This week’s TGIF considers In the matter of SurfStitch Group Limited  NSWSC 164, where the Court refused to allow administrators to value claims of class action group members at a nominal $1 for voting at the second creditors’ meeting.
On 11 December 2017, the administrators of SurfStitch filed an application seeking orders:
- to further extend the convening period for the second meeting of creditors; and
- entitling ‘subordinate claimants’ to vote at that meeting together with related orders for the admission of those claims for voting purposes.
Who is a subordinate claimant?
A subordinate claimant is a party with a claim which arises from buying, holding, selling or otherwise dealing in shares in a company.
With SurfStitch facing two separate shareholder class actions, the administrators were confronted with the possibility of there being over 3,000 subordinate claimants within the meaning of section 563A of the Corporations Act 2001 (Cth) (the Act).
- payment of such claims are postponed until all other debts payable by and claims against the company are satisfied; and
- a subordinate claimant is not entitled to vote at a meeting unless there is a Court order to that effect.
The rationale for this is to reduce costs and improve efficiency of external administrations by reducing the burden of communicating with claimants who would be unlikely to have any ‘real stake’ in a company’s administration.
Did the class action claimants have an interest in the administration?
In these circumstances, the SurfStitch administrators had formed a view that there would likely be a surplus after ordinary creditors were paid. As such, it was considered that the subordinate claimants might participate in a distribution and thus had a real financial interest in the liquidation.
To that end, the administrators sought, among other things, that:
- the subordinate claimants be entitled to vote at the second creditor’s meeting; and
- they be allowed to admit those claimants for a ‘just estimate’ of $1 (the Just Estimate Order).
The Just Estimate Order was opposed by the lead plaintiff in one of the class actions. It was contended by them that $1 would likely undervalue their claims, and the possibility that the administrators would be able to make a just estimate of the claims by the time of the meeting should not be foreclosed.
The Just Estimate Issue
Because the administrators were appointed before 1 September 2017, and the second meeting of creditors had not yet been held, the applicable law was provided by the Act and the Corporations Regulations 2001 (Cth) (the Regulations), in the form they were prior to the Insolvency Law Reform Act 2016 (Cth) (ILRA), Sch 2.
Regulation 5.6.23(2) provided that a creditor must not vote at a meeting of creditors in respect of an unliquidated or contingent debt or claim, or a debt the value of which had not been established, unless a ‘just estimate’ of its value has been made. A ‘just estimate’ of $1 might be appropriate where the claim cannot be quantified, either because it is impossible to do so or there is limited material from which conclusion as to a just value can be drawn.
The administrators sought the Just Estimate Order because of difficulties they perceived would be encountered having regard to evaluating prospects of success and the various alternative approaches to estimating losses. The administrators also wanted to avoid any dispute regarding the quantum for which the claims were admitted, which they submitted would be inevitable.
Although there are situations in which ascribing a nominal value of $1 is acceptable – Justice Brereton considered this was not one of them.
In reaching this conclusion, his Honour observed that complexity and multiplicity of claims were not sufficient reasons for the administrators not undertaking a valuation exercise at all. Brereton J noted that the regulation did not require a detailed inquiry; the process was ‘somewhat summary in nature’.
Further, as proofs had not yet been called for, it was not inconceivable that the class action claimants would adduce sufficient material to articulate the quantum of their claims thus, in his Honour’s view, assigning a $1 value now would be premature.
This decision serves as a useful reminder that, no matter how time-consuming or complex it may be to value a subordinate claim (such as those in shareholder class actions), administrators will not be justified in assigning a nominal amount without even attempting to make a summary assessment of value.
That said, claimants will bear the onus of adducing material to enable an evaluation to take place. If quantum, and the basis for that quantum, fails to be articulated, then admission for $1 only may well be practicable.