Section 436A: safe harbour – a change to the proper purpose test?
The Part 5.3A legislative regime does not (nor has it ever) obligated directors to appoint an administrator. Section 436A of the Act provides that the company "may" appoint an administrator if the board has resolved that, in the opinion of the directors, the company is insolvent, or likely to become insolvent at some future time and that an administrator should be appointed. Of course, if in the directors' view the appointment of an administrator is in the best interests of the company and its creditors and achieves the object of Part 5.3A, then the directors should resolve to appoint an administrator and, save for any collateral purpose or ulterior motive on the part of the directors, such an appointment would constitute a "proper purpose" under the Act.
Resolving to appoint an administrator for safe harbour is not a proper purpose under the Act. A director's duty to prevent insolvent trading does not override his or her duties to the company. If a director improperly resolves to appoint an administrator, he or she may still be personally liable to compensate the company for damages – as such, insolvent trading liability is certainly not the only risk directors need to be mindful of when trading during a period of financial distress.
In determining the validity of an appointment under section 436A of the Act, the Courts will consider whether, at the relevant date, the directors genuinely believed that the company was insolvent, or was likely to become insolvent, and whether that belief was reasonable in the circumstances. It is insufficient for the directors to have merely formed an opinion that the company's solvency is questionable. In the recent decision of Blackadder v McQuinn, the director of a company was criticised by the Court for not giving any "real thought" to whether the company was insolvent or was likely to become insolvent at some future time before passing a resolution under section 436A. In that case, the Court held that the director's actions were not taken in the best interests of the company as a whole and that the appointment did not attain the objectives set out in section 435A. The Supreme Court of New South Wales has also confirmed that the power under section 436A may only be exercised in the interests of the company as a whole.
Given the ongoing development of the law in this area, particularly the common law duty not to prejudice the interests of creditors when a company is in the red, directors now face the very real possibility that an appointment under section 436A may not satisfy the proper purpose test if the board has not consulted with key stakeholders and sought to achieve a solvent solution, if this course may be in the best interests of the company and its creditors.