This case concerns the veracity of resolutions made in a number of meetings of the directors of the applicant company, the Ngarluma Aboriginal Corporation (NAC). The parties to the case are the NAC, a PBC registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act). The first respondents were accepted as members of NAC at the November meeting. The second respondents were accepted as members of the NAC at the September meeting and accepted again at the November meeting. Two meetings are of importance, the September meeting (held over the 31 August and 1 September 2017) and the November meeting (held on 17 November 2017). At the material times there was a requirement that 12 directors hold office. At the time of the relevant meetings one director was disqualified due to bankruptcy meaning only 11 duly held office.
Consequently, the following questions arose:
Was the board properly constituted in accordance with its rules despite having only 11 directors holding office?
If not, were the directors still able to act under a quorum of directors?
As to the November meeting, was there a sufficient number of directors present to comprise a quorum?
As to both meetings, did any lack of consultation with the appointed Council of Elders otherwise invalidate the resolutions?
To the extent that there were irregularities arising out of the above matters, should such irregularities be validated by the Court?
Questions 1-3
Banks-Smith J draws on three ‘common scenarios’ concerning numbers of directors and quorums:
where a constitution provides for a minimum number of directors and there is no rule that authorises continuing directors to act. The Courts have found that the words are ‘imperative and not directory’ as shareholders had entrusted the management of their business to a ‘certain number of persons, and not to any other number’ (Re Alma Spinning Company (Bottomley's Case) (1880) 16 Ch D 681);
where the number of directors falls below the required minimum, but there is a provision that empowers the continuing directors to act (Re Scottish Petroleum Company (1883) 23 Ch D 413);
where the minimum number of directors fixed by the articles was never appointed. Re Sly, Spink & Company [1911] 2 Ch 430 found that the provision of the minimum number of directors must be met before there can be quorum. This position was affirmed in Correa v Whittingham (2013) 278 FLR 310, which held that where the Constitution ‘does not expressly or impliedly authorise directors to act where the numerical requirement as to the number of directors is not satisfied, then acts of a board will not be valid in this situation.’
In the present case, the parties were in disagreement as to the construction of r 12.3 of NAC’s Constitution, which stated that ‘the quorum for a Directors' meeting is a majority of the Directors, and that quorum must be present at all times during the meeting’. Her Honour states that the rule is clearly based on s 21220 of the CATSI Act and that the section operates in circumstances where a company may have a specified minimum number of directors, and thus accepted the applicant’s position that the clause must refer to a quorum of a properly constituted board. This is consistent with a constitution that ‘anticipates a board of 12 with specific gender representation and quite specific terms as to their nomination process’ (at [117]). Her Honour also rejected the contention of the second respondent that the Constitution permits directors to act individually, rather than as a board.
The NAC is governed by its own Constitution, and the replaceable rules of the CATSI Act, in so far as they are not inconsistent with the Constitution. Banks-Smith J held that the effect of the definitions and the terms of r 9.1 of the Constitution is that there must be 12 directors appointed, and that gender representation is provided for. This is consistent with the CATSI Act. The number of directors at the time of the resolutions at both the September and November meetings was less than this, and thus her Honour considered the board not properly constituted and lacking authority to pass resolutions (at [121]-[123]).
Banks-Smith J then turned to the question of whether or not the Constitution expressly or impliedly authorised the continuing directors to act where the required minimum is not satisfied, considering Re Alma Spinning and Correa v Whittingham (No 3) [2012] NSWSC 526; (2012) 267 FLR 120. Banks-Smith J resolved the issue of wording of r 9.4.3, ‘to make up a quorum’, which had the potential to result in a contrivance whereby if a meeting had quorum yet was deficient in directors, there was no capacity for the directors to appoint an additional director to fill the vacancy for the number of directors. They could only appoint to make up the quorum. Her Honour held at [141] that these additional words were in ‘error and can be ignored’.
Her Honour held that the continuing directors have only a limited role pending the calling of a general meeting, and they cannot thereby undertake other business, ‘let alone pass resolutions of the substantive kind the subject of the September and November meetings’. Thus the resolutions accepting the applications of the 256 pending members as members of the NAC were invalid.
Question 4
The Constitution held that directors are obliged to consult with the Council of Elders on membership applications, although the manner in which this consultation is to occur is not prescribed. Her Honour noted that, in considering the ‘relevance of the elders’ potential knowledge, guidance, advice and experience’ (at [154]), the obligation to consult is one that should be taken seriously by the directors and is of fundamental importance (Tomald v Toll Transport Pty Ltd [2017] FCA 1208). Banks-Smith J was not satisfied that such a process was achieved.
Question 5
A substantive irregularity can be validated by the Court under s 576.15(6)(a) of the CATSI Act by making a declaration in respect of an invalidity by reason of any contravention of, relevantly, a provision of the Constitution. The Court cannot make an order unless it is satisfied of one of three conditions:
the matter is essentially of a procedural nature;
the persons concerned in or party to the contravention or failure acted honestly; or
it is just and equitable that the order be made.
Banks-Smith J quoted Sandy v Yindjibarndi Aboriginal Corporation RNTBC [No 2] (2016) 306 FLR 205 in finding that a procedural irregularity is one which merely ‘departs from the prescribed manner in which the thing is to be done without changing the substance of the thing’ [103]. In the present case, the failure to consult changed the substance of the determination, causing a substantial injustice which cannot be remedied by an order of the court. Her Honour held that the view of the directors and elders present may have changed with different information provided by consultation, and there exists a prospect that some applications may have been rejected. Additionally, the acceptance of the new members could lead to an invalid dilution of voting rights, a matter which is substantive in nature. The crossclaim was dismissed.
Counsel for NAC submitted that as the relief sought by NAC is discretionary, the court may place certain safeguards around that process as part of the grant of declaratory relief. Banks-Smith J agreed to hear the parties further as to any proposed ordered in that regard, and ordered that the parties should provide a draft order to give effect to these reasons within 7 days, and the matter be adjourned to a hearing for directions.