DRAFT

Chapter 2 Version controlDate:9-May-23Time: 2:53 PM

Chapter 2 – The doctrine of ratification: Its current scope and application in the context of Companies governed by the Corporations Act 2001

Temporary table of contents

ContentsI. Introduction..................................................................................................................2II. Fiduciary and statutory duties of officers and directors..............................................3III. What is the meaning of ‘ratification’?.....................................................................4IV. The legal requirements for ratification....................................................................6

A. The reasonable time requirement.............................................................................7B. The full and frank disclosure requirement...............................................................8C. How ratification must be evidenced........................................................................9

V. What conduct cannot be ratified by shareholders?....................................................10VI. What is the legal effect of ratification?..................................................................13

D. Ratification as exoneration, exculpation or absolution..........................................14E. Ratification as affirmation.....................................................................................15F. Ratification as a promise not to sue.......................................................................17G. Ratification as a release.........................................................................................17

VII. Conclusion.............................................................................................................19

I. INTRODUCTION

Pursuant to the doctrine of ratification, a shareholder who is also a director of the

company may vote at a general meeting of the shareholders to approve a ratification

resolution in respect of their own breach of fiduciary and/or statutory duty as a director of

the company. There are currently no decisions in Australia or the United Kingdom which

have found that the director’s conduct in their capacity as a shareholder under the

common law amounts to a fraud on the minority, a conflict of interest, that a shareholder

owes any fiduciary duties to each other shareholder or to the company, or where

restitution for unjust enrichment has been granted against a director because of detriment

caused to a company arising from the approval of a ratification resolution. The current

law is predominated by the question of when a ratification resolution is void or merely

voidable.

In the context of public and private companies governed by the Corporations Act, a

shareholder may under Australian jurisprudence exercise their vote unless the directors’

conduct is not ratifiable because, for example, the conduct is contrary to section 232 of

the Corporations Act, unlawful (including because of actual, constructive or equitable

fraud, an abuse of power or a breach or threatened breach of the Corporations Act or a

breach of a director’s duties), a fraud on the minority or was an expropriation of the

company’s property.

In this Chapter, it is necessary to initially distinguish between the different contexts in

which the word ‘ratification’ is used. Arising from the different legal contexts in which

the word ‘ratification’ is used, this Chapter explains the different meanings of ratification

and how this applies to companies governed by the Corporations Act.

Arising from what could be significant legal consequences for minority shareholders of a

ratification of a breach of a director’s duty, the common law developed over time on a

case by case basis to limit what conduct could not be ratified by shareholders. The scope

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of the doctrine was thereby reduced and this Chapter will discuss the limits of the

doctrine in this context.

It is significant to note that if a director’s conduct is ratified, that ratification operates

retrospectively as through the conduct was authorised ab initio. The consequences of the

ratification may be far broader than simply to protect a director from liability for a breach

of duty and the consequences could extend to binding the company under section 128 of

the Corporations Act for the protection of third parties and this could have an adverse

impact on the company.

In this Chapter, the legal requirements for a valid ratification are then considered before

considering the legal effect of a ratification resolution. Since the word ‘ratification’ is

used in different legal contexts, therefore ratification can accordingly have different legal

effects which vary between the extinguishment of a company’s cause of action for breach

of a directors’ duty, a promise not to sue a director for breach of duty preventing of the

current controllers of the company from commencing legal proceedings or a release to

the directors in breach of their directors’ duties which may be pleaded as a defence to a

claim for breach of duty.

II. FIDUCIARY AND STATUTORY DUTIES OF OFFICERS AND DIRECTORS

Before embarking upon a discussion about the meaning of ratification, it is necessary to

briefly consider the fiduciary and statutory duties owed by a director of a company

governed by the Corporations Act.

The nature of the duties imposed upon directors under the Companies Act 1862 (UK) as

developed by the Courts of Equity was not always clear arising from differing judicial

views as to whether directors were to be regarded as agents, trustees, managing partners,

or some combination of these. It is sufficient to say at this juncture that pursuant to the

Corporations Act, the content of the statutory duties owed by a director to the company

includes duties to:

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(i) exercise their powers and discharge their duties with the degree of care and

diligence of a reasonable person (section 180(1) of the Corporations Act);

(ii) exercise their powers and discharge their duties act in good faith in the best

interests of the company and for proper purposes (section 181(1) of the

Corporations Act);

(iii) not improperly use their position to gain an advantage for themselves or someone

else, or cause detriment to the company (section 182(1) of the Corporations Act);

and

(iv) not improperly use information gained from being a director to gain an advantage

for themselves or someone else, or cause detriment to the company (section

183(1) of the Corporations Act).

The duties established pursuant to the Corporations Act with limited exceptions are

inclusive of each of a director’s fiduciary duties to a company. One such relevant

exception is an ‘honest’ breach of fiduciary duty which would not be a breach of a

statutory duty under the Corporations Act.

III. WHAT IS THE MEANING OF ‘RATIFICATION’?

Ratification, which developed from the law of agency, is concerned with the performance

of acts without authority by an agent in the name of a named or ascertainable principal.1

In connection with the doctrine of the undisclosed principal, if the agent does not act or

purport to act as agent for the principal,2 ergo the agent acts for themselves and the

1 Imperial Bank of Canada v Begley [1936] 2 All ER 367 citing with authority Halsbury's Laws of England, Hailsham Edn, Vol 1, page 231; Heath v Chilton (1844) 12 M & W 632, 638; Eastern Construction Co v National Trust Co [1914] AC 197, 213.2 In the context of an undisclosed principal, a party cannot become the undisclosed principal to a contract by subsequent ratification of the contract (see Keighley Maxsted & Co v Durant [1901] AC 240, 251; Howard Smith and Company Ltd v Varawa [1907] HCA 38; Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 (NSW CA), 150 (Hope JA); Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 (NSW CA), 276 (McHugh JA)). The foundation of liability of an agent to the other contracting party lies in the non-disclosure of the existence of a principal (see Marsh & McLennan Pty Ltd v Stanyers Transport Pty Ltd [1994] 2 VR 232, 244; Citi Nominees Pty Ltd v Fenny [2006] WASC 97). An undisclosed principal arises only where the agent was in truth their agent at the time of the transaction and this arises from not disclosing the identity of the principal (Keighley, Maxsted & Co v Durant [1901] AC 240; Marsh & McLennan Pty Ltd v Stanyers Transport Pty Ltd [1994] 2 VR 232, 244; Citi Nominees Pty Ltd v Fenny [2006] WASC 97; McNally v Jackson Spanney (1938) 42 WALR 27).

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doctrine of ratification cannot operate.3 The effect of the doctrine of ratification is to bind

a principal retrospectively to the acts of an agent so that the principal becomes liable for

the agent’s acts. A principal may at times make an election to ratify the agent’s conduct

become bound, such as will be the case when the principal wishes to enforce the terms of

a contract on a third party.

Ratification must be unambiguous4 and may be by express words, or implied from

conduct5 including silence6 and acquiescence.7 This is the case even with respect to a

matter to which statute requires the agreement to be in writing.8

In Beatty9 the doctrine was applied in the United Kingdom to directors of a company to

allow shareholders in general meeting to ratify a breach of a director’s fiduciary duties

owed to the company.

It is for the principal to decide whether or not to ratify an act of an agent. The strong

weight of authority10 indicates that when the principal has elected to ratify an act, the

maxim omnis ratihabitio retrotrahitur et mandato priori aequiparatur11 applies. Subject

to the exceptions developed to prevent unfairness to third parties, the ratification is

deemed by the law to be retrospective to the time of the agent’s conduct as though the

principal had authorised the act ab initio.12 The position is different from the situation

where the agent’s acceptance was expressly conditional upon the ratification by the

principal.13 In such circumstances, the ratification will not act retrospectively.

3 Imperial Bank of Canada v Begley [1936] 2 All ER 367. 4 The Bonita (1861) Lusb 252.5 See, eg. Hagler v Parker (1846) 7 M & W 322; Cornwall v Wilson (1789) 1 Ves 569.6 Yona International Ltd v La reunion Francaise SA [1996] 2 Lloyd’s Rep 84.7 Kent v Thomas (1836) 1 H & N 473; French v Backhouse (1771) 5 Bar 2728. See generally E. B. Wright, The law of principal and agent (Stevens and Sons, Ltd, 2nd ed, 1901), 58.8 For example, under the Statute of Frauds 1677 (UK). See McLean v Dunn (1828) 4 Bing 722.9 (1887) 12 App Cas 589.10 There has been expressions of disapproval of the application of the principle for which Bolton Partners v Lambert (1889) 41 Ch D 295 is authority for in Fleming v Bank of New Zealand (1900) AC 577 at 587; Isaacs J in his dissenting judgment in Davison v Vickery's Motors Ltd (1925) 37 CLR 1, 20 and Adams v Elphinstone [1993] TASSC 67.11 Every ratification is dragged back and treated as equivalent to a prior authority (Bolton Partners v Lambert (1889) 41 Ch. D. 295).12 Koenigsblatt v Sweet [1923] 2 Ch 314. See generally R. Munday, Agency law and principles (Oxford University Press, 2010), 105.13 See, eg, Watson v Davies [1931] 1 Ch 455.

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IV. THE LEGAL REQUIREMENTS FOR RATIFICATION

In Firth v Stainer,14 it was stated that a valid ratification will be constituted if the

following 3 conditions are satisfied:

1. the agent whose act is sought to be ratified must have purported to act for the

principal;

2. at the time that the act was done the agent must have had a competent principal;

and

3. at the time of the ratification the principal must have been legally capable of

doing the act themselves.15

In relation to the third requirement, any legal preconditions must be met prior to the

conduct taking place otherwise ratification is not permitted. This was highlighted in The

Owners - Strata Plan No. 2187 v Astoria Asset Management Ltd,16 where the strata

company firstly failed to give notice to the members of the strata company of the costs of

legal proceedings which had been commenced and secondly failed to call a meeting of

the strata company prior to the commencement of the proceedings.

In the context of companies, the legal requirements discussed in Firth v Stainer17 for a

valid ratification are as follows and considered in detail below:

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

(ii) the principal must have knowledge of the agent’s conduct; and

(iii) there must be full and frank disclosure.

There is uncertainty as to whether the provision of a release is a further requirement for a

valid ratification. This is considered in detail in Chapter 4.

14 [1897] 2 QB 70.15 Firth v Stainer [1897] 2 QB 70, 75 (Wright J).16 [2011] NSWDC 259.17 [1897] 2 QB 70.

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A. The reasonable time requirement

The ratification by the shareholders in general meeting of a breach of duty must take

place within a reasonable time, after which the conduct cannot be ratified to the prejudice

of a third person.18 By way of illustration, ratification cannot be made so as to divest

persons not parties to a ratified contract of their rights or otherwise prejudicially to affect

those rights, where the rights have vested prior to the ratification,19 or so as to

prejudicially affect the rights of persons such as assignees in bankruptcy claiming

through parties to a contract.20

It was held in In re Portugese Consolidated Copper Mines Ltd21 that the standard of

reasonableness must depend upon the circumstances of the case.22 In this case, it was

considered that the question was one which must be decided on the true construction of

the articles of association of the company.23 The Court did not set out what it considered

to be the relevant factors, or the principles upon which a reasonable time may be

determined and accordingly, there is legal uncertainty about what is a reasonable time.

A short delay in ratification may prevent the ratification of the conduct, provided that a

person can demonstrate prejudice. For example, in Metropolitan Asylums Board

Managers v Kingham & Sons,24 ratification by the principal was not permitted on 6

October, following the withdrawal of the offer on 24 September for the commencement

of the supplying of certain goods on 30 September. Conversely, a delay of 3 years may

be considered to be a reasonable time.25

18 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28; Forge v ASIC [2004] NSWCA 448, [385]–[389].19 LexisNexis, Halsbury’s Laws of Australia (at 27 January 2014) ‘Time for ratification’ [15-140]. Donnelly v Popham (1807) 127 ER 729; Ford v Newth [1901] 1 KB 683. See also Attorney-General v Wylde (1946) 47 SR (NSW) 99; Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653; Adams v Elphinstone (1993) 2 Tas R (NC) N14; BC9300066, 5-6 (Zeeman J).20 LexisNexis, Halsbury’s Laws of Australia (at 27 January 2014) ‘Time for ratification’ [15-140]; Bird v Brown (1850) 4 Exch 786.21 (1889) 42 ChD 160.22 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28, 37 (Bowen LJ).23 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28, 37 (Bowen LJ).24 (1890) 6 TLR 217.25 Presentaciones Musicales SA v Secunda [1994] Ch 271.

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Two related principles of law also serve to illustrate when ratification will be ineffective.

Firstly, if the validity of an act is dependent upon its being accomplished within a certain

time, ratification taking place outside that period will be ineffective.26 Secondly, if a time

is fixed for doing an act, whether by statute or by agreement, the doctrine of ratification

cannot be allowed to apply if it would have the effect of extending that time.27

The legal uncertainty in the reasonable time requirement is considered in Chapter 4.

B. The full and frank disclosure requirement

In order to satisfy the requirement that there be fully informed consent28 of the

shareholders in general meeting, the director in breach of their fiduciary and/or statutory

duties to the company must provide ‘full and frank’ disclosure of the material facts to the

general meeting.29 The requirement is analogous to a trustee seeking the informed

consent of each of the beneficiaries.30

The extent of disclosure required to ensure that consent is fully informed is a matter of

fact to be determined in the circumstances of each case31 or there must be an intention to

adopt the conduct regardless of what the material circumstances might be.32 It has been

described as ensuring that the fiduciary’s principal is ‘fully informed of the real state of

things’.33 In Forge v Australian Securities & Investments Commission,34 the Court held 26 Bird v Brown (1850) 4 Exch 786; Dibbins v Dibbins [1896] 2 Ch 348.27 Presentaciones Musicales SA v Secunda [1994] Ch 271, 279 (Dillon LJ).28 Maguire v Makaronis (1997) 188 CLR 449, 466.29 Forge v ASIC (2004) 213 ALR 574; The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, [9393].30 See, eg, Holyoak Industries (Vic) Pty Ltd and Anor v V-Flow Pty Ltd and Ors [2011] FCA 1154, [131].31 Holyoak Industries (Vic) Pty Ltd and Anor v V-Flow Pty Ltd and Ors [2011] FCA 1154,[133]; SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129; Bremner & Anor v Sinclair & Ors (NSWCA, unreported 3 November 1998). See also R Munday, Agency law and principles (Oxford University Press, 2010), 116.32 McKand v Thomas [2006] NSWSC 1028, [72] (Campbell J). See also The Phosphate of Lime Company, Limited v Green and Anor (1871) 7 CP 43, 56-57; Taylor v Smith (1926) 38 CLR 48, 54-55, 59, 60, 62; Marsh v Joseph [1897] 1 Ch 213, 246-7 (Lord Russell of Killowen CJ, Lindley and AL Smith LJJ); Bank of Montreal v Dominion Gresham Guarantee and Casualty Company, Limited [1930] AC 659, 666; Australian Blue Metal Ltd v Hughes & Ors (1961) 79 WN (NSW) 498, 515; Wilton and another v Commonwealth Trading Bank of Australia; Model Investments Pty Ltd (Third Party) [1973] 2 NSWLR 644, 674; Brockway v Pando (2000) 22 WAR 405, 433. See also Suncorp Insurance and Finance v Milane Assicurazioni SpA [1993] 2 Lloyd’s Rep 225.33 Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1, 14 (Lord Radcliffe).34 [2004] NSWCA 448.

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that full and frank disclosure required that the directors admit to breaches of their

statutory duties under the Corporations Act.

The issue whether shareholders will obtain full and frank disclosure is addressed in

Chapter 4 because this aspect of the operation of the doctrine is open to criticism.

C. How ratification must be evidenced

Before a Court could consider the validity of a ratification resolution, it must be satisfied

that there was a ratification resolution which was approved by the shareholders in general

meeting. It will be necessary for a plaintiff to adduce evidence of the facts which prove

that each of the requirements for a valid ratification discussed above have been met and

that evidence will include the details of the full and frank disclosure to the shareholders

and the minutes of the shareholders’ meeting which sets out the terms of the resolution

which was approved by the shareholders.

The most difficult situation to provide adequate evidence will be when there is claimed to

be ratification by an informal meeting of the shareholders under the Duomatic principle,35

or where it is claimed that the ratification arose because of the acquiescence by the

shareholders to a course of conduct by the directors.36

There is no requirement that a company give notice of a ratification resolution which was

approved to any person or to even disclose that the ratification has taken place.37 If

however notice is not given to any person of the ratification, there may be inadequate

proof of the ratification because there is a reluctance by the courts to accept as true the

unstated intentions or thoughts of a principal without other evidence.38 A company may

therefore be put to proof by a third party that the ratification occurred.39

35 36 37 Harrison & Crossfield Ltd v London & North-Western Railway Co. [1917] 2 KB 755; R. Munday, Agency law and principles (Oxford University Press, 2010), 108.38 Byrne v Van Tienhoven (1880) 5 CPD 344; Keighley, Maxsted & Co v Durant [1901] AC 240.39 R Munday, Agency law and principles (Oxford University Press, 2010), 110.

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V. WHAT CONDUCT CANNOT BE RATIFIED BY SHAREHOLDERS?

Even where the legal requirements for a valid ratification resolution by the shareholders

in general meeting are met, the conduct of the directors may not be able to be ratified.

The simplest case is a ratification of a breach of statutory duty and the more complex

possibility is a ratification of a breach of a fiduciary duty.

In respect of a breach of a statutory duty, the High Court held in Angas Law Services40

that a ratification of a breach of a statutory duty imposed by sections 180, 182 and 184 of

the Corporations Act could not relieve a director of a liability to the company for the

breach and the shareholders could not release a director from those statutory duties. The

reasoning of the High Court’s in Angas Law Services41 provides a strong basis for

concluding that a ratification of a breach of the statutory duties imposed by section 183 of

the Corporations Act will not result in any relief from liability or a release from the

requirements of the statutory duty.

There is a separate legal possibility that a statutory duty imposed on a director by the

Corporations Act may be attenuated and the content of the statutory duty narrowed which

could consequently have the effect that the statutory duty was not breached by the

director. This possibility is discussed later in this thesis in Chapter 5.

In respect of a breach of fiduciary duties, in light of the possibility that a majority of

shareholders in general meeting may ratify a breach of a director’s fiduciary duties and

that this ratification would extinguish any cause of action against that director, the scope

of the doctrine of ratification (as originally adopted into English common law) was

limited in the following ways and has the effect of protecting minority shareholders:

40 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23. See also Miller v Miller (1995) 16 ACSR 73; Macleod v The Queen (2003) 214 CLR 230; Forge v Australian Securities and Investments Commission [2004] NSWCA 448; Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267.41 Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23.

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(i) a ratification must be of a lawful act. Accordingly, a criminal act cannot be

ratified,42 nor an act contrary to public policy;43

(ii) where any contract amounts to a fraud44 or constructive fraud, on account of its

being opposed to some positive law, or public policy, it is void and incapable of

ratification;45

(iii) where an act is beyond the power of the company, it cannot be ratified46 (but

noting the possibility of the ratification of pre-incorporation contracts);47

(iv) where the act is void ab initio48 the maxim quod ab initio non valet, in tractu

temporis non convalescit49 applies50 and accordingly the act is not capable of

ratification;51

(v) an act beyond the purposes of the company for which it was created under the

relevant statute is not ratifiable52 and acts which are ultra vires are not ratifiable

(which in respect of companies governed by the Corporations Act would seem to

now be limited to acts which are illegal following the abolition of the doctrine of

ultra vires);53

(vi) an act beyond the scope of the purpose for which the power existed (ie. an abuse

of a power) is not ratifiable;54

42 Banque Janques Cortiev v La Banque d’Epergue (1888) 13 Ap Cas 111.43 Brook v Hook (1871) LR 6 Ex 89.44 Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258. 45 J. Cotterell, A collection of latin maxims & phrases (Stevens and Haynes, Bell yard, Temple Bar, 3rd ed, 1913).46 The Ashbury Railway Carriage Co. v Riche (1874) LR 7 H of L 659.47 Corporations Act 2001 (Cth) s 131.48 The Ashbury Railway Carriage Co. v Riche (1874) LR 7 H of L 659.49 That which was void from its commencement, does not improve by lapse of time.50 An example is the exercise of an option by an unauthorised person (see Holland v King (1848) 6 CB 727; Dibbins v Dibbins (1856) 2 CH 348).51 See, eg. The Owners - Strata Plan No. 2187 v Astoria Asset Management Ltd [2011] NSWDC 259, where the strata company (i) failed to give notice to the members of the strata company of the costs of legal proceedings which had been commenced and (ii) failed to call a meeting of the strata company prior to the commencement of proceedings.52 Baroness Wenlock v River Dee Co (1883) 36 Ch D 675n. The doctrine of ultra vires is no longer applicable in Australia to companies incorporated under the Corporations Act 2001 but may apply to other incorporated bodies.53 See Hutton v West Cork Ry Co (1883) 23 ChD 654; Parke v The Daily News Ltd and Others [1962] 2 All ER 929; United Australia Ltd v Barclays Bank Ltd [1940] 4 All ER 20. See generally LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390].54 In Colarc Pty Ltd v Donarc Pty Ltd (1991) 4 ACSR 155 Walsh J applied Re Southern Resources Ltd (1989) 15 ACLR 770 and held that an allotment of shares that went beyond the scope of the purpose for

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(vii) a ratification by the shareholders in general meeting will not be valid where there

is a board of directors which is able and willing to act;55

(viii) a ratification will not be valid where the ratification would constitute a fraud on

the minority;56

(ix) the shareholders in general meeting cannot ratify a transaction where the

ratification would constitute a misappropriation of company resources57 or an

appropriation to the majority of the shareholders, of property advantages which

belong to the company;58

(x) a transaction cannot be ratified where the ratification was entered into by an

insolvent company to the prejudice of creditors59 or a company nearing the point

of insolvency;60

(xi) the shareholders in general meeting cannot ratify a transaction where the

ratification defeated a member's personal right;61

which the power existed was not capable of ratification. In Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 Mason, Deane and Dawson JJ said (by way of obiter dicta) that it was arguable that a voidable allotment of securities made for an improper purpose can later be ratified by the board acting for a permissible purpose. Whether that would rest on the board having power to affirm a voidable transaction or some other basis was not stated. See generally LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014), ‘Ratification of abuse of power’ [8.380]. 55 Massey v Wales [2003] NSWCA 212.56 See Cook v Deeks [1916] 1 AC 554; Ngurli Ltd v McCann (1953) 90 CLR 425, 438 and 447; Whitehouse v Carlton Hotel Pty Limited (1987) 162 CLR 285; Permanent Building Society v Wheeler (1994) 14 ACSR 109, 137; Gambotto v WCP Ltd [1995] HCA 12. See also Miller v Miller (1995) 16 ACSR 73, 89 followed in Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303, 312–13 (on appeal Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1998) 16 ACLC 252). See generally LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390].57 See Cook v Deeks [1916] 1 AC 554; The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, [9396] (Owen J) stated that the creation and disposal of security interests over the assets of the company brought about in breach of duty would constitute misappropriation of company resources. An appeal from the judgment of Owen J was partly allowed and partly dismissed: Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157.58 Ngurli v McCann (1953) 90 CLR 425.59 Miller v Miller (1995) 16 ACSR 73, 89 followed in Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303, 312–13 (on appeal Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1998) 16 ACLC 252). See generally LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390]. In Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 it was held that a transaction entered into by directors for an improper purpose while the company was insolvent could not be validated by even unanimous approval of the members in disregard of the interests of creditors. Compare J. D Heydon “Directors' Duties and the Company's Interests” in P. D. Finn (ed), Equity and Commercial Relationships (Law Book Company, 1987), 130. 60 Spies v R [2000] HCA 43.61 See generally P. D. Finn, Fiduciary Obligations (The Law Book Company Ltd, 1977), 74. For example, where it is taken so as to deprive that shareholder of the enjoyment of their existing rights (eg. the right to vote at a meeting: Canon v Trask (1875) LR 20 Eq 669).

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(xii) where the ratification was oppressive, the ratification will be invalid;62

(xiii) where the majority of shareholders in general meeting acted for the same

improper purpose as directors the ratification will be invalid;63 and

(xiv) where ratification would constitute bad faith, the ratification will be invalid.64

Commentary by R. P. Austin and I. M. Ramsay suggests that,

[t]he clearest case is where the directors have acted irregularly and they control the

general meeting. If a meeting controlled by the directors purported to condone some

breach of duty on their part, a dissenting member could bring a derivative action ... on

behalf of the company.65

VI. WHAT IS THE LEGAL EFFECT OF RATIFICATION?

Following on from the above discussion which concerned the requirements for a valid

ratification, this Chapter will now consider the legal effect of the ratification.

As a general rule, ratification is considered ‘equivalent to an antecedent authority’66 and

therefore the ratification acts retrospectively. However, the effect of a ratification will

depend upon what is meant by the ratification, since the word ‘ratification’ is used in the

following different contexts:

(i) ratification as exoneration, exculpation or absolution;

(ii) ratification as affirmation;

(iii) ratification as a mere promise not to sue; and

62 Miller v Miller (1995) 16 ACSR 73, 89 followed in Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303, 312–13 (on appeal Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1998) 16 ACLC 252); HNA Irish Nominee Ltd & Anor v Kinghorn & Othrs (No 2) (2012) 290 ALR 372. See generally LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390]. 63 Miller v Miller (1995) 16 ACSR 73, 89 followed in Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303, 312–13 (on appeal Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1998) 16 ACLC 252); HNA Irish Nominee Ltd & Anor v Kinghorn & Othrs (No 2) (2012) 290 ALR 372. See generally LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390].64 Pascoe Ltd (in liq) v Lucas (1999) 33 ACSR 357, 384–88.65 LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390].66 Kernigrblatt v Sweet [1923] 2 Ch 314, 325 (Lord Sterndale MR).

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(iv) ratification as a release.

Each of the legal effects of ratification arising from the different contexts of the use of the

word are considered below.

D. Ratification as exoneration, exculpation or absolution

Ratification as exoneration (also sometimes referred to as exculpation or absolution) has

the same effect as if the person whose conduct is ratified had an original authority. The

position is reflected by the Latin maxim omnis ratihabitio retro trahitur et mandato

aequiparatur.67

In Bamford v Bamford,68 ratification was described as the directors seeking ‘absolution

and forgiveness of their sins’.69 The term ‘absolution’ means ‘a remission of sins

pronounced by a priest (as in the sacrament of reconciliation)’70 and is accordingly a term

used in connection with religion, but applied in the context of the doctrine of ratification

in the judgment of this case.

In the context of companies, subject to a majority of shareholders being lawfully capable

of ratifying the directors’ conduct which was in breach of a fiduciary duty, a majority of

shareholders which approved a ratification resolution will bind the minority of

shareholders and the resolution will act to extinguish the company’s cause of action

which arose from the breach of fiduciary duty. A subsequent controller, such as a

liquidator, will be in no better position than the shareholders following a valid ratification

resolution.71 In such circumstances, the company may lose a very valuable right to sue

67 Every consent given to what has already been done, has a retrospective effect and equals a command.68 [1970] Ch 212.69 Bamford v Bamford [1970] Ch 212, 238 (Harman J).70 Merriam-Webster Dictionary, Merriam Webster Dictionary (27 January 2014) Merriam-Webster Dictionary < http://www.merriam-webster.com/>.71 Pascoe Ltd (in liq) v Lucas [1999] SASC 519, [271] (Lander J, Millhouse and Duggan JJ agreeing) approving Multinational Gas & Petrochemical Co Ltd v Multinational Gas & Petrochemical Services Ltd per Dillon LJ at 290; Attorney-General (Canada) v Standard Trust Company of New York [1911] AC 498 at 501.

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the directors and the minority shareholders will also lose any right to commence a

derivative action against any director whose breach of fiduciary duty has been ratified.

In Pascoe Ltd (in liq) v Lucas,72 a sole director of a solvent wholly owned subsidiary

company acted on the authority of the sole shareholder (the holding company). The

conduct of the sole director was within the powers of the company, the sole shareholder

had obtained full disclosure about the proposed transaction and there was no evidence

that the sole director had acted in bad faith. The Court in its obiter remarks concluded

that there was a valid prospective authorisation (treating the question equivalent to a

retrospective ratification) of the sole director for the director to enter into the transaction

and accordingly, there was a valid prospective authorisation of any breach of fiduciary

duty.73

E. Ratification as affirmation

Ratification as affirmation arises in circumstances whereby a director has acted within the

scope of their authority, but there has been a breach of fiduciary or statutory duty.74 It is

useful to provide some specific examples of this type of ratification to elucidate the

distinction between the other possible legal effects of a ratification resolution.

In Beatty,75 the board of directors acting within the powers of the company, executed a

contract with one of the directors (who was acting as the vendor for the sale of an asset to

the company) which was fair in its terms. The contract was accordingly only voidable at

the election of the company. The Court held that such a dealing could be affirmed or

adopted by the shareholders in general meeting.76 Similarly in Grant v United Kingdom

Switchback Rys Co,77 a case concerning the exercise of the borrowing power by the

72 [1999] SASC 519.73 Pascoe Ltd (in liq) v Lucas [1999] SASC 519, [273] (Lander J, Millhouse and Duggan JJ agreeing).74 An example of ratification of this type of conduct is a circumstance whereby a director has acted for an improper purpose (see Hogg v Cramphorn Ltd [1967] Ch 254; Bamford v Bamford [1970] Ch 212).75 (1887) 12 App Cas 589.76 North-West Transportation Co, Ltd v Beatty (1887) 12 App Cas 589, 594 (Sir Richard Baggallay).77 (1888) 40 ChD 135.

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directors in excess of the limitation of their powers, Lindley LJ stated that ‘the

shareholders can ratify any contract which comes within the powers of the company’.78

In Hogg v Cramphorn Ltd,79 the board of directors devised a scheme to issue shares to a

trust controlled by the directors, the beneficiaries of which were the employees of the

company. The power to issue shares is a fiduciary power and if that power was exercised

for an improper motive, the issue of the shares is liable to be set aside, notwithstanding

that the directors held a bona fide belief that the issue of the shares was in the best

interests of the company.80 The court found that the primary purpose of the issue of the

shares was to ensure the control of the company by the directors. The Court relevantly

held that the conduct of the directors was ultra vires unless the conduct of the directors

was ratified by the shareholders (as they were on the register of members prior to the

issue and allotment of the shares in dispute) in general meeting. It appears from the

judgment that ratification in respect of an issue of shares was not different in effect to the

shareholders approving an issue of shares since the issue of shares is a residual power of

the company.81 Consequently, the effect of the ratification resolution was to validate the

issue of the shares.

In Bamford v Bamford,82 the board of directors issued and allotted shares to a third party

for the purpose of thwarting a takeover bid. The Court approved the decision in Hogg v

Cramphorn Ltd, 83 however the Court decided that an ordinary resolution ratifying such

an issue of shares by the directors was not itself an issue of the shares, ergo, the

resolution was ratification of the issuance of the shares since the issuance of shares was

within the powers of the company.

78 Grant v United Kingdom Switchback Rys Co (1888) 40 ChD 135, 139-140 (Lindley LJ).79 [1967] Ch 254.80 See Hogg v Cramphorn Ltd [1967] Ch 254.81 Hogg v Cramphorn Ltd [1967] Ch 254; Bamford v Bamford [1970] Ch 212.82 [1970] Ch 212.83 [1967] Ch 254.

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It is concluded from the foregoing case examples that the effect of the affirmation may be

restricted to affirming the conduct of the directors, however the effect of the ratification

could also be to exonerate the directors for breach of fiduciary duty.84

F. Ratification as a promise not to sue

Ratification may be no more than a covenant or promise not to sue.85 The relevant test

has been stated to be ‘what is the meaning and effect of the agreement having regard to

the surrounding circumstances and taking into account not only the express words used in

the document but also any terms which can properly be implied’.86 In such

circumstances, the covenant is merely a contract between the parties and does not affect

the liability of the party in breach of their fiduciary duties.87

If the ratification is no more than a promise not to sue by minority shareholders, this does

not bind the company from commencing proceedings in the future. Such a circumstance

will arise for example when there is a new controller (such as a liquidator). In these

circumstances, the company has a right to sue for any breach of fiduciary or statutory

duties.88

G. Ratification as a release

Ratification as a release may arise from a director being released for valuable

consideration, or by deed without consideration from their breach of fiduciary duty given

by the board of directors following valid ratification by way of release of the relevant

84 See Foss v Harbottle (1843) 2 Hare 461.85 Johnson v Davies [1998] 2 All ER 649; Apley Estates Co v De Bernales [1947] 1 All ER 213.86 Johnson v Davies [1998] 2 All ER 649, 655 (Chadwick LJ) (approving the statement of Neill LJ in Watts v Aldington, Tolstoy v Aldington (1993) Times, 16 December, [1993] CA Transcript 1578).87 See generally Watts v Aldington, Tolstoy v Aldington (1993) Times, 16 December, [1993] CA Transcript 1578, CA.88 See especially Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23.

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claim by the shareholders in general meeting.89 Such a release is not contrary to section

199A of the Corporations Act90 (formerly section 241 of the Corporations Law).91

In Miller v Miller,92 Santow J considered that such a release would exonerate a director. It

was stated that,

[r]atification of a past breach, though within the permitted scope for ratification, would not, of itself, generally speaking, extinguish a claim ... It has been contended in academic writing that, as equity follows the law, so either consideration is necessary if a company is to be prevented from pursuing its cause of action, or errant directors must have relied on the ratification to their detriment, so as to ground an estoppel ... In truth what ratification achieves, generally speaking, is to block action by the minority shareholders, leaving vulnerability still to new controllers in the event of a future change of control ... That is why one would expect the director relying on ratification would also want a documented formal deed of release, from the board.

It is not doubted that the release given in the circumstances of Miller v Miller93 is a

complete defence to a claim under the general law and a claim for statutory relief.94 In

such circumstances, it is not necessary for the company to also indemnify a director

against any claims (albeit, indemnification against any costs incurred in defending

proceedings in respect of the claim would be a different matter).

In Apley Estates Co v De Bernales95 and Cutler v McPhail,96 the Court considered

whether a deed was intended to operate as a release, or was merely a promise not to sue.

It will always be a question of interpreting the deed as a whole to determine the meaning

of the word ‘release’97 and determining the intention of the parties to release a party from

a cause of action.98

89 See Miller v Miller (1995) 16 ACSR 73; Forge v Australian Securities and Investments Commission [2004] NSWCA 448; Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737; Eastland Technology Australia Pty Ltd v Whisson (2005) 223 ALR 123.90 Section 199A of the Corporations Act 2001 concerns the indemnification and exemption of an officer or an auditor of the company.91 Eastland Technology Australia Pty Ltd v Whisson (2005) 223 ALR 123.92 (1995) 16 ACSR 73.93 (1995) 16 ACSR 73.94 Eastland Technology Australia Pty Ltd v Whisson (2005) 223 ALR 123.95 [1947] 1 All ER 213.96 [1962] 2 All ER 474.97 Cutler v McPhail [1962] 2 All ER 474; Gardiner v Moore and others [1966] 1 All ER 365.98 Apley Estates Co v De Bernales [1947] 1 All ER 213.

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VII. CONCLUSION

The doctrine of ratification has been applied widely to fiduciary relationships. In the

context of the fiduciary relationship of director and company, the doctrine performs

important functions and accordingly, the doctrine remains relevant and legally important

to companies governed by the Corporations Act.

What precisely is meant by ratification is dependent upon the context in which the term is

being used. In relation to companies, the meaning of ratification may turn on the true

construction of the resolution which is approved by the shareholders pursuant to the test

enunciated in Johnson v Davies99 as was shown by the cases of Apley Estates Co v De

Bernales100 and Cutler v McPhail.101 This has a consequent implication for the legal

effect of the ratification, which may be no more than a promise not to sue by those

persons approving the ratification resolution.

This thesis will now consider the benefits of the doctrine of ratification.

99 [1998] 2 All ER 649.100 [1947] 1 All ER 213.101 [1962] 2 All ER 474.

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