JUDGMENT
1 This case raises a narrow but important point of company law, surprisingly not directly resolved in Australia during the century and a half since limited liability was first made generally available to the shareholders of joint stock companies. The question is whether the constitution of a company may be amended to impose on its shareholders a liability to contribute to the recurring or administrative expenses of the company.
2 By their statement of claim the 20 plaintiffs who are members of the defendant company seek declarations as to the meaning or effect of two articles in the defendant's constitution.
3 Article 103(1) provides:
'103(1) An annual levy payable by members of the company to be used to maintain the navigability of the waterways and to maintain clean waterways owned by the company and to fund the ongoing operating expenses of the company shall be such as the company by ordinary resolution in general meeting shall from time to time prescribe.'
The plaintiffs seek a declaration that none of them is bound to pay to the defendant money levied under Article 103(1), having regard to s140(2)(b) of the Corporations Law (which replaced s180(3)(b) as from 1 July 1998).
Article 102(8) states:
'102(8) A person becoming a member after the date upon which the company acquired the company's land shall pay a fee of $350 or such other fee as the Board may determine for the rights referred to in Article 102(1).'
Article 102(1) says that subject to Article 102(8), each member shall have certain rights to moor a vessel, to erect and maintain a mooring boom, and to erect and maintain a pontoon, in each case over the waterway adjacent to the member's property. The plaintiffs seek a declaration that on its true construction, Article 102(8) does not permit the defendant to impose a charge on the plaintiffs for enjoyment of the Article 102(1) rights beyond a once-only payment of $350 or such other single fee as has been determined. They also seek a declaration that they are not liable to pay the defendant any further moneys pursuant to Article 102(8) for the rights under Article 102(1).
Essential facts
4 Certain limited facts must be determined to enable me to decide the questions of law and construction which arise with respect to Articles 103(1) and 102(8). The essential facts are:
- The defendant was duly incorporated with limited liability, and is a company for the purposes of the Corporations Law.
- The plaintiffs are each shareholders in, and therefore members of, the defendant.
- Each of the plaintiffs paid the defendant a fee at the time of becoming or soon after becoming a member.
- The plaintiffs became members of the defendant before 7 June 1995.
- Article 102(8) has been in place at all relevant times.
- Article 103(1) was adopted by amendments to the defendant's constitution made at a meeting of members on 7 June 1995.
- The defendant owns the land forming the seabed of the waterways at Sylvania Waters.
- Each member of the defendant is a registered proprietor of land adjoining the waterways.
- An annual levy has been fixed by ordinary resolution of the members in general meeting for the purpose of maintaining the navigability of the waterways and to maintain clean waterways.
- The defendant has made a demand on each of the plaintiffs for the payment of the levy under Article 103(1), and has made a demand on some of the plaintiffs for the payment of the levy under Article 102(8).
- The plaintiffs have not paid all of the amounts demanded by the defendant.
5 Another relevant fact relates to whether any of the plaintiffs has agreed in writing to be bound by Article 103(1). In their statement of claim and amended statement of claim, the plaintiffs asserted that none of them had made any such agreement. The defendant agreed to that assertion by the plaintiffs both in its defence to the amended statement of claim and in the contentions of fact which were exchanged by the parties before the hearing. However, at the hearing the defendant sought leave to amend its defence so as to withdraw the admission as regards some of the plaintiffs. The application for leave to amend was opposed by the plaintiffs' counsel. I reserved my judgment on that issue as well as on the points of law and construction which were argued at the hearing. I shall deal with the application for leave to amend later in these reasons.
Further background facts
6 Substantial additional factual materials, principally comprising minutes and papers for meetings of members of the defendant, were tendered by the defendant. Although the tender of this additional material was objected to on the ground of relevance, I decided to admit it into evidence. The additional material shows the factual context in which the questions of law and construction have arisen. I accepted the defendant's submission that the factual context is relevant to the problems of law and construction with which the Court has to deal, and to the exercise of the Court's discretion with respect to the granting of appropriate relief.
7 The additional material shows that in the housing estate known as "Sylvania Waters" there are over 300 properties which directly adjoin the waterways, which are partly canals and partly a bay which opens into the Georges River and Botany Bay.
8 In about 1984 the company which then owned the waterways went into liquidation. The defendant company was formed to avoid the risk that the waterways might be acquired by a commercial concern which might impose high fees on the landowners for moorings and pontoons. Most of the landowners of waterfront properties acquired shares, which were held in parcels of 350 for each landowner. Not all the eligible landowners are members in the company, though the company has endeavoured in various ways to persuade eligible landowners to become members. Over 80% of the eligible landowners are now members.
9 By Article 99(1) membership of the company is confined to the owners for the time being of the properties described in a schedule to the company's constitution, which identifies the waterfront properties at Sylvania Waters. Article 99(3) authorises the board of directors to decline to register any transfer of shares unless and until the transferee pays to the board an administrative fee of $350 or such other fee as the board might determine. As previously noted, Article 102(1), which appears under a heading 'Rights Attaching to Membership', confers on each member certain rights to moor a vessel, erect and maintain a mooring boom and erect and maintain a pontoon on that part of the company's land adjacent to the member's property; and Article 102(8) obliges a person becoming a member to pay a fee of $350 or such other fee as the board may determine for the rights referred to in Article 102(1).
10 The defendant has not at any stage engaged in a commercial business or any profitmaking activity in the normal sense. Its directors and secretary have been members and therefore property owners at Sylvania Waters. The defendant's main activities have been to maintain and oversee the use of the waterways, and to consider various applications for consent by shareholders under the company's constitution. Its modest revenue has arisen from the fees payable under the constitution when a purchaser of a waterfront property becomes a member, and fees charged from time to time for applications by members for approvals for repairs to the seawall, the erection of mooring poles and similar matters.
11 Sylvania Waters is a natural drainage point for surrounding areas. In the absence of devices to filter the water and prevent silt being carried into the waterways by runoff from creeks and drainage, silt and rubbish runs into the waterways. Additionally, there is a natural buildup of silt in the canal zone over time. By 1995 the buildup of silt had affected the navigability of parts of the waterways, especially in Gwawley Creek and Richmond Canal. Concern about the buildup of silt and also about the task of keeping the waterways clean, led to a series of meetings of members during the period 1995-98. During that time there were eight general meetings, some of them annual general meetings and some of them special general meetings. At the meeting of 7 June 1998 which amended the defendant's constitution to adopt (inter alia) Article 103(1), the members also set an annual levy of $500 under the new Article; and there was a great deal of discussion about the siltation problem and the need for maintenance, and the prospect of obtaining assistance from Sutherland Council. Some shareholders opposed the introduction of the levies, and arrangements were adopted for deferred payment in cases of hardship.
12 The minutes of the ensuing meetings show that various schemes for dealing with the siltation problem were investigated. One idea was to move the silt into "deep holes" in the waterways, and another was to construct an artificial island on which the silt would be placed. Eventually it emerged that the preferred alternative was to remove the silt from the waterways and dump it in the ocean. However, this was a more costly solution than some of the others which had been explored, and so, on the recommendation of the directors, the members resolved at a meeting on 26 February 1998 to increase the annual levies for the ensuing three years to $1,275 per year. Shortly after that decision, the present proceedings were commenced.
13 The material tendered by the defendant shows how difficult it has been for the company and its directors to develop and implement proposals for dredging and cleaning the waterways, and for financing that work. It appears that at all relevant times a small group of landowner/members has opposed and resisted the wishes of the vast majority. The additional material contains references to anonymous circulars, attacks on the character and motives of directors, and allegations of defamation. One concludes from a perusal of the minutes of the meetings that they were at times very heated and that some of the debate was conducted at a personal level. I note that at a meeting on 26 June 1998 the members resolved that the identity of those who had instituted the present proceedings be revealed, and after that resolution was passed the chairman read out the names and addresses of the plaintiffs. Though there is no further evidence on the point, one assumes that this action has made life very difficult for the plaintiffs in their home environment. The present situation is a very unhappy one.
Article 103(1)
14 The defendant company, having been formed under the Companies (NSW) Code in 1984, is now subject to s.140(2) of the Corporations Law. That section commenced on 1 July 1998. It applies to existing companies from that date having regard to ss.1413 and 1415, as a result of which references in s.140 to a "company" include a reference to a company taken to be registered under the pre-existing law and references to the company's "constitution" are taken to be references to the memorandum and articles of such a company.
15 Subsection 140(1) states that a company's constitution has effect as a contract between (inter alia) the company and each member. Subsection 140(2) is in the following terms:
'140(2) Unless a member of a company agrees in writing to be bound, they are not bound by a modification of the constitution made after the date on which they became a member so far as the modification:
(a) requires the member to take up additional shares;
(b) increases the member's liability to contribute to the share capital of, or otherwise to pay money to, the company;
(c) imposes or increases restrictions on the right to transfer the shares already held by the member, unless the modification is made:
(i) in connection with the company's change from a public company to a proprietary company under Part 2B.7; or
(ii) to insert takeover approval provisions of a kind referred to in s.671.'
16 The plaintiffs submit that, having become members of the defendant company before 7 June 1995, they are not bound by the modification to the defendant's constitution made on 7 June 1995 by which Article 103(1) was adopted, so far as that modification increases the members' liability 'otherwise to pay money to' the defendant, having regard to s.140(2)(b). The defendant submits that s.140(2)(b) does not apply to the liability of a member to pay a levy fixed under Article 103(1).
17 At first reading, the meaning of s.140(2)(b) seems plain enough, in its context. It is established elsewhere in the Corporations Law (notably in ss.254M and 515) that a member is liable to contribute to the share capital of the company. In the case of a company limited by shares, the liability is to pay the unpaid part (if any) of the issue price of the shares, but nothing more (s.516). That is the basic principle of limited liability. When s.140(2)(b) speaks of an amendment which 'increases' the member's liability to contribute to the share capital, it refers (in the case of a company limited by shares) to an increase in the liability to meet the unpaid issue price. Therefore the word 'increases' is applicable even to an amendment which introduces a new category of liability to contribute to the share capital, such as an amendment which purports to impose a liability to pay an additional premium upon shares which have already been issued.
18 The remainder of s.140(2)(b), if stated in full form, would say that unless members of a company agree in writing to be bound, they are not bound by a modification of the constitution made after the date on which they became members so far as the modification increases the member's liability otherwise to pay money to the company. Once again, in the case of a company limited by shares, the word 'increases' acknowledges the member's liability to pay any unpaid issue price and prohibits an increase of that liability.
19 It is true that the initial liability of the member to pay any unpaid issue price, and the forms of liability contemplated by ss.140(2)(a) (to take up additional shares) and the first part of 140(2)(b) (to contribute to the share capital) all relate to payments which the company must account for as share capital (members' funds). Money received on revenue account to meet the recurring administrative and maintenance expenses of the company is in a different category. But the remaining words of s.140(2)(b) are literally wide enough to cover an amendment which purports to oblige members to make payments of that kind. The words 'otherwise to pay money' are words of wide application.
20 The defendant submits that those words are to be read as if they were qualified by some such words as 'in the nature of share capital', and contends that payments for the provision of services of a recurring kind fall outside the scope of the words when they are properly construed. In my opinion, however, nothing in the words of the sub-section or its statutory context would authorise me to read down the words in the manner proposed. In particular, the word 'otherwise' appears to me to be intended to rebut any possible construction ejusdem generis with the preceding words of sub-paragraph (b) and sub-paragraph (a).
21 However, the defendant submits that the legislative history of s.140(2)(b) supports the construction for which it contends. According to the defendant, before the enactment of the provision, the articles of association of a company could validly impose on members an obligation to pay a fee or levy for corporate administration or the maintenance of the company's property (such as an annual membership fee, in the case of an incorporated club) and the articles could validly be amended to introduce such a fee in a manner binding all members. That being so, says the defendant, the legislative provision which became s.140(2)(b) was not intended to alter the law in this respect, but merely to make it clear, in light of a case which suggested that clarity was needed, that an amendment to the articles to increase the liability of members to make payments in the nature of share capital would not be binding on dissentients. In order to assess this submission, it is necessary to consider the state of the law prior to the enactment of the legislative provision, and to investigate whether anything can be said about the probable legislative intention underlying the provision.
Section 140(2) - legislative history
22 The immediate ancestor of s.140(2) was s.180(3) of the Corporations Law. Some of the changes to s.180(3) made by s.140(2) fall within the general category of simplified drafting - for example, s.180(3) referred to an alteration which increases the members' liability 'as at the date of the alteration' and those words do not appear in s.140(2), no doubt because they are unnecessary. A difference which could have significance is that s.180(3)(b) referred to an alteration which 'in any way' increases the members' liability to pay, those words being omitted from s.140(2)(b). But it is probable that even that change of wording does not affect the meaning of the provision. Paragraph 8.19 of the explanatory memorandum to the Company Law Review Bill which replaced s.180 with s.140, seems to imply that no change of the meaning was intended.
23 Section 180(3) was, in turn, identical with s.78(3) of the Companies Code, after amendments to the latter provision in 1985 added what is now subparagraph 140(2)(c). The provision in the form it took in the Companies Code before the 1985 amendment may be traced back, without any material changes in wording, through s.33(3) of the Uniform Companies Act 1961 to s.24 of the Companies Act 1936 (NSW) and equivalent provisions in other States. In turn, the Australian State legislation obviously derives from the almost identically worded UK provision, s.22 of the 1929 Act.
24 The defendant's counsel submits that the present s.140(2)(b) is relevantly to the same effect as the equivalent words in s.22 of the UK Act of 1929. I agree that while the wording of the provision has changed during the period from 1929 to date, there is nothing to suggest that the relevant Parliaments intended to achieve any change of substance, and on the contrary the changes of wording can all be explained as drafting improvements to simplify and clarify the provision.
The pattern of UK companies legislation prior to 1929
25 The cases upon which the defendant relies were, for the most part, English cases decided under the Joint Stock Companies Act 1856 and the Companies Act 1862, though some of them arose under the Industrial and Provident Societies Act 1893. As far as concerns the present case, the main features of the United Kingdom companies legislation were:
(a) the liability of the members of a company could, by the memorandum of association, be limited to the amount if any unpaid on the shares respectively held by them (Companies Act 1862, s.7);
(b) the memorandum of a limited company was required to contain a declaration that the liability of the members was limited (s.8(4));
(c) the company was permitted to adopt articles of association and when registered, the articles would bind the company and the members to the same extent as if each member had subscribed his name and affixed his seal thereto, and as if the articles contained a covenant by the member to conform to the regulations contained in the articles (s.16);
(d) the articles of association could be altered by special resolution of the members in general meeting (s.50);
(e) in the event of winding up, members were liable to contribute to the assets of the company to an amount sufficient for the payment of the debts of the company and the expenses of winding up, and the payment of amounts required for the adjustment of the rights of contributories among themselves, but in the case of a company limited by shares, no contribution could be required from any member exceeding the amount, if any, unpaid on the shares in respect of which he was liable as a member (s.38(4)).
Taken together, these provisions of the 1862 Act contain the principle of limited liability. The 1856 Act was similar, though it dealt separately with the adjustment of the liability of contributories. The pattern of legislation established by the 1862 Act has been substantially followed in all subsequent United Kingdom and Australian companies legislation. In particular, s.38(4) of the 1862 Act substantially corresponds with ss.515 and 516 of the Corporations Law.
26 There is a potential inconsistency between the provision which limits the liability of members to contribute on winding up, and the provision which binds the members to the articles of association as amended from time to time. There are two problems. The first is whether the provisions which limit the liability of members also prevent the articles from imposing a pecuniary liability on members other than their liability to pay the amount unpaid on their shares. The second is whether, even if a pecuniary liability can be imposed in the articles, such a liability can, by amendment to the articles, be imposed upon shareholders who dissent from the amending resolution.
27 In Ooregum Gold Mining Company of India Ltd v Roper [1892] AC 125 the House of Lords held that the scheme of the legislation entailed that a company which issues shares cannot bind itself to a discount below their par value. The statute limited the liability of members to the amount of the par value which had not been paid. In their Lordships' opinion this implied that in the winding up of the company, members would be liable to pay that amount, and their liability could not be further limited by the articles or the terms of issue of the shares or any other agreement. It may be permissible for the company, by the terms of issue of shares, to bind itself not to call up the unpaid portion of the par value except in the winding up of the company (see Lord Herschell at 143-144), but it could not eliminate the member's liability to contribute the unpaid amount on winding up.
28 In Welton v Saffery [1897] AC 299 the House of Lords held that, although the issue of shares at a discount was authorised by the company's articles, the holders of those shares were liable to contribute the unpaid amount in the winding up of the company for the purposes of adjustment of the rights of the contributories inter se, even though the company's external debts and the expenses of winding up were paid.
29 These cases underline the importance of the principle of limited liability, but they do not shed any direct light on the question whether the articles may add to the members' liability to contribute the amount unpaid on their shares, as opposed to reducing it.
The application of the principle of limited liability to articles which impose additional pecuniary obligations on members
30 There is a group of cases which appear to say that the articles of association of a company formed under the 1856 or 1862 Act may impose a pecuniary liability on members beyond the liability to contribute the amount unpaid on their shares. The reasoning in the cases is not entirely satisfactory, and they have been the subject of subsequent debate. They all appear to be cases where the articles which imposed the obligation were in place at all relevant times, and there was no issue as to whether the obligation could be imposed on existing members by amendment.
31 The first case is Peninsular Company (Ltd) v Fleming (1872) 27 LT(NS) 93. There the articles of a company registered under the 1862 Act permitted it to call upon its shareholders to provide loan capital not exceeding 200 per share, the loan bearing interest to be paid prior to the division of profits. The defendant refused to contribute money under this article but the Court of Common Pleas gave judgment against him in proceedings brought by the company. It was apparently not argued that the article was contrary to the principle of limited liability, reflected in s.38 of the 1862 Act. Instead, the argument turned on whether the article was contrary to the requirement of the Act that the memorandum must state the amount of capital with which the company proposes to registered. The Court held that the article related to a loan which was not 'capital' for the purposes of the Act.
32 Then came two cases relating to the articles of association of The Maria Anna & Steinbank Coal and Coke Company Ltd. Six of the shareholders, who were also the directors of the company, incurred debts on its behalf in order to provide part of the purchase money for the company's collieries. The articles stated that the company would pay those debts, but if there were insufficient funds to do so, then 'each and every shareholder in the company for the time being shall contribute and pay to the company, as a debt due to the company, a proportionate amount of the sum or sums which the company shall be so called upon to pay according to the number of shares held by each shareholder.' In Re Maria Anna & Steinbank Coal and Coke Company Ltd, Maxwell's Case, (1874) 20 Eq 585 Malins V.-C. held that there was nothing in the Acts of 1856 and 1862 to prevent the liquidator of the company from including shareholders in the list of contributories in respect of this liability, even though their shares were fully paid up. In Re Maria Anna & Steinbank Coal and Coke Company Ltd, McKewan's Case (1877) 6 Ch D 447 the Court of Appeal agreed, rejecting a submission that an article which imposes a liability on shareholders of a limited company in excess of the amount unpaid on their shares is necessarily void. The reasoning in the two cases is similar, though Malins V.-C. applied the 1862 Act to the winding up of the company, and Jessel MR applied the somewhat different words of the 1856 Act under which the company had been formed.
33 Jessel MR (at 6 Ch D 460) distinguished between 'debts of the company properly so called', which were governed by the limited liability provisions on winding up, and 'an arrangement inter se by the shareholders for indemnifying six of themselves against certain liabilities which they have assumed for the benefit of the company', to which those provisions have no application. The implications of the modern notion that the company is an entity separate from its shareholders were perhaps not fully recognised in 1877 (see, in a different context, Isle of Wight Railway Company v Tahourdin (1883) 25 Ch D 320). The article in question plainly required the shareholders to pay their proportionate amounts to the company 'as a debt due to the company', rather than directly to the six director/shareholders. The company's own obligation, which arose out of its adoption of the debts incurred by the six director-shareholders, was assumed to be binding on it. A modern lawyer would conclude, I believe, that the company had incurred a debt 'properly so called' and would reject the notion that the article merely recorded an arrangement between the shareholders inter se.
34 However, a principle wide enough to explain Maxwell's case and McKewan's case was articulated by the Court of Appeal in The Lion Mutual Marine Insurance Association Ltd v Tucker (1883) 12 QBD 176. The case involved the memorandum and articles of association of a mutual marine insurance company, which after some years of operation had been incorporated as a company limited by guarantee. Ship owners became members by insuring their ships or freight with the company and ceased to be members when they no longer had a ship or freight under insurance with the company. Each member guaranteed to contribute 5 to the assets of the company on winding up. Additionally, members were required by the articles to contribute funds to meet policy claims in the relevant insurance class. Thus, as Brett MR pointed out (at 188), a member of the company was also an insurer and an assured.
35 The Court of Appeal held that s.38 of the 1862 Act imposed a limit on the contributions which could be required of members as such, but did not limit the contributions which may be payable by a member in the capacity of mutual insurer under the company's articles. The statute applied only to liabilities incurred by the members in that capacity, not to collateral liabilities incurred by them in some other capacity such as insurer or assured.
36 Wright J applied that reasoning in Re Bangor and North Wales Mutual Marine Protection Association, Baird's Case [1899] 2 Ch 593. He distinguished between the liability of a contributory, to which s.38 of the 1862 Act applied, and liabilities incurred by a member in some other capacity, for which the member could be sued though not placed on the list of contributories. He criticised Maxwell's case and McKewan's case, not because those cases held that the members had undertaken a liability which was enforceable notwithstanding s.38, but because the courts allowed the members to be placed on the list of contributories in the winding up of the company in respect of those liabilities, rather than requiring that the liabilities be enforced by action.
37 The Lion Mutual and Baird cases hold that if a member incurs a liability under a contract entered into in some capacity other than as member, the terms of which are recorded in the company's constitution, the company may enforce the liability against the member regardless of the statutory limitation of liability which the member enjoys. That proposition is not easy to reconcile with the observations by Salmond J in Shalfoon v Cheddar Valley Co-operative Dairy Co Ltd [1924] NZLR 561. He said (at 577):
'A company cannot by its articles, whether original or amended, impose upon its members any pecuniary obligation over and above their statutory obligation to pay up the amount of their shares. Any attempt of a company to attach to its shares any accessory or collateral pecuniary liability is ultra vires and void as being contrary to that fundamental principle of limited liability which lies at the root of company law.'
Consequently in his opinion an article which obliged members of a co-operative dairy company to supply the whole of their milk and cream to the company, being an obligation to provide the company with money's worth and therefore indistinguishable from a pecuniary obligation, was void, quite apart from the question of restraint of trade.
38 The defendant has also referred to a line of cases dealing with schemes of reconstruction of companies. Section 161 of the 1862 Act introduced a statutory regime for schemes of reconstruction of companies in voluntary liquidation, by which the liquidator would transfer the assets of the company to another company (typically newly incorporated) in exchange for shares in the new company, which would be distributed to the shareholders of the old company, subject to the approval of the shareholders by special resolution. The old company would then be wound up. A shareholder who dissented from the resolution could require the liquidator either to refrain from implementing the scheme or to purchase the shareholder's interest at a price to be determined by agreement or arbitration. The substance of s.161 has been retained, in virtually identical form, in s.507 of the Corporations Law.
39 In several cases schemes were adopted to raise further capital for the enterprise by issuing partly paid shares in the new company for distribution to the shareholders of the old company, notwithstanding that the shares in the old company were fully paid. But instead of proceeding under s.161, the schemes relied on shareholders' resolutions allegedly authorised by the old company's memorandum and articles. The evident purpose was to side-step s.161 and thereby to deprive dissenting shareholders of their statutory right to sell their shares (see R R Pennington, Company Law (5th ed., 1985), p.975).
40 In Manners v St Davids Gold and Copper Mines Ltd [1904] 2 Ch 593 the shareholders in the old company had the option of taking new partly paid shares in the new company, but if they did not take up their shares, then the liquidator of the old company was to realise the shares and apply the proceeds in reduction of the obligations of the new company under the scheme. In other words, dissenting shareholders were faced with the choice of either exchanging their old shares for new shares with a liability, or losing their old shares and ending with nothing. The company contended that the transaction was authorised by a clause in its memorandum which permitted it to dispose of the property of the company and to accept in payment money or shares. The Court of Appeal held that the memorandum did not authorise the sale of the company's property for a consideration (the new shares) which was to be distributed immediately to its members, and consequently the scheme was invalid.
41 In Bisgood v Henderson's Transvaal Estate Ltd [1908] 1 Ch 743 the scheme was similar, except that the proceeds of sale of the shares in the new company which had not been taken up were to be distributed to the non-accepting shareholders. The old company's memorandum and articles authorised it to dispose of its property and authorised its liquidator to divide the assets of the company in specie amongst its shareholders, with the sanction of an extraordinary resolution. The Court of Appeal held that the scheme was ultra vires on several grounds, one of which related to the principle of limited liability. Responding to an argument that the scheme purported to impose a liability on shareholders contrary to the limitation of liability found in s.38 of the 1862 Act, Buckley LJ said (at 759):
'In the matter of liability upon his shares the statute provides in plain terms by s.38, sub-s.4, that in the case of a company limited by shares no contribution shall be required from any member exceeding the amount unpaid on his shares. In my opinion, any attempt so to define the constitution of the company as that the member shall in any event be liable for a larger sum is in breach of the statute and is ultra vires. Any clauses which can be used to maintain a scheme which imposes upon the member the alternative of accepting liability for a larger sum or of being dispossessed of his status as a shareholder upon terms which he is not bound to accept are, I think, ultra vires.'
42 Strictly speaking the scheme did not purport to impose any new liability on the shareholders of the old company, who could decline to take up the new partly paid shares and consequently receive the proceeds of sale of their old shares in the liquidation of the old company. But in his Lordship's view the scheme was tantamount to the imposition of an additional liability.
43 There is a tension between these two groups of cases. The Peninsula Company, Maxwell, McKewan, Lion Insurance and Baird cases (which I shall call 'the Lion Insurance group') give effect to additional or collateral obligations set out in or arising under the company's constitution. The Shalfoon, Manners and Bisgood cases decline to do so because of the principle of limited liability, reflected in s.38 of the 1862 Act. In my opinion the true explanation for the decisions in the Lion Insurance group of cases is that the obligations held to be enforceable against the members, notwithstanding s.38 of the 1862 Act, were found to have been undertaken on the facts as simple contractual obligations. True it is that the obligations arose by virtue of the members becoming members of the company, and their content was defined in the constitution of the company. Nevertheless, the obligations in each of those cases acquired their binding force by virtue of an act of assent which was both assent to membership of the company and assent to the additional contractual obligations known to the assenting members and recorded in the constitution.
44 In each of the cases in the Lion Insurance group the court proceeded on the basis that, as a matter of fact, the new member had accepted special contractual obligations in addition to the ordinary incidents of membership - obligations to lend money to the company, or to pay debts which the company had adopted if it could not do so, or to insure co-members. The additional contractual liability was not governed by the principle of limited liability. It is not clear whether the other members at the time of admission of the new member were contracting parties, or whether the only counterparty was the company, though in my opinion the latter is the better interpretation of the cases. In the Manners and Bisgood cases the attempt to impose an additional pecuniary liability failed because on the facts, it could not be said that the dissenting members had relevantly consented to anything other than mere membership of the company. The principle of limited liability accordingly applied to limit the pecuniary liability of the members to the amount unpaid on the shares which they had taken up.
45 The reasoning of the Lion Insurance group of cases might seem applicable to Shalfoon's case, where the members of the co-operative company were obliged by its constitution to sell their milk to the company, an obligation which seems to go beyond normal membership obligations. But Salmond J's observations are expressly based on the premise that the only relationship between the member and the company was the relationship constituted by membership and the company's constitution, and he contrasted the case before him with a case where there is an extraneous contractual relationship between the member and the company ([1924] NZLR at 574).
46 In my opinion the law which emerges from these two groups of cases remains the law today, though there is room to doubt Salmond J's factual finding in Shalfoon. A person who joins a limited company is not liable, solely by virtue of the act of assenting to membership, to make a pecuniary contribution to its assets beyond the amount unpaid on the shares taken up or the amount of the member guarantee, as the case may be. The principle of limited liability remains enshrined in the Corporations Law, ss.515-517, corresponding approximately to s.38 of the United Kingdom Act of 1862. However, the circumstances surrounding entry into membership may imply that the new member has entered into an additional contractual relationship with the company (and possibly other members) under which additional pecuniary obligations are incurred. The member's liability to perform those obligations is the liability of a contractor rather than a contributory, and therefore the limitation of liability in ss.516 or 517 of the Corporations Law (as the case may be) does not prevent the company from suing for recovery under the special contract. However, the member cannot be placed on the list of contributories in respect of that liability (see McPherson's Law of Company Liquidation (3rd ed, 1987, by J O'Donovan), p.292-3, where the author criticises McKewan's case for holding that a member may be included in the list of contributories in respect of a special contractual obligation).
47 If, therefore, the constitution of a company contains provisions which impose special pecuniary obligations on members, and those provisions are known to the applicant for membership when the application for membership is made, and the surrounding circumstances point to an intention to make a special contract, the court may well conclude that the pecuniary obligation is enforceable by the company or its liquidator against the assenting member notwithstanding ss.516 and 517. In this way the law recognises the constitutional provisions of mutual and co-operative companies and clubs. For example, the obligation of members of an incorporated club to pay an annual membership fee set by its constitution is probably based on this reasoning, though it would assist the court to conclude that there was a special contract if the member's application for membership included a clause specifically agreeing to the membership fee (see J McI Young, Third Cumulative Supplement to Wallace & Young's Australian Company Law and Practice (1971), note to p.131, which cites a letter to the Editor in (1968) 41 ALJ 523).
48 It follows that if the defendant's constitution had contained from the outset a provision setting an annual administration and maintenance levy, and evidence of the surrounding circumstances showed that the members at all relevant times had, expressly or by implication, agreed to that particular provision, a special contract would have arisen which would be enforceable against them. But of course, the facts do not fit this hypothesis, since Article 103 was introduced only by subsequent amendment to the constitution.
The imposition of additional pecuniary liabilities by amendment to the corporate constitution
49 This leads to the second question for consideration in the present case. As Salmond J explained in Shalfoon's case, one of the important differences between the obligation of a member arising under the corporate constitution and an obligation which the member owes to the company under a special contract is that in the first case, the constitution may be amended or repealed by the company, and the rights and obligations created by it may thus be modified or destroyed ([1924] NZLR at 575) - though, one would now add, this is subject to the law of oppression and fraud on the minority. In the case of a special contract, an express or implied term authorising one of the parties to vary or abrogate the rights and obligations of the other may be void for uncertainty, though a close analysis of the terms of the power of variation and the limits upon it would be needed. And if there is no special contract between an individual member and the company initially, obviously one cannot be created by amendment of the constitution without the individual member's consent.
50 These issues were explored in a group of cases in which societies registered under the Industrial and Provident Societies Act 1893 (UK) purported to amend their rules to require their members to take up additional shares. The societies were mutual trading organisations for the sale of farm produce. In each case the members of the society were originally obliged to take up a number of shares calculated by a formula related to acreage or quantity of produce or number of cattle or (in the case of another society) number of members. The societies purported to amend their rules to change the formula for calculating the number of shares to be held by members in a manner which purported to require existing members to take up additional shares.
51 There is an issue as to whether these cases are applicable or even relevant to a company formed under general companies legislation. On several occasions courts have drawn attention to the differences in the respective legislative schemes (see, in particular, Lord Tomlin's remarks in Hole v Garnsey [1930] AC 472, 498-9 and the remarks of Pollock MR in Agricultural Wholesale Society Ltd v Biddulph and District Agricultural Society Ltd [1925] 1 Ch 769, 779-80). Nevertheless the industrial and provident societies legislation contained provisions similar to the 1862 Act with respect to limitation of liability and the statutory contract constituted by the society's rules. To that extent, the reasoning in the cases has a potential relevance and I shall assume, for the purposes of considering the defendant's submissions, that the cases are applicable to companies as well as industrial and provident societies.
52 In Dibble v Wilts & Somerset Farmers Ltd [1923] 1 Ch 343 Lawrence J relied on the Ooregum Gold Mining case, Welton v Saffery and the Bisgood case to conclude that an amendment to a society's constitution to increase the number of shares required to be taken up, made after the plaintiff became a member and not assented to by him, was contrary to the statutory limitation of liability and was invalid. Citing Manners' case, he said there was no difference between an amendment increasing the nominal amount of shares already held, and an amendment to compel the shareholder to acquire additional shares .
53 In Agricultural Wholesale Society Ltd v Biddulph & District Agricultural Society Ltd [1925] 1 Ch 769 the Court of Appeal disagreed with Dibble and purported to overrule it. Biddulph was not a simple case of a dissenting member resisting an obligation to take up additional shares, imposed by amendment to the articles. In fact the member had already taken up some shares under the amended rules, and the question was whether it could be compelled to take up further shares under the same rules.
54 The Court of Appeal held that the member was bound to take up additional shares under the amended rules of the society. The central proposition in Warrington LJ's judgment was that the statute prohibited the company from enforcing an obligation on members to pay more than the statutory limit in respect of their shares, but it did not apply to the enforcement of an obligation of members to take up additional shares (at 786, 787). Pollock MR and Sargant LJ appear to have emphasised the special characteristics of industrial and provident societies, holding in effect that by originally becoming a member of the society, the respondent made a special bargain under which it accepted a liability to take up additional shares, increasing according to its own prosperity (see esp. at 783, 792).
55 The reasoning of Pollock MR and Sargant LJ may not have any general application to companies, but Warrington LJ's reasoning could be directly applied to the 1862 Act. It suggests that the principle of limited liability in the 1862 Act would not prevent the company from enforcing against members an obligation in the articles to take up additional shares, and raises the possibility that such an obligation might be introduced by amendment to the articles.
56 According to some authoritative commentaries, s.22 of the 1929 United Kingdom Act was enacted in consequence of the Court of Appeal's decision in Biddulph (Buckley on the Companies Acts (14th ed., 1981, by G V Parker and M Buckley), p.68; Palmer's Company Precedents (17th ed., 1956, by K W Mackinnon and R Buchanan-Dunlop), p.285; see also The Complete Statutes of England, Volume II, 1929, p.787). One can understand that the reasoning of Warrington LJ may have provoked a legislative response, because it leads to the proposition that a company may amend its articles to impose an obligation on members to take up additional shares, thereby exposing company shareholders to the risk of uncertain future obligations. Since the issues in Biddulph's case included whether a member could be forced to take up new shares, and whether there was any difference between an obligation to take up new shares and an obligation to pay more than the issue price of the shares, it is not surprising that s.22 expressly deals with those two subjects. But I do not find in the Court of Appeal's judgment in Biddulph's case any justification for confining the words 'otherwise to pay money' in s.22 to payments of a capital kind. The Lion Insurance, Baird, and Peninsula Company cases were relied upon by counsel and in the judgments. They are cases where the corporate constitutions of companies imposed pecuniary obligations other than to subscribe for additional shares or contribute to the share capital of the company. In my opinion, if s.22 was a response to the Court of Appeal's judgment in Biddulph, it is plausible to infer that the legislature intended to deal with constitutional amendments which would impose obligations of the kinds which arose in those cases, and not merely amendments relating to contributions in the nature of capital. On that basis, the words 'otherwise to pay money' would cover, at least, amendments which oblige the member to lend money to the company, or to contribute to payment of a particular debt of the company, or to pay insurance premiums or contributions to reimburse an insured co-member. If that is so, those words would also cover an amendment to oblige the members to pay an annual administrative or maintenance levy.
57 The House of Lords in Biddulph affirmed the decision of the Court of Appeal, but in my opinion the majority of their Lordships did not support Warrington LJ's reasoning. Viscount Cave, LC, Lord Sumner and Lord Blanesburgh found that by taking up one parcel of new shares under the amended rules, the appellant had assented to the amendment as a matter of contract, and consequently was bound to take up further shares by the application of the same rule. Because of the existence of such a contract, it was unnecessary for their Lordships to decide whether an alteration to the rules requiring members to subscribe for additional shares would be binding on a dissenting member ([1927] AC at 84, 88, 93-94). Lords Shaw and Parmoor agreed with the Court of Appeal, and should be taken to have accepted Warrington LJ's reasons (at 86-87, 91). Consequently, as Viscount Dunedin pointed out in Hole v Garnsey [1930] AC 472, 487, the majority reasoning in the House of Lords in Biddulph's case does not resolve the question whether a constitutional amendment can bind dissenting members to take up new shares. Dibble's case was overruled only so far as it was inconsistent with their Lordships' judgment.
58 In Hole v Garnsey [1913] AC 472 the House of Lords addressed that issue more directly. Their Lordships held, Lord Buckmaster dissenting, that an amendment to the rules of an industrial and provident society requiring its members to take up additional shares did not bind members who neither voted for nor otherwise assented to it. According to Viscount Dunedin, a rule which required members to take up additional shares by reference to a formula which might expand the member's liability over time would not be struck down by the statutory provisions dealing with limitation of liability, and would therefore be valid if part of the original rules or assented to as a new rule. This proposition is consistent with the Lion Insurance group of cases. The rule is binding on the members as a special contractual obligation which they have agreed to accept. However, in Viscount Dunedin's view the rule will not be binding on dissenting members if it is introduced by amendment under a general power of amendment. The reason, according to his Lordship, is that a contract in these terms would be too vague to be enforced (at 487). I take this to mean that a special contract under which a member agrees to be bound to whatever additional liability the society chooses to impose by amendment to its rules is void for uncertainty. The statutory power to amend (as opposed to an agreed contractual power to amend) would not render the amended rule binding because a provision which takes its force solely as a constitutional provision binding on the members as such is subject to the statutory limitation of liability.
59 Lord Tomlin took the view that the power to amend the rules contained an implied limitation, according to which amendments could be made only if they could reasonably be considered to have been with the contemplation of the parties when the original contract (arising upon membership) was made (at 500). In his Lordship's view the amendment in the present case was not within the reasonable contemplation of the parties. Viscount Sumner's reasoning was similar, for (at 493) he regarded the amended rules as unreasonable (though, interestingly, not uncertain).
60 Lord Atkin took the view that members were not bound outside the scope of the venture to which they had committed themselves. He held that the amended rules sought to impose an obligation outside the scope of the venture as originally framed, and were not binding for that reason. He contemplated, however, that 'such matters as the annual subscription to a social or other club which may be fairly be regarded as a matter of internal administration' may fall within the scope of the administration of the venture as originally framed, and therefore be binding (at 496).
61 The defendant in the present case relied strongly on this observation by Lord Atkin. In my opinion, Lord Atkin should be taken to be referring to the special contract which arises, in addition to mere membership, when a person applies to join an incorporated club. The obligation to pay the annual subscription arises out of the special contract, rather than out of membership as such, and therefore it is not affected by the principle of limited liability. Lord Atkin says, in effect, that the special contract is likely to contain an implied term by which the member authorises the club to make alterations to rules such as the rule governing the annual subscription for purposes which may fairly be regarded as matters of internal administration. Thus, if it appears from the facts that the purpose of the annual subscription is to cover (say) rent on the lease of the club's premises, and the rent is increased, it would be open for the club to amend its annual subscription rule to increase the subscription to cover the increased rent.
62 On Lord Atkin's reasoning, the amended rule would be binding on existing members, even those who oppose it. This is because they have already agreed to an implied term in the special contract which they entered into when they became members of the club and not merely members of a company, according to which they would be bound by amendments of this limited kind. Because of the constrained nature of the power to amend, the implied term authorising amendments would not be void for uncertainty and the amendment would be within the reasonable contemplation of the parties at the time of the original contract. Consequently the amended rule would be enforceable on the reasoning of Viscount Dunedin, Lord Tomlin and Viscount Sumner, as well as on the reasoning of Lord Atkin. The statutory provisions dealing with limitation of liability would not apply to prevent the amended rule from being enforced as part of the special contract, just as they would not apply to the original special contract when it was entered into.
The application of Hole v Garnsey to the present case
63 In my opinion Lord Atkin's observation would not assist the defendant in the present case, even apart from the effect of s.22 and its successors. The defendant is a company limited by shares, the constitution of which is for the most part indistinguishable from the constitutions of commercial companies. What makes the company unusual is that ownership of one of the specified waterfront properties is a qualification for membership and the member obtains special rights to moor a vessel, and to erect and maintain a mooring boom and pontoon. The company is empowered to grant licences to members for the use of its land, and is entitled to fees under Articles 99.3 and 102.8 when shares are transferred and when a person becomes a member. The fee is in each case $350 or such other amount as the board may determine.
64 Clearly, in my opinion, these articles when read together constitute a special contract of the kind referred to in the case law. The member's liability to pay the fees which the constitution provided for when that person became a member is enforceable against the member notwithstanding s.516 of the Corporations Law, and that is so whether the company claims the specified amount of $350 or some other amount fixed by the board of directors in the proper exercise of their powers under Article 99.3 or 102.8.
65 However, in my opinion the special contract which the landowner accepts upon becoming a member of the company does not expressly or impliedly authorise the company to amend its constitution to introduce a new pecuniary liability of the kind contained in article 103. The evidence before me provides no basis for implying a term into the special contract which is made when a person becomes a member of the defendant, by which the member authorises the company to alter its constitution to impose a new pecuniary liability to pay annual levies. I reject the defendant's submission that a power to introduce a levy must have been within contemplation from the outset, because of the need to provide funds to maintain the company's services and hence permit members to enjoy the rights conferred by Article 102(1). On the contrary, it appears from the evidence that the company has functioned from 1984 until the mid-1990s with the income which is received under the constitution in its unamended form, and in my opinion no applicant for membership would have had any reason to believe that the company may need to raise substantial additional funds and to look to its existing members for contribution of those funds.
The effect of section 22
66 Some commentators have suggested that the enactment of s.22 of the United Kingdom Act of 1929 was unnecessary, and did not change the law, having regard to the decision in Hole v Garnsey [1930] AC 472 (see, for example, Buckley on the Companies Act (14th ed., 1981, by G B Parker and M Buckley), p.68; note also Johnson v Eltham Co-operative Dairy Factory Co Ltd [1931] NZLR 216, 242). If the analysis of the law presented above is correct, it had been established well before Hole v Garnsey that if the only relationship between the shareholder and the company is the relationship of membership under the company's constitution, the statutory limitation on liability would prevent the constitution from containing any provision which imposes pecuniary liability in excess of the amount unpaid on the shares. That is so whether the provision for increased liability is part of the constitution when the shareholder becomes a member, or is introduced by subsequent amendment to the constitution. It was also established that a special contract in addition to membership could impose additional liabilities, which could be recorded in the company's constitution, if the member assented to those additional liabilities. Hole v Garnsey then establishes that if the special contract contains an implied term permitting amendments which add to the members' liabilities, the implied term is valid only if it is confined to amendments within the reasonable contemplation of the parties at the time of the contract (Lord Tomlin, Lord Atkin and Viscount Sumner) and not too vague to offend the contractual standard of certainty (Viscount Dunedin). Section 22 and its successors will have changed the law so stated if they apply to amendments authorised by an express or implied term in a special contract between the member and the company, as well as to amendments which are not grounded in special contractual provisions.
67 In my opinion, the better view is that s.22 and its successors apply to cases where there is a special contract which contains an implied term authorising the amendment which has been made. The effect of its application is to override the implied term and to declare that non-assenting members are not bound by the amendment even though they have previously entered into a special contract containing an implied term to contrary effect.
68 I reach this conclusion because of the wording of s.22, which seems to me to be unambiguous. The section expressly provided that it was not to apply in a case where the member agrees in writing, either before or after the alteration is made, to be bound thereby. Those words envisage the existence of a special contract under which the member expressly undertakes in writing to be bound by the amended article. Implied terms permitting amendments to increase the member's liability are therefore ineffective. I agree with counsel for the defendant that in consequence of this construction of s.22 and its successors, members who vote in favour of the amendment by a show of hands are not thereby bound to comply with the amended article. But I disagree with him that this conclusion is ridiculous or unlikely to have been intended.
69 Presumably the legislative intention was to remove the scope for uncertainty and argument about the effect of amendments, in light of the confusing and difficult case law. The consequence is, as the authors of Buckley on the Companies Act point out (at 69), that 'this section is not limited to alterations requiring members to subscribe for additional shares, but appears to extend to all forms of increased payments, eg increases in contributions for mutual insurance' - and, one would add, alterations which impose or increase obligations to pay annual subscriptions or administrative or maintenance levies.
70 In these cases the only practical solutions would appear to be either to draft the original article in such a way as to include within its terms a mechanism for increasing the charge (for example, by authorising the board of directors to determine the charge from time to time), or to ensure that applicants for membership sign a written application form or similar document in which they expressly agree in writing to be bound by subsequent amendments which increase the charge.
Case law after the 1929 Act
71 Subsequent cases are consistent with the analysis presented above, and tend to confirm it, though none of them is directly in point.
72 In Edmonton Country Club Ltd v Case (1974) 44 DLR (3d) 554 the Supreme Court of Canada held that an incorporated golf club formed under the Companies Act of Alberta could not validly alter its constitution to impose an annual assessment on its shareholders for the purpose of obtaining operating revenue. That conclusion was reached without the benefit of a provision equivalent to s.22 of the United Kingdom Act of 1929. Dickson J, with whom other members of the Court agreed on this point, based his conclusion on the 'basic jural principle… that a shareholder who has paid for his shares is thereafter free of pecuniary obligation in respect of those shares' (at 562). In terms of the analysis presented above, his Honour thereby confirmed that in the absence of a special contract, the statutory limitation of liability prevented the adoption of an article which imposed a pecuniary liability on holders of fully paid shares. He referred to Lord Atkin's remarks in Hole v Garnsey and explained them by reference to the 'wider range of obligations in invitum which may be validly created' under the legislation dealing with industrial and provident societies. I take this to mean that while a special contract extending to the payment of an annual subscription may be implied in the case of an industrial and provident society, there was no factual basis for doing so in the case of the golf club with which the Supreme Court was dealing. In terms of policy, Dickson J said (at 565):
'It would be a strange thing and contrary to all jurisprudence, if the purchaser of shares in a public company could be required of a sudden and against his will, at the instance of the company or a majority of its shareholders, to contribute to the operating expenses or capital needs of the company.'
73 In Johnson v Eltham Co-operative Dairy Factory Co Ltd [1931] NZLR 216 a similar principle was applied by the New Zealand Court of Appeal to an amendment to the articles of association of a co-operative dairy company, which deprived the plaintiff of part of the purchase price for dairy products which he sold to the company. At the time of the decision the New Zealand Companies Act did not contain any equivalent to s.22 of the United Kingdom Act of 1929. Again, in terms of the analysis presented above, the amendment would not have bound the plaintiff as an existing member in the absence of evidence of an express or implied term in the special contract between dairy producer and company authorising amendments of that kind.
74 In Finlayson v Carr [1978] 1 NSWLR 657 Waddell J rejected an argument that one of the rules of an unincorporated voluntary association was fundamental and could not be amended without the assent of all members. He cited Hole v Garnsey but observed that the decision was limited to the imposition of additional financial obligations by means of a general power of amendment (at 668).
75 In Gra-Ham Australia Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65 it was held that a power of amendment contained in the trust deed for a unit trust could be used to reduce the vested or accrued entitlements of unitholders who exercised their right under the deed to require the manager of the fund to repurchase their units. The Full Court of the Supreme Court of Western Australia considered whether the power of amendment, expressed in unqualified terms, was subject to an implied limitation of the kind referred to by Lords Atkin, Tomlin, Sumner and Dunedin, but held that the amendment to the trust deed would be valid even if the power of amendment was subject to an implied limitation of that kind.
Conclusion as to Article 103(1)
76 In my opinion, therefore:
(a) an article imposing pecuniary liability to pay an annual fee or levy, such as Article 103(1), is enforceable against members whose membership arises after the article is adopted, or who otherwise assent to it;
(b) the statutory limitation on liability now contained in s.516 of the Corporations Law does not render such an article invalid, because the members expressly or impliedly assent to the obligation when they become members and thereby enter into special contract in addition to their normal contract of membership;
(c) however, if such an article is adopted by amendment it cannot bind existing members, having regard to s.140(2), unless those members have individually agreed in writing to be bound, because s.140(2) applies to a modification of the constitution which increases the member's pecuniary liability to the company in any way.
Article 102(8)
77 Under Article 102(8) a person becoming a member after the date upon which the company acquired the company's land must pay a fee of $350 or such other fee as the board may determine for the rights referred to in Article 102(1) (that is, the rights to moor a vessel, to erect and maintain a mooring boom and to erect and maintain a pontoon). The defendant contends that Article 102(8) must have been intended to permit the board to impose a fee on all members from time to time, to provide funds to maintain the company's services and hence permit the members to enjoy the rights conferred by Article 102(1). I disagree with this submission. In my opinion as a matter of construction, Article 102(8) contemplates only a single fee payable by the person becoming a member at about the time admission to membership occurs. The article refers to an event, namely 'a person becoming a member' and the payment of 'a fee' for rights which the member obtains under Article 102(1) when membership arises. The whole tenor is that the article is directed towards a single set of events, namely the admission to membership, the obtaining of the rights under Article 102(1), and the consequent obligation to pay a single fee. The article does not authorise the board to impose a recurring fee upon members after they have become members.
Amendment of Pleadings
78 Paragraph 5 of the plaintiffs' amended statement of claim states:
'The plaintiffs have not, nor have any of them, whether collectively, individually or otherwise, agreed in writing to be bound by the alteration.' [That is, the alteration to the defendant's constitution which introduced Article 103(1).]
By paragraph 5 of the defence to the amended statement of claim, the defendant admitted the plaintiff's assertion.
79 On Friday 18 September 1998 the defendant applied by notice of motion to Hamilton J for expedition of the hearing. The following exchange occurred:
'HH: Is this purely a construction point? What's the point?
Jenkins [Counsel for defendant]: There is a construction point in relation to s180, subs.3.
HH: Is it purely a construction point?
Jenkins: Yes.
HH: How long will it take?
Jenkins: Probably a day.
Young [Counsel for plaintiffs]: If it is only to be a construction point and each of the plaintiffs allege that they haven't consented to the amendment, if that's not going to be in issue then I would have thought it could have been finished in less than a day.
Jenkins: Even if there was a factual issue about that it wouldn't take very long to resolve because s180 requires the consent to be in writing.'
His Honour ordered that the proceedings be expedited and directed, inter alia, that the parties deliver to one another a written outline of the propositions of fact and law to be contended for at the hearing.
80 The plaintiffs' contentions of fact, submitted to the Court on 19 October 1998, asserted that none of the plaintiffs had agreed in writing to be bound by the alteration of the defendant's constitution to include Article 103(1). The defendant's contentions of fact, which were dated 19 October 1998, stated:
'7. It is asserted on the part of the plaintiffs and it is agreed by the defendant that:
(a) the plaintiffs became members of the defendant before 7 June 1995; and
(b) none of the plaintiffs has agreed in writing to be bound by the modification in respect of Article 103(1) of the defendant's Articles of Association.'
Thus, as late as two days before the hearing of the matter on 21 October 1998, the defendant admitted that none of the plaintiffs had agreed in writing to be bound by Article 103(1).
81 According to evidence tendered by the defendant at the hearing, the board of directors of the defendant sent a report to the defendant's members prior to a special general meeting of members held on 25 June 1998. The report informed members that according to senior counsel's advice, a determination of the matter should not be overly expensive nor lengthy, if the matter could be expedited. The report said "It is anticipated the actual court proceedings could take somewhere between half to one day". The minutes of the meeting of 25 June 1998 indicate that some concern was expressed at the meeting about the cost of the proceedings to the defendant. The secretary of the company informed the meeting that in senior counsel's opinion the matter was projected to be a half to one day hearing, and made a personal estimate of costs on that basis.
82 After discussion, the meeting passed a resolution noting the litigation, resolving to defend it, instructing the directors to proceed accordingly, and to make every effort to expedite the matter and seek an early hearing and determination.
83 All of this implies that in all probability, the plaintiffs prepared for the hearing on 21 October 1998 on the basis that the defendant's admission would stand and it would not be necessary to lead to evidence as to whether any of them had agreed in writing to be bound by Article 103(1); and further, the members of the defendant who voted for the resolution of 25 June 1998 did so in reliance on a representation that the likely length of the hearing would be a half to one day and that costs would be determined on that basis.
84 Counsel for the defendant indicated, at the commencement of the hearing on 21 October 1998, that the defendant wished to apply to amend the defence by withdrawing its admission that none of the plaintiffs had agreed in writing to Article 103(1). He said the defendant now claimed that some of the plaintiffs (eventually specified as the third to the twelfth, the fifteenth and the twentieth plaintiffs) had in fact agreed in writing. His explanation for seeking a last minute amendment to the pleadings on a matter of central importance was that until very recently, the view had been taken that the words in s140(2), "agrees in writing to be bound", envisaged a single written consent and would not extend to an exchange of letters and cheques. The defendants' legal advisers have recently revised this opinion. No explanation was offered as to why the change of opinion occurred as late as it evidently did.
85 Since the application to amend would not need to be dealt with if the defendant were to be successful in its contentions on the law and the construction of the articles, and given that counsel for the plaintiffs submitted to me that if leave to amend were granted, the case would be a much longer one, I suggested to counsel for the defendant, and he agreed, that the application to amend be merely foreshadowed at that stage. I indicated to counsel for the plaintiffs that I would grant the plaintiffs leave to adduce further evidence on the question of consent if I were to grant the application for leave to amend after completion of the main body of the case. On this basis, I proceeded to hear the case and then to hear submissions on the application for leave to amend, and I reserved my judgment on both matters.
86 The defendant tendered evidence for the limited purpose of the application to amend. The evidence shows that some of the plaintiffs have made no payments by way of levy, while others have made one or more payments. The evidence also shows that the fifteenth plaintiff, Mr Massey, and the twentieth plaintiff, Mrs Coops, exchanged correspondence with the defendant. Though the positions which they expressed in their correspondence were not identical, broadly speaking they objected to payment on various grounds although they did pay some money under pressure from the defendant, who threatened legal proceedings against each of them. Counsel for the defendant indicated that if granted leave, the defendant would submit that the correspondence amounted to an agreement in writing to be bound by Article 103(1).
87 It is not appropriate for me to form a final view on that submission, since the matter has not been fully argued and there will almost certainly be other evidence if leave is granted. However, simply on the basis of a review the material tendered in evidence, I am inclined to regard as implausible the claim that, taken as a whole, the correspondence involving those two plaintiffs demonstrates an agreement in writing by each of them to be bound by Article 103(1). More significantly for present purposes, perusal of this evidence indicates that the circumstances of each of the 20 plaintiffs will be different from the circumstances of every other. Even confining the issue to twelve of the twenty plaintiffs, as the defendant proposes to do, it will be necessary to investigate all twelve separate sets of circumstances and reach a conclusion on each of twelve sets of facts. Counsel for the plaintiffs submits that if the question of consent is put in issue, he will need to lead a substantial additional amount of evidence and he estimates that the hearing of the issues could last for two or three days.
88 One must approach an application for leave to amend pleadings, even at a late stage, in light of the liberal approach set out by the High Court of Australia in State of Queensland v J L Holdings Pty Ltd (1997) 141 ALR 353. However, the cases indicate that a somewhat stricter approach is required where the amendment will withdraw an admission: Coopers Brewery Ltd v Panfida Foods Ltd (1992) 26 NSWLR 738. In the end, while the Court must not allow considerations of efficient case management to prevail over considerations of justice and fairness, the Court has a wide discretion to consider all circumstances relevant to the achievement of justice in the instant case. In the present case, it is difficult to have sympathy with the defendant's application for leave to amend. The very pleading now sought to be amended was confirmed less than 48 hours before the hearing, and there is no explanation for the defendant's last minute change of heart, other than a change of legal opinion which might and arguably should have occurred, if at all, at an earlier time. Expedition of the case was granted in reliance on the defendant's assertion that the case would be no more than a one day case. If leave to amend is granted it is likely that the hearing will be a significantly longer one, and while no doubt the directors of the defendant have authority to commit the company to such a course, the evidence indicates (as mentioned above) that the members voted to support the proposal for the company to defend the action on the basis that the case would be no more than a one day case.
89 However, giving full weight to all those circumstances, it still seems to me that it would be inappropriate to bind the defendant to declaratory orders which resolve the question of consent against the defendant solely in reliance on a pleading which the defendant now wishes to withdraw. I can meet the plaintiffs' legitimate complaints about amendment by refusing the application for leave to amend, while at the same time meeting the defendant's desire not to be hoisted on the petard of a pleading from which it now resiles, by limiting the declaratory orders so that the consent issue is not resolved. This would be achieved by declaring, in final resolution of the present proceedings, that the plaintiffs are not bound to pay a levy fixed under Article 103(1) except in the case of a plaintiff who has agreed in writing to be bound by the alteration which adopted Article 103(1). In other words, the declaratory relief would resolve the question of law as to the meaning of s140(2)(b), while expressly not resolving the questions of fact and law as to whether any agreement in writing has been given.
90 An obvious disadvantage of my doing so is that the obligation of each individual plaintiff to pay the levy is, to a degree, left unresolved. On the other hand, the plaintiffs as a group will have obtained a judgment on the questions of law and construction which they wished to resolve by these proceedings. The question of consent must be determined on an individual basis, and in my opinion that issue is best determined in differently constituted proceedings. There is evidence to indicate that the defendant has already taken proceedings in the Local Court for recovery of levies alleged to be due. If the defendant wishes to assert against an individual plaintiff that a levy is due because the defendant has agreed in writing to be bound by Article 103(1), that issue could be resolved in Local Court proceedings against the individual concerned for the recovery of the alleged debt. Consequently, if I refuse leave to amend but make declaratory orders which leave the question of consent at large, I will not exclude the defendant from the opportunity to assert in more appropriate proceedings that consent has been given.
Orders
91 I therefore propose to make declaratory orders with respect to Article 102(8) in terms of orders 2 and 3 of the plaintiffs' amended statement of claim, and make a declaratory order with respect to Article 103(1) along the lines of order 1 in the amended statement of claim, while adding some such words as "unless in the case of any plaintiff, that plaintiff has agreed in writing to be bound by the modification of the defendant's constitution whereby Article 103(1) was adopted".
92 I shall ask counsel for the plaintiffs and the defendant to prepare draft short minutes of orders to reflect these intentions, to give them a chance to influence the drafting of the orders.
93 Since the plaintiffs have been successful in the proceedings as pleaded, and they have also been successful in opposing the defendant's application for leave to amend the defence, I am strongly disposed to make an order for costs in their favour. However, I shall hear counsel's submissions, if any, on the question of costs.