Albarran v Pascoe

CATCHWORDS : CORPORATIONS - voluntary administration - directors who resolve to appoint administrators are undischarged bankrupts - whether s 447A(1) available to cause Part 5.3A to apply notwithstanding invalidity of resolution

LEGISLATION CITED : Corporations Act 2001 (Cth) ss 206A, 206B, 436A, 447A, 1322

Australasian Memory Pty Limited v Brien (2000) 200 CLR 270 CASES CITED : Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 Re Wood Parsons Pty Ltd (in liq) (2002) 43 ACSR 257 Wagner v International Health Promotions (Administrator Appointed) (1994) 15 ACSR 419

Richard Albarran (P1) PARTIES : Robert Elliot (P2) Scott Pascoe, Trustee of the Bankrupt Estates of Savvas Ioannou and Maria Ioannou (D)

COUNSEL : S Golledge (A) D McCrostie (R)

SOLICITORS : Etienne Lawyers (A) Turks Legal (R)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2557/06 RICHARD ALBARRAN & ANOR V SCOTT PASCOE - TRUSTEE OF THE BANKRUPT ESTATES OF SAVVAS IOANNOU AND MARIA IOANNOU

1 HIS HONOUR: By an originating process filed on 1 May 2006, the plaintiffs, Mr Albarran and Mr Elliott, seek orders for the purposes of validating their appointment as voluntary administrators of a company called SMTC Pty Ltd.

2 The plaintiffs were purportedly appointed voluntary administrators by Mr and Mrs Ioannou, who were purporting to act as the directors of the company under s 436A of the Corporations Act. The evidence before me now indicates that the company is insolvent.

3 The plaintiffs proceeded to investigate the business and affairs of the company by interviewing staff, conducting a stocktake of the company's sports stores, and reviewing financial information. They convened the first meeting of creditors, as required by Part 5.3A of the Act, which was held on 1 May 2006.

4 Just before that meeting, in the course of interviewing Mr Ioannou, Mr Albarran was informed that both Mr Ioannou and his wife and co-director were bankrupts. I have been informed from the Bar table that there is an application for annulment of the bankruptcy sequestration orders due to be heard in the Federal Magistrates Court next Tuesday but, for the time being, it is necessary to proceed on the basis that Mr and Mrs Ioannou were bankrupts at the time when they purported to resolve as directors that voluntary administrators be appointed to the company.

5 The application that is before me joins the trustee in bankruptcy of Mr and Mrs Ioannou as the defendant. Initially, the solicitor for the trustee in bankruptcy appeared and informed the Court that his client was apprehensive about the kind of orders that the plaintiffs were seeking because of a concern that the valid appointment of voluntary administrators, if established, might have an effect on commercial documents entered into by the company, including leases and financing agreements. Subsequently, the solicitor informed me that this concern was no longer present and that his client neither supported nor opposed the application for relief.

6 The significance of Mr and Mrs Ioannou being undischarged bankrupts at the time of their purported appointment of the plaintiffs as voluntary administrators is as follows. Section 206B(3) says that a person is disqualified from managing corporations if the person is an undischarged bankrupt. Section 206A(2) says that a person ceases to be a director of a company if the person becomes disqualified from managing corporations under Part 2D.6 (which includes s 206B). Therefore, at the time when they purported to appoint the plaintiffs as voluntary administrators, Mr and Mrs Ioannou were not directors of the company.

7 The plaintiffs have given evidence about the dire financial circumstances in which the company is now placed. They say that, while the company is still trading, it is trading at a loss and it is unlikely to be able to afford to pay the staff beyond the end of this week. Their evidence is that the company must be sold immediately to avoid closure of the business and a resulting fire sale. Since their purported appointment they have advertised for the sale of the business. While they received several enquiries as a result of the advertisement, only one offer has been received. The offer is for a figure substantially lower than the valuation that they have obtained. The person making the offer is the brother-in-law of Mr Ioannou. The plaintiffs wish to accept this offer and complete the transaction so as to provide some cash for distribution to creditors.

8 When the matter first came before me on 1 May 2006, it seemed to me that some careful attention would need to be given to the statutory and case law in order to identify the most appropriate and effective way of addressing the problem which the facts presented to the court. I set the matter down for hearing on 16 May. Subsequently, however, the plaintiffs have returned to Court in urgent circumstances, because their perception of the financial position of the company has become a little clearer. They have formed the view that the matter needs to be determined immediately, particularly so that they can respond to the offer for purchase of the business. The Court is, therefore, in the position of having to make a decision on the matter without the opportunity for counsel or the Court to give the issues full reflection. In particular, various alternatives to the primary form of relief that the plaintiffs have sought - such as a Court-ordered meeting of shareholders of the company to appoint new directors for the limited purpose of appointing voluntary administrators validly - have not been fully explored.

9 The primary form of relief sought by the plaintiffs is a curative order under s 447A. I shall also refer to s 1322, which is a more general provision allowing curative relief to be given.

10 Section 447A(1) empowers the Court to make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company. The meaning and effect of that provision was considered by the High Court in Australasian Memory Pty Limited v Brien (2000) 200 CLR 270. The High Court did not, in that case, directly consider whether s 447A is available to be used where the event that purports to make Part 5.3A relevant at all, namely, the purported appointment of voluntary administrators, is invalid. But the courts have had occasion to consider the application of the section to such circumstances in light of the High Court's exposition of its general scope.

11 In the limited time available, counsel has only been able to refer the Court to two decisions, both of which, as it happens, are decisions by me. In Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391, I had to consider the availability of s 447A(1), where the directors' meetings at which it was resolved that voluntary administrators be appointed to several companies had not been validly convened, in accordance with the companies' constitutions.

12 I reviewed the High Court's reasoning in the Australasian Memory case and drew particular attention to the observation by their Honours that the section gives the Court a broad power, which is an integral part of the legislative scheme provided for by Part 5.3A and is not to be read down, or confined to curing defects or remedying consequences of departures from other provisions. I also noted that their Honours had shown a willingness to use the section in cases where the parties had assumed validity of a deed of company arrangement and had acted accordingly; see Portinex at [30], [32]. I said (at [31]): "The cases before me do not involve failure to comply with a requirement of Part 5.3A that has come to be clearly applicable for the resolution of a doubt about future compliance with Part 5.3A. The problem in the present cases is that the event which triggers the application of Part 5.3A, namely, the appointment of an administrator pursuant to a resolution of the directors of the company, has not been validly authorised in accordance with s 436A. As a matter of first impression, it might appear arguable that the issue is not about how Part 5.3A is to operate but, rather, about whether anything has happened which validly makes Part 5.3A relevant at all. But the case law [reviewed in Portinex at [30]] implies that there is no such limitation on the scope of s 447A."

13 I distinguished Wagner v International Health Promotions (Administrator Appointed) (1994) 15 ACSR 419 on the ground that it was unnecessary in the cases before me in Portinex to consider whether s 447A is available to be used if there is no attempt at all to pass a resolution in compliance with s 436A.

14 I addressed similar issues in Re Wood Parsons Pty Ltd (in liq) (2002) 43 ACSR 257. The problem in that case was that the persons purporting to act as directors and, as such, to appoint administrators, had not been validly appointed as directors because a quorum of shareholders was not present at the meeting of shareholders when the appointments were purportedly made. I referred to the Australasian Memory and Portinex cases and expressed the view (at [46]) that the Australasian Memory case

"establishes the proposition that s 447A is available to cure such matters as a lack of quorum of properly appointed directors at the meeting where the resolution is purportedly passed to appoint the voluntary administrators: see Portinex at [33]".

I said that this conclusion is consistent with other cases and at [48] I again distinguished the Wagner case.

15 Here, the invalidity of the directors' resolution to appoint the administrators flows from their status as undischarged bankrupts and the statutory declaration in s 206A(2) that, by virtue of that status, they have ceased to be directors. However, in my opinion, their status is not relevantly distinguishable from the status of the persons purporting to act as directors in the Wood Parsons case, or the status of directors purporting to pass a resolution at an invalidly convened meeting of directors, in the Portinex case. In all three cases, an attempt has been made to initiate the Part 5.3A process, but the attempt has been invalid. On the authority of the Portinex and Wood Parsons cases, the Court may use s 447A(1) in such circumstances, to make an order as to how Part 5.3A is to operate in relation to the company concerned given that, as the High Court has pointed out, the section has a wide literal scope and is an integral part of Part 5.3A. I have, therefore, concluded that I have the power to use s 447A(1).

16 In the circumstances, my view is that an order should be made so as to enable the plaintiffs to occupy a position in which they can validly attend to the affairs of the company as external administrators and, if they think fit, contract to sell the company's business or take other steps in the administration of the company's affairs. The creditors of the company were made aware at the first meeting of creditors that the problem I have identified existed, and that the administrators were contemplating an application such as the one now before me, but no creditors objected to such a course at the meeting and none have sought to come forward to oppose it before the Court. In these circumstances, my view is that there is no discretionary consideration weighing against the Court making an appropriate order.

17 I need to address whether an order under s 447A is the most appropriate way forward given that, as I pointed out in Wood Parsons (at [49]), s 447A looks to the future rather than to the past and does not in terms permit the Court to make an order nunc pro tunc validating what has already occurred.

18 In the Wood Parsons case, where there had been a substantial period of time between the purported appointment of the administrators and the discovery of the problem, I was able to make an order under s 1322(4) having retrospective effect. But, in my view, s 1322(4) is not available in the present circumstances. The only potentially relevant part of it, subparagraph (A), speaks of an order declaring that an act, matter, or thing purporting to have been done under the Act, or in relation to a corporation, is not invalid by reason of any contravention of the provision of the Act, or the corporation's constitution. In my view, this is not a case of contravention of a provision of the Act. The problem with which I am concerned is a problem about the status of Mr and Mrs Ioannou who, as undischarged bankrupts, are disqualified from managing corporations and, therefore, have ceased to be directors. Moreover, the issue in this case is not essentially of a procedural nature, and therefore s 1322(6)(a)(i) is not satisfied. In any event, since the purported administration has been on foot for only a short time and since I intend to make such provision as I can for the plaintiffs' costs to date, it does not seem to me that there is any practical difficulty likely to arise if the order that I make is prospective only.

19 I have also considered whether a better course of action might be for the Court to appoint the plaintiffs as receivers and managers of the undertaking and assets of the company, with power to manage the business of the company and to sell its assets. I have decided not to take that course of action. While the evidence indicates that there is a need to deal with the assets of the company as a matter of urgency, it seems to me that the preferable course is for the plaintiffs to be put in the position of validly appointed administrators and in that position, to exercise their expert skill and judgment and make a decision as to what should be done. As Part 5.3A provides for administrators to have the requisite powers and provides a mechanism of accountability to creditors, on the whole it is better in such a case as this for the Court not to intervene by superimposing its own appointment, powers and accountability structure.

20 I order under s 447A(1) of the Corporations Act that Part 5.3A is henceforth to operate in relation to the company SMTC Pty Ltd ACN 104 228 775, as if the resolution purportedly adopted by Savvas Ioannou and Maria Ioannou on 24 April 2006 as directors of the company were a valid resolution under s 436A and as if the plaintiffs' appointment pursuant to that resolution were a valid appointment of them as voluntary administrators of the company.

21 I order under s 447A(1) that the costs incurred by the plaintiffs with respect to the administration of the affairs of the company in the period from 24 April until today be costs in the voluntary administration of the company.

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