FEDERAL COURT OF AUSTRALIA

Lift Capital Partners Pty Limited (In Liquidation), in the matter of Lift Capital Partners Pty Limited (In Liquidation)

[2009] FCA 1523

Corporations Act 2001 (Cth) s 411, 412

Fowler v Lindholm, Re; Opes Prime Stockbroking Ltd (2009) 259 ALR 298

In the matter of Lehman Brothers International (Europe) (in Administration) [2009] EWCA Civil 116

IN THE MATTER OF LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) (ACN 111 015 500)

LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) (ACN 111 015 500) and LIFT CAPITAL NOMINEES NO 1 PTY LIMITED (IN LIQUIDATION) (ACN 112 913 532)

NSD 1308 of 2009

EMMETT J

27 NOVEMBER 2009

SYDNEY

IN THE MATTER OF LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) (ACN 111 015 500)

THE COURT ORDERS THAT:

1.                  Pursuant to sub-section 411(1) of the Corporations Act 2001 (Cth) (the Act), there be convened:

(a)                a meeting of each of the following two classes of creditors of the First Plaintiff referred to as (i) and (ii) below for the purpose of considering and, if thought fit, agreeing, with or without modification, to a scheme of arrangement between them and the First Plaintiff (the Lift Capital Scheme):

(i)                 all creditors of the First Plaintiff who:

(A)             transferred, or assert that they transferred, any financial product (as defined in the Act) to the First or Second Plaintiff;

(B)              instructed, or assert that they instructed, the First or Second Plaintiff to purchase any financial product (as defined in the Act) on their behalf or to be held to their account; or

(C)             entered into a facility agreement with the First Plaintiff and borrowed money from the First Plaintiff to purchase securities and who, arising out of the transfer by the Second Plaintiff of securities that it held on behalf of that person to Merrill Lynch International and/or Merrill Lynch International (Australia) Limited, has a debt or claim admissible to proof against one or both of the Lift Companies within the meaning of section 553 of the Act.

(together the Lift Clients) (the Lift Clients Scheme Meeting); and

(ii)                all other creditors of the First Plaintiff who are not Lift Clients (the Trade Creditors Scheme Meeting) (together with the Lift Clients Scheme Meeting, the Lift Capital Scheme Meetings). 

2.                  Pursuant to sub-section 411(1) of the Act, there be convened a meeting of all creditors of the Second Plaintiff (the Lift Nominees Scheme Meeting) for the purpose of considering and, if thought fit, agreeing, with or without modification, to a scheme of arrangement between them and the Second Plaintiff (the Lift Nominees Scheme). 

3.                  The Lift Clients Scheme Meeting be held on 22 December 2009 at Wesley Conference Centre, Lyceum Theatre, 220 Pitt Street, Sydney commencing at 10.00 a.m. AEDT.

4.                  The Lift Nominees Scheme Meeting be held on 22 December 2009 at Wesley Conference Centre, Lyceum Theatre, 220 Pitt Street, Sydney commencing at 10.00 am AEDT and the conclusion of the Lift Clients Scheme Meeting.

5.                  The Trade Creditors Scheme Meeting be held on 22 December 2009 at Wesley Conference Centre, Lyceum Theatre, 220 Pitt Street, Sydney commencing at 10.00 am AEDT and the conclusion of the Lift Nominees Scheme meeting.

6.                  The Lift Capital Scheme Meetings and the Lift Nominees Scheme Meeting can resolve to adjourn.

7.                  Mr Anthony McGrath or, should he be unable to attend for any reason, Mr Joseph Hayes, is to chair the Lift Capital Scheme Meetings and the Lift Nominees Scheme Meeting and any adjournment of those meetings.

8.                  The draft:

(a)        document entitled "Explanatory Statement For The Schemes Of Arrangement Between Each Of Lift Capital Partners Pty Limited (In Liquidation) (ACN 111 015 500) Lift Capital Nominees No.1 Pty Limited (In Liquidation) (ACN 112 913 532) and their Respective Scheme Creditors" comprising the explanatory statements for the Lift Capital Scheme and the Lift Nominees Scheme at tab 3 of the Exhibit to the Affidavit of Joseph David Hayes sworn on 26 November 2009;

(b)        proxy forms for the resolutions to be passed at the Lift Capital Scheme Meetings and the Lift Nominees Scheme Meetings at tab 4 of the Exhibit to the Affidavit of Joseph David Hayes sworn on 26 November 2009;

(c)        voting forms for the resolutions to be passed at the Lift Capital Scheme Meetings and the Lift Nominees Scheme Meetings at tab 5 of the Exhibit to the Affidavit of Joseph David Hayes sworn on 26 November 2009;

(d)        letter from the Liquidators to scheme creditors at tab 6 of the Exhibit to the Affidavit of Joseph David Hayes sworn on 26 November 2009; and

(e)        a Lift Facility Statement regarding the valuation of the Lift Clients' scheme claims for voting purposes in the form contained at tab 8 of the Exhibit to the Affidavit of Joseph David Hayes sworn on 26 November 2009

be and are hereby approved.

9.                  The Court grants leave pursuant to section 411(7) of the Act permitting Mr Anthony Gregory McGrath and Mr Joseph David Hayes to be appointed to administer the Lift Capital Scheme and the Lift Nominees Scheme.

10.              The Lift Capital Scheme Meetings and the Lift Nominees Scheme Meeting shall be convened by publishing on or before 30 November 2009 a notice of the meeting in each of The Australian and The Sydney Morning Herald newspapers in the form, or substantially in the form, of the annexure to these Orders marked "A", such advertisement to be published not less than 14 days before the date appointed for the Lift Capital Scheme Meetings and the Lift Nominees Scheme Meeting.

11.              The application under subsection 411(4) of the Act for orders approving the Lift Capital Scheme and the Lift Nominees Scheme be advertised once in each of The Australian and The Sydney Morning Herald newspapers in the form, or substantially in the form, of the annexure to these Orders marked "B", such advertisement to be published not less than 5 days before the date appointed for the hearing.

12.              By no later than 30 November 2009 documents in the form, or substantially in the form, of the documents identified in paragraphs 8 (a), (b), (c), (d) and (e) above be posted by pre-paid post (or, in the case of any creditor whose registered address is outside the country, by airmail or dispatched by air courier for postage overseas) to each of the scheme creditors.

13.              On or before 30 November 2009:

(a)        the documents identified in paragraphs 8 (a), (b), (c) and (d) be made available for viewing and downloading on the McGrath Nicol website; and

(b)        an email be sent to all scheme creditors whose email addresses are known to the liquidators of the Plaintiffs containing an electronic link to the documents referred to at (a) above.

14.              Pursuant to Rule 3.3(2) of the Federal Court (Corporations) Rules 2000, the Plaintiffs be dispensed from compliance with replaceable rules (within the meaning of s135 of the Act) which appear at sections 249J(4) and (5) of the Act, and the documents referred at paragraph 12 above will be deemed to have been received by the scheme creditors at the expiration of 24 hours after:

(a)        the envelope containing the notice is posted; or

(b)        the email referred to at paragraph 13(b) is sent.

15.              A resolution put to the vote at any of the Scheme Meetings to approve the Lift Capital Scheme and the Lift Nominees Scheme must be decided by taking a poll and regulation 5.6.19 of the Corporations Regulations 2001 (Cth) (the Regulations) shall not apply to any such resolution.

16.              Regulation 5.6.20 of the Regulations shall apply to a poll referred to in order 15 as if that poll had been demanded.

17.              Regulation 5.6.33 of the Regulations shall not apply insofar as it relates to any general proxies which are granted in favour of the Chairman of the Scheme Meetings.

18.              Regulations 5.6.12, 5.6.21, and 5.6.36A of the Regulations shall not apply to the Scheme Meetings.

19.              The proceeding be adjourned to 10.15 am on 3 February 2010 for the hearing of any application that the Court approve the Schemes of Arrangement.

20.              The Plaintiffs have liberty to apply.

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.

a

Newspaper Advertisement – Meetings to consider Schemes of Arrangement

NOTICE OF COURT ORDERED MEETINGS TO APPROVE SCHEMES OF ARRANGEMENT

TO creditors of Lift Capital Partners Pty Limited (in Liquidation) (ACN 111 015 500) and Lift Capital Nominees No. 1 Pty Limited (in Liquidation) (ACN 112 913 532) (together the "Lift Companies" and each a "Lift Company").

WHEREAS pursuant to section 411(1) of the Corporations Act 2001 (Cth), the Federal Court of Australia has ordered that meetings of each class of creditors of each Lift Company be convened to consider and, if thought fit, approve a scheme of arrangement between that Lift Company and its creditors (each being a "Scheme").

NOTICE IS GIVEN that a meeting of each class of creditors of each Lift Company (together the "Scheme Meetings") will be held at Wesley Conference Centre, Lyceum Theatre, 220 Pitt St, Sydney NSW on 22 December 2009 starting at 10.00 am (Sydney time).

There are two classes of creditors of Lift Capital and a single class of creditors of Lift Nominees for the Scheme Meetings.  For further information, creditors should refer to the Explanatory Statement for the Schemes.  The Explanatory Statement is available on the website: www.mcgrathnicol.com. 

AGENDA FOR EACH SCHEME MEETING

To consider and, if thought fit, approve the following resolution:

"That, pursuant to and in accordance with section 411 of the Corporations Act 2001 (Cth), the scheme of arrangement between the Lift Company and its creditors, as contained and more particularly described in the Explanatory Statement, is approved and the Liquidators of the Lift Company are authorised to agree to such alterations or conditions to the scheme of arrangement as are thought fit by the Federal Court of Australia."

If you are a creditor of a Lift Company and wish to vote at either of the Scheme Meetings, you should lodge a completed Voting Form with Computershare Investor Services Pty Limited ("Registry") so that it is received by 10.00 am (Sydney time) on 19 December 2009.  If you are entitled to vote, you may attend the Scheme Meetings in person or send a completed Proxy Form appointing a proxy to attend in your place.  Proxy Forms should also be received by the Registry by 10.00 am (Sydney time) on 19 December 2009. 

The Proxy Form and Voting Form, together with the Explanatory Statement, will be sent to known creditors.  If you are a creditor of a Lift Company and you do not receive those documents, you may contact the Registry on 1300 850 505 to request that they be sent to you. 

CREDITORS SHOULD READ AND CAREFULLY CONSIDER THE EXPLANATORY STATEMENT FOR THE SCHEMES BEFORE DECIDING WHETHER OR NOT TO VOTE IN FAVOUR OF THE SCHEMES.

B

Newspaper Advertisement – Hearing to Approve schemes of Arrangement

LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION)

ACN  111 015 500 (Lift Capital)

LIFT CAPITAL nominees no 1 PTY LIMITED (IN LIQUIDATION)

ACN  112 913 532 (Lift Nominees)

Hearing to Approve Compromise or Arrangement

NOTICE IS GIVEN THAT, as:

(a)     a scheme of arrangement between all creditors of Lift Capital, who:

(iii)                   transferred, or assert that they transferred, any financial product (as defined in the Corporations Act 2001 (Cth) (the Act)) to Lift Capital or Lift Nominees (together, the Lift Companies);

(iv)                   instructed, or assert that they instructed, Lift Capital or Lift Nominees to purchase any financial product (as defined in the Act) on their behalf or to be held to their account; or

(v)                    entered into a facility agreement with Lift Capital and borrowed money from Lift Capital to purchase securities and who, arising out of the transfer by Lift Nominees of securities that it held on behalf of that person to Merrill Lynch International and/or Merrill Lynch International (Australia) Limited, has a debt or claim admissible to proof against one or both of the Lift Companies within the meaning of section 553 of the Act,

(together, the Lift Clients), and Lift Capital;

(b)     a scheme of arrangement between all other creditors of Lift Capital, who are not Lift Clients, and Lift Capital; and

(c)     a scheme of arrangement between all creditors of Lift Nominees and Lift Nominees,

were agreed to by the requisite majorities at meetings held on 22 December 2009, the Federal Court of Australia at the Law Courts Building, Queens Square, Sydney, will, at 10.15 am on 3 February 2010, hear an application for orders approving those scheme of arrangement.

Any person proposing to be heard on that occasion must, at least 1 day before, file and serve a notice of appearance in the prescribed form, together with any affidavit on which he or she wishes to rely at the hearing, on the Lift Companies at their address for service: Allens Arthur Robinson of Deutsche Bank Place, Corner of Hunter & Phillip Streets, Sydney 2000, ph (02) 9230 4000, fax (02) 9230 5333 (Attention:  John Warde and Chris Prestwich).

THE LIQUIDATORS

Joe Hayes and Tony McGrath
McGrathNicol

IN THE MATTER OF LIFT CAPITAL PARTNERS PTY LIMITED (IN LIQUIDATION) (ACN 111 015 500)

REASONS FOR JUDGMENT

1                                             The plaintiffs, Lift Capital Partners Pty Limited (in liquidation) (Lift Capital) and Lift Capital Nominees No.1 Pty Limited (in liquidation) (Lift Nominees) (together the Lift Companies), have applied to the Court for orders under s 411 of the Corporations Act 2001 (Cth) (the Corporations Act) that each of them convene a meeting with its creditors to consider and, if thought fit, agree to a scheme of arrangement with the relevant company.  On 10 April 2008, Messrs Joseph Hayes and Anthony McGrath were appointed as joint voluntary administrators of the two Lift Companies.  At the second meeting of creditors of the Lift Companies, convened pursuant to the provisions of the Corporations Act on 12 November 2008, a resolution was passed that the Lift Companies be wound up and that Messrs Hayes and McGrath be appointed as liquidators.  It is, in effect, Messrs Hayes and McGrath who are propounding the proposed schemes. 

2                                             When the matter was called on for hearing, Mr Sweeney SC sought leave to appear for a number of parties (the Disputed Creditors), who claim to be creditors of the Lift Companies.  The liquidators of the Lift Companies presently dispute the claims by the Disputed Creditors to be creditors.  Mr Sweeney asked the Court to adjourn the hearing of this application to enable him to consider the evidence that has been put before the Court at this stage and, if need be, to make submissions.  I indicated that I was not disposed to grant such an adjournment and I will explain the circumstances of that decision when I have explained the proposal for the schemes. 

3                                             It is first necessary to say something about the background to the schemes, which involves saying something about the business of the Lift Companies.  Prior to the appointment of the administrators on 10 April 2008, Lift Capital operated a margin lending business.  From 2005 onwards, Lift Capital entered into margin lending arrangements with its clients (the Lift Clients), under which the Lift Clients mortgaged in favour of Lift Capital, securities that they purchased with those loans.  However, the securities were, for the most part, transferred to Lift Nominees, on the basis that Lift Nominees would hold the securities as custodian trustee.

4                                             The funding for the margin loans that Lift Capital provided to Lift Clients was acquired primarily from Merrill Lynch International, Merrill Lynch International (Australia) Limited and Merrill Lynch Equities (Australia) Limited (the Merrill Lynch Companies).  Between July 2005 and the date of the appointment of the administrators on 10 April 2008, Lift Capital caused securities that had been mortgaged by or on behalf of Lift Clients in favour of Lift Capital, to be transferred by Lift Nominees to one or other of the Merrill Lynch Companies.  Whenever a Lift client wished to repay the margin loan made by Lift Capital relating to securities transferred to the Merrill Lynch Companies, the securities would be released by the Merrill Lynch Companies in return for a reduction in the amount owing to the Merrill Lynch Companies by Lift Capital.  Alternatively, if the amount owing was not to be reduced, other securities would be provided by Lift Capital to the Merrill Lynch Companies.  As at 10 April 2008, a sum of approximately $670 million was owing by Lift Capital to the Merrill Lynch Companies. 

5                                             Between 11 April 2008 and 5 May 2008, the Merrill Lynch Companies sold the majority of the securities that had been transferred to them and were under their control as at 10 April 2008, the date of appointment of the administrators.  The proceeds of sale were applied in repayment of amounts owing to the Merrill Lynch Companies by Lift Capital.  A number of the securities that had been transferred to the Merrill Lynch Companies, and which had not been sold, were retained by the Merrill Lynch Companies after 5 May 2008.  Those securities, together with accumulated dividends and some cash proceeds remaining after the Merrill Lynch Companies had sold more securities than were required to repay the amount owing to it by Lift Capital, are referred to in the documents relating to the proposed schemes as the Surplus Securities.  The claims of some creditors of the Lift Companies would be satisfied if Surplus Securities were returned to them.

6                                             The liquidators have concluded that there are approximately 700 Lift Clients who are creditors of Lift Capital.  Most of the claims of Lift Clients against Lift Capital arise because the value of the securities that they had mortgaged in favour of Lift Capital, and which were sold by the Merrill Lynch Companies, exceeded the amounts of their margin loans as at 10 April 2008.  Because of the action of the Merrill Lynch Companies, Lift Capital is unable to return to its clients the securities that had been mortgaged, even if the Lift Clients repaid their margin loans in full.  Claims that the Lift Clients might make against Lift Capital would include claims that Lift Capital had breached its contracts with the clients by transferring the securities to the Merrill Lynch Companies.  Lift Clients would also claim that provisions in the facility agreements between Lift Capital and its clients, relating to the mortgages of securities, were void as constituting clogs on their equity of redemption, in so far as the arrangements purported to authorise Lift Capital to give an unencumbered title to third parties, such as the Merrill Lynch Companies. 

7                                             The liquidators estimate that, if the claims of Lift Clients were calculated by reference to the value of their mortgaged securities as at 10 April 2008, less the amounts of their outstanding margin loans, the claims would aggregate some $116 million. 

8                                             In addition to creditors consisting of clients of Lift Capital whose claims have arisen in the way that I have just described, Lift Capital has approximately 20 trade creditors whose claims aggregate approximately $650,000.  The entitlements of all employees of Lift Capital have been paid in full. 

9                                             The liquidators have formed the view that there will be insufficient assets to satisfy the claims of clients and trade creditors of Lift Capital in full.  The liquidators estimate that the assets that Lift Capital has, or will have, available to meet claims of creditors amount to approximately $45 million, taking into account likely future loan recoveries.  Assuming that no new claims are made against Lift Capital, the likely dividend to creditors in the liquidation of Lift Capital would be in the order of 39 cents in the dollar. 

10                                          That estimate is made without bringing to account the claims by the Disputed Creditors.  The Disputed Creditors were clients of Lift Capital.  It has been asserted, in the course of argument, that the securities that were acquired by the Disputed Creditors, with loans from Lift Capital, were also covered by put and call options in relation to the relevant securities.  It is asserted that the underlying securities were transferred to the Merrill Lynch Companies, thereby breaking the nexus with the relevant put and call options.  When the administrators were appointed, the open option positions were closed out, generating losses that, Mr Sweeney asserted from the bar table, amount to approximately $40 million.  The Disputed Creditors assert, however, that, had the options not been closed out, but been allowed to run to maturity, the Disputed Creditors would have derived profits in excess of $60 million.  Those matters have not been taken into account in the estimate of 39 cents in the dollar, to which I have just referred. 

11                                          The question of whether the Disputed Creditors are, in fact, creditors or debtors is the subject of a proceeding presently on foot in the Supreme Court.  That proceeding has not yet reached the stage of close of pleadings and it is unlikely that there will be any resolution of the proceeding, by the Supreme Court, prior to the proposed meetings of creditors to consider the schemes.  Whether or not the Disputed Creditors are creditors is not something about which I can form any view on the basis of the material presently before me.  Ultimately, whether or not the disputed creditors will be admitted to vote at the proposed meetings, if they are convened, will be a matter for the chairman of the meetings.  Further, if the proposed schemes are agreed to by the requisite majority, the decision of the chairman may be called into question at any application for approval of the schemes by the Court.

12                                          However, it seems to me that whatever the position may be, there is nothing that the Disputed Creditors can say to the Court at this stage that would affect the question of whether or not the creditors of the Lift Companies should be given the opportunity of considering the proposed schemes.  It may be that the Disputed Creditors may propound variations to the scheme.  It is not, however, the role of the Court to adjudicate upon a proposed scheme and explanatory statement, except to the extent that changes are required to ensure that the scheme is capable of being approved and that the explanatory statement is not misleading.  It is a matter for those propounding a scheme to decide the scheme should be put to the creditors.  What the creditors, once their identity has been properly determined, decide to do, is a matter for them.

13                                          In the light of those considerations I did not consider that it was appropriate to adjourn the hearing of this application to enable further submissions to be made on behalf of the Disputed Creditors.  That, of course, is not to say that I have formed any view one way or the other about their prospective claims, and it may well be that they will be entitled to be heard if an application is made for the approval of any scheme by the Court. 

14                                          Lift Nominees does not have any trade creditors.  Its principal function was to hold securities on behalf of clients of Lift Capital and to transfer those securities to the Merrill Lynch Companies.  The liquidators are not aware of any assets of Lift Nominees.  Lift Clients, however, may have claims against Lift Nominees, in so far as Lift Nominees acted in breach of trust in transferring securities of clients to the Merrill Lynch Companies, since those securities were being held by Lift Nominees on behalf of the clients of Lift Capital, subject to any security interest of Lift Capital.  The quantum of the claims of Lift Clients against Lift Nominees would be identical to the claims that they have against Lift Capital, namely, $116 million, on the estimation of the liquidators.

15                                          It is against that background that the liquidators propound the proposed schemes.  However, before dealing with the substance of the proposed schemes, it is necessary to say something about other litigation in which the Lift Companies have been involved. 

16                                          In 2008, the administrators of the Lift Companies commenced a proceeding in the Supreme Court of New South Wales against the Merrill Lynch Companies and a number of Lift Clients.  The proceeding was intended to resolve a number of questions in relation to the Surplus Securities.  The question was whether the clients of Lift Capital retained a proprietary interest in the Surplus Securities and whether the Merrill Lynch Companies were obliged to return the Surplus Securities to Lift Capital or pay a monetary sum in lieu. 

17                                          On 3 February 2009, the Supreme Court found that the proprietary interest of the clients of Lift Capital in the Surplus Securities survived the transfer to the Merrill Lynch Companies.  The Supreme Court ordered that the Surplus Securities be returned to Lift Nominees to be held on behalf of the relevant clients, subject to the security interest that Lift Capital had in those securities as mortgagee.  Significantly, however, the Supreme Court was not asked to determine, and did not determine, the question of whether the Merrill Lynch Companies had a defence based on the doctrine of the bona fide purchaser for value without notice. 

18                                          Between 28 July 2009 and 30 July 2009, the liquidators and the Lift Companies, some Lift Clients and the Merrill Lynch Companies engaged in a mediation.  While some progress was made, resolution of claims as between the Lift Clients who participated, the Lift Companies and the Merrill Lynch Companies was not reached.  However, following the mediation, the Merrill Lynch Companies reached a separate agreement with the largest creditors of Lift Capital (the Swaby and Crabb Claimants).  Specifically, a compromise was reached in respect of claims that the Swaby and Crabb claimants had brought against the Merrill Lynch Companies in the Supreme Court of Western Australia.  The liquidators estimate that those claims are in the order of between $32 million and $38 million.  Those claims are included in the estimate of $116 million to which I have already referred.  However, the terms of the compromise reached between the Merrill Lynch Companies and the Swaby and Crabb claimants are not known to the liquidators.  That is a matter to which I shall return shortly in the light of observations made by Australian Securities and Investments Commission (the Commission), which appeared on the hearing of this application. 

19                                          A committee of inspection of the Lift Companies resolved that the liquidators be authorised to execute a Settlement Implementation Agreement with the Merrill Lynch Companies, consistent with a report made by the liquidators to the committee on 21 September 2009.  Following further discussions and negotiations between the liquidators and the Merrill Lynch Companies concerning possible compromise of all claims as between the Lift Clients, the Lift Companies and the Merrill Lynch Companies, a Scheme Implementation Agreement was entered into on 11 November 2009.  The parties were the Lift Companies, the liquidators and the Merrill Lynch Companies.  Certain United Kingdom based related entities of the Merrill Lynch Companies also executed the Scheme Implementation Agreement on 16 November 2009.  The proposed schemes of arrangements were annexed to the Scheme Implementation Agreement.

20                                          The compromise that has been reached with the Merrill Lynch Companies involves, first of all, the Merrill Lynch Companies procuring that the Swaby and Crabb claimants release their claims against the Lift Companies.  Secondly, the Merrill Lynch Companies will make a cash contribution to Lift Capital of $10.3 million.  In addition, the Merrill Lynch Companies and their related entities will release any claims that they have in respect of the Surplus Securities and will forego any right to prove in the proposed schemes of arrangement.

21                                          The quid pro quo for that consideration, passing from the Merrill Lynch Companies, is that the Merrill Lynch Companies will receive a release in respect of any claims that either the Lift Clients or the Lift Companies may have against them.  Under the terms of the proposed schemes, those releases are to be achieved by execution of a Scheme Deed of Release and Indemnity by the liquidators on behalf of the Lift Clients.  Under the proposed Scheme Deed of Release and Indemnity, in addition to the release of claims against the Merrill Lynch companies, Lift Clients would be required to indemnify the Merrill Lynch Companies in respect of claims made by third parties that arise out of the affairs of the Lift Companies, to the extent of any benefit that the Lift client actually receives, either under the proposed schemes or from claims against third parties.  The proposed schemes will involve the appointment of the liquidators, as scheme administrators, as attorneys of the Lift Clients for that purpose.

22                                          The liquidators have formed the view that the Merrill Lynch Companies would not have provided the consideration to which I have just referred if such a release and indemnity were not given.  They have formed the view that the release in favour of the Merrill Lynch Companies and the attendant indemnity are necessary because the Merrill Lynch Companies would not have entered into the Scheme Implementation Agreement without those provisions.  The liquidators also consider that the contribution being made by the Merrill Lynch Companies is sufficient, having regard to the likely improvement in the dividend that should be available to Lift Clients if the schemes become effective. 

23                                          The proposed schemes may be summarised as follows.  First, Lift Capital and Lift Nominees will be amalgamated, such that any assets and liabilities of Lift Nominees will be transferred to Lift Capital.  Since Lift Nominees does not have any assets and since the persons who have claims against it are identical to the Lift Clients who have claims against Lift Capital, the liquidators consider that the amalgamation of the two companies is convenient, and that the amalgamation may reduce the costs and administration expenses that would be involved in separate administrations in liquidation.  The liquidators are not aware of any reason why the amalgamation would affect any person adversely. 

24                                          Secondly, two scheme funds will be established.  The first scheme fund will contain all the assets of Lift Capital, except assets contained in the second scheme fund.  All Scheme Creditors will be entitled to a distribution from the first scheme fund.  The second scheme fund will consist of the cash contribution of $10.3 million to be made by the Merrill Lynch Companies together with any assets of Lift Nominees.  Only clients of Lift Capital will be entitled to a distribution from the second scheme fund.  The rationale for that is that the Merrill Lynch Companies are paying the sum of $10.3 million in order to obtain a release from the Lift Clients.  The liquidators take the view that it would be equitable for that sum to be paid only to Lift client creditors.  Lift Nominees has no trade creditors, its only creditors being the Lift Clients who have claims against Lift Nominees identical to the claims against Lift Capital.  As I have said, the scheme administrators will be appointed as attorneys for the Lift Clients for the purposes of executing the Scheme Deed of Release and Indemnity in favour of the Merrill Lynch Companies. 

25                                          Under the proposed schemes, claims by Lift Clients will be calculated by taking the value of their mortgaged securities sold by the Merrill Lynch Companies and deducting from that amount the balance of their margin loans as at 10 April 2008.  The value of mortgaged securities sold will be measured by reference to the price for which they were sold by the Merrill Lynch Companies.  A Lift client who had a credit balance in its account with Lift Capital, rather than a debit balance, as at 10 April 2008, will be able to claim for that amount.  The schemes will also contain provisions enabling Lift Clients to claim in respect of the value of any Surplus Securities that have not been returned to them.  However, the intention is that their claims will be valued after those Surplus Securities have been returned. 

26                                          The schemes are to be subject to several conditions precedent stated in the Scheme Implementation Agreement.  The first condition is that the Court grants leave, or the Commission directs in writing, permitting the appointment of the liquidators as administrators pursuant to s 411(7) of the Corporations Act.  That condition has been waived by the liquidators.  The other conditions precedent are that creditors agree to the schemes by the requisite majority contemplated by s 411(4) of the Corporations Act, that the Court approve the schemes pursuant s 411(4) and that the Swaby and Crabb claimants release their claims against the Lift Companies.

27                                          Under the proposed schemes, distributions to which Foreign Scheme Creditors would otherwise be entitled will be held in trust by the Scheme Administrators.  Once a Foreign Scheme Creditor has executed a proposed ratification deed, the amounts being held on trust will be paid to the respective Foreign Scheme Creditor.  That regime is proposed in order to reduce the risk that a Foreign Scheme Creditor might seek the benefit of distribution from the schemes but at the same time contend, in some other jurisdiction, that the schemes are not binding.  There are approximately 10 Foreign Scheme Creditors known to the liquidators. 

28                                          It is proposed that the meetings of creditors will be held on 22 December 2009.  There will be two classes of creditor of Lift Capital, being the Lift Clients and trade creditors.  There will also be the creditors of Lift Nominees, who will be identical to the Lift client creditors of Lift Capital.  It is proposed that the meetings of the two classes of Lift Capital creditors and the creditors of Lift Nominees be conducted concurrently, although there will be a separate vote in respect of the two classes and in respect of Lift Nominees creditors. 

29                                          A draft Explanatory Statement as contemplated by s 412 of the Corporations Act has been prepared and has been considered and approved by the Commission, subject to one matter to which I shall return in a moment.  I have considered the proposed Explanatory Statement and am satisfied that it complies with the requirements of the Corporations Act.  It consists of the following sections.

(1)        Reasons why creditors should vote in favour of the schemes. 

(2)        Reasons why creditors may consider voting against the schemes.

(3)        A description of the schemes and their effects.

(4)        An estimate of the dividends payable under the schemes as compared with liquidation.

(5)        An explanation of how claims will be calculated under the schemes.

The Explanatory Statement also annexes a copy of the proposed schemes, the Scheme Implementation Agreement and other incidental instruments designed to give effect to the schemes.  The liquidators propose to send a covering letter with the Explanatory Statement explaining in broad terms its effect. 

30                                          On 13 November 2009, the solicitors for the Lift Companies provided a planning memorandum to the liquidators outlining principles to be applied in establishing and implementing a verification process in respect of the Explanatory Statement.  Following the completion of the verification process contemplated, and the receipt and processing of comments from the Commission, the liquidators have formed the opinion that the Explanatory Statement contains all information material to a decision by a Lift Company creditor, as to whether or not to vote in favour of the relevant schemes.  Further, nothing has come to the attention of the liquidators that leads them to believe that the Explanatory Statement contains a statement that was misleading or deceptive, or was likely to mislead or deceive in any material respect, or that there was any omission from the Explanatory Statement. 

31                                          The liquidators estimate that, if the schemes become effective, Lift Clients will receive a dividend of 65 cents in the dollar in respect of their established scheme claims and trade creditors will receive a dividend of 54 cents in the dollar in respect of their established scheme claims.  The liquidators’ estimate of the distribution to creditors, in the event of completion of the liquidation, is a dividend of 39 cents in the dollar.  On the other hand, if the schemes do not become effective and the liquidation proceeds, both the Lift Companies and the Lift Clients will be free to pursue any claims they might have against the Merrill Lynch Companies.  One of the effects of the schemes will be that those claims be released. 

32                                          As outlined above, one of the conditions of the proposed schemes is that the Swaby and Crabb claimants execute and deliver a release of their claims against the Lift Companies.  The liquidators have no knowledge of the terms of the compromise reached between the Merrill Lynch Companies, on the one hand, and the Swaby and Crabb claimants, on the other.  The Commission has taken the stance that the terms of the compromise between the Merrill Lynch Companies and the Swaby and Crabb claimants may be material to the decision making process of creditors in deciding whether or not to agree to the schemes.  The Commission’s concern is that the claims of the Swaby and Crabb claimants may be substantially similar to the claims of other Lift Clients.  If it be the fact that the compromise between the Merrill Lynch Companies and the Swaby and Crabb claimants results in a return to the latter significantly greater than that that may be returned to other creditors under the schemes, the other creditors may be disposed to reject the scheme and to pursue their respective claims against the Merrill Lynch Companies, if they have any.  That, of course, depends upon whether the claims that the Swaby and Crabb claimants had against Merrill Lynch are substantially similar to those that other client creditors have. 

33                                          The liquidators do not consider that the fact that a settlement has been reached as between the Swaby and Crabb claimants and the Merrill Lynch Companies would reduce the amounts of the proofs of debt that would be submitted in a liquidation, for reasons that they give in the proposed Explanatory Statement.  In the proceeding in the Supreme Court of Western Australia, the Swaby and Crabb claimants asserted that one of the Merrill Lynch Companies had made particular representations to them, including representations to the effect that the Merrill Lynch Companies had no interest in the securities mortgaged by the Swaby and Crabb claimants, and that they were being held only as custodian.  The liquidators consider that such representations are likely to be peculiar to the Swaby and Crabb claimants and are not likely to have been common to all Lift Clients.  If that is so then, the details of the settlement as between the Swaby and Crabb claimants and the Merrill Lynch Companies would not necessarily be material to the decision making process of the Lift client creditors.

34                                          In any event, it may be that the fact that one creditor is able to reach a compromise with its debtor is not relevant to the terms upon which a second creditor may reach a compromise.  While the Commission outlined its disquiet as to the lack of disclosure, the Commission did not ask the Court to take any particular course in relation to the matter, but indicated that, depending upon what further information, if any, is made available to the creditors for the purposes for the meetings, the Commission may wish to take a particular stance on any application to the Court for the approval of the schemes, assuming that they are agreed to by the requisite majority of the creditors. 

35                                          The Court will not ordinarily summon a meeting of creditors for the purposes of considering a scheme of arrangement, unless the scheme is of such a nature, and cast in such terms, that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application which is unopposed.  The schemes have the unusual characteristic, to which I have referred, of requiring creditors to give a release and indemnity to the Merrill Lynch Companies.  However, I do not consider that there is any reason why a bargain might not be struck between a company and creditors whereby the creditors are bound to enter into an arrangement with third parties.  So long as there is some element of give and take, such that the creditors receive something in return for the benefit conferred on a third party, there is no reason, in principle, why that term could not be part of a scheme of arrangement, as contemplated by s 411 of the Corporations Act (see Fowler v Lindholm, Re; Opes Prime Stockbroking Ltd (2009) 259 ALR 298 at 69 and In the matter of Lehman Brothers International (Europe) (in Administration) [2009] EWCA Civil 116). 

36                                          I am satisfied that the schemes being proposed are such that, if they are agreed to by the requisite majority at the proposed meetings, the Court, in the absence of any further opportunity, would be likely to approve them.  I am satisfied that the proposed Explanatory Memorandum satisfies the requirements of the Corporations Act.  Accordingly, I propose to accede to the application by Lift Capital and Lift Nominees to convene meetings of their creditors. 

Associate:

Dated:         27 November 2009