Reducing And Expunging Proofs Of Debt And Dealing With Dividend Overpayments

Keywords: proofs of debt, dividend overpayment, proofs of debt

On a recent Mayer Brown JSM application (on behalf of the Liquidators of one of the Lehman Brothers entities) to reduce and expunge proofs of debt, the Hong Kong High Court has ruled that creditors who receive an overpayment of dividends due in respect of a proof of debt which has been "improperly admitted" (rule 96, Companies Winding-Up Rules) must give credit for those overpayments before receiving further dividends in the liquidation (Re Lehman Brothers Commercial Corp Asia Ltd ("LBCCA") [2014] HKEC 849) ("Proof Application").

In the Proof Application Harris J adopted the English common law position that a creditor who has been overpaid interim dividends is not entitled to receive any further payment out of the estate until the payments to the other creditors have been levelled up to the amount received by the overpaid creditor.

Factual Background

The liquidators of LBCCA admitted two proofs of debt from a single creditor ("Admitted Proofs"). Following admission of the Admitted Proofs the liquidators paid interim dividends to the creditor calculated on the value of the proofs as admitted. As the liquidators' investigations progressed it was understood that the calculation of certain debts against LBCCA had been carried out using one method of calculation, but that another method was to be preferred. The preferred method altered the debt positions as between LBCCA and the creditor which, in turn, called for one of the Admitted Proofs to be reduced, and the other expunged in its entirety.

While the debts due from LBCCA to the creditor had reduced, the interim dividends that had been paid had been calculated at the full amount of the Admitted Proofs. This resulted in the creditor receiving a higher rate of dividend payment than was properly due. The question for the Court was whether the overpayments could be recovered from the creditor by way of set-off against future interim dividend payments. The Court held that the overpayments could be recovered in this way.

Jurisdiction to Manage Improperly Admitted Proofs

A central function of a liquidator is to determine whether a proof of debt should be admitted or rejected in a liquidation. In fulfilling this function a liquidator acts in a quasi-judicial capacity. Liquidators have a duty to distribute the available assets of the debtor to the general unsecured creditors in proportions commensurate with the liabilities of LBCCA to...