When can a creditor surrender their security by voting in a liquidation?

01 August 2008

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The Federal Court recently considered whether voting at a meeting of creditors in a liquidation, without providing an estimated value of its debt, constituted an unequivocal election by a creditor to surrender its security pursuant to s 554E of the Corporations Act 2001 (Cth) and reg 5.6.24(3) of the Corporations Regulations 2001. The case is reported as Provident Capital Ltd v Kelso Builders Supplies Pty Ltd (in liq)(rec and manager apptd) [2008] FCA 868.

The facts

Provident was a secured creditor of Kelso pursuant to a charge. Kelso was placed into liquidation pursuant to orders made by the Supreme Court, and Kelso’s liquidator called a meeting of creditors to consider certain matters.

At the meeting, Provident as secured creditor, filed a proof of debt for the full value of Kelso's indebtedness without estimating the value of its security. Provident’s proxy voted on a show of hands on various resolutions. The chairperson informed the meeting that Provident had not provided an estimate of the value of its securities in the proof of debt. Nothing more was said on this issue at the meeting.

Approximately three weeks later, Provident appointed a receiver to Kelso pursuant to its charge. Around a month after the appointment, the liquidator wrote to the receiver stating that Provident, as creditor, had voted on resolutions based on the formal proof of debt, and sought confirmation that he would not take any further steps in relation to his "purported appointment". The liquidator argued that by voting at the creditors’ meeting without estimating the value of its securities, Provident had surrendered its rights under the charge.

Provident several months later commenced proceedings in the Federal Court, seeking a declaration that its actions in voting at the creditors’ meeting without estimating the value of its security were inadvertent, and therefore that it had not surrendered its security. The liquidator argued that the actions of Provident amounted to an unequivocal election to surrender its security pursuant to s 554E of the Corporations Act 2001 (Cth) and as such, it was not authorised to appoint a receiver.

Held

The court followed the decision of Surfers Paradise Investments Pty Ltd (in liq) v Davoren Nominees Pty Ltd (2004) 1 QR 567. In that case a secured creditor lodged a proof of debt for the full amount of the debt, disclosing a mortgage, but attributing no value to it. The creditor received from the liquidator a dividend cheque that it retained. This was held to be sufficient to constitute unequivocal conduct amounting to an election. Although submission of the proof of debt for the full amount of indebtedness may amount to evidence of an election, it was not by itself unequivocal conduct and something more was required.

In this case however, there was evidence that if Provident’s proxy realised the significance of voting on the proof of debt at the meeting of creditors without estimating the value of the security, he would have obtained instructions and abstained from voting. Also, in executing the proof of debt and proxy, it was not Provident's intention to waive any security then held by Provident over the assets of Kelso.

Jacobson J held that, on the evidence, there was “nothing more than equivocal conduct which does not rise to the extent necessary to amount to an election”. Although Provident attended the meeting and voted without disclosing the value of its security, this in itself did not amount to an election to surrender its security.

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