In the matter of Free Wesleyan Church of Tonga in Australia (inc (administrators appointed) Phoenix Lacquers & Paints Pty Limited v Free Wesleyan Church of Tonga in Australia Inc (administrators appointed) & Ors [2012] NSWSC 214 (13 March 2012), the plaintiff, Phoenix Lacquers, sought a declaration regarding the validity of a resolution to remove and replace joint and several administrators of the Free Wesleyan Church of Tonga which did not succeed.  The Free Wesleyan Church of Tonga in Australia was incorporated under the Associations Incorporation Act 2009 (NSW) and was in voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth).

Phoenix had submitted their proof of debt of approximately AUS$9.8 million at a creditors' meeting (made up of approximately AUS$950,000 principal and AUS$8.8 million interest, with the interest rate on the debt calculated at approximately 142% per annum).  The chairman of the creditors' meeting treated the debt as "a debt the value of which was not established" for the purposes of regulation 5.6.23(2)(d) of the Corporations Regulations 2001 (Cth), and admitted a debt of approximately AUS$1.2 million (being the principal of AUS$950,000 and interest of AUS$284,601.37) after re-calculating the interest at the Supreme Court interest rate of 15% per annum.  The majority in number of creditors voted for the resolution.  However, the majority in value (calculated on the lower amount of Phoenix's proof of debt admitted by the Chairman) voted against the resolution.

In their application, Phoenix questioned the validity of the resolution and sought declarations on whether the chairman's decision was made in bad faith, mistake as to facts, or an error of law or principle.  Phoenix contended that its debt could only be admitted in full, and the value of its debt should not have been reduced as the chairperson was not entitled to make a "just estimate" of the value of their debt under the Corporations Regulations.

The Supreme Court of New South Wales rejected all of Phoenix's contentions, holding that there was no irregularity in the meeting.  The Court held that the chairman was entitled to determine that the debt was not established on the terms of the loan and to admit a "just estimate of it", particularly because the administrators had sought opinions from their legal advisers and accounting experts on the just amount owing to Phoenix.  The chairperson also gave reasons for his decision to exercise his casting vote against the resolution, on the basis of legal advice and that he believed it was in the best interests of creditors.  The Court took the view that the Free Wesleyan Church also had some prospect of success under the Australian Securities and Investments Commission Act 2001 (Cth) regarding unconscionability in loans and therefore the value of the debt was not clearly established on the terms of the loan.

See court decision here.