- Ashrafinia v Ashrafinia

Supreme Court of NSW|2018-04-06|Before: Black J

Solicitors: Moisson Lawyers (Plaintiff) File Number(s): 2018/104186

Nature of the application

By Originating Process filed on 4 April 2018, as to which the Court made orders for short service, Messrs Moss and Kwok in their capacity as administrators ("Administrators") of Deposit Power Pty Limited ("Company") sought a declaration under s 447C of the Corporations Act 2001 (Cth) that their appointment as voluntary administrators of the Company is valid. Alternatively they sought an order under s 1322 of the Corporations Act validating their appointment as voluntary administrators of the Company. The formulation of the latter order appeared to invoke the operation of s 1322(4) of the Corporations Act, whereas the declaration under s 447C of the Act could be made either if there was no invalidity with the appointment, or if any invalidity in that appointment would automatically be validated by s 1322(2) of the Act. In the further alternative, the Administrators sought an order under s 447A of the Act that Pt 5.3A was to operate in relation to the Company as if they were validly appointed as voluntary administrators of the Company by a resolution passed at a meeting of the directors of the Company on 27 February 2018.
The issue identified by the Administrators that prompts the application is the possibility that the notice given of the relevant directors' meeting, to a third director of the Company who did not attend that meeting, was not reasonable notice. I will refer to the evidence of that matter below. The constitution of the Company relevantly adopts the replaceable rule in s 248C of the Corporations Act, which provides that a directors' meeting may be called by a director giving reasonable notice individually to any other director. The Company's constitution also provides, adopting the replaceable rule s 248F of the Act, that the quorum for a directors' meeting is two directors and the quorum must be present at all times during the meeting. There is no suggestion that quorum requirements were not satisfied in this case.

Evidence and factual background

The application is supported by several affidavits, which set out the nature of the events which led to the appointment of the Administrators, the manner in which that appointment took place, and deal with the steps which have been taken by the Administrators since their appointment. I have summarised some of those matters in an earlier judgment, by which I determined to extend the convening period for the administration, and will not repeat that summary at length, although I will highlight some relevant matters.
The Administrators rely on the affidavit of one of them, Mr Moss, dated 3 April 2018, which refers to the appointment by the High Court of New Zealand of an interim liquidator to CBL Insurance Limited ("CBL") on 23 February 2018 which appears to have prompted these events. CBL was the issuer of deposit bonds, including to Australian persons, and the Company provided management and other services in respect of the issue of those deposit bonds. Two Australian directors of the Company had taken steps, between 23 February 2018 when they became aware of that matter, and 26 February 2018, to restrict the Company's activities, reflecting the fact that deposit bonds would likely no longer be able to be sourced from CBL. On 26 February 2018, the directors were advised by the interim liquidators of CBL that outstanding expenses due by CBL to the Company, which had previously been approved for payment, were not likely to be paid for some time and will then only likely to be paid at approximately eighty cents in the dollar, and the interim liquidators of CBL also sought to have the Company remit to CBL any monies held on behalf of or to the account of CBL.
The Australian resident directors of the Company, appropriately, took legal advice as to the Company's position in that situation and moved on the next morning to appoint the Administrators. Mr Moss' affidavit also refers to the steps which have since been taken by the Administrators, to which I referred in an earlier judgment, to undertake a sale process in respect of the Company's business, in a manner that is likely to maximise the prospects that employees will continue in employment and that creditors will be paid in full, by contrast to the position if the Company was placed in liquidation.
An affidavit of Mr Grant Bailey, one of the Company's Australian resident directors, refers to the steps taken after they became aware of events concerning CBL, including the steps that were taken to appoint the Administrators. Mr Bailey refers to the position in respect of the third director of the Company, resident in New Zealand, whose resignation from his position as chief financial officer of CBL Corporation, an upstream company in the CBL group, had been announced in November 2017 but was not to become effective until late April 2017.
Mr Bailey also refers to the steps which had been taken and the matters which had come to the Company's Australian resident directors' attention leading up to their decision to appoint the Administrators. Although steps had been taken to reduce the scope of the Company's business over the weekend of 24-25 February 2018, it appears that the view that the Company could not continue its business, even in narrow scope, was formed on the morning of Tuesday, 27 February 2018 and the Australian resident directors and a legal representative met with the proposed Administrators that morning. After that meeting, they gave notice to the Company's New Zealand resident director, at about 11.50am, and again sought to contact him at about noon, but were unable to do so. At some time between noon and 12.10pm on that day, the two Australian resident directors resolved to appoint the Administrators, making a note on the minutes of the relevant meeting that an attempt had been made to contact the New Zealand resident director, but that had been unsuccessful, and resolving that the Company was likely to become insolvent as the basis for the appointment. In these circumstances, about twenty minutes notice was given to the New Zealand resident director of the meeting to make the relevant appointment.
An affidavit sworn by the Company's New Zealand resident director has also been read. He gives an account of his role within the Company, which appears to have been in the nature of a non-executive director's role, primarily involving participation in one meeting each year to approve the Company's accounts. Importantly, the New Zealand resident director's evidence is that he does not take issue with the resolution passed to appoint the Administrators, in the circumstances facing the Company at the relevant time. His evidence is that, had he attended the meeting of the Company's directors held on 27 February 2018, he would have considered the matters facing the Company at that time and would have supported the appointment of the Administrators in those circumstances, and he supports the Administrators' appointment and the sale process which they have put in place.
There is also evidence as to service of the application, which I need not address. I do recognise that, in respect of one entity, service was arguably effected outside the time originally contemplated by the orders for short service, and service ultimately was also delayed in respect of the Australian Securities Investment Commission, which had not indicated its view in respect of the application.

Whether reasonable notice was given of the directors' meeting

I have the benefit of detailed submissions from Mr Smith, who appears with Mr Davis for the Administrators. Four issues potentially arise, although it is not necessary to address a final view as to all of them in order to determine the application, and the Administrators would be successful in the application if they were successful in respect of any of those issues.
The first issue is whether, in the relevant circumstances, reasonable notice of the directors' meeting had been given to the Company's New Zealand resident director, such that the requirements of s 248C of the Act are satisfied. Mr Smith points to several matters which he contended might support that finding, although the Administrators have, appropriately, brought relevant matters to the Court's attention without necessarily committing themselves to a particular result. Those matters include the fact that the Australian resident directors of the Company were most closely involved in operational issues concerning the Company, and the urgency of the relevant matters, where a view had been formed that morning that the Company could not continue to conduct its business on a more limited basis, because of the likelihood of insolvency in the future, both by reason of nonpayment of the expenses due by CBL to the Company and the challenges to the continuance of its business where it could not source deposit bonds from CBL.
Mr Smith also draws attention to my analysis of the matters that are relevant to what is a reasonable time in these circumstances in Re Keneally as administrator of Australian Blue Mountain International Cultural and Tourist Group Pty Ltd (admin apptd) [2015] NSWSC 937 at [57], where I reviewed the relevant case law and noted that the time required for reasonable notice of a meeting depended upon the circumstances and what would be fair to the parties. I noted, for example, that a shorter period of notice has been accepted in McMaster v Eznut Pty Ltd [2006] WASC 109; (2006) 58 ACSR 199 at [162], in respect of the appointment of an administrator in urgent circumstances, and also in Ashrafinia v Ashrafinia [2012] NSWSC 500 in respect of the retainer of solicitors in respect of litigation.
While I accept the relevance of the matters to which Mr Smith refers, it seems to me that the period of notice given in this case was probably not reasonable notice in the circumstances. Here, that made no difference, a matter to which I will return, where the New Zealand resident director would have supported the appointment of the Administrators had he attended the meeting. However, had that director wished to oppose the appointment, possibly on cogent grounds, two attempts to contact him over a 20 minute period are probably too short a period to allow that director a reasonable opportunity to attend that meeting, even where matters are urgent. I do not, however, need to express a final view as to that matter, where it would not bring about a different result in the application.

Application of s 1322(2) of the Corporations Act

The second basis on which a declaration of validity could be made, under s 447C of the Corporations Act, is if s 1322(2) of the Act validates the appointment of the Administrators by its own force. That section relevantly provides that a proceeding under the Act is not invalidated because of any "procedural" irregularity, unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid. No reliance was placed on s 1322(2) in Re Keneally above, probably for good reason in the circumstances of that case, although I there noted that an irregularity could be described as "procedural" in character where it departed from the prescribed manner in which a thing was to be done, without changing the substance of that thing: Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd [2005] NSWSC 1005. I also there noted that it seemed to me that the failure to give reasonable notice of a directors' meeting in that case was arguably procedural in nature.
On balance, it seems to me that the failure to give longer notice of the directors' meeting in this case was procedural in nature, so far as it involved doing, with a shorter period of notice, what could regularly have been done with a longer period of notice, without changing the substance of what was done. The evidence indicates that, had a longer period of notice been given, and had the Company's New Zealand resident director participated in the meeting, then the same result would have followed. That is sufficient to establish that there is no substantial injustice by reason of the shorter period of notice, quite apart from reliance on the other matters which would support the same result, including the potential benefit to creditors and employees of the steps which have been taken to appoint the Administrators and seek to sell the business as a going concern. Section 1322(2) of the Act validates the step that was taken, without further order of the Court, where the Court would not find in the circumstances that the irregularity has caused any substantial injustice, or declare the proceeding to be invalid. For that reason, I would declare, under s 447C(2) of the Act, that the appointment of the Administrators as voluntary administrators of the Company was valid, by reason of the operation of s 1322(2) of the Act in the particular circumstances.

Application of ss 1322(4) and 447A of the Corporations Act

Had I not reached that conclusion, I would have been comfortably satisfied that the Court should validate the appointment of the Administrators, under s 1322(4) of the Act. The Court can make such an order in respect of an act purporting to have been done, or a proceeding purporting to have been instituted or taken, in relation to a corporation, and find that it is not invalid by reason of a contravention of a provision of the corporation's constitution, if it is satisfied of the matters specified in s 1322(6) of the Act: see the authorities which I summarised in Re Keneally above at [69]ff. It seems to me that the irregularity arising from short notice of the meeting would be of a procedural nature, a matter which underpins the view I have already formed in respect of s 1322(2) of the Act. If that were not the case, it appears that the relevant directors acted honestly in respect of the appointment of the Administrators, having regard to the Company's and its employees' and creditors' interests, and in circumstances where there is no suggestion of any improper purpose and no suggestion that the Company was not in fact at risk of future insolvency. I would also be satisfied that it is just and equitable that the order be made, where it has the potential to deliver the benefits to creditors and employees to which I have referred in my earlier judgment and above.
Finally, had I not reached any of those conclusions, and for the same reasons that I would otherwise have validated the appointment under s 1322(4) of the Act, I would have made the order sought under s 447A of the Act, had it been necessary to do so. It is not necessary to do so given the conclusions that I have reached on other grounds.

Orders

Accordingly, I make the following orders:
Declare, pursuant to s 447C(2) of the Corporations Act 2001 (Cth), that the appointment of the Plaintiffs as voluntary administrators of the Defendant was valid.
The Plaintiffs' costs of this application be costs in the administration.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 October 2018

Corporations Act 2001(Cth)ss 248C, 248F, 447A, 447C, 1322

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