Ashurst Restructuring Roundup

Terminating DoCA's (Part 3) – Administrators' Casting Vote

Commissioner of State Revenue v McCabe (No. 2) [2024] FCA 662 ("McCabe")

IMO Academy Construction & Development Pty Limited [2024] NSWSC 808 ("Academy Construction")

Summary

Where there is a deadlock between the majority in value of creditors and those creditors with a majority in number on the vote for a DoCA, the administrator has a casting vote.

That vote must be exercised impartially and with regard to the best interests of creditors as a whole.

Based on the authorities, it is our view that it would assist if the reasons for the administrator's exercise of the casting vote include both:

1. a comparison between the dividend to creditors under the DoCA and that payable in a liquidation; and
2. the basis for estimating the dividend payable in a liquidation, including details of the investigations conducted by the administrator as well as an analysis of the claims which could be brought by a liquidator.

It would be desirable if those reasons were explained in full at the creditors' meeting and recorded in detail in the minutes of that meeting.

The ARITA Code of Professional Practice provides guidance to insolvency practitioners as to how they should exercise a casting vote: see paragraph 3.2.6.4 of the Code.

Casting vote

Section 75-42, Insolvency Practice Schedule (Corporations) allows for a review by the court of the exercise by administrator of a casting vote to determine the outcome of the creditors' meeting convened to consider a company's future. Relevantly, if a majority in number of creditors voted, say, to support the execution by the company of a DoCA, and the majority in value voted against that proposal, the administrators' casting vote to break that deadlock may be reviewed by the Court on the application of ASIC or a person who voted against the resolution.

As a general matter, administrators have a "duty to act independently and impartially in the administration of the company's affairs"; Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110 at [70].

In each of Academy Construction and McCabe, the court appeared to adopt with approval the analysis by Besanko J in Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No. 4) [2019] FCA 1846 ("Adelaide Brighton") at [1224] – [1231] of the role of the Court when reviewing the exercise by administrators of a casting vote:

• The review is not a review on the merits. Rather, the focus is on the decision-making process adopted by the administrators "with a view to determining whether the decision was conscientiously made by reference to all relevant considerations appropriately identified and weighed"¹; Adelaide Brighton at [1226] and [1227].
• In determining whether the administrators acted conscientiously, regard will be had to whether the Administrators "[acted] honestly and [had] regard to the best interests of the creditors" and weighed "the considerations that a reasonable and prudent insolvency administrator would consider to be relevant"; Adelaide Brighton at [1228];
• For the purposes of that review, "the Court should have available to it all of the material available to the administrator"; Adelaide Brighton at [1224];
• In this context, it will be important for administrators to provide a detailed account of the considerations to which they had regard when exercising their casting vote. It is suggested that, desirably, those considerations should be disclosed to the second meeting of creditors and recorded in the minutes of that meeting;
• The list of matters to consider are:
  • "(1) whether the proposed DOCA is opposed by a major creditor, especially when there is a large disproportion between the major debt and other debts²;
  • (2) whether the proposed DOCA is supported by Directors in circumstances where it will deliver some advantage to them;
  • (3) whether creditors who voted in favour of the proposed DOCA will be prejudiced if the Court sets aside the resolution;
  • (4) whether the administrator carried out adequate investigations before exercising the casting vote; and
  • (5) whether the administrator's report contained misleading information."
    Adelaide Brighton at [1229]

Beyond those matters, the court will also have regard to "considerations of commercial morality and the public interest" in addition to the interest of creditors: Adelaide Brighton at [1231].

As acknowledged by the cases, the ARITA Code of Professional Practice provides guidance to insolvency practitioners as to how they should exercise a casting vote; see paragraph 3.2.6.4 of the Code.

In McCabe, the Court held there was an insufficient basis to warrant setting aside the casting vote. In doing so, the Court found that there was no suggestion that the administrator's decision-making process in exercising the casting vote was dishonest or not for a proper purpose in accordance with what he believed was in the best interests of the creditors as a whole.

In Academy, the Court held that it was not necessary to determine whether the resolution should be set aside on the basis of the administrator's casting vote, given that the Court found that the deed of company arrangement should be set aside on other grounds.