CORPORATE GOVERNANCE: CAN INNOCENT PROCEDURAL ERRORS BE REMEDIED?

The recent High Court decision in Weinstock v Beck [2013] HCA 14 (the "Weinstock Case") highlights the ability of the Court to correct innocent mistakes made during the corporate governance process pursuant to section 1322 of the Corporations Act 2001.

Background

The plaintiff was Tamar Beck, the sister of the defendant, Amiram Weinstock. The issues in dispute centred on the appointment of the directors of LW Furniture Consolidated (Aust) Pty Ltd ("LWC").  The articles of LWC provided that each director shall retire at every annual general meeting and be eligible to be re-elected.  Directors were also entitled to appoint a person as a director. 

LWC was incorporated in 1971 and the plaintiff and defendant's parents, Leo and Hedy Weinstock, were appointed directors.  Amiram and Tamar became additional directors of LWC on 29 June 1973 by resolution that Amiran and Tamar hold office until the next AGM.  At the following AGM, in accordance with the Articles of Association of LWC ("Articles"), Amiram and Tamar both retired from office at the general meeting held on 31 December 1973. Amiram was not validly reappointed, however continued to act in the capacity of a director of LWC.

Tamar resigned as a director on 8 January 1982.  In 2003, Leo died and Hedy, who had contracted Alzheimers, was unable to continue acting as a director.  The quorum of LWC was two directors.  On 30 July 2003, Amiram appointed his wife, Helen, as a director.  The Articles of LWC provided that if the number of directors was below the quorum, a director was entitled to act for the purpose of increasing the number of directors. 

Tamar requested that the Court wind up LWC as there were no validly appointed directors and none of the issued shares had voting rights.  Tamar alleged that there was no mechanism in the company to validly appoint directors.

At Trial

The trial Judge held that Amiram, although not validly appointed as a director when Helen was appointed, had acted as a de-facto director and that, as no substantial injustice had occurred, an order should be made under section 1322(4) that the appointment of Helen as a director was not invalid.  As the valid appointment of Helen would mean that Helen was entitled to validly appoint another director to meet the quorum, and issue shares that had voting rights attached, LWC was able to return to being a functioning corporation.  The trial judge dismissed Tamar's application to wind up LWC.

On Appeal

The Court of Appeal held that section 1322(4) only applies when there has been a contravention of the constitution of the company by infringing or failing to take advantage of one of its provisions.   Amiram's appointment of Helen as a director was not a contravention as there was no provision of the Articles that Amiram could have used to appoint Helen. 

High Court

The High Court held that although Amiram did not have the power to validly appoint Helen as a director, Helen's appointment was within the scope of section 1322(4).  The High Court referred the matter back to the Supreme Court to determine whether LWC should be wound up and whether Helen's directorship should be validated. 

Conclusion

The Weinstock Case is a useful example of the Court's views on the process of corporate governance.  Corporate governance involves a complex and technical set of requirements.  The Courts have demonstrated that they have the power to validate or correct certain events, in the case of innocent procedural errors.