Validity Of Administrators' Appointment And Mr. Lee's Directorship

Essential Facts of the Case

1.Why was it necessary to determine when Mr. Lee was removed as a director of both companies?

2.What was the relevance of the statutory assumptions to the validity of the administrators’ appointment by Mr Lee?

3.Do you agree with the ultimate determinations of the Court on the issues arising in this case?  What must your clients be aware of as a result of this decision?

The case is related to the provisions of The Corporation Act 2001 (Cth)[1]. In this case there are four defendants namely S.E.T. Services Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) (SET), Sydney Project Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) (SPG), Mr Salim Mehajer and Ms Khadijeh Mehajer. The plaintiffs in this case are Mr. Christian Peter Sprowles and Mr. Michael Andrew Hogan[2]. The plaintiffs in this case had been appointed the Administrators of both the defendant companies by their only director Mr Kenneth Wen Hsi Lee. The defendants had made a claim that the Mr. Lee had been removed from his post as a director through passing of a special resolution as stated in section 249B of the CA on the morning of the same day when the plaintiffs had been appointed as the administrators. The plaintiffs had been appointed as administrators through the due process as has been provided through section 436A of the CA.Therefore there was an emergence of possibilities which could suggest that the appointment of the plaintiffs as the administrator may not have been done in a valid way. Thus the plaintiff commenced proceedings in as quickly as possible seeking substantive relief for themselves.

The plaintiff pleaded for an under in relation to section 447C of the CA a declaration which would ensure that the plaintiffs had been appointed in a valid way as the administrators of both the company. The plaintiffs also demanded an order under section 1322(4) and/or 447A of the CA which would validate their appointment as the administrators of both the company. In addition the plaintiffs asked for the cost incurred by them in relation to this application be deemed as the cost incurred by the defendant company in the capacity of them being the administrators and also cost against the other defendants of this case.  An interlocutory injunction had been granted by the court which restricted the plaintiffs from exercising their powers as the administrators of the two defendant companies until 29^th June. The order was than extended on 29^th June till the final judgment had been made by the court. The defendants were sole shareholders of the company[3]. Mr Lee had received statutory demand by the creditors of both the companies and asked the defendant to appoint administrator.  Mr. Lee thought the company had become insolvent or was likely to become insolvent and thus opted for the appointment of administrators. ASIC search in relation to the directors of the company had been made by the plaintiff prior to being appointed as administrator[4].

Why it was Necessary to Determine Mr. Lee's Removal as a Director

1. It was important to determine whether Mr. Lee had been removed as a director or not in order to establish the fact that whether the plaintiffs had been appointed as the administrators of the company in a valid manner. If it was found by the court that the removal of the director had been made after the plaintiff had been appointed than the appointment would be held as a valid appointment[5]. This is because if the director would have been removed after the appointment of the administrators the appointment would have been done in proper capacity and would have been valid. To the contrary if the appointment of the administrators would have been done after the removal of Mr. Lee as a director the appointment would not have been valid as it would have been outside the scope of authority of Mr. Lee to take a decision in relation to the defendant companies. Thus it was a fundamental issue in this case to decide whether Mr. Lee had been removed as the director of the defendants company before appointing the plaintiffs as their administrators.

The authenticity of the date and time when the director had been removed by the defendants had to be brought out by the defendants as provided by the court although the burden of proof in retain to Mr. Lee’s removal as a director after appointment was on the plaintiffs. The CA acts provides that along with a special resolution the required forms also have to be lodged by the ASIC for the purpose of removing a director of the company. The belief of the defendants that as soon as the minutes were signed they became effective was rejected by the court stating that the evidence provided by defendant purported that during the course of dealing it was believed that Mr. Lee was still the director of the company. The court therefore concluded that the plaintiff should be given a declaration under section 447C of the CA that they had been appointed validly as the administrator of the company as the court was not able to come to the conclusion that Mr. Lee had not been removed as the director of the company before the appointment of the plaintiffs as administrators had been made by him[6].

2. The second basis upon which the plaintiff had been found to be entitled to the declaration under section 447C of the CA was in relating to statutory assumption[7]. According to section 128 (1) of the CA an assumption with respect to section 129 of thee CA can be made by a person in relation to transactions with the company. Any assumption which has been made cannot be asserted by the company to be incorrect in court proceedings.

Relevance of Statutory Assumptions

According to section 129 (2) of the CA an assumption can be made by person in relation to anyone who purports with respect to the information which is available to the public from the ASIC provided by the company to be a director or secretory of the company has been appointed duly by the company. In addition such director has the power to carry on the dealings which director would be entitled to do in relation to a similar company.

As per these assumptions provided by the CA when a person is dealing with a company and relied upon the information which had been provided to them by the ASIC in relation to the directors of the company, it an been provided that the transaction is valid if such dealing is within the power of the directors in a similar situation or company. Thus as in this case the plaintiffs had relied on the information provided by the ASIC with respect to Mr. Lee being the director of the defendant companies the defendants cannot provide in court that the assumption made by the plaintiff in relation to Mr. Lee being the director of the companies is not correct.

In the case of Correa v Whittingham[8] it had been ruled by the court that a person who has been made the administrator of a company can be regarded as persons in relation to section 128 and 129 of the CA and have the right to rely upon the assumptions provided in the sections. In the previous trial of this case Correa v Whittingham[9] it was held by the court that assumptions under section 129 were available to the administrators. In the case of Ross v GNC Homes Pty Ltd[10] a similar conclusion had been reached by the court.

Thus in the case one of the main issue was that if the assumptions were available to the administrators under the CA they had the right of claiming a declaration under section 447C.

1. The first issue was whether the resolution made by the defendants in relation to section 249B of the CA to remove Mr. Lee as the director was made before the appointment of the plaintiffs as the administrator of the company or after the appointment[11].
2. Whether the statutory assumptions as provided in section 128 and 29 of the CA were enough to ensure that the plaintiff had been appointed administrators in a valid manner and the defendant cannot provide such assumptions to be incorrect[12].
3. The final issue which had to be determined by the court the court was that whether the section 447A or 1322 of the CA had to be used to validate the appointments of the plaintiffs as the administrator of the company if their appointment had been invalid[13].

In relation to the first issue the court had provided that Mr. Lee had not been removed as the director of the company before the appointment of the plaintiffs as the administrators. The decision of the court was based on the fact that the defendants were not able to prove that the date and time the minutes had been signed were the same when the director had been removed. In addition the defendants had to launch specific forms with the ASIC for the removal process to be completed which they did not. The evidence of the defendants moreover made the court establish the fact that they did not consider Mr. Lee be removed as the director as soon as the minutes has been signed. Thus in this case it can been provided that the decision which have been made by the court in relation to the first issue of the case is appropriate, correct and just[14].

Ultimate Determinations of the Court

In relation to the second issue it had been provided by the court that the plaintiffs had the right to make assumption under section 128 and 129 and the defendant did not had the right to provide hold such assumption made by the plaintiff to be incorrect. The court based its decision on the wordings of the sections and on the fact that the plaintiffs had acquired information from the ASIC commission prior to being appointed as the administrators of the defendant company which was assumed to be insolvent by its sole director. The court also based its decision on the cases of Correa v Whittingham and Ross v GNC Homes Pty Ltd which were in relation to statutory assumptions as provided by the CA as well as the appointment of administrators. An attempt was made by the defendants to distinguish between the precedent and the present case that the submission which had been provided by the defendants in this case were not present in the precedents. However such attempt was rejected by the court further citing Sliteris v Ljubic[15]  in relation to statutory assumptions[16]. Thus the decision provided by the court in relation to the second issue was also correct.

The court did not have to decide the third issue as the first and second issue already established that the appointment of the plaintiffs as administrators was valid[17].

The case signifies the importance of keeping records in a good way and lodging notifications to the ASIC in a timely manner with respect to removing directors from their post. The case also provides that clear indication has to be provided to the directors that they have been removed from their post. The company would be bound to the actions of the directors who had been removed from their post if they have not been provided information about their removal, the records of the ASIC support their appointment and the company holds them to be the directors after removal.

ASIC v Vines [2005] NSWSC 738

Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34

Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389

Corporation Act 2001 (Cth)

Correa v Whittingham (No 3) [2012] NSWSC 526

Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310

Jones v Dunkel (1959) 101 CLR 298

Moukhayber v Camden Timber & Hardware Co Pty Ltd [2002] NSWCA 58

Ross v GNC Homes Pty Ltd [2015] SASC 168

Sliteris v Ljubic [2014] NSWSC 1632

Sydney Project Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) and S.E.T. Services Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [ 2017] NSWSC 881

Watson v Foxman (2000) 49 NSWLR 315