Tricky balancing act worthy of applause Law Reporter

Getting the balance right between a technical application of the law and facilitating business practice.

The Corporations Law today is full of complex and difficult provisions. Regulation of companies in this country has, regrettably, increased with new legislation not necessarily simplifying the law.

There are many technical rules which persons, even qualified lawyers and accountants, find it difficult to manage. Mistakes are commonly made (mostly of a technical nature) and it is important when the courts are faced with challenges to transactions on the basis of such technical mistakes that a good balance is struck by the relevant judge.

A recent illustration of the fine balance that may exist in a case involving the actions of companies, especially smaller companies, is the decision of Santow J in the case of Sutherland (as liquidator of Sydney Appliances Pty Ltd (in liquidation)) v Robert Bosch (Australia) Pty Ltd and Ors ((2000) 33 ACSR 680).

The facts of the case may well be familiar to readers who may have seen similar situations arise. They are taken from the Butterworths report.

The plaintiff (Sutherland) commenced proceedings against the defendants (Robert Bosch (Aust) Pty Ltd and Others) seeking to recover payments alleged to have been paid to them as preferences.

In March 1997, the company (Sydney Appliances Pty Ltd) had three directors and two shareholders. One director resigned on 25 March 1997. The company then adopted new articles of association on 11 April 1997 which made provision for the company to become a one-director company. On 17 April 1997, one of the remaining directors resigned her position and one of the shareholders executed a transfer of the share he held in favour of the remaining director and shareholder of the company. The board purported to approve the transfer of the share but did not have a quorum at the time it considered the matter. The plaintiff was subsequently appointed as administrator of the company on 12 May 1997 pursuant to a resolution made by the remaining director and shareholder.

The defendants asserted that the transfer of the share to the remaining director was ineffective as the board's approval was ineffective. The defendants then submitted that, therefore, the remaining director's powers were limited under the articles of association to the appointment of another director in order to achieve a quorum. The defendants contended that the plaintiff's appointment as administrator of the company was invalid and that, therefore, he could not have been validly appointed as the liquidator of the company.

Santow J after considering all of the facts indicated that the critical issue here was whether this company, which was in effect a one person company (the sole director being a Mr Michael Macdonald) had taken the appropriate steps and was empowered to do so to appoint the relevant plaintiff as administrator so that the relevant actions could be pursued.

The relevant articles in the company's articles of association provided as follows:

"62(1) The first Director or Directors of the Company shall be the person or persons named as Subscriber(s) in the Schedule to these Articles;

(2) Subject to paragraph (3) of this Article there shall be no restriction on the number of Directors but the Company may by resolution in general meeting:

(a) set a maximum number of Directors;

(b) set a minimum number of Directors;

(c) increase or reduce the maximum or minimum number of Directors so determined.

(3) If the number of Directors shall number two or more at any time then until otherwise determined by the Company by resolution in general meeting the number of Directors shall not be less than two.

76 At a meeting of Directors, the number of Directors whose presence is necessary to constitute a quorum is such number as is determined by the directors and, unless so determined, is two except where the number of directors is one then the quorum shall be one.

77 In the event of a vacancy or vacancies in the office of a Director or offices of Directors, the remaining Directors may act but, if the number of remaining Directors is not sufficient to constitute a quorum at a meeting of Directors, they may act only for the purpose of increasing the number of Directors to a number sufficient to constitute such a quorum or of convening a general meeting of the Company."

Santow J in examining the facts held that the transfer of shares which were affected in this case were to make Macdonald the sole shareholder of the company. Under the principles of a leading English case (Re Duomatic Ltd [1968] 2 Ch 365) the actions of Macdonald as sole director and shareholder were equivalent to the company exercising powers pursuant to a resolution in general meeting.

This case has recently been applied by the High Court of Australia in MYT Engineering Pty Ltd v Mulcon Pty Ltd ((1999) 162 ALR 441).

In considering the facts Santow J held that Macdonald was the relevant sole director, that the articles of association enabled him to become the sole director, and that therefore he had the power to appoint the administrator. The critical issue was whether the relevant director had exercised the necessary power and had formed the decision properly. In the view of Santow J, the sole director and shareholder "did in fact apply his mind to the appointment of Mr Sutherland as administrator, being the end point in the corporate steps involved. Moreover, when it came to otherwise determining [what the relevant number of directors were required for the appointment] Mr Macdonald describes himself as 'the sole director'. Clearly, he did apply his mind to the question both of the appointment of the administrator and, more relevantly, that he was henceforth the sole director acting ... accordingly. So by his actions he clearly reflected a determination by the company as its sole shareholder that the number of directors shall be not less than two. To require a formal resolution to that effect, is to prefer form over substance. I do not consider [that the relevant article] makes mandatory a written resolution or a written record in these circumstances, [the article being] facilitative rather than exhaustive. But even if it did, then I am [still satisfied that the director had taken the necessary steps]."

In the circumstances Santow J held that the actions taken by Mr Macdonald were valid, that Sutherland had been appointed properly as the administrator, and that he had the power necessary to pursue the action under question.

In all the circumstances the relevant defences thrown up by the defendants were defeated and the actions of the administrator confirmed.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.