Question

Background

Hydro Fracking Ltd (‘HFL’) is an Australian company incorporated in 2012. The registered office in is Melbourne and has offices in Adelaide and Perth. HFL does not have a written constitution. HFL’s corporate mission is to introduce the “Shale Revolution” to Australia by developing new unconventional gas projects. Hydraulic fracturing (also known as ‘fracking’) is a process of stimulating oil and gas wells through high pressure, fracturing shale rock formations and unlocking previously trapped oil or gas. Fracking – a type of ‘unconventional gas’ – is controversial and is strongly opposed by environmental activist groups. Generally, gas has a lower emissions profile compared to coal for energy generation. This finding is disputed by some researchers and remains the subject of scientific debate. Opponents of fracking also point to the fact that the hydraulic fracturing process has environmental risks around water usage, water contamination, and other air contaminants. Accordingly, in jurisdictions where it is permitted, hydraulic fracturing is subject to stringent environmental regulations. However, the CSIRO notes that “Australia has vast resources of unconventional gas”1 and Australia’s Chief Scientist has noted that the Federal government considers natural gas to be a reliable transition fuel. 2

The board of Hydro Fracking Ltd consists of five directors:

• Edward is the Chairman of the Board. He does not have any executive role. He is also a director of the South Australian Rural Finance Ltd.

• Louise is the Chief Executive Officer. • Richard is the Chief Financial Officer and the Company Secretary.

• Philippa is a non-executive director as nominated by Global Fracking Corporation.

• Monique is a non-executive director as nominated by NRG Super.

Shareholding: HFL is a subsidiary of Global Fracking Corporation (‘GFC’) an American company incorporated in the state of Delaware and listed on the New York Stock Exchange. GFC own 60% of HFL’s shareholding. The remainder of the shares are held by institutional investors, including NRG Super, an Australian industry superannuation fund.

Insurance: All directors hold a Directors’ & Officers’ Liability Insurance in the amount of $10 million each.

CLIENT INSTRUCTIONS

A number of issues are brought to our attention: In February 2020, HFL concluded a deal for the grant of an exclusive license over land in the Cooper Basin in South Australia. This will allow HFL to begin exploratory assessments for unconventional gas. The owner of the land, Matheson Pty Ltd, will be paid $1.2 million per year for three years. Edward was in charge of the process of securing the land license as delegated by the board. Even though other land in the area was also available, Edward was only ever in discussions with Herbert Matheson, the sole director of Matheson Pty Ltd. It is now discovered that Herbert Matheson has significant personal debts that are owed to the South Australian Rural Finance Ltd, after a long drought. The license fees will allow Herbert Matheson to pay off all of his debts and avoid bankruptcy. Edward did not provide a formal report to the board but the other directors were pleased that access to land has been obtained. At a directors’ meeting, the directors voted to approve the deal and give Edward and Richard the authority to execute the contracts in HFL’s name.

In August 2020, HFL’s accountants discovered a number of financial irregularities. It was revealed that a total of seven false invoices had been paid by HFL’s accounts payable team – amounting to $275,000. The invoices were discovered because the ABN and business name on the invoices had been faked and the GST component of the invoice was incorrectly calculated. It was revealed that the bank account on the fake invoices was traced to Edward’s wife. When Edward was confronted by Louise, he claimed that he had gambling debts and needed the extra money. He has agreed to pay all of the money back but is refusing to resign from the company.

Philippa and Monique are furious at this incident – not just because of Edward’s fraud but because earlier this year the board had delegated Louise and Richard the responsibility of implementing a new financial management system that was meant to use the latest Artificial Intelligence and Machine Learning technologies to immediately detect suspicious invoices. However, because Louise and Richard were too busy, this job was delegated to an external contractor to manage. Unfortunately there were several flaws in the computer software which a competent IT person would have recognised and fixed. Louise is embarrassed about this.

In September 2020, NRG Super made a formal complaint to ASIC that alleging that the executive directors are "unfit to hold office”. They also claimed that the company were full of “carbon criminals” that were wrecking the environment – although it did not provide any further evidence of this. NRG Super wants to pull its investment from HFL and cut any further association with the company. Accordingly, NRG Super directs Monique to resign. At 3:15pm on Friday 18 September 2020, Monique telephones Louise and says “I am calling to resign as a director of HFL effective immediately, please do not contact me again.”

QUESTION

Louise wants to remove Edward from the Board of Directors. Consider each of the followingpossibilities and discuss any procedural requirements.

(a)If Victoria Police charge Edward with “obtaining financial advantage by deception”(an indictable offence under section 82 of the Crimes Act 1958 (Vic) carrying amaximum sentence of 10 years imprisonment), will he automatically cease to bea director of HFL?

(b)Can the Board remove Edward as a director of HFL?

(c)Can GFC remove Edward as a director of HFL?

4.Advise Louise as to whether Monique has validly resigned as a director of the company.

Answer 1

a)If Victoria police charge Edward with obtaining financial advantage/unjust enrichment by deception then he will automatically cease to be a director in HCL.

He is also bound to make good for the company by repaying the amount if financial advantage/unjust enrichment by deception and also liable for penal provisions as per act regulating HFL.

b)No, The Board by itself cannot remove the director but by issuing a notice for calling general meeting and passing a ordinary resolution the company can remove a director.

c)GFL cannot remove the director by itself it should given special notice to the company to call for a general meeting and by ordinary resolution the director can be removed.

4)The telephonic intimation of Monique of resignation as a director is not sufficient and he has to give notice in writing to th company to make the resignation valid. Therefore in the given case the resignation is not valid and he continues to be a director until he is validly resigned.