New Lambton Land & Coal Co Ltd v London Bank of Australia Ltd [1904] HCA 23; (1904) 1 CLR 524 (6 September 1904)

HIGH COURT OF AUSTRALIA

The New Lambton Land & Coal Co. Ltd. Appellant; and The London Bank of Australia Ltd., Edward William Bancroft, and James Lindsay Ballantyne Respondents.

H C of A

On appeal from the Supreme Court of New South Wales.

6 September 1904

Griffith, C.J., Barton and O'Connor, JJ.

Wise, K.C., and Leverrier, for the appellants.

Dr. Cullen and Lamb, for the respondents.

Griffith, C.J.

This is an appeal from an order made by Mr. Justice Walker, on an application under sec. 232 of the Companies Act for rectification of the appellants' share register by entering upon it the transfer of 7,000 shares, which stood in the name of one Alexander Brown, to Messrs. Bancroft and Ballantyne, nominees of the London Bank of Australia Limited. The bank are, with Messrs. Bancroft and Ballantyne, respondents in the appeal. The order appealed from was made on 24th May, and it appears from the order that the motion for rectification was first made on notice given on behalf of the respondents, the London Bank, alone. At the hearing the Judge in Equity ordered an amendment to be made in the notice of motion, by joining Bancroft and Ballantyne with the bank, as applicants. The order states that the amendment was made by the Judge after hearing arguments of counsel, and then recites that the London Bank had undertaken to indemnify the appellant company in respect of any moneys due or becoming due to the company on the 7,000 shares in the notice of motion mentioned for which Alexander Brown would have been liable if his name had remained on the register as holder of the shares, and proceeds to order the appellant company to forth with register the seven transfers of shares of which particulars are then given, and to rectify the share register of the company by removing from it the name of Alexander Brown and entering the names of James Lindsay Ballantyne and Edward William Bancroft as holders of the shares mentioned in the transfers. An objection was taken that the amendment of the notice of motion was unauthorized by law, and that on that ground the motion should have been dismissed and this appeal should be allowed. The transfers in question were seven in number, for 1,000 shares each, which were executed by Alexander Brown in blank, with authority to fill in the names of transferees, and which have been so filled in with the names of Ballantyne and Bancroft, 6,000 shares being transferred to the former and 1,000 to the latter. As a matter of fact Ballantyne and Bancroft are nominees of the bank, which is the only party beneficially interested in the shares. The bank made the application for rectification of the register. Before that the transfers had been sent to the company for registration and the company had refused to register them. Then the bank, being the only party interested, made the application to the Court in its own name, and during the hearing applied for an amendment as stated. The application was objected to by counsel for the respondent company, but was granted. It is contended now that the Court had no power to make the amendment. First of all it is urged that the motion by the bank could not be heard by the Court, because it did not come within the meaning of sec. 232, which provides that application may be made by "the person or member aggrieved." In this case, it is said, the bank is not a member, and the only persons aggrieved were Bancroft and Ballantyne. Technically, perhaps, the transferees are the only persons aggrieved. But as the case is now presented to us, it is not necessary to decide this point, though it might have been if there had been no amendment. In favour of the contention it is urged that this is a section which gives a summary remedy and procedure, and can only be taken advantage of by the persons for whose relief it is expressly intended. But the Court of Equity could give the same relief in a suit, and if the application had been made to the Supreme Court in its equitable jurisdiction that Court would have entertained it, and the principles of equity would have been applied. One of those principles is that the person who is in substance interested in a matter may move the Court in his own name, and may join the trustee as a party in the suit, either as a plaintiff or a defendant. But the power of the Court to entertain the suit and add necessary parties is never restricted merely on account of a original absence of formal parties.

It seems probable that the section was intended merely to substitute a summary method of proceeding for the old remedy by suit in equity. If that is so, the ordinary principles that are applied in the Court of Equity should be applied by the Court which deals with applications under the section. Supposing, however, that this is not so, and that under its Statutes the Supreme Court of New South Wales has no general power of amendment, then the matter must be regarded not as one of form but as a matter of substance and treated accordingly. The words of the section are "may by motion in the Supreme Court, either in its common law or in its equitable jurisdiction, or by application to a Judge in Chambers, or in such other manner as the Court may direct." There is, therefore, no restriction upon the powers of the Court as to the mode of hearing the application. The substance of the matter, if there was no power of amendment, is that a new motion was made on notice given orally on behalf of Ballantyne and Bancroft in open Court, in the presence of all the parties interested, after all the evidence had been given, and the whole of the facts were before the Court, and that under those circumstances the present order was made. In that view there is, in my opinion, nothing in the objection. It is said that the evidence given on the original motion was not admissible on the new one. There is, however, no weight in that objection. The affidavits were properly entitled, although, when filed, they were intended to be used on an application by different applicants. But, where an objection is taken before a Court of Appeal as to the reception of evidence, it is never allowed if the defect could have been cured by amendment or adjournment in the Court below, without prejudice to the objecting party. That objection, therefore, fails. There was another objection, also a technical one, viz., that the application to the company for registration was not made in the name of the persons entitled to be registered, that it should have been made in the names of Ballantyne and Bancroft, and not of the bank. But it was proved that the transfers were sent to the company with a request for registration by the solicitors for the bank, who were the parties beneficially interested, and, inasmuch as both Ballantyne and Bancroft were officers and nominees of the bank, we may take it as a matter of inference of fact that the application was made and understood by the company to be made on behalf of the persons formally entitled. Substantially the bank was the transferee.

With respect to the merits there is no dispute as to the law. A share in a joint stock company is defined by sec. 235, which provides that it "shall be personal property, capable of being transferred in manner provided by the rules of the company." Now the regulations of a company may, and often do, modify this right of transfer. Sec.29 of the articles of association of the appellant company is in the following terms: [His Honor read the article.] The contention made for the appellants was that this article practically made the shares in the company non-transferable, and that it was in the absolute discretion of the directors to decide whether shares should be transferred or not. That, however, is inconsistent with sec. 235 and with decisions which have been given in English cases under the Companies Acts, since that Act became law. The earliest is Robinson v. Chartered Bank, L.R. 1 Eq., 32, a case of a bill to compel a company to allow a transfer of shares, in which it was held that the company had practically, by refusing to transfer, deprived the plaintiffs of the enjoyment of their property, and that a refusal to make any transfer at all was not a reasonable exercise of their powers by the directors. The next case was Ex parte Penney, L.R. 8 Ch., 446. There the company was an insurance company, not at the time under the Companies Act of 1862, but afterwards registered under it. A clause of the deed of settlement provided that "every shareholder shall be at liberty to sell and transfer his shares to any other person who shall already be a shareholder, or who shall have been approved of as such by the board of directors, and that no person not already a shareholder, or the executors or administrators, legatee or next of kin, of any shareholder shall be entitled to become the transferee of any share unless approved of by the board." In that case the only facts were that some shares were sold on the Stock Exchange in the ordinary way, and the transfer was executed and lodged for registration at the company's office, but the directors declined to register the transfer or give any reason for their refusal, and an affidavit filed by the secretary stated that the directors had arrived at their determination "upon deliberation and after consideration, and with reference only to the circumstances of the case." That was all that was before the Court. James, L.J., said (at p. 449): "No doubt the directors are in a fiduciary position both towards the company and towards every shareholder in it. It is very easy to conceive cases such as those cases to which we have been referred, in which this Court would interfere with any violation of the fiduciary duty so reposed in the directors. But in order to interfere upon that ground it must be made out that the directors have been acting from some improper motive, or arbitrarily and capriciously. That must be alleged and proved, and the person who has a right to allege and prove it is the shareholder who seeks to be removed from the list of shareholders and to substitute another person for himself." He goes on to give some instances of an improper exercise of the power of refusal, and further on he says: "If there is no such corrupt or arbitrary conduct as between the directors and the person who is seeking to transfer his shares, it does not appear to me that this Court has any jurisdiction to sit as a Court of Appeal from the deliberate decision of the board of directors, to whom, by the Constitution of the company, the question of determining the eligibility or non-eligibility of new members is committed. If the directors had been minded, and the Court was satisfied that they were minded, whether they expressed it or not positively to prevent a shareholder from parting with his shares, unless upon complying with some condition which they chose to impose, the Court would probably, in exercise of its duty as between the cestui que trust and the trustees, interfere to redress the mischief, either by compelling the transfer or giving damages, or in some mode or other to redress the mischief which the shareholder would have had a just right to complain of." That learned Lord Justice indicated as his opinion that the directors have no power to prevent a shareholder altogether from parting with his shares. In that case nothing appeared but that the directors refused to register the transfer without giving any reason whatever. Mellish, L.J., pointed out that "this being an insurance company, it is quite obvious that it may be a matter of very great importance to the company that they should have a substantial body of shareholders;" and, at the conclusion of his judgment, he said: "I am, therefore, of opinion that in order to preserve to the company the right which is given by the articles a shareholder is not to be put upon the register if the board of directors do not assent to him, and it is absolutely necessary that they should not be bound to give their reasons, although I perfectly agree that if it can be shown affirmatively that they are exercising their power capriciously and wantonly, that may be ground for the Court interfering."

Then he referred to Robinson's Case, taking it to be a case in which the directors had refused to allow a transfer at all to anybody, and added: "I quite agree that this would be a breach of trust towards the shareholders. They have no right to say, we will force a particular shareholder to continue a shareholder, and we will not allow him to transfer his shares at all. That would be an abuse of their power. In the same way it would be an abuse of this power to object, on any ground not applying personally to the transferee, to say, for instance, that a particular shareholder should not transfer his shares till he had given security for the calls. These would be plain cases of abuse, and I do not find any single case where it has been held that the directors, under a power like this, are bound to communicate the reasons for which they reject the intended shareholder." That was in 1872, and was decided by Judges very learned in company law. Then in 1891 came Re Bell Bros. Ltd., 65 L.T. (N.S.), 245, before Chitty, J. I will read a few words from the beginning of his judgment. He says (at p. 245): "According to the Constitution of this company, every shareholder is entitled to transfer his shares to any person not being an infant, lunatic, married woman or under any legal disability. This right, which is a right of property, is subject to the discretionary power conferred on the directors by Articles 18 and 34, of approving of the person to whom the transfer is made, and of rejecting the transfer on the ground that they do not approve of the transferee. The discretionary power is of a fiduciary nature, and must be exercised in good faith; that is legitimately for the purpose for which it is conferred. It must not be exercised corruptly, or fraudulently, or arbitrarily, or capriciously, or wantonly. It may not be exercised for a collateral purpose. In exercising it, the directors must act in good faith in the interests of the company, and with due regard to the shareholder's right to transfer his shares, and they must fairly consider the question of the transferee's fitness at a board meeting. When the Court once arrives at the conclusion that the directors have in good faith rejected a tranfer on the ground that the transferee is not a fit person to become a member of the company, it will not review the directors' decision"; and goes on to state that "the directors are not bound out of Court to assign their reasons for disapproving. If they decline to do so, or if their decision is challenged in Court and they refrain from giving evidence, upon which a cross-examination may take place as to their reasons, or if, in giving such evidence, they refrain from stating their reasons, the Court will not, merely on that account, draw unfavourable inferences against them." The learned Judge then went on to examine the facts of the case, to see whether the directors had brought themselves within the rule.

In the Coalport China Company's Case, (1895) 2 Ch., 404, which is the only other one that need be mentioned, there was nothing in the case except that the directors had refused to register the transfer. Lindley, L.J., pointed out (at p.407), that it was for those who say that the directors have exercised their power improperly to give some evidence to that effect. "Here," he said, "there is absolutely none." And later on, he said (at p.409): "I have not the slightest doubt that the Court has ample power to control the refusal of directors, or the exercise by them of their power to refuse, provided that there is some evidence which justifies the Court in coming to the conclusion that they have not done their duty; but in the absence of all such evidence the Court has no right to presume — it is contrary to the ordinary principles of justice to do so — that they have done wrong, but it must be presumed that they have done right." Rigby, L.J., summed up the rule again thus: "Even though in terms the power is absolute, it is a fiduciary power, it is to be exercised for the benefit of the company, and with due regard to the rights of the transferee; so that no power is absolute in that sense." It appears, therefore, that the directors, in exercising this power, must have due regard to the rights of the transferee, and also to those of the shareholders.

Bearing in mind these principles, the next thing is to apply them to the facts of the present case, as was done by Chitty, J., in Bell Bros.' Case. These facts are interesting, and, when carefully looked at and considered, they leave no room for doubt as to the conclusion which must be drawn as to the conduct and motives of the directors in refusing to register the transfer.

[His Honor then stated the facts as reported above, and proceeded.]

Now what inference is to be drawn from these facts? In the first place, when the transfers were sent in for registration, the managing director, holding 7,498 shares, refuses to register his own transfers. Holding half the shares in the company, his influence with the board must have preponderated. It appears that he had some dispute with his transferees, and the bank had to take proceedings against him in equity. He remained a director during the proceedings, and again the request to register was refused. At the moment that the decree is pronounced and he is restrained by injunction from interfering with or hindering the registration, he resigns from the board, and a sufficient number of his shares are transferred to Forsyth, who becomes a director in his place, whilst he himself remains a shareholder in the company with one share. The whole matter is then brought before the company, and the three directors. Forsyth, W.L. Brown, the son of the transferror, and Sir George Dibbs, the last-named being indebted to the extent of $20,000 to the bank, refuse to register the transfer, giving no reason whatever for their refusal. What conclusion are we to draw? The only conclusion that is possible for sensible men to draw in such circumstances is that the company was resolved that the bank should not get the benefit of Brown's transfer, and should not get the benefit of the trust. It was all very well for the Court to declare that Brown was a trustee for the bank, and to order him to abstain from hindering the registration of the transfers; the company said, "we shall not allow any other person to join the company except those whose names are already on the register." Clearly, according to the authorities, the directors had no right to act in that way. Their refusal to register was clearly within the rule that the directors will not be allowed to absolutely prohibit the transfer of shares by a shareholder, and, not only that, it was obviously done to prevent the transferees from enjoying their rights. The company has done nothing to suggest that there was any bonâ fide objection to the bank's nominee. On the contrary, when invited to say what were their reasons they absolutely declined to give any. The case in that respect differs from any of the others that have been referred to. The bank having shown that the nominees were officers of the bank, and having requested the company to say whether they had any objection to them personally, and to suggest any nominees in their place, the company simply say that they decline to register. Under these circumstances I think that the order of the learned Judge was right in directing that the share register be rectified by registering the transfers and entering the names of the bank's nominees as holders of the shares transferred.

There is another matter to be considered. It appears that the bank, by letter, offered to guarantee the amount of Brown's liability for calls on the shares, if any calls could be made on them. There was a suggestion that Brown could have been made liable for the full amount of the shares although they were nominally paid up. At the hearing counsel for the bank, some-what incautiously perhaps, offered to give such a guarantee. The learned Judge accepted the offer, and practically made his judgment dependent on that condition, and the undertaking is embodied in the order. There does not seem to have been any argument on the point. But it appears to me that if the Court could not make the order except on such an undertaking it could not make it all. I think that it was not in the power of the Court to impose such a condition, and it would be a dangerous precedent to allow it to stand as part of the order.

As to the suggested reasons that might have operated on the directors in refusing registration: First, as to the suggestion that the liability of Brown was an asset which the directors might naturally be disinclined to part with, that was sufficiently disposed of during the argument. The right of the transferror is a right of property the exercise of which can only be prevented for some valid reason. Secondly, if the liability of the shareholder for the full amount of the shares, as uncalled capital, is a sufficient reason for refusing to register a transfer of his shares, that is practically denying the right of transfer to anyone who has signed the memorandum of association of a company. The third reason, that the bank's nominees might have been considered disagreeable persons, is met by the conduct of the directors when the bank offered to substitute any nominees whom the directors would name. The fourth reason, that it was undesirable for a bank to have a controlling or large influence in the company, is met by Bell Bros.' Case. The fifth reason, that the company might naturally object to registering nominees, is met by Bell Bros.' Case, and the case of Pender v. Lushington. These are all the reasons that have been suggested, and on examination they all appear to be idle and trivial. The real reason is to be discovered from the evidence, and it amounted to a breach of trust on the part of the directors, if they acted upon the motives that their counsel has suggested.

The order therefore should be amended by omitting the condition as to the undertaking, but with that variation it will be affirmed.

Barton, J.

The judgment of the Chief Justice has been so exhaustive that I feel that I could not with advantage add anything to what he has said.

O'Connor, J.

I am of the same opinion.

Appeal dismissed. Order of Supreme Court varied by omitting undertaking. Order so varied affirmed. Appellants to pay the costs of the appeal.

Solicitors, for appellants, Dawson, Waldron & Glover.

Solicitors, for respondents, Macnamara & Smith.