Reported Decision : 43 ACSR 82 New South Wales Supreme Court CITATION : Australian Aloe Marketing Ltd v Australian Aloe Ltd and Ors [2002] NSWSC 941 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4641/02 HEARING DATE(S) : 1 October, 2002 JUDGMENT DATE : 1 October 2002 Australian Aloe Marketing Limited - Plaintiff/1st Cross Defendant Australian Aloe Limited - First Defendant PARTIES : Bradley Grogan - Second Defendant/1st Cross Claimant Vaughan Wellington - Third Defendant/2nd Cross Claimant Douglas Wilkinson - Fourth Defendant/3rd Cross Claimant Colin Thomas - 2nd Cross Defendant JUDGMENT OF : Palmer J COUNSEL : S.D. Robb QC, M.S. Henry - Plaintiff/First Cross Defendant F.M. Douglas QC, R.J. Webb SC - Defendants/Cross Claimants SOLICITORS : Blake Dawson Waldron - Plaintiff /First Cross Defendant Deacons - Defendants/Cross Claimants CATCHWORDS : CORPORATIONS - MEETINGS - PROCEDURAL IRREGULARITY - Meeting of holders of prescribed interests convened for purpose of considerating a resolution for removal of manager of an investment scheme governed by Corporations Law - resolution in terms could not be considered by meeting until fate of prior special resolution and ordinary resolutions known - insufficient quorum at meeting to consider special resolution - meeting adjourned to consider special resolution and ordinary resolutions but resolution for removal of manager declared lapsed - whether resolution validly declared lapsed - whether invalid declaration that resolution had lapsed was procedural irregularity under s.1322 of Corporations Law. HELD - Resolution for removal of manager could not validly be considered by a meeting until the fate of the special and ordinary resolutions was known - adjournment of meeting to consider special and ordinary resolutions but not resolution for removal of manager was a procedural irregularity which could be rectified under s.1322 of Corporations Law. LEGISLATION CITED : Corporations Law (Cth) - s.1069, s.1322 DECISION : Orders as sought in Cross Claim. 1 The Plaintiff is the Manager of an investment scheme constituted by an Investment Deed dated 27 May 1998. As the investment scheme involves prescribed interests, as defined by chapter 7.12 of the Corporations Law (Cth) as it was at the date of the Deed, the parties agree that the scheme is governed by the provisions of the Corporations Law as they were prior to the amendments of that Law in 1998. 2 The First Defendant is the supplier of products which are marketed by the Plaintiff pursuant to the investment scheme. The Second to Fourth Defendants are directors of the First Defendant and are directly or indirectly holders of what are called licensed interests in the investment scheme. 3 Disputes have arisen between the Plaintiff and the Defendants as to the management of the investment scheme. It is not necessary to go into the detail of that dispute. Proceedings were commenced by the Plaintiff against the Defendants by Summons filed in this Court on 18 September 2002. A meeting of licensed interest holders was convened to take place on 20 September 2002, one of the resolutions proposed at that meeting being for the removal of the Plaintiff as Manager of the investment scheme. 4 The meeting on 20 September was adjourned to 18 October in circumstances to which I will come. However, the resolution for the removal of the Plaintiff as Manager of the scheme was deemed by the chairman at the meeting to have lapsed. Accordingly, that resolution was not amongst the resolutions which the chairman ruled were to be considered at the adjourned meeting which is to take place on 18 October. 5 The issue to be determined at this stage of the proceedings arises on a Cross Claim which the Second to Fourth Defendants have filed. In that Cross Claim they seek declarations that the adjournment of the meeting of licensed interest holders without including the resolution for the removal of the Manager amongst the resolutions to be considered at the adjourned meeting was invalid under the terms of the Investment Deed. They seek relief under s.1322 of the Corporations Law and, in the alternative, they seek specific performance of the Manager's obligations in relation to the convening and holding of meetings as contained in the Investment Deed. Agreed facts 6 The parties have agreed upon a Statement of Facts in the following terms: "1. On 27 May 1998, Australian Aloe Marketing Limited, the first cross defendant ("AAM") and Australian Aloe Limited, the first defendant ("AAL"), and Inteq Custodians Limited entered into a deed ("Investment Deed") establishing a venture known as the "Australian Aloe Vera Project" ("Project"). 2. The Project is an investment scheme involving prescribed interests under Chapter 7.12 of the Corporations Law. As a prescribed interest scheme, it is governed by Part 7.12 of the Corporations Law as it was immediately before the amendment of the Law in 1998. 3. The Investment Deed was then registered with the Australian Securities Commission pursuant to section 1067(2) of the Corporations Law (as it was then known). By the Investment Deed, AAM was appointed the management company of the Project. 4. In early 1998: (a) AAM and people holding prescribed interests in the Project ("Licensees") entered into a Management Agreement; and (b) AAL and the Licensees, entered into the Licence Agreement. 5. Under the Project: (a) AAL owns the means for production of and produces aloe vera and products made using aloe vera ("Products"); (b) the Licensees each: (i) acquire a parcel of shares in AAL (pursuant to his, her or its Licence Agreement); (ii) acquire rights from AAL to distribute and sell a portion of the Products (pursuant to his, her or its Licence Agreement); and (iii) appoints AAM to act as agent for the sale of his, her or its share of the Products (by his, her or its Management Agreement); (c) AAM: (i) purchases all of the Product made by AAL on behalf of those Licensees who have entered into Management Agreements; (ii) sells all of that Product to third parties as agent for the Licensees; and (iii) undertakes other activities in the management of the Project; (d) Licensees' returns from the participation in the Project are: (i) any dividends paid on their shares in AAL; (ii) any profit on resale of products paid to them by AAM; and (iii) any capital gain on the sale of their shares in AAL or their interests in the Licence Agreements. 6. On 3 July 2002, a number of Licensees requisitioned AAM to hold a meeting of the Licensees to consider a number of resolutions proposed by the requisitioning Licensees. 7. On 23 July 2002, AAM gave notice to the Licensees that a Special Meeting on the Licensees would be held on 20 September 2002, at 3pm 8 Cliff Street, Milsons Point, New South Wales ("Meeting"). 8. The Meeting was summoned by the sending to Licensees of a 'Notice of Special Meeting – Australian Aloe Vera Project" ("Notice"). 9. The Notice discloses that there were 3 different types of resolutions to be considered by the Licensees at the Meeting. In addition to the resolution appointing the chairman of the Meeting, the following resolutions were proposed: ' Resolution 2 – Power to Terminate the Project Resolution 2.1 – Amendment to the Investment Deed To consider and, if thought fit, pass the following resolution as a special resolution: "THAT the Investment Deed be amended, in the manner set out in the draft supplemental deed circulated with the notice of meeting and designated as document "A", to provide that the Licensees may, by special resolution, resolve at any time that the Project be terminated." Resolution 2.2 – Execution of the Supplemental Deed To consider and, if thought fit, pass the following resolution as an ordinary resolution: "THAT if resolution 2.1 is passed, the Trustee and Manager each be directed to execute the supplemental deed in or substantially in the form of the draft supplemental deed circulated with the notice of meeting and designated as document "A", within 7 days after the date on which this resolution is passed." Resolution 2.3 – Lodgement of the Supplemental Deed To consider and, if thought fit, pass the following resolution as an ordinary resolution: "THAT if resolution 2.1 is passed, the Manager lodge, or cause to be lodged, the duly executed supplemental deed with the Australian Securities and Investments Commission in accordance with and pursuant to section 1067(1) of the Corporations Law (as applicable to the Project and the Investment Deed), within 7 days after the date on which the supplemental deed is executed." Resolution 3 – Termination of the Project To consider and, if thought fit, pass the following resolution as a special resolution: "THAT the Project be terminated on and from the date of the approval by the Australian Securities and Investments Commission of the supplemental deed, and the assets of the Project be distributed in accordance with the Investment Deed." Resolution 4 – Removal of the Manager Resolution 4.1 – Exercise of the Power to Remove the Manager To consider and, if thought fit, pass the following resolution as an extraordinary resolution: "THAT, if resolutions 2.1, 2.2, 2.3 and 3 are not passed, Australian Aloe Marketing Limited be removed as the Manager of the Project." ' 10. The terms "ordinary resolution" and "special resolution" are defined in clause 1.1 of the Investment Deed. The term "extraordinary resolution" is not. 11. Pursuant to both regulation 7.12.15(10)(g) of the Corporations Law Regulations (as in force in respect of the Project) and clause 16.2 of the Investment Deed, AAM must retire as the management company of the Project if Licensees holding 50% or more in value of the prescribed interests resolve at a meeting that AAM should be removed. This requirement is different to the requirements imposed by the Investment Deed for ordinary resolutions and special resolutions. 12. Mr Colin Thomas, the Second Cross Defendant, was appointed as chairman of the Meeting ("Chairman"). 13. There were not in attendance at the Meeting persons holding or representing by proxy or power of attorney the holders of valid and current Management Agreements in respect of less than fifty one percent (51%) in number and less than fifty percent (50%) in value of the Licensed Interests which were the subject of valid and current Management Agreements. For present purposes "Management Agreements" and "Licensed Interests" bear the same meanings as they do in the Investment Deed. 14. The Chairman said words to the following effect: "The way in which I see the situation is that we have an extraordinary resolution for which we do not have a quorum and I don't see any guidance in [clause] 18.8 [of the Investment Deed] in dealing with that particular resolution and as such I don't think that the deed gives any assistance in that matter and that we should look at each of the resolutions. Having looked at the resolutions I think that while we have a number of ordinary resolutions they seem to follow the contingency of the passing of the special resolutions so that I believe that we should adjourn the meeting to consider at a future date the power to terminate the project because that requires a special resolution. However, in regard to the extraordinary resolution I don't think that we have a quorum for that and I don't think that the deed deals with that so that I propose to let that motion lapse because of that. As that affects all of resolutions 4, I suggest that we adjourn the meeting to consider the special resolutions." 15. The Chairman adjourned, for proposal and voting at a meeting of Licensed Interest holders to be held on 18 October 2002, resolutions 2.1, 2.2, 2.3, 3, 4.2, 4.3, 4.4, 4.5 and 4.6 stated in the Notice. 16. The Chairman did not adjourn for later proposal and voting resolution 4.1 stated in the Notice." 7 The relevant terms of the Investment Deed are as follows: "' ORDINARY RESOLUTION ' means a resolution passed at a meeting of the Licensees duly convened and held in accordance with the provisions contained in this deed: (a) on a show of hands by a majority those so voting consisting of more than fifty percent (50%) of those present in person or by proxy or power of attorney and entitled to vote; or (b) on a poll, then by a majority of votes cast on such a poll." "' SPECIAL RESOLUTION ' means a resolution passed at a meeting of the Licensees duly convened and held in accordance with the provisions herein contained: (a) on a show of hands by a majority consisting of not less than 75% of the votes of those present in person or by proxy or power of attorney and entitled to vote; or (b) if a poll is demanded then by a majority consisting of not less than seventy-five percent (75%) of the votes given on such a poll." " 16. RETIREMENT OF MANAGER … 16.2 The Manager must retire if persons holding 50% or more in value of the Licensed Interests which are the subject of valid and current Management Agreements resolve at a meeting that the Manager in relation to those Interests should be removed." " 18. MEETINGS OF LICENSEES 18.1 The Trustee or the Manager may at any time summon a meeting of Licensees for such purposes as they may see fit. … 18.3 The Manager hereby covenants that it will within twenty-one (21) days after an application is delivered to it at its registered office being an application by not less than fifty (50) or one-tenth (1/10th) in number whichever is the less of the Licensees by sending notice by post of the proposed meeting at least seven (7) days before the proposed meeting to each of the Licensees at his last known address or in the case of joint Licensees, to the joint Licensee whose name stands first in the Register, convene a meeting of the Licensees for the purpose of either or both of the following: (i) laying before the meeting the accounts and balance sheet that were laid before the last preceding annual general meeting of the Manager or the last audited statement of accounts of the Trustee; (ii) giving to the Manager or to the Trustee directions: (A) the terms of which are set out in the notice of the meeting; and (B) that the meeting thinks appropriate to be given; whether or not the directions relate to the accounts, balance sheet or statement referred to in sub-paragraph (i) and will lay the latest audited statement of accounts of the Project before such meeting. Such meeting shall be held at the time and place specified in the notice, being a time not later than two (2) months after the giving of the notice under the chairmanship of: (i) such person as is appointed for that purpose by the Licensees present at the meeting; or (ii) where no such appointment is made a nominee of the Trustee approved by the Commission; and shall be conducted in accordance with the provisions herein contained or, insofar as this deed makes no provision, as directed by the Chairman of the meeting. … 18.8 No business shall be transacted at any such meeting unless a quorum is present when the meeting proceeds to business. The quorum necessary for a meeting at which an Ordinary Resolution only is to be proposed shall be persons holding, or representing by proxy or by power of attorney the holders of, valid and current Management Agreements in respect of at least ten percent (10%) in number of the Licensed Interests which are the subject of valid and current Management Agreements and for a meeting at which a Special Resolution is to be proposed shall be persons holding, or representing by proxy or by power of attorney the holders of valid and current Management Agreements in respect of which at least fifty-one percent (51%) in number of the Licensed Interests which are the subject of valid and current Management Agreements. If within fifteen minutes from the time appointed for any meeting a quorum is not present the meeting shall: (i) if called for the purpose of passing an Ordinary Resolution stand adjourned to the same day in the next week at the same time and the same place or if such place be unavailable at that time then at such other place as the Chairman shall direct; (ii) if called for the purpose of passing a Special Resolution stand adjourned for such period as the Chairman shall direct and provide notice of the proposed Special Resolution and of the fact that those present in person or by proxy will constitute a quorum at an adjourned meeting and that place, day and hour of such adjourned meeting has been given to the Licensees by the Manager or the Trustee. At an adjourned meeting the Licensees present in person or by proxy (whatever their number being not less than two) shall form a quorum and shall have power to pass such Ordinary or Special Resolution and the Manager and the Trustee or their respective duly appointed representatives shall be entitled to attend and address the meeting." Contentions 8 The Plaintiff submits that the chairman of the meeting was right in declaring resolution 4.1 to have lapsed at the meeting held on 20 September. It is quite clear, the Plaintiff says, that the requisite quorum for the consideration of that resolution was not present at that meeting. Accordingly, the chairman was entitled under clause 18.3 of the Investment Deed to make a ruling that the resolution had lapsed. 9 The Defendants contend that on the true construction of clause 18.8 the whole of the business proposed to be transacted at the meeting of 20 September should have been adjourned to 18 October and they initially relied upon the construction of clause 18.8 for a contention that, if a quorum was not present in respect of any resolution proposed at the meeting, the meeting had to be adjourned. 10 In my view, the construction of clause 18.8 must be approached in the context of the facts surrounding the particular problem which arises for consideration. Part of those facts is the business proposed at a meeting and, in particular, whether the resolutions proposed, if more than one, are completely independent of each other or are linked and, therefore, interdependent. A common sense practical construction of the clause cannot be undertaken unless it is seen how the clause applies to the factual situation which actually presents itself. 11 If the business of a meeting consists of only one ordinary resolution, there is no difficulty. The quorum is 10% in number of the licensed interests, to use a shorthand description. Likewise, there is no difficulty if the business of the meeting consists of only one special resolution. Then the quorum is 51% in number of the licensed interests. 12 Assume that the business of the meeting consists of one or more ordinary resolutions and one or more special resolutions and that a quorum for ordinary resolutions is present, but not a quorum for special resolutions. If none of the ordinary resolutions is linked with any of the special resolutions in such a way that the consideration of the meeting cannot be given to the ordinary resolutions until the result of voting on the special resolutions is known, then the ordinary resolutions can be voted upon even though the meeting would have to be adjourned to consider the special resolutions. 13 However, if the terms of any ordinary resolutions are such that the resolutions could not be put to the meeting until the result of the voting on a special resolution was known, then the meeting would have to be adjourned to consider both the special resolution and those ordinary resolutions which are dependent on the fate of the special resolution. 14 In the present case, resolution 4.1 is neither an ordinary resolution nor a special resolution, as those terms are defined in the Investment Deed. It is a resolution sui generis, being a resolution the requirements of which are prescribed in clause 16.2 of the Deed. But that does not mean that none of the provisions of clause 18 apply to a meeting convened for the purpose of considering a resolution under clause 16.2. 15 Clearly, in my view, a meeting to consider a resolution under clause 16.2 may be convened by requisition under clause 18.3. This is because a resolution under clause 16.2 would be a "direction" to the Manager to retire within the scope of clause 18.3(ii). 16 If a meeting convened under clause 18.3 had, as the only item of business, a resolution to remove the Manager under clause 16.2 and the terms of that resolution were simply that the Manager be directed to retire forthwith, then the position would be that if the percentage of licensed interests required by clause 16.2 was not present at the meeting, there being no other provision in clause 18.3 for this eventuality, the chairman would either adjourn the meeting or declare the motion for the resolution lost, as directed by the meeting in accordance with the final words of clause 18.3. 17 However, in this case, resolution 4.1 is linked to and is interdependent with resolutions 2.1, 2.2, 2.3 and 3. In terms, resolution 4.1 cannot be put to a meeting under clause 16.2 unless that meeting knows the fate of the voting upon resolutions 2.1 and 3, which are special resolutions, and resolutions 2.2 and 2.3, which are ordinary resolutions. 18 As there was an insufficient quorum for resolution 2.1 to be put to the meeting and, in their terms, resolutions 2.2 and 2.3 could not be put to a meeting until the fate of voting upon resolution 2.1 was known, the consequence was that the meeting on 20 September had to be adjourned in order to consider the ordinary resolutions, that is, 2.2 and 2.3, as well as the special resolutions 2.1 and 3. 19 Since the fate of those resolutions had to be known before resolution 4.1 could be put to a meeting and properly discussed by those present, pursuant to and for the purposes of clause 16.2, it followed that resolution 4.1 could not have been put to the meeting which was held on 20 September. It could only have been put to an adjourned meeting which considered special resolutions 2.1 and 3 and ordinary resolutions 2.2 and 2.3. That is the consequence of the terms in which resolution 4.1 was framed and of the requirements of clause 16.2 that there be a meeting to consider that resolution. It is not the consequence of any construction of clause 18.8 seen in isolation. 20 Resolutions 2.1, 2.2, 2.3 and 3 were to be considered at the meeting which the chairman adjourned to 18 October 2002. Accordingly, in my view, the only meeting which can properly consider resolution 4.1 is a meeting which knows the fate of those resolutions: in other words, the meeting to be held on 18 October 2002. 21 It follows that, in my view, the chairman invalidly declared that resolution 4.1 had lapsed. It has not lapsed and it must still be put to a meeting for the purposes of clause 16.2. That meeting is the meeting of 18 October 2002. 22 The Cross Claimants seek a declaration that the failure to adjourn the whole of the business of the meeting on 20 September to the meeting of 18 October was a procedural irregularity within the meaning of s.1322 of the Corporations Law. I think that such a declaration should be made for the following reasons. 23 The former s.1069 C of the Corporations Law prescribes how meetings of persons holding prescribed interests are to be conducted. Subsection (2) requires that a meeting convened for any of the purposes set out in s.1069 A – and this was such a meeting – is to be conducted in accordance with the provisions of the relevant Investment Deed. That being so, I think that a meeting conducted for one of the purposes of s.1069 A of the Corporations Law is a "proceeding under this Law" within the meaning of s.1322(1)(a) of the Law. That is made even more apparent by the terms of s.1322(1)(b) of the Law, which provide that a procedural irregularity within the operation of the section includes an irregularity arising from absence of a quorum of a meeting of members of a scheme such as the present. 24 In this case, the provisions of clauses 16.2 and 18.3 of the Investment Deed have not been complied with in that there has not yet been held a meeting pursuant to clause 16.2 which can properly consider resolution 4.1. Accordingly, there has been a non-compliance with the requirements of s.1069 C (2) of the Law, resulting in procedural irregularity. 25 It seems to me that it is proper to grant relief as sought by the Cross Claimants pursuant to s.1322(4)(b) of the Law so that what was done by the chairman in adjourning only part of the business of the meeting does not result in an invalidity of the adjournment as a whole. A declaration should be made in the terms sought in paragraph 3 of the Cross Claim. 26 In order to ensure that the meeting which is held on 18 October properly has before it resolution 4.1, a consequential or ancillary order pursuant to s.1322(4) should be made in terms of paragraphs 4 and 5 of the Cross Claim. 27 I should add that, in my view, relief could have and would have been ordered quite independently of the provisions of the Corporations Law upon the basis that the Court will order specific performance of the obligations contained in the Investment Deed in an appropriate case. The requirements of clauses 18.3 and 16.2 of the Deed have not been complied with in my view, as I have earlier noted, and an order for specific performance of those provisions by the Plaintiff as Manager of the Deed would be ordered to the same effect as paragraphs 4 and 5 of the Cross Claim. 28 The orders and declarations which I have indicated will be made. I think that costs should follow the event. The First Cross Defendant is to pay the Cross Claimants' costs of the Cross Claim. I order that the costs of the Cross Claimants be assessed and paid forthwith. Last Modified: 10/11/2002 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.