Double Trouble: Court Advises Liquidators to Reject A$905 Million Proofs of Debt
The Situation: A liquidator can reject a "double proof" for what is, in substance, the same debt as another accepted proof of debt.
The Question: When are liquidators justified in rejecting what could arguably be a double proof?
Looking Ahead: Liquidators should be prudent when considering potential double proofs and seek independent legal advice from counsel with relevant expertise. If in doubt, liquidators can seek judicial advice about their proposed decision to reject or accept the proof under the Corporations Act 2001 (Cth) ("Act").
In Re Octaviar Limited (in liquidation)  QSC 235, the Queensland Supreme Court advised that the liquidators of Octaviar Limited ("Octaviar") were justified in rejecting proofs of debt lodged by the liquidators of two of Octaviar's subsidiaries on the basis that they could be double proofs.
Before going into liquidation in 2009, Octaviar issued notes and debentures through Octaviar Investment Notes Limited ("OINL") and Octaviar Investment Bonds Limited ("OIBL"). Relevantly:
- OINL issued notes to the Public Trustee of Queensland ("PTQ"). OINL was the principal debtor and Octaviar and OIBL were guarantors; and
- OIBL issued bonds to Challenger Managed Investments Limited ("Challenger") and Colonial First State Investments Limited ("Colonial"). OIBL was the principal debtor and Octaviar and OINL were guarantors.
OINL and OIBL subsequently went into liquidation.
PTQ, Challenger and Colonial (together, "Investors"), OINL and OIBL all lodged proofs of debts with Octaviar's liquidators with respect to the notes and bonds.
OINL and OIBL claimed to be owed approximately $446 million and $459 million on three bases. The first two involved an allegation that Octaviar contravened section 588V of the Act because it knew of the insolvency of its subsidiaries when the transactions occurred.
Therefore, OINL and OIBL asserted that Octaviar was liable under section 588W for the obligations that they incurred in issuing and guaranteeing the notes and bonds. Alternatively, OINL and OIBL claimed that Octaviar was liable as an accessory to the breaches of duties owed by the subsidiaries' directors in causing the notes and bonds to be issued and guaranteed, and for forwarding the proceeds to a related entity.
Octaviar's liquidators obtained independent legal advice from counsel concerning the situation and the rule against double proofs. That rule prevents liquidators from accepting a proof of debt for what is in substance the same debt as another proof of debt against the same estate. This ensures that only one dividend is paid for that debt. As was the case here, issues with double proofs can arise in situations where parent companies have guaranteed the debt of a subsidiary.
Octaviar's liquidators accepted the proofs of debt totaling $500 million lodged by the Investors. Octaviar's liquidators considered that if the debts owed to the Investors were fully paid by Octaviar, OINL and OIBL would not have any claim against Octaviar. Further, they considered that the Investors had the better claims on the broad equity of the position because they were out of pocket.
However, OINL and OIBL's liquidators continued to press their proofs of debt. They contended that claims under section 588W of the Act should not be reduced by the repayment of the obligations that arose from acts of insolvent trading. If this argument was correct, then the statutory liability for insolvent trading by a parent company would remain at full value even if the obligations that gave rise to it were discharged in whole or part.
Octaviar's liquidators sought judicial advice and applied for orders under section 90-15(1) of Schedule 2 to the Act that they were justified to reject OINL and OIBL's proofs of debt because they were double proofs.
The Court considered the steps taken by Octaviar's liquidators in considering the proofs of debt and the relevant circumstances. The Court was satisfied that the liquidators' process of reviewing and considering the proofs was comprehensive and included a careful consideration of OINL and OIBL's legal arguments, along with seeking specific independent legal advice from counsel with relevant experience.
The Court advised that Octaviar's liquidators would be justified in rejecting OINL and OIBL's proofs of debt. In doing so, the Court addressed the following:
- The Court held that this was an appropriate case to give judicial advice because it involved a legal question and not a commercial decision. That is, should OINL and OIBL's proofs of debt be regarded as double proofs? This question involved the application of the complex area of law concerning double proofs and its interaction with section 588W of the Act.
- The Court also noted that the law regarding double proofs had not been considered by an intermediate appellate court or the High Court since the commencement of the insolvent trading provisions relevant to OINL and OIBL's claims.
- There was a real legal controversy, the Court noted, about the proofs of debt. While the Court's role was not to decide the underlying dispute, Octaviar's liquidators would be assisted by judicial advice. The Court noted that the existence of such a controversy about the subject matter for judicial advice does not automatically bar the Court from giving advice.
- The rejection or acceptance of OINL and OIBL's proofs of debt, which totaled more than $900 million, would likely have a very significant effect on the way the liquidators conducted the winding up of Octaviar.
Two Key Takeaways
- Liquidators should be alert to potential double proofs, especially when dealing with large numbers of proofs of debt and when appointed to parent entities in corporate groups.
- Liquidators should proceed carefully and seek independent legal advice when considering whether to accept or reject potential double proofs. If in doubt, liquidators can seek judicial advice about their proposed decision.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.