In Forex Capital Trading Pty Ltd (in liquidation) v Invesus Group Limited [2024] NSWSC 867, the Court considered two issues. The first issue is whether a liquidator, by admitting a proof of debt, creates a liability of the company in liquidation. The second is whether the determination of a liquidator is binding on the company in liquidation or a third party.
The answers to these questions determined whether the liquidators of a company could quickly recover the total amount admitted under proofs of debt from a parent company under a letter of comfort.
The Court answered "no" to both questions.
Background
Forex Capital Trading Pty Ltd (in liquidation) (FXCT) sold derivative products to retail consumers.
In October 2018, ASIC commenced an investigation of FXCT. The investigation was followed by proceedings.
On 17 March 2019, Invesus Group Limited (IGL), which was the ultimate parent company of FXCT, executed a letter of comfort which stated:
Invesus Group Limited irrevocably undertakes in favour of FXCT and any director of FXCT that with effect from the date of this letter, upon requests from time to time, it will provide to FXCT and its director(s), or procure from external sources, financial support to the extent FXCT or its director(s) require such financial support to meet any debts, including judgment debts, incurred by FXCT or its director(s) prior to or after the date of this letter in respect of FXCT's customers.
On 27 June 2021, FXCT was voluntarily wound up. The voluntary winding up was later converted to a winding up in insolvency pursuant to s 459A of the Corporations Act 2001 (Cth).
On 22 June 2022, the liquidators of FXCT sent a letter of demand to IGL demanding payment of the $43,645,127.26 pursuant to the letter of comfort. The amount demanded was equal to the amount admitted by the liquidator under the proofs of debts lodged with the liquidators by former customers.
IGL denied liability to FXCT and the liquidators instituted the proceeding.
Issues
The issue was whether the liquidators could recover from IGL pursuant to the letter of comfort.
The determination of the issue depended on whether the amount of $43,645,127.26 fell within the meaning of "any debts, including judgment debts, incurred by FXCT or its director(s) prior to or after the date of this letter in respect of FXCT's customers" under the letter of comfort.
FXCT arguments
The liquidators for FXCT argued that they were able to recover under the letter of comfort for two reasons:
- the admission of a proof of debt creates a debt owed by FXCT to the former customer whose debt was admitted; and
- the liquidators' conclusions on the existence of and the amount of FXCT's liability to a former customer bind FXCT and IGL.
Decision
Does admitting a proof of debt create a liability of the company in liquidation?
No, the admission of a proof of debt does not create a liability of the company..
When a liquidator admits a proof of debt, the liquidator determines whether a claimant can participate in the winding up as a creditor. In other words, the liquidator determines the rights of the claimant under a statutory process.
As a result, the admission of the proofs of debt by the liquidators of FXCT did not create a "debt" under the letter of comfort. IGL was not liable for the amount of $43,645,127.26 simply because the liquidators had admitted proofs of debt in that amount.
Is the company or a third party bound by a liquidator's decision regarding a proof of debt?
No, neither the company nor the third party is bound.
Since a liquidator's decision to admit or reject a proof of debt has no effect on the underlying liabilities of the company at law, the liquidator's decision is not binding on the company or a third party. The Court reasoned that although the amount admitted by a liquidator will normally correspond to the company's liability, that will not always be the case.
Furthermore, there is no authority that supports the liquidators of FXCT's contention that a liquidator's decision is binding. Rather, the existing Australian authority held that a winding up does not cause any common law liability to be extinguished or merged in the liquidation.1 A liquidator's admission of a proof of debt submitted by a creditor does not prevent a third party from challenging the existence or amount of a company's liability to the creditor in litigation.
For these reasons, IGL was also free to contest the existence and amount of the debts FXCT had incurred to FXCT's former customers and (by extension) the existence and amount of IGL's liability to FXCT under the letter of comfort.
Key takeaway
A liquidator holds significant power in the liquidation of a company to determine whether a claimant may participate in the winding up of the company and receive a distribution from the net assets of the company (if any). However, a liquidator's power is only for the purposes of administering the statutory winding up scheme. A liquidator's decision does not impact upon the rights of third parties, including those who may be affected by the admission or rejection of a proof of debt.
This decision may have a significant impact on the liability of sureties for company debts and for directors of any insolvent trading claims. The admission of a proof of debt by the liquidator will not constitute sufficient evidence of the relevant debt being due or the quantum properly claimed. The surety or director will retain the rights to dispute the amount owing and the onus will remain on the liquidator to prove a debt is due and the amount of that debt.
Footnote
1. Duke Group Ltd (in liq) v Arthur Young (Reg) (No 2) (1991) 4 ACSR 355 at 397.
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