If I can’t have it, no-one can

When a director is faced with allegations of improper conduct and removal from office by the company’s shareholders, is the appointment of administrators an abuse of the director’s power for the purposes of Part 5.3A of the Corporations Act.1

In Emperor Investment Group Pty Ltd v Delta Law Pty Ltd and Anor2, Chief Justice Holmes of the Supreme Court of Queensland considered this question, among others.3  Specifically, if the director’s decision to appoint an administrator was not predominantly motivated by a belief that the company was, or was likely to become, insolvent, should the administration be permitted to continue?

Delta Law Pty Ltd (administrators appointed) – an incorporated legal practice - (Delta) was placed into administration by its sole director pursuant to a seemingly standard s436A4 resolution. Mr Cotter was appointed administrator and commenced investigations in the usual way.

The director’s belief underlying the s436A resolution was called into doubt by Emperor Investment Group Pty Ltd (Emperor), a disgruntled shareholder of Delta, which alleged that Delta’s director was motivated to appoint the administrator to prevent his (the director’s) removal from office by the dissatisfied shareholders (including Emperor) and as a matter of fact, Delta was not insolvent.5 Consistent with these allegations, evidence given by both the director and the then-administrator revealed that, in the pre-appointment meetings Delta’s director’s primary concern was to move to appoint Mr Cotter before a shareholders’ meeting at which a resolution was proposed to remove him as director.6 The potential for the director’s removal was clearly significant because the shareholders had previously purported to remove him as director and indeed appointed a replacement whom then took over the conduct of the Delta’s affairs. The purported removal was short-lived, with the director successfully challenging his removal in the Supreme Court of Queensland.7 The director was reinstated some 6 weeks after his purported removal and resumed control of Delta’s affairs. The director renewed his pre-appointment discussions a short time after his reinstatement and ahead of a freshly convened shareholders’ meeting. The administrator gave evidence that he had some concerns as to the propriety of the appointment based on the apparent significance of the director’s future potential removal.8

The director and the then-administrator also gave evidence that their pre-appointment discussions included the general solvency position of Delta and, for example, Delta’s failure to comply with an expired statutory demand. The administrator said the director had concerns as to other demands for payment made on Delta, and he believed those concerns to be genuine.

The fact, or not, of Delta’s solvency was highly contentious with competing submissions made by Emperor, Delta, the director and other parties to the proceeding and traversing a complex series of underlying structuring considerations, assignments of debt, the legitimacy of claims and demands made on Delta and the propriety of the director’s conduct during his tenure. Significantly, the director had sworn an affidavit in proceedings to wind-up Delta, favouring the winding-up, after Delta failed to comply with a statutory demand in respect of which there was doubt as to whether the debt was legitimately owed. Suffice to say, the Court expressed doubt as to Delta’s true financial position and the director’s evidence as to his beliefs informing the s436A resolution. However, the position advanced by Emperor and others was not necessarily preferable, namely that the administration should end and the company should be returned to their control to conduct an assessment of its true financial predicament.

As Her Honour the Chief Justice observed, the spirit of Part 5.3A9 is to maximise the chance of a company’s continued existence and otherwise to improve the return to creditors; the appointment of an administrator should therefore meet that purpose. Over time the Courts have considered ‘the degree of potency of the10’ improper purpose – that is, one which is foreign to the Part 5.3A objective11 - and determined that:

  • An appointment would be improper if it would not have been exercised but for a purpose inconsistent with the Part 5.3A objectives.12
  • An appointment would be improper if it was predominantly motivated by the improper purpose.13

Her Honour considered whether there is, in substance, any real difference between an improper purpose which is the predominant reason motivating the appointment or simply a causative reason motivating the appointment.14 Her Honour observed there was none, in her view.15

The Court ultimately found that, even though the director may have held a genuine and reasonable belief that Delta was insolvent in light of demands for payment and difficulty in procuring payment from its major and only client, his primary motivation for placing Delta into administration was to ensure that the shareholders did not gain control of Delta.16  The Court observed four reasons in reaching this conclusion:

  • The director’s acquiescence in setting aside a debt the subject of a statutory demand where there were clearly good grounds to contest it;17
  • The director’s conduct in winding up Delta on the basis of the statutory demand which further extended to actually seeking an administrator and filing of an affidavit in support of Delta’s winding up;18
  • The director’s concern in dealing with the administrator was the prospective shareholder takeover;19 and
  • The director’s delay in raising a concern with non-payment of fees by its major and only client.20

Due to the uncertainty of Delta’s solvency, the question became one of whether the Court should exercise discretion under s447A21 to end the administration. The Court must do whatever it considers just in the circumstances, taking into account the rights of those who are affected by the administration.22 Here, that consideration included the rights and interests of shareholders, creditors (actual and contested), the ATO and Delta itself.

The Court observed that:

  • neither of the interests of Emperor or the director were concerned with Delta’s viability;23
  • Delta’s major and only client was advancing a position to gain control of Delta for costs collection;24
  • there was no evidence as to the worth of costs orders which were arguably assets assigned to Delta by its client;25 and
  • ending the administration would likely result in the shareholders replacing the director (this time successfully) and that recovery of fees owed by Delta’s client would not likely be pursued.26

The Court ultimately concluded that the administration should continue in the hands of the administrator (who had shown themselves to be independent) and that the creditors could then decide on what course of action to adopt at the creditors’ meeting.

Lavan comment

A s436A resolution must be informed by the requisite belief as to solvency and be made for a purpose which is consistent with the Part 5.3A objectives. If the resolution is motivated by other reasons, whether predominantly or not, then the resolution is likely to be improper and the appointment potentially invalid. In those circumstances, the appointee is left in an unenviable position both as to remuneration and costs, embroilment in proceedings and feasibly, reputational concerns.

In circumstances where there is, in any event, doubt as to the company’s solvency, then the Court may be persuaded to exercise its discretion to allow the appointment to stand. Perhaps though, this case is a further reminder that where competing motivations exist for an appointment, and at least one of those is outside of the Part 5.3A framework, alternatives strategies and appointments should be considered, for example an application for winding-up on just and equitable grounds.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.
Dean Hely
Managing Partner
Joseph Abberton
Lawrence Lee
Restructuring & Insolvency


[1] Corporations Act 2001

[2] Emperor Investment Group Pty Ltd v Delta Law Pty Ltd and Anor; Emperor Investment Group Pty Ltd & Anor v Rozario & Ors [2020] QSC 307.

[3] The background facts and corporate structures are complex; for the purposes of the update we have limited the background to those which directly relate to the issue in discussion.

[4] Corporations Act 2001

[5] Emperor Investment Group Pty Ltd v Delta Law Pty Ltd and Anor; Emperor Investment Group Pty Ltd & Anor v Rozario & Ors [2020] QSC 307, [6].

[6] Ibid, [35]-[36], [42] – [49].

[7] Rozario & Anor v Delta Law Pty Ltd & Ors [2019] QSC 159.

[8] Emperor Investment Group Pty Ltd v Delta Law Pty Ltd and Anor; Emperor Investment Group Pty Ltd & Anor v Rozario & Ors [2020] QSC 307, [35] – [36].

[9] Section 435, Corporations Act 2001 (Cth).

[10] Emperor Investment Group Pty Ltd v Delta Law Pty Ltd and Anor; Emperor Investment Group Pty Ltd & Anor v Rozario & Ors [2020] QSC 307, [51].

[11] Blacktown City Council v Macarthur Telephone Communications Pty Ltd (2003) 47 ACSR 391, 396.

[12] Re Condor Blanco Mines Ltd [2016] NSWSC 1196.

[13] Foti Investments v P&S Investments Pty Ltd [2009] FCA 1409.

[14] Emperor Investment Group Pty Ltd v Delta Law Pty Ltd and Anor; Emperor Investment Group Pty Ltd & Anor v Rozario & Ors [2020] QSC 307, [51].

[15] Ibid.

[16] Ibid [56].

[17] Ibid [57].

[18] Ibid.

[19] Ibid [58].

[20] Ibid.

[21] Corporations Act 2001 (Cth).

[22] Ibid [67] referring and citing Cawthorn v Keira Constructions (1994) 33 NSWLR 607.

[23] Ibid [74].

[24] Ibid.

[25] Ibid.

[26] Ibid [75].

[27] Ibid [76].