On 11 December 2019, the NSW Court of Appeal found that an administrator should not have used his casting vote to block a resolution for the appointment of a different person as the company’s liquidator. The decision (Glenfyne International Holding Limited v Glenfyne Farms International AU Pty Ltd (in liq)  NSWCA 304) reverses a previous decision where the Court found that it did not have the power to disturb the result of the vote.
Glenfyne Farms International AU Pty Ltd (Glenfyne or the Company) was a company established in 2013 to run a cattle farming joint venture between Mr Tai and Mr Flynn. Some disagreements arose which resulted in Mr Tai resigning as a director of the Company in 2017.
In July 2018, Mr Flynn, acting without Mr Tai’s knowledge or approval, caused the Company to enter into an agreement for the sale of the Company’s farm. This was done with the assistance of Mr Flynn’s accountant.
In September 2018, Mr Flynn, acting as the sole director of the Company and without Mr Tai’s knowledge, appointed Mr Gladman as the Company’s voluntary administrator. Gladman had been recommended by Mr Flynn’s accountant.
The second creditors’ meeting was presided over by Gladman in his capacity as voluntary administrator. The Company’s creditors resolved to place the Company in liquidation.
Mr Tai and his associated entities had concerns regarding the independence of Gladman (given that Gladman had been recommended by and had a prior relationship with Mr Flynn’s accountant, who had also taken part in transactions Mr Tai considered should be investigated). Mr Tai wished to have his preferred liquidators conduct the liquidation and so moved a resolution that they be appointed. If the resolution had failed, Gladman would assume the role of liquidator by default by virtue of section 499(2A) of the Corporations Act 2001 (Cth).
Vote on the resolution
Under s75-115 of the Insolvency Practice Rules, at creditors’ meetings:
- a resolution passes if it is a majority of creditors both by value and by number vote in favour of the resolution;
- a resolution fails if it is a majority of creditors both by value and by number vote against the resolution;
- if the creditors split (e.g. a majority by number vote one way and a majority by value vote the other), the person presiding over the meeting (generally the administrator) has the casting vote and if they do not exercise the casting vote, the resolution automatically fails;
- if the resolution relates to the removal of the administrator from office, the person presiding cannot exercise the casting vote to vote against the motion (i.e. they can vote for their removal or they can simply refuse to exercise the casting vote, resulting in the resolution failing automatically).
The resolution to appoint Mr Tai’s preferred liquidators was put to a vote with a majority by value voting for ($522,228 vs $245,550.50) and a majority by number voting against (2 for vs 3 against).
The majority by value (i.e. the parties in favour of replacing Gladman) consisted of Mr Tai and his related entity. The majority by number (i.e the parties against replacing Gladman) consisted of Mr Flynn along with Mr Flynn’s legal advisor and accountant.
Each of these advisors claimed to be owed only comparatively modest sums of $1,100 each. Mr Tai had previously offered to buy these debts from the advisors (which would have prevented them from voting), but the advisors declined the offer even though it would have resulted in them receiving the amounts they claimed in full.
Gladman used his casting vote to vote against the resolution. His reasons for doing so included that Mr Flynn’s advisors (who were, in his view, the only unrelated creditors) had voted against the resolution. As the resolution to appoint an alternative person as liquidator did not pass, Gladman became the liquidator of the Company by default.
Application for review by Court
Mr Tai’s related entity applied to the Court for orders that the resolution to appoint the alternative liquidators should be taken to have passed under the Court’s power to review the exercise of casting votes under section 75-43 of the Insolvency Practice Schedule along with under the Court’s general power to make such orders as it thinks fit in relation to the external administration of a company under section 90-15 of the Insolvency Practice Schedule.
The primary judge found that, because the resolution was for the removal of Gladman (as it would have that effect), under the Insolvency Practice Rules, Gladman was not permitted to exercise the casting vote against the resolution and so he had not actually exercised the casting vote. As the casting vote had not actually been exercised, the primary judge was not satisfied that the section 75-43 power could be exercised by the Court.
The primary judge also found that the general power could not be engaged on the basis that there needed to be some failure on the part of the liquidator to attend to their duties before an order is made under section 90-15.
In any event, the primary judge was not satisfied that either power should have been used to remove and replace Gladman with Mr Tai’s preferred liquidators.
On appeal, the Court of Appeal concluded that the primary judge erred in finding that the specific and general powers were not available to the Court.
The Court of Appeal noted that the resolution was for the appointment of the alternative liquidators as the joint liquidators of the Company. While this resolution (if passed) would have the effect that Gladman would not become the liquidator of the Company, this was not the same as a resolution to remove Gladman as liquidator. Further, Gladman had already been removed as administrator by the resolution to place the Company into liquidation. Accordingly, Gladman could and indeed did exercise his casting vote against the resolution and it was open to the Court to review Gladman’s decision to exercise the casting vote under section 75-43 of the Insolvency Practice Schedule.
The Court also clarified that the general power under section 90-15 can be exercised any time the Court thinks fit (i.e. the primary judge wrongly concluded that there needs to be a failing by the liquidator before the Court’s power can be exercised).
The Court of Appeal reviewed the general principles in relation to how a person presiding should exercise a casting vote and concluded that the resolution should be taken to have passed. The most compelling reason for this conclusion was that, had the resolution not been opposed by Mr Flynn’s advisors who were minor creditors evidently acting contrary to their own interests as creditors (having rejected the offer to be paid out in respect of their respective debts), the resolution would have passed without the need for any casting vote.
Accordingly, Mr Tai’s nominees were appointed as joint and several liquidators of the Company.
The decision confirms that the Court has significant powers to review and reverse decisions by insolvency practitioners and that it will not hesitate to do so where there is even the slightest appearance of a lack of the independence and impartiality on the part of the practitioner in exercising a casting vote. Accordingly, insolvency practitioners should take extreme care when deciding whether (and if so how) to exercise their casting vote.
By Peter Clay, Senior Associate.