The decision of Austino Wentworthville Pty Ltd v Metroland Australia Limited & Ors [2013] NSWCA 59 was an appeal brought by Austino against Metroland and its voluntary administrator Mr Levi (“Levi”) to amend a proof of debt for the purpose of voting at a meeting of creditors in a voluntary administration.

The decision is relevant to insolvency practitioners who act as voluntary administrators in assessing voting entitlements in the voluntary administration process in addition to creditors who offer assets as security to obtain finance.

Background

Metroland was placed into a voluntary administration under Part 5.3(a) of the Corporations Act (Cth). Levi was appointed as Administrator.

At a meeting of creditors of Metroland it was resolved that Metroland execute a Deed of Company Arrangement (“Deed”). The Deed was then executed and immediately implemented.

For the purposes of voting at the meeting approving the Deed, Levi admitted Austino as a creditor of Metroland in the sum of $353,312.18. Austino argued it should have been admitted for the amount of $2,826,496.00 with corresponding voting entitlements.

Austino voted against the Deed of Company Arrangement and had Levi admitted Austino as a creditor for $2,826,496.00 Levi would have been required to exercise his casting vote, potentially leading to the DOCA being rejected.

The debt Austino alleged was owed to it was a net income guarantee wherein Metroland covenanted that Austino would receive rent from a shopping centre to at least a specified sum and if the rent actually received was less than the amount guaranteed, Metroland would pay to Austino the sum equal to the shortfall.

Decision at first instance

Austino filed proceedings in the equity division of the New South Wales Supreme Court seeking relief against Metroland and Levi including to amend the proof of debt to recognise Austino as a creditor in the amount of $2,825,496.00.

At first instance, the Court held Austino was not a creditor in the sum of $2,826,496.00, or at all, as Austino had assigned the net income guarantee to the Bank of China (“BOC”) to secure a loan.

Appeal

The appeal was a challenge to the primary Judge’s conclusion regarding the effect of the Deed of Assignment in depriving Austino of the status of creditor, in the sum of $2,826,496.00 or at all .

It is necessary to consider why Austino was not considered a creditor to appreciate the implications of this Decision on insolvency practitioners and creditors.

Which entity was a creditor of Metroland was a question to be decided by analysis of the Deed of Assignment to ascertain whether Austino had made an absolute assignment of their rights under the rental guarantee, or, whether the assignment was merely by way of charge to secure advances made to Austino.

The Court of Appeal held the effect of the Deed was to make an absolute assignment of the rights to the net income guarantee to BOC, meaning Austino was unable to enforce the net income guarantee and the real creditor was in fact BOC.

Had the assignment merely been by way of charge, then Austino would have retained their status as creditor and been required to be admitted for the purposes of voting on the Deed for the total amount claimed.

Relevance to insolvency practitioners/creditors

For creditors, this decision highlights the inadvertent effect which can be achieved when providing security to third parties to secure finance and the need to understand the consequences of what is being agreed to ensure appropriate informed decision making occurs when entering these types of security arrangements.

Insolvency Practitioners should also understand the importance of making adequate investigations into the status of creditors and the amounts alleged to be owed to them. In this case it required an examination of the legal effect of the assignment and assessment of whether it was absolute. If absolute it meant that Austino was not a creditor and did not have the right to prove or vote in the administration.

Assessment of proofs of debt require appropriate investigations to be made by the insolvency practitioner and advice taken, if necessary, to ascertain who the creditor is for the purposes of proving in vote and the extent to which they are to be admitted.