The legitimacy of the appointment of an administrator by a single director

The legitimacy of the appointment of an administrator by a single director

HPI Australia Pty Ltd [2008] NSWSC 1106, New South Sales Supreme Court, Equity Division, Barrett J, 21 October 2008

(a) Summary

Mr Cathro (Applicant) sought orders from the court declaring that his appointment as administrator of each of six companies was valid. The Applicant was concerned that the appointments might be defective as each company only had one director in office at the time of the appointment and so may not have formed the necessary quorum for appointing an administrator by board resolution under section 436A(1) of the Corporations Act 2001 (Cth) (Corporations Act). In each case, for varying reasons, the court made an order either to confirm or cure the appointment of the administrator despite there being only a sole director in office at the time.

In so doing, his Honour (1) commented on the construction of certain clauses of company constitutions in the context of the appointment of an administrator; (2) considered the factors which would justify an order under section 447A of the Corporations Act to correct a defect in the appointment of an administrator and (3) considered the operation of sections 447A, 447C and 1322(4) of the Corporations Act.

(b) Facts  

The Applicant was appointed as the administrator, under Part 5.3A of the Corporations Act, of each of the following six companies: Ce’Nedra Pty Ltd (Ce’Nedra); North Ryde Hotel Pty Ltd (North Ryde Hotel); Australian Hotel Acquisition Pty Ltd (Australian Hotel); HPI Australia Pty Ltd (HPI Australia); HPI Parramatta Pty Ltd (HPI Parramatta) and North Ryde Property Pty Ltd (North Ryde Property).

The Applicant was initially appointed with his partner, Mr Cussen, on 27 August 2008. At the second meeting of creditors, Mr Cussen resigned but the Applicant was confirmed as the sole administrator for the six companies. At the time of the appointment, Mr Urwin was the sole director of each of the six companies but nevertheless purported to take the action described by section 436A of the Corporations Act as a “board resolution”. This was despite the constitutions of five of the companies requiring a quorum of two directors for any meeting. Accordingly, the Applicant applied to the court seeking orders that put his appointment beyond doubt.

(c) Decision

In each case the court made an order declaring that the appointment was valid, despite being made by a sole director. However, the justification for the orders differed depending on whether or not the constitution of the relevant company provided for single director resolutions “in the case of emergency”.

(i) Orders under section 447C, including where constitutions provided for single directors to act in the case of emergency

The constitutions of Ce’Nedra and North Ryde Hotel each had provisions that allowed a single director to act on behalf of the company when facing a situation of “emergency” that required them to act.  His Honour held that the need to appoint administrators because of insolvency or expected insolvency should be regarded as a situation of “emergency” for the purpose of such provisions.  Barrett J stated that such a situation called for “immediate and decisive action in the interest of creditors in order that exposure to danger may be addressed”.

Barrett J found that Australian Hotel was a Single Director Company within the meaning of its constitution and that it could validly act and operate with one director.

Accordingly, Barrett J made declarations under section 447C of the Corporations Act in each case that the appointments of the administrator in these circumstances were valid.  These orders were not curative in nature but confirmed a finding that no aspect of the appointment needed to be cured.

(ii) Orders under section 447A, where constitutions did not provide for single directors to act in the case of emergency

His Honour undertook a different analysis with respect to HPI Australia, HPI Parramatta and North Ryde Property.

HPI Australia and HPI Parramatta had adopted constitutions that required a minimum of two directors for a quorum at a meeting of directors and which made no provision for a single director to take any action on behalf of the company in the case of “emergency”. His Honour distinguished clauses which enabled the remaining directors to act to increase the number of directors to a number sufficient to constitute a quorum or to convene a general meeting.  As there was no ability for the sole director to act, Barrett J noted that the appointment of the administrator for HPI Australia and HPI Parramatta would “stand as a nullity unless an order of the court alters its character”.

In the case of North Ryde Property, Barrett J noted that the content of the company’s constitution had not been made available to the court.  Corporate records were submitted that established that there were six directors in the year to 30 June 2006 and that two directors had ceased to hold office on 28 July 2008.  His Honour noted that these records appeared to indicate that, should a constitution exist, it was likely to require multiple directors.  Given this, and the fact that the replaceable rules in section 248F of the Corporations Act required the presence of two directors for a quorum at a meeting of directors, Barrett J considered North Ryde Property together with HPI Australia and HPI Parramatta.

Barrett J took into account a number of factors in determining whether the appointment of the Applicant as administrator was valid for these three companies. Firstly, his Honour considered the circumstances in which the companies came to have only one director. In particular, his Honour noted that the corporate group of which these companies were part had entered into a settlement agreement in the context of a liquidation and the settlement agreement required changes to the number of directors of HPI Australia and HPI Parramatta such that there would only be two directors. However, while Mr Urwin consented to act as director, the second nominated person did not consent to the appointment. The members of the company had not seen fit to take steps to change the current situation. Secondly, as Mr Urwin was left as the sole director and he clearly desired the appointment of the administrator, there was no evidence to suggest that the action by Mr Urwin represented anything other than the “corporate will” of each company. Thirdly, his Honour took into account evidence from Mr Cussen that the decision had been taken in a considered and rational manner and that the appointment of an administrator was a sensible next step. Barrett J noted that the creditors had not voiced objection to the appointment and that it had in fact been ratified by the creditors at the second meeting on 8 September 2008. Finally, his Honour made a brief reference to the fact that it appeared no-one would be prejudiced by the appointment being upheld by the court.

Given these factors, Barrett J was of the opinion that any defect in the appointment should be cured by the court by an appropriate order and therefore considered the appropriate order to make.  Cases were referred to in which such an order had been made under section 1322(4) of the Corporations Act which confers power on the court to make an order “declaring that any act . purporting to have been done . under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation”. However, his Honour noted the need to consider the range of matters specified in section 1322(6) in order for relief under section 1322(4) to be available.

Whilst not suggesting relief would not be available under section 1322(4), his Honour instead took the view that, in any event, such an order was within the scope of section 447A of the Corporations Act which provides for the court to make an order which “it thinks appropriate about how this Part [5.3A] should operate”. His Honour noted the broad scope of section 447A, as confirmed by the High Court in Australasian Memory Pty Ltd v Brien [2000] HCA 30; (1999) 200 CLR 260, including its capacity in the case of a subsisting or purported administration to have retrospective curative effect.

His Honour made orders under section 447A in relation to HPI Australia, HPI Parramatta and North Ryde Property such that Part 5.3 operated in relation to those companies as if a purported resolution of the relevant company’s board was, for the purposes of an appointment of an administrator under section 436A(1), valid and effectual and a purported instrument of appointment under section 436A(1) was, for the purposes of that section, a valid and effectual instrument of appointment.

 

Co-authored by Paul Lewis.

Published by SAI Global on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Securities Exchange and the leading law firms.