The latest edition of Australian Insolvency Journal (the quarterly IPA publication) contained an article written by Mr Jim Johnson, a barrister practicing out of the Frederick Jordan Chambers in Sydney.

Mr Johnson’s article was about one aspect of the restriction placed on liquidators in compromising debts owed to the company when the amount owed is over $100,000. We have written about this and other restrictions on liquidators previously in our e-Updates (November 2008 and July 2009) and raised the discrepancy between liquidators’ and receivers’ rights and obligations in this area.

The same can be said for the discrepancy between the rights of liquidators and that of bankruptcy trustees. The Bankruptcy Act does not place the same restrictions on trustees, and trustees are as likely as liquidators to be faced with the compromise of a debt over $100,000 or entering into an agreement that would take longer than 3 months.

We said in those articles that a strict dollar limit does not appear entirely sensible, especially when you consider that a $99,000 debt can be compromised to any amount, but $101,000 cannot be compromised at all without approval. We suggested that:

Maybe some rewording of the provision stating that we cannot compromise debts over $100,000 by more than (say) 10% of the debt amount – or some other calculation based on ‘materiality’ – would be more efficient.

We had the same views when considering the 3 months time restriction, saying in November 2008:

This time period seems short when liquidators can take other actions (as long as they are not ‘agreements’) that will run for far longer than 3 months without any approval. … It seems a little strange that we can spend 2 years in the courts seeking judgment, but need approval for that person to settle the debt by paying the amount over more than 3 months.

Mr Johnson’s article discussed the question of whether a liquidator voting at a Part X or section 73 meeting under the Bankruptcy Act was a compromise of that debt and, if the debt was more than $100,000, whether creditor’s approval would be required. We believe that the same argument would apply to a voluntary administration meeting to consider a deed of company arrangement of a corporate debtor.

Voting for a proposal that is intended to give less than the full amount to creditors is agreeing to receive less – to compromise the debt. If the proposal is accepted by the required amount of creditors, that compromise is done. Or is it? Mr Johnson raises the point that the liquidator’s vote does not “constitute a compromise”, that this “arises as a result of the combined votes”.

I think that voting for the proposal is offering or agreeing to make the compromise and, if sufficient other creditors are willing, the offer will be accepted. From a purely practical point, the liquidator is doing something (voting for the proposal) that will result in the company receiving less on its debt and that must to be considered as comprising the debt.

Mr Johnson summarized his article with “strictly speaking .. approval under s 477(2A) of the Corporations Act is required” and we agree with his conclusions – at the very least out of an abundance of caution.

Another factor not considered in the article is whether, if the proposed agreement is intended to go longer than 3 months (which is common), whether the liquidator will need creditor approval under section 477(2B) regardless of the amount of their debt. One assumes that the similar arguments would apply and that this approval will be necessary.

If the legislators believe that the current restrictions and approvals should be maintained, the approval process itself could be streamlined. The Bankruptcy Act has provisions that allow some resolutions to be passed in the absence of dissent. In this case the liquidator could send a notice to creditors stating that he will compromise a debt or enter into a lengthy agreement – or both if applicable – unless creditors object within a certain period. If no one objects, the deal can be done. If someone objects, a meeting can be called to resolve it by way of a vote.

Food for thought.