Southern Resources Limited v Residues Treatment & Trading Company Limited

[1991] HCATrans 68

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A34 of 1990

B e t w e e n -

SOUTHERN RESOURCES LIMITED

Applicant

and

RESIDUES TREATMENT &
TRADING COMPANY LIMITED and

ODIN MINING & INVESTMENT

COMPANY LIMITED

Respondents

Application for special

leave to appeal

BRENNAN J
DAWSON J

Southern 1 8/3/91

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 8 MARCH 1991, AT 9.53 AM

Copyright in the High Court of Australia

MR F.H. CALLAWAY, QC:  May it please the Court, in that

matter I appear with my learned friend,

MR A. BESANKO, for the applicant. (instructed by

Baker O'Loughlin)

MR T.F. BATHURST, QC: If the Court pleases, I appear with

my learned friend, MR R.M. SMITH, for the

respondent. (instructed by Corrs)

MR CALLAWAY:	Your Honours, most companies in Australia have an article like article 112 of the Articles of
Association of the present applicant and every week
written resolutions are signed by directors in the belief that that will be as legally effective as if the directors had met and passed a resolution at a
meeting, so that in this case the Court is invited
to deal with the construction and legal effects of
an article of very widespread application.

The utility of written resolution articles is

called in doubt and diminished in two quite

separate and distinct ways by the judgments in this

case.

The starting point, if the Court pleases, is

to recall that the parties themselves did not

question the use of article 112. The parties to

the litigation assumed that the written resolution

signed by Messrs Gardner, Harken and Shaw on

27 April complied with article 112. That emerges

from two separate parts of Justice Perry's

judgment. It was Justice Perry, the trial judge,

who held that the article could not be used because

two of the directors had a conflict of interests

and, therefore, could not have voted at a meeting.

Justice Perry's construction of the article was that if any director has a conflict, the article

cannot be used. Now, the correctness or otherwise,

of that is of immense importance.

McHUGH J: Yes, but is it not open to corporations to change

tneir articles if they do not agree with the

interpretation that the judge put on it in this

case?

MR CALLAWAY:  Your Honour, the difficulty comes from the

fact that there are two conflicting decisions

because in Re Charles Atkins, Mr Justice Napier had

held almost the exact opposite. In Charles Atkins, the resolution had been signed by all the directors

including a director who manifestly had a conflict

and Mr Justice Napier held that the article had,

nevertheless, been properly used, so that we have

two almost diametrically, opposed decisions to the

Supreme Court of South Australia on the

availability of the article in those circumstances

and the Full Court simply does not resolve the

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conflict. There is nothing in the Full Court

judgment to tell you whether Justice Perry is right

or Justice Napier is right.

McHUGH J: That only throws up the point that to get special

leave you have got to deal with the reasoning of
the Full Court which is independent of this

construction point.

MR CALLAWAY:  Your Honour, the truth is that we would have

to do that but ultimately to succeed on the appeal,

if special leave were granted, we would have to

show that Justice Perry's construction is wrong

because the resolution was not signed by all the

directors.	We say it, correctly, was not signed by
all the directors.	So, the appeal would inevitably

raise that question. It would be a necessary part

of our argument to say that where two directors
have a conflict, as they did in this case, the
article means that the remaining three are all the
directors within the meaning of the article so the

point would necessarily arise - - -

McHUGH J:	Do you have to reach the point if you adopt the reasoning of the Full Court, that is to say, that the relevant decision was made at a time anterior
to 27 April 1988?

MR CALLAWAY: Well, Your Honour, there is, with great

respect, a difficulty in knowing why the Full Court

did not resolve the conflict because there is, with

equally great respect, a difficulty in knowing

precisely what Their Honours' understanding of

article 112 was. Their Honours clearly appear to

say that it is of evidentiary importance only.

They say that emerges from a statement of

Sir Mellis Napier but, clearly, that is

Their Honours' view. They say that it is just

formal evidence of a decision but, with respect,

there are all sorts of difficulties about that and,

again, that would be inevitably involved in the

appeal.

The first difficulty is that that is not what

the article says.	The article says that the
written resolution:

shall be as valid and effectual as if it had

been passed at a meeting of the directors duly

called and constituted.

It does not say it will be as good as a minute.	It
says it shall be as valid and effectual as a

resolution. In our respectful submission, there is

a world of difference between a minute evidence,

the Full Court's construction, and something which

is deemed to be as valid and effectual as a

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resolution. A minute is only prima facie evidence.

One can go behind the minute and see whether, what

it purports to record actually happened but that is

not what article 112 says. Article 112 does not say that you have a deemed minute. It says that

the written resolution is a written resolution. It

has the same legal status as if Messrs Gardner,

Harken and Shaw had met together face to face at a

duly convened and constituted meeting of the

directors on 27 April and had passed a resolution

in those terms.

BRENNAN J:  Mr Callaway, how do you avoid the conclusion of

the Full Court which appears at page 265 line 25:

The directors all participated in the decision to make the offer?

MR CALLAWAY:  Your Honour, we seek to meet that in two ways.

First of all, if we are right about article 112

that the written resolution is as good - not worse,

not better - as good as a resolution at a formal,

separate meeting, then it throws a different light

on the events that occurred between

22 and 27 April.

BRENNAN J: That would only mean that if,on 27 April, there

had been no instrument signed but a meeting of

those three persons who signed it and a resolution

passed at that meeting, that that would have

concluded the matter in your favour.

MR CALLAWAY:  We would submit that is so, if one takes the

facts. Your Honours will have noticed from the

notice of appeal that we do not seek in this case

to recanvass the evidence which occupied about

seven months of the learned primary judge's time.

We would be content to rely on the primary - - -

BRENNAN J: That is some consolation.

McHUGH J: _That is a relief.
MR CALLAWAY:	We hope to get special leave in this case,

Your Honour.	We would not start by announcing an
intention like that.	We would be content to rely

on the primary facts as found by the primary judge

to the extent they are consistent with the primary

facts found by the Full Court,but we would submit

if one looks at those primary facts in the relevant

part of Justice Perry's judgment and the relevant

part of the Full Court's judgment, there was a

separate and independent determination by Gardner,

Harken and Shaw on 27th after an interval of four

clear days from the discussions in Perth

on 22nd - - -

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BRENNAN J: That is the complexion that you put upon the

facts, or would put upon the facts, and the

complexion which raises the problem which you seek

to raise. But, the Full Court places a different

complexion upon it, as it seems to me. They say, "Here is the decision. There is a piece of paper which was done in implementation of it all and it

is the decision, the effect of decision to issue,

supported, of course, formally by the piece of

paper, is one which we find was entered into by the

directors contrary to their fiduciary duties".

MR CALLAWAY:  Not all the directors, Your Honour.

Messrs Gardner and Harken are exonerated.

BRENNAN J: 

Of course.

MR CALLAWAY: 

Of the three directors who, we say, made the

operative decision, two were free of breach of
fiduciary duty. It has never been suggested that

in those circumstances, a breach by Mr Shaw would

affect the resolution. It is crucial the decision

is made by three, of whom two are not to blame, or

made by five, of whom it has been held that three

were in breach of duty.

BRENNAN J: 

Even if there is a minute, one can go behind it

to show what the decision was of a board of

directors, can they not?

MR CALLAWAY:  Indeed one can, Your Honour. If article 112

were just a deemed minutes, one could go behind it

but it is a deemed resolution. That does not mean

that one is never entitled to look at the totality

of the facts. Cases like Darvall's case show that

if a director's non-participation is purely formal,

one can impugn a resolution whether it is passed at

a meeting or in the form of a written resolution.

We must accept that but that is not what happened

here, Your Honours.

McHUGH J: _I am sorry to interrupt you, Mr Callaway, but is

not the theory of the Supreme Court of South

Australia's decision that, although informed, only

Gardner, Harken and Shaw signed the minute? In

substance, the decision even on 27 April was made

by McDougall and Speck as well as the other three.

MR CALLAWAY:  Not quite, Your Honour. We would respectfully

read Their Honours' decision as saying that there

was a kind of continuous process. It is only a

fine distinction, but rather than a decision on

27 April that five men participated in, a decision

over a period of time that five men participated

in. We would say it would not be appropriate on a

special leave application but we would say that

that is not the way Justice Perry approached it.

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One of the issues in the Full Court was whether the

decision was punctilio or linear. We would say

that there is a great deal of material in

Justice Perry's judgment to show that he regarded it as punctilio, that there was either a decision

on 22 April or a decision on 27 April.

But still in an endeavour to come to grips

with the question that, I think, Your Honour the
presiding Justice asked me a few moments ago, there
are two distinct bases on which we would seek to
come to grips with the Full Court's perception that

the decision was made by five men over time. One

is, that we would invite the Court to look at the

primary facts and draw a different conclusion.	We
would respectfully say that if one reads the

finding of the primary judge and of the Full Court

about what happened between 22 and 27 April, it is

just not an appropriate conclusion that all five

directors participated in the decision.

Mindful of the time constraints on a special

leave application, Your Honours will recall that

McDougall went to Perth on the Friday, spoke to

Gardner in the morning, spoke to Gardner and Harken

in the afternoon and there were various telephone

conversations. Thereafter, over four clear days,

Gardner and Harken worked on the proposal on their

own. They looked at the valuation both of the

target company and of the proposing offeror. After

doing all that work - not just on one day but

several days, together and separately - on

27 April, a decision was taken by them plus

Mr Shaw. It is very different, indeed, from what

happened in a case like Darvall, where Mr Lanceley,

the director with the problem, attended meetings
and all the discussion took place and then when the

vote was about to take place Mr Lanceley went out

of the room. There, Mr Justice Kirby correctly,

with respect, says that the non-participation of

Mr Lanceley was just a formality. It was a formal

endorsement of a decision taken by other means but that, in our respectful submission, is not an	appropriate conclusion to draw from these facts.
That is a matter for the Court but it is well within the principle of Warren v Coombes and that is one-half of the way in which we seek to come to grips with the Full Court's perception that there
was a five-man decision over time or, if it were a
five-man decision on 27 April, if we are wrong
about that reading of the judgment.

The other point is this, if the Court pleases.

If we are right about article 112, that must inform

one's assessment of the primary facts. If the Full
Court were right - and I will return in a moment to

why we submit it cannot be right - that article 112

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is just an evidentiary provision, then, of course,

it would play little significance in one's

assessment of the events of 22 April to 27 April,

it is just a piece of paper. It is of almost no

significance at all because one knows the actual

facts and so forth. But if one gives full effect

to the words of the article and the written

resolution is not just a minute, it is not just

evidence, the written resolution is a resolution

with the same legal status as if those three men

had met and passed the resolution, that must be a

major factor in one's assessment of all the facts

between 22 and 27 April because then the facts take

on this complexion: that far from a fluid, unbroken

process, a melange of events, the legal position is

exactly the same as if McDougall had come to Perth,

spoken to them on the Friday, gone back to

Melbourne, they had worked on it independently,

they then directed the secretary to convene a

meeting of the board and the board meeting had been

held in Perth on 27 April at which all the

directors not having a conflict of interest had

voted in favour of a resolution.

BRENNAN J: That is perhaps one way of putting it,

Mr Callaway, but the other way - and this is the

way as I read the Full Court's judgment -

Their Honours are putting it that McDougall goes to Perth. He speaks to Harken and Gardner who need to

be assured by their independent study of the

validity of the proposition that is being put by

McDougall, but subject to that study, they are

prepared to give their assent to it. They reach

the stage where they are prepared to give their
assent to it and then the five directors being of
one mind, the arrangement is then made that three

of them will participate in the resolution. Now,

that is susceptible, I should have thought, of the

view that the effective decision was made by all

five but that the manner in which that decision was

carried through was that a formal resolution should

be passed by three and if that were so, I would

have thought that would support entirely the

observation made by the Full Court at page 265

line 25.

MR CALLAWAY:	Your Honour, we would, of course, say that that is simply not an appropriate conclusion on the
facts.
BRENNAN J:	I appreciate that but - - -
MR CALLAWAY:	We would also say that it is a way of looking

at the facts that is inconsistent with article 112

properly construed - and I very much in the Court's
hands as to what is of assistance to the Court -

but it may be that if I develop a bit further what

Southern 8/3/91

we respectfully say is wrong about the Full Court's

construction of article 112, I will make clearer my

submission that once that is appreciated, it throws

the facts into a different light. It is not just

the words of article 112. Your Honours, no doubt,

have read them on more than one occasion but

perhaps the second volume of the book is easier to

use than the other. Mr Simpson's affidavit in

support of the application begins at page 288.

McHUGH J: It is at page 293, is it not?

MR CALLAWAY:  Yes. I hope Your Honours' copies are better

marked than mine.	I can never read the top - mine
does begin at page 288.	I am sorry if
Your Honours - - -

McHUGH J:  No, the resolution is at page 293 in

paragraph 10.

MR CALLAWAY:  I am grateful to Your Honour. First of all,

there are the words if a resolution is to:

be as valid and effectual as if it had been
passed at a meeting of the directors duly

called and constituted -

it cannot, with respect, be right to say that it is

just, in the words of the Full Court "formal

evidence of a decision'' because the article says in

plain and unambiguous terms that the written

resolution:

shall be as valid and effectual -

as a resolution at a meeting, not that it shall be

as good as a minute. That is the first point.

We would submit that that argument is also true of

regulation 90 in the old table A which thousands of

companies still have and true, by parity of

reasoning, with regulation 77 in table A in the

Code - and I should tell Your Honours that

r~gulation 77 in table A of the Corporations law is exactly the same as regulation 77 in table A of the Code - but quite apart from the fact that the Full

Court's evidentiary reading is inconsistent with the words, the Full Court's evidentiary reading also faces a logical difficulty. Take the phrase

"formal evidence of a decision". One asks

rhetorically, "Well, what is the decision?" of

which the piece of paper according to the Full

Court is just evidence.

Your Honours, either the decision is the

written resolution which is, of course, cadit

quaestio or it is some other decision. If it some

other decision distinct from that constituted by

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the written resolution, it can have no effect as a

matter of company law because a company with

articles like this - and, indeed, nearly all

companies can only make operative board decisions

by one of two means: either you have a meeting of

the directors or you have a written resolution.

Now, of course, no one suggests that there was a

meeting of the directors on 27 April so that when

the Full Court says, "Oh it's just formal evidence
of a decision", either it is the decision for which

we contend, the deemed resolution in terms of the

article, or it is a decision which is not

consistent with company law or the articles, a

decision which would have no status in company law

because the only alternative is a decision at a

meeting and there was no meeting.

McHUGH J: But there was a meeting of the directors on

22 April, was there not?

MR CALLAWAY: That is, with respect, very debatable,

Your Honour. Mr McDougall came across and met with

Mr Gardner on his own in the morning. Then they met with Mr Harken in the afternoon. There is a

dispute about the nature of a telephone

conversation with Mr Shaw. There were, I think,

two telephone conversations with Mr Speck. My
recollection is that the learned primary judge

rejected the suggestion that there was a meeting on

22 April.

McHUGH J:  He certainly rejected the contents of the minutes

of that purported meeting but I cannot recollect

that he rejected it as a meeting.

MR CALLAWAY:	I may be wrong, Your Honour, but I did not think that His Honour accepted that there was a
meeting of the directors.
McHUGH J:	You may well be right.

MR CALLAWAY:  I mean, there was a meeting of individual

directors in twos and threes, but a meeting of the

directors. But even so, Your Honours, I have the

task of coming to grips with the Full Court's

assessment of the minutes of 27 April. Now, that

can only be a constituent resolution under the

articles or something of no effect. If there is
some other decision that occurred on or about

27 April, of which it is evidence, that cannot be a

decision having effect as a matter of company law.

BRENNAN J: Is the dichotomy complete though? If there were

a meeting on 27 April of all directors in which the

interested directors participated up until the

stage of the moving of a resolution, and then two

of them formally withdrew from the me·eting leaving

Southern 9 8/3/91

it to the other three to pass the resolution, would

the resolution be open to attack?

MR CALLAWAY:	Yes, Your Honour.
BRENNAN J:	What then is the distinction between such a

situation and a resolution passed under, or

equivalent to under, article 112?

MR CALLAWAY:  Your Honour, I would say none except the

answer would be, through my fault, misunderstood by

the Court. We contend only that a written

resolution has the same status as a resolution at a

meeting. It is no worse but we concede it is no

better, so that if Mr Lanceley in Darvall's case,

instead of leaving the room and leaving the other

directors to pass a resolution had left the room

and suggested they might sign a written resolution,

the position would be exactly the same. But that

is not what happened here because of the facts and

because of the failure of the Full Court, with
respect, to factor into its assessment of the facts

the true operation of article 112.

They are the two bases on which we would seek

to disturb the conclusion drawn by the Full Court

from the Warren v Coombes primary established

facts. The difference is this, Your Honour, and it

is a matter of some commercial importance.

Directors with a conflict must be able to talk to

other directors. They must be able to put a

proposal. Directors must be able to obtain

valuations, to canvass other directors for

something to be adopted, so long as the ultimate

decision is taken by directors without a conflict of interest. It is in the interests of a company

that that should be so and it may be the duty of
the interested directors. Very frequently, you

have some directors with particular knowledge of

the industry or of a company. They may be the only

directors who can put a particular proposal

together in a way that is sensible and beneficial

to-the company.

They must be free to do so. They must be free

to approach other members of the board with

valuations. They must be free to press for the

adoption of the proposal. There is nothing wrong

with that so long as there is ultimately a decision either at a meeting or by written resolution of the

directors not affected by the conflict. The danger

in the way the Full Court has viewed these facts is

that it will discourage interested directors from

playing their proper part in the preliminaries to a

decision.

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The second legal error which we submit the Full Court made, nothing to do with article 112, is

a failure to distinguish conduct on the way to a

decision from the decision itself. The conduct on

the way to a decision in this case is what happened

in Perth on 22 April, Mr McDougall mainly. The

actual decision, four clear days later, is the

decision taken on 27 April constituted by the

written resolution and sufficiently removed both in

time and in fact from Mr McDougall's
recommendations to be untainted by any breach of

fiduciary duty on Mr McDougall's part.

Your Honours, we would respectfully submit,

that the Court could properly take into account the conflicting decisions on the meaning of the article

because they would necessarily be involved in the

argument and it is a matter of, we would have

thought, unquestionable public importance to know

whether Justice Perry is right or not about the

utility of an article of this kind. I say it is an

incentive to the Court that it would be a very, very short case. If the Court were disposed to grant special leave and if my learned friend would

rise to the challenge, I could put the whole
argument in 50 minutes on the first afternoon of

the Adelaide sittings.

Unless there is anything else that I can add

that might assist the Court this morning, those are
the submissions in support of the application for

special leave.

BRENNAN J:	Thank you very much, Mr Callahan.
MR CALLAHAN:	May it please the Court.
BRENNAN J:	We need not trouble you, Mr Bathurst.

MR BATHURST: If the Court pleases.

BRENNAN J:  The point which the applicant seeks to raise by

way of appeal would not, even if determined in its

favour, allow the Court to dispose of the appeal.

It would be necessary to enter generally upon the

facts as found below. That means that this case is

an unsuitable vehicle to determine the point which

the applicant seeks to raise, even if it were
otherwise of sufficient importance to warrant the

grant of special leave.

Special leave is, accordingly, refused.

MR BATHURST:	I seek costs, Your Honour.
MR CALLAWAY:	We do not oppose that, Your Honour.

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BRENNAN J: It will be refused with costs.

AT 10.20 AM THE MATTER WAS ADJOURNED SINE DIE

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