Company shareholder disputes can be protracted and bitter.

Two recent High Court decisions considered the effect of non-compliance with the company’s Constitution and poor record management relating to the same proprietary limited company established by the parents of Mr Weinstock and his sister, Mrs Beck.

Both cases involved a consideration of the company’s constitution, basic company law principles and the Corporations Act.

The first case considered the validity of the appointment of Mrs Weinstock as a director by her husband who himself was invalidly appointed.

The second case considered whether preference shares were validly issued and could be redeemed even though no ordinary shares were issued.

In Weinstock v Beck [2013] HCA 14 the High Court considered the scope of the power of the Court in section 1322(4)(a) of the Corporations Act 2001 (Cth) to validate any act which has been done in contravention of the Act. The High Court held that section 1322(4)(a) was a wide power which should not be circumscribed by implied limitations and was wide enough to be used to validate the appointment of a person as a director which had been made by another director who, themselves, had been invalidly appointed.

The High Court held that under s 1322(4)(a) Mrs Weinstock’s appointment could be validated even though Mr Weinstock had not been properly appointed as a director when he purported to appoint her as an additional director.

The majority judgment said:

“Section 1322(4)(a) of the Act was cast in very broad terms. It dealt with “any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken”, whether done, instituted or taken under the Act or in relation to a corporation. The power given to the Court was to declare the act, matter or thing, or the proceeding, not invalid. The Court could do that either unconditionally or subject to such conditions as the Court imposed. The Court was given power to “make such consequential or ancillary orders as the Court thinks fit”. Section 1322(6) prescribed pre-conditions to making an order under s 1322(4)(a) but the detail of those pre-conditions need not be examined.

Mr A D Weinstock purported to appoint Mrs Helen Weinstock as a director. That appointment was not made by a continuing director for the purpose of increasing the number of directors to the number fixed as the quorum for a meeting of directors. It was, therefore, not made in accordance with the requirements of the company’s articles. Because the appointment was not made in accordance with those requirements, it was made in contravention of the company’s constitution. Observing that Mr A D Weinstock did not have power to make the appointment reveals how the contravention came about. That Mr A D Weinstock not only did not have power but could not have validly been given the power to make the appointment neither adds to nor subtracts from the conclusion that Mrs Helen Weinstock’s appointment was not made in accordance with the company’s constitution. The appointment was invalid and it was invalid by reason of a contravention of the company’s constitution.

Only if s 1322(4)(a) is to be read otherwise than according to its terms could it be said that the Court did not have power in these proceedings to make an order under that provision. But the power given to the Court by s 1322(4)(a) is not to be hedged about by any implied limitation.”

In Beck v Weinstock [2013] HCA 15 the High Court decided that shares in LW Furniture Consolidated (Aust) Pty Ltd, described as “C” Redeemable Preference Shares (the “C class shares”), were able to be redeemed under the Corporations Act 2001 (Cth).

The Court rejected Mrs Beck’s argument that the C class shares were not preference shares (and could not be redeemable preference shares) because no ordinary shares or other shares with lesser rights were issued.

The High Court held that the C class shares were preference shares and the redemption of shares was valid. The C class shares were preference shares, as they had rights attached that preferred the holder of those shares to the holder of any ordinary shares in the company on issue when the relevant right was to be examined.