Australasian Memory Pty Ltd v Brien [2010] NSWSC 451 | Case summary

2010/113452 CHRISTOPHER DAMIEN DARIN & ANOR AS ADMINISTRATORS OF PALAMEDIA LIMITED JUDGMENT 1 By their originating process filed on 7 May 2010, Mr Darin and Mr Moss apply, in the first instance, for relief under the Corporations Act 2001 (Cth) to deal with an apparent defect in their appointment as Part 5.3A administrators of Palamedia Limited. 2 Section 436A of the Corporations Act empowers a company to appoint an administrator "if the board has resolved" in terms of s 436A(1)(a) and (b). In this case, a decision in terms of s 436A(1)(a) and (b) was, on 15 April 2010, recorded in writing by Mr Shannon who, on the evidence, was then the only person in office as a director of Palamedia. 3 The constitution of Palamedia is not in evidence and one cannot know what it says about the constitution and proceedings of the board of directors. In the case of a public company such as Palamedia, however, it is unlikely that the constitution allows the board of directors to function in any fully effective way when its membership is reduced to one. In any event, a public company having only one director is not in compliance with s 201A(2): "A public company must have at least 3 directors (not counting alternate directors). At least 2 directors must ordinarily reside in Australia." 4 The formation and recording of the relevant opinion and decision by Mr Shannon may therefore be taken not to amount to an effective resolution of the board of Palamedia as envisaged by s 436A(1). 5 In two recent cases (Re Arnautovic and Kukulovski [2009] NSWSC 1444 and Calabretta v Redpen Developments Pty Ltd [2010] FCA 81), it has been necessary to address the situation where purported action under s 436A(1) apparently taken by the sole director of a company permitted to have one director only was in truth a nullity because the person was not a director at all. In each case, bankruptcy had intervened to cause the person's directorship to be terminated pursuant to s 206A(2) before the purported s 436A(1) action was taken. In both those cases, an order was made under s 447A having the effect of deeming the appointment under s 436A(1) to be valid. 6 The same approach was taken in Re Wood Parsons Pty Ltd [2002] NSWSC 1058; (2002) 43 ACSR 257 where persons who had not validly been appointed as directors purported to act under s 436A(1). Austin J there made a like order under s 447A, observing (at [46]) that Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 "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." 7 Austin J had earlier reached a like conclusion in a case where the meeting at which directors purported to act under s 436A(1) had not been properly convened: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 34 ACSR 391. 8 In the present case, it is not suggested that Mr Shannon was not validly in office as a director. The concern relates to his ability to function alone as the "board". The fact is, however, that he, as the sole director, did make the relevant assessment and decision. That is a factor relevant to exercise of the s 447A jurisdiction in such a case: Re HPI Australia Pty Ltd [2008] NSWSC 1106. 9 In the present case, there is nothing to call in question the existence of proper grounds for the appointment of administrators. Mr Moloney, who has presented a petition for winding up in insolvency, addressed the court with the concurrence of the applicants but did not make any suggestion to the contrary (nor did he seek to make any submission in relation to the application). The subsistence and continuation of voluntary administration are therefore accordingly consistent with the circumstances in which the company is placed. 10 It is also relevant to note that the applicants have applied themselves to the task at hand and are well advanced with a proposal that may see the voluntary administration realise value for creditors. The business of Palamedia was sold shortly before the commencement of the administration (apparently to interests associated with the director), leaving the company as a "shell" with a listing on Australian Securities Exchange. The administrators have in train proposals to realise value from the "shell". They also have in contemplation the possibility that irregularities associated with the sale of the business may yield recoveries, particularly to a liquidator. 11 In all the circumstances, an order should be made to put the purported appointment of 15 April 2010 on to a firm footing. It is now well established that s 447A may be employed for that purpose; also that the putative administrators have standing to apply for an order under that section, they being within the "any other interested person" description in s 447A(4)(f). 12 That leads me to the second part of the present application. The proposal to realise value from the listed "shell" has reached a point where expressions of interest were sought by means of an advertisement in the financial press on 5 May 2010. Some thirty responses had been received by the following day when Mr Darin swore his affidavit. Mr Darin is of the opinion, on what appear to be rational grounds, that the prospects of realising value will be better if the company remains subject to Part 5.3A administration that if it is wound up. On his assessment, Palamedia has "nil or minimal assets". To attempt to carry through the plan to recapitalise the listed corporate structure under the control of a liquidator would, in his view, "involve considerably more expense" than if the attempt were made by administrators. It is pertinent that the methodology the administrators have under consideration involves a deed of company arrangement which is, of course, unavailable once winding up commences unless the winding up is terminated and Part 5.3A administration is reimposed. Also of course, the second meeting of creditors in the present administration will be the forum for consideration of any such deed of company arrangement proposal. 13 With these considerations in mind, the applicants apply under s 439A(6) of the Corporations Act for an order extending the convening period for the second meeting of creditors in the Part 5.3A administration. Without extension, the convening period will end on 13 May 2010. The extension sought is until 15 July 2010, that is, just over two months. 14 In exercising the s 439A(6) power, the court should have regard to, and balance, the interests of creditors in a speedy administration and the need to allow sufficient time to administrators to carry out their function properly and maximise the benefit to creditors through a proper administration: Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10], Re Austcorp Group Ltd [2009] FCA 636 at [18], Re The Griffin Coal Mining Co Pty Ltd [2010] FCA 30 at [15]. 15 Considerations favouring an extension have already been mentioned: the administrators will have time to pursue the proposals they have under consideration for realising value for creditors from the listed corporate structure. 16 Against that, however, must be weighed the fact that, if an extension is granted, the statutory embargoes imposed by Part 5.3A will remain in force for a longer time. The main persons affected by that are the company's chargees and lessors. There appears to be only one chargee, a company associated with the director with whom the administrators are in discussion about actions on his part to facilitate the realisation of value from the corporate structure. There is one lessor under a lease involving rent of about $10,000 per month; however, the lessor holds a bank guarantee for some $55,000 in respect of rent, added to which the director has undertaken to provide the administrators with funds for rent. Prolongation of the administration by two months thus should not unduly prejudice the lessor. 17 The administrators sent a letter to all known creditors informing them of the proposed application for an order rectifying the defect in their appointment. No creditor expressed any opposition or reservation. The proposal to seek an extension of the convening period was not mentioned in the letter to creditors but I am satisfied that the extension is likely to be to creditors' benefit rather than detriment. 18 In saying this, I do not overlook the point that, as the administrators have recognised, recovery possibilities for the company may have arisen out of the sale of its business shortly before the start of the Part 5.3A administration. Pursuit of such possibilities is likely to best be undertaken by a liquidator. The extension of the convening period will postpone the time at which a liquidator can be appointed but, assuming that winding up is the eventual upshot of the administration, there will be no deferral of the relation back day. It follows that no detriment in that respect will arise. 19 I am satisfied that the benefits that may flow from the extension sought outweigh the detriments of allowing the administration to be prolonged by some two months. The extension will therefore be granted. 20 I make the following orders, as sought by the amended originating process: 1. Order pursuant to s 447A(1) of the Corporations Act 2001 that Part 5.3A of the Act is to operate in relation to Palamedia Limited (ACN 066 217 909) as if the plaintiffs were validly appointed as joint and several administrators of that company pursuant to s 436A of that Act on 15 April 2010.

Australasian Memory Pty Ltd v Brien

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