Introduction
In the recent case of
Independent Cement and Lime Pty Limited v Brick and Block Company Ltd (In Liquidation) (Receivers and Managers Appointed) [2010] FCA 352 (
Independent Cement) an unsecured creditor successfully applied for orders pursuant to section 503 of the
Corporations Act 2001 (Cth) (
Act) for the removal of a company’s liquidators. The creditor alleged that whilst the liquidators were administrators they failed to comply with their obligations, and in particular, that they had failed to carry out thorough investigations.
Facts
On 29 October 2009, Mr Barnden and Mr Kassem (Administrators) were appointed as administrators of Brick & Block Company Ltd (Brick & Block). After conducting various investigations, the Administrators received a proposal from Alphalite Pty Ltd, a related company, to enter into a deed of company arrangement (DOCA) with Brick & Block’s creditors.
On 25 November 2009, the Administrators sent their section 439A report (Report) to the creditors. The Report contained a recommendation that the creditors resolve that Brick & Block enter into the DOCA. At the second creditors’ meeting to consider the DOCA resolution, the solicitor for the plaintiff creditor highlighted certain alleged deficiencies in the Report and strongly opposed the Administrator’s recommendation. Despite those objections, the resolution to enter into the DOCA was passed by a majority of the creditors of Brick & Block.
Shortly after, the plaintiff commenced proceedings seeking orders that the DOCA be set aside and Brick & Block be wound up. Orders were made requiring the Administrators to convene a meeting of creditors to decide Brick & Block’s fate and giving the plaintiff an opportunity to provide information to the creditors.
The Administrators convened a meeting of creditors as required. They sent a report recommending that the creditors resolve to terminate the DOCA (on the basis that the sale agreement required to be executed under the DOCA had not been executed) and appoint the Administrators as liquidators of Brick & Block.
At the reconvened meeting the creditors voted in favour of the termination of the DOCA and the appointment of the Administrators as liquidators. The plaintiff voted against those resolutions. The plaintiff’s solicitor who attended the meeting advocated that the creditors should appoint alternative liquidators as the Administrators had failed to perform their obligations properly.
The plaintiff amended their previous application to the Court and sought the removal of the Administrators as liquidators and the appointment of alternative liquidators nominated by the plaintiff.
The plaintiff’s arguments
The main arguments raised by the plaintiff were that:
- the Administrators had failed to properly investigate possible preferential payments, uncommercial transactions, the directors ability to satisfy any insolvent trading claims and claims against Brick & Block’s holding company;
- the Administrators’ recommendation to approve the DOCA was ‘flawed and against commercial morality’;
- the Report contained a number of errors or omissions; and
- the Administrators’ conduct in the administration of Brick & Block generally including the level of fees, the way that the plaintiff’s objections were dealt with and their lack of impartiality.
The Court’s findings
Finkelstein J found that the arguments for and against the removal of the Administrators as liquidators were finely balanced. On the one hand the Administrators had significant acquired knowledge in relation to the affairs of Brick & Block and had clearly gained the support of the creditors. On the other hand, His Honour found that the Administrators’ investigations had been inadequate and they had recommended a DOCA to the creditors which faced a serious risk of being set aside.
Ultimately Finkelstein J made orders pursuant to section 503 of the Act for removal of the liquidators. In reaching his decision, Finkelstein J stated [at 51]:
‘On balance, I think it is more efficient for new liquidators to be appointed for the conduct of the liquidation as a whole, particularly given that a substantial part of the work to be performed by the liquidators would be the investigations’.
The critical issue to Finkelstein J was the Administrators’ failure to perform proper investigations. His Honour found the failure ‘troubling’ and that the Administrators’ lack of proper investigations into potential claims meant that the Report prevented the creditors from making an informed decision about Brick & Block.
His Honour was also concerned by the Administrators’ statement in the Report that ‘the purpose of our appointment is to assist the Directors in restructuring the affairs of the Company’ and the Administrators’ failure to compel the directors of Brick & Block to provide assistance with the recovery of, among other things, a potential insurance claim. His Honour considered that such actions might justify a loss of confidence in the ability of the liquidators to pursue the directors.
Conclusion
The Independent Cement decision highlights the importance for Administrators to undertake detailed investigations. Pro forma reporting in section 439A reports will be insufficient and a failure to properly investigate and report to creditors on all of the possible outcomes for a company can lead to a court order for removal pursuant to section 503 of the Act.
If you have any queries regarding this matter then please do not hesitate to contact
Simon Majteles on 9288 6763 / simon.majteles@lavanlegal.com.au or Alison Robertson on
9288 6872 / alison.robertson@lavanlegal.com.au.
