In re Russell Islands Plantation Estates Ltd - In Provisional Liquidation [2002] SBHC 122; HC-CC 243 of 2001 (18 October 2002)

IN THE MATTER OF RUSSELL ISLANDS PLANTATION ESTATES LIMITED (IN PROVISIONAL LIQUIDATION)

AND

IN THE MATTER OF THE COMPANIES ACT (CAP. 175)

AND

IN THE MATTER OF AN APPLICATION BY INTERNATIONAL COMTRADE AND SHIPPING LIMITED

High Court of Solomon Islands
(Palmer J.)

Civil Case No. 243 of 2001

Hearing: 16^th October 2002
Ruling: 18^th October 2002

Mr. MacDonald &

Mr. Ashley: for the Applicant (International Comtrade & Shipping Limited).

Mr. Apaniai: for the Respondent (Russell Islands Plantation Estates Limited).

Mr. Katahanas: for the Petitioning Creditor Mobil Oil Australia

Mr. Lavery: for Objectors Claudio Kabasi, Leonard Oge, Kwaeria Tabuke, Joe Haluepu and Allen Komelo (creditors and employees of the Respondent).

Mr. Nori: for Objectors John Idurara(creditor and employee of the Respondent).

Palmer J.: The Respondent, Russell Islands Plantation Estates Limited (“RIPEL”) in these proceedings was incorporated on 20^th February 1995 as a private company limited by shares. Its registered office was stated to be at Goh & Partners Office, P.O. Box 261, Honiara (VEL Building Parcel No. 191-023-41 Lot 446). The nominal share capital of the company is $21,000,000-00 divided into 21,000,000-00 ordinary shares of $1-00 each. As at 7^th September 2001 its shareholders according to the Register of Members were –

(1) CEMA Holdings Limited as trustee for the CEMA holdings Unit Trust – 11,700,000 ordinary shares (87.5%)

(2) Classic Design Limited as trustee for the RIPEL Employees share Option Trust – 1,000,000 cumulative, convertible redeemable preference shares (7.5%)

(3) Isabel Development Authority – 678,340 cumulative convertible redeemable preference shares (5%)

Also as at 7^th September 2001, the Register of Directors showed the following personal to be the directors of the company: S. Ilala, J Sunaone, G Mara, H Ragoso, G Kejoa, A Rose, A Kemakeza, L Eta, and P Mae. Company secretary was P. Lokay, who was also the General Manager of Commodities Export Marketing Authority (“CEMA”) (note CEMA is the holder of all issued units in the CEMA Holdings Unit Trust).

The company primarily engages in copra and cocoa exports including coconut oil production, livestock/butchery and motel/resort operations. Its assets as contained in the draft 1999 accounts show a book value on land and buildings of $17,670,466.00, but of this $10,934,877.00 represents unamortized development expenditure. The position may now be different after the effects of the ethnic tension. Some buildings at Lunga may have been destroyed and the value of other land and buildings may also have plummeted following the tension. Other major assets shown in the 1999 draft accounts put plant and equipment at $8,736,293-00, breeding cattle at $1,358,115-00, stocks at $7,670,029-00 and trade debtors at $5,329,222-00. These figures are bound to be different as at this point of time.

In normal times, RIPEL was the major copra and cocoa producer and exporter in the country as well as operating a thriving livestock industry. Unfortunately, things did not continue to bloom. The company struck hard times and debts accumulated. Between 10^th July 2000 and 19^th January 2001, in pursuance of its objects the company purchased petroleum goods and products from Mobil Oil Australia Pty Ltd (hereinafter referred to as “the Petitioner”) to the value of $870,579-56. After failing to pay up on its letters of demand for payment, the Petitioner formally served its statutory demand pursuant to section 211(a) of the Companies Act (Cap. 175) upon RIPEL on or about 14 May 2001. On or about 7^th June 2001 a sum of $200,000-00 was paid. The sum of $670,579-56 remains unpaid to date. Based on this default, the Petitioner commenced proceedings by way of Petition filed in this Court on 7^th September 2001 for the winding up of RIPEL.

On same date a notice of motion for the appointment of a Provisional Liquidator was filed pursuant to section 226 of the Companies Act and on same date an order was issued by this court for the appointment of Mr. Wayne Frederick Morris as the Provisional Liquidator of RIPEL. Mr. Morris has prepared a number of reports concerning the affairs of the company.

RIPEL’s operations cover five divisions in Russell Islands, Guadalcanal and Isabel. These are:

• Coconuts/copra
• Coconut oil
• Cocoa
• Livestock/Butchery, and
• Motel/Resort.
  

According to Mr. Morris’s report the operations had been badly affected by the company’s inability to pay its workers and by falling copra/coconut oil prices. At the time of appointment of Mr. Morris, employees had not been paid their August wages. He has been able to receive a grant of funds from CEMA to enable the August wages to be paid together with sale of copra and copra meal. Mr. Morris says that production has been spasmodic with insufficient funds being available to continue production. To date he has been able to keep things going from whatever funds he can get his hands on. The situation on the ground obviously is very unsatisfactory, unstable and volatile.

The total amounts owed to creditors can be summarised as follows:

Secured Creditors $1,587,243-27

Preferential Creditors $3,606,266-00

Priority Creditors $600,002-00

Unsecured Creditors $25,955,253-01

TOTAL $31,748,764.28

On or about 30 May 2002 a total of four Schemes of Arrangement proposals were submitted by Mr. Morris to a meeting of Creditors for their consideration. These scheme proposals were put forward for consideration of the creditors by those who were interested in taking over the operations of RIPEL with the view to rescuing it out of the downward plunge it was taking into liquidation and winding up. This was then adjourned to 17^th June 2002 to give Creditors opportunity to consider the four proposals before voting on them. These were:

• Black Gold Proposal
• Mataranka Proposal
• Elan Trading Proposal, and
• ICSL Proposal
  

At the meeting of 17^th June 2002, the creditors voted overwhelmingly in support of the Applicant’s proposal in preference to the other proposals. The Applicant received a clear majority of votes, the value of which came to $14,309,058-00. Elan Trading Company came second with a vote value of $3,945,080-00. Following this indication of preference by the creditors, a summons was filed by the Applicant under section 198(1) of the Companies Act for the court to consider the terms of the Scheme before making orders for the meeting to be convened. After satisfying itself that the Scheme was not contrary to commercial morality, or that it was contrary to public policy and that the contents of the documents were on their face, fair and reasonable, the court ordered inter alia that a meeting of creditors and members of RIPEL be convened on 26^th September 2002 at 9.30 a.m. to consider whether the Scheme of Arrangement proposed by the Applicant was to be approved or not. Those orders issued on 4^th September 2002 included an additional meeting to be convened called an Information Meeting to be held with the employees of RIPEL who were creditors, for the scheme documents to be explained to them. The employees were given this benefit as it was considered important that they understood what the terms of the scheme entailed before any votes were cast on 26^th September 2002. The Applicant and Mr. Morris appreciate that for any scheme to be successful it must also get the cooperation of its workers, apart from the support of indigenous landowners of Russell Islands, the Provincial Government and the Government of Solomon Islands. The Public Solicitor, Mr. Lavery was appointed and has completed his duty after filing a report of that meeting with the workers. I am satisfied the workers of RIPEL have been duly appraised of the scheme of arrangement of the Applicant before any voting took place on 26^th September 2002.

I am satisfied the meeting of 26^th September 2002 was properly convened and that the votes were made freely and voluntarily. The results of the voting were as follows:

Class Preferential

For Against
Number Value Number Value
8 $3,481,654 1 $2,532.00

% 88.89% 99.93% 11.11% 0.07%

Class Priority

For Against
Number Value Number Value
563 $525,802 371 $74,200

% 60.24% 87.63% 39.76% 12.37%

Class Unsecured

For Against
Number Value Number Value
602 $20,693,317.01 388 $2,210,781.49

% 60.81% 90.35% 39.19% 9.65%

Class Members

100% of those who voted favoured the scheme

Class Secured

The only secured creditor, NBSI, retained and preserved its rights and therefore was not required to vote.

I am satisfied the statutory requirement of three-fourths in value of the creditors or class of creditors present and voting either in person or by proxy at the meeting was achieved. There can be no doubt that the resolutions to approve the scheme had been passed by a properly informed statutory majority at the duly convened meeting.

The proposed Scheme of Arrangement can be summarized as follows. The purpose was to restructure the company so that it could remain in operation. It seeks at the outset to balance the interests of all parties. This is reflected in the proposed shareholding arrangements as follows:

Landowners 24.9%
Workers 20%
SIG 20%
Central Province 20%
ICSL (or nominee) 15.1%

It is quite obvious that the majority shareholding remains with the people of Solomon Islands. Both the interests of the landowners, the Provincial Government, Government and Workers are satisfactorily catered for. Obviously, the only person capable at this point of time of rescuing the company with an immediate injection of funds is the Applicant but who is prepared to hold the minority shares in the company. That is a big sacrifice on the part of the Applicant especially when it is prepared to pump in a large sum of money to cater for the creditors claims apart from the fact alone that it will be required to attempt to resurrect this company back on its feet and get the various operations back to normal production. It will most certainly need the cooperation and support of all the parties to this Scheme in particular the Provincial Government, the Landowners, not to mention the Workers and Government.

The Applicant proposes to make payments into the Scheme Fund to be administered by a Scheme Administrator, (who in this case will be the current Provisional Liquidator) backed up by a personal guarantee of two of the Directors of the company, Patrick Shung Wong and Willem Johan Van Vlymen as follows:

(i) The sum of $1,500,000-00 is to be paid in three equal instalments as follows; the first installment of $500,000-00 is to be paid on the date the Scheme Administrator (Mr. Morris) can make his first distribution to Creditors no later than two months from the commencement date and the second and third installments to be paid on the 6^th and 12^th month anniversary of the first installment.

(ii) The sum of $500,000-00 in two equal installments of $250,000-00 on both the 12^th and 24^th month anniversary of the Commencement Date.

At paragraph 3 of the Scheme of Arrangement, the commencement of the Scheme and appointment of the Scheme Administrator is made conditional on:

• approval being granted by the Foreign Investment Board of Solomon Islands,
• an export licence is granted to the company,
• that the company shall have majority representation on the Board in the company,
• a long term lease is granted on fair and reasonable terms over the land used by the company on Russell Island, and
• where the Applicant agrees by Deed that it will not participate in any distribution of the funds under the Scheme.
  

The Scheme anticipates a period of sixty (60) days within which the above conditions should be fulfilled, failing which the Scheme shall become null and void and of no effect.

The Scheme also provides for the distribution of the funds as follows. The sum of $1,400,000-00 is to be distributed by the Scheme Administrator to Preferential Creditors of the Company, $100,000-00 to the Priority Creditors and $500,000-00 to the Participating Ordinary Creditors of the company. It is apparent from this that the creditors who prove their debts to the satisfaction of Scheme Administrator will get at least something for their claims, but not all. Of-course if the company should be wound up, some if not most of the creditors may never get anything at all. Even as recent as the 4^th of October 2002, the Provisional Liquidator informed this court on oath that he was almost at his wits end to keep operations going. He told the court that he was struggling to find the necessary funds to get workers paid for the month of October and pay fuel to keep the mills going. These were necessary for copra to be produced for export so that money could be brought in. I note that the Provisional Liquidator has thrown his support behind this Scheme.

In any event, the hope of everyone is that the company does pull out of this impending downward spiral to liquidation and winding up.

There are two fundamental considerations the court must bear in mind when considering whether to sanction such a scheme or not. The first one is that the statutory requirements have been complied with, vis a vis, that the resolutions approving the scheme have been passed by a properly informed statutory majority at duly convened meetings. On this particular matter I have noted and given opportunity to certain employees of RIPEL to be heard regarding objections they wish to make on what they allege were improper conduct and behaviour of some persons and which they say might give rise to a completely different picture and conclusion as to the results of the voting which took place on the 26^th September 2002 by the creditors and members on whether to approve the Scheme or not. Despite being given reasonable time and opportunity, they have failed to produce the necessary evidence and so the matter has simply been dismissed by this court. I appreciate there may have been justifiable reasons for not coming up with the requisite evidence or for changing tact at the last minute, but unless these are brought to court within the time frame provided by the court, there is little the court can do. I am satisfied nevertheless that ample time and opportunity had been given including the issue of protection orders. I am satisfied after carefully considering the affidavit material adduced in support of this point that the meeting of Creditors and Members convened on 26^th September 2002 had substantially conformed to the requirements of the Act both as to the manner it has been convened and to the degree that the object of the order for that meeting had been attained. I am more than satisfied the statutory requirements have been complied with.

The second consideration is that the scheme is fair and reasonable so that ''an intelligent and honest man who is a member of that class, and acting alone in respect of his interest as such a member might approve of it'': Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1890] UKLawRpCh 171; (1891) 1 Ch 213 at p 243; In re Dorman, Long & Co Ltd (1934) 1 Ch 635; Re CM Banks Ltd [1943] NZGazLawRp 110; (1944) NZLR 248; Re Milne & Choyce Ltd (1953) NZLR 724; Re Stewart & Sullivan Farms Ltd (1981) CLC 40-729; Re Chicken Venus Pty Ltd (1983) 1 ACLC 794.

On the issue of fairness and reasonableness of the scheme, I bear in mind that the court should not substitute its commercial judgment for that of the members or creditors. Rather its role is to try and put itself in the shoes of an intelligent and honest man who is a member of that class and acting in his personal capacity whether he would approve the scheme. That is an objective position. Mr. MacDonald has cited a number of case authorities in support of his submissions, which I find very useful.

See Re: Peon Pty Ltd. (1986) 4 ACLC 669 per White J. at p.676 in which his Lordship said:

“The Court must leave it to the commercial good sense of the creditors to judge what is reasonable in their interests. After all, it is their money, which is at stake.”

The creditors have spoken loud and clear. I accept their money is at stake and that it is presumed they would have carefully considered the matters raised before casting their vote behind the scheme. It is not the court that makes the commercial judgment. All that the court is required to do in the exercise of its discretion to approve the scheme or not is to consider carefully whether this is what any honest and intelligent businessman would reasonably do in the circumstances.

In Re English Scottish & Australian Chartered Bank [1893] UKLawRpCh 112; (1893) 3 Ch 385 per Lindley LJ, his Lordship said:

“If 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...”

In the least, I am more than satisfied that the creditors have had ample time to consider all the relevant information pertaining to this scheme and have deliberately made their overwhelming support.

In Re MB Group Plc (1989) BCLC 672 per Harman J at 676:

“If persons with whom the scheme is made have been accurately and adequately informed by the explanatory statement and additional circulars, and the requisite majority has approved the Scheme, the court will not be concerned with their commercial reasons for approval”

I am satisfied this point has particular relevance in this case, given the time taken to date to conduct the Provisional Liquidation and the number of meetings and reports, which have occurred, to be in a position for members and creditors to vote to approve a scheme. I have already referred to the precarious plight of this company as adverted to by the Provisional Liquidator in his evidence to this court on 4^th October 2002. The longer the matter is prolonged, the harder it gets for him to source funds just to keep the concern going and ticking along. The company needs a lifeline thrown out to it and as far as he is concerned the Applicant should provide that under this scheme.

If the Scheme is not approved most likely the company will go into liquidation. On 4^th October 2002, the Provisional Liquidator was even unsure as to where he might be able to source funds to keep the business trading. This was partly the reason why hearing of this summons was brought forward from 23^rd October to 16^th October 2002. According to the reports of the Provisional Liquidator the potential return to creditors in a liquidation scenario was likely to be nothing (refer Pages 22-25 of the Explanatory Statement, detailing the Asset and Liability position of the company).

On the question of fairness, it was pointed out in Re Hudson Conway Ltd [2000] VSC 21; (2000) 18 ACLC 266 that:

“The question of fairness was determined by the fact that the vast majority of shareholders, fully informed by the explanatory materials sent to them, had made a commercial decision about their best interests and those of the company.”

I accept in this particular instance the vast majority of creditors and members in each voting class approved the scheme on the basis that it was in their best interests. The results were overwhelming and indisputable. They speak for themselves.

Mr. MacDonald pointed out and I accept that a number of creditors had the ability to independently veto the approval of the Scheme. These creditors were owed more than 25% of the monetary value of debts in their class. They include CEMA, Inland Revenue and the Provisional Liquidator. These parties however did NOT vote against the Scheme. Had any one of them voted against the Scheme the requisite majority would not have been achieved.

I also take note of learned Counsel’s submission that the Court’s Officer, the Provisional Liquidator voted in favour of the Scheme. The Provisional Liquidator made a deliberate decision to cast his vote in favour of the scheme. That is a relevant consideration, which the court is obliged to take into account in the exercise of its discretion.

I must also take into account the interest of the community and the nation as a whole (Vardin International (1971-1973) CLC 40-024). The community where RIPEL carries out much of its operations have spoken clear in favour of the scheme. The workers too who comprise a significant number and play a pivotal role in any future successful operation of the company have also cast their votes in favour of this scheme. I am satisfied both the landowners and the workers have been adequately appraised of the scheme and adequately represented. I am satisfied they have had the opportunity to cast their votes voluntarily and freely.

I also take into account the fact that approval by substantial majorities of all classes of creditors is a strong indication that it is satisfactory to the business community. Most, if not all, of the creditors of RIPEL (excluding the employees) are men of business and the support the scheme received at the meeting indicates that it is satisfactory to a businessman.

The Petitioner, who is owed a sum of $670,579-56 was even prepared to vote in favour of the scheme even though it was the creditor who took up winding up proceedings against the company.

It need not be over stressed that the copra industry in the country forms one of the major backbone industry of this country and that it is vital this industry, a good portion of which comes from the operations of RIPEL, is revamped. The Scheme of Arrangement proffered for sanction to a large extent extends a lifeline to this ailing company. There is indeed an urgency to put back this company into operation so that our people can start to reap the benefits that should be derived from it.

I note the Scheme has the support of the Solomon Islands Government, the Provincial Government, the workers and the Original landowners. Without the support of these paramount parties, no scheme would succeed. I am satisfied the voting of 26^th September 2002 gave a clear indication of their support.

What is paramount now is for the operations of the company to be maintained while the scheme is being implemented. This will take up to sixty days. Changes may not be seen overnight. It is however in the interest of all the parties who have an interest in the revival of the company to stand behind it and support the scheme as it is worked out. This could be the only realistic chance that all parties have. The transition period is the most crucial period of the company and a lot of patience and restraint in my respectful view, must be exercised by all parties. Many good things do not happen overnight though we would want such to happen on many an occasion, especially in a world where we have been misled into expecting things to happen instantly.

A number of amendments to the Scheme have been proposed. Mr. MacDonald has taken me through them. I am satisfied they do not detract in any significant way from the terms of the original scheme as proposed and that no prejudice or injustice would be caused to any of the creditors. I am satisfied too the Court has power to sanction an amendment to the Scheme (see Devi v People's Bank (Srimati Premila) of Northern India Ltd (in liq) (1938) 4 All ER 337 (PC), followed in Re Elliott's MF Services Pty Ltd [1965] VicRp 96; (1965) VR 756; Re Forklift Sales (SA) Pty Ltd (1971-1973) CLC 40-040; Re Stewart & Sullivan Farms Ltd (1981) CLC 40-729; see also Re Sydney & Suburban Building & Land Investment Association Ltd (No 2)(1892) 3 BC (NSW) 23; Re Morris's Will Trusts (1960) 3 All ER 548).

I grant the amendments sought to the Scheme. I am satisfied the Scheme complies with all statutory requirements and reflects on the whole what is fair and reasonable in the circumstances and which any reasonable businessman would approve. I grant order for the sanction of the scheme. Reserve question of costs.

I note that during the hearing, the Petitioner had asked the court to consider a number of consequential orders it seeks in the event the scheme should be sanctioned. I have considered those orders and see no reason as well not to grant them.

The Court.