Can a creditor vote and prove for a debt in an external administration, for a debt that it bought from another creditor?
This question frequently arises in an administrator’s or liquidator’s adjudication of claims for voting or dividend purposes. Often this happens where the business of the company in administration was continuing to trade and a related party has paid debts owed by the company to maintain a working relationship with suppliers. However, the admissibility of such a claim will depend on the circumstances under which the payment was made.
Assignments, Guarantor, Security and Subrogated claims
If a legal or equitable assignment of the debt took place, then the creditor can claim as an assignee of the debt. If no assignment took place, then it is possible that a right of subrogation will apply, but this will not apply in all circumstances.
If a guarantor pays a debt of a company in administration or liquidation, the guarantor can usually make a subrogated claim for the amount paid under the guarantee (but this may be subject to certain limitations in the terms of the guarantee). In this regard, a ‘subrogated’ claim puts the guarantor in the shoes of the creditor they had to pay and the guarantor can seek reimbursement from the company, as the company was primarily liable for that debt.
Where the debt paid on behalf of the company was secured, the payor may have a subrogation claim in the place of the secured creditor they paid out.
However, where a third party has spontaneously paid an unsecured debt of the company without any request by the company for that payment to be made, then that third party may not be able to claim reimbursement from the company by way of a subrogated claim in the liquidation or administration.
Case study Subrogated Claims
We recently had to consider this issue, where a company went into voluntary administration and then was subject to a deed of company arrangement, and certain trading debts of the company were paid by a related party (to maintain a working relationship with suppliers for that related party). There was no evidence that the company had requested the related party to pay those debts.
In that matter, the claim of the related party for the amount of the company debts it paid were not admitted for voting purposes at a meeting of creditors.
This was also the outcome in the case of re Dalma No 1 Pty Limited (In Liquidation) and Anor  NSWSC 1335. In that case, a related party paid wages directly to the staff and sought the Liquidators consent to subrogate them into the priority position of the employees’ claims for unpaid wages (which have priority above other certain other claims in a liquidation). As the related party paid the employees directly (rather than funding the company to pay the employees), section 560 of the Corporations Act 2001 allowing a priority claim to the related party did not apply. Relevantly in respect of subrogation, Justice Brereton in that case held that:
At : While the common law restitutionary claim for moneys paid might avail a third party who discharges a debt at the express or implied request of the debtor, its availability is contingent on an express or implied request; there is no such remedy for a third party who spontaneously pays off a debtor’s unsecured liability.
At : In my view, the only context in which a spontaneous voluntary payment by a third party may found a claim for subrogation is in the exceptional category of the payment off of existing securities. There is no authority for extending that exceptional case to unsecured debts.
Takeaways for creditors and related parties
If you intend to make a payment on behalf of another party (in particular if it is, or may soon be, in administration or liquidation), it is important to consider whether security, subrogation or assignment may be available to maintain rights for making such payment. This may require a request by the debtor for you to make such payment, or for security or assignment documentation to be prepared and signed before making such payment.
Rostron Carlyle Rojas Lawyers are available to advise you and to prepare documentation to maintain your rights when funding or making payments for another party’s debts. Contact our Insolvency Lawyers for assistance on subrogated claims or any matters to do with insolvency or commercial litigation.
It is not uncommon in closely held private companies for there to be shareholder disputes which result in a complete breakdown of relationship. In such cases-what can the shareholders do to resolve the dispute?
In Van Wijk (Trustee) ,in the matter of Power Infrastructure Services Pty Ltd, (214) FCA 1430, (12th December 2014) the shareholders could not resolve their differences and applied to the Court for orders appointing a liquidator and winding up.
The Court granted the orders sought under the “just and equitable” provisions of the Corporations Act:
Under S 461 (1) (k) the Corporations Act 2001, the Court may order a winding up if “the Court is of opinion that it is just and equitable that the company be wound up.”
In this regard, the Applicant relied on s 467(4) of the Act as raising relevant considerations.
That subsection provides where the application is made by members on the ground that it is just and equitable that the company should be wound up, the court, if it is of the opinion that:
(a) the applicants are entitled to relief either by winding up the company or by some other means; and
(b) in the absence of any other remedy it would be just and equitable that the company should be wound up,
must make a winding up order unless it is also of the opinion that some other remedy is available to the applicants and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
In the case, the company was solvent and trading. The dispute was acrimonious and the mutual co operation and trust between the competing shareholders had broken down completely. The Court reviewed the authorities and cited with approval authorities where the disputes led to a frustration of the commercially sensible operations of the company in accordance with the incorporator’s expectations and a loss of confidence was justified.
In the circumstances-while acknowledging the consequences of such a drastic option-the Court appointed a provisional liquidator.
The decision highlights the grounds for winding up under the just and equitable grounds where there is a shareholders dispute which results in a breakdown of mutual trust and confidence such that it will frustrate the commercial operations of the company.
It is important that in establishing companies that in the first instance-there is a proper means of resolving disputes in shareholder agreements and that efforts are made to exhaust alternative dispute resolution.
In the absence of a resolution however-those shareholders affected may rely on the Courts for an ultimate solution.
For assistance and advice on shareholder disputes, contact us.
Obtaining a judgment against your debtor does not mean you get paid immediately. The debtor may be unable or unwilling to satisfy the judgment debt for a variety of reasons. He or she may be having financial difficulties, other debts, or may be ignorant or careless of the circumstances.
Bankruptcy Proceedings – an outline of the process
One of the options available for enforcing a judgment against a debtor is bankruptcy proceedings.
This process is quicker than other enforcement methods and you will have more control over the process as a creditor.
The disadvantage of this alternative is that there may be other secured creditors, who rank ahead of you, and thus full payment of the debt may not be received.
To initiate the proceedings, a bankruptcy notice needs to be lodged in a proper form with the Insolvency and Trustee Service of Australia (“ITSA”). The current filing fee is $440.00.
Following personal service of the bankruptcy notice on the debtor, he or she will have 21 days, in which to comply with the notice by paying the full amount of the debt or entering into a repayment arrangement, on terms satisfactory to you.
If the debtor fails to comply with the bankruptcy notice, he or she are deemed to have committed an act of bankruptcy. Pursuant to the provisions of the Bankruptcy Act 1966 (Cth) at the time of non-compliance with the bankruptcy notice:
– the debtor must be present in Australia or have sufficient connection with Australia, and
– the debt must be over $5,000 (two or more creditors may combine their aggregate debts).
Provided the above criteria are satisfied you may be able to file for a creditor’s petition for the debtor to be declared bankrupt.
A creditor’s petition must be filed in the Federal Magistrates Court within six months of the act of bankruptcy. A court date will be allocated for hearing of the petition. Once the creditor’s petition is served on the debtor, and provided it is uncontested, a sequestration order may be made against his or her estate, vesting all of the bankrupt’s property in the appointed trustee.
The trustee collects information about the bankrupt’s assets and liabilities. Any creditors who wish to claim in the estate must lodge a proof of debt with the trustee. Any secured creditors will rank above any unsecured creditors, the latter being paid proportionately out of the pool of funds available from the bankrupt’s estate. The petitioning creditor’s costs of obtaining a sequestration order are usually taxed and paid out of the bankrupt’s estate as a priority.
Bankruptcy proceedings can be complex and strict requirements as to form as well as limitation periods apply. We can assist you with legal advice and support with your proceeding whether you are a creditor or a debtor.
Are you considering bankruptcy proceedings against your debtors? Perhaps a prior debt repayment arrangement has been dishonoured? Need to lodge a proof of debt? Confused about your options as a debtor? We can assist you with any of your questions relating to bankruptcy and insolvency. Contact us today.
In Australia there is a ‘one size fits all’ approach to determining the definition of corporate insolvency. The absence of a clear cut definition can lead to ramifications in the practical management of companies that are in financial distress.