Claims of contingent creditors in external administrations

16/03/2015

The word ‘contingent’ is defined as something that might occur when certain criteria are met. With that, a ‘contingent creditor’ in this article’s context is a creditor who does not have a debt at the date of the appointment of an external administrator, but who has a debt or claim that would come into existence should some criteria from a pre-appointment event be met.

During external administrations, proofs of debt or claim can be used for two main purposes. One would be to quantify a creditor’s debt, which would be used for the voting on resolutions at a meeting of an insolvent entity’s creditors. The other would be to provide sufficient information and evidence to support a creditor’s debt or claim, allowing the external administrator to admit the debt/claim for the purposes of paying a dividend.

Voting at meetings

When a meeting of creditors of an insolvent entity is being convened and conducted, various requirements are provided under the Corporations Regulations 2001 which must be met.

To determine which creditors have the right to vote on resolutions proposed, Regulation 5.6.23can be referred to: – ‘A creditor must not vote in respect of … (b) a contingent debt… unless a just estimate of its value has been made.’

Creditors are not automatically allowed by the external administrator to vote for the amount estimated. The meeting chairperson has the authority to either admit or reject a claim for voting purposes. Hence, if a creditor provides insufficient details and evidence to support the claim, or the estimated value, the proof may be rejected for voting purposes. However, the chairperson’s decision can still be appealed against in the courts, as long as this is done within 10 days after the decision has been made.

The regulations has a requirement stating that the chairperson is still able to allow the creditor to vote even if he has doubts about admitting or rejecting a proof of debt or claim as long as it is marked as having been objected to.

Decisions relating to the admission or rejection of creditors’ proof of debt or claim are not, however, binding when it comes to dividend payment.

Admission for dividend purposes

According to Regulation 5.6.63, if a creditor’s debt or claim is to participate in the dividend, it has to be admitted before or on the date when the dividend is paid.

For voting purposes, it is similar to an adjudication whereby an estimated value of the creditor’s contingent debt or claim must be calculated. However, it must be the external administrator who estimates, not the creditor.

And since contingent debts or claims can be complicated to quantify, they can be referred to the court. Then it would be up to the court to either quantify them themselves, or, to advise the external administrator with a methodology to estimate the value.

Should there be discontent caused by the decision of the external administrator or by the methodology applied on estimating the value, the aggrieved individual is allowed to appeal against this within 21 days of being made aware of the determination, or as extended by the court.

In summary, should there be a contingent or potential debt or claim prior to the date of the appointment of an external administrator, as long as they meet the criteria, they are all required to be dealt with exactly as how existing debts and claims are dealt with. This is actually confirmed under Section 553 of the Act, which states

“in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), are admissible to proof against the company.”

Previous post:

Next post: