Whyalla Electrical Discounters Pty Ltd v Narta International Pty Ltd

[2014] SASC 186

Supreme Court of South Australia

(Civil: Application)

WHYALLA ELECTRICAL DISCOUNTERS PTY LTD v NARTA INTERNATIONAL PTY LTD

[2014] SASC 186

Reasons for Decision of The Honourable Justice Parker (ex tempore)

8 December 2014

CORPORATIONS - MEMBERSHIP, RIGHTS AND REMEDIES - MEMBERS' REMEDIES AND INTERNAL DISPUTES - OPPRESSIVE OR UNFAIR CONDUCT - RELIEF - GENERALLY

EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS - RELEVANT CONSIDERATIONS - BALANCE OF CONVENIENCE GENERALLY

Interlocutory application for an injunction restraining the defendant from conducting a special general meeting.  The plaintiff is a member of the defendant company.  The board of the defendant made a recommendation that a special resolution be passed expelling the plaintiff from membership of the defendant due to alleged breaches of the company code of conduct.  A special general meeting has been called with a view to considering the proposed special resolution.

Whether the balance of convenience lies with the defendant conducting the special general meeting.

Held (Parker J):

Application dismissed. The plaintiff's case that there has been a denial of procedural fairness amounting to oppressive or unfairly prejudicial conduct within the meaning of s 232 of the Corporations Act 2001 is not sufficiently strong to grant an interlocutory injunction.

Corporations Act 2001 (Cth) s 232, s 233, s 1324; Defamation Act 2005 (SA) s 9, referred to.
CECA Institute Pty Ltd v Australian Council for Private Education  and Training (2010) 30 VR 555; Telstra Corporation Ltd v Australian Competition and Consumer Commission (No 2) (2007) 240 ALR 135; Paringa Mining and Exploration Co Plc v North Flinders Mines Ltd (1988) 52 SASR 22; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; Lowe v Australian Chinese Community Association of New South Wales [2010] NSWSC 1071; Kollbacks Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533, considered.

WHYALLA ELECTRICAL DISCOUNTERS PTY LTD v NARTA INTERNATIONAL PTY LTD
[2014] SASC 186

1. PARKER J:          This is an application for an interlocutory injunction to restrain the defendant company from conducting a special general meeting on 12 December 2014. The meeting has been called by the board of the defendant to consider its recommendation that the general meeting pass a special resolution that in substance will expel the plaintiff from membership and remove its access to the substantial commercial advantages that it currently enjoys through membership. The plaintiff has given the usual undertaking.

2. The claim for principal relief and the interlocutory application rely upon s 232 and s 1324 of the Corporations Act 2001. I suggested to counsel that each of the limbs of s 1324(1) refers to a contravention of the Act. However, s 232 is not couched in terms of a contravention but rather as a basis for a court to grant relief. In that light, counsel for both parties acknowledged that the court would have available its general power to grant injunctive relief but could not grant an injunction under s 1324 in the present circumstances.

3. The plaintiff runs a business selling electrical goods in four South Australian regional cities. The defendant is the largest independent electrical buying group in Australia. That gives it substantial bargaining power when negotiating with suppliers of electrical goods which enables it to obtain discounts, rebates and other benefits for its members, including the plaintiff.

4. The plaintiff has been a member of the defendant since 2006. It holds one redeemable preference share and 12,000 ordinary shares. These shares are not tradable and have no market value.

5. Clause 4.17 of the Narta constitution requires the defendant to redeem a preference share if the ordinary shareholders pass a special resolution declaring that the continued membership of the preference shareholder is prejudicial or disadvantageous to the company.

6. The proposed general meeting to be held on 12 December 2014 is to consider a resolution under clause 4.17. If that resolution is adopted, a further general meeting will immediately follow for the purpose of considering a resolution to buy back the 12,000 ordinary shares held by the plaintiff, pursuant to clause 4.9 of the constitution.

7. The plaintiff has signed an acknowledgement that it is bound by the Narta Code of Conduct and has given an undertaking to comply. Clause 17.2.3 of the Narta constitution also requires members to comply with the Code. Clause 12 of the Code imposes a duty to keep confidential information confidential.

8. The central factual issue underlying this dispute is an allegation that a director of the plaintiff, Mr Tom Antonio, in April 2014 disclosed confidential information to a Mr Geoff Hannaford contrary to the Code of Conduct.

9. The disclosure of that confidential information is said to be damaging to the interests of the defendant, as the information was commercially sensitive. Both the plaintiff and Mr Antonio have denied that allegation. The details of the alleged improper disclosure are set out in an explanatory memorandum circulated to members for the purposes of the special general meeting. It is not necessary for me to refer to that matter in any detail. Whether the allegation has been substantiated or not is not the question I have to decide.

10. There has been an exchange of correspondence between the plaintiff and defendant and their respective solicitors about the alleged disclosure. The plaintiff refused two invitations to meet with the board or its nominees about the allegation. On 5 June 2014 the board of the defendant found that the plaintiff had breached the Code of Conduct. The board also concluded that it was entitled to exercise its right under clause 4.13 of the constitution to redeem the plaintiff’s preference share.

11. Clause 4.13 provides as follows:

    “The Company shall be entitled, but not obliged, to redeem the Redeemable Preference Shares if any of the following events occurs:

    The holder:

    ...

    4.13.6       commits a breach of the Code of Conduct and demonstrates by the holder’s conduct that the holder has no intention of complying with the Code of Conduct;”

12. It can be seen that clause 4.13.6 has two limbs; ie, first, the member has breached the Code, and second, they demonstrate that they do not intend to comply in the future.

13. Senior counsel for the plaintiff has relied primarily on an alleged denial of procedural fairness in relation to the finding by the board that the plaintiff had demonstrated an intention not to comply with the Code in the future.

14. Counsel did not specifically refer in his written and oral submissions to the contention that the plaintiff had been denied procedural fairness in relation to the finding of the board that there had been an improper disclosure of confidential information.

15. The letter sent by the plaintiff to the defendant on 12 June 2014 informing it of the outcome of the board meeting held on 5 June 2014 stated:

    “The Board has also determined that Electrical Discounters has, by its conduct, demonstrated that it has no intention of complying with the Code of Conduct. This determination was made with reference to the seriousness of the current breach and your consistent practice of simply denying alleged Code breaches when they are raised with you and refusing to further engage with Narta in relation to any such alleged conduct.”

16. The plaintiff lodged with Narta notices of dispute under clause 12 of the Code in relation to the alleged breach of confidence. That dispute was mediated by a nominee of the New South Wales Law Society. That resulted in a recommendation that the Narta board reopen its investigation of the alleged breach of confidence. That proposal was rejected by the board and the plaintiff’s solicitors notified on 8 September 2014.

17. The dispute notification provision only applies to alleged breaches of the Code. It did not apply to the finding by the board under clause 4.13.6 of the constitution that the plaintiff had no intention of complying with the Code in the future.

18. The plaintiff complains that it was not given notice of the proposed finding that it had no intention of complying in future. In particular, it was not informed of the particulars of the alleged past misbehaviour on which the board based this opinion, and has not been given any opportunity to respond to the board on that issue.

19. The defendant redeemed the plaintiff’s preference share in September 2014 but later revoked that decision and reissued the share after the plaintiff instituted the present proceedings. The defendant had initially called a special general meeting of its members for 22 October 2014 to consider buy-back of the plaintiff’s 12,000 ordinary shares. That meeting has been replaced by that set down for 12 December 2014 which is the subject of the present application.

20. The defendant has given an undertaking that if the special general meeting is held and it resolves to redeem the plaintiff’s preference share and to acquire its ordinary shares, the defendant will not take any steps to buy back the ordinary shares, pending the outcome of these proceedings. It will also issue the plaintiff with a fresh redeemable preference share should the court find that the redemption was unlawful.

21. Counsel for the plaintiff accepts that this undertaking will avoid the plaintiff suffering any commercial loss prior to the final determination by the court. However, the plaintiff contends that if the meeting adopts the resolutions proposed by the board it would suffer real damage to its reputation. The reputation of Mr Antonio would also be damaged.

22. Counsel for the defendant suggested that because the company can no longer sue for defamation, any damage to its reputation is not relevant. I do not regard that submission as correct. The common law right to sue for defamation has been removed by s 9 of the Defamation Act 2005 from all corporations other than excluded corporations. However, that is not relevant to the consideration of procedural fairness issues, whether they arise under s 232 of the Corporations Act or otherwise.[1]

    [1] See CECA Institute Pty Ltd v Australian Council for Private Education  and Training [2010] VSC 442; (2010) 30 VR 555; Telstra Corporation Ltd v Australian Competition and Consumer Commission (No 2) [2007] FCA 493; (2007) 240 ALR 135.

23. An explanatory memorandum has been provided to members by the board, together with copies of all relevant correspondence that has passed between the parties and their solicitors. The explanatory memorandum refers to the findings made by the board on 5 June 2014. The plaintiff says that the board has affirmed these findings by making recommendations to the members consistent with them. The plaintiff also says that it can be expected that members would rely on the findings of the board as they state the outcome of a formal disciplinary process.

24. In the plaintiff’s submission the prejudice it will suffer will not be overcome by the statement that members must decide the matter for themselves. In that context the plaintiff has noted that the meeting to decide the clause 4.17 issue is set down for less than half an hour. Members will be entitled to vote by proxy. For those two reasons the plaintiff’s opportunity to persuade members orally will be very limited.

25. The recommendation by the Narta board included in the explanatory memorandum states at page 6 that: “There has been a significant loss of trust between Narta and Whyalla Electrical Discounters, such that the Board is not confident that such a breach would not reoccur.”

26. I accept that it is likely that this recommendation and the finding made by the board on 5 June 2014, combined with its calling of the meeting, will be a significant influence on the attitude taken by members to the resolution to be considered at the general meeting. The explanatory memorandum does not refer specifically to the finding made by the board under clause 4.13.6 of the constitution concerning the past denial of alleged breaches of the Code that was said to demonstrate that the plaintiff had no intention of complying with the Code in the future. The covering email sent to members with the explanatory memorandum also does not refer to that issue.

27. The defendant’s letter to the plaintiff dated 12 June 2014 referring to the issue has been provided to members as part of the large bundle of background material supplied for the purposes of the meeting. I also note that an earlier draft of the explanatory memorandum provided to the plaintiff for comment referred specifically to the finding made by the board under clause 4.13.6. That particular material has been removed from the final version of the explanatory memorandum, although the plaintiff’s solicitors apparently did not complain about its inclusion in any of the letters and emails they sent to the defendant’s solicitors.

28. The plaintiff has been given the opportunity to respond to the recommendation made by the board to the meeting. That response has been forwarded to members, together with other relevant material. The plaintiff has addressed in substantial detail the allegation that it improperly disclosed confidential information. It has also included a statement from Mr Hannaford in support of its denial of a breach of confidence. The plaintiff’s submission to members does not address the finding by the board that the plaintiff had no intention of complying with the Code in the future. There is at most an indirect reference to this question at para 19 of the submission where the plaintiff has stated that it remains totally committed to Narta and its members.

29. I also consider it significant that neither the plaintiff nor its solicitor has complained in any of its correspondence to the defendant and its solicitor about the failure to particularise the alleged past breaches and denials that had led the board to conclude that it could not be expected to comply with the Code in the future. That finding by the board was first communicated to the plaintiff on 12 June 2014.

30. I take into account the defendant’s submissions that courts are generally reluctant to prevent a company meeting being held to discuss issues and note the numerous authorities on that issue referred to in counsel’s written outline of argument, and in particular the decision of the Full Court of this Court in Paringa Mining and Exploration Co Plc v North Flinders Mines Ltd.[2]

    [2] (1988) 52 SASR 22.

31. On the other hand, I also take into account that ss 232 and 233 of the Corporations Act provide for the court to intervene where oppressive or unfairly prejudicial conduct is in issue and that power should not be unduly fettered.[3] An example of a court intervening to prevent a meeting being held in circumstances where there has been a denial of procedural fairness is provided by Lowe v Australian Chinese Community Association of New South Wales.[4]

    [3] See Campbell v Backoffice Investments Pty Ltd [2009] HCA 25 at [71]; (2009) 238 CLR 304 at 333 (French CJ).

    [4] [2010] NSWSC 1071.

32. It is relevant when considering the grant of an interlocutory injunction to take into account the strength of the plaintiff’s case.[5]

    [5] See Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 536.

33. I do not consider that the plaintiff’s case that there has been a denial of procedural fairness so as to amount to oppressive or unfairly prejudicial conduct in terms of s 232 is sufficiently strong to grant an interlocutory injunction. Of course, the ultimate decision under s 232 must be made at a later point. I do not consider the case based on an alleged breach of procedural fairness to be strong because, although the suggestion that the plaintiff has previously contravened the Code has not been particularised, the plaintiff has not addressed this issue in its communications with the board since June 2014 and nor has it done so in the statement circulated to members on its behalf. The plaintiff has apparently had ample opportunity to press that issue.

34. I also take into account that the decision to be made by the members at the general meeting is not whether the board was justified in reaching the conclusion that it did under clause 4.13.6, nor is the issue whether the board denied the plaintiff procedural fairness on that question. The issue for the general meeting is to decide under clause 4.17 whether the continued holding of a preference share by the plaintiff is prejudicial or disadvantageous to the defendant.

35. If the general meeting decides that issue against the plaintiff, that is not the end of the matter. The court will still need to make its determination in due course. In the meantime the plaintiff will suffer some damage to its reputation but no commercial damage, pending resolution by the court. Of course if the general meeting finds in favour of the plaintiff, that should resolve the matter.

36. On balance I consider that the balance of convenience lies with the defendant conducting the general meeting as planned. I therefore refuse the application for an interlocutory injunction in respect of the special general meeting to be held on 12 December 2014.