Legal Insight Issue 1

Contents:

Recent High Court of Australia Decision Awarding Damages to Landlord

Liquidators/Voluntary Administrators - Voting Rights of Proxy Holders

Recent High Court of Australia Decision Awarding Damages to Landlord

Tenant Undertakes Unauthorised Works

A recent judgment of the High Court of Australia, in Tabcorp Holdings Limited –v- Bowen Investments Pty Limited, found that the landlord, Bowen Investments, was entitled to recover damages from the tenant, Tabcorp, because Tabcorp had performed substantial alteration works in the foyer of the building it was leasing from Bowen, without first obtaining Bowen's consent (either written or oral). The damages recovered by Bowen included both:

the cost of reinstating the foyer area of the building to the state it had been in prior to the unauthorised works; and
the loss of rent the landlord would suffer whilst the reinstatement works were being undertaken.

The Court rejected the notion that Bowen should be limited to damages equal to the reduction in the market value of the premises caused by Tabcorp's unauthorised works. The High Court found that Tabcorp failed to comply with its contractual obligation under its lease not to disturb the foyer area of the building and not perform alteration or building works without Bowen's prior consent.

Liquidators/Voluntary Administrators - Voting Rights of Proxy Holders

Care When Estimating Value of a Creditor's Debt for Voting Purposes

The decision of Palmer J in the Supreme Court Equity Division in October 2008 in the case of Maylord Equity Management Pty Limited –v- ReelTime Media Limited highlights the substantial dangers involved when voluntary administrators:

seek to make a "just estimate" of the value of a creditor's unliquidated debt for voting purposes as a creditors' meeting; and
make rulings in connection with a proxy holder's rights to vote on motions/resolutions put at a creditors' meeting.

If an administrator does not make a just estimate of a creditor's unliquidated debt or makes an incorrect ruling on a proxyholder's right to vote, the administrator may have to pay considerable costs and disbursements personally (without having recourse to the assets of the Company under administration).

The relevant facts were as follows:

Maylord held convertible notes in ReelTime in connection with a $1 million loan made by Maylord to ReelTime.
In March 2008 a voluntary administrator was appointed to ReelTime.
Some days before the statutory creditors' meeting of ReelTime, Maylord advised the voluntary administrator of its claim against ReelTime and suggested that the voluntary administrator accept for voting purposes at the creditors' meeting its claim for an amount of $1million. Maylord explained that certain misrepresentations had been made by ReelTime which would support a claim to set aside the loan/convertible note transaction. Numerous documents were put to the voluntary administrator in support of Maylord's claim.
After receiving Maylord's claim the voluntary administrator sought further details of the alleged claim, confirmed the view that Maylord's claim was only an assertion and stated that the information submitted by Maylord in support of its argument was not evidence.
For the purposes of the creditors' meeting, the voluntary administrator assessed Maylord's claim in an amount of $10,000, rather than $1million for voting purposes.
Maylord had appointed a proxy to attend on its behalf at the creditors' meeting. The form of proxy indicated the proxy holder was to vote against a resolution which was proposed to be put to the meeting to approve a Deed of Company Arrangement ("DOCA").
Maylord's proxy moved a motion to adjourn the meeting, presumably in light of the administrator only allowing Maylord's claim in an amount of $10,000 for voting purposes.
The administrator allowed the motion to be put, but ruled that Maylord had no entitlement to vote on that motion by its proxy.
The adjournment motion was not carried and the resolution to approve the DOCA was successful.
Maylord and the voluntary administrator accepted (for the proceedings) that the motion to adjourn the meeting would have carried and the motion to approve the proposed DOCA would have failed if the voluntary administrator had accepted Maylord's claim for voting purposes in an amount of $1million and allowed its proxy holder to vote on the resolutions.

Justice Palmer was critical of the voluntary administrator's conduct in a number of respects. He made findings on a number of issues as follows:

Where a creditor's claim is not a simple debt claim, Corporations Regulation 5.6.23(2) requires a voluntary administrator to make a "just estimate" of the value of the creditor's unliquidated claim for voting purposes.
The voluntary administrator's estimate of Maylord's claim in an amount of $10,000, in light of the substantial material Maylord had submitted to him, was not a "just estimate" of the value of Maylord's claim.
Maylord's proxy holder, by operation of Corporations Regulations 5.6.28(2) and 5.6.30, was only restricted in terms of voting by Maylord's indication in its proxy that the proxy holder was to vote against the resolution approving the proposed DOCA, but, otherwise, its proxy holder had the same right as Maylord had to vote at the meeting on any other resolutions put to the meeting, including the motion to adjourn (as the agent of Maylord).
Therefore the voluntary administrator's ruling that Maylord's proxy was not entitled to vote on the motion to adjourn the meeting was incorrect. The result was that the Court set aside the DOCA.
The voluntary administrator did not make adequate or proper enquiries of ReelTime's directors such as:
1. what their personal financial position was; and
2. whether directors and officers insurance was held.
His Honour criticised the voluntary administrator for not undertaking such enquiries (in circumstances where the voluntary administrator, in his section 439A report to creditors included comments about the capacity of the directors to satisfy any judgments which may be made against them arising out of insolvent trading claims).

His Honour ordered the voluntary administrator to personally pay the costs of the proceedings on an indemnity basis. He also highlighted the responsibility of voluntary administrators and liquidators to act in the interests of the creditors of a company as a whole and not to exhaust such assets as may remain in insolvent companies in needless or unreasonable litigation. If they do, they are at risk of incurring a personal liability for such actions.

Lessons to be learned

Properly assess the value of a creditor's unliquidated debt claim for voting purposes based on reasonable evidence, with a view to making a "just estimate". It may warrant obtaining legal advice to assist in such an assessment if time permits.
Carefully check the terms of each proxy lodged by creditors for meetings and allow the proxy holder to vote, as the creditor would be entitled to vote, on any fresh resolutions or motions put to the meeting (subject of course to any limitation in the form of proxy), even though the proxy indicates that the proxy holder is to vote in a particular way in connection with a proposed resolution referred to in the notice of meeting.
Voluntary administrators need to exercise proper care and skill to make reasonable enquires before making recommendations or predictions about the outcome of potential legal actions for the purposes of a report to creditors under Section 439A of the Corporations Act.

Hugh & Associates is a Sydney based legal firm with extensive experience in commercial, finance and insolvency law and litigation. If you require legal advice in these areas, we would be pleased to assist you.

Legal Insight ("newsletter") contains information which is the copyright of Hughlaw Pty Limited ("Hughlaw"). It should not be copied, disclosed or distributed without the authority of Hughlaw. All reasonable efforts have been made to ensure the accuracy of the newsletter and Hughlaw does not represent, warrant and/or guarantee that the newsletter is free of error.

Legal Insight is not intended to be a comprehensive publication and is not a substitute for legal advice. The newsletter and any document attached to it are confidential and intended solely for the use of the party to whom it is addressed. If you wish to remove yourself from our Legal Insight database, please reply to this email with "UNSUBSCRIBE" in the subject line.