118 It is clear that authorisation by the informal consent of the directors of a corporation may be given within limitations. In Kinsela v Russell Kinsela Pty Limited (in liq) (1986) 4 NSWLR 722, Street CJ stated:-
"In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through that medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration."
119 In Re Duomatic Limited (supra), Buckley J heard a summons by liquidators of a company seeking, inter alia, repayment of amounts paid to directors of a company in respect of salaries on the ground that such sums had never been voted upon in general meeting.
120 The court held that the fact that a formal step had not been taken to convene a general meeting of the company was not determinative. The directors had approved the accounts of the company for the relevant financial year and had signed copies of those accounts. They had met together with the auditor of the company, who had explained to them the make-up of the aggregate figure for directors' salaries shown in the profit and loss account. Buckley J stated that a preference shareholder who had no right to receive notice or to attend to vote at a general meeting, could be in no worse position if the matter were dealt with informally by agreement between all the shareholders having voting rights than he would have been had the shareholders met together in a duly constituted general meeting.
121 In Duomatic (supra), Buckley J stated, in relation to the absence of a formal resolution by the company in a duly convened meeting:-
"It seems to me that if it had occurred to Mr Elvins and Mr East, at the time when they were considering the accounts, to take the formal step of constituting themselves a general meeting of the company and passing a formal resolution approving the payment of directors' salaries, that it would have made the position of the directors who received the remuneration, Mr Elvins and Mr Hanly, … secure, and nobody could thereafter have disputed their right to retain their remuneration. The fact that they did not take that formal step but that they nevertheless did apply their minds to the question of whether the drawings by Mr Elvins and Mr Hanly should be approved as being on account of remuneration payable to them as directors, seems to lead to the conclusion that I ought to regard their consent as being tantamount to a resolution of a general meeting of the company. In other words, I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be."
122 In Herrman v Simon (1990) 4 ACSR 81 at 83, Meagher JA, with whom Samuels and Priestley JJA agreed, cautioned that the Duomatic principle applies to formalities and not to substance, noting that it operates in circumstances where all shareholders want the same substantial result and say so, acting unanimously. Where those circumstances exist, the doctrine's operation dispenses with a failure to observe formalities. Meagher JA observed that the principle is really only one of waiver and would not apply to the destruction of rights of those who are ignorant of any relevant proposal.
123 In general terms, this principle applies where all director/shareholders are fully informed on a matter and, having duly considered it, give their unqualified consent to a course of action proposed. As noted in Sutherland (as liquidator of Sydney Appliances Pty Limited (in liq) v Robert Bosch (Aust) Pty Limited & Ors (2000) 33 ACSR 680 (Santow J), the Duomatic principle has been approved by the High Court in MYT Engineering Pty Limited v Malcon Pty Limited (1999) 162 ALR 441; 30 ACSR 705 at [9] and it can be taken to be settled law in Australia. Reference was made in Sutherland (supra) to the observations of Bowen CJ in Eq in Re Compaction Systems Pty Limited [1976] 2 NSWLR 477; (1976) 2 ACLR 135 (at 141):-
"If all the shareholders of a company are present together in a meeting, and signify their assent to a transaction which is within the powers of the company, their decision will be effective, as if a resolution to that effect had been passed at a properly constituted meeting. This may be so, notwithstanding those at the meeting thought they were conducting a directors' meeting and the necessary formalities required for the calling of a general meeting had not been observed ( In re Express Engineering Works Limited [1920] 1 Ch 466). This may also be so where those present thought they were conducting a meeting and passed a resolution, but where, in fact, the requirements of the articles or the Companies Act as to notice had not been observed ( In re Oxted Motor Co Limited [1921] 3 KB 32; In re Bailey, Hay & Co Limited [1971] 1 WLR 1357). Indeed, it has been held that provided the transaction is intra vires and honest, it is valid if all corporators assent, and that it does not matter whether assent is given at a meeting of some kind, or without a meeting, and whether it is given simultaneously or at different times and places ( Parker & Cooper Limited v Reading [1926] Ch 975). It should be added that the Privy Council in EBM Co Limited v Dominion Bank [1937] 3 All ER 555 at 566 thought it advisable to say that they found it unnecessary to express any view as to the correctness of this last decision."
124 The defendant relied upon past conduct as evidencing the consensus of all relevant parties as well as the fact and nature of the payment of dividends and the concurrence of the trustees in the arrangements established in that respect. Such conduct included the lodging of annual taxation returns and fulfilment of annual statutory reporting obligations.
125 In Re Harry Simpson & Co Pty Limited and Companies Act 1936 [1966] 2 NSWLR 445, fresh evidence concerning later events was admitted on appeal, the liquidator of the company in question having rejected a proof of debt on the ground that the amount in question was a sum due to a member of the company "in his character of member" within the meaning of the relevant provision.
126 The fresh evidence sought to be relied upon consisted of returns of income which in the relevant period had been lodged with the Commissioner of Taxation. These established, inter alia, that the trustees of the relevant settlements not only paid income tax on the dividends which were declared annually, but they also revealed that the company itself recognised in its returns to the Commissioner that the dividends had been capitalised. The evidence as to the method of treatment of the disputed dividends was relevant in determining what the parties had comprehended and agreed upon in relation to them. The evidence established that the monies in question were owing by the company to the creditor "in the character of a member" under the relevant statutory provision.
127 Mr Ireland identified two matters that he suggested limited the application of the Duomatic principle. The first was that it usually applied where there is an "overlapping" of directors and shareholders, if not a complete identity, and where the shareholders are beneficially entitled to the shares. In the present proceedings, it was observed, the shareholders (RAH No 1 and RAH No 2), as corporate entities, "would have to delegate somebody to perform that function". It was further observed that the "background" fact in the present case was the existence of the trusts and that, in earlier years, Mr and Mrs Jarrett and, in later years, Mr Milsom and Mrs Jarrett, did not hold beneficial interests in the shares of the companies.
128 These matters having been identified, Mr Ireland's submission was not that the Duomatic principle could not apply, but that, if the plaintiffs had displaced the prima facie effect suggested by minutes of meetings, then an onus fell on the defendant to make good the informal mode of validating the declaration of dividends and their payment.
129 The accounting records for RH & M and UIGI reflect decisions and actions in both declaring and paying dividends by crediting Mrs Jarrett's loan accounts and in the payment of her living expenses. The trustees' concurrence in the treatment of dividends declared by the companies but retained by them under those arrangements are seen reflected in the declarations and disclosures made in their respective taxation returns. Similarly, the returns of Mrs Jarrett manifested her consent and participation in the arrangements.
130 The documentary evidence as to the mechanism or arrangement for the payment of dividends, in my opinion, unless shown to be, in some way, falsified or as a "sham", consistently reflects consensus and mutuality from year to year as between RH & M and UIGI, the trustees and Mrs Jarrett. The pattern of conduct in this respect occurred in circumstances wherein corporate control resided in Mr and Mrs Jarrett in the earlier years and Mrs Jarrett and Mr Milsom in the latter years.
131 In terms of such "conduct", whether it be considered as the conduct of the plaintiff companies, of the trustee companies and/or the conduct of Mrs Jarrett and Mr Milsom, given the amount of retained profits in each of the relevant years and Mrs Jarrett's entitlement to receive income from the settlement trusts during her lifetime, there were no particular constraints or limitations on how dividends could be declared or paid arising from any relationship between Mrs Jarrett and her daughter, the first plaintiff.
132 Although it was contended on behalf of the plaintiffs that Mrs Jarrett procured the payments in question allegedly made without authority and that she was "in breach of duty", in that respect, there was little by way of analysis of the question of "duty" to support the contention.
133 In the Plaintiffs' Outline by way of opening (paragraph 9), it was contended that Mrs Jarrett "… had a fiduciary duty as the custodian of the assets for the ultimate beneficiary, her daughter, Alicia Jarrett …" and that the "… acquisition of … assets by the deceased was at the expense of her daughter …". The proceedings were said to have been initiated "to recover the assets of the companies which her mother illegally acquired". The Plaintiffs' Submissions in Reply (paragraph 2) similarly put forward the proposition that Mrs Jarrett:-
"… had the responsibilities of a trustee to her daughter, Alicia Jarrett (who was a minor), to preserve and protect the asset of the trust, namely, the shareholdings in the companies for their true beneficial owner … So long as she survived, Alicia Jarrett was always destined to be the beneficial owner of the assets. The deceased (her mother) was a steward of the assets with a right to receive dividend income only if and when it was legally generated. Where no dividend income was legally generated by those assets, the deceased was entitled to nothing in a particular year. The companies were entitled to retain these earnings. This is a matter entirely ignored in the defendant's submissions."
134 These submissions, with respect, somewhat elide the necessary distinction between the basis of Mrs Jarrett's entitlement to income under the settlement trusts with the concepts inherent in the submission as to breach of fiduciary duty.
135 The latter presupposes that a relevant relationship existed between Mrs Jarrett and her daughter which was, by specific conduct, breached. The existence of the necessary relationship (and the nature and purpose of that relationship) is fundamental to the scope and extent of any fiduciary obligations that arise from it: Say-dee Pty Limited v Farah Constructions Pty Limited [2005] NSWCA 309 at [158]. It is important, accordingly, to establish whether there was a relevant legal relationship between Mrs Jarrett and her daughter in the relevant years.
136 Whilst the plaintiff submitted that Mrs Jarrett was "a trustee of the assets", that expression in the context of the submission assumes rather than addresses the issues of the essential legal "relationship" and how a breach of duty on the facts of this case is said to arise, given, in particular, the absence of any allegation that the capital or corpus of the trusts has been in any way detrimentally affected. As noted earlier, at all material times, RH & M, UIGI and Elwood had adequate levels of income to pay the dividends. Each was entitled to declare and pay them and Mrs Jarrett was entitled to receive them by way of distributions from the dividend recipients.
137 In circumstances in which all disputed dividends were paid from current year profits and/or retained earnings, they were not, in my opinion, paid in breach of any obligation Mrs Jarrett owed as director of the plaintiff companies nor as a life interest beneficiary of the settlement trusts. That conclusion effectively leaves the plaintiffs' case as to an alleged misapplication of corporate assets to be determined upon the principal basis argued, namely, the claimed failure to declare dividends in accordance with the constitutions of RH & M, UIGI and Elwood.