Wrong Way, Go Back - Application For Orders Validating Appointment Of Administrator Dismissed

In the decision of In the matter of Premier Energy Resources Pty Ltd,¹ the New South Wales Supreme Court considered an application for orders under s 477A of the Corporations Act 2001 (Cth) (the Act) to validate the appointment of an administrator.

The case involved an allegation that the appointment of an administrator to Premier Energy Resources Pty Ltd (the Company) was invalid given that the resolution to appoint the administrator was made in circumstances where the apparent resignation of a former director had in fact been forged by the continuing (and allegedly sole) director.

Background

The Company was incorporated in December 2020 to carry on the business of mining and supplying coal fines.

The Company had four shareholders:

• Earth Technics Pty Ltd (Earth Technics).  The sole director and majority shareholder of Earth Technics was a Mr Ross Robson;
• Bobstan Investments Pty Ltd (Bobstan).  The sole director and shareholder of Bobstan was a Mr Luke Connor;
• Aussie Rehabilitation Services Pty Ltd (Aussie Rehab).  The sole director and shareholder of Aussie Rehab was a Mr Richard Bernard Clark; and
• Gregory Nominees Pty Ltd (Gregory Nominees).  The sole director and shareholder of Gregory Nominees was a Mr Gregory (no first name is identified in the judgment).

The shareholders were bound by a shareholders deed (Shareholders Deed), which (amongst other things) set out the rights of the shareholders in relation to the appointment of directors and the process for dealing with deadlocks in decision making between the shareholders. 

As at November 2021, the directors of the Company, appointed in accordance with the Shareholders Deed, were Mr Connor and Mr Robson.

The following events then occurred:

• On 18 November 2021, the Company entered into a coal fines supply agreement with Sunset Power International Pty Ltd t/a Delta Electricity (Delta and the Delta Contract), which was subject to successful completion of a trial burn.
• On 13 October 2022, Delta issued a dispute notice to the Company under the Delta Contract, contending, amongst other things, that the Company was in breach by failing to deliver coal fines for a trial burn.  
• Delta and the Company participated in a mediation in March 2023 but this did not resolve the dispute.
• On 12 April 2023, Mr Robson resigned as a director, leaving Mr Connor as sole director of the Company. 
• On 26 April 2023, following communications between Mr Connor and Mr Simon Thorn, a registered liquidator, regarding options for the Company, Mr Connor emailed documents for signing to Mr Robson, Mr Clark and Mr Gregory for a members’ voluntary winding up.  Mr Robson declined to sign these documents.
• Discussions were continuing with Delta, but by mid-May 2023, Delta’s solicitors indicated to Mr Connor that Delta would commence legal proceedings if the Company failed to agree to participate in an expert determination process.
• On 8 June 2023, Mr Connor informed Mr Thorn that he intended to wind up the Company because it did not have the funds for a legal battle, and Mr Thorn provided a bundle of documents to Mr Connor to convene a meeting of shareholders to vote on the winding up of the Company.
• On 13 June 2023, Earth Technics appointed Mr Clark as a director of the Company in accordance with the Shareholders Deed.
• On 14 June 2023, Mr Connor informed Mr Thorn that the shareholders meeting had taken place on 9 June 2023, and that the resolution to wind up the Company had been passed with 75% of shareholders voting in favour, but that the signed minutes had not been received from Mr Robson.
• On 20 June 2023, Mr Connor had a telephone conversation with Mr Thorn in which they discussed putting the company into voluntary administration.  Mr Thorn subsequently provided Mr Connor with a bundle of documents to convene and hold a directors’ meetings to appoint Mr Thorn as the voluntary administrator.  
• Later on 20 June 2023, Mr Connor provided Mr Thorn with signed minutes of what was described as a meeting of the sole director of the Company, at which it had been resolved that the Company be placed into voluntary administration and that Mr Thorn be appointed as administrator.  Mr Connor also informed Mr Thorn that Mr Clark had resigned as a director of the Company that afternoon and provided Mr Thorn with a copy of a resignation letter that, on the face of it, appeared to be signed by Mr Clark. 

The following further events then occurred after Mr Thorn’s appointment as administrator:

• On 21 June 2023, Mr Clark emailed Mr Thorn stating that the shareholders of the Company were surprised that the Company had gone into administration and that a shareholder had lost its director with no notice to the shareholders, and requesting an explanation as to why the Company had been placed into administration when it had no outstanding invoices and was not trading. 
• On 28 June 2023, Mr Robson emailed Mr Thorn’s office alleging that Mr Thorn’s appointment was unlawful and that Mr Connor had no authority to appoint Mr Thorn.  On the same day, Mr Clark informed Mr Thorn that he had not signed any resignation letter, and that the resignation letter had been falsified.
• On 28 June 2023, Mr Thorn wrote to Mr Clark and Mr Robson stating, amongst other things, that he had “acted on the documents” and had no reason to dispute the documents provided to him.  Further, Mr Thorn stated that as the Company was without funds, the shareholders would have to apply to the Court if they wanted to have the validity of his appointment reviewed.
• The minutes of the first meeting of creditors held on 29 June 2023 record that the validity of Mr Thorn’s appointment had been questioned by Mr Robson and Mr Clark, but that the chairperson had advised that based on the records available to him the appointment was valid. 

The dispute as to the validity of Mr Thorn’s appointment continued for the entire duration of the administration.  For the purposes of this article, it is sufficient to note that:

• Mr Clark consistently maintained that Mr Thorn’s appointment was invalid;
• Mr Thorn maintained that he had no reason to dispute the documents provided to him and that the shareholders should bring an application themselves or provide funding for such an application;
• there is no evidence to suggest that Mr Thorn made any enquiries in relation to the allegations that Mr Clark’s resignation letter had been forged; and
• the second meeting of creditors was convened on 24 July 2023, but was adjourned for 45 business days due to the ongoing dispute as to the validity of Mr Thorn’s appointment. 

On 15 September 2023, Mr Thorn commenced proceedings seeking:

• an order pursuant to s 447A of the Act that Part 5.3A of the Act is to operate in relation to the Company as if Mr Thorn was validly appointed by (creditor’s) resolution made on 20 June 2023; and  
• further or in the alternative, a declaration pursuant to s 1322(4) of the Act that the appointment as administrator of the Company on 20 June 2023, and all acts, matters and things done, are not invalid.

Decision

Williams J noted that the power under section 447A has been applied in numerous cases to make orders validating the appointment of administrators that would otherwise be invalid, or dispelling uncertainty that would otherwise exist about the validity of the appointment, and that there were a number of cases in which there had been doubts about whether instruments of appointment (or other relevant documents) had been forged.

However, Williams J ultimately decided not to exercise the Court’s discretion to validate Mr Thorn’s appointment for the following reasons:

• as Mr Clark’s evidence was unchallenged at the hearing, Williams J was satisfied that Mr Clark’s resignation letter had been forged;
• Mr Thorn was obliged to investigate the allegation of fraud promptly after the allegation was first made and, if not satisfied that his appointment was valid, to make an application to the Court;  
• Mr Thorn’s consistent rebuffing of the fraud allegations and assertions that he relied on the documents, amounted to rejecting the allegations without investigation;
• determining the validity of his appointment, or having the appointment validated by the Court was essential to Mr Thorn’s entitlement to take steps as administrator;
• Mr Thorn was not justified in refusing to apply to validate his appointment because he lacked funding and it was not appropriate for Mr Thorn to seek to impose on Mr Clark (or the other shareholders) the costs of seeking directions to determine the validity of the appointment when there was no proper basis for assuming that Mr Thorn’s appointment was valid;
• an order validating Mr Thorn’s appointment would give the imprimatur of the Court to conduct of Mr Connor in forging or procuring a forgery of the letter of resignation and the conduct of Mr Thorn in failing to promptly investigate and bring to the Court’s attention the doubts raised about the validity of his appointment;
• an order validating Mr Thorn’s appointment would cause a substantial injustice to the shareholders by depriving them of the right to have the dispute about the future direction of the Company determined under the Shareholders Deed, and/or by effectively permitting Mr Conner to bypass the agreed deadlock process in the Shareholders Deed; 
• there was no prejudice caused by the refusal of the application as the Company was not trading, the only creditors were the shareholders (and other related parties) and Delta, the shareholders could utilise the deadlock mechanism in the Shareholders Deed to try to resolve how the Company would address the Delta dispute and the future direction of the Company, and failing all else the shareholders could seek to wind up the Company on just and equitable grounds or the creditors could also commence winding up proceedings.

Accordingly, Williams J dismissed the application and made orders to have the ASIC register rectified to reflect that Mr Clark did not resign as a director on 20 June 2023.

Lavan comment

This case provides a useful reminder that any allegations which might call into question the validity of the appointment of an external administrator must be promptly and properly investigated.  

A key takeaway from the decision is that if a practitioner is not satisfied that his or her appointment was valid, an application to the Court should be made, and a lack of funding will not be a sufficient basis to dispense with such an application if there is no proper basis for a prima facie view that the appointment is valid. 

If you have any questions about this decision, or about any questions as to the validity of an appointment of an external administrator, the experienced Lavan team is here to help.