Thailand Law Forum Law Journal - The Role of Administrator

THE ROLE OF ADMINISTRATOR: FIDUCIARY DUTY INTRODUCTION

By Pornsakol Panikabutara(1)

INTRODUCTION

The intention of voluntary administration is that an insolvent company is to be administered in order to maximize the chances of the company continuing or, if it is not possible, to provide a better return for the creditors and members than if there was a winding up. This rescue approach will never be achieved without an honest and experienced administrator. The importance of an independent and impartial administrator is paramount for creditors and shareholders interests in an insolvent company. This is the reason why the administrator is required to maintain the fiduciary obligations since he or she is appointed.

This paper will illustrate how important the fiduciary duty is for the role of administrator. A number of leading authorities are referred to as explanation why administrators are held not being independent or impartial. Breaches of fiduciary duty, in some cases, were so profound that the administrator was removed. Indeed, a learned administrator should remind himself of this fiduciary duty to avoid any liability occurred from his administration.

THE IMPORTANCE OF THE ADMINISTRATOR

The essential person who runs the voluntary administration procedure established by Pt 5.3A of the Corporations Act 2001 (Cth) is an administrator. If a registered Thailand company is under administration, the administrator will be appointed and deemed to act as an agent of the company(2). According to section 437 of the Corporations Act 2001 (Cth), he or she has control of the company's business, property and affairs. He or she also has power to carry on such business and run its affairs. Moreover, the administrator can dispose of company's property or even property under a lease or a charge if the disposal is in the ordinary course of business(3).

Empirical evidence shows that there is a shift in favour of administration over liquidation for companies experiencing financial difficulties. This evidence indicates that the role of administrator has become the more crucial(4). During the process of voluntary administration, the administrator has several rights and duties. These rights and duties enable him to enter into the relationships among creditor, directors, employees, shareholders and other relating people.

In order to maintain or develop such relationships in a professional and commercial manner, the administrator is required to do his best from the time of appointment to the time of discharge of his duty. One of the important duties that the administrator is expected to fulfill is his or her fiduciary duty. But what is the fiduciary duty and how important is it for the role of administrator?

GENERAL PRINCIPLE OF FIDUCIARY DUTY

According to Kirby J in Pilmer v Duke Group Ltd(5), fiduciary obligations have mainly been inferred where the parties are linked in some financial or proprietary respect. Fiduciary is a reference to 'loyalty' to the vulnerable principal from the party who is more powerful or in the better position(6). More specifically, fiduciary laws proscriptive obligations restrain ascendant parties in fiduciary relationships from pursuing two types of personal interests. Derivation of secret profits is prohibited and fiduciaries are not allowed to enter into engagements where their private interests or other duties conflict with their duty to act for the vulnerable party in the relation(7). The fact that someone is in .a fiduciary relationship, will give rise to a number of implications. Such implications embrace obligations to act honestly, to avoid a conflict of interest and to act impartially(8).

DOES THE VOLUNTARY ADMINISTRATOR HOLD THE DUTY OF FIDUCIARY?

As stated in section 437A of the Corporations Act 2001, the administrator has to take control of the company's assets. Generally, he has a power to do everything necessary for the management of the company's business and affairs. He or she therefore holds the commercial and administrative relationships with the company. These relationships are, of course, one of the fiduciary relationships.

Ian Tunstall affirmed that as an agent of the company, the administrator is a fiduciary and holds a position of trust with a number of people in the company. There is a duty to uphold this trust at all times and to not allow self-interest to conflict with it(9). In James v Deputy Commissioner of Taxation (Cth)(10), Mahoney J held that a 'scheme manager', who is fulfilling a similar role to a voluntary administrator, acted as a fiduciary In relation to a corporate scheme of arrangement. Mahoney J's judgment is one of many that illustrates that an administrator has a fiduciary duty to fulfill, regardless whether he or she is labeled as a voluntary administrator.

WHAT CAN BE EXPECTED FROM THE FIDUCIARY DUTY OF THE ADMINISTRATOR?

Voluntary administration is an outcome of the recommendations of the Australian Law Reform Commission's General Insolvency Inquiry(11) which has also known as 'the Harmer Report' . The objectives of the scheme are stated in section 435A of the Corporations Act 2001. In summary, the insolvent company will be administered in a way as to

(a) maximize the chances of the company or as much as possible of its business continuing in existence; or
(b) result in a better return for the creditors of the company and its members than would result from an immediate winding up of the company where it is not possible for the company or its business to continue in existence.

Voluntary administration involves the appointment of an administrator to an insolvent company. The process of the deed of company arrangement then follows the administration. Under the deed of company arrangement, the company would either trade out of its financial difficulties or be wound up.

To achieve the purposes of the voluntary administration, it is not surprising that the Harmer Report specifies some qualifications that are required for being an administrator. One of such qualifications is described as 'impartial'(12). This is because the administrator has a task to balance the claims of creditors, whilst remaining independent of the directors, chargees or liquidators who have appointed them. The administrator's fiduciary obligations therefore include impartiality and independence. These two characteristics are probably the most important qualifications that the company and its creditors expect from the outsider who will direct the company under the voluntary administration.

General law duties of administrators are also codified in the Corporations Act 2001, under sections 180 to 183. These sections include the fiduciary duties to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for the proper purpose. In addition, administrators are not allowed to use their positions to improperly gain an advantage or cause a detriment to the corporation.

Part 2

(1) The author is a law lecturer from the Faculty of Law, Chulalongkorn University: Master of Laws, University of Sydney, Australia ( Australia-Asia Award) 2004; Master of Laws ( Upper Second Class Honours), University of Cambridge, England 2003; Barrister -at -Law, The Institute of Legal Education Thai Bar Association 2000; Bachelor of Laws (First Class Honours with the Gold Medal Award), Chulalongkorn University 1999
(2) Section 437B of the Corporations Act 2001 (Cth).
(3) Section 442C of the Corporations Act 2001 (Cth).
(4) David McCrostie, 'Is there a shift in favour of administration over Uquidation? (2002) 3(4) INSLB 69.
(5) (2001) 180 ALA 249 at 271.
(6) Ibid.
(7) John Glover and John Duns, 'Insolvency Administrations at General Law: Fiduciary Obligations of Company Receivers, Voluntary Administrators and Liquidators' (2001) 9(3) InsolvLJ 130.
(8) Andrew Keay and Michael Murray, Insolvency: Personal and Corporate Law and Pratice (2002) at 231.
(9) Ian Tunstall, Trading or Insolvency (2001) at 56.
(10) (1988) 19 AIR 1752.
(11) Report No 45
(12) The Harmer Report (1998) para [33].