Re O’Neill v Advantage Hearing Pty Ltd  NSWSC 175 considered the application by a former director for an injunction to prohibit the current director appointing a voluntary administrator in circumstances where the company was allegedly solvent.
Mr O’Neill, a former director of Advantage Hearing Pty Ltd (Company) was in a dispute with the Company, Ms Hughes (the current director of the Company) and Mr Iversen (a person with an interest in the Company) regarding the way in which his directorship was terminated.
The Company was attempting to reach a settlement with Mr O’Neill which would see the dispute resolved. However, the negotiations broke down, and in a last attempt to sway Mr O’Neill, the Company sent Mr O’Neill a letter. The letter stated (amongst other things) that if Mr O’Neill did not try to resolve the dispute, then Mr Iversen would call on a loan made to the Company (Loan). The demand of the Loan would render the Company insolvent and Ms Hughes would then have no alternative but to appoint an administrator.
Acting on this alleged threat, Mr O’Neill made an application for interlocutory and substantive relief against the Company, Ms Hughes, Mr Iversen and associated entities. Specifically, he sought (amongst other things) orders under section 1324 of the Corporations Act 2001 (Cth) (Act) that until a final hearing, Ms Hughes be injuncted from appointing a voluntary administrator to the Company.
In hearing the application, Justice Black stated that in order to be granted the relief sought, Mr O’Neill would need to establish that:
there is a serious question to be tried;
the appointment of an administrator is not only invalid but a contravention of the Act; and
the balance of convenience favours the granting of the injunction.
In turning to the first issue of whether there is a serious question to be tried, namely whether the Company is solvent, Mr O’Neill argued that the Loan was a non-current asset in the Company’s balance sheet and could not be called on until 2014. As a result, the Company was solvent. In response to this, Justice Black held that the fact that a loan which has not been called is treated as a non-current asset at a particular date does not establish that it cannot be called at some future date. Further, his Honour highlighted that the deed pursuant to which the Loan was advanced was unsigned, undated and unstamped and Mr O’Neill had adduced no evidence that the parties had executed it or conducted themselves in accordance with it.
In these circumstances, Justice Black raised the question of whether (at paragraph 8):
the court would, without clear evidence of solvency, restrain the appointment of an administrator under section 436A of the Corporations Act, where the provisions for an administrator to be appointed is important to the mechanism for reconstruction of potentially insolvent companies established under Pt 5.3A of the Corporations Act and also allows directors to avoid potential liability for insolvent trading from the point at which the administrator is appointed.
Justice Black identified that a potential consequence of restraining the appointment of an administrator would be that directors would in fact be exposed to potential liability for insolvent trading, if the company continued to trade in circumstances where it had been unable to appoint an administrator.
As a result of this risk and the failure of Mr O’Neill to establish that the Company was solvent, Justice Black refused to grant the relief being sought. In doing so, his Honour remarked that there are “protections” in place or able to be accessed that would prevent the appointment of an administrator for an improper purpose.
The first protection is, that the administrator on appointment has an obligation to take steps to satisfy himself or herself as to the validity of his or her appointment. Secondly, a person can on appointment of an administrator, apply to the Court to have the administrator removed. In his Honour’s opinion, it would have been preferable for Mr O’Neill to have adopted the second option (if an administrator was appointed), particularly given that, that option would not expose the current director to potential liability for insolvent trading if an injunction was wrongly granted.
Lavan Legal comment
Directors seeking to challenge the appointment of an administrator must produce satisfactory evidence to the Court that the company is in fact solvent. If an appointment, once made, is challenged, directors must be able to objectively justify the appointment and administrators must be able to demonstrate they satisfied themselves that the company was insolvent or likely to become insolvent.