Australia: Creditors Meeting - Court of Appeal Favours Substance Over Speculation - Vero Insurance Ltd v Kassem - Updated

Last Updated: 14 March 2012
Article by Philip Stern

In December 2011 Vero Insurance Ltd v Kassem was determined by the New South Wales Court of Appeal. A Focus Paper summarising the facts in the matter and the findings at first instance can be found at /focuspaper/173. In summary the trial judge found that:

  • The insurer had an unliquidated claim against the developer nowithstanding that the insurer's claim arose by way of subrogation;
  • When an administrator is called upon to assess the sum of a creditor's debt and technical legal issues are raised regarding the amount of the debt it is appropriate for the administrator to admit the debt for a nominal sum only.
  • A proxy must be properly executed on behalf of a company, in accordance with section 127 of the Corporations Act 2001 (Cth) or by power of attorney. If the proxy is not validly appointed then they have no power to vote at a creditors meeting.
  • The chairperson of a creditors meeting can only adjourn that meeting if so directed by the meeting or with the consent of the meeting. A chairperson has no unilateral power to adjourn a creditors meeting.
  • The insurer had failed to demonstrate a valid reason, pursuant to s445D(1), for terminating the Deed of Company Arrangement (DOCA)

Vero Insurance Ltd (Vero) raised two grounds of appeal:

  1. the primary judge was mistaken in finding that Vero was a creditor for a nominal sum only; and
  2. the primary judge gave inadequate reasons for finding that Vero had failed to establish grounds for terminating the DOCA.

There was no appeal against the finding that a "just estimate" of the amount of Vero's debt at the time of the creditors meeting would have been a nominal sum. Rather, the contention was that the court should have found that Vero was a creditor for a substantial sum and addressed its application to terminate the DOCA on the basis that it was a substantial creditor.

First Ground

Vero made payments to the Owners Corporation totalling $808,621.70. It admitted that whilst some of its debt may be subject to discounting it still had a proper claim for hundreds of thousands of dollars and was the largest creditor.

The respondent argued that Vero was a creditor for a nominal sum only alleging that:

  1. as the developer was listed as a beneficiary on the insurance policy Vero had no right of subrogation against the developer because it was a co-insured under the policy.
  2. its claim was statute barred. The respondent alleged that the limitation period commenced when the work to which the damage related to was completed rather than the date for practical completion.
  3. The respondent claimed that the damage had become far worse during the period of Vero's delay and therefore Vero had unreasonably failed to mitigate its damage.

The Court of Appeal found that there was a real question about the correct way to approach such arguments in an application to terminate a DOCA.

"While proceedings to set aside a DOCA are not to be decided in as summary a way as administrators necessarily must make many of their decisions.......they are not usually run as fully prepared and argued litigation of the topics in dispute. These are difficult questions, and the argument in the present case does not adequately equip the court to decide them."

Rather than the delay the matter by seeking further submissions on the matter Campbell JA determined that:

  • an exclusion clause in the policy applied so that the developer was not covered and not a co-insured;
  • the mitigation argument did not result in any substantial reduction in the amount claimed by Vero; and
  • the limitation argument failed.

Therefore Vero was a creditor for a substantial sum.

Second Ground

Vero claimed that the DOCA should be terminated to enable further investigations to take place into three suspect transactions. The Court held whilst an administrator must sometimes make decisions on the basis of meagre evidence, the Court is entitled to more substantial information when determining whether to terminate a DOCA. In this case, notwithstanding the lapse of nearly a year, Vero was unable to provide any more significant evidence regarding the suspect transactions to the court than was available to the administrators at the time of the creditors meeting. Further, even though Vero had offered to fund the investigations the court held that any prospect of recovery as a result of those investigations was speculative and did not justify termination of the DOCA.

Obiter - Decisions of a Creditors Meeting

The validity of Vero's proxy was not raised on appeal, however Campbell JA acknowledged that:

"It is well established that an administrator must make expeditious decisions about matters such as whether a person is entitled to vote at a creditors meeting and if so for how much. The need for speed often results in such decisions being made in a summary fashion."

Lessons to be learned

  • An applicant seeking to set aside a DOCA must be able to demonstrate with sufficient certainty that:
  • the company has engaged in suspect transactions requiring investigation;
  • it is likely that placing the company into liquidation would produce a better result for all creditors.
  • The Court recognises that it is often necessary for an administrator to make a summary decision at a creditor's meeting based on scanty evidence.

The assistance of Heather Collins, Solicitor, of Addisons in the preparation of this article is noted and greatly appreciated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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