Administrators accused of apprehended bias

In the Matter of Globaltech Corporation Pty Ltd (Administrators Appointed) [No 2] [2024] WASC 259
What factors will a court consider in determining whether an administrator has a reasonable apprehension of bias?

Overview

In this case, the Court considered an allegation of reasonable apprehension of bias in circumstances involving the administrators of a technology company in the mining industry and their fellow partners at McGrathNicol. The partners (not the administrators) had previously been directors of the ultimate parent of the company in administration. The Court concluded that there was no reasonable apprehension of bias, since there was no evidence that the partners continued to have any sort of relationship with the corporate group. To the contrary, the relationship had come to an end years before the appointment of the administrators. The Court also concluded that this was an inappropriate case for the appointment of special purpose administrators.

Background

Globaltech Corporation Pty Ltd is a Perth-based designer and manufacturer of innovative technologies used in global mining and exploration operations. Robert Brauer and Shaun Fraser of McGrathNicol were appointed as administrators of Globaltech (the administrators) by director resolution on 12 April 2024.

In May 2024, the administrators made two ex parte applications and obtained orders (the orders) extending the convening period of the second meeting to 8 July and limiting their personal liability under a funding deed for moneys borrowed in the course of the administration. Both orders gave interested persons the right to apply to modify or discharge the orders.

The administrators undertook significant work following their appointment, conducting a public sale process which resulted in two final offers being received. In the meantime, the trustees of the The Grampian Trust, an 8.65% shareholder in Globaltech (the applicants), brought an application to vacate the orders, remove and replace the administrators and/or appoint special purpose administrators. The application was based on an alleged apprehension of bias which was said to arise by virtue of the fact that two of the administrators’ partners at McGrathNicol (the partners) had previously been directors of Boart Longyear Limited, the parent company of the Boart Longyear Group of companies (also referred to as the BLY entities).

Globaltech is a member of the Boart Longyear Group. Its majority parent is Veracio Ltd, another wholly-owned subsidiary of the Boart Longyear Group, which acquired its shareholding sometime in 2022. Shortly before the administration, the applicants had commenced an oppression proceeding against Veracio, Globaltech and others, alleging that Veracio had diverted business from Globaltech, poached its employees and misappropriated its IP and other property.

The BLY entities have lodged proofs of debt in the administration which, if accepted, would make them the majority creditors of Globaltech. Veracio has also provided a funding facility to the administrators of up to $800,000.

Between September 2017 and November 2021, the partners acted as non-executive directors on the ASX listed Boart Longyear Group and Boart Longyear Group Ltd (an Ontario corporation). The partners deposed that, while they were directors, they were aware of Globaltech as a member of the boarder Boart Longyear Group, but that this was a high-level understanding only as part of the broader group's performance. During this time, Globaltech's contribution was immaterial to the Boart Longyear Group's revenue of $921m and 3,500 employees, and its operations and activities were not the subject of detailed oversight of its listed head company.

Although the partners ceased to be directors in November 2021, a register maintained by the Ontario Ministry of Public and Business Service reflected that the partners remained directors of the Ontario corporation until 1 September 2022. It was on this basis that the applicants argued that the administrators’ partners were directors of Boart Longyear Group Ltd within the two years prior to the administrators' appointment to Globaltech.

The Court’s Decision

The application gave rise to the following issues, among others:

1. Is there a reasonable apprehension of bias? If so, should the administrators be removed and replaced?

2. Should special purpose administrators be appointed?

Reasonable Apprehension of Bias

Like a liquidator, an administrator must be independent, which requires the administrator to be free of apprehended bias. The test for apprehended bias of an administrator, as for a liquidator, is the conventional 'double might' test, viewed through the lens of a fair‑minded lay observer. That is, apprehended bias is established if a fair‑minded lay observer might reasonably apprehend that the administrator might not bring an impartial mind to the resolution of questions that the administrator may be called upon to decide. The question is one of possibility (real and not remote), not probability.

The Court found that the applicants had failed to establish that a fair‑minded lay observer might reasonably apprehend that because the administrators are partners of the firm McGrathNicol, and two of their partners were previously directors of the holding company of the majority shareholder and largest claimed creditor of the company to which they have been appointed administrators, the administrators might not bring an impartial mind to the resolution of questions they may be called upon to decide concerning the rights and liabilities of Globaltech on the one hand, and members of the Boart Longyear group of companies on the other.

There was no evidence that the partners continued to have any sort of relationship with the Boart Longyear Group. To the contrary, the relationship had come to an end years before the appointment of the administrators. While the retirements of the partners were not promptly notified to the Ontario regulator (and possibly did not take effect until so notified), the resignations were tendered, recorded on the ASIC register as having come into effect on 16 November 2021 and announced to the market.

This was not a case where a reasonable fair‑minded observer might reasonably apprehend that, because of the administrators' interest in not jeopardising future income to be derived from the BLY entities, they might not discharge their duties as administrators with independence and impartiality.

The Court accepted that the administrators ought to have disclosed that Globaltech may have claims against Veracio (the lender under the funding deed) and or the BLY entities before the orders were made. However, considered in the context of all of the material objective facts, this did not warrant the suspicious character attributed to it and would not have added to the apprehension of a fair-minded observer. There was no evidence that the administrators had or would fail to perform their statutory obligations to undertake the investigations that will form the basis of their report to creditors, including with respect to claims Globaltech may have against the BLY entities. There was similarly no evidence that they would fail to properly exercise their discretion in admitting proofs of debt submitted by the BLY entities for the purposes of voting at the second meeting of creditors.

Accordingly, the Court concluded that there was no reasonable apprehension of bias in this case and did not consider whether the administrators ought to be removed on this basis.

Special Purpose Administrators

Where circumstances exist that demonstrate that administrators, who are tasked with performing the duties imposed by pt 5.3A of the Corporations Act, are failing to meet the required standards, it is for the benefit of all creditors that the appointment of special purpose administrators be made to ensure that the statutory process is fulfilled.

However, the Court was not satisfied that the appointment of special purpose administrators was warranted in this case. The administrators had been in office for a little over three months. This was not a case where the administrators had been appointed for a long period and it could be inferred that they had not progressed the investigation into claims against the BLY entities.

The Court also rejected a criticism made against the administrators for borrowing money from Veracio instead of allegedly pursuing recovery from the BLY entities. The book debts are owed by a variety of BLY entities. As at the date of their appointment, there was limited cash available to the administrators, with many patents due to expire and in need of renewal and retained employees to be paid.

In addition, there was no evidence to suggest that the costs of the appointment of special purpose administrators would not be another burden on the administration and would not negatively impact Globaltech's creditors. In all of the circumstances, the Court refused to appoint special purpose administrators.

Conclusion

Accordingly, the Court dismissed the application.

Judge: Strk J

Counsel for the Administrators and Globaltech: Konrad De Kerloy of Fourth Floor Chambers

Solicitors for the Administrators and Globaltech: Clayton Utz

Counsel for the Applicants: Anthony Young KC & Lucy Kirwan

Solicitors for the Applicants: K&L Gates

Counsel for Australian Mud Company Pty Ltd: Patrick Tydde

Solicitors for Australian Mud Company Pty Ltd: Gilbert + Tobin

Counsel for Boart Longyear Australia Pty Ltd: Charles Dallimore

Solicitors for Boart Longyear Australia Pty Ltd: Ashurst