Liquidators are obliged to assess the merits of each creditor’s claim.
Typically, this is not a complicated process. The liquidator will review the information provided by the creditor, compare it with the company’s records, and form a view as to whether the creditor has provided sufficient evidence to support the claim.
However, in some cases, the costs of assessing complex claims cannot be justified. These situations demand a more creative approach.
In the recent liquidation of Quest Care Incorporated (In Liquidation) (Quest Care), HopgoodGanim Lawyers and insolvency practitioners, P A Lucas & Co Pty Ltd, applied to the Supreme Court for an order under ss 90-15 and 90-20 of Schedule 2 of the Corporations Act 2001 (Act).
The Court approved the liquidator’s proposal to distribute funds according to a unique framework designed to achieve the fairest possible outcome for creditors.
Quest Care was a not-for-profit association, incorporated in 1987, with the purpose of assisting disadvantaged people suffering from mental health issues, addiction, trauma and homelessness.
Quest Care operated an adult care facility and a care home for children from its premises in Ipswich.
The association was funded primarily through donations from the public and funding from the Queensland Government.
In 2014, the Queensland Government cut Quest Care’s funding. Quest Care subsequently suspended its operations and, in 2017, the management committee applied to the Supreme Court to wind up the association. Mr Peter Lucas was appointed liquidator.
At the time of Mr Lucas’ appointment, Quest Care had already sold its Ipswich property (virtually its only asset) and had approximately $600,000 in its bank account.
The Royal Commission into Institutional Responses to Child Sex Abuse (Royal Commission) was established in 2013 to inquire into the history of abuse in Australian educational institutions, religious groups, state institutions and other organisations.
As part of the Royal Commission’s inquiries, three former residents of Quest Care came forward with claims that they were physically and sexually abused as children in the care of Quest Care.
The allegations prompted the management committee to wind up Quest Care, so that any claims could be appropriately dealt with.
After the decision was made to wind up Quest Care, the association was served with a personal injury claim from a former resident.
The claim alleged that, several decades ago, physical and sexual abuse had been committed by the local pastor who founded Quest Care, and by another female employee who managed the home for children.
It soon became clear that this was not an isolated accusation. Other similar allegations had been made online via social media platforms.
After discovering this, Mr Lucas placed advertisements in major Australian newspapers, calling for former residents to lodge particulars of any claims pertaining to Quest Care.
A total of 13 accusers came forward, each claiming they had been sexually or physically abused whilst under the care of the pastor and the female employee.
All the claimants were vulnerable or disadvantaged people, placed in the care of Quest Care because of their vulnerabilities. Most were children when the abuse occurred.
Difficulties assessing the claims
Historical claims of sexual abuse are especially difficult to prove in the legal system.
The pastor and employee stopped working for Quest Care in 1990 and are now both deceased.
Quest Care had no records to corroborate or disprove the accusations.
Given the limited funds available and the distressing nature of the claims, it seemed unreasonable to require each claimant to prove their claim to the legal requirement.
The costs incurred in assessing the legal merits of each claim would deplete the comparatively small amount available to the victims.
Difficulties assessing quantum
Moreover, even if the claims were accepted, there remained a major difficulty in determining the quantum of each claim.
The 13 contingent claims totalled $1,435,403.78, but the amounts being claimed were, at least in some cases, completely arbitrary.
Some claimants had lodged claims in the form of proofs of debt, some delivered personal injury notices, and others just wrote to the liquidator with scant details of what had happened to them.
What was clear, though, was that if even a few of the claims were successful, the available funds would be quickly exhausted and the legal costs associated with a more precise determination of the quantum of each claim would likewise substantially reduce the available funds.
The proposed methodology
Rather than deplete the liquidation funds through detailed assessments of each claim, P A Lucas & Co and HopgoodGanim devised a scheme to summarily assess each claim and fairly distribute the funds available.
As a result of the Royal Commission into Institutional Responses to Child Sex Abuse, the Australian Government had developed a framework for summarily quantifying redress payments for victims of institutional child sexual abuse. This framework is known as the National Redress Scheme (Scheme).
The Scheme uses the ‘reasonable likelihood’ test as a threshold for admitting each claim.
Applying that same burden of proof, Mr Lucas was satisfied that all 13 claims would qualify for payment.
The Scheme’s framework provides for a fixed payment to be made for each claim. The value of each payment is determined with reference to the type of abuse, the circumstances surrounding the abuse and the impact on the victim.
A modified version of the Scheme was developed to calculate the amounts which should be payable to the 13 claimants.
Each claim was allocated a set number of points, based on the type of abuse, surrounding circumstances and impact. The funds available were then to be divided amongst the claimants on a pro-rata basis in proportion to the points allocated to each claim.
Some modifications to the Scheme were required. The Scheme deals specifically with child sexual abuse victims. However, the claims made against Quest Care also included adult sexual abuse claims and physical and psychological abuse claims, which were not of a sexual nature. The Scheme was modified to take into account these other categories of abuse.
The Scheme was further modified to remove contingencies not relevant to these circumstances.
The Court application
To ensure this method of distributing funds was appropriate and that Mr Lucas was acting in compliance with his obligations as liquidator, an application was brought in the Supreme Court of Queensland pursuant to ss 90-15 and 90-20 of Schedule 2 of the Act (or alternatively under s 554A(A) of the Act).
Section 90–15(1) of the Insolvency Schedule provides that a Court may make such orders as it thinks fit in relation to the external administration of a company, including an order determining any question arising in the external administration of the company. A person with a financial interest in the external administration of the company can apply to the Court under this provision for guidance on matters of law and on the reasonableness of a contemplated exercise of its discretion.
Alternatively, s 554A of the Act provides that if a liquidator admits a debt or claim that, as at the time the winding up began, did not bear a certain value, the liquidator can make an estimate of the value of the debt or claim or refer the question of the value of the debt or claim to Court.
To assist the Court, Mr Lucas briefed a retired Supreme Court Judge, Mr Alan Wilson QC, to consider the proposed distribution methodology.
Mr Wilson QC conducted a review of the material and determined that the proposed formula was a reasonable and proper course for the liquidator to follow and an appropriate resolution of these distressing claims.
Some of the claimants’ legal representatives were initially against the proposed methodology. However, after being provided with copies of the application and the supporting evidence, including Mr Wilson’s QC review, the claimants were largely supportive of the proposal.
Justice Martin accepted the liquidator’s proposal and agreed with the views of Mr Wilson QC. Orders were made that the funds should be distributed in accordance with the proposed methodology.
With the limited funds available, it was never going to be possible to properly compensate the victims of this shocking abuse.
However, there would be no benefit in depleting the limited funds available by conducting detailed assessment of the merits and quantum of each claim.
The approach taken in this case meant that the liquidator could satisfy its obligations without unnecessarily draining the available funds.
In the end, nearly two thirds of the available funds were able to be distributed to the claimants. If a more traditional legal approach had been taken, those funds may have been exhausted entirely.
Where a novel approach to a liquidation will lead to a more satisfactory outcome, liquidators can apply to the Court to approve more innovative methods of distributing liquidation funds.