Re Rectron Electronics Pty Ltd
[2013] VSC 384
•30 July 2013
| Do Not Send for Reporting | |
| IN THE SUPREME COURT OF VICTORIA |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
List B
S CI 2013 2707
BETWEEN:
| RECTRON AUSTRALIA BV | Plaintiff |
| and | |
| CHIEN-MIN LU | First Defendant |
| HUNG-CHIH LU | Second Defendant |
| RECTRON ELECTRONICS PTY LTD | Third Defendant |
---
JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 17, 18, 19 June 2013 | |
DATE OF JUDGMENT: | 30 July 2013 | |
CASE MAY BE CITED AS: | Re Rectron Electronics Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 384 | |
CORPORATIONS – Inconsistency between Shareholders Agreement and Constitution – Amendment of Constitution by Shareholders Agreement – Appointment and Removal of Directors – Conduct of Meetings – Validity of Resolutions.
CONTRACT – Defences – Non Est Factum – Shareholder Agreement
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J Fajgenbaum QC | Deutsch Miller |
| Ms K Dawson | ||
| For the Defendants | Mr S Wilson QC Mr F Lim | Francis Lim Barristers and Solicitors |
HIS HONOUR:
Rectron Electronics Pty Ltd was incorporated on 6 January 1999 as a subsidiary of Rectron Holdings Ltd, a company incorporated in the Republic of South Africa. The shareholders of Rectron Electronics are the plaintiff, Rectron Australia BV, incorporated in The Netherlands, and the first defendant, Chien‑Min Lu, also known as Jimmy Lu. Rectron Australia is a wholly owned subsidiary of Rectron Holdings which, together with other entities, comprise the Rectron Group.
The control and composition of the Rectron Group has changed since the business was commenced in 1995 by the second defendant, Hung‑Chih Lu and David Kan. The second defendant, also known as Mark Lu, is the older brother of Jimmy Lu. Kan is the chief executive officer of Mustek Ltd, which now owns all of the shares in Rectron Holdings. For ease of reference, I will refer to the brothers as Jimmy and Mark.
The Rectron Group is a distributor of computer components, branded peripherals and related services. Rectron Holdings was listed on the Johannesburg Stock Exchange in November 1998, but has since been delisted. In March 2007, Mark and his related entities sold their interest in Rectron Holdings to Mustek. Mark, who was chairman and chief executive officer of Rectron Holdings, continued in his role until December 2011.
In late 1999, when Mark was chairman and chief executive officer of Rectron Holdings, it sought to expand, establishing branches in The Netherlands, Australia and the United Kingdom. Each branch was described in the financial statements of Rectron Holdings, as a subsidiary.
Each shareholder in Rectron Electronics held one share. Mark and Jimmy, who were both appointed directors on 24 May 1999, remain directors to this day. There were some other directors in the early years, but they resigned by early 2002.
The nature of the interest held by Jimmy, as a shareholder in Rectron Electronics, changed as time passed. The annual report for Rectron Holdings for the financial year ended 30 June 2001, noted a change in the relationship with its ‘Australian and UK operations’. The report noted that on 30 June 2001, in response to the weakening Rand and negative offshore influences, Rectron Holdings diluted its shareholding in the Australian subsidiary, Rectron Electronics, to 50 per cent. It was reported that the net result of the dilution was that Rectron Holdings provided no cross surety or future financial commitments for the group’s offshore operations and had reduced its exposure to further weak performance. The annual report also recorded a net value of asset disposed of at R998 000, and a loss on the sale of shares of R494 000.
Notwithstanding the ‘sale’ by Rectron Australia of 50 per cent of its interests in Rectron Electronics, the shareholdings did not change. Jimmy continued to hold one share, and Rectron Australia the other. Rectron Australia contended that Jimmy held his share on trust for Rectron Australia until a sale of a beneficial interest to him in 2001. That must be correct. It is consistent with the financial records for the prior year.
In the prior financial year, Rectron Holdings recorded its ownership interest in Rectron Electronics as 100 per cent. The accounts of subsidiaries were incorporated in consolidated financial statements for Rectron Holdings. In its accounting policies, adopted for the purpose of preparation of accounts, the basis of consolidation was explained in the following terms:
The consolidated financial statements incorporate the financial statements of the company and enterprises controlled by the company (its subsidiaries) made up to 30 June each year. Control is achieved where the company has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities.
The same or a similar policy was reported in subsequent years.
In the financial year ended 30 June 2003, Rectron Holdings recorded that:
During the year the group obtained controlling interests in Rectron Australia (Pty) Ltd and Rectron Electronics UK Ltd.
It was common ground that the reference to Rectron Australia (Pty) Ltd was a reference to Rectron Electronics. In the annual financial statements for the year ending 30 June 2004, it was reported that:
During the prior year the group obtained controlling interests in Rectron Electronics Pty Ltd and Rectron Electronics UK Ltd.
In the accounts of Rectron Holdings, Rectron Electronics was described as a subsidiary.
Mark, who did not participate in the trial, other than as a witness called by his brother, gave evidence of a requirement by the auditors of Rectron Holdings for evidence to support the consolidation of the accounts of Rectron Electronics into the accounts of Rectron Holdings. The instrument by which this was to be achieved was the Shareholders Agreement. Such an agreement was prepared on instructions from Mark, and signed by Jimmy on 29 June 2003.
The evidence concerning the preparation and execution of the Shareholders Agreement was confined to the knowledge of the brothers, Mark and Jimmy. In an affidavit dated 13 May 2013, Jimmy deposed that in about June 2003, Mark told him that they should sign a shareholders agreement. Mark told Jimmy that he had instructed lawyers in South Africa to draft the agreement which had been emailed to Jimmy. Mark said that the agreement was required by the auditors prior to 30 June 2003. There was some urgency. Jimmy said that nobody explained the content of the document to him. He was not represented by a lawyer in the transaction. Jimmy said that he was told by Mark that:
… everything would still remain the same as far as the operation of the company was concerned. I would continue to manage the company and its business operations as its managing director.
Jimmy initially deposed that he signed the Shareholders Agreement because he trusted Mark as his elder brother; Mark’s English was much better than his; Mark was an established businessman, and Mark would not do anything unfair to him, as he had just started out in business.
Jimmy gave a more fulsome explanation in a subsequent affidavit dated 13 June 2013:
3.In or about June 2003, my brother Mark telephoned me from South Africa and told me that we had to sign a document which he referred to as a “Shareholders Agreement”, which was he said for account purposes. He explained that Rectron Holdings which itself was a subsidiary of Mustek Ltd wanted to be able to incorporate the accounts of Rectron Electronics Pty Ltd into the groups accounts. My brother said that this was a document required purely for the accountants and that I would continue to run the company and be the MD of the same. The conversation between us took place in the Mandarin language. There was no discussion about the mechanics of the Agreement, and there was certainly no reference to the fact that under the terms of the Agreement the other shareholder was to have the right to appoint two Directors and have one with a casting vote. At that time I regarded my brother Mark as the other Director representing the interests of the other 50% shareholder. My brother was at the time the CEO and Managing Director of Rectron Holdings and was, as I understood it, in effective control of that company. In this regard I refer to paragraphs 3 and 4 of my Affidavit sworn 13 May 2013 and paragraphs 3, 4 and 5 of Mark Lu’s Affidavit sworn 13 June 2013.
4.In or about June 2003, Mark emailed me with the Shareholders Agreement … There was no further explanation of the contents of the Shareholders Agreement. He just told me to initial every page and sign at the last page and email the document back to him after signing.
5.At the time, in June 2003, I could barely speak or read any English. I could say a few words and if pressed could maybe read two or three words in English at a time, but I would then not necessarily have any understanding of them. I certainly could not have read the Shareholders Agreement, as I now understand it, and have had any understanding of it. My English in 2013 is certainly better than it was in June 2003 however I would still regard it as extremely limited and even as at this date I could not read the document being the Shareholders Agreement and understand its contents.
6.Since the time the Agreement was signed by me I have noted that the signatures on behalf of Rectron Australia BV and on behalf of Rectron International BV, are the signature of my brother Mark. At the time I signed the Agreement, no one else had signed it and certainly no one witnessed my signature. When I returned the Agreement to my brother Mark it bore only more initials and signature. I understood from my conversation with my brother Mark referred to in paragraph 3, that the Document was only meant for the accountants or auditors of Mustek Ltd to do their work and was never meant to be actually used in any other way.
7.Mark did not explain to me that if he sold his shares and his family trust’s shares in Rectron Holdings Ltd and/or if he was no longer its CEO, Rectron (Australia) BV would exercise its rights to appoint 2 directors to Rectron Electronic Pty Ltd, one of whom would be the chairman and have the casting vote and I could be removed as the managing director of Rectron Electronic Pty Ltd.
8.Nobody explained the contents of the Shareholders Agreement to me as Mark was in South Africa and I was in Australia. I did not ask anyone to translate it to me and I did not seek legal advice because Mark is my elder brother and I trusted him. In particular no one explained to me and I had no indication that the contents of the “Shareholders Agreement” was inconsistent with or contrary to the Constitution of the Company (which I have had translated for me). …
9.I remember that I scanned the Shareholders Agreement after signing and emailed it to Mark. No one witnessed my execution of the Agreement.
10. I signed the Shareholders Agreement because I trusted Mark as he:
(a)is my elder brother;
(b)had migrated to South Africa since 1994/1995 and his English is much better than mine;
(c)was already an established businessman and he would not do anything that’s unfair to me as I was just starting out in business, and
(d)was managing Rectron Holdings Ltd and Rectron Australia BV at the relevant time.
In his affidavit dated 13 June 2013, Mark deposed to the circumstances in which the Shareholders Agreement was made. He said:
15.In or about 2003, I was advised by the auditors of Mustek Ltd and Rectron Holdings Ltd, Deloitte Touche that David Kan wanted to consolidate the accounts of Rectron Electronic Pty Ltd into the accounts of Mustek Ltd to reflect an increase in the annual sales revenue of Mustek Ltd. …
16.… in or about June 2003 I instructed lawyers in South Africa to draft the Shareholders Agreement
17.In or about June 2003, I emailed the Shareholders Agreement to Jimmy. I did not explain the contents of the Shareholders Agreement to Jimmy. I just told Jimmy to initial every page and sign at the last page and email to me the Agreement after signing. On receipt I then arranged for someone to sign as a witness to his signature in South Africa. I did not ask Jimmy to send the original signed agreement to me because it was only meant for the auditors to do their work. We in South Africa just signed the scanned copy of the agreement signed by Jimmy. I cannot remember the identity of the person who I got to sign the Agreement as a witness.
The relevant parts of the Shareholders Agreement provide:
2.1Lu[1] and Australia BV[2] shall each be entitled by written notice to the Company[3] to appoint 2 (two) directors of the Company. Such shareholder (or their successors-in-title) shall be entitled to remove any such directors appointed and to replace any such director who is so removed or who ceases for any other reason to be a director of the company.
2.2…
3.1The quorum for any directors’ meetings of the company shall be 3 (three) directors, provided that if, within 30 (thirty) minutes from the time appointed for a meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week, at the same time and place or, if that day be a public holiday, a Saturday or a Sunday, to the next succeeding day other than a public holiday, a Saturday or a Sunday and if, at such adjourned meeting, a quorum is not present within 30 (thirty) minutes from the time appointed for the meeting, the directors or their alternates then present.
4.1The quorum for shareholders’ meetings of the company shall be those shareholders holding more than 50% (fifty percent) of the shares in the company. If, within 30 (thirty) minutes from the time appointed for a meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week, at the same time and place or, if that day be a public holiday, a Saturday or a Sunday, to the next succeeding day other than a public holiday, a Saturday or a Sunday and if, at such adjourned meeting, a quorum is not present within 30 (thirty) minutes from the time appointed for the meeting, the shareholders then present in person or by proxy shall be a quorum.
5.1Australia BV or its duly appointed director shall be appointed as the Chairperson of any shareholders’ and/or directors’ meeting, as the case may be, and shall have a casting vote.
6.1Subject to the provisions of clause 5, All resolutions of the company in order to be of force and effect must be approved by a majority the directors or the shareholders, as the case may be, present at a meeting or as otherwise provided for in this agreement. Each of the directors or his alternate appointed by a particular shareholder shall have as many votes as the number of shares which the shareholder appointing him holds divided by the number of directors appointed by that particular shareholder, who vote on the particular resolution.
6.2…
7.1Subject to the provisions of clause 5, if there is a deadlock between the shareholders or directors, as the case may be, as to any resolution proposed, which cannot be resolved, the resolution in question shall fail. Any such failure or deadlock shall not constitute a ground for the winding-up of the company.
8.1If there is any conflict between the provisions of this agreement and the memorandum and articles of association of the company at any time, the provisions of this agreement shall prevail.
8.2The shareholders undertake to take all such steps and do all such things as may be necessary to alter (promptly after the effective date) the memorandum and articles of association of the company so as to reflect, insofar as may be appropriate, the provisions of this agreement.[4]
[1]Defined as Jimmy Chien Ming Lu.
[2]Defined as Rectron Australia BV.
[3]Defined as Rectron Electronics Proprietary Limited.
[4]Headings omitted, emphasis added.
Background to litigation
On 17 April 2013, Rectron Australia purported to appoint Anthony Church and Ian Jackson as its nominated directors pursuant to clause 2.1 of the Shareholders Agreement. On 19 April 2013, Church sent an email to Jackson, Jimmy and Mark, attaching Notice of Directors Meeting to be held at 11.30 am on 26 April 2013 at the offices of Rectron Electronics at 61–63 Glenvale Crescent, Mulgrave, Victoria. A copy of the notice was also sent by registered mail to each of Jackson, Jimmy and Mark. The Notice of Directors Meeting referred to proposed resolutions, including the appointment of a forensic accountant to undertake an audit of the financial affairs of the company over the previous five years; the immediate suspension of Jimmy as managing director; the appointment of Shannon Ma as chief executive officer; and various steps to transfer control of the company’s bank accounts to Church.
Having received no response from Mark or Jimmy, Church and Jackson attended at the offices of Rectron Electronics at around 11.15 am on 26 April 2013. Having introduced himself to a receptionist, Church advised that he and Jackson were there for a meeting with Jimmy. He was informed that Jimmy was sick. Church and Jackson waited until shortly after 12 noon and then left, having advised the receptionist that they would be back in one week’s time. Under clause 3.1 of the Shareholders Agreement, a quorum for any directors meeting was three directors, provided that if, within 30 minutes from the time appointed for the meeting, a quorum was not present, the meeting would stand adjourned to the same day, time and place the following week.
Later that day (26 April) Church emailed Jackson, Jimmy and Mark advising them that the meeting stood adjourned until 11.30 am on Friday 3 May 2013. The email did not elicit any response from Jimmy or Mark.
On 3 May 2013, Jackson and Church again attended at the offices of Rectron Electronics at approximately 11.10 am, together with Kan and Ma. On this occasion Jimmy was present, accompanied by two other men, one of whom identified himself as Francis Lim, solicitor. There followed an exchange in which one of the men accompanying Jimmy threatened to call the police if Kan and his group did not leave. Police arrived and Kan and his party left the building. Church and Jackson then conducted a meeting on the footpath outside the office, during which they purported to pass the following resolutions, which corresponded with those proposed in the Notice of Directors Meeting, dated 19 April 2013:
1.That a forensic accountant being Cully Gower of Gower Jones & Co be appointed immediately by the Company for the purpose of performing a detailed audit of the financial affairs and conduct of the Company over the past five years;
2.That Jimmy Lu’s role as Managing Director be suspended immediately pending consideration by the board of directors of the Company of the results of the detailed audit referred to in Resolution 1 above;
3.That Ma, Shu‑Lan AKA Shannon Ma be employed as CEO of the Company and Anthony Church be authorised to negotiate the terms of a service agreement with Ms Ma for and on behalf of the Company and to execute and complete such agreement for and no behalf of the Company; and
4.That effective immediately and pending the board’s subsequent consideration of Mr Gower’s report:
a.all power of instruction over the Company’s bank accounts held by any director of the Company, whether or not such rights and/or power had been formally granted by the Company, be and are hereby suspended;
b.that Anthony Church be immediately confirmed as the director having the sole power of instruction over the Company’s bank accounts until such time as he is informed by the Company that his sole rights have been revoked or amended or he ceases to be a director; and
c.that the Chairman of the Company from time to time be granted the authority to grant rights of access to and power of instruction over the Company’s bank accounts to the CEO of the Company from time to time, such rights to be sole rights or joint with himself as he decides in his absolute discretion.
The minutes of the meeting were circulated on 6 May 2013. On 7 May 2013, solicitors for Jimmy advised Church that he disputed the appointment of Jackson and Church as directors of Rectron Electronics, and the validity of the resolutions that were purportedly passed on 3 May 2013.
On 10 May 2013, Rectron Australia commenced a proceeding in the Supreme Court of New South Wales. It sought injunctions restraining Jimmy from making any payments from any bank account of Rectron Electronics without the prior knowledge and consent of Church. The final relief sought included declarations as to the validity of the appointment of Church and Jackson as directors, and of the resolutions that were made by them on 3 May 2013. Alternatively, Rectron Australia sought specific performance of clause 8.2 of the Shareholders Agreement to ensure that the constitution of Rectron Electronics reflected the provisions of the Shareholders Agreement.
An application for interim relief was heard by Black J in the Corporations List, Equity Division of the Supreme Court of New South Wales. His Honour made orders restraining the defendants from carrying out, or causing to be carried out, any transactions on the bank accounts of Rectron Electronics without giving three business days’ notice to Church or such other representative as the plaintiff may nominate. His Honour also transferred the proceeding to this Court.[5]
[5](2013) NSWSC 610.
The interlocutory application was made returnable in the Commercial Court on 3 June 2013. On that occasion, a regime of undertakings and orders was crafted to enable Jimmy to carry on the business of Rectron Electronics, while providing transactional information to Rectron Australia. Some limitations were imposed on the type and value of the business obligations that could be incurred by Jimmy. In particular, the defendants were restrained from causing Rectron Electronics to enter into any new transaction, agreement or obligation which incurred a liability for an amount in excess of $10 000 without first giving Church and Jackson three business days’ notice of their intention to do so.
The undertakings were given and orders made in circumstances where the Court was in a position to fix a trial date two weeks later. An order for security for costs was made forthwith in favour of Jimmy, and directions made for the filing of affidavits. The proceeding was fixed for trial on 17 June 2013, on an estimate of three days.
Jimmy foreshadowed an application to wind up Rectron Electronics should the validity of the resolutions, purportedly made on 3 May 2013, be upheld. He was directed to file any such application on or before 7 June 2013, although it was common ground that the winding‑up application would only be pressed, if at all, following determination of the proceeding commenced by Rectron Australia. An affidavit of Jimmy, dated 7 June 2013, was filed in support of the winding‑up application. The parties accepted that insofar as evidence was to be given by Jimmy, Mark and any witness called on behalf of Rectron Australia in this proceeding, such evidence should also address the issues raised in the winding‑up application. A direction was made that the evidence given in this proceeding would be evidence in the winding‑up application, if the application were to be pressed.
The winding‑up application was made pursuant to ss 232, 233 and 461(1)(g) and (k) of the Corporations Act 2001 (Cth). In his affidavit in support, Jimmy relied on affidavits filed in this proceeding dated 13 May 2013, 29 May 2013, and 31 May 2013 respectively. A fair summary of Jimmy’s case for winding up, at least sufficient for present purposes, is that Rectron Australia was acting under the direction of Kan, whose object and purpose was to close down the business and harass Mark.
Jimmy contended at trial that the purported resolutions for the appointment of a forensic accountant and his suspension as managing director were designed to fish for evidence to assist Kan in litigation against Mark in South Africa. In response, Rectron Australia made allegations concerning conflicts of interest by Jimmy in his management of the business of Rectron Electronics, including the receipt of substantial amounts of cash paid into his private account from suppliers in Taiwan.
Putting to one side the issues between the parties in relation to a possible winding‑up application by Jimmy, the issues at trial were identified by the plaintiff as follows:
(a)Did the Shareholders Agreement directly amend the constitution of Rectron Electronics?
(b)If the Shareholders Agreement did not directly amend the constitution, did the principle in Re Duomatic Ltd[6] operate to amend the constitution?
(c)Should the Court exercise its discretion under s 1322(2) of the Corporations Act, to declare that the appointment of directors and the passing of the resolutions, is not invalidated by reason of procedural irregularity?
(d)Should the Court exercise its discretion under s 1322(4)(a) of the Corporations Act, to declare that the appointment of the directors, and the passing of the resolutions, were not invalid by reason of a contravention of the Act or of the constitution?
(e)Was Rectron Australia entitled to specific performance of the Shareholders Agreement?
[6][1969] 2 Cth 365.
Some of these issues identified by the plaintiff arose only in the alternative. Their resolution was, of course, anterior to the substantive relief sought by Rectron Australia to validate the appointment of Church and Jackson as directors of Rectron Electronics, and each of the resolutions made by them on 3 May 2013.
For his part,[7] Jimmy advanced the following contentions at the commencement of the trial:
(1)He should not be bound by the Shareholders Agreement, as he had not brought a consenting mind to its execution. This was a threshold defence of non est factum going to the enforceability of the Shareholders Agreement against him.
(2)Even if he might otherwise be bound by the terms of the Shareholders Agreement, it was unenforceable because there was no consideration moving from the promisee.
(3)Execution of the Shareholders Agreement was not done with any intention to create a legal relationship.
(4)If binding and enforceable against him, the Shareholders Agreement did not, on its proper construction, authorise the appointment of two directors by Rectron Australia.
[7]Second Defendant, Mark Lu, did not enter an appearance and only participated in the trial as a defendant.
In final submissions, Jimmy sought to raise an estoppel based on an alleged misrepresentation by his brother Mark, made on behalf of Rectron Australia, to the effect that the Shareholders Agreement would not be implemented or enforced by Rectron Australia. He also contended that Rectron Australia’s failure to rely upon the agreement for almost 10 years made it unjust and inequitable for Rectron Australia to now insist on its legal rights under the Shareholders Agreement, or to exercise them.
Rectron Australia objected to Jimmy raising the estoppel in final submissions. It argued that, had such a case been raised at or before the commencement of the trial, the evidence adduced by it might well have been augmented by evidence detailing the significance of the Shareholders Agreement to Rectron Holdings, explaining why it had not previously been acted on, and the reasons why it was now being relied upon to appoint two directors. It contended that such evidence would probably have required Kan to be called as a witness, and to travel from South Africa for that purpose.
During his closing submissions, Jimmy’s case for an estoppel changed. Initially, counsel for Jimmy contended that the representations by Mark were to the effect that Rectron Australia would not rely on the Shareholders Agreement to exercise control, or to remove Jimmy from his position in the company. On that basis he contended that it would be unjust and inequitable for the plaintiff to now insist on its legal rights. But he did not develop that case beyond asserting very general propositions. He did not address, with necessary precision, the question of what it was that Mark had said that induced Jimmy to believe and conduct himself on the assumption that the rights would never be exercised. In any event, the evidence was to the contrary. Jimmy conceded that he knew that his position was only secure while his brother was chief executive officer of Rectron Holdings.
The lack of precision with which the estoppel case had been advanced was compounded by the way in which counsel for Jimmy explained its relevance. He argued, in effect, that the estoppel case was another way of analysing the significance of the conversation between the brothers in late June 2003, as if between partners, with duties of good faith. This, it was said, added potency to the non est factum case. Counsel said that the reliance on the misrepresentation was
‘a way of testing whether or not [Jimmy Lu] ought to be held to the contract … that might just mean nothing more than that’s sufficient grounds to succeed on non est factum and that’s why we should succeed on non est factum’.
It is not surprising that Jimmy was ambivalent about his reliance on the estoppel case, as the factual matrix underpinning that case was inconsistent with his defence of non est factum. The estoppel case focussed attention on representations about the way in which the Shareholders Agreement might or might not be deployed. It assumed a level of understanding by Jimmy of the nature of the agreement to bolster his reliance on an assumption about enforcement.
In my view, it was unfair to permit Jimmy to raise the alleged misrepresentation as an estoppel at that stage of the trial. In the absence of pleadings, the scope of the issues must be determined by other means. In the present case, it was the affidavit material, correspondence passing between the parties and the openings. Rectron Australia could not reasonably have anticipated that such a contention would be raised. I reject the contention on that basis. More importantly, on the evidence presently before the Court, the allegation of misrepresentation, as the basis for an estoppel, is without substance.
If, as his contention implied, Jimmy was conscious of the rights of Rectron Australia under the Shareholders Agreement at the time he signed it, the mere fact that Rectron Australia did not exercise those rights for 10 years, is no basis to deny them. Jimmy always understood that there was a risk to his position if his brother moved on. Mark did not convey to Jimmy that the rights would never be relied upon. Moreover, for the reasons set out below, I find that Jimmy well knew, at the time he executed the Shareholders Agreement, that it was intended to operate so as to give control of Rectron Electronics to Rectron Holdings, to validate the consolidation of the accounts.
Non est factum
The threshold, and a central issue in this proceeding, was the enforceability of the Shareholders Agreement against Jimmy. He relied upon the decision of the High Court in Petelin v Cullen[8] in which the court held, in a joint judgment:
It is now settled beyond any shadow of doubt that when we speak of negligence or carelessness in connexion with non est factum we are not referring to the tort of negligence but to a mere failure to take reasonable precautions in ascertaining the character of a document before signing it. The insistence that such precautions should be taken as a condition of making out the defence is of fundamental importance when the defence is asserted against an innocent person, whether a third party to the transaction or not, who relies on the document and the signature which it bears and who is unaware of the circumstances in which it came to be executed. It is otherwise when the defence is asserted against the other party to the transaction who is aware of the circumstances in which it came to be executed and who knows (because the document was signed on his representation) or has reason to suspect that it was executed under some misapprehension as to its character. In such a case the law must give effect to the policy which requires that a person should not be held to a bargain to which he has not brought a consenting mind for there is no conflicting or countervailing consideration to be accommodated — no innocent person has placed reliance on the signature without reason to doubt its validity.
[8][1975] 132 CLR 355, 360; Barwick CJ, McTiernan, Gibbs, Stephen and Mason JJ.
The High Court held that, on the foregoing analysis, the element of carelessness did not arise as an issue in that case. The trial judge had found that the document in question, a receipt, had been misrepresented by the respondent’s agent and consequently, the respondent could not be considered as an innocent person without knowledge or reason to doubt the validity of the appellant’s signature. The High Court continued:
The other element in the defence which requires to be mentioned is the necessity that the appellant should show that he believed the document to be radically different from what it was in fact. Once it is accepted that the primary judge could properly find that the appellant believed it to be a receipt, this point of contention disappears from the case. The respondent urged that the evidence was so slight as not to overcome the “heavy” onus which rested with the appellant. The existence of that onus unquestionably was present to the mind of the primary judge when he came to assess the credibility of the appellant. But once he accepted the appellant's evidence the question of onus in our opinion was set at rest.
In Ford v Perpetual Trustees Victoria Ltd,[9] the New South Wales Court of Appeal considered the defence of non est factum in circumstances where the borrower suffered from a congenital intellectual impairment and was illiterate, although he had the ability to sign his name. He had been manipulated by his son into signing loan documents in order to procure funds for the purchase of a business which the son proposed to operate, but in the borrower’s name. The trial judge found that the borrower had no capacity to understand and did not understand the transaction. The Court of Appeal reviewed Petelin v Cullen and the speeches in Saunders (Executrix of the Will of Rose Maud Gallie, Deceased) v Anglia Building Society.[10] The decision of the Court of Appeal provides a useful distillation of the principles. It is unnecessary to set out those erudite passages in this judgment. The following summary will suffice. First, the defence must be kept within narrow limits; second, the range of incapacities that may be relied upon is narrow, confined to those who are permanently or temporarily unable, through no fault of their own to have, without explanation, any real understanding of the purport of the agreement; third, the difference between that which the person believed he was signing and the document must be radical or fundamental; fourth, even when a person is illiterate, blind or lacking in understanding, the defence will only succeed when the person has acted responsibly and carefully, according to their circumstances.[11]
[9][2009] NSWCA 186; (2009) 75 NSWLR 42.
[10][1971] AC 1004.
[11](2009) 75 NSWLR 42 at [40] – [46] per Allsop P, Young JA; Sackville AJA in agreement at 73.
Jimmy contended that he suffered from a lack of understanding of, and an inability to read, the English language. He said he conducted his business in Mandarin. He spoke to his brother in Mandarin. He said that he relied on his older more experienced brother, who gave assurances about the purpose of the document and that it would not change the way in which Jimmy ran the business. Mark said that the Shareholders Agreement was required by the auditor as a matter of urgency. Jimmy signed the document and dated it 29 June 2003. He returned it to Mark by facsimile transmission. Mark backdated his signature to 26 June 2003.
The financial year of the Rectron Group in South Africa ended on 30 June. Mark said the agreement was ‘done as a paper trail to get auditors off our back’. It was required to support the consolidation of the accounts. He gave instructions to lawyers to draft the document to enable the consolidation of the Australian entity accounts into the group accounts. Mark agreed that the Shareholders Agreement had been relied upon to consolidate the accounts in 2003 and each succeeding year. He said that it was also intended to cover the prior year, 2002. He accepted that consolidation flowed from the control that Rectron Holdings could exercise, through Rectron Australia, under the Shareholders Agreement. Mark said that he did not explain the document to his brother, other than to tell him that it was required by the auditors for the purpose of consolidation. He said:
Everything will remain the same. Don’t worry. Just sign it and send it back to me.
It was put to Mark in cross‑examination that, in the course of his discussion with his brother, there was mention of control. He was unsure, but did not deny the possibility. Mark said that the Shareholders Agreement, once signed, was provided to the auditors and placed in the records of Rectron Holdings Ltd. It would have been available to all directors, who were told of its existence. If the version of events given by Mark is complete and accurate, there is no suggestion that he informed the auditors or other directors of Rectron Holdings of the circumstances in which the Shareholders Agreement had been executed by Jimmy other than the fact of execution.
When Jimmy received the document, he understood that it looked like a contract. He knew that it was a Shareholders Agreement, with the potential to adversely affect his position in Rectron Electronics. Jimmy claimed that in June 2003 he could barely speak or read English. He conceded that his English was now better than it was in June 2003. At trial, he was assisted by an interpreter, although it was apparent to any observer that the process of interpretation was often unnecessary. It was clear that he understood questions framed in English, responding to them prior to translation.
But let it be assumed that his written and spoken English was very limited in June 2003. He was surrounded by people who could have, and often did, translate and explain important documents prepared in English. He conceded that he could have obtained a translation by asking an employee, his solicitor, or perhaps a friend. He could also have asked his brother for a translation or a more fulsome explanation of the Shareholders Agreement. Afterall, it would not have taken long to explain the significant terms of the Agreement. Jimmy did not contend that he was illiterate, or suffered from a disability that prevented him from understanding the nature and effect of the Shareholders Agreement. He relied on his inadequate spoken and written English, and what he had been told by his brother.
I am not persuaded that Jimmy’s comprehension of spoken and written English was as limited in 2003 as he made out. He sought the assistance of translators from time to time. He came to Australia in around June 1999 for the express purpose of managing Rectron Electronics. He rented warehouse and office space, and in November 1999 the company began trading. Documents were filed by Rectron Electronics with ASIC from time to time, such as annual returns and changes to company details. Jimmy later signed directors reports and declarations to be included in financial statements prepared by the auditors of Rectron Electronics.
Putting the best possible complexion on Jimmy’s reasons for not enquiring further about the document, or obtaining a translation, it was because he trusted and was obedient to his older brother who required the document to be signed as a matter of urgency. He was told by his brother that he would continue to run the business, and understood that the agreement would not be enforced, at least so long as his brother controlled Rectron Holdings, so as to adversely affect his position in the company. Therefore, he contended, he should be excused from any obligation to make further enquiry, and could not be regarded as negligent in the relevant sense.
From the evidence given by Jimmy and Mark, I am satisfied of the following:
(a)Mark came under substantial pressure from the auditors of Rectron Holdings in South Africa to justify the consolidation of the accounts of Rectron Electronics into Rectron Holdings, on the basis that Rectron Holdings had the power to control the financial and operating policies of Rectron Electronics and obtain benefits from its activities.
(b)Mark arranged for the preparation of the Shareholders Agreement to evidence the control of Rectron Electronics by Rectron Holdings, which had been assumed in the past, even after the transfer to Jimmy of the beneficial interest in his share.
(c)At the time Mark approached Jimmy to execute the Shareholders Agreement, both understood that, even then, Rectron Holdings was capable of exercising control over the business of Rectron Electronics. That may be inferred from Mark’s expectation that Jimmy would execute the agreement, and the fact that Jimmy did so.
(d)At the time of his conversation with his brother in late June 2003, concerning the Shareholders Agreement, and after executing the document, Jimmy understood that his position in Rectron Electronics, as managing director, depended on the goodwill of his brother.
(e)Jimmy understood that the agreement he was asked to sign was a shareholders agreement, required by the auditors of Rectron Holdings to justify consolidation of accounts, and that it confirmed the control of Rectron Holdings over Rectron Electronics.
(f)Jimmy understood that the Shareholders Agreement might be used in future by Rectron Holdings to exercise control, including his removal as managing director. Jimmy understood that his position was only secure if his brother remained in control.
The foregoing conclusions are reinforced by Jimmy’s conduct after having executed the agreement. In and from June 2008, when verifying the accuracy of the financial statements prepared for Rectron Electronics, Jimmy stated that Rectron Electronics was controlled by the ultimate parent entity in South Africa, Mustek. In about March 2007, Mustek acquired Mark’s shareholding in Rectron Holdings, although Mark continued as chief executive officer until December 2011. At no stage, whether before or after his brother left Rectron Holdings, did Jimmy seek to contradict his acknowledgements of control until shortly before this proceeding was commenced.
When Mark left his employment as chief executive officer at Rectron Holdings, he was expected to resign other positions, including as a director of Rectron Electronics. When asked why he had not done so, he said, ‘(h)onestly, first I forgot’. Later in his evidence he explained that he had not resigned because ‘Jimmy asked me to stay on because very scared; he doesn’t know what’s going to happen in the future’. While the precise timing of Mark’s re‑awakening about his position as a director of Rectron Electronics, and the need to assist his brother is unclear, the events of March 2012 may provide the explanation.
On 1 March 2012, Dan Kramer, a solicitor at Thomsons Lawyers, emailed Jimmy. He wrote:
As discussed yesterday, attached are the following documents that need to be signed by you … in order to appoint David (Kan) to the board, to effect the amendment in the Shareholders Agreement, the removal of Mark as a director of Rectron Electronics Pty Limited and to make the corrections on the ASIC register
Attachments included a circular resolution of members removing Mark as a director and appointing Kan as a director nominated by Rectron Australia. There was also a resolution to amend the Shareholders Agreement by replacing clause 3.1 with the following clause:
The quorum for any directors’ meeting of the company shall be 2 (two) directors provided that at least 1 (one) of the directors present at the meeting has been appointed by Australia BV and provided that if, within 30 (thirty) minutes from the time appointed for a meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week, at the same time and place, or if that day is a public holiday, a Saturday or a Sunday, to the next succeeding day other than a public holiday, a Saturday or a Sunday and if, at such adjourned meeting, a quorum is not present within 30 (thirty) minutes from the time appointed for the meeting, the directors or their alternates then present.
Jimmy refused to sign any of the documents. The reason given was that he ‘wanted Mark to stay on as a director and I was worried what Kan wanted to do with the company and its business’. Jimmy said that after he received the email, he asked one of his employees to translate the Shareholders Agreement, and realised for the first time that it provided for each shareholder to appoint two directors, and that a director appointed by Rectron Australia would have a casting vote. Even so, he did nothing to protest the consequence he claimed to have realised for the first time. He said that he spoke to his brother and asked what was happening.
Jimmy deposed that in early 2012, following some discussions with Kan, he was sent a draft sale and purchase agreement in relation to the share held by Rectron Australia in Rectron Electronics. The circumstances in which that agreement did not proceed were not explored at trial. There were discussions between Kan and Jimmy in relation to the sale of shares, and towards the end of 2012 they engaged Macquarie Commercial & Business Sales Pty Ltd to sell the business. The documents produced in evidence did not explain whether it was to be a sale of the shares or assets. In any event, such efforts as were made did not result in any sale. On 13 February 2013, Kan sent an email to Jimmy in which he said:
We had a board meeting this morning. My fellow directors are getting i[m]patient. We engaged with selling Rectron SA shares with you [a] year ago. 12 month later, I cannot table any tangible deal with the Board.…obviously I explained to them regarding the new approach we are taking etc., however, there is nothing concrete enough to put their mind at ease.
I have been given until 30th of June 2013 to table a tangible or promising enough deal, otherwise the Board will ask me to take over the management of the company. I don’t want you to interpret this message wrongly or read this as a threatening. Please put yourself into our chairs and let me know if we have other options.
Jimmy responded to the email:
David, don’t worry, I will do my best.
There was no suggestion by Jimmy that Kan was unable to ‘take over the management of the company’; nor did he protest about the legitimacy of the threat. It was not until after Jimmy had been notified, on 17 April 2013, of the purported appointment of Church and Jackson as directors of Rectron Electronics that he, through his solicitors, Gani Attorneys, challenged the basis for the appointments. Notwithstanding the fact that the Notice of Appointment expressly provided that the appointments had been made under clause 2.1 of the Shareholders Agreement, the letter from Gani Attorneys stated:
Our clients [Gani Attorneys also acted on behalf of Mark Lu] are unsure as to how Mr Anthony Church and Mr Ian Douglas Jackson have been appointed as Directors as neither of our clients have attended any Directors Meeting or signed any documentation consenting to any such appointment.
By the time his solicitors had sent that letter, Jimmy was well acquainted with the basis upon which Rectron Australia purported to act to appoint the directors. Afterall, he claimed that in March 2012 he had the Shareholders Agreement translated. Those events, coupled with the negotiations over the proposed sale, and Kan’s threat to assume control of Rectron Electronics, would have left Jimmy in no doubt as to the basis upon which Rectron Australia might act to assume control. For that reason, the expression of uncertainty advanced by Gani Attorneys on behalf of Mark and Jimmy seemed less than genuine.
I find that Jimmy has failed in his defence of non est factum. My reasons for so finding may be summarised as follows:
(a)I am persuaded that Jimmy was aware, at the time he executed the Shareholders Agreement, of the true nature and purpose of the agreement, as one that confirmed control by Rectron Holdings, through Rectron Australia, of the business of Rectron Electronics. He also knew that, if the agreement was acted upon, his position as managing director may be at risk.
(b)I do not accept that the true nature or purpose of the agreement was misrepresented to Jimmy by his brother Mark.
(c)Notwithstanding his difficulty with the English language, Jimmy was able, if he chose, to have the document translated or more fully explained. He did not do so in the knowledge that, if the agreement were to be acted upon, he could be removed from his position in the company.
(d)I am persuaded that if Jimmy had any doubt about the nature of the agreement, its purport and potential consequences, he would have sought explicit explanations and assurances from his brother, or a translation by a solicitor, employee or friend.
(e)I am persuaded that the attempt by Rectron Australia in March 2012 to rely upon the agreement came as no surprise to Jimmy, following the departure of his brother as chief executive officer of Rectron Holdings.
(f)I am persuaded that throughout his involvement in Rectron Electronics, and when executing the agreement, Jimmy always understood that Rectron Electronics was controlled by the Rectron Group in South Africa, through Rectron Australia, and that the Shareholders Agreement formalised that control.
(g)I accept that Jimmy may well have only had the Shareholders Agreement translated in full for the first time in about March 2012. Prior to that, he had no reason to have it translated, because he knew in substance its purport and effect. Perhaps it was only in March 2012 that he became aware of the mechanism by which Rectron Australia might exercise its control, through the use of a casting vote. Any misunderstanding, if there was any, about the manner in which voting might take place, is no basis upon which to relieve Jimmy from the consequences of the bargain that he made when executing the agreement.
Absence of consideration
Jimmy contended that the Shareholders Agreement was unenforceable, because consideration had not moved from the promisee.[12] His evidence on this topic was plainly crafted by lawyers, making it likely that other parts of his affidavits were also crafted to conform with a case they wished to construct rather than with the objective facts. For example, Jimmy deposed:
I did not receive any consideration in return for the purported surrendering of my effective control of the company and its business operations.
[12]Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460, 498.
Jimmy contended that under the agreement he had given away his right of veto as a director and shareholder, to prevent anything being done without his consent; he had provided an equal shareholder with effective control of the company; and provided an equal shareholder with the power to remove him as managing director from a company which he had, run for 13 to 14 years. He contended that he had received nothing in return.
These contentions are misconceived. The Shareholders Agreement recorded a mechanism for control of Rectron Electronics by Rectron Holdings. Control already existed and was manifest in Mark’s requirement of Jimmy that he execute the Shareholders Agreement.
The mechanism for control established by the Shareholders Agreement contained mutual promises and obligations. It conferred on Jimmy as shareholder, the right to appoint two directors. At a practical level, Jimmy understood that his continued enjoyment of the position of managing director depended upon the goodwill of his brother, who required the agreement to satisfy the auditors, and to ensure that Rectron Electronics would continue to enjoy the financial support of the parent entity.
Intention to create legal relationship
Jimmy contended that the Shareholders Agreement was no more than a device manufactured by Mark to accommodate a requirement of the auditors of Rectron Holdings. As the authorities make clear, the search for an intention to create contractual relations requires an objective assessment. An uncommunicated subjective reservation or intention is of no consequence.[13]
[13]Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95, 105 [24]–[26].
The fact that Mark may have regarded the document as merely a piece of paper to satisfy the auditors is of no consequence. The objective facts include the significance of control for the purpose of consolidation, the requirement of the auditors for evidence of that control, the fact that Mark engaged lawyers to prepare the document for that purpose, the urgency with which he sought and obtained Jimmy’s signature and the reservations Jimmy had about the risk to his continued control of Rectron Electronics.
Viewed objectively, the Shareholders Agreement was quite plainly intended to have the legal consequence of formalising control of Rectron Electronics by the Rectron Group, so that Rectron Holdings would be entitled to consolidate the accounts of Rectron Electronics into its own accounts. It was relied upon by all parties for that purpose.
Futility — the construction argument
Jimmy contended that even if valid and enforceable, the Shareholders Agreement did not provide for the removal of a current director, only the removal of such directors as may have been appointed by a shareholder ‘under the Shareholders Agreement’. As Mark had been appointed as a director prior to the Shareholders Agreement, Jimmy contended that Rectron Australia was unable to remove him as a director. But Jimmy contended, Mark should be regarded having been appointed by Rectron Australia, so that ha was entitled to appoint two more directors, in addition to himself, taking the number of directors in his camp to four. On the other hand, Jimmy contended, Rectron Australia was confined to the appointment of only one additional director.
Putting aside his inconsistent approach to Mark’s appointment, Jimmy’s contentions in support of his futility argument depended on the assumption that directors appointed prior to the execution of the Shareholders Agreement would remain in office notwithstanding the exercise by shareholders of their right of appointment under the agreement.
The construction of the agreement for which Jimmy contended was convoluted, illogical and inconsistent with the intention of the parties, evident from the nature and content of the document read as a whole, in the context in which it had been prepared and executed. The Shareholders Agreement must be construed as a commercial agreement intended by the parties to implement a new regime and mechanism under which control by the Rectron Group over the business and affairs of Rectron Electronics could be achieved and maintained.
Jimmy and Mark had been appointed prior to the introduction of the new regime and mechanism for control over management. What then was to become of their position of directors under the new regime? In my view, if the new regime is to be given practical effect, and prevails over the Constitution, each shareholder must be entitled to ‘start again’ by the appointment of two nominated directors. To limit the right, because of pre‑existing appointments, would undermine the concepts and entitlements embedded in the Shareholders Agreement. For example, Jimmy might nominate himself and another as directors. That ‘other’ may be Mark. But if not, and unless Mark were to be nominated by Rectron Australia as one of its directors, Mark’s position as a director must come to an end. His continuation in office would be inimical to the agreement. In my view it would be unnecessary for there to be a resolution of members to remove Mark as a director, because his continuation as a director, unless nominated by one of the shareholders, would frustrate the object and purpose of clauses 2.1 and 5.1 in the Shareholders Agreement.
I do not accept Jimmy’s contention that Rectron Australia is unable to remove Mark as a director because he was not appointed pursuant to the Shareholders Agreement. Unless appointed by Jimmy or Rectron Australia, as one of their two nominated directors, Mark’s position would be incompatible with the Shareholders Agreement once four directors had been appointed. He would be disqualified from continuing in office.
The fact that Mark regarded himself as a director appointed by Rectron Australia is of no consequence. Rectron Australia would have acted pursuant to its rights under the Shareholders Agreement when appointing two directors.
Validity of appointments and resolutions
In my opinion, the Shareholders Agreement was effective in itself, as a resolution of members, to alter the Constitution so as to introduce a limitation on the number of directors and a casting vote. The plaintiff’s contentions in relation to the amendment of the Constitution, as a statutory contract, overlap substantially with its invocation of the principle in Duomatic. In Duomatic, Buckley J said:[14]
[W]here it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be …
[14]Re Duomatic Ltd [1969] 2 Ch 365, 373.
I have already found that Jimmy is bound by the Shareholders Agreement. The change in regime brought about by the Shareholders Agreement is something which the shareholders in general meeting could have achieved, and by their agreement are taken to have achieved. They have disregarded the formalities to achieve a substantive outcome.[15] I am satisfied that the Shareholders Agreement constituted the unanimous consent of the shareholders to change the Constitution to reflect its terms, and in particular, clauses 2, 3, 4, 5 and 6. The contentions of Jimmy on this issue depended upon the Court accepting that he had not agreed to the Shareholders Agreement.
[15]Herrman v Simon (1990) 4 ACSR 81 at 83; Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Limited & Ors [1992] VR 279 at 314–321; Monecor (London) Ltd v Euro Brokers Holdings Ltd [2003] EWCA Civ 105; [2003] 1 BCLC 506; [2003] BCC 573.
Notwithstanding the existing appointments, Rectron Australia had the right under the Shareholders Agreement to appoint two directors. It did so. The appointments were, in my view, valid. Likewise, Jimmy is entitled to appoint two directors. He may nominate himself and appoint Mark, if he chooses. But if Jimmy appoints two directors other than Mark and himself, the effect of the Shareholders Agreement will be to disqualify Jimmy and Mark from acting as directors. That is because the shareholders have agreed, and are taken to have resolved, that the only directors shall be two each nominated and appointed by them under the Shareholders Agreement.
The resolutions purportedly made by Church and Jackson on 3 May 2013 are valid and effective resolutions made under the constitution as amended by the Shareholders Agreement. I am satisfied that the procedure implemented by them, pursuant to clause 3.1, was effective to validate the meeting that took place that day.
The plaintiff advanced elaborate contentions in support of declarations under s 1322(2) and (4)(a) of the Corporations Act to validate the appointment of Church and Jackson as directors and the validity of the resolutions. In my opinion, it is unnecessary to invoke those provisions. If and insofar as the Shareholders Agreement has the effect of amending the constitution, there is no procedural irregularity, mistake or error requiring correction and validation. But if I am wrong, and the Shareholders Agreement did not effectively amend the constitution, whether as a circular resolution or under the principle in Re Duomatic, I would not regard the unilateral appointment of Church and Jackson, and the resolutions made by them, as involving a mere procedural regularity that might be overlooked and validated by the Court under s 1322 of the Corporations Act.
There is no occasion for an order for specific performance of clause 8 of the Shareholders Agreement. It also follows that the notice dated 18 June 2013, prepared by Jimmy, purporting to appoint two additional directors to the board, in the event that the Shareholders Agreement is held to be valid and enforceable would, if pursued, result in his disqualification as a director. It would be inconsistent with the object and purpose of the Shareholders Agreement that he remain a director having exercised his right as a shareholder to appoint two others.
Key Legal Topics
Areas of Law
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Corporate Law & Governance
Legal Concepts
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Contract Formation
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Breach of Contract
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Implied Terms
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Unconscionable Conduct
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