JACK JAMES as Administrator of ZYL LTD [2015] WASC 57 (12 February 2015)

2 After hearing argument I made orders in terms of pars 1 and 2 of the originating process. I indicated I would publish reasons for my decision. These are those reasons.

3 The application was supported by an affidavit of the plaintiff sworn 12 January 2015. All reference to the relevant facts are drawn from the plaintiff's affidavit. I will not make reference to specific paragraphs in the affidavit or annexures thereto unless it is necessary to do so.

4 On 8 January 2015 the plaintiff was appointed as the administrator of ZYL Ltd by a resolution of the company pursuant to s 436A of the Act. The company is a public company that is listed on the Australian Stock Exchange. The company's securities are currently suspended from trading. The plaintiff sought the orders referred to in the application in order to address his concerns and dispel the uncertainty that he considers exists in relation to the validity of the resolution and his appointment as administrator.

5 Section 201A(2) of the Act provides that:

A public company must have at least 3 directors (not counting alternate directors). At least 2 directors must ordinarily reside in Australia.

6 In its terms s 201A(2) imposes an obligation on a public company to have the requisite number of directors. The failure to do so is an offence under s 1311(1)(b) and s 1312 of the Act: see DVT Holdings Ltd v Bigshop.com.au Ltd (2002) 42 ACSR 378 [15]. Uncertainty exists in relation to the consequences of a failure to comply with s 201A(2) of the Act and, specifically, whether a resolution passed by the remaining directors of a public company - that is to say by a number of directors less than the statutory minimum mandated by s 201A(2) will be valid and effective.

7 Section 436A(1) of the Act provides:

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.

8 Administrators have a positive nonfiduciary duty to satisfy themselves immediately that they have been properly appointed: see Correa v Whittingham [2013] NSWCA 263 [132], [144], [154]. Furthermore, the administrators should seek to confirm the validity of their appointment if, immediately after the appointment, the resolution or instrument of appointment does not appear to be valid or if, during the administration, they are put on inquiry about the validity of their appointment: see Wilson v Manna Hill Mining Co Pty Ltd [2004] FCA 1663; (2004) 51 ACSR 404.

9 In circumstances where an administrator has been confronted by uncertainty in relation to the validity of a resolution pursuant to s 436A the courts have indicated a willingness to provide curative relief pursuant to s 447A. The section itself is unusual. It allows a court to make such order as it thinks appropriate about how pt 5.3A is to operate in relation to a particular company. The section provides broad powers including the power to alter what would otherwise be the operation of pt 5.3A in relation to a particular company: see Brash Holdings Ltd (Administrators Appointed) v Katile Pty Ltd [1996] VicRp 4; [1996] 1 VR 24 [26] [27].

10 In Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 the High Court said:

Section 447A(1) speaks of orders about how 'this Part' is to operate. ... 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(1) may affect. And although the examples given in s 447A(2) cannot be taken as exhaustive of the scope, or as controlling the meaning, of s 447A(1) (s 109L), 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 (279 280).

11 The courts have interpreted s 447A as a provision conferring upon them an extremely wide jurisdiction to make any order considered appropriate for the operation of the regime. In Deputy Commissioner of Taxation v Portinex Pty Ltd (Subject to Deed of Company Arrangement) [2000] NSWSC 99 [30] a number of propositions concerning the section were set out. These propositions included the following:

(a) the power is not to be read down or confined to curing defects or remedying consequences of departures from other provisions of pt 5.3A;

(b) the section permits the court to make orders with respect to a particular provision of pt 5.3A, altering the operation of that provision, even where the provision would on its separate construction exclude such an order; and

(c) the section is not confined to filling in the gaps in the legislative scheme of pt 5.3A.

12 A number of cases have held that s 447A may be used as a basis for addressing the sorts of concerns raised by the plaintiff in this case. Although none of these cases is directly on point a number of principles do emerge which are of assistance in determining the outcome of this application.

13 The first of these cases is Re Darin (As Administrators of Palamedia Ltd) [2010] NSWSC 451. In this case the court made an order pursuant to s 447A(1) that pt 5.3A of the Act is to operate in relation to the relevant company as if the plaintiffs in that case had been validly appointed as joint and several administrators of the company pursuant to s 436A. The order was made in circumstances where:

(1) the company had one director remaining in office;

(2) the company was a public company and therefore noncompliant with s 201A(2) of the Act; and

(3) the director remaining in office purported to pass a resolution appointing the plaintiffs as joint and several administrators and as a consequence there is a real question as to the effectiveness of the resolution pursuant to s 436A.

14 In Re Ethan Minerals Ltd (Administrators Appointed) [2011] NSWSC 899 the court made an order pursuant to s 447A(1) to cure any defect in the appointment of the administrators in circumstances where:

(1) as at 1 July 2011 and shortly before the purported resolution appointing the plaintiffs as administrators the company had three directors;

(3) immediately before the meeting of 1 July 2011 one of the three directors tendered their resignation as a direction meaning the company had less directors that the statutory minimum;

(4) immediately following the resolution and the departure from the meeting of the resigned director the remaining two directors purported to pass a resolution appointing the plaintiffs as administrators; and

(5) as a consequence of these facts there arose a question concerning the effectiveness of the resolution pursuant to s 236A.

15 In Re Creative Memories Australia Pty Ltd (Administrators Appointed) [2013] NSWSC 652 it was s 201A(1) of the Act rather than s 201A(2) of the Act which was under consideration. That was because the company in question was a proprietary company. The relevant facts in that case were:

(1) s 201A(1) of the Act required the company to have at least one director and that director be ordinarily resident in Australia;

(2) the company had (at the relevant time) two directors but neither of these directors was ordinarily resident in Australia, and the company was therefore noncompliant with s 201A(1) of the Act;

(3) having resolved the company was insolvent the directors purported to pass a resolution appointing the applicants as administrators; and

(4) in the circumstances a question was raised as to the effectiveness of the resolution pursuant to s 436A.

16 In Re DH International Pty Ltd (Administrators Appointed) (2013) 95 ACSR 578 it was again s 201A(1) that was under consideration. The company had one director but that director appeared to be ordinarily resident in the United States of America. Having resolved the company was insolvent the director purported to pass a resolution appointing the applicants as administrators. The court held it was appropriate to sanction the appointment of the administrators.

17 From these cases two principles emerge. First, where doubt arises in relation to the validity of an appointment (including by reason of the potential for any breach of s 201A of the Act) it is reasonable for an administrator to seek to dispel that doubt by seeking an appropriate curative order from the court pursuant to s 447A(1) of the Act. Second, the administrator's costs in connection with any such application will be costs in the administration of the relevant company. As a caveat to these two broad statements of principle it is clear the court will not make a validation order if the irregularity has caused or may cause any injustice that cannot be remedied by any order of the court: see McIntosh v CMX Technologies Pty Ltd (Administrators Appointed) [2005] NSWSC 1282; (2005) 56 ACSR 283.

18 It is important to note that on an application pursuant to s 447C(2) the question is whether an appointment was valid not whether it should be validated. That distinction is of some importance.

19 In this case, as at the time the resolution was passed, although the Australian Securities and Investment Commission records suggested otherwise, the company had in fact only two directors. It would seem the directors proceeded on the basis that the resolution was valid by reason of cl 15.3 and cl 15.8 of the company constitution. Those clauses are in the following terms:

No business shall be transacted at any meeting of Directors unless a quorum is present, comprising 2 Directors present in person, or by instantaneous communication device, notwithstanding that less than 2 Directors may be permitted to vote on any particular resolution or resolutions at that meeting for any reason whatsoever. ...

...

15.8 Continuing Directors May Act

In the event of vacancy or vacancies in the office of a Director, the remaining Directors may act but, if the number of remaining Directors is not sufficient to constitute a quorum at a meeting of Directors, they may act only for the purposes of appointing a Director or Directors, or in order to convene a general meeting of the Company.

20 The approach of the directors can be explained in this way. The constitution provides pursuant to cl 15.3 for a quorum of two directors at any meeting of directors. Clause 15.8 of the constitution permits remaining directors to continue to act in circumstances where there is a vacancy in office save to say that if the remaining number of directors is not sufficient to constitute a quorum at a meeting of directors the remaining directors can act only for the purposes of appointing a director or directors or to convene a general meeting. Two directors were present at the meeting of the company directors that gave rise to the resolution and therefore they considered the resolution to be valid. Based on the above the company's noncompliance with s 201A(2) of the Act does not derogate from the validity of the resolution.

21 It is not clear whether, where there is a failure to comply with s 201A(2) of the Act and, specifically, whether a resolution passed by the remaining directors who number less that the statutory minimum mandated by s 201A(2) purporting to appoint an administrators, is valid. The administrator is uncertain whether the reasoning of the directors relying on the provisions of the constitution render any resolution valid in the face of the company's noncompliance with s 201A(2) of the Act. The specific question raised by this application is whether the operation of cl 15.8 of the constitution permitted the remaining directors of the company to validly pass a resolution pursuant to s 436A of the Act notwithstanding the company's noncompliance with s 201A(2) of the Act. The cases provide no definitive answer to the question raised. No single reported decision deals with the interaction between s 201A(2) of the Act and a provision of the sort contained in cl 15.8 of the constitution.

22 Perhaps the case closest to the present is Re DH International. In that case there was a slightly different provision in the company's constitution. It read as follows:

The continuing directors may act despite any vacancy in their body but if the number of directors falls below the minimum number fixed in accordance with the constitution the directors may act only:

(a) to appoint directors up to that minimum number;

(b) to call a meeting of members; or

(c) in emergencies.

23 In its decision the court observed, among other things, that although:

(a) the company in question was proprietary company;

(b) s 201A(1) of the Act required the company to have at least one director and that director ordinarily resident in Australia;

(c) the company had (at the relevant time) one director that appeared to ordinarily reside in the United States of America and appeared, on that basis, to be in breach of s 201A(1) of the Act;

(d) the constitution of the company stipulated a minimum number of directors; and

(e) the resolution appointing the administrators was passed by the one remaining director (who resided in the United States of America at that time),

cl 14.10 recognised that continuing directors may act, even if the number falls below the minimum number fixed in accordance with the constitution for certain limited purposes including emergencies. The court observed that the appointment of a voluntary administrator in circumstances of insolvency met that requirement.

24 The limitations of placing reliance on the Re DH International decision are obvious. Perhaps most importantly the court came to the conclusion there had been no breach of s 201A(1) of the Act.

25 In this case I was satisfied on the facts there had been a breach of s 201A(2). Without making a final determination I was satisfied it was arguable the resolution passed by the remaining directors was invalid. I was satisfied the court has power pursuant to s 447A of the Act and pt 5.3A of the Act was to operate in relation to ZYL Ltd (Administrator Appointed) to the effect that notwithstanding any noncompliance with s 201A(2) of the Act the plaintiff was validly appointed as administrator of the company pursuant to s 436A of the Act on 8 January 2015. I reached this conclusion for two reasons. First, the directors appear, at all times, to have acted bona fide. They were of the view it was in the best interests of the company to appoint an administrator. Relying on cl 15.8, they believed they had the power to do so. Second, no one is prejudiced by the decision. The company appears to be insolvent and experience shows the best outcome for creditors and members is administration with the eventual outcome determined after the administrator's investigation.

26 Consistent with the authorities the costs of the application should be paid out of the assets of the company.