The NSW Supreme Court has considered what constitutes a just estimate of creditors’ claims, voting rights of proxies and the public interest of not forcing a deed of company arrangement (DOCA) onto creditors. (Maylord Equity Management Pty Ltd v Reeltime Media Ltd  NSWSC 1045 – 3 October 2008)
ReelTime Media Ltd (ReelTime) was placed into administration on 6 March 2008.
The day before, Maylord Equity Management Pty Ltd (Maylord) had written to ReelTime’s directors alleging it had suffered losses as a result of misrepresentations made by ReelTime several months earlier.
In the course of correspondence between Maylord and the administrators, Maylord provided the administrators with a detailed statement and collection of documents outlining Maylord’s claim for compensation and full particulars of the alleged misrepresentations. The letter requested that Maylord’s claim for $1m be accepted for voting purposes at a meeting of creditors to be held on 9 May 2008 (Meeting).
The administrators took the position that Maylord’s claims were “mere assertions” and that there was no evidence supporting these assertions. This was a view which the court said it could not understand as having been taken in good faith, given the detail provided to the administrators.
For the purpose of voting rights at the Meeting, the administrators provided what they asserted to be a “just estimate” of Maylord’s claim, to the tune of $10,000, being in their opinion ReelTime’s capacity to compensate Maylard at the relevant time.
At the Meeting, Maylord’s proxy sought a motion to adjourn the meeting. The administrator accepted the motion for adjournment, but ruled that any representative who had a special rather than a general proxy from a creditor was disqualified from voting on the resolution. Maylord’s representative, who held a special proxy in that it specified the representative was to vote against the resolution approving a DOCA, was thus restricted from voting on the adjournment resolution.
The adjournment motion was voted on, without Maylord’s vote, and was lost.
A DOCA was then proposed, voted on, and carried. Maylord’s vote was admitted as $10,000 instead of $1m.
Maylord brought a claim seeking that the DOCA be terminated pursuant to s445D of the Corporations Act 2001 (Cth) and that the administration be continued so that further information could placed before the creditors.
As Maylord’s claim was a claim for damages (under the Trade Practices Act) rather than a simple contract debt, its value for voting purposes should have been estimated under CR 5.6.23(2). Palmer J stated that Maylord’s claim should have been estimated by reference to what it“would have received if the company were solvent at the time the claim is to be paid”. The take home quote in relation to just estimates from this case is: “It is important to remember that CR 5.6.23(2) requires ‘a just estimate’, not ‘just an estimate’ in the sense that any stab at a figure will do.”
Palmer J stated that “an estimate which is ‘just’ has two elements, one subjective and one objective…. an estimate… is not just if it is plainly unreasonable or wrong, despite the chairperson’s honest belief to the contrary.” Palmer J then went on to point out in this case, as the administrators knew the nature of the claim and the evidence in support prior to the Meeting, their estimate “cannot be treated with the same latitude” as an administrator who must make an estimate ”on the run”. Such a situation is quite different from where a creditor arrives at a creditors’ meeting with particulars of a claim which the chairperson or administrator have not previously seen, and the chairperson or administrator must quickly make a just estimate of that creditor’s voting rights.
Proxy voting rights
This case reinforces that a proxy has the same voting rights as his or her appointer if a resolution is moved at a meeting which is not one of those specified on the proxy form. The proxy voting right is only restricted in respect of a particular resolution specified in the proxy form (CR 5.6.30). Therefore, the administrator’s act in excluding Maylord from voting on the adjournment resolution was “clearly wrong” and so the DOCA should never have been put to the Meeting for approval.
Public interest considerations
Palmer J noted in his conclusion that “it is not in the public interest that the Court permit a DOCA to be forced upon creditors having the largest stake in a company’s insolvent administration when approval of the DOCA has been produced as a result of a manifest error by the chairperson… to permit the DOCA to continue to operate in this case would undermine the confidence of the public in the integrity and utility of administrations.”
The lesson to take away from this case is that any estimate of the value of a creditor’s unliquidated or contingent claim must start with the assumption that the company was solvent at the time of the claim, and the estimate must be “just”, taking into account the evidence provided by the creditor and the amount of time that the chairperson has had to consider it.
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