The Corporations Act 2001 (Cth) is no simple read. It is well on its way to hitting (and likely will hit, in the next few years) a whopping 5000 pages of text. Navigating the procedures, duties and obligations hidden among its provisions is a labyrinthine task even for the experienced corporations lawyer, let alone for a layperson.
Faced with such legislative complexity, the unfortunate reality of the 21st century is that it is becoming all too easy for parties to inadvertently contravene its provisions, or depart from prescribed procedures. If every contravention were to blow up the act, matter or proceeding it related to, companies and their officers would find it very difficult to function without being punished for honest (and sometimes minor) errors. Fortunately, by way of s 1322 of the Corporations Act, the Court has the power to ‘gloss over’ certain contraventions and relieve parties of civil liability – and while, of course, no contravention should ever be condoned, it comes as somewhat of a relief that sometimes, contraventions may be discarded from a proceeding like water off a duck’s back.
What is a ‘proceeding’?
S 1322 opens with the statement that the provision applies to “a proceeding under this Act”, which includes “any proceeding whether a legal proceeding or not” – but what exactly is a ‘proceeding under this Act’?
Case law has indicated that a broad definition of ‘proceeding’ should be adopted. As such, virtually any meeting or resolution made by a company, its shareholders and directors falls within the definition of ‘proceeding’. However, as was noted in Shearwood v Allied Resource Partners Pty Ltd [2017] FCA 1451, proceedings which are not actually under the Corporations Act do not qualify for the application of s 1322. Hence, in that case, the removal of a director purely pursuant to the power afforded by a shareholder’s agreement or the company’s constitution does not satisfy the definition of ‘a proceeding under this Act’.
What is a ‘procedural irregularity’ and when is it remediable?
By operation of s 1322(2), a proceeding under the Corporations Act is not invalidated because of a ‘procedural irregularity’, unless the Court is of the opinion that the irregularity has caused or may cause irremediable substantial injustice – or, to modify the old idiom, s 1322(2) allows an irregularity to flow like water off a proceeding’s back.
For a procedure to be departed from, it is first necessary that a provision of the Corporations Act which provides for the ‘proceeding’ actually specifies a procedure to be followed. If this is satisfied, whether an irregularity can be classed as ‘procedural’ is then dependent upon whether it changed the substance of what was to be done under the proceeding, or merely the manner in which to carry out the proceeding. If the former, then the irregularity is not merely procedural and is not automatically remedied by s 1322(2); if the latter, the irregularity will not invalidate the proceeding unless it has or would cause irremediable substantial injustice.
S 1322(4) and the power to relieve contraventions
S 1322(4) bestows a somewhat extraordinary power upon the Court to go above contraventions of provisions of the Corporations Act or a company’s constitution and make orders validating any purported act, matter or thing, notwithstanding the contravention. The Court is also afforded the power to rectify ASIC registers, relieve civil liability for contraventions, or extend the period for doing any act or thing or taking any proceeding under the Corporations Act.
Unlike s 1322(2), subsection (4) only operates when an application is made for such orders. As such, in exercising its discretion to make orders, the Court is required to be satisfied of the matters in s 1322(6). Primarily, the Court must be satisfied that the order would not cause substantial injustice to any person. Further considerations are required for validating acts despite contraventions: the Court must be satisfied that the act, matter or thing to be validated is procedural; that the persons involved in the contravention acted honestly, and that it is just and equitable to make the order. In the case of relieving a person of civil liability, the Court must be satisfied that the person acted honestly. Even if the Court is so satisfied, however, the Court still has the discretion to make orders under s 1322(4).
An obvious distinction may be drawn between subsections 1322(2) and (4). The former does not require an application to the Court to remedy the procedural irregularity; it operates automatically. In theory, s 1322(2) strives for efficiency, obviating the need for litigation. In practice, however, its seemingly simple operation may become convoluted if parties disagree about any one of its moving parts. In such circumstances, recourse to s 1322(4) may prove necessary to reinforce the automatic validation conferred under subsection (2). Regardless of which subsection is relied upon, it is obvious that s 1322 is, and will only grow more, valuable as corporations legislation grows more daunting.