Cao v Apollo Phoenix Resources Pty Ltd

Case [2018] FCA 1445

FEDERAL COURT OF AUSTRALIA

Cao v Apollo Phoenix Resources Pty Ltd [2018] FCA 1445

File number: NSD 1037 of 2018
Judge: MARKOVIC J
Date of judgment: 20 September 2018
Catchwords: CORPORATIONS – where the office of a director of a company was purportedly declared vacant at a directors’ meeting which the relevant director did not attend – where the relevant director did not speak English and lived overseas – whether the relevant director was absent from directors’ meetings for six consecutive months – whether the relevant director received reasonable notice of those directors’ meetings – whether a declaration should be made declaring that the purported vacation of the office of director is rescinded, void or to no effect and that the relevant person remains a director of the company – application dismissed.  
Legislation: Corporations Act 2001 (Cth) ss 232, 233
Cases cited:

Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359; [2008] NSWCA 95

Jones v Dunkel (1959) 101 CLR 298

Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361

Re Keneally (as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd)) (2015) 107 ACSR 172; [2015] NSWSC 937

Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 912

Dates of hearing: 6 and 7 September 2018
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Category: Catchwords
Number of paragraphs: 114
Counsel for the Applicant: Mr M Davis
Solicitor for the Applicant: Maddocks
Counsel for the Respondent: Mr P Silver
Solicitor for the Respondent: Mills Oakley

ORDERS

NSD 1037 of 2018
BETWEEN:

ZHONG CAO

Plaintiff
AND:

APOLLO PHOENIX RESOURCES PTY LTD ACN 158 977 881

Defendant

IN THE INTERLOCUTORY APPLICATION:
BETWEEN:

ZHONG CAO

Applicant
AND:

APOLLO PHOENIX RESOURCES PTY LTD ACN 158 977 881

Respondent

JUDGE:

MARKOVIC J
DATE OF ORDER: 20 September 2018

THE COURT ORDERS THAT:

1.The interlocutory application filed on 31 August 2018 be dismissed.

2.The applicant pay the respondent’s costs.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


REASONS FOR JUDGMENT

MARKOVIC J:

  1. Zhong Cao is a shareholder in, and until 22 August 2018 was (or on his case still is) also a director of, Apollo Resources Pty Ltd (Apollo). 

  2. On 18 June 2018 Mr Cao commenced proceedings against Apollo seeking declarations including a declaration pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) that Apollo engaged in conduct within the meaning of s 232 of the Corporations Act 2001 (Cth) (Act).  The proceeding concerns Mr Cao’s shareholding in Apollo.

  3. On 22 August 2018, at an Apollo board meeting, the directors who were present declared that Mr Cao was no longer a director of Apollo. 

  4. On 23 August 2018, on Mr Cao’s urgent application, the proceeding was relisted for case management hearing.  The Court was informed that the parties had reached an agreement that Apollo would not…

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AGLC
Cao v Apollo Phoenix Resources Pty Ltd [2018] FCA 1445
Case
[2018] FCA 1445
Decision Date

CaseChat Overview and Summary

In the matter of Cao v Apollo Phoenix Resources Pty Ltd, the applicant, Mr Cao, sought to have the decision to vacate his office as a director of the respondent company, Apollo Phoenix Resources Pty Ltd, rescinded. This was based on the argument that he had not received reasonable notice of the meetings in which the decision was made. The court was required to decide whether the directors of Apollo were entitled to rely on clause 9 of the company's constitution, which provides that a director automatically ceases to be a director if they are absent from board meetings for six consecutive months without special leave, to declare Mr Cao's office vacant. Additionally, the court had to determine whether Mr Cao had received reasonable notice of the meetings he did not attend.

The court found that the directors of Apollo were entitled to rely on clause 9 of the company's constitution to remove Mr Cao as a director. The court held that the provision was clear and unambiguous, and there was no evidence to suggest that it was not properly brought to Mr Cao's attention. Furthermore, the court found that Mr Cao had failed to establish that the notice provided for each board meeting was not reasonable, and that in any event, reasonable notice was given. As a result, the court dismissed Mr Cao's interlocutory application.

The court's reasoning was based on the evidence presented by both parties and the relevant legal principles. The court noted that the company's constitution provided for the automatic removal of a director who was absent from board meetings for six consecutive months without special leave. The court also noted that Mr Cao had failed to establish that he did not receive reasonable notice of the meetings he did not attend. As a result, the court held that the directors of Apollo were entitled to rely on clause 9 of the company's constitution to declare Mr Cao's office vacant.

In conclusion, the court dismissed Mr Cao's interlocutory application and ordered that he pay the respondent's costs. The court found that the directors of Apollo were entitled to rely on clause 9 of the company's constitution to remove Mr Cao as a director, and that Mr Cao had failed to establish that he did not receive reasonable notice of the meetings he did not attend. The court's decision was based on the evidence presented by both parties and the relevant legal principles.

Orders

Orders of the court

1. The interlocutory application filed on 31 August 2018 be dismissed.

2. The applicant pay the respondent’s costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

The evidence relied on by the parties was, in the case of Mr Cao, an affidavit affirmed by his solicitor, Timothy Alexander Atkin, on 28 August 2018 and, in the case of Apollo, an affidavit sworn by Christopher John Daws, a director of Apollo, on 3 September 2018. BACKGROUND FACTS Apollo was incorporated on 14 June 2012. It is a small mining exploration and investment company. It carries out mining exploration operations with the aim of identifying valuable mining tenements and then on-selling its tenement interests to mining companies. Its only sources of income are from the sale of assets and raising capital from its shareholders. According to Mr Daws, Apollo derives commercial advantage from its ability to make swift decisions on opportunities that arise and from its agility in responding to market conditions, including market conditions for natural resources. On or about 26 October 2015, upon the resignation of the previous directors, Mr Daws, Doug Daws and John Kingswood were appointed as directors of Apollo.Mr Cao becomes a shareholder of Apollo On 11 December 2015 Apollo resolved to issue 4,685 shares to Mr Cao representing 75% of its issued capital at the time. Those shares were ultimately issued on 2 February 2016. Mr Daws described the circumstances in which Mr Cao became a shareholder. In summary:(1)in about August or September 2015 Dehong Yu responded to an advertisement posted on the “MinesOnline.com” website, an online platform connecting buyers and sellers of mining projects worldwide, for the Fortitude Gold project in which Mr Daws was involved at the time;(2)after meeting with Mr Yu on or about 4 November 2015 Mr Daws received an investor term sheet from him naming Mr Cao as the proposed investor in Apollo;(3)on or about 12 November 2015, following negotiation, Apollo and Mr Cao entered into an equity facility agreement (Equity Facility Agreement) which provided for payment by Mr Cao to Apollo of consideration of $2.6 million in return for which Mr Cao was to receive 75% of the fully paid capital of Apollo. Mr Cao was also entitled to elect three new board members to Apollo’s board; (4)on or about 4 December 2015, during a visit to Kalgoorlie with Mr Yu, Mr Daws was made aware by Mr Yu that Mr Cao did not speak English and that Mr Yu would act as his translator after he invested. Mr Yu sought compensation for that role and on 11 December 2015 Apollo resolved to issue 62 shares to Mr Yu, representing 1% of the issued shares in Apollo at the time, in exchange for him providing translation services to Mr Cao; and(5)the full amount due under the Equity Facility Agreement was ultimately paid by Mr Cao on 2 February 2016. On 19 January 2016 Mr Daws sent a copy of Apollo’s constitution (Constitution) to Mr Yu by email. Mr Daws’ evidence was that, since the introduction of Mr Cao to Apollo, the arrangement for providing him with information was that he, Mr Kingswood or Doug Daws would call or email Mr Yu, in turn Mr Yu would translate and forward the information to Mr Cao and then Mr Yu would email the translated documents to Mr Daws, Mr Kingswood or Doug Daws. Mr Yu also introduced Mr Daws to other associates of Mr Cao, including Will, from GWM Resources NL (GWM), Gary Gu and Tony Zhu. Mr Daws received emails from those persons which led him to understand that on occasion they assisted Mr Yu in providing translated documents to Mr Cao. Mr Daws believed that Mr Yu and his associates used WeChat, a Chinese messaging app, to communicate with Mr Cao, including to send him documents.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

This application was filed and heard on an urgent basis. Given that and the conclusion I have reached in relation to the vacation of Mr Cao’s office as director pursuant to cl 9 of the Constitution, it is not necessary for me to consider Apollo’s alternate argument that Mr Cao ceased to be a director on 20 July 2017 by reason of the operation of cl 7 of the Constitution. CONCLUSION It follows that Mr Cao’s interlocutory application should be dismissed. Costs should follow the event. I will make orders accordingly.

Ratio Decidendi

Legal Principle Established

Apollo contends that there are two reasons why the declarations sought by Mr Cao should not be made. First, it contends that by reason of the operation of cl 7 of the Constitution, Mr Cao has not been a director of Apollo since 20 July 2017. That is because his appointment as a director was not confirmed at a general meeting within six months of his appointment. Secondly, Apollo says that Mr Cao has failed to establish that the notice provided for each board meeting was not reasonable but contends that, in any event, reasonable notice was given and that the directors of Apollo were entitled to rely on cl 9 of the Constitution, as they did, to make the declaration vacating Mr Cao from office. CONSIDERATION Was Apollo entitled to rely on cl 9 of the Constitution to remove Mr Cao as a director? By the operation of cl 9 of the Constitution, a director automatically ceases to be a director if he is absent from board meetings for six consecutive months without special leave and the directors consequently declare his or her office vacant. Mr Cao submitted that he did not receive proper notice of the meetings he did not attend and which were relied upon by Apollo to declare his office vacant pursuant to cl 9 of the Constitution. Accordingly, Mr Cao contended that he could not have reasonably attended or sought to be excused from those meetings. As for the 22 August 2018 board meeting at which Messrs Daws and Kingswood and Doug Daws sought to remove him from the office of director, Mr Cao only became aware of that meeting “at the last minute” and made an application to postpone the meeting through his solicitor. Had this application not been rejected, Mr Cao submitted that he could have had the information translated and sought advice and perhaps attended the postponed meeting. Mr Cao submitted that in all the circumstances the conduct was unfair and enlivened s 232(e) of the Act such that he was entitled to the relief sought under s 233 of the Act in the form of the first declaration and order set out in his interlocutory application. Before turning to consider the issues that arise I set out a summary of the relevant legal principles. Relevant legal framework and principles Mr Cao relies on s 232 and s 233 of the Act. Section 232 provides:The Court may make an order under section 233 if:(a) the conduct of a company’s affairs; or (b) an actual or proposed act or omission by or on behalf of a company; or(c)a resolution, or a proposed resolution, of members or a class of members of a company;is either:(d) contrary to the interests of the members as a whole; or(e)oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. Section 233 provides that the Court can make any order that it considers appropriate including those set out in subs (1). In Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359; [2008] NSWCA 95 Basten JA, in considering the terms of s 232 of the Act, noted at [176] that the section had three elements, the first of which was to identify the relevant conduct. His Honour then went on at [177] to consider the second and third elements which he said respectively required characterisation of the conduct and identification of those who may be adversely affected by the conduct. At [180]-[184] his Honour said the following about the operation of s 232:180One effect of the expanded language adopted in 1983 appears to have been the abandonment of the restrictive definition of oppression, adopted in Scottish Cooperative Society, as requiring conduct which was “burdensome, harsh and wrongful”: at AC 342; All ER 71 (Viscount Simonds). It is now appropriate to ask whether the action was conduct available to the officer in accordance with the constitution of the company; whether it was exercised in good faith, for a proper purpose, on the basis of relevant conditions and without taking into account irrelevant considerations: see Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 at 466; 61 ALR 225 at 230; 10 ACLR 87 at 91 (Wayde) (Mason ACJ, Wilson, Deane and Dawson JJ) and at CLR 469–70; ALR 233; ACLR 94 (Brennan J). In Thomas v H W Thomas Ltd [1984] 1 NZLR 686 at 693, Richardson J noted that there was overlap between the various concepts identified by the terms “oppressive, unfairly discriminatory or unfairly prejudicial”:The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for complaint … The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company.181Richardson J was clearly seeking to emphasise the breadth of the preconditions, both in their terms and by reference to those whose interests might be affected. It is doubtful if his Honour intended to substitute the concept of “unjust detriment” for the statutory language. In Morgan v 45 Flers Ave Pty Ltd (1986) 10 ACLR 692 at 704, Young J held that the proper approach was to ask “whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair”. His Honour proposed that the individual elements identified in the section should be considered “merely as different aspects of the essential criterion, namely commercial unfairness”.182That approach left open the question of whether the sole criterion of “commercial unfairness” incorporated the fourth element in the definition, namely conduct “contrary to the interests of the members as a whole”. In Re Polyresins Pty Ltd [1999] 1 Qd R 599 at 604–5; 28 ACSR 671 at 676, Chesterman J concluded that all four expressions overlapped and therefore each constituted an element in the broad criterion of “commercial unfairness”. However, as noted by Campbell J in Turnbull v National Roads and Motorists’ Assn Ltd (2004) 186 FLR 360; 50 ACSR 44; [2004] NSWSC 577 at [32], the structural change which removed the fourth element from the paragraph as it originally appeared and placed it in a separate paragraph, as now appears in s 232(d) and (e), required a different approach. The “contrary to the interests” element, now contained in paragraph (d), should be given a separate and independent operation because it may well cover conduct which is outside the scope of commercial unfairness.183Arguably there are two points of distinction which explain the separation of paras (d) and (e). Although para (e), by the inclusion of conduct oppressive to members, may include conduct oppressive to members as a whole, one sphere of operation of para (e), though not (d), is conduct which, either through intention or effect, operates prejudicially with respect to a member or class of members, as opposed to members as a whole. The second point of distinction is that the terminology of para (d) characterising conduct “contrary to the interests of” the members would appear to extend not only beyond disparate treatment of members, but also beyond conduct oppressive to the members as a whole. It is in this sense that the example given by Campbell J of “pointlessly wasteful” conduct has force.184More broadly, there is a danger in seeking to reduce the statutory language to the criterion of “commercial unfairness”. Not only does that terminology distract attention from the statutory language, but it tends to ignore important distinctions between different kinds of complaint and, if taken out of the context in which it was originally formulated, ignores the relatively strict test for judicial intervention. It is analogous to reducing to one criterion the various bases upon which it is open to an appellate court to intervene in relation to a discretionary determination of a trial judge, as set out in House v R (1936) 55 CLR 499 at 505, or reducing the grounds of judicial review of administrative action to one composite criterion. These examples are not remote from the present issue: in Wayde, the High Court adopted language which was reminiscent of both legal principles.