Entitlement of Administrators to Make Assumptions on Validity of Appointment

Entitlement of Administrators to Make Assumptions on Validity of Appointment

In a recent decision of the Supreme Court of South Australia in Ross & Anor as Joint & Several Administrators of GNC Homes Pty Ltd (Administrators Appointed) –v- GNC Homes Pty Ltd (Administrators Appointed) [2015] SASC 168 (“GNC Case”), the Court was required to decide on the validity of the appointment of Administrators in circumstances where the director who appointed the Administrators had been removed from his position prior to appointment. JHK Legal was instructed to act on behalf of the Administrators and a number of significant issues were raised by the Shareholders of the Company for which the Court had to consider in determining the validity of the appointment.

  1. Facts of the Case

GNC Homes Pty Ltd (Administrators Appointed) (“Company”) traded a business of providing residential building services in Adelaide. On 20 July 2015, the Administrators were appointed to the Company by resolution of the sole director of the Company on the basis that the Company was unable to maintain payments to creditors and the accounts of the Company had been frozen (“the Appointment”). Upon advice and taking into account the numerous director guarantees that had been provided to creditors, the sole director made the decision to appoint the Administrators to the Company.

On the day of Appointment, the Administrators had undertaken standard searches of the Australian Securities and Investments Commission’s (“ASIC”) records which confirmed that the director who had made the appointment remained the sole director of the Company.

Following the Appointment of the Administrators, the Shareholders wrote to the Administrators outlining that the sole director had been removed as a director of the Company by way of special resolution on 16 June 2015, some five (5) weeks prior to the Appointment. As the removal was prior to the Appointment, the Shareholders maintained that the Appointment was invalid and as such did not bind the Company and that the Administrators had no choice but to resign from their position.

The issue with the removal of the sole director from his position was that the Shareholders failed to advise him of the resolution removing him as director and at the time of the Appointment had not lodged relevant forms with ASIC outlining the resolution passed to remove the director.

The Administrators were forced to commence proceedings in the Supreme Court of Adelaide seeking orders confirming the validity of the Appointment pursuant to section 447C of the Corporations Act 2001 (Cth) (“the Act”) and in the alternative sought orders deeming the Appointment valid pursuant to section 447A of the Act.

  1. Statutory Assumptions under the Act

Pursuant to section 447C (2), the Court was required to make an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground.

It was argued on behalf of the Administrators that section 128 and 129 of the Act could be relied upon by the Administrators to bind the Company and as such the Appointment was valid.

Section 128 of the Act provides that a person is entitled to make certain assumptions as outlined in section 129 of the Act in relation to dealings with a company. Further the company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

The relevant assumption relied upon by the Administrators were, amongst others, pursuant to section 129 (2) of the Act which provides:

A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:

  • Has been duly appointed;
  • Has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

The Administrators argued that as result of the ASIC search conducted on the day of the Appointment, which evidenced that the appointing director was duly appointed, assumptions could be made that he had the authority to act and perform the duties customarily performed by a sole director of the Company, including the appointment of the Administrators.

The shareholders of the Company argued that the effect of sections 128 and 129 of the Act do not make an invalid act valid and that the assumptions only had operation until the Administrators became aware of the fact that the assumptions were incorrect.

  1. Decision

The Court ultimately held that the Administrators were able to rely upon the assumptions outlined under section 128 and 129 of the Act and thus held that the appointment was valid. Justice Dart outlined in his decision at paragraph 34 as follows:

“An estoppel is created against the Company. The estoppel arises because s 128 (1) provides that the Company is not entitled to assert in a proceeding in relation to a dealing that an assumption is incorrect. Thus, between a company and a party to a dealing with the company an incontrovertible set of facts are imposed whether those facts are correct or not. The legal result is to be ascertained from those facts.”

The Court noted the lack of notice provided by the shareholders to the director of the Company of the resolution passed removing him and that for unexplained reasons five weeks after the resolution was passed, the record at ASIC had not been corrected. The Court held that the appointment of the Administrators must be taken as valid because the Company is not entitled to dispute that the director was the sole director validly exercising powers customarily exercised by a director.

Despite the finding by the Court of the validity of the appointment pursuant to section 447C of the Act, the Court also made comment in relation to section 447A of the Act and held that it would have also exercised discretion to validate the Appointment if it was otherwise invalid.

The Court held that the evidence provided to the Court indicated that the Company was insolvent, was no longer trading at the time of the Appointment and that the options to creditors whilst the Company was in administration were broader given the relevant facts.

  1. Costs

Following the decision, the Administrators sought an order that the shareholders of the Company pay the costs of the Administrators for the proceedings on the basis of the shareholders actively opposing the orders sought by the Administrators regarding the validity of the Appointment.

Whilst the Court noted that the Administrators would have had to seek the orders in any event, the conduct of the shareholders in opposing the making of the orders caused significant additional costs for the Administrators. The Court also highlighted the lack of cooperation from the accountants of the Company which was an indication of the attitude of the shareholders to the Appointment.

On the basis that the opposition was unsuccessful in that the shareholders failed to have the appointment held to have been invalid and the additional costs for the creditors of the Company, the shareholders were ordered to pay 50 per cent of the costs of the Administrators.

  1. Application

There are a number of important lessons that can be taken from the decision in the GNC case for directors, shareholders and insolvency practitioners:

  • It is important for directors and shareholders to update the records of ASIC as soon as possible after a change of office holder so that it is public record. The decision also highlights that it is fundamental that notice is provided to any director or secretary upon resolution for removal from position of office holder;
  • The statutory assumptions as outlined under section 128 and 129 of the Act can be relied upon by insolvency practitioners under certain circumstances in relation to dealings with a company;
  • In actively opposing proceedings that would ordinarily have to be made by insolvency practitioners, a party could be liable for costs of the insolvency practitioner if unsuccessful in opposition. This is on the basis that creditors should not be put to extra costs in the event insolvency practitioners have more work to do as a result of opposition to orders being sought from the Court.

JHK Legal is well versed in dealing with all forms of insolvency matters.  We have previously acted on behalf of creditors, shareholders, directors, insolvency practitioners and other professionals involved in the insolvency process. If you have any enquiries or require any assistance with any insolvency matter you may be involved in, please don’t hesitate to contact our office.

 

Author: Patrick Hanrahan, Legal Practitioner Director

Published: March 2016

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