In the matter of Glacier Ceiling Battens Pty Ltd (in liq) [2017] NSWSC 1832

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Glacier Ceiling Battens Pty Ltd (in liq) [2017] NSWSC 1832 Hearing dates: 4 December 2017 Decision date: 04 December 2017 Jurisdiction: Equity - Corporations List Before: Black J Decision: The Court declares that, by voting in respect of its whole debt at the meeting of creditors of Glacier Ceiling Battens Pty Ltd (in liq) held on 7 August 2017, First Class Securities Pty Ltd did not surrender its security. Catchwords: CORPORATIONS — Winding up — Conduct of liquidation — Meeting of creditors – Application for declaration that secured creditor did not surrender security by voting its whole debt – whether debt voted through inadvertence. Legislation Cited: - Companies (NSW) Regulations, reg 96(2) - Corporations Act 2001 (Cth) - Corporations Regulations 2001 (Cth), reg 5.6.24 - Insolvency Practice Rules (Corporations) 2016 (Cth), r 75-87 Cases Cited: - Porter v Computer Based Technology Pty Ltd [2004] NSWSC 476 - QCMA Ltd v Humeri Pty Ltd (Cohen J, unreported, 25 July 1986) - Re Cosmopolitan Constructions Pty Ltd (in liq) [2013] NSWSC 780 Category: Principal judgment Parties: First Class Securities Pty Limited (Plaintiff) Glacier Ceiling Battens Pty Ltd (in liquidation) (Defendant) Representation: Counsel: J Foley (Plaintiff)

Solicitors: Dentons Australia Pty Ltd (Plaintiff) File Number(s): 2017/335779

Judgment – ex tempore (revised 5 december 2017) 1. By Amended Originating Process filed on 14 November 2017, the Plaintiff, First Class Securities Pty Ltd ("FCS"), seeks a declaration under r 75-87(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth) that, by voting in respect of its whole debt at a meeting of creditors of Glacier Ceiling Battens Pty Ltd ("GCB") held on 7 August, 2017, it did not surrender its security. 2. I pause to note that the application was initially brought under r 75-87(3) of the Insolvency Practice Rules (Corporations), although the relevant meeting of creditors took place on 7 August 2017. Mr Foley, who appears for FCS, was not in a position to address any relevant application of the transitional provision in respect of the Insolvency Practice Rules (Corporations) when the matter was heard. If r 75-87 of the Insolvency Practice Rules (Corporations) does not apply, then reg 5.6.24 of the Corporations Regulations 2001 (Cth), which previously dealt with voting by secured creditors in a liquidation, applies, and that regulation is in substantially the same terms as r 75-87 of the Insolvency Practice Rules (Corporations). I proceed on the basis that either reg 5.6.24 of the Corporations Regulations or s 75-87 of the Insolvency Practice Rules (Corporations) is the applicable provision, and I reserved liberty to FCS to apply, initially by email to my Associate, if Mr Foley ultimately concludes that any order that I make should be amended to be made under reg 5.6.24 of the Corporations Regulations rather than r 75-87 of the Insolvency Practice Rules (Corporations). After I made orders, Mr Foley informed the Court that he had reached that conclusion, and I have amended the order made accordingly. 3. Rule 75-87(1) of the Insolvency Practice Rules (Corporations) relevantly provides that for the purposes of voting, a secured creditor must state specified information in its proof of debt or claim, including the creditor's assessment of the value of the security unless he or she surrenders the security. Rule 75-87(2) provides that a creditor is entitled to vote only in respect of any balance due to him or her after deducting the value of his or her security as estimated by him or her, implicitly, unless he or she surrenders that security. Rule 75-87(3) provides that: "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." 1. Regulation 5.6.24 of the Corporations Regulations is in substantially the same terms. 2. The application is supported by an affidavit dated 27 October 2017 of Mr Swinton, the Head of Credit and Operations for FCS. Mr Swinton refers to the fact that FCS made an invoice funding facility available to GCB, and made funding under that facility available to GCB from 27 July 2016. The facility agreement provided for GCB to grant a security interest over the collateral class, "other goods", for the purposes of the Personal Property Securities Register, and FCS registered a security interest in the Personal Property Securities Register on 22 July 2016. It appears that GCB granted a further security interest over all its present and after acquired property to FCS on 22 November 2016, which was, in turn, registered on the Personal Property Securities Register on 28 November 2016. Subsequently, a deed of priority was entered into between FCS and a third party, which is in evidence in the application. 3. A liquidator was appointed to GCB on 28 July 2017. After that occurred, Mr Swinton, on behalf of FCS, returned a secured creditor questionnaire, completed as requested by the liquidator, which recorded that FCS' security was "a general security agreement, All PAAP [present and after acquired property], no exception," and responded to the question, "Intentions regarding your security?" by stating, "Awaiting liquidator's opinion." Mr Swinton's evidence is that, by that response, he intended to leave open FCS' position in respect of its security, which would be determined after the liquidator determined whether to continue the business for a short period to seek to obtain a going concern sale or to proceed to a winding up. 4. On 28 July 2017 the liquidator gave creditors notice of a creditors' meeting to deal with several matters, including whether an alternative liquidator should be appointed, whether a committee of inspection should be appointed, and approval of the liquidator's remuneration, and the notice to creditors attached a pro forma proof of debt and proxy for creditors to complete. Mr Swinton's evidence is that he did not have regard to note 4 of the proof of debt form, which requested a secured creditor to provide particulars of securities held and, where the securities are on the company's property, assess the value of the securities. He had, of course, previously provided information as to the nature of the security held in response to the liquidator's questionnaire, and that note did not draw attention to the operation of reg 5.6.24 of the Corporations Regulations or the corresponding provision in r 75-87 of the Insolvency Practice Rules (Corporations). Mr Swinton also observes that the liquidator did not make any comment to the effect that FCS should consider voting only any portion of its debt which exceeded the value of its security and otherwise risked losing its security. Mr Foley makes clear that that observation is not made by way of criticism of the liquidator, who did not necessarily have any obligation to make any such comment, but in explanation of the fact that no such comment by the liquidator had drawn the issue to Mr Swinton's attention. It seems to me that matter is relevant for that purpose. 5. Mr Swinton completed that proof of debt, but did not answer a question as to any satisfaction of the security, and gave a directed proxy in favour of the liquidator, directing that he vote in a specified manner in respect of resolutions to be put at the creditors' meeting. Mr Swinton's evidence is that he did not then know of r 75-87 of the Insolvency Practice Rules (Corporations) (or, implicitly, of the corresponding regulation in reg 5.6.24 of the Corporations Regulations) and was not aware of the possibility that, if a secured creditor voted in respect of its whole debt, it might be taken to have surrendered its security. His evidence is that he did not deliberately decide to abandon FCS' security and that any surrender occurred due to his lack of knowledge of the law and lack of experience in completing a proof of debt. 6. On 4 October 2017, the liquidator wrote to FCS drawing attention to r 75-87 of the Insolvency Practice Rules (Corporations) and contended that, by submission of its proof of debt, FCS had surrendered its security and would now rank as an ordinary unsecured creditor in the liquidation. By letter dated 10 October 2017, FCS's solicitors responded, indicating that they would bring an application to the Court, under r 75-87(3) of the Insolvency Practice Rules (Corporations), and that: "The basis of the application is that [FCS] was not aware that as a matter of law it would be taken to have surrendered its security by completing a proof of debt for the full amount of its indebtedness." In the past the courts have accepted that inadvertence of this nature is sufficient to mean that the secured creditor does not surrender its security, (see for example QCMA Ltd v Humeri Pty Ltd [1986] NSWSC [unreported, 25 July 1986])." 1. FCS's solicitors requested, and the liquidator responsibly provided, confirmation that no distribution would be made until the matter was determined. The liquidator has since indicated by letter dated 9 November 2017 that he is aware of this application and neither consents to, nor opposes, the application and does not seek to defend it and would abide by the Court's decision. There was no appearance by the liquidator today when the matter was called. 2. Mr Foley draws attention to the decision of Cohen J in QCMA Ltd v Humeri Pty Ltd above, to which FCS's solicitors had referred in their correspondence with the liquidator. The plaintiff there sought relief under an earlier, but corresponding, regulation, reg 96(2) of the Companies (NSW) Regulation, where its officer had filled in and signed a proof of debt and voted, by proxy, at a meeting of creditors. The plaintiff there contended that its officer's lack of knowledge of the effect of the regulation and his failure to realise that he should have valued the plaintiff's security amounted to inadvertence such as to justify the court granting relief under reg 96(2) of the Companies (NSW) Regulations, which was relevantly identical with reg 5.6.24 of the Corporations Regulations and r 75-87(3) of the Insolvency Practice Rules (Corporations). Cohen J reviewed the relevant authorities and observed that inadvertence can apply in a wide variety of situations and is the opposite of deliberate action. His Honour noted that the authorities had treated ignorance of the law, or of a requirement to take or not to take certain steps, as inadvertence in appropriate circumstances. His Honour indicated that, where he was satisfied that the relevant officer did not know that he should have valued the plaintiff's security, and was not aware of the effect of a surrender of the security from a failure to do so, then that amounted to relevant inadvertence, so as to support the relief that was sought. 3. Similar questions have been considered in subsequent case law, including by reference to reg 5.6.24(3) of the Corporations Regulations, which (as I noted above) is in similar terms to r 75-87 of the Insolvency Practice Rules (Corporations). In Porter v Computer Based Technology Pty Ltd [2004] NSWSC 476, Palmer J summarised the applicable principles noting, inter alia, that whether an election to surrender a security had been made was not subject to rules peculiar to insolvency law and was determined according to the principles applicable to election generally; that an election to surrender a security may be shown by proving a conscious decision, communicated to the liquidator, to give up the security and instead take a dividend from the insolvent estate; and that, if conduct said to imply an election to surrender a security is equivocal, or indicates confusion, or that the creditor had not yet decided on a final course of action, no election will be held to have been made. 4. Mr Foley fairly draws attention to my decision in Re Cosmopolitan Constructions Pty Ltd (in liq) [2013] NSWSC 780, where I held that the conduct of a secured creditor in voting at a creditors' meeting did amount to an election to surrender the relevant security. However, the creditor did not appear in that case and I expressly noted that it had not contended, or led evidence to establish, that any omission to value the security arose from inadvertence. That case is plainly distinguishable from the present case on that basis. 5. It seems to me that this case is factually indistinguishable from that considered by Cohen J in QCMA Ltd v Humeri Pty Ltd above. The evidence here establishes that there was inadvertence by Mr Swinton in completing the proxy, at least in the sense that he did not appreciate the consequence of not valuing the relevant security and of giving a proxy in favour of the liquidator for a creditors' meeting without valuing the security. It is also plain that Mr Swinton had previously disclosed the fact that FCS had not in fact made a decision as to what to do with the security, in the response to the liquidator's questionnaire which indicated that FCS was awaiting the liquidator's opinion. 6. I am satisfied that there was here no deliberate decision by FCS to surrender its security, and that the Court can be satisfied, for the purposes of reg 5.6.24 of the Corporations Regulations and r 75-87 of the Insolvency Practice Rules (Corporations), as applicable, that FCS's omission to value the security has arisen from inadvertence, in the sense of a lack of understanding of the relevant legal principles or the consequence of the relevant conduct and did not represent an informed decision by FCS to surrender the security. There is no suggestion that the liquidator has since altered his position, in any adverse way, because of the voting at the meeting by FCS. I am satisfied that the order sought should therefore be made. 7. Accordingly, I make the following order (as amended after Mr Foley confirmed the Plaintiff's reliance on reg 5.6.24 of the Corporations Regulations): Declare pursuant to Regulation 5.6.24 of the Corporations Regulations 2001 that by voting in respect of its whole debt at the meeting of creditors of Glacier Ceiling Battens Pty Ltd (in liquidation) held on 7 August 2017, First Class Securities Pty Ltd did not surrender its security.