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Bryan kevin hughes as joint and several liquidators of traditional therapy clinics limited (in liq) - (02 May 2019)

Courts cannot be compelled to take a rigorous and technical view of appointment process


In present case, the Plaintiffs sought a declaration confirming their appointment as administrators of Traditional Therapy Clinics Ltd (In liq) (Company) under the provisions of Section 447C of the Corporations Act, 2001. Alternatively, an order pursuant to Section 447A of the Act that, the appointment of the Plaintiffs as administrators of the Company is deemed valid.

At the time of the appointment of the administrators, the Company had five directors. Two of those directors had only recently been appointed. Two recently appointed directors did not have sufficient knowledge of the affairs of the Company to form an opinion as to whether the Company was insolvent or likely to become insolvent. The remaining three directors did have the requisite understanding of the Company's affairs and did form an opinion the Company was insolvent or likely to become insolvent. All of the directors voted in favour of the appointment of the administrators.

There is nothing in part 5.3A of Act which compels a court to take a rigorous and technical view of the appointment process. The whole exercise must necessarily be a matter of commercial judgment. A company will be insolvent when it is unable to pay its debts as and when they fall due. A company might become insolvent if, at a future date, when debts fall due it might not be possible for the company to make payment of those debts. All of this anticipates commercial judgment.

It is a matter of commercial judgment whether that account is likely to be paid before debts are actually due for payment. Some directors may have a better understanding of the financial position of the company than others. Some directors may have expertise in marketing and sales and limited knowledge of the financial aspects of the company. That does not mean they are failing in their duties as directors. It simply recognises different qualities of different individuals. Accordingly, each director having a fully formed carefully reasoned opinion is not to be expected. It is not something which, in the context of pt 5.3A, is a necessity.

The proper interpretation of the phrase 'the opinion of directors voting for the resolution' must mean the opinion of the majority. Resolutions of directors are passed by majority vote. It would be a strange outcome, if a decision of the majority acting on a fully informed basis was vitiated by the actions of a minority.

The circumstances in which administrators are appointed necessarily varies from case to case. But present case is by no means unusual. In broad terms, the external accountant for the Company came to the view that, the Company was insolvent and should appoint administrators. He put the directors in touch with the Plaintiffs. The Plaintiffs are experienced administrators and have been involved in any number of administrations. But there were equally competent alternatives.

It may be prudent for administrators, as part of any information package they provide to directors, to include a statement signed by each director regarding view that, company is insolvent or about to become insolvent. It might also be prudent for the prospective administrator to warn directors, if they have not reached that opinion they should either vote against the resolution or abstain. If that practice was developed as a matter of course, the problems which have arisen in this case could be avoided. Present Court make declarations sought by the Plaintiffs.


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