Just and equitable?

On 1 April this year, Justice Barrett handed down his decision in Beck v L W Furniture Consolidated (Aust) Pty Limited [2011] NSWSC 235.

The case concerned a company, L W Furniture Consolidated (Aust) Pty Limited (LWC), which had been founded by a Mr and Mrs Weinstock in 1973. Mr and Mrs Weinstock died in 2003 and 2004. Mulitiple disputes then followed between Mrs Beck, their daughter, and Amiram Weinstock, their son. Quite a lot of money was involved. At the heart of the dispute, in general terms, was the terms on which, as a result of wills and various arrangements made by Mr Weinstock in his lifetime, provision had been made for Amiram to receive two-thirds of his father’s estate and Mrs Beck to receive one-third. That is a simplification, of course.

One reason it is a simplification is that people like Mr and Mrs Weinstock did not, generally speaking, own directly the business assets which they (or, more likely, he) controlled, but (mostly for tax reasons, possibly originally with an eye to avoiding death duties)instead established combinations of company and trust structures. LWC was such a structure, or part of such a structure. From the “Consolidated” part of its name it is likely that in turn it owned shares in other companies through which the Weinstock’s businesses were conducted or assets were held.

The odd thing about LWC, which I can only assume was for taxation minimisation purposes, was that none of the shareholders in LWC was entitled to vote at a meeting of shareholders. Mr Weinstock had “A” class shares which, in his lifetime, he could convert so that he had the entitlement to vote for so long as he remained alive and the owner of those shares, but apparently he never did convert them, though meetings were conducted where the members purported to pass resolutions from time to time. None of the other issued shares carried any entitlement to vote.

After Mr and Mrs Weinstock’s death, his son, Amiram (ADW) and Helen Weinstock, ADW’s wife, controlled the company. In 2010, Mrs Beck (who, like ADW, had a non-voting share)commenced proceedings to wind up the company. Initially, one of the grounds on which she made her claim was that the affairs of the company were being conducted “oppressively” – in lay terms, unfairly to her. However, by the time of the trial the only ground advanced was what is known as the “just and equitable” ground. This is a bit of a catch-all, but in this case the claim was quite simple. Mrs Beck said that there was a “constitutional and administrative vacuum” which meant that the company could no longer operate. This was because, she said, there were no directors, and no shareholders who could vote to appoint directors, and the situation was irremediable.

Justice Barrett accepted that this is a recognized basis for winding up a company, and referred to Lunn v Cardiff Coal Company (No 3) [2003] NSWSC 789; (2003) 177 FLR 411 as a recent example. That case is itself worthy of a post. It involved a company which turned out to own valuable land near Newcastle, but which had long been dormant. In that case, the plaintiffs were held to be shareholders in the company, though the corporate skullduggery which they claimed to have occurred (and which was ultimately found to have occurred) was so outlandish that Justice Bryson refused to stop the sale of the land when the plaintiffs tried to stop it in advance of the trial because it was so outlandish. As a result, by the time the case was finally heard, the land had been sold and the money was mostly gone.

Justice Barrett dismissed Mrs Beck’s application. The situation was not irremediable. Even though no shareholders could vote to appoint directors, the directors had the power to allot shares and some of the classes of shares which they could allot were shares which would have voting powers. So long as there were directors, there was not a vacuum.

So were there any directors?

The original directors were Mr and Mrs Weinstock. Successive annual general meetings of the company had purported to re-elect them as directors. This was a nullity, because none of the shareholders could vote, but it didn’t matter because the articles had a kind of catch-all provision to meet this eventuality. If directors offered themselves for re-election at an annual general meeting, they were deemed to have been re-elected “unless at that meeting it is expressly resolved not to fill the vacated office or unless a resolution for the re-election of that director is put to the meeting and lost.” Justice Barrett held that in the circumstances Mr and Mrs Weinstock had offered themselves for re-election and at least for so long as there were annual general meetings, were deemed to be re-elected by this article.

In 1973, Mr and Mrs Weinstock had appointed ADW as a director. The articles gave them the power to do this and such directors could hold office until the next annual general meeting. However, Justice Barrett held that the provision about deemed re-election did not apply to directors appointed in this way, because they ceased to be directors immediately before the next annual general meeting and were not “retiring directors” who were deemed to be re-elected under the catch-all article. Mrs Beck had also been appointed a director at the same time, but “resigned” (the ” ” is because she wasn’t actually a director by then) in 1982.

In 2003, sfter his father’s death and at a time when Mrs Weinstock had ceased to be a director by reason of mental infirmity, ADW, who had acted as though he was a director all along since his first appointment, appointed his wife, Helen, as a director. As he wasn’t a director, this couldn’t have been effective. But the Corporations Law gives a court power (at section 1322(4)) to make:

an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation

The court can make such an order, provided that “no substantial injustice has been or is likely to be caused to any person” if it is satisfied of any one of the following three matters:

(i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;
(ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or
(iii) that it is just and equitable that the order be made

Justice Barrett made the order on the third ground.   [See postscript below: his decision was overturned on appeal by the Court of Appeal] He did not consider that the contravention was only procedural, and it could not affirmatively be said that ADW had acted honestly, even if there was no suggestion that he acted dishonestly. It was just and equitable because ADW, who had acted as a “de facto” director for many years, could reasonably have appointed his wife as a director of a family company to make up the numbers (there had to be two directors) and his wife had since acted as a de facto director for some seven years. Whether her actions as a director might cause substantial injustice to someone (ie, Mrs Beck) was not to the point because:

“The question is whether “substantial injustice” arose from the circumstance that she was purportedly appointed a director, not whether “substantial injustice” arose more remotely from what she did or could do in exercise of the powers thereby obtained.”

As a result, there was no “vacuum” in the governance of the company, because Helen Weinstock could now appoint her husband ADW (who had ostensibly appointed her, albeit that the appointment was now to be validated by the order) as a director to make up the necessary two, and if the absence of any voting shares meant there was a vacuum, the directors could then allot presently unissued shares, including from classes of shares provided for in the articles which did enable those shareholders to vote.

But in fact it doesn’t appear that Justice Barrett thought the absence of any voting shareholders was a problem at all, and this is the odd thing (to me) about his decision.

You will recall that directors appointed by directors could only hold office until the next annual general meeting of the company. So doesn’t there have to be an AGM to appoint new directors?

Well, apparently not.

One of the historical complexities of company law in Australia is that there have been successive rejigs of the legislative framework, notably in 1936, 1961 (the Companies Act), 1981 (the Companies Code), 1989 (the Corporations Law) and a subsequent flurry owing to constitutional complications resulting in the present Corporations Act 2001, which unlike the previous regimes is a Commonwealth Act which operates as such as a result of a referral by the States to the Commonwealth of the corporations power. This can cause difficulties, especially when the articles of a company have been drafted on the assumption of legislation which has since been amended or replaced.

At the time that LWC was formed, the relevant legislation was the 1961 Act. That Act required companies to hold annual general meetings. Article 45 of the company’s articles stated:

“An annual general meeting of the Company shall be held in accordance with the provisions of the Act.”

Justice Barrett interpreted this to mean that “an annual general meeting of the Company shall be held if the provisions of the Act require one to be held.” He said that in 1982 the Companies Code came into force to the exclusion of the 1961 Act. The reference to “the Act” in the articles did not extend to the new Code because under the Interpretation Act (which the articles adopted as the principle of interpretation of the articles) the Code did not amend or re-enact the 1961 Act, which was not, in fact, repealed until 2008.

The Code also included a provision requiring AGMs to be held, but the article itself had no content and instead the Code alone operated to require AGMs to be held. Then, in 1995, the Corporations Law (which had succeeded the Code) was amended to remove any requirement at all for a proprietary company such as LWC to hold AGMs. As a result, the power of directors to appoint directors who shall hold office until the next AGM was a power to appoint directors who could hold office until an event (an AGM) which would never occur, and hence a power to appoint directors who could hold office indefinitely.

That to me is extremely surprising. Normally, the powers of the directors are subject to the overriding supervision of the shareholders, who ultimately can remove them. In this case, the only shareholders who could ever do this would be the holders of any shares with voting rights which the directors themselves might choose to allot. It is hard to see how that is just and equitable, or how a court could find that no substantial injustice to the present shareholders was likely to be caused. The possibility is inherent in the situation and doesn’t depend on the likely actions of the directors so holding office: how can the court reach the conclusion that there is no likelihood of substantial injustice being caused?

This all depends on Justice Barrett’s interpretation of article 45 (which requires AGMs in accordance with the Act) as now being a nullity, but if so, that seems very much like an unintended consequence. I can think of other sorts of companies, such as “Home unit” companies which need to meet to determine the annual levies to be paid by shareholders, where annual general meetings continue to be held because the articles require this to occur. The power to appoint directors who shall hold office up to the next AGM strikes me as another reason why AGMs should continue to be held. Why should article 45 not mean that an annual general meeting of the company shall be held and that it is agreed by the articles that any such meetings will be in accordance with the Act?

Postscript

Justice Barrett’s decision to validate the appointment of Helen Weinstock was overturned on appeal –  Beck v LW Furniture Consolidated (Aust) Pty Ltd [2012] NSWCA 76 .  That was on the basis that the power to cure procedural irregularities only existed where the irregularity was nevertheless something which actually could be done but for some reason had not been.  That was not the case here because the core problem was that there were no directors who could appoint another director and no shareholders who could vote for fresh directors.

2 Responses to “Just and equitable?”

  1. Family Feud « Stumbling on melons Says:

    […] Beck v. Weinstock and Ors, to be heard on 21 June, is the latest of many rounds or many cases involving the children of Leo Weinstock and various companies established by him before he died in 2003 and his widow, Hedy, died in 2004.  I have written about an earlier round (which is, in fact, a related but separate strand of the dispute between two of Mr Weinstock’s children) here. […]

  2. Tami Beck Says:

    Glad you agree that Justice Barrett was wrong in his decision.
    Amazed that you should be so interested in my cases.
    Tami Beck

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