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01 Oct 2007

Rejecting Proofs of Debt

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4 min

To be able to participate in a dividend, creditors must lodge their claim in the estate. The trustee, the liquidator or the deed administrator will review the claim to determine whether it has been sufficiently proven. If it has, the claim will be admitted for dividend purposes. If not, it may be rejected.

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.

If the debt is ultimately not proven to their satisfaction, the practitioner will reject the claim in full or in part. Both the Bankruptcy Act and the Corporations Act have provisions that govern this process.

Both Acts require that notice be given to the creditor when all or part of a claim is rejected. The Bankruptcy Act requires 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 [section 102(2)].

The Corporations Act is simpler. Within 7 days after rejection, the liquidator – or the deed administrator if these provisions are included in the deed of company arrangement – must “notify the creditor of the grounds for that rejection in accordance with Form 537” [regulation 5.6.54].

Both Acts require that reasons or grounds be given for the rejection, and both Acts allow the creditor to seek a review of the decision to reject their claim. The review is done in the appropriate court depending on the type of administration.

The Bankruptcy Act says that the creditors or the bankrupt may apply to the Court for a review of a decision to admit or reject a proof of debt. But the application must be made within 21 days from the date “from which the decision 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.

The Corporations Act says that “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.” [regulation 5.6.54]. The Corporations Act is clearer. The creditor has a period “being not less than 14 days after service of the notice” to appeal to the court.

If the creditor does not appeal the decision in that period – subject to an extension granted by the court – the decision to reject will stand.

Both Acts also have provision for the practitioner to change their mind and reverse or amend a decision to admit or reject a proof of debt, whether in part or in full. If any amendment results in the amount of the admitted claim being reduced, the practitioner must give notice to the creditor, and the review provisions and time periods will commence.

If that amendment occurs after a dividend has been paid, the new amount of the claim may result in the creditor either having to refund part of the dividends received – if the claim was reduced – or the creditor being entitled to a ‘catch up dividend’ (subject to funds being available) – if the claim was increased.

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.

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