In a recent decision[1] the Supreme Court of Western Australia was asked, pursuant to section 447A of the Corporations Act 2001 (Cth), to appoint a special purpose administrator to cure a perceived conflict of interest between a company (in administration) and the original administrator appointed to the company.

Background

The receivers of Westgem brought an application seeking to appoint a special purpose administrator to the company.  It was argued that the administrator may have been in a position of conflict.  The conflict related to the administrator’s knowledge of a $1.3m payment by Westgem to another entity which was related to Westgem’s director.  That transaction was one of a number of transactions that was being investigated by the receivers and the administrator as a potentially voidable transaction under the Corporations Act 2001 (Cth).

Approximately two weeks before Westgem was placed into administration, the administrator had been retained to provide advice to the sole director of Westgem in relation to the company’s solvency.  During those two weeks the administrator met with the director on a daily basis and provided advice in relation to the company’s financial circumstances and the possibility of putting it into voluntary administration.  Subsequently the administrator was appointed to the company by the director.

The receivers seek to appoint a special purpose administrator

The receivers sought to have a special purpose administrator appointed to investigate the following matters:

  • related party transactions that may have occurred during the life of the company;
  • the $1.3m payment to a company related to Westgem’s director; and
  • whether there had been any breaches of duty by Westgem’s director.

As the administrator had met the director of the company on a daily basis in lead up to the company being placed into administration, the receivers argued that there was a perceived conflict of interest.  The Court confirmed that:

“the authorities make it plain that substantial involvement with a company prior to its administration will disqualify a person from appointment as that company’s administrator.  Such involvement will be seen to detract from the ability of the person to act fairly during the course of the administration”.

What is a special purpose administrator?

A special purpose administrator can be appointed in addition to the administrators initially appointed to a company.

The main benefit of appointing a special purpose administrator is to save time and costs – ultimately a benefit for the creditors of the company.  Often a special purpose administrator will be appointed to consider a select issue or number of issues that cannot be properly considered by the administrator initially appointed to the company.  This avoids the resignation of the original administrator and reappointment of a new administrator, which would add to cost and potentially cause delay.

In Westgem the Court found that a special purpose administrator was not necessary

Ultimately, the Court determined that the appointment of a special purpose administrator was not required for the following reasons:

  • It is common place for companies to seek professional advice in relation to actual or apprehended insolvency.
  • It is a commercial reality that often the administrator who recommends that a company be placed into administration subsequently accepts the position as that company’s administrator.
  • The perceived conflict of interest was no more than a theoretical possibility – the issues that the administrator was asked to consider in the lead up to Westgem being placed into administration were complex.  The administrator was justified in spending the time that he did with the company and its director.
  • While the administrator was funded by a group of Westgem’s creditors, the funding was not in itself sufficient to establish that there was a reasonable apprehension of a conflict of interest.

Take home messages following the Westgem decision

The appointment of a special purpose administrator is rare - in its decision the Court made it clear that:

  • Special purpose administrators will be appointed to deal with and cure perceived conflicts of interest.
  • An administrator’s prior involvement with a company will not of itself create a conflict of interest if that administrator is then appointed to the company – however substantial involvement with the company may give rise to a conflict of interest.
  • The courts do consider and take into account the practical reality of insolvency.  However administrators, receivers, and liquidators should seek judicial direction and guidance when there is some doubt about their ability to discharge their duties impartially.