Re Sovereign MF Ltd (in liquidation)
[2014] VSC 681
•17 June 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2014 02853
| SOVEREIGN MF LTD ACN 104 694 555 (IN LIQUIDATION) | Plaintiff |
| v | |
| PAUL VARTELAS IN HIS CAPACITY AS ADMINISTRATOR OF 668 SECRETARIAT PTY LTD 130 794 704 (ADMINISTRATORS APPOINTED) & ORS | Defendants |
– AND –
S CI 2014 02855
| SOVEREIGN MF LTD ACN 104 694 555 (IN LIQUIDATION) | Plaintiff |
| v | |
| PAUL VARTELAS IN HIS CAPACITY AS ADMINISTRATOR OF EOS JANUS CAPITAL PTY LTD ACN 142 206 308 (ADMINISTRATORS APPOINTED) & ORS | Defendants |
EX TEMPORE
JUDGE: | ROBSON J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 17 June 2014 |
DATE OF RULING: | 17 June 2014 |
CASE MAY BE CITED AS: | Re Sovereign MF Ltd (in liquidation) |
MEDIUM NEUTRAL CITATION: | [2014] VSC 681 |
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INSOLVENCY – Administrator appointed – Creditor lodged proof of debt for a liquidated sum – Debt disputed by company in administration – Administrator held doubt whether proof of debt should be admitted or rejected – Administrator admitted proof for $1 – Held administrator was obliged under regulation 5.6.26 of the Corporations Regulations2001 (Cth) to mark the proof as objected to and allow the creditor to vote subject to the vote being declared invalid if the objection was sustained – Administrator was not entitled to exercise powers under regulation 5.6.23 to make an estimate of the value of the debt – Resolutions against removing the administrator set aside and administrators nominated by the creditor appointed – Young v Sherman [2001] NSWSC 1020 and Selim v McGrath [2003] NSWSC 927 considered – Orders made under section 1321 Corporations Act2001 (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Fary | Maddocks Lawyers |
| For the Defendants | Mr M Gronow | Irlicht & Broberg Lawyers |
HIS HONOUR:
I have before me two applications, both commenced by originating process, that seek similar relief and rely on the same evidentiary material.
In the first matter, No 2853 of 2014, the plaintiff is Sovereign MF Limited (in liquidation) (Sovereign) and the first defendant is Mr Paul Vartelas in his capacity as administrator of 668 Secretariat Pty Ltd (administrator appointed) (668), which is the second defendant.
In the second matter, No 2855 of 2014, Sovereign is also the plaintiff. The first defendant is again Mr Vartelas, but in his capacity as administrator of EOS Janus Capital Pty Ltd (administrator appointed) (EJC), and the second defendant is EJC.
The applications seek the same relief in respect of each of the two companies, 668 and EJC, save that the application in relation to EJC seeks a further declaration pursuant to s 600A of the Corporations Act 2001 (Cth) (Corporations Act). The applications are made under ss 1321, 600A (EJC only), 447A and 449B of the Corporations Act for orders relating to the administration of each of 668 and EJC.
On the facts stated in the supporting affidavits Sovereign claims declarations in respect of both applications that:
(a) the proofs of debt submitted by Sovereign on 2 June 2014, in respect of the administration of both 668 and EJC ought to have been admitted by Mr Vartelas in full for voting purposes; and
(b) no results ought to have been reached in accordance with reg 5.6.21(2) or reg 5.6.21(3) of the Corporations Regulations 2001 (Cth) (Regulations) in relation to the resolutions–
(i) for the removal of the Mr Vartelas as the administrator of each of 668 and EJC; and
(ii) the appointment of Paul Burness and Matthew Jess of Worrell Solvency and Forensic Accountants as the administrators to each of the second defendants.
(c) Mr Vartelas ought to have exercised his casting votes in accordance with reg 5.6.21(4) of the Regulations to vote in favour of the resolutions for both 668 and EJC.
Pursuant to s 1321 of the Corporations Act and reg 5.6.26(3) of the Regulations, Sovereign seeks orders that:
(a) Sovereign’s appeal of the decision of Mr Vartelas to admit the proof of debts for voting purposes with a value of $1 in respect of both companies be allowed;
(b) the court vary or modify the decision to admit the proofs of debt each with a value of $1, such that the proofs of debt be admitted in full; and
(c) that the court makes such orders that the court shall deem appropriate in relation to the decision to admit the proofs of debt each with a value of $1.
In respect of its application against EJC, Sovereign also seeks an order pursuant to s 600A of the Corporations Act that:
(a) the resolutions for the removal of Mr Vartelas as the administrator of EJC and for the appointment of Paul Burgess and Matthew Jess as the administrators of EJC be considered and voted on at a meeting of the creditors of EJC, convened and held on a date to be specified;
(b) the related creditors are not entitled to vote on the resolutions (referred to in (a) above) or a resolution to amend or vary the proposed resolutions; and
(c) the resolutions (referred to in (a) above) be deemed carried.
In respect of both applications, Sovereign claims, pursuant to s 447A(1), that Part 5.3 of the Corporations Act operates in relation to 668 and EJC as if the resolutions for the removal of Mr Vartelas and appointment of Paul Burgess and Matthew Jess as the administrators of each of 668 and EJC were passed and the alternative administrators (Paul Burgess and Matthew Jess) became the administrators of each of 668 and EJC on and from the date of the order of the court.
Sovereign claims orders, pursuant to s 449B(1) of the Corporations Act, that Mr Vartelas be removed from office as the administrator of each of 668 and EJC.
And that, pursuant to s 449B(2), the alternative administrators be appointed as administrators of each of 668 and EJC.
Finally, Sovereign claims that the defendants pay Sovereign’s costs of and incidental to both originating motions and such further offers as the court deems appropriate, including without limitation, under s 447A of the Corporations Act.
Mr Newman
Both proceedings rely upon the affidavit of Mr David Charles Newman, sworn 10 June 2014. Mr Newman deposed that he is a partner in the firm Maddocks and is authorised to make his affidavit on behalf of Sovereign and he makes it in support of both the applications.
Mr Newman deposes the following background facts.
That on 19 April 2013 John Ross Lindholm and James Reynor Shady were appointed as joint and several administrators of Sovereign, pursuant to s 436A of the Corporations Act.
Subsequently, by a resolution made at the second creditors’ meeting of Sovereign convened pursuant to s 439A of the Corporations Act on 24 May 2014, Messrs Lindholm and Shady were appointed as joint and several liquidators of Sovereign. Mr Shady resigned as liquidator of Sovereign on 6 August 2013.
Mr Newman says that prior to the appointment of the liquidator as administrator of Sovereign, Sovereign was the responsible entity for two registered managed investment schemes, being the Sovereign Aged Care Property Fund, and the Sovereign Tarneit Land Fund.
Mr Newman deposed that there are six related entities of Sovereign, being EJC, 668, Krema Pty Ltd (in liquidation) (Krema), EOS Janus Holdings Pty Ltd (EJH), EOS Janus Equity Fund No 1 Pty Ltd (EJE), and Landlaw Pty Ltd (Landlaw).
Mr Newman says that the directors of Sovereign have at various times been Mr Charles Wantrup during the period 8 June 2012 to 26 April 2013, Mr Michael Kalidonis from 16 March 2010 to now, Mr Nickolas Giorgio from 16 March 2010 to now, and Mr Aldo De Luca during the period 16 March 2010 to 8 June 2012.
Mr Newman deposed that aside from Krema, of which Mr Kalidonis, Mr Giorgio and Mr Wantrup are each former directors, the related entities each share common directors and common shareholders and he sets out the following table to that effect.
Related Party Directors Shareholders Holdings (%) Sovereign Michael Kalidonis
Nickolas GiorgioEJC 100 668 Michael Kalidonis
Nickolas Giorgio
EJC 100 EJC Michael Kalidonis
Nickolas Giorgio
Landlaw
Michael Kalidonis50
50EJE Michael Kalidonis
Nickolas Giorgio
Charles Wantrup
EJC
Landlaw
Michael Kalidonis
Nickolas Giorgio13
12
26
31
18EJH Michael Kalidonis
Nickolas Giorgio
EJC
Landlaw
Michael Kalidonis
Nickolas Giorgio21
37
37
5Krema Peter Anastasopoulos EJC 100 Landlaw Nickolas Giorgio Nickolas Giorgio 100
Mr Newman says that on 15 May 2013, Sovereign served creditor statutory demands for payment of debt for amounts owed to Sovereign, as recorded in its books and records, on:
(a) 668 in the amount of $162,405.48;
(b) Krema in the amount of $169,056.09; and
(c) EJC in the amount of $6,243,964.47.
Those amounts were recorded in the balance sheet generated from Sovereign’s operating system as at 19 April 2013, being the date of the appointment of Messrs Lindholm and Shady as administrators of Sovereign.
Mr Newman says that the amounts demanded from EJC, 668 and Krema were also referred to in the accounts attached to the report as to affairs that was completed by Nickolas Giorgio and Michael Kalidonis, the directors of Sovereign on 30 April 2013, and the audit accounts.
Mr Newman deposed that each of EJC, Krema and 668 applied to set aside the statutory demands in proceeding Nos 02897 of 2013 (EJC proceeding); 02898 of 2013 (Krema proceeding); and 02899 of 2013 (688 proceeding). Mr Newman details certain affidavits sworn in each proceeding in support of the applications to set aside the statutory demands.
The statutory demand proceedings were heard before Efthim AsJ on 26 August 2013. On 20 December 2013, his Honour handed down his reasons for judgment. Mr Newman deposed that ultimately Efthim AsJ set aside the statutory demand served on each of EJC, Krema and 668.
Mr Newman quotes from the judgment of Efthim AsJ as follows:[1]
The concern that I have with this application is that there are three people on oath making positive statement that there was no loan. It was put that if the liquidator, Mr Lindholm, had the full documentary evidence and met with directors of the plaintiffs he would not have served statutory demands because there were no loans.
It concerns me that there were no loans. It concerns me that there are audited accounts demonstrating a loan and that the RATA, which is return as to affairs, had accounts attached to it with a loan being referred to. There is dispute as to whether there is a loan. The reconciled accounts demonstrate no such loan exists but there are reasons for not accepting those accounts.
The standard required in Eota v Hanave and the other cases is not an onerous standard. The plaintiff’s case is not strong however the grounds for alleging dispute appear not to be spurious or misconceived.
[1]EOS Janus Capital Pty Ltd, Krema Pty Ltd and 668 Secretariat Pty Ltd v Sovereign MF Ltd, Unreported, S CI 2013 2897, S CI 2013 2898, S CI 2013 2899, 20 December 2013 (Efthim AsJ) [53]; citations omitted.
Mr Newman states that on 7 April 2014, Efthim AsJ made orders in the 668 and EJC proceedings to the effect that, inter alia:
(a) Sovereign’s creditor statutory demand for payment of the debt dated 15 May 2013, be set aside; and
(b) Sovereign pay EJC and 668’s costs of the proceedings, including reserved costs.
Mr Newman says that orders were not made in the Krema proceeding, as on 9 July 2013, Kylie Wright and Peter Robert Bens were appointed as liquidators of Krema. He says this fact was not disclosed to the liquidator or the court prior to the hearing before Efthim AsJ.
Mr Newman deposes that Sovereign made applications for leave to appeal the decisions of Efthim AsJ by summonses filed with the Court of Appeal on 21 April 2014, supported by affidavits sworn by him. Mr Newman says that the appeal proceedings were listed for hearing at 9.30 am on 23 May 2013.
Mr Newman says that on the day prior to the hearing of the appeal proceedings, that is 22 May 2014, at approximately 4.38 pm, Maddocks received a letter sent by facsimile from Paul Vartelas of B K Taylor & Co stating that he had been appointed administrator of each of EJC and 668 pursuant to s 436A of the Corporations Act on that day.
The letter enclosed copies of the notices of his appointment as administrator of EJC and 668 respectively. Mr Newman says that the 22 May 2014 letter also stated, pursuant to s 440D of the Corporations Act, that the appeal proceedings were stayed against EJC and 668, except with the consent of the administrator or the court, and that the administrator was not in a position to consent to the continuation of the appeal proceedings.
Mr Newman says that on 23 May 2014, he attended the hearing of the appeal proceedings before Almond and Ashley JJ. The administrator also attended the hearings and was represented by Mr Robin Broberg of Irlicht & Broberg, who requested an adjournment of the appeal proceeding for 28 days to allow the administrator sufficient time to undertake his investigation into the affairs of EJC and 668.
Mr Newman says the Court of Appeal ordered that:
(a) Sovereign’s summonses be adjourned for a hearing on 19 June 2014;
(b) if there is a dispute as to costs, the parties file and serve a short outline of submissions; and
(c) Sovereign’s costs be reserved.
Mr Newman says that by an email dated 27 May 2014, Mr John Thompson of the administrator’s office sent him a copy of the circular to creditors with the notice of the first creditors’ meeting in respect to EJC and 668.
Mr Newman deposed that on Monday 2 June 2014, a meeting was held between the administrator, Mr Thompson, the liquidator, and Mr Newman, at which meeting the liquidator and Mr Newman provided a background to the creditors’ statutory demands served by Sovereign on EJC and 668 and relevant documents.
Mr Newman told the administrator that Sovereign intended to lodge proofs of debt for voting purposes, in the amounts sought in the statutory demands. In response, the administrator said that the proofs of debt lodged on behalf of Sovereign against each of EJC and 668 would be admitted in the amount of $1 respectively for the purposes of voting at the first creditors’ meetings to be held for EJC and 668. Mr Newman said to the administrator that he did not consider that this was a course available to him.
Mr Newman says that at approximately 6.41 pm on 2 June 2014, the liquidator’s office sent an email to the administrator with proofs of debt for EJC and 668 Secretariat, together with forms appointing himself as the proxy for Sovereign at the first creditors’ meetings.
Mr Newman says that at approximately 6.44 pm on 2 June 2014, he sent an email to Mr Thompson at B K Taylor & Co in relation to his foreshadowed decision and the application of regs 5.6.23 and 5.6.26 of the Regulations. The email refers to the conference of the same date and goes on:
You have foreshadowed admitting the proof of debt lodged on behalf of Sovereign with a value of $1. For the reasons set out below this is misconceived and does not properly apply the relevant provisions of the Corporations Regulations 2001.
Mr Newman says reg 5.6.23(1) of the Regulations provides that a person is not entitled to vote as a creditor at a meeting of creditors unless, relevantly, his or her debt or claim has been admitted wholly or in part by the administrator. Cases suggest that the lodgement of a formal proof of debt or claim under reg 5.6.23(1)(b) is the essential first step which secures the creditors’ voting entitlement, subject to that voting entitlement being negated by rejection by the chairperson under reg 5.6.26(1).
Regulation 5.6.26(1) provides that the chairperson of a meeting has the power to admit or reject a proof of debt for the purpose of voting. Mr Newman says that the power conferred on the chairperson by reg 5.6.26(1) is only the power to admit or reject, and that the concept of admitting a proof of debt ‘wholly or in part’ is irrelevant.
Mr Newman refers to the following explanation in Selim v McGrath:[2]
The power conferred on the chairperson by regulation 5.6.26(1) is merely a power to admit or reject. As I have already said, the concept of admission ‘wholly or in part’ expressly recognised in regulation 5.6.23(1)(a) has no part to play under regulation 5.6.26(1): it is all or nothing. If the chairperson entertains the kind of doubt referred to in regulation 5.6.26(2), the proof must be admitted, but on the marked basis. At the level of the chairperson’s decision making, therefore, the result must always be admission or rejection, although admission may be accompanied by an expression of doubt resulting in adoption of regulation 5.6.26(2) marking procedure. No process of evaluation by the chairperson is envisaged beyond a decision whether or not the debt or claim exists, that being the only factor relevant to the alternatives of admission and rejection to which regulation 5.6.26 is confined. If the chairperson’s decision is that the debt or claim does not exist, rejection follows and the voting entitlement that would otherwise have arisen under regulation 5.6.23(1)(b) by virtue of the lodgment is denied. In every other case, admission follows, with cases of doubt being dealt with in accordance with regulation 5.6.26(2).
[2][2003] NSWSC 927 [96] (‘Selim’).
Mr Newman goes on in his letter:
Pursuant to regulation 5.6.23(2) a creditor must not vote in respect of (1) an unliquidated debt; or (2) a contingent debt; or (3) an unliquidated or a contingent claim; or (4) a debt the value of which is not established unless a just estimate of its value has been made.
Mr Newman says the existence of a dispute does not of itself make a debt contingent. Where there is a disputed debt there are three possible approaches, which he quotes from Young v Sherman:[3]
First, the existence of a genuine, unresolved dispute about a debt of which the creditor has given particulars will frequently provide reasonable grounds for doubt as to whether the creditors claim should be admitted or rejected. Where that is so, the proper approach for the chairman will normally be to mark the proof as objected to and allow the creditor to vote, under reg 5.6.26(2). Second, where the chairman receives a claim that has not been adequately particularised, and believes that the claim (whatever precisely it may be) is disputed, the correct approach may be to reject the claim for voting purpose on the ground of lack of particulars. Finally, it may happen, though probably much less frequently, that the chairman recognises the existence of a genuine dispute but decides on reasonable grounds that he or she is in a position to form a view as to the merits of the dispute, in which case the proper approach may be to admit the proof of the amount (if any) which the chairman believes is the correct amount.
[3][2001] NSWSC 1020 [94] (‘Young’).
Mr Newman says that if the debt or claim is for an unliquidated amount, or 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. Regulation 5.6.26(3) provides for a decision by the chairman to admit or reject a proof of debt or claim for the purpose of voting may be appealed again to the court within 10 business days of the decision.
Mr Newman says:
A proof of debt has been lodged on behalf of Sovereign. The debt particularised in the proof of debt is derived from records obtained by Sovereign’s liquidators and confirmed in its audit accounts. We submit that you are bound by Regulation 5.6.26(1) to either admit or reject the proof of debt. As stated in Selim any concept of admitting a proof of debt wholly or in part has no part to play. If you have some doubt about the debt claimed in the proof of debt it must be admitted and marked as objected as contemplated by Regulation 5.6.26(2).
We also submit that there is no scope for you to make an estimate of the debt as Regulation 5.6.23(2) has no application. (1) The debt particularised in the proof of debt is not for an unliquidated or contingent amount. (2) The value of the debt is established by records obtained by Sovereign’s liquidators and confirmed in its audit accounts.
Mr Newman says that the debt was the subject of a credit statutory demand that was set aside by this Court, and that decision was the subject of an appeal, the hearing of which was stayed by the appointment of the administrator.
Mr Newman says that the statutory demand being set aside at first instance does not mean that the value of the debt has not been established. Rather, as Efthim AsJ acknowledged:[4]
It is not for me to enter into the merits of the dispute before the parties with only to ascertain if there was a genuine dispute.[5]
The standard to demonstrate [a genuine dispute] is not onerous.[6]
The grounds for alleging a dispute or an offsetting claim must not be spurious, hypothetical, illusory or misconceived.[7]
[4]Unreported S CI 2013 2897, S CI 2013 2898, S CI 2013 2899, 20 December 2013, EOS Janus Capital Pty Ltd, Krema Pty Ltd and 668 Secretariat Pty Ltd v Sovereign MF Ltd (Efthim AsJ).
[5][49] Citing TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd, (2008) 66 ACSR 67 [56], [71] (Dodds-Streeton J).
[6][50] Citing Powerhouse Australasia Pty Ltd v Viarc [2006] VSC 508, [41]–[42] (Dodds-Streeton J) in reference to Eyota v Hanave (1994) 12 ACSR 785 (McLelland J).
[7][51] citing Eyota v Hanave, (1994) 12 ACSR 785, 787 (McLelland J).
Mr Newman goes on:
No findings were made as to the merits of Sovereign’s claim as asserted in the proof of debt. We respectfully submit that you are not in ‘a position to form a view as to the merits of the dispute’, acting reasonably, and the only course open to you is to admit the proof of debt (marking it as “objected” as contemplated by Regulation 5.6.26(2) if you consider that there is some doubt or reject it.
The liquidator reserves Sovereign’s right pursuant to Regulation 5.6.26(3) of the regulations in the event that you proceed as foreshadowed and admit the proof of debt for the value of $1. We respectfully suggest you seek further legal advice in relation to these issues.
Mr Newman says that his firm received no response from the administrator to the correspondence prior to the creditors’ meetings. Mr Newman says that he attended the meeting for EJC at the administrator’s offices as a proxy for Sovereign on 3 June 2014, together with a lawyer from Maddocks, Vessa Procasi.
Mr Newman says that at the outset, the administrator stated the purpose of the meeting was to vote on the following two resolutions:
(1)whether a committee of creditors be appointed; and
(2)whether the administrator is to be replaced.
The administrator declared his independence and stated that he had never acted for EJC previously; and that he had only met Mr Giorgio an hour prior to his appointment as administrator of EJC.
The administrator discussed EJC as a company, stating in part:
(1)EJC acted as a treasury company. The reason for this was subsequently explained by the administrator to be that the secured creditors of Sovereign were worried about the winding up application that was made against Sovereign and therefore they requested EJC be set up as treasury so that money went to EJC rather than Sovereign’s account.
(2)The role of EJC was to receive funds from Sovereign in respect of various developments of which Sovereign was responsible for. The administrator referred to the statutory demand proceedings commenced by EJC against Sovereign to set aside the statutory demand, and noted that the court had set aside the demand which was currently subject to appeal proceedings. The administrator provided that the reason for his appointment as administrator to EJC the day prior to the appeal proceeding was to:
(i) give EJC breathing space; and
(ii) to ensure that no further legal costs were incurred.
Mr Newman asked the administrator which creditors of EJC were admitted for the purpose of voting and in what amounts. The administrator responded the following creditors of EJC were admitted:
(a) Mr Famularo in the amount of $250,000;
(b) Mr Giorgio in the amount of $290,000;
(c) Mr Wantrup (a solicitor who has previously acted on behalf of Sovereign and related entities and is also a shareholder of EJE) in the amount of $28,000;
(d) EJH in the amount of $55,000;
(e) Mr Kalidonis in the amount of $250,000; and
(f) Sovereign’s proof of debt for approximately $4 million would only be admitted for $1.
The administrator did not explain the basis for these creditors’ claims, or why he had admitted them.
Mr Newman says that the administrator acknowledged that he had received the 2 June 2014 letter from Mr Newman. The administrator said that he had discussed the contents of the letter with his solicitor numerous times on 2 June and again on 3 June 2014, prior to the creditors’ meeting. The administrator said that in accordance with advice provided to him by his solicitors, his decision was to admit Sovereign’s claim in the amount of $1 for the purpose of voting. The administrator said there was ‘a great deal of dispute for the claim.’
Mr Newman said that the options available to the administrator in those circumstances were either to reject or accept the claim. The administrator said that because:
(a) no information had been provided to the administrator in respect of Sovereign’s claim against EJC; and
(b) there is a dispute as to the claim,
Sovereign’s claim would be admitted for $1.
Mr Newman said he asked the administrator whether he had any funding to undertake the administration of EJC. The administrator stated that he had no funding up front. Mr Newman says that he asked the administrator a question to the effect of, ‘How will you meet your obligations and investigate the affidavit of EJC?’, to which the administrator responded, ‘That is a risk I have to take.’
Mr Newman says he informed the administrator that Sovereign had obtained the consent from new administrators to be appointed to EJC and 668 and that the proposed new administrators would receive funding from Sovereign to undertake investigation of the affairs of EJC and 668. Mr Newman says he then asked the administrator whether he thought that in those circumstances, it was appropriate for him to remain as administrator if he had no funding. Mr Newman says he does not consider that the administrator provided a direct response to this question.
Mr Newman says that after some discussion the resolution to remove the administrator was put forward to the creditors on behalf of Sovereign, and he moved the resolution to appoint a new administrator to EJC.
Mr Newman says that the administrator called a vote on the resolution. Mr Newman voted in favour of the resolution and all the other creditors in attendance voted against the resolution. The administrator declared the resolution failed, as the majority of creditors in value voted against the resolution. The creditors’ meeting concluded at approximately 11.20 am.
The first creditors’ meeting of 668 was held in the administrator’s office and it commenced at approximately 12.00 pm on 3 June 2014.
In attendance were the administrator, Mr Thompson and a member of his staff, Mr Giorgio, Mr Newman and Vessa Procasi of Maddocks and Mr Famularo. The administrator set out the purpose of the meeting and declared his independence. Mr Newman says the administrator then went on to discuss 668, stating in part that 668–
(a) was set up to provide secretarial duties to Sovereign;
(b) was non-existent without Sovereign; and
(c) it received funds from EJC.
Mr Newman says he asked the administrator to list the creditors of 668 that had been admitted for the purposes of voting and in what amounts. The administrator answered as follows:
(a) Ms Carol Mason in the amount of $72,000;
(b) Ms Joanita R Fernando in the amount of $57,000; and
(c) Sovereign would only be admitted for $1.
The administrator again stated that he was not provided with the information as to the quantum of Sovereign’s claim and that he needed an opportunity to investigate the claim.
Mr Newman says that the administrator did not explain the basis for the other creditors’ claims, or why he had admitted them.
Mr Newman says that he was informed by the liquidator and believes that Ms Mason is an employee of 668 and Sovereign, and Ms Fernando is an accountant previously employed by EJC, 668 and Krema, and who swore an affidavit in the statutory demand proceedings.
Mr Newman says that the administrator put forward the resolution for the removal of the administrator and that he moved and voted in favour of the resolution. Mr Newman says that the other creditors voted against the resolution. The administrator declared the resolution failed. Mr Newman says that the creditors also voted against the resolution to appoint a committee of creditors. The meeting concluded at 12.14 pm.
Mr Newman says that Sovereign obtained consents to act from Messrs Paul Burness and Matthew Jess of Worrells Solvency and Forensic Accountants to act as administrators of EJC and 668. In the declaration of independence contained in the consents to act, Paul Burness and Matthew Jess confirmed that Sovereign offered indemnities ($10,000 in relation to the administration of 668 and $20,000 in relation to ECJ) to cover their initial costs and remuneration associated with the appointment of administrators.
Mr Newman says that this funding was from funds that would otherwise be available to the secured creditors of Sovereign. Mr Newman says that he was informed by the liquidator of Sovereign and believes that these secured creditors of Sovereign will not consent to providing any funds to the administrator (Mr Vartelas).
Mr Newman says that the directors of Sovereign have failed to cooperate with the liquidator and have obstructed his attempts to investigate the affairs of Sovereign.
Mr Newman says that by application made on 6 May 2013 in this Court, in proceeding No 266 of 2013, the liquidator obtained orders pursuant to s 1324(4) of the Corporations Act requiring Messrs Kalidonis, Giorgio and Wantrup to inter alia, provide the liquidators with:
(a) copies of all emails in their possession or power that relate to Sovereign;
(b) access to all computers, hard drives, servers and electronic storage devices in their possession so that the hard drive or hard drives of each of them could be digitally imaged by the external computer technician; and
(c) reasonable access of the premises to:
(iii) the external computer technicians; and
(iv)a representative or representatives to Sovereign or in an alternative its solicitor.
Mr Newman says that following the refusal of Mr Kalidonis, Mr Giorgio and Mr Wantrup to comply with the first orders, he returned to court later that day, at which time Sifris J confirmed the first orders, and images of the hard drives located at the premises were subsequently taken by the liquidator’s staff.
Mr Newman says that by application made on 10 May 2013, in these proceedings, the liquidator obtained orders permitting the liquidator to access the digital images, created in accordance with the first orders, for the sole purpose of copying all emails.
Mr Newman said that the directors attempted to frustrate the liquidator’s attempt to realise assets of Sovereign. In particular, EJH has lodged four caveats over various lots of land held for the purpose of the Sovereign Tarneit Land Fund.
Mr Newman says that on 9 July 2013, Elliott J delivered a judgment in proceeding No 3450 of 2013. This judgment related to the first caveat lodged by EJH. He says that his Honour found that there was no proper basis for the caveat to have been lodged and stated:[8]
In summary, there was simply no merit in the conduct of EOS in lodging the Caveat (or for that matter the Previous Caveat). In those circumstances, Sovereign should not be out of pocket (nor should its creditors, given that the company is in liquidation). Accordingly, I order the costs of and incidental to the proceeding, including the reserved costs ordered on 5 July 2013, be paid on an indemnity basis.
[8]Sovereign MF Ltd (in liq) v EOS Janus Holdings Pty Ltd [2013] VSC 347, [21] (footnotes omitted).
Mr Newman says that, on 17 July 2013, EJH lodged yet another caveat. That day, Sifris J made orders that, inter alia, the Registrar of Titles remove the third caveat from the lots affected by it and EJH pay costs of and incidental to Sovereign’s application for its removal.
On 29 July 2013, a further caveat was lodged by EJH over 28 lots in the Tarneit development. On 15 October 2013, Elliott J made orders that inter alia, EJH be restrained from lodging any further caveats in similar terms. He ordered costs against EJH.
Mr Newman says that the secured creditors of Sovereign are concerned that the directors of EJC and 668, being the same directors of Sovereign, will be similarly uncooperative with the administrator in circumstances where the administrator has no funding. Mr Newman says the proper conduct of the administration is likely to be hindered.
Mr Newman says that the secured creditors of Sovereign wish to have the administrator replaced as:
(a) the administrator was appointed by directors of EJC and 668;
(b) their preference, as the majority creditors of EJC and 668, is for the alternative administrators to be appointed;
(c) they have concerns about the proper conduct in the administration as the administrator has no funding, particularly as the directors have been uncooperative in the liquidation of Sovereign;
(d) they have concerns about the purpose behind the administrator’s appointment immediately prior to the hearing of the appeal, particularly in view of the administrator’s comments at the creditors’ meeting;
(e) they have no confidence in the administrator’s ability to conduct the administration in view of his decision in relation to Sovereign’s proof of debt, and in the face of their letter of 2 June 2014; and
(f) they would prefer the alternative administrator by reason of the matters recorded in Re S&D International Pty Ltd,[9] a decision which discusses the failure of Mr Vartelas as the agent for the mortgagee in possession and the receiver and manager of the subject company, to faithfully and properly carry out his duties.
[9][2009] VSC 225.
The liquidator considers that it is in the interest of creditors of EJC and 668 for the alternative administrators to be appointed to allow for the best possible conduct of the administration.
Mr Vartelas
Mr Vartelas, in opposition to the application, has sworn two supporting affidavits dated 12 June 2014 and 13 June 2014.
Mr Vartelas, in his affidavit of 12 June 2014, says:[10]
Following my appointment as administrator and prior to the first meeting of creditors on 3 June 2014 I assessed the material and information in my possession in order to ascertain whether I could reasonably make a decision by the time of the first meeting on whether to admit the proofs of debt lodged with me by Sovereign for the purpose of voting at the first meeting of creditors in respect of [EJC] and the related entity [668].
[10][3].
For the purpose of assessing Sovereign’s claim as a creditor for voting purposes, Mr Vartelas said he considered the following:
(a) the reasons for decision of Efthim AsJ, handed down on 20 December 2013, setting aside the statutory demands served by Sovereign on EJC and 668;
(b) the extent of the affidavit material that was before Efthim AsJ; and
(c) the extent of any other documentation information provided to Mr Vartelas by the directors following his appointment as administrator.
Mr Vartelas says that in the short time available to him before the first meeting of creditors he came to the following conclusion in relation to Sovereign’s claim for voting purposes:
(a) Sovereign would ultimately be shown to have a claim for some amount as a creditor of EJC and 668. In making this assessment he took into consideration inter alia:
(v) that any amounts paid by Sovereign to EJC, to the extent that they were paid out by EJC in accordance with the purpose of which they were given, might not be moneys repayable as loans to Sovereign; and
(vi)EJC and 668 might have offsetting claims for expenses incurred, which matters were referred to Efthim AsJ, particularly in paragraphs 38 and 39 of his judgment on 20 December 2013, which are as follows:[11]
[11]Unreported S CI 2013 2897, S CI 2013 2898, S CI 2013 2899, 20 December 2013, EOS Janus Capital Pty Ltd, Krema Pty Ltd and 668 Secretariat Pty Ltd v Sovereign MF Ltd (Efthim AsJ).
Mr Giorgio has deposed that “With the appointment of the Administrators, expenses which had previously been attributed to EJC with the intention of being offset by ‘success fees’ on the successful completion of the project be concluded by STLF, had to be applied to the relevant costs centre as these success fees were not going to be recouped … It was our intention, when we commenced management of the management investment schemes, not to charge directors’ wages – management fees based on a percentage of funds under management but, rather, a ‘success fee’ at the completion of the project (hence the original application of this to EJC). Accordingly, directors’ wages and collection fees were not being applied against the notional loan account balances of the previous three years, with the expectation of a ‘success fee’ to recoup these expenses at the end of the development.”
Secondly, the defendant submits that it is an elementary principle of insolvency law that rights existing prior to liquidation will be recognised. The plaintiff’s evidence is that a success fee model was adopted and the costs of expenses incurred in managing the defendant and the schemes were to be recouped from that fee. It is said that the plaintiffs cannot now submit the opportunity to pay any success fee having disappeared, can apply those fees and costs against the loans. Such an approach is inconsistent with the manner in which the defendant’s affairs were conducted for several years and with the manner in which its financial records have been prepared. If permitted, the reconciliation is said to be fraud on the insolvency laws and confer preferences on each of the plaintiffs.
(b) Mr Vartelas said that he was not able to determine the quantum of those claims and was therefore not in a position to accept the full amount of the claims as submitted by Sovereign on its proof of debts.
As noted above, Mr Vartelas says that he was mindful of the decision of Efthim AsJ setting aside the statutory demands of Sovereign on the basis there was a genuine dispute about the debts, and ‘considered that [he] needed to conduct [his] own investigations in relation to Sovereign’s claim before [he] could properly make a decision on the amount of Sovereign’s claims that should be admitted for voting purposes.’[12]
[12][5(c)&(d)].
Mr Vartelas deposed that he considered he would need another 14 days to properly assess the material in regard to Sovereign’s claims. Mr Vartelas says he anticipated that this would involve collection from previous legal representatives of EJC and 668 of an estimated 20 to 30 boxes of sourced documents, which he would need to inspect and assess as part of his investigations.[13]
[13][6].
Mr Vartelas says, ‘I am mindful that my report to creditors would in the normal course be required to be given by 19 June 2014, and the second meeting of creditors convened on or before 26 June 2014,’ and that ‘in view of the extent of the investigation required by me I do not consider that I will be in a position to report to creditors by 19 June 2014, and will need an extension of that time and the time for the second meeting.’[14]
[14][7].
Mr Vartelas deposed that, by reason of the above matters, and his conclusion that Sovereign appeared to be a creditor for some amount, but given that in the time available he was not able to ascertain what that amount would be, in order to allow them to vote at the meetings, he admitted Sovereign as a creditor for $1, for the purpose of voting at each of the first meetings of creditors.
In his affidavit of 13 June 2014, Mr Vartelas details work he has carried out to date in ascertaining Sovereign’s claim as a creditor, and sets out his expenses for undertaking such work. Mr Vartelas further states that he considers it unlikely that he will have resolved the matter by the time of the second creditors’ meetings.
Sovereign’s claimed debts
Mr Fary of counsel, who appeared for Sovereign, took me briefly to the books and accounts of EJC, which prima facie show the existence of the debts. He took me to the statement of affairs which was lodged in this case by the directors of Sovereign,[15] which indicates that the statement of affairs dated 30 April 2013 was signed and which Mr Fary suggested were the signatures of Mr Giorgio and Mr Kalidonis.
[15]Exhibit DN1, at pages 576–619.
The assets and liabilities by the directors were said to be seen in the attached documents.[16] The attached documents include a balance sheet dated 31 March 2013,[17] which shows that as an asset of Sovereign, a current loan to EJC of $4,243,964.47 (being the amount of the statutory demand). It also shows under other current liabilities a negative liability, meaning it is an asset, of $162,405.48 owed by 668.
[16]At page 577.
[17]At page 615.
Mr Fary also took me to the audit of the accounts for the previous financial year ended 30 June 2012.[18] They were audited by Mr Neil Turner, chartered accountant. The audit of accounts show amounts received from related parties.[19] Those amounts are not broken down in the audited accounts. Also exhibited was a balance sheet which gives more detail as at 30 June 2012,[20] which shows the loan to 668 of a lesser sum, being some nine months earlier than the date it went into liquidation, of $27,808.86. It also shows EJC owing $3,344,608.39.
[18]Exhibit JRL23, at pages 624–652.
[19]At page 644.
[20]At page 654.
There is a directors’ declaration[21] relating to the audited accounts signed by Mr Kalidonis. The directors were Messrs Giorgio, Kalidonis and Wantrup.[22]
[21]At page 648.
[22]At page 625.
The notes to the financial accounts,[23] however, have the amounts owed by related parties at $3,909,288.
[23]At page 644.
In summary, the exhibited accounts demonstrate that as at 30 June 2012, the audited accounts showed that 668 owed Sovereign $27,808.86 and EJC owed $3,344,608.39. As at the date of liquidation, or of the statement of affairs dated 31 March 2013,[24] 688 then owed Sovereign $162,405.48 and EJC owed Sovereign $4,243,964.47.
[24]At page 615.
Relevant principles
It is necessary now to turn to the relevant provisions of the Corporations Act, which I set out below:
Section 447A General power to make orders
(1)The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2)For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
(3)An order may be made subject to conditions.
(4)An order may be made on the application of:
(a) the company; or
(b) a creditor of the company; or
(c)in the case of a company under administration—the administrator of the company; or
(d)in the case of a company that has executed a deed of company arrangement—the deed’s administrator; or
(e) ASIC; or
(f) any other interested person.
Section 449B Court may remove administrator
On the application of ASIC or of a creditor, liquidator or provisional liquidator of the company concerned, the Court may:
(a)remove from office the administrator of a company under administration or of a deed of company arrangement; and
(b)appoint someone else as administrator of the company or deed.
Section 600A Powers of Court where outcome of voting at creditors’ meeting determined by related entity
(1)Subsection (2) applies where, on the application of a creditor of a company or Part 5.1 body, the Court is satisfied:
(a)that a proposed resolution has been voted on at:
(i)in the case of a company—a meeting of creditors of the company held:
(A)under Part 5.3A or a deed of company arrangement executed by the company; or
(B)in connection with winding up the company; or
(ii)in the case of a Part 5.1 body—a meeting of creditors, or of a class of creditors, of the body held under Part 5.1; and
(b)that, if the vote or votes that a particular related creditor, or particular related creditors, of the company or body cast on the proposed resolution had been disregarded for the purposes of determining whether or not the proposed resolution was passed, the proposed resolution:
(i)if it was in fact passed—would not have been passed; or
(ii)if in fact it was not passed—would have been passed;
or the question would have had to be decided on a casting vote; and
(c)that the passing of the proposed resolution, or the failure to pass it, as the case requires:
(i)is contrary to the interests of the creditors as a whole or of that class of creditors as a whole, as the case may be; or
(ii)has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution, or for it, as the case may be, to an extent that is unreasonable having regard to:
(A)the benefits resulting to the related creditor, or to some or all of the related creditors, from the resolution, or from the failure to pass the proposed resolution, as the case may be; and
(B)the nature of the relationship between the related creditor and the company or body, or of the respective relationships between the related creditors and the company or body; and
(C)any other relevant matter.
(2)The Court may make one or more of the following:
(a)if the proposed resolution was passed—an order setting aside the resolution;
(b)an order that the proposed resolution be considered and voted on at a meeting of the creditors of the company or body, or of that class of creditors, as the case may be, convened and held as specified in the order;
(c)an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on:
(i)the proposed resolution; or
(ii)a resolution to amend or vary the proposed resolution;
(d)such other orders as the Court thinks necessary.
(3)In this section:
related creditor, in relation to a company or Part 5.1 body, in relation to a vote, means a person who, when the vote was cast, was a related entity, and a creditor, of the company or body.
Section 1321 Appeals from decisions of receivers, liquidators etc.
(1) A person aggrieved by any act, omission or decision of:
(a)a person administering a compromise, arrangement or scheme referred to in Part 5.1; or
(b)a receiver, or a receiver and manager, of property of a corporation; or
(c)an administrator of a company; or
(ca)an administrator of a deed of company arrangement executed by a company; or
(d)a liquidator or provisional liquidator 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 give such directions as it thinks fit.
Regulation 5.6.23 Creditors who may vote
(1)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 liquidator or administrator of a company under administration or of a deed of company arrangement; or
(b)he or she has lodged, with the chairperson of the meeting or with 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 the debt or claim.
(2)A creditor must not vote in respect of:
(a)an unliquidated debt; or
(b)a contingent debt; or
(c)an unliquidated or a contingent claim; or
(d)a debt the value of which is not established;
unless a just estimate of its value has been made.
Regulation 5.6.26 Admission and rejection of proofs for purposes of voting
(1)The chairperson of a meeting has power to admit or reject a proof of debt or claim for the purposes of voting.
(2)If the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.
(3)A decision by the chairperson 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.
In Selim, Barrett J of the Supreme Court of New South Wales usefully analysed decided cases on regs 5.6.23 and 5.6.26 as follows:[25]
[25]Selim, [82]–[87].
The way in which regulations 5.6.23 and 5.6.26 operate in the context of a Part 5.3A meeting of creditors has been considered in a number of cases. The effect of those provisions and the treatment of them in earlier case law (particularly Vincent White & Associates Pty Ltd v Vouris (1998) 28 ACSR 93 and Re Oriel Homes Pty Ltd (1997) 15 ACLC 564) were recently reviewed by Austin J in Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; (2003) 45 ACSR 612. It is instructive to quote at some length from his Honour’s judgment:
Regulation 5.6.23(1) provides that a person is not entitled to vote as a creditor at a meeting of creditors of a company in voluntary administration unless his or her debt has been admitted wholly or in part by the administrator, or he or she has lodged with the chairperson particulars of the debt or a formal proof of debt. By reg 5.6.23(2), a creditor must not vote in respect of a contingent or unliquidated debt, or a debt the value of which is not established, unless a just estimate of its value has been made.
Regulation 5.6.26(1) states that the chairperson of a meeting has power to admit or reject a proof of debt or claim for the purposes of voting. Regulation 5.6.26(2) states that if the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.
The meaning of these provisions was considered by Hodgson CJ in Eq (as his Honour then was) in Vincent, White & Associates Pty Ltd v Vouris (1998) 28 ACSR 93. There a plaintiff lodged a proof of debt for over $1.4 million, and the administrator decided that he would allow Sovereign to vote in respect of only about $420,000, on the basis that this was a just estimate of the value of the debt for the purpose of voting. A motion for the company to execute a deed of company arrangement was defeated, but it would have been carried on a poll if the proof had been admitted for the full amount of the claim. The plaintiff’s appeal against the administrator’s decision was unsuccessful.
Sovereign argued that, because the administrator was in doubt as to the amount of the debt, reg 5.6.26(2) meant that he should have marked the claim as objected to, allowing Sovereign to vote for the full amount claimed. Sovereign relied on the following observations by Thomas J in Re Oriel Homes Pty Ltd (1997) 15 ACLC 564, 565:
‘I interpret the effect of [the relevant regulations] as follows. Under reg 5.6.26(1) the power to admit includes the power to admit in part. If the position is clear, the chairperson should make a just estimate of the value of the debt. If, however, he or she is in genuine doubt, the claim must be allowed at the amount that the creditor has claimed and should thereupon be marked as “objected to”. The creditor should then be allowed to vote at that value. Any error, and any effect that the error may have on the result, may be corrected in due course by an appeal to the Court under reg 5.6.26(3).’
I respectfully agree with Hodgson J that this passage is not authority for the proposition that, whenever there is genuine doubt as to the correct amount of the debt, the chairman must allow the creditor to vote in the amount claimed. I would add that in Re Oriel Homes itself, the Court held that the proof should be admitted at a nominal value rather than for the amount claimed.
In light of these cases, and the wording of the regulations, the position may be summarised as follows:
(a) a creditor is not entitled to vote at a meeting convened under s 439A unless either the debt or claim has been admitted wholly or in part by the administrator, 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 whether a proof of debt or claim should be admitted or rejected, the proper procedure is to mark the proof as objected to and 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 reg 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 5.6.23(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).”
The approach taken by Hodgson CJ in Eq in Vincent White & Associates Pty Ltd v Vouris (above) was approved by Giles JA in Kirwan v Cresvale Far East Pty Ltd [2002] NSWCA 395; and, more recently, by Hansen J in Spiteri v Lindholm [2003] VSC 42. The judgment of Giles JA in Kirwan contains the following passage:
“Regulation 5.6.23(2) of the Corporations Regulations provides that a creditor must not vote in respect of an unliquidated debt or a contingent debt, an unliquidated claim or a contingent claim, or a debt the value of which is not established, unless ‘a just estimate of its value has been made.’ Regulation 5.6.26 of the Corporations Regulations gives the chairperson of a meeting of creditors the power to admit or reject a proof of debt for the purposes of voting. By regulation 5.6.26(2) — ‘If the Chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.’
In Vincent White & Associates Pty Ltd v Vouris (1998) 28 ACSR 93 Hodgson CJ in Eq noted the difference between not voting because a just estimate of the value of an unquantified debt or claim has not been made, on the one hand, and not voting because of doubt whether a proof of debt or claim should be admitted or rejected, on the other hand. The two regulations address different matters, and admission or rejection of a proof of debt or claim comes before any question of making a just estimate of the value of an unquantified debt or claim once the proof of debt or claim has been admitted.”
Later, dealing with the particular facts of the case before him, Giles JA said:
“Did Mr Gould act improperly in ruling that a just estimate of the value of Newland’s claim could not be made? On the information he had, it was an all or nothing claim. If representations justifying termination of the underwriting agreement had been made, there was no liability. If the underwriting agreement remained, there was a liability of $1,576,277. On one view, it was not a question of valuing the claim at all, because it was not a true contingent debt or claim or one the value of which (if there was a debt or claim at all) was not established: Mr Gould’s doubtful use of ‘contingent’ in the report to creditors has earlier been noted. (According to the minutes of the meeting, however, Mr Dubler shared this use of the word.) On another view, it would have been appropriate to give the claim a justly estimated nominal value, see re Zambena Pty Ltd (1995) 13 ACLC 1020 and National Australian Bank Ltd v Market HoldingsPty Ltd [2001] NSWSC 253; (2001) 161 FLR 1. On another view, a just estimate of the value could not be made because it was all or nothing and there was no realistic in-between figure. The inter-action between regulation 5.6.23 and 5.6.26(2) is not clear, and has exercised judicial minds.” (emphasis added)
The interaction between regulations 5.6.23 and 5.6.26 was also mentioned by Young CJ in Eq in Kirwan:
“There is some tension between the two regulations. However, even if the administrator was correct in applying in 5.6.23, it is not permissible to refuse to allow a creditor to vote at all by not making a just estimate of the value of the claim. If 5.6.23 is to be applied, then there is an obligation on the chairman to make ‘for the purpose of voting’ a just estimate. If the chairman finds it almost impossible to ascribe a value to the claim, then it should be valued at a dollar which at least would allow the claimant to be recorded amongst the number of creditors voting on the resolution.”
In Young v Sherman [2001] NSWSC 1020; (2001) 166 FLR 96, Austin J considered the phrase “If the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected.”. His Honour said that a chairperson presented with a proof unaccompanied by supporting information sufficient to enable him to determine how the amounts claimed had been calculated and whether those amounts reflected the arrangements in place between the companies was not, by that circumstance alone, placed in “doubt” as to whether the debt or claim should be admitted or rejected. In the particular case, there was nothing in the evidence to indicate that the chairperson was in fact (or should as a reasonable person have been) in doubt on the question whether to admit or reject.
Austin J also dealt with the situation where there is a dispute about a debt. He identified three possible approaches in such a case, noting that the existence of a dispute does not of itself make the asserted debt “contingent”. The three possibilities were described … [the relevant passages are cited below]:
In Young, Austin J said:[26]
In my opinion the fact that a debt is disputed does not make it, ipso facto, a “contingent” debt for the purposes of reg 5.6.23 (2). It is not open to the debtor company to prohibit a creditor from voting in respect of a debt simply by contesting it. Where the chairman is informed that there is a genuine dispute about the existence or amount of a debt claimed by creditor, it seems to me there are at least three possible approaches that can be taken.
First, the existence of a genuine, unresolved dispute about a debt of which the creditor has given particulars will frequently provide reasonable grounds for doubt as to whether the creditor’s claim should be admitted or rejected. Where that is so, the proper approach for the chairman will normally be to mark the proof as objected to and allow the creditor to vote, under reg 5.6.26 (2). Secondly, where the chairman receives a claim that has not been adequately particularised, and believes that the claim (whatever precisely it may be) is disputed, the correct approach may be to reject the claim for voting purposes on the ground of lack of particulars. Finally, it may happen, though probably much less frequently, that the chairman recognises the existence of a genuine dispute but decides on reasonable grounds that he or she is in a position to form a view as to the merits of the dispute, in which case the proper approach may be to admit the proof for the amount (if any) which the chairman believes is the correct amount.
In the present case, it appears on the evidence before me that the directors’ complaint is wholly or principally that they have causes of action in damages against the plaintiffs, for breach of duty, breach of contract and under the Trade Practices Act. The evidence does not indicate that the directors claim not to have retained the plaintiffs to work for them on the matters which are the subjects of the invoices, or that the plaintiffs did not do substantial work on the second defendant’s behalf. Indeed, such evidence as there is suggests that Mr Mackay may have agreed with the plaintiffs’ proposals to undertake work without imposing any particular limits on the amount to be expended, his principal concern being that recovery of the plaintiffs’ fees should be deferred until funds had been raised. That is to say, the evidence indicates that, subject to any legitimate set-off or cross-claim, the plaintiffs had a claim to recover payment for services provided, the only real dispute being as to the quantum of the debt and the amount of the alleged cross-claim. In Re Dingle; Westpac Banking Corporation v Worrell [1993] FCA 619; (1993) 47 FCR 478, the Full Federal Court accepted that it was appropriate, in the analogous bankruptcy context, to make an allowance for an established cross-claim in calculating the amount of the creditor‘s debt for voting purposes.
In these circumstances, although the first defendant had access to a great deal of information about the dispute, I very much doubt that he was in a position to resolve the uncertainty about the amount of the debt and the cross-claim, by determining an amount for voting purposes. If he had received adequate particulars of the matter, the correct approach for him would probably have been to admit and mark the plaintiffs’ informal proof of debt under reg 5.6.26 (2). But in my opinion the plaintiffs had failed to give particulars of their claim, for the purposes of reg 5.6.23, at least as regards the invoices of 22 March 2001. That being so, it was open to the first defendant to reject their claim in respect of those invoices. The first defendant’s second reason for his decision on the plaintiffs’ claim was, in effect, the lack of particulars. In my opinion he was right to base his decision on this ground, but not on the ground of “significant dispute”.
[26]Paragraphs 93 to 96.
Discussion
A person is not entitled to vote as a creditor at a meeting of creditors unless, inter alia, his debt or claim has been admitted wholly or in part by the administrator of a company under administration.[27] An issue has arisen in this case as to whether in admitting a debt or a claim the administrator is exercising a discretionary management decision, of which the court should not seek to substitute its own opinion where it differs from the administrator, or whether the administrator is exercising some quasi-judicial capacity and adjudicating on a person’s entitlement.[28]
[27]Reg 5.6.23(1).
[28]See Selim, [37].
In my view, the position is as follows. If the chairman is in doubt whether a proof of debt or claim should be admitted or rejected, the proper procedure is to mark the proof as objected to and allow the creditor to vote as required under reg 5.26(2). If the debt or claim is for an unliquidated amount, or it is contingent on, or is a debt, the value of which is not established, a just estimate may be made.
This does not apply in this case. The claim was not for an unliquidated sum, nor was it contingent, and nor was it one the value of which was not established. The sums were liquidated and precisely stated. The authorities suggest that if a claim cannot be quantified by a just estimate, 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. The just estimate clause in reg 5.6.23(2) was not enlivened and thus the authorities relevant to a nominal amount are not applicable.
As I have mentioned above, the scheme of the Corporations Act is such that some decisions are discretionary to be made by the administrators and some are mandated and required to be made by law.
Under reg 5.6.23(1) a person is not entitled to vote as a member at a meeting of creditors unless, inter alia, his or her debt or claim has been admitted wholly or in part by the liquidator. Mr Gronow for Mr Vartelas, contends that, accordingly, the administrator had a discretion to reject part of the proof of debt. He says that discretion is also supported by reg 5.6.26(1), which says that the chairperson of a meeting has power to admit or reject a proof of debt or claim for the purpose of voting. In this case, in my opinion, the debt or claim, as I mentioned, is for liquidated amounts.
Mr Gronow submits, on the other hand, that the debt or claim is contingent, or is for a debt the value of which is not established. In other words, Mr Gronow suggests that reg 5.6.23(2) was enlivened. In my view, the regulation was not enlivened. As I have said, it was not a case where the administrator was able to make a just estimate of the debt or claim. The debt or claim was a sum certain.
I accept, however, that if the chairperson was not in doubt — if he had no doubt that the debt or claim should be rejected — then it was his duty to reject it. On the other hand, if the administrator was not in doubt as to whether the debt or claim should be admitted, then he was bound to admit the debt or claim. Regulation 5.6.26(2) deals with the case of doubt — that is, whether there is a doubt whether to admit or to reject the debt or claim. The regulation is clear that if the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected he must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.
Sovereign contends that as the administrator was in doubt whether the proof of debt or claim should be admitted or rejected, the administrator was obliged to mark that proof as objected to and allow the creditor to vote.
The administrator says that in this case he had a discretion to disallow the proof of debt or claim for all but $1 and/or a discretion to make a just estimate of the value of the debt or claim for $1. I do not accept either of those submissions. In my opinion, in this case the administrator was only entitled to reject the proof of debt or claim if he reasonably was in no doubt that the proof of debt or claim, to all but $1, should be rejected.
The administrator does not contend that he had no such doubt. I have already referred to his affidavit of 12 June 2014, where he sets out expressly the doubts he had, and he does not express a view that he was in no doubt that the claim should have been rejected. In my opinion, Mr Vartelas does not say, in substance or effect, that he had no doubt that the proof of debt should be rejected.
In my opinion, Mr Vartelas concedes that he was in doubt whether the proof of debt should be admitted or rejected. The administrator made no attempt to make a just estimate. In any event, the proof of debt was for a set sum and, as I have said, the section entitling him to make an estimate was therefore not enlivened.
Accordingly, as the administrator (established in his own evidence) had doubts as to whether the proof of debt should be admitted or rejected in whole or in part, he was required under the Regulations to allow the proof of debt in each case and mark it for objection, and to allow the creditor to vote, subject to the vote being declared invalid if the objection was sustained.
The administrator said in his affidavit evidence that the payments recorded in the statutory accounts may not have been loans, and he also says in his evidence that there may have been offsetting claims.
These were the doubts which the Corporations Act expressly refers to which compelled him — mandatorily required him — to admit the proof of debt. These were not doubts which enlivened reg 5.6.23(2). That section does not apply to doubts. That section applies to things which are not in doubt — that is, where there is unliquidated debt, or a contingent debt, or a debt the value of which has not been established. In this case none of those matters applied.
I refer to what Young CJ said in Kirwan, that ‘if reg 5.6.23 is to be applied, then there is an obligation in the chairman to make “for the purpose of voting” a just estimate.’[29]
[29]Kirwan [85] (the paragraph is set out above in full in the extracted passages from Selim).
The defendant says if it was not possible to make a just estimate of the possible set-offs and claims then it was appropriate to ascribe a dollar value.
It was possible to ascribe a just value to the debt or claim. The claim was for a liquidated sum, certified by the directors in the statement of affairs. The fact that there may be defences or set-offs goes to the issue of doubt. The doubt does not enliven reg 5.6.23(2). The doubt enlivens the obligation in reg 5.6.26(2) to admit the debt but subject to marking it as being objected to.
If the administrator purported to reject the proof of debt for all but $1 under reg 5.6.23(1), I find he had no power to do so. If the administrator purported to apply reg 5.6.23(2), I find he had no power to do so. I find that in view of the nature of the proof, and the particulars given by the liquidator, and the evidence of the administrator of his doubts, the administrator was obliged to apply reg 5.6.26(2).
I have come to the conclusion that Mr Vartelas erred in not marking the proof in each case as objected to and allowing the creditor to vote subject to the vote being declared invalid if the objection was sustained. Mr Vartelas has erred in applying reg 5.6.23(2).
Sovereign has submitted that if the vote had been admitted then:[30]
[30]Plaintiff’s submissions [31]–[35].
(a) the administrator ought to have either:
i)admitted Sovereign’s proofs’ of debt for $4,243,964.47 and $162,405.48, respectively, without qualification; or
ii)admitted Sovereign’s proofs of debt for $4,243,964.47 and $162,405.48, respectively, and marked as objected as contemplated by regulation 5.6.26(2);
(b)if the administrator had admitted Sovereign’s proofs of debt then there would have been a deadlock:
i)Sovereign who voted in favour had the majority of value;
ii)the related parties, who voted against, would have had the numbers (5:1);
(c)the administrator as chairman would have been required to exercise his casting vote to resolve the deadlock.
2.Because of the administrator’s (erroneous) decision to admit Sovereign’s proof of debt for $1, there was no deadlock and there was no call for the administrator to exercise his casting vote.
3.In the circumstances, a proper exercise of the casting vote would have been in favour of the resolution for removal:
(a)the administrator in exercising his casting vote would be required to put to one side any personal interest in staying in as administrator;
(b)because of the ‘large disproportion between the values of the debts of the numerical minority and the numerical majority,’ the administrator would be required to take into account Sovereign’s wishes;
(c)the administrator would need to have taken into account the fact that the resolution was not passed because of the votes of related parties – and the attendant risk of a challenge under s 600A of the Corporations Act;
(d)the administrator was without funds, and Sovereign has indicated that it is only prepared to fund the alternative administrators.
4.Upon a successful appeal under s 1321 of the Corporations Act, the Court has power to ‘reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit.’
5.In the present case, Sovereign contends that the appropriate orders are to allow the appeal and to appoint the alternative administrators as administrators rather than to remit the matter back to a creditor’s meeting:
(a)administration is intended to be a ‘speedy process;’[31]
(b)it is important to resolve the issue of the identity of the administrator at the earliest point in the administration so as to prevent the companies from being burdened by unnecessary expense;
(c)a creditors meeting in each administration is likely to be deadlocked;
(d)the administrator has not indicated how he intends to fund a proper investigation into the affairs of EJC and 668 Secretariat;
(e)the administrator inexplicably made what Sovereign contends is a plainly erroneous decision in the face of a detailed letter explaining why the course that he proposed was wrong (namely the 2 June 2014 letter);
(f)the directors’ apparent reason for appointing the administrator was, amongst other things, to give the companies ‘breathing space;’
(g)the administrator took the appointment with ‘no funding upfront’ – it is unclear how a proper investigation is going to be funded;
(h)Sovereign has no confidence in the administrators ability to conduct the administration.
[31]Re Geraldton Building Co Pty Ltd (Administrators Appointed) (ACN 008 673 103); Ex Parte Trevor & Anor [2000] WASC 320.
I have given careful thought to this submission. If Mr Vartelas exercised his casting vote against the resolutions, I consider that it is likely that I would have reversed his decision.
In my opinion, it is in the interest of the creditors to have the administrators, in whom the majority of creditors have confidence, particularly where the creditor is prepared to fund the administration.
Turning to the evidence as to the obfuscation by the directors, which supports the decision that I should achieve a just, efficient, timely and cost-effective resolution of this dispute by granting the application, I accept the submissions of Sovereign on this aspect.
I propose to order that the decision on the resolutions:
(1)for the removal of Mr Vartelas as the administrator of EJC; and
(2)for the appointment of Paul Burness and Matthew Jess, of Worrells Solvency and Forensic Accountants, as the administrators of EJC, made 3 June 2014,
be set aside.
In lieu thereof, there be orders that Paul Vartelas be forthwith removed as the administrator of EJC, and that Paul Burness and Matthew Jess of Worrells Solvency and Forensic Accountants be appointed as administrator of EJC.
I propose to make the same orders with respect to 688.
I will hear the parties on costs.
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