When two is company but three’s a crowd…

The latest instalment in the Raine Square Development dispute, Bryan Kevin Hughes as Administrator of Westgem Investments Pty Ltd (Receivers and Managers Appointed) v the Receivers and Managers of Westgem Investments Pty (Receivers and Managers Appointed) (Administrator Appointed) [No 3] [2012] WASC 360proves the old adage that two is company but three’s a crowd.

This case saw Corboy J deal with the issue of whether or not to appoint a special purpose administrator to investigate and report on the affairs of Westgem Investments Pty Ltd (receivers and managers appointed) (administrator appointed) (Westgem).


On 11 January 2011, BOSI Security Limited (BOSI) appointed Mark Mentha and Cliff Rocke as joint and several receivers and managers of Westgem (pursuant to a fixed and floating charge over all of Westgem’s assets) (Receivers).  On the same day, Mr Luke Saraceni (the sole director of Westgem) (Saraceni) appointed Mr Bryan Hughes as the voluntary administrator of Westgem pursuant to section 436 of the Corporations Act 2001 (Act) (Administrator).


The Receivers applied for orders pursuant to section 447 of the Act to vary the operation of part 5.3A of the Act, so that a special purpose administrator could be appointed.  In opposition to this application, the Administrator initiated these proceedings seeking directions under 447D of the Act, alternatively an order under section 447A of the Act as to whether or not one should be appointed to Westgem.

In determining whether or not to make the appointment, Corboy J found that, it is an established principle that a special purpose administrator can be appointed to a company, where the company’s administrator is in a position of conflict, which results in an appearance or apprehension that the administrator will not without embarrassment, investigate or report on matters of the company, Re Obie Pty Ltd (in liq) (No 4) (1984) 8 ACLR 967 at 971.

It was this principle upon which the Receivers based their application.  They argued that the Administrator was in a position of conflict because:

  1. the Administrator had met with Saraceni, shareholders and representatives of related creditors for ten successive days prior to his appointment;
  2. the Administrator had received $83,000 in funding from IMF (as at July 2011) in addition to the funds provided by Saracen Project Management Pty Ltd (a related entity) (Saracen);
  3. it was anticipated that the Administrator intended to join Westgem, Saraceni and related entities in a claim for damages against the financers (BOSI and the Bank of Western Australia) – this would result in a high level of interaction between the Administrator and Saraceni;
  4. the Administrator and Saraceni had used the same solicitors in the litigation that had been conducted over the affairs of Westgem; and
  5. the Administrator had spent a significant amount of time investigating the validity of the Receivers’ appointment instead of investigating other matters such as the payment of $1.3 million made by Westgem to Saracen in January 2011.
  6. In response, the Administrator argued that his dealings with Westgem (and by inference, Saraceni) did not affect his ability to properly investigate any claims that Westgem might have against Saraceni or entities related to him.  Further, the expense involved in appointing a special purpose administrator would prejudice Westgem.


Corboy J held that the Receivers had not demonstrated that it was necessary to appoint a special purpose administrator to Westgem.  He held that the matters raised “form part of the commercial context within which many external administrations are conducted…I am not persuaded that, objectively considered, the matters to which the Receivers have referred establish more than a theoretical possibility that a conflict had arisen”.

In making his decision, Corboy J considered each of the Receivers’ arguments.  First, in relation to the Receivers’ argument regarding the Administrator’s pre-appointment dealings with Westgem and Saraceni, Corboy J referred to the decision in Lam Soon Australia Pty Ltd (administrator appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34:

a person is not disqualified from being appointed an administrator merely because he/she gave advice to the corporation about its financial position and options prior to appointment: the essential requirement in every case is that the insolvency practitioner at all times before appointment as administrator and after the appointment, act objectively in a manner that gives due regard and balance to the interests of all creditors.  Of paramount importance is that a practitioner be independent and impartial.

Secondly, in regard to the funding received by the Administrator from Saraceni and IMF, Corboy J said, the fact that an administrator "is funded by one creditor or a group of creditors would not, in itself, provide a basis for finding that there was a reasonable apprehension that an administrator was in a position of conflict".

Corboy J did not make a determinative finding on whether the Administrator engaging the same solicitors as Saraceni constituted a conflict, but did consider both sides of the argument.  He referred to Byrne J’s observations in Smarter Way (Aust) Pty Ltd v D’Aloia (As Administrator of Smarter Way (Aust) Pty Ltd [2000] VSC 408, “that it is undesirable for an administrator appointed by a chargee to engage the solicitors retained by the appointer to also advise and act for her/him”. Conversely, he referred to Burchett AJ’s comments in National Australia Bank Ltd v Wiley “there is, of course, no objection, in itself, to the engagement by a liquidator of a solicitor who is also acting for one of the parties interested in the liquidation.  It depends on the circumstances”.

Finally, he commented on the Administrator’s potential involvement in proceedings with Westgem and Saraceni.  He was not prepared to find one way or the other whether these future proceedings would result in conflict.  Mainly because it was not known what role the Administrator would play. However, he cautioned the Administrator and commented that he should think carefully how he is legally represented.

Lavan Legal comment

An insolvency practitioner must be and be seen to be independent and impartial at all times.  If an administrator is labouring under an actual or perceived conflict of interest, it can call the nature of the administration into question.  Here, the Administrator’s strategy of going on the front foot to Court, seeking directions concerning his appointment succeeded.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.