Dividends from Insolvent Estates
Generally about dividends
The intended result of most external administrators is the distribution of the debtor's property amongst the creditors of the estate. Both the Bankruptcy Act and the Corporations Act provide that the external administrator should pay dividends at the earliest possible but practical time. Most dividends are paid at the end of the file, but payment of interim dividends may be made depending upon the availability of funds during the insolvency and what funds will be required to complete the work in the estate.
What are the basics?
Creditors must lodge proofs of debt (proofs) to be entitled to receive a dividend. The external administrator may call for the lodgement of proofs for various reasons, but a creditor's right to dividends is not prejudiced if they do not lodge a proof for any purposes other than to receive dividends.
The dividend process requires that a formal notice be given and that creditors lodge their proofs within a prescribed period. If creditors do not lodge their proof within that period, they will loose their right to receive that dividend, regardless of what monies are owed to them.
The following basic procedure must be followed:
1. Notice must be given, meaning that any entity likely to be a creditor is to be given notice of the date for the lodgement of proofs and be supplied with the appropriate proof of debt form. The dividend cannot be paid before the set date for the lodgment of proofs.The notice may have to be published in the Public Notices which is deemed notice to creditors. That is, even if creditors do not receive notice by mail, they are deemed to have received notice through the advertising.
2. The notice will set the earliest date for the payment of the dividend. But the dividend will not be paid (declared) until all proofs have been admitted.
3. The external administrator may reject a proof in whole or in part if the creditor has not provided sufficient proof of their debt. They will issue the appropriate notice to the creditor detailing their reasons for rejecting the proof and giving the creditor an opportunity to provide better information. If no better information is provided, the creditor will have to make an application to the Court to have the proof admitted.
Do I need to lodge a proof of debt to receive a dividend?
Yes. A proof must be completed in the proper form and lodged with the external administrator before the lodgement date in order to participate in a dividend. A proof of debt form should be forwarded to the creditors with the notice of the intended declaration of a dividend. If it is not, the external administrator will provide one upon request. Creditors should ensure that their name, ABN if applicable, contact details are on the form and all relevant documents are attached.
Do I need to attach supporting documentation?
Yes. The debt has to be proved, hence the name of the form. Creditors should ensure that copies of all documents supporting the claim are either attached to the proof, or are available for the external administrator, should they require them. It is their obligation to prove their debt, not the obligation of the external administrator to chase that information. Creditors should send copies of documents and keep the originals.
Are ABN's or TFN's necessary?
Yes, if creditors have one or the other.
The tax laws provide that 'enterprises' must supply their ABN in order to receive a full dividend. Enterprises that do not provide their ABN will have their dividend reduced by 48.5% with those monies paid to the taxation office. If creditors are not enterprises and are not required to have ABN's, they should indicate this on the proof.
Employees will have tax withheld from their priority dividends if their Tax File Number is not provided. The amount withheld will be calculated at the top marginal rate.
How long do you have to lodge the proof under the dividend process?
The notice declaring a dividend will set a date for the lodgement of proofs. This date will not be less than 21 days after the date of the notice regardless of whether the estate is governed by the Corporations Act or the Bankruptcy Act. Allowing for delays in mailing, creditors should have at least 18 days to do so.
Once creditors lodge a proof in an estate, they need not do so again. The notice declaring a dividend will usually attach a list of proofs received as at that date. If creditors are not on that list, they should lodge a proof even if they have previously done so as the external administrator may not have received it.
Non-provable debts under the Bankruptcy Act
Under Corporations Act, all debts owed by the company at the date of appointment are provable. Provable means that the creditor can receive a dividend and that the debt will be released at the end of the insolvency (subject to the terms of any Deed of Company Arrangement).
Certain debts will not be released at the end of a bankruptcy or a Personal Insolvency Agreement. These debts include:
(a) some portion of a HECS debt;
(b) maintenance Agreements under the Family Law Act; and
(c) overpayments under the Social Security Act.
How long after the lodgement date will the dividend be paid?
This is an area where the Bankruptcy Act and the Corporations Act differ.
Dividends under the Bankruptcy Act cannot be paid for 21 days after the date for the lodgement of proofs, regardless of whether they have been admitted before that date. This means that a period of at least 42 days must expire from the original notice before a dividend can be paid.
The Corporations Act has no such requirement and a dividend can be paid as soon as the lodgement passes and all proofs have been admitted. This could be a day or two afterwards, but will vary depending upon whether further information is required for the admittance of claims.
Payment of dividends may be held up under either Act if some proofs are rejected and result in Court applications.
Rejection of proofs of debt
Both the Corporations Act and the Bankruptcy Act have provisions for the rejection of proofs if the external administrator is not convinced that the debt is owed, in part or in full. It is the external administrator's obligation to determine who are the valid creditors and to reject other claims.
A proof may be rejected may be in whole or in part - that is part of the claim may be admitted and part rejected. Usually an external administrator will contact a creditor requesting better particulars of a suspect proofs, but it is not compulsory. To reject a proof, the administrator must issue a formal rejection notice in the prescribed form, detailing what part of the debt is rejected and why.
The Acts also provides a mechanism for creditors to provide better details of their claims, or to make an application to the relevant court to have their claim reviewed. A court application is fairly rare as these matters are usually resolved with the provision of better information, or a better understanding of what is a provable claim under the Acts. But if the matter is not resolved before the rejection notice expires, that debt will not participate in the dividend.
Priorities for payment
Both Acts set out certain priorities under which dividends must be made, though the Acts differ in content. They place the costs of the estate first, then certain employee payments and then non-employee creditors. Each class or level of creditor is paid "pro rata" or in the same percentage as the other creditors in that class. Creditors should check each Act to determine what priority their claim will have against other classes of creditors.
Employee entitlements are also covered on another Fact Sheet in this series.
Disclaimer
The enclosed information is of necessity a brief
overview and it is not intended that readers should rely
wholly on the information contained herein. No warranty
express or implied is given in respect of the information
provided and accordingly no responsibility is taken by
Worrells or any member of the firm for any loss resulting
from any error or omission contained within this
fact sheet.
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Last Updated: 11.2.2008