31 Oct 2017

Challenging creditor votes in bankrupt estates


4 min

Not as easy as it would seem!

Creditors in bankrupt estates are often caught up in the emotional stress of a financial disaster.  They have lost money and, understandably, look to whom they can take out that frustration on.

Bankruptcy trustees have the difficult position of carrying out their duties to realise the estate’s divisible assets, while dealing with the bankrupt’s and their creditor’s emotional stresses.

Occasionally, this leads to creditors challenging bankruptcy trustee’s decisions in Court. This article examines court challenges in two Worrells administrations.  Both relate to our determination, as bankruptcy trustees, of creditors’ entitlements to vote at meetings of creditors.

Dingle v Worrell (1993) 47 FCR 478
This case involved a creditor challenging a vote at a creditors’ meeting to accept a composition, which would annul the bankruptcy.

The composition, accepted at the creditors’ meeting, involved pursuing litigation against a creditor.  If successful, 30 percent of the resolution sum from that litigation would be paid to creditors. The dispute arose at this creditors’ meeting, whereby the creditor, who was the defendant in the proposed litigation action lodged a claim and sought to vote on the composition.

Clearly, the bankruptcy trustee was in the difficult position of accepting the creditors’ claim for voting purposes, or rejecting it on the basis that there was a set-off because of the claim against the creditor.  The bankruptcy trustee had access to two competing legal opinions on the claim’s merits.

Ultimately, the bankruptcy trustee determined the creditor had failed to satisfy him that they were a creditor and therefore rejected the claim.  The creditor unsuccessfully appealed the decision to the Federal Court; and then appealed to the Full Court of the Federal Court.

The Full Court held that the bankruptcy trustee’s role in adjudicating a claim for voting purposes at a meeting was not to make a final ruling, but to rule on the claim “in a summary way avoiding technicalities and delays”.  The Full Court then agreed with the bankruptcy trustee’s approach that the onus was on the creditor to fully substantiate their claim.  As they elected not to tender the necessary evidence, either at the creditors’ meeting or during the appeal, the creditor’s appeal failed.

This is an important lesson for creditors to provide full supporting evidence of their claims.

Fielder v Cooper [2017] FCA 357
This case involved an appeal from a bankruptcy trustee’s decision to admit a related party claim, for voting purposes at a meeting. The creditor in question was the bankrupt’s son.  He lodged a claim for $2.7 million for funds he loaned to his father, in number of loan advances, and capitalised interest.

The creditor provided considerable documents in support of his claim, including two loan agreements, copies of cheques, copies of EFT payment confirmations, bank statements, statutory declarations, and spreadsheets setting out interest calculations. However, the bankruptcy trustee disallowed one loan advance that had no supporting documentation, but admitted the claim’s balance for voting purposes.

Creditors objected to that decision and asserted the son’s claim should have either been rejected in full or admitted for voting to the extent of $1.  They claimed the debt was “frivolous or baseless” and the son’s interest calculations should not have been relied upon due to some inconsistencies in the interest rates applied. A further complaint was that under the loan agreements’ terms, the debts were not due and payable as no demand had been made.  They alleged that as a consequence, the son was not entitled to vote at the meeting.

The Court applied the same reasoning as in Dingle that for assessing a claim for voting purposes, the bankruptcy trustee may conclude that there is sufficient information to permit a vote, even though the information may not meet the threshold for proving the claim for dividend purposes.

Regarding the argument that there was no demand for payment, the Court confirmed that a creditor is entitled to prove for (and vote on) any debt or liability that is “present or future, certain or contingent”. The absence of a demand for payment was irrelevant and the Court agreed with the bankruptcy’s trustee’s determination of the son’s revised claim for voting at the meeting.

This case is useful for creditors who may only have a contingent claim in bankrupt estates.  It establishes that they can prove and vote on their contingent claim.

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