JWS successfully protected the rights of the class action creditors to have their claims in the voluntary administration of SurfStitch Group Limited (SGL) valued appropriately, for the purposes of voting at the second meeting of creditors of SGL. Joseph Scarcella of JWS acts for Nakali Pty Limited (Nakali), the lead plaintiff in the first class action proceeding instituted against SGL.

“The administrators should not be permitted to admit the subordinate claimants for $1 only, without making a genuine - albeit summary - attempt to make a “just estimate” of those claims."

In proceedings last week before Brereton J, the voluntary administrators of SGL sought orders for (among other things) extending the time for convening the second meeting of creditors, and also pre-emptory orders permitting the administrators to admit the claims of certain creditors for a nominal value of $1 for the purpose of voting at that meeting. Those creditors comprise the shareholders of SGL who have commenced (or who might later join) class action proceedings against SGL in relation to alleged misleading and deceptive conduct of SGL concerning earnings announcements it made to the market in 2016 (the Class Action Creditors).

JWS sought and was granted leave to intervene in the administrators’ application, on behalf of Nakali. It was common ground between the administrators and Nakali that the Class Action Creditors are subordinate claimants of SGL within the meaning of s563A of the Corporations Act 2001 (the Act). It was also common ground that the Class Action Creditors are likely to receive a distribution in any eventual deed of company arrangement or winding up of SGL. It was agreed that the Class Action Creditors had a “real financial interest” in the outcome of the administration (though the extent of any future dividend is not yet known), and accordingly were entitled to vote at the meeting pursuant to s600H of the Act.

The administrators claimed that up to 3,313 shareholders of SGL might potentially be Class Action Creditors, and that to value the claims of those people for the purpose of voting at the meeting would be expensive and difficult. The administrators claimed that in order to properly value those claims, it would be necessary for them to undertake a complex method used in litigation for valuing damages, known as an “event study”. The administrators claimed that an event study could take months to complete, and would be prohibitively expensive. They claimed difficulty in assessing the prospects of success of the Class Action Creditors’ litigation. The administrators sought an order pursuant to s447A of the Act, modifying the operation of Corporations Regulation 5.6.23 which requires that the administrators form "a just estimate” of the value of the claims of the Class Action Creditors, and instead permitting them to admit the claim of each Class Action Creditors for $1. His Honour noted that the administrators’ object was to “avoid controversy about the quantum for which [claims] are admitted” and to “circumvent any potential appeal from a ‘just estimate’”.

Nakali submitted that this was not a case where it was “almost impossible to ascribe a value” to the claims of the Class Action Creditors (see Young CJ’s comments in Kirwan v Cresvale Far East Pty (2002) 44 ACSR 21 at [395]), justifying the attribution of the nominal $1 value. Nakali argued that there could no logical basis for attributing the same value ($1) to the claim of a shareholder who bought 10 shares, and another who bought 10,000 shares. It submitted that the process required to be undertaken by the administrators, in forming a just estimate, lay somewhere between assigning a nominal $1 value, and conducting a full event study. It also argued that there was no reason that the Class Action Creditors should not be able to avail themselves of their right to appeal any “just estimate” made by the Administrator.

His honour agreed with Nakali. He stated “… 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….The claimants will bear the onus of adducing sufficient material to enable the administrators to evaluate their claims, and if they do not, they are likely to be admitted for $1 only. But if they quantify their claim and explain the basis of it, it may well be practicable for the administrators to make a summary assessment of its value… But they should not, at this stage be exonerated from even attempting to [value the claims]."