Supreme Court of Tasmania|2002-10-03|Before: Underwood J, Re P

Whitehouse v Capital Radio Network Pty Ltd & Ors [2002] TASSC 78 (3 October 2002)

CITATION: Whitehouse v Capital Radio Network Pty Ltd & Ors [2002] TASSC 78

Corporations - Management and administration - Directors and other officers - Meetings of directors - Validity of proceedings - Absence of quorum - Procedural irregularity - Whether valid by virtue of the _Corporations Law, s_1322(2) - Whether substantial injustice.

Re Clearwater Pty Ltd (1981) 6 ACLR 201; Re Pembury Pty Ltd [1993] 1 Qd R 125; Sydar Pty Ltd v K Simmonds Finance Pty Ltd (1995) 16 ACSR 384, followed.

Re P W Saddington & Sons Pty Ltd (1990) 2 ACSR 158, not followed.

Respondents Leitch and Blyton: P Brereton SC and D Ash

Respondents Leitch and Blyton: Clerk Walker & Stops

Judgment Number: [2002] TASSC 78

ROBERT PAUL WHITEHOUSE v CAPITAL RADIO NETWORK PTY LTD

(ACN 057 940 628), DAVID THOMAS LEITCH, KEVIN JAMES BLYTON

1 These proceedings concern Capital Radio Network Pty Ltd ("CRN"). It is a holding company for a number of other companies, most, if not all of which are radio broadcasters.

2 The applicant, Paul Whitehouse, is a chartered accountant. He has made an application for an order:

"That the Meeting of Directors of Capital Radio Network Pty Ltd (ACN 057 940 628) held on the 11th April 2002 was not an invalid meeting by reason of there being no sufficient quorum."

3 The initial respondent to the application was CRN. At the commencement of the hearing of the application, Mr Brereton SC, appeared and sought an order that David Thomas Leitch, a director of CRN and Kevin James Blyton, a former director of CRN, be made respondents to the application. The application and supporting affidavits had already been served on these two persons and the order was made by consent. Mr Brereton then announced his appearance with Mr Ash for the second and third named respondents. For reasons that will soon be apparent, there was no appearance for the first named respondent. The Australian Securities and Investments Commission was also served with the application and other material, but chose not to appear on the hearing. The second and third named respondents resisted the making of the order sought by the applicant and themselves sought an order that:

"A declaration be made that the resolutions purportedly adopted at the meeting on 11 April 2002 are invalid by reason of the absence of a quorum."

4 The statutory provisions are contained in the Corporations Law, s1322. Relevantly, that section provides:

"(2) [Irregularity may not invalidate proceedings] 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.

(4) [Court may make orders] 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.

and may make such consequential or ancillary orders as the Court thinks fit."

5 These subsections are governed by subs(1) which contains the following definition:

"(1) [Interpretation] In this section, unless the contrary intention appears:

(a) a reference to a proceeding under this Act is a reference to any proceeding whether a legal proceeding or not; and

(b) a reference to a procedural irregularity includes a reference to:

(i) the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation, at a joint meeting of creditors and members of a corporation or at a meeting of members of a registered scheme; and

(ii) a defect, irregularity or deficiency of notice or time."

6 Also of relevance to these proceedings is subs(6), but I will leave this to one side for the moment.

7 The real protagonists in this dispute are the only other director of CRN, Geoffrey Garrott, who is also a chartered accountant, and the second named respondent, Kevin James Blyton. In order to understand why these applications have been made, it is necessary to set out some of the evidence.

8 Prior to 1997, 49 per cent of the shares in CRN were held by Mr Blyton or by entities he controlled and 11 per cent were held by DPIS Pty Ltd, a company owned by employees of CRN or its subsidiaries. Mr Leitch and his brother were two of those employees. The balance of 40 per cent of the share holding in CRN was held by a discretionary trust, the Opal Trust, which was controlled by Mr Garrott. At that time, Mr Blyton was the sole director of CRN and had the sole control of its management. Mr Blyton was also the controlling shareholder of another company, not a subsidiary of CRN, Radio Snowy Mountains Pty Ltd.

9 In 1997, Mr Blyton and his wife separated. There followed a property dispute which led to proceedings in the Family Court. Mr Garrott intervened in the dispute by obtaining legal advice on behalf of Mr Blyton. Mr Garrott and Mr Blyton decided to rearrange the shareholding in CRN. I find that this exercise was an attempt to minimise the size of any property settlement that the Family Court might order Mr Blyton to make in favour of his wife. A new trust was created. It was called the Sapphire Trust. The beneficiaries of this trust were Mr Garrott's family and Mr Blyton's family. The disposition of trust property was under the control of Mr Garrott. In about April or May 1997, DPIS Pty Ltd transferred six of its eleven shares to the Opal Trust and the other five shares to the Sapphire Trust. In consequence, Mr Blyton controlled 49 per cent of the shares in CRN, and the Opal and Sapphire Trusts, between them, controlled 51 per cent of the shares.

10 In January 1998, in furtherance of the attempt to minimise any order that might be made in favour of Mrs Blyton, Mr Blyton resigned as a director of CRN and Mr Garrott became the chairman of directors. In accordance with the articles of association, Mr Garrott thereby acquired a casting vote, in addition to his deliberative vote. At the same time, Mr Leitch was appointed a director of CRN. Ever since, Mr Garrott has been the chairman of directors with two votes in the event of a disagreement, and Mr Leitch has been the only other director with one vote.

11 The property dispute between Mr and Mrs Blyton continued. Next, Mr Garrott designed a rearrangement of the shares in CRN and Radio Snowy Mountains Pty Ltd. Mr Garrott, or an entity under his control, injected some $500,000 into Radio Snowy Mountains Pty Ltd and some 5,000 shares were issued. In end result, Radio Snowy Mountains Pty Ltd became a subsidiary of CRN and Mr Blyton's proportional interest in Radio Snowy Mountains Pty Ltd was reduced from 100 per cent of the shareholding to 23 per cent.

12 In early 1999, there was a settlement of the Blyton property dispute in the Family Court. It provided that Mr Blyton pay his wife $200,000. As I understand the evidence, the settlement was ineffective until Mr Blyton signed some documents.

13 Shortly after this settlement had been reached, but before the relevant documents were executed, Mr Blyton approached Mr Garrott and asked him to restore his equitable interests in CRN and Radio Snowy Mountains Pty Ltd. Mr Garrott refused to even discuss this matter with Mr Blyton until the Family Court settlement had been executed. In consequence, Mr Garrott and Mr Blyton fell out. Mr Leitch took Mr Blyton's side of the dispute. This disagreement between Mr Garrott and Mr Blyton led to the institution of these proceedings.

14 In June 1999, Mr Leitch told Mr Garrott that Mr Blyton was not going to execute the necessary documents to implement the Family Court settlement. Within days of that advice, Mr Garrott issued this notice to the only other director of CRN:

a Directors' Meeting will be held at Level 7, 39 Murray Street, Hobart on Tuesday, 15th June, 1999 at 9.30 am to consider and pass the following resolutions:-

1 That Michael Raymond Ferrall be appointed a Director of the Company.

2 That Michael Raymond Ferrall be appointed Managing Director of the Company.

A further item on the Agenda will be the provision of further capital from shareholders to enable the Company to meet it' [sic] present commitments and future capital commitments.

(I will arrange to be available by telephone at the time of the meeting on 03 62346533 or 03 62313127).

15 Mr Ferrall was a trustee of the Opal Family Trust. Mr Garrott was the only other trustee. Article 85 of the articles of association of CRN provides that two directors constitute a quorum for a directors' meeting. Accordingly, had Mr Leitch attended the meeting in respect of which notice was given, and attempted to block the proposal to appoint Mr Garrott's friend managing director of CRN, Mr Garrott would have exercised his casting vote and the proposed motion would have passed. In short, Mr Blyton and Mr Leitch would thereafter have had virtually no control over the affairs of CRN and its subsidiaries. As it turned out, Mr Leitch did not attend the meeting because he was ill in hospital. Mr Garrott issued a notice for another meeting to be held on 22 June. This time Mr Leitch deliberately abstained from attending the meeting in order to ensure that the motion could not be passed for want of a quorum.

16 As a result of the issue of the notice for a directors' meeting on 22 June 1999, Mr Blyton applied for, and obtained, an order of the Family Court on 25 June, restraining Mr Garrott from removing, replacing or appointing any director of CRN. This order was continued or renewed on several occasions. On 18 October 1999, the injunction provided:

2 That pursuant to s114(3), Geoffrey Garrott be restrained until the hearing or earlier further order from, by himself, his servants or agents, convening, attending or voting at the meetings of Capital Radio Network Pty Limited, Radio Canberra Pty Limited, Radio Goulburn Pty Limited, Broadcasting Facilities (ACT) Pty Limited, Radio Hobart Pty Limited, DPIS Pty Limited and Radio Shop Pty Limited proposed to be held on 20 October 1999, or any other meeting to consider the resolutions referred to in the Notices of the said meetings or resolutions to substantially the same effect, provided that this order does not prohibit the said Geoffrey Robert Garrott from convening, attending or voting at a meeting of the said companies for the purpose of adopting the Directors Report and Financial Statements of the said companies for the year ended 30 June 1999 a reasonable time after full information permitting any other director to satisfy himself as to the adequacy and propriety of those accounts has been provided to such director."

17 That injunction, or one to like effect, was in force at the time of the hearing of this application. Mr Garrott applied to the Family Court for orders dissolving the injunctions. He was unsuccessful. Notwithstanding the injunctions, on numerous occasions Mr Garrott gave notices for the holding of directors' meetings. According to the notices of meetings, each time the intention was to pass resolutions which would have the effect of changing the existing arrangements with respect to the control of CRN and its subsidiaries. Whether or not in so doing Mr Garrott was in contempt of an order made in the Family Court, does not arise upon the hearing of this application.

18 In the Family Court, Mrs Blyton applied for orders setting aside the share allotments that had been made, upon the basis that they constituted transactions to defeat her claim. On 11 February 2002, the proceedings in the Family Court between Mr Blyton and Mrs Blyton were finally settled and complex terms were entered into. For present purposes it is sufficient to state (albeit imprecisely), that as between Mr Garrott and Mr Blyton, the settlement provides that the latter may purchase the former's interest in CRN and its subsidiaries within a specified time frame. If that event does not occur, the former may purchase the latter's interest, and if that does not occur, the companies will be put into voluntary liquidation. Mr Blyton was to have interim management of the companies and, generally speaking, the status quo was to be maintained until the agreement had been performed.

19 In March 2002, shortly after the settlement agreement was executed by all parties, Mr Garrott went to see the applicant, Mr Whitehouse. He said that Mr Garrott asked him if he would be prepared to represent the shareholders in the manner provided for by the Corporations Law, s250D. That section provides:

"(1) [appointment of individual] A body corporate may appoint an individual as a representative to exercise all of any of the powers the body corporate may exercise:

(b) at meetings of creditors or debenture holders; or

(2) [Restrictions on power] The appointment may set out restrictions on the representatives' powers. If the appointment is to be by reference to a position held, the appointment must identify the position.

(4) [Power of representative at meeting] Unless otherwise specified in the appointment, the representative may exercise, on the body corporate's behalf, all of the powers that the body could exercise at a meeting or in voting on a resolution."

20 Mr Garrott gave Mr Whitehouse a general background of the events since 1997. He told Mr Whitehouse that injunctions were in place, but Mr Whitehouse did not then trouble himself to ascertain the terms of those injunctions. He agreed to represent the shareholders of CRN. I infer that Mr Garrott told Mr Whitehouse that if CRN was put into voluntary liquidation, he would be appointed liquidator and that Mr Whitehouse's compliance with Mr Garrott's request was motivated by his desire to earn fees as such liquidator.

21 On 2 April 2002, Mr Garrott gave the following notice to his fellow director, Mr Leitch:

To be held at the registered office of the company,

To consider a motion for the following agenda items:-

1 To appoint an auditor for the company and for the company's operating subsidiaries. Radio Canberra Pty Ltd, Radio Goulburn Pty Ltd and Broadcasting Facilities (ACT) Pty Ltd (Horwaths Tasmania have consented to the position).

2 To appoint a secretary of the company (M Ball, Chartered Accountant has consented to the position.)

3 To appoint a public officer of the company (M Ball, Chartered Accountant has consented to the position).

4 To appoint a representative under Section 250D of the Corporations Law, to each subsidiary (R Whitehouse of Wise Lord & Ferguson, Chartered Accountants, has consented to the position). The appointments are not to affect the current management arrangements provided the manager undertakes his duties with due diligence.

5 To appoint R Whitehouse on behalf of shareholders to implement directors' responsibilities, subject to the current manager conducting management duties with due diligence.

22 Mr Whitehouse went to that meeting. He made no inquiry about the affairs of the company whose shareholders he had agreed to represent. With respect to due diligence, he gave the following, somewhat startling evidence for a chartered accountant in his position:

"On the morning of the meeting, Mr Garrott - at Mr Garrott's office - he showed me a separate room at his practice premises which had, what he suggested, was all the documents in relation to the company; the issue of shares etc. He gave me the opportunity if I wanted to, to examine anything I chose.

Did you examine anything? ... No, I did not. I believe that anybody that gave you an open slather like that, had little, or nothing to hide."

23 The minutes of the meeting on 11 April 2002 note the absence of a quorum and the intention to make an application pursuant to the Corporations Law, s1322. The appointments proposed in the notice of meeting were duly made. Mr Garrott claimed that he acted as he did so that CRN could comply with certain statutory requirements, namely:

24 I do not accept that the foregoing was the motivation for Mr Garrott calling the meeting held on 11 April 2002. There was no statutory obligation to appoint an auditor. There had been an earlier resolution to dispense with the appointment of an auditor and there was an auditor for the subsidiaries. There are disputes between Mr Garrott and Mr Leitch over the accounts, but more importantly, Mr Garrott accepted that he knew that if he called a meeting just to approve the accounts, Mr Leitch would attend it. The tax returns have been lodged, as have the corporate annual returns, albeit without the directors' solvency resolution. I am satisfied that the meeting of 11 April was called for the purpose of attempting to gain control of CRN and its subsidiaries, presumably to effect some leverage with respect to the settlement to which Mr Garrott was a party. The meeting was called with the intention to pray in aid the Corporations Law, s1322(2) to get over the absence of a quorum. Mr Whitehouse's application for a declaration that the meeting was valid was filed the day after that meeting was held.

25 The first question is the scope of the Corporations Law, s1322(2). For the second and third named respondents, Mr Brereton contended that there was no procedural irregularity but rather a deliberate decision to convene, commence and persist in a meeting which it was known to be inquorate. This, he submitted, was not a procedural irregularity. In support of the submission, reliance was placed on the following passage in the judgment of Young J in Re P W Saddington & Sons Pty Ltd (1990) 2 ACSR 158 at 159:

"Although the court's power under s 539 is, as has been held over a large number of years, an extremely wide one, there are limitations to it. Section 539 indicates in its text that it is to deal with procedural irregularities. Section 539(1)(b) includes the absence of a quorum within the term 'procedural irregularity'. I am quite sure that if a meeting proceeds and then afterwards it is realised that there was no quorum, the court could make an order under s 539. One can well see that happening without fault on any party, where, for instance, one of the members of the quorum has to be a person who holds a particular class of share. There would be an interesting situation if a meeting was held where members had come very long distances and it was realised at the commencement of the meeting that there was no quorum, but the people present decided to hold a meeting with a view either to it being ratified later by valid meeting or by the court. Perhaps s 539 would cover that situation. However, I am quite sure that s 539 does not cover the situation where parties actually know that the meeting they are convening is invalid and attend to purport to pass resolutions which they know can only have any validity at all if the court acts under s 539. A deliberate choice to convene an invalid meeting is not a procedural irregularity within s 539. I do not think that anything that Powell J said in Re Broadway Motors Holdings Pty Ltd (in liq) (1986) 6 NSWLR 45; 11 ACLR 495 or I said in Sydney Aussie Rules Social Club Ltd v Superintendent of Licences (1989) 15 ACLR 662 cuts across anything I have just said."

26 Although I think his Honour's observation concerning the Sydney Aussie Rules Social Club Ltd case was correct, with respect, I do not think it was correct in the case of Re Broadway Motors Holdings Pty Ltd (in liq). In that case, a conscious decision was made not to send a notice to a shareholder. Holding that the Company's Code (NSW), s539(2), the terms of which were identical to the Corporations Law, s1322(2), applied, Powell J said, at 54:

"The present case was one in which the provisions of s 539(2) of the Code were free to operate, since:

(c) a failure - whether accident, or deliberate - to give, to one entitled to receive it, notice of a meeting is a defect in the procedure for validly summoning a meeting."

27 In Re Clearwater Pty Ltd (1981) 6 ACLR 201, Master Lee QC held with respect to the Companies Act 1961 (Qld), s366, that it should be given a liberal interpretation and not restricted in its operation to cases of oversight or inadvertence in the strict sense. That section was the precursor to the current legislation and provided:

"No proceeding under this Act is invalidated by any defect, irregularity, or deficiency of notice or time unless the court is of the opinion that substantial injustice has been or may be caused thereby that cannot be remedied by any order of the court."

28 In Re Pembury Pty Ltd [1993] 1 Qd R 125, Byrne J held with respect to the Corporations Law, s1322 that the procedural irregularities there referred to included those that occurred by way of deliberate choice. He said, at 126 - 127:

"Nothing in the language of s 1322 indicates that the defects and deficiencies which it identifies as procedural irregularities must arise from inadvertence. And as I construe s 1322, according [sic] its provisions the liberal interpretation their evident purpose requires, the section should not be restricted in its scope to instances of inadvertence or accidental non-compliance. This was the view of a precursor to s 1322 taken by Lee J, then Master Lee QC, in Re Clearwater Pty Ltd (1981) 6 ACLR 201 (see at 208-210) and is, in my opinion, to be preferred to remarks of Young J in Re P W Saddington & Sons Pty Ltd (1990) 2 ACSR 158 to the effect that the section does not apply to irregularities resulting from a deliberate choice: at 159. The view which appeals to me seems more consonant the legislative policy to be found in subss (1) and (2). It is also supported by the consideration that sub (3) uses language showing that the draftsman was quite familiar with words apt to distinguish between omissions which are accidental or inadvertent and those which are deliberate. Subsection(3) speaks of an 'accidental omission to give notice' of the meeting and relevant consequence. See also s 266(4)."

29 Pembury was cited with approval in Re Sidex Australia Pty Ltd (Receiver and Manager Appointed) v Popovic (1995) 18 ACSR 436 at 449. However, the issue raised here was not an issue in that case. In Sydar Pty Ltd v K Simmonds Finance Pty Ltd (1995) 16 ACSR 384, Santow J said, at 393, that s1322 was a remedial section and consequently should be given a liberal construction. In the course of making that remark, he referred to Pembury as an example of a liberal interpretation being given to the section by holding that it was not to be restricted in its scope to instances of inadvertence or accidental non-compliance.

30 In N A B Ltd & Ors v Market Holdings Pty Ltd (in liq) [2001] NSWSC 253, Young J had occasion to refer to the view he expressed in Re P W Saddington (supra) concerning the scope of s1322. He did not expressly affirm his previous decision, but said at 475:

"The decision in the Saddington case was followed in Western Australia in McGellin v Mount King Mining NL (1998) 144 FLR 288, 307, though it has not been universally approved; see eg Re Pembury Pty Ltd (1991) 4 ACSR 759; [1993] Qd R 125 (Qd SC). Whether or not it be completely correct, the fact that rival parties are employing technical arguments in a commercial war on the advice of experienced lawyers means that a court will be less likely to consider it just that one side should have relief under the section if it proceeded on wrong advice."

31 In Greig & Anor as liquidators of Australian Building Industries Pty Ltd (in liquidation) v Australian Building Industries Pty Ltd [2002] QSC 138, Chesterman J referred to Brown v D M L Resources (No 6) [2002] NSWSC 6 and said, at par30:

"The reasoning in Brown No 6 appears to proceed on the basis that some procedural defects are so serious in their consequences that they cannot properly be designated as 'procedural irregularities'. I do not think this is right as a matter of philology and would agree with Byrne J in Re Pembury Pty Ltd (1991) 4 ACSR 759, that s 1322 should be afforded a liberal interpretation to allow the court ample scope to uphold the results of proceedings, legal or corporate, which had not complied with the requisite rules but which have nonetheless not given rise to incurable injustice."

32 The issue in McGellin v Mount King Mining NL (supra) was whether or not participation in and voting upon a matter in breach of a director's fiduciary duty could properly be regarded as a mere procedural irregularity within the meaning of s1322. Murray J held that it was not. The director's action was deliberate. In holding that it was not a procedural irregularity, Murray J referred to Re P W Saddington & Sons Pty Ltd (supra) and said that his view was confirmed by that decision because in that case the contravention to convene a meeting without a quorum was deliberate.

33 It must not be overlooked that the question at hand is one of statutory interpretation. There are cases such as McGellin v Mount King Mining NL and David Grant and Co Pty Ltd (Receiver appointed) v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265 at 274 in which the question will arise as to whether the impugned conduct is a procedural irregularity because (inter alia) it was a deliberate breach, but this is not such a case. The statute prescribes that (inter alia) "the absence of a quorum at a meeting of directors of a corporation" is a procedural irregularity. It also provides that a proceeding is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused, or may cause, a substantial injustice. The statute does not qualify the words "absence of a quorum" with words such as "inadvertent" or "accidental". As Byrne J pointed out in Re Pembury Pty Ltd (supra), the legislators have qualified the omission to give notice of the meeting referred to in the following subsection, with the word "accidental", and the inference is strong that they did not intend to so qualify the absence of a quorum in the immediately preceding subsection. There is no warrant, in my view, for writing words into s1322(1) and (2) that are not there. See Thompson v Goold and Co [1910] AC 409 at 420; Dallikavak v Minister for Immigration and Ethnic Affairs (1985) 61 ALR 471 at 475 - 476; Marshall v Watson [1972] HCA 27; (1972) 124 CLR 640 at 649.

34 Accordingly, I conclude that the absence of a quorum at the meeting of directors was a procedural irregularity within the meaning of s 1322(2) even if:

* the meeting was called in the knowledge that it was extremely unlikely that there would be a quorum;

* the purpose of calling the meeting was to attempt to circumvent the effect of the orders made in the Family Court; and

* the meeting proceeded in the full knowledge of those present that there was no quorum.

35 I accept Mr Sealy's submission that subject to any order to the contrary, the applicant was entitled to rely upon s1322(2) to make valid a meeting of directors held without a quorum. I also accept the submission that notwithstanding that that is the effect of subs(2), the applicant is entitled to come to the court and ask for a declaration pursuant to subs(4) that the meeting was valid. In a case of substantial injustice, s1322(2) gives a court the power to defeat the legislative protection afforded by the subsection, and if there is a doubt about whether or not there has been substantial injustice or for some other reason, an interested person may not want to rely on subs(2) for the validity of an inquorate meeting. In such cases, that person may come to the court and obtain a declaration of validity as provided by subs(4). That subsection is governed by subs(6), which provides:

"The Court shall 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 in the public interest that the order be made;

(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

36 Only one of the three paragraphs set out in s1322(6)(a), needs to be satisfied. For the reasons already given, the applicant has satisfied the requirement of subs(6)(a)(i). Subsection (6)(b) does not arise upon the facts of this case and accordingly, the only question is whether I am satisfied that no substantial injustice has been, or is likely to be, caused to any person by the making of the order sought.

37 It is necessary to ascertain exactly what order the applicant seeks. By his application, the applicant seeks a declaration that the meeting of directors of Capital Radio Network Pty Ltd held on 11 April 2002 "was not an invalid meeting by reason of there being no sufficient quorum".

38 There must be shown a sufficient nexus between the making of the order validating the meeting and the absence of substantial injustice. For the applicant, Mr Sealy submitted that the issue raised by subs(6)(c) was not concerned with any possible injustice arising out of the resolutions passed at the meeting. He contended that the issue was whether validation of the meeting itself would cause injustice to any person, and argued that none had arisen, nor was any likely to arise because had Mr Leitch attended the meeting, the result of it would have been exactly the same as the result of the inquorate meeting. Mr Garrott would have exercised his deliberative and casting vote and overruled Mr Leitch's deliberative vote.

39 Leaving to one side a submission concerning Mr Garrott having a financial interest in the resolution to appoint his partner, Ms Ball, as secretary of CRN, and was thereby disqualified from forming part of the quorum, there is no doubt that had Mr Leitch attended the meeting, the result would have been the same. For the respondents, Mr Brereton submitted:

* that in reality, what was sought to be validated was the resolutions passed at the meeting and it certainly could not be shown that validation of those resolutions would not be likely to cause substantial injustice;

* alternatively, Mr Leitch had a right to prevent Mr Garrott, or those aligned with him, from seizing control of the company by staying away from a meeting of directors, the notice for which propounded resolutions that would have that effect. As Mr Leitch could not be forced to attend such a meeting, it was submitted that there would never be a quorum at such a meeting and, accordingly, validation of the inquorate meeting would work an injustice to Mr Leitch.

40 In Re Broadway Motors Holdings Pty Ltd (in liq) (supra), Powell J held at 58:

"... it must be shown that there is a nexus between the procedural irregularity which has occurred and the matters of prejudice relied upon as constituting injustice ...".

41 Poliwka v Heven Holdings Pty Ltd (1992) 7 ACSR 85 was a case in which the procedural irregularity was a deficient notice of meeting. With respect to the issue of substantial injustice, Anderson J said, at 97 - 98:

"A deficiency of notice (including absence of notice, as to which see Re Broadway Motors Holdings Pty Ltd (in liq) (1986) 11 ACLR 495; 4 ACLC 598 at 605) and the absence of a quorum are each procedural irregularities. See subs (1)(b)(i) and (1)(b)(ii). Hence Mr Putnin's resolutions are not invalid merely because no notice was given to Mrs Mamouney and he was the only member of the company present. Whether I should declare the resolutions to be invalid, depends on my opinion whether the irregularity 'has caused or may cause substantial injustice ...'. I am not of that opinion. It is necessary to appreciate that it is the procedural irregularity that must have caused the injustice, not the resolutions themselves: Re Pembury Pty Ltd, supra, at ACLC 940. I am quite unable to see that any substantial injustice has been or may be occasioned by the failure to give notice to Mrs Mamouney. By this time, Mrs Mamouney did not want anything to do with Heven Holdings Pty Ltd or any of Mr Boccamazzo's interests. She would not have attended the meeting, had she received notice of it, except to do what might still remain to be done to perfect her disassociation from Mr Boccamazzo and his companies. To this end, she would readily have agreed to the resolutions, calculated as they were, to complete the legal transfer of her share. I therefore decline to make a declaration of invalidity."

42 Re Pembury Pty Ltd (supra) concerned (inter alia) an inquorate meeting. Byrne J, at 127, drew the distinction between any injustice that might arise from the irregularity and any injustice that might arise from the proceedings that followed that irregularity, and adopted the passage from Re Broadway Motors Holdings Pty Ltd (in liq) that I have cited above. At 127, his Honour said:

It is, therefore, necessary to decide whether either of the irregularities has caused or may cause 'substantial injustice'. The burden Creevey and East bear is to show that one or other of the irregularities occasions a 'substantial injustice': not that the 'proceeding' (the meeting and its resolutions) caused or may yet cause substantial injustice: see Bell Resources Limited v Turnbridge Pty Ltd & Ors (No 2) (1988) 13 ACLR 762, 766; cf Broadway Motors Holdings at 58 where Powell J said, 'It must be shown that there is a nexus between the procedural irregularity which has occurred and the matters of prejudice relied upon as constituting the injustice'."

43 Mamouney v Soliman (1992) 9 ACSR 63 is authority to the same effect. Hodgson J referred to the cases which I have cited and said, at 71:

"Furthermore, in my view, it is necessary that the possible injustice be linked to the particular irregularities themselves. It is insufficient for the plaintiff to say that the resolutions were irregularly passed, and those resolutions have caused injustice. In my view, the plaintiff must show that there may have been a different result, if proper notice had been given. I think this is established by the cases referred to above, particularly Re Pembury and Poliwka v Heven."

44 In Sutherland v Robert Bosch (Aust) Pty Ltd [2000] NSWSC 32; (2000) 33 ACSR 680, Santow J said (obiter dicta) at 689:

"The courts on occasion have taken a narrow view of the meaning of 'substantial injustice' for the purpose of s 1322. In Poliwka v Heven Holdings Pty Ltd (1992) 6 WAR 505; 7 ACSR 85 Anderson J, after concluding that a meeting was a 'proceeding' for the purpose of s 1322 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 Soliman (1992) 9 ACSR 63 at 71."

45 In the light of the foregoing authorities, I conclude that any injustice that has arisen or that might arise by reason of the passage of the resolutions at the inquorate meeting, is irrelevant. The question is whether the applicant has discharged the onus of proof he carries of showing that validation of the meeting, as opposed to validation of the business transacted at that meeting, has not caused substantial injustice to Mr Blyton and/or Mr Leitch, nor is it likely to.

46 Is it sufficient for the applicant to show, as he has, that had there been a quorum at the meeting, the result would have been exactly the same as it was at the inquorate meeting? In the circumstances of many cases, the answer to this question may well be "yes", but, in my view, it is not so in this case.

47 It is unnecessary for me to traverse in any further detail the evidence in this case, for it is quite apparent that ever since the re-arrangement of the shareholding in CRN and Radio Snowy Mountains Pty Ltd, and ever since the first settlement of the troubled proceedings between Mr and Mrs Blyton in which Mr Garrott became involved, Mr Garrott has tried to gain control of CRN and its subsidiaries.

48 Although Mr Garrott's evidence was less than satisfactory in some respects, particularly with respect to his claimed reasons for wanting to convene a meeting of directors of CRN and its subsidiaries, I do not ascribe any dishonesty to his desire to gain control of the company. Although the evidence did not spell this out in detail, it became clear that either he, or entities with which he is closely associated, have invested in and/or lent moneys to CRN and/or its subsidiaries. It may well have been a desire on his part to protect his financial interests that motivated him to try and get control. At all events, it is very apparent that for some years now:

* there has been considerable animosity between Mr Garrott and Mr Blyton;

* that Mr Leitch is desirous of doing all he can to protect Mr Blyton's interests in these companies; and

* Mr Garrott is determined to alter the status quo, and Messrs Leitch and Blyton are determined to prevent him doing so, pending performance of the settlement agreement to which Messrs Garrott and Blyton are parties.

49 To date, the only way that Messrs Leitch and Blyton have been able to achieve their objective has been by the former deliberately absenting himself from any meeting at which it was proposed to pass a resolution that would have the effect of passing the control of CRN and its subsidiaries into the hands of Mr Garrott or those who would represent his interests. I infer that the applicant is such a person. Mr Leitch is entitled to absent himself from such directors' meetings if he chooses to do so. As Mr Brereton submitted, without the aid of s1322(2), Mr Garrott would not be able to gain control of CRN.

50 The position in this case is quite different from that in Re Pembury Pty Ltd (supra). In that case, the claimed injustice was a denial of an opportunity to put facts and argument to a director to persuade him not to act in a certain way. At 133, Byrne J held that although short notice of the meeting was given to two other directors, those two had known for a long time that the other director proposed to act in a certain way. Byrne J held that the two directors had had more than ample opportunity to put their arguments. His Honour further held that even had they done so, the outcome would have remained the same. As I read the report of that case, there was no suggestion that the two directors deliberately stayed away from the meeting in order to prevent certain resolutions being passed.

51 In Sunderland v Bosch (supra), Santow J referred (again obiter dicta) to the possible lack of a quorum at a directors' meeting at which it was resolved that the applicant be appointed administrator of a company. The administrator had commenced proceedings against the defendants to recover alleged preferential payments. By way of defence of those proceedings, the defendants contended that the administrator's appointment was invalid because it had been made at an inquorate meeting. Santow J held that the appointment was valid, but said that if he was wrong about that, no substantial injustice had, or was likely to, arise because the sole director who made the appointment could have, and would have, appointed another director or called a general meeting, and the appointment of the administrator would have been made at a quorate meeting. Then follows this important passage in his Honour's judgment, at 689:

"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 s 1322(4)." [Emphasis added.]

52 The passage that I have already cited from Poliwka v Heven Holdings Pty Ltd (supra) clearly demonstrates that the circumstances of that case were again quite different from the circumstances of this case.

53 The first named respondent in this case was very clearly relying upon the provision in the articles of association that prescribes a quorum of two directors for a valid directors' meeting, in order to prevent a certain course of action being taken that would be adverse to his and the second named respondent's interest. This he was entitled to do. In the light of the history of the relations between Mr Garrott and Mr Blyton since 1998, the injunctions in the Family Court and the settlement executed by Messrs Blyton and Garrott, the first named respondent was indeed, knowingly standing by at the time, relying upon there being no quorum. I find that in the circumstances this was a more than reasonable stance to adopt. It would work a serious injustice to the first and second named respondents to permit Mr Garrott to invoke the Corporations Law, s1322 to deny the right that Mr Leitch had, by virtue of the articles of association, to prevent the holding of a quorate meeting of directors.

54 Interestingly, in Re Pembury Pty Ltd (supra), Byrne J counselled, as follows, at 133:

"This decision should not encourage the notion that shareholders with voting control may always give short notice of general meetings or pass effective resolutions in the absence of a quorum."

55 Perhaps it did encourage Mr Garrott or his advisers, but it should not have done. To accept the submission put on behalf of the applicant in the circumstances of this case would set the relevant provision of company's articles of association at nought and enable a director with the controlling vote to act as if the other director did not exist and as if the articles of association conferred no relevant right upon him.

56 The application by the applicant is dismissed. To prevent the automatic operation of s1322(2), there will be a declaration, not quite in the terms sought by the second and third named respondents, that the meeting of directors of Capital Radio Network Pty Ltd (ACN 057 940 628) held on 11 April 2002 was an invalid proceeding by reason of there being no sufficient quorum.

Whitehouse v Capital Radio Network Pty Ltd & Ors [2002] TASSC 78

At a glance

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Decision date

Before

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Judgment (127 paragraphs)

Whitehouse v Capital Radio Network Pty Ltd & Ors [2002] TASSC 78 (3 October 2002)

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Cases Cited (6)