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02 Oct 2018

Liquidators’ challenges in quantifying creditor claims


3 min

What’s that worth?!

Insolvency practitioners regularly adjudicate on creditors’ claims. Most of the time it’s a straightforward process that involves reviewing the company’s records and sourcing documentation. Occasionally a claim is complex, requiring legal or expert advice.

A liquidation of a not-for-profit incorporated association being handled by our Melbourne office highlights the dynamic environment that insolvency practitioners work in, and the range of claims we must deal with.

The claims that emerged in the calling for proofs of debt process were somewhat out of the norm, and included:

  • claims of life tenancy

  • employee entitlements

  • misconduct claims.

Claims of Life TenancyLiquidators Challenges
The association owned several properties that were residences for some association members. They contributed relatively large sums of money to the association in exchange for life tenancy at the premises. As liquidators we had to realise the properties, which unfortunately meant evicting those tenants.

In the dividend stage of the liquidation, we had to consider whether those parties were creditors who could claim for compensation against the association, and if so, how to value their claims.

One way to adjudicate such claims is engaging an actuary to assess the occupancy rights’ net present value, considering the rent value and the tenants’ life expectancy. Extrapolated over many years, you can imagine those claims amounts can become a substantial.

Employee Entitlements
As could be expected in any not-for-profit association, members assisted in the day-to-day operations. While in operation, members were paid relatively modest amounts for their services, or in some cases, zero remuneration or compensation for their efforts.

Now in liquidation however, we received several formal proofs of debt from members claiming that they were in fact employees and were entitled to a string of entitlements—never paid to them before—including: unpaid wages, annual leave, long service leave, etc.

So how does a liquidator assess such claims and determine whether members were merely volunteers, or something more?

To overcome these questions, obtaining specialist legal advice is necessary to determine whether the “requisite intention to create legal relations” existed between the employee and employer. It must consider such things as the nature of the role, the responsibilities assumed, the frequency of payments received (if any), whether the person was given a title for their role, whether any formal agreements were executed, etc. Ultimately, demonstrating the requisite intention to create legal relations and the admissibility of each claim falls on their own facts.

Given the history and period applying to the outstanding entitlements under each claim, if each claimant proved to be an employee rather than a volunteer worker, the amount owed would be considerable—even if just the minimum wage was applied!

Misconduct Claims
Certain former members alleged cases of “impropriety” at the association. Claims in the liquidation were lodged on the basis of (among other things) damages for pain and suffering.

Determining the admissibility of such claims is beyond difficult for a liquidator to establish. How can a liquidator determine what happened? Often the resolution of such claims relies on directions from the court or coming to a settlement—both costly and sometimes protracted processes that affect all stakeholders in a liquidation

Although summarised briefly above, these matters highlight the unusual claims we see occasionally and shows that a liquidator’s adjudication is not always as simple as reconciling supplier invoices.

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