Rejecting the proof of a creditor who is owed money
Insolvency Update – Summer 2013
In Strawbridge, in the matter of Retail Adventures Pty Limited (Administrators Appointed) v Retail Adventures Pty Limited (Administrators Appointed)  FCA 891, Jacobson J considered the effect of a clause providing that the guarantor may not “prove in competition with the Landlord if a liquidator, provisional liquidator, receiver, administrator, or trustee in bankruptcy is appointed in respect of the Tenant or the Tenant is otherwise unable to pay its debts when they fall due; until all money payable to the Landlord in connection with this Lease or the Tenant’s occupation of the Premises is paid”.
The solicitors for the landlord asserted that this clause meant that the guarantor was prevented from proving in the administration of the tenant company and enforcing any right against the tenant company, including any right to vote at its meeting of creditors.
The administrators of the guarantor approached the court seeking directions on whether they would be entitled to withdraw the proofs of debt they had lodged with the administrators of the tenant company.
Having considered the guarantee, his Honour held that the words in the documents ought to be given their ordinary meaning. His Honour noted that creditors are not paid a dividend in an administration. His Honour considered therefore that for the clause to have any application, it must be interpreted as to prevent the guarantor lodging a proof of debt for voting purposes.
His Honour said that as reg. 5.6.23 of the Corporations Regulations 2011 provides that no person may vote at a meeting unless their claim has been admitted, the very act of lodging a proof of debt constitutes the making of a claim against the company. Jacobson J noted that this is something that the above provision of the guarantee was clearly designed to avoid.
The upshot is that lawyers should review their client’s company records to determine whether such clauses exist in guarantees or other documents signed by their corporate clients whose debts have been guaranteed by others. If an external controller is appointed to the corporate client, then if a person with the benefit of a guarantee lodges a proof of debt, the administrator should review the guarantee and if it contains a provision similar to that referred to above, reject out of hand any proof of debt lodged by the guarantor.
As part of the proving process, all relevant parties (including directors, banks, landlords and so on) should be asked to provide such documents even if they are not volunteered. This practice should become part of the process undertaken when considering the admissibility of proofs of debt.
The failure to consider any restrictions that might arise as a consequence of the inclusion of these provisions could lead to significant criticism if a resolution is carried using a proof of debt which it transpires should not have been admitted in the first place.