Introduction
On 9 May 2022, the Supreme Court of Brisbane handed down its decision in Stimpson v Allied Rural Pty Ltd (subject to deed of company arrangement) & Ors [2022] QSC 74. The case concerned an application by an administrator to review a remuneration determination. The fairly routine application was opposed on unusual grounds, namely, that the appointment was invalid.
Background
The company, Allied Rural Pty Ltd (“Company”), was incorporated in 2009. Josephine Doolan was appointed the sole director and trustee of the Doolan Trust and all the shares came to be held by her as trustee for the Doolan Trust. From the outset, the business of the Company was managed by Ms Doolan’s brother, William Doolan. The beneficiaries of the Doolan Trust were Ms Doolan and her niece (Mr Doolan’s daughter).
Ms Doolan ultimately resigned as director and was replaced in 2012 by Hugh Blennerhasset. Mr Blennerhasset also replaced Ms Doolan as trustee of the Doolan Trust.
By 2020, Mr Blennerhasset had stopped any day-to-day involvement in the management of the Company. Mr Doolan carried out the role of General Manager from then on. Mr Doolan and Mr Blennerhasset did not get along.
In November 2020, Mr Doolan filed an application to restrain the Company from selling certain real property, and to remove Mr Blennerhasset as trustee of the Doolan Trust. Around the same time, Mr Blennerhasset’s access to the Company’s electronic accounting records was terminated (facilitated by Mr Doolan’s accountant). In February 2021, Mr Doolan caused the Company to send an email directing customers to pay outstanding amounts to an entity controlled by him.
The administrator’s appointment
On 2 March 2021, Mr Blennerhasset resolved that the applicant, David Michael Stimpson, be appointed voluntary administrator by reason of the Company’s actual or likely insolvency.
On 4 March 2021, Mr Doolan’s solicitors served a draft application to terminate the administration on the basis that the Company was solvent and that the administrator had been appointed for an ulterior purpose. However, the application was never filed.
On 26 March 2021 (following the first creditors meeting), the administrator filed his own application to terminate the administration on the basis of his “conditional opinion” that the Company was solvent.
On 29 March 2021, an application was filed by an entity related to Mr Blennerhasset for the Company to be wound up on “just and equitable” grounds. Later that day, Mr Doolan approached the administrator with a proposal for a deed of company arrangement (“DOCA”).
Ultimately, the administrator formed the view that the Company was insolvent and the creditors resolved at the second meeting that the Company and creditors enter into a DOCA on the terms proposed by Mr Doolan (which saw, amongst other things, the removal of Mr Blennerhasset as director and the creation of a deed fund which Mr Doolan and his daughter were excluded from).
The creditors also resolved (instigated by Mr Doolan) that the remuneration of the administrator be fixed “on an ad valorem basis” and to 20 per cent of the creditor value as admitted for dividend purposes in the DOCA in the event that the appointment was valid.
The Decision
The administrator applied to the Court for a review of the remuneration determination. The application was opposed by Mr Doolan and others on the basis that the administrator was not entitled to additional remuneration because his appointment was invalid.
In considering the application, and whether there was a general duty imposed on an administrator to inquire as to the validity of his or her appointment, the Court had regard to the decision in Re Condor Blanco Mines Ltd [2016] NSWSC 1196. In that case, a claim for declaratory relief as to the invalidity of an administrator’s appointment was granted in circumstances where one of the directors was motivated by an improper purpose, and the other did not hold a genuine belief the company was solvent or likely to become so.
The Court in Condor observed that a duty to inquire may exist if an administrator is put on notice of possible invalidity. However, the Court opined that the duty is restricted to seeing that the board adopted due process to pass a resolution in all but very exceptional circumstances (i.e. where it was obvious the directors were resorting to administration for an extraneous purpose).
While having regard to the principles espoused in Condor, His Honour Justice Jackson expressed doubt as to a “general duty” of an administrator to inquire as to the validity of his or her appointment. However, His Honour ultimately concluded he was not required to reach a decision on these “potentially complex questions,” because the opponents were precluded from raising the question of invalidity by virtue of the doctrine of approbate and reprobate (i.e. you can’t have your cake and eat it too).
The opponents had deliberately chosen to approve the validity of the administrator’s appointment so as to carry the administration through to the second meeting of creditors and into a DOCA. The opponents then wished to reject the validity of the appointment so as to deny the administrator remuneration.
The Court noted that the statutory right to remuneration is for “necessary work properly performed.” Had the administrator’s appointment been promptly and successfully challenged, most of the work claimed would not have been necessary or done. The Court ultimately varied the amount of the remuneration determination to $228,891 plus GST.
Take-Aways
- A challenge to a voluntary administrator’s appointment should be made as soon as possible after the appointment.
- While it is doubtful that a voluntary administrator has a “general duty” or responsibility to inquire into the validity of their appointment, a duty may arise if the administrator is put on notice as to possible invalidity.
~ with Helen Hodgins, Lawyer
