Corporate Insolvency and Restructuring Forum 7 April 2004

Transcription

1 Corporate Insolvency and Restructuring Forum 7 April 2004 Issues for voluntary administrators the role of the court in voluntary administrations and practical solutions to common problems 1. (a) What is the court's role in voluntary administrations and when should applications be made to the court? (b) Practical aspects of applications by administrators and what you need to show to succeed? 2. Can a court assist an administrator to decide on what amounts to allow proofs for and on who to allow to vote at creditors' meeting? Alf Pappalardo Partner and David Courtness Senior Associate Corporate Insolvency & Restructuring Allens Arthur Robinson The Chifley Tower 2 Chifley Square Sydney NSW 2000 Tel Fax Copyright Allens Arthur Robinson 2004 dtcs S v Page 1

2 1. (a) What is the court's role in voluntary administrations and when should applications be made to the court and (b) Practical aspects of applications by administrators and what you need to show to succeed? 1.1 What are the objects of Part 5.3A CA? Section 435A - The object of this part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) (b) maximises the chance of the company, or as much as possible of its business, continuing in existence; or if it is not possible for the company or its business to continue in existence results in a better return to the company s creditors and members than would result from an immediate winding up of the company. 1.2 The role of an administrator is to assume control of a company's affairs. Section 437A -While a company is under administration, the administrator: (a) (b) (c) (d) Has control of the company s business, property and affairs; and may carry on that business and manage that property and those affairs; and may terminate or dispose of all or part of the business, and may dispose of any of that property; and may perform any function, and exercise any power, that the company or any of his officers could perform or exercise if the company were not under administration. 1.3 The role of the court under Part 5.3A Just like liquidators and receivers, administrators share the ability to approach the court to seek directions. It is also open to creditors, members and ASIC to seek such directions from the court under Part 5.3A. The court's jurisdiction to give directions can be found in: (a) (b) (c) (d) miscellaneous express provisions of Part 5.3A; s447a general power that the "the court may make such order as it thinks appropriate about how [Part 5.3A] is to operate in relation to a particular company"; s447d which allows an administrator (or a DOCA administrator) to apply to the court for directions about a matter arising in connection with the performance or exercise of any of the administrator s functions and powers (including the operation of and giving effect to a DOCA); powers of the court in Part 9.5, including: (i) s appeals to the court by persons "aggrieved" from decisions made by administrators; and dtcs S v Page 2

3 (ii) s1322 court power to cure procedural (as opposed to substantive) defects unless the defect causes substantial injustice. (a), (b), (c) and (d) are considered in further detail below. 1.4 (a) Throughout Part 5.3A, the role of the court in the operation of Part 5.3A is expressly provided for as follows: Section 435C(3) - Where administration may end normally an administration ends when a Deed of Company Arrangement (DOCA) is entered into or the company s creditors either resolve that the administration should end (section 439C(b)) or the company should be wound up (section 439C(c)). However, the administration of a company may also end because: (a) (b) the court orders under s447a or otherwise, that the administration is to end, for example, because the court is satisfied that the company is solvent; or the convening period, as fixed by s439a(5), for a meeting of the company s creditors ends: (i) (ii) without the meeting being convened in accordance with s439a; and without an application being made for the court to extend under s439a(6) the convening period for the meeting; or (c) (d) an application for the court to extend under s439a (6) the convening period for such a meeting is finally determined or otherwise disposed of otherwise than by the court extending the convening period; or the court appoints a provisional liquidator of the company, or orders that the company be wound up. Section 436B - the liquidator may appoint an administrator. (1) A liquidator or provisional liquidator of a company may in writing appoint an administrator of the company if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time. (2) With the leave of the court, the liquidator or provisional liquidator of the company may appoint himself or herself. The main question in an application under s436b is whether the liquidator or provisional liquidator is independent and the appropriate person to be an administrator (Re Cobar Mines Pty Limited (in liquidation) (1999) 17 ACLC 275). Section 437D(2) - only an administrator can deal with a company s property - a transaction or dealing is void unless (a) (b) (c) the administrator entered into it on the company s behalf; the administrator consented to it in writing before it was entered into; or it was entered into under an order of the court. [which may be retrospective see s437d(4)]. Section 437E - Court may order compensation - against an individual where an officer is involved in a void transaction. dtcs S v Page 3

4 Section 437F A transfer of shares in a company - or an alteration of the status of members of the company made during the administration of the company is void except so far as the court otherwise orders. (See Selim and Buzrio v McGrath and Honey (2003) NSWSC 806.) Section 483D Court may order that the Administrator lodge a report if it appears to the court that a past or present officer or member of a company under the administrator has been guilty of an offence in relation to the company. Section 439A- Convening of creditors' meeting within the convening period This section requires the administrator to call the final meeting of creditors to decide the companies future. In recent times this section has been the subject of high profile litigation such as the Pan Pharmaceuticals case. The part 5.3A procedure is based on a very tight timeframe which may be extended with court approval. In recent cases there have been some quite considerable extensions (see Re Daisytek Australia Pty Limited (Administrators Appointed) (2003) FCA 575) and Re Pan Pharmaceuticals Limited (2003) FCA 598 (75 day extension granted). The court may extend time deadlines or allow for alternative forms of notice. In Re Diamond Press Australia Pty Limited (2001) NSWSC C3013 Barrett J said the function of the court on an application such as this is as I see it to strike an appropriate balance between on the one hand the expectation that administration will be a relatively speedy and summary matter; and on the other hand the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders". The court will have regard to the objects of Part 5.3A when considering any application to extend time. Section 447A may be used to alter the requirements of section 439A (Australasian Memory Pty Limited v Brian (2000) 2000 CLR 270) (see below). Section 440B - During the administration of a company, a person cannot enforce a charge on the property of the company except (a) with the administrators written consent; or (b) with the leave of the court. Section 440C - During the administration of a company, the owner or lessor of property that is used or occupied by or is in the possession of the company cannot take possession of the property or otherwise recover it except (a) with the administrators written consent; or (b) with the leave of the court (see Lenin v Albarran (2002) NSWSC 1066). Section 440D - During the administration of the company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with except (a) with the administrator's written consent; or (b) with the leave of the court (and in accordance with such terms (if any) as the court imposes) (Wallabah Pty Limited v Navillo Pty Limited (1997) 15 ACLC sets out the relevant factors for the court when considering whether to grant leave). Section 440F - During the administration of a company, no enforcement process in relation to property of the company can be begun or proceeded with except with the leave of the court (and in accordance with such terms (if any) as the court imposes). Section 440J - During the administration of a company, a guarantee of a liability of the company given by certain persons cannot be enforced except with the leave of the court dtcs S v Page 4

5 (and in accordance with such terms (if any) as the court imposes) (see Helou v Mulligan Pty Limited (2003) NSWCA 92). Section 441D The court may limit powers of chargees and receivers in relation to charged property in certain circumstances. Section 441H - The court may limit powers of receivers in relation to property used by a company. Section 442C Deals with the circumstances where an administrator can dispose of encumbered property. Ordinarily this is prohibited save where the disposal is (a) in the ordinary course of the company s business; (b) with the written consent of the chargee, owner or lessor; or (c) with the leave of the court. The court may only give leave if satisfied that arrangements have been made to protect adequately the interests of the chargee, owner or lessor of the encumbered property. Section 444E - Persons bound by a DOCA cannot begin or proceed with a proceeding against the company or in relation to any of its property or begin or proceed with enforcement process in relation to property of the company except with the leave of the court (and in accordance with the terms (if any) that the court imposes). Section 444F - The court may limit rights of secured creditors, owners and lessors - to deal with security or property where a DOCA is executed or proposed. Section 445B - Where a DOCA is varied under s445a, a creditor of the company may apply to the court for an order cancelling the variation. Section 445D -The court may make an order terminating a DOCA (see Bovis Lend Lease v Wily (2003) NSWSC 467 where a DOCA was terminated because it was contrary to the interests of creditors as a whole and could not be given effect to without injustice). Section 445G The court may make an order declaring that a DOCA or part of it is void. Section 447B - ASIC or a creditor of the company may apply and the court may make such order as it thinks necessary to protect the interests of the company s creditors while the company is under administration. Any such order may be made subject to conditions. Section 447C - The court may declare whether an administrator was validly appointed. Section 447E - (1) Where the court is satisfied that the administrator of a company under administration or a DOCA (a) has managed or is managing the company s business or property in a way that is prejudicial to some or all of the company s creditors or members; or (b) has done an act or made an omission or proposed to do an act, or make an omission, that is or would be prejudicial to such interests, the court may make such order as it thinks just. (2) Where the court is satisfied that a company is under administration but (i) there is a vacancy in the office of the administrator of the company or (ii) no administrator of the company is acting; or a DOCA has not yet terminated but (i) there is a vacancy in the office of the DOCA administrator or (ii) no DOCA administrator is acting, a court may then make such an order as it thinks just. dtcs S v Page 5

6 Section 449B - on the application of ASIC or of a creditor of the company concerned, the court may remove from office the administrator of a company or a DOCA administrator under administration and appoint someone else as administrator of the company or DOCA. Section 449C(6) - Where a company is under administration, but for some reason no administrator is acting the court may appoint a person as administrator. Section 449D - If there is a vacancy in office of the administrator of a DOCA the court may appoint someone else and where a DOCA has not yet terminated but for some reason no DOCA administrator is acting, the court may appoint a person to administer the DOCA. Section 449E - If the administrator or the DOCA administrator s remuneration is not fixed by resolution of the company s creditors passed at a meeting, they are entitled to remuneration as the court orders. On the application of the administrator such entitlements can be reviewed by the court where they were fixed by resolution of the company s creditors. 1.5 (b) In addition to the miscellaneous express provisions of Part 5.3A referred to above, s447a(1) gives the court a general power "to make orders as it thinks appropriate about how [Part 5.3A] is to operate in relation to a particular company". s447a(2) states by example that the court may order that an administration come to an end if the court is satisfied that the administration of the company should end because (a) the company is insolvent (b) provisions of Part 5.3A are being abused or (c) for some other reason. Such an order may be made subject to conditions (s447a(3)) and the company, a creditor of the company, the administrator of the company or a DOCA administrator, ASIC or any other interested party may apply under s447a (s447a(4)). s447a confers broad powers on the court which includes power to fill gaps in the Part 5.3A legislative scheme and permit alterations to the way it operates in relation to a particular company. Clearly, any orders made must be exercised in accordance with the objects of Part 5.3A (see s435a above) but s447a should not be read down or confined to curing defects which have arisen (Australasian Memory Pty Limited v Brien (2000) 18 ACLC 500). Young J described s447a as conferring on the court "plenary powers to do whatever it thinks is just in all the circumstances" (Cawthorn v Keira Constructors (1994) 13 ACRS). s447a is such a wide power that: the court need not be strictly bound by the provisions of Part 5.3A as is illustrated by the court's comment in the Australasian Memory case - "It is not right to seek to characterise section 447A as some general source of power to which resort cannot be had because to do so would circumvent the statutory limitations upon the exercise of the power that is given by section 439A(6) to extend the convening period [which sets time limits for applications to extend the convening period]". it can be used to make an order with future effect in respect of past matters or events (Australasian Memory and Gibbons v LibertyOne Limited (in liquidation) (2002) 1 67 FLR 310 per Austin J). dtcs S v Page 6

7 However, as Austin J noted in Gibbons v LibertyOne Limited (in liquidation), s447a cannot be used to dispense with Part 5.3A altogether or to achieve an outcome unrelated to the administration of the company under Part 5.3A. Before any order can be made under section 447A(1), it is necessary to identify the relevant provision of Part 5.3A (or the effect produced, or to be produced, by the Part 5.3A provision), the operation of which is proposed to be modified. The next step is to articulate the modification that the order is to effect (Re AFG Insurance Limited (2002) 20 ACLC 1, 588). Orders have been made under s447a in relation to: Appointing a new administrator (Re National Express Group Australia (Bayside Trains) Pty Limited (2003) 21 ACLC 1351). The termination of an administration (Spacorp Aust Pty Limited v Fitzgerald (2001) 19 ACLC 979). Validating or curing defective appointments (Panasystems Pty Limited v Voodoo Tech Pty Limited (2003) 21 ACLC 842; Re Wood Parsons Pty Limited (in liquidation) (2002) 21 ACLC 111 and Re Epromotions Australia Pty Limited (92003) NSWSC 702)). Setting aside a DOCA (Re Bartlett Research Securities Pty Limited (1994) 12 ACSR 707). Adjournment of meetings (Cawthorn v Keira Constructions Pty Limited (1994) 33 NSWLR 607, Re Double v Marketing Pty Limited (1995) 16 ACSR 498 and Re Open Telecommunications Limited ex parte Whitton (2002) NSW SC930). Extending required time periods (Australasian Memory). The appointment of powers of attorney for union members (Re Basminco Limited (2003) 45A CSR 1). Relaxation of statutory requirement (s450e(2)) that the words "subject to DOCA" appear after a company's name on every public document (order not made) (Re Multilink Australia Limited (administrator appointed) (2003) NSWSC 836). Relaxation of the statutory requirement for a liquidator to call a meeting of members under s508(1)(b) (Gibbons v LibertyOne Limited (in liquidation) (2002) 41 ACSR 442). 1.6 (c) Section 447D An administrator (or a DOCA administrator) may apply to the court for directions about a matter arising in connection with the performance or exercise of any of the administrator s functions and powers. A DOCA administrator may apply to the court about a matter arising in connection with the operation of, or giving effect to, the DOCA. This section is designed to give administrators the benefit of the court s guidance. This is essentially important as administrators may be personally liable for the debts of the administration. dtcs S v Page 7

8 The underlying reason would be for an administrator to obtain the sanction of the court to a proposed course of action in circumstances where the administrator perceives that there may be some risk in pursing that course of action. If the administrator is successful in obtaining the orders or directions sought it will provide a seemingly watertight defence to any action being taken against the administrator for pursuing that course of action. By analogy to President Fitzgerald in Coats v Southern Cross Airlines Holdings Limited (In Liquidation) (1998) 16 ACLC 1393 " the primary purpose of the court's directions to a liquidator [is] the protection of the liquidator from allegations that he or she acted improperly or unreasonably or has caused actionable loss " S447D is being used with increasing frequency as administrators of complex corporate collapses face large groups of different creditors with competing interests. However, the court has repeatedly reaffirmed its stance in relation to similar rights of liquidators and receivers to make applications to the court for guidance, namely that it is not the courts role to give advice on matters which solely concern matters of commercial judgment (see the judicial comments below): President Fitzgerald in Southern Cross by analogy " it does not follow that the court can, or if it can that it should, give a direction whenever asked to do so by a liquidator, irrespective of the circumstances. Various factors are material a liquidator has, and is expected to exercise, his or her discretion, especially perhaps on commercial or practical issues. He or she has access to legal advice and can ascertain the wishes of creditors and contributories, even then, free to make and act on his or her own decisions. Although s379(3) of the companies Code is expressed in wide terms, it seems clear to me that it does not permit the liquidator or a provisional liquidator to come to the court whenever he feels some unease about a situation and obtain some sort of insurance against the possibility of error, as well as assurance that he is on the right track." and Goldberg J in Re Ansett Australia Limited [No. 3] (2002) ACLC 1187 "Authorities relevant to the rights of liquidators to seek directions from the court are applicable to issues arising in relation to the rights of administrators to seek directions pursuant to section 447D there must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, priority or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give an imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment." In the Ansett case the court was asked to approve the administrators' decision to continue trading Ansett's business at a substantial loss, which was significantly greater that the loss incurred to date in trading by the administrator. This decision was taken by the administrators as there was a prospect that Ansett's business might be sold during that dtcs S v Page 8

9 period of trading, to the benefit of creditors generally and pursuant to the objects of Part 5.3A. The court refused to endorse what it said was a purely commercial and business judgment of the administrators, which was only made more acute by the significantly increased losses which would be incurred in the extended period of trading. There was no issue that the administrators had power under Part 5.3A to operate the business of Ansett at a loss and as no matter of law arose, the court had no power to give directions. As Goldberg J said "of course the court will support and supervise the administrator if controversial issues, legal issues or challenges to their power arise" but "the court does not usually consider it proper to intervene and make the liquidator's commercial decisions for him. Indeed, the court is always reluctant to credit itself with any degree of competence in that field at all". The court will also not: make decisions which are binding on third parties For example, in circumstances where there was a dispute between the ownership of company property predating the appointment of the administrator, s447d was inappropriate and the court had no jurisdiction to make final judgments deciding questions concerning proprietary claims and the court has no power to make orders binding upon, or affecting the rights of the third parties (Editions Tom Thompson Pty Limited v Pilley (1997) ACLC 1331). give an opinion on a hypothetical question (Re PR Clarke Holdings Ltd 2 ACLR )] It is by no means certain that an application by an administrator for directions under s447d would be successful. Administrators would be well advised to take advice or at least consider the nature, character and ultimate effect of the directions which they seek. Despite the fact that an application may be unsuccessful there may still be some utility in making the application (with the court giving some clarification) and in any event, it is unlikely that an administrator would personally bear the costs of an application even if it were unsuccessful. Recent decisions in relation to s447d include: Ex parte Simms (1998) 38 ACLR 228, where an administrator was permitted to enter into on behalf of the company a litigation expense insurance agreement. Humphris, in the matter of ACN Pty Limited (2003) FCA 849, where the court made an order as requested allowing an administrator to pool the assets of the 5 group companies he was an administrator of in circumstances where the creditors had given their approval. Dean-Willcocks v ACG Engineering (unreported), where the court directed that funds transferred to a DOCA administrator for distribution prior to a liquidator being appointed, should be distributed in accordance with the terms of the DOCA and should not fall to be available to the liquidator for distribution to creditors generally. dtcs S v Page 9

10 1.7 (d) Part 9.5 Powers of the court s1321 allows a party whose interests are directly or indirectly affected by the decision of an administrator (or DOCA administrator) to appeal that decision. It provides that "a person aggrieved by any act, omission or decision of an [administrator or DOCA administrator] may appeal to the court and the court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit." An "aggrieved" person is interpreted in a broad way but must be more than a "mere busybody interfering with things that did not concern it" (Re Gasbourne PTY Ltd (1984) VR 801). The "aggrieved" person must prove that the administrator's decision was wrong (Westpac Banking Corporation v Totterdell (1998) 20 WAR 150). s1322 allows the court power to cure procedural (as opposed to substantive) defects unless the defect causes substantial injustice. In Re Epromotions Australia Pty Limited the court cured the late convening of a creditors' meeting and under s447a, ordered that subsequent breaches arsing from the late calling of the creditors' meeting also be cured and that Part 5.3A operate in relation to the company as if the meeting was not invalid by reason of the defect. 2. Lessons for administrators and creditors from Pan (Selim v McGrath (2003) NSWSC 927 per Barrett J) - Can a court assist an administrator to decide on what amounts to allow proofs for and on who to allow to vote at creditors' meeting? Issues: A range of issues relating to voting at creditors meetings A challenge by the owner of Pan Pharmaceuticals to the way creditor voting rights were dealt with by the voluntary administrator was dismissed in the Supreme Court of New South Wales. Background Pan Pharmaceuticals Limited (Pan) appointed voluntary administrators after its Therapeutic Goods Administration (TGA) licence was suspended and Pan products manufactured after May 2003 were recalled. A DOCA was proposed to transfer Pan's business to Sydney businessman Fred Bart. At the second creditors' meeting (the meeting), the central question was whether (a) the proposed DOCA should be approved; (b) Pan should be wound up; or (c) the administration should be brought to an end. The meeting was chaired by voluntary administrator Tony McGrath. At the meeting, the creditors resolved to reject the proposed DOCA and Mr McGrath subsequently used his casting vote as chairman to support the resolution to put Pan into liquidation. dtcs S v Page 10

11 Pan's founder and major shareholder Jim Selim challenged Mr McGrath's decision to liquidate the company and various other decisions made by Mr McGrath at the meeting, and sought to avoid Pan's liquidation by having those decisions reviewed or reversed. At the first creditors' meeting, Mr McGrath had allowed voting by 357 pharmacists who had sold Pan products. At the second creditors' meeting, Mr McGrath refused to allow voting by 417 consumers and retailers who had bought Pan products. Mr Selim argued that if 357 pharmacists who sold Pan products were entitled to vote, then so were the 417 consumers and retailers who bought them. Justice Barrett endorsed Mr McGrath's decisions, found that he had complied with his obligations as set out in the CA and CR, dismissed Mr Selim's application, and ordered costs against him. Implications The judgment fully endorsed the decisions taken by Mr McGrath. Justice Barrett's judgment is a useful guide to identify who can, and who cannot, vote at a creditors' meeting. The lessons are as follows: Creditors Creditors should lodge their proofs for voting purposes to allow administrators sufficient time to properly consider them. Creditors should provide sufficient information in the proof of debt to identify the nature and value of their claim. Administrators When claims are lodged late and insufficiently particularised, the administrator may not be able to make a fair estimate of value and, in that case, should not admit the proof. Administrators seeking to hold a creditors' meeting must advertise in Australia and notify all known creditors. However, the administrator does not need to go to extraordinary lengths to locate possible creditors or advertise overseas. Once a DOCA has failed to pass, it is appropriate for the administrator to use his or her casting vote to liquidate an insolvent company. Except in exceptional circumstances, the chair is not permitted to unilaterally adjourn a creditors' meeting without the meeting's consent or direction. Justice Barrett's analysis of CR and and recent cases that have considered them is a useful guide to administrators on how to treat claims for voting purposes. The meeting Who did Mr McGrath admit as a creditor for voting purposes? As a consequence of the TGA product recall, losses were sustained and Pan had a number of potential creditors, including: those with a direct contractual relationship, such as sponsors, trade creditors, and employees; and those without a contractual relationship, such as retailers (including pharmacists), health professionals and consumers. dtcs S v Page 11

12 The voting rights of 'contractual' claimants at the meeting was not contentious, but the rights of the 'non-contractual' claimants to vote on the future of Pan was. Relying on senior counsel's advice, Mr McGrath admitted for voting purposes: claims put forward by individual members of the Pharmacy Guild (who had given advance notice and submitted statements of loss in accordance with an agreed lodgment procedure), on the basis that it had been possible for him to make a just estimate of the value of each claim for voting purposes under (2) CR; and only 53 retailers' (including pharmacists) claims of the 470 'non-contractual' potential creditors who submitted claims immediately before the meeting began on the basis that a just estimate of value of each claim could be assessed on the information submitted (in a similar way to the Pharmacy Guild claims). The remaining 417 claims by other retailers, health professionals, and consumers were rejected for voting purposes. They contained either insufficient particularisation of the potential creditor or insufficient proof that any product purchased was manufactured by Pan and subject to the TGA recall (including failures to identify date of purchase, provide proof of purchase or the legal basis of the claim). In the short time available before the meeting, it was impossible for Mr McGrath to make a just estimate of the value of those claims for voting purposes under (2) CR. The resolutions Voting polls were taken during the meeting on the following proposed resolutions, with the following outcomes: that the meeting be adjourned so that the administrators might seek court directions on the admissibility of certain claims and classes of claims for voting purposes (not passed by creditors in value or number); that Pan execute the DOCA (not passed by creditors in value or number); and that Pan be wound up (passed with Mr McGrath using his casting vote when a majority in value voted for the resolution and a majority in number voted against the resolution). Did Mr McGrath apply the CA and CR properly in reaching his decisions? Notice and advertising of the meeting. Was it convened properly? Section 439A(3) CA required Mr McGrath to give notice of the meeting to 'as many of the company's creditors as reasonably practicable' and to advertise the meeting in a national newspaper or individual state or territory newspapers CR required written notice to be given to every person 'appearing on the company's books or otherwise' to be a creditor. It was not disputed that known creditors were advised of the meeting in writing and that advertisements were placed in Australian newspapers. In relation to unknown creditors, for example, 'non-contractual' claimants, Justice Barrett found that the 'reasonably practicable' provision did not extend the requirement for notification of the meeting beyond those creditors for whom a means of direct contact was readily ascertainable. The contact details of potential creditors with 'non-contractual' claims or of other creditors who were not apparent from the company's books were not readily ascertainable. Therefore, Justice Barrett confirmed that Mr McGrath was not obliged to attempt to notify them of the meeting by actually seeking them out, beyond his duty to advertise the meeting in the Australian press. dtcs S v Page 12

13 Justice Barrett did not accept that Mr McGrath had a legal duty to advertise the meeting more widely in overseas newspapers, so as to notify potential, non-obvious creditors of the meeting, even where it was known to Mr McGrath that Pan products were sold overseas. Justice Barrett also found that Mr McGrath did not have a duty to take active steps to seek out potential, but not obvious, creditors who had suffered economic loss and potentially fell within the creditor concept (for example, retailers and consumers with 'non-contractual' claims of certain types), simply on the basis that it would be fair to do so. Justice Barrett, therefore, found that the meeting had been properly convened. Was the decision not to unilaterally adjourn or suspend the s439a CA meeting of creditors (to seek judicial guidance on the voting eligibility of the 'non-contractual' claimants) the right one? In fact, the meeting had voted and declined to adjourn. Had it voted to adjourn, Mr McGrath would have been compelled, by CR, to do so. However, without the meeting's direction or consent (as envisaged by CR), Mr McGrath could have adjourned it only by relying on a residual unilateral power. This power is reserved for specific situations where, for practical reasons, the meeting's consent or direction cannot be obtained and the chairman considers an adjournment necessary to ensure that all wishing to vote can, in due course, vote at the meeting. Justice Barrett found that it was not for Mr McGrath to have adjourned the meeting unilaterally so as to get the court's input on this issue in advance. To do so would have been inconsistent with the principle that the chair's decisions are final but able to be appealed (s1321, s447a and s447e CA). Who could be a 'creditor' of the company under s439a(1) CA and admitted for voting purposes to consider its 'future'? Justice Barrett found that creditors for voting purposes are all persons who would have debts or claims proveable in a winding-up, thus importing into s439a CA the following words from s553(1) CA: 'all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages)'. This includes tortious claims and those under s82 and s87 of the Trade Practices Act Therefore, in addition to 'every person appearing on the Company's books or otherwise to be creditors' ( CR), creditors for voting purposes also include all persons with unliquidated or contingent debts or claims that are made known to the administrator, provided a just estimate of value has been made by the administrator ( CR). Justice Barrett considered whether the types of 'non-contractual' unliquidated claims presented by the 417 consumers who lodged claims immediately before the meeting (but were rejected), were the sorts of claims that may give rise to creditor status for voting purposes. Justice Barrett confirmed that the CA proceeds on the basis that recognition as a creditor for voting purposes (as distinct from a mere claimant to creditor status) will be determined by the chair having regard to (a) the formal proof of debt submitted (if so required); (b) any other relevant information; and (c) whether the chairman can make a just estimate of value, unless the administrator has already admitted the claim in whole or in part ( and CR). If the chair is in any doubt about whether a claim should be admitted, (2) CR provides that the proof of debt should be marked as 'objected to' and the creditor allowed to vote, subject to the vote being declared invalid if the objection is sustained (5.6.26(2) CA marking). dtcs S v Page 13

14 Justice Barrett went on to say that, as the determination of voting rights will be made by the chair shortly before or at the meeting, the legislation does not contemplate that the chair will undertake any detailed inquiry, debate or deliberation. He or she will do the best they can with the claimants' factual material. If there is no or little material from which a conclusion about the value can be drawn, the just estimate may be zero, or perhaps the nominal amount of $1, assuming that admission is warranted at all. On the facts, Justice Barrett found that the 417 consumer claims were properly rejected because Mr McGrath was given insufficient particularisation to even allow him to give them a (2) CA marking. Should the pharmacists' claims have been admitted for voting purposes and, if so, should Mr McGrath have distinguished the 417 consumer claims he rejected? Justice Barrett accepted that the particulars in the proofs of debt required by Mr McGrath to be submitted by the members of the Pharmacy Guild pharmacists (which had been said to be inadequate) should be seen in the context of the agreed procedure for lodging claims that had been established. Mr McGrath was correct to admit these claims because a just estimate of value could be made. In contrast, Justice Barrett found that the particulars in the proofs of debt submitted by the 417 consumers and retailers were inadequate (see above). Mr McGrath had been forced to do the best he could with the 417 proofs in the short time available and the material submitted and, as no just estimate of value could be made, his legal advice had formed a proper basis for him to reject them. Justice Barrett went further to say that none of the 417 proofs of debts conveyed a reliable claim, only bald assertions. The omissions were so pervasive that there was no doubt that the claims should be rejected for voting purposes, even with a (2) CR marking. Despite Mr Selim's contention that the claims should be treated equally, Justice Barrett said it would have been 'irresponsible for a person in a fiduciary position [such as Mr McGrath] to recognise entitlements of claimants who showed no objective evidence of entitlement.' Justice Barrett did, however, acknowledge that the type of claims made out in the 417 proofs, if properly particularised, may have been capable of being admitted for voting purposes because they fell within the wording of s439a CA. It was possible that further investigation could show that some of the proofs did relate to relevant Pan products and that, if the proofs had been lodged with Mr McGrath earlier, there would have been an opportunity for further particulars to have been sought. Justice Barrett found that the proofs were deliberately not lodged with Mr McGrath until the last minute, denying him the opportunity to seek better particulars. Justice Barrett suggested therefore that, given extra time and information, the claims may have been admitted for voting purposes and that a way of doing this would have been for Mr Bart, who had coordinated the presentation of the 470 proofs (from which the 417 were rejected), to have agreed a protocol with Mr McGrath in advance in the way the Pharmacist's Guild had done. In any event, Justice Barrett also commented that, had all the claims been admitted for voting purposes, the DOCA resolution, which Mr Selim was so keen to have passed, would have had the support of only a majority in number of creditors. Value would still have been against the DOCA, and Mr McGrath's affidavit evidence was that he would not have used his casting vote in favour of the DOCA in those circumstances. dtcs S v Page 14

15 The use of the casting vote under (4) CR Justice Barrett agreed that Mr McGrath appropriately used his casting vote to support value against numbers of creditors on the resolution to liquidate Pan. Section 439C CA provided that the meeting could make one of three resolutions: adopt the DOCA, wind up Pan, or end the administration. After the DOCA had been rejected, failure to pass the resolution for winding up would had been perverse. Because of Pan s position of apparent insolvency and inability to operate, a resolution to end the administration would have been entirely inappropriate. This case provides important lessons for administrators and creditors relating to the admission of proofs of debt, the use of the casting vote and the conduct of creditors meetings. This paper is only intended to provide an alert service in matters of concern or interest to readers. It should not be relied upon as advice. Matters differ according to their facts. The law changes. You should seek legal advice on specific fact situations as they arise. dtcs S v Page 15