The New South Wales Court of Appeal recently handed down an important judgment relating to the composition of classes in a creditors' scheme of arrangement.  In First Pacific Advisors LLC v Boart Longyear Limited, the Court of Appeal unanimously dismissed an appeal brought by First Pacific Advisors LLC (FPA).  The appeal was against an order made under s 411 of the Corporations Act 2011 convening meetings of creditors of Boart Longyear Limited (BLL) and several associated companies, to consider and if it saw fit, agree to two schemes of arrangements (one relating to unsecured creditors, the other relating to secured creditors). 

In an earlier landmark decision, the New South Wales Supreme Court had rejected FPA's contentions that aspects of the secured creditors' scheme amounted to differences in the treatment of the secured notes debt and the term loan debt.  FPA had also unsuccessfully argued that several associated transactions made it impossible for the parties to consult as one class.  The primary judge held that, on balance, although there were differences in rights between the two groups, they were not such that the creditors could not consult together with a view to their common interests.  This included the very substantial common interest that they have in addressing the risks of BLL's insolvency and how those risks are increased by the fact that they share security in respect of the same assets.

On appeal, the Court of Appeal:

  • Affirmed the long established test arising from Sovereign Life - creditors in a single class should only be those 'whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest'.  The Court held that in considering whether any difference in rights or different treatment of rights would make it impossible for creditors to consult together, the context in which the scheme is propounded is of importance.  The Court held that the relevant rights to be compared against the terms of the scheme are those that arise in an insolvent liquidation
  • Held that in the context of the case, and taking into account the company's financial position, the rights provided for by the scheme (including additional equity conferred on some, but not all, creditors in the class; the differential effect of the waiver of change of control rights; and different changes to interest regimes in relation to the secured note holders and term loan holder) were not so dissimilar as to require separate meetings
  • Held that the primary judge did not err in holding that the rights conferred by associated transactions were relevant to the question of class composition.  This aspect of the appeal was not of particular significance given that the waiver of the change of control clause formed part of the scheme and the purpose of the waiver was to give effect to the associated transactions. 

The Court of Appeal's decision, like the Supreme Court's earlier decision, has been viewed as potentially extending and somewhat blurring the boundaries of the differential rights that may be conferred on different creditors without causing the need for separate classes to be ordered.  The court still retains the ability to consider the overall fairness of the schemes in determining whether to give its sanction at the final court hearing and expressly noted that a number of the matters raised will be relevant to that assessment. 

In a New Zealand context, the decision will be of potential relevance to schemes of arrangement under Part 15 of the Companies Act 1993.  However, it will be of limited relevance to the composition of classes in creditors' compromises under Part 14 following the High Court's 2016 decision in Advicewise People Ltd & Ors v Trends Publishing International Limited [2016] NZHC 2119 (currently awaiting a decision from the Court of Appeal).

See the full New South Wales Court of Appeal judgment here.