Think Nicholsons

May 31

'Quorum busting' - What happens when that extra director isn't properly appointed?

'Quorum busting' - What happens when that extra director isn't properly appointed?
The Qld Supreme Court considered this issue very recently (13 May 2019) in Gallop Reserve Pty Ltd v Matton Developments Pty Ltd [2019] QSC 113 - the facts of the case illustrate the care which is needed, when trying to solve management problems within companies.
Due to a breakdown in relationships, and various allegations, 'considerable animosity' [para 5] had developed between the shareholders and directors of the company. 
Holmes CJ goes on to describe what happened next [abbreviated and with my emphasis added]: 

"[20] A solicitor ... emailed Mr Kenward to advise that the litigation funding agreement, having been signed by only one director, should be ratified. He proposed that Matton Developments enter a Deed of Variation to ratify the Resolution Deed ...

[21]  [The solicitor] advised Mr Kenward that under s 201H of the Corporations Act, he could appoint another director in order to form a quorum for a director’s meeting. (This advice appears to have overlooked the fact that s 201H confers the power of appointment on the company’s directors, not an individual director when there is more than one.) He proposed that Mr Kenward give Mr Clark notice by email of a directors’ meeting to be held a week later. Then, when Mr Clark did not attend, Mr Kenward could appoint his wife, Fiona Kenward, as director. That appointment (he said) would be valid for two months, during which time a power of attorney appointing Mr Kenward as attorney for Matton Developments should be signed. 

[22] Mr Kenward followed that advice, giving Mr Clark notice by email of a meeting to be held on 16 May 2012. In evidence, he agreed that he did not give any indication of its subject, although he contended that Mr Clark would have been able to surmise what it concerned .... He had not sent any of the .... notice of meeting, consent to act as a director, Deed of Variation or draft minutes of meeting – to Mr Clark.

[23]Mr Clark responded to Mr Kenward’s email, indicating that he would not attend the meeting, and taking issue with a number of aspects ... as non-compliant with the company’s memorandum of association.
....
[25]The meeting was held and purported to appoint Mrs Kenward as a director. It was resolved that Matton Developments would enter the Deed of Variation; ... and that Mr Kenward would be appointed the company’s attorney for all matters relating to the litigation. On the same day, Mr and Mrs Kenward signed a power of attorney appointing Mr Kenward as attorney of Matton Developments, enabling him to do anything he considered necessary in relation to the CGU litigation or the Westpac debt." 

The appointment and the subsequent actions of Mr & Mrs Kenward became crucial issues, and the validity of the appointment of Mrs Kenward was the subject of argument: 

"[59] Gallop Reserve argued that the appointment of Mrs Kenward as a director of Matton Developments entailed a procedural irregularity, being an absence of a quorum at the directors’ meeting. Since that would not invalidate the meeting, Mrs Kenward should be taken as being appointed as a director of Matton Developments. The results were that she and Mr Kenward had authority to enter the Deed of Variation and it was effective in ratifying the litigation funding agreement; and their execution of the power of attorney conferred on Mr Kenward was valid, so that he was authorised to execute the Continuation Deed and to enter the priority letter agreement with Gallop Reserve. Similarly, the resolutions to enter into the Deed of Variation and confer the power of attorney were not invalidated by the lack of a quorum. There was no substantial injustice caused by Mrs Kenward’s appointment, which was necessary in light of Mr Clark’s non-cooperation, in order to obtain funding for the CGU litigation in circumstances where it was expected to settle at mediation with the result, beneficial to Mr Clark, that the Westpac loan was likely to be paid out.

[60] In the alternative, Gallop Reserve sought a declaration that Mrs Kenward’s appointment as a director was not invalid, pursuant to s 1322(4) of the Corporations Act
... 
....
[62] Gallop Reserve argued that the appointment of Mrs Kenward was procedural; that Mr Kenward honestly believed that the way in which he was proceeding was proper on solicitor’s advice and also necessary in order to advance the CGU litigation; and for those reasons it was also just and equitable that a declaration be made that Mrs Kenward’s appointment was not invalid. Again, it was argued that there was no substantial injustice.

[63] Mr Clark contended that the court should declare the directors’ meeting at which Mrs Kenward was appointed invalid. He argued that the authorities in relation to s 1322 reflected a view that the section should be applied only where the course adopted accorded with the views of a majority of shareholders; those authorities included, he said, the decision of the High Court in Weinstock v Beck,[11] relied on by Gallop Reserve. In addition, the steps taken here had caused a substantial injustice. It meant that an existing director who did not represent the wishes of a majority of shareholders had deliberately brought about an outcome amounting to an act of “quorum busting”."


His Honour was not persuaded by Gallop's arguments and decided that the appointment was invalid:

[65]"[65] ... I do not consider that what occurred at the directors’ meeting entailed a procedural irregularity. It was not merely the lack of a quorum, but the installation of a purported quorum. The CGU litigation was Matton Developments’ only business at that stage, and the motivation was clearly to exclude Mr Clark from involvement in it. What occurred was intended to subvert Mr Clark’s right to participate in decisions as to the company’s management by the appointment of Mrs Kenward as an additional, compliant director, so that she and Mr Kenward could then pass resolutions which would not have been passed otherwise."

He went on to say:

"[66] Nor am I satisfied that any of the prerequisites for the making of an order under s 1322(6)(a) is met. The purported appointment of Mrs Kenward as part of a plan to oust Mr Clark from involvement in the company’s affairs was not a mere procedural step. And, although Mr Kenward (and no doubt Mrs Kenward) acted on legal advice, I am not satisfied that the actions of Mr Kenward, at least, are correctly characterised as honest. When he forwarded notice of the proposed meeting to Mr Clark, he had not told the latter of the litigation funding agreement he had purported to enter on Matton Developments’ behalf. Although there is no evidence that the company’s constitution required that the notice of meeting identify its subject matter, the failure in these circumstances to give any hint of what was proposed arouses suspicion. ...

[67] It is quite evident that Mr Kenward was acutely aware that Mr Clark would be implacably opposed to the appointment of Mrs Kenward; would not have agreed to the entering of the litigation funding agreement ... had he known about it, and certainly would not agree to the entering of a further agreement to ratify it; and would not have entertained the idea of handing Mr Kenward the power... to conduct Matton Developments’ affairs in relation to the litigation and the Westpac loan."


So, the 'plan' which had been developed to 'resolve' the management breakdown had several unintended (and no doubt expensive) consequences.  There were valid approaches available to tackle the problem - but the viable methods were likely to be less 'convenient' for the directors who desired to drive the litigation forwards.  Unfortunately, the 'convenience' which may have been perceived at the time turned out to be an illusion. 

This case illustrates that complying with the rules in relation to company management is not a mere formality - those rules have real consequences for the personalities involved, and can also have serious consequences for third parties who get involved.  If you have to resolve a dispute within a company or other structure, then please think carefully:  solutions which appear 'simple' can seem appealing, but their true cost may be hidden, or just postponed.

 

Stephen Robertson

Partner
Stephen is a commercial lawyer with extensive experience in advising businesses in areas of acquisitions and divestments, commercial agreements, structuring, legal risk and revenue issues. He also advises on property law, with a focus on commercial and industrial property.