FEDERAL COURT OF AUSTRALIA Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428 CORPORATIONS – voluntary administration – invalid resolution to appoint administrator - whether curative order should be made – whether administration should continue or a provisional liquidator should be appointed Corporations Act 2001 (Cth) ss 436A(1)(a), 440A(3), 447A and 447C and Pt 5.3A Wagner v International Health Promotions (1994) 12 ACLC 986 - applied Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 – applied Australasian Memory Pty Limited v Brien (2000) 200 CLR 270 - cited Re Brashs Pty Ltd (1994) 15 ACSR 477 - cited Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 – applied In the matter of First Netcom Pty Ltd (2001) 19 ACLC 324 - cited Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd (1999) 17 ACLC 642 - cited In the matter of Inventive Marketing Pty Ltd (2000) 36 ACSR 206 – cited Shirlaw v Graham [2001] NSWSC 612 – cited Supreme Imports Pty Ltd (in liquidation); Re De Vries [2001] NSWSC 1209 - cited IN THE MATTER OF VOODOO TECH PTY LIMITED ACN 088 963 893 PANASYSTEMS PTY LTD v VOODOO TECH PTY LIMITED V 3079 OF 2003 GREGORY JONES v VOODOO TECH PTY LIMITED V 3098 OF 2003 MERKEL J 9 MAY 2003 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 3079 OF 2003 IN THE MATTER OF VOODOO TECH PTY LIMITED ACN 088 963 893 BETWEEN: PANASYSTEMS PTY LTD ACN 098 179 045 PLAINTIFF AND: VOODOO TECH PTY LIMITED ACN 088 963 893 DEFENDANT JUDGE: MERKEL J DATE OF ORDER: 9 MAY 2003 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The interlocutory applications dated 15 April 2003 and 29 April for the appointment of a provisional liquidator and for a declaration under s 447C of the Corporations Act 2001 (Cth) ("the Act") respectively, be dismissed. 2. The costs of all parties in respect of the plaintiff's interlocutory application dated 15 April 2003 for the appointment of a provisional liquidator be reserved. 3. Gregory Jones pay the costs of the Plaintiff and Peter Ngan of and incidental to the interlocutory application for a declaration under s 447C of the Act. 4. Liberty to apply be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 3098 OF 2003 IN THE MATTER OF VOODOO TECH PTY LIMITED ACN 088 963 893 BETWEEN: GREGORY JONES PLAINTIFF AND: VOODOO TECH PTY LIMITED ACN 088 963 893 DEFENDANT JUDGE: MERKEL J DATE OF ORDER: 9 MAY 2003 WHERE MADE: MELBOURNE THE COURT MAKES THE FOLLOWING ORDERS AND DECLARATION: 1. Part 5.3A of the Corporations Act 2001 (Cth) ("the Act") is to operate in relation to Voodoo Tech Pty Limited ACN 088 963 893 ("the company") as if the resolution passed at the meeting of directors held on 2 April 2003 to appoint Peter Ngan as administrator of the company was a valid resolution of the board of directors for the purposes of s 436A, notwithstanding the failure of the board of directors to pass a resolution to the effect of that set out in s 436A(1)(a) of the Act. 2. Declare that the said resolution is not invalid by reason of the failure of the company to comply with the requirements set out in s 436A(1)(a) of the Act. 3. Gregory Jones is to pay the costs of the plaintiff and Peter Ngan of and incidental to the interlocutory applications brought under s 447A of the Act dated 6 May 2003. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 3079 OF 2003 IN THE MATTER OF VOODOO TECH PTY LIMITED ACN 088 963 893 BETWEEN: PANASYSTEMS PTY LTD ACN 098 179 045 PLAINTIFF AND: VOODOO TECH PTY LIMITED ACN 088 963 893 DEFENDANT V 3098 OF 2003 AND BETWEEN: GREGORY JONES PLAINTIFF AND: VOODOO TECH PTY LIMITED ACN 088 963 893 DEFENDANT JUDGE: MERKEL J DATE: 9 MAY 2003 PLACE: MELBOURNE REASONS FOR JUDGMENT Introduction 1 The applicant, Panasystems Pty Ltd ("Panasystems"), has applied to the Court to wind up the respondent, Voodoo Tech Pty Ltd ("Voodoo") and to appoint a provisional liquidator to Voodoo pending the hearing of the winding up application on 23 May 2003. Panasystems has also made an interlocutory application under s 447C of the Corporations Act 2001 (Cth) ("the Act') for a declaration that the purported appointment on 16 April 2002 of Peter Ngan ("Ngan") as administrator of Voodoo is invalid. Gregory Jones ("Jones"), the Chairman of Voodoo, has applied to the Court under s 447A of the Act for an order that, in the event that the appointment of Ngan is invalid, the Court validate the appointment. 2 Voodoo develops computer software. It has a number of large clients, including Australia Post. Most of its clients are located in Sydney and Melbourne. A company controlled by Jones holds all the issued shares in Voodoo. In about September 2002 an agreement was reached between a group of investors and Jones that a company to be nominated by those investors would purchase one half of the issued shares for $65,000 and would lend up to $225,000 to Voodoo. The loan was to be made at a rate of $45,000 per month. 3 Panasystems was nominated as the entity that would acquire the shares from Jones' company. The purchase price for the shares, namely $65,000, was paid in two instalments, one on 29 November 2002 and the other on 13 December 2002. Notwithstanding the payments, Jones' company has not transferred any shares to Panasystems. In addition to making payment for the shares, Panasystems has lent amounts totalling $165,000 to Voodoo. There has been a dispute between the investors and Jones. According to the investors they were not provided with regular financial reports as promised, and have been, in substance, excluded from the conduct of Voodoo's affairs. 4 Despite the injection of funds from Panasystems, Voodoo did not trade profitably. It appears to be common ground that by April 2003 Voodoo was not able to pay its debts as and when they fell due. On 1 April 2003 Panasystems' solicitors wrote to Voodoo about the insolvency of the company. The letter stated that Voodoo "cannot continue to operate without a significant injection of funds and we call upon you to agree forthwith that the company be placed into administration so that the creditors can consider its future, or alternatively it be placed into liquidation." The letter went on to state that unless agreement was reached in relation to the future of the company, Panasystems would make application to wind it up and appoint a provisional liquidator to take control of its affairs. 5 On 2 April 2003 there was a meeting of directors. The meeting was conducted on the telephone with Jones and his solicitor and accountant in Sydney and Mr Williamson ("Williamson") who is a director of Panasystems, his solicitor and other investors in Melbourne. Williamson's account in his affidavit of what transpired is as follows. Jones acknowledged that Voodoo was in serious financial difficulty. He was of the view that Voodoo should not continue trading. He moved a resolution that Ngan be appointed as voluntary administrator "effective immediately". Jones voted in favour of the resolution and Williamson voted against it. In view of the tied vote Jones purported to exercise his casting vote as chairperson of the meeting pursuant to sub-rules 94.1 and 95.3 of the Constitution of Voodoo. This was challenged by Williamson's solicitor for the reason that no chairperson had in fact been appointed to the meeting. Nevertheless, Jones declared the resolution passed on his casting vote. The challenge concerning Jones' entitlement to a casting vote as chairperson was not pressed at the hearing. 6 Jones' account of the meeting in his affidavit differs from that given by Williamson. Relevantly, for present purposes, Jones states that prior to calling for a vote on the resolution he stated to the meeting that Voodoo "did not have an ability to meet its debts as and when they fall due" and that "as such" he called for a vote on the resolution he was proposing that, in the circumstances, Voodoo be placed in the hands of an administrator, namely Ngan. Jones prepared Minutes of the meeting, which record the resolution that was passed as follows: "On a motion moved Mr G Jones seconded Mr G Jones, using casting vote, IT WAS RESOLVED that: (i) The Company is nearing insolvency or insolvent within the meaning of Section 588G of the Corporations Act 2001. (ii) Mr Peter Ngan, Registered Liquidator, be appointed as Administrator of the Company at a date subsequent to 2 April 2003, which date is noted on the document appointing the Administrator. (iii) The Director(s) sign the document appointing the Administrator. The Chairman declared the motion carried." 7 The difference between the two accounts of the meeting is significant because s 436A(1) provides: "A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed." 8 Panasystems, in reliance upon Williamsons' account of the meeting, contends that the appointment of Ngan as administrator is invalid because there was no resolution to the effect that in the opinion of Jones, the director voting for the resolution, Voodoo "is insolvent, or is likely to become insolvent at some future time" as required by s 436A(1)(a) of the Act. Jones, in reliance upon his account of the meeting, contends that, in context, the resolution was "to the effect" of the resolution required by s 436A(1)(a). Section 436A(1) 9 In Wagner v International Health Promotions (1994) 12 ACLC 986 ("Wagner") Santow J held that the appointment of the administrator in that case was invalid as, although there was discussion at the meeting of directors about the "questionable solvency" of the company and a statement was made by the Chairman of the meeting that "he had reason to believe" that the company "may be" insolvent, those statements fell short of a resolution in the terms required by s 436A(1)(a) with the consequence that the appointment was invalid. Santow J also held (at 989) that the invalidity could not be cured by s 1322 of the Corporations Law as it arose from a failure to comply with the mandatory requirement of the Corporations Law predecessor to s 436A(1)(a) and was not a "procedural irregularity". In Wagner no application was made under the Corporations Law predecessor to s 447A. 10 The Constitution of Voodoo does not require that resolutions at meetings of directors be passed or recorded in any formal manner. Although the Constitution provides for the Minutes of a meeting of directors signed by a Chairperson to be received in evidence it is not suggested by any of the parties that the Minutes can be relied upon to conclusively prove what they record. Thus, the issue of fact for determination in the present case is whether there was a resolution passed to the effect that in the opinion of Jones, the director voting for the resolution, Voodoo was insolvent or was likely to become insolvent at some future time. 11 I would be inclined to the view that, if Jones' version of the meeting were to be accepted, his statement as to Voodoo's insolvency, in effect, should be taken to be a recital to the resolution appointing Ngan as administrator and, as such, would probably be sufficient for the purposes of s 436A(1) to form part of that resolution. However, before having to determine that issue I must first be satisfied that Jones' version of the meeting, rather than that of Williamson, is to be preferred. It is clear that, on Williamson's version of the meeting, there was merely a reference to the serious financial difficulties of Voodoo and no reference to any actual or prospective insolvency of Voodoo. Thus, on that version nothing was said at the meeting to the effect that Voodoo was insolvent or was likely to become insolvent. While it may well be that those attending the meeting had that in mind there must, at the least, be an unequivocal statement to the meeting to the effect required by s 436A(1)(a) if such a statement were to be considered to be part of the resolution passed at the meeting. 12 Notwithstanding the conflict between the two versions of the meeting held on 2 April 2003 there was no cross-examination of any of the deponents of the Affidavits filed by the parties. If I was unable to determine which of the versions is to be preferred it would follow that Panasystems, carrying the onus to make out its case of invalidity, would fail. However, I have concluded that the version proffered by Williamson is to be preferred to that proffered by Jones and I shortly state my reasons for arriving at that conclusion. 13 First, Jones' reliability is significantly undermined by the fact that, even on his own version of events, no resolution was passed to the effect of the resolution that he purported to record as the resolution passed in the Minutes of the meeting. Second, contemporaneous notes were said to have been taken by the parties attending the meeting in Sydney and in Melbourne. Yet, the only contemporaneous notes produced in evidence were those taken by Williamson and Panasystems' solicitor in Melbourne. Those notes do not contain any reference to a statement being made to the effect that Voodoo was insolvent. Importantly, Panasystems' solicitor dictated a detailed memorandum of the discussion that occurred at the meeting shortly after it was held and those notes do not contain any reference to Voodoo's insolvency. Rather, they corroborate the version of the meeting proffered by Williamson. The failure to produce the notes said to have been taken by one of the parties attending the meeting in Sydney enables me to more confidently infer that those notes would not be helpful to the version of the meeting proffered by Jones. 14 Third, Jones' solicitor swore an affidavit which confirmed part of Jones' version of the meeting but did not confirm his alleged statements to the meeting concerning the insolvency of Voodoo. I regard that omission as significant as it has the consequence that neither solicitor attending the meeting has given evidence that is consistent with Jones' version of the events. I do not give much weight to the fact that Jones' accountant supported his version of events as the accountant stated that he did not take notes of the meeting and did not endeavour to recite the actual content of the conversations. Rather, he merely stated that the "detailed affidavit" of Jones is an "accurate record of the proceedings and voting of the resolution". The accountant's credibility in that regard is undermined by the fact that he also stated that the Minute "is an accurate record of the resolution", a view that is not supported by the evidence. 15 It must follow that the requirements of s 436A(1) were not satisfied with the consequence that, subject to the application of Jones under s 447A, the appointment of Ngan would be invalid. Section 447A 16 Section 447A provides: "(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. (2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the Court may order under subsection (1) that the administration is to end. (3) An order may be made subject to conditions. (4) An order may be made on the application of: (a) the company; or (b) a creditor of the company; or (c) in the case of a company under administration—the administrator of the company; or (d) in the case of a company that has executed a deed of company arrangement—the deed's administrator; or (e) ASIC; or (f) any other interested person." 17 In Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 ("Portinex") at 397-400 [29]-[33] Austin J, after carefully considering the nature and scope of the power conferred by s 447A, concluded that the section can be relied upon to cure a lack of a quorum at a meeting where the board of directors purported to resolve that the company is insolvent and that an administrator be appointed. In the course of considering the authorities in relation to 447A, and its statutory predecessors, Austin J referred to a number of cases, including Australasian Memory Pty Limited v Brien (2000) 200 CLR 270 and emphasised the broad scope of s 447A. In Re Brashs Pty Ltd (1994) 15 ACSR 477 ("Re Brashs") Hayne J accepted that a statutory predecessor to s 447A was not confined to filling in gaps in the legislative scheme and could be used to exonerate a person from what would otherwise be a contravention or a failure to comply with a provision of that scheme. In Portinex Austin J also stated that the power conferred by s 447A is to be exercised only in relation to how Pt 5.3A is to operate and therefore looks to the future, rather than the past, with the consequence that the orders made under s 447A only have effect from the time of their making. Although Austin J at 400 [33] stated that he did not have to consider whether s 447A could be used if there was no attempt at all to pass a resolution in compliance with s 436A(1) (cf Wagner), it is consistent with his Honour's reasoning to conclude that in a case such as the present, where there was an attempt, albeit unsuccessful, to pass a resolution in compliance with s 436A(1) because of the insolvency of the company, the failure to pass a resolution to the requisite effect may be cured by an order under s 447A. 18 Cases decided since Portinex support a broad view of s 447A: see In the matter of Inventive Marketing Pty Ltd (2000) 36 ACSR 206; Shirlaw v Graham [2001] NSWSC 612 ("Shirlaw") and Supreme Imports Pty Ltd (in liquidation); Re De Vries [2001] NSWSC 1209 ("De Vries"). In Shirlaw Young CJ in Eq, stated at [14] that s 447A can apply to a case, such as the present, where the directors failed to pass a resolution to the effect required by s 436A(1)(a). His Honour also expressed the view at [14] that, contrary to the view of Austin J in Portinex, s 447A could operate retrospectively: see also De Vries at [24]. Indeed, it was not contended by counsel for Panasystems that s 447A is not an available source of judicial power to overcome the deficiency in the resolution passed at the meeting of 2 April 2003 nor did he contend that the power could not operate retrospectively. 19 While I accept that a Court should hesitate to exercise the power under s 447A to overcome a failure to comply with a statutory requirement for a valid appointment of an administrator under Pt 5.3A, I have decided that I should exercise the power conferred under the section in the present case. My main reason for doing so is that it was common ground between the directors voting at the meeting that Voodoo was insolvent and that it was therefore necessary for the directors to take steps to deal with that situation. Accordingly, it was understood by the directors that the basis for the resolution appointing Ngan as administrator was Voodoo's insolvency, even if that was not expressly stated to be so. The failure to pass a resolution to the effect required by s 436A(1)(a) appears to have come about as a result of inadvertence in the conduct of the meeting. Nonetheless, Voodoo's insolvency was accepted by the directors participating in the meeting to be the basis for the resolution. 20 Panasystems put forward a number of discretionary considerations against the exercise of the power conferred by s 447A but those considerations related more to the question of whether it was preferable for a provisional liquidator to be appointed in the circumstances, rather than an administrator. As was pointed out by Austin J in Portinex at 400-401 [36], those questions are extraneous to and do not arise out of the deficiency which led to the invalidity of the resolution and can be appropriately dealt with in the application for the appointment of a provisional liquidator under s 440A(3). Significantly, Panasystems was not able to point to any prejudice to any party that would occur if the Court exercised its discretion under s 447A. 21 In the circumstances, it is appropriate to order under s 447A that Pt 5.3A is to operate in relation to Voodoo as if the resolution passed at the meeting of directors of Voodoo on 2 April 2003 was a valid resolution of the board of directors for the purpose of s 436A, notwithstanding the failure of the board of directors to pass a resolution to the effect of that set out in s 436A(1)(a) of the Act. As in Portinex it is also appropriate to make a declaration to the effect that the resolution passed by the board of directors of Voodoo on 2 April 2003 in relation to the appointment of Ngan as administrator of Voodoo is not invalid by reason of the failure of Voodoo to comply with the requirements set out in s 436A(1)(a). Section 440A(3) 22 The remaining matter is whether I should allow the administration to continue or, in the circumstances, whether I should exercise the power of the Court to appoint a provisional liquidator of Voodoo under s 440A(3). 23 As I have declared that the appointment of Ngan as administrator is valid, s 440A(3) of the Act comes into operation. That sub-section provides: "The court is not to appoint a provisional liquidator of a company if the company is under administration and the court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than have a provisional liquidator appointed." 24 The position appears to be as described by the Queensland Court of Appeal in Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456. There McPherson JA, with whom Davies and Pincus JJA agreed, said at 457 in relation to s 440A(2): "The question of whether an administration should continue, rather than that there be a winding up, is obviously closely related to the further question of whether the creditors could hope to get more by way of payment of their debts from one form of process or administration than from the other. In order to satisfy the court of the matter referred to in s 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of the administration rather than the other would produce a larger dividend, or at least an accelerated dividend for the creditors." 25 Although those comments were made in relation to s 440A(2) they are equally applicable to s 440A(3) having regard to the similarity in language. 26 The dispute concerning the conduct of Voodoo and its acknowledged insolvency are such that there can be little doubt that, but for any administration under Pt 5.3A of the Act, it would be appropriate to appoint a provisional liquidator. It would follow that the administrator (see In the matter of First Netcom Pty Ltd (2001) 19 ACLC 324) and Jones, who are seeking to resist a winding up order, carry the onus of establishing that it is in the interests of Voodoo's creditors for it to continue under administration rather than be wound up. Ngan's counsel contends in the alternative that, as Ngan has already undertaken steps in the administration, if a provisional liquidator is appointed it is preferable that it be him, rather than the liquidator nominated by Panasystems who has had no prior experience with Voodoo. It is not suggested that Ngan is not independent or has had any prior association with Jones or companies or entities associated with Jones: cf Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd (1999) 17 ACLC 642 at 643. 27 The question arising is whether the administration should be permitted to continue until the hearing of the winding up application on 23 May 2003, rather than whether the administration or a winding up order is appropriate. Although the evidence is not altogether satisfactory, I have been persuaded that in the interim period, the creditors are more likely to gain benefit from the administration continuing. My reasons for that conclusion are as follows. 28 First, the administrator is likely to have a better prospect than a provisional liquidator of securing a contract for ongoing services with Australia Post. Such a contract would be of benefit to the creditors. 29 Second, Ngan, acting as administrator, has already commenced the process of obtaining offers for the purchase of Voodoo's business. The creditors are more likely to benefit from that process continuing. 30 Third, there is no evidence that Ngan is not independent. If he had demonstrated any partisanship as between the disputing parties or if there was any basis for considering he is not fully independent of those parties I would not have continued his administration. 31 Fourth, no real prejudice has been demonstrated by Panasystems if the administration continues. Indeed an administration under Pt 5.3A was put forward by its solicitors as an appropriate step on 1 April 2003. 32 Fifth, the main reason provisional liquidation was proposed by Panasystems in preference to administration was that the liquidator would be likely to more vigorously pursue misconduct claims against defaulting directors or officers of the company. I am not satisfied that that is necessarily so, but, in any event, I expect that until 23 May 2003, when this issue can be reviewed, the administrator's main activity will be directed to best securing or realizing Voodoo's business assets in the interests of creditors. Conclusion 33 Jones is entitled to orders validating the administration under s 447A. It must follow that Panasystem's interlocutory application under s 447C is to be dismissed. However, that application would have succeeded had the Court not made orders validating the administration. As Jones' inadvertence and omission led to both applications, he should pay the costs of the parties in respect of those applications. In all the circumstances it is appropriate to reserve the costs of the parties of Panasystem's application to appoint a provisional liquidator. Liberty to apply is also to be reserved. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel. Associate: Dated: 8 May 2003 Counsel for the Plaintiff: Mr P Bornstein Solicitor for the Plaintiff: Irlicht & Broberg Counsel for the Defendant: Mr M O'Connor Solicitor for the Defendant: Andma Legal Counsel for the Administrator: Mr M Pirrie Solicitor for the Administrator: Stephen Byrne Date of Hearing: 2 and 5 May 2003 Date of Judgment: 9 May 2003