First Phoenix Consolidated Ltd, Re [1992] QSC 75

11 ~4f3 TRANSCRIPT OF PROCEEDINGS State Reporting Bureau, 4th Floor, The Law Courts, George Street, BRJSBANE. 0. 4000 ·Tel. (07) 227.4360 (Copyright in this transcript is vested in the Crown. Copies thereof must not .be made or sold without the written authority of the Director, State Reporting Bureau.) •SUPREME COURT OF QUEENSLAND CIVIL. JURISDICTION COOPER J No 588 of 1991 IN THE MATTER of The Corporations Law and IN THE MATTER of First Phoenix Consolidated Limited (in provisional liquidation) ACN 010 664 034 BRISBANE .. DATE 6/ 3/92 JUDGMENT 1 -- 1 of 9 -- 10 20 30 060392 JUDGMENT HIS HONOUR: These reasons are being given extempore. This is an application under s 411 6£ the Corporations Law (the law) to convene a meeting of creditors to consider a proposed scheme of arrangement in respect of First Phoenix Consolidated Limited (the company). An application to wind up the company is also before the Court. The applicant on the winding-up application has appeared and sought to be heard on the application to convene a meeting. The winding-up application was filed on 22 July 1991. A provisional liquidator was appointed on 2 August 1991. On 24 September 1991 Robin AJ ordered that a meeting of creditorsbe called to consider the question "whether the company should or should not be wound up". A clear majority of creditors voted against a winding up. The applicant, on the winding-up application, Celtic Investments Pty Ltd (in liquidation) (Celtic) will, if the application to wind up proceeds to the making of a winding-up order, have an entitlement to be reimbursed the costs incurred by it up to the appointment of a liquidator (s 466 (2) 40 of the Law) and such taxed costs would be first 50 priority with the costs of winding up in the payment out of funds· in the hands of the liquidator (s 566 (1) (a)) of the Law). If there is no winding up the costs incurred, and in respect of which orders have been obtained,would rank equally with other unsecured creditors for payment. Under the scheme as proposed Celtic would be treated no differently from any other unsecured creditor in respect of these costs and the debt on which the application to wind up is based. • Old. 2 10 20 30 40 50 60 -- 2 of 9 -- 10 20 060392 JUDGMENT In these circumstances I am satisfied that Celtic has a sufficient interest to appear and be heard on the application to convene a meeting of creditors to consider the scheme (in Curry & Mooney Development Ltd (1978) QdR 277 the petitioning creditor appeared and was heard in opposition to the application, although the report does not make it clear whether . its locus to do so was in question) . Celtic opposes the application on two grounds, namely:- (a) that it is not proposed to call a meeting of preferred creditors being persons who would have a priority under s 556 of the Law over the unsecured creditors in the event of a winding-up order being made. (b) that the proposed scheme fails to provide for a scheme of priority which reflects the statutory scheme contained in s 556 of the Law. 3° Mr Boughen, who appears for the applicant, has offered to amend the draft scheme in paragraph 8 (c) to provide for payment of debts in the amounts which would qualify as preferred debts under s 556 of the Law, after payment of the sums provided for in sub-clauses 8 (a) and (b) and before 40 payment of the dividend to unsecured creditors as provided for in the scheme. If the amendment were made Celtic and the provisional liquidator would receive the priority accorded under s 556 of the Law subject to the costs and expenses of the scheme (as defined) (clause 8(a)) 50 and the debts etc of the scheme manager incurred during the currency of the scheme (clause 8 (b)) being paid. On an application to convene a meeting the Court is required to have regard to the matters provided for -in s 411 of the Law and may not make an order unless notice has been given to the Australian 60 •. Qld. 3 10 20 30 40 I 50 60 -- 3 of 9 -- 10 20 50 060392 JUDGMENT Securities Commission as required by s 411 (2) . In this case the Australian Securities Commission has abridged the time for notice and consented to the hearing of the ' application by the Court on 5 March 1992. In a letter dated 5 March 1992 to the solicitors for the applicant the Australian Securities Commission has advised:- "The Commission" does not object to the proposed arrangement or the draft explanatory statement lodged with the Coml11.ission on 4 March 1992, PROVIDED HOWEVER that an executed copy of the agreement between BARRY LAWN JENNER and FIRST PHOENIX CONSOLIDATED LIMITED and SAUL SPIGLER and JOSEPH STARVAGGI"iS lodged with the Victorian regional office of the Australian Securities Commission in the same form as the copy of the unexecuted agreement lodged with the Commission on 4 March 1992 within seven (7) days of the date of the hearing of the application." The Court is also_entitled on this application to give consideration to the general proposals of the scheme and the scheme documents (see re Marketeers Pty Ltd (1982) QdR 93 at 95; re Exploration . Survey and Engineerin~ Pty Ltd (1969) QWN i1; re Bond Corporation Holdings Ltd (1991) 5 ACSR 304 at 316) and may, but not must, determine the question of whether separate classes of meetings of creditors ought to be called. The Court, in determining whether to call a meeting, is guided by the principle that a meeting will not be ordered to be called if, for whatever reason, the scheme would be unlikely to receive approval under s 411 (6) even if it were supported by a majority of the creditors (see Bond at 316 and the cases there cited) . However, any view taken by a court at this preliminary stage ' is not binding upon the Court if application is sought at a later date for approval under s 411 (6) of the Law after a meeting of creditors. ··"·Old. 4 10 20 30 50 60 -- 4 of 9 -- 20 060392 JUDGMENT A number of cases were cited by counsel for Celtic to support the proposition that "preferred" creditors ought to be excluded from the definition of unsecured creditors as provided in the proposed scheme and that a separate meeting of such creditors as a class ought to be called. Two observations ought to be made immediately. The first is that until a winding~up order is made there is no priority at law and such priority as may come into existence with the making of a winding-up order relates only t6 so much of the debt as falls within the terms of s 566 of the Law. It does not relate in this case to the underlying debt which founds the application to wind up. The second point is this: that until a winding-up order is made there is no 'right to priority and at law the rights of the creditor are no different from any other unsecured creditor. There are a number of Australian cases which consider the approach of the Courts to determining whether separate classes exist and whether separate meetings ought to be called, for example, re Jax Marine Pty Ltd (1967) 1 NSWR 145 at 148-149; re Linter Textile Corporation Ltd (1980) 8 ACLC 1089 at 1093 and re International Harvester (Aust) Ltd (1987) 7 ACLR 796 at 799. The cases are reviewed by Owen J in Bond. I agree with His Honour's conclusion at p 317:- "In determining classes of creditors, the Court must balance the danger of a compromise being forced on dissenting creditors by a majority, against the danger of a minority of creditorshaving the power to veto the scheme. The Court must be satisfied that the result of a meeting islikely to reflect properly che views of the creditors concerned. In approaching its task theCourt must identify the legal character of the 5 10 20 30 -to i ' l so -- 5 of 9 -- !Q 20 30 50 060392 JUDGMENT rights and obligations of the creditors against the company and must assess the way in which those rights and obligations will be affected in the implementation of the scheme. Creditors whose legal rights and obligations (so understood) are so dissimilar to those of other creditors that it would be impossible for them to consult together with a view to their common interest must be treated as a separate class." In the instant case Celtic has no accrued right under the law to a priority over other creditors. Under the scheme with the amendment conceded as being necessary to take account of the contingent interest of Celtic and any other person who might be in a similar position, Celtic receives an advantage which it does not presently have in respect of the costs it has incurred to date, but not as to its other debt. There is, therefore, no suf£icient dissimilarity between Celtic and other unsecured creditors on this account to treat Celtic as a separate class, nor would there be, in my opinion, any dissimilarity so far as concerns any other like creditor where the amendment as proposed is to be made as I think it ought. That Celtic is postponed under the scheme to the payments in clauses 8 (a) in 8 (b) does not, in my view, justify Celtic and others, if any, in a like situation, being placed in a separate class and possibly being given power to veto the scheme. The question of priority as to payments in this case ought to be regarded as a matter going to the general question of whether ultimate approval of the scheme by the Court is unlikely. Applying the tests as formulated by Owen J in Bond I am satisfied that Celtic and others similarly placed do not constitute a separate class of creditors and that separate meetings ought not to be called. The ultimate responsibility, however, to ensure that a class meeting is properly constituted lies tnr, Q!d. 6 10 20 ::o GO -- 6 of 9 -- 060392 JUDGMENT with the applicant and if it fails to do so subsequent approval may be refused (see re Brian Cassidy Electrical Pty Ltd (1984) 2 ACLC 628 at 631 and the cases cited there). I would not at this stage refuse to call a meeting of creditors for want of division into classes on the grounds !0 contended for by Celtic. 10 I was referred to a number of cases by counsel for Celtic as to the approach of the Court to the statutory priority where approval of schemes of arrangement are concerned. In re 20 Price Mitchell Pty Ltd (1984) 9 ACLR 1 the proposed scheme 20 sought to alter the statutory order of priority in the event of the company being placed in liquidation. That is not the situation here. The observations of McLelland J in Price Mitchell Pty Ltd when placed in the context of the scheme in 30 that case do not bear on what is proposed under the proposal 3C before me. There is no hard and fast rule that the priorities provided for under the Law should be transposed to a scheme of arrangement. In re V & M Diagnostic Services Pty Ltd (1985) 3 ACLC 306 Cohen J said at p 310:- "Should the Court, when asked to approve an arrangement with the creditors of an insolvent company which takes the place of a winding up require as a condition of that approval that the policy of priorities be applied in the same. way as it would in the winding up? My view is that in general the Court should so require. There may well be cases where that requirement need not be made and it would be a fetter on the Court's discretion to suggest that this should be an invariable rule." ; I agree with those observations. The scheme gives Celtic, subject to clauses (a) and (b) priority it would have under the Law and the scheme gives it 7 60 -- 7 of 9 -- 060392 JUDGMENT the prospect of a dividend in relation to its non-priority debt, such prospect, on the evidence, being something which it now does not have. That is, the scheme and the costs associated with the scheme give Celtic the hope of a payment which, otherwise, on the material, is remote. It is a 10 10 20 3C .:1() 50 question of judgment as to whether Celtic ought to have any further priority. I would not refuse the application as a matter of public policy on the basis of the now proposed order of priorities as it is contended by Celtic that I should do. · The proposed scheme must be amended to reflect the concession made. So too clause 8 (c) must be amended to reflect the definition of scheme fund. At the moment it is, at the least, misleading and prima facie establishes only a fund of the surplus achieved after the sale of the secured assets. The explanatory memorandum must be amended to reflect these changes. Clause 5 of the explanatory memorandum is misleading, particularly as the provisional liquidator's costs will be treated as being in the same position as Celtic's costs and, notwithstanding the reason for its inclusion, clause 5, as presently framed, must be deleted. Subject to the amendments being made to reflect what I have said above and subject to compliance with the requirements of the Australian Securities Commission I make the following orders. :r.ter, Old. 8 20 50 -- 8 of 9 -- 060392 JUDGMENT HIS HONOUR: I make orders in terms of paragraphs one, two, three, four and five of the notice of motion. 10 10 HIS HONOUR: I order that the application to wind up be adjourned to Monday 27 April 1992 and, on the application to wind up, I reserve the costs. 20 20 30 30 50 60 ! ----~- 1 --·-------~ -:~t.) 9 II -- 9 of 9 --