening of meetings of the Unsecured Creditors and the Farmer Creditors, respectively, to be convened by taking specified steps which included sending to "each known" creditor in the relevant class a notice of meeting and other documents "by prepaid ordinary post addressed to the last known address" of the creditor. The meeting of Unsecured Creditors was convened to be held in Sydney on 18 September 2001. There were two meetings of Farmer Creditors, convened to be held in Dubbo and Narrandera on 19 and 20 September 2001 respectively. 7 The evidence before me does not indicate that the meetings were held and that the Grains Board Scheme was approved by the various classes of creditors, but there is nothing to suggest that these events did not occur. At a hearing on 24 October 2001 Santow J made an order dismissing the application to wind up the Grains Board, and an order under s 80 (2) (b) of the Grain Marketing Act approving the Grains Board Scheme. An office copy of the order was lodged with the Minister on the same day, and so by virtue of s 80 (8) of the Grain Marketing Act the order took effect on that day. No appeal has been filed in respect of Santow J's orders. 8 In the present proceeding Ray Brooks Pty Ltd ("Brooks") appeals, by summons, against Mr Smith's decision as administrator of the Grains Board Scheme to reject Brooks' proof of debt, and also seeks orders designed to enable it to amend its claim under the Scheme. It appears that Brooks asserts a substantial claim against the Grains Board arising out of a joint venture agreement between them. It claims to be an Unsecured Creditor. Particulars of the claim are not in evidence at this stage in the proceedings. 9 On 15 April 2002 Brooks filed an amended summons, pursuant to leave granted by me on that day. No evidence was adduced upon the application for leave. The amendment adds the following prayer for relief: "7. A declaration that the Scheme is not binding upon the creditors of the Board by reason of the fact that it was not agreed to at a meeting convened in accordance with the orders of this Honourable Court made on 20 August 2001." 10 The defendants, Mr Smith and the Grains Board, object to paragraph 7. They have applied by notice of motion either for an order revoking the leave that I granted to Brooks on 15 April 2002, or an order that paragraph 7 be struck out pursuant to Part 13 rule 5. This is my judgment on their notice of motion. 11 The ground for Brooks seeking the relief claimed in paragraph 7 is now revealed in an affidavit made on 29 April 2002 by Christopher Brooks, a director of Brooks. He says that Brooks never received notice of the meeting of Unsecured Creditors, which was to be held pursuant to the orders of Santow J made on 20 August 2001. Mr Smith has sworn an affidavit saying that Brooks is a Farmer Creditor and was sent a copy of the documents required to be sent to Farmer Creditors by Santow J's orders, including a notice of meeting, a circular and a summary report. Christopher Brooks says that Brooks did not receive those documents. 12 It is unnecessary for me to make a decision to accept or reject the evidence of Christopher Brooks, in order to determine the present application. If Brooks were able to establish at the final hearing, as Christopher Brooks alleges, that it received no documents from Mr Smith or the Grains Board with respect to the Grains Board Scheme, and that it was known to be a creditor of the Grains Board at the relevant time, it would not necessarily follow that the orders made by Santow J on 20 August 2001 were not complied with, as regards Brooks. Santow J ordered that the documents be posted to the last known address of each known Unsecured Creditor and each known Farmer Creditor. It would be possible that Mr Smith complied with the orders by posting a set of documents to Brooks at its last known address, but that the documents were not received either because they were not correctly delivered to that address or because the address was wrong. 13 That being so, the acceptance of the evidence of Christopher Brooks would not establish any failure to satisfy s 80 (2) (a), which requires that the relevant meetings be convened "in accordance with an order of the Court". Brooks would fail to obtain the relief sought in paragraph 7 on that narrow factual ground. 14 However, I was informed from the bar table that Brooks will contend at the final hearing, if the present application is unsuccessful, not only that no documents were ever received with respect to any of the meetings of creditors, but that no such documents were ever sent to it. That contention implies that Mr Smith failed to comply with Santow J's orders, as regards Brooks. If that contention were made out at the final hearing, there would be evidence that the relevant meeting of creditors had not been convened in accordance with an order of the Court. The evidence would therefore tend to show that s 80 (2) (a) had not been strictly complied with. 15 In that event, the question to be resolved at the final hearing would be whether, if there is a failure to comply with s 80 (2) (a), the affected party can obtain a declaration that the resulting scheme is not binding upon the creditors by reason of that non-compliance, notwithstanding that the Court has made an order approving the scheme under s 80 (2) (b). That is the principal question I intend to address. 16 Counsel for the plaintiff submitted that as a matter of statutory construction, s 80 (2) sets out two separate conditions for a compromise or arrangement to be binding on the creditors. Condition (a) must in fact be satisfied, and additionally the Court must approve under condition (b). If, therefore, it is shown that condition (a) has not been satisfied, because in fact the meeting purportedly convened after the Court made orders was not convened in accordance with the orders, then the arrangement is not binding on the creditors notwithstanding approval by the Court. 17 Counsel for both parties accepted that as there is no material difference between s 80 (2) of the Grain Marketing Act and s 411 (4) of the Corporations Act, my decision in the present case would be applicable to s 411 (4). It seems to me that the construction advocated by the plaintiff would tend to undermine the efficacy of the scheme of arrangement procedure under the Corporations Act, both for members' schemes (which are relatively common and of substantial commercial importance) and for creditors' schemes. The great attraction of the scheme of arrangement as a procedure for corporate reconstruction flows from the perception that the court's order, binding all relevant parties including dissentients, is final, subject to appeal. It is generally thought that, once the order has been made and the time for an appeal has expired, nothing can be done to upset the arrangements implemented by the scheme. 18 If the plaintiff's construction were correct, that advantage would evaporate. A dissentient seeking to challenge a scheme, and having failed at the hearing for the approval of the scheme, could initiate proceedings contending that the condition in paragraph (a) had not been met, even though the Court had approved the scheme, if there were any ground for suspecting that some aspect of the orders for the convening of meetings had not been complied with. Certainty of outcome would be suspended until those proceedings were resolved. Corporate rearrangements, possibly of a highly significant kind for the future economic welfare of the entity concerned, its shareholders and employees, would be placed on hold. Further, it would not be possible to ascertain reliably the status of the company by searching the office copy of the court's orders lodged with the Commission. A construction leading to these consequences should not be adopted unless it is clearly entailed by the statutory language. 19 In my opinion, an alternative and preferable construction is available, and is supported by case law. The starting point is to appreciate the effect of an order made by a superior court of record such as this Court. Three propositions are relevant, as follows: (1) A subsisting order of such a court cannot be treated as void or invalid: see, in relation to an order approving a scheme of arrangement: Bridges v Hershon [1968] 3 NSWR 47, 56. (2) Such a court has power to determine whether the conditions upon which its jurisdiction depends are or are not satisfied on the facts of the case before it, and while the decision is subject to appeal, it is not open to collateral challenge: Cameron v Cole (1944) 68 CLR 571, 599 per McTiernan J. (3) It is not necessary for such a court expressly to make a declaration or finding that the conditions for the exercise of its jurisdiction are satisfied, because the making of an order implies a determination that those conditions exist. In Re Padstow Total Loss and Collision Assurance Association (1882) 20 ChD 137, Jessel MR said (at 142): "... an order by a Court of competent jurisdiction which has authority to decide as to its own competency (when that order is made), must be taken to be a decision by the Court that it has jurisdiction to make the order …". 20 The connection between these three propositions and s 80 (2) is as follows. On its proper construction, paragraph 80 (2) (a) sets a condition for the exercise of the Court's jurisdiction to approve the scheme under paragraph 80 (2) (b). The effect of s 80 (2) is that the scheme can be binding on the creditors only when the Court, being seized of jurisdiction because s 80 (2) (a) has been satisfied, makes the order approving the scheme under s 80 (2) (b). The condition in s 80 (2) (a) is not an independent condition unconnected with s 80 (2) (b). If it were, there would be no point in the Court following its universal practice when an application is made for approval of a scheme, namely the practice of meticulously ensuring that every requirement for the convening and holding of the meeting of creditors or members (as the case may be) has been scrupulously observed. One of the reasons for the Court going to such trouble is that proper compliance with the requirements for meetings is a condition of its own jurisdiction. 21 Once that construction is adopted, propositions (2) and (3) above have the consequence that the Court's order approving the scheme implies a determination by the Court that the condition for the exercise of its jurisdiction set out in paragraph 80 (2) (a) has been satisfied. Proposition (1) means that the Court's order stands even if an error has been made in the implied determination of jurisdiction. Except in those unusual cases where the error can be corrected by the Court, the order stands unless it is set aside on appeal. It is not open to collateral challenge. 22 Justice is achieved by this process because opponents of the scheme have the opportunity to appear and present their case, the Court takes care to ensure that appropriate meetings have been properly convened and conducted, errors may be corrected on appeal, and the Court may set aside its own order on special grounds. Those special grounds include cases where the Court's order is shown to have been obtained by fraud or denial of procedural fairness, or there has been an obvious error that can be corrected under the slip rule (Part 20 rule 10). 23 The view that paragraph (a) is a condition of the Court's jurisdiction to make an order under paragraph (b) was adopted by McLelland J in Chief Commissioner of Pay-Roll Tax v Group Four Industries Pty Ltd [1984] 1 NSWLR 680. In that case, a scheme of arrangement between a company and its creditors contained provisions purporting to remove the statutory preferential priority of the Chief Commissioner of Pay-Roll Tax and treat him as an ordinary unsecured creditor. After the Court approved the scheme, the Commissioner took proceedings for a declaratory order that he was not bound by it. McLelland J said (at 683) that there was "much to be said" for two contentions advanced by the Commissioner. The two contentions were that the Commissioner's special statutory priority meant that he was not in the same class as the unsecured creditors, for the purpose of the scheme of arrangement provisions (then s 315 of the Companies Code); and that the meeting of creditors that had in fact been convened did not, by the terms either of the order for the convening of the meeting or the notice convening it, include him as a matter of construction. 24 However, the order approving the scheme undoubtedly purported to bind the Commissioner. Consequently the Commissioner was bound by it, even though he might have persuaded the Court not to approve the scheme had he advanced his arguments in a timely manner. 25 McLelland J took the view that on the true construction of s 315, it was a condition of the Court's power to make an order approving the scheme that the matters prescribed in s 315 (4) (a) had been fulfilled (at 683). He said that "it is inconceivable that the legislature contemplated that the Court might approve a compromise or arrangement under paragraph (b) without first being satisfied that the condition (or more accurately conditions) prescribed in paragraph (a) had been satisfied; otherwise, despite approval by the Court there could never be any certainty the compromise or arrangement was legally operative and it may remain open to collateral challenge indefinitely on grounds not susceptible to ready discovery or investigation". He found support for this view in Re Montana Frocks Pty Ltd (1967) 87 WN (Pt 1) (NSW) 271, and in Re Dorman Long and Co Ltd [1934] Ch 635, 655. 26 McLelland J referred to Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 as an authority contrary to his view of the law. In the Sovereign Life case, a scheme of arrangement transferred policies from one insurance company to another and required the policyholders to accept certain reduced payments in full satisfaction of their claims. The scheme purported to bind all policyholders of the company, and was approved by a single meeting and by the court. The Court of Appeal held that policyholders whose policies had matured were a class of creditors separate from those whose policies had not matured, and that a separate meeting should have been held of the creditors whose policies had matured in order to make the scheme binding upon the members of that class. Consequently, when the company sued the holder of a policy that had matured to recover a loan that it had made to him on a mortgage of the policy, he was held not to be entitled to set off against the loan the amount that would have been due to him on the matured policy but for the scheme of arrangement. 27 McLelland J held that the Sovereign Life case should not be followed in Australia, to the extent that it held that a creditor in a class for which there should have been a separate meeting was not bound by the scheme. He preferred to follow the judgment of Hart J in Frick Australia Pty Ltd v Pen Pak Ocean Products Pty Ltd [1971] Qd R 286, and dicta in Excelsior Land Investment and Building Co and Bank Ltd v Phelan (1898) 19 LR (NSW) 59. I respectfully agree with his Honour's reasoning and conclusion. 28 Counsel for the plaintiff sought to confine the Group Four decision to cases where the Court has mistakenly not ordered a separate meeting for each class of creditors. In counsel's submission, McLelland J's reasoning should not be extended to a case where the company has failed to comply with the court's orders for the convening of meetings. In my opinion, there is no rational basis for confining his Honour's construction of the provision equivalent to s 80 (2) of the Grain Marketing Act to cases of the kind before him. His observations were general observations on the point of construction, equally applicable to cases where the complaint is failure to comply with the orders for convening meetings. Moreover, his construction of the section is plausible and supported by the other Australian authorities upon which he relies. 29 Counsel for the plaintiff submitted that I should not follow the reasoning in the Group Four case because McLelland J gave insufficient attention to the change in the wording of the scheme legislation that was introduced upon the enactment of the Companies Codes. The drafting of s 80 (2) was based on s 411 (4) of the Corporations Law (which began on 1 January 1991) or s 315 (4) of the immediate predecessor to the Corporations Law in this State, the Companies (New South Wales) Code (which began on 1 July 1982). These provisions are materially the same. They all derive from s 2 of the Joint Stock Companies Arrangement Act 1870 (33 & 34 Vict c 104). After authorising the Court to convene a meeting of creditors to consider a compromise or arrangement, s 2 continued: "and if a majority in number representing three-fourths in value of such creditors or class of creditors present either in person by proxy at such meeting shall agree to any arrangement or compromise, such arrangement or compromise shall, if sanctioned by an order of the Court, be binding on all such creditors or class of creditors, as the case may be, and also on the liquidator and contributories of the said company." 30 The ingredients of s 2 are not obviously different from the ingredients of s 80 (2), except in one respect. Section 2 adopts the drafting style of a "running narrative" while s 80 (2) is subdivided into two separate paragraphs joined by the word "and". The change from running narrative to conjoined subparagraphs was made when the Companies Code replaced the Companies Act 1961 (NSW), s 181 (2) of which was virtually identical with s 2 of the UK Act of 1870. I agree with counsel for the plaintiff that this change makes it a little easier to contend that paragraph (a) is an independent condition rather than a condition of the jurisdiction of the Court to make an order under paragraph (b). However, in my opinion the latter construction is open upon the new wording, and the change in statutory wording does not provide a sufficient reason for rejecting that construction. In addition to the points I have already made, I note that the explanatory memorandum for the Bill which became the Companies Code merely paraphrases the new provision and says that it is "based on" the 1961 Act. This suggests that no change of substance was intended. 31 The reasoning of McLelland J has been followed in two later cases, Elric Pty Ltd v Taylor (1986) 4 ACLC 321 and Re W Coogan & Co Pty Ltd (1993) 11 ACLC 388. In the latter case the company did not obtain any court order before convening meetings to approve its scheme, and then applied to the Court for orders to cure that defect under s 1322. Zeeman J declined to make any such order, referring to McLelland J's view that the holding of meetings in accordance with paragraph (a) is a condition of the Court's jurisdiction to make an order approving the scheme under paragraph (b). 32 In the Elric case, the scheme was approved by the appropriate majority of those who attended meetings convened by the Court, and by the Court itself. However, the plaintiff contended that those who purported to participate in the scheme as creditors were in truth not creditors of the company. Moynihan J held, applying the remarks of McLelland J in the Group Four case, that the Court's approval of the scheme involved an implicit determination that the parties to the arrangement were in truth creditors. 33 As I have said, in limited circumstances it is open to a person affected by an order of the Court to apply to set it aside, even after the order has been entered. The subject is addressed by Part 40 rule 9, as well as Part 20 rule 10, and is usefully discussed in Ritchie's Supreme Court Procedure, paragraphs [20.10.7] and [40.9.11]. The Court's inherent jurisdiction to set aside its orders is noted by Ritchie at [40.9.15]. One relevant category arises where it is alleged that the order was obtained by fraud, and the applicant to set it aside relies on facts discovered since the order was made. Moynihan J refers to this category of cases in Elric (at 329). Another is where there has been a denial of procedural fairness (a ground for setting aside orders that I considered in Brown v DML Resources (No 2) (2001) 39 ACSR 219; see also Brown v DML Resources (No 3) [2001] NSWSC 719; Brown v DML Resources (No 4) [2001] NSWSC 947; Brown v DML Resources (No 5) [2001] NSWSC 973). 34 It may be open to the plaintiff in this case to make an application for leave to amend its summons by seeking an order setting aside Santow J's orders of 24 October 2001, so far as they purport to bind the plaintiff to the scheme, on grounds of fraud or denial of procedural fairness. But such an application would need to be supported by sufficient evidence to demonstrate, in the words of Moynihan J, "reasonable prospects of success based on facts discovered since the judgment it is sought to impeach". In assessing whether there was sufficient evidence to justify the granting of such leave, the Court would bear in mind the policy considerations outlined above, which point to the conclusion that proceedings to set aside an order approving a scheme should be permitted only upon strong evidence. 35 Paragraph 7 of the plaintiff's amended summons amounts to a collateral challenge to Santow J's order approving the Grains Board Scheme, made on 24 October 2001. It does not seek an order setting aside the scheme so far as it purports to bind Brooks. The application for leave to amend the summons to introduce paragraph 7 was not supported by evidence, let alone clear evidence of fraud or denial of procedural fairness or the like. In my opinion the relief sought in paragraph 7 is inconsistent with the principles set out above, and therefore the claim to such relief is bound to fail. It is a claim to relief in respect of which no reasonable cause of action is disclosed, and it is therefore open to me to make an order striking it out under Part 13 rule 5. It is also open to me to revoke the leave pursuant to which paragraph 7 was introduced, and to strike it out on that basis, on the ground that a claim to declaratory relief of the kind sought in paragraph 7 is misconceived. 36 It follows that the plaintiff's application, filed on 22 April 2002, for orders directing it to advertise that it seeks a declaration in terms of paragraph 7 of the amended summons, does not arise for consideration and should be dismissed. 37 I shall make orders striking out paragraph 7 of the amended summons and dismissing the plaintiff's application of 22 April 2002, and I shall stand the matter over to hear the submissions of the parties on the question of costs.

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