Demonstrating that the administrators are wrong to reject a proof of debt: a tough ask!

By Alicia Hill, Principal and Matthew Deetlefs, Law Clerk

Not all applications for debt owed will be accepted by an insolvent company’s administrators. Where a proof of debt is rejected, prospective creditors may appeal to the court and have the administrators’ decision overturned if it can be shown that the administrators’ decision was wrong. To do so successfully, relevant evidence must be put forward as the court’s starting point is to side with the administrators’ decision, as demonstrated by Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann (No 3) [2021] FCA 938.

Background:

Shafston Avenue Contruction Pty Ltd (Shafston), 28 Baxter Street Construction Pty Ltd (Baxter), and Lincoln Street Construction Pty Ltd (Lincoln) were incorporated to undertake three construction projects for CRCG-Timfire Pty Ltd (CRCG). 

Between May 2016 and early 2017, Shafston, Baxter, and Lincoln each entered into agreements with CRCG related to their projects. Shafston and Baxter received signed letters of intent from CRCG. Additionally, a heads of agreement (HOA) document was prepared by CRCG and delivered to Shafston, however Shafston found that the HOA document was not properly executed. 

Lincoln entered into a contract with Rimfire Constructions (Qld) Pty Ltd, a company related to CRCG, and that contract was later novated to CRCG. 

Each agreement was eventually terminated.

Shafston, Baxter, and Lincoln each had the same sole director, who was also the Managing Director of Devcorp Pty Limited, a company which acted as the management entity for the projects.

On 16 November 2017, CRCG entered voluntary administration and joint and several administrators (Administrators) were appointed. Shafston, Baxter, and Lincoln then each lodged an original and two amended proofs of debt claiming amounts due under their agreements with CRCG. The final amended version of each proof of debt were rejected by the Administrators for various reasons. 

Shafston, Baxter, and Lincoln applied to the Court for orders that their proofs of debt be allowed in full under section 90-15 of Schedule 2 to the Corporations Act 2001. 

The questions the Court was asked to determine included:

• Whether CRCG and Shafston entered into a binding contract;
• Was CRCG required to provide Shafston and Baxter with confirmation that Shafston and Baxter could use the intellectual property in their documents in work undertaken by or on behalf of CRCG under the letters of intent;
• Was Lincoln entitled to claim costs for loss and damage by reason of defects under the Lincoln contract; and
• Was Lincoln entitled to claim costs for warranties that CRCG was obliged to procure for Lincoln?

Conclusion:

Shafston and Baxter were unable to demonstrate to the Court that the Administrators were wrong to reject their amended proofs of debt except Lincoln was partially successful in claiming costs for loss and damage by reason of defects under the Lincoln contract. Lincoln was also able to claim an adjusted amount for the costs for warranties that CRCG was obliged to procure for Lincoln.

The HOA alone, or taken together with the letter of intent and conduct of the parties, did not constitute a binding contract between CRCG and Shafston. 

The HOA’s true immediate object was not to enter into a building contract but to put in place a process to facilitate the provision of construction funding for the project, a goal which was never achieved. 

Whilst the letter of intent anticipated the possibility of a building contract being entered into, such a contract was never entered. 

CRCG and Shafston therefore never entered into a binding contract and the Administrators were not wrong to reject Shafston’s amended proof of debt in this regard.

The letters of intent provided clearly that Shafston and Baxter were assigned intellectual property rights and there was no merit to their argument that confirmation by CRCG was required. 

Accordingly, no loss could be claimed for CFCG’s supposed failure to provide Shafston and Baxter with confirmation and the Administrators were not wrong to reject the amended proofs of debt in this regard.

Lincoln was entitled to recover the costs of remedying aspects of the works under the Lincoln contract that amounted to defects from CRCG. This entitlement remained upon the termination of the Lincoln contract as this was an existing right and therefore remained unaffected by termination, an event which otherwise releases the parties from their contractual obligations. 

The Court assessed the evidence relating to Lincoln’s right to make a claim for defects and found that only the defects for which the Administrators had already accepted liability were claimable. The Court found that the Administrators were wrong to reject that particular claim made in the proof of debt.

Lincoln was also entitled to recover from CRCG an adjusted amount for its warranties claim that put it in the same position it would have been had the breach of contract not occurred. The Court also found as a result that the Administrators were wrong to reject the claim made in this proof of debt. 

Takeaways:

If a prospective creditor is seeking to overturn an administrator’s decision to reject a proof of debt, they must satisfy a court that the decision to reject a proof of debt was wrong. 

Prospective creditors must therefore ensure they have relevant evidence to satisfy a court that the administrators were wrong in their decision.

Letters of intent are unlikely to be sufficient to indicate a binding contract if they merely refer to the possibility of a future contract. Similarly, HOAs are unlikely to be sufficient if they do not, by their terms, express the crucial elements of a building contract such as the price to be paid to a builder and the scope of works to be performed for that price.

Even where a right to claim for a payment exists, sufficient evidence that such a claim would succeed is necessary. In this case, the failure to adduce any expert evidence at trial and merely relying on materials already provided to the administrators, and two documents which were inadmissible, was fatal.

On the other hand, expert reports, even if flawed in their calculations, may provide a basis for the court to find an entitlement to payment sufficient to demonstrate that administrators were wrong to reject a proof of debt

We recommend advice be sought:

• When submitting a proof of debt to administrators to ensure you collect sufficient evidence to support your claim to the administrators; or
• To challenge the administrator’s decision to the court in the event of a wrongful rejection.

If you have any queries about any of the matters raised by this case, then please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au