Mills v Mills
60 CLR 150(Judgment by: Rich J)
Mills
vMills
Judges:
Latham CJ
Rich JStarke J
Dixon J
Evatt J
Legislative References:
Companies Act 1899 (NSW) - s 7(e); s 11
Case References:
-
Judgment date: 17 February 1938
Judgment by:
Rich J
This appeal is an incident in a lamentable dispute among the members of a family company, which with conspicuous success has conducted a well-known sheep station devoted to the production of stud sheep. How far a preoccupation in protracted and expensive litigation is consistent with the continued improvement in the type of stud rams bred under the management of the company is a matter which time will tell. But the manner in which the hitherto successful direction of the company is now being attacked in this and concurrent litigation suggests, according to ordinary experience of such matters, that the business from which the company's profits arise is not likely to flourish in the future unless common sense is substituted for the cacoethes litigandi.
Our business, however, is the commonplace duty of construing some rather confused articles of association and of saying whether a resolution passed in purported pursuance of powers expressed to be conferred on the board of directors is invalid on the ground that it was animated by an improper purpose. The resolution in question is for the increase of capital by the creation of five new ordinary shares for every two ordinary shares in the then existing capital of the company and for their distribution as fully paid bonus shares by way of dividend out of reserves of trading profit. The directors by whose votes this resolution was passed say that they adopted it because they thought profits should be capitalized so as to be distributed amongst ordinary shareholders in the event of liquidation, an event which they began to fear in consequence of the dissensions in the company. The appellants who attack the validity of the resolution say, on the other hand, that it was not adopted bona fide in the interests of the company but for the purpose of maintaining a numerical majority of votes in the managing director and those likely to support him. The question, however, whether the power to increase share capital and issue bonus shares lies with the directors or is restricted to a general meeting of the company is logically anterior to the question of fact whether the power has been fraudulently abused. The location of the power depends upon the construction of the memorandum and articles of association. The memorandum complies with s 7 (e) of the Companies Act 1899 (NSW) and states the amount of capital divided into shares of a certain fixed amount. The articles include a regulation under s 11 of this Act authorizing the company to increase its capital. If there were nothing more, this would suffice to enable the directors under the general powers conferred upon them to exercise on behalf of the company its power of increasing its capital (See Campbell's Case [9] .; Palmer's Company Precedents, 12th ed (1922), Vol I., p 657). The articles include a general power of directors similar to that of which in Campbell v Rofe [10] . Lord Thankerton, in delivering the decision of the Privy Council, says that their Lordships would be prepared to hold that it clearly delegated "to the directors power to do everything that the company could do except where the authority of a general meeting of the company is expressly prescribed, and that such delegation would include power to issue preference shares." The memorandum of association includes an unusual statement in relation to the issue of capital. The provision is as follows: "Any shares of which the capital of the company may from time to time consist may be divided into classes and may be issued with any preferential, special, deferred or qualified rights, privileges or conditions attached to them according as may be prescribed by the articles of association of the company or duly decided upon by the company or its directors." The distinction between a due decision by the company and one by its directors seems to prelude a distinction in the articles of association, which, as I read them, confer parallel powers in this matter upon the shareholders and upon the board of directors. The articles which confer power upon the board of directors are, to my mind, very clear in granting to them ample authority to increase capital and to distribute paid-up shares by way of dividend. It is not necessary to quote these articles. They are Arts 25 and 26 read together, 29, 72, 74, 77, 78 and 80.
It is said, however, that the prima-facie effect of these articles must be modified because of an article expressed to give control of all shares to the company and requiring that they shall be dealt with upon such terms and conditions and at such times as the company shall direct by extraordinary resolution. I shall not set out this article, which is numbered 6. The argument founded upon it is that, to give any effect to it, it is necessary to treat the express power given to the directors to issue, allot and dispose of share capital as subject to a prior extraordinary resolution fixing the terms, conditions and times or in some other way sanctioning the transaction. This appears to me to be a fallacious application of the general rule by which judges are exhorted to attempt to give effect to every part of a document and reconcile its inconsistencies. When the draftsman put in the very clear powers of the directors, I have not the least doubt that he was led to do so by a desire that the directors should have these powers unqualified and unfettered by any condition precedent to their exercise. When he put in Art 6, I have similarly no doubt that he was guided by the opinion that it would be a good thing if by extraordinary resolution the shareholders could exercise the power that that article specified. He may well have perceived that by its exercise the shareholders might overrule or restrain in anticipation the action of the directors, but I do not think that he ever dreamt that the directors could not move in the exercise of their particular power until the shareholders allowed them. In other words, these powers are parallel powers. Accordingly, I think that the directors were armed with the necessary power to create, allot and issue the bonus shares. The validity of the directors' resolution, therefore, must depend on the question whether they exercised the power in good faith for the purpose for which the power was given. This question is not unlike that with which we dealt in Richard Brady Franks Ltd v Price [11] .. I repeat the observations I there made upon the criterion of validity. They are as follows: -- "The last objection to the judgment under appeal was that the power had not been exercised by the directors 'bona fide for the benefit of the company as a whole.' At the hearing before the learned judge the plaintiff accepted the onus of proving this proposition. The phrase 'bona fide for the benefit of the company as a whole' no doubt tends to become a cant expression in these matters but is not yet a shibboleth. Many of the cases which illustrate this 'phrase' relate to the alteration of articles of association by shareholders in general meeting. No court 'should consider itself fettered by the form of words, as if it were a phrase in an Act of Parliament which must be accepted and construed as it stands' ( Shuttleworth v Cox Brothers & Co (Maidenhead ) [12] .). But the learned judge found that 'the evidence as a whole preponderates in favour of the view that in regard to the issue of debentures the directors acted in the interests of the company and of the general body of shareholders and not in the interests of the proposed debenture holders' and found this issue of fact against the plaintiff. In order to succeed in a case like the present the plaintiff must prove the equivalent of fraud or bad faith. In Hirsche v Sims [13] . the Earl of Selborne formulated a test which seems applicable to the present case as follows: "If the true effect of the whole evidence is, that the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not chargeable with dolus malus or breach of trust merely because in promoting the interest of the company they were also promoting their own." Upon such a question an opportunity of seeing the parties concerned is a matter of special importance in arriving at a conclusion" [14] .. In the present case on the facts there appear to have been only two sensible purposes or reasons which could have prompted the capitalization of profits and distribution of shares. One purpose was within the power, the other was outside it. The purpose within the power was to confer upon ordinary shareholders a title to the fund pro tanto representing reserves of profits. The illegitimate purpose was to maintain the strength of the voting power likely to be used on the side of the directors concerned. The learned primary judge, Lowe J, heard at considerable length a cross-examination of the managing director and a cross-examination of the other director who supported the resolution. Each of them swore that their reason was that first stated -- the legitimate reason. The learned judge appears to me plainly to have accepted their evidence. In a desire fairly to furnish the appellant with an opportunity of challenging his conclusion Lowe J has stated his view of the attitude of the directors with some refinement. The appellant has availed himself to the full of the opportunity given to him and has made an attempt full of valiance and acumen to discover in the words of the judgment a finding that the directors' motives included a desire to increase voting strength. I am not impressed with the psychological subtleties which this argument attributes to the directors, and, having read the whole of the evidence and considered the reasons of Lowe J in the light thereof, I am clearly of opinion that his judgment means that the reason of the resolution was the desire of the directors to give ordinary shareholders a title to part of the reserve of profits and that except for this reason the resolution would never have been passed. This appears to me to be enough to show that the resolution was validly passed.
I think the appeal should be dismissed.