Provident Capital Limited v Kelso Builders Supplies Pty Limited

REASONS FOR JUDGMENT Introduction 1 Provident Capital Limited is a secured creditor of Kelso Builders Suppliers Pty Limited (in liquidation). Provident filed a proof of debt for the full value of Kelso's indebtedness to it without estimating the value of its security. A representative of Provident attended a meeting of creditors of Kelso on 21 September 2007 and voted on a number of resolutions. The representative voted on a show of hands or by voices, or orally, no poll being taken. 2 This matter came before me on 16 May 2008 as a matter of some urgency when I was sitting as the corporations duty judge. On that day Provident moved on its originating process filed on 18 January 2008 which seeks an order pursuant to reg 5.6.24(3) of the Corporations Regulations that the action of Provident in voting at the meeting of creditors without estimating the value of its security was inadvertent. 3 On 16 May, during the course of oral argument, counsel appearing for the liquidator of Kelso raised the possibility that the actions of Provident may be seen to amount to an unequivocal election to surrender its security pursuant to s 554E of the Corporations Act 2001 (Cth) and in accordance with the principles stated by the High Court in Sargent v ASL Developments Limited (1974) 131 CLR 634. Legislation 4 I will set out the relevant legislative provisions which are as follows: Section 554E Proof of debt by secured creditor (1) In the winding up of an insolvent company, a secured creditor is not entitled to prove the whole or a part of the secured debt otherwise than in accordance with this section and with any other provisions of this Act or the regulations that are applicable to proving the debt. (2) The creditor's proof of debt must be in writing. (3) If the creditor surrenders the security to the liquidator for the benefit of creditors generally, the creditor may prove for the whole of the amount of the secured debt. (4) If the creditor realises the security, the creditor may prove for any balance due after deducting the net amount realised, unless the liquidator is not satisfied that the realisation has been effected in good faith and in a proper manner. (5) If the creditor has not realised or surrendered the security, the creditor may: (a) estimate its value; and (b) prove for the balance due after deducting the value so estimated. (6) If subsection (5) applies, the proof of debt must include particulars of the security and the creditor's estimate of its value. Regulation 5.6.24 Votes of secured creditors (1) For the purposes of voting, a secured creditor must state in the creditor's proof of debt or claim: (a) the particulars of his or her security; and (b) the date when it was given; and (c) the creditor's estimate of the value of the security; unless he or she surrenders the security. (2) A creditor is entitled to vote only in respect of the balance, if any, due to him or her after deducting the value of his or her security as estimated by him or her in accordance with regulation 5.6.41. (3) If a secured creditor votes in respect of his or her whole debt or claim, the creditor must be taken to have surrendered his or her security unless the Court on application is satisfied that the omission to value the security has arisen from inadvertence. (4) This regulation does not apply to: (a) a meeting of creditors convened under Part 5.3A of the Act; or (b) a meeting held under a deed of company arrangement. The facts 5 The facts may be stated briefly. Provident entered into a deed of charge with Kelso on 2 August 2001. The charge is a fixed and floating charge and was registered on 9 August 2001. Kelso owned a factory and land situated at Wentworthville. That property was subject to Provident's charge. 6 Provident also held a further security in the form of a first registered mortgage over a property known as the Moree Hot Springs Health Resort. 7 The property at Wentworthville was insured by QBE Insurance Australia Ltd. During the currency of the contract of insurance with QBE, Kelso suffered a fire at the Wentworthville premises which caused the total destruction of the property, including the contents, stock and business records. QBE apparently declined to indemnify Kelso, but proceedings were commenced by Kelso in the Supreme Court of New South Wales against QBE on 27 March 2006. The claim sought an amount of nearly $9 million in damages. 8 Some three days later on 30 March 2006, Mr Sherman of Ferrier Hodgson was appointed official liquidator of Kelso by the Supreme Court of New South Wales. The claim against QBE was potentially a major asset of Kelso and Mr Sherman sought expressions of interest from creditors to fund the claim against QBE. 9 Prior to 21 August 2007 there was some discussion between Ms Phillips of Ferrier Hodgson and Mr Tiernan, the solicitor for Provident about the question of funding of the litigation against QBE. The correspondence to which I was taken by counsel for the liquidator demonstrates that there was a live issue as to the security over the Moree property, in particular the value of that security. 10 On 15 August 2007 Ms Phillips had a telephone discussion with Mr Tiernan about a meeting of creditors which was called for 21 August 2007 to discuss the question of litigation funding. Ms Phillips' file note of the discussion records that she advised Mr Tiernan that he needed to complete a proof of debt and a proxy and it was necessary to estimate the value of the security held by Provident. 11 On 21 August 2007 Ms Phillips sent an email to Mr Tiernan stating: In addition, I enclose a proof of debt form for your completion in respect of the meeting of creditors. In calculating the claim, your client is required to estimate the value of its security, being the Moree properties. In this respect, we note from our investigations that an offer to purchase the properties for $3.5M was received in January 2007, which was rejected by your client. I would therefore anticipate that the estimated value of the security would be no less than this amount.