Victorian Supreme Court rules that the appointment of an administrator was invalid, void and of no effect because the directors did not genuinely believe the company was insolvent and appointed the administrator for an improper purpose.  

BACKGROUND

In April 2015 ASIC filed an application to wind up Planet Platinum Limited (Planet Platinum) on the just and equitable ground and to appoint a provisional liquidator. The application to wind up Planet Platinum was based on the directors’ alleged misconduct and mismanagement of the company.

Approximately two weeks after receiving notice of the application, the directors of Planet Platinum appointed a voluntary administrator of the company. The only substantive query the administrator raised before his appointment was in relation to the company’s loan from NAB for $4.7 million (NAB loan).The administrator was told by the directors that Planet Platinum would not be able to pay the debt owing under the NAB loan if there was default and the loan was called up. That loan was due to expire in May 2015. 

At the first meeting of creditors, the creditors were assured that Planet Platinum was still solvent and the appointment was made due to ongoing issues with ASIC.     

In June 2015 the Court appointed a provisional liquidator to Planet Platinum who later reported that the company was not insolvent at the time it appointed the administrator.   

ASIC subsequently sought a declaration that the appointment of the administrator was invalid, void and of no effect. The application was made on two bases:

  • the directors of Planet Platinum did not have a bona fide genuine opinion that the company was insolvent or likely to be insolvent; and

  • the appointment was for an improper purpose.

In ASIC v Planet Platinum and Anor [2016] VSC 120 the Court held that the appointment of the administrator was invalid, void and of no effect.

THE DIRECTORS’ OPINION AS TO SOLVENCY

The question before the Court was whether section 436A of the Corporations Act 2001 (Act) was satisfied. This requires company directors to form the opinion that the company is insolvent, or likely to become insolvent at some time in the future, before resolving to appoint an administrator.

In determining this issue, the Court considered whether the opinion of the directors of Planet Platinum was bona fide and genuinely formed in all of the circumstances.

His Honour held that the directors’ opinion as to the company’s solvency was based on a lack of information. The directors did not hold a bona fide belief that the company was insolvent or likely to be insolvent based on, amongst other things, the statement made at the first meeting of creditors. The following factors also influenced his Honour’s decision:

  • the directors did not have any management accounts or financial information concerning Planet Platinum at the time of passing the resolution;

  • the directors had not made enquiries with Planet Platinum’s creditors seeking their positions in relation to any loans to the company. While the directors told the administrator that the company would not be able to pay its NAB loan when it became due, NAB had a previous history of extending the loan; and  

  • the provisional liquidator’s report stated that Planet Platinum was asset rich and also referred to the company’s trading performance as a factor showing that the company was able to pay its debts as when they fell due.

At the hearing the administrator argued that, even if the directors did not hold the requisite genuine opinion, his appointment was valid because he did not know what the directors’ true opinion was. His Honour rejected this submission and held that the administrator was required to take reasonable steps to confirm the validity of his appointment prior to accepting the role.     

THE PURPOSE OF THE APPOINTMENT

His Honour held that the dominant purpose to appoint an administrator of Planet Platinum was to (i) thwart ASIC’s application to wind-up the company and to appoint a provisional liquidator; and (ii) allow the directors of Planet Platinum to take further steps to privatise the company. His Honour deemed this to be an improper purpose. His Honour exercised his discretion and made the orders sought by ASIC, pursuant to section 447A of the Act.

COMMENTS

This decision serves as a reminder that directors must hold a genuine and reasonable belief that the company is insolvent, or likely to become insolvent, before resolving to appoint an administrator. It also highlights the factors a court may look to when analysing the belief held, namely:

  • whether the directors have analysed the company’s management accounts and financial information;

  • whether the directors have made enquiries with the company’s creditors; and  

  • the actual purpose of the appointment.   

Furthermore, while the opinion regarding a company’s solvency must be held by its directors, prospective administrators must take reasonable steps to confirm the validity of their appointment if they want to avoid being removed by a court.