FEDERAL COURT OF AUSTRALIA

In the matter of Opes Prime Stockbroking Limited (No 2) [2009] FCA 864

CORPORATIONS – scheme of arrangement – considerations relevant to exercise of discretion to approve scheme – whether the scheme is fair and reasonable – when a scheme may be altered by the court 

Corporations Act 2001 (Cth) s 411

Central Pacific Minerals NL, Re [2002] FCA 239

Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220

HIH Casualty and General Insurance Ltd, Re (2005) 53 ACSR 12

Independent Practitioner Network Ltd, in the matter of Independent Practitioner Network Ltd (No 2) [2008] FCA 1593

In the matter of Opes Prime Stockbroking Limited [2009] FCA 813 

Investorinfo Limited, Re (2006) 24 ACLC 44

Matine Ltd, Re (1998) 28 ACSR 268

Permanent Trustee Co Ltd, Re (2002) 43 ACSR 601

Buckley on Companies (14^th ed, 1981)

IN THE MATTER OF OPES PRIME STOCKBROKING LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 086 294 028), LEVERAGED CAPITAL PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION), HAWKSWOOD INVESTMENTS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) and OPES PRIME GROUP LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 120 273 223); JOHN ROSS LINDHOLM, ADRIAN LAWRENCE BROWN AND PETER DAMIEN McCLUSKEY

VID 222 of 2009

FINKELSTEIN J

4 AUGUST 2009

MELBOURNE

IN THE MATTER OF OPES PRIME STOCKBROKING LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 086 294 028)

THE COURT ORDERS THAT:

1.         The scheme of arrangement between Opes Prime Stockbroking Limited (Receivers and Managers appointed)(in Liquidation) (“OPSL”) and its creditors agreed to by the said creditors at the meetings convened pursuant to the order of the Honourable Justice Finkelstein made on 1 July 2009 and held on 24 July 2009, a copy of which is annexed to this order as Annexure A, be and is hereby approved.

2.         The scheme of arrangement between Leveraged Capital Pty Ltd (Receivers and Managers appointed)(in Liquidation) (“LCPL”) and its creditors agreed to by the said creditors at the meetings convened pursuant to the order of the Honourable Justice Finkelstein made on 1 July 2009 and held on 24 July 2009, a copy of which is annexed to this order, be and is hereby approved.

3.         The scheme of arrangement between Hawkswood Investments Pty Ltd (Receivers and Managers appointed)(in Liquidation) (“HIPL”) and its creditors agreed to by the said creditors at the meeting convened pursuant to the order of the Honourable Justice Finkelstein made on 1 July 2009 and held on 24 July 2009, a copy of which is annexed to this order, be and is hereby approved.

4.         The scheme of arrangement between Opes Prime Group Limited (Receivers and Managers appointed)(in Liquidation) (“Opes Prime”) and its creditors agreed to by the said creditors at the meeting convened pursuant to the order of the Honourable Justice Finkelstein made on 1 July 2009 and held on 24 July 2009, a copy of which is annexed to this order, be and is hereby approved.

5.         Orders under section 413 of the Corporations Act 2001 (Cth) that with effect from the date upon which the orders in paragraphs 1 - 4 come into effect in accordance with section 411(10) of the Corporations Act 2001 (Cth):

(a)        the whole of the undertaking and all of the property and liabilities of each of OPSL, LCPL and HIPL be transferred to Opes Prime; and

(b)        any pending legal proceedings by or against any of OPSL, LCPL and HIPL be continued by or against Opes Prime.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                          Orders were made on 1 July 2009 giving the liquidators of Opes Prime Stockbroking Limited (Receivers and Managers Appointed) (In Liquidation) (OPSL), Leveraged Capital Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (Leveraged Capital), Hawkswood Investments Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (Hawkswood) and Opes Prime Group Limited (Receivers and Managers Appointed) (In Liquidation) (OPGL) (together, the Opes companies) leave to convene meetings of separate classes of the companies’ creditors to agree to schemes of arrangement between the companies and those creditors.  The meetings were held on 24 July 2009, at which time the schemes were agreed.  The present application is to have the court approve the schemes under s 411(6) of the Corporations Act 2001 (Cth). 

2                          There is a description of the background leading to the proposed schemes and a summary of the schemes themselves in my reasons for permitting the liquidators to convene the meetings: see In the matter of Opes Prime Stockbroking Limited [2009] FCA 813.  I do not propose to repeat what I there said.  For present purposes, an abbreviated description will suffice.

3                          The Opes companies carried on stockbroking and related businesses. Many of their clients’ share trading activities were financed by an Opes company. The financing (called securities lending) was of a kind not understood by many, if not most, of the Opes companies’ clients.  There is material which suggests that a great number of clients were deceived into thinking they had entered into standard margin lending agreements to facilitate their share trading activities.  Following the stock market collapse in late 2007, the clients were left lamenting.  As a group they have lost hundreds of millions of dollars.  On current estimates the Opes companies owe their former clients approximately $630 million.

4                          Many clients have been left in a disastrous position.  Quite a number have lost all their savings and have suffered greatly.  I have been told how difficult it has been for so many people and their families and cannot help but feel the greatest of sympathy for them.  The proposed schemes, if approved, will provide small comfort for the creditors. 

5                          Australia and New Zealand Banking Group Limited, Merrill Lynch International and Merrill Lynch International (Australia) Limited, have agreed to contribute $226 million, together with a number of assets seized by the banks’ receivers, to establish a fund which, if distributed between creditors, will yield them a return of around 37 cents in the dollar.  In exchange, the banks, receivers, Green Frog Nominees Pty Ltd (in liq) (Green Frog) (the Opes companies’ nominee company) and Green Frog’s liquidators (together, the released parties) will be released from all claims by the Opes companies, their liquidators and Opes clients.  

6                          If the schemes are not approved the 13 or so actions which have been commenced by former Opes clients against an Opes company or the banks, and which at the moment are on hold, will be revived.  No doubt more actions will be commenced.  I am familiar with a number of them and can say, with some confidence, that the cost involved in taking them to trial will amount to many millions of dollars.  Moreover, if the creditors are forced to litigate to get back some of the money which they have lost, they will be embarking upon a very hazardous venture.  Most litigation is a gamble.  The clients here have gambled and lost on the stock market.  They may not wish to gamble any more.  If, on the other hand, the schemes are approved, the creditors will be able to put this entire affair behind them.

7                          The jurisdiction of the court to approve a scheme of arrangement is derived from s 411.  Relevantly sub-ss (1) and (2) provide:

(1)        Where a compromise or arrangement is proposed between [a company] and its creditors or … its members … the Court may … order a meeting … of … creditors or … members … to be convened in such manner, and to be held in such place … as the Court directs …

(2)        The Court must not make an order pursuant to an application under subsection (1) … unless:

(a)        14 days notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and

(b)        the Court is satisfied that ASIC has had a reasonable opportunity:

(i)         to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and

(ii)        to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.

8                          There are many cases that have discussed the role of the court in approving a scheme of arrangement.  The most useful statement to my mind is that found in Buckley on Companies (14^th ed, 1981) vol 1, 473-474 (which is in slightly different terms from the corresponding passages in the later editions of the work).  The relevant passage reads:

In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, second, that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme.

9                          This passage has been cited with approval in a number of English cases.  It is not inconsistent with Australian authority: see for example Re Central Pacific Minerals NL [2002] FCA 239;  Re Permanent Trustee Co Ltd (2002) 43 ACSR 601. 

10                        As to the first point mentioned by Buckley, compliance with the statute, I have already resolved several issues, namely whether (a) what is proposed is a scheme of arrangement for the purposes of s 411; (b) the creditors should be grouped into classes; and (c) the explanatory statement required to be provided to creditors complies with the statute. 

11                        Based on several affidavits which the liquidators have filed, a registrar prepared a memorandum in which he informs me that the meetings were convened as required by the order of 1 July 2009.  It was thought that there had been a mix up about the service of some scheme documents but that has now been resolved.  All creditors were served with a full set of documents.  The minutes of the meetings disclose that the creditors agreed to the schemes by substantial majority in both number and value.  Specifically, the evidence shows that the resolutions for adoption of the schemes were carried by the following majorities:

            (a) OPSL

            (b) Leveraged Capital

            (c) Hawkswood

            (d) OPGL

12                        The principal question now is whether the proposed schemes should be approved.  In my reasons for decision on the convening hearing, I referred to some troubling aspects of the proposed schemes.  I should mention two aspects.  First, the schemes provide that a sum of $11.5 million will be distributed otherwise than to the unsecured creditors.  That amount is to be distributed as follows:  (a) $1 million to CLF, a litigation funder who is funding the class action commenced by Imobilari Pty Ltd; (b) $2.5 million to IMF, a litigation funder who is funding several proceedings which have been brought against an Opes company or the banks; and (c) $8 million to be placed in a plaintiffs’ costs fund to cover, at least proportionately, the legal costs incurred by Opes clients in other actions brought against Opes companies or the banks.

13                        The second troubling aspect concerns the release and indemnity deed, which forms part of the proposed schemes of arrangement.  It is the deed which it is proposed the liquidators will execute on behalf of creditors for purposes of releasing all claims against the released parties.  Not only does this deed operate as a release, but there is an indemnity provision contained in it.  Clause 6.5 provides that each creditor must indemnify the released parties against any loss or liability resulting from an Opes related claim brought by any person.  Clause 6.6 provides for a cap on that liability.  That cap is to be limited to: (a) the amount actually received by a creditor under the scheme; plus (b) the proceeds received by a creditor in respect of any third party claims (for example, a claim brought by a creditor against a financial adviser) (the second limb of cl 6.6). 

14                        Those aspects of the proposed schemes were the subject of discussion at the meetings of creditors.  Resolutions were proposed at the OPSL meeting and the Leveraged Capital meeting that, in effect, the following amendments be put to the court at the approval hearing:  (a) the deletion of the second limb of cl 6.6; and (b) the deletion of the clauses providing for payment to the litigation funder and the establishment of the plaintiffs’ costs fund.

15                        The resolutions were defeated by substantial majority.  In the case of the Leveraged Capital meetings, the resolutions were defeated by the same number that voted in favour of the schemes.  At the OPSL meetings, the resolutions were defeated on majorities representing approximately 82 per cent by number and somewhere between 87 and 90 per cent of the value of voting claims.  Importantly for present purposes, when one dissects the votes and excludes the votes of those creditors who take a benefit from the provisions (that is, those creditors whose legal costs might be paid or who might otherwise be under an obligation to pay a litigation funder something out of the proceeds they would otherwise receive from the schemes) there is still a significant majority of creditors who oppose the resolutions.  Nevertheless, Mr Sweeney QC, who appeared for a group of more than 80 former clients, submitted that the court should make the amendments.

16                        Section 411(6) permits the court to approve a scheme of arrangement subject to such alterations as it thinks just.  The section does not circumscribe the extent of the power.  No doubt, it is available in many circumstances.  In Re Matine Ltd (1998) 28 ACSR 268, 284 Santow J said:

The discretion of the court under s 411(6) is at large, but the court would obviously have regard to whether the proposed variation was so novel or substantial as to take the varied scheme beyond the reasonable contemplation of shareholders at the time they agreed to it.

In Independent Practitioner Network Ltd, in the matter of Independent Practitioner Network Ltd (No 2) [2008] FCA 1593 at [17] Lindgren J said:

At least one thing is clear: the Court will not approve subject to alterations unless it is satisfied that the scheme as proposed to be altered would still have been agreed to by the requisite statutory majorities.

            A more circumscribed approach is evident in the judgment of Gyles J in Re Investorinfo Limited (2006) 24 ACLC 44.  He said (at 45) if “the alteration is of a minor kind which does not really affect the details of the scheme, then the Court has power to approve the scheme as amended”. 

17                        It is not presently necessary to determine the outer limit of the court’s power to amend a scheme of arrangement, assuming it is possible to describe the limit.  But whatever be the limit, there is no doubt that the court could remove an unreasonable or unfair provision in a scheme if the inclusion of that provision might warrant withholding approval, provided what remains is, substantially speaking, the scheme to which the members or creditors, as the case may be, agreed.  

18                        It was submitted by a number of creditors that if the amendments proposed in the resolutions were made, there is a risk the schemes may have been defeated.  I agree with that submission.  I am, therefore, not in a position to make the amendments.

19                        The resultant position is that I must decide whether the impugned provisions are such as to render the schemes so unfair that they should not be approved: a sort of “winner takes all” approach. 

20                        In my earlier reasons, I expressed concern about approving a scheme that involves a departure from a pari passu rule.  It is true, as the liquidators point out, that departure from the pari passu rule may, in certain circumstances, be justified.  Section 556 contains a growing list of debts which are accorded priority over other debts of an insolvent company.  Some are given priority for sound policy reasons while others exist for purely political purposes.  Nonetheless, Parliament has chosen what debts are to be preferred and then leaves the general body of unsecured creditors to be treated equally.  According to Mr Sweeney, what these schemes propose, at least in part, is a departure from that statutory regime.  Such a departure is not generally justified.  As to when a departure may be permitted see Re HIH Casualty and General Insurance Ltd (2005) 53 ACSR 12 and Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220 (a deed of company arrangement case).

21                        In the case of the instant schemes, there is not a true departure from the statutory regime for the distribution of assets in a winding up.  The reason is that the money which is to be distributed between creditors has been put up by the banks.  It is true that the liquidators believe there are potential causes of action against the banks which would get in a like amount, but the liquidators’ claim has never been tested and, in any event, the liquidators’ view is only one possible view.  For their part, the banks contend that they are under no liability to the liquidators or the companies in liquidation.  So, in real terms, the money that is to be distributed belongs to the banks and, at the risk of over-precision, does not form part of the liquidators’ assets.

22                        In any event, the liquidators seek to justify the departure, if there be a departure, from the pari passu rule on the basis that under the proposed schemes all creditors who have commenced litigation must discontinue the proceedings without any order as to costs; hence reimbursement of those costs is not unfair.  To the contrary, the liquidators say that not to provide compensation would be unfair.

23                        As regards the proposed payments to the litigation funders, the liquidators say it is fair that those creditors who have entered into funding arrangements should be relieved of the expense they may have incurred in commencing and conducting proceedings.  Specifically, the liquidators say that the spate of litigation which was issued against the banks is likely to have made a contribution to the decision by the banks to compromise the dispute and put up a very large sum of money which will go to all creditors.

24                        In my view, what is proposed is reasonable in all the circumstances.  While the amount involved ($11.5 million) is not small, it is, in reality, only a very small proportion of the funds available for distribution among creditors.  If the amount were to be divided between creditors, each creditor would receive an additional 1.9 cents in the dollar.

25                        As regards the indemnity in favour of the banks, the provision will, in a practical sense, only have application if a creditor is contemplating bringing a claim against an adviser.  Perhaps some creditors will pursue such claims.  I doubt many will; but for those who do I do not think the indemnity will be a bar.  The liquidators point out, and I agree, that the most likely claim a client will bring against a former adviser will be for negligence, breach of a contractual duty of care, or, possibly, misleading or deceptive conduct.  Many of those claims are subject to proportionate liability regimes.  If an adviser is sued he would most likely raise a proportionate liability defence without the need to join a bank.  The position in Victoria is different, but I would not refuse approval of the schemes to deal with what might only be one or two actions brought in this State. 

26                        Another point of potential unfairness is that the values of the releases have not been brought to account for purposes of determining how the fund should be distributed between creditors.  In my earlier reasons, I suggested this may amount to a confiscation of the client creditors’ money in favour of the trade creditors.  There are two reasons why this no longer troubles me.  First, what the trade creditors will receive by way of additional payment is minimal.  Second, the notion that it is possible to value the client creditors’ claims is largely theoretical.  The process of valuation, if one were to be undertaken, would be so complex and costly that I do not imagine any real benefit being achieved from undertaking the task.

27                        Finally, a large number of creditors, by a large majority, supported the schemes after having had explained to them in some detail the effect of the impugned provisions.  While I would not defer to the views of creditors in a clear case of unfairness or if a scheme were patently unreasonable, it would be wrong to disregard the creditors’ views here.  Many are sophisticated investors and most, at least for the purposes of the scheme meetings, had legal advice available to them.  This is a very good example of a scheme the reasonableness of which is best judged by the creditors.  It is clear from the voting that the creditors prefer to take what they will get out of the schemes rather than face the uncertain risks and hazards of litigation.

28                        I propose to approve the schemes and will make orders in the form of the short minutes that were provided by the liquidators.  

29                        The only thing that remains outstanding is whether I should keep secret the names, addresses and votes of creditors.  Section 50 of the Federal Court of Australia Act 1976 (Cth) provides that the court can forbid or restrict the publication of evidence or the name of a party or witness “as appears to the Court to be necessary in order to prevent prejudice to the administration of justice or the security of the Commonwealth”.  Although creditors may wish to keep their details confidential, the publication of that information will certainly not prejudice the security of the Commonwealth and there is no evidence to suggest that the publication could prejudice the administration of justice.  I decline to make a secrecy order.

Associate:

Dated:         12 August 2009