Is it valid? The importance of insolvency practitioners ensuring their appointment is valid.

A recent case in the Supreme Court highlights the importance of insolvency practitioners ensuring the validity of their appointment as external administrators.

In In the matter of Premier Energy Resources Pty Ltd [2023] NSWSC 1185, an administrator was purportedly appointed by a resolution of a sole director. However, the determination that the director was the sole director was formed based upon the premise that a prior co-director had recently resigned. That co-director subsequently claimed that the resignation letter was a forgery.

Unfortunately, the administrator elected to carry on with the administration, calling meetings of creditors, issuing reports and advertising the company’s assets for sale.
3 months later, the administrator brought an application to the Court to validate his appointment. Evidence tendered by the co-director that his purported resignation was a forgery was unchallenged and therefore accepted.

Justice Williams declined to make the orders, deciding that to do so would amount to the Court effectively validating the actions of the fraudulent director, which was apparently done to avoid dispute processes under a shareholders agreement. Her Honour also commented that it would effectively validate the actions of the administrator, of whom she criticised for continuing to carry out the administration despite the claims of the co-director about the validity of the appointment.

Undoubtedly, the administrator’s fees incurred in conducting the administration would be in peril. This decision highlights the importance for insolvency practitioners to ensure their appointment is valid before proceeding too far into the appointment. It also perhaps warns insolvency practitioners to make enquiries of a recently signed resignation letter of a former co-director when accepting an appointment.

Of course, it’s easier said than done. Insolvency practitioners need to move quickly at the beginning and have statutory deadlines under the voluntary administration regime. One is also reminded that there are times where appointments are challenged, by those unhappy about the appointment of a voluntary administrator, based on questionable assertions: In the matter of Sydney Project Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) and S.E.T. Services Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] NSWSC 881.