A non-conforming deed and an ineffective proxy were not up to par

The recent NSW case, Le Meilleur Pty Ltd (subject to Deed of Company Arrangement) v Jin Heung Mutual Savings Bank Co Ltd [2011] NSWSC 1115, raised some interesting questions in relation to Deeds of Company Arrangement (DOCA’s).   First, when is a DOCA a binding instrument within the meaning of s444B(6) of the Corporations Act 2001 (Cth)?; and secondly, when is a person who votes by a proxy bound by a resolution approving a DOCA?

Divergence between the proposed deed and the resolution

The case involved the voluntary administration and proposed sale of the Le Meilleur Horizons Golf Resort at Salamander Bay, Port Stephens.  The first defendant was a South Korean bank which held a registered mortgage over the golf course but no security over the Le Meilleur company or its business.  In their s439A report to creditors the administrators proposed a DOCA under which the business of the company would be sold but there was no reference to a sale of the land on which the golf course was operated.  However, at the second creditors’ meeting (the so-called ‘watershed meeting’) the creditors discussed a proposal that involved the sale of both the business of the company and the golf course property, with the proceeds of the respective sales to be apportioned between the secured and unsecured creditors.  This discussion was recorded in the minutes of the meeting.  But the resolution put to the meeting and recorded as having been carried ‘on the voices’ was that the company be required to execute a DOCA ‘in the same form as the proposal statement presented to the meeting’. 

Ward J concluded that the DOCA approved at the second creditors’ meeting was not a ‘binding instrument’ within the meaning of s444B(6) of the Corporations Act 2001 (Cth) because it did not accord with the deed ‘proposal statement presented’ to the meeting (ie the written proposal attached to the administrators’ report to creditors).  This was the subject of the resolution voted on at the second creditors’ meeting and it contained no reference to a proposed sale of the golf course itself.

The effect of the proxy

The first defendant, Jin Heung Mutual Savings Bank Co Ltd (Jin Heung), signed a proxy form authorising a vote in favour of the proposed DOCA.  The minutes of the second creditors’ meeting recorded that a vote was taken at the meeting ‘on the voices’ but there was evidence from one of the attendees that the vote was taken by a show of hands.  Either way, it was clear that the holder of Jin Heung’s proxy had not voted in favour of the DOCA.  When Jin Heung gave its proxy to vote in favour of the then proposed DOCA it acted in reliance on misrepresentations made by a Mr Kang to the effect that Jin Heung would retain a right not to consent to the sale of the golf course, at least if the sale was at a price that Jin Heung considered to be an unreasonably low price in all the circumstances.  Although these misrepresentations were not made on behalf of the administrators, they had the effect that Jin Heung gave its proxy under a mistaken view of the true position.  In these circumstances, Ward J held that Jin Heung was not bound by the exercise of the proxy.  In short, Jin Heung was not a creditor who ‘voted in favour of’ the resolution authorising the execution of the DOCA within the meaning of s444D(2) of the Corporations Act 2001 (Cth).

Lavan Legal comment

The Le Meilleur case highlights the need for deed administrators to ensure that the resolution passed by the creditors at their second meeting reflects the current terms of the proposed DOCA.  If those terms are amended at the second creditors’ meeting, the resolution should not refer to the original proposal.

The Le Meilleur case also serves as a reminder that a change in the terms of a proposed DOCA at the second creditors’ meeting can undermine proxies granted in favour of the original proposal.  This can be particularly significant where the deed administrators wish to bind a secured creditor, such as Jin Heung, to the terms of the proposed deed.

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