Key liquidation decision: creditor challenges to proof of debt decisions

In the context of a solvent liquidation, the High Court in Baker & Baker v Baker & Ors[1] has now confirmed that there is no time limit under the Companies Act 1993 (Act) within which creditors must apply to the court to seek to have a liquidator’s decision regarding a proof of debt reversed or modified.[2]

In a comprehensive judgment, which is the first to fully consider the issue, the Court clearly articulated the conceptual difference between a creditor’s right to apply to court and a liquidator’s obligation to exclude all rejected claims from participation in a dividend where no notice of an application has been given within 20 working days.[3]Previous obiter comments of the Court,[4] which had been made without the benefit of full argument on the issue, had suggested that there may be a 20 working day limit within which such applications must be brought.This is not the case.

However, because a creditor requires leave under s284(1)(b) of the Act, she or he will need to establish a credible factual basis for their claim and that there is a reasonable likelihood that, if the claim is established, the liquidator’s decision would be shown to be wrong or unreasonable such that the court would disturb that decision.[5]On the facts before the Court, leave was granted.This was not a case where leave and the substantive application were considered at the same hearing.

The Court considered the submission that in relation to insolvent liquidations, s226 of the Insolvency Act 2006 is imported into the Act to apply a 15 working day timeframe for creditors to apply to the court without leave.The court found that this is not the case and s284(1) of the Act equally applies to insolvent liquidations, meaning that there is no time limit for applications, but leave will need to be sought by creditors.[6]

Practically speaking this means that:

• In theory a creditor can make an application at any time during a liquidation to challenge a liquidator’s decision to reject or partially reject a proof of debt.
• Because a creditor requires leave under s284 of the Act, all applications in relation to a proof of debt will also need to seek leave and satisfy the court that leave is appropriate.
• A liquidator can continue to rely on regulation 15 to exclude a rejected proof of debt from a dividend and make a distribution if no application has been made within 20 working days of the liquidator’s decision.
• A creditor will be on risk that there will be no ability to participate in a dividend (if all funds have been distributed) after 20 working days, and so will need to assess the position before making an application after that timeframe.
• The Court has confirmed that it has the power under s284 of the Act to reverse the act of the liquidator in excluding a rejected proof of debt from distribution, if an application is successfully made after 20 working days from the liquidator’s decision. This ensures no mischief arises from regulation 15.