Buckleys Earthmoving Pty Ltd (in liq), Re [1995] QSC 6

IN THE SUPREME COURT OF QUEENSLAND No. 18 of 1992 Brisbane Before the Honourable Justice G N Williams [Re: Buckeleys Earthmoving Pty Ltd] IN THE MATTER of the Corporations Law s. 516 AND: IN THE MATTER of BUCKLEYS EARTHMOVING PTY LTD (In Liquidation) ACN 010 720 680 AND: IN THE MATTER of The Corporations Regulations Regulation 5.6.62 JUDGMENT - WILLIAMS J Judgment delivered 08/02/1995 CATCHWORDSCOMPANY LAW - appeal against names being placed on list of contributories - whether resolutions increased share capital - whether new shares "created" - meaning of "issue" and "allot" considered - failure of persons at meeting and advisers to follow proper procedures - appeal allowed Counsel: Bell QC and Sweeney for appellants Hanger QC and McKenna for liquidators Jackson QC for solicitors - respondents Solicitors: Flehr-Walker for appellants Andrew P Abaza for liquidators Corrs Chambers Westgarth for solicitors - respondents Hearing dates: 14, 15 and 16 November 1994 -- 1 of 36 -- IN THE SUPREME COURT OF QUEENSLAND No. 18 of 1992 IN THE MATTER of the Corporations Law s. 516 AND: IN THE MATTER of BUCKLEYS EARTHMOVING PTY LTD (In Liquidation) ACN 010 720 680 AND: IN THE MATTER of The Corporations Regulations Regulation 5.6.62 JUDGMENT - WILLIAMS J Judgment delivered 08/02/1995 Buckleys Earthmoving Pty Ltd ("the company") was ordered to be wound up by order of this Court made on 10 February 1992. In the course of carrying out their duties the liquidators settled a list of contributories which, prima facie, showed the appellants (Quantic Pty Ltd, Keendeck Pty Ltd, Coleenie Pty Ltd, Marjorie Joyce Moore, and Raymond Robert Moore) as being liable to pay a considerable sum of money as contributories not having fully paid for their shares. (G and N Williamson were at all times shareholders and directors of Quantic Pty Ltd, G F Gardner the principal director and shareholder of Keendeck Pty Ltd, and G J Brandon and J E Kurtz directors and shareholders of Coleenie Pty Ltd). The appellants have appealed pursuant to Regulation 5.6.62 against their inclusion on that list and I am called upon to determine de novo whether it is appropriate for them to be so placed on that list. It would be an understatement, as will become obvious on a reading of these reasons, to say that the affairs of the -- 2 of 36 -- 2 company from May 1990 to liquidation were in a real mess. There are a number of actions currently before this Court resulting from events which occurred between May 1990 and the date of the winding up. The acquisition by the appellants of a majority shareholding in the company in 1990 is relevant to most, if not all, of that litigation. This appeal raises for determination when and on what terms the appellants acquired that shareholding. In some of the other litigation the appellants here have alleged that their legal and accounting advisers in connection with the acquisition of that shareholding were negligent and they have claimed damages from those advisers to compensate them for any relevant losses they have sustained. In that other litigation it would be necessary to determine when and on what terms the appellants acquired the majority shareholding in the company in order to determine both the issue of professional negligence and the quantum of the claim. Of particular relevance is action 471 of 1994 in which the appellants claim damages, inter alia, against Clewett, Corser and Drummond, a firm of solicitors. Against that background White J on 8 April 1994 on the application of Clewett, Corser and Drummond made an order that those solicitors have the right to appear on the hearing of this appeal and to contest the liquidator's claim against the appellants as if they were appellants. She further ordered that those solicitors "be bound by the outcome of the appeal upon the issues determined in the appeal". Pursuant to that -- 3 of 36 -- 3 order Clewett, Corser and Drummond (hereinafter referred to as "the solicitors") appeared on the hearing of this appeal and called evidence. That evidence was by no means all that could have been called on the hearing of an action with respect to professional negligence. The evidence before me was such as to be capable of supporting submissions that at material times the solicitors were acting for some or all of the company, the appellants, or the shareholders prior to the appellants acquiring the majority interest (hereinafter referred to as the "Ostwald Group"). It is necessary for me in the course of these reasons to refer to certain conduct of and advice given by the solicitors. In so doing I do not make any finding with respect to the retainer, the instructions given, the sufficiency and accuracy of the advice based on those instructions, or other issues more relevant to questions of professional negligence. That is an illustration of the limited effect my findings should have with respect to the other litigation. I have avoided making any findings on issues relevant to the other litigation; the only findings I have made are specifically related to the questions when and on what terms the appellants became shareholders. When I have expressed a view that the solicitors gave wrong or inappropriate advice, or were apparently parties to conduct not in accordance with applicable company law, I have done so on a purely factual basis without giving any consideration to other issues which may be relevant in the other litigation. As may well be inferred from the foregoing the evidence -- 4 of 36 -- 4 discloses a comedy of errors associated with the acquisition by the appellants of shares in the company. If the consequences were not so serious a person with average knowledge of the company law could well find the farce quite hilarious. Others, aware of the damage that can be done when people are given control of potentially dangerous machinery they do not understand, could be forgiven for concluding from the facts of this case that the law ought to prevent people with no understanding of company law from having control of a company. The law has in the century since the House of Lords defined and highlighted the differences between Aron Salomon and A Salomon and Company Limited developed to the extent that there are now intricate rules and procedures to be followed and adopted when a company, as distinct from an individual, makes and acts upon a decision. If those procedures are not strictly followed, and the formalities not recognised, then confusion, if not commercial disaster, will certainly ensue. The company was incorporated under the name Talbron Pty Limited on 25 May 1987, and its name was changed on 26 February 1988. The Memorandum of Association provided for an initial share capital of $1,000,000 divided into 1,000,000 shares of $1.00 each. The original Articles of Association (which provided that Table "A" should not apply) made further provision with respect to the share capital and shares in the company. The following Articles are relevant for present purposes: "67. Subject to the rights of persons, if any, entitled to shares with special rights as to -- 5 of 36 -- 5 dividends and where the only shares issued other than those carrying such special rights are all ordinary shares, or all shares of the one class as the case may be, all dividends shall be declared and paid according to the amounts paid or credited as paid on the shares in respect whereof the dividend is paid . . . 81. 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 either at a premium or at par . . . and at such times as the Directors think fit. . . . any share may be issued with such . . . special rights or such restrictions whether in regard to dividend, voting, return of share capital or otherwise as the Company may from time to time by ordinary resolution determine . . . 83. If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue shown later in these Articles) may be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or with the sanction of a resolution passed at a separate general meeting of the holders of the shares of the class. . . . 84. Every person whose name is entered as a member in the register of members shall without payment be entitled to a certificate under the seal of the Company specifying the share or shares held by him and the amount paid up thereon . . . 122. The Company may by resolution passed in general meeting:- a) increase its share capital by the creation of shares of such amount as it thinks expedient; b) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; c) subdivide its shares or any of them into shares of smaller amount than is fixed by the Memorandum; so however that in the subdivision the proportion between the amount paid and the amount (if any) unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived; d) cancel any shares which at the date of the -- 6 of 36 -- 6 passing of the resolution have not been taken or agreed to be taken by any person or which have been forfeited and diminish the amount of its share capital by the amount of the shares so cancelled. 123. The Company may by special resolution reduce its share capital and any capital redemption reserve fund or any share premium account in any manner and with, and subject to, any incident authorised and consent required by law. 124. The capital of the Company is One Million Dollars ($1,000,000.00) divided into One Million (1,000,000) shares of One Dollar ($1.00) each and classified as under:- 900,000 - ordinary shares 10,000 - "E" class shares 10,000 - "A" class shares 10,000 - "F" class shares 10,000 - "B" class shares 10,000 - "G" class shares 10,000 - "C" class shares 10,000 - "H" class shares 10,000 - "D" class shares 20,000 - "J" class redeemable preference shares 125. The ordinary shares, "A" and "B" class shares shall entitle the holder or holders thereof to receive notice of meetings and shall confer upon the holder thereof, when present in person or by proxy or by attorney at any general meeting of the Company the right to cast one (1) vote upon a show of hands and upon a poll to cast one (1) for each share held. 126. The said "C", "D", "E", "F", "G", and "H" class shares shall carry no voting rights whatsoever. 127. Where at any time there shall be more than one class of shares on issue, any dividend or distribution of capitalised profits may be declared by the Company in general meeting, and as the Directors from time to time recommend, . . . " (my emphasis) At a general meeting duly convened and held on 15 February 1988 the following special resolutions were passed and copies thereof were lodged at the office of the Commissioner for Corporate Affairs; the resolutions were in these terms: -- 7 of 36 -- 7 "1. That the provisions of the Memorandum of Association be altered by increasing the share capital of the Company to $2,000,000.00 by the creation of 1,000,000 shares of $1.00 each. 2. That the provisions of the Memorandum of Association be altered by subdividing all of the 2,000,000 shares of $1.00 each in the share capital of the Company into 4,000,000 shares of $0.50 each. 3. That the Articles of Association of the Company be altered by deleting Article 124 of the Articles and inserting in lieu thereof the following Article to be numbered 124 and namely:- 'The capital of the company is Two Million Dollars ($2,000,000) divided into 4,000,000 shares of 50 cents ($0.50) each and classified as - 3,600,000 - ordinary shares 40,000 - "A" class shares 40,000 - "B" class shares 40,000 - "C" class shares 40,000 - "D" class shares 40,000 - "E" class shares 40,000 - "F" class shares 40,000 - "G" class shares 40,000 - "H" class shares 80,000 - "J" class redeemable preference shares." It is sufficient for present purposes to say that at least from February 1988 until May 1990 the company carried on a construction and earthmoving business in southern Queensland. The only shares which were issued were 2,000,000 ordinary shares. During that period there were approximately 13 natural persons or companies who held those shares. The principal director was H C Ostwald, and all the shareholders were favourably disposed towards him. The evidence tended to suggest that the company was one of the largest civil construction organisations outside of Brisbane in southern Queensland. But by early 1990 it was experiencing severe cash flow problems and it was obvious to the Ostwald group that a -- 8 of 36 -- 8 major injection of capital funds was required if the company was to survive. It was against that background that there were discussions between the Ostwald group, and N and G Williamson. The evidence is not all that clear as to how and when those discussions commenced, but it is unnecessary to go into those matters in any detail. It is significant, however, to record that the solicitors had prior to those negotiations coming to a head acted for the company, for members of the Ostwald group and for the Williamsons. It was therefore not surprising that the solicitors were brought into the discussions relating to an acquisition of a majority shareholding in the company by a group put together by the Williamsons and the provision by that group of additional loan funds. Initially the Williamson group included G and N Williamson, Coleenie Pty Ltd, and the Moores. There was some variation in the membership of that group after the initial purported agreement of May 1990. Ultimately the shares acquired as a result of the negotiations came to be held by the appellants and it is sufficient, and simpler, for present purposes to equate the appellants and the initial group and to refer to them both as the appellants. It should also be recorded that at all material times prior to May 1990 B H Vaughan was the accountant for the company. He was also a director of a company which was a significant shareholder in the company. The firm of which he was a member attended to the lodgment of necessary documents at the office of the Commissioner for Corporate Affairs. He was -- 9 of 36 -- 9 also involved in the discussions with the appellants which led to the transactions of May 1990. There is no doubt that the Williamsons made an offer to take control of the company; they wanted a 3:1 voting ratio in their favour. It was agreed that the shareholding should be in that same ratio. On the whole of the evidence I accept that the proposal put forward by the appellants was that they would invest $100,000 for shares and lend on security an additional $300,000. That was made up as follows: $50,000 for shares and $100,000 loan from the Williamsons, $25,000 for shares and $75,000 loan from the Moores, and $25,000 for shares and $75,000 loan from Coleenie Pty Ltd. That seems to be the basis upon which Statham, a partner in the firm of solicitors, was consulted on or about 17 May 1990. On the evidence before me there was no mention during the initial discussions of shares being issued at a discount, or that the shares to be allotted would be other than fully paid shares. I also find on the present evidence that the broad consensus reached between the Ostwald interests and the appellants was that the solicitors and accountants (query Vaughan) should "come up with the mechanism" to give effect to the arrangement. On 17 May 1990 Statham spoke at different times to both Ostwald and the Williamsons. I prefer, for reasons indicated earlier, not to make specific findings in relation to those meetings; it is not necessary to do so for present purposes. Suffice it to say that the appellants' offer was to invest $100,000 as share capital and to loan an additional $300,000 on -- 10 of 36 -- 10 security. Further, the appellants' shareholding was to be three times that of the Ostwald group, and the shares held by the latter were to have no voting rights. As a result of those instructions, resolutions were drawn up to be put to a series of meetings to be held on 21 May 1990. It is clear that Statham played a significant role in drawing those resolutions, but again I make no findings as to the basis on which he did so; nor do I make any findings as to the role, if any, played by Vaughan in the drafting of those resolutions. Suffice it to say that Vaughan raised no objection to the draft resolutions. There were 4 meetings held on 21 May 1990 as follows: i) A directors' meeting at which only the old directors were present held at about 8:00am; ii) A general meeting held at about 8:30am at which all the existing shareholders were represented and which the Williamsons attended by invitation; iii) A directors' meeting held at 9:00am at which only the old directors voted; iv) A directors' meeting held at 5:45pm attended by the new directors. It is necessary to set out in some detail the resolutions passed at those meetings. At the first meeting the offer to purchase shares made by the appellants was noted. In recording the offer in the Minutes, the following appears: "This offer was based on them purchasing three "A" Class shares for every one "B" Class share. The -- 11 of 36 -- 11 present shareholders in the Company, shares of 2,000,000, 50 cent shares, will be made "B" class shares. Williamsons and nominees propose to purchase 6,000,000 "A" class 50 cent shares." The Minute recorded that the directors "recommend acceptance of the offer". It also stated that the consideration for the share issue would be: 1) Share capital of $100,000; 2) The sum of $300,000 to be loaned to the company in the form of a non-redeemable interest free loan secured by a second mortgage. That meeting was followed immediately by the general meeting. As already noted, I expressly find that all existing shareholders were present either in person or by proxy at that meeting. The Minutes, which were signed by all persons present including the Williamsons, contained the following resolutions: "1) It was resolved that all times for which notice of meeting is required to be given under the Memorandum and Articles or by law are abridged or waived and notice shall be deemed to have been duly given for the calling of this meeting and for the passing of any resolutions passed by this meeting. 2) All "A" class shares presently issued shall be converted to "B" class $0.50 (50 cents) shares forthwith. 3) "B" class shares shall carry no voting rights of any nature. 4) The Company shall issue forthwith 6,000,000 "A" class $0.50 (50 cents) shares and those shares shall be allotted to George Williamson and Noel Eric Williamson or their nominees. 5) As from the date of issue the "A" class shares shall hold 100 percent of the voting rights of the company. 6) "A" class shares and "B" class shares shall rank equally with each other for the purpose of dividends. -- 12 of 36 -- 12 7) "A" class shares and "B" class shares shall rank equally in the winding-up of the Company. 8) The Memorandum and Articles of the Company shall be amended by omitting Article 125 and inserting the following Article in its stead:- 'The ordinary shares Class "A" shall entitle the holder or holders thereof to receive notice of meeting and shall confer upon any holder thereof when present or by proxy at any general meeting of the Company the right to cast one (1) vote upon a show of hands and upon a poll to cast one (1) vote for each share held. Class "B" shares shall entitle the holder or holders thereof to receive notice of general meeting but shall not confer any right on the holder to vote at any meeting. The holders of "A" class shares shall exercise 100 percent of the voting rights of the Company.' 9) The Memorandum and Articles of the Company shall be amended by inserting Article 125(A):- '125(a) At all stages the number of "A" class shares shall be equal to three times the number of "B" class shares so that at all times the present "B" class shares represent 25 percent of all shares issued in the Company.' 10) The amount to be introduced by way of capital by the Williamson Group consisting of the nominees of Messrs George Williamson and Noel Eric Williamson shall be the sum of $100,000. In addition the Williamson Group shall provide a further sum of $300,000 by way of non-redeemable interest free loan secured by a second mortgage on Perpetual Lease land situated at Boundary Road, Toowoomba together with all improvements thereon. It is agreed that the said loan shall only be redeemed in the event of the liquidation and winding-up of the Company.'" Immediately after that meeting the third meeting of that day took place. The "special resolution" passed at the shareholders' meeting (clearly that contained in paras. 1 to 10 above) was tabled. The Minutes record that the offer was accepted and Statham was to attend "to the allotment of new share capital of the following: -- 13 of 36 -- 13 "a) 6,000,000 "A" Class 50 cent shares to be allotted to George Williamson and Noel Williamson or to their Nominees. b) The 2,000,000 "A" Class ordinary shares currently owned by the present shareholders will be transferred to 2,000,000 "B" Class 50 cent shares." These Minutes also refer to the loan of $300,000, and go on to state that if "additional funds are required, the present 3:1 condition will be maintained whereby the present 'B' class shareholders will maintain 25 percent of the company". The Minutes then recorded the resignation of certain of the old directors and the appointment of new directors being the two Williamsons. The final meeting of the day took place at 5:45pm and was attended by the new directors. R Moore, Brandon and Kurtz were also appointed directors. The meeting accepted as a true and correct record the Minutes of the meeting held at 8:30am on that day. The Minutes record G Williamson giving a "resume on the meeting of the previous directors and advised that all the previous directors had now agreed to the situation as far as "B" class shares are concerned, also the issue of "A" class shares as per their Minutes". Under the heading "Shareholding" the following was recorded those Minutes: "It was decided that the 6,000,000 'A' class shares as decided in the meeting earlier this day, had to be divided between the parties of G Williamson, N E Williamson, R Moore, G Brandon and J Kurtz of the total amount subscribed 400,000, 100,000 to be apportioned to shareholding and 300,000 apportioned to non-redeemable interest free loan account to the Company secured by various charges and mortgages. The shares to be in the following names: Famalin Pty Ltd (for G Williamson) -- 14 of 36 -- 14 Famandi Pty Ltd (for N E Williamson) Raymond Robert and Marjorie Joyce Moore of 24 Faith Street, Toowoomba Coleenie Pty Ltd (half for G Brandon and half for J Kurtz)." The Minutes then record a fairly lengthy discussion with respect to the loan of $300,000 and the security for it. There was a specific resolution that the company would give a fixed and floating charge over its assets as a collateral security for that loan. It will be necessary to analyse the legal effect of those resolutions, particularly those purportedly passed at the general meeting, but before doing so it is convenient to set out subsequent events which are of relevance for present purposes. Documents evidencing the changes in directors and other officers of the company consequent upon the resolutions of 21 May 1990 were lodged pursuant to the provisions of the applicable company law. On 22 May 1990 George Williamson forwarded to the manager of the National Australia Bank, Toowoomba, copies of the resolutions passed at the general meeting the previous day. By letter dated 25 May 1990 the National Australia Bank approved a new overdraft facility with a limit of $310,000 for the company. The inference can readily be drawn that the Bank was motivated in so doing by the injection of funds referred to in the resolutions of 21 May. The manager of that Bank also wrote (presumably at the request of the company) to the Deputy Commissioner of Taxation on 1 June 1990 confirming that the Bank had "recently reviewed our -- 15 of 36 -- 15 involvement with the abovenamed Company and have approved the significant increase in the Bank's funding support". That letter expressly stated that "our decision to extend this increased assistance, is the confidence we have gained from the internal restructure of the Company. New share issues have injected substantial equity which will be supplemented by loans to the Company by the new shareholders. The newly appointed Board of Directors, in our opinion, bring strong business and technical expertise to the Company". The solicitors prepared a Form 35 "Return of Allotment of Shares" and it is endorsed that it was lodged with the Commissioner for Corporate Affairs on 18 June 1990. It specifies that 6,000,000 "A" class shares with a nominal value of $0.50 were allotted for a cash consideration and the following further details as to the allotment were set out: G Williamson 150,000 M J Moore 75,000 N E Williamson 150,000 G J Brandon 75,000 R R Moore 75,000 J E Kurtz 75,000 It is immediately obvious that the particulars provided as to the shares allotted do not add up to the total 6,000,000 allegedly allotted. That was claimed by Statham and others in evidence to be a typographical error, and under cover of a letter dated 4 July 1990 an amended Form 35 was forwarded to the Commissioner for Corporate Affairs. It again referred to an allotment of 6,000,000 "A" class shares of $0.50 each for a cash consideration, and gave the following as the particulars: G Williamson 1,500,000 M Moore 750,000 -- 16 of 36 -- 16 N E Williamson 1,500,000 G J Brandon 750,000 R R Moore 750,000 J E Kurtz 750,000 By 28 May 1990 Keendeck Pty Ltd had agreed to become part of the Williamson group and provide $25,000 for shares and a loan of $75,000. Gardner attended the directors' meeting on that date and the Minutes speak of five investors each outlaying a total of $100,000. Given all the irregularities it is not surprising that there was no reference to Keendeck Pty Ltd in the Returns of Allotment of Shares lodged 18 June 1990 and 4 July 1990. How Keendeck Pty Ltd was to get shares if all 6,000,000 "A" class shares had been allotted is a mystery. From then on the totals for the investment were $125,000 for shares and $375,000 loan. From 28 May Gardner appears to have acted as a director, though the first resolution having that consequence is minuted 18 June 1990. At the last of the board meetings held on 21 May 1990 it was resolved that R N Elliott and Co would henceforth be the company's accountants. However there appears to have been some delay in that firm obtaining all the records from Vaughan. The Minutes of a directors' meeting of 14 June 1990 record that the Share Register should be available from the previous accountants in the next day or two so that "shares would be issued to all of the new shareholders". Under cover of a letter dated 28 June 1990 the solicitors forwarded to R N Elliott and Co copies of various documents they had prepared relating to the matters dealt with by the various meetings on 21 May. -- 17 of 36 -- 17 By Indenture dated 27 July 1990 the company charged all of its undertakings and assets in favour of the appellants to secure repayment of the loan of $300,000. (This did not include the $75,000 lent by Keendeck Pty Ltd.) What is significant for present purposes is that in the recitals it was stated that the nominal capital of the company was $4,000,000. The figure of $4,000,000 could only have been determined by adding together 6,000,000 $0.50 shares supposedly held by the appellants and the 2,000,000 $0.50 shares held by the Ostwald group. In about July-August 1990 it was agreed that Coleenie Pty Ltd would provide a further $100,000; $25,000 being for additional shares and $75,000 by way of loan. That meant that by that date the Williamson group was putting in a total of $150,000 for "A" class shares, and loan funds of $450,000. Elliott, the accountant, apparently became concerned upon receiving some of the material previously referred to. It was not his understanding that the appellants were injecting $3,000,000 into the company by way of share capital; in his view the appellants did not have that money. In consequence from on or about 26 July 1990 he directed his mind to ways of effecting changes to company records to reflect what he then understood to be the intentions of the parties. His initial proposal (after discussions with the Williamsons) is set out in his letter of 2 August 1990 to the solicitors. It is not necessary to refer to the proposal in detail; suffice it to note that under it the appellants would have held "A" class -- 18 of 36 -- 18 preference shares. That proposal was implemented to the extent that each of the appellants signed an application for "A" class preference shares. Draft resolutions to give effect to such a proposal were circulated. There were then further discussions primarily involving Elliott, Statham, and Vaughan. It is not necessary to go through those discussions in any detail; it is sufficient to note that the proposal involving preference shares was not universally acceptable. Ultimately a series of resolutions were drafted and put to a general meeting of the company held on 14 September 1990. On that date the annual general meeting was held; after certain business had been transacted it was adjourned so that an Extraordinary General Meeting of Shareholders could be held. It is the resolutions passed at the latter meeting which are of critical importance and they were to the following effect: "It was unanimously resolved that all times for which notice of meeting is required to be given under the Company's Memorandum or Articles of Association or by law are abridged or waived and notice shall be deemed to have been duly given for the calling of the meeting and for the passing of any resolutions passed by the meeting as special resolutions. It was unanimously resolved that the authorised capital of the Company be increased from $2,000,000 to $3,000,000 by the creation of 40,000,000 shares of 2.5 cents each. It was unanimously resolved that the Articles of Association of the Company be altered by deleting Articles 124, 126, 127, 128 and 129 and substituting in their place new Article 124 reading as under:- 'The capital of the Company is Three Million Dollars ($3,000,000) divided into Four Million (4,000,000) "B" Class shares of Fifty Cents ($0.50) each and Forty Million (40,000,000) "A" Class Shares of Two and One Half Cents ($0.025) each.' -- 19 of 36 -- 19 It was unanimously resolved that the Articles of Association be altered by adding new Article 126 reading as under:- 'In the event that the Company is wound up "A" class shares and "B" class shares shall rank equally. Notwithstanding that the amounts paid up on the "A" class shares and on "B" class shares may be different.' It was unanimously resolved that 6,000,000 "A" class shares in the capital of the Company issued on 21 May 1990 be allotted in accordance with the applications tabled at the meeting as follows: G Williamson 1,000,000 shares N E Williamson 1,000,000 shares R R Moore 500,000 shares M Moore 500,000 shares G J Brandon 1,000,000 shares J E Kurtz 1,000,000 shares G F Gardner 1,000,000 shares Or Their Nominee Companies 6,000,000 shares It was unanimously resolved that Article 67 be deleted, and the Minutes of the Companies meeting held on 21st May 1990, that paragraph no. 2, subsection Resolutions be amended to read (2) all "A" class shares presently issued (6,000,000) shall be converted to $0.025 (2.5 cents) shares forthwith and paragraph (4) be deleted. These Minutes having been presented to the meeting it was moved Brandon Vaughan and seconded Noel Williamson that they be accepted and adopted carried unanimously." The evidence does not make it entirely clear who voted at that meeting. I am satisfied that all shareholders in the Ostwald group were present either personally or by proxy and that all of them voted in favour of the resolutions. The probability is that the appellants also voted at that meeting by proxy on the basis that each of them was a shareholder entitled to vote. By a further Indenture dated 6 February 1991 (which -- 20 of 36 -- 20 referred to Gardner) the company again charged all its undertakings and assets with the repayment of a loan of $300,000 and further advances made by the appellants. But notwithstanding the specific resolution of 14 September 1990 increasing capital to $3,000,000, that Indenture recited that the nominal capital of the company was $4,000,000. The 1990 Annual Return of the company did not get its issued share capital right; it referred to there being 6,000,000 "A" class shares of $0.50 nominal value per share and 2,000,000 "B" class shares having a nominal value per share of $0.025. That does not appear to have been corrected, but the 1991 Annual Return does correctly state that the issued share capital was 6,000,000 "A" class shares of $0.025 nominal value per share, and 2,000,000 "B" class shares of $0.50 nominal value per share. There is no doubt that each of the appellants invested money in the company for shares and also by way of loan. The document, ex. 7, establishes the relevant payments. The shareholding of the appellants is not recorded at all in the Share Register of the company and no share certificates have been issued to them. However, the 1991 Annual Return discloses the following shareholding by the appellants, such shares being "A" class shares of $0.025 nominal value per share: Keendeck Pty Ltd 1,000,000 Quantic Pty Ltd 2,000,000 M J Moore 500,000 R R Moore 500,000 -- 21 of 36 -- 21 Coleenie Pty Ltd 2,000,000. I do not find it necessary to refer to any other document or evidence in order to justify the conclusions I have reached. Counsel for the liquidators contended that in consequence of the resolutions passed on 21 May 1990 the appellants were the holders of 6,000,000 $0.50 shares on which only $150,000 had been paid up. On that basis the appellants were liable as contributories for the difference. In order to arrive at that result one has to conclude that the resolutions passed at the general meeting on 21 May 1990 had the effect of increasing the share capital of the company from the $2,000,000 fixed by the resolution of 15 February 1988. The liquidators' argument was based on the proposition that the resolutions of the shareholders' meeting of 21 May 1990, signed as they were by all who were present, constituted a signed written agreement containing all essential terms. It was submitted that the Court should construe those Minutes as one would a written contract. In my view, on the facts of this case, that cannot be done; or, at least, cannot be done so as to arrive at any result of assistance to the liquidators. As at 21 May 1990 there were no "A" class shares "issued" or allotted. Looking at the resolutions in the light of the Articles and nothing else, one would have to conclude that the resolutions did not effect any change with respect to the shares held by members of the Ostwald group; they would have remained the holders of 2,000,000 ordinary shares. Undoubtedly there would have been -- 22 of 36 -- 22 difficulties in determining the rights of ordinary shareholders in the light of resolutions 5, 6 and 7. There are also difficulties, adopting that approach, in construing the terms "issue" and "allotted" in resolution 4. Stirling J had to consider each of those terms in Spitzel v. The Chinese Corporation (1899) 80 L.T. 347. The following passages appear at 351: "What is an allotment of shares? Broadly speaking, it is an appropriation by the directors or the managing body of the company of shares to a particular person. The legal effect of the appropriation depends on circumstances . . . of itself an allotment does not necessarily create the status of membership. . . . Again, the word 'issue' is one which has not any very definite legal import with reference to shares. . . . The true meaning must be ascertained equally with respect to the word 'issue' and as to the word 'allot' from a consideration of the whole agreement with which I have to deal." Rich J in Central Piggery Co. Ltd v. McNicoll and Hurst (1949) 78 C.L.R. 594 at 598 quoted the observations of Stirling J on the term "issue" with approval. In the same case Dixon J said at 599-600: "Speaking generally the word 'issue' used in relation to shares means, where an allotment has taken place, that the shareholder is put in control of the shares allotted. A step amounts to issuing shares if it involves the investing of the shareholder with complete control over the shares." In the course of his judgment Dixon J referred to Mosely v. Koffyfontein Mines Limited [1911] 1 Ch. 73 wherein the distinction between creating new shares and issuing shares was considered. There, the Court was concerned with a particular Article which, it was held, contemplated two acts: "one the creation of shares, the other the issue of -- 23 of 36 -- 23 shares, and that the issue of shares comes subsequently in point of time to the creation." (per Fletcher Moulton L.J. at 82) Perhaps of more significance for present purposes is the following passage from the judgment of Farwell L.J. therein at 84: "As regards the construction of these particular Articles it is plain that the words 'creation', 'issue', and 'allotment' are used with the three different meanings familiar to business people as well as to lawyers. There are three steps with regard to new capital; first, it is created; till it is created the capital does not exist at all. When it is created it may remain unissued for years, as indeed it was here; . . . When it is issued it may be issued on such terms as appear for the moment expedient. Next comes allotment." In this case it is Article 122 which deals with the creation of new shares. Another use of the word "issue" is illustrated by Ludlow L.J. in In re London Paris Financial Mining Corporation limited (1897) 13 T.L.R. 569 at 571: "By clause 3 the Paris Company agreed to issue 250,000 shares of the increased capital. What does that mean? It means they agreed to offer to the public those shares, agreed to place them on the market in the usual way, agreed to invite the public to take them in the usual way - that is, by prospectuses, circulars, advertisements, and such like." The terms "issue", "allot", and "create" derive their meaning at least to some extent from the context in which they are used, and authorities must be used with caution because of that. The recent decision in National Westminster Bank v. Inland Revenue Commissioners (1994) 3 W.L.R. 159 is a good illustration of that. Counsel for the liquidators accepted, as indeed he was -- 24 of 36 -- 24 bound to do, that a company cannot validly issue shares save to the extent of its nominal capital. That proposition is clearly established by the decision in The Bank of Hindustan, China and Japan Limited v. Alison (1871) L.R. 6 C.P. 222. But he argued that resolution 4, properly construed, created 6,000,000 additional "A" class shares of $0.50 par value. Alternatively he contended that "if the term issue refers to an event occurring after the creation of shares, then the resolution clearly contemplated that there should be shares in existence to be issued. Accordingly, it contained a sufficient resolution to increase capital". I cannot accept those submissions. If the Court is obliged to construe the resolutions in question objectively in the light only of the necessary framework of objective facts (here the Memorandum and Articles of Association) one cannot arrive at the conclusion contended for by the liquidators. There was at least confusion as to, if not a total lack of understanding of, the existing share structure. The reference to the "A" class shares is sufficient to establish that. Why should the Court conclude that resolution 4 increased capital by $3,000,000 by the creation of 6,000,000 shares of $0.50 cents when there were already 1,000,000 shares of $0.50 of the existing share capital unissued. There is nothing in the resolutions passed at the shareholders' meeting on 21 May which indicates on any objective test that there was an intention to create additional share capital as distinct from issuing and allotting shares previously constituting unissued capital in -- 25 of 36 -- 25 the company. Judges, rightly so, have been reluctant to infer, even where there has been apparent unanimity amongst shareholders, that an increase in capital was necessarily intended though not specifically adverted to. Barwick C.J. in M Dalley & Co. Pty Ltd v. Sims (1968) 120 C.L.R. 603 at 613-4 said: "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 the 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." There is nothing in the evidence in this case which would justify a conclusion that all existing shareholders as at 21 May 1990 agreed to or acquiesced in an increase in share capital. Indeed most of those who gave evidence would not have understood the concept of an increase in capital of the company. Continuing for the moment with an objective analysis of the resolutions there are, at least, uncertainties created by resolutions 4 and 10. It is difficult to construe those -- 26 of 36 -- 26 resolutions as resulting in a binding agreement by George and Noel Williamson to take all of the 6,000,000 shares. Without going to the evidence (such as the introduction of Keendeck Pty Ltd with a further $25,000 for shares) the resolutions demonstrate that further steps and agreements would be necessary before specific shares were finally allotted. Such considerations highlight, in my view, the conclusion that the resolutions in fact passed did not have the effect in law of creating new capital. Given the authorities referred to above, and the use of the terms "issue", "allot" and "create" in the Articles quoted, the use of the terms "issue" and "allot" in resolution 4 cannot have the effect of creating new shares. As no reference is contained in the Share Register to the allotment of 6,000,000 $0.50 shares, and as there are no share certificates in existence relating to such shares, it is easier to draw the conclusion that no such shares were created. There is also the obvious inconsistency between the express terms of Article 124 (as amended 15 February 1988) and the consequence of those resolutions if in fact they did operate to create new capital. Article 124 was not amended on 21 May 1990 and it stated that the capital was $2,000,000. That Article also provided for the classification of the shares into which that share capital was divided. That was not altered in any way on 21 May 1990, save that resolution 2 may have resulted in the conversion of the 40,000 "A" class shares into "B" class shares. Maybe what was intended was that all existing shares should be converted to "B" class shares, but -- 27 of 36 -- 27 that certainly was not done. The company, so far as disclosed by the evidence, did not lodge with the Commissioner for Corporate Affairs in Form 24 a notice of a resolution increasing the nominal capital of the company. Though a Return of Allotment of Shares was lodged which prima facie was inconsistent with the nominal capital as disclosed by the Commissioner's records, that of itself could not evidence a valid increase in the nominal capital of the company. In my view it was strictly necessary for Article 124 to be amended for there to be a valid and effective increase in the nominal capital of the company, or at least that there be specific reference to the creation of new shares as referred to in Article 122. For all of those reasons I would arrive at the conclusion that there was no new share capital created consequent upon the resolutions passed on 21 May 1990, and there were not 6,000,000 shares of $0.50 which could then be allotted to the appellants. That conclusion, which is based on an objective consideration of the resolutions of 21 May 1990 and the Memorandum and Articles of Association, is reinforced, in my view, when one considers the evidence. It is clear that none of the members of the Ostwald group nor any of the shareholders in the appellants who gave evidence had any real knowledge and understanding of what was involved in implementing the agreement reached between the two groups shortly prior to 21 May 1990. Rather reluctantly I have also come to the conclusion that the legal and accounting advisers of the groups -- 28 of 36 -- 28 at that time were similarly ignorant as to what was required. The reasons for the latter conclusion are not of concern for present purposes. I am satisfied that none of the persons who voted on the resolutions at the shareholders' meeting on 21 May 1990, nor the Williamsons, understood what was meant by share capital, the creation of share capital, the issue of shares, the allotment of shares, and the difference between fully paid and partly paid shares. To each of those persons all such concepts were merely words on paper and the resolutions were blindly passed in the mistaken belief that somebody had taken the necessary precautions to ensure that the draft resolutions implemented the agreement previously reached between the parties. In circumstances where no one appreciated the meaning of the resolutions one cannot draw the conclusion by implication that the parties must have intended, for example, to increase the share capital of the company. Certainly the evidence does not establish that anyone who voted had a specific intention to do so. Insofar as it be relevant I am satisfied on the evidence, and find, that all parties to the antecedent agreement, and all persons present at the shareholders' meeting on 21 May 1990, fully and clearly understood that the appellants would be injecting $100,000 into the company by way of share capital, and in addition would be loaning on security a further $300,000. There was no mention in any discussions either antecedent to or at the meeting on 21 May 1990 indicating that any shares to be acquired by the appellants were to be issued -- 29 of 36 -- 29 at a discount or were to be other than fully paid shares. None of the participants appreciated the difference between fully paid and partly paid shares, but I am satisfied that if that distinction was explained to the Williamsons then they would have only proceeded on the basis that fully paid shares were acquired. It follows that the nominal share capital was not increased by the resolutions passed on 21 May 1990, nor were there 6,000,000 shares which could thereafter have been issued and allotted to the appellants. The antecedent agreement between the parties was not implemented by the passing of those resolutions. Thereafter those associated with the appellants acted as if they had control of the company, acted as directors, and kept the company trading. It is not necessary in these proceedings to consider the ramifications of their so doing, except to the extent that such matters are relevant to the liquidators' argument based on estoppel. Counsel for the liquidators submitted that the appellants were estopped from denying that they became shareholders in the company as at 21 May 1990, and from denying that the terms of their shareholding were as stated in the Minutes of the shareholders' meeting of that date. There is no doubt on the evidence that the appellants, the appellants' nominees as directors of the company, all other shareholders in the company, and at least a significant number of the company's creditors acted after 21 May 1990 on the assumption that the -- 30 of 36 -- 30 Williamson interests held the majority of shares in the company and were in control of its affairs. There is evidence presently before the Court (mainly in the form of Minutes) which strongly suggests that pressing creditors were informed after 21 May 1990 that there had been a significant injection of funds into the company by the appellants and that in consequence the company could realistically trade out of its financial difficulties. However, there was no actual evidence before me from creditors, and in consequence it is not possible to conclude with any certainty what was the precise representation made to them. For example, one does not know what the manager of the National Bank at Toowoomba made of the resolutions of 21 May 1990. As pointed out above they are ambiguous; some passages suggest the allotment of 6,000,000 $0.50 shares to the appellants, whereas other passages speak specifically of an injection of $100,000 by way of capital and $300,000 by way of loan. It may also well be, as contended by counsel for the liquidators, that the Ostwald group would not have relinquished control of the company after 21 May 1990 unless they believed that the appellants then validly held the majority voting rights. If there was some irregularity relating to the issue or allotment of the shares in question the conduct of the appellants after 21 May 1990 may well estop them from denying that they were lawfully the holders thereof. But that is not the case here. What the liquidators must establish is that the -- 31 of 36 -- 31 appellants are estopped in the circumstances from contending that the 6,000,000 shares in question were not validly created. As Kelly C.B. said on behalf of the members of the Exchequer Chamber in Bank of Hindustan v. Alison, if the shares never had lawful existence the question of estoppel could not arise. (223 and 227) I can find nothing in Eslea Holdings Ltd v. Butts (1986) 6 N.S.W.L.R. 175 which compels me to come to a contrary conclusion. The circumstances of this case are not such as to prevent the appellants from taking the point that the resolutions passed at the shareholders' meeting on 21 May 1990 did not validly create the 6,000,000 shares therein referred to. A deal of time was taken up during submissions referring to cases concerned with the consequences of issuing fully paid shares for a consideration less than their nominal value. Cases such as The Ooregum Gold Mining Company of India Limited v. Roper [1892] A.C. 125 and Production Sheet Metals Pty Ltd (1971) Q.W.N. 16 were referred to. Given my conclusion that the shares in question were not validly created it is not necessary to consider those submissions. I would, however, record that the evidence does not establish that any person at the meeting of 21 May 1990 believed that shares were being issued for less than their nominal value or at a discount. Whether or not R N Elliott fully appreciated the farcical situation which existed in the period June/August 1990 need not be explored. It is sufficient to say that he realised that there were problems with the resolutions passed on 21 May 1990, -- 32 of 36 -- 32 and that it was necessary to put the company's shareholding in order. It seems to me that the resolutions passed on 14 September 1990 were substantially effective. As there had been no resolution validly increasing the share capital in May, the resolutions of September did not effect a reduction in capital. By the September resolutions the Articles, including Article 124, were formally amended and new shares created pursuant to Article 122. The only difficulties I have with the resolutions of September relate to the last substantive paragraph, and the proposition that 6,000,000 shares were issued on 21 May 1990. The amendment to resolution 2 of 21 May and the express deletion of resolution 4 of 21 May suggests that the meeting of September regarded the resolutions of May as having some substantive operation. I should mention here that the September resolutions appear to assume that the shares held by the Ostwald group prior to 21 May 1990 had been converted to "B" class shares by some resolution passed on that date. If that was done it was by necessary implication only. Indeed there is nothing to indicate that the 4,000,000 "B" class shares referred to in the September resolutions are the same shares as the 4,000,000 ordinary and "A" to "J" class shares referred to in Article 124 as it stood immediately before the May meeting; but that was probably the intention of those who voted in September - or at least the intention they would have had if they knew what they were doing. The professional advice on this occasion was only marginally better than that given in May. In the circumstances -- 33 of 36 -- 33 I will treat these matters as but another indication of the failure of the personnel involved to appreciate what they were doing. That last substantive paragraph of the September resolutions can, in my view, be simply ignored; it is virtually meaningless. There clearly could have been an allotment of 6,000,000 shares consequent upon the resolutions of September, but they were different shares to those contemplated in the May resolutions. On that basis the resolutions of September were the only resolutions which increased the share capital and created shares available for issue and allotment to the appellants. The only valid enforceable agreement to which the appellants are parties in relation to the acquisition of shares is based on the September resolutions and the consequential signed applications for shares. Subsequent to the signing of those applications and their delivery to the company nothing was done formally to issue and allot the shares applied for. Again between September 1990 and February 1992 the appellants controlled the company. In connection with the appointment of the liquidators G Williamson deposed in an affidavit to the fact that the appellants were the holders of the only shares which carried voting rights in the company and that there was unanimous agreement with respect to the appointment of the liquidator. The consequences of the appellants acting as shareholders during the period in question, and their representatives acting as directors of the company during that period, will be the subject of other -- 34 of 36 -- 34 litigation and it is not necessary for me to comment further thereon. There are numerous authorities supporting the proposition that the list of contributories ought to comprise not only all persons properly on the register, but also all those who, although not on it, ought to be on it. (See, for example, In re National Bank of Wales [1897] 1 Ch. 298 at 308 per Lindley L.J.) The authorities also indicate that persons who have contracted to take shares from the company ought to appear on the register. In this case if the directors of the company had properly performed their functions and duties after September 1990 then the appellants would have appeared in the register as shareholders. Once it is established that the subject shares existed (that is, were validly created) then it is possible for the doctrine of estoppel to operate to prevent a person who has acted as a shareholder from denying that he lawfully held the shares in question. Therefore it is readily established that at all material times from and after 14 September 1990 the appellants were the holders of "A" class shares of nominal value 2.5 cents in accordance with the allotment referred to in the Minutes of that date. Indeed the appellants formally asked by way of alternative relief that the list of contributories be varied so that they are listed as holders of 6,000,000 "A" class 2.5 cent shares. However as a further alternative they also asked to have the list varied so that they were not listed as holders of any shares. -- 35 of 36 -- 35 The proceeding before me is strictly an appeal against the liquidators including each of the appellants on the list of contributories with respect to 6,000,000 $0.50 shares on which only $150,000 had been paid. For the reasons already given the appellants are entitled to succeed on that appeal. I will hear further submissions as to whether I ought on an application such as this finally declare that the appellants are the holders of 6,000,000 2.5 cent shares, and direct they appear on the list of contributories as such. I will hear submissions as to the form of order that I should make. I will also hear submissions on the question of costs; it is clear that the liquidators were obliged by their duty to the Court to have the Court sort out the mess created by the total lack of understanding of the requirements of company law exhibited by the appellants and their advisers in relation to the meetings of May and September 1990. -- 36 of 36 --