Shareholders: Right (or lack thereof) to Participate in a Company's Business when it is in Administration
What you need to know
During voluntary administration, decision-making authority rests with the administrator, creditors and the court. Shareholders' interests are relegated. Statutory powers conferred on administrators under s 437A(1)(c) of the Corporations Act to sell or dispose of company property are independent of the company's own powers and are not constrained by the company's constitution, the ASX Listing Rules, or other statutory approval requirements that would otherwise apply to the company.
The same principle extends to administrators of deeds of company arrangement (DOCA). A DOCA can also directly circumscribe members' rights, for example by appointing the administrator as proxy for all members at general meetings.
What you need to do
When advising administrators, be aware that member approval requirements in statutes, constitutions or listing rules do not limit the exercise of statutory powers under s 437A(1)(c) or equivalent DOCA powers. When drafting a DOCA, consider including provisions that appoint the administrator as proxy for members to attend and vote at general meetings, as such provisions have been upheld by the courts.
Shareholders: Right (or lack thereof) to Participate in a Company's Business when it is in Administration
IMO Cypress Community of NSW Limited [2025] NSWSC 949. ("Cypress Community")
"Voluntary administration is a regime under which decision-making is confined to the administrator and, as to certain matters and in certain ways, the creditors assembled in a meeting and the court. Members and the interests of members are relegated"; Re Smith; Berowra RSL Bowling and Community Club Ltd [2006] NSWSC 780 ("Re Smith") at [12].
That relegation of interests of members or shareholders in a company when it is in administration concerns their right to participate in decision-making affecting the company. As there is no equity of any value in an insolvent company, the interests of shareholders come last. The administrator, not shareholders, makes decisions.
In Cypress Community the court considered whether a requirement of the Registered Clubs Act (NSW) ("RCA") not to dispose of property without the approval of a general meeting of its members applied to a sale of the club's property by its voluntary administrator; the club being a company limited by guarantee to which an administrator had been appointed.
The power of a voluntary administrator to sell the property of a company is conferred by s 437A(1)(c), Corporations Act ("CA") which provides:
"While a Company is under administration, the administrator:
…
(c) may terminate or dispose of all or part of [the company's] business and may dispose of all or part of any of [the company's] property"
In essence, the court in Cypress Community held that, whilst the RCA imposed a limitation on the exercise by the club of its power to sell its property, that limitation did not apply to the exercise by voluntary administrators of their statutory power to sell a company's property. When reaching that conclusion, the court followed the decision in Re Smith; Berowra RSL Bowling and Community Club Ltd [2006] NSWSC 780 ("Re Smith") where the court said (at [10]):
"The power of an administrator under s 437A(1)(c) to discontinue any part of the company's business and to dispose of any part of its property is not a power of the company. It is a power that the administrator is given by statute, being a power exercisable by the administrator as administrator in relation to the company's business and property so as to be binding on the company. The administrator, in exercising the statutory power, is to be taken as acting as the Company's agent: see s 437B. That is the statutory mechanism that causes the company to be bound by the acts of the administrator in exercise of the separate statutory powers conferred on an administrator in respect of the company's property. The company has not in fact constituted the administrator as its agent. Nor has the Company done what has been done by the administration [sic] in exercise of the administrator's statutory power. The statute merely says that the acts of the administrator are to be taken to be of the same quality as if there had been an appointment of the administrator as the company's agent."
and further:
"[13] The circumstances that, in words of Beach J 'members are excluded from contemplation during the process of an administration' means that an administrator, in exercising the specific and statutory power to terminate part of the company's business and to sell part of its property, is neither constrained by nor bound to have regard to provisions of the [company's] constitution (being a provision of the statutory contract that arises under s 140(1)(a) of the Corporations Act between the company and its members which may regulate – or even prohibit – those steps). The administrator, when exercising statutory powers, is a stranger to that statutory contract. And the administrator's acts are not acts of the company, even though they are to be regarded as having been performed by an agent of the company.
[14] The fact that exercise by an administrator of a s 437A(1)(c) power is quite distinct from exercise by the company of a power of the company means that any effect that article 28 [of the company's constitution] might have as 'an express restriction, or prohibition of, the company's exercise of any of its powers', as referred to in s 125 [Corporations Act], is not a relevant consideration (emphasis added)"
Likewise, similar limitations in:
- a company's constitution; Re Smith; or
- the ASX Listing Rules, in the cases of a public listed company; Brash Holdings Ltd v Shafir (1994) ACSR 192,
do not affect the exercise by a voluntary administrator of the power to sell a company's property.
In the case of administrators of deeds of company arrangement, the High Court in MYT Engineering Limited v Mulcon Pty Limited [1999] HCA 24 said (at [25]);
"But a deed of company arrangement is more than a set of promises between those who are parties to it… First it is a document that, on execution, effects a change in status of the company – from a company under administration to a company subject to a deed of company arrangement. Secondly, it is a document that contains terms that bind all creditor of the company 'so far as concerns claims arising on or before the day specified in the deed…'. Those obligations stem from the combined operation of the deed of company arrangement and the [Corporations Act], not from any contractual bargain between the persons bound…"
Accordingly, having regard to the decision in Re Smith, limitations on the exercise by a company of its powers which are imposed by any of a statute, its constitution or, in the case of public listed companies, the ASX Listing Rules, do not apply to the exercise by the administrators of a deed of company arrangement of the powers, including the power to sell a company's property or, say, in the case of a compromise involving an equity for debt "swap", the allotment of shares in the company.
The rights of a company's members to participate in the conduct of the company's business may also be circumscribed by the DOCA. That may be done by a provision in the DOCA which appoints its administrator as the proxy for each of the company’s members with authority to attend and vote at the general meetings. Such a provision was considered in Scott v Port Hinchinbrook Services [2017] QSC 92 where the court said (in response to an objection from members of the company that such a stipulation was inconsistent with their rights under the company’s constitution to appoint proxies) (at [101]):
“As has already been explained, the powers conferred by a DOCA take precedence to and override the exercise of the members' powers [including the power to appoint a proxy]. Clause 3.1 of the DOCA provides that the deed binds the members. While that clause cannot itself be a source of power to bind members, it is in any event consistent with s 444G, which expressly provides a DOCA binds company members.”
It might be noted that case concerned a company limited by guarantee, so the option of pre-empting the exercise by shareholders of their right to vote at a general meeting by transferring their shares under s 444GA, CA was not available.
Authors: Richard Johnson, Partner; Richard Fisher, Consultant; Carmen Boothman, Partner and Michael Sloan, Partner.
