Australia: Challenge denied: administrator appointments held to be valid, ASIC register plays key role

What you need to know

• The sole shareholder of two companies has failed in attempting to challenge the validity of the appointment of administrators to those companies.
• The three key issues canvassed in the case were whether the evidence supported the claim of an invalid appointment, whether the appointment was effective based on assumptions made about the accuracy of the ASIC register, and whether validating orders should be made to uphold the appointment even if it was found to be invalid.
• Company directors and administrators alike should take notice of the guidance emerging from this decision.

An administrator's appointment may be challenged for a variety of reasons, such as in circumstances where:

• the directors of a distressed company are said to have appointed an administrator by improper purposes outside the ambit of the voluntary administration scheme (such as to manipulate relation back periods, or to stay potential litigation against a director)
• those who have appointed the administrator are said to not have the requisite power to make such an appointment.

These challenges often lead to court proceedings that detract time, resources and attention away from what a company's directors may be trying to achieve, and from the work the administrators believe they have been engaged to do. It is therefore in all parties' interests (including creditors) for any challenge to an administrator's appointment to be resolved as quickly and cost-effectively as possible.

With the new safe harbour reforms now in force, we may well see a decline in the number of companies entering administration as directors seek to rely on the protection afforded to them under the safe harbour regime. But administration will still remain a real possibility for some companies, whether in the shorter or longer term after safe harbour restructuring efforts may have failed.

For those who do seek to challenge an administrator's appointment, and for administrators defending a challenge, a case considered this year by the NSW Supreme Court[1] is a useful reminder that:

• a challenge to the validity of an administrator's appointment must be supported by appropriate and well-prepared evidence, and will always be considered in the context of the court's broad powers to make orders validating an otherwise invalid appointment
• administrators are 'persons' entitled to rely on the assumptions set out in sections 128 and 129 of the Corporations Act 2001 (Cth) (Corporations Act), which include assumptions relating to the accuracy of information on the ASIC register.

Background to the challenge

Robb J of the NSW Supreme Court considered a challenge to the appointment of Mr Hogan and Mr Sprowles (the Administrators) to two companies – Sydney Project Group Pty Ltd and S.E.T. Services Pty Ltd.

The Administrators had sought declarations confirming that on 16 June 2017, they had been validly appointed as administrators of both companies by their sole director, Mr Lee.

The Administrators' appointment was challenged by the sole shareholder of the companies, the well-known property developer and ex-deputy mayor of Auburn, Mr Mehajer, together with his sister Ms Mehajer (the Respondents). They argued that the appointment was invalid in light of a purported resolution by Mr Mehajer as sole shareholder of the companies, resolving to remove Mr Lee as director and replace him with Ms Mehajer. This resolution was said to have been passed early on the morning of 16 June 2017, before Mr Lee's resolution.

Key issues

Central to the Administrators' case was their reliance on ASIC searches they had obtained on 14 June 2017 which confirmed that Mr Lee was the sole director and secretary of both companies. This position was confirmed again by further searches obtained on 17 June 2017 following the Administrators' appointment. It was not until 19 June 2017 that the Administrators were provided with ASIC searches showing the purported removal of Mr Lee as director of the companies.

Robb J identified three key issues in the case.

1. Was the resolution purportedly passed by Mr Mehajer, removing Mr Lee as director, passed before Mr Lee's appointment of the Administrators?

In addressing this issue, Robb J closely considered the evidence produced by the Respondents.

The solicitor acting for Mr Mehajer had witnessed his client's signature on a copy of meeting minutes adduced in support of the purported resolution. Despite this, the Respondents did not require the solicitor to provide an affidavit confirming he was present when Mr Mehajer signed the minutes, and they did not seek leave from the Court to permit the solicitor to give evidence orally on that subject.

Accordingly, the Court had in evidence the minutes apparently signed by the solicitor as a witness, however he gave no evidence to authenticate his signature or verify the time when the documents were signed.

On this point, the Court found that it had been deprived of crucial evidence that may have been determinative on the issue of when the minutes were signed by Mr Mehajer and that "the position is so extreme that it appears that an understanding of the very purpose of having the execution of documents witnessed by disinterested parties has been lost".²

Inconsistent answers during Mr Mehajer's cross-examination, and evidence that Mr Mehajer held the belief that Mr Lee was the director of the companies well after the passage of the purported resolution removing him as director, led the Court to find that the Respondents had not met the civil standard of proof that the minutes were prepared before the appointment of the Administrators. The Respondents therefore failed on this first basis.

2. Was the appointment of the Administrators effective by operation of sections 128 and 129 of the Corporations Act?

Sections 128 and 129 of the Corporations Act provide that amongst other things, 'a person' is entitled to assume that directors who appear in information provided to the public by ASIC (namely via a search of the ASIC register) have been duly appointed and have authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary.

Robb J referred to extensive case law supporting the principle established in Correa v Whittingham³ that persons who are appointed as administrators of a company are persons for the purpose of sections 128 and 129 of the Corporations Act, and may rely upon the assumptions referred to in those sections.

His Honour found that, irrespective of the finding that ought to be made as to whether or not Mr Lee was removed as the director before the appointment of the Administrators, the Administrators were entitled to assume that Mr Lee remained the director up until the time of their appointment as this was the position reflected in the ASIC register at that time. This assumption could not be challenged by the companies or any other relevant person.

The Respondents therefore also failed on this second basis.

3. Even if the appointment of the Administrators was found to be invalid, should orders under either section 447A or 1322(4) of the Corporations Act be made validating their appointment?

It was unnecessary for Robb J to decide the third question in light of the failure by the Respondents on the first and second issues. However, his Honour did note that, if it had become necessary to decide that question, there was abundant evidence that the companies were "hopelessly insolvent", most notably in the form of statutory demands against the company which had not been set aside.

Accordingly, while further evidence would need to have been provided to the Court before a final decision could be reached on this issue, the likely outcome would have been that orders validating the appointment of the Administrators would have been made in any case.

Takeaways for administrators and company directors

In this case, there were serious questions about the strength of the Respondents' legal arguments and the evidence they put forward. It was therefore not surprising to read reports that the appeal against Robb J's decision was dismissed within a matter of minutes.⁴

So what can be taken away from this decision?

• For parties wishing to challenge the validity of an administrator's appointment, it is critical to carefully consider their evidentiary position, as the weight of case law sits firmly in favour of the administrator. This is particularly the case in circumstances where the company is in a dire financial position, as sections 447A and 1322(4) of the Corporations Act give the courts sweeping powers to cure any deficiencies in an appointment unless the court is of the opinion that the irregularity has caused, or may cause, substantial injustice.
• For administrators defending a challenge to their appointment, it is important to remain vigilant before and immediately following their appointment to ensure the directors resolving to appoint them are so entitled. Robb J's decision has confirmed that there is strength in the assumption that the information in the ASIC register is correct, and that where an appointment is challenged on the basis that a director lacks the necessary authority to appoint an administrator, but that appointment is supported by the information contained in the ASIC register (regardless of whether the register itself is incorrect), such a challenge will likely be unsuccessful. This is a powerful argument in favour of administrators who find their appointments challenged on the grounds of an invalid resolution.

Footnotes

¹ In the matter of 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.
² Ibid, 47.
³ [2013] NSWCA 263.
⁴ See Sydney Morning Herald article 'What are we doing here?': Court throws out Salim Mehajer's appeal in minutes at http://www.smh.com.au/nsw/what-are-we-doing-here-court-throws-out-salim-mehajers-appeal-in-minutes-20170816-gxx5m3.html.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories