Court ponders abuse of process as administrators act

Proceedings in the Federal Court yesterday aptly demonstrated the dangers insolvency practitioners face when accepting appointments as administrators in the middle of intractable shareholder disputes.

At a hearing before Federal Court judge Tim McEvoy in Melbourne, counsel for the administrators of Agrifunder Holdings Pty Ltd appeared seeking approval for Agrifunder to enter into a deed of refinance with Nomura Special Investments Singapore Pte Ltd.

As part of the application administrators Keith Crawford and Matt Caddy also sought a limitation on their liability in respect of causing Agrifunder to enter into the refinancing deed and approval of their entry into accompanying costs coverage deed.

The McGrathNicol pair were appointed administrators on March 3 by Gruyere Consulting, a company associated with Agrifunder Holdings director and major shareholder Damien Joseph Burgi.

Gruyere had previously loaned money to Agrifunder and when it defaulted Gruyere enforced its security.

By this time however oppression proceedings involving Burgi and Agrifunder’s other directors – including Nomura’s nominee – were already well advanced.

Acting for the administrators, Hamish Austin KC recounted to the court how the appointment of the administrators had swiftly followed Gruyere’s issuance of a demand for repayment of the loan on March 1.

Austin may well have intended to imply that the demand and appointment of administrators was for an improper purpose – namely securing an advantage in respect of the oppression proceedings – but the judge asked whether he had considered the possibility that his clients may have erred.

Should the administrators have been concerned about this allegation? the judge mused, asking out loud if they were appointed as part of an abuse of process.

Admitting that they could have sought judicial advice, Austin said his clients nevertheless were treating their appointment as valid until and if a court ruled it was otherwise.

This of course was a safe position given there was no application before the court to challenge the validity of the appointment.

Instead there was an application to approve entry into a deal with another of the major shareholders of Agrifunder that would see all creditors including Burgi paid in full, the administration brought to an end and the company returned to the control of its warring directors.

Thanks to the Agrifunder Holdings shareholder agreement the company’s board was in a position to potentially approve the refinance by a majority vote.

Given Burgi had signalled his objection to the refinance on the basis that it would destroy shareholder value that aspect was critical.

For his part Burgi, who didn’t appear yesterday, had given the administrators the vaguest sense that a DoCA would be proposed.

Crawford and Caddy however saw the refinance as preferable to what was described yesterday as an unspecified proposal that if accepted could have seen the shares Agrifunder Holdings holds in valuable downstream subsidiaries pass to the Burgi interests.

Nomura, represented by Banco Chambers’ Vanessa Whittaker SC also had a dim view of the appointment of the administrators but didn’t need to say much about the possibility that Crawford and Caddy might have failed to adequately consider their appointee’s motives. They were after all applying for orders to cement in place her client’s solution.

The judge’s queries however aren’t so easily dismissed.

The indemnities section of Crawford and Caddy’s DIRRI is heavily laden with qualifications around validity.

They were first approached by Burgi in late January after an unidentified partner from KingWood Mallesons referred him.

Burgi wanted them to undertake contingency planning for a possible insolvency appointment to Agrifunder. The DIRRI discloses that no formal written contingency advice as contemplated in the original engagement was delivered.

But on February 28 Burgi was back and during discussions over the next couple of days agreed to pay $100,000 via Gruyere Consulting upfront to cover the administrators’ initial remuneration and expenses.

The administrators also declared receipt of a Deed of Indemnity from Gruyere indemnifying them to an uncapped amount for “any invalidity or irregularity in the appointment of the administrators of Agrifunder; for the purported exercise by the Administrators or their staff of the powers of a duly appointed Administrator if it is found that the administrators’ appointment is invalid”.

It begs the question. Which is the most appropriate course for appointees?

If there’s a whiff of abuse of process in respect of an appointor’s motives is it best to decline the appointment altogether or wrap around your consent conditions sufficient to ensure you’re protected? The latter option does allow you make money.

Damien Burgi did not respond to a request for comment.