Ghosting Is A Bad Idea - Court Dismisses Appeal Against Rejection Of Proof Of Debt In The Absence Of The Applicant

In the recent case of Ball v Jeremy Joseph Nipps as liquidator of Ochre Group Holdings Ltd (In Liquidation),¹ the Supreme Court of Western Australia considered an unusual application by three former directors of Ochre Group Holding Ltd (In Liquidation) (Ochre) for orders revoking the liquidator’s rejection of their proofs of debt and requiring the liquidator to call a meeting of creditors to vote on a resolution to remove the liquidator.

The application was unusual in that by the time of the hearing, two of the directors had consented to their applications being dismissed, and the third director had ceased all communication with the liquidator and the Court and failed to attend the hearing.

In dealing with the matter, Justice Strk carefully considered the Court’s power to proceed with a hearing in the absence of the moving party, before providing a useful refresher of the principles for contesting a liquidator’s adjudication of a proof of debt. 

Background

Ochre was an unlisted public company that was incorporated on 5 October 1978 (at that time under the name Stirling Petroleum NL).  On 14 October 2020, the members of Ochre resolved to place Ochre into liquidation.  

On 24 March 2023, three former directors of Ochre, namely Mr Ball, Mr Deliu and Mr Sumarya, filed an originating process in the WA Supreme Court seeking relief under regulation 5.6.54(2) of the Corporations Regulations 2001 (Cth) (Regulations) and section 90-15 of the Insolvency Practice Schedule (Corporations) (Schedule 2 to the Corporations Act 2001 (Cth) (Act)) for orders to:

• revoke the rejection of their respective proofs of debt by the liquidator of Ochre (Liquidator);
• admit their proofs of debt; and
• require the Liquidator to call a meeting of the creditors for the purpose of voting on a resolution to remove the Liquidator.

Subsequently, on 15 August 2023, Mr Ball and Mr Deliu consented to the dismissal of their applications. 

However, the resolution of the application by Mr Sumarya was complicated by Mr Sumarya’s lack of participation in the application (and in other processes initiated by the Liquidator), and his failure to attend the hearing of that application.  The following matters were noted by the Court:

• the Liquidator had conducted public examinations pursuant to sections 596A and 596B of the Act, and an examination summons had been issued by the Federal Court to Mr Sumarya, but Mr Sumarya had failed to appear for his examination and a hearing had been listed to consider whether a warrant for the arrest of Mr Sumarya should be issued;
• Mr Sumarya had been represented by solicitors when the application against the Liquidator was filed, but his solicitors had ceased to act for him on 26 July 2023;
• Mr Sumarya had not appeared at any hearing since his former solicitors had ceased to act for him;
• the Court had sent various communications to the email and postal addresses for Mr Sumarya, but had received no response to those communications;
• the matter had been listed for substantive hearing on 15 August 2023 (and all relevant notices of the listing had been provided by the Court to Mr Sumarya) but Mr Sumarya had failed to appear at that hearing; and
• the matter was then adjourned to 11 September 2023 to allow Mr Sumarya an opportunity to appear (and all relevant notices of the adjournment and relisting had also been provided by the Court to Mr Sumarya), but he failed to appear on that date as well.

Power to Determine an Application in the Plaintiff’s Absence

As a preliminary matter, Strk J considered the following two points.

First, did Order 58 rule 22 of the Rules of the Supreme Court 1971 (WA) (Rules) apply such that the Court could proceed with a substantive hearing of Mr Sumarya’s application in his absence.  For the purposes of this paper it is sufficient to note that O 58 r 22 of the Rules provides that the Court can proceed with a hearing in the absence of a party to an originating summons if the Court thinks that it is expedient to do so. 

As to this first point, Strk J found that:

• the application was primarily governed by to the Supreme Court (Corporations) WA Rules 2004 (WA) (Corporations Rules);
• however, rule 1.3(2)(a) of the Corporation Rules provides that the Rules shall also apply to proceedings governed by the Corporations Rules “to the extent that the Rules are relevant and not inconsistent with the Corporations Rules”;
• as the Corporations Rules are silent as to what was to occur should an applicant fail to attend the hearing of a proceeding governed by the Corporations Rules, O 58 r 22 of the Rules did apply as it was relevant and not inconsistent with the Corporations Rules; and
• as a result of the above, the Court had the power to proceed with the substantive hearing in Mr Sumarya’s absence.

Secondly, should the Court instead make a springing order under O 4A r 23 of the Rules, giving Mr Sumarya a final chance to engage on his application but providing that if this was not done, the matter would be placed on the Inactive Cases list and then be automatically dismissed after a further 6 months.  This point was opposed by the Liquidator.

As to this second point, Strk J found that a springing order should not be made and that it was more appropriate that the hearing proceed in Mr Sumarya’s absence given the opportunities already afforded to Mr Sumarya to be heard, the further delay and uncertainty that would arise under a springing order, and the merits of Mr Sumarya’s application.

Strk J then proceeded to a determination of Mr Sumarya’s application.

Appeal Against Liquidator’s Rejection of Proof of Debt

Regulation 5.6.54(2) of the Regulations provides that a person may appeal against the rejection of a formal proof of debt or claim within the time specified in the notice of the grounds of rejection or, if the Court allows, any further period.

Strk J considered a number of the leading authorities in this area and reaffirmed that:

• an appeal against a liquidator’s rejection of a proof is not a proceeding against a company but an appeal from the liquidator when acting as an officer of the Court in a quasi-judicial function.  Although referred to as an appeal, it is heard by the Court as a hearing de novo;
• the Court has to consider the merits of the applicant’s claim and then decide on the existence and the amount of the debt, but it remains incumbent on the applicant to show that the liquidator was wrong.  If that onus is not discharged, then the Court will not overturn the liquidator’s decision.  If the Court is unable to conclude either way whether the proof should be admitted, then the liquidator’s decision must stand;
• in order to demonstrate that a liquidator’s decision was wrong, the applicant must adduce evidence establishing that the debts in question were true liabilities of the company as at the date of winding up.  The Court must be satisfied of this on the balance of probabilities before the liquidator’s decision rejecting the proof of debt will be set aside;
• the Court must take into account all relevant evidence adduced in the proceeding, whether or not it was before the liquidator at the time the proof was rejected; and
• however, the Court can only act on the evidence that is filed/adduced in the proceeding, as there is no rule or practice whereby the material that was before the liquidator is automatically considered to be material before the Court in the proceeding.

As to Mr Sumarya’s application, Strk J held that while Mr Sumarya had standing to appeal against the rejection and did so within time, there was insufficient evidence before the Court to discharge Mr Sumarya’s onus to show that the Liquidator’s adjudication was wrong. 

Her Honour noted that while the Court had seen a deed of acknowledgment of debt, which on its face acknowledged that Mr Sumarya was a creditor of Ochre, the following matters weighed heavily against Mr Sumarya’s appeal to revoke the rejection of his proof of debt:

• Mr Sumarya did not give any evidence in the proceeding as to his claimed debt;
• the deed of acknowledgment of debt was not supported by the books and records of Ochre or any other supporting documents;
• the Liquidator had requested supporting documents from Mr Sumarya but none had been provided, and no explanation had been given as to why no supporting documents had been provided;
• the final Form 520 – Declaration of Solvency signed by the directors including Mr Sumarya did not identify any fees or amounts payable to the directors, and no explanation had been given as to how this could be reconciled with Mr Sumarya’s claim;
• there was no evidence as to how the alleged debt was calculated; and
• the evidence given by Mr Ball and Mr Deliu in the course of their public examinations  cast significant doubt over the validity of the deed of acknowledgement of debt.

Given these matters, the Court dismissed Mr Sumarya’s application, and Mr Sumarya was ordered to pay the Liquidator’s costs.

Lavan Comments

This unusual case confirms that the Court can proceed to hear and determine an application governed by the Corporations Rules in the absence of a party to the application (including a plaintiff) if the Court thinks that it is expedient to do so.

Justice Strk’s decision also provides a helpful outline of the matters to be considered in a creditor’s appeal against a liquidator’s adjudication on a proof of debt, and highlights the onus on the appealing creditor to prove that the liquidator’s decision was wrong.

If you have any questions regarding this case, or in relation to an appeal against a liquidator’s adjudication on a proof of debt, the experienced Lavan team is here to help.