In the Matter of Inventive Marketing Pty Ltd [2000] VSC 432 (24 November 2000)

10. Between 11 August 1995 and 1 July 1996 the father of Mr John Papalia, Joseph Papalia was a director of the company together with Mr Green (who resigned on 3 February 1997) and Matthew James Neibling and Roderick John Neibling (both of whom resigned on 11 August 1995). A company search discloses that Mr John Papalia became a director of the company on 1 July 1996.

13. On the date of the appointment of the administrator Mr John Papalia was the sole director of the company. At the time of his appointment as administrator the plaintiff made a statement to John Papalia to the effect that the company was "a single director company". John Papalia confirmed that it was and the plaintiff made no further enquiries of him. The plaintiff subsequently conducted a search of the company that disclosed John Papalia to be a single director. The plaintiff inspected the relevant minutes of meetings of the company, including those concerned with the appointment of John Papalia and observed that they were unsigned. However, this did not cause concern because in the experience of the plaintiff, it was not an unusual occurrence. These matters led the plaintiff to conclude that John Papalia was a validly appointed director who in turn was duly empowered to appoint the plaintiff as administrator of the company. The Articles of Association of the company were believed by the plaintiff to have been altered on 3 February 1997.

History of Amendment to the Articles of Association

18. A meeting of shareholders of the company was convened on 3 February 1997. The persons present at the meeting were John Papalia, David Green and David Platt. Minutes of the shareholders' meeting held on 3 February 1997 reveal that a special resolution was passed to amend the Articles of Association. The shareholders' meeting was held at 9.45 a.m. Shortly thereafter, at 10.00 a.m. there was a meeting of directors of the company on the same day. The minutes of the meeting of directors reveal that Mr John Papalia and Mr Green were present. The minutes record, also, that Mr Green tendered his resignation and that a resolution was passed that he resign at the close of the meeting. The minutes reveal that a further resolution was passed that Mr John Papalia remain acting as director of the company. There is no reference in the minutes of the directors' meeting of 3 February 1997 to the amended Articles of Association passed earlier that day by the meeting of shareholders. The resolution amending the Articles of Association of the company purported to do so by replacing the previous articles in their entirety with a new set of Articles of Association.

21. Among other matters, the new Articles of Association provided (clause 23) for a minimum number of one director. The amended Articles of Association (clause 28) set out the powers and duties of directors.

24. Enquiries on behalf of the plaintiff made of Mr Green reveal that he attended a large number of meetings of the company. Mr Green apparently recalls discussions about an amendment to the articles of the company to allow for a single director. However, it seems that Mr Green is unable to recall the specific meeting at which the articles of the company were purportedly amended to allow for a single director.

27. The Articles of Association operative prior to 3 February 1997 were dated 10 August 1995. They provided for a minimum number of two directors of the company (clause 10). The voting rights of the company as at 3 February 1997 were contained in the previous memorandum and Articles of Association dated 10 August 1995. They provided that the holders of ordinary shares, "A" and "B" class shares and "F" class redeemable preference shares were entitled to notice of meetings, to be present in person or by proxy and to cast one vote for each share held (clause 3(e)). The previous Articles of Association specifically precluded "C" class shareholders from having voting rights (clause 3(g)). A company search reveals that at the relevant time the company had issued only ordinary shares and C-class shares. Hence, it follows that only ordinary class shareholders were entitled to notice of the meetings, to be present in person or by proxy and to vote on 3 February 1997. As Mr Joseph Papalia was the holder of 800 ordinary shares his voting entitlement was critical to the passing of the resolution in relation to the amended Articles of Association.

30. At the time of the meeting of shareholders when the resolution was passed purportedly amending the Articles of Association, Mr John Papalia was not a member of the company. He was its director and secretary only. At the time the meeting was convened on 3 February 1997 his father, Mr Joseph Papalia was a member of the company being the holder of 800 fully paid ordinary class shares. The other persons present at the shareholders' meeting on 3 February 1997 were, as already observed, Mr Green and Mr Platt. There is no evidence before the court of any enquiries made on or on behalf of the plaintiff of Mr Platt or Mr Joseph Papalia. At the time of the meeting Mr Green held 20,000 fully paid C-class shares and 100 fully paid ordinary shares. Mr Platt held 20,100 fully paid C-class shares. The total share issue of the company was 40,100 C-class shares and 900 ordinary class shares.

33. From the company search and the minutes of directors' meeting of 3 February 1997 it appears that Mr Green ceased to be a shareholder on 3 February 1997 and thereafter another entity, Ebonee Investments Pty Ltd ("Ebonee") acquired 20,000 C-class shares and 100 fully paid ordinary shares in the company. The acquisition of the shareholding by Ebonee immediately on and after 3 February 1997 accords with the resignation of Mr Green as a director on the same day. There was no evidence before the court concerning any transfer of shares or the subsequent interest of Ebonee or as to whom that company was associated with.

38. The difficulties that the plaintiff as former administrator and now as liquidator of the company faces is he fears a challenge to the validity of his appointment on the ground that the meeting on 3 February 1997 did not properly amend the Articles of Association of the company because the special resolution purporting to amend the articles was voted for and signed by Mr John Papalia when he was neither a member nor shareholder of the company. There is further concern on the part of the plaintiff that at the time of his appointment as administrator on 30 September 1998 by Mr John Papalia, the latter purported to act in accordance with the amended Articles of Association, that is, to reach a special resolution as a sole director pursuant to the amended articles. The plaintiff fears that it may follow that if the amended articles were not properly adopted by special resolution on 3 February 1997 then Mr John Papalia was not empowered under the former articles to appoint the plaintiff as administrator as he purported to do.

41. As a consequence, the plaintiff brings an application under ss.447A, alternatively 447C or s.1322(4) of the Corporations Law for declarations that the appointment of the plaintiff as administrator and liquidator were valid.

44. It is necessary to turn to the statutory provisions that prevailed as at 3 February 1997 when the articles were purportedly amended.

49. As at that date, s.176(1) of the Corporations Law provided that a company may alter by special resolution its articles, subject to the provisions of the Corporations Law. Section 253(2) of the Law at that time provided that a resolution was a special resolution if it was passed at a meeting of the holders of shares upon at least 21 days' written notice and passed by a majority of at least three-quarters of the shareholders or, where proxies were allowed, by proxy, at that meeting. Section 253(4) provided that reduced or less notice could be permitted if a majority of members with voting rights holding at least 95 per cent in nominal value of the shares passed a resolution where less than 21 days' notice had been given. Section 253(5) of the Law as at 3 February 1997 provided for a chairman's declaration. It provided that at a meeting at which a special resolution was submitted a declaration by the chairman that the resolution was carried was conclusive evidence of that fact.

52. Section 253(8) of the Corporations Law as at 3 February 1997 provided that notice of a meeting was deemed to be duly given and the meeting was deemed to be duly held where notice was given and a meeting was held in accordance with the provisions of the Law or the articles of the company.

55. There is no evidence before me as to whether 21 days' notice of the special resolution was given. It is to be observed that s.258(3) of the Law as it stood in 1997 provided that where minutes were entered and signed by the chairman (in accordance with sub-sections (1), (2) of s.258) then unless the contrary was proved three factors were deemed to have occurred. First, that the meeting was duly convened. Second, that the meeting took place as recorded in the minutes. Third, that all appointments of officers recorded in the minutes were validly made. However, the minutes of the meeting of 3 February 1997 were not signed. Hence, the presumption under the former s.258 of the Law cannot be invoked.

58. A further observation to be made is that s.256 of the Law as it existed in 1997 imposed a requirement upon the company to give notice to the Australian Securities and Investments Commission within one month of the amendment of the articles. This does not appear to have occurred. There was evidence of service of the present application upon the Commission but it did not appear at the hearing.

61. The court was told that the doubt concerning the validity of the adoption by special resolution of the amended articles on 3 February 1997 and the consequential doubt cast over the appointment of the plaintiff as administrator and later as liquidator of the company arose very recently in the course of proceedings in the Magistrates' Court. The plaintiff deposed on affidavit that in the course of proceedings in the Magistrates' Court to recover monies (said to constitute a preference) a defendant challenged the validity of the appointment of the liquidator. The court was not told any more than that " ... an issue was raised by the defendant's legal representatives as to the validity of my appointment on the basis that Mr John Joseph Papalia who had purported to act as a member of the company in the amendment to the memorandum, was not in fact a member at that time". It seems these events prompted the present application.

The Statutory Provisions: ss447A, 447C and 1322(4)

66. It is to be observed that the discretion vested in the court under ss.447A, 447C and s.1322(4) of the Corporations Law is not a discretion to be exercised lightly. It is a serious matter for the court to consider validation of an appointment of an administrator or a liquidator.

69. Section 447A vests a very wide discretion in the court to make orders considered appropriate to the operation of Part 5.3A of the Law (concerned with the administration of a company's affairs with a view to executing a deed of company arrangement):

"447A(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. 447A(2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the Court may order under subsection (1) that the administration is to end. 447A(3) An order may be made subject to conditions. 447A(4) An order may be made on the application of: (a) the company; or (b) a creditor of the company; or (c) in the case of a company under administration - the administrator of the company; or (d) in the case of a company that has executed a deed of company arrangement - the deed's administrator; or (e) the Commission; or (f) any other person."

73. Section 477C vests broad powers in the court to make such orders as it thinks appropriate as to how part 5.3A of the Corporations Law is to operate in relation to a particular company:

"447C(1) If there is doubt, on a specific ground, about whether a purported appointment of a person as administrator of a company, or of a deed of company arrangement, is valid, the person, the company or any of the company's creditors may apply to the court for an order under sub-s.(2). (2) On an application, the court may make an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground."

77. Section 1322 of the Law provides that a proceeding is not invalidated because of a procedural irregularity unless the court considers the irregularity will cause substantial injustice that cannot otherwise be remedied. Section 1322(4) empowers the court to make declaratory orders declaring any act, matter or thing purportedly done under the Law to be valid.

80. The High Court recently considered the application of s.447A of the Corporations Law in Australasian Memory Pty Ltd and Anor v Brien & Anor (2000) 34 ACSR 250. The court held (at 255-256):

"It is important to notice that the orders that may be made under s.477A(1) are described as orders about how Pt 5.3A is to operate "'in relation to a particular company'. The power is not cast in terms of a power to make orders to cure defects or to remedy the consequences of some departure from the scheme set out in the other provisions of Pt 5.3A. Its operation is not confined to such cases. Nor is there anything on the face of s.447A(1) that suggests that it should be read down. In particular, the words of the provision are wide enough to confer power to make orders which will have effect in the future but which are occasioned by something that has been done (or not done) under the other provisions of Pt 5.3A before application is made under s.447A(1). As was said in the judgment of the court in Owners of 'Shin Kobe Maru' v Empire Shipping Co Inc: It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words. Cogent reasons must be advanced, then, if the power given by the general words of s.447A(1) is to be read down. Section 447A(1) speaks of orders about how 'this Part' is to operate. The reference to 'this Part' cannot be read as referring only to the part as a whole. That is, it cannot be read as referring, in some global way, to the total operation or effect of the part. In its context, the reference to 'this Part' is to be understood as a reference to each of the provisions in it, for it is the provisions of the part which give it the operation which an order under s.447A(10) may affect. And although the examples given in s447A(2) cannot be taken as exhaustive of the scope, or as controlling the meaning, of s.447A(1), it is clear from those examples that they assume that orders under s.447A(1) may alter the operation of other provisions of the part. That is, the orders contemplated in the examples go beyond a curial determination of what is the effect of existing provisions of the part on a particular company in the circumstances that may be established in a proceeding; the orders contemplated are orders that alter how the part is to operate in relation to a particular company, not how the part does operate in relation to that company. Next, the other provisions of Div 13 of Pt 5.3A give a court wide powers to protect creditors during the administration, to declare whether an administrator was validly appointed, to give directions to an administrator and to supervise an administrator of a company or a deed of company arrangement. And while full effect must be given to the provisions of s.447F (that '[n]othing in this Division limits the generality of anything else in it') it is clear, from the other provisions of Div 13 that we have mentioned, that s.447A was intended to permit a much wider class of orders than those which declare what is the effect of the part or which protect the interests that creditors no doubt have in the administration or which a company being carried out in accordance with law."

84. After observing (at 256) that the approach taken by the court towards the powers under s.447A are wide the court devoted specific attention to circumstances where there is no longer a continuing administration (as in the present case). It had been suggested to the court that s.447A was limited to prospective rather than retrospective orders. The court (at 259) identified two kinds of cases where the effect of an order under s.447A would be to reinstate an administration. The court held that in the first case, to reinstate an administration may be inconsistent with rights created in the intervening period. The court identified a second kind of case where there would be no such inconsistency with rights created in the intervening period. Circumstances where an administration has been terminated by a resolution that a company should go into liquidation was regarded by the High Court as falling within the second category. The court held (at 259):

"Whether there would be no power to make an order under s.447A(1) in the first of the two kinds of case we mention, or whether there would be an insuperable discretionary obstacle to its making, are points we need not examine. The present case is of the second type we have identified. The steps taken by officers of the company and by third parties (such as those who bought the assets of the company) were predicated upon the company's creditors having invalidly resolved that the company should go into liquidation. The orders of Santow J which are now impugned were orders which remedied the irregularities which affected the validity of the premise for those steps. No rights which may have accrued in the intervening period are adversely affected by that order. The making of the order might be said, in some cases, to operate to perfect the rights which the parties to the transaction intended to create but even if that is so, it is no reason to read down s.447A."

88. Ultimately, the High Court concluded that the orders made by Santow J at first instance pursuant to s.1322 of the Law abridging the period for holding the second meeting of creditors, a declaration that the resolution by creditors for winding up the company was not invalid and a declaration of the date upon which the winding up commenced and that the administration of the company continued until the passing of the resolution by the creditors all ought remain undisturbed.

91. In Deputy Commissioner of Taxation v Portinex & Ors [2000] 34 ACSR 3191 Austin J considered the making of curative orders under ss.447A and 1322(4) of the Corporations Law. Portinex was a case that bore some similarity to the present in that the constitution of the subject company did not give authority to a single director to appoint an administrator of the company. The defect arose from an incorrect assumption that the relevant companies in Portinex had validly adopted new Articles of Association that allowed operation with a single director. The defendants to the proceedings in Portinex conceded the failure of both companies to validly convene and hold meetings of their shareholders and did not seek curative orders with respect to the proposed adoption of new single-director Articles of Association. Rather, the defendants sought declarations that the appointment of the administrator of the companies had not been invalidated, alternatively, they sought orders under s.447A that the appointment of the administrator in each case had not been invalidated by virtue of any defect in the appointment. In light of the observations of the High Court in Australasian Memory Austin J held that s.447A can be used to overcome the consequences of a defective resolution to appoint an administrator. His Honour proceeded then to determine whether or not it was appropriate to exercise the discretion under s.447A in the circumstances of the case before him. Ultimately, the learned judge determined to exercise the discretion on three bases. First, that the deficiency in quorum at the meeting resolving to appoint the administrator arose from the purported failure to properly adopt single-director Articles of Association and that if such articles had been validly adopted the resolution by the sole director appointing an administrator would have been effective. Second, there was no evidence of any prejudice to any shareholder as such persons were well aware of the administration. Third, any creditor who claimed to have been prejudiced by the administration had other remedies available, for example, under ss.445D and 445G of the Law. Ultimately, Austin J formed the view that it was appropriate in all the circumstances to make orders under s.1322(4) of the Law on the grounds that it was in the public interest that curative orders be made and that no substantial injustice had been or was likely to be caused by the making of such orders. His Honour observed that although the defects in the resolutions were not "procedural irregularities" for the purposes of s.1322(2) of the Law they could nevertheless be regarded as "essentially of a procedural nature": see also Re Vanfox Pty Ltd (1994) 13 ACSR 209, 216ff; Nece Pty Ltd v Ritek Incorporation (1997) 24 ACSR 38).

94. This entire application revolves around whether or not the events that occurred on 3 February 1997 were valid. If the Articles of Association were properly amended then it would follow that Mr John Papalia was a properly appointed sole director of the company and entitled to appoint the plaintiff as administrator as he purported to do on 30 September 1998. If, on the other hand, it transpired that the events that occurred on 3 February 1997 did not validly amend the Articles of Association it would follow that the previous Articles of Association dated 10 August 1995 continued to apply at the time of purported appointment of the plaintiff as administrator on 30 September 1998. It would follow that if the previous Articles of Association applied on the date of appointment that the plaintiff was not validly appointed as administrator of the company with further consequences for his appointment as liquidator.

97. In applying the construction of s.447A of the Law determined by the High Court in Australasian Memory I consider that the present matter is one that falls within the curial ambit of the section. I am satisfied that the circumstances of the case fall within the second category identified by the High Court in Australasian Memory (at 259). The administration has ceased and the company has proceeded to liquidation. The plaintiff has all but completed the winding up of the company subject to the recovery of one further sum believed to constitute a preference. The administration and subsequent liquidation of the company proceeded without difficulty for two years before the question of validity arose. Furthermore, the historical steps that preceded the appointment of the plaintiff as administrator are capable of being viewed in a manner that points to their probable regularity notwithstanding some partial non-compliance with form.

100. In my view the history of events surrounding the amendment to the Articles of Association including the events of 3 February 1997 point to the fact that the articles were intended to be amended and John Papalia was intended to be appointed as a single director. In my view it is significant that the records of the company reveal sets of minutes that, although unsigned, record events on 3 February 1997 that disclose the amendment of the articles and are consistent with the appointment of John Papalia as a single director.

103. There is well established authority for the proposition that "it is not necessary that any resolution by the board should have been expressed by a minute, although it ought to be so": see H.L. Bolton Engineering Co Limited v T.J. Graham & Sons Limited (1957) 1 QB 159. Indeed, the courts have generally taken, on occasions, a liberal attitude towards the conduct of directors' meetings including that, subject to the relevant articles, it is not strictly speaking necessary for directors to physically meet together: see Bell v Burton (1993) 12 ACSR 325, 328; also, Magnacrete Limited v Douglas-Hill (1988) 48 SASR 565. There is the difficulty that the court is not aware of all the circumstances of 3 February 1997. All that is before the court are unsigned minutes extracted from the records of the company. There is no evidence from persons present at the meetings on 3 February 1997 as to events that transpired. It is not apparent as to whether Mr John Papalia was acting as proxy for Mr Joseph Papalia or otherwise. It is to be observed, further, that under the Articles of Association of the company as existed at the time of the meeting of shareholders on 3 February 1997 C-class shareholders had no voting rights. Of the persons present, being Messrs Joseph Papalia, Green and Platt only Mr Joseph Papalia and Mr Green as the holders of 800 and 100 fully paid ordinary shares respectively were entitled to vote. If in fact Mr John Papalia voted in his own right he would not have been entitled to do so. Nevertheless, the events that occurred on and around 3 February 1997 occurred three years before any issue was raised as to the validity of the appointment of the plaintiff as administrator of the company. Inevitably in such circumstances an administrator or liquidator may face difficulties in piecing together a jigsaw of events that occurred some time beforehand. As I have already found, all records of the company and actions that occurred after 3 February 1997 support a finding that the events that occurred on 3 February 1997 occurred in accordance with the Law as in place at that time and leads me to conclude that Mr John Papalia was entitled to act as he did on 3 February 1997, that the articles were amended on that date to provide for a single director of the company and that Mr John Papalia was validly appointed as such sole directors. It follows, also, that later in time when Mr John Papalia appointed the plaintiff as administrator he was empowered to do so.

106. A further factor weighs in my mind in the exercise of the discretion under ss.447A, 447C and 1322(4) of the Law. Applying the approach adopted by Austin J in Portinex there is no evidence of any prejudice to any shareholder as such persons would have been aware of the administration at the time of the appointment of the plaintiff as administrator. Furthermore, pursuant to the Law it was the creditors of the company who determined to wind up the company. There is no evidence of any creditor claiming to have been prejudiced by the administration or the subsequent winding up of the company. In any event, as Austin J observed, also, in Portinex there are remedies available to such creditors, for example, under ss.445D and 445G of the Law. I am satisfied, therefore, to exercise the discretion under ss.447A and 447C of the Law and make orders to facilitate the operation of Part 5.3A so as to validate the appointment of the plaintiff as administrator of the company on 30 September 1998.

109. In so far as it would be necessary to make a declaration of validity under s.1322 of the law I would do so for a number of reasons. First, the administration is completed and the winding up is almost complete. Second, there is no evidence or any basis otherwise of prejudice to shareholders or creditors of the company. In accordance with the criteria set out in s.1322(4) I am satisfied that in so far as there may have been any action not taken affecting the validity of the appointment of the plaintiff as administrator it was a procedural matter. I am satisfied also that at all times the plaintiff acted honestly based upon a genuine belief as to the validity of his appointment as administrator. I am further satisfied that it is in the public interest that in all the circumstances that any uncertainty as to the validity of the appointment of the plaintiff as administrator ought be removed. Finally, I am satisfied that no substantial injustice has been or is likely to be caused to any persons if I make orders as I propose.

112. Accordingly, I am satisfied that it is appropriate to make orders under s.447A that Part 5.3A of the Law is to operate in relation to the company as if the resolution purportedly passed by Mr John Papalia on 30 September 1998 was a valid resolution for the purposes of the Law. That deals with the future. I am satisfied that it is appropriate to make a declaration under s.1322(4)(a) of the Law to the effect that the resolution purportedly passed by John Papalia as director on 30 September 1998 is not invalid by reason of any contravention of the articles of association of the company.