Australian Innovation Ltd v Petrovsky, Violet Kathleen

[1996] FCA 513

IN THE FEDERAL COURT OF AUSTRALIA                  )
  )
NEW SOUTH WALES DISTRICT REGISTRY                 )          NG 3264 of 1996
  )
GENERAL DIVISION  )

IN THE MATTER OF AUSTRALIAN INNOVATION LIMITED
                ACN 002 679 469

AUSTRALIAN INNOVATION LIMITED
  Applicant

VIOLET KATHLEEN PETROVSKY

Respondent

Coram:Whitlam J

Place:Sydney

Date:31 May 1996

MINUTES OF ORDER

THE COURT DECLARES THAT:

1. The document deposited with the applicant on behalf of the respondent on 17 April 1996 does not constitute a valid and effective requisition under section 246 of the Corporations Law.

AND ORDERS THAT:

1. The respondent pay the applicant's costs.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA                  )
  )
NEW SOUTH WALES DISTRICT REGISTRY                 )          NG 3264 of 1996
  )
GENERAL DIVISION  )

IN THE MATTER OF AUSTRALIAN INNOVATION LIMITED
                ACN 002 679 469

AUSTRALIAN INNOVATION LIMITED

Applicant

VIOLET KATHLEEN PETROVSKY

Respondent

Coram:           Whitlam J
Place:              Sydney

Date:31 May 1996

REASONS FOR JUDGMENT

(Ex tempore)

This is an application by a company impugning a purported requisition by the respondent under s 246 of the Corporations Law ("the Law").  The document in question was deposited on 17 April 1996.  It stated:

"I, Kathleen Petrovsky, as a shareholder of AUSTRALIAN INNOVATION LTD holding greater than 5% of the issued capital hereby requisition a shareholder meeting of the company for the purposes of putting the following resolutions.

Resolutions:

1.THAT the company request the Australia Securities Commission investigate Nick Geddes for breaches of his duty to the company.

2.THAT Nick Geddes be and is hereby removed as a director.

3.THAT Alex Petrovsky be and is hereby removed as a director.

4.THAT Mark Frecheville be and is hereby removed as a director.

5.THAT Terry Fay be and is hereby removed as a director

6.THAT John Fielding be and is hereby removed as a director.

7.THAT Hendrik Prins be and is hereby removed as a director.

8.THAT Nick Geddes be removed as company secretary.

9.THAT the maximum amount payable as directors fees be reduced to $30,000.00 per annum, to be divided amongst the directors as they

see fit.

10.THAT James Abbott be and is hereby elected as a director.

11.THAT Kenneth Winkel be and is hereby elected as a director.

12.THAT Nikolai Petrovsky be and is hereby elected as a director."

It is common ground that the respondent is qualified under s 246(1)(c) by virtue of her voting rights in the applicant to requisition a general meeting. She was also a director of the applicant until 31 January 1996, when the persons referred to in proposed resolutions 2 to 7 above were elected as directors. The background to that election may be shortly stated.

Prior to June 1995 the directors of the applicant were the respondent, her son Alex and a Mr John Rouse.  On 5 June the respondent, in her capacity as a director, convened an extraordinary general meeting for the purpose of removing Mr Rouse as a director and appointing as directors her son Nikolai, her daughter Irena and a Mr James Abbott.  The
meeting was held on 30 June and adjourned to 28 July, on which date the respondent's proposals to reconstitute the board of the applicant were defeated. 

Undeterred and again using her authority as a director, the respondent convened another extraordinary general meeting.  This time the proposed resolutions called for her son Nikolai, Mr Abbott and a Mr Craig Jones to be appointed as directors.  This meeting was held on 29 November.  The chairman declined to put the resolutions on the basis that the persons named had not given the signed consents to nomination required by the applicant's articles of association.  After the chairman closed the meeting, the respondent and certain other members purported to carry the resolutions. 

In December the respondent together with her son Nikolai and Mr Abbott commenced in this Court what is described as an oppression suit under s 260 of the Law. She named as respondents the other two directors, her son Alex and Mr Rouse, the applicant's secretary, Mr Nicholas Geddes, and the company's solicitors. In the course of those proceedings the parties consented to orders made by Ryan J on 20 December.

The applicant's annual general meeting had been delayed on account of difficulties in preparing group accounts.  The orders provided that that meeting be held on 31 January 1996, that all directors' offices be vacated at that meeting, and that six directors be elected.  The orders provided too that the meeting was to be chaired by a person nominated by the President of the Australian Institute of Company Directors (Victorian Division).  

The chairman so nominated was Mr Ian Renard, a solicitor, who is a partner in the firm of Arthur Robinson and Hedderwicks.  Nominations for directors were received from all nine persons named in the respondent's "requisition" presently under consideration plus the respondent herself and Mr Rouse.  Mr Renard declared elected as directors the six persons who would be removed from office if the respondent's proposed resolutions were carried.

At the outset it may be noted that the objects of the respondent's "requisition" are, in part, impermissible.  The respondent appears to concede as much.  In a curious letter sent to the applicant after this proceeding was commenced, she asked that, "whilst reserving my rights", resolution 1 be "removed" and resolution 8 be "withdrawn".  Any submission to the contrary could not succeed: Windsor v National Mutual Life Australia Ltd (1992) 34 FCR 580 per Black CJ and Beaumont J at 590 - 591.

The remaining resolutions are within the remit of the members in general meeting.  The approach to a requisition in respect of such objects was explained by Beach J in Humes Ltd v Unity APA Ltd [1987] VR 467. The important passages are:

"... the right given to a minority shareholder to requisition a general meeting of the company is a right which must be exercised bona fide and for the purpose for which it was conferred."  (p. 470)

... [a minority shareholder] is entitled to act in furtherance of its own interests, provided however that its requisition for the meeting is bona fide, in that its objective is to have the resolutions passed and not simply to harass the company and its directors."  (p. 471)

In my opinion this Court should be very reluctant to interfere with a minority shareholder's statutory right to requisition a general meeting.  I consider it
should only do so when it is clear that the purpose for calling the meeting is something other than the passing of the resolutions contained in the requisition."  (p. 472)

His Honour then went on in the case before him to consider the motive of the requisitioning minority shareholder.  The applicant accepts the above statements of law as the framework within which it must make its case. 

In support of its case the applicant relies particularly on statements by the respondent in letters she sought to have the applicant circulate with the notice of the requisitioned meeting.  The respondent was under the mistaken impression that she was entitled to have such letters circulated.  Indeed, the applicant was initially so concerned about statements in those letters which were said to be defamatory of third persons that it also made those letters the subject of this proceeding when it was commenced.

In particular, the applicant submits that the respondent's true motive is revealed in her letters dated 29 April 1996 and 2 May 1996.  It must be borne in mind that the passages occur in letters which were to be sent with the notice convening the extraordinary general meeting requested by her. 

The letter of 29 April 1996 consists of two closely typed pages.  The tone of the letter is reflected in the following passages.  In the third paragraph the respondent, speaking of her dissatisfaction with the attitude of another shareholder, states:

"Approaches have been made to Rob Ferguson on my behalf to try and resolve the recent board disputes to avoid the need to resort to further EGMs."

In the fourth paragraph she says:

"The only way in which AIL can survive is if the major shareholders of the company are represented on the board.  Without such representation the company's funds will be exhausted on further shareholder meetings and litigation.  It is simply not acceptable that shareholders holding over 25% of the issued capital have no say on the board while BT which holds only 5% of AIL's capital and oversaw the loss of 10 million dollars of AIL funds effectively determines the entire constitution of the board."  (Emphasis supplied).

In the last paragraph in that letter the respondent says:

"Once the current imbalance on the AIL board is redressed I give shareholders my assurance that I will do everything to ensure that the litigation currently affecting AIL is quickly settled.  Hopefully then the need for further EGMs will cease."

In a subsequent letter that the respondent proposed should be sent in lieu of that of 29 April, this being a letter dated 2 May 1996, the respondent said:

"AIL will only survive if the major shareholders have board representation.  Unless something is done soon to remedy this situation AIL's funds will be exhausted on recurrent shareholder meetings and expensive litigation."

Counsel for the applicant relies heavily on those passages as almost explicitly acknowledging that the objective of the respondent is to harass the company and its directors.  The respondent gave evidence.  She denied, in effect, that her motive was to harass the applicant.  I regret to say I do not accept this denial of her subjective motives.  She acknowledged that in her view she was entitled to have representation on the applicant's board and that the litigation would cease when this happened.  My conclusion does not depend simply on her demeanour in the witness-box.  It is supported by the events that have
occurred and the type of matters particularly that she and her son, Nikolai, call in aid in disavowing the purposes attributed to their camp. 

It must carefully be borne in mind that the applicant bears the onus in this matter.  There cannot be any suggestion of dual purposes, that is, an objective to have the resolutions passed and (to use the language of Beach J) an objective simply to harass the company.  What is called for here is a finding of either one or the other.  A finding that the objective is to have the resolutions passed would necessarily preclude a finding that the objective was simply to harass the company and, in that respect, not bona fide.

Naturally, one is not confined to the express acknowledgments of purpose by the requisitioner.  One can look to objective facts and purposes to ascertain purpose.  In Humes Ltd v Unity APA Ltd Beach J emphasised that it was not for the court to speculate about how resolutions might fare at the requisitioned meeting.  Nonetheless, in certain cases one must look at the events that have occurred in recent meetings, movements in the share register of the company, likely movements in the share register of the company and, particularly too, at what may be made of motives of parties as a result of other matters such as litigation.  But I do emphasise that if the genuine purpose of the respondent were to have the resolutions passed, then that would be the end of the matter.  That is not the same thing as saying that she might hope that that would be achieved because plainly, at the end of the day, when one comes to deal with the economic clout of a minority shareholder requisitioning meetings, there are elements of possible attrition to have regard to in assessing motive and purpose. 

As I have said, I disbelieve the respondent's express disavowal of an improper purpose.  In doing so, I am guided initially by the terms of the "requisition" itself, containing the impermissible objects.  The first proposed resolution touches on a matter which is not only unnecessary for discussion at a meeting, as Windsor makes clear, but is a matter which, if it were a bona fide concern, could be made the subject of complaint to the Australian Securities Commission by any member of the applicant at any time.  Associated with that, without setting them out in extenso, are the several letters that the respondent prepared and wished to have circulated with the notice of the requisitioned meeting.  The contents of those letters suggest a desire simply to have, at company expense, her views circulated to members in a way that was deprecating, at the very least, of other shareholders.  In particular, of course, I should say that is reflected in the concern that the respondent expresses about the role of Bankers Trust (Australia) Limited and its managing director.   That material is material to which I may have regard, and do have regard, in assessing her motives in requisitioning this meeting. 

In addition, of course, there are the meetings in the second half of last year and earlier this year.  Evidence was given, particularly by Mr Nikolai Petrovsky, on this matter.  It is suggested in his evidence that there were irregularities in the acceptance of proxies at the July meeting.  It is suggested that there were irregularities in the refusal to accept as eligible for election the persons named in the resolutions, the subject of the November meeting.   Finally, there is the January meeting which importantly resulted from consent orders in proceedings to which the respondent was a party.  There are some very important aspects of what is put against that meeting by the respondent's camp, articulated less perhaps by the respondent herself than by her son Nikolai.  I must be careful, of course, not to attribute to the respondent the subjective motives of Nikolai, and I am conscious of that but, again, this being the objective material upon which the respondent relies to show that the calculated effect of her requisition is not to harass the company, one is bound to have regard to this material. 

Mr Nikolai Petrovsky's complaints about the January meeting relate specifically to the acceptance of certain proxies.  Almost without exception they are formal objections.  There is no suggestion that the persons who have given those proxies or, in some cases, appointments of representatives to attend at the meeting, would vote any differently at any further meeting.  Nor have the consequences in any event of whether those proxies were invalid been explored in any detail in terms of the calculation of numbers of votes.  But, importantly, the objections are essentially formal to the meeting convened pursuant to the consent orders.

In addition, I have particular regard to the fact that that meeting was chaired by an independent chairman who relied upon the assistance of an experienced share registrar.  That meeting was being held as a result of consent orders.  If there were any doubt by the respondent who is a party to those proceedings that the court orders, even though they be consent orders, had not been observed in any particular, the matters should have been made the subject of application to the court.  That has not happened.

There are authoritative statements (mainly in urgent cases on interlocutory applications) that meetings may be requisitioned in order to resolve disputes in companies, notwithstanding there being pending litigation.  I do not say that it is not entirely appropriate
to do so from time to time but, in the particular circumstances of this case, the respondent must be visited with the inferences that flow from the conduct of the oppression suit instituted in December last year.  On 25 March 1996 Northrop J effectively struck out the pleadings and the application and left those proceedings in limbo.  The applicants in those proceedings were directed to put them in order in a certain time.  They had not done so when the matter was before Northrop J again earlier this month.  (At that time a further matter happened which reflects poorly, at least, on Mr Nikolai Petrovsky in the light of his attempt to appear for his absent mother on the first day of this application.  It was made very clear to Mr Nikolai Petrovsky by Northrop J, as transcript in Exhibit A reveals, that he was not entitled to appear for other parties.) 

Great emphasis was placed, not unnaturally, by the solicitor for the respondent on the proposition that one should be wary about assessing the outcome of a meeting.  In particular, he drew attention to the situation in the Humes Ltd v Unity APA Ltd where the requisition that survived the challenge was made on the very day that resolutions to reconstitute the board had been unsuccessful.  But that, it seems to me, is a very different situation.  There, one had a current takeover offer where a company was, to use the vernacular, "in play".  There was a real prospect that further persons might accept the offeror's offer, and that by the time of the extraordinary general meeting the parties' entitlements to vote could have varied greatly.

In this case, what can only be described as a relatively pathetic attempt was made (and I do not say that at all critically of the respondent's solicitor) to latch on to a very minor movement in the share register of the company.  Based on slight anecdotal material, it appears Bankers Trust Australia have sold their shareholding, or at least part of it, (it is not clear) to another person and, to that extent, entitlements to vote may have varied the next time round.  But this very evidence, so far as it goes, suggests that the purchaser is likely to vote in support of the existing board.  In any event, these changes were not known to the respondent when she requisitioned the meeting. 

The statements of principle in Humes Ltd v Unity APA Ltd taken by themselves, suggest that it will be an unusual case where a minority shareholder has a requisition declared ineffective on the basis that it has not been made bona fide.  Plainly a minority shareholder is entitled to use whatever economic power it may.  As Beach J said, it is entitled to have regard to its own interests as a minority shareholder in exercising its undoubted statutory right or, in this case, a natural person's right to requisition a meeting.  But one must be astute to assess whether the statutory right is being exercised for the proscribed purpose, that is, not bona fide and with a motive that, as his Honour said, is simply to harass the company.  I am conscious that the applicant bears the onus but I think it is easily made out in this case.  It seems to me to be one of the clearest cases possible where the power of the minority shareholder - the right and the authority of a minority shareholder to requisition that a meeting be convened, is being abused.  Accordingly, I propose to grant relief on that basis. 

The orders I make are:

1.A declaration that the document deposited with the applicant on behalf of the respondent on 17 April 1996 does not constitute a valid and effective requisition under section 246 of the Corporations Law.

2.An order that the respondent pay the applicant's costs.

I certify that this and the preceding 11 pages are a  true copy of the reasons for judgment herein of the Hon. Justice A.P. Whitlam

Associate:

Date: 31 May 1996

Counsel for the applicant:             N.A. Cotman

Solicitors for the applicant:  Stephen Blanks & Associates

Solicitor for the respondent:           T.C. Capelin (Corrs Chambers Westgarth)

Dates of hearing:  23, 24 and 27 May 1996