Appointing an administrator with a genuine belief as insolvency

Articles, Restructuring + Insolvency

In Australian Securities and Investments Commission v Sino Australian Oil and Gas Limited (prov liq apptd) [2016] FCA 42 (ASIC v Sino), the Federal Court considered whether the appointment of an administrator was valid under section 436A of the Corporations Act 2001 (Cth). When resolving to appoint an administrator to a company under section 436A, the company’s board must pass a resolution that, in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time.  In ASIC v Sino, it was necessary for the Court to consider whether that opinion had been validly formed by the directors of Sino Australian Oil & Gas Limited (Sino).

In the case, an administrator had been appointed to Sino, at a time when:

  • There was a lack of up-to-date financial information available to the directors;
  • The Australian Securities and Investments Commission (ASIC) was conducting an investigation into an IPO which had been ongoing for 14 months prior to the appointment of administrators;
  • As a consequence of the ASIC investigation, there was the potential that all of the IPO shareholders would have to be repaid in full which would require the payment of monies which Sino did not have; and
  • The management of Sino was dysfunctional.

ASIC applied to the Court for declarations that the appointment of the administrators was invalid, void and of no effect on the basis that the directors of Sino could not have formed a concluded opinion about Sino’s actual or impending insolvency based on the information available to the board, but had passed a resolution appointing administrators for the purpose of dealing with dysfunction in the management of Sino.  It was submitted by ASIC that even if the directors held genuine concerns about Sino’s solvency, the evidence did not show they had formed a genuine and bona fide opinion that Sino was insolvent or likely to become insolvent.  It was contended that the Board lacked financial information about Sino and the advice it obtained as to solvency rose no higher than advice that there may be a likelihood of insolvency or future insolvency, not that Sino was likely to become insolvent in the future.

The Court, in concluding the appointment of the administrators was valid, said:

  1. The Board had sufficient information about the affairs of Sino which was neither wrong nor inadequate from which an opinion as to solvency could be formed.
  2. The Board gave genuine consideration to the question of solvency in that advice had been sought as to the best way to protect shareholders’ interests and such advice had been provided to the directors before the relevant board meeting.
  3. The minutes of the board meeting clearly recorded the Board’s discussion about the appointment given the future solvency issues identified by the directors and that the key question was the future insolvency of Sino in its current circumstances (including circumstances arising out of the ASIC investigation).
  4. A report prepared by the provisional liquidator appointed to Sino following the conclusion of the administration supported the directors’ contention that Sino was likely to become insolvent in the future and that there was a rational basis for forming the view that Sino would be likely to become insolvent at some future time.
  5. The evidence did not show the resolution was based on ignorance or uncertainty about Sino’s financial position.

The Court accepted the directors’ evidence that the purpose of the appointment was to deal with solvency issues and not governance issues which had also been the subject of legal advice. For an appointment of an administrator to be valid, the appointment must be made in good faith and in furtherance of the objects of Pt 5.3A of the Corporations Act.

The appointment of an administrator may be invalid if it is affected for an ulterior or extraneous purpose in circumstances where the decision to make the appointment would not have been made but for the ulterior purpose.  The Court will look to all available information to determine the reasons behind the appointment of an administrator in matters where such a challenge is made.

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