July 28 2017
In a recent case,(1) the Supreme Court examined the correct application of Rule 56 of the Companies (Winding-up) Rules, which regulates the procedure to be followed by the chair at a creditors' meeting in the case of an objection by a creditor regarding whether a proof of debt by another creditor must be accepted in order to determine the creditor's voting rights.
One of the appellant company's creditors filed a petition for the winding-up of the appellant. The court made an order for the company to be wound up and temporarily appointed the official receiver as liquidator.
The official receiver called a creditors' meetings for the appointment of a liquidator. According to Rule 48 of the Companies (Winding-up) Rules, a resolution at a creditors' meeting will be deemed to have been passed when a majority in number and value of creditors present personally or by proxy vote in favour of the resolution.
At the creditors' meeting, only eight creditors were present, six of whom (ie, a 75% majority in number) had a claim totalling 18.55% in value and voted in favour of the official receiver's appointment as liquidator, whereas, the other two creditors (ie, a 25% majority in number) who had a claim totalling 81.45% in value voted in favour of the appointment of another liquidator.
Given that the requirement under Rule 48 had not been fulfilled, a petition was filed by the chair of the meeting to the court for the appointment of a liquidator pursuant to Chapter 113 of the Companies Law. By exercising its discretion, the court appointed as liquidator the person designated by the creditors who had a majority in value rather than in number.
On appeal, the first-instance judge's decision was challenged on the ground that the debts considered by the chair at the creditors' meeting to determine the majority in value of the creditors present had not been validated. The same objection had been raised during the creditors' meeting and the hearings for the winding-up petition and the appointment of the liquidator.
During the creditors' meeting, the chair had relied on the proof of debt presented by each creditor to determine the percentage in value of each creditor for voting purposes. When the value of the claim of the creditors who had a majority in value had been disputed by the creditors who had a majority in number, the chairman had invoked Rule 56 to resolve the issue. Rule 56 reads as follows:
"The chairman shall have power to admit or reject a proof for the purpose of voting, but his decision shall be subject to appeal to the Court. If he is in doubt whether a proof shall be admitted or rejected he shall mark it as "objected to" and allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained."
The chair went on to examine the objection raised by the creditors who had a majority in number against one of the creditors who had a majority in value, and who was also the lawyer who had presented the winding-up petition. The chair ruled that part of the claim concerned expenses for the winding-up petition, which in any event are paid in priority to other claims and are thus not subject to proof. The remaining part of the claim was also objected to by the creditors who had a majority in number, but the chair marked the vote as "objected to" and allowed the creditor to vote.
However, for the second creditor who had a majority in value, the chair simply marked the vote as "objected to" without proceeding with any examination of the objection raised by the other creditors and allowed that creditor to vote.
The Supreme Court observed that, based on the minutes of the meeting, the chair had not proceeded to examine the objection regarding the value of the claim of the second creditor who had a majority in value. According to the Supreme Court, only on examination of the objection would the chair have been able to decide on the validity of the creditor's vote in accordance with Rule 56. The Supreme Court went on to state that the chair's decision on the objection would have been a decisive factor regarding the percentage that the creditor was entitled to for voting purposes. Given that the first-instance judge, by exercising discretion, had relied on the majority in value to make an order for the appointment of the liquidator and the majority in value had been determined by the chair based on the false application of Rule 56, the Supreme Court found the first-instance judge's decision to be ill-founded. As a result, the Supreme Court ordered that a creditors' meeting be convened and Rule 56 be strictly observed.
This case serves as useful guidance as to how objections raised at a creditors' meeting in relation to the value of each creditor's claim should be handled by the chair.
For further information on this topic please contact Stelios Christofides at George Z Georgiou & Associates LLC by telephone (+357 22 763 340) or email (firstname.lastname@example.org). The George Z Georgiou & Associates website can be accessed at www.gzg.com.cy.
(1) Civil Appeal 238/2011, Re Companies Law Cap 113 and Re SM Tryfon Manufacturing Ltd and Markou Tryfonos as director of SM Tryfon Manufacturing Ltd (appellant) v Christaki Iacovide (respondent), March 14 2017.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.