Crusader Ltd, Re [1995] QSC 95 [1996] 1 Qd R 117

IN THE SUPREME COURT OF QUEENSLAND Brisbane O.S. No. 221 of 1995 [Crusader Limited] IN THE MATTER OF The Corporations Law - and - IN THE MATTER OF Crusader Limited ACN 009 785 326 JUDGMENT - THOMAS J. Judgment delivered 26 May 1995 This is an application by Crusader Limited ("the company") for the approval of an arrangement agreed upon by a body of creditors on 9 May 1995. It is opposed by four objectors. INDEX Background Facts 2 Composition or Arrangement 3 Adequacy of Information Statement 5 Different Classes of Creditors 13 Involuntary Membership 17 Whether Prospectus Necessary 19 Whether Scheme Unreasonable 20 Other Matters 21 Orders 22 Costs 22 -- 1 of 22 -- 2 BACKGROUND FACTS On 8 February 1989, the company issued approximately 13.385 million convertible unsecured notes by way of an underwritten non-renouncible pro rata offer to its then shareholders. The issue price of each note was $1.50. Features of the note included that it was convertible at the option of the note-holder on the last day of the months of November and May in any year, and on maturity on the maturity date of 31 January 1999. Upon conversion the note holder would become entitled to one fully paid ordinary share of 20c in the capital of the company at a premium of $1.30. In the absence of exercise of that option, each note would be repayable in cash on the maturity date. The notes bore interest at the rate of 12% per annum until conversion or maturity. The present proposal is an arrangement to bring forward the maturity date of the notes to 22 May 1995. On that date all notes are proposed to be redeemed. Note holders will receive in respect of each note, one fully paid 20c share in Crusader plus 60c cash. The current market value of such shares is in the vicinity of $1.40. It follows that note holders will not be able to elect to have their notes redeemed for cash alone. The company's reasons for proposing the arrangement are essentially commercial. They include the circumstance that the present interest burden under the notes is regarded as excessive or inconvenient. Further, the notes are thinly traded. This would seem to result from the fact that relatively speaking this was not a particularly large issue, and because approximately 50% of the notes are held by the company's major shareholder (Triton) and its Australian subsidiary. In 1994, the company stated an intention to buy back half of the notes, but in the event did not proceed to do so. Application was made to the Court by the company on 19 April 1995 under s.411(1) of The Corporations Law for an order that the proffered explanatory statement be used and that a meeting of a class of creditors be convened. Notice was given to the ASC which appeared on the -- 2 of 22 -- 3 application and made submissions. Byrne J. made the order including a direction that the explanatory statement be sent to note-holders, and for the holding of the meeting on 9 May 1995. Section 411(4)(a) requires both a majority in the number of persons present and voting (including proxies) and a majority to the extent of at least 75% of the total amount of the debts of the persons present and voting. The results of the meeting of 9 May show a resoundingly favourable response not only from the major note holder (Triton) but also from the minority note holders. The results, leaving Triton's votes entirely out of the reckoning for present purposes, were 193 votes in favour and 39 against (ie. 83.2% to 16.8%). The voting according to value was 3,624,131 in favour and 267,332 against, that it to say 93.2% in favour and 6.8% against. The inclusion of Triton's two votes makes little difference to the results. In the persons voting count the affirmative result becomes 83.3%. In the value count, the affirmative vote increases to 97.5%. Very many submissions have been presented on behalf of the objectors raising grounds upon which it is contended that the court ought not to approve the arrangement. It will be convenient if I deal with each of the principal points raised. IS THE PROPOSAL A COMPOSITION OR ARRANGEMENT Section 411 refers to - "a compromise or arrangement .. between a part 5.1 body and its creditors or any class of them or between a part 5.1 body and its members or any class of them." The submission is that the present scheme is neither a composition nor arrangement under that section. This is based upon the absence of any obvious prospect of insolvency or even any particular financial difficulty on the part of the company in meeting its current obligations to note holders. It is contended that where a company is able to discharge its obligations to the relevant class of creditors a scheme cannot be described as involving a "compromise or arrangement" with those creditors. Reference was made to statements in Mercantile Investments & General Trust Co -- 3 of 22 -- 4 v. International Co of Mexico (1893) 1 Ch. 484, 490, 491 and Mercantile Investment & General Trust Co v. River Plate Trust Loan & Agency Co (1894) 1 Ch. 578, 596 as suggesting that insolvency needs to be in sight before the power it brought into play. However, the legislation governing those cases referred only to a "compromise" and they are no authority with respect to the wider term "arrangement". Counsel's further reference to Isles v. Daily Mail Newspaper Limited (1912) 14 CLR 193, 196-197 does not in my view take the matter further, and does not suggest that the term "arrangement" is to be given the connotation of "compromise". The word "arrangement" whether used in the context of tax avoidance, trust law, bankruptcy or company law is generally regarded as having a very wide reach (cf. Re Steeds Will Trusts, Sandford v. Stevenson (1961) All E.R. 487, 492). On a more specific level it has been held that there is no requirement that there be any pre-existing dispute before the power of making a compromise on arrangement may be pursued. In Re Guardian Assurance Company (1917) 1 Ch. 431, 447-449, the Court of Appeal reversed the decision of Younger J who had refused to sanction a "compromise on arrangement" on the ground that some dispute or difficulty needed to be resolved before the procedure was available. In the Court of Appeal it was considered that the scheme although not a "compromise" was an "arrangement" within the section, and that there was no ground for limiting the meaning of the latter word to something analogous to a compromise. Similar views are apparent in Mercantile Investment and General Trust Company v. International Company of Mexico (1893) 1 Ch. 484, 489; Isles v. Daily Mail Newspaper Limited above at p.201 per Isaacs J; Re International Harvester Co of Australia Pty Ltd (1953) VLR 669, 672; and Re Sonodyne International Limited (1995) 13 ACLC 221). I shall not pursue this point further. The submission is unattractive in a number of respects, not the least of which is its vagueness. It posits the need for a level of financial difficulty somewhat less serious than inability to pay debts as they become due. It would also in my view unduly limit the intentionally wide range of situations in which companies might be permitted to -- 4 of 22 -- 5 make arrangements with its creditors or members which may be perceived to be beneficial to those concerned. The authorities in any event go against the submission. ADEQUACY OF INFORMATION STATEMENT Section 412(1)(a)(ii) requires that the explanatory statement set out "such information as is prescribed and any other information that is material to the making of a decision by a creditor or member whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the creditors or members". The explanatory statement was presented to the noteholders in the form of a booklet incorporating a letter from the Chairman, a letter from the trustee, a nine page explanatory statement, financial statements, an explanatory pro forma balance sheet showing the effect of the conversion of notes if the proposed scheme were implemented, the amended special conditions of issue of notes proposed to be effected in the trust deed relating to the notes, a notice of meeting containing the proposed resolution approving the scheme and approving the necessary amendment to the trust deed, a report by an independent expert (KPMG) concerning the proposal, taxation advice by KPMG Peat Marwick and a proxy form. In all the booklet comprised 91 pages. It was submitted that the statement should be regarded as deceptive, misleading, and inadequate. From the noteholders' point of view, in common with most rearrangements, there was a positive side and a negative side in the proposal, and in the end a commercial decision was called for. Obviously not all holders would wish to upset a fixed arrangement with some years left to run and which was providing a fixed rate of interest. Naturally the extent of the level of inducement sufficient to entice to exchange one set of rights for another would be expected to be the critical factor. The question arises whether the explanatory statement was sufficiently explicit in relation -- 5 of 22 -- 6 to the down side from the noteholders' point of view. Most of these would be immediately apparent to the noteholders from the nature of the scheme itself. In any event paragraphs 12 and 13 of the explanatory statement explicitly drew attention to the reduced credit ranking for noteholders who currently, in the event of a winding up, rank above ordinary shareholders; the loss of the fixed redemption price of $1.50 per note even though their market value may fluctuate; the fact that in lieu thereof they would become the holders of shares the market value of which could be expected to fluctuate; and the fact that noteholders would be foregoing an interest income stream which was relatively certain for a dividend stream which was far less certain. Attention was also drawn to the fact that under the scheme there would be no interest on notes in respect of the period 30 November 1994 up to the new maturity date. Mr Morris Q.C., for one of the objectors, advanced a number of criticisms of the explanatory statement and accompanying documents and these will now be mentioned. (a) The valuation exercise did not express any figure for the component value of the option to convert to shares. That of course was one of the many qualities that the notes possessed. It was submitted that failure to specify separately such a component value was a defect in the report. However the evidence, notably that of Mr Banks, suggests that whilst regard obviously should be had to that quality and value, it does not follow that the valuation exercise should dissect the notes into their totality of components each with a separate value or that such a factor should be separately attributed to the option. If separately regarded, it is a fluctuating factor. At material times Mr Banks thought its value may have ranged between 0 and 15 cents. He pointed out that the market did not rise when shares went from 88 cents to $1.40. From this he inferred that the market did not value the rights at any significant level. When valued at a time when shares are at $1.34, he considered the option would have had little or no value in the market. When shares trade up to -- 6 of 22 -- 7 $1.50 it would have more value. His exercise was to value the notes at a point in time, not to provide an academic discourse on the effect of possible future changing scenarios. He considered that market trading was the best indicator and he based his opinion on this. In his report he referred to the option component and commented that it was of small value. The criticism seems to be that he did not then ascribe a specific value to that component in the report. In the circumstances of this case I do not think that this rendered his valuation inadequate, inaccurate or misleading. In the end the question was whether the offer was reasonable, and there was a substantial margin to justify this conclusion that it was. (b) In the KPMG report, under the heading "Overview of Valuation Methodology" the following sentence was included:- "Where maturity date is relatively short, as is the case for the Crusader convertible notes, the value of the option to convert typically is not material". Mr Banks conceded that that is not well expressed, and his evidence, including the matters already discussed above, indicates that the value of the option to convert may have some relevance whether or not a dissection into component values ought to occur. Opinions might differ as to whether the maturity date was "relatively short" but no one could be misled by this as the actual date was known to all concerned. Whilst it is possible to criticise the statement that the value of the option was not material, this is essentially an academic criticism. In my view it falls far short of rendering the valuation inadequate or of misleading the noteholders. (c) In the same section of the report the statement was included that "the Black and Scholes option pricing formula assumes note-holders have the right to convert at any time prior to the expiry date of the Convertible Note". Mr Banks concedes that that -- 7 of 22 -- 8 statement is incorrect. This means that an incorrect reason was expressed for the non-inclusion of that particular valuation method. The correct, although unstated, reason for its non-inclusion was that it would not produce a reliable result in the given circumstances. The error was not in my view one which was likely to influence noteholders or such as to undermine the overall fairness of the explanatory statement. (d) The extent of Triton's influence over Crusader is a matter which is raised in the affidavit of Mr Graham Morris whose company Romaco is an objector. It was submitted that this ought more fully to have been bought out along with what was said to be Triton's future intentions regarding its shareholding in the company. Mr Morris expressed grave suspicions in relation to the motives of those who control Triton and who have been responsible for the present composition of the company's board. He deposes that from knowledge as a director of Triton until 10 November 1994, Triton "had a strong interest in buying further shares in Crusader, and an equally strong interest in selling interest Crusader shares or some of them at a higher price". There is a further allegation that Triton is in possession of confidential information not available to Crusader shareholders general. That may well be the case, but the nature and extent of that knowledge are not shown and no particular hidden agenda can be inferred. For example Triton's possession of a January 1993 report on the value of Crusader is hardly a sinister circumstance, and it does not bespeak the possession of special relevant information that ought to be shared with the noteholders two years later. The cognate submission for the objectors concerning the alleged requirement that Triton be regarded as a different class of creditor from all other creditors ultimately rested on the submission that as Triton's interest as a shareholder was considerably greater than its interest as a noteholder it -- 8 of 22 -- 9 has a greater interest in advancing the interests of Crusader than that of Crusader's noteholders. In the end Mr G. Morris' suggestion that "Triton has a strong interest in selling its shares in Crusader to its own maximum advantage and without necessarily any regard to the interests of Crusader's shareholders other than Triton" should be regarded as a suspicion rather than a proper inference. It is not a statement that should have been included in the explanatory statement. In one sense any commercial entity has an interest in realising some or all of its assets to best advantage, but the sting in the allegation is that it has an interest to do so without regard to the other shareholders. This is not satisfactorily established by the evidence. It was further complained that Triton's ascendant position was not adequately disclosed. However the explanatory statement describes Triton as the major shareholder and the extent of its shareholding is set out. The expert's report further goes on to state that "the board is now dominated by directors from Crusader's major shareholder Triton". The submission that the noteholders were not sufficiently apprised of Triton's position or influence cannot be upheld. (e) It was submitted that more should have been said about the tax effect on noteholders if this scheme were approved. Advice on this question appears at pp. 89-91, and there are earlier adjurations to noteholders to obtain their own advice. Given the individual differences to be expected from person to person, that is not unreasonable. This nature of the advice that the objectors say ought to have been given is not satisfactorily stated in any submission. This objection fails. (f) There is a further objection that the fees paid by Crusader to Triton were not disclosed. It is not suggested that the consultancy agreement has anything to do with the scheme as such or vice versa. It will always be possible to suggest that additional -- 9 of 22 -- 10 financial information might have been given, but in the circumstances the financial statements and other data supplied would seem to have been sufficient. (g) It was also submitted that there is a risk that Crusader will be obliged to sell down its shareholding Triton if the scheme proceeds, and that this ought to have been disclosed. This depends on a number of cumulative contentions, the first of which is that Triton will end up holding more than 50 percent of Crusader's shares. The fact that Triton as a noteholder will now receive shares in place of notes, on the information in the explanatory statement, means by simple arithmetical calculation that Triton would, if it retained all its then current shareholding, become a 50.03 percent shareholder as a result of the scheme. In the event such a result is not likely to ensue, because Triton has sold some notes in the interim. The submission is that if Triton were to hold more than 50 percent of Crusader's shares, s. 185 of the Corporations Law would require the company to divest itself of the shares which it holds in Triton as its holding company (ss. 185(2) and 185(8)). That shareholding is substantial. However I do not think that s. 185 applies in this way to Crusader. Its immediate Australian parent entity is Triton Oil (Holdings) Pty Ltd (incorporated in New South Wales) and the ultimate parent entity is Triton Energy Corporation (a corporation in the United States). Mr Morris QC submitted that the relevant relationship was between Triton Energy Corporation and Crusader, and that the former corporation is a "holding company" under s. 9 of the Law, which he submitted is not limited to the more restricted requirement in the definition of "company" which refers to bodies incorporated under the Corporations Law of this jurisdiction. If so, it would be capable of covering a foreign corporation. The submission is answered however by reference to s. 185(1) which gives the equivalent of a definition of "holding company" for the purposes of that section. -- 10 of 22 -- 11 Subs.(1) obviously contemplates that the "holding company" refers to a "company" which has a subsidiary, and it would seem that the ordinary definition of company would apply. On this basis Triton Energy Corporation is not a company and in turn is not a holding company. It follows that there would be no requirement under s. 185(8) for Crusader to sell all its shares in Triton Energy Corporation. There are therefore a number of reasons for holding that the failure to state that Crusader would be obliged to sell down its shareholding in Triton does not render the explanatory statement inadequate. The first is that it is not correct. The second is that if it is correct, it is a consequence that would be easily avoidable by the sale of relatively few shares, as has in fact occurred. It was a matter that the board could always avoid. It was not a future matter of sufficient probability or risk to require specific discussion in the statement. (h) On pp. 7 and 11 of the explanatory statement it is said that at the time the notes were issued the company stated its intention to buy back in accordance with the trust deed up to 50 percent of the notes on issue. It is arguable whether that statement is correct, as apparently such a statement was made in the United States but not in Australia. However, in the context of a scheme under which all the notes will be satisfied, the relevance of such a statement some years previously is very marginal, especially as no repurchases had occurred. Such a matter was obviously overtaken by the new offer. Mr Graham, who swore an affidavit on behalf of an objector conceded in the course of his evidence that this was not an important or substantial point. I am of the same view. (i) Other points were made in affidavits and in argument, and some of them overlap with other points including the one next to be addressed. However the principal points relied on were the view that the statement was misleading or inadequate have -- 11 of 22 -- 12 now been dealt with. The Code requires the commission, and ultimately the Court, to scrutinise any scheme carefully before approval. Forthrightness is required, and in White J's metaphor "the factual cards must not be played close to the chest but laid face up on the table in good lighting conditions" (Re Pheon Pty Ltd (1986) 4 A.C.L.C. 669, 682). The Courts are concerned with the notion of a fair picture being presented. Furthermore, in a scheme which involves difficult questions of commercial judgment and matters of degree and conjecture as to future prospects there is room for a range of opinion. Perfection is hardly attainable. "If every possible formulation of the commercial objective of the proposal, and arguments for and against every theoretical possibility, were set forth the total package of information to members would be likely to confuse rather than to illuminate the issue for decision, even for people having a familiarity with corporate law and commerce. The need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, and is likely to assist rather than to confuse." Fraser v. NRMA Holdings Ltd (1995) 13 A.C.L.C. 132, 144 per Black CJ, von Doussa and Cooper JJ) That statement was made in the context of a s. 52 disclosure, but the comment is pertinent, along with the following comments: "However the proposal was formulated, and however the information to members was drafted, it is likely that some criticism could be levelled at it" and "It is important that the adequacy of the information provided by the prospectus and supporting documents be assessed in a practical, realistic way having regard to the complexity of the proposal. In the circumstances the Court should not be quick to conclude that a contravention of s. 52 has occurred because other information could have been provided that was not." (ibid p. 145) The extent of disclosure required is a question of fact dependent upon the nature of the scheme (Re National Bank Limited (1966) 1 All E.R. 1006; (1966) 1 W.L.R. 819). Having read the explanatory booklet I do not gain the impression of unbalanced presentation, intentional obfuscation, or any of the many devices by which unfair sales techniques -- 12 of 22 -- 13 are used. It is after all the presentation to various noteholders of a commercial option which they might or might not find attractive. It is overall a very simple proposal, and it is hard to resist the conclusion that its commercial attractiveness (in the sense of enabling noteholders to obtain something substantially more valuable than the current market value of the notes) that led to its strong acceptance. It should not be overlooked that a minority found the existing attributes of the notes more attractive. However the present point is whether the statement was presented in such a form as to distort fair consideration of the proposal. On the whole I regard it as a reasonable satisfaction of what the Corporations Law requires. DIFFERENT CLASSES OF CREDITORS The question arises whether different classes of creditors should have been identified so that separate meetings were necessary. It was submitted that the Triton parent companies should have been treated as a separate class, and alternatively that all noteholders who were already shareholders in Crusader should have been treated as a separate class. That submission was supported by Mr Morris QC and Mr Kelly. An additional submission was made by Mr Lippiatt (on behalf of Mr Catto) that there are three distinct classes of noteholders, namely those holding notes who also hold shares in Crusader, those who hold notes alone, and Triton. The objections may be considered together. I accept that the initial responsibility for determining whether class meetings should be summoned is on the applicant, and that failure properly to constitute a class meeting may lead to eventual approval of the scheme being denied (Nordic Bank P.L.C. v. International Harvester Australia Limited and Others (1983) 2 V.R. 298; Re Brian Cassidy Electrical Industries Pty Ltd (1984) 2 A.C.L.C. 628). Many expressions have been used in the search for a test which will help identify a class of creditors. Perhaps the most helpful and frequently used statement is that of Bowen LJ in -- 13 of 22 -- 14 Sovereign Life Assurance Co. v. Dodd [1992] 2 Q.B. 573, 583; "It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest." A similar test was suggested in Re International Harvester Limited (1982-83) 7 A.C.L.R. 796, 799 and Re Bond Corporation Holdings Limited (1991) 5 W.A.R. 143, 152. It is fairly robust test, and does not suggest that interests have to be identical in all respects. There is obviously a need for some common interest and the possibility of reasonable consultation with a view to it. All the noteholders have the same legal rights and they may fairly be regarded as members of a class unless some sufficient ground of distinction can be shown, or unless the capacity to consult together with a view to their common interest is lacking. So far as the fact that some of them are shareholders and some of them non-shareholders is concerned, the argument is that the shareholders may have a greater interest in doing what is best for Crusader than doing what is best for noteholders. In particular it is suggested that they may be prepared to sacrifice their interests as noteholders in order to improve the value of their shares. Whilst it is true that such persons have two strands of self-interest, their interest in reasonable realisation of the notes still coincides with that of all noteholders, and I cannot regard their rights as so dissimilar as to make it impossible for them to consult together with a view to their common interest. This particular distinction (between creditors simpliciter and creditor/shareholders) has been raised in other cases. In the circumstances of Re Gazelle Constructions Pty Ltd (1984) 2 A.C.L.C. 680, the creditor/shareholders were held to constitute a separate class, whilst in Re Jax Marine Pty Ltd (1967) 1 N.S.W.R. 145 it was held that they did not. Both cases were in a sense stronger than that of the present objectors in that in those cases different benefits would be enjoyed by creditor/shareholders than by other creditors. It is not necessary to discuss these cases -- 14 of 22 -- 15 further, as they are primarily instances of circumstances which have influenced the characterisation exercise one way or the other. In the present case I am firmly of the view that this particular distinction is insufficient to call for the holding of separate meetings. The submission in relation to the need for the two Triton companies to be identified as a separate class is stronger. The same argument namely that it has a much stronger interest in doing what is best for Crusader than doing what is best for the noteholders is at the heart of the submission, but of course it is a stronger submission than the general one advanced on behalf of the other shareholder/noteholders. In my view the fact that Triton has such an interest does not stamp it into a separate class. It is difficult to see that any intrinsic feature of the scheme would necessarily cause the share value to rise or to fall, notwithstanding that in a general sense the scheme was perceived by the directors to be for the long term benefit of the company. It is open to think that such a scheme can be for the benefit both of the company and of the noteholders, and in the long term of the shareholders. It might even be for the benefit of the shareholders in the short term. This is not a situation where it may be perceived that noteholders would be dissuaded from attending the meetings because of the fact that an inappropriate, powerful party was permitted to attend. Where a sufficient clash of interest is apparent, separate meetings may be necessary. Conversely courts do not create classes unnecessarily because this causes unnecessary inconvenience, artificiality, and increases the possibility of veto by a limited group (cf. Nordic Bank P.L.C. v. International Harvester Credit Corporation of Australia Limited (1983) 2 V.R. 298, 301-302). In cases where divergent interests are shown to exist it is sometimes possible for the Court to treat the result of the voting at the meeting as not necessarily representing the views of the whole class as such, and thus to apply with more reserve the usual view of the Courts that members of the class are better judges of what is to their commercial advantage than the Court -- 15 of 22 -- 16 (Re Chevron (Sydney) Limited (1963) V.R. 249, 255 per Adam J). The taking into account of such a matter has been approved in subsequent cases including Re Landmark Corporation Limited (1968) 1 N.S.W.R. 759 and Re Jax Marine Pty Ltd above. Where very strong support can be seen in both potential subdivisions of the class, it may be appropriate for the Court to approve the scheme even though it is arguable that two meetings might have been held. In such a situation one has to consider whether the presence of the inappropriate parties may have unduly influenced the attendance or voting of the other sub-class. In the present case, even if separate meetings had been held, it would be very difficult to conclude that the majority view of both sub-classes could have been very different from the combined result that has been recorded. In other words, even applying the utmost reserve of the kind mentioned by Adam J, the events which have happened demonstrate a satisfactory level of support across the board. There are therefore several reasons for rejection of the submission that approval of the scheme should be withheld because separate meetings were not held between different components of the noteholders. INVOLUNTARY MEMBERSHIP Because part of the consideration for redemption of the note is a share in the company, it was submitted that the effect of the scheme is to compel every noteholder to become a shareholder. Section 184 of the Corporations Law includes the provision that: "A person who agrees to become a member of the company and whose name is entered in the company's register of members becomes a member of the company." Of course the formulation of a composition or arrangement does not justify schemes which are inconsistent with the law. "Whatever the basis for the United Kingdom decisions which sanctioned such an arrangement involving an alteration of rights, the interpretation given to the predecessors of s.411 provides no justification for regarding the section as -- 16 of 22 -- 17 constituting authority for approving an arrangement containing a provision which is inconsistent with the express or implied provisions of the Law." (Australian Securities Commission v. Marlborough Goldmines Limited (1992-1993) 177 C.L.R. 485, 502). The submission is that the proposed scheme is inconsistent with the requirements of s. 184 of the Corporations Law, as not all of the noteholders will have agreed to become members of the company. The submission seeks to draw support from statements of Lockhart J in Re Hunter Resources Limited (1992) 7 A.C.S.R. 436, 443-444, contending that "the actual agreement or assent" of a personal to become a shareholder is necessary. I do not read this into his Honour's judgment. His Honour expressly pointed out that no bilateral element of agreement was required by s. 184. The section merely requires the agreement of the person to become a member, and uses the word "agrees" in the sense of "assents". That is consistent with long standing interpretations of the Companies Act which recognise that formal agreement is not necessary. The taking of a transfer of shares is an obvious example where appropriate assent may be inferred. In the present matter, all noteholders had assented to and are bound by the trust deed. Clause 17.1g of the Fourth Schedule to that deed gives the power to the members through extraordinary resolution at a general meeting "to sanction the exchange of notes for the conversion of notes into shares, stock, debentures, debenture stock or other obligations or securities of the company or any other corporation formed or to be formed". The meeting at 9 May was expressly called to pass a resolution approving an amendment to the trust deed to require the exchange of the share and additional payment in satisfaction of the note. In short, all noteholders in assenting to the trust deed bound themselves to whatever amended obligations might lawfully be effected under that deed. It seems to me that all noteholders, including the minority, have assented to be bound in this way, and that when they receive shares in due course they will be doing so -- 17 of 22 -- 18 consistently with the requirements of s. 184. Additional arguments were presented by Mr Jackson QC in answer to this point and they will be briefly noted. It would seem that schemes of this kind have been previously approved by courts pursuant to a composition or arrangement. In Re Empire Mining Co. (1890) 44 Ch D. 402, North J held that the court had power to sanction a scheme which provides for debenture holders to accept fully paid shares in satisfaction of their claims: "It is proposed that the debenture holders, on giving up their so-called security, shall have fully paid up shares in the new company to a similar amount. Of course they need not take those shares unless they like, but that is what is offered to them." (p. 410). This seems to have been the sanctioning of a compulsory scheme inasmuch as the dissentient debenture holders would in any event lose their debentures in exchange for the potential benefit of taking or leaving the shares that were offered. This is made clear (again by North J) in Re Alabama New Orleans Texas and Pacific Junction Railway Co. (1891) 1 Ch 213, 223, where it was explicitly stated that debenture holders could be compelled to give up their debentures in exchange for fully paid up shares. That decision was approved in the Court of Appeal (ibid. p. 235), although the point was not further commented upon by the members of that Court. On the facts of the present case I hold that there is sufficient assent or agreement on the part of all noteholders to satisfy the requirements of s.184 in relation to any shares that those noteholders will receive. It is therefore unnecessary to decide the more general question whether, in the absence of such assent, compositions or arrangements are precluded from requiring the swapping of shares for debentures or shares in satisfaction of any other form of debt. Having regard to the cases already mentioned I incline to the view that it is possible for such schemes to be approved by a requisite majority, provided that they are not in effect an evasion of some other requirement of the Corporations Law, as for example in A.S.C. v. Marlborough Goldmines above. -- 18 of 22 -- 19 The primary conclusion is that the scheme does not infringe in any requirement of s.184. WAS A PROSPECTUS NECESSARY It was submitted that the scheme was really a share issue and that in consequence a prospectus ought to have been issued complying with s.1018(1) of the Corporations Law, and complying with the requirements of Division 2 of Part 7.12 of the Law. The preliminary question is whether the scheme involves offering "securities for subscription". The submission is that by putting the proposed scheme before the noteholders the company offered them collectively an opportunity to subscribe for shares. I would not characterise this scheme for the conversion of notes as an "offer for subscription" of an "issue of invitations to subscribe" for shares in the company. There is no reason to think that on any subjective basis the essential purpose which the company desired to achieve was a share issue, indeed the primary motivation was the alteration of obligations on the existing notes. On an objective level, whilst the issue of shares is a central feature of the scheme, it does not readily or even primarily satisfy the words which have been quoted above. I regard it as essentially what it purported to be, namely a scheme for an arrangement between the company and existing noteholders. It is unnecessary to consider alternative submissions on behalf of the company to the effect that there was sufficient compliance in substance with the requirements of a prospectus in any event. IS THE SCHEME FAIR AND REASONABLE It was submitted that the scheme is unreasonable in that it operates unfairly against noteholders who are not shareholders through forcing them to become shareholders. There is little doubt that the scheme will prove inconvenient to some noteholders, and as -- 19 of 22 -- 20 the voting shows it was opposed by some of them. That however is not to say that it was not overall commercially desirable. Unanimous satisfaction is rare. Inconvenience may be discerned to those noteholders who prefer a steady income, and who now they may find it necessary to sell the shares thereby obtained and reinvest those proceeds along with the money which has been paid to them. I do not underestimate these difficulties but they do not go to the extent of rendering the scheme unreasonable or as undesirable in an overall sense. Mr Morris QC referred to the following statement of Fry LJ in Re Alabama New Orleans Texas and Pacific Junction Railway Co above at p.247: ". . . it (the Court) is bound to be satisfied that the proposition was made in good faith; and, further, it must be satisfied that the proposal was at least so fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it." I think the scheme satisfies the above test, and it must be noted that a strong majority of the creditors who formed that class thought so too. Mr Morris further submitted that the scheme was in effect designed to extricate the company from its bargain with the noteholders and that it was unreasonable to force it on people who would wish the present terms and conditions to continue. Whilst this submission has some weight in the overall picture, it is to be noted that there is in any event a power in the trust deed to bring about the same result, and that the assent by the noteholders to the trust deed weakens the suggestion of unfairness in the presentation of a scheme such as the present one. The Court of course is reluctant to make commercial judgments, especially contrary to the recorded view of the creditors. I am unable to conclude that the scheme ought to be refused on the grounds that it is not fair or reasonable. OTHER OBJECTIONS Mr Lippiatt, on behalf of an objector, expressed concern at the failure of the applicant to -- 20 of 22 -- 21 arrange for the prompt filing in court of the minutes of the meeting 9 May. In consequence there would have been a disadvantage to objectors and potential objectors who might need to refer to the official record of proceedings. The usual practice, on the information before me, is that the chairman swears an affidavit exhibiting the minutes and relative data enabling attendance and proxy voting to be checked, and other matters that will enable the validity of the meeting to be examined. This is a desirable practice although no reference was made to any prescription of it by rule. I am prepared to say that it is a practice which should be adhered to, and failure to observe it may result in disadvantage to parties, possible adjournment and associated expense, and in a serious case might be regarded as tending to support bad faith. However having said that, the omission in the present case was not such as to require the scheme to be struck down. It was not suggested that the lateness in production of the minutes caused any irreparable disadvantage to any party. ORDERS It will be ordered that the arrangement agreed to by the noteholders of Crusader Ltd at the meeting of noteholders of 9 May 1995 be approved. COSTS Although the objections have been unsuccessful, and they have to some extent increased the company's costs in obtaining approval of the scheme, in a context such as this it is exceptional to order costs against persons who exercise their right to object. Not uncommonly they are given their costs, especially where they raise matters which should properly be aired even if they are not upheld. In the present matter I have no hesitation in ordering that the costs of Mr Catto, Gymboree Pty Ltd and Gymbo Pty Ltd should be paid by the company. Their intervention was limited and in any event did not contribute greatly to the extension of the litigation. -- 21 of 22 -- 22 A slightly different position pertains in relation to Romaco Pty Ltd which carried forward the fight and did so on a very wide front. The matter is complicated by the fact that Romaco is controlled by Mr Graham Morris who has had a long association with Crusader and who only recently relinquished his office as a director of that company in circumstances of public controversy. He was cross-examined by Mr Jackson QC with a view to showing him to be a disgruntled former director. This was denied. If it were shown that Mr Morris was embarking upon a deliberate campaign to frustrate the actions of the present board of Crusader, or was indirectly venting feelings of personal resentment of the actions of Triton, then the present intervention in this matter might be seen to be for an ulterior purpose, and this would be reflected in a costs order adverse to his company. If continued attempts to frustrate the projects of the present board became evident it would be difficult to resist the inference of a pattern of obstruction for a personal purpose. That however is not shown on the evidence before me, and I am not at this stage prepared to draw an adverse inference. I shall accordingly make the same order for costs in his company's case as in those of the other objectors. It is ordered that the company pay the costs of the objectors to be taxed. The trustee shall also have its costs of appearance. -- 22 of 22 --