A question that comes up from time to time with various stakeholders relates to the various nuances around creditor's meetings.
At a meeting of creditors, the following categories of creditors are only able to vote for the value as detailed below:
Creditor Categories and Voting Limitations
| Creditor Category | Description | Example | Limitation on Voting Rights |
| Unliquidated Debts |
Claims where the creditor and the company in liquidation have not agreed to a precise amount of the debt and determination of the amount of debt is subject to a Court order. | Claim for damages where the Court has not made an order quantifying the debt. | Value of voting rights is limited to a 'just estimate'. If a just estimate cannot be made by the creditor or the chairperson, the voting value will be nil. |
| Contingent Debts |
An existing obligation of the company that may become a present liability upon the happening of a future event. (Re William Hockley [1962] 1 WLR 555) | Company is party to a contract where a future event may trigger liability. | The value of voting rights must be based on a just estimate. |
| Debts where the value is not yet established |
A present liability exists, but the net amount owed is presently uncertain. | A secured creditor has security over a motor vehicle not yet sold, where a shortfall is anticipated. | The voting value is limited to the estimated shortfall amount. |
Note: Secured creditors must include an estimate of the value of their security on their proof of debt form. If they fail to do so, they will be deemed to have surrendered their security.
Landlord or Other Lease Creditors
Debts owed to landlords and lease creditors are considered incurred when the lease agreement is entered into. A just estimate for voting purposes may include future rent payable until the end of the lease term.
Example: If the company in liquidation has two years remaining on the lease, the creditor may include the rent for the remaining two years in their just estimate.
Purchaser of an Existing Debt
If a person purchases a debt at a discount (e.g., paying $500 for a $1,000 debt), they are only entitled to vote at creditors'meetings for the amount they paid - in this case, $500.
However, if a dividend is subsequently declared, they may prove for the full face value of the original debt ($1,000 in this example).
Employees
- Superannuation entitlements are claimed by the Australian Taxation Office (ATO) on behalf of employees, so the ATO holds the voting rights.
- Other employee entitlements (e.g., unpaid wages, leave) can be voted upon by employees unless paid under the Fair Entitlements Guarantee (FEG), in which case FEG holds the voting rights.
If employees are still employed (e.g., during a trade-on or a proposed DOCA), some entitlements may not yet be crystallised - such as long service leave or pay in lieu of notice. Only crystallised entitlements (due upon termination, plus entitlements due and payable at the time of liquidation such as unpaid wages) can be voted upon.
Secured Creditors
Refer to the table above for how secured creditors'voting rights are calculated based on the value of their security and any shortfall.
Creditor Rights to Request a Meeting
In a liquidation, creditors with sufficient voting rights may direct the liquidator to call a creditors'meeting for purposes such as:
- Discussing the liquidation;
- Asking questions;
- Providing relevant company information;
- Considering a resolution (e.g., replacing the liquidator).
The ability to compel a meeting depends on:
- The type of liquidation (Court vs. Creditors'Voluntary);
- The percentage of total creditor valueheld by the requesting creditors;
- Whether the request is considered reasonable.
Thresholds to Request a Creditors'Meeting
| Liquidation Type | % of Total Creditor Value | Power to Direct Liquidator | If the Request is Not Reasonable |
| Court Liquidation |
-25% or more -<10% but >25% | - Ask the liquidator in writing. The liquidator must call the
meeting unless the request is deemed unreasonable. - Creditors must also pay (or secure) the cost of holding the meeting. If security is provided, the liquidator must convene the meeting. |
The liquidator must notify the creditors who made the request and provide written reasons for the refusal. |
| Creditors' Voluntary Liquidation (CVL) |
<5% (excluding related entities) | Must make the written request within 20 business days of the winding up resolution. Related entities cannot be counted toward the threshold. | Liquidator must notify creditors if deemed unreasonable and provide reasons. If the creditors requesting the meeting pay security for the costs of the meeting, the meeting must still be held. |
When Is a Request Considered Unreasonable?
A liquidator may determine a request to be unreasonable in the following situations:
- Holding the meeting would cause substantial prejudice to creditors or third parties, and the harm outweighs the benefits.
- Insufficient funds are available in the liquidation to hold the meeting.
In either case, the liquidator must inform the creditors who made the request and provide reasons.
When Must a Meeting Be Convened Regardless?
A liquidator is required to convene a creditors'meeting if:
- A Committee of Inspection (COI) directs the liquidator to do so - provided the request is reasonable;
- Creditors pass a resolution requiring the meeting.
Final Thoughts - Understanding the intricacies of creditors'meetings and voting rights is essential for stakeholders involved in the insolvency process. Whether you are a landlord, an employee, or a secured creditor, your ability to influence the outcome of a liquidation often comes down to how your claim is assessed for voting purposes. Seeking advice or clarification early can ensure your interests are adequately represented at the table.
Cathro & Partners are experts in providing insolvency and restructuring services that help to create and preserve business value and to enable individuals to make a fresh start. The firm specialises in restructuring, turnaround, personal and corporate insolvency, safe harbour, secured enforcement services, government advisory services and pre-lending services.
For a confidential discussion on any of the above, please reach out to one of our experts
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.
