By Bonnie McMahon a Solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group
The Federal Court has recently considered the effect of special proxies in a judgment which is important for those considering how special proxies operate, both in corporate and in personal insolvency. The decision also disallowed retrospective approval of remuneration in bankruptcy, making only prospective fee approval available for trustees.
On 16 December 2015, a bankruptcy trustee held a creditor’s meeting (“the Creditor’s Meeting”), with the main purpose of considering and passing a resolution approving his remuneration. At this meeting the Trustee’s remuneration was approved, on the basis of certain special proxies in favour of the chairperson and minutes secretary.
In Fewin Pty Ltd v Prentice  FCA 1239 (“Fewin”), one of the creditors of the Bankrupt’s estate challenged the procedure undertaken by the Trustee at the Creditor’s Meeting and the validity of the approval of his remuneration.
The Federal Court found that the Trustee’s remuneration was not validly approved at the meeting for a number of reasons, mainly relating to the procedure followed at the creditor’s meeting.
Australian Taxation Office Proxy Form
At the Creditor’s Meeting the Trustee considered a statement of claim and proxy form given by the Australian Taxation Office (“ATO”), who at the time claimed to be owed $201,207.60 by the Bankrupt. Shortly after the creditor’s meeting, the ATO withdrew its proof of debt, meaning that it was no longer a creditor of the Bankrupt’s estate. The Applicant argued that as the ATO was no longer a creditor, its proxy should not have been allowed. The court determined that whilst the ATO was no longer a creditor, it was a creditor at the time of the Creditor’s Meeting and was therefore entitled to participate in the meeting and vote by a proxy. The Court believed that neither the ATO nor the Trustee had any notice of the Tax Assessment Proceedings, which were commenced after the Creditor’s Meeting and which led to the withdrawal of the ATO’s proof of debt.
Appointment of Minutes Secretary
The Applicants in Fewin also argued that the minutes secretary was not validly appointed, as under section 64L of the Act the Trustee must invite the proposal of a motion appointing the minutes secretary. The Applicant also raised issues with the Trustee’s reliance on a special proxy given by the ATO, which was used to appoint the minutes secretary. The Court held that a special proxy in bankruptcy is not able to be used for matters beyond the particular resolutions specified in the proxy. The Trustee submitted that the issues should be remedied by the Court under section 306(1) of the Act. The Court found that whilst the failure to invite the creditors to nominate a minutes secretary, could be considered a formal defect or irregularity, the use of the ATO’s proxy for a purpose not permitted by its terms, could not. Therefore, section 306(1) could not cure the failures to comply with the Act and the minutes secretary could not be considered validly appointed.
Appointment of President
The Applicants argued that the appointment of the President was invalid for a number of reasons. Firstly, because the Trustee had used a proxy given by the Commonwealth Bank of Australia (“CBA”) to the “chairman of the meeting”. The Applicants argued that the chairman of the meeting was the president, and therefore this proxy could not be used until the president was appointed and as a result of this, could not be used to appoint a president. The Court held that this assessment was incorrect, and that the Trustee was the chairman under section 64K of the Act, until the President is elected pursuant to section 64P.
Similar arguments were raised in relation to the proxies of the ATO and Woollahra Council, whose proxies had also been used to vote in favour of the appointment of the Trustee as president, despite the proxies not being allowed to be used for the election of the president. Another issue related to the proxy of Barry and Board, which indicated that the debt owing to them by the Bankrupt’s estate was secured. The Court found that this meant the proxy could also not be used for the vote. If these proxies had been excluded from the vote, Ronald Coshott, the brother and a creditor of Robert Coshott’s bankrupt estate, would have received a majority of the votes for president, by number and value.
Another issue related to the procedure used by the Trustee to elect the president, which the Court found was incorrect. The Trustee had used voting via “polling votes”. The Court said that the Trustee should have taken a vote on the voices under section 64P(5) and if this was unable to determine a selection, ask each creditor, proxy or attorney, who was either there in person or appearing by telephone, whether they would be casting a vote or abstaining, as required by section 64P(6).
Under the polling method the Trustee actually used, Ronald Coshott should have been appointed as president. Ironically, if the Trustee had used the correct method, being a vote on the voices, he would have likely won the vote.
Approval of Trustee’s Remuneration
The Court noted that even if the Trustee’s appointment as President was invalid, this did not mean the motion passing his remuneration was also invalidated. Despite any defect or irregularity in the Trustee’s appointment, the Trustee’s “voting for the remuneration motion by exercising in good faith the proxies in favour of the chairpersons would not be invalidated” (at ).
At the Creditor’s Meeting the Trustee sought to have his remuneration retrospectively approved in accordance with section 162(1) of the Act. However, the Court determined that this could not occur as the creditors have no power to approve the Trustee’s claim for remuneration retrospectively. For this reason, the Trustee’s remuneration was not validly approved. The Court identified that correct procedure for the Trustee to have his remuneration approved, would have been to make an application to the Inspector-General, for the Inspector-General to decide the Trustee’s remuneration pursuant to section 162(4) of the Act.
Lessons for Trustees in Bankruptcy
The decision in Fewin is on appeal. However it highlights the difficulty in ensuring resolutions are passed in accordance with the requirements of the Act, and potentially raises doubts over the validity of all retrospective remuneration approval.
Read the judgment here.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Bonnie McMahon at email@example.com or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or firstname.lastname@example.org
Stephen Mullette on (02) 9806 7459 or email@example.com.