How creditors get a debt admitted in a liquidation or voluntary administration

When a customer that owes your business money goes into external administration, the first question is usually whether you will ever be paid. The answer turns on a formal process: having your debt "admitted to proof" against the company. For an unsecured debt, admission to proof is what puts you on the official list of creditors who are entitled to vote in the external administration and to share in any dividend the administrator or liquidator distributes.

What you end up with is a written decision on your proof of debt, usually communicated by a notice from the external administrator, and a place in the queue of creditors ranked under the Corporations Act 2001 (Cth). One thing readers often assume is that being on the company's books, or having sent an invoice, is enough. It is not. Unless the liquidator admits your debt without formal proof, you will need to lodge a formal proof of debt, and there are deadlines attached to it.

What you need before you start

Before you start, gather the following:

• The company's legal name and ACN: You cannot identify the right administration without these, because appointment notices are published under the company's ACN.
• Evidence of the debt: Invoices, statements, purchase orders, contracts, delivery dockets and correspondence showing what was supplied and the amount outstanding.
• The identity and contact details of the external administrator: From the notice sent to you, or from the ASIC published notices website.
• Authority to sign: The proof of debt is a formal legal document and must be signed by you, or by someone authorised to sign on behalf of your business. This is a common hold-up for larger businesses where only directors or company secretaries can sign.
• A realistic expectation of the outcome: Unsecured creditors rank equally and are paid proportionately out of what remains after priority claims, so a dividend is not guaranteed.

Step 1: Confirm the appointment and identify the external administrator

If you received a notice of the administration or liquidation, the external administrator's name and contact details will be in it, usually with a copy of the proof of debt form. If you were not on the company's books, or the notice has not reached you, search the ASIC published notices website. Every notice of appointment of an administrator, liquidator or receiver published since 1 July 2012 is there; before that date these notices appeared in newspapers. Search by company name or ACN and the results will show the type of external administration, the date of appointment, and the name and contact details of the external administrator.

If the notice shows the company has been deregistered rather than placed in external administration, your debt is not recoverable through a proof of debt at all, and different options apply.

Step 2: Obtain the proof of debt form

The formal proof of debt is a prescribed form. Regulation 5.6.49(2) of the Corporations Regulations 2001 (Cth) sets out Form 535, the formal proof of debt or claim, which is the general form used for most claims. The liquidator can require creditors to prove their debts formally by giving notice that fixes a day, not less than 14 days after the notice, on or before which proofs must be lodged (reg 5.6.48).

In practice, most administrators and liquidators send their own version of the form with the first circular to creditors. That is normal and not a concern, provided the form covers the matters the regulations require. If you have not received a form, contact the external administrator directly and ask for one, or obtain a copy of Form 535.

A debt that is not required to be proved formally can be proved informally (s 553D of the Corporations Act 2001 (Cth)), but once the liquidator has called for formal proof, or where you want to vote or receive a dividend, you should expect to complete the formal form.

Step 3: Complete the proof of debt

Regulation 5.6.50 of the Corporations Regulations 2001 (Cth) requires a formal proof of debt to contain detailed particulars of the debt, a statement of account for the debt, and details of the vouchers by which the statement can be substantiated. In plain terms, the form should capture:

• your business's full legal name, ABN or ACN, and contact details;
• details of the debt, including when it was incurred, what it was for, and the amount;
• confirmation of whether the debt was owing when the external administration began;
• any amounts received or credited since the debt was incurred;
• whether you hold any security over the company's assets in respect of the debt;
• the supporting documents attached, such as invoices, statements and contracts; and
• a signature by you or your authorised representative.

The liquidator can call for the vouchers at any time, so keep the underlying records available even after you lodge the proof.

If you hold a security interest over the company's assets, you are a secured creditor and s 554E of the Corporations Act 2001 (Cth) applies. You cannot simply prove for the whole debt while keeping the security. You have three options: surrender the security to the liquidator and prove for the whole amount; realise the security and prove for any balance remaining; or estimate the security's value and prove for the balance, giving particulars of the security and your estimate. The choice matters because it affects both your dividend and what you can recover from the security.

Step 4: Lodge the proof by the deadline

The deadline is the part of this process that costs creditors the most. In a liquidation, the liquidator's notice will fix a day on or before which proofs must be lodged, and by regulation that day cannot be earlier than 14 days after the notice (reg 5.6.48). In practice liquidators commonly allow three to four weeks from the first circular, and the date will be stated clearly in the notice.

In a voluntary administration, the critical deadline is usually the one in the notice of the second meeting of creditors. The administrator must convene that meeting within the period prescribed by s 439A of the Corporations Act 2001 (Cth), in practice about a month after the administration begins, and give at least five business days' notice of it. To vote at the meeting, including on whether the company should execute a deed of company arrangement, your proof of debt must reach the administrator by the time the notice specifies, commonly the business day before the meeting.

Proofs lodged after the deadline can still be considered for later dividends, and a creditor who proves late is not shut out of the administration altogether. But a creditor who proves late generally cannot disturb a dividend that has already been paid, so the practical effect of missing the date is that you forgo that distribution.

Step 5: The liquidator's decision: admission, rejection or a request for more

Once your proof is lodged, the liquidator must deal with it in writing within set periods. If the liquidator gave notice requiring formal proof, the decision must be made within 14 days after the date shown in the notice (reg 5.6.66 of the Corporations Regulations 2001 (Cth)). If you write to the liquidator asking that your proof be dealt with, the decision must be made within 28 days (reg 5.6.53).

The liquidator's options are to admit the proof in full, reject it in whole or in part, or require further evidence in support of it. In every case the liquidator must give you written notice of the decision. A request for further evidence is common and is not a rejection: the time for the decision restarts once the liquidator receives a sufficient written answer to the request (reg 5.6.66(3)).

If the liquidator does nothing within the applicable period, you may apply to the Court for a decision on your proof.

Step 6: Challenging a rejection

If your proof is rejected in whole or in part, the first question is whether the rejection is a dispute about the facts or about whether the debt is provable at all. Under s 553 of the Corporations Act 2001 (Cth), all debts payable by, and all claims against, the company are admissible to proof if the circumstances giving rise to them occurred before the relevant date, including debts that are present or future, certain or contingent. Some debts are carved out: for example, a debt owed to a person in their capacity as a member of the company is not provable unless the member has paid all amounts they are liable to pay as a member (s 553A).

The Court has a broad power to make orders in relation to an external administration, exercisable on application by a person affected (ss 90-15 and 90-20 of the Insolvency Practice Schedule, being Schedule 2 to the Corporations Act 2001 (Cth)). A creditor who is dissatisfied with a decision on a proof of debt can therefore apply to the Court to have the decision reviewed. That is a court proceeding with costs consequences, and the Court can direct when applications must be made, so it is worth taking advice before commencing one.

Separately, a liquidator cannot reject a debt informally. Regulation 5.6.47 requires the liquidator to notify the creditor of the grounds of rejection and to require a formal proof of debt before rejecting the claim.

Step 7: What an admitted debt actually gets you

An admitted unsecured debt entitles you to vote at creditors' meetings to the value of your admitted amount, to receive notices of meetings and dividends, and to share in any distribution. Under s 555 of the Corporations Act 2001 (Cth), all debts proved in a winding up rank equally and, if the company's property is insufficient to meet them in full, they are paid proportionately. The Act also gives some claims priority over ordinary unsecured debts, such as certain employee entitlements, so the dividend you receive depends on where your debt sits in that order. In many external administrations the assets are exhausted by costs and priority claims and unsecured creditors receive little or nothing, which is why the admission process matters even when the likely dividend is small.

Where creditors get held up

The common points of failure are:

• Missing the lodgement date: The dividend can be paid without you if your proof arrives late, and a late proof generally cannot disturb a dividend already paid. Put the date in your diary the day you receive the notice.
• Under-documented proofs: Proofs that lack a statement of account or vouchers are routinely met with a request for further evidence, which delays your admission and your vote.
• Assuming you are on the creditor list: If you supplied goods on credit but the company's records are poor, you may not have received the notice at all. The ASIC published notices website is the reliable way to find the administrator and the deadlines.
• Treating a secured debt like an unsecured one: Proving for the whole amount while keeping your security is not available; the s 554E options need to be worked through before you lodge.

When a lawyer should be involved

A lawyer's main value in this process is in the steps that are easy to get wrong. Before you lodge, a lawyer can confirm that your debt is provable under s 553, work out where it ranks in the payment order, and identify whether the debt is actually a secured claim that must be handled under s 554E. That matters for contingent claims and guarantees, where the particulars required are more demanding than an ordinary invoice debt.

If the liquidator requests further evidence, a lawyer can put together a response that actually answers the request rather than restating the original claim. If your proof is rejected, a lawyer can assess the grounds of rejection, advise whether a court application under s 90-15 of the Insolvency Practice Schedule is worthwhile, and prepare the application within the time the Court allows. In a voluntary administration, a lawyer can also advise on voting, because the decision at the second meeting, particularly whether to accept a deed of company arrangement, can determine whether you recover anything at all.

The date in the notice decides your recovery

The single factor that most determines whether this process succeeds is the lodgement deadline in the notice from the external administrator. Miss it and you lose the dividend, not just the vote: the distribution can be made without you, and a late proof generally cannot reach back into money already paid out. Everything else, the particulars, the vouchers, even the rejection, can be remedied after the fact. The deadline cannot.

The process in short: confirm the appointment and find the external administrator through the ASIC published notices website, complete a proof of debt in the prescribed form with full particulars and supporting vouchers, lodge it before the date fixed in the notice, and deal promptly with any request for further evidence. If the proof is rejected, the Court can review the decision on application. A lawyer can help with provability, the secured creditor options, and any challenge, but the deadline is yours to manage.