In exercising a power of sale, administrators (like liquidators) are not under a duty to obtain 'the best possible price'. This is to be distinguished from the duties owed by controllers and mortgagees in possession in exercising their powers of sale. Administrators are entitled to take into account a wide range of considerations. The exercise of the administrators' power of sale involves business and commercial judgments with which, generally speaking, courts are reluctant to interfere.
In Robit Nominees Pty Ltd v Oceanlinx Limited (in liq) (Receivers and Managers Appointed)  FCA 225 (Oceanlinx), the Federal Court of Australia considered a challenge by unsecured creditors to decisions by voluntary administrators to sell company assets in circumstances where the choice facing the administrators was to run the risk of losing a fully-funded proposal that was capable of acceptance for a competing proposal that had all the appearances of being unfunded. The Court's reasons were published on 11 March 2016 and are available here.
In Oceanlinx, the plaintiffs sought orders setting aside a sale of assets by the then voluntary administrators (and now the liquidators) of Oceanlinx Limited (in liq) (Company). The plaintiffs also claimed that the administrators breached various common law, equitable and statutory duties in their conduct of selling certain of the Company's assets. The plaintiffs chiefly relied upon s 447E(1) or s 1321(1) of the Corporations Act 2001 (Cth) (Act) which relevantly provide that:
- the administrators and their management of the Company are subject to the supervision of the Court, in particular if there is prejudice to the Company's creditors or members; and
- a person aggrieved by any act, omission or decision of an administrator may appeal to the Court in respect of the act, omission or decision and the Court may confirm, reverse or modify the act or decision, or remedy the omission and make such orders or directions as it thinks fit.
The plaintiffs also submitted that if the Court found that there has been some failure of approach or duty by the administrators, then an order should be made under s 503 of the Act removing them as liquidators of the Company. The plaintiffs argued that this would enable a thorough investigation to be undertaken of the administrators' actions by a party who would have the power to pursue all available claims, including claims for breach of duty.
The key propositions advanced in the plaintiffs' case against the administrators were that:
- when undertaking the sale of assets, the administrators failed to properly consider the validity of certain of the secured loan transactions and the security interests that the Company entered into with various private lenders to finance its ongoing activities;
- as a consequence, the administrators proceeded on a flawed understanding that the security interests that were created were unquestionably valid and assessed the value of various deed of company arrangement proposals and various competing proposals for the sale of assets in the same flawed manner; and
- the administrators succumbed to pressure in making the sale to the eventual purchaser. The consequence being that an opportunity was lost to enter into a sale with a different purchaser that would have provided a greater return to unsecured creditors.
The plaintiffs sought the removal of the liquidators and the appointment of a new liquidator on the ground that it was in the interests of the plaintiffs and of all unsecured creditors that a new liquidator be appointed to investigate whether claims might be brought by the Company against the administrators for the alleged breaches.
Yates J found that no case for relief under either s 447E(1) or s 1321(1) of the Act had been established.
His Honour stated that 'when considering the existence or likelihood of prejudice in the context of s 447E(1) of the Act, one is concerned with actual, not theoretical, prejudice … [and] a counterfactual analysis is required' (at -).
His Honour found that the plaintiffs' counterfactual case advanced the new competing proposal as one that was capable of acceptance, based on an assumption that the purchasing consortium actually had the funds available to pay, by the deadline, the deposit that they had offered, as well as the ability to pay, on completion, the balance of the cash consideration. However, there was no evidence of any funds being available to be paid. In the absence of such evidence, his Honour said that 'it is difficult to identify what prejudice exists that would enliven the plaintiffs' recourse to s 447E(1) of the Act … [and] [t]he absence of demonstrated prejudice is an important element of the [administrators'] case' (at ).
In relation to the scope and purpose of s 447E(1) of the Act, his Honour (at ) noted the administrators' submission that:
- the Court's jurisdiction under s 447E(1) of the Act is essentially supervisory in nature and it is not for the Court to manage a company in administration or to interfere with commercial decisions of an administrator exercising business judgment; and
- s 447E(1) of the Act is not an avenue for prosecuting civil claims against an administrator for breaches of duty owed to a company or for claims in tort or contract or otherwise arising in equity. Similar submissions were also advanced with respect to the plaintiffs' case under s 1321(1) of the Act.
However, his Honour found that it was not necessary to consider what might be the outer limits of the Court's jurisdiction under either provision of the Act (at ).
The Court declined to order the removal of the administrators as liquidators of the Company. On this point, his Honour said that the onus was on the plaintiffs to establish, by evidence, a proper basis for removal, although fairness to the liquidator is not to be ignored, the real issue is the substantial and real interest of the liquidation (at ). His Honour found that it was not in the interests of the liquidation to remove the liquidators because of the finding that the administrators did not breach their duties to the Company.
The Court's decision in Oceanlinx reminds us that when administrators exercise their power to dispose of any part of a company's property, they do so as the company's agent and are subject to duties and limitations on the exercise of that power. However, administrators are not subject to the more onerous duties owed by controllers and mortgagees in possession in exercising their powers of sale.
The key statutory, common law and fiduciary duties owed by administrators in exercising the power of sale include:
- a duty to exercise their powers and discharge their duties with a degree of care and diligence that a reasonable person would exercise if they were an officer of the company;
- a duty to exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose; and
- a duty not to improperly use their position in the course of the administration.