In a previous article, 'In case of emergency: Using emergency power provisions to appoint a voluntary administrator' we discussed the use of emergency powers in a company’s constitution to appoint a voluntary administrator to a company, as well as the use of court assistance to cure defects in an appointment.
Indeed, there is ample precedent where courts have made orders under sections 447A or 1322(4) of the Corporations Act 2001 (Cth) (Corporations Act) to cure defects in an appointment of a voluntary administrator. Such circumstances which have warranted the exercise of this power include where the resolution to appoint administrators was passed at an inquorate board meeting (Re Australian Art Investment Pty Ltd  VSC 18), where notice requirements for the board meeting convened to appoint administrators were not met (Re Foodora Australia Pty Ltd  NSWSC 1426), and where the last director of a company purported to resign prior to appointing administrators (Big Village Australia Pty Ltd (Administrators Appointed)  FCA 4).
The incentive for an administrator to seek validation orders is obvious. Aside from being dutybound to take reasonable steps to satisfy themselves of the validity of their appointment on the face of the appointment documents, the doubt cast over their right to recoup their remuneration and expenses, should their appointment be deemed invalid, is enough to send most administrators to court.
Specifically, an invalid appointment puts at risk an administrator’s right of indemnity afforded under section 443D of the Corporations Act for remuneration and debts incurred, as well as the corresponding lien provided by section 443F over the assets of the company to secure that right of indemnity.
Given the potential exposure to administrators, the validity of an administrator’s appointment is an issue which is usually promptly resolved by the Court on application by an administrator. However, what happens if the Court is unwilling or unable to grant such orders when sought by an administrator? This is not to say that the Court would be deeming the appointment invalid, but rather, declining to adjudicate on the validity of the appointment at all. Aside from potentially jeopardising their right to payment of their remuneration and expenses from the assets of the company, a subsequent finding of invalidity may also have wider-reaching effects, such as calling into question the binding nature of steps taken by the administrator on behalf of the company during the appointment (including in respect of any transaction to which an administrator has sought to bind the company).
The Adaman Group administration
Whilst the above circumstance may be rare, this was the situation the administrators of gold mining business, Adaman Resources and six of its subsidiaries (Adaman Group or the Group) found themselves in and which precipitated 8 successive applications to the Federal Court of Australia.
Shortly after the appointment of administrators to the Adaman Group, questions were raised regarding the validity of their appointment, including due to the directors relying on an emergency power in the head company’s constitution to effect the appointment and a consent requirement contained in a shareholders’ deed.
Whilst Justice Banks-Smith made orders validating the administrators’ appointment over 5 of the Adaman Group entities less than two weeks after the administrators were appointed, her Honour declined to make the same orders for the two remaining Group entities at that time. Her Honour’s reasoning was that a separate oppression proceeding had been commenced by an aggrieved shareholder in respect of the two remaining Group entities which raised, amongst other things, the bona fides of the appointment of the administrators to those entities. Given that any determination of the oppression proceeding, including any complaints maintained against the administrators, would be some time off and the overlap between matters relevant to both proceedings, her Honour declined to resolve the balance of the administrators’ validation application at the same time as the other entities.
The unresolved question of validity created uncertainties for the administrators in continuing with the appointment over the two remaining Group entities, including:
- whether actions taken by them in the administration on behalf of the two remaining Group entities, such as entry into a Deed of Company Arrangement (DOCA), would be valid and binding on those companies; and
- the recoverability of their fees and disbursements incurred in the administration, in circumstances where they would be relying on the right of indemnity and lien over the two remaining Group entities’ assets under sections 443F and 443F of the Corporations Act, respectively.
Given the subsisting validity concerns, the administrators utilised the Court throughout the administration to mitigate their exposure and liability in continuing with the appointment over the two remaining Group entities.
Entry into the DOCA
In respect of the proposed DOCA, the administrators applied for and received orders to the effect that they were justified and would be acting reasonably and properly by entering into and giving effect to the DOCA. The administrators also received orders under section 447A that Part 5.3A of the Corporations Act was to operate in relation to the two remaining Group entities as if the administrators did have the power to enter into the DOCA pursuant to sections 437A(1) and 442A(c) and that entry into the DOCA would not be void under section 437(2) for lack of authority.
Remuneration and disbursements
Prior to the Adaman Group administration, there was precedent for invalidly appointed administrators and liquidators receiving orders entitling them to their remuneration and expenses already incurred in an appointment after having their appointment deemed invalid by the Court (See: In the matter of Warwick Keneally as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd)  NSWSC 2037 (administrator); In the matter of Polat Enterprises Pty Ltd (in liq)  VSC 485 (liquidator); Blackadder v McQuinn (No 2)  NTSC 57 (administrator)). As recognised by Justice Banks-Smith, typically in such cases, the foundational basis of this relief is restitution on a quantum meruit basis or that the work was of incontrovertible benefit.
However, the Adaman Group administration was the first time that a Court granted prospective relief, that is, orders that the administrators were entitled to their reasonable costs and remuneration, and a lien to secure same, irrespective of and before any determination as to the validity of their appointment. This form of order provided the requisite comfort needed for the administrators to continue with the appointments.
As part of the application, the administrators proposed a regime that in effect applied Division 60 of the Insolvency Practice Schedule (Corporations) (being Schedule 2 to the Corporations Act) (IPS), requiring creditor or court approval for payment of their remuneration, and (departing from the usual course) also provided for the same approval process for costs and expenses.
Setting precedent, her Honour granted orders entitling the administrators to their remuneration and expenses irrespective of and, prior to, any validity determination, sighting the following factors in their favour:
- the administrators continued to carry out all relevant tasks relating to the administration of the Adaman Group and had reported to the Court on a number of occasions as to the work that was being undertaken;
- the Adaman Group continued to trade through the administrators' efforts. That work was being undertaken to maximise the possibility of a sale or restructure of the Group and the value of the assets for the benefit of creditors and to preserve employment prospects, in furtherance of the objects of Part 5.3A;
- the administrators remained personally exposed and, in that context, it was appropriate that there be a measure of certainty in respect of their exposure in undertaking that work; and
- the orders proposed by the administrators advanced the objects of Part 5.3A by giving the administrators a reasonable degree of certainty in the continued performance of their functions and duties, whilst leaving open the ability of interested parties to review their costs, expenses and remuneration in due course.
Voluntary administration – an out of court process?
Although the voluntary administration process is traditionally considered to be an out of court process, the broad powers conferred on the Court are a powerful tool which can be utilised by administrators to assist them in the performance of their duties, especially when undertaking higher-risk and more complex appointments.
Whilst Justice Banks-Smith ultimately made orders validating the administrators’ appointment over the two remaining Group entities, those orders were only made some five months after the administrators’ appointment and only once the administration had effectively run its course, with the Adaman Group undergoing a restructure and recapitalisation through a DOCA. In the face of significant personal exposure, it was the ability to effectively run the Adaman Group administration under court supervision (consisting of 8 successive court applications) which allowed the administrators to continue with and finalise the appointment.
The prospective relief received for the administrators’ remuneration and disbursements is just one example of the reach of section 447A of the Corporations Act and 90-15 of the IPS. We will be keenly monitoring the development of case law in this area, as insolvency practitioners continue to turn to the Court for assistance, and the boundaries of the facilitative provisions in the Corporations Act are tested.
Gilbert + Tobin acted for the administrators of the Adaman Group. A link to Nipps (Administrator) v Remagen Lend ADA Pty Ltd, in the matter of Adaman Resources Pty Ltd (Administrators Appointed)  FCA 520 and the subsequent 7 decisions can be found here.