Beware the exercise of the casting vote; guidance from the NSW Supreme Court of Appeal
In Glenfyne International Holding Limited v Glenfyne Farms International AU Pty Ltd (in liq)  NSWCA 304, the NSW Court of Appeal exercised its discretion to order that a proposed creditors’ resolution to appoint liquidators (which was rejected following the exercise of the chairperson’s casting vote), be taken to have been passed.
1. At a second meeting of creditors, it was resolved that a liquidator be appointed to the company Glenfyne Farms International AU Pty Ltd;
2. At that point in time, the administrator ceased his role as administrator, but continued to act as the meeting’s chairperson;
3. Creditors with a majority in value proposed a resolution to the effect that alternative liquidators be appointed, rather than the former administrator being appointed as the liquidator;
a. Creditors with a majority in number voted against the resolution;
b. There was a deadlock (majority in value v majority in number);
4. Because the chairperson was not an ‘external administrator’ immediately following the resolution in 1 above (the administration had ended – s 439C(c) of the Corporations Act 2001 (Cth) (“CA”)), the former administrator was not prevented by s75-115(3)(b) of the Insolvency Practice Rules (Corporations) 2016(Cth) from exercising a casting vote on the resolution in 3 above;
a. The chairperson exercised his casting vote against the proposed resolution (the practical result being that he became the liquidator, by default – s499(2A)(b) of the CA);
b. As the chairperson was entitled to exercise his casting vote (viz not an appointed external administrator exercising a casting vote against a resolution relating to their removal), the aggrieved creditors (majority in value) were entitled to apply to the Court to have the exercise of the casting vote reviewed under s75-43(4)(a) of the Insolvency Practice Schedule of the CA (“IPS”);
c. However, the Court of Appeal held that the chairperson’s exercise of the casting vote in the particular circumstances of the case, was improper and ordered that the resolution proposed by the aggrieved creditors (referred to in 3 above) should be taken to have been passed;
5. This article deals with what factors chairpersons should take into account, should such a (not unusual) event occur.
The Court of Appeal set out the applicable authorities at -:
65. The principles governing a review of the casting vote of a presiding member have been considered in a large number of cases. Some of these were collected by Gordon J in Brisconnections Management Company Limited, In the matter of Thames Blund Holdings Pty Ltd (In Liquidation)  FCA 626; (2009) 72 ACSR 233 at  in relation to predecessor provisions of s 75-43(4). In that decision, at , her Honour usefully reproduced s 21.7.4 of the IPA Code of Professional Practice for Insolvency Practitioners which sets out a number of relevant matters for consideration when exercising a casting vote. At  of her decision, Gordon J observed that:
“The exercise of the casting vote is most appropriate in circumstances where a creditor with a majority in value (such as the [A]pplicant) has such an overwhelming interest that it is inappropriate to allow a majority in number who do not have the same monetary interest to carry the day. As the case law and the Code makes abundantly clear, there is no presumption in favour of the majority in value. However, where there is large disproportion between the values of the debts of the numerical minority and the numerical majority (as is the position here) it must be a factor to be taken into account.”
66. In an earlier decision, Cresvale Far East Ltd (In Liq) v Cresvale Securities Ltd  NSWSC 89; (2001) 37 ACSR 394 at -, Austin J made the following observations in relation to the review by a Court of the exercise of a insolvency practitioner’s casting vote. His Honour said:
“In my opinion, the Court's power under s 600B, to set aside or vary a resolution passed because of the exercise of the casting vote, permits it to review the administrator's reasons for the exercise of the casting vote. The Court need not confine itself to the question whether the administrator has acted honestly as chairman, because it is given a specific statutory power to hear an application to set aside or vary the resolution. As Santow J said in Re Martco Engineering, the Court does not automatically accept the (honest) exercise of the casting vote as an appropriate one. The Court's attitude will ‘depend on factors such as whether the administrator has properly exercised the casting vote in the interests of creditors as a whole, such as in circumstances where the vote or votes which prevent one of the two conditions being fulfilled [approved by numerical majority and by value of debts] would represent an outcome unfair to the remaining creditors if not reversed by a casting vote’ (at 489).
Re Coaleen Pty Ltd (1999) 30 ACSR 200 shows that it is relevant to take into account, as factors, matters such as:
• opposition to the proposal by the major creditor, especially when there is a large disproportion between the major debt and other debts;
• support of the proposal by the directors where the proposal will deliver some advantage to them;
• misleading information in the administrator's report; and
• whether creditors who voted in favour of the deed will be prejudiced if the Court sets aside the resolution.
Additionally, the Court may be influenced by whether the administrator has made adequate investigations before deciding on the use of the casting vote. Failure by the administrator to carry out sufficient investigations into taxation and other matters, before exercising the casting vote, led Derrington J to set aside a deed of company arrangement under s 447A, in Re Bartlett Research Securities Pty Ltd (1994) 12 ACSR 707. His Honour did not refer to s 600B, but his decision was applied by Moynihan J, in the context of s 600B, in Re Coaleen Pty Ltd.”
67. It was also submitted and, in my opinion, correctly so, that:
1. when ascertaining the interests of creditors, it is their interests as creditors that are to be primarily considered, with the views of those who are voting for foreign purposes unrelated to their desire to maximise recovery of their debts to be given reduced regard: Deputy Commissioner of Taxation v Alternative Business Solutions (Aust) Pty Ltd  FCA 400 at ;
2. when it comes to deciding who should be the liquidator of a company, the views of those with a vested interest in minimising investigations, such as those involved in or benefiting from transactions likely to be impugned, should be discounted: Haulotte Australia Pty Ltd v All Area Rentals Pty Ltd  FCA 615; (2012) 90 ACSR 177 at ; and
3. a director should not to be permitted, through control of a bloc of related creditors, to override the wishes of other creditors in order to minimise scrutiny of their conduct: In the matter of Sales Express Pty Ltd (Administrators Appointed)  NSWSC 460 at -.”
The Court of Appeal held at -:
1. There were certain creditors in the majority in number group whom had pre-existing relationships with the director, whom, despite being offered full value for their claims, refused to assign their debts to the majority in value group. The Court of Appeal considered that those creditors were not voting in their best interests as creditors;
2. As there were certain investigations to be made, it was preferable that those investigations be carried out by liquidators without any pre-existing relationship with such creditors.
When a chairperson is exercising a casting vote:
1. Whilst there is no presumption in favour of majority in value, when there is a large disproportion in value between numerical majority and numerical minority, that must be a factor to take into account;
2. The relevant interest of creditors, is that of the creditors as a whole (maximisation of financial return, and not any other reason);
3. Creditors whom are voting with vested interests (i.e. minimising the liquidator’s investigations), should be discounted.Please contact us If you wish to ensure your meeting procedures and legal compliance are correct, GPA Law can assist you with any question you may have. Contact us on (02) 9262 4471 or at firstname.lastname@example.org for a free no obligation consultation.