The perils of failing to notify a creditor about a meeting at which they are entitled to both attend and vote were highlighted in the recent decision of the Federal Circuit Court of Australia in Australia and New Zealand Banking Group Ltd v Shilton [2015] FCCA 1783 (Shilton).

In Shilton, Mr Liddell was the guarantor of an $8 million loan advanced to Areaworks Pty Limited by the Australia and New Zealand Banking Group (ANZ). Following Areaworks’ default on its loan facility, ANZ sold the property secured by its mortgage and commenced a proceeding against Mr Liddell seeking to recover the $700,000 shortfall pursuant to his guarantee.

Mr Liddell, after defending the proceedings for a time, presented a Debtor’s Petition to the Australian Financial Security Authority (AFSA) and and became a Bankrupt.  His debt to ANZ comprised a significant proportion of his equally significant total liabilities of circa $3.3 million.

At a meeting of the creditors of his Bankrupt Estate, the creditors in attendance accepted a proposed composition pursuant to which Mr Liddell’s family would pay $50,000 to creditors, resulting in a return of approximately 1 cent for every dollar owed to his ordinary unsecured creditors.

As it transpired, ANZ did not receive any notice of the meeting because the notice had been sent by Mr Liddell’s Trustee in Bankruptcy to an outdated registered office address.

ANZ made an application in the Federal Circuit Court to have the composition set aside pursuant to section 222 of the Bankruptcy Act 1966 (Cth) (the Act) on the basis that:

1. Had it been notified of the Meeting of Creditors, it would have attended the meeting and voted against the composition proposal. Given the size of its debt, ANZ submitted that its vote against the composition would have ensured its failure (This submission relied upon the operation of section 204 of the Act, which provides that a personal insolvency agreement must be accepted by way of a ‘special resolution’ which in turn requires a majority in number and at least 75% in value of the creditors present at a meeting of creditors to vote in favor for the resolution to be successful.); and
2. The terms of the composition were unreasonable or were not calculated to benefit the creditors generally.

The court relied on the leading decision in Hingston v Westpac Banking Corporation (2012) 200 FCR 493, which set out the guiding principles in the Court’s exercise of discretion in an application to set aside a personal insolvency agreement. These were as follows:

• there is a need to inform creditors of relevant matters and then allow them to make up their own minds as to what they wish to do;
• a composition might be set aside where its terms are unreasonable;
• the court should review the relevant procedures from the perspective of all creditors;
• a calculus of factors must be taken into account. The matters to be taken into account include;
  • is substantial further investigation required of a particular transaction or the affairs of the debtor more generally?
  • did some particular creditors dominate the vote where there may be questions about their relationship with the debtor?
  • is the composition proposal properly regarded as trivial, resulting in a negligible distribution to unsecured creditors? and
  • what is the relativity between a distribution under a bankruptcy and a distribution under the composition?

The Court found in favor of ANZ on both of its primary arguments. Ultimately, ANZ was entitled to notice of the meeting, and failure to give such notice was fatal to the composition particularly in the context of a clearly trivial return to creditors of 1 cent in the dollar.The case highlights the need for insolvency practitioners to be very careful when issuing notices to creditors, particularly if they want to avoid being caught up in costly and unnecessary litigation such as this!

For more information, please contact ERA Legal.