Voting by companies at creditors' meetings

Introduction

When a company is being wound up by way of a creditors' voluntary winding up, it is necessary to convene a meeting of its creditors. The primary purpose of this meeting is to appoint a liquidator which can be the person nominated by the members at their meeting or some other person chosen by the creditors. Since the company is insolvent, the interests of its creditors are paramount as they are the only ones likely to receive anything in the liquidation. Therefore, the person chosen by them as liquidator will take precedence over the members' nominee. The identity of the liquidator is a contentious matter which often results in heated debate at creditors' meetings. On its face, the question would seem to be straightforward – the person with the most votes is appointed liquidator – but the right of a creditor to cast a vote is often fraught with uncertainty and chaos. Specific rules apply to the rights of companies to cast votes at creditors' meetings and it is intended to discuss those rules below.

The status of creditors at a creditors' meeting

The liquidation is deemed to commence on the day of the members' meeting. Since the creditors' meeting is held subsequent to the members' meeting, the liquidation will already have commenced by the time the creditors cast their votes for appointing a liquidator. Yet none of the creditors' claims will have been tested and scrutinised at this stage – the adjudication of claims only happens once the liquidator is in place. Therefore, it is the duty of the Chairperson of the creditors' meeting to ensure, in so far as possible at such an early stage, that each person attending the meeting is in fact a creditor of the company and to determine the amount of their debt. This is often not as onerous as it sounds because the Chairperson will normally be a director of the company and will be familiar with the debts owed to each creditor. In addition to this role, the Chairperson is also required to ensure that the correct procedure has been followed by every person attending on behalf of a creditor to enable them to cast their vote. That procedure is set out in the Companies Act 2014 and, as we will see, is required to be strictly enforced by the Chairperson with little or no discretion.

Procedure for corporate creditors casting votes

A natural person can attend the creditors' meeting to represent himself without too much formality. That option is not available to a creditor which is a company. The Companies Act 2014 sets out two distinct methods by which a company can vote at a creditors' meeting.

Voting by appointed representative

Section 185 of the Companies Act 2014 enables a company or "body corporate" to appoint an "authorised person" to act as its representative at a creditors' meeting of any other company of which the first company is a creditor. The "authorised person" must be appointed by an ordinary resolution of the company's board of directors or other governing body, but is not himself required to be a director or member of the company which he represents. He is entitled to exercise the same powers on behalf of the creditor company as that company could exercise if it were a natural person.

Section 185 was formerly contained in section 139 of the Companies Act 1963, supplemented by Order 74 of the Rules of the Superior Courts. Section 95 and the former 139 were almost identical with one important exception. Section 185 empowers – but does not compel - the Chairperson of the meeting to require the production of evidence from a person purporting to be an authorised agent of his authority to act as such. Section 185(4) provides the following in that regard:

A natural person can attend the creditors' meeting to represent himself without too much formality. That option is not available to a creditor which is a company. The Companies Act 2014 sets out two distinct methods by which a company can vote at a creditors' meeting.

"The chairperson of a meeting may require a person claiming to be an authorised person within the meaning of this section to produce such evidence of the person's authority as such as the chairperson may reasonably specify and, if such evidence is not produced, the chairperson may exclude such person from the meeting."

By contrast, the former section 139 did not contain any such provision. Instead, there was a provision in Order 74 of the Rules of the Superior Courts (RSC) which required a person representing a company under section 139 to hand to the Chairperson of the meeting a copy of the resolution authorising him to so act. The resolution had to either be under the company's seal or else authenticated by signature of a director or Secretary of the company. This was a mandatory requirement. In other words, if the person did not bring a copy of the sealed/authenticated resolution then his vote would not be accepted, there being no discretion for the Chairperson to nevertheless accept it.

The new Order 74 RSC which accompanied the introduction of the Companies Act 2014, does not contain a similar provision. The upshot of the change appears to be that anyone who attends a creditors' meeting as an "authorised person" appointed under section 185 is not required to produce any evidence of that authority unless and until requested to do so by the Chairperson. If he is not asked to produce evidence and fails to do so of his own motion, any vote cast by him will not be invalidated as would have been the case under the former rules. But if he is requested to produce evidence and fails to do so then the Chairperson "may" exclude him from the meeting.

Voting by Proxy

The second way in which a company can be represented at the creditors' meeting of another company is by way of proxy. Section 702(5) of the Act states:

"Where a company is a creditor, any person who is duly authorised under the seal of that company to act generally on behalf of that company at meetings of creditors, members and contributories may fill in and sign the instrument of proxy on that company's behalf and appoint himself or herself to be that company's proxy."

This section permits a person authorised under the seal of the debtor company to appoint himself or another person to act as that company's proxy. Order 74 rule 44 RSC states that:

"Every instrument of proxy shall be in either the Form No. 18 or the Form No. 19"

Those forms (which are sent out by the company being wound up along with the notice of the meeting) contain a note as follows:

"If the appointor is a corporation, then the form of proxy must be under its common seal or under the hand of some officer duly authorised in that behalf and the fact that the officer is so authorised must be so stated."

Therefore, the completed proxy form must either be under the company's seal or contain a statement that the proxy was appointed by an officer who was duly authorised to make the appointment. In the case of a creditors' meeting, the proxy form must arrive at the company's registered address by no later than 4pm the day prior to the meeting (section 702(1)(b)).

The rules relating to proxies are mandatory and they must be strictly applied by those acting as Chairpersons of creditors' meetings.

In Re Michael Madden Quality Meats Limited [2012] IEHC 122 a company's largest creditor was prevented from voting by the Chairperson at the creditors' meeting because its proxy form did not contain a statement that the persons appointing the proxies was authorised to do so. The High Court agreed with the Chairperson that the proxy forms, not being compliant with the Rules, should not be accepted. The judge relied on a number of cases, including In the matter of Hayes Homes Limited (In Voluntary Liquidation) [2004] IEHC 124 where the Court had agreed that a Chairperson was correct in refusing to admit a vote where, although the creditor claimed to have posted the proxy forms on time, they had never arrived at the company's registered office.

In all of these cases, the vote is excluded on technical grounds – it does not matter that the debt itself is admitted or that the Chairperson is well aware that the persons acting as proxies are indeed authorised agents of the company they represent.

Relationship between section 185 and 702

Section 702 is contained in that part of the Companies Act 2014 dealing specifically with winding up whereas section 185 is a more general provision governing attendance at all meetings of creditors and members. Nevertheless, section 702 provides that it is "without prejudice to section 703". Section 703 states that "section 185 applies to any meeting of a company held during the course of its being wound up". In other words, section 185 applies to creditors' meetings in the course of a voluntary liquidation as an alternative to the procedure for appointing a proxy under section 702. In practice, most corporate creditors continue to prefer the latter procedure mainly because lawyers are more familiar with it and are therefore more comfortable in its operation. It may be argued, however, that the procedure is more cumbersome and prone to challenge than the lesser used procedure under section 185.

Conclusion

Insolvent liquidations inevitably result in a creditors' scrum for the largest share of the remains of a company. The first - and often most important – step in the process is the appointment of a liquidator, which takes place at the creditors' meeting. A large creditor with an undisputable debt can often be shocked to discover that it is excluded from voting at such a meeting, not because of any issues about the existence or size of its debt, but because it has failed to comply with some technical aspect of the procedure governing representation at the meeting. This is all the more likely to arise where the creditor is a company which necessarily must be represented by another person. Given the strict application of these rules by those acting as Chairpersons at such meetings, and the courts' consistent approval of a strict approach, corporate creditors should not be lulled into complacency by perceptions of their voting power or friendly personal relationships developed with the Chairperson over years of doing business together. It is therefore prudent to seek legal advice at an early stage upon receiving notice of a creditors' meeting in a voluntary liquidation. Equally, it is advisable for those acting as Chairpersons at creditors' meetings, although they are normally advised by a solicitor at the meeting, to be aware of their duties and their limited discretion under the Companies Act 2014.

Author: Mahmud Samad BL
Publication date: 16th January 2024

CORPORATELEGAL