FEDERAL COURT OF AUSTRALIA

Australian Executor Trustees Ltd v Provident Capital Ltd (No 3) [2012] FCA 1253

THE COURT ORDERS THAT:

1.    Pursuant to s 424 Corporations Act 2001 (Cth) on the proper construction of the Debenture Trust Deed dated 11 December 1998 (as amended from time to time) (the Deed) the defendant (the Company) would be justified in amending cl 18.2 of the Deed pursuant to cl 18.1.4 and/or 18.1.5 by adding cl 18.2.7 which shall provide:

“18.2.7    a quorum representing debenture holders with at least 10% of the face value of debentures on issue must be present at the meeting in person or by proxy or by attorney.”

2.    Pursuant to s 283HA of the Corporations Act 2001 (Cth) the plaintiff would be justified in approving the amendment to the Deed by the Company referred to in order 1.

3.    Pursuant to s 424 of the Corporations Act 2001 (Cth) the plaintiff and Marcus William Ayres, Philip Patrick Carter and Anthony Milton Sims (the receivers) would be justified in proposing the amendment to the Deed in the terms proposed in the draft Notice of Meeting of Debenture Holders and Explanatory Statement annexed to the Amended Interlocutory Process as filed on 12 November 2012 and marked “A” (Notice of Meeting).

4.    Pursuant to s 283HA of the Corporations Act 2001 (Cth) the plaintiff would be justified in:

(1)    approving and proposing the amendment to the Deed in the terms proposed in the Notice of Meeting;

(2)    convening a meeting of debenture holders (Meeting) during which:

(a)    all classes or possible classes of debenture holders (including lump sum, periodic interest and expired) are to be present in a single meeting; and

(b)    a single poll is to be taken from all debenture holders in relation to the amendment to the Deed proposed in the Notice of Meeting

5.    The plaintiff file an affidavit within 7 days (and provide a copy of that affidavit to the Associate to Rares J) following the Meeting deposing to:

(a)    any resolution that is passed at the Meeting;

(b)    the voting preference by quantity of votes (whether “for”, “against” or “abstained”) of the lump sum debenture holders;

(c)    the voting preference by quantity of votes (whether “for”, “against” or “abstained”) of the periodic interest debenture holders; and

(d)    the voting preference by quantity of votes (whether “for”, “against” or “abstained”) of the expired debenture holders.

REASONS FOR JUDGMENT

1    On 29 June 2012, I appointed receivers to the defendant, Provident Capital Limited, pursuant to s 283HB(1)(c) of the Corporations Act 2001 (Cth). That order was temporarily stayed and came into effect on 3 July 2012. On 10 July 2012, the plaintiff, Australian Executor Trustees Limited, as trustee, appointed the receivers as receivers and managers under the debenture trust deed executed by Provident, dated 11 December 1998, as amended. As I mentioned in my previous reasons, Australian Executor Trustees Ltd v Provident Capital Ltd (2012) 203 FCR 461, Provident had numerous series of debentures on issue at the time of the appointment of the receivers by the Court.

2    On 23 July 2012 the trustee exercised its power under cl 10.01 by issuing a notice that declared that all money actually and contingently owing on any debentures issued by Provident under the trust deed to be due and payable forthwith by it to the trustee as and from 3 July 2012. That had the effect of triggering what is referred to as the “distribution waterfall” in cl 11.5. The distribution waterfall provided an order for payment of various persons out of money realised from property held in the fund in which debenture holders’ moneys were invested. Currently cl 11.5 reads as follows:

“Subject always to the rights of persons whose claims to payment are preferred by law, all money received by the Trustee or any receiver from the Company, as a consequence of enforcement of the Trustee’s rights against the Company, must be applied in the following order:

11.1.1    first, in payment of the Trustee’s remuneration and other expenses under this deed;

11.1.2    second, in payment of the receiver’s remuneration and expenses;

11.1.3    third, in payment to the Trustee for the account of debenture holders in respect of interest accrued but unpaid on current debentures;

11.1.4    fourth, in payment to the Trustee for the account of debenture holders in respect of the face value of current debentures; and

11.1.5    fifth, any balance to the Company.”

The receivers’ application

3    In their interlocutory process filed on 28 September 2012, the receivers, in both their capacities, as officers of the Court and receivers and managers under the trust deed, applied for orders and directions under ss 424 and 283HA of the Act as to whether they would be justified in pursuing amendments to the trust deed. The principal purpose of the interlocutory process is to facilitate a fairer distribution to debenture holders of the proceeds of realisation of Provident’s loan portfolio that is the security for their investments. It is likely that there will be insufficient funds realised to pay the debenture holders in full in respect of all principal and interest. The receivers seek directions as to whether they would be justified in pursuing proposed amendments to the distribution waterfall designed to address what appear to be anomalies and potentially unjust consequences that arise from the existing provisions of the trust deed.

4    There are two substantive amendments that the receivers see as necessary. First, the receivers have proposed that the trust deed be amended to vary the distribution waterfall, provided in cl 11.5. Secondly, the trust deed fails to make any provision for what is to be a quorum at any meeting of debenture holders called under the trust deed.

5    The proposed amendments to the distribution waterfall appeared to have the capacity to affect different classes of Provident’s debenture holders differently. Because of this, when I adjourned the hearing on 23 October 2012, I directed the receivers to file an amended interlocutory process and sought further submissions from them and the views of the Australian Securities & Investments Commission on the possible affect on class rights.

6    Relevantly, ss 283HA and 283(1)(g) provide:

“283HA General Court power to give directions and determine questions

If the trustee applies to the Court for any direction in relation to the performance of the trustee’s functions or to determine any question in relation to the interests of the debenture holders, the Court may give any direction and make any declaration or determination in relation to the matter that the Court considers appropriate. The Court may also make ancillary or consequential orders.

283HB Specific Court powers

(1)    If the trustee or ASIC applies to the Court, the Court may make any or all of the following orders:

...

(g)    any other order that the Court considers appropriate to protect the interests of existing or prospective debenture holders.”

The distribution waterfall issue

7     One of the receivers, Marcus Ayres, explained in a detailed affidavit of 28 September 2012 how the distribution waterfall in cl 11.5, as currently drafted, does not, in his opinion, provide a fair or workable mechanism to distribute the funds that have been and will, in the future, be realised.

8    The receivers propose to hold a meeting of the debenture holders to ascertain whether a more appropriate distribution waterfall should be adopted. They originally proposed amendments to cl 11.5 in the following terms, which are marked up below:

“11.5.3    third, in payment to the Trustee for the account of debenture holders in respect of interest accrued but unpaid on current debentures up to (and including 3 July 2012;

11.5.4    fourth, in payment to the Trustee for the account of debenture holders in respect of the face value of current debentures;

11.5.4A    fifth, when the face value of current debentures has been repaid in full, in or towards payment to the Trustee for the account of debenture holders in respect of interest accrued but unpaid on current debentures after 3 July 2012 (such interest to accrue after 3 July 2012 at a flat rate of 8.4% per annum on each current debenture on the daily balance of the face value remaining unpaid of that debenture despite any provision to the contrary in this deed or in the Terms of Issue of any debenture); and

11.5.5    fifth sixth, when the amounts referred to in clause 11.5.4A have been paid in full, any balance to the Company.”

9    The default conditions of the issue of debentures prescribed in cl 2.3 of the trust deed were applicable unless the conditions of issue of any particular debentures provided otherwise. That clause concluded:

“The conditions of issue for any debentures prevail over the default conditions set out in this clause where there is any inconsistency between them.”

10    Mr Ayres noted that as at the date of the appointment of receivers, debentures had been issued under the trust deed for terms of between three months and five years with simple interest at rates varying between 3.5% per annum to 10% per annum. The nominal average interest rate was 8.4%, hence the suggested interest rate in the above proposed amendment to cl 11.5.4A. He also identified two particular classes of debentures that were issued: first, those where interest was paid periodically (64%) and, secondly, where interest was paid in a lump sum at the expiry of the term of the debenture (36%). Periodic interest debentures were held by 59% of the debenture holders by number, as opposed to face value, with the balance held by lump sum interest debenture holders. The trust deed provided in cl 2.5.1 that all current debentures ranked:

“… equally in priority of security notwithstanding that they may be issued at different times, or be at different rates of interest, or mature on different dates, or otherwise have different conditions of issue”

11    Provident had paid interest due under all of its issued debentures until 13 June 2012, when the Court ordered under s 283HB(1)(b) that no further redemptions be made after that time. Between 13 June 2012 and 3 July 2012, approximately $960,000 in interest became payable to the periodic and matured lump sum interest debenture holders and remains unpaid. A further $3.8 million was accrued in that period, but that amount of interest was not due and payable to any debenture holders as at 3 July 2012. Mr Ayres noted that Provident’s ongoing interest liability, on an accrual basis, for both classes of debentures would be approximately $1.3 million per month. Provident’s books continue to record interest when due and payable after the appointment of the receivers on the various series of issued debentures at various rates over a variety of different terms.

12    Mr Ayres illustrated the problems and potential unfairness that could arise if the distribution waterfall were followed. He used an example of two debentures, one providing for periodic interest that matured in November 2013, the other with a lump sum interest provision that matured in August 2014. The periodic interest debenture holder had received interest payments up to 13 June 2012 while the lump sum interest debenture holder had received no interest payments. Mr Ayres pointed out that if the distribution waterfall in the current cl 11.5 were maintained, then the periodic interest debenture holder would continue to be entitled to monthly payments of interest until the debenture matured in November 2013. In contrast, the lump sum debenture holder would not be entitled to receive any interest until the debenture matured in August 2014. He said that, as Provident would not realise sufficient funds to pay all interest as it accrued, it was possible that the periodic interest debenture holder would not receive any payments in reduction of the face value of its debenture. That would result in all moneys that were paid to that holder being characterised as interest. Mr Ayres feared that Provident’s cash resources might not be sufficient to make any payment to the lump sum debenture holder at all when its debenture matured in August 2014. He observed that this example highlighted one inequality between debenture holders caused by the operation of the distribution waterfall.

13    Mr Ayres’ opinion was that if the distribution waterfall were maintained, it was highly likely that Provident would exhaust its assets in meeting interest payments due to periodic interest debenture holders and would fall continually behind on principal repayments. He opined that potentially this would leave all debenture holders with a complete capital loss. He considered that such a result was inconsistent with the promise in cl 2.5.1 that all debentures had equal ranking in priority of security in proportion to their face value if they were not repaid in full.

14    Significantly, Mr Ayres considered that it would create unfairness in this situation if the limited funds that the receivership will realise and pay to debenture holders are interest rather than principal repayments. In particular, he noted that the current outcome provided by the distribution waterfall did not reflect appropriately that the source of the payments that will be made is the proceeds of Provident’s loan portfolio’s realisation in which the debenture holders’ capital had been invested. That is because, as I found in my earlier reasons and continues to be the case, only a very small percentage of Provident’s loan book consists of loans that are performing and paying interest, being the primary source of Provident’s promises to pay interest on the debentures and repay their principal: Australian Executor 203 FCR at 463 [4].

15    In Mr Ayres’ opinion, if the resolution were not passed, debenture holders with high rates of interest and later maturity dates would receive more interest over the course of the receivership in comparison to debenture holders whose terms expired closer to 3 July 2012. That is because in its present form cl 11.5.3 requires unpaid interest payments to be paid first before any principal is repayable to any of the debenture holders.

16    Mr Ayres explained that the proposed amendments to cl 11.5 would allow payment of all accrued, but unpaid, interest actually due on debentures up to and including the date of appointment of the receivers on 3 July 2012. That would treat all debenture holders equally as to their entitlements to be paid interest up to that date; that is, those debenture holders with periodic interest entitlements and with lump sum debentures that had by then matured would be paid interest to that point. However, lump sum debenture holders whose debentures had not matured by 3 July 2012 would not be paid any interest because they had no immediate right to receive any such payment. He considered that this approach would avoid the inequality that would be generated by some, but not all, debentures having paid interest on a periodic basis prior to 13 June 2012.

17    If the proposed resolution amendment to cl 11.5 were approved by a resolution of debenture holders, Mr Ayres considered that from 3 July 2012 all debenture holders would be treated equally with respect to their entitlement to be repaid the face value of their debentures and, if there were sufficient money available, some interest. During the hearing on 23 October 2012, I raised concerns as to whether the proposed resolution to amend cl 11.5 could affect the differing rights of debenture holders entitled to periodic payments and lump sum payments of interest, as well as those debenture holders who may have been entitled to an interest rate greater than 8.4%. Each of those groups appeared to be a separate class of debenture holders. The receivers now propose that they will amend the suggested terms of cl 11.5.4A to provide for a flat rate of 10% per annum.

18    At that time Mr Ayres thought that debenture holders with terms due to expire later than others after 3 July 2012 might receive marginally less than they would if the resolution were not passed, while those with debentures whose terms were due to expire on or around 3 July 2012 might receive marginally more than they would have if the resolution were not passed. Since then, the receivers have revised this somewhat. The receivers now consider that if the amendments to cl 11.5 were made the class or classes that might be better off would comprise the holders of debentures:

(1)    expiring after 1 September 2013;

(2)    with interest rates greater than 8.4%;

(3)    with both a term expiring after 1 September 2013 and interest rates greater than 8.4%; or

(4)    that paid interest on a periodic basis prior to 3 July 2012.

The receivers also consider that if those amendments were made the class or classes that might be worse off would comprise the holders of debentures:

(1)    with terms that had already expired;

(2)    expiring before 1 September 2013;

(3)    with interest rates below 8.4%; or

(4)    on which interest is payable as a lump sum on maturity.

19    Additionally, Mr Ayres considered that, if the amendment were made, there would be a substantial saving in administrative costs. This was because the receivers could discontinue the many calculations of various individual monthly interest payments. He observed that once payment was made to debenture holders who, prior to 3 July 2012, were entitled to receive, but had not received, interest accrued as due and payable, all subsequent payments to debenture holders would be made as repayments of the principal, or face value, of the debentures and so be a capital receipt in the debenture holders’ hands rather than a taxable receipt of interest. That would continue until all principal was repaid, when interest payments would resume if sufficient funds were then available. Mr Ayres noted that if the existing distribution waterfall were maintained, no debenture holders would be likely to receive any prepayment of capital and the only payments that would be made would be of interest due on periodic debentures and lump sum debentures that had matured. That interest payment would be taxable in the hands of the debenture holders, who would have lost the entire capital value of their investments.

20    Importantly, Mr Ayres explained that the amendments would enable repayment of (untaxable) principal to debenture holders first, before they received some (taxable) amounts by way of interest in what he considered the unlikely event that there was further money available to pay such interest at the suggested rate of 8.4%.

Consideration

21    I am satisfied, on the basis of the present evidence, that the receivers would be justified in propounding the proposed amendment to cl 11.5 in a meeting of the debenture holders. Once the non-performing and other properties in Provident’s loan portfolio are realised to generate cash, it currently appears that it would be anomalous and unfair to the debenture holders, as a whole, to use that cash to meet interest payments. That is because the money realised from Provident’s overwhelmingly non-performing loan portfolio, in substance, will represent the return of the investors’ principal rather than what that principal had earned (as would have been the case had Provident’s mortgagors paid their interest obligations). The unfairness would be compounded by the fact that the investors would be required to pay tax on the interest received in circumstances where they are unlikely to be repaid their principal in full, if at all. Moreover, if the investors continue to receive the money generated by realising the loan portfolio as interest, they may also be disqualified from any government assistance to which they might otherwise be entitled because of the insolvency of Provident. Additionally, if the proposed amendments for a standard rate of interest were not made, the receivers would incur significant ongoing additional administrative costs because of the need to calculate individual account balances on different rates on a monthly basis. This would deplete what would otherwise be available for payment to debenture holders.

Are class rights affected by the proposed amendments?

22    The now revised proposed amendment to cl 11.5 would still change the existing and different rights of at least two distinct classes of debenture holders who receive interest either periodically or in a lump sum on maturity. It may be that, as set out above at [17] there are more classes. The amendment would also change the character of their receipts of the realisation of Provident’s loan portfolio from being initially in the nature of income (i.e. interest) to being in the nature of capital (i.e. principal repayment). I was concerned whether each potentially affected class should be able to vote separately on the amendment because, if passed, it could have a differential impact on each of them.

23    Since the first hearing, the receivers and the Commission have made written submissions on the issue of class rights and have given detailed consideration to the terms of the materials to be given to, and the process to be used for, the debenture holders to consider the proposed amendments to cl 11.5. The receivers submitted that because of the unlikelihood that any interest will be paid, at least for the foreseeable course of realisation of the loan portfolio’s assets, the use of the higher flat rate of 10% would avoid any potential unfairness to debenture holders who were entitled to more than 8.4%. The receivers have made consequential amendments to the draft explanatory statement and notice of meeting that are to be sent to debenture holders. That has been done in consultation with the Commission to produce the current draft.

24    Similar considerations have long given holders of different classes of shares in companies the right to vote on proposals to change the existing rights attaching to their class or classes at separate meetings of each affected class. That right is now reflected in Pt 2F.2 of the Corporations Act. In particular, s 246B requires separate meetings of each class unless the company’s constitution makes other specific provisions for the alteration of class rights. Similarly, Pt 5.1 of the Act deals with arrangements and reconstructions that may affect the rights of members and or creditors of companies. The scheme of s 411 recognises that there may be classes of creditors or members whose votes should be taken in separate meetings. Part 5.1 requires that the interests of each class potentially affected by a proposed arrangement or reconstruction be addressed in the explanatory statement.

25    Because s 411 appeared to provide for what the receivers were seeking to achieve I invited them and the Commission made further submissions as to whether that provision or a procedure under Pt 2L was appropriate. Both the receivers and the Commission argued that each of Pt 2L and s 411 could provide an available means to achieve their purpose. Moreover, the Commission submitted that not only was the process proposed by the receivers available but it would also be likely to be adequate and faster. The Commission contended that, if the receivers were to proceed under Pt 2L.8, they should be required to observe the requirements for disclosure of information in s 412(1)(a)(ii). That requires that, relevantly, creditors be given:

“… any other information that is material to the making of a decision by a creditor ... whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the creditors ... .”

26    In addition, s 412(3) provides that where a compromise or arrangement affects the rights of debenture holders, the explanatory statement must give them information about any material interest of the trustee that would be affected differently to others in a similar position.

27    The receivers contended that it was arguable that the debenture holders were not creditors of Provident within the meaning of s 411. That was because, they argued, that after the trustee had given Provident the notice under cl 10.01 of the trust deed, only the trustee could enforce any obligation of Provident to make any payments due or payable under the debentures: i.e. any rights to enforce payment that the debenture holders would otherwise have had was thus superseded by the notice under cl 10.01 and the provisions of the trust dead vesting the right to recover moneys outstanding in the trustee (cll 2.16.2, 11.2, 11.5).

28    Both the receivers and the Commission submitted that the procedure under s 411 was more detailed and imposed significantly greater procedural and administrative requirements. The Commission argued that some of those requirements should be used, in a modified form, if the proposed process under Pt 2L.8 were pursued.

Would the procedure for a scheme of arrangement be appropriate?

29    I am of opinion that the debenture holders are creditors of Provident. The expression “creditor” is not defined in the Act. McLelland J held in Re Glendale Land Development Ltd (In liq) [1982] 2 NSWLR 563 at 566F that ‘creditor’ in the Companies (New South Wales) Code included “all persons with claims which would be entitled to be admitted to proof if the company were wound up”. That construction is also apposite for the Act. Provident’s debenture holders will be entitled to be admitted to proof in any winding up to the extent that the trustee fails to repay the amount, including interest, owing under their debentures. If the receivers had proposed an arrangement having the effect of the proposed amendment to cl 11.5, ss 412(1)(a)(ii) and (3) would have required that Provident’s debenture holders be provided with particular information if that arrangement would affect their rights. Here, the receivers’ proposal necessarily affects the rights of the debenture holders. The express reference in s 412(3) to debenture holders contemplates that they are proper and necessary parties to an arrangement under Pt 5.1 of the Act in which s 411 is contained. It follows that an arrangement under s 411 is an available mechanism for achieving the purposes of the receivers.

30    Nonetheless, s 411 is not an exclusive means for that purpose. That is because Pt 2L.8 gives the Court broad remedial powers to protect, adjust and affect the rights of debenture holders. The existence of an alternate mechanism to deal with those matters in an arrangement under Pt 5.1 cannot exclude or condition the exercise of the Court’s powers under Pt 2L.8: Owners of Shin Kobe Maru v Empire Shipping Company Inc (1994) 181 CLR 404 at 421 per Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ: Australian Executor 203 FCR at 477-478 [72]-[78]. Moreover, in a particular case, some or all of the procedures appropriate for protecting or informing creditors may be drawn on, or adapted, in implementing a process that may affect the rights or interests of debenture holders under Pt 2L.8. The scheme of Pt 2L of the Act, that deals specifically with debentures, is different to those of Pts 2F.2 and 5.1. Relevantly, Pt 2L does not make specific provision for dealing with matters affecting any potential separate classes of debenture holders in a manner akin to those in Pts 2F.2 or 5.1. However, ss 283HA and 283HB(1)(g) are wide enough to authorise orders that the receivers convene a meeting of debenture holders and that deal with how such a meeting is to be conducted.

Are there separate classes?

31    The Commission contended that it would be unlikely that separate classes of debenture holders would be established if a scheme were proposed under Pt 5.1. It submitted that the difference in the debenture holders’ various circumstances is arguably not so great that they would not be capable of, first, debating what is good or bad for them as a whole in a single meeting and, secondly, ascertaining where the common good lies: Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104 [12]. There, Barrett J said there that the test was not one of identical treatment but of community of interest.

32    The leading authority on the composition of classes in respect of companies is Sovereign Life Assurance Company v Dodd [1892] 2 QB 573: see per Lindgren J in Re Sino Gold Mining Ltd (2009) 74 ACSR 647 at 654-655 [51]-[54] and the cases there cited. The purpose of identifying a separate class or classes affected by a proposed arrangement or compromise under s 411 is to prevent the use of the section to result in confiscation or injustice and any such class “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”: Sovereign Life [1892] 2 QB at 583 per Bowen LJ. As Lindgren J noted that authorities have held that the test is based on the similarity or dissimilarity either of legal rights against the company or of interest derived otherwise than from such legal rights.

33    Despite the differences in rights to receive interest payments, the substantive community of interest of the debenture holders is likely to be found in their obtaining repayment of their principal as soon as practicable. That is because of the substantive likelihood that there will be a significant shortfall in the amount recovered from realisation of Provident’s loan portfolio. However, it may be that the voting breakup will reveal a different set of priorities. That can be considered when the matter returns to the Court after the vote. Since the meeting will be held for the purposes of Pt 2L.8, it is unlikely that the course of holding a single meeting of all debenture holders, with the votes of the members of all potential classes counted separately, will lead to any injustice. In any event, any one who then claims to have been adversely affected can make appropriate submissions when the matter returns to Court.

34    The process proposed by the receivers is intended to lead to an order of the Court under s 283HB(1)(g) that will bind all Provident’s debenture holders, including any who might dissent in any vote. That invites consideration of whether any and, if so, what information debenture holders ought be given before they vote and what procedures ought be imposed for the vote.

35     In my opinion, it is important that Provident’s debenture holders be in a position to make an informed choice on the receivers’ proposal based on their being given information of the kind referred to in s 412(1)(a)(ii). That objective is reflected in the present draft explanatory statement and notice of meeting. These have been developed by the receivers after taking the Commission’s views into consideration.

36    The receivers propose that they send one notice of meeting to all debenture holders that identifies the broad delineation between the various potential classes of debenture holders, including those with periodic and lump sum interest debentures. They also propose that the poll would be taken at the meeting in such a way that the votes of each of the possible classes could be counted separately. This would enable the receivers to return to the Court with the results of the vote and the perceived levels of approval by each of the possible classes with a view to an order being made under s 283HB(1)(g) of the Act, namely, an order that the Court considered appropriate to protect the interests of existing debenture holders.

37    The alteration of the rates of interest, and potentially, the timing of the payments of interest that are proposed to be made in the amendments to cl 11.5, may, on one view of the concluding provisions of cl 2.3, be capable of being characterised as a condition of issue that ought prevail over any provision of the trust deed, including any amendment of it. An example is the proposal to include a single rate of interest (of 10%) in cl 11.5.4A. For this further reason, I am of opinion that in order to avoid any doubt, if the meeting is held and, having regard to the results, the receivers wish to proceed further with their proposal they should return to the Court to seek an order under s 283HB(1)(g). At that time it will be possible to consider the number of debenture holders in each possible class who expressed views one way or another in respect of the resolutions and come to a final decision as to whether or not to confirm the amendment by an order under s 283HB(1)(g). On that occasion, any person who claims to be affected adversely will be able to be heard and the Court will be in a position to make orders that are appropriate to protect the interests of the existing debenture holders, having regard to the receivers’ proposals and any matters that emerge subsequently that may bear on that topic.

38    Subject to reviewing the final form of the explanatory statement and notice of meeting, and having regard to the views of the Commission that what is proposed is not inappropriate, I am satisfied that the receivers would be justified in putting the now proposed amendment to a meeting of the debenture holders and that it is appropriate to allow the receivers to conduct the meeting in the manner that they have suggested. On the material before me, the proposed amendment appears to be designed to benefit all the debenture holders in each possible class and debenture holders as a whole. It has evident purpose of protecting their rights to rank as equally as practicable in respect of the security for their investments in circumstances where it is unlikely that Provident will be able to repay all principal and interest due to its debenture holders in full. It may be that, in other cases, or when the matter returns to Court after the meeting, considerations different to those now before me, will suggest that separate class meetings of debenture holders would be appropriate.

The quorum issue

39    The trust deed provides that Provident may amend the trust deed at any time with the approval of the trustee in certain circumstances, relevantly provided in cl 18.1.6 as follows:

“The Company may amend this deed at any time with the approval of the Trustee where the amendment:

…

18.1.6    is first approved by a resolution passed at a meeting convened to consider the amendment by debenture holders holding debentures with an aggregate face value of at least 75% of the aggregate face value of the debentures held by the debenture holders present at the meeting.”

40    Next, cl 18.2 deals with the conduct of any meeting of debenture holders, convened for the purpose of cl 18.1.6. However, while cl 18.2.5 provides that all motions put to the meeting would be passed if approved by the required majority of 75% of votes of debenture holders present in person or by proxy or by attorney, there is no provision about what quorum is necessary for a meeting to be valid. I am satisfied by the evidence of Matthew Watts, Alexander Mufford and Phillip Joseph that the omission of any quorum provision in the trust deed dealing with a quorum is a manifest error or requires a formal technical or administrative amendment. Their evidence shows that a quorum of holders of no less than 10% of the total face value of the debentures on issue by a company is an acceptable level of participation by debenture holders in resolutions to amend debenture trust deeds.

41    For those reasons, I am satisfied that I should give directions under s 424(2) of the Act to the receivers, in their capacity as receivers appointed by the trustee, that they would be justified in causing Provident to amend cl 18.2 of the trust deed under cll 18.1.4. and 18.1.5, to add a provision establishing a quorum of 10% of the face value of debentures on issue, to be present at a meeting in person or by proxy or by attorney.

The Role of the Commission

42    The Commission has offered to fulfil a similar role in assisting the Court to that it plays when a proposal is made under Pt 5.1 of the Act. That role is:

    to review the documents, to implement the nature and the function of the receivers’ proposal;

    to represent the interests of the debenture holders and creditors where, or to the extent that, those interests are not represented in the Court proceedings;

    ensure that all matters that are relevant to the Court’s decision are properly brought to its attention before it orders a meeting or makes an order under Pt 2L.8 giving effect to the proposal.

43    It is important to the administration of justice that the Commission provides such assistance to the Court in such a situation. The Commission has very considerable experience in assessing such matters. It has been of significance that the Commission has given its own, independent, attention to the receivers’ proposal that, if implemented, will affect thousands of debenture holders most of whom are not in a position to play a meaningful role in the proceedings.

Conclusion

44    There was discussion in Court today as to some apparent errors and lack of clarity in a further draft of the notice of meeting and explanatory statement that had been proposed by the receivers and was considered by the Commission to be unobjectionable. The receivers tendered a final version of that material that incorporated appropriate amendments to accommodate the matters that I had raised. For the reasons above, I am satisfied that the receivers would be justified in proceeding on the basis of that final version of the documents that became an exhibit. I will make orders to give effect to what they have sought.

Associate:

Dated:    20 November 2012