Litig8: A warning to administrators when accepting their appointment

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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 article.

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:

  • On 4 May 2015, the Board of Sino Australia Oil and Gas Limited (Company) resolved to appoint administrators to the Company. In doing so, it passed resolutions that the Company was likely to become insolvent in the near future.
  • Prior to the resolution of the Board:
    • The administrators had no involvement with the Company. The first contact with the Company occurred on the day of appointment.
    • The Board had sought legal advice regarding the best course to protect shareholder interests in circumstances where, among other things, the Company had been unable to finalise financial statements for the year ending 31 December 2014, no management accounts for the Company’s operating subsidiary had been provided for the first four months of 2015, the Board had not met in 2015, auditors had advised that the Company’s subsidiary had run out of cash reserves, there was a collapse in the oil price which had a significant impact on the subsidiary, a number of directors of the Company had resigned and the Company was the subject of proceedings commenced by ASIC in which a significant sum of funds had been frozen.
  • Between 4 May and 21 May 2015, the administrators undertook work in relation to the administration of the Company which included various investigations and considering a proposal for a deed of company arrangement. In doing so, it incurred remuneration, costs and disbursements.
  • On 21 May 2015, upon ASIC’s application, a provisional liquidator was appointed to the Company. That application was not opposed by the administrators.

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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