In the matter of Avram Investments P/L

[1992] FCA 814

Re: AVRAM INVESTMENTS PTY LTD
No. V G3235 of 1992
FED No. 814
Corporations

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION
Heerey J.(1)

CATCHWORDS

Corporations - scheme of arrangement - classes of creditors - financial benefits of scheme compared with winding up - discounting of creditors' votes.

Corporations Law: s.411(1) and (4).

Federal Court Rules: 0.71 r.22 (7)(a).

Re Alabama, New Orleans, Texas and Pacific Junction Railway Co (1891) 1 Ch 213

Re Chevron (Sydney) Ltd (1963) VR 249

Re Data Homes Pty Ltd (1972) 2 NSWLR 22

Re Gazelle Constructions Pty Ltd (1984) 2 ACLC 680

Re Jax Marine Pty Ltd (1966) 85 WN(NSW) (Pt 1) 130

Re Linter Textiles Corporation Ltd (Receivers and Managers Appointed) (1990) 8 ACLC 1089

Nordic Bank PLC v International Harvester Ltd (1983) 2 VR 298

Sovereign Life Assurance Ltd v Dodds (1892) 2 QB 573

In the matter of Avram Investments Pty Ltd (ACN 006 3565 139)

HEARING

MELBOURNE

#DATE 10:11:1992

Counsel for the applicants: Mr A.C. Archibald QC with Mr D.H. Denton

Solicitors for the applicant: Henty Jepson and Kelly

Counsel for the Australian Mr M. Steward
Securities Commission:

Solicitors for the Australian Regional General Counsel for
Securities Commission: Victoria

Counsel for the Deputy Mr T. Ginnane
Commissioner of Taxation:

Solicitors for the Deputy Australian Government Solicitor
Commissioner of Taxation:

ORDER

IT IS ORDERED THAT

1. The scheme of arrangement a copy of which is exhibit PGL2 to the affidavit of Paul Gronshell-Luntz sworn 14 October 1992 and filed herein be approved subject to the following amendments:

(a) Clause 1(A) - delete 'July 1992' and substitute 'the Commencement Date'.

(b) Clause 3(b) - delete clause and substitute '(b) consequent upon (a), the Supreme Court of Victoria hearing and determining in Proceeding No. 10395 of 1991 the Appeal Notice of which is dated 28 August 1992; and.

2. The applicant pay the costs of the Australian Securities Commission of the application for an order for meetings.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

HEEREY J. Avram Investments Pty Ltd (the company) applies under s.411(4) of the Corporations Law for the approval of a scheme of arrangement between the company and its creditors. On 22 September 1992 I made an order under s.411(1) directing meetings to be held. Notwithstanding submissions by counsel for the Australian Securities Commission (ASC) at the time, I did not order separate meetings for different classes of creditor. As a consequence, only one meeting was held, at which the statutory majority of 75% in value and a majority in number was obtained. However that does not preclude opponents of the scheme at the approval stage contending that separate meetings should have been ordered or that in any event the Court should not approve the scheme: see Practice Direction (1934) WN 142.

The Company
2. The company was a substantial shareholder in Interwest Ltd, a property developer which collapsed in late 1989 with a net deficiency of $133 million and was ordered to be wound up by an order of the Supreme Court of Victoria on 25 May 1990. The company has not traded since October 1989. Its only activity since then has been litigation against Tricontinental Corporation Ltd in the Supreme Court of Victoria. Those proceedings were settled on 24 December 1991. One of the terms of the settlement was that a debt owed by the company to Tricontinental was assigned by the latter to Mr Peter Avram and Mr Warwick Kerridge.

1. In August 1991 the Deputy Commissioner of Taxation (DCT) commenced winding up proceedings against the company in the Supreme Court of Victoria. These proceedings were adjourned by consent pending the outcome of the Tricontinental litigation. On 14 August 1992 the DCT applied to bring on the winding up application. In the meantime the company had, on 10 August, brought the application for an order for meetings in the Federal Court. On 27 August Senior Master Mahony made a winding up order. A stay was granted pending appeal. The hearing of the appeal commenced on 10 September before Harper J and was subsequently adjourned to enable the application for meetings to be heard. Counsel for the company undertook to me that if the scheme was approved an office copy of the order would not be lodged with the ASC under s.411(10) until the appeal was determined.

2. The company's paid up capital is $3,466,841. All this has been lost. It has a deficit of liabilities over assets of $119.7 million. Creditors are as follows:
   

Australian Taxation office $2,220,611 Peter Avram and Warwick Kerridge $88,000,000 BCC Australia Ltd (in liquidation) (BCC) $10,200,000 Australia and New Zealand Banking Group Ltd (ANZ) $3,200,000 First National Finance Ltd $2,500,000 P and T Avram Ltd $12,157,612 Carlis Holdings Pty Ltd (as trustee of 497-501 Wyndham Street Trust) $1,382,609 Keogh Kerridge $700 Luntz and Co $500

The only assets are a debt from the estate of J and K Avram $4000, and a loan of $316.

The Proposed Scheme
5. Peter Avram will contribute a further $10,000 to the assets of the company. Peter Avram, Warwick Kerridge, P and T Avram Pty Ltd and Carlis Holdings Pty Ltd, whom I shall refer to collectively as "the gifting back creditors" and who together represent 84.85% of the company's debts, will gift to the administrator of the scheme the distribution received by them. The gifting back does not appear on the face of the scheme document itself. There were in evidence deeds of gift dated 2 September 1992 between each such creditor and the company which provided in each case that the creditor "hereby gifts unto (the company) the distribution it is entitled to pursuant to the scheme of arrangement to enable a further distribution to be made to scheme creditors save and except for Carlis Holdings Pty Ltd, P and T Avram Pty Ltd and Peter Avram and Warwick Norman Kerridge." After the distribution, the company is to be released by its scheme creditor and any other person from any debt.

1. It is estimated that if the scheme is implemented creditors will receive $789 per million dollars of debt as opposed to $199 on a winding up

The Meeting
7. The meeting pursuant to the order of 22 September 1992 was held on 9 October 1992. All creditors except ANZ and First National Finance were present in person or by proxy. Thus 95.6% in value and 77.7% in number were present. A number of amendments were adopted, mostly of a formal nature. However one amended the scheme by including in the definition of assets "the sum of $10,000 to be contributed by Peter Avram". The scheme as amended was approved by 98% in value and 86% in number of those voting in person or by proxy. The only dissenting vote was that of the DCT. No complaint was made before me of the convening or conduct of the meeting.

Objections by DCT
8. Counsel for the DCT cross-examined Mr Warwick Kerridge who as well as being the present solicitor for the company had been one of its secretaries from the beginning of 1988 to January 1990. The object of the cross-examination was to demonstrate that compromises with certain debtors of the company were unreasonable, that they might be set aside by a liquidator and that as a consequence the return on a liquidation would be more advantageous to creditors when compared with the scheme proposed by the company. I accept Mr Kerridge's evidence which supported the conclusion that the debtors in question were themselves in parlous financial circumstances and that the compromises were reasonable. In any event, the amounts in question are tiny in comparison with the total indebtedness of the company.

1. There was also an attack on the assignment of the Tricontinental debt to Peter Avram and Warwick Kerridge. Mr Kerridge was himself engaged in the negotiation of the settlement of the Supreme Court proceeding. I accept his evidence to the effect that it was an arms length transaction and that the bank creditors were prepared to assign the debt but not to write it off.

2. In his submissions counsel for the DCT emphasised the marginal difference as between the scheme and a winding up. There was some discussion in the course of argument as to the obvious unstated objective of the scheme, viz the utilization of tax losses incurred by the company. If the scheme is approved it was accepted that some tax benefit would ultimately be obtained, with a corresponding loss to the revenue, far in excess of the amount which the DCT seeks as a creditor. Counsel argued that where a company seeks to make use of the benefit of tax losses by a scheme of arrangement then in ordinary cases the DCT "could not quibble". However he said that where the benefit to creditors is marginal, the loss of public revenue caused by the utilisation of taxes was a factor weighing against the approval of the scheme. I do not agree. I do not see that any questions of commercial morality or public policy are involved. The tax legislation specifically provides criteria which will determine whether or not past tax losses can be utilised if the scheme is approved and the company thereafter earns income. Counsel expressly disavowed, in my opinion correctly, any contention that the scheme involved a fraud on the revenue: cf Re Data Homes Pty Ltd (1972) 2 NSWLR 22 at 28.
   Separate Classes

3. Counsel for the ASC contended that there were three classes of creditors and that separate meetings should have been held for each class. These classes he said were:
   

(i) Creditors whose debts were guaranteed (ANZ, BCC, First National, Peter Avram and Warwick Kerridge).

(ii) The gifting back creditors.

(iii) Other unsecured creditors (DCT, Luntz, Keogh Kerridge).

1. It was also pointed out that the company had granted in favour of BCC charges over shares in Interwest to secure guarantees by the company of debts owed by others to BCC. There was also a similar charge in favour of Tricontinental, the benefit of which passed to Peter Avram and Warwick Kerridge with the assignment.

2. The classic definition of the term "class" for present purposes is contained in Sovereign Life Assurance Ltd v Dodds (1892) 2 QB 573 at 583, where Bowen L.J. said that the court
   

"... 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."

1. In Sovereign Life itself holders of matured life policies were held to form a distinct class from creditors whose policies had not matured. Their respective rights against the company were quite different. One had policies which had already ripened into debts, the other had policies which might not ripen into debts for years to come (see per Bowen L.J. at 583).

2. Subsequent cases have emphasised the importance of considering the dissimilarity or otherwise of creditors' rights as against the company. The fact that different creditors with relevantly similar (thus not necessarily identical) rights may have rights in another capacity vis-a-vis the company will not of itself require them to be treated as separate classes. In Re Alabama, New Orleans, Texas and Pacific Junction Railway Co (1891) 1 Ch 213 the scheme involved first debentures. The court accepted that first debenture holders who had other interests as shareholders or second debenture holders could validly vote although the court would "look with caution and care at the effect of what was done at that meeting" (at 240). Similarly creditors who were also shareholders have not been required to meet as a separate class of creditors: Re Jax Marine Pty Ltd (1966) 85 WN (NSW) (Pt1) 130 at 133; Re Chevron (Sydney) Ltd (1963) VR 249 at 255.

3. Nor will a separate class be created where the legal character of the indebtedness by the company is the same but some collateral agreement establishes some other rights, as between the creditors themselves established by a subordination contract: Re Linter Textiles Corporation Ltd (Receivers and Managers Appointed) (1990) 8 ACLC 1089 at 1093-1094. In Nordic Bank PLC v International Harvester Ltd (1983) 2 VR 298 the Full Court of the Supreme Court of Victoria pointed out the danger involved in courts being too ready to find a multiplicity of classes. In delivering the judgment of the court Lush J said (at 301):
   

"The general plan of s.315 is that when a scheme is proposed it is first put to meetings to test whether those affected by it substantially support it. If they do, it is still open to any one or more persons affected to oppose its final approval. A separated class of creditors can only be bound by the scheme if the meeting of that class approves it by the necessary majority. It is appropriate that creditors who share an interest vis-a-vis the company which places them in a position distinct from that of other creditors and so dissimilar as to make it impossible to consult together with a view to their common interest should be allowed to make a separate decision. To break creditors up into classes, however, will give each class an opportunity to veto the scheme, a process which undermines the basic approach of decision by a large majority, and one which should only be permitted if there are dissimilar interests related to the company and its scheme to be protected. The fact that two views may be expressed at a meeting because one group may for extraneous reasons prefer one course, while another group prefers another, is not a reason for calling two separate meetings."

1. In the present case I do not think application of the Sovereign Life test produces more than one class. The test is to be assessed in relation to the proposed scheme if implemented; Linter at 1093. As to the first suggested class, the only significance of a creditor having a guarantee is that such a creditor has, under cl 6(b), an election whether to join the scheme. In itself the fact that a creditor can look to a surety does not relevantly distinguish that creditor from one who cannot. Both have rights of the same legal character vis-a-vis the company. In any case, it seems on the evidence that ANZ, First National and BCC are not creditors whose "debts are guaranteed by any person" within the meaning of cl 6(b) because the debts of the company are not so guaranteed. Rather it is the company who has guaranteed the debts of other persons. (In this respect the Explanatory Statement cl 41 is inaccurate.) Counsel for the company conceded that Peter Avram and Warwick Kerridge were creditors whose debts were guaranteed, but affidavit evidence indicated they will participate in the scheme.

2. Counsel for the ASC did not put great weight on the fact that First National, BCC, Peter Avram and Warwick Kerridge held security in the form of Interwest shares as a ground for constituting them as a separate class. Since those shares are worthless I do not think holding them as a security is a matter which should push a creditor into a separate class. The reality is that all creditors are unsecured.

3. As to the gifting back creditors, the fact that they may have extraneous reasons for preferring the scheme (International Harvester) or special motives or factors (Jax Marine at 134) does not in my view constitute them a separate class, although it is a factor relevant to any discounting of their vote at the next stage of the process of considering approval, to which I shall shortly refer.

4. Counsel for the ASC relied strongly on Re Gazelle Constructions Pty Ltd (1984) 2 ACLC 680. There McLelland J held that the two shareholders of the company formed a separate class of creditors in respect of a debt owed to them since the scheme provided that they would receive no distribution in respect of their debt. His Honour distinguished Jax Marine because in that case the shareholder/creditors had agreed to contribute some or all of their entitlements under the scheme by a "separate and ancillary agreement" rather than by the terms of the scheme itself (Gazelle at 681). The present machinery for ancillary deeds of gift rather than a provision in the scheme itself would seem to have been adopted with the Jax Marine and Gazelle distinction in mind. Although it might seem a fine distinction, I propose to follow it. I do so however the more confidently because, unlike the situation in Gazelle, the votes of the gifting back creditors are not critical. Once it be accepted that BCC at least was in the same class with the DCT, Keogh Kerridge and Luntz and Co, there would be a sufficient majority in number and value to overcome the DCT.

Discretion
21. In Jax Marine (an application for an order for meetings) Street J held that the shareholder/creditors did not form a separate class. But his Honour went on to say (at 134):

"To say that the Smithson group's interests do not preclude their being members of the class is, of course, far from saying that their vote will, if and when a petition is subsequently presented, carry equal weight to that of an unsecured creditor who is not shown to have any special interest. When the petition, if there be a petition, comes before the court there is ample room within the court's statutory discretion to decide the petition in accordance with the requirements of justice and equity as those requirements appear to affect the rights of the class and its members. Quite frequently it is necessary to discount, even to the point of discarding from consideration, the vote of a creditor who, although a member of a class, may have such personal or special interest as to render his view a self-centred view rather than a class-promoting view."

1. In Chevron (an application for approval) Adam J, after holding that debenture holders who were shareholders could form a class with those who were not, said (at 255):
   

"... I have concluded that, by virtue of their common rights as debenture holders, all debenture stockholders despite the different considerations which may influence them are properly to be treated as a single class for the purposes of a meeting convened under s.90(2). The true position appears to be that where the members of a class have divergent interests because some have and others have not interests in a company other than as members of the class the Court may treat the result of the voting at the meeting of the class as not necessarily representing the views of the class as such, and thus should apply with more reserve in such a case the proposition that the members of the class are better judges of what is to their commercial advantage than the Court can be. In so far as members of a class have in fact voted for a scheme not because it benefits them as members of the class but because it gives them benefits in some other capacity, their votes would of course, in a sense, not reflect the views of the class as such although they are counted for the purposes of determining whether the statutory majority has been obtained at the meeting of the class."

1. In the present case, as I have noted, there is in any case sufficient number and value of creditors unconnected with the gifting back creditors to constitute the statutory majority even if the value of the gifting back creditors debts were to be discounted to nil. This also answers the argument that the ultimate beneficiaries of the shareholding in the company also own, or are associated with, the gifting back creditors.

1. I think also that it has not been shown that the scheme is not one which could, "by reasonable people conversant with the subject, be regarded as beneficial to those on both sides who are making it": Alabama at 243. The only dissentient creditor, the DCT, will get $590 per million more under the scheme than on a winding up. Despite an attempt to demonstrate the contrary, it has not been shown that a liquidator would have any prospect of recovering more for creditors. Therefore it does not seem to me that the scheme involves coercing the DCT to promote interests adverse to those of the class: Alabama at 239. I do not see that an interest adverse to the DCT, qua creditor, is being promoted.
   

2. Finally, there is some authority for the proposition that the special motives of dissentient creditors might also be examined and their vote discounted as well: Jax Marine at 135. Since the losses of the company might be expect to generate tax benefits (assuming compliance with statute) far in excess of the debt of the DCT, his opposition might be looked at as being founded on considerations other than that applicable to a creditor for $2.2 million.

Orders
26. For the above reasons, I order that the scheme as amended at the meeting of 22 September 1992 be approved subject to certain further amendments as follows. In cl 1(A) delete "July 1992" and substitute "the Commencement Date." Delete cl 3(b) and substitute "(b) consequent upon (a), the Supreme Court of Victoria hearing and determining in Proceeding No. 10395 of 1991 the Appeal Notice of which is dated 28 August 1992; and".

1. I make the order notwithstanding the non publication of the application pursuant to O.71 r.22(7)(a).

2. It is not appropriate to make any order for costs in favour of the company since it would have incurred costs on the application for approval in any event. The ASC should get its costs for appearance on the application for an order for meetings since it has a statutory function to fulfil. It should not however recover costs on its unsuccessful opposition to approval. Nor should the DCT.