TGIF 10 November 2023 - Administrators put on notice to validate their appointment

In the matter of Premier Energy Resources Pty Ltd [2023] NSWSC 1185, the Administrator unsuccessfully sought an order validating his appointment where he failed to investigate allegations that his appointment documents included a director’s forged letter of resignation.

Key takeaways

• Administrators must investigate any doubts or allegations concerning the validity of their appointment and bring those matters to the Cout’s attention in a timely manner. This is an obligation and not merely best practice.
  
  
• If following an investigation, an administrator is still unable to satisfy themselves that their appointment was valid, they must apply to a court seeking an order validating their appointment.
  
  
• A court will not exercise its discretion to validate an administrator’s appointment where to do so would effectively grant the court’s approval of unsatisfactory conduct or result in substantial injustice to shareholders of the company in administration.

The Administrator of Premier Energy Resources Pty Ltd (PER), sought an order under section 447A of the Corporations Act 2001 (Cth) validating his appointment.

The Court dismissed the Administrator’s application, declining to validate his appointment because the Administrator had failed to discharge his obligation to promptly investigate and bring to the Court’s attention doubts raised about the validity of his appointment.

One week following the Administrator’s purported appointment, he was informed that his appointment documents included a director’s forged signature of resignation.

The Administrator made no inquiries in relation to the alleged forgery and failed to make an application to the Court validating his appointment until almost three months after his appointment. The Court held that it could not grant an order validating the Administrator’s appointment in these circumstances, as to do so would give the Court’s approval to the forgery and the unsatisfactory conduct of the Administrator.

Factual background

The decision in the matter of Premier Energy Resources Pty Ltd [2023] NSWSC 1185 concerns the validity of the appointment of Mr Simon Thorn as voluntary administrator of PER.

In June 2023, PER’s two directors Mr Connor and Mr Clark were considering PER’s options to deal with the threat of costly legal proceedings that the company did not have the funds to defend. Mr Connor supported placing PER into voluntary administration, however faced disagreement from Mr Clark.

On 20 June 2023, unbeknownst to Mr Clark, Mr Connor sent an email to Mr Thorn advising him that the company had determined to enter into voluntary administration. In the attached documents, Mr Connor included a copy of a letter of resignation purportedly signed by Mr Clark. Based on this letter, Mr Connor made it clear that he was placing the company into voluntary administration as “sole director”.

On 21 June 2023, Mr Thorn was appointed Administrator and notified ASIC and PER’s creditors of his appointment.

On 28 June 2023, Mr Clark sent an email to the Administrator claiming that his appointment was invalid, explaining that he had not resigned as a director and that his letter of resignation was a forgery. The Administrator declined to investigate Mr Clark’s allegations and continued to undertake activities in the administration, claiming that he had no reason to dispute the validity of the appointment documents.

From 28 June to 24 July 2023, Mr Clark repeated his allegations and urged the Administrator to bring an application before a court. The Administrator declined to do so, claiming that PER lacked sufficient funds to commence proceedings and informing Mr Clark that he had standing to bring proceedings himself.

The Administrator eventually applied for an order validating his appointment on 15 September 2023, almost three months after he was appointed.

Administrator’s argument

The Administrator accepted that Mr Clark’s letter of resignation was forged but argued that the Court should nevertheless validate his appointment because as PER lacked sufficient funding to defend costly legal proceedings that were to be commenced against it, it would in any event, end up in liquidation.

Findings

Justice Williams was not persuaded. Whilst her Honour accepted that there was a material risk of future insolvency, she determined that the Court should not exercise its discretion to validate Mr Thorn’s appointment in the circumstances.

Her Honour found that once the Administrator was notified of Mr Clark’s allegations that he had not resigned as director and that his letter of resignation was a forgery, he was obliged to investigate the allegation and, if he was unable to satisfy himself that his appointment was valid, make an application to a court.

Justice Williams rejected the Administrator’s argument that although it would have been ‘best practice’ for him to promptly investigate or make an application, it was not an obligation. Her Honour made it clear that Administrators must investigate any doubts raised in relation to their appointment in a timely manner, as determining the validity of their appointment is essential to administrators taking steps such as advertising property for sale, reporting to creditors and convening meetings of creditors.

Commentary

The decision serves as a cogent reminder for administrators faced with questions over the validity of their appointment.

Whilst the initial stage of an administration process is a busy time for administrators, it is essential that they prioritise confirming the validity of their appointment and promptly investigate and bring before a court any doubts raised regarding the same.