High Court validates irregular appointment of director

The Corporations Act 2001 (Corporations Act) and the constitutions of corporations set out a range of provisions which govern the legal effect of steps taken by directors, officers, and shareholders of corporations.

From time to time, often through oversight, actions are taken in relation to a corporation which do not comply with the Corporations Act, or the constitution, or both.

Section 1322(4)(a) of the Corporations Act enables courts to declare that steps taken in connection with a corporation are valid, despite a contravention of a relevant provision of the Corporations Act or the constitution of the corporation in question.

On 1 May 2013, the High Court delivered its decision in Weinstock v Beck [2013] HCA 14, a case which tested the limits of the Courts’ remedial powers under section 1322(4)(a).

The facts in that case concerned the appointment, on 30 July 2003, of Mrs Helen Weinstock as an additional director of LW Furniture Consolidated (Aust) Pty Ltd (LWC).  The appointment was made under Article 87 of the articles of the company, by Helen’s husband, Mr Amiram Weinstock, acting as the sole director of the company.  On the face of it, however, the appointment of Helen was invalid because Amiram’s appointment as a director lapsed by operation of the articles, at the annual general meeting on 31 December 1973.  As he ceased to be a director on that date, he was not in a position to appoint an additional director, on 30 July 2003.

Amiram’s sister, Tamar Beck, sought orders in the Supreme Court of NSW winding up LWC on the just and equitable ground, on the basis that it had no directors, and no means available to appoint any directors.  The Court dismissed the winding up application, and made an order under section 1322(4)(a) of the Corporations Act, declaring in effect that Helen’s appointment as a director was not invalid by reason of the fact that Amiram did not hold office as a director at the time of the appointment.

Tamar appealed to the NSW Court of Appeal, and the Court, by a majority, allowed the appeal, finding that section 1322(4)(a) did not permit an order declaring valid a purported appointment in circumstances where the sole director had ceased to be a director.  The Court of Appeal found that in order for section 1322(4)(a) to apply, there must be a contravention of the constitution of the company done either by infringing or failing to take advantage of one of its provisions, and that the section could only apply to validate an impugned action which could be done validly under the Corporations Act or under the constitution of the company.  On this view, Amiram’s purported appointment of Helen as a director was not such a contravention, as there was no provision in the articles of LWC of which Amiram could have taken advantage in order to appoint Helen as a director.

Helen then appealed to the High Court.

The High Court found that the fact that Amiram did not have power to appoint Helen as a director and could not validly have been given such power, did not mean that the appointment was not invalid by reason of a contravention of the company’s constitution.

The High Court’s decision involves a wide view of the circumstances under which orders can be made under section 1322(4)(a) of the Corporations Act, and a rejection of arguments based on technical and implied limitations on the remedial power under section 1322(4)(a).

This reflects a practical and sensible approach to the Court’s power to regularise steps taken by boards and officers of companies which, through technical non-compliance with a provision of the Corporations Act or the company’s constitution, would otherwise be invalid, and which could have unanticipated and serious consequences for the company.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.