Summerdowns Rail Ltd v Stevens

Primary facts

1. I will begin by determining the primary facts, principally based upon the documentary evidence, and the less controversial evidence given by Mr Stevens and Mr Barden. After I consider the issues raised by the parties, I will then address the facts that are necessary to determine those issues.
2. Summerdowns was incorporated as a limited liability company to be the vehicle for a single business venture. The commercial objective was to establish a rail terminal on certain land. The promoters of the venture were Mr McMahon and Mr Imrie. It appears that the opportunity to purchase the land was within the control of Mr McMahon, although the evidence was entirely unclear as to the nature of Mr McMahon's rights to obtain title to the land.
3. I infer that Mr McMahon and Mr Imrie asked MSA, which was in the business of providing consultancy services to assist start-up businesses, to provide them with a quotation in relation to the services necessary to incorporate and to finance the operations of Summerdowns.
4. On 6 June 2011, MSA provided a quotation letter by email to Mr McMahon and Mr Imrie. As the terms of the quotation are important to the resolution of the present dispute, it will be necessary for me to set out the quotation in full: Management Skills Alliance (MSA) are pleased to provide the following quotation pertaining to the provision of advice and scope of works as identified from your brief. Specifically, your brief was to establish a suitable entity to exploit the property on which to house the Rail Terminal "Nammoona - Summerdowns". This entity must allow for both of you to maintain a substantial shareholder position. Your request is to develop a business model which will attract investors, participants and provide an increasing share value whilst still building the infrastructure. Up to this point, no charge has been levied. MSA proposes a 2-stage approach to be adopted in preparation as per your brief. Each of the 2 stages are independent of each other, and are quoted accordingly. Stage (1) MSA will complete the following action steps to take you through the process. 1. Complete a comprehensive diagnostic study and a brief pre-prospectus information memorandum, which will serve as the basis of the final prospectus. 2. Work together with you to validate a three-year financial projection. Our intent would be to achieve a projected value for the company at the time of the prospectus with the shares valued at $1.00 per share. 3. Register a public company allowing the current businesses to be rolled in as discussed. Include a focused corporate constitution and corporate governance procedures. 4. A list of requirements is listed in the "Notes" section at the back of this document. 5. MSA would assist in the selection and election of a Board of Directors and secretary with professional skill sets to support your own. 6. MSA would develop a share model to manage and facilitate the allocation and control of the share placement. 7. It is envisaged you could also offer a number of shares to strategic investors to cover the immediate, and other associated costs leading up to the establishment of a fully unlisted public company with prospectus. MSA should assist in working with you to present the potential strategic investors. Note: Once the Public Company has been established the company is able, under section 708 of the Corporations Act, to offer shares under special conditions. Following recognition of additional requirements in company branding and structure, MSA would then establish a pre-prospectus, comprehensive, information memorandum based on your corporate goals for this new entity. Taking into account the full diagnostic study, the new structure and future opportunities, MSA would prepare a 3 year forecast and discounted cash-flow valuation. Our fee structure for this proposed stage (1) work is at a fee of $250 excl GST per hour, and we would envisage the total fees to range between $35,000 and $50,000 excl GST. This is dependent upon the outcome derived from the meeting scheduled for Thursday 9th June 2011. MSA are prepared to offer a staged payment approach. The payment schedule and timing will be listed as an item for discussion during meeting on Thursday. Based on the successful outcome and delivery of Stage (1), the parties will then review the opportunity to progress to Stage (2), namely to establish the full unlisted public company with approved prospectus. Stage (2) We believe that it will be necessary to raise further funds in the general market and therefore we believe you will require a prospectus. MSA will complete the following action steps to take you through the process of establishing a full unlisted public company with an approved prospectus incorporating the current business activities. The procedure would include the completion of the following; 8. Adoption of the information memorandum. 9. Preparation of the existing entities and complete roll-over 10. Legal certification of contracts and other relevant activities 11. Investigating accountants report 12. Completed prospectus including print preparation completion accepted and approved by ASIC 13. A prospectus release promotional campaign Note: Once the prospectus has been approved by ASIC it is envisaged that you would raise the funds, you would require, through share sales to provide for the company to exploit the expansion opportunities identified in the document. The estimated investment required to undertake this procedure can only be calculated once the initial investigation on the current entities has been completed. This information is identified in Stage (1). The fees to complete Stage (2) will be taken in advanced monthly milestone payments equalling the total figure at the prospectus release. As mentioned previously the company would be in a position at this time to access funding to cover these costs, potentially from the initial share sales to early "sophisticated" investors. MSA would have the business/es, valued by a recognised business valuer in current operating format to establish aroll over value. At the time of the release of the prospectus MSA having completed the overall plan and performance as agreed would receive shares as a success fee and as determined by the parties. We look forward to working with you in this exciting new direction of your business venture.
5. The quotation suggests that the commercial proposal for which Summerdowns was to be incorporated was to be implemented from scratch. The promoters had a concept as to how the proposed rail terminal could be constructed and operated. They sought advice from MSA concerning most significant aspects of the practical implementation of the proposal, including its structure, the incorporation of the vehicle, its constitution and governance structure, the assessment of its commercial viability, the preparation of an information memorandum and ultimately a prospectus, and the raising of capital to fund the project, including from the public.
6. On 1 July 2011, Mr Barden of MSA sent an email to Mr McMahon and Mr Imrie that attached a document called "Scope of Works & Quote 6th June 2011.doc". I infer that the attachment was the quotation that I have set out above. The email included the following: Hi Guys, * Barbara will send the bill for $45K re-addressed to both companies. * This includes MSA costs to date * The $10K you are paying comes off this bill. * All of the $45K including the $10K is loan monies to the public company and will be reimbursed to you… * As discussed, once the money has been received (tomorrow and Monday) we will apply for registration and should have the ACN by Wednesday next week at which time we can hold our first Board meeting… * Please sign the attached document and return by fax.
7. The copies of the quotation that are in evidence have not been signed by Mr McMahon and Mr Imrie. In fact, each of Mr McMahon and Mr Imrie paid $5,500 to MSA as a deposit for its services. The email appears to contemplate that Mr McMahon and Mr Imrie would pay the balance of the $45,000, and that this sum would in due course be a debt owed by the company to be formed. It appears that the fifth bullet point is a reference to the intended payment of the two sums of $5,500, as MSA commenced work without first receiving the balance of the $45,000 fee (plus GST) that was proposed.
8. MSA prepared a tax invoice dated 1 July 2011, which it sent to Mr McMahon. The amount of the invoice was $45,000 plus GST, giving a total of $49,500. The description of the services covered by the $45,000 was as follows: Scope of works as described in the attached document dated 6th June 2011 6th of June 2011 - Meeting regarding progression and business case evaluation 4hrs - No Charge 9th June 2011 - Meeting regarding progression and business case evaluation 4hrs - No Charge 24th June 2011 - Meeting regarding progression of work with John, Phil and wife. 3.5 hrs - No Charge 28th June 2011 - Discussion with Investor "BOAGS" - Adam & Rebecca 1.5hrs - No Charge
9. As appears from this tax invoice, the initial work done by MSA between 6 and 28 June 2011 was to be included within the quoted amount of $45,000. That sum was expressly stated to cover the scope of works described in the 6 June 2011 quotation.
10. Summerdowns was incorporated on 7 July 2011. MSA arranged for the company's incorporation.
11. The original directors of Summerdowns were Mr McMahon, Mr Imrie, Mr Barden and Mr Blackbeard. The company secretary was Mr Stevens.
12. The share structure consisted of 100,000 A class shares and 10 ordinary shares.
13. The company's constitution included the following rules: 47. The number of directors shall not be more than 20… 60. The business of the Company shall be managed by the directors, who may pay all expenses incurred in promoting and registering the Company, and may exercise all such powers of the Company as are not by the Law, or by these Regulations, required to be exercised by the Company in general meeting… 66. The directors may meet together for the dispatch of business adjourn and otherwise regulate their meetings as they think fit. A director may at any time and the Secretary shall on the requisition of a director convene a meeting of the directors. 67. Subject to these regulations questions arising at any meeting of directors shall be decided by a majority of votes and determination by a majority of directors shall for all purposes be deemed a determination of the directors… 71. The quorum necessary for the transaction of the business of the directors may be fixed by the directors, and unless so fixed shall be one…
14. Nothing in the constitution displaced the replaceable rule in s 248C of the Act, in so far as it provides for notice of meetings being given to directors: A directors' meeting may be called by a director giving reasonable notice individually to every other director.
15. The first meeting of the board of directors of Summerdowns occurred on 7 July 2011. The four directors and Mr Stevens were present. The board appointed Mr Barden as the chairperson. The documents recording the incorporation of the company were presented and accepted, and the constitution was adopted. The board resolved that it would consist of four members, including two executive directors, Mr Imrie and Mr McMahon, and two non-executive directors, Mr Barden and Mr Blackbeard. Mr Stevens was appointed as company secretary. The board appointed a number of professional service providers, including Mr Stevens' firm, WHK, as accountants, and MSA as consultants.
16. Mr Barden tabled at the meeting a checklist of items to be actioned and approved. The minutes record that the board accepted the action plan. Item 11 was as follows: 11. MSA to envelop [sic] Information Memorandum, including Sales, Marketing and Action Plan. Include, profit analysis, breakeven position, and three-year financial forecast.
17. The effect of the evidence given by Mr Stevens and Mr Barden was that they understood that Item 11 of the minutes recorded a resolution that MSA should provide the services set out in the quotation in respect of Stage 1 that had not already been provided, particularly the preparation of the information memorandum.
18. The 6 June 2011 quotation letter contained a statement that MSA was prepared to offer a staged payment approach, and that the payment schedule would be an item for discussion at the proposed meeting on 9 June 2011. There is no evidence of what took place at that meeting apart from the brief comment in the 1 July 2011 tax invoice. The minutes of the 7 July 2011 board meeting do not record any discussion or resolution concerning the schedule for paying to MSA the balance of the $45,000 plus GST.
19. The minutes of the meeting also included the following (I have omitted irrelevant and confusing numeration of the items): Further actions were also tabled by Lionel Barden, being as follows: 1. Talk to financier (Banksia) - MSA to discuss… 3. MSA to create a five page document, powerpoint presentation, and three page early stage financial forecast. 4. The Board agreed that monthly Board Meetings are to be held on the first Friday of each month, with the first meeting to be held on the 5th of August 2011. 5 and 6. [The minutes set out agreed amounts to be paid to each executive director and the secretary, and to Mr McMahon as head of business development and then record] The board recognises that Director payment is based on availability of funding and the Company's overall financial viability… 8. The Board agreed that the current hourly rate schedule for each of professional service providers will be as follows: a. MSA - $250/hour b. WHK - $300/hour…
20. A significant issue in the proceedings was whether the effect of the resolutions made by the board of directors on 7 July 2011 was that Summerdowns accepted MSA's quotation to perform Stage 1 of the services offered for a fee of $45,000 plus GST (as the defendants contend), or whether the company only agreed to pay MSA for work actually done at the rate of $250 per hour (as claimed by Summerdowns). Mr Barden's evidence was that MSA only agreed to provide its services for payment in advance, and both he and Mr Stevens gave evidence that they understood that Summerdowns agreed to pay a lump sum for Stage 1 and that the reference to payment of $250 per hour related only to additional work performed by MSA outside Stage 1.
21. MSA in fact commenced to carry out the necessary work before it received any further payment.
22. Mr Imrie wrote an email to the other directors and Mr Stevens on 13 July 2011. He raised a concern that the company had not yet entered into a formal agreement with his company, called Plateway, concerning the provision of his services. He observed: "I note that our other providers were quick to move and vote on such agreements during the board meeting but the approval for Plateway's was held over". This observation tends to confirm that, at the board meeting on 7 July 2011, the company accepted MSA's quotation.
23. The evidence included an unexecuted memorandum of understanding between Summerdowns and Adam and Rex Boag. The document may be a draft. The MOU referred in the recitals to the fact that Summerdowns was developing, constructing and preparing a lease of a grain terminal within the new rail terminal at the Summerdowns site on the northern outskirts of Casino, New South Wales, and that the Boags wished to lease and hold the rights to operate the grain terminal.
24. It also included a document described as "Position Document - 26th of July 2011" for Summerdowns. The document was prepared by MSA. The document described the proposed development of the rail terminal in stages as follows: 1. Stage 1. Covers consulting fees and Logistics development as well as Management services. 2. Stage 2. Purchase of the total land area. 3. Stage 3. Consists of constructing the core and secondary infrastructure, which comprises roads, rail sidings, hardstand and bulk store area and basic services connection.
25. The document suggested that Summerdowns had an estimated value of $51 million upon certain assumptions as to future trading. Summerdowns proposed to seek investments of $21 million through the raising of share capital.
26. On 26 and 27 July 2011, the directors by email approved what has been called a "flying resolution" in the following terms: The board agreed to open a bank account at Westpac Banking Corporation and that the bank account will have five (5) signatories and that any two of the five signatories can sign cheques and operate electronic bank transactions. The two signatories must consist of one Executive Director and one Non-Executive Director or Company Secretary and that Electronic Banking Tokens will be obtained from Westpac for the account signatories.
27. On 1 August 2011, $50,000 was deposited into Summerdowns' bank account. That sum was the subscription price for 100,000 shares in the company at $0.50 a share that were issued to Adam and Rebecca Boag. That was the only amount paid into Summerdowns' bank account in the period to which the dispute relates
28. On 2 August 2011, Mr Blackbeard sent an email to Mr McMahon, with a copy to Mr Stevens (and not to Mr Imrie and Mr Barden). The subject was "Loan Funds (In confidence)". The email said: I have attached a document outlining the requirements that the Board is required to address. I have only sent this to yourself and Andrew at this stage and not distributed to the Board as an official document. You will see by the points made, that it is a difficult decision and whilst we wish to provide you with the maximum level of support at this time, we will need to "tick all the boxes" prior to making any decision. I felt after our previous discussions it was better to put the position in writing so we can objectively assess the opportunity. Please review and discuss with Andrew, and we will discuss together thereafter.
29. The attachment was dated 2 August 2011, and was on MSA's letterhead. The subject was: "Independent use of monies from the Summerdowns Rail Ltd (SDR) account, by John McMahon". It said: This document outlines the requirements to be met prior to the assessment and decision by the board, to make a payment to John McMahon from the SDR account for costs incurred prior to the establishment of SDR. The following activities need to be completed prior to the assessment and the subsequent approval by the Board: 1. John McMahon to cede an independent property to Adam Boag as a guarantee against his investment as agreed. This protects the use of funds prior to SDR obtaining the Summerdowns property. 2. John McMahon is required to submit invoices to WHK and these to be substantiated by proof. 3. John McMahon needs to provide a request for cash and shares in lieu of payment for these invoices. Adam Boag, if he wishes, may withdraw his funds and provide them directly to John McMahon as a loan, but cannot direct the Board to do so, as this passes the responsibility to the Board. It is imperative that for SDR to be viable, the Summerdowns property needs to be purchased by SDR. This purchase agreement of the Summerdowns property needs to be completed within 2 weeks with a deposit of approx. $400,000 plus, and a 90 day settlement for the balance. Urgent action is needed to represent to, and provide qualified information to prospective large investors to attract funds for the purchase of the Summerdowns property. The current funds will allow SDR to enact these requirements. The Board needs to decide on the best use of the funds against John McMahon's request.
30. Aspects of this document are obscure, and it was not explained in the evidence. It appears that Mr McMahon made a request to Mr Blackbeard that he be repaid for costs that Mr McMahon had incurred personally in setting up Summerdowns, out of the money in Summerdowns' bank account. As the Boags had invested the $50,000 in Summerdowns, Mr Blackbeard made the suggestions in pars 1 to 3, and the following paragraph, as to how the money could be paid to Mr McMahon in a way that would protect the Boags.
31. Mr Blackbeard also observed that, for Summerdowns to be viable, it was imperative that it purchase the property upon which (I infer) the rail terminal was to be constructed.
32. The evidence in the proceedings concerning the proposed purchase by Summerdowns of the land upon which the rail terminal would be constructed was scant. It appears from this document that, before the company was incorporated, someone had negotiated the terms of a contract to purchase that land. Evidently, there was some urgency, and the proposed vendor expected that contracts would be exchanged, and the deposit paid, quickly. The MSA document suggests that Summerdowns was required to find more than $400,000 within two weeks, to pay a deposit on the land, and that further money would be needed to settle the purchase within 90 days. That could not be done unless substantial investments were made into Summerdowns, which would require urgent action on the part of Summerdowns.
33. I infer that the reference to the use of current funds to "enact these requirements", was intended to mean that the money in Summerdowns' bank account was sufficient to fund the steps necessary for Summerdowns to be able to present proposals to large investors, in order to convince them to make the necessary investments in Summerdowns.
34. Mr Stevens gave evidence that, on about 2 August 2011, Mr McMahon contacted him to request that he be given the $50,000 that had been deposited in Summerdowns' bank account. Mr Stevens and the directors other than Mr Imrie agreed to have a meeting with Mr McMahon on 4 August 2011 to consider his request.
35. Mr Blackbeard sent a second email on 2 August 2011 to the recipients of his earlier email. It said: Prior to the Board making any decision, I feel that Adam should be made aware of the total financial situation and the purpose of the funds. By advising him accordingly, we feel that it will dramatically weaken the opportunity to receive further funding from the family, and places the Board in a difficult situation.
36. On 3 August 2011, Mr Barden sent an email to the other directors and Mr Stevens, in which he referred to "a number of events over the last two weeks which are still ongoing and have impact on SDR Ltd". Mr Barden said that he was postponing the board meeting (which, on 7 July 2011, the board agreed would be held on 5 August 2011) until 12 August 2011.
37. Mr Stevens apparently advised that he could not attend on the new date, and, later in the day, Mr Barden circulated another email in which he asked whether everyone could attend on Tuesday, 16 August 2014.
38. On 4 August 2011, a meeting took place between Mr Barden, Mr Blackbeard, Mr McMahon and Mr Stevens. Mr Blackbeard and Mr Barden produced notes of what happened at the meeting.
39. Mr Imrie was not present. He was not given notice of the meeting. The meeting was initially called to deal with the request made by Mr McMahon. Mr Barden and Mr Stevens gave evidence that, after Mr McMahon's concern had been considered, the persons present realised that there was an urgent need for the members of Summerdowns' board of directors who were present to deal with the issue of how Summerdowns could acquire the land upon which it proposed to construct the rail terminal. Mr Stevens said in cross-examination that the initial meeting was suspended, and it was decided to call an emergency board meeting. Mr Imrie could not attend, as they understood it, because he was overseas and was not immediately contactable. Both said that they learnt this from Mr McMahon. Mr Stephen said that occurred during the meeting. The two witnesses disclosed this evidence in the witness box. It was not in their affidavits. It was not put to either witness in cross-examination that their understanding was incorrect.
40. Mr Stevens gave evidence that, at the meeting, Mr McMahon said: "I need the money to allow [sic] to rectify a deficiency in my trust account". Mr Stevens said that he understood that the trust account referred to was the JMR Trust Account. That appears to be the trust account of Mr McMahon's real estate firm. Mr McMahon said: "There is a settlement due and I don't have the money in my trust account… Can't the $50,000 be used to pay a deposit on the land". Mr Stevens replied: "I don't think releasing the funds for a deposit at this early stage is in the best interests of the company. For the company to enter into a contract and pay a deposit for the land without the ability to complete due to lack of funds would be a dangerous situation".
41. The real significance of this exchange was not explored in the evidence. Mr Stevens' evidence would suggest that Mr McMahon was worried because he did not have enough money in his trust account to settle the purchase of some unidentified property. Without any clear explanation in the evidence, the conversation then moved to a request that the $50,000 in Summerdowns' bank account be used to pay a deposit on "the land". The land concerned was not identified, but it appears to be a reference to the land that the company intended to acquire for the purpose of constructing the rail terminal. The effect of Mr Stevens' response was that Summerdowns should not pay the deposit, and accordingly should not enter into the purchase contract, until it was sure that it could finance the payment of the balance of the purchase price on settlement. It is not clear how the payment of $50,000 to Mr McMahon could assist him in relation to the payment of a deposit of more than $400,000. Nor is it clear how Mr McMahon could have had a trust account deficiency in relation to the purchase of the land by Summerdowns, as the company had not given Mr McMahon any money for that purpose.
42. Mr Blackbeard sent his note of the meeting to Mr Barden, at 7:37 AM, on 5 August 2011. The following aspects of the note are relevant: 3. Lionel B to follow through with Banksia to determine the requirements to release the land from John M so that Summerdowns Rail Ltd can proceed with the consideration of the Sale Agreement… 5. The agreement made that the following account payments are due to be made: 1. John M will be paid back for his $5,500 payment that he made to Summerdowns Rail Ltd, to engage MSA officially. 2. Philip I will be paid back for his $5,500 payment to Summerdowns Rail Ltd, to engage MSA officially. 3. MSA is paid the remaining $38,500 for the commencement of the IM, as initiated by the $11,000 previously paid by John M and Philip I
43. The note in par 3 suggests that Mr McMahon had the benefit of the proposal to purchase the land required by Summerdowns.
44. The payment referred to in the third subparagraph of par 5 is the subject of the complaint made by the plaintiff in these proceedings.
45. The other notes made by Mr Blackbeard related to the finalisation and timing of the investment to be made by Alex Boag, the allocation of shares to the promoters (called "founders"), the allocation of share options as success fees for board members, the appointment of Mr Stevens as a non-executive director, and the payment of a commission to early investors.
46. Paragraph 10 stated: 10. Personal Finance unrelated to Summerdowns Rail. It was advised that any further personal finance requirements are to be discussed directly between John M and Andrew S from WHK, and not tabled at any future Summerdowns Rail meetings as they are unrelated.
47. Mr Barden circulated his note on 5 August 2011, at 6:18 PM, to the attendees. Mr Barden stated: Gentlemen, please keep this information between ourselves as there is some personal information that should not be released as it could open up further questions which would be personally embarrassing for John. Specific outcomes will be articulated in further official detail.
48. Mr Barden's note appears to have built upon the earlier note prepared by Mr Blackbeard. In addition to the items in Mr Blackbeard's note (sometimes revised), Mr Barden's note stated: 5. John M is to put up property to guarantee the funds so far raised in SDR… 12. It was agreed that any further personal finance requirements of John M, or JM Realty will be treated independently and handled accordingly. Whilst the Board members of a SDR may act independently in support, these matters are not part of and will not be considered officially by the Board of SDR. This memo is a description of meeting points from 4th August 2011 meeting. They relate only to action plans necessary to offset the impact of personal finance requirements of John M or JM Realty may have on SDR. They have no relationship to and cannot be considered as minutes of any SDR meeting. Official SDR proposals and minutes derived from the meeting will be forthcoming for the SDR Board consideration.
49. It seems that the meeting on 4 August 2011 was initially called because Mr McMahon had a trust account problem. It is not clear that that problem could have been connected in any way with the proposal that Summerdowns would acquire land. At the meeting, the conversation turned to whether the $50,000 could be used for the deposit on the land that the company was to acquire. That proposal was rejected because the company did not at that time have secure finance to complete the contract. The attendees at the meeting then agreed to apply most of the $50,000 in repaying $5,500 to each of Mr McMahon and Mr Imrie, and paying the balance of the MSA invoice dated 1 July 2011. The evidence does not make it clear how the persons present moved from one subject to the other.
50. Neither of the two notes sheds any light on the issue of whether the participants in the meeting discussed why Mr McMahon and Mr Imrie should be repaid immediately, and why the balance of the fee claimed by MSA should also be paid immediately, or what their reasons were for making the decision to do so.
51. Mr Barden said in evidence that he accepted that the meeting which occurred on 4 August 2011 was not an official board meeting, as Mr Imrie had not been given notice. He said that the other board members nonetheless acted out of necessity, and did so because a quorum of the board was only one director, and the three directors who were present constituted a majority. Mr Barden said that he understood that the matters decided at the meeting would be put before the board at its next formal meeting for ratification. That belief is consistent with the final sentence of Mr Barden's note of the meeting, where he said that the proposals and the minutes would "be forthcoming for the SDR Board consideration".
52. The precise reason for the urgency is somewhat elusive. It appears that the vendor of the land upon which Summerdowns proposed to construct the rail terminal expected that a contract would be entered into soon. If Summerdowns was unable to purchase the land, then the project would fail. Although Summerdowns had the $50,000 in its bank account, it needed to secure substantial additional finance before it could justify paying the deposit. Effectively, Summerdowns had an urgent need to progress its fundraising activities.
53. It is not clear whether, and if so in what respect, Mr McMahon's trust account difficulties had any bearing on this need for urgency.
54. Mr Barden's justification for the agreement to pay the $38,500 to MSA was that it had become necessary for MSA to complete all of the work, the subject of the original quotation, within a matter of weeks.
55. In cross-examination, Mr Barden's position concerning the circumstances in which Summerdowns' affairs were dealt with at this meeting was (T 65): Q. You would accept, wouldn't you, that it wasn't in the best interests of Summerdowns for that payment to be made to MSA at a time when the information memorandum had not been provided to that company? A. It was the most important money that could be paid, because that paid for the information memorandum to be developed as fast as possible, and that was the intention at the time so that further funds could be raised, because the company - the - the holdings that backed the company were in jeopardy and that's what John McMahon was in trouble for.
56. The payments agreed to by the participants at the 4 August 2011 meeting were made on that date (or shortly after in the case of the $5,500 payable to Mr Imrie, as it was necessary for him to give the details of his account to enable the payment to be made). In the case of the $38,500 that was payable to MSA, the payment was effected by Mr Blackbeard and Mr Stevens. Mr Barden did not personally participate in the making of the payment, although he was present when the other two gentlemen did so, as they were all travelling in the same car.
57. The payment of the $38,500 by Mr Blackbeard and Mr Stevens was inconsistent with the flying resolution, as neither person was an executive director. The flying resolution would not have been contravened if Mr McMahon, who agreed to the payment being made, had implemented it.
58. On 8 August 2011, Mr McMahon circulated a copy of Mr Barden's note of the 4 August 2011 meeting, with Mr McMahon's comments. The comments were admitted into evidence, but not as to the truth of the assertions made.
59. Mr McMahon made the following comment concerning the agreement to make the payments out of Summerdowns' bank account: Regarding any payments I advised everyone that PI should be involved and have consultation as to whether it is agreed or disagreed. Regarding the $38,500 for COMPLETION of work - JTM & PI have no issue with payment once required work is COMPLETED.
60. This suggests that there may not have been unanimity at the meeting concerning the payments being made. It is also possible that Mr McMahon had been able to discuss the issue with Mr Imrie in the interim (see the reference to "JTM and Pl have no issue with…"). This question could not be resolved, as neither Mr McMahon nor Mr Imrie gave evidence. Mr McMahon's final comment was: "There are points within this document that are items that were discussed but not agreed on without input from ALL board members".
61. On 8 August 2011, Mr Stevens sent an email to Mr Imrie to advise that the previous week it had been agreed to reimburse "the $5000 that was paid to MSA" and that the sum had been paid to Mr McMahon. On 16 August 2011, Mr Imrie replied to correct Mr Stevens' incorrect reference to $5,000, rather than $5,500, and to give Mr Stevens Mr Imrie's account details.
62. On the one hand, Mr Stevens' email did not specifically mention the payment of $38,500 that had been made to MSA. On the other hand, Mr Imrie was content to receive repayment of his $5,500.
63. On 16 August 2011, MSA sent a draft information memorandum to Mr McMahon. On the following day, Mr McMahon sent an email to Mr Blackbeard to ask for a copy of work in progress so that all concerned could assist in finalising the information memorandum as a matter of urgency. Mr Blackbeard replied on the same day, saying that he was confused about the urgency "after our meeting yesterday". There is no evidence about what occurred at that meeting.
64. On 19 August 2011, Mr Barden sent a list of questions to Mr Imrie that required answers for the purpose of completing the information memorandum.
65. After various communications and work to complete the information memorandum, on 9 September 2011, Mr Barden sent an email to Mr McMahon, Mr Imrie and Mr Stevens to advise that the draft information memorandum would be delivered on the following Thursday morning. Mr Barden advised (to use his precise words) that MSA had been "unable to substantiate the figures regarding throughput volume, the company is to occupy and establish long-term leases and the structural build detailed quotes".
66. Mr Barden and Mr Blackbeard resigned as directors of Summerdowns on 9 September 2011. The ASIC records show that the resignations took effect on 9 September 2011.
67. Mr McMahon sent an email to Mr Barden on 9 September 2011, with copies to Mr Blackbeard, Mr Stevens and Mr Imrie. He said that the resignations would be accepted once an orderly handover process had been completed. He complained that MSA had only performed a limited number of the initial list of items to be supplied. He said: "This is quite concerning as this has been paid for in advance and in cash, contrary to other similar providers suggesting this could be achieved in two (2) weeks and for a retainer and equity payment arrangement". Mr McMahon suggested that it may be necessary for Summerdowns to reconsider the appointment of MSA. Mr McMahon listed information that he required MSA to provide, including: 7. An explanation as to why MSA was paid $50,000 upfront for works not completed.
68. Mr McMahon suggested a number of solutions, including: "Payment for any work not delivered should be refunded into the bank account to provide some liquidity".
69. Mr McMahon did not claim that the decision made on 4 August 2011 to pay $38,500 to MSA was unauthorised.
70. In the unlikely event that Mr Imrie had not already learned of the payment made out of Summerdowns' bank account to MSA on 4 August 2011, he became aware of the payment when he received this email.
71. On 13 September 2011, Mr Imrie sent an email to Mr Barden, Mr Blackbeard, Mr McMahon and Mr Stevens in which he requested MSA to submit a draft information memorandum that week and made a number of technical observations concerning the content of the information memorandum. It appears from the terms of the email that Mr Imrie expected MSA to take his comments into account in reformulating the draft information memorandum.
72. Mr Imrie also did not claim that the payment made to MSA 4 August 2011 was unauthorised.
73. On 19 September 2011, Mr Blackbeard forwarded by email a draft information memorandum (described as version 6) to Mr McMahon, Mr Imrie and Mr Stevens. The draft is not included in the evidence.
74. On 4 October 2011, Mr McMahon sent to MSA by email a letter dated 30 September 2011. The letter referred to the fact that Mr Barden and Mr Blackbeard had resigned as directors and, after listing the work that MSA had agreed to do, said: It is of concern to the board of Summerdowns Rail Ltd that you have effected a transfer of funds from SDR's bank account in the sum of $38,500 to MSA, contrary to the board approved withdrawal method. This payment was taken against the express statement by J McMahon that the approval of the Imrie was a pre-requisite. This is in addition to the $11,000 received as an advance on company funds previously from P Imrie and J McMahon… MSA has put forward a very basic draft Information Memorandum which in our view is a long way short of being in a usable form. The draft also includes a substantial amount of material photos, maps etc to which MSA does not appear to have intellectual property rights… We require the funds paid to MSA to be refunded to Summerdowns Rail Ltd forthwith. Should the work agreed to be carried out by MSA be satisfactorily completed then payment of MSA's account as approved at the time of commissioning the work will be attended to. This will be subject to the presentation of an itemised invoice as agreed at the time of commissioning…
75. This was the first time, after Mr Blackbeard and Mr Barden resigned as directors, that Summerdowns claimed that the payment had been made to MSA in a way that was contrary to the flying resolution.
76. Mr Blackbeard responded on 25 October 2011, after he returned to work after being ill. He asserted that MSA was still waiting to be provided with information by Summerdowns that was essential to complete the information memorandum. Concerning the payment that had been made to MSA, Mr Blackbeard said: Payment to MSA. We dispute your comment that payment to MSA was made contrary to Board Approval. In fact, we also met with you in Grafton and 3 Directors confirmed the payment could be made. There was no special requirement that Philip authorises such payments. As per the bank requirements, 2 directors need to act as signatories.
77. Mr Blackbeard also offered a reason for his and Mr Barden's resignation as directors, being that they were exposed to "new disclosures" concerning Summerdowns' affairs, which caused them "constant conflict". There was no elaboration in the evidence of the reasons for Mr Blackbeard and Mr Barden retiring as directors.
78. A meeting of the board of directors of Summerdowns occurred on 11 November 2011. Rex Boag, Mr Imrie and Mr McMahon are recorded as being directors. Mr Stevens was present as company secretary.
79. The minutes of the meeting referred to the previous board meeting held on 16 August 2011. The minutes of that meeting had not yet been produced, and Mr Stevens agreed to produce the minutes within the next week. There is no direct evidence that a board meeting of the company took place on 16 August 2011. If it did, there is no evidence of what occurred at the meeting. If minutes were prepared, they are not in evidence. If the meeting did occur, this may be a significant lacuna in the evidence.
80. The minutes of the 11 November 2011 board meeting contain the following concerning the company's relationship with MSA: 6. Outstanding Invoices … There was renewed discussion about the work that MSA had undertaken for the company to date and the state of their invoice. There was discussion about the nature of the contractual arrangements between Summerdowns, WHK and MSA. There was discussion about the role of MSA and their contractual duties in respect of the corporate governance of the company. There was discussion about the payment of $49,000 on the invoice presented by MSA for their work to date, and whether the authorisation of their payment followed procedures previously agreed by the board. 7. MSA performance and actions arising. MSA have responded to the letter of demand sent following the last meeting. The response is inadequate and does not deal with a substantial amount of unfinished work that MSA have yet to complete or the poor quality of the delivered work. The conduct of MSA's principals amounts to negligence. In an attempt to avoid costly legal action and preserve some shareholder funds Mr McMahon suggested that Mr Stevens go to MSA and request a refund of some of the payment that had been made to them against the unfinished works that they had contracted to undertake. Mr Imrie to review the costs of MSA and, after deducting their board costs, provide an estimate of their account to Mr Stevens, to take to MSA. Moved: Mr McMahon. Seconded: Mr Imrie. Agreed. 8. Funding: … It was agreed that MSA be given 10 days in which to respond to the matters put to it regarding the outstanding work and the regular withdrawals from the company bank account for payment for their invoice.
81. On 13 November 2011, Mr Imrie sent an email to Mr McMahon and Mr Rex Boag, apparently in performance of the request made of him in item 7 of the board minutes. He said: Please find attached a spreadsheet detailing the chronology of events I can reconstruct from my email, John please add any additional you are aware of. I have estimated the time spent by MSA taking into account the amount of material provided by Plateway and the JMR, the amount lifted from the Internet (mostly irrelevant) and previous MSA work and the amount of new material provided most of which is heavily drawn from Plateway and JMR. Using this estimate I have arrived at a figure of $27,700 of value to date rather than the $45,000 removed from the Summerdowns Rail bank account by MSA. Of this amount $8400 is payable from MSA to WSA Cameron is to cover an estimated 24 hours of involvement from Andrew Stevens. On this basis Summerdowns Rail is due a refund for $17,300 (excluding the board fees which cover the remaining involvement from Lance Blackbeard and Lionel Barden). Given the cash shortfall I would propose that the board be paid in share options at the rate nominated in the meeting held on 16 August 2011, upon receipt of the option amount we can then close out the other invoices from MSA…
82. It is not clear what Mr Imrie meant by his reference to the board fees. The best interpretation seems to be that MSA, or the individual directors, was entitled to payment for acting as directors, as well as any fee to which MSA was entitled.
83. The evidence stopped there. There was no evidence concerning whether Summerdowns prepared a completed information memorandum, and if so whether any of the work done by MSA contributed to the final document. There was no evidence as to whether Summerdowns used an information memorandum to raise investment funds. There was no evidence as to whether Summerdowns ultimately acquired the land, or whether it ultimately pursued its original business plan.

Summerdowns' case

1. As I have noted above, Summerdowns has challenged the circumstances in which the payment of $38,500 made out of its bank account to MSA on 4 August 2011 was made. The case that Summerdowns pleaded has two limbs. First, Summerdowns claims that the making of the payment did not have the authority of a validly constituted meeting of the board of directors of the company and, in any event, the way in which it was made was inconsistent with the requirements of the flying resolution, which required that the payment be effected by one executive director, and either one non-executive director or the company secretary. Secondly, a major part of the services that MSA agreed to provide to Summerdowns consisted of the preparation of an information memorandum, which Summerdowns would use to secure investments from sophisticated investors. At the time of the payment, MSA had not provided a final form of the information memorandum to Summerdowns, or even a draft of that document.
2. Summerdowns claims that the compensation to which it is entitled is necessarily equal to the amount of the payment. The claim, as made, does not involve any attempt to prove the net loss that Summerdowns suffered.
3. The manner in which Mr Stevens and Mr Barden were cross-examined on behalf of Summerdowns appears to expand the case propounded by Summerdowns. Suggestions were made, but resisted by the witnesses, that as of 4 August 2011, there was no binding contract between Summerdowns and MSA, other than that Summerdowns would pay MSA $250 per hour for work actually done by that company. As of that date (said Summerdowns), there was "no work product" produced by MSA and delivered to Summerdowns and, in particular, the information memorandum had not been completed. Counsel for Summerdowns suggested to the witnesses that MSA had not delivered to Summerdowns an invoice that supported the payment to it of the whole of the $45,000 plus GST.
4. As I understand it, at its highest, Summerdowns' case is that the defendants caused, or participated in, the payment of $38,500 to MSA, without the authority of the board of directors, and in a manner contrary to the flying resolution, when MSA was only entitled to receive an hourly payment for work actually done, and MSA had not produced a work product that entitled it to receive the amount paid (and in the events which occurred, never did so).
5. Summerdowns did not plead that, under the agreement between Summerdowns and MSA, Summerdowns was only obliged to pay MSA an hourly rate for work actually done. Summerdowns' pleading does not address the terms of the contract between the two companies.
6. Summerdowns has sued the defendants for compensation under s 1317H(1) of the Act. That subsection provides: (1) A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if: (a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and (b) the damage resulted from the contravention. The order must specify the amount of the compensation.
7. Subsection (2) of s 1317H has the unusual effect that the compensation payable to a person who has suffered damage as a result of the contravention of a civil penalty provision may include the profit made by the contravener. It provides: (2) In determining the damage suffered by the corporation or scheme for the purposes of making a compensation order, include profits made by any person resulting from the contravention or the offence. (Among other oddities, the syntax of this provision is defective)
8. Summerdowns alleged in its amended statement of claim that Mr Stevens contravened s 180(1) of the Act. That subsection provides: (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. Note 1: This subsection is a civil penalty provision (see section 1317E).
9. The company also alleged that Mr Stevens contravened s 181(1), which provides: (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. Note 1: This subsection is a civil penalty provision (see section 1317E)… (2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
10. It also alleged that Mr Stevens contravened s 182(1), which is in the following terms: (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. Note: This subsection is a civil penalty provision (see section 1317E). (2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
11. In relation to Mr Barden, Summerdowns has alleged that he was involved in the contravention by Mr Stevens and Mr Blackbeard of ss 181(1) and 182(1) of the Act. Separately, it makes equivalent allegations that Mr Barden contravened ss 181(2) and 182(2).
12. The meaning of "involved" for the purpose of these provisions is found in s 79 of the Act, which provides: A person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention.
13. Summerdowns also alleged that the defendants breached the equitable duties that are owed to companies by their officers that are equivalent to the statutory duties upon which it relied. The parties conducted the proceedings on the basis that the case based upon the equitable duties did not raise any different issues than Summerdowns' claims for compensation for breach of the statutory duties.

Credibility of witnesses

1. It will be necessary for the Court to explore additional issues of fact to those that have been considered above, that arise out of the primary evidence. That will require the Court to express a view as to the credibility of the evidence given by the witnesses.
2. As I have noted, the only witnesses who gave evidence were Mr Stevens and Mr Barden. I formed a favourable impression of the credibility of both witnesses. They are both apparently experienced in business and professional affairs. They gave their evidence forthrightly. They were both impressive witnesses, and appeared to give their evidence candidly, even when their answers appeared to be against their interests. It was not put to them that they were not telling the truth.
3. I accept that both Mr Stevens and Mr Barden gave their evidence carefully and honestly. Subject to certain limitations connected to the evidence in the case often being incomplete, or confused, I generally accept their evidence.

Additional findings of fact for resolution of the dispute

1. A significant aspect of this matter is the dearth of evidence on a number of important subjects. Additionally, neither Mr Imrie nor Mr McMahon gave evidence. As I have noted, Mr Imrie is a director of Summerdowns, and was apparently in Court during the hearing. No explanation was given as to why Mr Imrie and Mr McMahon did not give evidence. According to its counsel, Summerdowns took the view that its case could be established on the documentary evidence, and there was no need to call either of the directors. The evidence established that Mr McMahon became bankrupt by the making of a sequestration order on 1 November 2013. Summerdowns' position was that Mr McMahon was not a witness who was in either camp, so he was available to be called by either side.
2. So far as the absence of Mr Imrie and Mr McMahon from the witness box is concerned, the Court must apply the principle which Gleeson CJ and McHugh J accepted in Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; 200 CLR 121 at [51]: … But there was nothing which called on the defendant to lead evidence in respect of these matters: its failure to call evidence therefore had no probative significance and could not assist the drawing of any inference in favour of the plaintiff. In Cross on Evidence Mr Dyson Heydon QC declares that: "[T]he rule [in Jones v Dunkel] only applies where a party is 'required to explain or contradict' something. What a party is required to explain or contradict depends upon the issues in the case as thrown up in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts 'requiring an answer'." (Footnotes omitted)
3. Furthermore, "[t]he rule in Jones v Dunkel permits an inference, not that evidence not called by a party would have been adverse to the party, but that it would not have assisted the party": Kuhl v Zürich Financial Services Australia Ltd & Anor. [2011] HCA 11; 243 CLR 361 at [64] (Heydon, Crennan and Bell JJ). See also Woolworths Ltd v Ryder [2014] NSWCA 223 at [10], [13] and [35].
4. Although counsel for Mr Stevens criticised Summerdowns for not causing Mr Imrie and Mr McMahon to give evidence, he did not identify the particular consequences that should follow, consistently with the authorities mentioned above. I have not made any findings based upon the failure of Summerdowns to call either witness. The absence of evidence from these witnesses may well be significant to the fact-finding process, but only because that absence leaves the conclusions that I have drawn from the testimonial and documentary evidence unanswered.
5. I make the following additional findings of fact concerning the issues that require determination in this matter.
6. Item 11 of the minutes of the Summerdowns' board of directors' meeting, held on 7 July 2011, constituted an acceptance of MSA's offer comprised of its 6 June 2011 quotation, and its 1 July 2011 tax invoice. Certainly, both Mr Stevens and Mr Barden understood from what had happened on 7 July 2011 that the board of directors of Summerdowns had resolved to accept, or confirm an earlier agreement to accept, MSA's invoice to do the work in Stage 1 of the quotation for a total lump sum of $45,000 plus GST.
7. This is a significant finding because it means that Summerdowns and MSA entered into a contract whereby MSA was both entitled to, and required to, do the work contemplated by Stage 1, and to be paid a lump sum fee of $45,000 plus GST. MSA initially received a prepayment of $11,000, and then the balance of $38,500 on 4 August 2011. By that date, it had done some, but not all, of the necessary work, and thereafter it did further work, in some respects at the explicit request of officers of Summerdowns. Subject to MSA breaching its contract by failing to do all of the work or by failing to do the work adequately, MSA was entitled to payment. The effect of the resolutions made by three of the directors on 4 August 2011, whether or not they were valid, was that the payment of the agreed fee was accelerated. Summerdowns cannot now complain about the work being done, or the company having to pay for it. It can only complain - if the resolutions were not binding upon it - about the acceleration of the payment. There is evidence that Summerdowns complained that the work done by MSA was inadequate. Summerdowns made no proper attempt to prove that complaint.
8. At some time before 2 August 2011, Mr McMahon contacted Mr Blackbeard to make a special request concerning the $50,000 in the company's bank account. It is unlikely that Mr McMahon mentioned the issue to Mr Imrie, and it is unclear whether he separately raised the subject with Mr Barden. The nature and circumstances of Mr McMahon's request are not clear. Mr McMahon had a problem because the trust account of his real estate agency was deficient, which had the consequence that he did not have the funds necessary to complete a contract of purchase. The evidence did not disclose any detail about the cause of the deficiency, its magnitude, or the contract that was the subject of Mr McMahon's difficulty. While the nature of Mr McMahon's request is unclear, I find that he wanted to ask the directors of Summerdowns to reimburse Mr McMahon promptly for unidentified pre-incorporation expenses which he had incurred on behalf of the company.
9. The evidence was unclear as to whether or not the trust account deficiency had anything to do with the acquisition of the land that Summerdowns needed to acquire in order to construct the rail terminal. The evidence was, in fact, confused. Mr Stevens' evidence was that, at the meeting that took place on 4 August 2011, Mr McMahon said: "There is a settlement due and I don't have the money in my trust account… Can't the $50,000 be used to pay a deposit on the land". Mr Blackbeard's attachment to his 2 August 2011 email stated: "This purchase agreement of the Summerdowns property needs to be completed within 2 weeks with a deposit of approx $400,000 plus, and a 90 day settlement for the balance." Mr McMahon said that he needed the money for a settlement, not for the payment of a deposit. Mr McMahon spoke of the possibility of the $50,000 being used to pay a deposit, but Mr Blackbeard's email suggested that the deposit would be more than $400,000. Mr McMahon related the $50,000 to "the land", which in context appears to be a reference to the land that Summerdowns needed to acquire. On the state of the evidence before the Court, any attempt to resolve these uncertainties would involve mere speculation.
10. I find that the notice of the meeting that occurred on 4 August 2011 was initially not given to Mr Imrie because the other directors and Mr Stevens did not want to embarrass Mr McMahon. When those present decided that there was an urgent need to discuss the general business of Summerdowns, Mr Imrie could not be given notice because he was overseas. Mr Stevens and Mr Barden believed that Mr Imrie was overseas, and could not attend, or be contacted, because of information given to them by Mr McMahon. I accept Mr Stevens' evidence that he was told during the meeting by Mr McMahon that Mr Imrie was overseas.
11. The evidence did not establish where Mr Imrie was, how readily he could be contacted, whether he could participate in a meeting of directors remotely, or when he proposed to return to Australia. I am satisfied that the persons present at the meeting genuinely and reasonably understood that there was no point in trying to contact Mr Imrie, although the reasons for that understanding were not demonstrated by the evidence.
12. It is likely that the participants at the meeting felt there was some sensitivity in relation to informing others, probably including Mr Imrie, about the problem that Mr McMahon was experiencing concerning the deficiency in his trust account. That sensitivity, to the extent that it existed, did not extend to any reluctance to inform Mr Imrie about what had been agreed at the meeting concerning the affairs of Summerdowns that were not related to Mr McMahon's personal trust account problem.
13. Early in the meeting, the participants reached agreement that they could not assist Mr McMahon with Summerdowns' money in the way that he apparently wanted. Because the evidence is obscure, it is not possible to reconstruct the substance of what was said on this issue.
14. The meeting moved on to a discussion of the affairs of Summerdowns. Mr Stevens and Mr Barden gave evidence that there were in effect two meetings. I accept that that is the way that it may have appeared to those witnesses. It is true that most of the issues covered at the meeting concerned the affairs of Summerdowns.
15. A review of the notes of the meeting produced by Mr Blackbeard and Mr Barden, which I have set out in part above, clearly shows that most of the issues discussed at the meeting were issues of a nature that would ordinarily be considered by the board of directors of the company. They were issues relating to the business of the company, rather than Mr McMahon's personal problems.
16. I find that the participants agreed that Mr Imrie and Mr McMahon would be repaid the $5,500 that each of them had paid to MSA for its consultancy services. It is not clear, but it is likely that the decision to pay Mr McMahon his $5,500 was prompted by a desire to assist him in circumstances where the only payment to him that could be justified out of Summerdowns' funds at that time was reimbursement of that payment.
17. It was also agreed by all of the directors who were present to pay immediately to MSA the balance of the agreed fee for the provision of Stage 1 of their services.
18. I make this finding on the basis of the evidence given by Mr Stevens and Mr Barden. As I have noted, Mr McMahon did not give evidence, and his assertion in his 8 August 2011 response to Mr Barden's note of what happened at the meeting, in which he said "I advised everyone that PI should be involved and have consultation as to whether it is agreed or disagreed" in relation to the payment of the $38,500 to MSA, was not admitted to prove the truth of what happened at the meeting.
19. This is a significant finding for the disposition of these proceedings. Even though the meeting may not have been a valid board meeting, it would be likely to make a difference to the outcome, if Mr Stevens and Mr Blackbeard had caused Summerdowns' money to be paid to MSA, in circumstances where the resolution to make the payment was not made by a majority of the directors of Summerdowns, and Mr McMahon had expressly reserved his and Mr Imrie's position. In that case, there would be no authority for the payment to be made at all. The position would be different, where all of the directors present had agreed that the payments should be made, subject only to the expected agreement of Mr Imrie, after the matter could be raised with him.
20. As stated above, I formed a favourable view of Mr Stevens' and Mr Barden's credibility and honesty. I find that it is improbable that they would have gone ahead to make the payments, in the face of an express reservation by Mr McMahon, of his and Mr Imrie's agreement. There was no scope at all for Mr Stevens, Mr Blackbeard and Mr Barden to suppress the fact of the payment being made, given the small amount of money in Summerdowns' bank account, and the fact that payments of $5,500 were also made to Mr McMahon and Mr Imrie. The participants at the meeting would naturally have expected that, when Mr Imrie was advised that he would be repaid his $5,500, he would ask what had happened to cause the payment to be made, and he would have been informed of what had happened at the meeting.
21. I accept the explanation given by Mr Stevens and Mr Barden, that the reason why the balance of the fee due to MSA was agreed to be paid in one lump sum, was that the participants at the meeting appreciated that Summerdowns had an urgent need to raise the funds that were necessary to enable it to enter into a contract, and complete the purchase of the land that was essential for it to own, if the project to construct the rail terminal was to proceed. That would require a substantial level of investment from 'sophisticated investors', and possibly members of the public. That would require the urgent preparation of the proposed information memorandum, and possibly also a prospectus in due course. I accept Mr Barden's evidence that the intention was that at least the information memorandum would be prepared in two weeks or so. That finding is supported by Mr McMahon's 9 September 2011 email. There was a need for all hands to be on deck, so to speak.
22. The evidence was not sufficiently full to enable any fine calibration of the time that it would take to produce the completed information memorandum. In particular, as the evidence did not establish when Mr Imrie proposed to return to Australia, it is not possible to decide whether any significant damage to Summerdowns' prospects would have occurred, if the directors at the 4 August 2011 meeting had deferred the issue until Mr Imrie returned.
23. I am satisfied that the directors who were present at the 4 August 2011 meeting, particularly Mr Blackbeard and Mr Stevens, had a genuine and honest belief that it was in the interests of Summerdowns for it to agree to pay MSA the balance of the lump sum fee payable to it, in return for MSA's agreement to do what was necessary to complete the information memorandum on an urgent basis.
24. I am also satisfied that Mr Stevens, as the company secretary, believed that the 4 August 2011 meeting was an effective meeting of the directors of Summerdowns, and that it was his duty to assist the directors to implement the resolutions made at the meeting.
25. In making those findings, I have not ignored the available argument that, even if urgency was required, that did not require prepayment of the balance of the fee. The directors of Summerdowns could have made arrangements for paying the fee progressively against invoices on an expedited basis. However, given the expectation that the information memorandum would be completed within weeks, the idea that the balance of the lump sum fee would be paid in stages was hardly practical.
26. The evidence was scant on this issue, and there was no comprehensive investigation of the reason why the participants at the meeting took the course that they did. It would not be justified for the Court to find that the participants at the meeting acted as they did for any improper purpose, and I do not so find.
27. Mr McMahon clearly accepted the reimbursement of his $5,500. He could hardly have done that and cavilled with the proposal to pay MSA the balance of its fee. The natural inference to be drawn from the notes of the meeting prepared by Mr Blackbeard and Mr Barden is that the making of all of the payments was agreed as part of the one package.
28. Mr Imrie also accepted repayment of his $5,500. Mr Stevens' 8 August 2011 email, which advised Mr Imrie that "Last week it was agreed to reimburse the $5500 that was paid to MSA to commence work by both yourself and John", did not refer to the agreement that was reached at the same time to pay $38,500 to MSA. There was no direct evidence that Mr Imrie was informed at the time of the payment to MSA. As I have noted above, the first evidence that Mr Imrie became aware of the payment is his receipt of a copy of Mr McMahon's 9 September 2011 email to Mr Barden, which sought in item 7 an "explanation as to why MSA was paid $50,000 upfront for works not completed". It is, all things considered, improbable that Mr Imrie was not informed of the payment by Mr McMahon soon after he returned to Australia. As Mr Imrie and Mr McMahon did not give evidence, this issue remains unresolved.
29. No complaint was made by Summerdowns about the payment of the $38,500 to MSA until 9 September 2011. That was the same day that Mr Blackbeard and Mr Barden resigned as directors. It was also the same day that Mr Barden, in an email sent to Mr McMahon, Mr Imrie and Mr Stevens, advised that MSA had been "unable to substantiate the figures regarding throughput volume, the company is to occupy and establish long-term leases and the structural build detailed quotes". Mr Barden did not explain this difficulty in evidence, and it was not the subject of cross-examination. The difficulties to which Mr Barden referred were confronted by MSA in the course of preparing the information memorandum. Even though there was no explanation in the evidence, it seems obvious that, if MSA had been unable to substantiate the figures provided by Summerdowns concerning the throughput volume of the rail terminal, the long-term leases that could be established, and the cost of building the structure, that would have been a very serious impediment to producing the desired information memorandum on an expedited basis.
30. The terms of Mr Imrie's response to MSA's draft information memorandum as at 13 September 2011 suggest that there was significant dissension between Mr Imrie, on the one hand, and MSA on the other, concerning the course that the preparation of the information memorandum was taking.
31. By the time of Mr Imrie's 13 September 2011 email to MSA, it is clear Mr Imrie was aware that MSA had been paid the balance of its fee on 4 August 2011. Mr Imrie did not require MSA to cease work on the contract, and to repay any money it had received back to Summerdowns. On the contrary, he requested MSA to submit a draft information memorandum that week, and to do so having regard to the comments that Mr Imrie offered in his email. I infer that Mr Imrie was acting with the authority of the company in writing this email. In response, MSA submitted version 6 of the draft information memorandum on 19 September 2011.
32. Notwithstanding the appearance of dissension, the issue was not explored in the evidence, and there is no basis for the Court to make any finding about the adequacy of the draft information memorandum that was in the course of preparation by MSA. The evidence establishes that MSA had undertaken work to prepare the information memorandum; that it had made requests for information from Summerdowns; that MSA was probably not given all of the information that it required (although any shortfall in Summerdowns' response was not clearly identified); and that MSA produced a draft information memorandum at least up to version 6. The evidence also does not allow the Court to make any finding about whether there were any significant flaws in the business model upon which Summerdowns' project was based, or whether the issues that MSA had not been able to substantiate by 9 September 2011 were significant, or indeed fatal, to the success of the proposal.
33. The evidence, in fact, simply petered out. After Mr Blackbeard and Mr Barden resigned as directors of Summerdowns, the new board of directors, which still included Mr Imrie and Mr McMahon, took the stance that the services provided by MSA were inadequate and demanded repayment of "the funds paid to MSA", which I assume is the whole of the $49,500 (see Mr McMahon's 4 October 2011 email to MSA). MSA resisted Summerdowns' new position, but the evidence does not make clear precisely how and when the commercial relationship broke down. As I have noted, the originating process was not filed until 20 November 2013.
34. There was no evidence as to Summerdowns' fortunes after the breakdown in the relationship between it and MSA. It is not known whether Summerdowns was able to raise the finance necessary to acquire the land needed to build the rail terminal, or whether it has yet done so.
35. On 11 November 2011, the board of directors appointed Mr Imrie "to review the costs of MSA and, after deducting their board costs, to provide an estimate of their account to Mr Stevens, to take to MSA". As I have related above, Mr Imrie "arrived at a figure of $27,700 of value to date rather than the $45,000 removed from the Summerdowns Rail bank account by MSA". Mr Imrie concluded that Summerdowns was entitled to a refund of $17,300. The calculation of the refund apparently leaves out of account the entitlement of Mr Blackbeard and Mr Barden to directors' fees, and apparently also other tax invoices delivered by MSA for work done outside the original quotation.
36. In the face of Mr Imrie's estimate of the fees to which he calculated MSA was entitled, Summerdowns did not tender evidence capable of proving that the work done by MSA for Summerdowns was valueless. The evidence is silent as to whether Summerdowns was ever able to make any use of the draft information memorandum that MSA delivered.
37. It is clear, in any event, that MSA did provide some services to Summerdowns within the original quotation, that were of use to the company. MSA incorporated the company and established its structure, including its constitution. It seems likely that MSA also provided other services in accordance with the quotation, but the evidence was not explicit on this issue. Validity and effect of resolutions at 4 August 2011 meeting
38. A question arises as to whether the meeting of the three directors of Summerdowns that occurred on 4 August 2011 was a valid meeting of the board of directors of the company, given that no notice of the meeting was given to Mr Imrie, and he did not attend.
39. Summerdowns pleaded that the 4 August 2011 meeting had no relationship to, and could not be described as, a meeting of Summerdowns. I assume that the reference to Summerdowns was intended to mean the board of directors of the company. Mr Stevens and Mr Barden did not admit that allegation.
40. Summerdowns also pleaded that Mr Blackbeard and Mr Stevens had no authority to cause or procure the making of the $38,500 payment to MSA. Mr Stevens and Mr Barden denied this allegation, and the latter specifically alleged that Mr Blackbeard and Mr Stevens had authority.
41. Consequently, Summerdowns was obliged to establish on the balance of probabilities that the meeting that occurred on 4 August 2011 was not a valid meeting of the board of directors of Summerdowns, and did not effectively authorise the payment of $38,500 to MSA, that occurred on that date.
42. The particulars that Summerdowns supplied for its allegation that the 4 August 2011 meeting was not a meeting of the board of directors of Summerdowns was limited to Mr Barden's 5 August 2015 memorandum.
43. I have set out the relevant part of Mr Barden's memorandum above. It will be convenient to repeat the relevant parts of the memorandum: This memo is a description of meeting points from 4th August 2011 meeting. They relate only to action plans necessary to offset the impact of personal finance requirements of John M or JM Realty may have on SDR. They have no relationship to and cannot be considered as minutes of any SDR meeting. Official SDR proposals and minutes derived from the meeting will be forthcoming for the SDR Board consideration.
44. As I understand Summerdowns' position, it is that the meeting held on 4 August 2011 was not a meeting of its board of directors because the directors who attended the meeting did not intend it to be a meeting of the board. If that argument is made out in fact, then the conclusion advocated by Summerdowns would be valid.
45. When the whole of Mr Barden's memorandum is reviewed, it is clear that the "points" do not all relate only to action plans necessary to offset the impact of personal finance requirements of Mr McMahon on Summerdowns. Of the 12 points covered, only point 12 appears to concern the personal financial requirements of Mr McMahon. All of the other points related to the ordinary business of Summerdowns. The meaning of Mr Barden's statement: "They have no relationship to and cannot be considered as minutes of any SDR meeting" is quite unclear in its context. From the immediately preceding sentences, the statement only appears to refer to point 12. I am not satisfied that the true meaning of the words is that all of the points had no relationship to, and could not be considered as, minutes of any Summerdowns meeting.
46. On the other hand, Mr Barden said in the last paragraph of his memorandum that official proposals and minutes derived from the meeting would be produced for consideration at a forthcoming meeting of the board of directors. Mr Barden also said in cross-examination that he expected that the decisions made during the meeting would be "ratified" by a later formally convened board meeting.
47. Mr Barden, while evidently experienced in commerce, is a layman in legal terms. Notwithstanding his evidence concerning subsequent ratification, he also maintained that he understood that Summerdowns could act on the decisions made at the meeting, because three of the four directors were present, Mr Imrie was overseas and could not be contacted in the time available, and a quorum for meetings of the board of directors was one director.
48. As I have said, I accept that Mr Stevens genuinely understood that the meeting was a valid meeting of the board of directors of Summerdowns.
49. Mr Blackbeard's memorandum of the matters dealt with at the meeting does not contain any suggestion that the meeting was not a meeting of the board.
50. Mr McMahon's understanding is not known, because he did not give evidence. As stated above, I have found that Mr McMahon agreed with the other two directors that the payments that were agreed to be made to himself, Mr Imrie and MSA should be made. The three directors present accordingly believed that the decisions made would be ratified at any subsequent meeting of the board of directors at which Mr Imrie was present, as their votes would constitute a majority, even if Mr Imrie dissented.
51. I find on the balance of probabilities that the three directors present at the 4 August 2011 meeting decided to hold the meeting as a meeting of the board of directors of Summerdowns, and understood that it was an effective meeting of the board. I base that conclusion on the following considerations. First, other than the attention given briefly to Mr McMahon's personal financial position, all of the matters discussed were significant issues in the conduct of Summerdowns' affairs. They were proper subjects for consideration of its board of directors. There was no point in the directors present dealing with the issues in the detail that they did, if they were not acting as the board of directors of the company. Secondly, Mr Blackbeard and Mr Stevens acted immediately on the decision to make the three payments. Mr Barden was present when the payment was made to MSA. I infer Mr McMahon expected that the decision to make the payments would be implemented, as he immediately received repayment of his own $5500. Finally, I accept the evidence of Mr Stevens and Mr Barden that they understood that the meeting was a meeting of the board of directors of Summerdowns.
52. If the conclusion is correct that the three directors who attended the meeting intended that it would constitute a meeting of the board of directors of Summerdowns, then the question arises as to whether it was invalid by reason of the fact that Mr Imrie was not given notice.
53. I understand that Summerdowns' contention is that the meeting was not a valid meeting of the board, because of the absence of notice to Mr Imrie. Mr Stevens and Mr Barden contest that contention.
54. Unfortunately, neither side of the dispute gave any detailed consideration to the issues involved in determining whether or not in these circumstances the meeting was valid. Summerdowns appears to have assumed that the meeting was necessarily invalid because Mr Imrie was not given notice. The other parties did not explain their contrary position.
55. The issue of whether the meeting of the three directors that occurred on 4 August 2011 was not a valid meeting of directors of Summerdowns is not entirely straightforward. Under the constitution of the company, Mr Imrie should have been given reasonable notice of the meeting, but he was not given any notice. This question was considered by McLelland J (as his Honour then was) in Mitropoulos v The Greek Orthodox Church and Community of Marrickville & District Ltd (1993) 10 ASCR 134 at 136-7. His Honour said: I conclude from the evidence that the meeting was probably arranged no more than 36 hours before it took place (I think that Mr Magdalopoulos' recollection that he received a letter "maybe a week before the meeting" is probably mistaken), and it is clear that no notice was given to Mr Banbas. It was conceded by counsel for the defendant that any member of the committee actually present at an otherwise valid committee meeting of which he has not received 4 days' notice can effectively waive the requirement for such notice so far as concerns himself. However it is argued that the absence of notice to Mr Banbas would preclude the meeting from being treated as a committee meeting. Subject to the power of the court to make a validating order under s 1322(4) of the Corporations Law (or s 539(4) of the Companies Code), I consider this to be correct. In the absence of some contrary provision in the articles, the mere absence of a director of a company overseas does not dispense with the need to give him notice of a directors' meeting: see Re Portuguese Consolidated Copper Mines Ltd (1889) 42 Ch D 160; The Halifax Sugar Refining Co v Franklyn (1890) 42 LT 563; Windsor v Windsor (1912) 3 DLR 456; Young v Ladies Imperial Club Ltd (1920) 2 KB 523. I agree with Street J in Re Merchants & Shippers SS Co 17 SR 21 at 27-8: "that the true rule to be laid down is that every member within reach of notice is entitled to receive notice of a meeting, and that, in determining whether a member is within reach of notice, what has to be considered is whether his place of residence and the ordinary means of communicating with him are such that, if notice had to be given to him as provided for by the articles of association, this would involve such delay as seriously to hamper the transaction of business" (and see on appeal 17 SR 146). In considering whether a person is "within reach of notice" it is necessary to have regard to modern means of rapid communication and it is significant that art 89 does not require that notice be in writing.
56. A review of the reasons given by Street J shows that the source of his Honour's "true rule" was the general law of meetings. The position appears to be that, subject to any contrary provision in the constitution of a company, a meeting of the company, including of its board of directors, may sometimes be valid even though the required notice has not been given to a person entitled to attend the meeting, but only in exceptional cases in which, having regard to modern means of rapid communication, due notice cannot be given to the person without the necessary business at the proposed meeting seriously being hampered.
57. This position is consistent with the application of the replaceable rule in s 248C of the Act, which is applicable in the present case, because that rule requires that reasonable notice be given to directors, and the expression "reasonable" is capable of encompassing the situation where circumstances are such that it is reasonable that no notice be given. Logically, it does not follow from a requirement that reasonable notice be given that the circumstances will always be such that there will be a notice period that can be given which is reasonable.
58. It may at first seem strange that the reasonable notice to which a director may be entitled of a meeting the board of directors may in some circumstances be no notice. However, it is not difficult to image circumstances in which important interests of a company require the remainder of the board to act with such expedition that it is not practicable to give notice of the proposed board meeting to an absent director. Those circumstances should be exceptional, particularly having regard to McLelland J's admonition that regard must be had to modern means of communication.
59. The question therefore is whether the circumstances of the present case justified no notice being given to Mr Imrie in accordance with the "true rule" as expressed by Street J.
60. I have accepted that, after the three directors who were present dealt briefly with Mr McMahon's personal financial difficulties, they decided that it was necessary to hold an impromptu meeting of the board of directors of Summerdowns. They apparently did so primarily because they were told something concerning the arrangements for the purchase of the land that was essential for Summerdowns' business objective, that caused them to believe that the opportunity for Summerdowns to acquire the land was in considerable jeopardy, because the proposed vendor expected the purchaser to enter into a contract quickly. They therefore believed that it was necessary for Summerdowns immediately to accelerate the preparation of the information memorandum, that was an essential step in Summerdowns' securing the investments, that were necessary for it to receive before it could prudently enter into the contract, pay the deposit, and be in a position to complete the contract in due course. The other persons present learned from Mr McMahon, probably at the meeting, that Mr Imrie was overseas, and could not readily be contacted.
61. The problem is that the evidence does not disclose with any objectivity or clarity what the position was vis-à-vis the availability of the land for purchase, how pressing the need was for Summerdowns to enter into a contract with the vendor, where Mr Imrie was, how long it would take Mr Imrie to be in a position to participate in the directors' meeting, or whether the resolution of the issue simply could not wait to be determined at a properly constituted meeting of the board of directors at which Mr Imrie was present.
62. Although Summerdowns has the burden of proving that the meeting was not a valid meeting of the board of directors, in my view once it had proved that one of the directors was not given any notice of the meeting, the burden of adducing evidence to establish that the meeting was valid, notwithstanding the absence of notice, falls on the party that contends that, because of exceptional circumstances, it was reasonable to give that director no notice of the meeting. Notwithstanding my acceptance of the broad reasons why the persons present at the meeting believed that it was necessary to hold the meeting in the absence of Mr Imrie, the evidence is not sufficient to satisfy me that it was reasonable to give Mr Imrie no notice of the meeting, rather than to wait until he returned to Australia, so that a properly constituted meeting of the board of directors could be held. It is probable, that in the meantime, MSA could have gotten on with the preliminary work necessary to prepare the information memorandum.
63. I therefore find that the three directors of Summerdowns who attended the 4 August 2011 meeting failed to give Mr Imrie the reasonable notice of the meeting to which he was entitled by the replaceable rule imported into the constitution by s 248C of the Act
64. However, under the Act it does not necessarily follow that the meeting was invalid because Mr Imrie was not given notice of the meeting. This is another issue that was not addressed by the parties.
65. Section 1322 of the Act relevantly provides: (1) In this section, unless the contrary intention appears… (b) a reference to a procedural irregularity includes a reference to… (ii) a defect, irregularity or deficiency of notice or time. (2) A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid. (3) A meeting held for the purposes of this Act, or a meeting notice of which is required to be given in accordance with the provisions of this Act, or any proceeding at such a meeting, is not invalidated only because of the accidental omission to give notice of the meeting or the non‑receipt by any person of notice of the meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or ASIC, declares proceedings at the meeting to be void … (4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (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; (6) 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 (b) in the case of an order referred to in paragraph (4)(c) - that the person subject to the civil liability concerned acted honestly; and (c) in every case - that no substantial injustice has been or is likely to be caused to any person.
66. In this case Summerdowns has not sued MSA for the return of the $38,500 on the ground that the money was not authorised to be paid, because the decision to make the payment was made at an invalid meeting of the board of directors of Summerdowns. Instead, Summerdowns has sued one director and its company secretary, on the basis of an argument that, because the meeting of the board of directors was not valid, any steps taken by its officers to implement the decisions made at the meeting involved contraventions of the statutory and equitable duties of the officers. This proposition is questionable, and will be considered further below. For present purposes the point is that, as the issue before the Court does not directly raise the effectiveness of the payment to MSA, but Summerdowns has based its case on the argument that the payment was not authorised because the meeting was not a valid meeting of the board of directors, the parties seem to have lost focus on the legal requirements for the result that decisions made at an irregularly convened meeting of the board of directors of a company are invalid.
67. Neither Mr Stevens nor Mr Barden pleaded that the 4 August 2011 meeting was not invalid because of the effect of s 1322(2), or that the Court should make an order declaring the meeting to be valid under s 1322(4). Consequently, the issue was not addressed by the parties' in their submissions. More significantly, Summerdowns was not given the opportunity to contest on evidentiary grounds the question whether the failure to give Mr Imrie notice caused substantial injustice to Summerdowns. Furthermore, Mr Stevens and Mr Bardon did not address the conditions that were required to be satisfied before the Court could make an order under s 1322(4). I therefore should not decide this dispute having regard to the possible application of s 1322 of the Act.
68. Had Mr Stevens and Mr Barden raised the application of s 1322 in their pleadings, that may have affected the determination of whether or not the 4 August 2011 meeting was a valid meeting of the board of directors of Summerdowns.
69. I therefore find that the 4 August 2011 meeting was not a duly constituted meeting of the board of directors of Summerdowns, and the resolution to pay the $38,500 to MSA was not validly passed.

Failure to comply with flying resolution

1. There is a question as to whether it was a breach of the statutory duties imposed upon Mr Stevens and Mr Barden for them to take the part that they did in causing the $38,500 to be paid to MSA in a way that conflicted with the requirements of the flying resolution, as to how documents that effected the payment of Summerdowns' funds should be executed. This question depends in part upon the intended purpose of the flying resolution.
2. In my view, if it had not been established that the meeting on 4 August 2011 was an invalid meeting of directors of Summerdowns, the involvement of Mr Stevens and Mr Barden in the making of the payment in a manner that was not authorised by the flying resolution would not separately have been unauthorised conduct on their part. The flying resolution did not establish a constitutional rule of the company. It was a standing resolution authorising payments of Summerdowns' funds to be undertaken in a particular manner. Its purpose was to deal with the situation where, on a day-to-day basis, the need arose for payments to be made out of the company's funds in circumstances that did not involve the explicit authorisation of the board of directors. In that case the object of the flying resolution was to protect the financial interests of the company, by requiring that the transaction documents be signed by one executive director and one non-executive director, or the company secretary. It did not prevent the directors from authorising, whether expressly or implicitly, payments to be made in a different way.
3. If the directors at the meeting had validly decided that the three payments should be made, then it could not be injurious to the company's interests that the payments were made in a different manner than was authorised by the flying resolution.
4. If, on the other hand, the meeting of directors did not validly authorise the making of the three payments, then any liability on the part of Mr Stevens and Mr Barden that arose would arise out of the fact that the payments were not authorised, rather than that they were made in a manner inconsistent with the flying resolution.

Did Mr Stevens and Mr Barden breach their duties to Summerdowns?

1. Summerdowns' contention that, because the meeting on 4 August 2011 was not a valid meeting of the board of directors of the company, Mr Stevens and Mr Barden necessarily breached their statutory and equitable duties, and that as a result Summerdowns is entitled to payment of compensation equal to the amount of the payment to MSA, is in my view not necessarily correct. There may be cases where, because a company's officers cause its funds to be paid out in the knowledge that the payment is unauthorised, or with a lack of reasonable care as to whether it is authorised, or for some improper purpose, where the company obtains no benefit from the payment, that a breach of duty will occur, and the proper amount of compensation is the amount of the payment. However, the issue of whether there has been a breach of duty, and if so, what amount of compensation is payable, will depend upon a consideration of all of the facts.
2. The directors and other officers of a company have a duty to act lawfully and within their power and authority. The learned authors of Company Directors Principles of Law & Corporate Governance (LexisNexis Butterworths 2005) at [11.1] say: … Perhaps the duty to act lawfully and within their powers and authority is the most obvious duty of company directors. Acting within power means, in the case of the directors as a board, acting within the company's capacity and within the power allocated to the board by the corporate constitution. Acting within authority means, in the case of an individual director, acting within the authority conferred on the director by delegation from the corporate organ (usually the board) which has the power to delegate. Allied to those duties is the directors' duty to cause their company to act lawfully. … Assuming it is correct, notwithstanding Breen v Williams, to regard the positive duty of a fiduciary to act in good faith in the interests of the principal as part of the fiduciary responsibility rather than an extraneous duty of good faith, it seems appropriate to treat the duty to act within the terms of the constitutive instrument for the fiduciary relationship as part of that positive duty, and therefore itself a fiduciary requirement. Indeed, properly analysed, it is a fiduciary duty of fundamental importance.
3. It does not follow, however, that if it is subsequently established that steps taken by the directors of a company, or by its other officers, have been taken in contravention of the constitution of the company, then, ipso facto, the directors or officers will be obliged to compensate the company by restoring to it to the position that it was in before the steps were taken, irrespective of the reasons for their actions and all other relevant considerations. Nothing should be said in general that would encourage or condone the directors and officers of companies to fail to act in accordance with the constitution of the company. However, the fact of non-compliance will not be the only relevant issue in determining the consequences of non-compliance, particularly in cases where the question whether there has been a contravention of the constitution is contentious or doubtful. While the courts as a general principle will uphold the constitution of companies, not all irregularities lead to invalidity; there is statutory power to validate the consequences of irregular conduct; and there is also statutory power to excuse defaulting directors and other officers personally. It will also often be open to the members in general meeting to ratify the consequences of steps taken that are inconsistent with the constitution. Even if steps taken by directors and other officers that contravene the constitution do give rise to a right in the company to receive compensation, the loss suffered that is to be the subject of the compensation must be proved. It will not necessarily follow that the amount of the compensation will be that which reverses the effect of the transaction as at the time that it was undertaken, irrespective of the consequences.
4. I do not accept that any of the participants in the meeting on 4 August 2011 acted in bad faith or against the best interests of the corporation, or that they had an improper purpose within the meaning of s 181(1) of the Act. Nor did they use their position improperly for the purposes of s 182(1). Although they agreed to accelerate the payment of the balance of the lump sum fee to MSA (which provided some advantage to MSA and caused Summerdowns to suffer the detriment involved in a prepayment of money), they did that in order to gain for Summerdowns what was potentially a much greater advantage in securing the priority attention of MSA, and the accelerated preparation of the information memorandum, which they reasonably perceived was essential to Summerdowns' future prospects. I also do not accept that it is apt to describe the conduct of Mr Stevens and Mr Barden as constituting a failure to act with reasonable care and diligence. Given the urgency of the moment and the belief that the three directors present could secure a subsequent ratification of the resolutions made at the meeting, so that any shortcoming would be technical and short lived, their acting on the basis of resolutions of doubtful validity and inconsistently with the flying resolution cannot properly be characterised as being negligent or wanting in diligence.
5. Mr Stevens and Mr Barden believed they were authorised by the resolution made by the three directors on 4 August 2011 to participate in the payment of the $38,500 to MSA. I have found they were not authorised to do so, because notice of the meeting could not be given to Mr Imrie, and they have not carried the burden of showing that the issue could not wait until Mr Imrie was available to attend a meeting of the board of directors to consider the issue. That is not a black and white matter. Directors and other officers do not necessarily breach their duties to the company by acting in accordance with resolutions of the directors, which are subsequently found in contentious circumstances to have been invalid.

Has Summerdowns proved that it suffered damage?

1. In any event, Summerdowns has failed to establish that it suffered damage in the amount of $38,500, or any other sum. Even if there was a breach of one or other of the sections of the Act relied upon by Summerdowns, or a breach of the equivalent equitable duties, the company has not proved that it is entitled to any amount of compensation under s 1317H of the Act.
2. As the learned authors of Company Directors Principles of Law & Corporate Governance say at [18.54]: "The scope and measure of recovery under s 1317H appear to be the same as under the general law: Shum Yip Properties Ltd v Chatswood Investment & Development Pty Ltd [2002] NSWSC 13 at [254]".
3. The effect of the resolution by the three directors to accelerate the payment of the balance of the fee due to MSA, and to make the payment of $38,500, did not subject Summerdowns to the obligation to pay the fee, as that obligation had already arisen under the contract between the company and MSA.
4. The effect of the conduct was to accelerate the payment, and to cause the result that MSA would already have its fee, to which it was only entitled if it completed its work under the contract adequately. That subjected Summerdowns to the risk that MSA might not perform its contractual obligations in a way that entitled it to the full fee. In that event, Summerdowns would have foregone its ability to hold back payment, but would be required to seek repayment of the money paid, in whole or in part.
5. The loss to Summerdowns that could be attributed to the acceleration of the payment would be measured in terms of interest foregone and would be relatively trivial. That small loss would in the circumstances be adequately compensated by the acceleration by MSA of the performance of its work, assuming that work was done adequately in accordance with the contract.
6. The real risk to Summerdowns, which could cause it to suffer damage, flowed from the acceleration of the payment of the fee if in fact MSA did not perform the work adequately.
7. Summerdowns made no attempt to prove at all, let alone in any proper way, that MSA did not do, or was not ready, willing and able to do, the work required of it under the contract adequately in accordance with the agreement. The evidence makes it clear that MSA embarked upon the work required, and I find that it was ready and willing to complete the task. Though a dispute arose between Summerdowns and MSA concerning the adequacy of MSA's work, after Mr Blackbeard and Mr Barden retired as directors, the evidence before the Court is wholly insufficient to enable a finding in favour of Summerdowns that MSA's work was inadequate.
8. So far as the evidence goes, it suggests that the trouble started on the day Mr Blackbeard and Mr Barden retired as directors, 9 September 2011, when Mr Barden advised that MSA had been "unable to substantiate the figures regarding throughput volume, the company is to occupy and establish long-term leases and the structural build detailed quotes". The Court cannot determine the significance of this assertion, or whether the claims made by Mr Imrie in his 13 September 2011 reply were correct concerning the proper way to justify the commercial feasibility of the project. The matter was simply not explored in the evidence.
9. The evidence is not sufficient to enable the Court to form any view as to the worth of the work that MSA carried out for Summerdowns, or the amount to which MSA was entitled under the contract. The Court does not know whether the calculation that Mr Imrie carried out for the purposes of his 13 November 2011 email, in which he concluded that MSA was entitled to $27,700 was valid, although in the light of the conclusions expressed by Mr Imrie, the Court could not conclude that MSA was not entitled to any payment at all.
10. In fact, the evidence does not show what happened concerning the preparation of an information memorandum, and whether, and to what extent, the work done by MSA was useful.
11. I have also found that Summerdowns and MSA entered into a contract under which Summerdowns agreed to pay MSA lump a sum fee of $45,000, plus GST, for a number of services necessary to complete Stage 1 of the fundraising project that Summerdowns needed to implement successfully, if it was to achieve its business objectives.
12. The contract did not involve Summerdowns agreeing to pay MSA for services provided on an hourly basis.
13. Summerdowns has not proved that MSA would not have properly performed the work it was required to do under Stage 1 of the fundraising project, if Summerdowns had cooperated with MSA in relation to the performance of that work.

Claim by Mr Stevens to be excused

1. In par 25 of his defence, Mr Stevens pleaded: Further and in answer to the entirety of the claim maintained by the Plaintiff…in acting as secretary of the Plaintiff and as an authorised signatory upon the Westpac Account maintained by the plaintiff: 1. he did so upon the basis of his then understanding that he was author [sic] to do so as a consequence 2. he believed that the direction referred to in paragraph (a) above was valid and effective for the purposes of a decision of the Board of Directors of the Plaintiff then existing; 3. in doing so the [sic] was acting not as a director of the Plaintiff but as a secretary subject to the direction and control of the directors of the Plaintiff; 4. he believed that he was acting honestly and having regard to the circumstances existing at the time he ought fairly be excused for any breach of duty as alleged by the Plaintiff pursuant to the provisions of s 1317S or s 1318 of the Corporations Act 2001.
2. In the circumstances, it is not necessary for the Court to decide whether Mr Stevens ought to be excused under s 1317S and s 1318 of the Act. However, I am clearly satisfied that Mr Stevens acted honestly in relation to the conduct of which Summerdowns complains in these proceedings. He acted on the instructions of the three directors who were present at the meeting on 4 August 2011. He believed that the three directors were entitled to give him instructions, and he did not turn his mind to technical questions of the validity of the meeting or the application of the flying resolution. He acted on the basis that the steps that were taken were necessary for the viability of the company's business plan.
3. I cannot make an order excusing Mr Stevens, as I have not found that he has committed any breach of duty for which he needs excusing. He will only require such an order if I am wrong in the conclusions I have reached. As I cannot predict the alternative findings that would be made in that event, I cannot usefully say anything more about whether or not it would be proper for the Court to excuse Mr Stevens.

Orders

1. Summerdowns has failed to make out the case that it pleaded, and the proper orders to be made are that the claim be dismissed and that Summerdowns be ordered to pay the defendants' costs of the proceedings.

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: 13 April 2015