Cone eign v Pincedale Catto v

Cone eign v Pincedale Catto v - [1939] HCA 2 - HCA 1939 case summary — Zoe

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the assets of the company inconsistent with art. 120 as it stood at the date of the extraordinary general meeting above mentioned. The grounds upon which the declaration and the injunction were sought in the statement of claim as originally drafted were in sub- stance: (i) that the resolutions were passed solely for the purpose of benefiting fully paid shareholders to the disadvantage of partly paid shareholders and not in the interests of or for the benefit of the company, or the body of shareholders; and (ii) that '' the members of the company at all material times holding only partly paid shares were only a small minority of the shareholders and the plaintiffs charge and it is the fact that the fully paid shareholders used their majority voting power to pass the said resolutions to benefit themselves at the expense of the partly paid-up shareholders." At the hearing the plaintiffs put their case on three additional and alternative grounds as follow: (i) that a circular issued with the notice convening the meeting was misleading; (ii) that speeches made at the meeting by the chairman of directors and the company's solicitor were, even although bona fide, incomplete, inaccurate and misleading ; and (iii) that the chairman refused to put an amend- ment which was proposed at the meeting by a shareholder and which should have been put to the vote. _ Art. 120 was headed " Capitalization of Profits" and was in the following terms : - " 120. Notwithstanding anything in any other article contained the whole or any part of the undivided profits including amounts at credit of reserve or any other fund may with the sanction of the company in general meeting be converted into capital of the company by distributing the same amongst the holders of shares as a special dividend or bonus by issuing partly or fully paid-up shares in respect thereof to the holders of such shares in proportion to the shares held by them in the company. The directors may sell shares or make cash payments if necessary in order to adjust tights and a proper contract shall be filed in accordance with section 5b of the Companies Act 1899, and the directors may appoint any

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portions of the reserves, but owing to the ill-health of the then chairman, no decision was made. In 1934 the directors were warned by the auditor that if they intended to distribute part of the reserves it was desirable that they do so before the end of 1934 so as to avoid the extra taxation which came into force at that time. Counsel was thereupon consulted, but owing to his doubt about the exact effect of the articles it was regarded as impossible to take the steps necessary for a distribution before the end of that year. Between the months of May and June 1935, discussions took place between representatives of the company and a number of senior counsel, and also between officers of the company and the chairman of directors of a company which had recently succeeded in avoiding taxation on a distribution of profits. On 5th June 1935 the board of the defendant company resolved to leave the question of distribu- tion temporarily in abeyance. No proposal to alter art. 120 had come before the board until early in 1937, although a suggestion had been made earlier that the wording of the article would create a difficulty. On 17th March 1937, the chairman submitted to the board a scheme of distribution which had been framed after lengthy consideration with the company's auditors and which was designed to secure for the shareholders immunity from taxation on the benefits to be received by them. At this meeting the chairman stated that there was another matter exercising the minds of the board and that was in regard to art. 120 of the company's constitu- tion, " such article in its present form not appearing to be equitable." The board meeting was followed by a conference at the offices of the company's solicitor, and this conference by an opinion from senior counsel received on 4th April 1937. At the conference the directors were advised by their solicitor that the company could alter art. 120. It was not suggested that by doing so the majority would inflict an injustice on the contributing shareholders, but the opinion was expressed either then or at a later conference with senior counsel that it would be inequitable for shareholders who had paid 4s. 8d

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Agricultural Society Lid. v. Agricultural Wholesale Society Ltd. (2) may be very apposite with the right of the company to offer partly paid-up shares to its members. A mistake or ambiguity in an article may be removed only by the machinery provided by and under the Companies Act for the alteration of articles ; such a matter does not come within the court's jurisdiction to rectify documents on the ground of mutual mistake (Hvans v. Chapman (3) ). It is not sug- gested that art. 120, on any construction, is in any way ultra vires the Companies Act. In every case it is a question of fact: Did the shareholders vote to benefit the company or did they vote for the purpose of oppressing the minority of the shareholders ? [Dixon J. referred to Miles v. Sydney Meat Preserving Co. (Ltd.) (4) and Dutton v. Gorton (5).] The scheme put forward by the appellant is not a scheme which causes an expropriation of rights because: (i) art. 120 can only operate by resolution of a general meeting and it is obvious the shareholders in general meeting would not agree to an issue of bonus shares on the basis that one fully paid-up bonus share should be issued for each existing fully paid-up and partly paid-up share ; (ii) it is within the power of the company by ordinary resolution in general meeting to provide that what would be equivalent to bonus _ shares should be allotted on the basis of art. 108 ; (iii) the only case in which the company would be likely to pass a resolution in general meeting under art. 120 - if " dividend " in that article means dividend

on nominal capital - would be when (a) all the issued shares were : paid up to the same amount; (b) the holders of partly paid-up shares could outvote the holders of fully paid-up shares ; and (iv) if the holders of partly paid-up shares are entitled to an injunction _ in the present case, then, if these holders could outvote the holders 7 of fully paid-up shares and passed such a resolution under art. 120, _ the holders of fully paid-up shares might be entitled to an injunction _ to prevent a distribution of profits otherwise than in accordance _ with art. 108. The basic position is that the company in general

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alteration of art. 120 to be for the benefit of the company. The test is not whether the proposed alteration is for the benefit of the company as a trading concern. If it were so, Brown v. British Abrasive Wheel Co. Ltd. (1) would have been differently decided. The decision in Geary v. Melrose Co-operative Dairy Co. Ltd. (2) was based on a statement which appeared in Palmer's Company Precedents but which has been eliminated from the 14th and 15th editions of that work. An alteration may be made in good faith even thought it may prejudice some shareholders. The question in each case is one of fact (Sidebottom v. Kershaw, Leese & Co. Lid. (3) ). 'The scheme proposed is not unconscionable and is a proper exercise of the power to alter the articles ; it is not animated by an improper purpose (Mills v. Mills (4) ). The evidence strongly supports the finding of fact that throughout the directors acted in perfect good faith. The circular was an accurate circular and was not misleading. Its purpose was to explain the proposed resolutions set forth in the notice. Assuming, though not admitting, that the legal views expressed in the circular were erroneous, the notice and circular nevertheless accurately set forth sufficient facts to substantially put the shareholders in a position to know what they were being asked to vote about (Carruth v. Imperial Chemical Industries Ltd. (5) ). The inaccurate statements in, and the omissions from the circular, if any, were not in respect of material matters and were completely different in character from those under discussion in Kaye v. Croydon Tramways Co. (6), Tiessen v. Henderson (7) and Baillie v. Oriental Telephone and Electric Co. Ltd. (8), nor were there any intentional _and deliberate non-disclosures (Bulfin v. Bebarfald's Ltd. (9) ). No shareholder possessing ordinary intelligence could have been misled by the notice, the circular, or the speeches at the meeting as to any matter before the meeting. The evidence shows that the matters before the meeting were freely and fully debated. The directors

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bring about an alteration of rights in favour of the majority at the expense of the minority. The nature and effect of that alteration was not accurately and fully explained by those in charge of the company's affairs. Some of the information contained in the circular, particularly as regards an alleged inconsistency between art. 108 and art. 120, and the necessity to alter art. 120, was inaccurate, which together with some important and material omissions there- from tended to cause, and, doubtless, did cause, some shareholders to be misled ; consequently the resolutions were vitiated (Bulfin v. Bebarfald's Ltd. (1) ). Profits capitalized under art. 120 are changed in character and thereafter can reach shareholders only upon a winding up. It follows from In re Driffield Gas Light Co. (2), that if the company were wound up after a capitalization the distribution would go eventually on the basis provided for by art. 120. That article is a fair compromise of the rights that should attach as between paid-up and contributing shareholders. Inland Revenue Commis- sioners v. Blott (3), Inland Revenue Commissioners v. Fisher's Executors (4), Commissioner of Taxation (N.S.W.) v. Stevenson (5) and Commissioner of Taxes (Vict.) v. Nicholas (6) are " income tax " cases in which the respective decisions depended upon the terms of the particular statute involved, and thus are not applicable to this case. The meaning of the expression "distribute in proportion " was considered in Oakbank Oil Co. v. Crum (7) and Birch v. Cropper ; In re Bridgewater Navigation Co. Ltd. (8). Upon an alteration of articles the test is: Is there any reasonable prospect of advantage to the company as a whole? (Buckley on The Companies Act, 10th ed. (1924), pp. 25, 26). An attempt to reconcile the two lines of cases was made in British America Nickel Corporation Lid. v. M. J. O'Brien Ltd. (9). When exercising his vote a shareholder should have greater regard for the benefit of the company as a whole than for his personal enrichment. Directors, as fiduciary agents, are under a special obligation in this regard (Mills v. Mills (10) ). The

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upon such a matter does not amount to misrepresentation or ever to inaccuracy if the opinion, even if wrong, is accurately stated as an opinion. In so far as the circular stated that it was neces to declare a dividend in order to bring about a capitalization, stated what was, I think, plainly a matter of legal opinion. Thes observation applies to the statement that arts. 108 and 120 w only be consistent when all the issued shares of the company wer paid up to the same amount. The substance of the matter | that profits could be distributed in one way under art. 108 and it another way under art. 120. The two articles did deal with the same subject matter - so far as that subject matter was the dis tion of profits - in two different ways. In this sense the a were inconsistent. But I agree with Nicholas J. that in a str legal sense they were not inconsistent. In the first place botl articles could, upon any construction of them, be obeyed if all th shares were paid up to the same amount. The fact that the director did not wish to call up further capital did not make the arti inconsistent. But further, the introductory words of art. " Notwithstanding anything in any other article contained," my opinion, exclude the application of art. 108 when a capital is effected under art. 120 even if that capitalization involves a or a notional declaration of a dividend. I agree with what Nic/ J. says upon this matter. But, in my opinion, the circular sho in this respect, be regarded as expressing the views of the dir and not as laying down in absolute terms propositions of law guar teed as correct. Even if those views were wrong, the action of th shareholders in passing the resolutions is not invalidated. As W be pointed out later, the shareholders heard the other sid the case, and made their decision after hearing both sides. was reasonable ground upon which it could be believed that | obstacle to any capitalization of profits did exist. Even if a co should ultimately decide that such an obstacle did not exist, th fact would not deprive the shareholders of the right of so alte the articles as to express a meaning which they deliberately d them to bear.

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representing them as the result of a capitalization. It is, therefore, problematical whether a scheme involving capitalization would be sanctioned if it was necessary to carry it out under the existing art. 120. On the other hand the holders of partly paid shares proved no less human. When the proposal was carried for an alteration of art. 120 depriving them of the chance of obtaining a larger proportion on a capitalization than they would on a cash distribution, they brought the suit out of which this appeal arises, asserting that the alteration had been resolved upon mala fide in order to deprive them of that to which they were entitled and to hand it over to the majority. The directors, who feared the Commis- sioner of Taxation more than they did any internecine conflict, had at an early stage invoked the aid of their legal and financial advisers Their legal advisers saw the complication created by what they called the inconsistency of the articles, and this caused a pause in the proposal for capitalization when it was first mooted. In the hope of finding wisdom the directors summoned a multitude of counsellors, who, with less variation of opinion than might have been expected, tecommended a change in the articles. A circular explaining to the shareholders the purpose and nature of the proposed change was drawn up. It was drawn with much care and bears the evident marks of an attempt to give to an exposition of a complicated matter the not altogether compatible qualities of brevity, completeness, legalism and commercial intelligibility. Unfortunately, the prevail- ing thought among those who composed it was that the two articles were inconsistent because they prescribed different bases of distribu- tion. For this reason it seems to have been considered that the co-existence of the articles made it impracticable to carry out the desires of the directors. The predominant argument of the circular presents some such view. I have not gone into the exact details of phraseology in which art. 120 is expressed, but it is sufficiently clumsy to admit of an argument that to capitalize under art. 120 would involve a violation of the article relating to dividends, art. 108. But notwithstanding this possible argument it is clear enough that the articles allowed the company to capitalize the profits according to one proportion and to distribute them according to

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under their consideration. They were alive, of course, to the danger that a capitalization might mean a distribution liable to income tax. Tn the course of seeking advice upon the subject their attention was drawn to the anomaly that under the articles a cash dividend was payable in proportion with the paid-up capital of the respective shareholders, while a distribution of bonus shares directly made under the specific authority of art. 120 must be in proportion with the shares held. The plan which the directors favoured involved the formation of a new company to carry on the business so far conducted by the appellant company, the transfer to that company of the assets of the business, including goodwill, and the holding by the appellant company of the shares in the new or operating company. Under the plan the value at which the goodwill would be transferred to the new company would produce a large profit which could be capitalized without danger of the distribution being taxable. But the fact that a capitalization of profits and a distribution of shares formed part of the plan brought the directors face to face with the question what should be the basis of the distribution among share- holders, that is, whether according to capital subscribed or capital paid up. After taking much advice the directors determined to deal with the question by proposing alterations of the articles which would enable a direct distribution of shares according to the amount of capital paid up by the respective shareholders upon their shares. The alterations designed to effect this result were proposed as special resolutions at an extraordinary general meeting of the company on 14th September 1937. The notice summoning the meeting stated that resolutions would be proposed for the necessary increase of capital and for authorizing the directors to carry out the proposed transaction and, also, if the resolutions altering the articles increasing the capital and approving of the transaction were passed, for the capitalization under the new articles of the profits arising from the sale of the goodwill. At the meeting the special resolutions were passed by the requisite majority. No poll wasdemanded. The Temaining resolutions were then also carried.

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power is unrestrained. It is one thing, however, to say that such a power is not unlimited or uncontrolled and another to define the grounds upon which an ostensible exercise of the power should be considered invalid. At first an attempt was made to distinguish between matters which went to the foundation of a company's structure and matters which related only to the conduct and manage- ment of its afiairs. Thus, in the course of his now overruled judgment in Hutton v. Scarborough Cliff Hotel Co. (Ltd.) (1) Kindersley V.C. said ; " The question is whether the power given to a general meeting, by special resolution, to modify the regulations of the company is unlimited: clearly there must be some limit to the power; other- wise they might alter not only such as relate to the management of the company, but they might alter the very constitution and nature of the company." But the distinction was found untenable. It is the province of the memorandum of association to fix the constitution and nature of the company, and the power of altering the articles is subject to whatever restrictions it may contain. But no article as such could be made unalterable. It may be altered notwithstanding that it is expressed to be fundamental or part of the constitution of the company or unalterable, and a company cannot contract itself out of the power. In spite of what is said in British Murac Syndicate Ltd. v. Alperton Rubber Co. Lid. (2), the better opinion still appears to be that the fact that to alter an article involves a breach of con- tract can be no more than an evidentiary consideration and does not in itself make the alteration invalid: See Buckley on The Companies Adds, 10th ed. (1924), pp. 24, 25; 11th ed. (1930) pp. 18, 19; Law Quarterly Review, vol. 31, p. 359. After the abandonment of the distinction between, on the one hand, matters of administration and management admittedly subject to the power of alteration and, on the other, matters going to the constitution of the company and said

therefore to be outside the power, the courts sought for a limitation in the more general doctrine that a power must be exercised bona fide for the end for which the power is designed. Primarily a share _ in a company is a piece of property conferring rights in relation to

At a glance

Court

Decision date

Before

Source

Judgment (315 paragraphs)

1938-1939.

1938-1939.

Parties