Litig8: A warning to administrators when accepting their appointment

March, 2016

Each month as a part of Mills Oakley’s Litig8, we bring to you snapshots of eight key cases, legislative changes or other legal events. The summaries are not comprehensive and do not constitute legal advice. You should seek professional advice before taking any action based on the content of this email.

Part 4 of the March edition of Litig8

Mills Oakley recently appeared on behalf of the former administrators of Sino Australia Oil and Gas (in liquidation) in Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (prov liq apptd) [2016] FCA 42 which is a decision of the Federal Court that highlights issues regarding the validity of appointment of administrators.

The relevant facts of the case were as follows:

ASIC later filed an interlocutory process seeking among other things a declaration that the former administrators’ appointment was invalid void and of no effect. The former administrators filed an amended interlocutory process for various forms of relief in relation to their remuneration.

The applications before the Court raised a number of significant legal issues including what steps an administrator must take in satisfying himself/herself of the bona fides nature of the resolution regarding appointment and whether or not ASIC has standing to seek a declaration that any such appointment is invalid.

ASIC submitted that the Company’s Board could not have formed a concluded opinion about the Company’s lack of solvency and did not genuinely hold the opinion required under section 436A of the Corporations Act 2001 (Cth) that the Company was insolvent or likely to become insolvent at some time in the future. Rather, according to ASIC, the Board appointed the administrators because of the dysfunction in the Company and as such, should have sought relief from the Court for the appointment of a provisional liquidator.

The Court found that the former administrators’ appointment was valid. In doing so, it rejected ASIC’s arguments that the decision of the board was not bona fide and made for an ulterior purpose. Rather, the Board had obtained advice and could assess the likely insolvency of the Company on the information that was available to it on 4 May 2015, particularly in circumstances where the provisional liquidator’s report supported the conclusion of the Board. It therefore followed that the former administrators were entitled to their remuneration and costs pursuant to section 447E of the Act.

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