On 18 October 2010 administrators were appointed to Australian Property Custodian Holdings Ltd (Company) by a secured creditor, Daytree Pty Ltd (Daytree), pursuant to its registered charge dated 23 July 2008 (Daytree Charge).
The Daytree Charge secured all of the assets and undertaking of the company except for a cash amount of $5 million held on term deposit with a bank (Bank) to satisfy the net tangible asset requirements of the Company’s AFS licence. This cash amount was specifically excluded from the Daytree Charge.
On 19 October 2010 Capital Finance Australia Ltd (CFAL) assigned to the Bank a debt of $6.5 million (CFAL Debt) being part of an amount due and payable under the Company’s loan facilities with CFAL and a corresponding portion of all rights, powers and remedies of CFAL in the respect of enforcement of those facilities.
The administrators wrote to the Bank claiming an amount in excess of $5 million standing to the credit of the Company’s accounts with the Bank. In response, the Bank raised a concern that the administrators may have not been duly appointed to the Company under the terms of the Daytree Charge.
In order to resolve any question about their appointment, the administrators and the Company applied to the Supreme Court seeking a declaration that the appointment was valid.
Application to the Victorian Supreme Court
In the first instance, the primary judge found that the Daytree Charge was over a significant part of the Company’s assets but not over the whole, or substantially the whole, of the Company’s assets (as required by section 436C of the Corporations Act 2001 (Cth) (Act) in order for a secured creditor to appoint administrators).
The Court found that the directors always contemplated the appointment of administrators to the Company. It was clear on the evidence that the directors did not appoint the administrators only because they had already been appointed under the Daytree Charge.
The primary judge determined that section 447A can operate to allow the Court to make a declaration that the administrators were validly appointed as administrators of the Company as if they had been appointed by resolution of the Company’s board of directors on 18 October 2010 pursuant to section 436A of the Act.
The Bank appeals the primary decision
On appeal, the Bank challenged several of the primary Court’s findings, including the finding that the Company’s directors would have appointed the administrators on 18 October 2010 had they not already been appointed by Daytree.
Based on the evidence of the administrators that they would have been appointed to the Company in any event as at 18 October 2010, the Court of Appeal found that the order should be upheld that the appointment of the administrators by Daytree was valid.
The Court noted that this order will in its effect alter how Part 5.3A, and specifically how section 436C is to operate in relation to the Company by allowing Daytree to enforce a charge which was over a substantial portion of the Company’s property (approximately 68%) but not the 'whole or substantially whole of the Company’s property' (which is the test under section 436C).
This case illustrates the Court’s willingness to utilise the wide discretionary powers open to it under section 447A to ensure the objects of Part 5.3A are achieved.
The appointment of administrators by a secured creditor is clearly different from a secured creditor’s decision to appoint a receiver and manager to the assets secured by a charge. In this regard, one of the defining points of the case was that the appointment of the administrators to the Company would ensure that creditors were owed duties in the administration and in those circumstances, where the appointment also had the support of the Company’s directors, a declaration of validity of the appointment was appropriate.
An unusual aspect of the case is that the Court of Appeal did not apply the usual principle that a creditor is a substantial chargee if it has the capacity to take control of so much of the business and property of the insolvent company as is necessary to conduct an administration.¹
Rather, the Court specifically referred to the 68% portion of the Company’s assets that came within the ambit of the Daytree Charge and found that this percentage was insufficient to satisfy the test.
The Court of Appeal’s departure from the traditional ‘substantial chargee’ test might indicate future evolution of this area of law.
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