Mills Oakley Partner Ariel Borland, Special Counsel Nirupa Manoharan, and Lawyer Lincoln Smith discuss the recent decision In the matter of 1st Fleet Pty Ltd (in liquidation) where the NSW Supreme Court provided guidance on the scope and operation of sections 70-45, 70-55 and 70-90 of the Insolvency Practice Schedule (Corporations). The judgment is also a cautious reminder to practitioners about the need to carefully monitor their fees on any job because a firm’s timesheets are now open to inspection, and therefore potentially future challenge, they write.
The NSW Supreme Court has provided guidance on the scope and operation of ss 70-45, 70-55 and 70-90 of the Insolvency Practice Schedule (Corporations) (IPSC) in The Matter of 1st Fleet Pty Ltd (in liquidation)  NSWSC 6.
The IPSC sets out when creditors can request, and are entitled to receive, specified information and documents from external administrators (EAs). In this case, the Commonwealth of Australia sought information from the Liquidators of 1st Fleet Pty Ltd (in liq), and other companies (collectively the Companies) about the formation of a Committee of Inspection and remuneration that had been approved by the COI. The Liquidators failed to comply with the requests.
The Court found that:
- the scope of sections 70-45 and 70-55, IPSC are not to be narrowly construed;
- in circumstances where the prerequisites requiring the disclosure of information or documents under these provisions are satisfied the Court has only a narrow discretion to withhold an order for the provision of those materials; and
- in relation to s 70-55, provided a former employee of the company has made a claim for financial assistance from the Commonwealth, that section does not impose a limit on the nature of the information that may be requested by the Commonwealth.
The Liquidators were appointed as voluntary administrators to the Companies on 22 May 2012. At a creditors meeting held on 2 July 2012 creditors resolved that a committee of inspection (COI) be appointed.
The COI approved, or at least purported to approve, the Liquidators remuneration for future periods, calculated on a time basis. By 18 July 2018, the Liquidators had been paid $4.4M by way of remuneration, for the period between 25 April 2012 and 1 July 2018.
The Commonwealth, who advanced $9.4m to employees of the Companies, had a number of concerns regarding the remuneration of the Liquidators. In a letter dated 24 August 2018 (August Letter), the solicitors for the Commonwealth expressed their concerns as to whether:
1. certain persons acting as creditor representatives appointed to the COI were ineligible and, if so, whether the COI therefore lacked authority to pass the remuneration resolutions; and
2. the quantum of remuneration claimed was reasonable.
These concerns were reflected in a request for information in the August Letter which included a request for the Liquidators to provide a breakdown of the calculation of each remuneration payment made to the Liquidators.
Rather than complying with the specific requests, the Liquidators made several proposals including that they would provide the Commonwealth with the same remuneration reports provided to the COI, and that they would provide a report to the Commonwealth that would contain the specified information albeit at the level of categories of work performed rather than at the level of particular tasks undertaken as requested.
Under s 70-45, a creditor may request information, a report or a document from an EA in relation to the external administration of a company. The section provides that an EA is required to comply with such a request unless the request is not relevant or unreasonable. The Court held that section 70-15 of the Insolvency Practice Rules (Corporations) 2016 (IPRC) provided a complete statement of the circumstances in which it is not reasonable to comply with a request.
Section 70-55 relevantly provides that the Commonwealth may request specified information, reports or documents from an EA of a company in relation to the external administration. Unlike s 70-45, the requirement to produce such documents or information is mandatory if the relevant circumstances enlivening that section occur.
Section 70-90 provides that a person may apply to the Court for an order that the EA comply with that request.
The Commonwealth submitted that the Liquidators failure to provide the requested information contravened ss 70-45 and 70-55 of the IPSC, and the Court should order the production of that information under s 70-90 (or alternatively s 90-15) of the IPSC.
The Court refused to make orders compelling the Liquidators to produce documents or information as to the constitution of the COI. Among other reasons for the refusal, it was noted that the request for documents in the categories specified in the August Letter included several contentions that the Liquidators did not advance (for example that certain creditor representative were an eligible unsecured creditor) and then sought to require the Liquidators to produce information and documents to support those contentions. The Court held that there is no reason why an order should be made requiring the Liquidators to produce information or documents to support propositions which the Commonwealth, and not they, had advanced.
In relation to the information request relating to their remuneration, the Court found that the response of the Liquidators reflected a misunderstanding of the nature of their obligations that arise under ss 70-45 and 70-55 of the IPSC. Specifically, in relation to the contention that the information contained in the remuneration reports provided to the COI were adequate, the Court answered that the Commonwealth has invoked a statutory right to access information, and it is no answer to the exercise of that right that it ought to be satisfied, in the Liquidators’ view or even in the Court’s view, with the information that had been previously provided to the COI. Further, the Court noted that it would likely defeat the purpose of those provisions if the Courts too readily acceded to a liquidator’s preference that some other information or document, other than that which was requested, should be provided.
The Court accepted that where the prerequisite set out in s 70-55 is satisfied, namely that a former employee of the company made a claim for financial assistance from the Commonwealth in relation to unpaid employee entitlements, the Commonwealth may specify the information it seeks from the EA without restriction. That is, the Commonwealth’s requests for information are not to be confined to assessing or considering its claim relating to the payments it has made under GEERS or FEG.
The judgment confirms the ambit of an EAs obligations arising from a request for information made pursuant to the IPSC and IPRC. In addition, where a request is made by the Commonwealth for specified information or documents, if GEERS or FEG payments have been received by the EA on behalf of the company to which they are appointed, the provision of that information or specific documents sought is mandatory.
The judgment is also a cautious reminder to practitioners about the need to carefully monitor their fees on any job as a firm’s timesheets are now open to inspection, and therefore potentially future challenge. It will not be sufficient to simply rely on a remuneration report alone as justification for the reasonableness of the fees charged.
Partner Ariel Borland is known for her expertise in a wide range of litigious and non-litigious insolvency and restructuring matters. Her practice also includes aspects of trade practices, professional negligence, complex contractual disputes, financial services disputes and partnership and shareholders’ disputes. Ariel has a particular expertise in security and priority issues, the Personal Property Securities Act (2009) and issues arising from insolvent trustees. Ariel is valued for her exceptional client service, sound technical advice and pragmatic commercial approach to legal problems. Ariel acts for a wide range of clients including insolvency practitioners, secured creditors, unsecured creditors, debtors and directors. Contact Ariel at email@example.com or connect via LinkedIn
Special Counsel Nirupa Manoharan has particular expertise in corporate insolvency, restructuring and litigious and advisory insolvency work. Nirupa brings a variety of experience from her role as a high level advisor on a number of pre-insolvency engagements, receiverships, voluntary administrations, deeds of company arrangement, restructurings and liquidations. Nirupa previously worked in the area of Restructuring and Insolvency at international law firms in England. Contact Nirupa at firstname.lastname@example.org or connect via LinkedIn
Lincoln Smith is Financial Services Lawyer at Mills Oakley in Melbourne. Connect with Lincoln via LinkedIn