Commonwealth Homes and Investment Company Limited v MacKellar [1939] HCA 34

Commonwealth Homes and Investment Company Limited v MacKellar [1939] HCA 34 - HCA 1939 case summary — Zoe

[94]

In my opinion these words in their natural interpretation mean that MacKellar agrees to take up one thousand shares and that the company through Turner agrees that MacKellar is to be on the board and is to be the only architect upon the board. It is an agreement containing terms to be performed by each party. MacKellar immediately signed an application for shares and sent to the com- pany £250 as application money. The company allotted shares to him and so informed him. He made no objection. At that time he did not suggest that the company was not entitled to deal with his application until he had been appointed a director and had become the sole architect director. MacKellar's letters, the most important of which has already been quoted, adopted the same position, namely, that a contract had been made between him and _ the company but that the company had broken the contract so that _ MacKellar was entitled to be released. In his letter of 8th November 1927 he referred to the action of the company in appointing Thomp- _ son, an architect, as a gross breach of contract. His letter went on _ to state: "from this date I cease to have any connection with the company." He then asked for a refund of his deposit and a can- _ cellation of his application form. Thus, he admitted the existence ofa contract, but asked that it be set aside by reason of the breach of the contract by the company and that he be reinstated in his

original position. It is not to be expected that the parties would have in their mind any distinction between, on the one hand, a term of a contract and, on the other hand, a condition precedent to the formation of any contract between the parties. But it is, in my opinion, clear that MacKellar did not at the time when the agree- _ ment was made believe, or at the time when the dispute arose con- "tend, that the company was not entitled to accept his application for shares and to allot shares to him. There is nothing to show that _ the company regarded the application as being subject to any con- dition precedent. Thus, the conduct of the parties at the time when the agreement was made and thereafter was not such as to support

[110]

It is contended by the liquidator, on the authority of the cases cit that the transaction was ultra vires the company. i But it has long been established that a company has power to make a bona-fide compromise of a dispute (Dixon v. Evans (1); Bath's Case (2) ). It is also well settled that in certain cases, of which the most common is the case of fraud, a shareholder may repudiate his contract to take shares and may, if he acts in due time, get his money back. This rule is so well established that it is hardly necessary to cite authority, but I refer to the discussions in the leading cases of Oakes v. Turquand & Harding (3) a Directors dc. of Central Railway Co. of Venezuela vy. Kisch (4) and to" the other cases cited in Buckley on The Companies Acts, 11th ed. (1930), at pp. 218 et seq., and Palmer's Company Precedents, 14th ed. (1931), vol. 1, at pp. 168 et seq. Where a claim for rectification succeeds upon the ground of mis- representation the contract is avoided ab initio and the shareholder's | name is removed as from the time when it was put on the register (Pulbrook v. Richmond Consolidated Mining Co. (5) ). But where as in this case (upon the opinion which I have stated) rectification - is sought upon the ground, not of the absence of or the avoidance - of contractual obligation, but upon the ground of the breach of an essential term of a contract under which the shares were taken, q it cannot be said that the contract is avoided ab initio. It is a case of discharge, not of avoidance, of contract. But MacKellar's claim - was that he was entitled to be restored to his original position. - The company challenged this contention, but, instead of engaging in litigation with an uncertain prospect of success, compromised the dispute. If a company acts bona fide in settlement of a dispute as to whether or not an alleged shareholder is really a shareholder, it is not ultra vires the company to compromise the dispute by . removing his name from the register. I refer to cases in which a 4 company, in order to settle a dispute as to whether a shareholder's name should remain on the register, removed his name from the register and in which it was held that the removal was effective to (1) (1872) LR. 5 HL, at pp. 618, (3) (1867) LR. 2 HLL, 325, 619. (4) (1867) L.R. 2 HLL. 99, (2) (1878) 8 Ch. D. 334. (5) (1878) 9 Ch. D. 610, at p. 615.

[118]

Ricu J. The respondent relied upon many independent grounds in support of the judgment of Richards J. against which this appeal - is brought. I think it is sufficient to deal with one of them only: a ground which.seems to me to be unanswerable. While it has long been a commonplace of company law that the holder of partly - paid-up shares cannot be extricated from his contingent liability thereon by any attempt on the part of the company to rescind, - cancel or destroy the allotment of shares or his consequent member- ship, at the same time it has also been a commonplace of company - law that where an alleged member claims that he is not a member or that his.agreement to take shares is liable to avoidance for mis- - representation a bona-fide compromise between himself and the company of his claim will be supported notwithstanding that under the compromise his name is removed from the share register (Wright's Case (1); Diwon v. Evans (2); Bath's Case (3); First National ' Reinsurance Co. Ltd. v. Greenfield (4) ). The respondent took up - shares in the appellant company on the faith of an assurance that - he would be appointed to the local board of directors and that no other member of his profession would form a member of the board. - The company then proceeded to appoint another member of his - profession to the local board. He protested and claimed a return of his allotment money and a severance of his connection with the - company. Neither he nor the directors knew, so far as appears, - anything about the difference between conditions and collateral - agreements annexed to applications for shares, nor about the dis- - tinction between conditions precedent and conditions subsequent. - Richards J., who did, said that there was a condition precedent. - The appellant company says that his Honour's view is an erroneous application of these legal refinements. Be this as it may, the com- : pany and the respondent without understanding precisely on what - the validity of his application and allotment of shares depended

[145]

For instance, he might have imposed a condition that, before shares _ were allotted to him, all the other places on the Sydney board should be filled by directors none of whom was an architect. But the stipulation upon which he relies as a condition precedent was expressed in a very different way. It was expressed as a restriction upon the company's choice of local directors, observance of which was required for an indefinite future time. The letters, too, in which he complains of breach of faith and the receipt he signed for the _ £150, speak in terms which assume that immediate allotment was 'not only justifiable, but effective, to create membership, although, no doubt, a membership liable to avoidance or defeasance. There is so much weight in these objections to the view that there never was a contract of membership because MacKellar's application was controlled by an unfulfilled preliminary condition, that I prefer to rest my decision upon other grounds which appear to me, not only to justify, but to require, the same conclusion. In the first place, it seems to me that a valid compromise was made of Mackellar's claim that he was entitled to treat his membership of the company as avoided or brought to an end. It is, no doubt, _ true that a company cannot validly include in an agreement of compromise an wltra-vires term or condition. It is also true that an attempt to rescind an allotment of shares once effectively made is, speaking generally, ultra vires and void. But it is clearly settled that, if a claim is made that an allotment of shares or an agreement _ of membership is void or voidable, at all events if the grounds of the claim are not in law clearly untenable and insufficient, then it is open to the company as part of a compromise to treat the purported allotment of all or some of the shares as cancelled and to remove the name of the allottee from the share register. There is a wide dis- tinction between, on the one hand, compromising a claim on the

[148]

part of a person whose name appears in the share register that truth he never became a member, or, if he did, that he is neverthe lawfully entitled to treat his membership as avoided, and, on other hand, compromising some merely pecuniary demand made by a shareholder whose membership is not in dispute. In the latte case there is an evident objection to an attempt, by way of com- promising the money claim, to relieve him of some or all of the liabilities arising from membership by rescinding the allotment of the whole or part of his shares and cancelling or amending the regis- tration of his shareholding. By such an attempt the company would seek to do, as consideration for the compromise of a disputed money claim, a thing which it has no power to do, viz., relieve an admitted shareholder of his liability to contribute his just proportion of share capital. But when the matter in dispute is the existence or voidability of membership itself, the law must either altogether - deny to the company the capacity to deal with the question or concede to the company the power to capitulate to or compromise the claim that membership was never brought about, or is open to avoidance. 7 The law has taken the latter course. "There is no reason why . the directors, if they bona fide agree that a shareholder has a right to avoid the contract, should not thereupon assent to the eae of the contract and rectify the register in the appropriate manner" (per McCardie J. in First National Reinsurance Co. Ltd. v. Greenfield 7 (1) ). In Dizon's Case (2) Giffard L.J., though admitting that on _ a controversy between the alleged member, on the one hand, and - the company, on the other, as to whether he was or was not a share- holder, the company might in a compromise validly remove his name feom the share register, yet decided that the attempt in question to relieve him of membership was ineffectual because he had admitted his membership and complained only that he had been promised that he should not be required to sign the deed of settlement or be responsible as a shareholder unless and until company, which was registered before 1862, obtained an Act of - Parliament limiting the liability of its members. The decision of Giffard L.J. was reversed in the House of Lords on the ground that (1) (1921) 2 K.B., at p. 279. (2) (1869) LR. 5 Ch. App. 79.

At a glance

Court

Decision date

Before

Source

Judgment (184 paragraphs)