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01 Aug 2008

Legislation Highlighted - Sections 600A - Resolutions and Related Parties


3 min

An article in the May 2008 newsletter (Casting Votes Under Scrutiny) discussed some recent legislation that deals with the rights and obligations of chairpersons of meetings of creditors in corporate insolvency administrations, and the use of casting votes to pass or vote down resolutions.

Over the next two months we will look at some of the remedies available to people aggrieved by the passing or not of resolutions at meetings of creditors, where the resolutions passed or not because of either related parties votes or casting votes. This month we look at section 600A, which deals with resolutions and related parties.

Section 600A sets out the powers of the Court where a vote is determined by related entity votes.

(1) Subsection (2) applies where, on the application of a creditor of a company or Part 5.1 body, the Court is satisfied:

(a) that a proposed resolution has been voted on at:
(i) in the case of a company--a meeting of creditors of the company held:
(A) under Part 5.3A or a deed of company arrangement executed by the company; or
(B) in connection with winding up the company;

The first thing to note is that applications under this section are limited to creditors. This came to our attention because we were voluntary administrators of a company where a proposal for a DOCA was passed by related parties, and where we believed that other recoveries available in a liquidation would give a better return to creditors. We wondered whether we had standing to make this application, and the answer was no. The creditors have to decide whether they will challenge the resolution. (In this instance a creditor did make an application.)

The court will review a resolution if:

the vote or votes that a particular related creditor, or particular related creditors, of the company .. had been disregarded .., the proposed resolution:

(i) if it was in fact passed--would not have been passed; or
(ii) if in fact it was not passed--would have been passed;
or the question would have had to be decided on a casting vote; and

(c) that the passing of the proposed resolution, or the failure to pass it, as the case requires:
(i) is contrary to the interests of the creditors as a whole or of that class of creditors as a whole, as the case may be; or (ii) has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposed resolution, or for it, as the case may be, to an extent that is unreasonable ..:

The situation would be further aggravated if the related parties held a number of proxies from other non-related creditors where side-deals had been done to obtain those proxies, and where those creditors were not fully aware of the implications and results of the resolutions.

In cases where the court is convinced that the passing of the resolution should be reviewed because it was contrary to the interests of some or all of the unrelated creditors, it may make an order setting aside the resolution (and probably winding up the company); or an order that the resolution be again voted on at a meeting of the creditors of the company convened and held as specified in the order. To make sure that the vote is not again prejudiced by certain creditors, the court may order that a related creditor or some related creditors are not entitled to vote on that resolution.

Next month we will look at resolutions and casting votes.

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