NSW Court of Appeal quashes voluntary administrator’s casting vote, appoints alternative liquidators.

Insights29 Jan 2020

The NSW Court of Appeal has overturned a decision at first instance and confirmed the Court’s power under the Insolvency Practice Schedule to review a casting vote made by an administrator who voted against the appointment of alternative liquidators. In the decision, the Court of Appeal provides useful guidance to insolvency professionals about the factors they ought to consider when exercising a casting vote at a creditors’ meeting.

Introduction

Christmas came early last year for certain creditors of Glenfyne Farms International AU Pty Ltd (Glenfyne Farms), when the NSW Court of Appeal quashed the casting vote made by the outgoing voluntary administrator and gifted those creditors with the appointment of their preferred liquidators.

In Glenfyne International Holding Limited v Glenfyne Farms International AU Pty Ltd (in liq)[1], the Court of Appeal was asked, under section 75-43 of the Insolvency Practice Schedule (IPS), to review the casting vote made by the chairperson of a creditors’ second meeting (in this case, the voluntary administrator) who voted against a resolution put forward by a bloc of creditors to install their preferred liquidators. By voting against the resolution, the voluntary administrator automatically become liquidator by operation of the Corporations Act 2001 (Cth).

The decision provides useful guidance on the Court’s power to review failed creditor resolutions due to the exercise of a chairperson’s casting vote.

Key takeaways

The key takeaways from the decision are:

A resolution at a second creditors’ meeting to appoint a liquidator is not a resolution to remove an external administrator. Consequently, at a second creditors’ meeting, the chairperson (usually the outgoing voluntary administrator) is not prevented from exercising a casting vote against the resolution under section 75-115(5) of the Insolvency Practice Rules (IPR).
When exercising a casting vote, the paramount consideration should be the interest of creditors in maximising their financial return.
Insolvency practitioner’s should keep detailed minutes of meetings, and when exercising casting votes, carefully record the factors they took into consideration.
Section 90-15 of the IPS does not require a failure on the part of the external administrator to attend to their duties before an order can be made under that section.

Key Facts

By resolution of the sole director, Mr Flynn, a voluntary administrator was appointed to Glenfyne Farms International AU Pty Ltd (Glenfyne Farms). In his report to creditors, the administrator identified a number of transactions and conduct which, objectively, warranted further investigation including the accounting treatment of certain business conducted by Glenfyne Farms.

At the second meeting of creditors, it was resolved that Glenfyne Farms be placed into liquidation.

There were two ‘blocs’ of creditors. One was led by Mr and Mrs Flynn, and consisted of 1 related creditor, and 2 independent creditors (their lawyer and accountant), who held very minor debts (Flynn Creditors). The second group was led by a former director, Mr Tai. This second bloc consisted of two creditors (Tai Creditors).

The Tai Creditors proposed a resolution that alternative liquidators be appointed, rather than the administrator continuing as liquidator (Resolution). The Tai Creditors held the overwhelming majority of debt by value. Not surprisingly, the Flynn Creditors disagreed and voted against the Resolution, with a view to appointing the administrator as liquidator. The Flynn Creditors held the majority in number.

The chairperson (the administrator) exercised his casting vote under section 75-115 of the IPR, and voted against the Resolution. As the Resolution was not passed, the administrator automatically became liquidator by operation of section 499(2A) of the Corporations Act 2001 (Cth).

Application to the Court

Some months later, the Tai Creditors applied to the Court for orders seeking the appointment of its preferred liquidators (in effect a review of the result of the resolution due the chairperson’s casting vote) under section 75-43 of the IPS.

At first instance, the Supreme Court dismissed the application on two bases:

First, the Court found that the chairperson’s casting vote was invalid under section 75-115(5) of the IPR, which prevents an external administrator exercising a casting vote on a resolution to remove an external administrator. Because the casting vote was invalid, the Court’s power under section 75-43 to review the Resolution was not engaged.
Second, even if the section were engaged, as a matter of discretion, the Court would have declined to grant the relief sought.

On appeal, the Court allowed the appeal, finding:

Properly characterised, the Resolution was not a resolution to remove an external administrator. As it had been resolved to place Glenfyne Farms into liquidation, the administrator ceased his role as administrator, but continued to act as the meeting’s chairperson. Because he was not an external administrator, he was not prevented by section 75-115(5) from exercising a casting vote on the resolution. As the vote was valid, the Court’s power under section 75-43 IPS to review the casting vote was engaged.
After a detailed review of the leading authorities, the Court of Appeal concluded that the discretionary factors weighed in favour of the alternate liquidators (proposed by the Tai Creditors) being appointed over the previous administrator (proposed by the Flynn Creditors). In particular, the authorities suggested the Court (and chairperson) ought to consider:
- Whilst there is no presumption in favour of the majority in value, when there is a large disproportion in value between the numerical majority and numerical minority that must be a factor to take into account.
- The interest of creditors as a whole, and looking at their interest as creditors (i.e. a party seeking to maximise their financial return, and not any other reason).
- Discounting the votes of creditors with vested interest in minimising the liquidator’s investigations (i.e. directors or parties whose conduct or transactions may be impugned).
- That a director should not be permitted, by controlling a bloc of related creditor’s votes to override the wishes of other creditors to minimise the scrutiny of their conduct.
In considering these (and other) factors, the Court noted:
- The Resolution was not passed due to the votes of two independent creditors (a law firm and an accounting firm), in circumstances where the Tai Creditors had offered to purchase those debts for full value, but those parties declined. The Court considered those creditors were not voting in their best interest as creditors. It was common ground those parties had a professional relationship with Mr & Mrs Flynn, and the accounting firm had referred the administrator to the appointment.
- Because there were investigations to be carried out, particularly in relation to the accounting treatment, it was preferable that those investigations be carried out by liquidators without a professional relationship with the accounting firm involved. It ought be noted that there was no allegation made against, or criticism of, the administrator in this regard.

The Court subsequently made orders appointing the alternate liquidators as liquidators.

Section 90-15 of the IPS

Although it was not necessary to determine, the Court of Appeal also considered section 90-15 of the IPS, which gives the Court a broad power to make orders in respect of an external administration, including the removal of an external administrator. The Court opined that the section did not require some failure on the part of an external administrator to attend to his or her duties, before an order could be made. However the Court noted that if such conduct was present, there may be a stronger case for the exercise of the power under the section.

[1] [2019] NSWCA 304