The Facts
General manager’s faction vs chairman’s faction
Trouble had been brewing for some time at a not-for-profit company.
The company operated a number of social enterprises, including the provision of training and support services to government programs.
Within the company there were two factions.
One was associated with the company’s general manager, and the other with the chairman of the board, which consisted of eight directors.
Three of the directors were aligned with the general manager’s faction, four were aligned with the chairman’s faction and one unaligned director voted on an issue-by-issue basis.
Conflict erupts between factions over company finances and control of board
About ten years previously, the company had purchased a for-profit company that provided training opportunities and subsequently labour hire.
The intention was to use the profits made by the for-profit company to cross-subsidise the not-for-profit activities of other company entities.
Although originally profitable, the for-profit company began encountering financial difficulties, and divisions began to emerge between the company factions about how to deal with these financial challenges.
The chairman of the board had also become apprehensive that the general manager and his relatives, who held positions in the company, had ambitions to “take over” the company.
The general manager, on the other hand, claimed that the chairman boasted about having the board in the palm of his hand.
The company was in the process of collecting nominations for the election of directors to the board, with the election to take place at the next annual general meeting (AGM) on 10 February 2021.
Board meeting called to adjourn AGM where board elections to occur
Events came to a head in late in January 2021, when the chairman realised that at the upcoming AGM there would be more applicants than vacancies for positions of director. So, the board elections would be contested.
On 3 February 2021, the chairman prepared a list of motions for a board meeting to be held on the following day.
These included a motion declaring a couple of nominations for election to the board to be invalid. If adopted, this would have reduced the number of eligible candidates and hence obviated the need for an election.
The list also included a motion proposing adoption of a statement that the general manager and some of his allies had acted deceitfully.
Most importantly, there was a motion that the AGM set for 10 February be adjourned.
At 3:39 pm on 3 February the chairman sent an email to the board members, calling a board meeting by telephone for 5:00 pm on 4 February 2021.
The email did not include the motions.
In the late morning of the following day, the chairman met with the general manager and gave him the list of the motions.
There was a heated exchange, and the general manager tore the list up saying that he would resign.
The general manager did not in fact resign, however additional motions were added to the list of motions, including noting the supposed resignation of the GM, and appointing the chairman as an interim administrator.
Directors from general manager’s faction do not attend board meeting
Less than an hour before the scheduled 5:00 pm start of the 4 February board meeting, the three directors aligned with the general manager’s faction emailed the chairman saying that they could not attend due to lack of sufficient notice.
The meeting went ahead at 5:00 pm with five directors, only one of whom was not aligned with the chairman’s faction and was in fact not closely aligned with either faction.
The number of attendees was one short of a quorum, but in the litigation that followed, the general manager’s faction declined to rely on the lack of a quorum as a ground of challenge.
Board passes resolution to adjourn AGM and notifies company members
At the board meeting, all resolutions were passed unanimously, including the motion for the adjournment of the AGM.
This outcome was communicated by email to the 45 people who were members of the company and entitled to vote at the AGM for the election of the new board.
General manager’s faction proceeds with AGM and new board purportedly elected
The battle lines were drawn.
In the ensuing days, the chairman authorised the changing of locks on the premises and started, through security staff, to exclude those associated with the general manager from the premises.
On 9 February, a director aligned with the general manager’s faction emailed the company’s members, notifying them that the 10 February AGM would be proceeding as originally scheduled.
At 5:50 pm on 10 February 2021, thirty of the forty-five people entitled to vote tried to enter the company’s premises, but were turned away by security staff.
When they tried to meet in the car park, they were likewise ordered out by security.
They then convened on the footpath outside the company’s premises.
At this meeting, nine people were purportedly elected to the board.
No votes were cast in favour of the chairman, or of the chairman’s factional allies.
The unaligned director who had attended the board meeting on 4 February was elected to the board, but the chairman and the other three were not.
Parties litigate over whether new board duly elected
Both factions commenced litigation.
The general manager’s faction brought its claim in the name of the company, on the basis that it controlled the board.
This faction asked the court to confirm that the nine directors elected at the 10 February AGM were the lawful board of the company.
The individuals comprising the chairman’s faction asked the court to declare the purported election of the board on 10 February invalid.
Expert commentary on the court's decision
Court finds in favour of the company
In Career Employment Australia Ltd v Shepley & Ors [2021] QSC 235, the Queensland Supreme Court found in favour of the general manager’s faction of the company, Career Employment Australia.
The court declared that the resolutions carried by the board on 4 February 2021 were invalid and confirmed the election of the new board carried out at the AGM on 10 February 2021.
Procedural irregularities under the Corporations Act
Under section 1322(2) of the Commonwealth Corporations Act 2001, a proceeding under the Act is not invalidated because of a procedural irregularity unless the court is of the opinion that the irregularity caused or may cause substantial injustice that cannot be remedied by court order and the court declares the proceeding invalid.
The adoption of resolutions by the board was a proceeding under the Act and any failure to give reasonable notice of the board meeting as required by CEA’s constitution would be a procedural irregularity.
Therefore, in order for the court to declare the adoption of the resolutions by the board invalid, CEA (the general manager’s faction) had to demonstrate that the chairman, Mr John Shepley, had failed to give reasonable notice of the 4 February board meeting, and that this lack of notice caused, or may cause, substantial injustice
Chairman fails to give reasonable notice of board meeting
The court found that the notice given of the board meeting was not reasonable in the circumstances.
CEA’s constitution did not define what amount of time constituted “reasonable notice,” and so the court looked to the case law.
The court stated that the mere fact that it might have been possible for a director to attend a board meeting did not in itself establish that the notice was reasonable.
The court also said that an important purpose of giving reasonable notice of a board meeting is to allow directors adequate time to think about how they might vote. This is to ensure that each director can “make the necessary representation of the interests he or she has in his or her hands”. In this instance, there were over a dozen motions, and some of these, including the adjournment of the AGM, were of considerable consequence.
The court rejected the argument of the chairman’s faction that because meetings had been held on short notice in the preceding 12 months due to Covid-19, the notice for this meeting was reasonable.
The 4 February board meeting was not convened in the ordinary course and in the court’s view, the CEA board’s previous practice of holding meetings on short notice was of limited guidance in determining what was reasonable.
The court said that notice required for a specially convened meeting might be more, given the importance of the decisions to be made, or less, depending on the urgency of the situation.
While accepting that it had only been on 25 January 2021 that the chairman had found out that the election of directors to be held on 10 February would be contested, this had to be weighed against the gravity of the matters on which the directors were being asked to make decisions.
Lack of reasonable notice caused substantial injustice
In determining if there was substantial injustice, the court weighed the prejudice that would be suffered if it declared the adoption of the board resolutions invalid, against the prejudice that would be suffered if it did not.
The court noted that case law “supports the proposition that a substantial injustice may arise if a director is deprived of an adequate opportunity to address risks associated with proposed resolutions and the meeting proceeds in their absence.”
Ultimately, the court concluded that the lack of reasonable notice caused an injustice to members, staff and directors of CEA that outweighed any prejudice that would be suffered if the resolutions were not given effect to.
Motion to adjourn AGM cannot be severed from other motions
The chairman’s faction also argued that the motion for adjournment of the AGM should be “severed” from the rest of the motions, so that the question of substantial injustice could be argued in relation to that motion alone.
However, the fact that all the motions at the 4 February board meeting were put forward and voted on as a package made that argument hard to sustain.
The court accepted the submission by CEA’s counsel that “the resolutions were intended to operate collectively to stifle opposition to the board as it existed on 4 February 2021”.
Contrivance by one faction to defeat other faction
The court accepted a number of precedents in which shortness of notice or other procedural failings had not invalidated the decisions of company boards.
However, the court saw the events in this case as pointing to a contrivance by one faction to defeat another.
It may be inferred that there was no great hesitancy in rejecting the case of the chairman’s faction and declaring those nominated by the general manager’s faction, and elected on 10 February, to be the new, validly elected board.
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The obligation placed on the directors of CEA by its constitution to give reasonable notice of board meetings is just one of many obligations placed on company directors.
A new law which came into effect on 1 November 2021 requires that everyone who is (or intends to become) a director of a company, must apply for a Director Identification Number.
Non-compliance can result in a penalty.
For more detailed information see Company directors on a deadline to get their director ID number.