Australia: Administrator wipeout! Claimants stoked as court dumps nominal value for class action claims

This week's TGIF considers In the matter of SurfStitch Group Limited [2018] NSWSC 164, where the Court refused to allow administrators to value claims of class action group members at a nominal $1 for voting at the second creditors' meeting.

WHAT HAPPENED?

On 11 December 2017, the administrators of SurfStitch filed an application seeking orders:

  1. to further extend the convening period for the second meeting of creditors; and
  2. entitling 'subordinate claimants' to vote at that meeting together with related orders for the admission of those claims for voting purposes.

WHO IS A SUBORDINATE CLAIMANT?

A subordinate claimant is a party with a claim which arises from buying, holding, selling or otherwise dealing in shares in a company.

With SurfStitch facing two separate shareholder class actions, the administrators were confronted with the possibility of there being over 3,000 subordinate claimants within the meaning of section 563A of the Corporations Act 2001 (Cth) (the Act).

Ordinarily:

  • payment of such claims are postponed until all other debts payable by and claims against the company are satisfied; and
  • a subordinate claimant is not entitled to vote at a meeting unless there is a Court order to that effect.

The rationale for this is to reduce costs and improve efficiency of external administrations by reducing the burden of communicating with claimants who would be unlikely to have any 'real stake' in a company's administration.

DID THE CLASS ACTION CLAIMANTS HAVE AN INTEREST IN THE ADMINISTRATION?

In these circumstances, the SurfStitch administrators had formed a view that there would likely be a surplus after ordinary creditors were paid. As such, it was considered that the subordinate claimants might participate in a distribution and thus had a real financial interest in the liquidation.

To that end, the administrators sought, among other things, that:

  1. the subordinate claimants be entitled to vote at the second creditor's meeting; and
  2. they be allowed to admit those claimants for a 'just estimate' of $1 (the Just Estimate Order).

The Just Estimate Order was opposed by the lead plaintiff in one of the class actions. It was contended by them that $1 would likely undervalue their claims, and the possibility that the administrators would be able to make a just estimate of the claims by the time of the meeting should not be foreclosed.

THE JUST ESTIMATE ISSUE

Because the administrators were appointed before 1 September 2017, and the second meeting of creditors had not yet been held, the applicable law was provided by the Act and the Corporations Regulations 2001 (Cth) (the Regulations), in the form they were prior to the Insolvency Law Reform Act 2016 (Cth) (ILRA), Sch 2.1

Regulation 5.6.23(2) provided that a creditor must not vote at a meeting of creditors in respect of an unliquidated or contingent debt or claim, or a debt the value of which had not been established, unless a 'just estimate' of its value has been made. A 'just estimate' of $1 might be appropriate where the claim cannot be quantified, either because it is impossible to do so or there is limited material from which conclusion as to a just value can be drawn.

The administrators sought the Just Estimate Order because of difficulties they perceived would be encountered having regard to evaluating prospects of success and the various alternative approaches to estimating losses. The administrators also wanted to avoid any dispute regarding the quantum for which the claims were admitted, which they submitted would be inevitable.

THE DECISION

Although there are situations in which ascribing a nominal value of $1 is acceptable – Justice Brereton considered this was not one of them.

In reaching this conclusion, his Honour observed that complexity and multiplicity of claims were not sufficient reasons for the administrators not undertaking a valuation exercise at all. Brereton J noted that the regulation did not require a detailed inquiry; the process was 'somewhat summary in nature'.

Further, as proofs had not yet been called for, it was not inconceivable that the class action claimants would adduce sufficient material to articulate the quantum of their claims thus, in his Honour's view, assigning a $1 value now would be premature.

Key Takeaways

This decision serves as a useful reminder that, no matter how time-consuming or complex it may be to value a subordinate claim (such as those in shareholder class actions), administrators will not be justified in assigning a nominal amount without even attempting to make a summary assessment of value.

That said, claimants will bear the onus of adducing material to enable an evaluation to take place. If quantum, and the basis for that quantum, fails to be articulated, then admission for $1 only may well be practicable.

Footnote

1Now the ILRA has come into force, administrators can ensure the interests of subordinate claimants are accounted for by seeking orders pursuant to s 600H(1)(b) of the Act and s 90-15(1) of the Insolvency Practice Schedule (Corporations) permitting those claimants to vote in the administration.

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.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions