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Episode 75
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Substantive Law
Debased and Abused: Improper Uses of Part 5.3A of the Corporations Act
Law as stated: 3 February 2023
What is this?
This episode was published and is accurate as at this date.
Newly appointed Lecturer (Corporate Law) at Deakin, Paulina Fishman, geeks out with host and fellow insolvency aficionado David, exploring the meaning of abuse in Part 5.3A of the Corporations Act.
Substantive Law| What area(s) of law does this episode consider? | The concept of abuse in Part 5.3A of the Corporations Act 2001 (Cth). |
| Why is this topic relevant? | Part 5.3A of the Corporations Act has a long and arguably sordid history. After all, it’s the most popular corporate reorganisation regime in Australia. Located in the Part is section 447A. That section provides the Court with a general power to make orders, including where the Court is satisfied that the Part is being abused. But what is abuse? And how should practitioners go about spotting and dealing with abuse when they see it? |
| What legislation is considered in this episode? | Corporations Act 2001 (Cth) |
| What cases are considered in this episode? | Blacktown City Council v MacArthur Telecommunications Pty Ltd (2003) NSWSC 883
Aloridge Pty Ltd v Western Australia Gem Explorers Pty Ltd [1995] FCA 3; 127 ALR 410
Emperor Investment Group Pty Ltd v Delta Law Pty Ltd and Anor [2019] QSC 307
Re Condor Blanco Mines Ltd [2016] NSWSC 1196
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| What are the main points? |
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| What are the practical takeaways? |
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| David Turner:
1:00
2:00 | Hello and welcome to Hearsay the Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on the go and at a time that suits them. I’m your host David Turner. Hearsay the Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services and Hearsay the Legal Podcast is how we’re improving the experience of CPD. Part 5.3 of the Corporations Act has a long, and as we’ll discuss today, arguably sordid history. And we’ve talked about it plenty of times on the podcast before. This part of the Act governs two processes of external administration. It’s the most popular corporate reorganisation regime in Australia. And if you’ve listened to episode 9 of our podcast with Professor Jason Harris, you might know a little bit about the history and effectiveness of the Part 5.3A or voluntary administration regime. But today we’ll be looking at what might be described as abuse of the regime. Located within Part 5.3A is section 447A. Now that section provides the court with a general power to make orders and many insolvency lawyers might be familiar with it for that purpose. But it also includes a power to end the voluntary administration where the court is satisfied that the part is being abused. Now, on the face of it, the idea of what is and isn’t abuse might seem straightforward. Justice Barrett in Blacktown City Council v MacArthur Telecommunications Proprietary Limited proposed that the concept of abuse in that section meant using Part 5.3A for an “improper purpose”, and by analogy that it was equivalent to the common law doctrine of abuse of process. But that really isn’t the whole story. Abuse of Part 5.3A can more accurately be described as akin to an abuse of process rather than the same. After Justice Barrett’s comments, Justice Sackville commented on the similar but different nature of abuse under statute and the care and attention that needs to be paid to the terms of the legislation. So what does abuse mean in this context? If it’s something else entirely, then in a common law abuse of process, what is it? How often is Part 5.3A being abused? And how so? Joining me today to discuss those questions is Paulina Fishman, PhD candidate at the University of Adelaide whose doctoral research is supported by an Australian Government Research Training Program Scholarship and a Zelling-Gray Supplementary Scholarship. Paulina’s PhD thesis considers the abuse of provisions of Part 5.3A. Paulina, welcome to Hearsay the Legal Podcast! |
| Paulina Fishman: | Thank you so much for having me. |
| DT: | Now before we start, tell us a little bit about your background and your path to starting a PhD. |
| PF: 3:00
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5:00 | Yeah. Oh gosh. It’s been quite a long journey for me personally. So I did a Bachelor of Commerce and Bachelor of Laws double degree at Monash. That’s how I started out. And then I didn’t straight away go into academia. I actually was speaking to some mentors at the time. And I said, oh, look, I’m really interested in academia. And they said that’s great. But you should maybe explore practice first because you’re straight out of the law school, and it might be a shame when you’re at that stage where you could really launch yourself as a lawyer. So I was like, okay that sounds like good advice. Especially because they said you can always come back to academia. And so yeah I give it a go. And I went into a commercial law firm and that was so exciting. And I think the advice that I got was really excellent because I ended up learning so much more. I remember at the end of law school thinking, that’s it, that’s everything there is to learn. And I was so wrong. In practice, it’s a whole different thing. And you see the practical side of law and it’s incredible. And I got to work in the litigation department, which was very exciting. I was bright-eyed and bushy-tailed and I really just had the time of my life. Got to work on one High Court matter, which at the time I thought it was like a superstar and it was brilliant. But in practice there is this idea that as you go up with experience your charge out rate goes up, and it’s just not as possible for you to do as much legal research anymore. My first year I was doing a lot of research memos and then it was more appropriate for me to be running matters and I just missed the research too much. That was really it. And so then I found myself on a pretty long-winded journey to get back into academia because I went to the Supreme Court of Victoria and I worked as a judge’s associate and I got to do, you know, a lot of really exciting research there. And then after that I went to do a master’s degree. So I did that at the University of Oxford, a master of studies and legal research. And that was more research, so I was slowly coming back. And then just a few more detours. I worked as a sessional teaching associate at Monash when I came back to Australia. And that was great because at that point I was already quite fixed on trying to go into academia, but I thought; “I know I loved the research side, but will I love the teaching side?” And I’d never experimented with that. And so the opportunity presented itself and I just thought, I’m just going to give it my best go and I loved it. I was really amazed to discover that I can’t even tell which side is better, the research or the teaching. |
| DT: | Wow. |
| PF:
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7:00 | So, yeah, it was so rewarding because especially with the students that are struggling a bit. When you have some extra sessions or you explain something to them before or after like a lecture – finally, they understand! And it’s just you go to sleep at night so proud of yourself, cause you think I made a difference. With research, I love the process of research but I have a joke with my family, which is that once I have an article published, who reads it? Is it just on a shelf somewhere collecting dust? So at least with teaching you you get that immediate feedback, the glimmer of understanding in the students eye. And so yeah, I love that as well. And it just confirmed for me that yeah, academia, that’s what I want to do. And then a final detour was an opportunity presented itself to work as a legal research officer at the High Court and I thought that would be too cool to pass up. At that point I already knew that yes, I want to do the PhD, and I already applied. And, but I was like; “no, I can’t miss this chance. When in the future am I going to have an opportunity to go to the High Court like this?” And so I got to work there and do legal research in our highest court. And then finally after that I started my PhD. So; very long journey. And I even started it at a different university. I started it at the University of Melbourne. And then about seven months in, I transferred to the University of Adelaide. And I’m so delighted because my supervisors at the University of Adelaide are the most incredible supervisors. I’m just over the moon. So, I’m approaching the end. I’m now in my third year and so very close to that dream of academia that first formed when I was an undergraduate. |
| DT: | Yeah. Wow. Thanks for sharing your journey. I think there’s some great advice in there for any of our listeners who are considering academia. I think it’s wonderful that you had all of those other experiences in commercial practice, as a judge’s associate, before going into academia, because having that gloss on the academic or doctrinal knowledge is so beneficial especially when you’re studying a topic like the one that you’re studying for your PhD. Why were you interested in abuse of the voluntary administration regime? Was it the matters that you worked on as a commercial lawyer? Did you see some of it in the Supreme Court of Victoria? Where did that interest come from? |
| PF: 8:00
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11:00 | Yeah. So I think because my undergraduate studies were actually not just law but also commerce. I was from the very beginning interested in, kind of, the intersection between economics – which is what I majored in – and law. So right up the front when I was still a teenager essentially, I was in love with the law and economics movement. I was following Chicago School stuff. I was very interested in that. And I originally started out with a big interest in competition law. Which is also looking at companies and what they can and can’t do in the marketplace. But then when I went into the law firm that I worked at, I would keep hearing in the hallways, partners that I really looked up to and admired, mentioning this phrase, “DOCA”. It would always feel like “oh it’s covered by the DOCA” or “it’s in the DOCA”. And I was fascinated because I didn’t know what a “DOCA” meant. I was like what is this acronym? What does it stand for? So I googled it, and I discovered it stands for Deed of Company Arrangement. And I found out that it’s part of Part 5.3A, this regime, and that it’s in the field of insolvency law or corporate insolvency law in Australia. And I don’t know, I guess, part of the idea was for me was just; “it keeps being talked about by people that I really admire. And so I want to know more about it. It must be fun, it must be cool.” And that’s how I slowly shifted from my interest in competition law towards more insolvency law and specifically the regime in Part 5.3A. But it’s not such a huge change because I’m still looking at companies, which is what I’ve always been interested in from the beginning. But I ended up writing my Master’s thesis really focusing on DOCAs. And then, of course, DOCA is just a second mechanism, there’s administration beforehand. To enter into a Deed of Company Arrangement, you first need to have an administration. And so with my PhD thesis, I was thinking, I don’t want to just look at one of the mechanisms. I want to look at both. And so for my PhD thesis now I’m investigating the entire regime. And that’s pretty exciting that I get to look at the whole thing because of course it’s all interrelated. You can’t really separate it. And also the specific twist, because the regime is huge, and there’s so many things about it that you could research. So I had to narrow myself somehow. And I was reading cases on this. I was reading any Part 5.3A case that I could find when I was thinking like; “what could be my topic? What could I look at?” And a few improper purpose cases came up and I read them, and I was really interested in this. I thought; “this is a very cool regime, and what if it’s misused? Or what if someone has some improper purpose for using it?”And yeah, I was just so intrigued by that. I thought; “okay that’s the topic”. That’s what I’m going to look at. And within the bigger kind of topic of improper purposes for using the regime there’s this strand of it – which is abuse of the regime. So that by itself is interesting as well. But improper purposes actually come up in many aspects of the regime not necessarily amounting to abuse. |
| DT: | Absolutely. And we’re going to talk about abuse and some of the recent cases on what exactly that means. But before we do that, I just wanted to reflect on what you said about how this area joins your interests in law and economics. Plenty of economic geeks here on the Hearsay team – myself included. And I’ve always found that insolvency law is a great outlet for that interest in economics. The competition law field seems like an obvious choice, we’re always talking about market power in competition… |
| PF: | Yes. |
| DT:
12:00 | But in insolvency, and I suppose especially in a Deed of Company Arrangement, we’re talking about how to best allocate scarce resources, aren’t we? We’re identifying that there’s not enough to go around. What are the appropriate policy settings to allocate that scarcity? And I think that’s always been a fundamentally economic question. I think it’s a great area to be in if you are interested in economics. Now we’re going to talk about abuse of process and what exactly it is. Just before we do that we mentioned that section 447A is the provision that we’re talking about here as relevant to abuse of process in the voluntary administration regime. As I said at the top of the episode, a lot of practitioners, a lot of listeners might be more familiar with that section because of its first subsection, which gives that kind of general power to make orders, fix things that have gone wrong that the court often uses. Can you just refresh our memories on what that second subsection actually says? |
| PF:
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14:00 | Yeah, absolutely. So as you say the section itself is well known for the very broad power that it gives to courts, and that’s under subsection one. Basically, they can make any order that they think is appropriate; which is a huge power. And there are some limitations on it, it’s not completely unrestrained. But I’ve actually written an article on that section and subsection one in particular to look at “how much can you do”, and what are perhaps the limits of it. But I’m really interested in subsection two, which contains an example. So it’s not a separate power, it’s more “for example”. One of the things that the court can do on the subsection one is end an administration. And what’s interesting is if it were, you know, that by itself, that would be informative. But then it goes on to say more. And it actually says it might be that the court is satisfied that the administration should end “because” – and it gives us three options. And the first one is; “the company is solvent”. Yeah, sure. If the company is solvent, it makes sense because if we think about it, this is supposed to be an insolvency mechanism that you use to rescue the company, rescue the business, or make sure that creditors and members get as much of a return as possible. Now, if the company is financially healthy and robust you just wouldn’t need this regime. So that makes sense that you would end an administration if everything is fine and there’s no problem to be solved. And then the second option that it gives is “because the provisions of the part are being abused”. Basically that’s how we get this abuse in there. And the idea is that if we find abuse of the provisions of the Part that could be a valid reason for the court feeling that it’s appropriate to end the administration. And the power they would use is under subsection one. Subsection two clarifies that. Just for completeness; the third limb – “for some other reason”. So the court’s not, its hands aren’t bound. It can end the administration for some other reason. |
| DT: | Non-exhaustive list! That’s a really good point to make. And one I should have made that subsection two isn’t a separate power at all, is it? It’s a “for example” illustrative section of the kind of thing that the court can do under subsection one, something we should see more in legislative drafting. I think, actually, the “for example” clause |
| PF: | It is very useful. Yeah. |
| DT: 15:00 | Yeah, absolutely. Now we’re going to talk about the reasoning in Blacktown City Council, the case I referred to in the introduction to this episode and that you’ve referred to as well. Before we do though, let’s have a quick refresher on the facts of that case and its outcome. Now this was a case where the administration did end on the basis that an abuse of process had occurred and the company was then immediately placed into liquidation. Tell us a little bit about the facts of Blacktown City Council. |
| PF:
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18:00 | Basically this was a key abuse decision. The commencement of the administration was really for improper purposes. And some of the purposes that Justice Barrett was looking at were things like; “they were looking to prevent the hearing of a District Court matter going ahead, they were looking to protect themselves”. And the reason this case is really important though is because the Justice said; “what are we talking about when we’re talking about abuse in this context? Because the legislation says because the provisions are being abused. And what does that mean?” Because abuse isn’t defined in the Corporations Act. And so His Honour was saying, look, “I believe the concept of abuse here is actually the abuse of process concept”. And of course we have this doctrine of abuse of process already in the common law. TIP: The doctrine of abuse of process under common law that Paulina has just referenced is a fundamental aspect of ensuring that a court’s processes are not being misused. Or to phrase it another way; of preventing inconsistency with the judicial systems’ values. This is an inherent power of the court at common law. It must be able to protect itself from bad actors. The result of a finding of an abuse of process is a stay or dismissal of proceedings or a strike-out of pleadings. You can see why that reasoning by analogy was attractive to His Honour in the circumstances of the regime in Part 5.3A. Paulina will clarify this point in a moment. And so leaning on that to try to understand what the parliament was trying to say in 447A(2)(b). But His Honour did continue and then say that, basically, even though it’s that kind of concept it’s “akin” and I think that’s the key word, that it’s “akin” in its content and purpose to the court’s inherent jurisdiction to stay proceedings for abuse of process. And what’s interesting there is that I think that’s the better emphasis. So rather than saying that the parliament has just incorporated that concept of abuse of process that we already have into, basically, the Part 5.3A context. I think the better reading is that we have to look at the actual words – the legislation – and say “we can look to the abuse of process doctrine and try to analogise to better understand what abuse in this context means, and therefore they are akin and there is a relationship there. But I think we have to also just focus on the actual wording of the legislation when we’re interpreting it.” And I think you also mentioned in the introduction that Justice Sackville has spoken about this as well in a New Bounty, a more recent decision. And His Honour there was saying that; “we have to take care that we don’t just do like a wholesale import of the abuse of process doctrine and that we appreciate the different context, that this is a regime, a statutory regime, and that they mentioned abuse in the sense of abuse of the provisions of the part.” And so we do have to stick to the terms of the legislation when we’re trying to understand what we’re looking for in abuse in this context. |
| DT:
19:00 | Yeah, absolutely. The abuse of process doctrine is useful for casuistry. For; “this case is most like this other case”, but we shouldn’t conflate them. Just so our listeners know what kind of situation we’re talking about in Blacktown City Council, the directors had appointed a voluntary administrator the night before a two-week hearing which handily would’ve given them the benefit of the moratorium on claims against the company to delay that hearing. What are some other examples of abuse that you’ve seen in the case law? |
| PF:
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23:00 | Yeah, I would say that they all have this common element. Which is some kind of an improper purpose. To give one example of an early decision. There was the decision of Aloridge. So the regime actually only commenced operation in June 1993. And Aloridge is the decision that was heard in August 1993. Basically, what had happened there is; a director had sought and obtained the appointment of a provisional liquidator, and things were going well for a time, but then disputes started arising between this director and the provisional liquidator, and I guess to try to deal with this in not the most correct way, the director then sought to commence administration because at that time the legislation was such that the director could make an appointment under section 436C. Which is the one where if you have a security interest of the whole – or substantially the whole of the property – and it’s enforceable, then you can appoint an administrator. So the director relied on that power to appoint. At that time the legislation was such that the powers of the provisional liquidator would be essentially suspended. Now, the legislation has changed and it’s no longer possible to rely on section 436C when there’s already a liquidator or a provisional liquidator in office. But at that time, you still could. And so the director did this, and when the matter came to court the judge basically was finding that you didn’t appoint for the right purposes. This was an appointment made to take control away from the provisional liquidator in the hope that perhaps the administrator would be more compliant or more friendly towards you. So, same sort of thing that you just spoke about with Blacktown, where basically you make an appointment for some other ulterior purpose, not for the purposes of the regime. Because we have section 435A, which tells us the object of the regime, and that’s what we’re trying to achieve. And I mentioned it earlier, this is rescue, corporate rescue, business rescue, better returns for creditors and members. If you are doing this for some other reason. And it doesn’t have to be the appointment of an administrator. It could be that you are proposing a Deed of Company Arrangement, again, for some ulterior purpose. You’re not really seeking to advance the purposes of the regime. Then this could amount to an abuse. So Aloridge is another early example. And basically, since then there’ve been more cases of abuse, but they all have this similar pattern. Using their regime or trying to use the regime for some improper purpose. In many of those cases the court will expressly say that they’ve found abuse within the meaning of section 447A(2)(b). Sometimes, it’s more implied. They’ll talk about the improper purpose that was present on the facts, and then they’ll say for these reasons, an order to end the administration should be made. So sometimes it’s more implicit like that. Also you have situations where they say continuation in the regime by the company would be an abuse. So that’s like a slightly different way of wording it. And then, some cases – mostly the earlier cases – you’ll find courts making a positive finding that there’s an abuse of process but in the Part 5.3A context. And they’re clearly using the section 447A power to then end the administration or make another order. And then some cases I’ve come across where I think it’s arguable that there was abuse on the facts, and the court would’ve made an order ending the administration. So I think the problem of abuse is perhaps bigger than just if you look at the cases. Because, if you’re looking at just the judgment, it’ll be maybe a little over a dozen judgments like this that I’ve just described. But beyond that if you think about – from a practical point of view – not every case is going to result in a judgment. Things can settle and so forth. And then even before that there has to be a dispute about it. Maybe people notice the abuse, but decide for financial or other reasons not to take it to court. And even before that, there might be abuse that nobody notices. Because we’re looking at improper purposes, and that’s not always apparent. You might think people have the best intentions for starting an administration or proposing a Deed of Company Arrangement. So there’s probably, in my opinion, more abuse of Part 5.3A than just the case law would suggest. |
| DT: 24:00 | One of those examples I can think of in terms of abuse of the process that might go unnoticed is the use of voluntary administration to conclude a phoenix arrangement. That, after the assets of the company are stripped away, the voluntary administrator is appointed to the empty shell, and it predictably passes into liquidation. Just before we move on; as you mentioned and, I think, as Justice Barrett said in Blacktown City Council, improper purpose is really what we’re looking for when we’re talking about what is abuse in this context. And that improper purpose is, of course, any purpose that’s not consistent with the goals of Part 5.3A. But does it have to be the dominant or primary purpose of the appointment, or would a secondary or tertiary improper purpose be enough to enliven that power under the section? |
| PF:
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29:00 | Yeah, that’s an interesting question because my understanding is that it’s not completely settled in the case law. But I do have a preferred view, but that’s my opinion. So I’ll just explain what I mean by that. I’ll just take you to why I think it’s unsettled. There’s a case, Delta Law, and in that case the Chief Justice held that basically we don’t know how influential the improper purpose would need to be. And the judge pointed to two, kind of, lines of authority. There’s one line which says you would need to have the improper purpose be able to satisfy the but for test. So the “but for” test is, basically, “were it not for this improper purpose, the action would not have been taken. But for this improper purpose the power to appoint an administrator, for example, would not have been exercised”. That’s the “but for” test. And I believe the case that’s cited for that kind of line of authority is Condor. And then the alternative view is that – and the view that I personally favour at least at this stage based on the current body of case law – is the view that you need it to be a predominant purpose. The reason I favour it is – partly because of that relationship with abuse of process doctrine generally, where a court can stay proceedings because they think that there’s abuse – in that sphere it is a predominance test. As I understand it, the case that Justice Barrett was talking about in Blacktown when discussing that relationship with abuse of process is Williams v Spautz; the High Court decision. And in that case they use the predominance test. So I think if we see that they have things in common abuse of Part 5.3A and the abuse of process doctrine, then it makes sense that they would have a similar causation requirement or the same standard that you need predominance. But in addition, there’ve been some decisions that have relied on this predominant or sole requirement for causation. And I would refer to the case of Fotiand the case of New Bounty. And in both of those decisions – they’re abuse of Part 5.3A cases – and in both of them, this was the level that was required. And the other thing with Condor; is Condor was not a case that ended up making an order to end administration. From memory, this was a declaration of invalidity. And in invalidity cases when we have an improper purpose it is the “but for” test. Just to put this a little bit into context, so as I say, my PhD thesis is looking at improper purposes. Now it can be that an improper purpose will amount to abuse of the regime. And then if it is an abuse of the regime you could have orders under section 447A. But, in addition, if you have an improper purpose that results in the purported exercise of power to appoint an administrator you could have a situation where a declaration of invalidity is made, because an improper purpose is a ground for declaring the purported exercise of the power invalid and the purported appointment invalid. And I looked at that in an article published last year in the Insolvency Law Journal – and the relevant section there is 447C – and the line of case law there is that you need the “but for”. And Condor is an interesting decision because there were improper purposes there. But the reason for the declaration of invalidity was different. It was because you needed to have the director, the board of directors, to make the appointment under 436A had to have the belief in the insolvency or the kind of looming insolvency of the company that was not present. And so for that reason it was declared invalid. And the judge in that case said if it wasn’t invalid for this reason because of the improper purpose, they would’ve ended the administration. So it was like an alternative relief that could have been granted, but wasn’t necessary to grant on the facts. So I don’t think that Condor is such a strong line of authority when we’re looking at abuse of Part 5.3A because that wasn’t the point on which the case turned, the decision turned on a different matter. And so I think if we look to cases like Foti and New Bounty to see what the causation requirement needs to be, I think predominance; the weight of authority seems to favour that test. |
| DT: | It is interesting though that improper purpose can be both a basis to end an otherwise valid administration after the appointment and declare the administration invalid from the start. Now, what is the difference, either academically or forensically, between those two options? And when in practice might I choose one or the other? Is it because the jurisprudence on causation might be starting to diverge? Is it some other reason? |
| PF: 30:00
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33:00 | Yeah. As I was doing my research, I found this really interesting because I’ve come across one case where they use the same improper purpose as a basis to seek a declaration of invalidity. And so, other cases where you have similar facts and what they seek as an order to end the administration, which presupposes that it’s valid, because you wouldn’t be able to end an administration if it never validly commenced. I think my personal view is that in Australia we have the option, so you can choose how you want to address the proper purpose situation. So you can seek a declaration of invalidity or you can try to use 447A to seek an order ending the administration. But there are some differences. So one thing is there might be a different causation requirement. So it looks pretty clearly in the invalidity cases that it’s a “but for” test. And yeah, I would argue in the Part 5.3A abuse setting it’s probably a predominance test. Now, a lot of the time you would expect that the result would be the same from either tests, but might not always be the case. But in addition, abuse is broader because it can be abuse of the regime in any way. So not just when you are trying to make an appointment or when you are proposing a Deed of Company Arrangement. These would be the most obvious times. And that’s the kind of scenario I seem to come across again and again when I look at the cases, but not necessarily. There’s no limitation there in the wording that abuse has to be limited to those two times. If you look at invalidity – if you look at specifically section 447C – is that, specifically, when you’re trying to appoint an administrator of a company or the appointment of an administrator, a DOCA administrator, that’s in a temporal sense limiting it to when you might have a declaration of invalidity. So I guess I think of 447A as broader. Because, any stage, any kind of abuse is arguable as a basis for then seeking an order to end the administration or other relief. The other difference, as I say, there might be some technical differences in terms of what you have to prove but I think the more, kind of, positive interpretation of the situation that we have is that we have options. And you can go one way, you can go the other. I think if I were running a case and I saw some improper purposes; I think I would probably – I mean it depends on what your client’s trying to achieve and so forth – but I think one way to go about it would just be to argue that there’s been an improper purpose for appointing an administrator and on that basis with a declaration of invalidity. But failing that we would like an order to end the administration. Either because there’s been abuse of Part 5.3A or for some other reason. You’ve got that some other reason limb in the example in subsection two for why you could end administration. So if I was really keen to have some kind of relief because of improper purpose, I might just argue both in the alternative. |
| DT: | And I suppose a forensic decision that someone planning to make use of these provisions might want to make as well is whether following that order, the voluntary administrator’s actions will have been valid up to the date of the end of the administration or whether they were invalid. Of course, if the administration’s declared invalid, then the voluntary administrator is undertaken whatever actions they’ve taken to date without power to do but if the administration comes to an end, then whatever’s occurred before then will stand. And I suppose especially if the voluntary administrator’s undertaken a fair amount of work that, whether kicked off for an improper purpose or not, has benefited creditors or has benefited the company’s stakeholders more broadly, recognising that there’s so much discretion on the part of the judge at 447A, that might be one reason why they would make an order under that provision than another. |
| PF: 34:00
35:00 | Yeah, I do think there’s much more discretion under 447A than 447C. Because the way that I read 447C is that the court may make a declaration or may not make a declaration. But that’s the only relief that 447C gives them the opportunity to make. Whereas with 447A – and perhaps we’ll discuss this further later on – they’re not limited to just an order ending the administration. They can really cater it to the situation at hand. Think of what would be the best solution for the company here. And as I say, 447A(1) is such a powerful provision. It can even be used to cure invalidity. So for example suppose you have an improper purpose. You go to court, you say; “we would like a declaration of invalidity because the administrator was appointed for this improper purpose.” Even if the court is minded to find that; “yes, there was an improper purpose, the appointment was invalid”. You could then – if you’re trying to resist that kind of outcome – you could bring an application under 447A seeking an order to cure the invalidity so that the administration can continue. Because perhaps the purposes of the regime are within reach, perhaps we can get better results for creditors, and perhaps we can rescue the business or whatever it may be. And so 447A is very powerful. |
| DT: | And in fact we often see 447A used for that purpose to cure some kind of technical defect in an appointment. Not just an improper purpose, but where there’s been some formal rather than substantive failure to comply with the requirements. |
| PF:
36:00 | Exactly right. And actually – so I haven’t myself seen a case where it’s been used to cure an improper purpose – I just think it’s arguable because it has been used to cure, as you say, so many other, sort of, technical difficulties. So for instance, one that I see quite often is if the director was an undischarged bankrupt and they’re not supposed to under the legislation have the ability to manage a corporation, but then they appoint an administrator. And perhaps that was the sensible thing for the company for an administrator to be appointed. And so I’ve seen judges curing the invalidity there because they still think it’s best for the company, even though the director was an undischarged bankrupt. |
| DT: | I can think of another hypothetical that supports your argument that an abuse of process could be cured in that way that supports the idea that an improper purpose could be cured in that way. If a voluntary administrator was appointed for an improper purpose and that particular appointee was appointed to pursue that improper purpose. It might be appropriate to continue the administration so that the company remains in the hands of an external administrator, but in the hands of a different appointee. So it may be appropriate to make an order requiring that voluntary administration administrators to step out of the role, and to appoint a new one but for the administration to otherwise continue. And I suppose that raises a whole other question about whether the voluntary administration itself has a proper purpose, but a resolution to replace them might have an improper purpose, which is probably a question for another day. |
| PF: 37:00 | Yeah, there’s so many scenarios you can think of and just spend hours exploring. |
| DT: | Absolutely. Speaking of which, something that’s quite interesting in your research to me is that over time the legislature’s been able to write out some of the abuses or loopholes that people have used to abuse Part 5.3A. Can you tell me a little bit about that? |
| PF:
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42:00 | Yeah. I don’t think this is necessarily them thinking about specifically abuse but just ways to improve their regime. And in so doing there are certain things that could previously be done that now cannot. So I spoke earlier about the case of Aloridge where, you have this director, they seek the appointment of a provisional liquidator, then they don’t get along with the provisional liquidator, there’s disputes, and then they’re like, “oh, I can appoint an administrator because I have this charge”. And by the way, in that case the validity of the charge was one of the things in dispute with the provisional liquidator. But the director went ahead and relied on that to try to appoint an administrator. And you could see scenarios where when you have a liquidator or a provisional liquidator in place, you perhaps don’t want other people to have the ability to appoint an administrator because you trust those officers. You trust the liquidator, you trust the provisional liquidator; they’re independent. They’re there to look after the interests of the company, and its creditors if it’s in an insolvency situation. At that time, you probably don’t want someone, even if they do have a valid security interest, to be able to make the appointment. So the legislation was amended, and I believe effective from 31 December in 2007. The Corporations Amendment (Insolvency) Act 2007meant that now directors – the board of directors – are not able to make an appointment of an administrator under Section 436A when there’s already a liquidator or provisional liquidator. And likewise, the security holder, security interest holder, is not able to use 436C to make an appointment. So at a time when you have a liquidator or a provisional liquidator, only that person can make an appointment of an administrator at that time. So that’s the kind of thing that you could see would prevent certain kinds of abuse. And it’s, I think, a very good change that was made. Another one that comes to mind is there are a couple of cases – particularly St Leonards is a good example – where administration was commenced and the improper purpose motivating that seemed to have been to shift the relation back date. Now, I’m not a complete expert on that, but very briefly, it’s where if you do go into liquidation and there are say voidable transactions that might be unwound or can be voided by the liquidator. There’s a time period that you can look at for voidable transactions. It’s not any transaction that ever has occurred in the past, but within a specific period. And the way we calculate that period is linked to this concept of a relation back day and starting administration. It used to be the case that this would potentially change the relation back day. So if there was a winding up application that was pending against the company and then, for example, directors put it into administration and then later on it, say, progresses into a liquidation we would be looking at the date when the administration commenced rather than when the winding up application was filed – which may have been earlier. And that would’ve given us more time to look into the past for any voidable transactions. And so there was this potential to basically abuse the regime – Part 5.3A – in order to shift the relation back day and perhaps protect directors or other parties who are involved in voidable transactions from having that unwound or recovery proceedings being brought by a liquidator in the future. And so this was a bit of a problem. But again, we had reform, we had section 91 inserted into the Corporations Act effective from 1st of March in 2017 by the Insolvency Law Reform Act of 2016. And because of that section, now it makes it clear that if there was a pending winding up application, then administration commenced, you would still be looking at the date for the winding up application, and therefore you don’t lose any period of time in which liquidators in the future could investigate those potentially voidable transactions, for example. And yes I think those changes that I’ve just pointed to, they were perhaps not necessarily made just with abuse in mind. Perhaps they were just looking to improve the regime. But it’s just had this incidental benefit that there are certain reasons that you might try to appoint an administrator, for example, that are improper that are now prevented. Or even if you make the appointment, for instance, you’re not going to shift the relation back day; things like this. |
| DT:
43:00 | Yeah. That was the common scenario, wasn’t it? That an application to wind up the company would be filed ordinarily that would be the relation back day, the day before the winding up hearing you’d appoint a voluntary administrator, truncate the relation back day by a few weeks. And that’s now no longer possible. Although that particular silver lining has a cloud, which is that section 91 is a perennial brain teaser. Every time I open it up, it’s very difficult to understand. Very difficult to find the row in that table that exactly applies to you, but I think that’s just the sort of thing we have to live with. Now you mentioned earlier that time and again, you see some similar scenarios coming out in the judgments that you’ve been reviewing. Tell us a bit about the most common scenarios or the most common improper purposes that company directors are seeking to achieve by abusing Part 5.3A. |
| PF:
44:00 | Yeah, there’s definitely commonality between the cases and I feel like rather than having discreet standalone strength there is a lot of overlap in this area. So it seems to be that you could have improper purposes starting administration that are quite general. It could just be we don’t want liquidation and all of what that brings with it – so the consequences of going into liquidation. So instead, we’ll use 5.3A. Now, there’s nothing wrong if you’re in a scenario where your company’s having some solvency problems, perhaps it’s already insolvent. There’s nothing wrong in thinking about Part 5.3A, that’s a good thing to think about, because perhaps we can rescue the situation, perhaps we can rescue the company, the business, perhaps we can get better returns to creditors and members. That’s quite admirable, when you get into trouble is more where you’re just using it to avoid liquidation and where liquidation is appropriate. If you think of a case where you know there’s nothing to save here – the business isn’t viable. Creditors wouldn’t fare better or are very unlikely to fare better with administration than in liquidation. Perhaps liquidation would just be a cheaper option and perhaps creditors would even fare better under liquidation. So but you’re using Part 5.3A because you’re just trying to avoid proper, appropriate, timely liquidation. |
| DT: | There’s a separate provision that we’d be looking at in that scenario there, isn’t there? Section 440A, which sets out the situations in which the court is able to proceed to hear a winding up application, even though the company’s already in administration. |
| PF: 45:00
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50:00 | Yeah, that’s it. And that’s exactly where I was going to go to with this. Because there are a couple of cases that come to mind. So Gorst and Polar Agencies both cases where the court was considering section 440A(2). So very briefly, that’s basically that subsection says if the company is in administration and there’s a winding up application pending against the company the court must adjourn the hearing of that winding up application if it would be in the best interests of creditors for the administration to continue. So it’s basically a bar to hearing that pending application. So we could have scenarios where there’s the company and in a lot of financial trouble, there’s one or more winding up applications pending against it. And then for instance, the night before the hearing or the day before the hearing, the directors decide we’ll put the company into administration. And it is suspicious if it’s the night before the hearing, especially if the hearing’s been adjourned and things like this in the past. And they’ve known about the insolvency for many months, it’s a little suspicious if so close to the hearing of a winding up application they decide to make the appointment of an administrator. Because you wonder – like in that scenario, you wonder, “are they doing this because they think there’s a chance of rescue or better returns for creditors, or are they just trying to do anything to avoid the winding up”. And so this section 440A(2) will come up because if they’ve just put it into administration the day before the hearing, then when the hearing is supposed to happen for the winding up application, you’ve got this block which says – or this bar which says – “no, that hearing now has to be adjourned”. But it only applies if the court is satisfied that it would be in the best interest of creditors for the administration to continue. And so in that case, the court will look very much to the administrator that’s just freshly been appointed. And perhaps some evidence can be led about why it was put into administration, why it was put into administration so late. If the court can be persuaded that yes, there’s a good chance to rescue, or yes, it might be better for creditors. Then that bar or that prohibition will remain in place and the winding up application must be adjourned. That’s, kind of, what the section says. But if the court is not satisfied of this, then they’ll say; “we don’t have… the court hasn’t been presented with the evidence to establish that this would be better for creditors”. And if the court can’t be satisfied with that then that prohibition doesn’t apply. So the court actually has the option of going ahead with the hearing of the winding up application. And so both in Gorst and Polar Agencies this is what happened. The court was saying “there’s just no explanation for why it was so late that you made the appointment and it doesn’t look like it would be better for creditors, and therefore we can just go ahead with a winding up application”.And in that scenario – both in Gorst and Polar Agencies – the court also held that what we’re seeing is abuse of the provisions of Part 5.3A. It just looks like a last, kind of, attempt to avoid the consequences of liquidation. And so that’s like a general improper purpose that I can distill from the cases that sometimes it’s really just in a general sense to avoid liquidation and when it’s appropriate – when liquidation would be appropriate. But then in some cases you see it being more specific than that. So another kind of perhaps a subcategory of what I’ve described is when there’s a specific consequence of liquidation that you’re trying to avoid. And this might be, for example, to reduce how much scrutiny there is of past transactions because a liquidator has a much greater scope to investigate this than an administrator does for administration. There are timelines that are quite strict and there’s not as much time to; and to take a very detailed investigation of past transactions. It’s certainly compared to what a liquidator has in terms of time. And so one specific reason why you might want to avoid liquidation and try Part 5.3A, which is improper, is because you’re trying to conceal some past transaction. And generally you’re trying to protect – say you are the sole director and you make the appointment – you might be trying to protect yourself or somebody else who’s involved in that transaction. Perhaps you transferred assets out of the company to a relative or some other third party and you basically don’t want that to be discovered. Of course, an administrator might still discover this. I’m not saying that they wouldn’t. But the faster kind of pace of administration, the shorter timelines means that there’s just less scrutiny of that and so this could be a reason why you’re trying to use the administration not for the benefit of the company, not for the benefit of the business, for creditors, but for your own benefit just to hide some past misconduct. And so cases that I would put into that potential category or that are arguably in that category is QBI Corporation. Where ASIC intervened and was making the argument that – specifically in that case, it was not even administration, was the Deed of Company Arrangement – they were arguing that this is basically designed to protect parties from recovery action and in respect of voidable transactions. And so that’s one example. And then other arguable examples would be Paradise Constructors and Erol. So again, you see this kind of just this pattern of there might have been some wrongdoing in the past with perhaps assets leaving the company, and this could be a specific reason why we’re trying to avoid liquidation where it might all come up and be discovered. |
| DT: 51:00 | The director trying to achieve that improper purpose is really relying on getting that Deed of Company Arrangement up, aren’t they? Because of course, if they can’t achieve that, it’s going to go into liquidation anyway. And those more comprehensive investigations will happen. So in that short period, that 25 business days, they’re going to propose a Deed of Company Arrangement that at a surface level looks like a very good deal for creditors. So long as the voluntary administrator doesn’t discover the potential claims the company has against them and try to get that up as quickly as possible. |
| PF: | Yes. And honestly though, even if it is discovered to some extent, for instance, there might be something in the report to creditors that says there might be voidable transactions or something like this. If you get the Deed of Company Arrangement to go through and then nobody challenges that and it all goes ahead, then that’s one way that you might think you could get away with it basically. |
| DT: 52:00 | It’s important to distinguish that scenario of concealing those transactions from a voluntary administrator who’s pressed for time in the hope that your not very good DOCA will get up from the situation where claims are alleged or identified, but there is some inherent uncertainty about their prospects of success or recoverability and those have to be weighed. Those uncertainties have to be weighed against a Deed of Company Arrangement that the directors proposed. This is really about concealing those things from the voluntary administrator rather than merely proposing a DOCA in circumstances where those things are alleged. |
| PF:
53:00 | Yes. You do need that improper purpose to be there. And this is perhaps something that I think is arguable – just to introduce the new element – I think it’s arguable that you could establish abuse of Part 5.3A in the sense where you say; “I‘m not putting forward that some concrete person had the subjectively held improper purpose. I’m just saying that an abuse is apparent in all the, kind of, circumstances of the case.” I think because of the decision in New Bounty it is arguable that you don’t necessarily have to go down the subjective path, but a lot of the cases do take that approach of saying this director had subjective improper purpose. And so if we’re looking at that, then yeah it’s not enough that there were some dealings in the past that perhaps voidable if you’re proposing an administration or proposing a Deed of Company Arrangement for the purposes that you are supposed to under, looking at 435A, looking at the object and you genuinely have the best interest of the company, the business, the creditors in mind then that’s different. That is really different. |
| DT:
54:00 | And then what are some of the other categories? It sounds like at the core of many improperly commenced voluntary administrations or administrations commenced for improper purposes. It’s about using the unique features of the voluntary administration, whether that’s the moratorium or whether that’s the time period in which it takes place to circumvent or block some other legal process that would otherwise run its course. |
| PF:
55:00 | Yeah. So you are basically looking at the features and of the regime and the way in which it operates and thinking; “how can I make it operate for me or for my friends”, instead of thinking of “how can I make it operate the way it’s supposed to for the company, the business, the creditors, the members”. So just on that whole kind of what you’ve done in the past trying to conceal, one other thing you might be trying to conceal is your own. As a director, if you are the one making the appointment, if there’s been past insolvent trading, directors have a duty, of course, to prevent the company from trading in insolvency. So if that’s occurred in the past, you might not want to be pursued for that. And, you know, that’s a civil penalty provision; could also be a criminal offense if you were dishonest. And that’s another thing you might be trying to hide. That’s not a transaction but just your own past failure. But as you say exactly, there are other aspects. For example, when administration comes into place you can’t continue proceedings against a company or its property or commence proceedings against a company or its property without either the administrator’s approval or court leave. And the relevant section is 440D. And you might if you’re involved in litigation, if the company’s involved in litigation, you might only commence administration because you want to take advantage of that. That legal consequence that automatically happens. |
| DT: | Which really the Blacktown City Council we kicked off with. |
| PF:
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57:00 | Yes. That’s it. Yeah, that’s a great example. And so, if you’re, I guess, if you’re just looking at the features of their regime and thinking; “how can I make this work for me or my friends?” That’s where you’re getting into improper purposes and abuse territory. Another example is for instance another case we’ve discussed all where of course this can’t happen anymore, but where at the time that Aloridge occurred, they could have disrupted the work of the provisional liquidator by appointing an administrator. So then that was another way of trying to use the system to your own advantage. Another example is an interesting case, Spacorp. So in that case there was a debt creditor relationship. The creditor basically issued a statutory demand, and the ultimate goal with that would’ve been to wind up – to have the company wound up. But there was the dispute about the underlying debt and the statutory demand was – compliance with it was essentially stayed by the Court of Appeal. At first instance there was an argument there. Then there was an appeal; Court of Appeals, that until we make a decision about the underlying debt, the statutory compliance of the statutory demand will be stayed. And the particular creditor in that case was thinking; “we really want to basically wind up the company, how else can we achieve this?” And while proceedings were pending in the Court of Appeal they thought they we’ll use the power in section 436C as their secured creditor to appoint an administrator. Because from administration you could still get to liquidation if the creditors, for instance, vote in favour of winding up and having appointed the administrators. In fact, the administrators were going to recommend winding up to creditors. So they were using it as another means of achieving what they couldn’t achieve using the statutory demand. Any kind of attempt to use the regime for this; like for instance you can quite naturally go from administration into liquidation. That’s fine. But when you intentionally commence the regime and or place the company into the regime in order to achieve that outcome when you failed or are experiencing delays with another method, then it starts looking like abuse. |
| DT: 58:00 | The Court of Appeal has made orders explicitly preventing another parallel process from proceeding. It absolutely looks like abuse. There seems to be so many forms of abuse under the sun. People are very creative really. |
| PF:
59:00 | Yes. that’s the thing, and that’s, we’ve been talking about all these examples, but I think the takeaway is; “is there an improper purpose for using” – it boils that down to something so simple! – “just any purpose other than a proper one”. And something that I should highlight, I know I’ve been talking a lot about section 435A and this idea of rescue, either the company or the business or better return for members and creditors. I don’t want to be seen to suggest that these are the only proper purposes. Even going back to Blacktown the judge said; “you can also look at any purpose that kind of feeds into those purposes”. So if you want time to consider whether restructuring would be a good option, whether you could save the company, that’s also a valid purpose and a good purpose. So it doesn’t specifically have to be that we know we can save the business, so we know we can save the company. But as long as it’s a purpose that feeds into one of those ultimate purposes in some way, That’s still fine. But when you get into trouble, of course, is if it’s a purely selfish purpose – you’re trying to hide your own past misconduct or transactions that are voidable – or you’re using it just to interrupt other proceedings that are going on. That’s where you’re in the territory of abuse potentially. |
| DT:
1:00:00 | Yeah. So let’s pose a hypothetical. A client comes to me, they’re a creditor of a company perhaps, and they believe that the company which has recently been placed into voluntary administration has been placed into voluntary administration for an improper purpose. Before I run off and file my originating process in the Supreme Court or the federal court, what’s my checklist? What should I make sure that I can prove or establish? We spoke a little bit about the causation issue in terms of the connection between the improper purpose and the appointment itself, but what else? |
| PF:
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1:05:00 | Yeah, so I think you should. I think step one would be to try to essentially eliminate in your mind proper purposes. So the client might come to you and say; “oh, I think, they’re doing it for the selfish reason”. And that may be the case, but you should really look at the situation of the company. Is there a viable business there? If there is a viable business that might be rescued you have to think to yourself “could you still say the predominant purpose of the directors if it’s directors who make the appointment is their predominant purpose just to protect themselves in relation to potential claim for past insolvent trading”? Or looking at the business, which is fundamentally viable, but just facing some financial kind of difficulty, if it can be saved. Then probably Part 5.3A is still a good way to go. It really just depends. But for instance there was a decision, Dallinger, where basically the creditors have been told; “we’re not trying to save the company”. And so this creates this impression that; “oh, why are you using Part 5.3A?” But as the judge in that case pointed out, you might be using it to get a better return for creditors. Perhaps you could have a more protracted sales process with administration. Perhaps it depends on the assets. Maybe you have something that should be really sold at auction. If you have, like, livestock or horses, perhaps there’s some event, like some biannual event, where the best horses are sold and you could fetch a better price if you wait until that event. So maybe you’re using administration to avoid a kind of perhaps fire sale in liquidation to get a better return for creditors. So I think; consider very carefully whether administration would actually be good for the company, its business, its creditors, its members. Because if there is a very obvious proper purpose for the administration, then you have to wonder how easy it would be for you to prove and persuade a court that “no, there was actually this improper purpose”, and really this was the predominant reason. And also because of the discretion that we talked about in 447A even if you establish abuse, the court might, in its discretion, withhold relief and say; “no, just because it’s best for creditors or because it’s best for the business and the company, we’ll just continue with administration.” And Delta Law is an example of that where there was a finding of abuse, but a decision made to allow the administration to continue. I think if you are looking at it from a sort of a commercial pragmatic point of view, thinking about other proper purposes for using this regime would be a really good starting point. And then the other thing which I’ve touched upon already is that, you need to figure out how you’re going to prove the improper purpose. If you really think; “yes, there is an improper purpose amounting to abuse in our opinion”. How are you going to establish that? So you might say somebody, if it was the directors that passed the resolutions to make the appointment, you might be thinking, “can we prove that there was subjectively held, improper purposes there?” And if you are going down that path, you have the Briginshaw standard that applies. Which is, “you’re making a big allegation here. It’s a very serious allegation. What are the chances of somebody harboring improper purposes?” And it is a serious thing to accuse someone of the consequences could be serious for them. TIP: Most of you will be familiar with the case that Paulina just referenced – Briginshaw v Briginshaw. Briginshaw is a foundational case in civil proceedings. The principle or standard arises from a remark that Justice Dixon made in obiter; that where a serious allegation is made such as those that may have significant consequences for the accused if proved then a harder look should be taken at the evidence. Or to phrase it another way, that evidence of a stronger nature is required to be produced to successfully establish the serious claim. So the court will take that into account when seeing whether the civil standard is established. And in addition there’s the option of perhaps arguing that objectively you can discern an improper purpose and abuse in all the circumstances. And for that, as I mentioned, New Bounty I think as an authority. But with that, you also have to be careful because you can’t just say they went into administration when there had been a pending proceeding against the company, for example. And there’s that automatic stay that applies and therefore they must have done it to achieve the stay. You can’t just point to the natural consequences, there has to be something more to show that there was abuse or improper purpose. So I think it is a big task to establish abuse of Part 5.3A and perhaps that’s one of the reasons why we don’t have too many judgements in this. It might not be the only reason. Hopefully there’s just not too much abuse going on. But one reason could be that for instance, in the case of Foti, there was just not enough evidence there for the court to be satisfied. |
| DT: | Now, if abuse is established, if the court finds that the administration has been commenced for an improper purpose, and it isn’t that situation that we described earlier where it started for an improper purpose, but we are glad it has because there are some good outcomes from a voluntary administration in this particular circumstance anyway. Suppose that it’s an abuse, it’s been started for an improper purpose and there’s no reason to continue it anyway. What’s the ordinary outcome there? Now, in Blacktown City Council, the company was placed into liquidation immediately. Is that a common result? |
| PF: 1:06:00 | Yeah, so it’s interesting. So section 447A(2), as I said, focuses on ending administration, and then it simply lists reasons why you might want to do that. One of those reasons is if there’s abuse. And so if you find abuse of Part 5.3A provisions, you might automatically be thinking the best solution is to end the administration. But, the way that the regime works is that when you appoint an administrator, the powers of the directors are essentially suspended. You have the situation where they’re not running things once an administrator is appointed. But if you simply end the administration, then control reverts back to the directors. |
| DT: | Yeah, the one thing you don’t want once you’ve established that the directors are rogues that are using legislation for personal gain or to shield themselves from the consequences of their own impropriety, you don’t just want to hand them back the company do you? |
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1:09:00 | Exactly right. So it would be this very incongruous thing where if directors appointed an administrator for improper purposes, this amounted to abuse, and then if the court were simply to make an order ending the administration, therefore handing the keys to the kingdom back to those same directors. It would be a very strange situation. So I often find in the cases where they end the administration there’ll also be an order basically just to wind up the company. Because you don’t want those directors to be in charge after you have made a finding that they abused the regime. But of course there will be exceptions like the case of Spacorp that I mentioned earlier where it was a 436C appointment, so it was a secured creditor who’d made the appointment. Now, in that scenario, if the directors have done nothing wrong, then if you find abuse, why wouldn’t you let the directors return to being in charge of the company? It really depends on the circumstances, but because typically appointments of administrators are made technically by the company, but because of resolutions passed by the board of directors, because typically they’re the ones who caused the company to commence administration. If you find that was an abuse, you do not necessarily want them to be back in charge. So I think there’s broadly two ways to go about it. If the court finds the company can achieve the aims of administration, the creditors can fare better, the business can be saved. For example, if it’s looking like it’s a really likely thing that you can get good outcomes with administration, one option is for the court to not grant the relief. So even if the person who’s claiming abuse is seeking an order to end the administration and perhaps even to wind up the company, the court might say; “no, we really want you to stay in administration. It would just be very good. And because we trust the administrator as an independent person”. And if they don’t, the administrator can be replaced, as you said earlier. That’s one pathway to take the kind of Delta Law pathway. The other option is if you have a situation where it’s quite clear that administration wouldn’t help either the company or its business or the creditors or the members then what’s the point in that continuing? And then if there’s a winding up application then the court is very highly likely to grant that, I would think in that scenario because there’s no point in administration continuing it. But merely ending it would not be a good solution, particularly if the directors were the problem. So probably there’ll be an order to end the administration and to wind up the company. One little quirk that’s worth mentioning is there’s section 435C, which tells us the circumstances in which administration will end. And one of those is if a winding up order is made. So actually, if the court decides to make a winding up order, they don’t need to separately order under 447A that the administration end – that’ll just follow naturally once they make the winding up order. |
| DT: 1:10:00 | It’s good for your research that they do though. I feel like we’ve had a really wide ranging and deep discussion here, but I know that we’ve actually only scraped the surface of your research. So I’m looking forward to learning more when your research is complete. But just to conclude, if you were to give us three takeaways that a listener to this episode should walk away with, what would you say those are? |
| PF:
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1:13:00 | Yeah, I think to be aware that Part 5.3A can be abused and to be vigilant about that. So for example, if you see that the company has gone into administration, or that somebody is proposing a Deed of Company Arrangement, if you’re a little bit more progressed in that process and just have a think at all points in time, “can the company be saved? Can the business be saved? Is it likely or, possible, that creditors will get a better return, that members might fare better?” If you’re not seeing the likelihood for any of those positive outcomes that the regime is trying to achieve, then I think your next question should be; “why are we using this regime? Why? Why are we in it? And could there be abuse there? Could there be some improper purpose for its use?” And trying to get to, perhaps, investigating that. The other takeaway is if you are seeing some improper use for Part 5.3A, you don’t have to necessarily go to section 447A as I’ve discussed already. You might want instead a declaration of invalidity in respect of a purported appointment. So perhaps section 447C would be your preference. And so you’ve got more options than just 447A. But of course 447A is still great, I’m not saying don’t think about that. And the other thing is that other sections could be relevant. So for instance, if you’re in administration and there’s a winding up application – you might be in a court hearing where section 440A(2) is discussed – because, you’re thinking; “should the winding up application hearing be adjourned or should we continue to hear that that application and perhaps have the company wound up”. So that’s an application where cases like Gorst, for instance, tells us it could be relevant if there’s some improper purpose behind the scenes. Also, even if you’re already at the stage where there’s a Deed of Company Arrangement and it’s been executed there is section 445D, which is where you can apply to the court for an order to terminate, for the court to terminate that DOCA. And if you’re seeing improper purposes, or you believe you’re seeing improper purposes, that could be relevant at that stage as well, and to that application. So I don’t want listeners to think that they’re limited to 447A. Improper purposes are an important thing that can be used and – in terms of if you have evidence of it, and you can make a good argument for it – that might be relevant under various applications at various stages. And then I guess the final thing is; that if Part 5.3A abuse is established, or even say under 445D if there’s a Deed of Company Arrangement already in place, and there’s some abuse established remember that the court has a discretion and probably the court will be looking at; “what’s in the interest of creditors, what’s in the interest of the business and the company”. Don’t think that, for instance, with 447A, I’m limited to getting an order that the administration end, and then control will just revert to the directors. There’s more flexibility there and perhaps putting yourself into the shoes of a judge and thinking about it from their perspective and the objectives of the regime and trying to see what’s the relief that would really be best suited to this scenario that we’re in. |
| DT: 1:14:00 | Fantastic. Thanks so much for sharing with us your research. I’ve really enjoyed geeking out on another insolvency law topic, and we’ll be watching this space to find out more as your research continues. Paulina Fishman, thanks so much for joining me on Hearsay the Legal Podcast. |
| PF: | Thank you. It’s been an absolute pleasure. |
| Ross Davis:
1:15:00 | As always, you’ve been listening to Hearsay the Legal Podcast. I’d like to thank our guest Paulina Fishman for coming on the show. If you want to hear more in the insolvency space, check out episodes 9 and 27 with Jason Harris on the voluntary administration regime and the small business restructuring process respectively. If you’re an Australian legal practitioner, you can claim one Continuing Professional Development point for listening to this episode. Whether an activity entitles you to claim a CPD unit is self-assessed, but we suggest this episode entitles you to claim a substantive law point. More information on claiming and tracking your points on Hearsay can be found on our website. Hearsay the Legal Podcast is, as always, brought to you by Lext Australia, a legal innovation company that makes the law easier to access and easier to practice, and that includes your CPD. Finally, before you go, I’d like to ask you a favour. If you like us, please leave us a Google Review. It helps other listeners find us and that means that we can keep making the great content that you love. Thanks for listening and we’ll see you on the next episode of Hearsay. |
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