Division 8 of Part XVIII of the Companies Act 1997 governs how a debt becomes a claim in a liquidation.
Sections 351 and 356 — admissible claims
(1) A debt or liability, present or future, certain or contingent, whether an ascertained debt or liability or a liability for damages, may be admitted as a claim.
(2) Fines, monetary penalties, and costs to which section 356 applies are not claims that may be admitted.
Section 356 preserves the recovery of a fine imposed on a company for an offence, a monetary penalty payable to the State for breach of any law, and costs ordered in relation to those proceedings — whether imposed before or after the liquidation commenced. Those liabilities sit outside the distribution scheme entirely.
Section 352 — claims by unsecured creditors
(1) A claim shall be made in the prescribed form and shall (a) contain full particulars, and (b) identify any documents that evidence or substantiate the claim. (2) The liquidator may require production of any such document.
(3) The liquidator shall, as soon as practicable, either admit or reject a claim in whole or in part, and may later revoke or amend that decision if satisfied it was wrong.
(4) On rejecting a claim, the liquidator shall forthwith give written notice to the creditor.
(5) The costs of making a claim, and of producing documents, are borne by the creditor.
(6) Making a claim that is false or misleading in a material particular knowing it to be so, or omitting matter knowing the omission makes it so, is an offence, penalty under section 413(4).
A creditor dissatisfied with a rejection may apply under section 332(1)(b), with the Court’s leave, for the decision to be confirmed, reversed or modified.
Section 353 — the secured creditor’s three choices
A secured creditor may —
(a) realise the property subject to the charge, if entitled to do so; or
(b) value the property and claim as an unsecured creditor for the balance due, if any; or
(c) surrender the charge to the liquidator for the general benefit of creditors and claim as an unsecured creditor for the whole debt.
Under subsection (2) the creditor may realise whether or not it has valued and claimed. A creditor who realises may then claim for any balance after deducting the net amount realised — unless the liquidator has already accepted a valuation and claim — and must account to the liquidator for any surplus, after satisfying the debt with interest to the date of satisfaction and making proper payments to holders of other charges over the same property (s 353(3)).
A valuation and claim under paragraph (b) must be in the prescribed form and contain full particulars of the valuation and claim, full particulars of the charge including the date it was created, and identify the substantiating documents (s 353(4)). The date matters: it determines whether the charge is exposed under section 340A, 345 or 347.
The liquidator must accept or reject the valuation and claim. On rejection the creditor may submit a revised valuation and claim within one month, and the liquidator may later revoke or amend a rejection (s 353(6)).
Where the liquidator accepts a valuation and claim, the liquidator may — unless the creditor has realised the property — at any time redeem the security on payment of the assessed value.
So a creditor who values the security too low may find the liquidator paying that figure and taking the asset. Undervaluing to enlarge the unsecured claim is a bad strategy.
The liquidator may, by written notice, require a secured creditor within one month to elect which power it wishes to exercise, and — if it elects to value or to surrender — to exercise that power within the period.
A creditor who fails to comply is taken to have surrendered the charge for the general benefit of creditors, and may claim as an unsecured creditor for the whole debt. Losing security by inaction is a serious outcome, and the one-month notice must not be ignored.
Relief is possible: a creditor who surrendered, or is taken to have surrendered, may — with the leave of the Court or the liquidator, on such terms as they think fit, and at any time before the liquidator has realised the charged property — withdraw the surrender and rely on the charge, or submit a new claim.
A knowingly false valuation and claim is an offence under section 353(11), penalty under section 413(4).
Sections 354, 355 and 357 — measuring the claim
354(1) The amount of a claim is ascertained as at the date of commencement of the liquidation. (2) A foreign currency debt is converted at the rate of exchange on that date, or the average where there is more than one.
355 Where a claim is subject to a contingency, is for damages, or is otherwise uncertain, the liquidator may estimate it or refer it to the Court. On the application of the liquidator or an aggrieved claimant, the Court shall determine the amount as it sees fit.
357 A claim for a debt that, but for the liquidation, would not be payable until six months or more after commencement is treated as a claim for the present value of the debt — determined by deducting interest at the prescribed rate under the Judicial Proceedings (Interest on Debts and Damages) Act (Chapter 52) for the period from the liquidation to the due date.
Section 358 — mutual credit and set-off
Where there have been mutual credits, mutual debts, or other mutual dealings between the company and a claimant, an account shall be taken, amounts set off against each other, and only the balance may be claimed in the liquidation, or is payable to the company.
| Claimant | Set-off is unavailable where the credit or assignment arose within | Escape |
|---|---|---|
| A person other than a related person — s 358(2) | The specified period: six months before commencement (extended, in a Court appointment, by the time from application to order) | Proving that, at the time of the transaction or assignment, they did not have reason to suspect the company was unable to pay its debts |
| A related person — a related company, and including a director — s 358(3) | The restricted period: two years before commencement (extended in the same way) |
It cannot be manufactured late. Paragraph (b) of subsections (2) and (3) targets the assignment of a debt owed by the company — buying up claims against a failing company in order to set them off against what you owe it.
And under section 358(4) it does not apply to an amount paid or payable by a shareholder (a) as consideration for the issue of a share, or (b) in satisfaction of a call made by the board or the liquidator. A shareholder cannot set a debt owed to them by the company against their obligation to pay for their shares.
Section 359 — interest on claims
(1) A claim may include interest up to the commencement of the liquidation — at the contractual rate, or, for a judgment debt, at the rate payable on the judgment.
(2) Where surplus assets remain after payment of all admitted claims, interest is paid at the prescribed rate from commencement to the date each claim is paid, abating rateably if the surplus is insufficient.
(3) Where a surplus still remains, interest is paid on admitted claims at a rate equal to the excess of the prescribed rate over the contractual or judgment rate, again abating rateably.
The structure gives every creditor the prescribed rate first, and only then tops up those whose contractual rate was higher — so no creditor is advantaged by its own interest rate until all have received the statutory rate.
Sources
- Companies Act 1997 — ss 332, 340A, 345, 347, 351–359, 360, 361, 413; Schedules 9 and 10
The Judicial Proceedings (Interest on Debts and Damages) Act (Chapter 52), referred to in sections 357 and 359, is not currently available on PacLII and is cited here without a link.
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.