What ingredients do creditors need to prove a claim in a bankruptcy? And what if the evidence shelf is bare?
Bankruptcy trustees (as well as controlling trustees / PIA trustees) will assess creditors' proof of debt claims to determine the creditor’s entitlement to vote, or during the claim adjudication process when declaring a dividend to creditors. Occasionally, they may also adjudicate on a creditor claim if specifically requested by a creditor, most commonly for insurance or tax purposes.
To be recognised as a creditor to a bankrupt estate, a creditor needs to lodge a claim with the bankruptcy trustee. The claim's lodgement and the trustees’ acceptance may take a few steps.
Critically, the bankruptcy legislation places the onus on the creditor to prove they have a debt owing by the bankrupt. The trustees’ assessment of creditors' claim will be based on the evidence provided to them.
Step 1 – Steps to lodging a claim
Creditors must prove their debts under the requirements of section 84 (2) of the Bankruptcy Act:
- Set out the debt particulars
- On the correct Proof of Debt form (Form 8)
- Specify any vouchers (documents) to substantiate the debt
- State if the creditor's debt is secured, or not secured.
Accordingly, a creditor should lodge the Proof of Debt form with supporting documents (e.g. agreements, invoices, court judgements, etc.) to explain the debt.
The trustee will consider this information, along with the bankrupt’s records or the results of any investigations they've made.
Step 2 – Trustees’ review of claim
A trustee determines the validity and amount of the debt.
The courts have considered on several occasions the duty of an insolvency practitioner in adjudicating upon a proof of debt (for both bankruptcy and corporate insolvency). Notably “In determining whether to admit or reject a proof of debt, a liquidator has been said to act in a quasi-judicial capacity…according to standards no less than the standards of a court or judge”. (Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332).
If a trustee believes that all or part of the evidence is insufficient, they may seek further clarification and material from the creditor . The trustee is not required to locate sufficient information, nor do they need to disprove a debt (onus is on the creditor to prove their debt).
And if there is insufficient evidence of the debt, the trustee will not be able to admit it. However, debts rejected for voting purposes are not necessarily formally rejected for dividend purposes at that point. In other words, the decision for voting purposes is different for dividend purposes and the proof of debt can subsequently be re-examined for dividend purposes—if further information comes to hand.
Also the trustee’s decision is final at the meeting, but is challengeable in the court (post meeting). And if successful, the meeting's outcome, itself, may be challenged if using that claim would have definitely changed the meeting's outcome (see last month’s article – Right, Right ... Wrong! Wait, what just happened?.
Step 3 – Trustee request for statutory declaration
Most creditor claims in Worrells' bankruptcy administrations are for the supply of goods or services to the bankrupt and are easily proven with copies of outstanding invoices, court judgements, purchased orders, credit contracts, personal guarantees etc. These are largely straightforward for a trustee to adjudicate.
Other creditor claims can have a long history of events, countless documents, and some dealings are on verbal agreements. In these cases, trustees may request assistance in the form of a statutory declaration (detailing the gaps between the documents and verifying facts) to complete the full picture under section 84(3) of the Bankruptcy Act. Also section 84(4) says that besides the creditor, a "person whose own knowledge includes the facts set out in the statutory declaration and the proof of debt, and who is authorised by the creditor to make the declaration".
The bankruptcy regulator, the Australian Financial Security Authority (AFSA), published in their Personal Insolvency Regulator newsletter (December 2015 edition) the following guidance for statutory declarations:
It should be recognised that this represents only a single piece of information and should not be the sole determinant in whether or not a claim is admitted for voting purposes. Rather, it is anticipated that a trustee will consider all of the circumstances relating to the claim when making their adjudication in addition to the information that is contained in the statutory declaration.
In considering the impact of their decisions to determine the voting entitlement of creditors, trustees should address such issues as: the relationship of the claimants to the bankrupt; the materiality of the claims; their likely impact on the meeting outcome; and the number of related creditors proving in the estate.
Step 4 – Details required in statutory declaration
We acknowledge that in times of financial difficulty people are often loaned money by family and/or friends, and such advances are generally on an informal basis—no written terms—and are repayable ‘whenever you can’. Creditors in these circumstances find it difficult to give evidence of such debts, particularly when it is cash based.
If a statutory declaration is, by necessity, a key piece of supporting evidence to a Proof of Debt, it must be sufficiently detailed to outline the loan circumstances.
As reported in last month’s article, one of our bankrupts applied to court to review a decision on a Proofs of Debt (for voting eligibility) that affected the votes on his section 73 proposal to creditors. In that estate several creditors provided minimal evidence—principally a statutory declaration—to support their Proofs of Debt and the trustee, Raj Khatri, considered the detail insufficient to prove they were a creditor of the bankrupt and therefore not entitled to vote.
The Federal Court Judge hearing the trial commented on how the trustee viewed the creditor’s earlier statutory declaration (containing few details):
It is something that really does show why it is that Mr Khatri has, you know, undertaken his role in the manner in which he has and in the proper way that [sic] – if I may say so.
On the morning of the trial a more detailed affidavit was provided by one the excluded creditors outlining the circumstances of the alleged advance of money and loan to the bankrupt. The Federal Court Judge ultimately exercised the court’s discretion to permit the new evidence—not available to us at the meeting—when the initial decision (to exclude creditors from voting) was made.
However, in the process the judge made the following remarks about what is sufficient detail for a supporting declaration or affidavit:
It really is the fact that she [the creditor] has talked about the rates … that’s very specific and that is really where, you know, there’s something tangible about that which leads to, as it were, an acceptance of what it is that she says. It gives, as you say, a little bit of colour, a little bit of context to what it is that she says.
Creditors that intend to rely on statutory declarations to substantiate claims should ensure it contains details such as:
- The day, time and place of when the loan was discussed/made.
- How the funds were advanced.
- The discussed repayment terms.
- What the bankrupt said the funds were to be used for.
- Any subsequent payment instalments or demands for repayment.
If your client is a creditor of a bankrupt estate or company in liquidation, we can assist you and your client in the preparation of their Proof of Debt to ensure that the proof really is in the pudding! Your local Worrells partner will be happy to discuss any insolvency matters with you.