WHAT WOULD BE THE POSITION IF THERE IS A BREACH OF FIDUCIARY DUTY?

There is no provision directly specifying the punishment for the administrator who has committed breach of fiduciary. Only section 447E of the Corporations Act provides the primary remedial if the administrator has acts in a way that is prejudicial to the interests of some or all of the company's creditors or members. Section 447E empowers the court to make any order as it thinks just to indemnify those whose interests are affected from the administrator's decision.

Section 447E is equivalent to section 27 of the insolvency Act 1986 (UK). Specifically, section 27 allows a creditor or member of the company to apply to the court by petition for a order on the ground that the administrator's management is 'unfairly prejudicial' to their interests. There is little doubt that both sections provide a wide range of protection for creditors and members of the company.

However, in order to encourage more applications on the administration regime, the English legislature has increased more protection for creditors. This amendment can be seen from the Enterprise Act 2002 which came into force in 2003. The Enterprise Act 2002 has modified the 'unfair prejudice' remedy to give creditors a right to apply to the court where the administrator is acting or proposing to act in a way that 'unfairly harms' that creditor's interests or the interests of creditors generally. It has also introduced a new direct right for creditors to enforce the administrator's duty to act as quickly and efficiently as is reasonably practicable.

This amendment may become one of the useful authorities for Australian courts when they to decide the remedy in the case of administrators' breach of fiduciary duty. Moreover, the court has the power under section 449B of the Corporations Act to remove an administrator, on the application of a creditor or the Australian Securities and Investments Commission (ASIC). The section does not provide the grounds for removal but removal on the basis of conflicts of interests in the general approach of the courts(13). The measurement will be whether a fair-minded person, informed of the facts could reasonably entertain a doubt about the administrator's capacity to be independent(14).

Another aspect being seen as a punishment for the unfaithful administrator can be implied from the remuneration provision. This is because if the remuneration is not fixed, the court can fix the amount on an application by the administrator pursuant to section 449E(1 )(b) . It is quite certain that the court will deduct such amount if the administrator's performance is classified as a breach of fiduciary duty. Moreover, even if the remuneration has been determined by creditors, the court still retains the power to review such remuneration on an application by a company officer or member or creditors pursuant to section 449E(2) .

Partial disallowance of remuneration can be seen in City Suburban Pty Ltd v Smith, liquidator of Conpac (Aust) Pty Ltd(15). The court found in this case that the liquidator had not conducted adequately an. investigation in relation to breaches of fiduciary duty by the directors. The creditors had refused to approve the liquidator's remuneration. In contrast, the court held he was entitled to remuneration but it should be reduced by reference to work which had not been performed properly. Merkel J reasoned that the liquidator had failed on his activities and those failures were such that he ought not to be remunerated. This authority can be applied to the calculation of the administrator's remuneration.

Since committing a breach of fiduciary obligations could result in the penalty above mentioned, it is essential that administrator maintains the fiduciary duty both at the time of appointment and during the time that the company is under the voluntary administration scheme.

FIDUCIARY DUTY AT THE TIME OF THE APPOINTMENT OF THE ADMINISTRATOR

Prior to the appointment of an administrator, the directors are the ones who take the control of the company. But when the company initiates the voluntary administration, the management of the company is placed in the hands of the administrator. It is the administrator who has the power to investigate the affairs of the company in a time of financial crisis. Directors are usually skeptical of the administrator as it is their reputations and jobs that are on the line if they are the cause of the company failure.

(A) Directors appoint an administrator

Fearing for losing their jobs and reputations, the directors might have a motive to appoint a 'friendly' administrator whom the directors can seek to influence or manipulate. The Harmer Report recognizes this possibility and sought to ensure that the administrator will not be the puppet of the directors(16). The Harmer Report emphasizes the need of an independent administrator by stating that an administrator is expected to come to a company as an independent professional who will seek the best result for the creditors(17). According to the Australian Securities and Investments Commission (ASIC), it is usually the company's directors who identify the person they want appointed as voluntary administrator. David Cowling explained that more often than not, the propose administrator is from a second or third tier accounting firm. Thus, in order to win appointment, there is a likelihood that the prospective appointee might promise not to sue the directors in relation to personal guarantees and claims of trading while insolvent(18). Cowling concluded that secured creditors such as banks and other lenders do not view voluntary administrators as independent people. As a result, a secured creditor often attempts to appoint a receiver over the voluntary administrator.

(B) Creditors appoint an administrator

This is not the end of the independence issue as the directors are not the only party who can appoint the administrator. There are three parties having a right to appoint the administrator namely the company(19), the liquidator of the company(20) or a creditor who is entitled to enforce a charge on the whole or substantially the whole of the company's property(21). Consequently, there may be a case that the administrator will act in favour of 1he secured creditors who appoint him under section 436C of the Corporations Act 2001. This scenario appears to be what may have been attempted in Domino Hire Pty Ltd v Pioneer Park Pty Ltd(22).

In this case, the ANZ Bank was the creditor of Pioneer Park Pty Ltd and held a fixed and floating charge over its assets. It appointed accountants to investigate whether the company was in financial difficulties. After receiving the investigating report, the bank appointed the accountants as voluntary administrators of Pioneer Park under section 436C of the Corporations Law. However, the company went into liquidation and the administrators became its liquidators. A director of Pioneer Park sought removal of the liquidators on the basis that they were biased towards the bank. Hamilton J held that the liquidators had not displayed any actual bias towards the bank, but there was an appearance of lack of independence flowing from their prior appointment as investigating accountants. His Honour then removes the liquidators(23). It is clear from this decision that the voluntary administrators must not favour anyone.

However, does this mean that the administrators or liquidators cannot have any involvement before being appointed? In Chevron Furnishers Pty Ltd(24), it was held that the liquidator must have no prior or other involvement with the company, its directors and major shareholders or one of its creditors so that he or she could not fairly and impartially carry out his or her duties as liquidator(25).

Ray Mainsbridge disagreed with such decision as he reasoned that the adoption of such a strict test would be commercially unrealistic(26). This is because most secured creditors usually appoint an accountant to investigate the company in the first place. After the investigation, if they decide to put the company under the voluntary administration scheme, they should be permitted to appoint the dame accountant as voluntary administrator considering that such accountant has already studied the structure and the management of the company. Mainsbridge quoted two authorities to support his argument (Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd(27) and Commonwealth v Irving(28) ). Branson J in Commonwealth v Irving said:

It is now common place for a company to seek professional advice respecting actual or apprehended insolvency and for the advice received to appoint an administrator. Not infrequently, and, in my view, not improperly, the proponent of the advice to appoint an administrator then accepts appointment as an administrator.

The difficulty with the decision in Domino resulted in the opposite judgment of Re South Australian Ships Pty Ltd(29) where Domino was distinguished.

(C) Liquidators appoint themselves as administrators

The company in Porter v Chief Commission of State Revenue(30), having considerable assets but little liquid funds was wound up because the director had not had a statutory demand brought to his attention . A proposal was made to the liquidator for a deed of administration. Instead of appointing someone else as the administrator, the Supreme Court of NSW was asked to grant leave to the liquidator to appoint himself as an administrator according to section 436B of the Corporations Act.

In considering whether the liquidator is an appropriate person to be an administrator, the court must examine the principle of independence. Richard Schulte illustrated that if a liquidator had conducted investigations into the conduct of the director and had identified circumstances of misfeasance then there may be a conflict between the liquidator fulfilling his obligations and the negotiation of a proposal to have the company put back in the market place(31). This can be said that if there is too close relationship between the company and the administrator, that administrator might have interests he may need to protect as liquidator.

Alternatively, the court can look into the remuneration of the administrator in order to render whether the doctrine of independence is rotten. If a deed of company arrangement does not offer extra remuneration or special reward, there should be no concern about her appointment. This is because the fiduciary implication places a restriction on the administrator that he is not supposed to make improper use of his position to gain advantage except his remuneration. It may, of course, be more convenient and cost effective for the liquidator to appoint himself as the administrator. Hodgson J in Deputy Commissioner of Taxation v Foodcorp Pty Ltd(32) agreed that if there were no other grounds that made the appointment as an administrator inappropriate, then a court would usually give leave.

In order to avoid the disputes on the independence and a conflict of interest issues like the case of Porter v Chief Commission of State Revenue, the liquidator should protect himself or herself by applying to the court for leave to resign(33) instead of appointing himself as administrator.

Part  3

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(13) (1996) 19 ACSR 459
(14) Anderson and David Morrison, Crutchfield's Corporate Voluntary Administration (2003) at 267
(15) [1998] FCA 822
(16) Andrew Keay, "Corporate Governance During Administration and Reconstruction Under Part 5.3A of the Corporations Law" (1997) 15 C&SLJ 145.
(17) The Harmer Report (1998) para [72].
(18) David Cowling, "Corruption Could hangs over insolvency administrators" (2003) 4(3) INSLB 42 .
(19) Section 436A of the Corporations Act 2001.
(20) Section 436B of the Corporations Act 2001.
(21) Section 4360 of the Corporattors Mt 2QQ .
(22) (2002) 18 ACL 13 .
(23) Ray Mainsbridge, 'voluntary administrators and the independence principle' (2000) 3(7) IHC 77.
(24) (1993) 12 ACSR 565.
(25) Andrew Keay and Michael Murray, Insolvency: Personal and Corporate Law and Practice (2002) 3(7) IHC 77
(26) Ray Mainsbridge, "Voluntary administrators and the independence principle" (2000) 3(7) IHC 77.
(27) (1994) 14 ACSR 230.
(28) (1996) 65 FCR 291
(29) (2000) SASC 221.
(30) (2003) 44 ACSR 725.
(31) Rkberd Schulte,'voluntary administration: liquidators appointing themselves as administrators' (22003) 4(4) INSLB 54
(32) (1994) 13 ACSR 796.
(33) Re Timberlan Ltd (1979) 4 ACLR 259.