ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd (Receivers & Managers Appointed) [1990] QSCFC 67 [1991] 2 Qd R 360

IN THE SUPREME COURT OF QUEENSLAND FULL COURT BEFORE : No. 396 of 1990 Mr. Justice McPherson Mr. Justice Lee Mr. Justice Mackenzie BRISBANE, 14 SEPTEMBER 1990 Revised rno71 __—. (Copyright in this transcript is vested in the Crown. Copies thereof must not be made or sold without the written authority of the Chief Court Reporter, Court Reporting Bureau.) 10 BETWEEN: ANZ EXECUTORS AND TRUSTEE COMPANY LIMITED (Plaintiff) Appellant QINTEX LIMITED •and- -and- (First Defendant) QINTEX AUSTRALIA LIMITED (RECEIVERS AND MANAGERS APPOINTED) (Second Defendant) Respondent JUDGMENT MR. JUSTICE MCPHERSON: In my opinion this appeal should be dismissed with costs. 30 40 I-publish my reasons. I am authorised by Mr. Justice Lee to say that he agrees that the appeal should be dismissed with costs and that he agrees with my reasons. 50 MR. JUSTICE MACKENZIE: I agree that the appeal should be dismissed with costs for the reasons published by the learned presiding Judge. MR. JUSTICE MCPHERSON: The order of the court is _____________________ ______ ________________________________________________ 60 G214~Govt. Printer, Qid. 1 [1990] QSCFC 67 -- 1 of 33 -- ] 10 20 30 40 50 60 appeal dismissed with costs l 20 30 40 50 —Govt. Printer, Qld. ______ _ _______ _ __________________________ _ ____________________________ _ 60 2 -- 2 of 33 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT W.3996 of 1989 BETWEEN : ANZ EXECUTORS & TRUSTEE COMPANY LIMITED (Plaintiff) Appellant -and- OINTEX AUSTRALIA LIMITED (RECEIVERS AND MANAGERS APPOINTED (Second Defendant) Respondent MCPHERSON J LEE J MACKENZIE J Reasons for judgment delivered by McPherson J on the 14th September, 1990 Lee J and Mackenzie J agreeing with the reasons and with the order made "APPEAL DISMISSED WITH COSTS" -- 3 of 33 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT No. 3996 of 1989 Before the Full Court Mr. Justice McPherson Mr. Justice Lee Mr. Justice Mackenzie BETWEEN: ANZ EXECUTORS & TRUSTEE COMPANY LIMITED (Plaintiff) Appellant AND : QINTEX AUSTRALIA LIMITED (RECEIVERS AND MANAGERS APPOINTED) (Second Defendant) Respondent JUDGMENT - MCPHERSON J. Delivered the Fifteenth day of September, 1990 CATCHWORDS Companies - Members - Powers of - Act not for corporate benefit - Guarantee of debt of another - Holding company agreeing to procure guarantee by subsidiaries - Group of companies insolvent - Whether holding company may be ordered to procure execution of guarantee by subsidiaries - Companies (Queensland) Code, ss. 66C, 67, 68 Counsel: P . A . Keane Q.C. with him R. Bain for the Appellant W. Sofronoff Q.C. with him D.F.S. Jackson for the Respondent Solicitors: Clarke & Kann for the Appellant Blakes for the Respondent Hearing Dates: 16, 20, 21 August, 1990. -- 4 of 33 -- IN THE SUPREME COURT OF QUEENSLAND FULL COURT No. 3996 of 1989 BETWEEN: ANZ EXECUTORS & TRUSTEE COMPANY LIMITED (Plaintiff) Appellant AND : QINTEX AUSTRALIA LIMITED (RECEIVERS AND MANAGERS APPOINTED) (Second Defendant) Respondent JUDGMENT - MCPHERSON J. Delivered the Fifteenth day of September, 1990. On three occasions during 1988 and 1989 Qintex Australia Limited ("QAL") resolved to borrow sums of money totalling in all some $185,500,000 in return for acknowledgments of indebtedness in the form of notes, which are technically speaking unsecured debentures issued by that company. To facilitate the borrowings and the associated note issues, QAL on each of the three occasions executed a deed in favour of ANZ Executors & Trustee Company Limited ("ANZ"). Two of the deeds (exs. 2, 3) are dated 1 July 1988; the third (ex. 4) is dated 15 February 1989. The role of ANZ was to act as trustee of the deeds for the holders of the notes issued under the trust deeds. The note issues were undersubscribed, but large sums of money were nevertheless raised by this means. In late 1989 QAL defaulted in the performance of its obligations under the deeds, and, in an action brought by ANZ in this Court, Master Horton gave judgment against QAL for amounts totalling some $110,000,000 owing under the deeds. The Master's reasons for judgment are reported sub. nom. -- 5 of 33 -- 2 ANZ Executors & Trustee Co. Ltd, v. Qintex Australia Ltd. (1990) 5 ACSR 57). QAL is admittedly unable to satisfy that judgment, on which interest continues to accrue. The company has, however, 95 corporate subsidiaries in Australia. Of these a few are immediate subsidiaries in the sense that QAL directly owns all their issued share capital; the majority are intermediate, in that QAL owns the issued shares in a subsidiary, which either itself or by medium of another subsidiary or its subsidiary, owns shares in other companies, and so on down the ladder. Most but not quite all of the subsidiaries are wholly owned, meaning that QAL or subsidiaries ultimately answerable to it own or control 100 per cent of the issued share capital. There are nevertheless a few instances in which QAL directly or indirectly owns or controls only 51 per cent of the shares. Having failed to obtain satisfaction from QAL, ANZ turned its attention to the subsidiaries. In this action, ANZ as plaintiff claims against QAL as second defendant an order for specific performance of covenants in the three deeds to procure its wholly owned subsidiaries in Australia to execute guarantees in favour of the plaintiff in respect of QAL's indebtedness under those deeds. The first defendant in the action is Qintex Limited. It holds shares in QAL, and so is the holding company of QAL. Originally similar relief was sought against that company but it was not pursued at the trial. Byrne J., by whom the action was heard in the Supreme Court, dismissed the plaintiff's action, giving judgment for the second defendant. This appeal is brought against that decision. The foundation of ANZ's claim against QAL is a provision that appears in identical terms in each of the deeds. In the -- 6 of 33 -- 3 case of what is called the QAL 1988 Convertible Note Deed (ex. 2), it is cl.9.1(s): "On the request of the Trustee in writing [to] procure any one or more wholly-owned Subsidiary of the Company incorporated in Australia (whether formed or acquired before or after the date of this Deed) to become a guarantor in respect of the payment of the Moneys Owing Pursuant to this Deed or intended so to be and the performance and observance by the Company of all of its obligations hereunder such guarantee to be in favour of the Trustee in a form to the Trustee's satisfaction ." There is a definition of the term "subsidiary" in cl.1(p) of the deed; it adds nothing useful to the debate, and may be disregarded . It is the obligation undertaken by QAL in terms of cl.9.1(s) or its equivalent in the other deeds that is the target of ANZ's claim for specific performance. ANZ as trustee of that obligation seeks an order that QAL cause its subsidiaries to execute guarantees designed to give effect to that obligation by making the subsidiaries liable for QAL's indebtedness to ANZ. The covenant by QAL may thus be loosely but not inaccurately described as embodying an agreement for the detriment of a third party. Before considering its enforceability some matters going to the form of the action and the relief claimed must be mentioned. The first is that, in order to be effective, it will be necessary for any instruments of guarantee from the subsidiaries to be executed under seal. Because there is no identifiable consideration for their being given by those companies, an instrument under hand will not suffice. Subject to that qualification, instruments of guarantee have been duly tendered with a demand that they be executed by the subsidiaries. The demand has been refused but -- 7 of 33 -- 4 not for any reason related to the terms of the instruments tendered. A second point deserving mention is that QAL does not dispute that, for breach of cl.9.1(s), damages are in the circumstances now prevailing not an adequate remedy. It is not to be assumed that specific performance must necessarily follow. The decisions in Lamont v . Osborn (1902) 28 V.L.R. 434 and Wight v. Haberdan Ptv. Ltd. [1984] 2 N.S.W.L.R. 280 are explicable on other grounds; but in view of the attitudes of the parties on appeal and in the court below I am content to accept that, if other difficulties are surmounted, an order for specific performance may be made against the second defendant QAL. It may be added that Jones v. Lipman [1962] 1 W.L.R. 832 is authority for specifically ordering a vendor to perform his contract to sell land by procuring a company, of which he is the sole or controlling shareholder, to convey the land to the plaintiff purchaser. I regard the decision as depending on the circumstance that the corporate defendant acquired title to the land with notice of the plaintiff's prior contract and equitable interest, so that from the moment of acquisition it took as trustee for the plaintiff purchaser: cf. Duncombe v. New York Properties Ptv. Ltd. [1986] 1 Qd.R. 16, at 21. Whether a similar result would follow under the Torrens system is a question that does not arise here. The decision in Jones v. Lipman affords authority for saying that, at least in some circumstances, a shareholder may be specifically ordered to cause "his" company to do something he undertook to do; cf. also Ascot Investments Ptv. Ltd, v. Harper (1981 ) 148 C.L.R. 337, at 351-352. -- 8 of 33 -- 5 Finally, there is the matter of parties. In Jones v. Lipman judgment was also given against the company as co-defendant. I have been and continue to be troubled by the absence from this action of the subsidiaries themselves. They are the entities that will be most directly affected if the order for specific performance is made. The order will oblige them to execute the required guarantees which they will then be called on to satisfy. In Amon v . Raphael Tuck & Sons Ltd . [1 956] 1 Q.B. 358, Devlin J. held that a person ought to be joined as a party to an action if the order sought would affect him not merely in his commercial rights but in the enjoyment of his legal interests. There an injunction was sought to restrain one party to a bilateral contract from performing it without the other party being joined in the action; here the claim is for specific performance. I am conscious of the line of authorities concerning parties to suits for specific performance that begins with Tasker v. Small (1837) 3 My. & Cr. 63; 40 E.R. 848. It has been adopted in Queensland : see Hester v. Morton [1950] Q.W.N. 46; Duncombe v. New York Properties Ptv. Ltd. [1986] 1 Qd.R. 16, at 20. The criticisms of those decisions offered by Meagher Gummow & Lehane Equity Doctrines and Remedies . 2nd ed., paras. 2048-2051 , are to my mind persuasive; but even if they are disregarded, the position of the subsidiaries here is potentially more serious than those of a subsequent purchaser for value of the same estate. The latter is not so directly affected by the order for specific performance as are the subsidiaries in this instance. A subsidiary that, knowing of the order for specific performance, does anything to obstruct its fulfilment becomes liable to attachment or sequestration for contempt of court. See Seaward v. Paterson [1897] 1 Ch. 545, at -- 9 of 33 -- 6 556, which shows that that consequence is not dependent on being bound by the order. Rules of natural justice are not confined to inferior courts and tribunals. The subsidiaries were entitled to an opportunity of opposing the relief claimed in the action : cf. Commercial Banking Co. of Sydney Ltd, v. George Hudson Ptv. Ltd. (1973) 131 C.L.R. 605, at 613. In their efforts to achieve economy and expedition in this litigation, the parties have ignored this requirement. Whether the court may properly do so is another matter. Were I to differ from the conclusion reached by the learned trial judge, I would wish to be persuaded that the order could be made without first taking some further step to ensure that the interests of the subsidiaries, or those whose interests depend upon them, were properly represented. In this connection it is necessary to point out that, like QAL itself, the subsidiaries are insolvent. According to the balance sheets some of those companies show a surplus of assets over liabilities. The prime example is the group of subsidiary companies engaged in television operations, of which Qintex Television Limited is the principal holding company. Their worth is, however, dependent ultimately on the realisable values of television licences, which are shown in the books or balance sheets at cost. The uncontradicted evidence of Mr Allpass is that the television licences "are clearly not realisable for the values shown in the balance sheets". In addition the accounts of many of the subsidiaries include as assets claims on other companies in the group. The apparent financial solvency of those subsidiaries therefore assumes that intercompany debts will be paid in full, which must in the end depend on the capacity of the whole group of companies to meet their external -- 10 of 33 -- 7 indebtedness. The group as a whole is insolvent. After analysing this and other material his Honour concluded that "all those wholly owned Australian subsidiaries showing in their accounts a surplus of assets over liabilities cannot meet their debts as they become due" . This conclusion is plainly justified on the evidence. It was said to involve a finding of only "commercial" as distinct from "financial" insolvency. For what that matters here, it is a distinction without difference. The two concepts are not discrete but directly related. A debtor unable to meet claims as they fall due is one who has no such assets as can be realised by sale or mortgage to satisfy current demands. See Sandell v. Porter (1966) 115 C.L.R. 666, at 670. "Time to pay" is the common plea of insolvent debtors : but time is not enough without some quite exceptional appreciation in the market values of major assets. There is nothing to justify any such prediction here. Meanwhile, interest on the notes continues to mount. The case is therefore one where if the order is made each subsidiary becomes severally liable for a debt of $110 million on which interest is irresistibly accruing. It is said that by paying the debt a subsidiary will earn the right of every guarantor to compel other sureties to contribute to the liability - so discharged; and that the latter may have cross-claims' in the form of debts owing to it by the payer that can be set off. This does no more than demonstrate the frailties of book values as an index to corporate solvency. In law the process of set off may discharge the liability; but, where both creditor and debtor are insolvent, it yields no tangible asset. -- 11 of 33 -- 8 The object of enforcing execution of the guarantees is to compel their discharge not merely on paper but in cash. Once they are executed, demands for payment by the guarantors will follow as of course and immediately. What the court is being asked to do therefore is to order the subsidiaries to undertake liability for a debt that none of them presently owes, and to do so with a view to its immediate payment. Under a different legal system it may be that each company in a group would be jointly and severally liable for the debts of every other. But that is not the course the law has taken. The decision in Walker v. Wimborne (1976) 137 C.L.R. 1 is binding authority for considering each company in a group as a separate entity having assets and liabilities of its own that are distinct from those of all the others. The creditor who happens to deal with the only financially viable entity in the group may be exceptionally astute, or simply unusually fortunate; but, in either event, he is not in law liable to have his just claims defeated by arbitrary redistribution of assets or liabilities of his corporate debtor. The plaintiff's claim, if given effect, will compel each subsidiary to meet a liability that was never incurred by it. This to my mind raises a question, fundamental to the law relating to companies, which is whether a company that is insolvent or verging on insolvency may properly make a gift of its assets to some other person. I say "gift of assets" for reasons already explained. For a person to submit to a liability that must be satisfied at once by payment is, actually and really, to require him to make the payment to the extent at least of available assets. If the payment is made or the commitment that precedes it is assumed for no consideration, it -- 12 of 33 -- 9 is, by any standard, nothing but a gift. Applied to an insolvent company, this means that directors or shareholders, or all of them acting together, may validly make a voluntary disposition of assets that serves no corporate purpose whatever; and that they may do so in derogation of the interests of creditors, for whom the assets disposed of present the only prospect of receiving payment of their debts. ANZ does not shrink from the implications of stating the proposition in this way. As the only effective holder of the share or shares (for there must by statute be at least two) in each subsidiary, QAL covenanted that the subsidiary would undertake liability for the indebtedness of QAL under those deeds. QAL and its nominee co-shareholder were thus the only persons beneficially interested in any of the subsidiary companies. In that state of things, Mr Keane Q.C. submitted that the dominant principle is: "The law gave them control of its action. Under that control the company gave effect to the policy of the only persons who had any beneficial interest in its capital. The case is not one in which the apparent procedure can be said to have been unreal, or to have been a cloak under which a conspiracy to defraud was concealed ." The passage is taken from the opinion of Viscount Haldane delivering the advice of the Judicial Committee in A.G. for Canada v. Standard Trust Co. of New York [1911] A.C. 498, at 504. The extract in question was cited in the New Zealand Court of Appeal in Nicholson v. Permakraft (N.Z.) Ltd. [1985] 1 N.Z.L.R. 242, at 247, by Cooke J., who commended it as "marked by Viscount Haldane's lucidity and conciseness". In his Honour's judgment in the New Zealand decision it is referred to in support of the proposition that "a company is bound in a matter intra vires by the unanimous agreement of its members". -- 13 of 33 -- 10 What was said by both of those learned judges must, however, be read in context. Viscount Haldane was concerned with the question whether promoters of a company might be held to account for profits on a sale of assets to the company after full disclosure had been made to the only directors or shareholders at the time the sale was entered into or confirmed. Disclosure, as in that case, by and to co-profiteers may, as one writer has observed, seem a trifle cynical; but after Salomon's case in 1897 "it is impossible to hold that it is the duty of the promoters of a company to provide it with an independent board of directors if the real truth is disclosed" (Lagunas Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch. 392, at 426, per Lindley M.R. ). Viscount Haldane's statement therefore cannot be regarded as universally applicable throughout the law of companies. So much is acknowledged by Cooke J. in a subsequent passage in Nicholson v. Permakraft (N.Z.) Ltd. [1985] 1 N.Z.L.R. 242, at 250, where his Honour identifies himself with other judicial observations that "unanimous assent of the shareholders is not enough to justify the breach of duty to the creditors". The problem cannot, however, be solved by summoning up a duty to creditors by shareholders or directors of a company, if by "duty" in this context is meant a duty in law directly owing to and enforceable by creditors and sounding in debt or damages. A very recent decision of the Privy Council on appeal from New Zealand confirms this. See Kuwait Bank E.C. v. National Mutual Life Nominees Ltd. [1990] 3 W.L.R. 297, at 315, 321. And if no such duty exists, then, so ANZ submits, a shareholder is not only entitled, but may also be required by law, to compel a subsidiary to execute the guarantee and to do so free of any -- 14 of 33 -- 11 inhibitions arising from the interest of creditors in receiving payment of debts out of corporate property. A shareholder's vote is "a right of property, and prima facie may be exercised ...as he thinks fit in his own interest" : Carruth v. Imperial Chemical Industries Ltd. [1937] A.C. 707, at 765, per Lord Maugham; see also North-West Transportation v. Beatty (1887) 12 App.Cas. 589, at 593. Circumstances in which a duty is imposed on a shareholder of acting "bona fide for the benefit of the company" are properly confined to those involving individual rights or privileges of members deriving from the articles of association, contracts with the company, or the general law : cf. Peters' American Delicacy Co. v. Heath (1939) 61 C.L.R. 457, at 481-482. So runs the argument for the appellant. But a shareholder's freedom to exercise his vote as he pleases does not mean that in law he can accomplish everything that takes his fancy,. The right to vote is, it is true, a species of property that can be exercised at will, and it may confer control over the affairs and property of the company; but it does not follow that the holder may always do whatever he pleases with the corporate assets. For they are the property of the company and not of the shareholder, who has no legal or equitable interest in them : Macaura v. Northern Insurance Co. [1925] A.C. 619, at 626. That is the inescapable consequence of treating the company in law as an entity distinct from its members. For this reason there are some things that shareholders cannot do. Quite apart from specific statutory prohibition, they cannot authorise dividends to be paid out of capital; or the company to purchase its own shares; or the unrestricted return of capital to shareholders. To allow these things to be -- 15 of 33 -- 12 done otherwise than in accordance with the conditions under which the legislation permits would be "contrary to the plain intention of the [Companies] Act...and inconsistent with the conditions upon which, and upon which alone" Parliament has granted the right of trading in corporate form with limited liability : Trevor v. Whitworth (1887) 12 App.Cas. 409, at 433, per Lord Macnaghten. Hence, a limited company not in liquidation "can make no payment by way of return of capital to its shareholders except as a step in an authorised reduction of capital. Any other payment made by it by means of which it parts with moneys to its shareholders must and can only be made by way of dividing profits" : Hill v. Permanent Trustee Co. of N. S . W. [1930] A.C. 720, at 730. See also Re Anglo-French Exploration Co. [1902] 2 Ch. 845, at 853; Ridge Securities Ltd, v. I.R.C. [1964] 1 W.L.R. 479, at 495. Apart from instances like these, "the fundamental principle of company law" is that "the whole of the subscribed capital of a company with limited liability, unless diminished by expenditure upon the company's objects ... shall remain available for the discharge of its liabilities" : see Australasian Oil Exploration Ltd, v. Lachberg (1958) 101 C.L.R. 119, at 132, quoting Davis Investments Ptv. Ltd, v. Commissioner of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392, at 413, per Kitto J. What was described by Dixon C.J. in that case as the "liberation" of a "fund" of profits by its distribution to shareholders was also said to have been "not accomplished by a means provided by company law"; but, his Honour added (100 C.L.R. 392, at 407), "if there is no interest involved but that of shareholder ...no legal interest is invaded, and there is no one who is entitled to complain". -- 16 of 33 -- 13 Other interests are affected in the case of a company- confronted by insolvency. Thus, in Mackie v . Clough (1891) 17 V.L.R. 493, the distribution ostensibly by way of dividend of the proceeds of the only remaining corporate asset available to pay its creditor was held to be a breach of duty, which the directors were held liable to make good. The relevant Victorian legislation contained the express prohibition now found in s. 565(1) of the Companies (Queensland) Code by which no dividend is payable except out of profits; but, as Webb J. acknowledged, the principle is the same apart from statute. It is possible, consistently with ANZ's submission here, to distinguish cases like those on the grounds that : (a) the payment was out of capital; and (b) it was the directors that were made responsible; but (a) a company that is insolvent has no capital that can be returned to shareholders; and (b) it is seldom possible in the case of a company with only a few shareholders who are also the directors to differentiate between the actions of either or both. A useful example is the Canadian case of Plain Ltd, v. Kenlev & Royal Trust Co. [1931] 1 D.L.R. 468; affd. on appeal [1931] 2 D.L.R. 801 (Ont. C.A.), where the transfer by a company to the detriment of creditors of its most valuable assets was set aside as violating a "fundamental principle of law governing the constitution and management" of a limited company. According to Orde J.A. in that case ([1931] 1 D.L.R. 468, at 479): "while an individual may, broadly speaking, do what he pleases with his own (that right is in many respects restricted even in the case of an individual where creditors are affected) , a limited joint stock company cannot do what it likes with its property, but must deal with it according to the laws governing its constitution. It cannot lawfully give away its property, either to shareholders or others. I am speaking broadly, because there are cases where, in -- 17 of 33 -- 14 the interests of its own business, a company may give bonuses to employees or gifts to charities, but transactions of that character either depend upon the fact that they are prudent and proper business expenditures or are made out of accumulated profits and with the consent of the shareholders." If an insolvent company may not properly give assets to its members, it is difficult to see why it should be able to give them to anyone else. Some of the decisions may be narrowly distinguishable as instances of unauthorised "capital" distributions to shareholders; but the principle is demonstrably wider than that. The most comprehensive statement, as well as the most influential, has been that of Bowen L.J. in Hutton v. West Cork Railway Co. (1883) 23 Ch.D. 654, at 671: "We must go back to the root of things. The money which is going to be spent is not the money of the majority. That is clear. It is the money of the company, and the majority want to spend it. What would be the natural limit of their power to do so? They can only spend money which is not theirs but the company's, if they are spending it for the purposes which are reasonably incidental to the carrying on of the business of the company. That is the general doctrine. Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational. The test must be what is reasonably incidental to, and within the reasonable scope of carrying on, the business of the company." This passage, or the principle it involves, was adopted and applied by the learned trial judge in the present case, as it has been in other decisions since it was first enunciated by Lord Bowen. See, for example, Re George Newman & Co . [1895] 1 Ch. 674, at 685-686, per Lindley L.J.; Atherton v. Plane Creek Central Mill Co. [1914] St.R.Qd. 73, at 86-87; Parke v. Daily News Ltd. [1962] Ch. 927, at 951. In each case, the payment or benefit was directed not to a shareholder but to an outsider; or, in the case of Re George Newman & Co. , where the assent of all the shareholders was inferred, to a director. Other -- 18 of 33 -- 15 decisions to like effect include Re Halt Garage (1964) Ltd. [1982] 3 All E.R. 1016; Rolled Steel Products (Holdings) Ltd, v. British Steel Corporation [1986] Ch. 246; Kinsela v. Russell Kinsela Ptv. Ltd, (1986) 4 N.S.W.L.R. 722; West Mercia Safetvwear Ltd, v. Dodd [1988] BCLC 250, at 251, where on appeal Dillon L.J. explained that earlier comments he had made in Multinational Gas & Petrochemical Co. v. Multinational Gas & Petrochemical Services Ltd. [1983] Ch. 258, were concerned with a company that was "amply solvent" at the time the directors made their "business decision in good faith". The learned lord justice adopted the statement of Street C.J. in Kinsela v. Russell Kinsela Ptv. Ltd. (1986) 4 N.S.W.L.R. 722, at 730, that: "In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration." Finally, and most recently, in Brady v . Brady [1988] BCLC 20, at 38, Nourse L.J., in controverting a proposition that a memorandum of association may authorise a company "to give away all its assets to whomsoever it pleases", said: "The principle is only a facet of the wider rule, the corollary of limited liability, that the integrity of a company's assets, except to the extent allowed by its constitution, must be preserved for the benefit of all those who are interested in them, most pertinently its creditors." -- 19 of 33 -- 16 The decision in that case has since been reversed by the House of Lords, but without casting doubt on the principle stated by Nourse L.J. : see Brady v. Brady [1989] A.C. 755, at 777. Mr Keane Q.C. submits that the judgments in the foregoing cases resort to the ultra vires doctrine in support of the decisions. That is so in some but not all of them. For my part I do not read the observations of Bowen L.J. in Hutton v. West Cork Railway Co. as depending on that doctrine, although in several later cases the question is approached in that manner. The thrust of the submission is that in Australia the doctrine has been abolished "in its application to companies" see Companies (Queensland) Code, ss.67, 68. To that end, s.67(1) declares that "a company has...the legal capacity of a natural person...". It is, however, clear that what is spoken of there is a "company" considered as an artificial legal person or entity, and not the company comprising the members acting in general meeting or otherwise. That this is so is evident from s.66C(b), which describes one of the two specified legislative objects as being: "(b) without affecting the validity of the dealings of a company with outsiders, to ensure that provisions of the rules of a company relating to objects or powers of the company are given effect to by the company's officers and members." The point may be demonstrated by reference to s.67(1), which specifically authorises a company : "(c) to distribute any of the property of the company among the members, in kind or otherwise". To read this without importing any internal limitation on the powers of members, would mean not merely that the shareholders may now freely authorise gifts of corporate property to themselves, but that they are also at liberty to return company capital to members without regard for the general -- 20 of 33 -- 17 prohibition laid down in Trevor v. Whitworth (1887) 12 App.Cas. 409, and other leading cases of that kind. The purposes of ss . 67 and 68 are sufficiently achieved if, despite deficiencies in corporate capacity, the validity of corporate dealings with outsiders is made unimpeachable. Beyond that point the legislation does not affect to abrogate restrictions, explicit or implicit, on the exercise of directors' or shareholders' powers. Cf. Darvall v. North Sydney Brick & Tile Co. Ltd. (1988) 1 4 A.C.L.R. 474. The prohibition against returning capital to shareholders exemplified in Trevor v. Whitworth is an instance. It was a judicial development achieved by making broad generalisations about the nature of corporate trading with limited liability and the conditions on which the legislature had permitted it to proceed. Another limitation also identifiable in that way is that corporate property may be applied only for corporate purposes. No one can doubt that this is implicit in the structure of the legislation regulating the formation, management and winding up of corporate traders with limited liability. Decisions in the tradition of Hutton v. West Cork Railway Co. illustrate this rule. "The essential principle", said Mahoney J.A. in Advance Bank Australia Ltd, v. FAI Insurances Ltd. (1987) 9 N.S.W.L.R. 464, at 493, "is that the powers, and the funds, of a company may be used only for the purposes of the company". It was the application of this principle that in the present case led to judgment for the defendant QAL. The same essential principle underlies all the decisions referred to. In Plain Ltd, v. Kinlev & Royal Trust Co. [1931] 1 D.L.R. 468, at 479, Orde J.A. spoke of ultra vires "not in its primary application to the powers of the company as a corporate -- 21 of 33 -- 18 body, but in its secondary application to the irregular exercise by the directors or the shareholders of their powers or rights within the company...". In several recent English decisions, notably Rolled Steel Products Ltd, v. British Steel Corporation [1982] 3 All E.R. 1057, at 1077, a similar distinction is made between corporate capacity (ultra vires in the narrow sense), and abuse of power by directors or shareholders (ultra vires in the wide sense) . It is ultra vires in this second sense that is directly relevant in answering the question "whether a disposition of the property of the company was made for the benefit and to promote the prosperity of the company". The distinction was adopted by Browne-Wilkinson in the Rolled Steel case on appeal [1986] Ch. 246, in a passage adverted to by Mason C.J. in Northside Developments Ptv. Ltd. ’ v. Registrar-General (1990) 64 A.L.J.R. 427, at 433. See also Darvall v. North Sydney Brick & Tile Co. (1988) 14 A.C.L.R. 474, at 483. The judgment of Vinelott J. at first instance in the Rolled Steel case was responsible in Australia for the amending insertion in 1985 of s.67(3) of the Companies Code, which declares: "(3) The fact that the doing of an act by a company would not be, or is not, in the best interests of the company does not affect the legal capacity to do the Act." The explanatory memorandum accompanying the amending Bill, to which Mr Keane Q.C. referred us, explains that s.67(3) "specifically excludes" the application of the Rolled Steel case [1982] 3 All E.R. 1057, and is "designed to prevent any suggestion that any doctrine of 'wider ultra vires' as expounded by the courts remains in existence". Section 67(3) operates, however, to the extent and in the manner intended by S.66C; that is, it is concerned to ensure that the wider form of ultra vires -- 22 of 33 -- 19 "does not affect the legal capacity of the company to do the act", thus maintaining the validity of corporate dealings with outsiders : see s.66C{a). It does not free the directors or shareholders from ensuring that "rules of the company are given effect to by the company's officers and members" : s.66C(b). Except in relation to the validity of corporate dealings with outsiders, it therefore does not disturb the fundamental rule that the powers or funds of a company may be used only for company purposes. Cf . Darvall v. North Sydney Brick & Tile Co. (1988) 14 A.C.L.R. 474, at 484. The present case is not one in which the validity of company dealings with outsiders comes into question. None of the subsidiary companies dealt with ANZ. It was the holding company that entered into the trust deeds. On the submission advanced to us by ANZ, the holding company is to be viewed as the shareholder or holders of the subsidiaries or their holding companies. It is against it in that character that the order for specific performance is sought in order to procure execution of the guarantees it covenanted to obtain. Our order cannot compel QAL to do something that, apart from the order, the law does not permit. We cannot order a shareholder to require the company to execute the instrument of guarantee if to do so would involve infringing the "essential principle" that corporate powers and funds may be used only for corporate purposes . For a commercial or trading company confronting insolvency to make a gift of its assets in derogation of the interests of creditors is not to use powers or purposes for their corporate but to do so for a non-corporate purpose. For a subsidiary now to execute an instrument rendering it liable for an indebtedness in the order of $110 million cannot possibly be for its benefit. No -- 23 of 33 -- 20 doubt it may be "for the benefit of solvent companies within a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group" : see Northside Developments Ptv. Ltd, v. Registrar- General (1990) 64 A.L.J.R. 427, at 442, per Brennan J., with whom, on this matter of a creditor taking a company's guarantee for another's debt, Mason C.J. expressed his general agreement: see (1990) 64 A.L.J.R. 427, at 434 col.1G. The position is, as his Honour's observations at 442 col.1F-G imply, different if the guarantee is not "for the purposes of a company's business nor otherwise for its benefit". In that case, the High Court, and Brennan J. in particular, were considering whether in taking such a guarantee a creditor is put on inquiry that it is "not within the authority of the officers or agents of the company". To that extent, the Northside case differs from this. But a guarantee that is not for the company's business or benefit does not alter its character because it is given or promised on behalf of the company by its sole or controlling shareholder. Shareholders possess no general authority, whether actual, implied or ostensible, to bind the company, much less to bind it to a result that is not for its benefit. ANZ does not suggest that by entering into the trust deeds QAL contractually bound each subsidiary to execute instruments of guarantee when demanded by ANZ. QAL bound only itself and no one else. What is now attempted is to compel QAL to do an act that the subsidiary companies, whether by their officers, agents or, I would add, shareholders, are themselves not permitted by law to do. This brings me to what is virtually the final point in these already overlengthy reasons. ANZ submits that the proper -- 24 of 33 -- 21 time for considering the propriety of the subsidiaries executing the instruments of guarantee is not now, or when the specific performance order is made or obeyed, but when the trust deeds (exs. 2, 3, 4) were entered into by QAL in 1988 and 1989. For this purpose it is necessary to assume that at that time those guarantees would have served to benefit each of the subsidiary companies as well as other members of the group. There is evidence accepted by the learned trial judge that the proceeds of the note issues were designed to provide "working capital for the group" . Whether that is sufficient to satisfy the test propounded by Brennan J. in Northside Developments may be doubtful. Mr Keane Q.C. contended that the onus of proof to the contrary rests on QAL. My reading of what Brennan J. said leads me to question the appellant's proposition. Guaranteeing someone else's debt is not a transaction that naturally raises an inference of benefit to the guarantor. The authority on which ANZ relies for fixing the relevant time as 1988 or 1989, when the trust deeds were made, and not now or hereafter, is Thorbv v. Goldberg (1964) 112 C.L.R. 597. The point on demurrer there was that an agreement having the effect of binding company directors in advance to exercise their discretion in a particular way was illegal or contrary to public policy as preventing performance of the duty to exercise their powers in good faith for the benefit of the company as a whole. The High Court upheld a decision overruling the demurrer to the plea or pleas that raised it. Kitto J., with whom McTiernan, Windeyer and Owen JJ. agreed, said (112 C.L.R. 597, at 605): . "There are many kinds of transactions in which the proper time for the exercise of the directors' discretion is the time of the negotiation of a contract, and not the time at which the contract is to be performed. A sale of land is a familiar example. -- 25 of 33 -- 22 Where all the members of a company desire to enter as a group into a transaction such as that in the present case, the transaction being one which requires action by the board of directors for its effectuation, it seems to me that the proper time for the directors to decide whether their proposed action will be in the interests of the company as a whole is the time when the transaction is being entered into, and not the time when their action under it is required." Menzies J. was more cautious. His Honour said (112 C.L.R. 597, at 616) that he thought no question could really arise about the rights of shareholders to bind themselves to exercise their votes in a particular way at future meetings of the company. However while guarding against being understood as deciding that a company director can in ordinary cases bind himself to exercise his power as director in a particular way, he said he did not find any ground for objection to the directors committing themselves to act as set out in the agreement in that case. All the shareholders were parties to the agreement and what the directors undertook to do was what all the shareholders committed themselves to ensure that they did. The case was one in which 16 individuals forming the 0 Group, and five forming the G Group, agreed to develop land in Macquarie Street by constructing a new building on it. The land belonged to a company of which the 0 Group members were holders of the only issued share capital. The agreement provided for conversion of the company to a public company, the restructuring of its capital, and an amendment of articles to enable the allotment of further classified shares that were to be issued to 0 Group and G Group members entitling them to occupy specified parts of the new building. The critical term of the agreement was cl. 16, providing that each member of each Group covenanted with all other members of both Groups "that he shall so conduct -- 26 of 33 -- 23 himself as a member and/or Director of the Company as to give effect to the provisions hereinbefore contained". The case was therefore one in which all the members and directors, expressly contracting in both of those capacities, of a company agreed to act in a certain manner in relation to that company. The contemplated revision of articles and restructuring of share capital were within the province of the shareholders as matters to be effected by special resolution. Under the agreement the directors' functions were confined to allotting the proposed new shares and resigning or accepting resignations as provided. That, in all their capacities, ' they expressly bound themselves to achieve. Tendering or accepting resignations of directors can scarcely be considered an exercise of corporate power. Nothing much can be done in law to prevent it from happening. The right to issue and allot new share capital is, however, an advantage "which belongs to the company" ( Naurli Ltd, v. McCann (1953) 90 C.L.R. 425, at 447) and as such must be exercised by shareholders or directors for the benefit of the company. However, where as in Thorbv v. Goldberg, all shareholders and directors of a company agree upon it, and the transaction is one that at the time is visibly for the benefit of the company, there is no reason why they should not, in advance and conformably to the terms of that transaction, bind themselves in future to exercise their discretion in accordance with the agreed transaction; the more so if the interests of creditors are not likely to be adversely affected by performing the agreement . Only some of these features are evident in the present transactions even when viewed from the standpoint of affairs as they may have been in 1988 and 1989 at the time when the trust -- 27 of 33 -- 24 deeds were entered into by QAL. In the first place, QAL did not hold all the shares in each and every subsidiary company, even if, as the ultimate or penultimate holding company, it was in a position to control their affairs. In the second place: "The word 'group' is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company." See Walker v. Wimborne (1976) 137 C.L.R. 1, at 6, per Mason J. This I understand to mean that it was necessary for the interests of each subsidiary to be considered separately with a view to determining the likely impact upon it, before QAL could properly bind itself to exercise its powers as shareholder to cause the particular subsidiary to act in conformity with its own covenant. Mr Keane Q.C. submits that there is no evidence or even allegation that this was not done; but that ignores the circumstance that the covenant in cl.9(1)(s) purports to include within its scope subsidiaries of QAL not acquired or even formed before the date of the deed. Furthermore, the giving of a guarantee by one member of a group in favour of another is a matter that, as appears from the observations of Brennan J. in Northside Developments Ptv. Ltd, v. Registrar-General (1990) 64 A.L.J.R. 427, at 442, is to some extent the subject of special considerations that may cast the onus on the recipient of the guarantee . None of these matters is decisive against Mr Keane's submission in the present case. What may be is that, unlike -- 28 of 33 -- 25 Thorbv v . Goldberg, none of the directors of any of the subsidiaries here covenanted to exercise his powers to cause any subsidiary of which he was a director to give a guarantee. In entering into the deeds QAL could not have been acting as the directors, or even as a director, of each or any of the subsidiaries because by s.219(2) of the Code a person cannot be appointed as a director unless he is a natural person, which QAL is not. Furthermore, even a proprietary company is by s.219(1) of the Code required to have at least two directors. It is right to say that there is, in a schedule exhibited to the affidavit of Mr S.C. Russell, evidence of the identities of the directors of each of the subsidiaries on 15 February 1989. Although they vary to some extent from subsidiary to subsidiary, it may be accepted that in each instance those who were directors of a particular subsidiary at that date were also directors of QAL. This might carry ANZ's case a long way forward were it not for the fact that it was not those individuals who entered into the trust deeds. It was QAL that did so. Mr Keane Q.C. did not, I think, quite go to the length of submitting that, because the individuals who were directors of QAL evidently considered it in the best interests of QAL to give the covenants in the deeds, they must be taken to have considered that it was also in the best interests of each subsidiary of which they happened also to be directors. He did, however, rely on the absence of any evidence to the contrary. In the case of an ordinary commercial contract to which a corporate entity is a party, it no doubt is proper to assume or presume that the directors have, before entering into that contract, fulfilled their duty of considering whether to do so -- 29 of 33 -- 26 was in the best interests of the company. Various presumptions to that effect now appear in s.68A of the Code. But neither those provisions nor any presumption under the general law assists ANZ in the case of the trust deeds in the present case. The subsidiaries were not, any more than were the individual directors, parties to those deeds. If they had been, this action would not have been necessary. The distinction between this case and Thorbv v. Goldberg may thus be seen as ultimately resting in this difference. In the latter case all the organs of the company (that is, all shareholders and directors) agreed to act in a specified manner in the future; they expressly agreed to be bound to do so in their respective capacities of shareholders and directors. In the present case, at best only the controlling shareholder (if QAL can properly be so described) of each subsidiary company made any such agreement with ANZ. The directors of the subsidiary companies did not do so. A critical corporate organ is thus shown not to have been a party to the transaction. I say "critical" because giving or agreeing to give guarantees is a function of corporate management that, by reg.66(1) of the standard form of articles of association in Table A to the Code, is assigned to the directors of the company. It is now well settled that . under an article like reg.66(1), the shareholders or the members in general meeting have no authority to interfere with the exercise of powers of directors acting under such a provision : see Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame [1906] 2 Ch. 34; Salmon v. Quin & Axtens [1909] 1 Ch. 311; [1909] A .C . 442; John Shaw & Sons (Salford) Ltd, v. Shaw [1935] 1 K.B. 113; Scott v. Scott [1943] 1 All E.R. 582; Gower : Modern Company Law (4th ed. ) at 143-147. An attempt was made -- 30 of 33 -- 27 to say that the shareholders possess "reserve" or "default" powers in the matter of managing companies. As to that, it is enough to observe that there is nothing to suggest any circumstance in which powers of that kind became exercisable or were exercised at times when the trust deeds were entered into. Of course, it is true that the articles of association of the subsidiaries are not before us. We therefore do not know that they incorporate a provision like that in reg.66(1), although it would be astonishing if they did not. It does not follow that we should assume instead that they contain an article authorising the holding company to enter into contracts binding on the subsidiaries. Such a provision would be quite contrary to experience in these matters, and I would not be prepared to act on any such assumption in making an order for specific performance in a case like this. In any event, it bears repeating that in entering into the trust deeds QAL did not affect to be binding the corporate entities that are the subsidiary companies. Its covenant bound and was expressed to bind only QAL itself. Finally, it is appropriate to mention a further obstacle to the appellant's prospects of success in the action. This is that on 21 November, 1989 receivers (of whom one is Mr Allpass) were appointed by the Supreme Court of Victoria to be jointly and severally receivers and managers of the assets and undertaking of QAL and of each of a number of subsidiaries that are listed in a schedule to the order. The order was originally obtained by QAL and those subsidiaries on application made ex parte. However, the order has not been set aside, and on 11 May 1990 it was extended to 10 November 1990. On that -- 31 of 33 -- 28 occasion the representative lender appeared by solicitor on the hearing of the application. The order of appointment by the Court contains the usual power authorising the receivers to enter into possession and take control of the property of the applicant : see cl. 3 (a). As officers of court their possession is the possession of that Court, and any interference with it constitutes a contempt of court. What is more important, the functions of executing a document and of using the seal of those companies are consigned to the receivers, as is the power of voting shares and units held by the companies : see paras. 3(g), 3 ( i ) and 3(r) of the order of 21 November 1989. That is where those powers now rest in the case of each of the subsidiaries encompassed by the orders. It is consequently not possible for us here to compel those subsidiaries to execute guarantees either under hand or under seal. To do so would be tantamount to giving directions to officers of the Supreme Court of Victoria. Before undertaking such a step I would, in any event, wish to allow the receivers an opportunity of being represented and heard either here or in the Supreme Court of Victoria. In those circumstances an order for specific performance ought not to be made in respect of any of the subsidiaries now subject to a receiver. An attempt was made to meet these difficulties by inviting this Court to order its own Registrar to execute the instruments of guarantee. He, however, does not have access to the corporate seals needed to execute any deeds of guarantee on behalf of the subsidiaries. Quite apart from that, I would not be prepared to make any order requiring him to do so unless I was also satisfied that the subsidiaries themselves were bound to carry out the order for -- 32 of 33 -- 29 specific performance. Since they are not parties to the action they cannot be bound at all. In the end, I am, for the reasons given, satisfied that the appellant ANZ is not entitled in this action to specific performance of the relevant covenants in the trust deeds, and that the Court ought not to make the order that is sought. I would therefore dismiss the appeal with costs. -- 33 of 33 --