A shopping list for invalidity and impropriety – voluntary administration of listed entities

To validly appoint a voluntary administrator to a publicly listed company:

  • Can a board which is in breach of the Corporations Act 2001 (Cth) (Act) requirement to have 3 appointed directors validly appoint the administrator?
  • Will the resolution be invalid if, in fact, only one of the “directors” executing the resolution was suspected to have been a fraud impersonating the director?
  • What is required for the directors to hold the opinion that the company “is or is likely to become insolvent” pursuant to section 436A(1)(a) of the Act?
  • If the directors do hold not the s 436A(1)(a) opinion, is the resolution passed for an improper purpose? Here, allegedly to facilitate a pre-pack in favour of the existing directors and to defeat the appointment of new directors at a general meeting.
  • Could the resolution, in some or all of the circumstances described above, be an abuse of Part 5.3A?

These questions were before the Court in In the matter of Condor Blanco Mines Ltd [2016] NSWSC 1196 in which the only two appointed directors of a publicly listed company resolved to appoint an administrator the day before a general meeting to replace the board.

This update will consider the first 3 questions only.

Who signed the resolution?

One of the two appointed directors was “afflicted by alcoholism:” Condor [52]. He suffered from severe memory loss and did not recall executing the resolution appointing the voluntary administrator; he was alleged to have done so at his local pub, where he had been drinking for several hours beforehand. While not deemed unreliable, his evidence was such that he simply could not remember whether he had executed the resolution. He had been hospitalised for two days leading up to the appointment of the administrator as a result of “heavy intoxication.”

The Court heard from two separate witnesses including the (then) appointed administrator. Neither of these witnesses knew the directors personally and neither had met this director prior to attending the meeting at which the administrator was appointed. Photographic evidence was tendered in Court to identify the director in question; it transpired that the director was in fact the person who had executed the resolution.

At this juncture then, the Court held the resolution was validly executed by the board which, whilst invalidly constituted pursuant to section 201A the Act, was validly appointed under the company’s constitution.

Did the two directors genuinely hold the belief?

When assessing the validity of a directors’ resolution that a company is insolvent or likely to become insolvent, a Court will have regard to whether the directors genuinely held that belief and, in assessing that belief, what information was considered by the directors to establish their belief at the time of executing the resolution.

It is not necessary that, as a matter of fact, the company was insolvent or would become insolvent at a future time, but only that the directors reasonably held the requisite belief when passing the resolution.

In reaching its decision, the Court had regard to extensive evidence about the company’s financial status. Here, minutes of a directors’ meeting held two weeks before the section 436A resolution recorded that the company was solvent at that day, that the directors would, if required, make funds available to the company (it having no cash at bank) and would not call on any loans to the company until after certain capital raisings were completed. A further directors’ meeting held 4 days before the section 436A resolution was passed also recorded that the company was solvent (albeit it held $300 cash at bank with recorded liabilities of $200,000).

The minutes of the directors’ meetings were considered against the financial records of the company maintained by the company secretary. The evidence established that the secretary alone had access to the records, that no other party (including the appointed directors) had ever sought to access those records and indeed that over some 4 years, liabilities of the company had been met by share placements while the company recorded negative cashflow. It was clear that the company’s solvency was entirely dependent on the support of its then current directors, share placements or the disposition of assets to an arm’s length purchaser.

The Court ultimately found that only one of the directors – the former managing director - could have genuinely held the belief necessary to resolve that the company was, or was likely to become, insolvent. That was because of the director’s general awareness of the company’s affairs (as documented in the minutes of directors’ meetings) and the length of time he had held office (6 years). It was therefore reasonable to conclude that director, knowing of the general meeting scheduled for the following day (at which he and his fellow director were proposed to be removed), would be unlikely to continue his financial support of the company and that insolvency would be a likely outcome having in the context of the position outlined in the books and records.

In contrast, the Court was not satisfied that the remaining director held the belief necessary to pass the 436A resolution because he relied entirely on others to keep him informed about the state of the company’s financial affairs. In particular, he relied upon the word of the former managing director, whose word he took at face value, and had not taken any independent steps to review the financial records (or any others) of the company. That director was not entitled to abdicate his responsibilities, a finding consistent with earlier authorities.

As a result the Court found the administrator’s appointment to be invalid (leaving aside the issue of whether the board was validly constituted for the purposes of section 201A). It was therefore not necessary to consider the administrator’s application to cure his appointment which was founded on the company’s lack of the required 3 directors under section 201A.

Validity of the board

While the Court did not need to consider the board’s ability to function with only two appointed directors because of its conclusion that the resolution to appoint the administrator was invalid, it gave consideration to the effect of the 3 director requirement under section 201A and said at [102]:

Had it been necessary to decide Ground (1), my conclusion would have been that the circumstance that, at the time of the purported board resolution of 4 July 2016, Condor had only two directors did not affect the validity of a board resolution otherwise valid. The basis for this conclusion would have been that the reference in s 436A(1) to a company’s “board” extends to a board the composition of which does not accord with s 201A, provided that the constitution allows a board so constituted to function.

Lavan Legal comment

This decision provides guidance on a board’s ability to validly pass resolutions, even if in breach of the requirements of the Act. It suggests that provided the board is validly constituted under the terms of the company’s constitution, then the board’s resolutions will be valid.

It also provides guidance on the nature of the belief a director must hold and the enquiries a director must make to, in fact, demonstrate the belief was reasonably held.

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.