New South Wales Supreme Court CITATION : Drillsearch Energy Ltd v McKerlie [2009] NSWSC 517 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 09/06/09 JUDGMENT DATE : 9 June 2009 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J EX TEMPORE JUDGMENT DATE : 9 June 2009 DECISION : Proceedings permanently stayed. CATCHWORDS : CORPORATIONS - general meetings - meeting called to consider motions for removal of five directors - company by resolution of three of those directors commences proceedings against parties including the other two - company seeks various declaratory relief and injunctions restraining holding of the general meeting - a director defendant seeks permanent stay because of disqualifying material personal interest of each director voting for initiation of proceedings - held that material personal interest existed - whether resolution invalid - whether statutory injunction lies - whether need for court to protect its processes from abuse LEGISLATION CITED : Corporations Act 2001 (Cth), ss 195(1), 195(1A), 195(1B), 195(5), 249Q, 606, 671B, 672B, 1324, 1325A CATEGORY : Principal judgment Cadwallader v Bajco Pty Ltd [2001] NSWSC 1193; (2001) 189 ALR 370 CASES CITED : McGellin v Mount King Mining NL (1998) 144 FLR 288 McKerlie v Drillsearch Energy Ltd [2009] NSWSC 488 Drillsearch Energy Limited - Plaintiff James David McKerlie - First Defendant PARTIES : Glenluce Properties Pty Ltd - Second Defendant Beng Kai Choo - Third Defendant Nefco Nominees Pty Ltd - Fourth Defendant Philip Francis Kelso - Fifth Defendant FILE NUMBER(S) : SC SAD 78/09 (FCA) Mr M Hoffman QC/Mr P C Silver - Plaintiff COUNSEL : Mr R G McHugh SC/Mr N M Bender - First and Second Defendants Mr J Stoljar SC - Third Defendant Mr M J Watts - Fifth Defendant DMAW Lawyers - Plaintiff SOLICITORS : Thompson Eslick - First and Second Defendants Corrs Chambers Westgarth - Third Defendant In person - Fifth Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY 9 JUNE 2009 SAD78/09 (FCA) DRILLSEARCH ENERGY LIMITED v JAMES DAVID McKERLIE & 4 ORS JUDGMENT 1 These proceedings were commenced in the Federal Court of Australia, South Australia Registry, on 3 June 2009. By order made on 5 June 2009 by the Federal Court, the proceedings were transferred to this court which had, on 4 June 2009, delivered judgment in a separate proceeding involving the same principal parties or protagonists. That judgment concerned a general meeting of an ASX listed company which is to be held tomorrow, Wednesday 10 June 2009: see McKerlie v Drillsearch Energy Ltd [2009] NSWSC 488. 2 In the present proceedings, that company, Drillsearch Energy Limited (which I shall call "Drillsearch"), sues two of its directors, Mr McKerlie and Mr Choo, together with two companies which are shareholders, and Mr Kelso, a former director. The principal relief sought is declaratory relief. 3 In relation to all defendants, there is a claim by Drillsearch for a declaration that they have breached ss 606, 671B and 672B of the Corporations Act 2001 (Cth) concerned with, respectively, the acquisition of a relevant interest in voting shares beyond the take-over threshold of 20 percent and disclosure of relevant interests in voting shares above the 5 percent threshold for substantial shareholding disclosure. 4 There is a claim by Drillsearch for a declaration that the general meeting of Drillsearch convened by Drillsearch itself by notice dispatched on 8 May 2009 (that is, the meeting scheduled to be held tomorrow) has not been convened for a proper purpose (s 249Q). 5 In relation to Mr McKerlie (first defendant) and Mr Choo (third defendant), Drillsearch seeks declaratory relief to the effect that they have contravened the directors duties' and other provisions of the Corporations Act. A declaration sought by Drillsearch in respect of Mr McKerlie alone is that he has given false and misleading information to shareholders in breach of s 1309. As regards Mr Kelso, Drillsearch claims a declaration that he has committed a breach of contract. 6 In relation to the alleged breaches of directors' duties by Mr McKerlie and Mr Choo, Drillsearch advances a claim for compensation by the company itself as plaintiff. 7 Two paragraphs of the originating process seek injunctive relief on a final basis: first, an injunction restraining the holding of the general meeting of the members of Drillsearch to be held tomorrow, Wednesday 10 June 2009; and, second, an order restraining the defendants from voting at that meeting. 8 Leaving to one side the claims for compensation (which should, I think, be regarded as ancillary and, in the circumstances, minor), the only final relief that Drillsearch seeks, apart from what I might call free-standing declaratory relief, is injunctive relief, being injunctive relief that is aimed solely at the meeting of shareholders to be held tomorrow. 9 Counsel for Drillsearch indicated in the course of submissions an intention of seeking to amend the originating process to include a claim based on s 1325A of the Corporations Act, being a claim for a "remedial order" as defined by s 9 depriving certain shares of voting rights. That proposal was referred to for the first time from the bar table this morning and has not been fully formulated or articulated. 10 The interlocutory process filed with the originating process on 3 June 2009 seeks orders restraining the holding of the general meeting tomorrow pending determination of the claims in the originating process. 11 In a real and direct sense, therefore, a leading objective of the proceedings is to prevent the holding of the general meeting - by interlocutory order in the first instance and thereafter on a permanent basis. 12 The only items of business that will be before the general meeting tomorrow are proposed resolutions to remove from office five of the six directors. The directors whose removal will be considered by the meeting are Mr McKerlie, Mr Choo, Mr Simpson (who is the executive chairman), Mr Wicks and Mr Langusch. There is a sixth director, Mr Lingo, who is recently appointed and is to assume the office of managing director later this month. He is not affected by the director removal proposals. 13 Against this background, I come to the application with which I am now dealing, which is an application by the third defendant, Mr Choo, supported by all other defendants, for an order permanently staying the proceedings. 14 That application is made on the basis that there has been no effective or proper resolution of board of directors of Drillsearch as plaintiff authorising the initiation of the proceedings. The relevant resolution or purported resolution was passed on the evening of 2 June shortly after judgment was reserved at the conclusion of the hearing in the earlier proceedings and it was indicated that judgment would be delivered later in that week, as it was in fact two days later on Thursday 4 June. 15 At the beginning of the meeting of directors on the evening of 2 June all directors except Mr Choo were present. The minutes record Mr Choo's apology. The minutes also record that it was pointed out by Mr Simpson as chairman to Mr McKerlie that, because the business to be discussed was a proposal that the company institute proceedings against Mr McKerlie and Mr Choo (among others), those two directors had a "material personal interest" in the subject matter and were therefore precluded from participation. Mr McKerlie then absented himself (he was present by telephone) and the four other directors continued with their deliberations. I refer, of course, to Mr Simpson, Mr Wicks, Mr Langusch and Mr Lingo. 16 It was ultimately resolved, with Mr Simpson, Mr Wicks and Mr Langusch voting in favour and with Mr Lingo abstaining, that Drillsearch initiate the proceedings which are now before me. 17 Mr Choo maintains, and the other defendants agree, that each of Mr Simpson, Mr Wicks and Mr Langusch was himself precluded from voting on the resolution that the company institute these proceedings, with the result that their purported votes in favour of the resolution were ineffective and there was in reality no resolution of the board of directors at all. That being so, it is argued, the proceedings have not been properly instituted by Drillsearch and should be stayed. 18 These contentions proceed on the footing that each of Mr Simpson, Mr Wicks and Mr Langusch was caught by s 195(1) of the Corporations Act in that he had a "material personal interest" in the holding of the general meeting the restraining of which is a leading objective of these proceedings. This is so, in relation to each of them, because the question of his own tenure as a director is to be before the meeting for decision. 19 Section 195(1) is in these terms: "(1) A director of a public company who has a material personal interest in a matter that is being considered at a directors' meeting must not: (a) be present while the matter is being considered at the meeting; or (b) vote on the matter." 20 Section 195(1A) creates certain exceptions, none of which is of present relevance. Section 195(1B) provides: "(1B) An offence based on subsection (1) is an offence of strict liability." 21 I was taken to evidence about financial aspects of the company's relationship with Mr Simpson and Mr Wicks taken from the annual report for the year ended 30 June 2008. There was no such information for Mr Langusch who was appointed after that date. These matters, however, are of marginal relevance only. The significant point is that the position of each of Mr Simpson, Mr Wicks and Mr Langusch will arise for consideration at tomorrow's meeting in an atmosphere where a letter from Mr McKerlie critical of them has been sent to shareholders, and, in a realistic sense, the decision facing members, apart from the possibility of removing all five relevant directors, will be whether to remove Mr McKerlie and Mr Choo on the one hand, who are represented as being a bloc, or removing Mr Simpson, Mr Wicks and Mr Langusch on the other, who are also represented as a bloc. 22 Each of the last mentioned three has an obvious personal interest in resisting attempts to obtain a resolution of shareholders unseating him - the more so since a decision to remove could legitimately be regarded as an endorsement of the adverse criticisms that have been circulated. 23 There is in my view no doubt that each of the three, Mr Simpson, Mr Wicks and Mr Langusch, has a "personal interest" in what is, in terms, the only part of the relief sought in the proceedings that goes beyond mere stand-alone declarations and compensation orders which one cannot think could involve a great deal of money. I refer, of course, to the claims for orders restraining the holding of the general meeting. 24 I am also of the opinion that the personal interest of each of the three was, in the context of the directors' meeting of 2 June 2009, "material" in the sense in which that expression has been interpreted in the case law to which I was referred, in particular McGellin v Mount King Mining NL (1998) 144 FLR 288. In that case, Murray J said of the statutory predecessor to s 195(1) (at 304): "'Material' in this context, I think, means that the interest involves a relationship of some real substance to the matter under consideration or the contract or arrangement which is proposed. In that way the nature of the interest should be seen to have a capacity to influence the vote of the particular director upon the decision to be made, bearing in mind that both the article and the section are concerned with that aspect of a director's fiduciary duties which relates to the resolution of conflict of interest which must, of itself, be of a real or substantial kind. The interest with which both the article and the section are concerned should be of a kind as to give rise to a conflict of that character. If that test is met, it seems to me not to matter that the nature of the interest may be described as direct or indirect, or vested in interest or contingent. It is the substance of the interest, its nature and capacity to have an impact upon the ability of the director to discharge his or her fiduciary duty which will be important." 25 In summary, each of Mr Simpson, Mr Wicks and Mr Langusch was in a position at the directors' meeting where his own tenure was under threat. Each knew that he stood to come under fire at the general meeting and potentially to be unceremoniously dismissed by shareholders in the context of articulated criticisms which might then well be regarded as vindicated and therefore justified. Each had a clear interest in the question of the creation of a forum for debate and decision on the question of his removal, or the avoidance of the creation of such a forum. That interest, of its nature, was amply capable of shaping each relevant director's conduct. The contention that each of the three directors, Mr Simpson, Mr Wicks and Mr Langusch, had a "material personal interest" in the question submitted for the board's consideration on 2 June 2009 concerning institution of these proceedings is well-founded. 26 It remains to consider what follows, apart from the conclusion that each of the three directors contravened s 195(1). Section 195(5) says: "A contravention by a director of: (a) this section; or (b) a condition attached to a declaration or order made by ASIC under section 196; does not affect the validity of any resolution." 27 On one reading, this could mean that every resolution in which a director precluded by s 195(1) from being present and voting participates is nevertheless valid; and that this is so even if, as here, every director who participated was precluded from being present and voting so that none of the minds expressing an opinion on the resolution was free from the distorting influence that the section seeks to neutralise. That seems a drastic interpretation, but it is open on the words. 28 An alternative that has been put before me is s 1324 and the general power of the court to grant injunctions to restrain a person from engaging in conduct that constitutes or would constitute the contravention of the Corporations Act. In this case, the contravening conduct was the voting that occurred on 2 June. In the circumstances, an injunction to restrain that conduct is not a sensible proposition. 29 Even if s 195(5) technically preserves the validity of the resolution despite every vote cast being the vote of a director who was forbidden by s 195(1) to cast a vote or even be present at the meeting, the situation is seen to be one in which the corporate decision to initiate proceedings calculated to produce orders preventing the forthcoming meeting of members depended wholly and solely on and proceeded wholly and solely from statutory contraventions by the three directors who were present and voted and, furthermore, decisions on their part as fiduciaries that were demonstrably in their own personal interests. 30 These matters are sufficient to cause the court to order a stay of the proceedings in the exercise of its inherent jurisdiction in order that the processes of the court might be protected from abuse. It is pertinent to quote from the judgment of Austin J in Cadwallader v Bajco Pty Ltd [2001] NSWSC 1193; (2001) 189 ALR 370 at [225]: "Directors cannot use a fiduciary power to take steps which are designed to prevent the body of shareholders from considering a resolution to remove them, even if they believe that by retaining office they will be able to advance the interests of shareholders." 31 The making and implementation of the decision of 2 June 2009 were such steps. 32 In the event, therefore, the stay sought by Mr Choo, as third defendant, is granted and the proceedings are permanently stayed. ********** 12/06/2009 - Typos - Paragraph(s) 25, 27 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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