Leigh Adams Lawyers

The law on proxies in insolvency administrations has been clarified by the October 2008 decision in the Maylord Equity Management[1] case.

The case clarifies that a proxy has the same voting rights as his or her appointor if a resolution is moved at a meeting which is not one of those specified on the proxy form and that the Corporations Regulation 5.6.23(2) requires the administrator to undertake a “just estimate” of a creditor’s debt for voting purposes not “just an estimate”.

The case is a good example of what solicitors should advise their insolvency practitioner clients to avoid when recommending the approval by creditors of a deed of company arrangement (DOCA).

In 2007, ReelTime issued a convertible note to Maylord in respect of a loan for $1 million (the “Transaction”). The terms of the note provided that it could be subsequently converted into shares. The loan was advanced and subsequently converted. On 6 March 2008, ReelTime was placed into voluntary administration.

Maylord’s solicitor wrote to the administrator before the creditors’ meeting requesting that Maylord’s claim be accepted for voting purposes at $1 million. He advised that a claim would be made to set aside the Transaction and included a 12-page statement containing full particulars of misrepresentations alleged to have been made by ReelTime’s directors before the Transaction took place. He referred to a folder of documents containing 32 tabs to which precise reference was given in the statement. The statement was virtually in the form of an affidavit and had been prepared with care and attention to detail.

The administrator wrote back wanting “further particulars”, denying that the materials supplied was “evidence” and stating that the claim was a “mere assertion”.

In the event, at the creditors’ meeting the administrator estimated the value of Maylord’s claim for the purpose of voting at the nominal amount of $10,000. Maylord’s proxy then sought to move a motion to adjourn the meeting. The administrator accepted the motion but rejected Maylord’s entitlement to vote on it. He ruled that anyone who had a special rather than a general proxy was disqualified from voting on the adjournment resolution. Maylord’s representative held a special proxy specifying that he was to vote against the resolution approving a DOCA.

The motion for an adjournment subsequently failed, voting on the DOCA took place (with Maylord’s proxy voting against it) and it was resolved by majority to adopt it. Neither motion would have been passed had Maylord’s proxy been able to vote against it for the full amount of $1m.

Palmer J explained that Maylord’s claim was not just a simple contract debt claim and that it therefore must be estimated for voting purposes as an unliquidated debt. Corporations Regulation 5.6.23(2) requires that a creditor may not vote in respect of an unliquidated debt unless a “just estimate” of its value has been made.

He then quoted with approval Barrett J[2]: “ Any estimate of value undertaken pursuant to reg 5.6.23(2) … will, of necessity, be of a somewhat summary nature. …The situation is …not one in which extensive debate and deliberation will be possible. …[R]eg 5.6.23.....does not contemplate …any detailed enquiry. …[I]f…there is little or no material from which a conclusion as to value can be drawn, a just estimate may be zero or perhaps the nominal amount of $1….”

In reference to the above obligations, Palmer J queried how the administrator could have estimated the value of Maylord’s claim at a nominal amount of $10,000, particularly as he had had a number of days to consider the issue. He held that the estimate was “unjust”.

His honour noted that regulation 5.6.28(2) relevantly provides that “subject to…regulation 5.6.30, a proxy has the same right to speak and vote at the meeting as the person who appointed the proxy”.

Regulation 5.6.30 provides that an “instrument appointing a proxy may specify the manner in which the proxy is to vote on a particular resolution and the proxy is not entitled to vote on the resolution except as specified in the instrument”.

His honour said that this only restricts the proxy’s right to vote in respect of the particular resolution specified in the proxy form. If a resolution is moved at a meeting which is not one of those specified in the proxy form, his honour stated that regulation 5.6.28(2) gives the proxy the same rights to vote on that resolution as their appointor. He stated that in this regard the regulations merely reflect the general law of agency.

His honour stated that the administrator’s ruling that Maylord was not entitled to vote on the ajournment motion was “clearly wrong”.

He also criticised the administrator for undertaking a “perfunctory and inadequate investigation” in preparing the section 439A report as to the capacity of the directors to satisfy a judgment debt if an insolvent trading claim were made.

The enquiries the administrator had made of ReelTime’s directors were limited to searches of the public registers at the LTO and ASIC. Those searches did not disclose anything about the directors’ personal assets and yet the administrator failed to ask the directors for any information about their own financial position, including whether any of them had Directors’ and Officers’ insurance. The administrator conceded that he knew “virtually nothing at all about the assets and liabilities of the six company officers.”

His honour found it “odd” that 5 directors and the secretary of a publicly listed company could have between them no unencumbered assets, noting that at least one of the directors was a principal of a firm of solicitors. He formed the view that the prospects of an insolvent trading claim against the directors had not been properly investigated and put before the creditors for consideration.

His honour noted that if Maylord established its claim for $1 million, the amount of compensation which could be sought from the directors in proceedings taken by a liquidator under section 588M (insolvent trading) would be almost three times the amount stated by the administrator as being available to creditors under the DOCA.

His honour concluded that he was far from satisfied that the approval of the DOCA would be in the interests of the creditors of ReelTime as a whole. He terminated the DOCA pursuant to section 445D(1)(e).

His honour said that “administrators, like liquidators, must realise that they have personal liability for actions which cannot reasonably be regarded as taken in the interests of the creditors of a company as a whole. The remaining assets of an insolvent company are not to be exhausted by litigation undertaken by or provoked by administrators or liquidators acting unreasonably.”

He said: “ I … infer a culpable failure by (the administrator) to evaluate his stance in the light of plain commercial common sense…”. He ordered that the administrator pay indemnity costs personally.

The case clarifies the law in relation to proxies, the meaning of a “just estimate” for a creditor’s debt and the circumstances where costs orders may be made against insolvency practitioners.

[1]Maylord Equity Management Pty Limited –v- ReelTime Media Limited [2008] NSWSC 1045, heard 3 and 28 October 2008 by Palmer J

[2]in Selim –v- McGrath [2003] NSWSC 927 at [103].

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Deed of Company Arrangement and Voting Rights Author: Leigh Adams
Proxies, estimates and cost orders against administrators INTRODUCTION The law on proxies in insolvency administrations has been clarified by the October 2008 decision in the Maylord Equity Management[1] case. The case clarifies that a proxy has the same voting rights as his or her appointor if a resolution is moved at a meeting which is not one of those specified on the proxy form and that the Corporations Regulation 5.6.23(2) requires the administrator to undertake a “just estimate” of a creditor’s debt for voting purposes not “just an estimate”. The case is a good example of what solicitors should advise their insolvency practitioner clients to avoid when recommending the approval by creditors of a deed of company arrangement (DOCA). BACKGROUND In 2007, ReelTime issued a convertible note to Maylord in respect of a loan for $1 million (the “Transaction”). The terms of the note provided that it could be subsequently converted into shares. The loan was advanced and subsequently converted. On 6 March 2008, ReelTime was placed into voluntary administration. Maylord’s solicitor wrote to the administrator before the creditors’ meeting requesting that Maylord’s claim be accepted for voting purposes at $1 million. He advised that a claim would be made to set aside the Transaction and included a 12-page statement containing full particulars of misrepresentations alleged to have been made by ReelTime’s directors before the Transaction took place. He referred to a folder of documents containing 32 tabs to which precise reference was given in the statement. The statement was virtually in the form of an affidavit and had been prepared with care and attention to detail. The administrator wrote back wanting “further particulars”, denying that the materials supplied was “evidence” and stating that the claim was a “mere assertion”. THE CREDITORS’ MEETING In the event, at the creditors’ meeting the administrator estimated the value of Maylord’s claim for the purpose of voting at the nominal amount of $10,000. Maylord’s proxy then sought to move a motion to adjourn the meeting. The administrator accepted the motion but rejected Maylord’s entitlement to vote on it. He ruled that anyone who had a special rather than a general proxy was disqualified from voting on the adjournment resolution. Maylord’s representative held a special proxy specifying that he was to vote against the resolution approving a DOCA. The motion for an adjournment subsequently failed, voting on the DOCA took place (with Maylord’s proxy voting against it) and it was resolved by majority to adopt it. Neither motion would have been passed had Maylord’s proxy been able to vote against it for the full amount of $1m. A “JUST” ESTIMATE Palmer J explained that Maylord’s claim was not just a simple contract debt claim and that it therefore must be estimated for voting purposes as an unliquidated debt. Corporations Regulation 5.6.23(2) requires that a creditor may not vote in respect of an unliquidated debt unless a “just estimate” of its value has been made. He then quoted with approval Barrett J[2]: “ Any estimate of value undertaken pursuant to reg 5.6.23(2) … will, of necessity, be of a somewhat summary nature. …The situation is …not one in which extensive debate and deliberation will be possible. …[R]eg 5.6.23.....does not contemplate …any detailed enquiry. …[I]f…there is little or no material from which a conclusion as to value can be drawn, a just estimate may be zero or perhaps the nominal amount of $1….” In reference to the above obligations, Palmer J queried how the administrator could have estimated the value of Maylord’s claim at a nominal amount of $10,000, particularly as he had had a number of days to consider the issue. He held that the estimate was “unjust”. ENTITLEMENT TO VOTE His honour noted that regulation 5.6.28(2) relevantly provides that “subject to…regulation 5.6.30, a proxy has the same right to speak and vote at the meeting as the person who appointed the proxy”. Regulation 5.6.30 provides that an “instrument appointing a proxy may specify the manner in which the proxy is to vote on a particular resolution and the proxy is not entitled to vote on the resolution except as specified in the instrument”. His honour said that this only restricts the proxy’s right to vote in respect of the particular resolution specified in the proxy form. If a resolution is moved at a meeting which is not one of those specified in the proxy form, his honour stated that regulation 5.6.28(2) gives the proxy the same rights to vote on that resolution as their appointor. He stated that in this regard the regulations merely reflect the general law of agency. His honour stated that the administrator’s ruling that Maylord was not entitled to vote on the ajournment motion was “clearly wrong”. THE SECTION 439A REPORT He also criticised the administrator for undertaking a “perfunctory and inadequate investigation” in preparing the section 439A report as to the capacity of the directors to satisfy a judgment debt if an insolvent trading claim were made. The enquiries the administrator had made of ReelTime’s directors were limited to searches of the public registers at the LTO and ASIC. Those searches did not disclose anything about the directors’ personal assets and yet the administrator failed to ask the directors for any information about their own financial position, including whether any of them had Directors’ and Officers’ insurance. The administrator conceded that he knew “virtually nothing at all about the assets and liabilities of the six company officers.” His honour found it “odd” that 5 directors and the secretary of a publicly listed company could have between them no unencumbered assets, noting that at least one of the directors was a principal of a firm of solicitors. He formed the view that the prospects of an insolvent trading claim against the directors had not been properly investigated and put before the creditors for consideration. His honour noted that if Maylord established its claim for $1 million, the amount of compensation which could be sought from the directors in proceedings taken by a liquidator under section 588M (insolvent trading) would be almost three times the amount stated by the administrator as being available to creditors under the DOCA. His honour concluded that he was far from satisfied that the approval of the DOCA would be in the interests of the creditors of ReelTime as a whole. He terminated the DOCA pursuant to section 445D(1)(e). COSTS His honour said that “administrators, like liquidators, must realise that they have personal liability for actions which cannot reasonably be regarded as taken in the interests of the creditors of a company as a whole. The remaining assets of an insolvent company are not to be exhausted by litigation undertaken by or provoked by administrators or liquidators acting unreasonably.” He said: “ I … infer a culpable failure by (the administrator) to evaluate his stance in the light of plain commercial common sense…”. He ordered that the administrator pay indemnity costs personally. CONCLUSION The case clarifies the law in relation to proxies, the meaning of a “just estimate” for a creditor’s debt and the circumstances where costs orders may be made against insolvency practitioners. [1]Maylord Equity Management Pty Limited –v- ReelTime Media Limited [2008] NSWSC 1045, heard 3 and 28 October 2008 by Palmer J [2]in Selim –v- McGrath [2003] NSWSC 927 at [103].

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