What should a receiver or liquidator look for when investigating the actions of a director whose appointment of administrators ultimately nets for him or her the company’s valuable assets? And what does that director need to do when considering the appointment? How will a court later deal with issues of the director’s belief in insolvency, improper purpose in the appointment and the inevitable reconstruction of events in lay evidence?
In this episode of The Cut, Simon Cathro speaks with Robert True from Quinn Emanuel Urquhart & Sullivan about the NSW Supreme Court’s recent decision Re Empireal. The case provides important lessons for both insolvency practitioners investigating appointment conduct, and directors faced with the decision to appoint administrators.
Robert breaks down the circumstances affecting the defendant’s corporate group in early 2020, the administration, DOCA, subsequent breach of duty claim and ultimately how the suit was successfully defended despite a number of apparent “smoking guns”. Robert then analyses the judgment in terms of what it reveals about the conduct liquidators and receivers should be looking for, how a duty case might be constructed, and, on the flip-side, the pre-appointment steps directors can take to make sure they withstand the inevitable scrutiny.
Key Points
- Solvency is not the whole question:
When assessing a director’s decision to appoint administrators, the focus of any investigation should not simply be on whether the company was or wasn’t solvent on the day of the appointment. The director’s genuinely held, rational belief about present or future insolvency is critical. - The contemporaneous documents will probably make or break the case:
The Court placed significant weight on what was documented at the time, and significantly less weight on the director’s later explanations about what he was thinking. The emails, text messages, contemporaneous records and most importantly the advice a director received (and followed) are likely the crucial evidence. - For directors, what you do pre-appointment is what matters most. Good advice and proper documentation are essential.
For directors facing financial distress, Robert’s key messages are the value of high quality financial and legal advice, that decisions (and the capacity in which steps are taken) should be properly documented and that the pre-appointment period is the right time for a refresher on your duties to the company. Robert warns against simply attempting to repair the documentary record after the fact.
