8 November 2021
The Admission and Rejection of a Proof of Debt
Proof of Debt
A liquidator’s decision to accept a proof of debt was successfully challenged due to a lack of evidence that the amount was owed in the recent case of Tuscan Capital Partners Pty Ltd v Trading Australia Pty Ltd (in liq), in the matter of Trading Australia Pty Ltd (in liq) (Proof of Debt) [2021] FCA 1061 (Tuscan).
The processing of proof of debt is an essential part of the day-to-day work of insolvency practitioners. Creditors may lodge proof of debt during the insolvency administration to record their claims, participate in meetings of creditors and to participate in any dividends.
It is the creditors’ responsibility to prove their claim to the liquidators’ satisfaction. A creditor’s proof of debt may be accepted if there is sufficient evidence to satisfy the insolvency practitioner that the debt exists for the amount claimed.
The Federal Court decision in Tuscan highlights the court’s power to overturn decisions of insolvency practitioners in a company’s external administration. It serves as a reminder that insolvency practitioners must always exercise caution and diligence when assessing a proof of debt. They must also be mindful that they may be subject to an adverse costs order if they fail to do so.
What happened in Tuscan?
Fishbank Development Corporation Pty Ltd (FDC) submitted a proof of debt in the amount of $56,289.43 plus interest of $9,742.31. FDC’s proof of debt was premised on a claim for contribution against Trading Australia Pty Ltd (in liq) (TA) in respect of fees arising from a joint retainer for legal services. The liquidator accepted FDC’s proof of debt.
The applicant who is a director of TA contested the liquidator’s decision to accept FDC’s proof of debt claiming that no retainer had ever been entered between TA and the firm of solicitors in question. The applicant’s main arguments included that the retainer agreement was revoked by amended counter offers sent by FDC that were never accepted.
What did the court decide?
Perram J rejected the liquidator’s decision to accept FDC’s proof of debt and ordered the liquidator to pay the applicant’s costs.
In rejecting the liquidator’s decision to accept the proof of debt, Perram J first assessed the process by which the retainer was entered and noted that while the email from the firm of solicitors attaching the original retainer agreement had been copied to TA, the subsequent offer and counteroffer had not. These subsequent offers had the effect of revoking the original retainer and therefore could not be held that TA had accepted an offer of services and entered into such an agreement.
Although Perram J rejected the liquidator’s position, his Honour accepted it was a reasonable one and that the decision to defend the review application was appropriate. Despite this, the Court ordered the liquidator to pay the applicant’s costs.
Key Takeaways
Liquidators and administrators must carefully the basis for every proof of debt and must not admit a proof of debt without proper scrutiny of the surrounding circumstances to ensure the company in liquidation indeed owes the debt. This includes carefully reviewing any available documentation and evidence particularly when there is ambiguity in respect of the alleged contractual arrangements that give rise to the alleged debt.
Insolvency practitioners should be aware that despite acting reasonably in accepting a proof of debt and appropriately in defending a review application, they can still be exposed to adverse costs orders.
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Written by Meshal Althobaiti