Colin Charles Alan Ritchie v Watson Ferguson Holdings Limited [1992] ACTSC 12 (12 February 1992)

SUPREME COURT OF THE ACT

COLIN CHARLES ALAN RITCHIE v. WATSON FERGUSON HOLDINGS LIMITED
S.C. No. 445 of 1991
Corporations Law

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Higgins J.(1)

CATCHWORDS

Corporations Law - Remedy in cases of oppression or injustice - Whether Board of Directors validly constituted - Conduct of Board contrary to interests of members - Appointment of replacement Board.

Corporations Law, ss.260(2)(a)(b)

Glossop v Glossop (1907) 2 Ch 370

HEARING

CANBERRA
12:2:1992

Counsel for the Applicant: Ms L. McCallum

Instructing solicitor: Mr J. Pappas

Counsel for the Respondent: Mr M. Gray

Instructing solicitors: Messrs Brian Martin and Sons

ORDER

Colin Charles Alan Ritchie, Paul Edmund Campion Dunworth, Richard George Thomas and Eric Andreas Kulakauskas be appointed as an interim Board of Directors.

The Board take all necessary steps to put the affairs of the company in order.

Leave be given to the parties to bring in minutes of orders giving effect to the findings and proposals herein.

Leave be given to the parties or any of them to seek further directions or orders to give effect to the findings and proposals herein.

DECISION

This matter relates to the affairs of a company called Watson Ferguson Holdings Limited. It is a public company presently in receivership. It was previously known as Street Thompson Holdings Limited. I will refer to it as "Watson Ferguson".

2. The issue before me relates to the composition and conduct of the Board of Directors. I am asked to declare who is validly appointed, if any are, to the Board. If there is a deficiency in the composition or, if I am satisfied it is necessary otherwise to do so, I am asked to appoint a replacement Board and to give such further directions as will ensure the proper conduct of the affairs of Watson Ferguson in the future.

3. The power sought to be invoked is that conferred by s.260 of the Corporations Law. To invoke the power it is necessary for the Court to be satisfied that
"the affairs of (Watson Ferguson) are being conducted in a manner

that is oppressive or unfairly prejudicial to, or unfairly
discriminatory against, a member or members or in a manner that is
contrary to the interests of the members as a whole"

or that any act or omission or proposed act or omission would have one or more of those effects (s.260(2)(a)(b)).

4. In this matter it is the manner in which the Board has been constituted or not constituted which is said to be contrary to the interests of the members. Clearly, if Watson Ferguson has insufficient validly appointed directors then, even though its affairs are being conducted by a receiver, members' interests are not being properly served. I propose now to examine the position of the individual directors whose apparent right to be in office is questioned.
Damian Francis Street ("Street"):

5. Street was appointed a director in March 1986. Indeed, it seems he was one of the original directors of Watson Ferguson. The most recently filed Particulars of Directors of Watson Ferguson, dated 9 February 1990, listed only two directors, Street and Alex Mahl.

6. As at 11 December 1989, the directors of Watson Ferguson, according to its most recently filed Annual Return (dated 6 February 1989) for the year ending 31 August 1988, were: Damian Street, Alex Mahl, Ivan Hodges and Steven Wayne Brennan. The Return also disclosed that, for that year Watson Ferguson had an after tax profit of $2,207,000.00. It was part of a group of companies. Its holding company was noted as being Caxdan Corporation Limited ("Caxdan").

7. In late 1989 negotiations were put in train by Street with a company referred to as "Readyline". It was referred to by Street in evidence as "Readyline Investments Pty Ltd". The purpose of those negotiations was to obtain working capital for the Watson Ferguson Group.

8. As a result of the impending deal with Readyline, Steven Wayne Brennan, one director, resigned his office on 12 December 1989. Somehow, a Mr Scott had become a director since the last filed Annual Return. He resigned on 21 December 1989. The fate of Mr Hodges is not expressly recorded but it seems to be accepted that, by 22 December 1989 at least, he also had resigned.

9. On 5 January 1990, three persons signed forms consenting to act as directors of Watson Ferguson. They were referred to as Richard Bretso, John Levin and Max Di Russo. The latter was also referred to by Street, in evidence, as Nick "Kneecapper" Di Russo.

10. The three were invited to join the Watson Ferguson Board (and, it seems the Caxdan Board), subject to the advance of the funds agreed. Those funds never materialised. No formal resolution was ever passed appointing those persons unconditionally to the Board. Although Street said that he was, in early 1990, uncertain as to the status of the Readyline three, it is apparent that they were never unconditionally appointed as directors of Watson Ferguson.

11. When completion failed to materialise, Street called a meeting of Tricontinental, Partnership Pacific Ltd, ANZ Bank and Errol Chant (the person later appointed as Receiver). Street says he told them,

"Look, these Readyline people appear to be absolute men of straw.
In the absence of their ability to fund forthwith I recommend the
immediate appointment of receivers as we do not wish to breach the
company's code."

12. That suggestion was conveyed, it seems, on 23 January 1990 or shortly before that date. Street described it as being "after my resignation" (T.84).

13. Street also notified the Stock Exchange that trading in Watson Ferguson shares should be suspended. He also resigned as a director. He notified both Watson Ferguson's secretary and the Stock Exchange of this.

14. The extent of Street's consultation with Mahl over these matters is unclear to me. However, he certainly did not consult with the Readyline three. Following these actions, Street fled to Los Angeles, California.

`5. He was asked why he did that. He said, "I was forced to actually" (T.109). He claimed that death threats, albeit "veiled", were made against him on a number of occasions in early January 1990. He named Dr John Levin and "Kneecapper" De Russo as the source of these threats. The purpose of the threats, at best I can understand it, was to release Readyline from the obligation to provide the promised funds to the Watson Ferguson group.

16. On 26 June 1990, Street executed a Statement of Affairs relating to Watson Ferguson. He signed as "former director". It disclosed that Mahl then owed $918,000.00 to Watson Ferguson. That debt is currently the subject of litigation. Due to this obvious conflict of interest between Mahl and Watson Ferguson, Street readily agreed that it was not in the company's interests for Mahl to be a director, whatever his legal position currently.

17. As I understand it, thereafter Street took no part in the affairs of Watson Ferguson save perhaps to provide advice to the Receiver and/or the Corporate Affairs Commission, until 22 May 1991.

18. On 22 May 1991 a meeting was minuted. I set out the minute thereof in full:-

"WATSON FERGUSON HOLDINGS LTD
(Receiver and Manager Appointed)
Minutes of a Meeting of Directors
of Watson Ferguson Holdings Ltd
held at Mezzanine 285 George St Sydney NSW
4.00 pm on 22nd May 1991
Present: Mr A. Mahl - Director
Mr D. Street - Director
Mr P. Nugent - Director
Minutes of Previous Meeting
Mr Street advised that he had sought copies of the last
board minutes from the Receiver but that they had not been
received from the receiver in time for the meeting.
General Business
(1) The meeting noted that the statutory records needed
updating. Mr Mahl confirmed that he had not resigned furnishing a
letter dated 30th January 1990 sent to the ASC by the then company
secretary. It was noted that due to confusion surrounding the
Readyline Directors that the company secretary had erroneously
noted Mr Mahl's resignation and that in fact he had not resigned
at all.
(2) It was resolved to appoint Peter Nugent as a
Director to fill a casual vacancy pursuant to Article 90 w.e.f.
date of execution of consent to act.
(3) It was resolved to appoint Mr E. Kulakauskas as a
Director pursuant to Article 90 w.e.f. date of execution of
consent to act.
(4) It was resolved to appoint Mr P. Nugent as Company
Secretary (elected as temporary chairman).
(5) It was resolved not to accept the resignation of
Mr D.F. Street. Mr D. Street agreed to stay on.
(6) Mr Street explained to the meeting that the reason
behind the collapse of the company and his resignation (sic).
Mr Street advised the meeting that he felt it was very important
that all former directors should do all they can to rebuild the
company and recompense the shareholders. Mr Street outlined a
plan which he said he would submit to the board if he could get
the support of all creditors. The board then acknowledged
Mr Street's proposal and it was resolved to finalise the matter
upon receipt of a written report from Mr Street.
(7) Mr Street concluded that be (sic) would be
preparing a written report which he planned to send to all
shareholders at his own expense.
(8) The meeting noted that the AGM's for the company
were dangerously overdue and that the audit had to be completed.
It was noted that Mr Street had written to both the ASC
and Touche Ross (Mr Allworth) concerning the audit.
It was resolved that the Company Secretary be authorised
to contact the Auditors and the ASC to obtain rulings on
extensions of time to lodge the financial accounts.
It was noted that as the company needed to change its
registered office that Mr C Fearon be contacted by the secretary
to ask if his firm's address might be used. It was noted that all
statutory records were with the receiver.
Closure There being no further business the Chairman declared
the meeting closed.
(Sgd) P. Nugent
Chairman"

It will be observed that the minutes purport to record that, notwithstanding the notice to the Stock Exchange to the contrary of 30 January 1990, Mahl had not resigned. The minutes also assume that Street's resignation was conditional on acceptance by the Company. Mahl and Street purported then to appoint Mr Eric Andreas Kulakauskas ("Kulakauskas") and Mr Peter Martin Nugent ("Nugent") as directors. The Australian Securities Commission was so notified on 7 August 1991 by Nugent.

19. It is clear that the meeting of 22 May 1991 did not purport to be an appointment of Street ab initio as a director. Indeed the notification of 7 August 1991 refers to Street as a "continuing" director.

20. Article 96 of the Company's Articles provides as follows:-

"The office of a Director shall ipso facto be vacated:
...
(d) If he by notice in writing resign the appointment and such
resignation be not withdrawn prior to such notice becoming
effective.
...
PROVIDED THAT the office of a Director shall not be considered
vacant ... in the event referred to in sub-clause (d) of this
Article until the expiration of such notice or its earlier
acceptance. No Director whose office becomes so vacant shall,
subject to the Code, be eligible for re-election."

The terms of Street's letter of resignation of 25 January 1990 make it clear that he intended that resignation to take effect immediately. Indeed, his evidence confirms that to have been his own understanding.

21. I was referred to Glossop v Glossop (1907) 2 Ch 370. Neville J said:-

(374) "I have no doubt that a director is entitled to relinquish
his office at any time he pleases by proper notice to the company,
and that his resignation depends upon his notice and is not
dependent upon any acceptance by the company, because I do not
think they are in a position to refuse acceptance. Consequently,
it appears to me that a director, once having given in the proper
quarter notice of his resignation of his office, is not entitled
to withdraw that notice, but, if it is withdrawn, it must be by
the consent of the company properly exercised ..."

That, of course, is subject to the legislation and the Articles.

22. It seems to me that, having left a resignation unchallenged for over 14 months, neither Street nor Watson Ferguson could claim that the resignation was in some way incomplete or able to be refused by the company even with Street's consent. It should be noted that this was not a case of "retirement" under Article 91.

23. Further, in contradistinction to Glossop's case, there is no power reserved to the remaining directors to suspend the effect of a resignation so as to enable a resigning director to withdraw it.

24. It follows, therefore, that I am satisfied that Street's office as director of Watson Ferguson was vacated by him on the date of his notice, that is, 25 January 1990. He was not re-appointed on 22 May 1991. Accordingly, I declare that Street is not, and has not, since 25 January 1990, been a director of Watson Ferguson.
Alex Mahl ("Mahl"):

25. I have, of course, referred to Mahl's conflict of interest. However, his right to be regarded as a director of Watson Ferguson was also challenged.

26. On 30 January 1990, Mr William A Lange, a Secretary of Watson Ferguson, wrote to the Australian Stock Exchange in the following terms,

"I advise that Mr Alex Mahl has resigned as a Director of the
Company effective 25 January 1990."

27. However, Lange had also advised of his own resignation, effective 22 January 1990.

28. This is some evidence that Mahl submitted to the company, before 25 January 1990, a written notice effecting his resignation as a director effective from 25 January 1990.

29. Mahl did, of course, purport to act as director at the meeting of 22 May 1991. He did consult with the Receiver both before and after that event. The latter was of the view, presumably from March 1990, that Mahl was a director. However, he also accepted Street as a continuing director. His opinion as to the status of Street and Mahl is, of course, of no great weight.

30. Mr Derwin, solicitor for the applicant, deposed to a conversation with Mahl on 25 June 1991. I set it out as Mr Derwin recalled in in his affidavit of 3 July 1991.

"I said: I have been consulted by some shareholders of Watson
Ferguson Holdings and some searches carried out indicate a
conflict which I would like to discuss with you. The conflict is
that the Australian Securities Commission file shows you as a
continuing director, but on the Stock Exchange file there is a
notification signed by Mr Lange that you had, in fact resigned as
a director.
He said: Yes, well the receivers would not let
me resign, but they said it would not matter because
they were taking over anyway.
I said: Right, so you are still in fact a director.
He said: Well it is still a public company and really the last 3
directors are still there, that is the law.
I said: There is certainly not 3 directors.
He said: There would have to be. You cannot resign. Even if
they resign, they are still responsible because the law makes it
quite clear that you got to have 3 directors for a public company.
I said: A company can have less than 3 directors.
He said: How can that be?
I said: If no-one is prepared to serve they do not. People
cannot be forced to serve.
He said: Well I did resign then and my resignation was put to the
Stock Exchange.
I said: Then so far as you are concerned you are not a director.
He said: As far as I am concerned I do not think I am, but it was
such a turbulent period that I would need to clarify that. I
would need to find out if I am or not. It is a funny question. I
have never thought about it.
I said: If you are still a director the(n) I may have to serve
some papers on you. If you are not then I will not need to do that.
He said: I do not know. I am really not sure. The company went
into liquidation. I think I was still acting as a director
because there was nobody else. It is interesting though. On the
Readyline takeover the Readyline people were directors.
Max de Russo and Dr Levin. They took over the company and acted
as directors.
I said: Well the Corporate Affairs file does
not indicate their appointment. In the circumstances,
since there is some confusion about whether you are a director I
think I will arrange for you to be served."

That conversation reveals two things. First, that there was a proper resignation within the meaning of Article 96(d). Second, insofar as it was purportedly withdrawn or not accepted, it seems that it was the Receiver who took the attitude, rightly or not, that Mahl's resignation had not been effective. Of course, it was not a matter for the Receiver.

31. It also appears that Mahl was of the view that the last three directors could not resign. Of course, a public company is required to have three directors but that does not mean that the entire Board cannot resign, leaving it to shareholders, or even the Court, to appoint a new Board.

32. The Articles do provide for a Board constituted by less than the minimum number.

"95. The continuing Directors may act notwithstanding any vacancy
in their body but so that if the number falls below the minimum
above fixed the Directors shall not, except in any emergency or for
the purpose of filling up vacancies or for summoning a General
Meeting of the Company, act so long as the number is below the
minimum."

Nothing in this Article requires the resignation of the last, or last two, directors to be refused or robs them of the effect accorded to them by the Articles of their resignation.

33. It follows that, at least on the balance of probabilities, Mahl resigned effectively from 25 January 1990.

34. A consequence of this is that Street and Mahl lacked the authority, on 22 May 1991, to have appointed Nugent and Kulakauskas as directors.

35. It further follows that, since 25 January 1990, Watson Ferguson has had no directors.

36. I, therefore, so declare.
Future Conduct of the Company:

37. The affairs of the Company are, of course, in the hands of the Receiver. It does not follow that there is no role for the Board of Directors. The shareholders have interests they may wish to assert. They should be properly represented.

38. It follows that I am satisfied that a new Board of Directors should be constituted. It should be required to consult with the Receiver, ascertain the state of the company and summon an Annual General Meeting at which any eligible person may be elected to the Board to carry on the affairs of the Company in a regular manner.

39. The remaining matter for determination is to identify those persons who should be appointed as interim directors.

40. I have no doubt that neither Street nor Mahl should be appointed. Both resigned. They are persons who cannot be re-elected by reason of Article 96. Additionally, Mahl has, I consider, a disqualifying conflict of interest.

41. Street has, I accept, a detailed knowledge of the Group's affairs. His role in the collapse of the Group does not, however, engender confidence in his capacity to carry out the role now required. The arrangements with Readyline were disquieting, to say the least. Had that transaction been consummated, the shareholders would have been given three new directors, two of whom, according to Street, were prepared to use, or at least seriously to threaten, physical violence to achieve their ends. Of course, I cannot positively find, because I have not heard from those persons, that the persons so accused by Street were men of violence in fact. It is enough to note that Street's attitude to dealing with persons he has asserted to be of such a character is disturbing.

42. Further, Street's precipitate departure from Australia, leaving the company in the hands of a Receiver for a creditor, was not likely to engender confidence in shareholders.

43. Despite the letter to Mr Dunworth in October 1990, Street did little to consult with shareholders about the fate of their investment. That information which he did provide was very heavy on self-justification but very light on corroborative detail. Of course, that by no means suggests that Street was not telling the truth as he saw it. However, it does make it inappropriate for Street to be one of the interim directors. After all, one of the responsibilities of the Board will be to examine and report to shareholders on the conduct of Street with respect to the affairs of the company.

44. Colin Charles Alan Ritchie ("Ritchie") offers himself as an interim director. He is eligible for election as a director at an Annual General Meeting. He gave evidence. Naturally, he is concerned to discover whether there had been questionable deals leading to Watson Ferguson's collapse. He has, previously, been a director of Watson Ferguson. His general background and experience, to which he deposed render him suitable for appointment.

45. In cross-examination, his relationship with Paul Edmund Campion Dunworth ("Dunworth"), another proposed director, was explored. Dunworth is Ritchie's de facto father-in-law. He also was acquainted with a Russell Cockshott, also known as Sinclair. The latter is suing Watson Ferguson. He desires Ritchie to give evidence. However, it was not suggested that such involvement as Ritchie had with Sinclair served any purpose of Ritchie's. It was not suggested that Ritchie would do more or less than tell the truth as a witness in the proceedings involving Sinclair.

46. I conclude that, although no longer a major shareholder in Watson Ferguson, Ritchie is a suitable person to be an interim director notwithstanding the above objections.

47. Dunworth also consents so to act. I accept that he and Ritchie have a common interest. Dunworth is a holder of 95,000 shares. He has made a statement at the request of Sinclair's representatives. He may be required to give evidence in that litigation. He has had considerable financial experience with investments although he has not previously been a director of a public company.

48. I consider that Dunworth is a suitable person with a substantial interest in salvaging shareholder's interests. His relationship with Ritchie strengthens the latter's commitment to salvaging Watson Ferguson. I think Dunworth should be appointed an interim director.

49. Richard George Thomas ("Thomas") has also consented to act as a director. He is a barrister and solicitor. He has had considerable experience as an academic as well as in practice in areas of company and business law. His expertise would be an asset to the Board. If any one can follow Street's convoluted dealings, I am confident Thomas can. He should be appointed an interim director.

50. Kulakauskas has consented to act as a director. He was approached to do so by Street on or shortly before 22 May 1991 to act as a director of Watson Ferguson. That his appointment is invalid is no fault of his. He seems well qualified in financial and accounting matters. He was not required for cross-examination. That he is, it seems, someone in whom Street has confidence should not disqualify him from acting as a director of Watson Ferguson. Indeed, that relationship, in the absence of any negative suggestions concerning it, may well be a positive advantage in providing Street with confidence that at least one member of the Board will objectively ascertain and present his point of view. He may well also be satisfied that Kulakauskas will give him an objective view of the company's progress. I consider he should be an interim director.

51. Nugent was appointed a director, albeit invalidly, on 22 May 1991. He has not given evidence. No affidavit from him was tendered.

52. I do not propose to appoint Nugent.

53. I am satisfied that Ritchie, Dunworth, Thomas and Kulakauskas should constitute an interim Board. That Board should take all necessary steps to put the affairs of the company in order.

54. At this stage it is not possible fully to specify what further directions or orders may be required.

55. I propose to give leave to the parties to bring in minutes of orders to give effect to my findings and proposals and to grant leave to the parties or any of them to seek further directions or orders to give effect to them.

56. I will hear the parties as to costs.