In May 2012 a national Australian transportation company was put into liquidation and on 2 July, a meeting of creditors was held which purported to appoint a committee of inspection (creditors) and specify the members of the COI. ‘Purported’ because over 8 years later, the appointment of the committee has been found to be invalid: Tayeh v Commonwealth of Australia, in the matter of 1st Fleet Pty Limited (In Liq) [2020] FCA 1323.
The Commonwealth was invited to join the COI at the time but had declined.
Over 6 years later, in August 2018, the Commonwealth notified the liquidators that it was concerned that the resolutions approving the liquidators’ remuneration were invalid because the resolution appointing the COI may have been ineffective.
Meanwhile, the COI had held 11 meetings between December 2012 and February 2019 at which it passed various resolutions including those authorising the liquidators to draw down remuneration of $5.6m. As at 1 July 2019, the liquidators had drawn down $3.8m pursuant to those resolutions.
However, the whole process was defective. The named individuals nominated to represent institutional creditors including the ATO did not attend COI meetings, instead various employees of those creditors did so.
The finding of Justice Jagot was that
“people who had no right to do so participated in and voted at the meetings of the COI. Further, the constitution of the COI contravened s 548A(1)(d)(i) and (ii) of the Act as the resolution of the creditors appointing the members of the COI did not identify the members of the COI or their number”.
This was “not a mere failure of documentation” but a “failure of authority which relates to the fundamental requirements for a COI … the effect of what occurred was to disenfranchise the creditors from having effective representation on the COI …”
A differently constituted committee might or might not have reached a different result. It was for the liquidators to prove that no substantial injustice had been caused for any remedial orders to be made: s 1322 Corporations Act.
Reference was made to a decision in Re Great Southern,[1] where not only had the liquidators not complied with the terms of former s 548 in relation to COIs but it seems that this non-compliance was a matter of ‘industry practice … for some time’[2] among the profession. The outcome there was not only that remedial orders were made but also that s 548 was repealed and law was passed validating any non-compliance in other cases.[3] That did not assist the liquidators here.
“This is not a case in which a condition precedent to the constitution of a COI was omitted to be done. It is a case in which the COI itself has not been properly constituted”.
Consequences
The Judge noted that the liquidators would need to seek creditor or court approval of their remuneration; that is, no remuneration had in effect been properly approved. It is not apparent form the judgment what other authorisations the COI might have given over the last 8 years that would need to be revisited.
Commonwealth
As to the Commonwealth, its 2012 decision not to join the COI did not mean that it waived contraventions of the Act with respect to the constitution and functioning of the COI. That it took until 2018 to raise its concerns was not the subject of comment. The Judge did comment on the Commonwealth’s allegations of a lack of honesty on the part of the liquidators and the persons who attended the COI meetings, rejecting them, they being raised belatedly and in denial of procedural fairness. The Judge made findings that those involved in the contraventions acted honestly: see s 1322(6)(a)(ii).
As to the Commonwealth as a creditor in insolvencies, and in this matter, and in relation to its model litigant obligations, see A new priority of the Commonwealth in an insolvency? 18 January 2019.
Comment
Putting aside the particular facts in this case, the law’s ability to retrospectively invalidate an event on which reliance has later been placed is always there, but to be applied carefully. Bankruptcy itself can be retrospectively ‘annihilated’.[4]
COIs have extensive authority in insolvency law including to approve settlements, authorise funding and leasing agreements, to approve remuneration, obtain advice, apply to the court, request information, and authorise destruction of records.
That puts an onus on the practitioner and the creditors and members of the committee to ensure that their COI is properly constituted; and then on the court to get the balance right when some flaw in the process might be revealed.
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[1] [2016] WASC 234
[2] Insolvency Practice Rules (Corporations) 2016, Explanatory Statement.
[3] Insolvency Law Reform Act 2016, s 1611 ‘Validity of appointment under section 548 of the old Act not affected by lack of separate meeting of contributories’.
[4] Union Club v Lord Andrew Charles Robert Battenberg [2006] NSWCA 72
