When is it not reasonable to comply with a creditor's request for information and might personal costs orders follow if the external administrator gets it wrong?
A creditor has a right under s70-45 of the Insolvency Practice Schedule (IPS) to request information and documents from an external administrator. The external administrator must comply with the request, except in three prescribed circumstances:
- The material is not relevant to the external administration;
- The external administrator would breach duties in relation to the external administration if the external administrator was to comply with the request; or
- It is otherwise not reasonable in the circumstances to comply with the request.
The policy which underpins this right is to provide for more transparency in external administrations, by removing practical and regulatory barriers to obtaining information, thereby reducing a perceived risk of misconduct in the insolvency sector.
Reasonable or unreasonable - r70-15 IPR
Helpfully, r70-15 of the Insolvency Practice Rules (IPR) provides an exhaustive list of the circumstances in which it would be unreasonable for an external administrator to comply with a request for information or documents – exception (c). These circumstances are where:
- complying with the request would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the request;
- the material would be privileged from production in legal proceedings on the ground of legal professional privilege;
- disclosure of the material would found an action by a person for breach of confidence;
- there is not sufficient available property to comply with the request;
- the material has already been provided;
- the material is required to be provided under the Corporations legislation within 20 business days of the request being made;
- the request is vexatious.
Secatore, In the matter of Last Lap Pty Ltd (In Liq)  FCA 267
However, the decision in Secatore, in the matter of Last Lap Pty Ltd (In Liq) provides a warning to external administrators that care must be taken when deciding whether a creditor's request for information or documents is unreasonable and falls within r70-15, particularly as failure to respond to a reasonable request may expose the external administrator to an adverse personal costs order.
Last Lap Pty Ltd (In Liq) (Last Lap) had been in liquidation for nearly 28 years.
Since 29 June 1992, eight different liquidators had been appointed to Last Lap, including the current liquidator who was appointed in April 2015.
Around 4 years after his appointment, in July 2019, the liquidator estimated the total realisation of Last Lap's assets would be $10, and that there were two unsecured creditors with estimated debts valued at approximately $2.4 million.
The liquidator did not provide any reports to creditors concerning the affairs of Last Lap and no meeting of creditors had been convened.
Nonetheless, in June 2019 the liquidator commenced proceedings for the purpose of publicly examining various persons.
The request for information and documents
In September 2019, Bob Jane Corporation Pty Ltd (Bob Jane), one of the two unsecured creditors, requested pursuant to s70-45 of the IPS information and documents from the liquidator that would disclose, among other things, the identity of any person who had provided the liquidator with funds to run the examinations and any subsequent proceedings, and production of any agreement between the liquidator and the person in relation to such funding.
The liquidator refused, claiming that it would be unreasonable for him to comply with Bob Jane's request for information and documents, by reason of s70-15(2)(a), (b), (e) and (g), because:
- the solicitors for Bob Jane either presently or otherwise intended to also act for Rodney Bruce Jane, one of the proposed examinees, with respect to the public examinations; and
- the liquidator was investigating whether causes of action existed against Rodney Jane and entities and persons associated with him.
Bob Jane then promptly commenced proceedings for the disclosure of the material which had been the subject of the s70-45 request (Funding Disclosure Application).
The judgment dealt with two applications made in relation to the public examination proceedings commenced by the liquidator, but for the purposes of this article, we consider the determination of the Funding Disclosure Application only.
Importantly, the court prefaced its consideration by stating that the onus rests with the external administrator to prove that it was unreasonable to comply with a request.
The court was not satisfied on the evidence of the liquidator that Bob Jane's request for documents and information was unreasonable. In particular, the court found that:
- The liquidator had failed to identify how complying with Bob Jane's request would substantially prejudice the interests of Last Lap's creditors or a third party. The production of the requested documents would not have any adverse impact on the ability of the liquidator to conduct the examinations, nor were the documents requested relevant to the subject matter of the examinations;
- The liquidator's mere assertion that production of the documents would require him to disclose correspondence between his office and his solicitors which was "possibly privileged" was not enough. The liquidator failed to put forward any material to enable the court to determine the validity of that assertion;
- The statement in the liquidator's response to the request that he had not extended any priority to a third-party funder in respect of assets which may be recovered as a consequence of the public examinations or subsequent proceedings did not address the preponderance of the information and documents requested; and
- Bob Jane's request was not a vexatious request nor was it made for an improper purpose, in that it was related to the creditor's claims in, or the conduct of, the external administration. Of particular relevance was the unusual circumstances of the external administration – namely, the prolonged timeframe in which no substantive action was taken by the liquidators, the fact that there were apparently only nominal assets held by Last Lap, and the fact that the liquidator did not inform the creditors of the liquidator's objectives for the examinations.
The liquidator was ordered to produce the information and documents sought.
Costs order against the liquidator
Bob Jane sought costs on the indemnity basis against the liquidator personally, without recourse to the assets of Last Lap.
Whilst the court was not prepared to award indemnity costs, the court did make a party/party costs order in favour of Bob Jane against the liquidator personally, to be paid without recourse to the assets of Last Lap.
The liquidator was personally a defendant to the applications, and so at risk of a personal costs order. As the liquidator provoked the Funding Disclosure Application, the applicants were not required to show exceptional circumstances to warrant a costs order against the liquidator personally. However the court found that the liquidator's conduct in defending the Funding Disclosure Application was unreasonable and unnecessary anyway, so a personal costs order would follow.
Further, the costs had not been prudently and reasonably incurred, and were unnecessary, and as such the liquidator's costs were not properly incurred so he was not entitled to have recourse to the assets of Last Lap.
The court also noted that an order against Last Lap as opposed to the liquidator would be an empty gesture, given that the liquidator had estimated the total realisation of the company's assets would be $10.
Whilst the background to this case is unique, the underlying message from the court is clear – s70-45 will be applied in a manner consistent with the policy underpinning it – to empower creditors.
Even if a request is arguably unreasonable, external administrators may choose to err on the side of caution and comply with the request to avoid the potential for an adverse personal costs order.
Whether a creditor's request is unreasonable for the purposes of r70-15 and whether the evidence available supports that position can be difficult to assess, and the external administrator bears the onus of proof.
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.