JUDGMENT
1 HIS HONOUR : The plaintiff is a 50% shareholder in the first defendant. The first defendant is the holding company of a group of companies referred to in evidence as "the Allied Meridian Group of Companies". I will refer to it as "the Group". The other 50% shareholder is Allied Plant Services Pty Limited.
2 Up until 9 April 1999, there were two directors of the first defendant, the plaintiff and the second defendant Geoffrey Hugh O'Donnell who was associated with Allied Plant Services Pty Limited and the people behind that company, the Williams family.
3 For some time prior to 9 April 1999, Mr Peter B Allen, an insolvency expert was advising the Allied Meridian Group as to its financial problems. Mr Allen says that it was clear to him that the Group had to undergo extensive reconstruction and such a reconstruction was not able to be achieved without the co-operation of the Group's creditors which would only be forthcoming if the plaintiff ceased to be a director of any of the companies in the Group.
4 By 7 April 1999, Mr Allen's investigations had reached the stage whereby he had compiled figures which showed some considerable doubts about the plaintiff's solvency. Mr Allen made Mr O'Donnell aware of those matters on 8 April.
5 On 9 April, when the plaintiff called at the Group's premises, he was handed by Mr O'Donnell a document prepared by Mr Allen. The plaintiff had no prior notice of what was about to happen. The document alleged that the plaintiff was insolvent and that the plaintiff had vacated his office as a director of the first defendant. The plaintiff refused to accept what was in the document. However Mr Allen, who was in attendance at the time, said that the vacation of the office was automatic.
6 Mr O'Donnell then purporting to act as a one director board and following a script prepared by Mr Allen or his staff or solicitors, passed the following resolutions:
"1. That Hugh Charles Gordon be removed as secretary of the company.
2. That Geoffrey Hugh O'Donnell be appointed secretary of the company.
3. That in the opinion of the director, the company is insolvent or is likely to become insolvent at some future time, and an Administrator of the company should be appointed.
4. That Gregory James Robertson of Arthur Andersen be appointed by the Board as Administrator of the company under Part 5.3A of the Corporations Law."
7 Shortly afterwards, similar action was taken with respect to each of the subsidiary companies.
8 The plaintiff says that these resolutions and actions are completely invalid.
9 On 14 April 1999, the plaintiff filed the summons in the present proceedings raising the issues with which I am now dealing. That summons has been twice amended.
10 The proceedings originally came on for hearing before me on 27 April out of the duty judge list on the basis they would take three hours to hear. I was unable to complete them that day and spent the next day and the whole of this morning completing the hearing. I have been much assisted by the submissions of Mr Hammerschlag and Mr Green of counsel for the plaintiff and by Mr Coles QC and Mr Webb for the majority of the defendants. The defendants only incidentally affected by these proceedings appeared by solicitors.
11 The Articles of Association of the first defendant company relevantly provide as follows:
"2(a) ... 'Directors' and 'Board' shall mean all or any number of the Directors for the time being of the Company acting in accordance with these Articles and includes any single Director enabled under Section 221(1) of the Statute.
91. (a) Subject to the Statute:
i. whilst the Company is a proprietary company within the meaning of section 45A of the Statute the number of Directors shall be between one and ten. At least one Director must ordinarily reside in Australia;
ii. in any other case the number of Directors shall not be less than three nor more than ten.
(b) The Company may at any time by resolution increase the number of Directors.
93. In addition to the circumstances in which the office of a Director becomes vacant by virtue of the Statute or by virtue of any order made under the Statute the office of a Director shall ipso facto be vacated:
(a) If he becomes bankrupt or insolvent or suspends payment or compounds with his creditors;
(b) If he be convicted of an indictable offence;
(c) If he becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under any law relating to mental health;
(d) If by notice in writing to the Company he resigns his office PROVIDED THAT no proceedings of the Board shall be invalidated by reason of any Director taking part or concurring therein being then disqualified.
106. The quorum necessary for the transaction of the business of the Directors may be fixed from time to time by the Directors and unless so fixed shall be two. ...
111. The continuing Directors may act notwithstanding any vacancy in their body but if and so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors the continuing Directors or Director may act for the purpose of increasing the number of Directors to that number or of summoning a general meeting of the Company and for no other purpose.
114. If the Company has only one Director in accordance with the Statute then Articles 105 to 113 inclusive have no application to the proceedings of that single Director."
12 In this background, I am asked to consider the following questions:
1. On the true construction of the first defendant's Articles of Association, what is meant by "insolvent" in Article 93?
2. On 9 April 1999, was the plaintiff "insolvent" in the relevant sense?
3. Is the plaintiff a director of the first defendant?
4. If the plaintiff ceased to be a director of the first defendant on 9 April 1999, was it competent for the resolutions in PX16 to be passed?
5. What was the effect on the alleged appointment of an administrator of any defect in the resolution appointing him?
6. Is the plaintiff entitled to relief under s 246AA of the Corporations Law?
7. If question 6 is answered yes, to what relief is the plaintiff entitled?
8. What is the result of the case.
I will deal with each of these matters in turn.
13 1. Article 93(a) contains four separate events which if they happen, cause a director to vacate office. The four events are:
(i) if he or she becomes bankrupt;
(ii) if he or she becomes insolvent;
(iii) if he or she suspends payment;
(iv) if he or she compounds with his creditors.
Whilst I am only concerned with (ii), the presence of the other provisions may affect the construction that the court will place on (ii) when endeavouring to ascertain what the parties meant by the word "insolvent" in the articles; see James v Rockwood Colliery Co (1912) 106 LT 128, 129-130.
14 In this type of situation, the authorities suggest that even though the literal meaning of the article is that a director's seat is to be vacated by the mere fact of an event occurring, the court endeavours to construe the article to require something more to be done before the seat becomes vacant. Further, as Kekewich J said in Turnbull v West Riding Athletic Club (Leeds) Ltd [1894] WN (Eng) 4, 5 (a case dealing with whether a director had automatically lost office because he was interested in a contract), "Moreover natural justice required that the director should have an opportunity of saying what occurred to him on his own behalf. The proper course was to give notice to the director, and to have a board meeting specially summoned for the purpose of considering his position - that is to say, the matter should be placed on the agenda, in order that the director might have the opportunity of explaining and justifying his conduct."
15 The same view had been adopted by the House of Lords 30 years earlier in R v Saddlers' Company (1863) 10 HLC 404; 11 ER 1083. At p 458 (1104) Lord Westbury said that it was necessary to give the director concerned an opportunity of being heard before a resolution could be passed that his position had become void. However, it would seem from reading the other judgments that not all the Judges who heard that case would have agreed with that proposition.
16 The word "insolvent" can have many degrees of meaning. In particular it can have the meaning of "found insolvent", it can mean "actually in a state of not being able to pay one's debts as and when they become due" or it can mean "some open and notorious admission or acknowledgment of insolvency".
17 As one would expect in judgments dealing with a variety of words in a variety of contexts, not all the decisions in this area appear at first sight to be completely reconcilable. However, the trend of the cases is that this third meaning is the preferred meaning in articles of this nature; see for instance the Saddlers' Company case; New Zealand Insurance Company Ltd v Bevin [1936] NZLR 789. If this were not the case, then it would be difficult to know whether a person who had participated in a meeting for many years as a director had in fact unknowingly to anyone else been insolvent, which might have the effect of invalidating every board meeting which he or she attended (see the argument of counsel in London and Counties Assets Co Ltd v Brighton Grand Concert Hall and Picture Palace Ltd [1915] 2 KB 493, 499).
18 The third meaning was not accepted by the English Court of Appeal in the Brighton Grand Concert Hall case because of the contexts in which the word "insolvent" occurs though the court also said that it was important to realize that the Saddlers' case was decided before formal adjudications in insolvency became part of the law. This point had also been made by Hamilton J in the Rockwood Colliery case at p 129. The Queensland Full Court took the same view in Minion v Graystone Pty Ltd [1990] 1 Qd R 157.
19 In the instant case, the three other insolvency type events mentioned in Article 93(a) are all events which are public and notorious, the making of a bankruptcy order, a composition with creditors, or suspending payment. It seems to me that these reinforce the view that it is to be an open and notorious admission of insolvency or active insolvency which is meant by the word "insolvent" in Article 93. This also fits in with the scenario that for an ipso facto vacation one is looking to see something which is readily provable, not the compilation of an accountant's report of which the propositus has no chance to answer.
20 Mr Hammerschlag says that this construction also fits in with giving semantic significance to the opening words "In addition to the circumstances in which the office of a Director becomes vacant by virtue of the Statute...". He points out that the Corporations Law under s 224(1)(c) vacates an office if a person "becomes insolvent under administration".
21 Mr Hammerschlag submits that the opening words mean that something more than adjudication of insolvency was the intention of the article. A public definite statement of insolvency is the sort of event the article has in mind. It is appropriate to look at this, but the point I believe goes against Mr Hammerschlag rather than for him because the Corporations Law covers most of the situations where there is a formal declaration of insolvency leaving the articles to operate in the non-formal areas.
22 It must be remarked that this proposition loses a lot of its force because on any natural reading of the article there is considerable overlap between s 224 of the Law and the articles.
23 Mr Coles QC says that it is important to read the four lettered paragraphs of Article 93. If one does so, one can see that one of the specified events is becoming of unsound mind. This is an event which it is not really possible to show has occurred by declaration. A fortiori is this so if the "unsound mind" event in the article is in addition to the provisions of s 224(1)(i) of the Law.
24 Mr Coles QC stressed the approach of Buckley LJ in the Brighton Grand Concert Hall case at pp 501-2 where this "unsound mind" consideration told against adopting what I have called the third meaning.
25 The defendants also cited Nile v Wood (1988) 167 CLR 133 and Registrar-General v Harris (1998) 45 NSWLR 404, but these two cases were decided in different contexts and are not of assistance in the present case.
26 A telling point made by Mr Hammerschlag was that unless one could be fairly sure that an event had occurred, there could never be any certainty as to whether all or any of the directors had vacated office. As it suffices that at any one moment in time after a director's last election to the office, insolvency vacates the office, one would have to be sure that at no moment was a member of the board technically insolvent. I agree that this is a strong consideration.
27 Mr Hammerschlag made submissions based on the history of provisions of this nature in the Companies Acts over the last century. As he points out, there has been a development from 1936 Table A which merely vacated the office on a director becoming "bankrupt" up to s 224(1)(c) of the present Law which refers to a director becoming "insolvent under administration". In each case the legislation dealt with a formal declaration. Whilst this submission was interesting, I do not consider that it assists on the construction of an article which goes beyond the events stated in the legislation as a cause of vacation of a director's office.
28 Mr Hammerschlag next says that Article 93(a) is a penal provision and must be construed strictly. I do not think this line of enquiry is of assistance. I agree with Mr Coles QC that the article does not deprive the director of property, merely of an office. In any event, it has as much an aura of protection of the company about it as penalty of the director concerned.
29 As with very many questions of construction, there are pointers either way. However, in my view, when one looks at the context, I am of the view that the third meaning of the word "insolvent" is the applicable one in the instant context. I consider that apart from the reference to "unsound mind" the events specified generally require an objective observer to have an event about which there can be some certainty that it has occurred.
30 I would note, that even if the other view were accepted, on the authorities I have cited, there needs to be an opportunity given to the alleged insolvent director to explain away a prima facie view that he is insolvent. This opportunity was not given in the present case.
31 Thus, question 1 must be answered "Some open and notorious admission or acknowledgment of insolvency".
32 2. It follows that the answer to this question must be "No".
33 In case the matter should go further, if the test were "was the plaintiff able to pay his debts out of his own resources on 9 April 1999", on the evidence before me at the moment I would have considered that the answer would be that the plaintiff was insolvent in this sense.
34 It must first be noted that, by assuming the role of plaintiff, the plaintiff has accepted the onus of showing that he was not insolvent on 9 April 1999.
35 The evidence shows that it is more likely than not that the plaintiff could not pay his ordinary debts. The key indicator of this is his continuous non-payment of debts.
36 The defendants' list of non-payments set out in paragraph 33 of their submissions paints a picture of a man with a large number of small debts which he is just not paying. Some of the creditors are even obtaining judgment and sending in the Sheriff.
37 The plaintiff's answer that he has chosen not to pay them is one which I do not accept.
38 A key instance of the problems is the cancellation of the plaintiff's American Express card in February this year. He owed American Express some $16,000 and did not pay. He says that he explained to American Express that these were all company debts and he was endeavouring to get the company to honour the expenses but American Express naturally enough was not prepared to listen to that sort of explanation and cancelled the card. A business executive who has a personal American Express card and does not pay, even if he has a right to claim back from the company, is hardly the sort of person one would expect to be solvent. American Express then sent debt collectors and they were not paid, the plaintiff's principal Visa card was used to its limit, a judgment debt was obtained from a creditor and that creditor was only paid when the Sheriff came round for execution at which time the debt was paid, the plaintiff saying "That was a point in time that I chose to pay the debt".
39 Another small debt that was not paid was one in respect of the plaintiff's mobile phone which was cancelled for a debt of $1325.
40 I respectfully agree with the observation of McPherson JA in Minion v Graystone Pty Ltd [1990] 1 Qd R 157, 162 that non-payment of relatively small debts when they fall due is often as good a pointer to insolvency as one can get.
41 Then there were large debts. On 10 February 1999 the National Australia Bank made a demand under a guarantee for $4,373,000. The plaintiff is not able to pay.
42 The plaintiff says that the debts that he owes as surety for the Group should not be held against him unless there is taken into account and off-set the indemnity that the Group will have to provide.
43 This may be theoretically true, but it is not a complete answer for a number of reasons. First, the debtor cannot defend a claim of insolvency on the basis that given time he could pay his debts: Rees v Bank of New South Wales (1964) 111 CLR 210, 230. Secondly, there is no right at law to an indemnity before payment, Abigroup Ltd v Abignano (1992) 39 FCR 74, the only right is quia timet relief in equity which has not yet been sought. Thirdly, as the plaintiff owes the Group money for loans he has received, it may be that he would not get quia timet relief. Fourthly, on the evidence before me, there is very little likelihood of the Group of companies reimbursing any surety anything like 100 cents in the dollar for expenses paid on behalf of the companies.
44 When one takes this into consideration with the plaintiff's capital position, the financial unhealth of the plaintiff appears quite obvious. The plaintiff's riposte to that is that he has assets which would realize far more than what he owes and that many of the personal debts are debts really owed by the Group of companies. He cannot see why he should pay these debts rather than the Group, even though they are debts which people can sue him personally to recover. I am not impressed by the values in the list of assets given by the plaintiff. It seems to me that many of the assets are grossly over-valued.
45 As I say, on the balance of probabilities on the usual commercial test Mr Gordon was insolvent on 9 April 1999.
46 3. It follows from my answer at the beginning of question 2 that the answer is "Yes". In addition to that ground there is the ground that no natural justice was ever afforded to Mr Gordon to explain the position and put facts contrary to Mr Allen's opinion after a short but reasonable time for consideration of what was alleged.
47 4. In view of my answer to question 3, question 4 does not arise. However, in view of its possible relevance on appeal and in deference to the time spent by counsel in arguing it, I will give brief reasons.
48 This question depends on the construction of Article 114. This article which is under the heading "SINGLE DIRECTOR COMPANY" which I have already set out, but which I will repeat, is as follows:
"114. If the Company has only one Director in accordance with the Statute then Articles 105 to 113 inclusive have no application to the proceedings of that single Director."
49 Mr Hammerschlag for the plaintiff submits that on its proper construction Article 114 does not apply where there is only one director by reason of a vacancy. He puts that if all that was required to trigger Article 114 was for there to be in fact one director at any one time the words "in accordance with the Statute" would be otiose. He puts that Article 114 is intended to cover a company intended at the time in question to have only one director which became permissible after December 1995 under s 221(1) of the Corporations Law.
50 The Memorandum and Articles of Association were subscribed to on 23 August 1996 and the company incorporated as of that date. Thus s 221(1) was in place at the date of incorporation so that the construction urged upon me by Mr Hammerschlag is inherently possible.
51 When one is construing Articles of Association, one must construe them as a whole and not over-emphasize the provisions of any particular article: New South Wales Rugby League Ltd v Australian Rugby Football League Ltd (1999) 30 ACSR 354, 372. The articles provide that there shall be between one and ten directors (Article 91) but Article 106 fixes the quorum as two. Article 111 then provides that continuing directors may act notwithstanding any vacancy but if the number is reduced below the quorum "The continuing Directors or Director may act for the purpose of increasing the number of Directors to that number or of summoning a general meeting of the Company and for no other purpose."
52 Mr Coles QC distinguished Article 106 as providing that the quorum is two only if there are two or more directors. This is possible, but does not quite fit meaningfully into the articles as a whole.
53 Mr Coles QC says that Mr Hammerschlag's submissions do not give any semantic significance to the words in Article 114 "in accordance with the Statute". He submits that if one reads s 221(1) of the Corporations Law and Articles 2(a) and 91, it can be seen that the articles expressly provide, in accordance with the Statute for there to be only one director and what the regime will be under which that director will act.
54 Mr Hammerschlag denies this submission and indeed says that the words "in accordance with the Statute" in fact assist his submissions. He says that if all that were necessary to enliven Article 114 was for there to be one director per se at any time, these words would be otiose.
55 The articles must be construed in their factual matrix. At all material times there were two directors. The shareholdings were split 50/50 between two families. It was always envisaged that they would be represented at board level at least up until the point where the interests of the creditors and others might have to be taken into consideration. This is so despite any inchoate or formal shareholders' agreements that might have existed.
56 When one looks at this fact and the collection of Articles 106-113, particularly Article 111, it seems to me that the articles have made specific provision for what might have occurred in the instant case and Article 114 is directed to a quite different type of situation. Accordingly I agree with the submissions that were made by Mr Hammerschlag.
57 It is necessary briefly to note the consequences of this. First, it must be remembered that in view of what I have said in question 2 this matter is irrelevant. However, if I have erred in my answer to question 2, then it follows that Mr O'Donnell did not have the power to pass any resolution appointing an administrator under s 436A of the Corporations Law and accordingly the so-called administration of the company is a nullity unless someone applies to validate it under another provision of the Corporations Law.
58 5. As I have held that the plaintiff was a director and as it was not competent for Mr O'Donnell to pass the resolution for the appointment of an administrator by himself, I need to consider the status of the administration.
59 In Wagner v International Health Promotions (1994) 15 ACSR 419, Santow J held that where the resolution appointing the administrator is invalid, there is nothing that the court can do to save it. Thus the first defendant must be considered not to be under administration. A declaration should be made to this effect.
60 6. I now have to turn my consideration to whether there has been made out a case for relief under s 246AA of the Corporations Law. Essentially this section provides that when the affairs of a corporation are being conducted in a manner that is oppressive or unfairly prejudicial to a member, then the court can make orders to ameliorate the position.
61 The prime thrust of the plaintiff's case is that there was a deliberate scheme to remove the plaintiff from the board so as to further a reconstruction programme to which the plaintiff was considered to be an obstacle. There is little doubt that this was so. However, whether this conduct was oppressive or not depends to a degree on how far the plaintiff was entitled to continue to be a member of the board.
62 Ordinarily when one is looking to see what are the rights and expectations of members of a corporation, one looks at the basis of association in the Memorandum and Articles of Association which "adequately and exhaustively" provide those rights (Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, 379). However, in appropriate cases, particularly in companies which are quasi partnerships the superimposition of equitable considerations may mean that the expectations are to be found also de hors the articles and that one may get a situation where there was a reasonable expectation by the shareholders' agreement or the fact of entering into the company that a representative of each "partner" would be a director; see Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8, 14.
63 I reviewed these authorities in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688. I said at p 703, after discussing the authorities that one needs to spell out three provisos to the proposition that a two person company may well indicate that there is a reasonable expectation that each person will have a representative on the board, "The first is that the mere fact that the company is a quasi-partnership is insufficient to raise a legitimate expectation that each partner will be able to take part in management. The second is that mere failure to agree between the majority and the minority is not usually of itself sufficient to demonstrate oppression ... . The third is that the legitimate expectation does not last forever. It will be lost, if it is no longer practicable for the right to the expectation to continue."
64 This third point was based on what Lord Templeman said in Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413, 417-8 and by Robert Walker J in R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, 295, that the expectation if it exists is limited to the period until "for some other reason a change in management and control became necessary." That point will be reached, as I said in Fexuto, where the two directors just cannot get on with each other and where the company's survival depends upon the company being able to be managed by one of them or by neither of them. It seems to me too that if the position was reached where the company must be wound up because it is in debt and the creditors will not refinance whilst one person is still a director, then any legitimate expectation of being a director will come to an end. On the evidence before me at the moment, that point has been reached.
65 Although I believe there was a legitimate expectation that Mr Gordon be a director that expectation only lasted so long as it was practicable for that to occur.
66 Accordingly, the legitimate expectation is not enough to enable the plaintiff to succeed under s 246AA of the Corporations Law.
67 However, the plaintiff also relies on the activities of and leading up to 9 April 1999 which I have already summarised earlier in these reasons.
68 My view is that the defendants did bona fide believe that what they were doing was for the benefit of the company, it being the only way in which they considered the company could survive. However, that finding is not necessarily enough to defeat a claim under s 246AA of the Corporations Law. In Re Southern Resources Ltd (1989) 15 ACLR 770, 791, Perry J said, "It has been held by high authority that the scope of the duty imposed by (s 246AA) is wider than the fiduciary duty owed in equity, as a decision of directors which is both bona fide and in the interests of the company as a whole may none the less be held to be a breach of the section." These words were obiter and were not affected by the partial reversal of the decision by the South Australian Full Court in Southern Resources Ltd v Residues Treatment & Trading Co Ltd (1990) 3 ACSR 207.
69 The "high authority" to which Perry J referred in the passage I have quoted is principally a reference to the judgment of Brennan J in Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, 472. His Honour then said that the question of unfairness is one of fact and degree and the court must determine taking into account the view which the majority formed and allowing for any special skill knowledge and acumen possessed by the majority as to whether the course taken by the majority was unfair viewed as an objective fact. It should be observed that Wayde's case made it clear that whilst the effect of the defendant's decision was harsh indeed on the plaintiff it had not been shown objectively that the decision operated unfairly and oppressively in a prejudicial way to the plaintiff and accordingly the proceedings were properly dismissed.
70 In the instant case the material currently before the court would tend to suggest that unless there is a refinancing there is no real hope of the company surviving. The material also strongly suggests that there is no real hope of refinancing whilst the plaintiff remains a director. Objectively speaking then, a reasonable board of directors would take steps to remove the plaintiff as a director in the interests of the shareholders as a whole.
71 Furthermore, the evidence shows that the plaintiff joined in letters to creditors which went along with a restructure as proposed by Mr Allen: it would seem that the proposal was only abandoned by the plaintiff when some of his conditions were not agreed to.
72 On the facts, the only circumstances which would give rise to oppression are whether the director's methods of going about removing the plaintiff amounted to unfair and prejudicial conduct. Associated with this is the scheme devised to sideline the plaintiff so as to force the company into administration.
73 As the plaintiff took immediate action which has declared these steps were a nullity I cannot see how these had the effect of causing the plaintiff undue prejudice.
74 Accordingly in my view the case under s 246AA fails.
75 7. It is accordingly unnecessary to consider what would be the order had the case under s 246AA succeeded. The defendants submit that no order would be made. I have some sympathy with that submission. However, my preliminary view is that the only order that would have been made would be to order the defendants in the Allied Plant Services camp to purchase the plaintiff's shares. On the material before the court the plaintiff's shares are virtually worthless so that this order would not be of much comfort. It may be that some more detailed order would be required, but this would involve the plaintiff repaying to companies in the Group the moneys that he has borrowed because, unless those companies can be assured of receipt of these moneys, the value of the shares must be questionable.
76 8. Accordingly there must be a declaration that the plaintiff remains a director of the first defendant and a declaration that the resolution appointing an administrator is void. The claim under s 246AA of the Corporations Law is dismissed. I will hear counsel as to costs.
[AFTER DISCUSSION]
77 I will adjourn these proceedings until 9.50 am on 3 June 1999 to consider short minutes of order and questions of costs. The person who purports to be administrator has liberty to file a motion returnable then for an order that his disbursements be paid by the first defendant company.