The Point of valid removal of directors

The corporate world is very fluid and the structure of most, if not all companies within it, will undergo some form of change at some stage. There may be changes in: shareholders, whether an increase or decrease; a corporate takeover; or a change in governance. Directors may come and go, voluntarily or otherwise.

How and when a director can be removed from a company has often been cause for judicial consideration, whether it be a question of quorum or notice. The question before the court always ends up being one of validity. The case of Chalet Nominees (14999) Pty Ltd v Murray1 (Chalet Nominees) is no different.

The Facts

In 2011, Mr Buckeridge, a director of James Point Pty Ltd called a members meeting seeking to pass two resolutions: one, that three of the four directors of James Point be removed (not including himself); and two, that four new directors be appointed in place of the outgoing directors. Mr Buckeridge issued a notice of the intended meeting on 1 December 2011, including notice of the intended resolutions and the meeting was scheduled to occur on 23 December 2011 (December Meeting). Chalet, a 23% shareholder in James Point brought the matter before the courts, challenging the validity of the meeting and in turn the resolutions passed at the December Meeting. The respondents in the matter included the proposed incoming directors, James Point and Port 1, an entity that held a 53% share in James Point.

The three directors whose removal Mr Buckeridge sought were: Mr Moonen, a director of Chalet, Mr Peraldini, and Mr Catalano, both of whom were associated with entities holding shares in James Point.

On the day of the scheduled members meeting only Mr Buckeridge, Mr Teo, James Point’s company secretary, Mr Cochrane, a solicitor acting for Port 1, and Dr Whittaker, an observer, were in attendance. Both Mr Buckeridge and Mr Cochrane held proxies for members of James Point. Mr Cochrane declared that there was a quorum and the meeting went ahead as scheduled and the resolutions were passed.

The Decision

The question before the court was whether a quorum had been formed at the December Meeting. To determine this point the court needed to turn to the Constitution of James Point (Constitution). Article 45 of the Constitution declared that a quorum would be formed when two members who were entitled to vote were in attendance. It was the initial argument of Port 1 that two persons attending as proxies for one member constituted a quorum, but this was rejected.

Port 1 then relied  on section 1322 of the Corporations Act (CA) which states that where there has been a procedural irregularity in relation to a proceeding under the CA, that proceeding will not be invalidated because of the procedural irregularity unless the Court is of the opinion that the irregularity has, or may, cause a substantial injustice. One form of procedural irregularity is of course the absence of a quorum at a meeting.

The argument advanced by Port 1 was that although there was not a quorum at the meeting, at the time of the meeting this was not their understanding. Mr Cochrane who declared that a quorum was present, believed that that was a legitimate position to take. Mr Cochrane also believed that it was an arguable position to hold that no quorum had been formed. Justice Le Mere was unable to find on the evidence available that either position was actually held by Mr Cochrane.

This court then considered the long line of conflicting authority of whether a deliberately achieved procedural irregularity can still give rise to a s1322(2) validation. Justice Le Mere found that it was unnecessary to truly consider that question in relation to this matter as he was not able to establish whether the procedural irregularity in the matter before him had been deliberately achieved. Therefore, there was no bar to s1322 applying.

The final question that needed to be considered was whether a substantial injustice had or would occur in the circumstances if the meeting and resolutions were to be validated. His Honour found that this would not be the case. Chalet argued that they were denied the opportunity to argue their position, but this was not the case. They were not denied the opportunity, they were given appropriate notice of the meeting, they had the opportunity to put their case before the meeting, but they chose not to attend. As such, Le Mere J found that a substantial injustice had not and was not likely to occur. A declaration under s 1322(4)(a) should be made that the meeting was not invalid by reason of a lack of a quorum.

Lavan Comment

This case highlights the importance of knowing your rights in relation to meetings. Curve balls can be thrown from any angle but if you are aware of your position and can seek advice and information you can always be on point in any meeting. If you require any assistance with a corporate law matter contact Lavan’s Corporate Law Team.