Creditors resolutions and the ability of a creditor who voted against one to challenge it

25 July 2008

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Last month the Supreme Court of Western Australia considered when a court will set aside a creditors resolution to settle a claim on the grounds it prejudices creditors who voted against the proposal under section 600A of the Corporations Act 2001 (Cth). The case is reported as Australian Growth Managers Ltd v WA Forest Management Pty Ltd (In Liq) [2008] WASC 96.

The facts

WA Forest Management Pty Ltd (WAFM) and the plaintiff entered into a contract to plant eucalyptus trees on Kangaroo Island. The first plantations failed as a result of vermin damage and had to be replanted. Subsequently another company related to WAFM was incorporated and assumed the replanting contracts.

The plaintiff made a claim against WAFM for the failure of the original plantings. The dispute was settled by arbitration and the plaintiff was awarded damages. These damages were never paid and WAFM was wound up.

The liquidator of WAFM filed a number of claims against the directors of WAFM and related companies, particularly regarding the transfer of WAFM’s assets to the new company. The directors offered an out of court settlement where they would be released from the potential claims by paying cash and excluding their related companies, one of which was a secured creditor, from participating in the proceeds of winding up WAFM. The related company had obtained the position of secured creditor by paying out the original secured creditor’s debt. A majority of the creditors accepted the resolution. The liquidator valued the settlement as recovering 2.3 cents in the dollar. Given the number and complexity of the claims, the liquidator did not provide a dollar figure for the situation where WAFM pursued the claims. The plaintiff challenged the resolution on the grounds it would unreasonably prejudice the interests of the creditors who voted against the proposal.

Decision

Newnes J rejected the claim for the following reasons:

1. there were “obvious and substantial difficulties” in the claims that were being made;
2. there was no clear source of funding to pursue the claim and the liquidator had already incurred significant professional fees; and
3. a substantial portion of any amounts recovered would be taken by the secured creditor.

The key point to take from this case is a court is unlikely to overturn a creditors resolution for a settlement if it is not clear that the alternative will provide a superior return to creditors.

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