A Warning to Secured Creditors in Liquidations

Secured creditors in a liquidation must be careful when completing a proof of debt or voting at any meeting of creditors as doing so may render their security invalid. This was highlighted in the Queensland Court of Appeal decision of Surfers Paradise Investments Pty Ltd (in liquidation) v Davoren Nominees Pty Ltd.

In this case a secured creditor inadvertently completed and submitted a proof of debt despite holding a security to secure the debt owed to it. The initial trial judge determined the creditor’s submission of a proof of debt was made in error, did not amount to an unequivocal election and therefore did not void their security. The Court of Appeal however determined that the election to lodge a proof of debt stating there was no security held by the creditor could not be withdrawn and was an unequivocal election. The result was that their $1.2m security was lost.

If you lodge a proof of debt, for the full extent of the debt, you are electing to take part and benefit from the unsecured assets of the debtor in a pro rata share with the other unsecured creditors. In this case you cannot then, after receiving a dividend based upon the full amount of the debt, obtain the benefit of your security.

Before submitting a proof of debt or voting at a meeting of creditors, consider the following:

  • Why do you want to lodge a proof of debt or vote at the meeting of creditors?
  • Will your position be improved by lodging a proof of debt or by voting?

voting

In some liquidations there may be no dividend payable to unsecured creditors. In this case it may be unnecessary to vote.

Difficulty will arise if, at the time the liquidator is calling for proofs of debt or a meeting of creditors, the secured creditor has not yet realised their security (even more so if they are unsure of the value of their security).

If a secured creditor thinks it will have a surplus, it may believe there is no reason for it to lodge a proof of debt or vote. If however a secured creditor thinks it will have a shortfall, after the sale of its security, they will be entitled to lodge a proof of debt for the shortfall and vote. In this case the creditor will need to disclose its security and provide an estimate in good faith of the value of the security. Keep in mind it is possible in certain circumstances to amend the value of the security.