Proofs of Debt for Voting Purposes

It is very common to witness an administrator or liquidator resolve an argument about whether or not a creditor should be admitted to vote at a creditors’ meeting by agreeing to admit the proof but give it a value of $1. Although this is a practical way of resolving the problem, is it “correct” in terms of principle?

The ready reckoner provides a shorthand explanation of how common "disputed" proofs should be treated in both company administrations and in bankruptcy.

Companies
The rules as to admission or rejection of a proof of debt are the same whether the meeting is in a liquidation or an administration. Under Deeds of Company Arrangement, the rules as to proofs will depend upon the terms of the Deed. Most Deeds, however, pick-up the definition from Section 553 of the Corporation Act.

1.
The term "creditor" is a word of very wide meaning and will extend beyond those who claim to be owed a debt and with capture unliquidated (meaning unquantified), future and contingent claims. As a general rule however to be admissible the claim or the circumstances giving rise to the claim must have occurred before the relevant date.
2.
Although the Notice of Meeting will, ordinarily, prescribe a time by which proxies and proofs are to be lodged, it is common practice to allow creditors to participate in meetings notwithstanding that there has not been strict compliance with the timing requirement or that there is a defect in the form of the proxy or proofs (eg lack of particulars or irregular execution of the document). This is a proper approach provided it is applied consistently across all claimants.
3.

If the claim is for a specific amount (such as a debt) and the dispute is whether or not that specific liability does or does not exist then the Chairman must make a ruling. An example would be where the claim is for outstanding invoices and the director says either none of the goods were received or the debt has been paid. If, after reviewing the evidence, the Chairman is in doubt as to whether or not the debt exists, then the claim should be admitted in full but marked as "objected to". If he or she is in no doubt of the true position, then the ruling should be made to either admit or reject the claim noting there is power to admit a claim in whole or in part.
4.

If the quantum of the claim is subject to argument (say, a lessor suing for the balance of rent payable under a long term lease, or a purchaser of goods claiming for loss of profits as part of a breach of contract claim) but it is clear that there is a valid claim, then the Chairman must make a "fair" estimate of the value of the claim and then admit it to vote for that sum. In making an estimate the Chairman may have to apply a discount figure to reflect a contingency or the present value of a future claim which is impossible to justify as a matter of mathematical certainty. For example, how do you treat a claim which is defended and the Chairman decides has only a 50% chance of success? Provided there is some reasoned basis for the decision and the figure is not just plucked out of the air, then it should qualify to vote.
5.
If the dispute is whether or not the claim will ever actually arise (say a party to a contract seeking to vote at a Pt5.3A meeting for breach of contract before any actual breach has occurred) then, the same rule applies. A "fair" estimate of the value of the claim must be made and then ruled upon.
6.

If it is not possible to make a “fair” estimate because there is insufficient evidence available to the Chairman or the existence of the claim is subject to substantial uncertainty making it unsafe to predict one way or another then the creditor should not be allowed to vote at all. An example will be where a claim for damages is made but the director alleges that, in fact, the creditor was at fault and breached the contract first, then the Chairman will need to assess the merits of the claim and the counter allegation. In such a case, and if, in good faith, the Chairman cannot safely predict the outcome or who is right and who is wrong or what the final position will be, then the claim should be rejected.
7.
A claim should only be admitted for $1 where that figure represents a "fair" estimate of the value of the claim (which would almost never be the case) or where, after considering the evidence the Chairman is satisfied that a claim exists albeit the quantum is subject to a substantial contingency.

Bankruptcy
Since the repeal of sections 197-203, the rules concerning voting at a Part X meeting and those for a bankruptcy are, basically the same.

1.

A person will be entitled to vote if they are a "creditor".
2.
A creditor is any person with a provable debt. In bankruptcy (s82) provable debts include “claims and liabilities which are present or future, certain or contingent”. It is a concept of very wide meaning.
3.

Details of any claim must be lodged with the Trustee at or before the meeting. Proxies can be lodged before or after the s64 M announcement.

4.
The trustee (who may or may not be the Chairman/President of the meeting) determines all questions concerning any entitlement to vote.
5. There is no real equivalent, in bankruptcy, of the Corporations procedure of marking a proof as objected to but admitting it in full for voting purposes.
6.
The trustee is to decide if the creditor in fact has a claim and, if so, what is its value not whether the creditor has an arguable claim for some amount.
7.
Look at the evidence. If, on review of the material, you are satisfied that a valid claim exists, even though it is subject to some uncertainty as to quantum or existence, then it can be admitted provided a fair estimate can be made as to its value.
8.
If no fair estimate is possible because of lack of evidence or particulars or because the question of value is subject to substantial uncertainty which leaves the trustee with no comfortable view of a likely quantum then the claim should be rejected.

The attached "Ready Reckoner" provides examples of contentious claims which can arise together with our recommended approach. These examples are based on our expertise at creditors’ meetings. If you would like any other examples please email sgolledge@argylelawyers.com.au.

For any questions on this or other insolvency related topics, please contact Stephen Mullette of our Insolvency Team.