M Dalley & Co Pty Ltd v Sims [1968] HCA 82; (1968) 120 CLR 603 (11 December 1968)

HIGH COURT OF AUSTRALIA

M. DALLEY & CO. PTY. LTD. v. SIMS [1968] HCA 82; (1968) 120 CLR 603

Companies

High Court of Australia
Barwick C.J.(1), Kitto(2) and Menzies(3) JJ.

CATCHWORDS

Companies - Shares - Classes - Employees' shares - Increase of capital - Validity - No resolution of shareholders - Acquiescence of all shareholders - Oppression - Order that directors purchase shares held by oppressed shareholders - Companies Act 1961 (Vict.), s. 186.

HEARING

Melbourne, 1968, October 15-18;
Sydney, 1968, December 11. 11:12:1968
APPEAL from the Supreme Court of Victoria.

DECISION

December 11.
The following written judgments were delivered:-
BARWICK C.J. In December 1925 Mrs. Marie Dalley purchased a business business was that of a machinery and scrap metal merchant. In 1930 the appellant company was incorporated and the whole of the undertaking sold to it. From then until 1965 the company had as its governing director, Mrs. Marie Dalley. By the articles of the company the governing director could exercise all the powers of the board of directors as well as exercise the power of appointing its members (arts. 51 and 52). The shareholders of the company, other than Mrs. Dalley and the employees to whom I shall later refer, at the times material to the resolution of the questions in this suit were: Clare Cascarret; Francis Thomas Currie; Ida Currie; Ronald Currie; Joan Litchfield; William O'Brien; L. Smith (nee Currie). Of these, all were related either in blood or by marriage to Mrs. Dalley; and at least some of them had obtained their shares by gift from her. (at p608)

2. Article 13 of the company's articles, taken verbatim from a precedent in Palmer's Company Precedents (see 16th ed., vol. 1, p. 815), is in the following terms:

"13. The directors may remunerate any employee of the Company by
means of a share of the profits of the Company or by remuneration
varying with the profits earned or the dividends declared or with
the output or turnover of the Company and such remuneration may be
in addition to the ordinary remuneration of such employee and may be
either in cash or by way of allotment of shares fully or partly paid
as the directors think fit. And the directors may establish such
schemes for remuneration of employees in manner aforesaid or for
giving the employees or any of them a share in the management or
control of the Company as the directors may in their absolute
discretion think fit and the directors may from time to time vary
any such schemes and may attach to any shares allotted to employees
such special rights privileges conditions or restrictions as they
think fit provided always that any shares which shall be issued to
any employee of the Company by way of remuneration or share of
profits as aforesaid shall be called 'employee shares' and shall be
subject to the provisions hereinafter contained relating to employee
shares: -
(a) Each of the employees' shares shall whilst it
is held by an employee of the Company rank
for dividend as if it were an ordinary share
of One pound fully paid up.
(b) An employees' share shall not confer the
right to vote or to attend at general
meetings.
(c) An employees' share shall not be transferable except
as provided by paragraph (d) of this clause.
(d) Whenever an employees' share is allotted or pursuant to this
clause is transferred to any employee of the Company such
employee shall be entitled to retain and hold the same so long
as he remains an employee of the Company and if by death
resignation withdrawal or otherwise he cease to be an employee
of the Company he or his executors or administrators shall be
bound upon the request in writing of the directors to transfer
such share to such person as the directors may nominate and if
such person is not an employee of the Company such person
shall at any time on the request of the directors transfer
such share to any employee of the Company.
(dd) The request in writing of the Directors to transfer such
shares to such person as the Directors may nominate shall
state the consideration payable by the transferee for such
shares which shall be paid to the transferor or his Executors
or Administrators on the execution of the transfer. The
Directors' decision as to the consideration shall be final and
binding on all parties. (As Amd. Spec. Res. 21/8/1940.)
(e) If any person who ought in conformity with the last preceding
paragraph of this clause to transfer any shares makes default
in transferring the same the directors may by writing under
the common seal appoint any person to make the transfer on
behalf of the person in default and a transfer by such
appointee shall be as effective as if it were duly executed by
the person so in default. A certificate under the common seal
that such power of appointment has arisen shall be conclusive
for all purposes.
(f) In this article 'employee of the Company' means and includes
any manager departmental manager foreman clerk or workman but
the term does not include directors or auditors." (at p610)

3. According to the evidence in these proceedings, in 1940 Mrs. Dalley fell so ill that she began to contemplate the possibility of her death. At that time, the respondent, Mrs. Sims, was employed by the company as a clerk. Though so designated, it would seem that her role and services in and to the company were considerable and had been so for some fifteen years. Indeed, she had been employed by the previous proprietor of the business and had brought into her employment, first by Mrs. Dalley and later by the company, a knowledge of the running of that business. Her sister, Mrs. D'Arcy, was the secretary of the company. Mrs. Dalley at this time sent for the company's accountant who was a public accountant in practice on his own account and who had been familiar for over seven years with the company, its constitution and its affairs. Mrs. Dalley informed him that she wished to recognize the long service of four employees of the company of whom the respondent was one and her sister another: and that she wished to make each a gift of shares in the company. The accountant counselled her to provide for them in her will. This she declined to do. She directed him that shares were to be allotted to each of the four employees in specified number. In the case of Mrs. Sims and of her sister the number was 500. The accountant carried out Mrs. Dalley's instructions, no doubt treating them as being given to him in her capacity of governing director of the company, by minuting as follows:

"In accordance with instructions received from Mrs. Dalley,
dated 8th March 1940, the following bonuses were credited:
D. D'Arcy 500. pounds 0. 0
M. Sims 500. pounds 0. 0
James Allen 500. pounds 0. 0
Norman Basten 100. pounds 0. 0
Out of the bonuses, in lieu of cash, the following shares
were issued:
D. D'Arcy 500 pounds
M. Sims 500 pounds
James Allen 500 pounds
Norman Basten 100 pounds"

He erected a credit in the books of the company to each of the four employees of as many pounds as the number of shares to be given to that employee. In the respondent's case the amount of the bonus credited was 500 pounds. At the same time he made a debit in the wages account of the company of the total of the moneys thus credited to the employees by way of bonus. By a journal entry the amount credited to each employee was carried to the credit of the share allotment account and a corresponding debit made in the account of each employee. Fully paid up ordinary shares were then allotted to each employee and included in the annual return of the company to the Registrar of Companies, rendered under the signature of Mrs. Dalley as governing director, as ordinary shares issued for cash. (at p611)

4. Dividends were declared by the company from time to time. However, Mrs. Dalley ran the company's business as if it were her own and paid no more than perfunctory attention to the requirements of the articles or of the Companies Acts. Rather than communicate to the shareholders who were employees the fact and amount of the declaration of a dividend, her practice apparently was to give to each such employee the amount due by way of dividend, treating it as a present or gratuity. At no time in any record of the company were the shares allotted to the four employees in 1940 designated "employee shares". (at p611)

5. A book which was said to be the minute book of the company was produced and admitted into evidence. It purports to record amongst other things meetings and resolutions passed thereat by shareholders who are named as being present. Notwithstanding the statutory effect which is given to actual minutes of a company, I could have no confidence in this case in acting upon any minutes in this book whose contents are critical to the resolution of this case. But, in so far as the contents of this "minute book" reflect the understanding of those who participated in any degree in the management and control of the company and its affairs, it may be significant that on one occasion the respondent is recorded as being present as a shareholder and as having on another occasion voted upon a resolution concerning the company's affairs. She could not have done these things if her 500 shares were employee shares governed by art. 13. (at p611)

6. In 1962 Mrs. Dalley was advised by the company's accountant that it would be of advantage to the company in relation to its liability to pay income tax if certain undistributed profits were capitalized and distributed by way of bonus shares to the shareholders of the company. Mrs. Dalley and certain members of her family who were shareholders in the company agreed to do so. The accountant thereupon drew up a series of documents both to indicate to Mrs. Dalley what should be done and to record those acts as having been done. The authorized capital of the company was at that time insufficient to enable a bonus issue of shares of the requisite magnitude. Accordingly, these documents included a minute of a general meeting of the company attended by a number of named shareholders, more than enough to form a quorum and including Mrs. Sims, at which a resolution to increase the capital of the company to the necessary extent was recorded as having been unanimously passed. The documents, including annual returns reflecting an increased capital and the bonus issue were all appropriately signed: the returns were duly filed with the Registrar of Companies. But the fact clearly established is that no notice of a general meeting was given, no such meeting was held and no resolution was passed to increase the capital. However, the company did proceed as if the capital had been increased and the bonus shares duly issued: dividends were from time to time declared and paid upon such shares. The number of bonus shares issued to Mrs. Sims was 1187. Again, none of these shares were described in any record of or made on behalf of the company as employee shares. (at p612)

7. Mrs. Dalley died on 8th May 1965. The directors of the company then were Clare Josephine Cascarret and Ida May Currie, daughters of Mrs. Dalley. Without going into detail, it is quite apparent to me from the evidence in the proceedings that the directors decided that they would not afford the respondent, Mrs. Sims, any information as to the affairs of the company and that they would do what they could to exclude her from any participation in its management and control. They took the stand, no doubt as suiting their purpose, that all the shares held by her were "employee shares". Consequently, they required her to transfer all her shares to Clare Josephine Cascarret and Ida May Currie at two dollars per share, that being the sum fixed by the directors as the consideration for the transfer, purportedly in pursuance of art. 13 (par. (dd)). Upon the respondent refusing to transfer her shares as required, the directors purported to do so pursuant to art. 13 (par. (e)). (at p612)

8. At this stage, the respondent commenced proceedings against the company and the directors who were transferees of her shares under s. 186 of the Companies Act 1961. The matter came before a judge of the Supreme Court of Victoria upon affidavit evidence. The learned judge decided that the shares issued in 1940 were employee shares; that, although the company had not duly resolved to increase its capital, the shareholders had subsequently acquiesced in such increase: and that the respondent was the holder of the bonus shares which his Honour held were not employee shares. As the respondent did not press for liquidation of the company and was content to sell all her shares to the company's nominees, his Honour left the amount of the consideration for the transfer of the 500 shares which he found to be employee shares to be fixed by the directors under art. 13 : he ordered a reference to the Master to determine the consideration for the transfer of the bonus shares, directing that that consideration should be the larger of the amount which would be received in respect of them upon a liquidation of the company, and the market value of such shares. From this order the company has appealed to this Court and the respondent has cross-appealed. (at p613)

9. The grounds of the company's appeal are first that the whole of the shares formerly held by Mrs. Sims were employee shares, of which she had ceased to be the holder before the commencement of these proceedings; secondly, that if the bonus shares were not employee shares, there never was an issue of bonus shares because the capital of the company was never increased to an adequate amount, either by resolution or acquiescence or approbation of all the shareholders. (at p613)

10. The ground of the respondent's cross appeal is that the initial issue was of ordinary and not of employee shares. (at p613)

11. Before dealing with what it seems to me is the fundamental question, I ought to say that if there were an issue of bonus shares, the learned primary judge was clearly right in deciding that they were not employee shares under art. 13. This, it seems to me, for the simple reason that, whatever the nature of the shares initially issued to the respondent, the bonus shares were by way of dividend upon those shares. If it were correct to regard the allotment of the five hundred shares in 1940 as a means of remunerating the employee by a share of the company's profits, the bonus issue was part of that share of profits and quite clearly outside the provisions of art. 13. However, without a valid increase in the amount of the company's nominal capital, there could not have been a valid bonus issue. I am unable to agree with the learned judge that the purported increase in capital was validated by the acquiescence or approbation of all the shareholders. My reasons for not agreeing with the conclusion that there was effective increase of the capital of the company are, first, that though undoubtedly all the active shareholders both agreed in advance to the steps which ought to have been taken to increase the capital of the company and subsequently acquiesced in the company being treated as if the capital had been duly increased, I do not think that the evidence linked all the shareholders with that agreement or that acquiescence: and, secondly, that in any case I entertain some doubt as presently advised as to whether the lack of a resolution duly passed to increase the capital can be overcome by acquiescence on the part of all the shareholders. Having regard to my first reason and to the view I am about to express as to the initial issue of shares to the respondent, I have no need finally to resolve that question. (at p614)

12. If the shares initially issued to the respondent were not employee shares but carried all the rights of ordinary shares, then it cannot matter in the result whether or not there was an issue of bonus shares: but, in my opinion, as I have indicated, there was no valid issue of such shares at all in 1962. In truth the respondent did not receive any such shares: nor did any other shareholder. The company must be treated when the value of or the return in liquidation upon the validly issued shares is being considered as if its capital had not been increased and as if all its shareholders held no more shares than they held before the purported bonus issue in 1962, except such shares validly issued to them or purchased by them thereafter. (at p614)

13. I turn then to consider the terms of art. 13, which is headed "Employees' Shares". In the first place, art. 13 does not render the company incapable of issuing shares to an employee which shall not be "employee shares". This is so, it seems to me, even if the reason for the issue of the shares is the fact that the shareholder is an employee of the company. The shares which are necessarily to be "employee shares" are shares "which shall be issued to any employee of the company by way of remuneration or share of profits as aforesaid". The last words quoted carry attention back to the opening part of the article. It seems to me that what the article contemplates is that the directors must first decide to remunerate an employee in whole or in part "by means of a share of the profits of the company, or by remuneration varying with the profits earned or the dividends declared, or with the output or turnover of the company"; that is to say, in the first place, there must be a decision of the company through its directorate that the whole, or a component, of the remuneration of the employee shall be a variable sum dependent either on the level of the profits of the company or the dividends declared by the company or the turnover of the company. The article then provides that

"such remuneration (i.e., remuneration decided to be by way of a
share of profits etc.) . . . may be either in cash (i.e., be paid in
cash) or by way of allotment of shares (i.e., be provided by the
allotment of shares) fully or partly paid up as the Directors think
fit".

It is of course quite true that to make a gift of shares to an employee is to admit him, because he is a shareholder, to participation in the profits of the company. It also admits him to the capital of the company in the event of liquidation and meantime to participation in the control of its affairs through the voting power attached to the shares, though not if the allotment is under art. 13. But, in my opinion, upon the true construction of the article, shares allotted to an employee will not be employee shares simply because the allottee is an employee of the company; nor will they be employee shares simply because the allotment is itself to be regarded as recognition of services rendered. To be employee shares within the article they must be allotted as a means of carrying out a decision of the company to remunerate the employee by a share of profits, etc. (at p615)

14. It is important therefore closely to observe what the company through and by Mrs. Dalley did decide in relation to the four employees including Mrs. Sims. (at p615)

15. It is, to my mind, beyond question that Mrs. Dalley did not decide that for the future Mrs. Sims' remuneration for the services which she would render should be as to any part by a share of the profits of the company. Whilst it could be said that a gift to an employee motivated by a desire to recognize past services could be held to be remuneration of the employee within the meaning of an article employing that word, art. 13 does not speak merely of remuneration but of remuneration by means of a share of profits. Mrs. Dalley wanted to make a gift to each of the four employees without any general or mathematical relationship to his or her past or future remuneration. It may be that she carried the past so well in her mind that she had some conception of the adequacy or inadequacy of their past remuneration for the services they had already rendered. But I do not think it could be concluded that there was in fact in her decision to make the gift a decision as to any such relationship. Thus even if a gift for past services is remuneration, it could not, in my opinion, be said to be remuneration by means of a share of profits. (at p616)

16. Further, the accountant, who was familiar as I have said with the company's articles, interpreted Mrs. Dalley's instructions as calling, not for a decision to remunerate by a share of profits, but for the giving of a bonus of a fixed amount. That is what the company must be taken, in my opinion, to have decided to do; that is in high contradistinction to what the article requires. The shares were not issued to satisfy a determination to remunerate by a share of profits relative to the company's profits past or future but were issued in satisfaction of a decision to give a bonus of a certain amount. No doubt the employees were not given any choice as to whether or not they would take the shares: and, it may be that they could not at any stage have sued for the bonus which was credited to them in the books of account. But that to my mind is not to the point. The question is whether the shares were allotted in performance of a decision to remunerate the employee by a share of profits - and to do so on the restricted terms of art. 13 - or whether they were issued to satisfy a decision to give a lump sum bonus. It does not seem to me to matter that the latter course might infringe s. 45 of the Companies Act 1938 that is to say that it may amount to the giving of financial assistance for the purpose of subscription for any shares of the company. Even if the crediting of the bonus in terms that it could only be used as purchase money for shares did infringe s. 45, the allotment of the shares would not thereby be invalidated. The company would be exposed to the liabilities imposed or provided for by the section, but that is another matter. (at p616)

17. It seems to me therefore that the shares issued to Mrs. Sims in 1940 were not employee shares. They were ordinary shares, a conclusion which is in accordance with every record of the company including its annual returns. (at p616)

18. I agree with the primary judge that the proper order to be made as to the consideration for the transfer of ordinary shares which the respondent is willing to make is the order which his Honour made as to the bonus shares. That order, applied to the initial issue and on the assumption that there was no bonus issue at all, would yield the same result financially so far as the respondent is concerned as an order in the same terms applied to the initial issue and the bonus issue had it been valid. (at p617)

19. Accordingly, the appeal should be allowed in so far as the trial judge ordered that the respondent's name should be restored to the register of shareholders as the holder of 1187 ordinary shares (being the proportion of the bonus issue) and the cross appeal should be allowed in so far as the trial judge ordered that the respondent's name should be restored to the register of shareholders as the holder of 500 employee shares. In lieu thereof it should be ordered that the respondent's name should be restored to the register as the holder of 500 ordinary shares. The appellant should pay the respondent's costs both in this Court and the Supreme Court. (at p617)

KITTO J. I agree in the judgment of the Chief Justice. It seems to me at least doubtful whether art. 13 on its true construction authorizes the directors to give an employee additional remuneration for past services by means of a share of future profits by way of an allotment of shares. There is no need, however, to express a final opinion on the point. (at p617)

2. I would allow the appeal. (at p617)

MENZIES J. I agree that this appeal should be decided in accordance with the order proposed by the Chief Justice, but I have come to the conclusion that the first issue of shares to the respondent was of ordinary shares and not employees' shares on a ground narrower than that adopted by the Chief Justice. This I will do no more than state shortly. (at p617)

2. It is true in one sense that the profits of a company can only be ascertained when all remuneration of employees has been provided for, but it is a common-place that companies do remunerate employees by what is sensibly enough described as a share of profits. Where this is done out of current profits what is meant, of course, is profits before the deduction of remuneration of that sort. Article 13 of the articles of M. Dalley & Co. Pty. Ltd., covering as it does remuneration in cash or shares "by means of a share of the profits or by remuneration varying with the profits earned or the dividends declared or with output or turnover of the company", would, I think, authorize remuneration in cash out of profits, or, by shares to be issued and paid up out of profits and, I consider, that remuneration of this sort could be in respect of past services and it could be of a fixed amount with no relationship to other remuneration. Thus shares to be issued as remuneration to employees and to be paid up out of profits, would, I think, be employees' shares within the meaning of the article and it would not matter that, in the first place, the employees to be benefited were credited with a bonus out of profits. Accordingly, if the shares issued to the respondent in March 1940 fell into that description, those shares were employees' shares and not ordinary shares. However, as appears from the judgment of the Chief Justice, what happened in March 1940 was that the governing director of the company told the company's accountant that she wanted four employees with long records of faithful service each to have a specified number of shares in the company, as a gift, and, despite his suggestion that this should be done by will, insisted that they should have shares at the time. This was done simply by crediting each of the four employees with a bonus, which was not required to come out of profits, and was, in fact, debited to the wages account of the company, and by using the credits so created to pay up the shares which were then issued to the employees. These shares, therefore, if remuneration - as I think probable - did not fall within the description "by means of a share of profits of the company" and were, accordingly, outside art. 13. (at p618)

ORDER

Objection to the competency of the appeal overruled. Leave to the respondent to file notice of cross appeal out of time and order that it be treated as if filed in due time.

Appeal and cross appeal allowed.

Vary the order of the Supreme Court of Victoria as follows: (i) By omitting par. (2) and substituting:

"That the petitioner's name be restored forthwith to
the register of members of the abovenamed company
as the holder of 500 shares in the capital of the said
company."
(ii) By omitting par. (3) and substituting the following:
"(3) Declare that the said 500 shares are ordinary
shares in the capital of the said company and not
employees' shares within the meaning of art. 13 of
the said company's articles of association."
(iii) By substituting in pars. (4), (5) and (6) thereof the
figures 500 for the figures 1187 wherever appearing.
(iv) By inserting in par. (5) immediately after the words
"to determine" the words "upon the footing that
the purported issue of 27,548 shares as a bonus issue
of shares in June 1962 was invalid".

Order that the appellants pay the respondent's costs of the appeal and cross appeal.

Order that the respondent pay the appellants' costs of the objection to competency and of the application for leave to file notice of cross appeal.

Order that there be a set-off of the costs payable under this order.