Directors Duties and Shareholder Remedies
Exam Revision
Directors Duties and Shareholder Remedies
Due care, skill and diligence
Key Cases
ASIC v Adler (2002) 42 ACSR 80
ASIC v Cassimatis (No 8) (2016) 336 ALR 209
ASIC v Healey (2011) 196 FCR 291 (Centro case)
ASIC v Hellicar (2012) 88 ACSR 246 (High Court appeal for James Hardie directors)
ASIC v Macdonald (No 11) (2009) 71 ACSR 368 (James Hardie trial)
ASIC v Rich (2003) 44 ACSR 341 (Greaves case)
ASIC v Rich (2009) 75 ACSR 1 (One.Tel trial)
ASIC v Vines (2005) 55 ACSR 617 (trial)
AWA v Daniels (1992) 9 ACSR 383 (AWA trial)
Daniels v Anderson (1995) 37 NSWLR 438 (AWA appeal)
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109
Rich v ASIC (2004) 50 ACSR 242
Shafron v ASIC (2012) 88 ACSR 126 (High Court appeal for James Hardie company secretary/general counsel)
Vines v ASIC (2007) 73 NSWLR 451(appeal)
Vrisakis v ASC (1993) 11 ACSR 162
Key Sections
Corporations Act 2001 (Cth) ss 9, 180, 189, 1317E, 1317G, 1317H, 1317S, 1318
Insolvent trading
Key Sections
Corporations Act 2001 (Cth) ss 588G, 588H, 95A,588J-588M, 588R-588U, 588GA
Key Cases
Hawkins v Bank of China (1992) 26 NSWLR 562
ASIC v Plymin [2003] VSC 123
Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699
Hall v Poolman [2007] NSWSC 1330
Re McLellan; The Stake Man Pty Ltd v Carroll [2009] FCA 1415
Deputy Commr of Taxation v Clark [2003] NSWCA 91
Elliott v ASIC [2004] VSCA 54
Conflicts of interest
Key cases:
Boardman v Phipps [1966] 3 All ER 721
ASIC v Adler (2002) 41 ACSR 72
Cooks v Deeks [1916] 1 AC 554
Furs Ltd v Tomkies (1936) 54 CLR 53
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Pacica Shipping Co Ltd v Andersen [1986] 2 NZLR 328
Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162.
Canadian Aero Services Ltd v O'Malley (1973) 40 DLR (3d) 371
Re Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250
Australian Securities and Investments Commission v Vizard [2005] FCA 1037.
Queensland Mines Ltd v Hudson (1978) 18 ALR 1
Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d)
Key sections:
Corporations Act 2001 (Cth): ss 9, 182, 183, 184, 191, 195,207, 208, 217-227, 210-216,228, 229, 1317E, 1317G, 1317H, 1317S, 1318
Member Remedies
Key Cases
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Gambotto v WPC Ltd (1995) 182 CLR 432
Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97
Chahwan v Euphoric Pty Ltd (trading as Clay & Michel) [2008] NSWCA 52
Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90
Loch v John Blackwood Ltd [1924] AC 783
John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'asia) Pty Ltd (1991) 6 ACSR 63
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
Ngurli Ltd v McCann (1953) 90 CLR 425
Peters American Delicacy Co v Heath (1939) 61 CLR 457
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313
Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 101 ACSR 643
Wayde v NSW Rugby League Ltd (1985) 180 CLR 459
Broken Hill Pty Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609
Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128
Airpeak Pty Ltd v Jetstreat Ltd (1997) 15 ACLC 715
Key Sections
Corporations Act 2001 (Cth) ss 140, 231, 232, 233, 234, 236, 237, 461, 1324
Problem Question
Green Ltd is a construction company. The Directors are Ryan, Alex and Sue. The constitution of Green Ltd requires a quorum of two at Board meetings for a resolution to pass. Ryan, Alex, and Sue are also the company's majority shareholders having 75% of the shareholding. Red Ltd, together with 3 other shareholders, owns the remaining 25% of the shareholding.
Ryan is the managing director of Green Ltd. Ryan becomes aware that the NSW Government is looking for tenders to construct new International conference space. Ryan seeks out an expert report from Construction Consultancy, where his father is one of the managing partners. The purpose of the report is to see whether the company is in a position to branch out into the manufacture of materials so as to offer both construction and materials to the tender. The expert report recommends not expanding, given that materials are easily obtained at very low prices in the market and would not add any value to the tender. The expert report also suggested that given Green Ltd's struggling financial position, such a move might prove disastrous, especially as many strikes with factory workers and truck drivers are happening around the country. Ryan decides to take the risk anyway and presents the option to the Board. Alex agrees with Ryan without reading the report. Alex is unaware of the contents of the report but trusts that Ryan would do the right thing. Sue, a non-executive Director, did not turn up to the meeting as usual. The resolution was to start the manufacture of materials immediately without it being contingent on the acceptance of the Grant. Ryan contacts Amber Partners to source the raw materials for the production process. He did not disclose to the other Board members that Ryan's in-laws own Amber Partners. Given the significant investment required for the manufacturing plan, the Board decides not to declare dividends. However, the Board passes a resolution to grant a performance bonus and a vehicle allowance to the three directors.
Alex is also the sole director of his own company Blue Pty Ltd which is also in the construction industry. Alex decides Blue Pty Ltd should also put in for the Government tender. He resigns from Green Ltd, puts in a figure well below the figure quoted by Green Ltd, and is awarded the contract. After not receiving the tender, Green Ltd finds itself struggling financially. The expansion into the manufacturing of materials has turned disastrous, with many creditors remaining unpaid.
Discuss whether there have been any breaches of Director duties.
Red Ltd, a minority shareholder, wishes to know what actions it may take (if any) against the directors.
QUESTION
Miner Ltd owns a number of mines in Australia. Despite every other mining company currently doing well in business, Miner Ltd is finding things difficult. The previous Managing Director, Michael, together with the senior Operations Manager, Sally, both resigned in disgrace, as the media published reports that they had deliberately allowed waste from their processing plants to pollute a nearby river in breach of the law. The company would like to take action against them.
Angela is the new managing director of Miner Ltd. After her appointment, Angela acted swiftly and organised for Miner Ltd to buy over 2 million dollars worth of machinery. The Board thinks that she acted too quickly and now wants to get out of the contract. They observe that the company is not bound by the contract, as the companys constitution has been breached. The companys constitution has the following clause: The managing director cannot enter into a contract worth more than $500,000.
To deal with the companys financial difficulty, the company decides to raise capital from the market through the issue of shares. Accordingly, they pass a resolution to raise capital by issuing shares to financial institutions, friends and other members of the public. Marie, the company secretary puts an advertisement in the Australian Financial Review for interested investors detailing the rights and obligations that come with the shares.
Jim, a shareholder of the company, discovers that Angela has been pushing Miner Ltd into entering into contracts with a number of companies where she has a direct interest in. She is in fact receiving a commission for these contracts. Angela has not disclosed her interest in the contract to Miner Ltd. Jim approaches the board of directors regarding this matter. However, the board ignores his concerns by stating that the contracts are in the best interests of the company and therefore, any personal interest that Angela has in these contracts is irrelevant. Jim wishes to take action against Angela. Angela is upset by Jims criticism and she decides to call for a meeting to change the companys constitution to expropriate Jims shares.
One of the creditors of Miner Ltd, West Ltd, is a secured creditor that has a security interest over all the assets of the company. West Ltd is worried because Miner Ltd has not been making regular payments on its liability. West Ltd would like to know what type of external administration best suits its interest.
Discuss the corporate law issues raised by these facts.
Exam Revision
Corporate Liability, Promoters, Pre-Registration Contracts and Corporate Contracting
Corporate Liability and Corporate Contracting
Key Cases
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
Bolton Engineering Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Hollis v Vabu Pty Ltd (2001) 207 CLR 21; [2001] HCA 44
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500
Moore Stephens (a firm) v Stone Rolls Ltd (in liq) [2009] UKHL 39
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 6ACSR 353
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549
Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146
Royal British Bank v Turquand (1856) 6 El & Bl 327; (1856) 119 ER 886
Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722
Soyfer vEarlmaze Pty Ltd [2000] NSWSC 1068
Sunburst Properties Pty Ltd (in liq) vAgwater Pty Ltd [2005] SASC 335
New ZealandBanking Group Ltd vFernmast Pty Ltd (2013) 282 FLR 351
Key Sections
Corporations Act 2001 (Cth) ss ss 79, 124, 126, 127, 128, 129, 198A, 198D, 1308, 1308A, 1312, Pts 9.4B, 9.5
Criminal Code Act 1995 (Cth) Pt 2.5
Promoters, Pre-Registration Contracts
Key Cases
Emma Silver Mining Co Ltd v Lewis & Son (1879) 4 CPD 396
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
Gluckstein v Barnes [1900] AC 240
Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 Twycross v Grant (1877) 2 CPD 469
Key Sections
Corporations Act 2001 (Cth) ss Corporations Act 2001 (Cth) ss 131 133, 711, 728, 729
Share Capital and Corporate Fundraising
Share Capital
Key Cases
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171
Trevor v Whitworth (1887) 12 App Cas 409
Darvall v North Sydne Brick and Tile Co Ltd (1987) 16 NSWLR 212
Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33
Key Sections
Corporations Act 2001 (Cth) ss 232, 246B 246G, 254A(2), 256A 256E, 257A 257J, 258A 258F, 259A, 260A-260DA, 1324
Dividends
Key Sections
Corporations Act 2001 (Cth) ss 254T, 254U, 254V, 254W
Key Cases
Moxham v Grant [1900] 1 QB 88
ICM Investments Pty Ltd v San Miguel Corp (2013) 96 ACSR 358
Corporate Fundraising
Key Cases
ASIC v Axis International Management Pty Ltd (No 5) (2011) 81 ACSR 631; [2011] FCA 60
Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 56 ACSR 309; [2005] FCAFC 265
Fraser v NRMA Holdings Ltd (1995) 127 ALR 543
ASIC v Sino Australia Oil and Gas Ltd (in liq) (2016) 115 ACSR 437
Key Sections
Corporations Act 2001 (Cth) ss 113, 700, 704 706, 708 719, 723, 727 729, 731 734, 736, 738,739, 761A
Problem Question 1
Wang, the managing director of SCPL Ltd decides to expand the business by acquiring a mobile caf van worth $70,000. Wang signs a contract with Axion Finance Ltd to pay for the vehicle. Axion buys the vehicle and then leases it to SCPL under a five-year lease. It is anticipated that SCPL will buy the van at the end of the lease (or enter into a new lease with Axion). Wang signs the contract in the following manner: Signed Wang, Director for and on behalf of Sydney Caf Pty Ltd
Wang does not ask Erin to also sign, and he does not ask her permission to enter into this contract, although he has previously discussed the possibility of providing mobile caf services with her. In the past, Wang has signed contracts by himself, and Erin did not object to such actions. Wang Wang plans to drive this van to local football matches on Saturday to earn extra income for the business. Wang uses his young son, Victor, to help him operate the mobile caf van on weekends. Unfortunately, Victor is very clumsy, and he spills boiling hot coffee on a customer whose hand is badly burnt. The victim (Sally) wants to sue SCPL and Wang and Victor for $100,000 for her injuries.
The Axion lease contract contains a requirement that SCPL will indemnify Axion for any loss or damage however caused through the use of the vehicle. Erin claims that Wang was not authorised by SCPL to sign the lease with Axion and so SCPL is not liable for the indemnity to Axion.
Who may be liable for the harm suffered by Sally?
Problem Question 2
Prior to Wang and Erin setting up SCPL, Wang had entered into a commission arrangement with Axion Finance which paid Wang $2,000 commission for entering into the contract to acquire the van. Of course, this is not disclosed to Erin, who is furious. Erin is also unhappy with Wangs long-term coffee bean supply agreement, which she believes is too expensive. Wang signed this agreement before SCPL was registered.
Assess who may be liable for the lease contract with Axion and the coffee bean supply agreement.
What action (if any) could SCPL take against Wang for the secret commission?
Problem Question 3
Wang and Erin have resolved their differences, and the SCPL business is now doing very well. Wang decides that now is a good time to expand the business by opening up new stores. The caf was recently featured in the Good Caf Guide, and business is booming.
Wang estimates that they will need another $3 million to open up two more stores. Erin may be interested in investing another $200,000. The head barista, Sean, is also interested in investing $100,000. Wang decides to put an advertisement in the local Chinese language newspaper:
New investors needed: greater than 20% returns on investment guaranteed
Call Wang 0412345678.
There is no reasonable basis for this claim, but Wang is optimistic about the business's future prospects.
Wang decides to register a new company, SC Future Pty Ltd (with Wang taking on the sole director role and SCPL owning all the shares in SC Future), and this new company will issue securities to the public to raise money for the expansion of the SCPL business.
Advise Wang as to his position and the position of SC Future and SCPL in relation to the fundraising activities.
What action (if any) could ASIC take?
