The Exercise of Casting Votes in Deeds of Company Arrangements

The Exercise of Casting Votes in Deeds of Company Arrangements

At the second creditors meeting, a vote is taken on whether to accept a Deed of Company Arrangement. It is often the case that a deadlock is reached.   This is because if there is a majority in value of creditors in favour, but a majority in the numbers of creditors against, or vice versa, a decision is deemed to have not been reached, thereby preventing the resolution from passing.  In that situation the administrator has to decide whether and on what basis to exercise a casting vote to break the deadlock. 

Administrator’s casting vote decisions have been the subject of a number of court cases.  This is because section 600B of the Corporations Act provides the court with power to review such a decision.

In Ausino International Pty Limited v Apex Sports Pty Limited (2007) NSWSC 289 (30 March 2007) Barrett J. summarised a number of the principles surrounding the exercise of the casting vote, namely;

• It must be exercised consistent with the interests of creditors as a whole and with the purposes of part 5.3A;
• There is no rule that the chairperson should prefer the majority in value of creditors over the majority in number of creditors;
• As an officer of the company, an administrator has a duty to act with care, diligence and in good faith, in exercising the power of the casting vote or in deciding whether not to exercise the power;
• In an insolvent position, the interests of the company are predominantly those of the creditors.  That is the interest in seeing if the creditors can have their debts paid.

A number of earlier decisions had implied that there was no obligation to exercise a casting vote.  Barrett J. appeared to confine that circumstance, saying;

“It would be going to far to say that a person to whom a casting vote is entrusted must always exercise it. Clearly, there is a discretion …I am of the opinion that the person should proceed to exercise the casting vote and resolve the deadlock….unless there is some good reason to refrain from doing so; also that failure to exercise the casting vote for some irrational or irrelevant reason is inconsistent with the persons duty.”

In the recent case of Deputy Commissioner of Taxation v Wellnora Pty Limited [2007] FCEA 1234 Lindgren J.   considered a challenge to the exercise of a casting vote and decided:

1. the administrator did not have a role to pursue a wide ranging enquiry into the public interest and commercial morality in the context of a DOCA proposal;
2. questions of public interest and commercial morality were relevant in the considerations of the Administrator, if they related to some breach of duty of a director that might lead to a potential recovery in a liquidation;
3. the court could consider the wider public interest and commercial morality and not only the interests of the company’s creditors.

For further information please contact James Hamilton on (02) 9018 6403 or email: jhamilton@rbhm.com.au