A voluntary administrator is first appointed by the directors of an insolvent company. Creditors may want to replace this voluntary administrator with another insolvency practitioner. The voluntary administrator may be removed or replaced:
- at first meeting of the creditors by a vote;
- by resolution under the Insolvency Practice Rules; or
- by a state Supreme Court or the Federal Court.
Alternatively, creditors could look to work closely with the appointed voluntary administrator by appointing and then joining a committee of inspection.
Why would you want to replace the voluntary administrator anyway?
The voluntary administration process can be frustrating, and increasingly, creditors are looking to replace a voluntary administrator installed by the directors to give them comfort that the process and investigations are being run impartially.
To find out more about voluntary administration in general read our blog post: Who appoints a voluntary administrator?
Voluntary administration is a procedure where an independent professional is appointed to take over the affairs of a business for a set period of time. Voluntary administration is intended to support businesses on the brink of insolvency to continue operating and, where that is not possible, achieve a greater return for creditors than the immediate winding up of the company.
In this writer’s view, approximately 95% of voluntary administrations fail to meet the stated objective of voluntary administration, being saving goodwill value of insolvent businesses, saving jobs and repaying a decent percentage of unsecured creditor debts (in double digits).
For more on this read our blog post: What are the success rates of voluntary administration?
Crucially, if the directors can persuade creditors to vote in favour of a compromise a Deed of Company Arrangement this would stop further investigations into their management of the company and stop a liquidation that could claw back assets for creditors. To be fair to the voluntary administrator, it is not possible for them to conduct a thorough investigation into the company’s affairs during the limited time frames of the voluntary administration process.
Initial appointment of the voluntary administrator
The decision to appoint a voluntary administrator is one that can be made by:
- the directors (by resolution of the board and in writing)
- a secured creditor (with a security interest in all or substantially all of the company’s property), or
- a liquidator, or provisional liquidator (see s 436A of the Corporations Act 2001)
There are strict eligibility requirements for an individual to operate as a voluntary administrator. These include:
- being a registered liquidator (s 448B of the Corporations Act 2001)
- not having certain interests in the company, such as being a director, employee or creditor of a certain size (s 448C of the Corporations Act 2001)
On appointment, the voluntary administrator must make a declaration about indemnities, the existence of relevant relationships and lodge a notice of appointment (s 449CA, s 450A of the Corporations Act 2001).
Crucially, once appointed, the directors, the secured creditor or liquidator that appointed the voluntary administrator, cannot revoke that appointment (s 449A of the Corporations Act 2001). The key options for removal or replacement of voluntary administrators lies with creditors rather than those who appointed the voluntary administrator (such as directors). This makes sense – the because the voluntary administrator does not work for or owe duties to the directors. Their duties are primarily to the creditors. In light of this, the focus in this blog post is on options that are only available to creditors.
Replacement at first meeting of creditors
A long-standing complaint of creditors is that that directors have appointed voluntary administrators which are favourably disposed to the directors’ interests rather, than the interests of creditors (click here for an example). This is a difficult allegation to evaluate because much of the investigations conducted by the voluntary administrator are confidential. On the other hand, the voluntary administrator is chosen by the directors and therefore a conflict of interest may naturally arise if the insolvency practitioner aggressively procures work.
The first opportunity for creditors to replace a voluntary administrator is at the ‘first meeting’ of creditors. This meeting must be held within eight business days of being appointed, unless the court allows an extension of time. At least five business days before the meeting, the voluntary administrator must notify as many creditors as practical in writing and advertise the meeting.
Prior to the meeting, the voluntary administrator is required to send the creditors the declaration of relationships they have and indemnities given. This puts the creditors in a more informed position to decide whether to replace the voluntary administrator.
Any creditor who seeks to nominate a replacement voluntary administrator must approach a registered liquidator before the first meeting and get written consent that they are prepared to act as voluntary administrator. At the first meeting this individual will need to give the same declarations about any relationships and indemnities given as the original voluntary administrator. For more information, check out the ASIC website.
Creditors then vote at this meeting as to whether they wish to replace the voluntary administrator.
A replacement by resolution under the Insolvency Practice Rules
Sometimes creditors may wish to remove an administrator after the first meeting of creditors has occurred. In these cases, the creditors may by resolution at a meeting, remove the voluntary administrator and appoint another (Insolvency Practice Rules (Corporations) 2016, 75-265).
Note, how that the voluntary administrator still has the power not to convene meeting for such a resolution if ‘unreasonable’ (Insolvency Practice Rules (Corporations) 2016, 75-250).
Removal of voluntary administrator by the Court
If other options for removal of a voluntary administrator have failed, there remains the possibility of applying to the Court for a range of orders. These include:
- such order as the Court thinks necessary to protect the interests of a company’s creditors while the company is under administration. This application may be made by either the creditors or by ASIC (s 447B of the Corporations Act 2001). This could include the removal and replacement of a voluntary administrator.
- A declaration that the voluntary administrator has been validly appointed. This application may be made by the voluntary administrator themselves, the company or a creditor (s 447C of the Corporations Act 2001).
- General orders that the Court thinks appropriate in relation to voluntary administration. The application may be made by the company, creditors, the voluntary administrator, ASIC or any other interested person (s 447A of the Corporations Act 2001).
It is very rare that creditors will apply to a Court to replace a voluntary administrator because of the legal costs of the application.
Alternative to Replacement: Committee of Inspection
At the first meeting of creditors a committee of inspection may be formed to assist and advice the voluntary administrator, monitor their conduct and to give directions. The voluntary administrator must have regard to, but is not always required to comply with, these directions. For more information, consult the ASIC website.
In cases where the voluntary administrator cannot be replaced, this can be a useful mechanism for creditors to have sway over the voluntary administrator.
What options do directors have to replace a voluntary administrator?
As discussed in this blog post, there are several options available to creditors to influence or direct the removal or replacement of a voluntary administrator. Directors, however, are very limited in their ability to do so. Once appointed, the voluntary administrator is independent of the company and will not necessarily act in the way that directors would like or expect. This is yet another reason why directors should think very carefully before deciding to go into voluntary administration and make sure they have solid legal advice exploring the other options available to them.
For more information about the shortcomings of voluntary administration for directors read our blog post: What are the shortcomings of voluntary administration?
Key takeaway: The system is not designed to make replacement of a voluntary administrator easy
Creditors should take it from the above commentary that the voluntary administration system is designed to make replacing the voluntary administrator difficult. The lowest cost and most efficient means of replacing a voluntary administrator is through a vote at the first meeting of creditors. Unfortunately, this is the least likely avenue undertaken by creditors because they won’t have much time to get a feel for the newly appointed voluntary administrator. They usually want to replace them once they read their s439A report before the second meeting because they are dissatisfied with the voluntary administrator’s report. If they are truly dissatisfied it may be better for the creditors to vote against the director’s proposal and put the company into liquidation. That would give the insolvency practitioner more time to conduct investigations and give them an incentive to claw back insolvent transactions.
Do you want to learn more about voluntary administration?
Read our related blog posts:
- How do you pick the right voluntary administrator?
- What are the shortcomings of voluntary administration?
- What are the success rates of voluntary administration?
- When shouldn’t you appoint a voluntary administrator?
- Who appoints a voluntary administrator?
- What is phoenix activity? (if you suspect that voluntary administration is being used to shield a phoenix transaction)