The High Court has adopted a broad interpretation of what constitutes a “contravention” of the Corporations Act 2001 (Cth) (“Act”) or a company constitution, confirming the power of the Courts to validate such acts.
This case concerned the interpretation of section 1322(4)(a) of the Act, which provides that a Court may declare that any act purported to have been done under the Act, or in relation to a corporation, is not invalid by reason of any contravention of a provision of the Act or the corporation’s constitution.
The case arose from a dispute concerning the governance of a closely held company, LW Furniture Consolidated (Aust) Pty Ltd. In 1973, Amiram Weinstock and Tamar Beck were appointed as directors of the company “to hold office until the next annual general meeting of the company”. It was accepted in the litigation that their appointments came to an end at the start of the next annual general meeting, pursuant to the company’s articles.
Resolutions were passed at subsequent AGMs purporting to reappoint retiring directors, but it was accepted that none of those resolutions effected the appointment of either Mr Weinstock or Mrs Beck as directors because none of the issued shares carried voting rights. Nevertheless, both Mr Weinstock and Mrs Beck continued to act as if they were directors until Mrs Beck resigned from office in 1982. Mr Weinstock continued to act as a de facto director for some 30 years, at which time he purported to appoint his wife, Helen, as an additional director under a power contained in the company constitution.
Decisions at first instance and in the NSW Court of Appeal
At first instance, Barrett J (as his Honour then was) found that Mr Weinstock did not hold the office of director when he made the purported appointment of his wife, and that it was necessary that he hold that office in order for the appointment to be valid. However, his Honour held that the purported appointment was a “contravention” for the purposes of section 1322(4)(a) and made an order declaring the appointment valid.
The High Court’s decision records that the NSW Court of Appeal set aside this order. The majority judgments were delivered by Young JA and Sackville AJA. Young JA held that section 1322(4)(a) “could only apply to validate an impugned action which could be done validly under the Corporations Act or under the constitution of the company”. For section 1322(4)(a) to apply, his Honour held that “there must be a contravention of the constitution of the company done either by infringing or failing to take advantage of one of its provisions”. Sackville AJA accepted that a “contravention” was not limited to meaning “infringement”, holding that “a failure to comply with the articles in taking steps that the company was not obliged to take could constitute a contravention”, but said that “[s]ection 1322(4)(a) could not be applied to the purported act of someone who had never been validly appointed as a director and could not be so appointed”. His Honour held that there was no provision in the company’s articles which could have grounded Mr Weinstock’s appointment of Mrs Weinstock as a director.
The High Court’s decision
The High Court unanimously allowed the appeal and held that section 1322(4)(a) could be exercised to validate the purported appointment of Mrs Weinstock. In a joint judgment, Hayne, Crennan and Kiefel JJ held that the purported appointment was a contravention of the constitution, notwithstanding that Mr Weinstock not only did not have power to make the appointment, but could not have validly been given the power to make the appointment as matters stood. In so finding, their Honours stated that the power given to the Court by section 1322(4)(a) “is not to be hedged about by any implied limitation”.
In a concurring judgment, the Chief Justice stated that “the requirement that a contravention of a company constitution involve disobedience of a prohibition or non-compliance with an obligation would amount to an inexplicable limitation of the purpose of s 1322(4)(a)”. Gageler J agreed with the dissenting view of Campbell JA in the Court of Appeal, to the effect that “all that is required for there to be a ‘contravention’ of the constitution is that something have happened that is different to what the constitution of the corporation requires”.
The significance of the decision
The High Court has adopted a broad interpretation of what can constitute a “contravention” of the Act or a company’s constitution under section 1322(4)(a). The Chief Justice recognised that this section reflects a legislative purpose which acknowledges that mistakes occur in corporate governance and that it is not in the public interest that the validity of corporate decisions are made vulnerable to innocent errors. His Honour found that section 1322(4)(a) “is to be construed broadly and applied pragmatically, principally by reference to considerations of substance rather than those of form”.
However, it should be remembered that the Court’s power under section 1332(4) is discretionary. The Court must be satisfied that, in every case, no substantial injustice has been caused, or is likely to be caused. Extreme cases of total strangers to a corporation purporting to make a decision appointing other strangers to office can be guarded against by resort to such discretionary factors. Gageler J also remarked that this provision could not assist to achieve a result that could never be attained under a constitution, but could assist in “achieving a result that could in some circumstances be attained under the constitution … by removing the invalidating effect of any absence of compliance”.