Administrators deprived of their right of indemnity
The decision in Re Bluechain Pty Ltd (Admin Apptd) (No 3), delivered by the Supreme Court of Victoria on 15 July 2021, has upheld the broad powers of the Court under section 90-15 of the Insolvency Practice Schedule (IPS) to, among other things, disentitle external administrators from being reimbursed from the assets of a company for litigation costs, both those they have been ordered to pay and in relation to their own costs. The decision suggests section 90-15 has broadened the power of the courts to make orders disentitling external administrators from relying on rights of indemnity.
Prior to the introduction of the IPS in 2017, an external administrator must have acted ‘prejudicially to the interests of creditors’ or with impropriety to lose the benefit of their indemnity. It now seems that the Court’s discretion in making such orders is to be considered very wide indeed, perhaps limited only by the fact that the external administrators’ conduct made the court application necessary (whether improper or not). It could be said that the unsuccessful party’s conduct in a dispute almost always makes the litigation necessary.
The Administrators had been appointed as provisional liquidators by the Court following an application by a minority shareholder and then had subsequently been appointed administrators by the Court. At the first meeting of creditors, an attempt was made by Bluechain Payments Limited (a UK company) (Bluechain) and others (mostly related parties and employees) to replace the Administrators. The Administrators expressed a view to the meeting that, having been appointed by the Court, their replacement would have been an ‘attempt to subvert the Court’. They then adjourned the meeting for 15 days pursuant to section 75-140(2) of the Insolvency Practice Rules, expressing an intention to return to Court and seek an order that the company be wound up in insolvency. No proofs of debt were called for and no vote held regarding the adjournment.
Prior to the meeting, the solicitors for Bluechain had written to the Administrators, foreshadowing the attempt to replace them and also stating that any attempt to adjourn the meeting would be an improper use of their powers under section 74-140(2).
Bluechain and others then applied to Court to remove the Administrators, alternatively seeking orders to compel them to hold the first meeting of creditors and to prevent the Administrators from further adjourning the first meeting of creditors. The application was brought pursuant to liberty to apply in the existing proceeding that had resulted in the Administrators’ appointment. The Administrators were not named parties but made submissions and took an active role in opposing the application.
The Court declined to remove the Administrators but ordered them to convene the creditors’ meeting, and restrained them from further adjourning the meeting (see Re Bluechain Pty Ltd (No 2)  VSC 260). The outcome was therefore ‘mixed’; the applicants had not been successful in obtaining their primary relief (the removal of the Administrators) but had been successful in compelling the Administrators to hold the first meeting of creditors. The Administrators had also been unsuccessful in seeking orders dispensing with the requirement to hold the first meeting.
The present proceeding related to the question of costs.
The Administrators submitted that, given the primary relief had not been obtained, they ought to be entitled to their costs, or at least a portion of them. The Court rejected this submission, finding that even if an applicant is partially successful, the usual order that costs follow the event should proceed – a salient reminder that in litigation, obtaining some (but not necessarily all) of the orders sought may be considered a ‘successful event’. The Court found that there was no basis to order that any other party pay the Administrators’ costs.
The Administrators also submitted that, as non-parties, the court should not make any cost order against them.
Bluechain submitted that the Administrators ought to pay their own costs of the application. The Court agreed, finding that the conduct of the Administrators in both ignoring or disregarding the letter from Bluechain’s solicitors prior to the meeting and then adjourning the meeting, was responsible for the application. The Court similarly found that the Administrators (as well as with the other unsuccessful respondents), were the correct parties to pay Bluechain’s costs.
Administrators’ right of indemnity
Bluechain also sought an order restraining the Administrators from indemnifying themselves out of the assets of the Company in respect of their own costs of the application, and in respect of the order to pay Bluechain’s costs.
Ordinarily, administrators have a statutory right to be indemnified from the assets of the company to which they have been appointed, including any debts, liabilities, damages or losses incurred by the administrator in the performance of their function as administrators (section 443D of the Corporations Act 2001 (Act)). The right of indemnity would usually extend to an administrator’s legal costs in relation to a proceeding and any cost order made against them in that proceeding.
However, section 90-15 of the IPS gives the Court the power to deprive administrators of their right of indemnity in respect of adverse cost orders against them. In particular, sub-section 90-15(1) gives the Court broad powers to make orders as it thinks fit in relation to external administrations; sub-section (3)(d) gives the Court the power to make an order ‘in relation to costs’ (including of a court action); and sub-section (5) provides that, in relation to an order made under (3)(d), the Court can make an external administrator personally liable for costs, and order that the external administrator is not entitled to be reimbursed by the company or its creditors in relation to some or all of those costs.
The Administrators submitted that the role of an administrator is analogous to that of a trustee in bankruptcy or a liquidator, and that therefore if a costs order were made against them, they should not be refused indemnity from the assets of the Company. They also argued that an order in relation to their right of indemnity was not ‘an order as to costs’ for the purposes of section 90-15; rather, it was an order upsetting the statutory rights of the Administrators under Part 5.3A of the Act.
The Court distinguished previous decisions, such as Cresvale Far East v Cresvale Securities (No. 2)  NSWSC 791, Re Bipso Pty Ltd (1995) 17 ACSR 730 (and others) that had been decided prior to the introduction of the IPS (which were, it should be noted, all cases in which the external administrator had been deprived of a right of indemnity due to some impropriety by the external administrator), on the basis that they had not considered the broad powers of the court under section 90-15.
Delaney J found that the effect of section 90-15 was not to upset the statutory rights of the Administrators – but if it did, he found that he was expressly empowered to do so by section 90-15.
His Honour found that section 90-15 of the IPS does not require ‘findings of impropriety, or a failure to take reasonable care, on the part of the Administrators’ in order that the broad power in 90-15(1) and the specific powers in 90-15(3)(d) & (5) be exercised. It will be appropriate to make such orders where the application (and therefore the costs of it) were necessary because of the conduct of the Administrators.
In the circumstances, the Court ordered that the Administrators were not entitled to be reimbursed by the Company, or by its creditors, in relation to the costs they were ordered to pay to Bluechain or in relation to their own costs.
Unsuccessful parties to litigation are always at risk of bearing their own costs and being ordered to pay the successful parties’ costs, without the benefit of an indemnity enjoyed by external administrators. But, external administrators are often in the unique position of having inherited the circumstances giving rise to dispute and having a duty to pursue claims and act, in court proceedings, for the benefit of creditors.
Notwithstanding, external administrators should proceed with extreme caution when contemplating or threatened with litigation as they risk losing the benefit of their right of indemnity from company assets if unsuccessful. The Court’s powers under section 90-15 of the IPS are sufficiently broad to deprive an external administrator of the benefit of the right of indemnity even in circumstances where they have not acted with ‘impropriety’ or contrary to the interests of creditors.
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