Medical Research & Compensation Foundation v Amaca Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

6538/04 - MEDICAL RESEARCH & COMPENSATION FOUNDATION v AMACA PTY LIMITED JUDGMENT 1 HIS HONOUR: These proceedings, and virtually identical proceedings 6536 of 2004 in relation to an associated company, Amaba Pty Ltd, raise the question as to the validity of a provision in the constitution of a corporation restricting or forbidding its directors from putting it into liquidation. They also raise the question as to the principles under which the Court may make an order under ss 232 and 233 of the Corporations Act, 2001 (Cth) amending a corporation's constitution. 2 A similar consideration also arises in proceedings 6540 of 2004 between the same parties and others (in which I am part heard and which have been adjourned to 31 January 2005) which is whether those proceedings which are for winding up and were commenced in apparent breach of the terms of the corporations constitution, were validly commenced. If the answer to this question is, "No", I then need to consider whether any irregularity is cured by s 1322 of that Act. 3 Article 19 of the constitution of Amaca Pty Ltd (an identical provision forms Article 18 of Amaba Pty Ltd's constitution) is as follows: "The directors or the members must not take any action in order to appoint an administrator (or similar) to, or seek to wind up (whether voluntarily or otherwise), or take any other action under Chapter 5 of the Corporations Law (as amended or replaced) concerning the Company unless: (a) at that time an administrator (or similar) may be appointed to the Company on the basis that the Company is insolvent or the Company may be wound up as being in insolvency; or (b) the directors have acted in the affairs of the Company in their own interests rather than in the interests of the members as a whole." 4 Article 1.6 of each constitution further provides that these articles may only be amended or repealed by special resolution following the receipt by either company of a report from a duly qualified actuary which confirms that there is no reasonable prospect that the company will be able to pay compensation to any person in relation to an asbestos related injury in an amount greater than the net present value of the company's assets. 5 The directors have made it clear that they consider that it is just and equitable that the company be wound up, but they also are of the view that the pre-conditions referred to in Article 19 have not occurred. 6 The next matter that I need to consider is that, pursuant to s 233 (1)(b) of the Corporations Act, 2001 an order be made that the constitution of Amaca and Amaba be modified so as to add a new sub-paragraph (c) to the Article in question to read: "or (c) the Court is of the opinion that it is just and equitable that the Company be wound up." 7 Section 136(2) and (3) of the Corporations Act is as follows: "(2) The company may modify or repeal its constitution, or a provision of its constitution, by special resolution.

(3) The company's constitution may provide that the special resolution does not have any effect unless a further requirement specified in the constitution relating to that modification or repeal has been complied with." 8 Section 136(3) first appeared in the 1981 Companies Act, in a modified form as s 76(2). The reason for its insertion would appear to be the then long standing debate as to whether what is now s 136(2) alone would prevent articles protecting or entrenching class rights from having effect. 9 Apart from the escape provided by sub-section 3, a company cannot by its articles provide that the articles are unalterable or otherwise contract out of its statutory power to alter the articles; see eg: Walker v London Tramways Company (1879) 12 Ch D 705; Malleson v National Insurance and Guarantee Corporation [1894] 1 Ch 200; Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 479, 502-3, Russell v Northern Bank Development Corporation [1992] BCLC 431 (CA (NI)); [1992] BCLC 1016; [1992] 1 WLR 588; [1992] 3 All ER 161 (HL). 10 In Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 479, 503 Dixon, J noted that the "better opinion still appears to be that the fact that to alter the article involves a breach of contract can be no more than an evidentiary consideration and does not of itself make the alteration invalid." 11 As far as I am aware, there have been no decisions on the ambit of s 136 (3) of the Corporations Act. However, Article 1.6 does not come within its purview. The present is not a situation where the resolution may be passed to alter the articles provisionally, consequent upon some later event occurring before it is effective, such as the resolution of class meetings. Article 1.6 operates as a pre-condition to the passing of the special resolution. 12 Thus, article 1.6 does not operate to prevent the repeal or modification of article 19. I will not further complicate these reasons by considering whether article 1.6 may confer some in personam rights in the shareholders against the directors. 13 However, the validity of Article 1.6 is not the key matter in this debate. 14 Section 233(1)(b) lists amongst the remedies that the court may grant if it finds what might comprehensively be referred to as "oppression" under section 232 of the Corporations Act, an order "that the company's existing constitution be modified or repealed." 15 An order under paragraph (b) is not the most common order made in cases of unfair conduct, but examples of courts employing it may be found in Re Spargos Mining NL (1990) 6 ACSR 1 and Sutherland v National Roads and Motorists' Association Ltd (2003) 47 ACSR 428. 16 The purpose of s 233(1)(b) is to allow the court to eliminate a provision in a company's constitution if such removal will remove or minimise the oppression. 17 However, putting aside obvious exceptions such as schemes of arrangement, unless there is a finding of oppression and a finding that the repeal of part of the constitution is required to deal with the oppression, there is no power in the court to modify a corporation's constitution. 18 The only matter of oppression suggested in the present case is that under section 232(d) of the Corporations Act, the affairs of the company are being conducted contrary to the interests of the members as a whole. 19 It is submitted that paragraph (d) is a separate ground for relief so that, in order to gain relief under s 233, there is no requirement of proving unfair conduct or oppression in the sense of that word as used in the older cases, eg Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 at 342, ie "burdensome, harsh and wrongful": it is enough that the affairs are being conducted contrary to the interests of the members as a whole. 20 For the purposes of these reasons, I will accept that proposition of law. 21 It is then put that it is not in the interests of the members as a whole to prevent Amaba and Amaca, in light of the significant present financial and commercial uncertainty facing each company, from seeking relief by applying to wind up the companies on the just and equitable ground. 22 I do not accept this submission. Section 232 requires that there be conduct or alternatively an act, omission or resolution on behalf of a company which is contrary to the interests of the members as a whole. 23 There is no act or omission or resolution involved in the present case. The only "conduct" complained of is the fact that there is included in the articles, the article in question. 24 "Conduct" is to be construed widely and is to include inaction and omissions as well as positive acts: Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 at 347; Re Bright Pine Mills Pty Ltd [1969] VR 1002 at 1013. However, the semantic significance of the word is that those in charge of the company are by their action or inaction bringing about an unfair situation qua the plaintiff. 25 The mere fact that there have been changed circumstances since the adoption of articles of association, even coupled with the refusal of the majority to alter the status quo, is not usually sufficient to constitute unfair conduct: Re Empire Building Ltd [1972] NZLR 683 and on appeal [1973] 1 NZLR 214 and Hadfield v Kawarra Chambers Pty Ltd (1991) 4 ACSR 225 at 227. 26 The decision of Campbell J in Sutherland v National Roads and Motorists' Association Ltd (2003) 47 ACSR 428 at first sight tells against this view. However, that decision was one where the judge held that holding an election for directors was an act of conducting the affairs of the company. 27 The same reasoning cannot support an act of putting an end to the company. 28 In any event, Sutherland's case is one where unfair conduct was conceded, so that the present point did not have to be considered by the court. Furthermore, the case is also distinguishable because of the fact that, in that case, the article was one which was originally required by the Corporations Law, but had become obsolete. 29 Where there is a small company with agreements between shareholders dehors the articles, conduct strictly in accordance with the articles may constitute conduct in the affairs of the company which is oppressive. However, ordinarily, the articles map out the playing field in which the members have decided to carry on their commercial activity and neither the provisions of the articles themselves nor action strictly in accordance with the articles can be oppressive conduct; see Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 (CA) and O'Neill v Phillips [1999] 1 WLR 1092 (HL). 30 In the present case, there is no complaint about the action or inaction of the directors. The complaint is about the presence of Article 19. That matter is not one concerning the conduct of the company. 31 Furthermore, it is difficult to define what interest is represented by the phrase "interests of the members as a whole" where there are companies structured in the manner Amaca and Amaba are structured. 32 Thus there is not the material to find statutory oppression in the present case. It follows that no order can be made under s 233(1)(b). 33 Accordingly, I must address the question as to the validity of Article 19. 34 Section 461(1)(k) of the Corporations Act authorises the court to wind up a company if it is of the opinion that it is just and equitable that the company be wound up. 35 Section 462(2) of the Corporations Act provides that, subject to the section, "any one or more of the following may apply for an order to wind up a company". A list follows including the company itself and a contributory. 36 Section 462(5) provides: "Except as permitted by this section, a person is not entitled to apply for an order to wind up a company." 37 The corollary of subsection (5) is that the persons on the list in subsection (2) have an entitlement to wind up the company. 38 Article 19 does not prevent the company from presenting process to wind up the company: it seeks to forbid the directors from causing the company so to act. In the case of members, there is, a direct command not so to act. 39 On an analogy of the reasoning set out above regarding the alteration of articles, a contract or the articles themselves cannot prevent a person from exercising rights given to that person by the Corporations Act. 40 However, in some cases, a person exercising his or her statutory rights may put himself or herself in breach of contract. In such a case, a person with standing may be able to obtain an injunction. 41 I use the words "may be able" advisedly. It is abundantly clear a contract may be breached by directors exercising their statutory powers. An obvious example is where a managing director under contract is dismissed; eg Southern Foundaries (1926) Ltd v Shirlaw [1940] AC 701 at 740-1; Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038. 42 Other more complicated shareholder agreements may be enforceable at least if the breach is in acting on the altered articles rather than by the act of alteration itself: Russell v Northern Bank Development Corporation [1992] 1 WLR 588; [1992] 3 All ER 161 (HL). With respect, this is a more accurate statement than that of Myers CJ in Eltham Co-Operative Dairy Factory Co Ltd v Johnson [1931] NZLR 216, 247 that "a company cannot alter its articles for the purposes of committing a breach of contract." 43 In Oswald v Bailey (1987) 11 NSWLR 715 at 736 et seq (followed by Kirby P in New South Wales Medical Defence Union Ltd v Crawford (1993) 31 NSWLR 469, 483-5), Priestley JA pointed out that in the case of a special contract, contractual rights might not be altered by the simple expedient of amending the articles. 44 In Bailey v NSW Medical Defence Union Ltd (1995) 184 CLR 399, 411, (the appeal from the Crawford case), Brennan CJ, Deane and Dawson, JJ said that whilst articles of association regulate the relations of members, these do not preclude a member or members concluding contracts with the company which may or may not be defined by reference to the articles. Such a contract is termed a special contract. 45 As Bailey's case shows there may be a series of identical special contracts with each of the members. However, a contract within the articles themselves or a contract with the members generally, cannot be a special contract. It is thus not necessary to explore this aspect of the law further as there is no special contract involved in the instant case. 46 There are few cases where an injunction has actually been granted. One such case is British Murac Syndicate Ltd v Alperton Rubber Co Ltd [1915] 2 Ch 186 which Gower and Davies, Modern Company Law 7th ed (Sweet & Maxwell, London, 2003) at pp 507 simply dismisses as a wrong decision by a judge who misinterpreted the authorities. Again, in Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 479, 503, Dixon J distinguished the British Murac case. 47 An interim injunction was granted in the case of a home unit company in Fischer v Easthaven Ltd [1964] NSWR 261at 265. 48 However, whatever the scope of granting injunctions to prevent breach of contract contained in articles of association, the right to obtain an injunction is an equitable right vested in certain people to whom the company owes in personam obligations. Until one of those persons moves the court for an injunction, there is no bar to the directors acting as they think appropriate, possibly subject to paying damages for breach of contract in due course. 49 It follows that whilst the scope and practical effect of Article 19 may be limited, Article 19 is not invalid. 50 The above reasons show that there is no need to invoke s 1322 of the Corporations Act. Accordingly, there is no need to consider any of the submissions made on that part of the case. 51 The above reasons dictated my view that I should allow the winding up proceedings to be commenced, notwithstanding that my attention was drawn to Article 19. 52 It follows that the relief sought cannot be granted and the proceedings must be dismissed. I make no order as to costs.

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