Smolarek v Liwszyc

Case [2006] WASCA 50

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT :   THE COURT OF APPEAL (WA)

CITATION:   SMOLAREK & ANOR -v- LIWSZYC & ORS [2006] WASCA 50

CORAM:   STEYTLER P

MCLURE JA
BUSS JA

HEARD:   21 FEBRUARY 2006

DELIVERED          :   29 MARCH 2006

FILE NO/S:   CACV 123 of 2005

BETWEEN:   HANNA SMOLAREK

First Appellant

CHRISTINA SMOLAREK
Second Appellant

AND

DAVID  LIWSZYC
First Respondent

GHEORGHE EMIL DUTA
Second Respondent

EZNUT PTY LTD
Third Respondent

ON APPEAL FROM:

Jurisdiction              :  SUPREME COURT OF WESTERN AUSTRALIA

Coram  :HASLUCK J

Citation  :LIWSZYC & ANOR -v- SMOLAREK & ORS [2005] WASC 199

File No  :COR 144 of 2005

Catchwords:

Statutory injunction - Standing - Failure to comply with replaceable rules - Application of replaceable rules as contract

Corporations - Whether director appointed under s 201H of Corporations Act  2001 (Cth) automatically ceases to be director after two months - Failure to confirm appointment - Whether procedural irregularity enlivens operation of s 1322(2) of Corporations Act

Corporations - Transfer of shares - Directors' power to refuse to register - Whether directors must be given opportunity to refuse to register - Whether procedural irregularity enlivening operation of Corporations Act

Corporations - Members meeting - Absence of quorum - Whether irregularity caused substantial injustice - Section 1322(2) and s 1322(4) of Corporations Act

Words and phrases - "Procedural irregularity"

Legislation:

Administrative Decisions (Judicial Review) Act 1977 (Cth), s 9
Corporations Act 2001 (Cth), s 9, s 58AA(1), s 135(3), s 140, s 201G, s 201H, s 201B, s 201M, s 250A(4)(c), s 250B, s 250C(1), s 1072F, s 1072G, s 1322(2), s 1322(4), s 1322(6), s 1324, s 1337B(2)
Rules of the Supreme Court 1971 (WA), O 2 r 1(1)
Supreme Court (Corporations) (WA) Rules 2004 (WA), r 1.7

Supreme Court Act 1935 (WA), s 25(9)

Result:

Appeal allowed in part
Order for second respondent to be reinstated as a director of third respondent set aside

Category:    A

Representation:

Counsel:

First Appellant               :     In person

Second Appellant          :     In person

First Respondent           :     Mr A P Hershowitz

Second Respondent      :     Mr A P Hershowitz

Third Respondent          :     No appearance

Solicitors:

First Appellant               :     In person

Second Appellant          :     In person

First Respondent           :     Holborn Lenhoff Massey

Second Respondent      :     Holborn Lenhoff Massey

Third Respondent          :     No appearance

Case(s) referred to in judgment(s):

American Cyanamid Co v Ethicon Ltd [1975] AC 396

Australian Securities and Investments Commission v Edensor Nominees Pty Ltd (2001) 204 CLR 559

Beale v Government Insurance Office of New South Wales (1997) 48 NSWLR 430

Carlen v Drury (1812) 35 ER 61

Cash Converters Pty Ltd v Hila Pty Ltd (1993) 9 WAR 471

Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148

Charles Forte Investments Ltd v Amanda [1964] Ch 240

Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd (2005) 55 ACSR 185

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

Edwards v Halliwell [1950] 2 All ER 1064

Electro Research International Pty Ltd v Stec…

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AGLC
Smolarek v Liwszyc [2006] WASCA 50
Case
[2006] WASCA 50
Decision Date

CaseChat Overview and Summary

The appeal in Smolarek v Liwszyc was brought against the appellants, Hanna Smolarek and David Liwszyc, by the respondents, who sought to challenge several interlocutory orders made by the primary Judge in the context of control over Eznut Pty Ltd, a company in voluntary administration. The appellants were directors and shareholders of Eznut, which was formed in 2002 by Smolarek and Liwszyc to commercialise a new type of commercial fastener. The company did not adopt a constitution, opting instead to operate under the replaceable rules of the Corporations Act 2001 (Cth). The dispute arose from disagreements between the parties over the management and direction of Eznut, leading to legal actions regarding the validity of director appointments, procedural irregularities in meetings, and the enforceability of statutory injunctions.

The legal issues before the court included whether a director appointed under section 201H of the Corporations Act automatically ceases to be a director after two months if not confirmed by the board, whether procedural irregularities invalidate the actions of a meeting under sections 1322(2) and 1322(4) of the Act, and whether directors must be given an opportunity to refuse to register a transfer of shares. The court also considered the implications of the absence of a quorum in a members' meeting and the potential for substantial injustice under section 1322(2) of the Act.

The court held that the primary Judge's decision to reinstate a director was valid and created legal rights and duties that should not be antedated. The court emphasised that the appointment of administrators for Eznut did not constitute an exceptional circumstance warranting antedating of the order. Furthermore, the court found no procedural irregularities that would invalidate the primary Judge's decision and upheld the enforceability of the statutory injunctions granted. The court also concluded that the absence of a quorum did not necessarily cause substantial injustice if the meeting's decisions did not significantly affect the company's interests.

The final orders of the court set aside the primary Judge's order for the reinstatement of the second respondent as a director, effective from the date of the Court's pronouncement. The court emphasised the importance of maintaining the status quo pending further determination of the substantive issues in the case.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

JUDGMENT OF THE COURT: This appeal challenges a number of interlocutory orders made by the primary Judge in proceedings brought by the first and second respondents against the appellants. The third respondent, a company known as Eznut Pty Ltd ("Eznut"), although joined as a necessary party to the appeal by order of this Court made on 21 February 2006, chose to take no part in the appeal. Eznut has been under voluntary administration, pursuant to s 436A of the Corporations Act 2001 (Cth) ("Act"), since 27 January 2006. Leave was granted by the Court, under s 440D of the Act, for the appeal to proceed against Eznut. The challenged orders relate primarily to control of Eznut. So that they might be understood, it is necessary for us to say something about the background to, and formation of, that company. The first appellant, Hanna Smolarek, developed a new type of commercial fastener. It is said to be self‑tightening, able to withstand extreme vibration and capable of accurate pre‑loading. The first respondent, David Liwszyc, is an experienced mechanical engineer who has patented and commercialised a number of technologies. Believing that Mr Liwszyc could assist her in exploiting her invention, Ms Smolarek approached him during 2002. The two of them incorporated Eznut on 15 October 2002. They were its founding directors. Eznut issued 3,175,789 shares. Ms Smolarek held 95 per cent of them (3,017,000 shares) and Mr Liwszyc held the remaining 5 per cent (158,789 shares). Eznut did not adopt a constitution upon its registration and was content, instead, to make use of the replaceable rules provided for by Pt 2B.4 of the Act. During 2002, Ms Smolarek approached the second respondent, George Duta, for assistance. He, too, is an engineer. On 9 December 2002, he entered into an agreement with Eznut. Under that agreement, he agreed to provide, amongst other things, engineering advice. Part of the consideration to be provided by Eznut for his services was the issue of shares in that company. On 1 July 2003 Mr Duta was appointed as a director of Eznut. In order to raise money, others were approached to become shareholders. By early April 2005 some 4,677,519 shares had been issued. Ms Smolarek still held 3,017,000 of these (on behalf of a family trust). Mr Liwszyc then held 467,752 shares (on behalf of his family trust), Mr Duta held 561,302 shares (on behalf of his family trust) and the remaining shares were held by others, being Mr Henry Zelman (on behalf of his personal superannuation fund), Ms Agatha Walczuk (on behalf of a trust) and a company, Cacabon Pty Ltd. By this time Ms Smolarek had fallen out with Mr Liwszyc and Mr Duta. As the primary Judge described it (Liwszyc v Smolarek (2005) 55 ACSR 38; [2005] WASC 199 at [7]), areas of disagreement had begun to emerge between them as to how the project should be advanced. Ms Smolarek believed that the two men wanted to dilute her shareholding and exploit her invention in a way that was not in her best interests. She also believed that they had failed to honour representations made to her about their capacity to advance the affairs of the company. She doubted that they could be relied upon to act in what she saw as being the best interests of Eznut.

Ratio Decidendi

Legal Principle Established

In our opinion, this Court's order, setting aside the primary Judge's order for the reinstatement of the second respondent as a director, should take effect from the date of its pronouncement by this Court and not from the date of the primary Judge's order. We are of this opinion for these reasons:(a)The appointment of Mr McMaster and Mr Zohar as administrators of the third respondent militates against the antedating of this Court's order. If the third respondent is or is likely to become insolvent, it is in the interests of the third respondent's creditors and members, and also in the public interest, that the third respondent's business, property and affairs be administered in the manner contemplated by Pt 5.3A. If the third respondent is solvent, an application may be made to the Court for an order under s 435C(3)(a) that the administration be brought to an end. If the appointment of Mr McMaster and Mr Zohar as administrators of the third respondent was procured in consequence of an improper exercise of power by the first and second respondents, as alleged by the first appellant in COR 16 of 2006, the appointment will be invalid. If any such improper exercise of power by the first and second respondents constituted a breach of their duties to the third respondent, the third respondent may recover from them any loss or damage it has suffered by reason of that improper exercise of power.(b)Notwithstanding ss 128, 129 and 201M of the Act, the antedating of this Court's order may affect the accrued rights of third parties who have dealt with the third respondent (including, in particular, Mr McMaster and Mr Zohar in their capacity as administrators), which rights may depend for their efficacy upon the second respondent's status as a director pursuant to the primary Judge's order.(c)The appellants have alleged in their submissions that the first and second respondents, in their capacity as directors of the third respondent, abused their powers and breached their duties by resolutions allegedly passed by them at a meeting of the directors of the third respondent held on 29 October 2005. The first and second respondents deny these allegations. If the first and second respondents have abused their powers or breached their duties, as alleged by the appellants or at all, the third respondent will not be without a remedy. For example, the third respondent may obtain declaratory relief in relation to the alleged abuse of power and compensation for any loss or damage suffered in consequence of the alleged breach of duty. Plainly, whether there is any substance in the appellants' allegations cannot be determined by this Court in the context of an argument as to the orders which this Court should make in the appeal. (d)Any loss or damage suffered by the appellants which flows directly from the primary Judge's order, and which could have been foreseen when the order was made, should be recoverable from the first and second respondents under their undertaking as to damages. See Air Express Limited v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249 at 266 ‑ 267. (e)There is no procedural irregularity or difficulty to be overcome.(f)The decision of the learned Judge was not provisional; it was valid, unless and until set aside, and created legal rights and duties.(g)The power under O 42 r 2 to antedate orders is to be exercised cautiously, and the appellants have not established anything exceptional in the facts to justify antedating this Court's order. The appointment of Mr McMaster and Mr Zohar as administrators of the third respondent is not "exceptional" for this purpose. Indeed, for the reasons we have given in par 20(a) and (b) above, the fact of their appointment militates against (and not in favour of) the antedating of this Court's order.