Challenging the Appointment of an Administrator: s 436A Under the Microscope

Overview

The board of directors (board) of a company can appoint an administrator by passing a resolution (s 436A resolution) that the directors hold the opinion that the company is insolvent, or likely to become insolvent, and an administrator should be appointed; Corporations Act 2001 (Cth) (CA) s 436A. This decision is serious—and so are the legal grounds for challenging it.

If there is any uncertainty about the validity of the administrator’s appointment, either the administrator, the company, or any of the company’s creditors can apply for an order declaring whether the appointment was valid on any specific grounds; CA s 447C.

Three of the most common grounds of challenging include:

1. The board has not formed a bone fide and concluded opinion the company is insolvent.

2. The administrator was appointed for an improper purpose.

3. Problems with the formalities.

Nevertheless, the Court retains the discretion to validate the administrator’s appointment where continuing the administration is in creditors’ best interests; CA s 447A.

Bona-fide & concluded opinion of insolvency not formed

The board forming a bone fide and concluded opinion as to the company’s insolvency is a pre-condition to their passing a s 436A resolution. An administrator’s appointment may be vitiated if the board did not take adequate steps assess the company’s financial position (and solvency), relied on flawed or incomplete information, or misunderstood the law; In the matter of Cyprus Community of NSW Ltd [2024] NSWSC 1629, [54].

Solvency hinges on the “cash flow test” in s 95A – that is a company is solvent if it can pay debts as and when they fall due. Insolvency is not just phase, or a temporary lack of liquidity, but rather a continued inability to pay debts using realisable resources; Sandell v Porter 115 CLR 666.

An administrator’s appointment may be invalid where the board is unable to determine whether the company is able to pay its debts when they fall due based on the information available at the time. The circumstance that the board does not know whether the company is an insufficient basis to appoint an administrator; Kazar v Duus [1998] 88 FCR 218.

However, the validity of an appointment based on an opinion of likely insolvency future is less clear cut. The existence of some gaps or defects in the information before the board will not be sufficient to vitiate an administrator’s appointment.  The person challenging the administrator’s appointment must establish that at the time the resolution of insolvency was passed, there was more than a bare possibility or speculation the company could have realised its assets to satisfy its current and future debts; Cyprus Community, [59].

Similarly, the mere fact the company has received third party financial support in the past, or possibility that it may receive such financial support in the future, is insufficient unless the financial support is from a source who can be legally compelled to provide that support by a formal agreement; Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28, [43]-44].

Administrator appointed for improper purpose

The board’s exercise of its power to appoint an administrator will be invalid if it passed the s 436A resolution for an improper purpose, and the resolution would not have been passed but for the improper purpose. Practically speaking, this operates as a two-stage test. First, one must ascertain the board’s actual substantial purpose for passing the s 436A resolution. Second, one must compare the board’s actual substantial purpose for passing the s 436A resolution with the purposes of Part 5.3A articulated in CA s 435A. The purpose of the s 436A resolution will be characterised as improper if it was passed for a purpose other than maximising the changes of the company (or its business) continuing in existence or achieving a better return to creditors than would result from immediate winding up; Cyprus Community, [87]; CA s 435A.

Some case-examples of appointments made for an improper purpose include appointments for the purpose of:

• Perpetuating the board’s control over the company; Kazar v Duus [1998] 88 FCR 218.

• Preventing or frustrating a creditor’s winding up application; St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] 210 ALR 265, [16].

• Avoiding or delaying other proceedings, or a liquidator’s scrutiny of the board’s conduct; Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883, [21]-[24].

Problems with the formalities

The appointment of an administrator may be vitiated by the board not recording the s 436A resolution in writing, or if the written record of the resolution does not address the statutory criteria in s 436A. For instance, “A resolution was passed to place [company] into VA with EY, subject to agreement of brief details” is insufficient because it does not record the director’s formation of an opinion that the company is insolvent or likely to become insolvent; Cyprus Community, [81]-[83].

Additionally, a s 436A resolution may be vitiated if the persons who purport to pass the resolution of insolvency lack legal authority to do so. For example, where there is not a quorum at the board meeting where the s 436A resolution is passed, or the directors who vote in favour of the resolution have not been validly appointed; Xie v Crisp [2011] 248 FLR 265, [190]-[192]. See also: Ross & Anor As Joint & Several Administrators Of GNC Homes P/L (Admin Apptd) v GNC Homes P/L (Admin Apptd) [2015] SASC 168; 110 ACSR 60, [45].

Validation under of appointment under s 447A

CA s 447A(1) grants the court “plenary powers” to order whatever it considers just in all the circumstances of the administration, including to cure defects in an administrator’s appointment; Cyprus Community, [122].

There is no exhaustive shopping list of matters that the court may take into account in deciding whether to validate an administrator’s appointment, relevant matters include (Cyprus Community, [123]-[124]; Xie, [221]-[231]):

• The financial position of the company, including whether it is likely insolvent.

• Whether the administrator sought external legal advice regarding the validity of the appointment.

• Whether the administrator has carried out substantial work and incurred costs in the “not unreasonable” belief their appointment was valid.

• Whether any person would be subjected to any particular prejudice by validating the appointment.

• The desirability of having an independent person being responsible for the company’s affairs, versus control returning to the current board of directors.

• The prospects of the board and others responsible for the company’s affairs working together in the future.

• The prospects of the company (or its business) continuing in existence and trading profitably following the administration.

• In the case of incorporated associations – the prospects of preserving its functions for the benefit of its community.

• The interests of creditors and the purposes of CA Part 5.3A articulated in s 435A.

Key takeaways

1. Substance over form: An administrator’s appointment hinges on the board of directors forming a genuine, informed, and concluded opinion about insolvency—not a vague concern or guesswork. Even if the board has complied with the formalities, an administrator’s appointment can be vitiated by the board failing to form the requisite state of mind.

2. The formalities still count: Procedural missteps, like failing to properly document the s 436A resolution, or permitting persons other than validly appointed directors to vote, can invalidate the appointment.

3. Evidence is Essential: Parties challenging an appointment must raise more than mere speculation as to the possibilities – they must establish real defects in either the board’s decision-making or the procedural process.

4. Court Can Step In: Even where defects exist, the court may validate an administrator’s appointment under s 447A if it's just in all the circumstances to do so.