FEDERAL COURT OF AUSTRALIA

Young v Sal Mar Enterprises Lot Pty Ltd, in the matter of Sal Mar Enterprises Lot Pty Ltd [2005] FCA 1853

CORPORATIONS – application for rectification of the share register – whether agreement to issue shares – whether subscription price paid – application to invalidate shareholders resolution – power to declare resolution invalid

Corporations Act 2001 (Cth), ss 175, 1322(2)

Federal Court Act 1976 (Cth), ss 21 and 22

Australian Hydrocarbons NL v Green (1985) 10 ACLR 72 referred to

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 referred to

Poliwka v Heven Holdings Pty Ltd (1992) 6 WAR 505 referred to

Re PW Saddington & Sons Pty Ltd (1990) 19 NSWLR 674 referred to

Re Waldcourt Investment Co Pty Ltd [1988] WAR 1 referred to

Talbot v NRMA Holdings Limited (1996) 68 FCR 590 referred to

IN THE MATTER OF SAL MAR ENTERPRISES LOT PTY LTD

(ACN 109 292 266)

VID 1152 OF 2005

YOUNG J

16 DECEMBER 2005

MELBOURNE

IN THE MATTER OF SAL MAR ENTERPRISES LOT PTY LTD (ACN 109 292 266)

THE COURT ORDERS THAT:

1.       Pursuant to s 175 of the Corporations Act 2001 (Cth), the share register of Sal Mar Enterprises Lot Pty Ltd (ACN 109 292 266) (“Sal Mar”) be rectified so as to record that:

(a)           25,000 ordinary shares of $1.00 each in the capital of Sal Mar were issued and allotted to John Anthony Young on 1 April 2005; and

(b)          since 1 April 2005, John Anthony Young has held 25,000 ordinary shares of $1.00 each in the capital of Sal Mar.

2.       The defendant pay the plaintiff’s costs of the proceedings on an indemnity basis.

THE COURT DECLARES THAT:

3.       The resolution purportedly passed by a shareholders meeting of Sal Mar on 16 September 2005 that purportedly removed John Anthony Young as a director of the company is invalid.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF SAL MAR ENTERPRISES LOT PTY LTD (ACN 109 292 266)

REASONS FOR JUDGMENT

1                     In this case, the plaintiff, John Anthony Young (“Young”) applies for an order pursuant to s 175 of the Corporations Act 2001 (Cth) requiring the defendant, Sal Mar Enterprises Lot Pty Ltd (“Sal Mar”), to correct its share register so as to record the issue and allotment of 25,000 ordinary shares of $1.00 each to the plaintiff.  In addition, the plaintiff seeks an ancillary order declaring invalid a shareholder’s resolution that was purportedly passed on 16 September 2005 removing the plaintiff as a director of Sal Mar.

unopposed final hearing

2                     Sal Mar entered an appearance and defended the application in the early stages, but did not appear at the final hearing of the application.  On 13 December 2005, the solicitors on the record for Sal Mar, Messrs O’Halloran Davis, wrote to the District Registrar of the Federal Court in Melbourne and confirmed that they had no instructions to appear for the defendant on the hearing of the application. 

3                     When the matter came for hearing, Sal Mar was called.  There was no appearance. 

4                     Section 175 envisages a summary procedure.  The Court has a discretion to decline to exercise that jurisdiction and to require the applicant to bring an action by application and statement of claim.  However, the Court will ordinarily proceed under the legislation if the case is not complicated: see HAJ Ford, RP Austin and IM Ramsay, Ford’s Principles of Corporations Law, at 21.061.  In this case, it was appropriate in my view to proceed under the legislation.

the evidence

5                     The plaintiff relied upon the following affidavit evidence: an affidavit sworn by Simon Parsons dated 19 October 2005; an affidavit sworn by Tanya Dawson on 20 October 2005; and an affidavit sworn by John Anthony Young, the plaintiff, on 20 October 2005.  Young also gave oral evidence, which corrected his affidavit in some respects and in other respects elaborated on his affidavit evidence.  The plaintiff also called oral evidence from Bernard Davis, a solicitor who had from time to time acted for Sal Mar on the instructions of Ms Sally Martin (“Martin”).  Prior to Young’s involvement in Sal Mar, Martin was the sole director and shareholder of the company.

6                     Sal Mar carries on a security and crowd control business under the business name “Abacus Security Service”.  Young commenced working in this business in about 2002 as a senior guard.  He was involved in all aspects of the security business, including crowd control, mobile patrols, loss prevention and armed escorts. 

7                     In about February 2005, he was approached by Tanya Dawson, another employee of Sal Mar, who told him that Martin wanted Young to buy into Sal Mar.  Young told Dawson that if Martin wanted him to buy half of the company she should talk to him directly about it.  Dawson conveyed this to Martin.

8                     Martin telephoned Young shortly thereafter and asked him to meet her to discuss the possible purchase of a 50% interest in Sal Mar.  A meeting was arranged between Martin and Young for the second or third Wednesday in February 2005 at the Moe Turfside Racing Club.  At this meeting, Martin and Young had a conversation in words to the following effect:

“Martin:         I would like you to buy into Sal Mar and become a director of the company.  For $25,000 I will sell you 50% of the shares in the company.

Young:             That sounds okay, though you are aware that I drive a taxi for 6 different owners a couple of days a week and work as the head of security for the Churchill Saloon Bar on Thursday, Friday and Saturday nights.  I wouldn’t want to give all of that up.

Martin:            Well you would need to free up some time for Sal Mar.

Young:             I don’t mind dropping all the taxi owners but one, I would then not be able to work for Abacus on Wednesdays, and possibly one other day during the week.  That would leave me with about 5 days for Abacus.

Martin:            That sounds good, we have a deal.”

Martin and Young then shook hands and left the racing club.

9                     The records of the Australian Securities and Investment Commission (“ASIC”) disclose that Young was appointed as a director of Sal Mar on 21 February 2005. 

10                  On or about 3 March 2005, Martin and Young attended at the offices of Bernard Davis, solicitor.  Davis gave evidence that he performed legal work for Martin and Sal Mar on a fairly regular basis at that time.  At the meeting, Martin and Young explained to Davis that Young was acquiring a 50% interest in Sal Mar for the sum of $25,000. Martin instructed Davis to prepare the necessary documents to effect the issue and allotment of a 50% shareholding in Sal Mar to Young.  Davis advised that the relevant documentation should comprise the following: first, an application for shares signed by Young; secondly, minutes of a meeting of directors of Sal Mar at which resolutions would be passed to the effect that 24,998 ordinary shares would be allotted to Martin bringing her shareholding to 25,000 shares of $1.00 each, and an equivalent number of shares (25,000 of $1.00 each) would be issued and allotted to Young in consideration of the payment of $25,000; and thirdly, a share certificate recording the issue and allotment of the 25,000 ordinary shares to Young.  Davis also advised Martin and Young that they would have to attend at the offices of ASIC to lodge the necessary forms to record the foregoing share allotments.

11                  A second meeting between Young, Martin and Davis took place on or about 7 March 2005.  At this meeting, Davis took Young and Martin through the three documents he had prepared and explained what they needed to do.  He also advised Martin that she would need to lodge the necessary returns with ASIC. 

12                  Davis gave evidence that at some stage after this meeting he was informed that Young had paid the subscription price of $25,000.  Davis had no precise recollection of this conversation, but he believes that this information was provided to him by Martin in the course of one of his regular contacts with her.

13                  On or about 14 March 2005, Young attended a meeting of the staff of Abacus called by Martin at which Martin asked the staff to welcome Young on board as a director and 50% shareholder of Sal Mar. 

14                  Young gave evidence that he purchased a bank cheque in the sum of $25,000 on 1 April 2005.  The bank cheque designated Martin as the payee of the cheque.  It was deposited in Martin’s account with the National Australia Bank on 1 April 2005.  The receipt for the purchase of the bank cheque by Young and the deposit slip for the payment of the cheque into Martin’s bank account at the National Australia Bank were tendered in evidence. 

15                  Young attended several directors’ meetings of Sal Mar between 21 February 2005 and about August 2005.  On 12 September 2005, Martin delivered a letter to him.  The letter made various complaints about Young’s conduct and went on to state that Martin, purportedly as the sole shareholder and main director of Sal Mar, had decided that as of 12 September 2005, Young had been voted out as a director, effective immediately. 

16                  Young went to see a solicitor, Simon Parsons, about the action which Martin had taken.  After examining the ASIC historical company extract for Sal Mar, Parsons told Young that ASIC had never been informed of the change to Sal Mar’s shareholding by which Young had become a 50% shareholder. 

17                  On behalf of Young, Parsons wrote to Sal Mar’s solicitors, O’Halloran Davis, on 3 October 2005.  The letter stated that Young had purchased 50% of the business earlier in the year through the offices of Bernard Davis, but that the transaction had not been reported to ASIC and the company records are incomplete.  The letter also requested copies of the minutes of the meeting referred to in Martin’s letter of 12 September 2005 at which Young was purportedly voted out as a director. 

18                  By a further letter dated 6 October 2005 to O’Halloran Davis, Parsons requested a copy of the share register for Sal Mar. 

19                  O’Halloran Davis responded by a letter dated 12 October 2005.  On behalf of Sal Mar, the letter denied the contention that Young had purchased a 50% interest in the company or its business.  The letter attached a copy of a register of members showing that there were only two issued shares both of which were held by Martin.  It also attached a document recording a resolution by Martin, purportedly as the sole shareholder of Sal Mar, removing Young as a director and office holder of Sal Mar.  The document stated that the resolution was passed on 16 September 2005, and it was signed by Martin.  This post dates Martin’s letter of 12 September which asserted that Young had been voted out as a director on 12 September 2005.

20                  On 17 October 2005, Parsons sent a further letter to O’Halloran Davis demanding that the share register of Sal Mar be rectified to record Young’s purchase of 25,000 shares in Sal Mar for a consideration of $25,000.  The letter advised that if Sal Mar and Martin did not comply with the demand, the present proceedings would be issued for rectification of the register.  The letter also contended that the resolution purportedly removing Young as a director and office holder of Sal Mar was ineffectual. 

Findings

21                  Based on the forgoing evidence, I make the following findings.  Sal Mar entered into a binding agreement with Young to issue 25,000 ordinary shares of $1.00 each in the capital of Sal Mar to Young in consideration for the payment of $25,000 to Sal Mar.  Young has paid Sal Mar the subscription price of $25,000.  He made the payment to Sal Mar by depositing a bank cheque for $25,000 into Martin’s account with the National Australia Bank.  Martin received the said payment of $25,000 on behalf of Sal Mar and in her capacity as a director of Sal Mar.

22                  In the circumstances, Young is entitled to an order pursuant to s 175 of the Corporations Act rectifying the share register of Sal Mar so as to record that:

(a)                25,000 ordinary shares of $1.00 each were issued and allotted to Young on 1 April 2005; and

(b)               since 1 April 2005, Young has held 25,000 ordinary shares of $1.00 each in the capital of Sal Mar.

23                  Section 175(3) provides that if the Court orders a company to correct its register of members and the company has lodged a list of its members with ASIC, the company must lodge a notice of the correction with ASIC.  It follows that Sal Mar is obliged to lodge a notice with ASIC recording that 25,000 ordinary shares of $1.00 each in the capital of Sal Mar were issued and allotted to Young on 1 April 2005, and that Young has held those shares since 1 April 2005.

24                  The evidence I have recounted indicates that the proposed allotment of a further 24,998 ordinary shares to Martin has not been registered.  If that allotment in fact proceeded, Sal Mar will be able to take steps to ensure that this allotment is also registered and reported to ASIC, with the consequence that Martin and Young would each be the registered holder of 25,000 ordinary shares.

25                  Young also seeks a declaration that the resolution purportedly passed by Martin on 16 September 2005, allegedly in her capacity as sole shareholder of Sal Mar, is invalid.  In my opinion, it is appropriate to make a declaration to this effect.

26                  The purported resolution of 16 September 2005 is irregular in various respects.  First, the effect of the findings and rectification order I have made is that Martin was not the sole shareholder of Sal Mar as at the date of the purported resolution.  Secondly, Martin knew that Young was entitled to be recorded as the holder of 25,000 ordinary shares in Sal Mar pursuant to the share allotment agreement.  That agreement had been fully performed on Young’s part by the payment of the subscription price of $25,000.  Thirdly, Young received no notice of the purported meeting of shareholders or the purported resolution to remove him as a director.  As Young was entitled to be registered as a shareholder on and from 1 April 2005, he was entitled to attend and vote at any meeting of shareholders.  If Sal Mar had complied with its legal obligations, Young would have received notice of the meeting and the proposed resolution and would have been entitled to attend the meeting.  In particular, Young would have been entitled to notice of the meeting and the proposed resolution in accordance with ss 249H, 249J, 249L and 249O of the Corporations Act. 

27                  I am satisfied that I have the power to declare the resolution invalid and that it is appropriate to do so.  The power arises from ss 21 and 22 of the Federal Court Act 1976 (Cth) and/or s 1322(2) of the Corporations Act.  Section 1322(2) provides that:

“A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid.”

28                  It is clear that a proceeding for the purposes of s 1322 includes a meeting and resolution of the kind here in question: see Talbot v NRMA Holdings Limited (1996) 68 FCR 590; and Australian Hydrocarbons NL v Green (1985) 10 ACLR 72 at 81.  The Court’s power to declare a meeting and resolution invalid has been recognised in various cases, including Re Waldcourt Investments Co Pty Ltd [1988] WAR 1, Re PW Saddington & Sons Pty Ltd (1990) 19 NSWLR 674 and Poliwka v Heven Holdings Pty Ltd (1992) 6 WAR 505.  The last mentioned case specifically involved a failure to give notice to a member.

29                  The resolution purportedly passed by Martin on 16 September 2005 was passed in disregard of the company’s legal obligations under the share allotment agreement with Young.  Martin was not the sole shareholder of the company at that point of time.  Unless it is set aside, the purported resolution will inflict substantial injustice on Young.  No such resolution could have been passed without Young’s concurrence if his 50% shareholding had been recorded in the register of the company. 

Orders

30                  Accordingly, I propose to make the following orders:

(1)          Order pursuant to s 175 of the Corporations Act 2001 (Cth), that the share register of Sal Mar be rectified so as to record that:

(c)           25,000 ordinary shares of $1.00 each in the capital of Sal Mar Enterprises were issued and allotted to John Anthony Young on 1 April 2005; and

(d)          since 1 April 2005, John Anthony Young has held 25,000 ordinary shares of $1.00 each in the capital of Sal Mar.

(2)          Declare that the resolution purportedly passed by a shareholders meeting of Sal Mar on 16 September 2005 that purportedly removed John Anthony Young as a director of the company is invalid.

Costs

31                  Prior to the commencement of this proceeding, Martin and Sal Mar were given the opportunity of rectifying the register.  They did not do so.  Instead, they denied Young’s claim that he was entitled to be registered as a 50% shareholder of Sal Mar.

32                  When these proceedings were instituted by Young, Sal Mar defended the proceedings.  Sal Mar took various steps in defence of the proceedings, including the filing of an affidavit of documents. 

33                  Ultimately, Sal Mar did not appear on the final hearing of the application.  Its solicitors, who remain on the record, advised the Court that they had no instructions to appear for the company at the final hearing. 

34                  In my opinion, Sal Mar resisted the proceedings in circumstances where it ought to have known that there was no defence to the claim.  It must be presumed that it did so in wilful disregard of the known facts and its clear obligation to complete and record the allotment of 25,000 ordinary shares to Young: see Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401.

35                  In my opinion it is appropriate to exercise my discretion as to costs by making an order that the defendant pay the plaintiff’s costs of the proceedings on an indemnity basis.

Associate:

Dated:              16 December 2005