The Insolvency Law Reform Act 2016 (Cth) and committees of inspection

In certain liquidations, particularly those that are likely to be litigious, it is common for a committee of inspection (COI) to be convened to supervise and assist the liquidator.[1]

Historically, COI’s have been convened by the passing of a resolution at the second creditors’ meeting of a company in voluntary administration, immediately following the passing of a resolution that the company be wound up.

Two recent decisions of Her Honour Justice Pritchard of the Supreme Court of Western Australia considered the interpretation of section 548 of the Corporations Act 2001 (Cth) (the Act), in respect of the convening of COIs. In those two decisions, Her Honour found that the result of the failure to hold separate meetings of creditors and contributories was that the convening of the COI was invalid and, most importantly, all resolutions passed by the invalidly convened COI were also invalid. The result of Her Honour’s findings was that every COI convened by way of the industry standard, being simply a resolution at the second creditors’ meeting, was invalid.

The Insolvency Law Reform Act 2016 (Cth) (ILRA), following campaigning by, amongst others, the Australian Restructuring Insolvency & Turnaround Association (ARITA), has taken steps to resolve this issue.

Legislation prior to ILRA

Section 548(1) of the Act currently states:

The liquidator of a company must, if so requested by a creditor or contributory, convene separate meetings of the creditors and contributories for the purpose of determining:

(a) whether a committee of inspection should be appointed; and

(b) where a committee of inspection is to be appointed:

  • the numbers of members to represent the creditors and the contributories,respectively; and
  • the persons who are to be members of the committee representing creditors and contributories, respectively.

    Case law prior to the ILRA

    Re The Bell Group Ltd (in liq); Ex parte Woodings [2015] WASC 88 (Bell)

    Her Honour Pritchard J considered the application of section 548 of the Act in Bell in circumstances where COIs were convened without first conducting separate meetings of creditors and contributories. In Bell, Her Honour stated at

    [37] In my view, on its proper construction s 548(1) means that the liquidator must hold separate meetings of the creditors and of the contributories to determine whether a COI should be established, the number of members of that COI, and the identity of the members of that COI.

    [51] [A] failure by a liquidator to hold separate meetings of the creditors and contributories to determine if a committee of inspection should be established, and its membership, constitutes a contravention of s 548(1) of the [Corporations] Law.

    Following her comments on both a court ordered and voluntary liquidation, the final view of Her Honour in Bell was that it is always necessary for the liquidator to hold a separate meeting of creditors and one of contributories in order to validly convene a COI.

    Re Great Southern Ltd (in liq); Ex parte Jones [2016] WASC 234 (Great Southern)

    As in Bell, in Great Southern the COIs were convened with no separate meetings of contributories. After the Bell decision came to the attention of the liquidators, the liquidators made an application to the Supreme Court of Western Australia to validate the convening of their COIs. Her Honour Justice Pritchard maintained her position as set out in Bell, that section 548 of the Act required separate meetings of creditors and contributories.

    Despite Her Honour’s finding that the liquidators had contravened the Act in convening the COIs, Her Honour, having regard to the difficulties and cost of convening a meeting of contributories and noting that there would be no practical utility in doing so, made orders pursuant to section 1322(4) of the Act validating the appointment of the COIs.

    The ILRA

    Following Bell and Great Southern, there is now a line of authority in the Supreme Court of Western Australia requiring all liquidators to undertake the significant administrative burden of holding at least one meeting of creditors and contributories, if not more, in order to convene a COI. Furthermore, all previously convened COIs, and the resolutions passed by the COIs, are now deemed invalid.

    The ILRA repealed the entire division containing section 548 of the Act effective as of 1 September 2017.

    Section 80-10 of the ILRA states:

    The creditors of a company may, by resolution, determine that there is to be a committee of inspection in relation to the external administration of the company. (Emphasis added)

    Section 1611 of the ILRA states:

    The appointment of a committee of inspection under section 548 of the old Act before the commencement day is not invalid merely because a separate meeting of contributories was not convened.

    Lavan comment

    The ILRA has now repealed section 548 of the Act which has recently been the cause of much concern amongst insolvency practitioners. Furthermore, the ILRA has retrospectively ratified COIs convened without the convening of a separate meeting of contributories. Practically speaking this will now prevent insolvency practitioners from being put to the time and most importantly the cost of making applications to court to validate any COIs they are concerned have been convened invalidly.

    20 December 2016
    Finance News
    SERVICES
    Banking and Finance


    FOOTNOTES
    [1] See Harris, “Enhancing the Role of Creditors’ Committees in Corporate Rescue Laws” in Sarra (ed), Annual Review of Insolvency Law 2001 (Carswell Thomson Reuters, 2011) pp 675-701.