Bankrupt director appointing an IP as VA – what could possibly go wrong?

Does it pay to ask for forgiveness rather than permission? The curious case of (an unknown) bankrupt director appointing an insolvency practitioner (“IP“) to his insolvent company, and the Court validating the appointment.

This is a bit fact heavy, so bare with me – imagine the following:

Accountant realises a client company is in financial trouble and approaches the IP to consent to being appointed.

IP requests to meet with director first to ensure everything is hunky-dory.

Turns out director has mental incapacity issues and is unable to meet with IP.

Many months, and a new accountant, later and it turns out a creditor has applied to wind-up the company in court. So new accountant approaches IP to consent to being appointed Voluntary Administrator (“VA“).

IP again requests to meet with director, failing which the IP allegedly remarks that the accountant could replace the director with a new director.

The accountant takes steps to change the director, and in so doing the IP is appointed VA over the company.

The IP secures and sells all the assets, reports to creditors, and holds the necessary meetings, thereby causing the company to go into liquidation.

A few more months pass, and the IP realises that the new director is (and was at all material times) a bankrupt. Meaning that the IP’s appointment was invalid and everything undertaken during the IP’s appointment void.

IP applies to Court for orders.

So what do you think happened?

The Court, in effect, validated the appointment (and in a practical sense everything done during the appointment) due to the following:

  • the IP had been honest and diligent in their appointment
  • all assets had been sold, and so to order a replacement liquidator would otherwise increase costs and reduce the dividend payable to creditors
  • the Court would not order the return of the company to the former director, as it would be prejudicial to the company, its creditors and the incapacitated director

It is by no means practical or commercial to run bankruptcy searches on every director before an IP accepts an appointment. But it should be an important search conducted for the purpose (at least) of preparing the second VA report to creditors (75-225).

Link to case: https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2019/818.html

#SVVoidables

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