Voluntary administrators need to be careful that directors have taken the steps necessary for a valid appointment. In a recent Court case, a voluntary administrator was found to be invalidly appointed where there was uncertainty about the steps taken by the director in making the appointment.
Section 436A(1) of the Corporations Act 2001 (the Act) provides as follows:
- in the opinion of the directors voting for the resolution, the company is insolvent or is likely to become insolvent at some future time; and
- an administrator of the company should be appointed."
It has previously been stated by the Courts that the requirements in s436A(1) are no mere formality but underline the very purpose behind the voluntary administration regime: Wagner v International Health Promotions (1994) 15 ACSR 419. As such, administrators, as a matter of good practice, should always ensure that documents necessary for a valid appointment exist and confirm, where possible, that they are not in dispute. Sometimes, circumstances may require an administrator to investigate further than this including to determine whether the director's opinion about insolvency was reasonably based or whether, for example, the directors were motivated by some improper purpose in making the appointment: Darkinjung Pty Limited v Darkinjung Local Aboriginal Land Council & Ors  NSWSC 1008.
Important consequences flow from an invalid appointment. Importantly, an administrator has no entitlement under the Act to have any of their fees and expenses paid (or a right to the statutory lien) and an administrator is forced to rely on equitable principles. This may limit the administrators costs to only work that was of incontrovertible benefit to the company: Sherred v McDonald  QSC 153 although it has been suggested that a broader claim seeking to recover the reasonable value for the work performed could be brought against the company by the administrator: Kazar v Duus (1998) 88 FCR 218. Needless to say, it becomes complicated and expensive for the administrator to seek to recover any unpaid fees where the appointment is found to be invalid.
In the recent case of Lean v Realtown Pty Limited  WASC 5 the sole director of the company (Realtown) signed a letter addressed to the administrator (and prepared by the administrator) which stated that the director had, at a meeting of the Board, resolved to appoint the administrator to Realtown. The letter went on to note that a copy of the signed minutes of the meeting were enclosed. In actual fact, the evidence given in Court was that no minutes ever existed. Further, the letter did not make any reference to the actual or likely insolvency of Realtown.
The director, who the Court described as 'hard of hearing, requires spectacles and appeared easily confused' disputed that he intended to place Realtown into voluntary administration. The evidence in relation to this included:
- The administrator explained to the director that on the evidence before him the company was insolvent. The director's response was that he had had enough and then signed the letter. The director claimed it was never explained to him what insolvent meant or that Realtown would be placed into voluntary administration by signing the letter.
- The administrator accepted that the director did not have his glasses with him and did not read the letter.
- No meeting as required by s436A(1) was ever held.
- The director claimed he thought the letter was to allow the administrator to negotiate an extension with the Bank about Realtown's overdraft.
- Despite the above, the director is noted as having proposed a motion at the first creditor's meeting confirming the appointment of the administrator. The director attended the meeting by telephone and denied that he proposed the motion.
- The director had signed a document subsequent to the appointment which notes that Realtown is in administration.
In light of the above the Court found that the administrator was invalidly appointed. A crucial consideration for the Court was the director's failure to hold the opinion at the time of the appointment that Realtown was insolvent or likely to become insolvent and the director's failure generally to comply with s436A(1).
This case provides a useful reminder to practitioners to ensure that all necessary steps are taken leading up to the appointment so that the risk of the appointment being challenged is minimised. Given the serious consequences that flow from an invalid appointment, practitioners should not just rely on others stating that the requirements have been satisfied but should make their own independent enquiries. Often this will be satisfied by sighting a copy of the relevant minutes of meeting to ensure that what needed to be done has been done but on particular jobs an administrator might be required to conduct further enquiries into the circumstances leading to the appointment. It is noted however that it can be difficult for administrators to know where to draw the line and how far they need to go to confirm the facts leading to the insolvency of the company.
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.