Guidance for Creditors Filing Proof of Debt – Insolvency/Bankruptcy/Restructuring

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In my experience, many creditors or parties asserting a claim or debt in a liquidation, voluntary administration, or in voting or evidence in a Deed of Corporate Arrangement (DOCA) do not invest the time and care necessary to file valid proof of debt. or details of their complaint. This problem seems to be more common when the deposit is required for voting purposes at a meeting called to decide whether or not a DOCA will be accepted. This is probably due to the short time given to creditors.

Related to this issue is the failure of some corporate creditors to provide a valid power of attorney to the person attending a meeting of creditors on behalf of that creditor. Proxies for DOCA meetings can be a general proxy (given at the proxy’s discretion) or a special proxy (telling the proxy how to vote). A creditor is not required to attend the meeting and can generally vote by giving a special proxy to the chairman. However, this can be problematic if a modified proposal is made at the meeting.

If you get any of these things wrong, a creditor’s right to vote may be affected. This result can sometimes make the difference between the success or not of a DOCA proposal.

In voluntary administrations, the administrator must admit all debts or claims that would be legally enforceable and provable in a liquidation. This includes debts and receivables, unliquidated or contingent, present or future. There is therefore a wide range of potentially admissible requests.

The details of the evidence should be: “sufficient to show, at least on a prima facie level, the existence of the claimed debt or claim”: Selim v McGrath [2003] NSWSC 927.

The insolvency practitioner or presiding officer must act quasi-judicially when considering evidence of debt – like a judge. If it is a claim for damages, they must apply the usual rules for assessing damages. The administrator must also take into account pre-existing elements of which they are already aware, as they may be found in the books of the company.

If, as is often the case, the administrator requires formal proof of debt, the proof of debt form sent with the notice could lead the creditor to believe that little proof of the debt or claim. The form also does not invite you to submit supporting documents (called “supporting documents”) with the form. It’s just looking for a description of “supporting documentation”: Corporations Regulation 5.6.50. The administrator can then request the documents described.

Ideally, I suggest that creditors carefully describe the basis of the debt or claim and the documents proving their debt or claim and also attach the relevant supporting documents when returning the proof of claim. This method will maximize the chances that the evidence will be admitted at the meeting. This will provide the admin with the evidence they need to properly assess the request.

If the claim is based on a verbal contract or oral misrepresentation, a statutory declaration from the person(s) who spoke the relevant words may have to be presented.

In some cases, quite substantial elements may have to be provided if the debt is not liquidated or is conditional. Proving a claimed amount of damages can be a complex exercise. If such proof of debt is filed shortly before a meeting, it could make the chairman’s job very difficult and hurt the creditor’s chances. The law recognizes that the task of the administrator or the president can be: “of a somewhat sketchy nature”…do one’s best by referring to the factual elements provided by the applicant“: The case of Selim.

If legal proceedings are ongoing but undecided regarding the claim, the administrator will likely need to see the pleadings as a starting point, if any pleadings exist.

A creditor must also provide details of any collateral they have and an estimate of its value on the proof of debt. This requirement is indicated on the proof of debt form. Failure to do so can be fatal to maintaining that security. The value estimation process is not always easy.

If controversy surrounds the creditor’s claim and the creditor strongly desires that his debt or claim be admitted, the creditor should, at an early stage, retain the services of a lawyer to help him draft the evidence and collect supporting documents. Complex evidence of debt will often be assessed by the administrator with the assistance of legal advice. Filing evidence early will give that attorney more time to advise and possibly seek additional evidence from the creditor, if they feel the evidence presented is insufficient.

If the evidence is rejected at the meeting, or assessed for a sum less than that claimed by the creditor, the creditor will have the right to appeal the decision in court. The cost of such a call would mean that it would rarely be deserved. This underscores the need to file well-drafted and evidence-backed proof of debt quickly, especially when there are anticipated issues surrounding it.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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