With great power (to creditors) comes great responsibility (of insolvency practitioners), and the Court is holding insolvency practitioners to account.

We take a look at how the Commonwealth’s request for information pursuant to the Insolvency Practice Schedule (Corporations) (IPS) thrust a double-edged sword of information provision and remuneration into the heart of a liquidation.

A creditor’s right to information

In 2012, creditors resolved that a committee of inspection (Committee) be appointed in respect of a pool of 8 companies in liquidation. The Committee approved the liquidators’ remuneration on a number of occasions between 2012 and 2017, with over $4 million of remuneration drawn by the liquidators.

In 2018, the Commonwealth, a priority creditor, raised 2 areas of concern with the liquidators:

  1. the constitution of the Committee, including whether its members were validly appointed (Committee Issue); and
  2. the reasonableness of the quantum of remuneration drawn (Remuneration Issue).

The Commonwealth requested information and documents from the liquidators, relying on 2 sections of the IPS:

  1. section 70-45, which provides that a creditor may request information from an external administrator and that the external administrator must comply with such a request subject to certain exceptions; and
  2. section 70-55, which requires an external administrator to comply with a request by the Commonwealth for specified information, reports or documents if certain conditions are met.

Apparently dissatisfied with the outcome of those requests, the Commonwealth then applied to the Court, requesting the production of documents from the liquidators and an order that the liquidators pay the Commonwealth’s costs of the application. In bringing its claim, the Commonwealth relied on the following sections of the IPS:

  1. section 70-90, which allows a person who has made a request for relevant material to apply to the Court for an order for production of that material by the external administrator; and
  2. section 90-15, which provides that the Court may make such orders as it thinks fit in relation to the external administration of a company.

One for the money …

The Court did not make orders for the production of information regarding the Committee Issue for 3 reasons:

  1. section 70-90 of the IPS was not satisfied as the Commonwealth had, in its originating process, substantially reformulated the categories previously sought in the request for information. The Court held there had been no failure to produce within the meaning of section 70-90 because there had been no previous request to produce the information the subject of the proceeding;
  2. the liquidators established that they had made appropriate searches and, as far as they were aware, there were no further documents to be produced beyond what was already produced; and
  3. assuming the Commonwealth had pressed the original request for documents and not the reformulated request, the liquidators could not reasonably be asked to produce documents or information to establish or support propositions that were not advanced by the liquidators. In the original document request, the Commonwealth had formulated contentions it said the liquidators might advance (but had not, in fact advanced) and then sought the production of documents that would support those (non-existent) contentions. The Court could see “no reason” why it should order the production of information or documents in those circumstances.

In respect of the Remuneration Issue, production was ordered under sections 70-90 and 90-15 of the IPS, including production of time entries with narrations. The Court held that:

  1. the request for information is a creditor’s statutory right. It is no answer to the exercise of that right for the liquidators to take the view that the requested information had already been provided to the Committee (to enable approval of the remuneration);
  2. an offer by the liquidators to provide the requested information “in summary form” or to meet with the Commonwealth does not constitute a proper basis to refuse to produce the actual time records pursuant to sections 70-45 or 70-55 of the IPS; and
  3. there is no “impropriety” in a creditor relying on its statutory rights to access information (under section 70-45 of the IPS) prior to invoking other provisions of the Corporations Act 2001 (Cth) (Act), including to seek a review of remuneration or the external administrator’s conduct.

The issue of costs was not determined, but the Court expressed the preliminary view that the liquidators should pay one-half of the Commonwealth’s costs of the application without recourse to assets of the pooled companies.

Know your IPS

The decision In the matter of 1st Fleet Pty Ltd (in liquidation) [2019] NSWSC 6 is a lesson for creditors to take care to ensure their first request for information from an external administrator is phrased appropriately and encompasses all documents or information that are properly sought.

External administrators are encouraged to pay close attention to the production requirements including the specific exceptions of the IPS and associated legislation when responding to a request for information by a creditor.

The comments by the Court in this case also suggest that creditors may use their statutory rights to access information as a form of preliminary information gathering before then seeking a review of the external administrator’s conduct or remuneration under the Act. Such an approach suggests that knowledge certainly can give creditors power.

If you are a creditor seeking information about a company in administration, or an external administrator who has received a request under the IPS, we can help.

For more information, please contact Stephen Polczynski or Nicola Bailey on 02 9234 1500.