Most Read Contributor in New Zealand, September 2016
The Court of Appeal has confirmed that if a secured
creditor votes its secured debt in a liquidation meeting,
the vote is invalid – and the security remains.
Liquidation meetings are for unsecured creditors. A
secured creditor has no vote, except in respect of debt that is
The issue arose after a secured creditor voted at a
creditors' meeting in favour of a resolution to replace the
liquidators. The resolution did not achieve the required support,
despite the secured creditor purporting to vote its whole debt.
The liquidators then alleged that the creditor had lost its
security, being mortgages over millions of dollars' worth of
land. They were relying upon Liquidation Regulation
Subject to the Act, if a secured
creditor votes in respect of the creditor's whole debt, the
creditorshall be taken to have surrendered his or her
They lost in the High Court so tried again in the Court of
Appeal, which upheld the High Court's decision, finding that
Regulation 22(2) did not apply.
Security wasn't surrendered through voting
The Court of Appeal's starting point was that the
Regulations had to be interpreted subject to, and consistently
with, the Companies Act 1993. The Act debars secured creditors from
they have surrendered their charge and are claiming as an
unsecured creditor, or
they are claiming only for the unsecured portion of their
Neither condition applied in this case.
The secured creditor had made it clear to the liquidators that
it intended to exercise its power of sale under its mortgage
securities and the liquidators had confirmed to the secured
creditor in writing that its debts were wholly secured. Hence the
creditor had not been entitled to vote.
There is a provision in the Act (Clause 11, Schedule 5) for
technical errors or irregularities at creditors' meetings to be
"cured" by the Court when that will not disturb the
The liquidators asked the Court to use this power to overlook
the fact that the vote was cast in error but the Court declined,
saying "a vote without entitlement is not a mere irregularity
In addition, the Court noted that the proof of debt forms
supplied by the liquidator did not comply in important respects
with the forms required by the Act and the schedule to the
Chapman Tripp comments
In our view, the judgment correctly protects substantive
Mortgagees should not face a loss of security as a result of
their failure to understand the finer points of insolvency law and
procedure. That must particularly be the case where the
liquidators' own form contributes to any such lack of
It would pay for liquidators to check that their forms, in
substance, match those prescribed by the Schedule to the
We note the Court of Appeal's decision is only relevant to
liquidations, and not to voluntary administrations. In voluntary
administrations, all creditors can vote the full amount of their
debt, whether or not secured.
As a demonstration of India's combined political will, the much awaited and debated Insolvency and Bankruptcy Code, 2016 was passed by the Upper House of the Parliament on 11 May 2016 (shortly after being passed by the Lower House on 5 May 2016).
The Code envisages that the insolvency resolution processes will be conducted by insolvency professionals.
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