Direct Duty to Creditors?

The Full Court of the Supreme Court of South Australia (the Court) recently handed down its judgment in the long running matter of Macks v Viscariello [2017] SASCFC 172 (Macks).

Macks concerned circumstances which would not have been the envy of any insolvency practitioner. The case involved an administration that was conducted in 2002 and a claim by the administrator over $28,000 (for the sale of stock). The insolvency practitioner was accused of having a “litigious disposition” in incurring over $430,000 in legal fees, seemingly through no fault of his own but rather due to the actions of parties.  The claims against the insolvency practitioner were not ultimately made out with respect to his conduct, though he no doubt experienced more stress and aggravation than the appointment could ever have been worth.

In the course of the judgment running to over 800 paragraphs, the Court made a number of findings of general importance of the profession. In particular, the Court noted that it is now well established in law that an administrator appointed under part 5.3A of the Corporations Act 2001 (Cth) (the Act) owes fiduciary duties to a company.

The Court also added to the growing debate about whether directors owe duties to creditors in addition to the duties they undoubtedly owe to the company itself. There has been a growing body of judicial thought to the effect that directors may owe duties to creditors or at least take the interest of creditors into account when determining how to fulfill their duties, particularly as a company  nears or enters insolvency.

The Court stated that the directors have no such duties. So much is clear at paragraph 192 when the Court held:

 “The directors of the company, including a company that is nearly insolvent, do not owe duties to individual creditors…

Insolvency practitioners will be pleased to learn that the Court went on to hold that administrators similarly would not owe duties to individual creditors. The Court said again at paragraph 192;

… we are unable to discern any basis for reaching a different conclusion for administrators.”

The Court said that the law is now uncontroversial. It approved an earlier statement by the Western Australian Supreme Court in Geneva Finance Ltd (Receiver and Manager Appointed) v Resource & Industry Ltd  in the following terms:

…a director of a company, especially if the company is approaching insolvency, is obliged to consider the interests of creditors as part of the discharge of his duties of the company itself, but that he does not have any direct duty to the creditors…

For now the Court has confirmed that the orthodox view of the law will not be changed, though it will be interesting to see whether there are any developments in this area.

Macks is of particular interest in that it affirms that administrators do not owe creditors any particular duty in the conduct of the administration that is enforceable by creditors under the general law. At paragraph 208, the Court commented:

the recognition of such a duty would be inimical to the basic principles of the policies of which insolvency administration rests.”

For more information, please contact ERA Legal.

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