Lean v Realtown Pty Ltd

[2008] WASC 5

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   LEAN -v- REALTOWN PTY LTD [2008] WASC 5

CORAM:   ACTING MASTER CHAPMAN

HEARD:   22 NOVEMBER 2007

DELIVERED          :   22 JANUARY 2008

FILE NO/S:   COR 150 of 2007

BETWEEN:   GRAEME TREVOR LEAN AS ADMINISTRATOR OF REALTOWN PTY LTD (ADMINISTRATOR APPOINTED) (ACN 104 699 649)

Plaintiff

AND

REALTOWN PTY LTD (ADMINISTRATOR APPOINTED) (ACN 104 699 649)
First Defendant

DONALD WALTER STRONACH
Second Defendant

Catchwords:

Corporations law - Administration - Whether appointment of administrator valid

Legislation:

Corporations Act 2001 (Cth), s 436A, s 447C

Result:

Declaration that the appointment of the administrator was not valid

Category:    B

Representation:

Counsel:

Plaintiff:     Dr J O'Donovan

First Defendant              :     No appearance

Second Defendant         :     Mr J C Vaughan

Solicitors:

Plaintiff:     Carles Solicitors

First Defendant              :     No appearance

Second Defendant         :     D G Price & Co

Case(s) referred to in judgment(s):

Smolarek v McMaster [2006] WASCA 216

Wagner v International Health Promotions (1994) 15 ACSR 419

1. ACTING MASTER CHAPMAN: By way of originating process filed on 24 October 2007, the plaintiff seeks his appointment as administrator of the first defendant be declared valid pursuant to s 447C of the Corporations Act 2001 (Cth) and should the appointment be found to be valid, orders were also sought relating to the meeting of creditors pursuant to s 439A and s 447A.

The issues

1. The plaintiff is a registered liquidator and maintains that on 11 September 2007, he was appointed liquidator of the first defendant by the second defendant who is the sole director of the first defendant. This appointment is said to have been made pursuant to s 436A(1) of the Corporations Act.  By letter dated 27 September 2007, Kott Gunning, the solicitors for the defendants at that time, wrote to the plaintiff in the following terms (see page 19 to the plaintiff's affidavit sworn 24 October 2007):

   We confirm we have been instructed to act for the abovenamed.

   Before a company can appoint an administrator it is first necessary for the board of directors (or in this case the sole director) to resolve pursuant to section S436A(1) of the Corporations Act 2001 that:

   (a)in the opinion of the director, the company is insolvent, or is likely to become insolvent at some future time; and

   (b)an administrator of the company should be appointed.

   On the instructions of our client at no time has he made any resolution in the terms required by section 436A(1). It therefore follows you have not been properly or validly appointed administrator of Realtown Pty Ltd notwithstanding that you have lodged a Form 505 Notification of Appointment as an External Administrator at the Australian Security & Investments Commission.

   As a consequence our client requires you to immediately desist from further purporting to act as administrator of Realtown Pty Ltd.  He now requires you by 4.00pm Friday, 28 September 2007 to provide to our firm an accounting of the monies you have taken from the premises of the Medina Tavern since 11 September 2007.

2. Section 436A reads:

   (1)A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that:

   (a)in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and

   (b)an administrator of the company should be appointed.

   (2)Subsection (1) does not apply to a company that is already being wound up.

3. I respectfully agree with Santow J in Wagner v International Health Promotions (1994) 15 ACSR 419 where he said:

   It is clear that the section as a substantive matter and as a pre‑condition to any such appointment requires that the board has resolved to the effect of paras (a) and (b), quoted above.  That can be readily seen as fulfilling the purpose that the appointment of an administrator pre‑supposes, namely that the company be in financial circumstances which make such an appointment a proper course.  Thus the resolution, given this purpose, is no mere formality but underlines the very purpose behind that regime.  Indeed, the ready transition from a process of administration to a process of liquidation illustrated by s 446a underlines the criticality of the company being, if not insolvent, then likely to become so (420).

The evidence

1. The evidence of the plaintiff is that on 10 September 2007, he received a telephone call from the second defendant and on the following day visited the Medina Tavern, the business associated to the first defendant.  Whilst there, he formed the view the first defendant was clearly insolvent.  He deposes to the fact that the second defendant agreed with his recommendation to put the first defendant into voluntary liquidation.

2. On 11 September 2007, the second defendant signed a letter of appointment of the plaintiff as administrator.  The letter of appointment is to be found at page 90 of the plaintiff's affidavit sworn on 24 October and reads:

   Dear Sir,

   RE:REALTOWN PTY LTD (ACN 104 699 649)

   I, the undersigned, being the director of the above named company, have at a meeting of the Board resolved that Graeme Trevor Lean be appointed as Administrator Pty Ltd of the abovenamed company.

   A copy of the signed minutes of the above mentioned meeting is enclosed.

   Dated this 11^th day of September 2007

   [Signature]
   ____________________
   Donald Stronach

   Director

3. The letter does not reflect s 436A(1)(a) concerning insolvency. It does refer to a copy of the minutes of the meeting being enclosed, but the minutes are not attached. It would appear no such minutes were ever prepared. I accept that it is not necessary for the resolution of the board to be expressed in a minute. In that regard, I refer to the comments of Santow J in Wagner v International Health Promotions where he said:

   It is true that there is authority for the proposition that 'it is not necessary that any resolution by the board should have been expressed by a minute, although it ought to be so'; see H L Bolton Engineering Co Ltd v T J Graham and Sons Ltd [1957] 1 QB 159 Lord Denning approving the decision of the Queen's Bench Division in Austin Reed Ltd v Allied Assurance Co Ltd (Court of Appeal judgments, 1956, number 217 A).

   However, that proposition does not advance matters, if, as is clear, there was in fact no resolution by the board and not merely the neglect to take the trouble to minute a resolution that was in fact passed (421).

4. The plaintiff accepts that the second defendant is hard of hearing and is of the view that is part of the reason for the first defendant being in financial difficulty, although he was not aware of this at the time of the conversation on 11 September 2007.  Indeed, the plaintiff was of the view that the second defendant was following the conversation.

5. Although the plaintiff was aware of the ASIC information sheets, he did not provide a copy of the information sheet number 42 titled 'Insolvency - A Guide for Directors' to the second defendant.  The evidence of the plaintiff at page 18 of the transcript is as follows:

   What did you actually say to Mr Stronach before you gave him your advice about the financial position of the company and the possible appointment?‑‑‑At the second meeting I told him, 'Do you wish to have a member of the family present at this meeting?'  He said, 'No.'  I said, 'You could possibly borrow the money and put it into the company, trade for a short period, tidy up the affairs of the company and sell the business as a going concern.'  I then presented to him a copy of my summary of outstanding accounts which I had managed to gather off the table.  Someone pointed to a bundle.  I took a bundle of those and added them up.  It came to about $126,000 so, 'On the evidence in front of me, you are insolvent.  If you continue to trade, you will be trading insolvently.'  He accepted my advice and signed the form.

   What did he actually do to indicate his acceptance of the advice?  Did he say anything?‑‑‑He said, 'I've had enough.  I've had enough.'

   Did he agree with your assessment that the company was insolvent?‑‑‑Yes.  Well, he signed the form.

6. At the time the second defendant signed the letter of appointment, he did not have his reading glasses with him and the plaintiff does not believe that the second defendant read the document.  The plaintiff conceded that no minutes of the meeting of the board were ever prepared or signed.

7. On the other hand, the second defendant in his affidavit sworn on 6 November 2007, deposes to the fact he met with the plaintiff with the view of obtaining some assistance to increase an overdraft with the National Australia Bank.  He denies telling the plaintiff either he or the company were in financial difficulties.  As to the documents signed by the second defendant, he says he signed them to give the plaintiff authority to extend the overdraft and for the plaintiff to assist him in this regard.  He said there was no meeting of the company and there were no minutes.  He says there was no mention of the first defendant being put into voluntary liquidation.

8. Further, at a creditors' meeting held on 18 September 2007, the second defendant is recorded as moving a motion that the plaintiff's appointment as administrator of the first defendant be confirmed.  The minutes of that meeting are to be found at pages 92 ‑ 93 of the same affidavit.  It is recorded that the second defendant was in attendance by way of telephone.  The following is recorded at page 93:

   RESOLVEDRESOLUTION            Moved:         Mr D Stronach

   Seconded:N/A

   'THAT the appointment of Graeme Trevor Lean as Administrator of Realtown Pty Ltd be and is herein confirmed'.

9. The second defendant recalls the plaintiff advised him on 18 September 2007 that the first meeting of creditors was being held over the telephone and that he was participating in it.  He denied moving a motion at the meeting and states that he did not confirm the appointment of the plaintiff.

10. The second defendant recalls signing the Application for Protection Order No 6020015883‑Medina Tavern and agrees that the application refers to the fact the plaintiff had been appointed administrator of the first defendant.  He denies the plaintiff ever explained what being insolvent meant.  At par 41 of his affidavit he deposes as follows:

    If LEAN had told me the COMPANY was insolvent, explained what insolvency and administration meant, and advised me that I would need to put the COMPANY into administration, I would have:

    (a)disagreed with him; and

    (b)wanted to talk to my accountant before making any decision.

    On 19 September 2007, the second defendant consulted Peter Quigley, an accountant, and at par 55 of his affidavit, he deposes as follows:

    This was also the first time the proper meaning of insolvent was explained to me.  PETER informed me at this meeting that essentially if the COMPANY cannot pay its debts as and when they fall due the COMPANY was insolvent.  This was the first time following my approach to NAB that I turned my mind to the question of whether the COMPANY was insolvent.

Conclusion

1. A crucial consideration in this matter is whether or not the second defendant, at the time of appointment of the plaintiff, had the opinion and made a resolution to the effect that he had the opinion the company was insolvent or likely to become insolvent at some time in the future and that an administrator should be appointed.

2. Counsel for the second defendant submits that there are two conflicting accounts as to what happened at the relevant time.  He submits there is a third possibility that the events unfolded as suggested by the plaintiff, but the second defendant honestly believed he was appointing the plaintiff to assist regarding an overdraft of the first defendant with the National Australia Bank.

3. Given the conflict on the evidence, I consider there is doubt about the appointment of the administrator. Section 447C of the Corporations Act reads:

   (1)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)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.

4. I agree with the observation of Buss JA in Smolarek v McMaster [2006] WASCA 216 where he said at [25] that a declaratory order under this section is not a curative order.

5. I have had the opportunity of hearing evidence both from the plaintiff and the second defendant.  I agree with the observation of counsel for the second defendant that both appeared to try to assist by presenting their recollection of events.  It was clear to me that the second defendant was hard of hearing, required spectacles to read and appeared easily confused.  I am not persuaded on the evidence before me that the second defendant fully understood the events which occurred at the relevant time and, in particular, I am not satisfied he formed an opinion as to the insolvency of the first defendant, nor that the appointment of an administrator was necessary.

6. On the evidence before me, I am not satisfied a resolution was ever made by the second defendant that the first defendant was insolvent or likely to become insolvent at some future time and an administrator should be appointed as is required by s 436A. I would therefore declare that the appointment of the plaintiff as administrator was not valid.