Gallop Reserve Pty Ltd v Matton Developments Pty Ltd & Anor

In this decision, Holmes CJ considered issues relating to directors’ meetings, estoppel, and assignment. The two questions considered that are the subject of this note were whether the appointment of a director at a directors’ meeting held without quorum was automatically validated by s 1322(2) of the Corporations Act 2001 (Cth), and whether it could be validated by the Court under s 1322(4). The Chief Justice answered both questions in the negative.

Holmes CJ

13 May 2019

Background

The plaintiff (“Gallop”) entered into a litigation funding agreement with the first defendant (“Matton”), pursuant to which Gallop provided litigation funding to Matton. [17]. Matton prosecuted – and ultimately settled – an insurance claim against CGU Insurance Limited (“the CGU proceedings”). [1]. Matton paid the proceeds of that settlement into court. [1]. Some of the funds were ultimately paid out to Gallop. [1]. Matton had an earlier debt to the Westpac Banking Corporation (“Westpac”) pursuant to a loan agreement (“the Westpac loan”). [6]. Matton’s rights and obligations under the loan agreement were subsequently assigned to Gallop. [1].

Gallop acted through its sole director, Foggo. [4]. Matton had two directors: Clarke (the second defendant) and Kenward. [4]. The litigation funding agreement between Gallop and Matton was executed only by Kenward, and thus did not comply with s 127(1) of the Corporations Act 2001 (Cth). [15]. Kenward subsequently purported to hold a directors’ meeting without Clarke, and appointed a third director to Matton despite the absence of a quorum. [21]–[26]. Kenward and the third director signed a Deed of Variation to ratify the litigation funding agreement and a power of attorney in favour of Kenward. [27].

Claims

In the present case, Gallop advanced two claims against Matton: (i) a claim in respect of money lent by Gallop to Matton to enable it to litigate the CGU proceedings; and (ii) a claim in respect of Matton’s indebtedness to Westpac under the Westpac loan. [1]. Gallop sought: (i) an order for payment to it of the funds remaining in court; (ii) declarations as to the validity and enforceability of certain deeds and agreements in relation to the litigation funding; and (iii) a declaration that it was entitled to apply already recovered funds to discharge Matton’s debt under the litigation funding agreement in priority to the amount which Matton owed on the assigned Westpac loan. [1]. The result of the third order would be that the amount owing on the Westpac loan would remain unpaid. [50]. Clarke also made various claims against Gallop. [3].

Issues

A number of issues arose for decision. [53]. The issue that is considered in this note was whether the litigation funding agreement was ratified. [53]. Because the third director signed the Deed of Variation (which purported to ratify the litigation funding agreement) as a director of Matton, this issue required consideration of whether the resolutions passed at the directors’ meeting, particularly that which purportedly appointed the third director, were valid. [53].

Whether the litigation funding agreement was ratified?

Gallop advanced two alternative bases for the validity of the resolutions. First, it relied on s 1322(2) of the Corporations Act, which provides that “[a] proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid”. [58]. Gallop argued that the appointment of the third director entailed a procedural irregularity, being an absence of a quorum at the directors’ meeting. [59]. It argued that there was no substantial injustice caused by the appointment, which was said to be necessary, in light of noncooperation by Clark, in order to obtain funding for the CGU proceedings in circumstances where it was expected to settle at mediation with the result, beneficial to Clark, that the Westpac loan was likely to be paid out. [59]. The Chief Justice rejected this argument:

“I do not consider that what occurred at the directors’ meeting entailed a procedural irregularity. It was not merely the lack of a quorum, but the installation of a purported quorum. The [CGU proceeding] was [Matton’s] only business at that stage, and the motivation was clearly to exclude Mr Clark from involvement in it. What occurred was intended to subvert Mr Clark’s right to participate in decisions as to the company’s management by the appointment of [the third director] as an additional, compliant director, so that she and Mr Kenward could then pass resolutions which would not have been passed otherwise ... [T]his was an irregularity which ‘...change[d] the substance of ‘the thing to be done” ... it did not merely depart from the prescribed manner of doing it. For the same reason, I do not accept that the passing of the resolution to enter into the Deed of Variation or the resolution to confer the power of attorney, in circumstances where only one person at the meeting was a director and entitled to vote, amounted to procedural irregularities. These were substantive irregularities.” [65].

Second, Gallop relied on s 1322(4)(a) of the Corporations Act, which relevantly provides that the Court may make “an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation”. [60]. Section 1322(6) precludes the making of an order under s 1322(4)(a) unless the court is satisfied: (i) that the act, matter or thing, or the proceeding, is essentially of a procedural nature; (ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or (iii) that it is just and equitable that the order be made; and (iv) that no substantial injustice has been or is likely to be caused to any person. [61].

Gallop argued that the appointment of the third director was procedural, that Kenward honestly believed that the way in which he was proceeding was proper on solicitor’s advice and also necessary in order to advance the CGU proceeding, and that for those reasons it was also just and equitable that a declaration be made that the third director’s appointment was not invalid. [62]. It argued that there was no substantial injustice. [62]. The Chief Justice held that the pre-requisites in s 1322(6) were not satisfied. [66]. She held that the “purported appointment of [the third director] as part of a plan to oust Mr Clark from involvement in the company’s affairs was not a mere procedural step”, and that on the evidence she was not satisfied that Kenward acted honestly. [66]. In addition, the Chief Justice was not “satisfied, given that the contravention was designed to effectively prevent Mr Clark from exercising his role as a director, and the concealment from him of the steps taken, that it would be just and equitable to make an order under s 1322(4)(a) declaring that [the third director’s] appointment was valid”. [66].

M J Hafeez-Baig