Chapter 2 – The Doctrine of ratification and its legal effect. Chapter... · Web view9. Chapter...

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Research question: Does the doctrine of ratification remain germane relevant and appropriate to companies incorporated under the Corporations Act 2001?

Introductory paragraphs to Chapters 2 -79

I. CHAPTER 2 – THE DOCTRINE OF RATIFICATION AND ITS LEGAL EFFECT

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. The Australian jurisprudence does not suggest that the director’s conduct

in their capacity as a shareholder amounts to a fraud on the minority, a conflict of

interest, or that a shareholder owes any fiduciary duties to each other shareholder or to

the company. Further, there are no Australian cases where restitution for unjust

enrichment has been claimed against a director because of detriment caused to a company

arising from the approval of a ratification resolution.

In the context of companies incorporated under the Corporations Act, a shareholder may

therefore under Australian jurisprudence exercise their vote unrestrained by good

corporate governance principles and equitable principles unless that conduct is not

ratifiable because, for example the conduct was within the meaning of oppressive

conduct pursuant to section 232 of the Corporations Act, unlawful (including because of

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

breach of a director’s duties) or was an expropriation of the company’s property.

In this Chapter, it is necessary first to discuss the intersection of shareholder ratification

and the use of corporate property under the Corporations Act to explain the contemporary

role of the doctrine of ratification in respect of solvent and insolvent companies, discuss

the continuing importance of the doctrine of ratification to companies and to provide a

proper context for this doctrinal and legal reassessment of the doctrine. Each of these

matters has evaded close academic scrutiny and judicial consideration.

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

doctrine of ratification is then defined and the scope of its applicability to companies is

considered. An understanding of the legal effect of the doctrine provides a basis for the

later consideration of whether shareholders and creditors may suffer any prejudice as a

result of the operation of the doctrine and whether as a result of the identified prejudice

there should be law reform in Australia.

In this Chapter, the continuing relevance of the doctrine of ratification to companies

incorporated under the Corporations Act is considered for the purpose of describing the

essence of the differences between retrospective ratification and prospective authorisation

of a breach of statutory duty and setting out how ratification and authorisation may arise.

As a part of this discussion, the legislative context is considered first to establish the

context of the Australian corporations law before a consideration of the different legal

issues which arise for consideration of the attenuation of fiduciary and statutory duties

which is considered in detail in Chapter 45.

As a part of the assessment of whether the doctrine remains germane to companies

incorporated under the Corporations Act, a doctrinal and analytical assessment is

presented with respect to the criticisms and uncertainty in the operation of the doctrine.

Since the doctrine was first applied to corporations in North-West Transportation Co Ltd

v Beatty1 in 1887 there continues to be doctrinal questions, including in relation to the

legal principles upon which the doctrine was applicable to the fiduciary relationship of

director and company. Some of the authorities are irreconcilable and there is

consequently significant uncertainty in the operation of the doctrine and legal effect of

retrospective ratification and prospective authorisation.

A discussion concerning the misapplication of the doctrine to companies concludes this

Chapter. It is trite law that a trustee must obtain the informed consent of each beneficiary

of a trust before engaging in conduct which would be in breach of the trustee’s duties.

This however cannot apply with respect to companies because a ratification resolution

1 [1887] 12 AC 589.

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may be approved by ordinary resolution by the shareholders in general meeting.

Accordingly, only a majority of votes is required for the approval of the resolution and

the minority shareholders become bound by the decision.

The academic criticisms and uncertainty in the operation of the law may indicate that the

effect of the doctrine is prejudicial to the interests of some or all stakeholders of the

company and this may suggest that the doctrine is in need of law reform in Australia.

II. CHAPTER 3 – THE UNCERTAIN OPERATION AND CRITICISMS OF THE DOCTRINE

This Chapter commences with a discussion concerning the misapplication of the doctrine

of ratification to companies following on from the discussion in Chapter 2. Since the

application of the doctrine to corporations in Beatty2 in 1887 there continues to be

doctrinal issues and this raises a question concerning the basis of the application of the

doctrine to the fiduciary relationship of director and company.

It is trite law that a trustee must obtain the informed consent of each beneficiary of a trust

before engaging in conduct which would be in breach of the trustee’s duties. This

however cannot apply with respect to companies because a ratification resolution may be

approved by ordinary resolution by the shareholders in general meeting. Accordingly,

only a majority of votes is required for the approval of the resolution and the minority

shareholders become bound by the decision. A director/shareholder can exercise their

right to vote at a general meeting of the shareholders for their own benefit, whether or not

the interests of the director/shareholder are contrary to the company, or to the

shareholders as a whole. The application of the doctrine to companies in the above

contexts raises issues concerning the prejudice to minority shareholders.

Following the above discussion, the uncertainty in the operation of the doctrine is

considered. Some of the authorities are irreconcilable and there is consequently

significant uncertainty in the operation of the doctrine and legal effect of retrospective

2 [1887] 12 AC 589.

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ratification and prospective authorisation. One significant question is the scope of the

categories of non-ratifiable wrongs. The question is not trivial since if a wrong is

ratifiable, then the shareholders in general meeting may approve a ratification resolution

and thereby extinguish the company’s cause of action against any relevant directors.

There is also uncertainty in relation to the legal requirements of the doctrine of

ratification which result in the exoneration of a director and the legal effect of a

ratification resolution.

The academic and judicial criticisms of the doctrine and uncertainty in the operation of

the law discussed in this Chapter below suggest that the uncertainty is prejudicial to the

interests of companies and some or all of the company’s stakeholders which may include

different shareholders in corporate groups. The extent of the prejudice to companies and

the company stakeholders is considered in the context of the need of law reform in

Australia.

It is argued in this Chapter that the criterions of (i) uncertainty in the law and (ii)

prejudice to companies and corporate stakeholders in this reassessment of the doctrine of

ratification provide a basis for law reform to the Corporations Act.

III. CHAPTER 3 4 - THE DOCTRINAL ISSUES WITH RATIFICATION

Following the significant law reforms in Australia made to the Corporations Act through

the Corporate Law Economic Reform Program (‘CLERP’) commencing in 1997, despite

the codification of directors’ fiduciary duties and the introduction of the statutory

derivative action from March 2000, for the reasons discussed in Chapter 2, the doctrine of

ratification continues to be relevant, albeit in a less significant context, to a company

incorporated under the Corporations Act.

In this Chapter, this thesis firstly considers the theory of the corporation which is applied

by the doctrine of ratification and the legal reasoning for the doctrine. The consideration

of the historical origins of the doctrine from customary Roman law and the analysis of

the theory of the corporation which is applied by the doctrine provides a doctrinal

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perspective to the criticisms and the uncertainty in the operation of the doctrine which

was discussed in Chapter 23. Further, an understanding of the doctrinal issues with

retrospective ratification and prospective authorisation provides a separate criterion from

which an assessment may be made about whether the doctrine remains relevant and

appropriate to companies incorporated under the Corporations Act. Therefore a detailed

analysis of the doctrinal issues may suggest that there should be law reform to the

Corporations Act.

This Chapter is concluded with an examination of the legal reasoning for the doctrine.

An analysis of the different underlying principles of the law of agency, law of fiduciaries

and equitable defences to a breach of trust are considered and compared to the underlying

principles of the doctrine of ratification and to each other. If there are inconsistent

underlying principles of law, then this may suggest that there should be law reform to the

Corporations Act.

In light of the significant intersection between the doctrine of ratification and the use of

corporate property which was discussed in Chapter 2, this Chapter then considers

whether corporate property should be used for proper corporate purposes. Such an

approach which is argued in this thesis would be a narrower approach than the current

law enunciated in Hutton v West Cork Ry Co3 and ANZ Executors & Trustee Company

Limited v Qintex Australia Limited (Receivers and Managers appointed).4 The focus of

the discussion in the context of ratification is whether a gift of corporate property, such as

the extinguishment of a cause of action against a director arising from the approval of a

ratification resolution, should be considered to be the use of corporate property for a

proper corporate purpose. An important aspect of this discussion in this context is

whether the best interests of the corporation are a relevant consideration and whether

there is prejudice to stakeholders because the law does not recognise the relevance of the

corporation’s best interests. If the corporation’s interests are relevant, then this criterion,

together with a consideration of the principles of good corporate governance discussed in

Chapter 5, may indicate that there should be law reform in Australia.3 (1883) 23 ChD 654.4 [1991] 2 Qd R 360.

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[III.] CHAPTER 4 5 THE ATTENUATION OF DIRECTORS’ STATUTORY DUTIES BY

RATIFICATION OR AUTHORISATION

In this Chapter, the question whether statutory duties may be attenuated by retrospective

ratification or prospective authorisation is addressed to provide a separate doctrinal

criterion for assessing whether the doctrine of ratification remains germane relevant and

appropriate to companies incorporated under the Corporations Act.

The case law concerning attenuation of statutory duties arises principally in respect of

‘nominee’ directors and joint venture style companies and is exemplified by Levin v

Clark.5 This question was only partly resolved by the High Court in Angas Law Services6

with respect to ratification and there is limited other authority in Australia considering the

legal issues, including in respect of incorporated associations, strata companies and trade

unions. Accordingly, there remains doctrinal and policy issues which have not been

addressed in Australia, including by the academic literature.

The analysis provided in this Chapter considering the attenuation of statutory duties is

principally focused upon statutory interpretation in the context of the codification of

directors’ duties under the Corporations Act and the associated criminal offences. If

there is legal uncertainty in whether a particular statutory duty may be attenuated, then

this suggests that there should be law reform.

As a part of the consideration of the attenuation of statutory duties, this Chapter considers

the prejudice to stakeholders which arises from any attenuation of statutory duties which

would otherwise give rise to a breach of those duties. If there is prejudice to stakeholders

arising from the attenuation of statutory duties, this may suggest that there should be law

reform in Australia.

5 [1962] NSWR 686.6 Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507.

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Following on from the discussion concerning attenuation of directors’ statutory duties,

this Chapter addresses the doctrinal issues concerning the attenuation of directors’ duties.

An important doctrinal question is how a company’s constitution or shareholders’

agreement could affect the content of a director’s duties, especially given that fiduciary

duties of directors developed independently of contract law. It is further questioned

whether the company is the sole beneficiary of duties owed to it by the directors in light

of the duty against insolvent trading and the statutory duties imposed upon directors by

the Taxation Administration Act 1953 (Cth). If there is no doctrinal basis in support of

the attenuation of statutory duties, then this suggests that there should be law reform in

Australia.

This Chapter concludes by considering the policy arguments in favour and against the

adoption of an attenuated duty approach. Whilst the Australian and international case

law has responded to the unique issues which arise from joint venture companies and the

prevalence of directors whom are nominees of particular shareholders, the continued

development of the common law and the general law is questioned in the context of the

doctrine of ratification. Where the policy arguments suggest that there may be prejudice

to stakeholders of the company, this may suggest that there should be law reform in

Australia.

[IV.] CHAPTER 5 THE SIGNIFICANCE OF THE REGULATION OF CORPORATE

GOVERNANCE AND THE IMPORTANCE OF THE ROLE OF SHAREHOLDERS IN THE

CONTEXT OF RATIFICATION AND AUTHORISATION

In this Chapter, the regulation of corporate governance in Australia is considered firstly

by considering the different definitions of corporate governance and the different models

of corporate governance which are used in both common law and civil law countries.

This Chapter then considers the significance of the regulation of corporate governance to

shareholders in the context of the doctrine of ratification. The overarching principles of

good corporate governance and the role of shareholders in corporate governance is

discussed as a part of the consideration of the significance of the regulation of corporate

governance by the Corporations Act.

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The case of Beatty7 in 1887 established that a shareholder’s right to enforce their legal

proprietary rights by voting on a ratification resolution was not unlawful. The principles

which support a shareholder’s right to consult their own interests is discussed in the

context of ratification. This analysis of the principles of law highlights a significant

problem which arises from the doctrine of ratification because of the tension between a

number of principles which were discussed in Chapter 4.

The preceding discussion is necessary before this Chapter considers whether the

shareholders in general meeting should have the exclusive power to authorise a breach of

a director’s duties and whether the principles of good corporate governance are consistent

with the principles underlying the doctrine of ratification. As was discussed in Chapter 3,

the case law recognises the reserve powers of the shareholders which are exercisable in

general meeting, however, there remains uncertainty about the scope of the reserve

powers. The continued uncertainty in the application of the law concerning the scope of

the reserve powers may suggest that there should be law reform.

This discussion follows on from the issues raised in Chapter 3 with respect to the

relevance of the best interests of the corporation. If the principles of good corporate

governance and ratification are inconsistent, then this may indicate that there should be

law reform in Australia to properly align these principles. Any inconsistencies which

arise from a consideration of the principles of good corporate governance and the

principles underlying the doctrine are addressed as a part of Chapter 6.

IV.[V.] CHAPTER 6 – THE USE OF CORPORATE PROPERTY IN THE CONTEXT OF

RATIFICATION

In this Chapter, it is necessary first to discuss the intersection of shareholder ratification

and the use of corporate property under the Corporations Act to explain the contemporary

role of the doctrine of ratification in respect of solvent and insolvent companies, discuss

the continuing importance of the doctrine of ratification to companies and to provide a

7 North-West Transportation Co. v Beatty (1887) 12 App Cas 589.

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proper context different perspective for this doctrinal and legal reassessment of the

doctrine. Each of tThese matters has have evaded close close academic scrutiny by

academics and the judiciaryl consideration.

In light of the significant intersection between the doctrine of ratification and the use of

corporate property which was discussed in Chapter 2, this Chapter then considers

whether corporate property should be used for proper corporate purposes. Such an

approach which is argued in this thesis would be a narrower approach than the current

law enunciated in Hutton v West Cork RyRailway Co8 and ANZ Executors & Trustee

Company Limited v Qintex Australia Limited (Receivers and Managers appointed).9 The

focus of the discussion in the context of ratification is whether a gift of corporate

property, such as the extinguishment of a cause of action against a director arising from

the approval of a ratification resolution, should be considered to be the use of corporate

property for a proper corporate purpose. An important aspect of this discussion in this

context is whether the best interests of the corporation are a relevant consideration and

whether there is prejudice to the company’s stakeholders because the law does not

recognise the relevance of the corporation’s best interests. If the corporation’s best

interests are relevant, then this criterion, together with a consideration of the principles of

good corporate governance discussed in Chapter 57, may indicate that there should be

law reform in Australia.

[VI.] CHAPTER 6 REWORKING THE PRINCIPLES OF RATIFICATION

In Chapters 2 to 5 of this thesis, consideration has been given to the prejudice suffered by

company stakeholders, including shareholders, creditors, employees and beneficiaries of

trusts (where there is a corporate trustee) from different perspectives. As has been

discussed, the prejudice suffered by a company’s stakeholders arises from a benefit

which may be obtained by one or more directors of the company which may also include

one or more shareholders and this is a consequence of the organic theory discussed in

Chapter 4. The existence of prejudice to some or all of the company’s stakeholders

supports the need for law reform the Corporations Act in Australia.

8 (1883) 23 ChD 654.9 [1991] 2 Qd R 360.

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In Chapter 2, the criticisms and uncertainty in the operation of the doctrine of ratification

were addressed. The published literature strongly criticises the operation and effect of

the doctrine in its application to companies since the case of Beatty.10 This academic

criticism has been principally in respect of; (i) the types of conduct which may be ratified

by shareholders because of the distinction between voidable and void transactions (ii) the

limited requirements for ratification (iii) the underlying principles which do not recognise

firstly any conflict of interest between a shareholder/director voting to approve their own

breach of duty and secondly a shareholder does not owe any fiduciary duties to each

other shareholder and (iv) the difficulty in reconciling the case law.

Australian government reports and the academic literature have not considered in any

systematic way; (i) the legal basis for the adoption of the doctrine into the common law

from customary Roman Law, (ii) whether the doctrine is consistent with good corporate

governance principles, (iii) the theory of the corporation which is applied by the doctrine,

(iv) whether the best interests of the corporation is a better test for determining whether a

breach can be ratified and (v) whether corporate property should be used for proper

corporate purposes. Further, there has been no academic research or law reform

proposals in the context of body corporates incorporated under the State and Territory

legislation.

In Chapter 3, it was argued that there should be a new statutory obligation limiting the

powers of the directors and the shareholders from using corporate property for other than

proper corporate purposes. This limitation of powers aligns with the reforms proposed to

the doctrine of ratification arising from Chapters 2, 4 and 5.

In this Chapter, a principles based reassessment of the requirements of the doctrine of

ratification is undertaken. This reassessment of the doctrine is relevant to the question

whether the effect of the doctrine of ratification is prejudicial to the interests of

shareholders and other stakeholders of companies. Further, the reassessment is relevant

10 [1887] 12 AC 589.

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to resolving the inherent legal tension between the following 7 principles which was

discussed in Chapter 4:

[(i)] a person shall not derive advantage from their own wrong;

[(ii)] a director must act in the best interests of and avoid conflicts of interest to the

company;

[(iii)] the right of a shareholder to vote in their own interests provided that the conduct is

not fraudulent, a fraud on the minority, oppressive conduct11 or to expropriate the

property of the company;

[(iv)] a shareholder does not own any fiduciary duties to the company, or to any other

shareholder (save for rare cases on the principles explained in Peter’s American

Delicacy Co Ltd v Heath12);

[(v)] the directors and shareholders in general meeting may authorise corporate property

to not be used for a proper corporate purpose;

[(vi)] good corporate governance principles; and

[(vii)] equity follows the law.

This reassessment of the principles follows on from the analysis of the doctrine and the

main criticism is of its operation and effect with respect to companies. As a part of the

reassessment of the doctrine, this thesis draws upon the international jurisprudence in the

USA, UK, Canada, New Zealand and Singapore and the statutory responses of those

common-law jurisdictions to the problems inherent in the operation of the doctrine. This

thesis only considers the state of the law in common-law jurisdictions for three reasons:

[(i)] common-law jurisdictions have a common set of legal principles which are easily

translate all to the common law in Australia;

[(ii)] Australia’s general law has not diverged in any significant respect in relation to

fiduciary duties from other common-law countries; and

[(iii)] the approach taken in common-law jurisdictions to the principles of good corporate

governance can be applied in Australia, whereas civil law countries have taken a

very different approach to corporate governance principles and this is discussed in

detail in Chapter 5.11 Corporations Act 2001 (Cth) s 232.12 (1939) 61 CLR 457.

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Although there has been statutory reform to the operation and effect of the doctrine of

ratification internationally, Australia has not taken any legislative steps in this area of

law. The reassessment of the principles discussed in this Chapter will be a guide for the

Australian law to be amended to; avoid or reduce the prejudice to shareholders and other

stakeholders, reduce legal uncertainty in the operation of the doctrine and to properly

align the underlying principles of good corporate governance with the continued

operation of the doctrine. Each of the law reform proposals are discussed in Chapter 7.

I. CHAPTER 7 - THE SIGNIFICANCE OF THE REGULATION OF CORPORATE

GOVERNANCE AND THE IMPORTANCE OF THE ROLE OF SHAREHOLDERS IN THE

CONTEXT OF RATIFICATION AND AUTHORISATION

In this Chapter, the regulation of corporate governance in Australia is considered firstly

by considering the different definitions of corporate governance and the different models

of corporate governance which are used in both common law and civil law countries.

This Chapter then considers the significance of the regulation of corporate governance to

shareholders in the context of the doctrine of ratification. The overarching principles of

good corporate governance and the role of shareholders in corporate governance is

discussed as a part of the consideration of the significance of the regulation of corporate

governance by the Corporations Act.

The case of Beatty13 in 1887 established that a shareholder’s right to enforce their legal

proprietary rights by voting on a ratification resolution was not unlawful. The principles

which support a shareholder’s right to consult their own interests is discussed in the

context of ratification. This analysis of the principles of law highlights a significant

problem which arises from the doctrine of ratification because of the tension between a

number of principles which were discussed in Chapter 5.

The preceding discussion is necessary before this Chapter considers whether the

shareholders in general meeting should have the exclusive power to authorise a breach of 13 North-West Transportation Co. v Beatty (1887) 12 App Cas 589.

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a director’s duties and whether the principles of good corporate governance are consistent

with the principles underlying the doctrine of ratification. As was discussed in Chapter 4,

the case law recognises the reserve powers of the shareholders which are exercisable in

general meeting, however, there remains uncertainty about the scope of the reserve

powers. The continued uncertainty in the application of the law concerning the scope of

the reserve powers may suggest that there should be law reform.

This discussion follows on from the issues raised in Chapter 4 with respect to the

relevance of the best interests of the corporation. If the principles of good corporate

governance and ratification are inconsistent, then this may indicate that there should be

law reform in Australia to properly align these principles. Any inconsistencies which

arise from a consideration of the principles of good corporate governance and the

principles underlying the doctrine are addressed as a part of Chapter 8.

II. CHAPTER 6 8 REWORKING THE PRINCIPLES OF RATIFICATION

In Chapters 2 to 57 of this thesis, consideration has been given to the prejudice suffered

by company stakeholders, including shareholders, creditors, employees and beneficiaries

of trusts (where there is a corporate trustee) from different perspectives. As has been

discussed, the prejudice suffered by a company’s stakeholders arises from a benefit

which may be obtained by one or more directors of the company which may also include

one or more shareholders and this is a consequence of the organic theory discussed in

Chapter 45. The existence of prejudice to some or all of the company’s stakeholders

supports the need for law reform the Corporations Act in Australia.

In Chapter 23, the criticisms and uncertainty in the operation of the doctrine of

ratification were addressed. The published literature strongly criticises the operation and

effect of the doctrine in its application to companies since the case of Beatty.14 This

academic criticism has been principally in respect of; (i) the types of conduct which may

be ratified by shareholders because of the distinction between voidable and void

transactions (ii) the limited requirements for ratification (iii) the underlying principles

14 [1887] 12 AC 589.

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which do not recognise firstly any conflict of interest between a shareholder/director

voting to approve their own breach of duty and secondly a shareholder does not owe any

fiduciary duties to each other shareholder and (iv) the difficulty in reconciling the case

law.

Australian government reports and the academic literature have not considered in any

systematic way; (i) the legal basis for the adoption of the doctrine into the common law

from customary Roman Law, (ii) whether the doctrine is consistent with good corporate

governance principles, (iii) the theory of the corporation which is applied by the doctrine,

(iv) whether the best interests of the corporation is a better test for determining whether a

breach can be ratified and (v) whether corporate property should be used for proper

corporate purposes. Further, there has been no academic research or law reform

proposals in the context of body corporates incorporated under the State and Territory

legislation.

In Chapter 36, it was argued that there should be a new statutory obligation limiting the

powers of the directors and the shareholders from using corporate property for other than

proper corporate purposes. This limitation of powers aligns with the reforms proposed to

the doctrine of ratification arising from Chapters 23, 4 and 5.

In this Chapter, a principles based reassessment of the requirements of the doctrine of

ratification is undertaken. This reassessment of the doctrine is relevant to the question

whether the effect of the doctrine of ratification is prejudicial to the interests of

shareholders and other stakeholders of companies. Further, the reassessment is relevant

to resolving the inherent legal tension between the following 79 principles which

waswere discussed in Chapter 4[xx]:

(i) a person shall not derive advantage from their own wrong;

[(viii)] a director must act in the best interests of and avoid conflicts of interest to the

company;

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(ii) with limited exceptions on the principles explained in Peter’s American Delicacy

Co Ltd v Heath,15 a director does not owe a shareholder any fiduciary duties;

(iii) a shareholder does not owe any fiduciary duties to the company, or to any other

shareholder;

(iv) the shareholders in general meeting may authorise corporate property to be used

for corporate purposes;

(v) a person shall not derive advantage from their own wrong;

(vi) a director who is a shareholder may, subject to certain limited exceptions, vote at

a meeting of shareholders to prospectively authorise or to retrospectively ratify

their own breach of fiduciary and/or statutory duties;

(vii) the right of a shareholder to vote in their own interests provided that the conduct

is not unlawful, fraudulent, a fraud on the minority, oppressive conduct16 or to

expropriate the property of the company;

(viii) a shareholder does not own any fiduciary duties to the company, or to any other

shareholder (save for rare cases on the principles explained in Peter’s American

Delicacy Co Ltd v Heath17);

[(ix)] the directors and shareholders in general meeting may authorise corporate property

to not be used for a proper corporate purpose;

[(x)] equity follows the law; and

(ix) good corporate governance principles.; and

[(xi)] equity follows the law.

This reassessment of the principles follows on from the analysis of the doctrine and the

main criticism is of its operation and effect with respect to companies. As a part of the

reassessment of the doctrine, this thesis draws upon the international jurisprudence in the

USA, UK, Canada, New Zealand and Singapore and the statutory responses of those

common-law jurisdictions to the problems inherent in the operation of the doctrine. This

thesis only considers the state of the law in common-law jurisdictions for three reasons:

15 (1939) 61 CLR 457.16 Corporations Act 2001 (Cth) s 232.17 (1939) 61 CLR 457.

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(i) common-law jurisdictions have a common set of legal principles which are easily

translate all to the common law in Australia;

(ii) Australia’s general law has not diverged in any significant respect in relation to

fiduciary duties from other common-law countries; and

(iii) the approach taken in common-law jurisdictions to the principles of good

corporate governance can be applied in Australia, whereas civil law countries

have taken a very different approach to corporate governance principles and this

is discussed in detail in Chapter 57.

Although there has been statutory reform to the operation and effect of the doctrine of

ratification internationally, Australia has not taken any legislative steps in this area of

law. The reassessment of the principles discussed in this Chapter will be a guide for the

Australian law to be amended to; avoid or reduce the prejudice to shareholders and other

stakeholders, reduce legal uncertainty in the operation of the doctrine and to properly

align the underlying principles of good corporate governance with the continued

operation of the doctrine. Each of the law reform proposals are discussed in Chapter 79.

[VII.] CHAPTER 7 9 PROPOSALS FOR LAW REFORM

In Chapter 2, a brief discussion was provided in relation to the nature of the statutory

duties imposed upon company directors. In Chapter 34, it was discussed that the doctrine

of ratification does not require that the directors act honestly and in good faith in the best

interests of the company. Those duties arise as statutory duties pursuant to section 181 of

the Corporations Act and as discussed in Chapter 57, the principle of honesty is

supported by good corporate governance principles.

It is significant to note that the duty of a director to act in good faith in the best interests

of the company is not a duty to which a shareholder is bound with respect to either the

company or to any other shareholder. It was also discussed in Chapter [2/3] that there is

conflicting authority that a shareholder is subject to an implied limitation that their power

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is to be exercised in good faith in the best interests of the company.18 Both of these

matters draw attention to the right of a shareholder to vote to approve a ratification

resolution, even where that resolution concerns their own breach of a director’s duty. As

discussed in Chapter 68, the right of a shareholder to vote in their own interests conflicts

with other principles. Central to the problems of the doctrine highlighted in this thesis

are the prejudice to stakeholders of the company, unresolved doctrinal issues, legal

uncertainty in the operation of the doctrine and the application of inconsistent legal

principles.

In Chapter 68, this thesis concludes that in order to address the prejudice which arises

from the operation of the doctrine of ratification, there must be statutory reform to the

Corporations Act to resolve the inherent problems which arise from the doctrine of

ratification. Four of the principles considered necessary for the proper operation of the

doctrine of ratification are the requirements for honesty and good faith, solvency, the best

interests of the company and corporate property must be used for proper corporate

purposes. A discussion of the reasons for the requirements for those principles to operate

to eliminate or reduce the problems associated with the doctrine is considered in detail in

Chapter 68.

It is also important to recall from Chapter 2 that the statutory derivative action was, in

part, enacted to relieve the prejudice which arose from circumstances where minority

shareholders were unable to commence proceedings by reason of the rule in Foss v

Harbottle19 which established that the company was the proper plaintiff for wrongs done

to it. It is therefore consistent with previous corporate law reforms concerning the

doctrine of ratification that statutory reforms be undertaken to further protect the rights of

company and minority shareholders.

18 Compare Ngurli Ltd v McCann (1953) 90 CLR 425 and Bamford v Bamford [1970] Ch 212. See Austin R P, Ramsay, I M, Ford’s Principles of Corporations Law (2007, 13th ed), [8.390].19 (1843) 2 Hare 461.

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