Creditors voting rights on unliquidated or contingent claims: Re Mercon Group Pty Ltd
Introduction
In Re Mercon Group Pty Ltd (subject to deed of company arrangement) [2025] NSWSC 1601, the Owners – Strata Plan No 93160 (Owners Corporation) had unresolved proceedings against Mercon Group Pty Ltd before Mercon went into voluntary administration.
The Court rejected the Owners Corporation’s argument that it should have been admitted as a voting creditor at the face value of its claim rather than a nominal amount. This ruling illustrates the difficulties that those with unresolved litigation against a company may face when voting at creditors meetings and clarifies what is required to establish a “just estimate” of unliquidated or contingent claims for voting purposes.
Factual Background
Mercon performed construction work on a development known as “The Jacob” between 2014 and 2016.
In mid-2016, the Owners Corporation was constituted. Soon after, alleged defects began to emerge regarding the construction quality of the development.
On 12 October 2022, the Owners Corporation began proceedings for breach of statutory warranties and the statutory duty of care against Mercon in the New South Wales Supreme Court (NSWSC). However, before the proceedings were completed Mercon went into voluntary administration.
The NSWSC proceedings were consequently stayed.
Before the first creditors meeting, the Owners Corporation and six owners of individual units (the Unit Owners) sent proof of debts to the Voluntary Administrators of Mercon.
The Owners Corporation relied on a report and Scott Schedule prepared by a remedial building consultant, Mr Slatter.
The Unit Owners relied on a report by a Strate Defects Specialists Sydney (the SDSS Report).
Ahead of the first creditors meeting, the Administrators determined to admit the Owners Corporation and Unit Owners as contingent creditors at a nominal value of $1 for voting purposes only. This was done on the basis that the Scott Schedule and SDSS Report had not been independent verified or adjudicated on by the court.
At the second creditors meeting, a deed of company arrangement (DOCA) resolution was proposed and voted on. It passed on both votes (11 in favour, 7 against) and in value ($1,1918,601.19 in favour, $7 against). Only the Owners Corporation and the Unit Owners voted against the DOCA.
For a DOCA resolution to pass at a creditors meeting, it must be supported by both the majority of voting creditors and by creditors collectively owed more than half of the total debts. In the event of a deadlock, the Chairperson may choose to case a tiebreaking vote.
Subsequently, the Owners Corporation began proceedings against Mercon, its sole director, and its Deed Administrators in the NSWSC seeking orders to have the DOCA reversed or set aside.
Issues
Should the Owners Corporation and Unit Owners have been admitted as creditors for the purposes of voting at an amount greater than the nominal amount of $1?
Should the DOCA resolution vote be reversed and set aside?
Should the Court terminate the DOCA?
The amount the claims should be admitted for
The Owners Corporation argued that they and the Unit Owners should have been admitted as voting creditors at the face value of their claims rather than a nominal amount.
As their claims were unliquidated or contingent claims, under s 75–85(4)(c) of the Insolvency Practice Rules (Corporations) 2016 (Cth) (IPRC), they would not be entitled to vote at creditor meetings unless a just estimate of its value had been made. Where it is impossible to quantify a just estimate of a claim, but it appears a person is owed at least some amount of money, it is generally appropriate that they be admitted for voting purposes at a nominal value of $1 (Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467).
The Owners Corporation relied on a column titled “Estimates of Loss” in the prepared Scott Schedule as a basis for the just estimate of the value of their claim.
The Court found this to be insufficient for three reasons.
Mr Slatter appeared to lack any specialised experience or qualifications in assessing the costs of performing rectification works.
the Scott Schedule did not contain any information on the process he used to determine the estimated losses.
all the figures in the column were round figures (e.g. $7,000, $50,000), supporting an inference that they represent “ballpark” estimates rather than an attempt to genuinely calculate the cost of works.
The Unit Owners relied on SDSS Report as the basis for the estimate of their claims. However, the SDSS Report was silent on the costs of any rectification works and did not provide any material to otherwise substantiate the claims for the quantum of loss.
As there was insufficient material to support a just estimate, the Court found that admitting the Owner Corporation and Unit Owners at a nominal value for voting purposes was appropriate.
Should the court set aside the DOCA Resolution vote
The Owners Corporation attempted to have the DOCA resolution vote set aside in two ways.
they argued that the Administrators’ decision to admit the Related Creditors for the purposes of voting should be reversed as their proof of debts were insufficient.
they argued that the court should set aside DOCA Resolution vote under section 75–41 of the Insolvency Practice Schedule (Corporations) (IPS).
On the first argument, the Court found that there was sufficient material to substantiate the claims of each of the Related Creditors. The Administrators had regard not only to the supporting material provided in the proofs of debt, but also to Mercon’s records such as loan agreements which verified the claims being made.
On the second argument, the Court found that the Owners Corporation had failed to prove the conditions for relief. If a proposal has been voted on by creditors, s 75–41 of the IPS gives the Court the powers to set aside a proposal of they are satisfied of two conditions.
that if the votes of the Related Creditors were disregarded, either the outcome would have changed, or it would have needed to be decided by a tiebreaking vote.
that the passing or failure of a proposal is either contrary to the interests of a class of creditors, or that it is unreasonably prejudicial to the creditors who lost the vote.
The first condition was met. While the vote would still have passed on value, disregarding the votes of the four related creditors would have resulted in a 7 to 7 tie on votes. This would have required a casting vote by the chair. However, the Owners Corporation failed to demonstrate that the second condition had been met, the court consequently declining to grant relief.
Termination of the DOCA
The Owners Corporation also attempted to have the DOCA terminated on the grounds of misleading disclosure, abuse of process, and oppression or unfair prejudice to creditors.
On the first ground, a court under section 445D(1) of the Corporations Act 2011 (Cth) may terminate a DOCA if false or misleading information regarding the company was contained or omitted from a document that accompanied a notice of a creditors meeting. However, the Owners Corporation failed to prove that any of the information accompanying the notice of the second meeting was false or misleading.
On the second ground, the Owners Corporation argued that the DOCA constitutes an abuse of Part 5.3A of the Corporations Act and thus should be terminated. This was on the alleged basis that the only purpose in executing the DOCA was to frustrate the Owners Corporation’s claim and extinguish their liability. However, the Owners Corporation failed to prove that avoiding litigation was the only motive. The Court found that the position of creditors under the DOCA had clear benefits to creditors compared to their likely position under the alternative scenario where Mercon was liquidated.
On the third ground, the court may make an order under section 445D(1) of the Corporations Act to terminate a DOCA if it would cause injustice, is oppressive or unfair to one or more creditor, or is contrary to the interests of creditors in general. However, the Court found that the DOCA substantially improved the situation for non-related creditors as evidenced by the fact that the majority of non-related creditors voted to pass it.
Key Takeaways
Parties attempting to be admitted as creditors for voting purposes on the basis of unresolved litigation need clear and detailed supporting material to establish the quantum of their prospective claim.
Clear evidence must be presented to have the court set aside or terminate a DOCA agreement under the Corporations Act or IPS for being contrary to the interests of a class of creditors.
If you would like to discuss this further please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E:ahill@sladen.com.au
This article was prepared with the assistance of Tony Huang, Law Clerk.
