Whitehouse v Carlton Hotel Pty Ltd

[1987] HCA 11

HIGH COURT OF AUSTRALIA

Mason , Wilson , Brennan , Deane and Dawson JJ.

WHITEHOUSE v. CARLTON HOTEL PTY. LTD.

(1987) 162 CLR 285

7 April 1987

Companies

Companies—Shares—Issue and allotment—Powers of directors—Bona fides of exercise—Ulterior purpose—Article vesting powers of directors in named governing director—Issue and allotment of shares by governing director to provide for control after his death—Articles requiring new shares to be offered to existing shareholders—Application to allotment of part of original capital. Companies—Directors—Statutory requirement for more than one director—Powers of directors vested in governing director—Whether conflict with statute—Companies Act 1961 (Q), s. 114.

Decisions

MASON, DEANE AND DAWSON JJ.: This appeal arises out of long-running hostilities within the family of Mr. Charles MacDonald Whitehouse ("Mr. Whitehouse") and his former wife ("Mrs. Whitehouse") who is now deceased. The primary issue is whether the purported allotment by Mr. Whitehouse to each of his two sons, the appellants Alexander and Wilson Whitehouse, of two "B" class shares in the capital of the respondent Carlton Hotel Pty. Limited ("the company") was a valid exercise of the powers and discretion vested in him by Art.127 of the Articles of Association of the company. That Article provided (among other things) that Mr. Whitehouse should be the Permanent Governing Director of the company and that, for so long as he should continue to hold office as such, "all powers and authorities and discretion vested in the Board of Directors by the Companies Acts or these Articles shall be vested in him alone". It is common ground that, at relevant times, Mr. Whitehouse has held office as the company's Permanent Governing Director.

2. At the time of the purported allotment, Mr. Whitehouse and Mrs. Whitehouse, who was then living, were divorced. The four daughters of the marriage had aligned themselves with their mother; the two sons with their father. The company's capital was divided into three classes of shares, "A", "B" and "C". The "A" class shares, of which two had been issued, were held by Mr. Whitehouse. They alone carried unrestricted voting rights. The "B" class shares, of which two had been issued, were held by Mrs. Whitehouse. They carried full voting rights after the death of Mr. Whitehouse if, and for so long as, they were held by the original allottee or, if initially allotted to Mr. Whitehouse, by the transferee from him. The "C" class shares, of which six thousand four hundred had been issued, were beneficially owned by the two sons (1200 each) and four daughters (1000 each). The "C" class shares alone carried rights to share in profits and surplus capital but conferred no voting rights. It would seem that, in the courts below, the case was conducted on both sides on the basis that, on that state of the share register, the "B" class shares held by Mrs. Whitehouse would, during any period during which she survived Mr. Whitehouse and continued to hold them, alone enjoy voting rights. That approach overlooked the fact that the voting rights attaching to the two "A" class shares would continue after Mr. Whitehouse's death and ignored any significance in the fact that the material in evidence indicated that one of the two "B" class shares held by Mrs. Whitehouse had been initially allotted to a Mr. Wadley who was a subscriber to the company's Memorandum of Association. Be that as it may however, it is common ground between the parties that Mr. Whitehouse believed that, if there were no changes in the company's issued capital, Mrs. Whitehouse would, during any such period, enjoy control over at least one-half of the voting power at any general meeting of the company and it has not been suggested by either side that any purpose would be served by investigating the correctness of that belief. The finding of the learned trial judge, affirmed by the Full Court and not challenged in this Court, was that the purported allotment by Mr. Whitehouse of "B" class shares to his sons was made to ensure that the daughters and their husbands would not gain practical control over the company on his death through the voting power which might then attach to the "B" class shares held by Mrs. Whitehouse. In other words, the purpose of the allotment was to dilute the voting power which might attach to Mrs. Whitehouse's shares by creating, for the period after Mr. Whitehouse's death, a new majority. That the company, under the continuing control of Mr. Whitehouse, is now maintaining that the purported allotment of the "B" class shares to the two sons was invalid reflects a new alignment of forces among the surviving members of the family.

3. As the Privy Council pointed out in Howard Smith Ltd. v. Ampol Ltd. (1974) AC 821, at p 835, it is impossible to define in advance the exact limits beyond which the directors of a company must not ordinarily pass in exercising a fiduciary power to allot shares:

"(It) clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships' view, can this be done by the use of a phrase -- such as 'bona fide in the interest of the company as a whole,' or 'for some corporate purpose.' Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acting sectionally, or partially: i.e. improperly favouring one section of the shareholders against another."

However, one thing does emerge clearly enough from their Lordships' judgment in that case and from the numerous cases in this and other courts dealing with the validity of an impugned allotment of shares. It is that the directors of a company cannot ordinarily exercise a fiduciary power to allot shares for the purpose of defeating the voting power of existing shareholders by creating a new majority (see, e.g., Fraser v. Whalley (1864) 2 H. &M. 10, at pp 30-31 (71 ER 361, at pp 369-370); Ngurli Ltd. v. McCann (1953) 90 CLR 425, at p 440; Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L (1968) 121 CLR 483; Ashburton Oil N.L v. Alpha Minerals N.L. (1971) 123 CLR 614, at p 640; Howard Smith v. Ampol, at p 837).

4. The reason why, as a general rule, it is impermissible for the directors of a company to exercise a fiduciary power to allot shares for the purpose of destroying or creating a majority of voting power was identified by the Privy Council in Howard Smith v. Ampol. It lies essentially in the distinction between the indirect proprietorship and ultimate control of the shareholders on the one hand and the powers of management entrusted to the directors on the other. It is simply no part of the function of the directors as such to favour one shareholder or group of shareholders by exercising a fiduciary power to allot shares for the purpose of diluting the voting power attaching to the issued shares held by some other shareholder or group of shareholders. As their Lordships said (at p.837):

"The constitution of a limited company normally provides for directors, with powers of management, and shareholders, with defined voting powers having power to appoint the directors, and to take, in general meeting, by majority vote, decisions on matters not reserved for management. Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office (Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame (1906) 2 Ch 34), so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers."

To the like effect were the comments of Barwick C.J., McTiernan and Kitto JJ. in Harlowe's Nominees (at p.493):

"The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends."

5. As has been said, Mr. Whitehouse's purpose in allotting the "B" class shares to his sons was to procure the dilution of the voting power which might attach to Mrs. Whitehouse's shares on his death and to ensure that those whom he favoured would then command a majority. Plainly, such a purpose would ordinarily be an impermissible and invalidating one for the exercise by directors of a company of a fiduciary power to allot shares in its capital. The question arises whether there is anything in the provisions of the company's Articles or in the circumstances of the present case which avoids the invalidity of the allotment of the "B" class shares for that purpose.

6. The Articles of a company may be so framed that they expressly or impliedly authorize the exercise of the power of allotment of unissued shares for what would otherwise be a vitiating purpose. It was submitted on behalf of the appellants that that is so here. That submission encompassed two related arguments. The limited rights attached to the "B" class shares indicate, so the first argument went, that the power to allot those shares could properly be exercised merely for the purpose of affecting voting power. The provisions of Art.127 conferring all the powers of the directors upon Mr. Whitehouse while he remains Permanent Governing Director indicate, according to the second argument, that Mr. Whitehouse was intended to be free of the restraints upon the exercise of a fiduciary power to allot shares which would otherwise apply. Upon analysis, neither argument can be sustained.

7. It is true that the powers attached to the "B" class shares make it clear that the allotment of such shares will necessarily be, and was intended to be, concerned with the conferral of voting rights. The same can be said of the "A" class shares. Thus, it would seem plain enough that the allotment of "A" and "B" class shares was for the initial purpose of conferring voting power upon Mr. Whitehouse during his life and Mrs. Whitehouse during any period of survivorship. It is, however, one thing for those involved in the establishment of a company to exercise the power to allot shares for the purpose of creating a voting structure where otherwise there would be a vacuum filled only by the votes (if any) attaching to the subscribers' shares. It is another thing to exercise the power to allot shares for the purpose of defeating the voting power attaching to established shareholdings after such a voting structure has been established. Indeed, in the context of the wording of the provisions of Art.56 of the Articles defining the rights attaching respectively to the "A", "B" and "C" class shares and of the allotments of shares which were initially made, the inference could well be drawn in the present case that the power to allot "B" class shares was intended to be used for the initial creation of a settled and not uncommon structure of family control (voting control held by one parent during his or her life, by the other parent during any period of survival and by one or more of the children after the death of the survivor of the parents) rather than as a means of diluting the voting power of particular holders of issued shares. That is not to say that, after such a voting structure has been erected, there could be no further occasion for the legitimate allotment of "B" class shares. Such shares could, for example, be allotted pursuant to an arrangement between all shareholders or (perhaps in association with an allotment of "C" class shares) for a genuine purpose of raising further capital. What the cases are concerned to establish as impermissible and invalid is the exercise by directors of a fiduciary power to allot shares for the purpose of manipulating voting power by favouring one shareholder or group of shareholders at the expense of another non-consenting shareholder or group. It was for that very purpose that the allotment was made in the present case and there is nothing in the Articles of the company defining the rights attaching to the different classes of shares which operates to negative its prima facie invalidity.

8. The argument that it is implicit in Art.127 that Mr. Whitehouse should be freed of the ordinary restraints upon the exercise of the power to allot shares seems to us to be without substance. It may be assumed that the Articles of a company could be so framed that they conferred upon a governing director authority to exercise a power to allot shares for the purpose of diluting the voting power or other rights of existing shareholders. They have not been so framed in the present case. All that the relevant provision of Art.127 does is confer upon Mr. Whitehouse the "powers and authorities and discretion vested in the Board of Directors by the Companies Acts or these Articles". It does not change the nature of those "powers and authorities and discretion". It does not convert what is a fiduciary power in the hands of the directors into a non-fiduciary power in the hands of Mr. Whitehouse. It does not authorize the exercise by Mr. Whitehouse of that fiduciary power for what would be an impermissible and vitiating purpose if it were exercised by the directors. Put differently, what was conferred upon Mr. Whitehouse was the power to allot shares "vested in the Board of Directors" and the cases clearly establish that a purpose of manipulating the voting power of shareholders is, at least ordinarily, foreign to such a power.

9. It is arguable that special circumstances may arise in which the dilution of the voting power of an existing shareholder or group of shareholders or the creation of new voting power may constitute a legitimate purpose to be pursued by directors in the exercise of a fiduciary power to allot shares. Circumstances in which statutory provisions make a particular spread of voting power compulsory or commercially essential are a possible example of the kind of case where that may be so. It is unnecessary to pursue that question here however since it is plain that no such special circumstances existed to legitimize Mr. Whitehouse's purpose in allotting the "B" class shares to his sons. In that regard, it is unavailing that Mr. Whitehouse was not motivated by purely selfish considerations in that he believed that the manipulation of voting power in favour of his sons at the expense of his former wife was in the interests of the company in that it would ensure that the management of the company after his death was in the hands of those whom he favoured. Indeed, in the ordinary case of a purported allotment of shares for such an impermissible purpose, it is likely that the directors will genuinely believe that what they are doing to manipulate voting power is in the overall interests of the particular company (see, e.g., Piercy v. S. Mills and Company (1920) 1 Ch 77, at pp 84-85; Hogg v. Cramphorn Ltd. (1967) Ch 254, at pp 267-269). In this as in other areas involving the exercise of fiduciary power, the exercise of a power for an ulterior or impermissible purpose is bad notwithstanding that the motives of the donee of the power in so exercising it are substantially altruistic. Thus, for example, the "noblemen and gentlemen" in Fraser v. Whalley were acting in what they saw as the interests of the company of which they were directors when they allotted shares for the purpose of diluting the voting power of the "contractor", Savin, whom they believed to have conflicting interests in other companies and who had, by what they saw as "an unfortunate accident", acquired a majority of the ordinary shares. Their belief that they were so acting could not, however, serve to overcome the invalidity of the allotment. As the Vice Chancellor (Sir William Page Wood, as Lord Hatherley then was) commented (at p.29; p.369 of E.R.):

"I have no doubt that the Court will interfere to prevent so gross a breach of trust. I say nothing on the question whether the policy advocated by the directors, or that which I am told is to be pursued by Savin, is the more for the interest of the company. That is a matter wholly for the shareholders."

10. It should be mentioned that one finds in some statements of the vitiating effect of a purpose of diluting the voting power of one or more existing shareholders a qualification to the effect that the allotment will be invalid if it is "merely" or "purely" or "solely" for that purpose (see, e.g., Piercy v. S.M. Mills and Company, at p 84; Grant v. John Grant &Sons Pty. Ltd. (1950) 82 CLR 1, at p 32; Howard Smith v. Ampol, at pp 837-838). The introduction of such a qualification is intended to put to one side cases in which there are present both permissible and impermissible purposes. In such cases of competing purposes, practical considerations have prevented the law from treating the mere existence of the impermissible purpose as sufficient to render voidable the exercise of the fiduciary power to allot shares (see Mills v. Mills (1938) 60 CLR 150, at pp 185-186 and note, as to Dixon J's apparently inadvertent use of the word "void", Richard Brady Franks Ltd. v. Price (1937) 58 CLR 112, at p 142). In this Court, the preponderant view has tended to be that the allotment will be invalidated only if the impermissible purpose or a combination of impermissible purposes can be seen to have been dominant - "the substantial object" (per Williams ACJ., Fullagar and Kitto JJ., Ngurli Ltd. v. McCann, at p 445 quoting Dixon J. in Mills v. Mills, at p 186 and see Harlowe's Nominees, at p 493); "the moving cause" (per Latham C.J., Mills v. Mills, at p 165). The cases in which that view has been indicated have not, however, required a determination of the question whether the impermissible purpose must be "the" substantial object or moving cause or whether it may suffice to invalidate the allotment that it be one of a number of such objects or causes. As a matter of logic and principle, the preferable view would seem to be that, regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, "the power would not have been exercised" (per Dixon J., Mills v. Mills, at p 186). It is, however, unnecessary to express a concluded view on the question of precise formulation of the relevant test in such cases since the present case does not raise any problem of competing permissible and impermissible purposes. The only substantial or moving purpose of the allotment in the present case was the manipulation of voting power. As has been said, it is simply not to the point that Mr. Whitehouse believed that it was in the overall interests of the company that the voting power attaching to the shares held by his former wife be diluted so as to ensure that the control of the company in the period after his death would be in the hands of those whom he favoured. That belief was an explanation of, or reason for the allotment for the impermissible purpose. It did not constitute a competing permissible purpose.

11. It follows that the purported allotment by Mr. Whitehouse of two "B" class shares to each of his sons for the purpose of defeating the potential voting power of the "B" class shares held by Mrs. Whitehouse was invalid. It was submitted on behalf of the appellants that the effect of the allotment being tainted by the impermissible purpose was that it was voidable and not void and that the allotment had been subsequently ratified by the company. We agree with the first branch of that submission. The preferable view, both on principle and on authority, is that an allotment of shares which would otherwise be valid and binding is rendered voidable and not void if vitiated by an impermissible purpose. The second branch of the submission must, however, be rejected. Subject to one possible qualification, any ratification of the purported allotment of shares would need to have been by the company acting through its shareholders and there is nothing in the evidence which would support a finding that the allotment in the present case, which was made clandestinely and apparently kept concealed from Mrs. Whitehouse during her lifetime, was ever so ratified. The possible qualification is that it is arguable that a voidable allotment made by directors for an impermissible purpose can subsequently be ratified by the directors acting for a permissible purpose. It is unnecessary to consider that question here, however, since there is nothing in the evidence to suggest that either the directors of the company or Mr. Whitehouse, acting for a different and permissible purpose, ever purported to ratify the allotment of the four "B" class shares. Nor is there any proper basis in the evidence for a finding that either son stood in the position of a bona fide purchaser for value without notice of the impermissible purpose (cf. Harlow's Nominees, at p.500).

12. The conclusion which we have reached in relation to the primary issue on the appeal makes it unnecessary that we deal with the question whether the purported allotment of the "B" class shares to the two sons was in contravention of the positive requirement of Art.59 or the question whether the provision of Art.127 conferring the powers, authorities and discretion of the Board upon Mr. Whitehouse was inconsistent with s.114 of the Companies Act 1961 (Q.) as amended by s.117 of the Companies Act Amendment Act 1971 (Q.). It would, however, seem appropriate that we indicate that we are in general agreement with the views expressed in the judgments of Wilson J. and Brennan J. in relation to those two questions.

13. We would dismiss the appeal.

WILSON J.: This is an appeal from a majority decision of the Full Court of the Supreme Court of Queensland (Matthews and Kelly JJ., Carter J. dissenting) allowing an appeal from a decision by Andrews S.P.J. (as his Honour then was). At first instance the appellants, Alexander MacDonald Whitehouse and Wilson MacDonald Whitehouse, sued successfully for rectification of the share register of the respondent company by the entry therein of each of their names as the holder of two "B" class shares. The learned trial judge found that there was an agreement between the appellants and the respondent for the allotment of the shares in question and that pursuant to that agreement the allotments were made on or about 10 January 1974.

2. At all material times, the appellants' father, Charles MacDonald Whitehouse was the permanent governing director of the respondent. The other directors were Charles' former wife, Mary Olivia Whitehouse, their sons Alexander and Wilson and a solicitor, Mr Jones. Charles and Mary Olivia also had four daughters, all of whom were married. The respondent was one of a number of associated family companies engaged in the ownership and management of a number of hotels. Their activities constituted a large and prosperous family business.

3. Unfortunately, prior to 1974, discord developed within the Whitehouse family. It led to the dissolution of the marriage between Charles and Mary Olivia. In the airing of the marital differences between the spouses, the daughters had sided with their mother and the sons with their father. The difficulties posed a threat to the continued smooth operation of the family business. Both Alexander and Wilson were fully involved in that business, Alexander managing the Chevron Hotel in Sydney and Wilson the Carlton Hotel in Brisbane. None of the daughters had ever been involved and, prior to the middle of 1973, nor had Mary Olivia. However, about that time Mary Olivia began to show an interest in the conduct of the affairs of the group of companies. In August 1973, the daughters filed a petition seeking the winding up of the respondent and of another company in the group and this was followed by litigation to which it is not necessary to refer.

4. The nominal share capital of the respondent was $40,000, divided into 20,000 shares of $2.00 each. Article 56 of the Articles of Association provided for the shares to be divided into preference shares and ordinary shares and for the latter to be divided into "A" class ordinary voting shares, "B" class deferred voting shares and "C" class ordinary non-voting shares. Prior to the events with which the action is concerned the issued capital consisted of two "A" class shares held by Charles, two "B" class shares held by Mary Olivia and 6,400 "C" class shares held in trust for the children (1,200 being held for each of the appellants and 1,000 for each of the four daughters). Kelly J., with whose judgment Matthews J. agreed, adopted as a convenient summary the following description by the trial judge of the incidents attaching to the different classes of shares:

"To A class shares are attached all voting rights usually attaching to shares but such shares have no right to participate in any of the profits of the company by way of dividend or to participate in any distributions of capital other than the return of the nominal value of the shares. B class shares have attached thereto all voting rights ordinarily attaching to shares except that such rights shall not attach during the lifetime of Charles and that they shall only attach whilst the shares are held by the original holder thereof provided that if any such shares are held by Charles the original holder thereof for the purposes of Article 56 shall be the person who acquires them by reason of the death of Charles. Such shares have no right attached to them to participate in profits of the company by way of dividend or in any distribution of capital other than the return of the nominal value of the shares. C class shareholders have no voting rights in relation to the company but have the right to participate in the profits of the company by way of dividend and generally to participate in distribution of capital and profits. There is no division of nominal capital into specified numbers of shares in each class. Subject to provisions in the articles relating to authority to allot etc. shares there is no particular limit upon the numbers of shares which may be issued in a class."

5. The pre-eminent position held by Charles in the affairs of the respondent, reflected by the fact that he held the only current voting shares, was confirmed by the provisions of Art.127 which, so far as material, read as follows:

"(a) The said CHARLES MacDONALD WHITEHOUSE shall be the Permanent Governing Director of the Company and he shall hold office until he dies or resigns his office of Director.... So long as the Permanent Governing Director shall continue to hold office as such all powers and authorities and discretion vested in the Board of Directors by the Companies Acts or these Articles shall be vested in him alone and all other Directors (if any) for the time being of the Company shall exercise such powers only as the Permanent Governing Director may delegate to them and they shall be under his control and direction in regard to the company's business....

(b) So long as the Permanent Governing Director continues to hold office as such he may from time to time or at any time appoint other persons to be Directors of the Company and define limit and restrict their powers and fix their remuneration and duties and may at any time without any notice remove such Director from office.

(c) The provisions in these Articles relating to the appointment, remuneration, qualification, rotation and removal of Directors shall not apply to a Permanent Governing Director."

6. The trial judge accepted evidence to the effect that in the latter part of 1973, following the divorce proceedings and the commencement of the litigation to which I have referred, Charles had a number of discussions both with Alexander and with Mr Jones concerning steps that might be taken to ensure the continued existence and successful operation of the respondent and the other companies in the event of his resignation or death. He made known to Mr Jones his concern as to the capacity of the daughters and their husbands, should they gain control of the companies through their mother's "B" class shares, to conduct the business successfully. Early in January 1974 Alexander visited Mr Jones, taking with him a document written by Charles which proposed that the Articles of Association should be altered so as to ensure that in the event of his resignation or death full power should pass to Alexander and Wilson. Mr Jones advised Alexander against an alteration of the Articles and proposed an alternative method of achieving the desired result. He said that provided the directors acted honestly for proper reasons it would be in order to use the existing framework of the Articles to allot shares to accommodate Charles' wishes. He made particular reference to the "B" class shares as a means of ensuring that control would pass to Alexander and Wilson on the death or resignation of Charles. On the same occasion as he advised Alexander to this effect, Mr Jones telephoned Charles and repeated the advice. Although the evidence was somewhat meagre the trial judge was satisfied that Charles, exercising the wide powers conferred on him by Art.127, entered into an agreement with the appellants for the allotment of shares and did in fact allot two "B" class shares each to Alexander and Wilson. No meeting of directors as provided for in the Articles was held but the trial judge held that the powers conferred on Charles by Art.127 could be exercised without regard to the requirements of the Articles with respect to meetings of directors. The annual returns filed with the Commissioner for Corporate Affairs by the respondent in 1974, 1975, 1977 and 1978 recorded the allotment of four "B" class shares in addition to those held by Mary Olivia. It is unnecessary to examine in detail the evidence upon which the trial judge based his finding because the actual making of the allotment for valuable consideration by Charles in the manner described was not challenged in the Full Court or in this Court. It suffices to say that his Honour accepted the evidence of Alexander and Mr Jones in preference to that of Charles. The failure to record the allotments in the register of the respondent is explained by evidence that the register was not available to the company secretary because of legal action proceeding between 1973 and 1980. In 1980 Charles underwent a change of mind about the allotment because of differences that had arisen between him and his sons and he initiated action within the company which purported to reverse the decision.

7. At the trial it was argued, inter alia, for the respondent that even if the allotments were made the decision was invalid because it was made for an improper purpose. The trial judge rejected the argument, saying:

"I am satisfied that at the time when the allotments were made Charles had the interests of the company at heart in taking steps to ensure that the plaintiffs would retain control over the management of its affairs after his death. The purpose of the alteration in the balance of control was to ensure that the daughters and their husbands would not, by the exercise of their voting power, gain control over the company the business of which was likely better and efficiently controlled by his sons."

8. In the Full Court, the majority held that the allotments were void for two reasons: first, because in making the allotments the company failed to comply with Art.59; secondly, because in any event the allotments were made for an improper purpose. The appellants argue that their Honours erred in coming to these conclusions and further that even if their Honours were correct in those conclusions the result was merely to render the allotments voidable and not void. For reasons which will appear it is not necessary to consider this last-mentioned submission.

9. Article 59, so far as material, reads as follows:

"Subject to any direction to the contrary given by the company in general meeting ... all new shares of whatever kind shall be offered in the first instance and either at par or at a premium to all the then members or any class thereof in proportion to the amount of capital held by them in the class of shares to be issued ...".

It is argued for the respondent that the effect of this Article is such as to require that the "B" class shares allotted to Alexander and Wilson must first have been offered to Mary Olivia, the only then existing holder of shares in that class. On the other hand the appellants contend that the reference to "new shares" is a reference to shares newly created by an increase in the capital of the company. The respondent's submission finds support in the decision of Nevile J. in Lewis v. Riverton Public Golf Course Pty. Ltd. (1971) WAR 75, at pp 82-83. However, a contrary view of a similar provision was expressed by Russell J. in Musselwhite v. C.H. Musselwhite &Son Ltd. (1962) Ch 964, at p 979. See also, K.E. Lindgren, "The Fiduciary Nature of a Company Board's Power to Issue Shares", (1971-1972) 10 West. Aust. L. Rev. 364, at pp.365-366. I find the question to be one of considerable difficulty. In the end, I find the reasons advanced by Nevile J. to be insufficiently persuasive when considered in the context of the article here in question. Article 59 appears in a section headed "Alteration of Capital" and Arts.57,58 and 61 each use the term "new shares" in a manner which supports the contention of the appellants. The heading may be regarded in order to resolve an ambiguity in the wording of an article; at least, that is the intention that I draw from the obscure reference to headings in the Interpretation Article, Art.4, which is as follows:

"The head notes hereto shall not affect the construction hereof and in these presents unless there is something in the subject or context inconsistent therewith."

In my opinion, Art.59 has no application to an allotment of shares which form part of the unissued capital of the company.

10. The primary issue in the appeal is whether the allotment was made for an improper purpose. In examining this issue I bear in mind the submission of counsel for the respondent that all the circumstances surrounding the allotments must be evaluated in the context of the relief sought by the appellants, namely, equitable relief in the form of a rectification of the register. In his submission the appellants were party to a clandestine transaction undertaken deliberately with a view to impairing Mary Olivia's rights as a "B" class shareholder and that their conduct was such as to disentitle them to equitable relief.

11. The consideration of the issue of improper purpose must begin with the general proposition that the power to allot shares is a fiduciary power which must be exercised bona fide for the benefit of the company as a whole. This is a broad statement of principle which is not to be confined within narrow criteria. In Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 CLR 483 this Court upheld an issue of shares which was made to a large oil company in order to secure the financial stability of the company notwithstanding that it had the effect of defeating the attempt of a third party to secure control of the company. In the joint judgment of Barwick C.J., McTiernan and Kitto JJ. it was said, at p.493, in a passage cited with approval by the Judicial Committee of the Privy Council in Howard Smith Ltd. v. Ampol Petroleum Ltd. (1974) AC 821, at p 836:

"The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends.... 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."

12. The respondent points to the effect that the allotments had in diluting the voting power that Mary Olivia would enjoy after Charles' death or retirement as attracting the proposition that an issue of shares purely for the purpose of interfering with the voting power of shareholders will be beyond power: see Mills v. Mills (1938) 60 CLR 150, per Latham C.J. at p 163; Howard Smith, at p 837. As these citations indicate, there is ample authority for the proposition but it depends for its accuracy upon due regard being paid to the word "purely". After all, every issue of shares may be expected to effect an alteration to some degree of the voting power vested in the shareholders. All the circumstances surrounding the allotment must be considered in the search to discover the substantial object of those taking the action: Mills, per Dixon J., at pp.185-186. The nature of the task that the Court must undertake is described in a much cited passage from the judgment of Viscount Finlay in Hindle v. John Cotton Ltd. (1919) 56 ScLR 625, at pp 630-631:

"Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly of personal advantage, or for any other reason."

13. Any consideration of the circumstances pertaining to the allotments that are under challenge in the present case must take account of the position that Charles held in the affairs of the respondent. It was, in colloquial terms, a "one-man" company. Clause 8 of the Memorandum of Association provided:

"It is a condition of this Memorandum of Association that the Articles of Association of the Company shall not be amended without the permission of Charles MacDonald Whitehouse while he remains a Director of the Company."

The only shares to carry full voting rights were the "A" class shares and Charles was the only shareholder in this class. "B" class shares were to carry voting rights only after the death of Charles and then only for so long as the shares were held by the original holder. "C" class shares carried no voting rights but on the other hand this was the only class of ordinary shares to participate in the profits of the company by way of dividend and generally to participate in distributions of capital and profits. The consequences of all this was that so long as Charles remained the only "A" class shareholder then he held the total voting power of the company in general meeting. This does not rob other provisions of the Articles relating to the general meetings of the company of all materiality because it no doubt remained desirable and appropriate for such meetings to be held in order to give members of the company an opportunity to express views on matters touching the company notwithstanding that they had no power to vote. But it does emphasize, when taken in conjunction with the unlimited extent of the powers, authorities and discretions vested in Charles as the Permanent Governing Director of the company by Art.127, that Charles bore the responsibility for the total control and direction of every aspect of the respondent's operations. It is against this background that the critically important finding of the trial judge must be considered. His Honour was satisfied that at the time when the allotments were made Charles had the interests of the respondent at heart. It is implicit in the finding that Charles acted bona fide and reasonably, with a view to preserving the efficient and profitable operation of the respondent. Charles reasoned, as revealed in his communication to Mr Jones early in January 1974, that on his death his two "A" class shares with their voting rights - and assuming that he did not bequeath them to Mary Olivia - would be neutralized by her "B" class shares. In the light of his daughters' support of Mary Olivia and their attempts to have the company wound up, coupled with their lack of experience of the company's operations, Charles could reasonably conclude that the future profitability of the company would be enhanced if Alexander and Wilson were in a position to exercise control over the company after his death. They had the experience and expertise that were not to be found elsewhere within the membership of the company. There is no question of Charles' decision being infected by self-interest. It is clear that he had nothing personally to gain from the decision for its effect was not to be felt until after his death. True it is that if Mary Olivia survived Charles then the effect of the decision would be to diminish her capacity to influence the conduct of the company's business. But even if it be said that the allotments interfered with her contingent voting rights, the question remains whether they were made purely for that purpose. Counsel for the respondent argued that they were, attributing them to acrimony within the family. But the trial judge's finding is otherwise. This is an area where an appellate court must have strong grounds for departing from a conclusion of a trial judge where that conclusion depends on findings of credibility as between witnesses who were the actual participants in the impugned transaction and whose evidence was in conflict. As I have said, the trial judge accepted the evidence of Alexander and Mr Jones in preference to that of Charles and it was their evidence that enabled his Honour to determine the purpose that activated Charles in making the allotments. In my opinion, the words of Latham C.J. in Mills, at p.161, apply to this case:

"Where the interests of individuals are divergent and conflicting, where personal feeling is acute, and where the parties immediately concerned give oral evidence, the trial judge is in a position which enables him to estimate the weight and value of evidence much more effectively than any court of appeal can possibly do. Where so much depends upon the character, personal motives and interests of individual persons, the finding of a trial judge should not be disturbed unless there are strong and compelling reasons for taking a different view. In this case the learned trial judge has made scrupulously careful and precise findings of fact. There is plainly evidence to support them. In my opinion, they should be accepted by this court without hesitation."

Their Honours who formed the majority in the Full Court concluded that the substantial purpose for which the power was exercised was to alter the balance of voting power and thereby to give the ultimate control of the company to the appellants. Furthermore, their Honours were forced to the conclusion that in the exercise of the power Charles had acted in a clandestine fashion with the consequence that the power was not used bona fide. With all respect to their Honours, two things may be said about a resolution of the problem in these terms. First, the conclusion as to improper purpose fails to give sufficient weight to the finding of the trial judge to which I have referred. Secondly, Charles himself proposed that his objective be achieved by an alteration of the Articles, a procedure which would have been entirely above board and the outcome of which, having regard to his monopoly of voting power, would have been entirely predictable. The fact that he then accepted legal advice that there was an alternative lawful way of achieving the same end does not in my view suggest that in taking that advice he was acting other than bona fide. In my opinion, there is no reason to withhold relief on equitable grounds.

14. It may also be observed that an objective consideration which tends to support the conclusion that the allotments were made bona fide in the interests of the company as a whole lies in the fact that the interests of the "C" class shareholders were closely identified with the future stability and profitability of the company. They were the only class of shareholders who enjoyed an interest in the profits and Charles may well have been accused of dereliction of duty if he had not taken action to ensure, so far as he could and consistently with the powers vested in him, the future success of the company.

15. It was argued for the respondent that Art.127, in conferring such wide powers on the Permanent Governing Director, was inconsistent with s.114 of the Companies Act 1961 (Q.) as amended by s.117 of the Companies Act Amendment Act 1971 (Q.). I have had the opportunity of reading the reasons for judgment prepared by Brennan J. I agree with his Honour's reasons for rejecting this argument.

16. It remains for me to say that I have derived considerable assistance in the consideration of this case from the judgment of Berger J. in Teck Corporation Ltd. v. Millar (1972) 33 DLR (3d) 288, a decision which the Judicial Committee in Howard Smith (at pp 836-837) considered to be in line with the English and Australian authorities discussed in that case. The case provides a striking illustration of the propriety of directors taking action which they bona fide believed to be in the best interests of the company notwithstanding that it had the effect of destroying the voting power and intentions of the majority shareholder. In the course of reaching his decision, Berger J. engages in a critical discussion of the decision of Buckley J. in Hogg v. Cramphorn Ltd. (1967) Ch 254 where his Lordship took the view that the directors have no right to exercise their powers to issue shares, in order to defeat an attempt to secure control of the company, even if they consider that in doing so they are acting in the company's best interests. After observing that the proposition was inconsistent with the law as laid down by Lord Greene, M.R., in In Re Smith and Fawcett, Ltd. (1942) Ch 304, at p 306, his Honour continued, at p 312:

"How can it be said that directors have the right to consider the interests of the company, and to exercise their powers accordingly, but that there is an exception when it comes to the power to issue shares, and that in the exercise of such power the directors cannot in any circumstances issue shares to defeat an attempt to gain control of the company? ... If the directors, even when they believe they are serving the best interests of the company, cannot issue shares to defeat an attempt to obtain control, then presumably they cannot exercise any other of their powers to defeat the claims of the majority or, for that matter, to deprive the majority of the advantages of control. I do not think the power to issue shares can be segregated, on the basis that the rule in Hogg v. Cramphorn Ltd. applies only in a case of an allotment of shares.

Neither can it be distinguished on the footing that the power to issue shares affects the rights of the shareholders in some way that the exercise of other powers does not. The Court's jurisdiction to intervene is founded on the theory that if the directors' purpose is not to serve the interest of the company, but to serve their own interest or that of their friends or of a particular group of shareholders, they can be said to have abused their power. The impropriety lies in the directors' purpose. If their purpose is not to serve the company's interest, then it is an improper purpose. Impropriety depends upon proof that the directors were actuated by a collateral purpose, it does not depend upon the nature of any shareholders' rights that may be affected by the exercise of the directors' powers."

In my opinion, the approach of Berger J. is consistent with the approach of this Court in Harlowe's Nominees Pty. Ltd. v. Woodside. It is supportive of the case advanced for the appellants.

17. In the result, I conclude that the findings of the trial judge should not have been disturbed and that consequently the order for rectification should be restored.

18. I would allow the appeal.

BRENNAN J.: The respondent Carlton Hotel Pty.Ltd. ("the company") is one of a group of companies concerned with the ownership and management of hotels. The company is owned and controlled by members of the Whitehouse family. Charles, the father, held 2 "A" class shares in the company which were the only issued shares of that class. An "A" class share carries ordinary voting rights but no rights to participate in profits or in distributions of capital other than the return of the nominal value of the share. Mary Olivia, the mother, held 2 "B" class shares. A "B" class share carries ordinary voting rights in the hands of the original holder but not during the lifetime of Charles. A "B" class share carries no rights to participate in profits or in distributions of capital other than the return of the nominal value of the share. Each of the four daughters of Charles and Mary Olivia was beneficially entitled to 1000 "C" class shares and each of their two sons was beneficially entitled to 1200 "C" class shares. "C" class shares carry no voting rights, but they carry the right to participate in profits and in distributions of capital. The names of the respective beneficial owners of the "C" class shares were at first entered on the register as members but later, as the result of litigation, the children's names were removed from the register of members and the names of Charles and Mary Olivia were placed on the register as members in respect of the issued "C" class shares. They held the "C" class shares as trustees for the children.

2. Prior to 10 January 1974, the shares mentioned were the only issued shares. The authorized capital of the company (expressed in decimal currency) was $40,000 divided into 20,000 shares of $2 each. In the absence of any contrary determination by the directors, the shares in the company were divided into preference and ordinary shares and the ordinary shares were divided into "A", "B" and "C" class shares to which the rights earlier mentioned were respectively attached: Art.56. The articles did not prescribe the number of shares in the respective classes.

3. The marriage of Mr and Mrs Whitehouse was, after a period of disharmony, dissolved in 1973. The daughters sided with their mother, the sons with their father. The sons Alexander and Wilson, the present appellants, had been actively involved in the hotel businesses of the family companies; the daughters had not. The daughters, whose names were then on the register as members in respect of "C" class shares, petitioned for the winding up of the respondent company and of another company in the group. The company, under Charles' control, countered by suing successfully to have the children's names removed from the register of members in respect of the "C" class shares.

4. Charles held the only shares to which voting power was attached during his lifetime but, after his death, the voting power would have been shared between Mary Olivia (had she survived him) as the original holder of "B" class shares (or, more accurately, the original holder of one of her 2 "B" class shares) and the holders of Charles' "A" class shares. That prospect gave rise to some concern on the part of Charles, Alexander and Wilson, for the daughters may have been able to influence their mother in the exercise of her voting power. On 10 January 1974 Charles, purporting to act on behalf of the company, agreed with Alexander that 2 "B" class shares be allotted and issued to him, and with Wilson that 2 "B" class shares be allotted and issued to him. The issue of the 4 "B" class shares was intended to ensure that Mary Olivia would not have control or shared control of the company if she should survive Charles. This course was adopted on the advice of Mr T.O. Jones, a solicitor and a director of the company. It called for the exercise by Charles of the power to allot shares in the company. Charles' power to allot the shares is in dispute.

5. Article 56 provides, inter alia, that the shares in the company should be

" under the control of the Directors who may allot or
otherwise dispose of the same to such person or
persons on such terms and conditions and either at a premium or at par and with such rights and privileges annexed thereto and at such times as the Directors may think fit ... and in particular such shares or any of them may be issued by the directors with a preferential deferred or qualified right to dividends and in the distribution of assets of the company and with a special or qualified right of voting or without a right of voting."
The power to allot shares is affected by Art.59 which reads:
" Subject to any direction to the contrary given
by the company in general meeting and to the rights
of any debenture holder under any debentures of the company which shall be issued in pursuance of any of the articles herein contained all new shares of whatever kind shall be offered in the first instance and either at par or at a premium to all the then members or any class thereof in proportion to the amount of capital held by them in the class of shares to be issued and such offer shall be made by notice given to each member personally or by post specifying the number of shares to which he is entitled ..."

6. The powers of the directors are circumscribed by Art.127. Article 127 declares Charles to be the Permanent Governing Director until he dies or resigns and vests in him alone, so long as he continues to hold that office, "all powers and authorities and discretion vested in the Board of Directors by the Companies Acts or these Articles". The other directors (if any) are entitled to exercise only such powers as Charles might delegate to them and they are to be under his control and direction in regard to the company's business.

7. Charles' purpose in allotting the "B" class shares to Alexander and Wilson was in dispute. Andrews S.P.J. (as he then was) made this finding:

" I am satisfied that at the time when the allotments were made Charles had the interests of the company at heart in taking steps to ensure that the plaintiffs would retain control over the management of its affairs after his death. The purpose of the alteration in the balance of control was to ensure that the daughters and their husbands would not, by the exercise of their voting power, gain control over the company the business of which was likely better and efficiently (sic) controlled by his sons."

Although Mary Olivia was a director of the company at the material time - the other directors being Charles, Alexander, Wilson and Mr Jones - she was not informed of Charles' intention to allot further "B" class shares. No meeting of directors was summoned and no resolution was passed by the Board to allot "B" class shares to Alexander and Wilson. Mary Olivia died in 1981 perhaps without knowing of, and certainly without consenting to, the allotment of "B" class shares to Alexander and Wilson.

8. After some delay, the company lodged a Return of Allotment of Shares with the Commissioner for Corporate Affairs showing the allotment on 10 January 1974 of 2 "B" class shares to each of Alexander and Wilson. The annual returns of the company lodged with the Commissioner for Corporate Affairs in 1974, 1975, 1977 and 1978 showed each of Alexander and Wilson to be the holder of 2 "B" class shares. It seems (though the evidence is extremely sketchy) that the subscription money for the shares was debited by the company to the loan account of another company in the group. The share register of the company did not record the issue of these shares and no share certificates were issued. Nevertheless, Andrews S.P.J. found that Charles as Permanent Governing Director and Alexander and Wilson had agreed that the "B" class shares should be allotted and that $2 subscription per share should be paid. His Honour found that the shares were allotted for the appropriate consideration as Charles knew and intended.

9. On 26 May 1980, after Charles had fallen out with his sons, a resolution was passed at a directors' meeting (attended by Charles and Mrs J. Whitehouse) stating that the Board was satisfied that no allotments of "B" class shares had ever been made to Alexander and Wilson and directing the Secretary "to amend any records of the company by expunging any reference to such allotments, and further ... (to) inform the Commissioner for Corporate Affairs of the anomaly in the previous Annual Return". Alexander and Wilson sued the company in the Supreme Court of Queensland for rectification of the company register by entering therein their respective names as members of the company in respect of 2 "B" class shares. The company, under Charles' control, defended the action. Andrews S.P.J. ordered rectification of the register but on appeal the Full Court (Kelly S.P.J. and Matthews J., Carter J. dissenting) set aside his Honour's order and gave judgment for the company. There was no challenge to his Honour's findings that an agreement was made to allot the "B" class shares in consideration of the payment of the appropriate subscription moneys and that "B" class shares were allotted to Alexander and Wilson in intended exercise of Charles' power as Permanent Governing Director. Nor was there any challenge to his Honour's finding as to Charles' purpose in making those allotments. Andrews S.P.J. held that there had been no breach by Charles of the fiduciary duty he owed to the company in the allotment of the shares. On appeal the majority of the Full Court, accepting his Honour's finding as to Charles' purpose in allotting the "B" class shares to Alexander and Wilson, held that there had been a breach by Charles of his fiduciary duty to the company and further, that the allotments contravened the provisions of Art.59. On those grounds, the order for rectification of the register was set aside and, in lieu thereof, judgment for the company was entered.

10. On appeal to this Court, the appellants attack both of the conclusions on which the majority view in the Full Court was based. The company seeks to uphold the majority's conclusions that there was a breach of fiduciary duty and a contravention of Art.59. The company further submits that Art.127 is invalid in so far as it purports to confer exclusively on Charles the powers of the directors to allot shares and that Charles could not exercise the power to allot shares unless the allotment is resolved upon at a meeting of the Board. There was no relevant meeting of the Board nor any notice to Mary Olivia of the proposal to make the allotment. In addition to the specific grounds advanced for attacking the validity of the allotments, the company submits that the court, in the exercise of its discretion, would not order rectification of the company register when the appellants' claim is founded on an agreement which they had entered into with Charles clandestinely and for the improper purpose of defeating the rights, powers or privileges of Mary Olivia.

11. Having regard to the chief questions addressed by the majority judgments in the Full Court, it is desirable first to consider whether, assuming that Charles had power himself to allot "B" class shares to each of Alexander and Wilson and assuming that he had exercised that power for the purpose found by the learned trial judge, such an exercise of the power was in breach of his fiduciary duty. To resolve that question, it is necessary "to start with a consideration of the power whose exercise is in question, in this case a power to issue shares", as Lord Wilberforce said in Howard Smith Ltd. v. Ampol Ltd. (1974) AC 821, at p 835. It is necessary to focus on the particular power in order to ascertain whether the purpose, or one of the substantial purposes, for which the power was exercised in a particular instance is among the legitimate purposes for which the power is conferred: Mills v. Mills (1938) 60 CLR 150, at pp 185-186.

12. In the ordinary case, a power to allot shares is conferred for the purpose of enabling the company to raise capital and an allotment of shares for some other purpose - for example, for the purpose of maintaining control by shareholders friendly to the directors - is in breach of the directors' fiduciary duty to the company: Grant v. John Grant &Sons Pty.Ltd. (1950) 82 CLR 1, at p 32; Ngurli Ltd. v. McCann (1953) 90 CLR 425, at pp 439-440; Ashburton Oil N.L. v. Alpha Minerals N.L. (1971) 123 CLR 614, at pp 627-628,640. When an issue of shares has the double effect of raising needed capital and buttressing shareholder support for the directors, it may be a nice question whether the directors made the issue honestly in the interests of the company albeit with the realization that the result would be agreeable to them or whether in making the issue they had an actual purpose of creating an advantage for themselves otherwise than as members of the general body of shareholders: Harlowe's Nominees Pty.Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 CLR 483, at pp 493-494. An issue of shares which is made for an impermissible purpose is not immune from challenge because one of its effects is to benefit the company: an exercise by directors of their power to issue shares for a purpose foreign to that for which the power is conferred is a breach of their fiduciary duty to the company and a ground for avoiding the exercise of the power.

13. In the ordinary case, an issue of shares not for the purpose of raising needed capital but for the purpose of destroying the voting power of a particular shareholder cannot be upheld. But the power to allot "B" class shares is not a power conferred for the purpose of enabling the company to raise needed capital. A "B" class share gives no right to any financial return on the capital subscribed except the return of the nominal value of the share, and no voting power unless the original allottee continues to hold the shares and survives Charles. A "B" class share is not an attractive investment. The allotment of "B" class shares is not an appropriate means of enabling the company to raise capital. The allotment of "B" class shares determines who, in addition to the holders of "A" class shares, should have voting power after Charles' death. The allottees of "B" class shares cannot transfer that voting power to others. The purpose for which the power to allot "B" class shares was designed appears with tolerable clarity to be the nomination of those who should control the company after Charles' death. As Art.127 reposed the power to control the allotment of all classes of shares solely in Charles, he was able to determine who should control the company during his life and, by testamentarily disposing of his "A" class shares and controlling the allotment of the "B" class shares, he was able to determine who should control the company after his death. If the purpose for which the power to allot "B" class shares was conferred was not the raising of capital but the nomination of persons to control the company after Charles' death, the purpose of the power to allot "B" class shares is radically different from the purpose of the power to allot shares of the kind considered in the cases referred to. Therefore the results of those cases throw no light on the question whether the purpose for which Charles allotted "B" class shares to Alexander and Wilson was within the power conferred on him.

14. Charles exercised the power, as Andrews S.P.J. found, to ensure better and more efficient management of the company after his death. Subject to Art.59, his Honour's finding establishes that Charles' allotments of "B" class shares to Alexander and Wilson were made for a purpose within the power. The manifest purpose of the first exercise of the power when 2 "B" class shares were allotted to Mary Olivia was to provide for the management of the company after Charles' death. No challenge is made to the validity of that allotment. There is nothing in the articles which would preclude a second or subsequent exercise of the power for the purpose of nominating other persons to control the company after his death save, possibly, Art.59.

15. Article 59 regulates the offering of "new shares of whatever kind". Article 57 provides for increasing the authorized capital of the company by "the creation of new shares" and by dividing the increase "into shares of such respective amounts as the company (in general meeting) directs". Article 58 provides for the issue of "new shares" with such rights and privileges annexed as the general meeting resolving on the creation of the new shares may direct or, in the absence of such a direction, as the Board of Directors shall determine. Articles 57, 58 and 59 thus govern the creation, issue and offering of shares in the increased authorized capital of the company, reposing some powers in the company in general meeting and other powers in the Board. An offer of shares is a step towards allotment. The three articles thus regulate the steps to be taken when an increase in authorized capital is translated into an increase in the paid-up capital of a company. Farwell L.J. spoke of these steps in Mosely v. Koffyfontein Mines, Limited (1911) 1 Ch 73, at p 84:

" There are three steps with regard to new capital;
first, it is created; till it is created the
capital does not exist at all. When it is created it may remain unissued for years, as indeed it was here; the market did not allow of a favourable opportunity of placing it. When it is issued it may be issued on such terms as appear for the moment expedient. Next comes allotment. To take the words of Stirling J. in Spitzel v. Chinese Corporation ((1899) 80 LT 347, at p 351), he says: 'What is an allotment of shares? Broadly speaking, it is an appropriation by the directors or the managing body of the company of shares to a particular person.'"
The meaning of issue may vary according to its context, as Lord Hanworth, M.R. pointed out in Oswald Tillotson, Ld. v. Inland Revenue Commissioners (1933) 1 KB 134, at p 155. When issue is used in reference to shares which have already been allotted, it usually means an act which completes the title of the allottee or puts him in control of the shares allotted: Central Piggery Co.Ltd. v. McNicoll and Hurst (1949) 78 CLR 594, at pp 599-600; Maddocks v. D.J.E. Constructions Pty.Ltd. (1982) 148 CLR 104, at p 119.

16. It may be that in Art.58 issue means the entire procedure for getting new shares into the hands of shareholders and includes allotment. But whatever meaning is attributed to issue in Art.58, the "offer" governed by Art.59 is an offer of the shares issued or to be issued under Art.58. And the "new shares" the issue of which is regulated by Art.58 are created only by increasing the authorized capital of the company under Art.57. Article 59 therefore regulates the offering of such newly created shares but it does not regulate the offering of shares in the original capital of the company: see Musselwhite v. C.H. Musselwhite &Son Ltd. (1962) Ch 964, at p 979. Although the practical effect of Art.59 so construed is not as substantial as it would be if "new shares" meant unissued shares in the original capital of the company, the article is not thereby deprived of all operation. In Lewis v. Riverton Public Golf Course Pty.Ltd. (1971) WAR 75, at p 83, Nevile J. said with reference to a similar article that it would be "quite meaningless" if it did not apply to unissued shares in the original capital. With respect, the article is not without meaning if it is construed according to its context. The majority of the Full Court, on this aspect of the case, founded their opinion on Lewis v. Riverton Public Golf Course Pty.Ltd. As that case was, in my opinion, wrongly decided, it is erroneous to hold that the allotments of "B" class shares to Alexander and Wilson were invalid for non-compliance with Art.59.

17. The company's next ground of attack on the allotments is that Charles could not exercise the power of allotment except at a meeting of the Board and that no meeting was held and, in the absence of notice to Mary Olivia, no valid meeting could have been held. Clearly enough the power to allot shares conferred on the directors by Art.56 could have been exercised by the Board only at a meeting to which Mary Olivia and the other available directors had been summoned: John Shaw &Sons (Salford), Ld. v. Shaw (1935) 2 KB 113, at pp 133,138-139. But does Charles, when he is exercising the power to allot shares conferred on him alone by Art.127, have to summon a meeting of the Board? There is nothing in Art.127 to suggest that the valid exercise of the powers thereby conferred is conditioned upon the summoning of directors to a meeting of the Board or upon his giving of a hearing to the views of other directors. I respectfully agree with the view expressed by Jacobs J. in Levin v. Clark (1962) NSWR 686, at p 701, that the general principle that every director has the right, and the duty, to deliberate upon the affairs of the company, even if he is not entitled to vote must give way to any contrary express provision in the Articles. Article 127 vests in Charles "all powers and authorities and discretion vested in the Board of Directors", gives him control over other directors and empowers him to appoint and without notice to remove any other director from office. Article 127 authorizes Charles to exercise powers untrammelled by the need to consult with other directors. The want of notice to Mary Olivia of Charles' intention to allot further "B" class shares and the exercise of the power to allot them otherwise than at a meeting of the Board provide no grounds for invalidating the allotments, provided the operation of Art.127 remained unaffected by the amendment to s.114 of the Companies Act 1961 (Q.) introduced by s.117 of the Companies Act Amendment Act 1971 (Q.).

18. Until 1971, it was not necessary for a proprietary company in Queensland to have more than one director. By s.117, however, s.114 of the 1961 Act was amended to provide that every proprietary company should have at least two directors. The term "director" was defined by s.5(1) of the 1961 Act to include -

" any person occupying the position of director of a
corporation by whatever name called and includes a
person in accordance with whose directions or instructions the directors of a corporation are accustomed to act."
A qualification, presently immaterial, was provided for by s.5(2). The 1971 amendment raises the question whether, consistently with its provisions, an article may vest in one director all the powers which the articles otherwise vest in the board. (Of course, such an article could not vest in one director powers which a statute vests in two or more directors.) In Levin v. Clark, Jacobs J. observed that it may well be that articles which provide for the exercise of directors' powers by a single governing director contravene a statutory requirement for two directors, but he did not find it necessary to express a final conclusion. In Welch v. Welch (1973) ACLC 40-068, Holland J. had to decide the question. He regarded the practice of reposing the whole of the powers of the directors in one person's hands to be so well known to the legislature in 1971 that, in the absence of any express provision for abolishing the practice, the legislature should not be taken to have done so by implication.

19. The company's articles provide for the appointment of not more than four directors until the company in general meeting otherwise determines: Art.97. More than two directors had been appointed under this article and thus the requirement of the amended s.114 appears prima facie to have been satisfied. However, the "position of director" to which the statutory definition of "director" refers is not a merely titular position: to construe the definition in that way would make a mockery of s.114. The "position of director" must carry some power under the constitution of the company which a mere member of the company in virtue of his membership may not exercise or may not exercise in the same way as it may be exercised by an occupant of that position. Of course, a servant of the company may be entrusted with power not possessed by members of the company but a director is not a servant of the company. The question is whether the articles of the company confer on its directors sufficient power to stamp the positions to which they were appointed with the character of "position of director".

20. True it is that, so long as Charles continues to hold office as Permanent Governing Director, no other director may exercise any power unless the power is delegated to him by Charles, but the other directors are eligible to have power delegated to them and they assume the full powers of directors when the Permanent Governing Director ceases to hold office. In my opinion, that is sufficient to show that the other directors satisfy the statutory definition of directors. Once it appears that a person is a director, the Companies Act may impose upon him particular duties and functions - indeed, the 1971 Amendment Act contemplated that, in consequence of its provisions, there would be some statutory duties or functions which would thereafter be required "to be exercised or performed" by more than one director: see the transition provision in s.162(2). It may be that the statutory imposition of a duty or function imports the power to exercise the duty or perform the function irrespective of the provisions of a company's constitution, but it is not necessary to consider that question. The power to allot shares is not such a duty or function. It follows that s.114 of the Companies Act 1961 as amended was complied with despite the presence of Art.127 and that Art.127 was not invalidated by the 1971 amendment to that section.

21. It remains to consider the submission that rectification of the register should be refused in the exercise of the court's discretion. In Grant v. John Grant &Sons Pty.Ltd., at p 51, Fullagar J. said:

" The power to order rectification of the
register must clearly, I think, be in all cases
discretionary. The person claiming rectification must show that he has some equity which the court will protect. If he is a shareholder, then prima facie he shows such an equity if he establishes that a name is wrongly included in or omitted from the register of his company. Some definite reason must be shown, I would think, for refusing rectification before rectification will be refused."
It is immaterial whether the jurisdiction invoked by an applicant is equitable or statutory, for the statutory provision is merely procedural: Kathleen Investments (Aust.) Ltd. v. Australian Atomic Energy Commission (1977) 139 CLR 117, at p 151. What reason is there for refusing rectification in the present case? The application is made by allottees of shares whose shares have been paid for but who are not on the register. It may be assumed that the omission of their names from the register was not at first due to any deliberate decision and latterly the omission was not continued with their consent or acquiescence. There has been no occasion for them to exercise the voting power attached to the "B" class shares and there will be no occasion for them to do so during Charles' lifetime. The conduct to which the company points as a reason for refusing rectification is the secrecy and purpose of the agreement made between Alexander and Wilson on the one hand and Charles on the other. Making the agreement and keeping it from Mary Olivia's knowledge was less than frank but the parties to the agreement deprived her of no right, power or privilege to which she was entitled. She retained her "B" class shares until her death but, having regard to the provisions of the articles as I have construed them, the deferred voting power which they originally gave her was always subject to defeasance by Charles' allotment of further "B" class shares to others. For the reasons stated, she was not entitled to notice before Charles allotted the shares and Alexander and Wilson were under no legal or equitable obligation to notify her of their applications for shares or of Charles' intention to allot them. Alexander and Wilson are thus unregistered shareholders who neither consented to nor contributed to the omission of their names from the register nor failed in any legal or equitable duty to Mary Olivia or to the company. They are entitled to the decree of rectification first pronounced in their favour.

22. Although their victory might have proved to be Pyrrhic if my opinion had prevailed, that consideration could not have affected the result. I would allow the appeal and restore the order of Andrews S.P.J.

Orders

Appeal dismissed with costs.