Transport (Limited) v Schonberg

Background to the proceedings 3 AMC was established by Mr Cain in 1989. It carried on the business of aircraft maintenance and charter flying as well as documentation control in respect of aircraft for the Australian aviation industry. Since 1995 AMC has held an Air Operators Certificate ("AO certificate") in relation to Boeing 727 aircraft, which an operator of that type of aircraft must have before it can operate commercially in Australia, and a Certificate of Approval which licenses an organisation to perform maintenance on Australian aircraft. These certificates were issued by the Civil Aviation Safety Authority ("CASA") which regulates the Australian aviation industry. The AO certificate was AMC's principal asset. AMC also owned one third of the share capital in a company called Flight Simulators International Pty Ltd. 4 TransWorld Aircraft Leasing Services Pty Ltd ("TWA") was the lessee of two Boeing 727 aircraft and it engaged AMC to perform certain work on the aircraft. Work on one aircraft commenced in February 2002 and was completed in late April 2002. Work on the second aircraft commenced around late April or early May 2002 and, as at 29 July 2002, had not been completed. According to Mr Cain, $1.8 million was outstanding for the works performed and, due to TWA's failure to pay a number of invoices submitted by AMC, AMC had stopped work on the second aircraft. 5 On 26 July 2002 Mr and Mrs Cain, AMC, another related company Air Cargo Australia Pty Ltd ("ACA") and TransAustralian Operations Pty Ltd ("TAO") entered into Heads of Agreement by which it was agreed that TAO would manage AMC and ACA from 29 July 2002. TAO is a wholly owned subsidiary of TransAustralian Air Pty Ltd ("TAA"), which is a wholly owned subsidiary of TWA, the lessee of the aircraft which had engaged AMC to perform works. TAO, TAA and TWA have common directors. 6 It was also agreed that Mr Cain would grant a call option to TAO to purchase the shares he held in AMC and ACA, and a put option would be granted by TAO to Mr Cain to sell those shares for $4.5 million (less certain liabilities) on certain conditions. If the options were exercised, Mr Cain, AMC, ACA and TAO agreed to enter into a sale of shares agreement, which agreement was to provide for an initial payment to Mr Cain of $1 million and for the payment of the balance, $3.5 million (less certain liabilities), to be made by thirty‑six equal monthly instalments. Security was to be given to Mr Cain in respect of the amount which would remain owing to him by way of a fixed and floating second ranked mortgage debenture charge over the whole of the assets and undertaking of AMC and ACA. 7 The options were exercised and a shares acquisition agreement ("the Agreement") was entered into on 16 September 2002 between Mr Cain as vendor, TAO as purchaser, AMC and ACA. Pursuant to the Agreement Mr Cain, who held the entire share capital of the two companies, agreed to sell his shares in those two companies to TAO. TAO agreed to pay for the shares by a first instalment of $1 million and the balance by thirty‑six monthly instalments. Mr Cain has to date received only $1.9 million of the consideration due. 8 By the Agreement TAO agreed to procure that AMC and ACA would provide mortgage debentures (as defined) from AMC and ACA as security to Mr Cain for the amount of the sale price owing. TAO also agreed to use its best endeavours to arrange for any first ranking debenture holder to consent to Mr Cain registering the mortgage debentures and to enter into a deed of priority whereby the priority of the first registered security holder would be limited to $5,000,000 plus interest and costs of enforcement. The mortgage debentures were defined in the Agreement as "the form of mortgage debentures attached to schedule 2." There was no form of mortgage debenture attached to Schedule 2. Schedule 2 was in fact blank. 9 The parties negotiated and settled on the form and terms of the mortgage debentures and a deed of charge in favour of Mr Cain was executed by AMC and Mr Cain on 29 March 2003. It was registered with ASIC on 11 April 2003 as registered charge No 935612. 10 There is an issue as to whether Mr Cain then resigned as a director and secretary of AMC on 16 September 2002 or on a later date and I shall return to this issue. 11 On 16 July 2003 Mr Young was appointed voluntary administrator of TAA. On 21 July 2003 a resolution was passed at a directors' meeting of AMC that, in the opinion of the directors, AMC was insolvent or was likely at some future time to become insolvent, and Mr Young was appointed voluntary administrator of the company pursuant to Pt 5.3A of the Act. On the same day Mr Young was granted leave by the Supreme Court of New South Wales, as was required by s 448C(d) of the Act, to consent to act as voluntary administrator of AMC notwithstanding that he was an officer of a corporation which held a mortgage of property owned by AMC by virtue of his position as voluntary administrator of TAA. On 23 July 2003 Mr Young gave Mr Cain written notice of his appointment as voluntary administrator of AMC by letter dated 22 July 2003. 12 Clause 6.8 of the deed of charge provided that if an administrator was appointed to AMC under Pt 5.3A of the Act, an event of default at the option of Mr Cain would have occurred. On 22 July 2003 Mr Cain served a Notice of Default on AMC and Mr Young pursuant to the charge in which he specified the default as being the appointment of Mr Young as administrator. The Notice stated that if the default was not remedied within seven days of the date of service of the Notice, Mr Cain would exercise any of the rights specified in cl 7 of the deed of charge. 13 The first meeting of creditors of AMC was held on 28 July 2003. On 8 August 2003 Mr Young forwarded a notice to the creditors of AMC convening the second meeting of creditors together with a report and statement as required by s 439A(4) of the Act. 14 On 11 August 2003 Mr Cain appointed Mr Taylor as receiver and manager over the assets and undertaking of AMC pursuant to cl 7.1.7 of the deed of charge. 15 On 15 August 2003 Mr Young chaired the second meeting of creditors of AMC at which the creditors resolved to adjourn the meeting for a period not exceeding 60 days.

The proceedings 16 Two proceedings are before the Court. The first, filed by Mr Cain on 11 August 2003, in its final amended form sought orders, in substance, declaring the validity and enforceability of the deed of charge, the appointment of the receiver and the right of the receiver as against the administrator to take control of, and deal with, the assets and undertaking of AMC. The second, filed by Mr Young as administrator of AMC on 15 August 2003, sought orders declaring that the charge was not enforceable during the administration, that the appointment of the receiver was void and establishing the right of the administrator to take control of, and deal with, the assets of AMC freed from any interest of Mr Cain under the deed of charge and freed from any control by the receiver.

Did Mr Taylor's appointment as receiver and manager render Mr Cain's charge void pursuant to s 267(1) of the Act? 17 Mr Young's attack on the validity of the charge and the appointment of the receiver was based upon the proposition that within the period of six months prior to the creation of the charge Mr Cain was a director and secretary of AMC and that within six months after the creation of the charge Mr Cain purported to take a step in the enforcement of the charge without first obtaining the leave of the Court. Accordingly the charge was void pursuant to s 267(1) of the Act. 18 Mr Young contended that Mr Cain did not resign as a director and secretary of AMC prior to 29 September 2002. As a result, the charge had been created in favour of a "relevant person" for the purposes of s 267 of the Act because the six‑month period ending on the date of the creation of the charge, 29 March 2003, covered a period during which Mr Cain was still a director and secretary of AMC. Section 267 therefore operated to render the charge void from the time of its creation. 19 Section 267 relevantly provides: "(1) Where (a) a company creates a charge on property of the company in favour of a person who is, or in favour of persons at least one of whom is, a relevant person in relation to the charge; and (b) within 6 months after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under subsection (3), given leave for the charge to be enforced; the charge, and any powers purported to be conferred by an instrument creating or evidencing the charge, are, and are taken always to have been, void." (2) Without limiting the generality of subsection (1), a person who: (a) appoints a receiver of property of a company under powers conferred by an instrument creating or evidencing a charge created by the company; or (b) whether directly or by an agent, enters into possession or assumes control of property of a company for the purposes of enforcing a charge created by the company; is taken, for the purposes of subsection (1), to take a step in the enforcement of the charge. Section 267(7) defines a "relevant person" as meaning: "(a) a person who is at the time when the charge was created, or who has been at any time during the period of 6 months ending at that time, an officer of the company; …" Section 9 defines an "officer" of a company to mean, inter alia, a director or secretary of the company.

20 The charge was created on 29 March 2003. Whichever view is taken as to the enforcement of the charge, (that is, service of the Notice of Default on 22 July 2003 or appointment of the receiver and manager on 11 August 2003), a step in the enforcement of the charge was clearly taken within six months after the creation of the charge on 29 March 2003. Hence, the charge will be void from its inception pursuant to s 267(1) unless Mr Cain was not a "relevant person" during the six months period prior to the date the charge was created. The relevant inquiry is therefore whether Mr Cain ceased to be a director and company secretary prior to 29 September 2002.

When did Mr Cain cease to be a director and company secretary of AMC?

21 Mr Cain and the receiver submitted that Mr Cain resigned as, and ceased to be, a director and company secretary on 16 September 2002 or, at the latest, by 29 September 2002. Mr Young submitted that Mr Cain's resignation as a director and secretary had not occurred prior to 29 September 2002 and that, on and subsequent to that date, Mr Cain remained as a director and secretary of AMC.

22 There was no evidence that Mr Cain had signed a written resignation as director and secretary of AMC. Mr Cain said in affidavit evidence (which was not the subject of cross‑examination) that he submitted his resignation as director of AMC by "signing the Form 304 as supplied to me by R J S [Robert James Solicitors, the solicitors for TAO]". That form, which is an ASIC "Notification of change to officeholders" form, showed the appointment of Mr Anthony Howard Griffin and Mr Richard Alan Brown as directors of AMC on 9 September 2002, but the section "Ceasing to hold office" was not completed. In particular it did not refer to Mr Cain ceasing to hold office as director or secretary. I therefore cannot accept Mr Cain's evidence that on 16 September 2002 he submitted his resignation as a director and secretary in writing.

23 Mr Cain also said in affidavit evidence that he resigned as a director of AMC "pursuant to the resolution passed by the directors of Aero Marine on 16 September 2002." There was no such resolution passed by the directors of AMC on 16 September 2002, although it is apparent from the sequence of events to which I shall refer, that Mr Cain intended his resignation as a director and secretary of AMC to take effect on and from that day.

24 Although Mr Cain did not sign a written resignation as director and company secretary it is necessary to examine the sequence of events and conduct which occurred after the signing of the Heads of Agreement by the parties on 26 July 2002 to determine whether it can be established or inferred from subsequent events and conduct that Mr Cain had effectively resigned as a director and secretary prior to 29 September 2002.

25 Mr Cain said, and he was not cross‑examined, that he had not acted as a director of AMC since 26 July 2002 when the Heads of Agreement was signed. Clause 2.1 of the Heads of Agreement provided that TAO was to manage AMC and ACA with effect from 29 July 2002.

26 Mr Cain said that on 26 July 2002 he agreed to tender his resignation from all offices of AMC in accordance with cl 7.2.4 of the Heads of Agreement. Clause 7.2.4 of the Heads of Agreement provided:

"upon the exercise of the options to purchase or sell the shares, and the execution of the sale of the shares agreement, Cain shall simultaneously tender his resignation from all offices of the company together with a transfer of the shares in the companies to TAO. Provided, however, the resignation as a director of the companies may be deferred to a later date as may be required to enable the companies to satisfy the regulatory requirements of CASA and other statutory authorities."

27 At a meeting on 4 September 2002 Mr Cain told Mr Griffin, who was associated with TAO, that he was resigning as a director of AMC and that his resignation would become effective from the date of the execution of the shares acquisition agreement and the appointment of both Mr Griffin and Mr Brown as directors of AMC which was to occur on the same date. Mr Cain told Mr Griffin that although he would resign as director of AMC on execution of the shares acquisition agreement, he was prepared to remain as the "responsible person" to CASA in respect of the requirements of the AO certificate held by AMC until such time as Mr Griffin was approved as a responsible person. According to Mr Cain, and it was not contested, Mr Griffin was approved as a responsible person by CASA on or about 17 September 2002 and Mr Cain was automatically removed from the CASA records as the responsible person for AMC.

28 It was apparent from documentation passing between the parties' solicitors prior to 16 September 2002 that Mr Cain did not wish to continue to hold office in the two companies after the shares acquisition agreement was entered into. On 11 September 2002 Mr Cain's solicitor wrote to TAO's solicitors, Robert James Solicitors, noting, inter alia, that Mr Cain did not wish to hold the office of director in the two companies as provided for in the then draft sale agreement. On 12 September 2002 TAO's solicitors responded:

"Bill Cain should remain as the authorised responsible person under the AOC [Air Operators Certificate] until CASA accepts Tony Griffin or an alternate as his replacement. Mr Cain should remain as a director until he has appointed Messrs Tony Griffin and Dick Brown as additional directors". That appointment occurred on 16 September 2002 although there was no formal resolution signed that day. The ASIC Form 304 to that effect was signed and dated that day by Mr Cain and a subsequent resolution to that effect was intended by Mr Cain to be effective on and from 16 September 2002.

"I signed the ASIC Form 304 to resign from AMC and to simultaneously have Messrs Anthony Griffin and Richard Brown appointed as directors to AMC. After I had executed the documents, I told Mr Cetrola, whom I considered to be acting for the newly appointed directors of AMC as a result of the settlement, that I had complied with my obligations, and that as Tony Griffin and Richard Brown had been appointed as directors of AMC, I have now resigned from AMC and I am no longer a director. Mr Cetrola told me that he would process the forms with the ASIC, and that he would attend to the minutes regarding the s 260 Corporations Act matter".

30 Although it was contemplated by the parties that a formal resolution by the directors of AMC would be passed accepting Mr Cain's resignation, it was apparent, and I am satisfied, that the intention of the parties was that such resignation would take effect on and from 16 September 2002. So much appears from TAO's solicitors' letter of 12 September 2002 (par [28] above) and the fact that Mr Cain appointed Mr Griffin and Mr Brown as directors on 16 September 2002.

31 This intention of the parties is reflected in cl 4.2 of the Agreement which relevantly provides:

"On the Settlement Date (to the extent that such obligations have not already been performed), William Cain and the Companies must: (a) deliver to TAO or its nominee: … · any written resignations (in the form required by TAO) of each director, company secretary and public officer of the Companies acknowledging that he or she has no claim against the Companies for breach of contract, loss of office, redundancy compensation, payment or repayment of loans or otherwise, except for payments properly payable as an employee for Lease Entitlements; … (b) procure that duly convened meetings of the directors of the Companies are held and resolutions passed at those meetings (as applicable) which: … · appoints as additional directors, secretaries and public officers of the Companies those persons nominated by TAO by notice before the Settlement Date in writing to William Cain and who have consented to so act; · accepts the resignation (if required by TAO) of each existing director, secretary and public officer of the Companies."

32 So much also appears from Mr Cain's affidavit evidence and from a handwritten note Mr Cain sent to his solicitor on 17 September 2002 in which he stated:

"The minutes we talked about yesterday will have to be dated 16 September, because after that date I am no longer a director of the companies with Tony/Dick as directors. Can you tell your mate Frank Cetrola [the solicitor for TAO]". The minutes referred to were minutes including, inter alia, the recognition and acceptance of Mr Cain's resignation as director and secretary of AMC.

33 On 19 September 2002 Mr Frank Cetrola wrote to Messrs Botting and Armstrong seeking instructions, in effect from TAO, on a number of matters. Mr Botting was the legal officer in charge of affairs for TAO. The letter stated, inter alia:

"As to secretarial matters, please let me know if you want me to prepare Bill Cain's resignation as a secretary and as a director of AeroMarine". (Bold emphasis in original) I take the reference to "secretarial matters" to be a reference to the preparation of the documents or company returns required to be lodged with ASIC which recorded or evidenced changes in office‑holders.

34 On the next day, 20 September 2002, Mr Botting sent an email to Mr Cetrola in which he asked him, inter alia, to prepare Mr Cain's resignation as director and secretary of AMC. Mr Cetrola accepted that by 20 September 2002 TAO was requiring the resignation of Mr Cain as director and secretary, although he said this was subject to the passing of the resolution of acceptance. By 20 September 2002, at the latest, TAO had no need for Mr Cain to continue as director and secretary of AMC.

35 On 27 September 2002 Mr Cetrola wrote to Mr Cain's solicitors in which he referred to a number of matters relating to ACA. Although there is a reference in that letter to Mr Cain still being a director, it is apparent that that reference is to Mr Cain still being a director of ACA and not AMC.

36 On 4 October 2002 Mr Cetrola wrote a letter to Mr Cain's solicitors in which he attached proposed minutes of a meeting of directors of AMC and said that they could be signed and circulated by Mr Cain. The minutes provided for, inter alia, the appointment of Mr Griffin as secretary of the company and the acceptance of Mr Cain's resignation as director and secretary to take effect from the conclusion of the meeting. The minutes were incomplete as the place, date and time of the meeting was blank but those present were shown as Mr Griffin, Mr Brown and Mr Cain.

37 It is apparent from Mr Cain's solicitors' reply to that letter from Mr Cetrola that Mr Cain's view was that he had resigned at some time prior to 4 October 2002. The letter relevantly stated:

"Mr Cain has resigned as a director of both companies. The Minutes are approved; let us know the date, time and place of the meeting."

38 On 10 October 2002 TAO's solicitors wrote to Mr Cain's solicitors in which they noted that Mr Cain's solicitor had confirmed that Mr Cain "has not yet resigned as a director and secretary of both companies". Having regard to a subsequent reference in the letter to the fact that TAO required Mr Cain to remain as a director of ACA, I am satisfied that Mr Cain's solicitor was saying that Mr Cain had not resigned as a director and secretary of ACA. This is apparent from the subsequent reference in the letter to the following:

"In respect of AeroMarine, I suggest that the AeroMarine resolution that you already hold be signed by Mr Cain and be returned to me. I will then have the AeroMarine resolution signed by the other two directors so that the directors may pass the resolution without a formal meeting."

39 Those minutes were signed by Mr Cain and returned by his solicitors to TAO's solicitors on 14 October 2002. They were subsequently signed by Mr Griffin and Mr Brown and dated 5 November 2002 presumably by Mr Griffin or Mr Brown. The place of the meeting was shown as "By circulating resolution", which was written by Mr Cetrola. Shortly after 5 November 2002 Mr Cetrola lodged with ASIC the Form 304 showing that Mr Cain had ceased to be a director and secretary on 5 November 2002, which date was written by Mr Cetrola. Mr Cetrola sent a copy of the signed and dated circulating resolution to Mr Cain's solicitors under cover of a letter dated 27 November 2002.

40 Mr Young submitted that the sequence of events and conduct of the parties on and from 16 September 2002 did not assist Mr Cain as the only way Mr Cain could validly resign his position as director was to provide written notice to the company at its registered office, in accordance with r 21.5 of AMC's company constitution. Mr Young submitted that unilateral oral resignation, although possible at common law, was not available where, as here, AMC's constitution did not allow for unilateral resignation.

41 Rule 21.5 of AMC's constitution provided that: "A Director may retire from office by giving written notice to the Company at its registered office but otherwise will continue to hold office until (but not limited to the following): (a) the Director is removed by a resolution of the Company passed at a general meeting or dies in office; (b) the Director becomes disqualified under this Constitution; or (c) the term of the Director's appointment (if any) expires and the appointment is not renewed, whether or not clause 21.3 applies." It is significant to note that this rule does not require the director's notice of resignation to be accepted by the company in order to be effective. In such circumstances, if the director has given appropriate notice of resignation, the resignation will be effective independently of any acceptance by the company: Transport (Limited) v Schonberg (1905) 21 TLR 305 at 307; Glossop v Glossop [1907] 2 Ch 370 at 374.

42 Mr Cain submitted that r 21.5 was facultative rather than mandatory because of the use of the term "may" and that, as such, there was no mandatory requirement that Mr Cain give written notice of his resignation to AMC. In the absence of any requirement in the constitution of written notice to the company or acceptance of the resignation by the company, Mr Cain submitted that it was open to a director unilaterally to resign orally.

43 Mr Young accepted that, provided a company's constitution did not disallow unilateral resignation, such a form of resignation would be valid according to common law principles. However, Mr Young submitted that r 21.5 set out the only manner in which a director could resign from AMC. The use of the word "may" in r 21.5 was said to indicate that the provision was optional, that is, that a director may or may not resign from office. This interpretation was said to be supported by the words "but otherwise will continue to hold office" unless a number of situations thereafter set out arose.

44 Rule 21.5 allows for unilateral resignation as a director but requires such resignation to be in writing. There is no comparable rule in relation to the office of secretary. Thus if a director resigns in writing such resignation is effective without the need to refer to any surrounding circumstance or conduct of the parties.

45 Although r 21.5 requires a director's resignation to be effected in writing, it is still necessary to consider whether the parties by their conduct agreed or accepted that Mr Cain's oral resignation was effective or that his resignation was to be treated as effective on 16 September 2002 or on some date shortly thereafter. It will ultimately be a question of fact whether a company has notice of the resignation of a director which notice it has agreed to be sufficient notice: POW Services Ltd v Clare [1995] 2 BCLC 435.

46 A company can dispense with the formalities set out in its constitution in relation to the resignation of a director by agreement. In Latchford Premier Cinema Limited v Ennion [1931] 2 Ch 409 the company's articles provided that the office of director would become vacant if a director resigned in writing. The defendants orally tendered their resignations as directors at the company's annual general meeting and the meeting accepted their resignations. The court held that the resignations were valid. Bennett J said at 410: "I see no reason in law why the contract of service between the company and its directors should not be terminated by the same means as that by which the contract of service between two individuals may be terminated, and I see no ground in law for saying that where a written contract has been made for service which requires a written notice on either side before it can be terminated, it cannot be terminated by word of mouth by mutual agreement between the parties." 47 Latchford was implicitly approved by Windeyer J in Marks v Commonwealth (1964) 111 CLR 549. There the High Court considered the purported resignation of an officer whereby the officer had tendered his written resignation but no assent had been given by the Governor-General as was required by the Defence Act 1903-1956 (Cth). Windeyer J said at 571: "Turning from municipal corporations to trading corporations: A director of a company incorporated under the Companies Acts holds a public office: McMillan v. Guest, yet he may resign without his resignation having to be accepted by the company, unless the articles require it: Transport Limited v. Schonberg; Glossop v. Glossop; In re The Neokratine Safety Explosive Company of New South Wales Ltd.; Latchford Premier Cinema Ltd. v. Ennion. This has been put on the ground that a director is an agent of the company, and that an agent can renounce his agency: Palmer, Company Precedents, 16th ed., vol. I, p. 580." [footnotes omitted]. 48 In Knight v Bulic (1994) 13 ACSR 553 Hayne J gave tacit approval to the reasoning in Latchford. His Honour said at 561: "Both sides accepted that although the articles provide for a director to resign his office by notice in writing, a binding agreement of resignation could be reached by the director tendering his resignation orally and the company accepting that resignation. Latchford Premier Cinema Ltd v Ennion [1931] 2 Ch 409." This is so because the constitution of a company is a contract between the directors of the company and the company itself (s 140(1)(b) of the Act) which can be varied orally or implicitly by conduct. Hence a director can orally resign despite a requirement of written notice in the company's constitution, provided that such form of resignation is accepted by the company. 49 I am satisfied that Mr Cain resigned as a director and secretary of AMC on 16 September 2002 albeit not in writing, and that this form of resignation was agreed to or accepted on behalf of AMC either on that date or at the latest by 20 September 2002. The sequence of events and conduct of the parties to which I have referred makes it clear that it was the intention of the parties and, in particular Mr Cain, that Mr Cain resign as director and secretary of AMC on the date of settlement of the Agreement on 16 September 2002. That position was accepted by AMC, and on its behalf, by 20 September 2002 at the latest which was after the approval of CASA had been obtained to Mr Griffin as the responsible person for the purposes of the AO certificate. Although the circulating resolution was dated 5 November 2002, it was intended by the parties to relate to Mr Cain's resignation as a director and secretary which was to be effective from an earlier point of time. That resolution was expressed as an acceptance of Mr Cain's resignation as a director and secretary but acceptance by resolution was not required by AMC's constitution before the resignation could be effective. Although the resolution provided that Mr Cain's resignation was to take effect from the conclusion of the meeting, that provision cannot alter the fact that the resignation had taken effect at an earlier point of time. 50 In any event, TAO, the sole shareholder in AMC, assented to and accepted Mr Cain's resignation as a director and secretary when Mr Botting, its general counsel and agent, told Mr Cetrola on 20 September 2002 to prepare Mr Cain's resignation as a director and secretary. This conclusion is supported by the surrounding circumstances where it was clearly the intention of the parties that Mr Cain resign as director and secretary upon the appointment of Mr Griffin and Mr Brown as directors and the acceptance by CASA of an alternative responsible person, and these conditions were in fact met. 51 Mr Cain submitted, in the alternative, that if he had not resigned as a director and secretary of AMC prior to 29 September 2002 he should be given leave pursuant to s 267(3) of the Act to enforce the charge. Section 267(3) provides that: "On application by the chargee under a charge, the Court may, if it is satisfied that: (a) immediately after the creation of the charge, the company that created the charge was solvent; and (b) in all the circumstances of the case, it is just and equitable for the Court to do so; give leave for the charge to be enforced." 52 Counsel for Mr Cain acknowledged that, on the authorities, it did not appear that an application for leave pursuant to s 267(3) could be made after steps to enforce the charge had already been taken: Re The 21st Century Sign Company Pty Ltd (1994) 1 QdR 93 and Jesserson Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (1994) 13 ACSR 455. Counsel for Mr Cain formally made the submission that I should not follow these two decisions. However he did not press the submission but reserved his position. He submitted that those decisions should be reconsidered in the light of the reasoning in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 and Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. It is not necessary to address these issues in the light of my conclusion that Mr Cain was not a director or secretary of AMC after 20 September 2002. Nor is it necessary to consider whether orders should be made pursuant to s 1322(4) of the Act validating the charge, the enforcement of powers under it or the appointment of the receiver. 53 As the charge is not void I turn to the issue of whether the administration of AMC is subject to the powers of the receiver and manger.

Is the administration subject to the powers of the receiver and manager? 54 Mr Young contended that his powers and functions as administrator were not subject to those of the receiver and manager because the provisions in s 441A of the Act were not satisfied, and accordingly s 442D, which operates to subject an administrator's functions and powers to that of a receiver, did not apply. Therefore, Mr Cain had no right to enforce the charge by appointing Mr Taylor as receiver and manager without first obtaining the administrator's written consent or leave of the Court by virtue of s 440B of the Act. 55 Section 442D of the Act provides: "(1) Where section 441A applies, the administrator's functions and powers are subject to the functions and powers of a person as: (a) the chargee; or (b) a receiver or person of a kind referred to in paragraph 441A(3)(b) (even if appointed after the decision period). … (3) Where section 441B, 441F or 441G applies, then, so far as concerns the property referred to in subsection 441B(1), 441F(1) or 441G(1), the administrator's functions and powers are subject to the functions and powers of the chargee, receiver or other person." Section 441A of the Act provides that: "(1) This section applies where: (a) the whole, or substantially the whole, of the property of a company under administration is subject to a charge; and (b) before or during the decision period, the chargee enforced the charge in relation to all property of the company subject to the charge, whether or not the charge was enforced in the same way in relation to all that property. … (3) Nothing in section 437C or 440B, or in an order under subsection 444F(2) prevents any of the following from enforcing the charge, or any of the charges: (a) the chargee; (b) a receiver or person appointed as mentioned in paragraph (a), (b) or (d) of the definition of enforce in section 9 as that definition applies in relation to the charge, or any of the charges (even if appointed after the decision period)." The "decision period" is relevantly defined in s 9 of the Act as: "the period beginning on the day when: (a) if notice of the appointment of the administrator must be given to the chargee under subsection 450A(3) - such notice is so given; or (b) otherwise - the administration begins: and ending at the end of the tenth business day after that day." Section 440B of the Act provides that: "During the administration of a company, a person cannot enforce a charge on property of the company, except: (a) with the administrator's written consent; or (b) with the leave of the Court."

56 The parties agreed that notice of the appointment of the administrator had to be given to Mr Cain as the charge fell within s 441A(1)(a). Such notice was given to Mr Cain on 23 July 2003 by letter dated 22 July 2003. The decision period therefore commenced on 23 July 2003 and concluded at the end of 6 August 2003. Thus in order to satisfy s 441A(1)(b) of the Act, so that s 442D of the Act could apply to subject the functions and powers as administrator to those of the receiver and manager, Mr Cain was required to have "enforced the charge" on or before 6 August 2003.

When did Mr Cain "enforce" the charge? 57 Section 9 of the Act defines "enforce" in relation to a charge on property of a company under administration as including: "(a) appoint a receiver of property of the company under a power contained in an instrument relating to the charge; or (b) obtain an order for the appointment of a receiver of such property for the purpose of enforcing the charge; or (c) enter into possession, or assume control, of such property for that purpose; or (d) appoint a person so to enter into possession or assume control (whether as agent for the chargee or for the company); or (e) exercise, as chargee or as a receiver or person so appointed, a right, power or remedy existing because of the charge, whether arising under an instrument relating to the charge, under a written or unwritten law, or otherwise." The argument centred around par (e) of this definition and the meaning of exercising "a right, power or remedy existing because of the charge". 58 Mr Young submitted that the charge was first enforced on 11 August 2003 when Mr Cain appointed Mr Taylor as receiver and manager of the assets and undertaking of AMC pursuant to the charge. The enforcement was therefore outside the decision period. 59 Mr Cain and the receiver submitted that the enforcement of the charge occurred on 22 July 2003 when Mr Cain served Mr Young and AMC with a Notice of Default pursuant to the charge, and so occurred before or within the decision period. 60 Clause 6.8 of the deed of charge included the appointment of an administrator under Pt 5.3A of the Act as an "Event of Default". 61 Clause 7.1 of the deed of charge relevantly provided that: "Despite any other provision of this Deed, at any time after an Event of Default the Mortgagee may do any or all of the following: … 7.1.7 appoint in writing any person or any two or more persons jointly and/or severally to be receiver or manager or receiver and manager of the whole or any part of the Mortgaged Property whether or not a Receiver has previously been appointed; … provided that the Mortgagee must give notice of the Mortgagor before exercising a right power or remedy under this Deed. Where a provision stipulates that notice must be given then: (a) if no minimum period of notice is prescribed by statutory provision, seven days is fixed as the period during which: (i) default must continue before a notice is given or demand is made requiring payment of the Mortgage Debt or the observance or performance of obligations under this Deed; and (ii) the notice or demand referred to in sub‑clause (i) of this sub‑clause must remain not complied with before the Mortgagee's rights powers or remedies may be exercised; …" The issue thus became whether service of the Notice of Default on 22 July 2003 constituted the exercise of a right, power or remedy existing because of the charge. 62 Mr Young submitted that the Notice of Default had to be given before exercising a right, power or remedy under the deed of charge. Accordingly, the service of the notice was prior to the exercise of a right, power or remedy under the charge, it was not a step in the exercise of a right or power or remedy. 63 Mr Cain and the receiver characterised the exercise of the remedy of appointing a receiver and manager under the charge as a two‑step process. The first step was the opportunity or right to serve a Notice of Default and the second step was the right actually to appoint the receiver and manager. The service of the Notice of Default was therefore said to be a necessary step prescribed by the deed of charge in order to appoint a receiver and manager, and could be distinguished from a simple notification claiming rights under the charge which would not constitute enforcement of the charge. 64 Section 9 of the Act makes the exercise of a right, power or remedy existing because of the charge "enforcement", whereas the proviso in cl 7.1 of the deed of charge is expressed as requiring the Notice of Default to be given before the exercise of a right, power or remedy under the deed. However it does not follow that the words used in the definition of "enforce" in par (e) of s 9 are to be limited or restricted by the words used in the proviso in cl 7.1 of the deed of charge. A right, power or remedy "existing because of the charge" may be exercised before a right, power or remedy "under the charge" is exercised. The proper interpretation of the statutory expression "exercise … a right, power or remedy existing because of the charge" will determine whether the service of a Notice of Default for the purposes of the proviso also constitutes the exercise of a right, power or remedy existing because of the charge. 65 I consider that the concept of "enforcing" a right, power or remedy existing because of a charge involves the taking of a step, or the commencement of a process, contemplated, allowed or provided for by the charge without which the enjoyment or benefits of the charge cannot be obtained by the chargee. If the chargee wishes to obtain the benefit of a provision contained in the charge which will enable the chargee to protect in some way the purpose for which the charge was given, and the deed of charge requires the chargee to do an act or take a step as a prelude to obtaining that benefit, or without which that benefit cannot be obtained, then the doing of that act or the taking of that step is properly described, for the purposes of s 9(e) of the Act, as the exercise of a "right, power or remedy existing because of the charge". A distinction needs to be drawn between the taking of such a step which is the exercise of a right, power or remedy existing because of the charge and merely notifying or informing the company burdened by the charge that the chargee has rights under the charge which it is considering enforcing or which it may enforce. 66 This distinction was drawn by Hayne J in 400 Lonsdale Nominees Pty Ltd v Southern Cross Airlines Ltd (In Liq) (1993) 10 ACSR 739. The issue before the court was whether a chargee had taken a step in the enforcement of a charge within six months after the creation of the charge without the leave of the court so that the charge was void under s 267 of the Corporations Law (Cth). The solicitors for the chargee had sent a letter to a court‑appointed receiver stating that the appointment of the receiver was an event of default entitling the chargee to act upon its security and the solicitors called upon the receiver to undertake not to collect the chargee's book debts without its prior written consent. Hayne J held that the letter was not the taking of a step in the enforcement of the charge. His Honour said at 747: "In my view simply informing another party who claims an interest in the property which is subject to the charge of the existence of the charge, or informing that party of the fact that the chargee claims rights given by the charge, is not taking a step in its enforcement. As was pointed out in argument, the very fact of registration of the charge amounts to notice to the world of the existence of the charge and the rights that are claimed. Giving that notice again to a party interested in the property does not in my view amount to taking a step in the enforcement of the charge. It may be characterised as a step taken with a view to subsequent enforcement of the charge but having no element of immediate invocation or exercise of compulsive power, I do not consider that it is itself a step in enforcement of the charge. It is clear from the Act that appointing a receiver or taking possession of the charged property is taking a step in enforcement. Of course they are not the only matters that are or can be steps in enforcement but in my view it is significant that each of those steps is the actual exercise of powers given by the charge and that the exercise is against the company in invitum. In my view the threat of legal action does not amount to taking a step in enforcement." Hayne J characterised a step in the enforcement of a charge as having an "element of immediate invocation or exercise of compulsive power". 67 In my view a distinction can be drawn between a letter claiming rights and the service of a notice required by the deed of charge to be served. The latter has immediacy and is an overture to coercion. Put another way, a distinction is to be drawn between the notification of rights or the notification of prospective action and the service of a notice which constitutes a step required to be taken by the deed of charge as part of the procedure or process for the exercise of rights or remedies given by the deed of charge: Re Scandees Danish Home Ice Cream Pty Ltd (1995) 16 ACSR 777 at 779. 68 An example of the exercise of a power in relation to property subject to a charge is to be found in BBC Hardware Limited v G T Homes Pty Ltd [1997] 2 Qd R 123 where the commencement of a court proceeding to enforce a charge was held to be the exercise of such power as it was the only way in which the chargee could exercise its equitable charge. 69 The dichotomy between exercising rights, powers or remedies required to be exercised in order to implement provisions of a deed of charge and threatening to exercise rights under a deed of charge was explained more recently in Australian Innovation Ltd v Dean‑Willcocks and Purchase (2002) 40 ASCR 521. Palmer J said at 526‑527; "In my opinion, the authorities make it clear that a chargee does not purport to take a step in the enforcement of a charge within the meaning of s 267(1)(b), and its predecessor s 205A(1) of the Companies Code, merely by threatening to exercise its rights as a secured creditor or by taking a step preparatory to the exercise of such rights: what is required is that the creditor actually exercise, or attempt to exercise, a right which it has under the charge in aid of the realisation of its security: see, eg, Salcedo v Mawarie Mining Co Pty Ltd (1991) 6 ACSR 197 at 201; 400 Lonsdale Nominees Pty Ltd v Southern Cross Airlines Ltd (In Liq) (1993) 10 ACSR 739 at 744." This line of reasoning supports the proposition that it is the taking of a step or doing an act which is provided for in the deed of charge which is properly described as "enforcing" the charge for the purpose of par (e) of the definition of "enforce" in s 9 of the Act. 70 I am therefore satisfied that the service of the Notice of Default by Mr Cain on 22 July 2002 constituted an act of enforcing the charge and that Mr Cain as chargee enforced the charge before or during the "decision period". 71 As a consequence, s 441A of the Act applies in relation to the present administration of AMC. By virtue of s 442D(1) the administrator's functions and powers are subject to the functions and powers of Mr Cain as chargee and Mr Taylor as receiver and manager. The prohibition on enforcement of the charge during the administration without the administrator's written consent or the leave of the Court contained in s 440B of the Act does not apply by virtue of s 441A(3) of the Act. It is therefore not necessary to consider what matters ought to be taken into account in determining whether the Court should grant leave to Mr Cain to enforce the charge. Such leave is not required. Accordingly no issue as to the solvency of AMC at the time of the creation of the charge arises.

Conclusion 72 It is therefore appropriate to declare that the charge created on 29 March 2003 is valid and enforceable, that Mr Taylor's appointment as receiver and manager was valid and that the administrator's powers and functions are subject to the powers and functions of the receiver and manager. I will hear the parties as to the form of the orders which should be made. I certify that the preceding seventy-two (72) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.

Associate: Dated: 25 September 2003 Counsel for the Plaintiff in proceeding V 3185 of 2003: J I Fajgenbaum QC & H A Aizen

Solicitor for the Plaintiff in proceeding V 3185 of 2003: Grundy Maitland & Co

Counsel for the Defendants in proceeding V 3185 of 2003: J L Evans

Solicitor for the Defendants in proceeding V 3185 of 2003: Deacons

Counsel for the Plaintiff in proceeding V 3189 of 2003: J L Evans

Solicitor for the Plaintiff in proceeding V 3189 of 2003: Deacons

Counsel for the Defendants in proceeding V 3189 of 2003: J I Fajgenbaum QC & H A Aizen

Solicitor for the Defendants in proceeding V 3189 of 2003: Grundy Maitland & Co

Date of Hearing: 26, 27 & 28 August 2003

Date of Judgment: 25 September 2003