Para Wirra Gold & Bismuth Mining Syndicate v Mather [1934] HCA 46; (1934) 51 CLR 582 (15 October 1934)

Para Wirra Gold & Bismuth Mining Syndicate No Liability and Another Plaintiffs, Appellants; and Mather and Others Defendants, Respondents.

Towards the end of 1932 a no liability mining company was registered with a capital of 400 shares of £10. In the earlier part of the following year it proceeded to take up three "working options" over claims situated in one locality. One of these options was granted by the respondents, who are defendants in an action for specific performance brought to enforce the contract of sale arising from the exercise of the option. The original term was short, about fifteen days, but the agreement giving the option provided for an extension of a month. The consideration for the original term was a shilling only. The consideration for the sale to result from the exercise of the option was described as follows: "The consideration of the payment of a further sum of £500 in cash and of the allotment and issue to the vendors or their nominees or nominee of 1,000 fully paid up shares of £1 each in the capital of any company having a registered capital of not more than £50,000 divided into shares of £1 each (whether now or hereafter to be incorporated) which shall be formed for the purpose of exercising and shall exercise the said option." The provision for extending the option made it a condition that the sum of £500 should be paid as consideration for the extension, but allowed it to be taken into account as a payment of purchase money upon the subsequent exercise of the option.

The company elected to take an extension of the option and paid the £500. During its currency the company worked or exploited the claim at a cost of about £700. At the same time it exploited one of the neighbouring claims over which it had taken an option. Before the option expired, some attempt appears to have been made to arrange for raising capital from the public but without success. Then the company set about reconstructing. A little less than three weeks before the expiry of the option, it gave notice of the necessary extraordinary meeting and special resolutions, which were duly passed. Three days before the expiry of the option it registered a new no liability mining company with a capital of £50,000 divided into 50,000 shares of £1. On the last day of the option it executed the reconstruction agreement with the new company, which took an assignment of the option and notified the respondents, the vendors, of the assignment of the option and of the intention to exercise it and allotted to them 1,000 shares and tendered the scrip. The vendors, who in the meantime had, at their own request, been shown the reconstruction agreement, refused the tender and declined to complete the sale. The agreement of reconstruction provided for a consideration of 27,345 shares in the new company, of which 9,945 were allotted to the old company as fully paid up and 17,400 as paid up to 17s. 6d. The assets of the old company, for which this consideration was given, consisted substantially in nothing more than the options. In stating his clients' objection to complete the transaction, the respondents' solicitor wrote: "It was never in the contemplation of the parties to the option agreement that my clients would be offered shares in a reconstructed company which is virtually the same as the syndicate (i.e., the old company) itself and which even if the reconstruction is successful will have little, if any, capital to carry on development work." To this the solicitors for the company replied: "As the syndicate held rights over about 80 acres adjoining and in addition to your clients' 10 acres, it must have been in its contemplation that it would receive some consideration in the new company in respect thereof, and the constitution of the new company is entirely different from that of the old company."

These rival statements exhibit clearly the difficulty which is created by the terms of the option agreement expressing the consideration. The limitation of £50,000 placed upon the capital of the company contemplated by that agreement as the body to exercise the option ensures that the respondents' shares shall amount to no less than a fiftieth interest. It leaves it possible to issue £49,000 capital payable in cash and thus to raise money for actual mining operations. But no positive provision is made requiring that all or a specified part of this capital shall be issued only for a consideration in money representing new capital, and it is difficult to suppose that the old company was to receive nothing for the expenditure in exploiting the respondents' claims, and, either was not to transfer to the new company the neighbouring claims, or was not to receive any consideration therefor. While the probability is high that the parties intended that a large part of the company's shares should be issued for new capital, an equal probability exists that both intended that some of the shares should be allotted to the old company or its shareholders. The parties have omitted to deal with the question how much of the contemplated new company's capital is to be available for these conflicting purposes, and we can discover no materials warranting an implication of any term with which the course actually taken by the company is inconsistent. The fact that the new company is a reconstruction of the old does not prevent it being another and distinct company. It is said that the capital allotted as paid up (£25,170) is grossly in excess of the value of the assets taken as the consideration for its allotment. But this allegation rests only upon the suspicion which naturally arises from the steps in the transaction. No affirmative proof was led in support of it and indeed no case appears to have been made attacking the bona fides of the value assigned to the assets, including the options. Whether any and what additional information as to the value of the claims was obtained during the currency of the options does not appear. All that we know is that the parties regarded one of them as worth the trouble and cost of litigation.

By the judgment under appeal, Angas Parsons J. dismissed the plaintiff's claim for specific performance upon the ground that, as promoter of the new company, the old company owed a fiduciary duty to the new company and its future shareholders including the respondents, which it had broken by causing the allotment to itself of the 27,345 shares. No doubt the old company was promoter of the new. "In equity the promoters of a company stand in a fiduciary relation to ... those persons whom they induce to become shareholders in it, and cannot in equity bind the company by any contract with themselves without fully and fairly disclosing to the company all material facts which the company ought to know" (per Lindley M.R. in Lagunas Nitrate Co. v. Lagunas Syndicate[1]). It is, of course, well settled that disclosure to a board of directors is insufficient unless it is an independent board, and, in the present case, the board of the new company was identical with that of the old. But, in our opinion, these principles have no application to the complaint of the respondents. Their complaint is not as shareholders in a company which has suffered from a breach of fiduciary duty. It is as contracting parties, vendors to the new company and persons contracting with the old company. It is true that, under the contract, they are entitled to shares in the new company. That is part of the consideration bargained for. For all that appears, allottees of shares in the company, as such, may be entitled to cause properly constituted proceedings to be taken seeking relief on behalf of the new company in relation to the reconstruction agreement. But the principle requiring disclosure by promoters does not appear to us to have any application to the agreement with the respondents by which, as vendors, they agreed with the old company to give the option to the new. They stipulated for a specified consideration which included shares. If, upon its proper construction, that agreement required that the shares should be in an independent company with which the old company made no contract, or no contract entitling it to a consideration such as it took, the agreement has not been performed and there is no need for the doctrine of equity. But, in our opinion, the agreement will not bear that construction. It is so expressed as to admit of the new company taking over the assets of the old for shares. The principle has no application to a contract made between parties at arm's length. Merely because the agreement provides that one of them shall promote a company, shares in which shall form part of the consideration received by the other, they cannot thus suddenly be placed in a fiduciary relation.

We think the appeal should be allowed. The judgment appealed from should be discharged and an order for specific performance made.

The appellant, the Para Wirra Gold & Bismuth Syndicate No Liability—hereinafter called the old company—was incorporated in the State of South Australia with a nominal capital of £4,000, divided into four hundred shares of £10 each. One hundred and seventeen of these shares were issued, or agreed to be issued, as fully paid up, one hundred and seventy-five were contributory shares, and one hundred and eight were held in reserve. By an agreement in writing dated 4th March 1933, the respondents—in the agreement with their and each of their executors and administrators called the vendors—agreed to grant to the old company—in the agreement with its successors and assigns called the purchaser—an option to purchase certain mineral reef claims in the State of South Australia. The option was in these terms: "In consideration of the sum of one shilling (1s.) on or before the execution hereof paid by the purchaser to the vendors (the receipt whereof the vendors do by their execution hereof acknowledge) and for other the considerations hereinafter appearing the vendors hereby grant to the purchaser the sole and exclusive option to purchase free from encumbrances at any time on or before the 19th day of March 1933 the said premises and all the right title and interest of the vendors therein and thereto at or for the consideration of the payment to the vendors of the further sum of five hundred pounds (£500) in cash and of the allotment and issue to the vendors or their nominees or nominee of one thousand (1,000) fully paid up shares of one pound (£1) each in the capital of any company having a registered capital of not more than fifty thousand pounds (£50,000) divided into shares of one pound (£1) each (whether now or hereafter to be incorporated) which shall be formed for the purpose of exercising and shall exercise the said option to purchase." It was a further term of the option agreement that the purchaser should have the right to extend the period of the option to purchase, up to and inclusive of 19th June 1933, upon payment of £500. The right to extend was in these terms: "The purchaser shall have the right at any time on or before the said the 19th day of March 1933 to extend the period of the said option to purchase up to and inclusive of the 19th day of June 1933. If the purchaser desires to so extend the said period he shall on or before the said the 19th day of March 1933 give notice in writing of such his intention to the vendors and shall at the same time pay to the vendors or their solicitor the sum of five hundred pounds (£500) and thereupon the period for the exercise of the said option to purchase shall be extended accordingly and this agreement shall be read and construed subject to the provisions of this clause as if the words and figures June 1933 were substituted for the words and figures March 1933 wherever the same occur other than in this clause. If the purchaser shall subsequently exercise the said option to purchase the said sum of £500 shall be taken into account as and deemed to be a payment on account of the said purchase consideration but otherwise shall be deemed to be the consideration for the extension of the said option to purchase as aforesaid. Provided that if the purchaser shall form and register the company referred to in clause 1 of this agreement before the expiration of the extended period of the said option the scrip for the said 1,000 shares in the said company shall be delivered to the vendors or their solicitor forthwith upon the completion of the formation and registration of the said company without waiting for the expiry of the said extended period of option."

On 18th March 1933 the purchaser—the old company—exercised this right to extend the option, and paid to the vendors the sum of £500 accordingly. A director of the old company deposed that the option was taken up for the purpose of floating it off to the public, and that an attempt was made to do so, but failed. It was then resolved to wind up the old company and to reconstruct. Accordingly, the old company was wound up voluntarily, and a new company was formed to take over its assets and to acquire and exercise the option to purchase under the agreement of the 4th March already mentioned. It was incorporated on 16th June 1933, and was named the Para Wirra Gold Mines No Liability. Its capital was £50,000, divided into 50,000 shares of £1 each. By an agreement dated 19th June 1933 between the old company and its liquidator and the new company, the concessions, options, goods, chattels, moneys, undertakings and goodwill of the old company were transferred and assigned to the new company, or agreed so to be transferred and assigned, and the new company undertook to satisfy and discharge all the obligations of the old company and keep it indemnified. The assets so transferred and assigned included the mineral reef claims already mentioned, and also other assets. The new company issued to members of the old company as part of the consideration for the transfer 9,945 shares fully paid up, and 27,345 were, upon payment of 6d. per share, issued as paid up to 17s. 6d. It also allotted, in three parcels, 1,000 shares fully paid up, to the vendors of the option already mentioned. On 19th June 1933, the old and new companies gave notice to the vendors or their solicitor that the new company was formed, inter alia, to exercise and didthereby exercise the option to purchase the mineral reef claims mentioned in the agreement of 4th March 1933, and tendered share certificates for 1,000 shares in the new company, fully paid up. But the tender was rejected, and the vendors intimated that they considered themselves no longer bound by the option agreement. Action was then brought in the Supreme Court of South Australia by the old and new companies against the vendors for specific performance of the option agreement, but it was dismissed by Angas Parsons J. The learned Judge was of opinion that the old company was under a fiduciary duty to the vendors, in promoting a new company, to act in a manner fair and just, and therefore equitable, to the vendors, and he held that their interests were entirely disregarded and that it would be unconscionable to compel them to complete on terms which the facts showed to be unjust. An appeal from that decision is brought to this Court, and now falls for determination.

The object of forming a new company was, undoubtedly, to obtain more working capital than was possessed by the old company. But companies are usually incorporated, for mining purposes, on the noliability system, and the implication is clear, I think, that the option agreement did not exclude a company formed on this system. The acceptance of a share in such a company does not involve any contract on the part of the person accepting the same to pay any calls in respect thereof, or any contributions to the debts and liabilities of the company, and such person is not liable to be sued for any such calls or contributions (Companies Act 1892 S.A. (No. 557), sec. 219). The amount that would be subscribed in such a company, unless paid up in cash on the allotment of shares, was necessarily uncertain. And indeed, the option agreement stipulated that the 1,000 shares to be allotted and issued to the vendors might be in any company having a registered capital of not more than £50,000, divided into shares of £1 each. The amount of the working capital contemplated by the parties cannot therefore be gathered, expressly or by implication, from their agreement. It was urged that the option agreement did not contemplate a reconstruction arrangement. I see no substance in this contention, for the reconstructed company is a new and independent company. The argument went further, for it suggested that the agreement could not warrant the transfer of the option to the new company and the issue by it of shares fully or partly paid up as a consideration for the transfer: that would amount to a resale of the option at an excessive value destroying the balance of interests contemplated by the agreement. But I can see nothing in the agreement which entitles the vendors to anything more than 1,000 shares in a company with a registered capital of not more than £50,000. And further, on general business considerations, the old company and its shareholders were entitled to expect some consideration for the option procured and transferred to the new company, and the recoupment of any expenditure incurred. The issue of fully or partly paid up shares in the new company is just the consideration that might be expected. It is not the issue of the shares that is really objected to, but the amount that is credited as paid up upon those shares. The old company promoted the new company, and therefore stood in a fiduciary relation to it, and to its shareholders and future allottees of shares (Erlanger v. New Sombrero Phosphate Co.[2]; In re Leeds and Hanley Theatres of Varieties Ltd.[3]). It is suggested that the reconstruction arrangement, whereby the holders of 292 shares in the old company credited with the sum of £2,920 paid up thereon became entitled to 27,345 shares in the new company credited with the sum of £25,170 paid up thereon, was in breach of this fiduciary duty, and entitled the new company to rescind the arrangement. It may well be that, in proper proceedings, the new company and its shareholders could rescind the arrangement, but that depends a good deal upon the real value of the assets transferred and how far rescission is possible in the present circumstances; and both these questions are left in obscurity by the evidence. But I am unable to follow how this fiduciary relationship arose from the contract embodied in the option agreement. It gave an option to purchase and nothing more. It stipulated the consideration that should be given for the option: cash and shares in any company having a registered capital of not more than £50,000 divided into shares of £1 each. It was for the old company to find such a company, or to float it, and no stipulations were made as to how or in what proportion the capital in such a company was to be contributed. All the vendors bargained for was 1,000 shares fully paid up in a company of the character mentioned. The option agreement may have been imprudent, but it creates no fiduciary relationship between the parties to it, whatever relationship may be established between the old company and the new company and its shareholders, in connection with the reconstruction arrangement. (Cf. Re Cape Breton Co.[4]; Burland v. Earle[5].) The vendors must take their stand upon the true construction of the option agreement, and any necessary business implications arising therefrom. And in my opinion they fail to establish any defence to a claim for its enforcement.

The appeal should be allowed and a decree made for the specific performance of the option agreement.

Appeal allowed with costs. Judgment of the Supreme Court discharged. In lieu thereof order as follows:—Declare that the agreement in the pleadings mentioned arising from the exercise on 19th June 1933 of the option, dated 4th March 1933, which was assigned to the plaintiff, Para Wirra Gold Mines No Liability, ought to be specifically performed and carried into execution and order and adjudge the same accordingly. Let all parties be at liberty to apply to the Supreme Court for consequent directions or otherwise as they may be advised. Order that the defendants pay the plaintiff's costs of this action up to and including this judgment. Remit the cause to the Supreme Court.

[1] (1899) 2 Ch. 392, at p. 422.

[2] (1878) 3 App. Cas. 1218.

[3] (1902) 2 Ch. 809.

[4] (1885) 29 Ch. D. 795; (1887) 12 App. Cas. 652.

[5] (1902) A.C. 83.

High Court of Australia

Para Wirra Gold & Bismuth Mining Syndicate v Mather [1934] HCA 46; (1934) 51 CLR 582 (15 October 1934)

HIGH COURT OF AUSTRALIA