Reported Decision : 49 ACSR 568 (2004) 22 ACLC 873 New South Wales Supreme Court CITATION : The Chinese Cultural Club Limited [2004] NSWSC 432 HEARING DATE(S) : 14 May 2004 JUDGMENT DATE : 24 May 2004 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Declaration of validity of meetings made. Relief from civil liability refused. CATCHWORDS : CORPORATIONS - management and administration - holding of purported directors' meetings without quorum - whether meetings valid - whether declaration of validity of meetings to be made under section 1322(4)(a) Corporations Act 2001 (Cth) - proceedings on foot in Licensing Court against company arising from failure to have quorum at directors' meetings - whether appropriate to make order under section 1322(4)(c) Corporations Act 2001 (Cth) relieving company from civil liability LEGISLATION CITED : Corporations Act 2001 (Cth) Registered Clubs Act 1976 Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd [2003] HCA 49; (2003) 2001 ALR 1; (2003) 77 ALJR 1629 Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1 CASES CITED : Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 Labbozzetta v Director of Liquor & Gaming [1999] NSWSC 96 Naismith v McGovern (1953) 90 CLR 336 Re Vouris; Epromotions Australia Pty Ltd and Relectronic-Remech Pty Ltd (In Liq) [2003] NSWSC 702; (2003) 47 ACSR 155 PARTIES : The Chinese Cultural Club Limited - Plaintiff FILE NUMBER(S) : SC 2702/04 COUNSEL : F Donohoe - Plaintiff SOLICITORS : Laurence & Laurence Commercial Lawyers - Plaintiff IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY JUDGE LIST CAMPBELL J 24 MAY 2004 2702/04 THE CHINESE CULTURAL CLUB LIMITED JUDGMENT 1 HIS HONOUR: This is an application under section 1322 Corporations Act 2001 (Cth). The applicant is the Chinese Cultural Club Limited ("the Club"), a company limited by guarantee. 2 When the Club was incorporated, its Articles provided for eleven directors, and prescribed a quorum of five for a meeting of the Board. In November 1989 new Articles were adopted, which provided for a quorum for board meetings to be three. 3 On 29 November 1995 the Club adopted new Articles once more. There had been some amendments to the Registered Clubs Act 1976, the practical effect of which was that those parts of the Articles of the Club dealing with membership needed to be altered to comply with the legislation. A new set of Articles was submitted to a meeting for approval, and was adopted. It contained, in clause 39(a), a provision that a quorum of the board was five members. The Operations Manager of the Club at the time, Mr Thomas Chung, did not realise that the Articles which had been adopted provided for a quorum of five. Mr Chung suspects that the printer of the resolution used as a precedent the Articles with which the Club was originally incorporated. Mr Chung was of the view, until November 1998, that the quorum continued to be three. 4 In November 1998 someone pointed out to him that the printed Article provided for a quorum of five. Mr Chung took this to be a printing error, and soon thereafter had the Memorandum and Articles of Association reprinted, in a version showing the quorum for board meetings as being three. It was only in July 2000, when the Club carried out a search of the ASIC records, that Mr Chung realised that the version of the Articles adopted in 1995 had included a provision for a quorum of five for board meetings. In August 2000 an Extraordinary General Meeting of the Club amended the Articles, reducing the quorum to three. 5 Mr Jimmy Chung became a director of the Club, and its President, at the 1996 Annual General Meeting, and remained President until the 2000 Annual General Meeting. He was of the view, up to November 1998, that the quorum for board meetings was three. 6 On eleven occasions in 1996, ten occasions in 1997, and seven occasions in 1998 meetings purporting to be board meetings of the Club were held, at which four (or, on one occasion three) directors were present. The Proceedings in the Licensing Court 7 In mid-2000 the Director of Liquor & Gaming commenced proceedings against the Club in the Metropolitan Licensing Court. Those proceedings were begun by Complaint and Summons under section 17(1) Registered Clubs Act, which provides: "Upon a complaint made as provided by subsection (1AA) … the Principal Registrar, may issue a summons calling on a registered club to show cause why its certificate of registration should not be cancelled." 8 So far as is relevant, section 17(1AA) of the Registered Clubs Act provides: "… a complaint for the purposes of subsection (1) … may be so made on any one or more of the following grounds: … (xi) a rule of the club referred to in section 30(1) has been broken or any other rule of the club has been habitually broken." 9 Section 30(1) Registered Clubs Act provides: "The rules of a registered club shall be deemed to include the following rules: … (c) The governing body of the club shall hold a meeting at least once in each month of the year and minutes of all proceedings and resolutions of the governing body shall be kept and entered in a book provided for the purpose." 10 The complaint made against the Club is now formulated in an Amended Complaint and Summons, which includes the following: "H. Section 17(1AA)(a)(xi) A rule of the Club, namely article 39(a) of the Club's Articles of Association, which provides, inter alia, that the quorum of the Board is five (5) members of the Board, has habitually been broken." The particulars of that allegation are the various board meetings held from 1996 to 1998 when there were only three or four members of the Board present. 11 Another allegation in the complaint against the Club is: "I. Section 17(1AA)(a)(xi) A rule of the Club referred to in section 30(1)(c) namely that the governing body of the Club shall hold a meeting at least once in each month of the year, has been broken." The particulars of that allegation include an allegation that the governing body of the Club "held no valid meetings" in the various months in 1996, 1997 and 1998 when purported board meetings were held which were attended by only three or four members. 12 The Amended Complaint and Summons makes numerous other complaints, not relevant to these present proceedings. There have been ten days of hearing of the Amended Complaint and Summons in the Metropolitan Licensing Board in March 2004. It is next listed for further hearing on 22 June 2004. This Application 13 These proceedings were begun by an Originating Process filed on 4 May 2004. The orders sought are: "1. An order pursuant to Section 1322(4)(a) of the Corporations Act declaring that the meetings of directors of the Plaintiff listed in the schedule hereto were not invalid by reason of the absence of a quorum. 2. An order pursuant to Section 1322(4)(c) of the Corporations Act relieving the Plaintiff from any civil liability in respect of the absence of a quorum at the meetings of directors referred to in the schedule hereto." The Schedule lists the various purported meetings of directors in 1996, 1997 and 1998 at which three or four directors were present. 14 Section 1322 Corporations Act 2001 provides: "(1) 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. (2) A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid. … (4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation; (b) an order directing the rectification of any register kept by ASIC under this Act; (c) an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a); (d) an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding; and may make such consequential or ancillary orders as the Court thinks fit. (5) An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence. (6) 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 just and equitable 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 (c) in every case — that no substantial injustice has been or is likely to be caused to any person." 15 For the reasons which I gave in Re Vouris; Epromotions Australia Pty Ltd and Relectronic-Remech Pty Ltd (In Liq) [2003] NSWSC 702; (2003) 47 ACSR 155 at [48] section 1322 Corporations Act can be used to validate irregularities in the administration of a corporation which occurred at a time when the activities of that corporation were governed by the Corporations Law. The manner of operation of section 1322 is explained in Re Vouris at [50]–[56]; I will not set out again the authorities there collected. 16 The absence of a quorum at the various director' meetings is clearly a procedural irregularity, by virtue of section 1322(1)(b)(i). The effect of section 1322(2) is that each such directors' meeting is not invalidated because of the lack of a quorum, 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 meeting to be invalid. Because section 1322(2) refers to "the Court", with a capital "C", section 58AA Corporations Act 2001 has the effect that the Licensing Court is not one of the courts that can form the opinion that the irregularity has caused or may cause substantial injustice. Thus, for the purposes of the hearing in the Licensing Court, in circumstances where no one has brought an application under section 1322(2) seeking to have a Court declare those meetings of directors to be invalid, section 1322(2) has the effect that they are not invalid because of the lack of a quorum. Whether a Declaration Should be made under Section 1322(4)(a) 17 I turn first to whether section 1322(6)(a) prevents the making of a declaration of validity of the meetings under section 1322(4)(a). The holding of the directors' meetings in question without a quorum involves an error which is essentially of a procedural nature. The holding of directors' meetings is itself a procedural requirement for the administration of a company. Though there is some awkward English involved in saying that the directors' meetings in question are essentially of a procedural nature (as a strict application of section 1322(6)(a)(i) would require one to say, when it is the validity of the directors' meeting which is in question) it seems to me that adopting a purposive approach to section 1322 leads to the conclusion that section 1322(6)(a)(i) is satisfied. 18 The adoption in 1995 of the Article containing provision for a quorum of five was a mistake. It was a mistake in the sense that, even though the resolution which adopted the Article was validly passed, the Operations Manager of the Club did not realise that that was one of the provisions of the Articles which were being put to the meeting for adoption. Further, the basis upon which the Articles which were adopted in 1995 were put to the members was that the changes were needed to comply with the then current Registered Clubs legislation and regulations (and no change to the quorum of directors' meetings was needed to comply with that legislation and those regulations). There was no proposal put by the directors of the Club, nor anyone else, in terms which drew attention to the fact that the Articles relating to quorums or meetings of directors were to be altered. I am satisfied that the persons concerned in, or party to the holding of the meetings with less than a quorum, acted honestly. Thus, section 1322(6)(a)(ii) is satisfied. 19 I turn now to consider section 1322(6)(a)(iii). In Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [45]–[47] Barrett J collected authorities concerning "just and equitable": "The phrase "just and equitable" is commonly used in legislative drafting: see, for example, Corporations Act 2001 (Cth), s.461(1)(k), Family Law Act 1975 (Cth), s.75(2); Motor Accidents Act 1988, s.74(3); Property (Relationships) Act 1984, s.20(1); Conveyancing Act 1919, s.66M. Numerous cases have considered the significance of the phrase. The conclusions drawn are reflected in the words borrowed by Lord Shaw of Dunfermline in Loch v John Blackwood Limited [1924] AC 783 at p.791 from Neville J in Re Bleriot Manufacturing Aircraft Co (1916) 32 TLR 253 at p.255: "The words 'just and equitable' are words of the widest significance and do not limit the jurisdiction of the Court to any case. It is a question of fact, and each case must depend on its own circumstances." A court directed by statute to proceed according to what is "just and equitable" is given a wide discretion. There is, as Owen J observed in Thomas v MacKay Investments Pty Ltd (1996) 22 ACSR 294 at p.302, "no necessary limit on the generality of the words". They are "to be applied in their ordinary meaning as calling for the exercise of judgment in the conventional way." In Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 Sheller JA, in considering s.66M of the Conveyancing Act 1919, said (at p.113): "The determination of what is just and equitable in the circumstances is not a matter of unfettered individual opinion, nor does it involve a discretion of an arbitrary kind; see Cominos v Cominos (1972) 127 CLR 588 at 599. As Kitto J observed in The Queen v The Commonwealth Industrial Court; ex parte the Amalgamated Engineering Union, Australian Section (1960) 103 CLR 368 at 383, the criteria are of a nature with which Courts are familiar. In Talga v MBC International Limited (1976) 133 CLR 622 at 634 Stephen, Mason and Jacobs JJ dealing with the issue raised for the Court by the Banking Act 1974 of whether it was just and equitable that a transaction should be treated as valid, said: '… The court will have before it an existing transaction replete with all its surrounding facts and circumstances and in their light will determine what is just and equitable. In doing so it will certainly be exercising a wide discretion that this is a commonplace of the curial process; the court will be bound to act judicially, exercising its discretion by reference only to such considerations affecting the transaction as, on an examination of the legislation, may be seen to be material to the decision which it is called on to make. Irrelevant matters, matters such as the plaintiffs instanced in the course of argument, which have no rational connection with the policy of the regulations but would be expressive only of the personal predilections of the Court, cannot be allowed by it to play any part in its decision.'" Campbell J endorsed this approach in Sullman v Sullman [2002] NSWSC 169, applying it to his consideration of what was "just and equitable" in relation to s.20 of the Property (Relationships) Act 1984. Cominos v Cominos (1972) 127 CLR 588 was a case in which the High Court was asked to consider the constitutional validity of s.86 of the Matrimonial Causes Act 1959 (Cth), which granted the court power to order the settlement of property in the manner it considered "just and equitable". Gibbs J said at p.599: "It is true that in determining an application under s.86 the court, after deciding such questions of fact and law as have arisen, is called upon to make a discretionary judgment. The discretion, although wide, must, as was said by Windeyer J in Sanders v Sanders (1967) 116 CLR 366, at pp 379-380, "be exercised according to accepted principle, for what is just and equitable in this jurisdiction is not a matter of unfettered individual opinion". It is not discretion of an arbitrary kind. The standard imported by the familiar words "just and equitable" is "by no means foreign to the judicial function" (cf. Steele v Defence Forces Retirement Benefits Board (1955) 92 CLR 177, at p 188 nor is it "so indefinite as to be insusceptible of strictly judicial application" (cf Reg v Commonwealth Industrial Court; Ex parte The Amalgamated Engineering Union, Australian Section (1960) 103 CLR 368, at p 383). It is also true that s.86 enables the court to create new rights and impose new duties and not merely to enforce legal rights already existing, but the fact that a court is authorized to create or alter rights and not merely to declare and give effect to pre-existing rights does not necessarily show that the powers conferred are not judicial powers: Peacock v Newtown Marrickville and General Co-operative Building Society No. 4 Ltd (1943) 67 CLR 25, at pp 35, 46 and 54-55." 20 There can be no real doubt that it is the proceedings in the Licensing Court which have prompted the Club to make this application. 21 The Crown Solicitor's Office is acting for the Director of Liquor and Gaming in the proceedings in the Licensing Court. The solicitors for the Club have informed the Crown Solicitor of their intention to make the present application. The Crown Solicitor has written to them, saying: "I note that you have instructions to apply to the Supreme Court to have the meetings referred to in Complaint H declared valid. You must do as you wish in this regard. I trust that you will inform the Supreme Court upon the hearing that you are making the application for the purpose of attempting to defeat a complaint made against the Club in the Licensing Court. It is the Director's view that whether or not the meetings are declared valid retrospectively, the Club has habitually broken a rule of the Club." The Crown Solicitor, though informed of the date of today's application, has not sought to appear. 22 The Court needs to give careful consideration to whether it should make an order which is sought only for the purpose of affecting the course of proceedings already on foot in another court. In the present case, however, making an order under section 1322(4)(a) declaring that the directors' meetings were valid is doing nothing more than making clear a consequence which already flows from section 1322(2). It is, in my view, preferable that the proceedings in the Licensing Court go ahead on the basis that the correct legal situation concerning the validity of the meetings is known. 23 The meetings in question occurred many years ago. No items of business remain outstanding from any of them. There is evidence from a director of the Club that he is not aware of any person whose financial or other interests would be adversely affected if the Court made the declarations and orders sought by the Club. In all these circumstances I am satisfied it is just and equitable to make a declaration under section 1322(4)(a). Thus, the requirements of section 1322(6)(a)(iii) are satisfied. For the same reasons, the requirements of section 1322(6)(c) are satisfied. 24 In theory there remains a discretion whether, notwithstanding the satisfaction of those requirements of section 1322(6), the order ought be made. However, it is hard to see that there would ever be circumstances where the Court could be satisfied that it was just and equitable that the order be made, yet would exercise a discretion not to make it. There is no reason for adopting that course in the present case. I will therefore make the declarations sought under section 1322(4)(a). 25 I mention that the effect of making this order is solely to determine the question of the validity of the meetings. It remains the case that they were meetings held without the quorum which the Articles of the Club at the time required. It is for the Licensing Court to decide what, if any, consequences flow from that situation. Relief from Civil Liability? 26 Under section 17(2) Registered Clubs Act, if a Licensing Court is satisfied that a complaint has been made out, it can impose sanctions which include cancelling the club's certificate of registration, ordering the club to pay a monetary penalty, imposing conditions upon its continued registration, and appointing an administrator to the affairs of the club. These have been described as "disciplinary actions" by Simpson J in Labbozzetta v Director of Liquor & Gaming [1999] NSWSC 96 at [6]. 27 Mr Donohoe, counsel for the Club, submits that the words "civil liability" in section 1322(4)(c) extend to include liability arising under the Registered Clubs Act 1976 for failure to comply with Article 39(a). He points out that the meaning of the word "liability" was considered by McHugh J in Crimmins v Stevedoring Industry Finance Committee (1999) 200 CLR 1 at 51 and following; he submits that that discussion shows that the consequences which could befall the Club if the complaint against it were upheld amount to a "liability". Further, he submits that, particularly when section 1322(5) contemplates that there can be relief under section 1322(4)(c) even if the contravention or failure concerned resulted in the commission of an offence, a wide construction should be put on "civil liability" in section 1322. Further, he submits that section 1322(5), by its reference to "an offence" ought be used as an aid to construing "civil liability" as including all liabilities which are not criminal liabilities. He points out that the procedure involved under the Registered Clubs Act 1976 is by way of complaint and not by way of information, that procedurally the proceedings are civil proceedings, and the rules of evidence applicable to the proceedings are the rules applicable to civil proceedings. He points out that in Naismith v McGovern (1953) 90 CLR 336 a joint judgment of the High Court (Williams, Webb, Kitto and Taylor JJ) held that proceedings by the Commissioner of Taxation for recovery of a penalty were civil proceedings, and hence discovery was available in them. At 340 their Honours said: "In Robertson, Civil Proceedings by and against the Crown , at p.174 it is stated that informations for penalties are to be regarded rather as civil than as criminal proceedings. In Attorney-General v Freer (1822) 11 Price 183; 147 ER 441 Graham B said: "I think that the Attorney General is perfectly right when he says that these proceedings for penalties here, are although partly of a criminal nature, for many purposes to be considered as in the nature of civil actions." ((1822) 11 Price at p.197; 147 ER at p.446) In R v McStay (1945) 7 ATD 527 at p.553 Williams J said that proceedings under part VII are not strictly criminal proceedings, a view he adhered to in McGovern v Hillman Tobacco Pty Ltd (1949) 4 AITR 272 where, after citing s 237 of the Act, he said: "Accordingly, proceedings must, for many purposes, be considered as being in the nature of a civil action"." 28 Mr Donohoe recognises that it is not possible to categorise proceedings as civil or criminal for all purposes. Hayne J (with whom Gleeson CJ and McHugh J agreed) said in Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd [2003] HCA 49; (2003) 201 ALR 1; (2003) 77 ALJR 1629, at [114]: "Arguments founded on classification of the proceedings as "civil" or "criminal" as determinative of the standard of proof, must fail. As reference to the historical matters mentioned earlier reveals, the classification proposed is, at best, unstable. It seeks to divide the litigious world into only two parts when, in truth, that world is more complex and varied than such a classification acknowledges. There are proceedings with both civil and criminal characteristics: for example, proceedings for a civil penalty under companies and trade practices legislation. The purposes of those proceedings include purposes of deterrence, and the consequences can be large and punishing." (citations omitted) See also per Gummow J at [29]-[30]. 29 Even so, Mr Donohoe submits that in the particular context of section 1322(4)(c) the proceedings in the Licensing Court should be seen as proceedings involving a civil liability. 30 In Re Vouris at [126]-[127] I gave some consideration to what counts as a "civil liability" within the meaning of section 1322(4)(c), but ultimately did not decide that question, because as a matter of discretion I was not prepared to relieve the applicant from any liability which might be imposed upon him by another Tribunal which was at the time considering the behaviour of the applicant concerning which relief was sought. I propose to take the same course here. 31 There is no suggestion in the present case that there is any risk of civil liability attaching to the Club, by reason of the directors' meetings being held with insufficient members to make a quorum, other than from the proceedings currently before the Licensing Court. Even if it were the case that the types of sanctions which the Licensing Court could impose on the Club if the complaint against it were to be made out counted as a "civil liability", this Court ought not make an order which will cut across the exercise by the Licensing Court of the discretion which has been entrusted to it. The Licensing Court is a specialist Tribunal to which Parliament has entrusted responsibility for deciding what, if any, consequences ought flow from a complaint under section 17(1AA) of the Registered Clubs Act 1976 being made out. 32 In that circumstance, I decline to make an order under section 1322(4)(c) Corporations Act 2001 (Cth). Orders (1) Declare that the meetings of directors of the Plaintiff listed in the Schedule hereto were not invalid by reason of the absence of a quorum. (2) Otherwise, Originating Process dismissed. (3) The exhibits may be returned. SCHEDULE 1996 1997 1998 1 February 28 February 24 January 26 February 25 March 14 February 16 April 3 May 2 May 23 April 5 July 6 June 7 May 2 August 4 July 28 May 11 August 11 July 25 June 7 October 16 October 30 July 9 October 24 September 28 November 17 October 6 December 13 December ********** Last Modified: 05/26/2004 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.