CORPORATIONS - voluntary administration - administrators apointed without prior approval required by s 41 of the Registered Clubs Act 1976 (NSW) (the Act) - consideration of Correa v Whittingham - circumstances of the plaintiff considered by the court - held that the court should appoint the same administrators under s 41 of the Act from a new date of appointment
[2015] NSWSC 1088
Supreme Court of NSW|2015-08-03|Before: Robb J, Gleeson JA
The plaintiff in this matter is the Coffs Harbour Catholic Recreation & Sporting Club Ltd (the Club). There is no defendant.
The Club commenced this application by originating process filed on 21 July 2015. At the hearing of the application, counsel for the Club asked the court to amend order 2 sought in the originating process. As amended, the originating process reads:
This application is made under sections 41 of the Registered Clubs Act and section 448C of the Corporations Act 2001 ("the Act")
On the facts stated in the supporting affidavit, the plaintiff claims:
1. An order pursuant to section 41(1)(a) of the Registered Clubs Act 1976 appointing Morgan Chubb and David Morgan as voluntary administrators of the plaintiff.
2. Pursuant to section 448C of the Corporations Act leave is granted to David Morgan and Morgan Chubb:
(i) to consent to be appointed as; and
(ii) to act as
voluntary administrators of Coffs Harbour Catholic Recreation & Sporting Club Ltd ACN 000931788 and to consent to appointment as, and to acting as, the administrators of any deed of company arrangement in respect of that company should creditors resolve that the company should enter any such deed.
The need for the present application has arisen out of the decision of the Court of Appeal of this State in Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310. The Court of Appeal unanimously decided that s 41 of the Registered Clubs Act 1976 (NSW) has the effect that, if the Casino, Liquor and Gaming Control Authority (the Authority) does not give prior approval to a registered club appointing an administrator pursuant to s 436A of the Corporations Act 2001 (Cth), the appointment is invalid: see the judgment of Gleeson JA at [78] to [95]. The invalidity cannot be cured retrospectively by the Authority giving its approval, after the time of the appointment of the administrator. There is no provision in Part 5.3A of the Corporations Act that empowers the court to make any order having the effect of retrospectively validating the appointment of the administrator, or any of the steps taken by the administrator while invalidly appointed.
Section 41 of the Registered Clubs Act provides:
(1) A person is not capable of being appointed to act in the capacity of the administrator, the controller of property, the official manager, the receiver or manager, a member of the committee of management, the liquidator or the special manager of a registered club that is a company within the meaning of the Corporations Act 2001 of the Commonwealth or a co-operative registered under the Co-operatives National Law (NSW) or of acting in any such capacity unless the person has been:
(a) appointed to act in that capacity by the Supreme Court, or
(b) approved to act in that capacity by the Authority.
On 2 April 2015, the board of directors of the Club unanimously resolved to place the Club into administration, and to appoint Morgan James Chubb and David Michael Morgan as administrators of the Club.
The directors purported to act under s 436A of the Corporations Act, which provides:
(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.
(2) Subsection (1) does not apply to a company if a person holds an appointment as liquidator, or provisional liquidator, of the company.
The resolution by the directors of the Club was signed by all of the directors.
Also, all of the directors signed an instrument of appointment of administrators.
The administrators executed a consent of administrator to act.
Following their appointment, the administrators secured the premises of the Club by changing the locks, organising insurance and organising valuations. They started their investigation into the affairs of the Club. They also dealt with creditors and employees of the Club, and prepared a report for the first meeting of creditors that was held on 16 April 2015.
Shortly after the first meeting of creditors on 16 April 2015, Mr Morgan gave thought to whether or not the administrators should notify the Authority that they had been appointed as administrators. Mr Morgan read the provisions of the Registered Clubs Act, to see what its requirements were, and he noticed, for the first time, the provisions of s 41, requiring the approval of the Authority to be obtained for the appointment.
Mr Morgan immediately contacted the chief executive officer of the Club, and the board, and advised them of the provisions of s 41.
As soon as they became aware of the provisions of s 41, the administrators ceased doing any of the activities administrators are required to do under the Corporations Act, and they adopted a caretaker's role.
The administrators have never taken physical possession of the books and records of the Club. At all times, the books and records have remained at the Club's premises.
The administrators have not been collecting mail addressed to the Club, since they ceased doing any of the activities of administrators.
The administrators have generally not contacted any creditors or employees of the Club, since they ceased acting in the role of administrators. Mr Morgan has from time to time, since then, received telephone calls from creditors and employees, because the Club has been closed and there has been no-one to answer the phones there. To those creditors or employees of the Club that have rung Mr Morgan, he has said words to the effect:
The situation is in limbo as we have not been validly appointed as administrators. I can't tell you anything at the moment, but we will let you know as soon as the situation changes.
Since Mr Morgan has become aware that the administrators were not validly appointed, neither of them have purported to act on behalf of the Club, although Mr Morgan contacted the Club's creditors, including utilities providers, and told them that the administrators had not been validly appointed, and asked them to change their accounts back to the Club itself. Notwithstanding that request, utility providers such as electricity suppliers and Telstra kept forwarding accounts to Mr Morgan, with threats that if the outstanding accounts were not paid immediately, the services would be discontinued. After consultation with the president of the Club, Mr Morgan paid those accounts. He also paid, from funds previously provided to the administrators by the Club, after discussion with the president, insurances, Country Security who provides security to the premises, and the NSW Office of Liquor, Gaming and Racing for the Club's liquor licence fee.
The administrators are not holding any funds on behalf of the Club.
The president of the Club has informed the court in an affidavit that the board wishes the administrators to be appointed as administrators of the Club. First, the administrators are the only accountants who practice in the Coffs Harbour area, who have experience and competence in managing the affairs of registered clubs. Secondly, between 31 January 2011 and 27 November 2013, the administrators acted as administrators of the Club, under Part 5.34 of the Corporations Act, on a previous occasion. That occurred without the consent of the Authority having been obtained. As a practical matter, according to the president, the administrators performed their duties admirably and effectively, and returned the Club to a commercial footing, after administering a deed of company arrangement that led to the creditors of the Club receiving $.84 in the dollar.
It appears from the evidence, that the administrators did not appreciate that the Authority's approval to their appointment was required at all, and, in particular, before the time of the appointment. To the extent that the administrators acted upon any particular belief as to the legal position, it was apparently thought that the provisions of the Corporations Act of the Commonwealth had paramount effect over, and excluded the operation of, apparently inconsistent provisions of the Registered Clubs Act of the State of New South Wales.
The administrators sought the approval of the Authority to their appointment as administrators, by an email written by their solicitor on 13 May 2015. A reply by the Authority on 14 May 2015 advised the solicitor of the effect of the Court of Appeal's decision. Further correspondence ensued between the solicitor for the administrators and the Authority.
On 1 June 2015, the Authority wrote a letter to the solicitor, which relevantly said:
In regard to the current application, the Authority notes the documentation provided by you states that both Mrs Chubb and Morgan have previously acted as Administrators in relation to this Club and is of the opinion that the application for approval fails to meet the legislative requirement.
As referred to above, the Court of Appeal says that the Act prohibits the appointment of a person in a relevant capacity unless that appointment is approved by the Authority. That is, if you don't have the Authority's approval (or the Court's approval, as the case may be) the purported decision of the Board to appoint a voluntary administrator is invalid. That invalidity cannot be cured by the Authority later approving the appointment.
It is the Authority's view that legislation and case law preclude both the current application dated 13 May 2015, to appoint Messrs Chubb and Morgan as Administrators and any future application made by them in relation to this Club, from being approved until it is clear that some new event of external administration occurs.
You may submit a new application seeking approval for a different administrator ensuring that the Club provides the Authority with written confirmation about the person they are seeking to appoint.
The administrators persisted with their application, until, on 15 June 2015, a manager from the Authority advised the administrators' solicitor by telephone that it was the view of the Authority that the Court of Appeal decision "means that the appointment of Chubb and Morgan is invalid, and they became incompetent to become the administrators of the Club. We will not be changing our position on that. I suggest that your client moves on to another administrator".
The Club persists with its desire to have the administrators appointed as administrators, because of their great familiarity with the business and affairs of the Club, their past success, and the fact that any alternative administrators who might be appointed would have their primary place of business outside the Coffs Harbour area, which is likely to introduce additional cost and inefficiency, as well as delay.
There is evidence that suggests that the administrators may have performed work that would entitle them to fees of about $50,000, if their appointment had been valid. However, on the hearing of the application, counsel for the Club provided an undertaking by the administrators in the following terms:
David Morgan and Morgan Chubb undertake to the Court that they will make no claim for payment by Coffs Harbour Catholic Recreation & Sporting Club Ltd for services rendered to the Club or for work done by us while purporting to act as voluntary administrators of the Club following the resolution of the Board passed on 1 April 2015 except if specifically authorised to do so by an order of the Supreme Court.
Mr Chubb provided evidence of the Club's financial accounts for the year to date up to 23 March 2015, and for the previous financial year. It is not necessary to review the financial accounts in detail. Their effect was not explained in submissions. It is fair to note that the financial accounts do not appear to suggest that the Club is in a hopeless financial position viewed from the perspective of its assets and liabilities.
However, there are in evidence minutes of meetings of the board of directors of the Club that took place on 26 March 2015 and 30 March 2015. I am satisfied that, whatever the long-term financial prospects of the Club may be, it suffered significant adverse trading results over a period, which caused it to be insolvent to a degree that justified the board of directors forming the opinion required by s 436A(1)(a), that the company was insolvent, or was likely to become insolvent at some future time.
The Club is presently closed for business, and has not been operating since the administrators came to appreciate that they had not been validly appointed (or perhaps from the earlier time when the administrators were appointed). I understand that the Club has 3 bowling greens that require maintenance. The Club is continuing to incur some debts. No provision is being made for payment of the creditors of the Club, including its employees.
The view taken by the Authority that the administrators were not validly appointed, and that no approval given by the Authority could have the effect of retrospectively validating the appointment, is clearly correct in accordance with the decision of the Court of Appeal in Correa v Whittingham. However, with respect, I doubt that the view taken by the Authority is correct in so far as it believes that, once a registered club has purported to appoint administrators invalidly, because of the absence of prior approval by the Authority, it is incompetent for the Authority to give its approval to a new appointment by the registered club of the same persons to act as administrators prospectively from the date of the new appointment. I also do not think that the Authority is correct in taking the view that it could only approve the appointment of the same administrators, after their invalid appointment, if an entirely new event occurred that justified the appointment of administrators to the registered club. I simply do not think that those conclusions logically follow from the reasoning of the Court of Appeal. The crucial point is that any approval given by the Authority could only operate in relation to a new appointment of the administrators; it would have no retrospective effect; and the consequences of the invalid appointment in respect of the period before the new appointment would continue as if there had been no new appointment.
The position taken by the Authority is, however, one of some public importance. The validity of the Authority's position has not been the subject of detailed submissions by the Club. There has been no contradictor, and the Authority has not been given an opportunity to put submissions on the issues. Accordingly, I do no more at present than make the observations that I have made, but they should not be taken to be a formal ruling or decision concerning the principles that must be applied.
For reasons of need and practicality, the Club has ultimately taken the course of trying to deal with its problems by asking the court to make an order appointing the administrators under s 41 of the Registered Clubs Act.
I can see no reason why the court should not make the orders sought; on the contrary, I think there are pressing reasons for the court to make those orders.
As I have said, the evidence clearly proves that, if the Authority's approval had not been required, this would have been a proper case for the board of directors of the Club to resolve to appoint the administrators under s 436A of the Corporations Act.
I am satisfied that the administrators are competent persons to be appointed as administrators of the Club.
I do not think that the error that was made by the Club and the administrators disqualifies the administrators from being suitable to be appointed as such. The issue that the Court of Appeal finally decided was complex, and it is of some significance that the Court of Appeal reversed the determination of the point by the trial judge who on any view of things is a learned and accomplished company lawyer.
The Club has sought order 2 in its originating process, which I have set out above, out of fear that the administrators may be disqualified from seeking or consenting to be appointed as administrators, or acting as administrators of the Club or a deed of arrangement, because of the effect of s 448C(1)(b) of the Corporations Act. That section relevantly provides:
(1) Subject to this section, a person must not, except with the leave of the Court, seek or consent to be appointed as, or act as, administrator of a company or of a deed of company arrangement if:
…
(b) the person is, otherwise than in a capacity as administrator or liquidator of, or as administrator of a deed of company arrangement executed by, the company or a related body corporate, a creditor of the company or of a related body corporate in an amount exceeding $5,000;
The basis of the concern is that, as a matter of law, the administrators may be entitled to claim a debt of more than $5000 from the Club, because they provided services to the Club at its request, which might base a claim in quantum meruit. If that entitlement exists, it will do so because they were not validly appointed, so that the entitlement will arise "otherwise than in the capacity as administrator" of the Club.
It is not clear that the administrators' concern is valid, but there is a sufficient chance that it is to justify the court making order 2 as sought in the amended originating process.
The undertaking that the administrators have offered to the Court not to seek recovery of any amount to which they may be entitled because of work done as invalidly appointed administrators, will not necessarily negate the legal effect of any claim that they have.
The reason that the administrators have given the undertaking to the court is to avoid the situation where, if the court appoints them as administrators of the Club from the date of the order, a conflict of interest will be created, because otherwise the administrators would have to deal with their own quantum meruit claim.
In these circumstances, I will make the orders sought in pars 1 and 2 of the Club's amended originating process. I do so on the basis that the administrators give the undertaking to the Court referred to above.
[2]
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Decision last updated: 10 August 2015
Parties
Applicant/Plaintiff:
CORPORATIONS - voluntary administration - administrators apointed without prior approval required by s 41 of the Registered Clubs Act 1976 (NSW) (the Act) - consideration of Correa
Respondent/Defendant:
Whittingham - circumstances of the plaintiff considered by the court - held that the court should appoint the same administrators under s 41 of the Act from a new date of appointment