Insolvency Update 2010

Independent Cement and Lime Pty Limited (ICL) were unsecured creditors of Brick & Block Company Ltd (in liquidation) (Receivers and Managers appointed) (Brick & Block).

Messrs Barnden and Kassem (Barnden and Kassem),were Brick & Block’s liquidators.

Barnden and Kassem were appointed joint administrators of Brick & Block in October 2009. Upon their appointment, they allowed the company to trade for a few days before receivers and managers were appointed. They continued to operate the business with the intention of selling it.

ICL brought proceedings alleging that conduct of the Barnden and Kassem (in their capacity as administrators and then deed administrators) were sufficient grounds for their removal as liquidators under s 503 of the Act.

The allegations

The conduct of Barnden and Kassem that was complained of involved alleged:

•  lack of investigation into the company’s current situation, which resulted in a DOCA being entered into - possibly to the detriment of the creditors;
•  lack of investigation into potential claims and failure to report these to creditors;
• lack of investigation into directors assets to meet a potential insolvent trading claim;
•  failure to look out for the interests of all creditors, specifically in relation to the purchase of Brick & Block’s assets by company ‘Newco’ in which only some of the company’s unsecured creditors would qualify to receive distributions from the fund;
•  lack of enforcement over directors cooperation;
•  facilitatation via the DOCA of a ‘phoenix’ arrangement; and
•  the lack of any address to many of these matters in the s439A report written by the administrators, and errors and omissions in the report.

The decision

Justice Finkelstein held that the conduct of Barnden and Kassem in their capacity as administrators had shown cause for them to be removed as liquidators, despite the reluctance of the Court to make such a finding.

The Court found that the administrator’s duty to carry out reasonable investigations, to determine what future action would be in the creditor’s best interest, was not fulfilled.

It was held that the DOCA was entered into without fully exploring other potential claims. Further, it was found that there were shortcomings in investigations for potential recoveries.

Justice Finkelstein expressed his concern of Barnden and Kassem’s willingness to accept an arrangement which effectively ‘bought’ evidence from directors without ensuring that such assistance could be compelled. This was seen to demonstrate a possible loss in confidence in liquidators to pursue claims against directors.

It was held that conduct of the administrators was troubling and amounted to the creditors ‘losing faith’ in their abilities as liquidators. Due to such conduct, it was held that as it was uncertain whether the liquidation would be carried out efficiently, and this was sufficient cause for their removal.

What is the significance to insolvency practitioners?

The decision demonstrates the imperative for insolvency practitioners to properly investigate the companies they are administering.

Some important examples that can be drawn from the case around the issue of what constitutes reasonable investigations of insolvency practitioners and reporting to creditors of these investigations include:

•  enquiring into the company’s affairs so as to be able to form on opinion about which future action would be in the creditor’s best interest.
•  enquiring into the status of their directors in terms of possessing assets to meet a potential insolvency trading claim;
•  avoiding relying on the directors too heavily, as thorough investigations still need to be carried out.
•  as this case has revealed, there are some circumstances in which an administrator must go beyond perfunctory enquiries and make further inquiries.
•  reporting, after the carrying out of these investigations, to creditors so that they are adequately informed of the outcome of such investigations and the recommended course of action in the insolvency practitioner’s view based on the results obtained.

It is important for insolvency practitioners to be, and be seen to be, acting in the best interests of all creditors at all times. This case emphasises one of the means that this can be achieved by ensuring proper investigations of all claims and arrangements the company proposes to enter into are carried out, to ensure that on a whole, the best interests of the creditors are the priority.

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The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.

© DibbsBarker 2009