Legal Insights

Proofs of debt: how to manage voidable transaction and related party claims

By Sam Kingston & Josh Montebello

• 03 June 2020 • 4 min read

In the liquidation of corporate groups it is not uncommon for liquidators to be confronted by inter-company claims, including a multitude of potentially voidable transactions. Adjudicating on proofs of debt from related parties can be complicated, particularly where the liquidator is appointed to both parties.

After two recent judgments, liquidators should be aware that:

  1. A proof of debt based on a voidable transaction claim can be safely rejected (an issue courts had not directly considered previously); and
  2. Liquidators may be justified in admitting a proof of debt where they are appointed to both debtor and creditor companies, but court directions are possible even where no creditors object and the quantum involved is not significant.

Voidable transaction claims

In Rimfire Constructions (Qld) Pty Ltd (in liq) v CRCG-Rimfire Pty Ltd[1] (Rimfire Constructions), the liquidators of Rimfire lodged a proof of debt in the deed administration of CRCG (a related entity) based on a claim that Rimfire and CRCG entered into an uncommercial transaction under section 588FF of the Corporations Act 2001 (Cth) (Act). The deed administrators rejected the proof and the liquidators appealed.

The Court dismissed the appeal and upheld the decision to reject the proof. In doing so, the Court clarified that until an order is made pursuant to section 588FF of the Act there is nothing to found a proof of debt. Rimfire’s liquidator had no more than a right to apply for a discretionary order and no provable claim. Although there are cases in analogous situations, no judgments appear to have previously directly considered this point.

In Rimfire Constructions different insolvency practitioners were appointed to the related entities, meaning that no conflict issues arose. The position would have been perhaps simpler if the deed administrators were appointed to both entities, as no proof would have been lodged. However, the position would have been more complicated had the liquidators been appointed to both entities and considered that a proof should have been admitted.

Considering a proof lodged by you – related party issues

A liquidator’s job in considering proofs of debt is a serious one. A liquidator must adjudicate on a proof in a quasi-judicial capacity to standards no less than that of a judge.[2] In the absence of court directions, a creditor could challenge the acts of the liquidator. The ARITA Code also confirms that where a conflict arises (such as disputed inter-company loans that may put the liquidator in a position of being in effect on both sides of the dispute) then the liquidator must:

  1. advise creditors how the issue will be managed; or
  2. seek directions from the Court; or
  3. seek the appointment by the Court of a special purpose administrator or liquidator; or
  4. resign from one or all of the appointments.

In Barnden, in the matter of Masonry Works Pty Ltd (in liq)[3] (Masonry Works), the liquidator was confronted with intercompany loan accounts with irregularities in the amounts said to be owing and no loan documentation. The court accepted the amount for which the liquidator should admit the proof of debt is an issue that may properly be the subject of judicial advice where the relevant evidence is incomplete and conflicting. The court also accepted that, given the material disclosed, the liquidator’s decision was soundly based.

Related party proofs of debt usually come before courts where there is some dispute about the liquidator’s decision or the amounts claimed in the proof.[4] However, the Masonry Works decision is a example of a liquidator pre-emptively seeking the comfort of court orders notwithstanding no criticism of their decision by creditors at that time. In many liquidations the costs of seeking court directions may not be possible, but courts will clearly assist liquidators if approached in these circumstances.

[1] Rimfire Constructions (Qld) Pty Ltd (in liq) v CRCG-Rimfire Pty Ltd [2020] QSC 92.

[2] Tanning Research Laboratories Inc v O’Brien [1990] HCA 8 at [7]; (1990) 169 CLR 332; 1 ACSR 510.

[3] Barnden, in the matter of Masonry Works Pty Ltd (in liq) [2020] FCA 575

[4] See for example In the Matter of Daily Planet Pty Ltd (in Liq) [2019] VSC 265 or In the matter of Hawkesbury House Pty Limited (in liquidation) [2019] NSWSC 1673

By Sam Kingston & Josh Montebello

  • Share

Related articles

Online Access