Re Continental Pacific [2002] NSWSC 789

New South Wales Supreme Court

CITATION : Re Continental Pacific [2002] NSWSC 789 CURRENT JURISDICTION: Equity Division Corporations List FILE NUMBER(S) : SC 3581/02 HEARING DATE(S) : 26/08/02 JUDGMENT DATE : 26 August 2002

PARTIES : Christopher John Palmer - Plaintiff Re Continental Pacific Insurance Company (Aust) Ltd and CP (Aust) Holdings Ltd (In liq) JUDGMENT OF : Barrett J

COUNSEL : Mr P M Fordyce - Plaintiff SOLICITORS : Morgan Lewis Alter - Plaintiff CATCHWORDS : CORPORATIONS - voluntary administration - board resolution to appoint administrator passed by sole director of company required to have minimum of three directors - whether company having too few directors contravenes Corporations Act - validating order made LEGISLATION CITED : Corporations Act 2001 (Cth) Corpique (No 20) Pty Ltd v Eastcourt Ltd (1989) 15 ACLR 586 CASES CITED : DVT Holdings Ltd v Bishop.com.au Ltd (2002) 42 ACSR 378 Re Supreme Imports Pty Ltd [2001] NSWSC 1209 Wagner v International Health Promotions Pty Ltd (1994) 15 ACSR 419 DECISION : Validating order made

- 4 - IN THE SUPREME COURT REVISED OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

MONDAY 26 AUGUST 2002

3581/02- APPLICATION OF CHRISTOPHER JOHN PALMER - RE CONTINENTAL PACIFIC INSURANCE COMPANY (AUST) LIMITED & CP (AUST) HOLDINGS LIMITED (IN LIQ)

JUDGMENT

1 Before the court are applications in respect of Continental Pacific Insurance Company (Australia) Limited which I shall call "Continental Pacific" and Continental Pacific (Australia) Holdings Limited which I shall call "Holdings". Mr Palmer, who is now the liquidator of each company, seeks orders having the effect of curing certain irregularities. 2 Continental Pacific is a wholly owned subsidiary of Holdings and Holdings, in turn, is wholly owned by Clareleigh Holdings Pty Limited, a company owned and controlled by Mr Hashman. This pattern of ownership has existed at all times relevant for present purposes. 3 By an originating process filed on 11 July 2002, Mr Palmer, as plaintiff, seeks orders validating the first step in the process by which Mr Palmer was, in the first instance, purportedly appointed the administrator of each company under Pt 5.3A of the Corporations Act 2001 (Cth) and subsequently, in each case, became the liquidator under the form of creditors voluntary winding up which follows on from voluntary administration pursuant to s.446A. 4 The first step to which I refer is the purported resolution of the board of directors called for by s.436A. The problem is that there was, at material times, only one director of each company, being Mr Hashman. The evidence shows that he purported to hold a meting of one at which a resolution in the terms contemplated by the section was supposedly passed by him alone. There can be no doubt, as I see it, that he formed and expressed the necessary opinion as to actual or likely insolvency and that, to that extent, the appropriate issue was addressed and dealt with. 5 Each of the companies is a public company, not a proprietary company. As a result, s.201A(2) requires that there be at least three directors. In addition, the constitution of each company works by reference to a clear assumption (which is not surprising in light of s.201A(2)) that the company may not have a sole director. Each constitution sets the minimum number of directors at three. In the case of Holdings, the constitution states that the quorum for a meeting of directors is two directors. In the case of Continental Pacific, the relevant provision says that a quorum is two or such greater number as is determined by the directors from time to time. In the absence of evidence of any such determination I must work on the footing that the quorum is two. 6 In the constitution of Continental Pacific, unlike the constitution of Holdings, there is a further provision to the effect that, if there is a vacancy in the office of a director, the remaining directors may act but, if their number is not sufficient to constitute a quorum, they may act only for the purpose of increasing the number to a number sufficient to constitute a quorum or of convening a general meeting. 7 When a resolution of its board was supposedly passed in accordance with s.436A, neither company had a board of the minimum size required by s.201A(2) and the one director who was in office could not, under the constitution, constitute a quorate meeting, even assuming that the particular context might be regarded as one permitting a "meeting" of one. (I note here that s.436A does not, in terms, require a meeting – it only requires a resolution and, as the Act itself recognises in, for example, Division 1 of Part 2G.2, there can be a resolution without a meeting.) In the case of Continental Pacific, there is the further point that the constitution expressly limited the capability of the single director to increasing the number of directors to the minimum of three or convening a general meeting. 8 But this case is distinguishable from other cases of lack of quorum in that the totality of the directorate, in the person of the sole director, assented to the proposed resolution. It is not as if there were directors capable of attending who did not attend, or that proceedings took place in the absence of directors whose participation might have had some bearing on the outcome. 9 There is, I think, some uncertainty as to the consequences of failure to comply with s.201A(2). As has been pointed out in other cases (recently reviewed by Windeyer J in DVT Holdings Ltd v Bishop.com.au Ltd (2002) 42 ACSR 378), a company may fall into the position of having too few directors without any action on its part. This can, for example, happen where several directors resign or are removed at the one time. The company, as a person, has no control over these events and it cannot be intended that s.201A denies or controls an individual's right to resign or the corporators' right to remove. It is, for me, difficult to accept that a company contravenes s.201A(2) when the number of its directors falls below the statutory minimum. If that were the correct approach, a proprietary company with one director would, by operation of s.1311(1)(c), become guilty of an offence upon the death of that single director. 10 Despite this unease, I must accept the possibility that a contravention of s.201A(2) occurs if the number of the directors falls below the stated minimum for any reason. The need to recognise the possibility arises from observations of Cohen J in Corpique (No 20) Pty Ltd v Eastcourt Ltd (1989) 15 ACLR 586 and the comment by Windeyer J in DVT Holdings (above) that: "It is an offence for a public company to have fewer than three directors." 11 I therefore approach Mr Palmer's applications for curative orders on the basis, first, that at the time of the purported passing of the resolution of the kind referred to in s.436A, there existed a contravention of the Corporations Act in relation to each company in that the number of the directors was less than the number required by s.201A(2) and, second, that the action of the sole director in purporting to pass the resolution was in contravention of the constitution because its provisions did not allow a single director to pass such a resolution. 12 The claim for orders curing these defects and validating the position were advanced in reliance on s.1322(4)(a) and also by reference to s.447A. The claim must be considered in the light of the clear reality that each of Continental Pacific and Holdings was, at both shareholder and director level, under the sole control and direction of Mr Hashman and that his was the only human mind and will at work within each company. The purported passing of the s.436A resolution and the opinion reflected by that supposed resolution were thus expressions of the opinion and intention of the only person whose decisions were in any way meaningful in relation to the conduct of the affairs of each company. The case is not one in which those central issues were not addressed (cf, Wagner v International Health Promotions Pty Ltd (1994) 15 ACSR 419). 13 On the basis I have stated concerning contravention of s.201A(2) and of the constitution of each company, this is a case in which s.1322(4)(a) may be invoked, provided that the pre-requisites in s.1322(6) are satisfied. The latter section forbids the making of an order under s.1322 (4)(a) unless the court is satisfied as to one of the three matters in paragraph (a)(i) to (a)(iii), plus the overriding requirement in paragraph (c) that no substantial injustice has been or is likely to be caused to any person. 14 It is necessary for only one of the matters in s.1322(6)(a)(i) to (iii) to be shown to ground the jurisdiction. The first possibility (s.1322(6)(a)(i)) is that the act, matter, thing or proceeding to be validated is essentially of a procedural nature. That can be passed over here as I do not consider the absence of the statutory minimum number of directors to be of a procedural nature. It goes to substance, in the sense of substantive compliance with a statutory provision and a provision of the constitution. When it comes to the quorum, however the non-compliance may be regarded as procedural but that is not of itself enough to bring the case within s.1322(6)(a)(i). 15 The second possibility to be considered (s.1322(6)(a)(ii)) is that the person or persons concerned in or party to the contravention or failure acted honestly. There is no doubt on that score here and no room for any inference that there was any dishonesty of any kind. The evidence shows that there was an honest mistake by solicitors in appreciating and advising their client of the requirement that a public company, unlike a proprietary company, have more than one director and of the related requirements of the constitutions. 16 The third possibility (s.1322(6)(a)(iii)) is that it is just and equitable that the order be made and again it seems to me that the indications are positive here in that there is only one creditor which, it appears, was content to see the company go into administration. There is in both a direct and an indirect sense only one shareholder to worry about, so far as opinions and wishes expressed through resolutions of both shareholder and director levels are concerned and he, like the sole creditor, was content with the substance of what was happening – indeed, so much so that he actively participated by himself taking steps by which he intended to place each company in administration. 17 As to s.1322(6)(c), I cannot see that validation of what has occurred could possibly be productive of any injustice, nor that there has already been any injustice. 18 Section 1322(4)(a) allows the court to make an order declaring to be not invalid any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under the Act. The declaration is, of course, only effective to prevent invalidity to the extent that it would otherwise have arisen from or been traceable to the contravention by reference to which the order is made. The actions whereby Mr Hashman alone supposedly resolved, as the board of directors, to the effect stated in s.436A purported to be an act, matter or thing done or proceeding taken under that section. Mr Hashman's actions may therefore be the subject of an order under s.1322(4)(a) and the effect of that order will be to preclude any assertion that, because of the provisions of the Act and constitution as to number of directors, quorum and capability of directorate consisting of fewer than three persons, the act, matter or thing was not validly done or the proceeding was not validly taken. And if that assertion of invalidity is precluded, so too will be all other assertions of invalidity depending upon or arising from it. The availability of s.1322(4)(a) for this purpose in cases such as the present is, I think, confirmed by a number of decisions. They are conveniently collected in the judgment of Campbell J in Re Supreme Imports Pty Ltd [2001] NSWSC 1209.