TGIF 15 November 2024 – An interesting admission: Court offers first interpretation of section 563B of Corporations Act

This week’s TGIF examines a recent decision where the Federal Court considered when a proof of debt would be ‘admitted’ within the meaning of section 563B of the Corporations Act 2001 (Cth) and therefore attract the statutory entitlement to interest.

Key takeaways

• Section 563B(1) of the Corporations Act 2001 (Cth) sets out a creditor’s entitlement to be paid interest on debts or claims admitted by a liquidator. Critically, that entitlement will only arise if a claim or debt has been ‘admitted’ for the purpose of section 563B(1).
  
  
• Creditors and liquidators alike should be alive to the fact that, under section 563B(1), a creditor’s right to interest may be lost if a debt or claim against the company is satisfied prior to the liquidator determining the associated proof of debt.
  
  
• While a liquidator is not required to follow a formal process when determining a proof of debt, they must ‘consciously determine’ the proof for it to constitute an admitted claim or debt for the purposes of section 563B(1). The proof must be a conscious determination of who is entitled to participate in the distribution of the company’s assets, in accordance with the scheme set out in the Corporations Act.

The background

The decision in Park, Re Queensland Nickel Pty Ltd (in liq) (Statutory Interest) [2024] FCA 1300 (Park) involves one of the many aftershocks that occurred in the wake of the liquidation of Queensland Nickel Pty Ltd (in liq) (QNI), a company owned by Clive Palmer.

General purpose liquidators (GPLs) were appointed to QNI at a creditor’s meeting on 22 April 2016. Separately, on 18 May 2016, the Court appointed special purpose liquidators (SPLs) to QNI.

The SPLs were appointed in response to a Commonwealth application, which sought to recover around $70,000,000 it had advanced to QNI’s refinery workers under the Fair Entitlements Guarantee (FEG) Scheme. The SPLs’ mandate was to recover the Commonwealth’s FEG payments by pursuing Mr Palmer, as well his companies which owned the Queensland Nickel Refinery – Queensland Resources Pty Ltd and QNI Metals Pty Ltd (the JVCs) – and/or their directors.

Upon their appointment, the SPLs were provided with proofs of debt and other internal records that the then administrators of QNI sought. Later, the SPLs:

• caused QNI to commence a proceeding, which included a claim for indemnity from the JVCs, in which it asserted that QNI was liable to pay a class of creditors; and
  
  
• procured a promise – through a settlement deed, and in exchange for discontinuing their indemnity claim – that the JVCs would pay the remaining creditors in the class who had not been paid prior to the deed’s execution (Remaining Creditors).

In accordance with the settlement deed, the JVCs arranged for payment to be made to the Remaining Creditors for QNI’s liabilities.

The interest issue

Following the settlement deed’s execution and the payment of the Remaining Creditors, the GPLs sought judicial advice under section 90-15 of the Insolvency Practice Schedule (Corporations) (Cth). They questioned whether they would be justified in paying interest in accordance with section 563B(1) to the Remaining Creditors for their debts, which were satisfied by the JVCs pursuant to the settlement deed.

Under section 563B(1), a liquidator is required to pay interest on any ‘admitted debt or claim’ from the relevant date. That section expresses the sole entitlement and prescription for the payment of interest for admitted debts or claims: see McGrath v Sturesteps (2011) 81 NSWLR 690 at [77], [80].

Justice Downes held that an ‘admitted debt or claim’ was one which is subject to an admission by the liquidator within the meaning of Part 5.6, Division 6 of the Corporations Act and its regulations. That is, whether the proof of debt was admitted or rejected by the liquidator.

The decision

Justice Downes determined that the Remaining Creditors’ claims were not admitted by the SPLs for the purpose of section 563B(1). Accordingly, the GPLs would be justified in not paying interest relating to the amounts claimed.

Her Honour’s reasons set out some general observations regarding the role of liquidators and the proof of debt process, including that:

• the decision to admit or reject a proof of debt was a ‘critical function’ of a liquidator;
  
  
• while neither the Corporations Act nor its regulations impose formality on a liquidator’s decision to admit or reject a proof of debt, there must still be a ‘conscious engagement’ by the liquidator with that task; and
  
  
• liquidators must consciously determine who is entitled to participate in the distribution of the company’s assets in accordance with the scheme set out in the Corporations Act.

The GPLs submitted that the SPLs had, in effect, admitted the Remaining Creditors’ proof of debts for the purpose of section 563B(1) by investigating and verifying whether the Remaining Creditors’ claims were valid and correctly valued.

In reaching her decision, her Honour held:

• contrary to the GPLs’ assertion, the SPLs conduct did not comprise a ‘conscious determination’ of who was entitled to participate in the distribution of QNI’s assets; and
  
  
• as a matter of fact, the SPLs did not adjudicate the Remaining Creditors’ proofs of debt. When queried on such adjudication, one of the SPLs stated “[t]hat’s not part of my role. That’d be the role of the general purpose liquidator”.

Comment

This decision was, according to Justice Downes, the first authority on the proper construction of section 563B of the Corporations Act. The decision confirms that a liquidator cannot admit or reject a proof of debt passively – that is, their adjudication of a claim requires conscious engagement.

The consequence of the finding in Park was that the Remaining Creditors lost their right to interest, according to section 563B(1), when their claims / debts were satisfied by the JVCs prior to their proof of debts being determined by the GPLs. If the Remaining Creditors’ proofs were admitted prior to this, the reasoning in Park suggests that the Remaining Creditors would have been entitled to interest.

The decision should put creditors and liquidators on notice. While the ‘novel circumstances’ (as her Honour described them) contributed to the Remaining Creditors losing their right to recover interest under section 563B(1), prudent creditors and liquidators should ensure that a liquidator has fully engaged with and determined proofs in accordance with the scheme set out in the Corporations Act. This is particularly so where claims / debts associated with those proofs are to be satisfied by parties external to the liquidation or as part of settlement arrangements.