FEDERAL COURT OF AUSTRALIA Granger v A.C.N. 165 098 617 Pty Ltd [2016] FCA 474 File number(s): NSD 551 of 2016 Judge(s): JAGOT J Date of judgment: 6 May 2016 Catchwords: CORPORATIONS – application that applicants' appointment as administrators be treated as valid pursuant to Pt 5.3A of the Corporations Act 2001 (Cth) – where company constitution required a valid resolution be passed by two directors – where resolution appointing administrators passed by a single director Legislation: Corporations Act 2001 (Cth) Pt 5.3A Date of hearing: 2 May 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 18 Counsel for the Plaintiffs: Ms K J Young Solicitor for the Plaintiffs: JHK Legal Counsel for the Defendants: The defendants did not appear Counsel for Ms L Taratoris (Director, First Defendant): Mr L T Fermanis appeared with leave Solicitor for Ms L Taratoris (Director, First Defendant): Holman Webb Counsel for Mr J R Seaman (Director, First Defendant): The party appeared in person with leave ORDERS NSD 551 of 2016 BETWEEN: GEOFFREY GRANGER AS JOINT AND SEVERAL ADMINISTRATOR OF A.C.N. 165 098 617 PTY LTD (ADMINISTRATORS APPOINTED) ACN 165 098 617 First Plaintiff BRIAN SILVIA AS JOINT AND SEVERAL ADMINISTRATOR OF A.C.N. 165 098 617 PTY LTD (ADMINISTRATORS APPOINTED) ACN 165 098 617 Second Plaintiff AND: A.C.N. 165 098 617 PTY LTD (ADMINISTRATORS APPOINTED) ACN 165 098 617 First Defendant A.C.N. 165 098 617 PTY LTD (ADMINISTRATORS APPOINTED) ACN 165 098 617 IN ITS CAPACITY AS TRUSTEE FOR THE PHC BUSINESS TRUST ABN 65 813 160 154 Second Defendant JUDGE: JAGOT J DATE OF ORDER: 6 MAY 2016 THE COURT ORDERS THAT: 1. Part 5.3A of the Corporations Act 2001 (Cth) (the Act) is to operate in relation to A.C.N. 165 098 617 Pty Ltd as if the resolution made by Leanne Taratoris passed on 30 March 2016 to appoint Geoffrey Granger and Brian Silvia as joint and several administrators was a valid resolution of the board of directors for the purposes of s 436A of the Act, notwithstanding the lack of the requisite quorum at that meeting. 2. The costs of and incidental to this application are not to be costs and expenses of the administration which are to be paid out of the assets of the first defendant. 3. The further amended originating process dated 27 April 2016 otherwise be dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT 1 Before me today is an application by the plaintiffs for orders that their appointment as administrators be treated as valid pursuant to the Corporations Act 2001 (Cth) on and from the date of the resolution of one of the directors for that appointment, being 30 March 2016, as well as an order that the costs of and incidental to the application be costs and expenses in the administration and be paid out of the assets of the company. 2 I have given leave for the two directors of the company to make submissions today. Neither director opposes the making of order 1, that is, that the appointment of the administrators be taken to be valid. Both directors oppose the making of order 5, that the costs of this application be paid out of the assets of the company. 3 The reason the matter arises in this way is that in accordance with [12] of the affidavit dated 18 April 2016 of Geoffrey Granger, one of the purported administrators, Leanne Taratoris, one of the directors, contacted them seeking help. At the meeting on 30 March 2016 Ms Taratoris informed Mr Granger that there were two directors but that the other director Joshua Seaman: …was overseas and was not responding to her attempts to speak to him about the business and the creditors that needed to be paid. 4 Mr Granger's affidavit continued: Ms Taratoris informed me that she had advised Mr Seaman via text message that the landlord was being difficult and wanted the bank guarantee replaced. Ms Taratoris reported that she informed Mr Seaman that she did not have the money to replace any bank guarantees and asked if Mr Seaman had any money to put in. Ms Taratoris advised me that Mr Seaman had responded that he did not have any funds. 5 According to Mr Granger's affidavit, the resolution to appoint the administrators was passed by the single director at the meeting, Ms Taratoris. After that the administrators obtained the company search which indicated, as the administrators acknowledge they were already aware, that there were two directors. On the following day the administrators sought and received a copy of the company's constitution. The constitution disclosed that a valid resolution was required to be passed by the two directors. 6 The inevitable consequence, which is accepted by the administrators, is that as at 30 March 2016, the date of their appointment, the administrators were aware that their appointment was invalid. Despite this, and as a result of the information that had been provided by Ms Taratoris, the administrators proceeded with the administration. 7 At the same time as they did this, however, the administrators forwarded an email on the following day to Mr Seaman informing him of their appointment and requesting that he complete a directors' report as to affairs by 4 April 2016. Within a few days Mr Seaman responded to the email from the administrators indicating that he had not had any written communication from the other director and asking how the agreement with the other director had been reached "without my involvement or formal knowledge". In that email Mr Seaman also said: I agreed to give her management responsibilities whilst taking a leave of absence for personal reasons. Please give me an update, on the current status of your discussions and what has had signatures placed on paper? 8 Mr Seaman, who has appeared today, said that he was overseas for a period of around a week and was contactable at all times. This is the basis for his position that the administrators, notwithstanding what they had been told by Ms Taratoris, should not have the costs of this application because they proceeded with the administration knowing that they had not been validly appointed. This is the same position that Ms Taratoris takes; that is, no matter what she said on 30 March 2016, the administrators had a duty to ensure the validity of their appointment and ought to have contacted Mr Seaman, obtained his consent to the appointment and, thereafter, following valid appointment, proceeded with the administration. 9 Mr Seaman has also made it clear that at the meeting of creditors which is proposed to be held this Friday, being the second meeting of creditors, he wishes to seek the appointment of different administrators or liquidators on the basis that the company should be wound up. He also submits that the administrators should not have their costs of the administration between 30 March and 2 May 2016, again on the basis that they ought not to have proceeded with the administration knowing that their appointment was invalid. This latter submission is for another day, the only application before me being that of the administrators. 10 For their part, the administrators submit that they should have the costs of this application. They made a decision to proceed with the administration in circumstances where they had been informed by Ms Taratoris that Mr Seaman was overseas and had not responded to her communications and did not have any funds in any event. By their appointment the directors were protected from liability for insolvent trading, it being acknowledged that the company is insolvent. The administrators made a judgment call to assist Ms Taratoris. As they made a decision based on what they believed to be the position as indicated by Ms Taratoris, accordingly, at worst perhaps there should be an order that they be entitled to only 50 per cent of their costs of the application to this Court to validate their appointment. Otherwise, the costs of the administration, raised by Mr Seaman, would have to be resolved separately. 11 I do not find this issue easy to resolve. 12 The administrators did have a duty to ensure that their appointment was valid. It is also clear that it was not a mere oversight by the administrators to proceed with the administration in the circumstances I have described. The inescapable inference is that the administrators were aware at the time of the appointment that there were two directors of the company and that in all likelihood a resolution to appoint administrators was required to be approved by the two directors. They obtained a copy of the company's constitution immediately after the resolution purporting to appoint them, which indicates that they could have obtained a copy of that constitution immediately before appointment. Further, it is apparent from Mr Granger's affidavit that he knew that Mr Seaman was overseas and, I infer, must have been provided with Mr Seaman's contact details because the administrators made contact with Mr Seaman the very next day by way of email. While there was some delay in response by Mr Seaman between 1 and 4 April 2016, it is difficult to accept from the evidence that there was such a degree of urgency that Mr Seaman could not have been contacted before the appointment. 13 During the course of the argument before me I expressed some concern that there seemed to be a certain inconsistency in the position of the directors, on the one hand being willing to not oppose the making of an order in effect deeming the appointment to be valid, and on the other hand opposing the costs of this application being paid out of the assets of the company. However, what seems to be clear is that there is at this time no practical alternative to the making of order 1 so that the meeting of creditors can occur. The only other alternative might be the immediate winding up of the company, but that is not sought by anyone today and, in circumstances where the meeting of creditors is proposed for this Friday, I accept what appears to be the unanimous position that there is no reason not to make the order validating the appointment. 14 This has been done with recognition by the directors that it would be difficult, if not impossible, for them to suggest that the costs of the administrators between today's date and the meeting of creditors should not be paid out of the assets of the company because the position of both directors is that the validation order should be made, albeit without prejudice to their capacity to contend that the administrators should not have the costs and expenses of the administration paid out of the company between 30 March and 2 May 2016. As I have said, these issues are for another day and the only issue that I am dealing with today, apart from the substantive order, is whether the administrators should have their costs of this application paid out of the assets of the company. 15 Ultimately, I have reached the view that the administrators should not have their costs of this application paid out of the assets of the company. In my view, it was necessary and appropriate that the administrators make the effort to obtain Mr Seaman's consent to the appointment before proceeding with the administration in circumstances where they must have had Mr Seaman's contact details and were able to contact him almost immediately after the meeting. Further, the administrators must be taken to have known at the time of their appointment that the appointment was invalid. They could and should have found out from the company's constitution, which they managed to obtain one day after the appointment, that a resolution to appoint administrators had to be approved by both directors and they could and should have contacted Mr Seaman to obtain his consent before the appointment was purported to be effected. That is, they should not have simply accepted at face value any information from Ms Taratoris about difficulty in contacting Mr Seaman. 16 In this latter regard, I note that what is said at [12] of Mr Granger's affidavit is internally inconsistent, in that Ms Taratoris seems to have informed Mr Granger both that Mr Seaman was not responding to her attempts to speak to him about the business and creditors, but also had informed her that he did not have any funds. In these circumstances, I consider that it was incumbent upon the administrators to make further enquiries before the resolution was passed and they accepted and acted on the appointment. The only reason for this application and the associated costs of it is the fact that the administrators did not take these steps before 30 March 2016. 17 But for the fact that the administrators did not take these steps this particular application would have been entirely unnecessary. If there had been a stand-off between the two directors with the practical consequence that no resolution could be passed to appoint the administrators, then the directors could have each taken their own advice about the appropriate course of action in that circumstance. What has happened, however, is that the administrators have proceeded with the administration in circumstances where they knew that their appointment was invalid. 18 As a result, I consider that that there should be no order for the costs of this application to be met out of the assets of the company. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 11 May 2016