Hickey v Aselford & Anor [2003] NSWSC 185 | Case summary

Dyltax was Shareholder One. 5 Clause 5(3) of the shareholders' agreement provided that as from the date of the agreement Shareholder Ten was entitled to nominate and appoint a director who would initially be Mr Roche. Driftfair Pty Ltd ("Driftfair") was Shareholder Ten. Clause 5(2) was in the following terms: "Any person appointed as a Director may be removed or replaced only by the party who nominated the person." 6 Clause 18.1 of the constitution provided that the directors or the company might by resolution remove a director from office. 7 Because of ill health, Mr Roche resigned as a director. The directors in office following his resignation and at the time of the events in question were the plaintiff and the defendants. A dispute developed between the parties. On 10 March 2003 the plaintiff sent a letter to each defendant on the letterhead of Tradementors signed by him as managing director in which he purported to dismiss them as directors. 8 The first defendant gave notice to the plaintiff and the second defendant by email sent at 5.17 pm on 13 March 2003, that he was calling meeting of the directors of the Tradementors at the offices of Herbert Geer & Rundle in Sydney at 10.00 am the following day to consider a resolution that the company appoint Michael John Morris Smith as voluntary administrator pursuant to the Corporations Act 2001 (Cth), s 436. The plaintiff responded by email at 5.49 pm stating that unless he was advised of the cancellation of the meeting by 6.00 pm that night he would seek interlocutory relief ex parte before the duty judge the next morning. At 9.28 am on 14 March 2003, Bryson J issued an injunction restraining the defendants from resolving or purportedly resolving that Tradementors be placed in administration. 9 Shortly before 10.00 am on 14 March 2003, the defendants met with Karen Louise McManus, a solicitor in the employ of Herbert Geer & Rundle at their offices. She was called to reception and met Ian Sanderson who informed her that Bryson J had issued an injunction. She signed an acknowledgment of service of the document at 9.55 am. When she returned to the meeting it had already concluded. The minutes of the meeting signed by the first defendant recorded a resolution that in the opinion of the directors Tradementors was insolvent or likely to become insolvent, a resolution that the company appoint Mr Smith as voluntary administrator and a resolution that the directors execute a deed of appointment of the voluntary administrator. The deed was signed by the defendants and Mr Smith. 10 Mr Radojev who appeared for the plaintiff argued that the resolution placing Tradementors in administration was void for five reasons. 11 First, he argued that the defendants ceased to be directors of Tradementors upon service of the notices of 10 march 2003. It was submitted that they were appointed by the plaintiff and, in terms of clause 5(2) of the shareholders' agreement, the plaintiff was entitled to remove them. I reject that submission. 12 The shareholders' agreement operated as from 28 February 2002. It did not operate with respect to the initial board of directors specified in the schedule. In consequence, the defendants were not appointed by the plaintiff and he was not entitled to act under clause 5(2). 13 If I be wrong in that construction of the shareholders' agreement, the minutes of the shareholders' meeting of 19 September 2001 attended by the plaintiff and his wife indicate that the meeting resolved that the defendants be appointed directors. They were appointed by those persons at the meeting and the shareholders they represented and not by the plaintiff alone. In my view clause 5(2) of the shareholders' agreement applies when a single person nominated the director in question and does not apply where that person is one of a number of persons attending a meeting at which a resolution appointing a director is passed. I am of the view that for this reason as well, clause 5(2) of the shareholders' agreement was not enlivened in the instant circumstances. 14 Dyltax and Driftfair were the only parties entitled to appoint directors. I regard clause 5(2) of the shareholders' agreement as limited to appointees of Dyltax and Driftfair. With respect to any other director, clause 18.1 of the constitution applied. If this were not so and the only power to remove a director was contained in clause 5(2) it would create the absurd result that a director appointed at a general meeting and not by Dyltax or Driftfair could not be removed. 15 Section 203C(a) of the Corporations Act 2001 (Cth) provided that a proprietary company may by resolution remove a director from office. That is a replaceable rule. In accordance with s 135(2), cl 18.1 of the constitution of Tradementors modified the rule. It is obviously a matter of significance that provision be made for the appointment and removal of directors. I would be loath to regard cl 18.1 as having been abrogated by cl 5(2) of the shareholders' agreement. 16 There are indications within cl 5 of the shareholders' agreement that the constitution was an integral part of the arrangements between the parties. Directors were to be appointed under the constitution and meetings of the board were to be convened and held under the constitution. In my view that integrity is preserved by the interpretation I have placed on cl 5(2). Except for representative directors appointed by Dyltax and Driftfair, the removal of directors is governed by cl 18.1 of the constitution. 17 Mr Radojev argued that because Dyltax was present at the meeting of shareholders of 19 September 2001 through his representation and because a letter from Dyltax consenting to the appointment of the defendants was tabled, I should regard the defendants as having been appointed by Dyltax. I reject that submission. As I have indicated the defendants were appointed by those present at the meeting and not by any single person so present or by any single shareholder represented by a person present at the meeting. In any event, it was not Dyltax that purported to remove the defendants. It was the plaintiff, purportedly acting in his capacity as managing director of Tradementors. 18 It follows that the defendants were not removed as directors upon service of the notices of 10 March 2003 and the resolution for voluntary administration was not void on that account. 19 Mr Radojev's second argument was that the meeting was held prematurely and was void on that account. The plaintiff did not intend to attend the meeting called for 10.00 am on 14 March 2003. In those circumstances I doubt that the convening of the meeting shortly before the appointed hour would invalidate the resolution to enter voluntary administration. 20 I do not need to decide that point, however, because the evidence clearly revealed that the meeting commenced at the appointed hour. The second defendant was cross-examined. He said that he had synchronised his watch with the telephone time service a few days before the meeting and he and the first defendant counted down the time and commenced the meeting at exactly 10.00 am. He said the meeting concluded at 10.03 am and Ms McManus returned to the meeting room at 10.04 am or 10.05 am. The first defendant confirmed the counting down to the starting time and confirmed that Ms McManus returned at 10.05 am. Ms McManus was also cross-examined. Her estimate of the time she spent with Mr Sanderson was six to seven minutes or longer. She said that on receipt of the document she photocopied it and then, having read and signed the acknowledgement of service at 9.55 am, she again photocopied the document. She said Mr Sanderson was anxious to make a telephone call and since there was no telephone in reception she took him to an office and remained with him for security reasons while he made that telephone call. When she returned to the meeting room she was informed that the meeting had concluded. She was given the minutes of the meeting already signed by the chairman and the executed deed of appointment of Mr Smith. I find that the meeting was not held prematurely. 21 The third submission relied upon cl 5(5)(d) and cl 5(5)(f) of the shareholders' agreement. The former provided that unanimous approval by all directors was required for a decision to grant any encumbrance over any assets of the company and the latter required unanimous approval of a decision to delegate any powers from the board. 22 It was argued that in terms of s 437B, s 437C and s 437D of the Corporations Act 2001 (Cth), by resolving to enter voluntary administration the board had delegated its powers to Mr Smith and had vested the assets of the company in Mr Smith and thereby encumbered them. I reject those submissions. 23 Section 437B of the Corporations Act 2001(Cth) provides that when performing a function or exercising a power as an administrator the administrator is taken to be acting as the company's agent. A statutory agency is clearly established. But that does not mean that the directors have delegated their powers to the administrator. The administrator's authority arises by virtue of the statute and requires no delegation on the part of the directors. 24 Section 437A(1)(a) of the Corporations Act 2001 (Cth) provides that while the company is under administration the administrator has control of the company's business, property and affairs. But that does not mean that the property of the company is vested in the administrator. On the contrary, s 437D(1) provides that the section applies where a company under administration purports to enter into, or a person purports to enter into on behalf of the company under administration, a transaction or dealing affecting property of the company. Section 437D(2) provides that the transaction is void unless the administrator entered into it on the company's behalf or the administrator consented to it in writing before it was entered into or it was entered into under an order of the court. 25 The plaintiff's fourth argument was that contrary to clause 22.1 of the constitution, the meeting of 14 March 2003 had not been convened by giving reasonable notice. 26 What is a reasonable time is a question of fact. It depends upon the circumstances and its limit is determined by what is fair to both parties (Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 567-568). The plaintiff led no evidence that the notice was insufficient. He responded and demanded that the meeting be cancelled. He raised no suggestion that the notice was unreasonably short. The plaintiff has failed to establish to my satisfaction that the notice was not reasonable. 27 Finally, Mr Radojev challenged the defendants' opinion that Tradementors was or was likely to become insolvent. The defendants were cross-examined. It was not put to them that their opinion recorded in the resolution of the meeting of 14 March 2003 was ill-founded or not genuinely held. 28 On 7 March 2003 the wife of the plaintiff, the secretary of Tradementors, sent an email to the first defendant saying $25,000 had been received the previous night and she had only put through one payment and hopefully she would get some money in the next few days. The opening comment: "Won't have to mortgage the dog after all!!" is an indication that things were desperate. At a management meeting on 4 March 2003, the wife of the plaintiff tabled a document setting out the financial position of the company. It showed a cash balance of $4,741.98 and payments due of $29,745.45. Taking account of the $25,000 received on 6 March 2003, a small deficit of $3.47 was revealed. There was a dispute with respect to one item it being argued that it ought to have been $1,741 instead $984.86. The letters by which the plaintiff purported to terminate the directorships of the defendants contained a statement that salary base had been reduced to 50% until such time as the company was in the position to review this. Tradementors was reliant on others to pay its debts. It would only commence to generate a cash flow if a joint venture was put in place. The plaintiff gave general evidence that Dyltax would cover any shortfall. On the evidence before me, I am of the view that the defendants were entitled to form the opinion they did that Tradementors was, or was likely to become, insolvent.

Hickey v Aselford & Anor

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