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The process whereby directors can appoint a voluntary administrator to a company by resolution is set out in a straightforward manner in Part 5.3A of the Corporations Act.   A majority of directors must resolve, at a meeting of the board, that the company is insolvent or is likely to become insolvent.  In fact the procedure is so straightforward that there are relatively few cases which examine whether all aspects of the procedure were followed in a given situation.  One recent Supreme Court decision serves as a timely reminder that the Court is empowered to invalidate an appointment if it concludes that the procedure was not properly followed.

The Court considered the validity of the appointment of voluntary administrators In the matter of Condo Blanco Mines Limited [2016] NSWSC 1196 (30 August 2016).  It was alleged that the meeting of directors that purportedly appointed the voluntary administrators did not have a quorum because, as a public company, Condo Blanco Mines did not have the required number of directors (three) and the company was not therefore validly constituted.  Further, there was a factual dispute over whether the resolution itself had been signed by the two appointed directors of the company.  Interestingly, the Court was also asked to consider whether the directors who voted in favour of the resolution genuinely held the belief that the company was, or would become insolvent.  There was cross examination of the directors about the level of knowledge they had about the company’s financial situation at the time of the resolution.  In the end, the Court declared the appointment of voluntary administrators invalid and of no effect.

Key take-outs from this decision

The resolution needed to appoint a voluntary administrator requires the directors to form a genuine view, based on a knowledge and understanding of the company’s financial position, that the company is, or will be, insolvent.  This part of the process cannot be taken for granted.

The appointment of voluntary administrators is of enormous significance to a company, its shareholders and creditors, and the Court will have careful regard to any irregularity in the appointment procedure.

For those interested, a copy of the decision can be found here (hyperlink to is external))

If you are considering the appointment of an external administrator to a company, we have the expertise and experience to ensure that all of the necessary requirements are met.  Feel free to contact our Insolvency, Restructuring and Debt Recovery Team anytime.