Rofe v Campbell [1931] HCA 16; (1931) 45 CLR 82 (1 May 1931)

This is an appeal from an order of Harvey C.J. in Eq. by which he allowed an appeal by the official liquidator to the Court under sec. 85 of the Companies Act 1899 N.S.W. from the Master who, in settling the list of contributories, excluded the name of the appellant from the list of preferent shareholders, where the official liquidator had placed it. His Honor reversed the decision of the Master and restored the name of the appellant to its place among the preferent shareholders on the list of contributories. The appellant applied for 8,000 preference shares of the original capital of the Company which were offered by the directors for subscription, and his application was accepted and the shares allotted to him by the directors. The appellant's contention was that he did not become a member of the Company, because the articles of association did not authorize the issue of any of the original capital of the Company as preference shares and he had agreed only to take preference shares. His Honor, after examining the relevant articles of association, reached the conclusion that the directors were authorized by the constitution of the Company to issue part of its original capital as preference shares and make the allotment in question. Upon the appeal from this decision the parties agreed that our decision must be confined to the question whether the directors were authorized by the articles to issue part of the original capital as preference shares because, if we were of opinion that the articles did not confer such an authority, questions remained for consideration in the Court below whether, notwithstanding that the contract of membership in all its terms was made by the directors without authority in the first instance, the appellant might be retained upon the list of contributories either as a preferent or as an ordinary shareholder. (Cf. Waverley Hydropathic Co. v. Barrowman[1]; and, if there be a question of ratification, reference may be made to Marshall's Valve Gear Co. v. Manning, Wardle & Co.[2] and to Attorney-General for the Dominion of Canada v. Standard Trust Co. of New York[3].) It was not and could not be contended that the issue of part of the original capital in the form of preference shares was beyond the corporate powers of the Company. Not only is there nothing in the memorandum of association inconsistent with the issue of preference capital, but clause 5, which states the amount and division of the Company's capital, adds the words: "with power to divide the shares in the capital for the time being into several classes, and to attach thereto respectively and" (sic) "preferential deferred, qualified, or special rights, privileges, or conditions."

The question is not one of the existence of a corporate power of the Company to issue preference shares, but of the title of the directors to exercise that power. Moreover, we do not think the question depends upon restrictions, express or implied, contained in the articles preventing inequality or differentiation between shares forming part of the original capital. It is true that art. 7 provides that the capital is £250,000 and comprises 250,000 shares of £1 each, but it can no longer be maintained that this amounts to or imports a contract inter socios that the shares shall be uniform and rank equally (Andrews v. Gas Meter Co.[4]). The true question is whether the articles contain a positive provision empowering the directors to attach to part of the original capital preferential rights. An express power contained in the articles is enough to enable the directors to issue capital as preference shares (Palmer's Company Precedents, Part I., 12th ed., pp. 465-466; Turnbull & Jones v. Turnbull[5]), but the power must be given to them by the articles expressly or by necessary intendment. The learned Judge was of opinion that in fact the power was so conferred upon the directors by art. 10 of the articles of association. This article is as follows:—"The shares shall be under the control of the directors who may allot or otherwise dispose of the same to such persons on such terms and conditions and at such times as the directors think fit and with full power to give to any person the call of any shares either at par or at a premium and for such time and for such consideration as the directors think fit. The directors may reserve any of the shares in the original or increased capital of the Company upon such terms as to payment for same and otherwise as they may deem expedient." We find ourselves unable to agree with this interpretation of the article. We think this article does not deal with the classification of shares but only with the terms and conditions of their allotment and disposal. It places the shares such as they are under the control of the directors. Those shares, with whatever rights, privileges, or priorities belong to them, may be allotted or otherwise disposed of by the directors. The terms and conditions upon which they may be disposed of or allotted are the terms of the contract with the applicant and not part of the rights attached to or inherent in the share as property. We do not think that the words "terms and conditions" can bear so wide a meaning as would be required to authorize the addition to shares of rights and privileges affecting not merely the relation of the applicant to the Company but the relative rights and priorities of existing and future members of the Company. The learned Judge appears to have relied on Harrison v. Mexican Railway Co.[6]. But the language of the article in that case can only bear the meaning that the privileges with which it was sold were to belong to the share. We think our conclusion upon the meaning of art. 10 is supported by the provisions made in arts. 46-52 in relation to new capital which specifically authorize the classification of that capital and its issue with preferential and qualified rights. The respondent, however, contended that art. 117 operated to authorize the directors to issue original capital as preference shares. Art. 117 provides as follows:—"The management of the business of the Company shall be vested in the directors who in addition to the powers and authorities by these presents or otherwise expressly conferred upon them may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not hereby or by statute expressly directed or required to be exercised or done by the Company in general meeting but subject nevertheless to the provisions of the statutes and of these presents and regulations from time to time made by the Company in general meeting. Provided that no regulations so made shall invalidate any prior act of the directors which would have been valid if such regulations had not been made." We agree with the learned Judge in thinking that this article has no such operation. Our reason for this view lies in the terms of the article itself. It is concerned with the management of the business of the Company and not with the relations of the members of the Company inter se. This distinction is well expressed in a passage from the judgment of Bradley J. in Railway Co. v. Allerton[7], quoted in Brice on Ultra Vires, 3rd ed., pp. 579, 580.

For these reasons we are of opinion that the appeal should be allowed and the order of Harvey C.J. in Eq. discharged.

The matter should be remitted to the Supreme Court to be dealt with as may be just.

The appellant must have his costs here and in the Court below out of the assets of the Company.

The capital of the Marlow-Rolls Theatre Limited is, as specified in the memorandum of association, £250,000, divided into 250,000 shares of £1 each, with power to divide the shares in the capital for the time being into several classes, and to attach thereto respectively any preferential deferred, qualified or special rights, privileges or conditions. This capital clause is an old form, and the power taken by it was inserted to meet the decision in Hutton v. Scarborough Cliff Hotel Co. (B)[8], now overruled (Andrews v. Gas Meter Co.[9]; Palmer's Company Precedents, 6th ed., vol. i., p. 221; 12th ed., vol. i., p. 552). The memorandum must specify the amount of capital with which the company proposes to be registered, divided into shares of a certain fixed amount (Companies Act 1899 N.S.W., sec. 7), but in other respects "the rights of the shareholders in respect of their shares and the terms on which additional capital may be raised are matters to be regulated by the articles of association rather than by the memorandum." The inclusion, however, of the power above mentioned in the memorandum of association is not forbidden by law (Andrews v. Gas Meter Co.; In re Welsbach Incandescent Gas Light Co.[10]). It might, I apprehend, be exercised by the shareholders of the company in a meeting duly convened, or without a formal meeting if all the shareholders in fact assented to the issue of shares with preferential rights attached thereto (see Parker & Cooper Ltd. v. Reading[11]), and without any alteration or addition to the articles of association. But the question in this case is whether the directors of the Company have, without any assent of the shareholders, authority to issue to the appellant Rofe 8,000 shares in the original capital of the Company with a cumulative participating preference of ten per cent per annum attached thereto. If the capital of the Company had been increased by the creation of new shares, art. 48 would govern the matter. It provides: "The new shares shall be issued to such persons and upon such terms and conditions and with such rights and privileges annexed thereto as the general meeting resolving upon the creation thereof shall direct and if no direction be given as the directors shall determine and in particular such shares may be issued with a preferential or qualified right to dividends and in the distribution of the assets of the Company and with a special or without any right of voting." But, as to the original capital, the authority of the directors depends upon the construction of other articles of association. Art. 117 provides: "The management of the business of the Company shall be vested in the directors who in addition to the powers and authorities by these presents or otherwise expressly conferred upon them may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not hereby or by statute expressly directed or required to be exercised or done by the Company in general meeting..." In the construction of this article, it is not unimportant to observe that the directors may delegate their powers to committees of their own number, or to the managing director (see arts. 106, 111). Articles in the form of clause 117 authorize the directors doing anything the Company can do (In re Anglo-Danubian Steam Navigation and Colliery Co.[12]; In re Patent File Co.; Ex parte Birmingham Banking Co.[13]; In re Pyle Works [No. 2][14]). But the opening words of the present article suggest this limitation—that what they do must be done in the course of the management of the business of the Company, for the purpose of its business operations; and that, in my opinion, is its true scope. Express authority must be found for directors to vary the capital of a company or to attach privileges and conditions to shares in the capital, and no such authority can be found in the general words of art. 117. (See Brice on Ultra Vires, 3rd ed., p. 579.) Next, art. 10 provides: "The shares shall be under the control of the directors who may allot or otherwise dispose of the same ... on such terms and conditions and at such times as the directors think fit and with full power to give any person the call of any shares either at par or at a premium and for such time and for such consideration as the directors think fit..." But that clause, in my opinion, only gives the directors control over the shares of the Company as they exist or are specified in the memorandum of association, with such rights and privileges attached thereto as may be found in it or in the articles of association. It contains no authority to divide the capital into classes or to attach preferential rights or privileges thereto.

It may be that the appellant can be retained upon the list of contributories of the Company upon some other basis, but this Court, as I understand the matter, confines itself, at the request of the parties, to the determination of a pure question of law, namely, whether the articles of association of the Company upon their proper construction authorize the directors to issue shares in the original capital of the Company with preferential rights attached thereto.

Appeal allowed. Order of Harvey C.J. in Eq. discharged. Matter remitted to the Supreme Court to be dealt with as may be just. Costs of the appellant here and in the Court below out of the assets of the Company.

[1] (1895) 33 Sc.L.R. 131.

[2] (1909) 1 Ch. 267, at p. 272, per Neville J.

[3] (1911) A.C. 498, at p. 504, per Viscount Haldane.

[4] (1897) 1 Ch. 361.

[5] (1913) 32 N.Z.L.R. 670.

[6] (1875) L.R. 19 Eq. 358.

[7] [1873] USSC 137; (1873) 18 Wall. 233, at pp. 235-236.

[8] (1865) 2 Dr. & Sm. 521; 62 E.R. 717.

[9] (1897) 1 Ch. 361.

[10] (1904) 1 Ch. 87.

[11] (1926) Ch. 975.

[12] (1875) L.R. 20 Eq. 339.

[13] (1870) 6 Ch. App. 83.

[14] (1891) 1 Ch. 173.

High Court of Australia

Rofe v Campbell [1931] HCA 16; (1931) 45 CLR 82 (1 May 1931)

HIGH COURT OF AUSTRALIA