In the decision of Weinstock v Beck [2013] HCA 14 the High Court of Australia clarified a court’s power to remedy the effects of contraventions of the Corporations Act or company constitutions which occurred by reason of a procedural irregularity or honest mistake.

BACKGROUND

In 1972, Mrs Tamar Beck and Mr Amiran Weinstock were appointed directors of LWC Furniture Consolidated (Aust) Pty Ltd (LWC) “until the next following annual general meeting”.  At an AGM the following year, the company’s shareholders voted in favour of a resolution of re-appointing Mrs Beck and Mr Weinstock as directors.

That resolution was, for various reasons, not effectively passed such that Mrs Beck and Mr Weinstock technically were not re-appointed.  Not appreciating this, they continued to act as directors after the resolution.  Mrs Beck retired as a director in 1982.

On 30 July 2003 Mr Weinstock, as the sole director of LWC, decided to appoint his wife, Mrs Helen Weinstock, as a director of LWC.  Given that Mr Weinstock had not been validly re-appointed, his attempt to appoint Mrs Weinstock as a director contravened the constitution of LWC. 

All parties accepted that Mrs Weinstock’s appointment was technically invalid under LWC’s constitution.

THE LAW

Section 1322(2) of the Corporations Act provides that a procedural irregularity will be inconsequential unless a court is satisfied that “substantial injustice” has been, or may be, caused to a third party, which the court cannot otherwise remedy.

Section 1322(4) of the Corporations Act further provides that a court is empowered, on the application of an interested person, to make a variety of orders, including an order declaring that conduct which contravenes the Corporations Act or a company’s constitution is not invalid.  

THE DECISION

An application was brought seeking orders under section 1322(4) declaring that Mrs Weinstock’s appointment was not invalid. 

On appeal to the High Court, it was found that Mrs Weinstock’s appointment was not invalid by reason of the irregularity in Mr Weinstock’s re-appointment as director.  The Court found so on the basis of its powers under section 1322(4) of the Corporations Act, in relation to which the High Court held that the word “contravention” in that section was broad, as was the language of the section generally.  The High Court stated that the power in section 1322(4) should not be framed by any implied limitation as there is none expressly contained in that provision.  According to the High Court, in circumstances where Mr Weinstock had acted as a director of LWC for years, the fact that his re-appointment was technically invalid should not result in his subsequent decisions being invalid.

Chief Justice French noted that mistakes happen in corporate governance and that innocent errors should not undermine the validity of decisions made by corporations where no substantial injustice to third parties had occurred.  His Honour added that a court should look at such matters pragmatically, principally and by reference to substance over form.

COMMENTARY

The rationale underpinning the High Court’s decision is that a procedural error or an honest mistake should not undermine subsequent decisions which rely on or assume that previous conduct has been properly performed.  If the Court had found otherwise companies could be at risk of years of corporate decision making being unravelled each time a mistake is uncovered.  

While the importance of proper and thorough due diligence cannot be understated, it is useful to know that the Corporations Act contains these savings provisions to prevent procedural irregularities from undermining subsequent corporate decision making. 

In this way, the High Court’s decision should provide some comfort to external administrators of companies that may have a history of irregularities.  In circumstances where there is uncertainty about the consequential effects of a procedural irregularity or error, that uncertainly can be managed by making an application to a court under section 1322(4).