Lancedale v Heath

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4373/98 LANCEDALE HOLDINGS PTY LIMITED & ANOR v HEATH GROUP AUSTRALASIA PTY LIMITED & ANOR

JUDGMENT 1 HIS HONOUR: These proceedings relate to a parcel of 316,579 ordinary shares of 50 cents each in the capital of Heath Fielding Australia Pty Limited. The first defendant's name formerly was Heath Fielding Australia Pty Limited; it has been renamed Heath Group Australasia Pty Limited, but I use its former name. The second defendant is Heath Nominees Ltd. 2 The plaintiffs allege that the beneficial owner is the second plaintiff Mrs Wendy Langley. The defendants' position is that the shares had no economic value, and that they have now been cancelled. The plaintiffs do not accept that they had no value. In the words of Mr Andrew Clive Langley in his evidence: "….One day the shares may be worth something." 3 During negotiations the defendants' solicitors showed the plaintiffs' solicitors a "Pro-Forma Summary of the unaudited accounts" for the period ending 31 December 1997, which showed net assets at $6, 478,153, and this appears to have influenced the plaintiffs' view of what is involved in the proceedings. There is no basis on which I could make a finding about the value of the shares, except to say that they may have significant economic value. 4 In the Amended Summons the plaintiffs seek seven declarations establishing various propositions relating to dealings in the shares; and also seek orders giving effect to their propositions. The first defendant cross-claims for a debt which it says is payable in respect of the loan to acquire the shares. 5 At some date in 1992 Mr A.C. Langley, who is an Insurance Broker, commenced employment with Heath Fielding Australia in a senior executive position. By a letter of 11 January 1993 Heath Fielding Australia invited Mr A.C. Langley to participate in the Executive Share Plan which the company conducted. The company by a letter of 11 January 1993 sent him documentation, including a document of nine pages headed "Rules of the Heath Fielding Executive Share Plan." I call these the Plan Rules. The letter set out some additional rules, one requiring confidentiality and one requiring Mr Langley to enter into a Contract of Service. Mr A.C. Langley acted on this invitation by applying for shares to be issued to Lancedale Holdings Pty Limited, the first plaintiff, a private company effectively owned at all relevant times by himself, and a Family Company within the meaning of the Plan Rules. In the application for shares he agreed to an issue price of $122,368.44 payable in full on issue of the Plan Shares and requested Heath Fielding Australia to lend him the aggregate issue price to enable him to finance acquisition of the Plan Shares. He acknowledged that the Plan Shares would be issued pursuant to the Plan Rules and that they would be registered in the name of Heath Nominees and held in trust for himself. (This must be understood to mean in trust for Lancedale Holdings). Mr A.C. Langley agreed to be bound by and to comply with the Plan Rules and the Memorandum and Articles of Heath Fielding Australia. 6 Mr A.C. Langley completed a Loan Agreement in his own name for Heath Fielding Australia to lend him $122,368.44. Clause 3 limited the amount repayable: "3. REPAYMENT

3.1 Subject to the provisions of clause 3.2. the Principal Sum is repayable by the Executive -

(a) in full, upon disposal by the Executive of all his Plan Shares;

(b) in part, upon disposal by the Executive of some only of his Plan Shares, the partial repayment to bear the same proportion to the Principal Sum as the number of Plan Shares disposed of bears to the total number of Plan Shares held by the Executive immediately prior to the disposal.

3.2 If the Sale Price of any Plan Shares is less than the Issue Price, the Executive's liability to repay the Principal Sum shall be reduced by the aggregate difference between the Issue Price and the Sale Price of those Plan Shares." 7 Heath Nominees made a Declaration of Trust which established that the shares were held in trust for Lancedale Holdings. A written Contract of Service was executed. It bore date 1 January 1993 but was probably executed a little later that month. In January 1993 or soon afterwards the shares were issued to Heath Nominees. The evidence does not show the exact date on which the shares were issued to Heath Nominees, as the parties left significant documents undated and did not supply this information by evidence, but this probably happened in January 1993. Heath Nominees remained the registered holder of the shares until they were cancelled on 27 May 1998. By January 1998 or thereabouts the shares were Eligible Shares within the meaning of the Plan Rules; this was so because by then they had been held by Lancedale Holdings for more than five years. 8 The arrangements for loan finance for acquisition of the shares were contemplated by the Plan Rules. So too was the holding of shares by a Family Company and not by the Executive. 9 Mr A.C. Langley's employment ceased on 7 August 1995, and thereafter until the events of 1998 which I will set out no steps were taken to alter the beneficial ownership of the shares. 10 Rule 6 of the Plan Rules dealt with disposal of Plan Shares during employment and provided machinery, under which Heath Fielding Australia was able to buy back or arrange for the sale of Eligible Shares but was not obliged to do so. Rule 6 related only to Eligible Shares, and the shares in dispute were not Eligible Shares during Mr A.C. Langley's employment. Otherwise Rule 6 forbad disposition of Family Company shares during employment. 11 Rule 7 "Disposal of Plan Shares after termination of employment" is of high importance: "7. DISPOSAL OF PLAN SHARES AFTER TERMINATION OF EMPLOYMENT

7.1 The Company shall for a period of 60 days ("the Buy-Out Period") from the Termination Date in respect of an Executive or Family Company (as the case may be) have the right (but not the obligation) to purchase or to arrange for another person to purchase all (but not only some) of the Plan Shares of that Executive or Family Company (as the case may be), in accordance with the following provisions.

7.2 The right referred to in Rule 7.1 must be exercised by notice in writing ("Exercise Notice") served on the Executive or the Designated Executive (as the case may be) before expiry of the Buy-Out Period.

7.3 Subject to the provisions of Rule 7.4 the purchase price for the Plan Shares shall be:

(a) in respect of those Plan Shares which were Eligible Shares on the Termination Date, the higher of the Fair Value and the Issue Price;

(b) in respect of those Plan Shares which were Ineligible Shares on the Termination Date, the Issue Price.

(a) termination of the Executive or Designated Executive's services due to death, permanent disability, retirement (with the approval of the Committee) or retrenchment, all of the relevant Plan Shares shall be deemed to be Eligible Shares;

(b) the lawful summary dismissal of the Executive or Designated Executive, all of the relevant Plan Shares shall be deemed to be Ineligible Shares.

7.5 The holder of the relevant Plan Shares shall in return for the price to be paid for the Plan Shares, tender to the Company -

(a) the share scrip in relation to the Plan Shares; and

(b) a duly executed transfer form in respect of the Plan Shares

failing which the Company may cause the Plan Shares to be transferred to the Company (or other person referred to in Rule 7.1) and shall hold the price to be paid for those shares in trust for the former holder.

7.6 If the Company does not exercise its right under Rule 7.1 then, subject to the Articles of Association of the Company, the Executive or Family Company (as the case may be) may after expiry of the Buy-Out Period dispose of his or its Plan Shares to any third party." 12 Heath Fielding Australia took no action under Rule 7.1 within 60 days after Mr A.C. Langley's employment ended, and took no action of the kind indicated until 1998. 13 Rule 8 dealt with repayment of loans, but only operated unless otherwise agreed, and that subject was dealt with in Mr Langley's Loan Agreement. 14 Rule 13.1(d) "Powers and Procedures of the Committee" is also of importance: 13. POWERS AND PROCEDURES OF THE COMMITTEE

13.1 The Plan shall be administered by the Committee which shall have power to:

(a) determine appropriate procedures for administration of the Plan consistent with the Rules;

(b) resolve conclusively all questions of fact or interpretation arising in connection with the Plan or these Rules;

(c) delegate to any one or more persons for such period and on such conditions as they may determine the exercise of their powers or discretions under these Rules; and

(d) alter, modify, add to or repeal the Rules (even where such alteration, modification, addition or repeal might adversely affect existing rights or otherwise disadvantage an existing Plan participant).

13.2 The Committee shall endeavour to reach decisions by consensus. However, if a consensus cannot be achieved, decisions shall be made by majority vote." 15 Rule 16 - "Application of Rules" provided: "16. APPLICATION OF RULES

16.1 Subject to the provisions of Rule 16.2, these Rules cease to apply to Plan Shares when those Plan Shares are validly transferred away from the holder in accordance with these Rules.

16.2 These Rules continue to apply if the transferee of the Plan Shares is also an Executive or a Family Company." 16 For over two years after Mr A.C. Langley left Heath Fielding Australia's employment the shareholding was at a stand. By 1998 Mr A.C. Langley was working in a competing business. Heath Fielding Australia reported losses, there were no dividends and there was no action relating to the shares and involving Lancedale Holdings of which evidence speaks. In January 1998 Lancedale Holdings took some action which the evidence does not describe, and this led to a meeting between representatives of the parties on 12 February 1998. The meeting was followed by correspondence in which solicitors representing Lancedale Holdings recorded that Heath Fielding Australia was to give consideration to the price, if any, it was prepared to offer to purchase the shares, asked for financial information and called for the shares to be transferred to Lancedale Holdings. This call was not complied with. 17 On 19 February Heath Fielding Australia through its solicitors stated that it was interested in acquiring the shares by way of Buy-back ….as the policy of the controlling shareholder ….is that the only other persons who should hold HFA's shares are executives working for HFA". After putting some considerations affecting the value of the shares and suggesting that the fair market value was nominal, Heath Fielding Australia offered to buy back the shares for $122,368.44, which it was said would have been the price if the Buy-back arrangements under the Share Plan applied. In this offer the payment of the Buy-back Price was to be satisfied by extinguishing the loan, and any Buy-back Agreement was to be conditional on approval by shareholders pursuant to s. 206E of the Corporations Law. The Pro Forma Summary of the unaudited accounts for the period ending 31 December 1997 was furnished in support of this offer. 18 The attractiveness to Lancedale Holdings of the proposed extinguishment of the loan is qualified by the terms on which the loan was repayable; it was not repayable unless the shares were disposed of, and in that case liability to pay was reduced, in effect to the sale price. 19 The reason offered for not complying with the call to transfer the registered ownership of shares to Lancedale Holdings was that the Committee of the Share Plan required that all Plan Shares be held by Heath Nominees; this appears to reflect Rule 5.5 of the Plan Rules: "5. ACCEPTANCES

5.5 Notwithstanding anything to the contrary contained in these Rules, the Committee may require any Plan Shares issued pursuant to these Rules to be issued to and registered and held in the name of a nominee company specified by the Company." 20 On 25 February 1998 the Share Plan Committee resolved to modify the Share Plan in a number of ways pursuant to the power in Rule 13.1(d). On the face of things these amendments had a radical effect. One amendment deleted "for a period of sixty days" in Rule 7.1 and substituted "at any time"; this had the effect of extending the Buy-out Period permanently. Associated with this extension was Substituted Rule 7.6: "7.6 If the Company has not after the Termination Date sought to exercise its rights under Rule 7.1 the Executive or Family Company which holds the Plan Shares otherwise the subject of Rule 7.1 may by notice in writing served on the Company before the expiry of the Buy-Out Period require the Company to offer to acquire all of the Executive's or Family Company's (as the case may be) Plan Shares on the terms of Rules 7.3, 7.4 and 7.5". 21 The reference in Substituted Rule 7.6 to giving notice "before the expiry of the Buy-out Period" has a ridiculous aspect, as the Buy-out Period became permanent with the amendment to Rule 7.1. 22 New Rule 7.7 was added in these terms: "If the Company does not comply with its obligations under Rule 7.6 and buyback the Executive or Family Company's Plan Shares within 90 days of receiving the notice referred to in Rule 7.6, then subject to the Articles of Association of the Company the Executive or Family Company (as the case may be) may dispose of his or its Plan Shares to any third party permitted by the Committee in its absolute discretion and subject to such terms and conditions as the Committee may see fit. The Committee shall not be required to give any reasons for withholding approval to a proposed sale of Plan Shares to any transferee." 23 One effect of the interaction of New Rule 7.7 with the other Rules as amended is that the Executive or the Family Company would never obtain an unqualified entitlement to dispose of its shares; the position would permanently be at the discretion of the Committee. This is a sharp contrast to the previous situation in which, if Heath Fielding Australia did not accept the shares and pay the price in a transfer tendered by the Executive or Family Company, the Executive or Family Company became entitled to dispose of the Plan Shares to a third party. That entitlement was subject to restrictions on transfer in the Articles, and in turn the restrictions were subject to the powers of the Court under s. 1094 of the Corporations Law. 24 Heath Fielding Australia's offer of 19 February 1998 made any Buy-back Agreement conditional on approval by its shareholders pursuant to s 206E of the Corporations Law; it would seem that this condition was imposed because the shares would be cancelled. However approval by Heath Fielding Australia's directors or shareholders, under s 206E or otherwise, was not made a condition of the effectiveness of the alterations of the Plan Rules by the terms of the Share Plan Committee's resolution, and the Plan Rules impose no such condition on an alteration under Rule 13.1(d). 25 On 25 March 1998 Heath Fielding Australia, in a notice directed to Mr Langley and not to Lancedale Holdings, gave Mr Langley a purported notice of an Extraordinary General Meeting of Heath Fielding Australia to be held on Friday 17 April 1998, and an Explanatory Memorandum. Heath Fielding Australia told Mr Langley that Heath Fielding Australia had been instructed to issue the notice to all shareholders on behalf of Heath Nominees. In other correspondence the position had been put that Heath Fielding Australia was not obliged to give notices of company meetings to beneficial owners of shares, but only to Heath Nominees. The beneficial owners were not on the share register and had no right as against Heath Fielding Australia to receive notices or attend meetings. The discharge of trustee responsibilities to beneficial owners was a concern of Heath Nominees. Mr A.C. Langley was also given a Form of Direction to Heath Nominees Limited in the nature of a proxy. The resolution proposed was that the amendments made by the Plan Committee on 25 February be approved. The Explanatory Memorandum did not explain the need for approval. 26 On 7 April 1998 Lancedale Holdings sold the shares to the second plaintiff Mrs Wendy Langley, who is the wife of Mr A.C. Langley, for $100. The sale was effected by an Agreement under seal, and I regard the sale as an effectual equitable assignment of the beneficial ownership of the shares for value. However this conclusion is subject to the question of the operation of the alteration of Rule 7.1 which was made on 25 February 1998, with which I deal elsewhere. 27 On 15 April 1998 solicitors representing Lancedale Holdings and Mr A.C. Langley wrote to Heath Fielding Australia disputing that the amendments had effect or would have effect if approved, on the ground that after expiry of the Buy-Out Period the power of alteration could not be exercised to take away acquired rights; and further grounds were put forward. The same letter gave notice of the assignment of the shares, contended that the consideration of $100 was payable by Lancedale Developments to Heath Fielding Australia in accordance with the Loan Agreement and forwarded a cheque for that sum. The letter referred to the call which had been made to Heath Nominees for the share certificate and transfer, and indicated that when available these would be delivered for registration of a transfer to Mrs Wendy Langley. Notice was also directed to Heath Nominees. 28 On 19 May 1998, in a letter to Mr A.C. Langley care of Lancedale Holdings, Heath Fielding Australia gave a Buy-back Notice under Rule 7.1 in its new form at a price of $122,368.44; the notice said that the price was to be retained by Heath Fielding Australia, and that this would extinguish the loan. Heath Fielding Australia asked that Lancedale Holdings give a direction to Heath Nominees to transfer the shares to Heath Fielding Australia. Lancedale Holdings did not comply, and on 27 May 1998, Heath Fielding Australia wrote stating that it had exercised its power under Rule 7.5 and had caused the shares to be transferred to Heath Fielding Australia. The letter stated that the transfer had been approved by the Board on 27 May 1998, that the transfer had been registered, that pursuant to s 206I(3) of the Corporations Law the shares had been cancelled; and also said that the loan had been extinguished. The Transfer, Minutes and other documents which purport to carry out these transactions are in evidence. 29 Claim 1 in the Amended Summons claims a declaration which would establish that the plaintiffs are unaffected by these events because the Plan Rules in their first form were incorporated in a contract between Lancedale Holdings and Heath Fielding Australia. The contention is that there is no power to vary them so as to affect that contract. 30 Claim 2 claims a declaration that the purported acquisition of 27 May 1998 was of no effect. Claim 3 makes a similar claim about the purported cancellation of the shares. Claim 4 claims rectification of the Register under statutory powers. 31 Claim 5 claims a declaration establishing the effectiveness of the transfer of the beneficial ownership to Mrs Wendy Langley. Claim 6 claims an entitlement to discharge the loan on payment of $100. Claims 7, 8 and 9 are supplemental to these. Claim 10 claims damages arising out of the cancellation, alternatively to Claims 2, 3 and 4. 32 As a matter of language, the defendants are in a strong position because of the apparent breadth of the language in which the power of alteration is conferred by Rule 13.1(d). The defendants' position is also aided by the incorporation of the Plan Rules in the contract arising from the Application for issue for shares made by Lancedale Holdings to Heath Fielding Australia followed by their issue. Paragraph 4 of the Application acknowledged "…that the Plan Shares will be issued pursuant to the Rules of the Heath Fielding Executive Share Plan (the Plan Rules) " and an acknowledgment "…that he has read and understands the Plan Rules…". (The acknowledgment went on to say that the applicant "….understands that on his departure from the company the company will have the right, but will not be obliged, to buy-back his Plan Shares." The reference was to the rights arising on his departure, and not permanently.) Argument at the hearing related principally to the effect of Rule 13.1(d) and whether it should be interpreted in this simple way. 33 The operation of the Plan Rules is contractual; they have force because they are incorporated in the contractual relationship between a particular Executive or Family Company and Heath Fielding Australia. They do not operate in the way in which Articles of Association operate, and they are not subject to statutory powers of amendment. 34 Lancedale Holdings' property right was a beneficial interest in shares, and had its origin in the contract between Heath Fielding Australia and Lancedale Holdings which incorporated the Plan Rules and empowered action under Rule 13.1(d). To speak of Lancedale Holdings' interest as beneficial ownership of the shares is an abbreviation, accurate for most purposes, but not a complete statement of what Lancedale Holdings' interest in the shares was. A full definition of its equitable interest would refer to the whole scheme of the contractual relationship including the power of alteration and the restrictions on the right to transfer. 35 Plaintiffs' counsel contended that Rule 13.1(d) gave the Committee power to amend the general machinery of the Share Plan available from time to time for the Executive or the Family Company to take advantage of, but did not enable the Committee to modify the Rules so far as they had become part of a particular contract with an Executive or a Family Company. On this reading, the Share Plan is a standard set of provisions under which an Employee Share Acquisition Scheme Program is conducted, and those provisions may be altered, but they may only be altered up to the time when the Plan becomes part of the contractual relationship between Heath Fielding Australia and a particular Executive or Family Company. 36 The plaintiffs' counsel contended that the Committee was not at liberty to alter a contractual relationship retrospectively, that is to say was not able to alter some entitlement which had already come into existence, by an alteration made after it came into existence. Counsel pointed to the events which made the Share Plan one of the advantages accorded to Mr A.C. Langley by reason of his employment. After he had been in the employment for a period he had been given a fresh contract of which the Share Plan was part, and continued to serve for over two years until August 1995; before 1998 he had conferred every advantage on Heath Fielding Australia which he was obliged to confer and had no further obligation which he had not discharged, yet Heath Fielding Australia still had outstanding obligations and relationships of benefit to him, and it was these that the Committee chose to alter. 37 Counsel characterised the amendment as a retrospective deprivation of an accrued right to sell to a third party, and of an accrued right to beneficial ownership of the shares. 38 Where a power is conferred by a contract in language which literally appears to authorise one party to defeat contractual entitlements after they have accrued to another party, the construction of the contract should be approached with some care. I have in view the principle referred by McHugh and Gummow JJ in Bailey v New South Wales Medical Defence Union Limited (1995) 184 CLR 399 at 430 in these terms: "In the present case, the substance of the contract was to confer upon Dr Bailey, in the events that had allegedly happened during his treatment of Mr Crawford, an entitlement to indemnity in respect of the claim which might later be made upon him. In that sense, Dr Bailey acquired vested or accrued rights or interests. Consistently with general principle, a power which might be construed so as to curtail or abrogate what otherwise would be rights or interest in favour of one party to the contract is construed as operating prospectively ." 39 At Note 75 their Honours referred to Swabey v Port Darwin Gold Mining Co. (1889) 1 Meg 385 and to five other illustrations of the principle, three being decisions of the High Court itself. The illustrations to which their Honours referred show, with varying degrees of force, the general approach of Courts; they show a general approach to construction, and do not show any special legal doctrine relating to the construction of contracts. The discussion to which their Honours referred in Victrawl Pty Limited v Telstra Corporation Limited (1995) 183 CLR 595 at 620-621 relates to amending statutes, but exemplifies the general principle. 40 Rule 13.1(d) may well have been drafted with this principle under consideration, as its parenthesis appears to displace the principle. 41 Counsel pointed to some anomalies which could arise from conceivable amendments to other clauses of the Plan. It was said to be an anomaly that an amendment could extend the period of twelve months following the termination date during which competition was restrained under Rule 11. During argument I raised the possibility of an alteration regulating some subject with which the Plan Rules do not deal at all; my example of a Rule prescribing where the employee is to live was an extreme one, but less extreme examples could readily be devised. 42 Plaintiffs' counsel then contended that if the power of alteration had the breadth contended for by the defendants it would render the contract illusory; it would not be a contract at all because of the amplitude of the Committee's power over it. The argument proceeded on the assumption, not expressly articulated, that the Committee and Heath Fielding Australia are in substance the same thing. In the Share Plan the definition of Committee establishes that the Committee comprises the managing director and two nominees of Heath Fielding Australia, and this to my mind shows that the unspoken assumption was correct. 43 Counsel for the plaintiffs then contended that the contract should be construed with a view to a construction which supports its validity rather than a construction which introduces an illusory character to the contract. Counsel referred to Biotechnology v Pace (1988) 15 NSWLR 130 at 150-151. Counsel contended that Rule 13.1(d) would be effectual if on its construction it does not authorise what purportedly happened on 25 February 1998. 44 Counsel also observed that Heath Fielding Australia, the Committee and it would seem the General Meeting acted on the basis that the decision of 25 February 1998 would not have finality until the General Meeting approved, and that as the General Meeting did not approve until 23 April after the transfer to Mrs Wendy Langley, the transfer of the beneficial interest to her could not be unravelled; the alteration could not and did not purport to deal with sales which had already taken place. 45 Counsel referred me to authorities which show that the Court endeavours to determine the meaning of an ambiguous contract so as to avoid capricious, inconvenient and unjust results. He referred to the following observations of Gibbs J in Australian Broadcasting Corporation v Australasian Performing Right Association Limited (1973) 129 CLR 99 at pp109-110. The whole of the passage is important; the sentences most immediately significant are, at 109: "The court has no power to remake or amend the contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate.'" 46 Counsel contended that it would be capricious, inconvenient and unjust if Lancedale Holdings were to be told that the Committee could amend the Rules retrospectively and deprive it of its rights to sell to a third party. Plaintiffs' counsel referred to Swabey v Port Darwin Gold Mining Company, an obscurely reported decision referred to in Bailey v NSW Medical Defence Union. In Swabey's case Articles of Association had been altered to diminish the rate of Directors' remuneration. Lord Halsbury L.C. (at 386) held that an alteration in the Articles could only operate to vary the Agreement for Remuneration between a Director and the company prospectively: "A person who acts as director with those articles before him entered into a contract with a company to serve as a director, the remuneration to be at the rate contemplated by the articles. The person who does this has before him, as one of the stipulations of the contract, that it shall be possible for his employer to alter the terms upon which he is to serve, in which case he would have the option of continuing to serve, if he thought proper, at the reduced rates remuneration. Those terms, however, could be altered only as to the future. In so far as the contract on those terms had already been carried into effect, it is incapable of alteration by the company."

At 387 Lord Esher MR said: "It would be absurd to hold that one of the parties to a contract could alter it as to service already performed under it." 47 Counsel also offered examples of possible alterations which would not impact on existing rights; for example, the percentage of issued ordinary shares which could be Plan Shares prescribed at 24% by Rule 2.2. These examples were said to show that there is room for Rule 13.1(d) to have a wide operation if limited as he contended it should be. However he contended that it should not be understood that Lancedale Holdings and Mr Langley agreed to be bound by or to comply with the Plan Rules in relation to an alteration which could expropriate them years after they had complied with all their obligations. Counsel contended that an alteration could relate to and operate on Plan Rules which were to be laid before a new employee who had not yet adhered to them in a different way to their operation on the plaintiffs' accrued rights. 48 Counsel gave several illustrations of what could have been achieved in certain ways, for example by a Plan established under the Articles or by Scheme of Arrangement under s 411 of the Corporations Law as it stood in 1993. However these illustrations do not bear directly on the argument. 49 I was not referred to any ground on which, if the alteration to Rule 13.1(d) was effective, the cancellation of the shares was not effective. 50 Plaintiffs' counsel contended alternatively that the Court should regard Rule 13.1(d) as limited to administrative matters. I do not think that a limitation to administrative matters is authorised by the language used, or can be clearly implied, or if it were to be implied, that it could be readily applied. 51 Defendants' counsel stood firmly on the breadth of the language in Rule 13.1(d). In this I think he was justified. Drafting can achieve intended results, however surprising they are, if it is sufficiently clear, and I think that Rule 13.1(d) is sufficiently clear. Defendants' counsel also pointed out that there was no provision in the Articles in Swabey's case analogous to Rule 13.1(d) including its parenthesis. 52 Defendants' counsel contended that cases relating to contracts which were construed so as not to be illusory, such as Biotechnology v Pace and cases there referred to, are concerned with the situation where consideration is payable only if the promisor elected to pay it; and that they are all distinguishable for that reason. 53 In answer to the submission at para.44, defendants' counsel submitted that no condition of approval is imposed by the terms of the Committee's resolution, or in any other way, and that there is nothing to suggest that approval by an Extraordinary General Meeting was a condition of what the Committee intended to do. I hold that according to its terms the alteration of the Plan Rules took effect on its date, 25 February 1998; and that as the alteration was effectual it prevented the purported assignment to Mrs Wendy Langley from having effect. The Buy-out Period had been extended permanently before 7 April 1998, and the assignment was not authorised by but was contrary to the provisions limiting transfer under New Rule 7.7 without first going through the Notice of Procedures in Clause 7.6. Those provisions prevent the assignment from having effect. 54 Alternatively, defendants' counsel contended that it should be found that the transaction between Lancedale Holdings and Mrs Wendy Langley was not a genuine one and that Mrs Langley was under the control of Mr Langley; that the transaction had a nominal character only and was not in truth a sale, and there was no obligation to accept the $100 proceeds in discharge of the debt to Heath Fielding Australia. One of the pillars of this argument was that it was said to be strikingly anomalous that Mr Langley should sell his shares to Mrs Langley for $100 and discharge his debt to Heath Fielding Australia for $100 rather than selling them to Heath Fielding Australia for $122,638.44. However in his overall situation, including the limits of his liability under the Loan Agreement, I do not see this conduct as anomalous. As the transaction was ineffective for other reasons it is not necessary to decide the case on this issue. However I am of the view that on the evidence before me, including the oral evidence of Mr A.C. Langley, it should be found that the transaction was a genuine transaction and that Mrs Langley was not a nominee or otherwise acting under the control of Mr Langley. If there had been no alteration to Rule 7.1 the transfer to Mrs Langley would have been effectual. 55 The question whether the shares truly have value is speculative and unknown, and it was reasonable for Mr A.C. Langley and Mrs Langley to act on the basis expressed in evidence that one day the shares may be worth something. On that basis, and from the point of view of Mr Langley and Lancedale Holdings, $100 from Mrs Langley was the better offer. 56 The defendants' counsel submitted that there is a limit to the operation of Rule 13.1(d), and the limit is that it relates to matters with which the Rules deal. He said that the submission can be expressed by reference to the principles in Gambotto v. W.C.P. Ltd & Anor (1995) 182 CLR 432 and the limit is one of degree. He contended that in this case the alteration was not concerned with fundamental matters or absurdly onerous matters, but was concerned with matters which on their face are not oppressive in their formulation or operation, and are not different in kind to provisions which already have been made by the Plan Rules. He pointed out that it was not a situation where Lancedale Holdings had been entirely deprived of all opportunities to dispose of its shares, and contended that there was no abuse of the power of alteration. 57 The principles established in Gambotto relate to the amendment of Articles of Association under statutory powers and cannot, in my opinion, be applied outside the context in which they were established. In my opinion the power in Rule 13.1(d) must be exercised in good faith for the purposes for which it was conferred. However those purposes are very wide and are not limited to regard for or protection of the interests of Lancedale Holdings. 58 Nothing in the context suggests that the power of alteration existed solely for the benefit of the employer on the one hand or of the employee on the other. The power is a wide one, and can be exercised to produce advantages for the employer without going beyond the purposes of the power, just as much as it can be exercised to produce advantages for the employee. The alterations extend and modify provisions which already existed in the Rules, and the power has not, in my opinion, been exercised in a way which goes beyond the purposes of the power discernible from the Rules as a whole. 59 The power of alteration in Rule 13.1(d) is so wide as practically to put it in the hands of the Committee, and in truth of the employer, to defeat the Executive's advantages under the Share Plan. However those advantages have no other origin than the Share Plan, and the employer can decide to grant and the parties can join in contractually adopting advantages as heavily qualified as they choose. I do not see it as strange or anomalous or inconsistent with the grant of an interest in the shares that the employer should have or control an extremely wide power of alteration, and should keep a strong upper hand in influencing whether the employee really gets any benefit of substance. The parties can have a worm in their bud if they join together in contracting to do so, and the employer may not be prepared to give any advantage at all except on that basis, while the Executive may regard it as appropriate to receive it on that basis rather than to have no Share Plan and no advantage. 60 I do not see Rule 13.1(d) as entirely unlimited. There are limits arising from the limits (such as they are) of the concepts of an alteration, a modification and an addition. A purported alteration which introduced a new obligation of an entirely different kind, or a transforming alteration in an existing obligation, might be found to be beyond the concept of an alteration and beyond the powers in Rule 13.1(d). 61 The power of alteration should be approached with a predisposition not to see it as extending to deprivation of rights which have accrued under the Plan Rules; I should apply a long-established judicial predisposition to see documents which authorise alterations of rights as not operating on rights which have accrued or on property rights unless the intention that they should is clearly discernible, either from express language or necessary implication. However that approach does not in my view require me to regard the alterations made by the Committee on 25 February 1998 as beyond power. The parenthesis in paragraph (d) of Rule 13.1 expressly provides that the alteration might adversely affect existing rights, or might otherwise disadvantage an existing participant. In the absence of the parenthesis it would be difficult to uphold the alteration, but the parenthesis is there, and must be given effect. 62 If Rule 13.1(d) had the effect that the Committee was unrestricted in the alterations it could make, and could make alterations which entirely defeated any right of Lancedale Holdings, it is not clear to me that the contract incorporating the Plan Rules would be illusory for that reason. Unless and until there were an alteration which had that effect there would be real advantages for Lancedale Holdings under the Agreement, and this is no less true because they could be defeated by conduct which is entirely in the control of one party. I would not on any view class the contract as illusory in the sense that the obligations of Heath Fielding Australia were subject to reservation of an option as to performance, so as not to create a contract at all; see Placer Development Limited v The Commonwealth (1969) 121 CLR 353 at 356 (Kitto J); and the restatement of the law on this subject in Biotechnology Australia Pty Limited v Pace (1988) 15 NSWLR 130 at 150-151 (McHugh JA). See too the consideration of this subject by Emmett J in GIO v AMP Insurance Investment (1998) 29 ACSR 584 at 636-637. 63 If there were a problem with Rule 13.1(d) being illusory there would also be a problem of severance; the possible outcomes if the illusory character of Rule 13.1(d) were to destroy the whole contract could be radical and could themselves destroy the plaintiffs' position and any interest in the Plan Shares. 64 Although I approach the construction of Rule 13.1(d) with a sense that it is anomalous that the power should extend to an alteration which took away some contractual right or advantage which had already accrued to the Executive or the Family Company before the alteration was made, and with a disposition to adopt a construction in which an alteration can only operate prospectively on such a right, the parenthesis appears to me to make it completely clear that the power to make an alteration extended to allow the imposition of disadvantages on any rights of the Executive or Family Company, accrued or yet to accrue. The alterations made on 25 February 1998 appear to me to show clearly an intention actually to affect existing rights as well as to act prospectively. The power of alteration is a qualification of the grant or concession made by the employer, and must be regarded as part of any definition of what was granted. The terms of Rule 13.1(d) including the parenthesis make this sufficiently clear. 65 In the context of a pension fund and trust powers the judgment of Waddell CJ in Eq in Lock v. Westpac Banking Corporation (1991) 25 NSWLR 593 shows the nature of the limitations which may exist on a power of amendment, and also the breadth of the amendments which may yet be authorised. His Honour referred to a number of significant decisions in cases with some factual similarities. However, where a power of amendment is given to one of the contracting parties, and there is no context of a trust or of powers of a trustee, there is little room for implying limitations on the power. The terms of Rule 13(1)(d) show that an alteration may prejudice the employee and confer advantage on the employer, and this leaves little room for practical operation of limitations to exercise in good faith, for the purposes of the share plan, or for the benefit of all parties. 66 After judgment was reserved the report of the decision of the House of Lords in Lord Napier and Ettric v. R.F. Kershaw Limited [1999] 1 WLR 756 became available and I received written submissions from each party's counsel dealing with its implications. 67 That case related to a power of amendment of a Premium Trust Deed, an elaborate commercial arrangement under which moneys becoming payable to Lloyd's Names were carried to a trust fund to ensure payment of liabilities entered into on behalf of each Name. The Society of Lloyd's was trustee and had a power of amendment. The trust existed in a commercial context of protection of the insurance industry regulated by Lloyds and of enabling the industry's obligations to be met, not in any context of benefaction. Under the Trust Deed various moneys becoming payable to Names were to be carried to the Trust Fund, and the Society of Lloyd's exercised the power of amendment to extend the range of moneys so payable to certain damages. The validity of the amendments was the subject of a cross-appeal which was successful in part, for reasons stated by Lord Steyn at pp 765 to 767, affirming and in large part adopting the reasoning of Hobhouse LJ, who dissented in the Court of Appeal on this subject. 68 Hobhouse LJ in a passage adopted by Lord Steyn addressed the purpose of the deed, the contemplation of the deed and the relationship between the parties to it in deciding whether the amendment was valid: see 767D. These considerations were not raised by the terms of the clause (set out at 759C) which conferred the power of amendment. Those terms were expressed in completely general language, and Lord Steyn's address to the reasonable contemplation of the parties was not made in the course of construing the power of amendment, but in the course of applying to the exercise of the power a limit expressed thus: (at 766E): "Secondly, it is true that there is a well established line of authority which holds that a power of amendment reserved in a trust must be exercised for the purpose for which it was granted: see Hole v. Garnsey [1930] AC 472. This principle is closely linked with the general proposition that the power must not be exercised beyond the reasonable contemplation of the parties on which Nourse LJ founded his judgment. All this is hornbook law." 69 In the judgment of Hobhouse LJ in the Court of Appeal [1997] LRLR 1 at 13 this limit was expressed thus: "It was common ground between the parties both here and in the Court below that a power such as that conferred by cl.22, although unqualified in its terms - '… can be exercised only for the purpose for which it is conferred and not for any extraneous or ulterior purpose. [See Re Courage Groups Pension Schemes, [1987] 1WLR495, per Millet J at p505]' The issue was what exercise of the power was consistent with the purpose of the trust deed. It was not in dispute that the Council had acted bona fide …" 70 The authorities to which the English courts referred included Gra-Ham Australia Pty Ltd v. Perpetual Trustees WA Limited [1989] 1 WAR 65, which related to a power of amendment of a Unit Trust Deed in a commercial context, where the amendment was made by the trustee but with the approval of the unit holders, and Kearns v. Hill & Anor (1990) 21 NSWLR 107, which related to an amendment made by trustees in a context apparently of benefaction and not of commerce. 71 The Share Plan is not a trust instrument and the Committee are not trustees. It is very common to find that the manner of exercise of powers is limited by requiring that they be exercised in good faith and for the purposes for which they were conferred; sometimes this is a limitation imposed in Equity on the conduct of trustees or other persons with fiduciary responsibilities who deal with rights which exist only in Equity; and sometimes a control of that kind is implied in the terms of the instrument creating the power. Similar implications are usual for powers in public law. In my view a limitation of that kind applies to the exercise of the power of amendment in Rule 13(1)(d), but it has no practical effect in view of the width of the purposes for which the power of alteration exists and of their extension to securing and enhancing the employer's position. In my opinion there is no basis for imposing on the amendment the test applied in the Napier case, or for considering whether the amendment falls within the reasonable contemplation of parties to the Share Plan. The "reasonable contemplation" test is not a test applied in determining the meaning of the rule which created the power of amendment. I was glad to have counsels' submissions on the Napier case, which as with their earlier submissions were careful and helpful, but I have concluded that that case was determined on principles which are not presently applicable. 72 Counsel referred me to a number of authorities dealing with amendment of Articles of Association and other constitutions of incorporated and unincorporated bodies. I do not see any general principles in these cases, which largely turn on the terms of the power of amendment under consideration in each case; on the whole the cases illustrate the amplitude of powers of amendment. 73 In my opinion the plaintiff is not entitled to any of the orders claimed. 74 Defendants' counsel told me that the cross-claim does not arise if the Court accepts his primary submission that the transfer to Heath Fielding Australia of shares and their cancellation was effective, because in that case the application of the consideration would extinguish the debt. It is not necessary to address the submissions made on the cross-claim. 75 The orders are: 1. The proceedings are dismissed with costs. 2. The cross-claim is dismissed. 3. I order that each party pay its own costs of the cross-claim. *********

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