Australia: Creditors broad powers to remove external administrator

As part of the recent reforms under the Insolvency Law Reform Act 2016, creditors of a company in external administration have been bestowed with new powers to remove the external administrator without the need to go to court. "External administrators" includes administrators, the administrator under a DOCA and liquidators.

This is a major change for practitioners and it is important to understand the process creditors may use to effect their removal and, more importantly, what action may be taken to defend against removal.

In summary:

  • creditors may compel the external administrator to convene a meeting at which a resolution can be put seeking their removal
  • there are two ways in which an external administrator can seek to defend against their removal:
    1. by challenging the meeting called for removal on the basis that the direction to hold the meeting is not "reasonable"
    2. on removal, to seek reappointment by court application

Source of the power

The power to remove the liquidator is found in Subdivision D of Division 90 of the Insolvency Practice Schedule (Corporations) (IPS) in the newly implemented Schedule 2 of the Corporations Act 2001 (Cth). The key provision is section 90-35(1) which provides:

  1. The creditors may:
    1. by resolution at a meeting, remove the external administrator of a company; and
    2. by resolution at the same or a subsequent meeting, appoint another person as the external administrator of the company.

Meetings

As is clear from section 90-35, an external administrator may only be removed by the creditors by a resolution at a meeting.

Under the new regime, meetings are governed primarily by the new Division 75 of the IPS. However, the new Division 75 expressly notes the following in section 75-5:

Nothing in this Division limits the operation of any other provision of this Act, or any other law, imposing an obligation to convene a meeting in relation to a company, or the external administration of a company.

The consequence of this provision is that the compulsory meetings in an external administration remain, despite not being contained in the new Division 75. At any such compulsory meetings, it would be open to the creditors to advance a resolution to remove the incumbent external administrator.

The division provides that external administrators may call meetings at any time. As a consequence, this is the first defence against their removal, i.e. by not calling a discretionary meeting, thereby starving creditors of the opportunity to pass a resolution for their removal.

However, there are five circumstances where an external administrator must convene a meeting. These are:

  1. Where the committee of inspection directs the administrator to do so.
  2. Where the creditors direct the administrator to do so by resolution.
  3. Where at least 75% in value of the creditors direct the administrator to do so in writing.
  4. Where less than 25%, but more than 10%, in value of the creditors direct the administrator to do so in writing, and security for the cost of holding the meeting is given before the meeting is convened.
  5. Where the company is being wound up under a creditors' voluntary winding up, less than 25%, but more than 5%, in value of the creditors direct the administrator to do so in writing, (provided the creditors are not related entities and a period of time has passed before the resolution to wind up the company). (Section 75-15(1) IPS).


Not compelled to convene meeting if "not reasonable" to do so

If one of the above five circumstances is satisfied, the external administrator is prima facie compelled to convene a meeting. However, the external administrator is authorised not to comply with the direction where the direction is "not reasonable" (Section 75-15(2) IPS).

A direction to convene a meeting will not be reasonable where:

  1. .... the external administrator, acting in good faith, is of the opinion that:
    1. complying with the direction would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the direction; or
    2. there is not sufficient available property to comply with the direction; or
    3. a meeting of the creditors dealing with the same matters covered by the direction has already been held, or would be held within 15 business days after the direction is made; or
    4. the direction for the meeting is vexatious.
      (Insolvency Practice Rules (Corporations)
      2016 (IP Rules) , Rule 75-250)


Rule (2)(a) will have particular importance in circumstances where powerful creditors are seeking to remove the external administrator to the detriment of the interests of smaller, less powerful creditors. Further, it also allows the external administrator to consider the interests of third parties when forming their opinion as to the reasonableness or otherwise of the direction to convene a meeting.

However, rule 2(a) only considers directions to convene a meeting unreasonable where to comply will substantially prejudice the interest of one or more creditor, and the prejudice outweighs the benefits of complying with the direction. "Substantially", in our view, requires something more than a slight inconvenience or minor prejudice to be suffered by one or more creditors.

While it is easy to see how a direction to remove an external administrator may prejudice the interest of certain creditors, it may be more difficult to establish what constitutes the benefit of complying with the direction. The legislation and the rules do not provide any insight into what the benefit of such compliance might be or, more relevantly, in whose interest that benefit is to be considered. Consequently, the balancing of the interests (in order to determine which interests outweigh the other) will be difficult to conduct in practice, at least until the provision is given judicial consideration.

Where the direction is considered unreasonable by the external administrator, a specific process must be followed which, among other things, requires the external administrator to provide written notice of the decision and the reasons why the direction is unreasonable. (See Rule 75-255 of the Insolvency Practice Rules (Corporations) 2016.)

Resolutions

The IP Rules provide the procedure for voting on resolutions and replacement, essentially requiring a majority of creditors in number and value.

Court reappointment of external administrator

Where an external administrator has been removed by the creditors by a resolution at a meeting, the external administrator may apply to the court (generally speaking, this application may only be made to the Supreme Court or Federal Court - Corporations Act 2001 (Cth) section 58AA) to be reappointed (see section 90-35(4)).

There are two provisions of relevance (in section 90-35):

  1. The Court may order that the former administrator be reappointed as external administrator of the company if the court is satisfied that the removal of the former administrator was an improper use of the powers of one or more of the creditors.
  2. The Court may make such other orders in relation to the application as it thinks fit including orders in relation to:
    1. the costs of the application; and
    2. the remuneration of the former administrator.

Improper use of creditors' powers

The first of these two provisions allows the court to reappoint the external administrator where the removal of the administrator was an "improper use of the powers of one or more creditors".

It appears from the context of the provision that the power in question is the power to remove the external administrator by resolution at a meeting.

What constitutes an "improper use" of those powers is not clear, with no further guidance on the meaning of those words provided by the legislation itself or its explanatory material.

However, some guidance as to what constitutes an "improper purpose" may be taken from the Explanatory Statement for the IP Rules which provides the following:

There may also be circumstances where a change of practitioner is sought to obstruct the proper operation of the insolvency regime. For example, creditors being pursued for preferences may seek a change of practitioner to disrupt litigation in progress. Industry submissions to various Government consultation processes have raised concerns that a corporate insolvency practitioner's investigation and recovery efforts will be compromised with cost consequences to creditors generally, if creditors are able to remove a practitioner without Court involvement. This risk will be mitigated by allowing the Court to prevent removal where the removal is for an improper purpose.

Additionally, some further guidance may be taken from the Explanatory Memorandum for the equivalent provision newly inserted into the Bankruptcy Act 1966 for the removal of the trustee in bankruptcy, which suggests that the removal of the trustee to prevent them from conducting an investigation into a financial relationship between the creditor and the debtor would be an improper use of the power. (See Insolvency Law Reform Bill - Explanatory Memorandum [3.198], p 103.)

Alternative reasons to reappoint - "Other Orders"

There is also some uncertainty in relation to the scope of section 90-35(7). That provision entitles the court to make "other orders" on an application for reappointment as it thinks fit, "including" as to remuneration and the costs of the application.

The question is whether the court may reappoint an external administrator by relying on section 90-35(7) in isolation. In other words, is the court entitled to reappoint the external administrator for reasons other than being satisfied that there has been an improper use of the creditors' power?

This will be a question of statutory interpretation. Two interpretations are possible. The first is that the word "other" as it appears in subsection 7 means orders other than the order to reappoint the administrator. That interpretation would mean that section 90-35(7) does not authorise the court to reappoint an external administrator.

The second is that the words "such other orders", when read in conjunction with the word "including" as it appears later in the provision, could be interpreted as providing broad authority to the court to make any order, including an order to reappoint the external administrator "as it thinks fit".

Until judicially considered, this question of interpretation will remain unresolved. However, we suggest that the likely interpretation to be adopted by the court is the first of the two options, having regard to the ordinary meaning of the words of the provision, as well as the purpose and context of the section more broadly.

Conclusion

The new legislative provisions give creditors a broad power to remove the incumbent external administrator. However, there are some protections afforded to the external administrator.

Where faced with the prospect of removal, external administrators should ensure that the procedural requirements are strictly complied with.

Further, careful consideration should be given as to whether the direction to convene the meeting is "not reasonable" within the terms of Rule 75-250.

Finally, if removed, external administrators should assess the reasons for their removal. If there has been an improper use of creditors' powers, external administrators may be able to seek reappointment by the court.

Louise Thompson
Restructuring and insolvency
Colin Biggers & Paisley

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.

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