Contingent debt fails liquidator’s proof of debt test

Contingent debt fails liquidator’s proof of debt test

By Allan McDougall

July 11, 2013

 A “contingent” debt exists if there is a liability on a debtor to pay a sum of money to a creditor where the liability will arise upon the occurrence of a future event. This event can be either one which must happen, or one which may happen. If the event doesn’t happen no debt is incurred.

In Austino Wentworthville Pty Ltd v Metroland Australia Limited & Ors [2013] NSWCA 59 the debt instrument in question was a “net income guarantee”. Metroland covenanted that Austino would receive rent from a shopping centre to a certain minimum amount. If the rent actually received was less than the specified amount, Metroland would pay Austino the shortfall, pursuant to the guarantee.

Thus, if the rent payments were sufficient, the net income guarantee would never be called upon. As such, the guarantee would qualify as a contingent debt of Metroland.

Austino proceeded to assign the Metroland guarantee to its bank, as security for some of its own borrowings. Although it is not clear what value was attributed to the guarantee (being contingent upon the unknown future deficiency in rents) the assignment deed was drafted as being a complete transfer, and not by way of security only. The bank accepted the assignment as such.

Shortly after, Metroland went into voluntary administration and a meeting of its creditors was called to consider permitting Metroland to enter into a Deed of Company Arrangement. At the meeting Austino sought to be admitted as a creditor for $2.8 million. This amount was calculated as an eight times multiple of the rent deficiency accrued at the date Metroland went into administration.

The court found that the administrator had correctly declined to admit Austino’s proof of debt for $2.8 million, admitting only the actual rental deficiency of $353,000. The reason was Austino’s assignment of the income guarantee to the Bank being absolute, and not by way of security.  Hence Austino had no standing to purse its claim for the contingent amount because it had disposed of the Metroland obligation.

Presumably, had Austino not assigned its net income guarantee it would have been free to argue for the higher amount in its proof of debt against Austroland. However this begs the question as to whether a contingent debt is truly money lent. Arguably Metroland’s net income guarantee was really an indemnity, breach of which would need a court to decide the amount of damages payable. Hence no debt had relevantly been incurred, or owed, and the proof of debt (for the balance) would have failed anyway.

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This article is intended to provide general information in summary form on a legal topic, current at the time of publication.  The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.