AN IMPORTANT JUDGMENT.

Hawera & Normanby Star, Volume XLII, Issue XLII, 7 October 1922, Page 5

AN IMPORTANT JUDGMENT.

MacDONALD v. NORMANBY COOP. DAIRY FACTORY CO., LTD.

The report of- the judgment of the Full Court in this appeal case has been delayed .pending the receipt of copies of the<' judgments. Of the five Judges four have delivered separate judgments. Mr Justice Herdman did not Heliver a separate judgment, but concurred with Mr Justice Hosking. In the result four agreed that, the appeal should be allowed and one dissented from that view. We are not able to publish a complete copy of all the judgments, but the following is a precis of the judgments, with the exception of the judgment of-v the Chief Justice, which is not yet to hand. The result is that the appeal is allowed. At the hearing Mr F. C. Spratt (of Messrs. Halliwell, Spratt, and Thomson) appeared for the appellant, and Mr ODea, (instructed by Messrs Welsh, McCarthy and Beeehey) for the respondent company. It "will be remembered that the company amended its Articles of Association for the purpose of increasing the number of shares to be held by each shareholder and allotted to shareholders additional shares. The appellant objected and sued the company in, the Magistrate's Court for moneys de? ducted for share contributions in respect of the new shares; The Magistrate gave judgment for the company, and the appellant appealed; and as the matter was one of great importance the appeal was heard by the Full Court. Several questions were raised, but the whole matter resolved itself into the determination of the question: Could the company, by amending its'/Articles of Association, compulsorily allot to shareholders additional shares to those held by them. The answer of the Full 'Court-is that it cannot.

Sir John Salmond, in discussing the facts, makes - much of, the point that the -appellant dissented 'from the amendment, and holds that the amendment .was invalid, and 'that."the appellant made no contract to- take • additional shares. The company, contended that the Articles in both their original and;amended forms constituted' a contract between,, each shareholder and the company to, conform to all the requirements of those Articles and perform all the obligations imposed thereby. The contract, however, which jjs' necessary to justify the issue and allotment of shares niust be a real; contrjaet and not a constructive contract attributed to a dissenting member in reliance on section 24 of the Act. A person who acquires shares is not liable to have further shares forced upon him. .The' fight to allot shares and the obligation to accept them must depend upon a contract, and such a right and obligation cannot be constituted by regulation instead of a contract. Such a regulation would be ultra vires. "What is required to create an obligation to take ,shares is an actual contract and not a constructive contract constituted by section 24 of the Act, and such actual contract could be inserted as a., clause in the Articles of Association, but such a contract cannot be altered ;at the will of the company. A company can amend its regulations, but not its'contracts. V... : ;' -V; ;'•>/• ■ -r ",.;;' . Mr;. Justice Hbsking expresses his opinion in the following way: -r-In arriving at the ibrue /coiistruction pf the .Articles the nature of the company shall ibe taken into consideration. He points I out the main features of the co-opera-I tive companies, but concludes that under the Companies Act the position of the company is no different from ithat of other companies. He refers-to the fundamental characteristic of such companies, viz., that suppliers must be shareholders, which involves the fixing of the minimum number of shares which each supplier must take. There/is nothing in the law to prevent shareholders froni entering into a contract to take up additional shares on Ihe happening of some future event, nor is there, anything to prevent members frpflf insexbing in their contract a provision that' their shares may' be in-« creased" by the company. It might be unwise, hut would not be a bar to such a Contract being made. ■ ■ Nor is there anything to prevent'such a contract being_embodied in the company's Articles provided it is contained in Articles that are contemporaneous 'with,1 the Memo, of Association, and there is nqthing in. the Memo, of Association which precludes it from being inserted in the Articles. He cites iv support of these propositions Maxwell's case, 20 Eg. 585, and McKewan's case, fi O.l>. 447. •

By our Act tH© question to what extent the Memo, and Articles of Association constitute a contract between the members and the company has beep, settled by sees. 20 and 24 of the Act, which render tKose instruments binding on the company and the members to the same extent as if each member had duly executed the same and there were therein a covenant with the company to observe the conditions of the Memo, and conform to, the regulations contained in the Articles.

Proceeding then Lo discuss Articles 5 "and 7 of the Articles of Association and the amendment, he concludes that the Articles as amended would be effective if the amendment were valid. Referring then to the statutory power to alter the! company's regulations and the cases Allen v. Gold Reefs of West Africa, 1900, 1 Oh. 656, and British Murac Syndicate v. Alperton Rubber Co., 1915, 2 Oh. 186, in which the power of alteration was considered, he lays it down ths^t the Article altered must be "examined €o see if it is of such .a'character" that it may be altered without infringing, those principles which qualify the pjower of alteration, and expressed the opinion that Article 7 was? not such an Article as could be validly altered. The reason given for this view is that the Article defines the shareholder's liability, and cannot be altered with out his consent. If so a^majority might force on a minority a liability without limit, and from the very nature of the contract between the members and ihe company there must be an implied term that the contract shall not be altered. As To f!Ee"' coniiention that the appelr lant has lost His rights by coninuing to supply, the learned Judge admits that a shareholder might, by express agreement or by conduct, bind himself to an Article invali^ly passed, but points out that in this case the appellant dissented from the amendment before and the right under the contract .contained after it was passed, and that he had in the-Articles to supply milk to the company. ' , Mr. Justice Reed, in dissenting from the judgments of the other members of the Court, agrees that co-operative dairy companies are governed by the same laws as apply to other companies, with the exception of the special powers given by the Dairy Industry Act. After discussing articles 5 and 1, providing for the alteration of the basis of shareholding, he holds that these articles were intra vires the company and that the appellant acquired his shares with full eos^ructive knowledge of them. He points, out that appellant took bis shares knowing that he might become liable to take further shares, i and that the alteration of the ratio of I shares to the supply was also within | his contemplation. There could thus be ' no question of oppression, breach of comtract or want of good faith on the

part' of the majority of the shareholders passing the amendment. He points out that • the power of amendment of articles is a very wide one, that this amendment is in the interests of the company, and that the majority of the shareholders were imposing on themselves the same liability as that imposed on the minority. The learned judge discusses the submission that the amendment had a retrospective effect and decides that it had not, and is of opinion that the appeal should be dismissed. He proceeds to refer to the reasons why he disagrees with the other members of the Full Court, and quotes at length from the judgment in Allen v. Gold Reefs, and draws the conclusion that if the law be as stated by the learned judges in that case the appellant had no such special contract as to exclude him from the operation of the altered articles. He is satisfied that his conclusion as to the law 'does not involve that a majority of members in a trading company can by amendment of the articles compel a shareholder to take further shares. If such were the law the result would be calamitous and would sound the death kneH of limited liability companies. He bases his j opinion upon the particular facts in the ease: (1) The company is a co-operative company. (2) A shareholder' does not apply for shares, but has them oompulsorily allotted to him according to the butter-fat supplied by him. (3) His share of profits depends not on the shares he holds, but on the butter-fat supplied by him. (4) The company is not compelled to pay any dividend. (5) If the expenses of the company in any season- exceed receipts, the shareholders, in, proportion to butter-fat supplied by them have to pay the deficiency. (6) A director ceases to hold office, on ceasing to supply. These conditions place the company in a different category front an ordinary trading company. He is of opinion that the con-? tract between the shareholder and the company ■ contained/ by virtue of the terms of the Act, a condition that the terms and conditions of the contract might be altered by special resolution. It cannot be contended that- if. such a contract were entered into it could not be enforced: The distinction between the contract in this case and in the ordinary contract to take a specific number of shares is that ok. the. one hand the contract is to take an indefinite number of shares to be allotted from time to time in accordance with the terms of legally altered articles, and on the other a contract definitely fixing the number of. shares and the financial responsibility attaching to holding the same. "