Clifton & Hall v The Berri Club Incorporated - [2014] SASC 170

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
CLIFTON & HALL v THE BERRI CLUB INCORPORATED
[2014] SASC 170
Reasons of Judge Withers a Master of the Supreme Court
14 November 2014
CORPORATIONS - MANAGEMENT AND ADMINISTRATION - MEETINGS - MEETINGS OF DIRECTORS - QUORUM
CORPORATIONS - SUPERVISION - COURTS - POWERS - AS TO IRREGULARITIES
ASSOCIATIONS AND CLUBS - INCORPORATED ASSOCIATIONS
Application to remedy irregular appointment of administrators.
Associations Incorporation Act 1985 (SA) s 40B; Corporations Act 2001 (Cth) Pt 5.3A, s 447A, referred to.
Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; Panasystems Pty Ltd v Voodoo Tech Pty Ltd (2003) 21 ACLC 842, applied.
Re Darin (as administrators of Palamedia Ltd) [2010] NSWSC 451; Re Ethan Minerals Ltd (admins appointed) [2011] NSWSC 899, considered.

CLIFTON & HALL v THE BERRI CLUB INCORPORATED
[2014] SASC 170

JUDGE WITHERS. The Berri Club Incorporated (hereinafter “the Club”) is an Association that was incorporated on 29 August 1967. Its objects, set out in paragraph 1.2 of its Constitution[1], are as follows:
The Objects of the Club shall be:
a.To provide facilities and entertainment for Members and Members’ guests.
b.To support local institutions and bodies in a manner decided by the Board.
[1] See Exhibit “TJC3” to FDN 3.
The Club was incorporated under the Associations Incorporation Act 1985 (SA). By 2012 the Club had approximately 185 members. The annual fee for membership was $10.00.
In his affidavit in support of an application pursuant to s 447A of the Corporations Act 2001 (Cth) (“CA”), Timothy James Clifton attested that on or about 11 February 2013 he spoke to the accountant of the Club who advised him that he was of the view that it should enter voluntary administration. The accountant asserted that he had explained this to the members of the Board of the Club. Mr Clifton attests that he was requested to attend a meeting of the Board at Berri on 12 February 2013. The accountant provided to Mr Clifton financial statements for the Club for the years ending 30 June 2008 to 30 June 2011, together with a copy of the Constitution of the Club.
There was discussion at that time about obtaining a quorum for a meeting of the Board. The Constitution required five Board members to be present for a quorum. The accountant informed Mr Clifton that there were only four members of the managing committee, a Mr O’Malley, in hospital with advanced cancer, a Mr Panagopoulos, a Mr Schenke and a Mr Firli, who suffered from Alzheimers and was incapacitated.
On 12 February 2013, Mr Clifton attended at Berri in accordance with the request. The Board meeting was convened at the hospital bed of Mr O’Malley, who was suffering advanced cancer. Mr Schenke and Mr Panagopoulos attended by telephone. Mr Bill Konidaris, who was the manager and public officer of the Club, was also present. Mr O’Malley confirmed that the Board membership and the health of members was as earlier indicated. At that meeting, and by telephone, Messrs O’Malley, Schenke and Panagopoulos resolved that the Club was insolvent, or likely to become insolvent at some future time, and that an administrator should be appointed. Minutes of that meeting are Exhibit “TJC5” to Mr Clifton’s affidavit of 10 December 2013 (FDN 3). Subsequent to the Board meeting Messrs O’Malley, Schenke and Panagopoulos executed a Notice of Appointment of Administrators dated 12 February 2013 pursuant to s 436A(1) of the CA. They appointed Mr Hall and Mr Clifton as joint and several administrators. There was never any doubt that the appointment was irregular in that it did not comply with the requirements of the Constitution of the Club.
In an affidavit filed by Alan James Ranford, a member of the Club, on 22 May 2014 (FDN 12), Mr Ranford attests in paragraphs 6-7 that some members had come to the conclusion that the appointment could not be valid as there was no legal board. Some members took legal advice. The legal advice was that the administrators had been illegally appointed but that to remove them the members would have to prove that the Club was solvent, which they were unable to do. It is clear that at an early stage members of the Club were aware of the difficulty with the formal appointment that had occurred. The Club’s Constitution (Exhibit “TJC3”) in paragraph 5 requires that the Board shall consist of nine Board members, one of whom shall be the President. A quorum is required of five members – see sub-paragraph 5.3.4.
Externally prepared accounts for the Club demonstrated losses for each of the financial years ended 30 June 2010, 30 June 2011, and 30 June 2012. On the MYOB account to 12 February 2013 the Club had incurred a loss of $120,666.00. Mr Clifton was satisfied that the Club was insolvent at the date of his appointment. Evidence later filed in this matter clearly established insolvency on the part of the Club that had been present for some time. An affidavit of Paul Victor Jorgensen filed on 17 June 2014 (FDN 20) attests to a meeting by him as an accountant with Club representatives some six months before administrators were appointed when after discussion he advised that his opinion was that the Club was insolvent. Mr Clifton in his affidavit filed on 13 June 2014 (FDN 18) provides evidence to support his opinion that the Club was insolvent at the time of his appointment. An independent accountant, Brian Thomas Morris, was asked to examine the material and on 24 June 2014 an affidavit from him was filed in which he supported the opinion of Mr Clifton that the Club was insolvent and he describes it as “hopelessly insolvent”. No evidence was filed by those who initially opposed the plaintiffs’ application to suggest that the Club was not insolvent at the relevant time. On the evidence that has been filed, the Court is entitled to find that the Club was insolvent at the time of the appointment of Messrs Clifton and Hall as administrators and that it had been insolvent for a significant period of time prior to that date.
In his first affidavit (FDN 3), Mr Clifton describes the activities undertaken pursuant to their appointment of administrators. Their appointment was ratified by creditors at the first meeting of creditors. They determined that the Club should cease trading during the administration. In the usual fashion, on the second meeting of creditors consideration was given as to whether or not the Club should enter into a Deed of Association Arrangement to be proposed by members of the Club. At a reconvened second meeting on 23 May 2013, consideration was given to a Deed of Association Arrangement put forward by a number of people, including Mr Ranford, who in the initial stages opposed the application subsequently made by the plaintiffs in these proceedings.
At that second meeting the proposed Deed was tabled and the creditors unanimously resolved pursuant to s 435C of the CA that the Club execute the proposed Deed and that Mr Hall and Mr Clifton be appointed as joint and several deed administrators. A final version of the Deed was executed on 23 May 2013. The consortium that executed the Deed included Mr Ranford.
Pursuant to the Deed the Club’s gaming entitlements were to be realized. This led to a sale of licences held by the Association resulting in some receipts on 17 July 2013, with remaining receipts due in mid-December 2013. It therefore appeared that most of the assets of the Club would have been realized and a dividend able to be calculated at the end of 2013.
The administrators sought legal advice at this stage and were advised that as their appointment was not effected by the Board with a quorum in accordance with the Constitution there was doubt as to its validity. Accordingly, a decision was made to make an application to the Court to cure that irregularity.
On 10 December 2013 an Originating Process was issued in this Court in which the plaintiffs sought the following declarations:
1.That Part 5.3A of the Act [CA] is to operate in relation to the defendant as if the resolution passed at the meeting of the board members of the defendant held on 12 February 2013 (“Board Meeting”) was a valid resolution for the purposes of section 436A of the Act notwithstanding the failure of the board members to pass a resolution to the effect set out in section 436A(1)(a) of the Act;
2.That the resolution passed by the board members of the defendant at the Board Meeting is not invalid by reason of the absence of a quorum at the said meeting;
Also sought was an order that the plaintiffs’ costs of the proceedings on an indemnity basis be paid as costs of the administration of the defendant.
Section 40B of the Associations Incorporation Act provides as follows:
40B—Power to enter into voluntary administration
An incorporated association is declared to be an applied Corporations legislation matter for the purposes of Part 3 of the Corporations (Ancillary Provisions) Act 2001 in relation to the provisions of Part 5.3A and Division 3 of Part 5.9 of the Corporations Act 2001 of the Commonwealth, subject to the following modifications:
(a) the modifications necessary to give effect to this section and the succeeding provisions of this Part; and
(b) such other modifications (within the meaning of Part 3 of Corporations (Ancillary Provisions) Act 2001) as may be prescribed by the regulations.
Part 5.3A of the CA relates to the administration of a company’s affairs with a view to executing a Deed of Company Arrangement. The objects of the Part are set out in s 435A of the CA, which provides as follows:
435A Object of Part
The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence—results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
Section 436A provides for the company to appoint an administrator if the Board thinks it is or will become insolvent – see before.
There is no doubt that there was an irregularity in the appointment of the plaintiffs in this matter as administrators. However, that appointment occurred in the circumstances that are described before in these reasons where the company was clearly insolvent, where a duly constituted Board pursuant to the provisions of the Constitution did not exist, and where there was an obvious need for urgent action to be taken to address an insolvent Club. The report of the administrators pursuant to s 439A of the CA, delivered on 8 March 2013 – see Exhibit “TJC11” to FDN 3 – sets out the defect in the appointment of the administrators – see page 12.
Section 447A(1) of the CA provides the Court with a broad discretion. It is in the following terms:
447A General power to make orders
(1) [Orders Court may make] The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
The application may be made pursuant to sub-section (4) by:
(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.
In Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99, a decision of Austin J in the Supreme Court of New South Wales, his Honour (at [30]) set out propositions that emerged from the cases as to the proper interpretation of s 447A. Among those propositions were the following:
(2)the section gives the court a broad power which is an integral part of the legislative scheme provided for by Pt 5.3A, not to be read down or confined to curing defects or remedying consequences of departures from other provisions of Pt 5.3A …;
(3)the section permits the court to make orders with respect to a particular provision of Pt 5.3A, altering the operation of that provision, even where the provision would on its separate construction exclude such an order …;
…
(6)the section may be used where, in taking a step required by Pt 5.3A (such as the execution of a deed of company arrangement), the company has failed to comply with its constitution (as in the MYT Engineering case before the Court of Appeal);
…
(9)by empowering the court to make orders about “how this Part is to operate”, the section looks to the future rather than the past, but the temporal requirement is satisfied if the orders have effect from the time of their making; it is permissible for the court to make an order with future effect in respect of past matters or events …;
…
(12)in the exercise of its discretion under the section, the court must consider whether any interested party would suffer prejudice if an order were made …
In the matter of Panasystems Pty Ltd v Voodoo Tech Pty Ltd (2003) 21 ACLC 842 at 848, Merkel J said (at [18]):
18. Cases decided since Portinex support a broad view of s 447A: … 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: … 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.
In that particular matter, his Honour found in [21]:
21. … 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).
In considering an application under s 447A, Barrett J in the Supreme Court of New South Wales in Re Darin (as administrators of Palamedia Ltd) [2010] NSWSC 451, addressed a situation where a sole director had acted by himself when a public company is required to have at least three directors. His Honour found (at [8]) that:
[8] … the sole director, did make the relevant assessment and decision. That is a factor relevant to exercise of the s 447A jurisdiction in such a case: …
In [9], he found:
[9] In the present case, there is nothing to call in question the existence of proper grounds for the appointment of administrators. …
Further in [10]:
[10] It is also relevant to note that the applicants have applied themselves to the task at hand and are well advanced with a proposal that may see the voluntary administration realise value for creditors. …
This is a situation very similar to the situation presently before the Court. In a like situation where two directors of a public company acted where there was a requirement that there be at least three directors an order was made validating the appointment of an administrator. In Re Ethan Minerals Ltd (admins appointed) [2011] NSWSC 899, White J said (at [8]):
[8] Clearly, the remaining directors were of the view that the appointment of voluntary administrators was a preferable course to seeking an appointment of a provisional liquidator. There is no evidence of anyone having objected to the plaintiffs seeking an order for validation of their appointment. A committee of creditors has been established. No one on that committee has challenged the plaintiffs’ appointment. Indeed, the committee has voted unanimously in favour of an extension, as sought, of the time for the convening of the second meeting of creditors. In the circumstances, I will make the orders under s 447A.
In my view, it is clear that the Court has power to make the orders sought by the plaintiffs validating their appointment. During the course of this matter various affidavits were filed at the apparent behest of Mr Ranford, who appeared for the Club on a number of occasions. Eventually an application was made by Mr Ranford that he be permitted to represent the Club, which application failed. It appears that the Club then took legal advice, and at the hearing of this matter on 13 October 2014 the Court was informed by counsel that the Club no longer opposed the orders sought by the plaintiffs and had no objection to an order in the terms that the plaintiffs were seeking.
It is apparent from the affidavits that were filed on the part of the Club or the Ranford interests that most of them were directed to alleged misconduct in the management of the Club prior to the appointment of the plaintiffs. There was no admissible evidence of actual impropriety. It is worth noting that the Deed of Association Arrangement provides in any event that the Club has preserved to it the right to pursue former officers of the Club for alleged misconduct if it chooses so to do. It has not so done. It is also clear from the evidence that those involved with the Club and what is described as the Ranford interests in putting forward material in opposition were well aware of the defective appointment at a very early stage – from 8 March 2013 – and had chosen to do nothing about it but rather entered into the Deed of Association Arrangement. Counsel for the plaintiffs described it as “an estoppel acquiescence par excellence”. There is no suggestion of any inappropriate conduct by the administrators in the obtaining of the appointment of administration. The administration appears to have been entirely routine.
In all the circumstances it is appropriate that an order should be made pursuant to s 447A validating the original appointment. The plaintiffs have filed Minutes of Order. Counsel for the defendant indicated their consent to those orders. In the circumstances the orders of the Court will be as follows:
1.Pursuant to s 447A(1) of the Corporations Act 2001 (“the Act”), Part 5.3A of the Act is to operate in relation to the defendant as if:
1.1 the resolution passed at the meeting of the committee of members of the defendant held on 12 February 2013 to appoint Timothy James Clifton and Mark Christopher Hall as joint and several administrators of the defendant was, for the purposes of s 436A(1) of the Act, a valid and effectual resolution of the defendant;
1.2 the instrument of appointment under s 436(1) dated 12 February 2013 signed by Keith O’Malley, Peter Schenke and Stefanos Panagopoulos was, for the purposes of that section, a valid and effectual instrument of appointment; and
1.3 the plaintiffs were validly appointed as joint and several administrators of the defendant pursuant to s 436A of the Act on 12 February 2013.
2.The plaintiffs’ costs of these proceedings be paid as costs of the administration of the defendant