The longest-serving current High Court judge, Hayne J once observed, "1322 applications and predecessors were common and garden in every corporation's list around this country", yet there are only a very few reported cases on section 1322 of the Corporations Act 2001.
It is not uncommon for company directors to fail to comply with the requirements under the company's constitution or the Corporations Act as they carry out their responsibilities as directors. Their actions do not become invalid simply because of procedural non-compliance or irregularity. The Court has wide powers to declare their actions valid under section 1322(4) of the Corporations Act.
For the Court to make any such orders, it needs to be satisfied that:
- the act, matter or thing, or the proceeding is essentially of a procedural nature;
- the person or persons concerned acted honestly; or
- it is just and equitable that the order be made.
Importantly, the Court also needs to be satisfied that no substantial injustice has been or is likely to be caused to any person as a result of the orders of the Court.
The wide scope of this section is apparent from the High Court's decision in Weinstock v Beck (2013) 251 CLR 396, at the hearing of which Hayne J made the above-mentioned observation.
WEINSTOCK V BECK
In 1973, Tami and Ami were appointed directors of a family company "only until the next following annual general meeting". Resolutions passed at the next and subsequent annual general meetings purported to re-appoint them as directors, but those resolutions were not effective.
Having not appreciated this, both Ami and Tami continued to act as directors. Tami resigned in 1982, but Ami continued to act as a director. In 2003, Ami purported to appoint his wife, Helen as a co-director pursuant to the company's constitution which allowed the continuing director to increase the number of directors to requisite two directors. The difficulty though was that Ami, who was purporting to make that appointment, was not a validly appointed director himself.
The Court of Appeal (2:1) held that Helen's appointment was not valid because Ami was not a validly appointed director at the time he sought to appoint Helen, and that section 1322(4) of the Corporations Act could not be used to remedy that defect. Ami appealed.
The High Court took a wide approach to the remedial power conferred by section 1322(4), and held that the contravention in appointing Helen was of a kind that could be validated. This meant that Helen could be a valid director, even though the person who appointed her was not.
The High Court, however, did not make any order validating Helen's appointment. It remitted the matter back to the Supreme Court to determine whether the appointment should in fact be validated (having regard to further evidence on the issue of substantial injustice). The Supreme Court has not made any determination on that issue as at the time of publication of this article.
The decision has significant ramification for the company in question. Due to its unique shareholding structure with no shares in issue that have voting rights, if Helen's appointment could not be validated, there would be an administrative and constitutional vacuum which would warrant an order to wind up the company on just and equitable grounds.
- The Court holds wide powers to validate procedural and administrative errors as well as irregularities and mistakes of a general nature.
- The Court will only validate a contravention if there is no substantial injustice.
- A third party need not inquire about the formality of internal procedures of a company.
- Corporate governance is a matter of substance, not form.