Saad v Doumeny Holdings Pty Ltd - [2005] NSWSC 893

No judgment structure available for this case.

CITATION:
Saad v Doumeny Holdings Pty Limited [2005] NSWSC 893

HEARING DATE(S): 08/06/05-10/06/05, 22/06/05

JUDGMENT DATE :

8 September 2005

JURISDICTION:
Civil

JUDGMENT OF:
Burchett AJ at 1

DECISION:
The purported appointment of the second defendant as a director of the first defendant and certain allotments of shares in the first defendant were invalid and should not be validated under s 1322 of the Corporations Act.

CATCHWORDS:
(Corporations) (Power of Attorney) - Purported appointment of director of company - purported allotment of shares - whether holder of power of attorney of director and shareholder in coma could utilise the power of attorney - whether general meeting or directors had power to allot shares - fiduciary duty of directors with respect to power to allot shares - whether power of attorney available for performance of director's duty - fiduciary obligations attached to power of attorney - non-voting member's right to notice of meeting - whether meeting of one was a meeting - whether validation under s 1322 was available - nature and scope of s 1322.

LEGISLATION CITED:
Corporations Act (NSW) 2001

CASES CITED:
Gillett v Peppercorne (1840) 3 Beav. 78; 49 ER 31
Greenwood v Harvey (1965) 66 SR (NSW) 496
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Mancini v Mancini (1999) 17 ACLC 1570
Massey v Wales (2003) 47 ACSR 1
Meinhard v Salmon (1928) 249 NY 458
Midland Bank, Limited v Reckitt 1933 AC 1
National Roads & Motorists' Association v Parker (1986) 6 NSWLR 517
National Roads & Motorists' Association Ltd v Bradley (2002) 42 ACSR 616
Quin & Axtens, Limited v Salmon [1909] AC 442
Sutton v Forst (1925) 55 OLR 281
Whitehouse v Carlton Hotel Proprietary Limited (1987) 162 CLR 285
Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477
AW & LM Forrest Pty Ltd v Beamish (1998) BC 9804350
Re MJ Shanley Contracting Ltd (1979) 124 Sol J 239
Equity Nominees Limited v Tucker (1967) 116 CLR 518
Re Chinese Cultural Club Ltd (2004) 49 ACSR 568
McVeigh v Merlo [2004] VSC 107
Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391
Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53
NRMA Insurance Group Ltd v Spragg (2001) 38 ACSR 174
Lockwood & Fitzgerald v White (2005) 23 ACLC 379
In the Matter of Tony Barlow Australia Ltd (2005) 23 ACLC 821
Wave Capital Limited (2003) 21 ACLC 1995

PARTIES:
Wafaa Saad as Adminstratrix of the estate of the late Michael Joseph Saad (Plaintiff)
Doumeny Holdings Pty Limited (First Defendant)
Bassam Ghantous (Second Defendant)
Nicholas Saad (Third Defendant)

FILE NUMBER(S):
SC 1485 of 2004

COUNSEL:
V R Gray (Plaintiff)
R A Dick (Second Defendant)

SOLICITORS:
Gye Associates Lawyers (Plaintiff)
Gray & Perkins Lawyers (Second Defendant)

LOWER COURT JURISDICTION:

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BURCHETT AJ

8 September 2005

WAFAA SAAD as Adminstratrix of the estate of the late Michael Joseph Saad (Plaintiff)
V
DOUMENY HOLDINGS PTY LIMITED (First Defendant)

BASSAM GHANTOUS (Second Defendant)

JUDGMENT

1 By the Amended Originating Process and Statement of Claim in this matter, various declarations and orders are sought in respect of certain steps taken by the second defendant, who claims to be a director of the first defendant, in relation to that company. In particular, the plaintiff seeks declarations that the purported appointment of the second defendant as a director is void; that issues of 10 “C” class shares and 10 “D” class shares to him and the now deceased Michael Joseph Saad as trustees for the third defendant, Nicholas Saad, are also void; and that appropriate orders consequent upon these declarations should be made.

2 On 14 May, 2004, the third defendant filed a cross claim against the company and the plaintiff whereby he sought a declaration that the plaintiff holds 10 “D”class shares which were held by Michael Joseph Saad at the date of his death, on trust for the cross claimant and that the plaintiff also holds one “B” class share on trust for the cross claimant; a declaration that a minute of a meeting of members of the company dated 1 August, 1991 is erroneous and of no force or effect; and orders for consequential relief including rectification of the company’s register. However, this cross claim was subsequently withdrawn. Although the third defendant’s Statement of Defence was not also withdrawn, his solicitor was not instructed to appear at the hearing, and the third defendant did not seek to lead evidence or cross-examine witnesses. Without having made an affidavit, he gave evidence orally (by leave) in the case of the second defendant who did appear by Counsel to defend the proceedings. The first defendant did not appear.

3 The case arises out of the somewhat tangled personal and business relationships, over a period of a number of years, of an extended family. The plaintiff is the widow of the late Michael Joseph Saad. In the older generation, Michael Joseph Saad’s parents were Arthur Saad and Afifi Saad (both now deceased), and the second defendant Bassam Ghantous was his uncle. The third defendant Nicholas Saad was his brother, the two brothers being the only children of Arthur and Afifi Saad.

4 Arthur and Afifi Saad apparently conducted a dry cleaning business at Windsor with some success, and they formed in 1970 a company structured in a manner then considered appropriate for purposes including that of the minimisation of death duties. This company was the first defendant. Its capital was $20,000 divided into shares of various classes. These included one “A” class share of $1 issued to Arthur Saad as the first governing director of the company; one “B” class share being a redeemable preference share of $1 issued to Afifi Saad who was described as the “Second Director”; 10 “C” class redeemable preference shares of $1 each; and 10 “D” class redeemable preference shares of $1 each; as well as further shares of less significance for the purposes of this case. The Articles provided in the manner usual for such a company in respect of the “A” share and the “B” share, and, in particular, that on the death of the first governing director of the company, the “A” share should “cease to confer upon the holder thereof any voting rights whatsoever”, and that on the death of the Second Director, the “B” share should also cease to confer any voting rights. Ten “C” class shares were issued to Michael Saad and 10 ‘D’ class shares were issued to his brother Nicholas Saad.

5 In 1982, Arthur Saad died, being survived by Afifi Saad. During the 1980’s, and thereafter, Michael Saad conducted business as a motor vehicle dealer, apparently with considerable success. His brother Nicholas Saad, who had suffered at least two serious health setbacks as a child, did not except for a period of about three years seek to pursue a business career of his own. For some time, he worked for his brother as a detailer, and he also worked in other employments such as landscaping work. However, in the late 1980’s he did enter into a partnership to import primary products from the Philippines for sale at the Flemington Markets and conducted this business for about three years. It was not successful, and substantial debts were incurred. The evidence is not at all precise as to the extent of these debts, but at least the sum of $120,000 had to be found by Nicholas Saad’s brother, Michael. At the time the business was terminated, there may well have been substantial further debts, and the evidence indicates that the family had some concerns about Nicholas’s ability to manage assets and avoid their attachment for the benefit of creditors. Counsel for the second defendant said, at the hearing, that Nicholas Saad had “borrowed money from Afifi and the business was not going well and he was being pursued by creditors.” He gave this as the reason for a transfer of shares made, the second defendant claimed, on trust for Nicholas Saad.

6 In about August, 1991, Michael Saad said to Bassam Ghantous:

“ We want to transfer Nicky’s {Nicholas Saad’s} shares because he is in trouble again, owing a lot of money. “

According to Mr Ghantous, he replied:

“T hat’s OK, that’s a good idea, we can protect him that way if you hold the shares.”

“ It was resolved to transfer shares from Nicholas Saad to Michael Saad as follows:
10 D class shares .”

7 Notwithstanding that Nicholas Saad did not pursue his cross claim and did not defend the plaintiff’s claim at the hearing, Counsel for the second defendant submitted I should find that no effective transfer took place as recorded in the Minutes, or alternatively that any such transfer was not a transfer of the beneficial interest but was to Michael Saad as trustee for Nicholas Saad. Counsel pointed out that, although Nicholas Saad is recorded as being present at the meeting the subject of the minute, he did not, when giving evidence, recall being present at that meeting. But it does not seem to me that in this proceeding there is any issue as to whether the shares were or were not, at the date of his death, held by Michael Saad beneficially. In any case, the company’s register of members reflected the minute, and I do not think any doubts raised by the evidence were sufficient to enable it to be said that there was “evidence to the contrary” of the transfer of the shares to Michael Saad within the meaning of section 176 of the Corporations Act (NSW), 2001. Mr Nicholas Saad, although he made a claim against the estate of his mother Afifi Saad to which I shall refer, did not in the lifetime of Michael Saad take any proceeding to challenge the validity of the resolution recorded in the company’s minutes or the corresponding entry in its register of members. The circumstances of his financial position at the time render a decision to transfer the shares in order to protect them from creditors quite probable, and such evidence as he gave to the contrary was unconvincing. I do not mean to suggest that Mr Nicholas Saad was deliberately untruthful in any respect, but rather that he gave his evidence in a confused manner which made it difficult to rely on any particular statement not adequately supported by other evidence and that I was far from satisfied his memory was accurate.

8 I have referred to proceedings brought by Nicholas Saad against the estate of his mother Afifi. She died on 16 April, 1998, leaving a will made in 1995 in which she appointed her son Michael Saad and her nephew Bassam Ghantous executors and trustees. At that time, and still today, the register of members of Doumeny Holdings Pty Limited showed and shows that Afifi Saad held two non cumulative redeemable preference shares and the “A” share and the “B” share in the company; that Nicholas Saad was allotted 10 “D” class shares on 14 January, 1970 but transferred them on 1 August, 1991; and that Michael Saad was allotted 10 “C” class shares on 14 December, 1970 and received by transfer 10 “D” class shares on 1 August, 1991 from Nicholas Saad. By her will, Afifi Saad gave her class “A” share to Michael Saad together with one non cumulative redeemable preference share, and she gave her “B” class share to her trustees in trust for Nicholas Saad for life and on his death, for his children. She gave the other non-cumulative redeemable preference share to her nephew Bassam Ghantous. He gave evidence that he holds this share in trust for Nicholas Saad. Affifi Saad’s will contained a residuary gift to her two sons and devises of two properties at Windsor, as to one of them known as Kable Street, to Michael Saad, and as to the other, by a complex provision in favour of Nicholas Saad to the extent of a right of occupancy, but from 1 February, 2015 –

“ UPON TRUST for such of them my said son NICHOLAS SAAD and the children of the said NICHOLAS SAAD and his wife EVA SAAD as shall be alive on that date and if more than one in equal shares as tenants in common “.

9 The challenge to the provisions of the will of Afifi Saad was made by an Application brought by Nicholas Saad under the Family Provision Act, 1982. This Application was settled on the basis that it would be, as it was, withdrawn and dismissed but with no order as to costs. The circumstances are set out in a letter dated 26 April 2000, which was tendered in evidence, written to Mr Nicholas Saad by his solicitors, Messrs Saunders and Standen. Because of the light it throws on the family situation, I set this letter out, omitting formal parts but otherwise in full:

“ We refer to the settlement conference that took place at the office of Mr. Bassam John Ghantous at the corner of Fitzgerald and Macquarie Streets; Windsor, NSW 2756 on the evening of the 19th April, 2000.

We note that from the beginning of February last, you repeatedly instructed us that you wanted your claim for provision under the Family Provision Act 1982 NSW in the Supreme Court of New South Wales at Sydney, NSW 2000, to be ended. We note that you expressed that opinion to the writer, subsequently, by a written note; in telephone conversations and on visits to our office.

We note further that duriing the course of the present year, we formed the opinion that your prospects of success were very slight because there is a great deal of evidence that your Mother, over a long period of time, formed the opinion that you were not capable of managing large sums of money. The opinion is reflected in four Wills, including the Will that was admitted by the present Trustees to Probate.

At the conference, Mr. Ghantous stated that the Trustees would honour your Mother’s wish for you to be provided with a residence for the remainder of your life; that you and your Wife and children will be looked after and that your children will be educated in Catholic schools. Mr Ghantous was unprepared to agree to Orders reflecting these stated intentions to be made as part of the settlement.

Mr Ghantous stated on more than one occasion, that you and your wife and children will always have a house and that you will always be cared for, in respect of your needs, by the Trustees.

Accordingly, you signed written instructions to this firm to settle the matter on the following bases:-

1. That your Summons for proper provision under the Family Provision Act 1982 NSW is to be withdrawn and dismissed.

2. No order as to costs.

We note that you were made aware that Mr. David K. L. Raphael, our counsel, will go to the Supreme Court on the morning of the 20th April, 2000 to have the necessary Orders made, by consent of the Trustees’ solicitors.

The writer informed you that promises made to you by Mr Ghantous at the settlement conference that were not in the Orders, will be unenforceable at law. This point was also raised by Messrs. Lucas and Ghantous at the conference.

We note that you signed written instructions setting out the terms of the settlement and that before you signed those instructions, on the evening of the 19th April, 2000, the writer asked you if you understood them and you stated that you did, and that as you trusted your brother and Mr Ghantous, you willingly signed the instructions, after stating to the writer that you had read and understood them.

As you are aware, you will not be required to pay our costs and disbursements and we will now close our file.
We thank you for your instructions.”

10 Although the will of Afifi Saad drew attention to the company Doumeny Holdings Pty Limited by disposing of several shares in it, Nicholas Saad’s evidence was that, at the conference of 19 April 2000, there was no discussion about his own shareholding in the company, nor was there any such discussion with Michael Saad thereafter and up to the time of his death. It is unlikely that solicitors acting for Nicholas Saad were unaware of the recorded shareholders in the company, and still more unlikely that, had there been any controversy about the shareholding, the matter would not have been raised in connection with the settlement of Nicholas Saad’s claim to have been left inadequately provided for. It is, in fact, implicitly acknowledged by the terms of a minute drawn by Mr Ghantous in relation to a purported meeting of Doumeny Holdings Pty Limited, to which further reference will be made, that there was a connection between the position with respect to the shareholding in the company and the “legal action taken by Nicholas Saad”. Of course, absence of controversy about the state of the shareholding does not necessarily mean that Nicholas Saad was excluded. There is much evidence to suggest a family understanding, which included the plaintiff and her daughter Jacqueline Saad, that Nicholas Saad was to reap the benefit of a one half interest in the company. But whether that was by virtue of a trust for him of the 10 “D” class shares transferred to Michael Saad, possibly a resulting trust, or whether it was entirely left to a deliberately unenforceable family arrangement, is another question, not raised by the issues in this case. However, the absence of controversy does suggest the transfer of the 10 “D” class shares was not a mere paper entry, ineffective to transfer the legal interest in the shares, whatever may have been intended as regards the equitable interest. It is to be noted that article 10 expressly provides:

“Except as required by law no person shall be recognised by the Company as holding any share upon any trust and the Company shall not be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable contingent future or partial interest in any share…or (except only as by these regulations or by law otherwise provided) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder.”

There was no evidence the company had received any notice under s. 1072H of the Corporations Act or any other notice falling within s. 169(6).

11 It was not suggested that the terms of the settlement with Nicholas Saad were not faithfully carried out by the executors and trustees of the will of Afifi Saad right up to the time of the death of Michael Saad. He was admitted to Prince of Wales Private Hospital, Randwick, on 1 January, 2004 for surgery which was not expected to involve a serious threat to his life. However, Mr Saad was a diabetic and complications were presumably always a possibility. On 10 January, 2004 he was visited by Bassam Ghantous who handed him the sum of $2000 which he had requested for his wife. Mr Ghantous was on his way to Hong Kong and their conversation, at which no one else was present, was fairly brief. According to Mr Ghantous, there was some reference to Mr Saad’s will and to a previous discussion about “the kids” and what I take to be a proposal to have a clause in the will that would turn upon their attainment of the age of 30 years. This, it was recognized, would involve a solicitor. Then Mr Ghantous asked the question:

“Mate, what if something happens to you?”

to which Michael Saad replied :

“Look, just look after everybody.”

Mr Ghantous says he responded :

“You know I’ll do that, but I may have to get appointed as director of all the companies.”

He says Mr Saad replied :

“Yep, do that, you’ve got the power of attorney.”

Although Mr Ghantous says he spoke to Michael Saad on the telephone on a couple of further occasions, he does not suggest anything further relevant to the present case was said. On 17 January 2004, Michael Saad underwent surgery during which he suffered a cardiac arrest and fell into a coma. He died on 27 January, 2004 without ever recovering consciousness.

12 On 19 January, while Michael Saad was in a coma, Mr Ghantous, alone in his own home, purported to hold a meeting of the first defendant company to issue a further 10 “C” class shares and a further 10 “D” class shares to Michael Saad and himself Bassam Ghantous as trustees for Nicholas Saad, together with a further one “A” class share and one “B” class share to Michael Saad and a further two non cumulative redeemable preference shares to Michael Saad. He swore in his affidavit of 24 February 2004 that his purpose was “to equalise the shareholding in [the company] between Michael and Nicholas”. This stated purpose, of course, involves a concession that the 10 “D” class shares recorded as already held by Michael Saad were in fact held by him, and not as a trustee for Nicholas Saad but in his own right, since otherwise the fresh issue of shares, if valid, would not result in an equality of shareholding but in a majority of shares held in trust for Nicholas Saad. In a subsequent affidavit, Bassam Ghantous sought to explain this away on the basis that, on 19 January 2004, he “had forgotten…that Michael held the 10 “D” Class shares as trustee for Nicholas Saad”. I do not accept that explanation, bearing in mind the close involvement of Bassam Ghantous, as an executor and trustee of the will of Afifi Saad and otherwise, in the affairs of the Saad family.

13 Mr Ghantous prepared minutes of what he described as ”the Meeting held with Michael on 10 January 2004 and ……..of my Meeting on 19 January 2004.” The minute relating to 10 January, 2004 was headed “MINUTE OF MEETING OF SHAREHOLDERS OF DOUMENY HOLDINGS PTY LTD HELD AT ROOM 601 PRINCE OF WALES HOSPITAL AT 8.31 AM ON THE 10 JANUARY, 2004.” It showed as present Michael Saad and Bassam Ghantous (by invitation). The business was described as “TO DISCUSS THE APPOINTMENT OF BASSAM GHANTOUS AS A DIRECTOR & SECRETARY OF THE COMPANY” and the resolution was set out in the following terms :

The minute was expressed to be signed by Michael Saad, but the signature was that of Mr Ghantous followed by the words “ per Bassam Ghantos (signed under a power of Attorney)”. The words “shareholders of” in the heading have been added in ink at some time after the document was printed and there is a note at the bottom of the page, also in ink and after the signature for Michael Saad, “updated 2 [or possibly 21] Feb 2004”.

14 The second minute was headed: “MINUTE OF MEETING OF DOUMENY HOLDINGS PTY LTD HELD AT 49 MACQUARIE STREET, WINDSOR AT 4.30 PM ON THE 19TH JANUARY, 2004” and only Mr Ghantous was shown as present. The business was described as follows:

sic

IT IS ALSO ACKNOWLEDGED THAT THE ISSUE OF SHARES WAS NOT PREVIOUSLY RECORDED BECAUSE OF LEGAL ACTION TAKEN BY NICHOLAS SAAD.

IT WAS AN AGREEMENT BETWEEN MICHAEL SAAD AND BASSAM GHANTOUS THAT UNTIL A PERIOD OF SIX YEARS HAD ELAPSED, TO ENSURE THAT NO FURTHER LEGAL ACTION WAS COMMENCED BY NICHOLAS SAAD AGAINST THE ESTATE OR MICHAEL SAAD, AT WHICH TIME THE SHARES WOULD BE ISSUED.”

15 Mr Ghantous also took action, relying on the power of attorney he held and on his alleged appointment as a director by Michael Saad at the hospital, in respect of other companies in which Michael Saad was interested. As a consequence, disputes immediately arose with Michael Saad’s widow, the plaintiff Wafaa Saad, and her children Jacqueline and Alexander Saad. On 3 February, 2004, Mr Ghantous’s solicitors wrote to the plaintiff’s solicitor an email letter which included the following:

“I confirm that Michael Saad expressly appointed Bassam Ghantous as director of each of the companies and he is willing to resign from each of those roles for the companies listed above, but not for Doumeny Holdings, where he has responsibilities for the other shareholder.”

16 At the forefront of the plaintiff’s case is the simple proposition that nothing in the conversation in the hospital amounted to an appointment of Bassam Ghantous as a director of any company, much less of one particular company or of all companies in which Michael Saad held an interest. The response to the possibility of some medical disaster expressed in the words “just look after everybody” could not amount to a specific appointment. Nor, when Bassam Ghantous suggested that in order to do that he might need “to get appointed as director of all the companies”, was the alleged response: “Yep, do that, you’ve got the power of attorney” anything like a then present appointment by Michael Saad of Bassam Ghantous as a director of one particular company to the Board of which Michael Saad happened to have the power to make an appointment. In the first place, in the context, the reported conversation did not refer to any then present action; it would only be “if something happen[ed] to [Michael Saad]” that the suggested need “to get appointed as director of all the companies” would arise. At the time of the conversation, Michael Saad, on the evidence, was not expecting or expected to lapse into a coma. And in the second place, consistently with the absence of perceived need for an immediate appointment, Michael Saad used no words of appointment, contenting himself with reminding Bassam Ghantous of the existence of a long-standing power of attorney. Again, it is consistent with the absence of any immediate.appointment of Bassam Ghantous to be a director that s. 201D of the Corporations Act was not complied with.

17 It is true that there had, for some years, been only one director of the company, Michael Saad. Since the Articles provided for a quorum of two, Michael Saad’s conduct of the business of the company was irregular. That was a situation for which the Articles provided a remedy; a sole continuing director had power (see articles 92 and 93) to appoint another director so as to bring the number of directors up to a “quorum necessary for the transaction of the business of the Directors”, that is to two, or to summon a general meeting of the company. But neither during the preceding several years nor at the time of the hospital visit did Michael Saad do either of these things. He not having done them, it was too late, once he lapsed into coma, for Bassam Ghantous to do either of them as his attorney under power. For a power of attorney is not available for the performance of a duty of a director’s office which is his own personal responsibility as a director: Mancini v Mancini (1999) 17 ACLC 1570 at 1577 – 1578, per Bryson J. Indeed, it may well be that an irreversible coma ipso facto removed Michael Saad from his position as a director by virtue of article 80, which provides:

“The office of Director shall become vacant if the Director:-

…..

(d) becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under the law relating to mental health.”

18 A consideration of the minute prepared by Bassam Ghantous purporting to be a minute of a meeting of shareholders of the company at the hospital on 10 January 2004 reveals yet further difficulties. The resolution recorded in the minutes is for the appointment of Bassam Ghantous as both director and secretary. But there is not a scrap of evidence that Michael Saad said anything about making Bassam Ghantous the secretary of the company. The resolution as recorded also directs Bassam Ghantous “to prepare and sign the necessary documentation and sign this minute as a true record”. Curiously, Bassam Ghantous did not so sign the minute; he signed in the name of Michael Saad in reliance on his power of attorney. But, in any case, there is no evidence of any direction in the terms of the minute, or to any such effect. The minute is a piece of creative writing having no clear basis in anything that transpired at the hospital.

19 The second minute, written so as to record purported issues of shares including those of the 10 “C” class and 10 “D” class shares in the names of Michael Saad and Bassam Ghantous as trustees for Nicholas Saad, is introduced by a statement of the business to be discussed which is at odds with the resolution and contains allegations of an agreement relating to Nicholas Saad not apparently communicated to him and not supported by his evidence. Whatever may have been the position with respect to Michael Saad’s 10 “D” class shares transferred to him by Nicholas Saad in 1991, I am satisfied there was not any agreement to issue further shares as suggested by the minute. Other curious features of this minute are that it purports to be a minute of a “meeting of Doumeny Holdings Pty Ltd” constituted by one person only, Bassam Ghantous, who was not a voting member of the company; and Bassam Ghantous signed the minute in his own name as “Chairperson”, not as attorney for Michael Saad, although the minute contains a reference to his holding of a power of attorney for Michael Saad. It is important to observe that the minute does not purport to be of a meeting of directors.

20 Counsel for the plaintiff argued that an issue of shares was beyond the power of a general meeting of the company, even if (contrary to his other contentions) there was a valid meeting on 19 January 2004. He referred to article 81:

“The business of the Company shall be managed by the Directors who may pay all expenses incurred in promoting and registering the Company and may exercise all such powers of the Company as are not by the Act or by these regulations required to be exercised by the Company in general meeting subject nevertheless to any of these regulations to the provisions of the Act and to such regulations being not inconsistent with the aforesaid regulations or provisions as may be prescribed by the Company in general meeting; but no regulation made by the Company in general meeting shall invalidate any prior act of the Directors which would have been valid if that regulation had not been made.”

“Subject as hereinafter provided in Article 5(g) [a provision irrelevant for present purposes] the shares shall be under the control of and at the disposal of the Directors who may issue or allot or grant options over or otherwise dispose of the same to such persons or on such terms and conditions and at such times as they think fit and with full power to give any persons or person the call of any shares either at par or at a premium and for such consideration as the Directors think fit but that no shares shall be issued at a discount.”

21 At least since the decision of the House of Lords in Quin & Axtens, Limited v Salmon [1909] AC 442, it has been accepted law that an article in the terms of article 81 has the effect, in the words of Lord Loreburn LC at 443, that “the directors should manage the business; and the company, therefore, are not to manage the business unless there is provision to that effect”. The point was elaborated, with respect to a similar article, by McLelland J in National Roads & Motorists’ Association v Parker (1986) 6 NSWLR 517 at 521:

“It is clear that, in general, a power vested by the constitution of a company exclusively in the directors cannot be effectively exercised, nor can its exercise by the directors be effectively controlled or interfered with, by a resolution of members in general meeting, and that a power of control and management of the business and affairs of a company vested in directors in terms similar to those of art 25 in the present case is within this principle [citation of authorities omitted]. ?

National Roads and Motorists’ Association Ltd v Bradley

Massey v Wales

22 Insofar as these cases proceed on the basis that the conferral on the directors of a power of management excludes the company from exercising in general meeting a power belonging to management, article 4(a) strongly reinforces the plaintiff’s position. That article confers on the directors control of the shares of the company and the disposition of them “as they think fit”. The same reasoning which excludes the company in general meeting from interfering with the directors’ power of management also excludes similar interference with their power of issuing shares. As Lord Wilberforce said in Howard Smith Ltd v AmpolPetroleum Ltd [1974] AC 821 at 838, “the power over the share capital was conferred upon them.” It follows that the attempt to issue shares by a purported resolution of a general meeting of Doumeny Holdings Pty Limited was invalid.

23 Having referred to Howard Smith Ltd v Ampol Petroleum Ltd, I should add that it is also authority for the proposition that a power to issue shares cannot validly be used “purely for the purpose of destroying an existing majority”, as Lord Wilberforce put it at 837. That seems to me to have been Bassam Ghantous’s purpose. He was concerned that Michael Saad held a majority of the shares, while Nicholas Saad had a much smaller legal entitlement, whatever rights he might have been given through some family arrangement. Bassam Ghantous explained his attempt to issue shares as aimed at equalising the respective shareholdings of the brothers. But the principle stated by Lord Wilberforce, as his Lordship recognised and Mason, Deane and Dawson JJ emphasised in their joint judgment in Whitehouse v Carlton Hotel Proprietary Limited (1987) 162 CLR 285 at 289 – 290, finds its justification in the fiduciary nature of a power to allot shares confided in directors. Perhaps it was in seeking to avoid invalidity for breach of fiduciary duty that Bassam Ghantous incurred invalidity by the purported exercise through a general meeting of the company of a power belonging exclusively to its directors.

24 Yet a further difficulty arises from the use by Bassam Ghantous of the power of attorney he held for Michael Saad. A power of attorney is a species of agency, to which the rule stated by Lord Langdale MR in Gillett v Peppercorne (1840) 3 Beav. 78 at 83 – 84; 49 ER 31 at 33 has always been held to apply, that “where a man employs another as his agent, it is on the faith that such agent will act in the matter purely and disinterestedly for the benefit of his employer”. In general, the “fundamental basis of the contract of agency requires the agent to give an exclusive allegiance to his principal and to promote his interests with singleness of purpose”: Sutton v Forst (1925) 55 OLR 281 at 284, cited in Dal Pont, Law of Agency (2001) at 227. As Cardozo J said in Meinhard v Salmon (1928) 249 NY 458 at 468, in a passage quoted by Asprey J (with whom Sugerman and Collins JJ agreed) in Greenwood v Harvey (1965) 66 SR (NSW) 496 at 500, “the rule of undivided loyalty is relentless and supreme”. Specifically in relation to a power of attorney which authorised in wide terms the drawing of cheques by the attorney on the principal’s account, Lord Atkin, in Midland Bank, Limited v Reckitt 1933 AC 1 at 14, said the “only actual authority” of the attorney was “to draw cheques for his principal’s purposes”.

25 In deliberately attempting to use the power of attorney so as to dilute the shareholding of Michael Saad in favour of another, Bassam Ghantous departed from his duty of undivided loyalty to his principal’s interests. Nothing in what he alleges was said at the hospital could have authorised him to take the steps he took. A general request to “look after everybody” could not be treated as justifying the effective disposal of half the value of Michael Saad’s shareholding. Just as it was not for the agent in Greenwood v Harvey (see the comment of Asprey J at 500) to place his own view of economic reasonableness ahead of his allegiance to his principal, so it was not for Bassam Ghantous to act on his own view of Afifi Saad’s wishes or of fairness to Nicholas Saad; his duty was owed solely to Michael Saad.

26 A number of other questions were raised in argument: the difficulty of regarding the “meeting” of 19 January 2004, constituted by one person only, as a meeting; the absence of notice of the calling of a meeting for 19 January 2004 (see ss 248C, 249H and 249J of the Corporations Act and see Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477 at 484-485, where Bowen CJ in Eq held a non-voting member of a company with articles comparable to those of the first defendant – see articles 54 and 118 – was entitled to notice of a meeting); and the lack of a quorum at both the alleged meetings of 10 January and 19 January 2004. As to the invalidity of a so-called meeting of one person, even if he has two capacities (in this case, Mr Ghantous as a trustee for Nicholas Saad and as attorney under power for Michael Saad), I was referred to AW & LM Forrest Pty Ltd v Beamish (1998) BC 9804350, a decision of Young J in which he followed the conclusion of Oliver J (as Lord Oliver then was) in Re MJ Shanley Contracting Ltd (1979) 124 Sol J 239; Equity Nominees Limited v Tucker (1967) 116 CLR 518 at 526; and Mancini v Mancini at 1578 as authorities for the proposition that a “meeting” of one is no meeting.

27 Counsel for Bassam Ghantous claimed that his client acted on 19 January 2004 as a director. The minutes do not bear this out, nor, on my findings, had he been appointed a director, either actually or even purportedly. But had he been so acting, as has been noted, the fiduciary nature of a power to allot shares confided in directors would have ensured the invalidity of what he sought to do.

28 Counsel also relied on s 1322 of the Corporations Act, citing authorities such as Re Chinese Cultural Club Ltd (2004) 49 ACSR 568; McVeigh v Merlo [2004] VSC 107 at [62]-[68]; Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391. This provision has been much considered, and I add references to Re Compaction Systems Pty Ltd at 493 to 494; Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53 at 65; NRMA Insurance Group Ltd v Spragg (2001) 38 ACSR 174 at 179; Lockwood & Fitzgerald v White (2005) 23 ACLC 379 at 385; and In the Matter of Tony Barlow Australia Ltd (2005) 23 ACLC 821 at 824-826. In the last mentioned case a citation is made from the judgment of French J in Wave Capital Limited (2003) 21 ACLC 1995 at 2002-2003, where his Honour said of s 1322 that it (together with ss 1318 and 1325D) -

Corporations Act

Re Onslow Salt Pty Ltd

In the Matter of Insurance Australia Group Ltd

Re Australian Koyo Limited

Elderslie Finance Corporation Limited v Australian Securities Commission

29 A reading of s 1322, which is headed “Irregularities”, reveals that it has a dichotomous nature. On the one hand, by subsection (2) a proceeding (not limited to a legal proceeding) “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”. Subsections 3-3B amplify this relieving provision. On the other hand, corresponding but different provision is made for other cases under subsection (4), by which the Court is empowered to make declarations of validity curing (inter alia) contraventions of the Act or the constitution of a company and other orders, but subject (by subsection (6)) to the requirement that the Court “is satisfied”, in the case of such a declaration of validity, of the following matters:

“(i) that the act, matter or thing, or the proceeding, [in question] 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

…

(c) in every case – that no substantial injustice has been or is likely to be caused to any person.”

30 To the extent that the various irregularities identified in these reasons may fall within subsection (2) as “procedural” in nature, I am satisfied they have caused and may cause relevantly substantial and irremediable injustice and I should by order declare the proceeding in question invalid. Each of the breaches of the Act and the constitution of the company involved, as I have already made clear, a serious departure from his fiduciary duty by Bassam Ghantous, and plainly had a real and substantial effect. To the extent subsection (2) does not apply, I would not be satisfied under subsection (6) that the invalidity of the appointment of Bassam Ghantous as a director or of the issue of 10 “C” class and 10 “D” class shares on 19 January 2004 is essentially of a procedural nature or that it is just and equitable to make validating orders or that no substantial injustice has been or is likely to be caused to any person by the matter that has led to the request for remedial relief. It seems to me that the purported appointment of Bassam Ghantous as a director was, in the circumstances of this case as I have found them, and on his own account, without even a plausible basis. In those circumstances, the proceeding “was not essentially of a procedural nature”. Nor was the purported issue of shares by a person with no right to do so. Had it been only a question of the manner of the calling of the meeting or of the quorum, these would have been procedural matters, but the fundamental illegitimacy of what occurred was not merely of such a nature. It went to the right to issue shares and the purpose of the issue.

31 Even if section 1322 (4) were applicable, having regard to the matters already canvassed, the nature of the right in question, the purpose of the issue of shares, and the lack of even a plausible justification for the purported appointment of Bassam Ghantous as a director, I would not be satisfied that it is just and equitable that a validating order be made or that no substantial injustice has been or is likely to be caused to any person or that any order should be made relieving Bassam Ghantous of responsibility for his actions.

32 For these reasons, the plaintiff is entitled to declarations that the purported appointment of the second defendant as a director of the first defendant and the purported issues of shares on 19 January 2004 were each invalid and ineffective and to orders rectifying the relevant records. The second defendant must pay the costs of the plaintiff of the proceeding. I direct that the plaintiff bring in on a date to be fixed short minutes of order appropriate to reflect these reasons.

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Citations

Saad v Doumeny Holdings Pty Ltd [2005] NSWSC 893

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McVeigh v Merlo [2004] VSC 107

CITATION:	Saad v Doumeny Holdings Pty Limited [2005] NSWSC 893
HEARING DATE(S):	08/06/05-10/06/05, 22/06/05
JUDGMENT DATE :	8 September 2005
JURISDICTION:	Civil
JUDGMENT OF:	Burchett AJ at 1
DECISION:	The purported appointment of the second defendant as a director of the first defendant and certain allotments of shares in the first defendant were invalid and should not be validated under s 1322 of the Corporations Act.

CATCHWORDS:	(Corporations) (Power of Attorney) - Purported appointment of director of company - purported allotment of shares - whether holder of power of attorney of director and shareholder in coma could utilise the power of attorney - whether general meeting or directors had power to allot shares - fiduciary duty of directors with respect to power to allot shares - whether power of attorney available for performance of director's duty - fiduciary obligations attached to power of attorney - non-voting member's right to notice of meeting - whether meeting of one was a meeting - whether validation under s 1322 was available - nature and scope of s 1322.
LEGISLATION CITED:	Corporations Act (NSW) 2001
CASES CITED:	Gillett v Peppercorne (1840) 3 Beav. 78; 49 ER 31 Greenwood v Harvey (1965) 66 SR (NSW) 496 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Mancini v Mancini (1999) 17 ACLC 1570 Massey v Wales (2003) 47 ACSR 1 Meinhard v Salmon (1928) 249 NY 458 Midland Bank, Limited v Reckitt 1933 AC 1 National Roads & Motorists' Association v Parker (1986) 6 NSWLR 517 National Roads & Motorists' Association Ltd v Bradley (2002) 42 ACSR 616 Quin & Axtens, Limited v Salmon [1909] AC 442 Sutton v Forst (1925) 55 OLR 281 Whitehouse v Carlton Hotel Proprietary Limited (1987) 162 CLR 285 Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477 AW & LM Forrest Pty Ltd v Beamish (1998) BC 9804350 Re MJ Shanley Contracting Ltd (1979) 124 Sol J 239 Equity Nominees Limited v Tucker (1967) 116 CLR 518 Re Chinese Cultural Club Ltd (2004) 49 ACSR 568 McVeigh v Merlo [2004] VSC 107 Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53 NRMA Insurance Group Ltd v Spragg (2001) 38 ACSR 174 Lockwood & Fitzgerald v White (2005) 23 ACLC 379 In the Matter of Tony Barlow Australia Ltd (2005) 23 ACLC 821 Wave Capital Limited (2003) 21 ACLC 1995
PARTIES:	Wafaa Saad as Adminstratrix of the estate of the late Michael Joseph Saad (Plaintiff) Doumeny Holdings Pty Limited (First Defendant) Bassam Ghantous (Second Defendant) Nicholas Saad (Third Defendant)
FILE NUMBER(S):	SC 1485 of 2004
COUNSEL:	V R Gray (Plaintiff) R A Dick (Second Defendant)
SOLICITORS:	Gye Associates Lawyers (Plaintiff) Gray & Perkins Lawyers (Second Defendant)