Mills v Mills [1938] HCA 4

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actuated Neilson Mills wasa desire to get arrears of back pay to which he was entitled in 1929. He did not draw it then, but when he thought the reserves were large he put it to a general meeting which agreed to his taking it in 1936. There was no concealment of the foundation of the new stud by Neilson Mills. In fact he advertised it as founded on the Uardry stock, and it is an advantage to the parent stock to have subsidiary stocks in existence which are founded on it. The trial judge found that the conduct of Neilson Mills was bona fide throughout the whole transaction. The actual scheme of distribution of bonus shares was found by Lowe J. to have been honestly arrived at, and the resolution did not give Neilson Mills a majority of voting power. Neilson Mills was not unaware that the amendment would advantage him, but such advantage was only incidental to his main purpose to advantage the company (Australian Metropolitan Life Assurance Oo. Ltd. v. Ure (1); Gramophone and Typewriter Ltd. v. Stanley (2); Salmon v. Quin & Aatens Ltd. (3) ; Hirsche v. Sims (4)). The last case draws a distinction which should be drawn in the present case. Mills has been put by the testator in the position in which his interest and his duty must conflict. What Mills wanted to do was to distribute the reserve ; this was what he set out to do, and it could not be done without the bonus shares. Jt was the bonus shares that advantaged Mills, but the court is concerned only with the primary intention. Abbots- ford Hotel Ltd. v. Kingham (5), Punt v. Symons & Co. Ltd. (6), Fraser v. Whalley (7) and Piercy v. S. Mills & Co. Ltd. (8) were cases in which the power was exercised for an immediate purpose which was unauthorized. The greatest weight should be given to the decision of the primary judge on the question of bona fides (Richard Brady Franks Ltd. v. Price (9) ). To avoid the transaction you must find that the improper motive was what caused the conduct com- plained of (Automatic Self Cleansing Filter Syndicate Co. Ltd. v.

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Case (1) ; Palmer's Company Precedents, 12th ed. (1922), vol. 1., p. 657). The articles include a general power of directors similar to that of which in Campbell v. Rofe (2) Lord Thankerton, in delivering the decision of the Privy Council, says that their Lordships would be prepared to hold that it clearly delegated " to the directors power to do everything that the company could do except where the authority of a general meeting of the company is expressly prescribed, and that such delegation would include power to issue preference shares." The memorandum of association includes an unusual statement in relation to the issue of capital. The provision is as follows: '' Any shares of which the capital of the company may from time to time consist may be divided into classes and may be issued with any preferential, special, deferred or qualified rights, privileges or conditions attached to them according as may be pre- scribed by the articles of association of the company or duly decided upon by the company or its directors." The distinction between a due decision by the company and one by its directors seems to prelude a distinction in the articles of association, which, as I read them, confer parallel powers in this matter upon the shareholders and upon the board of directors. The articles which confer power upon the board of directors are, to my mind, very clear in granting to them ample authority to increase capital and to distribute paid-up shares by way of dividend. It is not necessary to quote these articles. They are articles 25 and 26 read together, 29, 72, 74, 77, 78 and 80. It is said, however, that the prima-facie effect of these articles must be modified because of an article expressed to give control of all shares to the company and requiring that they shall be dealt with upon such terms and conditions and at such times as the company shall direct by extraordinary resolution. I shall not set out this article, which is numbered 6. The argument founded upon it is that, to give any effect to it, it is necessary to treat the express power given to the directors to issue, allot and dispose of share capital as subject to a prior extraordinary resolution fixing the terms, conditions and times or in some other way sanctioning the transaction. This

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which judges are exhorted to attempt to give effect to every part of a document and reconcile its inconsistencies. When the drafts- man put in the very clear powers of the directors, I have not the least doubt that he was led to do so by a desire that the directors should have these powers unqualified and unfettered by any con- dition precedent to their exercise. When he put in art. 6, I have similarly no doubt that he was guided by the opinion that it would be a good thing if by extraordinary resolution the shareholders could exercise the power that that article specified. He may well have perceived that by its exercise the shareholders might overrule or restrain in anticipation the action of the directors, but I do not think that he ever dreamt that the directors could not move in the exercise of their particular power until the shareholders allowed them. In other words, these powers are parallel powers. Accord- ingly, I think that the directors were armed with the necessary power to create, allot and issue the bonus shares. The validity of the directors' resolution, therefore, must depend on the question whether they exercised the power in good faith for the purpose for which the power was given. This question is not unlike that with which we dealt in Richard Brady Franks Ltd. v. Price (1). I repeat the observations I there made upon the criterion of validity. They are as follows : - "' The last objection to the judgment under appeal was that the power had not been exercised by the directors ' bona fide for the benefit of the company as a whole.' At the hearing before the learned judge the plaintiff accepted the onus of proving this proposition. The phrase ' bona fide for the benefit of the com- pany as a whole' no doubt tends to become a cant expression in these matters but is not yet a shibboleth. Many of the cases which illustrate this ' phrase ' relate to the alteration of articles of associa- tion by shareholders in general meeting. No court ' should consider itself fettered by the form of words, as if it were a phrase in an Act of Parliament which must be accepted and construed as it stands' (Shuttleworth vy. Cox Brothers & Co. (Maidenhead) (2) ). But the learned judge found that ' the evidence as a whole preponderates in favour of the view that in regard to the issue of debentures the

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H.C. or A. directors acted in the interests of the company and of the general - carter body of shareholders and not in the interests of the proposed deben- Muss ture holders' and found this issue of fact against the plaintiff. In Muzs. order to succeed in a case like the present the plaintiff must prove the equivalent of fraud or bad faith. In Hirsche v. Sims (1) the Earl of Selborne formulated a test which seems applicable to the present case as follows : 'If the true effect of the whole evidence is, that the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not - chargeable with dolus malus or breach of trust merely because in promoting the interest of the company they were also promoting their own.' Upon such a question an opportunity of seeing the parties concerned is a matter of special importance in arriving at a conclusion" (2). In the present case on the facts there appear to have been only two sensible purposes or reasons which could have prompted the capitalization of profits and distribution of shares. One purpose was within the power, the other was outside it. The purpose within the power was to confer upon ordinary shareholders ; a title to the fund pro tanto representing reserves of profits. The illegitimate purpose was to maintain the strength of the voting power likely to be used on the side of the directors concerned. 'The learned primary judge, Lowe J., heard at considerable length a eross- examination of the managing director and a cross-examination of : the other director who supported the resolution. Each of them swore that their reason was that first stated - the legitimate reason. The learned judge appears to me plainly to have accepted their evidence. In a desire fairly to furnish the appellant with an oppor- tunity of challenging his conclusion Lowe J. has stated his view of the attitude of the directors with some refinement. The appellant has availed himself to the full of the opportunity given to him and has made an attempt full of valiance and acumen to discover in the words of the judgment a finding that the directors' motives included a desire to increase voting strength. I am not impressed ; with the psychological subtleties which this argument attributes to the directors, and, having read the whole of the evidence and con- sidered the reasons of Lowe J. in the light thereof, I am clearly of |

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ticularly with his lawyers, because it was regarded as inadmissible on one ground or another. The picture too was blurred by a great quantity of evidence extracted in the cross-examination of Neilson Mills which, however important to the parties in view of other litiga- tion, had but a remote bearing on the issues raised in the present proceedings. But, although these are matters tending to make the account of the transaction given by Neilson Mills less coherent and satisfactory than perhaps it otherwise might have proved, they ought not to be allowed to weigh against its acceptance. Indeed, it may be said in his favour that without a full understanding of the entire course of events it would be both improper and unsafe to find that he had not acted bona fide for the purpose which he claimed. As I read the judgment of Lowe J., he found that Neilson Mills and the director supporting him had some time before decided provisionally that the reserves of profit or a large part of them should be distributed by way of dividend in cash, which meant that they would be divided amongst the ordinary shareholders, but that, because of difficulties in selling a portion of the land to taise the money or of some other difficulty, they did not carry out their intention. His Honour then found, I think, that, because his Tesignation as a trustee might mean the impairment of the complete- ness of his control of the company, Neilson Mills before actually Tesigning adopted the course of capitalizing the profits and thus appropriating them to the holders of ordinary shares. I understand his Honour to mean this when he says that the particular form which the resolution finally assumed and the time at which it was adopted were due to the resignation of Neilson Mills as a trustee of the two trusts. It is not unnatural that Neilson Mills should decide that before handing over his shares he would take the steps necessary to ensure that the ordinary shareholders would get the greater part of the accumulated profits, and, as at that time the only form in which it could be done was capitalization, the time and form of the resolution might well be said to be due to the resignation. But his Honour definitely held that the two directors thought the resolution to be in the best interests of the company and that was their main reason for passing it. Although " the best interests of the company "

Mills v Mills [1938] HCA 4 - HCA 1938 case summary — Zoe

At a glance

Court

Decision date

Before

Source

Judgment (174 paragraphs)