The decision of the Supreme Court of New South Wales in the matter of SurfStitch Group Limited  NSWSC 164 provides a timely reminder to insolvency practitioners that no matter how time consuming or complicated an exercise they should always take the time to properly estimate the value of the creditor’s claim.
The appointment of voluntary administrators to SurfStitch Group Limited (the Company) saw the Company join a long list of recent infamous corporate collapses. The directors of the Company attributed a drain on cash flow due to mounting legal costs as one of the reasons for the Company’s collapse. The Company incurred legal costs defending two separate shareholder class actions. A party with a claim which arises from buying, holding, selling or otherwise dealing in a company is known as a subordinate claimant. The shareholders were considered to be subordinate claimants within the meaning of section 563A of the Corporations Act (Act).
Generally, a subordinate claimant:
- Is paid last once all other debts are paid and claims against the company are satisfied; and
- Is not entitled to vote at a meeting without an order from the Court.
In this instance, the administrators had estimated that once the ordinary creditors were paid there would likely be a surplus and the claimants could participate in the dividend distribution.
In light of the anticipated surplus, the administrators’ filed an application seeking amongst other things orders:
- For the extension of the convening period for the second creditors meeting;
- Entitling subordinate claimants to vote at the second creditors meeting; and
- That they be permitted to admit the claimants’ claims for an estimate of a dollar for voting purposes together with related orders in connection with the giving of notice.
In support of their application, the administrators claimed that to value approximately 3,313 subordinate claims for voting purposes would be expensive, difficult and a time consuming exercise. The difficulties arose because the administrators would need to consider and analyse complex legal issues such as the steps taken by a claimant to mitigate its loss and damage.
Whilst Justice Brereton acknowledged that there are some instances where it is acceptable for an insolvency practitioner to assign a nominal value of $1 to a creditor’s claim, primarily for voting purposes this case was not one of this instance. His Honour stated that the complexity and volume of the claims were not sufficient reasons for the administrators not to undertake the valuation exercise at all. Further the administrators were required to give a just estimate of the value of each subordinate claimant claim based on which it would be entitled to vote at the meeting of creditors.
This article was written by Dina Skapetis, Senior Associate.
Publication Editor: Grant Whatley, Partner.