Navigating alleged invalidity in administrator appointments

In a recent decision out of the Supreme Court of New South Wales, the Court considered whether the purported appointment of a company administrator could be validated, notwithstanding that the appointment had been facilitated by the forgery of a director’s signature.

In 2021, Premier Energy Resources Pty Ltd (the Company) entered into an agreement with Delta Electricity under which it would supply coal fines to a power station. As it transpired, by early 2023 Delta Electricity had alleged that the Company breached the supply agreement and threatened to commence legal proceedings. At around this time, the Company had two directors: Mr Connor and Mr Clark. Mr Connor, being of the view that the Company did not have the funds for a legal battle, took the position that the company should go into administration. This was a step that had been resisted by two of the four shareholders.

On 20 June 2023, Mr Connor sent an email to the purported company administrator to the effect that Mr Clark had resigned and Mr Connor, in his capacity as sole director, resolved that the company was ‘insolvent or likely to become insolvent at some time in the future’. It is sufficient to say that, if not for the resignation of Mr Clark, the appointment of an administrator would have been invalid. Attached to that email was the signed resignation letter of Mr Clark. The Court would ultimately find the resignation letter was the product of forgery by (or at least caused by) Mr Connor. The following day, the administrator notified ASIC of his appointment.

In the days that followed, Mr Clark notified the administrator that he did not sign any resignation letter and that it therefore must be fraudulent. In response to Mr Clark, as well as another shareholder that contested the validity of the appointment, the administrator sent an email taking the position that there was no reason to dispute the documents before him. It was the administrator’s view that Mr Clark or the other shareholder should apply to the Court if they doubted the validity of the appointment. The administrator was reluctant to apply of his own volition due to the lack of funds the Company had available to cover such an application.

Numerous communications to this effect continued until the administrator commenced proceedings almost three months later, seeking an order under section 474A of the Corporations Act that his appointment was valid or, in the alternative, that the activities he had undertaken pursuant to the purported appointment were not invalid.

Section 474A of the Corporations Act can operate to, among other things, validate the appointment of administrators where that appointment would otherwise be invalid. In Singleton v 24 Hr Cranes Pty Ltd [2003] NSWSC 1156, Hamilton J held that this could extend to instances where there is some doubt as to whether a forgery led to the appointment.

It this case, the Court found that there was a material risk of insolvency to the Company. Critically though, the relevance of the company’s solvency was overwhelmed by the administrator’s delay in bringing proceedings. The Court was particularly critical of the administrator’s failure to promptly investigate the allegations and commence proceedings if he could not be satisfied that his appointment was valid.

It was also no answer that the company did not have sufficient funds to make such an application as the administrator was willing to accept the appointment without any security for his costs and remuneration. In any event, as proceedings were commenced by the administrator in any event, it would appear that funding did not pose an insuperable obstacle.

The Court ultimately refused to validate the administrator’s appointment under section 447A of the Corporations Act 2001 (Cth) (Corporations Act).

Key Takeaway

If there is credible concern as to an administrator’s appointment, an application should be brought to validate their appointment in a timely way. Insolvency practitioners should also be mindful of the unexpected costs of an application to Court when accepting an appointment without funding. This will not be tolerated by a Court to refuse an application which should otherwise have been brought, as was the case here.

If you are an insolvency practitioner seeking advice on an appointment, please contact Pragma Lawyers’ specialty team for expert advice.