Drawing rather close to a bribe Law Reporter

Can a company discriminate among its creditors? Drawing rather close to a bribe.

Can a company discriminate among its creditors?

The New South Wales Court of Appeal decision in Young v Sherman & Anor ((2002) 20 ACLC 1559) offers some interesting observations on this question.

The facts of the case are fairly complex and we will summarise them briefly. Agriculture.Com Pty Ltd (the company) carried on business as a procurement agent for agricultural products. It sourced products for its rural customers endeavouring to offer them a more competitive rate because of the volumes of orders given to the suppliers.

The business of the company was similar to that of a buying group and fundamental to the development of its business was an e-commerce platform and website. Accenture was a partnership of 38 persons retained to develop the e-commerce platform on website.

The pursuit of the e-commerce strategy and the breakdown in negotiations with Accenture were alleged to be major contributors to the company's financial problems. Accenture claimed that the company was indebted to it for services rendered while the company claimed that it had cause of action in damages (for negligence, etc) against Accenture. An administrator was appointed to the company and the administrator recommended a Deed of Arrangement be entered into to provide a framework for resolving the relevant issues, but also to enable the company to bring proceedings against Accenture. The proposed deed provided that a premium of 10c in the dollar would be paid to creditors if the proceedings against Accenture were successful in particular ways.

A meeting of creditors was called at wh ch the proposal was put to the creditors and of course, as one can imagine, Accenture voted against the proposal. The way in which the votes were cast meant that the administrator, as chairman, had to exercise a casting vote. He voted in favour of the resolution because he felt it was in the best interests of creditors.

Accenture challenged the proposals and lost at first instance. Three judges heard the relevant appea---Sheller, Hodgson and Davies (who is an acting Justice of the Court of Appeal). A unanimous decision was reached by the judges (for different reasons) in favour of Accenture.

While the judges recognised that there was nothing improper in shareholders of the company offering compensation to creditors to delay payment of the company's debts, or to enter into arrangements whereby the debts of the company would be staggered in some form or another, this would be challengeable if the relevant arrangements had not been consented to by all of the creditors or if it affected the creditors in an unequal fashion. In this case the premium being offered did not operate equally for all the creditors. It was an inducement to some creditors to agree to a favourable result and unfavourable to other creditors. The court felt this was an improper inducement.

One judge held that the particular arrangements had no commercial justification. It was basically being introduced to provide some form of comfort to the directors. Indeed Acting Justice Davies suggested that the relevant premium that was being offered to the creditors almost amounted to a "bribe". At paragraph 96 of the judgment he suggested that the offer of a premium was an improper inducement or "bribe" to creditors to vote in favour of the scheme.

Justice Sheller felt that to offer a premium to certain creditors (by way of a gratuity) was a dangerous precedent. "In principle, if gratuities can be offered to induce creditors to vote in a particular way at a creditor's meeting, what is the limit of the amount of the gratuity? What is the difference between a gratuity offered to be paid from the resources of the company and a gratuity offered by another creditor from its own resources to achieve a particular result? " (at para 65). Indeed, Sheller JA went on to suggest that the practice of seeking to achieve results at a meeting of creditors by offering gratuities would open up the way for abuse. In his view, such a practice was contrary to the policy of the legislation and the public interest.

One further argument which was advanced by Justice Davies was that if the particular arrangement was accepted, it would "preclude examination of the directors for insolvent trading and like matters" . This would have been another argument which on proper evaluation of the matter, would clearly require the matter to be decided in the way in which the Court of Appeal did.

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