Australia: Tips for creditors lodging proofs of debt

Last Updated: 21 October 2015
Article by James Hamilton

In my experience, many creditors or parties asserting a claim or debt in a liquidation, voluntary administration or when voting for, or proving in a Deed of Company Arrangement (DOCA) fail to invest the time and care needed to lodge a valid proof of debt or particulars of their claim. This issue seems to be more common when the lodgement is required for voting purposes at a meeting called to decide whether a DOCA will be accepted or not. This is probably due to the short time frame provided to creditors.

Related to this issue, is the failure of some corporate creditors to provide a valid proxy to the person who attends a creditors' meeting on that creditor's behalf. Proxies for DOCA meetings can be a general proxy (given open discretion to the proxy holder) or a special proxy (directing the proxy holder how to vote). A creditor need not attend the meeting and can usually vote by giving a special proxy to the chairperson. This can be problematic if an amended proposal is made at the meeting however.

Get one of these tasks wrong and a creditor's voting right can be adversely affected. That outcome can sometimes mean the difference between a DOCA proposal passing or not.

In voluntary administrations, the administrator must admit any debts or claims which would be legally enforceable and provable in a winding up. This includes debts and claims, whether unliquidated or contingent, present or future. There is therefore a broad range of potentially admissible claims.

The particulars of the proof must be: "sufficient to show, at least at a prima facie level, the existence of the asserted debt or claim": Selim v McGrath [2003] NSWSC 927.

The insolvency practitioner or chairperson of the meeting must act quasi judicially when reviewing a proof of debt – like a judge. If the claim is for damages, they must apply the usual assessment of damages rules administrator should also take account of pre–existing matters they are already aware of, such as might be found in the company's books.

If, as is commonly the case, the administrator requires a formal proof of debt, the proof of debt form sent with the notice might lure the creditor into thinking that little proof of the debt or claim is required. The form also does not invite supporting documents to be lodged (called "vouchers") with the form. It merely seeks a description of the "vouchers": Corporations Regulation 5.6.50. The administrator can then call for the documents described.

Ideally, I suggest that creditors carefully describe the basis for the debt or claim and the documents proving their debt or claim and also attach the relevant supporting documents when returning the proof of debt. This method will maximise the chances of the proof being admitted at the meeting. It will arm the administrator with the evidence they need to properly assess the claim.

If the claim is based upon an oral contract or an oral misrepresentation, then a statutory declaration of the person(s) who spoke the relevant words may need to be proffered.

In some cases quite substantial material may need to be provided if the claim is unliquidated or contingent. To prove an asserted damages amount can be a complex exercise. If such a proof of debt is lodged shortly prior to a meeting it could make the task of the chairperson very difficult and harm the creditor's chances. The law recognises that the task for the administrator or chairperson may be: "somewhat summary in nature"..."do the best that can be done by reference to the factual material the claimant furnishes": Selim's case.

If court proceedings are on foot but undecided concerning the claim, then the administrator will probably need to see the pleadings as a starting point, if pleadings exist.

A creditor must also provide details of any security they have and an estimate its value on the proof of debt. This requirement is prompted on the proof of debt form. A failure to do this can be fatal to maintaining that security. The value estimation process is not always easy.

If controversy surrounds the creditor's claim and the creditor has a strong desire to get its debt or claim admitted, then at an early stage the creditor should retain a lawyer to help it draft the proof and assemble the supporting materials. Complex proofs of debt will often be assessed by the administrator with the help of legal advice. The early lodgement of the proof will give that lawyer more time to advise and to quite possibly seek further evidence from the creditor, if they think the evidence submitted is insufficient.

If the proof is rejected at the meeting, or assessed for a lesser sum than the creditor claimed, the creditor will be entitled to appeal the decision to a court. The cost of such an appeal would mean it will rarely be merited. This emphasises the need to promptly lodge a well drafted, evidence supported proof of debt, especially where there are anticipated issues surrounding it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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James Hamilton
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