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Chapter 2 Version controlDate:8-May-23Time: 7:56 PM

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 ..................................................................................................................2II. Fiduciary and statutory duties of directors ..................................................................2III. What is the meaning of ‘ratification’? .....................................................................4IV. The legal requirements for ratification ....................................................................8

A. The reasonable time requirement .............................................................................8B. The full and frank disclosure requirement .............................................................10C. How ratification must be evidenced ......................................................................10

V. Retrospective operation of the ratification ................................................................11D. Application to contract law ....................................................................................13E. Application to tort law ...........................................................................................16

VI. What conduct cannot be ratified by shareholders? ................................................17VII. When is ratification not necessary? .......................................................................20

F. Management buyouts .............................................................................................20VIII. What is the legal effect of ratification? ..................................................................22

G. Ratification as exoneration, exculpation or absolution ..........................................23H. Ratification as affirmation .....................................................................................24I. Ratification as a promise not to sue .......................................................................25J. Ratification as a release .........................................................................................26

IX. The continuing relevance of the doctrine to companies ........................................27K. Applications for leave to commence proceedings pursuant to section 237 ...........28

1 The relevance of a ratification resolution to an application for leave ...............292 Is section 237 relevant to applications commenced under section 232? ...........33

L. Director’s liability and the quantum of damages ...................................................35X. Conclusion .................................................................................................................36I. Introduction ..................................................................................................................2II. Fiduciary and statutory duties of directors ..................................................................4III. What is the meaning of ‘ratification’? .....................................................................6IV. The legal requirements for ratification ..................................................................10

A. The reasonable time requirement ...........................................................................10B. The full and frank disclosure requirement .............................................................13

V. What conduct of the principal constitutes ratification? .............................................15C. How ratification must be evidenced ......................................................................18

VI. Retrospective operation of the ratification ............................................................18D. Application to contract law ....................................................................................20E. Application to tort law ...........................................................................................23

VII. What conduct cannot be ratified by shareholders? ................................................24VIII. When is ratification not necessary? .......................................................................27

F. Management buyouts .............................................................................................28

IX. What is the legal effect of ratification? ..................................................................29G. Ratification as exoneration, exculpation or absolution ..........................................30H. Ratification as affirmation .....................................................................................31I. Ratification as a promise not to sue .......................................................................33J. Ratification as a release .........................................................................................34

X. The continuing relevance of the doctrine to companies ............................................35K. Applications for leave to commence proceedings pursuant to section 237 ...........36

1 The relevance of a ratification resolution to an application for leave ...............382 Does section 237 have any effect on applications commenced under section 232?41

L. Director’s liability and the quantum of damages ...................................................43XI. Conclusion .............................................................................................................44

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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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Robson & Hayes Legal, 03/06/17,

insert revised intro from Doc 32 as at 6/3/17

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.

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

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

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

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

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

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

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

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

arising from the approval of a ratification resolution.

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

therefore under Australian jurisprudence exercise their vote unrestrained by good

corporate governance principles and equitable principles unless that conduct is not

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

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

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

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

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

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

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

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

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

there should be law reform in Australia.

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

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

essence of the differences between retrospective ratification and prospective authorisation

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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 5.

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 companies2),

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

(v) avoid conflicts of interests.3

2 See, eg. Owners Corporation No 1 PS511693Q v Sulomar & Anor (Owners Corporation) [2012] VCAT 944.3 LexisNexis, Ford’s Principles of Corporations Law (at 23 October 2013) ‘The director as a fiduciary’ [8.010.3].

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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.4

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.5 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.6 Accordingly, the

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

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

4 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).5 For example in Victoria body corporates are incorporated under the Associations Incorporation Reform Act 2012 and the Owners Corporations Act 2006.6 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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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.7 In connection with the doctrine of the

undisclosed principal, if the agent does not act or purport to act as agent for the principal,8

ergo the agent acts for themselves and the doctrine of ratification cannot operate.9 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 BC10 and was concerned

with the relationship of principal and agent.11 The effect of the laws of agency and

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

7 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, 213.8 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).9 Imperial Bank of Canada v Begley [1936] 2 All ER 367. 10 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> .11 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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principals to torts committed by their agents where the principal will be held jointly and

severally liable with the agent.12 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.13

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.14

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

unambiguous15 and may be by express words, or implied from conduct16 including

silence17 and acquiescence.18 This is the case even with respect to a matter to which

statute requires the agreement to be in writing.19

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

ratify or to confirm.20 Ratification has been defined as ‘the adoption as [their] own by a

principal of an unauthorised act21 or contract of an agent’.22 In Wilson v Tumman,23

Tindal CJ defined ratification as follows:

12 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].13 E. B. Wright, The law of principal and agent (Stevens and Sons, Ltd, 2nd ed, 1901), 54.14 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). 15 The Bonita (1861) Lusb 252.16 See, eg. Hagler v Parker (1846) 7 M & W 322; Cornwall v Wilson (1789) 1 Ves 569.17 Yona International Ltd v La reunion Francaise SA [1996] 2 Lloyd’s Rep 84.18 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), 58.19 For example, under the Statute of Frauds 1677 (UK). See McLean v Dunn (1828) 4 Bing 722.20 Latin dictionary, Ratificare (1 November 2014) Latin dictionary < http://www.latin-dictionary.org/>.21 The unauthorised act may be a tort.22 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), 105.23 (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.24

In Firth v Stainer,25 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.26

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,27 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.28 The ratification of a

contract has the following consequences:

24 (1843) 6 M & G 236, 242.25 [1897] 2 QB 70.26 Firth v Stainer [1897] 2 QB 70, 75 (Wright J).27 [2011] NSWDC 259.28 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;29

(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;30 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.31

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.32 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 beneficiaries33 or (ii) was required to be

approved prior to the commencement of the proceedings.34

In Beatty35 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.

29 R Munday, Agency law and principles (Oxford University Press, 2010), 130-131.30 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), 132.31 Keay v Fenwick (1876) LR 1 CPD 745; R Munday, Agency law and principles (Oxford University Press, 2010), 130-131.32 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.33 See generally Lewis v Nortex Pty Ltd (In Liq) [2002] NSWSC 143; Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 1143.34 For example, the agent exceeds their authority in incurring costs in relation to legal expenses.35 (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 action36) 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.37 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 Jin Chapter 3.

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.38 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

36 Corporations Act 2001 (Cth) s 236.37 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.38 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28; Forge v ASIC [2004] NSWCA 448, [385]–[389].

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as at 6/3 this needs to be discussed in Ch 3

have vested prior to the purported ratification,39 or so as to prejudicially affect the rights

of persons such as assignees in bankruptcy claiming through parties to the contract.40

It was held in In re Portugese Consolidated Copper Mines Ltd41 that the standard of

reasonableness must depend upon the circumstances of the case.42 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.43 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,44 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.45

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;46 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.47

39 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).40 LexisNexis, Halsbury’s Laws of Australia (at 27 January 2014) ‘Time for ratification’ [15-140]; Bird v Brown (1850) 4 Exch 786.41 (1889) 42 ChD 160.42 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28, 37 (Bowen LJ).43 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28, 37 (Bowen LJ).44 (1890) 6 TLR 217.45 Presentaciones Musicales SA v Secunda [1994] Ch 271.46 Bird v Brown (1850) 4 Exch 786; Dibbins v Dibbins [1896] 2 Ch 348.47 Presentaciones Musicales SA v Secunda [1994] Ch 271, 279 (Dillon LJ).

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The uncertainty in the reasonable time requirement is considered in Chapter 3.

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.48 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.49 The

decision in Bolton Partners v Lambert50 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.51

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.52 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;53

[(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

48 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).49 Watson v Davies [1931] 1 Ch 455.50 Bolton Partners v Lambert (1889) 41 Ch D 295, CA51 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.52 Davison v Vickery’s Motors Ltd (in liq) (1925) 37 CLR 1, 21 (Isaacs J).53 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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offeror’s prejudice. The rule in effect prevents the offeror from withdrawing after

an unauthorised agent has purported to accept the offer;

[(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 consent54 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.55 The requirement is analogous to a trustee seeking the informed consent of a

beneficiary.56

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 case57 or there must be an intention to

54 Maguire v Makaronis (1997) 188 CLR 449, 466.55 Forge v ASIC (2004) 213 ALR 574; The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239, [9393].56 See, eg, Holyoak Industries (Vic) Pty Ltd and Anor v V-Flow Pty Ltd and Ors [2011] FCA 1154, [131].57 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

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adopt the conduct regardless of what the material circumstances might be.58 It has been

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

things’.59 In Forge v Australian Securities & Investments Commission,60 the Court held

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

statutory duties under the Corporations Act.

Whether shareholders will obtain full and frank disclosure is addressed in Chapter 3.

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.61 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.62

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,63 however there is no case authority on the point in Australia.

Proposition

Sinclair & Ors (NSWCA, unreported 3 November 1998). See also R Munday, Agency law and principles (Oxford University Press, 2010), 116.58 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 225.59 Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1, 14 (Lord Radcliffe).60 [2004] NSWCA 448.61 Warman International Ltd & Anor v Dwyer & Ors (1994) QCA 012.62 Phosphate Lease Co. v Green (1871) LR 7 CP 43.63 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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It 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

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.64 There is

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

agent.65 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.66

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.67

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.68

64 Taylor v Smith (1926) 38 CLR 48, 59; G. E. Dal Pont, Law of Agency (LexisNexis Butterworth, 2nd ed, 2008), [5.19].65 R. Munday, Agency law and principles (Oxford University Press, 2010), 117.66 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).67 SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129.68 Chartspike v Chahoud [2000] NSWSC 625, [18] (Master Macready).

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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

conduct.69 Ratification will arise when the principal having full knowledge of the

relevant facts, adopts the acts, by (for example) taking the benefit of them.70 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;71

[(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;72 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).73

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.74

In Suncorp Insurance & Finance v Milano Assicurazioni SPA,75 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

69 Peterson v Moloney [1951] HCA 57. See also R. Munday, Agency law and principles (Oxford University Press, 2010), 117.70 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 45.71 See Hogan v London Irish RFC Trading Ltd (1999) 20 December (QBD).72 OPM Property Services Ltd v Venner [2003] EWHC 427 (Ch).73 Australian Securities and Investments Commission v Cassimatis [2013] FCA 641, [103] (Reeves J).74 R Munday, Agency law and principles (Oxford University Press, 2010), 118.75 [1993] 2 Lloyd’s Rep 225.

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

inferred.76

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.77 Judicial views however vary on whether mere acquiescence or

inactivity can be sufficient to infer ratification.78 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.79

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

considered to be prima facie evidence,80 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;81

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

change their mind and resile from the ratification;82

[(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;83

76 Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225, 241 (Waller J)77 See, eg, SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] EWHC 35, [162].78 Compare Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225, 234 (Waller J).79 Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225, 235 (Waller J).80 J. D. Heydon, Cross on Evidence (LexisNexis Butterworth, 9th ed, 2013), [1595].81 Re Maucon Ltd [1969] 1 WLR 78, 83 (Pennycuick J).82 SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129.83 SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129.

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

advantageous to them before deciding whether to approve it;84 and

[(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.85

[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.86 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.87 A ratifying principal may therefore be put to proof by a third party that the

agent acted on the principal’s behalf.88

V.[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 authority89 indicates that when the principal has elected to

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

aequiparatur90 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

84 SEB Trygg Holding Aktiebolag v Manches Sprecher Grier Halberstam [2005] 2 Lloyd’s Rep 129.85 Suncorp Insurance & Finance v Milano Assicurazioni SPA [1993] 2 Lloyd’s Rep 225.86 Harrison & Crossfield Ltd v London & North-Western Railway Co. [1917] 2 KB 755; R. Munday, Agency law and principles (Oxford University Press, 2010), 108.87 Byrne v Van T'ienhoven (1880) 5 CPD 344; Keighley, Maxsted & Co v Durant [1901] AC 240.88 R Munday, Agency law and principles (Oxford University Press, 2010), 110.89 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 67.90 Every ratification is dragged back and treated as equivalent to a prior authority (Bolton Partners v Lambert (1889) 41 Ch. D. 295).

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see earlier point in my commentary

conduct as though the principal had authorised the act or contract ab initio.91 The

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

conditional upon the ratification by the principal.92 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.93 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;94

(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;95

(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;96

91 Koenigsblatt v Sweet [1923] 2 Ch 314. See generally R. Munday, Agency law and principles (Oxford University Press, 2010), 105.92 See, eg, Watson v Davies [1931] 1 Ch 455.93 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) 1218.94 Adams v Elphinstone [1993] TASSC 67.95 Alexander Ward and Co Ltd v Samyang Navigation Co Ltd [1975] 2 All ER 424 (the commencement of proceedings was ratified by the liquidator).96 Clarke & Anor v Abou-Samra & Ors [2010] SASC 205, [102] (Kourakis J) citing with authority J Beatson, The Use and Abuse of Unjust Enrichment (1991) chapter 7 at 200-05. See also Goff and Jones, The Law of Restitution (6th ed, 2002) at [1-018]. The proposition that a debt is not discharged unless the payment is made on behalf of the debtor and with the debtor’s authority is accepted by the authors of

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(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

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.97 A State may thereby avoid liability for an act

because of the retrospective operation of the doctrine of ratification.

B.[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.98 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.99

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.100 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

Restitution Law in Australia: K Mason, JW Carter and GJ Tolhurst, Mason & Carter’s Restitution Law in Australia (2nd ed, 2008) at [846].97 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.98 Simpson v Eggington (1855) 10 Exch 845.99 R Munday, Agency law and principles (Oxford University Press, 2010), 120.100 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’).

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acceptance.101 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

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

principal’s ratification.’102

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;103 and

(ii) where the right to the ownership of goods had vested.104

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

(i) ratification must take place within a reasonable time;105

(ii) unfair prejudice,106 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

101 Bolton Partners v Lambert (1889) LR 41 ChD 295.102 R Munday, Agency law and principles (Oxford University Press, 2010), 106.103 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 561.104 Bird v Brown (1850) 4 Exch 786; Dibbins v Dibbins (1896) 2 Ch 348.105 In re Portugese Consolidated Copper Mines Ltd [1891] 3 Ch 28. What is a reasonable time depends upon the circumstances of the case.106 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.

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rights107 but not where the ratification merely has the effect, or possible effect, of

affecting the rights of a third party;108

(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;109 and

(vi) ratification cannot take place where nothing remains to be ratified.110

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.111 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.112

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 107 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.’.108 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 be ratified even after loss.109 Smith v Henniker-Major [2003] Ch 182.110 Walker v James (1871) LR 6 Ex 124.111 R Munday, Agency law and principles (Oxford University Press, 2010), 120.112 R. Munday, Agency law and principles (Oxford University Press, 2010), 122.

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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.

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.

PropositionIt is a proposition advanced by this thesis that:

[(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.

C.[E.] Application to tort law

In relation to torts, including assault,113 defamation,114 conversion115 and deceit,116 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.117 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.

113 Eastern Counties Railway Co v Broom (1851) 6 Ex 314.114 Urbanchich v Drummoyne Municipal Council (1991) Aust Torts Reports 81-127; Bishop v State of New South Wales [2000] NSWSC 1042.115 Hilbery v Hatton (1864) 2 H & C 822.116 See, eg. Kettlewell v Refuge Assurance Co [1908] 1 KB 545 where the insurer’s agent made fraudulent misrepresentations to the plaintiff.117 See, eg, Kettlewell v Refuge Assurance Co [1908] 1 KB 545.

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

conduct,118 however a principal will be unable to ratify an act which the principal had no

power to perform119 and a principal cannot take or retain a benefit from a fraud committed

on their behalf.120

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.

VI.[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,121 nor an act contrary to public policy;122

118 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].119 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, 483.120 Davis v Williams [2003] NSWCA 371; Kettlewell v Refuge Assurance Co [1908] 1 KB 545.121 Banque Janques Cortiev v La Banque d’Epergue (1888) 13 Ap Cas 111.122 Brook v Hook (1871) LR 6 Ex 89.

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(ii) where any contract amounts to a fraud123 or constructive fraud, on account of its

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

ratification;124

(iii) where an act is beyond the power of the principal, it cannot be ratified;125

(iv) where the act is void ab initio126 the maxim quod ab initio non valet, in tractu

temporis non convalescit127 applies128 and accordingly the act is not capable of

ratification;129

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

relevant statute is not ratifiable;130

(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);131

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

power) is not ratifiable;132

123 Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258. 124 J. Cotterell, A collection of latin maxims & phrases (Stevens and Haynes, Bell yard, Temple Bar, 3rd ed, 1913).125 The Ashbury Railway Carriage Co. v Riche (1874) LR 7 H of L 659.126 The Ashbury Railway Carriage Co. v Riche (1874) LR 7 H of L 659.127 That which was void from its commencement, does not improve by lapse of time.128 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).129 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.130 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.131 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].132 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].

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(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;133

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

the minority;134

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

ratification would constitute a misappropriation of company resources135 or an

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

belong to the company;136

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

insolvent company to the prejudice of creditors;137

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

ratification defeated a member's personal right;138

(xiii) where the ratification was oppressive, the ratification will be invalid;139

133 Massey v Wales [2003] NSWCA 212.134 See Cook v Deeks [1916] 1 AC 554; Ngurli Ltd v McCann (1953) 90 CLR 425, 438 and 447; Whitehouse v Carlton Hotel Pty Limited (1987) 162 CLR 285; Permanent Building Society v Wheeler (1994) 14 ACSR 109, 137; Gambotto v WCP Ltd [1995] HCA 12. See also Miller v Miller (1995) 16 ACSR 73, 89 followed in Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 17 ACSR 303, 312–13 (on appeal Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1998) 16 ACLC 252). See generally LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390].135 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 157.136 Ngurli v McCann (1953) 90 CLR 425.137 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. 138 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).139 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].

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

improper purpose as directors the ratification will be invalid;140 and

(xv) where ratification would constitute bad faith, the ratification will be invalid.141

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.142

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’.143 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’.144

VII.[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.140 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].141 Pascoe Ltd (in liq) v Lucas (1999) 33 ACSR 357, 384–88.142 LexisNexis, Ford’s Principles of Corporations Law (at 27 January 2014) ‘The limits to the general meeting’s power to ratify’ [8.390].143 P. D. Finn, Fiduciary Obligations (The Law Book Company Ltd, 1977), 73.144 Ibid.

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

this thesis.

D.[F.] Management buyouts

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.145 The rules

145 Corporations Act 2001 (Cth) s 195.

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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

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.

VIII.[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’.146

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.147 By way of example, the shareholders of a company

which was in existence at the time of the conduct148 can ratify any contract which comes

within the powers of the company pursuant to its constitution.149

146 Kernigrblatt v Sweet [1923] 2 Ch 314, 325 (Lord Sterndale MR).147 R Munday, Agency law and principles (Oxford University Press, 2010), 130.148 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), 111.149 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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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;

(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.

E.[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.150 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 themselves151 and

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

liability.152

In Bamford v Bamford,153 ratification was described as the directors seeking ‘absolution

and forgiveness of their sins’.154 The term ‘absolution’ means ‘a remission of sins

pronounced by a priest (as in the sacrament of reconciliation)’155 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.

150 Every consent given to what has already been done, has a retrospective effect and equals a command.151 Kemp v Fenwick (1878) 1 CPD 745.152 Spittle v Lavender (1821) 2 Itrod & Bing 452.153 [1970] Ch 212.154 Bamford v Bamford [1970] Ch 212, 238 (Harman J).155 Merriam-Webster Dictionary, Merriam Webster Dictionary (27 January 2014) Merriam-Webster Dictionary < http://www.merriam-webster.com/>.

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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

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,156 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 Ltd157 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.

F.[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.158

In Beatty,159 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

156 (1995) 16 ACSR 73.157 [1983] Ch 258.158 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).159 (1887) 12 App Cas 589.

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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.160

In Grant v United Kingdom Switchback Rys Co,161 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’.162

In Hogg v Cramphorn Ltd,163 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.164 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. 165

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

shares.

In Bamford v Bamford,166 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, 167 however the Court decided that an ordinary resolution ratifying such

160 North-West Transportation Co, Ltd v Beatty (1887) 12 App Cas 589, 594 (Sir Richard Baggallay).161 (1888) 40 ChD 135.162 Grant v United Kingdom Switchback Rys Co (1888) 40 ChD 135, 139-140 (Lindley LJ).163 [1967] Ch 254.164 See Hogg v Cramphorn Ltd [1967] Ch 254.165 Hogg v Cramphorn Ltd [1967] Ch 254; Bamford v Bamford [1970] Ch 212.166 [1970] Ch 212.167 [1967] Ch 254.

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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.

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.168

G.[I.] Ratification as a promise not to sue

Ratification may be no more than a covenant or promise not to sue.169 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’.170 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.171

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.172

H.[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

168 See Foss v Harbottle (1843) 2 Hare 461.169 Johnson v Davies [1998] 2 All ER 649; Apley Estates Co v De Bernales [1947] 1 All ER 213.170 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).171 See generally Watts v Aldington, Tolstoy v Aldington (1993) Times, 16 December, [1993] CA Transcript 1578, CA.172 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.173 Such a release is not contrary to section

199A of the Corporations Act174 (formerly section 241 of the Corporations Law).175

In Miller v Miller,176 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,177 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,178 or the Court of Appeal (UK) in Bamford v Bamford.179

It is not however doubted that the release given in the circumstances of Miller v Miller180

is a complete defence to a claim under the general law and a claim for statutory relief. 181

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).

173 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 123.174 Section 199A of the Corporations Act 2001 concerns the indemnification and exemption of an officer or an auditor of the company.175 Eastland Technology Australia Pty Ltd v Whisson (2005) 223 ALR 123.176 (1995) 16 ACSR 73.177 (1995) 16 ACSR 73.178 [2005] HCA 23.179 [1970] Ch 212.180 (1995) 16 ACSR 73.181 Eastland Technology Australia Pty Ltd v Whisson (2005) 223 ALR 123.

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In Apley Estates Co v De Bernales182 and Cutler v McPhail,183 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’184 and determining the intention of the parties to release a party from

a cause of action.185

IX.[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.

182 [1947] 1 All ER 213.183 [1962] 2 All ER 474.184 Cutler v McPhail [1962] 2 All ER 474; Gardiner v Moore and others [1966] 1 All ER 365.185 Apley Estates Co v De Bernales [1947] 1 All ER 213.

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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,186 the doctrine of

ratification continues to be relevant in Australia to:

(i) an application for leave to commence proceedings;187

(ii) liability of the directors;188 and

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

236(1) of the Corporations Act.189

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.190 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.

I.[K.] 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.191

186 Corporations Act 2001 (Cth) s 236(1)187 Corporations Act 2001 (Cth) s 237188 Corporations Act 2001 (Cth) ss 1317S; 1318189 Corporations Act 2001 (Cth) s 239.190 See, eg, Zephyr Holdings Pty Ltd v Jack Chia (Australia) Ltd (1988) 14 ACLR 30 at 37 per Brooking J.191 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.192

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)

192 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.193 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);

193 (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.194

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.195 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.196

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

194 Para 6.15 on page 19.195 Para 6.16 on page 19.196 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.197 A court may consider

extrinsic material where a provision is ambiguous or obscure,198 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

197 Acts Interpretation Act 1901 (Cth) s 15AB.198 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 Is section 237 have any effect on relevant to 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.199 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 232200 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.201

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; and

[(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

199 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).200 The predecessor section was section 260 of the Corporations Law which was subsequently renumbered as section 246AA of the Corporations Law.201 (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.

J.[L.] Director’s liability and the quantum of damages

In connection with a ratification resolution, sections 1317S202 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 improperly203

or dishonestly.204

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

Act) was considered in Forge v Australian Securities & Investments Commission.205 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.

202 Formerly section 1317JA of the Corporations Law.203 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.204 See generally Schmierer and Anor v Taouk [2004] NSWSC 345.205 [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.

X.[XI.] 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

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.

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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 Davies206 as was shown by the cases of Apley Estates Co v De Bernales207 and

Cutler v McPhail.208 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.

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

206 [1998] 2 All ER 649.207 [1947] 1 All ER 213.208 [1962] 2 All ER 474.

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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.209

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 criticisms of and uncertainty in relation to the doctrine

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

appropriate to companies incorporated under the Corporations Act.

209 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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