The Court has granted leave for a member of the committee of inspection to enter into a deed of assignment with the Company, despite it potentially being in contravention of section 551 of the Corporations Act (“the Act”), as shown in the case of DH International Pty Ltd (in liq) (No 2)  NSWSC 871.
This article discusses how this section applies under the changes to the Corporations Act 2001 coming into effect on 1 September 2017.
Section 551 of the Act states (amongst other matters) that a member of committee of inspection must not, without the leave of the Court receive any profit or advantage from a transaction with the company or become the purchaser of any property of the company.
After 1 September 2017 section 551 will be repealed and replaced by sections 80-55 and 80-60, schedule 2 of the Corporations Act 2001.
The new law prohibits a member (or related entity) of the committee of inspection directly or indirectly deriving profit or advantage from the external administration of a company.
The relevant difference with the new law is that if the creditors resolve to approve the transition with a member from the committee of inspection, then Court approval is not required. In this case the relevant member of the committee of inspection cannot vote on the resolution approving the transition.
Under the new law there is also the ability to seek leave from the Court in the absence of creditor approval.
This case is relevant as the same considerations discussed below will be relevant if:
- The creditor’s do not approve the proposal; or
- The creditors do approve the proposal, however it is challenged.
- A committee of inspection was appointed after the winding up of the DH International Pty Ltd (in Liquidation) (“the Company”) and Mr Challis was one of the members of the committee.
- A deed was proposed which assigned any claim which the Company may have against any current or former director or employee to Mr Challis for a fee. One director was excluded from the proposed assignment because they had already settled with the liquidators.
- The Deed was unanimously approved by the creditors.
- Mr Challis commenced proceedings against one of the directors, being unaware of the restrictions of section 551 of the Act.
- Mr Challis brought an application for approval by the Court of the Deed of Assignment. The application was opposed by one of the directors of the Company and other related entities.
The Court’s findings
In this case the Court considered significant that:
- The creditors had unanimously approved the Deed of assignment.
- The committee of inspection did not consider the transaction – rather it was proposed to all of the creditors.
- The Deed was supported by the liquidators.
- The liquidators were without funds and no creditor had agreed to fund them to pursue the directors.
- The Deed of Assignment was fair for the creditors.
The Court approved the Deed of Assignment.
Generally, members of the committee of inspection should not profit from the dealing with the externally administer company. Under the new law, however, they will be in a position to enter into transactions with the company if the creditors approve the transaction and they abstain from voting on the resolution.
It is important under both the current law and the new law that the proposed transaction is fair to the general body of creditors and that it is recommended by the liquidator.