Ruling highlights risks for Australian voluntary administrators when new funding is available

The judgment, following a successful termination of the external administration and delivered in a costs dispute, examined the conduct of administrators overseeing a sporting club. The Federal Court found that delays in convening a creditors’ meeting forced stakeholders to seek court intervention, an outcome the court ultimately deemed unnecessary.

Hannah Griffiths, an expert in insolvency at Pinsent Masons, said: “Central to the Federal Court’s criticism was the administrators’ handling of a proposed ‘white knight’ refinancing package intended to resolve creditor claims and restore the club to solvency.”

“According to the judgment, the administrators did not initially request additional information about the funding facility and only later complained about the absence of a term sheet,” she said.

“The Federal Court held that this omission was decisive in the solvency assessment and contributed to delays in progressing the termination request.”

The Federal Court determined that the administrators’ continued investigations into historic issues were irrelevant to the immediate question of the club’s solvency and amounted to an “unnecessary distraction” that influenced the company and its creditors.

While the court questioned whether the administrators were misguided in their approach, overly rigid in following standard processes, or consciously accumulating fees, it noted that the underlying reason “did not matter” and what mattered was the resulting delay in convening a meeting of the company’s creditors.

Griffiths said: “Voluntary administrators should carefully consider requests to terminate external administrations and cite early the relevant matters central to forming their opinion on the company’s solvency including any barriers to convening the creditors’ meeting, what documents and information is required to form an opinion on solvency and whether the company is in fact solvent."

“Timely and transparent issuance of correspondence, explaining the “why” of decision making, is critical for insolvency appointees. Any requests to end an external administration must be dealt with efficiently by the voluntary administrator and their lawyer, even if there is a process to be followed, information required for reporting to creditors, notifications to be made or tax clearances to be obtained,” she said.

“There were no strategic letters that the voluntary administrator could produce to the court to support his decision making and communication to creditors even though litigation was threatened to terminate the external administration and this turned out to be quite detrimental for the insolvency practitioners in this case.”

Once refinancing was available, the Federal Court said the administrators should have acted “as swiftly as possible” by reporting the funding position to creditors, recommending termination of the external administration, and convening a meeting under section 439A of the Corporations Act within five days. Their failure to do so constituted unreasonable conduct on their part.

The Federal Court ultimately refused the administrators’ claim to be indemnified for their legal costs from the club’s assets finding the termination application only became necessary because of their inaction.

Griffiths said: “The judgment reinforces that administrators’ remuneration and indemnity rights may be at risk if they fail to make the right enquiries when confronted with prospective litigation and where their inactions are inexplicable based on satisfying themselves of the key consideration: whether or not the company was in fact insolvent and reporting to creditors.”