DVT Holdings v Bigshop.com.au

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2635/02 DVT HOLDINGS LIMITED V BIGSHOP.COM.AU LIMITED & ANOR JUDGMENT Question 1 The question for decision is whether a requisition calling on the plaintiff to call a general meeting for the purpose of considering three resolutions for the appointment of three persons as directors of the company and three resolutions for the removal of three directors, is one upon which the company is required to act. Facts 2 DVT Holdings Limited (DVT) is a public company. At the present time it has four directors, one of whom is resident out of Australia. 3 The defendants, by notice dated 22 April 2002, given pursuant to s249D(1) of the Corporations Act 2001 (the Act) requested DVT to call a general meeting of the company to consider, and if thought fit, to pass certain resolutions. The defendant requisitionists are members with at least five percent of the votes which may be cast at a general meeting and there is no challenge to their standing to call the meeting. 4 Resolutions 1, 2 and 3 proposed are respectively for the appointment of Farooq Khan, Brett Murray McKeon and Victor Poh Hong Ho, as a director of DVT with effect from the closure of the meeting. Resolutions 4, 5 and 6 are respectively for the removal of Jean Marie Simart, Mark Connor Hubbard and Edward Michael Rule as a director of the company with effect from the closure of the meeting. Resolution 7 is for the removal of any director appointed after the date of service of the requisition notice on the company and prior to the closure of the meeting. This is not a matter of concern at the present time. The necessary consents of those persons proposed to be appointed as directors have been obtained. 5 On 17 June 2002, the defendants notified DVT of their intention to call a meeting in view of the failure of DVT to do so. Pleadings and proceedings 6 The action commenced by statement of claim on 10 May 2002. Under that document DVT sought declarations that the requisition was invalid and ineffective and that DVT was not obliged to act upon it. On 18 June 2002, the day following the letter giving notice of intention to call the meeting, the plaintiffs filed a notice of motion returnable on 19 June for an interlocutory injunction to restrain the defendants from so acting until the determination of these proceedings. On 19 June, when the hearing commenced it was agreed that the matter would go forward that day as a final hearing on amended pleadings, rather than on the notice of motion for interlocutory relief. It was heard on 19 June as a final hearing. It was possible to do this in absence of evidence from the directors when counsel for DVT stated that if the requisition were held to be valid, the company would call a meeting as required, thus obviating the difficulties about notice to the directors. 7 The claim of DVT as articulated in the amended statement of claim is:

(a) That the members' power to appoint directors is limited to their power to do so by ordinary resolution passed at an annual general meeting of the company.

(b) That the resolution for removal is invalid because it is not a notice of intention within s203D(2) and that a notice of intention must be given two months before the meeting is held. 8 So far as the removal matters are concerned the arguments put were wider than those apparent on the pleadings, but they were accepted and I will proceed on that basis. The amended statement of claim seeks an order restraining the defendants from calling a meeting to consider all or any of the proposed resolutions. By their amended defence the defendants say that the meeting they have requisitioned does not have to be an annual general meeting. They deny the claims as to notice, and they plead that if their requisition is valid only to the extent of the removal requisitions, then it requires a meeting called to address those resolutions. Resolutions for appointment

Section 201G is a replaceable rule. It provides that a company may appoint a person as a director by resolution passed in general meeting. Clause 3 of the constitution of DVT provides that all replaceable rules that apply to public companies are displaced completely by the constitution. Clauses 13 and 14 of the constitution so far as they are relevant are as follows: 13. NUMBER OF DIRECTORS 13.1 Number of Directors The minimum number of the Directors is 3 or a higher number fixed by an Ordinary Resolution. The maximum number of Directors is 10 or another number fixed by an Ordinary Resolution. Do not count Alternate Directors for the purposes of this rule 13.1 13.2 Fewer than minimum number of Directors If the office of a Director becomes vacant, the continuing Directors may continue to act unless the number falls below the minimum number. In that case, the continuing Directors may act only: (a) to appoint Directors up to the minimum number; or (b) to call a General Meeting; or (c) in emergencies. 13.3 Powers of General Meeting At a meeting where there is a reduction or increase in the minimum or maximum number of Directors, the Company may by Ordinary Resolution do any of the following: (a) determine the rotation by which the reduced or increased number are to retire; (b) appoint a person to be an Additional Director (otherwise than by appointing an Alternate Director). 14. HOW DIRECTORS ARE APPOINTED 14.1 Board may appoint Directors The Board may appoint a person to be a Director. An appointment may be made even if there is not a quorum at a Board meeting, but only of enough Directors to make up a quorum. A person appointed under this rule 14.1 ceases to hold office at the end of the next AGM but may, if otherwise qualified, be appointed a Director by that AGM. That appointment starts at the end of the AGM. Note 1 This rule replaces section 224D Note 2 For Alternate Directors, see rule 19. For Associate Directors, see rule 21. 14.2 Appointment at AGM The Company may appoint a person to be a Director, by Ordinary Resolution at an AGM. 9 The argument of the plaintiff is that the power to appoint at general meeting is removed by the replaceable rule, so that clauses 14.1 and 14.2 set out the only means by which a director can be appointed, thus limiting the power of the members to appoint directors to do so by ordinary resolution passed at an annual general meeting. The plaintiff says quite correctly that there can be no obligation to call a meeting to consider resolutions which the meeting cannot pass. There was no argument to the contrary. If the resolutions cannot be put the company need not call a meeting to consider them, and the requisitionists can be restrained from calling one relying upon the failure of the company to do so. 10 The argument of the defendants is that there is an inherent power at common law for a general meeting to appoint directors by ordinary resolution, which can only be displaced by clear language evincing an intention to do so; and that the permissive language of Clause 14.2 does not show such an intention. 11 I consider the intention is clear. Clause 14.1 gives the directors some powers and the members at the annual general meeting possess other powers for the appointment of directors. I would conclude from this that no common law power subsists, except perhaps in circumstances to which I will later refer. Even if there were some doubt about this, the surrounding circumstances, namely the exclusion of the replacement rule and the substitution of that rule by Clause 14.2 would, I think, make the intention quite clear. The defendant placed reliance on Link Agricultural Pty Limited v Shanahan McCallum & Pivot Ltd [1999] 1 VR 466 particularly the judgment of Kenny JA at page 485. This does not seem to me to bear on the matter here. It was not suggested in that case, I think, that the provisions of the constitution could not take away a common law right to appoint directors in general meeting. The question which arose in the cases referred to by Kenny JA, namely Worcester Corsetry Limited v Witting [1936] Ch 640 and Grant v John Grant & Sons Pty Limited (1950) 82 CLR 1, was whether or not the power remained in light of the articles of association. That is made clear in Worcester at page 50 and I think in the judgment of Latham CJ in Grant at page 22 where, referring to Worcester, he said: The point of the decision is that the article conferring power upon the directors to appoint a director in certain cases does not deprive the company of the inherent power to nominate and appoint its own directors.

The provision in Clause 14.2 may be unusual but it is clear. I do not think that it could be read so as to mean: In addition to the right of the company in general meeting to appoint directors the company may appoint a person to be a director at an annual general meeting.

That is really nonsensical. I consider that the proposed resolutions 1, 2 and 3 would be invalid if passed. This means that the company is not required to call a meeting to consider them and thus the requisitionists can be restrained from themselves calling a meeting for that purpose. Removal of directors 12 Section 203D of the Act is not a replaceable rule. The relevant provisions of that section are:

(1) Resolution for removal of director A public company may by resolution remove a director from office despite anything in:

(a) the company's constitution (if any); or (b) an agreement between the company and the director; or (c) an agreement between any or all members of the company and the director.

If the director was appointed to represent the interests of particular shareholders or debenture holders, the resolution to remove the director does not take effect until a replacement to represent their interests has been appointed. (2) Notice of intention to move resolution for removal of director

Notice of intention to move the resolution must be given to the company at least 2 months before the meeting is to be held. However, if the company calls a meeting after the notice of intention is given under this subsection, the meeting may pass the resolution even though the meeting is held less than 2 months after the notice of intention is given.

Section 203D(2) need not be considered in light of the statement of DVT through its senior counsel that the meeting will be called if the resolutions proposed are held to be valid. I consider the giving of the requisition to the company amounted to the necessary notice of intention. 13 The plaintiffs' contentions are that the proposed resolutions are invalid because (a) they are part of a package including the appointment of directors; (b) the resolutions if passed would cause the company to be in breach of the Act. Section 201A(2) requires a public company to have three directors, at least two of whom must be resident in Australia. Package claim 14 So far as the package claim is concerned, I consider that it fails. The defendants have not indicated that the resolutions are a package. Their amended defence indicates that they are not. In Turner v Berner [1978] 1 NSWLR 66, Needham J held that if a requisition proposed a resolution which a company in general meeting had no power to pass, the directors were justified in excluding reference to that resolution in a notice of meeting. Young J in Totally and Permanently Incapacitated Veterans Association of NSW Limited v Gadd (1998) 28 ACSR 549 at 551 said: However, in Turner v Berner the directors did receive a requisition containing more than one requisition and their attitude in disregarding the invalid parts and convening a meeting for what they considered were the valid parts, appears to have the approval of Needham J. I think that is sufficient guidance for me to say that if parts of the requisition are valid and parts are not, then the directors are obliged to convene a meeting for the valid parts.

It is true that Young J went on to say that in some cases where the requisition fell far short of the requirements of the Corporations Law and was a package of matters containing a significant number of items which the meeting would not be able to pass, then the directors could be justified in refusing to call the meeting to put any other matters before it. That is certainly not the position here. Offence claims 15 It is an offence for a public company to have fewer than three directors. The plaintiff says that the company is not bound to call a meeting for the purpose of passing resolutions which would reduce the number of directors to one thereby making the company liable to a penalty. 16 Reliance is placed on Corpique (No. 20) Pty Ltd & Ors v Eastcourt Ltd & Ors (1989) 7 ACLC 794. In that case Cohen J said, at page 801: The next question raised was whether the chairman, having decided that the resolutions for the appointment for new directors could not be put, was obliged to continue the meeting and to put the rest of the resolutions. This in fact would relate only to the second and fourth proposed resolutions. The effect of their being passed would have been that there would have been one director left on the board. This would have put the company in breach not only of art 69 but also of s219(1) of the Code. In Claremont Petroleum NL v Indosuez Nominees Pty Ltd (1986) 4 ACLC 315 the Full Court of the Supreme Court of Queensland had to consider proposed resolutions removing existing directors and appointing three named persons in their place. It had been submitted that this would have left a gap for a short period between the removal of one lot of directors and their replacement and that for this short period there would have been a breach of s219(1). The court declined to take such a narrow construction of the section because of the fact that the directors would have been instantly replaced by the resolutions which followed. It was not however suggested that had those subsequent resolutions not been able to be put that the argument would have been unsuccessful. Had the meeting continued and had the second and fourth resolution been carried then the company would have been left with one director. There is no suggestion, as in the Claremont Petroleum case, that the defect would have been instantly remedied. Section 225(5) provides that a vacancy created by the removal of a director under the section, if not filed at the meeting at which he is removed, may be filled as a casual vacancy. This means that Mr Clavarino, as the only remaining director, could have appointed two other persons to join him but it would have meant that until he exercised that power then Eastcourt, a public listed company, would have fewer than the prescribed number of directors for an indefinite period. Until new directors were appointed the remaining director, by art 75 could only act in an emergency. In my opinion it would not be a proper exercise of the company's powers under s225 or art 85 to pass resolutions removing directors and not replacing them so that the company and its remaining director would become subject to a penalty under s219. 17 I have some difficulties with this decision. Each of the removal resolutions is intended to be put separately. It may turn out that none is passed, that one is passed or that two are passed or that three are passed. In cases 1 and 2 there would remain three directors. The resolution with which the court was concerned in Claremont Petroleum NL v Indosuez Nominees Pty Ltd & Anor (1986) 10 ACLR 520 was one for the removal of all directors to be followed by three separate resolutions for the appointment of three new directors. In short the court held that for a company to be without the required number of directors for a short period of time when it was envisaged that new directors would be appointed almost immediately, was not a sufficient reason to refuse to summon the meeting required by the requisitionists. In the present case Mr Jurg Walker, the director who, on the evidence, lives in Switzerland will remain a director of the company. He will have notice of the meeting and one would expect that he might attend it. He will be aware that if the resolutions for removal are passed, or if two of them are passed, then the company will remain with fewer directors than is required by the Act. In those circumstances he would have power to take immediate action to appoint the number of directors required to make up the minimum number. I do not think that the court should assume that he would not do so and would not do so immediately. The power to remove directors in general meeting is one given by the Act and cannot be altered by the constitution. It is therefore difficult to think that the legislature intended to make it impossible in a particular case to exercise that power, it being said to be made impossible as a result of a company by its constitution having deleted a replaceable rule and replaced that rule with one limiting the powers of the company in general meeting to appoint directors. In those circumstances I consider that a court should be very careful before coming to a view that resolutions for removal of directors cannot be validly passed if this would result in the company having fewer than the required number, at least for a short period. Although I do not think it is necessary to decide this for the purpose of this case, it is also possible that notwithstanding the provisions of Clause 14 of the constitution there may be some residual power in the members in a case of necessity to appoint new directors in general meeting. I would be more inclined to consider this a residual power rather than some inherent power. I do not consider that a company is necessarily stultified and unable to act at all if the number of its directors is reduced below the statutory number and if any remaining director refuses to act to fill any casual vacancy. This was the subject of some discussion by Barrett J in CIC Insurance Ltd v Hannan & Co Pty Ltd (2001) 38 ACSR 245 at 247 where he said: There are statements in the cases which call in question the propriety of actions which cause the number of directors of a company to be reduced below the statutory minimum (today, of course, one only in the case of a proprietary company). In Claremont Petroleum NL v Indosuez Nominees Pty Ltd [1987] 1QdR 1; objection was taken to a procedure whereby, if a members' resolution was passed, all directors would be removed. But the point was labelled "highly artificial" because the immediately following items on the agenda of the same meeting were motions to fill any resulting vacancies. Subsequently in Corpique (No 20) Pty Ltd v Eastcourt Ltd Cohen J observed that it would not be a proper exercise of a company's powers, either under statute or under its constitution, to pass resolutions removing directors and not replacing them so that the minimum number required by law was not maintained. It may be doubted whether these concerns are well founded, at least in so far as they relate to removal of directors by members. It is not as if disappearance of the whole board leaves a company without the means to continue. There is a residual common law power for the members in general meeting to appoint directors. This has been recognised most recently by the Victorian Court of Appeal in Link Agricultural Pty Ltd v Shanahan, McCallum & Pivot Ltd [1999] 1 VR 466. Where members act to remove all directors, they have it in their own hands to rectify the resultant breach of the statutory requirement and clearly should do so. 18 As I have said it is not necessary to decide this in this case because I think the court should assume that the director who would remain in office if all the removal resolutions succeeded would carry out his statutory obligations. It follows from this that the plaintiff's claims for declarations and orders in the amended statement of claim should be dismissed but appropriate declarations should reflect the issues upon which the case was fought. There should be a declaration that the proposed removal resolutions are valid and that the proposed appointment resolutions are invalid. The parties can discuss the precise form of order and I will hear any submissions on costs.

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