FEDERAL COURT OF AUSTRALIA Provident Capital Limited v Kelso Builders Supplies Pty Limited (in Liquidation) (Receiver and Manager Appointed) [2008] FCA 868 INSOLVENCY – application for declaration that creditor had not surrendered its security – creditor completed proof of debt form without estimating value of security – creditor voted at meeting by show of hands or on the voices – no poll taken – no relevant conduct – no question of inadvertence – no surrender of security Corporations Act 2001 (Cth) s 554E Corporations Regulations 2001 reg 5.6.24 Health & Life Care Ltd v SA Asset Management Corp (1995) 18 ACSR 153 applied Re Douglas Homes Qld Pty Ltd (in liq) [1980] Qd R 528 cited Sargent v ASL Developments Limited (1974) 131 CLR 634 distinguished Surfers Paradise Investments Pty Limited (in liq) v Davoren Nominees Pty Limited (2004) 1 QR 567 applied Young v ACN 081 162 512 (formerly Dallen Design Pty Ltd) (2005) 218 ALR 449 distinguished PROVIDENT CAPITAL LIMITED (ACN 082 735 573) v KELSO BUILDERS SUPPLIES PTY LIMITED (IN LIQUIDATION) (RECEIVER AND MANAGER APPOINTED) (ACN 002 026 039) NSD 85 OF 2008 JACOBSON J 6 JUNE 2008 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 85 OF 2008 IN THE MATTER OF KELSO BUILDERS SUPPLIES PTY LIMITED (IN LIQUIDATION) (RECIEVER AND MANAGER APPOINTED) (ACN 002 026 039) BETWEEN: PROVIDENT CAPITAL LIMITED (ACN 082 735 573) Applicant AND: KELSO BUILDERS SUPPLIES PTY LIMITED (IN LIQUIDATION) (RECEIVER AND MANAGER APPOINTED) (ACN 002 026 039) Respondent JUDGE: JACOBSON J DATE OF ORDER: 6 JUNE 2008 WHERE MADE: SYDNEY THE COURT DECLARES THAT: 1. By attending and voting at the meeting of creditors on 21 August 2007, Provident Capital Limited did not surrender its security constituted by the deed of charge and the mortgage over the Moree Hot Springs Health Resort. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 85 OF 2008 IN THE MATTER OF KELSO BUILDERS SUPPLIES PTY LIMITED (IN LIQUIDATION) (RECIEVER AND MANAGER APPOINTED) (ACN 002 026 039) BETWEEN: PROVIDENT CAPITAL LIMITED (ACN 082 735 573) Applicant AND: KELSO BUILDERS SUPPLIES PTY LIMITED (IN LIQUIDATION) (RECEIVER AND MANAGER APPOINTED) (ACN 002 026 039) Respondent JUDGE: JACOBSON J DATE: 6 JUNE 2008 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 Provident Capital Limited is a secured creditor of Kelso Builders Suppliers Pty Limited (in liquidation). Provident filed a proof of debt for the full value of Kelso's indebtedness to it without estimating the value of its security. A representative of Provident attended a meeting of creditors of Kelso on 21 September 2007 and voted on a number of resolutions. The representative voted on a show of hands or by voices, or orally, no poll being taken. 2 This matter came before me on 16 May 2008 as a matter of some urgency when I was sitting as the corporations duty judge. On that day Provident moved on its originating process filed on 18 January 2008 which seeks an order pursuant to reg 5.6.24(3) of the Corporations Regulations that the action of Provident in voting at the meeting of creditors without estimating the value of its security was inadvertent. 3 On 16 May, during the course of oral argument, counsel appearing for the liquidator of Kelso raised the possibility that the actions of Provident may be seen to amount to an unequivocal election to surrender its security pursuant to s 554E of the Corporations Act 2001 (Cth) and in accordance with the principles stated by the High Court in Sargent v ASL Developments Limited (1974) 131 CLR 634. Legislation 4 I will set out the relevant legislative provisions which are as follows: Section 554E Proof of debt by secured creditor (1) In the winding up of an insolvent company, a secured creditor is not entitled to prove the whole or a part of the secured debt otherwise than in accordance with this section and with any other provisions of this Act or the regulations that are applicable to proving the debt. (2) The creditor's proof of debt must be in writing. (3) If the creditor surrenders the security to the liquidator for the benefit of creditors generally, the creditor may prove for the whole of the amount of the secured debt. (4) If the creditor realises the security, the creditor may prove for any balance due after deducting the net amount realised, unless the liquidator is not satisfied that the realisation has been effected in good faith and in a proper manner. (5) If the creditor has not realised or surrendered the security, the creditor may: (a) estimate its value; and (b) prove for the balance due after deducting the value so estimated. (6) If subsection (5) applies, the proof of debt must include particulars of the security and the creditor's estimate of its value. Regulation 5.6.24 Votes of secured creditors (1) For the purposes of voting, a secured creditor must state in the creditor's proof of debt or claim: (a) the particulars of his or her security; and (b) the date when it was given; and (c) the creditor's estimate of the value of the security; unless he or she surrenders the security. (2) A creditor is entitled to vote only in respect of the balance, if any, due to him or her after deducting the value of his or her security as estimated by him or her in accordance with regulation 5.6.41. (3) If a secured creditor votes in respect of his or her whole debt or claim, the creditor must be taken to have surrendered his or her security unless the Court on application is satisfied that the omission to value the security has arisen from inadvertence. (4) This regulation does not apply to: (a) a meeting of creditors convened under Part 5.3A of the Act; or (b) a meeting held under a deed of company arrangement. The facts 5 The facts may be stated briefly. Provident entered into a deed of charge with Kelso on 2 August 2001. The charge is a fixed and floating charge and was registered on 9 August 2001. Kelso owned a factory and land situated at Wentworthville. That property was subject to Provident's charge. 6 Provident also held a further security in the form of a first registered mortgage over a property known as the Moree Hot Springs Health Resort. 7 The property at Wentworthville was insured by QBE Insurance Australia Ltd. During the currency of the contract of insurance with QBE, Kelso suffered a fire at the Wentworthville premises which caused the total destruction of the property, including the contents, stock and business records. QBE apparently declined to indemnify Kelso, but proceedings were commenced by Kelso in the Supreme Court of New South Wales against QBE on 27 March 2006. The claim sought an amount of nearly $9 million in damages. 8 Some three days later on 30 March 2006, Mr Sherman of Ferrier Hodgson was appointed official liquidator of Kelso by the Supreme Court of New South Wales. The claim against QBE was potentially a major asset of Kelso and Mr Sherman sought expressions of interest from creditors to fund the claim against QBE. 9 Prior to 21 August 2007 there was some discussion between Ms Phillips of Ferrier Hodgson and Mr Tiernan, the solicitor for Provident about the question of funding of the litigation against QBE. The correspondence to which I was taken by counsel for the liquidator demonstrates that there was a live issue as to the security over the Moree property, in particular the value of that security. 10 On 15 August 2007 Ms Phillips had a telephone discussion with Mr Tiernan about a meeting of creditors which was called for 21 August 2007 to discuss the question of litigation funding. Ms Phillips' file note of the discussion records that she advised Mr Tiernan that he needed to complete a proof of debt and a proxy and it was necessary to estimate the value of the security held by Provident. 11 On 21 August 2007 Ms Phillips sent an email to Mr Tiernan stating: In addition, I enclose a proof of debt form for your completion in respect of the meeting of creditors. In calculating the claim, your client is required to estimate the value of its security, being the Moree properties. In this respect, we note from our investigations that an offer to purchase the properties for $3.5M was received in January 2007, which was rejected by your client. I would therefore anticipate that the estimated value of the security would be no less than this amount. 12 The minutes of the meeting of 21 August 2007 record that Mr Tiernan was in attendance as a proxy for Provident. The attendance register records Mr Tiernan's presence at the meeting and the amount claimed by Provident, which was slightly in excess of $5 million. 13 The minutes record discussion about various alternative courses for the funding of the litigation against QBE. The minutes also record that Mr Tiernan voted, pursuant to his proxy, on various resolutions which were dealt with by a show of hands. 14 Ms Duggan, who is a principal of Ferrier Hodgson, was the chairperson of the meeting. Her affidavit of 16 May 2008, at [44], records what she said about the attendance of Mr Tiernan at the meeting. Ms Duggan states that she informed the meeting that Provident held security over properties at Moree and that her inquiries had indicated that an offer to purchase the properties for $3.5 million was received in January 2007 but was rejected by Provident. She also says that she stated that Provident had not provided an estimate of the value of its securities in the proof of debt lodged with the liquidator for the meeting. The minutes indicate that there was no further discussion about this question. 15 I should add that prior to the meeting Mr Tiernan forwarded the email which he received from Ms Phillips to a director of Provident, Mr O'Sullivan. It appears that the email was sent almost immediately on to Mr O'Sullivan. 16 Mr Tiernan states that he does not recall specifically reading the email from Ms Phillips. He says that if he had 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 from Mr O'Sullivan and would have given an estimate of the value of the security and, pending any instructions from Mr O'Sullivan, would not have voted at the meeting. 17 Mr O'Sullivan has also sworn an affidavit. He says that he signed the proof of debt. He says that in executing that document and the proxy it was not his intention, nor was he authorised, to waive any security then held by Provident over the assets and undertaking of Kelso. 18 Approximately three weeks after the meeting. Provident appointed a receiver of Kelso pursuant to its fixed and floating charge. However, on 5 October 2007, Mr Sherman wrote to the receiver stating inter alia that Mr Tiernan voted on resolutions based on the formal proof of debt. He referred Mr Godfrey, inter alia, to the provisions of s 554E of the Act and to regs 5.6.23 and 5.6.24. The letter concluded with a request for Mr Godfrey to confirm that he would not take any further steps in relation to his "purported appointment" as receiver of Kelso. Reg 5.6.24 19 In Health & Life Care Ltd v SA Asset Management Corp (1995) 18 ACSR 153, the Full Court of the Supreme Court of South Australia dealt with the question of construction of reg 5.6.24 and the principles of election relating to the surrender of a security by a secured creditor. Doyle CJ (with whom Duggan and Nyland JJ agreed) said at 158 that: …reg 5.6.24(3) refers to a creditor who has voted in respect of his or her whole debt or claim…When a vote is taken on the voices or by a show of hands each creditor who votes does so simply in the capacity of a creditor. The Chief Justice went on to say that in his opinion: …it cannot be said that a creditor who votes on the voices (or by a show of hands) votes in respect of the value of the debt or claim. 20 It is plain on the evidence before me that this is what occurred in the present case. It follows from what Doyle CJ said that the provisions of reg 5.6.24(3) were not enlivened. This regulation contains a statement of one situation in which a secured creditor is deemed to have surrendered his or her security. However, as I have said, that provision is not enlivened in the present case and it is unnecessary to further consider this issue. 21 I should add that the decision of Gzell J in Young v ACN 081 162 512 (formerly Dallen Design Pty Ltd) (2005) 218 ALR 449, which dealt with the question of inadvertence, does not arise in the present case. This is because the question of inadvertence would only need to be addressed if the creditor voted in respect of the whole debt or claim. Election 22 Doyle CJ in Health & Life Care went on at 162 to explain the relationship between reg 5.6.24 and the provisions of s 554E of the Act. It is evident that even if the provisions of the regulations are not applicable, there may nonetheless amount to conduct on the part of a secured creditor which would constitute an election within the principles stated in Sargent v ASL. 23 Such a situation arose in a decision of the Queensland Court of Appeal in Surfers Paradise Investments Pty Limited (in liq) v Davoren Nominees Pty Limited (2004) 1 QR 567. In that case the respondent was a secured creditor who lodged a proof of debt for the full amount of the debt, disclosing a mortgage, but attributing no value to it. Subsequently the secured creditor received from the liquidator a dividend cheque which it banked and retained. The dividend was calculated on that basis of the full amount of the appellant's total indebtedness. The lead judgment was delivered by Dutney J, but there is also a useful statement of the applicable principles in the judgment of Williams JA. (Jerrard JA agreed with both Williams JA and Dutney J). 24 Dutney J referred to the well-know statement of principle of Stephen J in Sargent v ASL where Stephen J observed that: The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that [the words or conduct are] consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other. Stephen JA also observed that there may be less unequivocal conduct which may provide some evidence of an election and that this may be sufficient if it is coupled with actual knowledge of the right of election. 25 Dutney JA went on to refer to two earlier decisions, one of which (Re Douglas Homes Qld Pty Ltd (in liq) [1980] Qd R 528) dealt with the submission of a proof of debt. It was observed in Re Douglas Homes that the proof of debt was some evidence of an election to surrender but it is not by itself conclusive evidence. 26 The effect of the reasoning in Surfers Paradise Investments seems to be that something more than the mere submission of the proof of debt is required to constitute an election in the sense referred to in Sargent v ASL. In Surfers Paradise Investments the Queensland Court of Appeal was of the view that there was an election because the receipt of the dividend cheque was unequivocal. At that point in time, as Dutney J observed at [37], the respondent was required to make a choice between accepting the cheque or returning it to the liquidator. The assertion of a right to retain the dividend evidenced by banking the cheque and retaining the proceeds was sufficient to constitute unequivocal conduct amounting to an election. 27 Plainly, that is not what occurred in the present case. Whilst it is true that the submission of the proof of debt for the full amount of the indebtedness to Provident may amount to some evidence of an election, it is not by itself unequivocal conduct. 28 I have considered the evidence disclosed in the affidavits and correspondence and discussions between the parties both before and after the meeting of creditors of 21 August 2007. It seems to me that all of this evidence reveals nothing more than equivocal conduct which does not rise to the extent necessary to amount to an election consistently with the principles stated in the well-known authorities. 29 In particular, I do not consider that what was said in the file note of 15 August 2007 or the email of 20 August 2007 was sufficient, notwithstanding that Mr Tiernan attended the meeting and voted in the circumstances which I have recorded above. Nor does what Ms Duggan said at the meeting take the matter beyond that which is recorded in the emails. Conclusion and orders 30 It follows from what I have said above that the basis upon which the originating process was filed has been shown by a careful consideration of the evidence to no longer require any order to be made in relation to the applicability of reg 5.6.24 or to the issue of inadvertence. Those were the principal issues originally agitated. 31 The issue of election is that which has brought the matter back before the court today and, as I have said, I am satisfied that Provident did not elect to surrender its security at the meeting of 21 August 2007. 32 I therefore propose to declare that by attending and voting at the meeting of creditors on 21 August 2007 Provident Capital Limited did not surrender its security constituted by the deed of charge and the mortgage over the Moree Hot Springs Health Resort. I will make no order as to costs. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson. Associate: Dated: 11 June 2008 Counsel for the Applicant: J T Johnson with B K Nolan Solicitor for the Applicant: Tiernan & Associates Lawyers Counsel for the Respondent: A Seward Solicitor for the Respondent: Kemp Strang Date of Hearing: 16 May 2008 and 6 June 2008 Date of Judgment: 6 June 2008