Scott & Ors v Port Hinchinbrook Services Limited & Ors

This case considers a number of matters arising from a Deed of Company Arrangement (DOCA). First, it considered a provision in the DOCA that permitted the administrator to exercise the power to appoint directors under s 442A of the Corporations Act 2001 (Cth). Henry J found that the entry into the DOCA was the exercise of that power by the administrator. Second, the court considered the powers of appointment under s 437A (being an implied power) and s 442A of the Act, finding that the power under s 442A was broader and could be used to appoint a person as a director who would otherwise be ineligible under the company’s constitution. Third, the court considered whether the DOCA was effective in amending the constitution to install a “special member”, being a new majority shareholder. In holding that it was not effective in doing so, the court found that the provisions of a DOCA could not in fact amend the company’s constitution.

Henry J

25 May 2017

This matter concerned an application seeking declarations with respect to various issues arising out of a Deed of Company Arrangement (“DOCA”) which purported to install a controlling share of voting rights, formerly held by the developer of a residential estate “Port Hinchinbrook Resort”, upon a new investor. [1]. The owner and developer of the estate, Williams Corporation Pty Ltd, entered into provisional liquidation around June 2013. [5].

The responsibility for the maintenance and provision of roads, sewerage services and the like at Port Hinchinbrook Resort was assumed by the first respondent, Port Hinchinbrook Services Ltd (“PHS”). [7]. PHS ran into financial difficulties following the damage caused to the estate by Cyclone Yasi in 2011. [18]. Since 2013 it had been in various forms of external administration. [18]. Relevantly for present purposes, it was in voluntary administration from January 2016 to March 2016, and had been subject to a DOCA since 11 March 2016. [18]. The application turned upon the lawful effect of a number of provisions in the DOCA. [40].

The first issue concerned cl 6.2 of the DOCA which provided that “[b]y entering into this Deed the Deed Administrator exercises its power under s 442A of the [Corporations Act 2001 (Cth) (the Act)] to appoint each of the [third, fourth and fifth respondents] as Directors of the Company”. [41]. The Deed Administrator was relevantly defined to mean the previously appointed voluntary administrator of the company, Ms Carter. [41]. The issue was whether Ms Carter was still empowered to appoint the directors. [43].

Henry J began with s 442A of the Act which “expressly empowers an administrator of a company under administration to appoint a person as a director”. [43]. By entering into the DOCA, Ms Carter exercised that power. [43]. However, the applicants asserted that she had lost her power of appointment by that time because s 435C(1)(b) of the Act provides that an administration ends when a DOCA is executed by both the company and the deed’s administrator. [43].

Henry J rejected this argument. His Honour explained that Ms Carter held the power under s 442A until the point in time when the DOCA was executed. [46]. “That point in time was at once both an end and a beginning, much like midnight is both the end of one day and the start of another”. [46]. It followed that Ms Carter held the power conferred by s 442A at the time she had entered into the DOCA. [47].

The second complaint was that the directors purportedly appointed by Ms Carter in entering into the DOCA were ineligible for appointment as directors. [49]. This was because they were not members of the company at the time, and PHS’s constitution required that every director be a member. [50]. The issue which arose was whether the express power of an administrator to appoint a director under s 442A of the Act was broader than the implicit power in s 437A(1)(d) which provides that an administrator may “perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration” (emphasis added). [54].

Henry J noted that a comparison of the sections compelled “the conclusion [that] the administrator’s express power to appoint directors under s 442A is broader than the administrator’s implied power to appoint directors under s 437A(1)(d)”. [57]. In particular, the limiting words (emphasised above) are not present in s 442A. [58]. Furthermore the inclusion of the words “whether to fill a vacancy or not” are consistent with the power of appointment of directors under s 442A going beyond appointments the company could make under its constitution if not under liquidation.  Accordingly, the express power in s 442A could be exercised to appoint as a director a person who would not ordinarily be eligible under the company’s constitution. [58]–[59].

The third argument raised by the applicants was that the fourth and fifth respondents were ineligible for appointment because they resided in the United States. [60]. Section 201A(2) of the Act requires that a public company have at least two directors who ordinarily reside in Australia. [60]. The respondents, however, submitted that this did not affect eligibility, and in any event, had been subsequently addressed by The Passage Holdings Ltd (“Passage”), a company which under the DOCA purportedly became the majority shareholder, appointing a further director who was an Australian resident. [61]–[62].

This ultimately turned on the next issue, namely, whether the DOCA was effective in amending the constitution of PHS to install Passage as a “special member”. [62]. For the reasons given below, his Honour held that the DOCA was not effective in so appointing Passage, and accordingly, Passage did not have the power to validly appoint a further director. [62]. The ultimate consequence of this was that the combination of directors appointed under the DOCA did not comply with s 201A(2) of the Act. [62].

The DOCA purported by cl 17.1 to amend the constitution of PHS to install Passage as a “special member”, holding 76 percent of the votes capable of being cast at a meeting. [67]. It also purported by cl 17.3 to empower Passage to exercise each vote which Williams Corporation (the previous “special member”) was “otherwise entitled to exercise under the constitution”, and by cl 17.4 deemed that members appointed the deed administrator as their proxy to vote and pass resolutions to ensure the amendment purportedly effected by cl 17.1 was effected. [67]. This raised two distinct issues: (i) could a DOCA lawfully amend a company’s constitution to change the entity upon which the constitution conferred special majority voting rights, and (ii) could a DOCA confer voting rights inconsistently with the constitution?

As for the first issue, Henry J distinguished between the situation in which the exercise of a power pursuant to a DOCA is inconsistent with the requirements of the company’s constitution and the situation where the DOCA purports to amend the constitution. [74]. The breadth of the powers of an administrator under a DOCA (see the Corporations Regulations 2001 (Cth), Sch 8A, cl 2) mean that in the former case, “the power’s parameters are constrained by the nature and scope of the arrangement entered into under the DOCA, independently of the constraints of the constitution”. [74]. The present case, however, was not “an instance of an exercise of power which happens to be inconsistent with the constitution. The power purportedly exercised by cl 17.1 [was] itself an amendment of the constitution”. [76]. This was a power which did not exist. Accordingly, his Honour declared that cl 17.1 was void and of no effect. [88].

As for the second issue, Henry J held that cll 17.3 and 17.4 were examples of an exercise of power for the legitimate purpose of implementing a central feature of the DOCA. [92], [104]. Clauses 17.3 and 17.4, unlike cl 17.1, did not purport to amend the constitution, and were exercises of power unconstrained by the constitution’s provisions ordinarily relevant to it. [92], [104]. They were therefore valid.

However, cl 17.3 was inoperative because Williams Corporation, for reasons not presently relevant, had lost its eligibility for membership of the company. [96]. As such, Williams Corporation no longer had an entitlement to vote, and cl 17.3 could no longer confer any power on Passage. [97]. Similarly, cl 17.4 referred to the “proposed” amendment effected by cl 17.1, which for the reasons outlined above was of no effect. [100]. Nonetheless, Henry J did not consider that the clauses should be the subject of the declarations sought. [98], [105].

In the result his Honour declared that cl 17.1 was void and of no effect, and indicated that he would hear the parties further on the appropriate form of order arising from the finding of non-compliance of with s 201A(2) of the Act.

J English