The Federal Court demonstrates the flexibility and breadth of orders under section 90-15 of the Insolvency Practice Schedule in a voluntary administration

In Krejci, in the matter of Union Standard International Group Pty Ltd,[1] the Federal Court provides an example of the ways in which section 90-15 of the Insolvency Practice Schedule[2] (IPS) can be used to craft orders that balance the interests of the company, creditors and third parties.

Background

The applicants were the voluntary administrators of Union Standard International (USI), which relevantly operated a financial services business conducted via two ‘platforms’ hosted on four servers.

USI’s sole shareholder, Union Standard Group International Holdings Ltd (USG Holdings), is registered in Samoa, and the mutual director, Mr Soe Hein Minn, is resident in Myanmar.

Mr Soe had ‘administrator access’ to the four servers, allowing him to see all the trading information on the platforms and all data on the servers, and to alter data. The administrators required ‘administrator access’ to properly investigate USI’s affairs. They sought it from Mr Soe, who refused to provide it on the basis that to do so would allow access to information of clients of companies in other jurisdictions within the group.

Evidence before the Court suggested that unless the administrators were provided with ‘administrator access’ to the servers immediately, there was considerable risk that the company’s records would be deleted or falsified and that considerable value to creditors would be lost.

In the circumstances, the administrators proposed to instruct the server host to shut down the servers. As this course would negatively affect USI clients and third parties who use the servers, the administrators sought orders pursuant to section 90-15 of the IPS that they were justified in doing so.

Judgment

The Court accepted that there was considerable urgency to the application, given that “there is reason to suspect that clients of the company are being unlawfully migrated off the platforms and the financial position of the company is being eroded”.

The Court rejected Mr Soe’s arguments against providing ‘administrator access’, noting he was a director of USI and was therefore obliged to give that information to the administrators.

The Court concluded that:

“Although the outcome of the direction that the administrators intend giving is uncertain, it has a prospect of being successful and there is little else that the administrators can do. They have therefore made out a good case in support of these actions.”

However, the Court was very concerned about the risks attendant on closing down the servers. These included interrupting trading on the platforms, preventing USI’s clients to close out open positions, the possible loss of data and possible liability for breach of sub-licensing agreements.

The Court also noted that there was another available remedy. That was to order Mr Soe to provide the administrators with ‘administrator access’, given that he is a director with an obligation to do so.

The Court also noted that this was a suitable case for making an order for service of the administrator’s application in a foreign country. Further, given that Mr Soe’s lawyers who had communicated with the administrators to refuse ‘administrator access’ were located in Sydney, it was appropriate to order that service be effected by email on Mr Soe at his known personal email address as well as by email to his lawyers’ email address used in corresponding on behalf of Mr Soe.

The Court therefore declined to make the directions proposed by the administrators and instead made orders that:

1. 1. Mr Soe be joined as a respondent;
   2. the administrators’ application be served by email on Mr Soe and his lawyers;
   3. by 2pm on the day following the hearing (31 July 2020), Mr Soe provide the administrators with ‘administrator access’ to the servers;
   4. that until 2pm on 31 July 2020, Mr Soe be restrained from using ‘administrator access’ to change or delete any data on the servers;
   5. requiring Mr Soe to inform the administrators by 1pm on 31 July 2020 if he opposed orders (3) and (4); and
   6. the application be adjourned until 2pm on 31 July 2020.

Key takeaways

Section 90-15 of the IPS gives the Court broad powers to give directions about a matter arising in connection with the performance or exercise of an administrator’s functions or powers.

This includes a power to craft orders to balance the interests of the creditors of the insolvent company and any relevant third parties, including making orders with extra-jurisdictional effect.

Authored by:

Guy Edgecombe, Partner
Craig Melrose, Associate

[1] [2020] FCA 1111.

[2] The Insolvency Practice Schedule is Schedule 2 to the Corporations Act 2001 (Cth).