TGIF – Federal Court does away with formal proof of debt – Insolvency/Bankruptcy


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he 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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.





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