Lean v Banning Holdings Pty Ltd
[2017] WASC 353 (S)
•23 MARCH 2018
[2017] WASC 353 (S)
| JURISDICTION | : | SUPREME COURT OF WESTERN AUSTRALIA IN CHAMBERS |
| CITATION | : | LEAN -v- BANNING HOLDINGS PTY LTD [2017] WASC 353 (S) |
| CORAM | : SMITH AJ | ||
| HEARD | : ON THE PAPERS | ||
| DELIVERED | : 23 MARCH 2018 | ||
| FILE NO/S |
| ||
| MATTER |
| ||
| BETWEEN | : GRAHAM TREVOR LEAN |
Plaintiff
AND
BANNING HOLDINGS PTY LTD
Defendant
Catchwords:
Practice and procedure - Application for indemnity costs - Lawyers on the record not validly retained - No quorum of directors - Two directors required to transact business of the corporation - Substantive irregularity - No substantial injustice - Order made to validate decision of single director to retain lawyers pursuant to s 1322(4)(a) and s 1322(6) Corporations Act 2001 (Cth) - Grounds for indemnity costs not made out
[2017] WASC 353 (S)
Legislation:
Companies Act 1961
(WA) s 461(1), s 1322, s 1322(1), s 1322(1)(b), s 1322(1)(b)(i), s 1322(2), s 1322(4),
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth), s 576-15,
s 576-15(2)
s1322(4)(a), s 1322(6), s 1322(6)(a), s 1322(6)(a)(i), s 1322(6)(a)(ii),
s1322(6)(a)(iii), s 1322(6)(c)
Statutes (Repeals and Miscellaneous Amendments) Act 2009 (WA)
Result:
1. Order made pursuant to s 1322(4)(a) and s 1322(6) of the Corporations Act
to validate the act of a single director appointing solicitors to defend and
represent defendant
2. Plaintiff to pay defendant's costs of the proceedings, to be taxed if not agreed
Category: B
Representation:
Counsel:
| Plaintiff | : No appearance |
Defendant : No appearance
Solicitors:
| Plaintiff | : | Chris Stokes & Associates |
Defendant : Eastwood Sweeney Law
Case(s) referred to in decision(s):
Australian Hydro Carbons NL v Green (1985) 10 ACLR 72; (1985) 3 ACLC
779
Chalet Nominees (1999) Pty Ltd v Murray [2012] WASC 147
Cordiant Communications (Australia) Pty Ltd v The Communications Group
Holdings Pty Ltd [2005] NSWSC 1005; (2005) 194 FLR 322
[2017] WASC 353 (S)
Fountain Selected Meat Sales Pty Ltd v International Produce Merchants Ltd
(1998) 81 ALR 397
J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers
(WA Branch) (No 2) (1993) 46 IR 301; [1993] FCA 70
Lean v Banning Holdings Pty Ltd [2017] WASC 353
Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty
Ltd [No 2] [2009] WASCA 183
Quancorp Pty Ltd v McDonald [1999] WASCA 101
Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477
Re Pembury Pty Ltd [1993] 1 Qd R 125
Re Richardson & Wrench Holdings Pty Ltd [2013] NSWSC 1990; (2013) 97
ACSR 351
Re Scottish Properties Pty Ltd (1977) CLC 40-307
Sandy v Yindjibarndi Aboriginal Corporation RNTBC [No 2] [2016] WASC 75;
(2016) 306 FLR 206
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S)
Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396
[2017] WASC 353 (S)
SMITH AJ:
Background
This matter came before me by way of an application brought by Mr Lean pursuant to s 461(1) of the Corporations Act 2001 (Cth) for the court to wind up Banning Holdings Pty Ltd (BH).
Whilst Mr Lean is the registered shareholder of one share in BH, I was not satisfied Mr Lean had standing to make the application. On 20 November 2017, I made an order dismissing the proceedings. An order was made that costs be reserved.
On 13 December 2017, orders were made that the parties file and serve submissions and affidavits as to costs to be dealt with on the papers.
The claim for costs
It is submitted on behalf of Mr Lean that, BH has no entitlement to claim the costs of defending the application to wind up as the solicitors on the record for BH were not validly retained. The grounds upon which this argument is put is that at the time the application was made to the court, and at the time the application was heard, BH could not form a quorum of directors to validly appoint lawyers as it had at all material times only one director, when its constitution and s 248F of the Corporations Act require two directors to transact its business.
BH admits the absence of a quorum when the decision was made to retain lawyers to act and claims that the absence of a quorum is a 'procedural irregularity' as defined in s 1322(1)(b)(i) of the Corporations Act. It argues that s 1322(2) is capable of operating to save the retainer of lawyers, unless the court finds the procedural irregularity has caused, or may cause a substantial injustice that cannot be remedied by any order of the court, and the court declares the corporate proceedings (the retainer) to be invalid.
Alternatively, if the court is not persuaded that the irregularity is 'procedural', BH seeks an order pursuant to s 1322(4)(a) and s 1322(6) of the Corporations Act, declaring that:
[2017] WASC 353 (S)
(a)
the retainer of lawyers either in July 2017, or as affirmed on 23 November 2017; and
(b) the acts of BH in defending the application to wind up; are not invalid by reason of the contravention of Memorandum and
Articles of Association (the Articles) of BH.
Section 1322(1), (2), (4) and (6) of the Corporations Act provides:
(1) In this section, unless the contrary intention appears:
(a)
a reference to a proceeding under this Act is a reference to any proceeding whether a legal proceeding or not; and
(b)
a reference to a procedural irregularity includes a reference to:
(i)
the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation, at a joint meeting of creditors and members of a corporation or at a meeting of members of a registered scheme; and
(ii)
a defect, irregularity or deficiency of notice or time.
(2)
A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid.
… (4)
Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:
(a)
an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation;
[2017] WASC 353 (S)
(b)
an order directing the rectification of any register kept by ASIC under this Act;
(c)
an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a);
(d)
an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding;
and may make such consequential or ancillary orders as the
Court thinks fit.
…
(6) The Court must not make an order under this section unless it is
satisfied:
(a) in the case of an order referred to in paragraph (4)(a): (i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;
(ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or
(iii) that it is just and equitable that the order be made; and
(b) in the case of an order referred to in paragraph (4)(c)— that the person subject to the civil liability concerned acted honestly; and (c) in every case - that no substantial injustice has been or is likely to be caused to any person.
Having read the affidavit of Mrs Banning (the single director of BH), made on 22 January 2018, and the affidavit of Mr Lean, made on 7 February 2018, and having considered the submissions made by each of the parties, I am satisfied that an order should be made pursuant to s 1322(4)(a) and s 1322(6) of the Corporations Act to validate the act of Mrs Banning (as a single director) appointing Eastwood Law in July
[2017] WASC 353 (S)
2017 as solicitors and TR Stephenson as counsel, to defend and
represent BH in this matter.
I am not satisfied that an order should be made that BH be entitled to indemnity costs. However, I am satisfied that an order should be made that Mr Lean pay BH's costs of the action.
In these reasons for decision, I set out the reasons why I am satisfied that a declaration should be made pursuant to s 1322(4)(a) of the Corporations Act and why no order should be made for indemnity costs.
How the absence of a quorum of BH arose
(a) The applicable rules of the constitution of BH
BH was registered on 8 December 1981.1
Article 1, of the Articles of BH, provides that table A of the fourth schedule of the Companies Act 1961 (WA), shall apply, save and except where expressly negatived, modified or varied. Article 7, of the Articles, provides that Article 63 of table A shall not apply, and in lieu thereof, the following article shall be inserted:
63. The number of Directors shall not be less than two nor more than eight. The first Directors of the Company shall be the subscribers to the Memorandum of Association of the Company.
Article 11, of the Articles, relevantly, provides that Article 80 of table A shall not apply, and the following article shall be inserted:
80. Subject to these regulations questions arising at any meeting of Directors shall be decided by a majority of votes and a determination by a majority of Directors shall for all purposes be deemed a determination of the Directors. In case of an equality of votes the Chairman of the meeting shall not have a second or casting vote.
The Articles do not otherwise provide for a quorum at a meeting of directors. Thus, pursuant to Article 1, Article 83 of table A applied at the time BH was first incorporated. Article 83 of table A provided:
1 Australian Securities and Investments Commission current and historical company extract.
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83. The quorum necessary for the transaction of the business of the directors may be fixed by the directors, and unless so fixed shall be two.
Article 83 of table A of the Companies Act ceased to have effect by the enactment of the Statutes (Repeals and Miscellaneous Amendments) Act 2009 (WA) on 22 May 2009. By operation of s 134 and s 135 of the Corporations Act, the internal management of BH is governed by the replaceable rules of the Corporations Act, and its constitution, or by combination of both. The replaceable rule that stipulates the requirements of a quorum at meetings of directors is provided for in s 248F of the Corporations Act. Section 248F is in substance the same as former Article 83 of table A.
Section 248F provides:
Unless a director determines otherwise, the quorum for a director's meeting is 2 directors and the quorum must be present at all times during the meeting.
(b) The relevant acts of Mrs Banning as a director and shareholder of BH
Mrs Banning was appointed a director of BH on 17 November 2008. She has been the sole director of BH since 10 May 2016 when Donald Campbell-Smith ceased to be a director.
When Mrs Banning was informed, on or about 21 November 2017, that Mr Lean was claiming that BH had 'no standing' to claim costs in these proceedings, as it could not validly appoint lawyers because it could not form a quorum of directors, she was advised to take steps to remedy the situation.
In her affidavit, Mrs Banning sets out the circumstances by which she came to be the sole director of BH as follows:
(a)
For most of her adult life she has been a housewife and is not versed in company law or the law generally. While she has been a director and shareholder of BH for a long time when her husband was alive he (as a director) managed the affairs of BH largely without consulting her and therefore she never read the Articles, or engaged with the legal issues around the management of BH.
(b)
Since her husband's death in late 2008, she has been reliant on legal advice to understand her role and obligations as a director
[2017] WASC 353 (S)
in relation to the management of BH, and the various complex
litigation in which it has been involved.
(c) At the time when Mr Campbell-Smith resigned in 2016 he had retired and was no longer available to conduct the affairs of BH. She was subsequently informed by a person from the Australian Securities and Investments Commission (whose name she cannot recall) that the law permitted companies to operate with only one director. In reliance on this advice, she did not enquire further as to the correctness, or otherwise, of her managing BH as a sole director and did not seek to appoint another director. (d) Until on, or about, 21 November 2017 she was unaware of the requirement that a quorum to manage the company could only be constituted by two directors. If she had known of this limitation, prior to 21 November 2017, she would have taken steps to amend the Articles of BH to authorise her to act as a sole director of BH. (e) At the time she appointed lawyers to defend the proceedings to wind up BH, she did so in circumstances where she would not have been able to attend to this personally.
On 23 November 2017 Mrs Banning held a shareholders meeting immediately followed by a directors meeting, to change the Articles of BH in an attempt to enable her to manage the affairs of BH as its sole director, and to validate the existing retainers of BH lawyers.
Annexed to the affidavit of Mrs Banning are minutes of a general meeting of shareholders of BH, held on 23 November 2017 at 10.00 am. The minutes of the meeting of 'shareholders' record:
PRESENT
Sandra May Banning (as sole shareholder)RESOLUTIONS
1. Notice of the meeting be abridged. - PASSED UNANIMOUSLY
2. Article 7 of the Articles of Association of the company be amended by inserting in place of the previous Article 7 the following (amendments highlighted):-
[2017] WASC 353 (S)
'Article 63 of Table A shall not apply and in lieu thereof the
following Article be inserted:The number of Directors shall be such number as may be allowed by law, and, for the removal of doubt a quorum of directors for the purposes of any meeting thereof may be constituted by a single director. The first Directors of the Company shall be the subscribers to the Memorandum of Association of the company.' - PASSED UNANIMOUSLY
CLOSURE
There being no other business the meeting was declared closed at
10.05am.
Mrs Banning held a meeting of directors immediately following the meeting of 'shareholders'. In the minutes of a meeting of directors of BH, held on 23 November 2017 at 10.05 am, it is recorded that:
PRESENT
Sandra May Banning (as sole Director)RESOLUTIONS
1. Notice of the meeting be abridged. - PASSED UNANIMOUSLY
2. For the removal of doubt the company accepts the validity of the existing retainer of Eastwood Sweeney Law & T R Stephenson of Counsel to represent the company in COR 140 of 2017 resolved by Mrs Sandra Banning as sole director and shareholder prior to this resolution and prior to the amendment of Article 7 of the Articles of Association of the company by shareholders (as set out in the Minute above) permitting her to act as sole director with the intent that the existing retainers be validated retrospectively.
3. That the company continue to defend the proceedings COR 140 of 2017 brought against it by Graeme Lean and retain Eastwood Sweeney Law & T R Stephenson of Counsel to represent the company therein. - PASSED UNANIMOUSLY
CLOSURE
There being no other business the meeting was declared closed at
10.10am.
Whilst Mrs Banning describes herself as sole shareholder in the minutes of the general meeting of shareholders, that is not the case.
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Pursuant to an order made by Simmonds J on 21 November 2008, one share in BH was transferred to Mr Lean by Mr Campbell-Smith as the executor of the estate of Mr Banning. The purpose of the order was for Mr Lean, as receiver of Professional Services of Australia Pty Ltd, to appropriate and sell the share so as to satisfy a judgment debt. However, the sale did not proceed and as a result of a successful appeal the judgment debt was in effect deemed to have been paid.2 Mr Lean was later discharged by order of Simmonds J as the receiver of Professional Services of Australia Pty Ltd and granted an equitable lien over the one share in BH, for the payment of his remuneration and costs, as receiver, to be assessed by the court.
As Mr Lean is the registered holder of one share in BH, he is the legal owner of the share by the fact of his registration in the register of members of BH.3
Whilst Mrs Banning may have a beneficial interest in the share held by Mr Lean as a beneficiary of the estate of Mr Banning, Mrs Banning has no more than an equitable interest in that share as her name is not entered into the register of members in respect of that share.4
In Mr Lean's affidavit sworn on 7 February 2018, Mr Lean states
that:
(a)
his address as shareholder is noted on the Australian Securities and Investments Commission records as 'GT Lean & Associates 424 Fitzgerald Street North Perth WA 6006'. Whilst he has moved from that address and presently carries on a business from premises in Applecross he continues to have all mail sent to the address in Fitzgerald Street, North Perth redirected to his post office box in North Perth under an Australia Post redirection notice. He clears that post office box on a weekly basis;
(b)
he has not received, either at his former address or his present address any notice of:
(i)
the proposed meeting of members of BH to authorise the retainer of BH's solicitors;
2 See Professional Services of Australia Pty Ltd v Computer Accounting and Tax Pty Ltd [No 2] [2009]
WASCA 183.
3 Corporations Act s 169.
4 See Lean v Banning Holdings Pty Ltd [2017] WASC 353 [31] - [32].
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(ii) a proposed meeting of members of BH (either on 23 November 2017, or at any other time) to ratify the retainer of BH's solicitors;
(iii) a special resolution to be considered at a proposed meeting of members of BH (either on 23 November 2017, or at any other time) to amend the articles of association of BH; and
(c) had he received notice of either of these proposed resolutions he would have attended the meeting of shareholders and voted against the resolutions.
Consideration - identification of the irregular acts for the purpose of s 1322 of the Corporations Law
There are three relevant irregular acts of a director of BH that require consideration.
The first is the act of Mrs Banning in appointing lawyers to defend these proceedings, in or about, July 2017. For reasons that follow, I am of the opinion that an order should be made to correct the irregularity of this act, pursuant to s 1322(4)(a) of the Corporations Act.
It is not in dispute that the appointment of the lawyers by Mrs Banning in July 2017 was an irregularity. Pursuant to Article 7 and Article 11 of the Articles of BH, a quorum of directors was not only not present when the retainer of lawyers was authorised by Mrs Banning but could not be constituted.
The second relevant act is the act of passing the resolution at a meeting of 'shareholders' on 23 November 2017, to amend the Articles of BH.
Pursuant to s 136(2) of the Corporations Act a company may only modify or appeal its constitution, or a provision of its constitution, by special resolution. A special resolution is defined in s 9 of the Corporations Act to mean, in relation to a company, a resolution:
(a)
of which notice has been given as set out in s 249L(1)(c) of the Corporations Act has been given; and
(b)
that has been passed by at least 75% of the votes cast by members entitled to vote on the resolution.
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Leaving aside whether notice was given to shareholders as prescribed by s 249L, it is clear that the resolution, passed at the meeting of shareholders on 23 November 2017, was not passed by at least 75% of the votes cast by members entitled to vote on the resolution, as at that date there were two registered members of BH who were entitled to vote and only one was present.
In circumstances where there is no evidence of any notice given to one of the shareholders, Mr Lean, it is clear that no valid meeting of members took place on 23 November 2017. It is also clear that no valid resolution was, or could be, passed at that meeting to amend the Articles of BH.
The question that then arises is whether these irregularities can be characterised as procedural or substantive. While s 1322(1)(b) of the Corporations Act provides that a reference to a procedural irregularity includes a reference to the absence of a quorum at a meeting of a corporation and a defect, irregularity or deficiency of notice, it does not necessarily follow that such an irregularity will necessarily result in, or be characterised as a procedural irregularity.
Whether an irregularity can be characterised as procedural or substantive was recently considered by Le Miere J in Sandy v Yindjibarndi Aboriginal Corporation RNTBC [No 2].5 In that matter, his Honour was called upon to consider whether a failure to give reasonable notice of a director's meeting was a procedural irregularity and could be rectified by the operation of s 576-15 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (the CATSIC Act). Section 576-15(2) of the CATSIC Act, is in substance, identical in terms to s 1322(2) of the Corporations Act.
In Sandy v Yindjibarndi Aboriginal Corporation RNTBC [No 2] Le Miere J set out and applied the following principles in considering whether in the failure to give reasonable notice raised a procedural or substantive irregularity. At [46] his Honour observed:
In Re Sidex Australia Pty Ltd (Receiver and Manager Appointed); Sipad Holdings DDPO v Popovic (1995) 18 ACSR 436, 449 Lehane J suggested that a procedural irregularity may arise where the parties have attempted to do something which the Act permits but have failed to do it effectively because of a procedural failure or a omission but not where the parties have tried to do something which the Act does not authorise. The Court of Appeal took the same approach in Smolarek v
5 Sandy v Yindjibarndi Aboriginal Corporation RNTBC [No 2] [2016] WASC 75; (2016) 306 FLR 206.
[2017] WASC 353 (S)
Liwszyc [2006] WASCA 50; (2006) 32 WAR 129 [59]. In Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd [2005] NSWSC 1005; (2005) 55 ACSR 185 Palmer J addressed the issue of what is a substantive irregularity as distinct from a procedural irregularity. His Honour referred to the cases concerning the distinction between a substantive law or rule and a procedural law or rule and in particular dicta from the joint judgment in John Pfeiffer Pty Ltd v Rogerson [2000] HCA 36; (2000) 203 CLR 503, 543 - 544 and continued:
'In the light of this observation and of the decisions in Industrial Equity, ANZ Nominees, Scallion and Link Agricultural I think that the following general propositions may be formulated for the purposes of the application of Corporations Act s 1322:
- What is a 'procedural irregularity' will be ascertained by first determining what is 'the thing to be done' which the procedure is to regulate; - If there is an irregularity which changes the substance of 'the thing to be done', the irregularity will be substantive; - If the irregularity merely departs from the prescribed manner in which the thing is to be done without changing the substance of the thing, the irregularity is procedural [103].'
The application of such a proposition in any particular case will depend upon the starting point, that is defining 'the thing to be done'. Different answers to the question will be found depending upon how broadly or narrowly one defines 'the thing to be done'. In this case, if one defines 'the thing to be done' as holding a directors' meeting, one could say that an irregularity which denies a director reasonable notice of the meeting and causes the director not to attend the meeting has not changed the substance of the thing to be done; a meeting has still been held - what has occurred is merely an irregularity in the procedure for calling the meeting. On the other hand, if one defines the thing to be done more narrowly, for example giving reasonable notice to all the directors, then to not give reasonable notice to one director changes the substance of the thing to be done so that the irregularity is substantive and not procedural.
The principles applied by Le Miere J in Sandy v Yindjibarndi Aboriginal Corporation RNTBC [No 2] emerge from the judgment of Palmer J in Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd.6 In Cordiant
6 Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd [2005]
NSWSC 1005; (2005) 194 FLR 322.
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Communications (Australia) Pty Ltd, Palmer J drew a distinction between whether an irregularity is procedural or substantive primarily according to the degree of injustice, or inconvenience, caused. Justice Palmer explained:7
The decisions in Industrial Equity and Scullion provide a useful guide to how problems arising out of irregularities at meetings may be resolved as a matter of fairness and practicality. A wrongful denial of a shareholder’s statutory right to vote at a meeting is a denial of a substantive right and is not a 'procedural irregularity' within the scope of s 1322(2) at all. Nevertheless, a pragmatic means of avoiding injustice or undue inconvenience is available by recourse either to the principles upon which the remedy of a declaratory order is given under the general law or by recourse to a validating order under CA s 1322(4)(a). By virtue of CA s 1322(6)(a)(ii), (iii) and (c), the Court can make a validating order under s 1322(4)(a) where the irregularity is substantive rather than procedural if the Court is satisfied either that the parties concerned acted honestly or that it is just and equitable that the order be made. In either case, however, the Court must also be satisfied that no substantial injustice has been, or is likely to be, caused to any person.
In this matter, Mr Lean's evidence is that if he had been served with notice of the shareholders meeting he would have attended and voted against the resolution. Given that there are only two shareholders of BH and the passing of a special resolution requires at least 75% of votes cast by members (entitled to vote) for the resolution to be validly passed, it is apparent that the presence of Mr Lean (even if he was to vote in favour of the resolution) was essential to the passing of the resolution.
In these circumstances, it is clear that the absence of a quorum at the meeting of shareholders on 23 November 2017 was a substantive irregularity and not a procedural irregularity. In his absence and without the affirmative vote of Mr Lean, the resolution could not have been passed. This point was made clear in Re Richardson & Wrench Holdings Pty Ltd8 by Brereton J when his Honour remarked:9
Section 1322(1)(b) contains a non-exhaustive definition of procedural irregularity, which nonetheless throws some light on what is contemplated namely, the absence of a quorum at a meeting; or a defect, irregularity or deficiency of notice or of time. It is difficult to
7 Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd [2005]
NSWSC 1005; (2005) 194 FLR 322 [97].
8 Re Richardson & Wrench Holdings Pty Ltd [2013] NSWSC 1990; (2013) 97 ACSR 351.
9 Re Richardson & Wrench Holdings Pty Ltd [2013] NSWSC 1990; (2013) 97 ACSR 351 [27].
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see how the absence of authority to cast a vote of a member, whose affirmative vote was essential to the passage of the resolution, can be seen as a procedural irregularity. Had the unauthorised assent not been given, the circular resolution could not have been passed.
A substantive irregularity can be validated by the court under s 1322(4)(a) of the Corporations Act.
Section 1322(4)(a) allows the court to make an order declaring that any act, matter or thing purporting to have been done, or any other proceeding purporting to have been instituted or taken, under the Corporations Act, or in relation to a corporation, not invalid. Thus, a declaration can be made under s 1322(4)(a) only in respect of an invalidity by reason of any contravention of a provision of the Corporations Act, or a provision of the constitution of the corporation.
The prerequisites for the making of an order of validation under s 1322(4)(a) is prescribed by s 1322(6)(a). Section 1322(6)(a) provides that the court cannot make a validating order unless it is satisfied of at least one of the three following conditions, namely:
(a) the matter is essentially of a procedural nature;10 (b) the persons concerned acted honestly;11 or (c) it is just and equitable that the order be made.12
The conditions prescribed in s 1322(6)(a) are not cumulative. Consequently, the power to make an order under s 1322(4)(a) is not limited to cases of procedural irregularity.13
Where one of the conditions in s 1322(6)(a) are satisfied the court must not make an order unless it is satisfied that no substantial injustice has been, or is likely to be, caused to any person.14
The court must also be satisfied that it is the irregularity which occasions the 'substantial injustice' and not the 'proceeding'.15
10 Corporations Act s 1322(6)(a)(i).
11 Corporations Act s 1322(6)(a)(ii).
12 Corporations Act s 1322(6)(a)(iii).
13 Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [10] (French CJ).
14 Corporations Act s 1322(6)(c).
15 Re Pembury Pty Ltd [1993] 1 Qd R 125.
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The onus of showing the fulfilment of one of the three conditions for an order as provided for in s 1322(6)(a), and the absence of substantial injustice, rests upon the applicant for an order.16
In this matter, the invalid resolution passed at the 'shareholders' meeting was not a procedural irregularity and thus cannot be characterised as an irregularity essentially of a procedural nature within the meaning of s 1322(6)(a)(i).
However, no issue is taken with Mrs Banning's honesty in taking the action she did. Consequently, I am satisfied that the precondition specified in s 1322(6)(a)(ii) is met.
The question is then whether the court is of the opinion that the irregularity has caused, or may cause, substantial injustice that cannot be remedied by any order of the court.
In Re Compaction Systems Pty Ltd17 Bowen CJ in Eq explained how 'injustice' within the meaning of s 1322(6)(c) arises:18
In my view, the word 'injustice' in this provision requires the Court to consider any real, and not merely insubstantial or theoretical, prejudice which will be suffered by, for example, a member by the making of an order, and to weigh this in the scales against the prejudice to the company, other members and creditors, if an order be not made. In other words, it is insufficient to show that there may be some prejudice to a member if, on a consideration of the whole matter, the overwhelming weight of justice, as it were, is in favour of making the order.
In Chalet Nominees (1999) Pty Ltd v Murray,19 the issue was whether substantial injustice was caused by an irregularity raised by an absence of a quorum. In that matter a company had issued a notice of meeting proposing resolutions to remove a number of directors. An article in the company's constitution provided that the quorum for a general meeting was two members. The meeting was held, but was only attended by one director (who held proxy votes for Part 1 Pty Ltd who was majority shareholder), the company secretary, a solicitor (who also held proxy votes for Part 1 Pty Ltd) and an observer. At the meeting, the secretary and others were appointed as directors.
16 Australian Hydro Carbons NL v Green (1985) 10 ACLR 72; (1985) 3 ACLC 779.
17 Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477.
18 Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477, 493; as applied in Chalet Nominees (1999) Pty
Ltd v Murray [2012] WASC 147 [27]; Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [11]
(French CJ).
19 Chalet Nominees (1999) Pty Ltd v Murray [2012] WASC 147.
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Subsequently, the new directors resolved to undertake a significant capital raising for the company. Chalet Nominees (1999) Pty Ltd also held share capital in the company. It disputed that the new board was validly appointed, contending that the shareholders meetings were invalid because no quorum was present and no resolutions could be validly passed. Prior to the hearing, it was conceded that a quorum was not constituted at the meeting. Whilst two proxies attended the meeting, the proxies were for only one member. Justice Le Miere observed that a failure to receive notice of a meeting may constitute substantial injustice, by denying those entitled to be present at a meeting the opportunity to consult together, to express views, to hear the views of others and then to vote at the meeting after discussion and a debate.20 However, in the matter before him, the members and directors of Chalet Nominees (1999) Pty Ltd had received proper notice of the meeting but chose not to attend. From these facts, Le Miere J inferred that other members of the company also chose not to attend the meeting.
Justice Le Miere found that no substantial injustice had been, or was likely to be, caused by the procedural irregularity as the shareholders had the opportunity to attend the meeting and make such representations as they wished in relation to the business conducted at the meeting. In circumstances where they chose not to take that opportunity, his Honour found that no injustice would be caused by permitting the meeting to proceed and the majority members to vote for, and thereby effect, the removal of directors and to appoint others in their place.
Whilst Chalet Nominees (1999) Pty Ltd raised different circumstances than the circumstances to be considered by the court in this matter, Le Miere J made relevant observations about the difficulties of constituting a quorum where there are only two shareholders. His Honour said:21
There are many companies with only two shareholders, and then life can become difficult where one shareholder ceases to co-operate. If one shareholder refuses to attend meetings, it would appear that the other is unable to hold a valid meeting and is therefore unable to pass resolutions necessary to conduct business. In Re Opera Photographic Ltd [1989] 1 WLR 634 a company consisting of two members with 51: 49 holding, the majority shareholder was not able to remove the other from directorship because under the articles a meeting without the other
20 Chalet Nominees (1999) Pty Ltd v Murray [2012] WASC 147 [30] - [32].
21 Chalet Nominees (1999) Pty Ltd v Murray [2012] WASC 147 [33].
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attending was not possible. So the majority member applied for a court order that a meeting should be called at which the attendance of one would be the quorum. Since the majority shareholder had a right to remove the other from directorship his right could not be vetoed by quorum requirements and therefore the court made the necessary orders. In Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198 counsel submitted that Mrs Rinehart could have prevented HPPL from resolving to declare discriminatory dividends by refusing to attend any general meeting of the company, thereby preventing the formation of a quorum. In response to that submission the Court of Appeal stated:
'There are a number of answers to this proposition. It is sufficient to state that the courts will not allow a minority of shareholders to so obstruct the wishes of the majority: In Re Opera Photographic Ltd [1989] 1 WLR 634 …'
In this matter, Mr Lean was denied the right to attend the shareholders meeting. Although he states in his affidavit he would have attended and voted against the resolution if he had notice of the meeting, in circumstances where he has been denied the opportunity of doing so, I am not satisfied that no substantial injustice has been, or is likely to be caused to any person, within the meaning of s 1322(6)(c) of the Corporations Act. Whilst Mr Lean has given no explanation why he would oppose the resolution put at the meeting of shareholders, in the absence of an explanation it is not appropriate to speculate why he would do so. In any event, if he attended the meeting, he may have changed his mind.
For these reasons, I am of the opinion that no order should be made to declare the meeting of shareholders of BH on 23 November 2017 not invalid.
If however, there was evidence before me that the meeting of shareholders had been validly called by notice being given to Mr Lean and there was evidence of a lack of co-operation between the two shareholders of BH at a properly convened meeting which resulted in BH substantially not being able to function, I would have made an order declaring the meeting not invalid (by reason of a contravention of the quorum requirements of the Articles). I would have also made an order that the resulting resolution passed at the meeting was not invalid.
The third relevant act of Mrs Banning as a single director of BH was her act to affirm the retainer of lawyers at the meeting of directors that immediately followed the meeting of shareholders on 23 November 2017. The resolution passed at this meeting also resulted in a
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substantial irregularity, as there was no quorum of directors present at the meeting as required by the Articles. In these circumstances, the resolution passed at the meeting to affirm the retainers was also invalid.
As Mr Lean had not been given an opportunity to attend the meeting of shareholders which immediately proceed this meeting, I am not satisfied that no substantial injustice has been, or is likely to be, caused to any person if an order was made to validate the resolution passed at the meeting.
Consequently, I am not satisfied that any of the actions taken by Mrs Banning in respect of the management of BH on 23 November 2017 should be validated.
Returning to the first relevant act of Mrs Banning of appointing lawyers to act for BH by a retainer agreement with lawyers in July 2017 to defend BH in these proceedings, I am satisfied that an order should be made to correct the irregularity of this act.
This act can also be characterised as a substantial irregularity. The entering into the retainer agreement to defend the proceedings brought against BH was only something that could be done by two directors and not by one. It was an act not authorised by s 248F of the Corporations Act. In these circumstances, the irregularity was substantive.
I accept that Mrs Banning was acting honestly in appointing lawyers to defend the application to wind up BH. In particular, I accept that she did not know, or she did not understand at the time, she entered into the agreement to retain lawyers, the legal requirement that the affairs of BH could only be managed by two directors.
To the extent that it is necessary, I am satisfied that at the time Mrs Banning entered into the retainer agreement that she acted innocently, and in good faith, to protect BH's interests.
I also find that no substantial injustice has been or is likely to be caused by this irregularity. The only consequence of making an order to correct this irregularity is that BH will be entitled to an order for its costs. Given that the ordinary rule is for costs to follow the event, no injustice will be caused to any person, or is likely to be caused to any person, if an order is made that Mr Lean is to pay BH costs of the action.
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BH claim for indemnity costs
BH seeks indemnity costs on the grounds that, on a proper consideration, Mr Lean ought to have known that his case against BH was hopeless as he had no standing to make the application.
BH claims that it made it plain to Mr Lean at a very early stage of the proceedings that his case as to standing was hopeless.
BH also says that the proceedings were conducted improperly or unreasonably because Mr Lean was not a creditor of BH. It says it should have been plain to him that nothing could be reasonably gained by him in seeking liquidation of BH. BH says the apparent purpose of the application to wind up BH was to investigate transactions going back as far as 2009 and 2010 (well before Mr Lean's fees as receiver of Professional Services Pty Ltd were assessed and allowed in 2017) so as to determine whether any assets had been 'disposed of' by BH 'without just cause'. BH also say that it was clear that the apparent purpose of the application was also to criticise the historical accounts of BH and make spurious claims as to improper management and insolvency.
It is conceded, however, by BH, that if Mr Lean did have standing to bring the proceedings it may have been proper for him to raise such matters. However, he did not have standing as found by the court.
BH also makes a claim that even after the proceedings were dismissed, Mr Lean has sought to raise technicalities to avoid liability for the payment of legal costs which has caused the costs argument to become complicated and time-consuming.
In Swansdale Pty Ltd v Whitcrest Pty Ltd22 the Court of Appeal pointed out that an order for indemnity costs will only be made in exceptional circumstances,23 and set out a number of relevant principles which include:
(a)
Solicitor and client costs can properly be awarded in appropriate cases, where 'there is some special or unusual feature in the case' to justify the court exercising its discretion in that way.24
(b)
To obtain an indemnity costs order, it is not the case that the successful party needs to show collateral purpose, or establish
22 Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S).
23 Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S) [7].
24 Fountain Selected Meat Sales Pty Ltd v International Produce Merchants Ltd (1998) 81 ALR 397, 400
(Woodward J).
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some species of fraud against the successful party. It is sufficient, to enliven the discretion to award such costs that, what forever reason, a party persists on what should on proper consideration to be seen to be a hopeless case.25
(c) Competing principles need to be balanced in assessing the making of a potential award for indemnity costs. On the one hand, a party should not be discouraged, by the prospect of an unusual costs order, from persisting in an action where its success is not certain. Uncertainty is inherent in many areas of law, and the law changes with changing circumstances. It is inappropriate that a case be too readily characterised as 'hopeless' so as justify an award of indemnity costs to the successful party. However, where a party has by its conduct unnecessarily increased the cost to litigation, it is appropriate the parties so acting should bear that increased cost.26
The difficulty with the submissions put on behalf of BH is that whilst the court found that Mr Lean had no standing to bring the proceedings, the application failed on grounds that Mr Lean was not 'a contributory' of BH within the meaning of s 9 of the Corporations Act.27 The grounds upon which BH put forward to the court that Mr Lean had no standing to institute the proceedings were put on an entirely different basis. It was argued on behalf of BH that Mr Lean's entitlement to be registered as a shareholder of BH ceased upon the cancellation of the receivership of Professional Services Pty Ltd on 10 November 2010. It was also argued that notwithstanding the transfer of the one share of BH to Mr Lean, the property in the share did not vest in him at any time. These arguments were implicitly rejected by the court in the proceedings.28
The means by which Mr Lean became the owner of the one share in BH are somewhat unusual in that in the normal course of a receivership a receiver is not usually entitled to have property transferred into his or her name by virtue of his or her appointment as receiver.29
25 J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA Branch) (No 2)
(1993) 46 IR 301; [1993] FCA 70 (French J).
26 Quancorp Pty Ltd v McDonald [1999] WASCA 101 [7] (Wheeler J).
27 Lean v Banning Holdings Pty Ltd [2017] WASC 353.
28 Lean v Banning Holdings Pty Ltd [2017] WASC 353.
29 Re Scottish Properties Pty Ltd (1977) CLC 40-307.
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In circumstances where the arguments put on behalf of BH as to standing were rejected by this court and decided on a point not raised by counsel for BH, it cannot be said that the case put on behalf of Mr Lean could be regarded as hopeless which merits the sanction of an indemnity costs order. In addition, there was no determination made by the court as to whether it was proper for Mr Lean to put arguments before the court in affidavit form criticising the historical accounts and management of BH and whether it was insolvent. In the absence of any findings in this regard, it is not open to BH to raise an argument that Mr Lean's engagement in the proceedings was either for an improper purpose or unreasonable.
For these reasons, I will make an order that Mr Lean pay BH's costs of the proceedings, to be taxed if not agreed.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
VV
ASSOCIATE TO SMITH AJ
27 MARCH 2018
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