28 Sep 2016

Introduction

Secured and unsecured creditors alike are often advised to lodge a proof of debt (‘PoD’) as soon as possible after a debtor company goes into liquidation. Secured creditors often presume that they are able to vote at any creditors’ meeting without their rights being affected.  In both of these instances however, a secured creditor runs the risk of surrendering their security interest.  Secured creditors should therefore be careful and seek legal advice before lodging a PoD and voting at creditors meetings.

 

Points secured creditors should keep in mind when lodging a PoD and voting

  1. Generally, a secured creditor should not lodge a PoD in relation to that part of the debt which would be satisfied by the estimated value of the security (ie the secured part of the debt).
  2. A secured creditor is only entitled to vote by poll in relation to that part of the debt which would not be satisfied by the estimated value of the security (ie the unsecured part of the debt).
  3. If a secured creditor does attempt to prove a secured debt or vote at a creditors’ meeting by poll in relation to the secured part of the debt, then the secured creditor might inadvertently surrender their security.
  4. The secured creditor will not however surrender their security if they lodge a PoD and vote at any creditors meetings in relation to only that part of the debt which would not be satisfied by the estimated value of their security (ie the unsecured part of the debt).

 

Case Examples

Listing a security interest as having ‘NIL’ value

In the NSW Supreme Court case of Cosmopolitan Constructions Pty Ltd (in liquidation) [2013] NSWSC 780, a secured creditor held a caveat over a property which was owned by the company that went into liquidation.

The secured creditor lodged a PoD in which it claimed the full amount of its debt.  The secured creditor stated in the PoD that the estimated value of the security was ‘NIL’.  At the creditors meeting the secured creditor’s debt was admitted in full.

The Court found that as a consequence of the secured creditor attributing a ‘NIL’ value to the security and having the debt admitted in full, the secured creditor had forfeited its security.

 

 

Voting by poll

In the case of Young v ACN 081 162 512 [2005] NSWSC 139, a secured creditor voted to adjourn a creditors meeting.  The secured creditor had lodged a PoD in which it stated that the value of the security was “not known”. The Court held that by voting by poll at the creditors meeting and not providing an estimate of the value of the security at the meeting, the secured creditor had surrendered its security.

A secured creditor will not be deemed to have surrendered its security by voting at a creditors meeting if the vote of creditors was conducted by a show of hands rather than by a poll.  That is because in those circumstances, the secured creditor would not be voting in accordance with the value of their debt.

 

How a secured creditor can avoid surrendering their security

A secured creditor should:

  1. seek appropriate legal advice as to:
    1. whether they should submit a PoD;
    2. what value should be attributed to the security interest on the PoD; and
    3. whether they should vote at creditors meetings.
  2. If the secured creditor does lodge a PoD in relation to the difference between the estimated value of their security and the amount of the debt, they should ensure that the PoD clearly indicates that the security is not surrendered. It is best practice to include an express statement on the PoD to that effect.

This is only general information and does not constitute specific legal advice.  If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.

 

 

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