BRISCONNECTIONS MANAGEMENT COMPANY LIMITED v PAUL ANDREW BURNESS and CON KOKKINOS

Federal Court of Australia|2009-06-10|Before: Gordon J

INTRODUCTION 1 This is an application pursuant to ss 503 and 1321 of the Corporations Act 2001 (Cth) ("the Act") by Brisconnections Management Company Limited ("the Applicant"). The Applicant seeks relief in respect of the decision of the First Respondent not to exercise a casting vote under reg 5.6.21(4) of the Corporations Regulations 2001 in favour of a resolution put to a meeting of creditors of Thames Blund Holdings Pty Ltd (in liquidation) ("the Company") held on 8 May 2009 to remove the First and Second Respondents as liquidators of the company and, in their place, to appoint Richard John Hughes and Timothy Bryce Norman. Mr William Edward Turner ("Mr Turner") was the sole director of the Company. Crestwin Corporation Pty Ltd ("Crestwin") is the sole shareholder of the Company and Mr Turner is the sole director of Crestwin. 2 The Applicant is a creditor of the Company and has lodged a proof of debt in the sum of $12,603,070.00. Mr Crutchfield appeared on behalf of the Applicant. Mr Charles appeared on behalf of the Respondents and informed the Court that his instructions were neither to consent to nor oppose the relief sought by the Applicant. Mr Samargis sought and was granted leave to appear on behalf of the other two creditors to lodge proofs of debt in the Company - Community Investors Action Pty Ltd (in liquidation) ("CIA") in the sum of $23,387.00 and DLC Consultants in the sum of $1,000.00. As noted above, Mr Turner is the sole director of Crestwin which is also the only shareholder of CIA.

Mr Critchley made note for the record that the majority creditor by value wishes for the Chairman to vote in favour of the resolution on the basis that his reasons given for declining to vote are inadequate, and to nominate the Liquidators that hold an indemnity. Mr Critchley expressed his disappointment that the resolution was not carried. 5 There is some dispute about the completeness of the minutes. Mr Critchley deposed to the following exchange between him and the First Respondent during the 8 May 2009 meeting of creditors which is not recorded in the minutes: Mr Critchley: Did you have regard to clause 21.7 of the IPA Code of Practice when considering whether to exercise your casting vote? First Respondent: I did have regard to that principle. Mr Critchley: Do you have the Code in your presence then? First Respondent: I do not. Mr Critchley: You say you had regard to the Code a moment ago, yet it is not with you. Do you have a recollection of what it says? First Respondent: I don't have to answer this. No, I wasn't asked whether I knew it exactly by you before. Mr Critchley: That wasn't what I asked. You have informed the meeting that you had regard to the Code. The Code is not before you. If you do not know what it says, how can you have regard to it? First Respondent: I don't have to answer these questions. Neither of the Respondents challenged Mr Critchley's evidence as to the fact or substance of the exchange. 6 The reference to the "Code" is, in fact, a reference to the IPA Code of Professional Practice for Insolvency Practitioners. Section 21.7.4 of the Code entitled "Use of the Casting Vote" provides: Applicable to Voluntary Administrators, Deed Administrators and Liquidators only The casting vote provides to the appointee a very powerful tool. Practitioners must exercise the casting vote according to law using their professional judgment in the circumstances of the particular administration. The legal principles that govern the exercise of the casting vote are explained in the case law and texts and are summarised below: · the Chairperson has discretion whether to exercise the casting vote. The chair 'should proceed to exercise the casting vote and resolve the deadlock (thereby resorting to the power for the purpose for which it exists) unless there is some good reason to refrain from doing so'. Failure to exercise the casting vote for some irrational or irrelevant reason is inconsistent with the person's duty; · the Chairperson must weigh up all relevant factors and act honestly and according to what they believe to be in the best interests of those affected by the vote; and for a proper purpose; · the exercise of the casting vote is most appropriate in circumstances where either creditors with a majority in value have such an overwhelming interest that it is inappropriate to allow a majority in number, who do not have the same monetary interest to carry the day, or vice versa. However, there is no presumption in favour of the majority in value, although any large disproportion between the values of the debts of the numerical minority and the numerical majority will be a factor to be taken into account; nor is there any presumption in favour of maintaining the status quo; · The practitioner is entitled to, and should, bring his or her experience and practical considerations to bear in deciding how to exercise the vote; … Some matters for consideration when exercising a casting vote are, but not limited to: · Do creditors with a majority in value however not in number have an overwhelming interest over those in number? · What opinion, if any, was proffered by the Practitioner in support or opposition of the resolution in any report to creditors or otherwise? · Has any information come to the Practitioner's attention since the Practitioner formed his or her opinion that might require a change in support of that opinion? · Do any of those creditor(s) voting have a motive that serves their own interests, which may not be in the best interests of all creditors and/or contrary to the purpose and objectives of the appointment? · Are those creditors opposing the Practitioner's opinion making an informed and unbiased decision? · Can the purpose for exercising the casting vote be substantiated by independent, objective and impartial reasoning? · Will any unfair advantages accrue to the directors by exercising a casting vote in a particular way? · Should the Practitioner seek to adjourn the meeting for the purpose of further consideration or taking advice? · What proxies have been given on the basis that the practitioner would vote in accordance with his or her recommendation? A Practitioner must not be influenced by any direct or indirect opportunity of financial benefit that he or she may receive in deciding how to exercise the casting vote; for example, the fact that remuneration will be higher if a deed is entered into. Practitioners should also be aware of the need to avoid any negative perception of self interest swaying the decision. A practitioner must not use the casting vote in relation to any resolution determining or fixing the practitioner's remuneration. A Practitioner must declare the rationale for: · exercising his or her casting vote (whether for or against a particular resolution), or · choosing not to exercise, his or her casting vote. The reasons must be minuted. 7 Subsequent to the meeting and the refusal of the First Respondent to exercise his casting vote, objection was taken by the Respondents and the other creditors to the alternate liquidators nominated by the Applicant. To avoid that issue (and without deciding whether their objection had any merit), the Applicant obtained the consent of Rodney Slattery to be appointed as liquidator if the Applicant was otherwise successful in relation to the failure of the First Respondent to exercise his casting vote in favour of the Applicant's resolution to replace the Respondents as liquidators of the Company.

ANALYSIS 8 The central issue concerns the refusal of the First Respondent to exercise his casting vote in favour of the Applicant's resolution to replace the Respondents as liquidators of the Company. 9 The principles relevant to the exercise of a casting vote have been considered in a number of cases: see eg Re Bartlett Researched Securities Pty Ltd (Administrator Appointed) (1994) 12 ACSR 707, Re Coaleen Pty Ltd (Administrator Appointed) (1999) 30 ACSR 200, Re Martco Engineering Pty Ltd (Administrator Appointed); Deputy Commissioner of Taxation v Martco Engineering Pty Ltd (1999) 32 ACSR 487, Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (2001) 37 ACSR 394, Young v Sherman [2002] NSWCA 281;(2002) 170 FLR 86, Blue Ring Pty Ltd v Landshore Pty Ltd (subject to a Deed of Company Arrangement) [2006] WASC 245 and Deputy Commissioner of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232 at [214] - [219]. 10 In the present case, counsel for the Applicant submitted that pursuant to s 1321 of the Act, the Court should reverse the decision of the First Respondent to refuse to exercise his casting vote, order that the Respondents be removed as the liquidators of the Company and, in their stead, appoint Mr Slattery as the Company's liquidator. In support of that application, Counsel for the Applicant relied upon the following facts and matters:

the Applicant accounted for 99.8% of the Company's indebtedness and was the only truly independent creditor: see [6] above. CIA was a related entity of the Company and there was no material before the Court concerning the relationship, if any, between DLC Consultants and Mr Turner;
the Applicant was willing to provide an indemnity to Mr Slattery but not to the current liquidators - the Respondents;
although the Code was not the law, it was permissible to test performance of the First Respondent against the Code (eg Gould v Companies Auditors and Liquidators Disciplinary Board [2009] FCA 475 at [49] and Dean-Willcocks v Companies Auditors and Liquidators Disciplinary Board (2006) 59 ACSR 698 at [21]-[34]) and the First Respondent did not properly comply with it because he did not properly turn his mind to how the casting vote was to be exercised consistent with the matters identified in the Code. Of particular significance was the alleged failure of the First Respondent to turn his mind to the matters set out in paras 1 and 2 above. The Applicant did not challenge the Respondents' competency or their independence. 11 In my view, it is appropriate in the unusual circumstances of this case to reverse the decision of the First Respondent to refuse to exercise his casting vote, order that the Respondents be removed as the liquidators of the Company and appoint Mr Slattery as the Company's liquidator. 12 The exercise of the casting vote is most appropriate in circumstances where a creditor with a majority in value (such as the Applicant) has such an overwhelming interest that it is inappropriate to allow a majority in number who do not have the same monetary interest to carry the day. As the case law and the Code makes abundantly clear, there is no presumption in favour of the majority in value. However, where there is large disproportion between the values of the debts of the numerical minority and the numerical majority (as is the position here) it must be a factor to be taken into account. 13 In addition, there is the factor that the Applicant is willing to provide an indemnity to Mr Slattery but not to the Respondents. That fact is not recorded in the minutes as being a factor taken into account by the First Respondent in refusing to exercise his casting vote. The three reasons given by the First Respondent were competency, conflict and cost. 14 In my view, the benefit of the indemnity was a factor that should have been taken into account by the First Respondent in deciding whether to exercise his casting vote. Given the relationship between CIA and the Company and the small debt owed to DLC Consultants, it is unlikely that funding would come from the other creditors and, as the minutes of the creditors meeting record, there are a number of investigations that the Respondents as liquidators would "in due course" undertake. In the absence of the indemnity, it is difficult to see how the Respondents would have been able to undertake those investigations. 15 As the decision not to exercise the casting vote was made without taking account of all relevant considerations, the First Respondent's decision should be set aside and, pursuant to s 1321 of the Act, the Court should now exercise the discretion in the manner in which it should have been exercised. Having regard to all of the circumstances, the First Respondent should have exercised his casting vote in favour of the resolution so that the resolution for removal of the Respondents as liquidators of the Company would have been carried: see reg 5.6.21(4) of the Corporations Regulations 2001. 16 In those circumstances, the orders will be:
The decision of the First Respondent not to exercise his casting vote under Regulation 5.6.21(4) of the Corporations Regulations 2001 in favour of the resolution put at the meeting of creditors of Thames Blund Holdings Pty Ltd (in liquidation) held on 8 May 2009 to remove the Respondents as liquidators of Thames Blund Holdings Pty Ltd (in liquidation) and appoint Richard John Hughes and Timothy Bryce Norman as liquidators of Thames Blund Holdings Pty Ltd (in liquidation) be reversed;
The Respondents be removed as liquidators of Thames Blund Holdings Pty Ltd (in liquidation) and Rodney Slattery be appointed as liquidator of Thames Blund Holdings Pty Ltd (in liquidation);
There be no order as to costs. (This was not a matter of dispute between the parties). I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate: Dated: 10 June 2009 Counsel for the Applicant: Mr P Crutchfield

Solicitor for the Applicant: Corrs Chambers Westgarth

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