Can an inquorate board of a public company appoint a voluntary administrator?

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In Australia, public companies are required to have at least three directors (s 201A(2) of the Corporations Act 2001 (Cth) (Act)). However, in exceptional circumstances, a public company might find itself with fewer than three directors – for example, where the other board directors resign because of some disagreement. Without a quorum of directors, and with precarious financials, the question might arise as to whether a sole director (or an otherwise inquorate board) can place a public company into voluntary administration.

Appointing an administrator of the company

Section 436A of the Act provides for the circumstances in, and method by, which an administrator may be appointed to a company (both public and private). Relevantly, s 436A requires the company’s board to resolve that:

  • in the opinion of the directors voting for the resolution (to appoint an administrator), the company is insolvent, or is likely to become insolvent at some future time; and
  • an administrator of the company should be appointed.

In order to pass a board resolution (see s 248G of the Act), broadly, a majority of the directors entitled to vote on the resolution must vote in favour of it. This is a ‘replaceable rule’, so it is critical to consider whether this position has been altered in the company’s constitution.

The opinion of the appointing directors regarding the company’s solvency must be bona fide and genuinely formed. The relevant test was summarised as follows by Weinberg J in Downey v Crawford [2004] FCA 1264: “[did the appointing directors genuinely believe] on reasonable grounds, that the company was insolvent or likely to become so in the future, and not upon whether that was the company’s actual position. The reasonableness of any such belief in turn depends, at least in part, upon the adequacy of the steps that they took to satisfy themselves that the preconditions for the appointment of an administrator had been met.”

The problem with an insufficient number of directors

The validity of an appointment under s 436A is less clear-cut (and can carry the risk of being challenged) when the board of a public company has fewer than three directors. Section 201A of the Act requires that a public company must “have at least three directors (not counting alternate directors)”. In addition to the requirements set out in s 436A, a further challenge arises for directors in circumstances where there is no quorum to validly pass a resolution, and consequently appoint an administrator.

Potential solutions 

Increase the number of directors

The company’s constitution might empower an inquorate board to increase the number of directors to a number sufficient to constitute a quorum or to convene a general meeting. If this is the case, the directors of an inquorate board considering the appointment of an administrator should explore whether there is the time and capacity to appoint further directors who could consider the solvency of the company and then, if appropriate, appoint an administrator.

This said, if a company is insolvent, and is continuing to incur debts or is otherwise vulnerable to creditor action (such as the service of a statutory demand or winding-up petition), there might not be adequate time to increase the number of directors. Moreover, in practice, it will be difficult to appoint further directors because any putative (and prudent) director will first want to carry-out some due diligence, and most will require some form of payment (to carry out that due diligence) and for taking the appointment, which an insolvent company might be unable to make.

Emergency powers – extend to appointment of administrator?

A company’s “board” for the purposes of s 436A can extend to a board which does not accord with s 201A, provided its constitution allows a board so constituted to function. In In the matter of Gulf Energy Ltd [2019] NSWSC 1637, the company’s constitution required its board to have a minimum of three directors, but that a board with fewer directors could act in “emergencies”. With reference to the earlier decision of DH International Pty Ltd [2013] NSWSC 1120, Ward CJ held that the appointment of a voluntary administrator in circumstances of insolvency met the “emergency” requirement set out in the company’s constitution.

Where a director of a public company finds themself seeking to appoint an administrator without the requisite quorum of directors, they should look to the company’s constitution for any provision that provides the necessary power. To prepare for this possible scenario, boards should consider whether their company’s constitution has such emergency provisions available, and whether the constitution might need amending.

The court’s extensive jurisdiction

In any event, whether or not an emergency power is available, the court has wide-ranging jurisdiction to make an order (or declaration) that the appointment of an administrator is valid. In In the matter of Gulf Energy Ltd [2019] NSWSC 1637, Ward CJ relied on the reasoning from Re Creative Memories Australia Pty Ltd (Administrators Appointed) [2013] NSWSC 652, “where any doubt [regarding validity of appointment] could properly be dispelled by the making of an order under s 447A(1) of the Act“.

To the extent it is necessary to rely on s 447A(1) to put the administrator’s appointment “on to a firm footing”: “[i]t is now well established that s 447A may be employed for that purpose; also that the putative administrators have standing to apply for an order under that section, they being within the “any other interested person” description in s 447A(4)(f)” (Darin Re Palamedia Ltd [2010] NSWSC 451). 

What should an administrator do once appointed?

If an administrator is in doubt about the validity of their appointment due to the appointment being made by fewer than three directors (and in any event, out of prudence), they should make an application to court for orders confirming the validity of their appointment

What should directors of an inquorate board do when considering the appointment of an administrator?

  1. Carefully assess the company’s solvency – this is usually best done with the assistance of an accountant or insolvency practitioner.
  2. Take advice about the powers available under the company’s constitution, especially any powers to act in an emergency.
  3. Consider whether it is appropriate and feasible to appoint further directors, who could assist in determining whether to appoint an administrator and then pass the requisite resolution to do so.
  4. Consider keeping careful notes about the decision-making process to appoint an administrator. But, as a word of caution, these notes could become discoverable in due course; for example, to a party challenging the administration.
  5. Seek early advice from a lawyer – advice given by a lawyer will benefit from legal professional privilege. It will be necessary to consider whether the advice is being sought by and given to the company or the director – this is important because this determines who benefits from the privilege.

Further information

For more information about appointing an administrator, director duties and insolvency generally, please contact:
Trevor Withane: trevor.withane@blackwattlelegal.com.au, tel +61 (0)418 717 001

Disclaimer

Blackwattle Legal’s communications are intended to provide commentary and general information. They 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 communication.

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