Corporations Law Notes – Contents - StudentVIP

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Corporations Law Notes – Contents

1. Introduction ... 1

Historical development of corporate law: UK & Australia ... 1

History of Corporate Law: United Kingdom ... 1

History of Corporate Law: Australia ... 1

Theories and conceptions of the company ... 2

The corporation as an artificial entity (concession theory) ... 2

The corporation as a group of individuals (aggregate theory) ... 2

The corporate as a ‘real’ equity (corporate realism) ... 3

Types of companies ... 3

Corporations Act 2001 (Cth) ss 9, 57A, 119 and 124 ... 3

Classification by liability ... 5

Classification by size ... 6

Corporations Act 2001 (Cth) ss 113 and 45A ... 7

Classification by Public Status (Listing)... 8

Corporations Act 2001 (Cth) ss 112-116 ... 8

Corporate groups ...11

Corporations Act 2001 (Cth) ss 9, 46 and 50AA ... 11

Administration of Australian Companies ...11

Key regulatory bodies in Australia – roles and effects ... 11

Why and how do you form a company? ...12

Factors likely to take into account ... 12

How to form a company ... 12

2. Corporate Personality and Limited Liability ...17

Corporate Personality ...17

Corporations Act 2001 (Cth) ss 112, 114, 119, 124, 125 and 201A... 17

Limited Liability ... 18

Salomon v A Salomon & Co Ltd [1897] AC 22... 20

Lee v Lee’s Air Farming Ltd [1961] AC 12 ... 21

What is the ‘corporate veil’? ...21

Piercing the Corporate Veil ...22

At common law ... 22

Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116 ... 22

Re FG Films [1953] 1 WLR 4823 ... 23

Facts ... 23

• UK company, FG Films, wanted Monsoon registered as a British film to obtain a subsidy. ... 23

• US parent, Film Group Inc, had financed and provide facilities to FG films for making the film .... 23

• 90 shares were held by a US director and 10 by a UK director while the film was made in India. 23 • Subsidiary was arguing that it was parent. ... 23

Outcome: Judgement for US parent – no agency. ... 23

Judgement ... 23

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• “participation…was so small as to be practically negligible, and that they acted… merely as the nominee of and agent for the American company… the suggestion that this American company and that director were merely agents for the applicants is, to my mind, inconsistent with and contradicted by

the evidence, and a mere travesty of the facts…” ... 23

Gilford Motor Co. Ltd v. Horne [1933] 1 ... 23

Jones v Lipman [1962] 1 WLR 832 ... 24

Fair Work Ombudsman v Ramsey Food Processing Pty Ltd [2011] FCA 1176 ... 24

Prest v Petrodel Resources Ltd [2013] UKSC 34... 25

* Industrial Equity v Blackburn (1977) 137 CLR 567 ... 26

DHN Food Distributors Ltd v London Borough of Tower Hamlets [1976] 3 All ER 462 (CA) ... 26

Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267 ... 27

* Briggs v James Hardie (1989) 16 NSWLR 549 ... 28

CSR Ltd v Wren (1997) 44 NSWLR 463 ... 29

Standard Chartered Bank of Australia v Antico (No 2) (1995) 38 NSWLR 290 ... 30

Under Statute ... 30

Corporations Act 2001 (Cth) ... 30

Position of employees upon insolvency ... 33

Corporations Act 2001 (Cth) ss 596AA and 596AB ... 33

3. Corporate Constitution ...35

What is a corporate constitution? ...35

Historical background (pre-1 July 1998)... 35

Replaceable rules (s141)... 35

Mandatory rules ... 36

Link Agricultural Pty Ltd v Shanahan (1998) 40 ACSR 498 ... 36

Allied Mining & Processing Ltd v Boldbow Pty Ltd (2002) 26 WAR 355 ... 37

Scottish & Colonial Ltd v Australian Power & Gas Co Ltd (2007) 65 ACSR 313 ... 37

State Street Australia Ltd In Its Capacity As Custodian For Retail Employees Superannuation Pty Ltd (Trustee) v Retirement Villages Group Management Pty Ltd [2016] FCA 675 ... 38

In the matter of Jervois Mining [2016] NSWSC 1650 ... 38

NAB Corporate Governance Dispute (2004) ... 38

The Coca-Cola Amatil Prenuptial Agreement (policy exercise) ... 39

Contents of the corporate constitution ... 39

Corporations Act 2001 (Cth) ss 117, 125, 134-141 and 9 ... 39

What is a corporate constitution?... 44

Alteration of the corporate constitution...44

The power to alter the constitution is mandatory ... 45

Southern Foundries v Shirlaw [1940] AC 701 ... 45

Limitations on alteration ... 45

The Boral Amendment ... 45

Bushell v Faith [1970] AC 1099 (English case) ... 46

Corporations Act 2001 (Cth) ss 246B, 246C ... 46

Gambotto v WCP Ltd (1995) 69 ALR 266... 48

Russell v Northern Bank Development Corp Ltd [1992] 3 All ER 161... 49

Effect of the Corporate Constitution ...50

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Objects Clauses and Limitation on Powers ... 50

The Statutory Contract (s140) ... 51

Corporations Act 2001 (Cth) s 140 ... 51

Foss v Harbottle (1843) 67 ER 189 ... 52

Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] ... 52

Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88 ... 53

Executive Directors’ Service Contracts ...54

Where are Executive Service Contracts Found? ... 54

Shuttleworth v Cox Bros and Co (Maidenhead) [1927] 1 Ch 154 ... 55

* Read v Astoria Garage (Streatham) Ltd [1952] 1 All ER 922 (Harman J); [1952] Ch 637 (CA) ... 55

* Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038 ... 56

Bailey v New South Wales Medical Defence Union Ltd [1995] 184 CLR 399 ... 57

Corporate Organs ...59

Division of powers between the corporate organs ...59

The Board of Directors ...61

Corporations Act 2001 (Cth) s 249Q ... 61

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunningham [1906] 2 Ch 34 ... 61

Australian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2016] FCAFC 80 ... 62

John Shaw & Sons (Salford) Ltd v Shaw [1935] ... 63

De-facto directors ... 64

Corporate Affairs Commission v Drysdale (1978) ... 64

Deputy Commissioner of Taxation v Austin (1998) ... 65

Grimaldi v Chamelon Mining NL (No. 2) (2012) ... 65

Shadow director ... 66

Standard Chartered Bank of Australia v Antico (No 2) (1995) 38 NSWLR 290 ... 66

Shareholders acting collectively: The company in general meeting ...68

Formal decisions by shareholders ... 68

Corporations Act 2001 (Cth) s 250N ... 68

Corporations Act 2001 (Cth) Division 2 – Who may call meetings of members ... 69

Re Totex-Adon Pty Ltd (1980) 1 NSWLR 605 ... 71

* Whitlam v ASIC (2003) 57 NSWLR 559 ... 72

In the matter of Jervois Mining Ltd [2016] NSWSC 1650 ... 73

Corporations Act 2001 (Cth) s 249L ... 73

Kaye v Croyden Tramways Ltd [1898] 1 Ch 358 ... 74

Re Marra Developments Ltd (1976) 1 ACLR 470 ... 74

* Fraser v NRMA Holdings Ltd (1995) 127 ALR 543 ... 75

ENT v Sunraysia TV Ltd (2007) 61 ASCR 626 ... 76

Informal decisions by shareholders ...77

Unanimous assent ... 77

Re Express Engineering Works [1920] 1 Ch 466 ... 77

Re Duomatic Ltd [1969] 2 Ch 365 ... 78

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In Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477 ... 78

Herrman v Simon (1990) 4 ACSR 81 ... 79

Corporations Act 2002 (Cth) ss 294A and 294B ... 79

Court’s jurisdiction to cure irregularities ... 80

Cordiant Communications (Australia) Pty Ltd v The Communication Group Holdings Pty Ltd (2005) 194 FLR 322 ... 82

Shareholder access to corporate information ...83

Corporations Act ss 250A, 250S, 250T, 247A-C ... 83

Functioning of the board of directors ...85

Irregularities and effectiveness of directors’ acts ... 85

Corporations Act 2001 (Cth) ss 201M and 1322 ... 85

Ceasing to be a director ... 86

ASIC v Adler [No. 5] [2002] ... 88

Corporations Act 2001 (Cth) s 206C-E ... 88

Remuneration ... 90

Corporations Act 2001 (Cth) ... 90

Appointment of managing directors ... 91

Corporations Act 2001 (Cth) ss201J and 198C ... 91

How is a Director’s Meeting Regulated? ... 91

Corporations Act 2001 (Cth) ss 248A-G, 195 ... 92

Director’s access to corporation information ... 94

5. Binding the corporation: capacity, authority and breach of duty ...96

Capacity of the corporation...96

Corporations Act 2001 (Cth) ss 124 and 125 ... 96

Authority of organs and agents ...97

Contracting by corporate organs and agents ... 97

Corporations Act 2001 (Cth) ss 126 and 127 ... 97

Authority at common law ... 98

Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 ... 99

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 ... 101

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Pty Ltd (1975) 133 CLR 72 ... 102

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 ... 103

Statutory assumptions to authority ... 104

6. Directors’ Duties ... 110

By Whom Are the Duties Owed? ... 110

To Whom Are the Duties Owed? ... 111

Percival v Wright [1902] 2 Ch 421 ... 111

Exception ... 112

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Coleman v Myers [1977] 2 NZLR 225 ... 112

Brunninghausen v Glavanics (1999) 32 ACSR 294 ... 113

Crawley v Short (2009) 262 ALR 654 ... 113

Duty to Act in Good Faith for the Benefit of the Company and for a Proper Purpose ... 114

Acting bona fide or in good faith ... 114

* Re Smith & Fawcett Ltd [1942] Ch 304 ... 114

Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 ... 115

Acting for the benefit of ‘the company as a whole’ ... 115

* Ngurli Ltd v McCann (1953) 90 CLR 425 ... 116

Gaiman v National Association for Mental Health [1971] Ch 317 ... 116

* Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 ... 117

The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239 ... 118

Spies v R (2000) 74 ALJR 1263 ... 118

* Teck Corp Ltd v Millar (1973) 33 DLR (3d) 288 ... 118

* Parke v Daily News Ltd [1962] Ch 927 ... 119

Duty to Promote the Success of the Company Companies Act 2006 (UK) s 172 ... 119

Equiticorp Finance Ltd v Bank of New Zealand (1993) 32 NSWLR 50 ... 120

* Walker v Wimborne (1976) 137 CLR 1 ... 120

Charterbridge Corp Ltd v Lloyd's Bank Ltd [1970] Ch 62 ... 121

Duty to exercise powers for a proper purpose ... 122

*Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 ... 123

* Hogg v Cramphorn [1967] Ch 254; [1966] 3 All ER 420 ... 124

*Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 ... 124

* Teck Corp Ltd v Millar (1973) 33 DLR (3d) 288 (Canadian case) ... 125

Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260 ... 126

Corporations Act 2001 (Cth) ss 181, 184 ... 127

Director’s obligations to avoid conflict between duty and interest ... 128

Director’s interests in contracts with their own company ... 128

Bray v Ford [1896] AC 44 ... 128

* Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 ... 128

* Transvaal Land Co v New Belgium (Transvaal) Land and Development Co [1914] Ch 488 ... 129

Guinness plc v Saunders [1990] 2 AC 663 ... 130

Corporations Act 2001 (Cth) s 191 – mandatory rule (constitution cannot override); public and proprietary companies ... 130

Corporations Act 2001 (Cth) s194 – replaceable rule ... 133

Secret profits: the appropriation of corporate property, information and opportunity ... 134

* Cook v Deeks [1916] 1 AC 554 ... 134

* Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 ... 136

* Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1 ... 137

* Industrial Development Consultants v Cooley [1972] 1 WLR 443 ... 137

* Queensland Mines Ltd v Hudson (1978) 18 ALR 1... 138

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Related Party Transactions ... 140

Corporations Act 2001 (Cth) ss 208, 229 and 228 ... 140

Further potential conflicts and conflict avoidance obligations ... 142

Thorby v Goldberg (1964) 112 CLR 597 ... 142

Duty of Care, Diligence and Skill ... 143

Source of Duty ... 143

Scope of duty ... 143

Re City Equitable Fire and Insurance Co Ltd [1925] Ch 407 ... 143

CBA v Friedrich (1991) 5 ACSR 115 ... 144

* AWA Ltd v Daniels (1992) 7 ACSR 759 ... 144

* Daniels v Anderson (1995) 16 ACSR 607 ... 145

* ASIC v Adler (2002) 168 FLR 253; [2002] NSWSC 171 ... 146

Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109 ... 147

Development of the Duty: The statutory duty ... 147

ASIC v Rich (2003) 44 ACSR 341 ... 149

Vines v ASIC (2007) 62 ACSR 1 ... 149

Vrisakis v ASC [1993] 9 WAR 395 ... 150

ASIC v Cassimatis (No 8) [2016] FCA 1023 ... 150

Reliance and Delegation (defence) ... 151

Corporations Act 2001 (Cth) ss 198D and 190 ... 151

ASIC v MacDonald (No.11) [2009] (restored on appeal in ASIC v Hellicar [2012]) ... 153

Morley v ASIC [2010] NSWCA 331 ... 153

ASIC v Fortescue Metals Group Ltd (2011) 274 ALR 731 ... 153

ASIC v Healey (2011) 196 FCR 291 (Centro liability decision) ... 154

Business Judgment Rule (defence) ... 154

ASIC v Mariner Corporation Limited ... 155

ASIC v Rich (2003) 44 ACSR 341 ... 156

Insolvent Trading ... 156

Liability under Corporations Act s 588G ... 156

Corporations Act 2001 (Cth) s 588G ... 157

Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 ... 159

Commonwealth Bank Ltd v Friedrich (1991) 5 ACSR 115 ... 159

Defences ... 160

Corporations Act 2001 (Cth) s 588H ... 160

McLellan, in the matter of the Stake Man Pty Ltd v Carroll [2009] FCA 1415 ... 161

Deputy Commissioner of Taxation v Clark [2003] 57 NSWLR 91 ... 161

Compensation remedies with respect to insolvent trading ... 162

Liability of a holding company for insolvent trading by a subsidiary under s 588V... 162

Corporations Act 2001 (Cth) ss 588V and 588W ... 162

Remedies for breach of general law duties ... 163

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Duty of care, skill and diligence ... 163

Duty of loyalty ... 163

Remedies for breach of civil penalty provisions... 163

Corporations Act 2001 (Cth) s 1317J ... 164

Criminal consequences ... 165

Release from liability for breach of duty ... 165

Ratification by general meeting ... 165

Ratification by board ... 165

Relief granted by court ... 165

Relief granted by Constitution... 166

7. Member’s rights and remedies ... 168

Background ... 168

Equitable Limitations on Voting Power of Majorities ... 168

1. Misappropriation of corporate property and rights ... 168

2. Release of directors’ duties ... 169

* Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 ... 169

3. Alteration of company’s articles that prejudice shareholder rights ... 170

Peters’ American Delicacy Co Ltd v Heath (1939) CLR 457 ... 170

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 ... 171

Australian Fixed Trusts v Clyde Industries Ltd (1959) 59 SR (NSW) 33 ... 171

4. Expropriation of a member’s shares (Gambotto’s case) ... 172

* Gambotto v WCP Ltd (1995) 69 ALJR 26 ... 172

Member Suits ... 173

Background ... 173

Statutory Injunctive Relief: s 1324 ... 173

Statutory Derivative Suit ... 175

Statutory protection for minorities ... 179

Compulsory liquidation remedies ... 179

Corporations Act 2001 (Cth) s 461(1)(k) ... 179

* Re Tivoli Freeholds Ltd [1972] VR 445 ... 179

* Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 ... 180

* Re Cumberland Holdings Ltd (1976) 1 ACLR 361 ... 181

* Re Weedmans Ltd [1974] Qd R 377 ... 182

Corporations Act 2001 (Cth) s 467(4) ... 182

Oppression: Modern Grounds for Relief... 183

Corporations Act 2001 (Cth) ss 232, 233 ... 183

* Thomas v H W Thomas Ltd (1984) 2 ACLC 61 ... 184

* Wayde v New South Wales Rugby League Ltd (1994) 180 CLR 459; (1985) 59 ALJR 798 ... 185

* Re Spargos Mining NL (1990) 3 ACSR 1 ... 186

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Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136; (1992) 6 ACSR 539 ... 186

Campbell v Backoffice Investments Pty Ltd [2009] HCA 25 ... 187

Protection of class rights ... 187

Corporations Act 2001 (Cth) Part 2F.2 , ss 246B – 246G ... 188

* Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper and Printing Co Ltd [1987] Ch 1 ... 191

* White v Bristol Aeroplane Co [1953] Ch 65 ... 191

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Division of powers between the corporate organs

Decisions by agents: the agent acts on behalf of the company, not as the company.

There is a notion that the directors are the agents of the shareholders (principle). Hence, although directors were vested with management functions of the company, everything they did could be subject to overarching reviews of the shareholders in general meeting. This role fundamentally changed in the early 20^th century.

Decisions by organs: the organ is the company for the purposes of the decision – each organ can act as the company.

A company comprises of two separate, discrete organs:

1. The general meeting of members; and 2. The board of directors

This distinguished the ownership and management roles of a company.

The statute states that all the companies need to do is appoint a board of directors to which the management power is vested, but it does not state how the division of power should be done, as this division is a matter of choice:

Corporations Act 2001 (Cth) ss 198A and 198E

198A Powers of directors (replaceable rule--see section 135)

(1) The business of a company is to be managed by or under the direction of the directors. [general rule – board of directors cannot be responsible for the day to day management of the company whereby they delegate their functions. This vests all management functions to the board of the directors.]

Note: See section 198E for special rules about the powers of directors who are the single director/shareholder of proprietary companies.

(2) The directors may exercise all the powers of the company except any powers that this Act or the company's constitution (if any) requires the company to exercise in general meeting. [Provides an exception to the management functions; vesting power in general meeting is available e.g. amending in constitution, removing of directors, those that fundamentally affect rights/obligations of members]

Note: For example, the directors may issue shares, borrow money and issue debentures.

198E Single director/shareholder proprietary companies Powers of director

(1) The director of a proprietary company who is its only director and only shareholder may exercise all the powers of the company except any powers that this Act or the company's constitution (if any) requires the company to exercise in general meeting. The business of the company is to be managed by or under the direction of the director.

Note: For example, the director may issue shares, borrow money and issue debentures.

Negotiable instruments

(2) The director of a proprietary company who is its only director and only shareholder may sign, draw, accept, endorse or otherwise execute a negotiable instrument. The director may determine that a negotiable instrument may be signed, drawn, accepted, endorsed or otherwise executed in a different way.

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themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.” (John Saw & Sons (Salford) Ltd v Shaw [1935] per Greer LJ).

i.e. shareholders no longer have the right to instruct board of directors to act in a certain way if there is disagreement.

Companies do have the flexibility to draft their own provisions in the constitution to change the replaceable rule regarding the powers of the organs.

Organ Source Power

General Meeting

Corporations Act Vested powers (often disclosure based):

• Modification or repeal of the constitution or a clause in it by special resolution [s136(2)]

• Alteration of the company’s name [s157]

• Altering rights attached to shares (also requires consent of class of shareholder affected [Part 2F.2]

• Power to remove a director of a public company [s203D].

A director of a public company cannot be removed by other directors [s203E]

• Non-binding shareholder vote [s250R(2)]

Corporations Act Gatekeeper functions (certain functions may wish to conduct, but requires approval of general meeting):

• Related party transactions [s208]

• Benefits for loss of office [s200B]

• Financial assistance [s260B(1)]

• Share buy-backs [s257D]

i.e. shareholders want to know because it is a little conflicting, despite it being okay to happen.

ASX Listing Rules Vested powers:

• Certain new issues of shares [ASX LR 7.1]

• Transactions with persons able to influence the company [ASX LR 10.1, 10.11]

• Changes to the nature or scale of the company’s activities [ASX LR 11.1]

• Disposal of major assets [ASX LR 11.2]

Replaceable Rules Vested powers (to control composition of the board):

• Power to elect directors [s201G]

• Power to remove directors [s203C]

• Power to set remuneration for directors [s202A]

• Power to authorise a member to inspect the books of a company [s247D, power held jointly by the board]

If general meeting does not like what the directors are doing, the can control the composition of the board by removing directors or amend the constitution.

Residual and reserve powers

Residual powers: traditionally, the general meeting has residual power (to the extent there is silence in the Act or Constitution as to which organ is to exercise a power or function, it automatically defaults to the general meeting to decide); however s198A reverses the traditional position – board of directors exercise all management functions (so now the residual power rests with them).

Reserve powers: exercisable by the general meeting if:

(i) board is unable to act due to deadlock or lack of quorum from disqualification of directors; or

i.e. if the general meeting is unable to act per a power vested in it, the power does not revert to the board. However, when the board is unable to act, the power reverts to the general meeting.

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or ratification of directors’ acts in excess of power.

e.g. even vote per board of directors, so general meeting makes final decision.

Board Replaceable Rules Corporations Act does not require the board of directors to do anything (except tax reporting), leaving it to the replaceable rules.

Conferred power:

• Power to appoint managing director [s201J]

• Power to call a general meeting [s249C] (note:

shareholders can do that too)

• Power to appoint the chair of the general meeting in certain circumstances [s249U(2)]

• Power to set terms and conditions of office for company secretary [s204F] (public: at least 1; proprietary: not required)

• Power to determine dividends [s254U(1)]

• Powers of directors [198A]

The Board of Directors

Only individuals can be appointed as directors, not companies.

Directorship by conduct refers to de-facto and shadow-directors (despite not specifically seeing those words).

• One who ‘acts in the position of a director’ (s 9).

• One who ‘acts in the position (of a director) with or without lawful authority’ (Corporate Affairs Commission v Drysdale)

• One who ‘exercises top management functions’ and has practical direction and effective control of the company (DCT v Austin; applied in Grimaldi v Chamelon Mining)

The whole purpose behind these provisions is protection – equivalent legal standard as a formal director (such as breach of director’s duties, and personal liability for insolvent trading), which is why the standard is very high to prove.

The board is immune from general meeting interferences:

Corporations Act 2001 (Cth) s 249Q

249Q Purpose

A meeting of a company's members must be held for a proper purpose.

The board of directors was always subservient to the general meeting, but this case changed everything by providing for 2 separate organs with their own powers:

Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunningham [1906] 2 Ch 34 Facts

• The constitution of ASCFS provided the board of directors with (specifically vested in board via statutory contract):

o Power to manage the business;

o Power to sell the company’s assets to other companies with similar objectives.

• The constitution also provided that directors could be removed by a special resolution.

• A major shareholder established a company and requisitioned a general meeting.

• The purpose of the meeting was to pass a shareholder resolution directing the company’s directors to cause the company to sell its assets to the newly formed company set up by the major shareholder.

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• Resolution passed by a majority of votes derived almost entirely by the major shareholder and his associates. Under the law at this point in time, this was completely valid – the board transferred the money to the shareholder in the new company. This left a corporate shell.

• The directors refused to follow the direction.

• The shareholder sought court orders forcing the directors to execute the transfer.

Outcome: Judgement for directors – directors not bound by wishes of members.

Judgement

Issue. Were the directors bound by the wishes of the majority of the members in the meeting?

• To allow the majority of members to overrule the directors is analogous to removing the directors from their positions.

• If the members wished to overturn the decision of the directors, they had to remove them by passing a special resolution (an ordinary resolution was insufficient under the constitution).

Warrington J (trial judge)

• ‘The result would be that when a majority of the shareholders disagree with the policy of the directors, though they cannot remove the directors except by special resolution, they might carry on the whole of the business of the company as they pleased, and thus, though not able to remove the directors, overrule every act which the board might otherwise do.’

Collins MR (appeal judge)

• ‘It is not competent for the majority of the shareholders at an ordinary meeting to affect or alter the mandate originally given to the directors, by the articles of association.’ [42]

i.e. discretion was equivalent to s 198A, not general meeting’s power.

Cozens-Hardy LJ

• ‘I do not think it true to say that the directors are agents. I think it is more nearly true to say that they are in the position of managing partners appointed to fill that post by a mutual arrangement between all the shareholders.’ [44]

i.e. if directors were agents of shareholders, the shareholders would be the principle and would be in full control.

In effect, if we are stating that the directors are always subservient to the shareholders in their general meeting, the directors are removed from their role. They cannot manage the business of the company (which is their role) if they are always subject of the shareholders. If the shareholders are displeased with the directors, the shareholders could amend the constitution, or remove the directors by special resolution. This case confirms that although directors may be stated to be agents, they are not bound by the control of shareholders. The board is insulated from the general meeting in their role of management.

Also applied in:

Australian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2016] FCAFC 80 Facts

• Members proposed to move resolutions that, in effect, stated it was their intention that the directors provide certain environmental reports in the company's Annual Report.

Outcome: Judgement for directors Judgement

• Members cannot make resolutions regarding the management of the company simply on the basis of a legitimate interest in how the managerial powers are exercised.