In the matter of Cameraworld Ltd

[1993] FCA 512

JUDGES' CHAMBERS

FEDERAL COURT OF AUSTRALIA
450 LITTLE BOURKE STREET

MELBOURNE. 3000

29 July, 1993

Ms. Jan Costello,
Principal Registry,
Federal Court of Australia,
Level 16,
Law Courts Building,
Queens Square,

SYDNEY. N.S.W. 2000.

Dear Ms. Costello,

Re: Colnputerised Leaal Information Retrieval Svstem

I enclose the following word processing disk (judgment included) for inclusion in the data base of Federal Court Judgments.

1.    In the matter of Cameraworld Limited - VG3120 of 1993 - Single Judge - Jenkinson J. - Melbourne - 29 July, 1993.

Please return the disk when finished with for further use.

Yours faithfully,

Secretary to Mr. Justice Jenkinson

Lois Bendall

IN THE FEDERAL COURT OF AUSTRALIA	)
VICTORIA DISTRICT REGISTRY	) No. VG3120 of 1993

GENERAL DIVISION 1

In the matter of an application pursuant to section 194 of the

Corporations Law

IN THE MATTER OF

CAMERAWORLD LIMITED

Applicant

CORAM:	Jenkinson J.
PLACE :	Melbourne
DATE :	29 July, 1993

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. Each purported allotment made - = S of

shares in the applicant except the following allotments made on 17 March 1992 namely of 400 shares numbered 9001 to 9400 (inclusive) to Peter and Angela Ciliberto and of 200 shares numbered 9401 to 9600 (inclusive) to Janamy Pty. Ltd. and of 200 shares numbered 9601 to 9800 (inclusive) to Haroon and Gail Mohamed and except the allotment of 4000 shares the entitlement to which allotment derived from the holding of the

pursuant to Section 194 of the Corporations Law.	said shares numbered 9001 to 9400 (inclusive) be validated
2. The applicant lodge forthwith an office copy of this order with the Australian Securities Commission.

l

NOTE :

-	Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA	)
VICTORIA DISTRICT REGISTRY	) NO. VG3120 of 1993
GENERAL DIVISION	)
In the matter of an applicat~on	pursuant to section 194 of the
Corporations Law

IN THE MATTER OF

CAMERAWORLD LIMITED

Applicant

CORAM:	Jenkinson J.
PLACE :	Melbourne
W:	29 July, 1993

REASONS FOR JUDGMENT

Application for an order validating purported allotments of shares in the applicant company.

The applicant was incorporated in 1974 as a

proprietary company. The authorised share capital is

all of the one class. There are about 45 shareholders.	1,000,000 shares of $1. The issued capital is 66,374 shares,
Originally 4 persons subscribed the memorandum of association. On 23 June 1975 each of those four and 17 others was allotted 200 shares. The articles of association provided:

"41. Subject to any direction to the contrary that may be given by the Company in General Meeting, all new shares shall, before issue, be offered to such persons as at the date of the offer are entitled to receive Notices from the Company of General Meetings in proportion, as nearly as circumstances admit, to the amount of the existing shares to which they are entitled. The offer shall be made by notice specifying the number of shares offered, and limitlng a time within which the offer, if not accepted, will be deemed to be declined, and, after the expiration of that time, or on their receipt of an intimation from the person to whom the offer is made that he declines to accept the shares offered, the directors may dispose of those shares in such a manner as they think most

beneficial . "

The requirements of Article 41 were overlooked until 1992. On 23 June 1975 the four subscribers, being the only members and the only directors, met as the directors and resolved to make those allotments. Although no such notice as Article 41 required was given, the assent of the four to the allotments mlght have had for a consequence that the allotments were validly made. To quell doubt those allotments will be validated by order of the court.

Thereafter fifteen parcels of 200 shares the subject

of allotment on 23 June 1975 have been transferred. The

members of the applicant should be allotted 200 shares or	policy of the directors has been that those persons who become
should acquire 200 shares by transfer from persons who wish to cease being members. The business of the company is to buy cameras and other photographic equipment and to sell the equipment to members and other persons whose business is, or includes, sale of such goods by retail. The retailer places many of his orders directly with the wholesale supplier and takes delivery directly from the wholesale supplier, which sends to the applicant the invoice for the goods and receives payment from the applicant, whlch in turn receives payment from the retailer. Some goods are bought by the applicant, warehoused by the applicant, and subsequently sold by the applicant to the retailer. Untll 1992 the applicant had never declared a dividend. The gains the applicant made by way of rebates allowed by suppliers were credited to loan accounts of members in proportion to the value of the purchases each member had made during the period when the gains were derived. The directors regarded these moneys as repayable on demand, although they were content that members should have the impression that the moneys were repayable only on cessation of membership. Interest on the moneys lent was credited by the applicant to lenders' accounts. By 30 June 1991 the share capital was less than $10,000 and the indebtedness of the applicant to its members exceeded $300,000. Liabilities and assets were both about $1.1 million. Non-current assets were about $12,000. In the year ended 30 June 1991 the applicant had made a loss of nearly $20,000. The directors were advised by the applicant's auditors, and believed, that the applicant
of members was approaching fifty and the directors believed should increase the proportion of equity capital. The number that the applicant should become a public company. A meeting of members on 28 May L992 passed the following resolutions:

"1. As a special resolution:

That the Company convert to a public company and change its name to Cameraworld Limited.

2. As a special resolution:
That the regulations contained in the
document submitted to the meeting and for
the purpose of identification signed by
the Chairman of the Meeting are adopted as
the Articles of Association of the Company
in substitution for the present Articles
of Association of the Company.

3.    As an ordinary resolution:

That the capital of the Company is increased to $1,000,000 by the creation of 900,000 new shares of $1.00 each.

4.  As an ordinary resolution:

That the recommendation of the Directors that shares in the Company no longer be issued as a matter of right to a person who contracts with the Company to become a member of the Cameraworld buying group is hereby approved.

5.    As an ordinary resolution:

That the recommendation of the Directors that the Company continue the policy of maximising the return to members of the Cameraworld buying group through rebates and discounts but that the long term financial stability of Cameraworld should also be improved by the retention of some earnings is hereby approved.

6. As an ordinary resolution:
That the recommendation of the Directors that 92000 shares in the capital of the Company be offered to the members is

hereby approved on the following terms:

(a) The Directors must give notice of the
issue to the members.

(b) The notice must specify the number and terms of the issue of the Shares proposed to be issued and the price per share ("issue price').

(c) A member may at the time within 14 days from the date on which the notlce is served on the Member ('acceptance period') lodge with the Directors at the Registered Office a notice in writing ('notice of acceptance') stating the number of the shares proposed to be issued for which the Member is willing to subscribe at the issue price.

(d) At the end of the acceptance period the Directors must give to any Member who has lodged a notice of acceptance a notice in writing specifying the names of any Members who have lodged notices of acceptance and the number of Shares to which each of them is entitled on a pro rata basis.

(e) If at the end of the acceptance period the aggregate number of shares in respect of which notices of acceptance have been lodged exceeds the number of shares proposed to be issued, the shares must be issued to the Members who have lodged notices of acceptance as nearly as may be in proportion to their respective shareholdings, but so that a greater number of shares is not in any case issued to a Member than is specified in the Member's notice of acceptance.

(f) If at the end of the acceptance

period the aggregate number of shares in respect of which notices of acceptance have been lodged is less than the number of shares proposed to be issued the shares must to the extent of the acceptances be issued to the Members who have lodged notices of acceptance and the Directors may deal with the remainder in accordance with paragraph (g).

(g) If under paragraph (f) the Directors

accordance with this paragraph, they must are entitled to deal with the shares in

at any time within three months from the end of the acceptance period offer all of the remainder of the shares to Members who have lodged notices of acceptance and the provision of these terms will apply ipso facto to that offer save that the period of '14 days' referred to in paragraph (c) will be ' 7 days'.

(h) In the event that following the offers made in paragraph (g) the aggregate number of shares in respect of which notices of acceptance have been lodged is less than the number of shares proposed to be issued then the Directors may at any time within three months from the end of that acceptance period issue all or any of those shares to any person on these terms of issue and at a price equal to or greater than the issue price."

As has been observed, new members were sometimes allotted shares and sometimes acquired shares by transfer. There was never compliance with the requirements of Article 41, which were overlooked until a newly appointed General Manager of the Applicant, Hugh Robert Gillespie, brought them to the attention of the directors, as he was sworn, at the meeting of the board on 17 March 1992, when the board was preparing to submit the resolutions passed on 28 May 1992 to a meeting of members. Peter Ciliberto, the chairman of the applicant's directors, has sworn that knowledge of Article 41 and the possible consequences of the directors' failure to observe its requirements was first communicated to the directors at a meeting of directors on 26 April 1992.

When a member to whom 200 shares had been allotted

in 1977 acquired a second shop in 1979 that member took by

transfer another parcel of 200 shares. That was said to be in	accordance with a policy of the directors that a member might
hold 200 shares in respect of each shop in which the member sold cameras and photographic equipment. Knowledge of the policy was not formally communicated to all members, and was confined, in the main, to persons each of whom had at some time been a director of the applicant.

A letter dated 16 April 1992 from Mallesons Stephen

Jaques to Mr. Gillespie tendered advice about the re- organisation of the applicant. The letter included the following:

"1. Allotment of Shares

1.1 The Articles of Association o f Cameraworld are the Regulations set out in Table A of the Fourth Schedule to the 1961 Companies Act (as amended by the written Articles adopted by Cameraworld).

1.2 Regulation 41 of Table A regulates the
directors' power to allot shares.

1.3 Regulation 41 is in the following

terms -

'41 Subject to any direction to the contrary that may be given by the company in general meeting, all new shares shall, before issue, be offered to such persons as at the date of the offer are entitled to receive notices from the company of general meetings in proportion, as nearly as circumstances admit , to the amount of the existing shares to which they are entitled. '

Regulation 41 goes on to allow the directors to issue shares other than on

whom the shares have been offered have a pro rata basis, when shareholders to

failed to accept an offer or when a pro

rata issue would be inconvenient owing to the ratios which the new shares bear to the shares currently held by shareholders.

1.4 It is clear that Regulation 41 prescribes that unless the company in general meeting directs otherwise, allotments of shares are to be pro-rata to existlng shareholders.

1.5 It seems that previous ad hoc single allotments are contrary to the articles of association and thus invalid.

1.6 Consideration should be given to

Cameraworld in general meeting rarifying
previous invalid allotments. If all
shareholders ratify these allotments,
they will be estopped from later raising
any objection to the allotments.

1.7 The draft articles of association enclosed under cover of this letter empower the directors to allot shares on any basis that they see f ~ t . If the draft articles are adopted, any future allotment will be made in accordance with the new articles.

1.8	A director is required to exercise the power vested in him for a proper purpose. For example, if a company is in need of additional capital, the directors may not raise that additional capital with the primary intention of diluting the shareholding of a shareholder or a group of shareholders.
1.9	Having regard to the present debt to equity ratio of Cameraworld and accepted business practice, the issue of 91,200 shares of $1.00 each in the capital of Cameraworld is a valid exercise of the directors' powers."

Two directors, Mr. Ciliberto and Kenneth Allan
Wanden, swore that they first had notice that allotments of
shares may have been invalidly made when that letter was shown to them. I do not accept the evidence of Mr. Ciliberto as to that. I accept the evidence, contradicted in evidence by Mr. Ciliberto, of Mr. Gillespie that he drew the problem which Article 41 had created to Mr. Ciliberto's attention in February 1992 and gave Mr. Ciliberto a short memorandum dated 19 February 1992 on the subject at about that time. I make no finding as to whether the subject of the invalidity of allotments was raised at the directors' meeting held on 17 March 1992, at which shares were allotted.

Mr. Ciliberto deposed as follows in respect of that

meeting:

"I am advised by each of the Directors of the Company and its auditor Mr. Cheeseman that at the Board Meeting on the 17th March 1992 when it was resolved to issue further shares none of them or myself was aware of the possible invalidity in prior share issues or that in issuing these further shares the Articles of Association were not being complied with. The reason why the Company's Auditor Mr. Cheeseman was at this meeting was for the specific purpose of assisting in the 'cleaning up' of the Share Register. There were several members still listed as (members who the Company had lost contact with. There were members who had ceased to be members of the Buying Group and were now members of alternative buying groups, but still held shares in the Company. There was an anomaly in the fact that I personally held share certificates for 1,000 shares and yet the Share Register reflected that i only held 800 shares. At the same time as the 'clean up' myself and two of the other directors decided to take further parcels of shares in respect of other retail outlets owned or controlled by them which purchased photographic equipment from the Company. As can be seen from Exhibit 'HG4' myself and my wife and Janamy being a Company which I then owned 50% of, which I now have no interest in, purchased or issued three parcels of shares. Haroon Mohamed and his wife received another	parcel and Peter Royce through a Company owned	and controlled by him, Amescourt Pty Ltd
purchased another parcel of shares which was obtained through the 'clean up'."

The applicant's auditor, who was present at the meeting from noon until 1.30 p.m., while resolution was taken to allot shares and to approve a transfer of shares, deposed as follows:

"The circumstances surrounding the further issues of shares are set out in paragraph 28 of

the Affidavit of Peter Ciliberto sworn on the 7th July 1993 which I have read. I confirm that I was at this particular Directors' Meeting for the speciflc purpose of assisting the Board in analysing the Share Reglster and ascertaining if any shares were held by persons who were no longer members of the Cameraworld Buying Group and to ascertain the correct and accurate details of all current shareholders and to sort out the problem that had arisen by reason of P & A Ciliberto holding Share Certificates for 1,000 shares and yet the Register recording them is only holding 800 shares. At the meeting 200 shares were allotted to P & A Ciliberto to correct this anomaly. A further transfer fo shares was approved to Peter Royce to his Company Amescourt Pty Ltd as he had recently purchased a business in Lilydale and was receiving the shares from the vendor of the business being a Company called Matlon Pty Ltd. In the same analysis the Directors considered any other shareholders who had multiple outlets and who did not have 200 shares for each outlet which purchased camera equipment from the Company. It was agreed that as Peter Ciliberto had six stores he should have a further 200 shares in respect of his sixth store. It was noted that Haroon Mahomed had two stores and yet didn't have 200 shares in respect of his second outlet and accodingly a fruther 200 shares was resolved to be issued to him in respect of that outlet. Janamy Pty Ltd was a Company in which the shares were owned equally by Ronald Gordon, who is currently a director of the Company and Peter Ciliberto. I am advised by Mr. Ciliberto and verily believe that he sold his 50%

the settlement did not occur and the transfer	interest in Janamy Pty Ltd in May 1992 however
was not recorded until November 1992. Janamy Pty Ltd operates a store in Bulleen and is now wholly owned by Ronald Gordon."
The minutes of the meeting read in part:
"MINUTES OF A MEETING OF DIRECTORS HELD ON TUESDAY 17TH MARCH 1992 AT 12 EDWIN ST TEMPLESTOWE AT NOON
PRESENT: Directors - P. Ciliberto (Chairman)

I. Herbert
J. Campbell
P. Royce

H. Mohamed
R. Crowther

K. Wanden

others - H. Glllespie (Gen.Mgr) R. Cheeseman (Auditor)

A. ALLOTMENT OF SHARES. The following
applications for shares were received:

Peter and Angela Ciliberto - 400 Shares Janamy Pty Ltd - 200 Shares

Haroon and Gail Mohamed - 200 Shares

It was RESOLVED that the shares be allotted at par payable in full on allottment and to affix the Common Seal of the Company to the Share Certificates issued in the names of the allottees.

B. TRANSFER OF SHARES. The following

transfer of shares was approved:

Matrol Pty Ltd to Amescourt Pty Ltd

- 200 Shares

It was RESOLVED to cancel the old share certificate and to affix the Common Seal of the Company to the new Share Certificate issued in the name of the Transferee.

C. BANK ACCOUNT SIGNATORIES. It was RESOLVED that the Bank Account signatories be changed and that any two of the Directors or any one of the Directors together with H.R. Gillespie be authorised to sign cheques and to otherwise

operate the bank accounts of the Company.

D. CURRENT LIST OF SHAREHOLDERS. R. Cheeseman tabled a list of shareholders current after the issue of shares and transfer of shares in A and B above. A copy of that list is attached to these Minutes.

R Cheeseman left the meeting at 1:35pm."

The subject of invalidity was not raised at the meeting of members on 28 May 1992, or in the letter to members signed by Mr. Ciliberto which was sent with the formal notice of the meeting. The prospectus in respect of the issue of 92,000

shares was silent on the subject. When the prospectus issued the applicant's articles no longer contained a provision like Article 41. The prospectus disclosed the directors' shareholding as follows:

"Ian Leslie Herbert
Peter Ciliberto
Kenneth Allan Wanden
John Alfred Campbell
Haroon Mohamed
Peter Ronald Royce

Rodney Crowther

*Note: M r Ciliberto's holding includes 200

shares in a company of which he owns 5 0 % . "

The prospectus stated, inter alia:

"2. Purpose of the Issues

The Offer is being made to raise approximately $92,000 by way of issue of up to 92,000 New Shares.

The Company is presently significantly under capitalised, with $9,200 in issued share capital and approximately $366,000 in loans from Members. It is expected that the

will come mostly from these loans already held	subscription moneys for the 92,000 New Shares
by the Company, and the balance in cash. Accordingly, the effect of the subscription will be to reduce the loans and increase the issued share capital and therefore, there will be a comensurate increase in net assets to the extent of that subscription. Directors of the Company feel that this capital reconstruction is essential and should be accomplished in conjunction with the change to public company status.
9.3 Dividend policy
Cameraworld will continue with its established trading policies in relation to its dealings with both suppliers and Members. However, as income increases with increasing Membership and consequently trading arrangements with suppliers improve, a portion of net income, if any, may be retaine,d the principal purpose of which will be to improve the financial stability of Cameraworld. In due course, subject to the Company having complied with its obligations to all Members, both shareholders and otherwise, and subject to having achieved a proper level of financial stability, the Board may, at its discretion, declare a divident or make a bonus issue of shares to shareholders. There can be no guarantee that dividents will
be paid. "

There was nothing elsewhere in the prospectus to suggest that gains would be distributed by way of dividends rather than by way of rebates. I think that the passages which I have quoted would have given members of the company aware that no dividend had ever been paid by the applicant no reason to think that that would change in the immediate future. In respect of the financial year ended 30 June 1992 dividends aggregating $9,956 were paid to members. The annual general meeting approved that dividend.

Mr. Gillespie, who appeared in person on the hearing of the application, and Mr. Gillies of counsel for a member who appeared on the hearing of the application, Brian William Murray, criticised the conduct of directors, particularly Mr. Ciliberto, in respect of their allotment of shares, their failure to ensure that members were aware that 200 shares might be alloted in respect of each shop conducted by a member in which photographic supplies were sold, their failure to notify members promptly of the possible invalidity of allotments and their declaration of a dividend. Selfish motives of directors were suggested. Directors denied improper motive and offered explanations of their conduct.

I find that Mr. Ciliberto's agreement in the allotment of shares on 17 March 1992, when he knew that the validity of an allotment without compliance with Article 41 was questionable, was improper, as would have been his failure to inform the other directors of the problem, if in fact they did not then know of it. I have not found that they did. I find that the failure of the directors to notify the members of the applicant, at or before the meeting of 28 May 1992, of the doubt about the validity of allotments, was improper. It was said that the directors were not advised by Mallesons Stephen Jaques, who were advising them about the matters which were the subject of the meeting, that the invalidity of allotments should be brought to the attention of the members at that meeting. That firm was not represented before me, nor did any member of the firm give evidence. For all I know the

about the conduct of any member or employee of the firm. I	firm was not aware of this proceeding. I make no finding
consider that a director without legal knowledge ought to have realised that the subject should be brought to the members' attention, whether or not Mallesons Stephen Jaques had adverted to the question.
I need go no further in consideration of the propriety or the reasonableness of the directors' conduct, for the purposes of determining what orders should be made in this proceeding. I find that the conduct of the directors was such that some members of the applicant would be very likely, when they learnt that the directors had failed to disclose the problem to the meeting, to suspect that the directors had concealed the problem for the purpose of serving their own interests, or the ~nterests of one or more of them. A shareholder who learnt of the allotments made on 17 March 1992 might well have had his suspicion strengthened. Only one member of the company who was not a director appeared before me, although all members were served with notice of the application. That might be said to indicate a lack of dissatisfaction on the part of members with the directors' conduct. But, in considering what is just and equitable to do in exercise of the jurisdiction conferred by s.194, I think regard should be had to what I think the reaction of a reasonable shareholder mlght be expected to have been when he received, with notice of the application to the court, a copy
of an affidavit filed in support of the application which discloses that in April 1992 Mallesons Stephen Jaques had "advised that previous allotments appeared to be invalid . . . .
[and] that consideration should be given to holding a general meeting ratifying the previous invalid allotments." The affidavit gives reasons why that was not done at the meeting of 28 May 1992. But neither in that affidavit nor elsewhere in the evidence do I find any reasonable explanation for the directors' failure to take the opportunity that meeting offered them to disclose the problem to the members.
Whatever the attitudes of members, the court ought in my opinion to take into consideration in exercising the
discretionary power conferred by s.194 the opportunity whlch
an application under the section offers to emphasise the imperative need of candour on the part of directors in their dealings with the members of a company.
Until the directors' meeting of 17 March 1992 there had been on the part of directors simply an oversight of Article 41. There had also been a regrettable failure to inform members of the policy that a member might be alloted 200 shares in respect of each shop. But I do not consider that a favourable exercise of the power conferred by s.194 ought to be withheld in respect of allotments to directors in furtherance of that policy before 17 March 1992. The allotments upon which the directors resolved on that day should not be validated. If the other directors did not know of the possible invalidity, Mr. Ciliberto did, as I have found. The allottment of 400 shares numbered 9001-940 to
numbered 9401-9600 to Janamy Pty. Ltd. and the allotment of Peter and Angela Ciliberto, the allotment of 200 shares
200 shares numbered 9601-9800 to Haroon and Gail Mohamed will not be validated. Nor will allotment of the 4000 shares allotted to Ciliberto Nominees Pty. Ltd., the purported entitlement to which derived from the 400 shares numbered 9001-9400. Mr. De Marco, who appeared for the Australian Securities Commission, submitted that the allotment of no more than 2000 shares allotted to a director in May 1992 should be validated. That would reflect, in Mr. De Marco's submission, the court's disapproval of the conduct of directors in taking advantage from time to time of the policy that a member might take an allotment of 200 shares in respect of each shop, but failing to publish the policy effectively to members. But some of the additional parcels of 200 were taken by transfer, not by allotment. And I am not persuaded they were taken to gain a personal advantage rather than to express as a director a commitment to the applicant. Even if I were, I am doubtful how far the discretionary power conferred by s.194 is available to discourage conduct which was not motivated by considerations which motivated the conduct bringing about invalidity. Until 17 March 1992 the acquisition of additional shares was quite unconnected with the failure to comply with Article 41, so far as I can determine on the evidence before me. On 17 March 1992 the director Peter Royce took by transfer, not by allotment. And Mr. and Mrs. Mohamed did not take an allotment of shares in May 1992. In all the circumstances all the allotments of shares in the applicant,
except the 4800 shares I have specified, will be validated. I certify that this and the 16 preceding pages are a true copy of the Reasons for Judgment of the Honourable Mr. Justice Jenkinson.

Associate

Dated: 29 July, 1993

Counsel for the Applicant	Mr. I.R. Jones
Solicitors for the Applicant	Coltmans
Counsel for B.W. Murray	Mr. W.F. Gillies
Solicitors for B.W. Murray	Price Bird
Counsel for Australian	Mr. A. De Marco
Securities Commission
Solicitors for Australian	Regional General Council
Securities Commission
Dates of Hearing	8, 9, 12 and 13 July,