Beck v Tuckey

Beck v Tuckey - [2007] NSWSC 1065 - NSWSC 2007 case summary — Zoe

[37]

11 Where the corporate constitution provides that a transfer is to be registered, but at the same time confers on the directors a discretion to decline to register, the transferee is entitled to be registered unless and until the directors formally and affirmatively exercise their discretion to decline; and where the directors are evenly divided and there is no casting vote, there is no such exercise of discretion [Re Hackney Pavilion Limited [1924] 1 Ch 276; Re Chas Jeffries & Sons Pty Ltd [1949] VLR 190, 194; Moodie v Shepherd [1949] 2 All ER 1044; [1950] SC (HL) 60, 66, 68, 71; Re Zinotty Properties [1984] 1 WLR 1249, 1260; Bothranch Pty Limited v Monitronix Limited (1989) 15 ACLR 35, 48; Sutherland v Bosch (Aust) Pty Limited (2000) 33 ACSR 680, 686 [42]]. 12 For Mr Weinstock, Mr Whittle SC submits that this is not so in a case of a closely held company, where the effect of such a construction would be to reward the first in a race to introduce a new shareholder to the corporation. I disagree, for a number of reasons. First, the construction of such Articles is and has for many years been well-established, as the cases to which I have just referred show. Other forms of Articles which require a positive exercise of discretion by directors to approve registration are also in use and can be adopted if a result different from that well-established by authority is desired. Secondly, there is no reason to distinguish the way in which Articles are construed in a closely held company from those in a larger public company. In any event, a number of the cases to which reference has been made, in which the conventional construction has been applied, involved proprietary companies. Thirdly, there is no good policy reason supporting the result for which Mr Weinstock contends. The introduction of a new shareholder by transfer does not change the voting power, nor affect the balance of the equity holdings in the company; at its highest, it increases the number of members available to produce a quorum at a general meeting. Although there are some exceptional cases in which the ability to veto corporate business by denying or breaking a quorum may be significant, of which Whitehouse v Capital Radio Network Pty Limited (2004) 13 Tas R 27; 48 ACSR 569 is an instance, there is no such basis in the context of a company such as Tuckey in which the shareholdings are far from equal and until relatively recently there had been four shareholders from which any two could assemble a quorum and it was not necessary for each shareholder to co-operate in holding a meeting as it now is, the number of shareholders having been reduced to two by the deaths of Mr and Mrs Weinstock Senior. 13 However, Mr Whittle has advanced two other bases upon which it is said that the relief should be refused.

[38]

14 The first is that, at least at the date on which proceedings were instituted, there had not been compliance with the requirements of Article 30, in that the evidence did not establish that the transfer had been left for registration at the registered office of the company nor accompanied by the share certificate. However, the evidence does establish that the transfer was tabled at the Board meeting - which was held not at the registered office (which is Mrs Beck's home) but elsewhere - although there is no evidence that it was then accompanied by the share certificate. During the adjournment of the hearing over the last two days - which was necessitated by the raising of this (and the following) issue only in the course of closing submissions - the transfer, accompanied by the share certificate, has been delivered to the registered office. 15 In my view, the purpose of Article 30 is to ensure that the transfer is brought to the attention of the company and that the right of the transferor to make the transfer is established. This follows, in particular, from the use of the words in Article 30 "such other information as a director properly requires to show the right of the transferor to make the transfer." The transfer was tabled and considered at a meeting of the Board. The Board did not then require the share certificate or any other information in order to be satisfied of the right of the transferor to transfer. Had it done so, it would have resolved, under Article 30, to require the transferor to produce the share certificate and other information. If it were not satisfied of the right of the transferor to transfer, that is what it ought to have done. In the context of this company, the directors could have entertained no bona fide doubt as to Mrs Beck's right to transfer. In my view, the transfer, having been tabled and been considered without the Board proceeding to require any evidence of the right to transfer, the company waived further compliance with Article 30: its purpose had been served. Alternatively, if production of the share transfer could not be waived, it nonetheless did not affect, as I will come to explain, the beneficial entitlement of the transferee under the transfer who was at least entitled to have it registered, subject to compliance with formal requirements, including production of the share certificate, which has, as I have said, since occurred. 16 The second argument advanced by Mr Whittle is that in the absence of a "proper instrument of transfer" within the meaning of Corporations Act, s 1071B, the directors were prohibited from registering the transfer, and the transferee therefore had no entitlement to be registered when proceedings were instituted. Corporations Act, 1071B, relevantly provides: …

[42]

17 (CTH) Corporations Regulations reg 7.11.22 relevantly provides: 7.11.22 Details to be included in instrument of transfer (1) For subsection 1071B (3) of the Act, for a transfer of unquoted securities, the State or Territory in this jurisdiction in which the company is taken to be registered is a prescribed detail. … 18 The transfer did not, until yesterday, contain any such reference identifying the jurisdiction of the company's incorporation and was, therefore, not a "proper instrument of transfer"; registration was, therefore, prohibited by s 1071B. However, the circumstance that registration is prohibited does not deprive the transfer of the character of a valid assignment vesting an equitable interest in the share in the transferee [Vaughan v Duncan [2005] NSWSC 670, [120]], and the detail as to the jurisdiction of incorporation can be inserted at any time before registration, not only before execution or delivery of the transfer [Vaughan v Duncan, [119]]. Those details having now been inserted, in the course of the hearing, there is now no longer any obstacle to registration of the transfer. Accordingly, although the directors could not have registered the transfer until the details of the jurisdiction of incorporation were inserted in the transfer, as they were yesterday, Alexi Beck nonetheless had a beneficial entitlement to the share in question when proceedings were instituted. 19 However, that does not change the position that, as at the date on which the Summons was filed, she was not entitled to immediate registration, and Mr Whittle submits that, on the authority of the decision of the Chief Judge in Monardo v Complete Hardware Ltd, the result is that the proceedings should be dismissed. In Monardo, there was no form of transfer in existence at all at the date when proceedings were instituted. His Honour held that it was necessary that there be a transfer in existence at the time of institution of proceedings, because until there was a transfer the transaction had not proceeded beyond an agreement or proposal to transfer, and what triggered s 186 (which was a predecessor of s 1071F) was not an agreement or proposal, but a transfer. His Honour said (at 491-492): It seems to me abundantly clear from the words "a transfer" in s 186 that the document must actually be in existence when the court is asked to consider whether there has been a refusal or failure to register the transfer. This is because of s 183, and the view is reinforced by s 185. It must be remembered too that up until 1985, s 186 was complementary to s 185 and it is only because of the 1985 amendments that it has an expanded operation.

[44]

However, it does seem to me that the actual transfer must be in existence, because until it is in existence there has been no transfer, as a matter of law, and the transaction has not proceeded past either an agreement to transfer or a proposed transfer. If one is being asked to consent to a transfer, then one is being asked to consent to a transaction which is to a great degree passed and closed. There is all the difference between this situation and a situation of a proposed transaction. This distinction is made as a matter of practice when under a trust deed a trustee is asked to consent to something which either the beneficiary has done or is about to do. The court considers what it is that needs to be done and if the trust deed requires that the consent must be given to a proposal, then the consent must precede the proposed action being consummated: see, eg, Greenham v Gibbeson (1834) 10 Bing 363; 131 ER 944 at 375; 949 and cf Offen v Harman (1859) 1 De G F & J 253; 45 ER 355. 20 It does not follow that a transfer must be in "proper form" in accordance with s 1071B in order to trigger s 1071F and its predecessors. It is also worth observing that Monardo arose in the context of a takeover, and his Honour said (at 490): The defendants say that the Court has no jurisdiction to make any order on the plaintiff's summons because the plaintiff has no locus standi and has no statutory cause of action as at the date when the summons was issued. It may be that after the transfer was executed, if the transfer is presented to the managing director at that time and consent is refused, that the plaintiff can commence fresh proceedings. In many cases that would mean that the court would be extremely unhappy to deal with the present motion as a mere technicality, but commercial experience has shown that in a take-over situation it is often wise to deal with matters strictly according to technicalities and to let the parties carry on their battle in the usual commercial fashion. 21 In the context of an application under another predecessor of s 1071F, Crawford J in the Supreme Court of Tasmania said, in Leaver v Taxi Combined Services (at [28]): 28. Subject to the view I later take of the transfer to the Harry Lewis Property Trust, and to the matter of unpaid stamp duty, I agree with counsel for the applicants that the other deficiencies in the forms of transfer were matters of form and not substance. They did not trouble the board of directors. It was common to the transferors, the transferee and the board, what each form was intended to transfer. Particularly having regard to the wide powers of the Court under s 1094(2), the Court may mould its orders to allow the applicants to amend the forms or submit fresh ones should that be necessary. Although the failure to pay stamp duty was not a mere matter of form, the same response is warranted when considering that failure. The board, if it had wished, could have refused to act on the forms because of all of the deficiencies. It could properly have claimed just cause for refusing approval. In such a circumstance, the applicants could have corrected the deficiencies and resubmitted amended or fresh forms of transfer which were not deficient. In the circumstances, I am not persuaded that the applications should be dismissed because the board would have had just cause for refusing to approve the transfers if it had adverted to the deficiencies. For reasons I will explain later, I do not hold that the board may not now rely on causes which were not expressly relied upon at the time. However, in a situation where causes now relied upon were apparent at the time but not then relied upon as causes and where they are of a technical nature and capable of being remedied by the applicants, I am unpersuaded that they may properly be regarded as constituting just cause for the board's original decision. 22 The same applies in this case, which is closely analogous. Monardo, on the other hand, is distinguishable, for several reasons. First, unlike Monardo, this is not a takeover case, but a dispute between the two surviving shareholders in a private family company, so that there is less reason to allow mere technicalities, which can be cured, to be decisive. Secondly, and most significantly, in this case a transfer was in existence when proceedings were commenced and when the directors considered, but did not determine, approval of its registration. True it is that there were a number of formal defects in it, one of which resulted in a legal prohibition on registration until it was cured, but they did not deprive the transfer of the effect of vesting a beneficial interest in the transferee. 23 There is, in this context, an analogy with an application for specific performance in circumstances where the purchaser is not immediately entitled to performance. In Turner v Bladin (1951) 82 CLR 463, Williams, Fullagar and Kitto JJ said (at 472): We are of opinion that the contract was specifically enforceable. We reject the contention that a contract, some part of which is not immediately performable, is not capable of specific performance. In our opinion proceedings for the specific performance of a contract which is of such a kind that it can be specifically enforced can be commenced as soon as one party threatens to refuse to perform the contract or any part thereof or actually refuses to perform any promise for which the time of performance has arrived. The court can then make a decree that the contract ought to be specifically performed and carried into execution, and can so mould its decree and order such inquiries, accounts and other proceedings under the decree as may be necessary to carry into effect all the promises of both parties whether they are presently performable or are only performable in the future.

[45]

24 That passage is redolent of the observations of Crawford J in Leaver, in which his Honour likewise referred to the ability of the Court to mould its orders, to allow the applicants to amend the defective forms or to submit fresh ones. In this case, but for the events which have subsequently transpired, it would have been possible to make an order for rectification of the register, subject to and conditional upon the presentation of the transfer and share certificate at the registered office, and the insertion in the transfer of the details of the jurisdiction of registration. In other words, at the time when proceedings were instituted, the transferee had an entitlement to registration, subject to compliance with certain formal requirements, unless the directors exercised their discretion to decline. The prima facie entitlement to registration arises from the vesting in the transferee of the equitable interest conveyed by the transfer, although the entitlement was not immediate but conditional upon remedying the formal defects in the transfer. Nonetheless, in its conditional form, the entitlement existed at the date of institution of the proceedings. The requirement to attach conditions to any order that might be made has since been removed, by the evidence that the formal defects have since been remedied. Accordingly, in my view, the plaintiffs are entitled to an order under s 175 rectifying the register by registering Alexi Beck as the holder of the subject share. 25 Mr Whittle submitted that, now that the formal defects had been remedied, the matter should be returned to the Board for its further consideration. I do not see why this course should be adopted in the circumstances. First, the attitude of each of the parties has been made quite clear - either by express evidence or by necessary inference from the position that they have adopted in the proceedings - such that it can be seen that there is no prospect of the directors resolving affirmatively to exercise their discretion to decline registration (because Tamara Beck will not support such a resolution). Secondly and more importantly, there was an existing entitlement to relief, albeit conditional, at the time when proceedings were instituted. The supervening removal of the formal defects does not justify requiring that the plaintiffs should now have again to await the determination of the Board, which has already had ample opportunity to exercise its discretion to decline registration if so minded, but has not done so. I do not accept that the Board's discretion arises only upon compliance with Article 30 (or presentation of a "proper form of transfer"); consistently with Monardo, the existence (not presentation) of a transfer is sufficient to trigger the discretion. Nor do I accept that the Board has never had an opportunity to consider exercising its discretion; it did so, after a transfer was in existence at the August 2006 meeting. Had it been desired to preserve the opportunity for the Board to reconsider the matter, it could have refused to proceed then because of the formal defects, allowing the plaintiffs to remedy the defects by lodging an amended form at the registered office. The Board did not do so. Although I need not determine the question, I doubt that Mr Weinstock adverted to the formal defects when he declined to support registration at the Board meeting; and consistently with the approach adopted by Crawford J in Leaver, I am unpersuaded that the application should be dismissed, even if the board would have had cause for refusing to approve the transfers had it adverted to the defects, which could have easily been remedied. 26 The formal objections advanced on behalf of Mr Weinstock were notified and articulated, for the first time, when written submissions were handed up at the commencement of the hearing. Had they been raised before proceedings were instituted, the whole of the proceedings could have been avoided. A defendant may be entitled in this type of proceeding to keep its powder dry, but if it chooses to do so, it cannot complain if there are consequences so far as the costs of proceedings which could have been avoided by earlier notification of the issues in dispute are concerned. Apart from the formal defects - which, if notified at an earlier stage, could have been remedied either before proceedings or earlier in the proceedings - there was no viable defence to Alexi Beck's claim to be registered. I do not see why the plaintiffs in those circumstances should be out of pocket, and the costs order which I will make in favour of the plaintiffs should be on an indemnity basis.

[46]

[Counsel heard on costs] 27 The basis upon which the Court makes an indemnity costs order can, for present purposes, be summarised as that the party entitled to costs has been unreasonably required to incur costs, through being subjected to litigation which was brought or defended without reasonable cause, or necessitated or exacerbated by unreasonable conduct. As I have said, but for the formal defects to which I have referred, there was no viable defence to this application. The formal defects were notified at the very last moment, and were remedied shortly after they were raised. The costs occasioned by their being raised would have been wholly avoided had they been raised before the proceedings were instituted. 28 Although I have listened carefully to what Mr Whittle has said on the topic - and he has said everything that could be urged against an indemnity costs order - I remain unpersuaded that any other costs order would be appropriate. Indeed, I think it would give quite a wrong message to directors generally in companies of this type if such an order were not made; it would indicate that it was reasonable to oppose registration on technical grounds and wait till the very last minute of litigation to notify those grounds. I do not accept that the view I hold makes a director, in effect, a guarantor or an insurer of a transferee, as was submitted. All that is expected is reasonable behaviour; but it is not reasonable behaviour on the part of a director to reject a transfer for formal defects which could easily be remedied, yet not inform the transferor or transferee of the defects until the final hearing of the application has commenced. Such behaviour unreasonably requires the transferor and transferee to incur costs. That is not to suggest that directors must give reasons for declining to register a transfer; only that where the reason is an easily curable formal defect, they unreasonably put the transferor and transferee to costs if they do not afford them an opportunity to remedy the defect, and for that purpose inform them of it. 29 I make order 2 in the Amended Originating Process (that the register of members of the first defendant be corrected to record the first plaintiff as the holder of one ordinary share in the first defendant). I make order 4 in the Amended Originating Process (that the second defendant pay the plaintiffs' costs of these proceedings). I order that those costs be assessed on the indemnity basis.

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