Facts and findings concerning the Company and the proposed share transfers
7 The Company was formed on 9 June 1970. It holds valuable assets including a portfolio of listed public company shares and a rural property known as Marila Park. Some documents prepared in the 1970s refer to folio numbers in the Company's share register, but the evidence before me indicates that the register, if it ever existed, cannot now be located. According to an historical company extract produced by the Australian Securities and Investments Commission on 25 November 1998, the issued share capital comprises 32 ordinary shares and 7,000 cumulative preference shares; all of the cumulative preference shares and two of the ordinary shares (which I shall describe together as 'the Estate Shares') are held beneficially by 'the Estate of John McPherson Drummond'; and the plaintiffs and the defendant each beneficially hold ten ordinary shares.
8 The evidence includes a copy of the memorandum and articles of association of the Company. J M and Elaine Drummond signed the memorandum as subscribers for one ordinary share each. Article 5 authorises the directors to issue shares with such preferred or other rights as the directors, subject to any ordinary resolution of the company, may determine. Article 10 gives every person whose name is entered as a member in the register of members an entitlement to receive a share certificate. Article 22 says that any member may transfer all or any of his shares by instrument in writing in common form or in the form approved by the directors. By article 25 the directors are empowered, but not required, to decline to register any transfer of shares unless, inter alia, the instrument of transfer is deposited together with the certificate of the shares to which it relates and such other evidence as the directors may reasonably require to verify the right of the transferor to make the transfer and the due execution of the instrument of transfer. By article 26 a person entitled to transfer a share in consequence of the death of a member is empowered to transfer the share to another member or certain other listed persons. Otherwise, the transfer of shares is subject to rights of pre-emption set out in article 28. By article 27 the directors are given the absolute discretion without assigning any reason, to refuse to register any transfer to a person of whom they do not approve. Article 30 provides that in the case of the death of a member, the legal personal representative is the only person recognised by the company as having any title to the shares, and by article 31 any person entitled to a share in consequence of the death of a member may upon producing appropriate evidence be registered or have his nominee registered as a member, but the directors have the same discretion to decline to register a transmission as they would have in the case of a transfer of the share.
9 Article 49 empowers any director to convene an extraordinary general meeting, and such a meeting may also be convened by requisitionists as provided by the Companies Act 1961 (NSW). Article 73 empowers the shareholders in general meeting to increase or reduce the number of directors by ordinary resolution, and article 75 empowers the shareholders in general meeting to remove any director and appoint a replacement, by ordinary resolution.
10 The evidence also includes a copy of a minute of an extraordinary general meeting of the shareholders of the Company held on 3 September 1970, at which several special resolutions were passed. One resolution converted 7,000 ordinary shares into cumulative preference shares, and set out the rights of the preference shareholders. The preference shares were not expressed to be redeemable, and the rights attaching to them varied during and after the lifetime of Edith Ethel Drummond, the mother of J M Drummond. Another special resolution of the same date amended the articles of association by providing that Edith Ethel Drummond and J M Drummond would be joint governing directors and setting out their powers. As far as the evidence in this case goes, the memorandum and articles of the Company remained in this form at all relevant later times.
11 During his lifetime J M Drummond was a director of the Company. The defendant was appointed secretary in 1979 and a director in 1983, and continued in those roles at all later relevant times. The Company was deregistered in 1991 for failure to lodge annual returns, and was restored to the register in November 1994. At that time it was necessary for John to arrange for the appointment of another director and at his request, Peter consented to join the board, his appointment taking effect in October 1994. Peter remained a director at all later relevant times.
12 On 5 June 1996, at a time when the parties were already in dispute over other matters, the plaintiffs wrote to the defendant asking the defendant to execute share transfers for the Estate Shares. The letter enclosed forms of share transfers by which the plaintiffs and defendant as administrators would transfer the shares from the Estate of J M Drummond to themselves as the executors of the Estate of Elaine Drummond, and would then transfer the shares as executors of the Estate of Elaine Drummond to themselves as the beneficiaries of that Estate, by transferring one third of the 7,000 preference shares to each beneficiary and transferring the remaining preference share and the two ordinary shares into the joint names of the three beneficiaries. The transfer forms were accompanied by a draft direction to be signed by the plaintiffs and defendant, addressed to themselves as administrators and executors and dealing with the distribution of the shares in this manner. The covering letter stated that it was 'not appropriate' that the shares remain registered in the name of the Estate of J M Drummond, that the matter 'needs to be tidied up' and that it would be 'in everyone's best interest to put the company's affairs on a proper footing'.
13 It seems to me that this request was a proper and reasonable one. As administrators and executors, the plaintiffs and defendant had the duty duly to administer the respective estates and after administration, to distribute the assets to the beneficiaries: generally, see J H G Sunnucks, J G Ross-Martyn and K M Garnett, Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (17th ed, 1993), p 934. In the present case, the practical effect of the duty was that they ought cause title to the Estate Shares to be transferred to the beneficiaries of the Estate of Elaine Drummond. It is true, as the defendant asserts, that the distribution of the shares did not affect the control of the Company, since the plaintiffs already had ten each of the remaining 30 ordinary shares. Nonetheless, in my opinion, it was appropriate for them to seek to regularise the position, particularly having regard to the history of irregular administration of the Company's affairs. The fact that the distribution of the shares would not affect voting control of the Company was no justification for failing to attend to the due administration of the estates.
14 The defendant's solicitors eventually responded on 22 August 1996. They referred to article 25 which, they said, 'require[d] the production of the share certificates before the transfer may be registered in the share register'. This is plainly wrong, since article 25 merely gave the directors a discretion to refuse to register a transfer in the absence of the share certificate. The letter asked the plaintiffs' solicitors to forward duly executed share transfers and share certificates, to be dealt with by their client 'as a director of' the Company. It would obviously have been impossible for the plaintiffs to produce 'duly executed' share transfers unless the defendant signed them as administrator and executor respectively. The letter pointed out that the inventory of the Estate of Elaine Drummond did not specifically identify the shares as being an asset of the Estate, and asserted that it would be necessary to apply to 'amend the Probate as granted' so as to permit a subsequent transfer from that Estate. Again, this was plainly wrong, since item 7 of the inventory of the Estate of Elaine Drummond referred to an 'Interest in Deceased Estate' and noted that as the date of her death Elaine Drummond had not had any of the assets of the Estate of J M Drummond transferred to her. Therefore at the time of her death, Elaine Drummond had a right in personam to compel the administrators of the Estate of J M Drummond to attend to the due administration of the estate, the nature of that right being described in the inventory. The letter proceeded to claim, again wrongly, that it would be necessary for the Company to issue certificates in the name of the Elaine Drummond before any subsequent transfer may be approved and registered in favour of the beneficiaries. The letter concluded that legal proceedings would inappropriate and premature and the defendant would seek to have them struck out with costs.
15 On every significant point the letter of 22 August 1996 was wrong in law. Further, the letter proceeded on the basis that the defendant had no active duty to investigate the true position with respect to the shareholdings in the Company, notwithstanding that he was a director and secretary of the Company and an administrator and executor of the two estates respectively, as well as the person most closely involved in the affairs of the Company and the person who had (as I shall point out) signed annual returns which represented that the Estate Shares were held by the Estate of J M Drummond. In fact the defendant had a clear positive duty of inquiry, to which I shall return.
16 Either the author of the letter was ignorant of important legal principles or the letter was a reckless or deceptive attempt to stand in the way of the plaintiffs' proper request to their fellow administrator and executor to discharge their common duty to complete the administration of the two estates. The immediate author of the letter was the defendant's solicitor, but the defendant admitted in evidence that he prepared a draft of that letter and settled its contents with the solicitor. The defendant is a barrister-at-law who practises, amongst other areas, in commercial law, and so the letter of 22 August 1996 reflects very poorly on him personally.
17 In their letter of 11 September 1996 the defendant's solicitors compounded the errors which they and their client had previously made. They claimed that their earlier letter had 'clearly' stated the effect of article 25, namely that the directors may decline to register a transfer of shares in the absence of the certificate, and they said 'our client did not, nor does it assert that such production was mandatory'. And yet the letter of 22 August 1996 had purported to note that article 25 required the production of the share certificate before the transfer may be registered, and stated that 'in the absence of the relevant share certificates the transfers cannot be registered if executed'.
18 The letter of 11 September 1996 asserted that the defendant had not refused to transfer the shares, but had merely sought production of the necessary evidence to establish that J M Drummond was the registered holder. The letter claimed that the plaintiffs had no material to establish that the 7,000 preference shares were ever in fact issued to J M Drummond, and that a director would be in breach of his fiduciary duty to the Company to register a share transfer where there exists no evidence to support the alleged entitlement to the shares. Again, this assertion is wrong in law, as I shall explain more fully later. In my opinion the defendant's fiduciary duty to the Company as a director was to make reasonable and proper inquiries to clear up the uncertainty which he claimed to have arisen notwithstanding his continued endorsement of annual returns which represented that the shares existed and were held by the Estate of J M Drummond. The letter reiterated that in the defendant's opinion any proceedings would be inappropriate and premature and the defendant would move to have them struck out.
19 The defendant sought to explain his attitude to the transfer of shares in his affidavit and oral evidence at the hearing. He said that until he received the request by his brother and sister for share transfers, he assumed that the Estate Shares had been properly issued and belonged to the Estate of J M Drummond because his father had told him so on several occasions. Relying on those statements, he was principally responsible for preparing the inventory of assets on the basis of which letters of administration cta were issued to him and the plaintiffs in respect of their father's estate. The inventory showed the Estate Shares as belonging to J M Drummond. He said that at some time after the plaintiffs wrote to him on 5 June 1996, he examined the memorandum and articles of association of the Company and noticed that his father had subscribed for only one share, the other share being originally held by his mother. He was unable to locate any share register or other documentation which would establish that the preference shares were in fact issued to Edith Drummond or transferred to J M Drummond, or any similar evidence to show the transfer of one ordinary share from Elaine Drummond to J M Drummond, or to show the issue of ten ordinary shares to the plaintiffs and himself. He did, however, find a tax return for 1982 which stated that he and the plaintiffs each held ten ordinary shares and that J M Drummond held the Estate Shares.
20 The defendant's investigation of the shareholdings of the Company was within a very limited compass. It appears that he looked through the papers which he possessed with respect to his father's and mother's affairs. He said he undertook an examination of the books and records of the Company but it is not clear that it extended beyond the papers in his possession. The Company's accountant during the period from 1983 until March 1994 was Mr G J Newman. The defendant replaced Mr Newman with Nelson Thomas & Co, Chartered Accountants, in 1994, after he discovered that the Company had been deregistered. While Mr Newman was no longer acting for the Company in 1996, it was open to the defendant to inquire whether Mr Newman had any relevant corporate records, but he did not do so. He had previously written a letter to Mr Newman on 27 May 1994 which he described in his affidavit of 14 December 1998 as a request 'that he return to me all the records held by him on behalf of' the Company. But on examination, that letter merely asked for specified documents to permit the defendant to prepare his personal tax return, including 'documents in relation to dividend receipts' and 'books and records in respect to the operation of 'Marila Park'', but not the Company's minutes books, registers or corporate records.
21 Further, it was open to the defendant to conduct a search of public records of the Company held by the Australian Securities and Investments Commission, including microfiche records of the Registrar of Companies, but he did not do so.
22 The defendant's evidence is that since the investigations which he made were unsuccessful, the doubt which had been created by his discovery of the memorandum and articles of association remained and he therefore declined to execute share transfers in the absence of evidence which would remove his doubt. This is not a plausible explanation for his refusal to co-operate with his co-executors. An ordinary prudent person, let alone a barrister, would have realised that one of the original subscribers may have transferred her shares and that the Company's constitution made provision for the issue of new shares. Prudence would then require that any queries be pursued by proper investigation from those most likely to have relevant information - the Company's accountant at the time and the Commission. Quite apart from the duty which he had as legal personal representative, director and secretary, the defendant's failure to pursue any such inquiries renders implausible his evidence that he developed a doubt about the status and ownership of the Estate Shares.
23 On 25 March 1997, some months after the commencement of these proceedings, the plaintiffs' solicitors wrote to the defendant's solicitors proposing a round-table conference and mediation but insisting that the proper administration of the estates required registration of the share transfers as a prerequisite to any settlement conference. The letter gave the defendant the opportunity to consent to the transfer of the shares without penalty as to costs, but he did not do so.
24 Shortly before the hearing and in accordance with my pre-trial directions, the plaintiffs served a chronology and bundle of documents on the defendant. The documents included the historical company extract of 25 November 1998 to which I have referred, a bundle of photocopy returns tabbed 'Records of the Registrar of Companies', and some copies of documents tabbed 'Drummond Investments Pty Ltd - Other Corporate Records'.
25 The records of the Registrar of Companies were obtained by search of the public records presently maintained by the Australian Securities and Investments Commission. The Commission, formerly known as the Australian Securities Commission, is the successor to the National Companies and Securities Commission and the Corporate Affairs Commission of New South Wales, which in turn was the successor to the Registrar of Companies of New South Wales. The records of the Australian Securities and Investments Commission include records of documents filed with the predecessor entities.
26 The 'Other Corporate Records' were obtained by the plaintiffs from Mr Newman, the Company's former accountant, within the two months preceding the hearing. There was no obstacle to the defendant obtaining both sets of documents at a much earlier stage.
27 The defendant's evidence is that the documents were served on his counsel on 10 December 1998 and he had the opportunity to examine them in counsel's chambers on Sunday 13 December 1998, two days before the commencement of the hearing. At no time prior to 10 December 1998 had the plaintiffs informed him, directly or through legal advisers, that these documents were in the plaintiffs' possession. The defendant said that when he examined the documents he concluded that they established that the Estate Shares were properly to be considered as part of the Estate of J M Drummond. He therefore agreed to execute transfers of the shares as sought by the plaintiffs, subject to an adjustment of the order in which the holders of the two ordinary shares were to be recorded.
28 The records of the Registrar of Companies in the tender bundle of documents relate to the Company for the period 1970 to 1979, supplemented by ASIC records from 1990 to 1997. The 'other corporate records' relate to the Company for the period from 1970 to 1975. The former category of records (which I shall call the 'public records') indicates that:
· an ordinary share was allotted to each of J M and Elaine Drummond upon the company's formation in June 1970, they being the subscribers to the memorandum;
· an additional 7,030 ordinary shares were allotted on 3 September 1970, 7,000 to Edith Ethel Drummond and 30 to J M Drummond;
· in the 1970 annual return of the Company J M Drummond was said to hold 31 ordinary shares in trust for Edith, Peter, John and Robyn, and Edith was said to hold one ordinary share and 7,000 cumulative preference shares;
· in the annual return for 1971 Edith's shares were recorded as held by 'Estate of the late Edith Drummond' (she having died in September 1971);
· in the annual return for 1972 all of the 7,032 shares were recorded as held by J M Drummond in trust for Peter, John and Robyn, and according to later annual returns that situation continued until at least 1979;
· the 1990 annual return recorded that the same number of shares was on issue, but 10 ordinary shares were held by each of John, Peter and Robyn, with the remaining two ordinary shares and 7,000 cumulative preference shares held by 'the Estate of Drummond, John McPherson', and those holdings were repeated in the annual returns for the years 1991 to 1997 inclusive;
· the annual returns up to 1979 were signed by J M and Elaine Drummond as directors, while the annual returns for 1990 to 1993 inclusive were signed by the defendant, in each case on 1 September 1994;
· on 8 November 1994 the Company was restored to the register after a period of deregistration;
· the annual returns for 1994 and 1995, showing the shareholding information noted above, were signed by the defendant on 2 February and 29 December 1995 respectively, and the annual returns for 1996 and 1997 showing the same information were lodged electronically.
29 The 'other corporate records' which are in evidence provide some corroboration of the public records. Some unsigned minutes of a meeting of directors of the Company on 3 September 1970 indicate that Elaine transferred her subscriber's ordinary share to Edith Drummond and J M Drummond declared a trust in favour of Edith Drummond over the other ordinary share which was registered in his name. Some copies of correspondence indicate that the trust referred to in the annual returns during the 1970s was probably a trust of only 30 of the issued shares, J M Drummond holding 10 shares for each of his children John, Peter and Robyn.
30 While the evidence of public and other corporate records is not complete nor entirely clear on some matters, it appears to me to establish that 7,032 shares of the Company were issued; the two ordinary subscriber shares were transferred and transmitted but eventually were held by J M Drummond; the 7,000 cumulative preference shares were also eventually held by J M Drummond; and the remaining 30 ordinary shares were at some point transferred or transmitted to each of the plaintiffs and the defendant in parcels of 10 shares.
31 ASIC's historical company extract issued on 25 November 1998 helps to overcome doubts which one might otherwise have about these conclusions, for it clearly states that the plaintiffs and the defendant each hold ten ordinary shares beneficially, while two ordinary shares and 7,000 cumulative preference shares are held by 'the Estate of Drummond, John McPherson'. The significance of the ASIC extract is explained by s 1274B(2) of the Corporations Law, which states:
'In a proceeding in a court, a writing that purports to have been prepared by the Commission is admissible as prima facie evidence of the matter stated in so much of the writing as sets out what purports to be information obtained by the Commission, by using a data processor, from the national database. In other words, the writing is proof of such a matter in the absence of evidence to the contrary.'
32 The historical company extract is a writing that purports to have been prepared by the Commission. It begins with the words 'Section 1274B This extract has been prepared by the Australian Securities and Investments Commission from information it obtained, by using a data processor, from the national database.' It follows that the historical company extract is prima facie evidence of, inter alia, the number of shares on issue and the identity of the shareholders in the Company. The earlier records of the Registrar of Companies and the other corporate records corroborate the information about shareholdings contained in the extract.
33 Taken together, all this evidence was sufficient to justify a decision by the executors to execute share transfers in order to distribute the shares to the beneficiaries of the Estate of Elaine Drummond.