Administrators’ Responsibility to assess the validity of their Appointment
An administrator will be properly appointed under section 436A of the Act when the following are satisfied:
- A resolution is passed by a company’s directors;
- By a majority of votes; and
- Those directors genuinely hold the belief that the company is insolvent or about to become insolvent.
In Re Condor Blanco Mines Ltd  NSWSC 1196 the appointment of the administrator of Condor Blanco Mines Ltd (Company) under section 5.3A of the Corporations Act 2001 (Cth) (Act) was successfully challenged on the basis that, at the time of appointment the board of the Company did not genuinely hold the belief that the Company was insolvent or about to become insolvent.
The Company sought that the administrator not be indemnified by the Company’s assets and instead be required to pay costs on the basis that he did not act in the way that a reasonable administrator should.
The Court made the following points regarding an administrator’s responsibility to assess the validity of his or her appointment:
- Administrators are not required to undertake an independent verification of the factual basis of the director’s resolution of their appointment and are only required to consider whether the resolution appears to be valid.
- If administrators are put on notice that their appointment may not be on the basis of the company’s insolvency, they are then required to make inquiries with respect to the financial information of the company, and whether a resolution in appropriate terms was passed by a majority of votes. It is not the administrator’s duty to assess a director’s motive beyond the actual or impending insolvency of the company.
- Administrators may test the validity of their appointment by commencing proceedings as follows:
- Apply under section 442A of the Act for declaratory relief with respect to the status of the company’s administration;
- Apply under section 446C of the Act for a declaration that their appointment is valid; or
- Apply under section 447D of the Act to the Court for directions in relation to their functions and powers, or on the operation of a Deed of Company Arrangement.
If administrators commence proceedings under sections 442A, 446C or 446D of the Act, a question may be raised with respect to their personal interest in retaining their paid office.
- Where a Company is without funds, and a certain action is discretionary, administrators are not required to take that action if they would be required to spend their own money in the process.
Administrators are not required to undertake independent verification of the factual basis of their appointment; they are however required to make enquiries with respect to the financial status of the company when put on notice that there may be ulterior motives beyond impending insolvency. If concerned, Administrators may test the validly of their appointment in sections 442A, 446C and 446D of the Act. Such actions are however discretionary and may raise concerns with respect to the Administrator’s self interest in retaining their paid office.