This is the final article in our series on Proofs of Debt. Over the last two months we have looked at why Proofs of Debt are important and how and when they need to be lodged in insolvent estates. We also looked at the process of admitting and rejecting proofs of debt for voting and dividend purposes.

This month we look at the review process. Like the admittance process, there are two review processes: one for a rejection of a proof of debt at meetings for voting purposes, and one for rejection for dividend purposes. We deal with both in this article.

As with the admittance process, the Corporations Act and Bankruptcy Act are similar with a few significant differences.

What can creditors do when their proof of debt is rejected for voting purposes?

The formal rejection process does not apply to the rejection of proofs of debts for voting purposes. From a purely practical point, proofs of debt are usually lodged at or just before a meeting of creditors and there is no time to issue notices and make court applications before the meeting. Therefore there are slightly different methods of resolving voting rights issues than for resolving rejections that involve dividends.

Not discussed in this article is the possibility of creditors making applications after the meeting under the more general provisions to have practitioner’s decisions reviewed.

The Corporations Act (in the Regulations) gives the chairperson of a meeting the power to admit or reject a proof of debt. They will do so based on the information available to them at the time. This process is quite easy most of the time as the information needed to prove a debt exists at a particular amount is usually either attached to the proof of debt or otherwise available, or it is not.

If the chairperson knows that the creditor has a debt, but cannot reliably calculate the amount that the debt should be, they may admit the debt and allow the creditor to vote for a debt of $1.

But sometimes this process is more difficult and no definite answer can be formed at the meeting. There are mechanisms in the Acts to adjourn meetings to seek better or more information, but sometimes no better information is available.

In cases where the chairperson simply has doubts whether a proof of debt should be admitted, the regulations state that the chairperson is to mark the proof of debt as ‘objected to’ and allow it for voting purposes at the amount claimed. That is, the benefit of the doubt is to go to the creditor.

The appeal mechanism in this regulation is also slightly different. A decision to admit or reject or object to a proof of debt can be challenged by that particular creditor, or any other creditor with 10 days after the decision. In these cases one creditor may object to the decision about another creditor’s proof of debt as the decision may have been beneficial to the claiming creditor and detrimental to other creditors.

CORPORATIONS REGULATIONS 2001 – REG 5.6.26
Admission and rejection of proofs for purposes of voting
(1) The chairperson of a meeting has power to admit or reject a proof of debt or claim for the purposes of voting.
(2) If the chairperson is in doubt whether a proof of debt or claim should be admitted or rejected, he or she must mark that proof as objected to and allow the creditor to vote, subject to the vote being declared invalid if the objection is sustained.
(3) A decision by the chairperson to admit or reject a proof of debt or claim for the purposes of voting may be appealed against to the Court within 10 business days after the decision.

TThe Bankruptcy Act has a more simplistic approach. The trustee must make a decision to admit or reject a proof of debt at the meeting. If they are unable to do so but believe that there may be better information available, they may adjourn the meeting to have that information provided. But ultimately they must make a decision either to admit or reject.

64ZA(8) The trustee may determine any question that arises as to the entitlement of a person to vote.
(9) If the trustee needs a period in which to determine a question referred to in subsection (8), the meeting is to be adjourned to such time, date and place as the meeting resolves, being a date not later than 14 days after the date of the original meeting, for the purpose of enabling the trustee to determine the question.

Appealing a Rejection of a Proof of Debt for dividend purposes

The review process applicable to a formal rejection of a proof of debt is very similar under both the Acts and provides essentially the same rights to creditors.

TThe Bankruptcy Act states that the creditors or the bankrupt may apply to the Federal Court or Federal Magistrates Court for a review of a decision to admit or reject a proof of debt. That application must be made within 21 days from the date from which the decision to reject was made.

The Bankruptcy Act is silent about how long the trustee has from making the decision to issuing the notice, but in practice 21 days is given from the date of the notice, assuming that signing the notice is the formal act of making that decision to reject.

104(1) A creditor, or the bankrupt, may apply to the Court for review of a decision of the trustee under subsection 102(1), (3) or (4) in respect of a proof of debt.
(2) The Court may, upon the application, confirm, reverse or vary the decision of the trustee.
(3) Subject to the power of the Court to extend the time, an application under this section to review a decision shall not be heard by the Court unless it was made within 21 days from the date on which the decision was made.

Regulation 5.6.54 of the Corporations Act has simpler wording. It states that:

5.6.54(2) A person may appeal against the rejection of a formal proof of debt or claim within:
(a) the time specified in the notice of the grounds of rejection; or
(b) if the Court allows — any further period.

The notice of rejection must contain notice to the creditor that they can appeal the decision and set a time period for them to do so. That time period “being not less than 14 days after service of the notice“. The commencement date is therefore the service of the notice – not a decision to reject – and the date is set by the notice and not the Regulation.

If the creditor does not appeal the decision in that period, the decision to reject will stand. If they do appeal, they will have to supply all of the information they can as they need to convince the court that the practitioner was wrong in their decision to reject./p>

The Court will then decide the matter based on the information before it. This process will undoubtedly delay the payment of the dividend, but that is unavoidable. But, it is more important to have a correct payment of dividends than a quick payment of dividends.

Under both Acts, the costs of the application will be borne by the creditor, unless the court believes that it is justified to award costs against the estate or the practitioner personally. If the creditor did not provide sufficient information to prove their claim before the rejection was sent or introduced new information that was not provided or available to the practitioner, it is not likely that costs will be paid by anyone else but the creditor.