Caysand No 64 Pty Ltd, Re [1993] QSC 377 [1994] 2 Qd R 467

SC9.3/37( rState Reporting Bureau TRANSCRIPT OF PROCEEDINGS (Copyright in this transcript is vested in the Crown. Co11it•s thereof must not be made or sold without the written authority of the Director, Stale Reporting Bureau.) SUPREME COURT OF QUEENSLAND CIVIL JURISDICTION THOMAS J · APN No 849 of 1993 IN THE MATTER OF CORPORATIONS LAW and IN THE MATTER OF CAYSAND No 64 ACN 010 776 413 and IN THE MATTER OF AN APPLICATION BY NORTRAD PTY LTDACN 010 685 042 BRISBANE .. DATE 19/11/93 JUDGMENT 1 -Jtl. ,,~1~..- -- 1 of 16 -- 191193 jjh/clc (Thomas J) HIS HONOUR: I declare that the appointment of the auditors was validly made. Nortrad's application will be dismissed. I ?Ublish my reasons. There will be an order made in the cross-application on behalf of the company. There will be a declaration that the attachment of the section 301 statement of the company's directors, a copy of which is Exhibit A to the affidavit of Paul Giardina filed on 11 November 1993 to the company's accounts for the 1992 financial year, is not invalid by reason of the failure to attach them within the time prescribed by section 303(3)(b) of the Corporations Law. The orders that I propose to make for costs, which counsel may make submissions upon as they choose, are that Nortrad pay four-fifths of Caysand's costs of each application. HIS HONOUR: I have given fairly careful consideration to the 10 20 30 40 means by which the orders have been obtained and one of the - ·..? ~~~~ ... _.!-/" factors which I have not set out _ is that 50 the short route that was mentioned in Mr McShane's submission was available~ and whilst it is not wrong for an applicant also to bring forward an alternative route to success it was a more expensive route. I must say that subject to any contrary submission I am_ reasonably comfortable with the four-fifths 60 JUDGMENT 2 -- 2 of 16 -- 191193 jjh/clc (Thomas J) costs order. HIS HONOUR: Whilst the submissions received from the Commission which chose to intervene in this matter were useful, and whilst the intervention was welcome it was not a matter in which any conduct of the parties contributed to the choice to intervene. In the present circumstances, I would not in the exercise of my discretion visit either of the parties with additional costs arising from the fact of the intervention by the Commission. I accordingly make no further order in relation to costs. JUDGMENT 3 10 20 30 40 50 60 -- 3 of 16 -- IN THE SUPREME COURT OF QUEENSLAND APN 849 of 1993 [Caysand No. 64 and Nortrad Pty Ltd] CATCHWORDS: IN THE MATTER of the CORPORATIONS LAW -and- IN THE MATTER of CA YSAND NO. 64 PTY LTD A.C.N. 010 776 413 -and- IN THE MATTER of an application by NORTRAD PTYLTD A.C.N. 010 685 042 REASONS FOR JUDGMENT - THOMAS J. Delivered the 19th day of November, 1993 Companies - Corporations Law ss. 326, 327, 1322 - auditors - power to appoint auditors - exempt proprietary company - whether directors had power - whether validly exercised - when duty to appoint arises - declarations of invalidity under s. 1322(2) - declarations of non-invalidity under s. 1322(4) - onus under each subsection - inherent power to make declarations. Corporations Law- ss. 301, 303, 326, 327, 1322. Counsel: P.A. Hastie for applicant P. Wolfe for respondent D.M. McShane- Australian Securities Commission Solicitors: Sly and Weigall, Cannan and Peterson lawyers for applicant Barry johnson solicitors for respondent G. Tanzer Regional General Counsel for A.S.C. Hearing date: 11th November, 1993 -- 4 of 16 -- IN THE SUPREME COURT OF QUEENSLAND APN 849 of 1993 IN THE MATTER of the CORPORATIONS LAW -and- IN THE MATTER of CA YSAND NO. 64 PTY LTD A.C.N. 010 776 413 -and- IN THE MATTER of an (lpplication by NORTRAD PTY LTD A.C.N. 010 685 042 REASONS FOR JUDGMENT- THOMAS I. Delivered the 19th day of November, 1993 On 3rd September, 1993 the Directors of Caysand No. 64 Pty Ltd ("the company") appointed Messrs Hall Chad wick as auditors of the company. Nortrad Pty Ltd ("Nortrad"), a shareholder in the company, has now applied for a declaration that the purported appointment is void, for orders for the calling of an annual general meeting and for the restraint of Hall Chadwick from carrying out any investigation as auditors. The latter orders are claimed under s. 260 of the Corporations Law, which gives the Court power to grant certain remedies on the application of a member in the case of oppression or injustice. A cross-application has been brought on behalf of the company for an order declaring that the appointment "is not invalid". The double negative follows the words in s. 1322(4)(a) of the Corporations Law, under which it is presumably brought. -- 5 of 16 -- 2 That section deals with the non-invalidation of proceedings on account of procedural irregularity (s. 1322 subs. (1), (2) and (3)), and subs. (4) specifically empowers the court to make an order "declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Law or in relation to a corporation is not invalid by reason of any contravention of a provision of this Law or a provision of the constitution of a corporation." The factual background to the present applications is a pending Supreme Court action between Mr Pucci and Nortrad (plaintiffs) and the company and Mr Cinelli (defendants). Briefly stated, those four parties were formerly joint venturers, and the litigation concerns their respective rights under an agreement under which the joint venture was terminated. Mr Pucci was formerly a director of the company until his resignation in September 1992. _ Mr Cinelli has been a director of the company since November 1991. Nortrad at some stage performed building work for the company, and it owns 50 per cent of the company's shares. The evidence before me suggests that Nortrad is insolvent, at least in the commercial sense. Some of the objections taken against the company's appointment of the auditors are, I think, legally irrelevant, although they may indicate why the utmost efforts are being taken to have the appointment set aside. It is said that the accounts of the directors and former directors of the company are in issue in the Supreme Court action, and that the auditors may use their investigative powers to obtain information for the purposes of those proceedings; that the appointment of auditors at this stage is "open to abuse"; that information obtained in this way may. . \ -- 6 of 16 -- 3 be used in the pending action; and that this may be used by the defendants as a reason for holding up the determination of the action. None of these matters has any bearing upon the validity of the appointment, or for that matter upon the application seeking the calling of a meeting. There is however potential relevance, if it can be substantiated, in an allegation that the auditors are biased, and alternatively that there is a reasonable suspicion that they would not perform their duties impartially. The basis of this claim is the fact that in April 1993 a partner in Hall Chadwick (Mr Blanch) swore an affidavit which was used in a security for costs application in the pending action. He was presented with a set of Nortrad's accounts, and as that affidavit acknowledges "I do not know any of the parties to this action. Hall Chadwick has no professional or other association with any of the parties hereto". The opinion was confined to "the key financial data disclosed in the annual returns at face value". Nothing more emerges. In September, 1993 when two other partners were requested to accept appointment as auditors of the company, they were unaware of the fact that Mr Blanch had rendered that particular professional service. Since it has been brought to their attention, they have expressed the view that it has no impact upon their independence in conducting the audit. Mr Blanch's involvement was a limited and technical one, involving no personal contact, and I fail to see how this amounts to evidence either ·of actual bias or constructive bias. It could not reasonably be thought that the auditors would fail to act independently by reason of these circumstances. I turn now to the grounds upon which it is said that ·the appointment was invalid. -- 7 of 16 -- 4 The company is an exempt proprietary company. Until the directors' resolution on 3rd September, 1993, there had not been any appointments of auditors at· any annual general meeting, and there had never been any agreement by all the members of the company not to appoint an auditor. No annual general meeting was held for the 1992 year, and an extension until March 1994 has been obtained for the holding of the 1993 annual general meeting. The company has not lodged an annual return in respect of the financial year ended 30th June, 1992. Indeed the directors are of the opinion that the profit and loss account and the balance sheet for the 1992 year does not give a true and fair view of the company's position at that time and that this is related to their decision to appoint an auditor with respect to the 1992 and 1993 financial years. The. ~irectors have recently caused accounts to be prepared, and have attached to them the statement required by s. 301. They have also attached a directors' statement of dissatisfaction with the company's accounting records and statements, iq line with the subject matter of s. 326(5)(a). On the material before me this seems to have been achieved on or about 9th November, 1993. Questions arise . whether in the circumstances the directors had any power to make an appointment, whether. the purport~d appointment was affected by any irregularity, and if so whether it is-capable of validation under s. 1322. The. sections covering the appointment of company auditors are ss. 326 and 327 of the Corporations Law. They are far too lengthy, for quotation within this judgment, and I shall quote ~nly isolated passages. The .schem~ of the Corporations Law co~cerning the appointment of auditors can more readily be. understood ifs ...327 is read first and if subs. (1) is identified as a . . ' , -- 8 of 16 -- 5 prima facie requirement that all companies, within one month of incorporation, shall appoint an auditor. To this general requirement there are narrow exceptions ss. 326(1) and 326(2) in favour of exempt proprietary companies. Unless early advantage is taken of subs. (2), it is not easy to get the benefit of the exception because under subs. (1) all members of the company must agree that an auditor need not be appointed before such an appointment can be avoided. The law does not expressly preclude directors from exercising the power to appoint an auditor. Indeed, the sections set out a variety of ad hoc situations in some of which the appointment is to be made at annual meetings, in some at general meetings, and in some by the directors. Instances of appointments by general meetings are found in ss. 326(1), 326(4), 327(3). Sotne of the instances where in which directors are recognised as having such a power are in the nature of interim appointments, where the appointment is limited until, say, the next opportunity for a general meeting to make an appointment (eg. ss. 326(10), 327(5) and 327(14)). This however is not uniformly so, as s. 327(14) also applies to some appointments at a general meeting. Having studied these sections I am unable to accede to the submission of counsel for the ASC (which intervened in the matter) that there is a general leaning in favour of appointment in general meetings rather_ than by directors, or any assumption that directors have only interim powers of appointment. It is simply unnecessary to resort to such generalities. If these sections are applied to the present facts, it is plain that the company did not exempt itself under s. 326(1) or- 326(2) from the general requirement of appointing an auditor. The company was therefore in breach of the requirements of -- 9 of 16 -- 6 s. 327(3) which required such an appointment to be made at the first annual general meeting and to fill any vacancy at each subsequent annual general meeting. A vacancy in the office occurred at least at the time of the first annual general meeting, and thereafter there remained a vacancy in the office of auditor. The period of vacancy runs at least from 31st December, 1991 when no appointment was made at. the annual general meeting. Section 327(5) provides that "within <?ne month after a vacancy ... occurs ... if there is no ... continuing auditor of the company, the directors shall" (unless the company has filled the· vacancy at a· general meeting, or unless all the members of an exempt proprietary company have agreed it is unnecessary to fill the vacancy) "appoint a person ... to fill the vacancy." It would therefore seem that the directors should long ago have filled the ' - . vacancy but failed to do so~ The directors' obligation to do so would in my view be a continuing obligation, with or without s. 1314, simply because nothing ever destroyed the obligation. That section relevantly states- "where ... by .... a prov1s10n,. an act is required to be done within a particular period ... then ... the obligation to do the act continues, after that period has ended ... and whether or not a person is convicted of a primary substantive offence in relation to failure to do the act, until the a~t is done." It was submitted that this section appears in the part of the Corporations Law that deals with offences, and that as it bears the heading "continuing offences" it ought to be read as applying only in a criminal rather than a civil context. Whilst there is some force ,in that submissio~, I do not see the civ;il and criminal streams as entirely -- 10 of 16 -- 7 separate, and to the extent to which the Corporations Law prescribes obligations I fail to see whys. 1314 does not apply generally. I return to the position of the company. On 3rd September, 1993, whilst still under the obligation to appoint an auditor to fill the vacancy, the directors resolved to appoint Hall Chadwick. The formal steps required by s. 327 have been complied with. Thus s. 327(7) requires the consent of the auditor prior to the appointment. This was given. The resolution of the directors was duly signed. The above analysis is largely in accordance with submissions made liy counsel for the ASC. On the above basis there is no reason to think that the appointment was invalid. An alternative basis of validity was submitted by counsel for the company, largely in reliance upon s. 326. This route is somewhat more difficult, but I shall consider it in case my primary view is incorrect. Under s. 326(5) there is "deemed to be a vacancy" when a director's statement relating to the accounts of a company contains a statement to the effect that in respect of a financial year the company did not keep such accounting records as correctly record and explain its transactions and financial position or did not keep such records that true and fair accounts of the company can be prepared from time to time. When such a director's statement exists, s. 327(5) expressly applies to the deemed vacancy. A resolution expressing the opinion of the directors to the above effect was duly made at the meeting of 3rd September. It was not however converted into a "statement" relating to the accounts of the company containing a statement to that effect until 9th November, 1993. The failure to endorse the directors' opinion upon the financial statements was submitted to be an irregularity that could be cured by the court under s. 1322. -- 11 of 16 -- 8 In short, it was sul;>Initted that if a sufficient compliance with the requirements of s. . . 326(~): can be shown, that subsection expressly applies s. 327(5) in relation to the dee~ed vacancy that thereupon occurs. By that process the company arrives at the same position a$ the earlier analysis produces. Counsel for Nortrad submitted that s. 326(5) is confined to cases where an auditor is already in office and it gives the directors the opportunity of producing a "deemed vacancy of office" if they become dissatisfied with the accounts. There is however no particular reason to impose such a limitation upon the subsection. A director's statement of dissatisfaction relating to the accounts of a company may equally become necessary whether the company has an auditor or not. In my view s. 326(5) simply creates a mechanism, which it calls a deemed vacancy, which activates s. 327(5) so that the directors are then obliged to appoint an auditor if none previously existed, or to replace the auditor if one was in office in the financial y~ar when th~ accounts became unsatisfactory. It is next necessary to address the effect of the failure by the company to submit financial statements and the directors' attached statement, for the 1992 financial year, within the time prescribed by ~· 303(2)(b). Is the preparation of a proper s. 301 statement for that year a condition that must be satisfied before the appointment of the auditors may become valid?. If my primary conclusion as to the effect of s. 327 is correct, the answer is "no" because the obligation to appoint auditors is unconditional and is created by the. ' . statut~~ However if that conclusion is. w~ong, ~nd if it is necessary to support the appointment by recourse to s. 326(5),. the resolution of the directors which is relied • - ~ - .... • • i • ._ •• upon authorised them to sign a statement "pursuant to s. 301" to that effect. It is -- 12 of 16 -- 9 not necessary for me to decide whether a "director's statement relating to accounts of a company" under s. 326(5) must always be a director's statement under s. 301(1), because in the present matter the directors expressly resolved that it should be such a statement. On this basis there is an irregularity in that the s. 301 statement was not made within the time prescribed by s. 303(2)(b). The question then arises whether this is an irregularity which· is curable under s. 1322. It seems to me that s. 1322 has two streams, the first essentially under subs. (1), (2) and (3), and the second essentially under subs. (4), (5) and (6). They are not entirely separate, but they envisage two different types of application. The first three subsections postulate the prima facie validity of any "proceeding under this law" despite procedural irregularity. Any such proceeding "is not invalidated ... 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" (s'. 1322(2)). The following three subsections (subs. (4), (5) and (6)) provide a wider base for remedial action, in that they give the court power to cure "any act, matter or thing purporting to have been done ... under this law or in relation to a corporation" (s. 1322(4)(a)). In this instance however, subs. (6) requires that the court shall not make an order (declaring the act etc. to be not invalid) unless it is satisfied of certain things including the procedural nature of the act or omission, the honesty of the persons concerned in it, and the public interest. I am of course not attempting a full paraphrase, and am attempting to indicate the essential structure of the section. Although subs. (6) says that the court shall not make an order "under this section unless ... ", subparas. (a) and (b) confrne "the reference to orders under su.bs: (4). Thus,·.: except for subpara. (c), which prevents the court making an order unless satisfied -- 13 of 16 -- 10 that no substantial injustice is likely to be caused to any person, subs. (6) has no application to an application made under s. 1322(2). The essential distinction is that subs. (1), (2) and (3) primarily contemplate a declaration of invalidity by the court, for which the onus lies upon the party attacking the validity of a proceeding to satisfy the court of substantial injustice that cannot be . remedied by the court (Broadway Motors Holdings Pty Ltd (in liquidation) (1986) 6 N.S.W.L.R. 45, 57; re Pembury Pty Ltd (1991) 9 A.C.L.C. 937, 939-940; Mamouney v. Soliman (1992) 10 A.C.L.C. 1674, 1681). In short, s. 1322(2) gives an initial pr~sumption of validity to any "proceeding under this Law", and that is only displaced by an actual declaration of invalidity. , On the other hand applications under subs. (4), (5) and (6) give a wider coverage of matters that qlay be remedied, but, where a declaration of non- invalidity is sought, (which in practical terms I am prepared to regard as a de~laration of validity), the onus is on those who seek such an order to satisfy the court of the matters mentioned in subs. (6), as the court is expressly required not to make an order unless satisfied of those matters. . (Elders lie Finance Corp. Ltd v. A.S.C. (1993) 11 A.C.L.R. 787, 790). ' . Counsel for Nortrad submitted that the omission in quest!on was not a "proceeding" within the meaning of .s. 1322(2). The interpretation provision (subs. (1)) states that a reference to a proceeding under this Law is a reference to any . . . - .. . . ~ proceeding whether a legal proceeding or not. A r~l!sonably _liberal construction has- . . . been given to the term in Broadway Motors Holdings above pp. 56-57 and in re.. . . - Pembury above. In my view the attachment of statements under s. 301(1) is plainly~ • - ~ o I ' L ~ -- 14 of 16 -- • 11 a proceeding under the Corporations Law. It is also an act under the Law in relation to a corporation under s. 1322(4). I therefore regard the failure to comply with s. 303(2) as a procedural irregularity, and do not consider that it has caused or will cause substantial injustice that cannot be remedied by an order of the Court. In this context I note that the correction of the irregularity was made after the present applications were brought, and that any disadvantage or injustice attaching to the position of Nortrad could be remedied by an order for costs. It is to be remembered however that the present discussion concerns only an alternative point, and it is not the primary basis upon which orders will be made. It would seem that Nortrad's application for a declaration of invalidity is made under s. 1322(2) whilst the company 1s cross-application for a declaration of non-invalidity is made under s. 1322(4). So far as the latter application is concerned, if it were necessary to make an order under s. 1322(4) I would do so as I am satisfied of the procedural nature of the omission, that the persons concerned acted honestly and that it would be in the public interest to make such an order. However on my primary findings, the appointment of the ·auditors was a valid acticm under s. 327 and it is not necessary to make any declaration of non-invalidity under s. 1322(4). Where an act is ex facie valid, the court may make such a declaration under its inherent declaratory power without any need for recourse to s. 1322. Equally a positive declaration of validity could be made in reliance upon the non-invalidation portion of s. 1322(2), although, as I see it, the· order primarily contemplated by that subsection is· a' declaration of invalidity under the latter part-- of the subsection. -- 15 of 16 -- 12 Although it is not necessary to do so in order to support the validity of the appointment of the auditors, it is desirable that the irregularity under s. 301, which has been exposed in the course of these proceedings, be identified as such and that there be a declaration that the attachment of the s. 301 statement of the company's directors (a copy of which is ex. A to the affidavit of Paul Giardina filed on 11th November, 1993) to the company's accounts for the 1992 financial year is not invalid by reason of the failure to attach them within the time prescribed by s. 303(3)(b) of the Corporations Law. It is also desirable that there be a formal declaration recognising the validity of the appointment of the auditors. This order will be made under inherent jurisdiction. There is no basis shown for the making of orders under s. 260, and Nortrad's application should be dismissed. The company has been substantially successful in this litigation, but because of the indulgence which it has obtained, the order will be that Nortrad pay four fifths of Caysand's costs of each application. • -- 16 of 16 --