UDL ARGOS ENGINEERING & HEAVY INDUSTRIES CO. LTD. v. LI OI LIN

FACV 11 of 2001

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 11 OF 2001 (CIVIL)

(ON APPEAL FROM CACV NOS. 157, 258,
259, 260, 261 AND 262 OF 2000)

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J U D G M E N T

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Chief Justice Li :

1. I agree with the judgment of Lord Millett NPJ.

Mr Justice Bokhary PJ :

2. I agree with the judgment of Lord Millett NPJ.

Mr Justice Chan PJ :

3. I agree with the judgment of Lord Millett NPJ.

Mr Justice Ribeiro PJ :

4. I agree with the judgment of Lord Millett NPJ.

Lord Millett NPJ:

5. These appeals are brought by creditors who object to Schemes of Arrangement in relation to seven companies in the UDL Group ("the Group"). The Schemes were among those sanctioned by an order of the Court of First Instance (Le Pichon J) made on 18 April 2000; an appeal from her order was subsequently dismissed by the Court of Appeal (Rogers VP, Woo JA and Seagroatt J). The Group consists of a parent company UDL Holdings Limited ("the Company") and more than 100 direct and indirect subsidiary companies. Its principal activities were in the businesses of building services, marine engineering, contracting and structural steel. The Company acts as the holding company of the Group and its shares were listed on the Hong Kong Stock Exchange.

6. The Group was a victim of the Asian financial crisis. Clients of major projects completed by companies in the Group delayed payment. Others refused payment altogether. The situation was aggravated when major loan creditors unexpectedly called in debts repayment of which was guaranteed by the Company. This triggered a chain reaction which led to the withdrawal of credit by trade creditors with consequential default in payments by members of the Group. The Group was insolvent and winding up petitions were presented against the Company and a number of its subsidiaries.

7. In due course the Company and 24 direct subsidiaries sought the Court's sanction for Schemes of Arrangement with their respective creditors. The 25 Schemes were in identical terms and formed part of a global scheme. A single composite document was circulated to creditors setting out the reasons for the Schemes, their effect, and a recommendation to creditors to vote in their favour.

8. The broad effect of the Schemes can be summarised as follows:

(1) The uncharged assets of each of the companies whose creditors voted in favour of the relevant Scheme by the requisite majority and in respect of which the sanction of the Court was obtained would be pooled to form a single fund for the payment of all unsecured external claims (that is to say claims of creditors other than the Company and subsidiaries whose Schemes were sanctioned by the Court).

(2) Neither the Company nor any subsidiary whose Scheme was sanctioned by the Court would claim against the pool in respect of debts to and from each other, though they would vote at the relevant Court Meetings in respect of such intercompany debts.

(3) The preferential creditors of companies whose Schemes were sanctioned by the Court would be paid the amount of their preferential claims in full and would be treated as ordinary unsecured creditors in respect of any balance.

(4) The unsecured creditors of companies whose schemes were sanctioned by the Court would receive dividends consisting of a mixture of cash and new shares in the Company.

(5) Pending completion of realisations and distributions there would be a moratorium on enforcement by creditors of claims against companies whose Schemes of Arrangement had been sanctioned by the Court.

(6) The terms of each Scheme sanctioned by the Court would be in full discharge of all claims by creditors of the company concerned.

(7) The 25 Schemes of Arrangement were independent of each other, save that if the creditors of the Company did not vote by the required majority in favour of its own Scheme of Arrangement, then none of the other Schemes would be proceeded with even if creditors of such other companies had approved their Schemes by the requisite majority.

9. Pursuant to an Order of the Court dated 3 February 2000 separate Court Meetings were held for the Company and each of the 24 subsidiaries which were putting forward Schemes of Arrangement. The Court was asked to direct separate class meetings of preferential and internal creditors but, following the established practice, declined to give any direction in this regard, leaving it to those who were proposing the Schemes to decide whether it was necessary to call separate class meetings. In the event, only one Court Meeting was held by each of the companies concerned. In each case the creditors voted in favour of the Scheme by more than the requisite 75%. The Company's own Scheme, which was essential but is not challenged in these proceedings (and could not be challenged by the appellants who are not creditors of the Company), was approved by 75.8% in value of the creditors, only just sufficient to satisfy the statutory requirement. The Schemes of the seven subsidiaries which are the subject of the present proceedings were approved by majorities ranging from 98.41% to 99.78%.

10. When the applications to sanction the 25 several Schemes came before the Court, objections were made by former employees of seven of the participating subsidiaries who had voted against the Schemes concerned and who would have been preferential creditors in respect of unpaid wages and other employee-related benefits if their respective employers had been put into liquidation. They submitted that the Court lacked jurisdiction to sanction the Schemes in question because only one meeting of all creditors had been held in respect of each company and all the creditors had voted as a single class. They complained that each of the seven subsidiaries concerned should have held separate class meetings for: (i) its preferential creditors; and (ii) internal creditors, meaning either (a) other members of the Group whether or not they were putting forward Schemes of their own; or alternatively (b) other members of the Group which were putting forward Schemes of their own.

The legislation

11. The power of a company to enter into a Scheme of Arrangement is contained in s.166 of the Companies Ordinance, Cap. 32. This reads as follows:

" 166. Power to compromise with creditors and members

(1) Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the court may, on the application in a summary way of the company or of any creditor or member of the company, or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the court directs.

(2) If a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company."

Legislation in identical terms has been enacted in England, Australia, New Zealand and South Africa and elsewhere in the Commonwealth. Decisions of the Courts of those countries on the application of the corresponding legislation are, therefore, of great weight in considering the application of the Ordinance in Hong Kong.

The procedure

12. As Chadwick LJ observed in Re Hawk Insurance Company Ltd [2001] EWCA Civ 241 at p.242, there are three stages in the process by which a Scheme of Arrangement between a company and its creditors or a class of its creditors may become binding on dissentients. First, there must be an application to the Court for an order that one or more meetings of the creditors be summoned. The application is made by the company ex parte. Secondly, the proposals must be put to the meeting or meetings, considered and approved by a majority in number representing 75% in value of the claims of those present and voting in person or by proxy. Thirdly, if (but only if) they are approved by the requisite majority, then the Court may sanction them, though it is not bound to do so.

13. At the first stage the Court does not address the question whether it is necessary to order more than one meeting. The practice in England was established by a Practice Note issued by Eve J and reported in [1934] WN 142. This laid it down that it was the responsibility of the company which was putting forward the Scheme to decide whether to call more than one meeting and if so how the meetings should be constituted. If they were incorrectly constituted or objection was taken to the presence of any class of creditors the objection ought to be taken on the application for sanction and the company must take the risk of the application being dismissed.

14. It might be thought singularly unhelpful to leave the question whether the meetings were correctly convened to the third stage, by which time a wrong decision by the company at the outset will have led to a considerable waste of time and money. But in my opinion the practice is a sound one. The only alternative would be to require the initial application to be made inter partes and for notice of the application together with a copy of the Scheme to be given to everyone potentially affected by it, with the risk of incurring the costs of a contested hearing and possible appeals before it could be known whether the Scheme was likely to attract sufficient support in any event. The present practice ensures that those advising the company take their responsibility seriously, since an error on their part will be fatal to the Scheme. At the same time it leaves the question, which goes to the jurisdiction of the Court to sanction the Scheme, to be decided at the appropriate time, that is to say when the Court is asked to sanction it. By then the outcome of the meeting or meetings will be known and the question, which will no longer be hypothetical, can be argued between the appropriate parties, that is to say the company on the one hand and those who object to the Scheme on the other.

The principles governing the constitution of the meetings

15. Section 166 provides for a company to enter into a Scheme of Arrangement with its creditors or any class of them, or with its members or any class of them, and requires meetings to be summoned of the creditors or members concerned, but provides no indication as to the manner in which such classes are to be constituted. As Chadwick LJ observed in Re Hawk Insurance Company Ltd (supra), the question whether a single meeting is sufficient or separate class meetings must be held depends on whether it can be said that the company is entering into a single composite arrangement with all the creditors or members affected by the Scheme or whether it is in reality entering into separate but interdependent arrangements with different classes of its creditors or members. While this provides the rationale for the summoning of one or more meetings, however, it does not provide a test by which the question can be determined.

16. The principles upon which the creditors or members should be grouped into classes for the purpose of a Scheme of Arrangement under s.166 or its equivalent have been considered by numerous courts in a number of different common law jurisdictions over more than a century: in England, see Re Alabama, New Orleans, Texas and Pacific Junction Railway Co. [1891] 1 Ch 213 CA; Sovereign Life Assurance Company v. Dodd [1892] 2 QB 573 CA at pp.579-80 (per Lord Esher MR) and 582-3 (per Bowen LJ); Re United Provident Assurance Company Limited [1910] 2 Ch 477; Re Hellenic & General Trust Ltd [1976] 1 WLR 123; Re BTR plc [2000] 1 BCLC 740 CA at pp.745-748 (per Chadwick LJ); Re Hawk Insurance Company Limited [2001] EWCA Civ 241 CA at paras 13-33 (per Chadwick LJ); in Hong Kong, see Re Industrial Equity (Pacific) Limited [1991] 2 HKLR 614 at pp.620-625 (per Nazareth J); in Australia, see Re Chevron (Sydney) Ltd [1963] VR 249; Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148-149; Re Landmark Corporation Ltd [1968] 1 NSWR 759 at p.766; Nordic Bank plc v. International Harvester Australia Ltd [1983] 2 VR 298 at p.303; Re Linter Textiles Corporation Ltd [1991] 2 VR 561 at p.565; Re Bond Corporation Holdings Ltd (1991) 5 ACSR 304 at pp.313-317; Re NRMA Ltd (1999-2000) 33 ACSR 595 at pp.616-617; and in South Africa, see Rosen v. Bruyns, N.O. [1973] 1 SALR 815 at pp.820-821; and Borgelt v. Millman NO [1983] 1 SALR 757 at p.769.

17. There is a notable degree of consistency in this line of authority. The principle upon which the classes of creditors or members are to be constituted is that they should depend upon the similarity or dissimilarity of their rights against the company and the way in which those rights are affected by the Scheme, and not upon the similarity or dissimilarity of their private interests arising from matters extraneous to such rights.

18. The starting point has always been taken to be the classic formulation of Bowen LJ in Sovereign Life Assurance Company v. Dodd (supra). The issue was whether the defendant, who was the holder of an endowment policy of assurance which had already matured, was bound by a Scheme of Arrangement between the company which had issued the policy and its policyholders. The Scheme provided that policies written by the company, which was in liquidation, should be replaced by policies issued by another life assurance company on less generous terms. The effect of the Scheme was that each policyholder was bound to accept reduced payments from the new company in full satisfaction of his claims against the old company. A single meeting of policyholders was held. Lord Esher MR held that the defendant was not a policyholder at all but simply an unsecured creditor who was not affected by the Scheme. The other members of the Court were sympathetic to this approach, but preferred to decide the case on the basis that, if the defendant was affected by the Scheme, he belonged to a different class from the holders of continuing policies. In a passage which is often cited, he said:

"What is the proper construction of that statute? It makes the majority of the creditors or of a class of creditors bind the minority; it exercises a most formidable compulsion upon dissentient, or would-be dissentient, creditors; and it therefore requires to be construed with care, so as not to place in the hands of some of the creditors the means and opportunity of forcing dissentients to do that which it is unreasonable to require them to do, or of making a mere jest of the interests of the minority. If we are to construe the section as it is suggested on behalf of the plaintiffs it ought to be construed, we should be holding that a class of policy-holders whose interests are uncertain may by a mere majority in value override the interests of those who have nothing to do with futurity, and whose rights have been already ascertained. It is obvious that these two sets of interests are inconsistent, and that those whose policies are still current are deeply interested in sacrificing the interests of those whose policies have matured. They are bound by no community of interest, and their claims are not capable of being ascertained by any common system of valuation. Are we, then, justified in so construing the Act of Parliament as to include these persons in one class? The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it 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." (emphasis added)

19. In Re Hawk Insurance Company Limited Chadwick LJ explained, rightly in my view, that the case is not authority for the view that creditors with vested rights must necessarily be regarded as a different class from creditors whose rights are contingent. They may or may not be, depending on how their rights are to be dealt with by the Scheme. In Sovereign Life Assurance Company v. Dodd the defendant was in a different position from the holders of continuing policies because he suffered an additional variation of rights not suffered by the others, inasmuch as his rights under a policy which had already matured were being replaced by the rights he would have had on death if his policy had not matured.

20. In Re Alabama, New Orleans, Texas and Pacific Junction Railway Co. Bowen LJ had previously remarked on the difference between the rights (or interests proceeding from rights) which were relevant to the constitution of the classes and extraneous interests which were not. The company, which had issued two sets of debentures, convened separate meetings of (i) shareholders; (ii) holders of first debentures; (iii) holders of second debentures; and (iv) unsecured creditors. It was objected that many of those who held first debentures also held second debentures or shares in the company, and that they ought not to have been allowed to vote at the meeting of first debenture holders. The Court of Appeal held that this did not disqualify them from attending and voting at the meeting, but only went to the discretion of the Court whether to sanction the Scheme. Bowen LJ said at p.243:

"[The object of the Section] is to enable compromises to be made which are for the common benefit of the creditors as creditors, or for the common benefit of some class of creditors as such. Now, it is very important to observe that creditors of the company may have other interests besides those of creditors, and that there may be a class of creditors composed of many individuals - some of whom have only interests as members of that class but others of whom may have interests of a predominant kind which they hold, not as members of that class, but because they belong also to some other class of creditors, or because they also belong to the body of shareholders of the company. Therefore, although in a meeting which is to be held under this section it is perfectly fair for every man to do that which is best for himself, yet the Court, which has to see what is reasonable and just as regards the interests of the whole class, would certainly be very much influenced in its decision, if it turned out that the majority was composed of persons who had not really the interests of that class at stake."

Thus creditors with different and potentially conflicting interests arising from circumstances unconnected with their interests as members of the class are not precluded from attending and voting at a meeting of the class. But while their presence does not invalidate the result of the meeting, it may lead the Court to decline to sanction the Scheme.

21. In Re Hellenic & General Trust Ltd a Scheme of Arrangement was used as a means of effecting a take-over. The Scheme provided that all the shares in the company should be cancelled and that fully paid shares should be issued to H, which would pay 48 pence per share to the former shareholders for the loss of their shares. M, a wholly owned subsidiary of H, already owned more than 50% of the shares. A single meeting of members was called, at which the Scheme was approved by the requisite majority with the help of M's votes. Templeman J refused to sanction the Scheme, holding that M's interests as a wholly owned subsidiary of the purchaser were different from those of the other shareholders who were vendors. He did not merely exercise his discretion to withhold the Court's sanction; he held that the Court had no jurisdiction to sanction the Scheme because a separate meeting of the minority shareholders should have been summoned.

22. The case was relied on by the present appellants as showing that separate meetings should have been held because the shareholders had conflicting interests rather than different rights, and it is true that Templeman J consistently referred to the parties' respective "interests" rather than their "rights". But it is important not to be distracted by mere terminology. Judges frequently use imprecise language when precision is not material to the question to be decided, and in many contexts the words "interests" and "rights" are interchangeable. The key to the decision is that M was effectively identified with H. It would plainly have been inappropriate to include M in the same class as the other shareholders if it had been buying their shares; it should not make a difference that the purchaser was its parent company.

23. But this was not because M and the other shareholders had conflicting interests, nor because they had different rights to start with. M's legal rights at the outset were the same as those of the other shareholders. What put M into a different category from the other shareholders was the different treatment it was to receive under the Scheme. The other shareholders were being bought out. In commercial terms M was transferring its shares to its own parent company and obtaining for its parent company the right to acquire the remainder of the shares from the other shareholders. The rights proposed to be conferred by the Scheme on M and the other shareholders were commercially so dissimilar as to make it impossible for M and the other shareholders to consult together with a view to their common interest, for they had none.

24. In Re Jax Marine Pty Ltd S, an unsecured creditor, also owned all the shares in the company. Under the proposed Scheme he subordinated his claims to those of the other creditors and guaranteed certain payments to be made to those creditors. A creditor who opposed the Scheme argued that separate meetings should be called of S and his associates on the one hand and the independent creditors on the other. Street J acknowledged that S and his associates had a special interest in the promotion of the Scheme which the other creditors did not possess, but he held that this did not preclude them from participating in the same meeting. This feature could be taken into account when the Court came to consider whether to exercise its discretion to sanction the Scheme. At p.148 the Judge said:

"... The fact that this group have an additional interest from the ordinary creditors does not, however, appear to me to go to the length of making their rights so dissimilar from those of the ordinary creditors as to make it impossible for them to consult together..... The existence of this motive or personal interest does not, in my view, preclude the Smithson group from membership of the class of ordinary unsecured creditors....."

"To say that the Smithson group's interests do not preclude their being members of the class is, of course, far from saying that their vote will, if and when a petition is subsequently presented, carry equal weight to that of an unsecured creditor who is not shown to have any special interest. When the petition, if there be a petition, comes before the Court there is ample room within the Court's statutory discretion to decide the petition in accordance with the requirements of justice and equity as those requirements appear to affect the rights of the class and its members. Quite frequently it is necessary to discount, even to the point of discarding from consideration, the vote of a creditor who, although a member of a class, may have such personal or special interest as to render his view a self-centred view rather than a class-promoting view........This Court is accustomed on the hearing of petitions under s. 181 (that is to say at the second stage of the proceedings) to recognizing and taking appropriately into account any special motives or factors affecting particular creditors."

In Re Landmark Corporation Ltd the same judge held that he had jurisdiction to sanction the Scheme despite the fact that subsidiaries and sub-subsidiaries of the company proposing the Scheme which were creditors of the company had attended and voted at the same meeting as the external creditors. The statutory majority was obtained at the meeting, but the Scheme was opposed by a large majority of the external creditors and the Court refused to sanction it.

25. Normally the Court acts on the principle enunciated by Lindley LJ in Re English, Scottish & Australian Chartered Bank [1893] 3 Ch 385 at p.409 and regards businessmen as much better judges of what is to their commercial advantage than the Court could be. But this assumes that they are voting in what they honestly believe to be the interests of the class of which they are members. But this may not be the case if they have some private interest of their own which is not shared by other members of the class. As Adam J explained in Re Chevron (Sydney) Ltd at p.255:

"The true position appears to be that where the members of a class have divergent interests because some have and others have not interests in a company other than as members of the class the Court may treat the result of the voting at the meeting of the class as not necessarily representing the views of the class as such, and thus should apply with more reserve in such a case the proposition that the members of the class are better judges of what is to their commercial advantage than the Court can be. In so far as members of a class have in fact voted for a scheme not because it benefits them as members of the class but because it gives them benefits in some other capacity, their votes would of course, in a sense, not reflect the view of the class as such although they are counted for the purposes of determining whether the statutory majority has been obtained at the meeting of the class."

26. Why, it may be asked, should persons with divergent interests be allowed to vote as members of the same class for the purpose of ascertaining whether the Scheme has been approved by the necessary 75% majority, if their votes are only to be discounted or disregarded by the Court when considering whether to sanction it? There seem to be three reasons. The first is the impracticality in many cases of constituting classes based on similarity of interest as distinct from similarity of rights. Re Alabama, New Orleans, Texas and Pacific Junction Railway Co. is an example of this; Re BTR plc is another. A second is that the risk of empowering the majority to oppress the minority to which Bowen LJ referred in Sovereign Life Assurance Company v. Dodd is not the only danger. It must be balanced against the opposite risk of enabling a small minority to thwart the wishes of the majority. Fragmenting creditors into different classes gives each class the power to veto the Scheme and would deprive a beneficent procedure of much of its value. The former danger is averted by requiring those whose rights are so dissimilar that they cannot consult together with a view to their common interest to have their own separate meetings; the latter by requiring those whose rights are sufficiently similar that they can properly consult together to do so. The third reason is that this is mandated by the rationale which underlies the calling of separate meetings. A company can be regarded as entering into separate but linked arrangements with groups whose members have different rights or who are to receive different treatment. It cannot sensibly be regarded as entering into a separate arrangement with every person or group of persons with his or their own private motives or extraneous interests to consider.

27. The following principles can be derived from this consistent line of authority:

(1) It is the responsibility of the company putting forward the Scheme to decide whether to summon a single meeting or more than one meeting. If the meeting or meetings are improperly constituted, objection should be taken on the application for sanction and the company bears the risk that the application will be dismissed.

(2) Persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting.

(3) The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based on their private interests not derived from their legal rights against the company is not a ground for calling separate meetings.

(4) The question is whether the rights which are to be released or varied under the Scheme or the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class.

(5) The Court has no jurisdiction to sanction a Scheme which does not have the approval of the requisite majority of creditors voting at meetings properly constituted in accordance with these principles. Even if it has jurisdiction to sanction a Scheme, however, the Court is not bound to do so.

(6) The Court will decline to sanction a Scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.

Application to the facts of the present case

28. The preferential creditors. The Schemes provide that preferential claims are to be paid in full and in preference to the claims of ordinary unsecured creditors. The status of preferential creditors is preserved by the Schemes, which affect them in two respects only: like the non-preferential creditors they are deprived of the opportunity of presenting a petition to wind up the company concerned; and the non-preferential part of their claims are treated in the same way as the claims of other creditors. In both respects they are in the same position as every other creditor and can readily consult with them as to their common interest.

29. The burden of their complaint, as formulated below and before us, is that they are concerned about likely delay in obtaining payment of their claims. They believe, rightly or wrongly, that the delay will be much greater under the Scheme than it would have been in a liquidation. They may or may not be right in thinking that the administrator of the Scheme will take longer to make payments to creditors than a liquidator would; but in this respect they are in the same position as every other creditor and can seek to persuade them to vote against the Scheme for this reason.

30. As former employees with preferential claims in respect of unpaid wages and other employee-related claims, the appellants do have a special interest in opposing the Schemes not shared by other creditors, including other preferential creditors (if any) who are not such employees. If the company which employed them were put into liquidation, they could expect to receive ex gratia payments out of the Protection of Wages on Insolvency Fund established under the Protection of Wages on Insolvency Ordinance, Cap. 380. Such payment entitles the Board by way of subrogation to payments by the liquidator. Thus the Board bears the burden of any delay in payment in place of the employee.

31. Although s.16(1)(b) of the Ordinance makes such payments conditional on the presentation of a winding-up petition, the Board does not in practice make payments unless and until there is a winding-up order. While this is obviously sensible as a general rule, it is difficult to understand why payments should not also be made where a winding-up petition is followed, not by a winding up order, but by a Scheme of Arrangement with creditors. This would serve the purpose of the Ordinance without discouraging former employees from approving arrangements which are in the interest of the general body of creditors.

32. This is, however, exactly the kind of private interest, not deriving from any legal right against the company, which may properly influence a creditor to vote against the Scheme, but which does not entitle him to demand a separate meeting of himself and others in a similar position. Were he able to do so, former employees would be able to veto a Scheme which enjoyed the overwhelming support of creditors and which did not affect their status as preferential creditors at all.

33. Internal creditors. The contention that internal creditors should have been treated as a separate class is contrary to the decisions in Re Jax Marine Pty Ltd and Re Landmark Corporation Ltd which were in accordance with principle and which I have no doubt were rightly decided. The internal creditors, and particularly the companies which were putting their own Schemes forward, undoubtedly had a special interest in promoting the Schemes, but this did not disqualify them from being treated as ordinary creditors. The Court was bound to take their presence into account when considering whether to exercise its discretion to sanction the Schemes, but it was not debarred from doing so.

34. In the present case it was impossible to distinguish participating subsidiaries from other internal creditors at the time when the meetings were summoned, for until each company's scheme was voted on it could not be known whether it would be a participating subsidiary or not. For this reason alone, the suggested distinction between the two classes of internal creditors is suspect.

35. It was submitted that the fact that participating subsidiaries were proposing to enter into reciprocal waivers of their claims distinguished their position from that of other internal and external creditors. If such a waiver were being forced on them by the terms of the Scheme, there would be some force in this point. But they were willingly agreeing to this course, so the fact that it was a term of the Scheme was a matter of form only. In substance they were voluntarily entering into mutual agreements that, if the Schemes were approved, they would waive their respective claims.

36. The Judge carefully considered whether to exercise her discretion to sanction the Scheme despite the presence of internal and Scheme creditors at the relevant meetings. In the case of each of the companies whose Schemes were before the Court the proposals attracted a majority, and in some cases a substantial majority, of the external creditors. In those circumstances her decision to sanction the Schemes concerned cannot be faulted, and no appeal was brought from this aspect of her judgment.

Conclusion

37. I would dismiss these appeals.

38. I would make an order nisi for the costs of these appeals in favour of the respondents against the appellants, with the following directions. Any party who wishes to challenge this order nisi should send in written submissions, copied to the other parties, within 21 days. The Court will decide on the basis of the written submissions. If no written submissions are received by the expiry of this period, the order nisi will become absolute.

39. I would order that the appellants' own costs are to be taxed in accordance with the legal aid regulations.

Chief Justice Li:

40. The Court unanimously dismisses these appeals and makes the order nisi for costs with the directions for any challenge to it and the order for legal aid taxation set out in the concluding paragraphs of the judgment of Lord Millett NPJ.