Validating an administrator's appointment following a forgery?

In the matter of Premier Energy Resources Pty Ltd [2023] NSWSC 1185
Will a court validate an administrator’s appointment where the appointment was based on a forgery?

Overview

In this case, the Court considered whether it should validate an administrator’s appointment where one of the company’s directors forged the signature of a second director on a letter of resignation, before purportedly resolving as a sole director to appoint the administrator. The Court refused to validate the appointment, finding that the administrator failed to take immediate steps to look into the allegation or to make an application to the Court on being advised of the forgery.

Background

Mr Simon Thorn, in his capacity as administrator of Premier Energy Resources Pty Ltd, applied for an order validating his appointment.

In November 2021, the company entered into an agreement to supply coal fines to Delta Electricity. A dispute arose between the parties under the agreement, and Mr Luke Connor, a director of the company, sought advice from Mr Thorn about the company’s options. On 20 June 2023, Mr Connor sent Mr Thorn a package of voluntary administration documents, including a resignation purportedly signed by Mr Richard Bernard Clark, the company’s other director, as well as a resolution made by Mr Connor purportedly as the sole director of the company to appoint Mr Thorn as administrator.

On 28 June 2023, Mr Clark advised Mr Thorn that the resignation was a forgery, and that he had not resigned as a director of the company. Mr Thorn did not take steps to investigate the allegation or bring an application to the Court, taking the position that he did not have the funds to do so. Mr Thorn proceeded to advertise the company’s mining lease for sale and to prepare his second report to creditors, in which he referred to “the company’s director”.

On 21 July 2023, counsel for Mr Clark wrote to Mr Thorn, taking the position that the dispute about the validity of Mr Thorn’s appointment was serious, and that he had an obligation to take steps to clarify whether it was valid. The second meeting of creditors was then adjourned, and Mr Thorn brought the application.

The Court’s Decision

Section 447A of the Corporations Act confers on the Court power to “make such order as it thinks appropriate about how [Part 5.3A] is to operate in relation a particular company.” The power under s 447A has been applied in numerous cases to make orders validating the appointment of administrators that would otherwise be invalid, or dispelling uncertainty that would otherwise exist about the validity of the administrators’ appointment. These include cases in which there were doubts about whether instruments of appointment had been forged.

The factors relevant to the exercise of the discretion include:

1. whether the company is insolvent, or is likely to become insolvent;

2. whether the administrators made inquiries to confirm the validity of their appointments, including by seeking external legal advice;

3. the potential disruption that may be caused by a future challenge to the validity of the administrators’ appointment;

4. the conduct of the directors prior to the administrators’ appointment, and whether it would be wrong to give the imprimatur of the Court to that conduct by validating that appointment;

5. the work carried out by the administrators on the assumption that their appointments were valid;

6. whether substantial injustice would be occasioned to any person by the validation of the appointment of the administrators and, in the present case, by the consequential effect of such validation on the validity of the appointment of the liquidators; and

7. whether the proposed orders under s 447A are otherwise consistent with the objectives of Part 5.3A of the Corporations Act.

Here, although the risk of future insolvency was material, the Court was not persuaded that it should exercise its discretion to validate the appointment. Once Mr Thorn was notified of Mr Clark’s allegation that he had not in fact resigned as a director of the company, and that his letter of resignation was a forgery, Mr Thorn was obliged to look into the allegation and, if he was unable to satisfy himself that his appointment was valid, to make an application to the Court.

The Court also rejected the submission that Mr Thorn was justified in so acting because he lacked the funding to make an application to the Court. Mr Thorn did ultimately commence these proceedings, and the Court inferred from that fact that funding was not an insurmountable obstacle to commencing proceedings earlier. It was not appropriate for Mr Thorn, who accepted the appointment without requiring any security for his costs and remuneration, to seek to impose upon Mr Clark the burden of the cost of commencing court proceedings to determine the validity of the appointment, while Mr Thorn continued to purport to deal with the company’s assets and creditors as administrator in circumstances where he had no proper basis for assuming that his appointment was valid. Mr Thorn failed to discharge his obligation to investigate the alleged invalidity of his appointment, and to make a prompt application to the Court to determine that issue or to validate his appointment.

An order validating the appointment of Mr Thorn would give the imprimatur of the Court to the conduct of Mr Connor in forging or procuring the forgery of Mr Clark’s signature on the letter of resignation, and to the unsatisfactory conduct of Mr Thorn in failing to investigate and promptly bring to the Court the doubts raised about the validity of his appointment.

Conclusion

Accordingly, the Court dismissed Mr Thorn’s claims for relief with respect to his appointment and ordered that his claim for remuneration and expenses to be paid from the company’s assets on a quantum meruit basis be determined separately at a later time.

Judge: Williams J

Counsel for the Plaintiff Administrator: Mr S Sykes

Solicitors for the Plaintiff Administrator: Hicksons Lawyers