TGIF 7 February 2020: Who has the casting vote? NSW Court of Appeal clarifies its powers to disturb the result of a creditors’ resolution

This week’s TGIF considers the decision in Glenfyne International Holding Limited v Glenfyne Farms International AU Pty Ltd (in liq); Glenfyne International Limited v GI Commercial Pty Ltd (in liq) [2019] NSWCA 304 where the NSW Court of Appeal exercised its discretion to order that a proposed creditors’ resolution to appoint liquidators, which was blocked by casting vote, be taken to have been passed. 

The NSW Court of Appeal has clarified the scope of its powers, under the Insolvency Practice Rules and Schedule, to scrutinise a chairperson’s exercise of a casting vote at a meeting of creditors. The decision indicates that the Court will look not only to the disproportion between the debts of the majority in value and the debts of the numerical majority, but will also examine whether creditors voted for an “ulterior purpose”; that is, a purpose other than maximising recovery of their debts.

Background

These proceedings arise from events that took place at the second creditors’ meeting of Glenfyne Farms International AU Pty Ltd (Glenfyne Farms). The meeting was chaired by Glenfyne Farms’ then administrator, Mr Gladman. After a vote was passed to place Glenfyne Farms into liquidation, a resolution was put on behalf of Glenfyne International Holding Ltd (Glenfyne International) to appoint its preferred liquidators (Resolution). The result of the vote was split; a majority in value voted for the Resolution, while a numerical majority voted against. Mr Gladman exercised his casting vote against the Resolution. Because no liquidator was appointed at the meeting, Mr Gladman became the company’s liquidator by operation of the Corporations Act 2001 (Cth).

Glenfyne International sought orders in the NSW Supreme Court that the Resolution be taken as passed. The Court also heard parallel proceedings regarding related companies and resolutions. Justice Rees, at first instance, declined to make the orders sought.   Glenfyne International appealed against her Honour’s decision.  

Issues on appeal

There were two related issues on appeal:

1. Whether the Insolvency Practice Rules prevent an administrator from voting against a resolution for the appointment of liquidators.
2. Whether the Insolvency Practice Schedule gave the Court power to order that the Resolution be treated as passed, and if so, whether it should make such an order.

Decision of the NSW Court of Appeal 

Can an administrator vote against the appointment of liquidators?

The first issue on appeal arose because, under the Insolvency Practice Rules, an administrator may not vote against a resolution relating to the removal of the administrator.   Justice Rees, at first instance, held that a resolution for the appointment of liquidators was a resolution for the removal of the administrator.  Her Honour concluded that the administrator could not have voted against the Resolution.

The Court of Appeal held that the primary judge had mischaracterised the Resolution; it was not a resolution for the removal of an external administrator, but a resolution for the appointment of joint liquidators. Mr Gladman had already ceased to be administrator on the passage of the resolution to wind up the company.  Accordingly, the Resolution did not “relate to the removal of the external administrator”, and Mr Gladman could (and did) cast his vote against the Resolution.

Can the Court scrutinise the casting vote, and should it?

The second issue arose because, under the Insolvency Practice Schedule, the Court’s powers with respect to a failed creditors’ resolution is enlivened where “the resolution is not passed because the person presiding at the meeting exercises a casting vote, or refuses or fails to exercise such a vote”.  Because Mr Gladman had the power to exercise his casting vote, and did so, the Court’s jurisdiction was enlivened. That meant that the Court had a discretionary power to order that the proposed resolution “is taken to have been passed at the meeting”.

The Court of Appeal ultimately made such an order.  In doing so, the Court examined the circumstances surrounding the vote at the creditors’ meeting.  It was relevant that:

1. Glenfyne International had made allegations about the conduct of the director of the company in liquidation;
2. Three creditors voted against the Resolution: the director of the company in liquidation, the director’s solicitor, and the director’s accountant;
3. The solicitor and accountant had each submitted proofs of debt for modest amounts.  They had refused offers from Glenfyne International to buy out these debts at 100 cents in the dollar; and
4. The accountant had recommended Mr Gladman’s appointment as administrator.  

In those circumstances, the Court of Appeal considered that:

1. there were various matters regarding the company in liquidation’s accounts which would, prima facie, call for the investigation of a liquidator and it would be preferable if those investigations were not carried out by someone with a professional history or association with the director’s accountant; and
2. it was evident that the accountant and solicitor were acting contrary to their own interests as creditors, having rejected an offer to be paid out in respect of their debts.

Accordingly, the Court of Appeal ordered that the Resolution be treated as passed.

The Insolvency Practice Schedule general discretion

While it was not necessary for the determination of the appeal, the Court also observed that, contrary to the findings of the primary judge, the Court’s power to make ”such orders as it thinks fit in relation to the external administration of a company” does not depend upon some failure on the part of an external administrator to attend to their duties. While a stronger case for the exercise of power would arise where there was fault or failing on the part of an administrator in the exercise of their duties, the Court’s power is not necessarily limited to that scenario.

Comment

The Court of Appeal has provided useful guidance on the operation of the Insolvency Practice Rules and Schedule.  It has confirmed the power of an administrator to exercise a casting vote against a resolution to appoint liquidators.  It has also confirmed the scope of the Court’s jurisdiction to order proposed resolutions be “taken to have been passed”. The exercise of this power depends ultimately on consideration of the interests of creditors as a whole.  However, the Court has shown that this analysis can extend beyond consideration of the debts and number of creditors to include an analysis of whether creditors have voted for an “ulterior purpose”.