TW McConnell Pty Limited v SurfStitch Group Limited

The C&G and FAI Schemes

1. Pursuant to the leave granted on 7 December 2018, two proceedings have been commenced by way of interlocutory process - one in respect of the FAI scheme, and the other in respect of the C&G scheme - by two applicants. In each proceeding, the first applicant Douglas Separovic has commenced the proceedings as representing all those shareholders in HIH who did not submit Final Claim Forms in respect of the relevant scheme before the Cut-off date referred to in those schemes. The second applicant in each interlocutory process, Gene Raymond Burr, has commenced the proceedings as representing all HIH shareholders who submitted a Final Claim Form before the Cut-off date, whose claims the Scheme Administrators did not determine to be an Acknowledged Creditor Claim, and who either did not appeal, or whose appeals were dismissed otherwise than after determination on the merits.

Representative proceedings

1. The class represented by each applicant comprises more than seven persons who claims are in respect of or arise out of at least similar or related, if not the same, circumstances, and give rise to substantial common questions of law and of fact, essentially whether, given the outcome of the Principal Shareholder Proceedings, the time for the Scheme Administrators to determine whether Qualifying Shareholders have an Acknowledged Creditor Claim be extended (and also, in the case of the Burr class, time to appeal from the Scheme Administrator's' (deemed) decision be extended and the appeal allowed). Accordingly, the proceedings commenced by the interlocutory processes were validly commenced as representative proceedings under (NSW) Civil Procedure Act Part 10, [2] subject to the power of the Court in various circumstances to order that they cease to be representative proceedings. [3] The effect of these provisions is that, if the proceedings are validly commenced as representative proceedings under Pt 10, they continue as such without any order of the Court to that effect, unless and until the Court determines under s 166, s 167 or s 168 that they should not do so. It is therefore unnecessary to make an order that the proceedings be representative proceedings, or that Mr Separovic and Mr Burr respectively be appointed to represent the groups on whose behalf they have commenced the proceedings. However, because s 179 requires that a judgment given in representative proceedings must describe or otherwise identify the group members, it will be appropriate that the final orders contain a notation describing the two classes that constitute the groups represented respectively by the first applicant Mr Separovic, and the second applicant Mr Burr. It is also unnecessary to conclude whether, as I am inclined to think may be the case, quite apart from Part 10, the Court would in any event be able, in proceedings under the (CTH) Corporations Act in respect of insolvency administrations, to grant relief without individually joining all the shareholders or creditors who might benefit.
2. Civil Procedure Act, s 162, provides that the Court must fix a date before which a group member may opt out of representative proceedings. That requirement is mandatory and cannot be dispensed with. [4] However, s 175(2) provides that the Court may dispense with compliance with the requirement to give notice to group members of the commencement of proceedings and of the right of group members to opt out of the proceedings before the specified date fixed under s 162(1), if the relief sought in the proceedings does not include any claim for damages. In SurfStitch, it was plainly acknowledged that the legislation contemplated that compliance with the otherwise mandatory step of notification to group members of the right to opt out before a specified date could in one circumstance - being the circumstance that there is no claim for damages involved - be dispensed with. [5] Moreover, his Honour's conclusion that s 183 was not available as a general dispensary power was informed by the availability of the specific dispensary power under s 175(2). [6]
3. That provision is engaged in this case, because the only relief claimed is the extension of time for the making of claims in the Schemes, or for the bringing of appeals from the Scheme Administrators' (deemed) decisions, and the allowing of those appeals. And that is unaffected by the variation in the relief now contemplated, which will involve extending the time within which the Scheme Administrators may determine that a creditor has an Acknowledged Creditor Claim. Notwithstanding that underlying any claim of a Qualifying Creditor in the Schemes is a claim for damages, there is no claim in these proceedings for damages, but only for an extension of time (pursuant to Corporations Act, s 1322) and the setting aside of the Scheme Administrators' decisions (under Corporations Act, s 599).
4. It is inconceivable how on any logical, informed basis, any group member in either group would not wish to have the benefit of an extension of time for the liquidators to determine that their claims are Acknowledged Creditor Claims, and any (deemed) rejection of those claims set aside. Such relief could only operate for the benefit of any member of either group. Moreover, in the context of a large insolvent administration such as this, it is highly desirable that all claimants be dealt with on the same footing, and with a little further complexity as possible. Accordingly, while I must (as s 162 requires it) fix an opt out date, this is a case in which it is entirely appropriate to dispense under s 175(2) with the giving of notice of the commencement of the proceedings and of the right of the group members to opt out before the opt out date.
5. Civil Procedure Act s 162(4) provides that, except with the leave of the Court, the hearing of representative proceedings is not to commence earlier than the opt out date. For the reasons which I have given for concluding that it is appropriate to dispense with the requirement for giving notice of the opt out date, it is also appropriate to give leave for the hearing of the proceedings to commence immediately.

Corporations Act s 1322

1. In the 7 December judgment, I explained that the terms of the FAI and C&G schemes did not provide the scheme administrators with any discretion to consider a final claim form if it was received after the Cut-off date, absent the grant of an extension of time under Corporations Act, s 1322. [7] I also set out the relevant provisions of s 1322, of which in particular subs (4)(d) empowers the Court, on application by any interested person, to make an order extending the period for doing any act, matter or thing, or instituting or taking any proceeding under the Act or in relation to a corporation. In the case of such an order under subs (4)(d), the only relevant mandatory condition in subs (6) attached to making it is that referred to in subs (6)(c), namely that no substantial justice has been or is likely to be caused to any person.
2. Based on the rationale of the decision in the Principal Shareholder Proceedings, each shareholder who acquired shares during the relevant period has a potential claim, not only against the company in liquidation, but also against the two schemes. Insofar as they made claims which were not accepted, then they were entitled to have those claims accepted. Insofar as they did not make claims, then by analogy with the reasons that I gave on 7 December as to why the liquidators were justified and acted properly in proceeding on the basis that claims not formally made by such shareholders should nonetheless be considered, so it is appropriate in respect of the schemes that the scheme administrators now consider the claims or potential claims of shareholders against the scheme of those same shareholders against those schemes.
3. Although the Scheme Administrators neither consent to nor oppose the proposed extension of time, they have formulated a procedure for the notification of shareholders who, on the footing of the principal judgment given in the shareholder proceedings, would have claims not only in the liquidation but also in the schemes, which would then be capable of proceeding entirely in parallel with that which will, in any event, apply in the HIH liquidation. In the scheme documentation, cl 25.1 provides that no scheme creditor should be entitled to have any liability determined to be an Acknowledged Creditor Claim, unless prior to the Estimation Date (a date in 2013) it has already been determined to be an Acknowledged Creditor Claim in accordance with cl 11. Clause 11 relevantly provides that an Acknowledged Creditor Claim shall be the amount of a liability of a scheme company which is - relevantly - "determined by the Scheme Administrators". As the Scheme Administrators have now identified, it is not a necessary precondition to such a determination that a claim form have been lodged, and an extension of time under cl 25.1 would enable the Scheme Administrators to determine that a claim is an Acknowledged Creditor Claim, even in the absence of a final claim form. This has considerable attraction, because there would then be symmetry (and with it simplicity) in the administration of the Schemes and the liquidation of the company HIH.
4. The only arguable "injustice" that this might occasion is that the payment percentages in the schemes would be diminished from that which other creditors who made timely claims might have expected. The liquidators have tendered evidence which indicates that the effect would be marginal, to the extent that, if all the potential claims of qualifying shareholders were admitted, then dividends might be reduced by in the order of one cent in the dollar. Moreover, that is not injustice, in circumstances where what would be admitted are, upon the rationale of the judgments in Principal Shareholder Proceedings, legitimate claims against the Schemes, the non-admission of which would be a windfall to other creditors arising only from the omission of qualifying shareholders to make a timely claim. As Black J explained the relevant notion of injustice in CIC Insurance Limited: [8] I turn now to the question whether substantial injustice has been or is likely to be caused to any person by SIRA's delay such that an extension of time cannot be granted under s 1322 of the Act. Mr Sulan points out that detriment to a third party is not the same as substantial justice, and injustice will not be established unless the detriment is unfair or inadequate or inequitable. I have noted above that admitting the additional claim by SIRA would slightly reduce the recoveries of insurance creditors and other creditors of FAI and CMC. That in one sense amounts to detriment, although only by comparison with the position if they obtained a windfall gain from SIRA's error. It does not seem to me that that amounts to injustice since it is not unfair or inequitable that SIRA should be entitled to prove for the amount that was properly recoverable in the scheme.
5. The same applies here. I am therefore satisfied that time for the Scheme Administrators to determine that a claim is an Acknowledged Creditor Claim should be extended, so that they may give the notices and make the determinations proposed in the draft shareholder circulars. Similarly, the Scheme Administrators' decisions not to admit the claims of those who made timely claims must, on the rationale of the judgments in Principal Shareholder Proceedings, be set aside, and time to appeal to the Court for that purpose should be extended.

The circulars

1. To a very large extent, the proposed Shareholder Circulars and public notices are not only uncontroversial, but entirely appropriate. As I have decided that it is not only appropriate but preferable that notice concerning the opt out date not be given, minor amendments to some of the documentation are required.
2. In the pro forma Circular to Qualifying Shareholders, para 3.4 should be omitted, and in para 3.5, the matter after "Acknowledged Creditor Claim," commencing "save for such shareholders" to the end of the paragraph, should be omitted. It will in that light be unnecessary to attach to that circular the draft opt out notice.
3. In the pro forma circular to Nil Claim Shareholders, para 3.5 should be omitted, and in para 3.6 the same matter, after "Acknowledged Creditor Claim," to the end of the paragraph, should be omitted.
4. I do not think any amendment is required to the proposed correspondence to ASIC.
5. In the pro forma notice to be published on HIH's website, para 3.5, and in para 3.6 the same matter after "Acknowledged Creditor Claim," to the end of the paragraph, should be omitted.
6. In the proposed newspaper advertisement, as Mr Lockhart observed, the words "during any of the above periods" in the second paragraph, should be replaced by "on or after that date".
7. With those amendments, the proposed circulars and notices are in order.

Costs

1. Mr McDonald sought costs of the interlocutory processes. The representative proceedings were ultimately brought for the benefit of a very large number of shareholders and potential creditors in the two schemes, and it is in those circumstances reasonable that their costs should not be borne exclusively by the two shareholders who have brought them. If an order is made against the respondents, then the respondents will be entitled to be indemnified in respect of it out of the scheme funds.
2. In those circumstances, as the representative proceedings have been substantially successful, I think the appropriate order in each application is that the respondents pay the applicants' costs (on the party/party basis), and the respondents are entitled to be indemnified in respect of their costs, including the costs that they must pay the applicants, out of the scheme fund.
3. In the HIH Liquidation (proceedings 58663 of 2001): 1. subject to the amendments which I have indicated above I make orders in accordance with the short minutes which I have initialled, dated this day and placed with the papers.
4. In each of the FAI Scheme (proceedings 58774 of 2001) and the C&G Scheme (proceedings 58776 of 2001): 1. subject to the amendments which I have indicated above I make orders in accordance with the short minutes which I have initialled, dated this day and placed with the papers; 2. I order that the respondents pay the applicants' costs, and the respondents are entitled to be indemnified in respect of their costs, including the costs that they must pay the applicants, out of the scheme fund.

Endnotes

1. In the matter of HIH Insurance Limited [2018] NSWSC 1886.
2. (NSW) Civil Procedure Act, s 157.
3. (NSW) Civil Procedure Act, s 166, s 167, s 168.
4. TW McConnell Pty Limited v SurfStitch Group Limited [2018] NSWSC 1749.
5. See SurfStitch at [28].
6. See SurfStitch at [42].
7. In the matter of HIH Insurance Limited [2018] NSWSC 1886 at [25]; referring to In the matter of CIC Insurance Limited (in liquidation and subject to a scheme of company arrangement) and FAI General Insurance Company Limited (in liquidation and subject to a scheme of company arrangement) [2015] NSWSC 1518 at [50].
8. [2015] NSWSC 1518 at [39]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 December 2018