The importance of due diligence before providing a consent to act.
Voluntary administrators and liquidators must do their due diligence prior to providing any consent to act. One consideration is how they will be paid for the time and expenses invariably incurred. Failure to consider this may result in completing a job without payment (a sure-fire way to end up in the same predicament as the potential client). To undertake due diligence consideration will be taken to:
- Company assets.
- Any security interests or competing priorities.
- Potential voidable recoveries.
- Whether third-party funding/indemnities is required.
However, one consideration that may slip under the radar is when an incumbent external administrator is in play. Occasionally, voluntary administrators are replaced by a liquidator via the court or at the second meeting of creditors (typically 25 business days after being appointed). During that initial period voluntary administrators may be required to (among other things):
- secure the company assets
- trade the company’s business
- restructure the company’s business
- explore a sale of business options
- engage with multiple stakeholders often with competing priorities
- conduct detailed investigations into company affairs
- prepare detailed reports to company creditors.
Each of the above are time-consuming tasks that inevitably lead to incurring significant costs. In contrast, it is not unusual that given the short timeframe the voluntary administrator has not had an opportunity to realise any/all of the company assets, which is why protection mechanisms under section 443F of Corporations Act 2001 provide the administrator a statutory lien over the company assets. This lien is important to secure payment for the time and expenses incurred to that date.
The lien presents a potentially contentious issue due to the interplay with other Corporations Act provisions, with the incoming liquidator potentially (and subsequently) realising company assets under a section 443F lien and therefore intend to get their remuneration and costs paid in priority to the former voluntary administrator under section 556(1) of the Corporations Act.
This underlying tension between sections 443F and 556 of the Corporations Act appear to be an ongoing cause of confusion for some in the legal profession despite the Victorian Supreme Court decision in Re Specialist Australian Security Group Pty Ltd (in liquidation) that our office was directly involved in.
The decision made in that case makes it clear that:
- Voluntary administrators can rely on statutory liens under section 443F of the Corporations Act in respect of the company’s property; even where the discovery and preservation of the property was not due to the voluntary administrators’ actions.
- Section 443E of the Corporations Act says nothing about the remuneration being payable only in the event that the voluntary administrators’ actions or conduct caused the company to have the property. Rather, it relates to the company property—whether or not the administrators had a hand in or contributed to its recovery.
The effect of this decision confirms that the voluntary administrators’ lien takes priority over any costs of the subsequent liquidator (excluding any direct realisation costs) in realising the assets subject to the section 443F lien.
The practical outcome confirms that any proceeds generated (less the realisation costs) remain subject to the section 443F lien and payable to the voluntary administrator. Critically, in the event that the company assets are insufficient to discharge the lien, any subsequent liquidation recoveries (e.g. voidable transaction claims, insolvent trading claims etc.) will be shared on a pari-passu basis (equally) with the former voluntary administrator until the lien is satisfied. (For the benefit of doubt this excludes any Universal Distributors lien that the liquidator may be entitled to rely on).
Given the above points, it’s critical for any incoming liquidator to consider before providing a consent to act is (among other things):
- the remuneration incurred by the incumbent administrator
- the value of company assets subject to section 443F lien
- the value of any other potential antecedent recoveries (in the event the assets are insufficient to discharge the lien in full).
Failure to consider these elements may risk the possibility of the liquidator getting paid.