Shirlaw v Graham

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

JUDGMENT 1 HIS HONOUR: This is the final hearing of these proceedings which were commenced at 2.20 this afternoon. The company, Actwane Pty Limited, had two directors at all material times, Dr Larkin and Mr Graham. The company was involved in some litigation and on 29 June 2001, Dr Larkin said to Mr Graham, "Given what the Court has said and the demands which we have received from Macquarie Bank and St George Bank, I can see no alternative but to have an administrator appointed." Mr Graham agreed. Dr Larkin has given evidence that he had in his mind that the demands of those banks and other creditors meant that unless some arrangements were made, the company would be insolvent. 2 However, the actual resolution that is recorded in the minutes, doubtless because the meeting was what is described as a teleconference meeting, merely noted that Dr Larkin and Mr Graham were present and that the directors agreed to appoint Mr Kevin Shirlaw as administrator. 3 Since 29 June, Mr Shirlaw has acted as administrator. However, he has doubts as to whether his appointment is effective because the resolution of the directors clearly does not comply with s 436A of the Corporations Law. 4 A similar position exists with respect to the other company named in the proceedings, Actwane Hotel Management Pty Ltd save that the relevant date is 4 July 2001.

Section 436A(1) of the Corporations Law provides that: "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." 5 The parties to the present proceedings are Mr Shirlaw, the plaintiff, for whom Mr Cotman SC appeared, Mr Graham, the first defendant, for whom Ms McDonald appeared, and Dr Larkin, the second defendant, for whom Mr Aitken appeared. All argued that an order should be made under s 447C of the Corporations Law that the company was properly under administration. Section 447A is headed "General power to make orders" and subsection 1 provides: "The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company." 6 It has been held, indeed I have said so myself in an earlier case Cawthorn v Keira Constructions Pty Limited (1994) 33 NSWLR 607, that the power under the section is plenary. That case has been applied in subsequent cases. 7 However, there are a series of decisions which, if read strictly and literally, might make one think that the court is powerless to intervene in a case where the initial resolution of the directors does not strictly comply with s 436A of the Corporations Law. 8 In Wagner v International Health Promotions (1994) 15 ACSR 419 at 421 to 422, Santow J pointed out that there was a requirement that the board actually resolve that it was of the requisite opinion. Inferentially, his Honour held that it was insufficient that some or all of the directors privately held that view. His Honour also said that s 1322 of the Corporations Law could not "cure failure to comply with a mandatory requirement of 436A(1) for a resolution." (422). This was not a "procedural irregularity" but one which went to the very underlying statutory basis, the appointment of an administrator. 9 Wagner's case has been followed on many occasions subsequently and indeed I, myself, in Gordon v Allied Meridian Pty Limited [1999] NSWSC 558 [59] summarised the decision by saying: "Where the resolution appointing the administrator is invalid, there is nothing that the Court can do to save it."

In hindsight that was too wide a dictum. 10 The High Court of Australia looked very closely at the operation of s 447A in Australasian Memory Pty Limited v Brien (2000) 200 CLR 270. The court was considering the scope of s 447A in the constitutional context as to whether the law invalidly purported to confer on the court quasi legislative powers. The court said that the section was valid, the court seemed to approve dicta in this court that power or the plenary power, but the court also emphasised the word "is" in s 447A saying at [26] at page 282: "But this temporal requirement is satisfied if orders made under s 447A are orders that have effect only from the time of their making." 11 In Deputy Commissioner of Taxation v Portinex Pty Limited (2000) 34 ACSR 391 at 398 to 399, Austin J summarised the law after the Australasian Memory case. Again he emphasised that the section looks to the future rather than to the past. However, as the headnote says, his Honour also held that s 447A is available to overcome the deficiency in the appointment of an administrator, see [29] on page 398. 12 However, in the unreported decision of Deputy Commissioner of Taxation v ACN 001 330 203 Pty Limited [1999] NSWSC 798, Santow J said at [9] that he could not apply s 1322(4) to remedy any defect in the appointment of an administrator as that was primarily because of a matter of "jurisdictional reach but in any event as a matter of discretion". 13 It seems to me, with great respect, that these various decisions, though correctly resolving the cases before them, have introduced complications into the Law that we could well do without. 14 In my view s 447A is a plenary power. In my view s 447A may be used as Austin J said in Portinex, to overcome a defect in compliance with the appointment procedure under s 436A which is within Part 5.3A of the Corporations Law. In my view the court can make an order under s 447A which has some effect in the past in the same way as the court can make an order nunc pro tunc. I cannot see any reason why in the exercise of its discretion the court cannot in relation to a particular company deal with a technical defect in the resolution under s 447A. This should include cases such as the failure of a resolution to state the opinion the directors held or of the directors so to resolve. After all, the purpose of s 447 is fulfilled, namely to make Part 5.3A work in the public interest so far as that company is concerned. 15 It seems to me that the general interpretation provisions of the Corporations Law which require the court when construing the Act, to construe it in a way that fulfils the aim of the Statute, see section 109H, operate in that direction. It is clear, as I said in Cawthorn, that the aim of the legislature was to allow companies which otherwise might be put to death with great loss to the shareholders, the employees and the creditors, to be resuscitated and people obtain as much from the company as they possibly could without undue regard to technicality. 16 However, even if this were wrong, it seems to me that there are at least two other ways in which the same result can be obtained. It seems to me that in Wagner, Santow J was referring to s 1322(2) of the Law rather than s 1322(4). He certainly referred to the latter sub-section in the Deputy Commissioner of Taxation case. With respect, I do not consider I should follow that part of the decision. It was, Santow J pointed out, an ex tempore decision in an ex parte matter. Perhaps I have the reverse problem, that I have an ex tempore judgment in a case where all three counsel are urging the same thing. I cannot, however, see, consistently with the authorities in New South Wales on the construction of s 1322, such as Sydney Aussie Rules Social Club Ltd v The Superintendent of Licenses (1989) 15 ACLR 662, why in a proper case s 1322(4) cannot be used to deal with situations that are not covered by s 447A. 17 Thus, if it be the case that I am bound by what the High Court said in the Australasian Memory case not to apply s 447A to the Part [and I do not think on reading the High Court I am so bound] then the proper order to make would be an order under s 447A for the future and an order under s 1322(4) validating the past. 18 Even if this were not available then an order under s 447A should be made for the future and the orders declaring that the purported administrator has a charge for his fees as per paragraphs 2 and 3 of the application, should be made which would have much the same result. 19 Accordingly, it seems to me that the appropriate order is that pursuant to s 447A of the Corporations Law the court orders that it is appropriate that as from 29 June 2001 Actwane Pty Limited has been validly under administration and Mr Kevin Richard Shirlaw has been the administrator. I make the same order with respect to Actwane Hotel Management Pty Limited substituting the date 4 July 2001.

Last Modified: 07/23/2001 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.