Version controlDate:8-May-23Time: 9:52 PM

Chapter 3 – The benefits of the ratification doctrine

Temporary tables of contents

ContentsI. Introduction..................................................................................................................2II. The legal benefits.........................................................................................................2III. Other beneficial aspects of the doctrine...................................................................2IV. Conclusion...............................................................................................................2

I. INTRODUCTION

II. THE LEGAL BENEFITS

III. OTHER BENEFICIAL ASPECTS OF THE DOCTRINE

IV. CONCLUSION

This thesis will now consider the criticisms of and uncertainty in relation to the doctrine

of ratification which provides a criterion to assess whether the doctrine of ratification

remains appropriate to companies governed by the Corporations Act.

V. COPIED TEXT FROM OTHER DRAFT CHAPTERS

In the context of companies governed by the Corporations Act, without the power of

ratification, directors would be at risk of the company (alternately the shareholders

pursuant to the statutory derivative action1) commencing proceedings for any breach of a

director’s fiduciary and statutory duties, even in circumstances whereby a majority of

shareholders consider the breach of duty to have been beneficial to the company.2 The

doctrine thereby has an important role in permitting shareholders to determine whether a

particular breach is of such a serious nature that the company must take legal steps to

protect its interests and thereby protect the interests of the shareholders, the company’s

employees and the creditors.

RetrospectivityThe following 6 examples of ratification serve to highlight the importance of the

retrospective operation of the doctrine:

1 Corporations Act 2001 (Cth) s 236.2 For example, the directors may engage in issuing shares during a takeover battle to prevent the takeover proceeding at a price considered to be too low compared to the net assets of the company.

Page 2 of 18

(i) the ratification of the commencement of legal proceedings.3 A client of a solicitor

may ratify the issuance of a writ after the period for the commencement of

proceedings has expired under a statute of limitations, however, it remains the

discretion of the Court to determine whether an extension of time ought to be

granted. The retrospective operation concerning the irregular issuance of the writ

ensures that the client’s legal rights are preserved;4

(ii) the ratification of the commencement of legal proceedings by persons not

authorised by a company, such as a liquidator. The liquidator’s ratification is

treated retrospectively as though the company authorised the commencement of

the legal proceedings which as previously, preserves the company’s legal rights;5

(iii) when the conduct of a director, including a shadow or de facto director, is ratified,

it has the effect of binding the company under section 128 of the Corporations Act

and thereby protects third parties;

(iv) the ratification of a payment made on a company’s behalf will result in a

discharge of the company’s debt to a creditor and this may be relevant in an

insolvency context;6

(v) the ratification by a principal of a contract entered into by an agent which did not

have authority at the time. Provided that the offeror was not unfairly prejudiced,

the offeror cannot withdraw the offer before the ratification takes place since the

ratification is retrospective to the time of the acceptance and the parties become

bound by the contract. The retrospective operation of the acceptance of the

contract thereby prevents the offeror from avoiding its obligation to perform the

contract; and

3 See, eg. Danish Mercantile Co. Ltd v. Beaumont [1951] Ch 680; Victoria Teachers Credit Union v KPMG [2000] VSCA 23; Alexander Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 1 WLR 673; Australian Liquor Hospitality & Miscellaneous Workers Union (WA Branch) v Gay-Dor Plastics Ltd (1994) 74 WAIG 961; Omega Estates Pty Ltd v Ganke (1962) 80 WN (NSW) 1218.4 Adams v Elphinstone [1993] TASSC 67.5 Alexander Ward and Co Ltd v Samyang Navigation Co Ltd [1975] 2 All ER 424 (the commencement of proceedings was ratified by the liquidator).6 Clarke & Anor v Abou-Samra & Ors [2010] SASC 205, [102] (Kourakis J) citing with authority J Beatson, The Use and Abuse of Unjust Enrichment (1991) chapter 7 at 200-05. See also Goff and Jones, The Law of Restitution (6th ed, 2002) at [1-018]. The proposition that a debt is not discharged unless the payment is made on behalf of the debtor and with the debtor’s authority is accepted by the authors of Restitution Law in Australia: K Mason, JW Carter and GJ Tolhurst, Mason & Carter’s Restitution Law in Australia (2nd ed, 2008) at [846].

Page 3 of 18

(vi) a ratification by a State of an ‘act of state’ will render that act immune from suit

under the doctrine of act of state.7 A State may thereby avoid liability for an act

because of the retrospective operation of the doctrine of ratification.

A. Application to contract law

A principal may ratify a contract even after initially refusing to ratify the unauthorised

transaction. If the third party is unaware of the principal’s initial refusal to ratify, the

principal may acquire rights under the contract with the third party.8 Conversely, if the

principal has at first led the third party to believe that they will not ratify the contract and

the third party has acted to their prejudice, then the principal will not later be allowed to

ratify.9

In respect of contracts, the retrospective operation to the time of acceptance of an

agreement can operate to the disadvantage of the third party. As a general principle of

contract law, an offer may be revoked at any time before acceptance.10 However, a third

party is unable to revoke their offer after the time of purported acceptance by the agent

since the ratification of the contract is deemed to operate from the time of the agent’s

acceptance.11 Accordingly, the normal principles of contract law do not operate in the

context of ratification.

The principle has been justified on the basis that ‘[a]lthough the principal may be

presented with an opportunity, even a windfall, not of [their] making, the important

consideration is that the third party ought not to feel [themselves] disadvantaged by the

principal’s ratification.’12

7 Buron v Denman (1848) 2 Exch 167. In Buron v Denman, in the course of their duty a naval commander who was entrusted to assist in the suppression of slavery freed the plaintiff’s slaves and destroyed the plaintiff’s ship which had been used to transport the slaves. The Court held that the minister of state’s ratification of the defendant’s actions rendered it an act of state and was therefore immune from suit.8 Simpson v Eggington (1855) 10 Exch 845.9 R Munday, Agency law and principles (Oxford University Press, 2010), 120.10 Dickinson v Dodds (1876) 2 Ch D 463; Byrne v Van Tienhoven [1874-1880] All ER 1432; Re National Savings Bank Association (1867) LR 4 Eq 9 (‘Hebb’s Case’).11 Bolton Partners v Lambert (1889) LR 41 ChD 295.12 R Munday, Agency law and principles (Oxford University Press, 2010), 106.

Page 4 of 18

To avoid unfairness to a third party, the law developed a general principal that a third

party may not be unduly prejudiced when a contract is ratified. Specific examples of the

unfairness to a third party include:

(i) where an agent, without the authority of the landlord, gives a tenant notice to quit,

that notice cannot be made binding on the tenant by ratification by the landlord

after the time for the giving of the notice has expired;13 and

(ii) where the right to the ownership of goods had vested.14

The general principle is recognised by the following principles concerning ratification:

(i) ratification must take place within a reasonable time;15

(ii) unfair prejudice,16 it would seem, is always present if the effect of a purported

principal’s ratification would be to divest a third party of vested proprietary

rights17 but not where the ratification merely has the effect, or possible effect, of

affecting the rights of a third party;18

(iii) an estate once vested cannot be divested;

13 Doe d Mann v Walters (1830) 10 B and C 626, Doe d Lyster v Goldwin (1841) 2 QB 143 and Right d Fisher, Nash and Hyrons v Cuthell (1804) 5 East 491); Dibbins v Dibbins (1896) 2 Ch 348, Bird v Brown (1850) 4 Exch 786; Lord Audley v Pollard (1597) Cro Eliz 561.14 Bird v Brown (1850) 4 Exch 786; Dibbins v Dibbins (1896) 2 Ch 348.15 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28. What is a reasonable time depends upon the circumstances of the case.16 In the context of members’ remedies in respect of unfairly prejudicial conduct, the test of unfairness is free from technical considerations of legal rights and to confer a wide power upon the court to do what is just and equitable (O’Neill v Phillips [1999] 2 All ER 961). Prejudice is not unfair where it occurs in the bona fide exercise of a power to prejudice (Wayde v NSW Rugby League Ltd (1985) 180 CLR 459). In the context of ratification the meaning of ‘unfair prejudice’ has not been authoritatively determined by a Court in Australia or the United Kingdom. See for example in Adams v Elphinstone [1993] TASSC 67, [25] (Zeeman J) approved Attorney-General v Wylde (1946) 47 SR (NSW) 99 that ratification cannot operate in destruction of rights that have accrued by reason of the acts sought to be ratified, having been done without authority and therefore being ineffective and not having been ratified at any time when the acts could have been done effectively.17 See, eg, Bird v Brown (1850) 4 Exch 786; N M Superannuation Pty Ltd v Baker (1992) 7 ACSR 105; R Munday, Agency law and principles (Oxford University Press, 2010), 129 cf Adams v Elphinstone [1993] TASSC 67, [26] (Zeeman J) where the correctness of the use of prejudice and unfairness were the relevant tests. It was stated that ‘It may well be appropriate to describe the relevant tests as falling into an overall category of unfair prejudice to a third party but only in a descriptive sense rather than as a test by reference to which the validity of a purported ratification is to be determined.’.18 Adams v Elphinstone [1993] TASSC 67. See also Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 where a contract of insurance entered into by an agent without authority may be ratified even after loss.

Page 5 of 18

(iv) a lawful act at the time it was done cannot be rendered unlawful by the operation

of ratification;

(v) ratification of a transaction after the expiry of an ordained time limit may give rise

to unfair prejudice to a third party;19 and

(vi) ratification cannot take place where nothing remains to be ratified.20

In light of the fact that the doctrine of ratification was applied generally to fiduciary

relationships with respect to the law of agency, trusts, contract and torts by the Courts in

the United Kingdom, each of the above principles remains relevant to the application of

the doctrine of ratification to breaches of fiduciary and statutory duty by directors of

companies.

In contrast, in cases where the third party is seeking to hold the principal liable on the

transaction, since prejudice to the third party will be absent, subsequent ratification by the

principal is permissible.21 If the principal does not elect to ratify a transaction, the third

party has no remedy as against the principal, although the third party may have a remedy

against the agent for breach of their warranty of authority.22

The practical consequences of the retrospective effect of the ratification are that:

(i) the principal may take some time to consider whether to accept the benefit of a

transaction, or enter into a new transaction. For example, during the period of

time permitted for the delivery of goods, the price may have increased, thereby

ensuring a monetary benefit to the principal. If the price of the goods falls in the

same period, the principal may simply not ratify the contract and then obtain the

reduced price for the goods by entering into a new contract; and

(ii) the principal is able to avoid any additional costs in negotiating a new contract

which may include new terms.

19 Smith v Henniker-Major [2003] Ch 182.20 Walker v James (1871) LR 6 Ex 124.21 R Munday, Agency law and principles (Oxford University Press, 2010), 120.22 R. Munday, Agency law and principles (Oxford University Press, 2010), 122.

Page 6 of 18

The underlying legal principles concerning the formation of contracts are consistent with

the adoption of the doctrine of ratification into English law on the basis that the ultimate

liability or benefit of a contract rested with the principal and not the agent.

PropositionIt is a proposition advanced by this thesis that it is unclear whether a third party must

suffer some prejudice, or whether the prejudice must be undue, alternately unfair before

ratification will not be permitted.

B. Application to tort law

In relation to torts, including assault,23 defamation,24 conversion25 and deceit,26 a principal

will be responsible for the conduct of the principal’s agent upon ratification of the agent’s

conduct consistent with the principles of ratification developed in the context of contract

law.27 If the principal does not ratify the agent’s conduct, the principal will not be liable

for any damage or loss caused by the agent and thereby the agent remains liable.

The illegality of an act does not of itself prevent a principal from ratifying the agent’s

conduct,28 however a principal will be unable to ratify an act which the principal had no

power to perform29 and a principal cannot take or retain a benefit from a fraud committed

on their behalf.30

23 Eastern Counties Railway Co v Broom (1851) 6 Ex 314.24 Urbanchich v Drummoyne Municipal Council (1991) Aust Torts Reports 81-127; Bishop v State of New South Wales [2000] NSWSC 1042.25 Hilbery v Hatton (1864) 2 H & C 822.26 See, eg. Kettlewell v Refuge Assurance Co [1908] 1 KB 545 where the insurer’s agent made fraudulent misrepresentations to the plaintiff.27 See, eg, Kettlewell v Refuge Assurance Co [1908] 1 KB 545.28 Hull v Pickersgill (1819) 1 Brod & Bing 282; Bedford Insurance Co Ltd v Institutto de Resseguros Do Brasil [1985] QB 966. See LexisNexis, Halsbury’s laws of Australia (at 27 January 2014) ‘Unlawful acts’ [15-145].29 For example, a principal cannot ratify a forgery (see Rowe v B & R Nominees Pty Ltd [1964] VR 477 (following Brook v Hook (1871) LR 6 Ex 89). However, see M’Kenzie v British Linen Co (1881) LR 6 App Cas 82 at 99 per Blackburn J. See also Muir’s Executors v Craig’s Trustees 1913 SC 349; Morison v London County and Westminster Bank Ltd [1914] 3 KB 356; Fung Kai Sun v Chan Fui Hing [1951] AC 489; Kernan v London Discount & Mortgage Bank Ltd (1878) 4 VLR (L) 279. See also Rowe v B & R Nominees Pty Ltd [1964] VR 477, 483.30 Davis v Williams [2003] NSWCA 371; Kettlewell v Refuge Assurance Co [1908] 1 KB 545.

Page 7 of 18

The underlying legal principles concerning the liability for a tort are consistent with the

adoption of the doctrine of ratification into English law on the basis that the ultimate

liability for a tort rested with the principal and not the agent.

VI. THE CONTINUING RELEVANCE OF THE DOCTRINE TO COMPANIES

Following the codification of director’s fiduciary duties under the former Corporations

Law, the effect of the doctrine of ratification was significantly curtailed, however, the

combined impact of this series of legislative reforms together with the introduction of the

statutory derivative action from 13 March 2000 has not resulted in the doctrine of

ratification being irrelevant to companies incorporated under the Corporations Act. This

section thus considers the continuing relevance of the doctrine of ratification to

companies incorporated under the Corporations Act (and hence its importance in the

context of prejudice to a company and its company stakeholders).

By reason that the fiduciary duties of directors are included within the statutory duties

established under sections 181, 182 and 183 of the Corporations Act (as separate from

any other codified common law duties), and since it is not possible for the shareholders in

general meeting to ratify a breach of a statutory duty it will not be possible for a majority

of shareholders in general meeting to exonerate a director from liability to the company

for a breach of their statutory duties. The question whether a statutory duty may be

attenuated by ratification or authorisation is considered in Chapter 5.

Notwithstanding that a majority of shareholders may not exonerate a director from a

breach of statutory duty, in relation to the statutory derivative action,31 the doctrine of

ratification continues to be relevant in Australia to:

(i) the assumptions permitted under section 129 of the Corporations Act;

(ii) the effect of a ratification resolution on irregularly commenced proceedings

where there is a limitation imposed by a statute of limitations;32

31 Corporations Act 2001 (Cth) s 236(1).32 See, eg, Presentaciones Musicales SA v Secunda [1994] Ch 271.

Page 8 of 18

(iii) an application for leave to commence derivative proceedings;33

(iv) the protection of honest directors and generally the liability of the directors;34

and

(v) the quantum of damages in relation to proceedings commenced under section

236(1) of the Corporations Act.35

Each of these matters is considered in greater detail in the following section. Before

proceeding to consider each of these matters, it is important to note that the courts play a

limited role in corporate disputes. A court will not consider an internal management

decision taken by the board of directors since this would create a situation where the

judiciary were exercising judgements which the directors undertook in the context of the

business judgement rule.36 This is recognition of the fact that the directors of a company

are uniquely placed to consider all of the risks and benefits inherent in any business

decision taken by the board of directors.

C. The assumptions permitted by section 129 of the Corporations Act

Section 129 of the Corporations Act is the statutory extension of the indoor management

rule under the common law.

The assumptions must be in relation to dealings with a company. The word ‘dealings’ is

of wide application and has been held to include contractual transactions,37 applications

for the registration of titles under Torrens system legislation38 and communications with a

third party.39 However, a dealing for the purposes of section 128 does not extend to the

relations between the company and a person who is under a duty to it to inquire into the

internal workings of the company.40

33 Corporations Act 2001 (Cth) s 237.34 Corporations Act 2001 (Cth) ss 1317S; 1318.35 Corporations Act 2001 (Cth) s 239.36 See, eg, Zephyr Holdings Pty Ltd v Jack Chia (Australia) Ltd (1988) 14 ACLR 30 at 37 per Brooking J.37 Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119.38 Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16.39 Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd (2013) 282 FLR 351.40 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 33 ACSR 1.

Page 9 of 18

The approval of a ratification resolution will be relevant to an assumption permissible

under section 129 of the Corporations Act since the ratification of a director’s breach of

duty to the company regularises the conduct retrospectively and accordingly, the

company thereby becomes bound by the conduct of the director (eg. the execution of a

contract, or the provision of a guarantee to a third party). This will be of greater

significance when a person knew or suspected that an assumption permissible under

section 129 was incorrect.41

D. The effect of a ratification resolution on irregularly commenced proceedings where there is a limitation imposed by a statute of

limitations

Where a solicitor commences proceedings without the authority of a client, the client may

ratify the commencement of those legal proceedings, even in circumstances when the

time for the commencement of the proceedings has expired pursuant to the relevant

statute of limitations. The lack of authority may arise for example, because there was a

defect in the removal of a director prior to the commencement of the proceedings, or a

liquidator was appointed to the company and the solicitors acted incorrectly on the

authority of the directors.42

The irregular commencement of the proceedings is not treated as a nullity for the

purposes of the court’s rules, although the court must consider whether to grant an

extension of time.

In the context of a company, a practice has developed that when an action is brought

without authority it will not be stayed or dismissed forthwith, but the company will be

permitted to convene a general meeting or a meeting of its directors to consider whether

to adopt the action.43

E. Applications for leave to commence proceedings pursuant to section 237

41 Corporations Act 2001 (Cth) s 128(4).42 See, eg, Presentaciones Musicales SA v Secunda [1994] Ch 271.43 SBA Properties Ltd v Craddock [1967] 1 WLR 716; McEvoy v Body Corporate for No 9 Port Douglas Road [2013] QCA 168.

Page 10 of 18

A shareholder does not have an inherent statutory right to commence or intervene in

proceedings on behalf of a company or intervene in proceedings. Pursuant to section

237(2) of the Corporations Act, the Court must grant a shareholder leave if the Court is

satisfied of the 5 enumerated matters in that section. The Court’s jurisdiction to grant

leave is grounded upon the same principle on which a beneficiary of a trust could always

have commenced proceedings in the old Court of Chancery against the trustee to be

allowed to use his or her name to recover the trust property.44

In a circumstance where a majority of shareholders in general meeting have approved a

ratification resolution or authorised the directors to engage in particular conduct, section

239 of the Corporations Act ensures that the shareholders’ ratification or approval does

not prevent the conduct from being within the scope of a derivative action brought by a

shareholder.45

Pursuant to section 239(2) of the Corporations Act, if a majority of the shareholders of a

company ratify or approve the conduct of a director, the Court has a discretion to take

into account the ratification or approval in deciding what order or judgment to make in

proceedings brought or intervened in with leave under section 237 or in relation to an

application for leave under section 237. The discretionary nature of the Court’s powers

to take into account a ratification resolution is significant because it prevents directors

from obtaining a release from liability from the company other than with the sanction of a

court. This accordingly means that the introduction of the statutory derivative action has

been largely effective to reduce the role of the doctrine of ratification, however the courts

are permitted to consider the ratification or approval as a part of the exercise of the

discretion.

Pursuant to section 239(2) of the Corporations Act, in exercising its discretion the Court

must have regard to:

44 Bl and Gy International Co. Ltd v Hypec Electronics Pty Ltd; Colin Anthony Mead v David Patrick Watson and Ors. [2001] NSWSC 705 at [70] per Einstein J.45 See Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52.

Page 11 of 18

(a) how well-informed about the conduct the members were when deciding whether to

ratify or approve the conduct; and

(b) whether the members who ratified or approved the conduct were acting for proper

purposes.

The principle upon which a ratification or approval resolution is relevant to leave being

granted pursuant to section 237 of the Corporations Act is enunciated by section 239(2)

which establishes what matters the court must have regard to in relation to an application

for leave to commence or intervene in proceedings.

Section 239(2) in Part 2F.1A of the former Corporations Law commenced on 13 March

2000 following the enactment of the Corporate Law Economic Reform Program Act

1999 (Cth). The Explanatory Memorandum to the Corporate Law Economic Reform

Program Bill 1998 at paragraph 6.8 on page 24 which concerned the proposed

introduction of section 239(2), explained the principle as follows:

Proposed subsection 239(2) will provide that the Court may take into account a

ratification or approval of conduct in deciding what order or judgment (including as to

damages) to make. However, the provision will make it clear that the Court may only

have regard to ratification if it is satisfied that the ratification was effected by the

company’s fully informed independent members. (emphasis added)

The Explanatory Memorandum indicates that the intention of the Commonwealth

parliament in introducing section 239(2) was to ensure that if the Court exercised its

discretion to take a ratification or approval resolution into account in relation to an

application for leave under section 237, the Court must be satisfied that the shareholders

which approved the resolution were both fully informed and were independent

shareholders from the affected director(s).

The Explanatory Memorandum explained the reason for the introduction of Part 2F.1A

into the Corporations Law was as a result of the practical and legal difficulties faced by

Page 12 of 18

litigants arising from the limited exceptions to the rule in Foss v Harbottle.46 The 3 main

difficulties associated with the common law action were explained as follows:

1. the effect of ratification of the impugned conduct by the general meeting of

shareholders (if effective, the purported ratification by a majority of shareholders

could deny the company as a whole, and hence minority shareholders, any right of

action against the directors);

2. the lack of access to company funds by shareholders to finance the proceedings

(where a shareholder seeks to enforce a right on behalf of a company, they are

likely to be disinclined to risk having costs awarded against them in a case which

will ultimately benefit the company as a whole, not just individual shareholders);

and

3. the strict criteria which need to be established before a Court may grant leave.47

The Explanatory Memorandum also explained that there would be appropriate checks

and balances to prevent abuse of the statutory derivative action to ensure that vexatious

proceedings were not commenced and that company funds are not expended

unnecessarily.48 This is an important policy consideration which in part raises an

economic argument in favour of retention of the doctrine of ratification in certain

circumstances separate from arguments identified later in this thesis in support of the

retention of the doctrine of ratification, subject to a series of legislative reforms.

Notwithstanding that section 239(2) of the Corporations Act has been unamended since

its introduction in 2000, the principle upon which section 239(2) was enacted has not

resulted in this section being interpreted by the courts in accordance with the

‘independent shareholders’ requirement. This may be because the cases which have

considered section 239(2) have not been required to consider whether a ratification

resolution was approved by an independent majority of shareholders.49

46 (1843) 2 Hare 461.47 Para 6.15 on page 19.48 Para 6.16 on page 19.49 See especially, William Arthur Forge & 5 Ors v Australian Securities & Investments Commission [2004] NSWCA 448; Massey & Anor v Wales & Ors; Massey & Anor v Cooney & Anor [2003] NSWCA 212; Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52; Ehsman v Nutectime International [2006] NSWSC 887.

Page 13 of 18

The failure of the section to expressly state the word ‘independent’ in relation to

shareholders supports an interpretation that there is no requirement that a ratification

resolution be approved by independent shareholders. Since it is a requirement of

statutory interpretation pursuant to section 15AA of the Acts Interpretation Act 1901

(Cth) that in interpreting a provision of an Act, the interpretation that would best achieve

the purpose or object of the Act (whether or not that purpose or object is expressly stated

in the Act) is to be preferred to each other interpretation.50 A court may consider

extrinsic material where a provision is ambiguous or obscure,51 however, on the face of

section 239(2), there is nothing ambiguous about the shareholders whom are being

referred to by the section.

If the parliament intended the meaning of ‘members’ to be ‘independent members’ the

word ‘independent’ could have been inserted into the proposed section 239(2). The

wording of the section is consistent with the general law because there is no requirement

in Australia for an independent majority of shareholders to approve a ratification

resolution. A further significant difficulty with implying the word ‘independent’ into

section 239(2) is that the word ‘member’ or ‘members’ is used extensively throughout the

Corporations Act and the word ‘member’ pursuant to section 9 of the Corporations Act

has a restrictive meaning.

However, there is no clear underlying principle enunciated by the Explanatory

Memorandum as to why:

(i) there ought to be any relevance of a ratification resolution to a shareholder

commencing proceedings pursuant to section 236 of the Corporations Act; or

(ii) the Court should take into consideration the fact that a ratification resolution was

approved by a majority of shareholders.

The strongest argument for taking into account a ratification resolution of any practical

significance is that if the shareholders were unable to obtain any substantial damages as a 50 Acts Interpretation Act 1901 (Cth) s 15AB.51 Acts Interpretation Act 1901 (Cth) s 15AB(1)(b)(i).

Page 14 of 18

result of the ratification resolution because of the effect of the ratification resolution, then

the granting of leave to commence proceedings would be otiose and only result in the

parties and the court devoting unnecessary resources to the resolution of the dispute.

This problem no doubt could be dealt with by the plaintiff shareholder(s) providing

security for the defendant company’s costs of defending the proceedings, however, that

highlights an element of prejudice to the minority shareholders who are required to use

their own resources to seek a remedy for a wrong done to the company.

At the time of the commencement of section 239(2) of the Corporations Law, the law in

Australia with respect to the doctrine of ratification was in a more uncertain state.

However, since that time, it is now clear that the shareholders in general meeting cannot

ratify a breach of statutory duty and since the fiduciary duties of directors are included

within the statutory duties pursuant to sections 180, 181, 182 and 183 of the Corporations

Act, a court would be unable to deny a shareholder leave to commence proceedings with

respect to a breach of a director’s statutory duties on the basis of a ratification resolution

being approved by the shareholders since that resolution could not be legally effective to

relieve a director of liability to the company.

Is section 237 relevant to applications commenced under section 232?

It should be recognised that there is no equivalent provision in Part 2F.1 of the

Corporations Act (Oppressive conduct of affairs) to section 239 contained in Part 2F.1A

(Proceedings on behalf of a company by members and others) which requires a court to

take into account specific matters following the approval of a ratification resolution.

In circumstances where there is no equivalent provision in a Part of a statute, a relevant

question for the purposes of statutory interpretation would be whether Part 2F.1 of the

Corporations Act established a code for the commencement of proceedings with respect

to oppressive conduct within the meaning of section 232 of the Corporations Act. If that

is the case, there would be little doubt that a ratification resolution is not relevant to the

Page 15 of 18

commencement of proceedings (although it is conceivable that the quantum of damages

is affected by a valid ratification resolution).

Further, there is also authority which indicates that section 232 was not affected by the

introduction of Part 2F.1A.52 In light of the foregoing discussion concerning sections 232

and 239, it is clear the considerations applicable under section 239(2) are different to

those under section 232 with respect to statutory oppressive conduct, notwithstanding that

a court may grant an order to a shareholder under section 233 to commence a derivative

action. The primary difference in the considerations under section 23253 being that the

relevant conduct of a director is contrary to the interests of the members as a whole or

oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or

members whether in that capacity or in any other capacity.

If a court refuses to exercise its discretion to grant leave, any appeal in respect of the

exercise of the discretion would need to satisfy the requirements in House v The King.54

This is therefore a significant legal difficulty faced by a shareholder when leave is

refused by the Court and accordingly the consequence is to prejudice the right of a

shareholder to commence or intervene in proceedings. This accordingly highlights a

matter of prejudice to minority shareholders which is separate from the doctrine of

ratification but interrelated with its application to companies.

PropositionIt is a proposition advanced by this thesis that:

(i) there is no clear principle upon which there ought to be any relevance of a

ratification resolution to a shareholder commencing a derivative action; and

(ii) there is no clear principle why a court should take into consideration as a part of

its discretion for the grant of leave for a shareholder to commence derivative

proceedings the fact that a ratification resolution was approved by a majority of

52 Fexuto Pty Limited v Bosnjak Holdings Pty Limited & Ors [2001] NSWCA 97 at [139]-[140] (Spigelman CJ); Short v Crawley (No. 30) [2007] NSWSC 1322 at [177] (White J).53 The predecessor section was section 260 of the Corporations Law which was subsequently renumbered as section 246AA of the Corporations Law.54 (1936) 55 CLR 499 at 505.

Page 16 of 18

shareholders since a breach of a statutory duty cannot be ratified.

F. Director’s liability and the quantum of damages

In connection with a ratification resolution, sections 1317S55 and 1318 of the

Corporations Act are relevant to the question of the extent of liability to be imposed upon

a director by reason that it is relevant to determine whether a director acted improperly56

or dishonestly.57

Section 1317JA of the former Corporations Law (now section 1317S of the Corporations

Act) was considered in Forge v Australian Securities & Investments Commission.58 The

Court held that section 1317JA supports the proposition that contraventions of the civil

penalty provisions (such as the statutory duties imposed upon directors) cannot be ratified

by shareholders. The only relief available to avoid or reduce liability is that for which the

legislature provided.

A director’s honest breach of their statutory duties is not a bar to a liability being imposed

under a civil penalty provision. Pursuant to section 1317S(2)(b) of the Corporations Act,

the Court must also have regard to all the circumstances of the case to determine whether

the person ought fairly to be excused from the contravention, in whole or in part. It will

be recalled that under the general law there is no requirement in Australia for a

ratification resolution to be approved by an independent majority of shareholders and

accordingly, a director (and their fellow directors and any associates of the directors) may

vote as shareholders to ratify a breach of a director’s duty.

55 Formerly section 1317JA of the Corporations Law.56 See ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373. See also ASIC v Adler and 4 Ors [2002] NSWSC 483 at 173 per Santow J. See generally Harris, J, ‘Relief from liability for company directors: Recent Developments and their implications’, (2008) 21(1) University of Western Sydney Law Review.57 See generally Schmierer and Anor v Taouk [2004] NSWSC 345.58 [2004] NSWCA 448.

Page 17 of 18

In Australia, there is no authority on the question of whether subject to the ratification

resolution being approved by a non-independent majority of shareholders, what weight

should be attributed to the ratification resolution being approved. In light of the general

law, it is very likely that a court would disregard which of the shareholders voted to

approve a ratification resolution in exercising its discretion to relieve a director from the

liability to the company. This highlights the prejudice which may be suffered by

minority shareholders in these circumstances.

PropositionIt is a proposition advanced by this thesis that:

(i) a court in exercising its discretion is not required to consider whether a

ratification resolution was approved as a result of (a) a shareholder voting to

approve their own breach of fiduciary and/or statutory duties as a director and (b)

fellow directors and associates of the director voting to approve the ratification

resolution; and

(ii) no weight should be attributed to the fact that a ratification resolution was

approved as a result of (a) a shareholder voting to approve their own breach of

fiduciary and/or statutory duties as a director and (b) fellow directors and

associates of the director voting to approve the ratification resolution.

Page 18 of 18