In the matter of Live Board Holdings Limited (Administrators Appointed)

[2014] NSWSC 161

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Live Board Holdings Limited (Administrators Appointed) [2014] NSWSC 161
Hearing dates:	28 February 2014
Decision date:	03 March 2014
Jurisdiction:	Equity Division - Corporations List
Before:	Brereton J
Decision:	Plaintiffs to bring in short minutes
Catchwords:	CORPORATIONS - external administration - administration - validity of appointment of administrators - application for declaration of validity under s 447C - whether appointment invalid by reason of exclusion of an alleged director from s 436A meeting - whether opinion as to insolvency genuinely held - if not, whether appointment should be validated under s 447A CORPORATIONS - external administration - administration - supervision of administrators - whether proposed acts prejudicial within s 447E
Legislation Cited:	(CTH) Corporations Act 2001, s 254E, s 436A, s 447A, s 447C, s 447E
Cases Cited:	Aloridge Pty Ltd v Christianos (1994) 12 ACLC 237 Alpha Resources Ltd v Corporate Affairs Commission (NSW) (1987) 12 ACLR 51 Arnautovic v Kukulovski [2009] NSWSC 1444 Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 Calabretta v Redpen Developments Pty Ltd (in liq) (recs and mgrs apptd) [2010] FCA 81; (2010) 183 FCR 47 Celtic Capital Pty Ltd v Cityview Corporation Ltd [2010] WASC 357 Cody v Live Board Holdings Limited [2014] NSWSC 78 Deputy Commissioner of Taxation v Portinex Pty Ltd (subject to DOCA) [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391 Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 58 ACSR 234 Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607; 13 ACSR 337; 12 ACLC 396 Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478; 13 ACLC 1113 Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428; (2003) 21 ACLC 842 Re Carpenter Pacific Resources NL (1997) 25 ACSR 754 Re Darin (as administrators of Palamedia Ltd) [2010] NSWSC 451 Re Farnell Electronic Components Pty Ltd (1997) 25 ACSR 345 Re HPI Australia Pty Ltd [2008] NSWSC 1106 Re Onslow Salt Pty Ltd [2003] FCA 429; (2003) 198 ALR 344; 45 ACSR 322 Re Pan Pharmaceuticals Ltd (admins apptd); Selim v McGrath [2003] FCA 855; (2003) 47 ACSR 139 Re Pasdonnay Pty Ltd (2005) 53 ACSR 717 Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058; (2002) 43 ACSR 257 Townsend & Parker Gravity Die Casting Pty Ltd v Lotusdale Pty Ltd [1997] 1 VR 295
Category:	Interlocutory applications
Parties:	Justin Holzman and Manfred Holzman in their capacity as joint and several administrators of Live Board Holdings Limited (plaintiffs) Live Board Holdings Limited (Administrators Appointed) (defendant) Pier Blue Pty Ltd (first applicant) Costa Koulis (second applicant)
Representation:	Ms J Shepard (plaintiffs/respondents) Mr L Menzies (applicants) Solicitors: Bridges Lawyers (plaintiffs/respondents) Teddington Legal (applicants)
File Number(s):	14/ 57817

Judgment

1. In a judgment delivered on 17 February 2014 in related proceedings [Cody v Live Board Holdings Limited [2014] NSWSC 78], I declined to declare that the board of the company Live Board Holdings Limited ("LBH") had power and authority to make an issue of shares on 3 September 2013 ("the 3 September share issue") to raise capital of approximately $1 million, of which approximately $748,000 was said at the hearing on 18 December 2013 to remain in its bank account [Cody v Live Board Holdings Limited [2014] NSWSC 78]. The following day Pierce Patrick Cody, Finola Anne Burke and Richard Charles Ochojski - who were the plaintiffs in the related proceedings - purported to resolve as the directors of LBH that the company was or was likely to become insolvent, and that the present plaintiffs Manfred Holzman and Michael Holzman be appointed as administrators. The administrators ascertained that in the related proceedings there remained on foot a cross-claim by Mr Costa Koulis for declarations that all board resolutions on or after 3 September 2013 were invalid and of no effect and that his removal as director on 26 November 2013 was invalid (presumably on the ground that they were affected by the invalid 3 September share issue); and for an order that he be reinstated as a director of the company. Being concerned that their appointment might be questionable if Mr Koulis were to obtain that relief, by originating process filed in these proceedings on 24 February 2014, the administrators sought relief pursuant to Corporations Act, s 447A, s 447C, s 447D and/or s 1322, to resolve any doubt attending the validity of their appointment. That process was made returnable on 28 February and served on the creditors and the contributories, and the parties to the related proceedings, including Mr Koulis (and his company Pier Blue Pty Ltd). On 28 February, Mr Koulis and Pier Blue appeared by counsel to oppose the relief sought, and by interlocutory process filed in court by leave that day, sought interlocutory relief - said to be pursuant to s 447E(1) - restraining the administrators from proceeding with the first meeting of creditors (which was to be held on 28 February at 2.00pm), and from proceeding to market and sell the company's assets; and in due course, final orders, pursuant to s 447A, terminating the administration. (As the hearing was still proceeding at 12.30pm on 28 February, and as it appeared that no prejudice would be occasioned to any interested person if the creditors' meeting were to proceed, no injunction in that respect was granted before it was due to be held).

Validity of appointment

1. The doubt as to the validity of the administrators' appointment arises because of Mr Koulis' pending cross-claim for orders declaring invalid all resolutions of the board on or after 3 September 2013 and his removal as director (by general meeting) on 26 November 2013, and that he be reinstated as a director. However, for present purposes, the question can be more precisely stated. The validity of the administrators' appointment depends on the validity of the resolution of 18 February 2014 which purported to appoint them. Two grounds have arguably been identified for impugning its validity: first, that there was no valid resolution, because the meeting was not validly convened, as Mr Koulis - who claims to have remained a director because his purported removal was invalid - had no notice of the meeting; and secondly, that the directors could not genuinely have believed that the company was likely to become insolvent. The administrators sought a declaration of validity under s 447C and alternatively a "validating order" under s 447A, or judicial advice under s 447D to the effect that they would be justified in proceeding as if they had been validly appointed pending the outcome of Mr Koulis' cross-claim in the related proceedings. Mr Koulis and Pier Blue sought to restrain the further conduct of the administration pending the hearing of their application that it be terminated.

1. In the case of there being a doubt on some specific ground as to the validity of an administrator's appointment, the court may, on application, declare whether or not the appointment was valid on the ground specified in the application or any other ground. Section 447C provides as follows:

447C Court may declare whether administrator validly appointed

(1) [Application to court] If there is doubt, on a specific ground, about whether a purported appointment of a person as administrator of a company, or of a deed of company arrangement, is valid, the person, the company or any of the company's creditors may apply to the Court for an order under subsection (2).

(2) [Court may make declaration on validity of appointment] On an application, the Court may make an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground.

1. Orders under s 447C(2) are declaratory, not curative; the question on such an application is whether the appointment was valid, not whether it should be validated. A declaration of validity may be made where, having examined the doubt, the Court is satisfied that the appointment was nonetheless valid. Where the court is not so satisfied, the court may be able in some circumstances to make a curative validating order under s 447A(1) [Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428; (2003) 21 ACLC 842, [21], [33]; Re Pasdonnay Pty Ltd (2005) 53 ACSR 717, [15]-[22]].

1. Under s 447A, the Court expressly is given power to terminate an administration, including if it is satisfied that the provisions of Part 5.3A are being abused, but also if satisfied that it should end "for some other reason". I accept that the plenary powers of the Court to do whatever it thinks is just in all the circumstances, having regard to the rights of the various groups of persons affected by the administration [see Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607; 13 ACSR 337, 341; 12 ACLC 396; see also Australasian Memory v Brien (2000) 200 CLR 270] given to the Court by s 447A "to make orders as it thinks appropriate about how this part is to operate in relation to a particular company" is sufficient to authorise orders that have the practical effect of suspending the administration pending resolution of a dispute as to whether the appointment is valid, or should be terminated [cf Aloridge Pty Ltd v Christianos (1994) 12 ACLC 237; Townsend & Parker Gravity Die Casting Pty Ltd v Lotusdale Pty Ltd [1997] 1 VR 295].

Exclusion of Mr Koulis

1. Because Mr Koulis was regarded as no longer being a director (following the general meeting of 26 November 2013), he was not given notice of the directors' meeting which resolved pursuant to s 436A to appoint the administrators. If he had not been validly removed, the failure to give him notice would mean that there was no valid meeting on 18 February and, therefore, no valid s 436A resolution.

1. The 3 September share issue, if valid, reduced Pier Blue's shareholding from about 60% (which carried control of the general meeting), to about 40% (which did not carry control). Mr Koulis had proposed a resolution for consideration at a shareholders meeting on 20 September 2013 to remove Mr Cody as a director. The Court was informed that this motion was withdrawn by Mr Koulis before the meeting, but in any event it was put at the meeting and defeated. There is no evidence of the votes cast. Mr Koulis says that but for the shares issued under the 3 September issue, it would have been carried, with the result that Mr Cody would no longer have been a director. The evidence does not establish this to be so, but for reasons to which I shall come it ultimately does not matter.

1. At a general meeting on 26 November 2013, a resolution was passed removing Mr Koulis as a director. While Mr Koulis says that this would not have been passed but for the 3 September share issue, it was passed unanimously; Mr Koulis neither attended, nor voted by proxy at, the meeting. Accordingly, even if the votes in respect of the shares issued under the 3 September issue were disregarded, it would still have been passed at the meeting. That Mr Koulis may have stayed away because he thought the outcome inevitable does not affect this. He was removed on the basis of the undisputed votes cast at the general meeting.

1. I am therefore unable to accept that Mr Koulis remained a director after 26 November 2013, or as at 18 February 2014. The directors in office on 18 February were Mr Cody, Ms Burke and Mr Ochojski, who constituted the board that passed the s 436A resolution. And even if one assumes that Mr Cody would have been removed on 20 September 2013 but for the invalid share issue, that would have left, as the only two directors in office on 18 February 2014, Ms Burke and Mr Ochojski, who were present and voted for the s 436A resolution to appoint administrators. The resolution was not invalid by reason of the exclusion from the board of Mr Koulis.

Insolvency

1. The evidence indicates, for present purposes, that as at 31 January 2014, the company had total assets of $1,089,835 (of which about $463,000 were current, including $451,000 cash at bank, presumably being the remaining proceeds of the 3 September share issue; while about $400,000 were intangibles); and liabilities of $265,480 (of which about $100,000 are current, $138,000 is Pier Blue's investment, and $10,000 Mr Cody's). This left equity of $824,355. However, by the time of the administrators' appointment, cash at bank had reduced to $320,000. And in addition to the liabilities referred to above, the consequence of the invalidity of the 3 September share issue would be an obligation to reimburse the subscription moneys, of about $1,000,000. On that footing, there was a deficiency of funds, and the administrators are of the opinion that the company is insolvent.

1. For Mr Koulis it was argued that it was premature for the directors to form this view, when no order setting aside or declaring void the 3 September issue had yet been made, and the cross-claim sought that the company reimburse the subscribers only to the extent that the company was able to do so, with Mr Cody, Mr Oscholski and Ms Burke to do so to the extent that the company was unable.

1. There were two substantive grounds for the decision for declining to make the declaration sought by the directors in the related proceedings as to the validity of the 3 September share issue, namely first, non-compliance with clause 6.1 of the constitution, and secondly, non-compliance with clauses 4.6(b) and 5.1(b) of the shareholders' agreement. Clause 6.1 of the constitution required 75% shareholder approval, in writing or at a shareholders meeting, for a direct or indirect variation of the rights or obligations of an existing class of shares. The ordinary shares were an existing class of shares. The rights attached to them would be varied, at least indirectly, by the issue of preference shares pursuant to the 3 September share issue, which would, at least in some respects, rank ahead of them. Accordingly, the concurrence of 75% of the ordinary shareholders was required, but was not obtained.

1. An issue of shares may be invalid if it is not made in the manner prescribed by the issuing company's constitution [see, for example, Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478; 13 ACLC 1113]. The necessary corollary of the conclusion that the share issue was not valid is that the subscription moneys must be repaid. It is beside the point that no order to that effect has yet been made; such an order would reflect, not create, the liability to reimburse, which does not depend on an order being made but is implicit in the failure to make a valid issue.

1. Reasons why such an order was not made include that the directors had foreshadowed an application to validate the share issue under Corporations Act, s 254E, which confers a power to validate the purported issue of shares if the issue is or may be invalid for any reason, if their application for declaratory relief failed (as it did). While s 254E is not to be interpreted restrictively, and the legitimate expectations of innocent allottees are a major consideration [Alpha Resources Ltd v CAC (NSW) (1987) 12 ACLR 51, 53; Celtic Capital Pty Ltd v Cityview Corporation Ltd [2010] WASC 357, [22]-[23]; Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478] the power to validate share issues is not lightly exercised [Re Farnell Electronic Components Pty Ltd (1997) 25 ACSR 345; Re Carpenter Pacific Resources NL (1997) 25 ACSR 754; Re Onslow Salt Pty Ltd [2003] FCA 429, [27]; (2003) 198 ALR 344; 45 ACSR 322]. While the directors foreshadowed such an application they have, at least so far, not brought one, though it remains open to them. In any event, where the ground of invalidity is a failure to comply with a requirement for shareholder approval of a variation to class rights, and (it can be assumed) Mr Koulis will oppose validation, there would seem to be significant obstacles to making such an order (at least in the absence of equitable considerations such as acquiescence or laches).

1. Accordingly, the company is liable to repay the subscription moneys, or at the very least is likely to be obliged to do so, and in that event would have a deficiency of funds, and be unable to pay its debts as and when they fall due. It is beside the point that Mr Koulis' cross-claim in the related proceedings seeks that the company reimburse the subscribers only to the extent that the company is able to do so, and that the directors Mr Cody, Mr Oscholski and Ms Burke do so to the extent that the company cannot. The primary liability is that of the company, regardless of what Mr Koulis may seek. Whether it has rights of indemnity or contribution against Mr Cody, Mr Oscholski and Ms Burke is not presently ascertainable, though it is possible (particularly having regard to the apparent dissipation of the proceeds of the issue between December 2013 and February 2014). But even if it is ultimately established that they are liable to contribute, this does not affect the conclusion that, at present, there are reasonable grounds to suppose that the company - being liable to reimburse the subscription moneys - is, or is likely to become, unable to pay its debts as they fall due.

1. The directors are, of course, under an obligation not to permit the company to trade while insolvent, breach of which has potentially serious consequences for them. In those circumstances, I do not accept that it can be said that the opinion that the company was, or was likely to become, insolvent, could not genuinely have been held. To the contrary, on the material presently before the court, there are reasonable grounds for it. The s 436A resolution is not void on the ground that the directors do not genuinely hold the opinion that the company is or may be insolvent.

1. Accordingly, neither ground upon which it has been suggested that there might be doubt as to the administrators' appointment in fact invalidates it. I will make a declaration under s 447C to the effect that the appointment is valid having regard to those doubts.

1. If I had not been persuaded that the resolution was valid notwithstanding the exclusion of Mr Koulis, I would have made an order under s 447A validating the appointment, having regard to the apparent insolvency of the company and that, on any view, a majority of the directors validly holding office supported the appointment of administrators. The position is analogous to case in which the court has under s 447A validated appointments made by an inquorate meeting of directors, or invalidly appointed directors [Deputy Commissioner of Taxation v Portinex Pty Ltd (subject to DOCA) [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391, 397-400; Re HPI Australia Pty Ltd [2008] NSWSC 1106; Re Darin (as administrators of Palamedia Ltd) [2010] NSWSC 451; Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058; (2002) 43 ACSR 257; Arnautovic v Kukulovski [2009] NSWSC 1444; Calabretta v Redpen Developments Pty Ltd (in liq) (recs and mgrs apptd) [2010] FCA 81; (2010) 183 FCR 47].

Prejudicial administration

1. Mr Koulis wishes to regain control of the company. Its assets are primarily in the nature of patents of inventions developed by him, which he wishes to be able to market. My decision in the related proceedings, that the 3 September share issue was not valid, means that there is a very real prospect that he could succeed in regaining control. However, the administrators propose to market and sell the assets of LBH, and to retain consultants to assist in the process. Mr Koulis and Pier Blue contend that the administrators are managing the affairs of the company in a manner that is, or propose to do acts that would be, prejudicial to their interests, in that the proposed sale of the assets of the company would deprive them of the fruits of success should the cross-claim in the related proceedings succeed; and that the engagement of consultants in the meantime runs down the finances of the company.

1. Corporations Act, s 447E relevantly provides as follows:

447E Supervision of administrator of company or deed

(1) [Court's powers where satisfied that management prejudicial to creditors] Where the Court is satisfied that the administrator of a company under administration, or of a deed of company arrangement:

(a) has managed, or is managing, the company's business, property or affairs in a way that is prejudicial to the interests of some or all of the company's creditors or members; or

(b) has done an act, or made an omission, or proposes to do an act, or to make an omission, that is or would be prejudicial to such interests;

the Court may make such order as it thinks just.

...

(3) [Who may apply for order] An order may only be made on the application of ASIC or of a creditor or member of the company.

1. Section 447E(1) creates a supervisory jurisdiction. It is analogous to provisions which similarly provide for supervision of administrators of schemes of arrangement (s 411(9)(b)), controllers () and liquidators (). The section is engaged where there is an act or omission, or proposed act or omission, by an administrator that is, or would be, prejudicial to the interests of some or all of the company's creditors or members. The requirement is for proof of conduct or proposed conduct that is or would be prejudicial and not that merely might be prejudicial [Honest Remark Pty Ltd v Allstate Exploration NL [2006] NSWSC 735; . As Allsop J (as he then was) said in Re Pan Pharmaceuticals Ltd (admins apptd); Selim v McGrath [2003] FCA 855; (2003) 47 ACSR 139:

[51] However, the notion of what is or would be prejudicial must be set against the background of the Act and the sorts of considerations which have time and again been identified by the courts about the care with which interference with business decisions especially of people such as liquidators and administrators should be made. I refer in this respect to decisions such as Naumoski v Parbery (2002) 171 FLR 332 at [13]-[15] and Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1; ; , in particular at [53]-[54].

1. In my view, the section is concerned with conduct of an administrator that is contrary to the interests of the administration as a whole, or unfairly prejudicial to one or more creditors. It is not concerned with acts which, while proper steps in the interests of the administration as whole, operate adversely to one or more creditors or members. Administrations, like liquidations, may often result in the interruption, deferral or diminution of the rights of creditors or members, but that does not make them prejudicial.

1. There is nothing unfairly prejudicial to Mr Koulis or Pier Blue in the proposed conduct of the administrators. The proposal to sell the assets, and to retain consultants to assist in the process, is likely to be a necessary step in maximising the return for creditors; at least, that is a matter for the commercial judgment of the administrators. As such, it prefers the interests of creditors in an expeditious realisation of assets to those of members in retaining and exploiting them, but in this context the interests of creditors prevails. To the extent that members have an interest, it affects them equally and is not prejudicial to Pier Blue. As was submitted on behalf of the administrators, the potential frustration of Mr Koulis' objective of regaining control of the assets is in reality attributable not to any act, omission or conduct of the administrators, but to the fact that there is an administration at all.

Conclusion

1. Neither ground upon which it has been suggested that there might be doubt as to the administrators' appointment in fact invalidates it. I will make a declaration under s 447C to the effect that the appointment is valid having regard to those doubts. If I had not been persuaded that the resolution was valid notwithstanding the exclusion of Mr Koulis, I would have made an order under s 447A validating the appointment.

1. There is nothing unfairly prejudicial to Mr Koulis or Pier Blue in the proposed conduct of the administrators. The proposal to sell the assets, and to retain consultants to assist in the process, affects all creditors (and, to the extent that they have an interest, members) equally. Any prejudice to Mr Koulis arises, not from any prejudicial conduct of the administrators, but from the fact that the company has gone into administration, and is not prejudice of the type contemplated by s 447E.

1. It seems to me that orders should be made:

(1)   Dismissing, with costs assessed in the sum of $2,500, the interlocutory process filed on 28 February 2014, at least in respect of the claim for relief in paragraphs (2) and (3) thereof;

(2)   Declaring, pursuant to Corporations Act, s 447C, that the appointment of Justin Holzman and Manfred Holzman on 18 February 2014 as joint and several administrators of Live Board Holdings Ltd, is not invalid by reason of (1) the participation in the meeting of 18 February 2014 of Mr Cody, or (2) the non-participation in that meeting of Mr Koulis;

(3)   Ordering that the administrators' costs of the originating process be costs in the administration.

1. I direct that the plaintiffs bring in short minutes to give effect to this judgment, at which time any argument as to the precise orders to be made may be heard.

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Decision last updated: 04 March 2014