The Facts
General managerβs faction vs chairmanβs faction
Trouble had been brewing for some time at aΒ not-for-profitΒ company.
TheΒ companyΒ operated a number ofΒ social enterprises,Β including the provision of trainingΒ and support services to government programs.
Within the company there were two factions.
One was associated with the companyβs general manager, and the other with the chairman of the board, which consisted of eight directors.
Three of the directors were aligned with the general managerβs faction, four were aligned with the chairmanβs faction and one unaligned director voted on an issue-by-issue basis.
Conflict erupts between factions over company finances and control of board
About ten yearsΒ previously,Β theΒ companyΒ hadΒ purchased a for-profitΒ companyΒ that providedΒ training opportunitiesΒ and subsequentlyΒ labourΒ hire.Β Β
The intention was to use the profits made by the for-profit company to cross-subsidise the not-for-profit activities of other company entities. Β
AlthoughΒ originally profitable, theΒ for-profitΒ companyΒ began encountering financial difficulties,Β and divisions began to emergeΒ between theΒ companyΒ factions aboutΒ how to deal with these financial challenges.Β Β
TheΒ chairmanΒ of theΒ boardΒ had also become apprehensive that theΒ general managerΒ and his relatives,Β whoΒ held positions in theΒ company,Β had ambitions to βtake overβ theΒ company.Β Β
TheΒ general manager, on the other hand,Β claimed that theΒ chairmanΒ boasted about having theΒ board in the palm of his hand.Β Β
TheΒ companyΒ was in the processΒ ofΒ collecting nominations forΒ the election of directors to the board, with theΒ election to take place at theΒ nextΒ annualΒ generalΒ meeting (AGM)Β onΒ 10 February 2021.
Board meeting called to adjourn AGM where board elections to occur
Events came to a head in late in January 2021, when the chairman realised that at the upcoming AGM there would be more applicants than vacancies for positions of director. So, the board elections would be contested. Β
On 3 February 2021,Β theΒ chairmanΒ prepared a list of motions for aΒ board meeting to be held on the following day.Β
These includedΒ a motionΒ declaring a couple of nominations for election to theΒ board to beΒ invalid.Β IfΒ adopted,Β thisΒ would have reduced the number of eligible candidatesΒ and hence obviatedΒ the need forΒ an election.Β
The list also included a motion proposing adoption of a statement that the general manager and some of his allies had acted deceitfully. Β
Most importantly, there was a motion that the AGM set for 10 February be adjourned.Β
At 3:39 pm on 3 February the chairman sent an email to the board members, calling a board meeting by telephone for 5:00 pm on 4 February 2021. Β
The email did not include the motions.Β Β
In the late morning of the following day,Β theΒ chairmanΒ met with theΒ general managerΒ and gave himΒ theΒ list of the motions.Β Β
There was a heatedΒ exchange,Β andΒ theΒ general managerΒ tore the list upΒ saying that he wouldΒ resign.Β Β
TheΒ general managerΒ did not in fact resign,Β howeverΒ additional motions were addedΒ to the list of motions,Β includingΒ noting the supposed resignation of the GM, and appointing theΒ chairmanΒ as an interim administrator.Β
Directors from general managerβs faction do not attend board meeting
Less than an hour before the scheduled 5:00 pm startΒ of theΒ 4Β February board meeting, the threeΒ directorsΒ aligned with theΒ general managerβs factionΒ emailed theΒ chairmanΒ saying that they could not attendΒ due to lack of sufficient notice.Β Β
The meeting went ahead at 5:00 pm with five directors, only one of whom was not aligned with theΒ chairmanβsΒ faction andΒ wasΒ in factΒ not closely aligned with either faction.Β
The number of attendees was one short of a quorum, but in the litigation that followed, the general managerβs faction declined to rely on the lack of a quorum as a ground of challenge.
Board passes resolution to adjourn AGM and notifies company members
At theΒ boardΒ meeting, all resolutions were passed unanimously,Β including the motion for the adjournment of the AGM.Β Β
ThisΒ outcomeΒ was communicated by email to the 45 people who were members ofΒ theΒ companyΒ and entitled to voteΒ at the AGM for the election of the new board.Β
General managerβs faction proceeds with AGM and new board purportedly elected
The battle lines were drawn.
In the ensuingΒ days,Β theΒ chairmanΒ authorisedΒ the changing of locks on the premises and started, through security staff, to exclude those associated with theΒ general managerΒ from the premises.
On 9 February, a director aligned with theΒ general managerβs faction emailed theΒ companyβs members,Β notifying them that the 10 February AGM would be proceeding as originally scheduled.Β
At 5:50 pm on 10 February 2021, thirty of the forty-five people entitled to vote tried to enter theΒ companyβsΒ premises,Β butΒ were turned away by security staff.Β Β
When they tried to meet in the car park, they were likewise ordered out by security.Β Β
They then convened on the footpath outsideΒ theΒ companyβsΒ premises.Β Β
At this meeting, nine people were purportedly elected to theΒ board.Β Β
No votes were cast inΒ favourΒ of theΒ chairman, or of theΒ chairmanβs factional allies.Β Β
The unaligned director who had attended theΒ board meeting on 4 February was elected to theΒ board, but theΒ chairmanΒ and the other three were not.Β
Parties litigate over whether new board duly elected
Both factions commenced litigation.
The general managerβs faction brought its claim in the name of the company, on the basis that it controlled the board.
This faction asked the court to confirm that the nine directors elected at the 10 February AGM were the lawful board of the company.
The individuals comprising the chairmanβs faction asked the court to declare the purported election of the board on 10 February invalid.
Expert commentary on the court's decision
Court finds in favour of the company
InΒ Career Employment AustraliaΒ Ltd v Shepley & OrsΒ [2021] QSC 235, the Queensland Supreme Court found in favour of theΒ general managerβs faction of theΒ company, Career Employment Australia.Β
TheΒ court declared that the resolutions carried by the board on 4 February 2021 were invalid and confirmed the election of the new board carried out at theΒ AGM on 10 February 2021.Β
Procedural irregularities under the Corporations Act
Under sectionΒ 1322(2)Β of the CommonwealthΒ Corporations Act 2001,Β aΒ proceedingΒ under the ActΒ is not invalidated because of a proceduralΒ irregularityΒ unless the court is of the opinion that theΒ irregularity causedΒ or may causeΒ substantial injustice that cannot be remedied by court orderΒ and the court declares the proceeding invalid.Β Β
TheΒ adoption of resolutions by the board wasΒ a proceeding under the Act and any failure to give reasonable notice of the board meeting as required by CEAβs constitution would be a procedural irregularity.Β
Therefore, in order for the court to declare the adoption of the resolutions by the board invalid, CEA (the general managerβs faction) had to demonstrate that the chairman, Mr John Shepley, had failed to give reasonable notice of the 4 February board meeting, and that this lack of notice caused, or may cause, substantial injustice
Chairman fails to give reasonable notice of board meeting
The court found that the notice given of the board meeting was not reasonable in the circumstances.Β Β
CEAβs constitution did not define what amount of time constituted βreasonable notice,β and so the court looked to the case law. Β
TheΒ courtΒ statedΒ that the mere fact that it might have been possible for a director to attendΒ a board meetingΒ did not in itself establish that the notice was reasonable.Β Β
The court also said that an important purpose of giving reasonable notice of a board meeting is to allow directors adequate time to think about how they might vote. This is to ensure that each director can βmake the necessary representation of the interests he or she has in his or her handsβ. In this instance, there were over a dozen motions, and some of these, including the adjournment of the AGM, were of considerable consequence. Β
The court rejected the argument of theΒ chairmanβs factionΒ thatΒ becauseΒ meetings had been held on short notice in theΒ precedingΒ 12 monthsΒ due to Covid-19, the notice for this meeting was reasonable.Β Β
The 4 February board meeting was not convened in the ordinary course andΒ in the courtβs view,Β the CEA boardβs previous practice of holding meetings on short notice wasΒ of limited guidance in determining what was reasonable.Β Β
The court said that notice required for a specially convened meeting might be more,Β given the importance of theΒ decisionsΒ to be made,Β or less,Β depending onΒ the urgency of theΒ situation.Β Β
While accepting thatΒ it had only been on 25 January 2021 that theΒ chairmanΒ had found out that the election of directorsΒ to be heldΒ on 10Β FebruaryΒ would be contested,Β this had to be weighed against the gravity of the matters on which the directors were being asked to make decisions.Β
Lack of reasonable notice caused substantial injustice
InΒ determiningΒ if there was substantial injustice, the courtΒ weighedΒ the prejudice that would be suffered ifΒ itΒ declared theΒ adoption of the board resolutions invalid,Β against the prejudice that would be suffered ifΒ itΒ did not.Β Β
The court noted thatΒ caseΒ lawΒ βsupports the proposition that a substantial injustice may arise if a director is deprived of an adequate opportunity to address risks associated with proposed resolutions and the meeting proceeds in their absence.βΒ
Ultimately, the court concluded that the lack of reasonable notice caused an injustice to members, staff and directors of CEA that outweighed any prejudice that would be suffered if the resolutions were not given effect to.Β
Motion to adjourn AGM cannot be severed from other motions
TheΒ chairmanβs faction also argued that the motion for adjournment of the AGM should be βseveredβ from the rest of the motions,Β so that theΒ question ofΒ substantialΒ injusticeΒ could beΒ arguedΒ in relation toΒ that motion alone.Β Β
However,Β the fact that all the motionsΒ at theΒ 4 FebruaryΒ boardΒ meeting were putΒ forwardΒ andΒ votedΒ onΒ as a packageΒ made that argument hard to sustain.Β Β
The court accepted the submission by CEAβs counsel that βthe resolutions were intended to operate collectively to stifle opposition to the board as it existed on 4 February 2021β.Β
Contrivance by one faction to defeat other faction
TheΒ court accepted a number of precedents in which shortness of notice or other procedural failings had not invalidated the decisions ofΒ companyΒ boards.Β Β
However,Β the court saw the events in this case as pointing to a contrivance by one faction to defeat another.Β Β
It may be inferredΒ thatΒ there was no great hesitancy in rejecting the case of theΒ chairmanβsΒ faction andΒ declaring those nominated by theΒ general managerβs faction,Β and elected on 10 February,Β to be the new, validly electedΒ board.Β
***Β
The obligation placed on the directors ofΒ CEAΒ by its constitution to give reasonable notice of board meetings is just one of many obligations placed onΒ companyΒ directors.Β Β
AΒ new law which came into effect on 1 NovemberΒ 2021Β requiresΒ that everyone who is (or intends to become) a director of aΒ company, must apply for a Director Identification Number.Β Β
Non-compliance can result in a penalty.Β
For more detailed information seeΒ CompanyΒ directors onΒ a deadline to get their director ID number.Β