The proof of debt and the secured creditor - How to avoid accidentally giving up your security
Creditors are asked from time to time to complete a proof of debt (POD) in the event of liquidation or company administration of a corporate customer. So, while completing a POD is usually straightforward, what is the position of a secured creditor in completing it? When can completion of a POD and voting amount to surrender of your status as a secured creditor?
The right to vote
A creditor has a right to vote in relation to its corporate customer who has entered into liquidation or company administration where:
- The creditor’s debt has been admitted in whole or in part
- The creditor has lodged particulars of its debt or, if required, a POD with the chairperson of the meeting.
Voting by a secured creditor
A secured creditor may complete a POD in order to vote. However, they would do so for the whole claim or debt only if they wish to surrender their claim to their security. If a creditor doesn’t want to surrender their security or be thought to have surrendered it, then they should make this clear in the way they complete the POD.
What does the Corporations Regulations 2001 say?
The ‘Corporations Regulations 2001’ (the Regulations) deals with voting by secured creditors in a liquidation - setting out what details of the security that a secured creditor should provide unless they surrender their security. These details include the date the security was given, what the security is and the estimate of the security’s value. This may be easy enough when the security is held over land but becomes more challenging when the security is held over personal property such as goods sold. The creditor is entitled to vote for the difference between the value of the security and the debt they are owed. The estimate should be arrived at in good faith and as accurately as is possible.
The POD form appears as Form 535 in Schedule 2 of the Regulations, and contains an opportunity to provide details of security held and the estimated value. If a creditor has seized the secured property and disposed of it, they can complete the POD for the shortfall.
When does a failure to give details of your security not matter?
There appear to be two scenarios when adherence isn’t required or doesn’t matter. These are:
- The Regulations make it clear that it doesn’t apply to a meeting of creditors of a company under the company administration or a meeting held under a Deed of Company Arrangement.
- When a vote at a meeting of creditors in a liquidation is conducted via a show of hands or is taken on the voices rather than by a poll. This is because with a show of hands or vote on the voices, creditors are voting just as a creditor and not in accordance with or relying on the value of their debt.
Important lessons for secured creditors to heed
In the matter of Cosmopolitan Constructions Pty Ltd (in liquidation)  NSWSC 780 the secured creditor held security in the form of an equitable charge protected by a caveat over real property. The creditor lodged a POD giving details of the security but estimating its value as nil. The creditor voted in a poll at a meeting of creditors for the full amount of its debt and its debt was admitted for the full amount. It was held by the Court that by the creditor submitting the POD for the full amount and voting in a poll for the full amount, it had elected to surrender its security. The valuing of the security as nil was taken as a surrender of the security.
Tips to avoid accidental surrender
- Consider why you want to vote at a meeting
- Ask yourself what will you gain in voting
If it appears that there will be no dividend to unsecured creditors or that voting is on a trivial issue, you can simply choose not to vote at all. Similarly, if you think there will be a surplus after you repossess and sell your security, there may be no point in completing the POD and voting.
Completing a POD requires thought and care and is not merely an administrative task so think carefully before you completing one and voting at a meeting of creditors in a liquidation.
If you would like more information please contact:
Rebecca Hegarty, Senior Associate
Phone: +61 2 9895 9289
Disclaimer: The information provided above is a general summary and is not intended to be nor should it be relied upon as a substitute for legal or other professional advice.