Should secured creditors lodge proofs of debt in liquidations?

Imagine you’re a secured creditor of a company and have done everything necessary to protect your security interests. During the pandemic lockdown, that company ceased trading and was subsequently placed into liquidation.

Shortly after the liquidation, amongst other correspondence, you received a report from the liquidator, wherein it advised that your claim ranked ahead of other creditors and there would be sufficient assets in the liquidation to repay your debt in full.

There was a blank “Proof of Debt” (POD) Form attached to this report.  A POD is a form for creditors for detailing their claim against the company with supporting information.

You previously provided the liquidator’s office with all relevant documentation substantiating your security interest claim.  But you decide to provide additional assurance to support your claim and return a completed POD to the liquidator’s office claiming the full amount of your debt.  Further, you used that POD and voted on a number of resolutions at the meeting of creditors.

Well, if that’s the case, you might have just surrendered all of your security interest by submitting a POD for the full amount of your debt.

Section 554E – Proof of debt by secured creditors

Section 554E of the Corporations Act 2001 (“the Act”) deals with the proofs of debt lodged by secured creditors. It states that in the winding up of an insolvent company, a secured creditor is NOT entitled to prove (i.e. claim) the whole or a part of the secured debt otherwise than in accordance with other provisions that are applicable to proving the debt.

Section 554E continues that the secured creditor may prove for the whole of the amount of the secured debt if “the creditor surrenders the security interest to the liquidator for the benefit of creditors”.  By surrendering the security interest, the secured creditor loses its security and it will be ranked together with other unsecured creditors of the company, i.e. it loses its priority in any asset distribution payments.

In the event that the secured creditor realises the security interest with a shortfall, the creditor may prove for that shortfall balance due after deducting the net amount realised. If the secured creditor has not realised or surrendered its security interest, the creditor may:

  1. Estimate the value of its security interest; and
  2. Prove for the balance due after deducting the value so estimated.

In this case, the POD must include particulars of the security interest and the creditor’s estimate of the value of its security interest.

Takeaways

The “imaginary secured creditor” mentioned at the beginning of this article is based on a real life case I have previously worked on.  In fact there were two secured creditors in that matter and both submitted PODs proving for the full amount of their respective secured debts, which inevitably surrendered their security interests.

Before submitting any POD and/or voting at any meeting of creditors, a secured creditor should carefully consider:

  • Whether it is necessary to lodge a POD and/or vote at the meeting of creditors;
  • Whether it has sufficient information and/or evidence in support of the estimated value of its security interest; and
  • Only prove for the shortfall balance if it is deemed necessary to do so.

If the secured creditor believes that there will be sufficient assets in the liquidation to repay its secured debt, then it may not be necessary to lodge a POD and/or vote. It is strongly suggested that secured creditors seek professional advice before submitting POD in a liquidation.

Want to know more?

If you have any further questions about the issues raised in this article, please contact Henry McKenna, our Insolvency & Reconstruction Director, for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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