Thailand Law Forum Law Journal - The Role of Administrator

(D) Related person is appointed as administrator

Section 448C of the Corporations Act specifies eight disqualifying connections between prospective administrators and the company. These are being a substantial shareholder, a creditor, employee, officer or auditor of the company or being related to any of these persons. It is clear that this restriction is created to maintain the administrator's role as a fiduciary. Nevertheless, does this restriction always serve the purpose of avoiding the conflict of interest?

In RE Chilia Properties Pty Ltd(34), the business partners of company directors were barred from being appointed as administrators . Although this prohibition was clearly indicated in the, legislation, it was held inappropriate in the case of a short-term directorship by which the incumbent was appointed solely in order to facilitate the appointment of a voluntary administrator(35). In such a case, the court should consider whether there is a real risk that the prospective administrator will do more harm than good.

If the court is not certain whether there will be the event of a conflict of interest after the appointment, the court may ask the potential administrator to give undertakings. In Investments Pty Ltd v Star(36), leave under section 448C (1 )(b) was given to the receiver of the parent company of a company in administration to act as the joint administrator of the company . Leave was granted subject to each administrator undertaking to the other that they would not deal with any matter in respect of which there was a conflict in their capacity as administrators(37).

In addition, to decrease problems on the independence and the conflict of interest issues like several cases shown above, there used to be a recommendation of the idea of having directors applying to a central registry for the appointment of an administrator from a panel on a roster basis. Directors would have no choice, having to accept the name appearing on the top of the list at the time of application(38). However, such recommendation was rejected. This is because it is more advantageous to allow directors to select the suitable administrator.

Although the roster system was denied, the principles of independence and avoiding the conflict of interest are still the central of the administrator's qualifications. This can be seen from the ethical pronouncements of the Institute of Chartered Accountants and the Australian Society of Certified Practising Accountants. Furthermore, an administrator who is a member of the Insolvency Practitioners' Association of Australia has to comply with a code of professional conduct, which focuses on the independence doctrine.

FIDUCIARY DUTY DURING THE ADMINISTRATION

All voluntary administrators should remind themselves of all guidelines, codes of professional conduct or cases including the written law and regulations at all times before appointment as administrator, and after the appointment. This expectation was illustrated in Lam Soon Australia Pty Ltd v Molt (No 55) Pty Ltd(39) especially during the administration. This is because when the administrator performs his function, he acts as the company's agent under section 437B. There are several activities that the administrator has to attempt while he is in his position such as calling and conducting of the creditors' meetings, investigating the affairs of the company or analyzing its financial position(40). Every function requires the administrator's fiduciary duty. However, the exercise of the casting vote will be focused in this paper.

THE CASTING VOTE AND FIDUCIARY DUTY

Under section 5.6.21 of the Corporations Regulations, the administrator is empowered to use the casting vote to overcome the deadlock which occurs when a majority of creditors in number and a majority of creditors in value do not vote the same way in a resolution. There is no guideline advising the administrator how to exercise this power but his decision is subject to the court's review pursuant to section 600B and Section 600C of the Corporations Act. According to Cresvale Far East Ltd v Cresvale Securities Ltd, the leading case concerning this matter, the administrator should exercise the casting vote with consideration to 'relevant factors' including 'good faith'(41).

The 'relevant factors' in Re Barlett Researched Securities Pty Ltd(42) also embrace the factor of whether there are unfair advantages to the directors of the company. This authority certainly has raised the issue of the administrator's fiduciary duty. To preserve the independence dogma in this case, it suggests that before exercising the casting vote the administrator had better examine whether the directors are protected from investigation or the support of the C proposal by the directors will deliver some unfair advantage to them(43).

There is another example that represents how difficult it is for the administrator to exercise the casting vote. Such case directly involve the administrator's interest and that the conflict of interest issue arises. This scenario occurs where the administrator is required to exercise the casting vote in a resolution that sought to remove him from office as an administrator(44). In Re Ballan Pty Ltd(45), it was held that the administrator does not have to leave the chair although there was a discussion on the replacement of the administrator . Giles JA said that there might be a time that the administrator was required to be in his position in order to protect weaker creditors(46).

Finally, when conducting the meeting, the administrator does not only have to remind himself of these 'relevant factors' in order to fulfil his fiduciary obligations. He also has to create trust among the creditors that he is independent by not acting too friendly to the directors. Andrew Keay affirmed that there is nothing worse than the administrator sitting at the table with the directors as it may give the impression, however erroneous, that he is the directors' agent(47).

CONCLUSION

It cannot be denied that administration provides the possibility of the company's survival. However, the real success of the procedure relies solely on the ability of the administrator. Independence and impartiality are essential requirements of a good administrator. While there is always a chance that the appointment will be an abuse of process and power, creditors can always damage the administrator's reputation. Dishonest administrators will also have to face the punishments of courts. Removal from administration positions, punishment by reductions in remuneration packages and fixed penalties all act as deterrence for negligent or corrupt administrators. The question whether these forms of punishment are sufficient is another question to be answered.

(34) (1997) 73 FCR 171
(35) John Glover and John Duns, "Insolvency Administrations at General Law: Fiduciary Obligations of Company Receivers, Voluntary Administators and Liquidators" (2001) 9(3) InsolvL J 130 at 138.
(36) (1995) 13 ACLC 1814.
(37) Colin Anderson and David Morrison, Crutchfeld's Corporate Voluntary Administration (2003) at 262.
(38) Andrew Keay, 'Corporate Governance During Administration and Reconshuction Under Part 5.3A of the Corporations Law' (1997) 15 C&SLJ 145 at 156.
(39) (1996) 70 FCR 34.
(40) Andrew Keay, "Voluntary Administrations: The Convening and Conducting of Meetings" (1996) 4 InsolvLJ 9.
(41) [2001] NSWSC 89.
(42) (1994) 12 ACSR 707 .
(43) David Richardson, 'The Casting Vote: weigh the factors" (2003) 15(4) AIJ 4.
(44) Ibid.
(45) (1994) 12 ACSR 605.
(46) Network v Exchange (1994) 13 ACSR 544.
(47) Andrew Keay, 'Voluntary Administrations: The Convening and Conducting of Meetings" (1996) 4 InsolvLJ 9 at 16.

BIBLIOGRAPHY

1. Andrew Keay and Michael Murray, 'Insolvency: Personal and Corporate Law and Practice (4th ed, 2002).
2. Andrew Keay, "Corporate Governance During Administration and Reconstruction Under Part 5.3A of the Corporations Law" (1997) 15 C&SLJ145.
3. Andrew Keay, "Voluntary Administrations: The Convening and Conducting of Meetings" (1996) 4 InsolvLJ 9.
4. Colin Anderson and David Morrison, Crutchfield's Corporate Voluntary Administration (3rd ed, 2003).
5. David Cowling, "Corruption cloud hangs over insolvency administrators" (2003) 4(3) INSLB 42.
6. David McCrostie, "Is there a shift in favour of administration over liquidation?" (2002) 3(4) INSLB 69.
7. David Richardson, "The Casting Vote: weigh the factors" (2003) 15(4) AIJ 4.
8. Ian Tunstall, Trading or Insolvency (2000).
9. John Glover and John Duns, "Insolvency Administrations at General Law: Fiduciary Obligations of Company Receivers, Voluntary Administrators and Liquidators" (2001) 9(3) InsolvLJ 130.
10. Ray Mainsbridge, "Voluntary administrators and the independence principle" (2000) 3(7) IHC 77.
11. Richard Schulte, "Voluntary administration: liquidators appointing themselves as administrators" (2003) 4(4) INSLB 54.
12. The Australian Law Reform Commission, The Harmer Report (1998).