I. CHAPTER 3 – THE JURISPRUDENCE AND LEGAL PRINCIPLES UNDERLYING THE

DOCTRINE OF RATIFICATION

TEMPORARY TABLE OF CONTENTS

ContentsI. Chapter 3 – The jurisprudence and legal principles underlying the doctrine of ratification............................................................................................................................1

A. [TEMP] SUMMARY POINTS...............................................................................2B. Fiduciary duties of a director...................................................................................6

Before embarking upon a consideration of the doctrine of ratification, it is necessary to consider the nature of the fiduciary duties owed by a director to a company which may be subject to ratification by the shareholders in general meeting........................6

C. What is meant by the ‘ratification’ of a breach of fiduciary duties and what is its effect?..............................................................................................................................8

1 Exoneration..........................................................................................................82 Affirmation........................................................................................................103 Promise not to sue..............................................................................................114 Release...............................................................................................................115 What conduct cannot be ratified?......................................................................116 How does authorisation differ from ratification?..............................................147 When it ratification not necessary?....................................................................148 Is section 1322 of the Corporations Act relevant to ratification?......................14

D. Which shareholders are entitled to vote on a resolution?......................................16E. Relevance of ratification to bodies corporate incorporated under the Corporations Act 18

9 Breach of fiduciary duty....................................................................................1810 Breach of statutory duty.....................................................................................18

F. Relevance of a ratification to an incorporated body incorporated under State or Territory legislation.......................................................................................................21G. Basis of the doctrine of ratification.......................................................................22

11 What is the legal reasoning for the doctrine of ratification?.............................2212 Criticism of the application of the doctrine to corporate law............................2413 What view of the theory of corporations is being reflected?.............................2414 Is ratification a residual power?.........................................................................2515 Does the law recognize a shareholder conflict of interest?...............................2716 Fraud on the minority........................................................................................3017 What is the position if there is no minority?......................................................3118 Is a director of a wholly owned subsidiary in a different position?...................31

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A. [TEMP] SUMMARY POINTS

How is ratification relevant to companies incorporated under the Corporations Act?A ratification resolution is relevant to:

Whether the company will be bound by an act of a director who has acted in excess of their powers and the company is not bound under the doctrine of ostensible authority or under section 128;1

Whether leave should be granted for a shareholder to commence legal proceedings as a derivative action under s 236 (the position in Canada is that a ratification resolution is irrelevant to a statutory derivative action);

may be relevant to the question whether a director has acted honestly under s 229(1) of the Uniform Companies Code, a predecessor of s 181.2

1317S;3 and 1318.

What is meant by ‘ratification’? Ratification as exoneration; Ratification as affirmation; Ratification as a promise not to sue; and Ratification as a release (may be indistinguishable from exoneration).

Ratification as exoneration Extinguish cause of action and bind minority

However: UK dissenting view - Release must be incidental to carrying on the business and

was made in good faith for the benefit of and to promote the prosperity of the company. If the release did not meet those standards, the release would not bind a subsequently appointed liquidator: Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258 per May LJ

Australia - Although it blocks action by the minority shareholders there is still the possibility of legal action being brought by new controllers where there is a change in control of a company. Consequently, a director relying on ratification would also require a documented formal deed of release from the board of directors: Miller v Miller (1995) 16 ACSR 73per Santow J

Australia (pre-Bamford) – ratification not possible: Provident International Corp v International Leasing Corp Ltd [1969] 1 NSWR 424

1 Ford, [8.375] Ratification of excess of power], as at 23 October 2013

2 Maron v Pressbank Pty Ltd (1987) 12 ACLR 465 at 472; 6 ACLC 338  (affirmed on other

grounds Urban v Pressbank Pty Ltd (1989) 15 ACLR 466  ) McPherson J3 See Forge v ASIC. This issue was left open in Forge v ASIC where the court acknowledged that this may be the case although, on the facts before the court, the opportunity to do this was not afforded to the primary judge (at [382]–[383]). (Ford [8.385] Ratification of action in breach of other fiduciary duties

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Criticism Application of the law to companies – the company is an abstract entity No requirement of director to act in good faith or to have acted honestly Whether shareholders are a legally competent body to make a decision in respect

of a legal claim held by the company? No requirement of independence. Transaction based analysis has been criticized. Cases of Deek v Cooks and Regal

(Hastings) Ltd v Gulliver cannot be reconciled. Difficulty in determining the ‘purpose’ of a group of majority shareholders in

voting to ratify a breach Pramatha Nath Mullick v Pramatha Nath Mullick v Pradyumna Kumar Mullick

(1925) LR 52 Ind App 245 – Hindu idol was a separate legal entity, not property. The idol was required to be represented by a disinterested next friend appointed by the Court. A decision which supports a view that the bests interest of the entity are the relevant interests, not the directors (perhaps not even the shareholders, although there could not be shareholders of the idol)

How does ratification promote accountability and good corporate governance?

Affirmation Minority bound effect could be restricted to affirming the conduct (eg. a contract), or effect could be to also exonerate the director.: Foss v Harbottle New controller can sue if effect is only affirmation

Promise not to sue minority bound or company bound? new controller can sue

Release director can be released for consideration, or by deed. Director exonerated

LEGAL BASIS OF DOCTRINE Law of fiduciaries - the principal may authorise the fiduciary to engage in

conduct which would otherwise be a breach of fiduciary duty, and may condone or ratify a breach of duty which has already occurred

Equitable doctrine of release – defence to a claim that the plaintiff has released the defendant from their obligation.

Some authorities suggest one or both are the legal basis.

What legal basis is there for the extinguishment of a shareholder’s right to commence proceedings?

WHAT THEORY OF THE CORPORATION IS BEING REFLECTED? Director as agent of the company, shareholders supreme governing body Organ theory, powers derived from the constitution

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nexus of contracts theory ‘stakeholder’ theory – effect on creditors. What about employees?

Is ratification a residual power? Yes: Bamford v Bamford; Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 Whether there is residual power is a matter of interpretation, which seems to

indicate that ratification is not in fact possible if there is no residual power

UNCERTAINTY IN RESPECT OF HOW THE DOCTRINE OF RATIFICATION WORKS

Whether a corporate trustee can be released from a breach of trust by shareholders?

Whether recklessness is treated the same as fraud? Why are management buyout situations treated as legally permissible whereas

acquisitions of corporate property are not? Is a director of a wholly owned subsidiary in a different position? Is the mere possibility of a ratification resolution sufficient to deprive a

shareholder of the ability to commence a derivative suit? Why can a shareholder commence an action for a breach of a member’s personal

right and not a derivative action? Anomaly arising from Foss v Harbottle and application of doctrine of ratification

Unanimous vote of shareholders Unanimous assent puts an end to liability: Regal (Hastings) Ltd v Gulliver; Furs

Ltd v Tomkies No problem of fraud on the minority. What about creditors (Kinsela v Russell Kinsela P/L) and employees? In the

circumstances of a sole shareholder, sole director company, the sole shareholder could vote to ratify a breach of their own duties to insulate themselves from any proceedings which may be later commenced by a liquidator. Such conduct, although lawful, would plainly be to the detriment of stakeholders of the company, including creditors and any employees. See Re Horsley & Weight Ltd [1982] Ch 442 at 453

A unanimous vote would be impractical for companies with large shareholder bases

Uncertainty as to who can vote, or whether it may matter by applying the fraud on the minority doctrine

Shareholders not subject to an implied limitation that their power was to be exercised in good faith in the best interests of the company: Bamford v Bamford [1970] Ch 212 (but see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1980] 2 All ER 841 – disregard votes cast or capable of being cast by shareholders who have an interest which directly conflicts with the interests of the company @ 862 and 874 overruled on appeal [1982] Ch 204). A similar decision by the Supreme Court of Canada was also overruled in North-West Transportation Co v Beatty (1887) 12 App Cas 589

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the right to issue new shares is an advantage which belongs to the company and any attempt by the directors or by the company to exercise that right not for the benefit of the company as a whole but so as to benefit the majority to the unfair detriment of the minority could be restrained in a suit brought by the minority against the company and majority: Ngurli Ltd v McCann

if the general meeting specifically requests that an allotment be made and the directors act pursuant to that request, then it cannot be said that there is any abuse of the exercise of a fiduciary power: Doncon v Doncon (but the decision did not consider Winthrop case and would seem to ignore the doctrine of the fraud on the minority)

No legal authority as to whether one or more directors with a combined majority interest voting to ratify their own breach of fiduciary duties is a fraud on the minority which would permit a shareholder to commence a derivative action if leave was granted by a Court. If this position is correct, this in effect imposes a restriction on a director with a majority of the votes from voting to ratify their own breach of fiduciary duty. It is unclear however whether such an argument could be extended to the voting rights of:

o other directors, o associates of directors, or o a director, whilst not having a majority interest, has an interest sufficient

to enable a ratification resolution to be approved.

If only ‘independent’ shareholders can vote, how should independence be determined? What appeal rights would there be to challenge such a vote? Effect of s 1322 of the Corporations Act may be relevant Denial of a voting right is a personal right which is a basis for a cause of action.

Would this create a risk of new litigation to determine whether the shareholder was independent?

What risk does a Chairperson face if they rule a shareholder’s right to vote in or out under the constitution or common law?

Other jurisdictions deal with ratification in different ways Canada and USA require independent majorities There is separate inconsistent commentary that Canada requires a Court to

determine whether a director breach should be ratified Singapore, a Court is required to determine whether a director’s breach should be

ratified.

BREACH OF STATUTORY DUTY Past conduct - Cannot be cured by a ratification resolution: Miller v Miller; Forge

v ASIC; Angas Law Services Pty Ltd (in liq) v Carabelas Authorization – point left open by the HCA in Angas Law Services Pty Ltd (in

liq) v Carabelas.

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B. Fiduciary duties of a director

Before embarking upon a consideration of the doctrine of ratification, it is necessary to consider the nature of the fiduciary duties owed by a director to a company which may be subject to ratification by the shareholders in general meeting.

Although a director is not a trustee the duties of the office are in some respects similar to those of a trustee. There are the same restraints and the same liability to account for improper profits and pay equitable compensation for improper loss of company assets: see [8.050].4

Because the relationship between director and company is a fiduciary relationship, a high standard of loyalty is set for directors by principles of equity. The standard of loyalty is reflected in a number of positive obligations, as well as in some negative ones.

The positive duties of loyalty of a company director include the duties:

• 

to act in good faith in the best interests of the company (see [8.065]ff);

• 

to act for proper corporate purposes (see [8.065]ff and [8.200]ff); and

• 

to give adequate consideration to matters for decision and to keep discretions unfettered: see [8.290]ff.5

The negative aspects of the duty of loyalty are those which require directors to avoid

conflicts of interest of various kinds. The equitable principles about conflict of interest,

and their statutory supplements concerning improper use of information and position

(ss   182 and 183), insider trading, financial benefits to related parties and retirement

benefits, are explored in Ch 9.6

4 Ford, [8.010.3] The director as a fiduciary, as at 23 October 20135 Ford, [8.010.3] The director as a fiduciary, as at 23 October 20136 Ford, [8.010.3] The director as a fiduciary, as at 23 October 2013

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The duty to act in good faith in the interests of the company and the duty to act for

proper purposes have been held to be fiduciary duties.7

The duty of loyalty, with both positive and negative aspects, is only one facet of the

duties of directors.

Additionally directors owe a duty of care to their company,8 however the duty is not a

fiduciary duty.

A director can owe a fiduciary duty to a company for more than one reason. The office of

director implies fiduciary status and, in addition, the director may in a particular activity

have trust reposed in him or her. For example, where the director is to negotiate on

behalf of the company: Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR

260; 15 ACLR 230 at 280; 7 ACLC 6599

Directors may be in breach of duty by acting irregularly in various ways. They may act improperly in:

(1) 

exceeding their powers;

(2) 

abusing their powers;

(3) 

taking unauthorised gains; and

(4) 

failing to act with reasonable care and diligence.10

7 The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 70 ACSR 1; [2008] WASC

239 at [4527]–[4582]  (an appeal was partly allowed and partly dismissed: Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 89 ACSR 1; [2012] WASCA 1578 Ford, [8.010.3] The director as a fiduciary, as at 23 October 20139 Ford, [8.010.3] The director as a fiduciary, as at 23 October 201310 Ford, [8.370] Power of members to authorize or ratify abuse of power, as at 23 October 2013.

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C. What is meant by the ‘ratification’ of a breach of fiduciary duties and what is its effect?

The word ‘ratification’ may be used in different legal contexts.

A ‘ratification’ resolution may have different legal effects. The word ‘ratification’ is thus

used in the following different legal contexts:

Ratification as exoneration; Ratification as affirmation; Ratification as a promise not to sue; Ratification as a release.

Each of these types of ratification are considered below.

1 ExonerationRatification of an unauthorised act by a director is for the purpose of exonerating or

exculpating the director. The ratification has retrospective effect in respect of the

conduct of the director.

A majority of shareholders which approves a ratification resolution will bind the minority

of shareholders and the resolution will act to extinguish the cause of action which arose

from the breach of fiduciary duties.

Judicial opinions vary however.

in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical

Services Ltd [1983] Ch 258; [1983] 3 WLR 492, May LJ posited a responsibility on

members not to forego even a claim in negligence as an asset of the company unless

the release was reasonably incidental to the carrying on of the company's business and

was made in good faith for the benefit of and to promote the prosperity of the company.

A gratuitous release not meeting those standards would not bind a subsequently

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appointed liquidator. His Lordship's approach is similar to that adopted by English courts

about gifts made by companies.11

Query whether this is legally distinguishable from a release.

Section 199A(2) does not forbid relaxation by the general meeting of duties in advance.

Where the general meeting votes after the breach and that vote can be seen to be true

ratification, that can be regarded as nullifying the breach whereas the indemnification

forbidden by s 199A(2) would merely save the wrongdoer from the consequences of

breach. In any event, relief given by the general meeting is outside the mischief at which

the section is aimed.12

In Miller v Miller (1995) 16 ACSR 73  , Santow J held that ratification by shareholders of what would otherwise be a breach of duty does not breach s 199A(2) (a case dealing with the predecessor of s 199A(2) — s 241). Ratification does not breach s 199A(2) because (at 87):

Ratification can never be a blanket indemnification or exemption on a prospective basis, clearly prohibited by [s 199A(2)] as such would be. Rather it is a specific absolution, afforded usually though not always, retrospectively, but necessarily for specific and properly disclosed infractions of the director's duties and subject to certain limitations … The essence of ratification is that the release so given obviates the liability, so far as any right of action to enforce it by existing shareholders is concerned.

However, Santow J noted that ratification does not of itself extinguish a claim. Although it blocks action by the minority shareholders there is still the possibility of legal action being brought by new controllers where there is a change in control of a company. Consequently, a director relying on ratification would also require a documented formal deed of release from the board of directors. Is such a release a breach of s 199A(2)?Santow J answered this question in the negative. His Honour stated (at 88):

The clear policy of [s 199A(2)], as evinced in its earlier reference to "indemnify", is to deal with the consequences of breach of obligation owed to the company, not the release of rights which give rise to those obligations. There is a long history known to the legislature, of ratification of such releases, with limits established by the cases. One would not expect that history to have been expunged with no reference in any explanatory memorandum or ministerial speech, or in the words of [s 199A(2)] itself. 11 Ford [8.390] The limits to the general meeting’s power to ratify12 Ford [8.410.15] Release by general meeting

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Section [199A(2)] is concerned with "blank cheque" indemnification and exemption, while ratification requires specific release after full disclosure of the particular cause for claim.

One of the clauses in the agreement under consideration by his Honour specifically required indemnification from the company. His Honour held that this did not breach s   199A(2) .The result is that indemnification, following an effective ratification and release by deed or for consideration, does not contravene s 199A(2). This is because (at 88):

… if there has been a prior effective release, following valid ratification, there is simply no liability against which indemnification can operate, so that [s 199A(2)]is not contravened. Section [199A(2)], it should be remembered, embargoes an indemnity "against a liability" and the release simply eliminates that liability, if supported by valid ratification.

However, the ratification must be within the scope permitted by that doctrine, as to which

see [8.380]–[8.395].13

It may be however that there may be other causes of action which a shareholder may

pursue.

There is no requirement that the director is required to have acted honestly, or in good

faith.

2 Affirmationthe director acted within authority, but there was a breach of duty

eg a tainted contract,

act for an improper purpose, see Hogg v Cramphorn Ltd [1967] Ch 254, Bamford v

Bamford [1968] 2 All ER 655; [1968] 3 WLR 317

What is the effect? affirmation and/or exoneration

13 Ford [8.410.15] Release by general meeting

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3 Promise not to suewhen will ratification bind the minority

personal right infringed residues case

what is a personal right

derivative action, ngurli ltd case

new controller can sue

4 ReleaseConsideration, or deed

5 What conduct cannot be ratified?

The following conduct cannot be ratified:

An act beyond the purposes of the company for which it was created under the

relevant statute (the doctrine of ultra vires)14

Acts which are ultra vires (which in Australia would seem to now be limited to

acts which are not illegal following the abolition of the doctrine of ultra vires)15

… ratification is not available where it would constitute a fraud on the minority …

or misappropriation of company resources16 … or was entered into by an

insolvent company to the prejudice of creditors … or defeated a member's

personal right17 … or was oppressive or where the majority in general meeting

acted for the same improper purpose as directors: Miller v Miller (1995) 16 ACSR

14 Baroness Wenlock v River Dee Co (1883) 36 Ch D 675n . The doctrine of ultra vires is no longer applicable in Australia to companies incorporated under the Corporations Act 2001.15 Ford [8.390] The limits to the general meeting’s power to ratify16 See Cook v Deeks; The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 at [9396] per Owen J stated that the creation and disposal of security interests over the assets of the company brought about in breach of duty would constitute misappropriation of company resources. An appeal from the judgment of Owen J was partly allowed and partly dismissed: Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 89 ACSR 1; [2012] WASCA 157 17 the doctrine of abuse of power in its application to the majority in the manner contemplated in Ngurli Ltd rests on implied limitations on powers created by the contract between members. These limitations may be enforceable by members by way of a members' personal action: see [10.230]ff. (Ford [8.390] The limits to the general meeting’s power to ratify). See also Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569

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73 at 89  followed in Gray Eisdell Timms Pty Ltd v Combined Auctions

Pty Ltd (1995) 17 ACSR 303 at 312–13; 13 ACLC 965  (on appeal

Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1998) 16 ACLC 252).18

The Court of Appeal in New South Wales in Kinsela v Russell Kinsela Pty Ltd (in

liq) (1986) 4 NSWLR 722; 10 ACLR 395; 4 ACLC 215  held that a

transaction entered into by directors for an improper purpose while the company

was insolvent could not be validated by even unanimous approval of the

members in disregard of the interests of creditors.19

Fraud is not ratifiable20

Bad faith21

In Colarc Pty Ltd v Donarc Pty Ltd (1991) 4 ACSR 155  Walsh J applied Re

Southern Resources Ltd (1989) 15 ACLR 770  and held that an allotment of

shares that went beyond the scope of the purpose for which the power existed was not

capable of ratification.22

in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; 70 ALR 251 at 258; 11

ACLR 715 at 722; 5 ACLC 421  Mason, Deane and Dawson JJ said (by way of

obiter dicta) that it was arguable that a voidable allotment of securities made for an

improper purpose can later be ratified by the board acting for a permissible purpose.

18 Ford [8.390] The limits to the general meeting’s power to ratify19 Compare Heydon “Directors' Duties and the Company's Interests” in P D Finn (ed), Equity and Commercial Relationships, 1987, p 130. Kinsela's case was considered in Re G S Enterprises Pty Ltd (unreported, SC(ACT), Miles CJ, No 26 of 1984). See also Southern Cross Commodities Pty Ltd (in liq) v

Ewing (1988) 14 ACLR 39; 6 ACLC 647  ; Liquidator of West Mercia Safetywear Ltd v Dodd

[1988] BCLC 250  ; Bowthorpe Holdings Ltd v Hills [2003] 1 BCLC 226 (Ch D); Official Receiver v Stern [2004] BCC 581 (CA). (see Ford [8.390] The limits to the general meeting’s power to ratify)20 Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258; [1983] 3 WLR 492 21 Pascoe Ltd (in liq) v Lucas (1999) 33 ACSR 357 at 384–8822 Ford, [8.380] Ratification of abuse of power

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Whether that would rest on the board having power to affirm a voidable transaction or

some other basis was not stated.23

The following remains unclear:

Reservations might also be felt in respect of a release given by members of a

corporate trustee in favour of a director whose acts or omissions caused the

company to be liable for breach of trust to beneficiaries.24

Whether recklessness is treated the same as fraud.25

Rule designed to protect the minority

transaction based approach, but this has been widely criticised

For valid ratification:

Conduct must be ratified within a reasonable time.26

There must be ‘full and frank’ disclosure to the general meeting to enable fully

informed consent.27

In relation to authorisation, Where the general meeting is relaxing the duties of directors

without reference to any particular transaction the disclosure requirements may well

differ: Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 at 67428

6 How does authorisation differ from ratification?

No breach, nothing to ratify

Section 199A(2) does not forbid relaxation by the general meeting of duties in advance

23 Ford [8.380] Ratification of abuse of power24 Ford [8.390] The limits to the general meeting’s power to ratify25 Ford [8.390] The limits to the general meeting’s power to ratify26 Forge v ASIC (2004) 213 ALR 574; 52 ACSR 1; (2005) 23 ACLC 1011; [2004] NSWCA 448 at [385]–[389]27 Forge v ASIC (2004) 213 ALR 574; The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 at [9393]28 Ford [8.395] Adequate disclosure to general meeting is required

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7 When it ratification not necessary?It is instructive to consider situations whereby the directors, acting within their authority,

are acting lawfully, and ratification is unnecessary.

A typical example is a ‘management buyout’ whereby the directors of the company make

an offer to buy the company from the existing shareholders. The directors have all of the

knowledge of the company’s business and it may be inferred that they are aware of the

risks to the business and how best to manage those risks.

The management buyout raises key questions:

Will the directors disclose everything that they know to shareholders?

What is the motivation of the directors in making the offer?

Will the sale be a fair value?

Have the directors conducted themselves in a way which assists them to purchase

the company at a valuation which they believe can be increased, thereby obtaining

for themselves an opportunity in the future to make a private profit at the expense

of the shareholders.

How can the shareholders protect themselves in these circumstances?

This example raises questions about the protection of minority shareholders under the

current law whereby the directors are not acting unlawfully and yet there are the same

types of difficulties apparent from this situation to other situations where the directors

have acted in breach of their fiduciary duties.

8 Is section 1322 of the Corporations Act relevant to ratification?

The section is not excluded by any possibility that the irregularity could be cured by

ratification by a general meeting: Australian Hydrocarbons NL v Green (1985) 10 ACLR

72 at 83; 3 ACLC 77929

29 See Ford, [7.580] Validation following irregularity, as at 23 October 2013

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It would not appear that section 1322 could be used to ratify an act since the purpose of

the section is directed to procedural irregularities, not substantive conduct such as a

breach of duty.

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D. Which shareholders are entitled to vote on a resolution?

There is inconsistent case authority on this point.

Bamford v Bamford [1970] Ch 212; [1969] 1 All ER 969; [1969] 2 WLR 1107 

leaves some questions unanswered. Plowman J at first instance accepted the

proposition that the members in general meeting, unlike the board, were not subject to

an implied limitation that their power was to be exercised in good faith in the best

interests of the company. There is authority in the law of Australian jurisdictions to the

contrary effect: Ngurli Ltd v McCann (1953) 90 CLR 425 at 438 and 447; 27 ALJ

349  . See also Cook v Deeks [1916] 1 AC 554  ; Millers (Invercargill) Ltd

v Maddams [1938] NZLR 490  .30

The High Court in Ngurli Ltd thought that the right to issue new shares is an advantage which belongs to the company and any attempt by the directors or by the company to exercise that right not for the benefit of the company as a whole but so as to benefit the majority to the unfair detriment of the minority could be restrained in a suit brought by the minority against the company and majority.

The view put in Ngurli Ltd suggests that it is not enough to ensure that the votes attached to the new shares are not exercised at the general meeting or, indeed, to ensure that the director at fault does not vote in respect of any old shares held by him or her; there could still be a fraud on the minority: see [10.030]ff.31

It is arguable that one or more directors with a combined majority interest voting to ratify

their own breach of fiduciary duties is a fraud on the minority which would permit a

shareholder to commence a derivative action if leave was granted by a Court.32

Surprisingly, there is no authority on the point. If this position is correct, this in effect

30 Ford [8.390] The limits to the general meeting’s power to ratify31 Ford [8.390] The limits to the general meeting’s power to ratify32 See especially Ford [8.390] The limits to the general meeting’s power to ratify

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imposes a restriction on a director with a majority of the votes from voting to ratify their

own breach of fiduciary duty. It is unclear however whether such an argument could be

extended to the voting rights of:

other directors,

associates of directors, or

a director, whilst not having a majority interest, has an interest sufficient to enable

a ratification resolution to be approved.

Canada (during the period X to Y) and the USA and require that a ratification resolution

be approved by an independent majority. The report on the statutory derivative action

proposed s 260A(6) was not based on Canadian law requiring an independent shareholder

vote.

As from [date], both Canada and Singapore have enacted laws which require a Court to

determine whether a director’s breach should be ratified.

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E. Relevance of ratification to bodies corporate incorporated under the Corporations Act

9 Breach of fiduciary dutyA ratification resolution is relevant to:

Whether the company will be bound by an act of a director who has acted in

excess of their powers and the company is not bound under the doctrine of

ostensible authority or under section 128;33

Whether leave should be granted for a shareholder to commence legal

proceedings as a derivative action under s 236;

may be relevant to the question whether a director has acted honestly under s

229(1) of the Uniform Companies Code, a predecessor of s 181.34

1317S;35 and

1318.

Should ratification have anything to do with the statutory derivative action?

does not apply in canada

10 Breach of statutory dutySo far as liability based on breach of the statutory duties in Pt 2D.1 is concerned (these duties being the duty to exercise reasonable care and diligence in s 180, the duties to act in good faith in the best interests of the company and for a proper purpose in s 181, and the duties not to make improper use of position or information in ss 182 and 183), disclosure and ratification by the members cannot relieve a director of a liability. In Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 215 ALR 110; 53 ACSR 208; 23

33 Ford, [8.375] Ratification of excess of power], as at 23 October 2013

34 Maron v Pressbank Pty Ltd (1987) 12 ACLR 465 at 472; 6 ACLC 338  (affirmed on other

grounds Urban v Pressbank Pty Ltd (1989) 15 ACLR 466  ) McPherson J35 See Forge v ASIC. This issue was left open in Forge v ASIC where the court acknowledged that this may be the case although, on the facts before the court, the opportunity to do this was not afforded to the primary judge (at [382]–[383]). (Ford [8.385] Ratification of action in breach of other fiduciary duties

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ACLC 509; [2005] HCA 23  , two judges of the High Court (Gleeson CJ and Heydon J) held that shareholders cannot release directors from the statutory duties imposed on directors by former s 229(2) and (4) of the Companies Code. Section 229(2) and (4) of the Companies Code have been replaced by ss 180(1) and 182(1) as well as s 184(2) (which makes improper use of position a criminal offence in certain circumstances).

The NSW Court of Appeal has also held that shareholders cannot ratify breaches of the statutory duties imposed upon directors: Forge v ASIC (2004) 213 ALR 574; 52 ACSR

1; (2005) 23 ACLC 1011; [2004] NSWCA 448 at [378]–[384]  . The court stated that civil penalty proceedings to enforce breaches of directors’ duties involve public rights (noting that when ASIC brings civil penalty proceedings a purpose can be to have the defendant director disqualified from managing corporations). Consequently, the court stated that shareholders cannot remove the declaration by the court of contravention of a civil penalty proceeding by ratifying the original acts of the director. Forge v ASIC was followed in Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; 23 ACLC 929; [2005]NSWSC 267 at [30]–

[33]  . See also the discussion of this issue in Eastland Technology Australia Pty

Ltd v Whisson (2006) 24 ACLC 76; [2005] WASCA 144 at [27]–[37]  .36

In Miller v Miller (1995) 16 ACSR 73 at 89  Santow J stated that "ratification

cannot cure a breach of statutory duty, more especially one imposing criminal liability.

The most it can do is remove from the scope of technical dishonesty such actions as

issuing shares for a purpose which is not a proper one, in the sense of not being for the

benefit of the company as a whole".37

Forge v ASIC

different considerations apply to public enforcement and private enforcement of

directors’ duties. Ratification cannot eliminate a contravention of a statutory duty in Pt

2D.1.38

An open issue is whether different considerations may apply to authorisation given by

shareholders in advance of the action taken by directors. Shareholders may modify

certain of the duties owed by directors to the company. Where the content of the 36 Ford [8.385] Ratification of action in breach of other fiduciary duties37 Ford [8.385] Ratification of action in breach of other fiduciary duties38 Ford [8.385] Ratification of action in breach of other fiduciary duties

Page 19 of 32

common law and statutory duties is the same, there is a question as to whether, where

shareholders give approval to directors to undertake action which otherwise would be a

breach of a common law duty, this authorisation by shareholders may also be taken to

modify the scope of the statutory duty. This issue was left open by the High Court in

Angas Law Services Pty Ltd (in liq) v Carabelas, above. The court stated, referring to

former s 229(2) and (4) of the Companies Code that, in a particular case, the

acquiescence of shareholders in a course of conduct by directors might affect the

practical content of those duties and might, for example, be relevant to a question of

impropriety (at [32]). However, this issue did not arise for consideration by the court.

There is further discussion of this issue at [8.410.12] in the context of the statutory

prohibition on indemnification in s 199A(2).39

39 Ford [8.385] Ratification of action in breach of other fiduciary duties

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F. Relevance of a ratification to an incorporated body incorporated under State or Territory legislation

Issue relates to incorporated bodies incorporated under State or Territory laws which

include:

Incorporated associations; and

Strata companies.

Whether any officer duties:

have been codified;

are offences; and

cover some or all of the fiduciary duties of the officers

depends upon the statutory scheme.

To the extent that officer duties are covered by the general law, Foss v Harbottle

continues to apply.

The type of ratification which is approved by the members of the body corporate will

give rise to different effects as considered above. A resolution which exonerates an

officer will retrospectively extinguish any cause of action in respect of the breach of

fiduciary duty.

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G. Basis of the doctrine of ratification

11 What is the legal reasoning for the doctrine of ratification?

(a) Law of fiduciariesIt is a central principle of the law of fiduciaries that the principal may authorise the

fiduciary to engage in conduct which would otherwise be a breach of fiduciary duty, and

may condone or ratify a breach of duty which has already occurred.40

(b) Equitable doctrine of release

[185-1900]41 Release Equity recognises as a defence, whether against a legal or

equitable claim, an assertion that the plaintiff has released the defendant from his or her

obligation. The release of legal rights must be supported by consideration or have been

effective as a release at law,1 for example, an obligation under a deed is released by an

instrument under seal.2 The release of equitable rights, at common law and apart from

statute, may be effected in writing,3 orally or by conduct provided that it is proof of a

‘fixed, deliberate and unbiased determination that the transaction should not be

impeached’.4 There must be a present fixed intention immediately to release and not a

mere promise or mere expression of a future intention to release.5 The defendant must

show that the plaintiff was aware of the nature and circumstances of the transaction

giving rise to the right in equity and of his or her rights to relief in equity.6 Where there

are joint obligees, where one joint obligee is released, the other joint obligee is

automatically released.7

[halsbury footnotes]

1 Lewis v Cook (2000) 18 ACLC 490Positive treatment indicated - Click for CaseBase

entry; Ashton Mining Ltd v Cmr of Taxation (2000) 44 ATC 4307; 44 ATR 249Neutral

treatment indicated - Click for CaseBase entry; Deputy Cmr of Taxation v Hadidi (1994)

40 Ford, [8.370] Power of members to authorize or ratify abuse of power, as at 23 October 201341 Halsbury Laws of Australia, (d) Equitable defences – release and waiver, As at 23 October 2013

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51 FCR 453 at 460; 123 ALR 48Positive treatment indicated - Click for CaseBase entry,

Fed C of A, Full Court.

2 Reeves v Brymer (1801) 6 Ves 516; 31 ER 1172Positive treatment indicated - Click for

CaseBase entry; Commissioner of Stamp Duties (NSW) v Bone (1976) 135 CLR 223; 9

ALR 11; 50 ALJR 632Neutral treatment indicated - Click for CaseBase entry; Crawley v

Short (2009) 262 ALR 654; [2009] NSWCA 410; BC200911618 at [165]Neutral

treatment indicated - Click for CaseBase entry.

3 (ACT)

(NT) s

(NSW)

(QLD)

(SA)

(TAS)

(VIC)

(WA) .

These provisions require the disposition of an equitable interest to be in writing.

4 Wright v Vanderplank (1856) 8 De GM & G 133 at 147; 44 ER 340Cautionary

treatment indicated - Click for CaseBase entry per Turner LJ.

5 Avtex Airservices Pty Ltd v Bartsch (1992) 107 ALR 539; 23 IPR 469; AIPC ¶90-

898Positive treatment indicated - Click for CaseBase entry.

6 Allcard v Skinner (1887) 36 Ch D 145; [1886-90] All ER Rep 90Cautionary treatment

indicated - Click for CaseBase entry.

7 Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574; 141 ALR 1;

71 ALJR 131Positive treatment indicated - Click for CaseBase entry.

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12 Criticism of the application of the doctrine to corporate law

The application of these principles to companies presents an obvious problem, because the company is an abstract entity. As we shall see in more detail in Ch 9, the general approach of the courts is that the company's decision to authorise or ratify is to be taken by the members in general meeting, by ordinary resolution.42

Helsham J, in Provident International Corp v International Leasing Corp Ltd [1969] 1

NSWR 424 at 440  , without having Bamford v Bamford before him, considered that although it might be possible that all the corporators might confirm the actions of directors who had breached their fiduciary duty, that breach could not be ratified by a majority of the shareholders. Six years later, in Winthrop Investments Ltd v Winns Ltd

[1975] 2 NSWLR 666; (1975) 1 ACLR 219; (1975–76) CLC ¶40-238  , on appeal [1975] 2 NSWLR 666, Helsham J applied Bamford v Bamford and expressly repudiated his earlier reasoning.43

13 What view of the theory of corporations is being reflected?

Since the incorporation of companies in the 1800s, there have been the following theories

of the corporation:

Director as agent of the company, shareholders supreme governing body

Organ theory, powers derived from the constitution

nexus of contracts theory

‘stakeholder’ theory [check how this is properly described]

(c) Directors as agentsAt the time when the doctrine of ratification was first applied to company law, the Court

of Chancery had exclusive jurisdiction. At this time, the dominant theory of the

corporation was that the directors were agents of the company and that as a result,

directors owed fiduciary duties to the company.

42 Ford, [8.370] Power of members to authorize or ratify abuse of power, as at 23 October 2013.43 Ford, 8.380] Ratification of abuse of power, as at 23 October 2013

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(d) Organ theory

(e) Nexus of contracts theory

(f) Stakeholder theoryDirectors are under a duty to consider the interests of the company's creditors in certain

circumstances: Walker v Wimborne (1976) 137 CLR 1; 3 ACLR 529; (1975–76) CLC

¶40-251  . In Ring v Sutton (1980) 5 ACLR 546  the New South Wales

Court of Appeal allowed a liquidator to recover compensation from a director who

procured loans to himself from the company on terms more favourable than either

current commercial terms or terms available to company customers.44

The Court of Appeal in New South Wales in Kinsela v Russell Kinsela Pty Ltd (in liq)

(1986) 4 NSWLR 722; 10 ACLR 395; 4 ACLC 215  held that a transaction

entered into by directors for an improper purpose while the company was insolvent could

not be validated by even unanimous approval of the members in disregard of the

interests of creditors.1. In The Bell Group Ltd (in liq) v Westpac Banking Corporation

(No 9) [2008] WASC 239 at[9391]  , Owen J held that ratification of breach of

directors’ duties was not possible because the company was in what Owen J termed “an

insolvency context” where the interests of creditors were prejudiced. The court stated

that “ratification would be problematic at any time when the duty to take into account the

interests of creditors has arisen” (at[9390]). The duty to consider the interests of

creditors is discussed at [8.100]. An appeal from the judgment of Owen J was partly

allowed and partly dismissed: Westpac Banking Corporation v Bell Group Ltd (in liq)

(No 3) (2012) 89 ACSR 1; [2012] WASCA 157.45

44 Ford [8.390] The limits to the general meeting’s power to ratify45 Ford [8.390] The limits to the general meeting’s power to ratify

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14 Is ratification a residual power?

In the absence of a limitation in stated objects or a prohibition or restriction on the

company’s exercise of any of its powers (see [12.130]ff) the members can, by majority

vote, ratify on the basis that although the directors lacked power, there was residual

power in the company.46

In Bamford,47 Plowman J stated:

The only limitation on that residual power was that it could not be used so as to conflict

with the grant of power to the directors. That is, the directors in using their power were

an organ of the company exercising an original power and were not delegates of the

general meeting. The general meeting could not by ordinary resolution usurp the board's

power or dictate to the board the manner of its exercise.48

See

Grant v United Kingdom Switchback Railways Co (1888) 40 Ch D 135

Boschoek Pty Co Ltd v Fuke [1906] 1 Ch 148 

In Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1  , Fullagar J impliedly

indicated that departures from the constitution could be validated by all the members.

The same view was taken by McLelland J in Re Australian Koyo Ltd (1984) 8 ACLR 928;

2 ACLC 429  . Unanimous assent would be effective in that way even if not

expressed in a formal meeting: see [7.590]ff. The constitution would not be changed for

the future by a resolution limited in effect to a particular transaction: Imperial Hydropathic

Hotel Co Blackpool v Hampson (1882) 23 Ch D 1.

46 Ford [8.375] Ratification of excess of power, as at 23 October 201347 Bamford v Bamford [1968] 2 All ER 655; [1968] 3 WLR 317 per Plowman J48 The decision was affirmed on appeal ([1970] Ch 212)

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In Winthrop Investments v Winns Ltd, Mahoney JA (at NSWLR 697ff), after noting that

an allotment for an improper purpose would be voidable, thought that there resided in

the general meeting power to affirm or avoid an allotment.49

15 Does the law recognize a shareholder conflict of interest?

The application of the doctrine of ratification implicitly assumes that shareholders will

exercise their right to vote in a manner which best benefits the company because this will

maximise their own wealth through either the potential increase in dividends payable

and/or through the increase in the value of their shares.50 This assumption therefore

assumes that there are no conflicts of interest which a shareholder may have in exercising

their right to vote.

In the real world, shareholders may have conflicts of interest. This can emerge in at least

two specific ways;

(i) a shareholder who is also a director, alternately an associate of a director, of

the company, and

(ii) a major shareholder which controls more than fifty percent of the shares

issued by the company which have attaching voting rights.

Shares are an intangible form of property known as a legal chose in action.51 A legal

implication arising from this legal principle is that shareholders may exercise their voting

rights attaching to the shares in their own interests52 provided that the conduct is not

49 Ford, [8.380] Ratification of abuse of power, as at 23 October 201350 It is an assumption derived from utilitarianism. Under utilitarianism, everyone's happiness counts the same. When one maximizes the good, it is the good impartially considered. Further, the reason I have to promote the overall good is the same reason anyone else has to so promote the good. It is not peculiar to me. (see Stanford Encyclopaedia of philosophy, ‘The history of utilitarianism’ (2009) as at 10 March 2013, http://plato.stanford.edu/entries/utilitarianism-history/ .51 Corporations Act s 1070A(1); Peter’s American Delicacy Co. Ltd v Heath (1938-1939) 61 CLR 457; Colonial Bank v Whinney (1886) 11 App Cas 426.52 See Pender v Lushington (1877) 6 Ch D 70; Northwest Transportation Company v Beatty (1887) 12 App Cas 589; Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 2 All ER 625; Peter’s American Delicacy Co. Ltd v Heath (1938-1939) 61 CLR 457. Dixon J stated that ‘[t]he right to vote in respect of their shares, which are property, and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner’s personal advantage.’ (see Peter’s American Delicacy Co. Ltd v Heath (1938-1939) 61 CLR 457 at 503-504).

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fraudulent or to usurp corporate property.53 Shareholders do not owe a fiduciary duty to

the company or to any shareholders. Further, the current law does not recognize that a

shareholder may have a conflict of interest in voting on a ratification resolution.

This means that under Australian jurisprudence, a director who is also a shareholder of

the company is entitled to vote on a ratification resolution which concerns their own

breach of fiduciary duties.

The Companies and Securities Law Review Committee (‘Committee’) in its report dated

21 May 1990, titled ‘Company Directors and Officers: Indemnification, Relief and

Insurance’, recommended an amendment to the Corporations Act to allow a company by

resolution of a properly informed and disinterested general meeting, to release a director

or officer from liability to pay damages or compensation to the company in respect of

wrongdoing that did not involve intent to deceive or defraud.54 This proposal to amend

the doctrine of ratification was not adopted as a part of the later reforms to the

Corporations Law.

It is a principle of the law of Equity that a person shall not derive advantage from their

own wrong.55 The operation of the maxim was qualified in Hooper v Lane,56 in the

following way:

[I]t seems to me that rule only applies to the extent of undoing the advantage

gained, where that can be done, and not to the extent of taking away a right

previously possessed. Thus, if A lends a horse to B, who uses it, and puts it in his

stable, and A comes for it and B is away, and the stable locked, and A breaks it

open, and takes his horse, he is liable to an action for the trespass to the stable,

and yet the horse could not be got back, and so A would take advantage of his

own wrong. So, though a man might be indicted at common law for a forcible

entry, he could not be turned out if his title were good. So, if goods are bought on

53 Menier v Hooper’s Telegraph Works (1874) LR 9 Ch App 350; Cook v Deeks [1916] 1 AC 55454 http://www.takeovers.gov.au/content/Resources/cslrc/cslrc_discussion_paper_no_11.aspx, para [51]55 See especially Meyers v Casey (1913) 17 CLR 90 at 124 per Isaacs J); Cadman v. Horner [1810] EngR 494.56 10 ER 1368.

Page 28 of 32

a promise of cash payment, the buyer on non-payment is subject to an action, but

may avail himself of a set off, and the goods cannot be gotten back. So, if I

promise a man I will sell him more goods on credit if he pays what he already

owes, and he does so, and I refuse to sell, I may retain the money. So, if I force

another from a fishing ground at sea and catch fish, the fish are mine ... and that

it means that no one shall gain a right by his own wrong; and not that if he has a

right, he shall lose it, or the power of exercising it, by a wrong done in connection

with it.57

In applying the equitable maxim to the right of a shareholder to vote on a ratification

motion concerning their own breach of fiduciary duties, on a narrow interpretation, the

director is entitled to exercise his vote in favour of ratification because they may not be

denied a right to vote by virtue of the wrongdoing in its own right. Something more than

the breach thus must give rise to a restriction on the right to vote. It is questionable why

at law a director who in breach of a fiduciary duty is considered to be free of any conflict

of interest as a shareholder in a general meeting which would otherwise give rise to a

similar fiduciary duty to the company. The unfairness of the outcome is more readily

observed in applying the maxim to a situation where the director is a controlling

shareholder or it is the votes of the director which enable the ratification motion to be

passed by a majority of shareholders. The ultimate question therefore is whether at law

the director as a shareholder ever had an unconditional or unqualified right to vote

thereby restricting their right to vote on a ratification motion concerning their own breach

of fiduciary duties.

Arising from the foregoing discussion, the legal principles concerning the doctrine of

ratification are not wholly consistent and thus the Courts have fashioned the doctrine with

an array of exceptions to ameliorate the effect of directors as shareholders exercising

their voting rights. The Courts in Australia however in recognising the problems with the

57 10 ER 1368 at 1375-6 per Bramwell B.

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doctrine of ratification have not considered the jurisprudence outside of the United

Kingdom.58

16 Fraud on the minority

The doctrine of ratification as it applies between an agent and a sole principal, or a trustee

and a sole beneficiary is simple to apply. Once the sole principal or beneficiary ratifies

the conduct of the agent or trustee, the effect is that the sole principal or beneficiary is

unable to commence proceedings for the breach of fiduciary duty. This doctrine however

does not neatly apply to corporations when there is more than one shareholder because of

the possibility that there is a minority shareholder who will not ratify a breach of

fiduciary duty.

The current law only requires that a majority of shareholders approve a ratification

resolution.59

The clearest case is where the directors have acted irregularly and they control the

general meeting. If a meeting controlled by the directors purported to condone some

breach of duty on their part, a dissenting member could bring a derivative action

(explained in Ch   10 ) on behalf of the company.60

In Doncon v Doncon (1990) 2 ACSR 385; 8 ACLC 860  Pidgeon J held (at

ACSR 396), without referring to the Winthrop case, that if the general meeting

specifically requests that an allotment be made and the directors act pursuant to that

request, then it cannot be said that there is any abuse of the exercise of a fiduciary

power. With respect, this statement seems too wide, because it disregards the

58 See Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.59 Ford [8.380] Ratification of abuse of power60 Ford [8.390] The limits to the general meeting’s power to ratify

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constraints imposed upon the majority of shareholders by the law of oppression and

fraud on the minority.

The High Court in Ngurli Ltd thought that the right to issue new shares is an advantage which belongs to the company and any attempt by the directors or by the company to exercise that right not for the benefit of the company as a whole but so as to benefit the majority to the unfair detriment of the minority could be restrained in a suit brought by the minority against the company and majority.

The view put in Ngurli Ltd suggests that it is not enough to ensure that the votes attached to the new shares are not exercised at the general meeting or, indeed, to ensure that the director at fault does not vote in respect of any old shares held by him or her; there could still be a fraud on the minority: see [10.030]ff.61

17 What is the position if there is no minority?

Unanimous assent of all members would put an end to liability. If the constitution could

be read as allowing approval by less than all the members, approval by a majority would

remove liability: Regal (Hastings) Ltd v Gulliver [1967]2 AC 134n at 139, 150 and 157;

[1942] 1 All ER 378  ; Furs Ltd v Tomkies (1936) 54 CLR 583 at 592  .62

In a situation where there is an unanimous vote by the shareholders, there will be no

minority, thus is follows that there can be no fraud on the minority.

In the circumstances of a sole shareholder, sole director company, the sole shareholder

could vote to ratify a breach of their own duties to insulate themselves from any

proceedings which may be later commenced by a liquidator. Such conduct, although

lawful, would plainly be to the detriment of stakeholders of the company, including

creditors and any employees.

61 Ford [8.390] The limits to the general meeting’s power to ratify62 Ford [8.385] Ratification of action in breach of other fiduciary duties

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Such a requirement for an unanimous would be impractical for companies which have

more than one shareholder.

18 Is a director of a wholly owned subsidiary in a different position?

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