The Federal Court has issued a warning to insolvency practitioners, involved in voluntary administrations, to ensure adequate investigation and reporting occurs of matters that have the potential to materially affect the outcome of the administration. In Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No.4),Besanko J set aside a deed of company arrangement due to inadequate investigations and reporting. The inadequate investigations and reporting lead to the second report to creditors containing false or misleading information to creditors’ decision to adopt the DOCA.
Over a 9-year period up to late 2017, Concrete Supply Pty Ltd (the Company) received cement with a value of $32.6M from Adelaide Brighton Cement Limited (Adelaide Brighton), but paid only $20.1M for it.
Adelaide Brighton discovered that its records recorded this debt as $2.1M when the real figure was $12.5M. The difference was due to fraud by an employee of Adelaide Brighton (apparently without complicity of the Company).
In response to a demand for payment of $12.5M, the Company asserted a right to a rebate of between 30% and 35% on the sales, reducing the debt to $2.1M (the Alleged Rebate).
On 14 November 2017, the Company entered voluntary administration, and on 19 December 2017, its creditors resolved it should enter a DOCA. Adelaide Brighton, by far the largest creditor by value, voted against the resolution, which was passed on the casting vote of one of the Administrators as chairperson of the meeting.
Adelaide Brighton sought to have the DOCA be set aside on the basis that the second report to creditors contained false or misleading information or omissions that could reasonably be expected to have been material to creditors of the Company in deciding whether to vote in favour of the resolution that the company execute the DOCA.
The Alleged Rebate
The Court noted that the Alleged Rebate a number of unusual features, including:
The Administrators’ investigations of the Alleged Rebate
The Court noted that although the Administrators became aware of the unusual features of the Alleged Rebate through preliminary investigations, they decided that the Alleged Rebate did not need to be investigated further. This was on the basis that they:
The Court held that:
The Court strongly criticised the Administrators’ investigations and reporting and remarked that “to carry out no or little investigation and to say nothing is not an option.”
Setting the DOCA aside
The Court held that the DOCA be set aside because:
If a voluntary administration raises complicated matters that have the capacity to significantly affect the administration and the vote of creditors at a second meeting of creditor, those matters must be properly investigated before the second report to creditors is issued.
If necessary, an administrator must apply to the Court for an extension of the convening period to conduct investigations.
“To carry out no or little investigation and to say nothing is not an option!”
Guy Edgecombe, Partner
Craig Melrose, Solicitor