The decision in ASIC v Planet Platinum Ltd (in liq)  [2016] VSC 120 (1 April 2016) raises interesting issues relating to the duties of administrators to confirm the validity of their appointment.

In this case, ASIC had a pre-existing application to wind up Planet Platinum Ltd on the just and equitable ground (s 461(1)(k) of the Corporations Act 2001 (Cth)) and the company’s directors responded by seeking advice about how to respond to this application. The company’s board was of the view that ASIC brought these proceedings because it was opposed to a particular director (Mr Trimble) being involved with a public company and received advice from the company’s accountant that appointing an administrator would allow an administrator to deal with the winding up application.

The board was advised further that appointing an administrator would allow the company to ‘deal with minority shareholders’. This was part of a board plan to privatize the company.The accountant further advised that once the administration was complete in 4-8 weeks, control of the company would be ‘returned to the rightful control of the directors’. This was at a time when the key director (Mr Trimble) was in dispute with the accountant.

Mr Trimble sought legal advice, with the solicitor advising him not to seek further clarification with ASIC regarding the winding up application, but to appoint a voluntary administrator as quickly as possible as this would deal with the ASIC action. The lawyer called an administrator who was informed (by the lawyer) of the ASIC action and the problem with the accountant and that the board ‘did not want these problems to continue’.

At the board meeting (held at the administrator’s office) the problems with ASIC were further discussed with reassurance from the administrator that the action would be dealt with by administration. The administrator also asked whether the company could pay its loan to the NAB (which was due soon after) to which the directors replied no.

The directors read a statement to the creditors at the first meeting which clearly stated that they believed the company was solvent and that the administration was undertaken to address the ASIC action. The administrator was present at the meeting and did not refute this statement. Shortly after this the court appointed a provisional liquidator over the company (and this progressed to a full liquidation by the end of the year).

The court held that the administrator could not have been satisfied that the directors had a genuine belief that the company was insolvent when they made the appointment of the administrator. Mr Trimble believed the NAB loan would be extended (as it had been many times before). The NAB’s security covered far more than the loan value and an extension was easily obtained during the administration. The directors did not have access to the company’s full financial records due to a dispute with the company’s accountant. It is not enough that the directors are merely unsure of solvency-they must genuinely believe that the company is insolvent or likely to become insolvent: Downey v Crawford [2004] FCA 1264. In Planet Platinum, the court held:

[40] The opinion formed by the directors of Planet Platinum at the time when [the administrator] was appointed was clearly based on a lack of information. The directors did not form an opinion that Planet Platinum was solvent and the only reason that they were appointing an administrator was to stop ASIC from appointing a provisional liquidator

…

[49] The dominant purpose to appoint [the administrator] was not because the directors held a bona fide view that Planet Platinum was insolvent or likely to become insolvent. It was to stop the application by ASIC and to privatise the company.

Given the appointment was to frustrate the ASIC enforcement action the court also held that it was for an improper purpose.

What should the administrator have done?

The court held that the administrator failed to take sufficient steps to verify the validity of their appointment. While the courts recognise that administrators must be satisfied that they have been validly appointed, they are not required to ‘trawl back through the records of the company to ensure that there is no defect prior to the resolution of appointment, if the resolution appears ex facie to be valid’: DCT v Portinex [2000] NSWSC 557 at [5]. It is not enough for administrators to simply rely on assurances from the directors: Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058.

In this case the directors made it clear that they were seeking administration to deal with the ASIC enforcement action and solvency was only discussed in relation to the NAB loan, which the directors actually believed would be extended. That the directors did not genuinely believe that the company was insolvent was made plain by their written statement to the creditors’ meeting confirming the company’s solvency-and the administrator had a draft of this prior to the meeting.

In this situation it’s not unreasonable to require more evidence that the directors did believe that the company was at least likely to become insolvent as required under s 436A.