Defective appointment of administrator retrospectively validated by the Supreme Court of NSW

The authority to act under power of attorney does not necessarily extend to all matters in business. In the recent Supreme Court of NSW case of Kahlefeldt, we are reminded of how deficiencies in the authority to appoint administrators to a company can prove a costly error.

‍The Kahlefeldt[1] case

‍The case concerned Kahlefeldt Securities Pty Ltd, and the recent decision to put the company into voluntary administration. Kahlefeldt's directors were an elderly husband and wife, and the company secretary was their daughter. The daughter also held an enduring power of attorney to act on behalf of her parents. Due to the age and declining health of the husband and wife, the daughter purported to use the enduring power of attorney to effect the appointment of an administrator pursuant to a resolution. The daughter misunderstood her authority to make decisions on behalf of her parents as to the company. This had effect of potentially making the appointment of the administrator defective. The administrator therefore applied to the Court to validate her appointment pursuant to s 447A of the Act. The Court found that the appointment was defective as the daughter did not have the requisite authority at the time of the purported appointment.

This is because:

"A power of attorney cannot validly authorise the attorney to exercise the powers and discharge the duties of a director. Such rights and duties are personal to the director. An alternative director could be appointed if the Company's constitution permits it."

‍[2] However, in considering the administrator's application, the Court looked at the intention of Part 5.3 of the Act, which serves a primary purpose of protecting creditors' interests. The Court validated the otherwise defective appointment for the purposes of s 436A of the Act, and made an order pursuant to s 447A.

‍Creditor Protection under Part 5.3A

‍The objects of Part 5.3A of the Act includes the pursuit of a more favourable outcome for company creditors and members, in comparison to external administration or liquidation. Where voluntary administration can be more effective in protecting these interests, directors have the power to resolve to appoint an administrator under s 436A where the company is, or is likely to become, insolvent.

The Kahlefeldt decision suggests that this power may not only be exercised by a person appointed as a director, but further by a person acting as the 'guiding mind and will'[3] of the company.

‍Important information for Administrators

‍As an administrator appointed under the voluntary administration of a company, it is prudent to consider the following:

• Whether the appointment is valid;
• If the appointment was not valid, whether an application should be made under s 447A for retrospective validation;
• Whether relevant documentation to the appointment has been maintained; and
• Whether action on the rectification of appointment has been done quickly.

If you require assistance in relation to any of the information above, Pragma Lawyers (Nick, Aaron, Liz and Henry) can provide advice to you and your business.

Contact us today by clicking here, or call us on (08) 6188 3340.

‍[1]In the matter of Kahlefeldt Securities Pty Limited (Administrator Appointed) ACN 001 320 270 [2022] NSWSC 939.[2] Ibid [11] (Hammerschlag CJ).[3] Ibid [21].