Citi Project Marketing (Qld) Pty Limited v VG Projects Pty Limited

Background facts and affidavit evidence

1. I will first set out the background facts and refer to the affidavit evidence before turning to the three applications in turn.
2. By way of background, the First Plaintiff, Mr Tang, is a director of the Company and the Second Plaintiff, AQPL, holds a 49 per cent interest in the Company. The Second and Third Defendants are directors of the Company appointed by the Fourth Defendant, Lesso Mall (Australia) Holdings Pty Ltd, which has a 51 per cent interest in the Company. I will refer to the Fourth Defendant, and its Chinese holding company, as "Lesso" in this judgment, unless it is necessary to distinguish between them.
3. The Company's constitution provides for meetings of directors, and relevantly, in cl 30, that: "No business may be transacted at any time during a meeting of directors unless a quorum is present. Unless the directors decide otherwise, the quorum for a meeting of directors is any two directors. If there is only one director, the quorum is that director. The quorum must be present throughout a meeting. An alternate director who is not also a director may be counted in the quorum if the appointing director is not present."
4. The Company's constitution had effect, of course, within the statutory framework established by the Corporations Act 2001 (Cth). In particular, s 136(1) of the Act provides that a company adopts a constitution, on registration, if each person specified in the application for the company's registration have, on consenting to becoming a member, agreed in writing to the terms of that constitution and, after registration, if the company passes a special resolution adopting that constitution. Section 136(2) of the Act provides that a company may, relevantly, modify its constitution or a provision of it, by special resolution. Section 140 of the Corporations Act provides that a company's constitution has effect as a contract between the company and each member; between the company and each director and company secretary; and between a member and each other member, under which each person agrees to observe and perform the constitution so far as it applies to that person.
5. A Shareholder Agreement relating to the Company was also executed, on 21 July 2016, between Lesso, AQPL and the Company. That Shareholder Agreement relevantly provides, in cl 2.3, that shareholders have certain obligations, including to cooperate and use their best endeavours to ensure that the Company successfully conducts the business; to act, broadly, in good faith; and to be just and faithful in the parties' activities and dealings with other parties. Clause 3.1 of the Shareholder Agreement provides that each shareholder, namely Lesso and AQPL, must exercise its rights as a holder of shares to ensure the board composition and meeting procedures comply with specified requirements, including that the board must consist of at least three directors; Lesso, for so long as it holds at least 51 per cent of the share capital, may appoint and remove, by notice to the Company, two directors; AQPL, for so long as it holds at least 49 per cent of the share capital, may appoint and remove one director; and, importantly for present purposes: "(P) (Board meeting quorum) the quorum for meetings of the board is two Directors, comprising at least one Director appointed by Lesso and one Director appointed by [AQPL] or their respective alternates; (Q) (Where no quorum is present) If a quorum is not present at a meeting of the Board within 30 minutes after the time stated in the notice of meeting, the meeting must be adjourned for two Business Days to the same time and place (with each Director being notified of the adjourned meeting) or to another day, time and place agreed by all Directors and, at the reconvened meeting, the quorum is any two Directors."
6. I pause to note that Ms Painter, who appeared with Mr Fernon for the Plaintiffs, placed considerable weight on cll 3.1(P) and (Q) of the Shareholder Agreement. Those subclauses are to be read in the context of the introductory words of cl 3.1 of the Shareholder Agreement, which is a requirement that each shareholder, namely Lesso and AQPL, must exercise its rights as a holder of shares to ensure that meeting procedures comply with those requirements. Clause 3.2 of the Shareholder Agreement in turn provides for the circumstances in which directors may consider the interests of shareholders, but expressly does not operate to relieve a director from any duty, liability or obligation owed by that director to the company.
7. Clause 20 of the Shareholder Agreement relevantly provides that: "If there is any inconsistency between this document and the Constitution, this document prevails as between the parties to the extent of the inconsistency and the parties agree to exercise their rights as holders of Shares and take any steps which are necessary to ensure that the Constitution is consistent with this document."
8. Two things should be noted about that clause. The first is that, so far as it provides for the Shareholder Agreement to prevail in the event of any inconsistency between it and the constitution, it does so "as between the parties", and implicitly recognises that that effect would not, and arguably could not, extend to third parties who were not party to the Shareholder Agreement. Second, the clause itself recognises the step which should be taken to address such inconsistency, namely that the parties would exercise their rights as shareholders and take any steps necessary to amend the constitution to address that inconsistency. I pause to emphasise those matters because that clause plainly does not itself amend the constitution, but contemplates that the parties would take steps to do so to address any inconsistency that might exist.
9. Returning to the present factual position, the Company is plainly in substantial financial difficulty. Ms Painter accepted, in submissions, that the Company was insolvent (subject to any effect of funding provided by Lesso to the voluntary administrators who have been appointed to it) and also that it was likely to be insolvent. Those are, I note, the two prerequisites to the appointment of a voluntary administrator to a company by resolution of its directors under s 436A of the Corporations Act. The evidence indicates that the Company has suffered significant losses since its establishment; has been funded by Lesso and supported by a letter of support which has now lapsed; has obligations to employees which fell due yesterday and were met, from funding provided by Lesso to the voluntary administrators; and other obligations in respect of rent and financing which fall due today, which the Company could not meet other than from funding provided by Lesso to its voluntary administrators.
10. On 7 May 2018, the Company requested Lesso, or more precisely its Chinese holding company, to extend the financial support provided to it, under the letter of support, which Lesso declined to do. On 18 May 2018, solicitors, who I assume were acting for the Lesso-appointed directors of the Company, gave notice of a meeting of directors to be held on 25 May 2018, the agenda for which provided that it would consider a resolution to repay a loan by Lesso to the Company (which, I interpolate, the Company plainly had no capacity to do), to consider whether or not the Company was insolvent or likely to be become insolvent, and to consider whether to appoint a voluntary administrator or liquidator. A balance sheet attached to that notice of meeting indicated that the Company had negative net assets and negative equity of nearly $8.3 million and that it had incurred a loss of approximately $1.147 million during the four months to 30 April 2018. In these circumstances, Ms Painter's concession that the Company was insolvent, subject to the qualification noted above, or likely to be become insolvent, was plainly well-founded.
11. Correspondence between solicitors followed, in which the Plaintiffs sought an undertaking that the Company's directors would not resolve to appoint a voluntary administrator or a liquidator. That undertaking was not given, perhaps not surprisingly given the Company's financial position. The Plaintiffs then threatened to seek interlocutory relief, which was not sought. Shortly before the meeting was due to take place on 25 May 2018, Mr Tang's solicitors drew attention to cl 3.1(P) of the Shareholder Agreement dealing with the quorum for directors' meetings and indicated, without further explanation, that Mr Tang was not available to attend the directors' meeting that was to occur that day. They did not volunteer when Mr Tang would be available to attend such a meeting.
12. The directors' meeting thereafter took place without Mr Tang attending, but was attended by two of Lesso's nominees to the Company's board, one of them by telephone. The minutes fairly recorded that the director appointed by AQPL was not present as required by cl 3.1(P) of the Shareholder Agreement and also noted that: "However, given that the Directors were required to consider whether or not the Company was insolvent or likely to become insolvent, the Directors proceeded with the meeting."
13. That meeting resolved that the loan provided to the Company by Lesso be repayable forthwith, although I have noted above that plainly could not occur; that the Company was insolvent; and that voluntary administrators, Messrs Krejci and Cummins, be appointed under s 436A of the Corporations Act.
14. I turn now to the affidavit evidence on which the parties rely. The Plaintiffs rely on Mr Tang's affidavit dated 9 May 2018, only part of which was read to support the tender of relevant documents. They also rely on parts of Mr Tang's affidavit of 25 May 2018, which refers to correspondence between the solicitors and the conduct of the directors' meeting. Mr Tang's affidavit did not address the financial position of the Company, and I have referred above to the concessions properly made by the Plaintiffs' Counsel in that respect.
15. The Defendants relied upon an affidavit of the Company's chief financial officer, Mr Hon Biu Lau, dated 24 May 2018, which was directed to its financial position. The Defendants also rely on affidavit of Mr Philip Campbell-Wilson, who has restructuring expertise, which annexed a report which concluded that, on two scenarios, the Company was insolvent or, on the second of them, likely to become insolvent. That, as I have noted, is not now contested. The Defendants also relied on the affidavit of their solicitor, Mr Harkin, dated 24 May 2018 which referred to correspondence to which I have referred above and a further affidavit dated 31 May 2018 of Mr Harkin which annexed more recent correspondence.
16. The voluntary administrators relied upon Mr Krejci's affidavit dated 30 May 2018 which set out the Company's assets and liabilities, referred to his appointment and the steps he had taken since appointment, and indicated his assessment that the Company was insolvent and could not continue without funding support from its shareholders or alternative finance. A further affidavit of Mr Krejci dated 1 June 2018 annexed a funding deed with Lesso, which provided funding of up to $700,000 for liabilities incurred by the voluntary administrators, on the basis that that facility terminated if the administration ceased. Mr Krejci also expressed the view that the Company remained insolvent, despite that facility, since the moneys advanced have been applied to payments of immediate debts of the Company.

The Plaintiffs' Interlocutory Process

1. With that background, the Plaintiffs' Interlocutory Process sought final relief, as may properly be done in an application in this list brought by Interlocutory Process, in several paragraphs. I grant leave pursuant to s 440D of the Corporations Act for the Plaintiffs to proceed against the Company, being a company in administration, limited to this application and so far as such leave is required. A second declaration sought was properly not pressed by the Plaintiffs' Counsel, where the proposition that a meeting was not validly convened because of the persons who subsequently attended it was plainly unarguable.
2. The third and fourth declarations sought were, relevantly, that all business transacted at the meeting on 25 May 2018 was null and void "in the absence of a property constituted quorum" and that the appointment of the voluntary administrators on 25 May 2018 was invalid. That proposition was consequential upon the suggested invalidity of the meeting. A further declaration that the Lesso appointed directors be restrained from passing any resolution that the Company be placed into external administration was not pressed, and that was plainly also correct, where it is highly unlikely that the Court would have granted such relief in respect of the Company in the financial position which I have set out above.
3. Ms Painter relies on cll 3.1(P) and 3.1(Q) of the Shareholder Agreement, to which I have referred above, to contend that the business transacted at the directors' meeting on 25 May 2018 was "null and void" by reason of the absence of a "properly constituted quorum". The reference to "a properly constituted quorum" there is, of course, to the quorum under the Shareholder Agreement. It is plainly not a reference to the quorum required by the constitution, because that quorum, being the presence of two directors, was satisfied. Ms Painter did not contend that the Shareholder Agreement had amended the quorum provision in the constitution, which takes effect under s 140 of the Corporations Act, as I have noted above. Such a contention would have raised the potential difficulty of how such an amendment would comply with s 136 of the Corporations Act, an issue which was noted by Kourakis J in Elders Forestry Ltd v Bosi Security Services Ltd [2010] SASC 223; (2010) 80 ACSR 122 at [76]-[77]. I need not address that difficulty where that contention was not put.
4. Ms Painter contended that the relevant board meeting was in defiance of the Shareholder Agreement; not authorised; not a proper meeting of the board and, in consequence, the appointment of the voluntary administrators was not valid. I do not accept that submission. Where the Plaintiffs did not contend that the constitution had been amended, cl 30 of the constitution takes effect in accordance with its terms, and the quorum requirement under the constitution was satisfied. Mr Harris, who appeared with Mr Robertson for the Defendants, advanced several contentions as to the duties of directors of the Company, and submitted, at one point, that such duties may be implied into the Shareholder Agreement. I do not consider it necessary to deal with that contention, given the conclusions that I have reached on other grounds.
5. I will assume, without deciding, that there may have been a breach of the Shareholder Agreement, in the relevant circumstances, so far as the shareholders, or at least Lesso, failed to exercise its rights as a shareholder to ensure that the meeting procedures reflected a quorum of two directors, comprising at least one director appointed by Lesso and one director appointed by AQPL, rather than leaving the quorum to proceed as specified in the constitution, simply as two directors. There may, of course, have been other breaches of cl 3.1 of the Shareholder Agreement in the circumstances, arising from the circumstances in which AQPL failed to procure Mr Tang's attendance at the relevant board meeting, where that board meeting was called in circumstances of considerable urgency, and having regard to the obligations to act in good faith and faithfully, also specified in the Shareholder Agreement. It is not necessary to address that question, which was not the subject of submissions.
6. Assuming, without deciding, that there was such a breach of the Shareholder Agreement by Lesso, the Plaintiffs could have, but did not, seek interlocutory relief to restrain it, perhaps recognising that the Company's impending or existing insolvency would have affected the balance of convenience in such an application. They could have, but did not, seek a mandatory injunction to require the shareholders to reverse the outcome of the board meeting, although such an application would almost inevitably have failed, given the Company's present financial position, and they may have a claim for damages arising from such a breach. It seems to me, however, that any breach of the Shareholder Agreement does not have the effect that a meeting that is otherwise conducted in accordance with cl 30 of the constitution, even in breach of that agreement, can be described as "null and void", in the language of the Plaintiffs' application, or is otherwise invalid. Ms Painter was not able to identify, in the course of submissions, any legal principle that had the consequence that an identified breach of contract led, not to the possibility of injunctive relief or damages in the ordinary way, but to invalidity of a corporate act which fell to be determined by other principles. In those circumstances, it seems to me that the Plaintiffs' application in paragraphs 3 and 4, which was the only part of that application which was pressed, must be dismissed. I will, however, deal with the applications brought by other parties, although it is not strictly necessary to do so, against the contingency that an appellate Court might take a different view.

The Defendants' Interlocutory Process

1. The Defendants, by their Interlocutory Process dated 30 May 2018, sought orders under s 1322(4) and (6) of the Corporations Act declaring that, if there was a procedural irregularity in respect of the directors' meeting, then any act, matter or thing purported to have been done by the directors, including the appointment of the voluntary administrators, was not invalid by reason of any contravention of the Act or a provision of the constitution arising from that procedural irregularity. It would be immediately noted that that issue does not arise, on the findings I have reached, because there was no such contravention of the Act or of any provision of the constitution.
2. The Interlocutory Process did not raise the application of s 1322(2) of the Corporations Act, which was addressed in the Defendants' submissions. That seems to me to be correct, as a matter of approach, because s 1322(2) operates of its own force, rather than being invoked by any application of the Defendants. That subsection relevantly provides that a proceeding under the Act is not invalidated because of any procedural irregularity, 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. The absence of a quorum at a meeting of directors is a "procedural irregularity" for the purposes of s 1322(2) because it is expressly defined as such in s 1322(1)(b)(i). The Defendants submit that in the present case, validation of the directors' meeting is brought about by s 1322(2) unless the Plaintiffs establish that the irregularity caused or may cause substantial injustice.
3. It seems to me that it cannot be established that the irregularity, if there was one, caused such injustice in this case. First, Mr Tang had reasonable notice of the directors' meeting, including what would be discussed at it, and chose, for whatever reason, not to attend. I will return to that matter below. Second, even if Lesso had caused its directors to follow the procedures set out in cl 3.1(Q) of the Shareholder Agreement, and adjourned the meeting for two business days, then reconvened it where the quorum would be two directors, without regard to the identity of their appointor, the same result would plainly have followed. There was no likelihood there would be, and there has not been, any favourable development in the financial position of the Company which raises even the slightest prospect that the directors would then have formed a different view as to its insolvency or likely insolvency, or elected to trade on despite that insolvency or likely insolvency. It seems to me that there can be no substantial injustice in appointing the voluntary administrators where that would also have occurred, had the alternative procedure in the Shareholder Agreement been adopted.
4. Alternatively, by their Interlocutory Process, the Defendants rely on s 1322(4) and (6) of the Corporations Act. Section 1322(4) allows the Court to declare that an act, matter or thing purporting to have been done 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 of a provision of the corporation's constitution. That power 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 other person for the purposes of s 1322(6). Relief under s 1322(4) is available if any one of these three requirements is satisfied and no substantial injustice has been or is likely to be caused to any person. I summarised the applicable principles in Re Keneally (as Administrator of Australian Blue Mountain International Cultural) v Tourist Group Pty Limited (admin apptd) [2015] NSWSC 937; (2015) 107 ACSR 172, and need not repeat that summary here.
5. Mr Harris draws attention to the decision of the Supreme Court of Queensland in Citi Project Marketing (Qld) Pty Limited v VG Projects Pty Limited [2017] QSC 65 which has significant similarities to the present facts. In that case, a shareholder chose not to attend an extraordinary general meeting, with the result that a quorum for that general meeting was not satisfied. Martin J held that the absence of a quorum was a procedural irregularity and that it caused no substantial injustice, where it was caused by the deliberate action of that shareholder. His Honour also noted, rightly, that it must be the irregularity - here the absence of the quorum and not the outcome of the resolution - that caused the relevant injustice. His Honour also observed, consistent with the case law, that a procedural irregularity can include deliberate acts of non-compliance, and that validation is available in that situation.
6. If, contrary to my view, there was an absence of the quorum at the meeting, that would be a procedural irregularity, and falls within the first limb of s 1322(4). There is no reason, on the evidence, to think that the directors appointed by Lesso were not acting honestly, and that was not put by Ms Painter in submissions. It seems to me that it would be just and equitable to grant the relief sought where, absent such relief, those directors would be placed in a position that they are arguably trading while insolvent, and employees and creditors of the Company would be placed at further risk. There is, in my view, no substantial injustice to the Plaintiffs in granting such relief, for the reasons noted in Citi Project Marketing (Qld) Pty Limited above, namely that the passage of the resolution in Mr Tang's absence was, at least in large part, brought about by his decision not to attend the meeting. Accordingly, had it been necessary to do so, and if I were incorrect in the view that I have formed above, I would have granted the relief sought by the Defendants' Interlocutory Process.

The voluntary administrators' Interlocutory Process

1. Third, the voluntary administrators seek a range of relief in their Interlocutory Process. First, they seek an order under s 447C of the Corporations Act declaring that their appointment as voluntary administrators by the resolution of the directors of 25 May 2018 was valid. That order is plainly addressed to the dispute between the parties as to the validity of that meeting. The orders made by the Court under that section are declaratory rather than curative: Smolarek & Anor v Brian Keith McMaster (as Administrator of Eznut Pty Limited) [2006] WASCA 216 at [2]; Re Keneally above at [107]. Such declaration should be made in this case, because it follows from the finding that I have reached above, dismissing the Plaintiffs' claim for a declaration to the contrary. To put that proposition another way, where it has not been established that the meeting was a nullity, then it was valid and the appointment of the voluntary administrators took effect in accordance with its terms.
2. Alternatively, the voluntary administrators seek an order under s 447A of the Act confirming the validity of their appointment. The phrasing of that order is somewhat imprecise, because s 447A of the Act is not confirmatory in nature, but varies the Act in circumstances that may, in an appropriate case, bring about a result that the Act would not otherwise bring about. There are many cases in which the Courts have made orders under s 447A of the Act validating an appointment of an administrator where, for example, a quorum was not present, or the appointment was made by a de facto director rather than a statutory director, most commonly where a company is plainly insolvent and that appointment will promote the purposes of Part 5.3A of the Corporations Act.
3. Mr Cook, who appears for the voluntary administrators, identifies a number of matters which he submits would support such an order in this case. It seems to me that the most significant of those matters is that it is plain that the Company is insolvent, and insolvent by a significant margin; the appointment of the voluntary administrators allows access to the statutory moratorium, in respect of the occupancy of the Company's premises, which may be important for its ability to be sold as a going concern; the appointment of the voluntary administrators has allowed access to funding from Lesso, which in its terms would not otherwise be available, and that has allowed payments to employees and will, it appears, allow payment of rent and other financing obligations today; and that appointment addresses the risk to the directors of continuing to trade while insolvent. All of these reasons seem to me to be strong reasons to grant the relief sought, if it were otherwise necessary to do so, and the evidence before me does not suggest that there is any reason not to do so. Accordingly, I would have made the order sought under s 447A of the Act if it were otherwise necessary to do so.
4. The voluntary administrators also sought an order under s 1322 of the Act confirming the validity of their appointment. That order raises the same issues as the Defendants' corresponding application, and would have been made for the reasons that the Defendants' corresponding application would have succeeded. The voluntary administrators' further, and alternative, order that they receive remuneration on a quantum meruit basis does not arise.

Costs

1. My preliminary view is that the Plaintiffs must pay the costs of their Interlocutory Process, as agreed or as assessed, and must also pay the costs of the Defendants' Interlocutory Process and the voluntary administrators' Interlocutory Process, again as agreed or as assessed. The Defendants and the voluntary administrators would each have succeeded in their interlocutory processes, but for the fact that the Plaintiffs' primary application has failed.
2. After I indicated that preliminary view, the Defendants sought an order for indemnity costs in respect of the evidence of Mr Lau and Mr Campbell-Wilson which goes to the question of the Company's insolvency. It does not seem to me that the basis for such an application has been established, implicitly on the basis that there was unreasonable conduct of the Plaintiffs in not conceding the question of insolvency at an earlier point. I reach that view for several reasons.
3. First, while it is clear that the Company was and is in a poor or very poor financial position, and I have referred to the overwhelming evidence of that matter above, the question of solvency is a somewhat different one. Companies which are in a poor financial position may, on occasion, be able to meet their debts as they fall due, at least in the immediate future. There is no doubt, on the evidence to which I have referred, that the Plaintiffs knew, or ought to have known, that the Company was in a position of significant difficulty, and that, absent further financial support, on which it had previously been dependent, it might well become insolvent. However, it seems to me that insolvency was not self-evident, such that the Plaintiffs should reasonably have conceded it without first having the opportunity to see the evidence which was put in support of it.
4. Second, the question of the costs which would fall within such an order has a degree of uncertainty attached to it, where the Defendants had foreshadowed, in earlier correspondence, that an expert report as to solvency would be prepared for the purposes of the relevant directors' meeting. It is by no means apparent that the Plaintiffs should now be required to pay the costs of that proposed report, or the work that was associated with it, for which they would not otherwise have been liable, by reason of this application.
5. Third, and importantly, it seems to me that the Plaintiffs' Counsel was correct to concede today, on the evidence led in this application, that the Company was insolvent or likely to become insolvent, subject to the funding provided to the voluntary administrators. The proceeding would have been more complex and longer had that concession not been made. The Court should be less ready to make an order for indemnity costs in a way that would discourage Counsel from making a proper concession of that kind at the commencement of a hearing.
6. For all those reasons, I would not make the order for indemnity costs which is sought. I would add that, in any event, the distinction between party/party costs and indemnity costs is becoming less significant in economic terms, in the assessment process.

Orders

1. In these proceedings I make the following orders:
2. The Plaintiffs' Interlocutory Process filed on 25 May 2018 be dismissed.
3. The Plaintiffs pay the costs of the Second, Third and Fourth Defendants and of Messrs Cummins and Krejci in their capacity as voluntary administrators of Lesso Building Material Trading (Sydney) Pty Ltd of and incidental to the Plaintiffs' Interlocutory Process, the Second, Third and Fourth Defendants' Interlocutory Process and Messrs Cummins' and Krejci's Interlocutory Process, as agreed or as assessed.
4. List the matter for further directions in the Corporations Directions List at 10am on 18 June 2018.
5. Liberty to apply on three business days' notice, including in respect of any dismissal by consent of other parallel proceedings in the Equity General List.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 October 2018