Albarran v Pascoe [2019] NSWSC 1897 | Case summary

Albarran v Pascoe [2019] NSWSC 1897 | Case summary | Zoe

Background and evidence

By Originating Process filed on 15 November 2019, Mr Shumit Banerjee and Mr Jason Porter as joint and several liquidators of All States Hire Pty Limited (in liq) ("All States") and Splendid Capital Investments Pty Limited (in liq) ("Splendid") apply for orders, inter alia, under s 1322 of the Corporations Act 2001 (Cth) validating their appointment as liquidators of All States and Splendid. They also seek alternative relief, which it will not be necessary to address in the relevant circumstances.
Turning now to the factual background of the application, on or about 18 August 2019, Mr Aman Kalil, who was then purportedly the director and sole shareholder of each of All States and Splendid, took the steps necessary to bring about the appointment of Messrs Banerjee and Porter as liquidators of the companies, in a creditor's voluntary winding up, including giving notice of a meeting of the member of each of the companies, consenting to short notice, resolving in a directors meeting that the companies should be wound up and holding a meeting of members, in each case attended by Mr Kalil alone, resolving that each company be wound up. There were at least two difficulties with that course. First, on the evidence, it is very likely that Mr Kalil was not then a director or shareholder of the relevant companies. Second, it is apparent that Mr Kalil had been bankrupt for a considerable period, and would have been disqualified from holding the office of a director of the companies, had he been validly appointed to that position.
By his affidavit dated 14 November 2019, Mr El Jarrar indicates that he was formerly the director and secretary of All States and Splendid, and believes that he remains as the sole director of All States. He indicates that All States is part of a group of family companies in which he, his former wife and his former brother-in-law, Mr Zaidder has an interest (Mr Zaidder has since changed his name, but I will refer to him by his former name). It appears that, in May 2019, both companies were engaged in disputes and, for reasons that are not entirely clear, Mr El Jarrar appears to have acceded to a suggestion by Mr Kalil that he become the shareholder and director of the companies and try to resolve the disputes, and if they could not be resolved, the companies would then be placed into liquidation. As I noted above, this account does not give the impression of a full explanation of the process which was adopted.
It appears that Mr El Jarrar then took steps, through his accountant, to have the asset records relating to the company amended, with neither Mr El Jarrar nor the accountant recognising that an amendment to records maintained by the Australian Securities and Investments Commission ("ASIC") was not sufficient to bring about a transfer of the company's shares or the appointment of a new director, unless the other necessary steps under the Corporations Act were taken. For these reasons, as I noted earlier, it is very likely that Mr El Jarrar remains as the sole shareholder of the company, although it may be that the steps he took were sufficient to bring about his resignation as director, and that the company would then have no director.
Mr Zaidder, as he was formerly known, gives similar evidence that he was formerly the sole director and secretary of All States and had an interest in Splendid, and that he had been informed of the proposal that Mr Kalil take over the relevant companies and seek to resolve the dispute or put the companies into liquidation. He refers to his resignation as director and secretary of All States and Mr El Jarrar's resignation as director and secretary of Splendid and also refers to the absence of steps other than the notification to ASIC to bring about the relevant appointments, or any transfer of the shares in Splendid or All States to Mr Kalil.
Mr Banerjee in turn refers to the circumstances in which he was appointed as liquidator, after initially being approached by a person who he understood to be the internal accountant of the relevant group of companies. He refers to having later become aware of Mr Kalil's bankruptcy and he then rightly questioned the efficacy of his appointment. Mr Banerjee also notes that he has since become aware of the difficulties in respect of the process by which Mr Kalil purportedly was appointed as a director of All States and Splendid, and the transfer of the shares in the companies was purportedly made to him. Mr Banerjee nonetheless expresses the view, supported by other documents that are in evidence, that both of the companies are insolvent, and that the best outcome for creditors can be achieved by validation of his appointment as liquidator, to avoid the need for another liquidator to be appointed, or further steps being taken to liquidate the companies.
There is in turn evidence, to which Mr McDonald who appears for the liquidators refers, of the scope of the relevant liquidations which show that All States has several related party creditors, and total debts owed to them in the order of $47,000, and had a relatively small annual turnover of less than $40,000 per year. Splendid was a somewhat larger company, with debts originally understood to be in the order of $46,000, and an annual turnover in excess of $1.4 million, although there is some evidence that it also initially had debts owed to a credit card provider and to two banks which have since been discharged pursuant to guarantees given by a director.

[3]

Determination

It seems to me that, notwithstanding the lack of clarity in the evidence as to how or why Mr Kalil became involved in relevant matters, the case for validation of the liquidators' appointment is established. In particular, steps were purportedly taken for their appointment, by the passage of relevant resolutions, albeit by Mr Kalil as director and shareholder. Whatever the difficulties with those steps, it is preferable that the companies now be under the independent control of the liquidators, rather than being returned to the control of the directors who took those steps.
I am also satisfied that the Court has power to make the orders sought under s 1322 of the Corporations Act. I bear in mind the observations in the authorities that the wider purpose of s 1322 of the Act is to ensure that the law should not invalidate transactions because of non-compliance with its requirements, where such non-compliance is the product of inadvertence and where the Court can avoid its effect without prejudice to third parties or the public interest in compliance with the law, and the Court will have regard to the purposes of the Act, the interests of all affected persons and the public interest in exercising its powers under that section: Re Wave Capital Limited [2003] FCA 969; (2003) 47 ACSR 418. The width of the Court's powers under that section was also confirmed by the High Court in Weinstock v Beck [2013] HCA 14; (2013) 93 ACSR 231. Here, it seems to me that the legislative policy will be served by not invalidating the appointment of the liquidators by reason of the non-compliance with the relevant requirements for their appointment, and the public interest will be served by their remaining in office.
I recognise that similar situations, typically involving the bankruptcy of a director who has made the relevant appointment, are relatively common in respect of the appointment of administrators, and similar orders have been made in several cases under s 447A of the Corporations Act in that context. Mr McDonald has fairly drawn attention to the decision of Austin J in Albarran v Pascoe [2006] NSWSC 418; (2006) 57 ACSR 451, where Austin J made orders in respect of a validation of an administrator's appointment under s 447A of the Act, rather than under s 1322 of the Act. I recognise that his Honour there expressed the view that the requirements of s 1322(4) were not satisfied in the relevant case, although that decision may turn upon a narrower reading of the concept of "contravention" in s 1322(4) of the Act than has been adopted in subsequent cases. Mr McDonald also refers to the decision in Re CV Constructions Pty Limited (in liq) [2019] SASC 156, where a wider view was taken by Master Dart in the Supreme Court of South Australia, in validating the appointment of a liquidator, where there was an issue as to the validity of the resolution by which he had initially been appointed as voluntary administrator. Mr McDonald also refers to my decision in Re Postnet Australia Pty Limited [2019] NSWSC 1260, where I reviewed the relevant authorities in respect of the validation of a voluntary administrator's appointment.
It seems to me that s 1322 of the Corporations Act is available in the relevant circumstances. Section 1322(4)(a) allows the Court to declare that an act, matter or thing purporting to have been done, or any proceedings purporting to have been instituted or taken, under the Act are not invalid by reason of a contravention of a provision of the Act. The reference to a "contravention" has been given a wide meaning in later cases, given the remedial nature of the section, and extends to a situation which falls short of an infringement of the Act, and a validating order can be made in that situation: Sheahan v Londish [2010] NSWCA 270; (2010) 80 ACSR 337; Re Postnet Australia Pty Limited above. That power may be exercised (1) where, relevantly, the contravention is essentially procedural, or the persons concerned had acted honestly, or it is just and equitable that the order be made, and (2) provided no substantial injustice has or is likely to be caused to any person: s 1322(6). The conditions imposed in s 1322(6) are alternatives, so that only one of them needs to be satisfied in order to allow for an order to be made under s 1322(4)(a) of the Act.
It is not necessary to decide whether the Court could find, on possibly incomplete evidence, that the directors acted honestly or that the contravention is essentially procedural, where Mr Kalil does not appear to have been properly appointed as a director, or to have taken a transfer of the relevant shares by any proper corporate step, and where he was disqualified from acting as a director by reason of his bankruptcy. The Court can, however, be satisfied that it is just and equitable that the order be made, where that will preserve the appointment of an independent liquidator to the companies, in circumstances that these events would likely have the result that it was just and equitable that the companies be wound up in any event.
For these reasons, I am satisfied that I can make orders under s 1322(4) of the Act, in respect of each of the companies, and I will also make the orders sought that there be no order as to costs. I therefore make orders which I have renumbered as orders 1-3 in accordance with the short minutes of order initialled by me and placed on the file.

Albarran v Pascoe

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Cases Cited (6)