31 August 2005
Key Points:
When voting in a poll of creditors, secured creditors should be aware that if they vote in respect of their whole debt, they risk losing their security.
In the recent case of Young v ACN 081 162 512 (2005) 52 ACSR 629, Justice Gzell of the Supreme Court of New South Wales held that the mandatory terms of Corporations Regulations 2001 regulation 5.6.24(3) cause a security to be lost by voting on any poll, whether on a substantive issue relating to the rights of a creditor, or a non-substantive issue such as adjournment of the meeting.
This case provides a timely reminder to creditors that they should take care not to vote in respect of their whole debt or claim unless they are prepared to surrender their security.
The facts
Mrs Cockerill was a creditor of ACN 081 162 512, formerly called Dallen Design Pty Ltd, which was under administration. Mrs Cockerill also held 49 percent of the company's shares and a fixed and floating charge over the company's assets and undertaking. As administrator, Mr Young placed an order with Xinrong Pty Ltd to manufacture uniforms for Estée Lauder. Xinrong refused to do so unless its invoice for earlier work in the amount of $14,713.60 was paid. The administrator refused to do so. Mrs Cockerill paid the invoice in the knowledge that she may not be repaid. Xinrong performed the work and ACN 081 162 512 subsequently received from Estée Lauder $262,463.19. The company was later put into liquidation with Mr Young appointed as the liquidator.
Mrs Cockerill attended a meeting of creditors. Under Corporations Regulations regulation 5.6.23(1) Mrs Cockerill was required to lodge a statement of particulars of debt in order to be eligible to vote at a meeting of creditors. A statement was lodged stating an amount owed and recording the estimated value of the charge security as "not known". A meeting was held at which a motion to adjourn was lost on the voices. A poll was demanded and held, on which Mrs Cockerill voted in favour of the adjournment.
At the direction of the creditors of the company, Mr Young sought an order that he be authorised to pay Mrs Cockerill the $14,713.60 in priority to any other creditor of the company.
The decision
Mr Young sought to have section 511 of the Corporations Act 2001 (Cth) applied. Section 511 provides that a liquidator may apply to the court to determine any question arising in the winding up of the company.
Justice Gzell held that a declaration would be made under section 511 of the Act that Mrs Cockerill held an equitable lien over the company's assets in the amount paid to Xinrong in priority to all other debts of the company, secured or unsecured. This was because there was no doubt that Mrs Cockerill conferred 'incontrovertible benefit on the company' and the only way in which the $262,463.19 was received was by virtue of her payment.
However, Justice Gzell also applied regulation 5.6.24 of the Corporations Regulations 2001 (Cth). This regulation prevents a secured creditor from voting in respect of that part of its debt which is secured, and requires a secured creditor to value that part of its debt which is secured. Regulation 5.6.24(3) goes on to provide that:
"If a secured creditor votes in respect of his or her whole debt or claim, the creditor must be taken to have surrendered his or her security unless the Court on application is satisfied that the omission to value the security has arisen from inadvertence."
Therefore, if, at a meeting in a winding up, a secured creditor votes in respect of the creditor's whole debt or claim, this is taken as an implied surrender of the security unless otherwise ordered by the court.
Mrs Cockerill's evidence was that she voted in favour of the adjournment because she thought it was of little consequence and she thought it was fair that the other creditors wanted an adjournment to consider their position. She had no idea that by voting at the meeting she would be taken to have surrendered her security. She was not advised of this either before the meeting or during the meeting by Mr Young. She said that if she had been advised she would not have voted.
However, Justice Gzell held that in the absence of:
the only inference to be drawn was that Mrs Cockerill voted in respect of the whole of her debt on the poll.
Accordingly, Mrs Cockerill was taken to have surrendered her security under regulation 5.6.24(3). Justice Gzell held that to "respond ‘not known’ to the question about the value of Mrs Cockerill's security indicated not a failure to value through inadvertence, but an inability to determine a value".
As noted by the judge, it is unfortunate that a secured creditor might become unsecured by voting on a poll that has nothing to do with the rights of creditors and has no apparent effect on the security. However, he stated that the provisions are "in mandatory terms and make no distinction between a vote on a substantive issue and a vote on a non-substantive one". The regulation is mandatory to provide for secured creditors to vote on the same basis as their debts are or are to be proved, and to relieve liquidators of the additional burden of formally admitting proofs of debt from secured creditors prior to convening a meeting of creditors.
When voting does not constitute a surrender
Where voting is "on the voices", rather than on a poll, a secured creditor will not surrender its security: Health and Life Care Ltd (in liq) v South Australian Asset Management Corporation (1995) 18 ACSR 153. In this case the Full Supreme Court of South Australia held that "voting on the voices or by show of hands does not involve voting on the whole of the debt". This is because when a vote is taken on the voices or by a show of hands each creditor who votes does so simply in the capacity of a creditor. If a resolution is carried on the voices each creditor has one vote. The task of the chairman is to ascertain the number of creditors voting for and against the resolution and as such, the value of the creditor's debt or claim is irrelevant to the task of the chairman.
Summary
This decision confirms that secured creditors can attend and vote at meetings of creditors on the basis of informal proofs of debt. However, if a secured creditor fills in the informal proof of debt without deducting the estimated value of its security, then they will be deemed to have surrendered their security if they vote the whole of their debt on a poll.
It is therefore crucial that secured creditors are aware of this regulation and do not follow the uninformed Mrs Cockerill's mistakes.
For further information, please contact Paul James.
