CATCHWORDS
Corporations Law - whether solicitors have authority to act for a party and, if not, whether the lack of authority can (and should) be made good by an order under s 1322 - whether a director may maintain proceedings as derivative proceedings
Corporations Law s 459G, s 260, s 1322(4), s 459J, s 459S, s 1322(6)
David Grant Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 269
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Healy‑Hutchinson v Brayhead Ltd [1968] 1 QB 549
Re Qintex Ltd (No. 2) (1990) 2 ACSR 479
Daimler Company Ltd v Continental Tyre & Rubber Company (Great Britain) Ltd [1916] 2 AC 307
Foss v Harbottle (1843) 2 Hare 461
Scarel Pty Ltd v City Loan & Credit Pty Ltd (1988) 17 FCR 344
Wallersteiner v Moir (No. 2) [1975] 1 QB 373
North Sydney Brick & Tile Co Ltd v Darvall (1989) 17 NSWLR 327
Omega Estates Pty Ltd v Ganke (1962) 80 WN (NSW) 1218
NECE PTY LIMITED v RITEK INCORPORATION
No. NG 3791 OF 1996
RITEK INCORPORATION v NECE PTY LIMITED & ANOR
No. NG 3055 OF 1997
CORAM: Lehane J
PLACE: Sydney
DATE: 11 June 1997
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3791 of 1996
GENERAL DIVISION ) No. NG 3055 of 1997
IN THE MATTER OF NECE PTY LIMITED
(A.C.N. 065 081 067)
MATTER NO. NG 3791 OF 1996
BETWEEN: NECE PTY LIMITED
A.C.N. 065 081 067)
Applicant
AND: RITEK INCORPORATION
Respondent
MATTER NO. NG 3055 OF 1997
BETWEEN: RITEK INCORPORATION
Applicant
AND: NECE PTY LIMITED
(A.C.N. 065 081 067)
First Respondent
PHILIP GRAHAM SIDNEY
Second Respondent
CORAM: Lehane J
PLACE: Sydney
DATE: 11 June 1997
MINUTE OF ORDERS
THE COURT ORDERS THAT:
1. The applicant file and serve short minutes of orders appropriate to give effect to these reasons for judgment.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3791 of 1996
GENERAL DIVISION ) No. NG 3055 of 1997
IN THE MATTER OF NECE PTY LIMITED
(A.C.N. 065 081 067)
MATTER NO. NG 3791 OF 1996
BETWEEN: NECE PTY LIMITED
(A.C.N. 065 081 067)
Applicant
AND: RITEK INCORPORATION
Respondent
MATTER NO. NG 3055 OF 1997
BETWEEN: RITEK INCORPORATION
Applicant
AND: NECE PTY LIMITED
(A.C.N. 065 081 067)
First Respondent
PHILIP GRAHAM SIDNEY
Second Respondent
CORAM: Lehane J
PLACE: Sydney
DATE: 11 June 1997
REASONS FOR JUDGMENT
LEHANE J
There are before the Court a number of motions in two separate proceedings. The first, which I shall call the statutory demand proceedings, is a proceeding in which Nece Pty Limited (Nece) purports to apply, under s 459G of the Corporations Law (the Law), to set aside a statutory demand served on it by Ritek Incorporation (Ritek). The reason for my use of the word “purports” will shortly become apparent. The second proceeding (the oppression action) is one in which Ritek applies for an order that Nece be wound up, on the ground provided for in s 260 of the Law. The respondents to the oppression action are Nece and Mr Phillip Sidney, the managing director of Nece.
In the statutory demand proceedings, Ritek moves for orders that the application be dismissed or, alternatively, struck out and an order that Gilbert & Tobin (the solicitors who filed the application on behalf of Nece) pay Ritek’s costs of the proceeding. Nece, by two separate motions, seeks orders that the appointment, by Nece or Mr Sidney, of Gilbert & Tobin to act as solicitors in the proceedings is not invalid, a declaration that Gilbert & Tobin are properly retained solicitors for Nece, an order that Mr Sidney be joined as second applicant and an order that he have leave to conduct the proceedings on behalf of Nece.
In the oppression action, Ritek moves for an order that the notice of appearance filed by Gilbert & Tobin for Nece be struck out, a direction that Gilbert & Tobin not file any document in the action or appear in it or instruct counsel in it on behalf of Nece without the leave of the Court and an order that Gilbert & Tobin pay Ritek’s costs of the motion. Nece seeks an order under subs 1322(4) of the Law that its appointment of Gilbert & Tobin to act as its solicitors in the proceeding is not invalid and an order declaring that Gilbert & Tobin are properly retained solicitors for Nece.
Thus the substantial questions in each proceeding are whether Gilbert & Tobin are authorised to appear for Nece or to take steps in the proceeding on its behalf and, if not, whether the lack of authority can (and should) be made good by an order under s 1322. In the statutory demand proceedings, there is a further question, whether Mr Sidney may maintain those proceedings as derivative proceedings.
Background facts
Nece is a joint venture company incorporated under the Law. Ritek (which is a Taiwanese corporation) owns 50% of its issued ordinary shares and one of its directors is Ritek’s nominee. Mr Sidney owns the remaining 50% of the issued ordinary shares of Nece, is its other director and is also the managing director. Ritek manufactures and sells compact discs. Before Nece was incorporated (in 1994), Mr Sidney was Ritek’s distributor in Australia. Nece was established for the purpose of manufacturing and selling compact discs in Australia.
The contractual relationship between Ritek and Mr Sidney is governed by a joint venture agreement which is undated but was apparently executed by both parties in late June 1994. It provides for the formation of a company to be known as “Nece Pty Ltd”; it provides that Nece’s business is to be the manufacture and sale of compact discs; it makes provision for the form of the articles of association of Nece and its share capital; it provides for the appointment of directors of Nece and for its management. It provides for the appointment of a managing director and that Mr Sidney is to be the first managing director. Clause 10.1 provides:
The Company shall have a managing director who shall be responsible for the day to day management of the Company in accordance with the instructions of the Board. The Board may entrust to the managing director any of the powers exercisable by the Board on such terms and conditions and with such restrictions as the Board may think fit, either collaterally with or to the exclusion of the Board’s own power.
Clause 6.11 lists a number of matters which it describes as actions which are not to be taken “unless there is prior resolution passed by the Board”. One of those matters is the “commencement of any litigation, arbitration or other dispute resolution proceeding involving an amount in excess of $50,000”.
There are quite complex, but reasonably conventional, provisions, first to the effect that if one of the parties wishes to dispose of its shares it must first offer them to the other and secondly for the resolution of deadlocks by way of offers to buy and sell shares.
The articles of association include conventional provisions for the appointment of a managing director. They include the following provision concerning the powers of a managing director:
82 (1) The Directors may, upon such terms and conditions and with such restrictions as they think fit, confer upon a managing director any of the powers exercisable by them.
(2) Any powers so conferred may be concurrent with, or be to the exclusion of, the powers of the Directors.
(3) The Directors may at any time withdraw or vary any of the powers so conferred on a managing director.
The evidence on the motions is not voluminous or, in relation to some matters that might have been significant, particularly informative. It is common ground that Mr Sidney was appointed managing director of Nece but that no board resolution was passed conferring upon him any particular powers, particularly any powers to instruct solicitors in relation to legal proceedings commenced by, or against, Nece. An affidavit of Mr Sidney states that he was responsible (that is to say, as I understand it, was in charge of) the day to day operations of Nece, and that evidence was not disputed. Mr Sidney instructed Gilbert & Tobin in relation to the commencement of the statutory demand proceedings; he also instructed Gilbert & Tobin to lodge an appearance for Nece, and to act on its behalf, in the oppression action. Affidavits of Mr Sidney read on the motions include evidence also of the acquisition by Nece from Ritek of equipment described as a “twin line system” and the failure of that system, causing Nece to suffer a loss; that loss is sought to be relied on as an offsetting claim in the statutory demand proceedings. There is not before me any evidence as to the precise circumstances giving rise to the alleged offsetting claim or as to the circumstances said to have given rise to the debt on which Ritek’s statutory demand is based.
Managing director’s authority
It is convenient, I think, to consider first the question of Mr Sidney’s authority to instruct solicitors to commence the statutory demand proceedings. It may be said immediately that if Mr Sidney lacked authority to instruct solicitors to do that, the consequences for Nece may be significant. Section 459G of the Law provides that a company may apply to the Court for an order setting aside a statutory demand served on it, but that the application may only be made within 21 days after the demand is served. That period of 21 days cannot be extended: David Grant Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 269. The Court is required to set aside the demand (s 459H) if it is satisfied that the existence of the debt demanded is the subject of a genuine dispute or if, having regard to an offsetting claim, the amount of the debt not in genuine dispute is less than the “statutory minimum” ($2,000: see the definition in s 9). The Court also has a discretion under s 459J to set aside a statutory demand in some circumstances where substantial injustice will otherwise be caused.
Section 459S of the Law then provides:
459S (1) In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground:
(a) that the company relied on for the purposes of an application by it for the demand to be set aside; or
(b) that the company could have so relied on but did not so rely on (whether it made such an application or not).
459S (2) The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent.
Thus, if a company does not effectively apply, within 21 days, to set aside a statutory demand served upon it, its ability to resist a winding‑up application based on the demand is significantly circumscribed.
A further preliminary comment should be made: the question with which I am concerned is whether Mr Sidney’s authority from Nece is established as against Ritek, not whether Nece is in a position to deny, as against the solicitors instructed by Mr Sidney, that Mr Sidney had authority to instruct them. Thus, although reliance was placed, by counsel appearing for Nece and Mr Sidney, on s 164 of the Law, in my view it does not matter for the purpose of the motions (except possibly in relation to costs) whether the solicitors may be able to rely on the assumptions for which that section provides. If the solicitors may make the assumptions and accordingly have rights against Nece, it does not follow that Ritek is bound by the action of Mr Sidney (if otherwise without authority) in instructing the solicitors.
Mr Sidney cannot rely on express actual authority to instruct solicitors: there is no evidence that any such authority was expressly given. Nor can he rely on ostensible authority, resulting from a representation by Nece that Mr Sidney was authorised to instruct solicitors (see the discussion by Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 503‑506): there is no evidence of any such representation. The question, therefore, is whether Mr Sidney is to be taken, from the circumstances of his appointment, the circumstances in which, and the manner in which, he conducted the business operations of Nece and the circumstances of the particular transactions in question, as having the implied authority of the directors of Nece to instruct solicitors in these two proceedings (see Healy‑Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 558 per Lord Wilberforce): that is, in the terminology which seems to have become accepted, the question is one of implied actual authority.
Ritek relied heavily on Re Qintex Ltd (No. 2) (1990) 2 ACSR 479. Underwood J there held that the managing director of Qintex Ltd, in the absence of express authority from the board, was not authorised to instruct solicitors to oppose a creditor’s petition to wind the company up. That was, however, a somewhat special case, as the following extract from the judgment (at 482) demonstrates:
There is no evidence on this application of the business of Qintex Ltd. There is no evidence of the role played by Mr Skase in the business of the company since his appointment as managing director. There is no evidence that Mr Skase has at any time prior to the filing of the petition for winding‑up acted or purported to act on behalf of Qintex Ltd. In short, there are no facts from which the extent of the authority of the managing director to bind the company can be inferred or implied other than that which might be inferred from the appointment to the office itself. It might be argued that such office usually carries with it the authority of the company to exercise some of its powers of management in the ordinary course of business, but in the absence of evidence of the grant of express authority or evidence from which an inference of the grant of authority could be drawn, it could not be said that the appointment to the office of managing director carried with it the authority to make critical decisions following the presentation of a petition to wind the company up including the decision to appoint solicitors with instructions to oppose the petition.
The case was special because of the remarkable lack of evidence as to the company’s business and any part played by its managing director in the conduct of the business. It was special also in that, although the petition was issued by a creditor which apparently had no other relationship with the company, it was not possible to arrange for the managing director’s actions to be ratified by the board. No doubt because in most cases a managing director’s actions are likely, if necessary, to be ratified, the question in practice rarely arises. Where it does arise, however, it is unlikely to be answered by reference to an abstract or general question such as, did the managing director have authority to instruct solicitors for the company?
It is, I should think, highly unlikely that a managing director entrusted with the day to day management of a company would not have implied authority to instruct solicitors to take proceedings to recover debts or to resist claims against the company where the transactions concerned occurred in the daily operation of the company’s business. It would not follow, however, that the managing director should be regarded as having implied authority, if the evidence went no further, to instruct solicitors to oppose a winding‑up application of any apparent substance. Rather, it might be expected that that would be a matter with which the board would be directly and immediately concerned. In this case, such material as there is (and it was not suggested that Mr Sidney did not bear the burden of proving his authority: Daimler Company Ltd v Continental Tyre & Rubber Company (Great Britain) Ltd [1916] 2 AC 307 at 327) extends only to the day to day conduct of the company’s business operations. But, while evidence of what happened in the daily business affairs of Nece might be relevant to the question of the managing director’s authority to instruct solicitors in matters arising in the course of those daily affairs, it would not, in my view, cast any light on the implied authority of the managing director to take steps (including instructing solicitors) in response to a winding‑up application by Ritek. Neither party suggested that the joint venture agreement casts any light on Mr Sidney’s authority to take such a step.
It is possible to imagine circumstances which might lead to a finding of implied authority for that purpose: for example, if it were established that, during the course of the transactions giving rise to the claim founding the statutory demand, and perhaps also the circumstances giving rise to an alleged offsetting claim, Mr Sidney consistently, and to the knowledge of the board, represented the interests of Nece in its dealings with Ritek. Such evidence might establish that Mr Sidney was recognised by the directors of Nece as representing Nece in all, or substantially all, aspects of the relevant transactions; and, if that were so, it might not be a difficult step to conclude that he was authorised equally to deal with disputes arising out of the transactions, including, should Ritek choose to pursue any claims it might have by initiating winding‑up proceedings, by taking steps on behalf of Nece in those proceedings, including making an application under s 459G to set aside a statutory demand. But that is speculation. There is before me on the motions no material of that sort; and the evidence that is before me is not capable, in my view, of establishing that Mr Sidney had authority to instruct solicitors to commence the statutory demand proceedings.
If that is so in relation to the statutory demand proceedings, it is in my opinion a fortiori true of the oppression action. Where what is in question is the propriety of the way in which Mr Sidney has managed the affairs of Nece, I find it impossible to see how evidence as to his authority in the daily affairs of Nece could give rise to an implication of authority to instruct solicitors for the purpose of active resistance to proceedings initiated by Ritek under s 260 of the Law. In a sense, that may not, except as to costs, be a matter of great practical concern: although the order sought is the winding‑up of Nece, and it is necessarily a party to the proceeding, the substantial issues in the oppression action are between Ritek and Mr Sidney.
An exception to the rule in Foss v Harbottle?
It was argued on behalf Mr Sidney that if I should hold that he was not authorised by Nece to instruct solicitors in the statutory demand proceedings, I should nevertheless make an order permitting him, or recognising his right, to maintain the statutory demand proceedings in a representative capacity, under what is sometimes described as the fifth exception to the rule in Foss v Harbottle (1843) 2 Hare 461: as expressed by Ipp J in Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785 at 848, under that fifth exception “the Court may allow a derivative action by shareholders in circumstances whenever the justice of the case so requires”. An appeal from his Honour’s decision ‑ reported at (1994) 15 ACSR 1 ‑ turned on other matters: the appeal was dismissed, and no member of the Full Court expressed any dissent from the view taken by Ipp J. It may be accepted that authority supports the principle applied in Biala: the cases are discussed by Ipp J at 644 to 648 and also (though it was unnecessary for his Honour to come to a conclusion about the principle) by Gummow J in Scarel Pty Ltd v City Loan & Credit Pty Ltd (1988) 17 FCR 344 at 349‑350.
Let it be assumed that, on the footing that the board would not authorise the making of an application to set aside the statutory demand, Mr Sidney would have been entitled, within the 21 day period permitted by subs 459G(2), to make such an application in a representative capacity. Clearly he could not, any more than could Nece itself, commence such an application after the 21 day period had expired. Here, proceedings were purportedly commenced by Nece within the period; on the evidence before me, however, it appears that those proceedings were commenced without authority. Unless they are ratified, they cannot be maintained. An order which permitted Mr Sidney to maintain the proceedings would not, however, amount to a ratification: its effect would be to sanction the commencement of an application, not presently on foot, outside the time permitted by the section. For that reason, in my view, I must accept the submission of counsel for Ritek that it cannot be done.
That conclusion, I think, follows whatever the precise form of the contemplated derivative proceedings. In Scarel, Gummow J, at 349, contemplated a “general principle that an action may be brought or continued in the name of a company by a contributory ... where the company cannot or will not bring or continue the action and it is in the interests of justice that the action be brought or continued”. That would, no doubt, have been the ultimate form of the proceedings under the former practice in Chancery. Two things, however, may be pointed out: one is that unless unauthorised proceedings are ratified, they can hardly be “continued”; and, with respect, the accepted form in which derivative proceedings are now cast is as I understand it that described by Lord Denning MR in Wallersteiner v Moir (No. 2) [1975] 1 QB 373 at 390, 391.
Order under s 1322?
Mr Sidney seeks in both the statutory demand proceedings and the oppression action an order, pursuant to subs 1322(4) of the Law, that the appointment of Gilbert & Tobin to act as solicitors for Nece in the proceeding is not invalid and an order declaring that that firm has been properly retained for Nece. The subsection provides, so far as is relevant for present purposes, as follows:
Subject to the following provisions of this section but without limiting the generality of any other provision of this Law, 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 instituted or taken, under this Law or in relation to a corporation is not invalid by reason of any contravention of a provision of this Law or a provision of the constitution of a corporation; ...
That provision is to be read in the light of subs 1322(6) which provides:
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 in the public interest that the order be made;
. . .
(c) In every case ‑ that no substantial injustice has been or is likely to be caused to any person.
Plainly the instructing of solicitors and the filing of the application in the statutory demand proceedings and of the appearance in the oppression action (and of other documents in both proceedings) were acts purporting to have been done in relation to a corporation. There can be no doubt that Mr Sidney is an interested person. It is correct, I think, to describe the acts, taken without authority (but capable of authorisation if the appropriate procedures under the articles were followed) as “invalid” for the purposes of the section: compare North Sydney Brick & Tile Co Ltd v Darvall (1989) 17 NSWLR 327 at 341. There is no question of contravention of the Law. I shall return to the question whether there is a contravention of a provision of the constitution of Nece. As for the matters listed disjunctively in para 1322(6)(a), it seems to me clear that the lack of authority is not to be described as a matter essentially of a procedural nature; I accept, however, that for the purpose of subpara (2) Mr Sidney and the firm of solicitors acted honestly. I shall defer consideration of the public interest.
I accept that, as Clarke JA expressed it in North Sydney Brick & Tile at 341:
[the section] is of a remedial character and should be accorded, therefore, a liberal interpretation. In particular it has been held that the scope and operation of the section should not be subverted or restricted solely because of the effect which its exercise might occasion to third persons: Omega Estates Pty Ltd v Ganke (1962) 80 WN (NSW) 1218 at 1225; [1963] NSWR 1416 at 1427.
I appreciate, additionally, the force of counsel’s argument that it would be a serious step, at least in relation to the statutory demand proceedings, to leave unremedied a situation where deadlock between 50% shareholders, and their representative directors, impedes Nece in defending itself against a winding‑up application made by one of the shareholders on the footing of a debt which it claims to be owed by Nece. Whether that is a “public interest” is, I think, a somewhat difficult question: that is a phrase which would ordinarily, I think, be given a meaning somewhat different from that of, for instance, “the interests of justice”.
However that might be, my difficulty with the argument on behalf of Mr Sidney is principally with the question of contravention of Nece’s constitution. It is true that cases such as North Sydney Brick & Tile and Omega Estates proceed on the basis that if something is done which has not been properly authorised because, for example, appropriate resolutions have not been passed or because there is in office no validly elected board of directors, the doing of it without authority may be regarded as a contravention, for these purposes, of the articles of association. The problem in this case, however, is that there is not merely a “contravention”; there is, it appears to be common ground, deadlock. The reason there is no authority, and no ratification, is that it is not given because one of the parties ‑ particularly, one the directors ‑ whose affirmative vote is needed in order that it should be given is unwilling to give that affirmative vote. It could hardly be said, where lack of authority resulted from a positive decision of the competent authority of a company ‑ ordinarily the board of directors ‑ to refuse it, that an act done in purported exercise of the authority thus refused was invalid by reason of a contravention of the articles. That must equally be true, I think, if authority is sought by way of a proposal to the board but refused. The situation can be no different, in my view, where in the circumstances it is plain that authority, if sought, would be refused.
For those reasons, in my opinion the orders sought under subs 1322(4) should not be made. For reasons I have already given, I think that no substantial injustice results in relation to the oppression action. In relation to the statutory demand proceedings, clearly the consequences I have already mentioned follow from the failure to commence authorised proceedings within the time prescribed by the Law. No doubt, however, if the matters on which Nece might have relied in the statutory demand proceedings go to the issue of solvency, appropriate procedural orders can be made to ensure that, if the Court considers it appropriate, they can be agitated in any application to wind Nece up in insolvency.
Costs and conclusion
Given the imminence of the final hearing of both proceedings, I think it is appropriate to reserve the question of costs until their conclusion. Rather than make formal orders immediately, I think appropriate to give the parties an opportunity to consider these reasons and to direct that the applicant file and serve short minutes of orders appropriate to give effect to my conclusions. Before making a formal order to that effect, I shall hear counsel as to the time within which the draft minutes should be filed.
I certify that this and the preceding 15 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lehane.
Associate:
Dated: 11 June 1997
Heard: 22 April 1997
Place: Sydney
Decision: 11 June 1997
Appearances: Mr J V Nicholas of counsel instructed by Elson Pow & Associates appeared for Ritek Incorporation.
Mr J T Svehla of counsel instructed by Gilbert & Tobin appeared for Nece Pty Limited and Mr P G Sidney.
