The High Court has taken a broad interpretation of what constitutes a ‘contravention’ of the Corporations Act 2001 (Cth) (Act) or the company’s constitution for the purposes of its power to make orders remedying invalid acts under section 1322(4)(a) of the Act. The High Court found that an irregularity in the appointment of a director (with the effect that the director had not been validly re-appointed 30 years ago), did not invalidate his subsequent appointment of another director. The High Court recognised that mistakes will happen in corporate governance and an innocent error should not open to question subsequent decisions made by the company. It is important to remember however that the Court’s discretion under section 1322 will not be exercised where there any substantial injustice caused.
Mr Weinstock and Ms Beck were appointed directors of LW Furniture Consolidated (Aust) Pty Limited (LWFC) to hold office until the holding of the next following AGM (which, it was accepted, meant to the beginning of the next AGM). At the next AGM, the shareholders purported to pass a resolution to re-appoint Mr Weinstock and Ms Beck but because none of the shareholders held voting shares, the resolution was ineffective. Subsequent re-appointments were similarly invalid. Without appreciating that they had not been validly re-appointed, Ms Beck continued to act as a director until she retired in 1982 and Mr Weinstock continued to act for 30 years until 2003 when he purported to appoint his wife as an additional director under a power conferred by the LWFC constitution.
It was accepted that as Mr Weinstock had not been validly appointed, the appointment of his wife pursuant to a power conferred upon directors by the LWFC constitution was technically invalid. Mr Weinstock sought orders remedying his wife’s appointment under section 1322 of the Corporations Act 2001 (Cth) (Act) which allows the Court to declare acts that are done in contravention of the Act or the company’s constitution as not invalid. At first instance in the NSW Supreme Court, such orders were made on the basis that the appointment was a contravention of the LWFC constitution for the purposes of section 1322(4)(a). However, the NSW Court of Appeal held that for there to be a contravention, the relevant action had to be capable of being achieved under the constitution or the Act, and as Mr Weinstock had not been validly appointed and there was no mechanism to validate his directorship at the time of the purported appointment of his wife, section 1322(4)(a) could not apply.
In making an order that Mrs Weinstock’s appointment was valid, the High Court held that:
- there is no implied limitation on the Court’s power under section 1322(4)(a) (to the effect imposed by the Court of Appeal);
- because the appointment of Mrs Weinstock was not made in accordance with the LWFC constitution , it was made in ‘contravention’ of it. The word ‘contravention’ in section 1322(4)(a) should be interpreted broadly to include anything done that is different to what the constitution requires; and
- the irregularity in Mr Weinstock’s re-appointment did not invalidate his appointment of Mrs Weinstock.
Chief Justice French noted that mistakes will happen in corporate governance and that it is not in the public interest that the validity of decisions be unduly vulnerable to innocent errors which may be corrected without substantial injustice to third parties.
See the case.