- Notable Unreported Decision
SUPREME COURT OF QUEENSLAND
Saltwater Studios Pty Ltd & ors v Hathaway & Anor  QSC 435
SALTWATER STUDIOS PTY LTD
SALTWATEROZ HOLDINGS PTY LTD
PAUL TERENCE HATHAWAY as Trustee of the
MICHAEL JAMES HATHAWAY
7 December 2004
8, 11 October 2004
CORPORATIONS – CONSTITUTION AND LEGAL CAPACITY – INTERNAL DISPUTES – derivative action – whether leave to proceed under s 237 Corporations Act 2001 (Cth) should be granted
CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DIRECTORS AND OTHER OFFICERS – APPOINTMENT, REMOVAL, RESIGNATION AND RETIREMENTS – REMOVAL, RESIGNATION OR RETIREMENT – where company had two directors – where criteria to be director of company included employment by company – where one director purported to remove other director by terminating his employment – whether director validly removed
Corporations Act 2001 (Cth), s 140, s 201M, s 236, s 237, s249F, s 249N
AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ACSR 759, cited
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72, cited
Goozee & Anor v Graphic World Group Holdings Pty Ltd & ors  NSWSC 640; 2 ACSR 534, cited
Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1, applied
Hely-Hutchinson v Brayhead Ltd  1 QB 549, cited
Isak Constructions (Aust) Pty Ltd v Faress  NSWSC 784; (2003) 47 ACSR 224, cited
Metyor Inc (formerly Talisman Technologies Inc) v Queensland Electronic Switching Pty Ltd  QCA 269, (2002) 42 ACSR 398, cited
Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279, cited
Re Qintex Ltd (No 2) (1990) 2 ACSR 479, considered
Southern Foundries (1926) Ltd v Shirlaw  AC 701, applied
Swansson v R A Pratt Properties Pty Ltd  NSWSC 583, (2002) 42 ACSR 313, cited
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, cited
J Crowther (solicitor) for the applicants
Crowther Lawyers for the applicants
- This dispute concerns the control of two companies, the first applicant, Saltwater Studios Pty Ltd (“Saltwater Studios”) and the second applicant, Saltwateroz Holdings Pty Ltd (“Saltwateroz”) (together referred to as “the companies”) which were under the control of two brothers: the third applicant, Paul Terence Hathaway, and the first respondent, Michael James Hathaway. The first respondent, Michael Hathaway, purported to dismiss Paul Hathaway from his position as an employee of the companies thereby removing him as a director. The pivotal question to be determined in this application is whether that removal was valid.
- The applicants sought a number of declarations by originating summons. The third applicant sought leave to bring this proceeding on behalf of the companies. The applicants sought declarations:
- that Paul Hathaway is a duly appointed director of the companies;
- that the appointment of the second respondent, Annita Hathaway, as a director of the companies has lapsed and that her name be removed from the records of the Australian Securities and Investments Commission (“ASIC”);
- that the appointment of the respondents as governing directors of the companies is invalid; and
- that the directors of the companies at the Extraordinary General Meeting (“EGM”) on 28 September 2004 were validly appointed.
Leave to Bring Proceedings under section 236 Corporations Act
- Paul Hathaway initiated these proceedings as a shareholder and sought leave to bring proceedings on behalf of the companies. He may only initiate proceedings in the companies’ names if, in accordance with ss 236 and 237 of the Corporations Act 2001 (Cth) (“the Corporations Act”), he has the leave of the court. Section 236 provides:
“(1)A person may bring proceedings on behalf of a company … if
(a)the person is:
(i)a member, former member, or person entitled to be registered as a member, of the company …; or
(ii)an officer or former officer of the company; and
(2)the person is acting with leave granted under section 237.
Section 237 of the Corporations Act provides:
“Applying for and granting leave
(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring … proceedings.
(2)The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings …; and
(b)the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.”
- Paul Hathaway, as trustee of the PT Hathaway Family Trust (the “PH Trust”), is a shareholder in and therefore a member of the companies. He therefore has standing pursuant to s 236(1)(a)(i) of the Corporations Act to make this application. In addition, he has standing pursuant to s 236(1)(a)(ii) as an officer or former officer of the companies. If his removal as a director was valid then he is a former officer; if not, he is an officer.
- In order to grant leave, it is necessary for the court to be satisfied of all the criteria set out in s 237(2), excepting criteria (e) in which a discretion to dispense with the notice requirement is conferred in (e)(ii) “where it was clear to the court that the company was already aware of the matters with which s 237(2)(e)(i) is concerned or that there was some good reason to allow the applicant to represent the company despite its not being so aware.”
- It is argued that in terminating the employment of Paul Hathaway and thereby causing his removal as a director of the companies, Michael Hathaway breached an implied term of his contract with the companies. Michael Hathaway remained a director, and it is therefore unlikely that the boards of the companies, as constituted by himself and his wife as governing directors, would take action against Paul Hathaway for this breach. This satisfies the criteria in (a) – that it is probable that the companies will not themselves bring proceedings – and (d) – that there is a serious question to be tried.
- The questions of whether the action is brought in good faith and in the best interests of the companies are linked. To establish whether there was good faith, the court must consider at least two interrelated factors: first, whether the applicant honestly believes a cause of action exists and that it has reasonable prospects of success; and second, whether there is a collateral purpose for bringing the action that may amount to an abuse of process.
- In addition to his complaint that he was invalidly removed as a director, Paul Hathaway deposes to a number of actions of Michael Hathaway that may amount to fraud on the companies; he does not appear to seek any specific relief for those alleged frauds. Paul Hathaway also complains about the appointment of Annita Hathaway as director and governing director and seeks a declaration that the directors appointed at an Extraordinary General Meeting (“EGM”) on 28 September 2004 were validly appointed. That issue will be dealt with later.
- In so far as most of the claims of Paul Hathaway relate to his initial removal as director, he has an honest belief that there is a cause of action and that cause of action is a valid one. The litigation cannot be seen to be an abuse of process. It is imperative that the questions posed to the court be determined.
- Paul Hathaway has a personal interest in that it was he who was removed as director and he who seeks leave to bring this matter on behalf of the companies. It is in the best interests of the companies that their directors are validly removed and validly appointed in accordance with their constitutions. It cannot be said that merely because the applicant may also have a personal claim against the companies that it is not in the best interests of the companies to grant the application.
- In all the circumstances it is appropriate to grant leave under s 237 to the third applicant, Paul Hathaway as trustee for the PH Trust, to bring this proceeding on behalf of the companies.
Is Paul Hathaway a duly appointed director of the companies?
- In considering the question of whether Paul Hathaway is a director of the companies or whether he was validly removed as a director by the termination of his employment by Michael Hathaway it is necessary to consider the structure of companies and the nature and history of the enterprise they conducted.
- Michael Hathaway and Paul Hathaway formed a view that there was a lack of film studio space in Australia and developed a business plan for acquiring suitable land, constructing a film studio and leasing the studio or using it themselves for film production. After inspecting many sites, they chose 62 hectares of land at the corner of Sunshine Motorway and the Coolum-Yandina Highway at Coolum (the “Coolum land”) which was then zoned rural and used for sugar cane farming.
- They consulted John Kenny, a solicitor, and, acting on his advice, entered into a shareholders’ agreement on 25 January 2001. The companies were purchased. Saltwater Studios and Saltwateroz each had 100,000 ordinary shares with the usual voting, dividend and capital rights, and 100,000 C-class shares which carried no voting rights nor any right to receive a notice of meeting but which had certain rights upon winding up as set out in cl 6 of the constitutions of the companies. On 25 January 2001, 26,000 shares in each class were issued to each of Michael Hathaway’s and Paul Hathaway’s family trusts. Michael and Paul Hathaway were the only two directors of the companies.
- The parties to the shareholders’ agreement were Michael Hathaway and Paul Hathaway, personally, their family trusts, MJ Hathaway Family Trust (“MH Trust”) and the PH Trust, Paul Jeffrey Barnetby, Saltwateroz and Saltwater Studios. Saltwateroz was to own the assets and Saltwater Studios conduct the business using the assets under licence from Saltwateroz. A licence agreement between the companies was entered into to give effect to that arrangement. The business was to be conducted as a joint venture with Michael Hathaway and Paul Hathaway each holding 49 per cent of the shares either personally or through their family trusts with Mr Barnetby holding a two per cent interest.
- The respective roles of Michael Hathaway and Paul Hathaway were set out in Schedule 1 and Schedule 2 of the shareholders’ agreement respectively. Both were to be executive directors, jointly and severally. Michael Hathaway was to act as managing director, including such matters as liaison with Council and Government; architecture and engineering; surveying; town planning; project management; handling the financial records and accounts; outsourcing of accounting and booking services as he saw fit from time to time; and liaison with professionals, including but not limited to accountants and lawyers. Paul Hathaway’s role on the other hand was to act as chairman, including but not limited to the handling of such matters as liaison with film producers; liaison with Government bodies and film creators, training and research bodies; early staff recruitment; completion and updating of business plans; overseeing the development of the website; and re-branding the venture. Mr Barnetby was not at that stage a director; nor did he work on the companies’ behalf on a full time basis.
- Provision was made in cl 2.5 of the shareholders’ agreement for payment of salary to the executive directors and it appears that regular payments of what were properly described in the books of Saltwater Studios as wages were made to each of them. Both were employees of Saltwater Studios. Both directors agreed to be guarantors from time to time. Clause 7.1 provided that each venturer agreed that the services rendered by them to the other parties to the shareholders’ agreement were unique and extraordinary, the loss of which could not be adequately compensated by damages and that each party would be entitled to an equitable remedy to enforce the provisions of the agreement. By cl 9.1, they agreed that they had entered into a fiduciary relationship with each other and would act in good faith.
- The articles of Saltwateroz were found under the name of the company Learning Enhancement Centre Pty Ltd whose name was changed from that to various other company names until it became Saltwateroz. The constitution of Saltwater Studios was found under the name Calypso Sun Pty Ltd which had been its original name.
- On 27 July 2001, the companies resolved that Paul Hathaway would be permanent chairman and Michael Hathaway would be managing director.
- During 2001-2002, Saltwateroz entered into an option agreement to acquire the Coolum land. The precise date of the option agreement was not disclosed in the material before the court. After the option agreement was entered into, Michael Hathaway and Paul Hathaway raised funds to acquire the land and to lodge a Change of Use application with the local Council. This was done by selling shares in the companies. New shareholders were allotted a particular number of shares which were identical in each company and each new shareholder held the same number of ordinary shares and C-class shares.
- On 2 April 2002, Saltwater Studios agreed to lend money to Paul Hathaway and Michael Hathaway up to the level of fees they were owed. A Change of Use application was lodged by Saltwateroz in about May 2002 and in November 2002, a Master Development Plan was submitted to the Council.
- On 3 September 2003, the companies held general meetings where new constitutions were adopted. They continued to have 100,000 ordinary shares and 100,000 “C” class shares. The list of attendees shows that the number of shareholders had substantially increased.
- Unsigned minutes of a meeting of Saltwater Studios on 11 September 2003 at which Paul Hathaway, Michael Hathaway, Christopher Davies and Paul Barnetby are noted as being present, record an offer to Christopher Davies and Paul Barnetby to become directors of the companies. The respective roles of the four directors were set out with each person being referred to by their initials as follows:
- “PH: liaison with government agencies (not related to MCU), coordination of potential tenants (training and film lot), development of relations for post-production and telecommunications, coordination of business planning documents.
- MH: liaison with Council, public consultation coordination (CPR), liaison with government agencies (MCU), liaison with consultants (MCU and design), legal and accounting, office staff.
- PB: coordination of funding process, assistance with MCU process.
- CD: assistance with fund raising and securing of future tenants.”
- Michael Hathaway used the reference to “office staff” to assert that it had been agreed by Paul Hathaway, himself and “the other then Directors”, that, as Managing Director, he would be responsible for the employment and termination of staff. He deposed that he kept his own handwritten notes of those meetings which assisted his recollection that all directors of both companies agreed that, in his role of Managing Director, he was to deal with office matters and staffing matters. Paul Hathaway denied that it was resolved at that meeting that Michael Hathaway would be responsible for the employment and termination of staff.
- There are certain problems with being able to accept Michael Hathaway’s evidence at face value. The reference to that matter in the unsigned minutes of the 11 September 2003 meeting is only to “office staff”. The handwritten notes said to support a wider meaning were not exhibited or otherwise put in evidence. There were no “other then Directors” as Christopher Davies and Paul Barnetby had not yet been appointed directors. Even if those problems are ignored, then it is far from obvious that Michael Hathaway’s understanding of what had been agreed, if correct, would be sufficient to give him the power to dismiss an employee of the companies who did not fit the description of “office staff” and who was the only other director of the companies.
- On 24 September 2003, Michael Hathaway disclosed to Paul Hathaway by email that he, Michael, had borrowed $133,500 from Saltwater Studios, whereas Paul Hathaway had borrowed $14,700. Paul Hathaway deposes that this was the first he knew of any borrowing above the level he had borrowed, which was the amount which they had agreed each would borrow from the company.
- On 29 October 2003, a Deed of Termination was entered into which had been drawn up by Kimballs Lawyers, who were then the solicitors acting for the companies. It was designed to terminate the shareholders’ agreement. It was signed by the original participants – Michael Hathaway as trustee for the MH Trust, Paul Hathaway as trustee for the PH Trust and Paul Barnetby as trustee for the Barnetby Family Trust and the Barnetby Super Fund; and by the subsequent shareholders, who by this stage numbered more than 30.
- Christopher Davies and Paul Barnetby were appointed directors of Saltwater Studios by resolution of its directors on 14 November 2003 as from 22 October 2003; each director being given specific roles. Annita Hathaway, Michael’s wife, was office manager of Saltwater Studios, and informed Paul Hathaway, Mr Davies and Mr Barnetby on 18 November 2003 that the appointment of Mr Davies and Mr Barnetby had been registered with ASIC. These appointments were made pursuant to cl 22.2(a) of the constitutions of the companies which provided that the directors could appoint other directors. However, pursuant to cl 22.2(b) these appointments would cease at the end of two months unless confirmed by resolution of the company within that time. Michael Hathaway told Paul Hathaway that he would call an extraordinary general meeting of the company to ratify the appointment of Mr Davies and Mr Barnetby.
- At a meeting of the directors of Saltwater Studios, Michael Hathaway, Paul Hathaway, Christopher Davies and Paul Barnetby on 18 November 2003, it was resolved to pay “net back wages of $350,000” to Michael Hathaway and Paul Hathaway. Other fees to be paid to the directors were also agreed. The amounts to be paid to Michael and Paul Hathaway were to be equal one to the other. The triggering event for the payment of the $350,000 was the raising of $2,000,000 which, according to Michael Hathaway, occurred on 8 December 2003 (“the loan”) when the mortgage refinance of the Coolum land occurred. Security for the loan which was in the amount of $2,500,00.00 was a registered mortgage over Lots 5 and 6 on RP27021 and Lot 103 SP161826, County of Canning, Parish of Maroochy, a fixed and floating charge over Saltwateroz and guarantees and indemnities from Michael Hathaway, Paul Hathaway, Paul Barnetby and Christopher Davies. Settlement on the purchase of the Coolum land occurred on the following day, 9 December 2003, for what was described as “approximately $1.6 million”.
- At a meeting held on 25 November 2003 the directors agreed as follows:
“All agreed that the Board should make all decisions outside the normal day-to-day running of the office.”
- On 27 January 2004, Michael Hathaway prepared a report for Saltwater Studios saying in part:
“The company owes PH about $180,000 and MH about $80,000 [down from 150,000.00 after paying an old bill turned nasty].”
While such a payment was consistent with the agreement made on 28 November 2003 to pay net back wages of $350,000, it was not consistent with the agreement that each of Michael and Paul Hathaway should be paid the same.
- Board meetings with the four directors took place where the various efforts made by different directors was discussed. At the board meeting on 18 February 2004, it was resolved that the board would be responsible for appointing consultants and employing new employees. However, relationships between the directors deteriorated. Michael Hathaway was unhappy about his brother’s involving Stephen Foley in the business as Mr Foley was made a bankrupt in New Zealand in August 2001. Paul Hathaway deposed that as soon as Mr Foley’s bankruptcy became known, he was dismissed and that he agreed to that dismissal. It does appear, however, that his agreement was reluctant.
- The minutes record that “there were still requests” from Paul Barnetby and Michael Hathaway for Christopher Davies and Paul Hathaway to resign from the Board. Paul Hathaway was unwilling to do so.
- On 7 April 2004, Michael Hathaway wrote to Chris Davies, Paul Barnetby and Paul Hathaway stating that as Mr Davies’ and Mr Barnetby’s appointment as directors had not been confirmed by general meeting, pursuant to cl 22.2(b) they ceased to be directors of Saltwater Studios and Saltwateroz on 22 December 2002. He advised Mr Barnetby and Mr Davies that Saltwater Studios would give them two weeks’ pay in lieu of notice.
- On the same date, Michael Hathaway sent a “Notice of board dispute” to Paul Hathaway saying Paul Hathaway’s actions were affecting the efficient operations of Saltwater Studios and proposing a meeting be held on 21 April 2004 chaired by the company’s solicitor. He said that if no solution was agreed between the two of them then a third director might be appointed in accordance with the constitution.
- On 13 April 2004, Michael Hathaway wrote to Paul Hathaway complaining about Paul’s activities with Saltwater Studios and asserting, “Please cease all involvement in operational matters until your activities past and future have been discussed with this office.” He asked if Paul Hathaway had noted in his diary the board meeting to be held in the solicitors’ office on 21 April 2004.
- Then on 19 April 2004, Michael Hathaway first warned Paul that his employment was at risk and then purported to terminate Paul Hathaway’s employment with Saltwater Studios. Michael Hathaway also wrote to Paul Hathaway on Saltwateroz letterhead informing Paul Hathaway that he had ceased to be a director of Saltwateroz as his employment with Saltwater Studios had been terminated. Yet, on the same date, that is 19 April 2004, Michael Hathaway sent an agenda to Paul Hathaway on Saltwateroz letterhead for the board meeting to be held on 21 April. Apart from notifying the time, date and place for the meeting, it said:
“Sole Itinerary [sic]: (As per Clause 39.5b of the constitution) -
‘The directors must meet and agree on the identity of an independent person to be appointed to the board as a director to break the deadlock.”
- The method of appointment and removal of directors is set out in clauses 22 and 23 of the constitutions of the companies. Clause 22.1 provides that the number of directors would not be fewer than two nor more than 25, and that the company was able to appoint directors and increase or reduce the permissible number of directors by resolution passed in general meeting. Clause 22.3(a) sets out the way in which directors can be removed and replaced. It provides:
“Removal of Director
(a)The members by special resolution may remove any Director and may by special resolution appoint another person in that Director’s stead.”
- Clause 22.10(a) provides that the office of a director will be vacated in various specified circumstances. Clause 22.10(b) is the relevant clause in these proceedings. It provides that:
“The office of a Director who is also an employee of the Company or of Saltwater Studios Pty Ltd is terminated on the Director ceasing to be so employed …”
- It was argued on behalf of the respondents that Michael Hathaway had power, as managing director, to dismiss the only other director, Paul Hathaway, from his employment with the companies which would lead to the automatic termination of his directorship.
- It is certainly true that s 198C of the Corporations Act provides that the directors may confer on a managing director any of the powers that the directors can exercise. It is apparent, however, that no such conferral is found in the constitutions of the companies which make no reference to the position of “managing director”. Clause 23.1 in the constitutions provides that the business of the companies is managed “by the Directors”.
- However, the managing director has implied authority to do all such things as fall within the usual scope of that office. This includes the day to day management of the companies and may include personnel decisions. They include the “normal day-to-day running of the office” referred to in Michael Hathaway’s notes of a meeting of himself, Paul Hathaway, Chris Davies and Paul Barnetby on 25 November 2003. But his or her powers are not unlimited. In Re Qintex Ltd (No 2), for example, it was held that the office of managing director did not carry with it the authority to make critical decisions following the presentation of a petition to wind up the company, such as deciding to oppose the application and appointing legal representatives to carry out those instructions. The power of a managing director does not impliedly include the capacity to remove the only other director of the companies from his employment and thus remove him from being a director. Nor was such a power explicitly conferred on him in this case.
- Clause 39 of the constitution of each company deals with the resolution of any dispute, disagreement, ‘deadlock’, difference or claim arising between, inter alia, the directors concerning the proper and efficient operation and control of the company through the board. In those circumstances, the procedures set out in Part A of the constitutions must be followed. The provisions are clear and detailed. Notice of the nature of the dispute and the outcome sought must be given, together with notice of what action that director thinks will settle the dispute. The directors must then negotiate in good faith for a period of up to seven days to attempt to resolve the dispute. If they are unable to resolve the dispute, the directors must meet to agree on the identity of an independent person to be appointed to the board. If they cannot agree then any director may refer the matter to the National President of the Australian Institute of Company Directors for the purpose of appointing an independent person to the board. Detailed provisions set out the role of that independent person. The procedure in Part A was initially followed but abruptly aborted when Michael Hathaway purported to terminate Paul Hathaway’s employment before the meeting to agree on the identity of an independent person to be appointed to the board. The procedures set out in Part A were not followed after that time. Rather, Michael Hathaway took the step of terminating his brother’s employment.
- That the procedure set out in Schedule A was not followed suggests that the removal of Paul Hathaway as a director was done in bad faith. To adopt the words of Lord Atkin in Southern Foundries (1926) Ltd v Shirlaw, one director cannot get rid of the only other director by disabling the other director from continuing. When each party may only be a director when a certain state of affairs exists, it is an implied term of the contract between the parties and each party and the company that neither may do something of his or her own motion to prevent the other from satisfying that state of affairs. The company’s constitution is a contract between the company and its members, and between each member pursuant to s 140(1) of the Corporations Act. Michael Hathaway’s action in removing his brother as the only other director by terminating his employment was, in these circumstances, a breach, not only of an implied term of his contract with Paul Hathaway, but also his contract with the companies. It follows that Paul Hathaway remains a duly appointed director of the companies.
Appointment of Annita Hathaway as director
- On 21 April 2004, Annita Hathaway was appointed a director of Saltwater Studios and Saltwateroz. That happened in the following way. Michael Hathaway appointed his son, Beau Hathaway, as a director of the companies “to constitute a quorum” pursuant to clauses 22.2a and 24.5 of their constitutions. The boards’ minutes note the following resolution:
“Beau Jordan Hathaway of 18 Grandview Drive, Coolum Beach Qld 4573, born in Ipswich Queensland the 1st day of February 1985, is appointed as Director for the purpose of constituting a quorum to appoint Annita Merle Hathaway of 18 Grandview Drive, Coolum Beach Qld 4573 born in Brisbane, Queensland the 15th day of February 1963 a Director of [Saltwateroz and Saltwater Studios respectively].”
Oddly enough, there was no resolution actually appointing Annita Hathaway as a director of the companies. Perhaps it could be implied but not in these circumstances where Paul Hathaway was not given notice of this meeting even though he lawfully remained a director. It follows that Annita Hathaway was not validly appointed a director of the companies.
- There is yet another reason why the appointment of Annita Hathaway as a director, even if it were valid at the time of her appointment, became invalid. Clause 22.8 of the constitution of each company provides that:
“Each Director is required to hold, within two months of the Director’s appointment and thereafter during the period of the office of Director, not less than two and one-half percentum (2.5%) of the issued Ordinary Shares of the Company, or such minimum amount as determined by the Board from time to time.”
On 21 June 2004 the companies met and discussed Annita Hathaway’s appointment as director in the following terms:
“We note Annita Hathaway is a beneficiary of the MJ Hathaway Family Trust which currently owns 26,000 shares out of almost 80,000 issued (or 32%). We note boards decision on 13th May 2004 to issue Michael Hathaway and Annita Hathaway 1,200 shares each in recognition of risk to professional reputation undertaken at the and [sic] further board decision on 14th June 2004 for compensation in recognition of risk to life in continuing to run the project, however it is recommended that this amount be taken under further advice.
It is the view of the board that Annita Hathaway meets the share requirement as set out in constitution and its decided the board will set the minimum requirement at 0.05% for Directors at this stage of the project. This will be reviewed at later stage.
... We acknowledge that Annita Hathaway (along with Michael Hathaway) was appointed Governing Director by the board on 23rd April 2004, hence does not need to have appointment confirmed in general meeting.”
“1.We resolve to fix the minimum share qualification for Directors at 0.05%
2.We resolve that the Directors appointed by current board need to be confirmed under the hands of the Governing Directors. There will be no need for confirmation in general meeting.”
The shareholder register of the companies has never shown Annita Hathaway as a shareholder of either company. There is no evidence which suggests that the MH Trust is different from the usual discretionary family trust which would be insufficient to confer beneficial ownership on Annita Hathaway.
Appointment of Michael Hathaway and Annita Hathaway as governing directors
- On 23 April 2004, Michael Hathaway and Annita Hathaway met purportedly as the boards of Saltwateroz and of Saltwater Studios. They resolved to appoint themselves as governing directors; appoint Annita Hathaway as chairman and confirm Michael Hathaway as managing director. As “duly appointed” governing directors they “confirmed the removal of Chris Davies, Paul Barnetby and Paul Hathaway as Directors.”
- The board of each company has the power pursuant to cl 30 to appoint no more than two of their members to the office of Governing Director. However as Mr Hackett on behalf of the respondents conceded, their capacity to do so and their capacity to resolve the other matters referred to in the previous paragraph stands or falls on the validity of the removal of Paul Hathaway as a director.
- The respondents argue that notwithstanding the defect in the appointment of Annita Hathaway as a director, the resolutions of the companies after her appointment are valid because of the effect of cl 24.9 of the constitutions and s 201M of the Corporations Act. Clause 24.9 of the constitutions of the companies provides that:
“All acts done by:
- any meeting of the Directors; or …
- any person acting as a Director;
notwithstanding that it is afterwards discovered that:
- there was some defect in the appointment of a person to be a Director … ; or
- there was some defect in the appointment of a person to act as a Director; or
- the person so appointed was disqualified;
are valid as if the person had been duly appointed and was qualified to be a Director …”.
- This rule is to somewhat similar effect as s 201M of the Corporations Act which provides:
“(1)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.”
- Such a rule does not however make the invalid appointment of a person as director valid. Annita Hathaway was not validly appointed a director, nor therefore a governing director. This provision will not make the appointment of Michael Hathaway as governing director valid unless the three circumstances set out by Fullager J in Grant v John Grant & Sons Pty Ltd apply. Those circumstances are:
- there has been an irregularity in appointment;
- the slip has occurred because the parties have not had present in their minds the legal difficulties in the way of doing what they honestly thought they were entitled to do; and
- the acts were done in good faith.
- The appointment of Michael Hathaway as governing director was apparently done, inter alia, to confirm the unlawful removal of Paul Hathaway as a director and to avoid the need for a general meeting to confirm Annita Hathaway’s appointment as a director. As such, it could not be said to have been done in good faith. The appointment of Michael Hathaway as governing director was accordingly invalid.
Appointment of directors at the EGM of 28 September 2004
- On 2 September 2004, Paul Hathaway delivered notices of an EGM of each of the companies to be held on 28 September 2004. The notices were the same in terms and read:
“NOTICE IS HEREBY GIVEN that an EXTRAORDINARY GENERAL MEETING of the abovenamed company will be held at 60 Edinburgh Road Benowa Waters on 28 September 2004 at 10.00am for the purpose of considering the following ordinary resolutions and/or special resolutions:
- Michael James Hathaway be removed as a director of the company.
- Confirmation that Paul Terence Hathaway and Christopher Davies are directors of the company.
- The following persons be appointed directors of the company:
- Mark Neilson
- Gary Duke
- Adam Hanson
- Stewart Freeman
- Phillip Oates
- Deana Stojanovic” (“the three resolutions”).
The EGM was called by Paul Hathaway and Carlo Bolodian who represented shareholders with collectively more than 5 per cent of the issued share capital of each company who were entitled to call a general meeting of a company pursuant to s 249F of the Corporations Act 2001.
- On 3 September 2004, the same notice was sent out but with the usual notice as to proxies appended to the notice. Mark Neilson and Carlo Bolodian, shareholders of the company, together deposed to having posted copies of the notices to all shareholders appearing on the Share Registry which Michael Hathaway had provided to Mark Neilson at his request on 24 August 2004. Copies were posted by ordinary mail, except to Annita Hathaway, Michael Hathaway, the MH Trust, the Barnetby Family Trust and the Barnetby Super Fund; all of whom were sent their notices by registered mail. The companies were given notice of the meetings at their registered office, 60 Edinburgh Road, Benowa Waters.
- Paul Hathaway deposed that on 6 September 2004, he caused a third notice to be issued to all the shareholders and deposited a notice with the registered office. That notice said:
“This is to advise that three additional names are to be added to the list of directors to be appointed at the AGM for Saltwater Studios P/L and Saltwateroz Holdings P/L on the 28th of September 2004. The completed list should read
- Various shareholders also received notice of an open day to be held at the office of Saltwater Studios on 25 September 2004. This notice was sent on behalf of Michael and Annita Hathaway. At the open day a letter dated 24 September 2004 from Kimballs Lawyers, acting as solicitors for the companies instructed by Michael and Annita Hathaway, was given to various shareholders (the “Kimballs’ advice”). Those who deposed to receiving it were Paul Barnetby who received it on behalf of Barnetby Super Fund which held 2000 ordinary shares in each company and on behalf of the Barnetby Family Trust which held 2200 ordinary shares in each company; Steven Mitchell, who together with Sandra Mitchell, held 600 shares; Donna Slaven who held 700 shares; Kim Hathaway, as representative of XOR Partnership, which held 180 shares; and Simon Passlow, a representative of the shareholders, MWP Joint Venture and DSG Superannuation Pty Ltd, who held 3,500 shares. The Kimballs’ advice told shareholders, staff and creditors of the companies that, in Kimballs’ view, the general meetings called for 28 September 2004 had not been validly called as not all members had been given notice of the meeting; none of the proposed special resolutions had been detailed sufficiently; and the companies had not been properly notified of the meeting. The Kimballs’ advice said it was unnecessary for any company representatives to attend and any resolutions passed at such a meeting would be of no effect. Those shareholders said that, relying on the Kimballs’ advice, they did not attend the meeting. They deposed that had they attended, they would have voted against each of the three resolutions. It was conceded at the hearing of this matter that each of them received notice of the EGM.
- A number of other shareholders said that they received the notice of EGM and the Kimballs’ advice, did not attend the EGM, but, if they had, would have voted against each resolution. On the other hand, other shareholders received the Kimballs’ advice but did attend the EGM. Timothy Cragg said he thought the EGM had been validly called. He abstained from voting to remain impartial in the present dispute. Peter Gibson said he attended the EGM and also abstained.
- The respondents assert that the EGM was not validly held. The first reason given was that the meeting did not have a relevant quorum. Clause 20.3 of the companies’ constitutions provides that a quorum cannot be constituted without the presence of a governing director and that as Michael Hathaway was not present there could not be a quorum. However as I have found that Michael Hathaway was not validly appointed as governing director this objection has no substance.
- The second objection was that none of the three notices of the EGM was served on all members. However, the list of shareholders to whom notices were sent was obtained from Michael Hathaway. It was conceded at the hearing that a number of shareholders did receive notice of the EGM. This point was not fatal to the validity of the EGM.
- Of more substance is the third objection. It was that notice was not properly given to the companies of the calling of the EGM contrary to the requirements of s 249N(1) of the Corporations Act. The notice was served on their registered address, 60 Edinburgh Road, Benowa Waters. That address had become their registered address on 30 August 2004 when Paul Hathaway changed their registered address with ASIC from 18 Grandview Lane, Coolum Beach to the Benowa Waters address. He did not, however, have the authority of the boards of the companies, which were then properly constituted by Paul Hathaway and Michael Hathaway, to change the registered address of the companies nor to appoint Christopher Davies as a director as the change of company details of 26 August 2004 purported to record. Service on the Benowa Waters address was not adequate to give notice of the EGM to the companies. It follows that the meeting could not pass binding resolutions on behalf of the companies and the purported appointment of directors at the EGM was invalid.
- The companies should be directed to file documents to rectify the ASIC register to reflect the fact that the only two directors are Michael Hathaway and Paul Hathaway, there are no governing directors and the registered address of the companies is 18 Grandview Lane, Coolum Beach.
Orders and declarations
- Paul Terence Hathaway has leave to bring this proceeding on behalf of Saltwater Studios Pty Ltd and Saltwateroz Holdings Pty Ltd.
- Paul Terence Hathaway is a duly appointed director of Saltwater Studios Pty Ltd and Saltwateroz Holdings Pty Ltd.
- The appointment of Annita Hathaway as a director of Saltwater Studios Pty Ltd and Saltwateroz Holdings Pty Ltd is invalid.
- The appointment of Michael James Hathaway and Annita Hathaway as governing directors of Saltwater Studios Pty Ltd and Saltwateroz Holdings Pty Ltd is invalid.
- The appointment of the directors of Saltwater Studios Pty Ltd and Saltwateroz Holdings Pty Ltd at the Extraordinary General Meeting held on 28 September 2004 is invalid.
- Saltwater Studios Pty Ltd and Saltwateroz Holdings Pty Ltd are directed to file documents to rectify the register of the Australian Securities and Investments Commission to show that:
(1)the only two directors are Paul Terence Hathaway and Michael James Hathaway;
(2) there are no governing directors; and
(3) the registered address of Saltwater Studios Pty Ltd and Saltwateroz Holdings Pty Ltd is 18 Grandview Lane, Coolum Beach.
 Isak Constructions (Aust) Pty Ltd v Faress  NSWSC 784; (2003) 47 ACSR 224 at 226 .
 Goozee & Anor v Graphic World Group Holdings Pty Ltd & ors  NSWSC 640; 42 ACSR 534 at 541 .
 Isak Constructions (Aust) Pty Ltd v Faress  NSWSC 784; (2003) 47 ACSR 224 at 229 .
 Swansson v R A Pratt Properties Pty Ltd  NSWSC 583, (2002) 42 ACSR 313 at 320 .
 Metyor Inc (formerly Talisman Technologies Inc) v Queensland Electronic Switching Pty Ltd  QCA 269, (2002) 42 ACSR 398 at  - .
 Hely-Hutchinson v Brayhead Ltd  1 QB 549 at 583; Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72.
 AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ACSR 759 at 866-867.
 (1990) 2 ACSR 479
 cf Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279 at 291; Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285.
  AC 701 at 717.
 (1950) 82 CLR 1 at 49.
- Published Case Name:
Saltwater Studios Pty Ltd & Ors v Hathaway & Anor
- Shortened Case Name:
Saltwater Studios Pty Ltd v Hathaway
 QSC 435
07 Dec 2004
- White Star Case:
No Litigation History