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In the recent case of 1st Fleet Pty Ltd (in liquidation), the Court clarified the information disclosure obligations of external administrators in the Insolvency Practice Schedule (Corporations) (IPSC) and Insolvency Practice Rules (Corporations) 2016 (Rules).
There is only a short time period for compliance, and there can be cost consequences for non compliance.
The decision provides practical guidance to external administrators in responding to information requests from creditors and other interested parties, including the Commonwealth.
The information disclosure provisions in Division 70 of the IPSC apply to ‘external administrators’ of a company, including administrators and liquidators.
Importantly, a receiver, receiver and manager, or controller will not be considered an ‘external administrator’ under the provisions.
Information, reports or documents may be sought from an external administrator under Division 70 by:
Upon receipt of a request, an external administrator must provide the information, report or document within five business days, unless a longer period is agreed.
Under section 70-45 of the IPSC, an external administrator must comply with a request unless:
The Rules may prescribe circumstances in which it is or is not reasonable for an external administrator to comply with a request.
Rule 70-15(2) provides that it is not reasonable for an external administrator to comply with an individual creditor’s request for disclosure of information, reports or documents if the external administrator, acting in good faith, is of the opinion that:
A request may be taken to be vexatious if the external administrator receives the request within 20 business days of receiving a similar request from the creditor.
An external administrator cannot refuse under (d), (e) or (f) if the creditor agrees to pay the cost of complying with the request and, if requested by the external administrator, security for the cost of complying with the request is provided.
Section 70-90(1) of the IPSC enables a person who has made a request to apply to the Court for an order that the external administrator provide all or part of the requested material.
Under section 70-90(3) of the IPSC, the Court can make orders regarding the provision of the requested material, including orders as to costs.
Justice Black considered the application of these provisions in the case of In the matter of 1st Fleet Pty Ltd (in liquidation) [2019] NSWSC 6.
The Commonwealth sought a range of information and documents after having paid more than $9 million to employees under the General Employee Entitlements and Redundancy scheme and the Fair Entitlements Guarantee scheme. The liquidators complied with some aspects of those requests but declined to provide information relating to their remuneration.
The Commonwealth was concerned as to the reasonableness of the liquidators’ remuneration, which was more than $4 million over six years. The committee of inspection had approved the remuneration, and there was a representative of the Deputy Commissioner of Taxation on the committee.
The Commonwealth was concerned that the committee of inspection was not authorised to approve the remuneration, having regard to the eligibility of certain persons appointed to the committee.
In relation to the remuneration, the Commonwealth requested that the liquidators provide information and documents containing a breakdown of the calculation of each payment made to the liquidators and identifying:
In seeking the information and documents, the Commonwealth relied primarily on section 70-45 of the IPSC (as an individual creditor) and section 70-55 of the IPSC (having advanced funds in relation to unpaid employee entitlements).
In respect of section 70-45 of the IPSC, Justice Black accepted the Commonwealth’s submission that it would only be reasonable for an external administrator to refuse a request if the liquidators, acting in good faith, were of the opinion that one of the exceptions in the IPSC or the Rules applied.
In respect of section 70-55 of the IPSC, Justice Black considered that, provided it satisfied the precondition in section 70-55(1) concerning financial assistance for unpaid employee entitlements, the Commonwealth could specify the information it sought without restriction. Relevantly, his Honour found that the language of the provisions does not limit the nature of the information that may be requested.
The liquidators argued that remuneration reports had been provided to the committee of inspection, which included the ATO representative.
The Court held that it is not an answer to the request for a liquidator to express the opinion that the information had been provided elsewhere (for example, to a committee of inspection), or for a liquidator to think the requested information will be of no utility.
The Commonwealth argued that there was every prospect that information as to the work actually carried out by the liquidators would provide information beyond that provided to the committee (which was generally directed to the approval of remuneration before the relevant work was carried out).
It was held that it was not relevant to the request that the Court would be satisfied with the information that had previously been provided to the committee or that the Commonwealth ought to be satisfied as to the adequacy of the information contained in the earlier reports. The Commonwealth was entitled to exercise its statutory right to request the information.
The Court held it was not improper to invoke the statutory right to information, even if it amounted to an alternative to preliminary discovery. The Court saw nothing inappropriate in creditors exercising the right to access instead of taking the costlier step of seeking an order for pre-action discovery from the Court.
Although the Commonwealth had previously requested information as to a range of matters, which the liquidators had provided (or largely provided), the Court observed that the Commonwealth had not previously sought information of the type being pressed in the application.
There was no suggestion that there would be any practical difficulty in the liquidators accessing the requested information, as they would have kept it in accordance with their professional obligations.
For ease of searching, the Commonwealth requested the time records in electronic form. The Court accepted this as a sensible approach, at least in production of the original time records, given the volume of entries.
Justice Black rejected a submission made by the liquidators that the Court had a ‘strong’ discretion to make or refuse orders for disclosure under section 70-90 of the IPSC. Rather, Black J considered that it was a ‘weak’ discretion, which existed for the practical purpose of:
In relation to the composition of the committee of inspection, the Commonwealth requested documents that ‘establish’ contentions that specified persons were an eligible creditor.
The Court decided that it should not make an order requiring the liquidators to produce information to ‘establish’, or documents to ‘support’, propositions that the liquidators do not advance.
As the Commonwealth was partially successful, the liquidators were ordered to pay 50% of the Commonwealth’s costs, without recourse to the assets of the company.
The decision provides important guidance to external administrators on how to manage and respond to requests for information. It highlights that the courts will give effect to the legislature’s intention to create more transparency and accountability in external administrations.
For those preparing requests, the categories of information or documents should be identified in a straightforward and objective manner, as would ordinarily be done in identifying disclosure categories or the content of subpoenas or notices to produce. At the hearing, the Court will not order information and documents to be produced in a substantially different form to that which is sought in the request.
An external administrator responding to requests should immediately consider:
The decision shows that the Court will not lightly disregard requests made under the IPSC and Rules, and that an external administrator must show that they reasonably believe, in good faith, that one of the exceptions applies. Where an external administrator is satisfied that an exception does apply, they should communicate this in writing to the party making the request.
If concerned with the time limits for providing the report, information or document, an external administrator should arrange a longer period with the requesting party. The provisions relating to the sufficiency of the available property of the company and costs also need to be considered.
External administrators should treat requests with critical importance and respond proactively and positively, because there is the risk that a personal costs order may be made against them if they fail to comply.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.
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