SEA ASSETS LIMITED v PERUSAHAAN PERSEROAN (PERSERO) PT PERUSAHAAN [2001] EWCA Civ 1696

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
COMPANIES COURT
(Mr Justice Lloyd)
[2001] EWCA Civ 1696Case No A3/2001/2264/AVenue Royal Courts of Justice, Strand, London WC2, Wednesday, 7th November 2001
Between
SEA ASSETS LIMITEDAppellantPERUSAHAAN PERSEROAN (PERSERO) PT PERUSAHAANPENERBANGAN GARUDA INDONESIARespondent
Before
Lord Justice Peter GibsonLord Justice LawsLord Justice LongmoreMR LAWRENCE COHEN QC and MR EDWARD DAVIES (Instructed by Gouldens, 10 Old Bailey, London, EC4 7NG)appeared on behalf of the Appellant.MR MARK PHILLIPS QC and MR RICHARD SNOWDEN (Instructed by Freshfields Bruckhaus Deringer,654 Fleet Street, EC4Y 1HS) appeared on behalf of the Respondent.Date 7 November 2001
[1]Wednesday, 7th November 2001 LORD JUSTICE PETER GIBSON: This is an application by SEA Assets Ltd ("the Appellant") for permission to appeal against the order of Lloyd J on 4th October 2001. Thereby the judge sanctioned a scheme of arrangement ("the Scheme") under section 425 of The Companies Act 1985 which had been put forward by the respondent, PT Garuda Indonesia ("Garuda"). The judge refused permission to appeal. Chadwick LJ directed that the application be heard on notice to Garuda and that the appeal should follow if permission to appeal were given.[2]It has been the legislative policy for well over a century to encourage compromises and arrangements between a company and its creditors or members. That has been achieved by the enactment of a statutory mechanism to enable the absence of consent of minority creditors or members to be overcome, provided that a sufficient number of the relevant creditors or members agree with the proposed compromise or arrangement and the court gives its approval. If that occurs, then the dissentient minority will be bound by that compromise or arrangement. That of course in the case of a creditor is an encroachment on his right to be paid what he is owed in accordance with the contractual terms. But the utility of the statutory mechanism is particularly obvious in a case where a company is in financial difficulties but can persuade most, but not all, of the relevant creditors that the company's debts should be restructured rather than that those creditors should exercise their rights, including the right to put the company into liquidation.[3]The statutory provisions are now contained in Part XIII of the 1985 Act. By section 425: "(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 of the company or any creditor or member of it ... 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, if sanctioned by the court, is binding on all creditors or the class of creditors or on the members or class of members (as the case may be), and also on the company...".[4]The information to be supplied to relevant creditors or members if the court orders a meeting under section 425(1) is contained in section 426. By subsection (2):
"With every notice summoning the meeting which is sent to a creditor or member there shall be sent also a statement explaining the effect of the compromise or arrangement... ."
[5]I turn to the facts. Garuda is the Indonesian national airline. It is a limited liability company incorporated under Indonesian law and wholly owned by the State of Indonesia. It operates regular flights to and from Gatwick. It is registered in England as an overseas company and there is no doubt but that section 425 can apply to it. It also operates flights and to from Singapore, where it has assets.[6]In the 1990s Garuda had several loss-making years until 1998 when a new management instituted some operational and financial rationalisations. They resulted in an improvement, but Garuda is unable to meet all its debts for which it is currently liable on the contractual terms. Further, according to its audited balance sheet at 31st December 2000 it has liabilities exceeding its assets. To survive it has to restructure its liabilities. Under Indonesian company law there is no provision comparable to section 425. There is a provision allowing for debt moratoria during which a composition with creditors generally may be put. But that is seen by the directors of Garuda to have at least two disadvantages. In those moratoria the business of the company is managed by a court appointed administrator who cannot be relied on to have had experience of running an international airline. If the composition is not approved by a sufficient majority of the unsecured creditors, the company must be declared bankrupt.[7]The companies legislation in Singapore contains provisions similar to those found in section 425. The restrictions on the ability of a company to come to an arrangement with its creditors outside bankruptcy led the directors of Garuda to decide against initiating proceedings in Indonesia. It chose to take advantage of the English and Singapore legislation to propose the Scheme and, unusually, to apply to the courts in both England and Singapore for their approval of the Scheme. The Scheme was made conditional on becoming effective in both jurisdictions. If the Scheme is to be effective, a number of conditions must be fulfilled before what is called the Long Stop Date of 15th November 2OO1. They include the certification by the directors of Garuda that no material adverse change in its financial position, as compared with the position set out in the Explanatory Statement prepared and distributed in accordance with the section 426, has occurred.[8]Garuda has proposed that there should be what is termed a Financial Restructuring of Garuda, of which the Scheme forms a part. The Directors of Garuda say that if the Financial Restructuring is not implemented in a timely manner, they may have no option but to recommend to the Indonesian Government that steps be taken towards the commencement of bankruptcy proceedings in Indonesia, under which the unsecured creditors would only receive, and then after some time, by way of dividend about 27.5% of the face value of their claims. The purpose of the Financial Restructuring is therefore to avoid a bankruptcy and to enable Garuda over time to meet in full its outstanding liabilities to creditors other than to the Indonesian Government and certain state-controlled entities, and to reduce Garuda's overall burden of debt to provide Garuda with a solvent balance sheet and to enable it to have access to new assets.[9]A crucial element of the Financial Restructuring is support from the Indonesian Government and the state-controlled entities. They are very substantial creditors. I will come shortly to how their debt is to be dealt with. There are also financing creditors in respect of the purchase of six Airbus A330 aircraft which were delivered in 1996 and 1997. Those creditors are secured creditors. There are also secured creditors who are owed monies under leases of two flight simulators. Finally there are other Indonesian secured creditors. All the secured creditors are within the scope of the Financial Restructuring and they are to be dealt with by individual contractual arrangements (which have been called "the Compromises"). The completion of the Compromises is a pre-condition to the Scheme becoming effective. There are also Scheme Creditors, being persons with Scheme Claims, who are described in the Explanatory Statement in this way:
"Creditors whose claims are to be restructured pursuant to the Scheme are the only material Financial Creditors of the Company (other than Government and certain trade creditors) who are unsecured (i.e. do not have formal or informal security from the Company) and whose claims are intended to be restructured pursuant to the Financial Restructuring. These creditors comprise as follows: (a)holders of certain unsecured promissory notes issued by the Company, denominated in either US Dollars or Rupiah; (b)creditors whose claim against the Company arises under a US dollar unsecured syndicated term loan facility entered into with the Company; and (c) creditors whose unsecured claim against the Company arises as a result of the termination by the Company of certain aircraft leases entered into by those creditors in their capacity as lessor or financiers of lessors."
[10]Finally, outside the scope of the Financial Restructuring are two categories of unsecured creditors: (1)creditors who have claims against Garuda based on procurement contracts for the future supply of aircraft and engines; and (2)trade creditors (in the sense of suppliers of goods and services on an on-going basis which are regarded as essential to the continuation of Garuda's business as a going concern).[11]The creditors in each of those categories can readily be seen to be in a strong bargaining position if Garuda is to continue its operations. In effect the Scheme acknowledges that they must be left free to pursue their liabilities, and their debts will be paid in full as they fall due.[12]The different elements of the Financial Restructuring proposals are these: (1)Some US $909 million of debt owed to the Indonesian Government is to be converted into equity of Garuda. That has been agreed to unconditionally. (2)Some US $441 million of debt owed to the Indonesian Government, including current and future aircraft lease rental obligations and other liabilities, is also to be converted into equity conditionally on all other elements of the financial restructuring being completed. (3)Some US $131 million owed to state-controlled entities is to be refinanced by the issue of mandatory convertible bonds subordinated to other debt, including the debts owed to Scheme Creditors. On maturity, this debt will be converted into equity. (4)Some US $610 million owed to the A330 financiers will be rescheduled over an extended period to 2010 with a reduction in the amount of principal repaid in the earlier years. (5)The debt of US $29.4 million in respect of the two flight simulators is to be restructured from leases to loans to be repaid by 2007 and 2008. (6)The debts owed to Scheme Creditors and certain unsecured Indonesian borrowings are to be rescheduled so as to be repaid by the end of 2007. (7)A mechanism called "the cash sweep mechanism" is to be set up whereby financial creditors other than the Indonesian Government and state-related entities will be able to take the benefit pro rata of a proportion of any excess cash which Garuda may have at the end of any financial year and of sums available (after retentions and certain provisions) from disposals.[13]Under the Scheme, the Scheme Creditors are to have their existing claims cancelled and replaced by an entitlement to receive new notes of the same principal value as their existing claims, denominated, at their choice, in US Dollars or Indonesian Rupiah. Under the note payment terms, 5% is to be repaid on the next business day after the issue of the note, a further 10% in December 2001, a further 15% in each of the months of December 2001 to 2006 and the remaining 10% in December 2007. An early pre-payment option is to be offered separately to note holders. Thus the effect of the Scheme for Scheme Creditors will be that by December 2002 they will have received under the Scheme a sum in excess of what they would eventually receive on the bankruptcy of Garuda with the prospect of being paid in full by the end of 2007. It is also estimated that, if the Scheme goes through, the debts of the unsecured creditors will be covered one and three-quarter times by assets. The unsecured Indonesian borrowings, amounting to 331 billion Indonesian Rupiah, are also to be replaced by the issue of new notes on the same terms as those which Scheme Creditors will receive.[14]The Scheme Creditors fall into three groups. First there are the holders of unsecured promissory notes, all to bearer. Some were issued under note purchase agreements with three Indonesian institutions. Others arose under a revolving trade finance note facility arranged with Morgan Grenfell (Asia) Ltd in October 1993, initially of US $40 million, later increased first to US $100 million and then to US $200 million. The facility was suspended in 1997. The nominal value of these notes is now some US $237 million.[15]The Appellant is the holder of US $9 million of notes. It acquired them in 1999 after they had been dishonoured, noted and protested. The Appellant obtained judgment in the Commercial Court on 27th June 2001 for some US $10.8 million including interest. Interest continues to accrue but is being paid.[16]The second group of Scheme Creditors are those entitled to a scheme debt under an unsecured syndicated term loan facility with Morgan Grenfell as arranger. US $52.5 million principal is outstanding on this debt.[17]The third category is the unsecured creditors who are owed about US $32.5 million as a result of the termination of certain leases.[18]The common characteristics of these three categories are that they are all unsecured, purely financial and overdue. All are treated in the same way under the Scheme.[19]On 30th July 2001 the Companies Court authorised the convening of a scheme meeting, pursuant to section 425(1). That meeting was to be of the Scheme Creditors and to be held on 17th September 2001 in Singapore. The Singapore court similarly ordered a meeting on the same day. The Explanatory Statement was then finalised and sent out with the notices of the meeting pursuant to section 426. The Explanatory Statement is a massive detailed document which, with its Appendices, runs to over 350 pages.[20]The meeting on 17th September was attended by 70 Scheme Creditors by proxy. Their claims amounted to some US $338.5 million of the US $343.25 million total of the debts of scheme creditors. 69 of those creditors, with debts of a value of US $329.5 million, or 97.3% by value, voted in favour. The Appellant alone voted against. One other creditor with a debt of US $3.26 million tried to vote in favour but did not succeed because its proxy was unable to attend the meeting.[21]After the meeting Garuda presented a petition to the English and Singaporean courts seeking the sanctions of those courts to the Scheme. The English petition was supported by evidence in due form. The Appellant put in evidence in opposition. A matter which had featured at the Scheme meeting was the likely impact on Garuda and its business of the tourist attacks in the USA on 11th September; and that was the subject of a second witness statement on 2nd October by Mr Satar, a director and the Executive Vice-President (Finance) of Garuda.[22]The petition was heard by Lloyd J. In his judgment on 4th October 2001 he dealt first with a jurisdictional objection taken by Mr Lawrence Cohen QC, appearing then for the Appellant as he does now before this court. Mr Cohen had submitted that the Scheme does not constitute what it must constitute if it is to be a scheme under section 425(1), that is to say a "compromise or arrangement ... proposed between a company and its creditors or any class of them". The judge noted Mr Cohen's submission that a class of creditors cannot be constituted by a process of arbitrary selection by the company, that there must be something that can be called a class which is identified by the sharing of objectively recognisable common characteristics and that the class must include all the creditors who share those characteristics. The judge considered two decisions of this court, Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 and Re Hawk Insurance Company Limited [2001] 2 BCLC 480 , as well as the decision of Plowman J in Re Robert Stephen Holdings Limited [1968] 1 WLR 522. The judge said that from a purely linguistic point of view he could see something to be said for Mr Cohen's construction. But it seemed to him that an important function of the word "class" was to show that the members of the class must have enough by way of shared characteristics, and he thought it open to doubt whether "class" had any other significance.[23]Moving away from the language of the section to look at the statutory purpose underlying the choice of language, the judge found less to be said for Mr Cohen's construction. He accepted that a company should not be encouraged to make an arbitrary selection of a particular body of creditors with which it seeks to deal by the statutory procedure, but he did not see why the company should not be free to determine, in a way which is not merely arbitrary, what is the particular group of creditors with whom it wishes or needs to deal by the statutory procedure. He drew attention to the fact that Garuda was still trading with a wide variety of creditors and to the explanation that whilst it was possible to deal with a certain creditors by agreement, it was not practical to do so with the Scheme Creditors. The judge said that Garuda was adopting a commercially rational approach in leaving the trade creditors and the procurement contract creditors to be dealt with outside the financial restructuring altogether and in using the statutory procedure limited to those creditors in respect of whom it was sensible and appropriate that it should be used.[24]The judge saw nothing inconsistent with the purpose and nature of the section, the word "class" being applied in relation to the Scheme Creditors even if they were not in ordinary language to constitute the whole of a class. The judge referred to an argument by Mr Cohen that Garuda could not fairly or properly distinguish between unsecured creditors in the Scheme and those who were not brought into the Scheme. The judge continued:
"However, since the question of class, or not, depends not only on the nature of the rights of a creditor but also on how the creditor is to be dealt with under the scheme, one might have a scheme which did comprise all unsecured creditors but dealt with different groups of unsecured creditors in materially different ways. In that case, each group would be likely to have to be regarded as a different class with separate meetings. That being so, I do not see why the same result should not also be achieved differently with one group of unsecured creditors - here the Government and related entities - being the subject of special bilateral negotiations, and another - here the trade creditors not the subject of any particular negotiation except perhaps as regards time to pay or the like, on an ad hoc basis in the ordinary course of business, and with the remainder of the unsecured creditors being dealt with through the scheme. Therefore, if it were necessary for the class of creditors not only to share sufficient common characteristics but also to comprise all those creditors who do so, I would be satisfied that the scheme creditors do because they are all the unsecured creditors of Garuda under financing contracts, other than the Government and Government-related entities who can entirely sensibly be segregated, and because the trade creditors, though unsecured, are sufficiently different from the scheme creditors to be properly segregated, as are the contractual creditors under the procurement contracts such as Boeing."

The judge therefore rejected the objection that the court had no jurisdiction to approve the Scheme.

[26]A second objection which had been taken by Mr Cohen went to discretion. He had submitted that the court should exercise its discretion against sanctioning the Scheme because the Scheme was objectionable, he said, on a number of grounds. First he said that the Explanatory Statement failed to meet the requirement of section 426(2) that it should explain the effect of the compromise or arrangement. The judge referred to the comments of Sir Donald Nicholls, Vice-Chancellor, in Re Heron International NV [1994] 1 BCLC 667 at 672 to the effect that what is needed in the Explanatory Statement is an explanation of how the Scheme affects the creditor commercially and that he needs to be given such up-to-date information as can reasonably be provided on what he can expect if the company goes into liquidation and what he can expect under the Scheme.[27]The judge then applied that guidance to the Explanatory Statement in this case, accurately describing it as a document evidently prepared with considerable care and with the cooperation of a number of highly reputable professional advisors. He then considered a number of specific points taken by Mr Cohen. One was the uncertainty as to the legal effect of the Scheme in jurisdictions other than England and Singapore. The judge pointed out that the Explanatory Statement had dealt with this by stating the legal advice received by the directors of Garuda. This confirmed that an Indonesian court, though not directly recognising the compromise as conferring rights in Indonesia, would give considerable weight to the existence of the Scheme in England and Singapore and would be unlikely to act inconsistently with the Scheme. Further, the judge also referred to the fact that those Scheme Creditors who voted in favour of the Scheme used a proxy form which included a provision that thereby they agreed to compromise any claim against Garuda under or in respect of the Scheme n consideration of the allocation to them of new notes under the Scheme. Thus thereby, the Scheme Creditors have bound themselves contractually.[28]Another point taken by Mr Cohen was a criticism that the identity of, and more information about, the trade creditors were not given in the Explanatory Statement. But the judge regarded that as immaterial and was satisfied that the disclosure made by the Explanatory Statement was adequate for the purposes of section 426.[29]A further point taken by Mr Cohen was that Garuda had failed to prepare and disclose revised projections, taking account of the consequences of the terrorist attacks on September 11th. The judge referred to the fact that Mr Satar in his second witness statement had indicated that the directors had reviewed the impact of those events on Garuda's business. Because Garuda does not fly to or from the USA and only flies to a limited extent to and from Europe, Mr Satar said that there had not been any significant adverse effect on Garuda's financial or operational performance. The only distinct adverse consequence had been in respect of insurance cover and Garuda had been in default. But Mr Satar said that the directors remained highly confident that arrangements would be put in place before the Long Stop Date to resolve the position.[30]The judge found nothing in the matters raised by Mr Cohen to justify objections to the scheme either on the grounds of the inadequacy of the Explanatory Statement or generally as a matter of discretion.[31]Finally, the judge considered other points taken by Mr Cohen going to the exercise of discretion, viz. the omission from the Scheme of trade creditors and the choice of proceedings in England and Singapore rather than Indonesia. The judge rejected those points, saying that the decision taken by Garuda was a fully rational, justifiable commercial decision. Accordingly he sanctioned the Scheme.[32]I have set out the judge's judgment in some detail as, despite the careful submissions advanced by Mr Cohen before us criticising the judgment, I have to say that I respectfully agree with that judgment to such an extent that I would have been happy to adopt it as my own. But in deference to Mr Cohen's submissions, I must say a little more on the points which he has taken before us.[33]The primary argument of Mr Cohen is that the court has no jurisdiction to sanction the Scheme because it is not a compromise or arrangement with a class of creditors within the meaning of section 425. He said that the sense in which section 425 uses the term "class" is as the entirety of the class of creditors in what he called "a recognisable company law sense", for example, all the unsecured creditors of a company, or the creditors at a particular date or future or contingent creditors. He said that it did not mean part of a class of creditors and pointed to the similar language in section 425 of a compromise or arrangement with the members or a class of members. He contended that it would be absurd to have an arrangement with only some members of a particular class. He said that a class of creditors cannot be limited to, say, the unsecured creditors who are listed in a schedule if they are some, but not all, of the unsecured creditors of the company. What is crucial, he submitted, is that the class is a true class and the whole of that class. That, he said, was implicit in the authorities.[34]It is not in dispute that the correct test is to be found in the often quoted words of Bowen LJ in the Sovereign Life case. At page 582 Bowen LJ said this:
"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."
[35]He then considered on the facts of that case the position of policy holders whose policies had not yet matured and were current and contrasted them with policy holders whose policies had matured. He continued at page 583:
"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."
[36]On that test those within a class must be persons with similar rights so that they can consult together with a view to their common interest. So much is uncontroversial. But it does not follow from what Bowen LJ said that the class is incomplete unless every person with similar rights is included. So to hold would go beyond anything said in the Sovereign Life case or indeed in any other case to which our attention was drawn.[37]In the Hawk case Chadwick LJ pointed out that there are three stages in the process by which a compromise or arrangement becomes binding on the company and the creditors within the class with which the compromise or arrangement is made. The first stage is the application to the court under section 425(1) for an order that a meeting be summoned. The second stage is the putting of the proposals to the meeting so convened and the approval (or not) by the sufficient majority. The third, if the requisite approval has been obtained, is the further application to the court for its sanction.[38]The time-honoured practice of the Companies Court at the first stage is that set out in a Practice Note issued by Eve J [1934] WN 137, where it was said that in proceedings under the statutory predecessor of section 425:
"the responsibility for determining what creditors are to be summoned to any meeting or constituting a class is the applicant's and if the meetings are incorrectly convened or constituted, or an objection is taken to the presence of any particular creditors, as having interests competing with the others, the objection must be taken on the hearing of the petition for sanction and the applicant must take the risk of having it dismissed."
[39]It is therefore clear that under that practice it is for the applicant to choose the class in the first place.[40]At page 512 paragraph 15 in the Hawk case Chadwick LJ envisaged cases where it would be plain that the compromise or arrangement proposed is between the company and one distinct class of creditors, for example unsecured trade creditors whose debts accrued before (or after) a given date, or that there are two (or more) separate compromises or arrangements with two (or more) distinct classes of creditors, for example one compromise with unsecured trade creditors whose debts accrued before a given date and a separate compromise on different terms with unsecured trade creditors whose debts occurred after that date. In such a case, he said, the section provides for the court to order a meeting of each class of creditors with whom the composition or arrangement is to be made.[41]At page 516, paragraph 26, after considering Bowen LJ's remarks, Chadwick LJ said this:
"The answer, therefore, which Bowen LJ may be taken to give to the question `... are the rights of those who are to be affected by the scheme proposed such that the scheme can be seen as a single arrangement; or ought it to be regarded, on a true analysis, as a number of linked arrangements?' is clear enough. The scheme proposed may be regarded as a single arrangement with those creditors whom it is intended to bind if, but only if, the rights of those creditors are not so dissimilar as to make it impossible for them to consult together with a view to their common interest."
[42]Pausing there and applying that to the present case, I should note that Mr Cohen does not dispute that the Scheme Creditors, being the persons whom the Scheme is intended to bind, do have rights not so dissimilar as to make it impossible for them to consult together with a view to their common interest.[43]At page 518 Chadwick LJ referred to the question:
"With whom is the compromise or arrangement made?", and said this: "
In each case the answer to that question will depend upon analysis (i) of the rights which are to be released or varied under the scheme and (ii) of the new rights (if any) which the scheme gives, by way of compromise or arrangement, to those whose rights are to be released or varied."[44]Chadwick LJ was in that case considering whether a group of creditors was one class or two, not the question, which is before us, whether persons to whom a scheme is not put should have been treated as within the class because they had similar interests to those to whom the Scheme was put. But consistently with his approach, one must look not only at the rights before the Scheme but also at the rights which as a result of the Scheme are obtained in order to decide who are within a class.[45]Mr Cohen's objection appears to be that other unsecured creditors were not brought within the Scheme to be treated in the same way as the Scheme Creditors. But it would be absurd to treat as part of the same class as the Scheme Creditors the Indonesian Government and the state-related entities, who with their massive unsecured debts would swamp the voting if they were included in the class and, in any event, who have agreed to take equity and so would rank after the Scheme Creditors' interest. Mr Cohen's complaint appears to be primarily that the trade creditors and the procurement contract creditors are outside the Scheme and are not to be treated like the Scheme Creditors under the Scheme. But to suggest that those who in the real world would not accept less than the due payment of 100% of their debt in order to continue supplying the company (and thereby to enable the company to continue trading) must be included in the Scheme as Scheme Creditors, defies not only commercial logic but would defeat the legislative purpose of section 425 to facilitate compromises and arrangements. If the creditors within the Scheme think the proposal unfair to them and unduly favourable to those left outside the Scheme, they can vote against the Scheme. If the majority vote in favour of the Scheme, then a minority creditor has the opportunity to seek to persuade the court that the Scheme is unfair and should not be sanctioned.[46]Mr Cohen suggested that to leave the company to select the members of the class of creditors to be brought within the Scheme would enable the company to pick a class such as would outvote a recalcitrant creditor. But such an example to my mind ignores the commercial realities. No company proposing a scheme will want to leave out of the scheme creditors other than those with whom they have reached agreement or those with whom agreement is impossible but who have to be paid in full if the company is to survive. Nor will it want to put forward a scheme with an arbitrary selection of creditors to be bound by it when it has to procure not only the approval of 75% of the scheme creditors subject to the scheme but also the sanction of the court.[47]Mr Cohen sought to obtain assistance from the use of the word "class" in relation to the members of a company. He submitted that it was plain that a class of members could not comprise some, but not all, of the members. But that submission runs counter to the usual practice in the Companies Court, as noted by Plowman J in the Robert Stephen case. In that case a company proposed to effect a reduction of capital by repaying the capital of some but not all of the ordinary shares in issue. The court considered the reduction to be fair, but Plowman J said at page 524:
"... in cases where one part of a class of equity shareholders has been treated differently from another part of the same class the usual practice is for the company to proceed by way of a scheme of arrangement under section 206 of the Companies Act 1948."
[48]That is the statutory predecessor of section 425. A few lines later he said:
"While I propose to confirm the reduction in this case, I think it right to express the view that it is desirable in cases like the present to proceed by way of a scheme of arrangement, for although no doubt it is true that a dissentient minority shareholder can come to the court and object to confirmation of a reduction, nevertheless the interests of the minority shareholders are better protected under section 206."
[49]Those remarks were plainly obiter but made by an experienced Companies Court judge. Further, we have been told by Mr Mark Phillips QC for Garuda that frequently restructuring proposals in schemes approved by the court have distinguished between different members although those members have shares with identical rights. Takeover schemes similarly apply only to shareholders not associated with the offeror and so distinguish between members having shares of the same class: see Re Hellenic General Trust Limited [1976] 1 WLR 723.[50]Mr Cohen took us to a decision of the New South Wales Supreme Court, Re Advance Bank Australia Limited [1997] 22 ACSR 513, in which Santow J referred to a comment in an Australian text book that Plowman J's dictum was "puzzling" and Santow J commented that Plowman J had not explained how a reduction of capital would proceed by way of a scheme of arrangement. But that authority does not show that the usual practice mentioned by Plowman J and referred to in all the English company law text books was wrong.[51]In my judgment Mr Phillips was right to submit that the proposer of a scheme is free to select the creditors to whom a scheme of arrangement should be put, provided that the rights of the creditors and the effect of the scheme on those rights are not so dissimilar as to make it impossible for those creditors to consult together with a view to acting in their common interest. That gives a sufficient meaning, in my judgment, to the phrase "class of creditors". I would therefore reject the Appellant's jurisdictional objection.[52]I come now to the second submission made by Mr Cohen. He submits that the judge was plainly wrong in the exercise of his discretion to sanction the Scheme because if of its highly unusual, if not unique, features and the lack of fair information on which a scheme creditor was to base his decision. In support of his argument under this head he asked for permission to adduce new evidence. This consisted of a witness statement by Mr Pearson of the firm of solicitors acting for the Appellant. That in turn exhibited two affidavits put to the Singapore court, when it considered whether to sanction the Scheme, and an article from the Daily Telegraph of 13th October 2001. The affidavits were one sworn by Mr Pearson, which set out the Appellant's position and the reasons why it opposed the Scheme, and another by Timothy Phelan, a senior Vice-President of an American company which operates an international air transport consultancy. Mr Phelan criticised the business plan of Garuda on which reliance is based in the Explanatory Statement. It is Mr Phelan's opinion that the business plan is flawed for the detailed reasons which he gives in his affidavit. The newspaper article reports advice given by the Foreign Office to British travellers to avoid most of Indonesia in the wake of anti-US and anti-British demonstrations in Jakarta. It also reports a Garuda spokesman saying that Garuda would be reviewing routes and its cancellation policy in the light of that advice.[53]The application to adduce new evidence dated 1st November is said to be relevant to the question of whether or not it should be left to the discretion of the directors of Garuda to determine whether or not a material adverse change in its financial condition has occurred since the circulation of the Explanatory Statement, particularly following the events of September 11th. That is not the material question. The question is whether, in the words of Fry LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 247, the Scheme "... was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class [to whom the scheme is put], and acting alone in respect of his interest as such a member, might approve of it."[54]That statement was referred to with approval by Lindley LJ in Re English Scottish and Australian Chartered Bank [1893] 3 Ch 385 at pages 408-9, where he went on to say:
"If the creditors are acting on sufficient information and with time to consider what they are about, and are acting honestly, they are, I apprehend, much better judges of what is to their commercial advantage than the Court can be."
[55]But even in the light of the correct question, I am not satisfied that the new evidence should be admitted on this appeal.[56]The tests in Ladd v Marshall [1954] 1 WLR 1489 continue to be relevant to the exercise of discretion under the Civil Procedure Rules, though the court will always now have regard to the overriding objective. In my judgment the new evidence, if admitted, is simply not such as would have an important influence on the appeal. The affidavits of Mr Pearson and Mr Phelan were put before the Singapore court and yet the Singapore court sanctioned the Scheme. It has not been shown to my satisfaction that the new material could not have been obtained with reasonable diligence for the hearing before Lloyd J, save for only a few unimportant pieces of evidence such as newspaper articles published after the date of the hearing before the judge. It was for these reasons that I, for my part, refused to allow the new evidence.[57]I will deal with the more important aspects of the particular points taken on discretion only briefly, given that we have to be satisfied that the high hurdle of the judge being plainly wrong was overcome for the Appellant to succeed.[58]First, Mr Cohen took the point that it was wrong for Garuda, an Indonesian company, to put forward schemes in England and Singapore with which it had no obvious connection when such a scheme was not permissible in Indonesia. He said that it was objectionable for Garuda to forum shop. But the reasons why Garuda chose not to seek a composition in Indonesia are fully explained in the Explanatory Statement, as I have already mentioned, and in Mr Satar's third witness statement he rejects the suggestion that there is no sufficient connection with Singapore and England. In my judgment there is nothing in this point.[59]Second, it is said that the effect of the Scheme is uncertain because it is not binding in Indonesia. I have already referred to the way the judge dealt with that point, which in my view cannot be criticised.[60]Third, it is said that there is a serious lack of information in the Explanatory Statement. It is said that the trade creditors are not identified and that other important information is missing. Again, I respectfully agree with the judge that the sort of information said to be lacking is simply immaterial. It was also suggested that other Scheme Creditors might not be in the same position as the Appellant because some arrangement might have been made with them. That again is expressly refuted by Mr Satar in his third witness statement.[61]Fourth, it is said that, in the absence of revised projections following the events of September 11th, the court and the creditors could not take a view on whether the Scheme could fairly proceed and that it was unsatisfactory to leave it to the directors to certify that no material adverse change had occurred. But Mr Satar's second witness statement indicates, as I have already explained, that the directors have reviewed the impact of the events of September 11th. He was able to explain why there had been no significant adverse effect on Garuda save only in relation to insurance. I have already set out what he said as to the directors' confident expectations on that matter.[62]The Scheme Creditors voted overwhelmingly in favour of the Scheme, notwithstanding that by the date of the meeting the events of September 11th were known to them, and questions were raised about the impact of those events at that meeting. The vast majority of the Scheme Creditors were content with the proposal in the Explanatory Statement that the directors should be left to certify before the Scheme came into effect that there had been no material adverse change. In my judgment the court should be very slow to say that that was so unsatisfactory as to withhold its sanction.[63]For these reasons, I am wholly unable to accept that the judge has been shown to be plainly wrong in the way in which he exercised his discretion. On the contrary, he seems to me to have been plainly right.[64]I would therefore refuse permission to appeal.

LORD JUSTICE LAWS: I agree entirely. I add a word of my own only upon the question of jurisdiction.

[66]To say that a class must include all its members, as does Mr Cohen for the applicants, is to assert a truth: but only to the extent that it is an empty truth, a mere tautology. To deny it would be to state that there may be some members of a class who are not members of the class, and that is a plain self-contradiction. By contrast, to say, as also does Mr Cohen, that in the context of section 425 of the Companies Act 1985 a class must include all those who possess the same or a like interest, is to assert not an empty proposition but a substantive one. However this second proposition cannot be derived from the first proposition, which, being a mere tautology, of itself proves nothing. Nor can it be derived from the reasoning of Bowen LJ in Sovereign Life v Dodd [1892] 2 QB 573 , 582-3 in the passages which my Lord has set out. That reasoning shows that members of a class must possess a like interest, one with another; not that all those having such an interest must be members of the class. I apprehend that Mr Cohen would accept that there may be two classes where the members of both are, say, unsecured trade creditors but who are distinguished by reference to the date when their claims fall due for payment: see Chadwick LJ's discussion in Hawk Insurance Company Limited [2001] BCLC 480, paragraph 15. In such an instance, depending of course on the whole factual position, the members of both classes might share a substantial common interest. But such a state of affairs is unobjectionable. Nor then, in my judgment, can there be any legitimate objection to a state of affairs in which some trade creditors are constituted members of a class for the purposes of section 425 and others are not, there again subsisting a substantial community of interest possessed both by those included in the class and those excluded. Accordingly, in my judgment the second proposition is false. The flaw at the root of Mr Cohen's submission on jurisdiction seems to me to involve a confusion between, or conflation of, these two propositions. His argument as to jurisdiction is thus fatally undermined.[67]I agree with my Lord, Peter Gibson LJ, that Mr Cohen's application to adduce new evidence should be dismissed and that the application for permission to appeal against the decision of Lloyd J should be refused. I agree also with all the reasons given by him for arriving at those results.

LORD JUSTICE LONGMORE: I agree with both judgments which have been delivered. There is nothing can usefully add.

Order

Application dismissed with costs.

Cited in 24 later judgments

and 15 more of the most senior