Corporate governance: High Court confirms its power to correct directors’ innocent mistakes
In a recent case the High Court has acknowledged that innocent mistakes can happen in relation to corporate governance and has unanimously confirmed the breadth of the Court’s power to correct such mistakes.
Weinstock v Beck ( HCA 14) concerned a family business, L W Furniture Consolidated (Aust) Pty Ltd (LWC), and a shareholder application challenging the purported appointment of a director.
The articles of association of LWC (Articles) provided that any director appointed to the board of directors would only hold office until the next following annual general meeting (AGM), and at that AGM each director would retire from office and be eligible for re-election. The Articles also gave the directors the power to, at any time, appoint a person to be a director of the Company, and any director so appointed would also be obliged to retire at the next AGM.
Amiram Weinstock, who was purporting to act as sole director of LWC, appointed his wife Helen, as director of LWC on 30 July 2003. Technically, however, Amiram did not have the power to do this, his appointment as director having expired at the AGM on 31 December 1973. Furthermore, no party at the AGM held any voting shares, so no shareholder was empowered to vote at an AGM.
On 10 December 2010 Amiram and Helen filed an application seeking an order that the Court exercise its power under s 1322(4) of the Corporations Act 2001 to declare that Amiram’s appointment of Helen as a director was not invalid. Amiram’s sister, Tamar sought orders to wind up LWC on the just and equitable ground, on the basis that it had no directors, and no means available to appoint any directors.
Section 1322(4)(a) provides that the Court may, make an order declaring that any act, matter or thing purporting to have been done, in relation to a corporation is not invalid by reason of a contravention of a provision of the Act or a provision of the Company’s constitution.
At first instance the Court held that Amiram was a member of the company and a former director and had acted as a de facto director for 30 years, and since there was no substantial injustice to any person, it was just and equitable that an order be made under s 1322(4) that the purported appointment of Helen as a director was not invalid. Tamar’s application to wind up the company therefore failed.
Tamar appealed to the Court of Appeal, where it was held that the purported appointment of Helen as a director was not a contravention of the Articles, but an attempt by Amiram to exercise a power that he simply did not have. Accordingly, the Court of Appeal held that the appointment of Helen as a director was invalid.
Amiram and Helen appealed to the High Court, who unanimously agreed that the term “contravention” as used in s 1322 should be interpreted widely. The High Court found that the fact that Amiram did not have power to appoint Helen as a director and could not validly have been given such power, did not mean that the appointment was invalid by reason of a contravention of the company’s constitution. In his judgment, French CJ emphasised that such innocent errors should not undermine the validity of decisions made by corporations in cases where there is no substantial injustice to a third party.
The High Court allowed Amiram and Helen’s appeal and remitted the matter back to the Supreme Court to determine (1) whether an order should be made under s 1322(4) validating Helen’s appointment as a director; and (2) whether LWC should be would up.
In Weinstock the High Court has recognised that corporate governance is quite intricate and can pose significant difficulties, and that those who own and operate corporations, both large and small, are not always knowledgeable and well-advised with regard to its intricacies.
Where errors have occurred as a result of an innocent failure to comply with procedure as provided for in the Corporations Act (including the Replaceable Rules) or a company’s constitution, the Court has power to declare that an act, matter, thing or proceeding done or instituted is not invalid merely because of a failure to comply with procedure.