FEDERAL COURT OF AUSTRALIA
Biodiesel Producers Limited (ACN 099 165 876) v Stewart [2007] FCA 722
CORPORATIONS LAW – applicant a start up company with first respondent as company secretary and second respondent effectively as company managing director – incorporated for the purpose of constructing and running a biodiesel plant – sources of funding to be a Commonwealth Government grant and private investor ANZ Infrastructure Services Limited – site for the plant purchased – delays in securing development approval – delays in securing funding – delays in securing plant – dispute between Board members and first and second respondents – second respondent settled with the applicant and took no part in the litigation.
CORPORATIONS LAW – purported issue of performance shares to respondents by directors under a ‘circular resolution’ – performance shares would convert into B Class shares upon the achievement of certain milestones.
CORPORATIONS LAW – breach of fiduciary duty – failure on part of first respondent to fully inform the board of directly relevant legal advice prior to signing of the circular resolution – first respondent owed a statutory duty as an officer of the applicant ss 180(1), 181(1) and 182(1) Corporations Act 2001 (Cth) and common law and fiduciary duties – Board would not have signed the circular resolution if it had known of the advice – circular resolution rescinded.
CORPORATIONS LAW – issue of performance shares which converted into B Class shares created a new class of shares – variation of class rights s 246C(5) Corporations Act – no shareholders’ consent – not done in conformity with s 246B(1) Corporations Act – not done in conformity with company constitution.
CORPORATIONS LAW – failure to obtain shareholders’ consent – whether a procedural irregularity amenable to validation under ss 1322 or 254E Corporations Act – no application made under either section – no substantial injustice.
CONTRACT – circular resolution – on proper construction performance shares issued at the time of the making of the circular resolution – performance shares were to convert in tranches at the achievement of the set milestones – milestones would be required to be achieved within a reasonable time – shares would not convert if the applicant achieved the milestones in the future.
CONTRACT – Executive Service Agreement for services of the first respondent – not executed under authority of a Board resolution – conditions precedent to the agreement were not met – agreement never took effect – whether clause that applicant pay the entirety of the remuneration package for the remainder of the term of the agreement amounted to a penalty.
Corporations Act 2001 (Cth) ss 128(4), 129(5), 208, 210, 228, 246B, 246C, 254E, 1322
Bordman v Phipps [1967] 2 AC 46 cited
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 cited
Broadway Motors Holdings Pty Ltd (In Liq) and the Companies (New South Wales) Code (1986) 6 NSWLR 45 cited
Chan v Zacharia (1984) 154 CLR 178 cited
Codelfa Construction Pty Ltd v State Rail Authority of…
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- AGLC
- Biodiesel Producers Ltd v Stewart [2007] FCA 722
- Case
- [2007] FCA 722
- Decision Date
CaseChat Overview and Summary
The primary legal issue for the court to determine was whether the resolution of the Board of Directors was valid and binding on the company. The court needed to consider whether the resolution was properly passed and whether the terms of the resolution were in accordance with the company's constitution and applicable law. Additionally, the court had to assess whether the issue of performance shares to Mr Stewart was valid and whether any subscription money paid by him should be returned. The court also needed to decide on the validity of the cross-claim brought by Mr Stewart.
The court found that the resolution of the Board of Directors was not valid and binding on the company. It determined that the resolution was not properly passed as it did not comply with the company's constitution and applicable law. The court held that the resolution was not valid because it was not properly circulated to all directors and did not provide adequate notice of the meeting. Furthermore, the court found that the terms of the resolution were not in accordance with the company's constitution. The court also concluded that the issue of performance shares to Mr Stewart was not valid as it was not properly authorised by the company's constitution. Consequently, the court ordered that the resolution be rescinded, the issue of performance shares to Mr Stewart be set aside, and the company's register of members be corrected. The court further dismissed Mr Stewart's cross-claim.
The final orders of the court were that the resolution of the Board of Directors made on 30 November 2004 be rescinded, the issue of performance shares to Mr Stewart be set aside, the company's register of members be corrected by deleting any reference to the issue of performance shares to Mr Stewart, and the cross-claim be dismissed. The court also ordered that the issue of performance shares to Mr Stewart be set aside subject to the return of subscription money paid by him.
Orders
Orders of the court
1. That the resolution of the Board of directors of the applicant made on 30 November 2004 whereby it was resolved:
(1) to issue 9,000 performance shares to Mr Dennis Barron subject to the receipt of the subscription money;
(2) to issue 5,500 performance shares to Mr Anthony Stewart subject to the receipt of the subscription money;
be rescinded.
2. Subject to the applicant paying to the first respondent the subscription money of $55.00 paid by the first respondent on 29 March 2005, the issue of the performance shares to the first respondent be set aside.
3. The applicant’s register of members be corrected by deleting any reference to the issue of the performance shares to the first respondent on 10 January 2005 (wrongly described in the register as 2004).
4. The cross-claim be dismissed.
Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
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Ratio Decidendi
Legal Principle Established
Established by: LANDER J
On 22 November 2004 ANZIS wrote to the directors stating that the offers and proposals contained in that letter superseded all previous offers and proposals made by ANZIS. ANZIS offered to fund the proposal in two separate ways; either by way of debt and equity funding, or by equity funding. The offer addressed the question of Mr Barron and Mr Stewart’s remuneration:‘5. Executive RemunerationWe confirm agreement with the BPL Board’s proposal that the total salary package plus superannuation contributions for D Barron as Managing Director should be $190,000 pa and for A Stewart as Chief Financial Officer, $140,000 pa.’ This was not in fact the last offer made by ANZIS prior to the Annual General Meeting to be held on 30 November 2004. In fact, on 29 November 2004, ANZIS wrote again to the directors putting a further proposal which, again, was said to supersede all previous offers and proposals. It wrote:‘If BPL’s board is agreeable to these arrangements, we would be pleased to move immediately to:● work with you to finalise a new Shareholder Agreement (“SHA”);● finalise the Pdf and BDI contracts and negotiate these changes;●discuss in detail BPL’s debt funding plan and assist BPL in securing and finalising these debt funding arrangements;●start our approval process.We believe that the project can achieve financial close before 31 Jan 2005 and construction could commence when Development Approval is received and final engineering designs are received from BDI in February 2005.’ Again it addressed two separate proposals; debt and equity funding, and all equity funding. In this letter it discriminated between the 7,500,000 founder shares which were to be issued to the second respondent and the 14,500,000 B Class shares which were to be issued eventually to both respondents. Its proposal in relation to executive remuneration was the same as in the previous letter. Those two letters show that the previous generous inducements in the correspondence after 30 September 2004 were no longer available to the respondents. The second respondent emailed the ANZIS proposal to the first respondent and the directors of the applicant. He said:‘Gentlemen,This is the new ANZIS offer. I think it is a very good one.They are offering to put in $12.4m or $10m with a further $2m from Rae, Max and Andrew White.I will ask Tony to present the offer tomorrow at 4 pm.The offer at $10m will give ANZIS 30.3%, existing shareholders 33.3% and Tony & Dennis 33.3%. I think this gives us great comfort.See you tomorrow at 4pm.’ In November 2004 the second respondent received advice from Mr Grant Burgess of BDO Consultants (WA) Pty Ltd relating to the tax implications of the issue and conversion of promoter shares. Mr Burgess had previously offered advice on preference shares in his letter of 14 October 2003. It appears clear from the correspondence that the second respondent met with Mr Burgess on 23 November 2004. On 29 November he emailed the first respondent:‘TonyFurther to our earlier conversation, I have undertaken a high-level review of the tax issues associated with the assignment of dividend income. I understand that the assignment will only take place if a specified rate of return is not achieved. I also understand that the assignment is in consideration of ANZ contributing funds to the project.My preliminary high-level review revealed the following:▪ The contingent assignment will give rise to a CGT event. The question being what is the value of the consideration received [i.e. what portion of ANZ’s contribution is given for the contingent assignment]? It could well be that the value of the consideration is minimal [since I would assume that ANZ place little value on this right].▪ The assignment should be effective for income tax purposes since consideration has been given for the right. This means that ANZ alone would be required to include the dividends in their assessable income.▪ ANZ is unlikely to be entitled to the imputation credit associated with the dividends. This is because they do not hold the shares [refer to Part IIIAA, Division 1A and the 45 day rule]. It may be possible to circumvent this by having a fixed trust hold the shares where a beneficiary has a contingent right [this option would need to be examined closer].Let me know if you require us to explore this matter further.’