Reported Decision : 56 ACSR 283 New South Wales Supreme Court CITATION : McIntosh & Anor v CMX Technologies Pty Ltd (Administrators Appointed) [2005] NSWSC 1282 HEARING DATE(S) : 5 December 2005 JUDGMENT DATE : 5 December 2005 JURISDICTION : Equity Division JUDGMENT OF : Palmer J DECISION : Declarations of invalidity made; Defendant to pay costs of Administrators. CATCHWORDS : CORPORATIONS – DIRECTORS – ADMINISTRATION – COSTS – A director had not provided a written consent to act prior to appointment – whether validly appointed – minority directors excluded majority directors from meeting voting to place company in administration – whether appointment of administrators should be validated – whether company should pay costs of invalidly appointed administrators. LEGISLATION CITED : Corporations Act 2001 (Cth) – s.201D, s.201M, s.447A, s.447C, s.463E, s.477, s.477A, s.477C, s.1322 Lachlan McIntosh and Ginette Muller as joint and several Administrators of CMX Technologies Pty Ltd (Administrators Appointed) – Plaintiffs PARTIES : CMX Technologies Pty Ltd (Administrators Appointed) – Defendant FILE NUMBER(S) : SC 5503/05 M.R. Aldridge SC – Plaintiffs COUNSEL : N. Dunstone (Sol) – Majority Shareholders E.C. Muston – Minority Shareholders Holman Webb – Plaintiffs SOLICITORS : Henry Davis York – Majority Shareholders Michael Drummond, Lawyer – Minority Shareholders LOWER COURT JURISDICTION : Ex tempore Introduction 1 The Plaintiffs were appointed under s.463E(3)(c) of the Corporations Act 2001 (Cth) as joint and several administrators of the Defendant ("CMX"), by a resolution of directors of CMX on 1 July 2005. 2 On 19 September 2005 the directors of CMX resolved that the company enter into a Deed of Company Arrangement whereby the sole asset of any value to the company, certain intellectual property, would be sold. 3 The majority shareholders of CMX assert that the directors' resolutions of 1 July and 19 September 2005 are invalid because two directors of the company were wrongfully excluded from attending and voting at those meetings. They say that, had the two directors been permitted to attend and vote, neither resolution would have been passed. 4 The Plaintiffs, as administrators of CMX, have commenced these proceedings in order to resolve the uncertainties which attend their position and the status of the proposed Deed of Company Arrangement. They seek an order under CA s.447C declaring valid their appointment and their execution of the proposed Deed of Company Arrangement. Alternatively, the Plaintiffs seek an order under CA s.447A to the effect that, notwithstanding any defect in their appointment as administrators, they should be deemed validly appointed and their execution of the Deed of Company Arrangement should be deemed valid. 5 The Plaintiffs' application is supported by the minority shareholders in CMX and is opposed by the majority shareholders. The facts 6 At all relevant times the shareholders of CMX were Sierra Holdings Pty Ltd which held 33.3% of the issued shares, Mr Siamak Yousofi who held 33.3%, and Mr Philip Cuff and his wife, Ms Corinne Torres, who together held the remaining 33.3%. The directors and shareholders of Sierra Holdings are Mr and Mrs Fairfull. 7 The shareholders entered into a Shareholders' Agreement dated 5 November 2004. Clause 3.1 of that agreement provided: "Each shareholder with a holding equivalent to five percent or greater of total equity issued shall have the right to be represented on the Board by a nominee." 8 On the same day as the Shareholders' Agreement was entered into, a shareholders' meeting appointed as directors Ms Torres and Mr Fairfull. Mr Cuff had previously been appointed a director of CMX. Apparently no written consent to act as directors had previously been obtained from Mr Fairfull and Ms Torres before they were appointed as directors. In this respect the company contravened the provisions of CA s.201D(1). 9 Since 5 November 2004 both Miss Torres and Mr Fairfull have regarded themselves as validly appointed directors of CMX and have acted as such. Although CMX itself has contravened s.201D(1) in failing to procure a signed consent to act as directors from Mrs Torres and Mr Fairfull, s.201D(1) does not provide that such contravention renders the appointment of a director invalid. On the contrary, CA s.201M(1) provides: "An act done by a director is effective even if their appointment or the continuance of their appointment is invalid because the company or the director did not comply with the company's constitution (if any) or any provision of this act." 10 Disputes have arisen between Mr Cuff and Ms Torres on the one hand and Sierra Holdings and Mr Yousofi on the other as to the way in which the business of CMX should be conducted. For the sake of convenience I will refer to Sierra holdings and Mr Yousofi as the majority shareholders and to Mr Cuff and Miss Torres as the minority shareholders. 11 By mid-2005 the dispute between the parties had reached a critical stage. On 6 June 2005 Mr Fairfull gave a notice to CMX requisitioning the convening of a meeting of shareholders for 28 June 2005. The requisition was given pursuant to clause 35 of CMX's constitution which provides that a director may call a meeting of members. 12 The purpose of convening the shareholders' meeting for 28 June 2005 was expressed as the appointment of additional directors. It was clear from the requisition that the majority shareholders intended to appoint as additional directors of the company Mrs Fairfull and Mr Yousofi. If that resolution had been passed, then the board of the company would have consisted of three directors representing the majority shareholders and two directors, that is Mr Cuff and Ms Torres, representing the minority shareholders. 13 A day before 28 June 2005, Ms Torres, as a director of the company, purported to cancel the shareholders' meeting. The ground of purported cancellation was not clearly expressed in the e-mail which she sent to Mr Fairfull but I gather that Ms Torres was of the view that Mr Fairfull was not a director of CMX because he had not given a prior consent to act as director in accordance with s.201D and therefore could not validly convene a meeting under clause 35 of the constitution of CMX. 14 As I have observed, the non-compliance by CMX with its obligation under CA s.201D did not invalidate what Mr Fairfull did as a director, nor did it invalidate his appointment as such. The ground upon which Ms Torres purported to cancel the shareholders' meeting was therefore misconceived. She had no authority to cancel that meeting or to declare it invalid. 15 Shortly before 28 June, Ms Torres and Mr Cuff purported to call a directors' meeting for 9.30am on 28 June, that is, half an hour before the shareholders' meeting convened by Mr Fairfull was due to commence. Mr Fairfull attended the offices of CMX at 9.30am on that day. There was a discussion between the parties as to their respective positions. 16 There is some divergence in the evidence as to what was said but, so far as is presently relevant, the essential facts are not in dispute. Ms Torres told Mr Fairfull that the shareholders' meeting scheduled to take place at 10am had been cancelled. Mr Fairfull protested that the meeting could not be cancelled, that it had been validly convened, and that it was to proceed. Ms Torres and Mr Cuff made it quite clear to Mr Fairfull that they regarded the holding of the shareholders' meeting as invalid and improper and that, if any attempts were made to proceed with that meeting on the company's premises, the police would be called and Mr Fairfull would be ejected. 17 Mr Fairfull informed Ms Torres and Mr Cuff that, as he believed that the shareholders' meeting had been validly convened and could be validly held, it would proceed, even though Mr Cuff and Ms Torres refused to permit the meeting to be held on the company's premises. He told them that the meeting would be held at 10am in a café across the road. According to his evidence, he invited them to attend and they made it clear that they would not. 18 According to the evidence of Mr Cuff and Ms Torres, they were simply told the meeting would be held in any event, but they were not told precisely where that meeting would be held. It is quite clear, in my opinion, that it would not have made the slightest difference to Mr Cuff and Ms Torres had they been given precise details of the location at which the meeting of shareholders would be held. They had made it perfectly clear that they regarded the shareholders' meeting as a nullity and that they would not themselves be attending. 19 Mr Fairfull, Mr Yousofi and Mrs Fairfull attended at 10am at the café across the road from the company's premises. A shareholders' meeting was then held. The meeting passed resolutions for the appointment of Mrs Fairfull and Mr Yousofi as additional directors of the company. 20 I am satisfied that due and proper notice of the shareholders' meeting was given to all of the shareholders of the company and that Mr Cuff and Ms Torres elected not to attend that meeting. Accordingly, the meeting was properly constituted by those shareholders present and entitled to vote, and the resolutions appointing as additional directors Mrs Fairfull and Mr Yousofi were validly passed. 21 Having passed the resolutions at the shareholders' meeting, those there present then returned to the company's premises. A directors' meeting was apparently scheduled for 11am, but it was made clear by Ms Torres and Mr Cuff that they did not regard Mrs Fairfull and Mr Yousofi as validly appointed directors of CMX and entitled to attend that meeting. 22 Apparently nothing was done at any directors' meeting or purported directors' meeting of CMX on 28 June. However, on 1 July 2005, a notice was given by e-mail to Mr Fairfull by Ms Torres on behalf of the company. The notice was for the convening of a directors' meeting later that day. The notice, it is conceded, was not given to Mr Yousofi and Mrs Fairfull. 23 At the directors' meeting which was held on 1 July 2005, the only directors present, Ms Torres and Mr Cuff, passed a resolution appointing the present Plaintiffs as administrators of the company. 24 Subsequently, a purchaser of CMX's intellectual property asset was procured by Mr Cuff and Ms Torres. Another purchaser was procured by Mr Fairfull to make an offer. However, the offer which has been recommended and which has found its way into the Deed of Company Arrangement is the offer proposed by the company procured by Mr Cuff and Ms Torres. The majority shareholders say that that offer involves the sale of the company's property at an under-value. Whether or not the sale is at an under-value and whether or not the offer procured by Mr Fairfull is a better offer in the interests of the company and its creditors, is not really in issue at this stage of these proceedings. Whether appointment of administrators valid 25 The first question for determination is whether the appointment of the Plaintiffs as administrators of the company was made pursuant to a valid resolution of the directors of CMX. 26 From the discussion so far it will have emerged that I regard the appointment of Mrs Fairfull and Mr Yousofi as directors of the company on 28 June 2005 as validly effected. It follows that, as at 1 July 2005, there were five, not three, directors of CMX. 27 It is said by Mr Muston of Counsel, who appears for the minority shareholders, that the resolution appointing the Plaintiffs as administrators which was passed on 1 July 2005 was validly passed because, notwithstanding the appointment of additional directors on 28 June 2005, the company itself had no notice of those additional appointments. He says that on 28 June Mr Cuff and Ms Torres did not know where the meeting of shareholders was to take place and they did not know that Mr Yousofi and Mrs Fairfull had been appointed as directors. 28 If this is in fact the case, it is because Mr Cuff and Ms Torres deliberately chose not to participate in a validly convened shareholders' meeting, the purpose of which had been properly notified. The purpose was to elect Mrs Fairfull and Mr Yousofi as additional directors. 29 The minority shareholders cannot rely upon their abstention from the shareholders' meeting and from their wrongful denial of its validity as a justification for failing to enquire as to the outcome and failing to notify the directors who had been validly appointed on 28 June of the directors' meeting which was to take place on 1 July. 30 In my opinion, it is clear that the company did not give notice to all directors on 1 July 2005 of the directors' meeting which was to be held on that day. I do not need to consider whether the notice given on the morning of 1 July 2005 to Mr Fairfull of that meeting was reasonable in accordance with the company's constitution. There is certainly an argument that it was not reasonable notice. However, as the meeting was invalid by reason of failure to give notice to all directors, there is no point in further considering that additional ground of invalidity. 31 It follows, therefore, that the resolution passed by Mr Cuff and Ms Torres at the purported directors' meeting on 1 July 2005 was invalid. The Plaintiffs were invalidly appointed as administrators and what they have done as administrators in procuring a Deed of Company Arrangement is likewise invalid. Should the administrators' appointment be validated 32 There is no doubt that in an appropriate case the Court would have power under s.477A or s.1322 to validate the appointment of administrators who were improperly appointed. Whether the Court will do so depends upon a variety of circumstances. One of those circumstances, in my view, is whether substantial injustice could be caused to any relevant party by validating an otherwise invalid appointment. 33 In my opinion, there is a real likelihood in the present case that if the appointment of the Plaintiffs was validated, the majority shareholders would suffer a substantial injustice. If the appointment is validated and the Deed of Company Arrangement is effectuated, what will have happened is that the rights of the majority shareholders by virtue of their shareholding and under the Shareholders' Agreement will have been entirely frustrated. A Deed of Company Arrangement will be propounded and will be executed whereby there is a distinct possibility that the interests of Mr Cuff and Ms Torres will have been furthered, to the possible disadvantage of the interests of the majority shareholders. I bear in mind that in the voting upon the Deed of Company Arrangement, substantial voting power was exercised by Mr Cuff and Ms Torres and their respective interests as creditors of the company. 34 It seems to me that the manoeuvring of the minority shareholders which brought about the appointment of the Plaintiffs as administrators in itself demonstrates prejudice to the majority shareholders. I see no reason, in the interests of justice, to approve under s.477 A a situation engineered by the minority shareholders which has deprived the majority of their rights as shareholders and as directors. 35 Mr Muston also urges that the appointment of the Plaintiffs may be validated under the provisions of CA s.1322(3). That section provides as follows: "A meeting held for the purposes of this Act, or a meeting notice of which is required to be given in accordance with the provisions of this Act, or any proceeding at such a meeting, is not invalidated only because of the accidental omission to give notice of the meeting or the non-receipt by any person of notice of the meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or ASIC, declares proceedings at the meeting to be void." 36 Mr Muston has submitted that the absence of notice of the directors' meeting of 1 July 2005 to Mrs Fairfull and Mr Yousofi was accidental, within the meaning of CA s.1322(3). I am not able to accept that submission. The minority shareholders were resolutely opposed to acknowledging in any way that any additional directors had been appointed or could be appointed and, it seems to me, they were bent on pursuing a strategy to entrench their position in that regard. If Mr Cuff and Ms Torres did not know that Ms Faithfull and Mr Yousofi had been appointed directors, it was because they chose not to know. 37 Mr Muston made no submission as to an essential requirement for a validation under s.1322, that is, the requirement imposed by s.1322(6)(c). For the reasons which I have given in relation to the application under s.477A, I could not be satisfied that no substantial injustice was likely to be caused to any person if the directors' meeting were to be validated under s.1322. 38 For those reasons, I decline to make a declaration under s.477C that the appointment of the Plaintiffs as administrators of CMX is valid. I likewise decline to make an order under s.447A validating the appointment of the Plaintiffs as administrators. For the same reasons, I decline to make a declaration or an order that the Deed of Company Arrangement is valid or should be validated under s.1322. 39 At the invitation of Mr Aldridge SC, who appears for the Plaintiffs, and there being no dissent from the other parties, I make a declaration that the appointment of the Plaintiffs as administrators of the Defendant on 1 July 2005 was not valid. I make a declaration that the execution of the Deed of Company Arrangement relating to the Defendant by Ginette Muller on behalf of the Plaintiffs on 19 September 2005 was not valid. Costs 40 The Plaintiffs seek an order that their costs of the invalid administration of the company as well as the costs of these proceedings be paid out of the assets of CMX, which is the sole Defendant to the proceedings. 41 The majority shareholders say that such an order should not be made. They say, in effect, that either the administrator should be left to bear those costs or, more appropriately, the minority shareholders should bear those costs. They say that as their position has ultimately been vindicated as correct, the company should not be ordered to pay the costs because otherwise the majority shareholders will end up paying 66% of those costs out of whatever assets may ultimately be available for distribution to shareholders of the company. 42 I do not think that the orders which the majority shareholders seek are appropriate even if the Court had power to make them as the proceedings are presently constituted. The fact is that the Plaintiffs have been brought into a dispute between these two warring factions of shareholders in order to disentangle the affairs of the company. Shortly after their appointment – an appointment which, I accept, seemed perfectly regular on the information made known to the Plaintiffs at the time of their appointment – the majority shareholders informed the Plaintiffs of the various reasons why their appointment was invalid. However, the minority shareholders contended that the appointments were valid and that the arguments of the majority shareholders were misconceived. 43 The Plaintiffs were faced with competing contentions as to the validity of their appointment in a situation in which legal opinions might legitimately differ. The most obvious and sensible course for resolving the difficulty was for the competing factions themselves to bring the matter before the Court to argue their respective positions. This was a solution which the Plaintiffs repeatedly put before the parties, saying that if the uncertainties of the Plaintiffs' position were not resolved by proceedings commenced by either one of the warring factions, then they themselves would be compelled to bring proceedings for the appropriate declarations and orders under s.477C or s.477A in order that their own invidious position might be made clear. 44 The position could not have been more directly put than in a report to creditors which the Plaintiffs circulated on about 20 July 2005. Having adverted to the failure of the competing factions themselves to commence proceedings whereby the issues between them might be resolved, the Plaintiffs concluded that they had no option but to make an application to the Court, the costs of which they would seek from CMX. That is the order that the Plaintiffs now seek, the competing factions having failed to provide a means for the resolution of the matters in issue. I think that in those circumstances it is entirely appropriate that the Plaintiffs have their costs and expenses of the administration to date and their costs and expenses of these proceedings out of the assets of the company. 45 I order that the remuneration yet to be fixed and determined, and the reasonable costs and expenses that the Plaintiffs have incurred in the administration of the Defendant, together with the costs and expenses of the Plaintiffs in these proceedings as assessed or agreed, be paid out of the assets of the Defendant. 46 I grant liberty to any party to apply. 47 I formally dismiss the Originating Process. – oOo – 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. 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