The cost of validating an appointment

Articles, Restructuring + Insolvency

At the time of taking on new appointments, it is essential that insolvency practitioners properly and carefully consider whether their appointment has been properly made.  Even where the Court validates the appointment, Granger v A.C.N. 165 098 617 Pty Ltd [2016] FCA 474 is authority that not giving proper consideration of the validity of an appointment can have serious costs consequences.

On 30 March 2016, one of the two directors of A.C.N. 165 098 617 Pty Limited (administrators appointed) (the Company) passed a resolution appointing administrators to the Company.  The administrators had been made aware, prior to their appointment, of their being two directors of the Company.  The day following the appointment, the Administrators obtained a copy of the Company’s constitution which relevantly provided that a valid resolution of the Company was required to be passed by the two directors.

Despite being aware of the invalidity of their appointment, and as a result of the information that had been provided by the director who passed the (invalid) resolution as to the ability to contact and communicate with the other director of the Company, the administrators proceeded with their appointment.  The administrators also sent an email to the other director requesting that he complete a Report as to Affairs.  This was, apparently, the first time that the other director had heard anything about the appointment.

The administrators applied to the Federal Court of Australia seeking orders validating their appointment and also sought orders for their costs of the application.  Neither director took issue with the making of the order validating the appointment however both directors opposed the order sought that the administrators’ costs of the proceedings be paid out of the assets of the Company.

Ultimately, Her Honour held that it was incumbent on the administrators to make proper enquiries before the resolution to appoint them was passed and before acting on their appointment.

In her decision, Justice Jagot stated that:

The administrators did have a duty to ensure that their appointment was valid.  It is also clear that it was not a mere oversight by the administrators to proceed with the administration in the circumstances I have described.  The inescapable inference is that the administrators were aware at the time of the appointment that there were two directors of the company and that in all likelihood a resolution to appoint administrators was required to be approved by the two directors.  They obtained a copy of the company’s constitution immediately after the resolution purporting to appoint them, which indicates that they could have obtained a copy of that constitution immediately before appointment.  Further, it is apparent from [the Administrator’s] affidavit that he knew that Mr Seaman was overseas and, I infer, must have been provided with Mr Seaman’s contact details because the administrators made contact with Mr Seaman the very next day by way of email.  While there was some delay in response by Mr Seaman between 1 and 4 April 2016, it is difficult to accept from the evidence that there was such a degree of urgency that Mr Seaman could not have been contacted before the appointment. 

Ultimately, I have reached the view that the administrators should not have their costs of this application paid out of the assets of the company.  In my view, it was necessary and appropriate that the administrators make the effort to obtain Mr Seaman’s consent to the appointment before proceeding with the administration in circumstances where they must have had Mr Seaman’s contact details and were able to contact him almost immediately after the meeting.  Further, the administrators must be taken to have known at the time of their appointment that the appointment was invalid.  They could and should have found out from the company’s constitution, which they managed to obtain one day after the appointment, that a resolution to appoint administrators had to be approved by both directors and they could and should have contacted Mr Seaman to obtain his consent before the appointment was purported to be effected.   That is, they should not have simply accepted at face value any information from Ms Taratoris about difficulty in contacting Mr Seaman.

Following her Honour’s logic, it is no surprise that the administrators were unable to be indemnified out of the assets of the Company for their costs of the application.

The case highlights the duty incumbent on insolvency practitioners to make full and proper enquiries prior to their appointment.

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