24/07/2013

In a recent decision the High Court used the court’s power under the Corporations Act to validate the appointment of a director to a family company where the appointment was made in contravention of the company’s constitution.

The court’s power is contained in section 1322 of the Corporations Act.

The case involves a family company and its operation over a 40 year period.

The essential facts of the case are:

•    1971 – the company is incorporated with 2 directors (husband and wife), the articles of association requires at least 2 directors at all times

•    1973 – the son and daughter are appointed as additional directors until the next general meeting in 1974

•    1974 - the son and daughter continued to act as the third and fourth directors after 1974 as if their appointment continued when in fact it had not

•    1982 – the daughter formally resigned as a director of the company

•    2003 – the father passed away and the wife contracted Alzheimer’s disease and was incapable of performing her duties as a director and therefore ceased to be a director by operation of the constitution
 
•    the day after the father passed away the son passed a resolution (as the sole director) to appoint his wife as an additional director so there were 2 directors of the company.

In 2010 the daughter commenced court proceedings seeking to have a liquidator appointed over the company on the just and equitable grounds as the company had “no validly appointed directors” and there was no mechanism for the company, whose members had no voting rights, to validly appoint a director.

In effect, the daughter argued that the son was not validly appointed after 1974 and that he therefore had no power to appoint his wife as the second director in 2003.  The company therefore could not act as it had no validly appointed director and a liquidator should be appointed.

The High Court held that the appointment of the son’s wife was in contravention of the company constitution as the son was not a validly appointed director at the time he purported to appoint his wife.  

However, the Court held that it had the power under the Corporations Act to declare the appointment of the wife valid.  In support of its decision, the Court considered the son had acted as a de facto director and in an honest way in continuing to make decisions as a validly appointed director at all times and therefore the Court validated the appointment of the wife as a director of the company.

The Court stated:

“Section 1322(4) and related provisions reflect …. 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”.

It also noted that the Court’s power is:

“not in the nature of a general absolution for all past errors.”

In other words, not all invalid acts done by a company may be validated by the courts.

In considering making an order to validate an act, the Court must be satisfied that:

•    the act was essentially of a procedural nature;
•    the person acted honestly;
•    it is just and equitable that the Court make the order; and
•    no substantial injustice has been or is likely to be caused to any person if the order is made.

If you have any questions in relation to this article or need advice or assistance on corporate matters, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.