Proofs of Debt – Should a Secured Creditor Lodge One in a Liquidation?

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If you are a creditor of a Company placed into Liquidation, but you are holding a security such as a mortgage or Personal Property Security Act charge over property of that Company, you should take legal advice before you respond to a request by the Liquidator to lodge a proof of debt.

Section 554E of the Corporations Act, provides for a secured creditor to surrender their security and prove for the whole debt balance, or realise that part of the debt that is protected by the security and prove for the balance, or estimate how much of the debt might exceed the value of the security and prove for the unsecured portion of the debt owing.

In the case of Cosmopolitan Constructions Pty Ltd (in Liquidation) a secured creditor lost the protection and value of their security by lodging a proof of debt for the whole amount and certifying in the proof of debt that the value of their security was nil. The Secured Creditor was admitted for the full value of its debt for voting purposes and voted on a poll at the meeting of Creditors. The Court determined that by voting for the full value of its debt at the meeting of Creditors, the Secured Creditor in this case had surrendered its security, and became an unsecured Creditor in the Liquidation.

The lesson to be learned is that if you hold a mortgage type of security, and have not been in a position to realise that security before a Creditors meeting, it would be very prudent to not vote at all, and not lodge a proof of debt, or alternatively take a very conservative view of the likely value of a distribution to unsecured creditors in the future, and only lodge a proof of debt for that part of your debt that you are sure will not be covered by your existing security position.

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