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Chapter 2 – The doctrine of ratification and its legal effect in the context of Companies incorporated under the Corporations Act 2001

Temporary table of contents

ContentsI. Introduction..................................................................................................................3I. The intersection of shareholder ratification and use of corporate property.................4II. Fiduciary and statutory duties of directors..................................................................8III. What is the meaning of ‘ratification’?...................................................................10IV. The legal requirements for ratification..................................................................14

A. The reasonable time requirement...........................................................................14B. The full and frank disclosure requirement.............................................................17

V. What conduct of the principal constitutes ratification?.............................................19C. How ratification must be evidenced......................................................................22

VI. Retrospective operation of the ratification............................................................23D. Application to contract law....................................................................................24E. Application to tort law...........................................................................................28

VII. What conduct cannot be ratified by shareholders?................................................29VIII. When is ratification not necessary?.......................................................................32

F. Management buyouts.............................................................................................32IX. What is the legal effect of ratification?..................................................................33

G. Ratification as exoneration, exculpation or absolution..........................................34H. Ratification as affirmation.....................................................................................37I. Ratification as a promise not to sue.......................................................................38J. Ratification as a release.........................................................................................39K. Uncertainty in the effect of ratification.................................................................40

X. The continuing relevance of the doctrine to companies............................................41L. Applications for leave to commence proceedings pursuant to section 237...........42

1 The relevance of a ratification resolution to an application for leave...............442 Does section 237 have any effect on applications commenced under section 232?47

M. Director’s liability and the quantum of damages...............................................49XI. Criticisms and uncertainty in the operation of the doctrine...................................50

N. Which wrongs are ratifiable?.................................................................................50O. Forgeries................................................................................................................52A. Valuable consideration..........................................................................................54B. Effect of the ratification on the rights of third parties...........................................55

3 Offeror bound....................................................................................................554 Irregular commencement of proceedings..........................................................56

C. Will shareholders obtain full and frank disclosure?..............................................56D. Ratification of breaches in the context of corporate trustees.................................58E. The position of directors of wholly owned subsidiaries........................................59F. Shareholder voting and unanimous informal assent..............................................60

XII. The misapplication of the doctrine to companies..................................................63G. An inappropriate application of principles?..........................................................67

XIII. Conclusion.............................................................................................................73

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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 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

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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 4.

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

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.

1 [1887] 12 AC 589.

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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.

I. THE INTERSECTION OF SHAREHOLDER RATIFICATION AND USE OF CORPORATE

PROPERTY

Under the Corporations Act and the general law there is a legal nexus between the use of corporate property and the doctrine of ratification. The relationship between ratification and the use of corporate property has not been considered by the academic literature and is a novel aspect of this thesis.

This thesis concerns, in part, the prejudice to stakeholders which arises from the operation of the doctrine of ratification. As a part of the doctrinal review presented in this thesis, it is necessary to place ratification and authorisation of breaches of director's duties in the context of companies incorporated under the Corporations Act because this analysis assists to explain the nature of the corporation, the limits of shareholder power and the extent to which shareholder primacy theory is implemented by the Corporations Act.

The use of corporate property and the doctrine of ratification intersect in many ways under the Corporations Act including; whether a company is bound by the conduct of a director under section 128 of the Corporations Act, whether a company’s cause of action may be statute barred because of the commencement of irregular proceedings, whether a third party payment will result in the discharge of a debt to a creditor, the consequences arising from pre-insolvency and insolvency for creditors and shareholders and whether a member’s remedy may be available to minority shareholders.

It is useful at this point to reflect on the position of minority shareholders in the context of companies. The relationship between each shareholder and the company is contractual2 and no shareholder has any right to absolute protection if their interests are affected.3 Further, unless the company is listed on a securities exchange, there may be no liquid market for their shares and in ordinary circumstances there is no mechanism for a shareholder to compel a buyout of their shares. A shareholder may choose to seek to protect their interests by the enforcement of their rights under the Corporations Act or under the company’s constitution and this choice will turn on considerations of the legal and factual matrix and economic considerations because of the costs involved in litigation in Australia. This highlights the prejudicial position which shareholders are in where the directors of a company are using their powers in their own interests or for their own benefit. A minority shareholder may seek to reduce or eliminate any prejudice under

2 s 1403 Dine, J, 781

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section 232 or section 461 of the Corporations Act and seek orders (for example) for the buyout of their shares by a majority shareholder.

A ratification resolution approved by a majority of shareholders which included the majority may be contrary to section 2324 and/or section 461 of the Corporations Act and accordingly there is an important connection between the use of corporate property, ratification and the limitation of the shareholders’ powers.5 The doctrine of ratification therefore does not operate free from some constraints in under the Corporations Act and the general law which impose limitations on the proprietary rights of shareholders to vote in their own interests.

Transactions which involve a director’s material personal interest are required to be approved by the shareholders in general meeting.6 Unless the company is a public company, a director whom has the personal interest in a related party transaction7 is permitted to vote on the approval of the transaction and this aligns with the right of a director/shareholder to approve a ratification resolution in respect of their own breach of statutory and fiduciary duty. The principles underlying the recognition of the shareholder’s proprietary right to vote highlights the intersection between the use of corporate property and the doctrine ratification. Save for the statutory prohibition against certain shareholders voting on related party transactions,8 the right of a director and their associates to vote on a transaction where a director will obtain a financial benefit from the approval of the resolution highlights the prejudice which arises from the largely unconstrained right of a shareholder at common law to vote in their own interests and not in the interests of the company. The company, minority shareholders and other stakeholders are prejudiced because the doctrines of equity are not imposed to ameliorate the unfairness which arises in these circumstances.

The doctrine of ratification and the use of corporate property are interrelated in the context of abuses of power by one or more of the directors. A typical example of this problem arises in relation to the sale of a company’s assets.9 An abuse by the directors of their powers which purportedly created rights in a third party is voidable and the ratification of the breach of duty by the shareholders in general meeting cures the breach to regularise the directors’ conduct. There is evident prejudice to minority shareholders in these circumstances since they will be unable to limit the majority’s power to approve a ratification resolution which concerns the use of the company’s property.

The enforcement of third party securities such as guarantees and security interests registered over land or pursuant to the Personal Property Securities Act 2009 (Cth) may involve considerations of (i) the assumptions the third party is entitled to make under section 129 of the Corporations Act10 (ii) the protection of irregularities which arise in

4 HNA Irish Nominee5 See, eg. Gambotto v WCP (1995) which concerns the duties on controlling shareholders.6 S 195(4)7 See Chapter 2E8 9 See for example, Bamford v Bamford; Hogg v Cramphorn Ltd.10 See, eg, Northside Developments v Registrar-General (1990) 170 CLR 146.

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shareholders’ meetings under section 1322 (iii) whether the shareholders approved (and were legally entitled to approve) the creation of the rights in the third party11 and (iv) whether because of an abuse of power by the directors,12 the shareholders in general meeting are required to ratify the directors' conduct.13

In the absence of a ratification resolution which remedies a breach of duties by the directors, provided that the third party does not have actual or constructive knowledge of different facts, a third party may be limited to reliance on the assumptions in section 129 of the Corporations Act.14 Ratification therefore has a role in resolving questions of the enforceability of third party securities as it relates to corporate property since a third party is entitled to rely upon the ratification for the purposes of section 129 and as evidence generally of the company’s powers being regularly exercised, however, whether there has been a ratification of a director’s conduct is not a complete answer to the legal controversy surrounding the enforcement of third party securities.15

The introduction of the statutory derivative action into the Corporations Act changed the common law position with respect to the operation of the doctrine of ratification and this therefore is an important intersection with the use of corporate property. Whilst section 236 of the Corporations Act permitted shareholders to bring derivative actions even where a director’s conduct was ratified, the approval of a ratification resolution remains relevant to the ultimate orders which may be made by a court in relation to derivative proceedings16 and in respect of applications for relief from liability made under section 1317S and 1318 of the Corporations Act. A court may order that a shareholder’s costs of bringing a derivative action be paid by the relevant company and this would have the effect of reducing the prejudice to the shareholders which commenced the legal proceedings.

In respect of proposed or actual conduct which is a contravention of the Corporations Act, a shareholder and creditors have rights pursuant to section 1324 of the Corporations Act to seek an injunction.17 It is notable that under section 1324, a court may make an order against a director of a company for damages for a breach of their duties18 and that declaratory relief may be sought in respect of the invalidity of a corporate act. Whilst minority shareholders and creditors are protected against a purported ratification of a breach of statutory duty,19 there remains the legal possibility of the attenuation of statutory duties which is discussed in detail in Chapter 3. The doctrine of ratification has a limited role in resolving questions of invalidity in this context and overall section 1324

11 See eg, Qintex12 13 Horrigan, B14 Horrigan, B, 242.15 Forgeries in the context of enforcement of third party securities is somewhat unique where ratification is involved. A forgery cannot be ratified, however a third party’s rights will be protected under section 129 unless the third party has actual or constructive knowledge of the forgery or is put on inquiry by facts known to the third party. See Horrigan16 S 23917 BH v Bell Resources Ltd (1984) 2 ACLC 157.18 Phoenix Constructions Queensland P/L v Coastline Constructions P/L [2011] QSC 167.19 Angas Law Services

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may have an effect of reducing prejudice to minority shareholders and creditors entirely separate from the operation of the doctrine of ratification.

Ratification and the use of corporate property do not intersect in the context of pre-insolvency and insolvency situations. It is notable that in an insolvency context where the company has acted to the prejudice of creditors, even the shareholders' reserve powers are curtailed in favour of creditors' rights. A line of authority following Kinsella20 explains that creditors in these circumstances have rights in respect of a company's property and not the shareholders.21

In a similar context, the Corporations Act establishes a code under Part [xx] for determining whether any corporate transactions are voidable transactions22 what orders should be made if a transaction is voidable23 and under Part [xx] establishes the priorities for the payment of moneys to creditors and employees of a company.24 The voidable transactions regime principally seeks to protect creditors since a declaration that a transaction is voidable may result in moneys paid back or property returned to a company. In this context, the doctrine of ratification does not affect a court’s jurisdiction under section 588FF of the Corporations Act to make orders in relation to voidable transactions.

Corporate insolvency law assists to provide a basis for placing the doctrine of ratification in its proper context. The doctrine has a limited scope of application under the Corporations Act and this arises in a pre-insolvency and insolvency context because creditors are given rights with respect to the use of corporate property and relevantly, the shareholders powers are restricted, including the use of the reserve powers. Accordingly, even if there are a series of conclusions raised by this thesis which supports the abolition alternately statutory reforms to the operation of the doctrine of ratification because of the doctrinal analysis, the application of good corporate governance principles or by reason of the criticisms and uncertainty in the operation of ratification, the abolition or statutory reform cannot provide a holistic or partial answer to legal issues which arise in the context of insolvency and voidable transactions.

The foregoing discussion places ratification in connection with the use of corporate property as those matters bear upon the theory of the corporation, the shareholder primacy doctrine and the limits imposed upon the powers of shareholders in general meeting.

In the context of the theory of the corporation, …

The shareholders in general meeting do not have wide reserve powers in circumstances where the board of directors is willing and able to act.25 It was considered in Massey v

20 21 Horrigan, B, 246.22 S 588FE23 S 588FF24 Ss 556 to 564. Some employee claims are prioritized in favour of unsecured creditors.25 Massey v Wales [2003] NSWCA 212.

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Wales26 that where there is a provision in a company’s constitution which assigns management decisions to the board of directors, the shareholders in general meeting do not have a reserve power to make management decisions.27 A principal reason for such a conclusion follows from a director’s fiduciary duty to act in the best interests of the company as a whole.28 That process of reasoning naturally extends to powers assigned to the board of directors by statute and the Corporations Act gives effect to management decision being made by the board of directors.

The theory of shareholder primacy clearly has limitations in light of the restrictions which are imposed upon the powers of shareholders.

II. FIDUCIARY AND STATUTORY DUTIES OF DIRECTORS

Before embarking upon a discussion about the meaning of ratification and an

examination of the jurisprudence and the underlying legal principles in Australia and the

United Kingdom which underpin the doctrine of ratification, it is necessary to briefly

consider the nature of the fiduciary and statutory duties owed by a director of an

incorporated body (for example, incorporated associations and strata companies29),

including a company incorporated under the Corporations Act, which may be subject to

ratification by the members in general meeting.

As will be discussed later in this chapter, the nature of the statutory 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:

(i) act in good faith in the best interests of the company;

(ii) act for proper corporate purposes;

(iii) give adequate consideration to matters for decision;

(iv) keep discretions unfettered; and

26 [2003] NSWCA 21227 Massey v Wales [2003] NSWCA 212 at [45] and [65] per Hodgson JA (Meagher and Beazley JJA agreeing).28 Massey v Wales [2003] NSWCA 212 at [46] per Hodgson JA (Meagher and Beazley JJA agreeing).29 See, eg. Owners Corporation No 1 PS511693Q v Sulomar & Anor (Owners Corporation) [2012] VCAT 944.

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(v) avoid conflicts of interests.30

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

inclusive of each of a director’s fiduciary duties to a company. There are limited

circumstances whereby a director may owe fiduciary duties directly to a shareholder.31

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. As a result of the establishment of

statutory director’s duties under the Corporations Act, the doctrine of ratification has

accordingly reduced greatly in significance, however, the doctrine of ratification

continues to be relevant to the statutory derivative action in respect of applications for

leave to commence derivative proceedings, the liability of the directors and the quantum

of damages arising from the breach. These matters are discussed in detail below.

Separately to companies incorporated under the Corporations Act, there are body

corporates which are incorporated under State and Territory legislation.32 The fiduciary

duties owed by officers of these body corporates, subject to any specific statutory duties

established by a particular statutory scheme, are considered to be the same, or similar to

the general law fiduciary duties owed by directors of companies incorporated under the

Corporations Act. There is however no authority on the point.33 Accordingly, the 30 LexisNexis, Ford’s Principles of Corporations Law (at 23 October 2013) ‘The director as a fiduciary’ [8.010.3].31 See Brunninghausen v Glavanics [1999] NSWCA 199. Whilst the general principle that a director's fiduciary duties are owed to the company and not to the shareholders is correct, the nature of the transaction may give rise to a fiduciary duty owed by the directors to the shareholders (see Galloway v Hallé Concerts Society (1915) 2 Ch 233; Ngurli Ltd v McCann (1953) 90 CLR 425, 439-40, Howard Smith Ltd v Ampol Ltd [1974] AC 821, 835, 837-8; Richard Brady Franks Ltd v Price (1937) 58 CLR 112, 143; Stein v Blake [1998] 1 All ER 724 CA, 727; Gething v Kilner [1972] 1 WLR 337, 341-2; Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423, 432, 438, 440, 443; Cook v Deeks [1916] 1 AC 554, 562-3 and Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 153). A fiduciary duty may be owed by the directors to shareholders where there are negotiations for a takeover or for a sale of the company's undertaking which requires the directors to loyally promote the joint interest of the shareholders and themselves (see Coleman v Myers [1977] 2 NZLR 225, 276-80; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, 1229, 1270; Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543 CA, 547, 557; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 72, 96-7, 107 and Chan v Zacharia (1984) 154 CLR 178, 198-9. See generally Strong v Repide [1909] USSC 119; (1909) 213 US 419, 432; Goodwin v Agassiz (1933) 186 NE 659, 661; Bailey v Vaughan 359 SE 2nd 599 (1987), 603, 605 and Van Schaack Holdings Ltd v Van Schaack 867 P 2nd 892 (1994), 898).32 For example in Victoria body corporates are incorporated under the Associations Incorporation Reform Act 2012 and the Owners Corporations Act 2006.33 L Warnick, Incorporated Associations: Liability of Board/Committee Members (1 June 2005), Lavan Legal <http://www.lavanlegal.com.au/images/galleries/12654233_40_Inc_ass_liab_paper_(2).pdf>

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doctrine of ratification remains entirely relevant to all body corporates incorporated under

State and Territory legislation, especially in circumstances where no statutory duties have

been enacted. This thesis however does not consider the ratification of breaches of duty

in respect of bodies corporate incorporated under State and Territory legislation.

III. WHAT IS THE MEANING OF ‘RATIFICATION’?

Ratification is concerned with the performance of acts without authority by an agent in

the name of a named or ascertainable principal.34 In connection with the doctrine of the

undisclosed principal, if the agent does not act or purport to act as agent for the

principal,35 ergo the agent acts for themselves and the doctrine of ratification cannot

operate.36 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.

The doctrine developed in customary Roman law prior to 449 BC37 and was concerned

with the relationship of principal and agent.38 The effect of the laws of agency and

34 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, 213.35 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).36 Imperial Bank of Canada v Begley [1936] 2 All ER 367. 37 University of California, Roman Legal Tradition and the compilation of Justinian (29 September 2014) University of California <https://www.law.berkeley.edu/library/robbins/pdf/RomanLegalTradition.pdf> .38 Slavery was a part of Roman law and society, however, there is uncertainty about the extent of slavery which was undertaken with respect to commerce in the Roman Empire at this time (see generally Dr A Perbi, Slavery and the slave trade in pre-colonial Africa (5 April 2001) Latin American Studies <http://www.latinamericanstudies.org/slavery/perbi.pdf>. It is therefore unclear whether the doctrine of ratification developed (at least in part) as a legal consequence of slavery.

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contract was that the principal will become bound by a contract entered into by the agent

and thereby liable to perform the contract. The doctrine was applied in connection with

principals to torts committed by their agents where the principal will be held jointly and

severally liable with the agent.39 A principal will only be liable for the acts of an agent

when they are within the agent’s actual or apparent authority, unless it can be proved that

the principal has ratified the acts of the agent.40

The subsequent assent by the principal to their agent's conduct not only exonerates the

agent from the consequences of a departure from their orders, but likewise renders the

principal liable on a contract made in violation of such orders, or even where there has

been no previous retainer or employment and this assent may be inferred from the

conduct of the principal.41

Ratification is a unilateral act of will by the principal. Ratification must be

unambiguous42 and may be by express words, or implied from conduct43 including

silence44 and acquiescence.45 This is the case even with respect to a matter to which

statute requires the agreement to be in writing.46

The term ‘ratify’ originates from the 14th century Latin word “ratificare” which means to

ratify or to confirm.47 Ratification has been defined as ‘the adoption as [their] own by a

principal of an unauthorised act48 or contract of an agent’.49 In Wilson v Tumman,50

Tindal CJ defined ratification as follows:

39 See, eg. Schuster v McKellar (1857) 7 E & B 704; Parkes v Prescott (1869) LR 4 Exch 169; Glynn v Houston (1841) 2 Man & G 337. See generally LexisNexis, Halsbury’s Laws of England (at 25 October 2014) ‘Tort Liability – Act expressly authorised’ [150].40 E. B. Wright, The law of principal and agent (Stevens and Sons, Ltd, 2nd ed, 1901), 54.41 Elwood v Bullock (1844) 6 QB 383. See Simpson v Wells (1871-1872) LR 7 QB 214; R. H Kersley, H Broom, A selection of legal maxims (10th ed, 1939). 42 The Bonita (1861) Lusb 252.43 See, eg. Hagler v Parker (1846) 7 M & W 322; Cornwall v Wilson (1789) 1 Ves 569.44 Yona International Ltd v La reunion Francaise SA [1996] 2 Lloyd’s Rep 84.45 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), 58.46 For example, under the Statute of Frauds 1677 (UK). See McLean v Dunn (1828) 4 Bing 722.47 Latin dictionary, Ratificare (1 November 2014) Latin dictionary < http://www.latin-dictionary.org/>.48 The unauthorised act may be a tort.49 E. B. Wright, The law of principal and agent (Stevens and Sons, Ltd, 2nd ed, 1901), 54; R Munday, Agency law and principles (Oxford University Press, 2010), 105.50 (1843) 6 M & G 236.

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That an act done, for another, by a person, not assuming to act for [themselves], but for

such other person, though without any precedent authority whatever, becomes the act of

the principal, if subsequently ratified by [them], is the known and well established rule of

law. In that case the principal is bound by the act, whether it be for [their] detriment or

[their] advantage, and whether it be founded on a tort or on a contract, to the same effect

as by, and with all the consequences which follow from the same act done by [their]

previous authority.51

In Firth v Stainer,52 it was stated that a valid ratification will be constituted if the

following three 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.53

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,54 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 the proceedings.

In order that the ratification has any legal consequences, the act or contract must have

been done either in the principal’s name, or for their benefit.55 The ratification of a

contract has the following consequences:

51 (1843) 6 M & G 236, 242.52 [1897] 2 QB 70.53 Firth v Stainer [1897] 2 QB 70, 75 (Wright J).54 [2011] NSWDC 259.55 Rochefoucauld v Boustead [1897] 1 Ch 196. See generally E. B. Wright, The law of principal and agent (Stevens and Sons, Ltd, 2nd ed, 1901), 54-55.

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(i) the principal and the third party will each become entitled to enforce the

contract;56

(ii) generally, the agent will no longer be liable to the principal for having acted

outside their authority, however this will not always be the case;57 and

(iii) the agent may acquire rights against the principal such as the right to a

commission, or to be indemnified for expenses incurred in performance of the

now legitimised agency.58

The ratification of an agent’s conduct may however give rise to separate breaches of

fiduciary duties by the principal to other parties because of the unauthorised expenditure

arising from the ratification of the agent’s conduct.59 A simple example is the ratification

of the commencement of legal proceedings commenced by a solicitor without the

authority of the client where the expenditure on legal costs (i) is considered to be for the

sole benefit of a particular person, not the beneficiaries60 or (ii) was required to be

approved prior to the commencement of the proceedings.61

In Beatty62 the doctrine was applied in the United Kingdom to directors of companies to

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

owed to the company. As will become clear later, the development of the doctrine’s

principles in customary Roman law and the consequent acceptance of parts of the

doctrine into English law are relevant to a consideration of the jurisprudence and

doctrinal issues for the doctrine as it applies to directors of companies.

56 R Munday, Agency law and principles (Oxford University Press, 2010), 130-131.57 In Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225 it was considered that the principal could retain any legal rights against the agent, notwithstanding ratification. See R Munday, Agency law and principles (Oxford University Press, 2010), 132.58 Keay v Fenwick (1876) LR 1 CPD 745; R Munday, Agency law and principles (Oxford University Press, 2010), 130-131.59 For example, where the board of directors of a company or governing board of an incorporated body have breached the limits of the board’s spending powers established by the constitution.60 See generally Lewis v Nortex Pty Ltd (In Liq) [2002] NSWSC 143; Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 1143.61 For example, the agent exceeds their authority in incurring costs in relation to legal expenses.62 (1887) 12 App Cas 589.

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In the context of companies incorporated under the Corporations Act, without the power

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

pursuant to the statutory derivative action63) commencing proceedings for any breach of a

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

consider the breach of fiduciary duties to have been beneficial to the company.64 The

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

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

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

employees and the creditors.

IV. THE LEGAL REQUIREMENTS FOR RATIFICATION

In the context of all incorporated bodies, the following legal requirements for a valid

ratification are 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.

In the context of exoneration of a director, there is uncertainty as to whether a further

requirement for ratification is the provision of a release. This is considered in detail

below in Section J.

A. The reasonable time requirement

The ratification by a principal of a contract or act must take place within a reasonable

time, after which an act cannot be ratified to the prejudice of a third person.65 By way of

illustration, ratification cannot be made so as to divest persons not parties to the ratified

contract of their rights or otherwise prejudicially to affect those rights, where the rights

63 Corporations Act 2001 (Cth) s 236.64 For example, the directors may engage in issuing shares during a takeover battle to prevent the takeover proceeding at a price considered to be too low compared to the net assets of the company.65 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28; Forge v ASIC [2004] NSWCA 448, [385]–[389].

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have vested prior to the purported ratification,66 or so as to prejudicially affect the rights

of persons such as assignees in bankruptcy claiming through parties to the contract.67

It was held in In re Portugese Consolidated Copper Mines Ltd68 that the standard of

reasonableness must depend upon the circumstances of the case.69 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.70 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.

A short delay in the ratification may therefore prevent ratification, provided that a person

can demonstrate prejudice. For example, in Metropolitan Asylums Board Managers v

Kingham & Sons,71 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 three years may be

considered to be a reasonable time.72

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

(i) 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;73 and

(ii) 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.74

66 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).67 LexisNexis, Halsbury’s Laws of Australia (at 27 January 2014) ‘Time for ratification’ [15-140]; Bird v Brown (1850) 4 Exch 786.68 (1889) 42 ChD 160.69 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28, 37 (Bowen LJ).70 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28, 37 (Bowen LJ).71 (1890) 6 TLR 217.72 Presentaciones Musicales SA v Secunda [1994] Ch 271.73 Bird v Brown (1850) 4 Exch 786; Dibbins v Dibbins [1896] 2 Ch 348.74 Presentaciones Musicales SA v Secunda [1994] Ch 271, 279 (Dillon LJ).

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It has been held that ratification of a contract is effective even when the third party has

given notice to the principal of withdrawal from it.75 This rule is however subject to the

exception that if the third party knows that the contract was made with the agent is

subject to ratification, the position is as if the third party had made an offer to contract, in

which case the offer may be withdrawn at any time before it has been accepted.76 The

decision in Bolton Partners v Lambert77 is contrary to earlier authority which held that a

third party will not be liable for any breach of contact between the making of the contract

with the third party and the ratification by the principal.78

It has been held that ratification is the adoption of the relationship of agency assumed by

the professing agent in the transaction, not the adoption of the transaction itself.79 The

rule is supportable on the basis that the offeror received what it bargained for, however,

the rule may be criticised on the following bases:

(i) there is no clear principle why an offeror should be permitted to withdraw an offer

when it is aware that the acceptance is subject to ratification. Knowledge is not

an appropriate basis for allowing a withdrawal of an offer since the ratification

does not ratify the contract, the ratification only regularises the authority of the

agent to act for the principal at the time of acceptance of the offer;80

(ii) the withdrawal of an offer prior to acceptance allows the offeror to protect

themselves by avoiding a contract from forming – a matter of relevance to the

offeror’s prejudice. The rule in effect prevents the offeror from withdrawing after

an unauthorised agent has purported to accept the offer;

75 LexisNexis, Halsbury’s Laws of Australia (at 27 January 2014) ‘Time for ratification’ [15-140]; Bolton Partners v Lambert (1889) 41 Ch D 295, CA; Powercor Australia Ltd v Pacific Power [1999] VSC 110; BC9907547, [1552]-[1580] (Gillard J).76 Watson v Davies [1931] 1 Ch 455.77 Bolton Partners v Lambert (1889) 41 Ch D 295, CA78 Kidderminster v Hardwick (1873) LR 9 Ex 13. In Adams v Elphinstone [1993] TASSC 67, [24] (Zeeman J) (referring to some guarded disapproval of it in Fleming v Bank of New Zealand (1900) AC 577, 587 and it was disproved of by Isaacs J in his dissenting judgment in Davison v Vickery's Motors Ltd (1925) 37 CLR 1 at 20) doubted the principle in Bolton Partners v Lambert (1889) 41 Ch D 295 where an agent without authority accepted an offer which was then withdrawn it was open to the principal to ratify the acceptance of the offer after that withdrawal so that the withdrawal was ineffective.79 Davison v Vickery’s Motors Ltd (in liq) (1925) 37 CLR 1, 21 (Isaacs J).80 Ratification is the adoption of the relationship of agency assumed by the professing agent in the transaction, not the adoption of the transaction itself (Davison v Vickery’s Motors Ltd (in liq) (1925) 37 CLR 1, 21 (Isaacs J).

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(iii) the withdrawal of the offer is relevant to construing the reasonable time for

acceptance;

(iv) allowing the offeree the right to ratify a contract after the withdrawal of the offer

permits the offeree to take advantage of any benefit which would accrue, such as

an increase in the price of the goods the subject of the contract. There is no basis

in law for allowing the principal this advantage, rather, the offeror can show

prejudice at the time of ratification in these circumstances; and

(v) allowing the offeree the right to not ratify a contract after the withdrawal of the

offer permits the offeree to avoid an unfavourable contract, such as when the price

of the goods the subject of the contract decreases. There is no basis in law for

allowing the principal this advantage.

PropositionIt is a proposition advanced by this thesis that the reasonable time requirement is

uncertain in its operation.

B. The full and frank disclosure requirement

In order to satisfy the requirement that there be fully informed consent81 of the

shareholders in general meeting, the director in breach of their fiduciary duties to the

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

meeting.82 The requirement is analogous to a trustee seeking the informed consent of a

beneficiary.83

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 case84 or there must be an intention to

81 Maguire v Makaronis (1997) 188 CLR 449, 466.82 Forge v ASIC (2004) 213 ALR 574; The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, [9393].83 See, eg, Holyoak Industries (Vic) Pty Ltd and Anor v V-Flow Pty Ltd and Ors [2011] FCA 1154, [131].84 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.

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adopt the conduct regardless of what the material circumstances might be.85 It has been

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

things’.86 In Forge v Australian Securities & Investments Commission,87 the Court held

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

statutory duties under the Corporations Act.

It is problematic for the shareholders that the material facts which are required to be

disclosed by the director in breach may be uniquely within that director’s knowledge and

accordingly, if the director fails to make proper disclosure of all the material facts, it is

questionable whether the company (or shareholders) will be capable of determining that

there has been inadequate disclosure, even by pre-action discovery. However, it is the

fiduciary which bears the onus of proof that there was fully informed consent after full

and frank disclosure of all the material facts.88 In exceptional circumstances, if it can be

proved that the principal meant to adopt what their agent has done on their behalf, it is

not necessary to prove knowledge.89

In relation to prospective authorisation, where the general meeting is relaxing the duties

of directors without reference to any particular transaction the disclosure requirements

may well differ,90 however there is no case authority on the point in Australia.

PropositionIt is a proposition advanced by this thesis that:

(i) what constitutes full and frank disclosure is uncertain;

(ii) it is questionable how a company (or shareholders) would obtain evidence of 85 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 225.86 Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1, 14 (Lord Radcliffe).87 [2004] NSWCA 448.88 Warman International Ltd & Anor v Dwyer & Ors (1994) QCA 012.89 Phosphate Lease Co. v Green (1871) LR 7 CP 43.90 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, 674; LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘Adequate disclosure to general meeting is required’ [8.395].

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non-disclosure to determine whether it should commence legal proceedings; and

(iii) there is legal uncertainty whether the same standard of disclosure is applicable to

authorisation of a breach of fiduciary and/or statutory duties.

V. WHAT CONDUCT OF THE PRINCIPAL CONSTITUTES RATIFICATION?

Ratification occurs whenever the principal clearly manifests that they have adopted the

unauthorised act or contract effected by the agent purportedly on their behalf.

Ratification of an agent’s contract or conduct by a principal may be express or implied,

however only unequivocal words or acts will suffice to establish ratification.91 There is

no requirement that this intention must be communicated either to the third party or to the

agent.92 Conversely, where a transaction is effected by a deed, the ratification of the

transaction must also be effected by deed. This seems to constitute the sole exception to

the above principles.93

In the same manner that a principal may authorise an agent to perform other acts on their

behalf, the principal may also authorise an agent to ratify on their behalf an act or

contract that previously was unauthorised. The agent may have express authority to

ratify, actual implied authority, or just apparent authority to do so.94

A principal may ratify the act of an agent even following an initial refusal to ratify,

subject to the doctrine of estoppel. This is said to arise from the fact that a refusal to

ratify is merely equivalent to a refusal to grant authority.95

Implied ratification will take place where either the conduct of the principal or the

surrounding circumstances invite the inference that the principal has endorsed the agent’s

91 Taylor v Smith (1926) 38 CLR 48, 59; G. E. Dal Pont, Law of Agency (LexisNexis Butterworth, 2nd ed, 2008), [5.19].92 R. Munday, Agency law and principles (Oxford University Press, 2010), 117.93 R. Munday, Agency law and principles (Oxford University Press, 2010), 121-122. See Hunter v Parker (1840) 7 M & W 322, 343-4 (Parke B).94 SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129.95 Chartspike v Chahoud [2000] NSWSC 625, [18] (Master Macready).

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conduct.96 Ratification will arise when the principal having full knowledge of the

relevant facts, adopts the acts, by (for example) taking the benefit of them.97 By way of

example, such inferences may arise from:

(i) permitting rugby players purportedly recruited by a coach to attend training

sessions and making payment to the players for the amount agreed with the

coach;98

(ii) a vendor giving a bottle of champagne to their real estate agent after the sale of

the vendor’s property following a lengthy period of marketing the property;99 and

(iii) the directors of a company being the only shareholders (since all the shareholders

plainly have knowledge of the conduct of the directors and have permitted or

acquiesced to the conduct of the directors).100

Generally, the principal’s conduct will need to be sufficient for a court to conclude that

impliedly the principal has ratified the contract entered into by the agent. Sometimes,

however, the principal’s silence or acquiescence may be sufficient to imply ratification

on the part of the principal. A party’s silence or acquiescence may be ambivalent,

signally either a willingness to adopt the agent’s unathorised act or a reluctance to do

so.101

In Suncorp Insurance & Finance v Milano Assicurazioni SPA,102 the principal had

knowledge that the other contracting party was acting and incurring expenditure on the

basis that the extent of the principal’s authority was as being stated by agent and the

principal did nothing to correct that impression. In those circumstances, ratification was

inferred.103

96 Peterson v Moloney [1951] HCA 57. See also R. Munday, Agency law and principles (Oxford University Press, 2010), 117.97 Jacobs v Morris [1902] 1 Ch 816, 832; Kelner v Baxter (1866) LR 2 CP 174; Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45.98 See Hogan v London Irish RFC Trading Ltd (1999) 20 December (QBD).99 OPM Property Services Ltd v Venner [2003] EWHC 427 (Ch).100 Australian Securities and Investments Commission v Cassimatis [2013] FCA 641, [103] (Reeves J).101 R Munday, Agency law and principles (Oxford University Press, 2010), 118.102 [1993] 2 Lloyd’s Rep 225.103 Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225, 241 (Waller J)

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The silence of the principal is likely to be considered to be equivocal conduct, since, the

conduct of the principal may be attributable to the inherent uncertainty arising from a

complex relationship.104 Judicial views however vary on whether mere acquiescence or

inactivity can be sufficient to infer ratification.105 It has been considered that a matter of

determining whether the only reasonable inference to draw in all the circumstances is that

the principal ratified their agent’s transaction.106

Since speculative and inconclusive evidence will fall short of being capable of being

considered to be prima facie evidence,107 it may ultimately be a matter of the weight of all

of the evidence from which reasonable inferences may be drawn.

Relevant factors

The case law reveals that the courts identify several factors as important when

determining whether or not ratification has actually taken place as follows:

(i) ratification of part of the transaction will constitute ratification of the entire

transaction;108

(ii) once the principal has adopted their agent’s unathorised transaction, he may not

change their mind and resile from the ratification;109

(iii) in the case of silence or acquiescence on the part of the principal, ratification will

be more readily be inferred where there is a pre-existing relationship of principal

and agent. This is because a principal who authorises an agent (to any extent)

puts themselves at risk as to that agent’s acts and will be bound by them;110

(iv) the principal is not allowed to wait and see whether the transaction is actually

advantageous to them before deciding whether to approve it;111 and

104 See, eg, SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] EWHC 35, [162].105 Compare Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225, 234 (Waller J).106 Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225, 235 (Waller J).107 J. D. Heydon, Cross on Evidence (LexisNexis Butterworth, 9th ed, 2013), [1595].108 Re Maucon Ltd [1969] 1 WLR 78, 83 (Pennycuick J).109 SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129.110 SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129.111 SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129.

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Robson & Hayes Legal, 01/16/17,

see earlier point in my commentary

(v) lapse of time is relevant to whether an inference may be drawn that ratification

has occurred. The longer the principal simply stands by and does nothing, while

action is taken by the contracting third party (and indeed by others) under a false

impression as to the agent’s authority, the more compelling the inference of

ratification becomes. And this is irrespective of whether the principal came under

a positive duty to speak.112

C. How ratification must be evidenced

There is no requirement that the principal give notice of the ratification to any person that

the ratification has taken place.113 If notice is not given to any person of the ratification,

there may inadequate proof of the ratification because there is a reluctance by the courts

to accept as true the unstated intentions or thoughts of the principal without other

evidence.114 A ratifying principal may therefore be put to proof by a third party that the

agent acted on the principal’s behalf.115

VI. RETROSPECTIVE OPERATION OF THE RATIFICATION

It is for the principal to decide whether or not to ratify an act or contract entered into by

an agent. The strong weight of authority116 indicates that when the principal has elected

to ratify an act or contract, the maxim omnis ratihabitio retrotrahitur et mandato priori

aequiparatur117 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 or contract ab initio.118

112 Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225.113 Harrison & Crossfield Ltd v London & North-Western Railway Co. [1917] 2 KB 755; R. Munday, Agency law and principles (Oxford University Press, 2010), 108.114 Byrne v Van T'ienhoven (1880) 5 CPD 344; Keighley, Maxsted & Co v Durant [1901] AC 240.115 R Munday, Agency law and principles (Oxford University Press, 2010), 110.116 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 67.117 Every ratification is dragged back and treated as equivalent to a prior authority (Bolton Partners v Lambert (1889) 41 Ch. D. 295).118 Koenigsblatt v Sweet [1923] 2 Ch 314. See generally R. Munday, Agency law and principles (Oxford University Press, 2010), 105.

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The position is different from the situation where the agent’s acceptance was expressly

conditional upon the ratification by the principal.119 In such circumstances, the

ratification will not act retrospectively.

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

retrospective operation of the doctrine:

(i) The ratification of the commencement of legal proceedings by a solicitor on

behalf of a client.120 A client of a solicitor may ratify the issuance of a writ after

the period for the commencement of proceedings has expired under a statute of

limitations, however, it remains the discretion of the Court to determine whether

an extension of time ought to be granted. The retrospective operation of the

issuance of the writ ensures that the client’s legal rights are preserved;121

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

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

treated retrospectively as though the company authorised the commencement of

the legal proceedings which as previously, preserves the company’s legal rights;122

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

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

and thereby protects third parties;

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

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

insolvency context;123

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

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

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

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

119 See, eg, Watson v Davies [1931] 1 Ch 455.120 See, eg. Danish Mercantile Co. Ltd v. Beaumont [1951] Ch 680; Victoria Teachers Credit Union v KPMG [2000] VSCA 23; Alexander Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 1 WLR 673; Australian Liquor Hospitality & Miscellaneous Workers Union (WA Branch) v Gay-Dor Plastics Ltd (1994) 74 WAIG 961; Omega Estates Pty Ltd v Ganke (1962) 80 WN (NSW) 1218.121 Adams v Elphinstone [1993] TASSC 67.122 Alexander Ward and Co Ltd v Samyang Navigation Co Ltd [1975] 2 All ER 424 (the commencement of proceedings was ratified by the liquidator).123

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

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

contract; and

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

under the doctrine of act of state.124 A State may thereby avoid liability for an act

because of the retrospective operation of the doctrine of ratification.

D. Application to contract law

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

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

principal may acquire rights under the contract with the third party.125 Conversely, if the

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

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

ratify.126

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

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

contract law, an offer may be revoked at any time before acceptance.127 However, a third

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

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

acceptance.128 Accordingly, the normal principles of contract law do not operate in the

context of ratification.

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

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

124 Buron v Denman (1848) 2 Exch 167. In Buron v Denman, in the course of their duty a naval commander who was entrusted to assist in the suppression of slavery freed the plaintiff’s slaves and destroyed the plaintiff’s ship which had been used to transport the slaves. The Court held that the minister of state’s ratification of the defendant’s actions rendered it an act of state and was therefore immune from suit.125 Simpson v Eggington (1855) 10 Exch 845.126 R Munday, Agency law and principles (Oxford University Press, 2010), 120.127 Dickinson v Dodds (1876) 2 Ch D 463; Byrne v Van Tienhoven [1874-1880] All ER 1432; Re National Savings Bank Association (1867) LR 4 Eq 9 (‘Hebb’s Case’).128 Bolton Partners v Lambert (1889) LR 41 ChD 295.

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

principal’s ratification.’129

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

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

unfairness to a third party include:

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

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

after the time for the giving of the notice has expired;130 and

(ii) where the right to the ownership of goods had vested.131

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

(i) ratification must take place within a reasonable time;132

(ii) unfair prejudice,133 it would seem, is always present if the effect of a purported

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

rights134 but not where the ratification merely has the effect, or possible effect, of

affecting the rights of a third party;135

129 R Munday, Agency law and principles (Oxford University Press, 2010), 106.130 Doe d Mann v Walters (1830) 10 B and C 626, Doe d Lyster v Goldwin (1841) 2 QB 143 and Right d Fisher, Nash and Hyrons v Cuthell (1804) 5 East 491); Dibbins v Dibbins (1896) 2 Ch 348, Bird v Brown (1850) 4 Exch 786; Lord Audley v Pollard (1597) Cro Eliz 561.131 Bird v Brown (1850) 4 Exch 786; Dibbins v Dibbins (1896) 2 Ch 348.132 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28. What is a reasonable time depends upon the circumstances of the case.133 In the context of members’ remedies in respect of unfairly prejudicial conduct, the test of unfairness is free from technical considerations of legal rights and to confer a wide power upon the court to do what is just and equitable (O’Neill v Phillips [1999] 2 All ER 961). Prejudice is not unfair where it occurs in the bona fide exercise of a power to prejudice (Wayde v NSW Rugby League Ltd (1985) 180 CLR 459). In the context of ratification the meaning of ‘unfair prejudice’ has not been authoritatively determined by a Court in Australia or the United Kingdom. See for example in Adams v Elphinstone [1993] TASSC 67, [25] (Zeeman J) approved Attorney-General v Wylde (1946) 47 SR (NSW) 99 that ratification cannot operate in destruction of rights that have accrued by reason of the acts sought to be ratified, having been done without authority and therefore being ineffective and not having been ratified at any time when the acts could have been done effectively.134 See, eg, Bird v Brown (1850) 4 Exch 786; N M Superannuation Pty Ltd v Baker (1992) 7 ACSR 105; R Munday, Agency law and principles (Oxford University Press, 2010), 129 cf Adams v Elphinstone [1993] TASSC 67, [26] (Zeeman J) where the correctness of the use of prejudice and unfairness were the relevant tests. It was stated that ‘It may well be appropriate to describe the relevant tests as falling into an overall category of unfair prejudice to a third party but only in a descriptive sense rather than as a test by reference to which the validity of a purported ratification is to be determined.’.135 Adams v Elphinstone [1993] TASSC 67. See also Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 where a contract of insurance entered into by an agent without authority may

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(iii) an estate once vested cannot be divested;

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

of ratification;

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

to unfair prejudice to a third party;136 and

(vi) ratification cannot take place where nothing remains to be ratified.137

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

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

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

the doctrine of ratification to breaches of fiduciary duty by directors of companies.

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

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

principal is permissible.138 If the principal does not elect to ratify a transaction, the third

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

against the agent for breach of their warranty of authority.139

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

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

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

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

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

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

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

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

which may include new terms.

be ratified even after loss.136 Smith v Henniker-Major [2003] Ch 182.137 Walker v James (1871) LR 6 Ex 124.138 R Munday, Agency law and principles (Oxford University Press, 2010), 120.139 R. Munday, Agency law and principles (Oxford University Press, 2010), 122.

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

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

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


(i) it is unclear whether a third party must suffer some prejudice, or whether the

prejudice must be undue, alternately unfair before ratification will not be

permitted; and

(ii) there is no basis in law for allowing a principal to obtain the benefit of a

transaction or avoid contractual or tortious obligations through the principal’s

discretion to ratify an agent’s conduct.

E. Application to tort law

In relation to torts, including assault,140 defamation,141 conversion142 and deceit,143 a

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

the agent’s conduct consistent with the principles of ratification developed in the context

of contract law.144 If the principal does not ratify the agent’s conduct, the principal will

not be liable for any damage or loss caused by the agent and thereby the agent remains

liable.

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

conduct,145 however a principal will be unable to ratify an act which the principal had no

140 Eastern Counties Railway Co v Broom (1851) 6 Ex 314.141 Urbanchich v Drummoyne Municipal Council (1991) Aust Torts Reports 81-127; Bishop v State of New South Wales [2000] NSWSC 1042.142 Hilbery v Hatton (1864) 2 H & C 822.143 See, eg. Kettlewell v Refuge Assurance Co [1908] 1 KB 545 where the insurer’s agent made fraudulent misrepresentations to the plaintiff.144 See, eg, Kettlewell v Refuge Assurance Co [1908] 1 KB 545.145 Hull v Pickersgill (1819) 1 Brod & Bing 282; Bedford Insurance Co Ltd v Institutto de Resseguros Do Brasil [1985] QB 966. See LexisNexis, Halsbury’s laws of Australia (at 27 January 2014) ‘Unlawful acts’ [15-145].

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power to perform146 and a principal cannot take or retain a benefit from a fraud committed

on their behalf.147

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

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

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

PropositionIt is a proposition advanced by this thesis that there is no basis in law for allowing a

principal to have a discretion to ratify a tortious act by an agent since this in practice

permits a principal to avoid liability for a tort and thereby expose the agent to the

liability.

VII. WHAT CONDUCT CANNOT BE RATIFIED BY SHAREHOLDERS?

In light of the possibility that a majority of shareholders may ratify a breach of a

director’s fiduciary or statutory duties and that this may extinguish any cause of action

against that director, the scope of the doctrine of ratification as adopted into English

common law was limited in the following ways and has the effect of protecting minority

shareholders:

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

ratified,148 nor an act contrary to public policy;149

(ii) where any contract amounts to a fraud150 or constructive fraud, on account of its

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

ratification;151

146 For example, a principal cannot ratify a forgery (see Rowe v B & R Nominees Pty Ltd [1964] VR 477 (following Brook v Hook (1871) LR 6 Ex 89). However, see M’Kenzie v British Linen Co (1881) LR 6 App Cas 82 at 99 per Blackburn J. See also Muir’s Executors v Craig’s Trustees 1913 SC 349; Morison v London County and Westminster Bank Ltd [1914] 3 KB 356; Fung Kai Sun v Chan Fui Hing [1951] AC 489; Kernan v London Discount & Mortgage Bank Ltd (1878) 4 VLR (L) 279. See also Rowe v B & R Nominees Pty Ltd [1964] VR 477, 483.147 Davis v Williams [2003] NSWCA 371; Kettlewell v Refuge Assurance Co [1908] 1 KB 545.148 Banque Janques Cortiev v La Banque d’Epergue (1888) 13 Ap Cas 111.149 Brook v Hook (1871) LR 6 Ex 89.150 Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258.

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(iii) where an act is beyond the power of the principal, it cannot be ratified;152

(iv) where the act is void ab initio153 the maxim quod ab initio non valet, in tractu

temporis non convalescit154 applies155 and accordingly the act is not capable of

ratification;156

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

relevant statute is not ratifiable;157

(vi) acts which are ultra vires are not ratifiable (which in respect of companies

incorporated under the Corporations Act would seem to now be limited to acts

which are illegal following the abolition of the doctrine of ultra vires);158

(vii) an act beyond the scope of the purpose for which the power existed (an abuse of a

power) is not ratifiable;159

(viii) 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;160

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

the minority;161 151 J. Cotterell, A collection of latin maxims & phrases (Stevens and Haynes, Bell yard, Temple Bar, 3rd ed, 1913).152 The Ashbury Railway Carriage Co. v Riche (1874) LR 7 H of L 659.153 The Ashbury Railway Carriage Co. v Riche (1874) LR 7 H of L 659.154 That which was void from its commencement, does not improve by lapse of time.155 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).156 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.157 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.158 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].159 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 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]. 160 Massey v Wales [2003] NSWCA 212.161 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

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

ratification would constitute a misappropriation of company resources162 or an

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

belong to the company;163

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

insolvent company to the prejudice of creditors;164

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

ratification defeated a member's personal right;165

(xiii) where the ratification was oppressive, the ratification will be invalid;166

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

improper purpose as directors the ratification will be invalid;167 and

(xv) where ratification would constitute bad faith, the ratification will be invalid.168

(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].162 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 157.163 Ngurli v McCann (1953) 90 CLR 425.164 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. 165 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).166 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]. 167 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].168 Pascoe Ltd (in liq) v Lucas (1999) 33 ACSR 357, 384–88.

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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.169

In the context of minority shareholder rights, Professor Finn criticised the guidance given

by the courts in respect of ratification as ‘neither conclusive nor satisfactory’.170 In

particular, suggesting that the approach taken by the courts to distinguish between a

situation where shareholders are already in hostile camps and one where they are not was

a logical distinction which was ‘a little difficult to discover’ and opined that ‘the

directors are entitled to interfere improperly with a threatening minority, but not a

threatening majority’.171

VIII. WHEN IS RATIFICATION NOT NECESSARY?

Ratification is not necessary in the following contexts:

(i) whether the directors, acting within the scope of their authority, are acting

lawfully in engaging in a management buyout; and

(ii) whether because of the constitution or a decision of a company, the content of a

director’s statutory and fiduciary duties has changed or been attenuated.

The first issue is addressed below, whereas the second issue is addressed in Chapter 3 of

this thesis.

F. Management buyouts

169 LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390].170 P. D. Finn, Fiduciary Obligations (The Law Book Company Ltd, 1977), 73.171 Ibid.

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A ‘management buyout’ occurs when some or all of the directors of a company make an

offer to buy the company from the existing shareholders. In this situation, the purchasing

directors have all of the knowledge of the company’s business and it may be at least

inferred that they are aware of (i) the future prospects of the company’s business, (ii) the

risks to the company’s business and (iii) how best to manage those risks.

The management buyout by some or all of the directors raises the following key

questions in connection with the doctrine of ratification:

(i) What is the motivation of the directors in making the offer to the shareholders?

(ii) Are the purchasing directors under a duty to disclose everything they know to the

shareholders?

(iii) If such a duty exists, will the directors disclose everything that they know to

shareholders?

(iv) If not all information is disclosed by the purchasing shareholders, how can the

shareholders determine whether the sale will be at a fair value?

(v) Have the purchasing directors conducted themselves in a way which assists them

to purchase the company at a valuation which they believe can be increased,

thereby obtaining for themselves an opportunity in the future to make a private

profit at the expense of the shareholders?

(vi) How can the shareholders protect themselves in these circumstances?

In this case, the directors have a clearly defined conflict of interest arising from the

directors’ material personal interest pursuant to section 191 of the Corporations Act and a

director of a public company would be prohibited from voting on the matter.172 The rules

of a securities exchange may also prevent the directors and their associates from voting at

a shareholders’ meeting to consider the proposed management buyout.

This example raises questions about the protection of minority shareholders under the

current law whereby the purchasing directors are not acting unlawfully and yet there are

172 Corporations Act 2001 (Cth) s 195.

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the same types of difficulties apparent from this situation to other situations where the

directors have acted in breach of their fiduciary duties.

PropositionIt is a proposition advanced by this thesis that the law in Australia is in an unsatisfactory

state by reason that the law does not recognise the possibility of a breach of a director’s

duties arising from a management buyout, the effect of which is to fail to protect minority

shareholders.

IX. WHAT IS THE LEGAL EFFECT OF RATIFICATION?

Following on from the above discussion which concerned the nature of ratification, this

Chapter will now consider the legal effect of the ratification.

As a general rule, ratification is considered ‘equivalent to an antecedent authority’.173

This means that the principal and the third party are deemed to have entered into their

contract from the moment that the agent, acting without authority, purported to conclude

the transaction with the third party.174 By way of example, the shareholders of a company

which was in existence at the time of the conduct175 can ratify any contract which comes

within the powers of the company pursuant to its constitution.176

However, the effect of a ratification will depend upon what is meant by the ratification,

since the word ‘ratification’ is used in the following contexts:

(i) ratification as exoneration, exculpation or absolution;

(ii) ratification as affirmation;

173 Kernigrblatt v Sweet [1923] 2 Ch 314, 325 (Lord Sterndale MR).174 R Munday, Agency law and principles (Oxford University Press, 2010), 130.175 At common law, a company cannot ratify a transaction which occur prior to its formation. See generally R Munday, Agency law and principles (Oxford University Press, 2010), 111.176 Since 1 January 1984, companies incorporated under the Corporations Act 2001 (previously the uniform Australian companies legislation) have the legal capacity of a natural person, but noting that companies incorporated prior to this date may remain subject to the doctrine of ultra vires. See Grant v United Kingdom Switchback Railways Co (1889) 10 Ch Div 135, 139-140 (Lindley J). See also Foster v Foster [1916] 1 Ch 532.

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

(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.

G. 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 act or contract is ratified had an original authority.

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

aequiparatur.177 In the case of a contract, the consequence of the ratification is that the

principal is in the same position as if they originally entered into it themselves178 and

provided that the agent was acting for a disclosed principal, the agent is relieved of all

liability.179

In Bamford v Bamford,180 ratification was described as the directors seeking ‘absolution

and forgiveness of their sins’.181 The term ‘absolution’ means ‘a remission of sins

pronounced by a priest (as in the sacrament of reconciliation)’182 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 being lawfully capable of ratifying a

director’s conduct, a majority of shareholders which approves a ratification resolution

will bind the minority of shareholders and the resolution will act to extinguish the cause

of action which arose from the breach of fiduciary duties. In such circumstances, the

177 Every consent given to what has already been done, has a retrospective effect and equals a command.178 Kemp v Fenwick (1878) 1 CPD 745.179 Spittle v Lavender (1821) 2 Itrod & Bing 452.180 [1970] Ch 212.181 Bamford v Bamford [1970] Ch 212, 238 (Harman J).182 Merriam-Webster Dictionary, Merriam Webster Dictionary (27 January 2014) Merriam-Webster Dictionary < http://www.merriam-webster.com/>.

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minority shareholders will lose any right to commence a derivative action against any

director whose breach of fiduciary duty has been ratified.

However, in Miller v Miller,183 Santow J concluded that whilst ratification blocked any

action by the minority shareholders there was still the possibility of legal action being

brought by new controllers where there is a change in control of a company. The Court

was of the view that a director relying on ratification would also require a documented

formal deed of release from the board of directors.

A similar view was expressed in Multinational Gas and Petrochemical Co v

Multinational Gas and Petrochemical Services Ltd184 in the dissenting judgment of May

LJ. In that case it was considered by May LJ that the release must be incidental to

carrying on the business and was made in good faith for the benefit of and to promote the

prosperity of the company. If the release did not meet those standards, the release would

not bind a subsequently appointed liquidator.

H. 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 duty.185

In Beatty,186 the board of directors within the powers of the company, executed a contract

with one of the directors 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.187

183 (1995) 16 ACSR 73.184 [1983] Ch 258.185 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).186 (1887) 12 App Cas 589.187 North-West Transportation Co, Ltd v Beatty (1887) 12 App Cas 589, 594 (Sir Richard Baggallay).

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In Grant v United Kingdom Switchback Rys Co,188 a case concerning the exercise of the

borrowing power by the 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’.189

In Hogg v Cramphorn Ltd,190 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.191 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 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. 192

Consequently, the effect of the ratification resolution was to validate the issue of the

shares.

In Bamford v Bamford,193 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, 194 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.

188 (1888) 40 ChD 135.189 Grant v United Kingdom Switchback Rys Co (1888) 40 ChD 135, 139-140 (Lindley LJ).190 [1967] Ch 254.191 See Hogg v Cramphorn Ltd [1967] Ch 254.192 Hogg v Cramphorn Ltd [1967] Ch 254; Bamford v Bamford [1970] Ch 212.193 [1970] Ch 212.194 [1967] Ch 254.

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It is concluded from the foregoing that the effect of the affirmation may be restricted to

affirming the conduct of the directors, however the effect of the affirmation could also be

to exonerate the directors.195

I. Ratification as a promise not to sue

Ratification may be no more than a covenant or promise not to sue.196 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’.197 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.198

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 duties.199

J. 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

195 See Foss v Harbottle (1843) 2 Hare 461.196 Johnson v Davies [1998] 2 All ER 649; Apley Estates Co v De Bernales [1947] 1 All ER 213.197 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).198 See generally Watts v Aldington, Tolstoy v Aldington (1993) Times, 16 December, [1993] CA Transcript 1578, CA.199 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.200 Such a release is not contrary to section

199A of the Corporations Act201 (formerly section 241 of the Corporations Law).202

In Miller v Miller,203 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.

On the authority of Miller v Miller,204 a mere ratification resolution by the shareholders in

general meeting is insufficient to exonerate a director from liability. The issue was not

expressly considered by the High Court in Angas Law Services Pty Ltd (In liquidation) v

Carabelas,205 or the Court of Appeal (UK) in Bamford v Bamford.206

It is not however doubted that the release given in the circumstances of Miller v Miller207

is a complete defence to a claim under the general law and a claim for statutory relief. 208

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).

200 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 123.201 Section 199A of the Corporations Act 2001 concerns the indemnification and exemption of an officer or an auditor of the company.202 Eastland Technology Australia Pty Ltd v Whisson (2005) 223 ALR 123.203 (1995) 16 ACSR 73.204 (1995) 16 ACSR 73.205 [2005] HCA 23.206 [1970] Ch 212.207 (1995) 16 ACSR 73.208 Eastland Technology Australia Pty Ltd v Whisson (2005) 223 ALR 123.

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In Apley Estates Co v De Bernales209 and Cutler v McPhail,210 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’211 and determining the intention of the parties to release a party from

a cause of action.212

K. Uncertainty in the effect of ratification

As is discernable from the potential effects of a ratification resolution passed by

shareholders in general meeting described above, there is uncertainty as to (i) the

requirements of the doctrine of ratification which exonerate a director and (ii) the legal

effect of a ratification.

Professor Finn has suggested that the decision in Bamford v Bamford213 is to be treated

with some caution. Professor Finn stated that:

Whenever the issue is one of prior approval of, or of ratification of, a breach of fiduciary

duty the matter to be determined is not whether the quality of the directors act is such that a

majority could ratify it, but rather whether any purported act of ratification or approval

would, in the circumstances, itself be open to challenge by an aggrieved minority

shareholder.214 (emphasis added)

Whilst Bamford v Bamford215 clarified the ratio decidendi in Hogg v Cramphorn Ltd,216

whether shareholders in any particular case are merely making an election to affirm a

voidable contract is not free from doubt. There would not seem however to be a reason

in principle to consider a ratification of a voidable contract as being different to the

ratification of some other conduct impugned by an improper purpose. Accordingly, it

will be necessary to determine what was the purpose of a ratification resolution by the

209 [1947] 1 All ER 213.210 [1962] 2 All ER 474.211 Cutler v McPhail [1962] 2 All ER 474; Gardiner v Moore and others [1966] 1 All ER 365.212 Apley Estates Co v De Bernales [1947] 1 All ER 213.213 [1970] Ch 212.214 See generally P. D. Finn, Fiduciary Obligations (The Law Book Company Ltd, 1977), 73.215 [1970] Ch 212.216 [1967] Ch 254.

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shareholders in general meeting since it may be determined that the ratification was not

for the purpose of exonerating a director from a breach of fiduciary duties.

PropositionIt is a proposition advanced by this thesis that there is legal uncertainty as to what is

required for a ratification resolution to exonerate a director and not merely be an

affirmation, a promise not to sue, or release. It follows that there is uncertainty as to the

legal effect of a ratification resolution.

X. THE CONTINUING RELEVANCE OF THE DOCTRINE TO COMPANIES

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

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

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

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

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

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

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

context of prejudice to company stakeholders) before commencing a discussion

concerning the attenuation of statutory duties and the prejudice to stakeholders.

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

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

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

general meeting to ratify a breach of a statutory duty (discussed in detail below in section

III) it will not be possible for a majority of shareholders in general meeting to exonerate a

director from liability to the company for a breach of their statutory duties. The question

whether a statutory duty may be attenuated by ratification or authorisation is considered

in Chapter 4.

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

breach of statutory duty, in relation to the statutory derivative action,217 the doctrine of

ratification continues to be relevant in Australia to:

(i) an application for leave to commence proceedings;218

(ii) liability of the directors;219 and

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

236(1) of the Corporations Act.220

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

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

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

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

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

business judgement rule.221 This is recognition of the fact that the directors of a company

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

decision taken by the board of directors.

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

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

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

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

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

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

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

allowed to use his or her name to recover the trust property.222

217 Corporations Act 2001 (Cth) s 236(1)218 Corporations Act 2001 (Cth) s 237219 Corporations Act 2001 (Cth) ss 1317S; 1318220 Corporations Act 2001 (Cth) s 239.221 See, eg, Zephyr Holdings Pty Ltd v Jack Chia (Australia) Ltd (1988) 14 ACLR 30 at 37 per Brooking J.222 Bl and Gy International Co. Ltd v Hypec Electronics Pty Ltd; Colin Anthony Mead v David Patrick Watson and Ors. [2001] NSWSC 705 at [70] per Einstein J.

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

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

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

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

shareholder.223

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

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

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

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

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

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

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

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

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

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

discretion.

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

must have regard to:

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

ratify or approve the conduct; and

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

purposes.

1 The relevance of a ratification resolution to an application for leave

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

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

223 See Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52.

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

for leave to commence or intervene in proceedings.

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

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

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

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

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

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

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

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

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

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

The Explanatory Memorandum indicates that the intention of the Commonwealth

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

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

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

which approved the resolution were both fully informed and were independent

shareholders from the affected director(s).

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

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

litigants arising from the limited exceptions to the rule in Foss v Harbottle.224 The 3 main

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

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

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

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

action against the directors);

224 (1843) 2 Hare 461.

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

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

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

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

and

3. the strict criteria which need to be established before a Court may grant leave.225

The Explanatory Memorandum also explained that there would be appropriate checks

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

proceedings were not commenced and that company funds are not expended

unnecessarily.226 This is an important policy consideration which in part raises an

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

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

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

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

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

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

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

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

resolution was approved by an independent majority of shareholders.227

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

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

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

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

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

225 Para 6.15 on page 19.226 Para 6.16 on page 19.227 See especially, William Arthur Forge & 5 Ors v Australian Securities & Investments Commission [2004] NSWCA 448; Massey & Anor v Wales & Ors; Massey & Anor v Cooney & Anor [2003] NSWCA 212; Chahwan v Euphoric Pty Ltd trading as Clay & Michel [2008] NSWCA 52; Ehsman v Nutectime International [2006] NSWSC 887.

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

in the Act) is to be preferred to each other interpretation.228 A court may consider

extrinsic material where a provision is ambiguous or obscure,229 however, on the face of

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

referred to by the section.

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

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

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

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

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

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

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

has a restrictive meaning.

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

Memorandum as to why:

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

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

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

approved by a majority of shareholders.

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

significance is that if the shareholders were unable to obtain any substantial damages as a

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

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

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

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

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

228 Acts Interpretation Act 1901 (Cth) s 15AB.229 Acts Interpretation Act 1901 (Cth) s 15AB(1)(b)(i).

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

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

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

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

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

ratify a breach of statutory duty (discussed below) and since the fiduciary duties of

directors are included within the statutory duties pursuant to sections 180, 181, 182 and

183 of the Corporations Act, a court would be unable to deny a shareholder leave to

commence proceedings with respect to a breach of a director’s statutory duties on the

basis of a ratification resolution being approved by the shareholders since that resolution

could not be legally effective to relieve a director of liability to the company.

2 Does section 237 have any effect on applications commenced under section 232?

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

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

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

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

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

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

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

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

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

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

is affected by a valid ratification resolution).

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

introduction of Part 2F.1A.230 In light of the foregoing discussion concerning sections

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

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

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

action. The primary difference in the considerations under section 232231 being that the

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

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

members whether in that capacity or in any other capacity.

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

exercise of the discretion would need to satisfy the requirements in House v The King.232

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

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

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

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

ratification but interrelated with its application to companies.


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

ratification resolution to a shareholder commencing a derivative action;

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

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

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

230 Fexuto Pty Limited v Bosnjak Holdings Pty Limited & Ors [2001] NSWCA 97 at [139]-[140] (Spigelman CJ); Short v Crawley (No. 30) [2007] NSWSC 1322 at [177] (White J).231 The predecessor section was section 260 of the Corporations Law which was subsequently renumbered as section 246AA of the Corporations Law.232 (1936) 55 CLR 499 at 505.

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shareholders; and

(iii) there is uncertainty as to whether a court may grant leave to a shareholder to

commence a derivative action where there has been a prospective authorisation of

a breach of statutory duty.

M. Director’s liability and the quantum of damages

In connection with a ratification resolution, sections 1317S233 and 1318 of the

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

a director by reason that it is relevant to determine whether a director acted improperly234

or dishonestly.235

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

Act) was considered in Forge v Australian Securities & Investments Commission.236 The

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

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

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

legislature provided.

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

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

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

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

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

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

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

vote as shareholders to ratify a breach of duty.

233 Formerly section 1317JA of the Corporations Law.234 See ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373. See also ASIC v Adler and 4 Ors [2002] NSWSC 483 at 173 per Santow J. See generally Harris, J, ‘Relief from liability for company directors: Recent Developments and their implications’, (2008) 21(1) University of Western Sydney Law Review.235 See generally Schmierer and Anor v Taouk [2004] NSWSC 345.236 [2004] NSWCA 448.

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

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

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

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

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

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

minority shareholders in these circumstances.


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

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

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

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

resolution; and

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

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

and/or statutory duties as a director and (b) fellow directors and associates of the

director voting to approve the ratification resolution.

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

of ratification to assess whether the doctrine of ratification remains germane to

companies incorporated under the Corporations Act.

XI. CRITICISMS AND UNCERTAINTY IN THE OPERATION OF THE DOCTRINE

N. Which wrongs are ratifiable?

A significant area of criticism of the doctrine are the categories of non-ratifiable wrongs,

or more aptly the exceptions to the doctrine of ratification237 which were discussed in

237 P. Lang, The enforcement of director’s duties in Britain and Germany: A comparative study with particular reference to large companies (European Academic Publishers, Bern, 2004), 230; J Kluver,

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Chapter [x]. The distinction is of great significance since the effect of allowing a

majority to approve a resolution as distinct from a unanimous vote of the shareholders,

generally deprives the minority of their legal rights to commence derivative

proceedings238 and results in the company’s cause of action against the director in breach

of their duties being extinguished.

The concern raised by the Companies and Securities Advisory Committee in its report on

the statutory derivative action in July 1993 was that ‘the distinction in law between

ratifiable and non-ratifiable matters is unclear and uncertain’.239 There are a number of

conflicting authorities which cannot be reconciled to determine what types of acts and

omissions by directors are ratifiable by the shareholders in general meeting.240

One such category of a non-ratifiable wrong which has been criticised for being in an

uncertain state is a fraud on the minority. Two areas have been highlighted by the

academic literature:

(i) a distinction is drawn between negligence of the directors (a ratifiable wrong) and

negligence which results in the directors’ making a profit (which may be within

the fraud on the minority exception);241 and

(ii) there is conflicting authority that a shareholder is subject to an implied limitation

that their power is to be exercised in good faith in the best interests of the

company.242

Derivative actions and the rule in Foss v Harbottle: Do we need a statutory remedy? (1993) 11 C&SLJ 7, 8; A Hargovan, ‘Under judicial and legislative attack: The rule in Foss v Harbottle (1996) 113 South African Law Journal 631, 634, 636-7.238 S Fridman, Ratification of directors’ breaches (1992) C&SLJ 252, 266.239 Companies and Securities Advisory Committee, Report on a statutory derivative action (1993), 6. See also S Friedman, Ratification of Director’s Breaches (1992) 10 C&SLJ 252; K Yeung: Disentangling the Tangled Skein: The Ratification of Directors’ Actions (1992) 66 ALJ 343; S. Beck, ‘The Shareholders’ Derivative Action (1974) 52 Canadian Bar Review 159, 207.240 L. Taylor, Ratification and the Statutory Derivative Action in the Companies Act 1993 (1998) 16 C&SLJ 221, 223; B McPherson, Duties of directors and the powers of shareholders (1977) 51 Australian Law Journal 460, 468-9; I M Ramsay, B B Saunders, Litigation by shareholders and directors: An empirical study of the statutory derivative action (2006) Research paper, Centre for Corporate Law and Securities Regulation, 13.241 Companies and Securities Advisory Committee, Report on a statutory derivative action (1993), 22. See especially Pavlides v Jensen [1956] Ch 565; Daniels v Daniels [1978] Ch 406.242 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].

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There is currently no authority in Australia which indicates that the approval of a

ratification resolution by a shareholder voting to approve their own breach of director’s

duties would be a fraud on the minority. One possible avenue than a shareholder may

take is to challenge the purpose of the majority in approving the ratification resolution to

come within existing authority on the doctrine of the fraud on the minority.243 However

there are significant evidential difficulties in ascertaining the purpose of the majority in

approving such a resolution.244

A second category non-ratifiable acts is a nullity. In Clamp v Fairway Investments Pty

Ltd245 the court held that the shareholders in general meeting could ratify a decision taken

by the board of directors, notwithstanding that the board meeting lacked a quorum.

However, an inquorate meeting lacks the authority to bind the company, ergo the

decision is a nullity and is not capable of being ratified.246

It may be thought that the principles of a non-ratifiable wrong would be able to be clearly

stated, if not easily applied in practice. This however has not been the experience and

moreover the courts have sought to engage in mental gymnastics to make sense of the

case law. In this respect, Professor Baxt has opined that various authors247 have

highlighted the difficulties in reconciling the cases of Cook v Deeks,248 Regal (Hastings)

Ltd v Gulliver249 and Furs Ltd v Tomkies.250,251

O. Forgeries

243 See generally Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457.244 See generally S Fridman, Ratification of directors’ breaches (1992) C&SLJ 252, 258.245 (1973) CLC 27,599.246 See generally Cheng v Song [2005] NSWSC 19 (a forgery is a nullity).247 See, eg, Gower, Principles of Modern Company Law (London, Stevens, 3rd ed, 1969).248 [1916] 1 AC 554.249 [1967] 2 AC 134.250 (1936) 54 CLR 583.251 R Baxt, Judges in their own cause: The ratification of directors’ breaches of duty (1978), 47.

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In Northside Developments Pty Ltd v Registrar-General,252 the High Court held that a

forgery cannot be ratified.253 Whilst there are some contrary decisions,254 the weight of

authority is supported on the following multiple bases:

(i) a forger who counterfeits a signature or seal does not profess to act as an agent;

(ii) a forged document is a nullity; it is void, not voidable; and

(iii) an act that is a criminal offence is not capable of ratification.255

In Chen v Song,256 it was held that if an agent in forging a signature purports to act for an

identified principal, there appears to be no reason why the principal should not be able to

ratify.257 It is notable however that Northside Developments Pty Ltd v Registrar-

General258 was not considered in Chen v Song259 and accordingly, there is significant

doubt whether this decision is good authority.

In two cases, it appears that knowledge of the forgery by the principal was the basis upon

which the decisions were made. In Klement v Pencoal Ltd & Ors,260 the Court held that

the deliberate silence by the party whose signature was forged amounted to ratification.

This was contrary to the decision in McLaughlin v City Bank of Sydney.261 In Perpetual

Trustees Victoria Ltd v Cox,262 it was held that the borrowers could not have ratified the

forged mortgage because they did not know that the mortgage had been forged at any

material time. In both cases, Northside Developments Pty Ltd v Registrar-General263 was 252 [1990] HCA 32.253 See also Brook v Hook (1871) LR 6 Ex 89; Greenwood v Martin’s Bank [1932] 1 KB 371; Imperial Bank of Canada v Begley [1936] 2 All ER 367; Rowe v B and R Nominees Pty Ltd [1964] VicRp 59; Stone v March (1827) 6 B and C 551; Harrisons and Crossfield v London and North-Western Railway Co [1917] 2 KB 755.254 See especially McKenzie v British Linen Company (1881) 6 App Cas 82; Kernan v London Discount and Mortgage Bank [1878] VicLawRp 141255 Cheng v Song [2005] NSWSC 19, [329] (Adams J) citing Rowe v B and R Nominees Pty Ltd [1964] VicRp 59 Cf McKenzie v British Linen Company (1881) 6 App Cas 82; Kernan v London Discount and Mortgage Bank [1878] VicLawRp 141.256 [2005] NSWSC 19.257 Cheng v Song [2005] NSWSC 19, [329] (Adams J) citing Rowe v B and R Nominees Pty Ltd [1964] VicRp 59 Cf McKenzie v British Linen Company (1881) 6 App Cas 82; Kernan v London Discount and Mortgage Bank [1878] VicLawRp 141.258 [1990] HCA 32.259 [2005] NSWSC 19.260 [2000] QCA 152.261 [1912] HCA 16.262 [2014] NSWCA 328.263 [1990] HCA 32.

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not considered. There is therefore significant doubt whether knowledge is a basis upon

which a ratification may be found in the case of a forgery.

A possible exception to the general rule is when there is a new agreement between the

adopter and the contracting party for valuable consideration which is enforceable by

law.264 However this would be contrary to other authority that an agreement under seal is

ineffective to ratify the void act.265


(i) it is unclear whether knowledge is a relevant principle for the ratification of a

forgery;

(ii) it is unclear whether a new agreement may be a basis for ratification; and

(iii) there is inconsistent authority on the question of whether a void act can be

ratified.

A. Valuable consideration

In relation to the requirement for valuable consideration, it is unclear whether the

ratification of a breach of fiduciary duty by the shareholders in general meeting requires

any consideration such as a peppercorn, hawk, or robe.266

The shareholders are typically asked to relieve a director of their liability to the company

for the breach, the effect of which is for the company to dispose of a valuable asset (the

right to sue) for nil consideration. This is a gift to the director from the company which

is not recognised in Australia as a fraud on the minority.267 In ordinary circumstances, for

an agreement to be binding without consideration it is necessary for the parties to execute

a deed. In Miller v Miller,268 a deed of release was considered to be required before a 264 Greenwood v Martin’s Bank [1933] AC 51, 57 (Lord Tomlin).265 Natal Land and Colonisation Co v Pauline and Development Syndicate [1904] AC 120; Dudley Building Pty Ltd v Rose [1933] HCA 14.266 Pinnel's Case [1602] 5 Co. Rep. 117a.267 See especially North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589.268 (1995) 16 ACSR 73.

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director would be relieved of their liability to the company. Since Miller v Miller269 was

not specifically considered in Angas Law Services Pty Ltd (In liq) v Carabelas,270 it is

unclear whether there is a requirement for the company to execute a deed, alternately,

obtain valuable consideration for the release of a director in breach of their fiduciary

duties.

PropositionIt is a proposition advanced by this thesis that it is unclear whether there is a requirement

for a company to execute a deed, alternately obtain valuable consideration for the release

of a director in breach of their fiduciary duties.

B. Effect of the ratification on the rights of third parties

It will be recalled that since ratification operates retrospectively, this may have a

prejudicial effect on third parties. Two examples of the operation of the doctrine to the

prejudice of third parties is the binding of an offeror to a contract after the withdrawal of

the offer and the ratification of the commencement of legal proceedings. These examples

are considered below.

3 Offeror bound

A commonly cited example of prejudice to a third party is the instance where a principal

ratifies a contract which was entered into by an unauthorised agent after the offeror has

withdrawn the offer. The acceptance of the contract by the agent is taken to be binding

on the parties, notwithstanding that the offer was withdrawn prior to a valid acceptance.

The courts have suggested that the contract should be binding following ratification

because (i) the parties got what they bargained for and (ii) it avoids the additional costs of

the parties negotiating a further contract which may include additional terms.271 The

operation of the doctrine of ratification has been criticised for the unfair prejudice.

269 (1995) 16 ACSR 73.270 [2005] HCA 23.271

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4 Irregular commencement of proceedings

One further common example of ratification is where a solicitor commences proceedings

without the authority of a client, the client may ratify the commencement of legal

proceedings, even in circumstances when the time for the commencement of the

proceedings has expired pursuant to the relevant statute of limitations. The irregular

commencement of the proceedings is not treated as a nullity for the purposes of the rules

of the court, although the court must consider whether to grant an extension of time.

Several points may be made about the operation of the doctrine in these circumstances:

(i) the court recognises the prejudice to the defendant of the ratification as being a

factor relevant to the extension of time. In so doing, the court treats the

ratification as though it operates retrospectively but not to the extent that it cures

the irregular commencement of the proceedings unless the extension of time is

granted;

(ii) on current authority, the retrospective operation of the commencement of

proceedings to the time prior to the elapsment of time under the relevant statute of

limitations is not of itself taken to be prejudicial to the defendant since the factors

relevant to the court’s discretion also include whether the plaintiff has a prima

facie case and whether there is a satisfactory explanation for the delay;272 and

(iii) the effect of the elapsment of time under the relevant statute of limitations is that

the cause of action is statute-barred.273 It is not the case therefore that the

defendant would be divested of a proprietary right which is a recognised

exception which gives rise to unfair prejudice.274

C. Will shareholders obtain full and frank disclosure?

It has been questioned whether in all cases shareholders will have before them adequate

information to decide whether a breach of duty by the directors should be ratified.275

272 See especially Adams v Elphinstone [1993] TASSC 67.273 See, eg, Harriton v Stephens [2006] HCA 15.274 See, eg, Bird v Brown (1850) 4 Exch 786.275 Companies and Securities Advisory Committee, Report on a statutory derivative action (1993), 22.

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A director in breach of their fiduciary duties will plainly be incentivised to give

disclosure to shareholders in general meeting which will provide an opportunity for

approval by a majority of shareholders purely on the basis of their own self-interest. This

is significant since, some matters may be uniquely within the knowledge of the director

and thereby not discoverable by the company, or the shareholders. There is a

fundamental problem with the application of the full and frank disclosure principle in

such circumstances since there is no practical way for the company or a shareholder to

test whether there has been adequate disclosure, except by the commencement of legal

proceedings. In the event of proceedings commencing, discovery and cross-examination

would provide an opportunity for the non-disclosed matters to be brought to the attention

of the court, however, that possibility of itself does not ensure that all facts relevant to

full and frank disclosure will be brought to the attention of a court. The relevant statute

of limitations may also be a cause for difficulty if a minority shareholder is unable to

commence proceedings within the statutory time limit which may because of the

difficultly in obtaining relevant evidence before the commencement of proceedings.

If the ratification resolution is approved, unless the company is required to pay the costs

of litigation, minority shareholders must commit significant financial resources to

commence proceedings to challenge whether the disclosure was full and frank. The cost

of litigation in Australia may be the greatest barrier to shareholders obtaining justice

since the shareholders risk the direct costs of engaging solicitors, the possibility of an

adverse costs order if in the event they are unsuccessful in the proceedings and the risk of

the legal costs associated with any appeal of the original decision.

PropositionIt is a proposition advanced by this thesis that there is significant doubt whether in

practice the shareholders will obtain full and frank disclosure from the directors in breach

of their duties.

D. Ratification of breaches in the context of corporate trustees

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It will be recalled that the shareholders in general meeting have a power of

authorisation276 and ratification277 which is considered to arise at common law as a reserve

power.278 In the context of a corporate trustee, on the ordinary principles of ratification,

the shareholders of a corporate trustee could ratify a breach of the director’s fiduciary

duties which affect the beneficiaries of the trust and thereby the beneficiaries would be

unable to commence proceedings against the directors for the breaches of fiduciary duty

or breaches of trust.

This corporate structure is to be distinguished from an individual trustee who is required

to obtain the informed consent of each of the beneficiaries of the trust.279 The corporate

trustee structure therefore gives rise to a disconnect between the beneficiaries of the trust

and the directors as being the persons ultimately responsible for the trust. It can be seen

therefore that the use of a company and the effect of the veil of incorporation can easily

be used to protect the directors from liability to the beneficiaries of the trust, especially

where the directors are the only shareholders of the corporate trustee.

The principles which underpin the doctrine of ratification work an injustice on the

beneficiaries in these circumstances and they are significantly prejudiced by the conduct

of the corporate trustee’s shareholders whom have authorised the directors’ conduct and

thereby disposed of a valuable trust asset (the right to sue) without the need to obtain the

informed consent of each of the beneficiaries. There is currently no Australian authority

on the point, however the primary argument in support of this being correct is the maxim

‘equity follows the law’ and accordingly, the ratification is permissible. However, it

would be necessary to show that there was no unfair prejudice to the beneficiaries. It is

unclear on what basis it could be suggested that the beneficiaries have not suffered unfair

prejudice, especially where the corporate trustee does not have any assets. The question

may turn on the unfair prejudice to the beneficiaries as a whole and accordingly, there

may be circumstances where a class of beneficiaries obtain a benefit to the detriment of

others.276 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.277 Bamford v Bamford [1970] Ch 212.278 Bamford v Bamford [1970] Ch 212.279 Keech v Sandford (1726) 25 ER 223.

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The above analysis indicates that the existing principle that ‘ratification is not permitted

where the ratification would divest a third party of vested proprietary rights’ should be

extended by analogy to the rights in equity which a beneficiary has against a director of a

corporate trust for breaches of fiduciary duties and breaches of trust.


(i) there is uncertainty whether a beneficiary of a trust managed by a corporate

trustee could commence legal proceedings against a director if the director’s

breaches of fiduciary duty are ratified by the directors; and

(ii) the existing principle that ‘ratification is not permitted where the ratification

would divest a third party of vested proprietary rights’ should be extended by

analogy to the rights in equity which a beneficiary has against a director of a

corporate trust for breaches of fiduciary duties and breaches of trust.

E. The position of directors of wholly owned subsidiaries

A director of a wholly-owned subsidiary is in a unique position with respect to the

shareholders of the parent (holding) company in 2 respects:

(i) the director could obtain the prospective authorisation of the parent company,

giving rise to the potential attenuation of the director’s duties280 without the need

to obtain approval of the shareholders of the parent company. The attenuation of

direcor’s duties is considered in detail in Chapter [x]; and

(ii) on the ordinary principles of ratification, the director could obtain the ratification

of the parent company, however since the director of the subsidiary has modified

duties of good faith281 there will be circumstances in which a director will not be

in breach of their duties to the subsidiary company.

280 This matter was specifically left open by the High Court in Angas Law Services Pty Ltd (In liq) v Carabelas [2005] HCA 23.281 Corporations Act 2001 (Cth) s 187.

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In both situations, the director is not required to obtain the informed consent of the

shareholders of the parent company. This raises the same issues of unfair prejudice

which were raised previously in this Chapter, however, in this case, all of the

shareholders of the parent company are affected by the loss of the right to consider the

authorisation or ratification of the breach of fiduciary duties.


(i) the authorisation and ratification of breaches of directors of subsidiary companies

by a parent company raises issues of unfair prejudice to all of the shareholders of

the parent company; and

(ii) a director of a subsidiary company may not be in breach of their fiduciary duties

of good faith to the subsidiary company, raising the potential for an issue of unfair

prejudice to all the shareholders of the parent company.

F. Shareholder voting and unanimous informal assent

The principle that a director can vote at a general meeting of shareholders to approve

their own breach of fiduciary duty has been widely criticised282 and described as ‘a

troubling aspect’ of the doctrine.283 Some of the case law indicates that a ratification

resolution in respect of certain types of breaches of fiduciary duties requires unanimous

approval284 however the weight of authority indicates that a ratification resolution will be

approved if the resolution is passed as an ordinary resolution. Such a resolution merely

requires a simple majority of the shareholders.285 This may be the case, even if the

directors act contrary to the express provisions of the constitution.286 The cases of Grant

282 Farrer et al, Farrar’s Company Law (2nd ed, 1988), 388; Robert Baxt, ‘Judges in their own cause: The ratification of directors’ breaches of duty’ (1978) Vol 5 Monash University Law Review, 16.283 Companies and Securities Advisory Committee, Report on a statutory derivative action (1993), 21.284 Hannes v MJH P/L (1992) 7 ACSR 8.285 North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589; Hogg v Cramphorn [1967] 1 Ch 254.286 In Grant v United Kingdom Switchback Railway Company (1888) 40 Ch D 135, the directors were prohibited from voting upon a contract in which they were interested. However, in breach of the constitutional requirement, the directors approved the transaction. The directors voted at the shareholders meeting to ratify the unauthorised contract. The approval was not considered to be an alteration to the constitution which would have required a special majority. However in Edwards v Halliwell [1950] 2 All ER 1064, the Court held that an ordinary resolution was insufficient to ratify the breach to the company’s

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v United Kingdom Switchback Railway Company287 and Edwards v Halliwell288 have been

suggested to be difficult to reconcile on this question of law.289

There have been a number of reported cases where proceedings against directors have

been adjourned for the purpose of a ratification resolution being considered at a future

general meeting of the shareholders.290 The approval of the ratification resolution will,

subject to interpretation of the resolution, finally dispose of the proceedings against the

director. The courts in Australia have given primacy to the proprietary interest which a

shareholder has in respect of their shares291 and have not introduced any equitable tests to

determine whether a shareholder is entitled to vote on a ratification resolution.

In the context of voting restrictions, a special situation is when there has been an

improper issuance of shares. In such a case, the shareholder holding those shares will not

be permitted to vote on a ratification resolution in respect of the issuance of the shares. 292

If this were not the case, there would be no internal corporate mechanism by which a new

majority could be prevented from ratifying the directors’ breach. This is a recognised

exception to the general rule that all shareholders are entitled to vote, but is explainable

on the basis that the persons being issued the new shares were not shareholders at the

time of the directors’ improper use of their powers.

In the context of different classes of shares, the current law in Australia permits a

company to issue one or more classes of shares which do not have voting rights attached

to them. Accordingly, only shareholders with voting rights attached to certain classes of

shares will be permitted to vote upon a ratification resolution.

constitution.287 (1888) 40 Ch D 135.288 [1950] 2 All ER 1064.289 David Chivers QC, Ben Shaw (ed), The Law of Majority Shareholder Power Use and Abuse (Oxford University Press, 2008), [7.33].290 See generally Hogg v Cramphorn [1967] 1 Ch 254; Bamford v Bamford [1970] Ch 212.291 Angas Law Services Pty Ltd (In liq) v Carabelas [2005] HCA 23.292 Hogg v Cramphorn [1967] 1 Ch 254.

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A unanimous vote of shareholders is a potential solution to the problems associated with

the doctrine ratification which have been addressed in this Chapter and later in this thesis.

The benefit of such an approach is to ensure that there is no minority, however this

approach has significant difficulties as follows:

(i) the directors do not owe fiduciary duties to each individual shareholder, except in

rare cases on the principles explained in Peter’s American Delicacy Co Ltd v

Heath;293

(ii) it would introduce practical difficulties for companies with large shareholder

bases and accordingly such a rule would favour small closely held companies; and

(iii) the rule may potentially bring about a situation where directors seek to obtain

proxy votes from shareholders for valuable consideration and this accordingly

may create a false market price for the shares in the company.

A further criticism of the doctrine is that the shareholders may ratify a breach of fiduciary

duty by unanimous informal assent294 and accordingly without the need to approve a

resolution at a formal meeting of which notice has been given. The principle in Re

Duomatic Ltd295 with respect to the informal assent of shareholders is suggested to be

unclear and there is a question of law whether the principle may not operate where there

is a statutory requirement for a meeting.296


(i) the case law concerning the ratification of breaches of express provisions of a

company’s constitution do not establish a clear principle where a special majority

will be required to approve a ratification resolution;

(ii) the underlying purpose which permits a company to issue classes of shares which

do not have voting rights does not take into account the possibility of a ratification

resolution being approved by certain classes of shareholders and there is

293 (1939) 61 CLR 457.294 Re Duomatic Ltd [1969] 2 Ch 365.295 [1969] 2 Ch 365.296 Elizabeth Boros, Virtual shareholder meetings: Who decides how companies make decisions? (2004) Vol 28 Melbourne University Law Review 265, 278. See also Ross Grantham, ‘The Unanimous Consent Rule in Company Law’ (1993) 52 Cambridge Law Journal 245, 254–5.

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uncertainty whether a ratification resolution may be invalid in certain

circumstances as being a fraud on the minority, or oppressive conduct within the

meaning of section 232 of the Corporations Act; and

(iii) the operation of the Duomatic principle is unclear and there is uncertainty

whether in certain circumstances the principle could operate where there is a

statutory requirement for a meeting.

XII. THE MISAPPLICATION OF THE DOCTRINE TO COMPANIES

The doctrine of ratification was first applied to corporations in the United Kingdom in the

late 19th century. At this time, the nature and scope of the legal duties owed by directors

to companies was still under development. In respect of proceedings concerning the

Companies Act 1862 (UK), the Courts variously described the position of directors as

agents, trustees and managing partners in relation to public companies.297 In Re Forest of

Dean Coal Mining Company,298 Jessel MR considered the legal nature of the role of a

director of a company and stated that,

[d]irectors have sometimes been called trustees, or commercial trustees, and sometimes

they have been called managing partners; it does not matter what you call them so long as

you understand what their true position is, which is that they are really commercial men

managing a trading concern for the benefit of themselves and all of the other shareholders

in it.299

In respect of the personal liability of directors, it was considered that the office of director

had a dual characteristic. The directors were agents for the company and trustees for the

shareholders of the powers committed to them.300 Such powers included; approving

transfers of shares, allotment of shares, employing funds of the company, making calls,

receiving payments of calls in advance and forfeiture of shares. The directors could be

297 A. C. Clauson, The law and practice under the Companies Acts, and the Life Assurance Companies Acts, 1902, London: Stevens and Haynes, 557.298 (1878) 10 Ch D 450.299 (1878) 10 Ch D 450, 451-2 (Jessel MR).300 A. C. Clauson, The law and practice under the Companies Acts, and the Life Assurance Companies Acts, 1902, London: Stevens and Haynes, 560-561. See generally G. E. Ry. Co. v Turner (1872) Ch App 149.

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rendered liable for the misuse of any of their powers.301 The office of director did not

create a relationship of trustee and beneficiary as between the directors and the

shareholders individually.302

In Foss v Harbottle,303 Wigram VC concluded that the directors were the governing body,

subject to the superior control of the shareholders in general meeting.304 Later in Isle of

Wight Railway Co v Tahourdin,305 Cotton LJ took the same view. The shareholders were

the supreme governing body306 and the position of the directors was as a delegate and

agent of the general meeting.307

The historical origins illuminate the present position in Australia. The starting point for

the application of the doctrine of ratification to companies incorporated under the

Corporations Act is that the shareholders in general meeting may by ordinary resolution

adopt an act of a director which will then bind the company.308 Since an ordinary

resolution requires only a majority of votes cast to be valid, the company becomes bound

notwithstanding that the minority of shareholders disapproves of the ratification

resolution.

By way of example, a director who is also a majority shareholder may vote on a

resolution to ratify their own breach of fiduciary duty. In such circumstances, and subject

to the ratification resolution being recognised as exoneration of the breach, the

company’s and the minority shareholders’ rights are extinguished. The law thus

recognises as paramount the proprietary rights which are attached to the shares309 and

301 A. C. Clauson, The law and practice under the Companies Acts, and the Life Assurance Companies Acts, 1902, London: Stevens and Haynes, 561-562.302 Percival v Wright [1902] 2 Ch 421.303 (1843) 2 Hare 461.304 Foss v Harbottle (1843) 2 Hare 461, 492 (Wigram VC).305 (1883) 25 Ch D 320.306 Isle of Wight Railway Co v Tahourdin (1883) 25 Ch D 320 at 330-1 per Cotton LJ.307 The same principle was applied in North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 which is the first reported case considering the application of the doctrine of ratification to a company. See generally Austin R P, Ramsay, I M, Ford’s Principles of Corporations Law (2007, 13th ed), [7.100].308 Grant v United Kingdom Switchback Railways Co (1888) 40 Ch D 135 (CA).309 See especially Bamford v Bamford [1970] Ch 212; Angas Law Services Pty Ltd (In liq) v Carabelas [2005] HCA 23.

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there is no basis in Equity under current Australian law that the shareholders are required

to vote in the interests of the company, or in the interests of the shareholders as a whole.

The recognition of the proprietary rights attaching to the shares as paramount suggests

that the law is permissive of prejudice to stakeholders of the company.


(i) the law in Australia is in an unsatisfactory state by reason that equitable

jurisprudence fails to bind the conscience of a shareholder which may exercise its

strict legal rights for its own benefit, whether or not the interests of the

shareholder were contrary to the company, or to the shareholders as a whole; and

(ii) the recognition of proprietary rights attaching to shares without the law of equity

ameliorating the effect of the exercise of those proprietary rights allows

stakeholders of companies to suffer prejudice arising from the decisions of the

shareholders in general meeting.

It is argued from a utilitarian point of view that the application of the doctrine of

ratification to companies implicitly assumes that shareholders will exercise their right to

vote in a manner which best benefits the company because this will maximise their own

wealth through either the potential increase in dividends payable and/or through the

increase in the value of their shares.310 This assumption therefore further assumes that

there are no material conflicts of interest which may affect a shareholder in exercising

their right to vote.

In the real world, shareholders may have material conflicts of interest. This can emerge

in at least two specific ways:

310 Under utilitarianism, everyone's happiness counts the same. When one maximizes the good, it is the good impartially considered. Further, the reason I have to promote the overall good is the same reason anyone else has to so promote the good. It is not peculiar to me. (see Stanford Encyclopaedia of philosophy, ‘The history of utilitarianism’ (2009) as at 10 March 2013, http://plato.stanford.edu/entries/utilitarianism-history/ .

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http://plato.stanford.edu/entries/utilitarianism-history/

(i) a shareholder who is also a director, alternately an associate of a director, of the

company, and

(ii) a major shareholder which controls more than fifty percent of the shares issued by

the company which have attaching voting rights.

Shares are an intangible form of personal property.311 A legal implication arising from

this nature of the personal property is that shareholders may exercise their voting rights

attaching to the shares in their own interests.312 The currently law in Australia does not

recognise that:

(i) the director has a conflict of interest in voting to ratify their own breach of

fiduciary or statutory duty;

(ii) the director’s conduct in ratifying their own breach of duty amounts to fraud on

the minority;

(iii) the director’s conduct in voting to approve a ratification resolution may amount to

the disposal for nil consideration of a valuable company asset (namely the

company’s right to sue for the breach);

(iv) there is a general doctrine of ‘waste of corporate assets’ with respect to the gift;313

(v) shareholders owe a fiduciary duty to the company or to any other shareholders;

(vi) any shareholder has a conflict of interest; and

(vii) the company has any right for its best interests to be determined by an

independent majority of shareholders.314

The above summary of the state of the law means that under Australian jurisprudence, a

director who is also a shareholder of the company is entitled to vote on a ratification

resolution which concerns their own breach of fiduciary duties. It is thereby a 311 Corporations Act 2001 (Cth) s 1070A(1); Peter’s American Delicacy Co. Ltd v Heath (1938-1939) 61 CLR 457; Colonial Bank v Whinney (1886) 11 App Cas 426.312 See Pender v Lushington (1877) 6 Ch D 70; North-west Transportation Co Ltd v Beatty (1887) 12 App Cas 589; Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 2 All ER 625; Peter’s American Delicacy Co. Ltd v Heath (1938-1939) 61 CLR 457. Dixon J stated that ‘[t]he right to vote in respect of their shares, which are property, and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner’s personal advantage.’ (see Peter’s American Delicacy Co. Ltd v Heath (1938-1939) 61 CLR 457 at 503-504). 313 See especially North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589.314 See especially Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 where a ratification resolution would only be valid if passed bona fide in the interests of the company as a whole.

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proposition advanced by this thesis that the current Australian law is in an unsatisfactory

state because it is permission of prejudice to a company’s stakeholders.

G. An inappropriate application of principles?

There are certain relationships which have been recognised as being fiduciary

relationships including; trustee and beneficiary; agent and principal, partners and director

and company. A fiduciary relationship is characterised by the fiduciary agreeing to act

on behalf of the principal. The relationship will exhibit such hallmarks as loyalty,315 trust

and confidence316 by the principal in the fiduciary and this gives rise to proscriptive

fiduciary obligations.317 A fiduciary relationship is therefore the highest standard of duty

which the law imposes.318

The doctrine of ratification has been applied to each of these fiduciary relationships,

however the application of the doctrine of ratification relate back to the particular nature

of the specific relationship. These principles are considered below in the context of

companies.

Before considering the application of the doctrine of ratification to the aforementioned

fiduciary relationships, something should be said about the concept of a fiduciary. Sir

Anthony Mason has suggested that the fiduciary concept is in search of a principle.319

This is because there is no widely accepted single basis for imposing fiduciary duties and

this affects the ultimate scope of the duties imposed because analysis must be made of the

extent of the trust and confidence in a particular relationship. Ergo, there is no

universally acknowledged test for determining when a fiduciary relationship exists.320

315 Boardman v Phipps [1967] 2 AC 46.316 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; Tate v Williamson (1866) 2 Ch App 55.317 Breen v Williams [1996] HCA 57.318 see generally Tate v Williamson (1866) 2 Ch App 55.319 Mason A, ‘Themes and Prospects’ in Finn PD (ed) Essays in Equity (1985) 242 at 246.320 See generally P Finn Fiduciary Obligations (1977), Mason A, ‘Themes and Prospects’ in Finn PD (ed) Essays in Equity (1985) 242 at 246; Flannigan, R, “The Boundaries of Fiduciary Accountability” [2004] NZLRev 215; Youdan TG (ed), Equity Fiduciaries and Trusts (Law Book Co, 1989); Ghosh, Devdeep "Fixing The Fiduciary Obligation : The Prescription-Proscription Dichotomy" [2012] CanLawRw 3;

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It is useful at this point to reflect on the nature of the fiduciary relationships which

concern trustees, partners and agents as a contrast to the fiduciary relationship been a

director and company.

In relation to the relationship of trustee and beneficiary, trustees owe their fiduciary

duties to each of the beneficiaries individually321 and accordingly, for a trustee’s conduct

to be ratified, each of the beneficiaries is required to give their fully informed consent.

The principle appears to arise from the duty of loyalty, one aspect of which is that the

trustee is disabled from acting for his own benefit or the benefit of a third person without

the informed consent of the principal.322

With respect to the relationship of partners, each partner owes fiduciary duties to each

other partner.323 There is a presumption that ordinary partnerships are based on both the

mutual trust and confidence of the partners in the integrity of every other partner. The

utmost good faith is fundamental to this relationship.324

(2012) 11(1) Canberra Law Review 24.321 See generally De Bussche v Alt (1878) 8 Ch D 286; Cotton v Dempster [1918] WALawRp 1; Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. See also Halsbury’s Laws of Australia [430-5510] Consent or concurrence in a breach of trust.322 See Bristol and West Building Society v Mothew [1998] Ch 1 at 18, [1996] 4 All ER 698 at 712, CA, per Millett LJ; Clack v Carlon (1861) 30 LJ Ch 639; 9 WR 568; Re Gates; Arnold v Gates [1933] Ch 913; [1933] All ER Rep 546.323 United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 11 per Mason, Brennan and Deane JJ. See also Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd [1988] 2 Qd R 1; Yunghanns v Elfic Pty Td (No 2) (2000) 1 VR 92; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; Gibson Motorsport Merchandise Pty Ltd v Forbes [2006] FCAFC 44. The duty however does not extend to a duty to negotiate a final agreement (Gibson Motorsport Merchandise Pty Ltd v Forbes [2006] FCAFC 44). See also Battye v Shammall [2005] SASC 138; GM & AM Pearce & Co Pty Ltd v Australian Tallow Producers [2005] VSCA 113. See also Halsbury’s Laws of Australia [185-710] (Partners and joint venturers).324 Helmore v Smith (1886) 35 Ch D 436 at 444 per Bacon V-C; Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 407; per Dixon J; Cameron v Murdoch (1986) 63 ALR 575 at 587; Metlej v Kavanagh [1981] 2 NSWLR 339; Zachariah v Ajay Investments Pty Ltd (No 1) (1983) 33 SASR 395; Hanlon v Brookes (1996) ATPR ¶41-523 at 42,710. The principle is firmly established in equity: see, for example, Floydd v Cheney [1970] Ch 602; Thompson’s Trustee in Bankruptcy v Heaton [1974] 1 All ER 1239. See, however, Johnson v Snaddon [2001] VSCA 91 at [27] per Buchanan JA (while partners must be worthy of each other’s trust and faith, they are not obliged to continue to have trust and have faith in each other’s abilities). See also Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd [2008] NSWSC 144 at [94] per Brereton J. See also Harlsbury’s Laws of Australia [305-355] (Nature of fiduciary obligation) as at 25 April 2014.

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In the context of the relationship of principal and agent, a principal may ratify the

conduct of an agent as discussed previously in Section [x]. In the case of co-principals

(such as persons in co-ownership) which jointly appoint an agent, the principals are

jointly liable to the agent, however, one co-principal may ratify the acts of the agent.325

There is authority that where a contract is made by an agent without authority for a

testator who dies without ratifying it, the testator’s executors cannot ratify the contract so

as to bind the estate.326 The principle relied upon is that the executor must take the debts,

assets and obligations in the state in which they were found at the time of death.327 The

position of an executor is to be contrasted with the right of a liquidator to ratify the act of

an agent on behalf of a company prior to the appointment of the liquidator.328

The position of a trustee, partner and an agent is to be contrasted with that of directors of

companies with respect to ratification. Only a majority of votes cast on a ratification

resolution at a general meeting of shareholders, as distinct from a majority of

shareholders, is required to pass a ratification resolution. This requirement arises directly

from the organic theory of the corporation. This coupled with the principle that directors

owe their fiduciary duties to the company and not to the shareholders are the significant

differences which give rise to the unique application of the principles of ratification to

directors as fiduciaries of a company. In this respect, it must be remembered that a

company is a creature of statute and that its existence, capacities and activities are only

such as the law attributes to it, whereas the acts and omissions attributed to a company

are the acts and omissions of natural persons.329

This direct application of the principles of ratification from the law of trusts, partnership

and agency to corporate law has permitted the existence of a minority of shareholders

325 Hughes v Hughes (1971) 115 Sol Jo 911, CA; Keay v Fenwick (1876) 1 CPD 745, 755 (James LJ).326 Bundoora Park Estate Ltd v Fisher (1894) 20 VLR 460327 Bundoora Park Estate Ltd v Fisher (1894) 20 VLR 460, 464 (Madden CJ).328 See, eg, Chartspike v Chahoud [2000] NSWSC 625; Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 2 All ER 424; Danish Mercantile Co Ltd v Beaumont [1951] Ch 680; Omega Estates Pty Ltd v Ganke (1962) 80 WN (NSW) 1218; Bank of Australia Ltd v Rudder [1911] HCA 39; Australian Blue Metal Ltd v Hughes (1962) 79 WN (NSW) 498.329 Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146, 171–2 (Brennan J).

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who disapprove of the ratification resolution and save for the principles explained in

sections [x] to [xx] above which protect the minority, the rights of the company to sue for

the breach of fiduciary duties is extinguished.330

The foregoing discussion of relationships may be contrasted with the relationship which

arise in connection with a unitised trust. A unitised trust resembles a company in many

ways because the unitholders have specific interests in the unit trust in the same way

which a shareholder has an interest in the capital of a company and the trustees of the unit

trust are analogous to directors of a company. A unitised trust however is different to a

company in the following key respects:

(i) each unitholder has a vote whereas a shareholder may not and this will depend

upon the rights attaching to a particular class of shares;331

(ii) each unitholder has a proprietary interest in the assets of the unit trust whereas a

shareholder does not have any interest in the assets of a company;332 and

(iii) each trustee owes fiduciary duties to the unitholders, whereas the directors of a

company do not generally owe fiduciary duties to each individual shareholder.333

In the case of a corporate trustee, the unitholders will have no control over the decisions

taken by the company334 since the unitholders are not the shareholders of the company

and thereby they do not have a right to appoint or remove the directors.

PropositionIt is a proposition advanced by this thesis that the application of the doctrine of

ratification to companies was wrong in principle. The application of the doctrine to a

company cannot be equated directly with the fiduciary relationships of trustee and

beneficiary, principal and agent and partners or by analogy to a unitised trust by reason

that:

(i) the fiduciary duties of directors are not owed to natural persons, rather they are

330 See Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Furs Ltd v Tomkies (1936) 54 CLR 583.331 332 333 334 See generally HL (QLD) Nominees Pty Ltd v Jobera P/L & Anor [2009] SASC 165.

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owed to a fictional entity unknown to the common law;

(ii) the fiduciary duties of directors are not owed to each individual shareholder

unlike the position of a trustee, partner or agent;

(iii) a trustee, agent or partner must always seek ratification from other persons and

not from themselves;

(iv) the ratification by a majority of shareholders whilst attributed to the company is

conceptually is not the same as a ratification by the company itself if the

company could independently act in its own best interests;

(v) there is an assumption inherent in the doctrine of ratification that all

shareholders have a right to vote in proportion to their shareholding;

(vi) there is an assumption that the majority of shareholders have approved the

ratification resolution in the best interests of the company, notwithstanding that

(a) the shareholders may include the director in breach of their duties, (b) fellow

directors and associates are entitled to vote on the ratification resolution and (c)

the directors are entitle to solicit proxies from shareholders to exercise their

votes at the general meeting.

Notwithstanding the proposition that the application of the doctrine was wrong in

principle, it is important to recognise that the doctrine of ratification does perform an

important function in respect of companies and it is argued that the following reasons

support the continued operation of the doctrine in a modified form:

(i) the company would be unable to ratify the conduct of a director where the

conduct was for the benefit of the company, but for some reason, the director

lacked the authority to bind the company. This would therefore give rise to

inconvenience to the company;

(ii) the company may not become bound by an act of a director under section 128 of

the Corporations Act. This would act to the prejudice of creditors;

(iii) the continued operation of the doctrine in a modified form would not be

inconsistent with the right of a company pursuant to section 131 of the

Corporations Act to ratify a pre-incorporation contract335 or the right of a 335 By way of example, the ratification of a contract of marine insurance pursuant to section 92 of the Marine Insurance Act 1909 (Cth).

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company under section 126 to engage an agent for the purpose of entering into

contracts on behalf of the company;

(iv) each director would remain liable for every breach of duty to the company,

irrespective of whether the company benefited from the breach of duty;

(v) the continued operation of the doctrine in a modified form would not be

inconsistent with the current operation of sections 237 and 239 in the context of

the approval of a ratification resolution;

(vi) a director who has acted honestly in carrying out his duties but was unable to seek

the ratification of their conduct would be in a weaker position in seeking to reduce

any liability to the company pursuant to section 1317S and 1318 of the

Corporations Act. This would be contrary to existing public policy as established

by these sections of the Corporations Act; and

(vii) the shareholders would be unable to fully regulate the affairs of the company

which is a long-standing principle of company law. The shareholders would

therefore be unable to regulate matters which concern ratification and

authorisation of breaches of duty.

The continued operation of the doctrine in a modified form is consistent with the

approaches taken internationally in New Zealand, the United Kingdom, Canada and the

United States of America. A discussion about the operation of the doctrine in these

jurisdictions is presented in Chapter 7 as a part of the review of the proposed

amendments to the Corporations Act proposed by this thesis.

This thesis now considers a different manifestation of the problems which arise from the

application of the doctrine of ratification to companies by considering the state of the law

in Australia with respect to the use of corporate property for corporate purposes.

XIII. CONCLUSION

The doctrine of ratification which developed in customary Roman law has been applied

widely to fiduciary relationships. The doctrine permits defects in an agent’s authority to

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be remedied by allowing ratification and in this context it performs an important function.

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

performs an important function by allowing the shareholders to relieve a director of a

breach of fiduciary duty to the company, otherwise, a director could be liable for any and

all fiduciary breaches, even breaches which were considered by a majority of

shareholders to be beneficial to the company.

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

being used and the operation and effect of the doctrine is uncertain in many respects. 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 Davies336 as was shown by the cases of Apley Estates Co v De Bernales337 and

Cutler v McPhail.338 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.

The principles upon which a principal may elect to ratify the conduct of an agent allows

that principal to gain a commercial advantage, however that advantage of itself is not

treated as prejudicial to the counter-party. Despite the significant criticism of the

principles, there has been no law reform directed to modifying the operation and effect of

the doctrine in Australia.

A shareholder may under current Australian jurisprudence exercise their vote

unrestrained by the Corporations Act, good corporate governance principles and

equitable principles because a conflict of interest is not recognised and a shareholder does

not owe any fiduciary duties to each other shareholder. Equity follows the law and in this

respect, equitable principles have not emerged in the Australian jurisprudence to

ameliorate the harsh application of the doctrine when a director votes to approve their

own breach of fiduciary duties.

336 [1998] 2 All ER 649.337 [1947] 1 All ER 213.338 [1962] 2 All ER 474.

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The application of the doctrine of ratification to companies is beset by difficulties which

fail to identify the doctrinal basis for its application to body corporates, or which theory

of the corporation is applied by the doctrine. These underlying problems indicate that the

application of the doctrine to companies was wrong in principle. The failure of the law to

recognise a conflict of interest arising from a director voting as a shareholder to ratify

their own breach of fiduciary duties is a significant problem for the protection of minority

shareholders.

The doctrine ratification has been subject to such continuous and strong criticism that in

Australia the Corporations Act was amended to include a statutory derivative action to

overcome the problems associated with the application of the doctrine to companies.339

Despite the Parliament’s intention to resolve the problems inherent in the operation and

effect of the doctrine of ratification, it has survived and continues to be relevant to

directors’ breaches and their liability to company. The principles underlying the

continued relevance of a ratification resolution to a derivative action are unclear and are

in need of statutory reform for the protection of minority shareholders.

This thesis will now consider the attenuation of directors’ fiduciary and statutory duties.

339 I M Ramsay, B B Saunders, Litigation by shareholders and directors: An empirical study of the statutory derivative action (2006) Research paper, Centre for Corporate Law and Securities Regulation, 15.

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