Sydney Appliances Pty Limited (in liquidation)) v Robert Bosch - [2000] NSWSC 32 - NSWSC 2000 case summary — Zoe

NSWNSWSC

Sydney Appliances Pty Limited (in liquidation)) v Robert Bosch

[2000] NSWSC 32

Supreme Court of NSW|2000-02-24|Before: Santow J

View original source

At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2000-02-24

Before

Santow J

Source

Original judgment source is linked above.

Judgment (24 paragraphs)

[1]

CITATION : Sydney Appliances Pty Limited (in liquidation)) v Robert Bosch (Australia) Pty Limited & 2 Ors [2000] NSWSC 32 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3431/99 HEARING DATE(S) : 01/11/1999 JUDGMENT DATE : 24 February 2000

[2]

Roderick Mackay Sutherland (in his capacity as Liquidator of Sydney Appliances Pty Limited (in liquidation)) (Plaintiff) PARTIES : Robert Bosch (Australia) Pty Limited (ACN 004 315 628) (First Defendant) Eurolinx Pty Limited (ACN 001 473 347) (Second Defendant) Southcorp Whitegoods Pty Limited (ACN 004 419 210) (Third Defendant) JUDGMENT OF : Santow J

[3]

COUNSEL : C R C Newlinds (Plaintiff) N Cotman, SC/J Priestley (Defendants) Kemp Strang (Plaintiff) SOLICITORS : Minter Ellison (First Defendant) Cutler Hughes & Harris (Second Defendant) Coudert Brothers (Third Defendant) CATCHWORDS : CORPORATIONS - One shareholder/director company - effect of which when only one director on efficacy of corporate action - no necessity for board resolution formally approving transfer of shares at least where pre-emptive rights not invoked - Duomatic principle - Validity of appointment of administrator and in consequence, liquidator - Scope for remedial order - Meaning of "substantial injustice" in relation to s1322(4) of Corporations Law - Avoidance of preference proceedings - Remedial order under s447A requires balancing process weighing up effect of making as against not making order. LEGISLATION CITED : Corporations Law s95A, s436A, s439C, s447A, s1322, Pt 5.3A Brien v Australasian Memory Pty Limited (1997) 25 ASCR 1 and on appeal (1998) 45 NSWLR 111 Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477; (1976) 2 ACLR 135 Re Duomatic Ltd (1968) 2 Ch 365 CASES CITED : Greenhalgh v Mallard [1943] 2 All ER 234 MYT Engineering Pty Ltd v Mulcon (1999) HCA 24 Mamouney v Suliman (1992) 9 ACSR 63 Poliwka v Heven Holdings (1992) 7 ACSR 85 Wagner & Anor v International Health Promotions & Ors (1994) 12 ACLC 986 DECISION : Liquidator validly appointed by one-man board.

[10]

the salient facts 5 I set out below the background and procedural history in a form that is agreed for the purposes of the present hearing. 6 On 12 May 1997 Roderick Mackay Sutherland was purportedly appointed administrator of Sydney Appliances Pty Limited pursuant to s436A of the Corporations Law (Annexure "E" (p32) affidavit of Michael Allen Macdonald sworn 5 October 1999). 7 From 12 May 1997 to 18 June 1997 the Company acted through Mr Sutherland as if it was under administration within the meaning of Pt 5.3A of the Corporations Law. 8 On 18 June 1997 at the second meeting of creditors a resolution was passed purportedly in accordance with s439C(c) that the Company be wound up. The Plaintiff contends by operation of s446A of the Corporations Law the Plaintiff then became the Company's liquidator. The Defendant denies that contention. 9 Following investigations by Mr Sutherland he caused the Company to commence three separate sets of proceedings in the District Court of New South Wales, being matter number 9663 of 1997 (against Bosch), 9662 of 1997 (against Eurolinx) and 9664 of 1997 (against Southcorp). 10 In each of those cases the Plaintiff sought the recovery of what are alleged to be unfair preferences paid by Sydney Appliances to each of those companies. The combined amount of the claims is $1,697,055.37 together with interest and costs. 11 The statements of claim were filed on 28 November 1997 and defences filed 4 March 1998 (Bosch), 2 February 1998 (Eurolinx) and 24 December 1997 (Southcorp). 12 Certain procedural directions were made in the District Court requiring the Defendants to put on evidence though there is a dispute as to whether they have been fully complied with. As at October 1999, only Eurolinx has complied, albeit late, serving in July 1999 affidavits sworn in January 1999. Bosch and Southcorp had served no evidence as at October 1999. 13 Various motions regarding discovery have been dealt with. 14 The Plaintiff filed a summons in the Supreme Court of New South Wales seeking orders to transfer all three proceedings to the Supreme Court of New South Wales and for case management of those proceedings. 15 Those proceedings came before me on 30 August 1999 wherein certain orders and directions were made and agreements noted (The Short Minutes of Order are annexure "A" (pp 4-6) to the affidavit of G E Cussen sworn 6 October 1999). 16 By those orders the Eurolinx and Southcorp proceedings were transferred to the Supreme Court of New South Wales. Southcorp was directed to file evidence by 27 September 1999 and it was noted that Bosch was prepared to abide and be bound by any decision of the Supreme Court concerning the validity of the appointment of the Plaintiff as administrator and liquidator of Sydney Appliances. 17 The last noted agreement came about when at the time of the transfer application the Defendants had given notice that they might amend their defences to allege that there had been no valid appointment of Mr Sutherland as either administrator or liquidator and that the Company was under no form of administration (Annexure "L" (pp41 and 42) to the affidavit of G E Cussen sworn 17 August 1999). What follows as to the steps leading to the purported appointment of the Administrator is also agreed, save where indicated.

[11]

The steps leading to the purported appointment of the Administrator and thereafter Liquidator 18 As at 24 March 1997 the Directors of Sydney Appliances were Andrew Gordon Warner, Michael Allen Macdonald and Sandra Kay Macdonald (para 2 affidavit M A Macdonald sworn 5 October 1999). 19 On 25 March 1997 Mr Warner resigned as director of the Company, leaving Mr and Mrs Macdonald as directors of the Company. 20 As at 25 March 1997 the shareholders of the Company were Mr Warner and Mr Macdonald (para 2 M A Macdonald sworn 5 October 1999). 21 On 11 April 1997 there was a meeting of the then shareholders of the Company wherein the Company adopted new Articles of Association (para 3 M A Macdonald and Annexure "A" (pp5-13) M A Macdonald). By those articles the Company had the ability to become a one director company (Articles 62(3), 76 and 77 (pp13-14) M A Macdonald). 22 Following adoption of the Articles of Association, on 17 April 1997 Sandra Macdonald resigned as a director of the Company and Mr Warner's shares were the subject of an executed transfer to Mr Macdonald, whereby, according to the Plaintiff (but disputed by the Defendants), Mr Macdonald was left as the sole shareholder of Sydney Appliances (paras 4 and 5 Macdonald). It is not in dispute that Mr Macdonald was the only director of Sydney Appliances. It is disputed whether the transfer was properly registered and effective. 23 As at 12 May 1997 the only director and, according to the Plaintiff, the only shareholder of the Sydney Appliances was Mr Macdonald (para 7 Macdonald). 24 On 10 May 1997 Mr Macdonald consulted Mr Sutherland and received some advice. On 12 May 1997 Mr Macdonald formed the view that the Company should appoint Mr Sutherland as a voluntary administrator (para 9 Macdonald). 25 On 12 May 1997 Mr Macdonald executed a document appointing Mr Sutherland administrator of the Company believing that by doing so he was validly executing the document (Annexure "E" (p34) Macdonald). 26 Thereafter Mr Sutherland, the creditors (including the Defendants) and all other relevant persons have conducted themselves upon the basis that Mr Sutherland was validly appointed as administrator and later validly appointed as liquidator (See generally paras 6-9 affidavit of R M Sutherland sworn 6 October 1999). 27 The Defendants now assert that Mr Sutherland's original appointment was not valid because at the time of the appointment there had been no resolution in general meeting by the Company as required by Article 62(3) and therefore any meeting of the Board to appoint Mr Sutherland as administrator did not comply with s76 or s77 of the Articles (A detailed version of the argument as put by Bosch's solicitor on 21 September is at pp44-47 affidavit of G E Cussen.). 28 The Plaintiff contends (and has provided an affidavit as to grounds) that as at 12 May 1997 and at all times since, Sydney Appliances Pty Limited was and is insolvent within the meaning of that word in s95A of the Corporations Law and it is accepted that Mr Macdonald as at 12 May 1997 also was of that view. For the purposes only of the present proceedings that latter contention is not disputed.

[12]

resolution of the legal issues 29 The attack on the Administrator's appointment starts with the contention that Mr Macdonald was not as at 12 May 1997 the sole shareholder of the Company, though it is not disputed that he was the sole director. If he were not the sole shareholder at the relevant day, then the Defendants contend that the effect of the relevant Articles of Association is that the only act that the board could validly carry out would be to increase the number of directors to a number sufficient to constitute a quorum of two, or, to convene a general meeting of the Company, relying in either case upon Articles 62(3), 76 and 77 as applicable in the circumstances of the relevant transfer of shares. 30 For convenience, I first quote the relevant Articles of Association: " 62. (1) The first Director or Directors of the Company shall be the person or persons named as Subscriber(s) in the Schedule to these Articles; (2) Subject to paragraph (3) of this Article there shall be no restriction on the number of Directors but the Company may by resolution in general meeting: (a) set a maximum number of Directors; (b) set a minimum number of Directors; (c) increase or reduce the maximum or minimum number of Directors so determined. (3) If the number of Directors shall number two or more at any time then until otherwise determined by the Company by resolution in general meeting the number of Directors shall not be less than two. 76. At a meeting of Directors, the number of Directors whose presence is necessary to constitute a quorum is such number as is determined by the directors and, unless so determined, is two except where the number of directors is one then the quorum shall be one. 77. In the event of a vacancy or vacancies in the office of a Director of offices of Directors, the remaining Directors may act but, if the number of remaining Directors is not sufficient to constitute a quorum at a meeting of Directors, they may act only for the purpose of increasing the number of Directors to a number sufficient to constitute such a quorum or of convening a general meeting of the Company."

[16]

38 Though its minute was unsigned, I am prepared to accept that the relevant meeting occurred and that Mr Macdonald purported to approve the share transfer. The Defendants respond that if such approval were necessary, it would constitute action outside the only two matters permitted by Article 77 when there is no quorum, as indeed there was not. However, that begs the question whether that minute and the Directors Meeting which it records was a necessary corporate step under the Articles of Association for the relevant transfer of shares to be registered in Mr Macdonald's name. 39 I note that the transfer of shares is annexed at page 31 to Mr Macdonald's affidavit and bears the date 21 April 1997. The Defendants contend that first, such a Directors Meeting was necessary but could not have been effectual because of Article 77, and second, the discrepancy in date between 21 April 1997 and the date appearing in the extract of the share register means that the Court should not accept, consistent with the Articles of Association, that the share transfer was ever registered. It was not however seriously disputed that Mr Warner would have at least transferred in equity his share to Mr Macdonald for the nominal consideration of one dollar, in circumstances where Mr Macdonald owned all the other shares, being the vast preponderance of the issued capital of the Company. 40 It is necessary at this point to refer again to the Articles of Association of the Company. I am satisfied for the reasons I explain below that no action on the board's part was required to register the relevant transfer of shares and that on the balance of probabilities the transfer had been validly effected prior to 12 May 1997. In other words, I am satisfied that the act of registration under the Articles of Association would have been a purely administerial act not requiring any formal resolution on the board's part. Therefore the Meeting, though inefficacious, was never legally necessary. 41 To explain, disregarding Article 28 which is a pre-emptive rights provision not relevant where the transfer was to the sole remaining shareholder, Articles 29-32 are as follows: " 29. (1) Subject to Article 28, a member may transfer all or any of his shares by instrument in writing in any usual or common form or in any other form that the Directors approve. (2) An instrument of transfer referred to in Sub-Article (1) shall be executed by or on behalf of both the transferor and the transferee. (3) A transferor of a share or shares remains the holder of the share or shares transferred until the transfer is registered and the name of the transferee is entered in the register of members in respect of such share or shares. 30. The instrument of transfer must be left for registration t the registered office of the Company, accompanied by the certificate of the shares to which it relates and such other information as the Directors properly require to show the right of the transferor to make the transfer, and thereupon the Company shall, subject to the powers vested in the directors by these Articles, register the transferee as a shareholder. 31. The Directors may decline to register any transfer of shares, without giving any reason therefor. 32 . The registration of transfers may be suspended at such times and for such periods as the Directors from time to time determine not exceeding in the whole 30 days in any year."

[17]

42 It is readily apparent that while it requires a positive act by the board as the relevant organ of the Company to "decline to register any transfer of shares…..", no such positive act is required where the transfer is in usual or common form, executed by both parties, as was the case here and, as can be inferred, was left for registration at the registered office of the Company accompanied by the relevant share certificate. The Company may then register the transferee as a shareholder, subject only to the powers vested in the directors by the Articles, namely to decline to register a transfer of shares. Such an outcome finds support in the proposition that, prima facie, shares are transferable; see, for example, Greenhalgh v Mallard [1943] 2 All ER 234. If there be any ambiguity, Articles of Association should be construed with that prima facie position in mind. 43 It is hardly to be expected that Mr Macdonald as the sole director at the time, who is the beneficiary of the share transfer, would if competent to act have declined to register the shares to himself. Indeed by Article 77 he could not have so acted as to do so would fall outside the permitted acts for a non-quorum board. Thus while some implication from the pre-emptive rights Article 98 might suggest that a transfer of shares which triggered the pre-emptive rights would need first to go to the board in order that the board fulfil the functions laid down by that Article, there can be no such implication here. 44 Nor do I place any significance upon the discrepancy of dates between the share transfer and the relevant register. Even if the share transfer were not signed on 17 April 1997, it was clearly signed by 21 April 1997 and registration in anticipation of the lodgment of the share transfer, if such occurred as I am satisfied it did, satisfies any requirement for valid registration in such circumstances. 45 It follows that I conclude that, by 12 May 1997, Mr Macdonald was both the sole director, as is undisputed, and the sole shareholder of the Company. 46 That leads to the second question, does the Duomatics principle apply in the present circumstances having regard to the relevant Articles of Association including Article 59 which is in these terms: " 59. If the Company has only one member and the member records in writing the member's decision to a particular effect the recording of the decision counts as the passing by the member of a resolution (except a resolution of which special notice is required or that is required to be by a majority other than a simple majority) to that effect."

[20]

49 The Defendants attempted to distinguish the Duomatic principle from the circumstances here, contending that there is not the history of conduct as in Duomatic to bring this case within that rule. They point to the absence of any resolution in writing by Mr Macdonald to the effect that the number of directors shall be not less than two. Also to the requirement of Article 59 that a record in writing suffices where the company has only one member as if a resolution had been passed, pointing, correctly, to the fact that there is not even such a written record. The Defendants contend that irrespective of the general application of the principle, any legislative or general law indulgence permitting a single director or shareholder corporation is here subject to a manner and form requirement, namely either a written resolution or written record by the sole shareholder. This is in order for those Articles to be bypassed which require the number of directors to be not less than two with a quorum consequently set at two. 50 These submissions fundamentally misunderstand the effect of the Duomatic principle. It was made abundantly clear in that case that no formal resolution approving what was there in issue, namely the payment of directors' salaries, was necessary. It was sufficient that they applied their minds to that end point of approving the drawings of the two directors concerned. 51 Here, the sole director and shareholder did in fact apply his mind to the appointment of Mr Sutherland as Administrator, being the end point in the corporate steps involved. Moreover, when it came to otherwise determining that "the number of directors shall not be less than two" for purposes of Article 62(3), both in the unsigned minute of resolution of directors of 17 April 1997 and in the actual appointment under seal, Mr Macdonald describes himself as "the sole director". Clearly, he did apply his mind to the question both of the appointment of the Administrator and, more relevantly, that he was henceforth the sole director acting in board meeting accordingly. So by his actions he clearly reflected a determination by the Company as its sole shareholder that the number of directors shall not be less than two. To require a formal resolution to that effect, is to prefer form over substance. I do not consider that Article 59 makes mandatory a written resolution or a written record in these circumstances, being facilitative rather than exhaustive. But even if it did, then I am satisfied that the two minutes to which I have referred suffice, particularly the second of the two which was in fact signed. 52 Thus on any view of matters, the number of directors had become one with the result that the quorum was one; see Article 76. It also followed that Article 77 did not operate as the number of directors were sufficient to constitute a quorum of one. Thus it was open to Mr Macdonald to deal with any item of business which the board was permitted to deal with including the appointment of an administrator.

[22]

Remedial Orders 54 Were I wrong in the conclusions above, such that there was lacking a quorum of the board of the Company to effect the relevant appointment in accordance with s436A of the Corporations Law I would be prepared to make remedial orders under s447A or 1322(4) of the Corporations Law. This is not a case where there was no actual resolution of the board. Rather it is a case where there were lacking the corporate formalities required for such a resolution by the Articles of Association, on the assumption that I am now making. Such a situation is distinct from that in Wagner & Anor v International Health Promotions & Ors (1994) 12 ACLC 986 where the board simply did not resolve at all in the terms required by s436A(1)(a). 55 So far as whether s1322(4) of the Corporations Law is precluded from operation by reason of "substantial injustice" to the Defendants, I am satisfied that even if it were the case that having to face a claim for recovery of a preference represents prejudice, it certainly does not represent "substantial injustice" nor injustice commensurate with the substantial injustice for other creditors if no remedial order were made; see Brien v Australasian Memory Pty Limited (1997) 25 ASCR 1 and on appeal (1998) 45 NSWLR 111 and now awaiting judgment in the High Court following leave to appeal on limited issues. 56 The courts on occasion have taken a narrow view of the meaning of "substantial injustice" for the purpose of s1322. In Poliwka v Heven Holdings (1992) 7 ACSR 85 Anderson J, after concluding that a meeting was a "proceeding" for the purpose of s1322 and that a lack of a quorum was a procedural irregularity, approached the matter by saying that it was the procedural irregularity itself and not the ultimate outcome of an irregularly convened meeting which must cause the alleged substantial injustice (at 97 and 98). This approach was not the subject of comment on appeal - (1992) 8 ACSR 747. Hodgson J expressly approved and followed this approach in Mamouney v Suliman (1992) 9 ACSR 63 at 71. 57 It would on this view, if correct, be an error of law to approach the question by looking at any effect the resolution itself might have had. The question is rather first what injustice would be caused by the lack of there being two directors and a consequent lack of quorum (the assumed irregularities) and - as I conceive this view must entail - what injustice would result from validating these irregularities by remedial order. The answer is clearly none at all so far as the first part of the question is concerned. If Mr Macdonald had appointed a second director of his choice or called a general meeting of himself, the resolution to appoint the administrator would have been made in any event. The Defendants were not knowingly standing by at the time relying reasonably upon there being no quorum. So far as the second part of the question is concerned - injustice from the remedial order - here the Defendants rather seek to exploit an adventitious technical deficiency (if such it were, contrary to my preferred view) to avoid amenability to preference recovery proceedings at the cost of other creditors, claiming substantial injustice if that exploitation were denied by remedial order. I consider that that is not the substantial injustice contemplated by s1322(4). It must not be forgotten that individual prejudice or detriment per se is not injustice, substantial or otherwise. What amenability to preference recovery entails is that justice is able to be done for creditors as a whole, vindicating their legal right to equal treatment if the preference recovery succeeds. That may be prejudicial to the creditor forced to disgorge a preference, when held to be an "unfair preference", but hardly injustice. 58 In relation to equivalent orders under s447A the Court is ostensibly invested with what has been described as "unfettered discretion" though in saying that, I do not suggest for one moment that the consequences of such a remedial order are to be ignored or that the discretion is wholly unfettered. In exercising that discretion in the alternative I accept that it may well be that concepts cognate with substantial injustice do need to be considered. However, here it is clearly legitimate to weigh up any individual prejudice or arguable injustice against the prejudice or injustice to others if a remedial order were denied, to determine where the balance falls in looking at justice overall. In that regard the Defendants need to be able to identify a good reason that tips the balance away from the overwhelming reasons to make such an order. For the reasons already given they have failed to do so.