Of all of the cases decided in 2007 dealing with chairpersons and casting votes in corporate insolvencies, two deserve further mention. The first dealt with the chairperson’s ‘obligation’ to use a casting vote (the case involved a chairperson that did not use one), and the second dealt with criticism from a creditor about a chairperson who did use one, just not in favor of that creditor.
The first case is Ausino International Pty Ltd v Apex Sports Pty Ltd. The chairperson was the deed administrator of Apex. Ausino, a creditor, applied to the court to have the deed set aside for a variety of reasons. The Court adjourned the matter for a time so that a meeting of creditors could be called to determine whether the DOCA should be terminated or not.
The meeting was held and two resolutions were put to creditors – (1) for the validation of the deed, and (2) for the termination of the deed. Both resolutions ended with the majority in number and value voting in different ways. The chairperson did not use their casting vote – saying that he did not do so because, firstly the matter was to go back before the court the next day, and secondly that he had ‘significant objections’ to some of the creditor’s voting entitlements.
The matter went back to the court. The court said that there were two considerations for a chairperson:
1. whether to exercise their casting vote, and
2. if they do, which way to vote.
The judge also said: “a casting vote is intended to be a means by which a tie or deadlock is resolved so that a decision is reached, one way or the other; also that a deed administrator is subject to the duties of an “officer” in making decisions with respect to the casting vote, including the duty to act for a proper purpose.“
The court determined that the chairperson had an obligation to resolve a deadlock if they could – “the person should proceed to exercise the casting vote and resolve the deadlock unless there is some good reason to refrain from doing so; also that failure to exercise the casting vote for some irrational or irrelevant reason is inconsistent with the person’s duty.“
The two reasons given for not using the casting vote were not accepted by the court. The court had adjourned the application to seek a vote of creditors and not determining the matter because of the impending court date was not sufficient. The second reason got no better hearing. The court said “The regulations expressly cater for the case where “the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected” for voting purposes.” The chairperson should deal with voting entitlements before the vote, and then conduct the vote on that basis.
The second case (DCT v Wellnora Pty Ltd) looked at a chairperson that had exercised a casting vote and what they should take into consideration when they did so.
The chairperson called a second meeting in a voluntary administration to consider the acceptance of a proposed deed. Certain associated proofs of debt were marked as objected to and, according to the Act, were allowed to vote. The vote was tied and the chairperson used their casting vote to accept the proposed deed.
The major creditor – who voted against the deed – questioned whether the chairperson took certain factors into consideration when deciding how to vote. They said that the administrator “is obliged, in the public interest and in the interests of enforcing standards of commercial morality, to inquire into and to take account of, the conduct of the company’s controllers and of persons associated with them..“
The Court did not agree that this was part of the administrator’s obligations. The Judge stated “it was not incumbent on [the administrator] to take it upon himself to pursue a wide ranging inquiry into the public interest and commercial morality in the context of the DOCA proposal. He was not required to assume the role assigned to ASIC, the ATO, and other public authorities invested with powers and responsibilities of law enforcement.“
The judgment went on to say that an administrator’s role is to investigate the company’s business, property, affairs and financial circumstances and to form an opinion about what best serves the interests of the company’s creditors.
The chairperson should use their vote on the option that is in the best interest of creditors, and this normally is the course that would give the better commercial return the body of all creditors. The court concluded with “[The administrator] was required to exercise his casting vote honestly and in accordance with what he believed to be the best interests of the creditors.“
The result of these two cases is that administrators should (expect in exceptional circumstances) use their casting vote to resolve a deadlock, and that their vote should (expect in exceptional circumstances) be for the option that gives the best return to creditors in general.
Creditors or their proxies attending meetings should ask the chairperson to use their casting vote, or explain in the minutes why they chose not to do so. They should also ask for reasons why a casting vote was used in a particular way. A wise chairperson will do this in any event.