Plumbers Supplies Co-operative Limited v Firedam Civil Engineering Pty Limited

Background 6The plaintiff provided plumbing supplies to the defendant. A debt of $48,000 arose for goods sold and delivered on 31 March 2010. The debt was not paid and the plaintiff served a statutory demand. 7On 17 June 2010, the plaintiff's originating process seeking a winding up order in respect of the defendant was filed. The winding up proceedings came before the court on 28 July 2010 and were stood over to 19 August 2010 and later to 12 October 2010. 8On 15 October 2010, the defendant was placed into voluntary administration by its sole director. The first meeting of creditors in the administration was held on 27 October 2010 and the second meeting of creditors commenced on 18 November 2010 and was adjourned to 26 November 2010. 9Before the second meeting of creditors, the administrator provided creditors with an "information package" containing a report by the administrator, the notice of the meeting, a proxy form and a proof of debt form.

The administrator's report 10The administrator's report disclosed the existence of potential recovery claims by a liquidator for unfair preferences, related party payments and other voidable transactions. I shall refer to these compendiously as "liquidator recovery claims". All will be maintainable, if at all, through s 588FF but only on the application of a liquidator. 11Particular reference was made in the administrator's report to Old Bawn having recovered through garnishment on or about 26 March 2010 a sum of $496,868.24 plus GST. The administrator stated an opinion that this prima facie constituted an unfair preference that could be made the subject of a liquidator recovery claim. 12Because the defendant is now subject to creditors voluntary winding up as a sequel to voluntary administration, the "relation-back day" in relation to the winding up is the date on which the administrator was appointed, that is 15 October 2010: s 513C(b). Pursuant to s 588FE(2), an unfair preference is prima facie recoverable under s 588FF if the relevant payment was made after the day that was six months before the relation-back day - that is, as things now stand, after 15 April 2010 which is after the benefit of garnishment was obtained by Old Bawn. 13If, as the plaintiff seeks, the court were to put an end to the administration and, at some later time, make a winding up order on the plaintiff's application filed on 17 June 2010, the payment to Old Bawn pursuant to the garnishee order on or about 26 March 2010 would be seen to have occurred after 17 December 2009, being the day that was six months before that which s 513A(e), if operative, made the relation-back day (that is, 17 June 2010). Indeed, if 17 December 2009 marked the start of the relevant period, a total of $545,416.95 received by Old Bawn would be potentially available under liquidator recovery claims. 14All these matters concerning possible liquidator recoveries and the ramifications and implications of the different relation-back days were explained in the administrator's report to creditors. 15The administrator's report went on to inform creditors that there were three options available for them in relation to voting at the second meeting of creditors, namely, to vote for the execution by the company of a deed of company arrangement (in the particular case, no deed of company arrangement proposal was in fact available), to vote for a resolution that the administration end and to vote for a resolution that the company be wound up. 16The report stated the administrator's view that the company was insolvent and that "it would be in the creditors' best interests for the company to be wound up."

The second meeting of creditors 17The minutes of the second meeting of creditors held on 18 November 2010 record several questions asked by creditors about the ability of any liquidator to pursue liquidator recovery claims. The meeting resolved to adjourn to 26 November 2010 so that the administrator could provide more information about that matter by reference to the two postulated relation-back days. 18At the adjourned meeting on 26 November 2010, the administrator expressed an opinion that $197,602.18 could be pursued under liquidator recovery claims should the creditors resolve that the company be wound up; and that $2,726,802.72 could be pursued under liquidator recovery claims should the creditors resolve not to wind the company up and the plaintiff's winding up application due to be before the court on 1 December 2010 was successful. 19The administrator also informed the meeting that, under the shorter relation-back period, unsecured creditors could expect to receive a nil return while, if winding up were in due course ordered by the court upon the plaintiff's application and the longer period applied, the return would likely be nil on a "pessimistic" view, 13.63 cents in the dollar on an "optimistic view" and 2.93 cents in the dollar on a "possible" view. The facts and assumptions making up these "views" were explained. 20The administrator then repeated his recommendation that creditors vote in favour of winding up. 21That resolution was put to a vote. Three creditors voted in favour of the resolution. Their debts or claims, as recognised for voting purposes, amounted to $700,130.11. Nine creditors voted against the resolution. Their debts or claims, as recognised for voting purposes, amounted to $583,271.84. The resolution thus failed to achieve the support of both a majority by number of creditors voting and a majority by value of creditors voting as envisaged by reg 5.6.21(2) and (3) of the Corporations Regulations 2001 (Cth). In those circumstances, reg 5.6.21(4) enabled the chairperson of the meeting to exercise a casting vote either in favour of the resolution or against it. 22The administrator, as chairperson, exercised the casting vote in favour of the resolution for winding up. The minutes record that the administrator gave the following reasons for exercising the casting vote in that way: " The company is insolvency and requires a formal insolvency appointment; It is not appropriate for an insolvent company to be released from Voluntary Administration and control returned to the director; There is no certainty that the Court would make an Order to wind up the company on 1 December 2010. In addition, it is uncertain what actions the director will take during the period from today's date to the date of the Court hearing." 23The defendant thus passed into creditors' voluntary winding up pursuant to s 446A.

The statutory provisions 24The plaintiff's claims are made under s 600B and s 447A of the Corporations Act . Section 600B is as follows: "(1) This section applies if, because the person presiding at the meeting exercises a casting vote, a resolution is passed at a meeting of creditors of a 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. (2) A person may apply to the Cour t for an order setting aside or varying the resolution, but only if: (a) the person voted against the resolution in some capacity (even if the person voted for the resolution in another capacity); or (b) a person voted against the resolution on the first-mentioned person's behalf. (3) On an application, the Court may: (a) by order set aside or vary the resolution; and (b) if it does so--make such further orders, and give such directions, as it thinks necessary. (4) On and after the making of an order varying the resolution, the resolution has effect as varied by the order. " 25As far as s 447A is concerned, it is sufficient to set out the first two subsections: "(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 administratio n is to end."

The plaintiff's argument 26The plaintiff says that the administrator did not consider the interests of the creditors as a whole when deciding to exercise the casting vote in the way he did. Mr S L Bell of counsel, who appeared for the plaintiff, submitted that the administrator, when faced with the choice for creditors between an assured nil return and a return which might be nil but also might be up to 13.63 cents in the dollar, should have preferred the latter. 27The plaintiff also says that if Old Bawn had not voted, the number of voters in favour would have been two, the number against would still have been nine and the value represented by the majority in number would have been $413,182.25 as against $583,271.84 represented by the majority against, so that there would have been a majority under both reg 5.6.21(2) and reg 5.6.21(3) against the motion, so that the resolution for winding up would not have been passed. 28Mr Bell noted the circumstances of the two creditors in addition to Old Bawn who voted in favour of the resolution, being Vinidex Tubemakers Pty Ltd and Colin Biggers & Paisley. The defendant's records show that Vinidex was paid $283,616.59 on 20 January 2010 and $165,000.00 on 1 April 2010. Both of these might have been the subject of preference recovery claims if the relevant period began on 17 December 2009 but not if the relevant date was 15 April 2010. Mr Bell did not suggest that the difference in dates had any implications for Colin Biggers & Paisley. 29While the plaintiff acknowledges that it is open to a creditor to exercise its vote according to its own selfish interests, it contends that the administrator, in deciding, first, whether to use the casting vote and, second, how it should be exercised, should prefer the course that is more beneficial to the creditors as a whole. In this case, the plaintiff says, the chairperson should have declined to adopt the course involving certainty of no return for creditors when an alternative that might have seen them receive some small return was realistically available. The emphasis must be, it is said, on the ascertained group of creditors who will participate under a winding up, not some hypothetical future creditor.

Old Bawn's argument 30Old Bawn says that the casting vote was properly exercised and that there is no room for resort to s 600B. Mr J T Johnson of counsel noted, on behalf of Old Bawn, that the plaintiff makes no allegation of fraud or impropriety on the part of the administrator. 31Old Bawn argues that the administrator made a thorough investigation and assessment, that the report he prepared for creditors for the purposes of the meeting was comprehensive, that he formed and held a consistent view that the company was insolvent and should accordingly be wound up and that, even if the earlier relation-back period was to apply, a liquidator would lack the resources with which to pursue preference recovery and similar claims - also that any such litigation carried with it no certainty of success. 32Mr Johnson also submitted that, when the second meeting reconvened on 26 November 2010, it was known that the winding up proceedings would be before the court on 1 December 2010. Thus, if the plaintiff had genuinely thought at the time that the resolution was susceptible to challenge, it could have foreshadowed such challenge at the meeting itself and pursued it a few days later when the winding up proceedings came before the court. As it was, it was not until 13 December 2010 that the plaintiff filed the amended originating process adding claims for that relief.

The duty of an administrator when exercising a casting vote 33The nature of the duty of a person enabled by reg 5.6.21(4) to exercise a casting vote at a meeting of creditors has been considered in a number of cases including, in the Court of Appeal, Y oung v Sherman [2002] NSWCA 281; (2002) 170 FLR 86 and Kirwan v Cresvale Far East Ltd [2002] NSWCA 395; (2002) 44 ACSR 21. It is sufficient, for present purposes, to quote three summations of the relevant principles. 34The first appears in my judgment in Global Realty Development Corporation v Dominion Wines Ltd [2005] NSWSC 1221; (2005) 56 ACSR 474: "The correct approach to the exercise of the casting vote was considered by the Court of Appeal in both Young v Sherman (2002) 170 FLR 86 ; [2002] NSWCA 281 and Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21 ; [2002] NSWCA 395. Several propositions emerging from those cases may be briefly mentioned. First, there is no general rule that the chairperson should use the casting vote to prefer the majority in value over the majority in number. The suggestion to the contrary in submissions on behalf of the plaintiff should be rejected. Second, the correct approach is for the chairperson to proceed according to what the chairperson believes to be in the best interests of those affected by the vote. Third, the objectives of Pt 5.3A must be considered in making the decision. Fourth, a distinction is to be drawn between propriety and wisdom, the latter probably being non-justiciable. Fifth, the court's decision on a challenge under s 600B should be made in the light of all the material the chairperson had." 35The second is found in the judgment of Lindgren J in Deputy Commissioner of Taxation v Wellnora Pty Ltd [2007] FCA 1234; (2007) 163 FCR 232 at [217] - [218]: "The question of the considerations that are relevant to a company administrator's exercise of a casting vote under reg 5.6.21 and of applications under s 600B to set aside a resolution passed on the casting vote has been considered in Re Bartlett Researched Securities Pty Ltd (Administrator Appointed) (1994) 12 ACSR 707 ( Bartlett ), Re Coaleen Pty Ltd (Administrator Appointed) (1999) 30 ACSR 200 ( Coaleen ), 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 ( Cresvale ), Young v Sherman (2002) 170 FLR 86, and Blue Ring Pty Ltd v Landshore Pty Ltd (Subject to a Deed of Company Arrangement) [2006] WASC 245 ( Blue Ring ). These authorities show that: (1) Good faith alone will not necessarily shield the resolution from a setting aside (or variation) under s 600B ( Cresvale 37 ACSR 394 at [111]); (2) A factor that may justify setting aside the resolution is a statement in or omission from the administrator's report under s 439A that is apt to have misled creditors when they cast their deliberative vote ( Blue Ring [2006] WASC 245); (3) Inadequacy and superficiality of an administrator's investigation of the company's business, property, affairs and financial circumstances, at least as disclosed by the evidence before the Court, may warrant a setting aside of the resolution ( Bartlett 12 ACSR 707; Cresvale 37 ACSR 394 at [113]); (4) 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 ( Coaleen 30 ACSR 200; Cresvale 37 ACSR 394 at [115]); and (5) Payment of a premium to the creditors who supported the DOCA but not to a dissident creditor will justify a setting aside by the court ( Young v Sherman 170 FLR 86)." 36Third, I would repeat what I said in Ausino International Pty Ltd v Apex Sports Pty Ltd [2007] NSWSC 289; (2007) 61 ACSR 532 - a case where the chairperson had refrained from exercising the casting vote - at [16]: "It is clear from the judicial statements I have quoted that a casting vote is intended to be a means by which a tie or deadlock is resolved so that a decision is reached, one way or the other; also that a deed administrator is subject to the duties of an "officer" in making decisions with respect to the casting vote, including the duty to act for a proper purpose. It would be going too far to say that a person to whom a casting vote is entrusted must always exercise it. Clearly, there is a discretion. But the discretion cannot be regarded as unfettered. I am of the opinion that the person 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; also that failure to exercise the casting vote for some irrational or irrelevant reason is inconsistent with the person's duty. That person plays, in the context, an administrative decision-making role attracting a duty to take into account relevant matters and to leave out of account irrelevant matters - with questions of relevance determined according to the purpose for which the power exists and the context in which it becomes exercisable."

The chairperson's decision 37The administrator listed the following factors in the report to creditors regarding the possible course under which the meeting of creditors would vote to terminate the winding up in the expectation (it could be no more) that the plaintiff would then press its winding up application and succeed in obtaining a winding up order productive of the 17 June 2010 relation back day: ' Control of the company would be returned to the director, Mr Frank O'Connell. The company would not be under any form of external administration; I am advised that the Application to wind up filed by Plumbers was disputed by the company and as such, there is no certainty that the Court will make an Order to wind up the company on 1 December 2010; and Old Bawn may choose to defend the unfair preference and the appointed Liquidator may be required to become involved in litigation to pursue the unfair preference. In this case, it is likely that funding from creditors or external parties would be required. There is no certainty that Old Bawn would be able to repay the amount if a Court ordered that the payment was an unfair preference and therefore voidable.' 38With respect to the third of these points, the administrator referred in his report to the substantial cost of litigation which might arise in pursuing liquidator recovery claims should the company go into liquidation, the uncertainty of success in that litigation and the further uncertainty of actually recovering funds under any judgment. I quote from the report: "In a Liquidation, I would require funding to commence any of the above actions [in relation to pursuing voidable transactions in litigation]. I note that there are a number of methods of obtaining such funding which would include the following sources: Asset realisations; Contributions from creditors; and A Litigation Funder. Creditors should note that I currently hold funds sufficient to only meet my disbursements in this matter. As such, should creditors wish for the Liquidator to pursue such recovery actions, then creditors may be requested to provide funds to cover the cost of the same." 39It is relevant also to quote from the minutes of the meeting on 18 November 2010: "Mr John Goggins of Old Bawn noted that they would defend any claims for unfair preferences by the appointed Liquidator. He also remarked that creditors would need to be mindful that Old Bawn might not be in a financial position to meet such claim if it was made." 40The possibility, mentioned by counsel for Old Bawn, that any recoveries under the voidable transaction provisions would be effectively swallowed up by the ANZ Bank which holds a fixed and floating charge is remote: National Australia Bank Ltd v Tolcher [2003] NSWSC 207; (2003) 44 ACSR 727. It may be left out of account for present purposes.

Assessment 41The function of the court under s 600B is not simply to come to a decision of its own as to how the casting vote should have been exercised and, if that decision differs from that made by the chairperson, to set aside the resolution and make orders implementing the decision that it thinks should have been made. 42The function of the court is, rather, to evaluate the decision-making process in which the chairperson engaged with a view to determining whether the decision was conscientiously made by reference to all relevant considerations appropriately identified and weighed by him or her. 43The casting vote, of its nature, comes to prominence when a difference of opinion has already manifested itself among the voting constituency. It is true that creditors' own decision-making may be motivated by considerations of self interest peculiar to individuals' circumstances and that the chairperson, by contrast, is not permitted to prefer the personal interest of any particular creditor or creditors, as distinct from the interests of the creditors as a body. I mention the fact that difference of opinion has already manifested itself only to make the point that there may not, in a particular case, be one obviously and unarguably correct view so far as concerns the shared interests of the body of creditors. There may be questions of degree and possibility on which minds may differ and which conservative decision-makers and adventurous decision-makers may view differently. 44When regard is had to the considerations identified in the cases as those relevant to a case of this kind, the following picture emerges: (1) There is no basis for any suggestion (nor is it alleged) that the administrator acted otherwise than conscientiously and in good faith. (2) There is no basis for any suggestion (nor is it alleged) that the administrator did not hold a subjective belief that the decision he made was not in the best interests of those affected by the vote. (3) The report presented by the administrator to creditors was a comprehensive report. It is not alleged that it was in any respect inadequate or superficial. (4) It is not alleged that any aspect of the report (or what the administrator said at the meeting) was apt to misled creditors deciding how to cast their votes. (5) The considerations that the administrator identified in his report and at the meeting as those to which he had regard in reaching his decision were not irrelevant considerations; nor, in my opinion, did he fail to take into account any considerations that were relevant. 45The administrator formed, on rational grounds, an opinion that the company was insolvent. His consequential opinion that it should be subjected to winding up was both rational and responsible. To proceed on the basis that the administration should end (and control of the company be returned to its sole director) would have been to countenance the unacceptable proposition that an insolvent company should be allowed to operate in the mainstream of commercial life. The response that the administrator should have recognised that the plaintiff's winding up application was pending and very likely to produce a winding up order overlooks the point that it is not for an administrator to hazard guesses. 46It was suggested on behalf of the plaintiff that the risk involved in returning the company to the mainstream of commercial life pending the hearing of the plaintiff's winding up application could be dealt with by ancillary orders on the present application restricting what the company could do in the meantime - including, no doubt, an order that no new Part 5.3A administration be put in place by the company itself. It is by no means clear on what basis the court could or would impose such a restriction; or, as regards the particular matter of Part 5.3A administration, how it would justify a prohibition at odds with the scheme of legislation under which resort to administration is a desirable and responsible reaction by directors to awareness that their company is insolvent. 47The administrator could have no confidence as to when the plaintiff would press its winding up application. That was something beyond his control and about which he could not responsibly speculate. It would not have been appropriate for him to recommend a course that not only left the sole director in charge of the company again but also left the winding up question in the hands of the plaintiff alone. There was also the powerful point that the administrator was on notice that the winding up proceedings would be defended, so that there was uncertainty as to when a winding up by the court may eventuate, assuming that it eventuated at all. 48As to potential liquidator recoveries and the two possible relation-back days, it is clear that the administrator fully appreciated the significance, as far as potential returns for creditors went, of the two different outcomes. He knew and recognised that, in one narrow sense, an assured zero return is less favourable to creditors that a chance of some small return. In addition, however, two particular factual considerations presented themselves. First, there would be insufficient funds for a liquidator to pursue recovery claims unless external funding were forthcoming, possibly form one or more funding creditors. Second, Old Bawn had professed itself prepared to fight any such claim; added to which there was no certainty that it would be able to meet any judgment. 49Success in achieving the earlier relation-back day rather than the later would, in any event, have depended on making good the proposition that, "immediately before" the making of the winding up order by the court on the plaintiff's application (assuming that it was made), the company was not under voluntary administration, so that s 513A(b) did not operate. That is a matter that would have brought to the fore potentially difficult considerations referred to by McMurdo J in Re Octaviar Ltd (formerly MFS Ltd) [2008] QSC 216 at [33]: "[T]here is authority suggesting that the term "immediately before" could permit an interval between administration and liquidation. In Chief Commissioner of State Revenue v Rafferty's Resort Management , Austin J applied the obiter dicta of Emmett J in Commissioner of Taxation v Macquarie Health Ltd (1999) 17 ACLC 171, that the expression "immediately before" within s 513A(b) "would permit of there being some interval between administration ending and a winding-up order being made", although as Austin J noted, it was unnecessary for Emmett J to decide how long an interval would be sufficient to preclude the operation of s 513A(b). In St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd (Admins Apptd) (2004) 210 ALR 265; (2004) 50 ACSR 443; [2004] NSWSC 851, Barrett J thought that the passage of a day between administration and liquidation would be sufficient. Having found that the administration was commenced for the improper purpose of affecting the relation-back day, he ordered that the administration be terminated, and stood over the winding-up application to the following day, restraining in the interim the initiation of any further administration. In Andreotti v Ausforest Ltd [2004] NSWSC 1229, Palmer J left open the question of whether the orders in St Leonards Property would be effective to avoid s 513A(b), but said that there was no point in making them in the case before him because there was no demonstrated need on the facts to do so." 50I am satisfied, on the evidence, that the administrator made adequate and relevant investigations, prepared a comprehensive report disclosing the potential for uncertain litigation with respect to liquidator recovery claims should there be a winding up, referred to the potential for substantial costs to be incurred in relation to pursuing such claims, provided reasons for the conclusion that the company was insolvent and should be wound up and explained the reasons for exercising the casting vote in favour of a resolution for winding up. 51The administrator's decision to take the course he in fact took in relation to the casting vote was conscientiously made by reference to all relevant considerations appropriately identified and weighed by him and in the context of all relevant disclosure by him. 52Judged in terms of the propriety versus wisdom dichotomy referred to in the extract from Global Realty Development Corporation v Dominion Wines Ltd quoted at paragraph 34 above, this case falls within the category of non-justiciable assessment of wisdom.

Disposition 53The plaintiff has failed to establish a case for an order under s 600B setting aside the 26 November 2010 resolution of creditors that the defendant be wound up. There is accordingly no basis for the making of the order sought under s 447A; nor is there any basis for ordering that the defendant be wound up in insolvency. 54The amended originating process is dismissed. 55As to costs, I note that neither Old Bawn nor Coates Hire is a party to the proceedings. The matter should be listed for argument on costs after the entities concerned have defined among themselves what costs orders are sought. In the meantime, the question of costs is reserved.

Postscript 56It is pertinent to note the decision in Commissioner of Inland Revenue v Grant [2010] NZHC 755 concerning the casting vote provisions of New Zealand's voluntary administration legislation. Hugh Williams J held in that case that, having regard to the precise terms of the legislation, an administrator chairperson can exercise the casting vote only where the number of creditors voting in favour (and accounting for the necessary majority by value - being 75% in New Zealand) is the same as the number of creditors voting against. Regard was had to the general law nature of a "casting vote" as one that tips an otherwise even balance. The explicit provisions of reg 5.6.31(4) of Australia's Corporations Regulations leave no room for that approach. The vote there labelled "a casting vote" is made exercisable in the particular circumstances specified, regardless of its general law character.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 April 2011