Australasian Memory Pty Ltd v Brien

(3) A declaration pursuant to s 1322(4) of the Act that the Notice of Appointment of Administrators is not invalid by reason of any defect in the holding of or recording of the meeting of directors referred to in the Minutes dated 6 March 2005 or by any failure to record in the Minutes of the Company a delegation of power to Laurie Fitzgerald to take steps to appoint or to complete the appointment of the plaintiffs as Administrators. 3 In early February 2005 the Company had two ordinary shareholders, Ian Graeme (Ted) Rear and his wife Rosemary Anne Rear. Andrew and Sharon Gilbert jointly held (and hold) three non-cumulative redeemable preference shares which have no voting rights. Ted Rear and Rosemary Rear were the directors of the Company. Ted Rear effectively controlled the activities of the Company that was trading under the name International Drill Quip. The Company had been involved in litigation in the Supreme Court of Western Australia with SDS Corporation Limited (SDS). That litigation concluded unfavourably to the Company with a judgment of the Court of Appeal of Western Australia on 21 January 2005 (Pasdonnay Pty Limited v SDS Corporation Ltd [2005] WASCA 9). That judgment meant that the Company was potentially liable for a substantial sum for damages. It was intended that there be settlement discussions. Ted Rear had been considering the appointment of an Administrator to the Company since receipt of the judgment in the case involving SDS. The Company had an outstanding tax liability which it was paying off by instalments by arrangement with the Australian Taxation Office. 4 On about 16 February 2005 Ted Rear was admitted to hospital. On or about that day Ted Rear signed minutes of a directors' meeting of the Company resolving to appoint McDonald and Strickland as Administrators of the Company and a Notice of Appointment and Declaration of Relationships. The documents were not dated. Those documents were given to Laurie Fitzgerald (Fitzgerald) who was a consultant to the Company. Ted Rear's intention was to appoint the Administrators in the event that the settlement discussions with SDS failed. On or about 18 February 2005 McDonald and Strickland signed an undated consent to act as Administrators of the Company. 5 On 1 March 2004 the Company resolved to repeal the whole of its existing constitution and adopted another constitution. On that day it was resolved that the minimum number of directors of the Company was one in accordance with the new constitution. On the same day Rosemary Rear resigned as a director and the resignation was accepted. 6 On 2 March 2005 Catherine O'Brien, the daughter of Ted Rear, had a telephone conversation with her father to the following effect: 'I said: "Look, if this thing is not resolved by Friday, do you think we should just put it into Administration and be done with it?"

He said: "If Laurie hasn't got it clearly resolved with SDS by Friday, then place the Company into Administration after that. Nothing has changed, it certainly isn't getting any better, we haven't been paying all of our bills and I don't want to have to worry about it after that."

I said: "OK Dad, leave it with us and just rest. If it's not done on Friday Laurie and I will organise the Administrators after that."' 7 On Friday 4 March 2005 Catherine O'Brien spoke to Fitzgerald and conveyed her father's instructions to him. 8 Fitzgerald then rang McDonald and said words to the following effect: '"It has been agreed that the appointment should now take place so can you arrange to be here on Tuesday.

He said: "I am not available Tuesday, but I can be there Sunday night for Monday."

He said: "That doesn't matter, we can meet on Sunday or Monday and at least get everything organised to proceed immediately. I think Kim Strickland will be available on Monday as well, so I will make the travel arrangements."

I said: "I have some family commitments, but what I'll do is arrange to meet you on Monday evening after you meet Andrew Gilbert, one of the shareholders, at the factory. He can show you around, give you all the documentation and you can effectively start the appointment straight away. He is here with me on the phone, so you guys can make arrangements to meet"' 9 Ted Rear died on 6 March 2005. Fitzgerald learned of that on the following morning and informed McDonald accordingly. Fitzgerald met McDonald on the evening of Monday 7 March and handed him the documents which had been received by Fitzgerald from Ted Rear in February. McDonald dated them 6 March in Fitzgerald's presence. He inadvertently wrote '5' instead of '3' as the month of the document when dating the Notice of Appointment of Administrators and thereafter altered that '5' to a '3'. 10 McDonald and Strickland are partners in the accounting firm of Hall Chadwick. They are registered company liquidators and official liquidators. They have acted as Administrators of the Company since 7 March, including convening a meeting of creditors pursuant to a Notice of Meeting dated 8 March 2005 held on 14 March 2005, it having been advertised in the West Australian newspaper on 10 March 2005. A committee of creditors was appointed at the meeting. 11 On 10 March the solicitors for SDS wrote to the solicitors for the Administrators raising questions as to the circumstances surrounding the preparation of the documents of appointment. At the creditors meeting a representative of SDS had it recorded that his client had reservations concerning the circumstances of the appointment of the Administrators and that SDS was present on a 'without prejudice' basis. 12 This proceeding was commenced on 16 March 2005. I was concerned to ensure that those with an interest in the affairs of the Company be made aware of this proceeding. Rosemary Rear, the widow of Ted Rear, is the sole beneficiary of his estate according to a Will which is in evidence. She has given evidence of her support for maintenance of the appointment of McDonald and Strickland as Administrators of the Company and says that, if the appointment is invalid, it would be her intention to procure the appointment of herself as sole director and, having done so, to pass a resolution pursuant to s 436A of the Act and to sign such other documents as are necessary to validly appoint McDonald and Strickland as Administrators of the Company. The Will in evidence appoints Catherine O'Brien, the daughter of the deceased, and Thomas Peter Carrigg (known as Peter T Carrigg) as executors and trustees of the Will. Each confirms support for validation of the appointment. The principal creditors have been supplied with a copy of the application and the principal evidence in support of it. SDS is the only creditor to be represented. It neither supports nor opposes the orders sought. Andrew Gilbert, one of the joint holders of the three non-cumulative redeemable preference shares in the Company, confirms the support of himself and his wife, the other joint holder, for the appointment. The Australian Securities and Investment Commission (ASIC) was also advised of the proceedings. It responded that it neither supported nor opposed the orders sought and would not appear. 13 The Administrators are continuing to operate the Company's business in order that it may be sold as a going concern. There is a secured creditor owed approximately $2,500,000. An early estimate of assets totalled $6,700,000. There is no reliable evidence before the Court as to the claims of potential unsecured creditors. The Company had not made all PAYG payments as they fell due. It seems that there is a substantial chance that the Company is insolvent. A lot will depend upon the fate of the damages claim by SDS.

Validity of appointment 14 Counsel for the plaintiffs submits that all that was required for the appointment was complete on 4 March and that attention should be directed to that date. Ted Rear was the sole director of the Company. He had signed the necessary instruments, as had the plaintiffs. He had given the necessary instructions to effect the appointment. It is submitted that it would have been quite appropriate for an authorised person such as Fitzgerald to date the documents 4 March then or at any later time (s 198D of the Act), that signing a minute is sufficient for a single company director (s 248B of the Act), that the fact that the documents were dated 6 March rather than 4 March is of no consequence and that the failure to minute the delegation to Fitzgerald does not affect validity. 15 Section 447C grants the jurisdiction to make a declaration of validity on the application of the plaintiffs. Whether that jurisdiction should be exercised in the absence of a contradictor is another matter. Issues of fact and law have to be determined. In any event, I am not satisfied that the appointment was valid, taking the evidence for the plaintiffs at its highest. I do not stay to consider what the position may have been if implementation of the appointment had taken place prior to the death of Ted Rear. Resolution of that issue would involve a close examination of the escrow principle. The fact is that the appointment was not implemented prior to the death of the sole director. Counsel was unable to cite any authority to support the proposition that the informal and inchoate authority alleged to exist here would survive the death of the sole director.

Section 447A 16 Counsel for the plaintiffs submitted that the intention of the sole director of the Company failed only because steps to implement that intention were not immediately taken, leading to a doubt as to validity in view of the death of the sole director. It was submitted that the state of the affairs of the Company, the support of the beneficial shareholders and the lack of opposition from any creditor made it appropriate to make an order pursuant to s 447A of the Act to ensure the validity of the appointment of the plaintiffs and that which has been done pursuant to it. Reference was made to Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 (Brien); Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453, (2000) 34 ACSR 391 (Portinex); Re Wood Parsons Pty Limited (in liq) (2002) 43 ACSR 257 (Wood Parsons). 17 The first question is in regard to the locus of the plaintiffs. Counsel submits that they fall within each of s 447A(4)(c) and (f). I doubt that an invalidly appointed administrator would be described as an administrator within the meaning of s 447A(4)(c) - compare the careful wording of s 447C. I am satisfied that invalidly appointed administrators who have acted on the basis of the appointment are interested persons within the meaning of s 447A(4)(f). The making of the order sought will directly affect the interests of the plaintiffs. Their legal position as administrators will be secured by an order. 18 The next question is in regard to the power to make the order sought in the present circumstances. Counsel for the plaintiffs is correct in submitting that the decision of the High Court in Brien gives a wide operation to s 447A. He is also correct in submitting that the section was utilised to validate the appointments of administrators in Portinex and Wood Parsons. In each case Austin J expressed reservations about the retrospective operation of orders (Portinex at [30], Wood Parsons at [49]). Merkel J considered those decisions and others which took a less cautious view (eg Shirlaw v Graham [2001] NSWSC 612 and In the Matter of Supreme Imports Pty Ltd (in liquidation); Re De Vries [2001] NSWSC 1209) in Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428; (2003) 21 ACLC 842 at [17] and [18] in a manner I will follow. An order along the lines sought here is consistent with the orders made validating appointments in other cases. Such an order technically operates only prospectively but the effect of it is that, once made, it is henceforth to be taken that the Act has the effect declared and so operates in respect of actions taken from the nominated date or event. In that sense, it has retrospective effect. I do not read anything in Brien as being to the contrary of that understanding. 19 The next, and most difficult, question is whether the power should be exercised. There are good reasons for taking that course. However, the circumstances of the appointment are troubling. McDonald made a deliberate decision to date the documents on the day of the death of Ted Rear. That gave the impression that the documents were signed, or at least became operative, on that day and during the lifetime of Ted Rear. That impression would tend to deflect inquiry as to the validity of the appointment. The inference is open that the matter would not have come into the open or this application made had it not been for the questions raised by the solicitor for SDS. There is much to be said for the view that it would be wrong to give the imprimatur of the Court to such conduct, particularly in the absence of a contradictor. 20 However, I came to the conclusion that making the order was in the interests of shareholders and creditors (including employees) and that the purposes of Pt 5.3A of the Act would be best served if it were made. The Company was trading but there was a real possibility that it was insolvent. That was not desirable. It may well be that sale of the business as a going concern would be in the best interests of all concerned. Administration under Pt 5.3A serves that purpose by enabling business to continue whilst the position is urgently investigated and analysed and alternatives proposed for the future of the Company. That process is well advanced. The second meeting of creditors will take place in the near future. There has been no suggestion from any creditor (including SDS) that the plaintiffs are not carrying out their duties in a competent and professional manner. It would be potentially disruptive to the affairs of the Company for there to be the capacity to challenge the validity of that which has occurred in the administration to date. 21 There are various mechanisms by which creditors, ASIC and the Court can supervise an administration. There is a committee of creditors (s 436F). The meeting of creditors decides the future of the company, assisted by a report from the administrators (ss 439A, 439B, 439C). The Court has wide powers of supervision and control (eg ss 447A, 447B, 447D and 447E), together with the power of removal (s 449B). Furthermore, creditors and the Court have control over the remuneration of administrators (s 449E). ASIC and other bodies may have disciplinary functions in relation to professional persons such as the plaintiffs. In my opinion, the shareholders, creditors and ASIC are better placed to assess the issues at stake, including the circumstances surrounding the purported appointment of the Administrators, than the Court. 22 I therefore determined that an order pursuant to s 447A should be made in slightly modified form, but on the condition that the members of the committee of creditors and ASIC be provided with a copy of these reasons. 23 That conclusion made it unnecessary to determine whether a declaration should be made pursuant to s 1322(4) of the Act. All I need say is that I would have required powerful persuasion to find the requirements of that provision satisfied in the circumstances of this case. 24 I expressly determined that there should be no order made by the Court as to the costs of this proceeding. The plaintiffs were responsible for the circumstances giving rise to the application. The question of costs is best left for the creditors to decide. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Solicitor for the Plaintiffs: Nash O'Neill Tomko Lawyers

Dates of Hearing: 16, 18 and 23 March 2005