In the matter of Molopo Energy Limited; Molopo Energy Limited v Keybridge Capital Limited

Background 5The plaintiff is a listed company. It has subsidiaries in Canada and the United States. It is the ultimate holding company of Molopo Energy Canada Limited ("MECL"). MECL was a party to oil and gas drilling joint ventures with 3105682 Nova Scotia ULC ("310") and Shallow Gas Drilling Corp ("Shallow Gas"). 6In March 2011 MECL sold its interests in the joint ventures, including its interest in certain lands in Canada, to Legacy Oil and Gas Inc ("Legacy") for CAD$188 million. The terms of the sale included warranties given by MECL that it was not in breach of the joint ventures with 310, as well as indemnities from MECL in favour of Legacy. The plaintiff guaranteed MECL's obligations to Legacy. 7The quarterly financial report for the plaintiff and its subsidiaries as at 30 September 2014 discloses that they then held cash or cash equivalents of US$58.5 million. 8The plaintiff, MECL, and some former employees of MECL, are defendants or cross-defendants in five proceedings commenced in the Supreme Court of Alberta. Those proceedings have been brought by 310 and by Shallow Gas. 9The first proceeding by 310 against MECL was commenced on 4 March 2011. 310 alleges that MECL breached the joint venture agreement and breached alleged fiduciary duties and duties of good faith in various respects. 310 claims that it was wrongly denied a 25 per cent ownership interest in certain joint venture lands. It claims an account of 25 per cent of revenue. It also makes a claim for what it calls general damages in the sum of CAD$35 million and a claim for CAD$1 million for punitive and aggravated damages. It also claims GST and indemnity costs. 10In a second proceeding brought by 310 against Legacy, 310 alleges that Legacy wrongly adopted certain notices of default issued by MECL and wrongly adopted penalties that had been imposed on 310 by MECL. It also alleges breaches by Legacy of its performance of the joint venture agreement. Part of the claims against Legacy overlap with the claims against MECL. 11Legacy has cross-claimed against the plaintiff on its guarantee of MECL's warranties and indemnity. 12310's claims against Legacy include an accounting for 25 per cent of revenues, CAD$90 million in general damages and CAD$1 million in punitive and aggravated damages, GST and indemnity costs. It is not clear how much of that claim against Legacy could be the subject of indemnity, but Legacy seeks a full indemnity against the plaintiff and MECL. 13On 27 February 2013, 310 brought proceedings against three former employees claiming that they induced MECL to breach the joint venture agreement. It claims more than CAD$65 million against them. 14Clause 11 of the plaintiff's Constitution requires the plaintiff to indemnify current and former officers of wholly owned subsidiaries in respect of liabilities incurred in acting for the subsidiaries, provided that they acted in good faith. 15The plaintiff has Directors and Officers Liability Insurance, but the insurance cover is less than the claim. The insurer has reserved its position in relation to a dishonesty exclusion. 16On 11 December 2014, 310 brought proceedings against the plaintiff, essentially alleging that the plaintiff is liable to 310 for inducing a breach of contract and inducing breaches of other duties by MECL. 17Shallow Gas filed a Statement of Claim against MECL and Legacy on 31 January 2014 claiming damages on the basis that their predecessor in the joint venture had negligently drilled wells that were not to the agreed or optimal depth. Shallow Gas claim damages estimated to be CAD$6 million and other relief. That claim has been summarily dismissed but an appeal is pending. 18If the claims made by 310 and Legacy against the plaintiff in the litigation in Alberta are successful for the amounts claimed, then the plaintiff would have liabilities that exceed all of its capital. 19In the interim financial report of the plaintiff and its subsidiaries for the half year ended 30 June 2014, the plaintiff's directors state that on 2 September 2014 the company announced that it was evaluating the possibility of a return of capital to shareholders in an amount of approximately one-third of the company's cash reserves which, as at 30 June 2014, were US $60.8 million. It described the legal disputes to which the company was subject as follows: "As described in Note 7, the Company was served a statement of claim ('Claim') in March 2011 by a former joint venture partner ('JV Partner') that specified damages of Canadian ('C') $36 million plus further unquantified damages. Based upon an extensive review of the transactions that gave rise to the Claim, the Company has determined that a provision of C$8.4 ($7.9) million is prudent for an amount related to certain lands which were acquired and subsequently sold by the Company that contractually should have been offered to the JV Partner. However, the Company believes that the majority of the claim is completely without merit and intends to vigorously defend its position. As described in Note 10, the JV Partner has also served a statement of claim in February 2014 ('Purchaser Claim') naming the purchaser of the Spearfish project ('Purchaser') as a defendant that specified damages of C$91 ($85.3) million. The Purchaser has filed a third party claim seeking indemnity from Molopo Energy Canada Ltd ('MECL') in accordance with the Spearfish project agreements should the JV Partner be successful. As described in Note 10, the JV Partner has also served a statement of claim in 2013 ('Ex-employee Claim') naming three ex-employees of MECL as defendants that specified damages of C$67 ($62.8) million each. Although not named in the lawsuit, MECL may have a duty to indemnify the ex-employees in accordance with the Alberta Business Corporations Act. The Company believes the Purchaser Claim and the Ex-employee Claim are frivolous and completely without merit. In addition, the Company believes the amounts sought grossly exaggerate any amount that would be awarded in the circumstances as any damages which may be established in any of the multiple lawsuits brought by the JV Partner can only be recovered one time. The above matters are continuing in the ordinary course with the Court of Queen's Bench of Alberta, Canada. No court dates have been set and the standard preparatory litigation processes are being undertaken." 20By Note 7, the company has made a provision for what is described as the "legal claim" as at 30 June 2014 in the sum of US $7,872,000. The note to that provision states: "In March 2011, Molopo Energy Canada Ltd ('MECL'), a wholly owned subsidiary of Molopo was served with a statement of claim ('Claim') that had been filed with the Court of Queen's Bench of Alberta, Canada ('Court') by a joint venture partner ('JV Partner') in the Spearfish project that was sold in March, 2011. The JV Partner is seeking various court orders, declarations and specified damages of C$36 ($33.7) million plus further un-quantified damages. On 8 April 2011, MECL filed a statement of defence and a counterclaim in respect of the above matter with the Court. Subsequent to the filing of the statement of defence, the Company undertook an extensive examination of the transactions that gave rise to the amounts in dispute. This examination revealed that an amount was likely owing to the JV Partner for certain exploration lands that were acquired and subsequently sold by the Company that contractually should have been offered to the JV Partner. As a result, a provision was reflected in the accounts. The original provision reflected in the accounts in 2012 was a net C$5.0 ($4.7) million. In early 2013, the JV Partner essentially settled the counterclaim by making a payment of C$3.4 ($3.2) million to the Company, which increased the net provision to C$8.4 ($7.9) million. During 2013, the Company specifically disclosed C$5.0 ($4.7) million of the C$8.4 ($7.9) million reflected in the accounts as negotiations were in progress with the JV Partner. These negotiations have been unsuccessful and it appears that a lengthy litigation process is probable. The matter is continuing in the ordinary course with the Court. No court date has yet been set and the standard preparatory litigation processes are being undertaken." 21Note 10 to the financial statements is headed "Contingencies and Commitments": "As indicated in Note 7, in March 2011, MECL was served with a Claim in the amount of C$36 ($33.7) million by a JV Partner in the Spearfish project that was sold in March 2011 and the Company has recognized a provision in the amount of C$8.4 ($7.9) million for the exploration lands that were acquired and subsequently sold by the Company that contractually should have been offered to the JV Partner. On 12 March 2013, the Company became aware that the JV Partner had filed a statement of claim ('Purchaser Claim') in the Court naming the purchaser of the Spearfish project ('Purchaser') as a defendant and on 24 February 2014, the Company became aware that the Purchaser Claim had been served on the Purchaser. The Purchaser Claim seeks several forms of relief, including punitive and aggravated damages of C$1.0 ($0.9) million and general damages of C$90.0 ($84.4) million. The Purchaser has filed a third party claim seeking indemnity from MECL should the JV Partner be successful in the ultimate outcome of the Purchaser Claim, in accordance with various agreements related to the sale of the Spearfish project. The JV Partner alleges, in both the Claim and the Purchaser Claim, that the Company improperly placed the JV Partner in default in early 2011 for non-payment of amounts it owed MECL. The Company's extensive examination of the transactions that gave rise to this portion of the Claim and Purchaser Claim indicates that the Company actions were fully in accordance with the governing agreements. During 2013, the Company became aware that the JV Partner had also served a statement of claim ('Ex-employee Claim') in the Court naming three ex-employees of MECL as defendants. The Ex-employee Claim seeks several forms of relief, including general and punitive damages of C$67.0 ($62.8) million each. Although not named in the lawsuit, MECL may have a duty to indemnify in accordance with the Alberta Business Corporations Act unless it is determined that the ex-employees did not act honestly and in good faith. The Company has engaged its directors' and officers' insurers and has secured legal counsel for the ex-employees as it believes this claim is without merit and will assist the ex-employees to vigorously defend the action. In addition to the Company believing that Purchaser Claim and Ex-employee Claim are frivolous as the amounts sought grossly exaggerate any amount that would be awarded in the circumstances, if damages are established in any of the multiple lawsuits brought by the JV Partner, such damages can only be recovered one time. The above matters are continuing in the ordinary course with the Court. No court dates have been set and the standard preparatory litigation processes are being undertaken. Spearfish Farm-in Lawsuit On 4 February 2014, MECL along with the purchaser of the Spearfish project, were served with a statement of claim in the amount of C$6.0 ($5.6) million by a company that had participated in a 2009 farm-in agreement with a MECL predecessor company for the drilling of three test wells into an area that was in the Spearfish project ('Farm-in Claim'). The Company believes that the Farm-in Claim is without merit and intends to vigorously defend the statement of claim." 22The announcement referred to in the financial statement that was made on 2 September 2014 was an announcement by the plaintiff to the Australian Stock Exchange. In it the company announced that: "The board has resolved to adopt a 'three-pillar' strategy of dividing the company's cash reserves in three parts: Approximately one[-]third set aside for investment in the Western Canada sedimentary basin, in accordance with the previously enunciated strategy; Approximately one-third set aside for passive investments in Australian oil and gas companies, managed by an investment committee based in Australia; and Approximately one-third set aside for capital management initiatives in the form a proposed return of capital to shareholders, subject to legal advice as to whether and to what extent the litigation to which Molopo is a party allows Molopo to reduce its capital. The company has commenced working with legal counsel to obtain confirmation of its ability to execute a return of capital, and upon receipt of such confirmation it is the company's present intention to call a meeting of shareholders to seek approval of such a return." 23On 25 September 2014, lawyers for Legacy complained of the foreshadowed possible reduction of capital of approximately $20 million. They asserted that the claims pending against the plaintiff in the 2011 Alberta action were at least $36 million, that the claim against the employees in the Alberta action was for at least $201 million, that the claim in the Legacy action was for at least $91 million, and that the "farming claim related to the Spear Fish project", presumably the claim of Shallow Gas, was a claim of approximately $6 million. 24In response, lawyers for the plaintiff rejected allegations made by the lawyers for Legacy that the proposed capital reduction would be unlawful, for various grounds asserted by Legacy. The lawyers for the plaintiff stated that the plaintiff and MECL were, "well aware of the claims being asserted against them, including the likelihood and quantum of such claims. None of the transactions presently being considered by [MECL] or [the plaintiff] would give rise to any such claims by Legacy against them or their officers or directors". 25The defendant, Keybridge Capital Limited, became a substantial shareholder in the plaintiff on 27 October 2014. It holds 5.29 per cent of the shares. 26On 31 October 2014 it served a request for the holding of a general meeting for shareholders to pass a resolution that: "For the purposes of section 256B of the Corporations Act 2001 (Cth) and for all other purposes: (a) The issued share capital of the company be reduced by approximately AUD $54,093,496; and (b) Such reduction be effected by the repayment to all the holders of fully paid ordinary shares in the company of the amount of 21.75 cents per fully paid ordinary share in company." 27The directors of the plaintiff rejected the validity of that request. Clause 5.1 of the plaintiff's Constitution provides that: "Except as otherwise required by the Act, any other applicable law, the Listing Rules or this document, the Board: (a) has power to manage the business of the Company; and (b) subject to rule 5.3, may exercise every right, power or capacity of the Company to the exclusion of the Company in general meetings and the Members." 28Rule 5.3 precludes the board from selling or disposing of a main undertaking of the company unless the decision is ratified by the company in general meeting. 29Following the rejection of the validity of the request of 31 October, the defendant served a fresh request dated 11 November. It states: "Resolution 1: The first resolution, which is to be considered and, if thought fit, passed as a special resolution, is as follows: 'That for the purposes of section 136 of the Corporations Act 2001 and for all other purposes, the constitution of the Company be amended with immediate effect so that rule 5.1 is in the following terms: "5.1 Powers generally Except as otherwise required by the Act, any other applicable law, the Listing Rules or this document, the Board: a)has power to manage the business of the Company; and b)subject to rule 5.3, may exercise every right, power or capacity of the Company to the exclusion of the Company in general meeting and the Members, Save that the right, power or capacity of the Company to reduce its share capital pursuant to Division 1 of Part 2J.1 of the Act may be exercised by the Company in general meeting and the Members or the Board."' Resolution 2: The second resolution, which is to be considered and, if thought fit, passed as an ordinary resolution, and then only if the first resolution (above) is passed by the required majority, is as follows: 'That, for the purposes of section 256B of the Corporations Act 2001 (Cth) and rule 32.5(a) of the Company's constitution and for all other purposes: a)The issued share capital of the Company be reduced by approximately AUD $54,093,496; and b)Such reduction be effected by the repayment to all the holders of fully paid ordinary shares in the Company of the amount of 21.75 cents per fully paid ordinary share in the Company.'" 30The request was given pursuant to section 249D of the Corporations Act that requires the directors to call a general meeting within 21 days and for the meeting to be held not later than two months after the date of the request. 31The proposed amendment to clause 5.1 of the Constitution is unhappily expressed. The inclusion of the words "and the Members" is inapt. It suggests that the proposed amendment might entitle the members, acting otherwise than in general meeting, to effect a reduction of share capital. 32The solicitors for the defendant sought to explain the amendment as being a reflection of the phrasing of the existing rule. As the existing rule states that the board's powers are to the exclusion of the company in general meeting and the members, the use of the same phrasing in the proposed resolution is inappropriate. But the defendant does not intend that a resolution for reduction of capital be passed otherwise than by members in general meeting. The proposed resolution can be amended by the deletion of the words "and the Members". The infelicity of drafting is not a reason for rejecting the validity of the requisition. I proceed on the assumption that if the request is otherwise valid, the proposed resolution would be amended prior to its being submitted to the shareholders' vote. 33Four of the directors of the plaintiff are concerned that the capital reduction proposed by the defendant might affect the ability of the plaintiff to pay its creditors, particularly if the litigation in Canada is determined adversely to the company, with the result that the plaintiff incurs a larger liability than that for which it has currently made provision, or if the costs of the Canadian litigation exceed the current estimates. 34Mr Ryan, a director of the plaintiff, deposes that the current provision of US$7.9 million in the plaintiff's consolidated accounts is one made after the plaintiff has considered the claims made in the Canadian litigation and after taking legal advice from its Canadian solicitors. A company internal memorandum, which appears to be a briefing paper for the board, states that: "Although it is not anticipated it is possible that a judge could issue decisions that would significantly alter the company's liability. A decision that MECL did not have the right to suspend would likely result in significantly higher damages being awarded to 310 ... A decision that MECL has to value the [lands] at a more current fair value or to keep either Legacy or 310 whole in some other manner would result in higher damages being awarded to 310, however mitigated by the fact that the current estimate includes ..." 35The provision of US $7.9 million in respect of the Canadian claims can be taken to have been made by application of accounting standard AASB 137. The accounting standard (clause 14) requires that a provision be recognised when an entity has a present obligation, as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If those conditions are not met, no provision is to be recognised but there is to be a note in respect of a contingent liability. 36A "contingent liability" is described in the accounting standard as a liability which is not recognised as a liability because either it has yet to be confirmed whether the entity has a present obligation that could lead to an outflow of resources, or a present obligation does not meet the recognition criteria: either because it is not probable that there will be an outflow of resources, or a sufficiently reliable estimate of the amount of the obligation cannot be made. It follows that the directors, in making a provision of approximately US$7.9 million in respect of the Canadian claims, currently assess that it is probable that the plaintiff and its subsidiaries will have to pay the amount provided for. The fact that that is the extent of the provision does not mean that the company is to be taken as having determined that the other claims to which it and MECL are said to be liable are necessarily lacking in any real substance, although the directors have expressed opinions as to the lack of merit of some of the claims. The absence of further provision might be explained either because it is considered that it is not probable, that is, that there is less than a 50 per cent chance, that the company has further obligations, or because the extent of any obligation cannot be reliably estimated. 37It is against that background that I consider the plaintiff's challenges to the validity of the first request.

Plaintiff's submissions: first request 38The plaintiff submits that the resolutions proposed in the first request could not lawfully be effected by shareholders in general meeting because a company's power to undertake a capital reduction is, so it submits, vested in the directors, and the shareholders only function is to approve a decision or proposal by the directors for the company to reduce its capital. The first proposed resolution is challenged on that ground. 39The second resolution proposed in the first request is also challenged on the ground that, if passed and implemented, the company would or might be in contravention of ss 256D(1) and 256B of the Corporations Act 2001 (Cth). 40There is an issue as to whether the plaintiff is entitled to maintain a case that the company's implementing the proposed resolution would involve a contravention of the Corporations Act or whether the plaintiff is confined to an allegation that implementing the proposed resolution might place the company in contravention of the Act.

Plaintiff's submissions: second request 41The second request of 18 November 2014 proposes resolutions that three of the current five directors be removed and that two persons, who have consented to act as directors who are nominated by the defendant, be appointed. 42Mr Ryan has deposed that one of the current five directors has informed him that, subject to the plaintiff's retaining enough money to cover the current provision in the accounts and to retain enough money to cover legal costs, he does not share the concerns of the other directors. 43The second request of 18 November 2014 also proposes a resolution for the removal of any other directors that might be appointed between 17 November 2014 and the date of the general meeting of the company. 44The second request is prefaced by saying that the proposed business is not to be considered if both of the resolutions in the first request of 11 November 2014 are passed by the required majorities. 45The validity of the second request was attacked on two grounds. One was the conditionality of the proposed resolutions; that is, that they only be put if the resolutions proposed in the first notice are not passed. The second ground of challenge is that the appointment of new directors would only be for the purpose of the company's effecting the proposed capital reduction and it would not be a proper purpose to appoint directors to seek to effect a capital reduction that might be unlawful. 46I deal first with the challenge to the first request and to the first of the resolutions contained in it.

Power of shareholders to effect a capital reduction 47Sections 256A-256E of the Corporations Act relevantly provide: "256A Purpose This Part states the rules to be followed by a company for reductions in share capital and for share buy-backs. The rules are designed to protect the interests of shareholders and creditors by: (a) addressing the risk of these transactions leading to the company's insolvency (b) seeking to ensure fairness between the company's shareholders (c) requiring the company to disclose all material information. Division 1-Reductions in share capital not otherwise authorised by law 256B Company may make reduction not otherwise authorised (1) A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction: (a) is fair and reasonable to the company's shareholders as a whole; and (b) does not materially prejudice the company's ability to pay its creditors; and (c) is approved by shareholders under section 256C. A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction. Note 1: One of the ways in which a company might reduce its share capital is cancelling uncalled capital. Note 2: Sections 258A-258F deal with some of the other situations in which reductions of share capital are authorised. Subsection 254K(2) authorises capital reductions involved in the redemption of redeemable preference shares and subsection 257A(2) authorises reductions involved in share buy-backs. Note 3: For a director's duty to prevent insolvent trading on reductions of share capital, see section 588G. Note 4: For the criminal liability of a person dishonestly involved in a contravention of subsection 256D(1) based on this subsection, see subsection 256D(4). Section 79 defines involved. (1A) To avoid doubt, a cancellation of a partly-paid share is taken to be for consideration. (2) The reduction is either an equal reduction or a selective reduction. The reduction is an equal reduction if: (a) it relates only to ordinary shares; and (b) it applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and (c) the terms of the reduction are the same for each holder of ordinary shares. Otherwise, the reduction is a selective reduction. (3) In applying subsection (2), ignore differences in the terms of the reduction that are: (a) attributable to the fact that shares have different accrued dividend entitlements; or (b) attributable to the fact that shares have different amounts unpaid on them; or (c) introduced solely to ensure that each shareholder is left with a whole number of shares. 256C Shareholder approval Ordinary resolution required for equal reduction (1) If the reduction is an equal reduction, it must be approved by a resolution passed at a general meeting of the company. Special shareholder approval for selective reduction (2) If the reduction is a selective reduction, it must be approved by either: (a) a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or (b) a resolution agreed to, at a general meeting, by all ordinary shareholders. If the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled. (3) The company must lodge with ASIC a copy of any resolution under subsection (2) within 14 days after it is passed. The company must not make the reduction until 14 days after lodgment. Note: A proprietary company may also have to notify certain particulars under Part 2C.2. Information to accompany the notice of meeting (4) The company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision on how to vote on the resolution. However, the company does not have to disclose information if it would be unreasonable to require the company to do so because the company had previously disclosed the information to its shareholders. Documents to be lodged with ASIC (5) Before the notice of the meeting is sent to shareholders, the company must lodge with ASIC a copy of: (a) the notice of the meeting; and (b) any document relating to the reduction that will accompany the notice of the meeting sent to shareholders. 256D Consequences of failing to comply with section 256B (1) The company must not make the reduction unless it complies with subsection 256B(1). (2) If the company contravenes subsection (1): (a) the contravention does not affect the validity of the reduction or of any contract or transaction connected with it; and (b) the company is not guilty of an offence. (3) Any person who is involved in a company's contravention of subsection (1) contravenes this subsection. Note 1: Subsection (3) is a civil penalty provision (see section 1317E). Note 2: Section 79 defines involved. (4) A person commits an offence if they are involved in a company's contravention of subsection (1) and the involvement is dishonest. 256E Signposts to other relevant provisions The following table lists other provisions of this Act that are relevant to reductions in share capital. Other provisions relevant to reductions in share capital 1 section 588G liability of directors on insolvency section 1317H Under the combined operation of these sections the directors may have to compensate the company if the company is, or becomes, insolvent when the company reduces its share capital. 2 section 1324 injunctions to restrain contravention Under this section the Court may grant an injunction against conduct that constitutes or would constitute a contravention of this Act. 4 Chapter 6CA continuous disclosure provisions Under this Chapter a disclosing entity is required to disclose information about its securities that is material and not generally available. 5 Chapter 2E benefits to related parties to be disclosed Under this Chapter a financial benefit to a director or other related party that could adversely affect the interests of a public company's members as a whole must be approved at a general meeting before it can be given. 6 section 125 provisions in constitution This section deals with the way in which a company's constitution may restrict the exercise of the company's powers and the consequences of a failure to observe these restrictions. 7 sections 246B- 246G variation of class rights These sections deal with the variation of rights attached to a class of shares. This variation may be governed by the provisions of the company's constitution.

" 48The current provisions were inserted into the Corporations Act by the Company Law Review Act 1998 (Cth). Prior to those amendments, s 195 of the Corporations Law provided, in substance, that a company, if so authorised by its articles, by special resolution, could reduce its share capital, subject to confirmation by the Court. 49Creditors were required to be notified and were entitled to object. If a creditor did not consent to the reduction, the creditor's consent could be dispensed with on the company's securing payment of the debt or claim by appropriating, as the court might direct, either the full amount of the debt or claim, if it were admitted, or otherwise an amount fixed by the Court after a like inquiry and adjudication as would be conducted if the company were being wound up and the creditor sought to prove. 50Similar provisions were contained in the companies legislation since the Companies Act 1862 (UK). 51The Explanatory Memorandum to the Company Law Review Bill 1997 (Cth) does not indicate that it was intended that the protection of creditors should be weakened, notwithstanding that the Court's supervision of a reduction was removed. 52Paragraphs 12.12 and 12.13 of the Explanatory Memorandum noted that court decisions had interpreted s 195 as providing certain safeguards to shareholders and creditors that included that the impact of the reduction on the company's assets must not be such as to prejudice the company's creditors. 53Paragraph 12.13 stated: "12.13 However, it is not appropriate for every capital reduction to be subject to the time and expense that Court confirmation involves, particularly as the safeguards that this brings can be provided in different ways. Currently, even a reduction that in fact offers no threat to the interests of members or creditors must nevertheless be confirmed by the court. Schedule 5 Item 18 of the Bill therefore omits the requirement that reductions of capital be subject to court confirmation. The interests of shareholders and creditors will be protected by other safeguards, described below." 54Paragraph 12.22 said the creditors' interests would be protected by the requirement that the company would only be able to reduce its share capital if the reduction did not materially prejudice the company's ability to pay its creditors; whether that prejudice is material would be a question of judgment to be determined in the light of all relevant circumstances, including the particular characteristics of the company and the situation of the company's creditors. (As has later been observed, that statement is not particularly illuminating.) 55The Company Law Review Act provided for a remedy of shareholders and creditors to take action to stop an improper capital reduction. Pursuant to s 1324(1B), on an application by a member or creditor for an injunction where it is alleged that a reduction of capital would constitute a contravention of s 256B, the onus is on the company to prove that the proposed reduction would not contravene the Act. 56The plaintiff argued that under s 256B the shareholders' role is confined to the granting or withholding of approval to a decision or a proposal made by the directors that the company reduce its capital. It submitted that the power to make, and the responsibility for the decision to undertake a capital reduction, was vested in the board. Only a power of approval or the withholding of approval was vested in the general meeting. The plaintiff supported that construction of s 256B by saying that shareholders are an inapt body to exercise the power to reduce capital because: (a) except in tightly held companies, the shareholders would not be in a position to know whether the conditions for the exercise of the power in s 256B were met; (b) individual shareholders are entitled to act in their own interests without considering how the proposal would affect shareholders as a whole, but a reduction can only lawfully be effected if it is fair and reasonable to the company's shareholders as a whole; and (c) if the general meeting could exercise the power to reduce share capital, the shareholders could impose liabilities on directors or management required to give effect to a decision to effect a reduction of capital, either by reason of their being knowingly involved in the contravention or, in the case of directors, under s 588G. 57The defendant accepted that amendment to the constitution was necessary for shareholders to be able to pass the second resolution as proposed in the notice, although as the argument developed, it was submitted that the shareholders could pass a resolution approving a proposed reduction of capital without amendment to the constitution. It was accepted however, that amendment to the constitution would be required if the members were to pass a resolution directing the reduction. 58The defendant submitted that shareholders' approval under s 256B(1)(c) and s 256C was approval to a proposed resolution that could be put by anyone entitled to put a resolution to the meeting, either the directors or a shareholder acting under s 249D or s 249N. The defendant noted that the shareholders are not approving the exercise of a power to reduce capital that has already been exercised, as the power to reduce capital cannot be exercised until after the approval is given. It was submitted that the approval of shareholders is approval to a resolution for a proposed reduction of capital that can be put by anyone capable of putting such a resolution, including shareholders. 59The defendant submitted that as s 265B(1) is silent as to the organ which can affect the reduction of capital, that can be done by whichever organ has authority to take that step under the constitution. In some cases, the Corporations Act requires particular powers to be exercised by directors. In some cases, it requires particular powers to be exercised by shareholders. In most cases, the Act is silent and it is left either to a replaceable rule or to the company's constitution to allocate power to a particular organ. Hence, it was submitted that as s 265B is silent, it is open to the Constitution to provide that the power to reduce capital can be exercised by shareholders in a general meeting. 60Counsel for the defendant noted that formerly, the power to reduce capital was exercised by shareholders by special resolution subject to confirmation by the Court. Hence it could not be said that shareholders were necessarily an inapt body for the exercise of the power. 61It was also submitted for the defendant that the plaintiff's argument requires reading words into the text of s 265B, namely, that, "the company by its directors may reduce its share capital" et cetera. Counsel submitted that the words "by its directors" could only be read into the text of s 256B if the conditions identified in Wentworth Securities Ltd v Jones [1980] AC 74 at 105 and in Taylor v The Owners of Strata Plan 11564 [2014] HCA 9; (2014) 306 ALR 547 at [22]-[25] are satisfied. Those conditions are: first, that the precise purpose of the provision can be identified; secondly, that there has been an inadvertent failure to deal with an eventuality that must be dealt with if the provision is to achieve its purpose; thirdly, that the words Parliament would have included can be clearly identified; and fourthly, that the additional words that might be read into the text are consistent with the wording otherwise adopted. 62In this case, I understand it would be said that at least the second condition, namely inadvertence in failing to deal with an eventuality, could not be established. 63It was also submitted for the defendant that it was not correct to say that the shareholders, as a body in general meeting, were an inapt body to exercise the power of reduction. 64Pursuant to s 256C(4), a company must include with the notice of meeting, a statement setting out all information known to the company, material to the decision on how to vote on the resolution unless it has been previously sent to shareholders. 65It was submitted for the defendant that the better construction of s 256C(4) may be that the material needed to be sent to shareholders is only that which they would need to be satisfied that the proposed reduction was fair and reasonable to the company shareholders as a whole. But it was submitted that in any event, if the directors considered that the proposed reduction could not lawfully be made, or might not lawfully be able to be made, they would be bound to explain their position and the grounds for it to the shareholders and would have a duty as part of their general law or other statutory duties to provide relevant information. 66I do not think that the company's obligation to set out "all information known to the company that is material to the decision on how to vote on the resolution" is confined to information material only to whether the proposal is fair and reasonable to the company's shareholders as a whole. But that being so, the defendant would nonetheless say that the shareholders would therefore have the necessary material for them to make the necessary judgment. 67I do not think that the criteria referred to above that are necessary for the reading of words into a statute, where words appear to have been omitted that are necessary to give effect to the statute's evident purpose, are applicable in the present circumstance. The company, being an artificial person, can only act through agents. Whether one reads "the company" as meaning "the company by its directors" or whether one reads it as "the company by any authorised organ", one is not truly adding words to the text of the section, as distinct from explaining what Parliament intended by the expression "the company" in the context in which it appears in s 256B. 68Prima facie, I would accept the defendant's submission that where the statute is silent as to who can act on behalf of the company, the company can act by any organ with authority under its constitution to do the thing contemplated. But s 256B has its own indication of the role of shareholders. That is, that shareholders approve of the proposed reduction of capital by the company. "Approve" in this context means to confirm or to sanction a decision or proposal by another. I think that is consistent with the ordinary dictionary definition of "approve". 69In Words and Phrases, Permanent Edition (Thompson West), the editors cite a number of American authorities that, in my view, are consistent with the ordinary meaning of "approval" including: "To give 'approval' is, in its essential and most obvious meaning to confirm, ratify, sanction, or consent to some act or thing done by another. - State v. Rhein, 127 N.W. 1079", and "'Approval,' when it appears in statutes, generally means affirmative sanction by one person or by a body of persons of precedent act of another person or body or persons. - In re Rooney, 11 N.E.2d 591" 70It is true that shareholders are asked to approve just a resolution. Nonetheless, it would not be correct to say that if the shareholders had the power to effect a reduction of capital under the constitution and exercised that power, they would thereby be approving the reduction. Rather, they would be effectuating it. 71Counsel referred to para 12.14 of the Explanatory Memorandum to the Company Law Review Bill which stated that, "Under the Bill, reductions of share capital would continue to require shareholder approval ...". As counsel submitted, that statement treated the shareholders' role under the régime which obtained under s 195 of the Corporations Law as amounting to an "approval". But that was a casual use of language. The fact that the writer of the Explanatory Memorandum characterised actions of shareholders under s 195 in effectuating a reduction by special resolution as an approval does not mean that s 256B(1)(c) should be read as if it meant "approved or effectuated". Focus must be on the text of the statute. The Explanatory Memorandum assists in understanding the purpose of the amendment. But a comparison of the meaning of words used in the Explanatory Memorandum with the words used in the statute is not appropriate. 72In my view, the construction advanced by the plaintiff is supported by the context of the provisions. The first support from context is that the defendant's construction would lessen the protection provided to creditors if the decision to effect a reduction of capital were put solely in the hands of shareholders, contrary to the purpose of the provisions stated in s 256A(a). The interests of shareholders are likely to be antithetical to those of the creditors. 73Secondly, where the decision to effect a reduction lies with the directors, subject to shareholder approval, creditors are at least protected by sanctions that could be available against directors if the reduction materially prejudiced the company's ability to pay its creditors. The directors would be likely to have knowledge of the material facts by reason of which the company's ability to pay creditors might be so materially prejudiced, and so would be exposed to the consequences under s 256D(3) for being involved in the company's contravention of s 256B, or would be exposed to liability under s 588G. 74At least, the latter sanction would be lost if the reduction were effected by act of the general meeting. The former sanction would be much weakened. That is, it would be much harder to show an involvement in a contravention of the Act by shareholders who would likely have more limited information than directors would have. 75On the other hand, if directors were required to implement the company's resolution by shareholders to effect a capital reduction, they might thereby incur a liability either under s 256D(3) or s 588G, and thereby, they would be unfairly exposed to liabilities by the actions of shareholders. 76Fourthly, where the company has creditors making claims against it, as in the present case, the directors would be required to provide to shareholders under s 256C(4) all material information to the decision on how to vote. That information would have to include information relevant to a determination as to whether or not the reduction, if implemented, would materially prejudice the company's ability to pay its creditors. Prima facie, that could include not only the directors' own assessment of the particular claims made against it, but the company's legal advice. To require a detailed description of the directors' assessment of the creditors' claims including, I think, its legal advice in respect of those claims, would clearly be potentially adverse to the company, even though there might be no waiver of privilege in the legal advice because the disclosure would be mandated by law. Any potentially adverse consequences to the company from such disclosures are matters that the directors would be expected to consider in making a decision whether to seek shareholder approval to a proposed reduction. But in the present case, if the defendant's submission is right, the question is taken out of the directors' hands. 77These are all matters that indicate that the shareholders, as a body in general meeting, are not an apt body to make a decision to effect a reduction in capital where the reduction is not proposed by the directors. In my view, the shareholders in general meeting can only have the function of approving a proposed resolution. They cannot effectuate it. Accordingly, in s 256B(1) the reference to the company making a reduction should be understood as being a reference to the company by its directors. It follows that the first resolution proposing the amendment to the constitution cannot be put. 78The first request stated that the second resolution contained in it was proposed to be put only if the first resolution for amendment to the constitution was passed by the required majority. In the course of submissions, counsel for the defendant proposed a revised wording for the second resolution, namely, a resolution to be passed as an ordinary resolution that: "For the purposes of s 256B of the Corporations Act 2001 (Cth) and rule 32.5(a) of the Company's Constitution, and for all other purposes, this General Meeting approves and directs the following: a) the issued share capital of the company be reduced by approximately A$54,093,496, and b) such reduction be effected by the repayment to all holders of fully paid ordinary shares in the company for the amount of 21.75 cents per fully paid ordinary share in the company." 79In the course of submissions, counsel accepted that the words "and directs" could not be included without constitutional amendment, but submitted that nonetheless, the shareholders could approve the proposed resolution even if the board was not bound to act on the approval. 80This was not the resolution contained in the request. If the resolution in the form proposed went forward, the company would be required to disclose material that could be prejudicial to its defence of the Canadian plaintiffs' claims. The defendant did not give evidence that it would wish to put such a resolution in those terms if it were to be merely aspirational. Nonetheless, the authorities indicate that although directors need not call a meeting to consider a resolution that could not lawfully be passed, a requisitioned meeting should be convened if the matter that would render the requisition invalid or unlawful could be cured by amendment, and the amendment would be within the scope of the notice of meeting. 81But s 256A states that the provisions in Part 2J.1 state the rules that are to be followed by a company for reductions in its capital. It follows that the proposed reduction that the shareholders are asked to approve must be one that the company, through its directors, proposes to make, not one that is merely proposed by a shareholder that the directors would not be minded to make. That is consistent with the general principle stated in National Roads and Motorists' Association v Parker (1986) 5 NSWLR 517 at 522 that: "... it is no part of the function of the members of a company in general meeting by resolution, i.e. as a formal act of the company, to express an opinion as to how a power vested by the constitution of the company in some other body or person ought to be exercised by the other body or person." 82The requirement to send out a statement setting out all information known to the company material to a decision on how to vote and the requirement to lodge documents with ASIC are imposed on the basis that shareholders are asked to decide whether to approve a resolution that if approved, it is proposed would be made; not for a resolution that would do no more than convey the shareholders' wishes to the Board. 83For these reasons, I conclude that the directors are not required to convene a general meeting to put either resolution contained in the first request. But in case I am wrong, I should deal with the additional ground advanced by the plaintiff as to why the directors are not required to convene a meeting to consider resolution 2, namely, that implementation of resolution 2 would or might involve a contravention of s 256B(1)(b).

Second resolution: where reduction of capital might prejudice creditors 84The defendant submitted that the plaintiff's case was confined to one of alleged actual unlawfulness. It was common ground that the directors need not include in a notice of meeting a proposed resolution whose object could not lawfully be effectuated. The defendant submitted, correctly in my view, that if a request for the convening of a meeting was otherwise compliant with s 249D, it could only be ineffective on such a ground as contended for by the plaintiff if the proposed resolution could not lawfully be effected, even allowing for the possibility of amendment. 85In his written submissions, and at times in his oral submissions, counsel for the plaintiff put the plaintiff's case on the basis that giving effect to the resolution 2 might be, not that it would be, unlawful. But the plaintiff did plead that: "28. (a) a capital reduction cannot be undertaken pursuant to the power conferred by s.256B of the Corporations Act unless it does not materially prejudice the plaintiff's ability to pay its creditors (s.256B and s.256D of the Corporations Act); (b) by reason of the matters referred to in paragraphs 5 to 21 the capital reduction proposed by resolution 2 in the 11 November Notice may materially prejudice the plaintiff's ability to pay its creditors and is consequently unlawful ..." 86Further in his oral submissions, counsel for the plaintiff also put the plaintiff's case on the ground of actual unlawfulness. The reason that, at times, the plaintiff's case was put on the basis that implementing the resolution might be unlawful was owing to the uncertainty as to whether the claims of creditors would be established, and if so, in what amount. Nonetheless, counsel submitted that s 256D(1) prohibits a company from making a reduction of capital unless it complies with s 256B(1), and that under s 256B(1) a company may only reduce its capital if, inter alia, the reduction does not materially prejudice the company's ability to pay its debts. 87Counsel for the plaintiff submitted that if the company were in a position where it appeared that a reduction might materially prejudice its ability to pay its creditors, that is, if it could not affirmatively say that the reduction did not have that effect, then the reduction was prohibited. 88In my view, this argument is open to the plaintiff. I think it is correct. Section 1324(1B) is consistent with this construction. Under s 1324(1B) the proof that the company would need to adduce on a challenge to a reduction of capital by a creditor would be proof that the reduction does not, not that it might not, affect its ability to pay its creditors. 89As I have said, under the law as it stood before the 1998 amendments, creditors who did not consent to a proposed reduction of capital would have to have their debts paid or secured in an amount which, in the event of dispute, the Court would be required to determine in the same way as if it were dealing with the admission of a proof of debt. That régime was replaced by one where the onus is on the company to ensure that the reduction does not prejudice its ability to pay creditors. 90Parts of the claims for which provision has not been made have been dismissed by the directors, in their statement that forms part of the interim financial report for the half year ended 30 June 2014, as being frivolous. The directors say that the amounts claimed grossly exaggerate any amount that might be awarded. 91The directors assert that their review of the impugned transactions indicates that the company's actions were fully in accordance with the governing agreements. 92However, on the evidence adduced in this case, the directors accept, and it seems that management who prepared the briefing note accepts, that, as to some parts of the case, the Judge might take a different view. No material was presented to demonstrate that the claims of the Canadian plaintiffs had no arguable prospects of success for higher amounts than those for which provision has been made, or indeed for the full amounts claimed. If those claims were successful for the amounts claimed they would more than exhaust the capital of the plaintiff which would prejudice its ability to pay its creditors. 93As the evidence adduced in this case does not show that the claims are without substance, I conclude that any capital reduction might prejudice the company's ability to pay its creditors. That being so, the company and the defendant cannot show, on the evidence adduced in this hearing, that the capital reduction does not materially prejudice that ability. 94This construction of the provisions is consistent with the decision of the Full Court of the Federal Court in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358. There Keane CJ and Jacobson J said (at [45] and [46]): "[45] In relation to the question of 'material prejudice' to a company's ability to pay its creditors, the text of the Act and the explanatory memorandum which accompanied the Bill which introduced s 256B into the Act are not particularly helpful. In cl 12.23 it said: 'Whether prejudice is 'material' will be a question of judgment to be determined in light of all relevant circumstances'. One is, we think, on safe ground, however, in treating 'material prejudice' to a company's ability to pay its creditors as relating to the creation of a material as opposed to theoretical increase, in the likelihood that the reduction in capital will result in a reduced ability to pay creditors. [46] The argument advanced on behalf of the fund went as far as to contend that CSR's burden of proof required it to exclude the possibility of a reasonable judgment that New CSR might not be able to pay all its creditors including asbestos claimants if the demerger were to be implemented. The short answer to this argument is that the expert opinion adduced including the evidence adduced by the interveners, does not contain any suggestion that one may reasonably predict that CSR will not be able to pay all its creditors, in the event of the demerger proceeding, even in scenarios of extraordinary stress. Importantly, none of the evidence adduced, including the evidence of the interveners' experts, suggests that the exercises of projection and assessment proposed on CSR's behalf are spurious or illusory because the assumptions on which they proceed are too uncertain to afford a sound basis for a conclusion that is not only reasonable but responsible having full regard to the interests of asbestos claimants and other creditors." 95The defendant stressed paragraph [45] and submitted that the mere possibility that the Canadian plaintiff's claims might succeed meant that there was only a theoretical, but not a material, increase in the likelihood that the reduction in capital would result in a reduced ability to pay creditors. I do not agree with that interpretation. 96The evidence in Re CSR Limited was that there was no realistic possibility that any claim could not be met after the reduction. As stated in the headnote, the actuarial projections: "... suggested that after the proposed capital reduction, the company would have sufficient cash flow to satisfy its asbestos-related liabilities as they emerged over time without recourse to asset realisation but if, on the worst case scenario, asset realisation became necessary, the company would have sufficient assets from which to meet the liabilities, or could raise capital to do so." 97Hence, at [46], Keane CJ and Jacobson J dealt with the argument that CSR had to exclude the possibility of a reasonable judgment that the new CSR after demerger might not be able to pay all its creditors, not by saying the argument was wrong as a matter of law, but rather on the basis that it was unsubstantiated in fact. 98On the evidence adduced in this hearing the company, whether acting by its directors or its shareholders, could not lawfully reduce its capital in the way it proposed in the resolution or at all. 99For these reasons, if I had concluded resolution 1 could have been put, I would nonetheless not have concluded that resolution 2 could be put. 100I turn to the second request, that of 18 November.

Requisition of 18 November 2014 to remove directors 101The first ground of attack was that the resolutions for removal and appointment of directors were expressed to be conditional on the resolutions proposed in the first notice not being passed. The plaintiff submitted that the notice requisitioning the meeting must state the resolution proposed, not a resolution that might or might not be proposed. 102Counsel submitted that the form of notice could put members who wished to vote by proxy in a quandary. 103I do not agree. No authority was cited in support of this argument that the notice was bad because of its conditionality. Section 249D does not require a notice convening the meeting to state a resolution that is to be proposed. 104I see no reason why a member wishing to vote by proxy would be placed in any difficulty in deciding whether to vote in respect of the resolutions proposed in the second notice. I would reject this argument. In any event, the plaintiff conceded that this ground would not be established if the directors were not required to submit the resolutions proposed in the first notice to members. In such a case it would be known in advance that the resolutions proposed in the second notice would be put. 105The second ground of attack was based on the premise that the directors who would be appointed if the resolutions were passed would seek to effect a capital reduction that may be unlawful. That ground might have been extended to saying that the proposed directors would seek a reduction of capital that on the evidence in this case could not lawfully be made. 106In essence, the contention assumed that newly appointed directors would not act in accordance with their duties as directors, either in relation to the proposed reduction or otherwise. There is no material which would justify any such inference. In my view, there is no substance to the challenge to the second notice. 107Although not raised in the points of claim, it was faintly suggested in the course of submissions that proposed resolution 4 was invalid, apparently on the grounds that it would be contrary to s 203D(4) and (5). 108If a notice of intention to remove a director of a public company is given, the director is entitled to put his or her case to members by, amongst other things, giving the company a written statement which is to be circulated to members if there is time to do so. If a director was appointed before the general meeting was held s 203D could still be complied with. 109In NRMA v Scandrett [2002] NSWSC 1123 members of a company requisitioned an extraordinary general meeting for the purpose of considering resolutions including a resolution calling for the removal of every director appointed by the Board to fill a casual vacancy between the period commencing on the day that polls would be declared at the extraordinary general meeting and concluding after all polls were declared; in other words for a period after the meeting had commenced. Palmer J said (at [34]-[35]): "[34] If resolution B were passed, a director appointed to fill a vacancy during the specified period would be removed from office immediately upon, and by virtue of, his or her appointment. It would be impossible for such a director to exercise the right to put his or her case to members in accordance with CA s203D(3), s203D(4) and s203D(5). [35] This is sufficient, in my view, to lead to the irresistible conclusion that CA s203D(1) and s203D(2) apply only to a resolution to remove a director who is in office at the time that the notice of intention to move the resolution is given to the company. Resolution B seeks the removal of unnamed directors not yet appointed so that it may not validly be passed at a meeting of NRMA." 110The conclusion in paragraph [35] could support the defendant's argument as his Honour stated that s 203D(1) and (2) applied only to a resolution to remove a director who is in office at the time the notice of intention to remove the resolution is given to the company. However, that conclusion is stated more widely than can be supported by the reasoning in [34]. In NRMA v Scandrett, s 203D could not be complied with because if the resolution were passed the director would be removed from office immediately on and by virtue of his or her appointment. In this case s 203D could be complied with as the resolution addresses only the appointment of additional directors by the board before the closure of the meeting. 111For these reasons I make a declaration in accordance with paragraph 1 of the originating process. I refuse the relief sought in paragraph 2 of the originating process. I will hear the parties on any questions that might require any further order in relation to the convening of the meeting of members in response to the 18 November requisition, and I will hear the party on costs. 112My prima facie view on costs is that as the plaintiff succeeded on one claim but failed on the other claim, both parties have had a measure of success and failure and I should make no order as to costs. But I will hear the parties. [Parties addressed.] 113I order that the time for the directors of the plaintiff to call the general meeting of members of the plaintiff in response to the requisition served by the defendant on the plaintiff and dated 18 November 2014 be extended for the purposes of ss 249D and 249E of the Corporations Act 2001 (Cth) to 2 January 2015 and that the time for the holding of such meeting be extended up to 6 February 2015. 114I make no order as to costs with the intent that the parties bear their own costs. 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: 31 December 2014