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Proof of Debts – Part One

 

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The most common connection between an insolvency practitioner and a creditor in any insolvent estate is often the lodgment and processing of a proof of debt. The majority of reports and advices provided by practitioners will inform the creditors of some upcoming event, for example the calling of a meeting of creditors or the declaring a dividend.

Lodging a proof of debt will usually be a necessary first step for a creditor to participate in the event. Most reports and advices will attach a proof of debt form and encourage creditors who have not already done so, to complete and lodge their claim as soon as possible.

Proofs of debt are so important, indeed fundamental, to the insolvency administration process that in this issue we start a three part series of articles dealing with:

a. Why proofs of debt are required
b. The admission and rejection of proofs of debt for voting purposes and for dividend purposes
c. How creditors go about appealing the rejection of a proof of debt

Why proofs of debt are required

The form of a proof of debt is a prescribed (differently) in both the Bankruptcy Act and the Corporations Act. Creditors will need to know under what Act an insolvent estate is being conducted to be aware which proof of debt form to lodge. Of course this is usually simple as the practitioner will issue the correct proof of debt form with their reports etc. But creditors need to keep in mind that they must use the correct proof of debt form or their claim may not be recognised, as it is certainly not unheard of for a creditor to lodge bankruptcy proof in company insolvency and vice versa.

Practitioners will encourage creditors to lodge a proof of debt so that the creditor can participate in a meeting of creditors (to be able to vote on resolutions) and so that they may share in a dividend. However, most practitioners will also encourage creditors to lodge proofs of debt as early as possible in the administration, as this provides the practitioner with information regarding the debts of the insolvent entity, which in turn assists with investigations and recoveries. Once a creditor has lodged a proof of debt they need not lodge another in that administration unless there is some change to the amount of debt claimed.

Although creditors are usually encouraged to lodge a proof of debt when they intend to participate in a meeting and wish to vote, a formal proof of debt form may not be needed.

The Bankruptcy Act (at section 64D) requires that the notice calling the meeting must state that “each creditor must give to the trustee at or before the meeting a written statement setting out” their claim and certain other details. Note that the Bankruptcy Act does not say that the creditors must lodge a formal proof of debt to participate in a meeting of creditors.

All that is required is a “written statement” of the claim. This is further confirmed by section 64ZA(6) which states “A creditor who has failed to give to the trustee a statement in accordance with section 64D is not entitled to vote”. We have heard of instances where a president of a meeting of creditors has attempted to exclude a creditor who has not lodged a formal proof of debt from participating in the meeting - such an approach is not in accordance with Bankruptcy legislation.

The Corporations Act has similar but slightly different provisions. That Act allows a creditor to vote at a meeting of creditors if “he or she has lodged - (i) those particulars [of their debt or claim], or (ii) if required, a formal proof of the debt or claim”. That is a creditor may vote at a meeting if they have simply lodged (meaning in writing) details of their claims unless a proof of debt is actually required by the practitioner. Of course if the practitioner does require that a formal proof of debt be lodged, he or she should make that requirement clear well before the holding of the meeting.

The position with dividends is different in that creditors must lodge the appropriate proof of debt form in order to participate in any dividend. That is the written statement of claim which was sufficient to participate in a meeting of creditors will not be sufficient to participate in a dividend and this is the case under both the Corporations Act and the Bankruptcy Act.

Both Acts require that creditors lodge a proof of debt (in the appropriate form) with the practitioner in order to receive a dividend, and both Acts provide for specific notice to be given to creditors to do so and a time period in which the proofs of debt must be lodged.

Bankruptcy Act 140(3): Before declaring the first dividend, the trustee must give written notice of the trustee's intention to declare the dividend to anyone the trustee knows of who claims, or might claim, to be a creditor but has not lodged a proof of debt (emphasis added)
Corporations Regulation 5.6.65(2): A notice in accordance with sub regulation (1) must specify a date, not less than 21 days after the date of the notice, on or before which formal proof, in accordance with Form 535 or 536, of a debt or claim must be submitted to participate in the distribution. (emphasis added)

A creditor must ensure that a proper proof of debt is lodged or they run a real risk of not sharing in a dividend. Practitioners will always give creditors adequate notice of the need to lodge the proof but a practitioner cannot simply add a creditor to the dividend list without a formal proof of debt.

One difficulty with the approach of initially lodging only a written claim rather than a proof of debt is that if a dividend becomes payable in the insolvency a second form must be prepared and lodged at a time when details may not be not so readily available.

What information should be included in a proof of debt?

What information should be shown on a proof of debt and what documents should be attached to a proof? The obvious answer is sufficient and relevant information to prove that the debt exists and explains how the amount of the debt is calculated.

Frequently creditors will provide only minimum information in support when first lodging a proof of debt. This may well be sufficient for meeting purposes and may even be sufficient for dividend purposes where there is no dispute regarding the claim and the books of the insolvent entity reflect the debt.

However, claims and proofs of debt lodged by related entities are always subject to close scrutiny and it is usually necessary that they contain full details of the debt and be supported by adequate documentation. Similarly where there is a dispute regarding the existence of the debt, or the amount of the debt, the practitioner will expect full details and documentation before admitting it.

It is our practice to suggest that creditors keep the originals of all documents and only attach copies to proofs of debt.

On line lodgment of proofs of debt through Worrells web site

Creditors in administrations conducted by one of the fourteen Worrells partners may lodge a proof of debt on line through our web site - worrells.net.au

This process allows a simple and convenient way of providing notice of a claim without the need for overly detailed information and documentation. More information is captured than is shown on standard proof of debt form, for example information on judgments securities, and that information is automatically attached as a schedule to the proof of debt form. The process also provides an area for creditors to indicate what supporting information they have without the need to copy it and send it to us in the first instance.

When the creditor has filled in the online information an unsigned (but authorised) PDF version of the form is lodged with Worrells and a copy emailed to the creditor for their records. If it becomes necessary or appropriate to get a signed version of the form, Worrells can email the copy of the proof back to the creditor to print, sign and attach any necessary documents.

In addition to streamlining the lodgment of proofs, this approach provides early information to Worrells which assists in administration generally and allows for easier and earlier payment of dividends.

Last Updated: 24.01.2012

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