Australia: Another hitch to appointing administrators to a registered club in NSW

On 2 January, whilst many us were all contemplating ways to use up the very last of the Christmas ham, the directors of the Belmont Sportmans Club Co-operative Ltd (Club) were asking Justice Black of the NSW Supreme Court to appoint John Morgan and Geoff Davis as voluntary administrators to the Club.¹

I have written before about the need for insolvency practitioners and directors of registered clubs in NSW to take extra care when appointing voluntary administrators to their registered club entity. This is because the insolvency of a registered club in NSW poses a dilemma.

The Corporations Act 2001 (Cth) (Corporations Act) contains general provisions governing the appointment of administrators. In particular, section 436A provides that a company many appoint an administrator if the board thinks the company is or is likely to become insolvent.

However, section 41 of the Registered Clubs Act 1976 (NSW) (Registered Clubs Act) requires the club to obtain the approval of the Independent Liquor and Gaming Authority (Authority) to the appointment, before an administrator can be appointed. The most widely-known authority on the subject is Correa v Whittingham [2013] NSWCA 263, where the NSW Supreme Court of Appeal confirmed that, without such approval, the appointment of an administrator is invalid, and is incapable of being validated by an order under section 447A of the Corporations Act. Section 41 then provides the alternative that an appointment is valid if the person has been appointed to that position by the Supreme Court of NSW (Court).

In a more recent decision which was the subject of my earlier article here, Justice Robb of the NSW Supreme Court found that section 41 of the Registered Clubs Act permitted the Court to appoint an administrator to a registered club. In that case, his Honour saw no reason, given the club's poor financial circumstances, why he should not make such an order.

Similarly, the Belmont Sportsman's Club was in dire financial circumstances: it had defaulted on payment arrangements with both the ATO and the Office of State Revenue; there was a large debt owed to Energy Australia; and a cleaning contractor had already filed proceedings to recover another debt owed. Justice Black acknowledged the difficult position that the Club and its directors were in. With the greatest regret however, his Honour did not agree with Justice Robb that the appointment of administrators by the Court pursuant to section 41 of the Registered Clubs Act would constitute a valid appointment as voluntary administrators under the Corporations Act. Instead, Black J's view was that the Registered Clubs Act allowed the Court to appoint some other kind of 'administrator', but not one appointed validly under the Corporations Act. (Interestingly, 'administrator' is not defined in the Registered Clubs Act).

Justice Black confirmed that the Court does not have jurisdiction to appoint a voluntary administrator. The Court can appoint a receiver or a provisional liquidator and it can grant leave for a liquidator to appoint an administrator under section 436B of the Corporations Act, however the Court does not have the power to appoint an administrator per se. The only way an administrator can be appointed is when one of the circumstances provided for under sections 436A-436C of the Corporations Act applies. In this case, the effect of the Court's order, if made pursuant to section 41 of the Registered Clubs Act, would be merely to 'approve' the act of the Club in making the appointment. However, in order for the appointment of Messrs Morgan and Davis as administrators to be valid for the purposes of the Corporations Act, the Authority's approval of the appointment must first be obtained.

Unfortunately in this case, the Court was informed that the Authority members were unable to meet until 19 January this year, which meant that the approval required under section 41 of the Registered Clubs Act to the appointment of Messrs Morgan and Davis could not be obtained until that time. To say that Justice Black was dismayed with such delay is an understatement.

Any other alternatives?

What should directors do if an appointment is urgent (and aren't they usually?) and the Authority cannot make a decision in a sufficient time frame? Should the directors cease trading and resolve to appoint a liquidator? Should they seek to have receivers appointed by the Court under the Supreme Court Act pending the Authority's later approval of the persons proposed for appointment as voluntary administrators? It should be noted that a Court-appointed receiver will not completely alleviate the risk of an insolvent trading claim being later brought against the directors, although it does satisfy s41 of the Registered Clubs Act.

As is often the case with any formal appointment, only the administration of a club permits it to continue to trade without exposing directors to the risk of insolvent trading, whilst at the same time giving the administrators the ability to attempt to obtain a better return for the company's creditors and members than would result from an immediate winding up of the company.

And of course, there is the relatively new Safe Harbour regime that may assist in certain circumstances (and you can read our insights about that new regime here). However, it is doubtful that this is the type of case that would qualify for Safe Harbour given there was no mention of a restructure plan in the director's affidavit filed in support of the application. Rather, the relevant director gave evidence that he was appointed in August 2017 and became concerned about the Club's financial position after becoming aware of several outstanding debts owed by the Club.

There is one lesson from this case for club directors: do not try and appoint an administrator to a registered club over a particularly tight and difficult time frame such as the Christmas holiday period. The Authority is unlikely to provide its approval for the appointment on an urgent basis.

Footnote

¹Re Belmont Sportsmans Club Co-operative Ltd [2018] NSWSC 2.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories