On 8 August 2006, a New South Wales court found that an administrator could not use his casting vote to pass resolutions for the approval of his own fees, being resolutions from which he stood to financially benefit.
The court ordered that the remuneration could be paid in accordance with the resolutions, but found that by using his casting vote, the administrator was in breach of his fiduciary duties to act in the interests of others over his personal interests.
The plaintiff, Mr Krejic, was the administrator and subsequently the liquidator of the company, Eaton Electrical Services Pty Ltd.
In his capacity as administrator, the plaintiff chaired the second meeting of creditors held under the provisions of the Australian Corporations Act (ACA). At that meeting, the creditors resolved that the company be wound up. In the meeting, the plaintiff also put forward two resolutions for consideration by the creditors, summarised as follows:
- That the administrator’s remuneration be fixed up to an amount of $52,565 (plus GST) and the administrator be authorised to draw remuneration for time spent up to the conclusion of the administration to a maximum of $10,000 (plus GST).
- That the liquidator’s renumeration be fixed up to a maximum of $30,000 (plus GST) and any amount in excess of that requires the liquidator to call a further meeting to seek the creditors approval of the remuneration or approach the court for approval.
After the resolutions were voted on, a creditor, as he was entitled to do under the ACA Regulations, demanded a poll. The poll returned no result, which under the Regulations entitled the plaintiff to exercise a casting vote. The plaintiff as administrator and chairperson exercised his casting vote in favour of the resolutions and declared them passed.
Later, the plaintiff had reservations about his course of action and brought the matter before the court to seek declarations in relation to the resolutions.
The Relevant Principles
The court found that the plaintiff was entitled to exercise a casting vote in favour of the resolutions under the Regulations. However, His Honour noted that there is an unwritten rule that a chairperson exercising a casting vote must act honestly and in accordance with what he or she believes to be in the best interests of those affected by the vote.
Furthermore, under the ACA an administrator has the power to manage and control the company’s business, property and affairs. In that capacity, the administrator is both a fiduciary and an officer of a company. His Honour said that it is an incident of a fiduciary’s duties that he or she must subordinate his or her personal interests to those of the person or group whose interests are to be served. Any profit derived from the fiduciary office without the informed consent of the person or group may not be retained.
These principles apply equally to liquidators.
In the circumstances, the plaintiff should not have lodged a casting vote. By doing so, he was acting in breach of his fiduciary duties.
Although the plaintiff was in breach of his fiduciary duties when he lodged the casting vote, the court considered that the plaintiff should be entitled to remuneration as an administrator in accordance with the resolution for the following reasons:
- All of the creditors who voted at the meeting had been given notice of the court application and had an adequate opportunity to be heard and object, and none of the creditors objected.
- There was no evidence that the plaintiff had acted dishonestly.
- The court reached the same view in regard to the resolution for the plaintiff’s remuneration as a liquidator and ordered that the liquidator’s costs be in accordance with the resolution.
However, the plaintiff was forced to bear the costs of the application. His Honour noted that the application was a salvage exercise undertaken by the plaintiff for his own financial benefit. The breaches of fiduciary duty, although unintentional, precluded the plaintiff from obtaining a costs order. The court made no order for costs and also said that the plaintiff was not entitled to recoup his costs from the company.
What the Case Means
In New Zealand, like their Australian counterparts liquidators have fiduciary duties, as will administrators under the forthcoming insolvency regime.
While in this case the court did excuse the plaintiff’s breach of fiduciary duty, it did have costs consequences.
Administrators and liquidators should be cognisant of their fiduciary duty to serve the interests of those who they are bound to serve (the company) particularly where there is a conflict with their personal interests. Administrators and liquidators should also be aware of the possible consequences of exercising a casting vote in circumstances where they stand to financially benefit from that vote.
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.