In the matter of Carbon & Energy Reductions Pty Ltd [2014] NSWSC 3

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Carbon & Energy Reductions Pty Ltd [2014] NSWSC 3 Hearing dates: 4 February 2014 Decision date: 04 February 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: (1) Plaintiff has leave to discontinue the proceedings. (2) Defendants pay the plaintiff's costs of the proceedings. Catchwords: COSTS - discontinuance - whether to "otherwise order" - where proceedings were necessitated by the conduct of the defendants, but further prosecution rendered inutile by subsequent work. Category: Interlocutory applications Parties: James McElhinney (plaintiff) Richard George Hayes (first defendant) Dean Arno Stehling (second defendant) Representation: Solicitors: BTC Lawyers (plaintiff) Matthew Sulman and Associates (defendants) File Number(s): 2014/1273

Judgment - EX TeMPORE 1HIS HONOUR: The plaintiff James McElhinney is a shareholder and was a director in Carbon & Energy Reductions Pty Ltd. The first defendant Richard George Hayes was also a director and shareholder, and the second defendant Dean Arno Stehling was and is a shareholder. 2At a directors' meeting purportedly held on 10 December 2013 it was apparently resolved to remove Mr McElhinney as a director. While there is dispute as to whether Mr McElhinney was given notice of that meeting, it is now common ground that, regardless of whether or not he was given notice, that meeting was not entitled to remove him as a director. 3The defendants say that he was not removed as a director at that meeting, but that the directors resolved that he be removed from any executive position, including but not limited to the removal of any executive authority conferred upon him by the directors, and that he was "in effect a non-executive director from the passing of the resolution". However, on the day of the meeting Mr Hayes, who was also company secretary, caused to be lodged with ASIC a change to company details in Form 484 which recorded that Mr McElhinney ceased to be a director and that Mr Stehling was appointed a director. Subsequently, Mr McElhinney found on 12 December that his authority to make payments from the company's bank accounts had been cancelled and that he had been removed as a signatory, the bank having been advised that he was no longer a director of the company. 4Instructively, the branch manager of the Chatswood Branch advised him on 12 December: Richard Hayes tried to have you and Anthony removed as signatories of the company on 10 December. I told him that it required two directors to remove a signatory. Two directors authorised the removal of you and Anthony and the relevant paperwork is held at the Mittagong Branch. 5Mr McElhinney did not understand that what was recorded with ASIC was merely a record and did not effect a removal or appointment of a director, and assumed that he had been removed as a director until he obtained some advice towards the end of the month. Although the defendants now say that as early as 12 December it was realised that his purported removal by the Form 484 "contained some incorrect details as a result of an administrative defect and some confusion on the part of the company secretary", and that he was "inadvertently removed as a director of the company on 10 December 2013 in error by the company secretary", and that by 12 December the company had prepared a Form 429 to notify ASIC of the relevant amendment, there is nothing in the evidence to suggest that any step was taken, at least before about 30 December, to inform Mr McElhinney that he in fact still remained a director. That was only done after his solicitor on 30 December wrote to the company raising complaint. Then, and in subsequent correspondence, reference was made to the proposal to lodge an amending form, but not until a further directors' meeting could be held to authorise its lodgement. 6Between 30 December and 2 January there was communications between the parties in the course of which it appeared likely that it would be possible to resolve the matter, at least on an interim basis. In particular, it seemed likely that a meeting of members, which had been purportedly convened without due notice for 3 January 2014, would be deferred. However, on the morning of 2 January 2013, Mr McElhinney received in his letter box a supplemental notice of meeting for 3 January and an additional resolution for the agenda. In those circumstances, Mr McElhinney commenced these proceedings on the afternoon of 2 January by application to Rothman J, sitting as vacation judge. 7The defendants' solicitor was informed of the application and appeared before his Honour. After hearing argument, his Honour made: (1) a declaration that the plaintiff is a director of the company and did not cease to be a director on 10 December 2013; (2) an order restraining the second defendant from acting as a director of the company; (3) an order restraining the company and any director from holding out that the second defendant was a director; (4) an order restraining the plaintiff and the first defendant from authorising any payments or other transactions on bank accounts held by the company other than under signature of each of them; (5) an order enjoining that the plaintiff and first defendant to take all reasonable steps to ensure that ASIC amend its records to record the foregoing orders; and (6) an order requiring that the meeting purportedly convened to be held on 3 January 2013 not be held. Those orders were expressed to be "until such further order of the Court". 8Pursuant to a requisition, a meeting of directors on 7 January 2014, the validity of which is not disputed, convened a meeting of shareholders for 31 January 2014 to consider and, if thought fit, pass as an ordinary resolution that Mr McElhinney be removed as a director. That meeting duly took place on 31 January, and that resolution was passed. 9In those circumstances, the plaintiff acknowledges that it is not appropriate that orders 2, 3 and 4 made by his Honour continue. The plaintiff does not propose to pursue the other substantive relief claimed in the originating process, which was essentially for declarations of contravention of directors' duties. The plaintiff, however, seeks an order that the defendants pay his costs of the proceedings. The defendants submit that there should be no order of the costs of the proceedings. 10Ultimately, the proceedings were necessitated by the conduct of the defendants on 10 January 2013 in purporting to remove the plaintiff as a director. Whether it was an innocent mistake, misapprehension or "administrative defect" (whatever that means), or not, the proceedings were necessitated by the fact that that plaintiff was apparently removed from the record as a director when there was no basis at law for doing so. The defendants may well have been entitled to remove the plaintiff in due course, as they ultimately did on 31 January, but they were not entitled to do so in an irregular manner. If, indeed, what happened on 10 January was "an administrative defect", then it behoved the defendants to cure that defect promptly and immediately, and not to leave it on foot until some further meeting could be convened to do validly what had so far not validly been done. 11While there were some references in the correspondence from the defendants to a proposal to lodge a Form 429 at a later stage, there was no sufficient categorical undertaking or indication that the wrong would be rectified to make it unreasonable for the plaintiff to institute the proceedings when he did, particularly in light of the notice he received in his letter box that morning. 12For those reasons, the defendants should pay the plaintiff's costs of the proceedings. 13The Court orders that: (1)Orders 2, 3 and 4 made on 3 January 2014 cease to have effect forthwith. 14To avoid any potential for declaration 1, made on 3 January, to have a misleading ongoing effect, I think it appropriate to declare that the plaintiff is no longer a director. The Court declares that: (2)The plaintiff ceased to be a director of the company on 31 January 2014. 15The Court further orders that: (3)That the plaintiff have leave to discontinue the proceedings. (4)The defendants pay the plaintiff's costs of the proceedings.