Introduction
The case of Re Mercon Group Pty Ltd (subject to deed of company arrangement) [2025] NSWSC 1601 arose from alleged construction defects at a residential development project, known as The Jacob. The dispute about defects was already on foot when Mercon, the builder, entered voluntary administration, triggering a stay of the proceeding.
The dispute then moved from the merits of the defects to the insolvency process, with administrators required to decide how (if at all) to admit and value the debts of different parties and whether to proceed with the proposed deed of company arrangement (DOCA).
Key takeaways
- Large defect claims supported only by “ballpark” estimates risk being admitted at a nominal value of $1 for voting purposes.
- In the event of a tied vote at a creditors’ meeting, the chair of meeting’s casting vote can be decisive and determine whether a DOCA is approved.
- Applications to set aside a DOCA usually face a high evidentiary threshold and require clear, cogent proof.
Facts
Mercon Group Pty Ltd (Mercon) was the building contractor for a mixed-use residential and commercial development known as The Jacob. Following completion, defects were alleged, including water ingress affecting both common property and individual lots.
On 12 October 2022, The Owners Corporation (OC) commenced Supreme Court proceedings against Mercon and others, alleging statutory breaches arising from those defects. On 28 June 2024, in the defects proceeding, the OC served several documents prepared by a remedial building consultant (OC Reports), which identified the alleged defects and provided a round-figure estimate of loss of $2.27 million.
On 8 July 2025, Mercon entered voluntary administration, with the defects proceeding stayed as a consequence. Following their appointment, the administrators issued an initial report to creditors convening the first meeting and requesting proofs of debt for voting purposes. On 17 July 2025, the OC lodged a proof of debt on its own behalf and separate proofs on behalf of seven individual unit owners, with the combined claims of the OC and the unit owners totalling over $4 million. The debts were supported by the OC Reports.
At the first creditors’ meeting on 18 July 2025, the administrators admitted the OC’s claim and the unit owners’ claims at $1 for voting purposes only, while admitting related-party creditor claims at their face value of $1.72 million. The nominal admission was made on the basis that the defect claims were unliquidated or contingent, had not been independently verified or adjudicated, and that the underlying defects proceeding remained unresolved.
On 5 August 2025, the administrators issued their second report to creditors (Second Report). The Second Report described the defects claims as unadjudicated and unquantified, set out Mercon’s financial position, compared the likely outcomes of a proposed DOCA and liquidation, and recommended that creditors approve the DOCA.
Shortly before the second meeting, on 11 August 2025, the OC reaffirmed reliance on its existing proofs of debt for itself and the Six UOs. The administrators again admitted the OC’s claim at $1 for voting purposes for the same reasons, admitted the claims of six UOs (Six UOs) at $1, rejected one UO claim that had been admitted at the first meeting, and admitted the related-party creditors’ claims at their face value.
At the second meeting on 12 August 2025, the OC and the Six UOs voted against the proposed DOCA. The four related-party creditors, the ATO and six other unsecured creditors voted in favour, with the result that the DOCA resolution passed on both number (11 to 7) and value.
The OC’s Pleadings
On 26 August 2025, the OC commenced this proceeding against Mercon and other defendants.
First, the OC pleaded that, for the purposes of voting at the second creditors’ meeting, the administrators incorrectly admitted the OC’s proof of debt and the Six UOs’ proofs of debt at a nominal value of $1.
Secondly, the OC pleaded that the administrators should not have admitted the related-party creditors’ proofs of debt at their face value for voting purposes, and that the Court should set aside the voting outcome on that basis.
Thirdly, the OC sought orders setting aside the DOCA on the grounds that the second report to creditors was misleading, that the DOCA constituted an abuse of the administration process, or that the DOCA was oppressive, unfairly prejudicial or unjust.
Issue 1: Did the administrators correctly admit debt claims at $1?
Rule 75–85(3) of the Insolvency Practice Rules (Corporations) 2016 (IPRC) permits a creditor to vote if its debt has been admitted. Rule 75–85(4) prevents an unliquidated or contingent claim from being admitted unless the chair of the meeting makes a just estimate of its value. A just estimate requires a genuine and rational attempt to value the claim on the material available at the time. The exercise is summary in nature and does not involve determining the ultimate merits of the claim. The authorities confirm that where the available material does not permit any sensible or defensible valuation, admission of a claim at a nominal amount, including $1, is permissible for voting purposes.
In the present case, although the OC’s pleaded debt was substantial, it was wholly unliquidated and contingent on unresolved litigation. The quantum relied upon was primarily derived from the OC Reports. The qualifications of the report’s author were not established, and the reports themselves contained only broad, “ballpark” estimates. There was no articulated methodology or evidentiary foundation capable of supporting a rational voting valuation. In those circumstances, the administrators were entitled to conclude that admission at $1 for voting at the second creditors’ meeting was appropriate.
Similarly, the Court also rejected the OC’s proposed approach of estimating the debt on a percentage or discounted basis. Where the underlying figures were themselves no more than “ballpark” estimates, there was no intelligible basis on which any discount could be quantified.
In practice, a proof of debt should be supported by cogent expert evidence and a defensible methodology, with clear and quantified figures, to maximise the prospect of admission for voting purposes.
Issue 2: Related-party proofs of debt and alleged impact on the voting outcome
The OC first contended that the administrators’ admission of the related-party creditors’ proofs of debt at their face value for voting purposes did not constitute a “just estimate” and should have been excluded.
Secondly, it argued that, if the related-party votes were excluded, the outcome of the second creditors’ meeting would have been different. It therefore submitted that the Court should exercise its power under rule 75–41 of the IPRC to set aside the resolutions passed at that meeting.
Whether the related-party proofs were admitted on a just estimate
The Court found that the loan agreements, the relevant loan accounts, and other Mercon’s books and records were sufficient to establish both the existence and the quantum of the related-party debts. Unlike the OC’s defect claims, the related-party debts were not contingent on unresolved litigation.
Whether the voting outcome should be set aside
The Court held that, even if the related-party proofs of debt were not admitted, judicial intervention would still not be warranted.
Rule 75–41 of the IPRC confers a discretion on the Court to set aside or vary a resolution passed at a creditors’ meeting where a decision about the admission or valuation of proofs has affected the result. The discretion is only enlivened if the Court is satisfied that disregarding the relevant votes would have altered the outcome of the resolution.
In the present case, the Court found that the outcome would not have changed even if the related-party votes were excluded. There were seven votes against the proposal, being the OC and the Six UOs, and eleven votes in favour, including the four related-party creditors. If the related-party votes were excluded, the resolution would still have passed on value, while the vote on number would have been evenly split at seven votes each.
In that circumstance, the resolution would be determined by the chair’s casting vote. The administrators gave unchallenged evidence that the chair would have exercised the casting vote in favour of the DOCA. The Court accepted that evidence, with the result that the proposal would still have passed by eight votes to seven.
Accordingly, the exclusion of the related-party votes would not have altered the outcome of the second creditors’ meeting, and the Court’s intervention was not warranted.
Outcome of Issue 2
Both limbs of the OC’s challenge failed. The Court held that the related-party creditors’ proofs of debt were properly admitted on a just estimate for voting purposes. In any event, even if those votes were excluded, the outcome of the meeting would not have changed and there was no basis to set aside the DOCA.
In practice, creditors should not overlook the significance of a casting vote, as it can be decisive in closely balanced situations and ultimately determine the outcome of a creditors’ meeting.
Issue 3: Challenges to terminate the DOCA
The OC sought termination of the DOCA on three grounds: misleading disclosure in the second report to creditors, abuse of the voluntary administration process, and oppression or unfair prejudice to creditors. Each ground required the OC to meet a high evidentiary threshold.
In relation to misleading disclosure, the Court emphasised that any false statement or omission must be material in the sense that it was capable of affecting creditors’ decision to vote in favour of the DOCA. The OC failed to meet that threshold. It adduced no expert evidence and identified no material inconsistency or contradiction in the content of the second report.
Termination on the basis of abuse of process required proof that an improper or collateral purpose was the predominant purpose of the administration. The Court rejected the contention that the company had entered voluntary administration to avoid other litigation. In particular, the OC failed to demonstrate the existence of any substantial proceedings that would likely have proceeded and materially worsened Mercon’s position but for the administration.
Finally, oppression is assessed by reference to the effect of the DOCA on creditors as a whole. The Court rejected this ground by finding that the DOCA, actually, improved creditors’ position compared to liquidation and was supported by the majority of creditors. Therefore, the DOCA was not oppressive.
As none of the grounds were made out, the DOCA was not set aside.
In practice, creditors’ cases must be carefully prepared. Credible expert evidence, clear quantification and a coherent evidentiary foundation are critical where the Court is asked to apply a stringent evidentiary threshold.
Further Information
For further information about proofs of debt, voting at creditors’ meetings, DOCA, and challenges to voluntary administration outcomes, please contact the author of this article:
Blake Shaw
PARTNER