This week’s TGIF considers the circumstances in which a resolution passed at a creditor’s meeting will be set aside on the basis that it is contrary to the interests of creditors as a whole.

Background

In Promnitz v Indochine Mining Limited (Subject to a Deed of Company Arrangement); In the Matter of Indochine Mining Limited (Subject to a Deed of Company Arrangement) [2015] FCA 857, a creditor sought an order under s 600A of the Corporations Act setting aside two resolutions -  a resolution passed at a creditor’s meeting that the Company execute a DOCA and a resolution not to adjourn the creditor’s meeting at which the DOCA resolution was passed.

Section 600A allows the Court to set aside a resolution where the outcome of voting has been determined by a related entity of the company in administration.

Here the applicant argued that an alternative DOCA was more favourable to creditors and that by voting against the adjournment resolution, the alternative DOCA was not able to be considered.

On the other hand, the administrators argued that the executed DOCA would result in a better return to creditors, as:

  • the secured creditor would not have accepted the alternative DOCA; and
  • the cost and time involved in holding a further creditor’s meeting would have jeopardised the preservation of the Company’s key asset.

The Decision

The Court held that had the votes of related creditors been disregarded, the adjournment resolution would have been passed (with the Administrator’s casting vote) and consequently, the DOCA resolution would never have been put or passed. 

In those circumstances, s 600A allows the Court to set aside a resolution if it is satisfied that the result of it is contrary to the interests of the creditors as a whole, or likely to prejudice the interests of the creditors who voted against it, to an unreasonable extent.

The Court held that it was not so satisfied, for the following reasons: 

  • The creditors who voted at the relevant meeting had the benefit of detailed reports from the administrators as to the two alternative DOCA proposals.  The most important feature of those reports was the need to preserve the Company’s only income producing asset and the fact that it required urgent funding in order to do so.The position of the secured creditor had to be considered and addressed. The secured creditor would not have accepted the alternative DOCA.  Further, if the adjournment resolution had been carried, it is highly likely that it would have appointed receivers to the Company in order to preserve the key asset.
  • The proponent of the alternative DOCA had not satisfactorily explained how its proposal would be funded (in circumstances where the Company required urgent funding).
  • The Company was insolvent and could not survive without a workable DOCA.  In the circumstances, the continued support of the secured creditor was vital for a DOCA to succeed.

Comment

This case confirms that when determining whether something is contrary to the interests of the creditors as a whole, or likely to prejudice the interests of creditors, it is not unreasonable to have regard to the position of the secured creditor.