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."