CIC v Hannan [2001] NSWSC 437 | Case summary

The reference to "the company" is in the context a reference to Hannan. 3 This, it is said, enlivens s.461(1)(a) which empowers the Court to order winding up if "the company has by special resolution resolved that it be wound up by the Court". A special resolution is defined by s.9 as a resolution of which certain notice has been given and which has been passed by at least 75 per cent of the votes cast by members entitled to vote on the resolution. In former times the holding of a meeting was an essential ingredient in the passing of a special resolution, and in that respect reference may be made to the decision of Lehane J in Sipad Holding ddpo v Popovic (1995) 61 FCR 205. But modifications to the Corporations Law, in the context where one member companies are now allowed without restriction, provide for simple paper-based processes. In particular, s.249B(1) provides that a company that has only one member may pass a resolution by the member recording it and signing the record. 4 It may be that there are instances where s.249B(1) cannot be employed to cause a resolution of a single member company to be passed. I have in mind cases where the Corporations Law itself imposes some special requirement (over and above a lodgment requirement of the kind dealt with by s.249B(2)) which relates to a meeting, thereby indicating that a meeting is an essential element. Examples are s.203D(4)(b) which gives a right to speak to the motion at the meeting and s.497(1) which makes it necessary to be able to identify the day on which the meeting is to be held. In cases of this kind, it may be that a meeting as such is made a necessary part of the statutory machinery (cf Re Montana Frocks Pty Ltd [1967] 2 NSWR 584) so that, in the case of a company having one member, the provision must be taken to be one in relation to which the normal meaning of "meeting" as a plurality of persons is displaced and the legislature countenances (indeed requires) a meeting of one: Re Hastings Deering Ltd (1985) 9 ACLR 775. Unlike predecessor provisions allowing paper-based resolutions by a single shareholder (eg, s.140(6) of the Companies Act 1961), s.249B of the Corporations Law does not deem such a resolution to have been passed at a meeting. 5 The present case, however, is not one which gives rise to such possibilities. Section 461 requires no more than the passing of a special resolution (s.461(1)(a)) and lodgment of a copy of it (s.461(2)). Both those elements are accommodated by the special paper-based procedure made available by s.249B, there being no reason to think that "resolution" in that section does not include the particular type of resolution referred to in the definition of "special resolution" in s.9. It follows that the s.461(1)(a) ground for the making of a winding up order will be established if it can properly be said that the act of Mr Macintosh in signing that document for CIC means that the document is a record signed by CIC. 6 In that connection I have been referred to s.472(4) of the Corporations Law which confers upon a provisional liquidator (that being the status that Mr Macintosh has in relation to CIC) the powers that a liquidator would have under inter alia s.477(2)(d), that is, the power to "do all acts and execute in the name and on behalf of the company all deeds, receipts and other documents, and for that purpose use when necessary a seal of the company". 7 I am satisfied that the combined effect of s.472(4) and s.477(2)(d) is to enable Mr Macintosh as provisional liquidator of CIC to make and sign a record pursuant to s.249B, such that that record is a record of CIC signed by CIC for the purposes of that section. 8 Accordingly I find that the ground for winding up in s.461(1)(a) is established in that Hannan has, by special resolution passed in the way I have described, resolved that it be wound up by the Court. 9 The second basis of jurisdiction invoked is that arising under s.461(1)(k), that is to say the just and equitable ground. There is evidence before the court that Hannan is currently without directors, and that its sole shareholder CIC is unable to arrange for new directors to be installed. The former directors delivered notices of resignation to Hannan on 19 March 2001. In terms of art 85(e) of the constitution of Hannan, the office of a director is vacated if the director resigns his office by notice in writing to the company. Accordingly, the offices of the two persons who constituted the totality of the directors of Hannan on 19 March 2001 became vacant on that day, and the company has since then been without directors. 10 There are statements in the cases which call in question the propriety of actions which cause the number of directors of a company to be reduced below the statutory minimum (today, of course, one only in the case of a proprietary company). In Claremont Petroleum NL v Indosuez Nominees Pty Ltd [1987] 1 QdR 1 objection was taken to a procedure whereby, if a members' resolution was passed, all directors would be removed. But the point was labelled "highly artificial" because the immediately following items on the agenda of the same meeting were motions to fill any resulting vacancies. Subsequently in Corpique (No 20) Pty Ltd v Eastcourt Ltd (1989) 15 ACLR 586, Cohen J observed that it would not be a proper exercise of a company's powers, either under statute or under its constitution, to pass resolutions removing directors and not replacing them so that the minimum number required by law was not maintained. 11 It may be doubted whether these concerns are well founded, at least insofar as they relate to removal of directors by members. It is not as if disappearance of the whole board leaves a company without the means to continue. There is a residual common law power for the members in general meeting to appoint directors. This has been recognised most recently by the Victorian Court of Appeal in Link Agricultural Pty Ltd v Shanahan [1999] 1 VR 466. Where members act to remove all directors, they have it in their own hands to rectify the resultant breach of the statutory requirement and clearly should do so. 12 In any event, the reality in the present case is that the resignations delivered on 19 March 2001 were effective under art 85(e) to cause the offices of both directors to be vacant and, while resort to the residual power of members (or any express power of appointment in the constitution) could, in theory, cause those vacancies to be filled, I am told that no one has been identified as willing to act. This is because of the company's parlous financial position to which I shall come in a moment. Directors are enjoined during times of economic difficulty in the company to take particular care in the incurring of debts by the company: Metal Manufactures Ltd v Lewis (1988) 13 NSWLR 315. Such circumstances will generally prompt diligent directors towards the voluntary administration regime in Part 5.3A or to cause the company itself to apply to the Court for the appointment of a provisional liquidator. Normally, wholesale resignation by directors would be a far less acceptable and meritorious reaction, given their duty in times of financial stress to pay particular attention to the interests of creditors according to the principles which have developed since Walker v Wimborne (1976) 137 CLR 1. As a general proposition it cannot be an exercise in diligent stewardship to desert the interests one is committed to serve, although in a case such as the present where there is a single shareholder which can easily act to fill the gap (as CIC has done by commencing these proceedings), the same negative overtones may not be warranted. 13 In the circumstances of this case, I consider that the absence of directors and of the prospects of any being appointed should be regarded as furnishing a basis for winding up on the just and equitable ground. The fact that directors are unable or unwilling to act so that there is a power vacuum at board level is probably not, of itself, sufficient to justify winding up on the just and equitable ground since it is always open to the members to appoint directors who can function as a board: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692. There must be some additional element of corporate paralysis such as absence of any prospect of the company continuing to operate: Cheng v Yeo [1998] WASC 38. In the present case, such an additional element comes from the practical reality that no one can be found to accept appointment to the board, coupled with the express wish of the sole shareholder that provisional liquidators be appointed, itself an acknowledgment that the shareholder sees no point in trying to restore the board of directors to functioning status. 14 That brings me to the third and final ground on which the application is based, that is the ground under s.459A related to insolvency. 15 The evidence shows that there is a net tangible assets deficiency in Hannan to the extent of some $418,000. Mr Macintosh says in his affidavit that Hannan has relied upon financial support from companies within the HIH Group to trade, and as HIH Insurance Limited and its major Australian subsidiaries, including CIC, are now in provisional liquidation, Hannan will not continue to receive financial support from the HIH Group. Mr Macintosh also says that without that continuing financial support Hannan could not continue to trade other than in the very short term. I think insolvency may therefore be taken to be established. 16 I come now to the standing of CIC in these proceedings. Standing to seek winding up on the grounds of insolvency is conferred by s.459P upon, among others, a contributory and a creditor, although s.459P(2) says that a contributory may apply only with the leave of the Court. The evidence before me establishes that CIC is a creditor of Hannan to the extent of some $2.7 million and, as I have already said, the evidence makes it clear that CIC is also the sole member of Hannan. CIC's status as a creditor is sufficient to allow it to proceed on the insolvency ground, no application for leave to proceed as a contributory having been made. 17 Standing to apply for a winding up order on a ground specified in s.461 is dealt with by s.462. Both a creditor and a contributory have standing, although certain prerequisites arise under s.462(4) where the applicant is a "contingent or prospective creditor", a status CIC does not have in relation to Hannan. Otherwise, each of the s.461 grounds may be acted upon by a creditor or a contributory alike: Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504; Port Kennedy Golf Country Club Pty Ltd v Port Kennedy Resorts Pty Ltd [2000] WASC 205. 18 CIC thus has standing to seek relief on all three grounds for winding up which have been asserted. 19 I turn finally to the jurisdiction to appoint a provisional liquidator, noting that, under s.472(2), an application for a winding up order is a prerequisite. In Constantinidis v JGL Trading Pty Ltd (1996) 17 ACSR 625, Kirby P, with whom Meagher JA agreed, adopted and approved the following statement of applicable principles in Re McLennan Holdings Pty Ltd (1983) 7 ACLR 732: "(1) A provisional liquidator is not automatically appointed by the court for the mere asking … even when the company presents its own petition. (2) A provisional liquidator may only be appointed after presentation of a duly authorised petition which must disclose a good ground for winding up .. … (4) Whilst the ultimate fate of the petition must be left to the court finally hearing the matter, a provisional liquidator will not usually be appointed unless it appears in the material that a winding up order is likely … This presupposes that there should be adequate evidence adduced on an application for appointment of a provisional liquidator to show that a winding up is, in the absence of material to the contrary, likely. (5) A company seeking the appointment of a provisional liquidator … is in no way limited; … The circumstances (which may constitute sufficient ground) under which a provisional liquidator may be appointed are infinite: Re Club Mediterranean Pty Ltd (1975) 11 SASR 481, 484 … There is no reason why the public interest should not operate in favour of or against the making of an appointment in particular circumstances … (7) Whilst mere evidence of insolvency alone is usually insufficient to justify the appointment of a provisional liquidator at the instance of a creditor … such evidence in the case of an application by a company may be sufficient to show that the application is bona fide and may be capable of constituting a 'sufficient ground' …" 20 Given the three matters that form the basis of this application, namely the desire on the part of the single shareholder evidenced by its passing a special resolution for winding up, the fact that the company's governance structure appears to be permanently damaged because it has no directors and no prospect of obtaining any, and the fact that the financial position of the company is parlous to the extent of insolvency, I consider that it is appropriate that a provisional liquidator should be appointed. This is particularly so where both the immediate holding company CIC and the ultimate holding company HIH Insurance Limited are already in the hands of provisional liquidators: Emanuel v Australian Securities Commission (1995) 63 FCR 54. 21 I make orders in the terms of the short minutes of order which have been handed up and which I now sign and date and place with the papers. In making these orders I note that I have before me the consent of Mr McGrath and Mr Macintosh to act as provisional liquidators, they being the appointees named in the short minutes. 22 In line with what I am informed is planned for the future attention of the court to the provisional liquidations of other companies in the HIH Group, I order, first, that the originating process in this matter be stood over to the Corporations List at 10 am on 2 July 2001 and, second, that the matter be placed in the Corporations List for mention at 10am on 18 June 2001 for the purpose of receiving a report from the provisional liquidators.

CIC v Hannan

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Judgment (9 paragraphs)

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