Smolarek v Liwszyc

[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 (1996) 20 ACSR 320

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672

Foss v Harbottle (1843) 2 Hare 461; 67 ER 189

Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881

Hogg v Dymock (1993) 11 ACSR 14

In re Smith and Fawcett Ltd [1942] Ch 304

Kraus v JG Lloyd Pty Ltd [1965] VR 232

Link Agricultural Pty Ltd v Shanahan [1999] 1 VR 466

Liwszyc v Smolarek (2005) 55 ACSR 38

Mamouney v Soliman (1992) 9 ACSR 63

Manning River Co‑op Dairy Co Ltd v Shoesmith (1915) 19 CLR 714

McGellin v Mount King Mining NL (1998) 144 FLR 288

Mount Lawley Pty Ltd v Western Australian Planning Commission (2004) 29 WAR 273

New Lambton Land & Coal Co Ltd v London Bank of Australia Ltd (1904) 1 CLR 524

O'Neill v Phillips [1999] 1 WLR 1092

Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417

Re Amcor Ltd (2000) 34 ACSR 199

Re Bell Bros Ltd (1891) 65 LT 245

Re Broadway Motors Holdings Pty Ltd (in liq) (1986) 6 NSWLR 45

Re Pembury Pty Ltd [1993] 1 Qd R 125

Re PW Saddington & Sons Pty Ltd (1990) 19 NSWLR 674

Ryan v South Sydney Junior Rugby League Club Ltd (1974) 3 ACLR 486

Sipad Holding ddpo v Popovic (1995) 18 ACSR 436

Whitehouse v Capital Radio Network Pty Ltd (2004) 13 Tas R 27

Woodroofe Ltd v McLeod Ltd (1984) 37 SASR 269

Case(s) also cited:

Ainsworth v Criminal Justice Commission (1997) 175 CLR 564

Allen v Atalay (1993) 11 ACSR 753

Australian Coal & Shale Employees' Federation v Commonwealth (1953) 94 CLR 621

Australian Coal & Shale Employees' Federation v Smith (1937) 38 SR(NSW) 48

Broken Hill Proprietry Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609

Cardile v LED Builders Pty Ltd (1999) 198 CLR 380

Cayne v Global Natural Resources plc [1984] 1 All ER 225

Emlen Pty Ltd v St Barbara Mines Ltd (1997) 24 ACSR 303

Kioa v West (1985) 159 CLR 550

Liquorland (Aust) Pty Ltd v Anghie (2002) 20 ACLC 58

Paringa Mining & Exploration Co plc v North Flinders Mines Ltd (1988) 52 SASR 22

QIW Retailers Ltd v Davids Holdings Pty Ltd (No 2) (1992) 37 FCR 57

Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601

Salomon v A Salomon & Co Ltd [1897] AC 22

Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459

Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40

Wilson v Metaxas [1989] WAR 285

1. 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.

2. 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.

Eznut's history

1. 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.

2. 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.

3. 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.

4. 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.

5. The three were also in disagreement as regards a potential capital raising for Eznut.  The issue was discussed at board meetings held on 9 and 16 April 2005.  In an affidavit sworn by him on 17 June 2005, Mr Liwszyc said that a resolution was passed, with Ms Smolarek objecting, that an amount of $67,000 would be raised by issuing 1.5 million shares in Eznut and offering these to existing shareholders in proportion to their shareholdings.  He says that all shareholders, other than Ms Smolarek, subsequently agreed to take up their allotment and that, by mutual consent, Ms Smolarek's allotment was taken up by the remaining shareholders in proportion to their respective shareholdings.  However, Ms Smolarek, in an affidavit sworn by her on 26 July 2005, disputes that agreement was ever reached in respect of this share allotment and contends that no valid allotment has been made.  If the allotment took effect, it would have the result that Ms Smolarek, while still holding 3,017,000 shares, would no longer be Eznut's controlling shareholder as 3,160,519 shares in that company would be held by others.

The calling of a general meeting

1. Because of her disagreements with Mr Liwszyc and, to a lesser extent, Mr Duta, Ms Smolarek decided that her best course of action was to remove Mr Liwszyc as a director and to have her daughter, the second appellant (to whom we shall refer as "Christina" so as to distinguish her from her mother), appointed as a director.  Consequently, on 4 March 2005, she gave notice that a general meeting of Eznut would be held at 9 am on 27 May 2005 at Eznut's boardroom at 6 Auriol Court, Carine.  She foreshadowed that two resolutions would be put, the first being that Mr Liwszyc be removed as a director with immediate effect and the second being that Christina be appointed as a director of Eznut with immediate effect.  The explanatory memorandum which accompanied the notice referred to what was described as Mr Liwszyc's "reckless action" in refusing to grant "company personnel" and in particular Ms Smolarek as Eznut's managing director, access to the company‑owned Junker Machine "in order to conduct vibration tests that are [an] essential part of company business".  The notice was also accompanied by proxy forms.

The transfer of shares to Christina

1. On the following day, 5 May 2005, Ms Smolarek transferred 1000 of the shares held by her to Christina.  She did not tell Mr Liwszyc or Mr Duta of her intention to do so.  She said, in her abovementioned affidavit, that there was, at the time, no indication that they would oppose a transfer of that kind and she consequently believed that she was entitled to assume that they would not object.  Annexed to her affidavit is a transfer form dated 5 May 2005.  She said (par 142 of her affidavit) that she registered the transfer in Eznut's register and that she also "registered the transfer" with the Australian Securities and Investments Commission ("ASIC").  It is not apparent from the affidavit when the transfer was registered in Eznut's register.  Nor is it apparent when ASIC was notified of the transfer, although the first and second respondents rely upon a company search made on 20 July 2005 in support of their contention that ASIC could not have been notified before 28 May 2005.  The search, insofar as it deals with Eznut's "Documentary history", reveals that the earliest of the documents "most recently" received by ASIC from Eznut was one dated 28 May 2005.

The appointment of Christina as a director

1. On 6 May 2005 Christina signed a consent to act as a director of Eznut.  In par 219 of her abovementioned affidavit, Ms Smolarek says that she appointed Christina as director of Eznut on 24 May 2005.

The proxy forms

1. On 25 May 2005, at 4.41 pm, three proxy forms arrived by fax at Eznut's office. These had been completed by Cacabon Pty Ltd, Mr Zelman and Ms Walczuk. Those completed by Cacabon Pty Ltd and Mr Zelman authorised Mr Liwszyc to vote on their behalf at the general meeting. That completed by Ms Walczuk authorised her father, Mr Wes Walczuk, to attend and vote on her behalf at the meeting. The proxy completed by Cacabon Pty Ltd directed Mr Liwszyc to vote against both resolutions, but those completed by Mr Zelman and Ms Walczuk were undirected (with the consequence, in the case of Mr Walczuk, that he would not have been entitled to vote at the meeting: see s 250C(1) of the Act). On 26 May 2005, Ms Smolarek sent an email to each of Mr Zelman and Ms Walczuk asking them to direct their proxies. Neither did so.

The general meeting

1. On the following morning, the general meeting started at 9 am.  Only Ms Smolarek and Christina were present.  Due to a misunderstanding of the time of the meeting, none of Mr Liwszyc, Mr Duta or Mr Walczuk attended the meeting.  Ms Smolarek was elected as chair.  The resolutions were put and a vote was taken.  In her affidavit, Ms Smolarek said that she "voted the proxies, both directed and undirected".  Both resolutions were passed.

Mr Duta is "removed" from his directorship

1. On the same day, Ms Smolarek sent to Mr Duta an email informing him that she had discovered that he "might not be legally a director of Eznut". She referred to s 201H of the Act, which reads as follows:

   "201H(1) Appointment by other directors

   The directors of a company may appoint a person as a director.  A person can be appointed as a director in order to make up a quorum for a directors' meeting even if the total number of directors of the company is not enough to make up that quorum.

   201H(2) Proprietary company – confirmation by meeting within 2 months

   If a person is appointed under this section as a director of a proprietary company, the company must confirm the appointment by resolution within 2 months after the appointment is made.  If the appointment is not confirmed, the person ceases to be a director of the company at the end of those 2 months."

   Ms Smolarek informed Mr Duta, in the email, that the company had not confirmed his appointment by resolution within two months after it had been made but that, if he still wished to be a director of Eznut, she would reappoint him and call a general meeting to seek shareholders' approval.  Mr Duta did not take up her offer.  Consequently, on 30 May 2005 Ms Smolarek informed ASIC that Mr Duta was no longer a director of Eznut and that its records should be amended accordingly.

Ms Smolarek's appointment as company secretary

1. Earlier, on 9 May 2005, Ms Smolarek had appointed herself as company secretary of Eznut.  She did so without prior consultation with either of Mr Liwszyc or Mr Duta.

The commencement of proceedings and the interlocutory applications

1. On 17 June 2005, the first and second respondents lodged an originating process citing Ms Smolarek as first defendant, Christina as second defendant and Eznut as third defendant.  They sought the following relief:

   "1.Damages pursuant to section 1317H of the Corporations Act.

   2.Interest pursuant to the Supreme Court Act.

   3.An order that the First Defendant be removed as a director of the Third Defendant.

   4.A declaration that the First Defendant holds 5% of the shares in the Third Defendant on trust for the second named Plaintiff [Mr Duta].

   5.An order that the First Defendant execute all documents and do all things necessary to transfer 5% of her shares in the Third Defendant to the second named Plaintiff.

   6.Costs.

   7.Further and or alternative relief."

2. Notice was also given that an interlocutory application would be made and, on 21 June 2005, Mr Liwszyc and Mr Duta obtained an interlocutory injunction from a Master of the Court restraining the appellants from binding or purporting to bind Eznut without their approval and consent and/or that of the Court, pending "determination of the interlocutory process for injunctive relief".  On 28 June 2005 the injunction was extended, by a different Master, until further order.  Further extensions were granted until the matter ultimately came on for hearing before the primary Judge on 18 and 19 August 2005.

Judgment of the primary Judge

1. When he came to give judgment in the interlocutory proceedings, the primary Judge, having set out some of the background to which we have referred, the competing submissions of the parties and some observations on the relevant legal principles, concluded that a number of serious issues had arisen which were fit to be tried.  He dealt with these in the following way.

Appointment of Christina as a director

1. He referred, first, to submissions which had been advanced on behalf of the first and second respondents as regards the appointment of Christina as a director of Eznut. He said (at [75] and [77]) that the first and second respondents' principal submission was that, in purporting to appoint Christina as a director of Eznut, Ms Smolarek had not exercised her powers as a director in good faith or in accordance with her statutory and fiduciary responsibilities. They had contended that the steps that she took in that regard had been designed to exclude the first and second respondents from further active involvement in the affairs of the company and to promote her own views about the future of the company, notwithstanding that a different course of action had earlier been decided upon at a board meeting held on 16 April 2005. The primary Judge referred (also at [77]) to a submission made on behalf of Messrs Liwszyc and Duta to the effect that the unilateral appointment of Christina by Ms Smolarek was ineffective as the decision had not been made by the board. He referred (at [78]) to a submission to the effect that Christina was not validly appointed as a director at the meeting on 27 May 2005 "because the proxies were not handled correctly and there was not a quorum". Then, in par [102] of his reasons, he concluded that, in circumstances in which it was quite clear that the other directors were not consulted in respect of, and played no part in, any decision to appoint Christina pursuant to s 201H of the Act, there was a serious issue to be tried whether an appointment by that avenue could be regarded as valid.

2. Having reached that conclusion, the primary Judge went on to consider whether or not the provisions of s 1324 of the Act, dealing with the circumstances in which a court may grant an injunction, had been enlivened. Under s 1324(1), where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute, inter alia, a contravention of the Act, the Court may, on the application of ASIC, or of a person whose interests have been, are, or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the firstmentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

3. The primary Judge referred, in this respect, to s 135(3) of the Act, which provides that a failure to comply with replaceable rules as they apply to a company is not of itself a contravention of the Act, with the consequence that the provisions concerning injunctions do not apply. He also referred to s 1322(2) of the Act, which provides that a proceeding under the Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid. He went on to say (at [103] ‑ [104]):

   "It will be apparent from my observations on corporate governance concerning s 135 and s 1322 that a procedural irregularity such as the unilateral action I have just described may not necessarily result in an invalidity.  However, in the circumstances of the present case, I am of the view that there is a serious issue to be tried as to whether … [Ms Smolarek] was acting in an adversarial manner and in breach of fiduciary and contractual duties owed to other members of the company in purporting, by unilateral action, to make such an appointment.

   That being so, the failure to comply with the requirement that directors are required to act pursuant to decisions taken at a properly constituted meeting may amount to a contravention of the Act within the meaning of s 1324. Arguably, such a contravention is not excused by s 135 because this is not a case in which it can be said that the procedural irregularity complained of stands alone. The failure to comply is not said to be simply 'of itself' a contravention. When the circumstances are considered as a whole there is an arguable case that the facts and matters taken together amount to a significant contravention which lies outside the protection afforded by the remedial provisions."

1. The primary Judge then turned to consider the question whether it could be said that Christina had been appointed as a director pursuant to s 201G of the Act by resolution passed in the general meeting held on 27 May 2005, although he felt obliged to note in passing that the forms filed by Ms Smolarek had spoken of Christina being appointed three days prior to the meeting, on 24 May 2005. He said, in this respect (at [106]), that a finding that Christina had been appointed by resolution depended upon the answer to the question whether there had been a quorum of two members present at the meeting. He said (at [107]) that the appellants' case in that respect had been that two members of the company had been present because Ms Smolarek had transferred some of her shares to Christina prior to the meeting. He went on to say (at [108] ‑ [110]):

   "However, this brings into play s 1072F of the Corporations Act which provides that a person transferring shares remains the holder of the shares until the transfer is registered and the name of the person to whom they are being transferred is entered in the register of members in respect of the shares. Further, consideration must be given also to s 1072G which provides that the directors of a proprietary company may refuse to register a transfer of shares in the company for any reason. Both these provisions are characterised as replaceable rules.

   There is evidence before me that registration of the subject transfer had not been effected prior to the meeting, albeit evidence disputed by the … [appellants]. It is apparent from the facts and matters in issue that in an adversarial situation the other directors of the company had not been afforded an opportunity to seek information about the transfer or to refuse to register the same before an attempt was made to exercise the voting powers associated with the shares the subject of the transfer. In the end, I am of the view that an arguable case has been demonstrated that there was a contravention of the Act as to the transfer rule and the presence of a quorum.

   Again, I must take account of the fact that each of the provisions bearing upon this aspect of the matter is characterised as a replaceable rule with the result that consideration must be given to the remedial provisions. However, for the reasons given previously, I consider that there is a serious issue to be tried as to whether the endeavour to appoint … [Christina] as a director was attended by an improper purpose and is thus not protected by the remedial provisions. This arguably amounts to a contravention which may warrant the grant of injunctive relief pursuant to s 1324(4) of the Act."

Removal of Mr Liwszyc as a director ‑ the proxies issue

1. In par [83] of his judgment, the primary Judge said that, pursuant to s 250B(1) of the Act, for an appointment of a proxy for a meeting of a company's members to be effective, the proxy's appointment must be received by the company at least 48 hours before the meeting. He went on to recite a submission which had been advanced on behalf of Messrs Liwszyc and Duta to the effect that, because the proxies were not received 48 hours before the meeting (having been received only at 4.41 pm on 25 May 2005), it followed that utilisation of and/or reliance on the proxies by Ms Smolarek was unlawful. He returned to this issue at [115] ‑ [116] of his reasons. He arrived at the following conclusions:

   "There is a serious issue to be tried as to whether … [the proxies] were received in sufficient time to be effective.  A finding to that effect would bear upon the validity of any resolution for removal of a director passed at the meeting.  Again, I do not consider that the remedial provisions necessarily cure the situation complained of.

   The conclusion I have come to is reinforced by certain of my earlier observations about corporate governance.  I noted [at [56] of the reasons, where the primary Judge had referred to Ken Robson's Annotated Corporations Act 2002 at pages 1645 to 1646] that where the irregularity results in a decision adverse to the interests of those complaining about the irregularity, and the irregularity is also comprised of a denial of an opportunity to speak against the decision, the Court is likely to make a declaration of invalidity, no matter how unlikely it is that the complainant (because he is in the minority) will be able to persuade a future meeting to vote against the decision."

Removal of Mr Liwszyc as a director ‑ the quorum issue

1. In pars [85] - [88], the primary Judge referred to arguments which had been advanced on behalf of Messrs Liwszyc and Duta, in reliance upon s 1072G and s 1072F(3) of the Act, to the effect that there had been no valid transfer of shares by Ms Smolarek to Christina. Then (at [89] ‑ [91]), he dealt with the submission that the company search mentioned earlier in these reasons had revealed that the transfer was only registered on 28 May 2005, the day after the general meeting. He went on to say (at [90] ‑ [92]):

   "I note … in passing that s 1072F(1) of the Act provides that a person transferring shares remains the holder of the shares until the transfer is registered and the name of the person to whom they are being transferred is entered in the register of members in respect of the shares.

   I note in passing that arguably there are indications that the transfer of shares from the first to second defendant was not entered into the register of members in respect of the shares until after the general meeting on 27 May 2005.  However, as to this matter, the second defendant submitted that the search entries being relied upon related to the entry and subsequent revocation of the proposed issue of further shares to … [Ms Smolarek] … and that, as appears from the Eznut register … the transfer of 1000 shares to … [Christina] was registered on 5 May 2005.  The … [appellants] placed reliance also upon a company details form concerning the transfer which was dated and stamped 24 May 2005.

   It is difficult to resolve an issue of this kind on the basis of affidavit evidence.  It is the sort of matter that is usually resolved by findings made at the trial of the action after a full review of the evidence."

2. The primary Judge returned to this issue in pars [112] ‑ [114] of his judgment.  He said:

   "The notice of general meeting referred to a resolution for the removal of … [Mr Liwszyc] in accordance with s 203C of the Corporations Act.  According to that provision, a company may by resolution remove a director from office and may by resolution appoint another person as a director instead.  The provision is characterised as a replaceable rule.

   As to this matter, the … [respondents] contend that there was a lack of compliance with requirements of the Corporations Act; that is, there were procedural irregularities concerning the manner in which proxies were dealt with and as to the presence of a quorum.

   I addressed the quorum issue in my findings as to the appointment of … [Christina] as a director.  It follows from what I have said then that, in my view, there is a serious issue to be tried as to whether the resolution for removal is invalid and ineffective owing to the absence of a quorum.  Further, for the reasons I have given previously, I consider that there is a serious issue to be tried that the remedial provisions are not sufficient to cure the lack of compliance and irregularity complained of owing to the presence of an improper purpose.  Upon the trial of the matter it would be open to the Court to form an opinion that the irregularity has caused or may cause substantial injustice."

"Removal" of Mr Duta as a director

1. In pars [94] ‑ [96] of his judgment, the primary Judge referred to submissions which had been made concerning the removal of Mr Duta as a director. These had been to the effect that no resolution had ever been passed to that effect and, indeed, that no meeting had even been convened to pass a resolution of that kind. Then, after referring to Ms Smolarek's contention that Mr Duta's appointment had automatically ceased, two months after it had taken effect, because it had never been confirmed by a members' resolution, he referred to the fact, relied upon by the first and second respondents, that the term "director", as defined by s 9 of the Act, embraces one who is not validly appointed if he in fact acts in the position of a director. He referred, also, to s 201M(1) of the Act, to the effect that an act done by a director is effective even if the director's appointment, or the continuance of that appointment, is invalid because the company or director did not comply with the company's constitution (if any) or any provision of the Act. He returned to this issue in pars [117] ‑ [119] of his judgment. He said:

   "It was clear from the evidentiary materials before me that … [Mr Duta] had acted as a director of the company for a considerable period of time without any question being raised as to the validity of his appointment.  He was, at least, acting as a de facto director in the manner allowed for by s 9 and s 201M(1) of the Corporations Act. To my mind, there is a serious issue to be tried that … [Ms Smolarek] contravened the Act by seeking to remove him by unilateral action.

   Even if it be found eventually that he was appointed pursuant to s 201H(1) without there being any subsequent confirmation by resolution, a question will then arise as to whether such an irregularity is affected by the remedial provisions.

   Put shortly, then, there appears to be a serious issue to be tried that it was not open to … [Ms Smolarek] to effect his removal otherwise than by resolution."

Appointment of Ms Smolarek as company secretary

1. In par [97] of his judgment the primary Judge referred to s 204D of the Act (the judgment incorrectly mentions s 104D) to the effect that a company secretary is to be appointed by the directors. He also referred to the submission, advanced on behalf of the first and second respondents, that Ms Smolarek was appointed as company secretary on 9 May 2005 without their knowledge or consent and that her purported appointment was consequently invalid. He returned to this issue in par [119] of his reasons, saying:

   "I am of the view … that it was not open to … [Ms Smolarek] to effect her own appointment as secretary by unilateral action. Section 204D of the Act provides that a secretary is to be appointed by the directors. On any view of the matter, the ... [respondents] were directors in early May 2005 when the purported appointment was made, and they did not consent to the appointment."

Standing

1. Having arrived at these conclusions, the primary Judge turned, next, to deal with a contention, advanced on behalf of the appellants, that the first and second respondents had lacked the necessary standing to apply for relief.  He said, in that respect (at [120] ‑ [121]):

   "However, as to that, I am minded to follow the approach adopted by Wheeler J in Emlen Pty Ltd v St Barbara Mines Ltd (1997) 24 ACSR 303. Her Honour said that for the purpose of an interlocutory application such a matter does not require final determination. It is enough to conclude (as I do) that the … [respondents] have an arguable case as to standing in that, to use the language of s 1324 of the Act, they are persons whose interests have been arguably affected by the conduct complained of.

   There are indications that the steps taken by … [Ms Smolarek] were taken pursuant to a sincere belief that what she regarded as being best for the company should prevail.  However, the Court has to keep in mind that other investors were involved and investors are entitled to presume that the rules of corporate governance will be observed, for they underpin the contract between the parties.  If a majority shareholder pursues her own self-interest to the exclusion of other concerns that can arguably be characterised as an improper purpose.  This is a matter that will have to be dealt with at the trial of the action."

Balance of convenience

1. The primary Judge then turned to the balance of convenience.  He said, in that respect (at [123] ‑ 124]):

   "I am of the view that it is necessary in order to preserve the status quo that orders be made in the terms sought by … [the first and second respondents].  The balance of convenience favours such a course in that if the … [appellants] are permitted to assume control of the company in the manner contended for by the … [appellants] then the investment made by various shareholders could be put at risk.  The proceedings concern the future planning of the company and it is therefore not a case in which damages would be an adequate remedy.

   I take account of the factor also that … [Christina] will continue as a director of the company if the proposed orders are made.   … [Christina] will remain in office but for the time being will be restrained from acting as a director."

Orders made

1. The primary Judge then made orders in terms of a minute which had been prepared on behalf of the first and second respondents and said that those orders would stand in place of the restraining orders previously made.  The orders which he made included the following:

   "1.[The first and second respondents] … be reinstated forthwith as directors of Eznut … 

   2.Until further order or pending the determination of the action herein, … [Christina] be restrained and an injunction be granted prohibiting her from acting as a director of Eznut … 

   3.The appointment of … [Ms Smolarek] as secretary of Eznut … be set aside."

2. We should mention, as regards the first of those orders, that, while it was not said to have been made only an interim basis, pending the determination of the action, the first and second respondents had contended only for an order of the latter kind and, given the nature of the interlocutory proceedings and the reasoning of the primary Judge in finding only arguable causes of action, it seems reasonable to assume that that was all that was intended by him.  We very much doubt that the position could have been otherwise.

Grounds of appeal

1. There are some 39 grounds of appeal.  However, these address 11 broad issues.  We consequently propose to deal with the grounds in groups, as they address each issue.

Failure to observe required procedures

1. By grounds 2.1(i) ‑ (iv) the appellants contend that the primary Judge erred by failing to observe, or to ensure that the respondents observed, required procedures.

2. The first of these grounds (ground (i)) complains that the parties in the interlocutory application were misdescribed in that they were called "plaintiffs" and "defendants" instead of "applicants" and "respondents" and that the originating process did not comply with the applicable rules because the nature of the proceeding was not stated and the relief sought was listed rather than claims specified. 

3. As to the first of those complaints, the reference to the applicants and the respondents as plaintiffs and defendants is a matter of no significance. Under r 1.7(2) of the Supreme Court (Corporations) (WA) Rules 2004 (WA) ("Corporations Rules"), the Registrar may not reject a document for filing only because a term used to describe a party in the document differs from the term used in the Corporations Rules.

4. As to the second complaint, there is no suggestion that, by the time of the hearing before the primary Judge, the appellants did not know what case was sought to be made against them. It was readily apparent from the affidavit material which had been lodged, even putting to one side the hearings which had taken place before the Masters. Any formal defect in the process, if brought to the respondents' attention, could readily have been cured by amendment. In any event, r 1.7(1) of the Corporations Rules provides that it is sufficient compliance with the Rules in relation to a document that is required to be in accordance with the form in Sch 1 if the document is substantially in accordance with the required form. Moreover, O 2 r 1(1) of the Rules of the Supreme Court 1971 (WA) ("Supreme Court Rules") provides that where, in beginning or purporting to begin any proceedings or at any stage in the course of or in connection with any proceedings, there has, by reason of anything done or left undone, been a failure to comply with the requirements of the Supreme Court Rules, whether in respect of time, place, manner, form or content or in any other respect, the failure shall be treated as an irregularity and shall not nullify the proceedings or any step taken in those proceedings or any judgment or order therein.

5. Ground (ii) complains that the primary Judge failed to identify the proper parties.  As best we understand the appellants' submissions in this respect, they contend that the proper plaintiff to the proceedings should have been Eznut and that it was inappropriately made the third defendant to the proceedings.  In our opinion there is no substance to this complaint.  The respondents brought the proceedings as personal actions, in their capacity as members of Eznut.  The proceedings were not brought on behalf of Eznut in respect of a wrong done to it.  Consequently, there was no need for Eznut to have been a plaintiff.  Eznut was properly joined as a defendant, being a party interested in the proceedings.

6. By grounds (ii) and (iii), the appellants contend, also, that the primary Judge erred in accepting that the respondents had the requisite standing to bring the proceedings.  That is an issue which requires some consideration.

7. We have said that s 1324 of the Act provides that, where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute a contravention of that Act, the Court may, on the application of a person whose interests have been, are or would be affected by the conduct, grant an injunction restraining the first‑mentioned person from engaging in the conduct and, if thought desirable, requiring that person to do any act or thing. Consequently, to the extent that the first and second respondents were able to make out a triable issue on the question whether or not their interests had been affected by conduct engaged in by the appellants amounting to a contravention of the Act, they had the necessary standing provided for by s 1324.

8. We have mentioned in this respect that, by virtue of s 135(3) of the Act, a failure to comply with the replaceable rules as they apply to a company is not of itself a contravention of the Act sufficient to enliven the operation of s 1324. However, by virtue of s 140 of the Act, any replaceable rules that apply to the company have effect as a contract between the company and each member, between the company and each director and company secretary and between a member and each other member under which each person agrees to observe and perform those rules so far as they apply to that person. It is accordingly plain, from this section, that it imposes a duty upon each of the parties to that deemed contract to comply with the replaceable rules so far as they apply to that person. The usual remedy for a member who complains of a breach of the statutory contract is a declaration or injunction (see R P Austin and I M Ramsay Ford's Principles of Corporations Law 12th ed (2005) at [11.235]) and there seems to be no reason why an injunction of this kind should not be ordered pursuant to the ordinary jurisdiction of the Supreme Court:  see, for example, Woodroofe Ltd v McLeod Ltd (1984) 37 SASR 269. Of course, a provision of the statutory contract cannot be enforced unless it affects the member in his or her capacity as a member: Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881. If the act or omission complained of is a wrong to the company alone, the members' standing to sue becomes doubtful: Austin and Ramsay, above, at [11.235].

9. The appellants relied, in support of their contention that the first and second respondents lacked standing, upon the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189. That rule was explained, in the following way, by Jenkins LJ in Edwards v Halliwell [1950] 2 All ER 1064 at 1066 ‑ 1067:

   "The rule in Foss v Harbottle, as I understand it, comes to no more than this.  First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself.  Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio.  No wrong had been done to the company or association and there is nothing in respect of which anyone can sue.  If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue.  In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right."

1. In Link Agricultural Pty Ltd v Shanahan [1999] 1 VR 466 at 473 ‑ 474, Kenny JA, with whom Batt and Buchanan JJA were in agreement, expressed the opinion that a shareholder has a personal or individual right to have the election or appointment of a director of the board of the company conducted or made in accordance with its articles of association. She considered that the rule in Foss v Harbottle had no application where the conduct complained of operated to infringe a personal right pertaining to the shareholder as member, either because the infringement was not capable of ratification by the members in general meeting at all or because, although capable of ratification, it had not in fact been ratified.  She referred, also, to Kraus v JG Lloyd Pty Ltd [1965] VR 232 at 235 ‑ 236, where Hudson J held that the rule in Foss v Harbottle did not operate so as to prevent a shareholder from personally enforcing his "individual membership rights" by action for an injunction against a person who was purporting to be a director although not validly appointed to the office.  Similarly, in Ryan v South Sydney Junior Rugby League Club Ltd (1974) 3 ACLR 486 at 492, Holland J held that the rule in Foss v Harbottle had no application to a case in which a member sought to enforce his rights under the articles as a member to have an election of directors carried out in accordance with the articles.

2. Against this background, it seems to us to have been at least arguable (bearing in mind that only interlocutory relief was sought) that the first and second respondents had standing to bring the proceedings in so far as they contended that Christina's appointment had not been made in accordance with the replaceable rules and that those rules had not been complied with in purporting to remove Mr Liwszyc as a director. Also, to the extent that the respondents alleged that the appointment of Christina by Ms Smolarek was made in bad faith in breach of fiduciary duties owed by her to the respondents as members, any such cause of action, if it exists (see, in this respect, Austin and Ramsay, above, at [9.050]), would be one in respect of conduct constituting a contravention of the Act and hence within the ambit of s 1324.

3. For reasons which will become apparent later in the course of these reasons, it is unnecessary for us to consider whether the first and second respondents had standing in respect of the other causes of action raised by them.

4. That leaves, under this heading, only the contention, raised by ground 2.1(iv), that the primary Judge acted ultra vires in "delivering final relief based on procedural hearing".  The appellants complain, under this ground, that the primary Judge failed to specify circumstances in which the orders made by him were to cease operation and that he failed to make his orders conditional, subject to an undertaking that the principal proceedings would be pursued.  They also point to the fact that the final relief sought in the originating process differed from that sought in the interlocutory proceedings.

5. In our respectful opinion, it would have been preferable if the order made by the primary Judge, reinstating the first and second respondents as directors of Eznut, had been expressed to have been made pending further order or determination of the action, as was the case with the order restraining Christina from acting as a director of Eznut.  However, as we have said, that seems to us to have been his intention, given the nature of the proceedings, his reasoning in finding only arguable causes of action, and the fact that no greater relief had been sought by the respondents, as was confirmed by their counsel during the course of the hearing of the appeal.

6. Similarly, it seems to us, with due respect, that it would have been preferable for the primary Judge to have made the orders conditional upon the expedition of the principal proceedings, given that control of the company was at stake.  However, it was always open to the appellants to apply to have the injunction discharged if the respondents, having obtained it, failed to prosecute their action with any diligence.

7. Finally, while it is true that the final relief sought in the originating process bore little or no relationship to that obtained in the interlocutory proceedings, this is a matter which could, very easily (and can still) be remedied by amendment.  It does not, of itself, justify the setting aside of the orders made by the primary Judge.

8. It follows that none of grounds 2.1(i) ‑ (iv) has been made out.

Jurisdiction of the primary Judge

1. Grounds 2.2(i) ‑ (iii) challenge the primary Judge's jurisdiction to make the orders made by him in three respects.  The first is that he is said to have acted ultra vires in awarding a permanent injunction.  The second is that he is said to have acted ultra vires by awarding an injunction when there was "no threatened or apprehended waste or trespass".  The third is that he is said to have acted ultra vires by awarding an injunction "while legal rights were not established".

2. As to the first of those propositions, we have already said that the trial Judge could not have intended to order a permanent injunction and that we do not consider that he did so, on a proper understanding of the orders made by him.  Counsel for the first and second respondents did not pursue an argument to the contrary. 

3. The second proposition advanced by the appellants proceeds under the misapprehension that, by virtue of s 25(9) of the Supreme Court Act 1935 (WA), an injunction can only be ordered "to prevent any threatened or apprehended waste or trespass". That section in fact empowers the granting of an injunction by an interlocutory order "in all cases in which it shall appear to the Court or a Judge to be just or convenient that such order should be made". While the section goes on to provide that, if an injunction is sought to prevent any threatened or apprehended waste or trespass, such an injunction may be granted even in circumstances which are there set out, that provision was inserted only to deal with that special case and does not detract from the general proposition that an interlocutory injunction may be granted in all cases in which it appears to the Court to be just or convenient to do so. As to the third proposition, it will be apparent from what we have already said that the injunction was sought by the respondents in order to protect what they contended to have been their recognised legal rights. They were undoubtedly entitled to apply for injunctive relief in such a case: see, for example, Australian Securities and Investments Commission v Edensor Nominees Pty Ltd (2001) 204 CLR 559 at 606. There is consequently no substance to any of grounds 2.2(i) ‑ (iii).

The basis for an injunction under the Corporations Act

1. By grounds 2.3(i) ‑ (x) and 2.6(viii) the appellants contend, in effect, that there was no basis for the granting of an injunction under the Act.  These grounds can conveniently be broken into a number of sub‑groups.

Grounds 2.3(i) and (ii) ‑ s 1324 read with s 135(3) of the Act

1. As we understand the appellants' submissions, they make three propositions in respect of these grounds. The first is that the Supreme Court of Western Australia had no jurisdiction to grant an interlocutory injunction under s 1324. The second is that, in any event, the interlocutory relief bore no relationship to the relief sought in the principal proceedings. The third is that the respondents relied upon failures to comply with the replaceable rules rather than upon any contravention of the Act with the result that there was nothing to enliven the operation of s 1324.

2. As to the first proposition, there is no doubt that the Supreme Court of Western Australia had the requisite jurisdiction. The word "Court" in s 1324(1) means, amongst others, the Supreme Court of a State: s 58AA(1) of the Act. Also, s 1337B(2) of the Act confers jurisdiction on the Supreme Court of each State with respect to civil matters arising under the Corporations legislation, defined in s 9 to include the Act. (While the appellants pointed to the fact that that conferral of jurisdiction is subject to s 9 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) and contended that this precluded a review of the kind embarked upon by the primary Judge, that contention misunderstood the provisions of the latter section, which have no bearing in a case of this kind.) We have also referred to the provisions of s 25(9) of the Supreme Court Act. 

3. We have already dealt with the second and third propositions and will not repeat what we have said in that regard.

Grounds 2.3(iii) and (v) ‑ Mr Duta's directorship

1. By grounds 2.3(iii) and (v) the appellants contend that the primary Judge erred in his approach to the allegedly wrongful removal of Mr Duta as a director.

2. We have said that the primary Judge concluded that Mr Duta had, at least, acted as a de facto director, that, even if it was eventually found that he was appointed pursuant to s 201H(1) of the Act without any subsequent confirmation by resolution, a question would then arise as to whether an irregularity of that kind is affected by the remedial provisions and that there appeared to be a serious issue to be tried whether it was open to Ms Smolarek to effect his removal otherwise than by resolution.

3. In our respectful opinion, his Honour erred in finding that there was a serious issue to be tried as regards this issue.

4. It seems plain, from the evidence as it stands, that Mr Duta was appointed as a director by the then directors of Eznut, being Ms Smolarek and Mr Liwszyc, in their capacity as such. He must, consequently, have been appointed pursuant to s 201H(1) of the Act. We have earlier set out the provisions of that section and of s 201H(2). While counsel for the respondents sought to contend that s 201H(2) (which requires that the appointment of a person as a director under s 201H be confirmed by the company by resolution within two months of the appointment and provides that, if the appointment is not confirmed, a person ceases to be a director at the end of those two months), applies only in the case of a person appointed to make up a quorum for a director's meeting, it seems to us to be quite plain, from the terms of the section, that it applies in the case of any appointment of a person as a director under s 201H(1). That is the plain meaning of the words used. Consequently, there having been no resolution by the members of Eznut to confirm Mr Duta's appointment within two months or at all (and there being no contention that his appointment was implicitly approved by a meeting of members), he ceased, by the operation of s 201H(2), to be a director of the company on 1 September 2003 (two months after his appointment). While the evidence suggests that he did, thereafter, act as a de facto director, and while his acts, as such, may have been effective by virtue of s 201M(1) of the Act, that does not alter the fact that he had ceased to be a de jure director and that Ms Smolarek was entitled to inform ASIC accordingly. She did not, herself, take any steps to remove him. That outcome had already been achieved by virtue of the operation of s 201H(2) of the Act. Moreover, it seems to us that the failure to confirm Mr Duta's appointment as required by s 201H(2) was not a procedural irregularity of the kind contemplated by s 1322(2) of the Act. The Act does not contemplate the appointment of a director by existing directors, without approval of the company, other than for the period of two months provided for by s 201H(2) and we very much doubt that s 1322(2) could have been intended to apply to a case in which the parties have done something which the Act does not authorise as opposed to one in which the parties have attempted to do something which the Act permits but have failed to do it effectively because of a procedural failure or omission: see Sipad Holding ddpo v Popovic (1995) 18 ACSR 436 at 449 per Lehane J.

5. It follows, in our respectful opinion, that no basis was made out for the reinstatement of Mr Duta as a director, whether on an interim basis or otherwise. That outcome could only be achieved by way of his reappointment in accordance with the provisions of the Act. We would consequently uphold grounds 2.3(iii) and (v) and set aside the order for the reinstatement of Mr Duta as a director of Eznut.

Grounds 2.3(iii) and (iv) ‑ the appointment of Christina as a director

1. By grounds 2.3(iii) and (iv) the appellants contend that Ms Smolarek was not required to consult other directors before appointing Christina as a director some three days ahead of the general meeting and that, in any event, the general meeting held on 27 May 2005 ratified her appointment. They also contend that the primary Judge misinterpreted and misapplied s 201B(1) of the Act which provides that only an individual who is at least 18 may be appointed as a director of a company.

2. As to the first of those propositions, it is apparent from the terms of s 201H(1) that, if that section is relied upon for the appointment of director, the appointment must be one by the directors, being, of course, a reference to the board and not to an individual director. Consequently, any appointment which relied only upon Ms Smolarek's say so would be invalid. It follows that Christina's appointment could only have been lawfully made if ratified or effected by the members in general meeting. For reasons to which we shall later come, it seems to us to have been arguable that there was no quorum at the meeting held on 27 May 2005, with the consequence that Christina's appointment was not properly ratified or effected. That being so, it follows that the primary Judge was right to conclude that there was, in this respect, a triable issue and that it was open to him to exercise his discretion so as to restrain Christina, until further order or pending the determination of the action, from acting as a director of Eznut.

3. As to the submission concerning s 201B of the Act, it seems to us that the primary Judge made only a passing comment concerning Christina's age. There is nothing in his reasons to suggest that he thought that her age disqualified her from acting as a director of Eznut. It is consequently unnecessary to give further consideration to that issue.

Grounds 2.3(vi) and (vii) ‑ proxy issues

1. As we understand the appellants' submissions, they make three propositions concerning the use of proxies at the general meeting held on 27 May 2005. The first is that the requirement that the proxies' appointment be received by the company at least 48 hours before the meeting should be treated as a maximum period, rather than a minimum, and that it consequently did not matter whether or not the proxies were received within the period of 48 hours specified in s 250B: see, in this respect Austin and Ramsay, above, at [7.560] and Re Amcor Ltd (2000) 34 ACSR 199 at 205. The second proposition is that Ms Smolarek, as chair, proclaimed the proxies valid at the meeting and her decision, having been made in good faith and rationally, should not be reviewed. The third proposition is that there is no evidence to suggest that Ms Smolarek breached s 250A(4)(c) of the Act by voting the proxy which was directed otherwise than in accordance with the direction.

2. It seems to us that it is unnecessary to give consideration to any of these propositions. It is common cause that, at the time of the meeting, Ms Smolarek held some 64 per cent of the voting shares in Eznut and that it accordingly did not matter whether, or in what way, the proxies were voted. Consequently, any procedural irregularity in that regard could not have caused a substantial injustice sufficient to justify a declaration, on that account only, that the proceedings were invalid: see s 1322(2) of the Act, the provisions of which are discussed below.

Grounds 2.3(viii) and (ix) and 2.6(viii) - share transfer issues

1. By grounds 2.3(viii) and (ix) and 2.6(viii), the appellants make five submissions.

2. The first is that s 1072G of the Act, which provides that the directors of a proprietary company may refuse to register a transfer of shares in the company for any reason, is a replaceable rule and, hence, by the operation of s 135(3), a failure to comply with it is not, of itself, a contravention of the Act enlivening the operation of s 1324. We have already said that a failure to fall within that section is not, of itself, necessarily fatal to an application for an injunction. It seems to us that, if it was reasonably arguable that the transfer of shares in favour of Christina was invalid and that there was consequently no quorum at the meeting held on 27 May 2005, then it was open to the Court to conclude that there was arguably an infringement of the statutory contract affecting the first and second respondents as members and that this was sufficient, in the circumstances, to justify the ordering of an interim injunction restraining Christina from acting as a director and reappointing Mr Liwszyc as a director until further order.

3. The second submission was that the transfer was registered prior to the meeting on 27 May 2005 and there was no proper basis upon which the respondents could have objected to it. It seems to us that there is nothing in the available evidence to support the proposition, advanced by the first and second respondents, that the transfer was not entered in Eznut's register in advance of the meeting. The date upon which ASIC was notified of the transfer sheds no light on that issue. However, it also seems to us to be plainly arguable that it is implicit in s 1072G that a transfer of shares in a company cannot lawfully be registered without the approval of the board, with the consequence that its approval must first be sought regardless of whether or not there is any basis for objection. There is a good deal of authority to support the proposition that the power to refuse to register a transfer must be exercised for a proper purpose and in what the directors bona fide believe to be the company's best interests:  Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672; Re Bell Bros Ltd (1891) 65 LT 245; Manning River Co‑op Dairy Co Ltd v Shoesmith (1915) 19 CLR 714; Charles Forte Investments Ltd v Amanda [1964] Ch 240 and In re Smith and Fawcett Ltd [1942] Ch 304. However, that does not detract from the proposition that the decision to register a transfer is that of the board, and not one for an individual director, even a managing director. Moreover, we doubt that s 1322(2) has any application in a case of this kind. If the approval of the board is required by the Act, the failure even to seek it seems to us to be at least arguably a substantive irregularity, and not merely a procedural irregularity. Registration is not authorised in those circumstances. It is not as though an attempt was made to obtain the approval of the board, but there was some irregularity in the course of obtaining it. No attempt was made at all: see, in this respect, Sipad Holding, above, at 449 and Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd (2005) 55 ACSR 185 at 206 per Palmer J.

4. No order has been sought under s 1322(4)(a) of the Act, which empowers the Court, subject to the pre‑conditions in s 1322(6), to make an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been taken, under the Act or in relation to a corporation is not invalid by reason of any contravention of a provision of the Act or of the constitution of a corporation.

5. The third submission was that it was unreasonable to expect Ms Smolarek to try and secure the consent of the other directors to the transfer because Mr Duta was then in China and Mr Liwszyc was then in "caretaker" mode as there was a resolution pending for his removal as a director. However, circumstances such as these cannot justify a transfer made in breach of the Act. There was, in any event, nothing to prevent Ms Smolarek from approaching Mr Liwszyc, even if he was in "caretaker" mode, and, so far as Mr Duta is concerned, the appellants while suggesting (in their written submissions) that he was uncontactable in China, went on to say only that he never responded to correspondence from Eznut while he was there.

1. The fourth submission asserts that the primary Judge misinterpreted s 1072F of the Act. This is because he referred to s 1072F(3), which provides that the directors may refuse to register a transfer of shares in the company if the shares are not fully paid or if the company has a lien on the shares. The appellants assert that neither of these prerequisites to registration was present. However, we did not understand his Honour to have suggested otherwise. His reference to the section was made, in passing, in the course of general discussion concerning the power to refuse to register a transfer of shares.

2. The fifth, and last, submission is that the primary Judge disregarded the principle that shares are freely transferable. The appellants refer, in this respect, to authority to the effect that there is a rebuttable presumption that shares are freely transferable and that the courts have always viewed any restraint on the free alienation of property with repugnance. In our opinion that proposition does not bear upon the question whether or not, by virtue of s 1072G, a transfer of shares may be registered without seeking the prior approval of the board.

3. It follows that none of these grounds has been made out and that it was open to the primary Judge to find, as he did, that it was arguable that, at the time of the general meeting, Christina was not lawfully a member of Eznut and that there was consequently no quorum.

Ground 2.3(x)

1. That brings us to ground 2.3(x). We have mentioned that the primary Judge found that there was a serious issue to be tried whether or not the remedial provisions were sufficient to cure the lack of a quorum having regard for what was said to have been the improper purpose of Ms Smolarek in appointing her daughter as a director and removing Mr Liwszyc as a director. By this ground the appellants contend that, if there was a lack of a quorum, this was merely a procedural irregularity which gave rise to no substantial injustice and which, by virtue of s 1322(2) of the Act did not invalidate proceedings on 27 May 2005. The appellants say that this is so even if (which they contest), the meeting proceeded in the full knowledge of those present that there was no quorum, as to which see Whitehouse v Capital Radio Network Pty Ltd (2004) 13 Tas R 27 and Re Pembury Pty Ltd [1993] 1 Qd R 125, but cfRe PW Saddington & Sons Pty Ltd (1990) 19 NSWLR 674; Electro Research International Pty Ltd v Stec (1996) 20 ACSR 320 at 351 and McGellin v Mount King Mining NL (1998) 144 FLR 288.

2. As we have earlier mentioned, s 1322(2) provides that a proceeding under the Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceedings to be invalid. Section 1322(1) provides that, unless the contrary intention appears, a reference to a proceeding is a reference to any proceeding whether a legal proceeding or not and that a reference to a procedural irregularity includes a reference to the absence of a quorum at a meeting of a corporation.

3. It has been held that, if invalidation is sought upon the ground that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court, the party seeking a declaration of that kind must show that the irregularity occasioned the substantial injustice and not that the proceeding caused or may cause substantial injustice:  Re Pembury Pty Ltd at 127 per Byrne J (where the proceeding was said to be a meeting and its resolutions).  In Re Broadway Motors Holdings Pty Ltd (in liq) (1986) 6 NSWLR 45 at 58 Powell J said that it must be shown that there is a "nexus" between the procedural irregularity which has occurred and the matters of prejudice relied upon as constituting injustice. In Mamouney v Soliman (1992) 9 ACSR 63 at 71 Hodgson J said that the possible injustice must be "linked" to the procedural irregularities, that it is insufficient for a plaintiff to say that resolutions had been irregularly passed and that they had caused injustice and that, in the case before him, the plaintiff had been obliged to show that there may have been a different result if proper notice of proposed resolutions had been given. However, he also said (at 72), that he accepted that the more significant the resolutions passed at the meeting, and the greater the procedural defects, the more ready the Court will be to say that they have caused or may cause substantial injustice.

4. It will be apparent from the background which we have recited, that, on the case advanced by the first and second respondents (strongly contested by the appellants) there had been a valid resolution, in April 2005, to issue an additional 1.5 million shares and these had, by the date of the meeting on 27 May 2005, been issued and allotted, albeit the persons to whom they were allotted had yet to be registered as shareholders.  Consequently, on the first and second respondents' case (which could only really be tested at a trial), Ms Smolarek must have known that, once the shares had been registered, she would become a minority shareholder and that the persons who would then hold the majority were allied with Mr Liwszyc and saw him, and perhaps also Mr Duta, as their representatives on the board.  Also, this may well have been a case in which there was a common understanding between members, outside the company's constitution, which gave rise to a legitimate expectation of an entitlement to participate in the management of the company:  see Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417; Hogg v Dymock (1993) 11 ACSR 14 and Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. The words "legitimate expectation" have been used, in this context, to describe an understanding or expectation of a member which, because of equitable considerations, can make it unfair for a party to exercise legal rights (although see the criticism of that expression by Lord Hoffman, in O'Neill v Phillips [1999] 1 WLR 1092). The cases to which we have referred demonstrate that, in a case such as this, where the company is formed by a majority and minority shareholder (respectively Ms Smolarek and Mr Liwszyc) on the basis that both will participate in the management of the company and that each will be a director (that, on the face of the evidence as it stands, seemingly having been the understanding between Ms Smolarek and Mr Liwszyc when Eznut was incorporated on 15 October 2002), the Court can restrain the exercise of the majority shareholder's legal right to remove the minority shareholder as a director upon the ground that it breaches the understanding that both will be involved in management as directors and is oppressive (see also Austin and Ramsay, above, at [11.450]).

5. In those circumstances, and taking into account the evidence which was before the primary Judge to the effect that Ms Smolarek wished to impose her own will on the future direction of the company contrary to the wishes of Mr Liwszyc and Mr Duta, and of the other members who saw them as their representatives on Eznut's board, it seems to us that it was open to him to find that it was arguable that the irregularity was such as to cause a substantial injustice that could not be remedied by the order of the Court.  Had the meeting been adjourned until such time as there was a quorum, enabling Messrs Liwszyc and Duta to be present, the two men would have been able to put their case to Ms Smolarek, and also to advance the preferred position of the other shareholders who had provided Mr Liwszyc with their proxies, and perhaps persuade her that Mr Liwszyc should not be removed as a director and that Christina should not be appointed to Eznut's board.  While that prospect might not have been likely in all of the circumstances, a denial of the opportunity, given the significance of the resolutions passed, seems to us to have been such as arguably to give rise to a substantial injustice and, hence, to justify an interim injunction of the kind ordered by the primary Judge in respect of the two resolutions passed.

6. It also seems to us that it would have been open to the primary Judge to find that it was arguably not just and equitable that an order under s 1322(4)(a) of the Act should be made, as to which see s 1322(6)(a)(iii).

Procedural fairness issues

1. By grounds 2.4(i) and (ii) the appellants contend that the primary Judge disregarded principles of natural justice by demonstrating bias (or, as it was put in the appellants' written submissions, by being a "judge in his … own cause") and by failing to apply the "audi alteram partem" rule.  It is enough to say, in this respect that a reading of the judgment, and of the transcript of the hearing before the primary Judge, reveals nothing which would support either proposition.

Failure of discretion

1. By grounds 2.5(i) to (vi), the appellants contend that the primary Judge erred in his approach to his exercise of discretion.

2. Ground 2.5(i) contends that he took irrelevant considerations into account.  The only example of this which was provided by the appellants is par [73] of the primary Judge's reasons, in which he referred to a submission which had been advanced on behalf of the first and second respondents to the effect that Ms Smolarek had arguably acted "pursuant to a self‑interested and improper purpose" in unilaterally issuing bonus shares in Eznut to herself.

3. In her affidavit dated 26 July 2005 Ms Smolarek explained what took place in that respect.  She said that she believed that she and Mr Duta were entitled to a bonus issue in lieu of monetary compensation for the work which they had been doing for Eznut, in respect of which no remuneration had been received by them for over a year.  She consequently decided to issue bonus shares to herself and Mr Duta "posted the changes to ASIC" on 25 May 2005.  On the following day she had doubts as regards the legal propriety of what she had done and consequently sent an email to ASIC in order to ask it to "hold processing of … [her] form".  She also telephoned ASIC and explained the situation.  Despite her efforts, the form was processed and she subsequently wrote to ASIC a letter requesting withdrawal of the form and saying that the bonus shares had been issued in error.  ASIC subsequently reversed its record of the issue.

4. Although the primary Judge did refer to the submission which had been made on behalf of the first and second respondents in this regard, it seems to have played little part in his reasoning, there being no subsequent reference to it.  In any event, it seems to us that it was open to him to take the submission which had been advanced in this respect into account as an indication of the manner in which Ms Smolarek might exercise her control over Eznut so long, of course, as her explanation for her conduct was also taken into account.

5. While the appellants' written submissions suggest that this was "just one of [many] irrelevant considerations", no other such considerations have been identified.

6. Ground 2.5(ii) asserts that the primary Judge failed to take relevant considerations into account.  The appellants complain, first, that the judgment "further extended the injunctive orders made … by the Masters that prevented the … [appellants] from acting for the Company for the period of 21 days" in spite of a statement by counsel for the first and second respondents, made in the course of his submissions to the primary Judge, that those respondents did not wish to restrain Ms Smolarek from acting as a director of Eznut.  It will be apparent from what we have already said that the primary Judge made no order restraining Ms Smolarek from acting as a director of Eznut.  There is consequently no basis for any appeal in that respect.

7. The appellants' next complaint, under this ground, is that a number of submissions made by them were not considered by the primary Judge.  They contend, amongst other things, that he erred in his approach to the balance of convenience in that he ignored the appellants' submissions to the effect that their conduct posed no danger to the interests of the first and second respondents, or anyone else, and that it was the respondents who had misused their positions as directors and who posed a threat to the interests of the company as a whole.  We will return to this issue when dealing with the balance of convenience below. 

8. The appellants also contend that no basis was made out for the grant of an injunction and that the primary Judge erred in failing to have regard to submissions which had been made by the appellants in respect of critical issues, including the question whether or not the absence of a quorum could be a procedural irregularity and the issue of Mr Duta's status as a director.  All of these issues have been dealt with in dealing with the other grounds of appeal and it is unnecessary for us to comment on them further.

9. Ground 2.5(iii) contends that the primary Judge exercised his power for a purpose other than that for which it was conferred.  The appellants refer, in this respect, to what was said by Lord Eldon in Carlen v Drury (1812) 35 ER 61 as follows:

   "This Court is not to be required on every occasion to take the management of every playhouse and brewhouse in the Kingdom."

   They contend that the primary Judge wrongly intervened in the company's business by ordering the reinstatement of the first and second respondents as directors.  It is enough to say, in this respect, that it seems to us to have been open to the primary Judge, for the reasons which we have already given, to order the reinstatement, on an interim basis, of Mr Liwszyc as a director but not to do so in the case of Mr Duta.  We need add only that we are not persuaded that there is any substance to the suggestion that there was any improper, as opposed to mistaken, exercise of power by the primary Judge.

10. Ground 2.5(iv) contends that the primary Judge exercised his discretionary power in bad faith.  The submissions advanced in support of this ground do no more than generally attack the logic of the judgment and assert, without any foundation at all, that aspects of it reveal an intention on the part of the primary Judge to harm Ms Smolarek.  The allegations are entirely unfounded and we do not propose to give any further attention to them.

11. Ground 2.5(v) asserts that the primary Judge exercised "personal discretionary power at the direction or behest of another person".  The appellants seek to support this extraordinary assertion by suggesting that the primary Judge allowed himself to be "dictated to" by the first and second respondents, as evidenced by the fact that his judgment contained "primarily opinions of the Respondents" and the fact that orders made by him were made in terms of a minute which had been prepared by the first and second respondents' solicitors.  There is no basis for these contentions and we do not propose to consider them further.

12. Ground 2.5(vi) asserts that the primary Judge "exercised a discretionary power in accordance with a rule or policy without regard to the merits of the particular case".  The submissions made in support of this ground do no more than attack the reasoning of the primary Judge as regards the directorship of Mr Duta.  We have dealt with that issue above and need say nothing further in respect of it.

Lack of reasons and uncertain exercise of power

1. Grounds 2.5(vii) and (viii) contend, respectively, that the judgment of the primary Judge did not reveal the logic behind his decision and that he "exercised a power in such a way that the result of the exercise of the power is uncertain". 

2. As to the former proposition, the submissions made in support of it do no more than attack the logic of the primary Judge's reasoning.  In our opinion, there is no basis for any assertion that the reasoning of the primary Judge was inadequately disclosed.  The basis for the decision was plainly apparent and the reasons were more than adequate for the purposes of giving effect to the appellants' right of appeal:  Beale v Government Insurance Office of New South Wales (1997) 48 NSWLR 430 at 442 and Mount Lawley Pty Ltd v Western Australian Planning Commission (2004) 29 WAR 273 at 282 ‑ 283.

3. As to the latter proposition, we are not persuaded that there is any uncertainty in the orders made by the primary Judge.  Save for the fact that, we have said, it might have been preferable for him to have ordered, expressly, that the reinstatement of the first and second respondents was to be on an interim basis, his orders, and their effect, are plain enough.  While the appellants complain, in this last respect, that the primary Judge directed that the orders made by him should stand in place of the restraining orders previously made, but then went on to dismiss the appellants' application to set aside those orders as giving rise to uncertainty, it seems to us to be quite plain that he thereby intended to make the orders in fact made by him but otherwise to dismiss the application to set aside the interim restraining orders which had previously been made.

Preservation of status quo

1. By ground 2.6(i) the appellants contend that the primary Judge misinterpreted and misapplied what they referred to as the "preservation of status quo" principle.  They contend, in effect, that the "status quo", at the time of the hearing before the primary Judge and immediately before it, was that the first and second respondents were no longer directors of Eznut and that the appellants were its only directors.  In our opinion, the primary Judge plainly understood what the status quo was at different times and tailored the relief ordered by him according to the view which he took of the issues before him and the balance of convenience.  There is no substance to this ground.

Balance of convenience

1. That brings us to grounds 2.6(iv) and (ix) which challenge the primary Judge's approach to the balance of convenience.

2. The primary Judge plainly understood the task before him in this respect. He accepted (at [35]) that the usual interlocutory injunction test applied, that the first and second respondents were required to satisfy him that there was a serious question to be tried (at [36]) and that, if there was a serious question to be tried, he was obliged to consider whether the balance of convenience was for or against the grant of the injunction (at [37]). He said (at [39]) that he was conscious that the first and second respondents sought an order in the nature of a mandatory injunction. He referred to well‑known authorities in these respects, including Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153; American Cyanamid Co v Ethicon Ltd [1975] AC 396 at 408 and Cash Converters Pty Ltd v Hila Pty Ltd (1993) 9 WAR 471.

3. However, the appellants make two specific complaints.  The first, as best we understand it, is that the appellants' case was so strong that an injunction should not have been granted, least of all in circumstances in which the handing over of control of the board to the respondents might cause Ms Smolarek, in particular, irreparable harm.  The second is that injunctive relief should not have been granted in circumstances in which the principal relief claimed in the originating process filed on behalf of the first and second respondents was not pursued.  We have already dealt with the second complaint.  As to the first, because we have arrived at the conclusion that the order reinstating Mr Duta should be set aside but that there is no basis for interfering with the order for the interim replacement of Mr Liwszyc or that restraining Christina from acting as a director on an interim basis, the parties are left in the situation in which there will only be two participating directors of the company (if it should come out of external administration).  While this option is a good deal less than ideal, given that Ms Smolarek and Mr Liwszyc are unable to agree on the future direction of the company, it seems to us to be the best of a number of unsatisfactory options.  While it is unlikely that Ms Smolarek and Mr Liwszyc will be able to agree on matters of significance, that seems to us to be the only means of protecting the interests of all parties pending the final resolution of the matters in dispute or the implementation of some other means of breaking the deadlock.  With even a small degree of willingness to co‑operate, the two directors should, at least, be in a position to work out some means of preserving the company's position in the interim.

Failure to apply other well‑established principles

1. By grounds 2.6(ii), (iii) and (v) to (viii), the appellants contend that the primary Judge failed to apply a number of other well‑established principles.

2. Ground 2.6(ii) asserts that the primary Judge disregarded rules relating to the "purpose of injunction".  The only complaint made by the appellants, in their written submissions, is that Ms Smolarek does not know why an injunction was imposed upon her and Christina.  As will be apparent from what we have already said, the injunction imposed upon Ms Smolarek by the Master has since been discharged.  The basis for the restraint imposed in respect of Christina has been adequately explained by the primary Judge.

3. Next, ground 2.6(iii) asserts that the primary Judge misinterpreted and misapplied the principle of "serious issue to be tried".  The submissions advanced in support of this ground do no more than assert that the primary Judge erred in the decisions at which he arrived.  They consequently add nothing to the grounds of appeal already considered.

4. Ground 2.6(v) contends that the primary Judge disregarded "equitable principles".  The submissions in support of it contend that the first and second respondents did not have "clean hands" and consequently should not have been granted equitable relief.  It is enough to say in this respect that it would have been inappropriate for the primary Judge to find, upon the basis of contested evidence in interlocutory proceedings, that any misconduct on the part of the first and second respondents, sufficient to deny them equitable relief, had been proved.

5. Grounds 2.6(vi), (vii) and (viii) respectively contend that the primary Judge disregarded the "controlling shareholder power" principle, "the separate entity doctrine" and the "presumption that shares are freely transferable".  None of these grounds adds anything of any significance to the issues which have already been discussed.  The fact that Ms Smolarek was Eznut's controlling shareholder at the time of the general meeting held on 27 May 2005 and the fact that courts have traditionally taken the view that shares should be presumed to be freely transferable (as to which see, for example, New Lambton Land & Coal Co Ltd v London Bank of Australia Ltd (1904) 1 CLR 524 at 544) do not alter any of the conclusions at which we have earlier arrived. Nor is there substance to the suggestion that the primary Judge somehow ignored the independent existence of Eznut as contended for in ground 2.6(viii).

Improper purpose

1. Ground 2.7(i) asserts that the primary Judge "acted for an improper purpose" when he presented "unwarranted opinions and baseless accusations of wrongdoing".  In their written submissions, the appellants contend, in effect, that there was no basis for the presentation by the primary Judge of "a scenario" to the effect that the share transfer from Ms Smolarek to Christina was for an improper purpose.  However, the primary Judge did not "present" any such scenario.  In his judgment, he did no more than recite the submission which had been advanced on behalf of the first and second respondents to this effect.  He did not himself reach any final conclusion on that issue.  The suggestion that he acted for an improper purpose merely because he recited an allegation which he was bound to consider has no substance.

Grounds 2.8(i) and (ii) ‑ no evidence to justify the decision of the primary Judge

1. Ground 2.8(i) asserts that the primary Judge based his decision on an incorrect assumption of fact.  The appellants' written submissions make it plain that this ground attacks the conclusions arrived at by the primary Judge as regards the issue of registration of the transfer of shares from Ms Smolarek to Christina.  Those submissions add nothing to what has been said by the appellants in respect of the issues, dealt with earlier in these reasons, concerning the transfer of shares to Christina and the recording of the transfer in the register of members.

2. The final ground, ground 2.8(ii), asserts that the primary Judge based his decision on the existence of a non‑existent fact.  In their written submissions the appellants contend that there was no evidence to support the allegation, made on behalf of the first and second respondents, that Ms Smolarek had initiated, and then carried into effect, a plan to exclude the first and second respondents from the management of the company.  The primary Judge made no finding as regards the existence, or otherwise, of any such plan.  All that he found, as we have explained, were the triable issues to which we have referred.

3. The written submissions lodged by the appellants in support of this ground make two other propositions.

4. The first relates to the comment, made by the primary Judge at [56] of his reasons, to the effect that, where an irregularity results in a decision adverse to the interests of those complaining about it and the irregularity is comprised of a denial of an opportunity to speak against a resolution, the Court is likely to make a declaration of invalidity, no matter how unlikely it is that the complainant will be able to persuade a future meeting to vote against the same resolution.  The appellants contend that this principle had no arguable application to the circumstances of the case as neither of the first and second respondents had been denied an opportunity to speak.  It had been open to either of them to attend the meeting and speak against the resolutions had they not mistaken the date of the meeting.  We have already concluded that there is a triable issue concerning the absence of a quorum at the meeting, and that this arguably amounted to a procedural irregularity which caused or may have caused substantial injustice that could not be remedied by an order of the Court, in that the failure to adjourn the meeting to a time when the other members could be represented at it resulted in their inability to attempt to persuade Ms Smolarek to their point of view.

5. The second proposition is that the primary Judge "misrepresented" Ms Smolarek's position as regards Mr Duta's appointment as a director.  The submissions advanced in this respect add nothing to those already considered earlier in these reasons.

Conclusion

1. It follows, from what we have said, that we would allow the appeal, but only to the extent of setting aside the order made by the primary Judge for the reinstatement of Mr Duta as a director.

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT :   THE COURT OF APPEAL (WA)

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

CORAM:   STEYTLER P

MCLURE JA
BUSS JA

HEARD:   21 FEBRUARY 2006

DELIVERED          :   29 MARCH 2006

SUPPLEMENTARY

DECISION              :26 APRIL 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 (ADMINISTRATORS APPOINTED) (ACN 102 508 789)
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:

Practice and procedure - Rules of the Supreme Court 1971 (WA) - Order 42 r 2 - Principles relevant to exercise of discretion to antedate orders - Whether order of this Court allowing appeal should be antedated

Legislation:

Civil Judgments Enforcement Act 2004 (WA), s 3, s 11
Corporations Act 2001 (Cth), s 128, s 129, s 201 M, s 435A, s 435C(2), s 435C(3), s 436A(1), s 440 D
Rules of the Supreme Court 1971 (WA), O 42 r 2

Supreme Court (Court of Appeal) Rules 2005 (WA), s 5

Result:

Application under O 42 r 2 to antedate order refused

Category:    A

Representation:

Counsel:

First Appellant               :     In person

Second Appellant          :     In person

First Respondent           :     Mr G W Massey

Second Respondent      :     Mr G W Massey

Third Respondent          :     No appearance

Administrators of the Third Respondent    :        Mr J C Vaughan

Solicitors:

First Appellant               :     In person

Second Appellant          :     In person

First Respondent           :     Holborn Lenhoff Massey

Second Respondent      :     Holborn Lenhoff Massey

Third Respondent          :     No appearance

Administrators of the Third Respondent    :        Christensen Vaughan

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

Advanced Building Systems Pty Ltd v Ramset Fasteners (Aust) Pty Ltd (1997) 71 ALJR 814

Air Express Limited v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249

Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270

Belgian Grain and Produce Co Ltd v Cox & Co (France) Ltd [1919] WN 317

Bingham v England (1996) 17 WAR 226

Borthwick v Elderslie Steamship Company Ltd (No 2) [1905] 2 KB 516

Cameron v Cole (1944) 68 CLR 571

Hartley Poynton Ltd v Ali [2005] VSCA 53

Kazar v Duus (1998) 88 FCR 218

Kuwait Airways Corporation v Iraqi Airways Co (No 2) [1994] 1 WLR 985

Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627

Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306

Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590

Case(s) also cited:

Battenberg v Union Club (2005) 189 FLR 206

Commissioner for Railways (NSW) v Cavanough (1935) 53 CLR 220

Easterday v Western Australia (2005) 30 WAR 122

Isaacs v Robertson [1985] 1 AC 97

Kschammer v R W Piper and Sons Pty Ltd [2003] WASCA 298 (S)

Matheson v Commissioner of Main Roads (2001) WAR 269

Minister for Immigration Local Government and Ethnic Affairs v Taveli (1990) 20 ALD 315

Nicol v Allyacht Spars Pty Ltd (No 2) (1988) 165 CLR 306

Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1

Templeton v Hamersley Iron Pty Ltd [2001] WASCA 179

Toolan v Metropolitan (Perth) Passenger Transport Trust (2001) 25 WAR 1

White v White [1947] VLR 434

1. JUDGMENT OF THE COURT: On 29 March 2006 this Court delivered reasons for decision ([2006] WASCA 50) in an appeal against a number of interlocutory orders made by the primary Judge in proceedings brought by the first and second respondents against the appellants ([2005] WASC 199).

2. We decided, relevantly for present purposes, that the appeal should be allowed, but only to the extent of setting aside the order made by the primary Judge for the reinstatement of the second respondent as a director. 

3. When our reasons for decision were delivered, an issue arose as to whether 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 or from the date of the primary Judge's order (namely, 2 September 2005).  The appellants and the respondents have filed written submissions in relation to this issue pursuant to leave which this Court granted on 29 March 2006.

4. Order 42 r 2 of the Rules of the Supreme Court 1971 (WA) provides:

   "(1)A judgment or order of the Court takes effect from the day of its date.

   (2)Such judgment or order shall be dated as of the day on which it is pronounced, given or made, unless the Court orders that it be dated as of some earlier or later day, in which case it shall be dated as of that other day."

   Order 42 r 2 applies to orders of this Court on appeal. See r 5 of the Supreme Court (Court of Appeal) Rules 2005 (WA).

5. In Advanced Building Systems Pty Ltd v Ramset Fasteners (Aust) Pty Ltd (1997) 71 ALJR 814 at 816, McHugh J observed:

   " … it needs to be understood that judgments given by courts are not provisional judgments until they are subsequently confirmed by appellate courts.  They create legal rights and duties.  A party which is entitled to the benefit of a judgment is also entitled to enforce it …"

6. A decision of a Judge of a superior court is valid unless and until it is set aside.  See Cameron v Cole (1944) 68 CLR 571 at 590. If such a decision has not been set aside, and a stay has not been granted, it is a lawful judgment and action taken in reliance upon it is lawful. See Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590 at 603.

7. In Borthwick v Elderslie Steamship Company Ltd (No 2) [1905] 2 KB 516, consideration was given to the date on which a judgment allowing an appeal should take effect in the context of a Rule of Court analogous to O 42 r 2. Collins MR said, at 519:

   "The judgment is not ipso facto antedated by reason that it is substituted for the judgment in the Court below.  The power to antedate ought, in my opinion, only to be used on good ground shewn …"

   Romer LJ said, at 521:

   "When a plaintiff has failed in the Court below so that his action has been dismissed, if he succeeds on appeal it cannot, I think, be properly said that the judgment of the Court of Appeal must be regarded for all purposes as if it had been the judgment given by the Judge in the Court below.  The judgment in favour of the plaintiff must be treated as of the date on which it was given in the Court of Appeal, subject to the right of that Court to antedate its judgment.  That right should, in my opinion, be exercised with caution."

   See also Belgian Grain and Produce Co Ltd v Cox & Co (France) Ltd [1919] WN 317; Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 318.

8. In Bingham v England (1996) 17 WAR 226 at 234, Kennedy ACJ said, in relation to O 42 r 2:

   "Traditionally, the power to make an order nunc pro tunc has been exercised cautiously and only where there has been something exceptional in the facts to justify the making of such an order."

   His Honour noted the decision in Kuwait Airways Corporation v Iraqi Airways Co (No 2) [1994] 1 WLR 985, in which the Court of Appeal evinced a greater willingness to make such orders. Kuwait Airways was, however, overruled subsequently by the House of Lords in Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627.

9. In Hartley Poynton Ltd v Ali [2005] VSCA 53 Ormiston JA (with whom Buchanan and Eames JJA agreed) reviewed the authorities relating to the power to antedate judgments and orders, and concluded, at [73]:

   " … with a few minor exceptions, nunc pro tunc judgments and orders, … have not been granted to alter the substantive rights of parties but only to overcome procedural irregularities and difficulties. …"

10. As we mentioned in our reasons for decision delivered on 29 March 2006, the third respondent has been under voluntary administration pursuant to Pt 5.3A of the Corporations Act 2001 (Cth) ("the Act") since 27 January 2006. This Court granted leave, under s 440D of the Act, for the appeal to proceed against the third respondent.

11. There is evidence before this Court that the administrators, Brian Keith McMaster and Oren Zohar, were appointed pursuant to resolutions passed by the first and second respondents at a meeting of the board of directors of the third respondent held on 27 January 2006.  It appears that the first appellant was not in attendance at the meeting.

12. On 8 February 2006, Mr McMaster and Mr Zohar, in their capacities as administrators of the third respondent, commenced proceedings in the Supreme Court (COR 16 of 2006) against the third respondent (as first defendant), the first appellant (as second defendant), the second appellant (as third defendant) and the first and second respondents (as fourth defendants).  Mr McMaster and Mr Zohar sought relief, as follows:

    "A declaration in accordance with s 447C(2) of the Corporations Act 2001 that the plaintiffs were validly appointed as administrators of the first defendant under s 436A of the Corporations Act 2001 on 27 January 2006 despite doubts, on the following specified grounds as raised by the second defendant (a director of the first defendant), about whether the appointment is valid, namely, that the resolution of the first defendant's directors made 27 January 2006 was invalid in that:

    (1)the resolution was outside the powers of the fourth defendants as directors of the first defendant as they were mere caretakers appointed pursuant to an interlocutory order of this Honourable Court made 2 September 2005 in action COR 144 of 2005 which order is the subject of an appeal;

    (2)the resolution was not bona fide and genuinely formed;

    (3)the resolution was made for an improper purpose;

    (4)the second defendant was not given notice of the meeting of the first defendant's directors at which the resolution was passed.

    Alternatively, an order in accordance with s 447A(1) of the Corporations Act that Part 5.3A of the Corporations Act 2001 is to operate in relation to the first defendant as if the plaintiffs had been validly appointed as administrators of the first defendant on 27 January 2006 under s 436A of the Corporations Act 2001".

13. COR 16 of 2006 was tried before Simmonds J on 1 and 2 March 2006.  The learned Judge reserved judgment.  It has not yet been delivered.

14. Part 5.3A of the Act is headed "Administration of a Company's Affairs with a View to Executing a Deed of Company Arrangement". Its object is said, by s 435A, to be:

    "… to provide for the business, property and affairs of an insolvent company to be administered in a way that:

    (a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or

    (b)if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company."

15. As Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ said in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 at 274 – 275 [2]:

    "Part 5.3A contains elaborate and detailed provisions about how and when the administration of a company is to begin and end (ss 435C, 436A, 436B, 436C), about the consequences of administration, and about how and when a company may pass from administration to the making of a deed of company arrangement, or into liquidation (ss 439C, 445E and Div 12 of Pt 5.3A (ss 446A‑446B)) or back into the hands of its directors (s 439C)."

16. The system of voluntary administration embodied in Pt 5.3A of the Act gives effect to public policy considerations in relation to the handling of the affairs of companies which are or are likely to become insolvent. See Justice R Austin and R Brown, "Voluntary Administrators as Fiduciaries" in Key Developments in Corporate Law and Trusts Law (I Ramsay, editor), 2002, at pages 182 – 183, where it is said:

    "[The Australian system of voluntary administration] was conceived as a simple and efficient method for an expert assessment to be made of the position and prospects of companies in, or at the brink of, insolvency.  It permits an expert insolvency practitioner to implement a workout scheme when it is feasible to do so, without needing to obtain court approval, while offering a safe harbour from directors' liability.

    The system depends crucially on the competence and independence of the insolvency practitioners who are available for appointment as voluntary administrators.  The administrator is required to review the business and report to creditors, comparing any proposed workout scheme with the alternatives of liquidation and the return of the company to its directors.  In doing so, the administrator must consider the creditors' prospects of recovering assets through legal proceedings in the course of liquidation.  Frequently a focus of attention will be the conduct of the directors, and their potential liability for breach of duty and insolvent trading.  Questions will also arise about unfair preferences to individual creditors."

17. Section 435C(2) of the Act provides that the normal outcome of the administration of a company is that:

    (a)a deed of company arrangement is executed by the company and the deed's administrator; or

    (b)the company's creditors resolve under section 439C(b) that the administration should end; or

    (c)the company's creditors resolve under section 439C(c) that the company be wound up.

1. Section 435C(3) provides, however, that the administration of a company may also end in other ways specified in the subsection.  In particular, by s 435C(3)(a), the administration of a company may end because the Court orders, under s 447A or otherwise, that the administration is to end, for example, because the Court is satisfied that the company is solvent.

2. Section 436A(1) empowers a company, by writing, to appoint an administrator of the company if the board has resolved to the effect that:

   (a)in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and

   (b)an administrator of the company should be appointed.

   The directors must form a genuine opinion in relation to the company's insolvency. Also, the power of a company to appoint an administrator must be exercised in furtherance of the object of Pt 5.3A, as set out in s 435A. If the power is exercised for an ulterior or extraneous purpose, the exercise of the power will be invalid. See Kazar v Duus (1998) 88 FCR 218 at 233.

3. 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.

4. In the circumstances, the order of this Court, setting aside the order made by the primary Judge for the reinstatement of the second respondent as a director, should take effect from the date on which this Court's order is pronounced.

5. Finally, we should mention that s 11(1) of the Civil Judgments Enforcement Act 2004 (WA) does not apply in that the order of this Court, setting aside the primary Judge's order for the reinstatement of the second respondent as a director, is not a "judgment" as defined in s 3 of the Act. In any event, for the reasons we have given in relation to O 42 r 2, we would not have antedated this Court's order pursuant to s 11(1)(b).