New South Wales Supreme Court CITATION : HPI Australia Pty Ltd [2008] NSWSC 1106 HEARING DATE(S) : 20/10/08 JUDGMENT DATE : 21 October 2008 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Orders under s 447C and s 447A CATCHWORDS : CORPORATIONS - voluntary administration - administrators purportedly appointed to each of several companies by sole director - constitution in one case allowed sole director but in others did not - whether action of sole director effective to cause resolution of board to be passed - in some cases sole remaining director permitted to act in "emergency" - whether appointment of administrators is "emergency" - in other cases act of sole director ineffective - whether curative order should be made - consideration of provision under which order should be made LEGISLATION CITED : Companies (New South Wales) Code, Table A, Schedule 3, Regulations 57, 73, 74 Corporations Act 2001 (Cth), Part 5.3A, ss 248F, 436A(1), 447A, 447C, 1322(4), 1322(6) CATEGORY : Principal judgment Australasian Memory Pty Ltd v Brien [2000] HCA 30; (1999) 200 CLR 270 Glen Morton Holdings Pty Ltd v D'Aloia [2001] FCA 1331 CASES CITED : McVeigh v Merlo [2004] VSC 107 Re Continental Pacific Insurance Co (Aust) Ltd [2002] NSWSC 789 Re Pasdonnay Pty Ltd [2005] FCA 335; (2005) 53 ACSR 717 Re Supreme Imports Pty Ltd [2001] NSWSC 1209 PARTIES : Simon Cathro (in his capacity as administrator) - Applicant FILE NUMBER(S) : SC 4827/08 COUNSEL : Mr J Baird - Applicant SOLICITORS : Sparke Helmore - Applicant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY 21 OCTOBER 2008 4827/08 HPI AUSTRALIA PTY LIMITED JUDGMENT 1 The applicant, Mr Cathro, is ostensively the continuing administrator of each of six companies under Part 5.3A of the Corporations Act 2001 (Cth). He and his partner, Mr Cussen, were ostensibly appointed on 27 August 2008. At the second meeting of creditors Mr Cussen resigned and did not seek to be confirmed in office. Mr Cathro, however, was confirmed as the sole administrator on that occasion. 2 Apprehending that there are or may be defects in the appointment of 27 August 2008 in each case, the applicant has approached the court seeking orders putting beyond question his status as administrator. 3 The circumstance that has prompted the application in respect of each company is that there was only one director of the company in office at the relevant time, and that one director acted alone in purporting to take the action described in s 436A(1) by the words "if the board has resolved". The sole director of each company was Mr Urwin. 4 I shall consider each of the companies in turn. 5 The first company is Ce'Nedra Pty Ltd. Mr Urwin purported to act alone under s 436A(1) to appoint Mr Cathro and Mr Cussen as administrators of this company. The constitution of the company states in article 21(a) that the number of directors shall be not less than two. Article 31(c) says that, until otherwise determined, two directors shall be a quorum. There is no evidence of any other determination. There is, in article 32, a prohibition upon the directors acting if their number is below the number fixed for a quorum or the minimum number of directors (in each case two) "except in the case of emergency or for the purpose of filling of vacancies or of summoning a general meeting". 6 It follows that action by Mr Urwin alone to take the steps contemplated by s 436A(1) as being taken by "the board" were within his power under article 32 if he acted in what was properly described as a "case of emergency". 7 I am satisfied that a company faced with a need to take action to appoint administrators because of insolvency or expected insolvency should be regarded as facing a situation of "emergency". Such a situation is one calling for immediate and decisive action in the interests of creditors in order that exposure to danger may be addressed. It is within the ordinarily accepted concept of "emergency". 8 The appropriate course in relation to Ce'Nedra Pty Ltd will be to make an order under s 447C declaring the purported appointment of the administrators on 27 August 2008 to be valid, notwithstanding that the action required by s 436A(1) was taken by the sole person at that time in office as a director. Section 447C is apt to deal with cases where doubt has arisen on a specific ground and the doubt is found not to have substance: see, for example, Glen Morton Holdings Pty Ltd v D'Aloia [2001] FCA 1331. A s 447C order in positive terms is not a curative order because it is based on a finding that there is nothing that needs to be cured. 9 I next consider North Ryde Hotel Pty Ltd where the position is similar. In that case the constitution states that the minimum number of directors is three. A quorum is two directors, unless and until the directors fix some other quorum. There is no evidence that any other number has been fixed. The constitution goes on to say that if there is any vacancy in the office of a director, the remaining director or directors may act, but this is subject to article 7.10(d) which limits the things that can be done by the remaining director or directors to increasing the number of directors to the minimum number (or a number sufficient to constitute a quorum) or convening a general meeting. Article 7.10(d) goes on, however: "and until that has happened, must only act if and to the extent that there is an emergency requiring them to act". 10 The word "them" here clearly refers back to "the remaining director or directors". 11 As in the earlier case, I am satisfied that the sole director was faced with a situation of "emergency" on 27 August 2008 in which the constitution enabled him to act alone. There will again be an order, as I have indicated, under s 447C. The doubt is resolved in favour of the validity of the appointment of the two administrators on that day. 12 I consider next Australian Hotel Acquisition Pty Ltd. In that case the relevant provision is article 1.5 of the constitution: " 1.5 Single Director Company The Company is a Single Director Company if: (a) at the time of its registration as an Australian company, only 1 person had consented to be a Director; or (b) the Company has passed an ordinary resolution that it be a Single Director Company, and the Company has not, since registration or the passing of that resolution (as the case requires), passed a resolution that it cease to be a Single Director Company and, at the relevant time, there is only 1 Director." 13 An ASIC search shows that, at the time of the company's registration, only one person had consented to be a director of the company. There is no evidence of any resolution of the company that it cease to be a "Single Director Company". And at the time under consideration, there was only one director. The inference therefore must be that the company was at that time a "Single Director Company". 14 Article 2.1(a) says that, if the company is a "Single Director Company", it must have "at least" one director. The words "at least" show that even though the company is a "Single Director Company", it may have more than one director. The real point is that it may regularly and validly operate with one director. 15 Again, therefore the matter will be appropriately dealt with by an order under s 447C. 16 I consider next the case of HPI Australia Pty Ltd. The constitution of that company states that, until otherwise determined by the company in general meeting, the number of the directors will be not less than two nor more than seven. The quorum is fixed at two or such other number as the directors determine. There is no evidence of any different determination under either of these provisions, with the result that the minimum number of directors was two and two directors were required for a quorum. Unlike the first two cases I have considered, there is here no provision allowing a deficient board to act in case of emergency or, for that matter, at all. 17 Before discussing the case of HPI Australia Pty Ltd further, I shall outline the position in relation to HPI Parramatta Pty Ltd, which is similar. The constitution in that case states that, subject to specified modifications (none of which is relevant), the regulations in Table A in Schedule 3 to the Companies (New South Wales) Code apply. Regulation 57 says that the number of directors and the names of the first directors shall be determined by the subscribers to the memorandum or a majority of them. There is no evidence of the number so fixed, but given that the Companies (New South Wales) Code did not countenance single director companies and required that a proprietary company have at least two directors, it may safely be inferred that the number fixed by the subscribers was two or more. 18 Regulation 73 of Table A fixes the quorum for a meeting of directors at two, unless the directors themselves otherwise determine. There is no evidence of any such determination. Regulation 74 of Table A says that, in the case of a vacancy in the office of a director, the remaining directors may act; but if their number is not sufficient to constitute a quorum at a meeting of directors, they may act only for the purpose of increasing the number of directors to a number sufficient to constitute a quorum or to convene a general meeting. There is no power for the remaining director or directors to act in case of emergency. 19 In relation to each of HPI Australia Pty Ltd and HPI Parramatta Pty Ltd, therefore, the position is that the person who was for the time being the only director of that company could not validly act as a board of directors in the way contemplated by s 436A(1). This is therefore not a case of doubt that may be dealt with by order under s 447C. It is a case in which the purported appointment will stand as a nullity unless an order of the court alters its character. 20 I consider, finally, North Ryde Property Pty Ltd. In this case there is no evidence of the content of the company's constitution. That is a position or possibility that one must accept today in relation to a proprietary company. The legislation no longer requires lodgment with ASIC of the constitution of a proprietary company or a resolution altering the constitution of a proprietary company. It is left for ASIC to decide whether to require such a company to lodge a consolidated copy of its constitution, something that one imagines ASIC would not do without some particular reason. The public record is therefore not helpful in this instance. 21 The content of the constitution of North Ryde Property Pty Ltd has not been made available to the court because the ostensible administrator does not have the document, despite having been given a large quantity of corporate records. From those records it appears that there were six directors throughout the year to 30 June 2006. The two directors ceased to hold office on 28 July 2008 and that another three ceased to hold office on 12 August 2008. Mr Urwin, as I have said, is the sole remaining director. 22 From the evidence I have just mentioned it may be inferred that, if the company had a constitution at all, it was a constitution requiring a plurality of directors. Such a constitution may well have been in a form similar to that of the constitutions of the last two companies I have considered. If there was no constitution, and the replaceable rules applied, the replaceable rule in s 248F would have required the presence of two directors for a quorum at a meeting of directors. In this case, I am prepared to infer that the position is the same, in essence, as in relation to the last two companies mentioned. It is, therefore, appropriate to consider those three companies together. 23 It is relevant to note the circumstances in which each of the companies came to have one director only. The companies are members of the Bridgecorp Group, the holding company of which is a New Zealand company in liquidation. The affidavit filed in support of the present application refers to proceedings in the High Court of New Zealand which resulted in a settlement. Clause 14 of the settlement agreement made provision for two companies to procure a change of directors of a number of companies, including the two with which I am presently concerned, so that there would be two directors in office, being Mr Urwin, a person aligned with one of the two companies, and Mr Kendon, a person aligned with the other. It appears that the parties to the agreement were not able to procure the individuals to act in the way envisaged in that Mr Kendon did not consent to the appointment and was not appointed. Mr Urwin alone remained as a director in each case and the members of the companies have obviously not seen fit to take steps to change that. 24 In each such case the appointment of administrators was, clearly enough, desired by the one person who was in office as a director at the time – the person who had been left by the members to be the sole director. There is nothing before the court to suggest that the appointment of administrators represents anything other than the corporate will of each company. In addition, an affidavit of Mr Cussen makes it clear that Mr Urwin approached the question of appointment of administrators in a considered and responsible way and that there were good grounds for such an appointment. 25 In the circumstances in which the companies found themselves at 27 August 2008, appointment of administrators was a rational and sensible step. Receivers had been appointed by a secured creditor and were in the process of selling the only substantial assets. Mr Urwin was unable to satisfy himself as to the companies' ongoing financial stability. Creditors have not voiced any objection to the advent or continuation of voluntary administration. Mr Cathro was confirmed in office at the second meeting of creditors on 8 September 2008. He deposes to a belief that no-one will be prejudiced by an order validating his position by way of validation of the appointment of the two administrators originally. I am of the opinion that the defect should be cured by an appropriate order in relation to each of HPI Australia Pty Ltd, HPI Parramatta Pty Ltd and North Ryde Property Pty Ltd. 26 That raises a question of what the appropriate order is. Mr Baird has drawn my attention to a number of cases and I have considered others. Three distinct approaches appear to have been taken to validation in cases of this kind. In some cases, an order has been made under s 1322(4) alone: see, for example, Re Continental Pacific Insurance Co (Aust) Ltd [2002] NSWSC 789. In other cases there has been an order under s 447A alone. An example is Re Pasdonnay Pty Ltd [2005] FCA 335; (2005) 53 ACSR 717. In yet other cases, there have been orders under both sections: see, for example, Re Supreme Imports Pty Ltd [2001] NSWSC 1209 and McVeigh v Merlo [2004] VSC 107. 27 One difference between the two sections is that an order cannot be made under s 1322(4) unless the court is satisfied in relation to matters specified in s 1322(6) including, importantly, that no substantial injustice has been or is likely to be caused by the validation. There is no corresponding requirement expressed in s 447A, but it is axiomatic that the court would not make an order under that or any other section if it thought that substantial injustice would or might be occasioned by it. 28 Given the broad scope of s 447A, as confirmed by the High Court in Australasian Memory Pty Ltd v Brien [2000] HCA 30; (1999) 200 CLR 270, including its capacity, in the case of a subsisting administration or purported administration, to have a retrospective curative effect, it is possible for an order under that section to cause Part 5.3A to operate in relation to a particular company as if a purported resolution of the company's board, particularly described, was, for the purposes of s 436A(1), a valid and effectual resolution of its board; and as if a purported instrument of appointment under s 436A(1), particularly described, was, for the purposes of that section, a valid and effectual instrument of appointment. 29 If that position is achieved under s 447A it seems to me that there is no need for any further order under s 1322(4). 30 In the case of each HPI Australia Pty Ltd, HPI Parramatta Pty Ltd and North Ryde Property Pty Ltd, it will be sufficient to make an order under s 447A along the lines I have described. 31 Short minutes of orders under ss 447C and 447A, in conformity with these reasons, should be delivered to my Associate. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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