By Jacob Reardon a solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
Over the years, decisions such as In the matter of Condor Blanco Mines Ltd [2016] NSWSC 1196 and ASIC v Planet Platinum and Anor [2016] VSC 120 have served as sober reminders for voluntary administrators of the need to be satisfied of the validity of their appointment.
Under section 436A of the Corporations Act 2001 (Cth) (“the Act”), a company may appoint an administrator if the board resolves to the effect that:
- The directors are of the opinion that the company is insolvent or likely to become insolvent at some future time; and
- An administrator should be appointed.
Therefore, relevant to any determination under section 436A is the directors’ opinion of an entity’s solvency position and an accompanying resolution for the appointment of an administrator.
But what if the directors are incapacitated, unwilling, unable, or just simply absent?
The wording of section 436A raises questions as to who is relevantly a director for the purposes of the Act and incidentally, how those looking after incapacitated directors can navigate the requirements of the Act.
Definition of a Director under the Act
Apart from formally appointed directors, the s 9 definition of “Director” includes people who:
- Act in the position of a director; or
- Can exercise influence over the company’s board.
(“the Expanded Definition”)
Often the former definition is described as a ‘de facto director’ (that is, someone who acts as one) and the latter as a ‘shadow director’ (that is, someone who controls or influences the company from behind the scenes). Neither of these terms, ‘de facto director’ or ‘shadow director’, has a specific definition, although both are regularly used in modern insolvency parlance.
Further, s 9 says that the Expanded Definition only applies where there is no contrary intention.
The Expanded Definition also contains a note of examples where a contrary intention might be present:
- Section 249C – Power to call meetings of a company’s members;
- Section 251A(3) – Signing minutes of meetings; and
- Section 205B – notice to ASIC of change of address.
So merely having the ability to undertake these tasks might not mean a person is a director under the Expanded Definition.
However, if a person is a director under the Expanded Definition then he or she is bound by duties of directors including a director’s duty to prevent insolvent trading (e.g. Williams v Bearing Trading Pty Ltd (2008) 69 ACSR 334).
How have the Courts interpreted the Expanded Definition?
In Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109, Young JA examined the authorities relating to the characterisation of informal directors. At [229] to [232] he formulated the following general principles:
First, not every person whose advice is in fact heeded as a general rule by the board is to be classed as a de facto or shadow director.
Secondly, if a person has a genuine interest of his or her or its own in giving advice to the board, such as a bank mortgagee, the mere fact that the board will tend to take that advice to preserve it from the mortgagee’s wrath will not make the mortgagee, etc a shadow director.
Thirdly, the vital factor is that the shadow director has the potentiality to control. The fact that he or she does not seek to control every facet of the company or the fact that from time to time the board disregards advice is of little moment.
Fourthly, Millett J’s proposition that the evidence must show “something more” than just being in a position of control must be shown. The whole of the facts of the case must be shown to see whether that power to control was put into practice. The emphasis that one must judge on the whole of the facts and circumstances is made many times over in the leading cases, see…
Fifthly, although there are problems with cases where the board of the company splits into a majority and minority faction, so long as the influence control, the real decision makers, the person providing the influence may be a shadow director.
Thus, in applying the Expanded Definition, the court will have regard to whether a person:
- Occupied a position of control in a company; and
- That power to control was actually put into practice.
Implications for the purposes of the Act
As noted, the Expanded Definition applies unless a contrary intention appears. The definition is therefore malleable and it would be prudent to adopt a conservative approach when considering whether a person may be treated as a director under the Act.
Can informal directors appoint an administrator under section 436A?
Perhaps unsurprisingly, judicial consideration as to whether directors under the Expanded Definition can appoint an Administrator under section 436A is scant. However, the issue was directly discussed by Ferguson J in Xie v Crisp and Ors [2011] VSC 154 (“Xie”).
In Xie, a company had one formally appointed director and two ‘shadow directors’. In the absence of the formally appointed director, the shadow directors purported to call a meeting, and at that meeting, purported to resolve that the company was insolvent or likely to become so, and that a voluntary administrator should be appointed.
In a subsequent challenge to the validity of the appointment, the shadow directors referred to the duty to prevent insolvent trading and its application to informally appointed directors as well as their ability to rely upon defences contained in section 588H of the Act.
Ferguson J ultimately found however that there was in fact a contrary intention in section 436A which meant that it could only be utilised by formally appointed directors. The Court at [190] said that:
“…the remedy of appointing an administrator lies with the company, not the director. It is the board of the company that must make the resolution for appointment, not a single director acting alone (except, of course, where the company is a sole director company). This is to be contrasted with s 459P(1) where any director acting alone can apply to have the company wound up.
It was argued that the shadow directors were not without options to try and prevent the company from trading whilst insolvent. For instance they could have:
- become formally appointed directors of the company and act as the legislation intended;
- applied to wind up the company through the Court; or
- taken action to prevent the company from incurring the relevant debts in the first place.
Application under section 447A
Notwithstanding Ferguson J’s finding that informally appointed directors are incapable of appointing an Administrator under section 436A, the court nevertheless did in fact use its separate powers to regularise the appointment of the administrator under section 447A of the Act.
Section 447A(1) of the Act allows the Court to make orders about how the provisions relating to voluntary administration are to apply in a particular context. In considering its powers under section 447A, the Court found that it could validate the administrator’s appointment having regard to the merits of continuing the administration and objects of Part 5.3A and the inability of the directors (formally and informally appointed) to work together.
So although the Court was not prepared to accept that the (informally appointed) directors could (formally) appoint a voluntary administrator, it was satisfied that the (informally appointed) administration should remain on foot.
Also relevant to the exercise of the Court’s discretion under section 447A was the intention that the informally appointed directors were supposed to have been directors of the entity.
Unfortunately, the judgment does not provide any assistance in determining whether and if so in what circumstances, director/s under the Expanded Definition might validly appoint an administrator without having to rely upon the rescue provisions of s 447A.
This interpretation of section 436A and the finding of a contrary intention for the purposes of the Expanded Definition does not appear to have been otherwise directly endorsed or considered by subsequent authorities. However, Xie does suggest that directors under the Expanded Definition are unable to appoint administrators under section 436A without curative orders being sought under section 447A of the Act.
Those who think they are a director of an entity, should ensure they are in fact formally recorded as such. Administrators should ensure that the persons who purport to have appointed them are in fact registered as current directors of the Company. Otherwise, an expensive application for relief under section 447A of the Act may be required, and may not necessarily be granted.
If you would like to discuss valid appointments, informal and formal directors or any other insolvency related issues, Matthews Folbigg Lawyers can provide you with specialist advice.
If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery law, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
