Ashurst Restructuring Roundup

Due Diligence by Voluntary Administrators in respect of their Appointment

Robust Construction Services Pty Ltd [2023] NSWSC 1156 ("Robust")

Are the directors of a company wanting to put a company into administration who they say they are?  Should insolvency practitioners undertake a process of due diligence prior to their appointment as voluntary administrators?  The importance for practitioners being satisfied that they are actually dealing with a company's directors was illustrated in Robust Constructions where the validity of the appointment of administrators prior to the creditors voluntary liquidation of the companies was challenged.  The basis of the challenge was that the sole director of the companies in question had not resolved to make the appointments.

In this case, a liquidation followed the administration. The Court held the liquidators had standing to apply for orders under s 447A that the appointment of administrators, and their subsequent appointment as liquidators, be validated. 

The Court referred to the following factors:

1. the likely insolvency of the company;
2. whether the administrators made inquiries to confirm the validity of their appointments, including by seeking external legal advice;
3. the potential disruption that may be caused by a future challenge to the validity of the administrators' appointment;
4. the conduct of the directors prior to the administrators' appointment, and whether it would be wrong to give the imprimatur of the Court to that conduct by validating that appointment;
5. the work carried out by the administrators (and liquidators) on the assumptions that their appointments were valid;
6. whether substantial injustice would be occasioned to any person by the validation of the appointment; and
7. whether the proposed orders under s 447A are otherwise consistent with the objectives of Part 5.3A.

The administrators were found to have undertaken sufficient due diligence concerning the validity of their appointment to support an order being made under s 447A, Corporations Act, validating their appointment:

(a) by relying on the advice of a solicitor that he acted for the director of the companies and that the director of the company wished to place the companies into voluntary administration; 

(b) verifying the identity of the person represented by the solicitor to be the director of the companies by requiring production of the person's driver's licence; 

(c) by acting on an email sent from the person's email address (which had previously been provided to the administrators by the solicitor) to institute the voluntary administration; 

(d) by relying on documents appearing to be signed (when compared with the signature on the driver's licence) by the person to the effect that the companies had resolved that they be placed into administration;

(e) the financial information available to the administrators gave them no reason to question the bona fides of the resolutions that the companies were insolvent or likely to become insolvent; and

(f) the subsequent investigations by the administrators, and the liquidators, confirmed the companies were indeed insolvent.

It is suggested that it would be prudent for administrators to undertake an ASIC search to satisfy themselves of the status of the people with whom they are dealing.  Additionally, as happened in Robust Constructions, the identity of those with whom the administrators are dealing should be verified by some form of photo ID such as a driver's licence.  Helpfully, in this case the administrators sought detailed financial records of a kind which, amongst other things, enabled them to be satisfied about the financial condition of the companies.

Authors: Richard Fisher AM; and Emanuel Poulos, Partner.