In recent times, we have been instructed to provide a number of advices relating to the application of the so-called “rule against double proofs”.
The rule potentially applies in any situation where a guarantor has previously paid money to a creditor pursuant to a guarantee and either the guarantor or the creditor seeks to prove in the winding up of the primary debtor.
There are generally four situations that guarantors and creditors can find themselves in the event that the primary debtor goes into liquidation:
- where the guarantee relates to the whole amount of the primary debtor’s debt and the guarantor has paid out the entirety of that debt;
- where the guarantee relates to part of the primary debtor’s debt and the guarantor has paid out that part of the debt in respect of which the guarantee was given;
- where the guarantee relates to the whole of the primary debtor’s debt but only a part of that primary debt has been paid by the guarantor;
- where the guarantee relates to the whole of the primary debtor’s debt but the guarantor’s liability is limited to a specified maximum amount.
In the first two situations, the rule against double proofs will not apply. The creditor’s proof should only be admitted for the balance of the debt (if any) that remains due and payable by the primary debtor after the guarantor’s contribution has been taken into account. The guarantor will be able to lodge a proof in the winding up of the primary debtor for the amount which they have paid pursuant to the guarantee.
In the third and fourth situation the rule against double proofs will apply as follows:
- the creditor is able to prove for the full amount of its debt and does not need to take into account any monies received from the guarantor. For example, if the principal debt was $100,000 and the creditor was successful in recovering $50,000 from the guarantor, the creditor is still able to prove in the winding up of the primary debtor for $100,000; and
- any proof submitted by the guarantor for monies paid to the creditor should not be admitted to proof. In the above example, the guarantor can not be admitted for the $50,000 it has paid.
The rule against double proofs can result in a creditor obtaining more than 100 cents in the dollar in respect of its debt. In the above example, if a dividend in excess of 50 cents in a dollar was paid, the creditor would recover a total amount in excess of its primary debt. However, it must be remembered that any surplus must be accounted to the guarantor in accordance with ordinary principles of law.
The application of the rule against double proofs can lead to some interesting disputes between liquidators in situations where, for example:
- both the primary debtor and the guarantor are in liquidation; and
- the creditor submits a proof of debt for the full amount of its debt in the winding up of both the primary debtor and the guarantor.
These disputes are particularly common where a dividend has been paid in the winding up of the guarantor prior to the payment of a dividend in the winding up of the primary debtor.
When adjudicating proofs, insolvency practitioners should keep the above issues in mind and seek advice where necessary.