HIS HONOUR: Kahlefeldt Securities Pty Limited (ACN 001 320 270) (the Company) is a company owned in equal shares by Mr Brian Henry Kahlefeldt (Brian), aged 94 years, and his wife Mrs Joy Winifred Kahlefeldt (Joy), aged 90 years. They reside in Wagga Wagga, New South Wales. I use first names with no disrespect intended.
They are, or perhaps were, its sole directors. There is evidence, including medical evidence, which indicates that the respective mental state of each of them has deteriorated recently, to the point where there is real doubt that they could effectively act as directors and, for this reason, each may well have vacated the office of director.
This is because the Articles of Association of the Company were adopted at a time when the Companies Act 1961 (NSW) was in force and incorporated Table A, Article 72(d) of which provides that the office of director shall become vacant if the director becomes of unsound mind. However, it is not necessary to determine whether this article has been activated and it would be inappropriate to do so ex parte.
The Company is the proponent of two property developments, one in Cowan Road, St Ives, on the upper North Shore of Sydney, being the construction of seven luxury residential units, which are approximately 60% complete, and another in Cammeray, on the lower North Shore, involving the acquisition of residential units in an apartment block, and a house, for intended redevelopment. These developments are financed by advances from retirees and investors who have invested their retirement funds in the developments to obtain advantageous returns. The Company also owns a property in Wagga Wagga.
Joanne Susan Kahlefeldt-Harris (Joanne) is the daughter of Brian and Joy, and the secretary of the Company. Since 8 August 2017, Joanne has been the attorney respectively of Brian and Joy under powers of attorney given to her on 8 August 2017. In addition, she has previously acted as a director of the Company on an ad hoc basis when it was required.
Brian has significant health problems including chronic obstructive pulmonary disease, depression and, very recently, memory loss. Not long ago, Brian contracted COVID-19. Recently, Brian became unable to attend to the daily tasks necessary to run the Company's business and, according to Joanne, it became harder and harder to obtain instructions from him. Dr Mark Smith, a general practitioner from Wagga Wagga, is Brian and Joy's treating doctor. He gave evidence of having seen Brian recently and of him being chairbound and not engaging in any conversation. His opinion is that Brian is unfit to make decisions on behalf of the Company.
Joy, according to Joanne, has had no involvement in the operations of the business of the Company except to sign some documents at a time when Brian had a physical ailment which prevented him from holding a pen. Dr Smith tested her recently. She has a moderate cognitive impairment, but scored particularly poorly on time, short-term recall and simple mathematics. Dr Smith's opinion is that she too is unfit to make decisions on behalf of the Company.
Significant Company funds have been invested in the Cammeray units acquired so far and in developing plans and taking preparatory steps for the project. It has recently emerged that it is going to be difficult to obtain or acquire the remaining units, which places the Company's ability to execute the development in jeopardy. One investor has communicated an intention to call up a loan when it matures in the next few months rather than roll it over.
Joanne became concerned about Brian's indisposition, in particular in the context that:
1. a large amount of work needs to be undertaken to ascertain if the Cammeray project can be salvaged or to realise moneys tied up in it and apply them to another project;
2. a significant portion of the cash reserves available to the Company will be required to fund completion of Cowan Road; and
3. the Company does not have active directors and she has not identified anyone who might be prepared to accept an appointment in the circumstances.
Joanne consulted with her accountant on 21 June 2022 and formed the view that the Company is likely to become insolvent and that a voluntary administrator should be appointed. She identified the first plaintiff (the administrator), an accountant and experienced registered liquidator, as an appropriate appointee.
Believing that she had power to do so under the powers of attorney, on 4 July 2022 she purported to pass a directors' resolution appointing the administrator. Subsequently, she came to understand that the resolution may not be effective. Plainly, it is not. 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. An alternative director could be appointed if the Company's constitution permits it.
In these circumstances, the administrator and the Company move the Court for an order pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (the Act) that Part 5.3A of the Act is to operate in relation to the Company as if the resolution passed by Joanne and 4 July 2022 was valid for the purposes of s 436A of the Act and so as to validate her appointment.
The administrator has sworn an affidavit which sets out the steps she has taken so far. She expresses the preliminary view that the Company is either insolvent or likely to become insolvent. She considers that there is a material risk to the interests of the Company's creditors if her appointment is not validated. She refers to a number of urgent tasks crucial to the administration which she has put on hold as a result of the defect in her appointment.
Section 436A(1) of the Act 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.
Section 447A(1) of the Act provides:
(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
Part 5.3A, which spans ss 435A-451H, is entitled administration of a company's affairs with a view to executing a deed of company arrangement. The objects of the Part are stated in section 435A to be:
…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.
In In the matter of Wingaway Air Pty Limited (Administrator Appointed) ACN 003 200 128 and Heron Airlines Travel Pty Limited (Administrator Appointed) ACN 052 408 170 [2012] NSWSC 246, it was observed that (at [13]):
Section 447A grants a most unusual power requiring careful consideration before exercise. The section permits substantive alteration as to how Pt 5.3A operates. It does not only apply to procedural requirements; Sims; Re Huon Corporation Pty Limited (Administrators Appointed) (2006) 58 ACSR 620 at 624 and Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. The section can be used to validate the appointment of an administrator or to cure uncertainty as to the validity of an appointment; see Re Inventive Marketing Pty Ltd (In Liquidation) [2000] VSC 432.
The categories of cases in which s 447A should be used are not closed and whether it should be will of course turn on the particular circumstances of the case, but in considering whether an order should be made, and if so the terms of it, it is important to bear the object of the Part in mind.
I have concluded that this is an appropriate case in which the power conferred by s 447A should be exercised.
Both Brian and Joy are indisposed.
Although she is not formally a director, Joanne was left, practically, as the guiding mind and custodian of the Company. She holds powers of attorney from both Brian and Joy and is the Company secretary. She has acted formally as a director from time to time and has informally assisted Brian in conducting the affairs of the Company. She is no commercial stranger to it, or to its shareholders.
Urgent action was, and is, required in the interests of the Company, its creditors and members, and realistically, only Joanne was in a position to bring about the appointment of the administrator.
Not to recognise the validity of the administrator's appointment would be to deprive the Company and its creditors and members of the potential benefits of Part 5.3A. To recognise it would further its objects.
Voluntary administration, it seems to me, is more likely to protect the Company's interests and hence those of its creditors and members than an immediate winding up.
The form of the orders I propose to make, however, will reserve to the creditors liberty to apply so as to give them an opportunity, should they wish to take a contrary position.
I make the following orders:
1. Pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (the Act), I order that Pt 5.3 of the Act is to operate in relation to Kahlefeldt Securities ACN 001 320 270 (the Company) as if the resolution purportedly passed on 4 July 2022 as a resolution of directors of the Company was valid for the purposes of s 436A of the Act to the effect that the first plaintiff's appointment pursuant to that resolution is valid.
2. The first plaintiff's costs of and incidental to the Originating Application so far as the relief sought in connection the Company is concerned be treated as costs and expenses in the administration of the Company.
3. The first plaintiff is to forthwith, so far as is practicable, but in any event no later than seven days after the making of these orders, inform the known creditors of the company by means of a circular forwarded by post or email of the terms of these orders.
4. I reserve liberty to any person who can demonstrate a sufficient interest, within fourteen days after the making of these orders, to make application on not less than three days' notice to vary or discharge them.
5. I stand the remainder of these proceedings over until 8 August 2022 in the Corporations List, with liberty to apply on three days' notice.
6. These orders may be entered forthwith.
[3]
Amendments
13 July 2022 - Para 3 - "incorporated Table A
Para 6 - according to Joanne
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 13 July 2022