Beck v L W Furniture Consolidated

Judgment 1By Originating Process dated 8 April 2013, the applicants, H & P Newcastle Pty Ltd (in liquidation) ("Company") and Mr Stewart Free in his capacity as liquidator of the company seek declaratory relief in respect of his appointment as liquidator and an order under s 1322 of the Corporations Act 2001 (Cth) as to that appointment. The form of order sought was refined in submissions before me, and the order ultimately sought was an order that: "Pursuant to s 1322(4) of the Corporations Act 2001 (Cth), the Court orders, nunc pro tunc, that each of the resolutions purportedly made by the [Company] at the meeting on 18 March 2013 were not invalid resolutions of the first applicant by reason of any contravention of the Act. 2The background facts to the application are in narrow scope and are established by affidavits of Mr Free sworn 5 April 2013, Mr Paul Gidley sworn the same date and Mr James Shaw also sworn the same date. Those facts are helpfully set out in the submissions of Mr Emmett, who appears on behalf of the applicants, and I draw on those submissions for the summary that follows. 3Mr Free is an insolvency practitioner and became involved in this matter after he was contacted by a former director of the Company, Mr Mile Predojevic. Mr Predojevic had resigned as a director of the Company on 13 July 2011 and the Company has had no directors since that date. The Company's two shareholders, Mr Peter Hubbard and Mirjana Predojevic are both bankrupt and it does not trade and it has no assets. 4Mr Predojevic was served with a director penalty notice issued by the Australian Tax Office in respect of a tax liability relating to a period prior to his resignation. That notice permitted 21 days to take specified steps in respect of the Company's liability, which could include the appointment of a liquidator, and in the absence of those steps being taken, Mr Predojevic would be potentially liable to pay the amount due as a penalty, by reason of sections 269-15 - 269-25 of Schedule 1 to the Taxation Administration Act 1953 (Cth). 5Mr Free, after being contacted by Mr Predojevic in these circumstances, took steps to assist with the appointment of a liquidator to the Company. In order to appoint that liquidator, it was necessary to convene a meeting of shareholders to place the Company in voluntary winding up. 6The Official Trustee in Bankruptcy acts as trustee in bankruptcy for Mirjana Predojevic, who is, as I noted above, one of the company's two shareholders. The Official Trustee provided a signed proxy form in respect of a meeting to place the Company in voluntary liquidation and signed a consent to short notice of the meeting. There is no doubt as to the validity of that proxy or consent to short notice. Mr Free proceeded on the basis that the trustee in bankruptcy for the company's other shareholder, Mr Hubbard, was Mr Paul Gidley of the firm of Shaw Gidley, and Mr Free sought his consent to the appointment of a liquidator to the Company. Mr Free's assumption that Mr Gidley was the trustee in bankruptcy was incorrect, and Mr Gidley proceeded on the same mistaken assumption. In fact, another partner in Shaw Gidley, Mr Shaw was the trustee in bankruptcy for Mr Hubbard. Mr Gidley signed a consent to short notice, as Mr Hubbard's trustee in bankruptcy, the position which Mr Shaw rather than he held. 7A meeting of the Company was then held, a resolution was passed waiving the notice period for the meeting, the Company was wound up voluntarily and Mr Free was appointed as liquidator. 8Had all that occurred validly, then Mr Predojevic would have been protected against liability for a penalty arising under the Taxation Administration Act, at least in respect of the director penalty notice issued by the Australian Tax Office, by adopting the steps which the Act contemplated to achieve protection against such a liability. 9There are several difficulties with the meeting, which have as their origin the mistake as to the identity of the trustee in bankruptcy for Mr Hubbard. I should note that this application has been brought on the basis that either the quorum requirement in s 249T of the Corporations Act applies, as a replaceable rule, or the Company's constitution imposes some other quorum requirement and a requirement for notice of a shareholders' meeting to shareholders, in circumstances that the Company's constitution has not presently been located by Mr Free, the company or Mr Predojevic. This is a reasonable assumption in the circumstances; if, in fact, the constitution permitted a meeting with a quorum of one shareholder, and imposed no such notice requirement, then, at worst, the present application might be unnecessary. If the constitution imposed a requirement for notice, and a quorum of two shareholders, then the application is necessary. 10The Applicants relevantly seek orders under s 1322(4) of the Corporations Act that the resolutions passed at the shareholders' meeting were not invalid. They have identified three potential irregularities that need to be addressed. The first is that Mr Shaw, as the person who was in fact trustee in bankruptcy for Mr Hubbard, did not receive notice of the meeting and did not attend it, although Mr Gidley, his partner, did receive notice of the meeting and did attend it. The evidence makes clear that this occurred due to an honest mistake as to the identity of the trustee in bankruptcy for Mr Hubbard, and Mr Shaw has also given evidence that he would have consented, and does in fact consent, to Mr Free's appointment as liquidator of the Company. The Applicants contend that any failure to meet an associated notice or quorum requirement is capable of being validated under s 1322(4) of the Act. 11The second irregularity relates to the process for calling the meeting, which was initiated by Mr Predojevic, who was a former director of the company, in circumstances that the company had no present directors. It is likely that Mr Predojevic had no entitlement to call that meeting, assuming the Company's constitution took the usual form and permitted such a meeting to be called by a director. However, the applicants point out that a shareholder could call such a meeting under s 249F of the Corporations Act, so the meeting could readily have been called by the Official Trustee, which in fact had consented to it being held and to the resolutions which were passed. 12The Applicants have also drawn my attention to what is, in truth, an error in the minutes of the meeting rather than an irregularity, namely, a reference to Mr Predojevic having been appointed chairperson of the meeting, where the evidence is that Mr Gidley had acted as chairperson of the meeting, and had signed the minutes in that capacity. This is, in my view, simply an error and not a matter which would otherwise give rise to invalidity of the resolution. 13The first and second irregularities noted above might well be treated as a "procedural irregularity", as that term is defined in s 1322(1)(b) of the Corporations Act as including the absence of a quorum at a meeting of a corporation or a defect in the notice in the meeting. In that case, they would be validated by s 1322(2) of the Act, without need for application to the Court, unless the Court were of the opinion that the irregularity had caused or may cause substantial injustice that cannot be remedied by order of the Court and declared the proceedings to be invalid. Nonetheless, it is understandable and appropriate that, given the potentially adverse impact of invalidity on Mr Predojevic, the applicants have taken the view that the proper course is to seek a determination as to the validity of the meeting under s 1322(4) of the Corporations Act, putting the question beyond doubt, rather than relying on the application of s 1322(2) of the Act. 14It is well established that s 1322 reflects a broad legislative policy, plainly applicable in the present case, that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements, where such non-compliance is the product of honesty or inadvertence and where the Court can avoid its effects without prejudice to third parties or the public interest in compliance with the law, the Court will have regard to the purposes of the Corporations Act, the interests of all affected parties and the public interest in exercising its powers under the section: Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418. 15Section 1322(4) in turn allows the Court to declare that an act, matter or thing purporting to have been done, or any proceedings purporting to have been instituted or taken, under the Corporations Act or in relation to a corporation is not invalid by reason of a contravention of a provision of the Act or a provision of the corporation's constitution. In Holmes v Life Funds of Australia Ltd [1971] 1 NSWLR 860, a meeting was validated under the section, notwithstanding that notice of it was not properly given, where the failure did not cause substantial injustice to any person. That power has been used to validate an irregularity, for example, in respect of non-compliance with a company's constitution in NRMA Ltd v Gould (1995) 18 ACSR 290. The power under s 1322(4)(a) may be exercised where, relevantly, the contravention is essentially procedural, or the persons concerned had acted honestly, or it is just and equitable that an order be made, and provided that no substantial injustice has been or is likely to be caused to any person: s 1322(6). The conditions specified in s 1322(6) are alternative, so that only one of them need be satisfied in order to allow an order to be made under s 1322(4). 16Mr Emmett has drawn my attention to the summary of the relevant principles in Beck v L W Furniture Consolidated (Aust) Pty Ltd [2012] NSWCA 76; (2012) 87 ACSR 672 at [232] where Sackville AJA accepted that the section should be accorded a liberal interpretation; that the word "contravention" should be read widely and includes a failure to comply with a company's constitution in taking steps that the company is not obliged to take, and that the section extends beyond procedural irregularity to errors and mistakes of a general nature, including a power to validate an act that is not in accordance with the constitution. The majority in that case held that an act could not be validated where it could not otherwise have been achieved in the circumstances of the relevant corporation, consistent with the Corporations Act and its constitution. However, Mr Emmett points out, and I accept, that that limitation is not presently relevant, since the holding of the relevant meeting could have been achieved under the Act, by giving notice to the correct persons and by the correct persons attending the meeting. 17In these circumstances, it seems to me that an order to validate the relevant steps may properly be made under s 1322(4) provided the preconditions in s 1322(6) are satisfied. That question is readily answered, because, in my view, each of the preconditions specified as alternatives in s 1322(6) are satisfied. The evidence establishes that all persons concerned acted honestly and this would be sufficient, in itself, to warrant an order for validation in the absence of substantial injustice to any person. It is also just and equitable that the order be made, bearing in mind, first, that what was done could readily have been done validly, but for the errors that occurred; second, that the outcome of what was done is supported by Mr Shaw, whose evidence is that he would have consented to Mr Free's appointment as liquidator; third, that notice of the relevant irregularity has been given to the Australian Tax Office; and fourth, the significant detriment to Mr Predojevic, if the orders were not made, in circumstances that he is deprived, after the event, of the benefit of taking a step which the Taxation Administration Act contemplates that he could take to avoid being exposed to a penalty under that Act. 18Mr Emmett points out, and I accept, that the Court has power to make orders under s 1322 nunc pro tunc, and it has frequently done so: for example, Re Wood Parsons Pty Ltd (in liq) (2002) 43 ACSR 257 at [52]. 19Mr Free has responsibly accepted that the costs of the application should not be paid out of the Company's assets, and does not seek an order for costs against the Company. 20In these circumstances, I make the following orders: