Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame

Judgment 1This is an oppression suit concerning the affairs of Winlyn Developments Pty Ltd ("Winlyn"), a property development company. The originating process is dated as recently as 26 September 2011. 2These reasons relate to an interlocutory application heard as a matter of urgency yesterday afternoon. 3There are three shareholders in Winlyn . They are the plaintiff, Taiqi Investments (Aust) Pty Ltd ("Taiqi") which holds 50 shares (20%); the second defendant Yu Wen Cao (known as "Wendy") who holds 50 shares (20%); and Jinbiao Zheng (who I shall call "Jinbiao") who holds 150 shares (60%). The directors are Qi Gui Duan (known as "Grace") and Wendy, plus, perhaps, Jinbiao to whose position it will be necessary to return. Grace is the principal of Taiqi Investments. 4The interlocutory application is that of the plaintiff, Taiqi, and was prompted by a notice dated 20 September 2011 by which Wendy and Jinbiao have convened a general meeting of Winlyn to be held at 10:30 am today. No point has been taken by Taiqi as to the right and ability of those two shareholders, as an abstract matter, to convene a general meeting. 5The notice of meeting sets out three proposed resolutions: "1. A resolution that the company is to make rectification and notify the Australian Securities and Investments Commission of the appointment of Mr Jinbiao Zheng as a director of Winlyn Developments Pty Ltd. 2. A resolution that further shares will be issued at $1.00 per share* to meet the financial obligation of Winlyn Developments Pty Ltd in respect of its loans facility including the Shareholders' loans and commercial loan of the National Australia Bank**. 3. A resolution that NAB loan will be repaid and directors' guarantor will be discharged." 6As can be seen, two parts of proposed resolution 2 are marked with asterisks. It is necessary to set out also the footnoted material to which the asterisks relate: "* Members of the company may subscribe as many shares as he or she is so willing and ready, provided that such subscription will not result in the shareholder's interest in the company, expressed as a percentage in proportion to a dominator of 100(%), exceed his or her current shareholding. ** The National Australia Bank has granted a fixed and floating charge in favour of Winlyn Developments Pty Ltd, which is due to expire on 31 January 2012. The company is required to confirm with the bank on or before 30 October 2011 in respect of whether [sic]" 7The interlocutory orders Taiqi seeks are orders 4, 5, 6 and 11 in an amended interlocutory process filed in court yesterday: "4. An Order restraining the first defendant (by itself, its officers, employees, agents or assigns) from proceeding without the leave of the court with any business at the general meeting of members scheduled for 13 October 2011 as identified in the Notice, other than by the taking of such steps as are necessary or appropriate to adjourn the meeting. 5. An order restraining each of the second defendant and the fourth defendant from calling any further shareholders' meeting of the first defendant to consider or resolve the matters as identified in the Notice of the meeting. 6. An order restraining each of the second defendant the fourth defendant from calling any shareholders' meeting of the first defendant pending determination of the proceeding commenced by the plaintiff on 27 September 2011. 11. An Order restraining the Fourth Defendant from acting, until further order of this Court, as a Director appointed to the First Defendant pursuant to a purported appointment on 10 October 2011." 8In considering the application for order 4 it is necessary to look separately at the three proposed resolutions set out in the notice of meeting. 9As regards resolution 1, the first thing to be said is that its intended meaning and effect are obscure in the extreme. A resolution that the company "make rectification" suggests that something already existing stands in need of correction. A resolution that the company "notify ASIC" suggests that some existing fact or circumstance is capable of being notified to ASIC. That fact or circumstance -- and apparently also the thing that stands in need of correction - may be some appointment of Jinbiao as a director of Winlyn. 10A form of proxy accompanied the notice of meeting. It contains boxes in which a shareholder can give voting directions to a person appointed proxy in respect of the separate items of business. The label against the first box is "Resolution 1: Appointment of Jinbiao Zheng as a director." This implies that the proposed resolution, if passed, might itself effect an appointment. 11Winlyn was registered in 2008. It has a constitution. Certain of the provisions of the constitution displace and modify the "replaceable rules" contained in the Corporation Act 2001 (Cth). By virtue of s 135, therefore, Winlyn is governed by those of the replaceable rules that are not displaced or modified by the constitution, such modified versions of the replaceable rules as apply by virtue of the constitution and the operative provisions of the constitution itself. 12In relation to the appointment of directors, the replaceable rule in s 201G applies. The company in general meeting may therefore make an appointment of a director by resolution. 13It follows that, if and to the extent that resolution 1 is properly construed as a resolution to appoint, it is within the proper province of the company in general meeting. 14I am not persuaded, however, that resolution 1 is a resolution to appoint, or that it is even arguably of that character. The terms of the shorthand label in the proxy form cannot control the content of the resolution itself, which is a resolution that the company "make rectification" and that it "notify ASIC", each of which shows that the resolution relates to some existing and established circumstance. 15One remote possibility, I suppose, is that the members are being invited to ratify or endorse some earlier appointment of Jinbiao. Tendered in evidence yesterday, that is, on 12 October 2011, was a form signed by Wendy on 11 October 2011 and lodged on that day notifying ASIC of the appointment of Jinbiao as a director on 10 October 2011. But I do not see how the proposed resolution contained in the notice of meeting dated 20 September 2011 could possibly relate to the appointment or purported appointment so notified which did not exist at the date of the notice of meeting. The notice spoke as at 20 September 2011 and if it was referring to any existing appointment or purported appointment, it could only refer to one made on or before that date. 16A curious part of this aspect of the case is the final relief sought by Winlyn as the plaintiff, that is a declaration in terms of paragraph 4 of the originating process: "A declaration that the fourth defendant JianBiao Zheng is a director within the meaning of s9 of the Corporations Act 2001 of the First Defendant and was a director at all material times since 12 February 2010, or for such period or during such times as the Court determines." 17Let me come now to proposed resolution 2 in the notice of meeting. Again, there is very distinct uncertainty of meaning, although I suppose the basic message is tolerably clear, that further shares are to be issued at one dollar each to raise funds to make payments in respect of Winlyn's loans, including shareholder loans and a loan from the National Australia Bank. 18Taiqi again raises the question of power. The replaceable rule in s 198A applies. It is thus clear it is the board of directors, not the company in general meeting, that has power to issue shares, to fix the issue price and terms of issue, and to decide how the proceeds of any issue are to be applied. 19The replaceable rules in this respect are to be approached in the same way as the provisions of a company's constitution have long been approached in cases such as Gramophone & Typewriter Ltd v Stanley [1906] 2 KB 856, Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 and Quin & Axtens Ltd v Salmon [1909] AC 442 - t hat is, on the basis that, unless a clear contrary intention is shown, functions assigned to the company in general meeting are not exercisable by the board of directors and likewise those given to the board of directors are not exercisable by the company in general meeting. 20A qualification to what I have said about the replaceable rule in s 198A comes from the replaceable rule in s 254D the effect of which is, in substance, that new shares must be offered in the first instance to existing members pro rata to their existing holdings; but with a proviso (in s 254D(4)) that enables the company in general meeting to displace this pro rata requirement so as to allow a particular issue. 21An important aspect of resolution 2 comes from its first footnote which, by means of the asterisk, must be taken to be part of the resolution. The footnote begins by saying that an existing member may subscribe for whatever shares he or she chooses, provided that any member's subscription does not result in his or her shareholding coming to represent, in percentage terms, a greater percentage than that members pre-existing percentage interest. 22This must mean that if, say, one of the existing 20% shareholders elects to subscribe a very small amount (for example, $100), the other 20% shareholder will be restricted to the same small amount ($100) and the 60% shareholder will be restricted to three times that amount ($300). The most reluctant existing shareholder thus sets the size of the total issue. 23Furthermore, the terms of the resolution, giving full effect to the footnote, contemplate the issue of shares to existing members only. The resolution, if passed, would not envisage an issue to an outsider. 24I refer next to proposed resolution 3. This is obviously within the power of the directors under the replaceable rule in s 198A. There is no conceivable basis on which a resolution of members in these terms could either require or justify the making of any payment to the bank. And, of course, to the extent that the resolution may purport to effect a discharge of directors' guarantees, it seeks to do something that no organ of the company is capable of achieving. 25I pause then to summarise the position in relation to the several resolutions. 26Resolution 1, if passed, will not be, in terms, a resolution for the appointment of Jinbiao as a director; nor will it ratify the appointment or purported appointment on 10 October 2011. It is therefore not a resolution that a general meeting can meaningfully pass. 27Resolution 2 is not a resolution under the replaceable rule in s 254D(4). It does not, as there contemplated, authorise the directors to make "a particular issue of shares". That, coupled with the fact that the company in general meeting has no other power with respect to the issue of shares (the matter being confided to the directors by the replaceable rule in s 198A subject to the qualification in replaceable rule under s 254D) means that resolution 2, if passed, would have no valid or effective operation. 28Nor, of course, would Resolution 3, which I have said clearly entails encroachment by the company in general meeting on to territory that is the province of the board of directors. 29Because the three resolutions will, if passed, produce no legally meaningful consequences, one possibility is to let the meeting go ahead and allow the members to engage in an exercise in futility if they so choose. The likelihood is, of course, that the resolutions will be passed, given that the two members who have convened the meeting possess between them 80% of the total available voting power. 30A more powerful consideration, to my mind, is the undesirability of allowing legally meaningless resolutions to go forward lest those who have proposed them rely on them, once passed, as if they were legally meaningful. If this were a case in which members had requisitioned a meeting rather than actually called it, the court would say that the directors were under no obligation to create the desired forum by acting in accordance with the requisition: see, for example, Turner v Berner [1978] 1 NSWLR 66; National Roads and Motorists Association v Parker (1986) 6 NSWLR 517 . Here too, in my view, the court should prevent the creation of the desired forum. 31Subject to some matters to be dealt with presently, therefore, order 4 should be made, as should order 5, which will merely reinforce the message that the particular resolutions should not be submitted to a general meeting. 32The application for order 6 raises quite different considerations. On what conceivable basis, one asks, can Taiqi claim to prevent the holding of all or any general meetings of Winlyn until the oppression suit is determined? If Wendy and Jinbiao wish to call another meeting to consider proposals clearly within the province of a general meeting - whether under the replaceable rule in s 201G or the replaceable rule in s 254D(4) or otherwise - what right of Taiqi is thereby invaded or compromised? The pendency of an oppression suit - particularly one in its very early stages - does not give the plaintiff some kind of blanket right to see one of the company's decision-making organs paralysed until the suit is determined. There is no basis whatsoever for the making of order 6. 33That leaves order 11, which raises the question of the validity of the purported appointment of Jinbiao as a director on 10 October 2011 as notified to ASIC on the form lodged on 11 October 2011 34There are, in the abstract, two possible ways in which Jinbiao may have been appointed a director on 10 October 2011: by resolution of a general meeting passed under the replaceable rule in s 201G; or by the directors under the first sentence of the replaceable rule in s 201H. 35There is no suggestion by anyone that a resolution passed at a general meeting made an appointment on 10 October 2011. There could have been an appointment by the directors on 10 October 2011 only if both Wendy and Grace had signed a written resolution under the replaceable rule in s 248A or passed a resolution at a meeting at which a quorum of two as required by the replaceable rule in s 248F was present and a majority of the votes cast were votes in favour in accordance with the replaceable rule in section 248G. In the case of this board of two members, such a resolution would be passed only if both directors were present and cast positive votes. Grace did not participate in any such directors meeting. 36There is accordingly a very strong arguable case - one would even say an overwhelmingly strong arguable case - that Jinbiao was not appointed a director on 10 October 2011. 37The ASIC register regarding officers is no more than prima facie evidence of matters appearing from it, although people often seem to approach it, particularly in cases like this, as if it conferred some kind of Torrens-like indefeasibility. 38A basis for making orders 4, 5 and 11 has been made out, subject to the balance of convenience. 39As to that as regards orders 4 and 5, and having regard to the business of the meeting called for today, there is nothing, as I have said, to stop Wendy and Jinbiao calling a further general meeting with a view to considering resolutions properly framed so as to have legal effect. The time required for that is not great. Any challenge Taiqi may choose to make if steps are taken to convene a new meeting will fall to be considered in the light of the particular circumstances as they then exist. The balance of convenience as it relates to orders 4 and 5 therefore favours the plaintiff or, putting this another way, the making of the orders will not visit particular hardship on the defendants. 40The balance of convenience as it relates to order 11 is clouded to some extent by Taiqi's claim in its originating process for declaratory relief regarding Jinbiao, to which I have referred. However, the case against the validity of the purported appointment of 10 October 2011 is so strong that I think that consideration fades into the background. 41Counsel for the defendants raised the question of the worth of an undertaking as to damages given by Taiqi. Counsel for Taiqi offered, in addition, the undertaking of Grace. There is evidence that she has assets, including a debt owed to her by Winlyn, and that that company has cash resources in a solicitor's trust account of some $800,000. 42Given that proper steps to achieve the outcome that Wendy and Jinbiao desire as shareholders, regarding resolutions of a general meeting, can be initiated quite promptly, the undertakings are sufficient, 43Therefore, upon the plaintiff and Qi Gui Duan, a non-party, each by its or her counsel giving to the court the usual undertaking as to damages, I make orders 4, 5 and 11 in the amended interlocutory process filed in court on 12 October 2011.