Background
Between 2020 and 2022, four companies (the plaintiff companies) transferred a collective total of $272,976.90 to Videriva Pty Ltd. Later, all companies involved entered liquidation. The liquidators for the plaintiff companies lodged proofs of debt in the members’ voluntary winding up of Videriva, asserting that the transfers were liabilities owed back to them. Videriva’s liquidator rejected these proofs, stating they were unsupported by sufficient documentation to establish that the asserted debts were true liabilities.
The plaintiff companies appealed the rejection to the Federal Court of Australia. In response, Videriva’s sole director, Mr. Kotevski, claimed via his solicitor that Videriva had provided various consulting services (including operational, administrative, and facilitation support) in exchange for the payments. However, no contemporaneous commercial documents, such as contracts, invoices, or engagement letters, were produced from the records of any of the companies to substantiate this claim. The director’s explanation was provided only after legal proceedings had commenced and evolved over time.
The Court’s Holding
The Federal Court allowed the appeal, setting aside the liquidator’s rejection and ordering that the proofs of debt be admitted in full. The hearing was conducted de novo, meaning the Court determined the issue for itself based on all the evidence, rather than simply reviewing the liquidator’s original decision. Justice Lee found that the plaintiff companies had successfully met the burden of proof to establish the liabilities on the balance of probabilities.
The Court found the explanation for the payments offered by Videriva’s director to be unpersuasive, noting it was vague, uncorroborated, and had evolved incrementally only after the commencement of the litigation. The complete absence of any contemporaneous commercial documentation was a key factor. The judge concluded that it was “materially more probable” that the payments created an obligation of repayment (either as advances on demand or on a restitutionary basis for money paid without consideration) than that they were payments for services rendered.
Key Takeaways
- An appeal against a liquidator’s rejection of a proof of debt involves a de novo hearing, where the court decides for itself whether a liability exists, and is not limited to the material that was before the liquidator.
- The party lodging a proof of debt bears the onus of establishing that the debt claimed is a true liability of the company in liquidation.
- In the absence of commercial records like contracts or invoices, a court can find that payments from one company to another create a repayable liability based on objective evidence and the balance of probabilities.
- Post-facto, vague, and evolving explanations for transactions, especially when uncorroborated by documents or other evidence, will be given little weight by a court.
Why It Matters
This decision reinforces the fundamental importance of maintaining clear and contemporaneous commercial records. It shows that simply receiving money is not enough to establish an entitlement to keep it, particularly in an insolvency context. For companies, it serves as a caution that without documented proof of a valid commercial reason for a transaction (like a contract for services), funds received from another entity may be deemed a repayable debt.
For liquidators, the case clarifies that while a claimant bears the onus of proof, a rejection cannot simply rest on the claimant’s failure to produce perfect documentation. Liquidators must consider all evidence, and if objective records (like bank statements) establish a transfer of funds without a credible, documented commercial basis, a court is likely to find that a liability exists. The ruling highlights that courts will infer the most probable explanation for a transaction, and the absence of a documented commercial relationship will strongly suggest an obligation to repay.