A golden age of creditor empowerment? The "good faith" reason not to call requisitioned creditors' meetings

When can an external administrator legitimately avoid calling a meeting of creditors directed by the requisite quantum of creditors? Until now, the answer to that question would be sought in section 75-15(1) of the Insolvency Practice Schedule (Corporations). The Supreme Court of New South Wales has, perhaps surprisingly, held that an external administrator can legitimately avoid calling a meeting of creditors when directed to do so by more than 25% of the creditors if the external administrator forms the "good faith" opinion that:

• this would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the direction, or

• the direction is vexatious.

Crucially, there is no requirement that the external administrator's opinion be reasonable (unlike the direction by creditors provided for in section 75-15(1)), and their decision will not be subject to a merits review (In the matter of Balamara Resources Limited (in liq) [2025] NSWSC 618).

Arguably, this significantly undermines the rights of creditors introduced to Chapter 5 of the Corporations Act made by the Insolvency Law Reform Act 2016 (Cth) (ILRA), particularly the capacity of creditors to replace an external administrator.

Empowering creditors: the changes in the Insolvency Law Reform Act 2016

The ILRA – which introduced the Insolvency Practice Schedule (Corporations) (IPSC) and the Insolvency Practice Rules (Corporations) (IPRC) – heralded a new era of creditor empowerment.

The Explanatory Memorandum (EM) for the Insolvency Law Reform Bill 2015 relevantly stated that the Bill sought to (among other things) to:

"address current regulatory and market failures by:

- enhancing competition within the market for insolvency services; and

- empowering stakeholders with an interest in the conduct of an insolvency administration to better protect their own interests."

Additionally, "creditors…in all forms of administration would be empowered to remove an insolvency practitioner through an ordinary resolution" and the insolvency practitioner would retain a right to apply to the Court to prevent removal in “restricted circumstances”. "The Court would not….be empowered to conduct a merits review of the collective decision of …creditors to remove a practitioner."

The Minister's Second Reading Speech set out the underlying policy goals:

“The [B]ill promotes market competition within the insolvency industry. It removes barriers to creditors receiving relation [sic – presumably this is intended to read "information"] in the course of insolvency administrations and to creditors taking action to protect their interests in relation to an administration.

Creditors will be empowered under the [B]ill to remove a practitioner appointed to a personal or corporate insolvency through a simple resolution of creditors at any time, and without court involvement. These changes will remove a significant barrier to removing an unjustifiably expensive or poorly-performing practitioner."^[1]

The right to have a meeting of creditors convened

One of the new creditor rights in the ILRA was that in section 75-15(1) of the IPSC, which provides that an external administrator must convene a meeting of the creditors in various circumstances, including where at least 25% of the creditors by value direct the external administrator to do so in writing.^[2]

IPSC section 75-15(1) is subject to the proviso in IPSC section 70-15(2) that the external administrator need not comply with the direction if it is not reasonable.

In turn, IPRC rule 75-250 provides that a direction under section 75-15(1) is not reasonable if the external administrator, acting in good faith, is of that opinion that:

1. complying with the directions would substantially prejudice the interest or one or more creditors or a third party and that prejudice outweighs the benefits of complying with the direction;

2. there is not sufficient available property to comply with the direction;

3. a meeting of creditors dealing with the same matters covered by the direction has already been held, or would be held within 15 business days after the direction is made; or

4. the direction for the meeting is vexatious (where "vexatious" is not defined).

The decision in Re Balamara Resources and its impact on creditors' meetings

In the Re Balamara Resources case, Justice Black had ordered that the company be wound up on the just and equitable ground. Subsequently, creditors (the Directing Creditors) issued a direction to the liquidators under IPSC section 75-15(c) that a meeting of creditors be convened to consider the replacement of the liquidators. The liquidators refused to convene the meeting of creditors. Subsequently the liquidators sought an order pursuant to section 90-15 of the IPSC that they were justified in not convening the meeting, and Justice Black ordered that the Directing Creditors be joined as defendants to the application.

In Re Balarama Resources, the liquidators relied in part on their assessment that given the direction to convene the meeting was made on 9 December, and as the relevant meeting could not be held for 8 weeks (presumably due to the summer holiday period) that would prevent them taking steps to prosecute a recovery proceeding in that time (on the basis that they could not properly do so in circumstances where they may be replaced), which would be prejudicial.

Justice Black considered that the liquidators were justified in declining to convene the meeting.

In summary, his view was that an external administrator can legitimately avoid calling a meeting of creditors to put a resolution to remove them when directed to do so by more than 25% in value of the creditors in circumstances where the external administrator forms the opinion in "good faith" (that is, honestly, and having made a genuine attempt to inform themselves and assess relevant matters) that:

• complying with the direction would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the direction, or

• the direction is vexatious.

The relevant opinion can, in his Honour's view, relate to the resolution proposed to be put at the meeting rather than (strictly) the convening of the meeting independently of the resolution to be put.

Critically, in Justice Black's view, there is no requirement that the external administrator's opinion be reasonable, and their decision will not be subject to a merits review – so whether the requirements of IPRC rule 75-250(1)(a) to (d) are satisfied objectively or as a matter of fact cannot be tested.

The effect of the decision is that an external administrator can decline to call a meeting at which a resolution will be put to replace them on the basis that they form the subjective view that their remaining is in the best interests of one or more creditors including (for example) because there would be cost and delay involved in getting a new external administrator up to speed.

This is a low bar: it feels contrary to the spirit of the ILRA amendments designed to allow creditors to more easily replace external administrators (and without cause), and out of sync with the expectations regarding external administrators (say) exercising their casting vote against a resolution seeking their removal.

The decision has been appealed.