CHALET NOMINEES (1999) PTY LTD -v- MURRAY [2012] WASC 147 (2 May 2012)

3 On 1 December 2011 Mr Buckeridge, as a director of James Point, issued a notice of meeting of members of James Point to be held on 23 December 2011. The notice of meeting gave notice of resolutions proposing the removal of Mr Moonen, Mr Peraldini and Mr Catalano as directors of James Point and the appointment in their place of the first defendants: Mr Teo, Mr Samuel Buckeridge, Mr Ambrose and Ms Murray.

4 Article 45 of the constitution of James Point provides relevantly that a quorum for a general meeting of members is two members entitled to vote. The 23 December 2011 meeting was only attended by Mr Buckeridge, Mr Ian Cochrane, a solicitor acting for Port 1, Mr Teo and Dr Whitaker. Mr Buckeridge and Mr Cochrane each held proxies for Port 1. Mr Teo attended as company secretary of James Point. Dr Whitaker attended as an observer. Mr Cochrane declared that two proxies were present and as such a quorum was present. Mr Cochrane moved a resolution appointing himself as chairman of the meeting and the resolution was approved by Mr Cochrane and Mr Buckeridge. Mr Cochrane and Mr Buckeridge carried resolutions removing Mr Moonen, Mr Peraldini and Mr Catalano as directors and appointing Mr Teo, Mr Samuel Buckeridge, Mr Ambrose and Ms Murray as directors.

5 Chalet asserted that no valid meeting of members had occurred on 23 December 2011 because no quorum was present. On 27 January 2012 Port 1 sought the consent of Chalet to short notice of the convening of a meeting of the members of James Point for the purpose of again putting to members the resolutions put to the 23 December 2011 meeting. On 30 January 2012 Chalet informed Port 1 that it did not consent to such short notice. On 31 January 2012 Mr Buckeridge, as director of James Point, issued a notice of meeting to James Point shareholders calling for a meeting of members to be held on 23 February 2012. The notice gave notice of resolutions proposing the removal of Mr Moonen, Mr Peraldini and Mr Catalano as directors of James Point and the appointment in their place of Mr Samuel Buckeridge, Mr Ambrose, Mr Teo and Ms Murray. The 23 February 2012 meeting was only attended by Mr Buckeridge as the proxy holder for Port 1 and other persons who were not, and did not purport to be, members. Mr Teo was appointed as chairman of the meeting. After 30 minutes had passed, Mr Teo, as chairman of the meeting, noted that only Port 1 had tendered a proxy and as no other member was present at the time, there was no quorum. The chairman adjourned the meeting to 9 am on Thursday, 1 March 2012. Mr Teo gave due notice of the adjourned meeting to the shareholders of James Point. At 9 am on 1 March 2012 the meeting of members resumed. The meeting was attended by Mr Teo as proxy for Port 1 and Mr Forbes as an observer. Mr Teo adjourned the meeting for 30 minutes. When the meeting resumed Mr Teo noted that Port 1 was the only member present and dissolved the meeting.

6 On 5 January 2012 Mr Buckeridge, Mr Samuel Buckeridge, Mr Teo and Ms Murray, acting on the basis that they constituted the validly appointed board of James Point, resolved to undertake a rights issue to raise $15 million by the issue of 3 million new shares at an issue of $5 per share (Capital Raising). Chalet disputes those persons were validly appointed. On or about 6 January 2012 Mr Teo, as the company secretary of James Point, sent to each of the shareholders of James Point an offer to subscribe for new shares for the purposes of the Capital Raising. The offer lapsed on 6 February 2012. No shareholders of James Point accepted the offer.

7 Chalet claims declarations that no valid meeting of the members of James Point occurred on 23 December 2011 and that the first defendants were not appointed as directors of James Point and are not the directors of James Point. Chalet contends that the purported shareholders' meeting on 23 December 2011 is not a valid meeting because no quorum was present and consequently the resolutions passed at the meeting were not validly passed.

8 Article 45 of the constitution of James Point deals with proceedings at General Meetings:

(1) No business shall be transacted at any General Meeting unless a quorum of members is present at the time when Meeting proceeds to business.

(2) For the purpose of determining whether a quorum is present the person attending as a proxy, or as representing a corporation that is a member, shall be deemed to be a member.

(3) A quorum shall be two members entitled to vote or one member where the Company has only one member entitled to vote.

It is common ground that James Point has more than one member entitled to vote and hence the quorum for voting at general meeting is two members who are entitled to vote.

9 Port 1 initially contended that two persons attending as proxies for one member constituted a quorum. However, prior to the hearing of this application Port 1 conceded for the purposes of this matter that the deeming words in article 45 do not have the effect of creating a quorum where two proxies of one member attend a meeting. That is, Port 1 accepts that a quorum was not present at the 23 December 2011 meeting. However, Port 1 submits that the absence of a quorum was a procedural irregularity for the purposes of s 1322 of the Corporations Act 2001 (Cth). Section 1322(2) provides that a procedural irregularity does not invalidate a meeting 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.

10 Chalet says that in the circumstances of this case s 1322(2) does not have the effect of making the 23 December 2011 meeting, and the resolutions passed at it, valid. That is so for two reasons. First, the conduct of Port 1 was deliberate and deliberate conduct does not constitute a procedural irregularity for the purposes of s 1322. Second, the absence of a quorum has caused or may cause substantial injustice that cannot be remedied by any order of the court.

11 Port 1 has applied for orders under s 1322(4)(a) of the Corporations Act declaring the 23 December 2011 meeting is not invalid by reason of any contravention of the quorum requirements of the articles of association of James Point and declarations that the resolutions passed at the meeting are not invalid by reason of any contravention of the quorum requirements.

12 The parties agreed a statement of facts. It is an agreed fact that the members and directors of James Point received proper notice of the meeting of members held on 23 December 2011. Mr Buckeridge and Mr Cochrane were appointed by two proxies to represent Port 1. Mr Buckeridge was appointed to represent Port 1 as to 400,000 shares and Mr Cochrane as to 402,884 shares. Mr Cochrane is an experienced commercial lawyer. He is a partner in an international law firm and specialises in the area of corporate governance and mergers and acquisitions. At the time of the 23 December 2011 meeting Mr Cochrane was providing advice to Mr Buckeridge and had been since shortly before 1 December 2011. Mr Cochrane prepared the notice of meeting of members of James Point to be held on 23 December 2011. Mr Cochrane attended the meeting as a proxy for Port 1. Mr Cochrane referred the meeting to the provisions of article 45(2) of the company's constitution and noted that as two proxies both deemed to be members were present a quorum was present.

13 Mr Cochrane was subpoenaed by Chalet to give evidence. Counsel for Chalet asked Mr Cochrane what consideration he gave to article 45(3). Mr Cochrane said:

I believe that the provisions of 45(2) permitted a legitimate position to be taken that a quorum was present (ts 85).

Mr Cochrane referred to article 45(2) which provides that a person attending as a proxy shall be deemed to be a member and observed that the article does not say 'is a member'. Mr Cochrane said that it is a deeming provision. When asked whether he considered the matter free from doubt Mr Cochrane replied:

I considered that another, like yourself, might have an alternative argument but I believed that to be a legitimate position to adopt (ts 86).

14 Mr Cochrane prepared the two proxies for Port 1. When asked by counsel for Chalet why he did that Mr Cochrane said:

We had had the previous experience on 1 December where a notice had been issued and representatives each shareholder had attended, but when called upon to vote had said that they were not there as shareholders but were there in some other capacity, notwithstanding the fact that they debated the issues at that meeting. When we were preparing to go to the meeting on 20 December I was going through the constitution and became aware or saw again, I suppose, the provision which required a quorum of two. I had a concern that consistent with their previous behaviour, they might seek to frustrate our position by not attending at all on the 23rd, and then I read article 45(2) and believed that I could legitimately provide for those two proxies to be prepared, which is what we did when we got back from the meeting on the 20th in order to ensure that we got the proxies in at least 48 hours before the meeting (ts 87).

Mr Cochrane said in evidence that prior to the meeting he had discussed with Mr Buckeridge what they would do at the meeting. They agreed that they would pass the resolution. I conclude from Mr Cochrane's evidence that, prior to the meeting, he and Mr Buckeridge agreed that if no other member attended the meeting they would, as proxies of Port 1, vote to appoint Mr Cochrane chairman of the meeting, move that the motions put to the meeting be decided by poll and pass the resolutions by voting in favour of them.

15 Counsel for Port 1 submitted that the court could find on the evidence that Mr Cochrane positively believed that there was a quorum at the meeting. Counsel submitted there was no evidence that Port 1 knew that there was no quorum present and proceeded with the meeting regardless, deliberately flouting the articles. Counsel for Chalet submitted that the evidence showed not that Mr Cochrane believed that there was a quorum, that is, he did not have an honest belief that what he was doing was authorised by the constitution. Rather he believed it was a legitimate position to take.

16 I find that Mr Cochrane, as chairman of the meeting, believed that it was a legitimate position to take that there was a quorum present and he was authorised to proceed with the meeting. Mr Cochrane believed that article 45(2) permitted a legitimate position to be taken that a quorum was present and that he was authorised to proceed with the meeting. He also believed the alternative position, that is, that no quorum was present, was an arguable position. The evidence does not permit me to make a finding that Mr Cochrane had a positive belief that a quorum was present and that he was authorised to proceed with the meeting. Nor does the evidence permit me to find that Mr Cochrane believed that a quorum was not present and that he was not authorised to proceed with the meeting. Mr Cochrane did not deliberately flout the constitution in the sense of proceeding with the meeting when he knew that there was no quorum present and he was not authorised to do so.

17 The case law is divided as to whether s 1322(2) is available to validate a procedural irregularity if deliberately achieved.

18 In Re P W Saddington & Sons Pty Ltd (1990) 19 NSWLR 674 Young J held that a procedural irregularity deliberately achieved could not be validated pursuant to s 539 of the Companies Code (NSW), which was in similar terms to s 1322 of the Corporations Act. Young J did not say a procedural irregularity could not be validated if that irregularity was known at the time the irregularity occurred. What his Honour said was, in effect, that a deliberate choice to convene an invalid meeting is not a procedural irregularity which may be validated. His Honour said:

Although the court's power under s 539 is, as has been held over a large number of years, an extremely wide one, there are limitations to it. Section 539 indicates in its text that it is to deal with procedural irregularities. Section 539(1)(b) includes the absence of a quorum within the term 'procedural irregularity'. I am quite sure that if a meeting proceeds and then afterwards it is realised that there was no quorum, the court could make an order under s 539. One can well see that happening without fault on any party, where, for instance, one of the members of the quorum has to be a person who holds a particular class of share. There would be an interesting situation if a meeting was held where members had come very long distances and it was realised at the commencement of the meeting that there was no quorum, but the people present decided to hold a meeting with a view either to it being ratified later by valid meeting or by the court. Perhaps s 539 would cover that situation. However, I am quite sure that s 539 does not cover the situation where parties actually know that the meeting that they are convening is invalid and attend to purport to pass resolutions which they know can only have a validity at all if the court acts under s 539. A deliberate choice to convene an invalid meeting is not a procedural irregularity within s 539 (675).

I note that Young J said that in the circumstances he referred to if it was realised at the commencement of the meeting that there was no quorum but the people present decided to hold a meeting with a view either to it being ratified later by a valid meeting or by the court, s 539 might cover that situation.

19 In Electro Research International Pty Ltd v Stec (1996) 20 ACSR 320 Olsson J held a deliberate choice to convene an invalid meeting does not constitute a procedural irregularity within the meaning of s 1322 of the Corporations Law.

20 In McGellin v Mount King Mining NL (1998) 144 FLR 288 a meeting of directors lacked a quorum because certain directors had conflicts of interest and duty. Murray J held that what occurred at the director's meeting could not qualify as a procedural irregularity given that the circumstances that constituted the cause of the invalid meeting was known to the directors at the time. Murray J held that participation in and voting upon a matter in breach of a director's fiduciary duty was not a mere procedural irregularity. The director's action was deliberate. McGellin v Mount King Mining NL does not assist in resolving the issue in this case. In that case Murray J held that participation in and voting upon a matter in breach of a director's fiduciary duty could not properly be regarded as a mere procedural irregularity.

21 In Re Pembury Pty Ltd [1993] 1 Qd R 125 Byrne J declined to follow Saddington and stated s 1322 should not be limited to procedural irregularities which arise from inadvertence or accidental noncompliance. In Whitehouse v Capital Radio Network Pty Ltd [2004] TASSC 12; (2004) 48 ACSR 569 the court held that a meeting which proceeded in the full knowledge of those present that there was no quorum could still be a procedural irregularity within the meaning of s 1322(2).

22 Re Pembury was cited with approval in Re Sidex Australia Pty Ltd (Receiver and Manager Appointed); Sipad Holding DDPO v Popovic (1995) 18 ACSR 436, 449. In Sydar Pty Ltd v K Simmonds Finance Pty Ltd (1995) 16 ACSR 384, Santow J said at 393, that s 1322 was a remedial section and consequently should be given a liberal construction. In the course of making that remark, his Honour referred to Re Pembury as an example of a liberal interpretation being given to the section by holding that it was not to be restricted in its scope to instances of inadvertence or accidental noncompliance.

23 In Greig v Australian Building Industries Pty Ltd [2002] QSC 138 Chesterman J said he agreed with Byrne J in Re Pembury that s 1322 should be afforded a liberal interpretation to allow the court ample scope to uphold the results of proceedings, legal or corporate, which had not complied with the requisite rules but which have nonetheless not given rise to incurable injustice.

24 In Cheerine Group (International) Pty Ltd v Yeung [2006] NSWSC 1047 Young J reiterated his view that 'procedural irregularity' does not include acts or omissions deliberately done contrary to the Act. In Wellington Capital Ltd, In the Matter of Premium Income Fund v Premium Income Fund Action Group [2011] FCA 781; (2011) ASCR 51 Dowset J said that there is much to be said for the proposition advanced by Young J in P W Saddington & Sons Pty Ltd that a deliberate choice to convene an invalid meeting is not a procedural irregularity within the predecessor to s 1322.

25 In Neena v Australian Securities and Investments Commission [2011] FCA 1193; (2011) 284 ALR 386 Middleton J considered the meaning of procedural irregularity in s 1322. In anticipation of a disqualification order being made by the court under s 206C of the Corporations Act against Mr Neena in proceedings by ASIC against the directors of Centro, Mr Neena gave notice of an application under s 206G of the Act to manage two particular corporations of which he was a director. Mr Neena failed to comply with the notice requirement in s 206G(2). Mr Neena sought an order under s 1322(4)(a) declaring that his failure to comply with s 206G(2) did not invalidate his application for leave to manage the two companies. In considering the power conferred by s 1322(4) Middleton J reviewed the line of authority to the effect that the term 'irregularity' does not include deliberate acts of noncompliance with the Act. His Honour reviewed those cases including P W Saddington & Sons Pty Ltd and Re Pembury. His Honour then undertook a textual analysis of s 1322. His Honour concluded the terms 'irregularities' and 'procedural irregularity' can involve deliberate acts of noncompliance. His Honour said the question will then arise, if the act is deliberate, whether the requirements of s 1322(6) are otherwise complied with so that the court can make an order under s 1322.

26 I find it unnecessary to decide whether or not a procedural irregularity deliberately achieved can be validated pursuant to s 1322. The evidence does not establish that either Port 1 or Mr Cochrane set out to convene a meeting they knew would be inquorate or that Mr Cochrane proceeded with the meeting knowing that it was inquorate. The chairman knew that no member was present other than Port 1, which was present by two proxy holders, but he did not know or hold a positive belief that in those circumstances the meeting was inquorate. Mr Cochrane believed that it was a legitimate position to take that a quorum was present although he also believed that the contrary position was arguable. Section 1322(2) should be interpreted so that that is a procedural irregularity capable of validation.

27 The remaining question is whether 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. As it appeared in s 366 of the Uniform Companies Act 1961 (Cth) this condition was considered in Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477 by Bowen CJ in Eq:

In my view, the word 'injustice' in this provision requires the Court to consider any real, and not merely insubstantial or theoretical, prejudice which will be suffered by, for example, a member by the making of an order, and to weigh this in the scales against the prejudice to the company, other members and creditors, if an order be not made. In other words, it is insufficient to show that there may be some prejudice to a member if, on a consideration of the whole matter, the overwhelming weight of justice, as it were, is in favour of making the order ...(493).

28 It must be the irregularity which causes the substantial injustice not the proceeding: Re Pembury Pty Ltd:

The burden Creevey and East bear is to show that one or other of the irregularities occasions a 'substantial injustice': not that the 'proceeding' (the meeting and its resolutions) caused or may yet cause substantial injustice: see Bell Resources Ltd v Turnbridge Pty Ltd (No 2) (1988) 13 ACLR 762, 766; cf Broadway Motors Holdings at 58 where Powell J said, '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 the injustice' (127).

In the present case, therefore, the question is whether 'substantial injustice' flowed from the meeting proceeding in the absence of a quorum.

29 In its supplementary written submissions Chalet identified the substantial injustice that arises is that Chalet was denied the opportunity to speak against the resolutions, arguing the oppression that the resolutions would cause, however unlikely it is that Chalet would have been unable to persuade Port 1 to alter its view. Chalet submits that the substantial injustice was correctly identified by Slattery J in BI Constructions Pty Ltd v Shad [2010] NSWSC 484. In that case the relevant question for determination was whether Mr Samir Bayeh had ceased to be a director of BI Constructions on 13 July 2009. Mr Joe Bayeh and Mr Issa claimed that a meeting of the members of BI Constructions removed Mr Samir Bayeh as a director on 13 July 2009. Mr Samir Bayeh said that the meeting on that date was a meeting of directors, which had no power to remove him as a director. Slattery J found that the meeting was a meeting of directors, not a general meeting of members. BI Constructions submitted that that was a procedural irregularity that may be cured by the application of Corporations Act s 1322, unless substantial injustice was shown. Slattery J held that the circumstances of the irregularity did not attract the court's intervention under Corporations Act s 1322 and declined to excuse the irregularity under that section. His Honour said:

However where the irregularity results in a decision adverse to the interests of those complaining of the irregularity and the irregularity also constitutes a denial of the 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 will be able to persuade a future meeting to vote against the same decision: Re Chevron Furnishers Pty Ltd (in liq) [1994] 2 Qd R 475; (1992) 8 ACSR 726. Where the irregularity arises from a deliberate informed decision to create an irregularity s 1322 will not be able to be used to excuse the irregularity: Re PW Saddington & Sons Pty Ltd (1990) 19 NSWLR 674; (1990) 8 ACLC 1722. That principle has application here.

In failing to give notice to Mr Samir Bayeh of the 13 July meeting, Mr Joe Bayeh and Mr Sam Issa excluded him from an opportunity to defend his position as a director and his conduct in relation to BI Constructions generally. There is an additional factor. They also deliberately pursued a course of action of removing Mr Samir Bayeh from the Board of BI Constructions on 13 July 2009 at a time when he was known to them to be in Lebanon and was unlikely to be able to come to the meeting. They knew that they were holding a directors meeting not a members meeting. I accept Mr Barrak's evidence that he neither attended nor gave legal advice to Mr Joe Bayeh or Mr Issa about the 13 July 2009 meeting before it occurred. They proceeded without his assistance. None of these circumstances would attract the Court's intervention under Corporations Act s 1322. I decline to excuse the irregularity under the section [37] [38].

30 A failure to receive notice of a meeting has been held to constitute substantial injustice: Lorenzi v Lorenzi Holdings Pty Ltd (1993) 12 ACSR 398.

31 The removal of the right of a director of a public company under s 203D of the Corporations Act to make representations to members in the context of a resolution to remove the director may also constitute substantial injustice: Dick v Comvergent Telecommunications Ltd [2000] NSWSC 331; (2000) 34 ACSR 86 [17].

32 The common feature of these cases is that the member or director was denied an opportunity to attend a meeting or to make representations to members. In this case no director was denied an opportunity to attend the 23 December 2011 meeting or to make representations to the members concerning the motions before the meeting. The members and directors of James Point received proper notice of the meeting. Mr Moonen and Mr Grant each gave evidence that, in effect, they chose not to attend the meeting on behalf of Chalet. It is to be inferred that the other members chose not to attend the meeting.

33 The major rationale of having a quorum is to avoid decisions being taken at a meeting by a small minority which may emerge to be objectionable to the vast majority of members. A tactic of quorumbusting, that is causing a quorum to be prevented from meeting, has been used in deliberative bodies by minorities seeking to block the adoption of some measure they oppose. There are many companies with only two shareholders, and then life can become difficult where one shareholder ceases to cooperate. If one shareholder refuses to attend meetings, it would appear that the other is unable to hold a valid meeting and is therefore unable to pass resolutions necessary to conduct business. In Re Opera Photographic Ltd [1989] 1 WLR 634 a company consisting of two members with 51: 49 holding, the majority shareholder was not able to remove the other from directorship because under the articles a meeting without the other attending was not possible. So the majority member applied for a court order that a meeting should be called at which the attendance of one would be the quorum. Since the majority shareholder had a right to remove the other from directorship his right could not be vetoed by quorum requirements and therefore the court made the necessary orders. In Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198 counsel submitted that Mrs Rinehart could have prevented HPPL from resolving to declare discriminatory dividends by refusing to attend any general meeting of the company, thereby preventing the formation of a quorum. In response to that submission the Court of Appeal stated:

There are a number of answers to this proposition. It is sufficient to state that the courts will not allow a minority of shareholders to so obstruct the wishes of the majority: In Re Opera Photographic Ltd [1989] 1 WLR 634 ...

34 I find that no substantial injustice has been or is likely to be caused by the procedural irregularity. The members, other than Port 1, had the opportunity to attend the meeting and to make such representations as they wished in relation to the business of the meeting. They chose not to take that opportunity. No injustice will be caused by permitting the meeting to proceed and the majority member to vote for, and thereby effect, the removal of directors and to appoint others in their place.

35 The plaintiff's application should be dismissed. An order should be made under s 1322(4)(a) declaring that the meeting is not invalid by reason of any contravention of the quorum requirements of the articles of association and that the resolutions passed at the meeting are not invalid by reason of any contravention of the quorum requirements.