It is not uncommon for companies served with wind up proceedings to appoint external administrators for the purposes of investigating the affairs of the company and so that recommendations can be made to creditors to either have the company wound up, execute a deed of company arrangement or hand the company back into the control of directors.
In circumstances where the administrators conclude that the company should be wound up, it is common for the administrators to seek to be appointed as the official liquidators of the company.
Section 532(2)(c)(i) of the Corporations Act 2001 prohibits an officer of a company from becoming an official liquidator of the company without leave of the court. It is thus necessary for the administrators to make an application for leave for their appointment as liquidators.
Applications by administrators to be appointed as liquidators have been considered by the courts a number of times. In determining whether to grant leave and appoint the administrators, the courts seek to promote the interest of creditors. These interests are informed by the impartiality (both actual and perceived) of the administrators, the costs benefit to the creditors of the appointment of the administrators as liquidators and the relevant qualifications of the administrators.
There can be a perception on the part of the creditors generally (and the petitioning creditor specifically) that administrators appointed by directors are not disposed to properly investigate or prosecute any recoveries or offences against the directors of the company appointing them. For this reason, the courts have a general principle that it will appoint the liquidator nominated by the petitioning creditor. This general policy can be displaced.
In considering the impartiality of the administrators the court will closely examine:
- the contents of the reports to creditors and the manner in which the administrators critique any deed of company arrangement proposed by the directors;
- any suggestions of 'phoenix' activities;
- any possible antecedent transactions or possible claims against directors for insolvent trading. If these issues are raised in the reports to creditors the court may be more confident that the administrators are sufficiently impartial such that they will properly pursue the rights and interests of creditors.
It is routine, and in accordance with the guidelines published by the Australian Restructuring Insolvency and Turnaround Association, for administrators to meet with directors before the appointment of the administrators. However, in a recent decision, Justice Brereton of the Supreme Court of New South Wales gave particular attention to the notation of pre-appointment meetings in the reports to creditors and the insufficiency of the explanation of advice given in the pre-appointment meeting.
In this case, the director sold the assets of the company to a third party between the first pre-appointment meeting and the appointment of the administrators. The second report to creditors referred to the sale of business, stated that the terms of the sale required further examination, may constitute 'phoenix' activity or director related transactions, and the director may have personal liability as a result of this transaction. However, the explanation of advice given in the declaration of independence, relevant relationships and indemnity (DIRRI) was 'pro-forma'. The DIRRI did not go into any detail of what was said at the meeting or what advice was given. The administrators also failed to explicitly state that they were unaware of the proposed sale before their appointment.
His Honour held that the nature of the advice given in the pre-appointment meeting could require investigation by a liquidator and it was therefore inappropriate to grant the administrators leave and appoint them as the liquidators of the company.
The administration process necessarily involves the administrators incurring costs to the company which costs are afforded a priority in the subsequent liquidation of the company. These costs, particularly in circumstances of companies with few assets, are a very strong factor weighing in favour of the court granting leave to the administrators to be appointed as liquidators. This is because, if a different person is appointed as liquidator there will be a duplication of costs (which could be significant) in the liquidator getting 'up to speed'. However, the court will give no consideration to this factor if it is not satisfied of the actual or perceived impartiality of the administrators.
In most instances there will be little to be said to criticise the qualifications of the administrators and their suitability to be a liquidator.
The example raised above is a useful reminder of some of the core principles involved in the court's supervision of companies and external administrations:
- Perception is reality. The Court will act proactively to avoid any genuine basis to suspect, or a reasonable perception of, bias or impartiality;
- Wearing different hats. Administrators and other external administrators interact with companies in different ways and in different capacities. Practitioners should take care during pre-appointment correspondence and meetings to take proper notes and understand what role they are in at any given time. There could be significant cost consequences of failing to give this issue due consideration;
- Whilst completing a DIRRI is often formulaic and routine, it is a document which creditors and the court pay particular attention to and therefore warrants particular attention.
- Where practitioners are unsure of their role, capacity and obligations to their clients (e.g. pre-appointment), companies to which they have been appointed or to the court, they should seek appropriate advice.