In the recent decision of Morgan, in the matter of Traditional Values Management Limited (in liq) [2024] FCA 74, the Federal Court considered an application by a liquidator for approval for an abridged procedure to allow investors to be admitted as creditors in the liquidation of a company without requiring formal proofs of debt under section 600K of the Corporations Act 2001 (Cth) (the Act) and sections 90-15 and 90-20 of the Insolvency Practice Schedule (Corporations) (the IPS).
The liquidator claimed that the abridged procedure was warranted on the basis that the anticipated costs of dealing with proofs in the usual manner would absorb all, or nearly all, of the total funds for distribution. The abridged procedure would allow investors who elected to participate to recover more than would otherwise be possible if no abridged process was adopted.
The Court appointed a contradictor to consider and obtain information from the liquidator in relation to the abridged process and considered the factual circumstances of the case before concluding that the abridged process proposed by the liquidator should be approved. This independent process facilitated impartial submissions.
A contradictor is not a party to a proceeding, but a person who assists the court by providing submissions in relation to a particular question of law or fact. Courts have the power to appoint a contradictor where the Court is of the opinion that it will be significantly assisted by their submissions. Here the Court appointed a barrister with extensive experience in insolvency matters to provide submissions on certain aspects of the liquidator’s abridged proposal.
Traditional Values Management Ltd (in liq) (TVM) was incorporated in 1992 and was the responsible entity of a managed investment scheme called the Blue Diamond Deposits Trust No 1 (BDT). Investors acquired units in BDT. TVM loaned monies using the funds generated from investors. From early 2007, TVM was using the funds of incoming investors to pay income distributions or redemptions to existing investors, similar to a Ponzi scheme.
Many of the investors in the scheme were “mum and dad” investors and elderly. The liquidator considered that the investors’ capacity to show sufficient evidence of their reliance on the misleading or deceptive statements to support their debts had been impacted by the passage of time and that dealing with proofs of debt using the usual procedure would absorb all or nearly all of the funds that remained for distribution.
Accordingly, the liquidator proposed adopting an abridged procedure which involved eligible investors being admitted to proof in the liquidation with a 20% discount applied to their claims, without lodging a formal proof of debt.
The liquidator advanced the following reasons in support of an abridged claim procedure:
After engaging with the contradictor, the liquidator modified his abridged process, requiring investors to ‘opt-in’ and extending the time for the process to be undertaken.
Section 90-15(1) of the IPS
Section 90-15(1) of the IPS provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. That provision imposes a power on the Court to make judicial directions, including the power to approve an abridged process where that abridged process involves considerable savings and does not exhaust funds remaining in the winding up.
The Court was satisfied that the liquidator had clearly and precisely set out the manner in which the proposed abridged process would operate. The proposed abridged process also did not involve the lodgement of a “global proof” and did not exclude any investor or class of investor. Any investor who did not want to participate in the abridged process remained able to lodge a proof of debt to be adjudicated upon by the liquidator.
Opt out vs Opt in
A number of investors were uncontactable and there was a high probability that distribution cheques sent to those investors would need to be paid over to ASIC or be subject to a second round of distributions.
Given the limited amount of funds available to the investors, the contradictor recommended that the abridged proposal be changed to an “opt-in” model.
The Court held that the “opt-in” model was appropriate and also noted that it made the abridged process simpler whereby a single notice could be sent to all the investors, whereas previously, a separate notice was sent to a sub-group of investors who had already registered a claim with the liquidator.
The Court concluded that the proposed abridged process should be approved.
This decision demonstrates that a Court may be willing to accept an appropriate abridged process to the usual proof of debt process where it can assist liquidators in maximising creditor returns. Factors that are taken into consideration include the amount of the distribution pool, the creditors, the complexity, impracticalities and volumes of potential claims.
Courts also have the power to appoint a contravener to provide submissions on a particular issue where the Court is of the view that their submissions would assist the Court by providing submissions on issues that may be overlooked.
The case also demonstrates that liquidators need to clearly articulate precisely what their proposed methodology for admitting claims entails in the abridged process. Creditors will also need to consider whether it is in, or not in, their best interests for them to oppose, in the first instance, and if approved, participate in, a liquidator’s proposed abridged process.
If you have any questions regarding this decision or the matters summarised in this paper, the experienced Lavan team is here to help.
