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24 Jan 2012

Proof of Debts – Part Two

READ TIME

6 min

In Part One of this series (published last month) we noted that the most common connection between an insolvency practitioner and a creditor is often the lodgment and processing of a proof of debt. That being the case, it is important that creditors and their advisors have a good working knowledge of:

a. Why proofs of debt are required
b. The admission and rejection of proofs of debt for voting purposes and for dividend purposes, and
c. How creditors can go about appealing the rejection of a proof of debt

In our previous article we dealt with the reasons for lodging a proof of debt and the circumstances when they were absolutely necessary. This month we deal with how proofs of debt are admitted and rejected.

The admission and rejection of proofs of debt

The processing of proofs of debt is an integral part of the day to day work of trustees and liquidators. Proofs may be are lodged by creditors throughout an insolvency administration to record their claims, participate in meetings of creditors, or to participate in dividends.

When a claim is lodged for participation in a meeting, or when a dividend is about to be paid, the trustee, the liquidator or the deed administrator must closely examine the proof of debt to determine whether the debt has been sufficiently proved both as to existence and amount. This is generally done by examining the material attached to the proof of debt, and by cross referencing the claim to those books and records of the debtor which are available to the practitioner.

If there is sufficient evidence to satisfy the practitioner that the debt exists for the amount claimed, it will be admitted for the relevant purpose. If not, it may be rejected.

It is often the case that a creditor will lodge a proof of debt at the start of a meeting of creditors leaving the chairperson or president with only a limited time to examine the proof and any accompanying documents. In such cases most practitioners will admit a proof for voting purpose only, provided there is no obvious difficulty or dispute with the claim.

If the practitioner detects a problem with the proof lodged for voting purposes or believes that it requires further consideration, he or she has a number of options open to them and these will be reviewed in next month’s article.

Of course a practitioner dealing with the admittance of proofs of debt for dividend purposes has more time to consider the claim in detail and will generally require a higher level of proof before admission. Practitioners look particularly hard at disputed proofs and proofs from related parties.

In practice, if a claim is not proved to the satisfaction of the practitioner, he or she will generally seek better information from the creditor before rejecting it. This is achieved by the practitioner contacting the creditor and stating the areas which the practitioner believes need clarification and or requesting documents required to do so. Practitioners appreciate that many creditors will not be aware of what is needed to prove a claim and will attempt to assist the creditor as far as possible.

If no better information is available or provided and the debt is ultimately not proven to their satisfaction, the practitioner must reject the claim in full or in part. The debt may only be rejected in part as some of debt may have been adequately proved.

Both the Bankruptcy Act and the Corporations Act contain provisions which mandate the way in which insolvency practitioners must advise claimants of a rejection or partial rejection of a claim. These provisions are very similar and generally apply in the case of companies to both liquidations and Deeds of Company Arrangement, and in the case of personal insolvencies to both bankruptcies and arrangements under Part X of the Act.

Both Acts require that formal written notice be given to the creditor when all or part of a claim is rejected.

Section 102(2) of the Bankruptcy Act states that “where the trustee rejects a proof of debt in whole or in part, he or she shall inform the creditor by whom it was lodged, in writing, of the grounds of the rejection” not later than 14 days after the date set to lodge proofs of debt in the notice declaring a dividend.

Regulation 5.6.54 of the Corporations Act has simpler wording and provides that within 7 days after the rejection of a claim, the liquidator must “notify the creditor of the grounds for that rejection in accordance with Form 537”. As stated above it is usual that Deeds of Company Arrangement will also have these provisions included in the deed to deal with rejections of claims.

Both Acts require that the practitioner provide reasons or grounds for rejecting the claim. In practice the reasons must be cogent and adequately explained. Both Acts allow the creditor to seek a review of the practitioner’s decision to reject their claim. The review is carried out in the appropriate court, depending on the type of administration. That is the topic of our next article.

The notices are intended to provide a time period for the creditor to provide the necessary information to prove their debt (and if they do so within the time period the rejection notice will generally be withdrawn) or for the creditor to seek that review. If they do not seek the review, or provide information satisfactory to the practitioner within the time period they will not participate in that dividend.

Two more factors are important.

Firstly, being rejected from one dividend does not preclude the creditor from participating in the next dividend, if they can provide the required information before that next dividend is paid. They are also entitled to receive a catch up dividend for the missed first dividend.

Secondly, even if they provide the necessary information after the end of the rejection period but before the dividend is paid, they are not automatically entitled to receive that dividend. The legislation allows the practitioner to treat the debt as rejected for the purposes of that particular dividend.

Obviously creditors will want to provide sufficient information to prove their debt when first requested. Although practitioners will always attempt to assist it is not the role of the practitioner to prove the debt for the creditor, it is the creditor’s claim and they have that responsibility. Remember, it is called PROOF of debt for a reason.

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