Replacing a voluntary administrator: How? Why?

Benefits of voluntary administration for directors and creditors
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A voluntary administrator is often appointed by the company. The directors have a role in selecting the administrator; often the referral will come through one of the company’s advisers, such as the accountant or lawyer.

The administrator has a duty to act in the best interest of the creditors as a whole, and to investigate the affairs of the company. Sometimes, this may (or at least should) result in claims being brought against the company directors – for example in relation to insolvent trading. Occasionally, however misplaced (and it often is), creditors have the perception that the appointed administrator will favour the company directors or not otherwise act in the best interests of the creditors as a whole – perhaps to keep the referrer on-side who has the capacity to refer more work or for some other reason.

How is an administrator appointed?

One route to appointing a voluntary administrator (who must be a registered liquidator) is by the board of the company when the directors of that company decide that the company is, or is likely to become, insolvent, and they pass a resolution to appoint a voluntary administrator. Section 436A of the Corporations Act 2001 (Cth) requires that this be in writing.

A voluntary administrator can also be appointed by a secured creditor (who has an enforceable security interest in all, or substantially all, of the company’s property, although more often than not a secured creditor would appoint a receiver) or by a liquidator or provisional liquidator.

Who can be a voluntary administrator?

There are strict rules around who can operate as a voluntary administrator. Challenge to an administrator’s appointment often rests on the grounds that they are not eligible under these rules.

An administrator must be a registered liquidator (s448B of the Corporations Act 2001 (Cth)).

Section 448C of the Corporations Act 2001 (Cth) sets out a number of disqualifications for administrator’s connected to the company (or in some cases, to a body corporate related to the company) including (except with the Court’s permission) an administrator who has an interest in the company as a director, employee, substantial creditor or auditor (or importantly, where the administrator is a partner or employee of an auditor of the company).

Administrators from multi-disciplinary practices might find that they are disqualified from taking an appointment because their firm has acted for the company in some other capacity. This is not always clear-cut, and the particular facts surrounding the previous work will need to be looked at carefully. If you are concerned, you should study the DIRRI carefully (see below).

The ARITA code

The Australian Restructuring, Insolvency & Turnaround Association (ARITA), has developed a Code of Professional Practice. The Code is comprehensive, and intended to:

  • Set standards of conduct for ARITA Members
  • Inform and educate Members as to those standards of conduct
  • Provide a reference for stakeholders, Regulators and the Court to gauge the conduct of ARITA Members

A recent practice note sent to ARITA members condenses some of these principles as they relate to independence. It includes examples of conduct which might mean a potential administrator is not independent. Among them are:

  • Where the firm has provided other services to the insolvent company, like accounting or taxation advice
  • Where the firm has been engaged as a restructuring adviser, like valuations or forensic services
  • Where the firm has been engaged as a safe harbour adviser

When they are appointed, the voluntary administrator must file a Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) to declare any relevant relationships and indemnities that might affect their appointment. If you are concerned about the impartiality of an administrator, it is worth having a close look at the DIRRI to identify any curious disclosures.

How is an administrator removed?

Although administrators are appointed by the directors, generally the directors cannot replace them. That is because, broadly speaking, the voluntary administrator works for and owes duties to the creditors — not the directors.

The voluntary administrator may be removed or replaced:

  • at the first meeting of the creditors by passing a resolution;
  • by resolution under the Insolvency Practice Rules (see for example Insolvency Practice Schedule s90-35); or
  • by applying for orders of the Court.

At the first meeting of the creditors 

The voluntary administrator’s appointment will need to be ratified at the first creditor’s meeting.

If a creditor wants to nominate a replacement voluntary administrator, they must approach an eligible registered liquidator before this meeting and get written consent that they are prepared to act. The potential replacement will need to present a DIRRI at this first meeting. A point to note is that sometimes the proposed replacement might want an indemnity for remuneration from the party putting he or she forward, especially if they are concerned that the company will not have adequate cash or assets to be reimbursed; this can sometimes make replacement unrealistic.

Creditors then vote as to whether they want to replace the voluntary administrator with the proposed replacement.

The vote to either retain or replace them must be passed by at least 50 per cent of its creditors, by both number and value, at the first creditors meeting. That means that:

  • more than half the number of creditors who are voting vote in favour of the resolution; and
  • the creditors who are owed more than half of the total debt vote in favour of the resolution.

If a majority in both number and value is not reached, the person presiding at the meeting (usually the administrator) has a casting vote. This vote cannot be exercised in respect of removing the administrator unless it relates to voting in favour of the removal.

By resolution under the Insolvency Practice Rules

If the administrator is ratified at the first meeting, but creditors want to remove them later, they may pass a resolution at a subsequent meeting under the Insolvency Practice Rules (Corporations) 2016.

Removal of voluntary administrator by the Court

Creditors (and others) may also apply to the Court for a range of orders. These include:

  • Any order the Court thinks necessary to protect the interests of a company’s creditors, including the removal or replacement of a voluntary administrator. This application may be made by a creditor or ASIC
  • A declaration that the voluntary administrator has been validly appointed. This application may be made by the voluntary administrator, the company or a creditor
  • General orders in relation to voluntary administration. These applications may be made by the creditors, voluntary administrator, ASIC, company or any other interested person

In any event, before voting for or applying to remove an incumbent administrator, creditors are well-advised to think about the cost implications (including legal costs for Court applications). If another administrator must climb the learning curve, where the incumbent has already done so to some extent, replacement may ultimately mean depleting the pot available for distribution to the creditors.

How would one go about galvanising the creditors to pass a resolution?

You need half of the other creditors (by both number and value) to agree to replace the administrator. How do you do it?

Find out who the creditors are. There are two types of creditor: secured and unsecured. A secured creditor is one who has a registered interest in some or all the company’s assets, for example a mortgage or other security interest. You can find out who they are by doing a search of the Personal Property Security Register (PPSR) and a title search of any real property held by the company, and then contacting them.

Then, there is leveraging other connections who might wield significant influence over a large group of eligible voters, such as employees, and can influence their vote. For example, reportedly, in the Arrium administration, it was the Australian Workers Union representing around 2000 workers, and lenders, who were pivotal in causing Grant Thornton to be replaced by KordaMentha.

Appeal to their interests. Creditors are usually owed money because they have:

  • provided goods or services
  • made a loan to the company
  • bought goods and services that have not been received (partly or in full)
  • accrued entitlements as an employee of the company, such as unpaid wages or leave

No matter why someone is a creditor, they share the same concern: to maximise the amount of money available to pay their debt.

Creditors are more likely to vote for a replacement if they believe that the administrator is not acting in their best interests. This does not have to be deliberate misconduct. It could be as simple as suggesting that the administrator is more focused on their own interests than the interests of the creditors at large, or pleasing the parties who got them the job (such as the company’s lawyers or accountants who often have the capacity to provide further referrals).

One pinch point that might play out is where, optically at least, the administrators make decisions that apparently work in the directors’ favour, rather than in the creditors’ favour. Given that directors are the ones who choose voluntary administrators, and sent the lucrative work their way, there can be a perception (however misplaced – and it often is) that the administrators are keeping directors on side at the expense of the creditors.

The Ten Network case

The 2017 decision in Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914, might give us a clue as to how a Court might view the appointment of an administrator who has executed some pre-administration work for the company.

In the Ten Network case, Mark Korda (of KordaMentha) along with Jarrod Villani and Jennifer Nettleton of the same firm, were appointed administrators of Ten Network Holdings Ltd in June 2017. They sought directions under s447D of the Corporations Act 2001 (Cth) that they were justified in remaining as administrators.

The main issue here was that KordaMentha had been retained by the Ten Group’s lawyers Gilbert + Tobin for several months prior to the company entering voluntary administration. KordaMentha acted as consultants under a limited retainer in order to ensure that they would be in a position to accept the role of administrator.

Between February and June 2017, KordaMentha attended about 50 meetings with the Ten Group’s management, directors, financiers, shareholders and advisers. They did not provide advice directly to any of these groups. They did, however, remit around $1M in fees during this time, and had knowledge that they were retained as a ‘Plan B’ administrator should things go south.

The Court was asked to decide if these matters, disclosed in the DIRRI, meant that KordaMentha could not continue as administrators. The Court did not consider KordaMentha were disqualified.

The Court found that because KordaMentha had not, in their pre-appointment role:

  • Reached an agreement with creditors; or
  • Provided advice directly to the directors, management or other groups,

they could continue in their role as administrators.

The Court also considered the ARITA Code. Relevantly, the Judge noted that while the Code provides “guidance on standards of practice and professional conduct expected of ARITA members”, it has no legal status. “It is not the Court’s function […] to either apply or interpret the code.

The Court’s decision in Ten Network may suggest that the Court takes a more lenient view on the disqualifying factors than ARITA.

What does this mean for you?

If you are a creditor of a company which is entering voluntary administration, and you have some doubts about the administrator, seek early legal advice about what you can do to protect your position. An insolvency lawyer will help you understand your options and develop a strategy. You may not need to go to Court if you can foment a creditors’ revolution. You should also remember that administrators are part of an honourable profession, and most will be executing their duties lawfully and well regardless of the optics.

Administrators should remain aware that their involvement with a company prior to being appointed might have implications for their appointment and ability to remain in office. Administrators should do all they can to get the company’s creditors on-side as soon as they are appointed to thwart any revolution.

Further information

For more information about the rights and responsibilities of voluntary administrators, please contact:
Trevor Withane: trevor.withane@blackwattlelegal.com.au, tel +61 (0)418 717 001

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