Mills v Mills

60 CLR 150

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(Judgment by: Starke J)

Mills
vMills

Court:

Judges: Latham CJ
Rich J

Starke JDixon J
Evatt J

Legislative References:
Companies Act 1899 (NSW) - s 7(e); s 11

Case References:
-

Hearing date: 26-28 October 1937
Judgment date: 17 February 1938

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Judgment by:
Starke J

This action was brought in the Supreme Court of Victoria and sought declarations that a resolution passed by the directors of Charles Mills (Uardry) Ltd on 7th September 1936 was invalid and not binding upon the company and its members and that any allotment and/or issue of shares made pursuant to the resolution was invalid and should be set aside and ancillary relief. The action was dismissed and an appeal is now brought to this court.

The company is a family company and was incorporated in 1915 in New South Wales, and its principal objects were to acquire from Charles Mills the "Uardry" station and the stock and other assets connected therewith and the business conducted on the station and to carry on, inter alia, the business of station owners, graziers, pastoralists and stock breeders.

The station and other assets were duly acquired, and the company has since its incorporation carried on and still carries on the business of pastoralists and stock breeders on the station. The original capital of the company was £46,000, divided into 46,000 shares of one pound each, of which 11,500 were preference shares and 34,500 ordinary shares. The preference shares conferred a right to a fixed cumulative preferential dividend of a total amount of £2,500 in each year, to be distributed amongst the holders for the time being of the preference shares ratably and in proportion to the number of preference shares held by them respectively. Other than as aforesaid the preference shares were not entitled to participate any further in the profits of the company, and such preference shares had not in a winding up any preferential claim on any capital assets but ranked in that respect with ordinary shares.

All the shares, other than four hereinafter mentioned, were allotted and issued to members of the Mills family. The preference shares were allotted to Mrs Margaret Ainslie Mills, the wife of Charles Mills. Mrs Mills and the respondent Neilson Mills were the first directors of the company. Neilson Mills was the first managing director, Both, under the articles of association, held office for life. About 1927 Mrs Mills died and two other directors were appointed; one, W. A. Mills, has since died, but the other, Birtchnell, a respondent to this appeal, is still alive and acting.

In April of 1935 the appellant Ainslie Mills was appointed a director to fill the vacancy caused by the death of W. A. Mills. The management of the business was in the hands of the respondent Neilson Mills, and it was extraordinarily efficient and successful, and there are many minutes of the company expressing high appreciation of his able management. Between 1916 and 1937 all mortgages and debts taken over by the company, and amounting to £63,000, were discharged. About £280,000 was distributed in dividends to the preferential and ordinary shareholders, and a reserve of about £140,000 was accumulated out of profits, of which £70,000 to £80,000 appears to have been invested in the purchase of "Burrabogie" station adjoining "Uardry."

On 7th September 1936 a directors' meeting was held and the resolution, which is now attacked was passed. The directors Neilson Mills and Birtchnell -- respondents here -- voted in favour of the resolution, and Ainslie Mills -- an appellant here -- voted against it. The resolution was as follows: "That in view of the improvement in the company's position and the passing of the worst of the financial depression, it is considered that the whole of the accumulated profits standing to the credit of reserve account are now not required as reserves; and that, as they belong solely to the ordinary shareholders and, if a liquidation of the company, as has been suggested, took place, such ordinary shareholders would not alone participate in their distribution, the sum of £86,250 part of such accumulated profits should be distributed by way of dividend on ordinary shares; and accordingly that a dividend amounting in the aggregate to the said sum of £86,250 be and is hereby declared out of such accumulated profits, and that the said dividend be paid and satisfied by the issue to holders of ordinary shares of 86,250 new ordinary shares fully paid up, being five of such new shares for every two ordinary shares held by them; and that for this purpose the capital of the company be and is hereby increased from £46,000 to £132,250 by the creation of 86,250 new ordinary shares of £1 each; and that any difficulty arising in the distribution of the said shares be settled by issuing fractional certificates or otherwise as the directors may hereafter determine; and that the secretary be instructed to make out share certificates for such shares and that the same be sealed and that a proper contract to be filed in accordance with the Companies Act be entered into and that Samuel Charles Birtchnell is hereby appointed to sign such contract on behalf of the persons entitled to the dividend."

The grounds of the attack upon this resolution, argued in this court, were: -- 1. It is not within the authority of the directors conferred on them by the articles of association of the company. 2. It was not passed bona fide in the interests of the company but in the interests and for the purposes of Neilson Mills with the sole object and intention of creating voting power and controlling the company.

The first ground depends upon the proper construction of the articles of association, which, unfortunately, are not as clear as is desirable. The Companies Act 1899 (NSW), s 11, gives the company power to increase its capital by the issue of new shares of such amount as it thinks expedient, and it was conceded during the argument that there is no provision in the legislation of New South Wales, as there is in the English Act of 1929, s 50 (2), providing that the power to increase must be exercised by the company in general meeting.

The relevant articles are, I think, Arts 6, 25, 26, 27, 72 and 80. Article 25 provides that the company may from time to time increase its capital by the creation of new shares, and Art 72 contains an express provision that the directors may increase the capital of the company. These provisions deal with the creation of new shares ( Koffyfontein Mines Ltd v Mosely ^[15] .). Article 6, however, provides that all shares (other than those mentioned in the agreement for the purchase of "Uardry") shall be under the control of the company and shall be issued, allotted and placed under option or otherwise on such terms and conditions and at such times as the company by extraordinary resolution as denned by subs 2 of s 130 of the Companies Act shall direct.

The shares originally issued were issued and allotted to members of the family of Charles Mills under the agreement mentioned other than about four shares, which I gather from the memorandum of association were issued to representatives of the solicitors preparing the purchase agreement. So Art 6 had little scope for operation except in the case of an increase of share capital. But Art 26 dealt with the issue of new shares on an increase of capital. It provided that such new shares shall be of such amount and shall be issued upon such terms and conditions and with such rights and privileges annexed thereto as the directors shall determine and, in particular, such shares may be issued with a preferential or qualified right to dividends and in the distribution of assets of the company and with a special or without any right of voting.

Article 27 provides that capital raised by the creation of new shares shall be considered part of the original capital and shall be subject to the same provisions as shares in the original capital except so far as otherwise provided by the conditions of issue or the articles of association.

Some reliance is placed upon the use of the words "issued, allotted and placed" in Art 6, whilst in Art 26 the word used is "issued." But I attach no importance to the difference in language. Neither the word "allotted" nor "issued" has, I think, any technical meaning. "Broadly speaking," said Stirling J ^[16] ., an allotment "is an appropriation by the directors ... of shares to a particular person": the acceptance by the company of an offer. An issue of shares takes place when a shareholder has been put completely in the possession of his shares. "Shares may have been issued which have been allotted but for which no certificates have ever been issued and on the other hand shares as to which a resolution to allot has been made may not have been issued "(Buckley on Companies, 7th ed (1897) p 612). The conclusion is more one of fact than of law ( Levy v Abercorris Slate and Slab Co ^[17] .; Spitzel v Chinese Corporation Ltd ^[18] .; Blyth's Case ^[19] .; Clarke's Case ^[20] .; Re Perth Electric Tramways Ltd; Lyons v Tramways Syndicate ^[21] .; Buckley on Companies, 7th ed (1897), p 612).

The proper construction of the articles therefore depends upon other considerations and upon the intention disclosed by the articles of association. It is true that Art 6 refers to "all shares," but Art 27 explicitly and expressly provides for the mode of the issue of new shares and of their amount and the terms and conditions upon which they shall be issued and gives in itself an authority to issue new shares, concurrent though it may be with the authority conferred by Art 6.

Article 72 does not, I think, afford much assistance in the construction of the articles. If Art 6 controlled the issue of new shares, I should not think that its express provisions for an extraordinary resolution would be affected by Art 72; whilst, if Arts 25 and 26 are the controlling articles as to the creation and issue of new shares, then Art 72 but reinforces them (Cf Campbell v Rofe ^[22] .). Article 80 empowers the directors, when declaring a dividend, to direct payment in shares of the company.

In my opinion, therefore, the resolution of the directors of 7th September 1936 was within their powers and is valid.

That part of the resolution which declares a dividend of £86,250 out of accumulated profits to be paid and satisfied by the issue to the shareholders of ordinary shares of 86,250 new ordinary shares fully paid up, being five of such new shares for every two ordinary shares held by them, is warranted by Arts 78, 80 and 74. The latter part of the resolution increasing the capital of the company by the creation of new shares is warranted by Arts 25, 26 and 72.

The other ground of attack must now be considered: namely, that the resolution of 7th September 1936 was not passed bona fide and in the interests of the company. Directors in the exercise of their powers are in a fiduciary position and must exercise those powers for the benefit of the company. So, directors are not entitled to exercise their powers merely for the purpose of maintaining control over the affairs of the company or merely for the purpose of defeating the wishes of the majority of shareholders ( Piercy v S, Mills & Co Ltd ^[23] .).

The resolution of the directors of 7th September 1936 does not, on its face, appear improper. All preference dividends had been provided in due course, and there remained in the hands of the company a reserve of some £140,000 accumulated out of profits and available for distribution. Prima facie the directors had authority to apply this accumulated reserve in such manner as they considered advantageous and beneficial to the interests of the company and its members. Unfortunately, behind the resolution there is a long story of disagreement between Neilson Mills and Ainslie Mills, his nephew, which need not be related in detail. Suffice it to say that about the year 1934 Ainslie Mills heard that Nielson Mills had established or proposed to establish a rival stud to that of "Uardry" on a property known as "Pembelgong" close to "Uardry." "Pembelgong" belonged to Neilson Mills. It had for many years been leased to the "Uardry" company, but the lease was not renewed, I think in 1934. It is undoubted that Neilson Mills did establish a stud of his own at "Pembelgong" and that he purchased rams and sheep from "Uardry" for that purpose in the names of agents. Further, in 1936, notice was given of an extraordinary meeting of the company to consider a resolution that the directors pay Neilson Mills the sum of £7,250 representing the undrawn portion of the salary authorized by previous resolution to be paid to him as managing director. A resolution had in fact been passed in 1929 at an extraordinary general meeting of the company that the salary of Neilson Mills as managing director should be £3,500 per annum and that he receive a fee of £500 per annum as a director. But during years of depression Neilson Mills had not drawn all the salary granted by this resolution and now proposed to draw the balance. Ainslie Mills challenged Neilson Mills's right to establish and manage a rival stud and also the payment of the undrawn salary, which, as it did not appear in the accounts of the company, Ainslie Mills considered as abandoned.

In these objections he was supported by Mr George Aitken, who was a co-trustee of Neilson Mills of certain shares in the company, known as "Mrs Price's Trust" and "Ainslie Mills' Trust." But, despite the objection, a resolution was carried at an extraordinary general meeting of the company by a majority of 3,488 votes that the directors pay to Neilson Mills the sum of £7,250, undrawn salary. The voting power in respect of the shares in "Mrs Price's Trust" and "Ainslie Mills' Trust" were not used, but, if they had been cast against the resolution, it would have been lost.

Article 48 provided that, in the case of joint holders of shares, the vote of the member standing first in the register should be accepted to the exclusion of the votes of other joint holders. And Neilson Mills stood first on the register in respect of the shares in the "Price Trust" and the "Ainslie Mills' Trust" and did not use the voting powers in respect of those shares. Thus were the shares in these trusts deprived of their voting power. Suggestions were made that Neilson Mills should retire from these trusts, and action was threatened. Ultimately Neilson Mills agreed to and did retire from these trusts. But this was followed in September 1936 by the calling of directors' meetings to consider and decide how the accumulated profits of the company should be dealt with. And on 7th September 1936 the challenged resolution was passed by the majority of the directors; Neilson Mills and Birtchnell voted for the resolution and Ainslie Mills against it.

The appellants suggest that the resolution was not passed bona fide in the interests of the company but to increase the voting power of Neilson Mills in order that he might protect himself from any attack in respect of the establishment of a rival stud on "Pembelgong" and the payment to him of undrawn salary and also to prevent the removal of Birtchnell from his office as a director. On the other hand, Neilson Mills and Birtchnell defended the resolution on these grounds: the preference shareholders were entitled to a fixed cumulative preferential dividend so long as the company carried on business, but in case of a winding up preference shareholders were entitled to rank pari passu with ordinary shareholders in any distribution of assets. The latter position would be unfair to ordinary shareholders, who were really entitled to the accumulated profits and would have received them if larger dividends had been declared.

The voting power in the company before and after the resolution of 7th September 1936 may thus be stated: --

It is clear on these figures that the voting power of Neilson Mills was largely increased, but it did not give him control of the company unless some other shareholder supported him. It was suggested that he relied upon the support of Miss Mills. I see no reason for thinking that Miss Mills will vote otherwise than as she sees her own interests. It may well be that she places great reliance upon her brother, Neilson Mills, whose management of "Uardry" has been so successful. But the circumstances as a whole are suspicious and somewhat disconcerting. The establishment of the rival stud at "Pembelgong" is hard to defend and gives rise to the suspicion of Ainslie Mills and, perhaps, of Mr George Aitken, that the resolution of 7th September 1936, carried by Neilson Mills and Birtchnell, was more for the interest of Neilson Mills than any interest of the company or its members. Again, Birtchnell may be a very good accountant and secretary, but he appears wholly to lack that independence of character and judgment which one expects of a director. He seems blindly to support Neilson Mills in all his actions, and that as regards "Pembelgong" is open to question. A more independent mind might, I think, have prevented some of the unfortunate disagreements and charges that have been made in this case. However, Lowe J in his usual careful manner has weighed all the facts and this was his conclusion: -- "I think the scheme of distribution as actually carried out in the resolution was honestly arrived at and I think those who voted in favour of it thought it to be in the best interests of the company and I also think that that was their main reason for passing the resolution. But I think and I find that neither Neilson Mills nor Birtchnell was at all unconscious of the effect that that resolution would have in altering the voting power. The resolution, when carried into effect, did not give a majority to Neilson Mills. He probably hoped it would make the matter easier." The learned judge saw and heard the various parties and their witnesses and is in a much better position than any court of appeal to reach a just conclusion. I accept his finding unhesitatingly and with confidence in its justice and propriety. "If," said the Judicial Committee of the Privy Council in Hirsche v Sims ^[24] ., "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 mains or breach of trust merely because in promoting the interest of the company they were also promoting their own."

The result is that this appeal should be dismissed.