TGIF 26 July 2024 – In admitting proofs of debts, liquidators do not create new liabilities

This week’s TGIF considers a recent decision of the Supreme Court of New South Wales (Forex Capital Trading Pty Ltd (in liquidation) v Invesus Group Limited [2024] NSWSC 867). Justice Ball determined that admission of a proof of debt by a liquidator was not akin to a judgment or settlement, and that such an admission did not create a new liability of the company.

Key Takeaways

• Liquidators are given broad powers to realise assets of the company and distribute them in accordance with the scheme in Div 6, Pt 5.6 of the Corporations Act. However, a liquidator is not determining the liabilities of the company when administering the scheme.
  
  
• When dealing with proofs of debts, a liquidator is acting in a quasi-judicial capacity, undertaking a statutory task as an officer of the court, and is not acting as an agent of the company.
  
  
• Amounts for which a proof of debt is admitted by a liquidator will not always correlate to the amount for which the company is liable.

Background

The plaintiff (Forex) faced ASIC proceedings for unconscionable conduct and other Corporations Act contraventions.

In the context of those proceedings, the defendant (Invesus), the ultimate parent company of Forex, executed a letter of comfort in favour of Forex and its directors in March 2019. The letter of comfort said that Invesus would provide financial support to Forex to meet ‘any debts, including judgment debts, incurred by Forex … prior to or after the date of this letter in respect of Forex’s customers’.

Consent orders were made in the ASIC proceedings in April 2021, with declarations that Forex had engaged in unconscionable conduct. A $20 million civil penalty was imposed on Forex, which was paid by Invesus, under a loan agreement.

Having regard to the Court’s decision, Forex’s liquidators determined that former customers had valid claims for loss or damage suffered as a result of trading with Forex. The liquidators sought and obtained court orders in May 2022, permitting the liquidators to:

• invite former Forex clients to submit proofs of debt for net trading losses suffered; and
  
  
• admit those proofs of debt for 85% of the amount claimed.

Proofs of debt totalling $51,247,208.38 were subsequently lodged. The liquidators admitted 85% of the amount claimed totalling $43,645,127.26 (‘claimed amount’). The liquidators sent a letter of demand to Invesus for the payment of the ‘claimed amount’. Invesus denied that the letter of comfort applied. The liquidators commenced proceedings against Invesus seeking payment.

Decision

The central issue was whether the ‘claimed amount’ fell within the ambit of the letter of comfort. Justice Ball found that admission of proofs of debt cannot create a new liability of the company. Hence, Invesus was not obliged to pay the ‘claimed amount’ to Forex under the letter of comfort.

Justice Ball emphasised that a debt is not the same as a claim, and that the purpose of the letter of comfort was to ensure that Forex would be able to meet liabilities if and when they crystallised, as opposed to settling uncrystallised claims.

Justice Ball rejected the submission that the liquidators’ admission of 85% of the amount claimed established a liability on Forex to pay that amount as though it was similar to a judgment or settlement. His Honour stated that in adjudicating a proof of debt, the liquidator acts in a quasi-judicial capacity. He said that in accepting or rejecting a proof of debt, the liquidator is not acting as an agent of the company, but rather is undertaking a statutory task as an officer of the Court. The amount admitted to proof by the liquidators was not a liability of the company. Rather, it was a liability of the liquidators to pay the creditor their share of the funds realised by the liquidators, which would only arise after all assets were realised and all proofs were determined.

Justice Ball also rejected Forex’s alternative argument that the liquidators’ conclusion on the existence and amount of Forex’s liability to former customers was binding on Forex and therefore, created a debt for the purposes of the letter of comfort. His Honour found that the liquidators’ decision was not binding on Forex, let alone Invesus. His Honour emphasised that while the amount for which a proof of debt is admitted will normally correspond to the amount for which the company is liable, that will not always be the case. In this case, the amounts for which the customers were entitled to prove did not correspond to any liability of the company. Rather, it was determined in accordance with Federal Court orders to avoid the necessity of having to make any determination in relation to the company’s actual liabilities. His Honour also held that the process by which the liquidators allowed customers to submit proofs with a 15% discount to the claim value did not constitute a settlement.

Comment

This case reminds liquidators that in adjudicating proofs of debt:

• They are not acting as an agent of the company, but rather as a quasi-judicial officer performing a statutory task as an officer of the court.
  
  
• The amount for which a proof of debt is admitted may not necessarily correspond with the amount for which a company is liable. There are some liabilities that may be enforceable against the company, which are not provable in a liquidation.
  
  
• While a liquidator has broad powers to craft a scheme for the adjudication of proofs of debts, an admissions of a proof of debt is not equivalent to a judgment or settlement, and does not create new liabilities for the company to pay any sum. Alternatively, it creates a liability of the liquidator to pay the creditor their share of the realised funds.

The case also serves as a useful reminder that letters of comfort will not always encumber the issuer with a legally enforceable obligation. Liquidators must carefully regard the precise language used in the letter and the relevant facts.