Casenotes: Liquidations and Proofs of Debt … ensuring your claim is considered

The Supreme Court of Queensland has ruled this week on an issue of some uncertainty in the interpretation of the Corporations Act and Corporations Regulations as they apply to proof of debts.

The Dispute

This matter concerns the liquidation of the Equititrust Limited (the “Company”). The combatants were the court appointed receiver of a fund called the Equititrust Income Fund and the liquidators of the Company.

Prior to its liquidation, the Company was under administration. At a second meeting of its creditors, which was held on 20 April 2012, it was resolved that the Company be wound up. For the purposes of that meeting, the applicant provided a document to the respondents, as the administrators, which claimed that the Company was indebted to the Fund in an amount of $537,656.57 (“the Document”).

The parties are in dispute as to the Document’s effect, if any, after the meeting of creditors for which it was provided. The respondents as liquidators have treated it as a formal proof of debt and they have rejected it. The applicant says that the Document had no effect after the creditors‟ meeting of April 2012. His case is that the Company is indebted to the Fund, but for substantially more than the amount which was claimed in the Document. He wishes to lodge a proof of debt for that higher claim. He has purported to withdraw the Document, if it did have some effect after the meeting of April 2012. The respondents say that he could do so only with their consent, which they have refused to provide.

The Issue

The parties agreed that certain questions would be answered by the Justice hearing the matter in advance of other issues being dealt with. The principal issue underlying those questions was:

“What is the relevance, or otherwise, of a formal proof lodged at an administrator’s meeting if and when the company into liquidation?”

This is not a question that has been considered at any length by the Courts (save for some obiter commentary by Justice McMeekin in Re: Castleplex Pty Ltd (in liq) [2010] QCA 59 at [80]) so Justice McMurdo’s task was to come up with a solution to this problem based on first principals.

The Judgment

Justice McMurdo answered the question noted above in the following way:

· There is no provision of the Corporations Act or Corporations Regulations which is in terms that a proof of debt lodged at an administrators meeting will constitute a proof of debt as if it had been lodged with a liquidator, in the event that the company is placed in liquidation.

· There is a different between a proof of debt which is relevant to an administrator and in a liquidation being:

o In an administration the relevant date for the adjudication of a proof of debt is the date of the second meeting of creditors; and

o In a liquidation the relevant date is the day on which the winding up is taken to have begun and, additionally, a proof of debt for a liquidation must include a statement that the company was not only indebted to the creditor as at the relevant date, but remained indebted as at the date of the proof of debt.

· These factors considered together meant, in the view of McMurdo J, that a proof of debt for voting purposes at a second meeting of creditors in a voluntary administration could not comply with the Corporations Regulations as they apply to proofs of debt in liquidations because it would address the indebtedness of the creditor at different dates.

· Some other problems also arose in McMurdo J’s view:

o Regulation 5.6.48 permits a liquidator to fix a day by which creditors whose debts or claims have not been admitted are to formally prove their debts or claims. If a formal proof lodged for voting at an administrator’s meeting is to be treated as a formal proof in the liquidation, the operation of reg 5.6.48 would be unclear where the debt or claim has not been admitted by the liquidator.

o Regulation 5.6.49 provides that a formal proof of debt is to be delivered or sent to the liquidator. A proof lodged with the administrator, as the chairperson of a meeting under s 439A, would not satisfy reg 5.6.49 unless subsequently the document was delivered or sent by the creditor to the liquidator.

The Conclusion

Justice McMurdo answered the key question noted above as follows (at paragaraph 38 of the judgment):

In the present case, the creditor has not asked the liquidator to treat the document as a formal proof of debt in the liquidation. In my view, the document was not a formal proof of debt for the purposes of the liquidation. If reg 5.6.23 does provide for the lodgement of a formal proof in a meeting under s 439A, such a document will not be a proof of debt in and for the purposes of a liquidation, at least unless the creditor acts in a way towards the liquidator which effectively puts forward the document as a proof of debt intended to be assessed by the liquidator. Otherwise a proof of debt lodged at an administrator’s meeting will not constitute a proof of debt in the liquidation.

The Learnings

For liquidators the learning here is simple: unless a creditor advises you otherwise the liquidator cannot consider or adjudicate upon a proof of debt lodged in a voluntary administration for the purposes of paying a distribution.

For creditors it is important that they realise that they have to lodge another proof of debt after the company is placed into liquidation at the second meeting of creditors of a voluntary and, indeed, that they have the opportunity to reassess their debt.

The Case

Re: Equititrust Limited (in liq) [2013] QSC 346

Liquidators, Disclaimers and Leases: the High Court Rules

The High Court of Australia handed down its decision in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51. This has been decision awaited with bated breath by insolvency practitioners around the land and deals with a previously confusion aspect of interpretation when it comes to the Corporations Act.

This appeal posed two statutory questions:
1. Does Div 7A (ss568 – 568F) of Pt 5.6 of the Corporations Act 2001 (Cth) (the “Act”) give the liquidator of a company power to disclaim the leases which the company granted?
2. If the Act gives that power, does disclaimer terminate the tenants’ rights arising under the lease?

Background:

Willmott Forests Limited (“WFL”) ran a forestry investment scheme under which it leased to participants in those schemes portions of land which it either owned or leased. Each lease was for a term of years, often with an option for a further term and provided that rent was to be paid either up front or on an annual basis.

In September 2010, WFL went into voluntary administration whilst receivers and managers were appointed to property within the WFL group which it had charged. Certain freehold land was not charged. In March 2011, the creditors of WFL voted to wind up it up.

The liquidators and receivers and managers sought to the sell the assets of WFL, including its freehold land and its interests as lessee of certain land. The sale was said to have been run on the basis that parties could either purchase the relevant assets unencumbered by the investment schemes or so encumbered with the ability to take over as manager of the schemes. No party sought to purchase the assets on an encumbered basis but 54 binding offers were made to acquire the assets on an encumbered basis.

Procedural History:

Having received the offers noted above, the liquidators applied to the Supreme Court of Victoria for a direction pursuant to section 511 of the Act for directions and orders about the sale process. The judge at first instance ordered separate determination of this question:

“Are the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land?”

Justice Davies (at first instance) answered this question in the negative. The liquidators appealed and the Court of Appeal of Victoria reversed Justice Davies. The Growers’ appealed on special leave to the High Court.

Decision:

In a 4-1 decision (French CJ, Hayne, Kiefel and Gagelar JJ in the majority, Keane J in the minority) the Growers’ appeal was dismissed and the questions posed above where both answered in the affirmative.

Joint Reasons of French CJ and Hayne and Kiefel JJ:

The key points to arise from the binding joint judgment are as follows:

1. Their honours concluded that the term “Property” in section 568 (1) does not just deal with the ownership of land but that is it a “compendious” description of legal relationships amounting to ownership of objects of property (both tangible and intangible).
2. That being the case, the reference in section 568(1)(f) to “a contract” must be understood as identifying, as the disclaimer property, the rights and duties which arise under the contract.
3. The rights and duties which a landlord and tenant have under a lease are bundles of rights and duties which together can be identified as a species of property.
4. Further, the rights and duties of the landlord are a form of property; those rights and duties “consist of”, in the sense of derive from, the contract of lease.
5. That being the case, the leases to investors of which WFL was landlord were property of the company which may be disclaimed by the liquidator.
6. The effect of any disclaimer of the leases was that, because the company’s rights, interests and liabilities in respect of the leases cannot be brought to an end without bring to an end the correlative liabilities, interests and rights of the tenants, in order to release the company liability (as prescribed by section 568D(1)) it was necessary to terminate the tenants’ rights under the leases which operates to terminate the tenants’ estates or interests in the land.
7. The tenants are then left with the right to prove in the winding up as creditors for whatever damage is inflicted as a result of the disclaimer.

This case gives an important guidance to liquidator lessees and their tenants clearing up a previously uncertain area. The joint judgment notes that it has left a number of questions unanswered including:

1. Is the leave of the Court required for a disclaimer of a lease to be effective and, if so, what considerations would inform the Court’s decision as to whether to disclaim; and
2. How will the Court consider a scenario in which it is pleaded by the tenant that it has suffered gross prejudice as a result of the disclaimer (in the context of an application to set aside a disclaimer)?

The sooner these questions, for insolvency practitioners, are answered the better.