The Supreme Court has ruled by majority that creditors with different rights or interests can be put into the same class in a compromise under Part 14 of the Companies Act 1993 where they can be expected to vote with a “class-promoting" view.
We look at the decision.
In Trends Publishing International Ltd v Advicewise People Ltd, Trends’ directors proposed a compromise with all of its unsecured creditors under Part 14 of the Companies Act.
The underlying principle in part 14 is that creditors representing a majority in number and 75% in value of debts can commit all creditors to a compromise.
But, where there is more than one class of creditors in a proposal, the requisite voting majorities apply to all individual classes. The approach taken to how creditors are classified, therefore, is important.
The majority decision
The majority noted that the policy of Part 14 is that a proposal which reflects a “fair business assessment by creditors” should be approved. The classification of creditors is instrumental to this policy – classification is not an end in itself, but facilitates a fair process that produces compromises which bind dissenting creditors.
A complete identity of rights or interests is not required within a class. If all creditors aim to maximise the return on their debts and can be expected to vote accordingly, differences between them will not really matter. Those proposing a compromise are entitled to take a broad approach to classification. Where creditors, despite differences in commercial interests or legal rights, can be expected to vote on the basis of a “class‑promoting view”, they should be classed together.
Separate classes may be needed where:
- creditors are treated differently under the proposed compromise (as was the case in Trends, where creditors who were to be paid in full were classed with creditors who were to receive, for example, 10 cents in the dollar), or
- creditors may well not share the same class‑promoting view as other creditors because of other interests in a company — for example, as directors, or
- that common interest is outweighed by other considerations.
But, while other circumstances may affect classification, classes should still be assessed on the rights and interests of the creditors in relation to the company, and not on matters extraneous to it — for example, a creditor who is facing financial pressure and is particularly inclined to accept a compromise.
The minority view
The Chief Justice and Ellen France J dissented on this approach to classification, holding it is only the legal rights held by creditors that should impact upon classification.
If dissenting creditors could point to their individual interests as reasons for opposing the compromise, and were constituted a distinct class for the purposes of Part 14, they would obtain a power of veto contrary to the scheme of the legislation.
In Australia, the United Kingdom and Hong Kong, legal rights determine the classes in which creditors vote, not commercial interests.
Chapman Tripp comments
The majority has taken a pragmatic and commercial interpretation to the classification of creditors, correctly recognising that a broad approach should be accorded those proposing a compromise. It is not the Court’s place to substitute its view for that of creditors under Part 14.
By contrast, the minority’s reliance on strict legal rights is more precise and allows less room for argument on questions of classification. However, both the majority and the minority approaches led to very similar outcomes, with the ultimate focus being on whether the compromise would be unfairly prejudicial to a creditor or class of creditors.
The decision did not deal with Part 15 of the Companies Act. Under Part 15 of the Act, compromises are proposed and voted on under the Court’s supervision.
For arrangements and amalgamations, including arrangements affecting some creditor interests, concerning companies subject to the Takeovers Code, Schedule 10 of the Companies Act 1993 directs that the Court must look at the impact on legal rights. So at least in some situations, the approach under Part 15 will differ from the approach in Part 14. Note also that separate rules apply for voting under Part 15A (voluntary administration) and Part 16 (liquidations).