QLD Company Directors Meeting - Valid Resolution?

[Raina]

If there were 3 company directors where 2 decided to call a meeting. They called the third director who happened to be sleeping and did not answer the phone. So the 2 directors had a meeting without her and passed a resolution to change the manufacturer. The third director later knew about this and did not agree to the decision. There was no chair and no minute at the meeting.

Is there anything that the third director could do?
Was the resolution valid?
Could the resolution be passed at a board meeting where there is no chair and no minute?

 

[Sarah J]

Hi Raina,

Yes, this sounds like a irregularity. Basically, board meetings require prior notice to all the board directors, of a few days at least. Generally, it is 30 days.

1. Check your company's articles of association (or constitution). What does it say about the minimum notice required to directors before calling a board meeting? What does it say about quorum?
2. The Corporations Act 2001 (Cth) governs the minimum standards a company must meet. Chapter 2G of this act governs directors meetings. Most of these are replaceable rules (including that directors must give reasonable notice before calling a meeting under section 248C). So, check your company' articles to see if there is an alternative rule. If not, this default position applies. Calling directors during the night before the meeting is not reasonable notice and you may have grounds to invalidate the resolution on the basis of irregularity
3. Further, under section 251A, a company needs to keep minutes of procedures and resolutions passed within 1 months the event

 

[Raina]

Hi Raina,

Yes, this sounds like a irregularity. Basically, board meetings require prior notice to all the board directors, of a few days at least. Generally, it is 30 days.

1. Check your company's articles of association (or constitution). What does it say about the minimum notice required to directors before calling a board meeting? What does it say about quorum?
2. The Corporations Act 2001 (Cth) governs the minimum standards a company must meet. Chapter 2G of this act governs directors meetings. Most of these are replaceable rules (including that directors must give reasonable notice before calling a meeting under section 248C). So, check your company' articles to see if there is an alternative rule. If not, this default position applies. Calling directors during the night before the meeting is not reasonable notice and you may have grounds to invalidate the resolution on the basis of irregularity
3. Further, under section 251A, a company needs to keep minutes of procedures and resolutions passed within 1 months the event

The company has adopted replaceable rules and the quorum (2 directors) has been met. I am concerned that suing under S1322 (procedural irregularity) would not be successful because even if the director attended the meeting, the outcome might be the same (majority vote to pass the resolution). So, I am not sure whether the court would declare the proceeding invalid. I was also wondering if the absence of the chair would constitute to invalid resolution. According to Carpathian Resources Ltd v Hendricks, it was held that no chair means no resolution could be passed at the member meeting. I am not sure whether this would also apply to the board meeting as well. Thank you Sarah!

 

[Sarah J]

Hi Raina,

As far as I know, there is no requirement that a chairperson must be present at a director's meeting for the resolution passed to be valid. The case you mentioned, Carpathian Resources Ltd v Hendriks dealt with a unique situation where neither the chairperson or director was present at the meeting. It was an extremely rare situation where the person temporarily elected to be director and chairperson ended up not getting approved by the shareholders at the AGM (to be a director and chairperson). Therefore, at the general meeting, it resulted in a situation where the person acting as director and chairperson was neither, so there was no actual director or chairperson present. This case does not apply to your situation.

It may be worth challenging in court, even if the two directors there was sufficient to pass the vote. Had you been present at the meeting, you may have persuaded one or both of the directors to vote against the decision. If your presence would not have made a difference (i.e. the other two directors were dead set on changing manufacturer) then you have a bigger problem than this meeting, you have an issue whereby those two directors can always outvote you. Further, with this resolution, are they acting in the best interests of the company? Example, if changing manufacturers means breaking contract and exposing the company to compensation claims, this may not be a proper decision.

 

[Alexander Michael John]

Hi Raina,

As far as I know, there is no requirement that a chairperson must be present at a director's meeting for the resolution passed to be valid. The case you mentioned, Carpathian Resources Ltd v Hendriks dealt with a unique situation where neither the chairperson or director was present at the meeting. It was an extremely rare situation where the person temporarily elected to be director and chairperson ended up not getting approved by the shareholders at the AGM (to be a director and chairperson). Therefore, at the general meeting, it resulted in a situation where the person acting as director and chairperson was neither, so there was no actual director or chairperson present. This case does not apply to your situation.

It may be worth challenging in court, even if the two directors there was sufficient to pass the vote. Had you been present at the meeting, you may have persuaded one or both of the directors to vote against the decision. If your presence would not have made a difference (i.e. the other two directors were dead set on changing manufacturer) then you have a bigger problem than this meeting, you have an issue whereby those two directors can always outvote you. Further, with this resolution, are they acting in the best interests of the company? Example, if changing manufacturers means breaking contract and exposing the company to compensation claims, this may not be a proper decision.

This is a very interesting situation, I was wondering at the board meeting would it be possible for that one director to invalidate the meeting on the ground that no resolution was passed because there was no minute (no evidence) ?

Also, regarding the best interest, could that one director attempt to invalidate the resolution if the decision was not in the best interest of the company?

 

[Raina]

In order to attempt to invalidate the meeting for defective notice, there needs to be a substantial injustice caused from the irregularity. Would the absence of that one director resulting in prohibition to voice the opinion to influence the meeting of the decision be sufficient to illustrate substantial injustice?

 

[Sarah J]

@Alexander Michael John : under Corporations Act, there is a replaceable rule that minutes be written and signed within 30 days of the meeting. Of course, you could argue that a pattern of not recording minutes in meetings, or meeting the replaceable rule, suggests breach of directors' duties, but this would be a tenuous argument by itself. Replaceable rules are replaceable by the company's actual articles, but again, failure to take minutes during a meeting in itself would not invalidate a resolution. If a director was acting against the best interests of the company (e.g. changing manufacturers would expose the company to substantial litigation claims, there was nothing really wrong with the performance of the manufacturer, the contract would have come to an end soon anyway) then if you successfully argued that the directors acted against the best interests of the company then you could ask the court to invalidate the resolution. However, if the directors had already contracted with a new manufacturer in this time, then invalidating the court may be unwilling to invalidate because it might unfairly prejudice innocent third parties.

@Raina : from what it appears, no. But it all depends no the facts, how the directors felt about the proposal walking in etc. You're best to speak with a corporate lawyer about this, so they can look through your company articles and see if there any any probably grounds to set aside the resolution.

 

[Raina]

If the decision was in fact not in the best interest of the company and the one director successfully established that, would it be possible for the court to invalidate the resolution from the other two directors breaching their duty?

 

[Sarah J]

Hi Raina,

I've touched on this point above in response to Alexander Michael John. If you establish that the directors breached their duties, this would make the directors personally liable. You, on behalf of the company, can ask the court to declare the resolution invalid. However, it is up to the court to decide whether to grant this remedy or not. The court will consider, amongst other things, whether invalidating the resolution will unjustly prejudice third parties (e.g. new manufacturer).

 

[Shivam]

@Sarah J Thanks for that help to solve that issue. But can you some way help to prove using either case law or statutory law that there is no requirement for a chair in directors meeting?