Australia: Appointment of a voluntary administrator for an improper use

Part 5.3A of the Corporations Act (Act) provides a regime for a company that is insolvent or likely to become insolvent to maximise the chance of the company continuing to trade or a proposal which results in a better return to creditors rather than its immediate liquidation. Part 5.3A sets out the requirements for the appointment of a voluntary administrator to the distressed company with a view to the company possibly executing a deed of company arrangement (DOCA) with its creditors. The structure of Part 5.3A is designed to ensure that a normal outcome of an administration is, if appropriate, for the company to execute a DOCA.

The appointment of the voluntary administrator suspends the powers of the directors and any attempt by the directors to exercise powers in this period may not be performed except with the administrator's written approval. The administrator has the power to make decisions concerning the immediate affairs of the company, including decisions relating to its continued trading operations.

The administrator has control of the company and may carry on its business, property and affairs. During the administration period the administrator is the agent of the company and may perform any function and exercise any power that the company, and its officers, could perform as if it were not under administration.

Section 436A of the Act provides the mechanism for directors to resolve to appoint a voluntary administrator. As a statutory power it must be exercised for a proper purpose. If the power is exercised for more than one purpose, where one of those purposes is improper, the exercise of the power will be vitiated if the improper purpose was a substantial reason in that the decision would not have been made but for the ulterior purpose.

The stated objective of Part 5.3A in section 435A is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

• maximises the chances of the company, or as much as possible of its business, continuing to trade; or
• if it is not possible for the company or its business to continue, would result in a better return for the company's creditors than from an immediate winding up of the company.

If the statutory power to appoint an administrator is exercised for a purpose unrelated to these objectives but for an ulterior or extraneous purpose then the power would be invariably exercised for an improper purpose.

For example, the appointment of an administrator under Part 5.3A was terminated by the Court where it is made to wrest control of the affairs of the company from a previously appointed provisional liquidator, with whom the directors were in dispute¹. Similarly it is improper for the company's directors to appoint an administrator during the adjournment period of a winding up hearing for the purpose to alter the relation back period².

The Court found that the substantial reason for the appointment of an administrator by the Governing Committee of the Goolburri Aboriginal Corporation Land Council was to impede the possible actions of the Registrar of the Aboriginal and Torres Strait Islands Commission and to retain the influence over the affairs of the Goolburri. The Court held that the power was exercised for an ulterior and therefore improper purpose which was unrelated to the objectives of Part 5.3A as stated in section 435A³.

In Blacktown City Council v Macarthur Telecommunications Pty Ltd⁴ a director appointed an administrator on the evening before a two week hearing with the effect that there was a moratorium on claims against the company and the proceedings were stayed. The Court found that the administration was a clear and deliberate attempt to stave off the hearing and that the administration should end because the provisions of Part 5.3A were being abused.

The Court has a supervisory role over the administration process and may make such orders as is appropriate as to how Part 5.3A is to operate in relation to a company. For example, the Court may make orders ending the administration of a company if it is satisfied, because the company is solvent, or because the provisions of Part 5.3A are being abused including that the power of appointment of the administration was not exercised for a proper purpose, or for some other reason, s447A of the Act.

In addition an interested party may bring an application to overturn a DOCA or invalidate a provision within it. Where there is doubt, on a specific ground, whether a DOCA was entered in accordance with Part 5.3A the administrator, shareholder or creditor of the company, or the regulator (Australian Securities and Investments Commission), may apply to the Court for an order to declare the DOCA, or a provision within it, void or not void as the case requires, under s445G of the Act.

When a creditor finds itself confronted with the administration of a corporate debtor, it you ought to place close attention to the reasons for the appointment of an administrator. Those reasons are to be consistent with the object of Part 5.3A of the Act. Otherwise it may be that the process is being used for an ulterior purpose and a creditor may be able to bring an application to the Court for an order that the administration end or that the DOCA or certain provisions of the DOCA be set aside.

Given the current uncertain economic climate the number of insolvencies is likely to rise. Should you find yourself in this dilemma, whether as the creditor or the distressed company, we are able to advise you of your rights and options.

Footnotes

¹Aloridge Pty Ltd v Christianos & Anor [1994] 13ACSR99.

²St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] 50ACSR443.

³Kazar v Duus and Ors [1998] FCA1378.

⁴(2003) 47 ACSR 391

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.