BRYAN KEVIN HUGHES as joint and several liquidators of TRADITIONAL THERAPY CLINICS LIMITED (In liq) [2019] WASC 139 (2 May 2019)

(1) A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that:

(a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and

(b) an administrator of the company should be appointed.

1. At the time of the appointment of the administrators the Company had five directors. Two of those directors had only recently been appointed. It is clear from the evidence the two recently appointed directors did not have sufficient knowledge of the affairs of the Company to form an opinion as to whether the Company was insolvent or likely to become insolvent. The remaining three directors did have the requisite understanding of the Company's affairs and did form an opinion the Company was insolvent or likely to become insolvent. All of the directors voted in favour of the appointment of the administrators.
2. Essentially it was ASIC's position that s 436A(1)(a) required that every director who voted for a resolution appointing administrators had to have formed an opinion the Company was either insolvent or was likely to become insolvent. If a director had not formed that opinion and voted in favour of the resolution then the resolution was invalid and the appointment was not properly made. ASIC accepted if a director who had not formed an opinion abstained from voting and the resolution was passed by a majority the resolution would be valid. It was the position of the administrators that reading of the subsection was too narrow. It was submitted so long as a majority of directors held the opinion the company was insolvent or likely to become insolvent that was sufficient.
3. In deciding which of these two interpretations is to be preferred the subsection is to be considered both textually and in context. It is convenient to begin by putting s 436A(1) in context.
4. The section appears in pt 5.3A of the Act which is entitled 'Administration of a Company's Affairs with a View to Executing a Deed of Company Arrangement'.
5. The objects of the part are set out in s 435A. This section reads as follows:

The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

Note: Schedule 2 contains additional rules about companies under external administration.

1. The following sections - that is to say s 435B through to s 451D aim to give effect to these objects. The striking thing about the administration process is the way in which it is director and administrator driven rather than court driven. This can be illustrated by s 436A itself. It anticipates the appointment of an administrator by the directors of the company. It is they who are required to form the opinion as to solvency, make contact with an administrator to make sure he or she is prepared to act and then pass the necessary resolutions to effect the appointment. The court has no role in that process. It could well have been otherwise. Prior to the days when the administration process was available there was no way of an external administrator taking over the affairs of the company short of a provisional liquidator. The appointment of a provisional liquidator was not uncommon and could, in certain circumstances, protect the assets of the company. But that process could only be undertaken with the court's sanction. The legislature could have determined appointment of an administrator was only possible if it was court sanctioned. But it chose not to take that step. That demonstrates at least two things. First, the legislature wished to make the process as quick and as cheap as possible thus maximising the return to creditors and perhaps shareholders. Second, the responsibility was to rest with the directors - there being no court process to absolve them from responsibility for an appointment.
2. Of course the court has an overall supervisory jurisdiction. By far the most common applications made to the court by administrators are for an extension of time to convene a second creditors' meeting: s 439A(6). Clearly the intent of that section is to prevent an interminable administration to the prejudice of creditors. But otherwise the administrator's powers are plenary even to the point where, under s 442A(a), an administrator may remove a director from office.
3. During the course of his submissions counsel for the plaintiffs made the comment that most administrations lead to liquidation. There is no evidence to that effect in this case but in all probability counsel was right. But what pt 5.3A is designed to do is to provide every opportunity for the company to be restructured - that is to enter into a deed of company arrangement - under div 10. Once again that is a process undertaken by the administrator and the directors. The court really has a limited role. It may terminate the deed under s 445D and the court is given certain other powers, for instance limiting the right of a secured creditor under s 444F. But once again what is striking is the legislative intent that the affairs of the company are best handled by the administrator, the directors and the creditors who between them can reach an accommodation. The solution is not court driven.
4. In context then there is nothing in pt 5.3A which compels a court to take a rigorous and technical view of the appointment process. The whole exercise must necessarily be a matter of commercial judgment. A company will be insolvent when it is unable to pay its debts as and when they fall due. A company might become insolvent if, at a future date, when debts fall due it might not be possible for the company to make payment of those debts. All of this anticipates commercial judgment. For instance a company may be expecting an outstanding account to be paid. It is a matter of commercial judgment whether that account is likely to be paid before debts are actually due for payment. Some directors may have a better understanding of the financial position of the company than others. Some directors may have expertise in marketing and sales and limited knowledge of the financial aspects of the company. That does not mean they are failing in their duties as directors. It simply recognises different qualities of different individuals. So some directors may, with the benefit of their financial expertise, be well across the question of a company's solvency whereas others are dependent upon their fellow directors' opinion or opinions offered by others both internal and external.
5. Accordingly, each director having a fully formed carefully reasoned opinion is not to be expected. It is not something which, in the context of pt 5.3A, is a necessity.
6. That then leads on to the proper reading of s 436A itself. In my view, the proper interpretation of the phrase 'the opinion of directors voting for the resolution' must mean the opinion of the majority. Resolutions of directors are passed by majority vote. It would be a strange outcome if a decision of the majority acting on a fully informed basis was vitiated by the actions of a minority. It is possible if that were the case that sometime after the appointment of an administrator one of the directors, perhaps with the intention of sabotaging the administration, could say 'I never formed an opinion one way or the other as to whether the company was solvent and I voted for the appointment mistakenly'. That surely could be in no one's interests. It would however be a real possibility if the interpretation favoured by ASIC was accepted. None of this serves to excuse directors from exercising the duty they have under s 436A(1)(a).
7. The circumstances in which administrators are appointed necessarily varies from case to case. But this case is by no means unusual. In broad terms the external accountant for the Company came to the view that the Company was insolvent and should appoint administrators. He put the directors in touch with the plaintiffs. The plaintiffs are experienced administrators and have been involved in any number of administrations. But there were equally competent alternatives. What any potential administrator must demonstrate to the directors is that they can conduct the administration in an efficient and cost effective manner. Part of that process is to provide the directors with pro forma resolutions allowing for the appointment of administrators. It is, of course, always for the directors to make the ultimate decision. But there is nothing wrong with their adopting the pro forma resolutions once the decision has been made.
8. In various cases there has been discussion about the extent to which an administrator must enquire as to the circumstances of his or her appointment. Perhaps the definitive statement in this area is the decision of Barrett AJA in The matter of Condor Blanco Mines Ltd [2016] NSWSC 1196. His Honour said at [139]:

Both at the time of the appointment and subsequently, an administrator must be attentive to any matter coming to his or her notice that may call into question the premise upon which the appointment is made, that is, that directors genuinely holding the requisite opinion concerning solvency have validly and regularly passed a resolution in terms of s 436A. Two matters will therefore have to be tested: first, the formal validity of the resolution and, second (and to the extent that testing is possible on the materials available to the administrator), whether the directors voting for the resolution appear to hold the stated opinion at the time of voting. It may be expected that an administrator will make some inquiry of those by whom he or she is approached with a view to gaining insight into the company's financial position and thereby to subject the expressed opinion of directors to a rough check. Publicly available information will also be examined. In that way, the administrator will discover who the directors are. The administrator must see that the board consisting of those directors has adopted due process to pass, by a majority of votes, a resolution in appropriate terms. But there, in my opinion, the responsibility ends in all but very exceptional cases.

1. It may be prudent for administrators, as part of any information package they provide to directors, to include a statement signed by each director to the effect they have formed a view the company is insolvent or about to become insolvent. It might also be prudent for the prospective administrator to warn directors if they have not reached that opinion they should either vote against the resolution or abstain. If that practice was developed as a matter of course the problems which have arisen in this case could be avoided.
2. Nonetheless, I am satisfied that both contextually and textually all that was required to appoint the administrators in this case was a majority of directors who had formed the opinion the Company was insolvent or about to become insolvent voting in favour of the appointment.
3. If I am wrong in that conclusion I would nonetheless have made an order under s 447A deeming the appointment to be valid. The court's discretion under s 447A of the Act is a plenary one and the prime consideration must be whether substantial injustice would be caused by validating the appointment: Calabretta v Redpen Developments Pty Ltd [2010] FCA 81 [37] (Yates J); Correa v Whittingham [2012] NSWSC 526 [74] (Black J).
4. As counsel for the plaintiffs said in his written submissions (par 29) it is difficult to conceive of any injustice that will be or has been suffered by any person by reason of the appointment being made in circumstances where two of the directors did not form the view the Company was insolvent or likely to be insolvent. Counsel submitted the Company was clearly insolvent.[1] Without going through the evidence that is correct. Its sole source of revenue had dried up. It had nowhere to go. The fact is by going into administration it took the only course that was open to it.
5. In broad terms I would make the declarations sought by the plaintiffs. On publication of these reasons I will give the parties the chance to consider the appropriate form of orders. There is also the question of costs - in particular ASIC's costs. During the course of the hearing I indicated to the parties I would hear argument on that question after my reasons were published. That is the course I will adopt.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

[1] Plaintiffs' outline of submissions field 19 March 2019.