FEDERAL COURT OF AUSTRALIA

Billingsley v Napoli, in the matter of Biometric Identity Systems Pty Ltd (administrators appointed) [2019] FCA 1640

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 447A of the Corporations Act 2001 (Cth) (Act), Part 5.3A of the Act is to apply to the second plaintiff as though the appointment of the first plaintiffs to the second plaintiff on 8 August 2019 was valid.

2.    Costs of the originating process filed on 26 August 2019 are reserved.

3.    Pursuant to s 447A of the Act, Part 5.3A of the Act is to operate in relation to the second plaintiff such that, notwithstanding s 439A(2) of the Act, the second meeting of creditors of the second plaintiff is to be convened at any time during, or within 5 business days after the end of, 31 October 2019.

4.    The first plaintiffs are to take all reasonable steps to cause notice of these orders to be given to the creditors of the second plaintiff within 2 business days of the making of these orders by:

(a)    where the first plaintiffs have an email address for a creditor, notifying each such creditor via email of the making of the orders and attaching a scanned, sealed copy of, or otherwise providing access to, the interlocutory process filed on 17 September 2019 and any evidence in support of the interlocutory process; and

(b)    where the first plaintiffs do not have an email address for a creditor but have a postal address for that creditor, enclosing a scanned, sealed copy of, or otherwise providing access to, the interlocutory process and any evidence in support of the interlocutory process.

5.    Pursuant to s 447A(1) of the Act, and further or alternatively s 90-15 of Part 3 of Div 90 of Sch 2 to the Act (Insolvency Practice Schedule), Part 5.3A of the Act is to operate in relation to the second plaintiff as if the notice of the second meeting required to be given pursuant to ss 75-225(1) and 75-15 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (Notice) will be validly given to creditors of the second plaintiff by, not less than five business days prior to the date of the proposed meeting:

(a)    where the first plaintiffs have an email address for a creditor, sending the Notice by email to each such creditor;

(b)    where the first plaintiffs do not have an email address for a creditor but have a postal address for the creditor, sending by post a copy the Notice to the postal address for each such creditor; and

(c)    causing the Notice to be published on the ASIC published notices website at https://insolvencynotices.asic.gov.au/.

6.    The first plaintiffs’ costs of and incidental to the interlocutory process are reserved.

7.    The following parties have liberty to apply upon giving all other interested parties not less than 2 business days' written notice of the intention to relist the matter specifying the reason for the relisting and the relief sought:

(a)    any person who can demonstrate a sufficient interest (including any creditor of the second plaintiff) for the purpose of modifying or discharging any orders made in accordance with prayers 1 to 3 of the interlocutory process; and

(b)    the plaintiffs.

8.    The first plaintiffs are to file and serve any evidence and written submissions on the question of costs of the originating process and interlocutory process on or before Monday, 14 October 2019.

9.    The defendant is to file and serve any interlocutory process, evidence and written submissions on the question of costs on or before Tuesday, 28 October 2019.

10.    The question of costs is listed for further a case management hearing on Monday, 29 October 2019 at 9.30 am.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

FARRELL J:

1    These reasons relate to two applications made by Michael James Billinglsey and David Ian Mansfield (first plaintiffs) as voluntary administrators of the second plaintiff, Biometric Identity Systems Pty Ltd (Company).

2    The originating process in relation to the first application was filed on 26 August 2019. By it, the first plaintiffs seek an order under s 447A of the Corporations Act 2001 (Cth) that Part 5.3A is to apply to the Company as though their appointment as voluntary administrators on 8 August 2019 was valid. That application was opposed by the defendant (Mr Napoli) until 25 September 2019.

3    The interlocutory process in relation to the second application was filed on 17 September 2019. By it, the first plaintiffs seek relief under s 447A of the Corporations Act to further extend the convening period for the second meeting of the Company’s creditors to 31 October 2019. The application is made under s 447A because Lee J made orders under s 439A(6) on 28 August 2019 extending the convening period to 30 September 2019.

4    These are the reasons for making those orders.

Background

5    The Company’s business was to develop software which unifies biometric technology to enhance business processes through unique and secure identification of individuals. All of the Company’s employees had either resigned or were made redundant before 8 August 2019.

6    On 8 August 2019, Daniel Gerard Gough and Damien Simon Crabtree purported to pass a resolution pursuant to s 436A of the Corporations Act appointing the first plaintiffs as voluntary administrators of the Company. The appointment documents in evidence include minutes of a meeting of the directors signed by Mr Gough as chairman and an instrument of appointment signed by Messrs Gough and Crabtree. Searches of the register maintained by the Australian Securities and Investments Commission on 12 June 2019, 9 August 2019 and 13 September 2019 indicate that Mr Gough was appointed as a director on 27 October 2015, Mr Crabtree was appointed as a director on 17 May 2019 and neither resigned prior to 8 August 2019.

7    From the time of their appointment and until 14 August 2019, the first plaintiffs and their staff took a number of steps to advance the voluntary administration of the Company as detailed in Mr Billingsley’s affidavit sworn on 26 August 2019 at [14].

8    At around 5.45 pm on 14 August 2019, the first plaintiffs received a letter of the same date from Madison Marcus, lawyers for Mr Napoli and Human IQ Pty Ltd. The letter advised that in around November 2018, the Company, Mr Gough, Mr Crabtree and Human IQ entered into a shareholders agreement in relation to the Company. A copy of a document said to be that shareholders agreement was attached to the letter. The letter stated that:

(1)    Under the shareholders agreement, Messrs Gough and Crabtree have the right to appoint one director (and as at the date of signing the shareholders agreement, that director was Mr Gough) and Human IQ had the right to appoint one director.

(2)    The appointment of Mr Crabtree as a director on 17 May 2019 was in breach of the shareholders agreement.

(3)    On 5 August 2019, Human IQ sent a notice of appointment of Mr Napoli as a director by pre-paid post in accordance with clause 3.5 of the shareholders agreement with the result that his appointment took effect on 7 August 2019.

(4)    Under clause 4.1 of the shareholders agreement, a quorum of directors was a minimum of two directors and if there is no quorum a meeting cannot proceed.

(5)    Mr Napoli was not notified of, nor did he attend, the meeting of directors to consider the appointment of administrators, nor was he consulted in relation to that appointment.

(6)    Mr Crabtree was not entitled to vote at the directors’ meeting.

(7)    The first plaintiffs had therefore not been validly appointed pursuant to s 436A of the Corporations Act.

9    By a circular to creditors dated 16 August 2019, the first plaintiffs advised creditors that their appointment as voluntary administrators may be contested and of their intention to make an application to the Court concerning it. They said:

We would encourage all creditors to ventilate any concerns that they may have with respect to our appointment as Administrators of the Company and to indicate – whether at the first creditors meeting or in writing before or after that meeting – their consent or opposition with the course proposed by the Administrators in respect of the proposed Court action.

10    The first meeting of creditors of the Company was held on 19 August 2019. At the meeting, the first plaintiffs discussed the need to bring an application in relation to their appointment and no objection was raised to their appointment or the application. Mr Napoli was allowed to attend the meeting as an observer.

11    The first plaintiffs say that an order validating their appointment is justified and consistent with the overriding objects of Part 5.3A because:

(1)    The persons acting on the basis that they were directors on 8 August 2019 believed that the Company was insolvent or likely to become insolvent at the time the resolution was passed.

(2)    Mr Billingsley believes that the Company is insolvent based on:

(a)    The balance sheet of the Company as at 8 August 2019 created on that day discloses a deficit of assets over liabilities of $129,516.50. Since the first plaintiffs have had access to the Company’s books and records, it appears that there is further “decay” in the Company’s financial position to a deficit of $153,704.49;

(b)    The Company’s liability to the Australian Taxation Office (ATO) may increase because it has several outstanding lodgements. It also has a history of unfulfilled payment arrangements with the ATO;

(c)    The Company’s profit and loss statement for the period from 1 July 2019 to 8 August 2019 revealed a net loss of $326,015.81; and

(d)    The Company is no longer trading and it has no employees so that (save for revenue derived under the Licence Agreement referred to below and $1,0154.54 in cash at bank held as at 8 August 2019) it has no sources of revenue to meet existing liabilities.

(3)    On 7 August 2019, the ATO issued director penalty notices to Messrs Gough and Crabtree.

(4)    Having reviewed the Company’s bank statements for the period between June and August 2019, it appears that there have been movements of money between the Company’s bank account and Mr Gough’s. While it appears that all amounts taken out were returned, it bears investigation.

12    The Company had an unwritten service and maintenance agreement with a major client for about three years. The Company’s final services were to be completed in September 2019. The expected revenue for those final services is approximately $77,724, The first plaintiffs approved entry into a Licence Agreement with Mr Gough for use of the Company’s property to enable provision of those services to the client because:

(1)    The licence was necessary to enable Mr Gough to provide the service to a longstanding client.

(2)    Completion of the work was in the best interest of the creditors of the Company because it would preserve value in the Company’s business while the first plaintiffs attempt to initiate a sale of the Company’s business and assets, which remains a course they wish to exhaust.

(3)    Subject to the terms of the Licence Agreement it will generate income.

(4)    The Company did not have the funds to pay the upfront costs (wages, travel expenses and accommodation) necessary to perform the works required and Mr Gough agreed to fund those costs on the basis that he would be reimbursed.

(5)    The first plaintiffs in their absolute discretion may elect to terminate the Licence Agreement.

13    The fact of the Licence Agreement has been disclosed to creditors. The revenue derived under the Licence Agreement would not be sufficient to change the first plaintiffs’ view of the solvency of the Company.

14    The first plaintiffs believe that the intellectual property and client lists of the Company are assets which hold material value which could be sold to an interested purchaser. For reasons set out in the next paragraph, the first plaintiffs have not advertised the business for sale, but if their appointment is validated, Mr Billingsley would expect a sale process to take about four weeks, or perhaps longer depending on the number of interested parties.

15    Since learning of the issue concerning their appointment, the first plaintiffs have been unwilling to advance the voluntary administration as they are concerned that, if the relief sought in the originating process were not granted, they may face personal liability for any step they take in that respect. The unwillingness of the first plaintiffs to advance the administration was strengthened when the defendant opposed the relief sought at the first case management hearing held on 28 August 2019 before Lee J. The defendant’s opposition was only withdrawn on 25 September 2019.

16    Mr Billingsley says that the first plaintiffs would have pressed for orders under s 447A in relation to their appointment as administrators at the case management hearing on 28 August 2019 had the defendant not opposed the orders at that time. In his view, it will take the first plaintiffs four weeks to conduct their functions so that it is likely that an extension of the convening period to 30 September 2019 would have been sufficient if the relief they sought had been granted then.

17    The functions still to be undertaken are:

(1)    Exploring opportunities to turn the business of the Company around, sell the business or sell the assets of the Company (specifically its intellectual property) with a view to improving any return to the Company’s creditors;

(2)    Reviewing the books and records of the Company and taking advice in respect of any recovery actions that might be available were the Company to enter liquidation; and

(3)    Weighing the costs/benefits of any possibilities referred to in (1) against any possibilities referred to in (2) for the purposes of making a recommendation to creditors of the Company as to what ought to occur following the end of the convening period and producing a meaningful report pursuant to s 75-225 of Insolvency Practice Rules (Corporations) 2016 (Cth).

Accordingly, the extension now sought is until 31 October 2019.

18    The Company is not trading and there are no employees whose interests the Court would otherwise be concerned about when asked to extend the convening period. In relation to any prejudice to other creditors of the Company arising from the continuation of the statutory moratorium, the first plaintiffs have communicated their intention to apply to the Court for a further extension of the convening period and invited creditors to state whether they consent or oppose the application.

19    By a circular dated 19 September 2019, the first plaintiffs advised that the hearing of the application in relation to their appointment as voluntary administrators was set down for hearing on 30 September 2019 and the application for extension of the convening period until 31 October 2019 was listed for hearing on 27 September 2019. Copies of the interlocutory process and Mr Billingsley’s affidavits sworn on 26 August 2019 and 13 and 17 September 2019 were attached to the circular. Those affidavits, along with the affidavit of Christopher Athanassios sworn on 26 September 2019, were read on both applications. The hearing on 27 September 2019 was stood over to 30 September 2019.

20    Other than Mr Napoli, who withdrew his opposition to orders relating to the first plaintiff’s appointment as voluntary administrators on 25 September 2019, the first plaintiffs received no notice of any opposition to the request for extension of the convening period or orders in relation to their appointment as voluntary liquidators and no creditor appeared at the hearings on 27 or 30 September 2019 to oppose those orders being made. Counsel for Mr Napoli appeared at both hearings seeking to establish a timetable for dealing with the issue of costs. A form of orders in relation to the issue of costs was agreed between Mr Napoli and the first plaintiffs.

Should an order be made curing any defect in the appointment of the first plaintiffs?

21    As there would be no utility in granting an extension of the convening period unless the Court were minded to make the order sought by the first plaintiffs under s 447A concerning their appointment as administrators, it is appropriate that that issue be dealt with first.

Principles to be applied

22    The Court accepts the first plaintiffs’ submission that it is well settled that s 447A of the Corporations Act is capable of being used by voluntary administrators to cure defective appointments: see Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428; 21 ACLC 842; Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058; 43 ACSR 257; and Re Foodora Australia Pty Ltd [2018] NSWSC 1426. In Re Foodora Australia Pty Ltd at [7], Black J relevantly held that:

… It seems to me to be sufficient, for present purposes, to have regard to s 447A of the Act, on which the Administrators rely, which provides, inter alia, that the Court may make such order as it things appropriate about how Part 5.3A of the Corporations Act is to operate in relation to a particular company. That section confers wide discretionary powers on the Court, including to do what it thinks is just in all of the circumstances having regard to the rights of those affected by an administration, and including making order that would alter what would otherwise be the operation of Part 5.3A of the Act: Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607 at 611; Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 280 at 280-281. The overriding requirement for an order under that section is that any order made and any directions given must be designed to achieve the objective of Part 5.3A as expressed in s 435A of the Corporations Act, and such an order must have a nexus with how Part 5.3A is to operate in relation to the particular company: Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd [2004] FCA 130; (2004) 49 ACSR 1 at 15; Correa v Whittingham above at [4]. That section is available to cure defects in the appointment of an administrator, including where the administrator has been appointed by directors of a company: see, for example, Calabretta v Redpen Developments Pty Ltd (in liq) (recs & mgrs apptd) [2010] FCA 81; (2010) 183 FCR 47; National Australia Bank v Horne [2011] VSCA 280; (2011) 85 ACSR 869.”

23    The first plaintiffs do not seek to be heard in respect of the validity or invalidity of the directors’ resolution on 8 August 2019, as they would have to do if they sought relief under s 447C of the Corporations Act. The first plaintiffs rely on Re Maria’s Farm Veggies Pty Ltd (admins apptd) [2016] NSWSC 1899 where, at [16], Black J held that:

It does not seem to me that there is anything in the structure of s 447A of the Corporations Act that requires the Court to determine anything other than what the section directs it to determine, namely, whether it is appropriate to make an order that Part 5.3A of the Corporations Act operates in a way in relation to a particular company in the circumstances which then subsist. The section does not dictate the range of factual findings which need to be made, or the generality with which those circumstances might be identified. It seems to me that that section can readily apply in circumstances where there is a dispute about a matter, and the urgencies of the matter are such that it could not be readily determined on a factual basis while meeting the commercial urgencies of the matter. In those circumstances it is open to the Court to find, in a proper case, that the existence of that dispute warrants an order under s 447A of the Corporations Act that will provide for Part 5.3A to operate in a particular way in relation to that company. It follows that the exercise of the Court’s jurisdiction under s 447A of the Corporations Act does not require that it first determine whether or not the FDMA applies. Section 447A of the Corporations Act will authorise the making of an order where that matter is disputed, at least so long as the Court is satisfied that the making of that order would advance the purposes of Part 5.3A of the Corporations Act and the prompt resolution of the dispute would also advance the purposes of Part 5.3A.

24    The Court accepts that, in the circumstances described by the first plaintiffs, there is some urgency attached to resolving the question of whether the first plaintiffs are authorised to act as voluntary administrators of the Company and that it would advance the object of Part 5.3A to do so without resolving the issue of whether or not Mr Crabtree or Mr Napoli was a duly appointed director as at the time the resolution was passed or whether any necessary quorum was present at the meeting on 8 August 2019.

25    The first plaintiff also relied on a list of matters which Kenneth Martin J adopted from submissions made by the parties in Hayes v Doran (No 2) [2012] WASC 486 which were set out in that judgment at [406] in relation to the exercise by courts of the power conferred by s 447A to cure defects in administrator appointments. In full, that list is as follows, although these considerations should not be taken to be exhaustive or prescriptive:

(a)    the likely insolvency of the company: Correa v Whittingham [No 3] [2012] NSWSC 526 at [83]; Re Pasdonnay Pty Ltd at [20]; Re Australian Art Investment at [8];

(b)    whether the administrator made inquiries to confirm the validity of his appointment including seeking external legal advice: Correa v Whittingham at [81]-[82];

(c)    whether it would be potentially disruptive to the affairs of the company for there to be the capacity to challenge the validity of what has occurred in the administration to date: Re Pasdonnay Pty Ltd at [20];

(d)    whether it would be wrong to give the imprimatur of the court to the conduct giving rise to the purported appointment: Re Pasdonnay Pty Ltd at [20];

(e)    the fact that the administrator had carried out substantial work and incurred costs in the not unreasonable belief at the time that his appointment as administrator was valid: Calabretta v Redpen Developments at [50];

(f)    the effect of an order on the administrator's entitlement to a statutory indemnity and remuneration and the consequences of a change in the relationback date: Calabretta v Redpen Developments at [38];

(g)    whether any creditor opposes the application: Re Australian Art Investment at [9];

(h)    whether a creditor challenging the validity of the appointment promptly pursued that challenge. Correa v Whittingham at [87]. There is an inconsistency with the purposes of Part 5.3A for creditors to delay challenging the validity of an administrator's appointment until after he or she had completed his work and steps had been taken on the basis that the administrators and the DOCA were valid;

(i)    the acquiescence of the persons who challenged the DOCA in the administration: Correa v Whittingham [87] citing Natarajan v ACIB Accumulus Pty Ltd (2006) 56 ACSR 356;

(j)    whether any person would be subject to any particular prejudice by the validation of the appointment: Re Australian Art Investment at [10];

(k)    whether the directors of the company can work together in the future: Xie v Crisp at [224]; and

(l)    the stage of the administration, the financial position of the company, whether the business could continue if it was returned to the control of the directors and whether there are any better options available to deal with the company's future: Xie v Crisp at [225].

Conclusion

26    The objects of Part 5.3A are set out in s 435A:

435A Object of Part

The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a)    maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b)    if it is not possible for the company or its business to continue in existence — results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

27    The Court is satisfied that it would serve the objects of Part 5.3A for it to make an order curing any defect in the appointment of the first plaintiffs as voluntary administrators of the Company in circumstances where:

(1)    There is unresolved doubt about the efficacy of the resolution pursuant to which the first plaintiffs were appointed as voluntary administrators of the Company but it appears that the Company was then and is now insolvent or likely to be insolvent;

(2)    Some part of the Company’s business may be able to continue in existence if the first plaintiffs are satisfied of their power to conduct a sale process;

(3)    Some conduct of one of the persons acting as a director may require investigation;

(4)    No creditor has come forward to oppose the Court making the order sought by the originating process; and

(5)    Mr Napoli (as a putative director) has withdrawn his opposition to the order and no other stakeholder (such as Mr Gough or Mr Crabtree) has indicated any opposition to the Court making that order.

28    Further, the Court is not aware of any conduct of the first plaintiffs which should give the Court pause in making such an order. The Court should grant the relief sought by the first plaintiffs.

Should an order be made extending the convening period?

Principles in relation to the extension of the convening period

29    The first plaintiffs relied on, and the Court respectfully adopts, the statement of principles of Markovic J in Crawford, in the matter of North Queensland Heavy Haulage Services Pty Ltd (Administrators Appointed) [2017] FCA 635 at [18]-[20] as follows:

In exercising the jurisdiction to extend time under s 439A(6) the Court must have regard to the objects of Pt 5.3A of the Act as set out in s 435A. Those objects are to maximise the chances of the company or as much as possible of its business continuing in existence or, if that is not possible, to result in a better return for the companies' creditors and members than would result from an immediate winding-up of the company.

The approach taken by the Court in applications of this type is well settled. The power to extend the time for convening the second meeting is one that should not be exercised as of course. Rather, the Court must strike an appropriate balance between the expectation that administration will be a relatively speedy matter and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders (see In the matter of Harrisons Pharmacy Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) [2013] FCA 458 (Harrisons Pharmacy) (per Farrell J) at [11] and the authorities referred to therein).

Other relevant factors, particularly in the circumstances of this case, are:

(1)    whether the prospects of a better outcome for creditors through a longer period of administration may outweigh the general expectation of a prompt resolution of the administration: see Fincorp Group Holdings Pty Ltd (2007) 62 ACSR 192; [2007] NSWSC 363 (Fincorp) at [18];

(2)    the fact that while the voluntary administration continues there is an embargo or moratorium on the enforcement of remedies by secured creditors, lessors and others, a factor which may militate against the too ready grant of an extension: see Fincorp at [4]; and

(3)    whether an extension is necessary to enable the administrators to prepare and provide the report and statements, and to arrive at the opinion required by s 439A(4), in order to inform creditors adequately so that they, in turn, will be in a position to decide whether to terminate the administration, execute a DOCA or place the company in liquidation: see Re Pan Pharmaceuticals Ltd (admins apptd) (ACN 091 032 914) (McGrath and Honey as joint liquidators) (2003) 46 ACSR 77; [2003] FCA 598 at [41]).

Conclusion

30    The Court is satisfied that making an order extending the convening period to 31 October 2019 would serve the objects of Part 5.3A because:

(1)    Shortly after the resolution appointing the first plaintiffs was passed, they received notification casting doubt on the validity of their appointment. It was therefore reasonable for them to take no further steps in the administration until the validity of their appointment had been resolved.

(2)    The first plaintiffs were not, as at 30 September 2019, in a position to formulate the report required by s 75-225(3) of the Insolvency Practice Rules.

(3)    The first plaintiffs have formed the view that it may be possible to sell the Company’s business or assets (and specifically, its intellectual property) with a view to improving the return to the Company’s creditors which is consistent with the object of Part 5.3A. Mr Billingsley considered that a sale process might be conducted in the four weeks period or slightly longer.

(4)    No creditor has come forward to object to the order being made in circumstances where they were advised on the application by the circular dated 19 September 2019.

(5)    There is no evidence of prejudice to secured creditors or lessors arising from the moratorium imposed on them by the extension of the convening period until 31 October 2019.

Costs

31    Both the first plaintiffs and Mr Napoli have advised the Court that they require an opportunity to make submissions concerning the appropriate orders to be made as to costs. Mr Napoli has foreshadowed an application that Messrs Gough and Crabtree be ordered to pay costs. The first plaintiffs also submitted that they would like an opportunity to make submissions concerning the nature of the orders that should be made as to costs.

32    The Court determined to make orders reserving costs on both the originating and interlocutory processes and the timetabling orders agreed by the first plaintiffs and Mr Napoli.

Associate:    

Dated:    3 October 2019