You Can’t Have Your Cake And Eat It Too - Creditor Estopped From Raising Invalid Appointment In Remuneration Review

In the case of Stimpson v Allied Rural Pty Ltd (subject to deed of company arrangement) & Ors [2022] QSC 74, the Supreme Court of Queensland considered an application by an administrator for review of a remuneration determination made by resolution of the creditors.

The matter was unusual in that the administration of the company, Allied Rural Pty Ltd (Allied Rural), had resulted in a deed of company arrangement (DOCA) that was proposed by, approved by and operated for the benefit of certain creditors of Allied Rural.

However, those creditors then refused to approve the administrator’s fees for reasons including that the administrator had been invalidly appointed and should have immediately terminated the administration after being appointed.  The administrator was therefore required to apply to the Court for approval of his fees.

Background

Allied Rural was originally incorporated and run by siblings Josephine and William Doolan in 2009.  Josephine held all of the shares in Allied Rural as trustee for the Doolan Trust and was the sole director, while William ran the company’s business.

Subsequently, in the period between 2012 and 2013, a person by the name of Hugh Blennerhasset effectively replaced Josephine as director of Allied Rural and as trustee of the Doolan Trust.  Mr Blennerhasset also took ownership of the 210 shares in Allied Rural, of which 180 were held on trust for the Doolan Trust and 30 were held on trust for Mr Blennerhasset’s trust. 

A dispute then arose in 2019 and 2020 regarding the running of Allied Rural.  In the course of that dispute, William Doolan issued demands to Allied Rural for amounts totalling approximately $400,000.  Further, Katrina Perey, an employee of the company and the partner of William Doolan, also issued a demand for approximately $19,000 said to be owing to her.  Both Ms Perey and the accountants for William Doolan made allegations of insolvency during this period.  In addition, through a variety of circumstances, Mr Blennerhasset was denied access to the company’s books and records for a period of approximately 2 months in January and February 2021.

Mr Blennerhasset placed the company into administration on 2 March 2021.  This was stridently opposed by William Doolan on the basis that Allied Rural was solvent.

Following this appointment, a number of developments took place:

• the first creditors’ meeting was held on 12 March 2021 at which William Doolan claimed that the administrator had not been validly appointed, that the company was solvent, and that the administrator had been appointed for an ‘improper purpose’.  The meeting was adjourned for the administrator to consider and if appropriate issue a notice to creditors of the administrator’s intention to apply to terminate the administration under section 447A of the Corporations Act 2001 (Cth) (Act);
• on 18 March 2021, the administrator completed a solvency report on Allied Rural for the purpose of an anticipated application to terminate the administration under section 447A of the Act.  The report found that Allied Rural was solvent assuming that claimed debts of $1.5m owing to William Doolan and his related entities were in fact non-current liabilities as recorded in the accounts;
• the first creditors’ meeting was resumed on 22 March 2021.  At this meeting William Doolan proposed a resolution that ‘the administration be terminated on 29 March 2021 which was carried on the voices but which of course had no legal effect;
• on 26 March 2021, the administrator filed an application under s447A of the Act to terminate the administration.  The administrator noted in his affidavit that he had concluded the company was solvent assuming the debts to William Doolan were in fact non-current liabilities, but that in his opinion the ongoing dispute between Mr Doolan and Mr Blennerhasset risked the trading activities of the company and would ultimately result in the insolvency of the company;
• then between 29 March and early April 2021, Mr Doolan changed his position, advising that he did not want the administration terminated, that he instead wanted the creditors to vote on a DOCA proposal put forward by him, and that neither he or his related entities would continue to forbear on demanding their debts if his DOCA proposal was not approved; and
• this resulted in the s447A application falling away and the administration proceeding to the second creditors’ meeting.

The administrator completed his report to creditors on 29 April 2021.  The report concluded that Allied Rural was insolvent based on the revised position regarding Mr Doolan’s debts and recommended that the creditors approve Mr Doolan’s DOCA.

The second creditors’ meeting was held on 10 May 2021.  Mr Doolan’s DOCA was approved, but the resolutions for approval of the administrator’s fees were not carried.  Mr Doolan instead proposed a resolution that the administrator’s fees be fixed on an ad valorem basis at 20% of the value of creditors’ claims admitted for dividend purposes under the DOCA.  This resolution was carried.

The administrator then applied to the Court for review of that resolution and determination.

Decision

The administrator’s application was opposed by Mr Doolan, Allied Rural and Mr Doolan’s partner Ms Perey on the grounds that the appointment was invalid, that the administrator should have immediately terminated the administration after being appointed, and that the administrator’s remuneration should be as per the determination made by the creditors (ie fixed at 20% of admitted claims under the DOCA).

After going through the facts of the matter, Justice Jackson considered that overall Mr Doolan had acted as a ‘disruptive humbug’.¹

On the matter of the alleged invalid appointment, Justice Jackson concluded that he was not required to reach a decision on the matter because Mr Doolan was precluded from raising the invalidity of the appointment on the basis of the doctrine of approbate and reprobate.  His Honour referred to previous case law on the doctrine:

Where a person obtains advantages by relying upon rights which can exist only upon the basis of an assumed state of facts, he is not permitted thereafter to rely upon other rights in relation to the same person which are inconsistent with the existence of the rights formerly asserted.²

In other words, you can’t have your cake and eat it too. 

The circumstances relevant to precluding Mr Doolan from raising the alleged invalidity of the appointment included that Mr Doolan had changed his position and had requested the administrator adjourn the application to terminate the administration and continue the administration by putting Mr Doolan’s proposed DOCA to creditors at the second meeting.  

As to reviewing the remuneration determination, the Court has the power to do so pursuant to section 60-11 of the Insolvency Practice Schedule (Corporations).  In this respect, His Honour held it was appropriate to review the determination, having regard to the unusual circumstances of the case.³

In respect of the reasonableness of the remuneration sought by the Administrator, his Honour referred to the leading case of Sanderson as Liquidator of Sakr Nominees Pty Ltd v Sakri, and the requirement that the Court must have regard to whether the remuneration is reasonable, taking into account any or all of the following matters:⁴

• the extent to which the work by the external administrator was necessary and properly performed;
• the extent to which the work likely to be performed by the external administrator is likely to be necessary and properly performed;
• the period during which the work was, or is likely to be, performed by the external administrator;
• the quality of the work performed, or likely to be performed, by the external administrator;
• the complexity (or otherwise) of the work performed, or likely to be performed, by the external administrator;
• the extent (if any) to which the external administrator was, or is likely to be, required to deal with extraordinary issues;
• the extent (if any) to which the external administrator was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case;
• the value and nature of any property dealt with, or likely to be dealt with, by the external administrator;
• the number, attributes and conduct, or the likely number, attributes and conduct, of the creditors;
• if the remuneration is worked out wholly or partly on a time-cost basis--the time properly taken, or likely to be properly taken, by the external administrator in performing the work;
• whether the external administrator was, or is likely to be, required to deal with one or more controllers, or one or more managing controllers;
• if:
  • a review has been carried out under Subdivision C of Division 90 (review by another registered liquidator) into a matter that relates to the external administration; and
  • the matter is, or includes, remuneration of the external administrator;
• the contents of the report on the review that relate to that matter;
• any other relevant matters.

His Honour ultimately rejected all of Mr Doolan’s arguments and the administrator was successful, with the Court ordering that the remuneration determination be varied to $228,891.

Lavan comment

This case is a useful reminder to both creditors and insolvency practitioners of the Court’s power to review remuneration determinations, as well as the complex scenarios that can arise in external administrations.

If you have any questions about the Court’s power to review remuneration determinations, the experienced Lavan team is ready to help.