Lessons from Lavan: Navigating the “No Profit Rule” in a committee of inspection

Insolvency practitioners are aware that the statutory function of any committee of inspection (COI) is provided for in the Insolvency Practice Schedule (Corporations) (IPS) set out in Schedule 2 of the Corporations Act 2001 (Cth) (Act).

Whilst the primary function of a COI is to advise, assist, give directions, and monitor conduct, s 80-55 of the IPS restricts creditors from deriving a profit or advantage from their role on a COI without, amongst other exceptions, leave of the Court.

The case of Marsden, in the matter of Brindabella Christian Education Limited (administrators appointed) [2025] FCA 456 (Marsden), presided over by Justice Derrington, provides practical guidance on the circumstances in which the Court may grant leave under s 80-55, particularly where a creditor has an ongoing financial interest in the administration.

Background

Brindabella Christian Education Limited (the Company) operated a school in Canberra and entered voluntary administration on 5 March 2025 following sustained financial difficulties. Given the essential nature of its services, the administrators sought and obtained urgent interim funding to maintain operations, cover staff wages, and preserve the school’s value.

At the time of appointment, the Company owed approximately $23.8 million to creditors, including $9.3 million to a secured lender, $6.1 million to the Australian Taxation Office, and $1.4 million to employees.

National Australia Bank (NAB), as the secured lender, was entitled to representation on the COI. However, as NAB continued to accrue interest under its lending arrangements, it required leave under s 80-55 to participate on the COI.

Justice Derrington granted leave on the basis that:

• NAB was the largest secured creditor and its interests ought to be represented;
• excluding NAB from the COI would risk a lack of proper representation of secured creditor interests;
• NAB’s participation was unlikely to prejudice other creditors; and
• its involvement was likely to enhance the overall return to creditors.

That is, confirmation was provided that the Court may grant leave under s 80-55 where a creditor’s participation on a COI, despite a financial interest, is likely to benefit the administration and does not result in material prejudice to creditors.

Preliminary Question

The decision raises a practical question: would the same approach apply where the relevant creditor is not a major institutional lender such as NAB, but a mezzanine financier or “white knight lender” providing funding at significantly higher interest rates (e.g. 20–30% per annum)?

In such cases, the tension between the statutory restriction in s 80-55(1) and the commercial reality of rescue funding becomes more pronounced. While high-interest funding may be critical to preserving the business and maximising returns, it also increases the extent of the creditor’s financial interest in the administration.

Marsden suggests that the existence of a financial benefit alone is not determinative. Rather, the Court’s focus is likely to remain on:

• whether the creditor’s participation on the COI is necessary or desirable for the administration;
• whether any conflict can be appropriately managed; and
• whether the arrangement operates to the detriment of creditors as a whole.

In circumstances involving high-interest lenders, the Court may apply closer scrutiny. However, where such funding is reasonably necessary to enable continued trading and preserve value, leave may still be granted, particularly where appropriate safeguards are in place.

Application

In Marsden, the nature of the Company’s operations was significant. The Company operated a school, and its continued trading directly affected employees, students, and the broader community. Justice Derrington expressly recognised the importance of maintaining operations and commended the administrators for securing interim funding.

While the decision does not turn solely on the public importance of the business, it illustrates that the Court will take into account the practical consequences of insolvency, including the need to preserve going concern value.

This suggests that, even in cases involving higher-cost funding, leave under s 80-55 may be granted where:

• the funding is critical to the continuation of the business; and
• the creditor’s involvement on the COI supports, rather than undermines, the administration.

A comparable issue arose in GTLK Europe Designated Activity Company [In Liquidation] v Companies Act 2014 (Approved) [2025] IEHC 105 (GTLK), decided by the Irish High Court.

In GTLK, certain creditors appointed to the equivalent of a COI held substantial loan notes and sought permission to continue trading those notes. The Court accepted that such trading would give rise to a conflict with the applicable “no profit” rule. Notwithstanding, the Court permitted trading to continue subject to a structured protocol designed to manage conflicts.

While the factual context differs from Marsden, the decision similarly reflects a willingness to allow creditors to engage in profit-generating activities connected with an insolvency process, provided that:

• conflicts are recognised and controlled; and
• the overall integrity of the process is maintained.

Key Takeaways

Marsden demonstrates that:

• the restriction in s 80-55(1) is not absolute and may be displaced with Court approval;
• the existence of a financial interest (including ongoing interest accrual) does not automatically preclude participation on a COI;
• the Court will focus on practical outcomes, including creditor representation, absence of prejudice, and the utility of the creditor’s involvement; and
• in appropriate cases, particularly where funding is critical to the continuation of the business, leave may be granted even where a creditor derives a commercial benefit.

In a practical sense, the case underscores the importance of identifying potential conflicts early, seeking timely Court approval where required and demonstrating that any proposed arrangement will enhance, rather than compromise, the administration.

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.