In the matter of Railway & Transport Health Fund Ltd [2020] NSWSC 1435

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Railway & Transport Health Fund Ltd [2020] NSWSC 1435 Hearing dates: 9 October 2020 Decision date: 16 October 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: Declarations made that notices of proposed resolutions and calling a general meeting are invalid. Declaration that directors are not compelled to call a general meeting. First Defendant to pay costs. Catchwords: CORPORATIONS — Meeting of members — Resolutions — Resolutions for removal of directors — Resolutions for appointment of new directors — Resolutions proposed by shareholders under ss 203D and s 249D — Where constitution provides mechanism to appoint new directors only at AGM — Where constitution excludes replaceable rules — Whether implied power to appoint directors outside of AGM CORPORATIONS — Meeting of members — Resolutions — Where notice of meeting provides for replacement of six of seven directors — Whether altering motion to removing but not replacing these directors would require new notice of meeting Legislation Cited: - Corporations Act 2001 (Cth), ss 201A, 201G, 203D, 249D, 249G Cases Cited: - Aveo Group Ltd v State Street Australia Ltd [2015] FCA 1019 - Barron v Potter [1914] 1 Ch 895 - CIC Insurance Ltd v Hannan & Co Pty Ltd (2001) 38 ACSR 245 at 247; [2001] NSWSC 437 - Donaldson v Natural Springs Australia Ltd [2015] FCA 498 - DVT Holdings Ltd v Bigshop.com.au (2002) 42 ACSR 378; [2002] NSWSC 571 - Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1; [1950] ALR 1046 - Link Agricultural Pty Ltd v Shanahan [1999] 1 VR 466; (1998) 28 ACSR 498; [1998] VSCA 3 - Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; [2006] FCAFC 144 - National Roads & Motorists Association Ltd (NRMA) v Bradley (2002) 42 ACSR 616; [2002] NSWSC 788 - Oil Basins Ltd v Bass Strait Oil Company (2012) 297 ALR 261; [2012] FCA 1122 - State Street Australia Ltd (Trustee) v Retirement Village Group Management Pty Ltd (2016) 113 ACSR 483; [2016] FCA 675 - Taylor v McNamara [1974] 1 NSWLR 164 - Totally and Permanently Incapacitated Veterans' Association of NSW Ltd v Gadd (1998) 146 FLR 161; 28 ACSR 549 - Worcester Corsetry Ltd v Witting [1936] Ch 640 Texts Cited: - Ford, Austin and Ramsay's Principles of Corporations Law (LexisNexis), [7.230.21] and [7.370] - Australian Corporations Law Principles and Practice (LexisNexis online) Category: Principal judgment Parties: Railway & Transport Health Fund Ltd (Plaintiff) Mark Diamond (First Defendant) Representation: Counsel: N Hutley SC/N Kirby (Plaintiff) R Newlinds SC/A D Lang (First Defendant)

Solicitors: Jones Day (Plaintiff) Slater & Gordon (First Defendant) File Number(s): 2020/276531

Judgment

Nature of the application and evidence 1. By Originating Process filed on 23 September 2020, Railway & Transport Health Fund Ltd ("RTHF") seeks a declaration that a notice provided to it by the First Defendant, Mr Mark Diamond, on 5 August 2020 under s 203D of the Corporations Act 2001 ("August Notice") is invalid. RTHF also seeks a declaration that a notice provided to it by Mr Diamond on 11 September 2020 under s 249D of the Act ("September Notice") is invalid. I will refer to the content and statutory basis of these notices below. RTHF also seeks a declaration that, by reason of the invalidity of the September Notice, its directors are not compelled, under s 249D of the Corporations Act, to call a general meeting of RTHF. 2. The application is supported by an affidavit dated 23 September 2020 of Mr Matthew Latham, the solicitor for RTHF. Mr Latham refers to RTHF's receipt of the August Notice and then the September Notice from Mr Diamond and to the terms of RTHF's constitution. Mr Latham also referred to the terms of the nomination procedure for "Elected Directors" (as defined) set out in cl 13.3 of RTHF's constitution and the exclusion of the replaceable rules in the Corporations Act by cl 20.4 of RTHF's constitution, to which I refer below; and noted that the latest date on which RTHF's annual general meeting can be held is 30 January 2021, in accordance with a no action statement made by the Australian Securities and Investments Commission in May 2020 in respect of the coronavirus pandemic, and the last date that can be set for nominations and ancillary steps relating to the appointment of directors, under cl 13.3 of RTHF's constitution, is 1 November 2020. Mr Latham's evidence is that the procedures contemplated by RTHF's constitution for the appointment of Elected Directors (as defined) were not complied with in respect of the August Notice or the September Notice, and at least the September Notice contemplated the appointment of Elected Directors at an extraordinary general meeting rather than an annual general meeting of RTHF. Mr Latham also addressed the time within which a meeting must be called by RTHF's directors under s 249D of the Act if the September Notice is valid, which has since been extended by the Court. There was no contest as to the applicable facts. 3. By way of background, RTHF is a public company limited by guarantee and is a registered private health insurer. RTHF's constitution relevantly provides, in cl 5.2, that RTHF must hold an AGM (as defined) in accordance with the Corporations Act and the AGM is to be held in addition to any other General Meetings held by RTHF in each financial year. The term "AGM" is defined in cl 20.1 as RTHF's annual general meeting. Clauses 11.1 and 11.2(a) provide that the board must have a minimum of six and a maximum of nine directors, of which there must be at least three Elected Directors (as defined) and there may be up to six Appointed Directors (as defined). The term "Elected Director" is defined, in cl 20.1, as a "Member of the Company elected by the Members of the Company at a meeting called for that purpose". Clause 11.2(b) provides for a change in the number of directors and, if that occurs, contemplates an election "at the next AGM" for such number of Elected Directors as to the board determines, or otherwise the appointment of persons as Appointed Directors (as defined). 1. Clause 12.2 of RTHF's constitution sets out eligibility criteria for the election or appointment of persons as a director of RTHF, including in respect of age, capacity, and satisfaction of guidelines or criteria for suitability for appointment as a director under the Private Health Legislation (as defined). Clause 12.5 provides for the removal of a director, as follows: "Whether or not a Director's appointment was expressed to be for a specified period, the Members may by ordinary resolution in a General Meeting remove a Director from office. The power to remove a Director under this Article is in addition to section 203D of the Corporations Act." Pausing there, there is no doubt that Mr Diamond (and sufficient other persons to satisfy the requirements of s 249D of the Act) could validly have required RTHF to call a meeting of its members that simply sought to remove specified persons as directors of RTHF, as distinct from seeking to replace those persons at the same meeting without compliance with cll 12.2 and 13 of RTHF's constitution, to which I refer below. Clause 12.7 provides that the board may appoint a person to a casual vacancy in the position of a director in specified circumstances, including if the number of directors is less than the maximum or minimum number of directors contemplated by clauses 11.1 and 11.2 of RTHF's constitution. 1. Clause 13 of RTHF's constitution deals with Elected Directors (as defined) and cl 13.1 authorises the board to adopt eligibility requirements additional to those specified in cl 12.2 which any candidate for any forthcoming election for an Elected Director position must satisfy. Clause 13.2(a), importantly, provides that an Elected Director shall hold office from the conclusion of the AGM following their election for a period not exceeding the conclusion of the third AGM thereafter. Clause 13.3 sets out a detailed nomination procedure for Elected Directors, requiring nomination by at least two members of RTHF, the provision of certain information as to qualifications and eligibility of the nominee following his or her nomination and the provision of a written consent to act as an Elected Director, signed by the nominee. That clause also sets out steps which must be taken by the Returning Officer (as defined) in respect of the election to available Elected Directors' positions, including permitting the Returning Officer to require candidates to undergo checks set out in the RTHF's "Fit and Proper Person" policy and to provide further information or attend interviews conducted by the Remuneration and Nominations Committee to determine his or her eligibility or ability to complement existing skills, experience and qualifications of the board, and provides that a failure or refusal of a candidate to reasonably cooperate disqualifies that person from the election or filling a casual vacancy of an Elected Director position. Clause 13.4 in turn sets out an election procedure to be followed "at the AGM". Clause 20.4 provides that the replaceable rules in the Corporations Act do not apply. 2. By the August Notice (Latham 23.9.20, Annexure MGL-1), Mr Diamond gave notice of his intention to move six successive resolutions at a general meeting of RTHF each taking the form: "THAT with effect from the end of this meeting [named person] be removed as a director of the company and [another named person] be appointed as a director of the company in [his or her] place." 1. One of RTHF's seven directors would not have been removed by those resolutions. The August Notice relied on s 203D of the Act which relevantly provides that, notwithstanding anything in its constitution or any agreement between a director and RTHF or any of its shareholders, a public company may remove a director by ordinary resolution. The effect of passage of one or more of those resolutions was that one or more of the seven existing directors of RTHF would be removed, and, depending on who was removed, another person would be appointed. 2. The September Notice (Latham 23.9.20, Annexure MGL-2) in turn sought to require RTHF's directors, under s 249D of the Act, to call and arrange to hold a general meeting of RTHF at which the same six resolutions would be put to members. That section requires a company's directors to call a general meeting at the request of members who hold at least 5% of the votes that may be cast at that general meeting. It is common ground that sufficient members of RTHF signed such a request to satisfy the requirements of s 249D of the Act. However, directors may decline to call a under this section if the proposed resolution could not be lawfully effected by the company in general meeting, and the requisitionists could not then call a meeting relying upon any failure of the company to do so: DVT Holdings Ltd v Bigshop.com.au Ltd (2002) 42 ACSR 378; [2002] NSWSC 571 ("DVT Holdings") at [9]; National Roads & Motorists Association Ltd (NRMA) v Bradley (2002) 42 ACSR 616; [2002] NSWSC 788 at [8]. If parts of a requisition for a general meeting under this section are valid and parts are not, directors must convene the meeting in respect of the valid parts of that requisition, as long as those valid resolutions can be separated from the invalid resolutions: Totally and Permanently Incapacitated Veterans' Association of NSW Ltd v Gadd (1998) 146 FLR 161; 28 ACSR 549.

The case law and the parties' submissions 1. The parties referred to case law which addresses similar issues to those which arise here. It appears to have been recognised in Worcester Corsetry Ltd v Witting [1936] Ch 640 and by Latham J in Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 at 22; [1950] ALR 1046 that a constitutional provision that confers a power upon the directors to appoint a director in certain cases does not deprive a company of its inherent power to nominate and appoint its own directors in general meeting. That proposition does not address the position where a company's constitution specifically confines or delimits the scope of the company's power to appoint directors in general meeting. 2. In Link Agricultural Pty Ltd v Shanahan [1999] 1 VR 466; (1998) 28 ACSR 498; [1998] VSCA 3 ("Link Agricultural"), Kenny JA (with whom Batt and Buchanan JJA agreed) observed (at [52]) that s 227 of the Corporations Law, as it then stood, conferred not only a right on a public company, constituted by the members in general meeting, to remove a director by ordinary resolution, but also a power for members who removed a director in general meeting to appoint a replacement in the same meeting. Her Honour observed (at [54]) that "[t]his reflects the position at common law that the company, constituted by the members in general meeting, retains an inherent power to appoint a director by ordinary resolution" and referred to Worcester Corsetry Ltd v Witting above; Barron v Potter [1914] 1 Ch 895 and Grant v John Grant & Sons Pty Ltd above. Her Honour there rejected a submission that the articles of association of that company provided exhaustively for the appointment of a replacement director in place of one removed and excluded the general law position. However, that decision is distinguishable, first, because the power to appoint director in general meeting, when a director is removed, is now contained in a replaceable rule in s 201G of the Act, and that replaceable rule has been excluded from RTHF's constitution; and, second, because the constitution of RTHF contains a comprehensive mechanism for appointment of directors, which is incapable of applying other than at the AGM and which would not be complied with, so far as the qualifications of directors were concerned, by appointment other than following the process specified in respect of the AGM. 3. In CIC Insurance Ltd v Hannan & Co Pty Ltd (2001) 38 ACSR 245 at 247; [2001] NSWSC 437 ("CIC Insurance"), Barrett J in turn referred to Link Agricultural as authority that: "There is a residual common law power for the members in general meeting to appoint directors … where members act to remove all directors, they have it in their own hands to rectify the resultant breach of the statutory requirement and clearly should do so." 1. In DVT Holdings, Windeyer J noted (at [10]) the defendant's argument, also put by Mr Newlinds in this case, that there is an inherent power at common law for a general meeting to appoint directors by ordinary resolution, which can only be displaced by clear language evidencing an intention to do so and that the language of cl 14.2 of the company's articles in that case (which permitted the company to appoint a person to be a director, by ordinary resolution at an AGM) did not show an intention to exclude that power. His Honour there found (at [11]) that the provision for members at the annual general meeting to appoint directors excluded that common law power, with the possible exception of specified circumstances, and also relied on the exclusion of the replaceable rule in that case for that proposition. His Honour noted that the decision in Link Agricultural was not authority that the provisions of the constitution could not take away a common law right to appoint directors in general meeting. 2. His Honour also there also noted that the one director who continued in office after the removal of all other directors would have the power to take immediate action to appoint directors to casual vacancies to make up the minimum number, and also noted (at [17]), referring to CIC Insurance that. "Although I do not think it is necessary to decide this for the purpose of this case, it is also possible that notwithstanding the provisions of cl 14 of the constitution there may be some residual power in the members in a case of necessity to appoint new directors in general meeting. I would be more inclined to consider this a residual power rather than some inherent power. I do not consider that a company is necessarily stultified and unable to act at all if the number of its directors is reduced below the statutory number and if any remaining director refuses to act to fill any casual vacancy." His Honour also there observed (at [18]) that the Court should assume that a director who would remain in office if all the removal resolutions succeeded would carry out his statutory obligations, presumably, including the exercise of the power to appoint other directors to fill any casual vacancies that arose. 1. I also bear in mind the principles applicable to the construction of a company's constitution and, in particular, that the constitution should be read and construed as a whole; general principles of construction of commercial contracts are applicable to a constitution, and the commerciality of a particular construction may tip the balance in its favour where it is implausible that the parties could be taken to have intended otherwise; a constitution should not be construed narrowly or pedantically; words used should be given their natural and ordinary meaning; and a construction of a provision which gives a congruent operation of the various applicable provisions of a constitution should be preferred to another construction which does not: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; [2006] FCAFC 144; Oil Basins Ltd v Bass Strait Oil Company (2012) 297 ALR 261; [2012] FCA 1122 at [32]; Donaldson v Natural Springs Australia Ltd [2015] FCA 498 at [148]; Aveo Group Ltd v State Street Australia Ltd [2015] FCA 1019 at [59]. 2. Mr Hutley, with whom Mr Kirby appears for RTHF, submits that RTHF's constitution provides that the exclusive forum for members to appoint Elected Directors is the AGM; provides, in cl 13.3 (to which I have referred above) for a nomination, declaration and voting procedure for Elected Directors which culminates in election of a director at the AGM, and which Mr Diamond and the proposed directors he has nominated have not complied with; and displaces the replaceable rule in s 201G of the Act, which would otherwise allow the members in general meeting to appoint a director. Mr Hutley submits that the proposed resolutions are incapable of being validly passed by members in general meeting rather than the AGM. 3. Mr Newlinds, with whom Mr Lang appears for Mr Diamond, in turn point to the recognition in professional commentary, including Ford, Austin & Ramsay's Principles of Corporations Law, [7.230.21] and [7.370] and Australian Corporations Law Principles and Practice, [3.2.0210], of a power of a company in general meeting to appoint a director, including by filling a resulting vacancy where a director is removed under s 203D of the Corporations Act. Mr Newlinds also refers to Grant v John Grant & Sons Pty Ltd above and Link Agricultural above. Mr Hutley submits, in reply, that the case law on which the learned authors of Ford rely for the proposition that a general meeting can replace the directors does not support that proposition, and that the statement in Ford that a vacancy may be filled in a general meeting is a correct but incomplete statement of the relevant law, since the authors also recognise that the constitution may give the power to fill a casual vacancy to directors, as occurs here or, implicitly, otherwise confine the power to replace directors. 4. In reply, Mr Hutley submits that no implied or residual power can exist in the face of contrary provisions of the Act or RTHF's constitution, and he points to s 125 of the Act which recognises that a company's constitution may restrict or prohibit the exercise of its powers. He submits that there is no room for any implied or residual power to appoint directors in general meeting where RTHF's constitution has displaced the replaceable rule in s 201G, which would allow such an appointment, and provided for an elaborate regime for the annual election of directors at the AGM. He points out that that result also is consistent with that reached by Windeyer J in DVT Holdings, where the relevant article was of a somewhat simpler character. 5. Mr Newlinds also submits that, if six directors of RTHF are removed at a general meeting and the meeting does not have power to appoint their replacements, then RTHF would be left with one director in breach of s 201A(2) of the Act and that RTHF's submissions, if accepted, would deprive members from deciding who RTHF's directors ought be going forward. Mr Hutley responds that the members themselves have specified the process by which they may elect directors in cl 13 of the constitution, and that the members are not deprived of the ability to appoint directors, which they may do at the next AGM. 6. It seems to me that RTHF's submissions do not have the consequence which Mr Newlinds attributes to them. Those submissions would have the consequence that the resolutions could not be passed in the form that Mr Diamond has proposed; however, if resolutions for removal of the six directors were put before a general meeting, the directors could be removed and the remaining director would have the power to fill a casual vacancy; if all directors were removed, the general meeting would arguably have a residual power, of necessity, to appoint the remaining directors and, alternatively, the Court would have a power to call a general meeting under s 249G of the Act in order to allow the board to be reconstituted; and RTHF's members could in any event elect RTGF's directors at an AGM. The members of RTHF are also not deprived of the opportunity to remove directors, which remains available to them under s 203D of the Act. 7. In my view, cl 13.2 of RTHF's constitution is also incapable of applying sensibly, in respect of the appointment of a director other than at the AGM. If the concept of "Elected Director" is sufficiently wide to permit the election of a director at a general meeting other than the AGM, then, as Mr Hutley pointed out, that article has the result that such a director would only hold office from the conclusion of the AGM following their election, not from the end of the general meeting at which he or she was purportedly appointed. Conversely, if the concept of "Elected Director" does not include a director elected in that way, then, as Mr Hutley pointed out, that clause would not specify a maximum period for that director's appointment, by contrast with the three year period specified by that clause where a director is elected at an AGM. RTHF's constitution would plainly not have a sensible operation where a director could be elected at a general meeting, but not take office until an AGM potentially some considerable time thereafter, and those directors who were appointed at an AGM would have a three year term and those directors appointed at another general meeting would arguably have an unlimited term. 8. It seems to me that, in the present case, members of RTHF have restricted their ability to appoint directors, or at least the means by which they can do so, so that it can only occur in a particular manner, which involves verification of the directors' qualifications, and on a particular occasion, the AGM, where such verification can occur. It seems to me that the terms of RTHF's constitution therefore exclude any implied power or residual power of members to appoint a director other than at an AGM, at least while RTHF has any remaining director who can appoint other directors to fill a casual vacancy. The resolutions proposed by Mr Diamond could not properly be passed at a general meeting of RTHF, rather than an AGM, and the directors of RTHF are not bound to call the relevant meeting.

Mr Diamond's alternative approach 1. Mr Newlinds submits that if, as I have found, there is no power for members to appoint replacement directors at a general meeting other than the AGM, then Mr Diamond should be given an opportunity to seek amendment of the six proposed resolutions of which he has given notice at the general meeting to delete the second clause of each resolution referring to the appointment of new directors and, if those amendments were passed, there could be no question as to the validity of the proposed resolution. 2. Mr Hutley responds that the amended form of resolution which Mr Diamond contemplates would be put at the meeting is very different from that which the requisitionists have supported and that there is a real question whether the amendment would comply with the requirement that it did not alter the nature of the resolution, so as to fall outside the notice given of the meeting: Totally and Permanently Incapacitated Veterans' Association of NSW v Gadd above at 165. Mr Hutley submits, with considerable force, that the result of the amendment, being the dismissal of six elected directors without appointment of replacements, would be qualitatively and significantly different from the resolutions of which members would be notified, when the meeting was called. 3. It does not seem to me that this submission assists Mr Diamond. For the reasons put by Mr Hutley in reply, there is a real doubt as to whether the amendment proposed by Mr Diamond would have been open, if RTHF had wished to call the general meeting requisitioned by Mr Diamond on the basis that the resolutions could then be put before members in an amended form. It seems to me that the proposed amendments would arguably substantively alter the effect of the resolutions, since their result would be that, rather than six identified persons chosen by members being appointed as directors of RTHF at the general meeting, the remaining director(s) of RTHF would have the opportunity to appoint such directors as he or she saw fit, in order to fill a casual vacancy. The notice of meeting in its present form and the information which Mr Diamond contends should be sent to members of RTHF, would not fairly disclose that possibility to members. 4. In any event, it is plain enough that RTHF does not wish to call that general meeting and the effect of the findings that I have reached is that it is not bound to do so, and Mr Diamond is not entitled to do so upon its failure to do so, where the resolutions take their present form. It is not to the point that, if RTHF had chosen to do what it is not bound to do, then the resolutions could potentially be amended at the meeting.

Orders 1. For these reasons, I am satisfied that declarations should be made in the form sought in paragraphs 1 – 3 of the Originating Process and, in the ordinary course, costs would follow the event. I direct the parties to bring in short minutes of order, within two business days, to give effect to this judgment.

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