New South Wales Supreme Court CITATION : Cheerine Group (International) Pty Ltd v Yeung [2006] NSWSC 1047 HEARING DATE(S) : 25, 26 September 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Young CJ in Eq EX TEMPORE JUDGMENT DATE : 09/26/2006 DECISION : Invalid appointment of alternate director. Invalid resolution appointing administrators. First defendant to pay costs of plaintiff and second defendant on the indemnity basis and in default of payment of such costs by the first defendant, the administrators to pay. CATCHWORDS : CORPORATIONS [91]- Directors- Validity of appointment- One director purporting to use power of attorney of another director to appoint alternate director- Power of attorney cannot confer powers of director- Held invalid appointment. CORPORATIONS [103] Validity of proceedings- Purported resolution appointing administrators- Deliberate convening of invalid meeting- Substantial injustice- Not procedural irregularity- Held resolution invalid. COSTS [575]- Administrators- Duty to inquire- Administrators' attention directed to invalidity of appointment- Pursued application- Held liable to pay costs upon default of payment by first defendant. LEGISLATION CITED : Corporations Act 2001 (Cth) ss 198D, 1322 Deputy Commissioner of Taxation v Portinex Pty Ltd (No 2) (2000) 34 ACSR 422 Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 Mancini v Mancini (1999) 17 ACLC 1570 CASES CITED : McIntosh v CMX Technologies Pty Ltd (2005) 56 ACSR 283 Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd (2004) 11 BPR 21,505 Re P W Saddington & Sons Pty Ltd (1990) 19 NSWLR 674 Saad v Doumeny Holdings Pty Ltd [2005] NSWSC 893 Whitehouse v Capital Radio Network Pty Ltd (2004) 48 ACSR 569 Cheerine Group (International) Pty Limited (P) PARTIES : Starboard Tit-Hong Yeung (D1) Wai Kai Wong (D2) Stefano Solferini (D3) FILE NUMBER(S) : SC 4893/06 A Ivantsoff (P) COUNSEL : J Scarcella (S) (D1) D R Stack (D2) Matthews Folbigg Pty Ltd (P) SOLICITORS : Blake Dawson Waldron (D1) Deacons (D2) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST YOUNG CJ in EQ Tuesday 26 September 2006 4893/06 – CHEERINE GROUP (INTERNATIONAL) PTY LTD v YEUNG JUDGMENT 1 HIS HONOUR: This is an application brought by Messrs Porter and Mansfield who were purportedly appointed as administrators of Cheerine Group (International) Pty Ltd (the Company) for orders that the third defendant had been validly appointed as an alternate director of the Company and that the purported resolution of the Company on 11 September 2006 appointing Messrs Porter and Mansfield as administrators was valid and effective and any other orders that the court might see fit to make. 2 The first defendant was Starboard Tit-Hong Yeung, who was a director of the Company; the second defendant was Wai Kai Wong, who was, apart from one argument which I will deal with shortly, also a director of the Company. The third defendant was Stefano Solferini, who was purportedly appointed as an alternate director for Mr Wong on 11 September 2006. 3 Mr Solferini has taken the position that he does not wish to become involved in this litigation and has submitted to any order that the court should see fit to make other than as to costs. 4 The hearing took place before me yesterday and today, Mr Ivantsoff of counsel appearing for the plaintiff, Mr Scarcella, solicitor, appearing for the first defendant and Mr Stack of counsel appearing for the second defendant. 5 The Company is involved in the wine industry, to use a fairly broad brush term, and it is also connected with a company, Cana Estate Pty Ltd. Essentially the Company produces the grapes and Cana, the wine. The shareholding of the Company is Mr Wong holds 70 per cent and Mr Yeung holds 30 per cent. Mr Wong lives in Hong Kong and Mr Yeung in Australia. Both these gentlemen were directors. 6 Mr Wong and Mr Yeung are related. Mr Wong is referred to as Mr Yeung's uncle but they are actually cousins. Mr Wong has given two powers of attorney to Mr Yeung, the first on 2 March 2001 and the second on 1 March 2003. The powers of attorney were granted in very wide terms. 7 Mr Yeung says that particularly from July 2006 onwards he was quite concerned with what he calls the failure of Mr Wong or the Hong Kong office to pay the Company's suppliers and creditors. It would seem that these concerns related to an amount of between $20,000 and $25,000. Mr Yeung was concerned that there be meetings of the Company to deal with the problem. He gave notice of a directors' meeting for 11 am on 11 September. I need not concern myself with the question of whether or not the notice was such to cover the business that was actually conducted on 11 September because other matters made it of no moment. 8 Mr Yeung says that on 11 September 2006 "Mr Wong did not attend the board meeting". He then says "At that meeting, based on the advice of Mr Stefano Solferini of Interfinancial Ltd, that the Company was insolvent, and also my own view as to the insolvency of the Company, I appointed Messrs Richard Porter and David Mansfield of Moore Stephens as joint administrators of the Company". 9 The way in which that happened was that Mr Yeung was the only director present. He says he tried to contact Mr Wong but was unable to contact him and he then purported to appoint Mr Solferini as an alternate director for Mr Wong under the 2003 power of attorney, which appointment was accepted by Mr Solferini. It was then resolved by Messrs Yeung and Solferini, purporting to act as the board of the Company, to appoint the administrators. 10 That resolution is obviously invalid. It has been held on three occasions by judges of this court that a power of attorney given to a person who is also a director of a corporation confers no authority whatsoever for that person virtually to be or appoint an alternate director or exercise the functions of a director of that corporation, even though the donor is a director of the corporation and even though the power of attorney is in very wide terms: Mancini v Mancini (1999) 17 ACLC 1570 at para [30]; Saad v Doumeny Holdings Pty Ltd [2005] NSWSC 893 and Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd (2004) 11 BPR 21,505. 11 Mr Ivantsoff for the plaintiff told the court that he wished to take a neutral position. I pointed out that that was impossible. His client was the plaintiff. His client was asserting the validity of the appointment of the administrators. 12 Mr Ivantsoff presented written submissions, but spoke very briefly to them. The evidence that was provided by the plaintiff showed that the Company did have an excess of assets over liabilities. Moreover, not only has Mr Wong said that he would stand behind the Company and pay its liabilities (and he has already contributed $1.9 million to the Company), he has also backed that up today with an undertaking to the court that he will be responsible for discharging the existing liabilities of the Company to external creditors. There does not appear to be evidence that the Company was insolvent at any stage, though it may be that it had some temporary liquidity problems. 13 Mr Yeung gave evidence in the witness box. I was very reluctant to let that evidence flow because it seemed to me from the beginning that the case for the plaintiff and the first defendant was absolutely hopeless and that evidence was quite unnecessary. However, always being very careful, Mr Stack reminded me that s 1322 of the Corporations Act 2001 might have the effect that, notwithstanding the defect, the appointment of the administrators and of Mr Solferini as alternate director might have to be considered as being valid. Accordingly, we spent over an hour with Mr Yeung in the witness box. 14 He gave evidence that he had impressive qualifications, that he was a Doctor of Philosophy in business studies and a lecturer in business studies at a tertiary institution. However, the evidence he gave showed that he was completely ignorant about basic business matters. Either that, or he was pretending to be completely ignorant of basic business matters. My impression is that it is the former. He kept repeating his mantra of the problems that he faced with Mr Wong not communicating with him and appearing to ignore his concerns about a crisis. However, the impression came through fairly solidly that he had an ulterior motive in seeking to have this Company held to be insolvent and putting in administrators. 15 Mr Stack was concerned with the submissions made by the solicitor appearing for Mr Yeung that the decisions of 11 September were defensible on the basis of s 1322 of the Corporations Act, s 198D of the Corporations Act and because of Article 65 of the Company's Articles of Association. 16 Section 1322(2) provides that: "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." 17 Mr Stack says that there was no procedural irregularity here or, if there was, that substantial injustice would be caused through allowing the decision to stand; see McIntosh v CMX Technologies Pty Ltd (2005) 56 ACSR 283. 18 In Re P W Saddington & Sons Pty Ltd (1990) 19 NSWLR 674 I held that where a plain decision is made to do something contrary to the Act, then one cannot say it is procedural irregularity. That decision has been followed since. However, it would appear at first reading of the decision of a two judge Full Court of the Supreme Court of Tasmania, Whitehouse v Capital Radio Network Pty Ltd (2004) 48 ACSR 569, that it was not followed in that court. However, one can see why when one reads paragraph [12] of the decision where the Chief Justice says: " Re Saddington ... differs from the present case in that there was here no deliberate choice to convene an invalid meeting." 19 Accordingly, in situations where there is a deliberate choice to convene an invalid meeting, Saddington would have appeared to have passed muster with the Full Tasmanian Supreme Court. 20 Accordingly, in my view, consistent with authority, there was no procedural irregularity here. However, I would agree also with Mr Stack's submission that the appointment of administrators, which involves a company in loss of representation and liability for a large amount of professional fees is clearly within the term "substantial injustice", and, if necessary, the court should under the interlocutory process filed by the second defendant declare invalidity. 21 As I have said, the next argument concerns s 198D of the Corporations Act. This section provides that the directors of a company may delegate any of their powers to, inter alia, a director. I agree with the submission and it is supported by the explanatory memorandum issued by the Treasury in connection with CLERP 9 that the section only applies to a delegation by the board of directors and not by any individual director and, accordingly, has no assistance in the present case. 22 Article 65 of the Articles of Association of the Company say that a director's office becomes vacant if the director: "(c) is absent without the consent of the Directors from meetings of the Directors held during a period of 6 months." 23 Now, it would seem that Mr Wong who is resident in Hong Kong did not physically attend any meeting of directors and there was provision for meetings to be held by telephone at which he could have been involved. However, the evidence clearly shows that Mr Yeung treated Mr Wong as still being a director on 11 September. Indeed, he endeavoured to make contact with him because he wanted him to attend the meetings as a director so that it is impossible to say on the evidence before me that the absence of Mr Wong from meetings of directors for six months, if that indeed in fact occurred, was without the consent of the directors. Accordingly, Article 65 does not assist Mr Yeung's case. 24 Mr Scarcella also relied on Article 72 of the Articles of Association, that a director may, with the approval of other directors, appoint an alternate, but that is not apposite for a number of reasons, not the least of which is that the other directors did not agree. 25 Mr Scarcella also relied on Article 78 which invalidates acts done by a director or a meeting of directors, notwithstanding, as afterward discovered, there is some defect in the appointment of a person to be a director. 26 Mr Scarcella did not refer me to the High Court's decision and decisions of the Supreme Court against that presentation and I reject it, see the case of Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1. Accordingly, as I have said, the case made by the plaintiff and supported by Mr Yeung is a hopeless one. 27 It is almost incredible that experienced lawyers would try the point even though the Supreme Court has three times rejected it. The originating process must be dismissed and the appropriate orders made on the interlocutory process. 28 As to costs, the problem was caused wholly by the first defendant and it is appropriate that he should pay costs. His attitude was completely unfounded. He is not an inexperienced person; he is a Doctor of Philosophy in business matters, a lecturer in business matters. He completely disregarded three decisions of the Supreme Court and it is appropriate that the costs be made on the indemnity basis. 29 As to the administrators, Mr Ivantsoff relies on the decision of Austin J in Deputy Commissioner of Taxation v Portinex Pty Ltd (No 2) (2000) 34 ACSR 422 that administrators do not have to conduct an enquiry to see whether they have been properly appointed and that ordinarily they should get their costs. It is also to be noted that in the McIntosh case Palmer J held that an appointment of administrators was invalid because new directors were wrongly excluded from attending the directors meetings at which the vote was held, but still made an order that the costs of administration together with the costs and expenses of the administrators be paid out of the assets of the company. He made that order it would appear without argument. 30 Each case is different. It may well be that in a situation where there is nothing on the face of the documents to show any irregularity one does what Austin J did in the Portinex case and it may be that the McIntosh case falls into that category. 31 However, in the present case, we have professional administrators who have solicitors appearing for them and the solicitors' attention is directed explicitly to a decision of the Supreme Court which says that the appointment was invalid. However, they still continued to commence proceedings to have the appointment declared valid (it is to be noted that they made no application to validate the appointment, merely to seek to argue that it was already valid). It would seem to me that in such a case, ordinarily the administrators should pay the costs of their failed proceedings. 32 Again, as I emphasised, each case is different but the present case was, as I have said before, hopeless and it is almost beyond belief that it was pressed as far as it was. 33 Accordingly, in my view, the costs order shall be that the first defendant pays all the costs of the administrators including any costs paid by the administrators to the second defendant, that the first defendant is to pay the costs of the plaintiff in these proceedings on the indemnity basis, that the first defendant pay the costs of the second defendant on the indemnity basis, and in default of payment of such costs by the first defendant, by the administrators. There should be no order for costs in respect of the third defendant. The Court accordingly dismisses the originating process and makes the orders in the short minutes of order. Exhibits may be returned. ************************ 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.