This week’s TGIF considers the recent ruling of the Federal Court of Australia in Tuscan Capital Partners Pty Ltd v Trading Australia Pty Ltd (in liq) [2021] FCA 1061, where a liquidator’s decision to accept a ‘proof of debt’ was successfully challenged due to a lack of evidence that the amount was owed under a binding obligation.

Key Takeaways

  • Liquidators should carefully scrutinise the basis for every ‘proof of debt’, particularly where a company in liquidation is said to owe money under a contract for services that does not list that company as a party to the contract.
  • When courts assess whether a company in liquidation was party to a contract for the purposes of a debt, the surrounding circumstances can be indicative of whether the debt is enforceable against the company. Liquidators should make sure to be apprised of the factual context of a claimed debt.
  • Although a court may reject a liquidator’s decision to accept a ‘proof of debt’, if the liquidator’s position was reasonable, the court may nevertheless find that it was appropriate to defend the application, possibly shielding the liquidator from adverse costs orders.

The application

The ‘proof of debt’ was lodged by Fishbank Development Corporation Pty Ltd (Fishbank) on the basis of a bill for legal services. Fishbank claimed it had jointly retained a firm of solicitors with Trading Australia Pty Ltd (Trading Australia) (the company in liquidation) for a matter, but had paid the bill in full. The liquidator accepted Fishbank’s assertion that half of the bill was therefore owed to it by Trading Australia by way of contribution.

The liquidator’s decision to accept the ‘proof of debt’ was challenged by the applicant, a director of Trading Australia, who claimed no retainer had ever been entered between the company and the firm of solicitors.

Applicable law

In this case, the Court considered whether Trading Australia was contractually obliged to pay the firm of solicitors. Perram J referred to basic principles of contract law to assess whether Trading Australia had ever entered a retainer for services jointly with Fishbank. His Honour also considered the surrounding circumstances of the retainer, including the subsequent correspondence between the parties.

What did the Court decide?

Perram J ultimately rejected the liquidator’s decision to accept the proof of debt and ordered the liquidator to pay the applicant’s costs. In his finding, his Honour first assessed the process by which the retainer was entered. Specifically, his Honour noted that while the email from the firm attaching the original retainer agreement had been copied to Trading Australia, the subsequent offer and counter-offer had not. As these subsequent offers effectively revoked the original retainer, it could not be said that Trading Australia had accepted an offer of services and entered the agreement.

His Honour also considered that, in later correspondence between the parties, Fishbank was treated as the client. Emails and letters were consistently addressed to, and requested instructions from, Fishbank personnel. Although Trading Australia was present at meetings and copied in to email chains about costs and instructions, this was insufficient to prove the existence of a retainer. This finding was made in spite of the fact that there were documents relating to the firm’s engagement that referred to Trading Australia.

His Honour reasoned that, on balance, the references to Trading Australia in some documents could not overcome the fact that no retainer had validly been entered and the firm of solicitors had not acted like Trading Australia was their client.

This conclusion was also said to be supported by the way Fishbank had conducted itself. Fishbank had not suggested at the time the retainer was entered that Trading Australia was liable for contribution and had not made a demand on Trading Australia after paying the bill. Instead, Fishbank had waited five years to request any kind of payment upon the company’s winding up.

Although Perram J rejected the liquidator’s position, his Honour accepted it was a reasonable one and that the decision to defend the review application was appropriate. Despite this, the Court ordered the liquidator to pay the applicant’s costs.

The case suggests liquidators should carefully scrutinise the underlying contractual matrix before accepting a ‘proof of debt’ where the evidence does not clearly and specifically establish a relationship between the amount said to be owed and the company in liquidation.

Provided that a liquidator has acted reasonably in accepting a proof of debt, they may not be criticised for the decision or a subsequent decision to defend the review application, however, the liquidator may still be exposed to adverse costs consequences.