Harpro Group Pty Ltd v BM Sydney Building Materials Pty Ltd

[2018] NSWSC 603

Supreme Court

New South Wales

Medium Neutral Citation:

Harpro Group Pty Ltd v BM Sydney Building Materials Pty Ltd [2018] NSWSC 603

Hearing dates:

3 May 2018

Decision date:

03 May 2018

Jurisdiction:

Equity - Technology and Construction List

Before:

Stevenson J

Decision:

Application to dismiss proceedings itself dismissed; declare that second defendant has been removed as a director of plaintiff; plaintiff to provide security for costs of $60,000

Catchwords:

PROCEEDINGS – whether solicitors for plaintiff retained by plaintiff absent instructions from second defendant as director – whether proceedings liable to be dismissed for that reason - whether second defendant was still a director of plaintiff at time of retainer

 

CORPORATIONS – whether second defendant was removed as director of the plaintiff at a meeting of members of the plaintiff – whether meeting of members at which resolution passed was convened in accordance with provisions of constitution of the plaintiff – whether any shortcoming was a procedural irregularity for the purpose of s 1322 of Corporations Act 2001 (Cth)

  COSTS – security for costs - where plaintiff admittedly impecunious – whether such impecuniosity caused by conduct complained of in proceedings – whether ordering security would stultify proceedings – whether costs likely to be incurred will be duplicated in proceedings ordered to be heard concurrently

Legislation Cited:

Corporations Act 2001 (Cth)

Cases Cited:

Bell Wholesale Corp Pty Limited v Gates Export Group (No 2) (1984) 8 ACLR 688 at 591.
BM Sydney Building Materials Pty Ltd v AWT Building Group (AUST) Pty Ltd; BM Sydney Building Materials Pty Ltd v AWT Building Pty Ltd [2017] NSWCA 177
Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146; [1990] HCA 32

Category:

Procedural and other rulings

Parties:

Harpro Group Pty Ltd (Plaintiff)
BM Sydney Building Materials Pty Ltd (First Defendant)
Ngoc Anh Thu Le (Second Defendant)
Ming Lee (Third Defendant)

Representation:

Counsel:
A Norrie (Plaintiff)
B Phillips (Defendants)

  Solicitors:
Herald Legal (Plaintiff)
Deutsch Partners (Defendants)

File Number(s):

SC 2017/317266

EX TEMPORE Judgment (REVISED)

1. The plaintiff, Harpro Group Pty Ltd, brings these proceedings against BM Sydney Building Materials Pty Ltd, Ms Ngoc Anh Thu Le and her brother, Mr Ming Lee. Mr Lee is a director of and a shareholder in BM Sydney.

2. Ms Le holds one of the three issued shares in Harpro as trustee, or in some other way, on behalf of Mr Lee. The other two shares in Harpro are held by Mr Wenge Teng.

3. At the times that are relevant to the allegations made in the Statement of Claim both Ms Le and Mr Teng were the two directors of Harpro.

4. Harpro alleges that:

1. Mr Lee was a de facto director of Harpro;

2. Mr Lee directed the affairs of Harpro through Ms Le; and

3. Ms Le holds her shares in Harpro and was a director of Harpro "as a proxy for" Mr Lee.

5. Mr Teng contends that at a meeting of members of Harpro on 16 June 2016, Ms Le was removed as director of Harpro. I will return to this.

6. BM Sydney has been embroiled in litigation involving two companies, AWT Building Group (Aust) Pty Ltd and AWT Building Pty Ltd. Mr Teng is a director of both those companies. He is a defendant in those proceedings which were heard in the District Court by Curtis DCJ.

7. On 24 July 2017 the Court of Appeal set aside the orders that Curtis DCJ made and remitted the two proceedings to the District Court for retrial: BM Sydney Building Materials Pty Ltd v AWT Building Group (AUST) Pty Ltd; BM Sydney Building Materials Pty Ltd v AWT Building Pty Ltd [2017] NSWCA 177.

8. The two proceedings have now been removed to this Court and were ordered to be heard together with these proceedings.

9. Most of the allegations made by Harpro in these proceedings are directed to Ms Le and Mr Lee. In short, Harpro alleges that Ms Le and Mr Lee sought to procure Mr Teng's removal as a director of Harpro, caused Harpro to sell product at an undervalue to a number of companies and caused some $320,000 of Harpro's funds to be transferred to BM Sydney. In those circumstances, Harpro alleges that Ms Le failed to exercise her duties as a director of Harpro under ss 180 and 181 of the Corporations Act 2001 (Cth), and Mr Lee and BM Sydney were knowingly involved in those breaches.

10. Against that background, by Notice of Motion filed 15 February 2018, the defendants seek an order that the proceedings be dismissed and, alternatively, an order that Harpro provide security for costs.

Should the proceedings be dismissed?

11. The defendants’ case is that the proceedings should be dismissed because the solicitors purporting to act for Harpro have not been validly retained. That is said to be because Ms Le remains a director of Harpro, and yet did not join Mr Teng in giving the relevant instructions to those solicitors.

12. The general rule is any company with several directors, a director acting individually has no authority to bind the company: for example, Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 205; [1990] HCA 32.

13. The constitution of Harpro provides that its control is “vested in the directors”. So the usual rule would apply.

14. However, as I have mentioned, Mr Teng contends that at a meeting of members held on 16 June 2016, Ms Le was removed as a director and, thus, when the solicitors were retained for the purpose of these proceedings, Mr Teng was the only director.

15. The question of whether Ms Le was validly removed depends on whether the meeting of 16 June 2016 was quorate.

16. Rules 14.1 and 14.2 of Harpro's Constitution provide:

“14.1   Quorum

No business may be transacted at any meeting of members unless a quorum of members is present at the time when the meeting proceeds to business. Except as provided in rule 14.2, 3 members present are a quorum.

14.2   Failure of Quorum

If a quorum is not present within 15 minutes from the time appointed for a meeting of members:

(a)   where the meeting was called by, or in response to, the requisition of members made under the Act, the meeting is dissolved; or

(b)   in any other case the meeting stands adjourned to such day, and at such time and place, as the directors determine or, if no determination is made by the directors, to the same day in the second week following the same time and place. If at the adjourned meeting a quorum is not present within 15 minutes from the time appointed for the meeting, 2 members constitute a quorum, or where 2 members are not present, the meeting is dissolved.”

17. Rule 14.1 thus provides that a quorum for a meeting of members is 3 members. The problem is that there are, and have only ever been, two members of Harpro: Mr Teng and Ms Le. Accordingly, the requirements of r 14.1 can never be satisfied.

18. However, r 14.2 provides that at "an adjourned meeting" of members "2 members constitute a quorum.”

19. The question before me thus comes down to whether the meeting at 16 June 2016 was an "adjourned meeting" for the purposes of r 14.2.

20. In my opinion it was.

21. Mr Teng gives unchallenged evidence that in early May 2016 he called for an extraordinary general meeting to be held at 2pm on 31 May 2016 at "the offices of my solicitors".

22. Mr Teng had power to take that step: r 12.2 of the constitution.

23. Rule 12.4 of the constitution provides Mr Teng was obliged to give 21 days’ notice of the proposed EGM. He said he sent his notice out in early May. It appears that that requirement was satisfied.

24. Mr Teng says in his affidavit that he sent to his co-shareholder, Ms Le, a "Notice of EGM". Mr Teng did not annex a copy of that document to his affidavit. However, on 27 May 2016, Ms Le sent a letter to Mr Teng's solicitors referring "to your notice of EGM to be held on 31 May 2016". Thus Ms Le acknowledged that Mr Teng had sent and that she had received such a notice.

25. In her letter, Ms Le went on to say that she was unable to attend the meeting and sought to have it adjourned for a month.

26. Mr Teng said that, nonetheless, he attended his solicitors' office at the time foreshadowed, and that Ms Le did not appear.

27. I am satisfied that a meeting was requisitioned for 31 May 2016. It was not quorate as Ms Le did not attend. Indeed it could not have been quorate even if she had.

28. The result was that by the operation of r 14.2(b) of the Constitution, the meeting stood adjourned.

29. As the directors made no determination of the kind referred to in r 14.2(b), the effect of that rule is that the meeting stood adjourned to “the same day in the second week following” the purported meeting; that is to 14 June 2016.

30. In fact Mr Teng caused the meeting to be adjourned to 16 June 2016: two days later than required by r 14.2.

31. In early June he sent another notice of EGM, identical in form to that of the main notice to Ms Le. That notice was in a form that satisfied the particular requirements of r 12.6 of the Constitution.

32. Mr Teng heard nothing from Ms Le between then and 16 June 2016 when she attended the meeting.

33. Thus the 16 June 2016 meeting was an adjourned meeting for the purpose of r 14.2. Two members constituted a quorum. Two members were present. The meeting was quorate. Each member had one vote for each share held: r 15.2 (b) of the Constitution. A resolution to remove a director may be passed by ordinary resolution: r 16.3 of the Constitution. The resolution was passed two votes to one.

34. Subject to whatever problem might have been caused by the fact that the meeting was scheduled two days later than required by r 14.2, it was effective to remove Ms Le as a director.

35. By Notice of Motion filed 24 April 2018, Harpro seeks a declaration that Ms Le was validly removed as director at the 16 June 2016, or alternatively, an order under s 1322(4)(a) of the Corporations Act declaring her removal was not invalid despite any procedural irregularity.

36. Harpro doubtless took that course against the possibility that the effect of that two day slip was to invalidate what occurred at the meeting.

37. It is of course unusual for the Court to be asked to make a declaration at an interlocutory stage of proceedings. However, the Court has jurisdiction to do so and, as Harpro’s solicitors' retainer is challenged and dismissal of the proceedings sought on that basis, I am satisfied that I should do so.

38. The conclusion to which I have come is that I should make the declarations sought.

39. Indeed, Mr Phillips, who appeared for the defendants, did not seek to be heard to make a contrary submission.

40. I am satisfied Ms Le was validly removed as a director and that her removal was not invalidated by the fact that Mr Teng adjourned the meeting from 31 May 2016 to 16 June 2016, rather than 14 June 2016.

41. I am satisfied that the requirements of s 1322(6) of the Corporations Act are satisfied. The two day difference in the date fixed for the hearing of the meeting was a matter of procedural nature. There is no reason to think Mr Teng acted otherwise than honestly. It appears to me to be just and equitable that I make that declaration.

42. Accordingly, I declare that Ngoc Anh Thu Le was validly removed as a director of Harpro Group Pty Ltd on 16 June 2016.

43. I order, pursuant to s 1322(4)A of the Corporations Act that the removal of Ms Le as a director of Harpro Group Pty Ltd was not invalid by reason of contravention of r 14.2 of the Constitution of Harpro Group Pty Ltd.

44. The plaintiff’s Notice of Motion of 24 April 2018 is otherwise dismissed.

45. I order the defendants pay the costs of that application.

Security for costs

46. I now turn to the defendants’ alternative claim that Harpro provide security for costs.

47. There is no dispute that Harpro could not meet an order for costs if unsuccessful in these proceedings. Mr Teng has deposed that Harpro has never traded and is impecunious.

48. The solicitor for the defendant, Mr David Deutsch, has sworn an affidavit in which he estimates that the defendants’ recoverable costs in the proceedings, should they be successful, and assuming a three day hearing, will be in the order of $100,000.

49. There is no dispute about the reasonableness of that estimate, all other things being equal.

50. Harpro contends that there will be a duplication between the costs incurred in these proceedings and the costs already incurred, and to be incurred in the two proceedings remitted to the District Court by the Court of Appeal, now removed to this Court and to be heard together with these proceedings.

51. The facts in dispute in these proceedings will, to some extent, be similar to those in the two related proceedings. However, as Mr Deutsch explained in his affidavit, the issues raised in these proceedings are different, and a number of new issues will require investigation; particularly relating to Mr Teng's state of mind.

52. In any event, even if there is some evidence that the defendants will have to deploy in these proceedings which will be to the same effect as that deployed by them as plaintiffs in the related proceedings, the fact remains that that evidence will have to be adduced again in these proceedings; and tailored to match the particular allegations that are made in these proceedings.

53. Counsel's tentative estimate as to the time required for the proceedings to be heard is three, perhaps four days. I am told that the remitted proceedings took two days for hearing in the District Court. Thus it appears that one, or perhaps two further hearing days will be required because of the commencement of the new proceedings.

54. Harpro also contends that its impecuniosity is attributable to the conduct of which it complains in the Statement of Claim. However, I have not been directed to any evidence to show that is true.

55. Harpro also contends that the making of an order for security will stultify the proceedings. However, the general rule is that a court is not justified in declining security on that ground, unless those who stand behind the litigation and benefit from it are also shown to be without means: for example Bell Wholesale Corp Pty Limited v Gates Export Group (No 2) (1984) 8 ACLR 688 at 591.

56. Mr Teng does not offer to be responsible for Harpro's costs if it is unsuccessful; and there is no evidence at all before me of his financial position, let alone, that he is without means.

57. In those circumstances I do not find that factor to be determinative.

58. Taking all these matters into account, I am satisfied that I should make an order for security for costs. It appears to me that it would just to discount to some extent Mr Deutsch’s estimate, on account of the potential for duplication of costs between the proceedings to be heard together.

59. It is difficult for me, as this removed, to make a definitive assessment of the extent to which the costs that will be incurred in these proceedings will necessarily be incurred in any event in relation to the other proceedings.

60. However, doing the best I can, I propose to order that the plaintiff provide security for costs in the sum of $60,000. I invite the parties to confer and agree on the usual consequential orders to be made in that regard.

61. I order that the defendants’ Notice of Motion of 15 February 2018 be otherwise dismissed. I propose to make no order as to the costs of that motion.

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Decision last updated: 04 May 2018