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Insolvency

How Do Creditors’ Meetings Work in Administration and Liquidation?

If you’re unlucky enough to be a supplier to a company that goes into external administration (specifically, administration or liquidation), then you’re probably wondering what happens next.

Specifically – what is the insolvency practitioner going to do and what is your role in the process?

Your role as a creditor is mostly reading reports about the company and, optionally, participating in meetings that might be called.

So in this article we’re going to summarise how creditors’ meetings work, how you can participate, and answer some common questions about the process.

Who Counts as a “Creditor”?

While there are technical legal definitions, generally anyone who has a claim against the company can be considered a creditor.

That includes:

  1. Claims that have not yet fully crystallised, provided the main facts or circumstances giving rise to them occurred prior to the appointment of the insolvency practitioner;
  2. Claims for damages (eg breach of contract or negligence);
  3. Claims that are contingent on something happening in the future (eg the completion of a work-out process under a construction contract).

So while there are some circumstances where you might not meet the test, if you have a claim then you’re reasonably likely going to be a creditor.

How do Creditors Participate in Meetings?

When the administrator or liquidator is appointed, they will send out a notice of their appointment to all known creditors. You might or might not receive this depending on how up to date the company’s records are.

If you don’t receive a notice, just contact the practitioner, tell them you might be a creditor, and ask for their initial notices and report. They are generally happy to provide them.

There are then two main documents you will need to complete to participate in a meeting.

1. The Proof of Debt

A proof of debt is a formal document which summarises the elements of your claim against the company in external administration, including any supporting documents you might provide.

So, for example, you might submit a proof of debt for “outstanding invoices for supply of goods and services pursuant to a contract dated 1 March 2020”. You could then provide the invoices and the contract in support of your claim.

Once you have submitted this proof of debt you do not need to do so again unless the details change.

Caution: you should be careful about submitting a proof of debt if there is any chance you might be a secured creditor (that is, you have some form of security over property to help pay your debt). Get legal advice if that is possible as your rights can be affected and you might accidentally abandon your right to security.

2. Proxy Form

For each meeting that you intend to participate in, you need to:

  1. Attend in person if you are a sole trader or individual creditor; or
  2. For companies, appoint a “proxy” (ie – a person) who represents the company at the meeting.

There is a standard form to complete if you are appointing a proxy. You can also simply nominate the chairperson of the meeting as your proxy if you don’t want to attend the meeting.

When you appoint someone to attend the meeting, you can either direct them how to vote (a specific proxy) or let them use their discretion (a general proxy).

How Will you Know When a Meeting is Going to Happen?

The administrator or liquidator will send you a notice telling you where and when the meeting is, provided they know of your existence as a potential creditor.

Admission of your Proof of Debt

At the commencement of a creditors’ meeting, the chairperson will “admit” or “reject” proofs of debt.

Importantly, these “admissions” are only for voting at the meeting (more on that below), and not an indication that your debt is accepted in a final sense (or that you will get any money).

There are two steps to the assessment process for any proof of debt:

  1. Does the creditor have a claim against the company that makes them a “creditor” for the purposes of the relevant law? And
  2. If yes, can the chairperson ascertain or reasonably estimate the value of that claim?

So, for example, if you have a simple debt claim against the company because you delivered 1000 widgets to it at its request, and an unpaid invoice for $1,000, then that’s clear.

More complicated are claims where the final figure is not yet known – for example, damages claims. In that case, your job is to provide details to support a rational estimate of the value of your potential claim without locking yourself in. Make it clear that it is an estimate only, and provide the logical basis on which your estimate has been provided. That makes the chairperson’s job easier and it more likely that your proof of debt will be admitted in the amount you want.

If the chairperson accepts that you have a claim but cannot make an estimate of its value, then they can accept your proof of debt for a nominal amount only – say, $1.

A Common Mistake – in many meetings, the two steps are often confused. For example, it may not be clear to the chairperson that the claim exists (or it might be disputed by the company), even though the amount of the potential claim is fairly certain. In many meetings this situation is resolved by the proof of debt being admitted for a nominal sum of $1, but technically that is not the correct way to do it.

What Actually Gets Decided at Creditors’ meetings?

Generally speaking, administrators and liquidators have discretion to deal with the affairs of the company. In most cases they do not need to hold a meeting to get approval for their conduct.

However, there are some common decisions that require the creditors to vote for the insolvency practitioner to proceed:

  1. Approval of their fees;
  2. Deciding the future of the company in an administration process;
  3. Negotiating a debt owed to the company that is worth more than a defined amount.

In these (and other) cases, a creditors’ meeting is usually necessary to keep things moving. We won’t go into each of those specific resolutions in detail here, and will leave them for another day.

Creditors’ meetings are also an opportunity to ask questions about the status of things, get updates on the timeframe for actions taken by the administrator/liquidator, and understand more about the company’s situation (if you care to).

How Do Creditors Vote at Meetings?

Resolutions are put to creditors in the form of a proposition, and creditors are asked to vote yes or no (or abstain) from the resolution.

So, for example, the proposition might be “that the liquidators’ fees and outlays for the period 1 January 2020 to 31 March 2020 be approved in the sum of $50,000 plus GST”.

The outcome of the vote is determined “on the voices”. In practice this usually involves creditors either saying “yes” or “no” or, in larger meetings” raising their hand so that a count can be taken.

So in a simple situation, if 25 vote in favour and 5 vote against, then the resolution will pass.

But not all situations are simple. What happens, for example, if those 25 creditors are only owed $10,000 between them, and the 5 others are owed $1,000,000?  Surely the larger debts should have some kind of greater influence over the company’s affairs?

Well, they sort of do.

The chairperson, or a creditor, can ask for a “poll” of the outcome of a vote. If that happens, a count is taken of:

  1. the number of creditors who voted for or against; and
  2. the value of the admitted proofs of debt for those creditors who voted for or against.

If the majority in both number and value of the creditors were in favour of the resolution, then it has passed.

However, if the number voted one way and the value voted the other way then the chairperson has an opportunity to exercise a casting vote (unless the resolution relates to the practitioners’ remuneration or their removal).

If the chairperson decides NOT to exercise their casting vote, then the resolution fails.

If they do decide to exercise their casting vote, then the resolution will be determined in accordance with the chairperson’s exercise.

In each case, the chairperson should provide reasons explaining their decision.

As you might expect, the exercise of a casting vote has a lot of potential for disputes.

If you have been on the receiving end of a casting vote and don’t like the outcome, it’s best to get legal advice promptly to discuss what options you have.

Important Note – as part of COVID-19 measures, a determination has amended the Corporations Act so that resolutions during creditors’ meetings held electronically must ALL be determined by a poll.

Creditors’ meetings in a Nutshell

So that’s our 101 lesson on creditors’ meetings in external administration.

Here’s the short version if you scrolled to the end:

  1. Administrators and liquidators often hold meetings to update creditors and pass important resolutions;
  2. Creditors can exercise a vote in relation to those resolutions provided they:
    1. Have submitted a proof of debt that gets admitted; and
    2. Attend the meeting in person or by proxy
  3. The outcome of a vote is generally determined “on the voices” but could also be determined by a “poll” using the process described above.

If you believe you’re a creditor of a company in financial distress and need assistance with submitting a proof of debt or navigating the insolvency process, reach out to us here and we’d be happy to help.

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