Cor­po­rate gov­er­nance: High Court con­firms its pow­er to cor­rect direc­tors’ inno­cent mistakes

In Brief

In a recent case the High Court has acknowl­edged that inno­cent mis­takes can hap­pen in rela­tion to cor­po­rate gov­er­nance and has unan­i­mous­ly con­firmed the breadth of the Court’s pow­er to cor­rect such mistakes.

Wein­stock v Beck ([2013] HCA 14) con­cerned a fam­i­ly busi­ness, L W Fur­ni­ture Con­sol­i­dat­ed (Aust) Pty Ltd (LWC), and a share­hold­er appli­ca­tion chal­leng­ing the pur­port­ed appoint­ment of a director.

The arti­cles of asso­ci­a­tion of LWC (Arti­cles) pro­vid­ed that any direc­tor appoint­ed to the board of direc­tors would only hold office until the next fol­low­ing annu­al gen­er­al meet­ing (AGM), and at that AGM each direc­tor would retire from office and be eli­gi­ble for re-elec­tion. The Arti­cles also gave the direc­tors the pow­er to, at any time, appoint a per­son to be a direc­tor of the Com­pa­ny, and any direc­tor so appoint­ed would also be oblig­ed to retire at the next AGM.

Ami­ram Wein­stock, who was pur­port­ing to act as sole direc­tor of LWC, appoint­ed his wife Helen, as direc­tor of LWC on 30 July 2003. Tech­ni­cal­ly, how­ev­er, Ami­ram did not have the pow­er to do this, his appoint­ment as direc­tor hav­ing expired at the AGM on 31 Decem­ber 1973. Fur­ther­more, no par­ty at the AGM held any vot­ing shares, so no share­hold­er was empow­ered to vote at an AGM.

On 10 Decem­ber 2010 Ami­ram and Helen filed an appli­ca­tion seek­ing an order that the Court exer­cise its pow­er under s 1322(4) of the Cor­po­ra­tions Act 2001 to declare that Ami­ram’s appoint­ment of Helen as a direc­tor was not invalid. Ami­ram’s sis­ter, Tamar sought orders to wind up LWC on the just and equi­table ground, on the basis that it had no direc­tors, and no means avail­able to appoint any directors.

Sec­tion 1322(4)(a) pro­vides that the Court may, make an order declar­ing that any act, mat­ter or thing pur­port­ing to have been done, in rela­tion to a cor­po­ra­tion is not invalid by rea­son of a con­tra­ven­tion of a pro­vi­sion of the Act or a pro­vi­sion of the Com­pa­ny’s con­sti­tu­tion.

At first instance the Court held that Ami­ram was a mem­ber of the com­pa­ny and a for­mer direc­tor and had act­ed as a de fac­to direc­tor for 30 years, and since there was no sub­stan­tial injus­tice to any per­son, it was just and equi­table that an order be made under s 1322(4) that the pur­port­ed appoint­ment of Helen as a direc­tor was not invalid. Tamar’s appli­ca­tion to wind up the com­pa­ny there­fore failed.

Tamar appealed to the Court of Appeal, where it was held that the pur­port­ed appoint­ment of Helen as a direc­tor was not a con­tra­ven­tion of the Arti­cles, but an attempt by Ami­ram to exer­cise a pow­er that he sim­ply did not have. Accord­ing­ly, the Court of Appeal held that the appoint­ment of Helen as a direc­tor was invalid.

Ami­ram and Helen appealed to the High Court, who unan­i­mous­ly agreed that the term ​“con­tra­ven­tion” as used in s 1322 should be inter­pret­ed wide­ly. The High Court found that the fact that Ami­ram did not have pow­er to appoint Helen as a direc­tor and could not valid­ly have been giv­en such pow­er, did not mean that the appoint­ment was invalid by rea­son of a con­tra­ven­tion of the company’s con­sti­tu­tion. In his judg­ment, French CJ empha­sised that such inno­cent errors should not under­mine the valid­i­ty of deci­sions made by cor­po­ra­tions in cas­es where there is no sub­stan­tial injus­tice to a third party.

The High Court allowed Ami­ram and Helen’s appeal and remit­ted the mat­ter back to the Supreme Court to deter­mine (1) whether an order should be made under s 1322(4) val­i­dat­ing Helen’s appoint­ment as a direc­tor; and (2) whether LWC should be would up.

Conclusion

In Wein­stock the High Court has recog­nised that cor­po­rate gov­er­nance is quite intri­cate and can pose sig­nif­i­cant dif­fi­cul­ties, and that those who own and oper­ate cor­po­ra­tions, both large and small, are not always knowl­edge­able and well-advised with regard to its intricacies. 

Where errors have occurred as a result of an inno­cent fail­ure to com­ply with pro­ce­dure as pro­vid­ed for in the Cor­po­ra­tions Act (includ­ing the Replace­able Rules) or a com­pa­ny’s con­sti­tu­tion, the Court has pow­er to declare that an act, mat­ter, thing or pro­ceed­ing done or insti­tut­ed is not invalid mere­ly because of a fail­ure to com­ply with procedure.