El-Saafin v Franek (No 3)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

TECHNOLOGY ENGINEERING AND CONSTRUCTION LIST

S CI 2018 01685

HASSAN EL-SAAFIN	First Plaintiff
MOHAMAD EL-SAAFIN	Second Plaintiff
v
MARK FRANEK and others according to the Schedule	Defendants

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JUDGE:	LYONS J
WHERE HELD:	Melbourne
DATE OF HEARING:	30 January and 14 February 2019
DATE OF RULING:	15 March 2019
CASE MAY BE CITED AS:	El-Saafin & Anor v Franek & Ors (No 3)
MEDIUM NEUTRAL CITATION:	[2019] VSC 155

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CORPORATIONS – External administration – Second meeting of creditors - Appeal from person presiding’s decision to admit or reject proofs of debt - Section 75-100(4) of the Insolvency Practice Rules (Corporations) 2016 – Nature of appeal – Where debts or claims the subject of legal proceedings – Relief to be ordered where resolution to place company into liquidation would not have passed

CORPORATIONS – External administration – Second meeting of creditors – Whether external administrator or person presiding at meeting must ask creditor to give evidence in writing in relation to a debt claimed – Meaning of ‘if necessary’ - Section 75-95 of the Insolvency Practice Rules (Corporations) 2016

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr I Upjohn QC with Mr B Mason	Hicks Oakley Chessell Williams
For the First and Fourth Defendants	Mr J Evans QC with Mr P Miller	Mark J Halse
For the Second and Third Defendants	–	Capstone Koroneos Legal
For the Fifth and Sixth Defendants	Dr A Trichardt	Charles Fice Solicitors
For the Liquidators of Saafin Constructions Pty Ltd (receivers and managers appointed) (in liquidation)	Mr E Moon	Thomas Egan & Associates

HIS HONOUR:

Introduction and Summary

In this proceeding, I have already delivered two interlocutory judgments.[1] For convenience, in these reasons, I will adopt the terms defined in them.
[1] El-Saafin & Anor v Franek & Ors [2018] VSC 450 (‘Reasons No 1’) and El-Saafin & Anor v Franek & Ors (No 2) [2018] VSC 683 (‘Reasons No 2’).

In this application, the plaintiffs appeal against certain decisions of Mr Ivan Glavas when presiding at the second meeting of the creditors of the Company held pursuant to s 439A of the Corporations Act 2001 (Cth) (the ‘Act’) on 12 November 2018 (the ‘12 November meeting’). At that meeting, the creditors whose proofs of debt were admitted by Mr Glavas voted by value, but not by number, to place the Company into liquidation. As a result, Mr Glavas used his casting vote to resolve to place the Company into liquidation.

The plaintiffs appeal against Mr Glavas’ decisions:

(1) to reject the 7 proofs of debt of Ramahi, Ibaida, Wael El-Saafin, El-Daouk, Nasser, Abou-Eid and Bakhtiyar and to reject part of the proofs of debt of each of Drs Atalla and Hegazy (collectively, the ‘rejected proofs’); and

(2) to admit 3 proofs of debt of Mekkya, MAG and Mr Ibrahim (collectively, the ‘challenged proofs’).

In the amended summons filed on 10 December 2018, the plaintiffs also sought an order that the winding up of the Company be terminated pursuant to s 482 of the Act (the ‘termination application’). However, at the hearing of this application, counsel for the plaintiffs advised the Court that the plaintiffs did not wish to pursue the termination application at this stage. Rather, the plaintiffs seek orders in effect reversing the decisions of Mr Glavas in relation to the challenged proofs and the rejected proofs. The plaintiffs also seek the following order:

Mr Caspaney is directed to make his report to creditors pursuant to Section 70-40 of the [Insolvency Practice Rules (Corporations) 2016 (Cth) (‘IPR’)][2] by 22 February 2019 and to call a meeting of the Company’s creditors as soon as reasonably practicable thereafter, at which time the meeting is to resolve whether the Company should remain in liquidation (the ‘direction’).

[2]The plaintiffs later submitted that this report should be filed pursuant to s 482(2) of the Act which applies in respect of an application under s 482 of the Act to terminate a winding up. As noted above, the termination application is not pursued at this stage.

For the reasons that follow, I consider that, on the evidence before me:

(1) the Ibaida proof of debt should be, and should have been, admitted in the sum of $300,000;

(2) the Hegazy proof of debt should be, and should have been, admitted in the sum of $353,000, not $250,000;

(3) each of the Mekkya proof of debt in the sum of $1,560,000 and the Ibrahim proof of debt in the sum of $306,001.37 should be, and should have been, rejected;

(4) the MAG proof of debt in the sum of $3,768,023.04 should be, and should have been, admitted for a nominal value.

As a result, I conclude that it is very likely that the creditors properly entitled to vote at the 12 November meeting would have voted by number and by value:

(1) against the proposed resolution that the Company be placed into liquidation; and

(2) in favour of a resolution to end the administration.

Based upon this conclusion, in the usual course, I would make orders terminating the liquidation. However, I have concerns about the solvency of the Company. As a result, I will direct that the liquidator provide a report on the solvency of the Company pursuant to s 90-15 of the Schedule or alternatively s 482(2) of the Act.

The evidence

Before considering this application, I wish to say something about the evidence before the Court and the way in which the application has proceeded. The application was made by summons in this proceeding. When the application came on for mention before me on 6 December 2018, I ordered that the Administrators be joined as parties to the proceeding. I made timetabling orders for the plaintiffs to file an amended summons and any further evidence, for the MAG parties and the Administrators to file evidence in opposition and for the plaintiffs to file evidence in reply. These steps were all to be completed before 22 December 2018.

When the application first came on for hearing before me on 30 January 2019 (the ‘initial hearing’), the plaintiffs originally relied upon:

(1) three affidavits of their instructing solicitor sworn 22 November 2018, 10 December 2018 and 25 January 2019, respectively,[3] and

(2) an affidavit of the first plaintiff sworn 25 January 2019 (the ‘Hassan affidavit’).

[3]The ‘eleventh Nair affidavit’, the ‘thirteenth Nair affidavit’ and the ‘fourteenth Nair affidavit’, respectively.

In oral argument at the initial hearing, the plaintiffs referred to evidence filed for the purpose of previous applications in the proceeding.

At the time of the initial hearing, the Administrators chose not to file material or make submissions. In particular, Mr Glavas did not produce the documents, such as agreements, which he considered at the 12 November meeting in respect of the rejected proofs or the challenged proofs.

The MAG parties did not file any material but made submissions based on very limited evidence filed for the purposes of previous applications. However, that did not include the documents of the kind referred to in the previous paragraph.

After the initial hearing, I became aware of two relevant legislative provisions. First, I became aware of s 75-95 of the IPR which was not drawn to my attention during the initial hearing. It relates to requests, ‘if necessary’, for further information by an external administrator to establish the liability of a company for a debt claimed by a creditor for the purposes of a creditors’ meeting. The parties did not draw my attention to this section at the initial hearing. This is notwithstanding that Mr Glavas subsequently deposed that he turned his mind to s 75-95 at the 12 November meeting.[4] As a result, an email was sent to the parties on 1 February 2019 seeking submissions about the relevance, if any, of this section to this application. Following this email, Mr Glavas sought leave to file the Glavas affidavit relating to the rejected proofs and his consideration of s 75-95. Mr Glavas also sought leave to make submissions on fact and law relating to the application. Further, the plaintiffs and the defendants filed further submissions on fact and law.
[4]Affidavit of Ivan Glavas sworn 5 February 2019 (the ‘Glavas affidavit’) [18].

Second, I became aware of Order 14 of the Supreme Court (Corporations) Rules 2013 (Vic) (the ‘Corporations Rules’) which relates to appeals to the Court authorised by the Act, like this application. The parties did not draw my attention to this Order either at the directions hearing in December 2018 or the initial hearing.

Relevantly, r 14.1(5) provides that as soon as practicable after being served with a copy of the originating process or the interlocutory process and any supporting affidavit, a person whose act, omission or decision is being appealed against must file an affidavit stating the basis on which the act, omission or decision was done or made and exhibiting a copy of all relevant documents that have not been put in evidence by the person instituting the appeal.

The Glavas affidavit did not comply with this Rule as it only related to some aspects of the proofs of debt being challenged in this application and did not produce all documents relating to those proofs of debt.

As a result, a further email was sent to the parties on 6 February 2019 listing the matter on 8 February 2019 for the hearing of submissions on the legal issues relating to s 75-95 of the IPR, whether leave should be granted for the Administrators to file and rely upon the Glavas affidavit and whether Mr Glavas should be ordered to file an affidavit consistent with the requirements of r 14.1(5) of the Corporations Rules.

At the request of the parties, the hearing was delayed until 14 February 2019 (the ‘further hearing’). Prior to the further hearing:

(1) the plaintiffs sought to file, without leave, a further affidavit of Mr Nair sworn 13 February 2019 (the ‘fifteenth Nair affidavit’);

(2) the MAG parties sought to file, without leave, the day before the further hearing, an affidavit of Mark Halse sworn 13 February 2019 with 370 pages of exhibits.

At the further hearing, the MAG parties informed the Court that they did not seek to rely upon the Halse affidavit for the purpose of this application. No reason was given as to why it had sought to have been filed and served. I gave the plaintiffs leave to file and rely on the fifteenth Nair affidavit.

At the further hearing, no party objected to leave being given for the Administrators to file and rely upon the Glavas affidavit. As a result, leave was granted.

Further, each of the plaintiffs, the MAG parties and the Administrators submitted that, notwithstanding the Glavas affidavit did not comply with r 14.1(5) of the Corporations Rules, no further affidavit should be ordered from him. Given that none of the parties to this application sought further affidavit material from Mr Glavas, I proceeded on that basis.

However, as I raised with the parties at the time, the result is that the Court does not now have before it all of the material that was available to Mr Glavas at the 12 November meeting. As I set out below, I consider that this application is a hearing de novo. Given the way in which the parties wished for this matter to proceed, I will determine the issues on the evidence available before me.

Background facts

The facts leading up to the appointment of the Administrators of the Company on 3 August 2018 are set out at [7]-[25] of Reasons No 1. The facts between 3 August 2018 and 25 October 2018 are set out at [31]-[55] of Reasons No 2.

There are facts now relied upon both before and after 25 October 2018 relevant to this application.

The first meeting of creditors took place on 7 September 2018. Prior to the first meeting, on 7 August 2018, the Administrators sent an Advice to Creditors and notice of the first meeting of creditors. The notice stated that creditors ’need to submit a Proof of Debt and supporting documentation to participate in the meeting’. At the first meeting, Mr Glavas was the person presiding. The minutes of the meeting record that at that meeting:

(1) Dr Hegazy’s proof of debt for $540,000 in respect of moneys paid to the Company for the purchase of a unit in the North Melbourne development was admitted for voting purposes;

(2) Mr Ibaida’s proof of debt for $300,000 in respect of moneys paid to the Company for the purchase of a unit in the North Melbourne development was admitted for voting purposes.

The minutes also record that at that meeting the following relevant claims were rejected:

(1) Dr Atalla in the sum of $550,000;

(2) Mr Wael El-Saafin in the sum of $757,000;

(3) Mr El-Daouk in the sum of $90,000;

(4) Mr Nasser in the sum of $30,000.

The minutes record that in relation to these rejected claims:

The Chairperson noted that the above claims would not be admitted for voting purposes on the basis that:
* The creditors failed to complete POD forms;
* The creditors had failed to supply any documentation in support of their claim;
* The Directors of the Company had failed to provide to the Administrators any books and records of the company to assist in determining whether the above amounts were owed to the respective creditors;
* The Directors had failed to provide books and records to the Receivers which would assist in determining whether the above amounts were owed to the respective creditors; and
* The Directors of the Company failed to provide to the Administrators a completed Report as to Affairs (RATA) disclosing the above claims as creditors.

…
Dr Hegazy, the proxy appointed by the above creditors, did not agree that the claims should not be admitted for voting purposes. Dr Hegazy argued that the Chairperson should take the Directors’ word that the above claims existed. The chairperson reiterated his reasons for not admitting the claims for voting purposes and noted that the meeting was the first time he had been notified of these claims, despite numerous requests to the Directors for the Company’s books and records, and a complete RATA.

On 9 October 2018, the Administrators sent an Advice to Creditors and Notice of an adjourned second meeting. The Notice was not exhibited. The Advice stated that creditors ’who intend on attending the reconvened creditors meeting … must lodge a proof of debt with supporting documentation’. It attached a schedule of the proofs of debt that had been received and stated that a further proof did not need to be lodged if the creditor was on the list.

On 2 November 2018, the Administrators sent a further Advice to Creditors which referred to the adjourned second meeting being held on 12 November 2018, the last date upon which it could be held. The advice also included a statement that creditors who wished to attend the reconvened creditors’ meeting must lodge a proof of debt with supporting documentation ‘if you have not already done so’. It also attached a schedule of the proofs of debt that had been received (which was not exhibited) and stated that a further proof did not need to be lodged if the creditor was on the list.

A form of proof of debt was attached. It was in the usual form under the Act and included a space for details of particulars to be provided of the amount of the debt, the date, consideration etc. It contained a box for creditors to tick if attaching supporting documentation.

On 9 November 2018, Dr Hegazy sent by email 12 proof of debts on behalf of a number of purported creditors of the Company (the ‘9 November email’),[5] including the rejected proofs, namely for:
[5]Exhibit HN-3 to the eleventh Nair affidavit. Dr Hegazy’s proof was on the list attached to the 9 October Advice.

(1) Mr Ramahi in the sum of $354,000;

(2) Mr Ibaida in the sum of $520,000;

(3) Mr Wael El-Saafin in the sum of $757,000;

(4) Mr El-Daouk in the sum of $50,000;

(5) Mr Nasser in the sum of $40,075.89;

(6) Mr Abou-Eid in the sum of $50,000;

(7) Mr Bakhtiyar in the sum of $430,000; and

(8) Dr Atalla in the sum of $550,000.

Each of the 12 proofs of debts (other than the one for Dr Hegazy) also appointed Dr Hegazy as that creditor’s proxy for the 12 November meeting. In the 9 November email, some supporting documents were submitted for two of the 12 proofs. But no supporting documents were submitted in relation to any of the rejected proofs. However, the 9 November email concluded ‘please let me know in need attention regarding above matters for creditors meeting’ [sic]. No further information was sought by the Administrators from Dr Hegazy prior to the 12 November meeting.

The 12 November meeting took place at 11:00am at the offices of the Administrators. Typed minutes of the meeting were prepared and signed by the chairperson, Mr Glavas (the ‘12 November minutes’). The 12 November minutes record that at the meeting:

(1) the proposed resolution was that the Company be wound up and that Ivan Glavas and Matthew Kucianski be appointed liquidators;

(2) 4 creditors (36%) whose proofs of debt totalled $5,729,944.04 (71%) voted in favour of the resolution (these creditors included the challenged proofs);

(3) 7 creditors (64%) whose proofs of debt totalled $2,391,000 (29%) voted against the resolution; and

(4) Mr Glavas exercised his casting vote pursuant to section 75-115(3)(a) of the IPR to pass the resolution.

During the 12 November meeting, Mr Glavas went through the process of accepting and rejecting the proofs of debt submitted by persons claiming to be creditors. I will set out below the evidence relating to the process by which proofs of debt were admitted and rejected by Mr Glavas. As noted above, Mr Glavas relevantly rejected seven proofs of debt totalling $2,201,075 and allowed in part two proofs of debt, of Drs Atalla and Hegazy, reducing the amount claimed by $208,000 and $290,000 respectively.

The 4 creditors who voted in favour of the resolution were:

(1) Mekkya, for an admitted proof of debt for $1,560,000;

(2) MAG, for an admitted proof of debt for $3,768,023.04;

(3) Mr Ibrahim, for an admitted proof of debt for $306,001.37; and

(4) the Australian Taxation Office, for an admitted proof of debt of $95,200.

The 7 creditors who voted against the resolution were:

(1) Dr Hegazy, for an admitted proof of debt for $250,000 (not the $540,000 claimed);

(2) Dr Atalla, for an admitted proof of debt for $342,000 (not the $550,000 claimed);

(3) Evelyn Yelda, for an admitted proof of debt for $155,000;

(4) the first plaintiff, for an admitted proof of debt for $185,000;

(5) the second plaintiff, for an admitted proof of debt for $950,000;

(6) Tax Line Group Pty Ltd, for an admitted proof of debt for $440,000;

(7) Trustworthy Nominees Pty Ltd, for an admitted proof of debt for $470,000.

Given that the majority of creditors voting by number did not vote in favour of the resolution, Mr Glavas exercised his casting vote in favour of the resolution.

On 22 November 2018, the plaintiffs issued this application seeking to appeal various decisions of Mr Glavas at the 12 November meeting.

On 30 November 2018, Mr Glavas and Mr Kucianski resigned as liquidators of the Company.

On 6 December 2018, Mr Michael Caspaney was appointed replacement liquidator of the Company. On that day, the plaintiffs obtained leave to amend their application. They did so by introducing the termination application.

The parties’ arguments

In summary, the plaintiffs argued that:

(1) There was insufficient basis to admit the challenged proofs for the full amounts thereof;

(2) Mr Glavas erred in failing to admit the rejected proofs because, in light of the terms of the 9 November email, he failed to inform Dr Hegazy prior to the meeting that further details would need to be provided for the rejected proofs to be admitted;

(3) Dr Hegazy would have produced further material at the 12 November meeting to establish all the rejected proofs, such as the material produced on this application in respect of Dr Atalla if the issue had been raised by Mr Glavas before the 12 November meeting;

(4) If the rejected proofs had been allowed and the challenged proofs had been rejected, the majority of creditors, both by number and by value, would have opposed the Company’s liquidation on 12 November 2018 (14 creditors whose proofs of debt totalled $5,095,075.80 voting against the resolution and one creditor whose proof of debt totalled $95,200 voting in favour of the resolution);

(5) As a result, the direction should be given for the liquidator to provide a report on the solvency of the Company and then to hold a further meeting of the creditors to determine if it should remain in liquidation.

In summary, the MAG parties submitted that:

(1) There was a difference between admitting a proof of debt for the purpose of a second creditors meetings and for the purpose of proving a debt in insolvency;

(2) There was sufficient basis for Mr Glavas to admit the challenged proofs for the full amount thereof;

(3) The person asserting creditor status must provide particulars sufficient to show, at least to an approximate level, the existence of the asserted debt or claim. Dr Hegazy failed to provide any material prior to the meeting to substantiate the rejected proofs. When such particulars were provided at the meeting, some proofs were allowed in part. There was no onus on Mr Glavas to seek out further information prior to the 12 November meeting;

(4) In any event, the plaintiffs have not established on the material before the Court that the rejected proofs should have been accepted and the challenged proofs should have been rejected: in any event not all the supporting documents have been produced in evidence.

(5) The Court, in the exercise of its discretion, should not make the direction sought by the plaintiffs in circumstances where:

(a) the Company is in liquidation;

(b) the termination application is not pursued at this time;

(c) the Court ought not order a liquidator, in effect, to hold a second creditors meeting as the administration has come to an end;

(d) the direction would be futile in any event as the plaintiffs have failed to establish that the Company is solvent.

The plaintiffs submitted in reply that they have demonstrated their ability to refinance. At the initial hearing, they relied upon:

(1) a proposal for a $10 million loan from Barrington Winstanley Group (‘BWG’);[6] and

(2) a $2 million loan from Dr Atalla which was originally offered in November 2018 and recently confirmed.[7]

[6] See fourteenth Nair affidavit [6].

[7]See fourteenth Nair affidavit [9]; Hassan affidavit.

At the further hearing, rather than the BWG proposal, the plaintiffs relied upon a letter from National Commercial Funding (‘NCF’) dated 12 February 2019 which offered a loan facility of $10,000,000 with the security being a registered first mortgage over the North Melbourne property and a PPSR registered charge over the Company.

In the course of submissions, the MAG parties relied upon the failure of the plaintiffs to provide a report as to the affairs of the Company pursuant to s 438B of the Act[8] and to provide the Company’s books and records to the Administrators. They contended that there was a deliberate and wrongful refusal by the plaintiffs to provide this information in order to deny the Administrators the ability to verify the claimed debts by reference to the Company’s books and records. They relied upon the decision of Hansen J in Spiteri v Lindholm (‘Spiteri’).[9]
[8]As recorded at page 71 of the 30 August Administrators’ report which forms part of the exhibit to the affidavit of Mr Halse sworn on 16 September 2018.
[9](2003) 7 VR 315 (‘Spiteri’).

It is appropriate that I deal with this contention now. There was in evidence correspondence between the solicitors for the parties which disputed that the plaintiffs had failed to provide the Company’s books and records to the Administrators. However, the plaintiffs did not go on oath as to the material in fact provided to the Administrators or produce copies of that material. Further, it appears that the plaintiffs did not provide a report as to the affairs of the company pursuant to s 438B of the Act.

In these circumstances, I am prepared to conclude that relevant material was not provided to the Administrators. However, based on the evidence before me, there is no proper basis to conclude that this was the result of some deliberate or wrongful refusal by the plaintiffs in order to deny the Administrators the ability to verify the claims lodged at the second creditors’ meeting.

The legislation

The appeal application is brought pursuant to s 75–100 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (‘IPR’). Section 75-50 of the Schedule (which came into force on 1 September 2017) provides that the IPR may provide for and in relation to meetings concerning companies under external administration. Division 75 of the IPR (which also came into force on 1 September 2017) is headed ‘Meetings’. Section 75-1(a) provides that div 75 is made for the purposes of s 75-50 of the Schedule. It replaced a number of regulations in the Corporations Regulations 2001 (Cth) relating to meetings, relevantly, regs 5.6.12–5.6.36A. A relevant summary of div 75 of the IPR is as follows.

First, s 75-50 provides that, if a meeting is convened by an external administrator under s 439A of the Act, the external administrator must preside at the meeting.

Second, s 75–85(2) provides that, subject to subs (3) to (5), each creditor is entitled to one vote and has one vote. Section 75-85(3) (which is the equivalent of previous reg 5.6.23(1)) provides:

A person is not entitled to vote as a creditor at a meeting of creditors unless:
(a)his or her debt or claim has been admitted wholly or in part by the external administrator; or
(b)he or she has lodged, with the person presiding at the meeting or the person named in the notice convening the meeting as the person who may receive particulars of the debt or claim:
(i) those particulars; or
(ii) if required, a formal proof of debt or claim.

Third, s 75-85(4) (which is the equivalent of previous reg 5.6.23(2)) provides:

A creditor must not vote in respect of:
(a)       an unliquidated debt;
(b)       a contingent debt;
(c)       an unliquidated or contingent claim;
(d)      a debt that the value of which is not established
unless a just estimate of its value has been made.

Fourth, s 75-95 is headed ‘Evidence of liability for debt’. This section was not contained in the previous regulations. It provided, at the time the 12 November meeting was held,[10] as follows:

(1)If necessary, an external administrator must ask a creditor to give evidence in writing in relation to a debt claimed by the creditor to establish the liability of the company for the debt.
(2)If the external administrator considers that the evidence is insufficient for the purpose of subsection (1), the administrator, before asking for further information, must have regard to the expected dividend rate and the materiality of the issue requiring clarification.
(3)An external administrator must keep a copy of any evidence or information relied upon in deciding, for the purpose of voting or distributing dividends, whether to accept or reject a creditor’s claim.

[10]In December 2018, the IPR were amended by the Insolvency Practice Rules (Corporations) Amendment (Restricting Relating Creditor Voting Rights) Rules 2018 to include a new s 75-95(1)(a) and s 75-110(7).

Fifth, s 75-100 is headed ‘Decisions in relation to entitlement to vote at creditors’ meeting’. Section 75–100(1) (which is equivalent of previous reg 5.6.26(1)) provides that the person presiding at a meeting may determine any question that arises as to the entitlement of a person to vote.

Sixth, s 75-100(2) (which is new provision) provides that, in deciding whether a person is entitled to vote at a meeting of creditors, the person presiding must have regard to ‘the merits of the person’s claim’ and act ‘impartially and independently’.

Seventh, s 75-100(3) (which is the equivalent of previous reg 5.6.26(2)) provides that, if the person presiding is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark the proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.

Eighth, s 75-100(4) (which is the equivalent of previous reg 5.6.26(3)) provides that a decision by the person presiding to admit or reject a proof of debt or claim for the purposes of voting may be appealed against to the Court within 10 business days after the decision.

Ninth, s 75-115(1) provides that a resolution is passed at a meeting of creditors of a company if:

(1) a majority of the creditors voting (whether in person, by proxy or by attorney) vote in favour of the resolution; and

(2) a majority in value of the creditors voting (whether in person, by proxy or by attorney) vote in favour of the resolution.

In the event that only one of these requirements is met, s 75-115(3)(a) provides that the person presiding at the meeting may exercise a casting vote in favour of the resolution, in which event the resolution is passed.

Tenth, s 75-270 provides that a meeting, or anything done at a meeting, is not invalid because a requirement of div 75 has not been strictly complied with, if the requirement has been substantially complied with.

Eleventh, s 75-42 of the Schedule, in summary, provides that, on application, a person who voted at the meeting may apply to the court for an order setting aside or varying a resolution passed because the person presiding at the meeting exercises a casting vote. Further, s 75-44 allows the Court to make such interim orders as it thinks fit on any such application.

The amended summons refers to s 1321 of the Act. That section was repealed in 2017. It relevantly provided:

A person aggrieved by an act, omission or decision of an administrator of a company may appeal to the Court in respect of the act omission or decision 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 directions as it thinks fit.

The power of a person to appeal from a second creditors’ meeting is now contained in s 75-100(4) of the IPR. The power of the Court to make orders is now contained in s 90-15(1) of the Schedule. As noted above, it provides that:

The Court may make such orders as it thinks fit in relation to the external administration of a company.

Much of the case law on s 1321 has continuing relevance to the determination of applications under s 75–100(4) and the orders that the Court might choose to make.

There are three issues of particular relevance here:

(1) is the external administrator under an obligation to seek further details of a debt or claim which is uncertain?

(2) in what circumstances should a creditor’s claim be allowed, in particular if the debt or claim is subject to legal proceedings?

(3) what relief should be ordered if the appeal is successful?

Before considering these issues, I wish to address the nature of, and role of the Court in, an appeal under s 75-100(4), and then how I will proceed to determine this application.

Role of the Court on appeal

It is important to consider the role of the Court in an appeal from a decision to admit or reject a proof of debt or claim at a creditors’ meeting convened under s 439A of the Act. In argument, reference was made to the judgment of Brennan and Dawson JJ in Tanning Research Laboratories Inc v O’Brien[11] (‘Tanning’) where their Honours noted:
[11](1990) 169 CLR 332 (‘Tanning’) 340-1.

(1) such an appeal is a hearing de novo with the result that the Court must determine the question on the evidence before the Court;

(2) the liquidator or person whose decision is challenged no longer acts quasi judicially but as an adversary defending his decision; and

(3) the issue in any appeal is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it.

As a result, it has been held that the parties are not bound by the evidence at the meeting and may lead additional evidence.[12]
[12]Westpac Banking Corporation v Totterdell (1997) 142 FLR 137, 141-3; Brodyn Pty Ld v Dasein Constructions Pty Ltd [2004] NSWSC 1230 [32]-[33]; In the matter of Federation Health Limited (Administrator Appointed) [2006] FCA 314, 10 [32]-[33] (Young J) (‘Federation’). Each of these cases involved an appeal from the decision of a chair at a creditors’ meeting during an administration.

I am conscious that these principles have developed for the most part in the context of challenging proofs of debt in liquidation. In this regard, I note the comments of Barrett J in Selim v McGrath[13] (‘Selim’), where his Honour noted that Tanning related to a proof of debt for distribution purposes in a liquidation and contrasted claims for voting purposes under Part 5.3A of the Act.[14]
[13]177 FLR 85 (‘Selim’).
[14]Ibid 96 [36]-[38].

In argument at the further hearing, I raised with counsel for the parties the role and function of the Court on such an appeal in respect of decisions at a second creditors’ meeting. I referred the parties to the decision of the Full Court of the Supreme Court of Western Australia in Westpac Banking Corporation v Totterdell.[15] In that case, the Court held, consistent with Tanning, that appeals against the rejection or admission of proofs of debt by a liquidator ‘are dependent solely on whether the debt in question is a liability at law owing to the company. No element of discretion is involved.’[16] Again, that case involved the decision to admit a proof of debt in a liquidation.
[15]Westpac Banking Corporation v Totterdell 20 WAR 150.
[16]Ibid 158 (Ipp J, Pidgeon and White JJ agreeing).

Counsel for the defendants submitted that there was a discretion on the part of the decision maker in admitting or rejecting a proof of debt and the Court had to conclude there was an error on the part of the decision maker before relief could be granted. Unhelpfully, no authority was relied upon.

From my researches, there are single judge decisions to the effect that a decision of a chair at a creditors’ meeting will not be interfered with on appeal unless it can be shown that the chair was in error and, where the dispute concerns a matter of professional judgement, it will ordinarily require demonstrating that the decision was affected by bad faith, a mistake as to the facts, an erroneous approach to the law or an error of principle. For example, these principles were applied where there was a challenge to the ‘just estimate’ of a debt which had not been established under reg 5.6.23(2)[17] and where the chair refused to admit a proof for debt for more than a nominal value.[18]
[17]Re Free Wesleyan Church of Tonga in Australia Inc 260 FLR 348 (‘Free Wesleyan Church’) 357 [33] (Black J).
[18]Weriton Finance Pty Ltd v PNR Pty Ltd (in admin); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd (2012) 92 ASCR 88 (‘Weriton’) 98 [35] (Black J).

In Free Wesleyan Church and in Weriton, Black J relied upon the decision in Bacnet Pty Ltd v Lift Capital Partners Pty Ltd (in liq)[19] (‘Bacnet’). In that case, Keane CJ and Jacobson J, in the absence of full argument, preferred to leave open the question of the nature of such an appeal. However, they noted that the authorities to which they were referred to in argument were to the effect that the chair of the meeting was vested with a discretion which would not be interfered with on appeal unless it could be shown the chair was in error.[20] By contrast, Finkelstein J concluded that such an appeal was an hearing de novo with the result that new evidence should be considered on appeal and the matter considered afresh.[21]
[19](2010) 183 FCR 386 (‘Bacnet’).
[20]Ibid 395 [72].
[21]Ibid 407 [155]; 412 [176].

However, as noted above, there are single judge decisions which have applied the principles in Tanning to appeals from the decision of the chair at a creditors’ meeting to admit proofs of debt for voting purposes.[22]
[22]See footnote 9 above; see also Re North Sydney District Rugby League Football Club (2000) 34 ACSR 630, 631 [3] (Bryson J).

I note for completeness that some of these authorities were considered by Griffiths J in Wentworth Metals Group Ltd v Leigh[23] in a different context, namely, a challenge to a liquidator’s decision to sell an asset of the relevant company which was the subject of a vote at a creditors’ meeting.[24] Griffiths J placed great weight on the decision in ASIC v Forestview Nominees Pty Ltd.[25] In that case, French J (as he then was) concluded that where an appeal is brought against a discretionary or evaluative decision of receivers and managers, at the very least, the appellant must demonstrate the decision is informed by some error of law or significant factual error or is otherwise so unreasonable in the circumstances that it should not be allowed to stand.[26]
[23](2013) 93 ASCR 626 (‘Wentworth’).
[24]Ibid 634-636 [20]-[24].
[25]236 ALR 652.
[26]As referred to in Wentworth (n 23) [22].

However, in the absence of any real argument by counsel, I consider that I should follow Tanning to the effect that an appeal such as the present is a hearing de novo and the decision of whether to admit or reject a proof of debt does not involve a discretion.

Further, I refer to the decision in Allesch v Maunz[27] where Gaudron, McHugh, Gummow and Hayne JJ summarised the nature of a hearing de novo, concluding as follows:

[T]he critical difference between an appeal by way of rehearing and a hearing de novo is that, in the former case, the powers of the appellate court are exercisable only where the appellant can demonstrate that, having regard to all the evidence now before the appellate court, the order that is the subject of the appeal is the result of some legal, factual or discretionary error, whereas in the latter case, those powers may be exercised regardless of error.[28]

[27](2000) 203 CLR 172.

[28]Ibid 180-1 [23].

As a result, I will determine this application on the basis that there is no requirement on the plaintiffs to establish that Mr Glavas erred in deciding whether to admit or reject a proof of debt. However, the plaintiffs must establish, on the evidence before me, that a particular proof of debt should have been admitted or rejected, as the case may be.

In the event that I am wrong in this approach, I will also consider whether Mr Glavas in fact erred in reaching the conclusions that he did on the proofs of debt that are the subject matter of this application. By reason of Mr Glavas having failed to go on oath to explain each of the decisions he made or produce documents which he considered in relation to each of the proofs of debt, I can only consider whether he erred on the basis of the evidence now before me.

In light of these principles, I will now consider further the legal issues for determination in this application.

The issues
Particulars of the debt or claim

Before the introduction of the IPR, it was clear that a person asserting creditor status was obliged to provide particulars sufficient to show, at least at a prima facie level, the existence of the asserted debt or claim. For example, in Selim, Barrett J concluded that the person claiming to be a creditor must at least go to the extent of setting out facts or alleging facts which, viewed within the context of the pre-existing knowledge of the person making the decision about the proof of debt, were sufficient to warrant a finding that a claim exists that is more than a mere assertion.[29]
[29]Selim (n 13) 115 [104].

Further, in Selim, Barrett J made the following comments on the decision making process in considering regs 5.6.23 and 5.6.26[30]:

That decision-making is undertaken by reference to documents persons claiming to be creditors choose to present. As Spiteri v Lindholm confirms, it is also undertaken against the background of all relevant contextual matters of which the decision-maker is aware. The second point is that it is no part of the function of an administrator or the chairperson of a s 439A meeting to promote or advance the claims of certain persons to be creditors.

[30]Ibid 120 [123].

The decision in Selim was before the introduction of s 75-95(1) of the IPR. The meaning and effect of that section is not clear on its face. I was informed by counsel for the parties that there is no authority on the meaning and effect of this section. This has been confirmed by my researches.

As a result, it is necessary to interpret the words of s 75-85 in the context of the IPR, the Schedule and the Act consistent with decisions of the High Court such as Project Blue Sky v Australian Broadcasting Authority (‘Project Blue Sky’).[31] In that case, the majority stated:

The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute. The meaning of the provision must be determined ‘by reference to the language of the instrument viewed as a whole’. In Commissioner for Railways (NSW) v Agalianos, Dixon CJ pointed out that ‘the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed’. Thus, the process of construction must always begin by examining the context of the provision that is being construed.[32]

[31](1998) 194 CLR 355 (‘Project Blue Sky’).

[32]Ibid 381 [69] (McHugh, Gummow, Kirby and Hayne JJ) (citations omitted). See also 381-2 [70]-[71]; 384 [78].

Before looking at the words used, I note that the Explanatory Statement to the IPR provides a brief comment on s 75-95 as follows:[33]

Under section 75-95, if an external administrator is uncertain about a debt claimed by a creditor, he or she must ask the creditor to give evidence in writing in order to establish the liability of the company for the debt. The administrator must have regard to the cost of seeking such evidence from the creditor.

[33]Explanatory Statement, Insolvency Practice Rules (Corporations) 2016 (Cth).

First, the section is in the part of the IPR dealing with the general rules relating to external administrations. It is in the subdivision dealing with the procedures at meetings within an external administration. Those sections apply with equal force to liquidations and administrations.

Second, s 75-95(1) requires an ‘external administrator’ to ask a creditor to give evidence in writing in relation to a debt claimed by the creditor to establish the liability of the company for the debt. This obligation is imposed upon the external administrator and not the ‘person presiding at the meeting’. This would appear to reflect a distinction between the process by which a creditor may be entitled to vote in s 75-85(3)(a) and s 72-85(3)(b), referred to above. That is to say, it may suggest that the obligation under s 75-95(1) is not imposed upon the person presiding at the meeting under s 75-85(3)(b), but is imposed upon an external administrator who is deciding whether to admit a debt or claim under s 75-85(3)(a).

This construction appears to be consistent with the time and other constraints which can exist when a person presiding at a meeting is making decisions to admit or reject proofs of debt or claims. It is also consistent with s 75-100(3) which provides that, if the person presiding at a meeting is in doubt as to whether a proof of debt or claim should be admitted or rejected, he or she must mark the proof as objected to and allow the creditors to vote, subject to the vote being declared invalid if the objection is sustained. In this regard, I am conscious that, in fulfilling the obligations imposed under the IPR, the person presiding at such meetings must act impartially and independently and consider the merits of each case in deciding whether a proof should be admitted or disallowed, consistent with s 75-100(3) of the IPR.

Third, s 75-95(1) provides that, if necessary, an external administrator must request from a creditor evidence in writing to establish the liability of the company for the debt. That requirement to give evidence in writing is different to, and more onerous than, the requirement in s 75-85(3)(b) to lodge with the person presiding at the meeting particulars of the debt or claim, or a formal proof of debt (if required), to be eligible to vote.

Fourth, s 75-95(1) provides that, ’if necessary‘, an external administrator must ask for such evidence. The words ‘if necessary’ are, in my view, important. There is no blanket obligation on an external administrator to ask a creditor to give evidence in writing in every case.

The Macquarie Dictionary defines ‘necessary’ as ‘that cannot be dispensed with’, ‘happening or existing by necessity’ and ‘acting or proceeding from compulsion or necessity; not free; involuntary’.[34] Further, the meaning of the word ‘necessary’ depends upon the context in which it is used: it is not of ‘a fixed character, peculiar in itself’ but rather ’admits of all degrees of comparison’.[35]
[34]Macquarie Dictionary (online at 7 March 2019) ‘necessary’ (def 1, 2 & 3).
[35]In the language of the Supreme Court of the United States in McCulloch v Maryland (1819) 4 Wheat 316 at 413-414 [17 US 159 at 203] cited by Gummow and Crennan JJ in Thomas v Mowbray (2007) 233 CLR 307, 353 [101]. See also Fairfax Digital Australia and New Zealand Pty Ltd v Ibrahim (2012) NSWLR 52, 65 [45]-[46] per Baston JA (with whom Bathurst CJ 56 [8] and Whealy JA 79 [106] agreed).

The Explanatory Statement set out at [84] above would suggest that if an external administrator is uncertain about a debt claimed by a creditor then such a request must be made. In my view, this is not consistent with the words ‘if necessary’ in the context in which they appear. I consider that the external administrator must consider all the circumstances of the particular case to determine if such a request for evidence in writing is necessary. In my view, those circumstances would include the nature of the meeting for which the information was relevant, the previous requests made for information and/or evidence in relation to the debt claimed, and the information in fact provided.

In this regard, I am conscious of the purpose of a second creditors’ meeting under s 439A of the Act and, in particular, the time and other constraints which can often exist both before and during such meetings.[36]
[36]See my comments at [97] below.

Fifth, s 75-95(2) provides that, if the external administrator considers that the evidence is insufficient for the purposes of s 75-95(1), the external administrator, before asking for further information, must have regard to the expected dividend rate and the materiality of the issue requiring clarification. In my view, this subsection only applies where a request has been made pursuant to s 75-95(1) and the evidence provided in response to that request is insufficient. Further, I consider that it only applies when a dividend rate will be relevant, namely, for the purpose of a meeting during a liquidation or a meeting during an administration voting on a Deed of Company Arrangement. Neither is relevant here.

The proper construction of s 75-85(1) is not easy. On balance, I have concluded that it only applies to external administrators, in deciding whether to admit a debt or claim under s 75-85(3)(a), and does not apply to a person presiding at the meeting in deciding whether to admit or reject a proof of debt or claim for the purposes of voting under s 75-100, even if that person is also the external administrator. Based on this construction, further issues may arise about the operation of the section where the external administrator is the person presiding at the meeting, such as in this case. However, in my view, if there is uncertainty or doubt about whether a proof of debt or claim should be admitted at such a meeting, the external administrator in such circumstances is, in making such a decision, acting in the capacity of the person presiding at the meeting not as the external administrator, with the result that the decision is made pursuant to s 75-100(3), and not s 75-95(1).

Further, I have concluded that the person on whom the obligation to request evidence in writing is imposed must consider all the circumstances of the particular case to determine if such a request is necessary to make. In my view, those circumstances would include the nature of the meeting for which the information was relevant, the previous requests made for information and/or evidence in relation to the debt claimed, and the information in fact provided.

The decision making process

The second issue relates to the process by which a creditor may be allowed to vote. The submissions of the parties on this legal issue were limited.

The previous regulations relating to proofs of debt applied to both liquidations and administrations. However, the courts recognised the significant differences between proofs of debt and claims for voting purposes in relation to meetings under part 5.3A and proofs of debt and claims for the purposes of entitlement to a distribution in a winding up.[37]
[37]See, eg, Selim (n 13) 96 [36]-[38], 106-107 [78], 115 [103].

Further, the case law prior to the IPR noted that the interaction between regs 5.6.23 and 5.6.26 (which are reflected for the most part in s 75-85 and s 75-100) was not clear. Principles which developed were summarised by Austin J in Bovis Lend Lease Pty Ltd v Wily[38] as follows:
[38](2003) 45 ACSR 612, 677-678 [269] approved by Barrett J in Selim (n 13) 108-109 [82].

(a)a creditor is not entitled to vote at a meeting convened under section 439A unless either the debt or claim has been admitted wholly or in part by the administrator, [presumed to be before the meeting] or the creditor has lodged with the chairman of the meeting or other appropriate person “particulars of the debt or claim” or (if required) a formal proof of the debt or claim (reg 5.6.23 (1);
(b)the chairman of the meeting has a discretion to admit the debt or claim wholly or in part, or to reject it for the purposes of voting (reg 5.6.26 (1)) and that decision may be the subject of an appeal to the court under reg 5.6.26(3);
(c)if the chairman is in doubt about whether proof or debt of claim should be admitted or rejected, the proper procedure is to mark the proof as objected to and to allow the creditor to vote (reg 5.6.26(2);
(d)if the debt or claim is for an unliquidated amount, or it is contingent, or it is a debt the value of which is not established, a just estimate of the value of the debt or claim must be made by the chairman of the meeting acting reasonably before the creditor is permitted to vote (reg 5.6.23(2)); Oriel Homes at 565; Vincent, White at 101;
(e)if a just estimate cannot be made at all, in circumstances where regulation 5.6.23(2) applies, then the creditor should not be permitted to vote at all, and reg 5.6.26(2) has no application: Vincent, White at 101;
(f)if the claim cannot be quantified by a just estimate, but it appears that the creditor is a creditor for at least some amount (for example, where a debt is subject to an uncertain contingency), it is appropriate to admit the creditor for voting purposes at a nominal value of $1: Oriel Homes at 566; Re Zambena Pty Ltd (1995) 13 ACLC 1020;
(g)if a just estimate has been made as required by reg 5.2.23(2), but the administrator remains in doubt as to whether the creditor should be allowed to vote on the basis of the just estimate, then the administrator must mark the proof as objected to and allow the creditor to vote under reg 5.6.26(2): Vincent, White at 101.

Barrett J adopted these propositions for the most part in Selim.[39] His Honour noted the nature of the obligation undertaken by the chairperson at a creditors’ meeting under Part 5.3A of the Act.[40] He concluded that the decision of whether to admit or reject the debt and the decision to estimate the just value of a debt or claim to be taken at the meeting will ‘of necessity, be of somewhat summary nature’ and that situation is accordingly not one in which extensive debate or deliberation or detailed consideration will be possible. He continued in relation to estimating a value:

He or she will do the best that can be done by reference to the factual material the claimant furnishes, viewed in the total context with which the decision-maker is dealing. If that material provides reasonable grounds, within that context, for ascribing a particular figure to the particular claim, the chairperson or administrator is no doubt expected to accept that position. If, on the other hand, 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 assuming that admission is warranted.[41]

[39]Selim (n 13) 111-16 [89]-[106].

[40]Ibid 115 [103].

[41]Selim (n 13) 115 [103].

The issue of what the chairperson of a meeting of creditors should do when faced with a proof of a disputed debt was considered in Bacnet. In that case, the Court held that it was proper for the chairperson of a creditors’ meeting to reject the proofs of debt for voting purposes where the underlying claims were bona fides disputed and involved decisions as to complex underlying factual assertions.

Keane CJ and Jacobson J adopted the reasoning of the Hong Kong Court of Appeal in Re UDL Holdings Ltd (‘UDL’).[42] In UDL, the disputed creditor (Nishimatsu) claimed to be a creditor of the scheme company in an amount of $343 million under parent company guarantees in respect of subcontract work in relation to an airport development. All of these claims were the subject of legal proceedings. The chair estimated the proof at nil value and the disputed creditor was not permitted to vote at the meeting. Keane CJ and Jacobson J approved of the following comments of Seagroatt J (with whom Rogers V-P and Woo JA agreed) in UDL:

How was Nishimatsu’s potential debt to be valued? There was no admission of any part of it. Until the arbitration award, or any settlement of the claim, it would be impossible to determine any fixed amount to represent it. It may fail utterly. The counterclaim may succeed fully. It may fail in part with the counterclaim extinguishing part of the claim. It may succeed fully with the counterclaim failing. It would require a careful evaluation of the merits of the claim and the counterclaim to determine a range for its value. That would be an unrealistic course. In my view it would be impossible to give it any value for sensible purposes. In fact a nil value was attributed to it meaning that it had no voting rights. I do not see how there could be any different decision.[43]

[42][2001] HK LRD 156 adopted by Keane CJ and Jacobson J in Bacnet (n 19) 397-398 [86]-[89], Finkelstein J agreeing 407 [153].

[43]Bacnet (n 19) 398 [88].

A slightly different approach was adopted by Black J in Free Wesleyan Church. In that case, the creditor provided a proof of debt of $950,000 principal and $8.8 million interest. The administrators received legal advice which recommended the debt be admitted for voting purposes in the amount of $1.2 million principal plus interest of $284,000. The chairperson at the creditors’ meeting concluded that the amount of the debt had not been established under reg 5.6.23(2)(d) and admitted the proof of debt for $1,484,000 as a just estimate of the value of the debt.

Black J held that:

(1) this regulation requires a focus on whether the value of the debt is presently established;

(2) as the characteristics of the loan were challenged and proceedings had been brought, the value of the loan could not be ascertained merely by reference to its terms and substantial further enquiries would be required; and

(3) in the circumstances, the administrator’s decision to treat the plaintiff’s debt as one where the amount had not been established and making a just estimate of its value was correct in all the circumstances.[44]

[44]Free Wesleyan Church (n 17) 354-7 [20]-[31].

Relief which may be ordered

As to the third issue, the authorities make clear that the usual order on a successful appeal of the kind in this application is to direct the administrator or liquidator to admit the proof of debt.[45] However, in the case of an appeal in respect of a second creditors’ meeting, there may be real difficulties in making such an order if the creditors at that meeting voted to put the company into liquidation, particularly if no stay of the liquidation has been sought or no application is pursued to terminate the liquidation. I raised this with counsel for the plaintiffs who was unable to point to any authority where the Court had ordered a reconvening of a second meeting of creditors after the relevant company had been placed into liquidation.
[45] See, eg, While v Norman (No 2) (2012) 202 FCR 38, 41 [10]; Federation (n 12).

Indeed, the only relevant authority to which I was referred was Spiteri. In that case, Hansen J declined to reverse an administrator’s decision at a second meeting of creditors convened under section 439A of the Act. However, his Honour concluded:

If I had concluded that Lindholm had erred in rejecting the plaintiffs’ proof of debt it would have been necessary to give consideration to the appropriate resolution of the proceeding in view of the following matters. The company is not trading, it is insolvent, and there is, in Lindholm’s opinion, a need to investigate the disposition of the company’s fixed assets which may constitute voidable transactions. It was having regard to these circumstances, and the fact that there is no proposal for a deed of company arrangement, that Lindholm was, and remains, of the opinion that the proper course is for the company to be wound up.[46]

[46]Spiteri (n 9) 329 [49].

With respect, I agree with his Honour that these issues, including solvency, are relevant to the exercise of the Court’s discretion to make orders upon a successful appeal.

Rejected debts: evidence and analysis

As noted above, during the 12 November meeting, Mr Glavas went through the process of accepting and rejecting debts submitted by persons claiming to be creditors.

Was s 75-95(1) engaged in this case?

As a result of my preferred construction of s 75-95(1) above, there was no obligation imposed upon Mr Glavas under s 75-95(1) of the IPR at the 12 November meeting. In the event I am wrong on the construction of 75-95(1), I have nevertheless considered whether Mr Glavas in his capacity as one of the external administrator, or as chairperson of the 12 November meeting, complied with that obligation. This is in a context where I have concluded that s 75-95 applies where the relevant decision maker, or a reasonable person in his or her shoes, considers, in all the circumstances of the particular case, that such a request is necessary, including whether that person was a liquidator or an administrator, the nature of the meeting for which the information was relevant, and the previous requests made for information or evidence in relation to the debt claimed and the information in fact provided.

In the present case, I do not consider that Mr Glavas was obliged to request further evidence in writing in respect of each of the rejected proofs of debt either in response to the 9 November email or at the 12 November meeting. This is because:

(1) prior to the 7 September meeting, the Administrators sent a notice to creditors which stated that creditors needed to submit a proof of debt and supporting documentation to participate in that meeting;

(2) at the 7 September meeting, a number of proofs of debt were rejected on the express basis that the creditors had either failed to complete the proof of debt form or had failed to supply any documentation in support of their claim, notwithstanding they were on notice of the approach being adopted by the Administrators;

(3) on 9 October 2018, the Administrators sent a notice of the adjourned second creditors’ meeting which stated that creditors who wished to attend the reconvened meeting must lodge a proof of debt with supporting documentation;

(4) a further notice advising that the second meeting was to be held on 12 November 2018 was sent to creditors on 2 November 2018 which restated that creditors who wished to attend the reconvened creditors meeting must lodge a proof of debt with supporting documentation; and

(5) the 12 November meeting was the last day upon which a creditors meeting could be held under the Act.

It is important to bear in mind the nature of the second creditors’ meeting. As no deed of company arrangement had been proposed, it was to determine whether the Company should be placed into liquidation or whether the administration should end. The nature of the consideration of each proof of debt required of the person presiding at the meeting was very different from the nature of the consideration required for the purpose of admitting a proof of debt in liquidation.

In my view, the Administrators and Mr Glavas made clear the basis upon which proofs of debt would be admitted at the 12 November meeting. Each of the creditors whose proofs were rejected had had more than sufficient time to lodge a proof of debt with supporting documentation in order to make good their claims. They failed to do so in the 9 November email, which I note was sent on the Friday before the 12 November meeting which was a Monday.

In these circumstances, I do not think it was necessary for Mr Glavas to request further evidence in writing from each of these creditors either prior to or during the course of the 12 November meeting.

Rejected proofs of debt based on contracts of sale and investment loan contracts

The rejected proofs of debt of each of Ramahi, Ibaida, El-Daouk, Abou-Eid and Bakhtiyar and the partly rejected proofs of Drs Atalla and Hegazy relate to alleged payments:

(1) under contracts of sale between the Company and each of them as purchaser of a unit in the North Melbourne development; and

(2) a ‘loan investment contract’ entered into by each of them to assist the development of the North Melbourne property.

At the 12 November meeting, in the case of all but Dr Atalla and Dr Hegazy:

(1) the relevant proof was presented and objected to by Mekkya;

(2) the relevant contract of sale for each of these persons was provided to Mr Glavas;

(3) a director of the company confirmed that each contract was valid;

(4) Mr Glavas said he would reject the claim due to lack of supporting information and access to company records;

(5) Dr Hegazy, as proxy, asked why such information was not requested by Mr Glavas in light of the 9 November email before the meeting and that, if requested, supporting documentation would have been provided; and

(6) Mr Glavas noted the objection and then rejected the proof of debt.

In the case of Dr Atalla and Dr Hegazy, the process outlined in (1) to (4) of the previous paragraph also took place. However:

(1) Dr Hegazy located receipts relevant to Dr Atalla’s proof totalling $342,000 which were reviewed by Mr Glavas and a proof of debt was accepted in that sum;

(2) Dr Hegazy located receipts relevant to his claim totalling $250,000 which were reviewed by Mr Glavas and a proof of debt was accepted in that sum.

In this application, Mr Nair, the plaintiffs’ solicitor, deposed that the relevant documents in respect of each of these claims were a contract of sale, an investment loan agreement and receipts. However, the plaintiffs only exhibited the contract of sale and loan investment contract for Dr Atalla and receipts for amounts paid under those contracts.

Mr Nair deposed that the contact of sale and investment loan agreement for each rejected claimant was in the same form. The relevant contracts of sale were later exhibited to the Glavas affidavit. My review of these contracts of sale reveals that they were not all relevantly in the same form. For example, as I set out below, some provided that the deposit had been paid at the time of execution of the contract and others provided for the deposit to be paid at a later time.

Further, the loan investment agreement and receipts which might have been relied upon for the rejected proofs (other than for Dr Atalla) were not in evidence. As a result, it is necessary to deal with each of the proofs of debt in turn.

Dr Atalla

Mr Glavas admitted a proof of debt for Dr Atalla in the sum of $342,000.

Dr Atalla signed a proof of debt dated 1 November 2018 in the sum of $550,000. No particulars of the debt were provided. No supporting documents were attached to the proof. As noted above, Dr Atalla’s contract of sale and some receipts totalling $342,000 were produced at the 12 November meeting.

The contract of sale between the Company and Dr Atalla dated 8 August 2014 was in evidence before me. It records that the purchase price was $364,000 for apartment 202 and that the deposit was $182,000, ‘of which $182,000 has been paid’. A receipt for the payment of this amount on 8 August 2014 signed by Wael El-Saafin and the first plaintiff was in evidence before me. Mr Nair also exhibited a second receipt for a further payment of $160,000 for purchasing apartment 202 dated 17 October 2014. This was also signed by Wael El-Saafin and the first plaintiff. This receipt recorded that the balance of the purchase price of $22,000 would be paid at the end of the project and handing over the title.

Based on this evidence, I have concluded that Dr Atalla has established a liability of the Company to him of $342,000. It was not in dispute before me that a creditor was entitled to vote at the 12 November meeting for the value of the deposit in fact paid under such a contract of sale. No doubt that this was because, given the position of the Company at that time, it was very unlikely that such a contract could be completed and the purchaser would be entitled to recover from the Company at least the deposit paid.

Mr Nair also exhibited an undated Investment Loan Agreement between the Company and Dr Atalla as the ‘Investor’. The terms of this Investment Loan Agreement are far from clear. Clause 3.1 provides that the Investor ‘has agreed to … lend to the [Company] the ‘Principle Sum’ [sic] of $350,000 in consideration of the Company transferring to the Investor the ‘Return Asset’ which is defined in the Schedule as Apartment 202. Clause 3.2 provides that the Investor ‘agrees to advance the ‘Principle Sum’ [sic] to the [Company] on the ‘Completion Date’. The ‘Completion Date’ has not been filled in in item 6 of the Schedule.

Clause 4.1.1 provides that the Company must transfer Apartment 202 to the Investor on the ‘Repayment Date’, which is defined to mean the ‘Expiry Date’ which is, in turn, defined to mean ‘18 months from the Completion Date’.

Clause 4.1.2 provides that the Investor cannot require that the ‘Principle Sum’ [sic] be repaid or that apartment 202 be transferred earlier than the Repayment Date. Clause 4.2 provides that, if any of the events specified in clause 7 of the Agreement occur, the ‘Principle Sum’ [sic] will become immediately due and payable at the option of the Investor. Clause 7.1(e) provides that one of these events is an Insolvency Event which is relevantly defined as a party to the investment loan contract becoming an externally administered body under the Act.

In my view, Mr Glavas did not err in not admitting Dr Atalla’s proof of debt to the extent it was based upon the amount that might have been paid under the Investment Loan Agreement. The Investment Loan Agreement of Dr Atalla produced to the Court does not allow me to form any concluded view that any money was in fact advanced to the Company.

Indeed, Dr Atalla’s Investment Loan Agreement is undated and the Completion Date has not been filled out. Further, I am unsure of the relationship between the amount paid under the contract of sale ($364,000) and the purported loan in the agreement of $350,000 in light of the terms of clause 3, which states that the Principle Sum [sic] is advanced in consideration for the purchase of apartment 202.

As a result, on the evidence before me, I have concluded that a proof of debt for Dr Atalla in the amount of $342,000 should have been admitted.

Dr Hegazy

Mr Glavas admitted a proof of debt for Dr Hegazy in the sum of $250,000 at the 12 November meeting.

Dr Hegazy signed a proof of debt on 5 September 2018 claiming $540,000 for the purpose of the first creditors meeting. In the section ’Particulars of the debt are’, it is written ‘Aug 2014’.

At the first creditors’ meeting on 7 September 2018, Mr Glavas admitted Dr Hegazy’s proof of debt for $540,000 ‘for voting purposes’. The minutes of the meeting record that this was on the basis that Dr Hegazy had lodged a claim in respect of moneys paid to the Company for the purchase of a unit at the North Melbourne property development. I note that other proofs of debt were admitted at the first meeting but recorded in the minutes as being so admitted ‘for the purpose of today’s meeting only’.

He did not lodge a subsequent proof of debt in light the letter from the Administrators dated 9 October 2018 referred to above.

At the second creditors’ meeting, there is evidence that a contract of sale was provided to Mr Glavas. It is in evidence before me. The contract of sale is between the Company and Dr Hegazy dated 8 August 2014 for apartment 201 in the North Melbourne development. The purchase price was $406,000. The contract of sale records that a deposit of $203,000 has been paid.

In addition, Mr Glavas was provided with a copy of a receipt dated 17 October 2014 acknowledging a further payment of $150,000 from Dr Hegazy in relation to the contract to purchase apartment 201. That receipt was signed by the first plaintiff and Wael El-Saafin. It is in evidence before me. It was also produced to Mr Glavas at the second creditors’ meeting.

As a consequence, based on the evidence before me, I have concluded that Dr Hegazy’s proof of debt in the sum of $353,000 should be admitted. This was the amount that had been paid under the contract of sale. For the reasons set out in [122] above, Dr Hegazy was entitled to recover that amount. Further, as the evidence of the amount paid under the contract of sale before me was also before Mr Glavas at the 12 November meeting, he erred in not admitting a proof of debt in that amount. Indeed, I have no basis to determine how Mr Glavas admitted this proof for $250,000.

Mr Ramahi

Mr Glavas rejected Mr Ramahi’s proof of debt.

Mr Ramahi signed a proof of debt dated 1 November 2018 in the sum of $354,000. No other particulars of debt or supporting documentation were provided at that time. Indeed, the section ‘Particulars of the debt are’ in the proof of debt he signed is relevantly blank.

At the second creditors’ meeting, there is evidence that a contract of sale was provided to Mr Glavas. It is in evidence before me. It is an undated contract of sale between the Company and Mr Ramahi for apartment 203 in the North Melbourne development. The purchase price was $400,000. The contract records that a deposit of $300,000 was to be paid on 12 May 2015 with the balance to be paid at settlement. There is no evidence on the face of the contract that the deposit was paid. Further, there are no receipts in evidence which record the payment of any moneys under this contract.

As a consequence, based upon the evidence before me, I have concluded that Mr Ramahi’s proof of debt should be rejected. Mr Glavas did not err in rejecting it at the 12 November meeting.

Mr El-Daouk

Mr Glavas rejected Mr El-Daouk’s proof of debt.

Mr El-Daouk signed a proof of debt dated 5 November 2018 in the sum of $50,000. No other particulars of debt or supporting documentation were provided at that time. Indeed, the section ‘Particulars of the debt are’ in the proof of debt he signed is entirely blank.

At the second creditors’ meeting, there is evidence that a contract of sale was provided to Mr Glavas. It is in evidence before me. The contract of sale was between the Company and Mr El-Daouk dated 19 September 2014 for apartment 204 in the North Melbourne development. The purchase price was $500,000. The contract recorded that a deposit of $50,000 was to be paid on 23 September 2014. The balance was payable at settlement. There is no evidence on the face of the contract that the deposit was paid. There are no receipts in evidence which recorded the payment of any moneys under this contract.

As a consequence, based upon the evidence before me, I have concluded that Mr El-Daouk’s proof of debt should be rejected. Mr Glavas did not err in rejecting it at the 12 November meeting.

Mr Abou-Eid

Mr Glavas rejected Mr Abou-Eid’s proof of debt.

Mr Abou-Eid signed a proof of debt dated 5 November 2018 in the sum of $50,000. No other particulars of debt or supporting documentation were provided at that time. Indeed, the section ‘Particulars of the debt’ in the proof of debt he signed is entirely blank.

At the second creditors’ meeting, there is evidence that a contract of sale was provided to Mr Glavas. It is in evidence before me. The contract of sale is between the Company and Mr Abou-Eid dated 26 September 2014 for apartment 205 in the North Melbourne development. The purchase price was $540,000. The contract recorded a deposit of $54,000 was to be paid on 3 October 2014 with the balance to be paid at settlement. There is no evidence on the face of the contract that the deposit was paid. There are no receipts in evidence which record the payment of any moneys under this contract.

As a consequence, based upon the evidence before me, I have concluded that Mr Abou-Eid’s proof of debt should be rejected. Mr Glavas did not err in rejecting it at the 12 November meeting.

Mr Bakhtiyar

Mr Glavas rejected Mr Bakhtiyar’s proof of debt.

Mr Bakhtiyar signed a proof of debt dated 6 November 2018 in the sum of $430,000. No other particulars of debt or supporting documentation were provided at that time. Indeed, the section ’Particulars of the debt are‘ in the proof of debt he signed is entirely blank.

At the second creditors’ meeting, there is evidence that a contract of sale was provided to Mr Glavas. It is in evidence before me. The contract of sale is between the Company and Mr Bakhtiyar (it was signed by the vendor on 12 December 2014) for apartment 304 in the North Melbourne development. The purchase price was $435,000. The contract records a deposit of $150,000 was to be paid within one week of signing and a further instalment of $150,000 was to be paid on 1 June 2015. The balance was payable at settlement.

There is no evidence on the face of the contract that the deposit or any other sums were paid. There are no receipts in evidence which record the payment of any moneys under this contract.

As a consequence, based upon the evidence before me, I have concluded that Mr Bakhtiyar’s proof of debt should be rejected. Mr Glavas did not err in rejecting it at the 12 November meeting.

Mr Ibaida

Mr Glavas rejected Mr Ibaida’s proof of debt at the 12 November meeting.

At the first creditors’ meeting on 7 September 2018, Mr Glavas admitted Mr Ibaida’s proof of debt for $300,000 ‘for voting purposes’. The minutes record that this was on the basis that Mr Ibaida had lodged a claim in respect of moneys paid to the Company for the purchase of a unit at the North Melbourne property development. I note that other proofs of debt were admitted at the first meeting but ‘for the purpose of today’s meeting only’.

Mr Ibaida signed a proof of debt dated 4 November 2018 in the sum of $520,000.[47] No other particulars of debt or supporting documentation were provided at that time. Indeed, the section ’Particulars of the debt are’ in the proof of debt he signed is entirely blank.
[47] I note that Mr Ibaida also signed a proof of debt dated 19 October 2018 which stated in the proof of debt
that the amount related to the purchase of apartment 4.

At the second creditors’ meeting, there is evidence that a contract of sale was provided to Mr Glavas. It is in evidence before me. The contract of sale is between the Company and Mr Ibaida dated 20 June 2014 for Lot 4 in the North Melbourne development. The purchase price was $300,000. The contract records the full purchase price ‘has been paid’. For the reasons set out in [122] above, I consider that Mr Abou-Eid was entitled to recover the amount so paid against the Company.

As a consequence, based upon the evidence before me, I have concluded that Mr Abou-Eid’s proof of debt should be admitted in the sum of $300,000. As the evidence before me relating to the amounts paid under the contract of sale was also before Mr Glavas at the 12 November meeting, I conclude he erred in not admitting the proof of debt at the 12 November meeting.

Rejected proofs of debt based on loans to the Company
Mr Nasser

In relation to Mr Nasser, at the 12 November meeting, Dr Hegazy, as proxy, provided a proof of debt for the sum of $40,075.89. It was rejected by Mr Glavas.

Mr Nasser signed a proof of debt dated 5 November 2018 in the sum of $40,075.89. The section ’Particulars of the debt are‘ include three amounts of $5,000 on ‘21/11/2016’ and $20,000 and $5,000 on ‘22/11/2016’ and the claim for ’principal plus interest’. No other supporting documentation was provided at that time.

The evidence before me is that at the 12 November meeting:

(1) Mekkya objected to this proof of debt;

(2) a director of the Company stated that it was a loan in early 2016 and a valid debt;

(3) Mr Glavas said he would reject the proof of debt due to lack of supporting receipts and access to company records to establish payments to the Company;

(4) Dr Hegazy again asked Mr Glavas why such information was not sought from him in response to the 9 November email; and

(5) Mr Glavas noted the objection and rejected the proof of debt.

No further material to support Mr Nasser’s claim was provided on this application.

In my view, on the evidence before me, I have concluded that Nasser’s proof of debt should be rejected. There is insufficient evidence to establish that the debt is a liability of the Company. This is in circumstances where no supporting material was produced at the 12 November meeting or to the Court on this application. Mr Glavas did not err in rejecting the proof of debt at the 12 November meeting.

Wael El-Saafin

In relation to Wael El-Saafin, Dr Hegazy, as proxy, provided a proof of debt for the sum of $757,000 signed by Wael El-Saafin dated 5 November 2018. No other particulars of debt or supporting documentation were provided at that time. Indeed, the section ’Particulars of the debt’ is entirely blank.

The evidence before me is that at the 12 November meeting:

(1) Mekkya objected to this proof of debt;

(2) a director of the Company stated that it was based on loans to Company and a valid debt;

(3) Mr Glavas said he would reject the proof of debt due to lack of supporting receipts and access to company records to establish payments to the company;

(4) Dr Hegazy again asked Mr Glavas why such information was not sought from him in response to the 9 November email; and

(5) Mr Glavas noted the objection and rejected the proof of debt.

No further material to support this claim was provided on this application.

In my view, based on the evidence before me, I have concluded that the Wael El-Saafin proof of debt should be rejected. There is insufficient evidence to establish that the debt is a liability of the Company. This is in circumstances where no supporting material was produced at the 12 November meeting or to the Court on this application. Mr Glavas did not err in rejecting the proof of debt at the 12 November meeting.

Challenged debts: evidence and analysis

Mr Glavas accepted, in full, proofs of debt from MAG, Mekkya and Dr Ibrahim, totalling $5,626,600. The plaintiffs submit that these proofs should not have been accepted for the amounts claimed. I will deal with each in turn.

Mekkya debt

In the case of Mekkya, Mr Glavas accepted a proof of debt totalling $1,560,000. The proof of debt lodged is not in evidence. The circumstances in which the proof of debt was accepted are set out in [25] of the eleventh Nair affidavit. In summary:

(1) it was objected to by Mr Carney of counsel, as proxy for Dr Hegazy, and Mr Nair, as proxy for the first plaintiff;

(2) Mekkya said the debt was pursuant to ‘a contract entered into with the Company’ and was ‘for his pain and suffering in connection with the North Melbourne development’;

(3) the first plaintiff said that the Company had not entered into such a contract with Mekkya;

(4) Mekkya provided Mr Glavas with two different contracts which he claimed were signed in the presence of Omar El-Hissi. The creditors were not provided with copies of the contracts for examination;

(6) the first plaintiff said that they were fraudulent documents and that he never signed any such contracts; and

(7) Mr Glavas said that, while he accepted there was not a lot of information to rely upon, since the contract was signed by a solicitor and the Company’s directors had reportedly signed it, he would accept the debt for the purposes of the meeting.

The typed minutes of the 12 November meeting record that:

(1) Mr Nair objected to the claim;

(2) Mr El-Saafin stated that he did not sign the loan investment contracts produced;

(3) Mr Glavas queried whether Mekkya could produce evidence of the monies advanced. Mekkya advised that the investment loans were ‘to provide consideration for his efforts in obtaining planning and permit approval’ for the North Melbourne property; and

(4) Mr Glavas ‘advised that based upon the documentation provided prior to and at this meeting which included the original loan documents witnessed by a solicitor, the proof would be admitted for voting purposes’.

Mr Glavas did not explain his decision to admit this proof of debt in the Glavas affidavit. The documentation provided prior to and at the meeting was not exhibited before the Court on this application.[48]
[48] I note that in the Administrators’ report to creditors dated 30 August 2018 (page 61 to the exhibit to the affidavit of Mr Halse sworn 16 September 2018) records that Mekkya claimed $1,560,000 in respect of two general security agreements dated 7 November 2016 with payments of $1,270,000 and $290,000 respectively: at page 73. However, those documents were not exhibited before the Court.

I am not satisfied, based on the evidence before me, that Mr Glavas had sufficient material before him to enable him to admit the Mekkya proof in the amount claimed. This is particularly so in circumstances where there was a discrepancy between:

(1) the original basis of the debt asserted by Mekkya (namely, pursuant to ‘a contract entered into with the Company’ and was ‘for his pain and suffering in connection with the North Melbourne development); and

(2) the subsequent basis asserted, being two loan investment contracts which were not exhibited before the Court.

Further, when Mr Glavas queried whether Mekkya could produce evidence of the monies advanced, Mekkya advised the investment loans were ‘to provide consideration for his efforts in obtaining planning and permit approval’ for the North Melbourne property. I do not know what this does, or was intended, to convey. It certainly does not provide evidence of the monies advanced pursuant to the agreements to establish a liability of the Company. This is quite apart from the fact that the relevant director disputed that he did not sign the loan investment contracts produced.

On the evidence before me, the approach adopted by Mr Glavas in relation to the Mekkya proof (where he did not require receipts for payment before admitting it) was very different to the approach he adopted in respect of the rejected proofs (where receipts were required to be produced before the proof was accepted).

On the evidence before me, Mr Glavas erred in admitting this proof of debt.

In all these circumstances, on the evidence before me, I have concluded that the Mekkya proof should be rejected.

Ibrahim debt

In the case of Dr Ibrahim, Mr Glavas accepted a proof of debt totalling $306,001.37 for moneys alleged owed to the Company. The proof of debt lodged is not in evidence. The circumstances in which the proof of debt was accepted are set out in [27] of the eleventh Nair affidavit. In summary:

(1) it was objected to by Dr Hegazy, as proxy, for the creditors he represented and Mr Nair, as proxy, for the first plaintiff;

(2) the debt was for a default judgment of the County Court;

(3) Mr Nair said the judgment had been set aside and the matter was listed for trial in 2019; and

(4) Mr Glavas said he noted the objection but since there was an order of the court he was going to accept the proof.

Once again, the typed minutes of the meeting are generally consistent with this version of events. They record that Mr Glavas advised that, based on the supporting documentation available to him at the meeting, the proof of debt would be admitted for voting purposes, noting that the directors had been given ample opportunity to provide the books and records of the Company which may have assisted in assessing this claim.

Mr Glavas did not explain his decision to admit this proof of debt in the Glavas affidavit. The documentation provided prior to and at the meeting were not exhibited before the Court on this application.

On the evidence before me, Mr Glavas did not have sufficient material to admit the Ibrahim proof of debt. This is in circumstances where Mr Nair informed Mr Glavas that the default judgment had been set aside and no documents were produced relating to the underlying debt or claim asserted by Mr Ibrahim. Mr Glavas erred by accepting the proof of debt without objectively considering the merits of the claim.

Once again, the approach adopted by Mr Glavas in relation to the Ibrahim proof (where he did not require receipts for payment before admitting it) was very different to the approach he adopted in respect of the rejected proofs (where receipts were required to be produced before the proof was accepted). Further, the absence of books and records of the Company, in this case, appeared to assist in Mr Glavas’ decision to admit this claim (in contrast to his decision in respect of some of the rejected proofs, where the absence of books and records was relied upon by Mr Glavas to reject the proof of debt).

I have no evidence before me on this application relating to the merits of this claim. As a result, based on the evidence before me, this proof of debt should be rejected.

MAG debt

In the case of MAG, Mr Glavas accepted a proof of debt totalling $3,768,023.04. The proof of debt lodged is not in evidence. The circumstances in which the proof was accepted are set out in [26] of the eleventh Nair affidavit. In summary:

(1) the MAG proof was provided by MAG’s proxy, Sacca;

(2) Mr Glavas did not ask for objections from the creditors;

(3) this was notwithstanding the letter from Mr Nair dated 5 November 2018 disputing the debts;[49]

(4) Dr Hegazy questioned the administrator regarding the validity of the debts to MAG in light of Reasons No 1 and Reasons No 2;

(5) the only question Mr Glavas asked about this proof concerned the costs sought by MAG.

[49]See exhibit HN-1 to the eleventh Nair affidavit.

The typed minutes of the meeting record that:

(1) Mr Glavas noted that MAG had lodged a claim in respect of several different debts which had been assigned to it and that the balance of the combined debt, being $4,139,078.56, remained outstanding;

(2) as MAG had failed to provide supporting documents to evidence its enforcement costs and disbursements, for voting purposes, the claim would be reduced to $3,068,023.04;

(3) Dr Hegazy formally objected to admitting this claim on the basis that the validity and assignment of several debts that make up the MAG debt were being questioned in this proceeding; and

(4) based on the documentation provided prior to and at this meeting, Mr Glavas was of the opinion that the proof should be admitted for the voting purposes for the amount stated.

It is important to set out the nature of the MAG debt. The MAG debt represents the balance of all moneys allegedly owed by the Company to the MAG parties less the proceeds of sale of the North Melbourne property. As noted in [81] of Reasons No 2, the MAG debt at that time was made up of:

(1) the Balanced Securities loan of $3,795,766 (of which the plaintiffs acknowledge approximately $3.2million. It was not disputed that the Balanced Security loan was secured);

(2) the Franek Loan of $1,219,000 (of which the plaintiffs acknowledge approximately $1.2 million. It was not disputed that the Franek Loan was secured);

(3) the 20 June debts which the defendants asserted totalled approximately $3.6 million were purportedly assigned on 20 June 2018 in order to obtain security but this assignment and its effect are challenged by the plaintiffs in this proceeding.

Further, the proceeds of sale of the North Melbourne property were first applied in repayment of the 20 June debts and then in part satisfaction of the Balanced Securities loan and the Franek loan. It is alleged in this proceeding that applying these funds against the 20 June debts was improper and unlawful.

As noted at [81] of Reasons No 2, the 20 June debts are made up as follows:

(1) a debt allegedly owing to Mekkya in his personal capacity for $982,848.22 which the MAG parties previously acknowledged was disputed;

(2) a debt owing to New Concept Homes of $521,342.22 which the MAG parties previously acknowledged was disputed;

(3) a debt owing to New Concept Designs (owned by Mekkya) of $174,907.59 which the MAG parties have previously acknowledged was disputed;

(4) a debt owing to Sacca of $1.9 million which is also disputed by the plaintiffs.

In relation to the merits of these issues, I said in Reasons No 2:

As noted in the Earlier Judgement, senior counsel for the defendants conceded that there are serious issues to be tried as to whether the 20 June debts are validly the subject of the MAG security interest and whether the sale and transfer of the North Melbourne property to AAGG should be set aside in light of the circumstances in which the sale was entered into. Further, in the Earlier Judgement, I concluded that:
(1)there appears to be a reasonably strong case that the 20 June debts are not validly the subject of MAG’s security interests; and
(2)while I was not able to form any view about the strength of the claim in relation to the transfer of the North Melbourne property to AAGG, the circumstances in which this occurred and the 20 June debts were assigned raise serious issues about the conduct of Franek, MAG, Mekkya and Sacca.

…
I consider that there is also a reasonably strong case that MAG and the Receivers, in failing to provide the payout of the Balanced Securities loan during the period when the 20 June debts were assigned, and then exercising their powers based on those assignments, breached the duties owed to the Company.[50]

[50]Reasons No 2 (n 1) [127], [129].

All of these matters were known to Mr Glavas from my previous Reasons. Given that Mr Glavas did not go on oath in this application in relation to the MAG proof, I have no basis to determine how Mr Glavas formed the view to admit the MAG proof in the amount claimed of $3,768,023.04, other than the matters set out in the minutes. Those minutes refer to the documentation provided prior to and at the meeting, which was not exhibited before the Court on this application.

Underlying the acceptance of the MAG proof was an admission that each of the 20 June debts were debts owed by the Company and had been validly discharged by applying the proceeds of sale of the North Melbourne property. But given that Mr Glavas was aware of this proceeding, the nature of the claims made and the serious issues which I concluded were raised in relation to them, he was required to consider the merits of the MAG proof or, as the value of the debt had not been established in light of the issues in this proceeding, make a just estimate of its value. On the evidence before me, he did not do so.

To adopt the terminology of Black J in Free Wesleyan Church, the value of the debt owing to MAG could not be ascertained merely by reference to the MAG proof in light of all the issues raised in this proceeding. Substantial further enquiries were required to be made by Mr Glavas. On the evidence before me, he did not make such enquiries. This is contrast to Free WesleyanChurch where the Administrators received and tendered into evidence legal advice on the true value of the amount claimed.

Further, Mr Glavas’ failure to do so is troubling in light of the significant nature of the MAG debt in any vote of the second creditors’ meeting. I note there is no evidence that Mr Glavas received legal advice in relation to the true amount owing to MAG in light of the issues raised in this proceeding. After careful consideration, I have formed the view, based on the evidence before me, that Mr Glavas did not act independently and impartially when he failed to consider the merits of the MAG claim in light of the issues raised in my Reasons. I refer also to the difference between the way in he approached the challenged proofs and the way in which he approached the Mekkya proof and the Ibrahim proof, as set out above at [168]-[175] and [176]-[181] above.

On the evidence before me, it is difficult to determine the amount of the MAG debt in fact owing. Indeed, this is a question in the proceeding. There were no detailed submissions from either party based on the evidence about it. In oral submissions, counsel for the plaintiffs relied upon the matters set out at [6]-[11] of their submissions dated 23 July 2018 and [20]-[29] of the proposed further amended statement of claim.

In summary, those documents record that:

(1) the debt allegedly owed to Mekkya for $982,848.22 relates to an investment loan agreement which Mekkya asserts was executed by the directors of the Company. This is disputed by the plaintiffs. It was the subject of a default judgment which has been set aside. I note in passing this may relate to the Mekkya proof of debt of $1,560,000 which Mr Glavas accepted;[51]
[51]Affidavit of Harish Nair sworn 28 June 2018 (‘28 June Nair affidavit’) [5]; Plaintiffs’ Submissions for a Hearing on 7 August 2018 filed 23 July 2018 (’Plaintiffs’ 23 July submissions’) [9]; Proposed Further Amended Statement of Claim dated 3 August 2018 (‘PFASOC’) [27].

(2) the Builder debt is not enforceable and, in any event, the Company is entitled to liquidated damages and/or the damages for defective and incomplete work;[52]

(3) the New Concept Designs debt has not been articulated. In any event, the plaintiffs say the Company is entitled to damages for delay in undertaking these works and that there appears to be double dipping in respect of the other claims made relating to the Mekkya proof;[53]

(4) the plaintiffs contend that the Sacca debt relates to a loan agreement between Sacca and the plaintiffs and Wael El-Saafin as individuals, and not the Company.[54] I note that the MAG defendants contend that these rights may have been exchanged for rights against the Company in respect of four apartments in the North Melbourne development.

[52]28 June Nair affidavit [6]; Plaintiffs’ 23 July submissions [10]; PFASOC [28].

[53]28 June Nair affidavit [7]; Plaintiffs’ 23 July submissions [11]; PFASOC [29].

[54]28 June Nair affidavit [4]; Plaintiffs’ 23 July submissions [8]; PFASOC [26].

I was not referred to on this application any documents which might allow me to determine if each of the 20 June debts was a true liability of the Company. For example, I was not referred to any documentary evidence to support the debt allegedly owed to Mekkya for $982,848.22. On the assumption it is an investment loan agreement of the kind exhibited to Mr Nair’s affidavit, there is no evidence any such money was paid by Mekkya to the Company. The same is true in respect of the Sacca debt in so far as it is said to relate to a loan agreement between Sacca and the plaintiffs and Wael El-Saafin as individuals, and not the Company.

Notwithstanding my concerns expressed earlier in these reasons about the state of the evidence, I have been asked to determine this application on the evidence that has been filed. Given the serious breaches of obligation which I have identified in the process undertaken by Mr Glavas, his assessment of the value of the MAG debt cannot remain.

In my view, the MAG proof should be allowed, but only for a nominal amount. This is because there is no evidence before me relating to whether any of the 20 June debts were due and payable at the time they were paid out from the proceeds of sale of the North Melbourne property. In my view, this had to be established as a first step to give rise to the legal entitlement of MAG to pay the proceeds of sale of the North Melbourne property in satisfaction of the 20 June debts, rather than the undisputed secured debts (i.e. Balanced Securities loan and the Franek loan). The MAG parties and Mr Glavas did not provide any evidence on this issue in this application.

This is in circumstances where the sale price of the North Melbourne property ($4.5 million) would have discharged the amount of the Balanced Securities loan and the Franek loan, which the plaintiffs acknowledge, as set out above. As a result, I am not satisfied that the MAG debt in the amount claimed is due by the Company.

For completeness, I have also considered how the person presiding at the second creditors’ meeting should have considered this proof. In my view, as the amount of the MAG debt had not been established, the chairperson would need to be made a just estimate pursuant to s 75-85(4). Different persons could reach different conclusions as to what a just estimate is in the circumstances of this case.

However, consistent with the decision in Bacnet, given the range of outcomes in this proceeding and the absence of any evidence relating to whether any of the 20 June debts were due and payable at the time they were paid out from the proceeds of sale of the North Melbourne property, it was appropriate for the chairperson to give a nominal value of $1 to the MAG debt.

Consequence of conclusions

As a result of the conclusions I have reached:

(1) the Ibaida proof of debt should be, and should have been, admitted in the sum of $300,000 and the Hegazy proof of debt should be, and should have been, admitted in the sum of $353,000, not $250,000;

(2) each of the Mekkya proof of debt in the sum of $1,560,000 and the Ibrahim proof of debt in the sum of $306,001.37 should be, and should have been, rejected;

(3) the MAG proof of debt in the sum of $3,768,023.04 should be, and should have been, admitted for a nominal value.

As a result, it is necessary to consider how the creditors would have voted if these proofs of debt had been admitted in these amounts at the 12 November meeting. I do so on the basis that Dr Hegazy (who held the proxy for Mr Ibaida) would have voted the same way for all proxies he held.

I have concluded that in respect of the proposed resolution that the Company be wound up:

(1) 2 creditors (MAG and the ATO) whose proofs of debt to total $95,201 would have voted in favour of the resolution;

(2) 8 creditors whose proofs of debt total $2,794,000 would have voted against the resolution.

The result is that the creditors by number and by value would have voted against the winding up of the Company. Further, those same creditors would have voted to end the administration.

Relief to be granted

It is necessary to consider the relief to be granted. This is in circumstances where:

(1) the Company is now in liquidation; and

(2) the Company appears insolvent, as explained in Reasons No 2.

As to solvency, the defendants submitted that the Company was clearly insolvent. By contrast, the plaintiffs submitted that the Company was solvent because they had demonstrated in this application its ability to refinance.

I addressed in some detail the financial position of the Company and its purported ability to refinance in Reasons No 2. I concluded, in light of the evidence then before me, that:

(1) it appeared that the Company was insolvent but the extent of that insolvency was not clear; and

(2) to the extent the plaintiffs relied upon the purported offers from Black Arrow and El Baracka, the plaintiffs had not established, on the balance of probabilities, that they had any sufficient funds available to complete the development of the North Melbourne development.

At the initial hearing of this application, the plaintiffs relied upon:

(1) the BWG proposal for a $10 million loan; and

(2) a further $2 million loan from Dr Atalla which was originally offered in November 2018 and recently confirmed.

At the further hearing, rather than relying upon the BWG proposal, the plaintiffs relied upon a letter from NCF dated 12 February 2019. It was a letter of offer for a loan facility of $10m (of which $8,641,500 clear funds would be available at settlement) with the security required being a registered first mortgage over the North Melbourne property and a PPSR registered charge over the Company. The facility would also be guaranteed by all the directors of the Company. I am unsure how the Company could presently provide a registered first mortgage over the North Melbourne property as it is not currently the registered proprietor of that property; the ability to provide that security depends on the outcome of this proceeding.

These offers of finance must be considered in circumstances where the plaintiffs say that the indicative ‘budget’ for the completion of the North Melbourne development (which is exhibit HN-3 to the 14th Nair affidavit) provides that the $12 million would be applied as follows:

(1) in repayment of the MAG debt claimed, with a balance remaining of $6,880,000; and

(2) payment of the costs of completing the construction in the sum of $3.2 million, with a balance remaining of $1,912,000.

The plaintiffs submit the estimated value of sales from the completed North Melbourne development is in the order of $15,566,000, resulting in a net profit of $4,278,000. However, this was subject to challenge by the defendants at the hearing of a previous application.

I note that the expected costs to completion are said to be some $3.2 million. This is based upon the report prepared by Napier and Blake dated 28 March 2018.[55] That amount includes a builders’ margin of 25%. The first plaintiff is a registered builder and he currently intends to complete the construction of the North Melbourne development in the event that finance becomes available. He has deposed that he will not charge this builder’s margin.
[55]Part of Exhibit D2.

I remain concerned about the solvency of the Company. However, I consider that there has not been an independent analysis of the Company’s true liabilities and financial position to date. I do not consider that the Administrators undertook such an independent analysis.

In Reasons No 2, I expressed concerns about the appropriateness of the Administrators’ conduct in seeking to sell the Company’s claims against the MAG parties without undertaking an independent and appropriate analysis of the claims in fact made or their likely worth, in particular, with the assistance of independent lawyers.[56] I also expressed concerns that:

(1) the MAG parties had sought to secure a compliant administration, namely to install a regime pursuant to which it obtained the assignment of the company’s claims as an alternative to the rigours of those claims being pursued in Court or being independently examined by an external administrator with the assistance of independent lawyers; and

(2) the Administrators were participants in that process.[57]

[56]Reasons No 2 (n 1) [113].

[57]Reasons No 2 (n 1) [141].

At that time, I did not suggest that the Administrators acted with impropriety but was concerned about the perception that they may have. However, after careful consideration, I consider that based upon the evidence before me in this application Mr Glavas has breached the obligation to act independently and impartially imposed by the IPR as a result of the way in which he determined the challenged proofs at the 12 November meeting as set out in paragraph [191] above.

In all the circumstances, in light of my concerns that there has not been an independent analysis of the Company’s solvency, I consider that the current liquidator should provide a report to the Court, within a reasonable amount of time, regarding the solvency of the Company pursuant to s 90-15 of the Schedule or alternatively s 482(2) of the Act.

I note that during the course of argument, Counsel for the liquidator indicated that the liquidator wished to be heard in relation to any orders requiring a report from the liquidator and the time for the provision of such a report. Accordingly, I will list the matter for hearing to make orders in accordance with these reasons.

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El-Saafin v Franek (No 3) [2019] VSC 155

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[2019] VSC 155

15 March 2019