A creditor with any form of security against a company needs to take care when considering voting at a meeting of creditors under the Corporations Act. The creditor can run the risk of surrendering their rights to any security if they vote at a meeting for the wrong amount.

We recently had to examine whether a creditor (who held a security over some assets of the company) who lodged a proof of debt and used that proof of debt to vote amounted to a surrender of security under the Corporations Regulations.

Regulation 5.6.24 has four clauses that need to be considered to determine if a creditor has surrendered their security. Each element will be discussed below with reference to our example.

The creditor must state the value of any security they claim to hold or an estimate of that security’s value.

5.6.24(1) For the purposes of voting, a secured creditor must state in the creditor’s proof of debt or claim:
(a) the particulars of his or her security; and
(b) the date when it was given; and
(c) the creditor’s estimate of the value of the security;
unless he or she surrenders the security.

We received a proof of debt and proxy form (appointing the liquidator) from the creditor when we called a meeting of creditors. The proof of debt specified the amount and particulars of the debt being claimed. The supporting evidence was a statutory demand and affidavit. Neither the proof of debt or supporting material mentioned any form of security.

A creditor holding a security is able to vote at a meeting without surrendering their security, if they vote for the balance of their debt after deducting the value of their security. There was no mention of any security in our material, so any vote did not take into account the security interest or its value.

5.6.24(2) A creditor is entitled to vote only in respect of the balance, if any, due to him or her after deducting the value of his or her security as estimated by him or her in accordance with regulation 5.6.41.

If a creditor votes at a meeting for the full value of their debt, their claim to security is deemed to be surrendered. Up until this point we were looking at the position of the creditor deeming to have surrendered their security. But this is where the regulation and the facts start to separate. The regulation states:

5.6.24(3) If a secured creditor votes in respect of his or her whole debt or claim, the creditor must be taken to have surrendered his or her security unless the Court on application is satisfied that the omission to value the security has arisen from inadvertence.

The important words are “his or her whole debt or claim”. This is relevant and easily provable if a poll is conducted at the meeting. This is where we sought legal advice.

The authorities on this point say that when a vote is taken on the voices or by a show of hands at a meeting each creditor is simply voting in their capacity as a creditor – not voting for their part or whole debt. This is also evidenced by the fact that the majority in this manner of voting is in number. The situation may be different in cases under the Bankruptcy Act where a simple majority is in the value (not number) of the creditors voting. It could be deemed under that Act that on the voices or by a show of hands is a vote using the values of debts.

It is the election to use a poll to pass or reject a resolution that is important. The voting by show of hands or voting on the voices in a resolution under the Corporations Act does not use the value of the creditor’s debt. Clause 3 of the regulation does not operate when there is no poll. Hence they have not voted “in respect of his or her whole debt or claim” and have not been “taken to have surrendered his or her security”.

The votes cast at our meeting were passed on the voices and no poll was called for or conducted.

It is not applicable to our situation, but the regulation does not apply to the Voluntary Administration regime under Part 5.3A where secured creditors can vote at the first and second meetings for the full amount of their debts without risking their surrender.

5.6.24(4) This regulation does not apply to:
(a) a meeting of creditors convened under Part 5.3A of the Act; or
(b) a meeting held under a deed of company arrangement.

It appears that secured creditors can vote at meetings outside the voluntary administration regime without surrendering their securities if they vote on the voices or make an estimate of the value of their securities and lodge a proof of debt for the difference.

Secured creditors should exercise caution when voting at meetings of creditors to ensure they do not jeopardize their secured position.