Kraus v J.G. Lloyd Pty. Ltd. [2003] NSWCA 212 | Case summary

Kraus v J.G. Lloyd Pty. Ltd. [2003] NSWCA 212 | Case summary | Zoe

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Monday 4 August 2003 MASSEY & ANOR. V. WALES & ORS. MASSEY & ANOR. V. COONEY & ANOR. Judgment 1 MEAGHER JA: I agree with Hodgson JA. 2 BEAZLEY JA: I agree with Hodgson JA. 3 HODGSON JA: On 14 September 2001, proceedings No. 4586 of 2001 in the Equity Division were commenced by solicitors Massey Bailey in the name of Zimmerman Holdings Pty. Ltd. (ZH) against John Wales, Downunder Pty. Limited and Eli Barel. A fourth defendant, Damiz Pty. Limited was added by amendment on 26 September 2001. Two further defendants, Isaac Barel and Dennis Conney were added later. A Statement of Claim filed 23 October 2001 joined Yaqob Ragwan and Baruch Rajwan as second and third plaintiffs. 4 On 28 September 2001, a statutory demand was served on ZH by Dennis Cooney, and on 17 October 2001, proceedings No. 5093 of 2001 in the Equity Division were commenced by Massey Bailey in the name of ZH against Mr. Cooney, seeking to set aside that statutory demand. 5 On 22 February 2002, Eli Barel commenced proceedings No. 1639 of 2002 in the Equity Division seeking to wind up ZH on the ground of oppression and on the just and equitable ground. 6 On 5 March 2002, Yaqob Rajwan filed a Notice of Motion in proceedings No. 4586 of 2001 seeking leaving to intervene in those proceedings for the purpose of taking responsibility of behalf of ZH for those proceedings (Corporations Act s.236). 7 On 3 April 2002, Mr. Cooney filed a Notice of Motion in proceedings No. 5093 of 2001 challenging the retainer of Massey Bailey, and seeking an order that the proceedings be dismissed as incompetent and an order that Massey Bailey pay Mr. Cooney's costs of the proceedings. 8 That Notice of Motion was part-heard by Master McLaughlin on 3 and 4 April 2002, and then adjourned to 18 April 2002. On 18 April 2002, ZH (or Massey Bailey on its behalf) sought an adjournment until after a meeting of shareholders of ZH, proposed to be held on 6 May 2002. That application was refused, and Master McLaughlin completed the hearing and reserved his decision. 9 On 3 May 2002, Master McLaughlin delivered his reserved judgment, in which he dismissed the proceedings No. 5093 of 2001 as incompetent, and ordered Massey Bailey to pay Mr. Cooney's costs of those proceedings. 10 At a meeting of shareholders of ZH on 6 May 2002, a resolution was carried in the following terms: Ratification of the appointment of Massey Bailey, Solicitors as solicitors for Zimmerman Holdings Pty. Limited in relation to the proceedings numbered 4586 of 2001, 5093 of 2001, 1636 of 2002 and 1639 of 2002 issued in the Supreme Court and proceedings No.1437 of 2001 in the District Court. 11 Between 6 May 2002 and 17 May 2002, three Notices of Motion were filed by various defendants in proceedings No.4586 of 2001, seeking orders that the proceedings be dismissed as incompetent and that Massey Bailey pay the defendants' costs of those proceedings; and on 16 May 2002, Massey Bailey filed a Notice of Motion in proceedings No.4586 of 2001 for orders pursuant to s.1322(4) of the Corporations Act to the effect that ZH's act in retaining Massey Bailey for the purposes of these proceedings was "not invalid". Similar orders were sought by a Notice of Motion dated 16 May 2002 by Yaqob Rajwan and Baruch Rajwan. 12 On 16, 17, 20, 22 and 23 May 2002, the various Notices of Motion in proceedings No.4586 of 2001 and No. 1639 of 2002 were heard by Bryson J. He gave the principal judgment on 22 May, and on that day he made the following orders: 1. On the sixth defendant's Notice of Motion of 6 May 2002, the first and second defendants' Notice of Motion of 10 May 2002 and the third, fourth and fifth defendants' Notice of Motion of 16 May 2002 I order that the allegations and claims of the first plaintiff be dismissed as incompetent. …

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237(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings. (2) The Court must grant the application if it is satisfied that: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b) the applicant is acting in good faith; and (c) it is in the best interests of the company that the applicant be granted leave; and (d) if the applicant is applying for leave to bring proceedings---there is a serious question to be tried; and (e) either: (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or (ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied. (3) A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that: (a) the proceedings are: (i) by the company against a third party; or (ii) by a third party against the company; and (b) the company has decided: (i) not to bring the proceedings; or (ii) not to defend the proceedings; or (iii) to discontinue, settle or compromise the proceedings; and (c) all of the directors who participated in that decision: (i) acted in good faith for a proper purpose; and (ii) did not have a material personal interest in the decision; and (iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and (iv) rationally believed that the decision was in the best interests of the company. The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold. (4) For the purposes of subsection (3): (a) a person is a third party if: (i) the company is a public company and the person is not a related party of the company; or (ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and (b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company. …

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1322(1) In this section, unless the contrary intention appears: (a) a reference to a proceeding under this Act is a reference to any proceeding whether a legal proceeding or not; and (b) a reference to a procedural irregularity includes a reference to: (i) the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation, at a joint meeting of creditors and members of a corporation or at a meeting of members of a registered scheme; and (ii) a defect, irregularity or deficiency of notice or time. (2) A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid. (3) A meeting held for the purposes of this Act, or a meeting notice of which is required to be given in accordance with the provisions of this Act, or any proceeding at such a meeting, is not invalidated only because of the accidental omission to give notice of the meeting or the non-receipt by any person of notice of the meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or ASIC, declares proceedings at the meeting to be void. (3A) If a member does not have a reasonable opportunity to participate in a meeting of members, or part of a meeting of members, held at 2 or more venues, the meeting will only be invalid on that ground if: (a) the Court is of the opinion that: (i) a substantial injustice has been caused or may be caused; and (ii) the injustice cannot be remedied by any order of the Court; and (b) the Court declares the meeting or proceeding (or that part of it) invalid. (3B) If voting rights are exercised in contravention of subsection 259D(3) (company controlling entity that holds shares in it), the meeting or the resolution on which the voting rights were exercised will only be invalid on that ground if: (a) the court is of the opinion that: (i) a substantial injustice has been caused or may be caused; and (ii) the injustice cannot be remedied by any order of the court; and (b) the court declares the meeting or resolution invalid. (4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation; (b) an order directing the rectification of any register kept by ASIC under this Act; (c) an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a); (d) an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding; and may make such consequential or ancillary orders as the Court thinks fit. (5) An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence. (6) The Court must not make an order under this section unless it is satisfied: (a) in the case of an order referred to in paragraph (4)(a): (i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature; (ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or (iii) that it is just and equitable that the order be made; and (b) in the case of an order referred to in paragraph (4)(c) - that the person subject to the civil liability concerned acted honestly; and (c) in every case - that no substantial injustice has been or is likely to be caused to any person. FIRST INSTANCE DECISIONS 25 There is now no dispute that the Rajwans did not have authority to give instructions on behalf of ZH to Massey Bailey to commence the two sets of proceedings. The primary question argued on appeal was whether the resolution of the general meeting on 6 May 2002 had the effect of ratifying those instructions, or otherwise authorising the commencement and maintenance of those proceedings. If it did not, as held by Bryson J, then questions as to the exercise of discretion by Master McLaughlin in refusing the adjournment would not arise. I will accordingly focus on Bryson J's decision. 26 When Bryson J admitted evidence of the resolution of the general meeting of ZH on 6 May 2002, he limited its use to the application made under s.1322 of the Corporations Act. He did so on the basis that the powers of the meeting of shareholders did not extend to resolving on the appointment of solicitors to conduct proceedings or resolving to bring proceedings. The primary judge said that an organ of a company cannot ratify a purported exercise of power unless that exercise of power was within the power of the ratifying organ; and that bringing legal proceedings was not within the power of the general meeting (Article 66). 27 The primary judge rejected a submission for the Rajwans that the general meeting had residual authority to use powers which might otherwise be exclusively vested in directors, as discussed in Alexander Ward & Co. Limited v. Samyang Navigation Co. Limited [1975] 1 WLR 673. 28 The primary judge also rejected an application under s.1322 of the Corporations Act on the basis that the lack of notice to Mr. Barel and the lack of a quorum were not procedural irregularities, and on the basis that it was not just and equitable that an order for validation be made. He also rejected arguments based on delay against dismissing the proceedings as incompetent. 29 He ordered that Massey Bailey pay the defendants' costs of the proceedings on an indemnity basis. He did not apparently expressly consider whether the proceedings could be effectively continued by the Rajwans, except to the extent that he dealt with, or failed to deal with, Yaqob Rajwan's application under s.236 of the Corporations Act filed on 5 March 2002. However, as I have noted, he ordered that the Rajwans pay to Massey Bailey any costs which they had to pay to the defendants.

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GROUNDS OF APPEAL 30 Massey Bailey seek to rely on the following grounds of appeal in relation to Master McLaughlin's decision: 1. That the Master erred in refusing to grant an adjournment at the hearing of the proceedings. 2. That the Master erred in failing to recognise that a company in general meeting may effect ratification retrospectively of acts which at the time when they were purported to be done were a nullity, those acts being the appointment of Baruch Rajwan as a director, the retainer of solicitors to institute proceedings on behalf of the company and the institution of those proceedings. 3. That the Master erred in dismissing the proceedings as incompetent and ordering the Appellant to pay costs of the motion and the proceedings. 4. That the Master erred in refusing to grant a stay of his Orders. 31 They seek to rely on the following of grounds of appeal in relation to Bryson J's decision: 1 On the question of whether the Appellant should pay the costs of the Respondents: a) His Honour erred in holding that the resolution of the general meeting of shareholders of Zimmerman Holdings Pty Limited ("the company") passed on 6 May 2002 did not effect a ratification by the company of the proceedings then before his Honour. b) His Honour erred in holding that only the directors of the company had the power to ratify the proceedings in circumstances where: i) the constitution of the company conferred on the directors the power to manage the business of the company and did not confer such power on the shareholders in general meeting; and ii) there was a deadlock at board level. c) His Honour should have held that, in the circumstances: i) the shareholders in general meeting had a residual power to ratify the proceedings; and ii) the shareholders in general meeting did ratify the proceedings. d) His Honour should have found that the failure to convene a meeting of the board of the company prior to 6 May 2002 was a procedural irregularity for the purposes of s 1322 of the Corporations Act 2001, which did not cause substantial injustice and should have held pursuant to s 1322(4) that the proceedings brought by the company were not invalid by reason of the failure to obtain the formal ratification of the board. e) His Honour failed to deal with or provide any reasons for not dealing with the Eighth Respondent's Notice of Motion filed 5 March 2002 seeking leave for the Eighth Respondent to intervene for the purpose of taking responsibility on behalf of the company for the proceedings. f) His Honour erred in ordering the Appellants to pay the First to Sixth Respondents' costs of the proceedings. g) His Honour erred in finding that the Appellant continued to act for the company after 3 May 2002. 32 The respondents other than Mr. Cooney have put on a Notice of Contention, relying on the following grounds: If, contrary to the principal submissions of the Sixth Opponent/Sixth Respondent it is held that the Eighth Respondent did press his application for leave to intervene pursuant to s236 and 237 of the Corporations Act, Bryson J was still correct in making final the draft orders for the dismissal of the proceedings and the costs orders against the solicitors, because: (a) the decision as to what was to be done in connection with any possible cause of action rested with the Liquidator after his appointment; (b) there was no impediment to the Liquidator prosecuting any cause of action on behalf of the company if he determined such a course was appropriate; (c) the best interests of the company would be considered by the Liquidator in connection with that decision; (d) the Eighth Respondent could not show that the company would not itself bring proceedings (as required by s237(2)(a) of the Corporations Act); (e) there had already been findings by Bryson J inconsistent with the good faith requirement contained in s237(2)(b) of the Corporations Act; (f) the proceedings in respect of which intervention was sought were a nullity; (g) the First-Fifth Opponents/Respondents were entitled to the orders which followed from their successful challenge to the solicitors' retainer. 33 Mr. Cooney has put on a similar Notice of Contention. 34 There is evidence before this Court that the costs involved in the proceedings are very substantial indeed, running into some hundreds of thousands of dollars. However, no challenge has been made to the decision of the primary judge on the ground that the defendants did not bring their applications challenging Massey Bailey's retainer promptly, but brought them at a time when enormous costs had already been incurred. I note also that there was no Notice of Contention put on relying on delay in ratification as an answer to reliance on the resolution of 6 May 2002, or upon possible changes in the financial position of the company between the original instructions and the purported ratification. Accordingly, it is not necessary for this Court to consider those matters. 35 Also, no argument was advanced to the effect that the primary judge's decision not to validate the purported directors' meeting of 28 August 2001 was incorrect. There were in substance two issues that were argued, which I will consider in turn: first, the efficacy of the purported ratification by the resolution of the general meeting on 6 May 2002; and second, the failure of the primary judge to dispose of the s.236 application.

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EFFICACY OF RATIFICATION Submissions 36 Mr. Gleeson SC for Massey Bailey submitted that the primary judge found that the Board of ZH was deadlocked; and accordingly, he submitted, the general meeting had power to act. In particular, he submitted, it had power to act in relation to the commencement of Court proceedings. In support of these propositions, he referred to the following authorities: Barron v. Potter [1914] 1 Ch. 895 at 902-3; Foster v. Foster [1916] 1 Ch. 532 at 551-2; Danish Mercantile Co. Limited v. Beaumont [1951] 1 Ch. 680 at 686-7; Alexander Ward at 427-9 and 432-3; Winthrop Investments Limited v. Winns Limited [1975] 2 NSWLR 666 at 673-4 and 682-4; Entsch v. Mr. Crocodile Pty. Limited (1990) 3 ACSR 720; Poliwka v. Heven Holdings Pty. Limited (1992) 6 WAR 505 at 518; Victoria Teachers Credit Union Limited v. KPMG [2000] 1 VR 654 at 662; Gower, The Principles of Modern Company Law, 2nd Ed. (1957) pp.127 and 508, and 6th Ed. (1997) pp.187-8 and 707; Ford's Principles of Corporations Law, par.7.130; and Palmer's Company Law, par.8.801. 37 Mr. Williams for Mr. Cooney (in proceedings No.4582 of 2001) submitted that, quite apart from any questions of the power of the general meeting, the terms of the resolution, referring as they did to the appointment of solicitors, were not adequate to ratify the commencement of proceedings. 38 Next, Mr. Williams submitted that, subject to whatever was the correct principle concerning reserve powers of the general meeting, the general meeting did not have power to take a management decision, such as commencement of court proceedings: Automatic Self-Cleansing Filter Syndicate Co. Limited v. Cunninghame [1906] 2 Ch. 34; Gramophone and Typewriter Limited v. Stanley [1908] 2 KB 89; and Quin & Astens Limited v. Salmon [1909] AC 442; Kraus v. J.G. Lloyd Pty. Limited [1965] VR 232 at 236-7. 39 Mr. Williams submitted that the general meeting had a reserve power to act, when the Board was unable to act, only where this was a matter of necessity; and where, as here, the general meeting could resolve the matter by appointing additional directors (Article 58) there was no implied or reserve power to do anything else. In any event, the content of the reserve power was in general only such that the general meeting could act by constituting a Board which was able to act. 40 Mr. Gibb SC for the other opponents adopted Mr. Williams' submissions. He pointed out that the case of Marshall's Valve Gear Co. Limited v. Manning Wardle & Co. Limited [1909] 1 Ch. 267, which suggested there was a power in the general meeting to authorise the commencement of proceedings, was decided before Quin and should be considered as overruled or disapproved by Quin. 41 Mr. Darvall for Mr. Cooney in proceedings No.5093 of 2001 also adopted Mr. Williams' submissions. He also submitted that, in any event, no error was shown in the exercise of Master McLaughlin's discretion. 42 In reply, Mr. Gleeson submitted that Article 58 did not exclude the existence of a reserve power in the general meeting: he submitted that the Articles of Association of the companies involved in cases such as Barron had a power in the general meeting to remove directors and replace; and nevertheless a reserve power was held to exist. Furthermore, he submitted, the reserve power was not limited to the appointment of new directors: this would not necessarily remove a deadlock, and in any event, unless and until it did so, in the absence of a reserve power the company would be without any organ able to exercise any management functions. The law would not countenance that this would be the situation: cf. Alexander Ward at 427-9, 432-3. An article conferring powers of management on a board of directors does not thereby prohibit any exercise of that power by the general meeting.

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Decision 43 Dealing first with Mr. Williams' first point, in my opinion the resolution that was passed sufficiently manifested an intention to ratify the commencement of proceedings. If the general meeting did have power to do this, the wording of the resolution was adequate to achieve this end. 44 Turning to the main point, I will later be referring in some detail to the text books to which we have been referred and also some of the authorities; and it will be seen that in general terms, the text writers are somewhat tentative in the views they express and somewhat uncertain as to the principles that are involved; and it will be seen that the authorities are also somewhat unclear as to the principles being applied. In those circumstances, I propose to take the course of first discussing the question on the basis of principle, and then considering whether the views I express are consistent with the authorities. 45 Where, as is usual, the Articles of Association of a company provide that the business of the company is to be managed by the directors, there is generally no power in the general meeting to make management decisions or to control or direct the board of directors in the management of the company: see Automatic Self-Cleansing, Gramophone & Typewriter and Quin. In general terms, this applies to the commencement of legal proceedings, just as to any other aspect of management of the company's business: Kraus. 46 Furthermore, there is reason to see this as a significant aspect of the contract between the members constituted by the memorandum and articles of the company. It is of significance that management of the company should be by a body of persons who each have a fiduciary duty to act in the interests of the company as a whole, rather than a body where the majority is free to favour its own interests over those of the minority. The general meeting does have power to approve transactions undertaken by directors which might otherwise be a breach of fiduciary duty; but this requires that there be full disclosure by the board to the general meeting, and it is also subject to the requirement that there not be "fraud on the minority" or oppression. Despite this power in the general meeting, it is reasonable to see the entrusting of management to a body of persons subject to fiduciary duties to act in the interests of the company, as a whole, as giving greater protection to minority shareholders than they would have if the general meeting could simply make majority decisions on management matters. 47 I have stated a general position; and there is strong authority that this is subject to a qualification to the effect that, where the board is unable or unwilling to act, the general meeting does have some kind of reserve power. In my opinion, the source of this reserve power must be considered a matter of implication or presumed intention of the members, on the basis of business efficacy or necessity. It seems reasonable to say that it could not have been the intention of the members, and could not have been the intention of the memorandum and articles of association, that the company be rendered powerless to act in circumstances where the board is unwilling or unable to act. However, especially where the articles contain an express power to appoint additional directors, as in this case, it does not seem to me reasonable to regard a deadlock arising from disagreement between the only two board members as giving rise to any general power of management, when the deadlock can be resolved by the general meeting exercising its power to appoint additional directors. It may be that, even if the articles do not provide for the appointment by general meeting of additional directors, the power which the general meeting has to remove directors and replace them with other directors would itself be sufficient to prevent the implication of any general reserve powers in the general meeting to undertake management decisions. 48 Mr. Gleeson argued that this approach does not deal with the question of management of the company in the period between the time when the deadlock or other inability or unwillingness of the Board to act arises, and the time when a newly constituted Board is able to undertake management functions. In my opinion, except in cases where there is unanimity among the members, that argument has little force, because, unless there is unanimity, a general meeting can only act when it is called with proper notice. There would thus be no period of time before the general meeting could re-constitute the Board, in which the general meeting could itself make management decisions. That may leave some circumstances in which, as a matter of business efficacy or necessity, some term could be implied by which a general meeting could exercise emergency powers, namely, where an urgent decision is required and the members are unanimous, or where no-one ready, willing and able to accept an appointment as director, so as to resolve a deadlock, could be found. 49 In the present case, it seems to me that the general meeting could have appointed additional directors on 6 May 2002; and the Board so constituted would then have had power to ratify the commencement of proceedings. However, in those circumstances the directors would have been subject to fiduciary duties to the company, and would have had to take into account that, in ratifying the commencement of proceedings, they were for the first time making the company potentially liable for very large costs to its own solicitors, and also subjecting it to the risk of very substantial costs payable to the other parties to the proceedings. The decision would also have had possible implications in relation to insolvent trading, and the situation could have been one where the fiduciary duties of the directors would have required them to have considered the interests of creditors of the company. Although no independent argument was put on the basis of Kinsela v. Russell Kinsela Pty. Limited (In Liquidation) (1986) 4 NSWLR 722, the possibility that the company may have been in a situation where interests of creditors had to be taken into account is of some significance where there is a question whether commencement of proceedings can be authorised by members, or only by directors. 50 I will now consider the main authorities that have been cited, with a view to seeing how they stand with the principles, as I understand them to be. 51 The headnote of Barron v. Potter [1914] 1 Ch. 895 stated: Where the articles of association of a company incorporated under the Companies (Consolidation) Act 1908, give to the board of directors the power of appointing an additional director, and owing to differences between the directors no board meeting can be held for the purpose, the company retains power to appoint additional directors in general meeting.

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Jenkins J went on to reject the last argument of Mr. Shelley. 56 It is implicit in that passage from the judgment of Jenkins LJ that a company in general meeting has power to ratify the commencement of legal proceedings in the company's name. However, in that case there was no issue argued as to whether the appropriate organ to ratify was the general meeting or the board of directors; and in my opinion the passage should be taken as authority only for the proposition that, in circumstances where there is a question as to whether proceedings have been properly brought on behalf of a company, it may often be appropriate to adjourn the proceedings so that such meeting or meetings can be held as will appropriately determine the will of the company. It may be that the appropriate meeting is just a meeting of the board of directors. It may be that the appropriate meeting is a general meeting which will constitute a board, which will then make a decision as to the proceedings. In so far as the passage is taken to assert that the general meeting can generally ratify the commencement of proceedings, I would respectfully disagree with it. 57 Alexander Ward was a case where proceedings were commenced by a company at a time when the company had no directors. Later, after the company went into liquidation, the liquidator purported to ratify the commencement of proceedings. The House of Lords had to consider an argument that, because at the time the proceedings were commenced the company as principal could not itself have commenced the proceedings, therefore the commencement of the proceedings was not capable of subsequent ratification by the liquidator. The articles of association of the company had the usual provision that the business of the company should be managed by directors. In dealing with this argument, Lord Hailsham at 428-9 said this: With respect, however, this argument is a non sequitur which would only become cogent if one adopted a false and question-begging meaning to the word "competent". In my opinion at the relevant time the company was fully competent either to lay arrestments or to raise proceedings in the Scottish courts. The company could have done so either by appointing directors or as I think by authorising proceedings in general meeting which, in the absence of an effective board, has a residual authority to use the company's powers. It had not taken, and did not take, the steps necessary to give authority to perform the necessary action. But it was competent to have done so, and in my view it was therefore a competent principal within the meaning of the second of Wright J's three conditions.

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Lord Hailsham then referred to a passage from Gower's Modern Company Law , to which I will come later. 58 At 432, Lord Kilbrandon said this: My Lords, I must say I have the gravest doubts as to the soundness of the proposition pleaded. I am not at all convinced that, the management of a company having been confided to the directors, and the instructing of actions at law being an act of management, then, if the company has for the time no directors, it cannot during that time take steps to recover its debts. I think the article probably means no more than this, that the directors, and no one else, are responsible for the management of the company, except in the matters specifically allotted to the company in general meeting. This is a term of the contract between the shareholders and the company. But it does not mean that no act of management, such as instructing the company's solicitor, can validly be performed without the personal and explicit authority of the directors themselves. In any case I have even graver doubts whether the validity of the company's act, resting as it must on a construction of the contract with the shareholders, can in such a matter be challenged by someone whose only relationship with the company is one of indebtedness. The point, however, does not seem to, have been taken in this form in the Court of Session, and I will therefore say no more about it. 59 In so far as Lord Hailsham and Lord Kilbrandon suggest that a company, the management of whose business is given to the directors, can in general meeting authorise the commencement of proceedings, I would respectfully disagree. I note that Lord Hailsham's expression of that view is tentative, it is supported by reference to a passage from Gower, which, as will be seen, relies in part on the case of Marshall's Valve Gear referred to earlier which, as was submitted, would appear to have been substantially discredited by Quin. In my opinion, the decision in Alexander Ward is supportable on the basis that a company can be a competent principal, for the purposes of later ratification of an act purportedly done on its behalf by an unauthorised agent, even if at the time of the act it had no agent or organ immediately available to act on its behalf. To the extent that it supports a proposition that, in the absence of a competent board, a general meeting can authorise the commencement of legal proceedings, I would respectfully disagree. 60 Turning to Winthrop Investments Limited v. Winns Limited (1975) 2 NSWLR 666, the most pertinent passage is that by Samuels JA at 682-3, as follows: But there are, no doubt, circumstances in which the shareholders in general meeting may exercise powers vested in the directors. I exclude from consideration the effect of any doctrine of residual powers which, as I understand it, contends that the shareholders may still act in areas of decision which the articles prima facie exclude from their ambit. I need not decide whether any such doctrine exists, or, if it does, whether the present circumstances would attract its application. If it does exist it would enable the shareholders to make their own decision in place of a decision by the directors. It looks to an original decision by the general meeting, and not to a resolution approving a decision to be taken by the directors. So it has no operation in this case. Nor indeed, and for the same reason, has the principle that the shareholders have more clearly defined default powers, so that if "for some reason the board cannot or will not exercise the powers vested in them, the general meeting may do so": Gower, op. cit., p. 136. Examples of action by the shareholders on this ground are said to be the existence of a deadlock on the board: Barron v. Potter, where Warrington J. observed: "For practical purposes there is no board of directors at all."; or the absence of an effective quorum as in Foster v. Foster, where the board "owing to internal friction and faction" was unable to appoint a managing director. Peterson J. applied Barron v. Potter and held that the directors being unable to exercise the powers conferred upon them by the articles, the company in general meeting could make the appointment. Apart from Quin & Axtens Ltd. v. Salmon, the other cases which Gower cites in support of his proposition are strictly examples of ratification. Neither Grant v. United Kingdom Switchback Railways Co. nor Irvine v. Union Bank of Australia seem to me to illuminate what the learned author means when he exemplifies a board which "will not" exercise its powers. Certainly, I would suppose that, if the directors for some reason refuse to act, so that, to borrow the words of Cotton L.J. in Isle of Wight Railway Co. v. Tahourdin, "the business of the company" is at a deadlock, the shareholders could themselves intervene.

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All these instances are remote from the present situation, and the cases which establish them do not authorize the resolutions in suit as the product of some general supervisory power in the general meeting. No such power exists. The shareholders may have ultimate control, because they can alter the articles or remove the directors; but they cannot interfere in the conduct of the company's business where management, as here, is vested in the board. The general meeting has power to intervene to resolve a deadlock, other than one produced by the application of power secured by the articles, e.g. Quin & Axtens case which prevents the company's business from being carried on at all; and it has power to ratify an act of the directors done in breach of their duty, or to authorize the doing of an act which would be in breach of duty. In each of the last two cases the shareholders are waiving their right to object or avoid: see e.g. Foster v. Foster, a passage questioned by Williams J. in Grant's case, but apparently approved in the Harlowe's Nominees case. But they have no general power to transact the company's business, or to give effective directions about its management. As Jordan C.J. said in Clifton v. Mount Morgan Ltd.: "But there is no universal rule that shareholders in general meeting may by ordinary resolution bind or represent the company with respect to anything and everything." 61 It will be noted that Samuels JA does not decide whether a wide doctrine of residual powers exists: my view is that it does not. The remainder of the passage is entirely consistent with the views I have expressed. 62 I do not think there is anything in the other cases referred to by Mr. Gleeson that conflicts with what I have said; and what I have said is positively supported by Kraus. 63 Turning to the text books, the second edition of Gower, at p.127, contains the following paragraph: It seems that if for some reason the directors cannot or will not exercise the powers vested in them, the general meeting may do so. On this ground, action by the general meeting has been held effective where there was a deadlock on the board and where an effective quorum could not be obtained. Moreover, although the general meeting cannot restrain the directors from conducting actions in the name of the company, it still seems to be the law (as laid down in Marshall's Valve Gear Co. v. Manning, Wardle & Co.) that the general meeting can commence proceedings on behalf of the company if the directors fail to do so. These exceptions are convenient, but difficult to reconcile in principle with the strict theory of a division of powers. Their exact limits are not entirely clear. They can hardly mean that, although the members cannot restrain positive action by the directors, they can always take action if the directors have resolved against it. There must, it is submitted, normally be a failure by the directors validly to exercise their discretion; only then will their discretionary powers revert to the members. 64 There are footnotes referring to Barron v. Potter and Foster v. Foster. The footnote to the last sentence is as follows: But anomalously this does not seem to apply when it is a question of commencing legal proceedings on behalf of the company. Though the general meeting cannot interfere with the directors' decision to take proceedings (Shaw & Sons (Salford), Ltd. v. Shaw, supra) it can, apparently, reverse a decision by the directors not to take proceedings: see further, Chap. 25, infra. But quaere whether this latter rule is not limited to infra-corporate disputes. 65 I have already expressed the view that the Marshall's Valve Gear case was discredited by Quin; and in so far as the passage suggests that there is a general reserve or residual power of the general meeting to make management decisions generally, I would respectfully disagree with it. 66 In the same edition of Gower, at 508, there is the following statement: But, as we have seen, the general meeting is regarded as having power to act in place of the board if, for any reason, the board cannot function. If, therefore, a proper quorum cannot be obtained at a directors meeting or there is deadlock on the board, the general meeting may act instead.

Kraus v J.G. Lloyd Pty. Ltd.

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