Massey v Wales

Case [2003] NSWCA 212

NEW SOUTH WALES COURT OF APPEAL

CITATION:      Massey & Anor. v. Wales & Ors; Massey & Anor. v. Cooney & Anor. [2003]  NSWCA 212

FILE NUMBER(S):
40521/02 and CA40794/02

HEARING DATE(S):               7 May 2003 and 27 June 2003

JUDGMENT DATE: 04/08/2003

PARTIES:
Daniel Massey and Marion Bailey t/as Massey Bailey, Solicitors & Consultants - claimants
John Andrew Wales - 1st opponent
Downunder Pty. Ltd. - 2nd opponent
Eli Barel - 3rd opponent
Damiz Pty. Limited - 4th opponent
Isaac Barel - 5th opponent
Dennis Cooney - 6th opponent
Zimmerman Holdings Pty. Ltd. (In Liq) - 7th opponent
Yaqob Rajwan - 8th opponent
Baruch Rajwan - 9th opponent

JUDGMENT OF:       Meagher JA Beazley JA Hodgson JA   

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):          ED4586/01 and ED5093/01

LOWER COURT JUDICIAL OFFICER:     Bryson J

COUNSEL:
Mr. J. Gleeson SC with Mr. P. Walsh for claimants
Mr. S. Gibb SC for 1st-5th opponents
Mr. D. Williams with Mr. I. Griseti for 6th opponent
Mr. J. Darvall for Mr. Cooney

SOLICITORS:
Turtons, Sydney for claimants
McClellands, Sydney for 1st-5th opponents
Riley Gray-Spencer for 6th opponent
Ashlars, Sydney for Mr. Cooney

CATCHWORDS:
CORPORATIONS - Management - Deadlock of board of directors - Reserve powers of general meeting - Whether general meeting can authorise commencement of legal proceedings.

LEGISLATION CITED:
Corporations Act 2001 ss.236-7, 239, 1322

DECISION:
1. Leave to appeal granted. 2. Direct filing of Notice of Appeal within 14 days. 3. Appeal dismissed with costs.

JUDGMENT:

- 27 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40521/02
CA 40794/02
ED 4586/01
ED 5093/01

MEAGHER JA
BEAZLEY JA
HODGSON JA

Monday 4 August 2003

MASSEY & ANOR.  V.  WALES & ORS.
MASSEY & ANOR.  V.  COONEY & ANOR.

Judgment

  1. MEAGHER JA:  I agree with Hodgson JA.

  2. BEAZLEY JA:  I agree with Hodgson JA.

  3. HODGSON JA:  On 14 September 2001, proceedings No. 4586 of 2001 in the Equity Division were commenced by solicitors Massey Bailey in the name of Zimmerman Holdings Pty. Ltd. (ZH) against John Wales, Downunder Pty. Limited and Eli Barel.  A fourth defendant, Damiz Pty. Limited was added by amendment on 26 September 2001.  Two further defendants, Isaac Barel and Dennis Conney were added later.  A Statement of Claim filed 23 October 2001 joined Yaqob Ragwan and Baruch Rajwan as second and third plaintiffs. 

  4. On 28 September 2001, a statutory demand was served on ZH by Dennis Cooney, and on 17 October 2001, proceedings No. 5093 of 2001 in the Equity Division were commenced by Massey Bailey in the name of ZH against Mr. Cooney, seeking to set aside that statutory demand. 

  5. On 22 February 2002, Eli Barel commenced proceedings No. 1639 of 2002 in the Equity Division seeking to wind up ZH on the ground of oppression and on the just and equitable ground.

  6. On 5 March 2002, Yaqob Rajwan filed a Notice of Motion in proceedings No. 4586 of 2001 seeking leaving to intervene in those proceedings for the purpose of…

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AGLC
Massey v Wales [2003] NSWCA 212
Case
[2003] NSWCA 212
Decision Date

CaseChat Overview and Summary

The case of *Massey v Wales* concerned a dispute regarding the authority of a general meeting of a company to authorise the commencement of legal proceedings. The specific issue arose in the context of a potential deadlock among the company's directors, preventing them from acting.

The court was required to determine whether, in circumstances where the board of directors is unable to act due to deadlock, the general meeting of shareholders possesses the inherent power to authorise the company to initiate legal proceedings. This question involved considering the interplay between the powers vested in the board of directors and the reserve powers of the general meeting, particularly in extraordinary situations.

The court's reasoning, informed by established legal principles and commentary on corporate law, acknowledged that while company constitutions typically grant broad powers to the board, there are exceptional circumstances where the general meeting can exercise powers ordinarily vested in the board. One such circumstance is director deadlock, where the board is incapable of functioning. The court also considered the impact of the *Corporations Act 2001* (Cth), specifically sections 236-237, which govern the ability of members to bring proceedings on behalf of a company, requiring court leave. Despite the statutory framework, the court found that the principle allowing a general meeting to act in place of a deadlocked board, to avoid a nonsensical outcome, remained relevant. Ultimately, the appeal was dismissed, upholding the decision of the lower court.

Orders

Orders of the court

1. Leave to appeal granted. 2. Direct filing of Notice of Appeal within 14 days. 3. Appeal dismissed with costs.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The provisions of the Corporations Act 2001 of relevance to these proceedings are ss.236-7, 239 and 1322. Those sections are as follows:236(1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if: (a) the person is: (i)a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or (ii)an officer or former officer of the company; and (b) the person is acting with leave granted under section 237. (2) Proceedings brought on behalf of a company must be brought in the company's name. (3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished. Note 1: For the right to inspect company books, see subsections 247A(3) to (6). 237(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings. (2) The Court must grant the application if it is satisfied that: (a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b)the applicant is acting in good faith; and (c)it is in the best interests of the company that the applicant be granted leave; and (d)if the applicant is applying for leave to bring proceedings---there is a serious question to be tried; and (e)either: (i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied. (3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that: (a) the proceedings are: (i)by the company against a third party; or (ii)by a third party against the company; and (b) the company has decided: (i)not to bring the proceedings; or (ii)not to defend the proceedings; or (iii)to discontinue, settle or compromise the proceedings; and (c) all of the directors who participated in that decision: (i)acted in good faith for a proper purpose; and (ii)did not have a material personal interest in the decision; and (iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and (iv)rationally believed that the decision was in the best interests of the company. The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold. (4) For the purposes of subsection (3): (a) a person is a third party if: (i)the company is a public company and the person is not a related party of the company; or (ii)the company is not a public company and the person would not be a related party of the company if the company were a public company; and (b)proceedings by or against the company include any appeal from a decision made in proceedings by or against the company. …239(1) If the members of a company ratify or approve conduct, the ratification or approval: (a)does not prevent a person from bringing or intervening in proceedings with leave under section 237 or from applying for leave under that section; and (b)does not have the effect that proceedings brought or intervened in with leave under section 237 must be determined in favour of the defendant, or that an application for leave under that section must be refused. (2) If members of a company ratify or approve conduct, the Court may take the ratification or approval into account in deciding what order or judgment (including as to damages) to make in proceedings brought or intervened in with leave under section 237 or in relation to an application for leave under that section. In doing this, it must have regard to: (a)how well-informed about the conduct the members were when deciding whether to ratify or approve the conduct; and (b)whether the members who ratified or approved the conduct were acting for proper purposes. …1322(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. (3) A meeting held for the purposes of this Act, or a meeting notice of which is required to be given in accordance with the provisions of this Act, or any proceeding at such a meeting, is not invalidated only because of the accidental omission to give notice of the meeting or the non-receipt by any person of notice of the meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or ASIC, declares proceedings at the meeting to be void. (3A) If a member does not have a reasonable opportunity to participate in a meeting of members, or part of a meeting of members, held at 2 or more venues, the meeting will only be invalid on that ground if: (a) the Court is of the opinion that: (i)a substantial injustice has been caused or may be caused; and (ii)the injustice cannot be remedied by any order of the Court; and (b)the Court declares the meeting or proceeding (or that part of it) invalid. (3B) If voting rights are exercised in contravention of subsection 259D(3) (company controlling entity that holds shares in it), the meeting or the resolution on which the voting rights were exercised will only be invalid on that ground if: (a) the court is of the opinion that: (i)a substantial injustice has been caused or may be caused; and (ii)the injustice cannot be remedied by any order of the court; and (b)the court declares the meeting or resolution 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; (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. (5) An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence. (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. FIRST INSTANCE DECISIONS

Ratio Decidendi

Legal Principle Established

In the current loose-leaf service of Ford’s Principles of Corporations Law, there appears the following at par.[7.130][7.130] Even where the constitution gives wide powers to the board to be exercised independently, there are some situations in which the power can be exercised by the general meeting.1. Board unable to actA provision in the constitution conferring power over a certain matter on the board exclusive of the general meeting is not taken to prevent the general meeting exercising the power in certain extraordinary situations. An example is where the directors are in such conflict among themselves as to be deadlocked and incapable of exercising the power (Barron v Potter [1914] 1 Ch 895), at least where the shareholders have ordinary powers of appointing directors. Barron v Potter may not apply where in a joint venture company two groups of shareholders have each the exclusive right to appoint their own nominee directors: Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 at 155.2. Not enough directors in office to form a quorumAnother case where the general meeting can act in place of the board is where the number of directors in office has fallen below the number required for a quorum and the power of appointing new directors is given by the constitution to the board: Isle of Wight Railway Co v Tahourdin (1883) 25 Ch D 320 as explained in Barron v Potter, above; Foster v Foster [1916] 1 Ch 532; cf s 201H(1), which is a replaceable rule providing that the directors of a company may appoint a person as a director.The juridical basis for these very convenient propositions is unclear. Perhaps they illustrate the preparedness of courts to find an implied exception in the constitution, as in other contracts, where it is necessary to do so in order to avoid a nonsensical outcome.It would appear from that paragraph that Ford is not supporting a wider principle than that which I have adopted. Finally, in Volume 2 of the current loose-leaf edition of Palmer’s Company Law, as par.8.801, there appears the following:Where the directors of a company can be shown to have broken the duties, described above, owed by them to a company, no special legal difficulties attend the initiation of litigation by the company against the errant directors. Such litigation may be initiated by the organs of the company having authority under the company's articles of association to commence legal actions in the company's name. Under Table A such authority is normally vested in the board and the shareholders in general meeting cannot forbid by ordinary resolution the exercise by the directors of this power. No doubt, a board containing a majority of errant directors is unlikely to initiate litigation against themselves by the company, but, such litigation may be initiated by a new board. Such litigation may also, of course, be brought by a receiver or liquidator. It would also seem that the shareholders in general meeting can by ordinary resolution bring litigation in the company's name, at least where the directors are alleged to be party to the wrongdoing, no matter what provisions the company's articles make in respect of the initiation of litigation.'The footnote to the final sentence is as follows:Marshall's Valve Gear Co. Ltd. v. Manning Wardle & Co. Ltd. [1909] 1 Ch. 267, Alexander Ward & Co. Ltd. v. Samyang Navigation Co. Ltd. [1976] 1 W.L.R. 673, 679, but cf. Breckland Group Holdings v. London & Suffolk Properties [1989] B.C.L.C 100. These two cases do not fully support the proposition stated in the text, but it is submitted that, unless that proposition is correct, the rule in Foss v. Harbottle (1843) 2 Hare 461 (see para. 8.806, post) makes no sense.