Supervision of external administrators – Committees of Inspection
The Insolvency Practice Schedule (IPS) in schedule 2 of the Corporations Act 2001 (Cth) permits the creditors of a company subject to external administration (as that term is defined in the IPS) to pass a resolution which appoints a Committee of Inspection (COI) in relation to the external administration process.[1]
There are similar provisions in schedule 2 of the Bankruptcy Act 1966 (Cth) that deal with a COI in relation to the supervision of a trustee in bankruptcy charged with the administration of a bankrupt estate (analogously to the functions in respect of a COI in relation to administrators and liquidators in a corporate insolvency context).
Members of a COI appointed by creditors are usually either creditors themselves (or in the case of a company, an authorised officer of the creditor company) or a person authorised by a creditor to act in the capacity of a member of a COI. Otherwise, a representative of the Commonwealth is entitled to be a member of a COI if there is a claim on foot for financial assistance in relation to unpaid employee entitlements, or if the Commonwealth considers that such a claim is likely to be made.[2]
Creditors, and employees in certain circumstances, can appoint a member to a COI in accordance with sections 80-15, 80-20 and 80-25 of the IPS.
Functions and Powers of a COI
A COI consists of a group of creditors (or their authorised representatives) who are elected to represent the interests of creditors in the external administration of a company.
The COI is responsible for advising and rendering assistance to an external administrator and retains a variety of powers under the IPS and the Act to authorise action and request information from an external administrator.
The functions of a COI, pursuant to s 80-35 of the IPS, include (without limiting the other functions and powers invested in a COI under the Act):
a. to advise and assist the external administrator of the company;
b. to give directions to the external administrator of the company; and
c. to monitor the conduct of the external administration of the company.
Directions and Requests for Information
Directions provided to an external administrator by a COI are mandatory and relevant considerations for the external administrator to consider in taking action in relation to the relevant company. Notwithstanding that an external administrator retains the discretion to refuse to comply with a COI direction, a refusing external administrator is obliged to produce a written record and reasons in relation to that refusal.
A COI is also empowered, pursuant to s 80-40 (1) of the IPS, to request the provision of the relevant material specified in that sub-section. An external administrator must comply with such request unless:
a. the material the subject of the request is not relevant to the external administration of the company; or
b. compliance with the request would otherwise cause the external administrator to be in breach of their duties in respect of the external administration; or
c. it is otherwise not reasonable for the external administrator to comply with the request.[3]
Matters informing an assessment of reasonableness for the purposes of an external administrator’s refusal to comply with a request under s 80-40 of the IPS made by a COI are governed by rule 80-15 of the Insolvency Practice Rules (Corporations)
It is important to recognise, however, that section 85-5 (4) of the IPS provides that a direction given to an external administrator by creditors prevails relative to a direction provided by a COI.
Other Powers available to a COI
Further, in tandem with its supervisory function, a COI also has the power under certain circumstances to approve an external administrator’s remuneration.[4]
A COI also has the power to issue a direction to an external administrator to convene a meeting of creditors pursuant to s 75-15 (1) (a) of the IPS, provided that such direction is reasonable, having regard to the matters set out under rule 75-250 of the Rules. If an external administrator, however, acting in good faith, is of the opinion that:[5]
a. complying with a direction to convene a meeting would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of compliance; or
b. there is insufficient property available to permit compliance with the direction; or
c. a meeting of creditors dealing with the same matters covered by the direction has already been held, or will be held within 15 business days following the issuance of the direction or;
d. the direction is vexatious;
the external administrator may refuse to convene the meeting of creditors.
A COI may also obtain specialist advice or assistance that the COI considers desirable in relation to the conduct of the external administration. If the COI will incur costs, however, it must obtain either prior approval from the relevant external administrator or make an application to the Court for orders permitting the COI to incur those costs.[6]
The overarching theme, therefore, relevant to the powers and functions of a COI, and the qualifications of reasonableness which attach to those powers under the Act, IPS and the Rules is the protection of the interests of creditors in the external administration process. Those objects are achieved by:
a. the conferral of powers dealing with oversight by the COI and the need for transparency by the external administrator; and
b. the overarching supervision of the Court in relation to a COI.[7]
Conclusion
If you are a creditor in relation to a company that is subject to external administration, you may need to consider the need to take steps to appoint a COI to preserve the benefit of a facility extended to the relevant company, depending on the nature and extent of the debt, and the interests of the corpus of creditors generally.
If you are a member of a COI, you owe what is the equivalent of a fiduciary duty to creditors, and have separate onerous obligations under the Act, IPS and the Rules, which are the subject of oversight and supervision by the Court.
MPH Lawyers has expertise in the various external administration processes and can provide tailored advice to creditors and insolvency practitioners alike.
[1] Section 80 -10 of the IPS (in circumstances where relevant company is not a member of a pooled group, in which case the appointment of a COI is dealt with under s 80-26 of the IPS).
[2] Rule 80-5 of the Insolvency Practice Rules (Corporations) 2016 (Cth).
[3] Section 80-40 (2) of the IPS. Note: s 80-40 (3) provides that the Insolvency Practice Rules may prescribe circumstances in which it is, or is not, reasonable for an external administrator of a company to comply with a request under s 80-40 (1) of the IPS.
[4] 60-10 (1) (b) of the IPS
[5] Note external administrators must also convene a meeting of creditors on the direction of a COI in a “pooled group” context, subject also to the qualification that the direction must be reasonable – see s 80-27 (2) of the IPS.
[6] Section 80-50 of the IPS.
[7] Section 80-70 of the IPS – the Court may inquire into the conduct of a COI and make such orders as it thinks fit to ensure the proper conduct of the committee.