This week’s TGIF considers a recent application to the Queensland Supreme Court for judicial advice as to whether certain proofs of debt should be rejected due to the rule against double proofs.

Background

The liquidators for the once ASX listed company Octaviar Limited (in liq) (the liquidators) applied to the Supreme Court of Queensland (pursuant to sections 90-20(1)(d) and 90-15(1) of Schedule 2 to the Corporations Act 2001 (Cth) (the Act)) seeking the Court’s advice that they would be “acting appropriately and properly” in rejecting proofs of debt on account of the rule against double proofs. This rule prevents more than one dividend being paid in respect of what is, in substance, the same debt.

The Proofs of Debt

The proofs of debt in question were lodged by Octaviar group subsidiaries Octaviar Investment Notes Limited (in liq) (OIN) and Octaviar Investment Bonds Limited (in liq) (OIB).

OIN and OIB’s proofs of debt claimed that Octaviar Limited (as holding company) was liable under sections 588V and 588W of the Act in respect of debts incurred by OIN and OIB whilst insolvent. The debts related to notes that OIN and OIB had issued to the Public Trustee of Queensland (PTQ) (in the case of OIN) and to Challenger Managed Investments (Challenger) and Colonial First State (Colonial) (in the case of OIB). OIN’s proof debt claimed $445,775,030 and OIB’s proof of debt claimed $459,139,762.

Importantly, PTQ, Challenger and Colonial First State had all lodged (and the liquidators had accepted) proofs of debt in relation to notes on account of Octaviar having been a guarantor.

Issues

The Court was required to answer two broad questions:

  1. Could the Court provide advice to the liquidators?
  2. What advice should the Court provide the liquidators?

Findings

Court’s provision of judicial advice – no effect on “substantive rights”

In deciding to provide advice to the liquidators, the Court noted the broad powers conferred upon it under section 90-15 of Schedule 2 of the Act and observed that the section was “intended to facilitate the performance of a liquidator’s functions” and that the Court could give advice “where it is in the interests of the liquidation to do so”.

A critical factor that permitted the provision of advice in this case was that the liquidator’s application concerned a legal question rather than a commercial / factual question.

The Court made it clear that this was a situation where the liquidators faced a complex area of law (i.e. how the rule against double proofs interacted with insolvency provisions of the Act) in respect of an “all-round group insolvency”.

Such complex situations, including where matters are adversarial, warrant the court’s advice, but the advice will not extend to deciding disputes. As the Court observed:

“The court’s advice should not be directed to deciding disputes between interested parties. It ought to be directed to whether the external administrator is justified in conducting a winding up in a particular way.”

Rejecting the proofs of debt - acting appropriately and properly

Since the Court was only to advise the liquidators, no determination was made regarding the application of the rule against double proofs to statutory claims.

The Court did, however, have regard to the facts and the competing arguments put forward by the parties, as part of its consideration of the matter.

The position put forward by the liquidators of Octaviar was that, if the amounts owing to PTQ, Challenger and Colonial were paid in full by Octaviar, then the insolvent trading claims by OIN and OIB against Octaviar would fall away.

On the other hand, OIN and OIB argued that “the statutory liability for insolvent trading remains at full value even if the obligations that gave rise to it are discharged in whole or part”.

The Court’s task was not to resolve this argument but rather to consider the appropriateness of the liquidators’ assessment of the proofs of debt that OIN and OIB had lodged. The Court concluded that the liquidators “process of reviewing and considering the proofs was comprehensive and included a careful consideration of the legal arguments put on behalf of [OIN and OIB] by their solicitors and the taking of specific independent legal advice from counsel with experience in the relevant field.”

The Court proceeded to give advice to the liquidators of Octaviar that they would be justified in rejecting the proofs of debt lodged by OIN and OIB.

No certainty can be drawn from this decision as to the application of the rule against double proofs and its interaction with statutory claims brought under the insolvency provisions of the Act.

However, from a lack of certainty comes a willingness on the part of the Court to advise external administrators on their approach to the liquidation, particularly when they are faced with complex questions of law.