Papua New Guinea Law Reports - 1965-66
[1965-66] PNGLR 169
PAPUA NEW GUINEA
[SUPREME COURT OF JUSTICE]
SANDY CREEK GOLD SLUICING LIMITED, COSMOPOLITAN HOTEL LIMITED AND NOTRE MAL PLANTATION LIMITED
V.
MCEACHERN
Port Moresby
Frost J
1-4 November 1965
COMPANY - Injunction to restrain person acting as director - Order to account for moneys received - Inherent power in company to appoint directors - Failure to observe articles of association - Validity of extraordinary general meeting.
Article 22 of the articles of association of Cosmopolitan Hotel Limited provided as follows: “(a) The number of Directors shall be not less than three nor more than seven unless the members of the Company at a General Meeting shall otherwise determine and such Directors shall be the Board of Directors. (b) The first Directors of the Company shall be appointed at the first General Meeting of the Company which shall be held immediately after the incorporation of the Company and such appointed Directors shall hold office until the next or first Annual General Meeting of the Company to be held not later than fifteen months after the incorporation of the Company.”
The company was formed in 1953. Although the rotation provisions of the articles of association had not been observed the validity of the constitution of the board of directors which was appointed at the ninth ordinary meeting of shareholders, held on the 23rd November, 1961, was not challenged. At that meeting five directors were appointed to hold office, for the year ending 30th of June, 1962. After that time no further ordinary general meeting of the shareholders of the company was held. During 1962, the shareholding of the Cosmopolitan Hotel Limited was changed and three of the directors transferred their shares to Sandy Creek Gold Sluicing Ltd.
The offices of these three directors were vacated in accordance with article 25 (iii). Pursuant to article 64, the defendant and two others were appointed directors of the company to fill the vacancy thus created. It was conceded by counsel for the defendant that these three directors ceased to be directors on the 30th June, 1962, which was the end of the term of office of those directors, whose places they were filling. However, after that date the defendant and the two other directors so appointed continued to exercise the powers of directors. The defendant was appointed managing director and additional directors were purported to be appointed.
On the 9th of March, 1964, Sandy Creek Gold Sluicing Limited requisitioned an extraordinary general meeting which was convened on the 30th April, 1964. The defendant claimed to be chairman of the meeting so convened, and refused to accept the validity of a proxy given by Sandy Creek Gold Sluicing Ltd. to S. The defendant refused an adjournment of the meeting. S. and three other shareholders of Cosmopolitan Hotel Ltd., after informing the defendant, retired from the meeting and held another meeting elsewhere on the premises. The defendant continued to carry on the business of Cosmopolitan Hotel Limited. On the 18th October, 1965, an interlocutory order was made restraining the defendant from leasing the Cosmopolitan Hotel Ltd.’s business premises. On an application for an injunction restraining the defendant from acting as a director of Cosmopolitan Hotel Ltd. and for an order that he account to the company for all moneys and property received on behalf of the company,
Held:
(1)      The board of directors appointed by the ordinary general meeting of shareholders on the 23rd November, 1961, which was to hold office until the 30th June, 1962, was validly appointed.
(2)      A company has inherent powers to appoint directors.
(3)      As from the 30th June, 1962, there were no de jure directors of the company, who could lawfully exercise the powers of the directors or bind the company in the capacity of directors.
(4)      The defendant be restrained from acting as a director of Cosmopolitan Hotel Ltd.
(5)      The meetings said to be meetings of the directors of Cosmopolitan Hotel Ltd on and after 1st July, 1962, were invalid and all resolutions purporting to be resolutions of directors of the said company, on and after 1st July, 1962, up to and including 17th October, 1965, were invalid.
(6)      The defendants’ action in rejecting the proxy, given to S. was invalid and any resolution passed at the meeting, purporting to be an extraordinary general meeting of the company on the 30th April, 1964, under the chairmanship of the defendant, was invalid and of no force and effect.
(7)      The defendant should render an account for all moneys and properties received by him, for and on behalf of Cosmopolitan Hotel Ltd., and of his disposition thereof from the 1st of July, 1963, up to the 15th of October, 1965, the date on which he vacated the hotel.
Cases referred to:
Barron v. Potter, [1914] 1 Ch. 895; Foster v. Foster, [1916] 1 Ch. 532; Worcester Corsetry Limited v. Witting, [1936] 1 Ch. 640; Morris v. Kanssen, [1946] A.C. 459.
Action for Injunction and Account.
The facts are fully set out in his Honour’s judgment.
Counsel:
Henderson, of the New South Wales Bar (with him Kirke), for the plaintiff companies.
White, for the defendant.
4 November 1965
FROST J:  This action is brought by Cosmopolitan Hotel Limited (hereinafter called “the company”), which conducts the business of the Cosmopolitan Hotel, Rabaul, and two other companies, Sandy Creek Gold Sluicing Limited and Notre Mal Plantation Limited, which are the two most substantial shareholders in the hotel company.
The company was formed in 1953. The nominal capital of the company is £50,000 divided into £38,000 ordinary shares at £1 each and £12,000 8% cumulative preference shares of £1 each. The issued capital is £38,083 comprising £26,083 ordinary shares of £1 each fully paid and £12,000 preference shares of £1 fully paid. As the first plaintiff owns 20,120 ordinary shares and the third plaintiff 5,000 ordinary shares, between them the two plaintiff company shareholders own more than two-thirds of the company’s share capital. The defendant has not held at any time more than one share in the company’s capital.
The main heads of relief claimed against the defendant are an injunction restraining him acting as a director and an order that he account to the company for all moneys and property received by him on behalf of the company.
The articles of association of the company provide that Table “A” in the Second Schedule of the Companies Ordinance shall apply to the company except in so far as they are inconsistent with, etc., the additional articles of the company.
As to the directors, the articles provide as follows:-“22. (a) The number of Directors shall be not less than three nor more than seven unless the members of the Company at a General Meeting shall otherwise determine AND such Directors shall be the Board of Directors. (b) The first Directors of the Company shall be appointed at the first General Meeting of the Company which shall be held immediately after the incorporation of the Company and such appointed Directors shall hold office until the next or first Annual General Meeting of the Company to be held not later than fifteen months after the incorporation of the Company.”
Subject to the above modifications the articles in Table “A” of the Companies Ordinance dealing with the rotation of directors thus apply to this company. Thus when the offices of the directors appointed at the first general meeting expired, at the next or first annual general meeting one-third of the directors or the number nearest to one-third were to retire from office (article 58). The one-third or other nearest number to retire during the first and second years ensuing the first general meeting of the company shall, unless the directors agree among themselves, be determined by ballot and in every subsequent year the one-third or other nearest number who have been longest in office shall retire (article 59). A retiring director shall be re-eligible (article 60). The company at the general meeting at which any directors retire in manner aforesaid shall fill up the vacated offices by electing a like number of persons (article 61).
There is provision for casual vacancies, and this is important in this case, as follows:- “Any casual vacancy occurring in the Board of Directors may be filled up by the Directors but any person so chosen shall retain his office so long only as the vacating Director would have retained the same if no vacancy had occurred.” (Article 64.)
There is provision for the company in general meeting by a special resolution to remove any director before the expiration of his period of office, and by an ordinary resolution to appoint another person in his stead (article 65).
Now at the second annual general meeting held on the 15th March, 1955, there was a resolution to increase the number of directors to four, including the managing director. This number was increased to five at the third annual general meeting on the 14th March, 1956. The number was increased to six on the 23rd March, 1958, and it remained at six until the eighth annual general meeting on the 11th November, 1960, when the number was reduced to five.
The practice at these annual meetings was for the chairman to declare all offices vacant, excluding that of managing director, and call for nominations to fill the vacant positions. Upon nomination, directors were duly appointed. However, at the meeting held on the 26th March, 1958, all office bearers except the managing director were stated to be retired in accordance with the articles, and on the 10th April, 1959, the same formula was used in respect of all office bearers. The acceptance of their retirement by the directors concerned would seem to constitute a resignation of those directors, and acceptance thereof by the company, pursuant to article 23 of the articles of association, the requirement of written notice being waived. At the later meeting six directors were declared elected for the ensuing year, at the expiration of which upon the terms of their appointment, they would cease to be directors.
At the seventh annual general meeting held on the 27th April, 1960, that is, at a time when the number of directors was fixed at six, six nominations were received and six appointments to the office of director were duly made, for the then ensuing year. At the next ordinary meeting of the shareholders held on the 11th November, 1960, it was resolved that the number of directors should be reduced to five and the term of appointment of the then board of directors should be extended until the 30th June, 1961. At the ninth ordinary general meeting of shareholders, held on the 23rd November, 1961, five persons were appointed directors for the year to end 30th June, 1962. They were Mrs. Adams, Mrs. Vallentine, Mrs. Lee, Mrs. Ralph and Mr. Warner Shand.
Since that time no further ordinary meeting of the shareholders of the company has been held. It will thus be seen that the rotation provisions of the articles were never observed. Neither counsel in the action challenged the validity of the constitution of the board of directors, which was appointed on the 23rd November, 1961. In my opinion this board was validly constituted.
The ground upon which I would uphold the validity of the 1961 board is based upon the rule in Barron v. Potter[cliv]1, which is as follows:-“If Directors having certain powers are unable or unwilling to exercise them—are in fact a non-existent body for the purpose - there must be some power in the Company to do itself that which under other circumstances would be otherwise done.” See also Foster v. Foster[clv]2 and Worcester Corsetry Ltd. v. Witting[clvi]3. The latter case is authority for the proposition that the company has an inherent power to appoint directors. As the company had never observed the rotation provisions, and as at the meeting of the company held in November, 1961, the appointment of the previous directors had expired on 30th June, 1961, then the company at that general meeting properly had the power to appoint persons with the authority of directors of the company pursuant to the articles. But it will be noted that at that meeting the board was appointed only until 30th June, 1962.
During the year 1962 the shareholding of the company was changed. Mrs. Ralph, Mrs. Vallentine and Mrs. Lee each sold their share holding, share transfers were approved including a transfer of shares to Sandy Creek Gold Sluicing Limited, and thus the offices as directors of these ladies were ipso facto vacated (article 25 (iii)). In accordance with article 64 the defendant, one Stitt and one Peter Drake, were all appointed directors of the company to fill the casual vacancies thus created. According to the terms of article 64 these directors would retain their offices so long as the vacating directors would have retained the same, if no vacancy had occurred, and as Mrs. Vallentine, Mrs. Lee and Mrs. Ralph had been appointed directors for the year to 30th June, 1962, only, it is plain that on the 30th June, 1962, each of these gentlemen, the defendant, Mr. Stitt and Mr. Drake ceased to be a director. In the end Mr. White, on behalf of the defendant, did not dispute this.
Thereafter however these three directors continued to exercise the powers of directors. Indeed the defendant was appointed managing director and other directors were purported to be appointed by these three directors. But as from the 30th June, 1962, there were no de jure directors who could lawfully exercise the powers of directors or bind the company in the capacity of directors. See Morris v. Kanssen[clvii]4. I accordingly propose to grant the plaintiffs the relief they ask and restrain the defendant from acting as a director.
The company continued to carry on a highly profitable business. Accounts were drawn up for the year ended 30th June, 1963, showing that the company had bar sales of over £75,000 and house trading revenue of over £32,000. Since that year no balance sheet or profit and loss account has been drawn up. On the 28th February, 1964, a meeting of directors was held at which the only purported director who appears to have been present was the defendant. Although two directors constitute a quorum (article 29) the defendant was not deterred from purporting to appoint one MacDougall as a director. On the 2nd March the defendant and MacDougall again purported to hold a meeting of directors, and resolved to allot one share to Mr. MacDougall and to appoint the defendant as chairman of directors. Mr. White, for the defendant, admits that both these proceedings were invalid and does not contest that the plaintiffs are entitled to a declaration accordingly.
Now by this time the plaintiff shareholders had become very dissatisfied with the defendant’s conduct of the hotel, and took steps to remove him from his office as manager and what was then considered to be his valid appointment as director. On 9th March, 1964, Sandy Creek Gold Sluicing Limited caused to be delivered to the defendant a requisition requesting an extraordinary general meeting of the shareholders to be called, the main business being the removal of all directors, except Mrs. Adams, and that steps be taken to remove the defendant from his position as manager and licensee of the hotel. On the 1st April, 1964, the plaintiff, Sandy Creek Gold Sluicing Limited, executed a proxy appointing Mr. Shand to attend and vote at the extraordinary general meeting, which, as the directors failed to convene a meeting, the said plaintiff, Sandy Creek Gold Sluicing Limited, thereupon convened on the 30th April, 1964, to consider the business I have referred to. The defendant does not now dispute the validity of this proxy and the plaintiff is accordingly entitled to a declaration accordingly.
Mr. Henderson argued that after 30th June, 1962, the defendant had ceased to be a director, but in any event if his appointment was still valid he was removed from office by the proceedings which took place at the extraordinary general meeting convened for 30th April, 1964.
In fact the meeting was convened for the registered office of the company, which was the hotel. Mr. Shand and three shareholders of the company arrived at the hotel to attend the meeting, were directed to the manager’s residence, where they found the defendant and MacDougall. Mr. Shand then said that as there was a quorum present, they would have to elect a chairman. The defendant claimed to be chairman in view of his appointment as chairman of directors (article 39), and then Mr. Shand said that he accepted the defendant’s chairmanship under protest. However, when the defendant refused to accept the validity of Mr. Shand’s proxy, Mr. Shand asked for an adjournment and the defendant failed to agree, so Mr. Shand and the other three shareholders retired from the meeting. They then held a meeting in the hotel, after the defendant and MacDougall were informed of their intention.
The effect of this meeting was argued at some length before me, and I should say that I was impressed by Mr. White’s argument that in fact the meeting did commence in the manager’s residence, which was in the immediate vicinity of the hotel, for which it was convened, that there was a quorum with the parties present accepting the chairmanship of the defendant and that as there was no adjournment of that meeting by the chairman (article 41) the proceedings which took place in the hotel could not validly be said to be an extraordinary general meeting of the shareholders, which had been convened by the notice. However, as Mr. White conceded that the defendant’s directorship ceased on 30/6/1962, and Mr. Henderson decided not to pursue his claim for a declaration that the meeting in the lounge was a valid one, it is unnecessary for me to decide this part of the case.
The other main claim brought by the plaintiffs is that the defendant render an account for moneys and property received by him on behalf of the Cosmopolitan Hotel Limited from the 24th August, 1963, which is the date of the last account of the company. The fact is that the defendant was the manager of the hotel from that date until last month, when he left the hotel premises pursuant to an interim injunction of this court. In fact, very large sums of money indeed passed through the defendant’s hands. On 9th July, 1964, an interlocutory order of this court was made in this action, that the defendant be restrained from acting as a manager or director of the company unless he accounted daily to Mr. Frazer for all moneys and receipts received by or for the company, and deliver daily to Mr. Frazer for banking purposes all such moneys except such reasonable sum as is notified by the defendant to Mr. Frazer and kept at the premises of the Cosmopolitan Hotel for current cash purposes. Thereafter the defendant continued to act as manager. He purported to render daily accounts to Mr. Frazer for all moneys received (between the date of the order and June of this year, the receipts of the hotel business amounted to over £151,000), and he has also purported to account for the expenditure of these moneys.
Mr. Eskell, who was called as a witness on behalf of the plaintiffs, was able to give expert evidence as to the percentage of profit in the Territory in a hotel business. His evidence that a reasonable percentage of profit would be at least 30% of the total takings was not disputed. Thus as Mr. Henderson submitted, the hotel turnover of £151,000 for this period alone should have returned a profit of £45,000, and this sum must have passed through the defendant’s hands. Since the date of the writ herein, it further appears that the defendant in breach of this order, and whilst acting as manager, took the step of opening a banking account in his own name in Rabaul and paying the company’s moneys into this account, from which it appears that he also paid some at any rate of the company’s accounts. Also the accounts and expenditure sheets submitted to Mr. Frazer show that large sums of money were paid for other than current cash purposes of the hotel. Directors’ fees were paid. He paid heavy legal fees to a Sydney barrister amounting to £1,475; large audit fees to Fishwick, Lord & Co., amounting to over £800, the last such payment of £302 8s. to this firm being made only last month, and in addition he paid on the 29th September, 1964, a staff bonus of £815. Whether the defendant’s conduct leaves him open to proceedings for contempt of this court is a matter which at this moment is not for me to investigate.
A further interlocutory order was made by this court at Rabaul on 18th October, 1965, restraining the defendant from leasing the plaintiff hotel company’s premises, and the goodwill of this business. During the hearing of this action it appears that on the 16th October, 1965, the defendant, without informing any of the shareholders, purported to give a lease, for a period of five years at a rent of £7,000 per annum, to Palm Taverns Pty. Limited, the directors of which are one Geoffrey M. Martin and one Lord, the subject matter of the lease being the hotel premises, the hotel business, plant, fixtures, furniture, etc. Although his wife, Mrs. McEachern, was not a director nor was MacDougall a director, the defendant procured these persons to exercise the powers of the board of directors to grant a lease and allowed the common seal of the company to be affixed to a document of lease. Both Mrs. McEachern and MacDougall affixed their names to the document, purporting to be directors, and the defendant signed it as secretary. As the validity of this lease is the subject matter of another action brought by the plaintiffs against the defendant, I do not propose to consider its legal effect.
Rather than go into the witness box and defend all these aspects of his conduct, which was plainly high handed, the defendant preferred to remain in the well of the court. Mr. White does not dispute that the defendant is an accounting party, and does not dispute that the defendant was entitled to an order that he account to the company for the moneys and property of the company which he has received. In fact, the defendant has left the hotel and is no longer meddling with the company’s moneys or its property, so I do not propose to grant any injunction restraining him from acting as a manager or employee of the company.
I therefore propose to make orders as follows:
(1)      That the defendant be and he is hereby restrained from acting as a director of the plaintiff Cosmopolitan Hotel Limited.
(2)      That the defendant render an account for all moneys and property received by him for or on behalf of the said plaintiff and of his disposition thereof from the 1st July, 1963, up to the 15th October, 1965, and that such accounts be properly vouched.
(3)      I further order that the defendant hand over to Ross Henry Jennings of Mango Avenue, Rabaul, on behalf of the said plaintiff company all cash, keys and other property belonging to the company and held or controlled by him.
(4)      That I declare that the meetings said to be meetings of the directors of the said plaintiff company on and after the 1st July, 1962, are invalid and that all resolutions purporting to be resolutions of directors, including the defendant, of the said plaintiff company up to and including 17th October, 1965, are invalid.
(5)      I further declare that the actions of the defendant in rejecting a proxy given to Francis Nigel Warner Shand by the plaintiff Sandy Creek Gold Sluicing Limited to vote for and on its behalf at any meeting referred to therein on 30th April, 1964, and accepting in lieu thereof the proxy purporting to have been given to Ian Alexander McDougall or failing him the defendant by the plaintiff Sandy Creek Gold Sluicing Limited were invalid, and that any resolutions passed at the meeting thereafter held under the chairmanship of the defendant or attended by him and purporting to be an extraordinary meeting of the shareholders of the said plaintiff Cosmopolitan Hotel Limited were invalid and of no force and effect.
(6)      And I further order that it be referred to the registrar or deputy registrar of this honourable court to tax and certify the costs of the plaintiffs of this action up to the date of this order, and that the defendant within fourteen days after service upon his solicitor of the certificate of taxation of the costs do pay to the plaintiffs or to their solicitor the plaintiffs’ disbursements and two one-third parts of the plaintiffs’ costs as so certified.
(7)      I certify that this action was such as to justify the plaintiffs in engaging two counsel on their behalf including counsel from Australia.
(8)      And I further certify that this action was such as to justify the calling of witnesses normally resident upon the mainland of Australia and at Rabaul in the Territory of New Guinea save and except William Leonard Speight and Arnold William Lander.
(9)      I further order that further costs and further consideration be and they are hereby reserved.
(10)    And I further order that the exhibits may be returned and all parties are to be at liberty to apply as they may be advised.
Judgment accordingly.
Solicitor for the plaintiff companies: C. P. Kirke, Port Moresby.
Solicitor for the defendant: N. H. White.

[cliv][1914] 1 Ch.D. 895, per Warrington J., at p. 903.
[clv][1916] 1 Ch. 532.
[clvi][1936] 1 Ch. 640.
[clvii][1946] A.C. 459.