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THE LEGAL EFFECT OF THE MEMORANDUM AND
ARTICLES OF ASSOCIATION OF A COMPANY AFTER
THE INTRODUCTION OF THE COMPANIES AND
SECURITIES LEGISLATION (MISCELLANEOUS
AMENDMENTS) ACT 1985
by
G.A. Egert*
The memorandum and articles of association comprise the company's constituent documents. Under the Companies Code 1981 the main provision dealing with the legal effect of the memorandum and articles of association is s.78( 1). Prior to the introduction of the Companies and Securities Legislation (Miscellaneous Amendments) Act 1985's.78(1) provided as follows: Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company, and the members thereof to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles. S. 78(1) now provides as follows:^2 Subject to this Act, the memorandum and articles of a company have the effect of a contract under seal - (a) between the company and each member, (b) between the company and each officer, (c) between a member and each other member, under which each of the above-mentioned persons agrees to observe and perform the provisions of the memorandum and articles as in force for the time being so far as those provisions are applicable to that person. The broad effect of the original s.78(l) was that the memorandum and articles were intended to have contractual effect. The scope of this statutory contract has been the subject of considerable controversy both in Australia and in England.^3 The unclear wording of the Section and its predecessors has given rise to conflicting judicial interpretation. Thus, in the past it has not been entirely clear which parties were bound by the contract which the memorandum and articles constitute. Further, there has been some conflict in the cases relating to the ability of a member to enforce those articles of association which do not confer rights on him in his capacity as a member but confer rights in some outsider or private capacity. There has also been some confusion in the cases as to the extent to which
- the rule in Foss v. Harbottle^4 will defeat an individual or minority shareholders action when there has been an infraction of the statutory contract. It is not surprising then that it has
*B.A., LL.M. (Qld), Barrister-at-Law (Qld), Senior Lecturer-in-Law, Queensland Institute of Technology.
**1. Hereafter referred to as the 1985 Amending Legislation.
- This provision took effect from 31 March 1986. 3.** Beattie v. E. and F. Beattie Ltd **[1938] Ch. 708 at 721 per Lord Greene M.R.
- (1843) 2 Hare 461.**
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been said in relation to the English equivalent of the original s.78(l)^5 that 'it has been so overlaid with judicial interpretation that, on any count, it no longer means what it says and that a redrafting of it is long overdue'. 6 An early explanatory memorandum in relation to the introduction of the present s.78(l) specified that the purpose of the amendment was to clarify the law relating to the contractual status of the memorandum and articles. 7 It is intended by the writer to examine the consequences of the original Section 78(1) and then consider the effect of the new provision in order to ascertain whether the law has been clarified. It is further intended by the writer to briefly examine the relationship between s.78(l) and s.574 of the Companies Code.
1. Relationship between a Company or its Members and Non-Members Under the former s.78( 1) and its English counterpart, the courts have considered that the provisions of the articles and the memorandum do not constitute a contract binding the company or any member to a non-member because of the principle of privity of contract.^8 Hence a solicitor,^9 promoter,^10 or director^11 of a company to whom a right has been given by the articles has not been able to enforce such right upon the basis that there is a contractual relationship between himself and the company unless it could be shown that the relevant articles formed part of a contract independently of the articles and the memorandum.^12 It is thought that this principle is also applicable to debenture holders or their trustees who are entitled to appoint or remove a director under the Articles and that it should not be presumed that such a provision would be legally enforceable by such debenture holders or their trustees despite what might appear to be judicial pronouncements to the contrary in Woodlands Ltd v. Logan & Ors. 13
The terms of the new provision alter this position to a limited extent. Section 78(1 )(b) provides that the memorandum and articles of a company constitute a contract between the company and each 'officer'.^14 There is however, no provision such as that set out in Clause 40(5) of the National Companies Bill 1975 allowing outsiders, such as debenture holders or their trustees, to enforce an article to appoint or remove a director or other officer notwithstanding that such person is not a member or officer of the company. It is understood that such a provision was considered in the early stages of redrafting the former s.78(l).
2. Relationship between a Company and its Members The former s.78(l) provided that the company and members were bound by the memorandum and the articles only to the extent that they had been signed and sealed by the members, not by the company. The English counterpart of this provision is to the same effect. As a result of this unclear wording English authorities until the end of the nineteenth **5. Section 20(1), Companies Act 1948.
- L.C.B. Gower,** The Principles of Modern Company Law **, (1979) at 320.
- Explanatory Paper Companies and Securities Legislation (Miscellaneous Amendments) Bill (No.2) 1984, Business Affairs Division, Commonwealth Attorney Generals Department June 1984. at 53. 8.** Hickman v. Kent or Romnev Marsh Sheep-Breeders 'Association [ 1915] 1 Ch. 881 at 900 per Astbury J.; Forbes v. N.S. W. Trotting Club Ltd [1977] 2 N.S.W.L.R. 515 at 520 per Hutley J.A. 9. Elev v. Positive Government Security Life Assurance Co. Ltd (ISI6) 1 Ex.D. 88 (CA). 10. Re English & Colonial Produce Co. [1906] 2 Ch. 435. 11. Browne v. La Trim dad (1888) 37 Ch.D. 1; Melhado v. Porto Alegre Railway Co. (1874) L.R. 9 C P 503 12. Re New British Iron Co. **[1898] 1 Ch. 324.
- [1948] N.Z.L.R. 230. In this type of case it was suggested by Cornish J. of the New Zealand Supreme Court that enforcement by legal proceedings against the company was unnecessary, as the outsiders were able to enforce their rights by merely exercising them.
- As to the meaning of'officer' see s.78(5)** post.
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does create a contract between the members inter-se^32 The decision of Vaisey J. in Rayfield v. Hands, 33 wherein a member was allowed to enforce a pre-emption clause directly against another member without joinder of the company as a party to the proceedings, has been much touted as supporting the latter view. 34 However, the decision was qualified by the statement that such a principle 'may not be of so general an application as to extend to the articles of association of every company, for it i s... material to remember that this private company is one of that class of companies which bears a close analogy to a partnership'.^35 Although it has been correctly pointed out that there is nothing in the English equivalent of the former s.78(l) which distinguishes between the contractual effect of articles in proprietary and in public companies, 36 the fact that Vaisey J. restricted his decision to circumstances in which the company in question was analogous to a partnership means that doubt must still remain as to how far the decision can be said to support the general principle espoused. In the Australian context, the principle that the articles and the memorandum constitute a contract between the members inter-se has been accepted by implication by Latham C.J. of the High Court in Peters'American Delicacy Ltd v. Heath.^31 In more recent times, Burt J. of the West Australian Supreme Court considered the application of the principle in the case of Re Caratti Holding Co. Pty Ltd which again concerned, in part, the question of whether one member could enforce a pre-emption clause against another member. Burt J. made the following statement: The extent to which the articles can bind one member contractually to another is a matter of long-standing debate, but the weight of authority seems clearly to establish that they do have that effect, particularly when the articles confer rights on members by way of pre-emption or otherwise to acquire the shares of another member. Borland Trustee v. Steel Bros & Co. Ltd [1901] 1 Ch. 279 and Rayfield v. Hands [1960] Ch. I. 38 Although upon appeal the Privy Council upheld the judgment at first instance on a different point it impliedly accepted the principle espoused. 39
Despite these authorities it was still felt that the matter remained uncertain. 40 As a result, the terms of s.78(l)(c) now state clearly that there is a statutory contract between the members inter-se.
4. Outsiders 9 Rights Incorporated in the Articles or Memorandum of Association In relation to the English counterpart of the former s.78(l) there is authority which accepts that the provision gives the memorandum and articles contractual effect only in so far as they confer rights or obligations on the member 'in his capacity as member'^41 and that 32. Pritchard's Case (1873) 8 Ch. App. 956 at 960 per Mellish L.J.; Eley v. Positive Government Security Life Assurance Co. Ltd supra n.9. at 89 per Lord Cairns L.C.; Browne v. La Trinidad supra n.l 1 at 12 and 15 per Cotton and Lindley. JJ.; Salmon v. Quinn & Axtens Ltd [1909] 1 Ch. 311 at 318 per Farwell L.J. 33. [1960] 1 Ch. 1. 34. For example see R. Pennington, Penningtons Company Law (1985) at 67; Gower, The Principles of Modern Company Law, supra n.6 at 316. 35. Supra **n.33 at 9.
- K.W. Wedderburn, 'Company Law - Effect of Articles as Contract - Remedy against Directors' (1958)** C.LJ. 148 at 149; L.C.B. Gower, 'The Contractual Effect of Articles of Association', (1958) 21 M.L.R. 401 at 403. 37. Supra n.l9 at 480; McTiernan J. concurred with his judgment. 38. Supra n.l9 at 99. 39. Caratti Holdings Co. Pty Ltd v. Zampatti **(1978) 52 A.L.J.R. 732 at 735.
- Explanatory Paper, Companies and Securities Legislation (Miscellaneous Amendments) Bill (No. 2) 1984** supra n.7. 41. Hickman v. Kent supra n.8 at 900 per Astbury J.; Beat tie v. E. & F. Beattie Ltd [1938] 1 Ch. 708.
THE LEGAL EFFECT OF THE MEMORANDUM^49
this principle extends to cover the contract between members as well as that between members and the company. 42 It has been judicially stated that the time honoured expression 'in his capacity of member' means that a member may only enforcerightswhich are common to himself and all other members^43 and not rights which may concern him in his capacity as outsider or in some private capacity as for instance as solicitor, promoter or director.^44 Thus, in Beattie E. & F. Beattie Ltd^45 it was held that an article which provided that disputes between the company and its members must be referred to arbitration would not avail a person whose dispute was between the company and himself in his capacity as a director, even though he was also a member. Initially, in the Australian context, there was uncertainty about the application of the principle in relation to the former s.78(l). Thus, in Heron v. Port Huon Fruitgrowers' Co-operative Association Ltd Knox C.J., Gavin Duffy and Starke JJ. made the following statement: The law governing [this] contention has been the subject of very recent examination and statement by Astbury J. in Hickman v. Kent or Romney Marsh Sheep-Breeders' Association , but his opinion shows that the matter is still surrounded with a good deal of difficulty.^46 In more recent times, however, Burt J. in Re Caratti Holding Co. Pty Ltd made the following statement in support of the principle: It was said that the articles cannot as against the company or as against another member confer upon a shareholder rights in some capacity other than that of a shareholder. That as a general proposition, is now well established, Hickman's Case [1915] 1 Ch. 881, now being regarded as the leading authority.^47 In that case Burt J. held that the rights conferred upon the registered holder of a life governor's share to compulsorily acquire the shares of any other member at a sum equal to the capital paid up on the shares were conferred upon the holder in his capacity of shareholder or member. The sentiment expressed in Re Caratti Holding Co. Pty Ltd has been re-iterated in a number of other Australian cases.^48 In particular, there is a series of cases which has adopted the principle and which has suggested that the articles in a home unit company allocating rights of enjoyment of particular areas in association with the particular shares do relate to members in their capacity as such.^49 The principle of the necessity for the articles and memorandum to confer rights or obligations on the member in his capacity as member has been criticized upon a number of grounds. The first ground of criticism is that this restrictive principle has sometimes led to a strained construction of the articles by the courts. 50 Thus, in Rayfleld v. Hands 51 Vaisey J. construed an article imposing an obligation upon the directors of a company, who were also
42. London Sack & Bag Co. v. Dixon & Lugton supra n.31 at 765-766 per Scott J.; Ray field v. Hands supra n.33. 43. Beattie v. E. & F. Beattie Ltd supra **n.41 at 722 per Greene M.R.
- 44.** Hickman v. Kent or Romney Marsh Sheep-Breeders' Association supra n.8 at 900 per Astbury J. 45. Supra n.41. 46. Supra n.19 at 323. Contrast the obiter dicta of Isaacs J. at 339-340. 47. Supra n.19 at 99. 48. H.H. Halls Ltd w.Lepouris{ 1964) 65 S.R.(N.S.W.) 181 at 189, per Macfarlan J.; Forbes v. N.S. W. TrottingLtd supra n.8 at 520 per Hutley J.A. 49. Fisher v. Easthaven ( 1963) 80 W.N. (N.S. W.) 1,555; Crumpton v. Morrine Hall Pty Ltd ( 1965) N.S.W.R. 240 at 243 per Jacobs J.; Magill v. Santina Pty Ltd supra n. 19 at 1111 -1112, per Hutley J.A. and at 1113-14 per Glass J.A.; Brentwood Village Ltd v. Corporate Affairs Commission supra **n.19 at 1008-9 per McLelland J.
- S. Mayson & D. French,** A Practical Approach to Company Law , (1982) at 33; Gower, supra n.6 at 317. Cf. H. A. J. Ford, Principles of Company Law, (1982) at 59. 51. Supra n.33.
THE LEGAL EFFECT OF THE MEMORANDUM 51
shareholder, sought to restrain his removal as a director by the company in general meeting despite the fact that the Court was prepared to assume that there was a stipulation incorporated into the articles of association that he would be appointed for a fixed term. Thus, it is apparent that the legal reasoning in this trilogy of cases is inconsistent with the Hickman principle. A third ground of criticism is that, notwithstanding the Hickman principle, there has been a number of English and Australian decisions in which rights and obligations under the articles, which have not affected a member in his capacity as member, have been enforced. Thus, the Courts have allowed a shareholder-director, suing as a single shareholder or in a representative capacity^63 to enforce rights conferred by the articles upon him as a director to hold office, or to participate in management, or to exercise a veto over board decisions even though this has had the effect of allowing the enforcement of'outsider rights'.^64 The confusion which these cases have caused is well illustrated by Quin and Axtens Ltd v. Salmon ,^65 In that case the company's articles vested the general management of the company's business in the directors subject to the qualification that any resolution for the acquisition or letting of premises would be invalid if either of the two managing directors dissented therefrom. The directors passed resolutions for the letting of premises from which Salmon, one of the managing directors, dissented. Salmon, suing as a shareholder by way of representative action, sought an injunction to restrain the company acting on the resolutions. The House of Lords upheld the decision of the Court of Appeal granting an injunction and thereby indirectly allowed Salmon to enforce the right given to him as managing director in the articles to veto any resolution for the acquisition or letting of premises. The attempt by Lord Greene M.R. in Beattie v. E. & F. Beattie Ltd^66 to rationalize that case and Salmon's case by identifying the latter case as one in which 'the plaintiffs right as a member was being enforced' loses its cogency when a case like Re Standard Salt and Alkali Ltd; Ex parte Lahiff^1 is considered. In that case it was stated by Napier J. of the South Australian Supreme Court, applying the Hickman principle that an article which appointed a particular person, whether he was a member or not, as managing director for a specified period, could not be enforced against the company. Despite the abovementioned criticisms, commentators have generally supported the Hickman principle.^68 There have howevever, been some divergent views as to the construction to be applied to this provision. Thus, it has been suggested that every member of a company has a right to have the company's business conducted in accordance with the contract in the articles even if that means indirectly the enforcement of outsider rights vested either in third parties or himself, so long as he sues in his capacity as member and not in his capacity as outsider.^69 Another view postulates that outsider rights will be enforced if two conditions are fulfilled. These are that the member sues in his capacity as
- 63. A representative action is one brought on behalf of all the members of the company, except those members responsible for the alleged wrong, who, with the company, are made defendants to it. 64. Pulbrook v. Richmond Consolidated Mining Co. (1878) 9 Ch.D. 610; Imperial Hydropathic Hotel v. Hampson (1882) 23 Ch.D. 1; Quin and Axtens Ltd v. Salmon supra n. 17; Hayes v. Bristol Plant Hire [ 1957] 1 All E.R. 688; Re Richmond Gate Property Co. Ltd[ 1965] 1 W.L.R. 335; Ryan v. South Sydney Junior League Club Ltd [1 974] 3 ACLR 486. 65. Supra n. 17. 66. Supra **n.41 at 714.
- [1934] S.A.S.R. 168 at 171.
- Gower,** supra n.6 at 317-318; Pennington supra n.34 at 64-65; R. Baxt, Introduction to Company Law **(1986) at 44-5.
- K.W. Wedderburn, 'Shareholder's Rights and the rule in Foss v. Harbottle' (1957) 15** C.L.J. 193 at 212-13; K.W. Wedderburn, supra n.36 at 150-51; Gregory, supra n.55 at 531.
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member and that the enjoyment of the 'outsider-right' is incidental to the exercise by a particular organ of the company of a power vested by the companies legislation or by the company's memorandum or articles in that organ.^70 The present s.78(l) of the Companies Code provides that each of the parties to the statutory contract 'agrees to observe and perform the provisions of the memorandum and articles... so far as those provisions are applicable to that person.' The editors of CCH Australian Company Law and Practice suggest that 'there is little reason for doubting that a similar interpretation will be put on Section 78 as amended.'^71 However, another author has commented that it is unclear whether the restriction on the statutory contract that it does not confer a benefit on a member in another capacity, for example as a company's solicitor, has been removed. 72 Ford points out in his text that although the matter is not clear, this form of drafting may suggest two things: firstly, that as with the previous s.78(l), obligations imposed upon the members would only be enforceable against them in their capacity as members; secondly, that a shareholder, as long as he sues as such, could compel the company not to depart from the statutory contract even if this results indirectly in the enforcement of'outsider rights' vested in the plaintiff shareholder.^73 Thus, a provision such as that in Eley v. Positive Government Security Life Assurance Co. Ltdā¢ that a particular person should be the company's solicitor, would not affect the member in his capacity of member and could not be enforced as a contract by the company against him. In contradistinction to this, a member in this position would not necessarily be denied a remedy against the company. In accordance with cases like Quinn &Axtens Ltd v. Salmon^75 he could sue qua member to compel the company to observe the contract between it and the members that he should be employed as the solicitor of the company. Undoubtedly, this approach would protect a member from the hazardous situation of a company inserting unusual provisions in its articles which would be binding upon the member in another capacity. What is unusual or affects a member in another capacity would no doubt depend upon the genus of the company.^76 Whilst the proposal outlined by Professor Ford has merit, it is suggested by the writer that in all probability this will not be the approach adopted by the Courts. From a consideration of the views espoused it is apparent that s. 7 8(1) in this respect, is ambiguous or obscure and that, accordingly, s.5B(l) of the Companies and Securities (Interpretation and Miscellaneous Provisions) Code allows consideration to be given to certain extrinsic material in relation to the interpretation of the provision. Such material includes 'any explanatory memorandum relating to the Bill containing the provision'. 77 The explanatory memorandum, in so far as is relevant, states as follows: It is intended that the memorandum and articles will constitute a contract between the company and its members and as between the members themselves in their
70. G.D. Goldberg, 'The Enforcement of Outsider-Rights under Section 20(1) of the Companies Act 1948 (1972) 35 M.L.R. 362; G.D. Goldberg, The Controversy on the Section 20 Contract Revisited (1985) M.L.R. 158. 71. Australian Company Law and Practice, **(CCH Ltd) at 9905.
- H.L.F. French,** Guide to Company Law , (1987) at 47. Contrast the earlier view of the same author in 'Liberalisation of Standing to Sue for Non-Observance of Memorandum and Articles', (1985) 6 Co. Lawyer **283.
- H.A.J. Ford,** Principles of Company Law, (1986) at 483. 74. Supra n.9. 75. Supra n.\7. 76. Ford, supra **n.73 at 483.
- Section 5B(2)(f) of the Companies and Securities (Interpretation and Miscellaneous Provisions) Code.**
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articles upon him as a director to hold office or to participate in management or to exercise a veto over board decisions. 90 In addition to this incongruous position, there may be noted the criticism that^4 it seems rather absurd to regard directors as outsiders since they stand in a fiduciary relationship to the company which in part is defined by the articles'.^91 As already noted, s.78(l)(b) now provides that the memorandum and articles constitute a contract between the company and each 'officer'. The 'officer' need not be a member. However, the meaning of'officer' for the purposes of the section is a very narrow one when compared with the definition in s.5(l) of the Companies Code. Section 78(5) provides that 'officer', means a director, the principal executive officer or a secretary of the company. In particular, it is to be noted that reference to 'employee of the corporation' is excluded. The philosophy then must be that principally the proper place for contract between the company and its officers is not in the memorandum and articles of associaton but in a service contract. It has been suggested that as there is already a wide range of provisions in the Companies Code dealing with company officers their powers, duties and potential liabilities, s.78( 1 )(b) may be seen to be slightly superfluous.^92 However, it is thought that such provision would enable a director to enforce his right to remuneration specified under the articles and would oblige him to take up his minimum share qualification where the articles so require. Further, it is thought by the writer that the provision would now provide a sound legal explanation for the abovementioned cases in which the courts have allowed a director, suing as shareholder, to enforce rights conferred by the articles upon him as a director against the company. There should be no need in the future for the Courts to construe such articles as affecting an officer in his capacity as shareholder.
6. Enforcement of the Articles or Memorandum of Association and the Rule in Foss v. Harbottle The extent to which a shareholder can enforce the statutory contract created under provisions like s.78(l) measures the extent to which the rule in Foss v. Harbottle^93 will not defeat an individual or minority shareholder's action. This rule has two aspects - the 'Proper Plaintiff aspect and the 'Internal Management' aspect.^94 The 'Proper Plaintiff aspect is to the effect that if a wrong is done to the company, the company acting normally through its board of directors 95 is the only proper plaintiff in an action to prevent or recover in respect of the wrong. This principle is a consequence of a company having a legal personality separate and distinct from its membership. The 'Internal Management' Aspect is based upon an elementary principle of law relating to companies that the Courts regard themselves as having no jurisdiction to interfere with the internal management of companies. Thus, where the alleged wrong is one which might be made binding on the company and all its members, by a simple majority of the members, no individual member of the company is entitled to maintain an action in respect of that matter. The relationship between the two aspects may be explained as follows. 96 If the alleged wrong is ratifiable by a simple majority of the members of the company, then no wrong has been done to the company and there is nothing in respect of which anyone sue. If, on the other hand, a 90. Supra **n.64.
- J.H. Farrar, 'Company Law', (1985) at 104.
- Australian Company Law and Practice, (CCH Australia Ltd),** supra n.72 at 9,804. 93. Supra n.4. 94. Edwards v. Halliwell [ 1950] 2 All E.R. 1064 at 1066; _Prudential Assurance Co. Ltd. Newman Industries _ **19821 1 Ch. 204 at 210. 1 J
- See Table A. Art 66. 96.** Edwards v. Halliwell supra n.94; Prudential Assurance Co. Ltd v. Newman Industries supra n.94.
THE LEGAL EFFECT OF THE MEMORANDUM 55
simple majority of the members opposes what has been done, then there is no valid reason why the company should not institute the suit. The rule in Foss v. Harbottle will not apply where a member has a personal right of action for wrongs done to himself in his capacity as member.^97 Further, in exceptional circumstances, a member may sue upon behalf of his company, by way of representative or derivative action, to remedy a wrong done to his company. Where a member has a personal right of action or a member may sue by way of derivative action the wrong complained of cannot be remedied by the company in general meeting passing an ordinary resolution. Where there is an infraction of the company's articles there is a number of effects.^98 Firstly, there is a wrong done to the company by the perpetrator of the irregularity. Secondly, the company is put in breach of the statutory contract vis-a vis its shareholders where the irregularity occurs, for instance, in the passing of a resolution. Thirdly, a shareholder is put in breach of the statutory contract vis-a vis the other shareholders where, for instance, such shareholder fails to fulfill his obligations to the company. The former s.78(l) created, and its English counterpart creates, a statutory contract in respect of 'all the provisions of the memorandum and the articles'. However, the Courts have taken the view that this does not mean that an individual shareholder has the right to have each of the provisions in the memorandum and articles enforced by declaration or injunction. Indeed, in Salmon v. Quin & Axtens Ltd Farwell L.J. took the view 'that it [might] well be that the Court would not enforce the covenants as between individual shareholders in most cases'.^99 The reason for this non-enforcement is that the Courts may consider any breach of the memorandum or articles to be one affecting a corporate right only and therefore ratiflable by the members in general meeting.^100 However, breaches of the constituent documents which infringe a shareholder's individual rights conferred upon him in his capacity as member are not ratifiable by the members in general meeting.^101 Whether a member has a personal right of action for any breach or attempted breach of the statutory contract is a question which has not been fully answered by the Courts and it may be said that the case law is still in a state of confusion. 102 However, it may be said with some degree of certainty that an individual member will have a personal right of action in the following circumstances: 103 (a) where the infraction of the statutory contract by the company prevents the company's organs being properly constituted such as when directors are irregularly elected,^104 directors hold office without the prescribed qualifications,^105 directors act without a quorum, 106 persons act as directors without lawful authority 107 and directors are excluded from board meetings; 108
97. Edwards v. Halliwell, ibid. 98. R.J. Smith, 'Minority Shareholders and Corporate Irregularities', (1978) 41 M.L.R. 147 at 151. 99. Supra **n.32 at 318.
- See for example** MacDougall v. Gardiner ( 1875) 1 Ch.D. 13. 101. Edwards v. Halliwell supra **n.94 at 1067.
- Smith,** supra n.9 at 155; R.R. Druery, The Relative Nature of a Shareholder's Right to Enforce the Company Contract', (1986) 45 C.L.J. **219 at 238.
- See generally Ford, (1986),** supra n.73 at 485-7. 104. Ryan v. South Sydney Junior Rugby League Club Ltd supra n.64; Papaiannoy v. The Greek Orthodox Community of Melbourne (1979) C.L.C. 32,209. 105. Catesby v. Burnett [1916] 2 Ch. 325. 106. Kraus v. J.G. Lloyd Pty Ltd [1965] V.R. 232 at 235. 107. Ibid. 108. Pulbrook v. Richmond Consolidated Mining Co. supra n.64; Hayes v. Bristol Plant Hire, supra n.64.
THE LEGAL EFFECT OF THE MEMORANDUM 57
statutory contract against the company, the Courts may refuse to countenance such suit where there is only involved a procedural irregularity which would be ratifiable by the company in general meeting.^121 If the Courts adopt such a stance this would be consistent with the rationale of the rule that they should not interfere in the internal management of a company.
7. Relationship between Section 78(1) and Section 574 of the Companies Code Section 574 of the Companies Code gives the Court a discretion to grant prohibitory and mandatory injunctions to compel compliance with the Code. In particular, s.574(l) states that the Courts may, on the application of the Commission or any person whose interests have been, are, or would be affected, grant an injunction restraining a person who has engaged, is engaging, or is proposing to engage in any conduct that constituted, constitutes, or would constitute a contravention of the Code.^122 Under s. 574(2) the Court may, on the application of either of the abovementioned persons, grant an injunction requiring another person to do an act or thing where such person has refused or failed, is refusing or failing, or is proposing to refuse or fail to do an act that he is required by the Code to do. In addition to granting prohibitory and mandatory injunctions, the Court may also order the person who is the subject of the injunction to pay damages to any other person either in addition to or in substitution for the grant of the injunction. In order that proceedings under s.574 may be commenced, the applicant must have the requisite locus standi. It has been pointed out that since s.574(l)(a) grants the commission standing this will enable it to bring what in effect is a class action when there is a sizable number of persons affected by a contravention of the Code.^123 This is perhaps borne out by the recent litigation in the Supreme Court of Western Australia between the Commission and W.A. Pines Pty Ltd^124 wherein the Commission sought an injunction pursuant to s.574(l) restraining W.A. Pines Pty Ltd from offering shares in a company or proposed company without a prospectus, in breach of s.95 of the Companies Code. Section 574(1 )(b) also grants standing to 'any person whose interests are affected' by conduct that constitutes a contravention of the Code. It has been stated that the meaning of such an expression must be considered in the context of the statute in which it appears.^125 In Broken Hill Proprietary Company Ltd v. Bell Resources Ltd^126 Hampel J. took the view that the Companies Code is legislation which is clearly concerned in the broadest sense with the protection of the public in respect of commercial activities of corporations and the provision of information to the public relevant to those activities. With the assistance of s.5A of the Companies and Securities (Interpretation and Miscellaneous Provisions) Code,^127 Hampel J. considered that in interpreting s.574(l)(b) a broad interpretation 121. Sealy, supra n.82 at 105. ? 122.^ The Court may grant an interim prohibitory injunction pending the determination of an application under s.574(l). 123. Law of Companies in Australia (CCH Australia Ltd) (1986) at 310. The same argument would apply to s.574(2)(a). 124. NCSC. W.A. Pines Pty Ltd (1987) 5 ACLC 138; W.A. Pines Pty Ltdv.NCSC (1981) 5 ACLC 487. On appeal to the Full Court of the Supreme Court the injunction granted at first instance was discharged because a majority of the Court held that the offer was not made to a section of the public. 125. Re Gasbourne Pty Ltd (1984) 2 ACLC 103 at 127, per Nicholson J. 126. (1984) 2 ACLC 157 at 162. 127. This provision states that the Courts, when interpreting a Code under the National Companies and Securities Scheme, must prefer a construction that would promote the purpose or object underlying the particular Code over a construction that would not promote that purpose or object whether the underlying purpose or object is expressly stated or not.
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consistent with the objectives of the Code should be adopted and not the more restricted interpretation of the kind adopted under the previous Uniform Companies Legislation.^128 Hampel J. concluded that the interests referred to in s.574( 1 )(b) 'are interests of any person (which includes a corporation) which go beyond the mere interest of a member of the public.' It was stated that it is not necessary for an applicant to show that personal rights of a proprietary or similar nature are or may be affected or that any special injury arising from a contravention of the Code has occurred.^129 As a result, Hampel J. held in the circumstances of the case, where Bell Resources Ltd issued a tender offer to 7% of the shareholders of B.H.P. Ltd with a view to such shareholders exchanging their shares for shares in Bell Resources Ltd, that B.H.P. Ltd had locus standi under s.57(4)(l)(b). It was said that there was a sufficient nexus between B.H.P. Ltd and its shareholders to give the company standing as a person whose interests had been or would be affected by an alleged contravention of s.96(l) of the Companies Code.^130 In the context of the rule in Foss v. Harbottle it has been suggested that s.574 may create an important statutory exception thereto in that an individual shareholder would be 'a person whose interests are affected' within s.574(l)(b).^131 Certainly, this would clearly be the case where under s.68(6)(f) an application for an injunction under s.574 may be asserted to restrain a company from entering into an agreement which is contrary to an express restriction or prohibition on the company's powers or not in pursuance of the company's objects and is therefore a contravention by the company of s.68(l) of the Code and by the officers of the company knowingly concerned under s.68(2). In cases where there is an alleged contravention of those provisions of the Code whereby a public company is prohibited from issuing shares, debentures or prescribed interests to the public unless a prospectus or similar statement is registered with the Commission,^132 there is authority which suggests that individual shareholders of the company issuing any such interest may have locus standi under s.574(l)(b).^133 Further, where a company offers shares to the members of another company in exchange for its own shares in contravention of s.96(l) of the Code, then it is probable that individual members of the offeree company would have locus standi under s.574(l)(b). This is implicit in the judgment of Hampel J. in Broken Hill Proprietary Co. Ltd v. Bell Resources Ltd.^134 When consideration is given to the locus standi of an individual shareholder under s.574(l)(b) in relation to a breach of the statutory contract under s.78(l) of the Code the matter becomes less clear. It has been suggested that where an infringement of the articles involves a breach of duty a shareholder's interests 'may not be affected' unless it can be shown that the duty is owed to him or that he has an interest in its enforcement going beyond the interests of the shareholders generally.^135 In view of the liberal construction adopted by Hampel J. in Broken Hill Proprietary Co. Ltd v. Bell Resources Ltd to the effect that no special injury need be shown by an applicant under s. 5 74( 1 )(b), it is suggested by the writer that no such restriction ought to be placed upon an applicant. It is suggested by the writer that the spectre of the rule in Foss v. Harbottle ought not to impinge upon the locus
128. See for example Colotone Holdings Ltd v. Calsil Ltd **[19651 V.R 129
- Supra n. 126. 130.** Ibid. **It is thought that the analysis of Hampel J. would also apply to s 574(2)(b)
- R. Baxt,** supra n.68 at 209-210; Equity and Commercial Relationships\ supra **n. 81, 1987, Chapter 4 F H
- Part IV Divs 1 and 4. 133.** Eastern Petroleum Australia Ltd v. Horeshoe Lights Gold Pty Ltd (1985) 3 ACLC 594 at 599 134. Supra **n. 126 at 160 and 162.
- Callaway,** supra n.131 at 118.
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the effect of the rule in Foss v. Harbottle upon the enforcement of the statutory contract by an individual member. Although s.574 of the Companies Code may prove in the future to be an important exception to the rule in Foss v. Harbottle , it is doubtful that it will be of much assistance in the enforcement of the statutory contract. Even if a wide interpretation be given to the locus standi requirement, such that an individual shareholder would be a 'person whose interests are affected' in the case of a breach of his company's articles, it is thought that the language of s. 7 8(1) does not lend itself to the enforcement of the statutory contract through the mechanism of s.574. Notwithstanding the deficiencies created by the rule in Foss v. Harbottle , the statutory contract will remain an important remedy to an individual member particularly in those cases where it is accepted by the Courts that the irregularity under the statutory contract is one in which the member may institute a personal action. Further, the statutory contract will continue to be relevant to a company where it seeks to institute proceedings against a member in order to enforce a pecuniary liability.^140
140. Ford , (1986) supra n.73 at 48.
