The treatment of shareholders in VA

Amendments to the Corporations Act in 2010 to address concerns with the effect of the High Court’s Sons of Gwalia decision introduced a new regime for insolvency practitioners to deal with claims by shareholders, including revising s 563A and a new s 600H. These provisions were considered in the recent decision in Re SurfStitch Group Ltd [2018] NSWSC 164 (22.2.18).

Essential facts

Surfstitch is a company involved in the online wholesale and retail market for surfwear and sports clothing. The company listed in 2014 and was hailed by commentators as a new market force in online clothing, with sales channels in several countries. Unfortunately, the company’s aggressive expansion strategy failed and a string of bad news (including profit downgrades and the abrupt resignation of its CEO to link up with private equity to take the company private) led to multiple shareholder class actions (potentially involving more than 3,000 investors) and an ASIC investigation. The group’s holding company and listed company entered voluntary administration in August 2017, with the operating subsidiaries remaining outside of administration.

The investors who could form part of the class actions were subordinate creditors under s 563A (as their claims against the company related to their acquisition or holding of the company’s shares) and under s 600H they were not entitled to vote in the administration without a court order.  The administrators sought court orders enabling the shareholders to vote on the basis that there was likely to be a surplus in the administration and therefore there was some residual value in the company’s equity.

The administrators also sought orders varying the reporting obligations under s 439A (to accomodate the subordinate creditors) and orders varying the operation of the Corporations Regulations restricting voting by subordinate creditors until their proofs of debt were submitted prior to the notice of meeting, allowing the Chair of the meeting to admit their claims for $1 and allowing the Chair to refuse to put a resolution for a distribution where that resolution would allow for payment to subordinate creditors unless other creditors had first approved.

Issues for consideration

This case involves several important issues relating to meetings in voluntary administration and to the treatment of equity holders with claims against the company. The key issues were:

  1. Whether the subordinate claimants should be permitted to vote;
  2. How to adjust the reporting obligations and proof of debt process to accomodate this;
  3. How resolutions relating to distributions should be dealt with; and
  4. Whether the Chair should be permitted to admit subordinate claimants for nominal amount of $1 as a ‘just estimate’.

(1) Voting by subordinate claimants under s 600H

The administrators advised the court that, even on a pessimistic view, there was likely to be a surplus in the administration and that shareholders would share in a distribution in any winding up. The court agreed (at [9]) that the subordinate claimants therefore had a ‘real financial interest in the liquidation’ and accordingly should be permitted to vote in the administration. The Supplementary Explanatory Memorandum to the Corporations Amendment (Sons of Gwalia) Bill 2010 stated (at [1.15]) that in deciding whether to allow voting under s 600H the court might reasonably consider whether the claimant had a real financial interest in the external administration. See further Re Atlas Iron Ltd [2016] FCA 366.

(2) Adjustments to accomodate voting

The court agreed to the administrators’ request for orders varying the notice requirements so that notices were given to subordinate claimants as identified by the administrators through a filtering process to determine the broadest number of potential class members. Notice was then ordered to be given to the solicitors for the lead plaintiffs in the class actions, to group members by email (where emails were identified) and otherwise by post or fax as well as notice in the AFR, to the ASX and on the administrators’ website. The court (at [10]) described these variations as ‘uncontroversial, sensible and cost-effective’. Other potential subordinate claimants who were not identified group members would need to request a copy of the notices.

The court refused the administrators’ request to vary the operation of the rules relating to proofs of debt on the basis that those rules already acknowledged that proofs submitted late could already be disregarded, but agreed to give directions that the administrators would be justified in doing so (at [12]-[13]).

(3) Resolutions by subordinate claimants

The court agreed with the administrators’ request that orders be given under s 447A allowing the Chair to not put any resolution that would allow payment to subordinate creditors in a DOCA before approval by a vote of the ordinary (non-subordinate) creditors. The court acknowledged that creditors could vote for a DOCA proposal that varied the statutory priorities that would apply in a liquidation (which applies by default under Corporations Regulations 2001 (Cth) Sch 8A cl 4), but where this occurred it may open up the DOCA to be set aside by the court. The court held (at [16]) that: ‘it is plainly desirable that the operation of Part 5.3A be modified to the extent necessary to ensure that the subordinate claimants cannot, at least without the concurrence of the ordinary creditors, use their numbers to enhance their priority.’

(4) Making a just estimate

Perhaps the most interesting aspect of the case relates to the power of the Chair of the meeting to make a just estimate of a unliquidated or contingent claim in a proof of debt. Prior to 1 September 2017, this was previously dealt with under Corporations Regulations 2001 (Cth) reg 5.6.23 (which applied to this administration) and the same rule applies under the current Insolvency Practice Rules (Corporations) 2016 (Cth) s 75-85(4).

The court explained the circumstances where a just estimate of a nominal amount would be appropriate as follows (at [20]):

An administrator may admit a claim for voting purposes, with a nominal “just estimate” of $1, where the claim cannot be quantified by a just estimate but it appears that the creditor is a creditor for at least some amount (such as where the debt is subject to an uncertain contingency), [9]or where there is no or limited material from which a conclusion as to the just value of the debt can be drawn, [10] or where it is almost impossible to ascribe a value to the claim, [11] or where a claim is an “all or nothing” one and there is no realistic intermediate figure

The administrators argued that the task of assessing each of the subordinate claims was complex and expensive and could lead to further disputes with individual claimants (and the cost and delays that could be involved with such disputes) and therefore sought orders allowing them to attribute each of the subordinate claims at a nominal value of $1.

The court rejected the administrators’ arguments stating (at [22]): ‘I do not consider that the circumstances that the claims may be numerous and their valuation complex and time consuming affords sufficient reason for not undertaking the exercise at all.’ The court applied the leading decision on the role of the Chair in Selim v McGrath [2003] NSWSC 927, which held (at [103]) that the making of a just estimate does not require the Chair to ‘undertake any detailed inquiry…he or she will do the best that can be done by reference to the factual material the claimant furnishes, views in the total context’. Justice Brereton held (at [23]):

Those observations do not mean that the exercise need not be undertaken where it is complex; rather, they means that despite the complexity of the exercise, the administrators are entitled to take a robust, rough and ready approach to evaluation. There is a difference between a summary approach, and an arbitrary one. Proofs have not yet been called for, let alone received. It is not inconceivable that when proofs are called for, claimants may be able to articulate the quantum of their claim. The claimants will bear the onus of adducing sufficient material to enable the administrators to evaluate their claims, and if they do not, then they are likely to be admitted for $1 only. But if they quantify their claim and explain the basis of it, it may well be practicable for the administrators to make a summary assessment of its value. On the other hand, it may eventuate that, for some or all of the reasons given by the administrators, they would be justified in assigning only a nominal value to some or all of the subordinate claims for the purposes of voting at the s 439A meeting. But they should not at this stage be exonerated from even attempting to do so.

The court refused to make orders under s 447A requiring a just estimate of $1, stating that this would be a ‘significant erosion of creditors’ rights’ which would circumvent their rights to challenge the decision by the Chair to make a just estimate of their claims: see at [25].


The Surfstitch case provides useful guidance on a number of important matters relating to the conduct of meetings in voluntary administration and to the treatment of equity claimants under s 600H for those that are subordinate creditors under s 563A. The Sons of Gwalia amendments in 2010 were supposed to fix the problems created by shareholders claiming creditor status and to rebalance the priority between debt and equity. The Surfstitch case demonstrates that the Sons of Gwalia amendments have not adequately addressed these problems. The difficulty with the amendments is that they have taken a Clayton’s approach to overturning the High Court’s Sons of Gwalia decision, by not preventing shareholders from being creditors but seeking to take away their rights as creditors unless the court orders otherwise under s 600H. The risk of shareholder claimants remains and this creates uncertainty for those proposing to restructure a company through a DOCA. The Surfstitch case does confirm that this risk will only be present were the shareholder claimants have a real financial interest in the administration, and so it is only where equity has residual value that the problems will arise, which is only a very small number of companies that enter administration.

The Surfstitch case demonstrates clearly that the problems caused by the Sons of Gwalia case have not gone away.

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