Sule Arnautovic and John Kukulovski [2009] NSWSC 1444

CATCHWORDS : CORPORATIONS - voluntary administration - sole director of a group of companies who became disqualified from managing corporations under s 206B(4) of the Corporations Act 2001 (Cth) ("the Act") and consequently ceased to be a director of any of the companies, then purported, as director, to appoint the plaintiffs as voluntary administrators of the companies - plaintiffs applied to the Court to validate their appointment as administrators - held that under s 447A(1) of the Act the Court has the power to order that Pt 5.3A of the Act could henceforth operate in relation to the companies, as if the plaintiffs' appointment as voluntary administrators of the companies should be validated

LEGISLATION CITED : Corporations Act 2001 (Cth) Bankruptcy Act 1966 (Cth)

Re Wood Parsons Pty Limited (In Liq) (2003) 43 ACSR 257 CASES CITED : Deputy Commission of Taxation v Portinex Pty Limited (2000) 34 ACSR 391 Albarran v Pascoe (2006) 57 ACSR 451

PARTIES : Sule Arnautovic and John Kukulovski - Plaintiff

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

4826/2009 SULE ARNAUTOVIC AND JOHN KUKULOVSKI EX TEMPORE JUDGMENT 1 HIS HONOUR: This is an application by the plaintiffs for an order under s 447A of the Corporations Act 2001 (Cth) ("the Act"), for orders in the following terms: 1. Pursuant to s 447A(1) of the Corporations Act 2001, Part 5.3A is henceforth to operate in relation to: (a) Freepeople Investments Pty Limited ACN 131 730 777; (b) Freepeople Clothing Pty Limited ACN 131 730 820; (c) Freepeople Wholesale Pty Limited ACN 131 730 955; (d) No Substitute Pty Limited ACN 070 047 666; (e) Under Cover Pty Limited ACN 068 403 681; (collectively " the Freepeople Group of Companies ") as if the resolutions purportedly adopted by Neeru Anand on 16 September 2009 as director of the companies were valid resolutions under s 436A and as if the plaintiffs' appointments pursuant to those resolution were valid appointments of them as voluntary administrators of the companies. 2. Pursuant to s 447A(1), the costs incurred by the plaintiffs with respect to the administrations of the affairs of the Freepeople Group of Companies in the period from 16 September 2009 until today be costs in the voluntary administrations of the companies. 2 Section 447A(1) of the Act provides: The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. 3 On 16 September 2009 one Neeru Anand ("Anand") purported to appoint the plaintiffs as joint and several administrators of the following companies: · Freepeople Investments Pty Limited ACN 131 730 777; · Freepeople Clothing Pty Limited ACN 131 730 820; · Freepeople Wholesale Pty Limited ACN 131 730 955; · No Substitute Pty Limited ACN 070 047 666; · Under Cover Pty Limited ACN 068 403 681; (collectively "the Companies"). 4 Company searches in evidence establish that immediately prior to 25 March 2009 Anand was the sole director of each of the Companies. 5 On 25 March 2009 Anand entered into a personal insolvency agreement pursuant to the provisions of Pt X of the Bankruptcy Act 1966 (Cth) with one Andrew Hugh Jenner Wiley ("the Trustee"). 6 Clause 4 of the Personal Insolvency Agreement was to the following effect: "The Debtor agrees to pay a total amount of $40,000 into an account held and maintained by the Trustee in the name of 'Estate of Neeru Anand' in full and final settlement of all debts. The funds will be paid immediately upon execution of the Personal Insolvency Agreement and are being provided by a family member."

7 Anand defaulted by not paying the amount she agreed to pay. 8 Section 206B(4) of the Act provides as follows: A person is disqualified from managing corporations if:

(a) the person has executed a personal insolvency agreement under: (i) Part X of the Bankruptcy Act 1966 ; or (ii) a similar law of an external Territory or a foreign country; and

(b) the terms of the agreement have not been fully complied with.

A person who is disqualified from managing corporations under this Part commits an offence if:

(a) they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(b) they exercise the capacity to affect significantly the corporation's financial standing; or

(c) they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation: (i) knowing that the directors are accustomed to act in accordance with the person's instructions or wishes; or (ii) intending that the directors will act in accordance with those instructions or wishes. 10 Section 206A(2) of the Act provides as follows:

A person ceases to be a director, alternate director or a secretary of a company if:

(a) the person becomes disqualified from managing corporations under this Part; and

(b) they are not given permission to manage the corporation under section 206F or 206G. 11 On 1 September 2009, in light of Anand's failure to comply with cl 4 of the Personal Insolvency Agreement, the Trustee terminated it. 12 Section 206A(2), read with s 206B(4) of the Act, had the effect that on 25 March 2009, or at least immediately thereafter when Anand failed to comply with cl 4 of the Personal Insolvency Agreement, Anand ceased to be a director of each of the Companies because she became disqualified from managing them by reason of s 206B(4). 13 Consequently on 16 September 2009, when she purported as a director of the Companies to appoint the plaintiffs as administrators, she had no power to do so. 14 Not long after the purported appointment this difficulty was drawn to the attention of the plaintiffs by one James Byrnes, whose involvement and connection with the Companies is, on the material before me, opaque. 15 On 24 September 2009 Mr Chan, a senior manager in the employ of the plaintiffs, acted as chairperson at a concurrent first creditors meeting (or purported meeting) of each of the Companies at which he informed the creditors as follows: "There has been a challenge to the validity of the administrators' appointment by a party claiming to represent various shareholders. That person has raised concerns that, because the director of each of the companies comprising the Freepeople Group, Ms Neeru Anand, had not complied with the terms of a Personal Insolvency Agreement under the Bankruptcy Act, she was not able to manage a corporation and act as director at the time when she appointed the administrators. The challenge also asserts that Ms Neeru Anand was removed as the sole director of the Freepeople Group upon entry into the Personal Insolvency Agreement leaving the Freepeople Group without a director. The administrators intend to make an application to the Court to ratify their appointment or alternatively to have the Freepeople Group placed into liquidation." 16 A resolution was moved and passed in favour of an application by the plaintiffs to validate their appointment. 17 On 28 September 2009 the plaintiffs circularised creditors and shareholders of the company, informing them of the intention to make an application to the Court to validate their appointment and calling for any objections. No objections have been notified. 18 An affidavit of the Companies' external accountant, Praveen Manaktala, who is a creditor of each of the Companies, was read. In it he expresses support for the application. Based on his knowledge of the financial affairs of the Companies he expresses the opinion that each is insolvent. 19 The application has been served on each of the Companies, on Mr Byrnes, on Mr Kapil Anand, a former director of the Companies, on ASIC and on each of the shareholders of the Companies except for one Sagar Ritu, who holds one share in No Substitute Pty Limited and who is apparently resident in India. The papers have been mailed to him. Mr Kenneth Wilson, a bankrupt, owns fifty shares in No Substitute Pty Limited. His trustee in bankruptcy has been notified and wishes to take no part in this application. No one has appeared to oppose it. 20 Mr Golledge of counsel appeared for the plaintiffs. 21 He relied on three authorities as support for the proposition that relief by way of an order under s 447A(1) of the Act was available to cure the plaintiffs' defective appointment: Re Wood Parsons Pty Limited (In Liq) (2003) 43 ACSR 257; Deputy Commission of Taxation v Portinex Pty Limited (2000) 34 ACSR 391 and Albarran v Pascoe (2006) 57 ACSR 451.

22 In Albarran v Pascoe, which is the closest analogue to the present case, directors were undischarged bankrupts and, as a consequence, were disqualified from managing corporations and had vacated their office as directors. They purported to appoint administrators. At [15] Austin J said the following: "Here, the invalidity of the directors' resolution to appoint the administrators flows from their status as undischarged bankrupts and the statutory administrators flows from their status as undischarged bankrupts and the statutory declaration in s 206A(2) that, by virtue of that status, they have ceased to be directors. However, in my opinion, their status is not relevantly distinguishable from the status of the person purporting to act as directors in the Wood Parsons case, or the status of directors purporting to pass a resolution at any invalidly convened meeting of directors, in the Portinex case. In all three cases, an attempt has been made to initiate the Pt 5.3A process, but the attempt has been invalid. On the authority of the Portinex and Wood Parsons cases, the court may use s 447A(1) in such circumstances, to make an order as to how Pt 5.3A is to operate in relation to the company concerned given that, as the High Court has pointed out, the section has a wide literal scope and is an integral part of Pt 5.3A. I have, therefore, concluded that I have the power to us s 447A(1)." 23 His Honour went on to make orders in the following terms: "I order under s 447A(1) of the Corporations Act that Pt 5.3A is henceforth to operate in relation to the company SMTC Pty Ltd ACN 104 228 775, as if the resolution purportedly adopted by Savvas Ioannou and Maria Ioannou on 24 April 2006 as directors of the company were a valid resolution under s 436A and as if the plaintiffs' appointment pursuant to that resolution were a valid appointment of them as voluntary administrators of the company."

24 Although I have some reservations about the correctness of Albarran v Pascoe, in that s 206A of the Act makes it an offence for a person who is disqualified from managing corporations to make or participate in making decisions that affect the whole or a substantial part of the business of the corporation (which would undoubtedly include appointing an administrator) and on one view the order sought gives effect to conduct in contravention of the Act, the decision is a reasoned one and I propose to follow it. 25 None of the parties served have appeared to oppose the relief sought, the creditors support it and it is clearly of utility. 26 I accordingly will make the orders which are contained in the document entitled "Orders" which I have initialled, dated today's date and placed with the papers. 27 The orders may be entered forthwith. **********

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