TGIF 20 August 2021 – Proving your proof: the onus is on the creditor

This week’s TGIF looks at a recent case in which it was determined that, when challenging the adjudication of a liquidator or administrator, the onus of proof, for establishing that proofs of debt be accepted, is on the creditor lodging the challenge.

Key Takeaways

• The onus of proof, for establishing that proofs of debt be accepted, rests firmly on the creditor challenging the adjudication of the liquidator or administrator.
  
  
• The rejection of a proof of debt should not be disturbed unless the Court is properly satisfied that the person relying on the proof of debt has discharged that onus. Proper and sufficient admissible evidence needs to be adduced.
  
  
• The critical question is whether the debt concerned is a true liability of the company.

What happened?

The recent Federal Court case of Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann (No 3) [2021] FCA 938 considered whether various proofs of debt lodged by a property developer were true liabilities of a construction company that had entered voluntary administration.

The property developer lodged proofs of debt in the administration claiming in respect of different projects:

• damages for additional costs incurred in completing constructions;
  
  
• damages for delay in completing constructions;
  
  
• costs of preparing new documents because of a lack of permission to use the construction company’s documents;
  
  
• damages for defective works; and
  
  
• damages for failing to provide warranties.

Principles on proofs of debt

Justice Reeves outlined the following established principles in relation to challenging of adjudication by an administrator or liquidator of a proof of debt. These were taken from In the matter of Azmac Pty Limited (2020) 146 ACSR 113; [2020] NSWSC 204 at [41] – [44], Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 at [340], Re Galaxy Media Pty Ltyd (In Liq) [2001] NSWSC 917 and Re: Castaplex Pty Ltd (in liq) [2010] QCA 59 at [4] and included that:

• the case law in respect of the former provision (section 1321 of the Corporations Act 2001 (Cth)) is of continuing relevance;
  
  
• the hearing is a hearing de novo, so the Court may make its decision based on fresh evidence not before the administrator or liquidator;
  
  
• whether the alleged debt – the subject of the proof – is a ‘true liability of the company’ is the key issue;
  
  
• a defence is available if the evidence suggests the debt was an unreasonable compromise or if fraud or collusion are apparent;
  
  
• the onus in any challenge is on the creditor; and
  
  
• if the Court is unable to conclude either way, then the liquidator or administrator’s decision must stand.

Consideration of the property developer’s claims

Justice Reeves considered that the property developer’s claims were not established and were properly rejected because:

• for one of the projects, there was no binding contract between the parties. The property developer relied on a Letter of Intent (LOI) and a Heads of Agreement (HOA) which had not been properly executed. Further, the HOA did not contain the crucial elements of a building contract, namely price and scope of works, to be performed for that price;
  
  
• the evidence submitted in support of the defect claims was insufficient; and
  
  
• the LOI expressly provided that intellectual property in the construction documents was assigned to the property developer. Therefore, there was no need for any additional confirmation so the property developer could use the construction company’s documents.

Comment

When lodging a proof of debt, it is critical to ensure all necessary elements are present to demonstrate the alleged debt is a true liability of the company. The creditor has the onus in any court challenge to file proper, admissible evidence to support its position.