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30
Aug 2017

Salim Chance: a lesson in timely communication, good recording keeping, and ‘holding out’

The recent case of In the matter of Sydney Project Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) and S.E.T. Services Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] NSWSC 881  (Sydney Projects) serves as a reminder of the importance of timely communication, good record keeping and knowledge of the Corporations Act 2001 (Cth) (the Act).

Sydney Projects concerned the validity of the appointment of Mr Hogan and Mr Sprowles (the Administrators), who were appointed over two companies facing insolvency, Sydney Project Group Pty Ltd (SPG) and S.E.T. Services Pty Ltd (SET) (collectively, the Companies). The Administrators were appointed on 16 June 2017 by a person they understood to be the sole director of both SPG and SET, Mr Kenneth Wen His Lee (Mr Lee).

However, the Companies’ sole shareholder, Salim Mehajer (Mr Mehajer), claimed that Mr Lee had been removed as director of the Companies pursuant to section 249B of the Act on the morning of 16 June 2017 at a meeting convened by him (the Meeting), prior to the Administrator’s appointment that evening, rendering the Administrators appointment invalid. Mr Mehajer purportedly replaced Mr Lee with his sister, Khadijeh Mehajer (Ms Mehajer), as director. Importantly, changes to company details (Form 484) documents were not lodged with the Australian Securities and Exchange Commission (ASIC) until two days later on 18 June 2017.

Accordingly, the Administrators sought a hasty declaration/order(s) under sections 447C/447A/1322(4) of the Act confirming the validity of their appointment.

Issues

Three key issues were in dispute in the proceedings, namely:

  1. Whether Mr Mehajer made resolutions to remove Mr Lee pursuant to section 249Bbefore or after Mr Lee appointed the Administrators;
  2. In the event that Mr Lee was removed as a director prior to the appointment of the Administrators, whether the appointments were nevertheless effective by virtue of sections 128and 129 of the Act, where the Administrators were entitled to assume Mr Lee was the sole director of the Companies.
  3. Whether the appointment of the Administrators was invalid.

Timing of the resolutions

The timing of the resolutions was key. The minutes of the Meeting were signed at 5:31am on 16 June 2017. Four persons were purportedly present, Mr Mehajer, Ms Mehajer, Mr Abbas (Mr Mehajer’s solicitor) and Ms Yagni (Mr Mehajer’s personal assistant). Critically, Mr Mehajer was the only one to provide evidence to the Court that the meeting took place.

Following the Meeting, neither Mr Mehajer nor Ms Mehajer informed Mr Lee that he had been removed as a director, as might have ordinarily been expected. Instead, Mr Mehajer exchanged several text messages with Mr Lee which, in the Court’s view, was consistent with Mr Lee continuing to occupy the office of director. This included Mr Mehajer seeking Mr Lee’s agreement to respond to two statutory demands served on the Companies and a later request for Mr Lee to resign as director.

These communications were significant. According to Mr Mehajer’s evidence, Mr Lee’s reluctance to respond to the statutory demands was a partial reason for Mr Mehajer to remove him two days earlier at the Meeting.

Ultimately, the Court found the evidence provided by Mr Mehajer was not sufficient to conclude that the meeting held at 5:31am on 16 June 2017 ever took place. Of the four purported attendees of the Meeting, only Mr Mehajer provided evidence that it occurred. In circumstances where corroborating evidence could have easily been given, the Court held that his evidence and minutes of the Meeting were of themselves not persuasive enough, particularly when viewed in light of Mr Mehajer’s contradictory actions throughout the two days following the purported Meeting.

Assumptions under the Act

ASIC’s records had shown Mr Lee was the sole director at the time of the Administrator’s appointment. The Court held that, irrespective of the timing of Mr Lee’s removal, Mr Lee had been held out as a director by the Companies to the extent that the Administrators were entitled to assume that the was the sole director when they were appointed, pursuant to sections 128 and 129 of the Act.

Validity

Accordingly, there was no further requirement for the Court to make any direct findings concerning the veracity of Mr Mehajer’s meeting claims. It follows that it was unnecessary for the Court to determine the validity of the appointment of the Administrators.

Lessons

Sydney Projects highlights the importance of accurate record keeping, timely lodgement of ASIC notifications in addition to clear communication with relevant directors concerning their removal. The corollary is that a director can still bind a company even though they  may not have not been informed of their removal, in circumstances where their office remains recorded in ASIC’s registers and/or where they are being held out as a director.

For more information, contact ERA Legal.