5.1 Does section 440D of the Corporations Act apply to winding up proceedings?
(By Fiona Hammond, Blake Dawson Waldron)
Australian Prudential Regulation Authority v Rural & General Insurance Limited [2004] FCA 185, Federal Court of Australia, Gyles J, 5 March 2004
The full text of the judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/federal/2004/march/2004fca185.htm
or
http://cclsr.law.unimelb.edu.au/judgments/
(a) Summary
The Federal Court has held that leave of the Court pursuant to section 440D of the Corporations Act 2001 (Cth) (the Act) is not required in order to proceed with a winding up proceeding in the absence of the written consent of an administrator.
(b) Facts
Australian Prudential Regulation Authority (APRA) commenced proceedings for the winding up of Rural & General Insurance Limited (Rural & General). The hearing of the application was adjourned and, in the interim prior to the recommencement of the hearing, Rural & General resolved to appoint an administrator pursuant to section 436A of the Act.
(c) Issue for determination
It was submitted on behalf of Rural & General that section 440D required that leave be granted for the winding up proceeding to proceed in the absence of the written consent of the administrator. APRA submitted that section 440D does not relate to winding up proceedings, which are specifically dealt with under section 440A.
(d) Section 440A and section 440D
Section 440A of the Act states that a company under administration cannot be wound up voluntarily, except as provided by section 446A. The Court may adjourn the hearing of a winding up application if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. The Court is not to appoint a provisional liquidator if the Company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration.
Section 440D provides that during the administration of a company, a proceeding against the company cannot be begun or proceeded with except with the administrator's written consent, or the leave of the Court.
(e) Case law
Gyles J referred to a number of cases in order to determine whether section 440D relates to winding up proceedings.
Hall v Mercury Information Technology (South Australia) Pty Ltd [2002] FCA 272 concerned whether an application for the appointment of a provisional liquidator of a company which was already in administration required leave pursuant to section 440D. The application sought the appointment of a provisional liquidator as a precursor to an order for winding up and appointment of liquidators. It was contended that the application was not a proceeding "against the company" but rather a proceeding "in respect of the company" (Young v Sherman (2002) 20 AGLC 149). Stone J found it difficult to imagine how a proceeding seeking such an order could be other than a proceeding "against the company", and stated that if this was correct then under section 440D, the leave of the Court was required if the application was to proceed.
In GIO Workers Compensation (NSW) Ltd v Primbee Pty Ltd [2003] NSWSC 591, an application for winding up was commenced before the appointment of the administrators. Austin J observed that section 440A is arguably an exhaustive text and on this basis it would be otiose for the legislature to require leave or the consent of an administrator under another provision.
In Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd (2003) 47 ACSR 197, Austin J made an order under section 440D granting leave to commence winding up proceedings on terms intended to echo section 440A(2) – that is, on terms that the appointment of a provisional liquidator would not be made if the Court was satisfied that it would be in the interests of their creditors that those companies should continue under administration rather than be wound up.
(f) Statutory Construction
Gyles J observed that section 440D(1) appears to be comprehensive in its terms, and noted that this is reinforced by the express exclusions in subsection (2). His Honour stated that there is no necessary inconsistency between section 440D and section 440A, as the latter would still have operation when the application for winding up or for the appointment of a provisional liquidator comes on for hearing in the event of prior leave having been granted pursuant to section 440D.
Gyles J noted that Division 6 of Part 5.3A, dealing with the protection of a company's property during administration, contains a series of provisions dealing with discrete topics, the first of which is section 440A specifically dealing with winding up. His Honour observed that section 440A deals with particular proceedings, and section 440D deals with proceedings generally. APRA submitted that the general provisions should be construed as not covering the proceeding dealt with by the particular provision, appealing to the principle of construction, "generalia specialibus non derogant" (general things do not derogate from special things). Gyles J observed that it is not easy to see how leave pursuant to section 440D(2) is to be assessed, bearing in mind section 440A(2) and (3).
Rural & General submitted that this principle applies only where, and to the extent that, the special and the general provision are in conflict and that where (as here) a general provision is found in the same division of the same Act as the special provision, a conflict is unlikely to be inferred. It was submitted that, if both sections can operate harmoniously, there can be no implied derogation from the scope of one by the other. It was submitted that these sections can operate together as each related to a separate time, and this proceeding was not yet at the stage where section 440A could operate.
Gyles J did not find the Explanatory Memorandum relating to the Act to be of assistance in this case. His Honour noted that, while there has been much discussion as to the interplay between Part 5.3A administration and winding up, the cases to which he referred focused on section 440A, as have the commentators.
(g) Judgment
Gyles J concluded that the better view was that a winding up proceeding is not caught by section 440D. In coming to this conclusion, his Honour considered the whole of Division 6, with regard to the place it occupies in Part 5.3A, which in turn was considered in the overall context of Part 5. Part 5.3A administration is one form of external administration in insolvency, winding up is another. Gyles J stated that neither is necessarily entitled to precedence, and the inter-relation is dealt with by section 440A. In each form of external administration it is necessary to have a moratorium for what might be called external claims, and that is the role of section 440D. Gyles J referred to section 444E in observing that the legislature clearly distinguishes between a winding up proceeding and a proceeding "against the company".
5.2 Application for stay of criminal proceedings due to exposure to double jeopardy
(By Nghi Tran, Phillips Fox)
Regina v Adler [2004] NSWSC 108, Supreme Court of New South Wales, James J, 5 March 2004
The full text of the judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2004/march/2004nswsc108.htm
or
http://cclsr.law.unimelb.edu.au/judgments/
This was an application by Rodney Adler for an order that the criminal proceedings brought against him be permanently stayed on the ground that they constitute an abuse of process. The criminal proceedings were alleged to constitute an abuse of process on the basis that in earlier civil proceedings brought against Mr Adler by the Australian Securities and Investments Commission (‘ASIC’) Mr Adler had already been punished for the same conduct as was the subject of the criminal charges.
(a) The civil proceedings
The conduct the subject of both the earlier civil proceedings and the criminal charges relate to Mr Adler’s conduct as a director of each of HIH Insurance Limited (‘HIH’), HIH Casualty and General Insurance Limited (‘HIHC’) and Pacific Eagle Equity Pty Ltd (‘PEE’).
In the civil proceedings it was found that between 15 June 2000 and 30 June 2000, Mr Adler had caused PEE to purchase a total of 3,924,545 shares in HIH for a total price of $3,991,856.21. Mr Adler also caused HIHC to draw a cheque in favour of PEE in the amount of $10 million which was banked into PEE’s account. The purchase price of the HIH shares was paid by PEE out of the $10 million paid by HIHC to PEE. On 7 July 2000, PEE entered into a deed which made PEE the trustee of the Australian Equities Unit Trust (‘AEUT’) and made the HIH shares purchased by PEE assets of the AEUT.
In the civil proceedings it was also found that Mr Adler had caused PEE as trustee of the AEUT to acquire from Adler Corporation, at cost, shares in companies called dstore Limited, Planet Soccer International Limited and Nomad Telecommunications Limited. Mr Adler had also caused PEE as trustee of the AEUT to make unsecured loans to morehuman Pty Limited, Pacific Capital Partners Pty Ltd, Intagrowth Fund No. 1 and PCP Ensor No. 2 Pty Limited. Mr Adler was associated with all of these companies. The funds used for all of these 7 transactions came out of the $10 million paid by HIHC to PEE.
In the civil proceedings, based on the conduct detailed above, Santow J made declarations against Mr Adler to the following effect:
(a) Mr Adler contravened section 209(2) of the Corporations Act by being involved in the contravention by HIH and HIHC of section 208 by providing a financial benefit to a related party, being PEE;
(b) Mr Adler contravened section 260D(2) of the Corporations Act by being involved in the contravention by HIHC of section 260 by providing financial assistance to PEE to acquires shares in HIH; and
(c) Mr Adler had breached his directors duties to HIH, HIHC and PEE under sections 180(1), 181(1), 182(1) and 183(1) of the Corporations Act in relation to the payment of $10 million by HIHC to PEE, the purchase of HIH shares by PEE and the other 7 transactions using the $10 million paid by HIHC to PEE.
(b) The criminal proceedings
Based on the same conduct, the indictment on which Mr Adler was arraigned on 5 September 2003 contained 5 counts, to all of which Mr Alder pleaded not guilty. In summary there were 3 counts alleging that Mr Adler had engaged in stock market manipulation by inducing PEE to buy shares in HIH with the likely effect of increasing, maintaining or stabilizing the price of HIH shares on the Australian Stock Exchange. The other two counts alleged that Mr Adler had disseminated information knowing it to be false in relation to HIH shares so as to induce people to purchase shares in HIH. The allegations of disseminating knowingly false information related to conversations Mr Adler had with Mr Mellish, a journalist with the Australian Financial Review.
(c) Submissions of the parties and decision of James J
It was submitted by counsel for Mr Adler that the criminal proceedings should be stayed as an abuse of process because of the exposure of Mr Adler to double jeopardy. This was on the basis that Mr Adler had already been punished, by the pecuniary penalty orders made in the civil proceedings, for substantially the same conduct as was alleged in the criminal proceedings.
James J, in concluding that the criminal proceedings did not constitute an abuse of process, addressed the following legal issues:
1. James J accepted the submission by counsel for the Crown that the elements of the criminal offences were different from the elements of the causes of action in the civil proceedings. As such no plea in bar was available to Mr Adler in the criminal proceedings.
2. His Honour regarded the civil causes of action and the criminal offences to also be different in another important respect. The purpose of the civil causes of action was to enforce the obligations of a director or an officer of a company involved in a contravention by a company and to provide remedies for wrongs done against the company or its shareholders. On the other hand, the purpose of the criminal offences of stock market manipulation was to protect the integrity of the market and to punish wrongs to potential purchasers of shares in a company.
3. Counsel for the Crown had sought to rely on what McHugh, Hayne and Callinan JJ had stated in paragraph 33 of the joint judgment in Pearce v The Queen (1998) 194 CLR 610, namely that because “the offences are different (and different in important respects) the laying of both charges could not be said to be vexatious or oppressive or for some improper or ulterior purpose.” His Honour accepted the interpretation submitted by counsel for the Crown that the passage was dealing generally with the subject of the staying of proceedings on the grounds of abuse of process. James J did not think that the passage was limited in its application to cases in which two or more offences were charged in the same indictment as was the facts in Pearce.
4. Under section 1317M of the Corporations Act a court could not make a pecuniary penalty order against a person for a contravention of a civil penalty provision, if the person had already been convicted of an offence constituted by conduct that was substantially the same as the conduct constituting the contravention. On the other hand, under section 1317P of the Corporations Act, criminal proceedings could be started against a person for conduct that was substantially the same as conduct constituting a contravention of a civil penalty provision, even though a pecuniary penalty order had already been made against the person. Counsel for Mr Adler submitted that section 1317P would undermine public confidence in the administration of justice by the courts, if the extent to which a person was punished for his conduct depended on a decision of the executive as to whether the first proceedings to be brought against a person should be civil penalty proceedings or criminal proceedings. This argument was rejected by James J.
James J stated that the extent to which an offender is punished for his conduct always depends on decisions made by the prosecuting authorities, whether to prosecute and, if so, what charges should be laid. Decisions taken by the executive which affect the extent to which an offender is liable to be punished for his conduct would not undermine public confidence in the administration of justice by the courts.
His Honour thought that the proper interpretation of section 1317P was that the starting of criminal proceedings against a person for conduct that is substantially the same as conduct which has been found in earlier civil penalty proceedings to be a contravention of a civil penalty provision is not ipso facto or per se an abuse of process. However, a court had power to grant a stay of criminal proceedings, in an appropriate case, by having regard to other matters.
(d) Conclusion
James J dismissed the application for a stay of the criminal proceedings brought against Mr Adler. James J concluded, independently of section 1317P, that because of the important differences between the elements of, and the different purposes served by, the civil causes of action and the criminal offences, the criminal proceedings did not constitute an abuse of process.
Section 1317P reinforced James J’s conclusion that the criminal proceedings should not be stayed as an abuse of process. Section 1317P specifically authorises the starting of criminal proceedings against a person for conduct that is substantially the same as conduct constituting a contravention of a civil penalty provision and notwithstanding that a pecuniary penalty order has been made against the person.
A court has power to stay criminal proceedings falling within section 1317P, on the basis of matters other than that the conduct charged in the criminal proceedings is substantially the same as the conduct constituting the contravention of a civil penalty provision. However, in Mr Adler’s case, there were no such other matters or no sufficient such other matters.
5.3 Authority of director to enter into a contract on behalf of a company
(By Rebecca Taube, Freehills)
L.K. Bros Pty Ltd (Receivers and Managers Appointed) v Gerald Collins and Philip Jefferson and Landmara Pty Ltd [2004] QSC 026, Supreme Court of Queensland, Chesterman J, 27 February 2004
The full text of the judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/qld/2004/february/2004qsc026.htm
or
http://cclsr.law.unimelb.edu.au/judgments/
This decision concerns the ability of a director to act as an agent for their company and subsequently bind the company in an enforceable agreement, despite the fact that the agreement was not properly executed according to the company’s constitution.
(a) Background
The company had entered into a franchise agreement on 14 April 2003 allowing it to operate as a part of the Night Owl convenience store chain. In conjunction with this agreement, a charge deed was also signed on 7 April 2003. The company had two directors, Mr Louati and Mr Komoto. Both directors had a limited command of English, and had difficulty communicating with each other, let alone understanding legal and commercial documents. Only Mr Louati resided in Brisbane and was involved in the day-to-day management of the company and its business. Mr Komoto, also the father-in-law of Mr Louati, resided in Japan.
It quickly became apparent that the company was unable to properly administer the business, and the respondents, as receivers of the business, sought to enforce the mortgage debenture contained in the charge deed.
The company submitted that the deed was improperly executed, and therefore unenforceable. Mr Louati’s signature appeared in two places: once above the word “Director” and once above the words “Director / Secretary.”
(b) Findings
Justice Chesterman noted that the company’s constitution clearly contemplated that two distinct persons’ signatures would be required to manifest the company’s assent to a contract. Accordingly, this mode of execution “is one which, if followed, has the consequence that the [company] itself executes a contract. The clause does not preclude the [company] from being bound to the terms of a written agreement where the agreement is executed by an agent for the company.”
Here, only one director’s signature was present. That director could be understood to be acting within the terms of section 126(1) of the Corporations Act 2001 (Cth), which states:
“A company’s power to make, vary ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company.”
Further, section 227 of the Property Law Act 1974 (Qld) states:
“(1) Contracts … may be made or effected by any body corporate…as follows –
(a) a contract … which if made or effected by or between individuals would by law be required to be in writing, signed by the party to be charged with it or effecting the same, may be made by the corporation in writing signed by any person under its authority, express or implied; …
(2) A contract … made or effected under this section shall be effective in law, and shall bind the corporation and the corporation’s successors and all other parties to the contract.”
Even though there was no resolution to effect Mr Louati’s appointment as agent for the company, Justice Chesterman found that a number of facts suggested there was implied authority for Mr Louati to act its behalf:
Mr Louati owned 5/6ths of the issued shares and therefore could exercise effective control at general meetings;
Mr Komoto could not understand the language of the jurisdiction of the business, and could not read or comprehend the relevant business and company documents;
Mr Louati did not communicate with Mr Komoto with regards to the company, and according to his testimony, “he simply never discussed such matters with him in person, through other people or over the telephone”;
Mr Komoto essentially played no part in the company’s commercial endeavours; and
there was a course of conduct by which Mr Louati essentially made all the decisions for the applicant company.
These factors suggested Mr Louati had the authority to act as agent for the company in signing the charge deed, and rendered it subject to the relevant mortgage debenture.
Justice Chesterman held that despite irregularities in the execution of the deed, the director had acted in the capacity of an agent for the company and was therefore still able to bind the company in contractual arrangements, in a manner authorised by the Corporations Act 2001 and the Property Law Act 1974. The charge deed was therefore valid.
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