Australia: A creative application: using section 447A of the Corporations Act to validate an administrator appointment

Administrators sometimes find themselves appointed in circumstances that may create problems for themselves, and the Administration, in the future. Some recent cases serve as examples of how the court will treat an application to validate an otherwise invalid appointment as an Administrator. In particular, this article discusses the outcome in In the matter of Creative Memories Australia Pty Ltd (Administrators Appointed) [2013] NSWSC 652 (13 May 2013).

The problem

On 30 April 2013, Atle Crowe-Maxwell and James White of BDO were appointed joint and several Administrators of Creative Memories Australia Pty Ltd (the Company).

The only potential problem was that neither of the two directors who appointed them were residents of Australia. They resided in the USA. The previous Australian resident director had resigned on 19 April 2013.

The Administrators therefore approached the NSW Supreme Court for orders under section 447A of the Corporations Act 2001 (the Act) validating their appointment.¹

Section 201A(1) of the Act requires that a company has at least one resident Australian director. Section 436A(1) permits the directors to appoint an Administrator. Section 447A of the Act provides that:

The outcome

Justice Hammerschlag noted that while the discretion provided by section 447A is wide, it is not unlimited.

His Honour was also not convinced that the resolution appointing the Administrators was necessarily invalid. However, the two overseas directors had formed the view that the Company was insolvent, and had purported to appoint the Administrators, so something had to be done about those resolutions.

Why persist with the Administration?

There were sound commercial reasons why the Administration should remain on foot. The Company was still left with a significant quantity of its scrap-booking stock, and 22 employees. The remaining directors had formed the view that the best way to maximise a return to creditors was to continue to trade through an Administration. The Administrators had also secured the leased premises to allow trading to continue.

Orders granted

In those circumstances Justice Hammerschlag considered it entirely appropriate that the Administration should continue, and so declared the appointment valid pursuant to section 447A. The costs of the court application were ordered to be a cost of the Administration.

When in doubt, make an application!

If an Administrator has any doubt about the validity of his or her appointment, and there are reasonable commercial grounds for the continuation of the Administration, the Court will generally exercise its discretion under section 447A of the Act to validate the appointment. So, if in doubt, make an application!

But section 447A won't fix everything!

However, while section 447A may assist with validating many appointments that would otherwise be invalid, it won't cure all of them. In a more bizarre case, two practitioners, who were appointed to a group of companies by a director, made an application to the Queensland Supreme Court under section 447A in August last year to validate their appointment as joint Administrators. They were concerned that the director may not have even existed at the time of their appointment.

In that case, ASIC intervened in the proceedings and sought to appoint separate liquidators, rather than validate the Administration, since otherwise the validation might be applied in a manner which would validate a fiction. The Court refused the validation order, and instead appointed separate liquidators.

Footnote

¹In the matter of Creative Memories Australia Pty Ltd (Administrators Appointed) [2013] NSWSC 652 (13 May 2013).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.