On 24 August 2017, Messrs Park, Olde and Hansell were appointed joint and several administrators of SurfStitch Group Limited. Prior to their appointment, two shareholder class actions were commenced against SurfStitch. The administrators identified 3,313 shareholders who may be potential group members in the class actions.
Pursuant to section 563A(1) of the Corporations Act 2001, the payment of a subordinate claim against a company is to be postponed until all other debts payable by, and claims against, the company are satisfied. The claim of each person who may be a group member in the class actions falls within limb (b) of the definition of ‘subordinate claim’ in s 563A(2) (being “any other claim that arises from buying, holding, selling or otherwise dealing in shares in the company”).
The administrators applied to the Supreme Court of New South Wales for various relief, including:
- An order pursuant to section 600H, entitling subordinate claimants to vote at the second meeting of creditors at which the future of the company is to be decided;
- An order pursuant to section 447A, modifying the operation of Corporations Regulations, reg 5.6.23, so that the Chair of the meeting may admit any group member claimant (including those who have lodged sufficient particulars of their debt or claim or a formal proof) for a just estimate of $1.
Pursuant to section 600H, subordinate creditors are to vote as a creditor of the company at a meeting of creditors only if the Court so orders. Brereton J had little difficulty in making such an order in the present case because the administrators had formed the view that even on a pessimistic scenario, it is likely that there will be a surplus after paying all debts and claims other than subordinate claims. Accordingly, his Honour was satisfied that the subordinate claimants have “a real financial interest in the external administration” of SurfStitch (being one of the matters relevant to an order under s 600H).
Turning, then, to the proposed order permitting the Chair to admit any subordinate claimant who may be a group member in the class actions for a purported just estimate of $1, Corporations Regulations, reg 5.6.23(2) provides that:
“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”.
His Honour set out (at ) the circumstances in which an administrator may admit a claim for voting purposes with a nominal “just estimate” of $1, as follows:
- where the claim cannot be quantified by a just estimate but it appears that the creditor is a creditor for at least some amount (such as where the debt is subject to an uncertain contingency);
- where there is no or limited material from which a conclusion as to the just value of the debt can be drawn;
- where it is almost impossible to ascribe a value to the claim;
- where a claim is an “all or nothing” one and there is no realistic intermediate figure.
In the present case, the administrators submitted that it was appropriate to dispense with the requirement for the administrators to make any just estimate other than a nominal one because of the difficulties that they are likely to encounter in doing so, having regard to, amongst other things, evaluating the prospects of success of the class actions, the various alternative approaches to estimating the losses (which would not necessarily be the same for all claimants), the sheer number of such claims (potentially up to 3,313), and the time and financial cost of the exercise required.
The subordinate claimants opposed the order sought, contending amongst other things that $1 would likely undervalue their claims.
Brereton J was not persuaded that the factors proffered by the administrators, referred to above, afforded sufficient reason for the administrators not undertaking the reg 5.6.23 exercise at all. In this regard, his Honour emphasised the nature of the inquiry which reg 5.6.23 requires an administrator undertake. After referring to the oft-quoted observations of Barrett J in Selim v McGrath (2003) 47 ACSR 537, which include that any decision under reg 5.6.23 “will be of a somewhat summary nature”, his Honour said (at ):
“Those observations do not mean that the exercise need not be undertaken where it is complex; rather, they mean that despite the complexity of the exercise, the administrators are entitled to take a robust, rough and ready approach to evaluation. There is a difference between a summary approach, and an arbitrary one”.
His Honour also stated that he was not persuaded, “assuming without deciding that by resort to s 447A it could be done”, that it was appropriate to circumvent the rights given to creditors in the way contemplated. In the words of his Honour (at 25]):
“Effectively removing a right of appeal from an administrator’s decision on admission of a proof, even only for voting purposes, is a significant erosion of creditors’ rights”.
Accordingly, his Honour concluded that the administrators should not be permitted to admit the subordinate claimants for $1 only without attempting to make a “just estimate” of those claims.
- The exercise which reg 5.6.23 requires an administrator undertake is not intended to be an onerous one, but it must be attempted genuinely.
- An exercise of the power under section 447A, modifying how Part3A of the Act is to operate in relation to a particular company, involves the court addressing two questions: the first is one of power (whether the order sought can be made) and the second is one of discretion (whether if it the order can be made, it ought to be made). In the present case, Brereton J declined to make the order sought as a matter of discretion, without deciding if the order could be made.
- Although subordinate creditors rank behind other creditors and claimants of a company by virtue of section 563A(1), they still have rights under the Corporations Act which must be respected. In this regard, it has been said that “it is a contravention of a deeply rooted principle of company law for a court to assist one creditor to improve its position vis-a-vis another creditor after it enters an insolvency regime”: Commercial Banking Co of Sydney Ltd v George Hudson Pty Ltd (in Liq)(1973) 131 CLR 605 at 613 per Menzies J.