Vol 14 (2017) - Issue 5

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A Class of Their Own? Class Constitution in Schemes of Arrangement

The New South Wales Court of Appeal has recently confirmed the circumstances in which companies seeking approval of schemes of arrangement will be required to convene separate meetings for different classes of creditors.

Class constitution: key principles
The Corporations Act 2001 (Cth) (the 'Corporations Act') provides that a scheme of arrangement cannot bind a class of a company’s creditors unless a meeting of those creditors is convened and a majority of creditors who are entitled to vote and are present and voting (or vote by proxy), vote in favour and the debts and claims owed to those creditors comprise at least 75% of the total debts and claims. As the recent Boart Longyear dispute makes clear, the constitution of these classes can therefore be critical in respect to the success of a scheme proposal in two ways:
– each class of a company’s creditors must approve the scheme before it can be presented to the Court for approval. Class constitution may therefore give minority creditors a 'veto' over the scheme if in their own class;
– correct class constitution underpins the Court’s power to approve a scheme. If the Court considers that creditors were inappropriately classified per class, the Court will not approve the scheme.

What, then, forms a 'class' of creditors? In short, a class of creditors is a group of creditors who share a 'community of interest', which is sufficiently dissimilar to the interests of other creditors. These interests are assessed by reference to the rights which creditors have against the relevant company and which may be affected under the scheme. Private, commercial or financial interests do not affect class constitution. As the creation of separate classes may inhibit 'majorityrules' decision-making, Courts have closely scrutinised challenges to class constitution, requiring any proposed class demonstrate that its interests are so divergent from those of other creditors such that they could not sensibly assess the scheme as a group.