Insolvency Law Bulletin 2018 . Vol 19 No 6&7

Getting into the club: s 41 of the Registered Clubs Act as a barrier to timely external administration appointments

Nicola Cosgrove and David Turner

There are approximately 1400 registered clubs in New South Wales. These organisations are operated for both member and community benefit, which, amongst other activities, are permitted to serve alcohol and operate gaming machines on premises. Registered clubs are regulated under the Registered Clubs Act 1976 (NSW) (RCA) and administered by the Independent Liquor and Gaming Authority (ILGA).

Prior to appointing an external administrator, the proposed appointee must obtain pre-approval under s 41 of the RCA from the ILGA. This article provides an overview of s 41 and summarises the current requirements considered by the ILGA in determining whether to grant approval. It then highlights the problems with s 41 by reference to the case law. It concludes by arguing that s 41 should be repealed or alternatively amended to enable directors to act urgently in effecting an appointment and to better align with the objects of Pt 5.3A of the Corporations Act 2001 (Cth).

Section 41 of the RCA – an overview

Section 41 of the RCA provides that “a person is not capable of being appointed” as administrator, controller, receiver, receiver and manager, or liquidator of a company that holds a club licence under the Liquor Act 2007 (NSW), unless the appointment is made by the Supreme Court or the appointment is approved by the ILGA.

It is worth noting that, except in respect of members’ voluntary winding up, any person appointed to any of those capacities must already be a registered liquidator and therefore subject to the oversight of the Australian Securities and Investments Commission (ASIC). Registration as a liquidator (as many readers will know) involves scrutiny of the applicant’s academic qualifications, experience and employment history (including proof of 4000 hours of insolvency experience at a senior level) and references, criminal history, probity and background checks to determine that the applicant is a fit and proper person to act as an external administrator of companies.

What does the ILGA require?

In around May 2014, after both the New South Wales Supreme Court and the Court of Appeal were required to consider the application of s 41, 1 the ILGA published guidelines 2 on how an application for approval of an appointment under s 41 of the RCA should be made. The guidelines provide that the application must:

1. provide evidence of the board’s consent to the appointment of the proposed appointee (a matter which is a necessity for appointments such as board-appointed voluntary administrators, but unlikely to be obtainable for appointments of receivers or voluntary administrators by secured creditors)
2. provide evidence of the appointee’s consent to act
3. provide evidence of the appointee’s professional qualifications, including whether the appointee is a registered or official liquidator
4. provide evidence of the appointee’s previous experience as an external administrator, including in relation to any registered clubs, and including specifically any appointment to a club for 18 months or more
5. provide “an explanation as to why approval of [the appointment] requested in the Application has become necessary” in relation to the club
6. provide an account of any other legal prerequisites to the appointment and how they have been satisfied
7. annex financial information “that forms the basis of the [club’s] decision to seek the approval or the appointment”
8. advise whether any civil, criminal or disciplinary proceedings have been commenced against the proposed appointee
9. advise whether any concerns have been raised by anyone with the club in relation to the proposed appointment
10. disclose the nature of any prior personal or commercial relationship or dealings between the club, its officers and members, and the proposed appointee

The ILGA maintains a list of registered insolvency practitioners, inclusion on which, the ILGA indicates, is sufficient to satisfy items 3 and 4 above, but that items 1, 2 and 5 through 10 must still be specifically addressed by the practitioner for each proposed appointment over a registered club.

Of the items set out in the published guidelines, the following can be observed:

• Item 4 is the only item which specifically relates to the context of registered clubs regulated by the ILGA.
• Items 1 (in the context of a voluntary administration), 2, 6 and 10 (in the form of a declaration of independence, relevant relationships and indemnities) are already required of appointees as a matter of law.
• Items 3 and 8 are matters squarely within the scope of the ASIC’s regulation of insolvency practitioners, as discussed above.
• Items 5, 7 and 9 are matters for the determination of the appointor, whether that is the board of the registered club in the context of a voluntary administration or a secured creditor in the context of a receivership. It should be noted that, in respect of any secured creditor appointment, any concerns regarding the appointment are likely to be raised by the debtor company or its directors in most cases.

The scope adopted by the ILGA in the guidelines seems to suggest that s 41 of the RCA places the ILGA, a state gaming and liquor regulator, in the role of supervisor of company boards, secured creditors and registered liquidators.

It is not clear what policy purpose this supervisory role achieves, in light of ASIC’s own supervisory role over those players, and the existing legal prerequisites to appointments found in the Corporations Act. It is also not clear why a supervisory role is needed, when no such role exists in other industries that are highly regulated.

For example, there is no comparable provision in the legislation that governs the regulators of childcare providers, insurance companies, legal practices and retirement villages (or indeed for other categories of businesses which are licensed to serve alcohol but which are not registered clubs). It is also unusual that this supervisory role is unique to New South Wales — the requirement for prior approval does not exist in other states.

The problem with s 41

The Supreme Court cannot approve an appointment retrospectively for the purposes of s 41 of the RCA, 3 so it has to be done in advance of the appointment. That creates a particular difficulty in the event that the ILGA is unable to approve an appointment in urgent circumstances: for example, where an urgent appointment of a receiver is necessary to preserve security or enterprise value, or where the appointment of an administrator in a voluntary administration under Pt 5.3A of the Corporations Act is urgently needed to avoid trading whilst insolvent.

The latter circumstance, where the appointment of an administrator was urgently required, arose in Re Belmont Sportsmans Club Co-operative Ltd 4 (Re Belmont). In that matter, the directors of a registered club resolved, on 21 December 2017, to appoint administrators, subject to the ILGA’s approval. The affidavit evidence in that case indicated that the ILGA was initially unable to approve the appointment of administrators until February 2018, and that, after further enquiries were requested by the court on the hearing date of 2 January, the ILGA was still unable to approve the appointment until 19 January 2018, more than 2 weeks later. The court’s displeasure at that state of affairs was apparent:

I should pause to note that it would be a most unfortunate state of affairs if a statute provides that a person is not capable of being appointed to act in the capacity of a voluntary administrator, in circumstances that a registered club is in a position of insolvency or likely insolvency, without the approval to act in that capacity by the Authority, but the Authority will not promptly take steps to determine whether to grant such approval. It is to be hoped that the Authority’s position is not, in fact, that which was communicated to the Court in this application.

…
I recognise that this is an unsatisfactory result, at least if the Authority does not promptly consider an application for its approval to allow the Club to make that appointment for itself. It is obviously undesirable that s 41 of the Registered Clubs Act have the result that directors of registered clubs that face financial difficulties cannot take responsible steps which would be available to directors of companies to address those difficulties. That difficulty could generally be avoided by the Authority reaching prompt decisions whether to approve such appointments where they are genuinely urgent, as will often be the case. That difficulty could be avoided in this case if, on review of this judgment, the Authority will act more promptly in determining whether to approve the persons proposed for appointment as voluntary administrators than it has to date indicated to the Plaintiffs. 5

Re Belmont also determined that there is no alternative to ILGA approval in the context of voluntary administration; the court cannot appoint an administrator under s 41(1)(a) of the RCA because there is no corresponding power to do so in Pt 5.3A.

Similarly, in Re Coogee Sports Club Ltd 6 (Re Coogee), directors resolved to appoint an administrator, subject to ILGA approval, on 7 June 2016. The ILGA could not consider whether to grant approval until 29 June 2016, 3 weeks later. On 16 June 2016, the court appointed a receiver to act in the interim until the ILGA considered the application. This not only extended the time during which the directors were potentially exposed to liability for insolvent trading, but it also presumably increased costs, to the overall detriment of creditors — two outcomes which conflict with the objectives of Pt 5.3A.

While Re Belmont is an extreme case, where ILGA approval was sought over the Christmas and New Year public holidays, it is demonstrative of the serious consequences to which s 41 of the RCA exposes company directors. It is not difficult to imagine other situations — for example, a secured creditor seeking to appoint a receiver and manager to a club whose assets are rapidly diminishing in value — where delay would be similarly prejudicial.

There is also a continued risk that an appointment could purportedly be made and action taken in relation to the administrator prior to approval being granted by the ILGA, due to the appointor either not knowing about the requirement or assuming that the process of seeking approval is sufficient. If this occurs, the appointment will be invalid and incapable of being remedied under s 1322 or s 447A of the Corporations Act, which could result in claims of trespass against the practitioner, in addition to practitioners having to justify their remuneration and expenses to a court on a quantum meruit basis.

Repeal or amendment of s 41

We therefore suggest that s 41 of the RCA should be repealed, or at least amended.

Registered clubs are specialist businesses with public health and safety impacts, so it is important that they are managed by appropriately qualified individuals, even in external administration. Yet as discussed above, s 41 of the RCA does little to achieve that end that is not already achieved by the regulation of insolvency practitioners by ASIC, and in some cases can materially delay necessary appointments, to the detriment of companies and their directors and creditors.

If not repealed, s 41 should be amended to ameliorate the negative outcomes listed above. Appointments under Pt 5.3A of the Corporations Act could be excluded from the operation of s 41. This exclusion would be appropriate for four reasons:

• First, as discussed above, all administrators are registered liquidators, whose qualifications are carefully regulated by ASIC. Further, voluntary administrators may be replaced by creditors at an early stage.
• The appointment of administrators by a board of directors is often required on short notice to prevent liability for insolvent trading. The appointment of administrators on short notice is also likely to arise in a new context with the advent of the “safe harbour” regime — in the event that a board discovers that its turnaround strategy is no longer meeting the requirements of the safe harbour defence, it will be necessary to act quickly to avoid exposure. This need for haste renders this category of external administration most vulnerable to the potential negative effects of s 41. Correa v Whittingham,7 Re Belmont and Re Coogee were all examples of attempts to appoint administrators.
• Exclusion of appointments under Pt 5.3A would also allow creditors with security over substantially all of the assets of the club to act quickly to appoint a voluntary administrator to preserve the value of those assets in an enforcement context, where the private appointment of a receiver would not be possible on short notice due to s 41 approval.
• Administrators under Pt 5.3A are intended to occupy their office for a short time, with a specific task in mind. While an administrator may continue to trade a registered club, they will usually do so with the assistance of some existing staff and managers and will not do so beyond the ordinary duration of their appointment without court approval (typically, depending on when meetings are called and subject to extension by a court, about 5 weeks). An administrator is unlikely to operate a registered club, without the benefit of specialist support, for an extended period of time.

Alternatively, s 41 could be amended to allow the pre-approval of appointments of all registered liquidators included on the ILGA’s list of registered insolvency practitioners. As discussed above, previous experience in the administration of registered clubs is one of the only items identified in the ILGA’s published guidelines which is specific to the ILGA’s regulatory mission and which is not already regulated by someone else, and inclusion on the list of registered insolvency practitioners constitutes deemed satisfaction of that particular item under the guidelines. However, that proposal would retain an unnecessary distinction between the qualifications required to externally administer registered clubs as distinct from a range of other specialist businesses, and would present a practical difficulty in the training of pre-approved liquidators in the future — if one can only be endorsed as a pre-approved liquidator by the ILGA with sufficient experience in the management of registered clubs, and can only obtain that experience through approval by the ILGA, that places an undue restriction on the class of otherwise well-qualified insolvency practitioners available to perform that work.

In conclusion, s 41 is unnecessary. The current requirements associated with accepting an appointment, set out in the Corporations Act, in addition to the role played by ASIC in supervising registered liquidators, are sufficient. In our opinion, s 41 adds an unnecessary hurdle that is causing confusion and delay, while also increasing risk and costs. It should be repealed, or at least amended, to address the issues raised in this article.

Footnotes

1. Correa v Whittingham (No 3) (2012) 267 FLR 120; [2012] NSWSC 526; BC201203404; and Correa v Whittingham (2013) 278 FLR 310; [2013] NSWCA 263; BC201311925.
2. Independent Liquor and Gaming Authority Approval to Act as Administrator, Liquidator or in Certain Other Capacities under Section 41 of the Registered Clubs Act 1976 GL4004 — Guideline 9 (2016).
3. Correa v Whittingham, above n 1.
4. Re Belmont Sportsmans Club Co-operative Ltd [2018] NSWSC 2; BC201800024.
5. Above n 4, at [3], [14].
6. Re Coogee Sports Club Ltd [2016] NSWSC 817; BC201604821.
7. Correa v Whittingham, above n 1.

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