Mills v Mills

60 CLR 150

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(Judgment by: Latham CJ)

Mills
vMills

Court:

Judges:
Latham CJRich J
Starke J
Dixon 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:
Latham CJ

This is an appeal from a judgment of Lowe J in an action in which the plaintiffs sued on behalf of themselves and all shareholders in Uardry Ltd (other than the two personal defendants), claiming as against those defendants and the company a declaration that a certain resolution passed by certain directors of the company is invalid. The resolution was challenged upon two grounds: first, that it was not passed bona fide in the interests of the company but really in the interests of the defendant Andrew Agnew Neilson Mills (who was the managing director of the company) with the intention of securing to him continued control of the operations of the company; secondly, that the resolution was not authorized by the articles of association and was ultra vires the directors. The learned judge gave judgment for the defendants.

The controversy arises out of the relations between Ainslie Mills, who is a director of the company and a large shareholder, and the defendant Neilson Mills, who is his uncle. Neilson Mills has been the managing director of the company for many years and has managed it with conspicuous success. Ainslie Mills is his nephew. When he attained the age of twenty-five years he became the owner of a large number of shares. He secured the appointment of himself as a director of the company. Relations between Ainslie Mills and his uncle have for some years been very unpleasant and difficult, and it is evident that there has been bitter feeling on both sides.

The resolution which is challenged is a resolution of the directors of the company. The directors are Neilson Mills and Ainslie Mills (both of whom are large shareholders) and the defendant Birtchnell (who, though a director, is not a shareholder). The company is a family company, and its shares are held by the personal plaintiffs, by Miss Winifred M. Mills, the defendant Neilson Mills in his own interest, and by Neilson Mills and others as trustees for certain members of the family. Two of these trusts have been referred to as the Ainslie Mills trust and the Price trust. There is one shareholder, Miss Winifred M. Mills, who is not a party to the action. She has generally voted with Neilson Mills. Neilson Mills was entitled under the articles of association to exercise the vote of the trustees in the two trusts mentioned, and, when these shares were taken into account, controlled a majority of votes, if Miss Mills supported him. The interest of Neilson Mills was mainly in ordinary shares, whereas the interest of Ainslie Mills was mainly in preference shares. There were 34,500 ordinary shares, each with one vote, and 11,500 preference shares, each with three votes.

The resolution of the directors which is challenged was carried by Neilson Mills and Birtchnell against the vote of the plaintiff Ainslie Mills. The resolution declared that the whole of the accumulated profits standing to the credit of the reserve account was not required as reserves and that, as the profits belonged solely to the ordinary shareholders, a sum of £86,250 should be distributed thereout by way of dividends on ordinary shares and that the dividends should be paid and satisfied by the issue to the holders of ordinary shares of 86,250 new ordinary shares fully paid up and that for this purpose the capital of the company should be increased by the creation of 86,250 new ordinary shares of £1 each.

The interests of those concerned in the company were affected by this resolution in varying ways. The passing of the resolution did not affect the dividends which the preference shareholders would receive, because they were entitled only to a cumulative preferential dividend of £2,500 per annum. The dividends upon ordinary shares were not affected. As between them and the preference shareholders the position was the same as before -- the ordinary shareholders came in for dividend after the preference shareholders. Each ordinary shareholder maintained his proportionate share in the capital of the company represented by the ordinary shares because he received five new shares for every two ordinary shares held by him. Thus, the dividend rights of ordinary shareholders inter se were not affected. The relative rights of the two classes of shareholders upon a winding up were, however, profoundly affected by the resolution, because the articles of association provided, in Art 76, that the preference shares should not in a winding up have any preferential claim on the assets of the company, but that they "should rank in that respect with ordinary shares." Thus the resolution greatly improved the position of ordinary shareholders if a winding up should take place. Further, the resolution affected the voting power of the shareholders, because a large increase was made in the number of ordinary shares, while the number of preference shares remained unchanged. Neilson Mills had, as already stated, been trustee of two trusts, but immediately before the resolution was passed on 7th September 1936 he had, under pressure, agreed to retire from these trusts, and therefore in the future he would not have been in a position to exercise voting power in respect of the trust shares. The result of the resolution, if it is effective, is that he will continue to be in as strong a position with respect to voting power as if he had not retired from the trusts. It is contended on behalf of the plaintiffs that the object of Neilson Mills and of Birtchnell, who always supported Neilson Mills in matters affecting the management of the company, was not really to promote the interests of the company, but to preserve for Neilson Mills the same position in respect to voting power (which had always in fact been a dominant position) as he had held before his enforced resignation of his position as trustee.

The evidence shows that Neilson Mills had for many years controlled the company in effect as if it were his own business, and had done so with the concurrence of those interested, who had appreciated his excellent and most successful management. With the entry of Ainslie Mills upon the scene, however, the position changed. Ainslie Mills was very critical of his uncle's management, and it is plain that Neilson Mills resented the attitude of the younger man.

I propose to consider first the contention that the resolution was not passed bona fide in the interests of the company.

Where the interests of individuals are divergent and conflicting, where personal feeling is acute, and where the parties immediately concerned give oral evidence, the trial judge is in a position which enables him to estimate the weight and value of evidence much more effectively than any court of appeal can possibly do. Where so much depends upon the character, personal motives and interests of individual persons, the finding of a trial judge should not be disturbed unless there are strong and compelling reasons for taking a different view. In this case the learned trial judge has made scrupulously careful and precise findings of fact. There is plainly evidence to support them. In my opinion, they should be accepted by this court without hesitation.

The only question which I conceive arises upon this branch of the case is the question of the legal significance and effect of the findings of fact which have been made. The learned judge asked the question whether the resolution was passed in the interests of the company. He expanded this question by asking: "Was it passed in the honest exercise of the directors' discretion, to distribute reserves which were no longer needed, or was it passed with the sole view of creating voting power which would inure for the benefit of Neilson Mills and those supporting him?" I think that the form of this question is not entirely appropriate. In fact, reserves were not distributed in consequence of the resolution. All that was done by the resolution was to distribute new shares to the ordinary shareholders in proportion to their existing shares. The assets in the reserve fund were retained in the business. Further, the alternatives which this question submits for consideration are not completely exhaustive. A resolution may have been passed honestly in the exercise of the directors' discretion but also with the view of creating voting power to which it was thought that ordinary shareholders, in view of the relative extent of their interest in the assets of the company, were fairly entitled. Again, even though the view of the directors in passing the resolution was not solely that of creating voting power which could be used by them as desired, yet, if the substantial object of the directors was to bring about this result, the resolution might be held to be invalid.

But, although his Honour has asked the question in the particular form stated, his findings of fact are not confined to answers to this question. His Honour accepted the evidence for the defendants as to the reasons which brought about the passing of the resolution. He went on to say in his judgment that "while I accept the evidence to the extent which I have mentioned (that is as to the honest initiation and abandonment of one proposal and the honest final acceptance of the proposal embodied in the resolution) I feel no doubt whatever that the particular form which this resolution finally assumed and the time at which it was adopted were due to the resignation of Neilson Mills as a trustee of the Ainslie Mills and the Price trusts." His Honour expressed his conclusion in the following words: -- "I think the scheme of distribution as actually carried out in the resolution was honestly arrived at, and I think that 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 that 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 that it would make a majority easier. That being the conclusion at which I have arrived, it seems to me that the law, as I have stated it, does not invalidate that resolution. In my opinion, where the main purpose is such as I have indicated the resolution is valid." There is, as I have said, no doubt that there was evidence which, when accepted by the trial judge, entitled him to make these findings of fact. The question is whether upon the findings of fact set out his Honour's conclusion that the resolution was valid is correct.

It has been argued for the appellants that these findings entitle them to judgment. It is urged that the rule laid down by the cases is that directors must act always and solely in the interests of the company and never in their own interests. It is clear that, if it is established that the directors did not act bona fide in the interests of the company, the court in a properly constituted action will set aside their resolution. Thus, if directors issue shares only for the purpose of conserving their own power, the resolution creating the shares will be set aside or an injunction will be granted to prevent the holding of a proposed meeting ( Fraser v Whalley ^[1] .; Punt v Symons & Co Ltd ^[2] .; Piercy v S Mills & Co Ltd ^[3] .). But before the exercise of a discretionary power by directors will be interfered with by the court it must be proved by the complaining party that they have acted from an improper motive or arbitrarily and capriciously ( Re Gresham Life Assurance Society ; Ex parte Penney ^[4] .; Richard Brady Franks Ltd v Price ^[5] .; Australian and Metropolitan Life Assurance Co Ltd v Ure ^[6] .).

It must, however, be recognized that as a general rule, though not invariably (as, for example, in the case of Birtchnell in this case), directors have an interest as shareholders in the company of which they are directors. Most sets of articles of association actually require the directors to have such an interest, and it is generally desired by shareholders that directors should have a substantial interest in the company so that their interests may be identified with those of the shareholders of the company. Ordinarily, therefore, in promoting the interests of the company, a director will also promote his own interests. I do not read the general phrases which are to be found in the authorities with reference to the obligations of directors to act solely in the interests of the company as meaning that they are prohibited from acting in any matter where their own interests are affected by what they do in their capacity as directors. Very many actions of directors who are shareholders, perhaps all of them, have a direct or indirect relation to their own interests. It would be ignoring realities and creating impossibilities in the administration of companies to require that directors should not advert to or consider in any way the effect of a particular decision upon their own interests as shareholders. A rule which laid down such a principle would paralyse the management of companies in many directions. Accordingly, the judicial observations which, suggest that directors should consider only the interests of the company and never their own interests should not be pressed to a limit which would create a quite impossible position.

Directors are required to act not only in matters which affect the relations of the company to persons who are not members of the company but also in relation to matters which affect the rights of shareholders inter se. Where there are preference and ordinary shares a particular decision may be of such a character that it must necessarily affect adversely the interests of one class of shareholders and benefit the interests of another class. In such a case it is difficult to apply the test of acting in the interests of the company. The question which arises is sometimes not a question of the interests of the company at all, but a question of what is fair as between different classes of shareholders. Where such a case arises some other test than that of "the interests of the company" must be applied, and the test must be applied with knowledge of the fact already mentioned that the law permits directors, and by virtue of provisions in articles of association often requires them, to hold shares, ordinary or preference, as the case may be. A director who holds one or both classes of such shares is not, in my opinion, required by the law to live in an unreal region of detached altruism and to act in a vague mood of ideal abstraction from obvious facts which must be present to the mind of any honest and intelligent man when he exercises his powers as a director. It would be setting up an impossible standard to hold that, if an action of a director were affected in any degree by the fact that he was a preference or ordinary shareholder, his action was invalid and should be set aside. There is high authority which, in my opinion, supports the view which I have expressed. In the case of Hirsche v Sims ^[7] . their Lordships of the Privy Council said with reference to directors whose action was challenged: "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." The question is: What was "the moving cause" of the action of the directors? (See per Lord Shaw in Hindle v John Cotton Ltd ^[8] .). If this principle is applied to the findings of the learned judge, his decision upon this aspect of the case is seen to be right.

The second question which is raised depends entirely upon the construction of the articles of association, which are expressed in such terms as to create much uncertainty in interpretation. Identical or overlapping powers are conferred by the articles upon the company and upon the directors of the company, and it is difficult to arrive at a completely satisfactory interpretation of all the articles taken together. Art 6 provides that all shares except the original shares shall be under the control of the company and that they shall be issued, allotted, placed under option or otherwise disposed of under such terms and conditions and at such times as the company by extraordinary resolution directs. Art 25 provides that the company may from time to time increase its capital by the creation of new shares, while Art 72 provides (inter alia) that the directors may increase the capital of the company. Art 26 provides that new shares created by the company (referred to in Art 25) 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. Other articles entitle the directors to establish and invest a reserve fund, to manage the reserve fund, and to declare dividends. Article 80 provides that, when declaring a dividend, the directors may direct payment thereof wholly or in part by the distribution of specific assets and, in particular, of shares, debentures or debenture stock of the company, & c.

Thus, both the company and the directors can create new shares. The company by extraordinary resolution may determine the terms and conditions upon which such shares are to be issued. The directors may also determine the conditions upon which any shares created by the company may be issued. Further, the directors may declare dividends and may direct that a dividend be paid by the distribution of shares in the company.

The position, therefore, is that it is possible to find articles of association which in terms authorize the directors to do precisely what they have done, namely, to create new shares, to declare a dividend, to direct that the dividend be paid by the distribution of the shares, and to deal with the reserve fund by applying it in payment for new shares. On the other hand, it is contended that Art 6 requires an extraordinary resolution of the company before any new shares can be issued, allotted or otherwise disposed of, and that this article also requires that the terms and conditions of issue & c. shall be determined by such a resolution. If the articles to which I have referred are all read as conferring powers upon the company or the directors, some practical inconveniences might arise if the shareholders and the directors differed in policy, but there would be no necessary inconsistency between the articles. There would simply be duplicate coexisting powers. If, on the other hand, the articles are construed as imposing limitations upon the exercise of general powers (such, for example, as a power to create and issue new shares) so that, for example, the directors could not distribute new shares by way of dividend without an extraordinary resolution of the company, the result would be that the powers expressly conferred upon the directors would be ineffective in practice. The directors would not be able to do what the articles in express terms state that they may do, unless the shareholders concurred by an extraordinary resolution. I am of opinion, though I confess not without some doubt, that the former construction is that which should be adopted and that the articles which in terms authorize the directors to do what they have done should not be limited by requiring an extraordinary resolution to the same effect under Art 6. Accordingly, I am of opinion that the resolution of the directors was not invalid and that the action under it was effectively authorized.

I am, therefore, of opinion that the appeal should be dismissed.