By Jacob Reardon, an Associate in our Insolvency, Restructuring and Debt Recovery Group
There are certain circumstances in which the appointment of an insolvency practitioner can become exceptionally difficult, even where everyone is agreed that an appointment is essential and should proceed as soon as possible. This is a reminder to pay careful attention to corporate governance and the need to make sure businesses can function, even in the vagaries and vicissitudes of life.
Kahlefeldt[1] concerned the validity of the respective resolutions of two company directors to appoint a Voluntary Administrator under section 436A of the Corporations Act 2001 (Cth) (“the Act”).
Pursuant to section 436A of the Act, a company board must pass resolutions to the effect that:
- In the opinion of the directors the company is insolvent or likely to become so; and
- An administrator should be appointed.
The directors of the Kahlefeldt Securities Pty Limited (Administrator Appointed) (“the Company”) were a married couple aged 91 and 94. Both directors were affected by physical and mental ailments which made it incredibly difficult for them to make sound commercial decisions as to the financial management of the Company.
The Company was principally involved in the acquisition and development of residential property in Sydney. Many of the contributors to the funding of the Company’s projects were elderly retirees.
In 2017, no doubt recognising their advancing years the Company’s directors had sensibly executed and registered enduring powers of attorney in favour of their daughter (“Ms Kahlefeldt”) who had for some time been assisting with the management of the Company’s business. As the physical and mental condition of the Directors deteriorated, Ms Kahlefeldt assumed effective management of the Company’s business and affairs whilst continuing to care for them.
In June 2022, Ms Kahlefeldt (in consultation with the Company’s accountant) formed the view that the Company was likely to become insolvent in the near future due to ongoing funding issues with the Company’s projects. She subsequently resolved to appoint a Voluntary Administrator in early July 2022.
Ms Kahlefeldt purported to appoint the Administrator by executing the necessary respective director resolutions on behalf of both the directors as their attorney. The directors’ resolutions signed by Ms Kahlefeldt were marked as being signed by her in her capacity as enduring power of attorney for each of her mother and father. There was no dispute as to the validity of the enduring powers of attorney granted to Ms Khalefeldt by the Company’s directors.
Upon receipt of the executed ‘directors’ resolutions’ the Voluntary Administrator became concerned as to the whether Ms Kahlefeldt, as an attorney for the Directors, could legitimately effect her appointment under section 436A of the Act.
Powers of Attorney
So why did the Voluntary Administrator become concerned?
Generally, a power of attorney confers on the person to whom the power is granted the ability to do anything that the grantor may lawfully do.[2] Subject to its terms, a Power of Attorney normally enables the attorney to manage the grantor’s financial and legal decisions, for instance in circumstances where the grantor becomes incapable of making those decisions, for instance due to absence from the area, or through loss of mental or physical capacity.
However, as this case showed, the ability of a grantor to empower their attorney is not unlimited.
Directors’ Powers and Powers of Attorney
In particular, there is longstanding authority in the New South Wales Supreme Court that the powers of a director are personal to the office holder and cannot be delegated to someone else through a Power of Attorney.[3]
Cheerine Group (International) Pty Ltd v Yeung [2006] NSWSC 1047 (“Cheerine”)
For example, in Cheerine, a company had an Australian based director (Mr Yeung) and a director located overseas. The overseas based director gave Mr Yeung two Powers of Attorney, at separate times, both of which were drafted in very wide terms.
Mr Yeung began to feel concerned about the company’s solvency and convened a meeting of directors. The overseas director did not attend the meeting in person or by phone (even though this was permitted under the company’s constitution).
During the meeting, Mr Yeung was therefore the only director in attendance and on the advice of the company’s accountant decided that it was appropriate to resolve that the company was insolvent and to appoint voluntary administrators.
In order to effect the appointment of administrators, Mr Yeung purported to appoint the Company’s accountant as an alternate director in place of the overseas director by virtue of the power of attorney granted to him. It was then resolved by Mr Yeung and the company’s accountant to appoint administrators.
Young CJ in Eq at [10] said:
“That resolution is obviously invalid. It has been held on three occasions by judges of this court that a power of attorney given to a person who is also a director of a corporation confers no authority whatsoever for that person virtually to be or appoint an alternate director or exercise the functions of a director of that corporation, even though the donor is a director of the corporation and even though the power of attorney is in very wide terms: Mancini v Mancini (1999) 17 ACLC 1570 at [30]; Saad v Doumeny Holdings Pty Ltd [2005] NSWSC 893 and Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd (2004) 11 BPR 21,505.”
Delegation of directors’ powers pursuant to s 198D of the Act
Subject to a company’s constitution, the Act provides that company directors “may delegate any of their powers” to, inter alia, any other person.[4] However, in Cheerine, Young CJ in Eq held that s 198D of the Act “only applies to a delegation by the board of directors and not by any individual director”.[5]
Judgment
To correct what were clearly defective resolutions, the Administrator urgently sought curative Orders under section 447A of the Act. In short, section 447A enables the Court to make Orders as to how the Voluntary Administration provisions contained in Part 5.3A of the Act should operate in a relation to a specific company or administration.
Accordingly, the Administrator applied for an Order (which was ultimately granted) that the resolutions purportedly passed by Ms Kahlefeldt as attorney for the Directors to appoint the administrator were to operate as if they were valid for the purposes of section 436A of the Act.
The Court considered the actions of Ms Kahlefeldt in the particular context of the financial position of the Company, the viability of its ongoing projects and her intimate connection to it. At [18] Hammerschlag J said:
“The categories of cases in which s 447A should be used are not closed and whether it should be will of course turn on the particular circumstances of the case, but in considering whether an order should be made, and if so the terms of it, it is important to bear the object of the Part in mind.”
On the basis of sworn medical evidence, Hammerschlag J accepted that the Directors were incapable of making decisions on behalf of the Company and Ms Kahlefeldt was effectively the sole “guiding mind and custodian of the Company.” Hammerschlag J also noted that Ms Kahlefeldt had from time to time acted in the capacity of a director to assist in the handling of the Company’s affairs. On this basis, the Court considered that Ms Kahlefeldt was not a “commercial stranger” to the Company, and that in circumstances where urgent steps were required to be taken to appoint an administrator, “only Joanne was in a position to bring about the appointment of the administrator”[6].
Interests of creditors
Just because a Court has power under s447A to fix a problem in a voluntary administration, does not mean that it will. In considering whether to exercise its discretion under section 447A, the Court considered evidence from the Administrator in which she deposed that the defect in her appointment prevented her from undertaking a number of crucial tasks requiring immediate attention for the benefit of creditors. The Administrator advised the Court that the completion of this urgent work was essential to the preservation of value in the Company’s projects and that were her appointment not promptly regularised, the interests of creditors would be exposed to material risk.
The Court said:
“[23] Not to recognise the validity of the administrator’s appointment would be to deprive the Company and its creditors and members of the potential benefits of Part 5.3A. To recognise it would further its objects.
[24] Voluntary administration, it seems to me, is more likely to protect the Company’s interests and hence those of its creditors and members than an immediate winding up.”
Khalefeldt is an example of the extent to which the Court is willing to validate a manifestly defective appointment under section 447A where there is a clear benefit to creditors to do so. Central to the Court’s reasoning was the context within which the appointment was purportedly made, the urgent requirement to validate the Administrator’s appointment to preserve value for creditors and a desire to further generally the objects of Pt 5.3A of the Act.
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[1] In the matter of Kahlefeldt Securities Pty Limited (Administrator Appointed) ACN 001 320 270 [2022] NSWSC 939 (“Kahlefeldt”).
[2] Powers of Attorney Act 2003 (NSW) s 9.
[3] Mancini v Mancini [1999] NSWSC 799 [30]; Saad v Doumeny Holdings Pty Ltd [2005] NSWSC 893 at [17]; Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 at [39].
[4] Corporations Act 2001 (Cth) s 198D(1)(d).
[5] Cheerine Group (International) Pty Ltd v Yeung [2006] NSWSC 1047 at [21].
[6] Kahlefeldt at [21].
