Morgan v 45 Flers Avenue Pty Ltd

[1985] HCA 68

HIGH COURT OF AUSTRALIA

MASON ACJ, WILSON, BRENNAN, DEANE, DAWSON JJ

WAYDE AND ANOTHER v NEW SOUTH WALES RUGBY LEAGUE

(1994) 180 CLR 459

17 October 1985

Companies

Companies—Incorporated controlling body of professional football competition—Member club—Decision to exclude member club from competition—Power in articles to exclude—Whether exclusion oppressive—Companies (New South Wales) Code, s. 320(2).

Decisions

MASON A.C.J., WILSON, DEANE, DAWSON JJ. This is an appeal from a unanimous decision of the Court of Appeal of the Supreme Court of New South Wales (Street C.J., Kirby P. and Hope J.A.) setting aside a decision of the primary judge (Hodgson J.). That latter decision had restrained the respondent ("the League") from acting on a decision made by its Board of Directors ("the Board") on 3 September 1984 that the number of teams in the Winfield Cup premiership competition in 1985 be limited to twelve and its further decision of the same date that the application of the Western Suburbs District Rugby League Football Club ("Wests") for entry into that competition be refused. The present appellants, who were the plaintiffs in the proceedings, are members of the League in their capacity as representatives of Wests.

2. The reasons for judgment of the Court of Appeal contain a description of the history and organization of rugby league football in New South Wales and it is unnecessary for us to do more than sketch events since 1983 so far as they affect Wests.

3. The League was incorporated on 21 December 1983, taking over the functions of an unincorporated association ("the Association") which had conducted rugby league football competitions in Sydney since 1907. Wests had been a member of the Association since 1907. In 1982 the number of clubs participating in the competition conducted by the Association increased to fourteen, thereby imposing considerable strains on the conduct of the competition. At the same time Wests was experiencing financial difficulty and secured an interest-free loan of $200,000 from the Association. On 26 September 1983 the General Committee of the Association resolved that Wests would not be permitted to participate in the competition in 1984. Another team had been withdrawn from the competition, with the result that without Wests the number of participating clubs would be reduced to twelve. However Wests sued successfully in the Equity division of the Supreme Court to have the decision set aside. On 22 November 1983, Helsham C.J. in Equity held that the power conferred by cl.46(1) of the Association's constitution, namely a power in the General Committee of the Association to "conduct such competitions between teams representing District Clubs ... as the General Committee may, from time to time, determine ... ", did not authorize the Committee to exclude any particular team from the competition. Thereafter, on 5 December 1983, a special meeting of the General Committee of the Association passed a resolution that cl.46(1) of the constitution be amended by inserting the words "all or some of the" following the word "representing" and before the word "District". Although in the course of the debate that preceded the passing of the resolution the Chairman assured the meeting that the resolution was not directed against Wests, the amendment was clearly intended to make good the lack of power exposed by the decision of the Supreme Court. Wests entered teams in the premiership competition in 1984.

4. In the meantime arrangements had been concluded for the Association to be incorporated pursuant to the Companies (New South Wales) Code ("the Code") and this was accomplished, as we have mentioned, on 21 December 1983.

5. Clause 3 of the League's memorandum of association sets out the objects for which the League is established and its powers. That clause includes the following paragraphs:

"(a) To take over the funds and other assets and the liabilities of the present unincorporated body known as the New South Wales Rugby Football League.

(b) To foster and control the game of rugby league football throughout the State of New South Wales and The Australian Capital Territory and generally to take such action as may be
considered conducive to its best interests.

...

(j) To determine which Clubs shall be entitled to enter teams in the Rugby League Premiership and other competitions conducted by the League and the terms and conditions upon which and the manner in which Clubs shall make and renew such applications".

Article 2 of the articles of association provides for the membership of the League and that the members of the League shall constitute its General Committee. Article 23 provides that there shall be nine persons constituting the Board and defines its composition. Article 32(a) provides as follows:

"The business of the League shall be managed by the Directors who may pay all expenses incurred in promoting and arranging for the incorporation of the League and who may exercise all such powers of the League as are not by the Code or by these Articles required to be exercised by the League in general meeting subject nevertheless to any of these Articles and to the provisions of the Code and to such Rules and Regulations as may be prescribed by the Board of Directors".

Article 76, corresponding substantially with cl.46(1) of the Association's constitution, is as follows:

"The League may conduct such competitions between teams representing all or any of the Clubs or Junior Leagues as the Board of Directors may from time to time determine provided that the Board of Directors may at its discretion invite other Clubs to participate in any competition conducted pursuant to the provisions of this clause".

6. Beginning in June 1984 the Board engaged in consultation with the district clubs concerning the conduct of the premiership competition in 1985. It called for applications for entry into the competition and circulated guidelines by reference to which those applications would be considered. It also requested comment on the format of the competition, including a suggestion that the number of competing teams be limited to twelve. The request produced a diversity of responses.

7. On 30 July 1984 Wests applied for admission to the 1985 competition. On 3 September 1984 the Board considered a recommendation from a committee that the 1985 competition be conducted among twelve teams. At that meeting the General Manager of the League, Mr Quayle, outlined the reasons for the recommendation as follows:

"(a) There were too many games in the Competition and the Competition was too long.

(b) There had been complaints from the players that they were playing too much football particularly during the early stages of the season when four rounds of football had been played in two weeks.

(c) If there was a reduction to twelve teams it would mean that the Competition would require four fewer playing days. That would allow the defendant to have three weekends throughout the year to be used for split rounds prior to representative fixtures and also to keep two weekends free in order to allow for possible cancellation of games due to bad weather. It might also be possible to use the extra time to overcome the problems of the players doubling up on weekends in representative and Premiership fixtures.

(d) Mr Quayle also referred to problems discussed in 1983 by the Executive Committee of the unincorporated association which arose from the early start in 1983 Competition due to the necessity to play so many games. These problems related to the dangers to the players involved in playing such games in hot weather.

...

(f) Mr Quayle also referred to the other problems caused by playing four games in two weeks namely that the players did not have a proper opportunity to recover even from minor injuries between games".

The recommendation was accepted. There followed, after further discussion, a decision that Wests' application for entry into the 1985 competition be refused.

8. Two distinct submissions are advanced by Mr Conti for the appellants. The first is that the decisions of 3 September 1984 to which we have referred were beyond the power of the Board. This point is not pleaded in the Statement of Claim and Mr Conti frankly admits that it was only faintly raised in the Court of Appeal. Indeed the Court was informed that the written submissions tendered to the Court of Appeal on behalf of the appellants expressly conceded that a power to exclude a club from the competition was to be derived from cl.3(j) of the memorandum of association and art.76 of the articles of association. Be all this as it may, the point which is now sought to be taken is one of importance, touching as it does an important aspect of the powers of the League in its conduct of its affairs. Having heard full argument on the question, it is manifestly desirable that the Court should determine it.

9. The appellants argue that art.76, on its proper construction, does not empower the Board to exclude any club from a competition. The purpose of the article is said to be facultative, conferring power only to include, not to exclude, any club. The phrase "as the Board of Directors may from time to time determine" controls only the words "such competitions". Alternatively, it is argued that the article permits only exclusion of a club from entering a team in a section or grade of a competition.

10. These propositions cannot be accepted. First, they fly in the face of the plain meaning of the words used in the article. If it was intended that the discretion of the Board extended only to the determination of the competitions that are to be conducted, the phrase "as the Board of Directors may from time to time determine" would follow immediately on the words "such competitions". The power conferred on the Board extends, as a matter of language, to the composite subject matter "such competitions between teams representing all or any of the Clubs or Junior Leagues". So far as the alternative argument is concerned, there is no warrant for limiting the power of the Board to determine that one or some but not all of the teams representing a particular club be excluded from a competition.

11. Secondly, if regard is had to the breadth of the object set out in cl.3(j) of the memorandum of association, it is to be expected that the articles of association will contain a corresponding power. That object, inter alia, is to determine which clubs will be entitled to enter teams in the premiership and other competitions conducted by the League. Article 76 indicates the route by which that object may be pursued.

12. Thirdly, as we have already noted, the litigation in 1983 focused on the very issue which is now raised and the subsequent amendment of cl.46(1) of the Association's constitution, precisely in order to overcome the lack of power found to exist by Helsham C.J. in Equity, points clearly to the intended breadth of art.76.

13. The second submission of the appellants relies upon s.320 of the Code. It is the claim for relief under this section which formed the substantial matter of contention in the proceedings before Hodgson J. and in the Court of Appeal.

14. The section, so far as relevant, reads as follows:

"320.(1) An application to the Court for an order under this section in relation to a company may be made -

(a) by a member who believes -

(i) that affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or in a manner that is contrary to the

interests of the members as a whole; or

(ii) that an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or

members or was or would be contrary to the interests of the members as a whole;

...

(2) If the Court is of the opinion -

(a) that affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section referred to as the 'oppressed member or members') or in a manner that is contrary to the interests of the members as a whole; or

(b) that an act or omission, or a proposed act or omission, by or on behalf of a company, or a resolution, or a proposed resolution, of a class of members of a company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section also referred to as the 'oppressed member or members') or was or would be contrary to the interests of the members as a whole,

the Court may, subject to sub-section (4), make such order or orders as it thinks fit, including, but without limiting the generality of the foregoing, one or more of the following orders:

(c) an order that the company be wound up;

(d) an order for regulating the conduct of affairs of the company in the future ... ".

15. It is conceded that the Board made the decisions which are under attack in good faith. There is no suggestion that, in exercising the power conferred by art.76, it failed to have regard to relevant considerations or that it took irrelevant considerations into account. It is a point of great importance that the decisions were made in the exercise of a power that is expressly conferred on the Board, a power to determine the nature and extent of the competition that was to take place in 1985 and the clubs that were to be permitted to participate in it. It is not a case where the directors of a company, in the exercise of the general powers of management of the company, might bona fide adopt a policy or decide upon a course of action which is alleged to be unfairly prejudicial to a minority of the members of the company. In that kind of case it may well be appropriate for the Court, on an application for relief under s.320, to examine the policy which has been pursued or the proposed course of action in order to determine the fairness or unfairness of the course which has been taken by those in control of the company. The Court may be required in such circumstances to undertake a balancing exercise between the competing considerations disclosed by the evidence: cf. Thomas v. H.W. Thomas Ltd. (1984) 2 ACL.C. 610, at pp 618, 620.

16. But here the decision to limit the premiership competition to twelve participants - and this was the critical decision - was taken honestly in pursuit of the object of fostering the game of rugby league and serving its best interests (cl.3(b), memorandum of association). The Board was not only empowered but obliged to face up to the difficulties presented by a competition which occupied too long a period of the year and to exercise the power expressly bestowed upon it in a manner which it considered to be in the best interests of the game. It is not seriously suggested that the Board overlooked the extreme consequences which the decision would visit upon Wests, amounting perhaps to its virtual extinction. The appellants' contention is that, while the Board could reasonably conclude that a competition confined to twelve clubs was preferable to one involving thirteen clubs, the facts that the latter was not wholly unworkable and that Wests was a viable competitor lead to the conclusion that the prejudice to Wests so outweighs the perceived benefits to the League as to be unfair. They submit that the exclusion of a viable club, such exclusion not being required to render the competition workable, would promote "purposes foreign to the company's operations, affairs and organizations", adopting the meaning ascribed to the phrase "benefit of the company as a whole" by Dixon J. in Peters' American Delicacy Co. Ltd. v. Heath (1939) 61 CLR 457, at p 512.

17. The answer to this contention is that no amount of sympathy for Wests can obscure the fact that the League was expressly constituted to promote the best interests of the sport and empowered to determine which clubs should be entitled to participate in competitions conducted by it. It was upon this basis that the clubs, including Wests, chose to incorporate. Indeed, the 1984 correspondence between Wests and the League which is in evidence plainly shows that Wests itself fully appreciated that it had no secure right to participate in the premiership competition. In truth, the Board was confronted with a conflict of immediate interest between Wests on the one hand and the League as a whole on the other and the exercise of the power conferred by art.76 must necessarily be prejudicial to one or the other. Given the special expertise and experience of the Board, the bona fide and proper exercise of the power in pursuit of the purpose for which it was conferred and the caution which a Court must exercise in determining an application under s.320 of the Code in order to avoid an unwarranted assumption of the responsibility for management of the company, the appellants faced a difficult task in seeking to prove that the decisions in question were unfairly prejudicial to Wests and therefore not in the overall interests of the members as a whole. It has not been shown that those decisions of the Board were such that no Board acting reasonably could have made them. The effect of those decisions on Wests was harsh indeed. It has not, however, been shown that they were oppressive or unfairly prejudicial or discriminatory or that their effect was such as to warrant the conclusion that the affairs of the League were or are being conducted in a manner that was or is oppressive or unfairly prejudicial. That being so, the appellants have failed to make good their second submission.

18. The appeal must be dismissed.

BRENNAN J. The Board of Directors of New South Wales Rugby League Limited ("the League") has power under Art.76 of the League's articles of association and conformably to cl.3(j) of the memorandum of association to determine which clubs should and which clubs should not be entitled to enter teams in the Sydney Winfield Premiership Competition and in other competitions conducted by the League. The majority judgment states the reasons for so construing Art.76 and I agree with those reasons. The exclusion of a club from a competition deprives the club of no property and denies it no right under the articles of association. However, the exclusion of a club from the Premiership Competition is extremely damaging for it deprives the club of considerable revenue which flows from its teams' participation in the three grades of the competition and goes far towards destroying the club's ability to retain players and to maintain its existence as a football club. It is common ground that, when the directors of the League decided to reduce the number of competitors in the Premiership Competition to 12 and to exclude Western Suburbs District Rugby League Football Club ("Wests") from the competition, they were aware of the damage which their decision would cause to Wests. The evidence disclosed that the directors made the decision for the purpose of advancing the object contained in cl.3(b) of the League's memorandum of association:

" To foster and control the game of rugby league football throughout the State of New South Wales and The Australian Capital Territory and generally to take such action as may be considered conducive to its best interests."

The Premiership Competition is the focus of interest in the game of rugby league in New South Wales and the Australian Capital Territory and the organization of that competition is essential to the fostering of the game. Control of the number of competitors is an integral part of the organization of the Premiership Competition. The power conferred by Art.76 to control the number of competitors in the Premiership Competition is of great importance in the fostering of the game generally.

2. As the power conferred by Art.76 is of such a nature that its exercise may discriminate among the clubs wishing to compete and may prejudice a club which is excluded from a competition, an exercise of the power is not necessarily invalid because a club is discriminated against and prejudiced by being excluded from a competition. The countervailing considerations of efficient organization of the competition and the interests of the respective clubs which wish to compete must be weighed by the directors (cf. Mills v. Mills (1938) 60 CLR 150, at p 164) and a decision made as to which interest shall prevail or as to how the interests should be adjusted. The resolution of the countervailing considerations was a function entrusted to the directors by the constitution of the League and the members of the League were entitled to have their directors perform that function according to their own judgment. If we leave aside for the moment s.320 of the Companies (New South Wales) Code, there is no foundation for the order sought by Wests to restrain the Board of Directors from acting on their resolution to exclude Wests. As Lord Wilberforce said in delivering the judgment of the Judicial Committee in Howard Smith Ltd. v. Ampol Ltd. (1974) AC 821, at p 832:

" There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at."

That proposition does not apply, of course, where the statute requires a decision to be confirmed by the court and the court gives or withholds confirmation according to its opinion of the fairness of the decision - for example, a decision to reduce capital (cf. Poole v. National Bank of China, Limited (1907) AC 229, at p 239; Carruth v. Imperial Chemical Industries, Ld. (1937) AC 707, at pp 744,763,770). But in the absence of statutory authority, the court may not intervene and hold the decision invalid on the ground that the court thinks the decision unreasonable. If the decision is such that no reasonable board of directors could think the decision to be substantially for a purpose for which the power was conferred, the court may infer that the directors did not make the decision in good faith for a purpose within the power and intervene on that ground (see Shuttleworth v. Cox Brothers &Co. (Maidenhead) (1927) 2 KB 9, at pp 23, 24). The dictum of Latham C.J. in Peters' American Delicacy Co.Ltd. v. Heath (1939) 61 CLR 457, at p 481, with respect to a decision which "no reasonable man could have reached" relied on Shuttleworth, and should not be understood as asserting a wider ground for intervention. In the present case the good faith of the directors was conceded and Wests' complaint was not that the directors failed to consider the object of fostering the game or failed to take into account the impact of their decision on Wests. In essence, the attack on the decision is founded on the submission that the directors unreasonably failed to give the disability which their decision placed on Wests sufficient weight. The validity of an exercise of power cannot be challenged merely because too little weight is given to some matters which properly fall for consideration and too much to others, for the court will not substitute its discretion for the discretion exercised in good faith by the directors. As Barwick C.J., McTiernan and Kitto JJ. said in Harlowe's Nominees Pty.Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 CLR 483, at p 493:

" Directors in whom are vested the right and the duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts."

3. Section 320, however, extends the grounds for curial intervention. It provides a wide range of remedies when the Court is of the opinion, inter alia, that a resolution or a proposed resolution "was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members ... or was or would be contrary to the interests of the members as a whole" (sub-s.(2)(b)). The remedies for which s.320 provides are available whether or not the resolution complained of is a valid resolution. To say that the resolution was adopted in good faith and for a purpose within the power conferred is relevant to but not conclusive of the question whether relief should be granted under s.320.

4. In earlier times, the statutory precursors of s.320 empowered the court to grant a remedy when the affairs of the company were being conducted "in a manner oppressive to one or more of the members" (see, for example, s.186 of the Companies Act 1961 (N.S.W.)). In that context, Viscount Simonds defined oppressive to be "burdensome, harsh and wrongful" (Scottish Co-operative Wholesale Society Ltd. v. Meyer (1959) AC 324, at p 342). The strength of those epithets confined the grounds on which the court might intervene, but s.320 (both in its original 1981 form and in its amended 1983 form) broadens the grounds of intervention. Clearly the legislature intends to provide a greater measure of curial protection to members of a company, especially if they be in a minority, than the protection afforded under earlier Companies Acts. In Thomas v. H.W. Thomas Ltd. (1984) 2 ACLC 610, the Court of Appeal of New Zealand held that under a similar but not identical provision (s.209 of the Companies Act 1955 (N.Z.)) it was not necessary for a complainant to point "to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company": per Richardson J., at p.617. I would respectfully adopt that observation and apply it to s.320. Section 209 of the New Zealand Act provides a remedy in cases where the Court "is of the opinion that it is just and equitable" to grant a remedy. Although notions of what is just and equitable are relevantly to be considered in applying s.320, the just and equitable requirement does not appear in the analogous provisions of the Australian Companies Codes. That textual difference may be material, but I do not pause to consider it now, for it does not affect the view which I take of the present case.

5. Here, the appellants seek to restrain the exercise of a power of such a nature that its exercise is apt to discriminate among the clubs whose representatives are members of the League and to prejudice any club which is excluded from the Premiership Competition. The expression "the interests of the members as a whole" is not likely to provide a criterion for intervention in respect of a decision made in exercise of a power that is conferred to resolve a conflict of interests between one or more members on the one hand and the League's object of fostering the game on the other. In that context the interests of the members as a whole "tends to become a cant expression", to adopt the words of Rich J. in Richard Brady Franks Ltd. v. Price (1937) 58 CLR 112, at p 138. In the present case, the relevant expressions are "oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member". Where the directors of a company are empowered to discriminate among its members and to prejudice the interests of one of them, the adoption of a resolution which has that effect and which is made in good faith and for a purpose within the power is not, without more, "oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member". Section 320 requires proof of oppression or proof of unfairness: proof of mere prejudice to or discrimination against a member is insufficient to attract the Court's jurisdiction to intervene. In the case of some discretionary powers, any prejudice to a member or any discrimination against him may be a badge of unfairness in the exercise of the power, but not when the discretionary power contemplates the effecting of prejudice or discrimination. It is not necessary now to decide whether "oppressive" carries in the context of s.320 the meaning which it carried in the context of the statutory precursors of s.320. At a minimum, oppression imports unfairness and that is the critical question in the present case.

6. It is not necessarily unfair for directors in good faith to advance one of the objects of the company to the prejudice of a member where the advancement of the object necessarily entails prejudice to that member or discrimination against him. Prima facie, it is for the directors and not for the Court to decide whether the furthering of a corporate object which is inimical to a member's interests should prevail over those interests or whether some balance should be struck between them. The directors' view is not conclusive, but an element in assessing unfairness to a member is the agreement of all members to repose the power to affect their interests in the directors: see s.78 of the Code. Nevertheless, if the directors exercise a power - albeit in good faith and for a purpose within the power - so as to impose a disadvantage, disability or burden on a member that, according to ordinary standards of reasonableness and fair dealing is unfair, the Court may intervene under s.320. The question of unfairness is one of fact and degree which s.320 requires the Court to determine, but not without regard to the view which the directors themselves have formed and not without allowing for any special skill, knowledge and acumen possessed by the directors. The operation of s.320 may be attracted to a decision made by directors which is made in good faith for a purpose within the directors' power but which reasonable directors would think to be unfair. The test of unfairness is objective and it is necessary, though difficult, to postulate a standard of reasonable directors possessed of any special skill, knowledge or acumen possessed by the directors. The test assumes (whether it be the fact or not) that reasonable directors weigh the furthering of the corporate object against the disadvantage, disability or burden which their decision will impose, and address their minds to the question whether a proposed decision is unfair. The Court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.

7. The question here is whether the resolutions which were manifestly prejudicial to and discriminatory against Wests, were also unfair - that is, so unfair that reasonable directors who considered the disability the decision placed on Wests would not have thought it fair to impose it. The decision by the League's directors to reduce the number of competitors to 12 and to exclude Wests was in fact taken with full knowledge of the disability that that decision would place on Wests. But the directors also knew that the larger competition was burdensome to, and perhaps dangerous for, players and that a shorter season was conducive to better organization of the Premiership Competition. The directors had to make a difficult decision in which it was necessary to draw upon the skills, knowledge and understanding of experienced administrators of the game of rugby league. The Court, in determining whether the decision was unfair, is bound to have regard to the fact that the decision was admittedly made by experienced administrators to further the interests of the game. There is nothing to suggest unfairness save the inevitable prejudice to and discrimination against Wests, but that is insufficient by itself to show that reasonable directors with the special qualities possessed by experienced administrators would have decided that it was unfair to exercise their power in the way the League's directors did. The appeal should be dismissed.

Orders

Appeal dismissed with costs.