Brief Counsel
Liquidation meetings – does a secured creditor lose its security by voting?
02 March 2015
The Court of Appeal has confirmed that if a secured creditor votes its secured debt in a liquidation meeting, the vote
is invalid – and the security remains.
Liquidation meetings are for unsecured creditors. A secured creditor has no vote, except in respect of debt that is
unsecured.
The case
The issue arose after a secured creditor voted at a creditors’ meeting in favour of a resolution to replace the
liquidators. The resolution did not achieve the required support, despite the secured creditor purporting to vote its
whole debt.
The liquidators then alleged that the creditor had lost its security, being mortgages over millions of dollars’ worth of
land. They were relying upon Liquidation Regulation 22(2):1
Subject to the Act, if a secured creditor votes in respect of the creditor’s whole debt, the creditor shall be taken to have surrendered his or her charge.
They lost in the High Court so tried again in the Court of Appeal, which upheld the High Court’s decision, finding that
Regulation 22(2) did not apply.
Security wasn’t surrendered through voting
The Court of Appeal’s starting point was that the Regulations had to be interpreted subject to, and consistently with,
the Companies Act 1993. The Act debars secured creditors from voting unless:
• they have surrendered their charge and are claiming as an unsecured creditor, or
•
• they are claiming only for the unsecured portion of their debt.
•
Neither condition applied in this case.
The secured creditor had made it clear to the liquidators that it intended to exercise its power of sale under its
mortgage securities and the liquidators had confirmed to the secured creditor in writing that its debts were wholly
secured. Hence the creditor had not been entitled to vote.
There is a provision in the Act (Clause 11, Schedule 5) for technical errors or irregularities at creditors’ meetings to
be “cured” by the Court when that will not disturb the Act’s intention.
The liquidators asked the Court to use this power to overlook the fact that the vote was cast in error but the Court
declined, saying “a vote without entitlement is not a mere irregularity or defect”.
In addition, the Court noted that the proof of debt forms supplied by the liquidator did not comply in important
respects with the forms required by the Act and the schedule to the Regulations.
Chapman Tripp comments
In our view, the judgment correctly protects substantive property rights.
Mortgagees should not face a loss of security as a result of their failure to understand the finer points of insolvency
law and procedure. That must particularly be the case where the liquidators’ own form contributes to any such lack of
understanding.
It would pay for liquidators to check that their forms, in substance, match those prescribed by the Schedule to the
Regulations.
Click here for a copy of the judgment.
ends