Tosich v Tosich Construction Pty Ltd
[1993] FCA 344
•31 MAY 1993
DANKA TOSICH and MILA PINFOLD v. TOSICH CONSTRUCTION PTY LIMITED; STARATOS
NOMINEES PTY LIMITED; LENSKA PTY LIMITED; TOSICH HOLDINGS PTY LIMITED; TOSBRO
PTY LIMITED; DOSSO PTY LIMITED and ROBERT SLOBODON TOSICH
No. G3156 of 1992
FED No. 344
Number of pages - 7
Corporations Law
(1993) 10 ACSR 590
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart J(1)
CATCHWORDS
Corporations Law - whether members of a family company have acted irregularly - winding up application - distribution of profits - interpretation and construction of articles of association
HEARING
SYDNEY, 23 April 1993
#DATE 31:5:1993
Counsel for the Applicants : B Walker
Solicitors for the Applicants : Corrs Chambers Westgarth
Counsel for the Respondents : B Oslington QC with
L S Einstein
Solicitors for the Respondents: Baker and McKenzie
ORDER
The Court answers the two questions submitted to it as follows:
Question A
Whether, on the true construction of the Articles of Association of the first, second, third, fourth and fifth respondents all profits of those companies must be distributed by way of dividend unless the holders of the "B", "C", "D" and "F" class shares unanimously agree that all or part of those profits not be distributed?
Answer A
No.
Question B
Whether, on the true construction of the Articles of Association of the first, second, third, fourth and fifth respondents no remuneration may be paid to persons who are directors of those companies, including remuneration for work as an employee rather than as a director, unless the holder of the "B", "C", "D" and "F" class shares resolve upon such remuneration unanimously in general meeting?
Answer B
No.
The Court orders that:
The costs of this application be reserved.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
LOCKHART J The first applicant (Danka Tosich) and the second applicant (Mila Pinfold) are the widow and daughter respectively of the late R D Tosich who founded the six corporate respondents (to which I shall refer as "the Tosich companies") which carry on a building and construction business in and about Sydney. The business is large and the turnover considerable. The children of the marriage of the late R D Tosich and Danka Tosich are Mila Pinfold, the seventh respondent (Robert Slobodon Tosich), Thomas Tosich and John Tosich. Robert Tosich is the chairman and managing director of each of the Tosich companies. John Tosich is employed by the Tosich companies. Thomas Tosich was actively engaged in the affairs of the Tosich companies until October 1989 when the shareholding in the Tosich companies was restructured and arrangements were made between the members of the family in effect to buy out his interest in the companies.
Before the issued capital of the Tosich companies was restructured in October 1989, the shares in the capital of the first respondent, Tosich Construction Pty Limited, was as follows (I shall for convenience refer to Tosich Construction, but the shareholding, and memorandum and articles of association, of each of the other Tosich companies are substantially the same):-
. Robert Tosich - one "A" class share and one "C" class share . Danka Tosich - one "B" class share . Mila Pinfold - one "D" class share . Thomas Tosich - one "A" class share and one "E" class share . John Tosich - one "A" class share and one "F" class share
Each of the shares was a management share. Only holders of management shares are entitled to vote.
The "A" class shares held by Robert Tosich and Thomas Tosich were held as co-executors of the estate of their late father, R D Tosich.
Following the relinquishing by Thomas Tosich of his interest in the Tosich companies in October 1989, the "A" and "E" class shares were acquired by Tosich Holding Pty Limited (the fourth respondent), and are now non-voting shares.
The present shareholding in Tosich Construction, so far as relevant, is as follows:-
. Danka Tosich - one "B" class share . Robert Tosich - one "C" class share . Mila Pinfold - one "D" class share . John Tosich - one "F" class share .
The rights attaching to the "B", "C", "D" and "F" class shares are the same.
Relations between Danka Tosich and her daughter Mila Pinfold on the one hand and Robert Tosich and John Tosich on the other, are strained. Danka Tosich and Mila Pinfold assert that the Tosich companies, under the management of Robert Tosich, have been mismanaged; that there are irregularities in the conduct of their affairs; that the Tosich companies have used their assets and income for improper purposes and have diverted their assets for the private purposes of Robert Tosich and others. They seek an order that the Tosich companies be wound up, that the shares in the companies be valued by an independent valuer, that a family trust known as the Tosich Family Trust be wound up and the capital and income distributed.
Other orders sought are that, pending the winding up of the Tosich companies and the distribution of capital and income of the Tosich Family Trust, the retained profits of Tosich Construction be distributed in equal shares to the holders of the "B", "C", "D" and "F" class shares in the capital of Tosich Construction. An order is sought also that, pending the winding up of the Tosich companies and the distribution of the capital and income of the Tosich Family Trust, the directors' fees and other remuneration payable to them, whether as directors or employees, shall be limited to such amount as the holders of the "B", "C", "D" and "F" class shares unanimously resolve at general meetings. These orders raise two questions which the parties have agreed should be decided as preliminary questions before the other questions in the proceeding are decided. The two questions are as follows:
"A Whether, on the true construction of Article 5E(2) of the Articles of Association of the first, second, fourth and fifth respondents, and of Article 10D(2) of the Articles of Association of the third respondent, all profits of those companies must be distributed by way of dividend unless the holders of the "B", "C", "D" and "F" class shares unanimously agree that all or part of those profits not be distributed? B Whether, on the true construction of Article 5E(7) of the Articles of Association of the first, second, fourth and fifth respondents, and of Article 10D(7) of the Articles of Association of the third respondent, no remuneration may be paid to persons who are directors of those companies, including remuneration for work as an employee rather than as a director, unless the holder of the "B", "C", "D" and "F" class shares resolve upon such remuneration unanimously in general meeting?"
Articles 10D(2) and (7) of the articles of association of the third respondent (Lenska Pty Limited) are in the same terms as articles 5E(2) and (7) respectively of the articles of association of the first, second, fourth and fifth respondents.
The relevant articles of association of Tosich Construction are article 5 and related articles which define the rights attaching to the various classes of shares in the capital of Tosich Construction. Those articles have been amended more than once and they are not lacking in complexity. I shall refer to the articles in the form which they presently take following the amendments made in October 1989. They read as follows:
"5B(1) ... 5B(2)(a) ...
(b) The 'B' to 'F' class shares Subject to the proviso to this paragraph (b), the rights attaching to the 'B' to 'F' class shares in the company shall be as follows:-
(i) the shares comprised in each of the classes 'B' to 'F' inclusive shall carry the right to one vote at any general meeting of members of the company;
(ii) the shares comprised in each of the classes 'B', 'C', 'D' and 'F' shall carry right to such dividends as may be distributed under article 5E(2) or may otherwise be declared or paid by resolution of the holders of the 'B', 'C', 'D' and 'F' shares from time to time in accordance with article 5E;
(iii) the shares comprised in each of the classes 'B' to 'F' inclusive shall each carry the right, in a winding up or upon a reduction of capital of the company, to participate in profits or assets of the Company equally after payment in full of the amount paid up on on any 'A' class management share, any 'G' to 'N' class shares, and any unclassified ordinary shares issued PROVIDED THAT ...
(aa) ...
(bb) ...
(cc) the rights set out in this paragraph
(b) in relation to each of the classes of shares 'B' to 'F' inclusive shall attach to any such class of share only so long as the registered holder of such share in the Register of members of the company is the person named in respect of that share in article 5A(2) hereof, or one or more of his lineal descendants, and if at any time any share in any of the said classes ceases to be so held then it shall thereupon become an unclassified ordinary share in the capital of the company, and shall carry the rights applicable to such shares.
(c) ...
(d) ...
5C ...
5D ...
5E Notwithstanding any other Article in these Articles of Association:
(1) The holders of the 'B', 'C', 'D' and 'F' shares shall have an absolute power to declare dividends on any shares in the capital of the company and to pay interim dividends, to the exclusion of the Directors, and such holders may declare or pay such dividends, subject to Article 5E(2), at different rates in regard to different classes of shares, and may in their discretion exclude any class of shares from participation in a dividend.
(2) All profits of the company must be distributed in equal shares to the holders of the 'B', 'C', 'D" and 'F' class shares, unless such holders unanimously agree to the contrary, as to profits to be set aside as reserves or as to rates of distribution for classes of shares.
(3) No interim dividend shall be paid by the directors without the unanimous approval of the holders of the 'B', 'C', 'D' and 'F' shares. ...
(7) Directors may be paid such directors fees and other remuneration as the holders of the 'B', 'C', 'D' and 'F' class shares from time to time unanimously resolve upon in general meeting.
(8) No profits may be capitalized by the issue of bonus shares without the unanimous approval of the holders of the 'B', 'C', 'D' and 'F' class shares and bonus shares so issued must be distributed equally amongst the holders of the 'B', 'C', 'D' and 'F' class shares. ...
(10) Articles 5A to 5E inclusive may only be deleted, amended or otherwise varied by a unanimous resolution of the holders of 'B', 'C', 'D' and 'F' class shares in general meeting, and such other consents and resolutions as may be required by these Articles and the Companies (New South Wales) Code.
(11) The provisions of this Article 5E shall prevail over all other articles of these Articles of Association, but nothing in this Article 5E shall affect Article 5B(2)(b)(aa) and (cc)."
The articles of Tosich Construction (which was incorporated on 25 July 1969) contain, in the main, standard articles of association; the principal differences being those to which I have referred and other articles which reflect the various family interests involved in the Tosich companies. Articles in the more standard form of articles that are presently relevant include Article 76, which provides:
"The remuneration of the directors shall from time to time be determined by the company in general meeting. That remuneration shall be deemed to accrue from day to day. The directors may also be paid all travelling, hotel, and other expenses properly incurred by them in attending and returning from meetings of the directors or any committee of the directors or general meetings of the company or in connection with the business of the company."
Articles 112 to 119 relate to "DIVIDENDS AND RESERVES". The relevant articles under that heading are as follows:-
"112. The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the directors.
113. The directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company. ...
115. The directors may, before recommending any dividend, set aside out of the profits of the company such sums as they think proper as reserves which shall, at the discretion of the directors, be applicable for any purpose to which the profits of the company may be properly applied, and pending any such application may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares in the company) as the directors may from time to time think fit. The directors may also without placing the same to reserve carry forward any profits which they may think prudent not to divide.
116. Subject of the rights of persons, if any, entitled to shares with special rights as to dividend, all dividends shall be declared and paid according to the amounts paid up or credited as paid on the shares in respect whereof the dividend is paid, but no amount paid or credited as paid on a share in advance of call shall be treated for the purpose of this regulation as paid on the share. All dividends shall be apportioned and paid proportionately to the amounts paid or credited as paid on the shares during any portion or portions of the period in respect of which the dividend is paid; but if any share is issued on terms providing that it shall rank the dividend as from a particular date that share shall rank the dividend accordingly."
Question A
I turn first to question A. Counsel for the applicants argued that, on the true construction of article 5E(2) of the articles of Tosich Construction (the same argument applies to each of the other corporate respondents, though it is article 10B(2) in the case of the third respondent), once profits of the Tosich companies exist, then they must be distributed by way of dividends, unless the holders of the 'B', 'C', 'D' and 'F' class unanimously agree that all or part of those profits shall not be distributed. The argument in substance is that articles 5B(2)(b)(ii) and 5E(2) are paramount and evince an intent that the holders of the "B", "C", "D" and "F" class shares are the sole arbiters of the fate of any profits of the company; that, unless they agree to the contrary, the holders of the "B", "C", "D" and "F" class shares must receive the whole of the profits in equal shares as between those classes and as between the members of each class. Counsel further argued that those articles override articles such as article 112 which vests the power of declaring dividends in the company in general meeting.
Counsel for the respondents argued that article 112, which vests the power in the directors to recommend dividends to shareholders, is not overridden or superseded by the other articles of association. The corporate respondents are a number of large building and construction companies and it would be absurd, so the argument proceeds, for the directors, in whom is vested the power of management and carrying on the business of the companies and through whose efforts the profits are created, to make hollow declarations of dividend which of necessity and by force of the articles must inevitably be distributed in whole and in equal shares to the holders of the "B", "C", "D" and "F" class shares unless they unanimously agree to the contrary. It would deprive the directors of the power to retain dividends or to set aside profits as reserves or carry forward profits as they think prudent. Counsel for the respondents agreed that, once dividends are recommended by the directors, then it is the holders of the "B", "C", "D" and "F" class shares in whom is vested the power of Tosich Constructions to declare dividends and the right to distribute profits in the form of dividends so recommended and declared.
In my opinion the argument of counsel for the respondents is correct. The answers to this question before the Court are complicated by the fact that amendments made to the articles of association of the Tosich companies over the years, especially between 1985 and October 1989, leave the articles in a state of some confusion. They are not easy to construe. It is necessary to keep steadfastly in mind that the Court is construing the articles of association of a number of companies the objects of which are to carry on the business of building and construction and which do in fact carry on such business and have done so at all material times since they were established by the late R B Tosich. The present management of the affairs of the Tosich companies is vested essentially in Robert Tosich as chairman and managing director and, to a lesser extent, in John Tosich. Both are sons of the founder, R B Tosich. It would be a very strange construction of the articles of association of companies of this kind if, once profits emerge at the end of each financial year, they must automatically be appropriated in whole towards the shareholders (admittedly those having a primary financial interest in the companies), namely, the holders of the "B", "C", "D" and "F" class shares, Danka Tosich, Robert Tosich, Mila Pinfold and John Tosich. The exigencies of business, a fortiori companies engaged in the building and construction industry, point strongly in the direction of an interpretation of the articles of association that the provisions of the articles 112 to 119 relating to dividends and reserves empowering the directors to recommend dividends to the shareholders are not superseded by articles 5B and 5E, notwithstanding that, once dividends are recommended by the directors, it is the holders of the "B", "C", "D" and "F" class shares who, as the company, declare the dividends and to whom they are payable. In circumstances where articles of association give rise to some doubt as to their construction, the construction which is sensible or reasonable is to be preferred: see Holmes v Keyes (1959) Ch 199 at 215 per Jenkins LJ; North v McCaughan Dyson Capel Cure Ltd and Ors (1988) 12 ACLR 739 at 746.
This construction is consonant with the language as well as the evident intendment of the articles of association with which this case is primarily concerned, namely, articles 5B(2)(b)(ii) and 5E(1) and (2). Once the directors have decided, if they do so decide, to recommend to shareholders the declaration and payment of dividends, the power of declaring those dividends as recommended is vested solely in the hands of the "B", "C", "D" and "F" class shareholders. The dividends so declared must then be paid in equal shares to the "B", "C", "D" and "F" class shareholders unless they unanimously agree to some unequal distribution of the dividends as between the classes of shares or the particular holders of shares within each class or unless they agree unanimously that the profits are to be set aside as reserves or to exclude any class of shares from participation in a dividend.
The language of the articles of association does not lead to the ousting of the power of the directors, who are charged with the management and conduct of the affairs and business of the companies, to recommend the declaration of dividends in the exercise of their discretion. It is I think tolerably clear that the reference in article 5E(2) to the distribution of "profits" of companies means profits that are available for the declaration and payment of dividends, a construction equally appropriate to articles 5E(2)(b)(ii) and 5E(1). The power of the directors to recommend or not to recommend as the case may be, must, like all powers of directors, be exercised by them in good faith for the benefit of the company as a whole.
The articles assume that there must be a declaration of dividends out of profits by the holders of the "B", "C", "D" and "F" class shares before any entitlement to distribution of those profits arises under article 5E(2). This is supported by the language of article 5E(1) which in turn assumes the prior exercise by the directors of their power under article 112 to recommend the declaration of dividends to the shareholders. Article 115 empowers the directors, before recommending dividends, to set aside profits as reserves, or, without placing profits to reserve, to carry forward any profits which they may think prudent not to divide.
I would therefore answer question A, no.
Question B
20. I turn to question B. Counsel for the applicants argued that upon the proper construction of article 5E(7) of the articles of association of Tosich Constructions, the directors are not entitled to directors' fees or other remuneration both for services as directors and services of any other kind, whether as employees or otherwise unless the holders of the "B", "C", "D" and "F" class shares unanimously approve the same.
Counsel for the respondents argued that article 5E(7) was confined simply to the payment of directors' fees and other remuneration for services as directors.
In my opinion it is plain that article 5E(7) is directed to payment to directors of directors' fees and other remuneration for their services as directors; but does not extend to services which directors may render to the companies as employees or in some other capacity. It would be a curious construction of article 5E(7) that building and construction companies, which have always been managed by members of the Tosich family, cannot employ for payment directors of the companies unless the holders of the "B", "C", "D" and "F" class shares unanimously agree. Such a contravention effectively would place an important managerial function, namely, the employment of staff, in the hands of the shareholders, thus ousting a power customarily vested in the directors. If there were doubt about the true construction of article 5E(7) then I would prefer a reasonable construction, which is the one which I have adopted. But the language of article 5E(7) is clear enough; that it is talking solely of remuneration of directors, whether by way of directors' fees or some other form of remuneration payable to directors in their capacity as directors: for example, work done by them as directors beyond the work involved in attending board meetings and considering board papers.
I would therefore answer question B, no.
I therefore answer the two questions submitted to the Court as follows:
Question A
Whether, on the true construction of Article 5E(2) of the Articles of Association of the first, second, fourth and fifth respondents, and of Articles 10D(2) of the Articles of Association of the third respondent, all profits of those companies must be distributed by way of dividend unless the holders of the B, C, D and F class shares unanimously agree that all or part of those profits not be distributed?
Answer A
No.
Question B
Whether, on the true construction of Article 5E(7) of the Articles of Association of the first, second, fourth and fifth respondents, and of Article 10D(7) of the Articles of Association of the third respondent, no remuneration may be paid to persons who are directors of those companies, including remuneration for work as an employee rather than as a director, unless the holder of the B, C, D and F class shares resolve upon such remuneration unanimously in general meeting? Answer B
No.
The Court reserves the costs of this application.
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