Skafcorp v Jarol

Mr J T Johnson (P) COUNSEL : Mr P A Fury (D1, D2) Mr C R C Newlinds (D3, D4)) Henry Davis York (P) SOLICITORS : David Carson (D1, D2) Gillis Delaney & Brown (D3, D4) CATCHWORDS : CORPORATIONS - voluntary administration - administrator's claim for remuneration for pre-administration work - whether creditors can approve payment - whether acceptance of appointment contravened s 448C - whether, if so, appointment invalid - whether leave should be granted LEGISLATION CITED : Corporations Act 2001 (Cth) ss 448A, 448B, 448C, 448D, 449E Aboriginal & Torres Straight Islander Commission v Jurnkurrakur Aboriginal Resource Centre Aboriginal Corp (in liq) (1992) 10 ACSR 121 CASES CITED : Cussen v Signature Resorts Pty Ltd [2000] NSWSC 89 Re Chilia Properties Pty Ltd (admin apptd) (1997) 23 ACSR 548 Re Horsham Kyosan Engineering Co Ltd [1972] VR 403 DECISION : Leave granted. Declaration of validity of appointment made.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5746/02 SKAFCORP LTD (ADMINISTRATOR APPOINTED) & ANOR V JAROL PTY LTD & 2 ORS JUDGMENT 1 HIS HONOUR: The principal dispute between the parties to this proceeding relates to the ownership and possession of some scaffolding. However, by their originating process, the plaintiffs are also seeking an order that leave be granted to the second plaintiff under s 448C of the Corporations Act 2001 (NSW) to consent to be appointed and act as administrator of the first plaintiff, and as administrator of any deed of company arrangement that may be approved by creditors of the company. The plaintiffs seek that order nunc pro tunc. By that they mean that they wish the Court's leave to apply prospectively in respect of the second plaintiff's future conduct, and retrospectively in respect of the second plaintiff's past conduct. In another sense of the phrase "nunc pro tunc", an order granting leave now, after the administrator has been in office for some time rather than before the office has been taken up, is necessarily nunc pro tunc. I was informed in argument that the plaintiffs also seek a declaration that the appointment of the second plaintiff as administrator was valid. 2 On 21 August 2002 the second plaintiff was appointed administrator of the first plaintiff pursuant to a resolution of directors, under s 436A of the Corporations Act. The first meeting of creditors under s 436E was convened and held on 28 August 2002. No resolution was passed at that meeting for removal of the second plaintiff as administrator. 3 Prior to the appointment of the second plaintiff, his firm had provided professional services to the first plaintiff. In his report to creditors under s 439A, the second plaintiff dealt with the topic "administrator's remuneration". He referred to the entitlement of an administrator under s 449E to remuneration fixed by resolution of creditors, and said this: "I will seek creditors to approve the remuneration of the Administrator pursuant to section 449E(1)(a) of the Corporations Act 2001, up to the date of the creditors meeting, in an amount or up to a maximum of $83,573.10 plus GST. "I will seek creditors to approve the remuneration of BDO, Chartered Accountants & Advisers, for professional services rendered prior to the date of the appointment of the administration in the amount of $14,836.80 plus GST. This remuneration is to be treated as a cost of the administration." 4 The assumption underlying this part of the report is that the claim for $14,836.80 is a claim for professional fees resulting from an engagement of the firm by the company, the quantum of which is to be fixed by resolution of the creditors under s 449E. 5 The second meeting of the creditors of the company was held on 15 October 2002. The meeting was adjourned, and the adjourned meeting has not yet been held. According to the minutes of the meeting, the following discussion took place, although no resolution was passed on the subject: "Administrator's Remuneration: Fees incurred prior to appointment were put to creditors for approval. It was argued under section 488C [sic] of the Corporations Act, if a 'liquidator' incurred more than $5000 the 'liquidator' cannot continue to act. The Administrator advised approval was sought for the services rendered. A report was prepared to the Commonwealth Bank to gain consent for the Administrator's appointment. A creditor argued that the fees should be considered a claim against Skafcorp. "The Administrator highlighted that the Court has awarded these costs to the Administrator, as it does not expect an administrator to begin an appointment 'cold'. However, the Administrator declared that he would not spend creditors' money seeking a determination of these fees and withdrew the claim for fees prior to the appointment." 6 Following the meeting, solicitors acting on behalf of Lewis Securities Ltd, a creditor of the company, raised concern in respect of the appointment of the second plaintiff and his acting as administrator, having regard to s 448C. That section, to the extent relevant, is as follows: "448C (1) Subject to this section, a person must not, except with the leave of the Court, seek or consent to be appointed as, or act as, administrator of a company or of a deed of company arrangement if: … (b) the person is, otherwise than in a capacity as administrator or liquidator of, or as administrator of a deed of company arrangement executed by, the company or a related body corporate, a creditor of the company or of a related body corporate in an amount exceeding $5000…. (1A) An offence based on subsection (1) is an offence of strict liability." 7 The second plaintiff responded to this expression of concern in a letter dated 29 October 2002. He made the following points: "1. There never has been any contract or engagement, implied or otherwise, between Skafcorp or my firm for the provision of professional services rendered prior to my appointment as administrator in connection with the preparation for the administration; 2. Neither my firm or I have any legal right to seek recovery for remuneration in connection with this pre-appointment work; 3. The work performed was voluntary in nature because it is my and my firm's policy that we will not accept an appointment until the major secured creditor has advised that they have no objection to my appointment. In this regard, to assist the secured creditor with their decision we, as a matter of course, submit a report to the secured creditor setting out the financial position of the company and the security position of the secured creditor; 4 and 5 [He referred to ASIC v Lawrenson Light Metal Die Casting Pty Ltd (1999) 158 FLR 307; 33 ACSR 288 and National Australia Bank Ltd v Market Holdings Pty Ltd (2000) 50 NSWLR 465; 35 ACSR 572.] 6. The approach I have taken is to seek creditors approval that the pre-appointment remuneration should be taken as a cost of the administration. If creditors were not prepared to treat this remuneration as a cost of the administration then I would have no entitlement to be paid this particular amount and I definitely would have no entitlement to prove in a deed or in the liquidation of the company. Although there were benefits for the company in having certain work done before my appointment I have no entitlement to make a claim. I was merely seeking creditors to acknowledge the benefits and voluntarily put me in a similar position to as if I had performed the work after my appointment. 7. I acknowledge that this approach puts the payment for such work completely in the hands of creditors without any recourse to appeal an adverse decision but I prefer an approach based on full disclosure of such issues rather than wrapping all costs up in one single administrator's remuneration figure. I consider the approach of wrapping the pre-appointment costs up with the administrator's remuneration to be misleading and improper." 8 The contrast between these assertions and the way the claim for remuneration for pre-administration work was put in the report to creditors, is obvious. 9 When the application came before me for hearing on 9 and 10 December 2002, I decided that it should be notified to the Australian Securities and Investments Commission ("ASIC") and also to the creditors of the company. ASIC replied after notice, saying that it did not propose to intervene in the proceeding or to appear at the adjourned hearing on 16 December 2002, and that it neither consented to nor opposed the application.

10 Creditors were notified in the body of a supplementary report to creditors dated 10 December 2002. The supplementary report drew attention to the issue regarding s 448C that is raised in the present application, and informed creditors that if they wished to have their views brought to the attention of the Court, they should contact the second plaintiff's office. No creditor (other than the parties) has done so. In the supplementary report the second plaintiff said two things particularly worthy of note: "I took the approach that it was in the hands of creditors whether they resolved that I should be paid for such work. I acknowledge that my report to the second meeting did not clarify that I had no entitlement as such to the amount in question." "[I]t is not my intention nor the intention of my firm to seek to participate as a creditor in the meeting, to seek to have the previous resolution relating to pre-administration remuneration approved or to prove in any deed of company arrangement that may be approved as a creditor in respect of the performance of work prior to my appointment as administrator." 11 There is no dispute that the second plaintiff or his firm, BDO, carried out pre-administration work, and the amount claimed, namely $14,836.80, has not been challenged before me as excessive (although I make no finding about that matter). However, that work was not the subject of any contract or engagement of the second plaintiff or his firm. That being so, the second plaintiff submits that at the time of his appointment as voluntary administrator, neither he nor the firm of which he is a partner was a "creditor" of the first plaintiff. He relies on the Lawrenson Light Metal and Market Holdings decisions. 12 In the Lawrenson Light Metal case, the question was whether an interim receiver and manager of the company appointed by the Court was a creditor, bound, having regard to s 444D(1), by the terms of a deed of company arrangement into which the company had entered after the receivership. Gillard J said that the reference to a "creditor" in Part 5.3A of the Corporations legislation is "to a person who has had dealings with the company and who is owed money by it". He continued: "The whole scheme of Part 5.3A puts the fate of the company in the hands of its creditors, those who have dealt with it in the past, are owed money by it and who can by reason of their dealings and information supplied make a decision as to its future." 13 His Honour found that a receiver-manager does not fall into that category. His right does not depend upon the company owing him any money but upon his right in law to be reimbursed for his remuneration, costs and expenses. A receiver-manager is not, according to his Honour, concerned to decide the fate of the company. 14 In the Market Holdings case the question was whether notice of a meeting of creditors of the company, held for the purpose of voluntary winding up, was invalid because no notice of the meeting was given to the plaintiff, who asserted a contested claim for damages. Young J held that for the purposes before him, a person who had the right to prove in a winding up should be regarded as a "creditor". 15 In my opinion, the question raised for determination in the Market Holdings case is fairly remote from the question before me here. It is plain from Young J's judgment that the word "creditor" has a meaning affected by the context in which the word is used. In that case the issue was whether the plaintiff had a sufficient interest that it should have been notified of a creditors' meeting. In the present case the question is whether an insolvency practitioner who carries out pre-administration work for a company should be precluded from accepting appointment as administrator of that company. The issue for determination in the Lawrenson Light Metal case is more closely analogous to the present case. 16 Nevertheless, the position of the second plaintiff, vis-a-vis the claim for $14,836.80, is distinguishable from the position of a receiver-manager appointed by the Court, who seeks payment for work carried out in that capacity. The second plaintiff had a statutory entitlement to remuneration under s 449E(1) with respect to his work as administrator, but that statutory entitlement was limited, by the words of the subsection, to the work that he carried out in his capacity as administrator of the company under administration. In my opinion, it did not extend to the work that he carried out before his appointment, in preparation for the administration. As to the pre-administration work, he or his firm was entitled to remuneration only if there was an express or implied contract between him (or his firm) and the company for the work to be carried out, or he was entitled to recover reasonable payment on a quantum meruit. 17 The limitation created by the wording of s 449E(1) has important consequences. Pre-administration work is not recoverable under the subsection, regardless of whether there is a resolution of the company's creditors purporting to fix the remuneration. Further, the Court has no power under the subsection to fix remuneration for pre-administration work. Nor, it seems, is there any right of indemnity or lien in respect of that work. If the administrator is entitled to recovery at all (on contractual or quasi-contractual grounds), his or her entitlement is that of an ordinary unsecured creditor. 18 It is not easy to see any legal basis upon which the creditors of a company, even if it is unanimous, could validly commit the company to pay for pre-administration work which the company was not otherwise bound to pay the administrator. Quite apart from the legal position, it is hard to see why creditors would ever wish to do so, if the position were properly explained to them. The disclosure made by the second plaintiff in his report to the second meeting of creditors was far from adequate, for it did not even address the question whether the administrator had a contractual or quasi-contractual entitlement to be paid, or had merely (as he later claimed in his letter) engaged in the work voluntarily without any arrangement for payment. Fuller disclosure was made in the supplementary report, but no level of disclosure can overcome the fundamental problem that creditors are not invested with the power to approve payment for pre-administration work where the company is not otherwise bound to pay paid for it. 19 I am not in a position to decide whether there was any contract for performance of the pre-administration work, or any occasion for recovery on a quantum meruit, on the evidence before me. It would be necessary for me to hear evidence as to what was said and done by the second plaintiff and the directors of the company before the work was carried out, and perhaps also during performance of the work. Evidence of that kind has not been adduced. 20 On the first hearing date, counsel for the second plaintiff offered to put his client in the witness box when I raised the point during the hearing. I decided not to proceed in that fashion, because I was concerned at that stage that the application for leave had not been notified to all creditors or to the Australian Securities and Investment Commission, who may have wished to appear and make submissions. I note that in the Lawrenson Light Metal case, by way of contrast, there was a contest on the question between the receiver-manager, and the administrator and two secured creditors, who appeared after the Court directed that the summons be served on them. ASIC was also represented. 21 When the matter returned to me on 16 December 2002, after I had directed that ASIC and creditors be notified of the application, the second plaintiff still did not place before the Court any evidence on the basis of which the Court could proceed to determine whether he or his firm was in fact a creditor of the company. 22 If, as he contends, the second plaintiff was not a creditor for the purposes of s 448C(1)(b), the company's creditors had no authority to approve his remuneration for pre-administration work under s 449E(1), and it appears that they had no other authority to do so. If, on the other hand, he or his firm was a creditor of the company for pre-administration expenses, then he was precluded by s 448C(1)(b) from seeking or consenting to be appointed as, or acting as, administrator of the company, or as administrator under any deed of company arrangement that might be proposed, in the absence of the granting of leave by the Court. I shall assume, contrary to the second plaintiff's submission, that he was a creditor under s 448C(1)(b), for the purpose of considering whether to grant leave under the section. 23 In my opinion, it is appropriate in this case that leave be granted. Section 448C was part of the insolvency law reforms introduced by the Corporate Law Reform Bill 1992. The Explanatory Memorandum to the Bill, paragraph 790, states that an administrator must act in a way that safeguards the interests of the company's creditors as well as those of the company itself, and adds: "In order to discharge those obligations effectively, it is very important that the administrator is independent of the company. This proposed section specifies a number of possible connections between a person and a company, each of which disqualify the person from being appointed to administer that company".

24 Whatever else may be encompassed by the concept of independence, it is clear that conflicts of interest are an important factor in the exercise of the Court's discretion in an application for leave under the section. As Lehane J said in Re Chilia Properties Pty Ltd (admin apptd) (1997) 23 ACSR 548, 550: "The section is intended to operate in circumstances where there arises a real possibility of a conflict of interest". 25 There is no ground for concern that the second plaintiff might be in a position of conflict of interest if he or his firm is a creditor of the company. This is because of the statement, made to the Court by counsel for the second plaintiff on the second hearing day, and repeated in the supplementary report, that the second plaintiff and his firm will not seek to participate as a creditor at the meeting of creditors, or seek to have the previous motion relating to pre-administration remuneration approved, or prove with respect to pre-administration work in any deed of company arrangement that may emerge. Therefore the second plaintiff will not be placed in the position of having to adjudicate on his own or his firm's claim in the course of the administration. 26 The second plaintiff's contravention of s 448C was inadvertent, if there was any contravention. He has acted in the position of administrator since his appointment on 21 August 2002. There is no evidence of any objection to his doing so, except on the legal ground that s 448C(1)(b) stands in his way. On the first hearing date the defendants informed me that they had no objection to leave being granted, provided that the order was only prospective. The plaintiffs submitted that as the meeting of creditors is to resume on 18 December 2002, it is important that the second plaintiff's status is resolved before that meeting, so that his capacity to chair the meeting and deal with the admission of proofs of debt and proxies is clear. 27 However, there remains an issue as to the nature and effect of an order granting leave under s 448C(1)(b). The defendants object to my granting leave nunc pro tunc, by which they mean that I should not make any order directed to validating the past conduct of the second plaintiff. They do not object to my making an order granting consent under the section, provided that the order operates only prospectively. They say that, if the second plaintiff has contravened s 448C(1)(b), he has committed a criminal offence which is a strict liability offence. For that reason alone, they submit, the Court should not intervene except prospectively. On the other hand, the second plaintiff is concerned that if leave is granted nunc pro tunc, the validity of his appointment might be open to challenge. 28 In my opinion the resolution of this contest is found in Re Chilia Properties Pty Ltd (admin apptd). In that case Chilia was a subsidiary of a company in liquidation, whose liquidator was Mr Lee. The parent was a creditor of the subsidiary. Mr Lee, as liquidator, appointed two directors to Chilia, and then those directors resolved to appoint Mr Lee's partner, Mr Sutherland, as administrator of Chilia. Section 448C(1) prohibited Mr Sutherland from consenting to be appointed and acting as administrator without the leave of the Court, because he was a partner of an officer of a related body corporate. Subsequently Mr Sutherland applied to the Court for leave under s 448C, or for a declaration under s 1322 that his appointment and actions as administrator were not invalid by reason of contravention of s 448C. 29 Having decided that, in substance, leave should be granted, Lehane J turned to the question whether leave should or could be granted now on a nunc pro tunc basis after the event. He referred to authorities on a similar question arising with respect to s 276 of the Companies Act 1961 (NSW). That section provided that where a petition had been presented to the court to wind up a company on the ground that it was unable to pay its debts, the company should not without leave of the court resolve that it be wound up voluntarily. In Re Horsham Kyosan Engineering Co Ltd [1972] VR 403 and Aboriginal & Torres Straight Islander Commission v Jurnkurrakur Aboriginal Resource Centre Aboriginal Corp (in liq) (1992) 10 ACSR 121 it had been held that this provision should be regarded as directory rather than mandatory, and that the effect of a contravention might be cured by the grant of leave after the event. 30 Lehane J applied these authorities by analogy, and held that s 448C was directory only, and therefore contravention of it did not invalidate the appointment of the administrator. He made an order granting leave under s 448C(1), and he also made a declaration under s 1322(4)(a) that Mr Sutherland's appointment as administrator and his acts in that office were not invalid by reason of any contravention of s 448C. Notice of the application had been given to creditors of the company. 31 I respectfully agree with Lehane J's reasoning. It was followed by the present Chief Judge of this Division of the Court in Cussen v Signature Resorts Pty Ltd [2000] NSWSC 89. It is reinforced by the structure of Division 14 of Part 5.3A. Section 448A sets out circumstances in which a person cannot be appointed as administrator, and ss 448B and 448D prescribe that a person must not consent to be appointed or act as administrator except in stated circumstances. Neither of those provisions allows the Court to grant leave to permit what would otherwise be prohibited. In contrast, s 448C permits the Court to grant leave. Although it is unnecessary for me to decide the point, it is arguable that a purported appointment in contravention of s 448A, 448B or 448D (of a person who has refused to consent to the appointment, or a person who is not a registered liquidator, or a person who is an insolvent under administration) is an invalid appointment. If that were so, then the fact that the prohibition in s 448C can be overcome by the granting of leave by the Court, in contrast with the other provisions, suggests that non-compliance with s 448C does not invalidate the appointment. Additionally, in my opinion, the fact that s 448C, like ss 448A and 448B, now creates a strict liability offence, does not require the conclusion that a contravention of it invalidates the appointment. 32 Given these conclusions, there appears to be no room for the Court to make an order granting leave under s 448C that would operate only prospectively. On the authority of Re Chilia, the Court has the power to grant leave under the section after the appointment has been made and consented to, and may therefore act "nunc pro tunc" in that sense. Once leave is granted, any contravention of the section is cured. As far as invalidity is concerned, Re Chilia is authority for the proposition that contravention of s 448C does not invalidate the appointment in any case. 33 Now that ASIC and the creditors of the company have been notified of the application, I see no obstacle to my granting leave, and also making a declaration as to the validity of the second plaintiff's appointment as administrator and the acts he has performed in that capacity. 34 I shall make orders accordingly, and hear the submissions of the parties with respect to costs. I shall stand the proceedings over to the Registrar's Corporations List on 20 December 2002, so that directions can be made to prepare the remaining issues for hearing, after the creditors have met. **********

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