Insolvency practitioners appointed over a registered club in New South Wales (NSW) face obligations under state legislation that are inconsistent with the federal insolvency legislation. The primary issues are:

Section 41 of the Registered Clubs Act 1976, which requires practitioners to seek approval of the Independent Liquor and Gaming Authority (“ILGA”) to be appointed as administrator, liquidator or controller.

Section 21 of the Gaming Machines Act 2001, which requires member approval to sell gaming machine entitlements (“GMEs”) if at any time the club holds 10 or less GMEs.

Section 41 – Registered Clubs Act

Historically, ILGA provided Section 41 authority retrospectively, enabling practitioners to be appointed external administrator over a NSW club before seeking approval. This made commercial sense, but it all changed on 15 August 2013 following a NSW Court of Appeal decision in the matter of Correa v Whittingham [2013] NSWCA 263. In that matter the court determined that ILGA could not grant authority retrospectively, and the liquidator was ruled to have been invalidly appointed. ILGA no longer grants retrospective authority.

This can be a problem for the clubs or secured creditors who wish to appoint administrators, liquidators or controllers. There are often compelling commercial considerations that require immediate or fast appointments. ILGA has procedures to process Section 41 applications, but it takes time. In my experience, the process takes about a week; sometimes less, sometimes more, occasionally a lot more.

All this red tape is unnecessary. ASIC has a much more intensive process to ensure a person’s qualifications, experience, and capacity to be registered as a liquidator. Furthermore, ILGA cannot prevent a secured creditor, a board or the Courts from appointing an external administrator. There is no need to involve ILGA in the decision regarding which practitioner to appoint. It could be argued to be contradictory to the intention of the federal legislation (this is an argument best left to people better qualified than I).

For these reasons, we believe that Section 41 of the Registered Clubs Act should be repealed. If it is not repealed, then the following amendments should be made:

• That an insolvency practitioner, once approved by ILGA, can then be appointed in a relevant capacity over any club.
• That a practitioner appointed by a Court be exempt from obtaining ILGA approval (currently there is an exemption that only applies to Supreme Court appointments).

Section 21 – Gaming Machines Act

Subsection 21(4) of the Gaming Machines Act requires member approval to sell GMEs if the club holds 10 or less GMEs. GMEs are often a club’s most valuable asset and this subsection generates unnecessary expense for external administrators. It’s an expense that’s hard to avoid because GMEs must be sold in blocks of three and liquidators and controllers are often left with one or two “orphan” GMEs. These can be grouped with other orphans and sold, but the cost of complying with section 21 can render that sale uncommercial.

Worse, where a club has been in liquidation there might be no members remaining to grant that approval.

Worse still, ill informed members can vote to disallow the sale.

This promotes the will of the club’s members over the rights of creditors, which are preserved by the Corporations Act. Subsection 21(4) of the Gaming Machines Act should be amended so that it does not apply where an external administrator is appointed.

What can be done?

In the coming weeks and months, we will be having a conversation with our professional bodies requesting them to prepare a submission to the NSW Government seeking amendments to the legislation. Failing this, we will prepare that submission.