Appointment of administrators by secured creditors and directors and the subsequent application of s 447A

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15 April 2011

The recent case Re Australian Property Custodian Holdings Ltd (Administrators Appointed) (Receivers and Managers appointed) [2010] VSC 492 provides clarification as to the appointment of administrators by secured creditors under s 436C of the Corporations Act 2001 (Act) and the application of s 447A of the Act to validate a defective appointment of an administrator.

FACTS

Australian Property Custodian Holdings Limited (Company) was part of a group of companies comprising 18 subsidiaries. On 18 October 2010, a secured creditor of the Company purported to appoint two individuals as joint and several administrators (Administrators) of the Company under s 436C of the Act. The secured creditor held a charge over 68% of the company’s total assets.

Over that same day and the next, all of the directors of the Company and each of the companies within the group met and resolved that the Administrators be appointed as administrators of the 18 subsidiaries, in accordance with s 436A of the Act.

The validity of the appointment of the Administrators of the Company was queried by the bank which held a sum of money on behalf of the Company, as a condition of the Company’s Australian Financial Services Licence.

Issues

Section 436C allows a person to appoint an administrator of the company in circumstances where they are entitled to enforce a charge “on the whole, or substantially the whole, of a company’s property.” It was argued that the appointment of the Administrators of the Company was invalid because the charge was not over “the whole or substantially the whole, of [the Company’s] property.”

If the purported appointment under s 436C was found to be invalid, counsel for the Administrators submitted that the court should use the broad powers in s 447A of the Act to remedy the defect and validate the appointment.

Decision

The court found that while the charge was over a significant part of the Company’s assets, it was not over the whole or substantially the whole of the Company’s property. The court reasoned that “substantially” refers to “almost all of the assets”, but not 68% of the assets. Accordingly, the court held that the appointment of the Administrators of the Company under s 436C was invalid.

The court declined to use s 447A to validate the purported appointment under s 436C, but the court was prepared to use s 447A to confirm or validate the appointment of the Administrators pursuant to s 436A as administrators of the Company.

The court considered the factual circumstances and found that the appointment of the Administrators to the Company was the clear intention of the directors, what they had in mind and what was always intended to be achieved on the day they appointed the Administrators as administrators of the 18 subsidiary companies. Sifris J considered that if the validity of the appointment of the Administrators to the Company under s 436C had been doubted, the directors would have appointed the Administrators to the Company through a resolution under s 436A, as they did with the subsidiaries. Therefore, all of the relevant matters that needed to be considered for a valid s 436A appointment were considered, but not implemented.

The court also held that the preconditions for the appointment of the Administrators to the Company under s 436A were able to be subsequently performed and that that was not the case with s 436C.

Sifris J did express reservations about the retrospective operation of the orders and using s 447A to validate what was invalid. However the court referred to various authorities and held that it had been done on a number of occasions by s 447A and that the retrospective orders would merely give effect to what was always intended and what the parties thought the situation to be.

Comments

This case highlights the fact that for a person to validly appoint an administrator of a company under section 436C, the person must be entitled to enforce a charge on all, or almost all, of a company’s property and not merely a significant part of the company’s property.

It is important to remember that s 447A will only be applied to validate a defective appointment of administrators in limited circumstances, such as in this case where it was the clear and undisputable intention of the directors of the company that the administrators be appointed under s 436A.

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