TGIF 5 April 2019: Prove it or lose it: Court allows appeal on rejected proofs calling company liquidation into question

This week’s TGIF examines a decision of the Victorian Supreme Court which found that several proofs had been wrongly admitted or rejected, and had correct decisions been made, the company would not have been put into liquidation.

BACKGROUND

In El-Saafin & Anor v Franek & Ors [2019] VSC 155, the Supreme Court of Victoria considered an appeal against the decisions of the administrator of Saafin Constructions Pty Ltd (the Company) to admit and reject several proofs of debt lodged for the purposes of voting at a creditors’ meeting.

As a result of the administrators’ decisions, the creditors whose proofs had been admitted were able to pass a resolution to place the Company into liquidation. The Court found that several proofs had been wrongly admitted or rejected, and that had the correct decisions been made at the meeting, the Company would not have been put into liquidation.

The decision provides a thorough analysis of the Insolvency Practice Rules, particularly the procedure to be followed by administrators with respect to proofs of debt, and also examines the options available when a company has been improperly placed into liquidation, but nevertheless appears to be insolvent.

INSOLVENCY PRACTICE RULES 

This decision considered several sections of the Insolvency Practice Rules on which the Court has previously offered few comments.

Relevantly, section 75-85(3) of the Insolvency Practice Rules provides:

A person is not entitled to vote as a creditor at a meeting of creditors unless:

1. his or her debt or claim has been admitted wholly or in part by the external administrator; or 
2. he or she has lodged, with the person presiding at the meeting, or with the person named in the notice convening the meeting as the person who may receive particulars of the debt or claim: 

 i. those particulars; or

 ii. if required – a formal proof of the debt or claim. 

Section 75-95(1) provides:

If necessary, an external administrator must ask a creditor to give evidence in writing in relation to a debt claimed by the creditor to establish the liability of the company for the debt. 

Together, these rules provide that external administrators may, in certain circumstances, be required to ask a purported creditor to provide more information about the nature of their debt.

In this instance, the Court held that section 75-95 does not create a “blanket obligation” to call for more information, but rather an obligation that will arise in particular circumstances, depending on “the previous requests made for information and/or evidence in relation to the debt claimed, and the information in fact provided.”

In this case, the administrators had advised potential creditors on several occasions that supporting documentation was required to be lodged before purported creditors could participate in creditors’ meetings. This included notices of meetings, and comments made at the first creditors’ meeting that proofs of debt (including those of the plaintiffs) were rejected on the basis that no documents were provided in support of the debt claimed. In response, three days before the second creditors’ meeting, fresh proofs of debt were provided – only some of which attached supporting documents. The Court found that in these circumstances, the administrators were not obliged to request more information.

Rejection/admission of debts

The application alleged that seven proofs of debt, and parts of another two proofs, were wrongly rejected by the administrators, and that three proofs of debt which had been admitted should have been rejected.

In considering those proofs, the Court observed that the administrators had adopted an inconsistent approach, rejecting some proofs of debt for not providing documents, while admitting others that similarly lacked supporting documentation.

For example, in the case of proofs that concerned contracts for sale of apartments, those proofs attached contracts which recorded that a deposit had been paid (sufficient for the proofs to have been admitted). However, proofs which provided only contracts which anticipated that moneys would be paid, without any evidence of those moneys actually having been paid, should have been rejected.

Where a company’s solvency is in question

The Court in El-Saafin found that, had the administrators adopted a consistent approach, and correctly admitted/rejected proofs, the Company would not have been placed into liquidation.

However, the Court considered the Company was likely to be insolvent, making it undesirable to undo the liquidation. In these circumstances, the way forward proposed by the Court was to require the liquidators to prepare a report considering the Company’s solvency, at which point the Court would be able to revisit the question of setting aside the resolution.

Key principles and takeaway 

When deciding whether to admit proofs of debt, administrators should be aware that in certain circumstances, an obligation may arise for them to seek more information from potential creditors.

That said, this decision suggests the Court will not consider this obligation to arise in circumstances where creditors have been given ample time and opportunity to provide that information. Administrators should also adopt a consistent approach to all proofs of debt, ensuring that the same evidentiary standard is applied to all potential creditors.