Insolvency Rules construed by Court

Recently, in The Matter of 1st Fleet Pty Ltd (in liq) [2019] NSWSC 6, the New South Wales Supreme Court offered guidance on the scope and operation of the Insolvency Practice Schedule (Corporations) (IPSC), which provides rules on when creditors can request and are entitled to recover specified information and documents from external administrators.

On 22 May 2012, Liquidators were appointed as voluntary administrators of First Fleet and its associated companies and at a creditors meeting on 2 July 2012, it was decided that a Committee of Inspection be appointed.

The Committee subsequently approved the liquidator’s remuneration on a time basis and by 18 July 2018, the Liquidators had accrued $4.4 million in remuneration for work done between 25 April 2012 and 1 July 2018.

Having advanced $9,444,014 to employees of the Companies in liquidation under the General Employee Entitlements and Redundancy Scheme (GEERS) and the Fair Entitlements Guarantee (FEG) scheme, the Commonwealth had an interest in the matter. Accordingly, on 24 August 2018, solicitors for the Commonwealth questioned whether certain persons acting as creditor representatives appointed to the Committee of Inspection were ineligible, and if so, whether the Committee of Inspection consequently lacked authority to pass remuneration resolutions. They also expressed concern that the quantum of remuneration was unreasonable.

The Commonwealth subsequently sought information from the liquidators regarding the formation of the Committee of Inspection and remuneration approved by it, including a breakdown of the calculation of remuneration payments to the liquidators. However, the liquidators failed to comply and so the case ensued.

Ultimately, the court was required to consider whether the liquidator’s failure to comply with the Commonwealth’s request constituted a breach of sections 70-45 and 70-55 of the IPSC, and whether it should subsequently order the production of that information under s 70-90. In doing so, Justice Black was required to determine whether the Commonwealth’s request was both relevant and reasonable, in which case, the liquidators would be obliged to comply with it.

Here, the court referred to section 70-15 of the Insolvency Practice Rules (Corporations) 2016, which it deemed an exhaustive list of the circumstances in which it is reasonable to comply with a request.

Ultimately, Justice Black held that it is only reasonable for an external administrator to comply with a request if that external administrator, acting in good faith, is of the opinion that one or other of the specified circumstances exists, and it is otherwise reasonable for that external administrator to comply.

Committee Constitution

The court refused the Commonwealth’s request for information, finding that it was unreasonable on three grounds;

  1. The liquidators had confirmed that after having made appropriate searches, to their knowledge, there were no further documents to be produced.
  2. The liquidators could not reasonably be asked to produce information to ‘establish’, or documents to ‘support’, propositions which the Commonwealth, not they, had formulated and which they did not advance.
  3. A number of the orders sought in the Originating Process had been significantly reformulated from those originally sought, and thus the liquidators could not be held to have failed to produce the documents because they were not previously requested to do so.

Liquidator’s Remuneration

The court was satisfied that where the liquidators had not produced the information sought by the Commonwealth, they should now be ordered to do so.

The liquidators were also ordered to pay half of the Commonwealth’s costs, without recourse to 1st Fleet’s assets.

This decision highlights some key indicators regarding the scope of sections 70-45 and 70-55 of the IPSC, particularly its broad interpretation and reinforces that where information or documents are required to be disclosed, the court only has a narrow discretion to withhold an order. Moreover, it clarifies the scope of an external administrator’s obligations, reinforcing that where a party (like the Commonwealth) requests specific information or documents and GEERS or FEG payments have been received by the external administrator on behalf of the company to which they are appointed, it is mandatory to provide the information and documents sought.

James Conomos

James Conomos is the Managing Director of James Conomos Lawyers where he practices in the areas of insolvency, bankruptcy and commercial litigation. If you or your business needs assistance navigating a legal dispute, please do not hesitate to contact him.

3004 8201 |      |  jim@jcl.com.au