Bonds and Securities (Trading) Pty Ltd v Australian Foundation Investment Co Ltd (No 2)

[1974] HCA 15

HIGH COURT OF AUSTRALIA

Barwick C.J., McTiernan, Menzies, Mason and Jacobs JJ.

BONDS &SECURITIES (TRADING) PTY. LTD. v. AUSTRALIAN FOUNDATION INVESTMENT CO. LTD. (No. 2)

(1974) 131 CLR 50

8 May 1974

Companies

Companies—Directors—Interest—Disqualification from voting—Scheme of arrangement for merger of companies—Identical boards of directors—Articles of association prohibiting directors from voting in respect of any arrangement in which they were interested—Whether resolutions of directors proposing scheme involve voting in respect of an arrangement entered into by or on behalf of the company—Companies Act 1961 (Vict.) s. 181 (2)*. * Section 181 (2) of the Companies Act 1961 (Vict.) provides as follows : "If a majority in number representing three-fourths in value of the creditors or class of creditors or members of class of members present and voting either in person or by proxy at the meeting agrees to any compromise or arrangement the compromise or arrangement shall if approved by order of the Court be binding on all the creditors or class of creditors or on the members or class of members (as the case may be) and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company".

Decisions

May 8.
The following judgments were delivered:-
BARWICK C. J. This is an appeal from an order of the Supreme Court of Victoria (Gowans J.) made under s. 181 of the Companies Act 1961 (Vict.) approving an arrangement for the merger of eight companies in a ninth. (at p55)

2. The detail of the arrangement is not of present concern beyond the circumstance that the assets of all eight were to be vested in the ninth against the allotment of shares in the ninth to shareholders of the eight according to a settled scale related to shareholding in the individual eight companies. (at p55)

3. The boards of each of the nine companies by resolution approved and adopted the draft scheme which had been submitted to each by J. B. Were &Son, which firm had interested itself in promoting the merger. (at p55)

4. Upon an application by the companies, the Supreme Court of Victoria ordered each of the companies to summon a meeting of its members for the purpose of considering, and if thought fit, approving, with or without modification, the scheme of arrangement, suitable directions being given for the calling and the conduct of the meetings. Pursuant to that order Mr James Campbell Johnston reported to the Supreme Court in substance, but providing the detail of the voting, that the requisite majority of the members of each company had agreed to the arrangement. (at p56)

5. The companies, after these meetings and report, sought the approval by the Supreme Court of the arrangement. As I have said, the Court did so approve. (at p56)

6. It was submitted to the Supreme Court on behalf of the appellant as an objector to the approval of the arrangement and it has been submitted to this Court in this appeal that, firstly, the Supreme Court could not, and, secondly, should not, approve or have approved the arrangement, because the resolutions of the various boards were nullities for the reason that all the directors of each company were identical and as well were shareholders in the companies of which they were directors. (at p56)

7. The argument was and is that by reason of an article in identical terms in the articles of each company there could be no quorum of any of the boards of any of the companies of directors able to vote on a resolution to approve or adopt the draft scheme, or for that matter any other resolution to further the application to the Court for an order to summon meetings or to approve the scheme of arrangement, all directors being affected by the terms of the article. (at p56)

8. The article in question is in the following terms:
"No director shall be disqualified by his office from contracting with the company either as vendor purchaser or otherwise nor shall any such contract or any contract or arrangement entered into by or on behalf of the company in which any director shall be in any way interested by avoided nor shall any director so contracting or being so interested be liable to account to the company for any profit realised by any such contract or arrangement by reason of such director holding that office or of the fiduciary relation thereby established but it is declared that the nature of his interest must be disclosed by him at the meeting of the directors at which the contract or arrangement is determined on if his interest then exists or in any other case at the first meeting of the directors after the acquisition of his interest and that no director shall as a director vote in respect of any contract or arrangement in which he is so interested as aforesaid, but this prohibition may at any time or times be suspended or relaxed to any extent by a general meeting." (at p57)

9. The first question is whether in voting to approve and adopt the draft scheme of arrangement each director was, as a director, voting in respect of a "contract or arrangement" entered into by or on behalf of the company in which he was in any way interested. I so express the question because, in my opinion, the proper construction of the article is to regard the contract or arrangement in respect of which the director is prohibited from voting as a contract or arrangement entered into by or on behalf of the company, that being the description of the contract or arrangement to which the opening words of the article apply. The expression "entered into by or on behalf of the company" in the article would, in my opinion, be satisfied, by a resolution in respect of entering into such a contract. To apply this construction of the article to the present matter, it is to be observed that when approving and adopting the draft scheme, the boards of directors are not making or authorizing the making of any contract or arrangement at all, and certainly not on behalf of the company.

10. After the making of the resolution by the board, the company was not bound to or by anything in the nature of a contract or arrangement: the boards were doing no more than authorizing an application to the Supreme Court for orders to summon meetings to consider the draft and to approve the arrangement if a majority of members of the company agreed to the arrangement. (at p57)

11. No agreement was made by those resolutions of the boards, neither by the us of the word "approve" nor the word "adopt". (at p57)

12. It is plain that Pt VII of the Companies Act regards the arrangements for the purposes of that Part as having been made by members of the company voting at the meeting, though then only subject to the approval of the Court. Secton 181(2) makes this clear, and I quote it in full:
"(2) If a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members present and voting either in person or by proxy at the meeting agrees to any compromise or arrangement the compromise or arrangement shall if approved by order of the Court be binding on all the creditors or class of creditors or on the members or class of members (as the case may be) and also on the company or, in the case of a company in he course of being wound up, on the liquidator and contributories of the company." (at p57)

13. There is thus in law no arrangement binding on the company or made on its behalf until that approval. (at p57)

14. In my opinion, the submission of the appellant is misconceived. In voting to approve or adopt the draft scheme of arrangement, the directors were not voting in respect of any contract or arrangement within the meaning of the article however widely the words " in respect of" may be read. (at p58)

15. This conclusion, in my opinion, is sufficient to dispose of this appeal. The Supreme Court, in my opinion, was both authorized and justified in approving the scheme of arrangement. (at p58)

16. I have therefore no need to consider what, under an article in terms of the article in this case, would be the effect upon the validity of a contract or arrangement entered into by a board of directors, of a resolution carried when no quorum was present of directors who were not prohibited from voting by the last provisions of the article. (at p58)

17. I would dismiss the appeal. (at p58)

McTIERNAN J. I agree with the judgment of the Chief Justice and have nothing to add. (at p58)

MENZIES J. I agree that the appeal should be dismissed, and my agreement is based upon two interlocking grounds: the first is that in voting to adopt the scheme to be submitted to the Court pursuant to s. 181 the directors did not vote in respect of an arrangement within the meaning of art. 96 because that article relates to voting in respect of a company entering into an arrangement; here the directors at no time "determined on" an arrangement as that phrase is used in art. 96; they did no more than vote to make an application under s. 181 which might or might not lead to the adoption of an arrangement. (at p58)

2. Such an application was made on behalf of the companies and this leads me to the second basis of my decision. (at p58)

3. Section 181 authorizes an application by a company where an arrangement is proposed. Here an arrangement is proposed to the companies seemingly by J. B. Were &Son and the companies, by counsel, made an application for an order. The Court was not, I think, concerned to investigate whether or not the application had been authorized by the board of directors of the companies and, if it were that the application was not authorized by the board to the directors, the Court was nevertheless entitled to accede to the application made to it in accordance with the section. The proceedings brought before the Court were not a nullity as counsel for the appellant contend. (at p58)

MASON J. I agree with what the Chief Justice has said and I agree also with the observations made by my brother Menzies with respect to the Court's function under s. 181 of the Companies Act. I would dismiss the appeal. (at p59)

JACOBS J. I also agree and I would dismiss the appeal. (at p59)

Orders

Appeal dismissed with costs, including reserved costs.