TGIF 1 March 2024 – Federal Court does away with formal proof of debt

The Federal Court in Morgan, in the matter of Traditional Values Management Limited (in liq) [2024] FCA 74, approved an abridged process that allowed the liquidator to admit debts of a group of unsecured creditors without requiring a formal proof of debt.

Key Takeaways

• During a liquidation, courts will carefully consider approving a departure from the traditional proof of debt process where satisfied that the formal procedure would deplete the distribution pool and ultimate return to creditors.
  
  
• Whether the abridged process ought to be an ‘opt in’ or ‘opt out’ process will depend on the nature of the liquidation and creditors. An ‘opt in’ process may be preferrable where creditor details are unknown or unreliable and there is a high prospect that distributions would be returned and remitted to ASIC as unclaimed monies or cause a second round of distributions.
  
  
• It is important for liquidators to clearly articulate and tailor the proposed methodology of the abridged process. They also need to ensure that any discount to the debt fairly reflects the price of reducing the burden of proof and assessing the veracity of all creditor claims.

Background

Traditional Values Management Ltd (in liq) (TVM) was the responsible entity of Blue Diamond Deposits Trust No. 1 (BDT), a registered managed investment scheme. Investors acquired units in BDT. TVM loaned monies to BDT using funds generated from investors subscribing for units. By early 2007, TVM was using funds of incoming investors to pay distributions or redemptions to existing investors.

TVM was placed into liquidation in February 2010. Although the liquidator successfully recovered over $22 million, significant costs were incurred in obtaining recoveries, substantially reducing the distribution pool.

During the course of the liquidation, the liquidator determined that a class of investors had claims for misleading and deceptive conduct. Considering the characteristics of the investor cohort as unsecured creditors, primarily elderly or ‘mums and dads’, and the considerable time which had passed since their investments, the liquidator anticipated it would be difficult for those investors to provide sufficient evidence of individual reliance to support their debts. Further, the liquidator considered that the costs of dealing with their debts in the traditional manner would significantly deplete the remaining funds available for distribution.

Accordingly, the liquidator approached the Court seeking approval of an abridged process. This would facilitate eligible investors being admitted to proof in the liquidation (with a 20% discount applied), without lodging a formal proof of debt.

Decision

The Court appointed a contradictor to consider and obtain information from the liquidator in relation to the abridged process. Following consultation, two modifications were made to the abridged process, requiring investors to ‘opt in’ and extending the time for the process to be undertaken.

The Court approved the abridged process the liquidator proposed, accepting the:

• burden investors faced in lodging a proof of debt with sufficient evidence for proper consideration by the liquidator; and
  
  
• adjudication of formal proofs of debt would further deplete the distribution pool.

The ‘opt in’ method was considered the most suitable as investor details were scant, increasing the probability of unclaimed monies being remitted to ASIC or a second round of distributions.

The abridged process did not prohibit investors submitting formal proofs of debt in the usual way if they wished to do so.

Comment

An abridged process does not relieve liquidators of their overriding duties. However, considering the distribution pool, creditors, the complexity, impracticalities and volumes of potential claims, an appropriate abridged process can assist liquidators in maximising creditor returns.

As adjudication of debts is a fundamental duty of a liquidator, they need to clearly articulate the proposed methodology for the purpose of admitting claims in the abridged process. Aggrieved creditors ought to carefully assess the abridged process to consider whether it is commercially viable to challenge the liquidator’s proposal.