Claims of contingent creditors in external administrations

Contingent, by definition, is something that only occurs or exists if certain criteria are met. Accordingly, a contingent creditor is a creditor who, as at the date of the appointment of an external administrator, does not have a debt, however, should certain criteria of a preappointment event or agreement be met in the future, a debt or claim will come into existence.

There are two main uses for proofs of debt or claim in external administrations. The first is to quantify a creditor’s debt for the purpose of voting on resolutions considered at a meeting of an insolvent entity’s creditors. The second is to provide details and evidence to support a creditor’s debt or claim, sufficient to enable the external administrator to admit the debt or claim for the purposes of paying a dividend.

Voting at meetings

The Corporations Regulations 2001 provide various requirements which must be met when convening and conductinga meeting of creditors of an insolvent entity.

Regulation 5.6.23 addresses which creditors may vote on the resolutions proposed - ‘A creditor must not vote in respect of…(b) a contingent debt… unless a just estimate of its value has been made.’

An external administrator does not, however, have to automatically allow the creditor to vote for the amount estimated. The chairperson of the meeting, usually the external administrator, has the power to admit or reject a claim for voting purposes. Accordingly, should the creditor not provide sufficient details and evidence to support the claim, including the estimated value, the proof may be rejected for voting purposes. The chairperson’s decision may be appealed against in the courts within 10 days after the decision has been made.

If the chairperson has any doubt about admitting or rejecting a proof of debt or claim, the regulations require that the chairperson allow the creditor to vote, however, the proof of debt or claim must be marked as having been objected to.

Any decision made regarding the admission or rejection of a creditor’s proof of debt or claim is not binding when it comes to the payment of a dividend.

Admission for dividend purposes

Pursuant to Regulation 5.6.63 a creditor’s debt or claim must be admitted on or before the date on which a dividend is paid if it is to participate in the dividend.

Similar to an adjudication for voting purposes, an estimate as to the value of the creditor’s contingent debt or claim must be made. However the external administrator must make the estimate, not the creditor.

Given that contingent debts or claims can be complex, the quantification of the contingent debt or claim can be referred to the court.

It is then up to the court to either quantify the debt or claim, or provide the external administrator with a methodology to determine a value.

A person who is aggrieved by the decision of the external administrator or the external administrator’s application of the court ordered methodology is able to appeal against the decision within 21 days of becoming aware of the determination, or as extended by the court.

Consequently, even though a debt or claim may not exist at the date of the appointment of an external administrator, any potential debt or claim, provided that they are based on conditions instigated prior to the appointment, are required by statute to be dealt with, just as debts or claims which did exist at the appointment must be dealt with. In fact, Section 553 of the Act provides confirmation of this as it 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.”

Claims of contingent creditors can be quite complex. For more information talk to us.

Cristy Houghton