JD HANNES v MJH PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL SAMUELS, CLARKE and SHELLER JJA 20 February 1992, 19 March 1992 [1992] NSWCA 17 JD Hannes, the first appellant, was Governing director of, and held all the Governors' shares in Hanset Pty Ltd, the second appellant. The powers conferred on the Governing director were wide and included the right to "the whole management government and control of the Company" and control over any necessary majority of votes at shareholders' meetings. On 27 April 1988, at a directors' meeting at which JD Hannes was present, 18,999 shares of Hanset were allotted to Jamar Pty Ltd, a company in which JD Hannes and his second wife were the only shareholders. On 10 May 1988 JD Hannes and Hanset executed a service agreement which provided for JD Hannes to be paid a substantial salary and to receive other benefits. The respondents, who were the other shareholders in Hanset, contended firstly that both the share allotment and the service agreement constituted breaches by JD Hannes of his fiduciary duty to the company. Secondly, they contended that there was such conduct or such oppressive unfairly prejudicial or unfairly discriminatory acts or omissions as would entitle the Court to make orders under s320 Companies (NSW) Code. The appellants argued that the powers conferred upon JD Hannes as a director and shareholder allowed him to act in a way that might otherwise be a breach of fiduciary duty, even capriciously, without giving rise to any justifiable cause for complaint. McLelland J held that there was a breach of fiduciary duty and acts and conduct entitling him to exercise his discretion under s320. Held, on appeal: 1. The allotments and the service agreement constituted a breach of fiduciary duty by JD Hannes and were correctly set aside. 2. There was such conduct as to allow the Court to make orders under s320 but that the form of some of the orders went beyond what in the circumstances was appropriate. To that extent the orders were varied. Whitehouse v Carlton Hotel Pty Ltd 1987) 162 CLR 285 Wayde v New South Wales Rugby League (1985) 59 ALJR 798 Hindle v John Cotton Ltd (1919) 56 ScLR 625 Mills v Mills (1938) 60 CLR 150 Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 Fraser v Whalley (1864) 2 Hem and M 10; 71 ER 361 Hogg v Cramphorn Ltd (1967) Ch 254 Ngurli Ltd v McCann (1954) 90 CLR 425 Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR 666 Banford v Bamford (1970) Ch 212 Grant v John Grant and Sons Pty Ltd (1950) 82 CLR 1 Mulholland v Mitchell (1971) AC 666 Warr v Santos (1973) 1 NSWLR 432 Sinclair v Graham (1984) 2 NSWLR 253 Companies (NSW) Code Samuels JA I agree with Sheller JA. Clarke JA I agree with Sheller JA. 2 UNREPORTED JUDGMENTS Sheller JA Introduction Hanset Pty Ltd is a family company. Jack Dieter Hannes is the Governing director and holds all the Governors' shares. Prior to 27 April 1988 the other shareholders were the plaintiffs in the court below and are the respondents on this appeal. The defendants, JD Hannes, Hanset, Jamar Property Pty Ltd and Keith Allan Irish, an accountant and director of Hanset, appeal against a decision of McLelland J in which he made orders setting aside allotments by Hanset on 27 April 1988 of 18,999 "A" shares to Jamar and 1 "A" share to Irish and a service agreement entered into between Hanset and JD Hannes on or about 10 May 1988, made a declaration and order in respect of a superannuation scheme established pursuant to the service agreement and made orders pursuant to s320(5) of the Companies (NSW) Code altering parts of the Memorandum and Articles of Hanset. His Honour delivered two judgments, the second supplementary judgment on 19 October 1990, after the appellants had applied for and obtained leave to adduce further evidence from JD Hannes and the parties had made detailed submissions as to the appropriateness and form of the draft orders his Honour had published with his reasons for judgment on 28 August 1990. The appeal involves two major matters of contention which overlap. First, whether the allotments of shares involved a breach by JD Hannes of his fiduciary duty and the service agreement a breach by JD Hannes and Irish of their fiduciary duties and were therefore voidable. McLelland J held that they did and set them aside. Second, was there such conduct or were there such oppressive unfairly prejudicial or unfairly discriminatory acts or omissions as would entitle the Court to make an order pursuant to s320. McLelland J held that there were and made orders accordingly. In large measure his Honour relied upon the allotments of shares and the service agreement as grounds for exercising his discretion to make orders pursuant to s320. In this appeal the appellants submitted that his Honour should have made no orders but rather dismissed the suit or alternatively made some only of the orders or different orders. In particular it is claimed that the orders made by his Honour under s320 went too far. On the other hand the respondents cross appealed on the basis that the orders made were not apt or sufficient. JD HANNES' RIGHTS AND POWERS JD Hannes was the holder of the 2,000 issued Governors' shares in Hanset and the Governing director of Hanset. Central to the appellants' argument were his resultant rights and powers. They were extensive, indeed such as led the appellants to argue that he could act capriciously in ordering the affairs of Hanset without giving rise to any justifiable cause for complaint. CLS of Hanset's Memorandum of Association which deals with the rights attached, inter alia, to the Governors' shares provided in part: "5. The initial capital of the Company is one hundred thousand pounds (100,000) divided into ninety six thousand (96,000) ordinary shares of one pound (1) each which shall be called "A" shares, two thousand (2,000) shares of one pound (1) each which shall be called "B" shares and two thousand (2,000) Governors' shares of one pound (1) each. Subject as hereinafter provided the rights following shall respectively be attached to the "B" shares and Governors' shares aforesaid: (a) The two thousand (2,000) "B" shares which are to be issued to Morna Jean Hannes shall be numbered | to 2,000 inclusive and shall whilst held by the said Morna Jean Hannes or until converted into three per cent (3%) fixed preference URJ JD HANNES v MJH PTY LTD (Sheller JA) 3 shares as hereinafter provided confer upon the holder thereof when present in person or by proxy or attorney at any general meeting of the Company and both on a show of hands and on a poll the right to three times the number of votes given personally or by proxy or attorney by the holders of the "A" shares on any resolution at such meeting. (b) The said Morna Jean Hannes shall be entitled to hold her "B" shares for such time as she may think fit and to convert them into three per cent (3%) fixed preference shares of the Company at any time by notice in writing to the Company under the hand of the said Morna Jean Hannes accompanied by the certificate or certificates relating to such shares and such notice shall have effect accordingly and thereupon the certificate or certificates as aforesaid or any of them shall be cancelled and a fresh certificate or certificates issued in the place thereof. (c) Subject as aforesaid the holder of the "B" shares shall have the same rights as the holders of the "A" shares. (h) The Governors' shares whilst the same shall be held by the said Jack Dieter Hannes shall confer on him the right to the whole management government and control of the Company." (Article 3A (i) of the Articles of Association, inserted by special resolution on 14 June 1957, was in the same terms.) "(i) Whilst held by the said Jack Dieter Hannes the said Governors' shares shall confer on him when present in person or by proxy or attorney at any general meeting of the Company and both on a show of hands and on a poll the right to as many votes in the case of an ordinary resolution as shall constitute a majority of the votes given personally or by proxy or attorney on such resolution and in the case of an extraordinary resolution or special resolution as shall constitute a majority of three fourths of the votes given personally or by proxy or attorney on such resolution. (j) The said Governors' shares shall confer on the holder the right to such dividend as may from time to time be determined in accordance with the Articles of Association for the time being in force." Article 4 of the Articles of Association of Hanset provided: "4. Subject of the provisions of the Memorandum of Association and Articles 30 to 33 inclusive hereof all shares shall be under the control of the Directors who may issue allot place under option or otherwise dispose of the same to such persons for such consideration on such terms and conditions at such times and generally in such manner as they think fit." Article 57 provided: "(i) Morna Jean Hannes whilst she is the holder of the two thousand (2,000) "B" shares in the capital of the Company shall when present in person or by proxy or attorney at any general meeting of the Company and both on a show of hands and on a poll have the right to three times the number of votes given personally or by proxy or attorney by the holders of the "A" shares on any resolution at such meeting. (ii) Jack Dieter Hannes whilst he is the holder of the two thousand (2,000) Governors' shares in the capital of the Company shall be Governing Director thereof and shall hold such office until he die or resign or cease to hold such shares. (iii) The said Jack Dieter Hannes whilst he is the holder of the said two thousand (2,000) Governors' shares when present in person or by proxy or attorney at any general meeting of the Company and both on a show of hands and 4 UNREPORTED JUDGMENTS on a poll shall have the right to as many votes in the case of an ordinary resolution as shall constitute a majority of the votes given personally or by proxy or attorney on such resolution and in the case of an extraordinary or special resolution as shall constitute a three fourths majority of the votes given personally or by proxy or attorney in such resolution." Article 58 provided: "(i) The said Jack Dieter Hannes whilst he is the holder of the said two thousand (2,000) Governors' shares shall notwithstanding anything in these articles contained and so far as the law allows have power to exercise all the powers conferred upon the Company and/or its shareholders by the Memorandum of Association and by these Articles. (ii) The decision of the said Jack Dieter Hannes whilst he is the holder of the said two thousand (2,000) Governors' shares as to all matters affecting the Company shall be paramount and he may veto any resolution of the Company howsoever made or carried. (iii) All the other directors (if any) for the time being of the said Company shall be under the control of the said Jack Dieter Hannes whilst he is the holder of the said two thousand Governors' shares and shall be bound to conform to his directions with regard to the Company's business." Article 60 provided: "The said Jack Dieter Hannes whilst he is the holder of the said two thousand Governors' shares may from time to time or at any time appoint any other person or persons to be Directors of the Company and may define limit and restrict their powers and may fix and determine their remuneration an duties and may at any time remove any Directors howsoever appointed and may at any time convene a general meeting of the Company." Article 63 provided: "The powers and authorities hereby granted to the said Jack Dieter Hannes shall not devolve upon a subsequent holder of the said two thousand (2,000) Governors' shares." Article 80 provided: "The Directors shall be paid out of the funds of the Company by way of remuneration for their services such sum as the Directors may from time to time determine but such determination shall be subject to confirmation by the Company in general meeting and such remuneration shall be divided amongst the Directors in such proportions and manner as they may determine and in default of determination equally." Article 85 provided: "No Director shall be disqualified by his office from contracting with the Company either as vendor purchaser or otherwise nor shall any such contract or any contract or arrangement entered into by or on behalf of the Company with any company or partnership of or in which any Director shall be a member or otherwise interested be avoided nor shall any Director so contracting or being such member or so interested be liable to account to the Company for any profit realised by any such contract or office by reason only of such Director holding that office or of the fiduciary relation thereby established. Any such Director may vote in respect of any such contract or arrangement but the nature of his interest must be disclosed by him or on his behalf at the meeting of Directors at which the question of entering into the contract or arrangement is first taken into consideration if his interest then exists or in any other case at the first meeting of Directors after the acquisition of his interest. A general notice given by a Director URJ JD HANNES v MJH PTY LTD (Sheller JA) 5 that he is a member of a specified company or firm and is to be regarded as interested in any contract which may after the date of the notice be made with the company or firm shall be deemed to be a sufficient declaration of interest in relation to any contract so made. It shall be the duty of the Secretary to record such declaration in the minutes of the meeting." Article 95 provided in part: "The management and control of the business and affairs of the Company shall be vested in the said Jack Dieter Hannes whilst he continues to hold the office of Governing Director or in the Board who in addition to the powers and authorities by these presents or otherwise expressly conferred upon him or them may exercise all such powers and do all such acts and things as may be exercised or done by the Company in general meeting but subject nevertheless to the provisions of the statutes and of these presents and to any regulations from time to time made by the Company in general meeting......." On 14 June 1957 by special resolution new Articles 100 and 100A were inserted in the following terms: "100. The Company in general meeting may declare dividends and the Directors may from time to time declare interim dividends such dividends and/or interim dividends to be paid to the members in proportion to the amounts of the shares held by them respectively." "100A. The profits of the Company made during the financial year or other period comprised in the accounts submitted to the ordinary general meeting in each year and available for dividend with any profits carried forward from past years shall be applicable in order of priority and manner following: Firstly, to the payment of a preferential dividend at the rate of three per centum (3%) per annum to the holders of the three per cent (3%) fixed preference shares in proportion to the amounts of the shares held by them respectively. Secondly, to the payment to the holders of the "B" shares and of the Governors' shares of such dividend as the Company in general meeting may from time to time declare. Thirdly, the residue shall be applicable to the payment of a dividend to the holders of the "A" shares in proportion to the amounts of the shares held by them respectively." Article 101 provided: "No dividend shall be payable except out of the profits of the Company and no dividend shall carry interest as against the Company. The declaration of the Directors as to the amount of the net profits shall be conclusive and no larger dividend shall be declared than is recommended by the Directors but the Company in general meeting may declare a smaller dividend." SHARE HOLDINGS Hanset was incorporated on 22 June 1956 under the Companies Act 1936. Prior to the allotments made on 27 April 1988 13,250 "A" shares were held by the first plaintiff, MJH Pty Ltd, a company, 9,999 of whose 10,000 issued shares were held by Mrs M J Hannes, who married JD Hannes on 8 March 1949. The marriage dissolved in early 1983. The second plaintiff, VLH Pty Ltd, a company, 19,998 of whose 20,000 issued shares were held by a child of the marriage, Victoria, held 21,250 "A" shares as did the third and fourth plaintiffs, MRH Pty Ltd and JAH Pty Ltd 19,998 of whose 20,000 issued shares were held respectively by the two other children of the marriage, Martin and John. 2,000 "B" shares were held by Mrs M J Hannes. Neither Jamar nor Irish had any shares in the company until the allotments of 27 April 1988 complained of. Jamar is a 6 UNREPORTED JUDGMENTS company the shares of which were held equally by JD Hannes and his present wife, Mrs Margaret Hannes, whom he married in 1983. Irish holds his share in Hanset in trust for Jamar. BUSINESS AND ASSETS OF HANSET His Honour in his judgment of 28 August 1990 described Hanset as being and having been at all material times an investment company. In his supplementary judgment he referred to unchallenged evidence of its being involved in the distribution and marketing of imported products in Australia. At some previous point in time it had also been involved in property development. According to its balance sheet as at 30 June 1989 it had net assets of $8,632,313, which included substantial investments in shares and real property, accumulated losses of $310,530 but reserves totalling $8,742,843 (comprising capital profits of $2,504,864 and asset revaluation reserve of $6,237,979). One asset was a house and land at Bay view valued in the accounts at $4.5 million. This had been acquired in about 1958 and was used by JD Hannes and Mrs M J Hannes as their matrimonial home until they separated. After that it was occupied by Mrs M J Hannes. 1988 ALLOTMENTS OF SHARES AND SERVICE AGREEMENT At a directors' meeting of Hanset held on 27 April 1988 and attended by JD Hannes and Irish, business was transacted which was recorded in the minute book in the following terms: "Share Issue Employment Contract: Mr JD Hannes submitted to the Board of Directors an outline of his involvement in his position of Governing Director of Hanset, the work load involved and the company's direction. The company at present is a property developer and owner, investor in commercial companies including venture capital, researcher of new products and concepts and is involved in import distribution, and has plans to operate overseas as well as in Australia, Mr Hannes sees himself as the key to the company's growth and success. The structure, policy and effective development of Hanset Pty Ltd since its inception have been based on growth of assets rather than earnings. Since the commencement of even more active management, from January 1982 onwards, the company has made investments and has been engaged in developments to ensure continued capital growth. While such a policy has proved, is proving and is expected to continue to be the correct policy for the company, the only benefit to shareholders therefrom is the growth in the company's assets. The Governing Director at the present time through his holding of Governors' Shares does not share in this growth, and therefore has little incentive to continue this policy and as such he believes his remuneration, superannuation and shareholdings are matters that should be addressed. Bearing in mind these factors, the Board of Directors has resolved to: (1) Accept a share application from JD Hannes and/or his nominees for an amount of 19,000 Ordinary "A" Shares in the company's capital to be issued at a par value of $2.00 per share. (2) Enter into an employment contract with JD Hannes for a period of seven years, subject to JD Hannes entering into a Non Compete contract with the company in his retirement. (3) The formation of an appropriate Superannuation Fund of which JD Hannes will be a member." URJ JD HANNES v MJH PTY LTD (Sheller JA) 7 At the same meeting, appropriate applications having been tabled, it was resolved that 18,999 "A" shares be allotted to Jamar and | "A" share be allotted to Irish, in each case at a par value of $2 per share. It was recorded that the allottees were the nominees of JD Hannes. As I have said it was common ground Irish took and held his share as trustee for Jamar. On 9 May 1988 the Hanset Pty Ltd Executive Superannuation Fund was established, with Hanset as trustee. JD Hannes became a member of the fund. On 10 May 1988 at a directors' meeting of Hanset attended by JD Hannes and Irish it was resolved that Hanset execute a service agreement between Hanset and JD Hannes tabled at the meeting. The agreement was executed on that date. It provided for JD Hannes to act as "the chief executive of the company and in such capacity to use his best endeavours to protect and promote the interests and investments of the company and its subsidiary and related companies, it being recognised that the executive's function shall require him to devote considerable time and attention to the business and affairs of subsidiary and related companies." The agreement was to operate for seven years (with provision for earlier termination for breach). Hanset was to pay JD Hannes a commencing salary of $90,000 per annum to be indexed annually in accordance with variations in the consumer price index, together with supplementary benefits comprising the provision of a luxury motor vehicle on a fully maintained basis, the payment of entertainment, travel and similar expenses, the provisions of superannuation benefits by the establishment of a non-contributory superannuation scheme and the making of contributions at a level equivalent to the maximum permitted by Tax Office guidelines. It also provided for the payment to JD Hannes of a sum of $500,000 forthwith upon termination of his employment for any reason, in consideration of a five year restraint on competition with Hanset or any subsidiary or related company. The share allotments were alleged by the respondents to have been made by JD Hannes in breach of his fiduciary duty and in breach of s229(1) and s229(4) of the Code and to have materially reduced the value of the shares held by the respondents. The entry into the service agreement was alleged to involve breaches by JD Hannes and Irish of their fiduciary duties and s229 (4) of the Code without notice to shareholders or approval by Hanset in general meeting. For obvious reasons the share allotments and the service agreement were for the considerable benefit of JD Hannes and to the detriment of Hanset and the other shareholders. The appellants submitted that this was justified by the contribution JD Hannes had made to the prosperity of Hanset and as an inducement to him to continue to run Hanset so as to enhance the capital value of the other shares in the company. They submitted that by causing the shares to be allotted and by entering into the service agreement JD Hannes did no more than exercise the powers conferred upon him by the Memorandum and Articles and flowing from his control over the votes of shareholders' meetings, his power to exercise alone all the powers conferred upon the company and its shareholders and his control over the directors. In exercising these powers, it was said, he was accordingly involved in no breach of fiduciary duty. Irish gave evidence that having regard to JD Hannes' position in the company and to the history of his involvement in it, it was proper that the allotments be made to the company nominated by him, namely Jamar. He also said that he formed the view that the 19,000 "A" shares were worth no more than par value, having regard to the rights attached to the Governors' shares and "B" shares. Irish also said in his affidavit that he agreed with the decision to enter into the service agreement because in his view it was in the interests of Hanset that the services 8 UNREPORTED JUDGMENTS of JD Hannes be secured to it in a commercial way and that having regard to his experience and expertise and the services rendered and to be rendered by him to the company the terms of the service agreement were proper. His Honour said of Trish that he was very guarded in cross-examination about these transactions and his recollection of the events surrounding them was less than clear. FINDINGS His Honour was satisfied that so far as JD Hannes was concerned, the dominant motivation for causing Hanset to allot the shares and enter into the service agreement was to provide additional means to derive financial benefits for himself and his second wife from Hanset, in the light of the deteriorating position as between himself and his former wife and to a lesser extent his three adult children (a symptom of which was the service on JD Hannes on 18 April 1988 of notice of extraordinary general meetings of each of MJH Pty Ltd, VLH Pty Ltd, MRH Pty Ltd and JAH Pty Ltd at which it was proposed to remove him as a director of those companies). His Honour noted that as at 27 April 1988 the authorised capital of Hanset was $200,000 divided into 96,000 "A" shares at $2 each (of which 77,000 had already been issued), 2,000 "B" shares at $2 each (all of which had already been issued), and 2,000 Governors' shares at $2 each (all of which had already been issued), so that the only shares available for allotment were the 19,000 "A" shares in fast allotted on that day. The authorised capital was subsequently on 19 May 1989, increased to $2 million divided into 5 million "A" shares at $2 each, $2.5 million "B" shares at $2 each, and $2-5 million Governors' shares at $2 each. So far as Irish was concerned, his Honour considered that he was aware of what he described as JD Hannes' dominant motive, was willing to join in giving effect to it if an arguable justification could be found, and was content to treat the undoubted past success and anticipated future success of Hanset under JD Hannes' management as sufficient for the purpose as well as treating the vulnerability of the holders of "A" shares to JD Hannes' assumed capacity to divert all the capital profits and reserves by way of dividends to the holders of the Governors' and "B" shares, as justifying the issue of new "A" shares at par. His Honour said that in the case of both directors, he considered that in respect of both transactions under attack, their duty to act in what they considered to be the best interests of the company was overshadowed by their desire to give effect to JD Hannes' desire to provide additional means to derive financial benefits for himself from the company. It followed that both the allotments of shares of 27 April 1988 and the service agreement of 10 May 1988 must be set aside. EVIDENCE This conclusion was attacked by the appellants on the basis that his Honour had made no primary findings of fact to support it. His Honour set out the evidence of Irish, giving reasons why, in his opinion, the allotments and the service agreement were for the benefit of the company but did not expressly say whether he accepted or rejected that evidence. The respondents have referred to the transcript of evidence to support his Honour's conclusions. As to the allotments of shares there was evidence that: (a) There was no need for Hanset to raise further capital. (b) The reason for the allotments was to reward JD Hannes for past services. (c) The shares were in part, if not in whole, allotted as an incentive for JD Hannes to perform in the interests of and for the benefit of other companies with which he spent a large part of his working time. URJ JD HANNES v MJH PTY LTD (Sheller JA) 9 (d) A little over a week before the allotments, which was the first such allotment of shares in fifteen years, JD Hannes had received notices of meetings of the four respondent companies designed to bring about his removal as a director of those companies. (e) The allotments were at a par value of $2 per share in a situation where the issued shares, prior to the April 1988 allotments, consisted of 77,000 "A" shares, 2,000 "B" shares and 2,000 Governors' shares and according to the 1988 balance sheet the shareholders equity was $8,416,348. It was true that the value of the "A" shares had to take account of the rights of the Governors' shares while JD Hannes held them and his position as Governing Director. (f) The shares were allotted without notice to existing shareholders and without offering them any part of the allotments or even telling them that an allotment of shares was proposed. Mrs M J Hannes first learnt of the allotments from a search of the Hanset statutory returns. (g) Irish made no attempt to canvass the views of other shareholders as to whether, in their opinion, the allotments could be justified. As to the service agreement there was evidence that: (a) It too was entered into after the receipt of the notices of meetings designed to remove JD Hannes as a director of the four respondent companies. (b) It was entered into by JD Hannes for his own benefit in a situation of uncertainty as to his future and without negotiation. (c) At the date of the service agreement Hanset was not a trading company nor according to its accounts had it become such by 30 June 1989. (d) In 1988 its income consisted of rents, dividends and a small amount of interest from deposits of money. (e) JD Hannes was not working full time for Hanset. He had many other activities and calls on his time. (f) The setting up of the company's asset strength had taken place many years before. (g) In 1988 the payment, pursuant to the service agreement, of JD Hannes' salary and superannuation contribution resulted in Hanset incurring a net loss. In 1989 it would have incurred a net loss but for a large dividend from Hannes Estates Pty Ltd, a company in which it had a one third interest. (h) JD Hannes was, at the time, sixty five years old. The respondents argued that the salary was over generous, the superannuation unjustified and the termination payment in return for a pointless five year covenant not to be engaged in any business carried on by the company and not to disclose confidential information. Indeed the evidence of both JD Hannes and Irish as much as conceded that the termination clause whereunder Hanset covenanted in the event of termination (for any reason) of JD Hannes' employment, to pay him $500,000 forthwith upon such termination, was indefensible. The matters to which I have referred together with the history and circumstances set out in his Honour's judgment show, in my opinion, that his Honour's findings as to the dominant motivation for the allotments of the shares and the service agreement and his conclusion that the duty of JD Hannes and Irish to act in what they considered to be in the interests of the company was overshadowed by their desire to give affect to JD Hannes' desire to provide additional means to derive financial benefits for himself from the company were right and I respectfully agree with them. LIMITATIONS ON THE POWERS OF JD HANNES 10 UNREPORTED JUDGMENTS The appellants argued that the Memorandum and Articles and the rights and powers they conferred on JD Hannes freed him from the restraints otherwise imposed by law on the exercise by directors or shareholders of their powers. The appellants relied upon statements in the majority judgment of the High Court in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285. In my opinion the ratio of the majority is against the appellants' submission. Mr Whitehouse held office as permanent Governing director with all the powers and authorities and discretion vested in the Board of Directors by the Companies Act or the Articles vested in him alone. At 292 their Honours said: "All that the relevant provision of article 127 does is confer upon Mr Whitehouse the 'powers and authorities and discretion vested in the board of directors by the Companies Act or these articles'. It does not change the nature of those 'powers and authorities and discretion'. It does not convert what is a fiduciary power in the hands of the directors into a non-fiduciary power in the hands of Mr Whitehouse. It does not authorise the exercise by Mr Whitehouse of that fiduciary power for what would be an impermissible and vitiating purpose if it were exercised by the directors. Put differently, what was conferred upon Mr Whitehouse was the power to allot shares 'vested in the board of directors' and the case is clearly established that a purpose of manipulating the voting power of shareholders is, at least ordinarily, foreign to such a power." It is quite true that their Honours said that the Articles of a company might be so framed that they expressly or impliedly authorised the exercise of the power of allotment of unissued shares for what would otherwise be a vitiating purpose. But the point was that the Articles had not been so framed. The conferral upon the Governing director of wide authority to exercise powers which might otherwise be vested in the Board did not change the nature of the powers. On this the present case is indistinguishable. Though JD Hannes stood in the shoes of the majority of shareholders and the Board of Directors, the powers he was authorised to exercise as a result were those otherwise exercisable by the majority of shareholders or the Board and not some special or different powers which would have enabled him to act capriciously or for some ulterior purpose. The appellants referred also to Wayde v New South Wales Rugby League Ltd (1985) 59 ALJR 798. In that case the appellant failed in an application for relief under s320 of the Companies Code. It was not suggested that the Board of Directors of the respondent League had acted otherwise than in good faith or had failed, in exercising its powers under the Articles, to have regard to relevant considerations or taken irrelevant considerations into account. The decision to refuse the club's entry into the competition was made in the exercise of a power that was expressly conferred on the Board, to determine the nature and extent of the competition that was to take place and the clubs that were to be permitted to participate in it. It was not a case where the directors of a company, in the exercise of general powers of management had adopted a policy or decided upon a course of action which was alleged to be unfairly prejudicial to a minority of the members of a company. As their Honours said at 801: "4.0 amount of sympathy for Wests can obscure the fact that the League was expressly constituted to promote the best interests of the sport and empowered to determine which clubs should be entitled to participate in competitions conducted by it. It was upon this basis that the clubs, including Wests, chose to incorporate.......... In truth, the board was confronted with a conflict of immediate interests between Wests on the one hand and the League as URJ JD HANNES v MJH PTY LTD (Sheller JA) 11 a whole on the other and the exercise of the power conferred by Article 76 must necessarily be prejudicial to one or the other." Such is far removed from the present situation where on the findings made by his Honour what was being promoted was the self interest of JD Hannes. This was not the purpose for which Hanset was incorporated. The general proposition that the powers of directors or shareholders must be exercised bona fide for the benefit of the company as a whole, as has been pointed out in many cases, provides little assistance in resolving conflicts arising from the exercise of powers affecting the mutual rights and liabilities inter se of shareholders of different classes and descriptions; see, for example per Brennan J in Wayde's case at 803. Where such conflicts arise it is necessary to look rather at the extent of the power and whether it has been exceeded and, if not, to consider concepts of oppression, reasonableness and unfairness linked with prejudice to or discrimination against the interests of others. These concepts have been taken up in the language of s320 and its successor, s260 of the Corporations Law, which emphasise oppressive or unfair behaviour. Brennan J said: "Where the directors of a company are empowered to discriminate among its members and to prejudice the interests of one of them, the adoption of a resolution which has that effect and which is made in good faith and for a purpose within the power is not, without more, 'oppressive or unfairly prejudicial to or unfairly discriminatory against, a member'. $320 requires proof of oppression or proof of unfairness: proof of mere prejudice to or discrimination against a member is insufficient to attract the court's jurisdiction to intervene." In order to determine whether a director shareholder or other person vested with authority to exercise powers was honestly acting in discharge of the powers in the interests of the company or acting to achieve some ulterior purpose or for personal advantage or for any other illegitimate reason, that person's state of mind and the motive for which that person acted are all important. The Court may go into the question of what the intention was, collecting from the surrounding circumstances all the materials which genuinely throw light on that question; see generally Hindle v John Cotton Ltd (1919) 56 ScLR 625 at 630-631. In Mills v Mills (1938) 60 CLR 150 at 186 Dixon J, as he then was, referred to the "substantial object the accomplishment of which formed the real ground of the Board's action. If this is within the scope of the power, then the power has been validly exercised." In the present case the substantial object the accomplishment of which formed the real ground of JD Hannes' action was one of self interest. Once that is acknowledged there is no legitimate basis left for his actions even if they were intra vires. As the Privy Council said in Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 at 834: "Further it is correct to say that where the self interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected (eg Fraser v Whalley (1864) 2 Hem and M 10; 71 ER 361; and Hogg v Cramphorn Ltd (1967) Ch 254) - just as trustees who buy trust property are not permitted to assert that they paid a good price." In my opinion on the ultimate finding of fact made by his Honour both the allotments of shares and the employment agreement were rightly set aside. His Honour's statement that the directors' duty to act in what they considered to be the best interests of the company was overshadowed by their desire to give effect to JD Hannes' desire to provide additional means to derive financial benefits for himself from the company is a finding that, in the language of Dixon J in Mills 12 UNREPORTED JUDGMENTS Vv Mills, this was the substantial object the accomplishment of which formed the real ground of the Board's decision. Moreover it is nothing to the point to say that either or both decisions could have been ratified by his exercising the powers of the majority of shareholders in general meeting since any such decision to achieve the same substantial object would have been likewise vitiated. The majority of shareholders cannot authorise or ratify irregular acts of directors where to do so would be oppressive or unfairly prejudicial to the minority; Ngurli Ltd v McCann (1954) 90 CLR 425 at 447 where their Honours said: "As we have said, a shareholder is not a trustee of his vote and can use it to advance his own interests at a general meeting. But even in general meeting a majority of shareholders cannot exercise their votes for the purpose of appropriating to themselves property or advantages which belong to the company for that would be for the majority to oppress the minority. The right to issue new capital is an advantage which belongs to the company. Any attempt by directors or by the company to exercise this right not for the benefit of the company as a whole but so as to benefit the majority to the detriment of the minority could be restrained in a suit brought by the minority against the company and the majority: Cook v Deeks (1916) 1 AC 554." See also Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR 666 at 692 where Mahoney JA draws the distinction between an abuse of power by directors which deprives the minority shareholders of their rights and an irregularity or act otherwise in excess of power being something which the majority of shareholders in general meeting is entitled to do; compare Bamford v Bamford (1970) Ch 212 where the acts of the directors, assumed to have been actuated by improper motives, were regarded as capable of being ratified by the company in general meeting. By contrast the acts of JD Hannes complained of here are not capable of such ratification in the absence of the agreement of all the shareholders; see Grant v John Grant and Sons Pty Ltd (1950) 82 CLR 1 at 48. In my opinion his Honour correctly set aside the allotments of shares and the service agreement. This brings me to the orders made under s320 of the Code. $320 OF THE COMPANIES CODE $320(2) empowers the Court subject to subs(4) to make such order or orders as it thinks fit including those enumerated in the section if it is of the opinion (a) that affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in the section referred to as "oppressed member or members'') or in a manner that is contrary to the interests of the members as a whole; or (b) that an act or omission, or a proposed act or omission, by or on behalf of a company, or a resolution, or a proposed resolution, of a class of members of a company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in the section also referred to as the "oppressed member or members") or was or would be contrary to the interests of the members as a whole. Para (a) speaks of the affairs of the company being conducted in the present tense, that is to say at the time the Court is making its order, whereas para (b) speaks of an act or omission in the past tense oppressive or unfairly prejudicial to or unfairly discriminatory against a member of members. I do not think, accepting his Honour's findings, and for the reasons I have already given, that there could be any doubt that the allotments and the entering into the service agreement were acts oppressive unfairly prejudicial to and _ unfairly URJ JD HANNES v MJH PTY LTD (Sheller JA) 13 discriminatory against the other members of the company. The question becomes one of whether any order and if so what order should, in the exercise of the Court's discretion, have been made. OTHER MATTERS RELIED UPON BY THE RESPONDENTS Before coming to the conclusion he did that he should make orders under s320 his Honour referred to a number of other events. The first of these was what he described as an attempted bonus share issue. In late 1980 JD Hannes presented to each of Mrs M J Hannes and his sons Martin and John a set of documents and requested their signatures. He described them as relating to a restructuring of Hanset for taxation purposes. He discouraged further inquiry as to their nature or effect. The documents in fact provided for (a) a special resolution of Hanset increasing the authorised capital, reassigning the "A" shares held by MRH Pty Ltd, JRH Pty Ltd and VLH Pty Ltd as "C", "D" and "E" shares and permitting a differential treatment of "A", "C", "D" and "E" shares by way of dividends or bonus share issues; (b) an ordinary resolution of Hanset for a bonus issue out of the capital reserve account of 714,000 "A" shares to JD Hannes and 238,000 "A" shares to Mrs Hannes. His Honour said: "My conclusion from the evidence is that Mr JD Hannes did not at the time volunteer any substantial further information to Mrs Hannes, Martin or John as to the effect of the proposal, but did upon receiving resistance, either leave the documents with each of them, or later provide copies to each for consideration. Subsequently each of them refused to sign the documents and the proposal lapsed." The main purpose of the proposal seems to have been to alter the proportion of equity in the company held by JD Hannes from approximately 2.5 per cent to approximately 70 per cent and by Mrs Hannes and MJH Pty Ltd from approximately 19 per cent to approximately 25 per cent with a view to the further distribution to shareholders by way of return of capital from existing and future capital gains by the company. The second purpose seems to have been to enable differential treatment so far as future dividends and bonus shares were concerned between MJH Pty Ltd, VLH Pty Ltd, MRH Pty Ltd and JAH Pty Ltd. By implementation of the proposal, JD Hannes would have been in a position to bring about the payment to himself tax free of approximately 70 per cent of the capital profits derived by the company, in lieu of the declaration of a fully taxable dividend of the amount of those profits which (if the provisions of Article 100A were to be given effect) would have had to have been shared equally with Mrs Hannes. It is not without significance that by the time this proposal was presented by JD Hannes in late 1980 he had finally made up his mind to terminate his marriage to Mrs Hannes, and had set up the woman who subsequently became his second wife in an apartment. During his evidence concerning this proposal JD Hannes' asserted: "there was no benefit whatsoever in it for me". His Honour rejected this as a true statement either of fact or of any belief held by JD Hannes. He then said: "Of itself this incident provides no basis for relief under s320, but it does reveal an attitude on the part of Mr JD Hannes which lends colour to subsequent events". Second his Honour referred to a statement alleged to have been made by JD Hannes in 1981 to the effect that he had structured Hanset "to give me complete control so that I can do what I like". His Honour, nine years later, was not 14 UNREPORTED JUDGMENTS prepared to make any definitive finding on the terms of the conversations. His Honour pointed out that it was clear that JD Hannes regarded it as legitimate to use funds or assets of Hanset for the benefit of the particular members of his family and he instanced using the Bayview property as a family home and latterly as a home for Mrs Hannes, using the company's liquid funds as a bank for drawings by or on behalf of individual family members, having Hanset offer to guarantee liabilities of a company in which John and Martin were interested. However, he concluded: "But in all the circumstances it is difficult to regard such matters as these as breaches of duty of which the plaintiffs can now legitimately complain." The third matter of which complaint was made was the nonappointment of auditors. From 30 December 1983 there was no auditor of Hanset until after the annual general meeting held on 14 February 1989 when complaint concerning the absence of an auditor was made on behalf of the plaintiffs. Falsely the minutes of each of the annual general meetings for the years ended 30 June 1984 to 1987 included statements that all the members of the company had agreed pursuant to s279(1) of the Code that it was not necessary to appoint an auditor. His Honour said: "This was a breach of duty on the part of Mr Hannes which cannot be overlooked having regard particularly to the fact that after 1984 Mrs Hannes was no longer a director. However it is also relevant to note that it has not been shown that any particular detriment to the plaintiffs ensued (except in relation to the departure from parity between "B" shares and Governor's shares in respect of dividends declared in 1984, 1985 and 1986 as already mentioned) and that when complaint was made the position was remedied." The fourth matter was the removal of Mrs M J Hannes as a director. The reason given by JD Hannes for removing Mrs Hannes as a director unilaterally and without notice from 9 March 1984 was that she had placed a caveat on the title to the Bayview property and that JD Hannes intended that Hanset should commence proceedings for its removal. His Honour said that it was possible that this was merely a pretext; objectively it was not in the circumstances a particularly cogent reason. However, JD Hannes undoubtedly had the power to take the course he did. Nevertheless the effect was that Mrs Hannes was thereby removed from any access to the management of Hanset, which was not without significance when considered with the absence for four years thereafter of notices of general meetings, and of auditors and the departures from parity between "8" shares and Governors' shares in the declaration of dividends. His Honour put aside altogether a complaint relating to the maintenance of the Bayview property. He came finally to what he described as arbitrary payments of dividends on "A" shares and the requirement according to the Articles of Association that the "A" shares should have received the same dividend. There was, he said, no ready explanation for a discrepancy in 1981 and 1982. However, he said no complaint was made about it until 1990 and the discrepancy over the two years was small. MSJH Pty Ltd should have received a dividend of $6,235 in each year, totalling $12,470. In fact it received $13,219, a discrepancy of $749. His Honour did not think that any inference could be drawn relevant to the present proceedings. No auditors had been appointed between 1983 and 1989. Mrs M J Hannes had been removed in 1984 as a director. This tendency by JD Hannes to tighten his control of the company free from the reasonable management input of other shareholders and the scrutiny of independent auditors has, in my opinion, URJ JD HANNES v MJH PTY LTD (Sheller JA) 15 significance in considering whether and if so in what manner the discretion under s320 should be exercised. It is part of a pattern of which the failure to disclose the allotments of shares in 1988 is another example. Further it has added significance when it is demonstrated that JD Hannes was prepared to exercise his powers to serve his own ends. The other matters referred to by his Honour, because of the lapse of time, (they occurred no later than 1982), and bearing in mind his Honour's views about them, can I think be disregarded. JUSTIFICATION FOR ORDERS The allotments of shares, the entering into the service agreement and the reasons already given why they were correctly set aside amply justified the making of orders under s320. Further His Honour was satisfied that unless some order was made under s320, acts unfairly prejudicial to one or more of the respondents as members of Hanset were likely to recur. In his supplementary judgment his Honour said that the prospect seemed to him a very real one that in the absence of some appropriate order of the Court JD Hannes would continue to seek to divert the property of Hanset to himself or his associates and away from the respondents in a manner which would be unfairly prejudicial to the respondents. Article 100A had been inserted in 1957 within twelve months of the incorporation of the company and before the allotment of any shares other than the two subscriber shares (of which one had been allotted as a Governors' share and the other as a "B" share). In a cross claim the appellants sought declarations that to the extent that Article 100A purported to equate the right to dividends of the holders of "B" class shares with the right to dividends of the holder of Governors' shares instead of equating them with the right to dividends of holders of "A" class shares the Article was in conflict with CL5(c) of the Memorandum of Association and invalid or alternatively the Article was wholly invalid as being in conflict with CL5(j) of the Memorandum of the company. In his judgment his Honour observed: "Tt was not until 21 April 1959 that the first dividend was declared. There is no evidence of any suggestion on the part of anyone that the 1957 amendments were wholly or partly invalid or ineffective until the cross claim in these proceedings was filed on 28 May 1990, the first day of the hearing. The conclusion seems irresistible that from 1957 until after the commencement of these proceedings the affairs of Hanset had been conducted on the assumption by all involved in those affairs that those amendments were valid and effective. With the exception of a dividend declared on 30 April 1980 which made no differentiation between classes of shares, dividends have never been declared at the same rates on "A" and "B" shares. Indeed on each of the 26 occasions when dividends were declared up to April 1977, they were declared on "A" shares alone. It is true that in 1978 and 1979, and again in 1984, 1985 and 1986 dividend parity between Governors' and "B" shares was not observed, although it was observed in 1980, 1981 and 1982. The evidence does not disclose why this departure from parity occurred, although as already observed it may be significant that when dividends were declared in 1984, 1985 and 1986 the company had no auditors and no notice of the meetings which ratified the dividends was given to any of the plaintiffs. Whatever be the explanation, there is no evidence of any explicit rejection of article 100A." His Honour regarded JD Hannes' attempt to seek to rely on the invalidity of Article 100A as an example of his continuing to seek to divert the property of Hanset to himself and said, in answer to a submission that an order validating 16 UNREPORTED JUDGMENTS Article 100A was not related to conduct found to be oppressive: "There is, accordingly, in my view a sufficient nexus between the unfairly prejudicial conduct established and the 'validation' of article 100A to justify in principle an order of the kind proposed." In the orders he made His Honour validated the Article in a re-drafted and clearer form. To this order there was no challenge before us. FORM OF ORDERS His Honour gave careful consideration to the form that the orders should take and clearly what he did was a matter for his discretion. His Honour considered the relief should involve four elements, "first, a prohibition on the issue of any further shares in the company without the consent of a majority of the holders for time being of each existing class of shares; secondly a prohibition of any payment of remuneration to a director without the consent of a majority of the holders for the time being of each existing class of shares; thirdly a prohibition of the company entering into any contract with a director or with any company or partnership of or in which a director shall be a member or otherwise interested, without the consent of a majority of the holders for the time being of each existing class of shares, and fourthly, a restoration to legal effect of the substance of Article 100A, so as, in particular, to maintain parity as between Governors' shares and "B" shares in relation to entitlement to dividends". His Honour made the following orders: "The Court orders that: 1. The allotment by the Defendant Hanset Pty Ltd on or about 27 April 1988 of 18,999 A shares to the Defendant Jamar Properties Pty Ltd and | A share to the Defendant Keith Allan Irish be set aside and that the register of members of the Defendant Hanset Pty Ltd be rectified accordingly. 2. The Defendant Hanset Pty Ltd repay to the Defendants Jamar Properties Pty Ltd and Keith Allan Irish any money paid by them for the allotment of those shares. 3. The employment agreement entered into between the Defendants Hanset Pty Ltd and Jack Dieter Hannes on or about 10 May 1988 be set aside. 4. The Defendant Jack Dieter Hannes repay to the Defendant Hanset Pty Ltd all moneys received by him pursuant to that agreement, provided that this order shall not prevent the said Defendant Jack Dieter Hannes from retaining remuneration received by him during the period 1 July 1987 to 7 September 1990 up to an amount of $140,000.00 per annum, being a total of $127,561.00. The Court declares that: 5. All moneys or assets held by the Defendant Hanset Pty Ltd as the trustee of the superannuation scheme established pursuant to the said employment agreement, representing contributions made by the Defendant Hanset Pty Ltd in respect of the Defendant Jack Dieter Hannes, are held as part of the general funds of the Defendant Hanset Pty Ltd and free of any trusts under the said scheme. The Court further orders that: 6. The Defendants Jack Dieter Hannes and Hanset Pty Ltd severally take all steps reasonably open to them respectively to restore to the general funds of the Defendant Hanset Pty Ltd all moneys or assets representing contributions made by the Defendant Hanset Pty Ltd for the purpose of the said superannuation scheme, in respect of the Defendant Jack Dieter Hannes. 7. Pursuant to s320(5) of the Companies (NSW) Code that the memorandum of association of the Defendant Hanset Pty Ltd be altered as follows: URJ JD HANNES v MJH PTY LTD (Sheller JA) 17 (a) by omitting from subCL(a) of CLS, everything after the words "holder thereof" and substituting "such voting rights as may be prescribed by the articles of association for the time being in force"; (b) by adding immediately after subCL(b) of CLS a new subCL(ba) as follows: "(ba) the said B shares shall confer on the holder the right to such dividend as as may from time to time be determined in accordance with the articles of association for the time being in force"; (c) by omitting from subCL(h) of CL5 everything after the words "confer on him" and substituting "such rights of management and control of the company as may be prescribed by the articles of association for the time being in force"; (d) by omitting from subCL(i) of CLS everything after the words "confer on him" and substituting "such voting rights as may be prescribed by the articles of association for the time being in force". 8. Pursuant to s320(5) of the Companies (NSW) Code that the articles of association of the Defendant Hanset Pty Ltd be altered as follows: (a) by omitting existing articles 100, 100A and 101 and substituting the following new articles 100 and 101; 100(1) The company in general meeting may declare a dividend if, and only if, the directors have recommended a dividend. (2) A dividend shall not exceed the amount recommended by the directors. 101 A dividend shall be apportioned in the following manner and priority: firstly, to the holders of the 3% first preference shares (if any), in proportion to the nominal value of their shares, the amount required for payment of a preferential dividend at the rate of 3% per annum; secondly, to the holders of the B shares and the governors shares in proportion to the nominal value of their shares, such amount (if any) as the company in general meeting may determine; thirdly, to the holders of the A shares in proportion to the nominal value of their shares, the residue (if any) of the amount recommended by the directors. (b) by adding to article 4, immediately after the words "and Articles" the words "4A, and", (c) by adding immediately after article 4, a new article 4A as follows: "4A Notwithstanding anything in these articles no further shares shall be issued on or after 19 October 1990 without the consent in writing of the holders of a majority of each existing class of shares". (d) by inserting at the commencement of article 57 immediately before "(i)" the words "Subject to these articles -"; (e) by making the following changes to article 58: - inserting at the commencement before "(i)" the words "Subject to these articles"; - omitting "notwithstanding anything in these Articles contained and" in para (i); - inserting "or directors" immediately after "shareholders" in para (i); - omitting the whole of para (iii); (f) by adding immediately after article 58 a new article 58A as follows: *58A Articles 57 and 58 shall not apply to any resolution, decision or act in relation to: (a) the remuneration of a director; (b) the appointment or removal of an auditor; (c) the issue of shares; (d) the amendment of the memorandum or articles of association; 18 UNREPORTED JUDGMENTS (e) a contract with a director or with any company or partnership of or in which a director shall be a member or otherwise interested." (g) by omitting from article 60 the words "fix and determine their remuneration and" and substituting "determine"; (h) by adding immediately after article 63 the following new article 63A: "63A Until the said Jack Dieter Hannes shall cease to be Governing Director of the company, the holders of a majority of the A shares may from time to time in writing appoint any person to be a director of the company and remove any person so appointed. Any such director shall hold office until so removed or until the annual general meeting of the company next after the said Jack Dieter Hannes ceases to be Governing Director, whichever shall first occur." (i) by omitting article 80 and substituting the following: "80 A director shall be paid out of the funds of the company by way of remuneration for his services such sum and other benefits as shall be approved at a general meeting of the company by the holders of a majority of the issued shares in the company (without regard to any special voting rights) and (so long as any of the Governors' shares are held by Jack Dieter Hannes) by the said Jack Dieter Hannes"." (j) by omitting from article 85 the words "No director" and substituting the words "Subject to article 85A, no director"; (k) by adding immediately after article 85 a new article 85A as follows: "85A Notwithstanding anything in these articles, the company shall not enter into any contract with a director or with any company or partnership of or in which a director shall be a member or otherwise interested without the consent in writing of the holders of a majority of each existing class of shares."; (1) by omitting from article 95 the passage commencing with the words "who in addition" and concluding with the words "in general meeting but". The proceedings be otherwise dismissed. 10. The crossclaim be dismissed. 11. The First Defendant pay to the Plaintiffs half of their costs of the proceedings. 12. Reserve liberty to apply." The appellants did not suggest that the orders made by his Honour were beyond power. His Honour had referred to s320(5) and the mechanism therein mentioned for ordering an alteration in or addition to the Memorandum or Articles of Association, with the consequence that no further alteration in or addition to the Memorandum or Articles inconsistent with the Court's order could be made by the company without the leave of the Court. The appellants submitted however that this Court should interfere on the basis that the exercise of discretion had miscarried. His Honour was exercising a discretion. We may only interfere with it if it is shown to have been exercised upon some wrong principle; House v The King (1936) 55 CLR 499 at 505. ORDERS SETTING ASIDE ALLOTMENTS AND SERVICE AGREEMENT For reasons I have already given O.1 to O.3 inclusive must stand. 0.4 was challenged by the respondents on the basis that his Honour should not have provided for the retention by JD Hannes of any remuneration received during the period from 1 July 1987 to 7 September 1990. I shall return to deal with this submission when considering the cross appeal. As to declaration 5 and O.6 the appellants submitted that there was error in ordering, in effect, that the whole of the superannuation contributions made from the commencement of the service agreement be restored to Hanset in view of his URJ JD HANNES v MJH PTY LTD (Sheller JA) 19 Honour's findings concerning discussions held in 1983. It was submitted that the proper conclusion was not merely that JD Hannes understood that his wife and children were not objecting to a superannuation contribution of $45,000 per annum but that those persons in fact were all aware of his claim to be entitled to such a contribution and either agreed to it or raised no objection. It was suggested, by reference to the evidence, that the proper inference was that the respondents did agree, or alternatively, raised no objection to the proposal that JD Hannes should receive a salary package comprising a basic salary plus superannuation contributions and that this package comprised a salary of $40,000 and superannuation contributions of $45,000 per annum. His Honour said: "Hanset is the trustee of the superannuation fund and I think that it is a necessary consequence of the setting aside of the service agreement that those moneys be repaid. The evidence concerning discussions in 1983 falls short of establishing any agreement or equity which should be treated as precluding such a consequence." No satisfactory reason was shown for disturbing this finding. It was open to his Honour on the evidence and I agree with it. In the alternative the appellants submitted that because in 1983 JD Hannes was Governing director and had full authority to decide for himself the appropriate salary package for his services which included a superannuation contribution of $45,000, the setting aside of the service agreement revived the arrangements in place immediately prior to its execution. With all respect to the submission, what other arrangements may or may not have been made by JD Hannes were, as is conceded, not an issue in the proceedings. JD Hannes in fact made no contribution in the years prior to the service agreement being executed. I see no basis for its being taken into account in the making of orders in this case. A consequence of the setting aside of the service agreement should be, in my opinion, that the superannuation fund contributions made as a consequence should be restored to Hanset. The declaration and order made by his Honour should stand. $320 ORDERS The appellants submitted that, if an order was to be made under s320, an order for the compulsory purchase by JD Hannes of the respondents' shares at value would be the appropriate form of relief and that his Honour's reason for refusing such namely that "it would be very difficult to arrive at any adequate and principled basis of valuation" was not a sufficient reason. However relief in this form is opposed by the respondents who have made a case of misuse of power and a case under s320 of the Code. That being so and particularly having in mind that a Court ordered purchase during the life of JD Hannes at a valuation taking account of the rights and powers vested in him as Governing director and the holder of the Governors' shares may well be oppressive to the respondents it seems to me that his Honour correctly rejected this contention. The thrust of the appellants' submissions in respect of the orders altering the Memorandum and Articles was that the effect of the alterations was to increase the value of the "A" and "B" shares and reduce the value of the Governors' shares. Relief in such form was said to be inappropriate. It was submitted that his Honour's orders restructured the company by altering the Memorandum and Articles in such a way as to reduce the powers of JD Hannes as Governing director and increase the powers of the other shareholders. This is neatly if not completely demonstrated by the new Article 58A inserted by his Honour's orders whereby Articles 57 and 58, which gave JD Hannes control of meetings of 20 UNREPORTED JUDGMENTS shareholders and the powers of the company its shareholders and its directors, were altered so as not to apply to any resolution decision or act in relation to: (a) the remuneration of a director; (b) the appointment or removal of an auditor; (c) the issue of shares; (d) the amendment of the Memorandum or Articles of Association; (e) a contract with a director or with any company or partnership of or in which a director shall be a member or otherwise interested. The appellants, while not conceding the necessity of the alteration, did not challenge the nonapplication of the special voting rights attached to the Governors' shares to any resolution concerning the appointment or removal of an auditor. His Honour moved the voting rights and dividend rights of the "B" shares and the right to the management government and control of the company and the voting rights of the Governors' shares from the Memorandum to the Articles by amendments to CL5(a), CL(h) and CL(i) of the Memorandum and the inclusion of a new para (ba). Article 3A remained unchanged. The new Article 4A prevented any further share issue on or after 19 October 1990 without the consent in writing of the holders of the majority of each existing class of shares. This effectively replaced JD Hannes' control over the issue of shares. Articles 57 and 58 were made subject to the Articles and Article 58 (1) altered expressly to state that JD Hannes' powers extend "so far as the law allows". There was introduced the new Article S8A which I have paraphrased. His Honour altered Article 60 to remove JD Hannes' power to fix the remuneration of directors and inserted Article 63A to enable the holders of the majority of the "A" shares to appoint any person to be a director of a company and remove any person so appointed. The new Article 80 provided for the remuneration of directors to be approved at a general meeting of the company by the holders of the majority of the issued shares in the company without any regard to any special voting rights and so long as any of the Governors' shares were held by JD Hannes. Article 85A prohibited the company from entering into any contract "with a director or with any company or partnership of or in which a director shall be a member or otherwise interested without the consent in writing of the holders of the majority of each existing class of shares". Article 95 under the heading "Powers of Directors", as amended, removed the provision whereunder JD Hannes or the Board in addition to the powers and authorities expressly conferred upon him or on the Board might exercise all such powers and do all such acts and things as might be exercised or done by the company in general meeting. This was no more than to give effect to the earlier amendments. Articles 100 and 101 in their amended form prevented the company in general meeting declaring a dividend if the directors had not recommended it or declaring a dividend in excess of any recommendation by the directors and provided for an apportionment amongst the shareholders. As I have said the appellants do not challenge the omission of Articles 100, 100A and 101 and the substitution by his Honour of new Articles 100 and 101. It has been pointed that the proposed Article 63A sits uncomfortably with Article 60, even as amended, wherein JD Hannes as the holder of the Governors' shares "may at any time remove any Directors howsoever appointed". This is overcome by amending Article 60 further to include after the words "may at any time remove any Directors howsoever appointed" the words "other than a Director or Directors appointed pursuant to Article 63A." URJ JD HANNES v MJH PTY LTD (Sheller JA) 21 It has also been pointed out that the new Article 80 and Article 85A do not by reason of Article 64 apply while JD Hannes is Governing director. Article 64 provides: "As soon as the said Jack Dieter Hannes shall cease to be Governing director of the company, (which event is hereinafter referred to as 'such cessation') but not before the following Articles numbered 65 to 94 inclusive shall commence to have effect." To overcome this problem an order should be made amending this Article to read "but not before the following Articles numbered 65 to 79 inclusive, 81 to 85 inclusive and 86 to 94 inclusive shall commence to have effect". SUBMISSIONS ON FORM OF ORDERS The appellants submitted that the new Article 4A requiring the consent of the holders of the majority of each existing class of shares to any new issue went further than was reasonably necessary for the protection of the respondents. The finding that JD Hannes would continue to seek to divert property of Hanset to himself or his associates and away from the respondents in a manner unfairly prejudicial to them was said to be erroneous. JD Hannes had secretly and in fraud of his powers caused shares to be allotted to his nominees and entered into a highly advantageous service agreement for reasons of self interest. Those facts alone would justify his Honour's finding. In addition his Honour had the advantage of hearing the evidence of JD Hannes and Irish. I do not think his Honour's finding was erroneous. On the other hand I agree with the appellants' submission that a requirement that the directors give all shareholders one month's advance notice of any intended share issue including details as to the number, class and price of shares, and the identity of the intended allottees, together with a statement of the reasons for their allotment would sufficiently protect the respondents and enable them to consider whether they wished to challenge the intended allotment as being for an improper purpose or on any other ground. In my opinion the alteration made by his Honour not only dramatically changes the control given by the Memorandum and Articles to JD Hannes but introduces elements of inflexibility with the prospects of deadlock which are inconsistent with the objects for which the company was founded. To that extent, in my opinion, the discretion miscarried. The appellants submitted that by virtue of the new Article 58A the special voting rights attached to the Governors' shares and the "B" shares do not apply to a resolution to alter the Memorandum or Articles. In consequence the respondents are now able to pass the necessary resolutions for any such amendment against the opposition of JD Hannes as the holder of the Governors' shares. Previously the holder of the Governors' shares could pass such a resolution without the assistance of any other shareholder. The alteration has transferred the power of amendment to the opposing parties in the proceedings. The appellants suggested that if some restriction was thought to be appropriate on the power to amend the Memorandum and Articles, the respondents would be adequately protected by an entrenched clause which required the company to give all shareholders one month's advance notice of any intention to propose or pass a resolution for the alteration of the Memorandum or Articles. Alternatively it was submitted that any alteration should require the consent of the holder of the Governors' shares as well as the consent of 75 per cent of the holders of the majority of the other issued shares. 22 UNREPORTED JUDGMENTS In my opinion his Honour's order in this respect went beyond what in the circumstances was appropriate. Reading his Honour's judgment I do not think that he intended such a dramatic switch in control as flows from his order. Rather I think he had in mind limiting the power of JD Hannes, acting alone, to alter the Memorandum and Articles. I do not think the circumstances permitted the Court, in the exercise of its discretion under the section, to amend the Articles 80 radically to alter the balance of power in the company. In my opinion the rights of the parties are appropriately preserved by leaving Article 58A as proposed, but in addition amending the Memorandum of Association by inserting a clause to the effect that any special resolution altering or adding to the Memorandum or Articles of Association shall not have any effect unless or until the consent of the holder of the Governors' shares and of 75 per cent of the holders of a majority of the other issued shares has been obtained. The appellants challenged the alteration to Article 60 and the insertion of Article 63A. Such is designed to ensure that there is a representative of the "A" class shareholders present at meetings of directors and to enable them through a director appointed by them to remain aware of the activities of the Board of directors and to take part in discussions at directors' meetings. I regard these as important protections to those shareholders which in no way prejudices the proper management of the company. The amendment provides for such person to hold office until removed by such majority or until the annual general meeting of the company next after JD Hannes ceases to be Governing director, whichever shall first happen. In my opinion these amendments were entirely appropriate in the exercise of his Honour's discretion under the section. The appellants submitted that the removal of the power of JD Hannes to fix the remuneration of directors went further than was reasonably necessary. However, in my opinion, his Honours' findings in regard to the service agreement justified his exercising his discretion to provide, as the new Article 80 provides, that the remuneration of directors should be approved at a general meeting of the company by the holders of the majority of the issued shares of the company without any regard to any special voting rights and (so long as any of the Governors' shares are held by JD Hannes) by JD Hannes. Similarly I agree with the amendment to the Articles made by the insertion of the new Article 85A requiring the written consent of the holders of the majority of each existing class of share to any contract with a director or company or partnership of or in which a director is a member or otherwise interested. This alteration is amply justified by the service agreement and the circumstances in which it was entered into. His Honour dismissed the cross claim of the appellants as a matter of discretion on the basis that since the proposed regime for the future conduct of the affairs of the company would substantially qualify the powers of JD Hannes under the Memorandum and Articles, there was no utility making declaratory orders in relation to those powers. The appellants submit that the cross claim was wrongly dismissed. His Honour's reasoning still applies. In addition some at least of the declarations sought are inconsistent with the limits on the powers of JD Hannes pursuant to the Memorandum and Articles in their form unamended by his Honour's orders. His Honour's order should not be interfered with. RESPONDENTS' SUBMISSIONS ON CROSS APPEAL URJ JD HANNES v MJH PTY LTD (Sheller JA) 23 It was argued on behalf of the respondents that his Honour should have made an order winding the company up as the only effective way in which JD Hannes can be restrained from continued oppressive acts. In my opinion the respondents' claim to a winding up order was correctly rejected. Before his Honour the respondents submitted that since the company was purely an investment company and operated no business, no significant disadvantage to shareholders would flow from a winding up, which would merely involve realising the investments and distributing the proceeds. However, as his Honour pointed out unless there was no less draconian alternative relief available sufficiently providing for the future conduct of the affairs of the company, an order for winding up would operate unduly harshly against JD Hannes. On the basis that the allotments to Jamar Pty Ltd and Irish were set aside, JD Hannes' equity in the company would be no more than about 2.5 per cent and the winding up would bring about a defective forfeiture of his very valuable control over the distribution of dividends. Of course if the appellants engage in the future or have engaged since the making of his Honour's order in activities which fall within s320(2) or its equivalent in the Corporations Law it is open to the respondents to approach the Court for further orders under s320 or for an order to wind the company up under 320 or alternatively on the just and equitable ground. Realisation of this should be a sanction which would reduce the chance of further oppressive conduct by JD Hannes. The respondents further submitted that the orders made by his Honour were inadequate to prevent further misuse of power or oppressive conduct by JD Hannes. The respondents referred to the inadequacy of a director appointed by the "A" class shareholders having at best a consultative role and the history of the manner in which JD Hannes had exercised his control of the company. In support of these submissions the respondents applied to lead further evidence in this Court designed to show that the conduct of JD Hannes since the trial demonstrated that his Honour's orders did not go far enough and that an order should have been made winding the company up or removing JD Hannes as Governing director. We refused the respondents' application to lead this evidence and said we would give our reasons when we gave judgment. Fresh evidence ought not to be admitted on appeal upon a matter falling within the field of uncertainty about which the trial judge has made findings, in this case the future conduct of J D Hannes, unless to refuse it would affront commonsense or a sense of justice; Mulholland v Mitchell (1971) AC 666 at 679-80; Warr v Santos (1973) 1 NSWLR 432 at 440-1; Sinclair v Graham (1984) 2 NSWLR 253 at 255. This is not a situation when fresh evidence should be admitted particularly bearing in mind that if JD Hannes' conduct since the trial has been such as would require the making of a winding up order or further orders under s320 or its equivalent in the Corporations Law that is better dealt with by a fresh proceeding when the issues can be properly defined and evidence led in the ordinary way. In my opinion the orders made by his Honour on the material before him and subject to the amendments to which I have referred were apt. I do not think this Court should interfere with them in the way suggested by the respondents. The respondents further submitted that there was no proper basis for allowing JD Hannes to retain the part of the salary that he had received from Hanset during the period from | July 1987 to 7 September 1990. It was said that there was no legal principle upon which his Honour could base the fixing of a retrospective salary, that the evidence showed that JD Hannes' activities were more related to 24 UNREPORTED JUDGMENTS work for companies other than Hanset and that his evidence did not provide any bona fide basis for assessing a salary on a quantum meruit basis. Accordingly upon the setting aside of the service agreement all money paid pursuant to it should be repayable by him. The evidence led by leave before his Honour delivered his supplementary judgment showed that prior to 1983 JD Hannes received no remuneration from Hanset, but since 1983 he had received a salary from Hanset which amounted to $20,000 in the year ended 30 June 1984, $36,000 in the year ended 30 June 1985 and thereafter $40,000 per annum. His Honour acknowledged that the evidence on the question of the awareness of Mrs M J Hannes and her three children of the payment of the salary of $40,000 per annum to JD Hannes was fairly tenuous but in the absence of any evidence to the contrary thought it permissible and proper to draw the inference that they were aware of, and acquiesced in, the payment of a salary to him at that rate. Any such acquiescence had however to be treated as having come to an end by the 7 September 1990 when submissions were first made concerning the first draft orders. He thought it proper also to draw the inference that to the knowledge of the respondents and with their acquiescence JD Hannes had since the date of the service agreement rendered substantial services to Hanset of value to the company in the reasonable expectation of being paid for those services. On this basis he made the order that he did. In my opinion the inference that his Honour drew was the correct one in the circumstances and I would not disturb this order. The evidence of JD Hannes, if accepted by his Honour on this point, supported the inference that he drew. His evidence was that the other shareholders were aware that he was drawing a salary in the amounts that I have set out, never contested it and agreed that it was not unreasonable. This evidence was not, as his Honour said, contradicted. The respondents also challenged his Honour's order whereunder JD Hannes paid only one half of the respondents' costs of the proceedings. This was a matter entirely for his Honour's discretion. The respondents arguments by reference to transcript pages do not persuade me that his Honour, well familiar with the extent to which the matters upon which the respondents succeeded took up time at the trial should be disturbed. I propose the following orders: 1. The appeal should be allowed to the extent of amending McLelland J's orders as follows: By adding to O.7 the following new paragraph: "(e) By adding immediately after CL5 a new CL6 as follows: 6. Any special resolution of the Company altering or adding to the Memorandum or Articles of Association shall not have any effect unless and until the consent of the holder of the Governors' shares and of 75 per cent of the holders of a majority of the other issued shares has been obtained." By deleting O.8(c) and inserting in its place: "(c) By adding immediately after Article 4, a new Article 4A as follows: 4A. Notwithstanding anything in these Articles, no further shares shall be issued on or after 19 October 1990 until the expiry of 28 days from the giving to all shareholders of notice in writing of the intended issue including details as to the number, class and price of shares, and the identity of the intended allottees, together with a statement of the URJ JD HANNES v MJH PTY LTD (Sheller JA) 25 2. 3. 4. reasons for their allotment, such notice to be given by sending the same by prepaid registered post addressed to the shareholder at the shareholder's address shown in the register of members or if none is so shown at the last known address of the shareholder." By deleting O.8(g) and substituting the following: "(g) By omitting from Article 60 the words 'fix and determine their remuneration and' and substituting 'determine' and inserting after the words 'may at any time remove any Directors howsoever appointed' the words 'other than a Director or Directors appointed pursuant to Article 63A'. By adding to O.8 after para (h) the following new para (ha): "(ha) By omitting from Article 64 the words 'but not before the following Articles numbered 65 to 94 inclusive shall commence to have effect' and substituting 'but not before the following Articles numbered 65 to 79 inclusive, 81 to 85 inclusive and 86 to 94 inclusive shall commence to have effect." Otherwise the appeal is dismissed. The appellants to pay three quarters of the respondents' costs of the appeal. The cross appeal is dismissed with costs. Counsel: For the Appellant: G K Downes QC, F P Carnovale Instructed by: Briggs Paul Dowding For the Respondent: M D Broun QC, H Bleicher Instructed by: Laurence and Laurence