Drillsearch Energy Ltd (Drillsearch) commenced proceedings against two of its directors, a former director and two companies, the companies being shareholders of Drillsearch. Drillsearch sought a variety of relief, with the principal relief being of a declaratory nature. Importantly, Drillsearch also sought injunctive relief on a final basis, aimed at restraining the holding of a general meeting of Drillsearch and restraining the defendants from voting at that meeting. As noted by his Honour, Justice Barrett, “in a real and direct sense, therefore, a leading objective of the proceedings is to prevent the holding of a general meeting – by interlocutory order in the first instance and thereafter on a permanent basis”. The general meeting at the centre of the proceedings was scheduled the day after the proceedings were heard by Justice Barrett, with the only item of business at that meeting being a proposed resolution to remove five of the six directors from office.
The third defendant brought an application, supported by all other defendants, seeking an order to permanently stay the proceedings. The third defendant alleged that there had not been a proper resolution of the board of directors of Drillsearch to authorise the institution of proceedings. This, the third defendant alleged, was because the directors who voted for the company to institute proceedings (the third defendant being an apology at the board meeting in question) were in fact precluded from voting on that resolution on the basis that those directors had a material personal interest in the subject of the resolution. Put another way, the directors in question had a personal interest in preventing a meeting from taking place in which there was a risk they would be removed from office.
Section 195 of the Corporations Act 2001 governs the restrictions on voting by directors of public companies. Section 195(1) provides:
“1. A director of a public company who has a material personal interest in a matter that is being considered at a directors’ meeting must not:
a. be present while the matter is being considered at the meeting
b. vote on the matter.” A breach of section 195(1) is a strict liability offence.
Justice Barrett was of the view that each of the directors of Drillsearch who voted to institute the proceedings had a personal interest in attempting to stop the general meeting of Drillsearch. Justice Barrett then considered the meaning of the word “material”. His Honour referred to the decision of McGellin v Mount King Mining NL in which Justice Murray noted, in reference to the word “material”:
“‘Material’ in this context, I think, means the interest involves a relationship of some real substance to the matter under consideration or the contract or arrangement which is proposed. In that way the nature of the interest should be seen to have a capacity to influence the vote of a particular director upon the decision being made, bearing in mind that both the article and the section are concerned with that aspect of a director’s fiduciary duties which relates to the conflict of interest which must, of itself, be of a real or substantial kind…It is the substance of the interest, its nature and capacity to have an impact upon the ability of the director to discharge his or her fiduciary duty which will be important.” The attempt to avoid a forum in which a removal from office was a likelihood was, in his Honour’s view, “amply capable of shaping each relevant director’s conduct” and hence the directors in question had a material personal interest in the resolution at hand and thus they each contravened section 195(1).
While Justice Barrett was required to consider section 195(5) of the Corporations Act 2001 which states, in part, that a contravention by a director of section 195(1) does not affect the validity of any resolution, his Honour was more concerned with how contravention would impact on the processes of the court. Thus even if section 195(5) “technically” preserved the validity of the resolution, the statutory contraventions by those directors who were present and voted and exercised their fiduciary duty in such a way to favour their own personal interests enlivened the inherent jurisdiction of the court to stay the proceedings to prevent an abuse of its own process. Accordingly, the application of the third defendant was granted and the proceedings were permanently stayed.
The case of Drillsearch is a timely reminder to both directors of public companies and the solicitors who advise them. Directors cannot exercise their fiduciary duty to take steps on behalf of the company that are also in their personal interest. The proper course is for the director to declare a conflict of interest and to remove him or herself from the meeting in which the resolution is being considered and voted upon. The case is also of interest for solicitors as care must be taken when instructed to issue proceedings to ensure that a valid resolution has been passed by the board, particularly in circumstances where there is internal division within the board or one of the proposed defendants is an officer of the company. Failure to do so may lead to a position where the court is required to consider whether or not the costs of the action should be ordered against the solicitors on a personal basis.