Mentha v Colorbus Pty Ltd

"1. A declaration pursuant to s.201M and/or 447C(2) of the Act that the plaintiffs were validly appointed as administrators of the defendant company. 2. Alternatively to paragraph 1, an order pursuant to s.1322(4) that the appointment or purported appointment of the plaintiffs as administrators of the defendant company was not invalid by reason of the defendant company's failure to comply with s.201A of the Act. 3. Alternatively to the relief sought in paragraphs 1 and 2, orders pursuant to s.447A ..."

6. The relevant facts appear from affidavits and exhibits both in this proceeding and in the winding up proceeding (no. 8313 of 2003).

9. The Company was incorporated on 18 July 1997. From 1 September 2000 until 19 October, or 5 November, 2003 the Company's only director was a non-resident of Australia (Thomas White of 775E Blithdale Mill Valley, United States of America).

12. By originating process dated 6 October 2003 the Deputy Commissioner of Taxation ("ATO") made application for the winding up of the Company on the ground of insolvency. The ATO relied upon the failure to pay tax debts totalling $324,000, as referred to in a statutory demand dated 17 July 2003. The winding up application was returnable before the Senior Master on 12 November 2003.

15. The plaintiffs are official liquidators and members of the firm of KordaMentha and Michael Scott Fingland is a director of corporate restructuring with that firm.

18. On Friday 7 November 2003, the first plaintiff, Mr Mentha, and Mr Fingland met with Daniel Marquet of Corrs Chambers Westgarth and one Hans Joseph Kintsch ("Mr Kintsch"). Mr Marquet and Mr Kintsch wished to consult them in relation to the possible entry of the Company into voluntary administration. Mr Marquet informed Mr Mentha and Mr Fingland that he acted for the Company (and also for Color Print Solutions Inc ("CPS"), the sole shareholder of the Company). Mr Marquet told them of the winding up proceeding by the ATO and that he was working on a proposal to save the Company from liquidation. In the course of their discussions, Mr Marquet told Mr Mentha and Mr Fingland that there was an irregularity disclosed in the Company's records with ASIC in that the Company did not have a director resident in Australia, but that this was in the process of being rectified.

21. Unknown to the plaintiffs, the "rectification" of the "irregularity" appears to have been handled as follows. Mr Kintsch, in his capacity as "authorised representative of [CPS]", signed a sole shareholder resolution bearing date 19 October 2003, whereby CPS, "being the holder of all of the shares and the capital of the Company" resolved:

"NOTED that a Consent to Act as Director and Secretary of the Company has been received from Hans J Kintsch. RESOLVED that Hans Joseph Kintsch be appointed as a Director and Secretary of the Company effective from the close of this meeting. The Secretary was directed to notify [ASIC] of the appointment of the new Director and Secretary of the Company ..."

25. A "change to company details" form bearing date 19 October 2003 was signed by Mr Kintsch as director notifying ASIC that Hans Joseph Kintsch of 231 Paseo Picaro, Anaheim, California, United States of America, was appointed director and secretary of the Company. The date given for his appointment in the form, for some unexplained reason, was 5 November 2003, but nothing would seem to turn on this. Thus it appeared from the form lodged with ASIC (and there is no evidence to the contrary) that Mr Kintsch was ordinarily resident in the United States of America. Certainly, it does not appear from any evidence before the Court that he ordinarily resided in Australia.

28. An affidavit of the liquidator ("Mr White"), sworn and filed 25 November 2004 in answer to an affidavit of Steven Vincent Curtain (on behalf of the plaintiffs) sworn 22 November 2004 deposes to the fact that on 14 November 2003 he wrote to Mr Marquet asking him to advise of any records or documents held by Corrs which belonged to the Company. Mr White deposes that in response to the letter Mr Marquet forwarded to him a folder of documents which did not include the sole shareholder resolution (see para [7] above) which had been exhibited to Mr Curtain's affidavit. Mr White adds the comment, in his affidavit, that it is not apparent to him why, if the sole shareholder resolution was passed on 19 October 2003, the form sent to ASIC referred to an appointment on 5 November 2003 and the form was not sent to ASIC until that date. It seems to me that there is a question as to the true date upon which the sole shareholder resolution was passed, but I do not think that this question affects the plaintiffs' application in this proceeding.

31. A further "change to company details" form bearing date 7 November 2003 was signed by Mr Kintsch as director notifying ASIC that Thomas White had ceased to be a director of the Company on that date.

34. On Monday 10 November 2003, Mr Mentha and Mr Fingland were advised by Mr Marquet that a new director had been appointed to the Company to pass the necessary resolutions to place the Company into voluntary administration. The plaintiffs then provided a consent to act as administrators of the Company and were subsequently advised that the director had resolved to place the Company into administration and to appoint them to act as administrators. Mr Fingland was provided with a copy of minutes of a meeting of directors of the Company held on 10 November 2003 at 11.30am. The minutes recorded that Hans Kintsch, director and secretary, was present, that a copy of the plaintiffs' consent to act was tabled and that it was resolved that, in the opinion of the directors, the Company was likely to become insolvent at some future time, that the Company appointed the plaintiffs as administrators and that the Company execute the instrument of appointment. Mr Fingland was also provided with a cheque for $122,000, on behalf of CPS, from Corrs Chambers Westgarth's trust account and payable to Colorbus Pty Ltd (Administrators appointed), a sum of that order having been requested by the plaintiffs on the previous Friday to enable the Company to continue trading through to the second meeting of creditors, when it was expected that a deed of company arrangement would be proposed by CPS.

"By reason of an established professional association with Marquet and Corrs Chambers Westgarth, and our awareness of their experience and expertise in Corporations matters, Korda and Mentha accepted that the irregularities concerning the directorship of Colorbus had been rectified and consented to act as its administrators, on the terms outlined above, in the reasonable belief that the appointment was validly made by a validly appointed director."

41. Early in the afternoon of 11 November 2003, the plaintiffs received a copy of a proposal for a deed of company arrangement from Corrs Chambers Westgarth as solicitors for CPS. The proposal had also been forwarded to the ATO (which subsequently refused to agree to an adjournment of the winding up proceeding).

44. Mr Fingland deposes that upon appointment the plaintiffs and their team (Mr Fingland and two "executive analysts") performed substantial work.

47. At about 5pm on Tuesday 11 November 2003 (i.e. the day following their appointment), the plaintiffs were informed, by the solicitors whom they had engaged to act in relation to the winding up proceeding, that their solicitors had been notified that afternoon by Mr Marquet that ASIC had rejected the form notifying the appointment of Mr Kintsch as a director. The letter from ASIC, they were told, referred, inter alia, to the requirement of the Corporations Act that the Company have at least one director who resides in Australia.

50. The solicitors for the plaintiffs filed a notice of appearance dated 12 November 2003 in the winding up proceeding, opposing the application for winding up. The plaintiffs also filed an affidavit of Mr Mentha opposing the winding up application, disclosing the problem in relation to their appointment and seeking an adjournment or, in the alternative, that they be appointed liquidators "given the level of work already performed". However the Senior Master, on Wednesday 12 November 2003, made an order for the termination of the "administration or purported administration", an order for the winding up of the Company and an order appointing Clyde Peter White (the second defendant in the current proceeding) as liquidator. The liquidator opposes the present application by the plaintiffs.

53. The plaintiffs filed an interlocutory process dated 28 May 2004, in proceeding no. 8313 of 2003, seeking that the fees of the administrators be paid from the assets of the Company. That application was ultimately discontinued by consent. The plaintiffs have paid over to the liquidator sums totalling $94,000 from the funds held by them.

56. In the foregoing circumstances, the plaintiffs seek the confirmation or validation of their appointment as administrators but only for the purpose of recovering appropriate fees and expenses of their purported administration. They do not seek to disturb the termination of the administration (or purported administration) by the Order of the Senior Master made on 12 November 2003.

59. Section 201A of the Corporations Act 2001 (Cth) ("the Act") provides as follows:

"(1) A proprietary company must have at least 1 director. That director must ordinarily reside in Australia. (2) A public company must have at least 3 directors (not counting alternate directors). At least 2 directors must ordinarily reside in Australia."

63. Presumably, in order to make sense, s.201A(1) should be read as requiring that in the case of a proprietary company, if there is more than one director, at least one director must ordinarily reside in Australia.

66. In my opinion the mandatory obligation or requirement contained in s.201A(1) operates so that the appointment of a person as a director of a proprietary company, who does not at the time of the appointment ordinarily reside in Australia, is "invalid" or irregular, if the company does not at that time have a resident director. The appointment of Mr Kintsch as a director, although invalid in that sense, was not in my view a nullity.[1] The invalidity might have been cured by Mr Kintsch commencing to ordinarily reside in Australia. It might also have been cured by the appointment as an additional director of a person who ordinarily resided in Australia. These events of course did not occur and Mr Kintsch's appointment was invalid and remained so.

69. However, I consider that s.201M(1) of the Act is applicable in this case. Section 201M(1) provides that an act done by a director is effective, even if the appointment or the continuation of the appointment of the director is invalid because the company or director did not comply with the company's constitution or any provision of the Act. "Director" in this section must mean "purported director" because the section applies to a director whose appointment is invalid. Mr Kintsch's appointment was invalid because the Company failed to comply with the mandatory requirements of s.201A(1)[2]. The appointment continued to be invalid while Mr Kintsch was not ordinarily residing in Australia. The invalidity also arose because of Mr Kintsch's failure to comply with s.201A(1) by accepting the appointment and acting as director while not ordinarily resident in Australia. As a result, both the appointment and the continuation of the appointment of Mr Kintsch were invalid because both the Company and Mr Kintsch himself did not comply with s.201A(1) of the Act. The conditions of s.201M(1) of the Act are therefore met. I conclude that Mr Kintsch's act in appointing the plaintiffs as administrators was rendered effective by s.201M(1) of the Act.

72. If (contrary to my view) s.201M(1) of the Act does not operate to render effective the appointment of the plaintiffs as administrators, I think that the plaintiffs have made a good case for validation of their appointment pursuant to s.1322(4)(a) of the Act[3]. Although the failure of the plaintiffs to verify for themselves the existence of the legal foundation for their appointment may be legitimately criticised, I find that they acted in good faith and that it was not grossly unreasonable of them to rely upon the experience of Corrs and the assurance of Mr Marquet. An additional but not decisive factor in their favour is that the purported appointment of the plaintiffs as administrators appears to have advantaged the creditors of the Company because the funds paid by CPS to the Company would not otherwise have been available. Even if the plaintiffs' remuneration as claimed, and various other expenses, are deducted from or reduce those funds, there will still be, as I understand it, a surplus available to the liquidator. In saying that I am not taking into account the costs of this proceeding which must be considered as a separate issue.

75. In order to invoke s.1322(4) of the Act, the Court must be satisfied that no substantial injustice has been or is likely to be caused to any person.[4] I am so satisfied. The Court must also be satisfied of one or more of the three matters listed in s.1322(6)(a) of the Act.[5] I am not satisfied in relation to s.1322(6)(a)(i) because the matter is not "essentially of a procedural nature". I am not satisfied in relation to s.1322(6)(a)(ii) because there is no evidence that all of the persons concerned in or party to the contravention "acted honestly". There is of course no evidence that Mr Kintsch or anyone else did not act honestly, but there is no positive evidence either, save that I am satisfied that the plaintiffs acted honestly (but that is insufficient to satisfy s.1322(6)(a)(ii) in the circumstances). However I am satisfied, in relation to s.1322(6)(a)(iii), that "it is just and equitable that the order be made" for the reasons stated in para [23] above and in all the circumstances. If necessary, I would also have invoked s.447A of the Act.

78. For the foregoing reasons there will be a declaration that the appointment of the plaintiffs as administrators of the Company was rendered effective by s.201M(1) of the Corporations Act 2001 (Cth) and an order pursuant to s.1322(4)(a) of the said Act that, insofar as necessary, their said appointment (until terminated) was not invalid by reason of any contravention of the Corporations Act.

81. It seems to me that the plaintiffs, upon such validation of their appointment, are entitled to reasonable remuneration and reimbursement of their expenses properly incurred for the period from the time of their appointment to the time of the order terminating their administration and I will so order. There is a body of evidence before the Court relevant to the quantum of such remuneration and expenses. I invite the plaintiffs to provide to the Court and to the defendant a statement of the further orders which they seek including a list of the monetary amounts and to produce and verify any additional relevant documentation. I propose to refer any disputes on these aspects to a Master. I will hear the parties further as to the foregoing and also as to costs.

[1] Cf the discussion of s.124 of the Companies Act 1936 (NSW) in Grant v John Grant & Sons Pty Ltd [1950] HCA 54; (1950) 82 CLR 1.

[2] It is arguably an offence, as well as a contravention, by a company to fail to comply with s.201A of the Act: see DVT Holdings Ltd v Bigshot.com.au Ltd (2002) 42 ACSR 378, 382 at [15] per Windeyer J; Re Continental Pacific [2002] NSWSC 789, at [9] to [11] per Barrett J.

[3] Section 1322(4)(a) empowers the Court, inter alia, to make an order declaring that any act done under the Act or in relation to a corporation is not invalid by reason of any contravention of a provision of the Act.

[5] Only one of the three matters needs to be established: see Ausam Resources Ltd [2004] FCA 823 at [19] per French J; Re Continental Pacific [2002] NSWSC 789 at [13]- [17] per Barrett J.