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Shareholder ratification and authorisation of

breaches of directors’ duties

PhD Thesis Progress Report

28 January 2015

Michael Anthony Robson

LLB (1st Class Hons) GDLP, BSc (Physics)

Faculty of Law, Monash University

Monash ID: 25002546

Supervisors

Associate Professor John Duns

Professor Bryan Horrigan

Contact details

Work: (08) 6181 0790Mobile: 0401 002 997Email: [email protected]: 4 Wintergreene Drive, Bennett Springs WA 6063Postal: PO Box 390 Beechboro WA 6063

Michael Anthony Robson Thesis Progress Report

ContentsI. Introduction..................................................................................................................3II. Research question........................................................................................................6

A. Subsidiary questions................................................................................................6III. Review of relevant research and theory...................................................................8IV. The procedure........................................................................................................11V. Thesis Chapter outline...............................................................................................12VI. Progress to date......................................................................................................12VII. Future research proposals......................................................................................13VIII. Current proposals for law reform to the Corporations Act 2001...........................18IX. Other law reform research.....................................................................................20X. Timetable for completing the thesis..........................................................................22XI. Bibliography..........................................................................................................23XII. Example of written work for the thesis..................................................................27

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I. INTRODUCTION

In Australia, in relation to a company incorporated under the Corporations Act 2001

(Cth) (‘Corporations Act’), a director who is also a shareholder may, subject to certain

exceptions, vote at a general meeting of shareholders to prospectively authorise or to

retrospectively ratify their own breach of fiduciary and/or statutory duties.1 In North-

West Transportation Co Ltd v Beatty2 it was considered that a shareholder’s proprietary

interest in their shares is the legal basis for permitting a shareholder to vote in their own

interests.

The doctrine of ratification remains relevant to companies incorporated under the

Corporations Act in relation to; (i) whether the company will be bound by an act of a

director under section 128,3 (ii) whether leave should be granted for a shareholder to

commence derivative proceedings under section 237, (iii) whether a director should be

granted relief from liability under section 1317S4 and (iv) whether a director should be

excused from liability under section 1318.

Separate to companies incorporated under the Corporations Act, the operation of the

doctrine of ratification is of significance to body corporates incorporated under State and

Territory legislation which include; strata companies,5 trade unions,6 co-operatives,7 not-

for-profit organisations and other incorporated associations.8 There are estimated to be

1 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23; Bamford v Bamford [1970] Ch 212.2 (1887) 12 App Cas 589.3 R P Austin, I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 13th ed, 2007), [8.375].4 See Forge v Australian Securities & Investments Commission [2004] NSWCA 448. This issue was left open in this case 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]). See generally R P Austin, I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 2007, 13th ed), [8.375].5 See, eg, Strata Titles Act 1985 (WA).6 See, eg, Trade Unions Act 1958 (Vic).7 See, eg, Co-operatives National Law Application Act 2013 (Vic).8 See, eg, Associations Incorporations Act 1987 (WA); Associations Incorporation Act 2009 (NSW).

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over 276,000 strata companies9 and 200,000 incorporated associations across Australia.10

Further, approximately 18% of all employees were members of a trade union in 200811

and there were 13 million people who were members of a co-operative in 2011.12

In relation to the codification of officers’ duties of:

(i) strata companies, only Victoria13 and the Australian Capital Territory14 have

codified the duties;

(ii) incorporated associations, only Victoria15 and the Northern Territory16 have

codified the duties;

(iii) co-operatives, all jurisdictions have at least partially codified the duties, however,

only South Australia,17 New South Wales,18 Victoria19 and Western Australia20

have enacted the Co-operatives National Law21 to codify the duties to the same

extent as officer’s duties under the Corporations Act; and

(iv) trade unions, only Western Australia,22 Queensland23 and New South Wales24 have

codified the duties.

9 Strata Community Australia Ltd, Submission to Inquiry into residential strata title insurance (Unknown date) Strata Community Australia <http://www.stratacommunity.org.au/sites/default/files/stratainsuranceinquiry1.pdf>.10 Justice Connect, Which incorporated legal structure should we choose? (Unknown date) Not-for-profit Law Information Hub <http://www.nfplaw.org.au/sites/default/files/Which%20incorporated%20legal%20structure%20should%20we%20choose.pdf>.11 Australian Bureau of Statistics, Australian Social Trends 2008 (23 July 2008), Australian Bureau of Statistics <http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/4102.0Chapter7202008 >. 12 Australian Bureau of Statistics, 1301.0 Year Book Australia 2012 (24 May 2012), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1301.0~2012~Main%20Features~Measuring%20the%20activity%20of%20co-operatives~289>.13 Owner Corporations Act 2006 (Vic) Part 5.14 Unit Titles (Management) Act 2011 (ACT) Schedule 1.15 Associations Incorporation Reform Act 2012 (VIC) Part 6 Division 3.16 Associations Act (NT) Part 4 Division 1.17 Co-operatives National Law (South Australia) Act 2013 (SA).18 Co-operatives (Adoption of National Law) Act 2012 (NSW).19 Co-operatives National Law Application Act 2013 (Vic).20 Co-operatives Act 2009 (WA).21 All jurisdictions have agreed under the Australian Uniform Co-operative Laws Agreement to enact legislation in the same form as the legislation enacted by New South Wales which was unanimously approved by the Ministerial Council on Consumer Affairs which is known as the Co-operatives National Law.22 Industrial Relations Act 1979 (WA) Part 2 Division 5.23 Industrial Relations Act 1999 (QLD) Chapter 12, Division 3.24 Industrial Relations Act 1996 (NSW) Part 4 Division 5.

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http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/4102.0Chapter7202008

http://www.stratacommunity.org.au/sites/default/files/stratainsuranceinquiry1.pdf


In the context of the statutory derivative action under the Corporations Act25 and more

generally for State and Territory body corporates, by reason that directors or officers may

also be shareholders or members of the same company or body corporate, there is an

inherent legal tension between the application of the following principles:

(i) a person shall not derive advantage from their own wrong;

(ii) a director/officer must act in the best interests of and avoid conflicts of interest to

the company/body corporate;

(iii) the right of a shareholder/member to vote in their own interests provided that the

conduct is not fraudulent, a fraud on the minority, oppressive conduct26 or to

expropriate the property of the company or body corporate;

(iv) a shareholder/member does not owe any fiduciary duties to the company/body

corporate, or to any other shareholder/member;

(v) equity follows the law;27 and

(vi) good corporate governance principles.

The doctrine of ratification is of continuing importance to corporate governance. Whilst

the principles of good corporate governance are generally consistent with the exercise of

the power of authorisation/ratification by the shareholders in general meeting, the failure

of the general law to recognise a director’s conflict of interest in voting to approve their

own breach of fiduciary or statutory duty is inconsistent with the principles of good

corporate governance, in particular the promotion of accountability and ethics by the

directors.

Corporate governance should be considered to be a cornerstone of modern company

regulation, however reforms to the Corporations Act have not kept pace with

recommendations from significant government reports, in particular, the

recommendations in the Companies and Securities Law Review Committee report in

199028 (‘CSLRC Report’) were not enacted by the Commonwealth parliament to remedy

25 Corporations Act 2001 (Cth) s 236(1).26 Statutory oppression is particular to companies incorporated under the Corporations Act.27 See generally Miller v Miller (1995) 16 ACSR 73.28 The Companies and Securities Law Review Committee, ‘Company Directors and Officers: Indemnification, Relief and Insurance’, (21 May 1990).

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significant deficiencies in the operation of the doctrine of ratification. Key corporate

collapses in Australia and internationally also adds weight to a need for reform to the

Corporations Act to protect minority shareholders.

In light of the principles of good corporate governance which have emerged since the

Cadbury Report (UK)29 in 1992, this thesis considers the significance of shareholders’

rights in the context of authorisation and ratification, with a focus upon what has emerged

from key reforms the Corporations Act in respect of (i) the regulation of corporate

governance, (ii) the codification of directors’ duties and (iii) the statutory derivative

action. This thesis will draw upon international jurisprudence in relation to the doctrine

of ratification and propose reforms to the Corporations Act and to State and Territory

legislation which concerns body corporates.

It is concluded by the author that the doctrine of ratification continues to have legal

significance to companies incorporated under the Corporations Act following the

introduction of the statutory derivative action from 13 March 2000 and moreover to body

corporates incorporated in the States and Territories. A re-examination of the doctrine of

ratification and the international jurisprudence is thus of important contemporary legal

significance to future law reforms to the Corporations Act, State and Territory legislation

and to the general law which affects the members of body corporates such as trade

unions, strata companies, co-operatives, not-for-profit organisations and other

incorporated associations.

II. RESEARCH QUESTION

Is the effect of the doctrine of ratification prejudicial to the interests of

shareholders/members and other stakeholders of companies and other body corporates in

Australia?

29 The Committee on the Financial Aspects of Corporate Governance and Gee and Co Ltd, The Report of the Committee on the financial aspects of corporate governance (1992).

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A. Subsidiary questionsThis thesis poses the following 11 important questions concerning the state of the

common law doctrine of ratification in Australia:

1. Is there uncertainty in the operation of the doctrine of ratification?

2. Is there uncertainty in the legal effect of a ratification?

3. Which theory of the corporation underlies the doctrine of ratification?

4. What is the legal basis for the adoption of the doctrine of ratification into the

common law from customary Roman law?

5. Are the legal principles underlying the doctrine of ratification consistent?

6. Is Australian corporate law and its jurisprudence consistent with the jurisprudence

in other common law jurisdictions?

7. Did the introduction of the statutory derivative action into the Corporations Act

resolve the lacuna in the protection of the rights of minority shareholders?

8. Are the principles of good corporate governance consistent with the

shareholders/members in general meeting having the exclusive power to ratify or

authorise a breach of a director’s or officer’s fiduciary or statutory duties?

9. Are the principles of good corporate governance consistent with the principles

underlying the doctrine of ratification?

10. Arising from the above subsidiary questions, is the doctrine of ratification in need

of reform?; and

11. If the doctrine is in need of reform, what law reform may be necessary to the

Corporations Act or State and Territory legislation to strengthen members’

remedies?

The following additional subsidiary questions arise from the question whether the legal

principles underlying the doctrine of ratification are consistent:

(a) Is ratification a residual power?

(b) What is the legal basis for the extinguishment of a right to commence

proceedings?

(c) What is the legal basis for the exclusion of honesty and good faith from the

requirement for ratification?

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(d) Whether there is an inherent problem with the shareholders in general meeting

taking a decision to extinguish a company’s cause of action in light of the fact

there is no requirement for an independent vote of the shareholders when

considering a ratification or authorisation resolution?

(e) Whether the best interests of the company is the predominant or sole interest, as

distinct from the directors and the shareholders, in the context of the

extinguishment of a cause of action arising from a breach of fiduciary duties?

(f) Whether the best interests of the company may be determined by an unanimous

vote of the shareholders?

(g) Should the doctrine of ratification be relevant to proceedings under section 236

(the statutory derivative action)?

III. REVIEW OF RELEVANT RESEARCH AND THEORY

There have been a plethora of journal articles and parliamentary reports written in

Australia and internationally concerning the doctrine of ratification. A brief summary of

the most significant literature is set out below.

The seminal Australian paper written by Professor Robert Baxt published in 1978 titled

‘Judges in their own cause: The ratification of directors’ breaches of duty’30 considered

the state of the law in Australia following the decision in Winthrop Investments Ltd v

Winns Ltd.31 Professor Baxt raised important questions about whether the principles of

law were consistent and how the doctrine of ratification could work in practice. Journal

articles in the United Kingdom have similarly considered the principles and application

of the doctrine of ratification.32

Academic writing in the United States of America has considered the doctrine of

ratification as it has developed independently from the law in the United Kingdom. An

30 R Baxt, ‘Judges in their own cause: The ratification of directors’ breaches of duty’ (1978) 5 Monash University Law Review 16.31 [1975] 2 NSWLR 666.32 See eg. S Worthington, ‘Corporate Governance: remedying and ratifying directors’ breaches’ (2000) Law Quarterly Review 116.

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important paper written by Professor Earl Sneed titled ‘The stockholder may vote as he

pleases: Theory and Fact’33 considered the legal and equitable rights of shareholders to

vote on an authorisation/ratification resolution in the context of the law in the United

States of America.

The CSLRC Report 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. Such

a reform to the Corporations Act would be similar to the current legislation in the United

Kingdom,34 United States of America35 and Canada.36 These recommended reforms were

never enacted by the Commonwealth parliament.

The published literature does not consider the doctrine of ratification in the context of

strata companies, trade unions, co-operatives and incorporated associations (including

not-for-profit organisations), nor does it consider in any systematic way:

(i) the legal basis for the adoption of the doctrine into the common law from

customary Roman law;

(ii) whether the doctrine is consistent with the principles of good corporate

governance;

(iii) the theory of the corporation which is applied by the doctrine; or

(iv) is the best interests of the company a better test for determining whether a breach

can be ratified?

Each of these issues is considered as a part of the thesis.

In relation to strata titles legislation, the value of real property which is under the control

of officers of strata companies across Australia is not regularly reported by the States and

33 E Sneed, ‘The stockholder may vote as he pleases: Theory and fact’, (1960) 22 University of Pittsburgh Law Review 23.34 Companies Act 2006 (UK) s 239.35 Delaware General Corporations Law (US) s 144.36 Canada Business Corporations Act (Canada) s 120(5).

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Territories, however, as at September 2014, the Australian Bureau of Statistics

determined that the total value of all residential dwellings and land in Australia was

$5,296 billion.37 The estimated value of strata properties in Western Australia in 2010

was $96 billion and was projected to increase to $467 billion by 2020.38 The increase in

Western Australia is stated to be driven by an increase in the population from 2.5

million39 to 3.5 million by 2031 and an increase in demand for affordable and sustainable

housing.40 The Government of New South Wales has reported an increase of 14.8% for

the 2013-2014 year from the previous year for new strata lots.41

The total value of residential and commercial property which is subject to strata

legislation in Australia is unclear, however it is evident that the value of land which is

under the control of officers of a strata company may be around $923 billion (based on

population estimates)42 and is expected to significantly increase. If a majority of

members of a strata company lawfully ratified an officer’s breach of fiduciary duty,

subject to interpretation of the resolution, the minority of members would be unable to

recover any of their economic losses43 unless the loss was otherwise within the coverage

of an insurance policy maintained by each member of the strata company.

37 Australian Bureau of Statistics, 6416.0 - Residential Property Price Indexes: Eight Capital Cities, Sep 2014 (11 November 2014), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/mf/6416.0 >. 38 Department of Commerce (Western Australia), Licensing of Strata Managers in Western Australia (October 2011), Department of Commerce <http://www.commerce.wa.gov.au/sites/default/files/atoms/files/thestratamgrsconregpaperoct2011.pdf > , 4; Western Australian Government, Report of Legislative Council Standing Committee on Public Administration into Western Australian Strata Manager (September 2011).39 Australian Bureau of Statistics, 3101.0 - Australian Demographic Statistics, Mar 2014 (18 December 2014), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/mf/3101.0 > .40 Landgate, Strata Titles Act Reform Consultation Paper, (31 October 2014), 1.41 Office of Finance & Services (NSW), Office of Finance & Services Annual Report 2013/14 (Unknown date), Office of Finance & Services <http://www.finance.nsw.gov.au/sites/default/files/pdfs/OSF_Annual_Report_2013-14_section_1.pdf > , 24. 42 According to the 2011 Census data available from the Australian Bureau of Statistics, the population of Western Australia in 2011 was 2,239,171 and the population of Australia was 21,507,717. Accordingly, the population of Western Australia represents 10.4% of the total Australian population.43 See, eg, Quarante Pty Ltd v The Owners Strata Plan No. 67212 [2008] NSWCA 258.

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http://www.finance.nsw.gov.au/sites/default/files/pdfs/OSF_Annual_Report_2013-14_section_1.pdf

http://www.abs.gov.au/ausstats/[email protected]/mf/3101.0

http://www.commerce.wa.gov.au/sites/default/files/atoms/files/thestratamgrsconregpaperoct2011.pdf

http://www.abs.gov.au/ausstats/[email protected]/mf/6416.0


Other common law jurisdictions have amended legislation to reform the way in which the

doctrine of ratification operates in relation to companies. These reforms include:

1. a requirement for an independent majority of shareholders to approve a

ratification resolution;44

2. a requirement for a formal meeting to avoid implied approval or waivers;45

3. imposing fiduciary duties upon controlling shareholders;46 and

4. in relation to derivative proceedings, the approval of a ratification resolution by

shareholders (including the directors) may carry little evidential weight when

considering whether leave ought to be granted to a shareholder to commence

proceedings.47

Since the introduction in Australia of the statutory derivative action in March 2000, there

has not been a significant further contribution made to considering the doctrine of

ratification.

IV. THE PROCEDURE

This thesis undertakes a doctrinal analysis by considering the jurisprudence of ratification

in Australia and the United Kingdom which emerged from customary Roman law and

was applied broadly to fiduciary relationships in relation to the law of agency, trusts,

contract and torts. This thesis will then consider international jurisprudence on the

doctrine of ratification from common law countries and compare and contrast that

jurisprudence with the applicable principles of law in Australia. A significant aspect of

the doctrinal analysis is the consideration of the independent development of the

principles of corporate law in the United States of America.

The majority of the published literature is widely available from libraries and electronic

journal databases and has been cited in government reports. Legislative reforms have 44 See Companies Act 2006 (UK) s 239(3); Delaware General Corporations Law (US) s 144; Canada Business Corporations Act (Canada) s 120(5).45 Companies Act 2006 (UK) s 239(2).46 The doctrine arises in general law in the United States of America. The scope of the duty depends upon the circumstances. Where there is ‘self-dealing’ an ‘intrinsic fairness’ test is applied. A ‘controlling shareholder’ need not have a majority interest but must exercise control over a de facto majority.47 See R Dickerson et al, Proposals for a New Business Corporations Law for Canada (1971) (‘Dickerson Report’).

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generally been undertaken in the past 20 years which is expected to enable access to

second reading speeches and explanatory memoranda which concerned any statutory

reforms. The international case law in common law countries is also widely available

through case citators and electronic legal databases including Worldlii.org.

V. THESIS CHAPTER OUTLINE

The following is an outline of the Chapters for the thesis:

Chapter title and key matters addressed Estimated word limit

Chapter 1 - Introduction 5,000Chapter 2 - The doctrine of ratification(i) The meaning of ratification(ii) The legal requirements for ratification(iii) Conduct which gives rise to ratification(iv) Retrospective operation of ratification(v) Conduct which cannot be ratified, or ratification not necessary(vi) The legal effect of ratification

10,000

Chapter 3 - The origins of the doctrine of ratification and its application to companies(i) Legal origins and basis of the doctrine of ratification(ii) Application of ratification to companies(iii) The continuing relevance of the doctrine to the statutory derivative

action(iv) Relevance of ratification to body corporates(v) Theory of the corporation applied by the doctrine(vi) Criticisms and uncertainty in the operation of the doctrine

15,000

Chapter 4 – Reworking the principles of ratification(i) A principles based reassessment of the requirements for ratification

15,000

Chapter 5 – The significance of the regulation of corporate governance and the importance of the role of shareholders in the context of ratification(i) Significance of the regulation of corporate governance(ii) Importance of the role of shareholders in the context of ratification(iii) Are the principles underlying the doctrine of ratification consistent

with the principles of good corporate governance?

12,000

Chapter 6 – Proposals for law reform(i) Reforms to the Replaceable Rules of the Corporations Act(ii) Reforms concerning strata companies and incorporated associations

15,000

Chapter 7 - Conclusion 8,000Thesis total 80,000

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VI. PROGRESS TO DATE

This thesis was commenced in January 2013 on a part-time basis.

The following 2 tables provide an overview of the progress to date with respect to the research which has been conducted and the drafting of chapters for the thesis.

Table 1: Chapters which have been drafted for review following research into the topics.

Chapter number and title Date for completion of current draft for review

Current draft word limit

Chapter 1 – Introduction November 2014(first draft comments received April 2013)

4,500

Chapter 2 - The doctrine of ratification November 2014(first draft comments received March 2014)

10,000

Chapter 3 - The origins of the doctrine of ratification and its application to companies

March 2015(some aspects were previously a part of Chapter 2 and were commented on in March 2014)

14,500

Chapter 5 - The significance of the regulation of corporate governance and the importance of the role of shareholders in the context of ratification

November 2014(initially drafted September 2013)

11,000

Total 40,000

Table 2: Chapters which are part researched and/or part written

Chapter number and title CommentChapter 4 - Reworking the principles of ratification

Commenced research and writing the summary of international jurisprudence for USA, Canada, UK, NZ and Singapore (circa 2,500 words)

Detailed notes on the comparison of Australian and US law including case authorities (circa 6,000 words)

Chapter 6 - Proposals for law reform

Draft law reform proposals (1,000 words in summary form)

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VII. FUTURE RESEARCH PROPOSALS

Arising from the current scope of the research which has been undertaken in respect of

Chapters 4 to 6, the following are the current proposals for future research for these

Chapters of the thesis:

Chapter 4 – Reworking the principles of ratification

1. Was the development of the law of agency under customary Roman law

influenced by the extent of trade undertaken by slaves? A satisfactory answer to

this question may be impossible to determine because the law developed in

Roman law prior to 449 BC and from current research records of the development

of the law which are in existence are insufficiently detailed.

2. The legal basis of the doctrine

(a) What is the legal basis for the adoption of ratification into the common law;

agency law, fiduciary law, or the equitable doctrine of release?

(b) If more than one basis is correct, are the legal bases all consistent with one

another?

3. Can the principles of the doctrine be supported on the basis of the legal maxim

‘Equity follows the law’?

4. Whether authorisation potentially extinguishes a company’s cause of action in

certain circumstances, a matter specifically left open by the High Court in Angas

Law Services Pty Ltd (in liq) v Carabelas?48

5. Void and voidable transactions and effect on the scope of the doctrine of the fraud

on the minority

(a) What is the essence of the distinction between a void transaction and one

which is voidable in the context of the doctrine?49

(b) Why should a voidable transaction be able to be ratified whereas a void

transaction cannot?

48 (2005) 226 CLR 507.49 See, eg, The Directors of the Ashbury Railway Carriage and Iron Company Ltd v Riche (1875) LR7 HL 653 where it was held that the shareholders could not ratify a contract entered into ultra vires the objects of the company because the contract was void, not merely voidable.

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6. Management buyouts

(a) Why does an offer by the directors to buy shareholders’ shares (colloquially

known as a ‘management buyout’) not give rise to a breach of their duties to

the company given the state of their knowledge? Does the avoidance of

breach arise from the disclosure requirements?

(b) Is the process of a management buyout merely a process of authorisation of

a prospective breach which was considered in Winthrop Investments Ltd v

Winns Ltd?50

7. What is the rationale for a ratification resolution being relevant to (moreover

given significant weight) reducing or extinguishing a director’s liability under

sections 1317S and 1318 of the Corporations Act in the context of a statutory

derivative action?

8. Is there any significance to the independent development of the law in Australia

in respect of ‘oppressive conduct’51 and ‘unacceptable circumstances’52?

(a) In relation to oppressive conduct, HNA Irish Nominee Ltd v Kinghorn (No

2)53 is a significant development in relation to the lawfulness of a ratification

resolution in Australia. The Court held that the approval by the major

shareholders of a ratification resolution was oppressive pursuant to section

232, ergo oppressive conduct is independent of the doctrine of ratification.

At the current time, no authorities have followed HNA Irish Nominee in

relation to oppression arising from a ratification resolution.

9. Whether the doctrine of the fraud on the minority in the context of ratification has

been subsumed by the principles in HNA Irish Nominee, a case which concerned

section 232 of the Corporations Act?

10. In Pramatha Nath Mullick v Pradyumna Kumar Mullick,54 the Indian idol was

considered to be an entity (not property) and consequently had the rights of a

natural person. The idol was required to be represented by a disinterested next

friend appointed by the Court. It raises doctrinal questions:

50 [1975] 2 NSWLR 666.51 Corporations Act 2001 (Cth) s 232.52 Corporations Act 2001 (Cth) s 657A.53 [2012] FCA 228 (‘HNA Irish Nominee’).54 (1925) LR 52 Ind App 245.

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(a) Are the best interests of the entity the relevant test in the context of

ratification?

(b) If so, does this imply anything about the nature of the powers given to the

internal organs of a company?

(c) How does this compare to how the interests of a company are determined by

the internal corporate organs?

(d) Should approval of a ratification resolution be undertaken by an

independent majority of shareholders, or should a director be required to

approach the Court?

11. Why has the jurisprudence developed independently in the USA?

12. Do other common law countries have different jurisprudence to the UK and

Australia?

13. Did the Canadian Courts follow North-West Transportation Co v Beatty55 after it

was overturned on appeal from the Supreme Court of Canada to the Privy

Council?

14. Is there a different doctrinal approach between civil law and common law

jurisdictions in relation to the doctrine of ratification and if so, does this arise

from:

(a) the corporate governance model used?;

(b) adoption of the Roman law doctrine in whole; or

(c) some other basis?

15. How have equitable principles been applied by the international jurisprudence?

16. Whether there is an argument for international comity on the principles

underlying the doctrine of ratification?

Chapter 5 - The significance of the regulation of corporate governance and the

importance of the role of shareholders in the context of ratification

1. Are the principles of good corporate governance and the principles underlying the

doctrine of ratification consistent (based on the further research in Chapter 4)?

55 (1887) 12 App Cas 589.

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Chapter 6 - Proposals for law reform

1. Oppressive conduct under section 232 of the Corporations Act

(a) Is the HNA Irish Nominees decision sufficiently broad to allow any

ratification to be held to be ‘oppressive conduct’ under section 232 of the

Corporations Act?

(b) Does the oppression remedy in section 232 need to be amended?

2. Whether in the context of oppressive conduct, a doctrine of waste of corporate

assets should be recognised in Australia?

(a) Is it recognisable from the existing case law which recognises that a

misappropriation of company resources or an appropriation to the majority

of shareholders is incapable of ratification?

(b) Is it recognisable by way of analogy to the common law doctrine of waste in

property law?

(c) What should be the relevant test(s) for a gift of valuable property (eg. the

right to sue) being given to a director from the company (by way of release)

upon a ratification resolution being approved to be recognised within the

meaning of section 232?

(d) Whether section 232 should be expanded to encompass excessive

remuneration of directors?

3. Whether a company incorporated under the Corporations Act can transfer its

incorporated status to a State or Territory pursuant to section 601AI of the

Corporations Act and thereby permit the officers to avoid the statutory duties

established by the Corporations Act?56

4. Whether fiduciary duties should be imposed between (i) shareholders inter se or

(ii) controlling shareholders and other shareholders.

5. What is the history of the introduction of section 239 of the Companies Act 2006

(UK) which enacted restrictions on the ratification of acts of directors?

6. Codification of shareholders’ conflicts of interest

56 There is no authority on the point, however obiter in Australian Securities and Investments Commission v Medical Defence Association of Western Australia Inc [2005] FCAFC 173 may indicate that this is not possible.

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(a) Should there be statutory reform to codify the recognition of a conflict of

interest where a shareholder votes to ratify/approve their own breach of

fiduciary or statutory duties?

(b) Should the conflict of interest extend to; associates of the director in

breach, related parties of the director in breach, persons involved in the

breach, all directors (within the meaning of section 9 of the Corporations

Act), or all former directors?

7. Whether statutory law reform should be approached in Australia on the basis of

one or more of the following models of regulation:

(a) imposing greater corporate governance requirements (using a rule-based

approach);

(b) imposing greater corporate governance requirements adopting a principles-

based approach (ie. by not regulating in a manner consistent with a rule-

based approach);

(c) limited risk mitigation (a risk-based approach) to minimise the risks to

shareholders in company over a certain size; or

(d) other models of regulation?

VIII. CURRENT PROPOSALS FOR LAW REFORM TO THE CORPORATIONS ACT 2001

The following draft proposals for law reform arise from the state of the current research

and will be discussed in Chapter 6:

Amendments to the replaceable rules

1. Voting rights. Amend the Corporations Act to prohibit companies issuing shares

which exclude the right to vote.

2. No implied approval or waiver. A ratification resolution must be approved by a

general meeting of the shareholders.

3. Independent vote and/or maintenance of legal rights

(i) Introduce a requirement that an independent majority of shareholders is

required to approve a ratification or authorisation resolution. This should be

implemented by introducing a new definition of an ‘excluded person’ which

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would be a prescriptive list of shareholders which are not entitled to vote,

being, a director, former director, an associate of a director, an entity which

is a related party of a director or associate of a director and any party

involved in the acts or conduct which is sought to be ratified (whether or not

the ratification resolutions presented at the meeting are split into different

resolutions to be put).

(ii) Amend the Corporations Act such that only those shareholders which vote

to approve a ratification resolution are bound by its effect.

4. Applicability of the Replaceable Rules. Consider whether the Replaceable Rules

may be mandatorily applied to companies.

Saving provision for non-compliance

5. Amend the Corporations Act to allow a ratification resolution to be confirmed

where there is evidence that the ratification resolution would have been passed but

for non-compliance with a voting exclusion rule by an excluded person.

Introduction of a solvency requirement

6. Invalidation of a ratification resolution if the company is insolvent within 6

months of the relation-back day.57

Introduction of a prohibition and/or restriction of waste of corporate assets

7. Definition of waste of corporate assets. Amend the Corporations Act to include a

definition of ‘waste of corporate assets’. The objective test would include

whether:

(i) the acquisition or disposal of the company’s asset was reasonable; and

(ii) the directors acted in good faith for the benefit of the company as a whole.58

57 Corporations Act 2001 (Cth) s 9 (definition of ‘relation-back day’)58 In the United States of America in relevant test is whether the consideration received by the corporation was so inadequate that no person of ordinary sound business judgment would deem it worth that which the corporation paid (see Saxe v Brady, 184 A.2d 602 (Del Ch. 1962); Steiner v Meyerson, C.A. No. 13139 (Del. Ch. July 18, 1995)). See also Daniels v Daniels [1978] Ch 406; MacFarlane v Barlow (1997) 8 NZCLC 261; Pramatha Nath Mullick v Pradyumna Kumar Mullick (1925) LR 52 Ind App 245.

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8. Special resolution for gifts to an excluded person. Amend the Corporations Act

to require a special resolution of independent shareholders which concerns an

agreement between the company and an excluded person which is within the

meaning of a waste of corporate assets.

Restrictions and prohibitions

9. If the company is a trustee of a trust, the shareholders may not ratify a breach of

fiduciary duties to relieve the director against a liability to beneficiaries of the

trust.

10. Prohibit solicitation of votes by an excluded person.

11. Prohibit a shareholder from dealing with or disposing of their right to vote at a

shareholders meeting. Such a restriction could be limited to dealings with or in

connection to an excluded person.

Introduction of statutory duties on controlling shareholders

12. Introduce a statutory duty on controlling shareholders to the minority shareholders

to act in good faith for the benefit of the company as a whole.

Amend existing law concerning director liability to the company

13. Exclude from consideration the relevance of a ratification resolution to section

1317S of the Corporations Act (Relief from liability for contravention of civil

penalty provision).

14. Exclude from consideration the relevance of a ratification resolution to section

1318 (Power to grant relief).

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IX. OTHER LAW REFORM RESEARCH

As discussed above, strata companies, incorporated associations and trade union

legislation in the States and Territories have generally not codified any of the duties of

officers and accordingly, the doctrine of ratification may be utilised to relieve an officer

from liability for a breach of fiduciary duties. This is to be compared to co-operatives

legislation where all States and Territories have at least in part codified the duties of

directors.

The laws in the States and Territories which concern strata titles, incorporated

associations and trade unions have not generally undergone any significant reforms,

unlike co-operatives legislation and the Corporations Act. There is, for example, no

strata titles, trade union or incorporated associations legislation which has adopted a

statutory derivative action in any of the 8 State and Territory jurisdictions. These laws

are overdue for reform in relation to the codification of officer’s duties and other law

reforms which are proposed by this thesis.

A summary of the relevant State and Territory legislation is set out below:

Jurisdiction Strata companies

Incorporated Associations

Trade Unions Co-operatives

WA Strata Titles Act 1985

Associations Incorporation Act 1987

Industrial Relations Act 1979

Co-operatives Act 2009

NT Unit Titles Act Associations Act N/A Co-operatives ActQLD Body

Corporate and Community Management Act 1997



Cooperatives Act 1997

NSW Strata Schemes Management Act 1996



Co-operatives (Adoption of National Law) Act 2012

ACT Unit Titles (Management) Act 2011


N/A Co-operatives Act 2002

VIC Owner Corporations

Associations Incorporation

Trade Unions Act 1958

Co-operatives National Law

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Act 2006 Reform Act 2012 Application Act 2013

TAS Strata Titles Act 1998


Trades Unions Act 1889

Cooperatives Act 1999

SA Strata Titles Act 1988


Fair Work Act 1994

Co-operatives National Law (South Australia) Act 2013

X. TIMETABLE FOR COMPLETING THE THESIS

The following is the proposed timetable for completion of the thesis:

Date Activity

March 2015 Finalisation of Chapters 1, 2, 3

Expected to receive supervisor comments

on Chapter 5

November 2015 Finalise draft of Chapter 4 for review

July 2016 Finalise Chapter 4

November 2016 Finalise Chapter 5

January 2016 Finalise draft of Chapter 6 for review

July 2016 Finalise Chapter 6

November 2016 Finalise draft of Chapter 7 for review

January 2017 Finalise Chapter 7

January 2017 Proof reading

8 July 2017 Mid-candidature review stage

TBC Pre-submission seminar

January 2018 Submission

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XI. BIBLIOGRAPHY

The following list of resources contains the most significant information which the author

will be relying upon for the thesis:

Articles/Book/Reports

Austin R P, Ramsay, I M, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 13th ed, 2007)

Australian Securities Exchange, Corporate Governance Principles and recommendations with 2010 amendments (2nd ed, 2007), 6 March 2013

Baxt, R, ‘Judges in their own cause: The ratification of directors’ breaches of duty’, (1978) 5 Monash University Law Review 16

Dickerson, R et al, Proposals for a New Business Corporations Law for Canada (1971)

The Committee on the Financial Aspects of Corporate Governance, Report of the Committee on the financial Aspects of Corporate Governance (1992)

The Companies and Securities Law Review Committee, ‘Company Directors and Officers: Indemnification, Relief and Insurance’ (21 May 1990)

Finn, P. D, Fiduciary Obligations (The Law Book Company Ltd, 1977)

Hargovan, A, ‘Australian Securities and Investments Commission v McDonald [No 11] – Corporate governance lessons from James Hardie’ (2009) 33 Melbourne University Law Review 984

Landgate, Strata Titles Act Reform Consultation Paper (31 October 2014)

LexisNexis, Ford’s Principles of Corporations Law

LexisNexis, Halsbury’s Laws of Australia

LexisNexis, Halsbury’s Laws of England

Munday, R, Agency law and principles (Oxford University Press, 2010)

Report of the HIH Royal Commission, The failure of HIH Insurance – Volume I: A corporate collapse and its lessons, Canberra, Commonwealth of Australia (2003) xxxiii.

Page 23 of 27


Sneed, E, ‘The stockholder may vote as he pleases: Theory and fact’, (1960) 22 University of Pittsburgh Law Review 23

The Committee on the Financial Aspects of Corporate Governance and Gee and Co Ltd, The Report of the Committee on the financial aspects of corporate governance (1992)

Worthington, S, ‘Corporate Governance: remedying and ratifying directors’ breaches’ (2000) Law Quarterly Review 116

Warnick, L, Incorporated Associations: Liability of Board/Committee Members (1 June 2005), Lavan Legal <http://www.lavanlegal.com.au/images/galleries/12654233_40_Inc_ass_liab_paper_(2).pdf>

Wright, E. B, The law of principal and agent (Stevens and Sons, Ltd, 2nd ed, 1901)

Case Law

Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507

Australian Securities and Investments Commission v Medical Defence Association of Western Australia Inc [2005] FCAFC 173

Bamford v Bamford [1970] Ch 212

Daniels v Daniels [1978] Ch 406

HNA Irish Nominee Ltd v Kinghorn (No 2) [2012] FCA 228

Hogg v Cramphorn Ltd [1967] Ch 254

Quarante Pty Ltd v The Owners Strata Plan No. 67212 [2008] NSWCA 258

MacFarlane v Barlow (1997) 8 NZCLC 261

Miller v Miller (1995) 16 ACSR 73

North-West Transportation Co v Beatty (1887) 12 App Cas 589

Pramatha Nath Mullick v Pradyumna Kumar Mullick (1925) LR 52 Ind App 245

Saxe v Brady, 184 A.2d 602 (Del Ch. 1962)

Steiner v Meyerson, C.A. No. 13139 (Del. Ch. July 18, 1995)

Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666

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Legislation

Associations Act (NT)

Associations Incorporation Act 1985 (SA)

Associations Incorporation Act 1987 (WA)

Associations Incorporation Reform Act 2012 (VIC)

Canada Business Corporations Act (Canada)

Companies Act (Singapore)

Companies Act 1993 (NZ)

Companies Act 2006 (UK)

Corporations Act 2001 (Cth)

Delaware General Corporations Law (US)

Industrial Relations Act 1979 (WA)

Industrial Relations Act 1996 (NSW)

Industrial Relations Act 1999 (QLD)

Owner Corporations Act 2006 (VIC)

Strata Titles Act 1985 (WA)

Unit Titles (Management) Act 2011 (ACT)

Treaties

Nil.

Other sources

Australian Bureau of Statistics, Residential Property Price Indexes: Eight Capital Cities,

Sep 2014, Australian Bureau of Statistics

<http://www.abs.gov.au/ausstats/[email protected]/mf/6416.0>

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Australian Bureau of Statistics, Australian Social Trends 2008 (23 July 2008), Australian Bureau of Statistics <http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/4102.0Chapter7202008>

Australian Bureau of Statistics, 3101.0 - Australian Demographic Statistics, Mar 2014 (18 December 2014), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/mf/3101.0>

Australian Bureau of Statistics, 1301.0 Year Book Australia 2012 (24 May 2012), Australian Bureau of Statistics <http://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1301.0~2012~Main%20Features~Measuring%20the%20activity%20of%20co-operatives~289>

Department of Commerce (Western Australia), Licensing of Strata Managers in Western Australia (October 2011), Department of Commerce <http://www.commerce.wa.gov.au/sites/default/files/atoms/files/thestratamgrsconregpaperoct2011.pdf>, 4; Western Australian Government, Report of Legislative Council Standing Committee on Public Administration into Western Australian Strata Manager (September 2011)

Justice Connect, Which incorporated legal structure should we choose? (Unknown date) Not-for-profit Law Information Hub <http://www.nfplaw.org.au/sites/default/files/Which%20incorporated%20legal%20structure%20should%20we%20choose.pdf>

Office of Finance & Services (NSW), Office of Finance & Services Annual Report 2013/14 (Unknown date), Office of Finance & Services <http://www.finance.nsw.gov.au/sites/default/files/pdfs/OSF_Annual_Report_2013-14_section_1.pdf>

Strata Community Australia Ltd, Submission to Inquiry into residential strata title insurance (Unknown date) Strata Community Australia <http://www.stratacommunity.org.au/sites/default/files/stratainsuranceinquiry1.pdf>

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XII. EXAMPLE OF WRITTEN WORK FOR THE THESIS

Draft Chapter 2 of the thesis is attached to this Progress Report at Annexure A.

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Documents

Introduction - satusworldwide.comsatusworldwide.com/backup/25. Progress Report... · Web viewWhilst the principles of good corporate governance are generally consistent with the