Voluntary administrations and liquidations – validly convened COIs

A recent decision by Pritchard J in Great Southern Ltd (in liq), Ex parte Jones[1] offers some guidance to Western Australian insolvency practitioners on what is required to validly appoint a committee of inspection (COI).

The uncertainty surrounding s 548

Since Pritchard J’s decision in Re The Bell Group Ltd (in liq); Ex parte Woodings[2] significant legal uncertainty has existed regarding what is required to validly convene a COI. 

In Bell Pritchard J held that the proper construction of s 548(1) of the Corporations Law (Cth) (Law) requires a liquidator to hold separate meetings of the creditors and the contributories to determine whether a COI should be established, and the number and identity of its members.

This finding was in contrast to Greenwood J of the Federal Court in RiverCity[3] who had previously construed s 548(1) of the Corporations Act 2001 (Cth) (Act)[4] differently, finding that separate meetings were only required if there was a request from either the creditors or the contributories, and that if the liquidator had initiated the appointment of a COI then only a meeting of creditors was required.

The uncertainty arising from these decisions was compounded by the fact that RiverCity concerned a voluntary winding up while Bell was in relation to a court ordered winding up.  Despite this Pritchard J commented in Bell:

[37] ... 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.[5]

As we have previously identified,[6] these contradictory positions have created uncertainty around what is required under s 548 of the Act to validly appoint a COI and concern that the decision in Bell was a departure from what had been the accepted general practice.

Great Southern

In this case Pritchard J affirmed the position Her Honour indicated in Bell in relation to COIs appointed in a voluntary administration.  It therefore appears that, at least in Western Australia, s 548 of the Act requires separate meetings of the creditors and of the contributories in order for a COI to be validly appointed.[7]

Curing defective appointments of COIs

Section 1322(1) of the Act provides that a proceeding under the Act is not invalidated due to procedural irregularity, provided that the court is satisfied the requirements of the section are met.  However, it has been held that the failure to hold a separate meeting of the contributories, as well as of the creditors, to consider the appointment of the Committee, cannot be characterised as a mere 'procedural irregularity'.[8]

Instead, liquidators concerned about invalidly appointed COIs, should take action to cure the defective appointment and ensure that resolutions passed are valid by seeking orders pursuant to   s 1322(4) of the Act.  This section provides a court the power to make a range of orders of a remedial nature, provided the court finds that no substantial injustice has been caused or is likely to be caused to any person by the making of the order.  Such orders were sought and made in Bell, RiverCity and Great Southern.

Lavan Legal comment

While Great Southern does not resolve the controversy that has existed since Bell, it does provide some guidance to insolvency practitioners in Western Australia on how s 548 of the Act is likely to be construed.  The decision highlights the need for practitioners to ensure that a COI is established only after meetings for both creditors and contributories have been convened.  Additionally the decision indicates that, irrespective of whether a winding up is voluntary or not, where liquidators have relied on the decisions of a COI established solely by a meeting of creditors, orders under s 1322 of the Act should be sought.