Is your appointment valid? Part 2

Australian Securities and Investments Commission v Planet Platinum Ltd [2016] VSC 120

Facts

On 21 April 2015, ASIC commenced an application to wind up Planet Platinum Ltd (the Company) on just and equitable grounds and sought orders appointing provisional liquidators.

On 3 May 2015, a director of the Company met with the Company’s solicitor as well as various other company representatives. During this meeting, the solicitor stated that in order to deal with the ASIC proceedings, the Company needed to appoint an administrator. During the meeting, the proposed administrator was telephoned and explained the issues surrounding the ASIC proceedings. After asking a few questions, the administrator accepted the appointment.

On 4 May 2015, the board met and resolved to appoint the administrator.

On 13 May 2015, one of the Company’s directors, Mr Trimble, made a statement to the meeting of creditors that the Company was still solvent and the administrator was appointed due to compliance issues.

Issue

ASIC sought a declaration that the appointment of the administrators was invalid because the directors did not have a bona fide opinion that the Company was insolvent or likely to be insolvent.

The Court’s Decision

The Court held that the appointment of the administrator was invalid as:

• The directors did not form an opinion that the Company was insolvent; and
• The dominant purpose of the appointment was to deal with the ASIC application and privatise the Company.

Efthim AsJ, in reaching that conclusion, also considered the following matters:

• At the time of the appointment of the administrator, the directors did not have access to management accounts or other financial information concerning the Company;
• While the Company’s $4.7 million loan with NAB was due to expire on 31 May 2015 and the Board believed that the Company would not be able to pay the debt at that date, the due date would have likely been extended, as it had been on a number of previous occasions;
• Mr Trimble knew of and deposed to that fact; and
• The secondary loans were worth approximately $260,000, while the Company’s assets totalled approximately $10 million.

His Honour stated that insolvency practitioners must be satisfied of the statutory conditions in section 436A before accepting appointments.

His Honour ordered that the Administrator be paid for any work that benefited the Company on a quantum meruit basis.

Granger (as joint and several administrator of A.C.N. 165 098 617 Pty Ltd) v ACN 165 098 617 Pty Ltd (admin apptd) [2016] FCA 474

Facts

Ms Taratoris, one of the directors of ACN 165 098 617 Pty Ltd (Company), contacted a potential administrator with a view to appointing him as a joint and several administrator of the Company. The Company’s second director Mr Seaman was, according to Ms Taratoris, overseas and was not responding to her regarding the business and unpaid creditors.

The Company then executed a resolution signed by Ms Taratoris only, appointing an administrator. After his appointment, the administrator received a copy of the Company’s constitution which required any resolution to be passed by two directors.

Upon being informed of the administration, Mr Seaman took issue with the appointment.

Issue

The Administrators applied to the Court for orders that:

• Their appointment be treated as valid pursuant to Part 5.3A of the Corporations Act 2001 (the Act); and
• The costs of the application be paid out of the assets of the Company.

The directors did not oppose the making of Order 1 but opposed the making of Order 2 on the basis that the administrators should not have proceeded with the administration knowing that their appointment was invalid.

The Court’s Decision

The Court found that the administrators should not have their costs of the application paid out of the assets of the Company because:

• The administrators knew or ought to have known at the time of their appointment that the appointment was invalid, and certainly by the time they received the Company’s constitution; and
• It was necessary and appropriate for the administrators to then make the effort to obtain Mr Seaman’s consent to the appointment before proceeding with the administration and should not have simply accepted at face value any information from Ms Taratoris about difficulty in contacting Mr Seaman.

Ross (as joint and several administrators of GNC Homes Pty Ltd) (admin apptd) v GNC Homes Pty Ltd (admin apptd) [2015] SASC 168

Facts

On 20 July 2015, joint and several administrators were appointed over GNC Homes Proprietary Ltd (Company) by its sole director Mr Burrows. However, on 16 June 2015, the shareholders of the Company had resolved to remove and replace Mr Burrows as the sole director but did not notify Mr Burrows or ASIC.

At the time of their appointment, the administrators conducted a search of the ASIC records in respect of the Company which stated that Mr Burrows was the sole director of the Company.

Issue

The administrators applied to the Court for a declaration pursuant to section 447A of the Corporations Act 2001 confirming the validity of their appointment.

The Court’s decision

Sections 128 and 129 of the Act provide that a party dealing with a company is entitled to proceed on a set of assumptions. One of those assumptions, pursuant to section 129(2) of the Act, is that the person listed as a director of a company on the ASIC records is an actual director of that company.

Such assumptions then become incontrovertible facts with the only question for the Court being whether or not any particular corporate act is valid based on such facts.

The Court held that since Mr Burrows was listed as the sole director in the ASIC records, the administrators were entitled to rely on the assumption that he was the sole director and had the power to execute a company resolution and the appointment was valid.

Implications of the three decisions

These cases show that it is important for insolvency practitioners to carefully consider the proposed basis upon which they are to be appointed prior to accepting an appointment. The Planet Platinum and Granger cases show that failing to take such steps can result in, inter alia, practitioners being unable to recover their remuneration and expenses. Prior to accepting an appointment practitioners should ensure that they:

• Confirm that the directors have formed a bona fide opinion as to the insolvency or likely insolvency of the company and that the appointment is not being made for some other purpose;
• Ensure that the resolution will be correctly passed in accordance with the Company’s constitution or the Replaceable Rules; and
• Ensure the resolution appointing them was passed by directors as they appear on the ASIC records.

This article has been prepared by Polat Siva, Partner and Jason Frydman, Solicitor.