The Summary Nature of Proof Adjudications: Lessons from Mercon Group

When a company enters voluntary administration, administrators request creditors to submit proofs of debt for the purpose of voting at the second meeting of creditors. 

It is at the second meeting that creditors vote to determine the company’s future, namely, whether it will enter into a Deed of Company Arrangement (DOCA), be placed into liquidation, or be returned to the control of its directors. 

The decision in In Matter of Mercon Group Pty Ltd (subject to a DOCA) [2025] NSWSC 1601 (Mercon) provides useful guidance on what is expected of administrators when adjudicating proofs of debt within statutorily-compressed timeframes.

Background

Between 2014 and 2016, Mercon Group PL (Mercon PL or the Company) constructed ‘the Jacob’, a multi-storey development in Baulkham Hills. Shortly after completion, complaints alleging defective works emerged, including but not limited to, water damage (Defects). 

In October 2022, the Owners Corporation for the Jacob (Owners Corporation) commenced proceedings against Mercon PL for breach of statutory warranties in respect of the Defects, relying on remedial reports to estimate its loss at some $2.27 million (Remedial Reports). Those proceedings were subsequently stayed upon Mercon PL’s entry into voluntary administration on 8 July 2025. 

Proceedings

Ahead of the first meeting of creditors, the administrators of the Company (Administrators) requested that creditors submit formal proofs of debt for voting purposes. The Owners Corporation then lodged proofs of debt on behalf of itself and seven-unit holders, referring to portions of the Remedial Reports in support of those proofs, with a total combined value of over $4 million (Initial Proofs). A further five proofs of debt for additional unit holders was submitted by the Owners Corporations ahead of the second meeting of creditors (Additional Proofs, and together with the Initial Proofs, Proofs).

For the purposes of voting at the second meeting to be held on 12 August 2025 (the Second Meeting), the Administrators admitted the Initial Proofs for a nominal value of $1 each on the basis that, amongst other things, the claims were contingent, and the information and evidence provided in support of the claims not yet independently verified or adjudicated. The Additional Proofs were rejected entirely on the basis of wholly insufficient supporting evidence. Conversely, related-party creditor claims with adequate supporting evidence were admitted at face value for $1.72 million. 

Despite the Owners Corporation and the six nominally admitted unit holders voting against the proposed DOCA, the DOCA resolution passed at the Second Meeting. 

The Owners Corporation subsequently sought to challenge the Administrators’ decision to admit the Initial Proofs for only a nominal amount and to reject the Additional Proofs, and also sought orders that the decision to admit related creditors be reversed, the resolutions at the Second Meeting be set aside, and the DOCA itself terminated (the Application).

Nixon J’s comprehensive dismissal of the Application in its entirety offers useful insight into best practice when it comes to proof adjudication in the context of voluntary administrations, particularly in the context of building and construction, where administrators must make quick decisions about complex claims within short timeframes. 

Proof Adjudication is Summary in Nature 

Regulation 75-85(4) of the Insolvency Practice Rules (Corporations) 2016 precludes a creditor with an unliquidated or contingent claim from voting unless a “just estimate” of the claim’s value has been reached.

A “just estimate” has two components, a subjective requirement that the chairperson, here the administrator, make a genuine attempt to ascertain value, and an objective requirement that the estimate is not plainly wrong or unreasonable (Maylord Equity Management PL v Reeltime Media Ltd [2008] NSWSC 1045).

Nixon J considered the authority of Selim v McGrath [2003] NSWSC 927, in which the Court held that the task of making a “just estimate” is “of a somewhat summary nature”, whereby the chairperson “will do the best that can be done by reference to the factual material the claimant furnishes”. On that basis, Nixon J endorsed the approach taken by the Administrators, finding: 

• the Remedial Reports were not prepared by a person with the appropriate specialised experience;
• no information was provided as to how the estimates contained in the Proofs were arrived at, with all the estimates being round figures suggesting they were “ballpark estimates”.

Additionally, the Court rejected the Owner Corporation’s submission that the Administrators should have accepted the claim and simply discounted it for uncertainty, holding that “if the material is not sufficient to provide a reasonable basis for ascribing a particular figure to a claim, the appropriate course is not to apply some arbitrary discount (...) but to admit the proof for voting purposes for a nominal amount”.

Expert Reports Should Not Be Accepted at Face Value 

Consistent with the authorities of Bacnet PL v Lift Capital Partners PL (in liq) [2010] and Re UDL Holdings Ltd [2000], where proofs contain assertions that cannot be tested without careful and lengthy evaluation, and where claims are the subject of dispute and ongoing litigation, it may be appropriate to either “reject the proof entirely” or admit it for a nominal value.

With respect to the Remedial Reports, Nixon J rejected the submission that, as a matter of procedure, because Mercon PL had not filed evidence in reply, the opinions of the expert report should be accepted without examination or scrutiny. Additionally, certain Proofs had referenced sections of the Remedial Reports that either failed to support the unit owners’ claims or, in some cases, themselves indicated the claims were invalid.   

On that basis, Nixon J held the figures contained in the Remedial Reports did not constitute admissible evidence of quantum and thus, could not be given any weight. Furthermore, there remained live issues as to whether or not some of the alleged defects in the Proofs were statute-barred and whether Mercon PL was, in fact, liable for them.

Key Considerations 

Mercon highlights the tension inherent in the proof adjudication process, where claimants may seek to rely summarily on material as a way to establish their debts, and administrators must make “fair value” assessments of, what are often complex, claims within compressed timeframes dictated by the legislation governing the voluntary administration process. 

This tension is particularly pronounced in the building and construction sector, where proofs of debt can enliven disputes about the scope and standard of work, compliance with building codes and statutory warranties, and involve quantification of loss turning on technical evidence and expert opinion. 

In line with previous authorities, in Mercon, the Court resolved this tension by distributing responsibility in recognition of the constraints both claimants and administrators operate under. Claimants have the onus of providing credible, sufficiently detailed material in support of their proofs of debt to substantiate their claims. Any expert reports relied upon must be prepared by appropriately qualified experts and there must be a transparent and replicable methodology demonstrating how any estimates as to quantum were reached. 

Administrators have a duty to evaluate material provided in support of any proof of debt with independence and impartiality but are not required to accept bare assertions or conduct detailed enquiries. Where uncertainty persists as to the “fair value” of a proof of debt claim, admission for a nominal amount is the appropriate and accepted course of action.