Dangerous appointments - why section 436A resolutions should not be passed in Kings Cross Hotels

In the matter of Condor Blanco Mines Ltd [2016] NSWSC 1196 (30 August 2016) ("Condor Blanco Mines") 

In the recent matter of Condor Blanco Mines, the New South Wales Supreme Court considered an application by Condor to declare void the appointment of its Administrator. 

The Judgment refers to some peculiar circumstances (which makes it an interesting read), but more importantly, it also provides useful guidance for Administrators regarding their responsibility to assess the validity of a resolution to appoint them under s 436A of the Corporations Act 2001 (Cth) ("Act"). Administrators should make inquiries when accepting an appointment under s 436A, or risk the adverse costs orders that may result from an application to set aside their appointment and a failure to do so. 

In this case, Condor was successful in its application against the Administrator, and his appointment was deemed invalid, void and of no effect. However, whilst the Administrator’s appointment was deemed invalid (for reasons explained later in this article) the Administrator was found to have fulfilled his responsibility to assess the validity of his appointment, and as a result, was justified in accepting the appointment. The Court found that, for the most part, the circumstances which confronted the Administrator did not exhibit any feature that caused his action in accepting appointment to be otherwise than in accordance with his responsibility to assess the validity of the appointment [148]. This was a matter relevant to costs, which were sought by Condor against the Administrator personally. 

Legal ground advanced by Condor 

A number of grounds were pursued by Condor in its attempt to void the appointment of the Administrator. Condor ultimately succeeded in its application, on the ground that its board did not validly pass a resolution to appoint the Administrator, as required by s 436A. In determining this ground and Condor’s application for costs, the Court considered both: 

  1. Whether the conduct of the directors evidenced that they had in fact resolved (in good faith) that Condor was insolvent, or likely to become insolvent; and 
  2. The responsibility of an Administrator to assess the validity of their appointment by resolution under s 436A of the Act. 

The events surrounding the 436A appointment 

On 4 July 2016 the Defendant was appointed as Administrator of Condor. 

It was put to the Court that at the time of appointment, Condor had two directors in office, being Glen Darby and Timothy Stops ("Directors"). Glen Darby ("Mr Darby") had been director of Condor since its establishment and had previously held the role of Managing Director (relinquished on 20 May 2015). Timothy Stops ("Mr Stops") on the other hand had only been appointed to the board some days before the Administrator’s appointment, on 28 June 2016. 

On 4 July 2016 the Directors signed two documents, including a resolution of the board of directors that, in the opinion of the Directors the company was insolvent or likely to become insolvent and that the Administrator should be appointed under s 436A ("Resolution"). The constitution of Condor stipulated that any resolution signed by all of the directors for the time being was considered to be as effective as though the resolution was passed at a meeting of directors. 

The Resolution was prepared by the Administrator, in the standard style and signed by the Directors, however in unusual circumstances. The Resolution was signed in the Empire Hotel, where the Administrator was introduced to Mr Stops, who was drinking in the public bar. 

The Administrator was present when both Mr Darby and Mr Stops signed the Resolution and importantly, witnessed Mr Darby tell Mr Stops that Condor was insolvent, and Mr Stops appeared to accept that statement as true. 

It was contended by Condor that, despite the Resolution, Mr Stops had never acquired any knowledge about the financial position of the company and, as a matter of fact, did not form any opinion on the subject of solvency [57]. 

Did the Directors hold the opinion that Condor was insolvent, and did the Administrator do enough to check? 

Prior to the execution of the Resolution, the Administrator had discussed the solvency of Condor with Mr Darby for a period of about 45 minutes, during which time the Administrator reviewed the quarterly report for the period to 31 March 2016. At that time, Mr Darby made statements to the Administrator to the effect that Condor had only a few hundred dollars in the bank and that some directors had been funding operations because the company had no money. 

The Court found that there was no sound basis for finding that Mr Darby did not hold a rationally based opinion that, at least, Condor was likely to become insolvent at some future time. 

The problem for this appointment was with the opinion of Mr Stops. The Court found that the evidence makes it clear that Mr Stops never inquired about Condor’s financial state or addressed his mind independently to the question whether Condor was insolvent or likely to become insolvent at some future time [82]. 

As a result of the above, the Court determined that Mr Stops did not form any opinion about the capacity of Condor to pay its debts as and when they fell due and, it followed, the appointment of the Administrator was invalid, void and of no effect. 

The Court noted that there was nothing to indicate that Mr Darby ever shared with Mr Stops any basis for the opinion cryptically stated by him in the Administrator’s presence that Condor was insolvent [82]. 

Whilst the Court found that: 

  1. It was not open to Mr Stops simply to take at face value and unquestioningly the terse opinion communicated by Mr Darby; and 
  2. Mr Stops had a responsibility to think and assess for himself [the solvency of Condor] and, for the purpose of doing so, to familiarise himself with relevant financial facts [82].

It was nonetheless determined that, in the circumstances, it was not incumbent on the Administrator to make further inquiries of Mr Stops before accepting the appointment. 

The Court noted that, before accepting an appointment, an Administrator must give some attention to whether the directors have considered the solvency of the company before resolving to appoint the Administrator under s 436A. However, the level of inquiry required to be undertaken by the Administrator is not onerous. In the matter of Lime Gourmet Pizza Bar (Charlestown) Pty Ltd [2015] NSWSC 244, His Honour Justice Black found that the level of inquiry required is not some form of independent verification of the factual basis on which the directors proceed in that appointment, but a review of whether the resolution appointing the administrator appeared, on its face, to be valid [72]. 

Returning to Condor Blanco Mines, the Court found that, in considering whether the Resolution on its face appeared valid, the Administrator was able to rely on the statement made by Mr Darby to Mr Stops that the company was insolvent, and Mr Stops’ apparent acceptance of that statement, as confirmation that the solvency of Condor was on Mr Stops’ mind when he signed the Resolution. In support of the conduct of the Administrator, the Court stated that for all he knew, the two directors had had earlier discussions on the subject [146]. 

The Administrator was not expected to ask Mr Stops whether he had discussed the solvency of Condor with Mr Darby in greater detail at some earlier time before accepting the appointment as valid. 

Costs Orders made against the Administrator 

Subsequently, on 16 September 2016 the Court delivered its Judgment in respect of the parties’ costs applications in Condor Blanco Mines. Unfortunately for the Administrator, the Court ordered the Administrator personally pay 50% of the costs of Condor. 

It is important to note however that the conduct of the Administrator in accepting the appointment was not criticised and did not form the basis of the Court’s decision to award Condor its costs. It was the Administrator’s conduct in the proceedings, not at the time of accepting the appointment, which led to the Court awarding Condor its costs. 

The Court found that Condor should have a costs order against the Administrator because, in respect of the proceedings, he had abandoned a stated position of essential neutrality in favour of a partisan and adversarial role [71]. In drawing this conclusion the Court noted that the Administrator neither volunteered in a timely way relevant facts within his own knowledge nor desisted from conduct that could only be regarded as opposition to the due progress of the matter to determination by the court [67]. 

If the Administrator had failed to discharge his responsibility to assess the validity of a resolution for his appointment under s 436A this could have formed the basis alone for a costs order against him. In this case the Administrator was confronted with an adverse costs order for different reasons, however, this should not distract from the fact that his conduct in accepting the appointment was considered in relation to costs. For this reason Administrators must be alert to their obligations to assess the validity of their appointments. 

Finally, we have considered the wider practical implications of Condor Blanco Mines. In our view this case has wider implications for administrations where, for example, the sole director in office at the time of appointment of an Administrator has only recently been appointed to the board and knows little of the financial affairs of the company. 

Should you be faced with the situation where a company seeking your appointment as Administrator under s 436A appears to have effected a last minute replacement of its board, we urge you to consider the capacity of that sole director to form a genuine opinion in good faith that the company is insolvent or likely to become insolvent. Where you hold any concerns please contact us so that we can provide guidance in respect of your responsibilities before accepting the appointment.

gavinparsonsadm

Date posted: 2016-10-06