Justice Brereton of the Supreme Court of NSW recently delivered judgment in Re CGH Engineering Pty Ltd [2014] NSWSC 1132 (CGH Engineering).
CGH Engineering concerned an application by a shareholder for leave to commence proceedings in the name of a company in voluntary administration.
His Honour was unable to locate any decisions on foot, but relied on the analogous position applying in a liquidation to find that:
section 237 of the Corporations Act 2001 (Cth) (Act) did not provide the Court with the power to allow a shareholder to commence proceedings in the name of a company in voluntary administration;
the Court did, however, have an inherent jurisdiction to make such an order, alternatively a power under section 447E(1) of the Act; and
in the circumstances he was prepared to make the order sought.
Background
CGH Engineering Pty Ltd (administrator appointed) (Engineering) and CGH Mixers Pty Ltd (in liquidation) (Mixers) were related companies.
Gary John Hird was a 50% shareholder of Engineering and applied for leave to commence proceedings in the name of Engineering against Mixers (Application).
Mr Devine, in his capacity as the administrator of Engineering and liquidator of Mixers, neither consented nor objected to the Application.
The Application was made pursuant to section 237 of the Act and the inherent jurisdiction of the Court.
Section 237, amongst other things, empowers the Court to order that a shareholder have leave to commence proceedings in the name of a company.
Issues
Two key issues arose for consideration:
Did section 237 have application given that Engineering was in voluntary administration?
In the circumstances of the case should the Court exercise its inherent jurisdiction to grant the Application?
Applicability of section 237
His Honour observed that there appeared to be an absence of authority dealing with the question of the application of section 237 to a company in voluntary administration.
However, in Chahwan v Euphoric Pty Ltd [2008] NSWCA 52 the NSW Court of Appeal had held, despite some earlier authority to the contrary, that section 237 could not be relied upon in circumstances where the relevant company was in liquidation.
Justice Brereton was of the view that the Court of Appeal’s reasoning was compelling and, on the basis of the following considerations, held that section 237 was not available in the context of a voluntary administration:
Section 237 was directed towards extending the limited exceptions available at common law to the rule in Foss v Harbottle (1843) 67 ER 189 (which is authority for the proposition that the proper claimant in an action for a wrong done to a company, is the company itself). His Honour was of the view that the policy considerations which underlay the statutory exception (ie section 237) to the rule in Foss v Harbottle, did not apply to a company in administration.
Once the requirements in section 237(2) are satisfied, a court must grant leave, ie there is no residual discretion. Justice Brereton found it wholly unsatisfactory that the Court have a mandatory obligation to allow litigation to be commenced in a voluntary administration setting, particularly where this may be in the face of opposition from the administrator.
The absence of any judicial discretion once the requirements in section 237(2) were satisfied was appropriate when faced with potentially biased directors, but sat uncomfortably alongside the position of an administrator as an independent and unbiased controller of a company. His Honour considered that this told strongly against the applicability of the section in the context of an administration.
While it was true that insolvent companies typically lacked the financial resources to commence proceedings and this consideration favoured the application of section 237, insolvency practitioners were experienced in overcoming this, including by seeking funding from third parties or by obtaining appropriate indemnities from creditors.
Finally, it was not necessary that section 237 have application to administrations because the Court had an inherent discretion to allow creditors and shareholders to commence proceedings in the name of a company. Further, section 447E provided the Court with an additional statutory basis to make such an order in the context of an administration.
Exercise of discretion
Justice Brereton noted that a court will often be reluctant to exercise its discretion to grant leave to a shareholder to pursue litigation in relation to a company in voluntary administration, particularly given that an administration is generally intended to be a short term arrangement.
However, in the circumstances of the case he was satisfied that it was proper that leave be granted, in particular given that:
Engineering’s administrator did not oppose leave;
Mr Devine was administrator of Engineering and liquidator of Mixers and therefore it was “difficult to see that he would be in other than a particularly awkward if not entirely conflicted position in deciding whether or not to bring the proceedings”; and
Mr Hird had brought the application in good faith, there was a serious question to be tried, it was in the best interests of Engineering that leave be granted, and notice for the purposes of section 237(2)(e) had been given.
Interestingly, His Honour expressly left open the possibility that section 237 may have application in the context of a deed of company arrangement, “where other considerations may emerge, particularly if a company has been returned to the control of the directors”.
Lavan Legal comment
CGH Engineering provides useful guidance in clarifying that section 237 is not available in the context of a voluntary administration, but that the Court retains other bases (both inherent and statutory) to allow a creditor or shareholder to commence proceedings on behalf of a company in administration. However, it appears that we will need to await another decision before we have clarity on the position with respect to companies subject to Deed of Company Arrangement.
