November 17, 2015

Contingent Creditors – what powers and protections are afforded to them

SV Partners was recently appointed Administrator to a Company which was subject to ongoing litigation and disputes, with claimants submitting Proofs of Debt in excess of $200 million. Despite not having  proven debts these claimants wielded significant power in the Administration to further their respective positions.

It’s not uncommon for parties to assert rights against a company on the basis that, although no present liability exists, a claim relating to pre-administration events may arise in the future. It is therefore essential that directors and advisers are vigilant of the powers these type of claimants possess prior to proceeding with any formal appointment.

In the context of an External Administration these claimants are considered contingent creditors, common examples of contingent creditor claims include:

  • possible taxation liabilities;
  • a possible damages liability arising in tort, such as negligence or defamation;
  • a claim for damages against a company for breach of contract;
  • warranty claims that may arise within the warranty period;
  • a claim against a company alleging misleading or deceptive conduct in breach of section 52 of the Trade Practices Act.
  • a claim for indemnity by a guarantor against a company which is the principal debtor and has defaulted, in circumstances where the lender has yet to enforce its claim against the guarantor; and
  • a claim by a builder against an owner under a building contract, where the builder’s entitlement to payment under the contract is dependent upon an architect’s certificate.

Despite not being a present liability of a company these claims are afforded protections/ powers under the Corporations Act (“the Act”).  Some  of those protections/ powers are as follows:

1.Winding Up Applicant

Under Section 459P(1) of the Act a contingent creditor can apply to the Court for a company to be wound up. However the application may only be made with prior leave of the Court and for leave to be granted the Court must be satisfied that there is a prima facie case that the company is insolvent.

2. Entitlement to Vote at a Creditors Meeting

Corporations Regulation 5.6.23(2) prohibits a claimant voting at a creditors meeting unless a just estimate of the value of the claim has been made. The concept of ‘just estimate’ was addressed by the Court in Selim v McGrath, where the Court indicated that Regulation 5.6.23 did not impose a duty on an Administrator, Liquidator or Chairperson of a creditors meeting to “undertake any detailed enquiry” into a claim, rather the ‘just estimate’ is made by reference to the material provided by the claimant to support its claim.

In Selim, the Court also noted that in the event “there is little or no material from which a conclusion as to value can be drawn, a just estimate may be zero or perhaps the nominal amount of $1.00”. As such a prudent Chairperson, in the absence of information to substantiate a ‘just estimate’, may admit the a contingent creditor claim, for voting purposes, for $1.00. The admission of one vote at $1.00 may in turn be a significant tool at the respective creditors meeting.

3. Set aside a Deed of Company Arrangement

Section 445D(2) of the Act may afford contingent creditors with the power to bring an application to Court to set aside a Deed of Company Arrangement (“DOCA”) on the basis the contingent creditor is an “interested party” in the DOCA.

In summary contingent creditor claims need to be afforded proper consideration by advisers when providing pre-appointment advice to directors, as the unforeseen admission of a contingent claim for voting at a creditors meeting may result in an unexpected outcome. Similarly, insolvency practitioners should ensure to act prudently when arriving at a just estimate of the contingent claim’s value, as a hasty decision to refuse admission for voting purposes may result in the contingent creditor seeking to set aside a DOCA.

Seeking early appropriate advice on the potential impacts of a contingent creditor claim on an External Administration can minimise ones exposure. Should you or your client require advice please contact SV Partners on 1800 246 801.


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