Case Study: Proof of debt claims for Subrogated Claims

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.

subrogated claims

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 [2013] 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 [33]: 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 [37]: 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.

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