NSW Court of Appeal casts a shadow over voting rights

Whilst the power of a chairperson to exercise a casting vote at creditors’ meetings is a useful mechanism to resolve a deadlock in voting, it does not confer unconstrained discretion. The recent Glenfyne Appeal[1] provides valuable guidance as to the appropriate exercise of a casting vote and also serves as a reminder of the Court’s significant powers to review and reverse failed creditors’ resolutions due to the exercise of a casting vote.

Background

These proceedings concerned the exercise of a casting vote made by the chairperson of a second creditors’ meeting, who was also the voluntary administrator, against a resolution by a bloc of creditors to appoint their preferred liquidators.

Mr Gladman was appointed as administrator of Glenfyne Farms International AU Pty Ltd (Glenfyne Farms) by the company’s sole director, Mr Flynn. At the second creditors’ meeting, Glenfyne Farms was placed into liquidation. Glenfyne Farms had the following unsecured creditors and no secured creditors:

Mr Tai, a former director and major unsecured creditor of Glenfyne Farms, then moved a resolution on behalf of Glenfyne International Holding Limited (Glenfyne International) to have his preferred liquidators be appointed as joint liquidators of Glenfyne Farms (the Resolution). The vote was deadlocked with a majority by value voting for, whilst a majority by number voting against, the Resolution.

Mr Gladman, as the person presiding at the meeting, purported to exercise his casting vote to resolve the deadlock, pursuant to rule 75-115 of the Insolvency Practice Rules (IPR).[2] As a consequence of Mr Gladman exercising his vote against the Resolution, the vote accordingly failed and Mr Gladman became the liquidator of Glenfyne Farms by default.[3]

First instance

Glenfyne International and Mr Tai sought orders in the NSW Supreme Court that the failed Resolution be taken to have been passed, effectively seeking to replace Mr Gladman with the plaintiffs’ preferred liquidators. The Court’s powers to make such orders under section 75-43 of the Insolvency Practice Schedule (IPS)[4] are engaged where a proposed creditor’s resolution fails due to the chairperson’s exercise of a casting vote or failure to do so.

The primary judge emphasised that rule 75-115(5) of the IPR precludes an external administrator from exercising a casting vote against a resolution to remove themselves. As Judge Rees characterised the failed Resolution as a resolution for the removal of the external administrator, it was held that Mr Gladman was never entitled to exercise a casting vote against the Resolution, as he had purported to do so. On this basis, Her Honour held that the Resolution simply was not passed as Mr Gladman was unable to exercise his casting vote, and as such, there was no basis for an application under section 75-43 of the IPS.[5]

NSW Court of Appeal

The key issues raised upon appeal were:

1. 1. whether the IPR precluded an administrator from exercising a casting vote against a resolution relating to the appointment of the liquidators; and
   2. whether the Court could make an order pursuant to the IPS that the proposed resolution be taken as having been passed at the second meeting of creditors and, if so, whether or not such an order ought to be made.

In relation to the first issue, the Court held that the primary judge had mischaracterised the proposed resolution under rule 75-115 of the IPR. As the administration of Glenfyne Farms had already ceased upon the earlier resolution to place the company into liquidation,[6] the Resolution for the appointment of the joint liquidators was not a vote for the removal of the external administrator. Accordingly, Mr Gladman had been entitled to exercise his casting vote against the Resolution.[7]

As Mr Gladman’s casting vote was the cause of the Resolution not passing, the Court’s jurisdiction to make an order under section 75-43 of the IPS was enlivened.[8] In considering whether the Resolution ought to be taken as having been passed, the Court reviewed the established principles regarding how a chairperson ought to exercise a casting vote.

In particular, the chairperson ought to give reduced regard to creditors voting for an ulterior purpose, unrelated to the recovery of their debts.[9] The Court emphasised that the only reason the Resolution had failed to pass outright was the votes of Mr Flynn’s lawyer, Mr Crilly, and his accountant, Mr Moustacas. It was held that these minor creditors had evidently acted contrary to their own interests as creditors, having both declined an offer from Mr Tai to purchase their respective debts in full prior to the vote.[10]

Moreover, the Court considered that for the sake of potential investigations it would be preferable that Mr Gladman be replaced as liquidator, as he had an association with Mr Moustacas, who had referred Mr Gladman for appointment.

The Court also re-stated the principle that insolvency practitioners ought to take any large disproportion between the values of the debts of the majority in value and the debts of the numerical majority into account.[11] As Mr Tai’s interests were plainly the most substantial of the creditors, the Court concluded that the Resolution should be treated as passed, thereby appointing Mr Tai’s nominees as joint liquidators.[12]

Key takeaway

The Glenfyne Appeal demonstrates that the Court will not hesitate to review and reverse a chairperson’s exercise of a casting vote at a meeting of creditors in circumstances where there may even be the appearance of partiality. In exercising casting votes, insolvency practitioners must be cautious to thoroughly consider the interests of creditors and maintain independence from appointers.