Estate of Hancock (Deceased) v Bennett (Executor) [1999] FCA 295

1999FCA0295 - Corrigendum

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – administration of an estate in bankruptcy – whether valid debt – discretion to dismiss petition – need for independent and impartial administrator.

CORPORATIONS – fiduciary duties – improper purpose – conflict of interest – abuse of power – calls on shares and forfeiture – whether meeting held – validity of resolution making a call on shares – distinction between motive and purpose of the directors’ decision – whether company genuinely in need of funds or whether genuine debt

ABUSE OF PROCESS – petition for administration of estate in bankruptcy where no valid debt

WORDS & PHRASES – “debt”, “abuse of process”

Bankruptcy Act 1966 (Cth) s 244

Federal Court Rules (Cth) O 77 r 9 and r 11

News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410, followed

Estate of Hancock (Dec); Porteous v Rinehart (as Executor and Trustee of the Estate of Hancock) (unreported, 31 August 1998), cited

Jones v Dunkel (1959) 101 CLR 298, cited

Briginshaw v Briginshaw (1938) 60 CLR 336, followed

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, distinguished

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, distinguished

King v Henderson [1898] AC 720, applied

Williams v Spautz (1992) 174 CLR 509, applied

The Commonwealth v Verwayen (1990) 170 CLR 394, followed

THE ESTATE OF LANGLEY GEORGE HANCOCK (DECEASED) v

MARTIN LAWRENCE BENNETT, GARRY RICHARD SCHWAB AND GEORGINA HOPE RINEHART AS THE EXECUTORS OF THE ESTATE OF LANGLEY GEORGE HANCOCK

NG 8429 OF 1997

TAMBERLIN J

SYDNEY

25 MARCH 1999

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 8429 OF 1997

BETWEEN:	THE ESTATE OF LANGLEY GEORGE HANCOCK (DECEASED) Applicant
AND:	MARTIN LAWRENCE BENNETT, GARRY RICHARD SCHWAB AND GEORGINA HOPE RINEHART AS THE EXECUTORS OF THE ESTATE OF LANGLEY GEORGE HANCOCK Respondent
JUDGE:	TAMBERLIN J
DATE OF ORDER:	25 MARCH 1999
WHERE MADE:	SYDNEY

THE COURT DIRECTS THAT:

The parties bring in Short Minutes within ten (10) days and the matter be stood over for a period of fourteen (14) days when the Court will hear the parties as to any arguments they wish to advance as to the terms of the Short Minutes including arguments on costs.

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	NG 8429 OF 1997

IN THE MATTER OF:

THE ESTATE OF LANGLEY GEORGE HANCOCK

(DECEASED)

Applicant

BETWEEN:

MARTIN LAWRENCE BENNETT,

GARRY RICHARD SCHWAB AND

GEORGINA HOPE RINEHART

AS THE EXECUTORS OF THE ESTATE OF

LANGLEY GEORGE HANCOCK

Respondent

EX PARTE:

HANCOCK PROSPECTING PTY LTD

(ACN 008 676 417)

Applicant

JUDGE:	TAMBERLIN J
DATE:	25 MARCH 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1 This is the hearing of a creditor’s petition presented by Hancock Prospecting Pty Ltd (“the company”) in respect of the estate of Langley George Hancock (“the estate”). The petition is for an order that the estate of Mr Hancock, who died on 27 March 1992, be administered in bankruptcy.

2 The petition is presented pursuant to s 244 of the Bankruptcy Act 1966 (Cth) (“the Act”). The relevant provisions are:

“244(1) Subject to this section, where:

…

(c) a debt of not less than $2,000, or debts amounting in the aggregate to not less than that amount, which a deceased person would have been liable to pay to a creditor or any 2 or more creditors if he or she had not died becomes or become owing after his or her death;

the creditor or creditors to whom the debt or debts is or are owing may present a petition to the Court for an order for the administration of the estate of the deceased person (in this section referred to as “the deceased debtor”) under this Part.

…

244(11) At the hearing of the petition, the Court shall require proof of:

(a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);

(b) service of the petition, unless service of the petition has been dispensed with; and

and if it is satisfied with the proof of those matters, may make an order that the estate be administered under this Part.”

3 Where the Court is not satisfied with the proof of any of the matters set out in s 244(11) or is of the opinion that for other sufficient cause the order sought ought not be made, it may dismiss the petition (s 244(12)). The reference to “this Part” is to Part XI of the Act which governs the administration of estates of deceased persons in bankruptcy. The above provisions do not require it to be established that the estate is insolvent. However the order is discretionary, and solvency is clearly a matter which should generally be taken into account in exercising the discretion.

4 The respondents are the executors of the estate. Mrs Georgina Rinehart is the daughter of the deceased. Mr Schwab and Mrs Rinehart at all material times were directors of the company. Mrs Porteous contends that the executors have a conflict of interest arising from their role as executors of the estate and as directors of the company.

5 The petition is opposed by Mrs Porteous, the widow of Mr Hancock, who sought and on argument was granted leave to be heard. The reasons for granting leave are set out later in this judgment.

6 The application for administration in bankruptcy is supported by Mr Schwab and Mrs Rinehart as executors of the estate. Mr Bennett has not sought to appear or place any submissions before the Court in this proceeding.

7 The claim of debt, on which the petition is founded, is sought to be challenged by Mrs Porteous. The debt in question is said to arise from a call made pursuant to a resolution of the directors of the company on 13 June 1995, with respect to 500,000 “D” class preference shares held by Mr Hancock at the time of his death. The shares had a par value of $1 and were paid to one cent. In addition, there were 220,000 additional “D” shares which were paid to $1.70. All of these shares were held by the estate after Mr Hancock’s death. The claim of debt is challenged on the ground that there was no meeting held on 13 June making the call. Alternatively, it is said that if any resolution was passed it was made for an ulterior purpose and therefore any proceeding to enforce the “debt” was an abuse of process. The resolution of 13 June 1995 is of importance and the full terms are set out below.

8 On 14 June 1995, notices of call on the shares were sent to the executors but the calls were not met. On 27 June 1995, the directors resolved to issue and serve on the holders of the “D” class shares a further notice requiring payment of the unpaid amounts within 21 days and giving notice that if the payment was not received by that time the shares would be forfeited. Notices pursuant to the resolution of 27 June were duly sent out on that date to the executors. These notices were not met by the due date of 18 July, and on 21 July the directors resolved that the “D” class shares held by the estate should be forfeited. Forfeiture of the shares, under the provisions of the Articles of the company (set out below), did not extinguish the debt constituted by the call. Accordingly, the estate remained liable to the company for the outstanding amounts.

9 Not much happened until 20 February 1997 when the directors resolved to formally demand from the estate payment of the sum of $995,000 being the amount outstanding under the calls on the “D” shares which had been paid to one cent. By that date all the forfeited “D” class shares paid to $1.70 had been sold. The February demand was not satisfied and on 18 November 1997 the directors of the company resolved to make yet a further demand on the estate. This was duly made but again was not met. More than one year after this demand, the call has still not been met and there is no indication that the estate has any present assets to pay the call. As at 5 December 1998, the company claims that the estate was liable to it for $995,000, together with interest at 7% per annum, making a total of $1,160,442.

Articles of association – calls and forfeiture

10 At this point it is appropriate to set out the relevant provisions of the Articles of Association which concern the making of calls. The relevant provisions read as follows:

17 The Directors may from time to time make such calls as they think fit upon the members in respect of all moneys unpaid on the shares held by them respectively … and each member shall pay the amount of every call so made on him … at the times … appointed by the Directors. A call … shall be deemed to have been made when the resolution of the Directors authorising such call was passed.

18. Seven days notice of any call shall be given specifying the time and place of payment and to whom such calls shall be paid …

…

23. If any member fail [sic] to pay any call or instalment on or before the day appointed for the payment … the Directors may at any time thereafter during such time as the call or instalment remains unpaid serve a notice on such member requiring him to pay the same together with any interest …

24. The notice shall name a day (not being less than fourteen days from the date of the notice) and a place or places on and at which such call or instalment and such interest and expenses …are to be paid. The notice shall also state that in the event of nonpayment at or before the time and at the place appointed the shares in respect of which the call was made … will be liable to be forfeited.” (Emphasis added)

11 Article 28 provides that notwithstanding forfeiture of a member’s shares, the member remains liable to pay to the company all calls which remain unpaid together with interest. The provisions do not refer to or delimit any grounds or reasons for which a call can be made. Nor do they specify any point of time at which calls can be made. In particular, there is no reference to any necessity for the company to demonstrate any pressing need, or indeed any need for the money sought to be realised on the call. The directors have the power to make a call at any time as they think fit.

Meetings and Notices

12 The material in evidence contained an unsigned copy of the minutes of a board meeting of the company dated 13 June 1995. Present at that meeting were Mrs Rinehart, who is described as director and chairman, Mr Schwab as director, Mr Lee as secretary, and Messrs Morhall and Paice by invitation. After considering a copy of the Hancock Group - Cash Position Summary of 7 June 1995 the minutes state:

“… it was agreed that the above cash position was unsatisfactory and that urgent steps should be taken to increase the cash reserves available to the company.”

13 It was then noted that an amount of $1,067,403.80 could be raised for the essential working capital purposes of the company by calling all unpaid sums on the issued shares. A table followed in relation to three classes of shares. Relevantly, in relation to the “D” class shares it was noted that $66,000 could be raised by call on the 220,000 which had been paid to $1.70, and that an amount of $995,000 could be raised on the 500,000 “D” class shares which had only been paid to one cent.

14 Under the heading “Resolution” the minutes record:

“It Was Resolved that ‘calls be immediately issued in accordance with Articles 17 to 22 of the Companies Articles, on all shareholders affected requiring the payment by such shareholders within seven days of the date of the notice of all unpaid amounts on all the Companies issued and not fully paid share capital and that the Secretary of the Company be authorised to do all such acts and things to effect this resolution’. (Carried)

It Was Further Resolved that ‘should any member fail to meet such payment by the due date a notice of forfeiture be issued to the member in accordance with Articles 23 to 30 of the Companies Articles and that the Secretary of the Company be authorised to do all such acts and things to effect this resolution’. (Carried)”

15 The typewritten minutes provide for signature by Mrs Rinehart and Mr Schwab. There is a statement that the meeting was closed and that the minutes were signed as a correct record. However, the minutes are unsigned and there has been no explanation as to the absence of any signed original minutes.

16 However, in his affidavit Mr Schwab said that he remembered signing a copy of the minutes. This statement is of course not accepted on the part of Mrs Porteous. I am not satisfied on the evidence that the minutes were signed.

17 The following day Notices of Call were sent. They were in substantially similar terms to the following effect:

“14 June 1995

The Executors for the

Estate of Mr L G Hancock

The Executors

NOTICE is hereby given that a call of $1.99 per share on the above issued shares of $2.00 par value now paid to $0.01 each in the capital of Hancock Prospecting Pty Ltd (“Company”) (making such shares fully paid) has been made and, accordingly, a total amount of $995.000.00 is due and payable by you before 5.00 pm on Wednesday 21 June 1995.

Cheques should be made payable to “Hancock Prospecting Pty Ltd”, crossed “Not Negotiable” and forwarded to the Company at the address shown above. Alternatively, remittances may be made direct to the Company’s bank account, the details of which are:

Bankers: Bank of New Zealand

A/C name and number: Hancock Prospecting Pty Ltd

B.S.B. Number 206-061

Account Number 723 245

The payment in full of the call will make the above shares fully paid.

Please note that in accordance with the Company’s Articles of Association, failure to pay the call by the due date will result in interest being payable on unpaid amounts at the rate of 10% per annum and could result in the forfeiture of all shares in respect of which the call has not been paid.

Yours faithfully

Gary R Schwab

Company Secretary”

18 On 20 June 1995, Mrs Rinehart wrote to Messrs Bennett and Schwab in these terms:

“Dear Sirs,

Estate of L G Hancock (Deceased)

The enclosed notices of call were received by me as the first named executor from Hancock Prospecting Pty Ltd (“HPPL”) in relation to the D class shares held by the estate in HPPL. You will note that the total amount payable is $1,061,000 and the amount is payable by 21 June 1995. I am advised that should the call not be met by 21 June 1995, HPPL will need to consider the issue of Notice of Forfeiture which will require a minimum of 14 days notice.

The call has been made by the company to raise funds for its working capital requirements. Mr Schwab and I have information in our capacity as directors of HPPL as to the detailed reasons for HPPL making the call which can be made available to Mr Bennett on a confidential basis. It is in any event evident from the company’s published accounts that the company has significant debts and commitments.

Pursuant to the terms of the will the shares were the subject of a specific legacy in my favour.

It will be necessary for the executors to meet to discuss what, if any, action is to be taken by the executors in relation to the call.

Yours faithfully,

Gina Rinehart

(dictated by Mrs Rinehart and signed in

her absence by secretary Pauline Sharpe).”

19 Discussions followed between Mrs Rinehart and Mr Schwab leading to a decision on their part not to pay the call because a dividend was unlikely to be paid and the call was for an amount of over one million dollars. Accordingly, the call was not paid. There was cross-examination to the effect that the assertions in the minutes as to the need for capital were misleading and that the claimed liquidity problems did not really exist to the extent asserted. Furthermore, attention was directed to discrepancies in word processor references and dates and to the perhaps surprising lack of recollection on the part of witnesses as to the holding of the meeting. In addition, reference is made to other anomalies and to the fact that the minutes were not signed. These matters are considered later in the reasons.

20 On 27 June 1995, a further board meeting was held. The minutes record that Mrs Rinehart was chairman and Messrs Schwab and McKenna (the secretary), were present. The minutes note that the call notices in respect of “D” class shares authorised in the board meeting of 14 [sic] June 1995 had been sent but had not been met. It was noted that in accordance with the Articles, the shares upon which the calls had not been met could be forfeited on 14 days notice. The following resolutions were then passed:

“RESOLVED to instruct the Secretary of the Company to immediately issue and serve on the holders of the D class shares a further notice (the “Further Notice”), in accordance with Articles 23 and 24 of the Articles of Association, requiring payment of the unpaid amounts within 21 days, and giving notice that if the payment is not received by that time, the shares will be forfeited.

FURTHER RESOLVED in accordance with Article 25 of the Articles of Association, to immediately forfeit all of the D class shares in respect of which a call is not met by the date set out in the Further Notice.

FURTHER RESOLVED that, in accordance with their powers under Article 26 of the Articles of Association, the directors offer all forfeited D class shares to the existing shareholders (other than the present holders of the D class shares) in proportion to the existing shares held by them. The sale price of each of the forfeited shares shall be equal to the amount unpaid on the relevant share and, on payment of the sale price, each such share shall be deemed to have been fully paid.” (Emphasis added)

21 The minutes were signed by the chairman and by Mr Schwab. It is common ground that this meeting took place. The dispute is over the effect of the meeting. That is to say whether it ratified the earlier decision, or whether the resolutions and subsequent notices operate as a fresh independent call for payment.

22 On 27 June 1995, notices were sent which were substantially in the following form:

‘NOTICE OF FORFEITURE OF “D PREFERENCE” CLASS SHARES ISSUED AT $2.00 PRESENTLY PAID TO $1.70 EACH

Unpaid Call per Share: $0.30

Due Date: 2 June 1995

Shares Liable to be Forfeited: 220,000

Total Amount Due: $66,000.00

27 June 1995

The Executors for the

Estate of L G Hancock

The Executors

NOTICE is hereby given that the abovementioned amount of $66,000.00 due and payable by 5.00 pm on Wednesday 21 June 1995 has not been received.

In accordance with the Company’s Articles of Association, the abovementioned shares will be FORFEITED unless payment is received by 18 July 1995.

Cheques should be made payable to “Hancock Prospecting Pty Ltd”, crossed “Not Negotiable” and forwarded to the company at the address shown above. Alternatively, remittances may be made direct to the Company’s bank account, the details of which are:

Bankers: Bank of New Zealand

A/C name and number: Hancock Prospecting Pty Ltd

B.S.B. Number 206-061

Account Number 723 245

Yours faithfully

[Signature]

Gary R Schwab

Company Secretary”

23 There were two notices which together made up the total amount of $1,061,000.

24 On 28 June 1995 a letter was sent by Mrs Rinehart to Messrs Bennett and Schwab which relevantly reads:

“Dear Sirs,

Estate of L G Hancock (Deceased)

The enclosed forfeiture notices of call were received by me as the first named executor from Hancock Prospecting Pty Ltd (“HPPL”) in relation to the class shares held by the estate in HPPL. You will note that the total amount payable was $1,061,000 and the amount was payable by 21 June 1995.

It will be necessary for the executors to meet to discuss what, if any, action is to be taken by the executors in relation to the forfeiture.

Yours faithfully,

[Signature]

Gina Rinehart”

25 The estate did not pay the calls before 18 July 1995, and on 21 July the directors resolved that since the notices of 14 June 1995 and 27 June 1995 had not been complied with by the due date, and because the calls remained unpaid, then the 720,000 “D” class shares in respect of which the sum of $1,061,000 was outstanding should be forfeited.

26 At a board meeting of the company on 10 August 1995, the directors resolved that 220,000 fully paid “D” class preference shares should be issued in separate portions to HMHT Investments Pty Ltd and 150 Investments Pty Ltd. Subsequently, the company received from Mrs Rinehart the payment of $66,000 in respect of those shares and accordingly the outstanding debt was reduced to $995,000. It is this amount plus interest which has not been paid to date.

27 The petitioner’s case in essence is that it is a creditor of the estate within s 244(1)(c) of the Act, and it was therefore entitled to present a petition under that subsection for administration of the estate. The petitioner submits, and this is common ground, that the petitioner is not required to establish insolvency of the estate.

28 In opposition to the petition, counsel for Mrs Porteous makes three submissions. The first is that there was no valid resolution either in June or July or at any other time to authorise the calls. The second submission is that if there was a resolution to make a call then it was invalid as an abuse of directors’ powers because the call was made for an ulterior or improper purpose and the petition was therefore an abuse of process. The third ground is that, as a matter of discretion, the Court should take into account the conduct of the directors and exercise its discretion against the petitioner.

29 On the discretion issue, the submission for Mrs Porteous is that the call on the “D” class shares were a contrivance to create the appearance of a debt which the company could use as a pretext for making an administration order. In other words, the Court should conclude that the applicant is not a true creditor. Moreover, it is said, if a pending action against the company brought by Mrs Porteous, which I will refer to as proceedings 2121 in the Supreme Court of Western Australia ultimately succeeds, it is said that there will be a significant prospect that the company will have to return to the estate an amount of over $10 million. These proceedings are designed to set aside a deed made by Mr Hancock disposing of two major assets two weeks before his death. The assets comprised entitlements to a royalty stream and control of the Hancock Family Memorial Foundation. Those proceedings are properly described as complex and they give rise to many issues of both fact and law. It is submitted that Mrs Porteous is pursuing those proceedings for the benefit of the estate. Mrs Porteous submits that the alleged debt in this matter is the result of an arrangement between the debtor and creditor both of whom are effectively controlled by Mrs Rinehart and Mr Schwab. Moreover, the call was not made with any expectation of recovering the debt. Mrs Porteous further says that (i) the estate is not insolvent; (ii) that the company directors have acknowledged that the company is unlikely to recover any payment; and (iii) that the petition proceedings are an abuse of the Court’s process.

Standing of Mrs Porteous

30 By Notice of Motion dated 11 February 1988 Mrs Porteous applied for leave pursuant to O 77 r 9 of the Federal Court Rules (“the FCR”) to be heard in the bankruptcy proceeding.

31 The basis on which leave was sought is particularised in a Notice of Intention to Oppose Petition pursuant to O 77 sub-rule 11(2) of the Rules.

32 Order 77 relevantly provides:

“9 (1) The Court may grant leave to be heard in a proceeding to person who is not a party to the proceeding.

(2) The Court may grant the leave on conditions and may revoke the leave at any time.

(3) If:

(a) the granting of leave to the person causes additional cost for a party to the proceeding; and

(b) the Court considers that the cost should be paid by the person;

the Court may order the person to pay the costs.

…

(5) The Court may grant leave or make an order under this rule:

(a) on the application of a party to the proceedings or a person having an interest in the proceeding; or

(b) on the Court’s own initiative.

…

11(1) This rule applies to a person who intends to oppose an application or petition.

(2) At least 3 days before the date fixed for the hearing of the application or petition or, with the Court’s consent, at the hearing, the person must:

(a) enter an appearance …

(b) file a notice, in accordance with Form 149, stating the grounds of opposition to the application or petition; and

(d) serve the notice and supporting affidavit on the applicant.”

33 The rule is framed in wide language. The discretion conferred to grant leave is not constrained by any specified considerations but, of course, the discretion must be exercised judicially. The basic reference requirement is that the person must have an “interest in the proceedings”, or that the Court considers that the person should be granted leave to be heard either generally or on limited issues. In this respect the discretion of the Court is cast in broader terms than provided for in O 6, r 7 and 8 of the FCR. Those rules are concerned with non-joinder and joinder of persons who are not parties but ought to have been a party or whose presence is necessary to ensure that all matters in dispute are properly adjudicated upon.

34 The submissions for the company and the estate refer to the discussion of the joinder of parties by the Full Court in News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 at 523-525. That discussion concerned the operation of O 6 of the FCR. In considering whether parties ought to have been joined, the Court said (at 525):

“The test involves matters of degree, and ultimately judgment, having regard to the practical realities of the case, and the nature and value of the rights and liabilities of the third party which might be directly affected.”

35 In the present case, Mrs Porteous claims that the predominant purpose of the petition was not for its expressed legitimate end, but was actuated by the desire on the part of Mrs Rinehart and Mr Schwab to avoid being removed as trustees and executors of the estate. Mrs Porteous claims that the petition was issued in circumstances where the creditor and Mrs Rinehart were involved in protracted and bitter litigation with her in relation to the affairs of Mr Hancock. It is evident that there is a complex network of inter-related and hard fought litigation in place between the parties of which the bankruptcy petition is but one proceeding. There is a recent decision of White J of the Supreme Court of Western Australia in Estate of Hancock (Dec); Porteous v Rinehart (as Executor and Trustee of the Estate of Hancock) (unreported, 31 August 1998) in which his Honour found that there was a conflict of interest in the positions of Mrs Rinehart and Mr Schwab, but that this was not sufficient to warrant their removal as trustees or executors of the estate. That decision is presently under appeal. His Honour there held that Mrs Porteous had standing as a potential beneficiary under the will of Hancock. That interest was in the nature of her entitlement as legatee under the will.

36 Another relevant factor in the present case is the submission that unless Mrs Porteous is permitted to make submissions in relation to the petition there will be no proper contradictor to the making of a sequestration order: there are said to be circumstances which, on the evidence placed before me, raise at least a suspicion as to the irregularity of the making of the call. Ultimately, however, I find that these submissions are not sufficiently cogent to warrant dismissal of the petition.

37 In opposition to the application for leave to be heard, the company points out that the remedy sought will result in the appointment of an independent third party in a case where it is clear there are bitter hostilities and divisions and that the rights of Mrs Porteous will not be adversely affected.

38 Weighing these competing considerations and having heard the evidence and submissions, I am persuaded in the exercise of the discretion conferred by O 77 r 9 that leave should be granted to Mrs Porteous to appear and be heard. I am satisfied having regard to the practical realities of the case and the nature and value of the rights and liabilities claimed by Mrs Porteous, that although her rights may not be directly affected, by looking at the matter in the broader context she does have a sufficient interest to justify the grant of leave to be heard. I will reserve the questions of costs for further submissions.

39 I now turn to consider the first issue raised on behalf of Mrs Porteous.

Directors Meeting 13 June 1995 – was it held?

40 The submission is that notwithstanding the documentation, no board meeting was ever held on 13 June 1995. In support of this submission the applicant relies on a number of unusual aspects of the facts leading up to the meeting and on the circumstances in which the meeting was held. It is then submitted that because there was no meeting, there was no resolution to make a valid call.

41 Many matters were raised in cross-examination, but for present purposes it is only necessary to deal with the principal matters raised. The first unusual feature is that the witnesses for the company, Messrs Schwab and Morhall, who are recorded in the minutes as having been present at the meeting, have no independent recollection of the meeting apart from the minutes. They relied on and paraphrased the minutes in their evidence. The meeting was evidently an important one with some striking features which make it memorable. The evidence of Messrs Schwab and Morhall was premised on the circumstance that the company at that time was in dire need of cash having regard to the large financial commitments which were anticipated at that time. A second important consideration is that at the time the call was made on the estate, neither of them believed that the estate would be able to pay during the call period specified in the notice. A third matter is that Mrs Rinehart, who was apparently in Sydney at the time of the hearing, despite her obvious interest on the matter did not give evidence. This is said to strengthen the inference, otherwise said to be available on the material, that no meeting was held: see Jones v Dunkel (1959) 101 CLR 298 at 308. A fourth matter relied on is that the minutes in evidence are unsigned and that this is not in accordance with the general pattern disclosed by other minutes in evidence over a period including June and July 1995. It is said that the inference should be drawn that the general practice of the directors was that the minutes were always signed where a meeting was held, and that the apparent failure to verify the minutes was a matter which reinforces suspicion that there was no meeting. Furthermore, there are said to be apparent anomalies as to dates in earlier and later documents, and an incorrect reference to the date of this meeting in the minutes of the later board meeting on 27 June which refers to a meeting on 14 June.

42 The allegation that there was no meeting held on 13 June, involving as it does in substance an allegation of fraudulent fabrication of records and a deliberate intention to deceive, is a serious one requiring a correspondingly higher level of satisfaction: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 368-9. Whilst it is true that the circumstances are unusual, the evidence does not satisfy me to the required standard that no meeting was ever held. This is particularly so in view of the fact that at the 27 June meeting, which was undoubtedly duly called and held, specific reference was made to an earlier meeting on 14 June 1995 when the initial resolution was passed. I have reached the conclusion that the mistaken reference to the meeting of 14 June was based on the date of the call letter, being 14 June which call was authorised by the 13 June meeting. In addition, the inferences sought to be derived from various notes on word processing documents, in my view, are only equivocal and speculative and provide no support of any substance for a conclusion that there was no meeting. Another consideration which influences me is the improbability that parties who intended a carefully calculated course of deception would be likely to make such obvious errors and allow such discrepancies as occurred in the present case. The nature and extent of such discrepancies weighs heavily against the conclusion urged by Mrs Porteous. There is no suggestion that the directors whose conduct is under attack, are other than experienced and commercially astute, and therefore such a course is improbable.

43 For these reasons I am satisfied that the meeting of 13 June 1995 was held and that the minutes accurately record what took place. I am also satisfied that a resolution making a valid call on the shares was duly passed at that meeting.

Meeting of 27 June

44 Mrs Porteous does not accept that the resolutions of 27 June were independently capable of giving rise to a call. In view of the conclusion which I have reached, namely that the resolution of 13 June was a valid resolution, it is not necessary to deal with this question. However, I think it is appropriate that I indicate my view in relation to the operation of the resolutions of 27 June 1995.

45 There is no dispute that this meeting was regularly convened and held as evidenced by the minutes. The first question raised is whether there was any ratification of the earlier resolution if it is held to be invalid as an abuse of the directors’ power to make a call on the shares. It is submitted that there was no valid ratification because there was no valid act to ratify. It is also submitted that the resolutions of 27 June were infected with the conduct said to have taken place in relation to the earlier meeting, and were invalid as a continuation of the earlier deliberate course of fabrication.

46 The reasoning advanced is that if there was no valid call made on 13 June, then it could not have be ratified by the meeting of 27 June. It is pointed out that there is no express statement of any intent to ratify or acknowledge the earlier resolution referred to in the Notices of Call sent on 14 June. The “notices” of 14 June it is said were simply pieces of paper with no legal effect. The question as to ratification turns on the proper construction and effect of the resolutions passed on 27 June.

47 The course of that meeting was as follows. After noting that calls on the “D” class shares had been made and that the outstanding balance had not been paid, the board resolved to issue and serve further notices requiring payment within 21 days, thereby notifying the recipient that if payment was not received within 21 days, namely by 18 July, the shares would be forfeited. There was considerable discussion in submissions in this case as to the proper characterisation of the resolution. Mrs Porteous claims that it could not operate as a call because it was only a notice to meet an invalid earlier “call” which could not confer any legal effect to the earlier resolution. The company contends that even if there was no earlier valid call, nevertheless the resolution of 27 June requiring payment was an independent call untainted or unaffected by any earlier irregularities.

48 In my view, on its proper construction, the resolution of 27 June did not amount to a ratification of the earlier resolution. There was no suggestion at that meeting that the earlier resolution was invalid or inoperative. Therefore it is, to say the least, unlikely that the directors intended to ratify the earlier resolution. Furthermore, in my opinion, even if there was no valid resolution passed at the meeting of 13 June, the resolution of 27 June amounted to a fresh decision to demand payment of the moneys unpaid on the “D” class shares within the specified time frame of 21 days. Notice of such demand for moneys unpaid on the shares was a call on the shares. In substance a call is simply a demand to pay moneys which remain unpaid on issued shares. The call is made by the notice of 27 June calling or requiring payment. Although Articles 17 and 18 of the company’s Articles are not perfectly clear, my view is that a call is made when a resolution is passed but notice of that call must be given and the demand must be not met before it can give rise to a right of forfeiture. The resolution in this case was to make a demand. The demand was for the moneys unpaid on shares to be paid within the specified time. These notices sent pursuant to the resolutions of 27 June, in my view, satisfy the requirements of the Articles as to the making of a call. The calls were not met within the specified period and have never been paid.

49 It was submitted for Mrs Porteous that Article 23, which is referred to in the resolutions of 27 June 1995, does not authorise a call but only a demand and notice of forfeiture. Accordingly, so it is suggested, the resolutions could not take effect as a call on the unpaid capital.

50 I do not accept this submission. The demand for payment pursuant to the resolution of 27 June was a demand for payment of the amount of uncalled capital and it gave rise to a debt. The fact that it may arguably not be effective to give rise to an entitlement to forfeit the shares cannot affect the existence or non-existence of the debt which arises from the demand. This is because even if the shares were not lawfully forfeited, there is a debt. If they were lawfully forfeited, the forfeiture cannot extinguish or diminish the debt: see Article 28. The critical point is whether the resolution gave rise to a valid call and therefore a debt to the company. I find that it did.

51 I therefore conclude that the resolution of 27 June operated independently as a call on the unpaid capital so as to create a debt which has not been paid.

Bad faith and abuse of process

52 The next attack on the validity of the call is that, even if the resolution of 13 June was validly passed or, alternatively, if the resolution of 27 June was a lawful independent call, both resolutions were tainted by bad faith such that it would be an abuse of process to permit the petition to proceed having regard to the conduct of those in control of the company in breach of their duties to the company.

53 The submission that there is an abuse of power or a fraud on the power, is made on the ground that the reasons stated to the call were false and were part of a concerted course of conduct directed to the improper and ulterior purpose of creating a fictional debt which the directors knew could not be met.

54 In furtherance of this submission, counsel for Mrs Porteous referred to the decision in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285. In that case the High Court held that an allotment of shares by a governing director to his sons, that was made in order to manipulate control of a company and to ensure that his former wife would not gain control, was initiated by an impermissible purpose. Specifically, the Court considered that the allotment of shares was made for the purpose of defeating the exercise of power by existing shareholders by creating a new majority. Their Honours concluded that the only substantial purpose of the allotment was to manipulate voting power. Mason, Deane and Dawson JJ (at 289), adverted to the fiduciary duty of directors to act “bona fide in the interests of the company as a whole” or “for some corporate purpose” and not to act sectionally or partially by favouring one section of shareholders over another. After referring to the decision of the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, their Honours said (at 290):

“It is simply no part of the function of the directors as such to favour one shareholder or group of shareholders by exercising a fiduciary power to allot shares for the purpose of diluting the voting power attaching to the issued shares held by some other shareholder or group of shareholders.”

55 When considering allegations of bad faith and ulterior purpose it is necessary to keep firmly in mind the important distinction between “motive”, or the subjective reasons for the decision, and the “purpose” of the resolution. It is the “purpose” sought to be achieved by the resolution, and not simply the motives for the resolution, which is the important consideration. The existence of a reprehensible motive is not enough: see King v Henderson [1898] AC 720 at 731; Williams v Spautz (1992) 174 CLR 509 at 525. While there are a number of anomalies in matters which might engender suspicion as to the motives of the directors in relation to the 13 June resolution, I am not satisfied that either the motive or purpose of the directors in passing any of the resolutions of 13 and 27 June has been shown to have been made for an ulterior purpose such that they would be invalidated. More specifically, the calls were not discriminatory in nature. They were made on all the shareholders of issued shares. There is no partiality shown in that respect. The calls did not diminish any entitlements of the shareholders or impose any differential liabilities. The company was not in any way disadvantaged by the calls. The effect both legally and practically was simply to demand payment of moneys outstanding on the shares and to exercise the company’s entitlement to claim its rights as provided for under the Articles. The resolutions were designed to realise assets in the form of capital from the shareholders. This is a proper purpose. The resolutions were not to the detriment of the company or its even-handed administration by the directors in any way.

56 The fact that the directors may have entertained a belief that the shareholders on whom the call was made might not be able to pay or might not be willing to pay, is not to the point. Such a circumstance in the present case does not provide a basis on which to seek to invalidate a resolution. As the High Court pointed out in Spautz at 526-527:

“The ultimate purpose of bringing about disqualification is not within the scope of the criminal process instituted by the prosecutor. But the immediate purpose of the prosecutor is within that scope. And the existence of the ultimate purpose cannot constitute an abuse of process when that purpose is to bring about a result for which the law provides in the event that the proceedings terminate in the prosecutor’s favour.

It is otherwise when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as means of obtaining some advantage for which they are not designed … or some collateral advantage beyond what the law offers…” (Emphasis added)

57 In this case the company had the right to call up the moneys as the directors thought fit and the raising of funds is prima facie an act which is for the benefit of the company. The legal consequence of the resolution was to create a debt. The purpose and effect of the bankruptcy proceeding is to appoint an independent and qualified person to administer the estate.

58 In all the circumstances I am not persuaded that any of the matters raised on behalf of Mrs Porteous, either taken alone or considered cumulatively, operated to invalidate either of the resolutions or any subsequent actions of the company relating to the call. In particular, I am not satisfied that any of the demands were made for any invalidating purpose or were an abuse of power. Nor do I consider that the enforcement of the debts created by these demands is an abuse of process.

Discretion

59 Counsel for Mrs Porteous submits that even if the Court finds that the calls were valid, nevertheless, it should not exercise its discretion to make an order for administration in bankruptcy against the estate. There is no contest between the parties as to the existence of a broad discretion in the Court to make the order or dismiss the petition. This is evident from s 244(11) and (12) of the Act. There are three specific matters which are required to be proven and upon such proof the Court has power to make the orders. It is not necessary to prove either insolvency or any other specific conduct, but the Court is not precluded from considering the solvency of the estate in an appropriate case. Indeed, it will often be a most important matter to take into account in an appropriate case.

60 Mrs Porteous raises the following matters as discretionary factors which justify dismissal of the petition. These are said to be:

· the conduct of the directors of the company regarding the resolutions;

· that the estate is engaged in litigation of claims which, so it is contended, if successful, would make the estate solvent. Therefore, the Court should proceed on the prospect of solvency and refuse to make the orders. The Court is asked to look at the substantial merits of these claims and form a view that they amount to significant contingent assets which indicate a state of solvency; and

· because the payment was not treated as a debt until late in 1997 in the records of the company, the company has elected not to treat it as a debt and should not be allowed to “approbate” and “reprobate”.

61 In relation to the first matter, for the reasons given above, I am not satisfied that the unusual circumstances and inconsistencies which surrounded the passing of the resolution of 13 June ought to be given any great weight. Therefore, although I have taken them into account, I am not convinced that they significantly advance the case advanced for Mrs Porteous on the question of discretion.

62 As to the issue of solvency, the fact is that no reliable approximate estimate can presently be made as to the outcome of the complex network of litigation which is currently on foot in relation to the estate, involving the parties to this proceeding, which is relied on to support a submission that the estate is potentially solvent or is likely to become solvent. On the evidence before me and having regard to the stage of those proceedings, any conclusion as to the likely or prospective outcome is pure speculation. The litigation is complex in the extreme and there is little doubt that every appellate avenue will be explored with further consequential uncertainty and flux. No result is likely for an indeterminate time. I note that White J in Porteous v Rinehart (supra) was invited to form a view as to the prospects of success in the main action. His Honour declined to embark on that exercise and so do I. Again, I cannot assign any significant weight to this consideration and I do not accept that the estate is solvent.

63 As to the suggestion of election or waiver, I am not persuaded that the company has evinced any intention to abandon its rights to payment of the unpaid calls or has made any choice between inconsistent courses of conduct in pursuing the petition: see The Commonwealth v Verwayen (1990) 170 CLR 394 at 407-9 and cases there cited. Nothing in the material suggests that the company has elected to do anything other than insist on payment of the debt arising from the unpaid calls. This is obvious from the conduct and pursuit of the hearing before me.

64 Against the discretionary considerations advanced for Mrs Porteous, counsel for the company and the estate point out that because of the continuous history of division and apparent lack of compatibility between the parties it is appropriate and desirable to appoint a neutral independent party as trustee who can take such action as is considered necessary without interference and ensure the effective and impartial administration of the estate. There is considerable force in this submission, and in the submission that the administration of the estate has, on the evidence, languished under those presently in control. Given these considerations I am led to the conclusion that it is in the best interest of the proper administration of this estate that an independent trustee should be appointed to gather in the assets and pay the debts of the estate who will be unfettered by the hostility and division which for whatever reason has surrounded the administration of this estate in the past.

65 There is no suggestion that the trustee who has consented to act would proceed otherwise than in an independent and even-handed manner.

Conclusion

66 Having regard to the above matters I am satisfied that I should proceed to exercise my discretion in favour of making an order under s 244 of the Act.

67 I make no order at this stage but I direct the parties to bring in Short Minutes within ten (10) days. I will stand the matter over for a period of fourteen (14) days when I will hear the parties as to any arguments they wish to advance as to the terms of the Short Minutes including arguments on costs.

I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.

Associate:

Dated: 25 March 1999

Counsel for the Applicant:	T E F Hughes QC A Sullivan

Solicitors for the Applicant:	Corrs Chambers Westgarth

Counsel for the Respondent:	S G Finch SC S J Archer

Solicitors for the Respondent:	P W Turk & Associates

Counsel for Mrs Porteous:	J Burnside QC G Chettle

Solicitors for Mrs Porteous:	Slater & Gordon

Date of Hearing:	16 and 17 December 1998

Date of Judgment:	25 March 1999

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