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Door rolls open for administrators to recover remuneration for work impliedly requested: the latest in a line of cases on invalid appointments

Darwin is not ordinarily regarded as a petri dish of insolvency jurisprudence, but the Northern Territory Supreme Court’s recent decision in Blackadder v McQuinn (No. 2) [2017] NTSC 57 has broken new ground by expanding the extent to which invalidly-appointed administrators can claim remuneration and expenses.

Ordinarily, when a company is validly placed into voluntary administration, administrators have a statutory right to remuneration under the Corporations Act 2001 (Cth) (Act). However, if the appointment of administrators is found to be invalid, they have no statutory right to be paid and must bring their claim in quantum meruit (that is, fair payment for work done). Numerous Australian judgments in recent years have awarded a limited amount of quantum meruit remuneration to invalidly-appointed administrators for any “incontrovertible benefit” conferred upon a company through their work. (You can read our notes on a few of these decisions here, here, and here.) Some of these judgments have alluded to the hypothetical possibility of ordering a more extended scope of remuneration, for any work carried out at the “implied request” of a company, regardless of the value of incontrovertible benefits conferred. However, in none of these previous judgments has it been found that administrators were actually entitled to this extended scope of remuneration having regard to the individual facts of each case.

The recent NT Supreme Court judgment is the first in Australia to recognise the entitlement of invalidly-appointed administrators to be remunerated for work impliedly requested by the company, and to order that remuneration be paid on this basis. The judgment also confirms that an administrator’s claim for remuneration and expenses is secured by a lien over the company’s assets.

Background

The company in question was NTRDS Pty Ltd (Company), trading as Roller Door Service NT. Mr Blackadder and Mr McQuinn were the Company’s only shareholders and directors until September 2015, when Mr Blackadder resigned as director and sought to have Mr McQuinn buy him out. No agreement was reached in the ensuing months, and court action was commenced by Mr Blackadder in July 2016. In November 2016, by consent, the Court ordered Mr McQuinn to buy Mr Blackadder’s shares at a value to be subsequently determined by the Court. In February 2017, less than 24 hours before the valuation hearing was scheduled to commence, Mr McQuinn as sole director resolved to appoint voluntary administrators (Administrators) to the Company. The resolution included the standard declaration to the effect that the director believed the Company was or was likely to become insolvent. (It is a crucial prerequisite for the commencement of voluntary administration that the directors hold a reasonable and genuine belief that the company is or is likely to become insolvent).

Following their appointment, the Administrators formed the view that the Company may in fact have been solvent. Further, at the commencement of the valuation hearing on 28 February 2017, there was a tacit suggestion by Mr Blackadder’s counsel that Mr McQuinn had appointed the Administrators with the ulterior purpose of thwarting the hearing. As a result, the Administrators filed an application under section 447C of the Act to confirm whether their appointment was valid and to claim remuneration and expenses.

The Court’s first judgment (Blackadder v McQuinn [2017] NTSC 29) held that Mr McQuinn did not hold a reasonable and genuine belief of insolvency at the time of the appointment, and that the Company was solvent. The Court took the view that Mr McQuinn had appointed the Administrators for an improper purpose: “Mr McQuinn was keen to have the hearing of the Valuation Proceeding adjourned, apparently hoping that he could obtain a more conservative valuation report… and perhaps negotiate a more modest settlement with [Mr Blackadder]. Indeed his understanding was that “if the company was in administration, chances were the hearing would be put off or postponed”“. That first judgment left open the questions of whether the Administrators ought to have been aware of the improper purpose, and how the Administrators should be remunerated. These questions were the subject of the second judgment on which this article now focusses.

The Decision

If the Administrators were found to have been aware from the outset of the Company’s solvency or of Mr McQuinn’s improper motives, they would not have been able to claim remuneration on the “implied request” basis – the rationale being that no court could infer an “implied request” for administrators to carry out work associated with an administration if the administrators were aware from the outset that the administration was invalid.

However, the Court rejected Mr Blackadder’s submission that the Administrators breached any duty by accepting the appointment, finding that there was no evidence to conclude the Administrators were aware of the Company’s solvency or of the director’s improper purpose. In the circumstances of the case, the Court held that the Administrators were entitled to accept at face value the opinions of insolvency expressed to them by Mr McQuinn and by an external business advisor who was assisting Mr McQuinn. Further, the Court took the view that the Administrators conducted themselves appropriately throughout the course of the proceeding by remaining neutral and by taking the initiative to file a timely application for determination of the validity of their appointment.

The judgment goes on to confirm the Administrators’ right to quantum meruit remuneration for work carried out at the “implied request” of the Company. In other words, when the Company appointed the Administrators, the Company impliedly requested that the Administrators undertake the work ordinarily undertaken in the course of voluntary administration. The judgment provides a number of examples of such remunerable work, some of which overlap with work remunerable on the “incontrovertible benefit” basis and some of which significantly extend on the scope. The examples referred to in the judgment include operating the Company’s business, collecting debts, valuing assets, reconciling the Company’s financial information and finalising outstanding tax lodgements. Based on the principles set out in the judgment, it is likely that the scope would also extend to cover work required in the course of voluntary administration, such as the preparation of reports to creditors and the filing of ASIC forms (provided that such work was carried out on a reasonable and cautious basis in light of the questionable validity).

Notwithstanding that the Administrators’ remuneration was held to be claimable on a quantum meruit basis rather than a statutory basis the judgment indicates that the calculation of remuneration may be analogous to statutory remuneration and calculated at “a reasonable rate for work actually done“. Further, the Court accepted that the law recognises a lien over Company funds to secure the Administrators’ remuneration and expenses. As a result, the Administrators could retain control of Company funds from which they would seek to draw their remuneration, pending agreement or judicial determination as to the precise amount.

Conclusion

While previous Australian judgments have adverted to the hypothetical possibility of invalidly appointed administrators recovering quantum meruit remuneration on the “implied request” basis and have alluded to the existence of a lien, none have confirmed the existence of such entitlements as definitively as this judgment. The principles expounded by the NT Supreme Court will be of reassurance to administrators who find themselves questioning the validity of their appointment to a company, provided that they promptly take the appropriate steps after being put on notice of the potential invalidity. The appropriate steps may differ having regard to the facts of the individual case, but the following principles will ordinarily apply once an administrator begins to question the insolvency of the company or the motives of the director(s):

  • An administrator should not bury his or her head in the sand once on notice of a reasonable suggestion that the appointing-director(s) did not believe their company to be insolvent or approaching insolvency. If the company might be solvent, the administrator should investigate and confirm whether it is;
  • If there is a genuine question as to the company’s solvency or the propriety of the director’s purposes, an administrator should promptly apply for a determination of validity under s 447C of the Act. It is highly preferable for an administrator to file such an application before a disaffected stakeholder does so, as courts will ordinarily look much more favourably upon administrators who are not seen to be trying to extend their tenure over a company;
  • While undertaking these investigations and applying for a determination of validity, it is inappropriate for an administrator to step out of the ring entirely. Instead, the administrator should cautiously continue to carry out his or her duties, while minimising the expense incurred pending the investigations. This might entail applying to a court to extend the convening period for the second meeting of creditors (as the administrators of the Company did in the recent NT Supreme Court proceedings); and
  • Importantly, if an administrator is on notice of the company’s solvency or improper purposes prior to the commencement of voluntary administration, the appointment should not be accepted at all. Accepting an appointment as administrator in these circumstances would be a serious breach of duty and would disentitle the administrator to remuneration for work carried out at the implied request of the company.

The full judgment of the NT Supreme Court can be viewed here. The Administrators were represented by HWL Ebsworth’s litigation and insolvency team in Darwin.

This article was written by Ryan Sanders, Special Counsel and Polat Siva, Partner, in our Darwin office.

Publication Editor: Grant Whatley.

Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.