HIGH COURT OF AUSTRALIA

                                                          Mills

                                                           Vs.

                                                          Mills

                               (Latham C.J., Rich, Starke, Dixon and Evatt JJ.)

                                                  17 February 1938

Latham C.J.

This is an appeal from a judgment of Lowe J. in an action in which the plaintiffs sued on behalf of
themselves and all shareholders in Uardry Ltd. (other than the two personal defendants), claiming as
against those defendants and the company a declaration that a certain resolution passed by certain
directors of the company is invalid. The resolution was challenged upon two grounds: first, that it
was not passed bona fide in the interests of the company but really in the interests of the defendant
Andrew Agnew Neilson Mills (who was the managing director of the company) with the intention
of securing to him continued control of the operations of the company; secondly, that the resolution
was not authorized by the articles of association and was ultra vires the directors. The learned judge
gave judgment for the defendants.

The controversy arises out of the relations between Ainslie Mills, who is a director of the company
and a large shareholder, and the defendant Neilson Mills, who is his uncle. Neilson Mills has been
the managing director of the company for many years and has managed it with conspicuous success.
Ainslie Mills is his nephew. When he attained the age of twenty-five years he became the owner of a
large number of shares. He secured the appointment of himself as a director of the company.
Relations between Ainslie Mills and his uncle have for some years been very unpleasant and
difficult, and it is evident that there has been bitter feeling on both sides.

The resolution which is challenged is a resolution of the directors of the company. The directors are
Neilson Mills and Ainslie Mills (both of whom are large shareholders) and the defendant Birtchnell
(who, though a director, is not a shareholder). The company is a family company, and its shares are
held by the personal plaintiffs, by Miss Winifred M. Mills, the defendant Neilson Mills in his own
interest, and by Neilson Mills and others as trustees for certain members of the family. Two of these
trusts have been referred to as the Ainslie Mills trust and the Price trust. There is one shareholder,
Miss Winifred M. Mills, who is not a party to the action. She has generally voted with Neilson
Mills. Neilson Mills was entitled under the articles of association to exercise the vote of the trustees
in the two trusts mentioned, and, when these shares were taken into account, controlled a majority
of votes, if Miss Mills supported him. The interest of Neilson Mills was mainly in ordinary shares,
whereas the interest of Ainslie Mills was mainly in preference shares. There were 34,500 ordinary
shares, each with one vote, and 11,500 preference shares, each with three votes.

The resolution of the directors which is challenged was carried by Neilson Mills and Birtchnell
against the vote of the plaintiff Ainslie Mills. The resolution declared that the whole of the
accumulated profits standing to the credit of the reserve account was not required as reserves and
that, as the profits belonged solely to the ordinary shareholders, a sum of £86,250 should be
distributed thereout by way of dividends on ordinary shares and that the dividends should be paid
and satisfied by the issue to the holders of ordinary shares of 86,250 new ordinary shares fully paid
up and that for this purpose the capital of the company should be increased by the creation of
86,250 new ordinary shares of £1 each.

The interests of those concerned in the company were affected by this resolution in varying ways.
The passing of the resolution did not affect the dividends which the preference shareholders would
receive, because they were entitled only to a cumulative preferential dividend of £2,500 per annum.
The dividends upon ordinary shares were not affected. As between them and the preference
shareholders the position was the same as before--the ordinary shareholders came in for dividend
after the preference shareholders. Each ordinary shareholder maintained his proportionate share in
the capital of the company represented by the ordinary shares because he received five new shares
for every two ordinary shares held by him. Thus, the dividend rights of ordinary shareholders inter
se were not affected. The relative rights of the two classes of shareholders upon a winding up were,
however, profoundly affected by the resolution, because the articles of association provided, in
article 76, that the preference shares should not in a winding up have any preferential claim on the
assets of the company, but that they "should rank in that respect with ordinary shares." Thus the
resolution greatly improved the position of ordinary shareholders if a winding up should take place.
Further, the resolution affected the voting power of the shareholders, because a large increase was
made in the number of ordinary shares, while the number of preference shares remained unchanged.
Neilson Mills had, as already stated, been trustee of two trusts, but immediately before the
resolution was passed on 7th September 1936 he had, under pressure, agreed to retire from these
trusts, and therefore in the future he would not have been in a position to exercise voting power in
respect of the trust shares. The result of the resolution, if it is effective, is that he will continue to be
in as strong a position with respect to voting power as if he had not retired from the trusts. It is
contended on behalf of the plaintiffs that the object of Neilson Mills and of Birtchnell, who always
supported Neilson Mills in matters affecting the management of the company, was not really to
promote the interests of the company, but to preserve for Neilson Mills the same position in respect
to voting power (which had always in fact been a dominant position) as he had held before his
enforced resignation of his position as trustee.

The evidence shows that Neilson Mills had for many years controlled the company in effect as if it
were his own business, and had done so with the concurrence of those interested, who had
appreciated his excellent and most successful management. With the entry of Ainslie Mills upon the
scene, however, the position changed. Ainslie Mills was very critical of his uncle's management, and
it is plain that Neilson Mills resented the attitude of the younger man.

I propose to consider first the contention that the resolution was not passed bona fide in the interests
of the company.

Where the interests of individuals are divergent and conflicting, where personal feeling is acute, and
where the parties immediately concerned give oral evidence, the trial judge is in a position which
enables him to estimate the weight and value of evidence much more effectively than any court of
appeal can possibly do. Where so much depends upon the character, personal motives and interests
of individual persons, the finding of a trial judge should not be disturbed unless there are strong and
compelling reasons for taking a different view. In this case the learned trial judge has made
scrupulously careful and precise findings of fact. There is plainly evidence to support them. In my
opinion, they should be accepted by this court without hesitation.
The only question which I conceive arises upon this branch of the case is the question of the legal
significance and effect of the findings of fact which have been made. The learned judge asked the
question whether the resolution was passed in the interests of the company. He expanded this
question by asking: "Was it passed in the honest exercise of the directors' discretion, to distribute
reserves which were no longer needed, or was it passed with the sole view of creating voting power
which would inure for the benefit of Neilson Mills and those supporting him?" I think that the form
of this question is not entirely appropriate. In fact, reserves were not distributed in consequence of
the resolution. All that was done by the resolution was to distribute new shares to the ordinary
shareholders in proportion to their existing shares. The assets in the reserve fund were retained in
the business. Further, the alternatives which this question submits for consideration are not
completely exhaustive. A resolution may have been passed honestly in the exercise of the directors'
discretion but also with the view of creating voting power to which it was thought that ordinary
shareholders, in view of the relative extent of their interest in the assets of the company, were fairly
entitled. Again, even though the view of the directors in passing the resolution was not solely that of
creating voting power which could be used by them as desired, yet, if the substantial object of the
directors was to bring about this result, the resolution might be held to be invalid.

But, although his Honour has asked the question in the particular form stated, his findings of fact
are not confined to answers to this question. His Honour accepted the evidence for the defendants as
to the reasons which brought about the passing of the resolution. He went on to say in his judgment
that "while I accept the evidence to the extent which I have mentioned (that is as to the honest
initiation and abandonment of one proposal and the honest final acceptance of the proposal
embodied in the resolution) I feel no doubt whatever that the particular form which this resolution
finally assumed and the time at which it was adopted were due to the resignation of Neilson Mills as
a trustee of the Ainslie Mills and the Price trusts." His Honour expressed his conclusion in the
following words:--"I think the scheme of distribution as actually carried out in the resolution was
honestly arrived at, and I think that those who voted in favour of it thought it to be in the best
interests of the company, and I also think that that was their main reason for passing that resolution.
But I think, and I find, that neither Neilson Mills nor Birtchnell was at all unconscious of the effect
that that resolution would have in altering the voting power. The resolution when carried into effect
did not give a majority to Neilson Mills. He probably hoped that it would make a majority easier.
That being the conclusion at which I have arrived, it seems to me that the law, as I have stated it,
does not invalidate that resolution. In my opinion, where the main purpose is such as I have
indicated the resolution is valid." There is, as I have said, no doubt that there was evidence which,
when accepted by the trial judge, entitled him to make these findings of fact. The question is
whether upon the findings of fact set out his Honour's conclusion that the resolution was valid is
correct.

It has been argued for the appellants that these findings entitle them to judgment. It is urged that the
rule laid down by the cases is that directors must act always and solely in the interests of the
company and never in their own interests. It is clear that, if it is established that the directors did not
act bona fide in the interests of the company, the court in a properly constituted action will set aside
their resolution. Thus, if directors issue shares only for the purpose of conserving their own power,
the resolution creating the shares will be set aside or an injunction will be granted to prevent the
holding of a proposed meeting (Fraser v. Whalley[1]; Punt v. Symons & Co. Ltd.[2]; Piercy v. S.
Mills & Co. Ltd.[3]). But before the exercise of a discretionary power by directors will be interfered
with by the court it must be proved by the complaining party that they have acted from an improper
motive or arbitrarily and capriciously (In re Gresham Life Assurance Society; Ex parte Penney[4];
Richard Brady Franks Ltd. v. Price[5]; Australian and Metropolitan Life Assurance Co. Ltd. v.
Ure[6]).

It must, however, be recognized that as a general rule, though not invariably (as, for example, in the
case of Birtchnell in this case), directors have an interest as shareholders in the company of which
they are directors. Most sets of articles of association actually require the directors to have such an
interest, and it is generally desired by shareholders that directors should have a substantial interest in
the company so that their interests may be identified with those of the shareholders of the company.
Ordinarily, therefore, in promoting the interests of the company, a director will also promote his
own interests. I do not read the general phrases which are to be found in the authorities with
reference to the obligations of directors to act solely in the interests of the company as meaning that
they are prohibited from acting in any matter where their own interests are affected by what they do
in their capacity as directors. Very many actions of directors who are shareholders, perhaps all of
them, have a direct or indirect relation to their own interests. It would be ignoring realities and
creating impossibilities in the administration of companies to require that directors should not advert
to or consider in any way the effect of a particular decision upon their own interests as shareholders.
A rule which laid down such a principle would paralyse the management of companies in many
directions. Accordingly, the judicial observations which suggest that directors should consider only
the interests of the company and never their own interests should not be pressed to a limit which
would create a quite impossible position.

Directors are required to act not only in matters which affect the relations of the company to persons
who are not members of the company but also in relation to matters which affect the rights of
shareholders inter se. Where there are preference and ordinary shares a particular decision may be
of such a character that it must necessarily affect adversely the interests of one class of shareholders
and benefit the interests of another class. In such a case it is difficult to apply the test of acting in the
interests of the company. The question which arises is sometimes not a question of the interests of
the company at all, but a question of what is fair as between different classes of shareholders. Where
such a case arises some other test than that of "the interests of the company" must be applied, and
the test must be applied with knowledge of the fact already mentioned that the law permits directors,
and by virtue of provisions in articles of association often requires them, to hold shares, ordinary or
preference, as the case may be. A director who holds one or both classes of such shares is not, in my
opinion, required by the law to live in an unreal region of detached altruism and to act in a vague
mood of ideal abstraction from obvious facts which must be present to the mind of any honest and
intelligent man when he exercises his powers as a director. It would be setting up an impossible
standard to hold that, if an action of a director were affected in any degree by the fact that he was a
preference or ordinary shareholder, his action was invalid and should be set aside. There is high
authority which, in my opinion, supports the view which I have expressed. In the case of Hirsche v.
Sims[7] their Lordships of the Privy Council said with reference to directors whose action was
challenged: "If the true effect of the whole evidence is, that the defendants truly and reasonably
believed at the time that what they did was for the interest of the company, they are not chargeable
with dolus malus or breach of trust merely because in promoting the interest of the company they
were also promoting their own." The question is: What was "the moving cause" of the action of the
directors? (See per Lord Shaw in Hindle v. John Cotton Ltd.[8]). If this principle is applied to the
findings of the learned judge, his decision upon this aspect of the case is seen to be right.

The second question which is raised depends entirely upon the construction of the articles of
association, which are expressed in such terms as to create much uncertainty in interpretation.
Identical or overlapping powers are conferred by the articles upon the company and upon the
directors of the company, and it is difficult to arrive at a completely satisfactory interpretation of all
the articles taken together. Art. 6 provides that all shares except the original shares shall be under
the control of the company and that they shall be issued, allotted, placed under option or otherwise
disposed of under such terms and conditions and at such times as the company by extraordinary
resolution directs. Art. 25 provides that the company may from time to time increase its capital by
the creation of new shares, while art. 72 provides (inter alia) that the directors may increase the
capital of the company. Art. 26 provides that new shares created by the company (referred to in art.
25) shall be of such amount and shall be issued upon such terms and conditions and with such rights
and privileges annexed thereto as the directors shall determine. Other articles entitle the directors to
establish and invest a reserve fund, to manage the reserve fund, and to declare dividends. Art. 80
provides that, when declaring a dividend, the directors may direct payment thereof wholly or in part
by the distribution of specific assets and, in particular, of shares, debentures or debenture stock of
the company, &c.

Thus, both the company and the directors can create new shares. The company by extraordinary
resolution may determine the terms and conditions upon which such shares are to be issued. The
directors may also determine the conditions upon which any shares created by the company may be
issued. Further, the directors may declare dividends and may direct that a dividend be paid by the
distribution of shares in the company.

The position, therefore, is that it is possible to find articles of association which in terms authorize
the directors to do precisely what they have done, namely, to create new shares, to declare a
dividend, to direct that the dividend be paid by the distribution of the shares, and to deal with the
reserve fund by applying it in payment for new shares. On the other hand, it is contended that art. 6
requires an extraordinary resolution of the company before any new shares can be issued, allotted or
otherwise disposed of, and that this article also requires that the terms and conditions of issue &c.
shall be determined by such a resolution. If the articles to which I have referred are all read as
conferring powers upon the company or the directors, some practical inconveniences might arise if
the shareholders and the directors differed in policy, but there would be no necessary inconsistency
between the articles. There would simply be duplicate coexisting powers. If, on the other hand, the
articles are construed as imposing limitations upon the exercise of general powers (such, for
example, as a power to create and issue new shares) so that, for example, the directors could not
distribute new shares by way of dividend without an extraordinary resolution of the company, the
result would be that the powers expressly conferred upon the directors would be ineffective in
practice. The directors would not be able to do what the articles in express terms state that they may
do, unless the shareholders concurred by an extraordinary resolution. I am of opinion, though I
confess not without some doubt, that the former construction is that which should be adopted and
that the articles which in terms authorize the directors to do what they have done should not be
limited by requiring an extraordinary resolution to the same effect under art. 6. Accordingly, I am of
opinion that the resolution of the directors was not invalid and that the action under it was
effectively authorized.

I am, therefore, of opinion that the appeal should be dismissed.

Rich J.

This appeal is an incident in a lamentable dispute among the members of a family company, which
with conspicuous success has conducted a well-known sheep station devoted to the production of
stud sheep. How far a preoccupation in protracted and expensive litigation is consistent with the
continued improvement in the type of stud rams bred under the management of the company is a
matter which time will tell. But the manner in which the hitherto successful direction of the
company is now being attacked in this and concurrent litigation suggests, according to ordinary
experience of such matters, that the business from which the company's profits arise is not likely to
flourish in the future unless common sense is substituted for the cacoethes litigandi.

Our business, however, is the commonplace duty of construing some rather confused articles of
association and of saying whether a resolution passed in purported pursuance of powers expressed to
be conferred on the board of directors is invalid on the ground that it was animated by an improper
purpose. The resolution in question is for the increase of capital by the creation of five new ordinary
shares for every two ordinary shares in the then existing capital of the company and for their
distribution as fully paid bonus shares by way of dividend out of reserves of trading profit. The
directors by whose votes this resolution was passed say that they adopted it because they thought
profits should be capitalized so as to be distributed amongst ordinary shareholders in the event of
liquidation, an event which they began to fear in consequence of the dissensions in the company.
The appellants who attack the validity of the resolution say, on the other hand, that it was not
adopted bona fide in the interests of the company but for the purpose of maintaining a numerical
majority of votes in the managing director and those likely to support him. The question, however,
whether the power to increase share capital and issue bonus shares lies with the directors or is
restricted to a general meeting of the company is logically anterior to the question of fact whether
the power has been fraudulently abused. The location of the power depends upon the construction of
the memorandum and articles of association. The memorandum complies with sec. 7 (e) of the
Companies Act 1899 N.S.W. and states the amount of capital divided into shares of a certain fixed
amount. The articles include a regulation under sec. 11 of this Act authorizing the company to
increase its capital. If there were nothing more, this would suffice to enable the directors under the
general powers conferred upon them to exercise on behalf of the company its power of increasing its
capital (See Campbell's Case[9]; Palmer's Company Precedents, 12th ed. (1922), vol. i., p. 657).
The articles include a general power of directors similar to that of which in Campbell v. Rofe[10]
Lord Thankerton, in delivering the decision of the Privy Council, says that their Lordships would be
prepared to hold that it clearly delegated "to the directors power to do everything that the company
could do except where the authority of a general meeting of the company is expressly prescribed.
and that such delegation would include power to issue preference shares." The memorandum of
association includes an unusual statement in relation to the issue of capital. The provision is as
follows: "Any shares of which the capital of the company may from time to time consist may be
divided into classes and may be issued with any preferential, special, deferred or qualified rights,
privileges or conditions attached to them according as may be prescribed by the articles of
association of the company or duly decided upon by the company or its directors." The distinction
between a due decision by the company and one by its directors seems to prelude a distinction in the
articles of association, which, as I read them, confer parallel powers in this matter upon the
shareholders and upon the board of directors. The articles which confer power upon the board of
directors are, to my mind, very clear in granting to them ample authority to increase capital and to
distribute paid-up shares by way of dividend. It is not necessary to quote these articles. They are
articles 25 and 26 read together, 29, 72, 74, 77, 78 and 80.

It is said, however, that the prima-facie effect of these articles must be modified because of an
article expressed to give control of all shares to the company and requiring that they shall be dealt
with upon such terms and conditions and at such times as the company shall direct by extraordinary
resolution. I shall not set out this article, which is numbered 6. The argument founded upon it is
that, to give any effect to it, it is necessary to treat the express power given to the directors to issue,
allot and dispose of share capital as subject to a prior extraordinary resolution fixing the terms,
conditions and times or in some other way sanctioning the transaction. This appears to me to be a
fallacious application of the general rule by which judges are exhorted to attempt to give effect to
every part of a document and reconcile its inconsistencies. When the draftsman put in the very clear
powers of the directors, I have not the least doubt that he was led to do so by a desire that the
directors should have these powers unqualified and unfettered by any condition precedent to their
exercise. When he put in art. 6, I have similarly no doubt that he was guided by the opinion that it
would be a good thing if by extraordinary resolution the shareholders could exercise the power that
that article specified. He may well have perceived that by its exercise the shareholders might
overrule or restrain in anticipation the action of the directors, but I do not think that he ever dreamt
that the directors could not move in the exercise of their particular power until the shareholders
allowed them. In other words, these powers are parallel powers. Accordingly, I think that the
directors were armed with the necessary power to create, allot and issue the bonus shares. The
validity of the directors' resolution, therefore, must depend on the question whether they exercised
the power in good faith for the purpose for which the power was given. This question is not unlike
that with which we dealt in Richard Brady Franks Ltd. v. Price[11]. I repeat the observations I there
made upon the criterion of validity. They are as follows:--"The last objection to the judgment under
appeal was that the power had not been exercised by the directors bona fide for the benefit of the
company as a whole. At the hearing before the learned judge the plaintiff accepted the onus of
proving this proposition. The phrase bona fide for the benefit of the company as a whole no doubt
tends to become a cant expression in these matters but is not yet a shibboleth. Many of the cases
which illustrate this phrase relate to the alteration of articles of association by shareholders in
general meeting. No court should consider itself fettered by the form of words, as if it were a phrase
in an Act of Parliament which must be accepted and construed as it stands (Shuttleworth v. Cox
Brothers & Co. (Maidenhead)2(1927) 2 K.B. 9, at p. 26.). But the learned judge found that the
evidence as a whole preponderates in favour of the view that in regard to the issue of debentures the
directors acted in the interests of the company and of the general body of shareholders and not in the
interests of the proposed debenture holders and found this issue of fact against the plaintiff. In order
to succeed in a case like the present the plaintiff must prove the equivalent of fraud or bad faith. In
Hirsche v. Sims1(1894) A.C., at pp. 660, 661. the Earl of Selborne formulated a test which seems
applicable to the present case as follows: If the true effect of the whole evidence is, that the
defendants truly and reasonably believed at the time that what they did was for the interest of the
company, they are not chargeable with dolus malus or breach of trust merely because in promoting
the interest of the company they were also promoting their own. Upon such a question an
opportunity of seeing the parties concerned is a matter of special importance in arriving at a
conclusion"[14]. In the present case on the facts there appear to have been only two sensible
purposes or reasons which could have prompted the capitalization of profits and distribution of
shares. One purpose was within the power, the other was outside it. The purpose within the power
was to confer upon ordinary shareholders a title to the fund pro tanto representing reserves of
profits. The illegitimate purpose was to maintain the strength of the voting power likely to be used
on the side of the directors concerned. The learned primary judge, Lowe J., heard at considerable
length a cross-examination of the managing director and a cross-examination of the other director
who supported the resolution. Each of them swore that their reason was that first stated--the
legitimate reason. The learned judge appears to me plainly to have accepted their evidence. In a
desire fairly to furnish the appellant with an opportunity of challenging his conclusion Lowe J. has
stated his view of the attitude of the directors with some refinement. The appellant has availed
himself to the full of the opportunity given to him and has made an attempt full of valiance and
acumen to discover in the words of the judgment a finding that the directors' motives included a
desire to increase voting strength. I am not impressed with the psychological subtleties which this
argument attributes to the directors, and, having read the whole of the evidence and considered the
reasons of Lowe J. in the light thereof, I am clearly of opinion that his judgment means that the
reason of the resolution was the desire of the directors to give ordinary shareholders a title to part of
the reserve of profits and that except for this reason the resolution would never have been passed.
This appears to me to be enough to show that the resolution was validly passed.

I think the appeal should be dismissed.

Starke J.

This action was brought in the Supreme Court of Victoria and sought declarations that a resolution
passed by the directors of Charles Mills (Uardry) Ltd. on 7th September 1936 was invalid and not
binding upon the company and its members and that any allotment and/or issue of shares made
pursuant to the resolution was invalid and should be set aside and ancillary relief. The action was
dismissed and an appeal is now brought to this court.

The company is a family company and was incorporated in 1915 in New South Wales, and its
principal objects were to acquire from Charles Mills the "Uardry" station and the stock and other
assets connected therewith and the business conducted on the station and to carry on, inter alia, the
business of station owners, graziers, pastoralists and stock breeders.

The station and other assets were duly acquired, and the company has since its incorporation carried
on and still carries on the business of pastoralists and stock breeders on the station. The original
capital of the company was £46,000, divided into 46,000 shares of one pound each, of which 11,500
were preference shares and 34,500 ordinary shares. The preference shares conferred a right to a
fixed cumulative preferential dividend of a total amount of £2,500 in each year, to be distributed
amongst the holders for the time being of the preference shares ratably and in proportion to the
number of preference shares held by them respectively. Other than as aforesaid the preference shares
were not entitled to participate any further in the profits of the company, and such preference shares
had not in a winding up any preferential claim on any capital assets but ranked in that respect with
ordinary shares.

All the shares, other than four hereinafter mentioned, were allotted and issued to members of the
Mills family. The preference shares were allotted to Mrs. Margaret Ainslie Mills, the wife of
Charles Mills. Mrs. Mills and the respondent Neilson Mills were the first directors of the company.
Neilson Mills was the first managing director, Both, under the articles of association, held office for
life. About 1927 Mrs. Mills died and two other directors were appointed; one, W. A. Mills, has since
died, but the other, Birtchnell, a respondent to this appeal, is still alive and acting.

In April of 1935 the appellant Ainslie Mills was appointed a director to fill the vacancy caused by
the death of W. A. Mills. The management of the business was in the hands of the respondent
Neilson Mills, and it was extraordinarily efficient and successful, and there are many minutes of the
company expressing high appreciation of his able management. Between 1916 and 1937 all
mortgages and debts taken over by the company, and amounting to £63,000, were discharged. About
£280,000 was distributed in dividends to the preferential and ordinary shareholders, and a reserve of
about £140,000 was accumulated out of profits, of which £70,000 to £80,000 appears to have been
invested in the purchase of "Burrabogie" station adjoining "Uardry."

On 7th September 1936 a directors' meeting was held and the resolution, which is now attacked was
passed. The directors Neilson Mills and Birtchnell--respondents here--voted in favour of the
resolution, and Ainslie Mills--an appellant here--voted against it. The resolution was as follows:
"That in view of the improvement in the company's position and the passing of the worst of the
financial depression, it is considered that the whole of the accumulated profits standing to the credit
of reserve account are now not required as reserves; and that, as they belong solely to the ordinary
shareholders and, if a liquidation of the company, as has been suggested, took place, such ordinary
shareholders would not alone participate in their distribution, the sum of £86,250 part of such
accumulated profits should be distributed by way of dividend on ordinary shares; and accordingly
that a dividend amounting in the aggregate to the said sum of £86,250 be and is hereby declared out
of such accumulated profits, and that the said dividend be paid and satisfied by the issue to holders
of ordinary shares of 86,250 new ordinary shares fully paid up, being five of such new shares for
every two ordinary shares held by them; and that for this purpose the capital of the company be and
is hereby increased from £46,000 to £132,250 by the creation of 86,250 new ordinary shares of £1
each; and that any difficulty arising in the distribution of the said shares be settled by issuing
fractional certificates or otherwise as the directors may hereafter determine; and that the secretary be
instructed to make out share certificates for such shares and that the same be sealed and that a
proper contract to be filed in accordance with the Companies Act be entered into and that Samuel
Charles Birtchnell is hereby appointed to sign such contract on behalf of the persons entitled to the
dividend."

The grounds of the attack upon this resolution, argued in this court, were:--1. It is not within the
authority of the directors conferred on them by the articles of association of the company. 2. It was
not passed bona fide in the interests of the company but in the interests and for the purposes of
Neilson Mills with the sole object and intention of creating voting power and controlling the
company.

The first ground depends upon the proper construction of the articles of association, which,
unfortunately, are not as clear as is desirable. The Companies Act 1899 N.S.W., sec. 11, gives the
company power to increase its capital by the issue of new shares of such amount as it thinks
expedient, and it was conceded during the argument that there is no provision in the legislation of
New South Wales, as there is in the English Act of 1929, sec. 50 (2), providing that the power to
increase must be exercised by the company in general meeting.

The relevant articles are, I think, arts. 6, 25, 26, 27, 72 and 80. Art. 25 provides that the company
may from time to time increase its capital by the creation of new shares, and art. 72 contains an
express provision that the directors may increase the capital of the company. These provisions deal
with the creation of new shares (Koffyfontein Mines Ltd. v. Mosely[15]). Art. 6, however, provides
that all shares (other than those mentioned in the agreement for the purchase of "Uardry") shall be
under the control of the company and shall be issued, allotted and placed under option or otherwise
on such terms and conditions and at such times as the company by extraordinary resolution as
defined by sub-sec. 2 of sec. 130 of the Companies Act shall direct.

The shares originally issued were issued and allotted to members of the family of Charles Mills
under the agreement mentioned other than about four shares, which I gather from the memorandum
of association were issued to representatives of the solicitors preparing the purchase agreement. So
art. 6 had little scope for operation except in the case of an increase of share capital. But art. 26
dealt with the issue of new shares on an increase of capital. It provided that such new shares shall be
of such amount and shall be issued upon such terms and conditions and with such rights and
privileges annexed thereto as the directors shall determine and, in particular, such shares may be
issued with a preferential or qualified right to dividends and in the distribution of assets of the
company and with a special or without any right of voting.

Art. 27 provides that capital raised by the creation of new shares shall be considered part of the
original capital and shall be subject to the same provisions as shares in the original capital except so
far as otherwise provided by the conditions of issue or the articles of association.

Some reliance is placed upon the use of the words "issued, allotted and placed" in art. 6, whilst in
art. 26 the word used is "issued." But I attach no importance to the difference in language. Neither
the word "allotted" nor "issued" has, I think, any technical meaning. "Broadly speaking," said
Stirling J.[16], an allotment "is an appropriation by the directors ... of shares to a particular person":
the acceptance by the company of an offer. An issue of shares takes place when a shareholder has
been put completely in the possession of his shares. "Shares may have been issued which have been
allotted but for which no certificates have ever been issued and on the other hand shares as to which
a resolution to allot has been made may not have been issued" (Buckley on Companies, 7th ed.
(1897) p. 612). The conclusion is more one of fact than of law (Levy v. Abercorris Slate and Slab
Co.[17]; Spitzel v. Chinese Corporation Ltd.[18]; Blyth's Case[19]; Clarke's Case[20]; In re Perth
Electric Tramways Ltd.; Lyons v. Tramways Syndicate[21]; Buckley on Companies, 7th ed. (1897),
p. 612).

The proper construction of the articles therefore depends upon other considerations and upon the
intention disclosed by the articles of association. It is true that art. 6 refers to "all shares," but art. 27
explicitly and expressly provides for the mode of the issue of new shares and of their amount and
the terms and conditions upon which they shall be issued and gives in itself an authority to issue
new shares, concurrent though it may be with the authority conferred by art. 6.

Art. 72 does not, I think, afford much assistance in the construction of the articles. If art. 6
controlled the issue of new shares, I should not think that its express provisions for an extraordinary
resolution would be affected by art. 72; whilst, if arts. 25 and 26 are the controlling articles as to the
creation and issue of new shares, then art. 72 but reinforces them (Cf. Campbell v. Rofe[22]). Art.
80 empowers the directors, when declaring a dividend, to direct payment in shares of the company.

In my opinion, therefore, the resolution of the directors of 7th September 1936 was within their
powers and is valid.

That part of the resolution which declares a dividend of £86,250 out of accumulated profits to be
paid and satisfied by the issue to the shareholders of ordinary shares of 86,250 new ordinary shares
fully paid up, being five of such new shares for every two ordinary shares held by them, is
warranted by arts. 78, 80 and 74. The latter part of the resolution increasing the capital of the
company by the creation of new shares is warranted by arts. 25, 26 and 72.

The other ground of attack must now be considered: namely, that the resolution of 7th September
1936 was not passed bona fide and in the interests of the company. Directors in the exercise of their
powers are in a fiduciary position and must exercise those powers for the benefit of the company.
So, directors are not entitled to exercise their powers merely for the purpose of maintaining control
over the affairs of the company or merely for the purpose of defeating the wishes of the majority of
shareholders (Piercy v. S. Mills & Co. Ltd.[23]).

The resolution of the directors of 7th September 1936 does not, on its face, appear improper. All
preference dividends had been provided in due course, and there remained in the hands of the
company a reserve of some £140,000 accumulated out of profits and available for distribution.
Prima facie the directors had authority to apply this accumulated reserve in such manner as they
considered advantageous and beneficial to the interests of the company and its members.
Unfortunately, behind the resolution there is a long story of disagreement between Neilson Mills
and Ainslie Mills, his nephew, which need not be related in detail. Suffice it to say that about the
year 1934 Ainslie Mills heard that Nielson Mills had established or proposed to establish a rival stud
to that of "Uardry" on a property known as "Pembelgong" close to "Uardry." "Pembelgong"
belonged to Neilson Mills. It had for many years been leased to the "Uardry" company, but the lease
was not renewed, I think in 1934. It is undoubted that Neilson Mills did establish a stud of his own
at "Pembelgong" and that he purchased rams and sheep from "Uardry" for that purpose in the names
of agents. Further, in 1936, notice was given of an extraordinary meeting of the company to
consider a resolution that the directors pay Neilson Mills the sum of £7,250 representing the
undrawn portion of the salary authorized by previous resolution to be paid to him as managing
director. A resolution had in fact been passed in 1929 at an extraordinary general meeting of the
company that the salary of Neilson Mills as managing director should be £3,500 per annum and that
he receive a fee of £500 per annum as a director. But during years of depression Neilson Mills had
not drawn all the salary granted by this resolution and now proposed to draw the balance. Ainslie
Mills challenged Neilson Mills's right to establish and manage a rival stud and also the payment of
the undrawn salary, which, as it did not appear in the accounts of the company, Ainslie Mills
considered as abandoned.

In these objections he was supported by Mr. George Aitken, who was a co-trustee of Neilson Mills
of certain shares in the company, known as "Mrs. Price's Trust" and "Ainslie Mills' Trust." But,
despite the objection, a resolution was carried at an extraordinary general meeting of the company
by a majority of 3,488 votes that the directors pay to Neilson Mills the sum of £7,250, undrawn
salary. The voting power in respect of the shares in "Mrs. Price's Trust" and "Ainslie Mills' Trust"
were not used, but, if they had been cast against the resolution, it would have been lost.

Art. 48 provided that, in the case of joint holders of shares, the vote of the member standing first in
the register should be accepted to the exclusion of the votes of other joint holders. And Neilson
Mills stood first on the register in respect of the shares in the "Price Trust" and the "Ainslie Mills'
Trust" and did not use the voting powers in respect of those shares. Thus were the shares in these
trusts deprived of their voting power. Suggestions were made that Neilson Mills should retire from
these trusts, and action was threatened. Ultimately Neilson Mills agreed to and did retire from these
trusts. But this was followed in September 1936 by the calling of directors' meetings to consider and
decide how the accumulated profits of the company should be dealt with. And on 7th September
1936 the challenged resolution was passed by the majority of the directors; Neilson Mills and
Birtchnell voted for the resolution and Ainslie Mills against it.

The appellants suggest that the resolution was not passed bona fide in the interests of the company
but to increase the voting power of Neilson Mills in order that he might protect himself from any
attack in respect of the establishment of a rival stud on "Pembelgong" and the payment to him of
undrawn salary and also to prevent the removal of Birtchnell from his office as a director. On the
other hand, Neilson Mills and Birtchnell defended the resolution on these grounds: the preference
shareholders were entitled to a fixed cumulative preferential dividend so long as the company
carried on business, but in case of a winding up preference shareholders were entitled to rank pari
passu with ordinary shareholders in any distribution of assets. The latter position would be unfair to
ordinary shareholders, who were really entitled to the accumulated profits and would have received
them if larger dividends had been declared.

The voting power in the company before and after the resolution of 7th September 1936 may thus
be stated:-- Before After Neilson Mills 16,868 votes 47,531 votes His son Andrew (an infant for
whom Neilson Mills was trustee) 3,296 votes 8,662 votes Mrs. Price 3,910 votes 5,060 votes Ainslie
Mills 22,194 votes 28,809 votes Mrs. Maslin 1,648 votes 2,895 votes Mrs. Bell 1,648 votes 2,895
votes Miss Mills 9,430 votes 24,380 votes "Ainslie Mills' Trust" 4,485 votes 15,698 votes "Mrs.
Price's Trust" 5,250 votes 19,320 votes Totals 69,000 (in round figures) 155,250 votes

It is clear on these figures that the voting power of Neilson Mills was largely increased, but it did
not give him control of the company unless some other shareholder supported him. It was suggested
that he relied upon the support of Miss Mills. I see no reason for thinking that Miss Mills will vote
otherwise than as she sees her own interests. It may well be that she places great reliance upon her
brother, Neilson Mills, whose management of "Uardry" has been so successful. But the
circumstances as a whole are suspicious and somewhat disconcerting. The establishment of the rival
stud at "Pembelgong" is hard to defend and gives rise to the suspicion of Ainslie Mills and, perhaps,
of Mr. George Aitken, that the resolution of 7th September 1936, carried by Neilson Mills and
Birtchnell, was more for the interest of Neilson Mills than any interest of the company or its
members. Again, Birtchnell may be a very good accountant and secretary, but he appears wholly to
lack that independence of character and judgment which one expects of a director. He seems blindly
to support Neilson Mills in all his actions, and that as regards "Pembelgong" is open to question. A
more independent mind might, I think, have prevented some of the unfortunate disagreements and
charges that have been made in this case. However, Lowe J. in his usual careful manner has weighed
all the facts and this was his conclusion:--"I think the scheme of distribution as actually carried out
in the resolution was honestly arrived at and I think those who voted in favour of it thought it to be
in the best interests of the company and I also think that that was their main reason for passing the
resolution. But I think and I find that neither Neilson Mills nor Birtchnell was at all unconscious of
the effect that that resolution would have in altering the voting power. The resolution, when carried
into effect, did not give a majority to Neilson Mills. He probably hoped it would make the matter
easier." The learned judge saw and heard the various parties and their witnesses and is in a much
better position than any court of appeal to reach a just conclusion. I accept his finding unhesitatingly
and with confidence in its justice and propriety. "If," said the Judicial Committee of the Privy
Council in Hirsche v. Sims[24] "the true effect of the whole evidence is, that the defendants truly
and reasonably believed at the time that what they did was for the interest of the company, they are
not chargeable with dolus malus or breach of trust merely because in promoting the interest of the
company they were also promoting their own."

The result is that this appeal should be dismissed.

Dixon J.

Under the articles of association of the respondent company, at a poll of its members preference
shares carry three votes each and ordinary shares one vote each. It is a family company which under
the management of the respondent Neilson Mills has carried on the breeding of stud sheep with
much profit to its shareholders. Neilson Mills occupies for life the position of managing director,
and the board consists of him, the secretary of the company, who is not a shareholder, and the
appellant Ainslie Mills, who is a nephew of Neilson Mills. Ainslie Mills is a young man who is
conducting a revolt against his uncle's control of the company's affairs. As matters stood up to 28th
August 1936 his uncle was able to withstand his insurgence because his uncle controlled shares
carrying votes exceeding the greatest number of votes likely to be cast in favour of any proposal
made by Ainslie Mills to which he might object. But a large number of votes so controlled by
Neilson Mills belonged to shares held by him as a trustee under three several settlements. The
beneficiaries under two of these trusts might be considered to be ranged on Ainslie Mills' side in the
family division. As a result of pressure exerted by, or at the instigation of, Ainslie Mills his uncle,
on 28th August 1936, consented to retire from these two trusts. If the votes attached to the shares
held under the trusts in question were cast in favour of any ordinary resolution proposed by Ainslie
Mills and opposed by his uncle Neilson Mills and the members who so far had supported Ainslie
Mills voted for the resolution, then it would be passed notwithstanding that Neilson Mills should
continue to carry with him the votes of a sister, named Winifred, who so far had voted in accordance
with his views. Neilson Mills' prospective retirement from the trusteeship of the two settlements was
therefore calculated to inspire his nephew with a hope that his opposition to his uncle might become
more formidable. But before he actually resigned, Neilson Mills, at a meeting of directors held on
7th September 1936, proposed a resolution for the distribution among the ordinary shareholders of
86,250 fully paid ordinary shares of £1 as bonus shares paid up out of reserves of undistributed
profit. Having regard to the manner in which the holdings of ordinary and of preference shares were
respectively distributed among the family, the result of the allotment of 86,250 more ordinary shares
among the ordinary shareholders would be to leave Neilson Mills in a position, if, but only if, his
sister Winifred voted with him, to pass or defeat any ordinary resolution notwithstanding that the
votes attached to the shares belonging to the two trusts should be cast against him. Ainslie Mills
voted against the resolution, which, however, was passed by the votes of the other two members of
the board.

On 9th September 1936 he issued the writ in the present action, suing on behalf of himself and all
other shareholders in the company except his uncle and claiming a declaration that the resolution
was invalid and an injunction restraining any action upon it. In fact, however, the resolution had
been acted upon on the same day as the issue of the writ and the names of the shareholders had been
entered in the share register in respect of the new shares and the certificates sealed and executed.

The company is incorporated in New South Wales, and, in common with all other matters affecting
the membership and organization of the corporation, the validity of the allotment and issue of its
share capital is governed by the law of that State. The action was, nevertheless, brought in the
Supreme Court of Victoria.

The first question which naturally suggests itself is whether the Supreme Court of Victoria can and
ought so to interfere in the internal management of a "foreign corporation" and to pass upon the
validity of the issue or allotment of part of its share capital. It is not a question, however, in which
the parties manifested any interest, and it has not been argued.

A dogmatic assertion has long stood in Westlake that the English court will not interfere in the
internal disputes of foreign corporations (Westlake, Private International Law, 7th ed. (1925), sec.
302). So far as English authority goes, the statement is based upon the not very solid foundation of
Lord Romilly's decision in Sudlow v. Dutch Rhenish Railway Co.[25]. In the United States, however,
there is a body of authority which works out a principle. The principle is stated as follows by
Professor J. H. Beale in his Conflict of Laws (1935), sec. 192, I., p. 885, vol. 2:--"In dealing with
the internal affairs of a foreign corporation the courts may have complete jurisdiction over the
parties; both the corporation itself and its officers may be subject to the jurisdiction of the courts:
the lack of jurisdiction which may be claimed, therefore, is of the somewhat vague thing called
jurisdiction of the subject matter. This phrase in this connection indicates that a court which has
entire power to issue orders refrains from doing so for some reason connected with the nature of the
contention. A court may decline to act from a lack of power to enforce its decrees, or because the
court of some other jurisdiction is better entitled to settle the dispute. In the case of a foreign
corporation, both these reasons exist to prevent a regulation of its internal affairs by a foreign court.
But these considerations, it will be noticed, apply only in the case of an exercise of discretionary
jurisdiction; the granting of an equitable remedy or of a prerogative writ." This means, I think, that
where, owing to its authority over the persons concerned, a court of equity may be able by remedies
in personam to control the corporators and perhaps the corporation, it will not assume jurisdiction to
deal with the constitution or internal management of a foreign corporation except on special grounds
which in the particular case exclude the application of the principle of forum non conveniens. But a
somewhat wider statement of the doctrine of the American cases has been made in the Supreme
Court of the United States in Rogers v. Guaranty Trust Co. of New York[26], where Butler J. collects
and states the effect of the decided cases. Omitting the citations, what he says is as follows:--"It has
long been settled doctrine that a court--State or Federal--sitting in one State will as a general rule
decline to interfere with or control by injunction or otherwise the management of the internal affairs
of a corporation organized under the laws of another State but will leave controversies as to such
matters to the courts of the State of the domicil. ... While the district court" (i.e., in the instant case)
"had jurisdiction to adjudge the rights of the parties, it does not follow that it was bound to exert
that power... It was free in the exercise of a sound discretion to decline to pass upon the merits of
the controversy and to relegate plaintiff to an appropriate forum... Obviously no definite rule of
general application can be formulated by which it may be determined under what circumstances a
court will assume jurisdiction of stockholders' suits relating to the conduct of internal affairs of
foreign corporations. But it safely may be said that jurisdiction will be declined whenever
considerations of convenience, efficiency and justice point to the courts of the State of the domicil
as appropriate tribunals for the determination of the particular case"[27].

I should have thought that there was a good deal to be said against the Supreme Court of Victoria
exerting an authority to declare invalid the steps taken by the directors of the New South Wales
company now in question to issue further capital and to capitalize profits to answer the liability on
the shares. But, as the matter was not argued and as the conclusion at which I have arrived upon the
validity of the resolution makes it unnecessary to deal with it, I shall not pursue the question
whether it was not the proper course for the Supreme Court to decline to determine the matter.

The first ground upon which the validity of the resolution for the issue of bonus shares was attacked
is that, upon the proper interpretation of the articles of association of the company, they did not
empower the directors to make the necessary increase of capital and to issue the shares. The
contention is that the authority of a general meeting is necessary to enable the directors to do what
they have resolved upon.

Power to increase capital is taken pursuant to sec. 11 of the New South Wales Companies Act 1899.
This is done by art. 25, which says that the company may from time to time increase its capital by
the creation of new shares. The article is silent upon the question whether the power so taken by the
company is to be exercised on its behalf by the members or the directors, but the question is
expressly dealt with by arts. 26 and 72. Art. 72, which vests the general management and control of
the business and affairs of the company in the directors and enables them to exercise all powers and
do all such things as are within the scope of the memorandum, expressly authorizes the directors to
increase the capital of the company. Art. 26 gives the directors the power of determining the amount
of the new shares, the terms and conditions upon which they shall be issued and the rights and
privileges which shall be annexed thereto. The directors are given complete control of reserves of
profit and of the declaration of dividend (arts. 74, 77 and 78). Then art. 80 empowers them to direct
payment of a dividend by the distribution of shares of the company.

If these articles stood alone and were not qualified or abridged by any other provision, it is almost
needless to say that there could be no doubt whatever of their sufficiency to authorize the creation
by the directors of new capital and its distribution by them as bonus shares paid up out of the
reserves of profit. Every step is specifically authorized by the articles in express terms: increase of
capital, distribution of the reserves as dividends, distribution of shares as payment of dividend. The
resolution of the directors, the text of which it has been thought unnecessary to set out, follows these
steps. The difficulty arises entirely, as it seems to me, from a general article which occurs in the
early part of the articles of association. It is art. 6, which provides that all shares shall (subject to an
immaterial exception) be under the control of the company and shall be issued, allotted, placed
under option, or otherwise disposed of, on such terms and conditions and at such times as the
company by extraordinary resolution shall direct. If this means that the terms, conditions and times
upon and at which the shares shall be issued, allotted, &c., shall be determined by the authority of
an extraordinary resolution and by no other authority, then the article is directly contradictory of art.
26 in relation to new capital. Upon ordinary principles the special provision relating to new capital
would prevail over the general and the apparent contradiction would be so removed. But, in any
case, I do not think that art. 6 prevents full effect being given to the articles I have already quoted. It
must be remembered that we are dealing with a document containing a collection of powers,
authorities and directions for the governance and guidance of shareholders and directors in all the
contingencies which the future may produce. The preparation of articles often consists in the
adoption of one well-known provision or type of provision after another in order to supply a source
of power or authority in case it should be required. The intention of the framers is not carried out by
seeking to reconcile apparent inconsistencies, redundancies, repetitions and repugnancies and
obtaining coherence and symmetry by qualifying or restricting an intention expressed in one article
by an intention implied by another. As a rule, power is sought and is taken by articles intended to be
cumulative or alternative one upon or with another. Where an express power is given in clear words
it is more probably intended to take effect according to its tenor, although at the expense of an
intention of a restrictive nature implied or even expressed by another article.

In the present case, I think art. 6 can only be completely reconciled with the articles I have
mentioned by treating it as meaning that, if an extraordinary resolution is passed, then it shall
control the terms, &c., of issue, &c., of shares and shall prevail over the powers otherwise residing
in the directors. It is susceptible of this interpretation, which, perhaps, should be adopted. But,
however this may be, I do not see how the very clearly expressed special powers of the directors to
increase capital, to determine the conditions of its issue and to distribute shares as dividends can be
overridden by the general provision contained in art. 6. For this reason, I think that such a resolution
as that passed fell within the powers conferred on the directors by the articles of the company.

The appellants, however, deny that the resolution amounted to a valid exercise of these powers.
They maintain that it was proposed and adopted for no purpose which fell within the scope of the
powers in question, but in order to achieve a collateral and extraneous object. The object which the
appellants ascribe to the directors who proposed and supported the resolution is that of maintaining
the voting strength which otherwise the resignation of Neilson Mills from the two trusts would
impair.

Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised
in order to obtain some private advantage or for any purpose foreign to the power. It is only one
application of the general doctrine expressed by Lord Northington in Aleyn v. Belchier[28]: "No
point is better established than that, a person having a power, must execute it bona fide for the end
designed, otherwise it is corrupt and void."

Upon the facts of the present case, or at all events upon the expressions used by Lowe J. in stating
his findings, it may be thought that a question arises whether there must be an entire exclusion of all
reasons, motives or aims on the part of the directors, and all of them, which are not relevant to the
purpose of a particular power. When the law makes the object, view or purpose of a man, or of a
body of men, the test of the validity of their acts, it necessarily opens up the possibility of an almost
infinite analysis of the fears and desires, proximate and remote, which, in truth, form the compound
motives usually animating human conduct. But logically possible as such an analysis may seem, it
would be impracticable to adopt it as a means of determining the validity of the resolutions arrived
at by a body of directors, resolutions which otherwise are ostensibly within their powers. The
application of the general equitable principle to the acts of directors managing the affairs of a
company cannot be as nice as it is in the case of a trustee exercising a special power of appointment.
It must, as it seems to me, take the substantial object the accomplishment of which formed the real
ground of the board's action. If this is within the scope of the power, then the power has been
validly exercised. But if, except for some ulterior and illegitimate object, the power would not have
been exercised, that which has been attempted as an ostensible exercise of the power will be void,
notwithstanding that the directors may incidentally bring about a result which is within the purpose
of the power and which they consider desirable.

In the present case the circumstances attending the resolution to issue bonus shares in satisfaction of
a dividend upon the ordinary shares suggest at first sight that the real object was to give to ordinary
shareholders such an increase in their voting power that Neilson Mills with the help of his sister
Winifred might retain the means of defeating or of passing any ordinary resolution proposed at a
shareholders' meeting. But Neilson Mills swore in the witness box that the reason why he proposed
the resolution was that he considered that accumulations of profit ought not upon a winding up to be
distributed ratably among holders of preference and of ordinary shares, but ought to be divided
among ordinary shareholders only, and that he feared that a winding up might be a consequence of
the attempts of Ainslie Mills to displace his control of the company. He gave a more or less
circumstantial account of the genesis and cause of the proposal to distribute the company's reserves
or accumulations of profit, and in all he said he was substantially supported by the evidence of his
fellow director who with him formed the majority in favour of the resolution. What I hope has been
a complete examination of the evidence has led me to the conclusion that there is nothing inherently
incredible or improbable about his story, and it is at least clear that Lowe J., who heard his evidence
and that of his fellow director, did not disbelieve either of them. The picture presented is in some
respects incomplete, because by common consent some very important negotiations which resulted
in Neilson Mills' agreeing to retire from the two trusts were treated as inadmissible in evidence
because they were conducted without prejudice. Further, evidence was not given of some
conversations which Neilson Mills appears to have had, particularly with his lawyers, because it was
regarded as inadmissible on one ground or another. The picture too was blurred by a great quantity
of evidence extracted in the cross-examination of Neilson Mills which, however important to the
parties in view of other litigation, had but a remote bearing on the issues raised in the present
proceedings. But, although these are matters tending to make the account of the transaction given by
Neilson Mills less coherent and satisfactory than perhaps it otherwise might have proved, they ought
not to be allowed to weigh against its acceptance. Indeed, it may be said in his favour that without a
full understanding of the entire course of events it would be both improper and unsafe to find that
he had not acted bona fide for the purpose which he claimed. As I read the judgment of Lowe J., he
found that Neilson Mills and the director supporting him had some time before decided
provisionally that the reserves of profit or a large part of them should be distributed by way of
dividend in cash, which meant that they would be divided amongst the ordinary shareholders, but
that, because of difficulties in selling a portion of the land to raise the money or of some other
difficulty, they did not carry out their intention. His Honour then found, I think, that, because his
resignation as a trustee might mean the impairment of the completeness of his control of the
company, Neilson Mills before actually resigning adopted the course of capitalizing the profits and
thus appropriating them to the holders of ordinary shares. I understand his Honour to mean this
when he says that the particular form which the resolution finally assumed and the time at which it
was adopted were due to the resignation of Neilson Mills as a trustee of the two trusts. It is not
unnatural that Neilson Mills should decide that before handing over his shares he would take the
steps necessary to ensure that the ordinary shareholders would get the greater part of the
accumulated profits, and, as at that time the only form in which it could be done was capitalization,
the time and form of the resolution might well be said to be due to the resignation. But his Honour
definitely held that the two directors thought the resolution to be in the best interests of the company
and that was their main reason for passing it. Although "the best interests of the company" is an
indefinite phrase, its meaning admits of little doubt. There were two rival explanations of the
resolution. On the one hand, it was said to have been adopted for the purpose of maintaining voting
strength and, on the other, for the purpose of protecting ordinary shareholders. As no third purpose
has ever been suggested, the finding must mean that the main reason of the directors was the desire
to secure the benefit to ordinary shareholders of the greater part of the reserves of profits in the
event of liquidation. When his Honour goes on to say that the two directors were not unconscious of
the effect of the resolution in altering voting power and that Neilson Mills probably hoped that it
would make a majority easier, he is far from finding that an actuating motive for the resolution was
the desire to maintain voting strength. The statement does no more than to ascribe an appreciation of
one incidental consequence and a hope that it might occur. But, whether I have correctly interpreted
the meaning of Lowe J. or not, it remains true that the appellant failed to obtain from the learned
judge any finding which would make the resolution invalid on the ground that it was not adopted
bona fide for a purpose within the power. Upon the materials before us we could not arrive at such a
finding for ourselves, and I can see no ground for a rehearing of the action.

The appeal, accordingly, could not succeed. In my opinion it should be dismissed with costs.

Evatt J.

I have read the judgment of my brother Rich, and I agree with it.

Appeal dismissed with costs.

Solicitors for the appellants, Hedderwick, Fookes & Alston.

Solicitors for the respondents, Blake & Riggall.

[1] (1864) 2 Hem. & M. 10; 71 E.R. 361.

[2] (1903) 2 Ch. 506.

[3] (1920) 1 Ch. 77.

[4] (1872) 8 Ch. App. 446.
[5] [1937] HCA 42; (1937) 58 C.L.R. 112.
[6] [1923] HCA 29; (1923) 33 C.L.R. 199.
[7] (1894) A.C. 654, at pp. 660, 661.
[8] (1919) 56 Sc.L.R. 625.
[9] (1873) 9 Ch. App. 1.
[10] (1933) A.C., at p. 99; 48 C.L.R., at p. 265.
[11] [1937] HCA 42; (1937) 58 C.L.R. 112.
[12] (1927) 2 K.B. 9, at p. 26.
[13] (1894) A.C., at pp. 660, 661.
[14] (1937) 58 C.L.R., at pp. 138, 139.
[15] (1911) 1 Ch. 73; (1911) A.C. 409.
[16] (1899) 80 L.T., at p. 351.
[17] (1887) 37 Ch. D. 260, at p. 264.
[18] (1899) 80 L.T. 347.
[19] (1876) 4 Ch. D. 140.
[20] (1878) 8 Ch. D. 635.
[21] (1906) 2 Ch. 216.
[22] [1932] UKPCHCA 3; (1933) A.C. 91; 48 C.L.R. 258.
[23] (1920) 1 Ch. 77.
[24] (1894) A.C., at pp. 660, 661.
[25] [1855] EngR 692; (1855) 21 Beav. 43; 52 E.R. 774.
[26] [1933] USSC 20; (1932) 288 U.S. 123; 77 Law. Ed. 652.
[27] (1932) 288 U.S., at pp. 130, 131; 77 Law. Ed., at pp. 656, 657.
[28] [1758] EngR 208; (1758) 1 Eden 132, at p. 138 [1758] EngR 208; ; 28 E.R. 634, at p. 637.

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