Previously, Worrells published an article concerning the effect of a secured creditor proving for their debts. To recap, they discussed the case of Surfers Paradise Investments Pty Ltd (in liq) v. Davoren Nominees Pty Ltd  1 QR 567 That same issue has recently been revisited by the Federal Court in Provident Capital Ltd v Kelso Builders Supplies Pty Ltd (in liq)  FCA 868.
Under section 554E of the Corporations Act 2001, when an insolvent company is being wound up, secured creditors cannot prove for the whole or part of a secured debt. However, if a creditor surrenders the security to the liquidator, then the creditor can prove for the whole of the secured debt (554E(3)).
What caused difficulties in both Surfers Paradise Investments and the Provident Capital cases was section 554E(5) which says that when the security is not realised or surrendered then the creditor is allowed to estimate its value and prove for the balance due after they estimate the value.
In Surfers Paradise Investments, Davoren Nominees had lodged a proof of debt, voted and received and banked a dividend. The Court of appeal found there that by lodging a proof of debt where the value of the security was nil and accepting and depositing the dividend cheque, the secured creditor had elected to surrender the benefit of the security. That highlights one of the traps for secured creditors in an insolvency situation.
In Provident Capital, Provident had a charge over Kelso who was later placed into liquidation. Provident had two charges over Kelso’s properties, namely a Hot Springs Health Resort at Moree and over a factory and land in Wentworthville.
The Wentworthville property was destroyed by a fire and Kelso’s insurance refused to pay out about $9 million for the damage. Kelso then sued QBE (their insurers) and during the litigation, went into liquidation. As the case against QBE was ongoing and worth about $9 million, the liquidator asked creditors to express interest in the case.
The solicitor for Provident, a Mr Tiernan was told that he needed to complete a proof of debt and a proxy so that the liquidator could estimate how much the security was worth. Mr Tiernan was then told that because someone had offered to purchase the Hot Springs for $3.5 million then the value of the security couldn’t be less than that.
Mr Tiernan attended a meeting of creditors pursuant to a proxy and lodged a proof of debt. In the proof of debt, Mr Tiernan (or Provident) did not put a value on the security. Various matters were voted on by a show of hands. Mr Teirnan, using his proxy, voted by a show of hands for many of the resolutions.
An application was brought to determine if Provident had surrendered the security. Given that Mr Tiernan had voted, the liquidators argued that Provident had surrendered its security. Mr Teirnan gave evidence that had he known the significance of the vote without estimating the value of the security, he would not have voted and obtained instructions from Provident as to how much the security was worth and would not have voted at the meeting.
It came on for hearing in the Federal Court at Sydney before Justice Jacobson who held that:-
(i) Voting on the voices or by way of show of hands is not a proper way to vote in respect of the value of the debt or claim.
(ii) Provident had to have made an unequivocal election vote to surrender the security and they had not done this.
(iii) Provident had only exhibited equivocal behaviour because they had lodged a proof of debt and voted by show of hands without providing a proper valuation of the security.
(iv) This was not enough to be an unequivocal election.
(v) Provident had not surrendered their security.
This is an example of the issues that can arise for all concerned when secured creditors vote in liquidations. Caution should be used by all concerned as, while in this case it did not arise, the benefit of security can be inadvertently waived to the detriment of the secured creditors.
Quinn & Scattini