Australian Innovation Ltd v Petrovsky
[1996] FCA 587
•3 JULY 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No. G3429 of 1996
)
GENERAL DIVISION )
BETWEEN:AUSTRALIAN INNOVATION LIMITED
Applicant
AND:PAUL ALEXANDRE PETROVSKY
Respondent
JUDGE MAKING ORDER: LOCKHART J.
WHERE ORDER MADE: SYDNEY
DATE ORDER MADE: 3 JULY 1996
MINUTE OF ORDER
THE COURT ORDERS THAT:
Pursuant to s. 1322(4) of the Corporations Law, the convening by the respondent of an extraordinary general meeting of members of the applicant to be held on 8 July 1996 is invalid.
The respondent shall pay the costs of the applicant of the proceeding including reserved costs, if any.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
CATCHWORDS
CORPORATIONS - directors - meetings - resolutions - director's requisition of a meeting to replace directors - whether director acted without care and diligence: Corporations Law, s. 232(4) - whether director neglected to act bona fide in interests of company as whole - whether procedural irregularities - whether substantive injustice that cannot be remedied by order of Court: Corporations Law, s. 1322 - whether an abuse of power or process.
Corporations Law: ss. 232(4), 254, 1322
AUSTRALIAN INNOVATION LIMITED v PAUL ALEXANDRE PETROVSKY
G3429 of 1996
LOCKHART J.
3 JULY 1996
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No. G3429 of 1996
)
GENERAL DIVISION )
BETWEEN:AUSTRALIAN INNOVATION LIMITED
Applicant
AND:PAUL ALEXANDRE PETROVSKY
Respondent
3 July 1996
REASONS FOR JUDGMENT
LOCKHART J.
This is an application for an order pursuant to s. 1322(2) of the Corporations Law declaring that irregularities in relation to the convening by the respondent of a general meeting of members of the applicant to be held on 8 July 1996 have caused, or may cause, substantial injustice that cannot, or could not, be remedied by any order of the Court; and for a consequential order pursuant to s. 1322(6) that the convening by the respondent of that general meeting is invalid.
Because the meeting is scheduled to be held next Monday, 8 July 1996, and it is now Wednesday, 3 July, the matter is urgent. If the applicant succeeds, notice will have to be given in some appropriate form to the shareholders of the applicant before next Monday.
The applicant is a listed public company and I was informed that it has approximately 1,000 shareholders.
The proceeding is one round in a long-standing feud between certain shareholders and directors of the applicant. An earlier dispute was heard by Whitlam J. who gave judgment on 31 May 1996 in relation to a purported requisition by a director of the applicant for an extraordinary general meeting of the company. His Honour declared that the document of requisition did not constitute a valid and effective requisition under s. 246 of the Corporations Law.
The evidence before me is by affidavit; there was no oral evidence. Much of the evidence and argument centred on rival allegations of the parties, each challenging the other's bona fides. The applicant asserts that a notice convening an extraordinary general meeting of the company by the respondent was not a bona fide exercise of the power conferred on a director by article 52 to convene such a meeting. The respondent asserts that this proceeding has been commenced and prosecuted by the applicant for the ulterior purpose of displacing certain directors of the applicant, of whom the respondent is one, because the directors of the applicant who are behind the proceedings wish to harm their rivals and wish to retain their own seats on the board of the applicant.
As the time available for this judgment is very limited (the evidence and argument having concluded at 4.40pm yesterday evening), I shall go straight to the nub of the case. I have taken all the facts into account in so far as they are probative of anything. There is a deal of material before the Court, principally led by the respondent, which is inadmissible or to the extent that it is admissible is not probative of any matter in issue. I have admitted the whole of the evidence subject to objection and relevance. But in any case, in the light of my findings it is necessary to resolve these questions of bona fides only to a limited extent.
On 6 June 1996 shareholders holding more than 5% of the issued shared capital in the applicant requisitioned an extraordinary meeting of the applicant. At a meeting of the applicant's board on 20 June 1996, at which the respondent was present, the directors discussed the documents purporting to be requisitions for that general meeting; but they did not decide then whether or not to convene a meeting because a response had not been received to a letter from the applicant to a Mr Green dated 14 June 1996 and the directors thought that further enquiries should be made before deciding whether or not to convene a meeting pursuant to the requisition. Mr Green was the signatory to the principal requisition.
After the board meeting of 20 June 1996, the respondent sent notices to shareholders of an extraordinary general meeting convened by him, allegedly pursuant to his powers under article 52 of the applicant's articles. Article 52 provides that any director may, whenever he thinks fit, convene an extraordinary general meeting. The notice of meeting was accompanied by an explanatory note and a form of proxy. Also on 20 June 1996, Mr Green sent to shareholders of the applicant a letter enclosing a form of proxy in a reply paid envelope for return of the proxy form.
On 25 June 1996 the board of the company convened an extraordinary general meeting of the company for 15 July 1996, in response to the requisition previously served by Mr Green on 6 June.
The issues in the case concern the action of the respondent in convening the general meeting of the applicant which is due to be held on 8 July. I attach copies of the notice of meeting, explanatory note, and form of proxy sent by the respondent, and copies of the letter sent by Mr Green, together with the accompanying form of proxy.
The explanatory note which accompanied the notice of meeting sent to shareholders by the respondent concerning the prospective meeting on 8 July contained, in my opinion, a number of misleading or potentially misleading statements.
One such misleading statement appears in the last sentence of the explanatory note sent by the respondent which states:
'The EGM will be held at a neutral venue, namely the offices of Minter Ellison, Solicitors, Level 9, Market Street, Melbourne.'
In fact, those solicitors at their Melbourne office act for certain minority shareholders. I do not suggest for a moment that Minter Ellison was a party to making this misleading statement; it was made by the respondent.
Another misleading statement in the explanatory note is in the first paragraph. The relevant sentence reads:
'I note that any member of the company is entitled to nominate candidates to stand for election to the AIL board at this meeting, subject to proper compliance with the appropriate provisions of AIL's Articles of Association.'
The relevant article is article 86 which provides, so far as material, that no qualified person shall, unless recommended by the directors for election, be eligible for election to the board at any general meeting of the applicant unless he or some other member intending to propose him has, at least 15 business days before the date of a general meeting at which directors will be elected or re-elected, left at the
company's office a notice in writing duly signed by the nominee giving his consent to nomination and signifying his candidature and the intention of the proposing member to propose him.
The notice was sent by the respondent on 20 June and the meeting was to be held on 8 July. Plainly the requirement of at least 15 business days in relation to leaving the documents at the applicant's office could not be complied with.
There is another misleading statement in the explanatory note. In the second sentence of the last paragraph it says:
'In accordance with the practice at the 1995 AGM, proxies will be collected and audited by Draffin Walker & Co., Accountants, who will also assist with the conduct of any poll.'
In fact, at the 1995 annual general meeting of the applicant the address for lodgement of proxies for that meeting was KPMG Registrars Pty Limited, Melbourne. This statement is misleading because readers of it would gain the impression that Draffin Walker & Co., Accountants, had been authorized at the 1995 annual general meeting to collect and audit the proxies for that meeting.
The form of proxy which accompanied the respondent's notice of meeting gives as the address for the return of
proxies:
'The Chairman of the Meeting,
Australian Innovations Limited
c/-Draffin Walker & Co,
Level 3, 40 Market Street,
MELBOURNE, VIC 3000'
Also, the notice of meeting sent out by the respondent states that forms of proxy must be deposited at the offices of Draffin Walker & Co, Level 3, 40 Market Street, Melbourne not less than 48 hours before the time of the meeting. So both the notice of meeting and the form of proxy sent by the respondent make it clear that proxies should be returned to Draffin Walker & Co in Melbourne.
Article 73 provides that a form of proxy shall be deposited at the company's registered office or at such other place within the State (that is defined as New South Wales by article 1(a)) as is specified for that purpose in the notice convening the meeting.
The impression conveyed by the form of proxy sent by the respondent is that the articles permit proxies to be deposited with Draffin Walker & Co in Melbourne; whereas in fact they must be deposited at the company's registered office or such other place within New South Wales as is specified for that purpose in the notice convening the meeting. Melbourne is not in New South Wales. Nor is the address stated in the form of
proxy the registered office of the applicant. I recognize that there is an argument to the contrary, namely, that the proxies may be returned to the address stated in the form of proxy sent out by the respondent, provided that Draffin Walker & Co ensure that they are deposited in accordance with article 73. However, in my opinion article 73 is designed to ensure that shareholders who send forms of proxy send them to the place stated in the article. Hence this statement in the form of proxy is also misleading.
As mentioned earlier, Mr Green also dispatched documents to shareholders on 20 June, including a form of proxy which placed a cross (X) against nine resolutions of the available ten resolutions either removing or appointing certain directors. The form of proxy sent by the respondent contained no crosses or another indication of preference. Mr Green's form of proxy was sent with an accompanying reply paid envelope addressed to Epic Securities Limited of Melbourne, a company of which Mr Green is chairman. In my view shareholders would be confused by the receipt of the two forms of proxy, one in blank and the other completed, though I do not think the degree of confusion is such as to say that they would be misled.
In my opinion the matters to which I have referred, taken either individually or collectively (I exclude the last allegedly misleading act), constitute absence of care and diligence by the respondent as a director of the applicant under s. 232(4) of the Corporations Law. That sub-section requires that in the exercise of a director's powers in the discharge of that person's duties, the director must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances.
Apart from the statutory duty imposed upon directors by s. 232(4) to act with due care and diligence, duties of the same kind are owed under the general law.
It is important that the courts do not impose burdens upon directors which make their task so onerous that capable people would be deterred from serving as directors: see Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 per Lindley M.R. at 435. However, here there is no need for the Court to be reticent. The action of the respondent in convening the meeting for 8 July went beyond failure to observe due care and diligence.
The powers of directors are entrusted to them for the benefit of the company, namely, for the benefit of the shareholders as a whole, and not for the benefit of the directors themselves, or of a group of shareholders of the company, or of outsiders: Parke v Daily News Limited [1962] 1 Ch 927; Charterbridge Corporation Limited v Lloyds Bank Limited [1970] 1 Ch 62; Levin v Clark [1962] NSWR 686.
The respondent attended the board meeting of 20 June and he knew that the question of Mr Green's requisition had been discussed, though not determined for reasons previously mentioned. Yet the respondent then took steps to convene the meeting for 8 July pursuant to article 52. In my opinion it has been established that, in acting as he did, the respondent did not act bona fide in the interests of the company as a whole. Rather, he purported to exercise the power conferred by article 52 in the interests of a shareholder, or of a particular group of shareholders.
The statutory framework established by the Corporations Law in relation to the convening of general meetings upon the requisition of members entitled to at least 5% of the total voting rights allows the directors 21 days after the date of the deposit of the requisition to convene the meeting (s. 246(3) of the Corporations Law). As the requisition was deposited on 6 or 7 June, the period of 21 days had not expired when the respondent took the action he did. The respondent knew on 20 June at the meeting of directors that they were considering what to do about the earlier requisition. Yet he chose to act as he did.
In all these circumstances, in my view the purported exercise of power pursuant to article 52 by the respondent was not a valid exercise of that power. I add that the power conferred upon a director by article 52 is a power which is exercised by the director in his capacity as a director; and when he does invoke article 52, he does so in the course of the exercise of his functions and powers as a director.
These matters constitute irregularities within the meaning of s. 1322 of the Corporations Law. They are also procedural irregularities within that expression as referred to in that section.
A proceeding under the Corporations Law is not invalidated because of procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by an order of the Court. Also, s. 1322(6) provides that so far as relevant the Court shall not make an order under s. 1322 unless it is satisfied that no substantial injustice has been, or is likely to be, caused to any person.
I am satisfied that the irregularities previously mentioned may cause substantial injustice that cannot be remedied by order of the Court, and I am not satisfied that no substantial injustice has been or is likely to be caused to any person. Shareholders receiving the documents previously mentioned are likely to be misled in relation to important matters concerning the meeting of 8 July. In my view these defects lead the Court (a) to declare that the irregularities in relation to the convening by the respondent of the meeting on 8 July 1996 cannot be remedied by order of the Court and (b) to order that the convening of the meeting should be declared to be invalid.
I turn to another matter. Section 254 of the Corporations Law requires that when by that law 'special notice' is required of a resolution to be put at a meeting of a company, the resolution is not effective unless notice of the intention to move it has been given to the company at least 28 days before the meeting at which it is moved. 'Special notice' is required of a resolution to remove a director under s. 227, and of a resolution to appoint a person in place of a director so removed at the meeting at which the director is removed (see s. 227(1) and (3)).
The meeting convened by the respondent calls for the removal of certain directors and for the appointment of others. Less than 28 days notice of the meeting was given; so s. 254 has been contravened. It follows that any resolution that may be passed at the meeting is not effective.
Assuming that s. 1322 applies to that irregularity and that it answers therefore the description of a procedural irregularity, I make the same finding in relation to substantial injustice that I made with respect to the earlier matters. This irregularity itself is sufficient to cause the meeting to be declared invalid.
I do not accept the argument advanced by the respondent that the applicant is not competent to bring this application. The respondent submitted that an application of this kind can be brought only by an 'interested person' within the meaning of s. 1322(4). That expression is not defined; but a 'person' includes a body corporate (see s. 85A). In my opinion the applicant is an interested person for the purposes of s. 1322(4).
Also, I must deal with the argument advanced by the respondent (who appeared in person) that this proceeding was in effect an abuse of power by the directors of the company and in effect an abuse of the process of the Court. Even if the evidence which I admitted subject to objection and relevance has probative value on this question, in the light of the evidence as a whole it cannot sustain a finding that the proceeding has been instituted mala fide, or that it is an abuse of the process of the Court.
Finally, I make an observation. The directors and certain shareholders of the applicant are plainly locked in combat concerning the affairs of the applicant. The history of litigation between them, of which this case is an eloquent example, unless resolved by the warring forces, will ultimately lead to substantial diminution of the company's assets to the detriment of shareholders generally. I urge the parties to be sensible and to try and resolve their litigation as amicably as they can. In the long run this will be in everybody's best interests.
The Court makes the following orders:
That pursuant to s. 1322(4), the convening by the respondent of an extraordinary general meeting of members of the applicant to be held on 8 July 1996 is invalid.
That the respondent shall pay the costs of the applicant of the proceeding including reserved costs, if any.
I certify that this and the preceding thirteen (13) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart.
Associate
Dated: 3 July 1996
Counsel for the Applicant : Mr G B Colyer
Solicitors for the Applicant : Stephen Blanks & Associates
The Respondent appeared in person.
Date of Hearing : 2 July 1996
Date of Judgment : 3 July 1996
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