Donnola v Silverleaf Constructions Co Pty Ltd [2024] FCA 1133 | Case summary

whereafter the Court will direct what redacted versions of the Court documents should be filed without further restriction. 5. Pursuant to s 447A of the Corporations Act 2001 (Cth) (Corporations Act), the Court orders that Pt 5.3A of the Corporations Act is to operate in relation to each of: (a) Childcare Development Opportunities Pty Ltd ACN 609 149 582; (b) Civic Avenue Early Learning Pty Ltd ACN 618 154 251; (c) St Helena Early Learning Pty Ltd ACN 623 522 010; and (d) Sturt Street Early Learning Pty Ltd ACN 614 078 394; ((a)-(d) collectively, the Companies) as if the resolution purportedly passed on 22 August 2024 as a resolution of the directors of each of the Companies was valid for the purposes of s 436A of the Corporations Act to the effect that the Administrators' appointment pursuant to that resolution is valid. 6. The Administrators' costs of and incidental to the Originating Process, so far as the relief sought in connection with the Companies is concerned, be treated as costs and expenses in the administration of the Companies. 7. The Administrators give notice of these orders to: (a) the director of the Companies within 24 hours, by sending a PDF copy of the sealed orders by email; and (b) all creditors of the Companies by the following means: (i) within five (5) business days, by sending a PDF copy of the sealed orders by email to the creditors at their known email addresses; (ii) within five (5) business days, by placing a PDF copy of the sealed orders on the Administrators' website, with reference to each of the Companies; and (iii) within ten (10) business days, by informing all known creditors by circular, sent to them at their known postal addresses, that these orders have been made and that a copy of the sealed orders has been placed on the plaintiffs' website, with reference to each of the Companies. 8. The Court grants liberty to apply to any person who can demonstrate sufficient interest, to modify or discharge the orders on reasonable notice to the Administrators, such application to be made within 21 days of these orders subject to further order. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

STEWART J: 1 The plaintiffs are the joint and several administrators of each of four companies, and each of the four companies. 2 In April 2022, a person whom I shall refer to as the wife commenced property settlement proceedings in the Federal Circuit and Family Court of Australia (FCFCOA) (Division 2) against her husband (or former husband). (I am referring to them in this way only in order to ensure compliance with restrictions on the publication of the names of parties to certain proceedings as imposed by the Family Law Act 1975 (Cth), and certainly out of no disrespect to them.) 3 On 1 February 2024, a judge of the FCFCOA (Division 2) made amongst other orders the following: first, an order that each of the companies be joined as respondents to the FCFCOA proceeding; secondly, an order that the wife be appointed as trustee to sell the childcare businesses operated by each of three of the four companies, that is, excluding Childcare Development Opportunities Pty Ltd. The husband is the sole director of each company and, I understand, the sole shareholder albeit indirectly through other interests owned by him. 4 On 9 July 2024, the FCFCOA (Division 2) judge made further orders authorising the wife to act on behalf of the companies, including to pass any resolutions required pursuant to the Corporations Act 2001 (Cth) to appoint an insolvency practitioner as an administrator and/or liquidator to any of the companies, based on advice received by the professionals so engaged. 5 On 20 August 2024, the wife purported to pass resolutions for the companies, pursuant to the further orders, appointing the administrators as administrators of each of the companies. 6 The administrators have since formed the view that each of the companies is insolvent, some of them having been so for quite some time. The administrators have continued to operate the childcare businesses operated by three of the four companies. The fourth company operates as a management services provider to the others. The administrators have embarked upon a process of attempting to sell the businesses. 7 The administrators have recently identified a potential issue with regard to the validity of their appointment and for that reason they wish to obtain relief under s 447A(1) of the Corporations Act prior to the second meeting of creditors which is to take place tomorrow. They are justifiably of the view that their attempts to sell the businesses to the benefit of creditors will be stymied in the event that their appointment is at some stage deemed or regarded to be invalid. 8 The effect of the orders of 9 July 2024 of the FCFCOA (Division 2) judge was to permit the wife to stand in the shoes of the board of directors and to appoint administrators to the companies pursuant to s 436A of the Corporations Act. Such orders were presumably made under s 79 and/or s 80 of the Family Law Act and s 447A(1) of the Corporations Act. However, an issue now arises as to whether the judge had the jurisdiction in the sense of the power to make such orders under the Corporations Act. 9 Section 337C(1) of the Corporations Act confers a corporations law jurisdiction on the FCFCOA (Division 1) but not on the FCFCOA (Division 2). It may be that a judge sitting in Division 2 has power to make orders such as those made on 9 July as a matter "associated" with a matter in respect of which the FCFCOA (Division 2) had jurisdiction. Such "associated" jurisdiction is provided for by s 134 of the Federal Circuit and Family Court of Australia Act 2021 (Cth). There is, however, some uncertainty as to that. The contours of the debate are helpfully canvassed by Judge Manousaridis in Donnola v Silverleaf Constructions Co Pty Ltd (No 2) [2024] FedCFamC2G 577 at [3]-[19]. 10 It is not necessary to resolve that issue, save to say that I am satisfied that a genuine question arises as to whether the 9 July 2024 orders, insofar as they authorise the wife to exercise powers of the directors of the companies under the Corporations Act, were valid. For that reason, the administrators are justified in seeking the relief that they seek. 11 The next question is whether that relief should be granted. 12 An analogous situation to that in the present case arose in Re Kahlefeldt Securities Pty Ltd (Administrators Appointed) [2022] NSWSC 939. There the company's directors were an elderly couple who had limited capacity to perform their duties and functions as directors. Their daughter had an enduring power of attorney permitting her to make decisions on behalf of her parents. The daughter, who acted as a custodian of the company, although not a director, mistakenly believed that the enduring power of attorney permitted her to appoint an administrator to the company. She acted on that belief, but later a question arose as to whether that appointment of an administrator by her was valid. 13 It was held by Hammerschlag CJ in Eq that the daughter's purported appointment of the administrator was ineffective. His Honour observed (at [11]) that "[a] power of attorney cannot validly authorise the attorney to exercise the powers and discharge the duties of a director. Such rights and duties are personal to the director." 14 The company and the administrators sought an order under s 447A(1) of the Corporations Act that Pt 5.3A was to operate in relation to the company as if the resolution passed by the daughter had the effect of validly appointing the administrator. His Honour included amongst his reasons for granting that relief the following observations. Although the daughter was not formally a director, practically she was the guiding mind and custodian of the company. She held powers of attorney for the directors. She was not a commercial stranger to the companies. Further (at [22]), "[u]rgent action was required in the interests of the company, its creditors and members." 15 His Honour reasoned (at [23]) that "[t]o not recognise the validity of the administrator's appointment would be to deprive the company and its creditors and members of the potential benefits of Pt 5.3A." Voluntary administration was regarded (at [24]) as more likely to protect the company's interests and hence those of its creditors and members than an immediate winding up. 16 Returning to the present case, I am satisfied that recognition of the validity of the administrators' appointment would further the objects of Pt 5.3A of the Corporations Act as identified in s 435A. In that regard, each of the companies is insolvent. For that reason, the companies cannot be returned to the director's control. 17 I am satisfied that should the companies be placed into liquidation, the creditors are unlikely to receive any dividend because the principal asset of the companies is the value of the goodwill in the child care centres operated by three of the companies which would be lost. Preservation of the administration would at least preserve the prospect of a return to creditors by way of a sale of at least two and possibly three of the businesses. In that regard there is evidence to suggest that there is significant value in the businesses. There is also interest from potential purchasers. There is also an urgent need to act in the interests of the companies and its creditors. 18 Like the daughter in Re Kahlefeldt, the wife in the present case has had some involvement in the financial aspects of the companies. Since her appointment as trustee for sale on 1 February 2024, she is not a "commercial stranger" to the companies or the businesses they operate. 19 The administrators have spent considerable time and effort in running the businesses, investigating the financial positions of the companies, and in seeking to sell the businesses. All of that would be lost if the companies went into liquidation. I also see no prejudice or injustice to any person in continuing the administration. 20 For those reasons, I make the orders in essentially the same form as the orders made in Re Kahlefeldt, including the usual order that anyone having an interest have liberty to apply for the setting aside or varying of the orders. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

Donnola v Silverleaf Constructions Co Pty Ltd

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