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Corporations – insolvency – voluntary administration – deed of company arrangement – standing to bring application under ss445D and 447A of Corporations Act 2001 (Cth) – whether administrators had a conflict of interest

In Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd [2020] FCA 1395 (29 September 2020) the plaintiff, Habrok, sought orders under ss445D and 447A of the Corporations Act 2001 (Cth) (Act) terminating a deed of company arrangement (DOCA) executed by the first to seventh defendants (GCY Group) and the eighth defendant (administrators/FTI).

Background

After the investigation of options available to the GCY Group, the administrators recommended to the creditors of the GCY Group that a DOCA should be entered into involving a recapitalisation.

A rival DOCA was proposed by Habrok Mining Pty Ltd, the holding company of Habrok, at the second meeting of creditors. The creditors voted to cause the companies in the CGY Group to execute the DOCA put forward by the administrators, which was then executed. Habrok was not at that time a creditor of any entity in the GCY Group but took an assignment of a claim by a creditor of one of the companies in the GCY Group on the day that the proceedings were commenced.

Habrok’s principal complaint against the administrators is that, having assisted the GCY Group to formulate a turnaround plan in late 2018 when FTI were consultants to GCY, the administrators pursued their plan for the DOCA with single-minded determination during the administration, and in the process disregarded material conflicts of interest.

The issues

The issues in the proceedings included whether:

  • Habrok had standing to make the application in circumstances where it was not a creditor at the date of the second meeting of creditors which resolved to accept the DOCA, and
  • the administrators’ prior involvement with the CGY Group was a conflict of interest.

Did Habrok have standing?

The court found that Habrok had standing both as a creditor and as an interested person pursuant to s445D(2)(c) of the Act. Having taken an assignment of a pre-administration debt, the court was satisfied that Habrok was a creditor notwithstanding that it was not a creditor at the time that creditors resolved for the companies in the CGY Group to execute the DOCA.

Further, Habrok had standing to bring the application as “any other interested person” pursuant to s445D(2)(c). Applying the principles enunciated in Allstate, the court found that the expression “any other interested person” is to be interpreted broadly, that is, whether the person’s material rights or economic interests are or may be affected by the operation or effect of the deed of company arrangement that they seek to challenge. Habrok satisfied that test.

Administrator’s pre-appointment involvement with the GCY Group

The question before the court was whether (as Habrok claimed) FTI’s prior involvement with the GCY Group would likely impede them from acting independently and impartially as administrators in making recommendations about the GCY Group’s future.

The court said that “…in terms of impartiality, not only the reality but the perception of impartiality are important and that an appearance of bias arising from prior involvement may be disqualifying” (at [442]).

Nevertheless, the court found that the involvement of FTI pre-appointment did not compromise its independence or objectivity on any insolvency analysis, whether as a matter of reality or appearance by a hypothetical fair-minded observer (at [450]).

Anthony Lo Surdo SC is a barrister, arbitrator and mediator at 12 Wentworth Selborne Chambers, Sydney, Lonsdale Chambers, Melbourne, and Outer Temple Chambers, London, Abu Dhabi and Dubai. Theresa Power is a barrister at 12 Wentworth Selborne Chambers, Sydney. The full version of these judgments can be found at austlii.edu.au.

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