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Episode 128
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Substantive Law
Balancing the Books: Exploring the Role of a Liquidator in Adjudicating Proofs of Debt
Law as stated: 21 August 2024
What is this?
This episode was published and is accurate as at this date.
Join David as he sits down with Nik Angelakis, Senior Associate at Mills Oakley, to delve into the nuances of insolvency law. Nik shares his insights into the demanding role of liquidators in adjudicating proofs of debt, discussing the quasi-judicial nature of their responsibilities and the challenges they face.
Substantive Law| What area(s) of law does this episode consider? | The supposed quasi-judicial role a liquidator plays in adjudicating proofs of debt. |
| Why is this topic relevant? | The role that liquidators play when adjudicating proofs of debt is complex and presents many unique challenges. Adjudicating proofs of debt involves a thorough evaluation of claims, ensuring that only legitimate debts are admitted. This supposed quasi-judicial function is not merely administrative; it demands a high degree of integrity, legal knowledge, and fairness. Liquidators must navigate between competing interests, often under significant pressure, making their role particularly onerous and impactful on the outcomes of insolvency administrations. Understanding this particular role is more relevant than ever, as the rate of external administrations is increasing – Insolvency appointments in May of this year, being 2024, reached their highest levels since ASIC started publishing the statistics in 1999. As the number of liquidations increases, we will likely see an increase in the number of claims that liquidators must adjudicate on. |
| What legislation is considered in this episode? | Corporations Act 2001 (Cth) |
| What cases are considered in this episode? | Re RM Road Services Pty Ltd (in liq) & Ors [2023] VSC 794
Colbran, in the matter of Balsub Pty Ltd (in liquidation) [2023] FCA 1635
Australian Securities and Investments Commission v Edge [2007] VSC 170
Morgan, in the matter of Traditional Values Management Limited (in liq) [2024] FCA 74
Re Home and Colonial Insurance Co Ltd [1929] All ER Rep 231
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| What are the main points? |
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| What are the practical takeaways? |
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| Show notes | Angelakis, Nikita, ‘The Adjudication of Proofs of Debt in Liquidation: A Background’ (2024), Insolvency Law Journal |
DT = David Turner; NA = Nik Angelakis
| 00:00:00 | DT: | Hello and welcome to Hearsay the Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on the go and at a time that suits them. I’m your host, David Turner. Hearsay the Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services, and here’s how the legal podcast is how we’re improving the experience of CPD. The topic of today’s episode of Hearsay is the challenging and sometimes unenviable role that liquidators play in adjudicating proofs of debt. Liquidators are called upon to make impartial and independent decisions about the validity and quantum of claims made by creditors, and it’s said that they act in a quasi-judicial fashion in doing so. Now, this quasi judicial function is not merely administrative. It demands a high degree of integrity, legal knowledge, or expert advice, and fairness. Liquidators have to navigate competing interests, often under a lot of pressure, making their role onerous and impactful on the outcomes of insolvency proceedings and appointments. Now, with the rate of external administrations increasing, this particular role is more relevant than ever. Insolvency appointments in May of this year, 2024, reached their highest levels since ASIC started publishing statistics in 1999. And as the number of liquidations increases, we’ll likely see an increase in the number of claims that liquidators must adjudicate on. Our guest today is Nikita Angelakis, a Senior Associate at Mills Oakley. Nik has a wealth of experience in insolvency law and has written extensively on the topic of liquidators quasi-judicial capacities. His expertise provides a deep understanding of the complexities and responsibilities involved in adjudicating proofs of debt. Nik, thank you so much for joining me today on Hearsay. |
| 00:01:55 | NA: | Thank you, David. It’s a pleasure to be here. Hopefully I can help illuminate the relatively dry area of proofs of debt today. |
| 00:02:02 | DT: | Dry? Never. |
| 00:02:03 | NA: | Well, it depends who you ask. |
| 00:02:05 | DT: | Look, we’re both insolvency lawyers, so maybe I’m biased. I’ve always felt that it’s an area that seems a little dry on the outside, but is full of interesting characters and interesting stories. Tell us a bit about how you got into insolvency law. |
| 00:02:19 | NA: | So I was exposed to insolvency law relatively early in my education and then career. So I started out at the University of Adelaide, where I studied a Bachelor of Law and a Bachelor of Commerce specialising in accounting. While I was in university, I did an elective course on personal insolvency law that was taught by Professor Chris Symes. That led to some work experience with John Sheahan and Ian Lock, who were registered trustees and liquidators in Adelaide. After I finished university in 2018, I moved over to Melbourne. My first job in practice was as an Associate to Justice Sifris of the Victorian Supreme Court. At the time, His Honour was sitting in the trial division as the judge in charge of the corporation’s list. So, His Honour heard all of the insolvency applications imaginable, and my first exposure to a proof of debt case was while I was at the court. It was a decision His Honour handed down in Re Daily Planet Pty Ltd (in liq) [2019] VSC 265. That was an application for judicial directions brought by a liquidator that was effectively run as an appeal from their decision on certain proofs of debt. The case itself is a relatively straightforward application of principle, but what I did not know at the time and now know is that the company in liquidation was a relatively infamous Melbournian brothel. |
| 00:03:42 | DT: | Yeah, so when you said the name, I did a quick Google, because I thought, isn’t that the newspaper that Superman works for? |
| 00:03:49 | NA: | It’s both. |
| 00:03:50 | DT: | It is, but the first result was not that. |
| 00:03:53 | NA: | No, no. |
| 00:03:54 | DT: | It was, yeah, the brothel in Melbourne. |
| 00:03:57 | NA: | Yes. So I finished up at the court in 2020. From there, I joined Mills Oakley in Melbourne in the Commercial Disputes and Insolvency team. While I was at the court and at Mills Oakley, I was completing my master’s at the University of Melbourne. I studied a unit in corporate insolvency that was taught by Carl Moller SC. For that unit, I wrote a paper on unfair preference claims in liquidation. That paper was later published in the Insolvency Law Journal and I was awarded the BACS prize from the Law Council of Victoria. I completed my master’s thesis and my master’s generally in 2023. My thesis was on the adjudication of proofs of debt, and that thesis has been published in substantially the same form over three articles, also in the Insolvency Law Journal. So in practice, the majority of my work is in the area of corporate insolvency and more so on the liquidation end rather than the restructuring end, but I do restructuring work as well. The bread and butter of my practice is really applications for directions or for other orders in a liquidation, really on technical issues such as how assets are to be distributed when there’s particular controversy. Some of the recent, more interesting applications that I’ve run were Re RM Road Services Pty Ltd (in liq) & Ors [2023] VSC 794, and that raised a point of principle about whether a liquidator can obtain orders under the Insolvency Practice Schedule (Corporations) (Sch 2 to the Corporations Act 2001 (Cth)), that compel a secured creditor to to deliver up assets, subject to security, to the liquidator so that the liquidator can then realise them. Or, another application for direction, Colbran, in the matter of Balsub Pty Ltd (in liquidation) [2023] FCA 1635, which determined a novel question of how a liquidator is to distribute proceeds of a claim for insolvent trading in circumstances where the company has incurred debts as a trustee and in its own right. So the question was, do they all get shared between all creditors equally or do you have to carry out some form of apportionment exercise? So I think that’s probably a broad snapshot of how I’ve gotten to where I am today. |
| 00:06:18 | DT: | And fair to say then, a good distribution of experience and exposure to insolvency law, both in an academic and a practical context, which is pretty appropriate for our topic today because we often talk about the quasi-judicial role in academic terms, in a high minded way about the purpose and policy reasons for the role being carried out, but it has some more prosaic practical considerations that come out every day at creditors meetings and in the finalisation of liquidations. Let’s start at the beginning, though. We’ve used this term quasi-judicial a few times. When we say a liquidator is acting in a quasi-judicial role, what do we mean by that? |
| 00:06:56 | NA: | So there’s a lot to unpack there. I managed to unpack it over three articles. |
| 00:07:01 | DT: | Just summarise them in a sentence, if you can, Nik. |
| 00:07:03 | NA: | My sentence would be, I don’t think that liquidators act quasi-judicially, but the High Court said they do, and we’re left to determine what exactly that means. The way I’d like to start is, first you look at what exactly does a liquidator do, and a good statement that I’ve always liked is a statement of Justice Dodds-Streeton in the case of Australian Securities and Investments Commission v Edge [2007] VSC 170. Her Honour, was referring to the essential functions of a liquidator, and she said that it’s really to identify, take possession and realise a company’s assets, to investigate and determine the claims against the company, and to apply the assets of the company in satisfaction of the claims in accordance with the priorities provided by the Corporations Act 2001 (Cth). So we’re looking at that second stage of investigating and determining the claims made against a company, and the process by which the liquidator does that is through the adjudication of proofs of debt. That’s recognised as really the default mechanism for ascertaining the existence and value of claims made against a company in liquidation, because as soon as the liquidation commences, creditors are restrained by a statutory moratorium from suing the company as they ordinarily could in the court. |
| 00:08:16 | DT: | Effectively, the right to submit a proof of debt and have it considered by the liquidator replaces your right to sue the company. TIP: Now a proof of debt is a form that a creditor of an insolvent company or individual submits to establish their claim against the insolvent estate or company. It details how much that creditor is owed by the insolvent company or estate and creditors are usually invited to lodge a proof of debt by the bankruptcy trustee or by the liquidator throughout the bankruptcy or liquidation process. Creditors are also invited to lodge proofs of debt in voluntary administrations, but those are for voting purposes rather than dividend purposes. A proof of debt usually includes supporting information to prove the debt is owed, things like tax invoices or contracts. In a liquidation, the form used for lodging a proof of debt is Form 535. You can find that in the Corporations Regulations at regulation 5.6.49(2). In an individual bankruptcy, a proof of debt form is Australian Financial Security Authority Form 8. I suppose when I think of the liquidator’s quasi-judicial capacity, they’re adjudicating on a proof of debt, standing in the shoes of what would otherwise be the court that would rule on a liquidated claim, in respect of that claim? |
| 00:09:31 | NA: | To a degree, yes. The creditor can no longer sue the company without leave of the court, but the right of a creditor that a court deals with, is a little bit different to the right that a liquidator deals with. So a court will, if it determines cause of action, give judgement on the cause of action, whereas if a liquidator does it, all they do is add the creditor to a creditor’s list, maintain on their system, and that’ll assist them to determine what the dividend is. But as a matter of substance, they become the decision maker in place of the court, yeah. |
| 00:10:06 | DT: | And I suppose it’s not merely a matter of “this person submitted a proof of debt, so onto the list they go.” There is a threshold requirement the liquidator has to be satisfied of, before they can admit them as a creditor. |
| 00:10:20 | NA: | Correct. The threshold requirement really is, “if I was standing in the shoes of the court, what evidence would I need to satisfy myself, on the balance of probabilities, that the creditor has a good claim?” So in that sense, there is a large similarity between the two roles, but then on the other side of it, there are stark differences. A liquidator is in the court, they don’t have barristers sitting before them arguing over whether the creditor has a good claim. They will have, say, a bundle of papers, investigative tools that they can deploy, and they have to come to a view on their own with the assistance of their staff. |
| 00:10:56 | DT: | Yeah, they sort of fulfil an inquisitorial role in a way. They can investigate the claim themselves, collect evidence themselves and make a decision by themselves, but they’re not assisted by advocates to help them interpret the evidence before them, and I suppose they’re not also bound by rules of evidence. |
| 00:11:11 | NA: | That’s right. It is this mismatch of an adversarial role in the sense that you may have a rather aggressive creditor at the other end, an inquisitorial role in that the liquidator conducts their own investigations, seeks out books and records that may assist them in their investigation. They can administer oaths and have a creditor give evidence on oath in support of their claim, and then if we then go to the next stage, after the liquidator determines the proof of debt and if there is an appeal from their decision, they then act as the adversary against the creditor, defending their decision. So, the liquidator’s role throughout the process is quite varied. |
| 00:11:52 | DT: | And it’s not just liquidators who act in a quasi-judicial capacity either. Voluntary administrators adjudicate on proofs of debt, for voting purposes rather than dividend purposes, but the role is similar, no? |
| 00:12:03 | NA: | That’s right. The role of administrators is recognised as a little bit different in that administrators have to make their decisions necessarily on the fly. You might have a situation where an administrator is handed a bundle of, say 50 proofs of debt, right before the next meeting of creditors and they have to adjudicate them on the spot. So, the court provides a degree of deference to the pressures that administrators are placed in. Deed administrators, so administrators of a deed of company arrangement, have a very similar role to a liquidator in that they’re determining proofs of debt for the purpose of calculating what dividends should be paid out of the deed fund in the deed of company arrangement. So, across all ends of corporate insolvency, there is some form of adjudication function, and the same for personal insolvency; bankruptcy trustees have to carry out largely the same function as a liquidator does in a corporate insolvency. |
| 00:13:01 | DT: | One thing that’s always interested me about the task of a liquidator or a deed administrator, as you say, in admitting proofs of debt for dividend purposes, is that the authorities have told us that the discretion that’s being exercised by the liquidator or the debt administrator, is exercised in the context of the resources available to them, the number of claims and the amount that’s available for distribution, which means that you sometimes might have very different approaches to the investigation and verification of proofs of debt submitted by creditors, in what we call a large job, a well funded administration like Virgin Airlines or Channel 10, not that it ever went into debt administration. But on the other hand, you might have a company that’s substantially assetless and a liquidator has to make a highly discretionary decision about whether or not to admit proofs of debt. What are the limits or the bounds of that discretion? Where do the outer limits lie in terms of what a liquidator or a deed administrator can and can’t do in trying to make a decision about these things? |
| 00:14:02 | NA: | When we use the term discretion in the context of proofs of debt, we’ve got to be a little bit careful with how we use the term. So, the general principle that governs how a liquidator is to adjudicate claims, is that a liquidator does not have any discretion to determine whether a claim is in fact provable in a given administration. So, the principles that govern whether a creditor has a good claim are the same as those applied by the courts. So, if a creditor has a good claim at law, the liquidator is obliged to admit the claim. They can’t discretionarily reject it for some arbitrary reason, for lack of a better term, and the same if they have a bad claim. But in terms of process, liquidators have a very extensive discretion. Now, the proof of debt process is contained almost entirely in the Corporation’s Regulations 2001 (Cth). The regulations contain provisions that deal with the form and content of a proof of debt, the time frame for the process, notice requirements, and the consequences of an admission or rejection by the liquidator, but the regulations don’t say anything about how a liquidator is to assess a proof of debt. So, that includes what evidence to which a liquidator can have regard, what state of satisfaction a liquidator has to come to, and what they can do in order to satisfy themselves that the claim is good or bad. So, that gives them a large degree of flexibility in how they come to their views, to the investigative procedures that they can carry out to assess the proof, and who they can engage in order to assist them. Liquidators can engage solicitors to advise them, they can engage subject matter experts if they need that for the particular proof, they can seek out documents in their inquisitorial capacity that might bear on the proof. Now, the view that I express in my articles is that liquidators are required to act reasonably when carrying out the adjudication process, which encompasses giving a creditor a fair crack to make their case. They have to keep an open mind, they have to disclose material that might be adverse to the claim, but what really impacts that question of reasonableness, is the extent to which the liquidator has funds in the job that they can apply to the adjudication. In a large job, more will be expected of a liquidator because they have resources available to them. In an assetless job, there may be no expectation whatsoever that a liquidator will adjudicate proofs of debt at all. That comes down to a twofold consideration. One, if the company’s got no assets, then there’s no point adjudicating proofs of debt because there’s never going to be a dividend paid. On the other hand, the statute recognises that liquidators are not required to do work that they will not be paid for, and so if a particular adjudication is going to cost a liquidator, let’s say $10,000, and they have no assets from which they can pay that amount, they don’t have to do it. |
| 00:17:14 | DT: | Something you mentioned just then Nik jumps out at me as one of many distinctions between the role that a liquidator plays in their quasi-judicial capacity and what a judge plays in their judicial capacity, and that’s that although some liquidators, voluntary administrators, deed administrators are trained lawyers, many are not, and are often relying upon the advice of solicitors or counsel to make findings about proofs of debt. Nik, you would have played that role many times, assisting a liquidator to come to conclusions about whether or not a proof of debt should be admitted, or should not be admitted, or should be admitted for a certain amount. Tell me about some of the challenges of that role. |
| 00:17:54 | NA: | The challenges faced in adjudicating proofs of debt more generally, a liquidator or their staff could speak to that, I think, a bit better than I could, being at the coalface and dealing with the request of creditors, which can be demanding on them. But from my perspective, we see some very complex issues arising, which don’t have straightforward answers and have relatively limited jurisprudence, and so we’ll have to advise on those issues. I can give a couple of examples, which will well illustrate this. So, we had a matter recently, Morgan, in the matter of Traditional Values Management Limited (in liq) [2024] FCA 74. Now, that was the liquidation of a responsible entity of a managed investment scheme. It was wound up in 2010. Its business involved having unit holders subscribing for units and writing loans with the funds that it obtained from these unit subscriptions. It ultimately collapsed in 2009, 2010, when it became apparent that the scheme’s entire loan book was impaired, but nobody had thought to record impairments to the loan book prior to then. So, we’re now 15 years down the line. There have been significant recovery actions in this liquidation, and the liquidator’s at the tail end of the job with a fund that he can distribute out to creditors. Some proofs of debt have been adjudicated over the course of the appointment. But what had not been dealt with, were the claims that the investors in the scheme might have. The liquidator formed the view that the investors in the scheme had claims against the responsible entity for misleading or deceptive conduct, specifically that they had been misled by the financial statements and product disclosure statements, and that they hadn’t been informed of the true extent of the impairment of the scheme’s loan book. The difficulty here was that, one, the unit holders in the scheme were mainly elderly mum and dad investors, a large proportion of which had passed away or were quite elderly and wouldn’t quite understand the process. And the second was that, while there was strong evidence to support that these Investors would have claims, it’s unlikely that they would be able to provide evidence of their reliance on misleading conduct, which would leave the liquidator in a pretty undesirable place because if he was to admit them, you would have to infer a critical element of their cause of action, and that’s something that’s going to leave any liquidator in a bit of an uncomfortable position. So what we brought was an application for judicial directions and for orders that would allow the adoption of a modified procedure for adjudicating the claims of these investors. We sought a direction that the liquidator would be justified in admitting claims of all investors in the scheme who had invested beyond a certain point in time, the idea being that the scheme would have collapsed by that point. And the process involved a relatively short form notice being sent out to these investors where they could elect to buy a tick box if they wanted to participate. They wouldn’t have to provide direct evidence of the fact that they relied on misleading or deceptive conduct, but their claims would be admitted at a discount. I think that matter’s a good example of how different issues can arise. You might have an issue in a small administration dealing with the sufficiency of evidence of a particular claim, or you might have these large scale issues of, we have a large body of creditors or potential creditors and it’s not practical to deal with their claims in the way that the statute ordinarily provides. So, as an insolvency solicitor, one of the things I enjoy the most about my job is there is a large degree of creativity that’s required. It’s about trying to find the most pragmatic and cost effective solution for the problem. So, obviously problem solving skills is at the core of it all. |
| 00:22:21 | DT: | That’s such an interesting example and one that really rings true for me. I remember having a matter of my own a few years ago that involved similarly, a difficult to prove element of a claim, a very large body of prospective creditors for a very small fund, and kind of taking a heuristic approach to calculating discounts on those claims based upon almost summary or short form proofs of the various elements of these claims. It was to do with combustible cladding, and what was known about the risks of that product at the time, and whether or not other professionals might have been contributorily negligent in not advising on the installation of it; lots of different issues that would be very difficult to fully ventilate for a poorly funded deed administrator, but which we could creatively deal with. One of the interesting things about that example to me, though, is you made the decision to seek directions, which is a prudent one. The liquidator was empowered by the act to adjudicate in the way you ultimately did without the directions, right? It’s a risk management step, a clarificatory step to bring the proceedings and get directions or clarification from the court. Talk to me a little bit about the decision making process for when you decide to go to court and seek those directions, or go ahead and adjudicate in the way that you think is just. |
| 00:23:47 | NA: | In my example, I think it could be said that the liquidator could adjudicate on the basis that he proposed to do, but the risk is, without the judicial direction, he’d be exposed to liability for, say, breach of duty if he did so, because it was ultimately found that there was no basis to admit and pay claims on that basis. But the other consideration was really, the risk of a large number of appeals being brought. So, following each adjudication, every other creditor of the company has a right of appeal under the Corporations Regulations 2001 and under the Insolvency Practice Schedule, and the risk for a liquidator is that the appeal is brought against the liquidator personally. The liquidator, if they are unsuccessful in the appeal, will be exposed to an order for adverse costs. And while in an ordinary case, a liquidator’s cost liability is limited to the assets of the company and the liquidator’s entitled to be indemnified from the company’s assets for that cost liability, if it’s found the liquidator has acted unreasonably, the court may order that they pay those costs without a right of indemnity from the company. So in those circumstances, a liquidator faces A, paying costs out from their own pocket, B, paying out from the firm’s pocket, or C, claiming against PAI insurance and any increased premiums that might be payable from that point onwards. The risk I think here was, it would be such a large decision and such a risky decision for a liquidator to effectively infer an entire element of the cause of action, that a credible argument could be made that a liquidator acted unreasonably if the court took a different view to that position. So really, there isn’t a large element of risk mitigation, and part of your role as an insolvency solicitor is to prevent your client’s liquidator from being exposed to personal liability where practicable, and two, preventing them from being criticised, whether that be by the court, by creditors, or by public. So they, I think, were some of the considerations that came into the decision to bring that application. |
| 00:26:10 | DT: | Interesting. So Nik, you said the High Court tells us that liquidators act in a quasi-judicial capacity, but as we’ve just identified, their role is starkly different both in procedure, content, goal to the role of the court – they act in an inquisitorial role, they have a lot of discretion over their procedure, they are fulfilling a role that is proportionate to the them. So leaving aside the High Court’s definition of what it means to act in a quasi-judicial capacity, what do you say it means? |
| 00:26:42 | NA: | Well, I say, ultimately, what we draw out of later decisions as to what this quasi-judicial capacity means, is really a bundle of obligations, and this is shorthand for those obligations. It includes acting independently and being perceived to act independently. It’s reflective of the fact that the liquidator is administering a fund for the benefit of creditors, and reflective of the fact that the liquidator’s role is to determine claims according to law, and so not to be swayed by arbitrary considerations informing their decisions. My view is, if they are the obligations of liquidators, then we can just say it like that. There’s no need to dress it up as a quasi-judicial role and draw analogies between liquidators and judges. So where I then get to is, the liquidator’s role is to act reasonably. In doing so, they provide a creditor with the opportunity to make their case. They have to form a state of satisfaction that would permit them to admit the claim, and that state of satisfaction is, as you’d expect, more likely than not. So if a creditor asserts that a loan agreement is being entered into between the company and the creditor, the liquidator’s role is, “am I satisfied that it is more likely than not that that is the case?” How the liquidator gets there is going to be different in every given case, and as I said, proportionality is a very large factor, in that the resources that a liquidator can or shouldn’t take in a large administration to investigate that question, will be different in a small administration where a liquidator really has to be frugal with every expense that they incur, because they have to try and preserve and safeguard whatever assets might ultimately be distributed out to creditors. |
| 00:28:40 | DT: | Recognising the discretion over procedure that we’ve just acknowledged and barring some other, more novel and creative approach to factual findings in respect of a proof of debt, a liquidator is bound by the Briginshaw principle in making findings of fact that might lead to a proof of debt being admitted. I’m thinking, for example, a proof of debt that suggests that the company engaged in false or misleading statements, that it defrauded them, engaged in some conduct which ordinarily you would expect a higher standard of proof for. |
| 00:29:13 | NA: | I can’t say I’ve ever thought about that question. It’s an interesting one. I suspect the answer is no in the sense that the liquidator is not bound by the rules of evidence, but there is an inherent logic in saying that if a serious allegation is made, the evidence in support of that allegation should be cogent. So, I think I would say, if a serious allegation has been made that the liquidator will need to be positively satisfied and have persuasive evidence that it’s the case, whether that’s a matter of the liquidator just acting prudently, or whether it is that they are bound by the Briginshaw principle as a matter of law. |
| 00:29:57 | DT: | And I guess, what are the consequences when a liquidator gets this wrong? Of course, they have a broad discretion to, as you said, decide the procedure by which they admit proofs of debt, but not a discretion on whether or not to admit a good claim or deny a bad one. What are the rights of appeal or redress against a decision that aggrieves a creditor, and what are the consequences for the creditor, and what are the consequences for the liquidator? |
| 00:30:25 | NA: | So when a proof of debt is dealt with, it can either be admitted or rejected. If a proof of debt is admitted, the creditor might not even be told about it. There’s no requirement for a liquidator to inform a creditor that they have admitted their claim. If a liquidator rejects a proof of debt, they have to give notice of that rejection to the creditor and that notice will also fix a time in which they’re permitted to bring an appeal from the liquidator’s decision. That appeal is brought under the Corporation’s Regulations or the Practice Schedule, and as I’ve said, it’s brought against the liquidator personally. The liquidator is in the role of defending their own decision and somewhat ordinary rules as to costs apply. So there is the risk, where the liquidator gets it wrong, that they will be exposed to adverse costs. So, an appeal is one area where a proof of debt may come under scrutiny. The next area is an application for a judicial inquiry. So, under the Practice Schedule, a creditor and others withstanding, can apply to the court for a review of the conduct of a liquidator, where there is something that prima facie requires investigations, and what that process is concerned with is really disciplinary sanctions and shortcomings. That’s another area and there are a few cases in which proofs of debt have formed in part the basis of a judicial inquiry, but they’re relatively uncommon. TIP: Now if a creditor takes issue with a liquidator’s decision to admit or reject a proof of debt, that decision can be appealed to the court directly pursuant to regulation 5.6.54 of the Corporations Regulations, or it can be subject to a more general application for review of the liquidator’s conduct under section 90-15 of the Insolvency Practice Schedule. What I think is interesting, there is one case that came out of the High Court of England and Wales in 1929, that is Re Home and Colonial Insurance Co Ltd [1929] All ER Rep 231, and this case illustrates, on the other end, what can go wrong if a liquidator admits a claim that they shouldn’t have admitted. Now, in that case, the liquidator admitted claims for £89,000 and they paid a dividend of £38,000. So we’re dealing with 1929, I don’t have the precise inflation rate, but a fairly significant sum. |
| 00:33:07 | DT: | Decent amount of money. |
| 00:33:09 | NA: | Exactly. The court held that the liquidator ought to have, but they have not, sought legal advice on the claim that they had admitted and paid, and if they had sought that legal advice, it would have been abundantly clear that the claim should have been rejected. So, this was a claim for a breach of the liquidator’s duty of care, and the claim was established, and the liquidator was ordered to pay compensation to the company, equal to the amount that they paid out to the creditor. So that’s probably on the, let’s say, the real extreme end of what can go wrong. As far as I’ve been able to tell, I’ve not seen a similar case run in Australia, but in Australia liquidators have duties of care, the statutory offices under the Corporations Act, and so I can’t see any reason, in principle, why that conclusion could not also apply here. |
| 00:34:06 | DT: | And I suppose actions like that, whether brought as specific rights of appeal against determinations of proofs of debt or the more general 90-15 of the Schedule route, these sorts of claims are often threatened, if not brought, by creditors who seek to have the liquidator, or the deed administrator, or the voluntary administrator, make a determination that suits their interests, no? it’s a role that comes with it. A lot of pressure from a lot of different stakeholders, and sometimes that can be complicated by that creditor being directly or indirectly responsible for the liquidator or voluntary administrator’s appointment, for example. Not that that wouldn’t form a disclosure in a declaration of relevant relationships and indemnities and things like that, but those relationships, those expectations, sometimes by creditors who believe that an independent appointee that they’ve caused to be appointed is somehow meant to act in their interests, that can create a real challenging environment for both the insolvency practitioner and their advisors. Tell me a little bit about how liquidators and others in a similar quasi-judicial capacity manage that pressure. |
| 00:35:14 | NA: | Good question. I suppose, really, there’s a large element for liquidators, which is dealing with stakeholder management. As you’ve said, It’s very common to have a scenario where, let’s say a sole director has resolved to appoint a voluntary administrator, the administration runs its course, company goes into liquidation, and then the liquidator is obliged to investigate and if they’re tenable, bring claims against that director that appointed them. Now, to a director who does not have experience with insolvency law, they may see that as really breaching the trust that they put in that practitioner, or if we look on the other side, insolvency practitioners have to maintain relationships with financiers and banks, and liquidators will sometimes be placed in a role where they are realising the assets of secured creditors, and their costs will come out of the amounts that they realise those secured creditors, and that creates an inherent tension in that on the one hand, they’re trying to get their fees paid for the work that they have done, and on the other hand, they’re trying to preserve a relationship that they have with these individuals. So I probably can’t say too much about how liquidators go about this stakeholder management, but I suppose on the broader issue of where acts of a liquidator can come under scrutiny, there are some strategies that a liquidator can employ to try and make sure that they are as best protected as they can, obviously. The best advice that I can give is to go and seek advice. Where a liquidation starts becoming contentious, it’s prudent to have a solicitor that you can get advice from. Of course, there are going to be jobs where that’s not possible because there are no assets in the job and so a liquidator’s ability to seek advice is hampered, but at a more, I suppose, day to day level, something like keeping file notes and records of reasons for decision can come in very handy if, for example, there is a particularly disgruntled creditor that drags a liquidator to court and criticises the decision made, and these types of records will assist in showing that genuine consideration was made at the time and that a liquidator weighed various options to come to the decision that they came to. That’s probably a good path for a liquidator to take. |
| 00:37:57 | DT: | As we’ve just said, voluntary administrators also act in a quasi-judicial capacity in admitting proofs of debt, although typically they do that for voting purposes, not to distribute the funds of the company to which they’re appointed, but just to allow the creditors to participate in the decision making process about its fate. How is the quasi-judicial capacity that a voluntary administrator exercises admitting proofs for voting purposes different to the capacity that a liquidator exercises admitting proofs of debt for dividend purposes? |
| 00:38:28 | NA: | Well, there’s a greater degree of deference provided to a voluntary administrator reflecting the fact that their decisions can be made under significant time pressures with imperfect evidence. They may simply be given some assertions that a claim is owing with little to no substantiation behind it, and they’re forced to make snap decisions in those circumstances. So while, let’s say in liquidation, a higher standard is expected in a voluntary administration… Really, I think it’s placed the courts to place themselves in the position of the voluntary administrator to get an understanding of why they’ve made the decision in the way that they have. Now, there are some legal differences between the two. Last time I looked, there’s some disagreements in the law as to whether, when reviewing an administrator’s decision, it’s the same type of appeal, the same procedure applies as from a liquidator’s decision, that is, it’s a de novo appeal based on all evidence available at the date of the hearing, or whether in reviewing an administrator’s decision, one should be looking to a liquidator at the decision made by the administrator on the basis of the evidence that was available at the time. Personally, I think I sway towards the latter view because it does have better regard for the tough position that administrators can find themselves in. TIP: Okay, so we’ve just mentioned de novo appeals. For any listener who might be unfamiliar, an appeal de novo means that the appellate court will re-hear the whole matter as if it had never been heard before, rather than just reviewing the decision of the original decision maker and deciding whether it was a valid decision. In an appeal de novo, the appellate court can re-hear each issue and it’s not limited to the evidence that was before the trial court. It can consider new evidence. As Nik mentioned, the evidence has to have been available though at the time of the trial hearing, even if it wasn’t ultimately presented there. It’s important to note that in appealing a liquidator’s decision regarding a proof of debt, it’s not necessary to establish error on the liquidator’s part because it is an appeal de novo. The court isn’t merely looking for a reason why the decision was procedurally or substantively incorrect. |
| 00:40:47 | DT: | We’ve talked a little bit about bringing appeals or otherwise seeking the court to conduct an inquiry into the conduct of liquidators or voluntary administrators when it comes to proofs of debt. In your experience, how often are those sorts of claims or actions successful? |
| 00:41:02 | NA: | Don’t think I could put it any higher than 50/50. |
| 00:41:05 | DT: | Really? That’s higher than I would have expected. |
| 00:41:08 | NA: | I mean, a big part of that comes down to the fact that they are de novo appeals. So, the liquidator can make their decision and ordinarily if they reject a proof of debt, they’ll provide detailed or semi detailed reasons for their rejection, but as soon as it comes to court, the creditor has a second crack to put whatever they want before the court in terms of evidence. The claim may differ, there may be some variance in the claim from what was put before the liquidator. So, you may be dealing with an entirely different decision by the time it gets to court than what was before the liquidator. So, it’s very hard to predict when the decision is made by the liquidator as to whether any appeal might be successful. |
| 00:41:51 | DT: | Nik, we’re nearly out of time today, but before I let you go, I’d like to finish each episode by asking for some tips for the young lawyers who might be listening, recent graduates, maybe even some law students who are interested in pursuing a career just like yours. As you said, you got a pretty early exposure to insolvency law, both in your academic career and in your professional one. What advice would you give to a young lawyer, or graduate, or law student listening, who wants to spend a bit more time on the topics that we’ve talked about today? |
| 00:42:19 | NA: | There are all the usual things that can be done. Law students will go off and apply for clerkships and look for firms. If they want to do insolvency work, then firms that do insolvency work, or reaching out to a mentor, whether that be a member of counsel, or a solicitor, or an insolvency practitioner, but I think a couple of good things for young students and young legal professionals to do is, really to try and observe court hearings dealing with insolvency matters. So for example, the winding up list is a good place to start. It’s a good illustration to see how winding up applications are dealt with in practice because they are the type of application where you can learn the law, but there’s really something very different about seeing them in practice and how fast paced they proceed and the pressures that practitioners are subject to in acting in those matters, or reviewing court lists and trying to find other insolvency cases, and the good thing is they’re usually identifiable because they’ll have the company name as one of the parties and you’ll usually see, say, “in the matter of [Company Name] (in liq)”, or “(Administrators Appointed)” and that will give you a clue that it’s an insolvency related matter. So, seeing court hearings on the one hand, and then if you can, trying to get into some creditors meetings. So, you can see when creditors meetings are on from insolvency notices. You’ll most likely need to contact the practitioners involved who are listed on the insolvency notice to see if they’ll allow observers in, but again, it’s just something good to see unfold in practice. |
| 00:44:04 | DT: | Absolutely, and that tip about attending creditors meetings is a great one. I never really thought of that. We always tell young lawyers to go and watch court proceedings, but creditors meetings can be just as exciting, maybe more so. As I said, there’s always some interesting characters in high profile administrations, and the really big ones are often at large venues that it is possible for observers to attend. Nik, thank you so much for joining me today on Hearsay. |
| 00:44:27 | NA: | Thank you, David. |
| 00:44:38 | DT: | As always, you’ve been listening to Hearsay The Legal Podcast. I’d like to thank my guest today, Nik Angelakis, for coming on the show. Now, Hearsay’s got a lot of insolvency law related episodes. Too many for me to enumerate here. But for your next episode, why don’t you listen to an episode about a very special kind of liquidator – episode 44 with Stephen Parbury? That one’s called Special Purpose Liquidators, and it’s all about the unique functions of a special purpose liquidator, and it’s sort of a memoir of Stephen’s experience as one for the company Queensland Nickel. If you’re an Australian legal practitioner, you can claim one continuing professional development point for listening to this episode. Whether an activity entitles you to claim a CPD unit is self assessed, as you know, but we suggest this episode entitles you to claim a substantive law point. More information on claiming and tracking your points on Hearsay can be found on our website. Hearsay the Legal Podcast is brought to you by Lext Australia, a legal innovation company that makes the law easier to access and easier to practise, including your CPD. Before you go, I’d like to ask you a favour, listeners. If you like Hearsay the Legal Podcast, please leave us a Google review. It helps other listeners to find us, and that keeps us in business. Thanks for listening, and we’ll see you on the next episode of Hearsay. |
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