With great ‘creditor’ power comes great ‘external administrator’ responsibility

Over two years ago, on 1 September 2017, new powers were granted to creditors in external administrations. William Buck welcomed the increased transparency to external administrations and the ability for creditors who may be experiencing an insolvent administration for the first time to understand their rights and the role they can play in the process.

However, it is our experience that these powers are underutilised by creditors and it is useful for advisors to remind their clients of the powers they possess, and when it is appropriate, both legally and commercially, to exercise them. Below is a quick reference guide to refer to in these situations.

Power to provide directions to the external administrator

An External Administrator (‘EA’) must regard any directions given via a resolution of creditors but is not required to comply with such directions. If the administrator does not comply, they must provide a written record of their non-compliance reasons.

Example directions:

  • To distribute surplus funds held rather than continue to use company assets to fund a potential claim (e.g. for insolvent trading)
  • To pursue claims against related parties
  • Directing the EA to finalise investigations and complete external administration

Power to request information from the external administrator

Creditors have the formal right to request information and documents from an EA where compliance is obliged unless:

  • Information sought is not relevant to the external administration
  • Releasing the requested information would result in a breach of the administrator’s duties
  • It is otherwise not reasonable

Once a request is received, the EA has 5 business days (upon receipt) to provide the requested information, unless an extension has been agreed upon.

Power to request that a meeting of creditors be held

When a creditor requests that a meeting of creditors be held under ‘reasonable direction’, the EA must convene a meeting (with the company bearing the costs) if:

  • A Committee of Inspection – a small group of creditors who represent the majority of creditors’ interests – reasonably directs him or her
  • Majority of creditors (in number and value) resolve to convene a meeting by circulating proposal
  • Greater than 25% of the value of creditors direct him or her in writing

One of the primary reasons for requesting that a meeting be held is to replace the incumbent Liquidator. Historically, before the power to request a meeting was bestowed on creditors it was difficult to have a meeting convened to consider a resolution to replace a liquidator.

Benefits of replacing Liquidator

The appointment mechanism for liquidations could lead to a conflict of interest whereby the Director appointing the Liquidator is the person under the most scrutiny during a Liquidator’s investigations into the company’s pre-appointment affairs.

Creditors may have concerns about the lack of investigations and or action to recover compensation from identified breaches of the law. They may also have specific information about breaches and wish an independent party to investigate and pursue for the benefit of the creditors.

The Liquidator can plead ‘absence of funding’ as a defence to further investigations. In this situation, creditors have the option to indemnify a Liquidator to undertake investigations and recovery actions. If a lack of confidence in the incumbent Liquidator’s ability already exists, a condition of funding may be the replacement of Liquidator.

It is important to note that section 564 of the Corporations Act 2001, allows for a priority to be granted to a party funding the investigations in consideration for the risk they have assumed.

Purchase right of action from Liquidator

An alternative to replacing a liquidator to pursue a right of action is to purchase that right of action from the Liquidator. Our advice is generally against this course of action as it can be difficult to gain access to books and records, and creditors do not have the powers bestowed upon a Liquidator such as the ability to undertake public examinations.

What is an “unreasonable” request?

The underlying principle to the powers noted above are that they should be exercised in a reasonable manner. The reasonable test is subjective in nature and an EA will follow the guidelines noted below in determining whether a request is not reasonable:

For both request of information and meetings:

a) Complying with the request would prejudice the interests of one or more creditors, or a third party
b) There is not sufficient available property to comply with the request
c) Request is vexatious

For meetings only:

d) A meeting of creditors addressing the same matters has been held or will be held within 15 business days

For information requests only:

e) The information requested would be privileged from production in legal proceedings
f) Disclosure would trigger an action for breach of confidence
g) Information has already been disclosed
h) Information required to be provided under law within 20 business days of the request

If a request is deemed ‘unreasonable’ under b), g) or h), the external administrator must comply with the request if the creditor meets the cost of complying with same.

Otherwise, the EA must inform a creditor and provide reason when a request for meeting or information was deemed ‘unreasonable’.

If you need any guidance or assistance with a corporate restructuring, insolvency or a personal bankruptcy matter, please contact one of the William Buck Business Recovery Specialists.