Meetings and Notices
12 The material in evidence contained an unsigned copy of the minutes of a board meeting of the company dated 13 June 1995. Present at that meeting were Mrs Rinehart, who is described as director and chairman, Mr Schwab as director, Mr Lee as secretary, and Messrs Morhall and Paice by invitation. After considering a copy of the Hancock Group - Cash Position Summary of 7 June 1995 the minutes state:
"… it was agreed that the above cash position was unsatisfactory and that urgent steps should be taken to increase the cash reserves available to the company."
13 It was then noted that an amount of $1,067,403.80 could be raised for the essential working capital purposes of the company by calling all unpaid sums on the issued shares. A table followed in relation to three classes of shares. Relevantly, in relation to the "D" class shares it was noted that $66,000 could be raised by call on the 220,000 which had been paid to $1.70, and that an amount of $995,000 could be raised on the 500,000 "D" class shares which had only been paid to one cent.
14 Under the heading "Resolution" the minutes record:
"It Was Resolved that 'calls be immediately issued in accordance with Articles 17 to 22 of the Companies Articles, on all shareholders affected requiring the payment by such shareholders within seven days of the date of the notice of all unpaid amounts on all the Companies issued and not fully paid share capital and that the Secretary of the Company be authorised to do all such acts and things to effect this resolution'. (Carried)
It Was Further Resolved that 'should any member fail to meet such payment by the due date a notice of forfeiture be issued to the member in accordance with Articles 23 to 30 of the Companies Articles and that the Secretary of the Company be authorised to do all such acts and things to effect this resolution'. (Carried)"
15 The typewritten minutes provide for signature by Mrs Rinehart and Mr Schwab. There is a statement that the meeting was closed and that the minutes were signed as a correct record. However, the minutes are unsigned and there has been no explanation as to the absence of any signed original minutes.
16 However, in his affidavit Mr Schwab said that he remembered signing a copy of the minutes. This statement is of course not accepted on the part of Mrs Porteous. I am not satisfied on the evidence that the minutes were signed.
17 The following day Notices of Call were sent. They were in substantially similar terms to the following effect:
"14 June 1995
The Executors for the
Estate of Mr L G Hancock
The Executors
NOTICE is hereby given that a call of $1.99 per share on the above issued shares of $2.00 par value now paid to $0.01 each in the capital of Hancock Prospecting Pty Ltd ("Company") (making such shares fully paid) has been made and, accordingly, a total amount of $995.000.00 is due and payable by you before 5.00 pm on Wednesday 21 June 1995.
Cheques should be made payable to "Hancock Prospecting Pty Ltd", crossed "Not Negotiable" and forwarded to the Company at the address shown above. Alternatively, remittances may be made direct to the Company's bank account, the details of which are:
Bankers: Bank of New Zealand
A/C name and number: Hancock Prospecting Pty Ltd
B.S.B. Number 206-061
Account Number 723 245
The payment in full of the call will make the above shares fully paid.
Please note that in accordance with the Company's Articles of Association, failure to pay the call by the due date will result in interest being payable on unpaid amounts at the rate of 10% per annum and could result in the forfeiture of all shares in respect of which the call has not been paid.
Yours faithfully
Gary R Schwab
Company Secretary"
18 On 20 June 1995, Mrs Rinehart wrote to Messrs Bennett and Schwab in these terms:
"Dear Sirs,
Estate of L G Hancock (Deceased)
The enclosed notices of call were received by me as the first named executor from Hancock Prospecting Pty Ltd ("HPPL") in relation to the D class shares held by the estate in HPPL. You will note that the total amount payable is $1,061,000 and the amount is payable by 21 June 1995. I am advised that should the call not be met by 21 June 1995, HPPL will need to consider the issue of Notice of Forfeiture which will require a minimum of 14 days notice.
The call has been made by the company to raise funds for its working capital requirements. Mr Schwab and I have information in our capacity as directors of HPPL as to the detailed reasons for HPPL making the call which can be made available to Mr Bennett on a confidential basis. It is in any event evident from the company's published accounts that the company has significant debts and commitments.
Pursuant to the terms of the will the shares were the subject of a specific legacy in my favour.
It will be necessary for the executors to meet to discuss what, if any, action is to be taken by the executors in relation to the call.
Yours faithfully,
Gina Rinehart
(dictated by Mrs Rinehart and signed in
her absence by secretary Pauline Sharpe)."
19 Discussions followed between Mrs Rinehart and Mr Schwab leading to a decision on their part not to pay the call because a dividend was unlikely to be paid and the call was for an amount of over one million dollars. Accordingly, the call was not paid. There was cross-examination to the effect that the assertions in the minutes as to the need for capital were misleading and that the claimed liquidity problems did not really exist to the extent asserted. Furthermore, attention was directed to discrepancies in word processor references and dates and to the perhaps surprising lack of recollection on the part of witnesses as to the holding of the meeting. In addition, reference is made to other anomalies and to the fact that the minutes were not signed. These matters are considered later in the reasons.
20 On 27 June 1995, a further board meeting was held. The minutes record that Mrs Rinehart was chairman and Messrs Schwab and McKenna (the secretary), were present. The minutes note that the call notices in respect of "D" class shares authorised in the board meeting of 14 [sic] June 1995 had been sent but had not been met. It was noted that in accordance with the Articles, the shares upon which the calls had not been met could be forfeited on 14 days notice. The following resolutions were then passed:
"RESOLVED to instruct the Secretary of the Company to immediately issue and serve on the holders of the D class shares a further notice (the "Further Notice"), in accordance with Articles 23 and 24 of the Articles of Association, requiring payment of the unpaid amounts within 21 days, and giving notice that if the payment is not received by that time, the shares will be forfeited.
FURTHER RESOLVED in accordance with Article 25 of the Articles of Association, to immediately forfeit all of the D class shares in respect of which a call is not met by the date set out in the Further Notice.
FURTHER RESOLVED that, in accordance with their powers under Article 26 of the Articles of Association, the directors offer all forfeited D class shares to the existing shareholders (other than the present holders of the D class shares) in proportion to the existing shares held by them. The sale price of each of the forfeited shares shall be equal to the amount unpaid on the relevant share and, on payment of the sale price, each such share shall be deemed to have been fully paid." (Emphasis added)
21 The minutes were signed by the chairman and by Mr Schwab. It is common ground that this meeting took place. The dispute is over the effect of the meeting. That is to say whether it ratified the earlier decision, or whether the resolutions and subsequent notices operate as a fresh independent call for payment.
22 On 27 June 1995, notices were sent which were substantially in the following form:
'NOTICE OF FORFEITURE OF "D PREFERENCE" CLASS SHARES ISSUED AT $2.00 PRESENTLY PAID TO $1.70 EACH
Unpaid Call per Share: $0.30
Due Date: 2 June 1995
Shares Liable to be Forfeited: 220,000
Total Amount Due: $66,000.00
27 June 1995
The Executors for the
Estate of L G Hancock
The Executors
NOTICE is hereby given that the abovementioned amount of $66,000.00 due and payable by 5.00 pm on Wednesday 21 June 1995 has not been received.
In accordance with the Company's Articles of Association, the abovementioned shares will be FORFEITED unless payment is received by 18 July 1995.
Cheques should be made payable to "Hancock Prospecting Pty Ltd", crossed "Not Negotiable" and forwarded to the company at the address shown above. Alternatively, remittances may be made direct to the Company's bank account, the details of which are:
Bankers: Bank of New Zealand
A/C name and number: Hancock Prospecting Pty Ltd
B.S.B. Number 206-061
Account Number 723 245
Yours faithfully
[Signature]
Gary R Schwab
Company Secretary"
23 There were two notices which together made up the total amount of $1,061,000.
24 On 28 June 1995 a letter was sent by Mrs Rinehart to Messrs Bennett and Schwab which relevantly reads:
"Dear Sirs,
Estate of L G Hancock (Deceased)
The enclosed forfeiture notices of call were received by me as the first named executor from Hancock Prospecting Pty Ltd ("HPPL") in relation to the class shares held by the estate in HPPL. You will note that the total amount payable was $1,061,000 and the amount was payable by 21 June 1995.
It will be necessary for the executors to meet to discuss what, if any, action is to be taken by the executors in relation to the forfeiture.
Yours faithfully,
[Signature]
Gina Rinehart"
25 The estate did not pay the calls before 18 July 1995, and on 21 July the directors resolved that since the notices of 14 June 1995 and 27 June 1995 had not been complied with by the due date, and because the calls remained unpaid, then the 720,000 "D" class shares in respect of which the sum of $1,061,000 was outstanding should be forfeited.
26 At a board meeting of the company on 10 August 1995, the directors resolved that 220,000 fully paid "D" class preference shares should be issued in separate portions to HMHT Investments Pty Ltd and 150 Investments Pty Ltd. Subsequently, the company received from Mrs Rinehart the payment of $66,000 in respect of those shares and accordingly the outstanding debt was reduced to $995,000. It is this amount plus interest which has not been paid to date.
27 The petitioner's case in essence is that it is a creditor of the estate within s 244(1)(c) of the Act, and it was therefore entitled to present a petition under that subsection for administration of the estate. The petitioner submits, and this is common ground, that the petitioner is not required to establish insolvency of the estate.
28 In opposition to the petition, counsel for Mrs Porteous makes three submissions. The first is that there was no valid resolution either in June or July or at any other time to authorise the calls. The second submission is that if there was a resolution to make a call then it was invalid as an abuse of directors' powers because the call was made for an ulterior or improper purpose and the petition was therefore an abuse of process. The third ground is that, as a matter of discretion, the Court should take into account the conduct of the directors and exercise its discretion against the petitioner.
29 On the discretion issue, the submission for Mrs Porteous is that the call on the "D" class shares were a contrivance to create the appearance of a debt which the company could use as a pretext for making an administration order. In other words, the Court should conclude that the applicant is not a true creditor. Moreover, it is said, if a pending action against the company brought by Mrs Porteous, which I will refer to as proceedings 2121 in the Supreme Court of Western Australia ultimately succeeds, it is said that there will be a significant prospect that the company will have to return to the estate an amount of over $10 million. These proceedings are designed to set aside a deed made by Mr Hancock disposing of two major assets two weeks before his death. The assets comprised entitlements to a royalty stream and control of the Hancock Family Memorial Foundation. Those proceedings are properly described as complex and they give rise to many issues of both fact and law. It is submitted that Mrs Porteous is pursuing those proceedings for the benefit of the estate. Mrs Porteous submits that the alleged debt in this matter is the result of an arrangement between the debtor and creditor both of whom are effectively controlled by Mrs Rinehart and Mr Schwab. Moreover, the call was not made with any expectation of recovering the debt. Mrs Porteous further says that (i) the estate is not insolvent; (ii) that the company directors have acknowledged that the company is unlikely to recover any payment; and (iii) that the petition proceedings are an abuse of the Court's process.
Standing of Mrs Porteous
30 By Notice of Motion dated 11 February 1988 Mrs Porteous applied for leave pursuant to O 77 r 9 of the Federal Court Rules ("the FCR") to be heard in the bankruptcy proceeding.
31 The basis on which leave was sought is particularised in a Notice of Intention to Oppose Petition pursuant to O 77 sub-rule 11(2) of the Rules.
32 Order 77 relevantly provides:
"9 (1) The Court may grant leave to be heard in a proceeding to person who is not a party to the proceeding.
(2) The Court may grant the leave on conditions and may revoke the leave at any time.
(3) If:
(a) the granting of leave to the person causes additional cost for a party to the proceeding; and
(b) the Court considers that the cost should be paid by the person;
the Court may order the person to pay the costs.
…
(5) The Court may grant leave or make an order under this rule:
(a) on the application of a party to the proceedings or a person having an interest in the proceeding; or
(b) on the Court's own initiative.
…
11(1) This rule applies to a person who intends to oppose an application or petition.
(2) At least 3 days before the date fixed for the hearing of the application or petition or, with the Court's consent, at the hearing, the person must:
(a) enter an appearance …
(b) file a notice, in accordance with Form 149, stating the grounds of opposition to the application or petition; and
(c) file an affidavit in support of the grounds of the opposition; and
(d) serve the notice and supporting affidavit on the applicant."
33 The rule is framed in wide language. The discretion conferred to grant leave is not constrained by any specified considerations but, of course, the discretion must be exercised judicially. The basic reference requirement is that the person must have an "interest in the proceedings", or that the Court considers that the person should be granted leave to be heard either generally or on limited issues. In this respect the discretion of the Court is cast in broader terms than provided for in O 6, r 7 and 8 of the FCR. Those rules are concerned with non-joinder and joinder of persons who are not parties but ought to have been a party or whose presence is necessary to ensure that all matters in dispute are properly adjudicated upon.
34 The submissions for the company and the estate refer to the discussion of the joinder of parties by the Full Court in News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 at 523-525. That discussion concerned the operation of O 6 of the FCR. In considering whether parties ought to have been joined, the Court said (at 525):
"The test involves matters of degree, and ultimately judgment, having regard to the practical realities of the case, and the nature and value of the rights and liabilities of the third party which might be directly affected."
35 In the present case, Mrs Porteous claims that the predominant purpose of the petition was not for its expressed legitimate end, but was actuated by the desire on the part of Mrs Rinehart and Mr Schwab to avoid being removed as trustees and executors of the estate. Mrs Porteous claims that the petition was issued in circumstances where the creditor and Mrs Rinehart were involved in protracted and bitter litigation with her in relation to the affairs of Mr Hancock. It is evident that there is a complex network of inter-related and hard fought litigation in place between the parties of which the bankruptcy petition is but one proceeding. There is a recent decision of White J of the Supreme Court of Western Australia in Estate of Hancock (Dec); Porteous v Rinehart (as Executor and Trustee of the Estate of Hancock) (unreported, 31 August 1998) in which his Honour found that there was a conflict of interest in the positions of Mrs Rinehart and Mr Schwab, but that this was not sufficient to warrant their removal as trustees or executors of the estate. That decision is presently under appeal. His Honour there held that Mrs Porteous had standing as a potential beneficiary under the will of Hancock. That interest was in the nature of her entitlement as legatee under the will.
36 Another relevant factor in the present case is the submission that unless Mrs Porteous is permitted to make submissions in relation to the petition there will be no proper contradictor to the making of a sequestration order: there are said to be circumstances which, on the evidence placed before me, raise at least a suspicion as to the irregularity of the making of the call. Ultimately, however, I find that these submissions are not sufficiently cogent to warrant dismissal of the petition.
37 In opposition to the application for leave to be heard, the company points out that the remedy sought will result in the appointment of an independent third party in a case where it is clear there are bitter hostilities and divisions and that the rights of Mrs Porteous will not be adversely affected.
38 Weighing these competing considerations and having heard the evidence and submissions, I am persuaded in the exercise of the discretion conferred by O 77 r 9 that leave should be granted to Mrs Porteous to appear and be heard. I am satisfied having regard to the practical realities of the case and the nature and value of the rights and liabilities claimed by Mrs Porteous, that although her rights may not be directly affected, by looking at the matter in the broader context she does have a sufficient interest to justify the grant of leave to be heard. I will reserve the questions of costs for further submissions.
39 I now turn to consider the first issue raised on behalf of Mrs Porteous.
Directors Meeting 13 June 1995 - was it held?
40 The submission is that notwithstanding the documentation, no board meeting was ever held on 13 June 1995. In support of this submission the applicant relies on a number of unusual aspects of the facts leading up to the meeting and on the circumstances in which the meeting was held. It is then submitted that because there was no meeting, there was no resolution to make a valid call.
41 Many matters were raised in cross-examination, but for present purposes it is only necessary to deal with the principal matters raised. The first unusual feature is that the witnesses for the company, Messrs Schwab and Morhall, who are recorded in the minutes as having been present at the meeting, have no independent recollection of the meeting apart from the minutes. They relied on and paraphrased the minutes in their evidence. The meeting was evidently an important one with some striking features which make it memorable. The evidence of Messrs Schwab and Morhall was premised on the circumstance that the company at that time was in dire need of cash having regard to the large financial commitments which were anticipated at that time. A second important consideration is that at the time the call was made on the estate, neither of them believed that the estate would be able to pay during the call period specified in the notice. A third matter is that Mrs Rinehart, who was apparently in Sydney at the time of the hearing, despite her obvious interest on the matter did not give evidence. This is said to strengthen the inference, otherwise said to be available on the material, that no meeting was held: see Jones v Dunkel (1959) 101 CLR 298 at 308. A fourth matter relied on is that the minutes in evidence are unsigned and that this is not in accordance with the general pattern disclosed by other minutes in evidence over a period including June and July 1995. It is said that the inference should be drawn that the general practice of the directors was that the minutes were always signed where a meeting was held, and that the apparent failure to verify the minutes was a matter which reinforces suspicion that there was no meeting. Furthermore, there are said to be apparent anomalies as to dates in earlier and later documents, and an incorrect reference to the date of this meeting in the minutes of the later board meeting on 27 June which refers to a meeting on 14 June.
42 The allegation that there was no meeting held on 13 June, involving as it does in substance an allegation of fraudulent fabrication of records and a deliberate intention to deceive, is a serious one requiring a correspondingly higher level of satisfaction: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 368-9. Whilst it is true that the circumstances are unusual, the evidence does not satisfy me to the required standard that no meeting was ever held. This is particularly so in view of the fact that at the 27 June meeting, which was undoubtedly duly called and held, specific reference was made to an earlier meeting on 14 June 1995 when the initial resolution was passed. I have reached the conclusion that the mistaken reference to the meeting of 14 June was based on the date of the call letter, being 14 June which call was authorised by the 13 June meeting. In addition, the inferences sought to be derived from various notes on word processing documents, in my view, are only equivocal and speculative and provide no support of any substance for a conclusion that there was no meeting. Another consideration which influences me is the improbability that parties who intended a carefully calculated course of deception would be likely to make such obvious errors and allow such discrepancies as occurred in the present case. The nature and extent of such discrepancies weighs heavily against the conclusion urged by Mrs Porteous. There is no suggestion that the directors whose conduct is under attack, are other than experienced and commercially astute, and therefore such a course is improbable.
43 For these reasons I am satisfied that the meeting of 13 June 1995 was held and that the minutes accurately record what took place. I am also satisfied that a resolution making a valid call on the shares was duly passed at that meeting.