- Notable Unreported Decision
- Appeal Determined (QCA)
SUPREME COURT OF QUEENSLAND
Isaiah Jumeirah Kahrter Pty Ltd as trustee for The Isjuka Trust v Beenleigh Housing & Development Company Limited; Leon v Beenleigh Housing & Development Company Limited  QCA 217
In Appeal No 9706 of 2017:
ISAIAH JUMEIRAH KAHRTER PTY LTD as trustee for THE ISJUKA TRUST
In Appeal No 12522 of 2017:
Appeal No 9706 of 2017
Appeal No 12522 of 2017
SC No 5594 of 2015
Court of Appeal
General Civil Appeal
Supreme Court at Brisbane –  QSC 170
14 September 2018
20 April 2018
Gotterson and McMurdo JJA and Bond J
In Appeal No 9706 of 2017:
In Appeal No 12522 of 2017
PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COMMENCING PROCEEDINGS – SETTING ASIDE ORIGINATING PROCESS OR SERVICE THEREOF – where the appellants applied to have the proceedings summarily dismissed on the ground that it was commenced by the solicitors on the record for the respondent without the respondent’s authority – where the constitution of the respondent provided that a person is unable to be nominated for appointment as a director and will cease to be a member of the company if the person does not pay an annual fee by the commencement date of the relevant year – where the respondent’s solicitors were retained under an agreement executed by two individuals as directors of the respondent – where there were no company records of the respondent to prove that the company directors at the relevant time had paid their annual membership fee – where the appellants argued that the individuals who had purported to act as directors of the respondent, at any time which was relevant to the retainer of the solicitors, were not validly appointed directors or were persons who had become disqualified from continuing to act as directors, because they were not financial members of the respondent as required by its constitution – whether it was open to the primary judge to find that the non-payment of membership fees was not proved by the absence of records to the contrary
CORPORATIONS – MANAGEMENT AND ADMINISTRATION – OFFICERS OF CORPORATION – DIRECTOR – APPOINTMENT – VALIDITY OF ACTS NOTWITHSTANDING DEFECT IN APPOINTMENT OR QUALIFICATION – where article 50 of the respondent’s constitution validated any act done bona fide by a director notwithstanding that it be later discovered that there was some defect in the director’s appointment or continuance in office, or that the director was disqualified – whether article 50 could affect the validity of an act by the Board or a director as against an outsider to the company
CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COSTS – APPEALS AS TO COSTS – OTHER PARTICULAR CASES – where the appellants in both appeals jointly made the originating application – where Mr Leon (the appellant in appeal number 12522 of 2017) withdrew as an applicant before the application was heard – where Mr Leon’s evidence provided the basis for much of the argument ultimately run by the other applicant (the appellant in appeal number 9706 of 2017) – where Mr Leon had a personal interest in the outcome of the application – where the application was unsuccessful – where the primary judge found that Mr Leon gave false testimony and must have known that the case was untenable with no basis in fact – where Mr Leon was ordered to pay the costs of the unsuccessful application upon the indemnity basis up to and after the date of his withdrawal – where Mr Leon accepts that he should pay the costs of the application both before and after the date of his withdrawal – whether the costs to be paid by Mr Leon should be assessed on the indemnity basis
Corporations Act 2001 (Cth), s 201M, s 1322(4)(a)
Albert Gardens (Manly) Pty Ltd v Mercantile Credits Ltd (1973) 131 CLR 60;  HCA 60, considered
Gangemi v Osborne  VSCA 297, cited
Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1;  HCA 54, considered
Morris v Kanssen  AC 459, cited
Royal British Bank v Turquand (1856) 6 El & Bl 327; 119 ER 886;  EngR 470, cited
Sheahan v Londish (2010) 244 FLR 64; (2010) 80 ACSR 337;  NSWCA 270, considered
In Appeal No 9706 of 2017 and Appeal No 12522 of 2017:
D P O’Brien QC, with M K Callanan, for the appellant
P L O’Shea QC, with C S Harding, for the respondent
In Appeal No 9706 of 2017 and Appeal No 12522 of 2017:
Stokes Moore for the appellant
Mitchells Solicitors for the respondent
GOTTERSON JA: I agree with the orders proposed by McMurdo JA and with the reasons given by his Honour.
McMURDO JA: The respondent to these appeals is a not-for-profit company and registered charity, the object of which is to assist Aboriginal and Torres Strait Islanders with housing in Beenleigh and surrounding areas. Its members are able to rent accommodation from a pool of properties which it owns.
The appellant in one of these appeals, Mr Nelson Leon, is a former member of the respondent and until about October 2014, he was employed or engaged by it to perform administrative and other tasks. The respondent says that he was employed as its chief executive officer, which Mr Leon disputes although he did describe himself as the CEO in documents which he prepared or sent at relevant times. In the judgment under appeal, the primary judge disbelieved Mr Leon’s evidence that he was not the CEO.
The other appellant, which I will call “IJK”, is the trustee of a trust under which the principal beneficiaries are Mr Leon and his de facto partner, Ms Pascoa. She is the sole director of IJK.
By a contract of sale dated 12 November 2014, the respondent agreed to sell to IJK 26 of its properties for a total price of $3 million, of which $2.2 million was to be paid on settlement (to occur on 19 December 2014) and the balance was to be paid a year later with interest. The contract settled and IJK paid $2.2 million to the respondent, but nothing more has been paid. IJK became the registered proprietor of the properties.
The respondent claims that it was induced to sell those properties by misleading representations by Mr Leon and IJK that their value was $3 million, when the true value was $6 million. It claims that Mr Leon breached his contract of employment and fiduciary duties which he owed to the respondent, by inducing the respondent to sell at an undervalue.
Those claims are made in the subject proceeding which was commenced in the trial division on 9 June 2015. The appellants disputed the claims, pleading that Mr Leon did not owe the obligations and duties alleged and that his involvement was limited to undertaking certain administrative tasks and undertaking repairs of the properties on a pro bono basis. They have denied that they made any representations as to the value of the properties and they say that the respondent obtained its own valuation and legal advice before entering into the contract.
After the commencement of the proceeding there followed a series of amendments of the respondent’s pleading before, in September 2016, the appellants applied to have the proceeding summarily dismissed on the ground that it was commenced by the solicitors on the record for the respondent without the respondent’s authority. By that application, the appellants also sought an order that the solicitors pay their costs of the proceeding on the indemnity basis. In essence, the application was made upon the basis that the individuals who had purported to act as directors of the respondent, at any time which was relevant to the retainer of the solicitors, were not validly appointed directors or were persons who had become disqualified from continuing to act as directors, because they were not financial members of the respondent as its Constitution required.
In October 2016, the respondent filed a cross-application, seeking an order pursuant to s 1322(4)(a) of the Corporations Act 2001 (Cth) (“CA”), in the form of a declaration that the retainer of the solicitors was not invalid. On 14 October 2016, both applications were adjourned to 3 November 2016 for a one day hearing. On the same date, the solicitors for the appellants advised that Mr Leon “no longer presses the Application” but that IJK did so. When the applications were heard on 3 November 2016, Mr Leon was not a party although he had an obvious interest in the outcome. As I will discuss, he was an important witness.
The primary judge dismissed the application which had been filed by the appellants, holding that at all times the solicitors had instructions from the respondent. More particularly, the judge found that more probably than not, the persons whose positions as directors were challenged had been financial members and directors. In a subsequent judgment, the judge ordered that Mr Leon pay the costs of the application, including those incurred after his withdrawal from that application, upon an indemnity basis. He ordered that IJK pay the costs of the application on the standard basis but that those costs not be assessed or payable until the end of the proceeding. Mr Leon appeals against the order made against him, having obtained leave from the primary judge to do so.
For the reasons that follow I would affirm the decision in the Primary Judgment, but would vary the order for costs against Mr Leon so that those costs are assessed on the standard basis.
The Constitution of the respondent
The members of the respondent do not hold shares. They are obliged to pay an annual membership fee of $10. Membership fees are payable in advance of a membership year, which commences on 1 July.
If an existing member does not pay his or her annual fee by the commencement date of the relevant year, that person will continue to be a member until 31 August of that year, but will be immediately unable to be nominated for appointment as a director. If the annual fee is not paid by 31 August, the person will cease to be a member of the company unless the payment of that fee is suspended or waived by the board. The primary judge noted that there was no suggestion that the board had done so.
Where a member fails to pay the membership fee by 31 August, and the membership ceases, it may be reinstated only by a fresh application for membership.
The Constitution also provides for Associate Membership, which is open to persons who are unable to meet the requirements for membership on the grounds of not residing in the Beenleigh and surrounding area or not being an Aboriginal or Torres Strait Islander.
By clause 21, it is provided that upon admission of a person as a member, his or her name is to be recorded in a register of members, to be kept in the custody of the secretary of the company and made available to any member for perusal.
Clauses 26, 27, 29 and 30 provide for the appointment of directors and it is necessary to set them out in full:
“26 The Board of Directors of the Company shall consist of not more than seven (7) persons nor less than four (4) persons and one (1) position, non executive, can be held by an Associate Member that is Aboriginal and/or Torres Strait Islander and one (1) position, non executive, can be held by an Associate Member that is non Aboriginal and/or Torres Strait Islander who are members of the Company eligible to act as directors of the Company and who shall be elected for that purpose at the Annual General Meeting of the Company. The number of seven (7) persons shall include the President, the Vice President, the Secretary and the Treasurer of the Company.
27 The Board of Directors shall have power subject to the last preceding paragraph hereof to appoint any persons to be members of the Board of Directors either to fill casual vacancies or as additions thereto but any persons who are appointed shall hold office only until the next following Annual General Meeting when he/she shall be eligible for election.
29 Members of the Board of Directors shall be elected at the annual general meeting of the Company. Nominations for Directors shall be in writing on the prescribed form and delivered to the Secretary at the registered office of the Company a minimum of seven (7) days prior to the date of the Annual General Meeting. All nominees must have been financial voting members of the Company and resided in the Beenleigh and surrounding district area for six (6) months prior to the date of the nomination, and can be either a full member or associate member. Nominators and seconders of nominations for a member for the Board of Directors must be current financial members who are eligible to vote at meetings of the Company. Nominations will be displayed at the registered office forty eight (48) hours after closure of nominations.
30 The positions on the Board of Directors will rotate in that each member will be able to serve a term of three years before coming up for re-election. At the first Annual General Meeting after the 30 June 2002 and at every subsequent year one third of the directors for the time being, or, if their number is not three (3) or a multiple of three (3), then the number nearest one third, shall retire from office. A retiring director is eligible for re-election. The directors to retire at an annual general meeting are those who have been longest in office since their last election, but, as between persons who become directors on the same day, those to retire shall (unless they otherwise agree among themselves) be determined by lot.”
Clause 28(c) provides for the vacation of a director’s office as follows:
“(c) The office of the Board of Directors shall be vacated by a Director:
If he/she becomes bankrupt or make any arrangements or composition with his/her creditors.
If he/she is found to be lunatic or becomes of unsound mind.
If by notice in writing to the Company he/she resigns his office.
If he/she ceased to hold office by virtue of any provision of the Law.”
By clause 42 of the Constitution, the board of directors may appoint officers and representatives to whom it may delegate any one or more of its powers as it thinks fit.
Importantly, clause 50 of the Constitution provides as follows:
“All acts bon[a] fide done by any members of the Board of Directors or any committee thereof or any person acting as a member of the Board of Directors shall notwithstanding that it be afterwards discovered that there was some defect in the appointment or continuance in office of any such member or person acting as aforesaid or they or any of them were disqualified, be as valid as if every person had been duly appointed or had duly continued in office and was qualified to be a member of the Board of Directors.”
As I will discuss, the judge was not asked to consider the application of clause 50 because he was informed by the parties, wrongly, that it had no potential relevance.
The solicitors were retained under a written agreement dated 4 February 2015. The document was executed under the common seal of the respondent, with the signatures of two individuals as directors who were Mr Peter Eather and Ms Gail Turnbull. The agreement summarised the subject matter of the retainer and there is no issue as to whether that extended to the claims made in this proceeding. It provided that subject to the further instructions of the respondent, the solicitors would commence legal proceedings against IJK “and any other appropriate parties”. Clause 5 of the agreement provided:
“The Client authorises the Firm to obtain ongoing instructions in relation to the matter from William Davis and such authority will continue until notice in writing signed by all members of the Client board is received by the Firm.”
At this point it may be noted that the contract of sale between the respondent and IJK was also executed under the respondent’s common seal with Mr Eather signing as “President Director” and Ms Turnbull signing as “Secretary Director”. And a related document for the same transaction, also dated 12 November 2014, was executed in the same way. Consequently, the contract by which IJK acquired these properties was made for the respondent by the same individuals who made the costs agreement three months later, but also are said by the appellants to have ceased to be directors from 31 August 2014.
As the parties asked him to do, the primary judge considered the status of purported members of the board on various dates which were said to be relevant to the retainer: 4 February and 17 May 2015 and 3 and 10 August 2016. His Honour considered it more probable than not that those persons were financial members, and directors, of the respondent on those dates. However it is necessary to consider only the position as at 4 February 2015 of the four purported directors who resolved on that day to retain the solicitors. If that was a valid retainer, it authorised Mr Davis, who had become the CEO of the respondent, to give ongoing instructions. Mr Davis remained in that position at the time of the hearing and gave evidence in the respondent’s case.
It may be noted that this is not the type of case, more frequently encountered, where there is a contest between two factions within a company as to the authority of one of them to act on its behalf. There was no evidence that any person within the respondent, either as a member or director, challenged the authority of those who resolved to retain the solicitors, or otherwise challenged the commencement and prosecution of this proceeding.
Evidence of membership
The appellant Mr Leon gave affidavit evidence and was cross-examined. IJK had caused a subpoena to issue to the respondent, requiring it to produce certain documents such as minutes and accounts. In his affidavit dated 27 October 2016, Mr Leon said that he had reviewed the material produced in response to the subpoena, from which he was able to say the following about the status of the four individuals who as purported directors, resolved to retain the solicitors on 4 February 2015. He said that Mr Peter Eather had been appointed on 3 November 2012 and was still purporting to hold the office of a director, as was Ms Gordon who had been appointed on 22 November 2003 and Ms Turnbull who had been appointed (for a second time) on 31 January 2012. The fourth director, Mr David Leon, was said to have been appointed as a director on or about 4 April 2014 before resigning “shortly after” the meeting of 4 February 2015. He identified a record of payments of membership fees by Mr Eather and Ms Gordon, but not by Ms Turnbull and David Leon, for the year commencing 1 July 2014. However the payments by Mr Eather and Ms Gordon were made on 22 January 2015, by which time, on the appellants’ case, their memberships would have lapsed for non-payment of the fee by 31 August 2014. In that same affidavit, there were other arguments advanced by Mr Leon which challenged the status of one or more of these four persons as directors. But from the outline of submissions by IJK’s counsel to the primary judge, the challenge to the status of these four persons was limited to an argument that they failed to pay their fees by 31 August 2014, thereby ceasing to be members and causing their positions as directors to be vacated.
Mr Davis explained the absence of relevant records as follows. After his appointment as CEO of the respondent, which occurred in October 2014 although Mr Davis remained in a position at Southern Cross University in Lismore until January 2015, a dispute arose between the respondent and Mr Leon (the appellant) in which the respondent was claiming that Mr Leon had taken some of its records with him when he left the respondent In November 2014, Mr Leon allowed the respondent access to a commercial storage unit which contained what Mr Davis described as records and other property owned by the respondent, as well as other items which Mr Leon said he owned. Mr Davis was present on this occasion and described his inspection of the items which were found. He said that most of the records which would have been expected to have been generated between January 2013 and October 2014 were not there. He said that the respondent had been unable to locate all of the source documents related to the receipts and expenditures by the respondent for the period from January 2013 to September 2014, and for that reason the respondent’s auditors had been unable to audit financial statements up to 30 September 2014.
Mr Davis said that in early 2015, he began to ask members whether they had paid their membership fees for the year commencing 1 July 2014 and, because of the absence of records, he encouraged all those to whom he spoke to pay (or again pay) the fee for that year, so that the respondent could have a record of the payment. Eleven members (including Ms Turnbull) said that they had paid the fee but that they would not make a further payment of $10. Consequently, Mr Davis said, he arranged for $110 to be paid to the respondent’s bank account. Of course, on the appellants’ argument, those payments were irrelevant because a lapsed membership would not have been revived by the payment of the member’s outstanding fee. But that evidence was relevant to explain how the deposit of $110 was not evidence which was favourable to the appellants’ case. That evidence also explained why the payments by Mr Eather and Ms Turnbull in January 2015 did not support the appellants’ case that they had not paid earlier.
There was no register of members, kept in the custody of the respondent’s secretary, which showed whether the four persons were members in February 2015. The secretary was Ms Turnbull, who swore an affidavit which said nothing about a register of members. Nor did her affidavit say whether she had paid her membership fee, and equally curious was the omission of evidence in any of the affidavits of Mr Eather that he had paid his membership fee. In evidence were bank statements for the respondent’s account at relevant times, which provided no particular support for a case that these individuals had paid their fees, or that they had not done so.
The primary judge prescribed the argument advanced by IJK as based “almost wholly on an absence of records to prove [that the membership fees had been paid]”. He noted that one exception to that might have been the evidence of payments made in early 2015, but concluded that they could be adequately explained by the approaches by Mr Davis to members which I have discussed. The judge said:
“It cannot be doubted that membership and other records over the relevant period have either not been kept or, if they were, that they have been lost or destroyed. Nor can it be doubted that those records were, or should have been, generated at the time when Nelson Leon was acting as CEO of the company. In such circumstances, the evidential onus must be regarded as remaining with IJK as the propounder of the challenge.”
According to that reasoning, before any consideration was given to a list of members which the appellant Mr Leon emailed to a consultant retained by the respondent in November 2014, the evidence had not persuaded the judge that, more probably than not, the purported directors had ceased to be members for non-payment of their fees. Much of the appellants’ argument in this Court challenges the judge’s acceptance of that list as probative of the respondent’s case. The present point is that it was not critical to the judge’s reasoning.
Mr Leon’s list of members
On 5 November 2014, Mr Leon sent an email to Dr Tony Watt, a consultant providing services to the respondent. The email and its attachments were exhibited to an affidavit of Mr Davis, in which it was said that Dr Watt was involved in dealings with Mr Leon about the respondent’s records and financial data. Mr Leon’s email was under the subject “Some reports. more to follow”. It attached three documents, described respectively as “Financial member list as at today”, “Waiting List as at today” and “Water Rates for 7 months”. The list of members was headed “Current Financial members – Full membership”. It listed the names of 45 persons, which relevantly included Mr Eather, Ms Turnbull, Ms Gordon and Mr David Leon. However it contained this notation:
“Memberships are due for renewal annually by 30 June 2014 and are valid for 12 months.”
At the hearing, counsel for IJK objected to the admission of the email and that attachment. It was argued that Mr Leon had not prepared or adopted the list and that it was simply something which had been prepared by an unknown person which had no probative value. It was not said to have been the Register of members which the Secretary was required to maintain under clause 21 of the Constitution.
The judge reserved the question of its admissibility pending the cross-examination of Mr Leon. Subsequently, in the Primary Judgment, he ruled that it was admissible as relevant to whether relevant individuals had been financial members at relevant times.
On that question the judge reasoned as follows. Mr Leon’s denial that he had been the CEO of the respondent was to be rejected and “his claimed ignorance of the provenance or accuracy of the list emailed by him on 5 November 2014 were demonstrated through cross-examination to be most unconvincing.” The judge’s impression of Mr Leon “was of a man who, with little or no regard for the truth, did his level best to avoid saying anything he perceived might assist [the respondent] while at the same time being prepared to advance a version that he must have believed might enhance IJK’s application and, in turn, its prospects of securing an order for the dismissal of the proceeding”. When he emailed this list, Mr Leon “was conveying a belief he [had] held … at that time”. On those findings, the judge had “little hesitation in concluding that the email and list [were] admissible”, coming as they did from a man who only a short time earlier had been acting in the capacity of CEO. The fact that the list was compiled from other documentation did not matter because the evidence established that “the source documentation has been lost or destroyed”.
In this Court, Mr O’Brien QC for the appellants said that the many grounds of IJK’s appeal came down to two arguments, namely that the judge wrongly admitted the email and list into evidence or that he erred in giving inappropriate weight to the document and as compared with the little weight given to other evidence. It can be seen then that the appeal by IJK, and in turn the appeal by Mr Leon, was largely concerned with the use which the judge made of the email and the attached list of members.
In an affidavit, Mr Leon said that he did not prepare the list and that he could recall that it was prepared by a Ms Williams for the financial year commencing 1 July 2013. He said that he simply forwarded the list to Dr Watt, without amending or updating the document for the financial year commencing 1 July 2014, in the circumstance that he did not have access to the respondent’s records by which he could have done so. He pointed to the further fact that the list showed him as a financial member, which, according to other evidence, he had ceased to be. In July 2015, the solicitors acting for the respondent wrote to him confirming that, pursuant to the respondent’s Constitution, his membership ceased when his subscription became overdue by more than two months. As to that last matter, Mr Leon may not have understood that to be the case when he sent his email to Dr Watt in November 2014. Be that as it may, Mr Leon’s more substantial point was that, on its face, this was a list of members as at a date prior to 30 June 2014 and that in November of that year Mr Leon, being no longer employed or engaged by the respondent, was in no position to update it.
In my respectful view, the judge’s further inference that this list was updated from or checked against relevant and reliable source documents, is difficult to accept. There may not have been appropriate source documents which were prepared or kept by the respondent, during the period in which Mr Leon was effectively the CEO; indeed that possibility was recognised by the judge at  of the Primary Judgment.
There is no discernible error in the judge’s finding that when he sent this list to Dr Watt, Mr Leon believed it to be a list of then current members. And I would accept that it tended to prove that these persons were members in the year ending 30 June 2014. But in my view the list was not proof that they were members in November 2014. It was not demonstrated that there were source documents which would have proved that each of these members, the four directors in particular, paid their fee for the then current year.
Nevertheless, as already noted, the judge’s reasoning was not dependent upon this piece of evidence. Nor was it dependent upon evidence in the form of lists for the years commencing 1 July 2014 and 1 July 2015, which Mr Davis prepared working from the list which Mr Leon had sent to Dr Watt. Because the list sent by Mr Leon was not reliable, it was not a proper basis for the lists prepared by Mr Davis. The point is that, quite apart from these pieces of evidence, the judge was unpersuaded by the other evidence that the four directors who met on 4 February 2015 had ceased to be financial members. The question then is whether the judge’s view in that respect is shown to be erroneous.
The judge was influenced by the fact that the fee was in a “nominal amount, and therefore easily affordable”, as well as by the fact that members who had not paid their fees were reminded of the need to do so. He added that the payment of the fee was important because otherwise a membership would be lost and with that, a person’s eligibility to remain (or become) a tenant of one of the respondent’s properties would also be lost. All of those factors were relevant, in my view. It is possible that the administration of the respondent’s affairs was in such disorder that the observance of the rules for membership had become largely non-existent. But that possibility has no particular support in the evidence. Mr Leon’s list of financial members suggests otherwise, as does the fact that letters were sent to members reminding them of the need to pay the fee.
In my conclusion, there is no demonstrated error in the judge’s conclusion that the non-payment of membership fees was not proved by the absence of records which was effectively the basis for IJK’s case. Regardless of whether Mr Leon was responsible for such records not being kept, the absence of those records, taken together with the circumstances which I have discussed in the previous paragraph sufficiently supported the judge’s conclusion.
At least for those reasons, the appeal by IJK should be dismissed. But three further matters should be discussed.
Clause 28 of the Constitution
I have set out earlier the terms of clause 28(c), which provides that the office of a director shall be vacated in certain circumstances. They do not include the circumstance that the director has ceased to be a member. By clause 29, to be nominated for election as a director a person must be a financial voting member, residing in the Beenleigh or surrounding area for six months prior to the date of the nomination. Still the terms of clause 28(c) make it at least doubtful that these four persons ceased to be directors if, as was argued, they ceased to be members after August 2014.
Section 201M of the CA and clause 50 of the Constitution
I have set out earlier the terms of clause 50, which was not considered by the judge for two reasons. The first was that it was irrelevant because of the judge’s findings that the directors were not disqualified; the second was that counsel who then appeared for IJK told the judge that clause 50 could not be relevant and counsel for the respondent agreed. Without reference to authority, each of them told the judge that clause 50 could affect the legal position between members, or between the respondent and a member, but it could not affect the validity of an act by the Board or a director as against an outsider. In the hearing in this Court, the parties were asked to present further written submissions about the potential operation of clause 50 and also on the potential operation of s 201M of the CA. It is appropriate to say something about those questions, because had I held that the judge’s conclusion on the status of the directors should not stand, I would have dismissed the appeal upon the basis of clause 50.
Before discussing clause 50, something should be said about s 201M, which is as follows:
“Effectiveness of acts by directors
An act done by a director is effective even if their appointment, or the continuance of their appointment, is invalid because the company or director did not comply with the company's constitution (if any) or any provision of this Act.
Subsection (1) does not deal with the question whether an effective act by a director:
binds the company in its dealings with other people; or
makes the company liable to another person.
Note: The kinds of acts that this section validates are those that are only legally effective if the person doing them is a director (for example, calling a meeting of the company's members or signing a document to be lodged with ASIC or minutes of a meeting). Sections 128-130 contain rules about the assumptions people are entitled to make when dealing with a company and its officers.”
The operation of s 201M is subject to two limitations. The first is that, as Kitto J said in Grant v John Grant & Sons Pty Ltd about a predecessor of s 201M(1), the provision applies only where “some requirement has been neglected in exercising a power to make an appointment”, as distinct from a case involving “the non-exercise or non-existence of such a power”. In Grant, the appointments of two persons as directors were invalid, not because of any slip in making the appointments, but because the company already had the maximum number of directors who could constitute its board at any time. It was, therefore, a case of the second kind and was outside the operation of the statutory provision. The distinction described by Kitto J derived from the decision of the House of Lords in Morris v Kanssen, and was considered again by the High Court in Albert Gardens (Manly) Pty Ltd v Mercantile Credits Ltd.
In Albert Gardens, security documents were executed purportedly on behalf of the appellant company in favour of the respondent for monies which the appellant borrowed from it. The persons who had executed the documents “as directors” had been formally appointed as directors of the company, but had not at any relevant time held the share qualification which the articles required of a director. The appellant argued that the execution of the security documents was invalid. The argument was rejected for three reasons. One was that the lender was entitled, upon the principle of Royal British Bank v Turquand, to assume that steps had been taken by the company to have the person who executed the security documents on its behalf duly appointed as directors. The second reason was that s 124 of the Companies Act 1936 (NSW) did apply in that case to validate the execution of the documents. The third reason, which is relevant to the potential operation of clause 50 in the present case, was that the execution of the documents was validated by a relevantly identical provision of that company’s articles of association which was as follows:
“109. All acts done at any meeting of the Directors or of a committee of the Directors or by any person acting as a Director shall notwithstanding that it be afterwards discovered that there was some defect in the appointment of such Directors or person acting aforesaid or that they or any of them were disqualified be as valid as if every such person had been duly appointed and was qualified to be a Director.”
Barwick CJ described the appellant’s argument as being in reliance upon the judgment of Kitto J in Grant v John Grant & Sons Pty Ltd, by characterising the case as one of the non-existence of a power of appointment of the directors, rather than the defective exercise of any existing power. Barwick CJ rejected that argument as follows:
“I do not so read the article or so regard such an appointment. In my opinion, it would be too narrow a construction of the articles which require the possession of a share qualification at the time of appointment to treat that requirement as a condition of the ability to appoint a director or directors. It would be destructive of the utility of an article such as art. 109, particularly in the case of companies prone to irregularity in respect of appointments, and would as well weaken the effect of the principle in Royal British Bank v. Turquandhttp://eresources.hcourt.gov.au/showbyHandle/1/11236 - XN.2. In my opinion, the power to appoint is not denied in the case of a person not then holding the share qualification though an appointment of such a person will be defective. It is quite true that, apart from the validating effect of such an article as art. 109, a person who is appointed as a director and who did not have at the time of his appointment the requisite share qualification would not be validly appointed: but this, in my opinion, would be because he lacked the share qualification and not because there was no power in the electing or appointing body or person to have appointed him without the share qualification.
In my opinion, the settled view is that an article such as art. 109 and a section in terms of s. 124 is each effective to validate acts done as director on behalf of a company by a person appointed a director by a person or body with power under the articles to appoint directors … Such an “appointment” was merely defective and art. 109 and s. 124 each operated to validate the execution of the securities, notwithstanding the defect in the appointment or the lack of qualification as director of the signatories. In my opinion, disqualification as used in the article is apt to cover both an initial lack of qualification as well as a subsequent loss of qualification or a disqualification for conduct or other reason.”
The second limitation upon the operation of s 201M comes from the terms of sub-section (2), which had no equivalent in the statutory predecessors of this section. In Sheahan v Londish, Young JA said that the effect of sub-section (2) is that the section does not deal with the questions as to whether an effective act by a director is to be effective “when considering its dealings with third parties”, a subject matter which was dealt with by ss 128 – 130. That was also the view of the court in Gangemi v Osborne.
For present purposes, that second limitation on the operation of s 201M can be accepted, because the same limitation does not apply to the operation of clause 50 of the articles. The primary judge was told by counsel then appearing for IJK that the same limitation did apply in the case of clause 50, because clause 50 “doesn’t bind outsiders … in terms of whether an act of someone purporting to be a director is binding between the company and the members, yes, clause 50 binds, but if you’re looking at it between the company and an outsider, it’s irrelevant.” No authority was cited to the primary judge for that proposition and counsel for IJK later agreed that Young JA had not said so about a relevantly identical provision of the company’s articles in Sheahan v Londish. In that case, the provision was held by Young JA and Lindgren AJA to be inapplicable, not because it could not affect outsiders, but because there had been no purported appointment of the person in question as a director. The potential for a provision such as clause 50 to affect outsiders of a company is illustrated by many cases, including Albert Gardens, where it validated the execution of the security documents and thereby provided a basis for their enforcement by the lender as an outsider of the company.
In this Court, it is submitted for IJK that article 50 could have no application, because this was a case where “substantive provisions relating to an appointment have been ignored or overridden”, adopting the words of Kitto J in Grant v John Grant & Sons Pty Ltd. Had I decided that the judge’s critical finding was wrong, and that the four directors who met in February 2015 had ceased to be directors because their memberships had lapsed at the end of August 2014, I would have held that their acts in retaining the solicitors by the costs agreement were nevertheless valid, by the operation of clause 50. There is no suggestion that these persons were not acting in good faith at the time at which the costs agreement was made. Nobody had then suggested that there was any doubt about their status as directors. In that event, it would have been a case where they had continued in office although disqualified, and their acts on 4 February 2015 would be “as valid as if [each] had duly continued in office and was qualified to be a member of the Board of Directors.” The reasoning of Barwick CJ in Albert Gardens (Many) Pty Ltd, as set out above, is instructive. According to that reasoning, where a share qualification is a requirement for appointment as a director, the absence of that qualification will result in a defective exercise of a power to appoint, rather than the non-existence of such a power. And in the same way, the article would apply also to validate acts of a director who had ceased to satisfy the required share qualification.
For these reasons, I would order that in appeal number 9706 of 2017, the appeal be dismissed with costs.
Mr Leon’s appeal
Mr Leon was ordered to pay the costs of the unsuccessful application upon the indemnity basis. He conceded that he should be ordered to pay the costs of the application up to the date of his withdrawal as an applicant (14 October 2016) on the standard basis. The judge concluded that it was appropriate that he pay the costs even after his withdrawal, essentially because it was Mr Leon’s evidence that provided the basis for much of IJK’s ultimate argument and that as a defendant, Mr Leon had a personal interest in the outcome. The judge found it unnecessary to draw any inference about Mr Leon’s motive in withdrawing from the application, which the respondent had suggested was to avoid a personal liability for costs. Mr Leon does not challenge the judge’s decision that he should pay the costs of the application, both before and after 14 October 2016. His challenge is to the order that the costs be assessed upon an indemnity basis.
In essence, the judge reasoned that Mr Leon should pay indemnity costs because he attempted to promote the application by providing false testimony. The judge said that he could not accept that the application would have been pursued had Mr Leon given a truthful account to those instructing counsel for IJK. Mr Leon, the judge said, must have known that the case then advanced by IJK was “untenable and had no basis in fact”.
As should appear, I do not agree with all of the judge’s findings about the list of members which Mr Leon provided to Dr Watt in November 2014. On my view of the facts, there would not be the same justification for criticism of Mr Leon’s participation in the application and the circumstances would not be so exceptional that indemnity costs would be ordered against him. I would therefore allow appeal number 12522 of 2017, resulting in the costs being assessed on the standard basis.
As to the order to be made, Mr Leon’s notice of appeal seeks an order which, on one view at least, would result in no costs being paid by him. That is inconsistent with his argument here and his concession to the primary judge. I would order that paragraph 3(b) of the orders made on 31 October 2017 be amended by substituting the word “standard” for “indemnity”. I would order that the respondent pay to Mr Leon the costs of this appeal, unless written submissions are made within 14 days of the delivery of this Court’s judgment.
BOND J: I agree with the reasons for judgment of McMurdo JA and with the orders proposed by his Honour.
 Beenleigh Housing & Development Company Pty Ltd v Isaiah Jumeirah Kahrter Pty Ltd as trustee for the Isjuka Trust & Anor  QSC 170 (the “Primary Judgment”) at .
 Primary Judgment at .
 Beenleigh Housing & Development Company Ltd v Isaiah Jumeirah Kahrter Pty Ltd as trustee for The Isjuka Trust & Anor (No 2)  QSC 241 (the “Costs Judgment”).
 By an order made on 24 November 2017.
 Primary Judgment at .
 Ibid at .
 His affidavit of 7 October 2016.
 His affidavit of 3 November 2016.
 Primary Judgment at .
 Sworn on 7 October 2016.
 Primary Judgment at  – .
 Ibid at .
 Ibid at .
 Affirmed on 27 October 2016.
 Primary Judgment at 44.
 (1950) 82 CLR 1 at 53;  HCA 54.
 s 124 of the Companies Act 1936 (NSW).
  AC 459.
 (1973) 131 CLR 60;  HCA 60.
 (1856) 6 E&B 327; 119 ER 886.
 (1973) 131 CLR 60 at 64 – 65.
 (2010) 80 ACSR 337 at 344  (Hodgson JA) 353  –  (Young JA) and 365 – 366  –  (Lindgren AJA);  NSWCA 270.
  VSCA 297 at  (Nettle and Harper JJA) and  (Mandie JA).
 (2010) 80 ACSR 337 at 354 , .
  VSCA 297 at .
 (2010) 80 ACSR 337 at 350  and 365  – .
 See also Dawson v African Consolidated Land and Trading Co  1 Ch 6, British Asbestos Co v Boyd  2 Ch 439 and Channel Collieries Trust Limited v Dover St Margaret’s and Martin Mill Light Railway Co  2 Ch 506 at 511 and 515, each of which was cited by Fullagar J in Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 at 48 for the proposition that it was “well settled that such provisions operate … between a company and outsiders” as well as between the company and its members.
 (1950) 82 CLR 1 at 53.
 Costs Judgment at .
- Published Case Name:
Isaiah Jumeirah Kahrter Pty Ltd as trustee for The Isjuka Trust v Beenleigh Housing & Development Company Limited; Leon v Beenleigh Housing & Development Company Limited
- Shortened Case Name:
Isaiah Jumeirah Kahrter Pty Ltd v Beenleigh Housing & Development Company Ltd
 QCA 217
Gotterson JA, McMurdo JA, Bond J
14 Sep 2018
- White Star Case:
|Event||Citation or File||Date||Notes|
|Primary Judgment|| QSC 170||24 Aug 2017||First defendant's application to have proceeding summarily dismissed: Burns J.|
|Primary Judgment|| QSC 241||31 Oct 2017||Costs Judgment: Burns J.|
|Notice of Appeal Filed||File Number: Appeal 9706/17||18 Sep 2017||Appeal from  QSC 170.|
|Notice of Appeal Filed||File Number: Appeal 12522/17||27 Nov 2017||Appeal from  QSC 241.|
|Appeal Determined (QCA)|| QCA 217||14 Sep 2018||In Appeal No 9706 of 2017, appellant's appeal against  QSC 170 dismissed; In Appeal No 12522 of 2017, appellant's appeal against  QSC 241 allowed in part (substitution of standard costs for indemnity costs): Gotterson and McMurdo JJA and Bond J.|