Above board: The importance of following meeting procedure

In this case, her Honour Justice Hill ordered that the proceedings to be stayed on the basis that Anglo Australian Resources N.L.’s (Anglo Australian Resources) solicitors had not been properly authorised to commence legal proceedings on its behalf given that:

• one of Anglo Australian Resources’ directors (Mr Stern) had not been given notice of any directors’ meeting; and
• two directors of Anglo Australian Resources (Mr Jones and Mr Smith) had a material personal interest in the commencement of proceedings and could not¹ participate in any meeting that considered a resolution concerning the proceedings.

Application for the removal of the stay

Anglo Australian Resources later applied to lift the stay of proceedings. It made that application on the basis that a further directors’ meeting had been held at which its directors had resolved to appoint two directors (Mr Barclay and Mr Hardisty) and that Mr Barclay and Mr Hardisty (with a Mr Varcoe abstaining) had resolved to authorise the commencement of the proceedings.

The application to lift the stay was opposed by some of the defendants who asserted that (amongst other basis):

• the resolution to appoint Mr Barclay and Mr Hardisty was invalid as Mr Jones and Mr Smith had a material personal interest in the resolution to authorise the commencement of the proceedings; and
• there had been no valid or effective ratification of the proceedings.

Further meeting to ratify proceedings

At the further directors’ meeting each of the directors of Anglo Australian Resources were present, being Mr Jones, Mr Varcoe, Mr Smith and Mr Stern.

Mr Jones moved a resolution that Mr Barclay and Mr Hardisty be appointed directors of Anglo Australian Resources. Mr Smith and Mr Jones voted in favour of the resolution, Mr Varcoe abstained, and Mr Stern voted against the resolution. On this basis Mr Jones declared the resolution passed.

Mr Barclay and Mr Hardisty were then invited to join the meeting. The next resolution considered was in relation to the ratification of the legal proceedings and appointment of Anglo Australian Resources’ solicitors. Each of Mr Jones, Mr Smith and Mr Stern declared a material personal interest in the resolution and left the meeting.

Then, the chairman of the meeting at that time, Mr Barclay, stated that the purpose of the second resolution or action was to protect shareholders’ interests seeking an injunction to protect them from a change of control in the company through a change in directorship of the company. There was no other discussion in respect of the resolution. Mr Barclay and Mr Hardisty voted in favour of the resolution; Mr Varcoe abstained. On this basis the resolution was declared to have passed.

Validity of appointment of new directors

The defendants asserted that the appointments of Mr Barclay and Mr Hardisty were invalid as Mr Jones and Mr Smith had a material personal interest in the resolution to appointment them as directors. They further claimed that the resolution was passed with the ‘interconnected purpose of ratifying an earlier decision to commence proceedings to prevent their removal as directors’.

Anglo Australian Resources denied that the directors had any such material personal interest in the appointment of the new directors and said further that:

• decisions may need to be made in respect of a general meeting that was shortly to be held and that prior to the appointment of the new directors there was only one director of Anglo Australian Resources who did not have a material personal interest in considering any matter associated with the general meeting; and
• that with the appointment of Mr Barclay and Mr Hardisty, there was now a quorum of directors to deal with any such matters.

In considering this issue, her Honour referred to the decision of Claremont Petroleum NL v Cummings² (Claremont Petroleum) in which Wilcox J considered the limits of a case referred to by Lawrence J in Re North Eastern Insurance Co Ltd³ (Re North Eastern).

In Re North Eastern, the court held that the resolutions passed at a meeting of directors were not valid as they were part of one transaction in which two of the four directors present at the meeting were jointly interested. Because of that interest, it was held that there was no valid quorum at the directors meeting and the resolutions were invalid.

In considering Claremont Petroleum, Wilcox J in Re North Eastern found Lawrence J’s view as to the type of resolution that would result in a quorum to be infected with interest to be sound. The view expressed by Lawrence J in that regard was that:

• a quorum resolution will be infected by interest where the resolution was passed for the sole purpose of procuring a substantive resolution in which a director had a financial interest; and
• where a quorum resolution was one of general application, it was not rendered invalid by the mere circumstance that it would facilitate the adoption of a resolution in which a director might be financially interested.

Wilcox J said further that while it is important to uphold the principle that what cannot be done directly cannot be done indirectly, it is undesirable to apply that principle so as to invalidate resolutions in which no director has a financial interest.

In this case, Hill J found that:

• The resolution for the appointment of Mr Barclay and Mr Hardisty was one of general application. That is, they were not to be appointed for the sole purpose of considering the second resolution.
• On that basis, she did not consider the resolution considering their appointment to be linked to the second resolution to be considered at the meeting or that Mr Jones and Mr Smith had a material personal interest in the resolutions.

She did not consider that the resolution for the appointment of Mr Barclay and Mr Hardisty was rendered invalid because it would facilitate the adoption of a resolution in which Mr Jones and Mr Smith had a material personal interest. 

Decision to ratify the commencement of proceedings and appointment of solicitors

The defendants contended that the resolution of the board of directors to ratify the commencement of proceedings and appointment of solicitors was ineffective as there was no decision to be ratified as the first directors’ meeting was inquorate.

Anglo Australian Resources argued that the question as to whether the directors could ratify the previous conduct depended on the act sought to be ratified. Anglo Australian Resources drew a distinction between the ratification of a previous resolution of directors at an inquorate meeting and the ratification of a decision to commence proceedings.

Hill J found this distinction to be important, noting that the issue for her consideration was whether the act falls within the authority of the directors. That is:

• if an act falls within the authority of the directors, it is open for a properly constituted meeting of the directors to ratify that act; and
• a resolution passed at a meeting at which there is no quorum is a nullity. As such, there is nothing to ratify and any resolution purporting to be a ratification can only be a fresh decision.⁴

Her Honour also referred to Massey (trading as Massey Bailey, Solicitors & Consultants) v Wales⁵, in which the NSW Court of Appeal considered whether a general meeting of shareholders could authorise the commencement of legal proceedings which had already been commenced (which it could not in that case, the relevant power was vested in the directors). Relevantly, in that decision Hodgson JA (with whom Meagher JA and Beasley JA agreed) held that:

• Where proceedings are commenced in the name of the plaintiff without proper authority, it is a nullity and can be stayed at any time.
• It is, however, open at any time to the purported plaintiff to ratify the act of the solicitor who started the action and to adopt the proceedings. When this has been done, in accordance with the ordinary law of principal and agent and in accordance with the ordinary doctrine of ratification, the defect in the proceedings as originally constituted is cured.

Her Honour also referred to the comments made by Finkelstein J when considering this issue in Ox Operations Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (in liq).⁶ In that decision, Finkelstein J stated that it is well established that it is possible for a company to ratify the unauthorised act of a solicitor bringing an action in its name without its actual or implied authority. He said further that because such ratification is possible, a practice has developed that when an action is brought without authority it will not be stayed or dismissed forthwith, but the company will be permitted to convene a general meeting or a meeting of its directors to consider whether to adopt the action.

Ultimately, her Honour decided that:

• It was open to the directors of Anglo Australian Resources to ratify the unauthorised act of the solicitors in commencing the proceedings.
• The resolution of the directors of Anglo Australian Resources was not to ratify the decision of an inquorate meeting, but rather to ratify the commencement of the proceedings and appointment of the solicitors to represent the company.
• The resolution that was passed sufficiently manifested an intention to ratify the commencement of the proceedings and authorisation of the of the solicitors to represent the company.

On the basis of her Honour’s reasons, she ordered that the stay be lifted.

Lavan comment

This case is a reminder that when a company seeks to retain solicitors to commence proceedings on its behalf, the company must ensure that it has properly retained and authorised the solicitors to do so. It is also a reminder of the serious consequences that can follow where proper meeting procedure is not complied with, or where directors fail to appreciate that they have an obligation not to vote on resolutions in which they have a material personal interest.

If you have any questions in relation to these issues, or require advice tailored to your or your company’s specific circumstances, please do not hesitate to contact Cinzia Donald.