Dairy Farmers Milk Co-operative Ltd v Australian Co-operative Foods Ltd - [2008] NSWCA 126

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Dairy Farmers Milk Co-operative Ltd v Australian Co-operative Foods Ltd [2008] NSWCA 126

FILE NUMBER(S):
40935 of 2007

HEARING DATE(S):
1 May 2008

JUDGMENT DATE:
4 June 2008

PARTIES:
Dairy Farmers Milk Co-operative Ltd - Appellant
Australian Co-operative Foods Ltd - Respondent

JUDGMENT OF:
McColl JA Basten JA Young CJ in Eq

LOWER COURT JURISDICTION:
Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):
SC 50141 of 2007

LOWER COURT JUDICIAL OFFICER:
Hammerschlag J

LOWER COURT DATE OF DECISION:
23 November 2007

LOWER COURT MEDIUM NEUTRAL CITATION:
[2007] NSWSC 1311

COUNSEL:
Mr T F Bathurst QC and Ms K Barrett - appellant
Mr J R Sackar QC and Mr R M Foreman - respondent

SOLICITORS:
Johnson Winter & Slattery - appellant
Allens Arthur Robinson - respondent

CATCHWORDS:
CORPORATIONS – co-operatives – variation of statutory cap on ownership by resolution of co-operative – whether proportion varied – Co-operatives Act 1992, s 289 - CORPORATIONS – resolutions – construction – whether resolutions ambiguous - CORPORATIONS – co-operatives – schemes of arrangement - CORPORATIONS – s 1322 Corporations Act 2001 (Cth) – whether deficiencies in resolutions procedural irregularities capable of being cured.

LEGISLATION CITED:
Co-operatives Act 1992
Corporations Act 2001 (Cth)

CATEGORY:
Principal judgment

CASES CITED:
Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99
Australian Co-operative Foods Ltd v Dairy Farmers Milk Co-operative Ltd [2007] NSWSC 1311
Bullock v Federated Furnishing Trades Society of Australia (No 1) (1985) 5 FCR 464
Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956
In re North Victoria Deep Leads Gold Mines Ltd [1934] ArgLR 221
MacConnell v E Prill & Co Ltd [1916] 2 Ch 57
Omega Estates Pty Ltd v Ganke (1962) 80 WN (NSW) 1218
Re International Harvester Co of Australia Pty Ltd [1953] VLR 669
Re Penarth Pontoon Slipway and Ship Repairing Co [1911] WN 240 (Eng)
Rural Press Ltd v Australian Competition and Consumer Commission [2003] HCA 75; (2003) 216 CLR 53
Ryan v Edna May Junction Gold Mining Co No Liability [1916] HCA 37; (1916) 21 CLR 487
Stylis v United Medical Protection Ltd [2007] NSWCA 109

TEXTS CITED:

DECISION:
Appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40935/07
SC 50141/07
McCOLL JA
BASTEN JA
YOUNG CJ in EQ
Wednesday 12 June 2008

DAIRY FARMERS MILK CO-OPERATIVE LTD v AUSTRALIAN CO-OPERATIVE FOODS LTD

Judgment

McCOLL and BASTEN JJA: In June 2004, Australian Co-operative Foods Ltd (“ACFL”) underwent a restructuring arrangement. Prior to the restructure, the whole membership of ACFL consisted of dairy farmers and former dairy farmers. The effect of the restructuring was to insert Dairy Farmers Milk Co-operative Ltd (“the Supply Co-operative”) between the members of ACFL and the restructured ACFL. The intention was that members would supply milk to the Supply Co-operative, which in turn would provide the milk pursuant to a milk supply agreement to the restructured ACFL for processing and marketing. The benefits of this arrangement were said to include transparency in the arrangements by which prices were set for the supply of milk from dairy farmer members and an enhanced ability for ACFL to obtain finance for its operations. An additional “stage 2” benefit was the possibility that the restructured ACFL could be floated as a public company.

The restructuring took place with the overwhelming support of the members of ACFL. However, by 31 July 2007 the Supply Co-operative held 27.13 per cent of the share capital of ACFL. Pursuant to s 289(1) of the Co-operatives Act 1992 (NSW), no person is entitled to hold more than 20 per cent of the nominal value of the issued share capital of a co-operative. If such a situation should arise, the board of the co-operative is required to declare the shares in excess of the prescribed cap to be forfeited, pursuant to s 290(1).

By proceedings commenced on 31 August 2007, ACFL sought declarations to the effect that it was obliged to cancel such shares held by the Supply Co-operative as exceeded 20 per cent of its nominal issued share capital. The operation of the relevant provisions was not in dispute: the issue was whether, in approving elements of the restructuring, the members had, in accordance with the provisions of s 289(3), increased the 20 per cent cap, with the result that the Supply Co-operative had not contravened it.

The primary judge, Hammerschlag J, concluded that the Supply Co-operative shareholding was in contravention of the statutory cap and that no resolution had been passed increasing the proportion set out in s 289(1). Accordingly, his Honour made the declaration sought by ACFL: see Australian Co-operative Foods Ltd v Dairy Farmers Milk Co-operative Ltd [2007] NSWSC 1311 at [6], [165]-[166]. By its notice of appeal, the Supply Co-operative alleged more than 40 errors in his Honour’s succinct reasoning. In fact, there are only two questions to consider, namely whether either of two resolutions passed in the course of the restructuring arrangements had the effect of increasing the proportion of shares specified in s 289(1) in accordance with the requirements of s 289(3). As will be seen, his Honour answered each of the questions correctly. However, before turning to the specific issues, it is necessary to provide some brief explanation of the restructuring proposal and subsequent events.
Background

The result of the proposed restructuring allowed the members of ACFL to retain 80 per cent ownership, with the remaining 20 per cent ownership being vested in the Supply Co-operative. Members would obtain 100 per cent ownership of the Supply Co-operative. The total share capital of ACFL would not change as a result of the restructure, nor would the financial entitlements of the members, although a 20 per cent interest in ACFL would be indirect, through ownership of shares in the Supply Co-operative.

The mechanism by which this was to be achieved was designed with an eye on the tax consequences and with the intention of avoiding a taxable return of capital to the members.

The scheme was to be achieved by a number of steps. On its incorporation, the Supply Co-operative had a paid-up capital of $80 (in shares held by directors) and had not traded prior to the implementation of the scheme. The first step in the scheme involved ACFL issuing five shares of $1 each to the Supply Co-operative. The second step in the scheme involved the cancellation by ACFL of all shares held by members (other than the shares which had been issued to the Supply Co-operative). At that stage, the Supply Co-operative held 100 per cent of the shares in ACFL.

The members directed that the proceeds of the cancelled shares be paid to the Supply Co-operative in return for fully paid shares in it, which it was to issue in proportion to the cancelled holdings of members in ACFL. The proceeds of the share issue to members was then to be applied by the Supply Co-operative as subscriptions for shares in ACFL. At that stage, the Supply Co-operative continued to hold 100 per cent of the shares in ACFL, but the shares amounted to the total share capital of ACFL, and not merely the five shares initially issued to it.

The next stage in the process required ACFL to cancel 80 per cent of the shares held by the Supply Co-operative, with the proceeds being distributed to existing members. ACFL then issued shares equivalent to the cancelled 80 per cent to existing members, who directed the Supply Co-operative to pay their entitlements on the cancelled shares to ACFL as subscription moneys on the new shares.

A result of the restructuring was that, following implementation, which occurred on 29 June 2004, the Supply Co-operative held 20 per cent of the shares of ACFL. However, that percentage was not immutable. One potential variation was that, if ACFL were listed as a company, former members would be entitled to take up shares in the company so that the percentage of shares held by the Supply Co-operative would decrease, but the proportion would be a figure between 20 per cent and 15 per cent, depending on the number of shares taken up by former members. Change was also possible in the other direction. The possible causes of an increase in the percentage holding of the Supply Co-operative fell into two categories. The first was that as members withdrew from the industry, their shares would be cancelled, thus diminishing the number of issued shares in ACFL with the result that the unaltered shareholding of the Supply Co-operative would increase as a percentage of the issued shares in ACFL. The other factor which was likely to achieve a similar effect was the availability of a dividend reinvestment plan which, if taken up by the Supply Co-operative, but not to the same extent by other shareholders, would result in the issue of further shares to the Supply Co-operative, thus increasing its percentage of the issued share capital.

The first variable did not eventuate, because ACFL did not and has not yet listed. The other variables have eventuated, so that by 31 July 2007 the Supply Co-operative held 27.13 per cent of the nominal value of the issued share capital of ACFL.
The statutory cap on ownership
The increase in the proportion of shares held, to a figure in excess of 20 per cent, has given rise to a possible contravention of the Co-operatives Act, s 289 of which relevantly provides:
“289 Maximum permissible level of share interest
(1)A person is not to have a relevant interest in shares of a co-operative the nominal value of which exceeds 20 per cent of the nominal value of the issued share capital of the co-operative.
(2)The Council may by order published in the Gazette specify a maximum greater than 20 per cent as the maximum for the purposes of subsection (1) in respect of a particular co-operative, a particular class of co-operatives or co-operatives generally, and such an order operates to vary that percentage accordingly.
(3)The maximum of 20 per cent specified by subsection (1) may be increased in respect of a particular person by special resolution of the co-operative concerned passed by means of a special postal ballot, but the resolution does not have effect unless it is approved by the Council or the person concerned is another co-operative.”
References to “the Council” are references to the Co-operatives Council established under the Act: ss 5(1) and 414. There was no suggestion that the Council had varied the relevant percentage pursuant to sub-s (2), nor was it necessary for the Council to approve a resolution of ACFL pursuant to sub-s (3), because the person concerned was another co-operative, namely the Supply Co-operative.

Two other provisions are relevant to the operation of s 289. First, s 290 provides for the consequences of a shareholding exceeding the maximum. Secondly, s 293 requires that the Registrar be informed of the breach. The latter section is not significant, but the former should be set out in full and reads as follows:
“290 Shares to be forfeited to remedy contravention
(1)If a person has a relevant interest in a share of a co-operative in contravention of this Division, the board of the co-operative is to declare to be forfeited sufficient of the shares in which the person has a relevant interest to remedy the contravention.
(2)The shares to be forfeited are:
(a)the shares nominated by the person for the purpose, or
(b)in the absence of such a nomination—the shares in which the person has had a relevant interest for the shortest time.
(3)A declaration of the board that shares are forfeited operates to forfeit the shares concerned.
(4)Sections 134–136 (which concern the repayment of amounts due on shares forfeited under the active membership provisions) apply to and in respect of shares forfeited under this section as if the shares had been forfeited under Part 6 (Active membership requirements).”
It is not in dispute in the present case that the Supply Co-operative holds shares in excess of the relevant proportion prescribed by s 289(1). The present issue is whether the restructuring arrangements approved by members of ACFL effected a variation in that proportion, so that the consequences which might otherwise fall under s 290 should not occur.

The Supply Co-operative seeks an affirmative answer to that question but, in the alternative, says that any failure with respect to the necessary resolution was a technical failure which may be waived under s 1322 of the Corporations Act 2001 (Cth).
Effect of first resolution
The restructuring proposal was sent to members in a document described as a “Scheme Booklet” with 14 sections, covering some 200 pages. It was accompanied by a voting guide which contained a “Notice of Postal Ballot” and a “Postal Ballot Paper”. The notice of postal ballot contained six resolutions, of which only resolutions 1 and 2 were relevant to the present dispute. Resolution 1 was set out under the heading “Notice of Special Postal Ballot”. That description, together with the identification of the resolution as a “special resolution”, had statutory significance to which reference will be made below. The resolution was in the following terms:
“PROPOSED SCHEME OF ARRANGEMENT
(Special Resolution)
The coming into effect of the following proposed resolution is conditional upon the passing of Resolutions 2 to 6 inclusive below.
Resolution No 1 (Special Resolution):
To approve the Scheme of Arrangement
THAT the Scheme of Arrangement set out in Section 12.1 of the Restructure Booklet accompanying the Notice of this Special Postal Ballot be approved.”
The scheme of arrangement between ACFL and its existing members was to occur pursuant to Part 13 of the Co-operatives Act. Its effect has been described above. It had two significant consequences of present relevance. First, for a brief period (perhaps minutes), the Supply Co-operative was the owner of 100 per cent of the shares in ACFL. Secondly, at the end of the procedure described above the Supply Co-operative was the owner of 20 per cent of the shares in ACFL. However, as explained above, unless ACFL converted promptly into a public company, it was likely that that percentage would increase. The question which arises is whether the effect of the scheme was to increase the maximum of 20 per cent specified in s 289(1).

If this result were not achieved by resolution 1, it would need to be achieved by resolution 2, which is the only available alternative. Although resolution 2 was identified as a “Special Resolution”, it appeared under the heading “Notice of Postal Ballot”, and not under the heading “Notice of Special Postal Ballot”. There are other issues which arise in relation to the effect of resolution 2, which will be addressed below. It is useful at this stage to identify the significance of the distinction between a postal ballot and a special postal ballot.

As appears from s 289(3), a change to the maximum percentage specified in sub-s (1) required both a “special resolution” and a “special postal ballot”. Pursuant to s 189, the Act provided for different forms of special resolution.
“189 Special resolutions
(1)A special resolution is a resolution of a co-operative which is passed:
(a)by a two-thirds majority at a general meeting of members, or
(b)by a two-thirds majority in a postal ballot (other than a special postal ballot) of members, or
(c)by a three-quarters majority in a special postal ballot of members.”
Resolution 1 was presented as a special resolution to be considered in a special postal ballot and obtained the necessary 75 per cent approval requirement. The only question is whether it had the effect of varying the maximum membership proportion prescribed by s 289. In terms, the scheme of arrangement set out in section 12.1 of the scheme booklet did not purport to have that effect. However, it identified a number of “conditions precedent”, absent satisfaction of which before a given date, the scheme would lapse: cl 4.7 and cl 4.8. The first condition precedent was defined in cl 2.1 as “the passing of the Members’ Scheme Resolution”. The members’ scheme resolution was in turn defined to mean “a special resolution passed by means of a special postal ballot of Existing Members entitled to vote in or to the effect of the resolution set out in Schedule A to Part 4”. That, in effect, was resolution 1.

The second relevant condition precedent was “the passing in a postal ballot, in accordance with the [Co-operatives Act], of resolutions each of which is in or to the effect of the Resolutions set out in Schedule B to Part 4”. Schedule B included each of the proposed resolutions 2-6, including changes to the rules of ACFL.

The fact that the conditions precedent were defined by reference to the passing of various resolutions, and in particular that the effect of resolution 1 was dependent on passing resolutions 2-6, demonstrates that resolution 1 did not purport to approve the rule changes. Accordingly, if resolution 1 were to effect a change to the maximum percentage prescribed by s 289(1), it had to do so in its own terms.

The fact that it did not make such a change expressly by reference to the statutory provision is not fatal: absent some statutory requirement to the contrary, there is no reason why a resolution could not have the relevant effect, without reference to the specific statutory authority. For that reason, resolution 1 may have been effective to approve an increase in the percentage of shares held by the Supply Co-operative to 100 per cent, during the restructuring. However, it is clear from the proposal that that holding was to be temporary and brief and approval of the proposal should be construed accordingly. For reasons which will appear, the changes to the rules clearly did not envisage that the Supply Co-operative would have an entitlement to 100 per cent membership on a continuing basis. However, there was nothing in the proposal which provided any basis for construing the resolution as approving a percentage ownership for the Supply Co-operative after restructuring at any figure in excess of 20 per cent. As the primary judge held at [84]:
“The proposition that Resolution 1, by approving the Scheme, authorised [the Supply Co-operative] after the Implementation Date, to have a relevant interest in a percentage of the shares in [ACFL] greater than that to which it was reduced on the Implementation Date is unsustainable.”
To the extent that the appeal challenged that finding, it should be rejected.
Effect of resolution 2
As noted above, resolution 2 was identified as a special resolution, but as one contained in a notice of “postal ballot” and not in the notice of special ballot. As a matter of fact, like resolution 1, it received 85 per cent approval and hence satisfied the requirements for a special resolution passed in a special postal ballot. The fact that the ballot was not designated as such in the notice may have two consequences. The first is that it may not be effective to vary s 289(1) because it did not purport to be passed in a special postal ballot. The second consequence is that the deliberate listing of the resolution as part of a postal ballot may be relevant to resolving any doubt about whether it was in fact intended to vary s 289(1).

Before considering the issue relating to the form of the ballot, it is appropriate to consider the effect of the resolution. If it was not capable in its terms of constituting a variation of s 289(1), the procedural question will fall away.

Resolution 2 was in the following terms:
“Resolution No 2 (Special Resolution)
To approve the amendments to the ACF Rules
THAT the Rules of the Co-operative be amended as shown in Section 11.3 (entitled ‘Changes to ACF Rules’) of the Restructure Booklet accompanying the Notice of this Postal Ballot of Members.
Note: The reasons for, and the effect of, passing this resolution as a special resolution are set out in Section 11.3 of the Restructure Booklet which accompanies this Notice.”

The relevant amendment to the rules involved the substitution of sub-rule 16(4). Prior to the restructure, that sub-rule had read:
“(4)(a)The number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Two million dollars ($2,000,000.00);
(b) For the purpose of sub-rule (4)(a), a person holds shares if that person has a relevant interest, as defined in the Act, in those shares;
(c) No member of the Co-operative shall hold, or have a relevant interest in, shares the nominal value of which exceeds

a number having the nominal value of Two million dollars ($2,000,000.00), or
one-twentieth of the total nominal amount of the issued share capital of the Co-operative,
whichever is the lesser.”

The proposed amendment, passed by the members in the postal ballot, provided as follows:
“(4)(a)(i)On the Implementation Date the number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Two hundred million dollars ($200,000,000);
(ii)After the Implementation Date, the number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Fifty million dollars ($50,000,000);
(b)For the purpose of sub-rule (4)(a), a person holds shares if that person has a relevant interest, as defined in the Act, in those shares;
(c)No member of the Co-operative, apart from the Supply Co-operative, shall hold, or have a relevant interest in, shares the nominal value of which exceeds
(i)a number having the nominal value of Two million dollars ($2,000,000) or
(ii)one-twentieth of the total nominal amount of the issued share capital of the Co-operative,
whichever is the lesser.”
The new sub-rule 16(4) was item 9 in the proposed changes: the note to item 9 read as follows:
“It is necessary for tax purposes to have a specific limit on the number of shares any member may hold or have held on the member’s behalf. Because the Supply Co-operative after Step 1 of Stage 1 will hold all of the shares of Restructured ACF, the specific limit in new rule 16(4)(a) is a very high number on the Implementation Date and a lower figure thereafter.
In addition to the overall limit required by the tax legislation, the rules contain a provision which restricts substantial shareholdings to the lesser of 5 per cent of the nominal value of the issued share capital or $2 million. As the Supply Co-operative will hold more than this limit it is necessary to amend the rule by excluding the Supply Co-operative from its operation.”
The effect of this rule was to permit the Supply Co-operative, after the date of implementing the restructuring, to hold shares having a nominal value of $50,000,000. That is a limit which it has never exceeded, after the implementation date, and, as at 31 July 2007, it held shares having a nominal value of a little under $27.5 million.

There is no doubt that s 289(3) envisages that the relevant percentage may be increased “in respect of a particular person”, thus allowing differential maxima for different members of a co-operative. For all members except the Supply Co-operative, the rules of ACFL precluded a holding in excess of 5 per cent. Thus, other than for the Supply Co-operative, the limit imposed by s 289(1) was immaterial. The new rule, however, imposed no percentage limit on the holding of the Supply Co-operative. The use of a ceiling on nominal value of shares will give rise to a variable percentage where the number of issued shares may change. Thus, in the present case, upon completion of the restructuring the cap constituted approximately 38.6 per cent of the issued shares; at 31 July 2007, the relevant percentage was almost 50 per cent.

Section 289(1) contains a fixed percentage. It is arguable that a resolution could vary that percentage without adopting another percentage in terms, but the resolution must have the effect of creating a maximum which can be expressed in terms of a fixed percentage. A resolution which is expressed in terms of nominal share value does not involve a fixed percentage where the value of issued shares may vary. As a result, the change proposed in relation to the Supply Co-operative seeks to impose a cap which has quite a different operation to that prescribed by s 289(1). Indeed, if the share capital were to increase, the new cap on the holding of the Supply Co-operative might fall below 20 per cent. The resolution would not then be a resolution increasing the maximum of 20 per cent for the purposes of s 289(3). Such a resolution is not a resolution increasing a prescribed percentage, but a resolution imposing a cap of a different kind. In its terms, the resolution does not operate as an increase of the kind permitted by s 289(3).

In coming to this conclusion, no reference has been made to s 293 of the Co-operatives Act, which requires a co-operative to inform the Registrar within 14 days after the board becomes aware that a particular shareholder holds more than 20 per cent of the nominal value of the issued share capital of the co-operative: s 293(1). The operation of that provision, where there has been a variation of the figure contained in s 289(1), becomes obscure. It does not appear to have any bearing on the permissible variations under s 289(3).

That the resolution is not effective to vary the 20 per cent cap imposed by s 289(1) is not surprising. The resolution did not in terms purport to vary the cap provided by that section. Further, the explanation given to members of the purpose of the change related specifically to identified “tax purposes” and requirements of the “tax legislation” and made no reference to any requirement of the Co-operatives Act. Finally, the fact that the change in the rules was not intended to constitute a variation of s 289(1) provides an explanation as to why resolution 2 was not proposed as part of a “Special Postal Ballot”, as would have been required had the variation of the cap imposed by s 289(1) been part of its purpose.

It is not necessary to consider whether, had resolution 2 been capable of effecting a change to s 289(1), the failure to identify it as requiring a special postal ballot might have been a procedural irregularity which could be the subject of relief under s 1322 of the Corporations Act.

Had it been necessary to consider the question of irregularity, it would have been necessary to take account of the failure of the notice to identify the variation of s 289(1) as one of the reasons for the special resolution and also as an effect of the special resolution if passed, as required by s 189(3)(b) and (c) of the Co-operatives Act. That matter also may be put to one side for present purposes. The conclusion of the primary judge that resolution 2 did not have the effect for which the Supply Co-operative contended was correct and the appeal in this regard should be rejected.
Argument based on ambiguity
The appellant also contended that, if the resolutions were not to be construed as it proposed, they were at least ambiguous and the Court should therefore prefer a construction which would avoid a consequence which appears to be “capricious, unreasonable, inconvenient or unjust”, calling in aid the judgment of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99 at 109-110, as applied by McColl JA in Stylis v United Medical Protection Ltd [2007] NSWCA 109 at [15].

The principle of interpretation may readily be accepted, but the condition for its operation does not arise. The resolutions are not ambiguous; they simply do not address the topic. Why that is so is a matter of speculation. One reason may have been that those who designed the restructuring arrangements anticipated that ACFL would move promptly to become a public company with the resultant diminution in the proportionate shareholding of the Supply Co-operative, a matter referred to in a number of places in the Scheme Booklet: see, eg, pp 8, 16-17 and 70-71. Despite the fact that the booklet extended for some 200 pages, the Court’s attention was not drawn to any statement in the booklet which identified in express terms an intention to vary the statutory cap in s 289(1).

Further, it was not demonstrated that the consequence of the construction accepted in the Court below (and here) would result in injustice in a practical sense. The Supply Co-operative pointed to an independent financial report prepared in November 2004 which estimated the value of ACFL shares at $4.35. Assuming that the shares are worth more than their nominal value, it is true that the Supply Co-operative would suffer a loss on each share forfeited of the difference between its “real” value and its nominal value. However, it must also be recalled that the members who voted for the restructuring not only formed 100 per cent of the shareholders of the Supply Co-operative, but also the remaining 80 per cent of the shareholders of ACFL. For each forfeited share in ACFL, the value of remaining shares would in principle increase. From the point of view of the members of both co-operatives, as at the date of the restructuring, the result was to increase their direct holding of ACFL shares (which may well be tradeable in the future) and decrease their indirect holding through the value of the Supply Co-operative. The result for those members was not shown to be capricious, unreasonable, inconvenient or unjust.

Apart from its shares in ACFL, the Supply Co-operative’s only other “main asset” was said to be its loan agreement with ACFL. In written submissions it asserted that the construction accepted above “inevitably means that the warranty in clause 6 of the Loan Agreement is breached”. Clause 6 involved a representation and warranty that ACFL had power to enter into the agreement. How that was breached, and how that would involve an event of default under the agreement, remained obscure. A further “unjust” result was said to be the undermining of the rule of the Supply Co-operative which required member approval for disposal of its shares in ACFL. That complaint was not explained.

More significantly, the Supply Co-operative relied upon the affidavit of its Chair, Mr Ian Zandstra, who noted that dairy farmers who had joined the Supply Co-operative after 29 June 2004 were not members of ACFL. He also noted that there were farmers who were members of both co-operatives, but with widely differing shareholdings in each.

No doubt it may be inferred that the forfeiture of the shares will result in a diminution in the value of shares in the Supply Co-operative, to the detriment of those who joined after the implementation date. No doubt the forfeiture would also disadvantage some who are members of both co-operatives but with differential shareholdings. (Others might benefit.) If ambiguity were demonstrated, these considerations would need to be taken into account. However, ambiguity has not been demonstrated. Further, it is not entirely insignificant that those who will suffer most are new shareholders of the Supply Co-operative: the Court was not taken to any passage in the Scheme Booklet which made any reference to their interests.

Because there is no ambiguity, it is not necessary to pursue these issues further. However, no error was demonstrated in the reasoning of the primary judge at [139]–[157].
Conclusions
On the basis that his Honour did not err in those respects, the declarations are not otherwise challenged. Accordingly, the appeal should be dismissed with costs.

YOUNG CJ in EQ: This appeal involves a ruling as to whether two resolutions passed by the respondent shortly prior to 29 June 2004 were effective to permit the appellant to hold in excess of 20 per cent of the issued capital of the respondent.

Both the appellant and the respondent are co-operatives, being corporate entities governed by the Co-operatives Act 1992 (the “Co-operatives Act”).

The existence of the appellant came about because of a restructuring of the respondent in 2004. The background and circumstances of this restructuring are well set out in the reasons of the learned primary judge.

As at 2004 the respondent operated a dairy products processing and manufacturing business. Its members consisted of dairy farmers and co-operatives of dairy farmers.

During that year it put a restructure proposal to its shareholders. One of the commercial drivers of the proposal was to put the respondent in an improved position to raise capital, so that it did not have to rely on farmer members as the sole source of its share capital.

The restructure proposal involved two stages. The first stage (which entailed two steps) provided for the respondent’s ownership structure to be restructured by the establishment of a new entity, described as the Supply Co-operative, and for the split of the then member capital of the respondent into two component parts: 20 per cent into shares in the new Supply Co-operative and 80 per cent in the respondent.

The Supply Co-operative is now the appellant which was incorporated under the Co-operatives Act on 13 June 2004.

The proposal was that the then members of the respondent would have separate holdings in two co-operatives. The shares held in the respondent would be equal to 80 per cent of the number originally held by members in the respondent and the reduction in respondent shares would be balanced by a new holding in the Supply Co-operative equal to 20 per cent of the members’ original holding in the respondent.

Stage 2 envisaged the future corporatisation of the respondent and the possibility of raising capital perhaps by listing on the Australian Stock Exchange.

The present problem largely comes about as a result of the fact that that listing has not yet taken place.

The restructure proposal made provision for the entry into of a milk supply agreement between the two co-operatives. Instead of supplying their milk directly to the respondent as they had in the past, members would supply the appellant which would in turn supply the respondent which would process it.

The restructure of the respondent’s ownership structure was effected by a Scheme of Arrangement (“the Scheme”) between it and its members. The appellant was not itself a party to the Scheme. However, as is usual in these cases, it covenanted by way of Deed Poll to submit to and be bound by the Scheme as if it were a party.

The Scheme was approved by the Court on 29 June 2004.

A Scheme booklet (“the Booklet”) including an Explanatory Statement (containing the terms of the Scheme), an Independent Expert’s Report, Taxation Adviser’s Report and an Active Members’ Voting Guide (“the Guide”) which included a Postal Ballot Paper, was circulated to the then members of the respondent.

Stage 1 did not seek approval for the introduction of external or non-farmer ownership capital. It was described in the Chairman’s introductory letter contained in the Scheme Booklet as a proposal:
“to introduce a supply co-operative and to effectively split existing Member capital into two component parts:
1. 20 per cent of shares into the new supply co-operative, Dairy Farmers Milk Cooperative Limited.
2. 80 per cent into shares in the processor co-operative, Australian Co-operative Foods Limited trading as Dairy Farmers.”
The “Provisions of the Scheme” were in four parts and were contained in s 12 of the Booklet. Part 2 contained “Definitions and Interpretation” provisions and Part 4 the “Provisions of the Scheme”. The respondent was referred to as “ACF”.

The operative provisions of the Scheme were as follows:
“Cancellation of Scheme Shares and Issue of Supply Co-operative Shares and ACF Shares
4.1 On the Implementation Date and in the following order:
(a)ACF will issue 5 shares of $1.00 each in its capital to the Supply Co-operative (the First Shares) in consideration of a payment of $5.00 made by the Supply Co-operative to ACF;
(b)(i)The Scheme Shares will be cancelled and, by virtue of the cancellation, capital to the extent of $1.00 per Scheme Share will be payable by ACF to the Existing Members in proportion to the number of Scheme Shares held by them;
(b)(ii)Each Existing Member directs that the capital repayable by ACF to the Member in respect of such cancellation of Scheme Shares be applied to the issue to the Member (in accordance with 4.1(c) of shares of $1.00 each in the capital of the Supply Co-operative so that such shares are issued as fully paid;
(c)(i)The Existing Members will subscribe for, and the Supply Co-operative will in compliance with the Deed Poll issue to the Existing Members an aggregate number of shares of $1.00 each in the capital of the Supply Co-operative equal to the number of Scheme Shares, on the footing that the shares so subscribed for shall be issued by the Supply Co-operative to the Existing Members in proportion to the numbers of Scheme Shares held by them and in consideration of the payment of subscription moneys of $1.00 per share;
(c)(ii)The Supply Co-operative will in compliance with the Deed Poll direct that the subscription moneys payable to the Supply Co-operative by each Existing Member in respect of such issue of shares be applied to the issue to the Supply Co-operative (in accordance with 4.1(d)) shares of $1.00 each in the capital of ACF so that such shares are issued as fully paid;
(d)(i)The Supply Co-operative will in compliance with the Deed Poll subscribe for, and ACF will issue to the Supply Co-operative, an aggregate number of shares of $1.00 each in the capital of ACF equal to the number of Scheme Shares, in consideration of the payment by the Supply Co-operative of subscription moneys of $1.00 per share;
(d)(ii) The aggregate of the capital payable by ACF to the Existing Members (in accordance with 4.1(b)) shall be applied by ACF (in accordance with the directions described in this clause) in fully paying up the shares so issued.

Part Cancellation of Shares by ACF and Issue of Shares by ACF to Existing Members
4.2Following the implementation of clause 4.1, on the Implementation Date and in the following order:
(a)(i)80 per cent of the shares in the capital of ACF held by the Supply Co-operative (including the First Shares) will be cancelled and, by virtue of the cancellation, capital to the extent of $1.00 for each share so cancelled will be payable by ACF to the Supply Co-operative.
(a)(ii)The Supply Co-operative will in compliance with the Deed Poll direct that the capital repayable by ACF to the Supply Co-operative in respect of such cancellation of shares be applied to the repayment (in accordance with 4.2(b)) of capital by the Supply Co-operative to the Existing Members;
(b)(i)The Supply Co-operative will in compliance with the Deed Poll cancel 80 per cent of the shares in the capital of the Supply Co-operative held by each Existing member, and will also cancel a further 4 shares being part of the initial holding of ten (10) shares allotted to any one of the formation members of the Supply Co-operative, and, by virtue of such cancellations, capital to the extent of $1.00 per share will be payable by the Supply Co-operative to the Existing Members in proportion to the number of shares in the capital of the Supply Co-operative so cancelled formerly held by them;
(b)(ii)Each Existing Member directs that the capital repayable by the Supply Co-operative to the Member in respect of such cancellation of shares be applied to the issue (in accordance with 4.2(c)) of shares of $1.00 each in the capital of ACF so that such shares are issued as fully paid;
(c)(i)The Existing Members will subscribe for, and ACF will issue to the Existing Members an aggregate number of shares of $1.00 each in the capital of ACF equal to the number of shares cancelled in accordance with 4.2(a), on the footing that the shares so subscribed for shall be issued by ACF to the Existing Members in proportion to the number of shares so cancelled formerly held by them and in consideration of the payment of subscription moneys of $1.00 per share;
(c)(ii) The aggregate of the capital payable by ACF to the Supply Co-operative (in accordance with 4.2(a)) shall be applied by ACF ( in accordance with the directions described in this clause) in fully paying up the shares so issued.”

In summary, the Scheme entailed the following steps:
(a)the Supply Co-operative was introduced by the issue to it of five shares in ACF;
(b)all members’ shares in ACF (except for the five shares allotted to the Supply Co-operative) were cancelled and the members were paid $1.00 per share;
(c)the face value of the cancelled shares was applied to the subscription for shares in the Supply Co-operative by the ACF members whose shares in ACF were cancelled;
(d)the Supply Co-operative subscribed for and was issued the same aggregate number of shares in ACF as had been previously held by the ACF members, for $1.00 per share; and
(e)80 per cent of the shares held by the Supply Co-operative in ACF were cancelled, 80 per cent of the shares held by members in the Supply Co-operative were cancelled and shares in ACF equal to the number of shares which the Supply Co-operative had held in ACF and which were cancelled, were then issued to the members.
On completion of these steps, it was envisaged that the original members of the respondent would hold 100 per cent of the appellant and 80 per cent of the respondent, and that the appellant would hold the remaining 20 per cent of the respondent’s shares.

Schedule A to Part 4 of the Scheme set out the Members’ Scheme Resolution. It was in the following terms:
“1. Approval of the Scheme of Arrangement
THAT the Scheme of Arrangement set out in Section 12.1 of the Restructure Booklet accompanying the Notice of this Special Postal Ballot be approved.”
Schedule B to Part 4 of the Scheme included relevantly the following:
“2. Approval of amendments to the ACF Rules
THAT the Rules of the Co-operative be amended as shown in Section 11.3 (entitled “Changes to ACF Rules”) of the Restructure Booklet accompanying the Notice of this Postal Ballot of Members.
3. Approval of the Terms of Issue of Convertible CCUs
THAT the terms of issue of CCUs to be known as Convertible CCUs contained in the document entitled “Terms of Issue of Convertible CCUs” being the Appendix to Section 11.4 of the Restructure Booklet accompanying the Notice of this Postal Ballot be approved.”
The Guide contained the following statements:
“VOTING GUIDE FOR ACTIVE MEMBERS
Your Postal Ballot Paper (coloured blue) is on page 9 and can easily be removed from this Voting Guide.
Resolution No.1, being the special resolution approving the Scheme of Arrangement, requires a majority, in the Special Postal Ballot, of at least 75 per cent of those who cast valid votes.
Resolution No.2, being a special resolution to change the Rules of ACF, and Resolution No.3, being a special resolution to approve the terms of issue of Convertible CCUs in ACF, both require a majority, in the Postal Ballot, of at least 66.67 per cent of those who cast valid votes…”
Like the primary judge, I will refer to Resolution No 1 to approve the Scheme as Resolution 1 and to Resolution No 2 to change the respondent’s rules as Resolution 2. Together they will be referred to as the Resolutions.

The Guide gave “Notice of Postal Ballot” for Resolution 1 and Resolution 2 in the following terms:
“NOTICE IS HEREBY GIVEN that the Co-operative is conducting Special Postal and Postal Ballots which close at noon on 25 June 2004 to consider and if thought fit, to pass the following resolutions:
NOTICE OF SPECIAL POSTAL BALLOT
PROPOSED SCHEME OF ARRANGEMENT
(Special Resolution)
The coming into effect of the following proposed resolution is conditional upon the passing of Resolutions 2 to 6 inclusive below.
Resolution No 1 (Special Resolution):
To approve the Scheme of Arrangement
THAT the Scheme of Arrangement set out in Section 12.1 of the Restructure Booklet accompanying the Notice of this Special Postal Ballot be approved.
NOTICE OF POSTAL BALLOT
OTHER RESOLUTIONS
The coming into effect of each of the following proposed resolutions is conditional upon the approval of the Court (with or without alteration) of the Scheme of Arrangement referred to above.
Resolution No 2 (Special Resolution):
To approve the amendments to the ACF Rules.
THAT the Rules of the Co-operative be amended as shown in Section 11.3 (entitled “Changes to ACF Rules”) of the Restructure Booklet accompanying the Notice of this Postal Ballot of Members.
Note: The reasons for, and the effect of, passing this resolution as a special resolution are set out in Section 11.3 of the Restructure Booklet which accompanies this Notice.”
The Guide contained notice of further resolutions, being Resolution No. 3 (Special Resolution) to approve the terms of issue of CCUs, Resolution No. 4 (Special Resolution) to approve an amendment to the Share Acquisition Program (described as the Equity Structure Proposal) and Resolutions No 5 and No 6 (Ordinary Resolutions) to approve the decision of the Board to execute the Milk Supply Agreement and the Loan Agreement.

The Co-operatives Act requires every co-operative to have rules. Rules of a co-operative are much more closely supervised by the Registrar than is the case of the constitution of a corporation. There are standard model rules which must usually be adopted and any change must be approved by the Registrar, see ss 106 et seq.

Under s 106 of the Co-operatives Act, the rules have the effect of a contract under seal between the co-operative and each member and between a member and each other member.

The amendments to the respondent’s rules brought about by Resolution 2 were shown in s 11.3 of the Booklet.

Prior to amendment by Resolution 2, r 16(4) of ACF’s rules was in the following terms:
“(4)(a)The number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Two million dollars ($2,000,000.00);
(b) For the purpose of subrule (4)(a), a person holds shares if that person has a relevant interest, as defined in the Act, in those shares;
(c) No member of the Co-operative shall hold, or have a relevant interest in, shares the nominal value of which exceeds

a number having the nominal value of Two million dollars ($2,000,000.00), or
one-twentieth of the total nominal amount of issued share capital of the Co-operative,
whichever is the lesser.”
76 By Resolution 2 that rule was deleted and the following new r 16(4) was inserted:

“(4)(a)
(i)On the Implementation Date the number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Two hundred million dollars ($200,000,000):
(ii) After the Implementation Date, the number of shares which may be held by or by and on behalf of any one member of the Co-operative shall not exceed a number having the nominal value of Fifty million dollars ($50,000,000)
(b) For the purposes of subrule (4)(a), a person holds shares if that person has a relevant interest, as defined in the Act, in those shares;
(c) No member of the Co-operative, apart from the Supply Co-operative, shall hold, or have a relevant interest in, shares the nominal value of which exceeds
(i) a number having the nominal value of Two million dollars ($2,000,000) or
(ii) one-twentieth of the total nominal amount of issued share capital of the Co-operative,
whichever is the lesser.”

“Implementation Date” meant the date an office copy of the Scheme was lodged with the Registrar which in fact was 29 June 2004.

Rule 2(2) provided relevantly that “[t]hese rules may not be altered except by a special resolution passed by the members …”.

The explanatory note in the Booklet to the amendment to r 16(4) was in the following terms:
“It is necessary for tax purposes to have a specific limit on the number of shares any member may hold or have held on the member’s behalf. Because the Supply Co-operative after Step 1 of Stage 1 will hold all of the shares of Restructured ACF, the specific limit in new rule 16(4)(a) is a very high number on the Implementation Date and a lower figure thereafter.
In addition to the overall limit required by the tax legislation, the rules contain a provision which restricts substantial shareholdings to the lesser of 5 per cent of the nominal value of the issued share capital or $2 million. As the Supply Co-operative will hold more than this limit it is necessary to amend the rule by excluding the Supply Co-operative from its operation.”
Resolutions 1 and 2 were (as were the other resolutions) passed with over 85 per cent of votes received being in favour.

As a consequence of the Scheme, on 29 July 2004, the appellant held 25,848,746 shares in the respondent out of a total 129,248,218 on issue, that is, 19.999 per cent.

However, between that date and 31 July 2007 the percentage of the respondent’s issued capital held by the appellant increased as a consequence of the forfeiture by members of shares in ACF, cancellation of shares in ACF in accordance with its policies on hardship and members turning 65 (ACF has a policy of re-purchasing shares of members in case of extreme hardship or from members who have reached age 65), and the issue of shares to the appellant pursuant to ACF’s Dividend Reinvestment Plan.

As at 3 January 2006 the appellant held 23.35 per cent of ACF’s share capital and as at 31 July 2007 the holding had increased to 27.13 per cent.

The respondent has currently on issue 101,014,748 shares each with a nominal value of $1.00. The appellant has 27,404,577 of these shares, or 27.13 per cent of the nominal value of the respondent’s share capital. The shares which it holds in excess of 20 per cent of the nominal value of the respondent’s share capital will be referred to as “the excess interest”. There is no evidence that there has been any change since then.

In hindsight, if the respondent did not cease to be a co-operative shortly after the Scheme was approved, what has happened to the appellant’s shareholding was almost inevitable. However, it does not appear to have been fully considered by the proponents of the Scheme.

Part 11 of the Co-operatives Act contains, inter alia ss 289(1) and (3) and 290 which are at the heart of this appeal and which I will set out in due course.

The respondent brought these proceedings seeking declarations that:
(a) the appellant has a relevant interest in shares of the respondent the nominal value of which exceeds 20 per cent of the nominal value of the issued share capital of the respondent;
(b) so much of the appellant’s relevant interest in shares of the respondent as exceeds 20 per cent of the nominal value of the issued share capital of the respondent (the excess interest) is held in contravention of the Act; and
(c) the board of the respondent is obliged by s 290(1) of the Act to declare the excess interest to be forfeited.
The present appellant filed a cross-claim seeking injunctions restraining the respondent from forfeiting shares, declarations as to validity and, if necessary validating declarations or orders under s 1322 of the Corporations Act 2001 (Cth) to remedy any irregularity.

Hammerschlag J delivered reasons for judgment on 23 November 2007 in which his Honour held that the excess interest was in contravention of the Co-operatives Act and made the declarations as asked, ordering the appellant to pay the costs of the proceedings.

The essential question on this appeal is whether the appellant has the excess interest in contravention of s 289(1) of the Act and is liable to forfeit the excess. The answer to this question turns on whether the Resolutions increased the maximum of 20 per cent specified in s 289(1) of the Act in accordance with s 289(3) of the Act so as to permit the appellant to have the excess interest.

I should at this point make some general observations concerning the operation of the Co-operatives Act and set out some of its provisions which affect the determination of this appeal.

First, generally speaking, the principles of law and equity applicable to corporations and the provisions of the Corporations Act govern co-operatives. This does not come about by any one provision of the Co-operatives Act. That Act does expressly incorporate some parts of the Corporations Act and on other occasions makes specific provisions for co-operatives, but my statement is generally true.

So far as Schemes of Arrangement are concerned, the Co-operatives Act provides in Part 13, particularly s 344, that an arrangement between a co-operative and its members may be proposed on which the court may grant its approval in which case, the arrangement becomes binding.

Section 368 of the Co-operatives Act provides that the Court’s jurisdiction under the Co-operatives Act is to complement its jurisdiction under the Corporations Act and is to be exercised in harmony with that jurisdiction.

Basically, the procedure under the Co-operatives Act for a Scheme of Arrangement is the same as under the Corporations Act. The major difference is that there is no actual meeting of members: the members vote by special resolution passed by means of a special postal ballot. I will come to the statutory definition of those terms in due course.

I must now set out various other provisions of the Co-operatives Act which are necessary for the decision in this appeal.

Section 189 provides as follows:
“Special resolutions
(1)A special resolution is a resolution of a co-operative which is passed:
(a)by a two-thirds majority at a general meeting of members, or
(b)by a two-thirds majority in a postal ballot (other than a special postal ballot) of members, or
(c) by a three-quarters majority in a special postal ballot of members.
(2) A special resolution may be passed by a postal ballot only if the rules of the co-operative so permit or this Act requires the special resolution to be passed by postal ballot (including a special postal ballot).
(3) A resolution is not to be considered to have been passed as a special resolution unless not less than 21 days’ notice has been given to the members of the co-operative specifying:
(a) the intention to propose the special resolution, and
(b) the reasons for the making of the special resolution, and
(c) the effect of the special resolution being passed.
(4) (Repealed)”
Section 193(1) provides as follows:
“Postal ballots
(1) A postal ballot may be held as provided by the rules of a co-operative and is to be conducted in accordance with the regulations.”
Section 194 provides as follows:
“Special postal ballots
(1) A special postal ballot is a postal ballot that is conducted as required by this section.
(2) The ballot must not be held less than 21 days after notice of the ballot is given to members so as to enable sufficient time for a meeting to discuss the proposal that is the subject of the ballot to be convened and held (whether by the board or on the requisition of members).
(3) The co-operative must send to each member (along with any other material required to be sent in connection with the postal ballot) a disclosure statement approved by the Registrar and containing information concerning:
(a) the financial position of the co-operative,
(b) the interests of the directors of the co-operative in the proposal with which the ballot is concerned, including any interests of the directors in another organisation concerned in the proposal,
(c) any compensation or consideration to be paid to officers or members of the co-operative in connection with the proposal, and
(d) such other matters as the Registrar directs.
(4) If the Registrar so requires, the statement is to be accompanied by a report made by an independent person approved by the Registrar concerning such matters as the Registrar directs.
(5) Sections 17 (except subsections (2), (4) and (11)) and 28A apply to the approval of a disclosure statement under this section with any necessary modifications and in particular as if any reference in section 17 to a formation meeting were a reference to the notice of the special postal ballot.”
Section 194A(d) provides as follows:
“When is a special postal ballot required?
In addition to any requirement of this Act, the rules of a co-operative must require a special postal ballot to be conducted for the purpose of passing a special resolution in relation to any of the following matters relating to a co-operative:
…
(d) the maximum permissible level of share interest in the co-operative….”
Finally, it is necessary to set out some of the rules of the respondent. Rule 30(1A) of ACF’s rules provides as follows:
“30. Notice of general meetings
(1A) Notice of a special resolution shall be given to those persons who are, under these rules and the Act entitled to receive such notice, at least 21 days before the general meeting and shall specify the intention to propose the resolution as a special resolution at that meeting, the reasons for the making of the special resolution and the effect of the special resolution being passed.”
Rule 35(10) provides as follows:
“Attendance and voting
A special resolution is a resolution which is passed:
(a)by a two-thirds majority at a general meeting of members; or
(b) by a two-thirds majority in a postal ballot (other than a special postal ballot) of members; or
(c) by a three-quarters majority in a special postal ballot of members.”
Rule 36A(1)(d) provides as follows:
“Postal Ballots
(1) In addition to any requirement of the Act or these Rules a special postal ballot must be conducted for the purpose of passing special resolutions in relation to any of the following matters in relation to the Co-operative.
(d) … the maximum permissible level of share interest in the Co-operative….”
The appeal was heard on 1 May 2008, Mr T F Bathurst QC and Ms K Barrett appeared for the appellant and Mr J R Sackar QC and Mr R M Foreman for the respondent.

The argument focused on the efficacy of either Resolution 1 or Resolution 2 to effect a change in the maximum holding of shares in the respondent.

In this respect the vital sections of the Co-operatives Act are ss 289 and 290, the relevant parts of which are as follows:
“289 Maximum permissible level of share interest
(1) A person is not to have a relevant interest in shares of a co-operative the nominal value of which exceeds 20 per cent of the nominal value of the issued share capital of the co-operative.
…
(3) The maximum of 20 per cent specified by subsection (1) may be increased in respect of a particular person by special resolution of the co-operative concerned passed by means of a special postal ballot, but the resolution does not have effect unless it is approved by the Council or the person concerned is another co-operative.
290 Shares to be forfeited to remedy contravention
(1) If a person has a relevant interest in a share of a co-operative in contravention of this Division, the board of the co-operative is to declare to be forfeited sufficient of the shares in which the person has a relevant interest to remedy the contravention.”
It seems to me that the debate over the efficacy of the Resolutions can be examined on two levels: (A) whether the Resolutions were effective procedurally; and (B) whether the Resolutions were effective substantially.
(A) Resolution 1 – Procedurally
It is beyond doubt that Resolution 1 was carried by the appropriate procedure.
(A) Resolution 2 – Procedurally
Under s 189(3)(b) and (c) of the Co-operatives Act a resolution is not to be considered to have been passed by a special resolution unless not less than 21 days notice has been given to members of the co-operative specifying: the reasons for the making of the special resolution (s 189(3)(b)); and the effect of the special resolution being passed (s 189(3)(c)). This is reinforced by the respondent’s r 30(1A) which also required the notice of general meeting to specify those matters.

His Honour then made three points, viz:
(a)          At common law, unless all corporators are present or otherwise consent, a meeting is only competent to deal with special business which is properly notified to all members in a notice convening the meeting: Ryan v Edna May Junction Gold Mining Co No Liability [1916] HCA 37; (1916) 21 CLR 487 at 496.
(b)          Directors have a fiduciary duty not to mislead the corporators who are to consider whether to pass a resolution by providing them with material that is other than substantially full and true: Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956 at 958.
(c)          Directors seeking the passage of a resolution at a meeting of shareholders should provide shareholders with sufficient information concerning the business to be brought forward at the meeting. The shareholders must be enabled to have an understanding and to form a judgment upon such business. It must enable the man in the street, “on the run”, to absorb and understand the substance of what it is that the shareholders are being called upon to determine at the meeting: Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) at 959.
The primary judge then ruled that, whilst it might not have been necessary for notice of Resolution 1 and Resolution 2 to have referred in terms to s 289 of the Co-operatives Act, it was necessary, under the general law, the Act and the respondent’s rules if the purpose of those Resolutions was to effect an increase in the statutory maximum so that the appellant could have more than 20 per cent after the Implementation Date, for that purpose and that effect to have been specified.

His Honour held that this necessary obligation was not met because in no way could it fairly be said that the shareholder reader was being informed that the substance of what he, she or it was being called on to determine was whether or not the appellant should be permitted to exceed the 20 per cent maximum provided in s 289(1) of the Co-operatives Act after the Implementation Date.

One has to be a little careful about the primary judge’s three propositions. As I pointed out in Devereaux Holdings, the first proposition is a rule of common law going to validity of the meeting and resolution. The other propositions are principles of equity pursuant to which a court may restrain implementation of a resolution that was passed unfairly.

In the instant case, the Court is only concerned with principles of law: equitable rules do not feature.

In order to see what is essential to the passing of a special resolution or a special resolution by postal ballot, one must look to the statute. Differently worded statutes will give different results as can be seen by cases such as MacConnell v E Prill & Co Ltd [1916] 2 Ch 57 and In re North Victoria Deep Leads Gold Mines Ltd [1934] ArgLR 221.

These cases demonstrate that, whilst ordinarily it may not be necessary to state in a notice of meeting that a resolution is to be proposed as a special resolution, the wording of the relevant statute may mean that such a statement is mandatory to the effectiveness of the resolution.

The problem with Resolution 2 is not so much as whether it was a special resolution, the Chairman ruled that it was carried as such and that is prima facie determinative. The real problem was that no notice was given that it was required to be a special resolution at a special postal ballot and no indication was given in the notice of resolution of that fact.

However, there is no requirement in s 194 or anywhere else in the statute that such reference is required. The holding of the special postal ballot is merely the mechanism for passing the resolution. It has nothing to do with whether or not the resolution is a special resolution. Cases such as Re Penarth Pontoon Slipway and Ship Repairing Co [1911] WN 240 (Eng) support this approach.

There is a difference between a postal ballot and a special postal ballot as noted in ss 193 and 194 of the Co-operatives Act set out earlier. However, in the instant case, the facts adduced demonstrate that what happened was that actually, there was a special postal ballot.

Accordingly, Resolution 2 was a special resolution which was in fact passed at a special postal ballot and is procedurally effective.
(B) Resolution 1 - Substance
Appellant’s counsel put, as they put before the primary judge, that Resolution 1 approving the Scheme was passed by special postal ballot and was on its own effective as a resolution to increase the 20 per cent maximum in respect of the appellant because on the Implementation Date the appellant would, under the provisions of the Scheme, own 100 per cent of the shares in the respondent. Resolution 2 then, in conjunction with Resolution 1, brought about an amendment to the rules of the respondent which “clicked in” to reduce the maximum to shares having the nominal value of $50,000,000.

For a resolution to increase the maximum percentage holding under s 289 to apply where another co-operative is the focus, three preconditions must be satisfied: viz there must be (i) a purported increase in the percentage holding; (ii) a waiver in favour of a particular person; and (iii) a special resolution by special postal ballot.

Looking at these requirements in reverse order, I have already noted when dealing with procedure that I am satisfied about point (iii).

I also have no worry about point (ii).

As the primary judge said, Resolution 1 did not directly provide for any increase in the maximum either in respect of a particular person or at all. However, the appellant submits that the Scheme, whose terms are unambiguous, and whose operation is clear, which Resolution 1 approved, did so.

The primary judge ruled that by passing Resolution 1, the members voted to permit the appellant to have 100 per cent of the respondent, but only momentarily.

However, his Honour ruled that the proposition that Resolution 1, by approving the Scheme, authorised the appellant after the Implementation Date, to have a relevant interest in a percentage of the shares in the respondent greater than that to which it was reduced on the Implementation Date is unsustainable. His Honour said that such an outcome is inconsistent with the terms and operation of the Scheme which the members voted pursuant to Resolution 1 to approve.

Appellant’s counsel put that this analysis just could not be correct. They say that there is no such thing as excusing a breach of the Act even momentarily. Therefore Resolution 1 must have had the effect of raising the barrier generally. The whole Scheme would have fallen apart had s 290 operated to require forfeiture of the appellant’s shares over 20 per cent at Step 1.

They say that this construction makes sense of Resolution 2 and it being passed merely as a special resolution to ensure that provisions were put in place consistently with Resolution 1.

Furthermore, when one reads the Scheme, new r 16(4)(c) (which I have set out earlier) clearly specifies the appellant as the “particular person” in respect of whom the barrier was lifted.

I have no difficulty in agreeing with the primary judge’s view that Resolution 1 validly excused the momentary 100 per cent holding.

Under the Corporations Act, a very wide view has been taken as to what may be done under schemes of arrangement. As Lowe ACJ said in Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 at 672 (omitting reference to authority):
“It is now plain that the word ‘arrangement’ is not restricted in its meaning by its association with ‘compromise’. The word has been given liberal meaning and, generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down or to evade a restriction imposed by the Act, almost any arrangement otherwise legal which touches and concerns the rights and obligations of the company or its members of creditors may come under [the section].”
Smith J, who dissented in the result, makes a similar observation at 677.

In my view, general procedural provisions including the prescription of maximum holdings contained in the relevant statute, within limits, give way to a particular prescription contained in a duly approved Scheme of Arrangement.

The basal reason for this is that the same statute which makes the prescription, also authorises the Court (in the case of a co-operative after input from the Registrar) to deal with particular problems including problems caused by the prescriptions in the statute in a way that is beneficial both to the members or creditors on the one hand and the general community on the other.

However, the Resolution 1 fails on point (i).

The vital question is whether the Scheme permanently altered the maximum
percentage holding of the appellant.

There was debate before us as to whether a resolution intending to increase the maximum holding must nominate a percentage or whether it is sufficient that there be the specification of an actual number of shares, the method used in r 16(4).

It was put to Mr Bathurst that specifying a number of shares was not increasing the percentage. His riposte was that it did not matter and that so long as what was done had that effect that was sufficient.

I cannot, with respect, accept that submission.

Where there is a co-operative with a fluctuating number of shares, placing the ceiling as a fixed number of shares is as useful as having a fraction with a numerator but no denominator.

Because of forfeiture, issues of new shares to new members, issues of shares under the Dividend Reinvestment Plan etc, the percentage of the number of shares held by the appellant to the total number of issued shares, would usually be in a continuous state of flux.

Thus, Resolution 1 did not have the effect of increasing the maximum of 20 per cent referred to in s 289.
(B) Resolution 2 - Substance

The appellant put in the alternative that Resolution 2 was, in any event, sufficient on its own to increase the 20 per cent maximum and should be found to have been passed by special postal ballot. If it was passed only by postal ballot, the difference was no more than a procedural irregularity which would not invalidate it.

The primary judge held that Resolution 2 did not assist the appellant. He ruled that Resolution 2 did no more than to authorise an alteration to the rules of the respondent.He also held that it was clear that the alteration to r 16(4) made by Resolution 2 was not directed to the statutory maximum in s 289(1) of the Co-operatives Act.

The primary judge further held that there was nothing to suggest that the new rule was directed to allowing the appellant to have the excess interest after the Implementation Date pursuant to s 289(3) of the Co-operative Act.

In expansion of that ruling, the learned primary judge made five points.

First, his Honour said, s 289(3) is directed to an increase in respect of a particular person not to the entirety of the available body of persons to whom the maximum could conceivably apply. The statutory reference to “a particular person” is not mere “drafting verbosity”, it has work to do: Rural Press Ltd v Australian Competition and Consumer Commission [2003] HCA 75; (2003) 216 CLR 53 at 62. New r 16(4)(a) was directed to “any one member” of ACF, and therefore did not satisfy the requirements of a resolution under the section: cf Bullock v Federated Furnishing Trades Society of Australia (No 1) (1985) 5 FCR 464 at 473.

Secondly, his Honour said, new r 16(4)(a) contained thresholds not expressed in percentage terms. Because the number of shares on issue is not static the number specified in new r 16(4)(a)(ii) could represent any percentage of the shares on issue at any particular time in the future and be less than 20 per cent of the nominal value of shares on issue.

His Honour’s third point was that new r 16(4)(a)(ii) imposes a limitation on the number of shares which may be held by or on behalf of any one member. It does not purport to supplant the statutory one. If the number of shares having the nominal value of $50,000,000 were less than 20 per cent, the rule operates to restrict a member to the nominal value of $50,000,000. If the nominal value of $50,000,000 is greater than 20 per cent, then in the absence of a complying resolution under s 289(3) of the Co-operatives Act, the 20 per cent maximum applies.

Fourthly, the primary judge referred to the explanatory note to the rule change which informed the reader that for tax purposes it was necessary to have a specific limit on the number of shares “any member may hold or have held on the member’s behalf”. It went on to explain that because the Supply Co-operative “would hold all the shares” after Step 1 of Stage 1, the specific limit in the new rule “is a very high number on the Implementation Date and a lower figure thereafter”. The note further explained that the rule restricted substantial shareholdings to the lesser of 5 per cent of the nominal value of the issued share capital or $2,000,000 and that as the Supply Co-operative’s holding would be above this limit, it was necessary to amend the rule by excluding the Supply Co-operative from its operation.
Fifthly, his Honour said that whilst new r 16(4)(c) makes express reference to the Supply Co-operative (and is therefore in respect of the appellant), all that alteration did was to relieve the appellant from a limitation on its shareholding which was even more severe than the statutory one.

Appellant’s counsel say that the learned judge fell into error here.

However, the simple answer is that one must not lose sight of where one is going. The quest is to see whether or not Resolution 2 had the effect of increasing the maximum percentage of the interest in shares to more than 20 per cent of the nominal value of all the issued shares.

Resolution 2 read with the amendment to r 16(4)(a) did not deal with percentage holdings at all. It merely prescribed the maximum number of shares which could be held.

This conclusion is implicit in the learned primary judge’s points 2 and 3 noted above.

Accordingly, Resolution 2 does not achieve the appellant’s desired goal.
Other matters

Submissions were put by the appellant that any procedural irregularity was or could be cured by the application of s 1322 of the Corporations Act which applies to co-operatives by virtue of ss 9 and 10 of the Co-operatives Act.

It is clear that s 1322 has extremely wide operation as has been held in a host of cases over the last 45 years probably commencing with the decision of Else-Mitchell J in Omega Estates Pty Ltd v Ganke (1962) 80 WN (NSW) 1218 at 1225.

However, as the learned primary judge recognised, the problems in the instant case were principally problems of the substantive effect of the Resolutions rather than procedure (though he was more concerned about matters of proper procedure than I am) so that s 1322 has no role to play in the present case.

Thus the appeal must be dismissed with costs.

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LAST UPDATED:
4 June 2008

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Dairy Farmers Milk Co-operative Ltd v Australian Co-operative Foods Ltd [2008] NSWCA 126

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