Kimberley College Ltd v Davis, in the matter of Kimberley College Ltd

GREENWOOD ACJ: 1 In these proceedings, heard today, the plaintiffs seek orders pursuant to s 1322 of the Corporations Act 2001 (Cth) (the "Act") declaring that the appointment of the second, third, fourth and fifth plaintiffs as directors of Kimberley College Ltd (the "Company") was not invalid by reason of any contravention of a provision of the Company's Constitution. 2 They also seek an order pursuant to s 1322 of the Act that the time fixed by s 249D(5) of the Act for calling and holding a meeting of members be extended. 3 The first plaintiff is the Company. 4 The second, third, fourth and fifth plaintiffs are individuals. They are described as individuals who "ostensibly" hold a position of director of the Board of the Company. Their qualification to hold office has been called into question. The second plaintiff, Paul Wilton, was appointed to the Board on 29 June 2016. The third plaintiff, Warwick Steen, was appointed on 22 October 2014. The fourth plaintiff, Mark Milton, was appointed on 14 March 2017 and the fifth plaintiff, Gregory O'Donnell, was appointed on 19 October 2017. 5 The Company is a registered unlisted company limited by guarantee and operates an independent school at Carbrook in Queensland under the name "Kimberley College". 6 On 12 June 2018, the solicitors for the second defendant, Rhys Davis, the third defendant, Jacob Brown, the fourth defendant, Eleine de Klerf and the fifth defendant, Mariska de Klerf sent an email to the plaintiffs' solicitors asserting that: … it is apparent from the Members Register that none of the present directors are actually Members of the Company. Therefore, they are unqualified to hold office in accordance with clause 28.1 of the Constitution (both the 2015 and the 2017 Constitution have the same relevant provision) and must resign immediately, failing which they will be susceptible to declaratory relief from the Supreme Court that they were never validly appointed. 7 The Company was registered in 1997 and is bound by a Constitution. It seems that several purported versions of the Company's Constitution have been located by the Company's solicitors but only two of those ever appear to have been adopted by the Company in General Meeting. A Constitution was adopted in or about July 2001 described in the evidence as the "2001 Constitution" and a Constitution was adopted on 28 November 2017 described in the evidence as the "2017 Constitution". 8 As to the contention of the defendants by their solicitors in the letter of 12 June 2018, it should be noted that each of the four directors under challenge was appointed prior to the adoption of the 2017 Constitution at which time, the operative Constitution was the 2001 Constitution. The 2017 Constitution at cl 28 addresses the topic of "Directors' qualifications" and cl 28.1 provides that: "No person may be a director unless that person is an ordinary member or a life member (which includes a paid life member) of the Company". The 2001 Constitution did not contain a provision in the same terms as cl 28.1 of the 2017 Constitution. However, cl 16.2 of the 2001 Constitution provides that the composition of the Board of Directors shall, subject to subclauses 16.3 and 16.6, be made up as follows: (a) not less than half of the number of directors from time to time shall be parent members appointed by ordinary resolution; … (c) such other suitably qualified persons as the board may appoint, but in no case shall the number of directors appointed from time to time under this paragraph exceed the number that is one less than the number of directors appointed from time to time under paragraph (a). 9 Relevantly, para 16.6 provides: Any casual vacancy may be filled by the then remaining directors, provided that any such appointment to fill a casual vacancy for a director appointed under paragraph 16.2(a) must be confirmed by ordinary resolution at the next AGM. If the appointment is not confirmed, the person ceases to be a director at the end of the AGM, and that person shall not thereafter be eligible for appointment under paragraph 16.2(c) until after the following AGM. 10 The second thing to note about the assertion in the email of 12 June 2018 from the solicitors for the defendants is that the assertion was based upon a version of the Register of Members which was not current. Each of the directors is, according to the current Register of Members, now a member of the Company having been so admitted on or about 28 March 2018. 11 Nevertheless, both the Company and the individual plaintiffs must address the assertion made by the email. 12 The plaintiffs accept that there are two "actual or potential" contraventions of "the Constitution" in respect of the qualification requiring directors to be members of the Company. The first is put this way: At the least, during the period between 28 November 2017 (the date of adoption of the 2017 Constitution) and 28 March 2018 (the date of their admission to membership), it is alleged by some of the defendants that the requirement that each director be a member was contravened. 13 The second concerns an unresolved question over the validity of each of the directors' admission to membership as mentioned later in these reasons. 14 As to the first matter, it should be noted that the plaintiffs contend in response that the contended contravention is "questionable" because cl 29.1 seems to hold over the directors' appointment until the AGM, without membership being required. 15 As to the second matter, these considerations should be noted. Clause 13.1 is in these terms: 13. Form of application 13.1 An application for membership must be: (1) in writing in a form approved by the directors; (2) signed by the applicant; (3) signed by the proposer and seconder, each of whom must be members; and (4) accompanied by any other documents or evidence as to qualification for membership which the directors require. 16 The application form for membership signed by each of the directors was seconded by Deborah Horn. Ms Horn, according to the Register of Members, has been a member since 2 January 2017. However, there is a question raised by the evidence as to whether Ms Horn was ever actually admitted to membership by the Board. If Ms Horn is not a valid member of the Company, then cl 13.1(3) has been contravened. The evidence is that such a contravention occurred "unwittingly". Accordingly, an order is sought pursuant to s 1322(4)(a) of the Act to ensure the validity of the admission of each of the directors to membership, and therefore their qualification to remain as directors: see [21] of these reasons. 17 There is a further matter which ought to be noted. 18 Each of Mr Steen, Mr Milton, Mr O'Donnell and Mr Wilton were, according to the evidence, appointed by the Board of the Company and not by the Company in General Meeting. At the date of their appointments as directors, the 2001 Constitution was in force. As already noted, cl 16.2(c) permitted the Board to appoint suitably qualified persons as directors subject to the condition that in no case shall the number of directors appointed in that way, exceed the number that is one fewer than parent members appointed by ordinary resolution. There is the possibility of a contravention of the proviso engaged in the circumstances of the events which occurred. 19 Clause 16.6 enabled the Board to fill any casual vacancy provided that any such appointments were confirmed by ordinary resolution at the next following AGM. The Company did not hold an AGM in 2015 or 2016. Although three of the directors are noted in the Minutes of the 2017 AGM as directors with the fourth director, Mr O'Donnell, noted as an apology, there is no formal resolution confirming their appointment at the 2017 AGM. 20 If it is assumed that each individual was appointed pursuant to a power contained in cl 16.2(c) or cl 16.6 of the 2001 Constitution, an order pursuant to s 1322(4)(a) of the Act becomes necessary, subject to the exercise of the Court's discretion, to ensure the validity of their office is not impugned. 21 The source of the statutory power is to be found in s 1322(4) of the Act. That subsection provides that, subject to the provisions of the section itself, but without limiting the generality of any other provision of the Act, the Court may, on an application by any interested person, make a number of possible orders either unconditionally or subject to such conditions as the Court imposes. Relevantly here, the orders include these: (a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation; … (d) an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding. [emphasis added] 22 The Court may also make such consequential or ancillary orders as it thinks fit. 23 Section 1322(6) is, relevantly, in these terms: [Pre-conditions to making orders] The Court must not make an order under this section unless it is satisfied: (a) in the case of an order referred to in paragraph 4(a): (i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature; (ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or (iii) that it is just and equitable that the order be made; and … (c) in every case - that no substantial injustice has been or is likely to be caused to any person. 24 As to those powers, the following observations of French CJ in Weinstock v Beck (2013) 251 CLR 396 ("Weinstock v Beck") at [39] to [43] ought to be noted: 39 Corporations, in contemporary Australian society, served the purposes of enterprises, large and small, owned and operated by men and women, some of whom are sophisticated, knowledgeable and well-advised on matters of corporate governance and some, perhaps many, of whom are not. Section 1322(4) and related provisions reflect a long-standing legislative recognition that mistakes will happen in corporate governance and that it is not in the public interest that the validity of decisions made in relation to corporations be unduly vulnerable to innocent errors which may be corrected without substantial injustice to third parties. In accordance with its evident purpose, s 1322(4)(a) is to be construed broadly and applied pragmatically, principally by reference to considerations of substance rather than those of form. 40 … The remedy may be sought by a party fearing or suspecting invalidity [by reason of a provision of the Corporations Act or a provision of the Constitution of a corporation] or, as in the present case, to meet a contention of invalidity advanced by another party in adversarial proceedings. The effect of a declaration under the provision is limited to overcoming invalidity flowing from a particular contravention or contraventions. … 42 … There is no reason to limit the construction of the term "contravention" by reference to a subset of contraventions which attract civil liability nor by reference to that subset which can be characterised as a "failure" to do something. 43 It is not appropriate to torture a limit out of the language of s 1322(4)(a) against the extreme case of a stranger to the company purporting to make a decision appointing another stranger as a director. Extreme cases are amply covered by the discretionary nature of the power and the constraints upon its exercise imposed by s 1322(6). [emphasis added] 25 The case before the High Court in Weinstock v Beck was not an "extreme case". Nor is this case an extreme case. 26 In Weinstock v Beck, Hayne, Crennan and Kiefel JJ said this at [55]: Only if s 1322(4)(a) is to be read otherwise than according to its terms could it be said that the Court did not have power in these proceedings to make an order under that provision. But the power given to the Court by s 1322(4)(a) is not to be hedged about by any implied limitation. [emphasis added] 27 These observations of their Honours represent the definitive construction to be attributed to s 1322(4)(a). 28 As to s 1322(6), the conditions set out in s 1322(6)(a) are to be read in the alternative. Only one of them need be satisfied in order to enable an order to be made under s 1322(4)(a). However, in every case, it must be demonstrated that no substantial injustice has been or is likely to be caused to any person. 29 The power conferred by s 1322(4)(d) is also subject to no substantial injustice having been caused to any person or a likelihood of substantial injustice being caused to any person. The power conferred by s 1322(4)(d) has been exercised to extend the time fixed by s 249D(5) for the calling and holding of a meeting: Woolworths Ltd v Getup Ltd (2012) 90 ACSR 670 at [18]. 30 The phrase used in s 1322(6)(c) is "no substantial injustice". The focus is upon the relevant "person" affected by the order, that is, materially affected by the order in terms of rights and entitlements arising under the Act or the Constitution of the Company. 31 I am satisfied on the evidence that at all times since their respective appointments, the relevant directors have acted on the assumption that they were validly appointed directors and remained validly appointed directors. I am satisfied that they have acted in the roles of directors throughout. Additionally, they have been recognised as persons acting as directors by members in General Meeting: see the Minutes of the AGM dated 28 November 2017. In light of the email of 12 June 2018 from the solicitors for the defendants, the four relevant directors are confronted with an assertion of invalidity and labour in their roles under fears that their appointment may be invalid. That provides a proper basis for an application under s 1322 of the Act. 32 Importantly, there can be no suggestion of substantial prejudice because the effect of making an order would simply be to confirm the state of affairs previously assumed to be valid and acted upon by the relevant parties. 33 Thus, I am satisfied that an order ought to be made under the section. 34 As to s 249D(2), these things should be noted. 35 On 30 May 2018, the Board received a request under the section signed by eight members of the Company asking the Board to call a General Meeting for the purpose of passing resolutions removing all of the current directors and electing a number of named replacements and additions. None of the proposed directors are currently members of the Company and thus, as things stand, they are ineligible to stand as directors. Section 249D(5) requires the directors of a company who have been given a request under s 249D to call the meeting within 21 days after the request and to hold the meeting no later than two months after the date of the request. As a result of a previous order, the time for the calling of the meeting has been extended until the final hearing and determination of this originating application. Unless the times are extended, the directors must call the meeting no later than 24 July 2018 and hold the meeting no later than 30 July 2018. 36 In the course of the hearing, other factual matters were put before the Court. Those matters concern allegations about the contended conduct of particular individuals arising out of an independent examination of the Company's financial affairs by a consultant called GT Advisory and Consulting ("GT"). On 1 June 2018, GT presented its second interim report. That report contains findings in relation to contended conduct on the part of particular individuals. It is not necessary in these reasons to examine the content of that conduct. I make no findings about it because it is not a question alive in the controversy in these proceedings. I simply note the fact of the report and the fact of the contentions within it concerning the relevant conduct. The contended conduct does not involve conduct on the part of any of Paul Wilton, Warwick Steen, Mark Milton or Gregory O'Donnell. 37 The matters just mentioned condition the view formed by the directors of the Company. The directors consider that a fresh election should be held. This step has been recommended in the second interim report by GT. Each of the directors intend to stand down at the 2018 AGM so that all director positions are open to election. The directors believe that in light of the matters referred to above at [36] of these reasons, it is important that an opportunity be provided to the broader school community to participate in the election of new directors. This participation, in their view, ought to be facilitated by the admission of new members from the broader school community enabling such new members to stand for election to a new Board. The current membership is too few in number and is not reflective of the broader school community. Of the eight members who signed a request pursuant to s 249D, a number of those members are named in the second interim report of GT in relation to questions of contended conduct of concern. Again, I make the point that I simply note the contention and express no view about any aspect of that conduct. The conduct allegations simply frame contextual matters of relevance. 38 To enable the broader school community to engage with membership and consider the possibility of standing for election to the Board, the Board has resolved that a General Meeting be held at a time after an open and fair process has been undertaken to open membership of the Company to all persons in the school community including parents, teachers, staff and past students who wish to become members and who may wish to stand for a Board position. 39 The directors consider that the time periods fixed in s 249D(5) are not sufficient to allow that process to occur and accordingly the plaintiffs seek by way of final relief orders that the times fixed by s 249D(5) be extended to facilitate "an open board election at the 2018 annual general meeting, which is proposed to be held no later than 30 November 2018". 40 The defendants have considered orders proposed by the plaintiffs. They consent to the orders. However, the orders involve the exercise of a discretion and accordingly, the Court has considered all of the facts and contextual matters with a view to determining whether the discretion ought to be exercised in favour of making the orders sought. The Court is satisfied that it is proper to exercise the discretion to make the orders. 41 Accordingly, orders will be made pursuant to s 1322(4)(a) and s 1322(4)(d) in the terms set out below. 1. Pursuant to s 1322(4)(a) of the Corporations Act 2001 (Cth) (the "Act"): (a) acts, matters or things purporting to have been done, and proceedings purporting to have been instituted or taken, by the second, third, fourth and fifth plaintiffs, or any of them, between 28 November 2017 and 28 March 2018, are not invalid by reason of any contravention of clause 28 of the Constitution of the first plaintiff; (b) the admission of each of the second, third, fourth and fifth plaintiffs as members of the first plaintiff is not invalid by reason of any contravention of clause 13(3) of the Constitution of the first plaintiff; and (c) the appointment of each of the second, third, fourth and fifth plaintiffs as directors of the first plaintiff was not invalid by reason of any contravention of: (i) clause 28 of the Constitution of the first plaintiff; (ii) clause 16.2, clause 16.6 or clause 16.7 of the previous Constitution of the first plaintiff, which is Exhibit "PW-02" to the affidavit of Paul Wilton filed 19 June 2018. 2. Pursuant to s 1322(4)(d) of the Act, the time fixed by s 249D(5) of the Act for calling the meeting requested in the document which is Exhibit "PW-14" to the affidavit of Paul Wilton filed on 19 June 2018, (the "EGM") be extended up until and including 27 July 2018. 3. Pursuant to s 1322(4)(d) of the Act, the time fixed by s 249D(5) of the Act for holding the EGM be extended up until and including 30 November 2018. 42 There is one further matter that ought to be mentioned. The affidavit of Mr Warwick Steen sworn 10 July 2018 and filed on 11 July 2018 contains exhibits which consist of Minutes in which there are references to circumstances and events of third parties. Those matters ought to remain confidential. The affidavit has been electronically filed. Those parts of the affidavit which contain the confidential information will be removed from the file in order to preserve the confidentiality of those third parties. 43 One further matter that should also be noted is that the plaintiffs seek to rely upon the affidavit of Ms Emily Kate Davis sworn 23 July 2018. Leave is given to rely upon that affidavit. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Acting Chief Justice Greenwood.

SCHEDULE OF PARTIES QUD 398 of 2018

Plaintiffs Second Plaintiff: PAUL WILSON Third Plaintiff: WARWICK STEEN Fourth Plaintiff: MARK MILTON Fifth Plaintiff: GREGORY O'DONNELL

Defendants Second Defendant: RHYS DAVIS Third Defendant: JACOB BROWN Fourth Defendant: ELEINE DE KLERF Fifth Defendant: MARISKA DE KLERF