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Week one: introduction

Why study corporate law?

Entrenched members of the society.

Ability to govern our lives.

Immense power wielded by corporations and the need for regulation.

Key elements and terminology

Separate legal personality

Perpetual succession

Capital

Management the decision making organs of corporation

Board of directors

Members

Ownership shareholders/members

Limited liability

Corporate legislation

Greek and Roman legal devices -Canon Law - Guilds -Royal Charters joint stock companies

Australia

Early state legislation

Uniform companies acts

First attempt at a commonwealth corporate legislation

Cooperative legislation

Corporations law

Corporations act 2001 (Cth)

Administration of corporate law

Australian Securities and Investments Commission (ASIC)

Australian Securities Exchange Group (ASX)

Other bodies created under the Australian Securities and Investments Commission Act 2001 (Cth)

Corporations and companies

Common to use the terms corporation and company interchangeably.

However, historically,

company referred to business enterprises which were organised using variations on the law of partnership and/or trusts (i.e. joint stock companies)

Corporation referred to public entities (i.e. local government area (Birmingham corporation) or the local church diocese)

Private trading ventures used a royal charter or a private statue to achieve the incorporation.

Traditionally corporations served a public/quasi-public purpose while companies concerned with the interests of the members.

Corporation act 2001 (Cth) (Corporations Act)

S9 company a company registered under this act

S57A corporation a company , anybody corporate (whether incorporated in Australia or elsewhere) and an unincorporated body.

Types of companies

Section 112 of corporations act

0000

Most popular form companies limited by shares.

Most suitable for charities and clubs companies limited by guarantee.

Different corporations

Corporations Sole

An individual is given a special office with legal status as a separate corporation.

E.g., The Monarch and the Bishop of a church diocese.

Property owned by the title transfer of property from one holder of office to the other.

Corporations Aggregate

Legal status given to the sum of a group of persons (i.e., Birmingham Corporation).

Focused on ownership and management of property over time.

Statutory Corporations

Corporations Sole (i.e., Official Trustee in bankruptcy).

Corporations aggregate (i.e., Australian Securities and Investments Commission (ASIC)).

Indigenous corporations introduction

Corporations (Aboriginal and Torres strait islander) act 2006 (cth)

Aboriginal and Torres strait islander corporations (ATSI corporation)

Office of the registrar of indigenous corporation (ORIC)

Purpose:

Empower indigenous Australians by allow ATSI corporations to adopt rules that support indigenous culture and value

Provide essential services

Improving governance and capacity in the indigenous corporate sector

Closing the gap

Indigenous corporations characteristics

Registration requirements

members

directors

shares or debentures

types of corporations

internal governance rules

reporting

Indigenous corporations - reform agenda

areas for reform:

maximising alignment with corporation act

use of CATSI act mostly not for profit enterprise

the flexibility of the regime

registration classification profit distribution

interventionist approach by ORIC

the CATSI ACT review of 2020 hybrid entity

Theories of corporate law

fiction or concession theory

realist or natural entity theory

economic or contractarian perspectives

progressive communitarian perspectives

feminist perspectives

Historical development

The early corporations

Importance of ownership and management of property on behalf of a collective group of persons with changing membership.

Generally used by local communities, groups of merchants and craftsmen.

Royal charters and merchant guilds.

Chartered corporations

Royal charters were granted to exploit new inventions or conduct trading expeditions (East India Companies).

Characteristics included private benefits, members contributed funds/personal skills, stock of the company replenished for each trading mission and an entitlement to share profits of the venture.

Membership was not freely transferable.

Incorporation was also made possible through a special Act of Parliament (regulated corporations).

Joint stock companies

Incorporation through Charter or special Act of Parliament was inconvenient mechanism for domestic trading enterprises.

Not sanctioned by law a necessity of the time and economic development witnessed in 18th Century.

A common enterprise that centered around a partnership of members.

Often set up as a partnership with a management committee holding the property under a trust (known as a deed of settlement).

Free transfer of shares imperative for a stock market.

No separate legal personality or limited liability.

E.g. Dutch, French & English East India Companies.

The Bubble Act

Speculation and widespread losses led to disrepute of joint stock companies.

The South Sea Company, a major chartered corporation, complained about the misuse of charters.

The British Parliament passed Bubble Act in 1720.

However, the South Sea company also collapsed causing widespread losses with officers being exposed for fraud and corruption.

Ambiguous provisions and limited enforcement of the Bubble Act did little to prevent the spread of joint stock companies.

General Incorporation

Joint Stock Companies Registration and Regulation Act 1844 (UK)

Establishment of a business entity comprised of both chartered corporations and an unincorporated joint stock company.

Separate legal personality.

Incorporation under a general public right.

No monopoly rights or limited liability.

Limited Liability Act 1855 (UK)

Member liability was limited to capital contribution.

The rogues charter?

Companies Act 1862 (UK)

First modern company law statute.

The history of Australian corporate law

The colonies had a mix of chartered corporations, joint stock companies and private partnerships.

Little need for corporations with large subscriptions of capital.

Early state legislation modelled on Companies Act 1862 (UK).

Companies Statute 1864 (Vic)

s 51(xx) of Constitution:

The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:

(xx) foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth

Constitutional issues re s 51 (xx)

The wording of s 51(xx) does not specifically include the power to register corporations.

Former colonies wanted to retain such power as a source of revenue.

Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330

The High Court held that the Commonwealths power to regulate corporations under s 51(xx) did not extend to the domestic trading activities carried on by corporations within a particular state.

Strickland v Rocla Concrete Pipes Ltd (1971) 124 CLR 468 overturned the above decision.

NSW v Cth (1990) 169 CLR 482 (the Incorporation case).

The High Court later ruled that the Commonwealth did not have the power to make laws providing for the incorporation of companies.

Attempts at implementing a consistent national corporate regulation system

Uniform Companies Acts (1961-2)

Each state passed largely uniform corporate law statutes.

Enforced by individual, state-based corporate regulators known as the Corporate Affairs Commissions (CACs).

Limited effectiveness due to inconsistent amendments and administration.

Co-operative Scheme (1980s)

The uniform Companies Codes in the 1980s included separate statutes for internal corporate matters, and takeovers and securities regulation.

The Companies Codes were enforced by the National Companies and Securities Commission (NCSC).

The NCSC was replaced by the Australian Securities Commission (ASC) in 1989.

In 1998 the ASC became ASIC.

The Corporations Law vested administrative authority over State Acts to federal authorities and cross-vesting scheme allowed federal and state courts to hear matters.

In Re Wakim; Ex parte McNally (1999) 198 CLR 511, the High Court ruled that the system of cross-vesting (which allowed the Federal Court to apply and enforce the state corporations law statutes) was constitutionally invalid.

Current corporate regulatory system

In 2001, the Corporations Law was replaced by the Corporations Act 2001 (Cth), after each of the states referred their corporate law powers to the Commonwealth.

States received compensation for the loss of revenue involved in losing regulatory control over corporations.

The referral legislation has a sunset clause which following extension, will give the States and Northern Territory the power to terminate the referral on 15 July 2021 (Victorian Government Gazette No. S 195 21 June 2016).

The ASIC was reconstituted under the Australian Securities and Investments Commission Act 2001 (Cth).

Theoretical perspectives

Why consider corporate theory?

Theories represent ways of thinking about corporations.

These theories are deployed to explain or recommend what the law should be and to criticise the way it is or is going to be.

How we view the corporation will affect how we decide the answer to a variety of questions.

Questions to consider:

What is a corporation? (real entity or an artificial/abstract concept)

Whose interests corporations designed to serve? (private purpose or public purpose)

How should corporations be regulated?

Fiction (or concession) theory

The corporation is seen as an artificial entity whose privileges have been granted by the state.

The corporations should be run (at least partly) for public purposes.

The separate legal status accorded to the corporation by the state justifies regulation of corporations by the state.

The state plays a primary role in regulating corporations.

Outdated theory???

Realist (or natural entity) theory

A corporation is not just an artificial concept created only by law, rather a product of social interactions.

A company is more than the sum of individuals working within it.

Corporations are a product of private relationships, serving private interests and private wealth.

Laws and regulations perform a facilitative role.

Economic (or contractarian) perspectives

Accepts that a corporation is an artificial device.

Corporations are internal marketplace with stakeholders entering into bilateral contractual transactions.

A nexus of relationships or a forum within which mutual exchanges occur.

Shareholder primacy.

The role of shareholders as residual claimants and residual risk bearers.

Economic theory and its relevance to corporate law.

Agency theory.

Transaction costs.

Progressive (communitarian) perspectives

View corporations as a real social entity with significant impact on the its stakeholders.

Rejects the notion of shareholders as sole residual risk bearers.

E.g., displaced workers and involuntary tort claimants

A social institution, which operates within a broader community.

Stakeholder benefit as opposed to mere shareholder benefit.

Promotion of social causes as part of the corporate purpose.

Lacks a clear, comprehensive and consistent narrative.

Law reform?

Feminist perspectives

Diverse perspectives including liberal, socialist and radical feminism.

Liberal feminism

Eradication of discrimination by adopting an equal rights perspective.

Refocus of corporations social footprint to achieve greater gender equality.

Socialist feminism

A critique of the system of market-based capitalism.

Individualisation, family unit and unequal treatment of female workers.

Radical feminism

Capitalist systems a male construct designed to serve male wants and sits within male value set.

View of corporations as a power structure which promotes individualism.

Recognition of a corporations impact on a broader constituency.

Corporate regulation

What is regulation?

Regulation is [t]he act or process of controlling or directing by rule, restriction, principle etc.

Australian Encyclopaedic Dictionary

Need for regulation.

Corporations are separate legal entities with the powers of natural persons.

Market Failure.

How to regulate such an entity?

Different theoretical perspectives provide different answers to this question.

E.g., economic approach - to promote efficiency (to manage agency cost and transaction cost).

How companies are regulated?

The carrot or the stick approach or punish or persuade.

A wide variety of regulatory methods comprised of both aspects.

Responsive regulation theory.

Trends and development in Australian corporate regulation

Corporate regulation around the time of federation was almost a misnomer, with no separate government body responsible for regulating corporations.

Early corporate regulation was limited to basic administrative and record-keeping requirements.

Corporate scandals and widening public participation in investment created a political climate that demanded greater regulation.

Increasing popularity of investor class actions.

The global financial crisis (GFC) has also generated an extensive debate concerning the nature of corporate regulation.

Different sources of corporate regulation

Legal regulation of corporations may take various forms:

Statutory rules

May take the form of positive obligations or negative prohibitions.

The disclosure of key information through both periodic and continuous disclosure obligations (Efficient Capital Markets Hypothesis (EMH)).

Judicial rulings

Jurisdiction to hear and determine legal matters involving corporate law is shared between the Federal Court and state and territory Supreme Courts: s 58AA.

Non-judicial tribunals, such as the Administrative Appeals Tribunal (AAT) and the Takeovers Panel.

Administrative guidelines

ASIC Regulatory Guides provide guidance on ASICs view of how particular rules may be complied with.

Applications for relief ASIC can grant exemptions and modifications from the requirements under the Corporations Act by issuing class orders.

Legal recognition of industry codes and standards

ASX Corporate Governance Principles and Recommendations.

International treaties that impose obligations on national governments.

UNCITRAL Model Law on Cross-Border Insolvency and Cross-Border Insolvency Act 2008 (Cth).

The role of non-legal mechanisms

Executive labour market

Product market

Debt and equity capital markets

The market for corporate control

Institutional and sophisticated inventors

Hedge funds

Private equity funds

Derivative traders

Sovereign wealth funds

Shareholder activism

ASIC

ASIC was established by the Australian Securities and Investments Commission Act 2001 (Cth) (ASICA).

ASIC is broadly divided into a number of work teams responsible for particular areas of corporate regulation.

Enforcement teams.

The stakeholder teams.

i.e., Corporations; Deposit takers, insurers and credit services; Emerging mining and resources; Insolvency practitioners; Investment banks; Investment managers and super funds; Financial advisers; Financial market infrastructure; Financial reporting and audit; and Market and participant supervision.

ASICs statutory role is expressed in s 1(2) of ASICA.

ASIC is given power under corporations legislation, which is defined in s 5 of ASICA to mean the Act itself and the Corporations Act, to carry out functions as specified in those statutes: ASICA s 11(1).

ASIC is also obliged to advise the minister responsible for corporate law regarding changes to the corporations legislation that are needed to assist in resolving any problems that ASIC has encountered in exercising its powers: ASICA s 11(2).

ASIC has several important roles in corporate regulation:

Serving as a registry for the lodgement of documents required under the Corporations Act.

Enforcing the corporations legislation.

Enforcing consumer protection in financial services.

Enforcing national credit licensing.

Enforcing financial market regulation.

Informing law reform.

Informing the public.

ASIC has the power to commence proceedings for an offence against the Corporations Act: s 1315.

It also has the power to commence prosecutions for breaches of the corporations legislation (which includes both the Corporations Act and ASICA): ASICA s 49.

The Director of Public Prosecutions (DPP) which undertakes major criminal cases.

ASIC may intervene in any proceeding relating to a matter arising under the Corporations Act: s 1330.

ASIC may also pursue civil penalty proceedings under Pt 9.4B of the Corporations Act. Civil penalty proceedings can involve a range of contraventions of the Act, with s 1317E designating over 30 separate provisions in the Act as civil penalty provisions.

ASIC has a broader power to seek compensation for individuals under ss 1325 and 1325A where particular provisions of the Corporations Act are contravened.

ASIC may pursue an injunction against an actual or proposed contravention of the Corporations Act under s 1324.

ASIC may also apply to the court for a public disclosure order under s 1324B where a person has contravened particular parts of the Corporations Act.

ASICS Power to conduct investigation

ASIC has a general power of investigation with respect to potential breaches of the corporations legislation and may also investigate a potential contravention of any other law that concerns the management or affairs of a body corporate or managed investment scheme: ASICA s 13.

The minister may also issue a direction for ASIC to undertake a particular investigation: ASICA s 14. In addition, ASIC may undertake an investigation based on a report by a liquidator or receiver: ASICA s 15.

ASIC has the power to conduct an examination as part of an investigation, which includes the power to:

require a person to appear before ASIC to give information relevant to an investigation: ASICA s 19.

require that books and records of a body corporate (or the responsible entity for a managed investment scheme) be provided: ASICA s 30

conduct public and private hearings in relation to any of its functions under the corporations legislation: ASICA s 51.

commence civil proceedings on behalf of a person to seek recovery of property or damages: ASICA s 50.

accept an enforceable undertaking from the persons (including corporations) involved in a matter within ASICs jurisdiction, under ASICA s 93AA (individuals or companies) and ASICA s 93A (entities responsible for registered managed investment schemes).

Non-compliance with ASIC investigations

Where a person fails to comply with a requirement to assist ASIC in its investigation (for example, by failing to provide information), the person may be subject to a range of sanctions:

ASIC may complain to the court and the court may order compliance: s 70.

It is a criminal offence to:

intentionally or recklessly fail to comply with a requirement to attend an examination or provide information or produce books (s 63);

give information or make a statement that is false or misleading in a material particular (s 64);

obstruct or hinder a person from the exercise of a power under Pt 3 of ASICA (ss 65, 66); and

conceal, destroy, mutilate or alter books or engage in conduct that sends the book out of the jurisdiction that is relevant for an ASIC investigation: s 67.

Where ASIC believes that relevant information related to its exercise of powers cannot be found because a person has failed to comply with a requirement under Pt 3 of ASICA, the commission may make one of a number of orders under ss 72 75.

Review of ASIC decisions

Section 1317B provides that an application may be made to the Administrative Appeals Tribunal for the review of a decision made under the Corporations Act by ASIC. However, a range of decisions is excluded under s 1317C from this review mechanism. Decisions by ASIC may also be reviewed under the Administrative Decisions (Judicial Review) Act 1977 (Cth).

ASICs power to conduct investigation

ASIC has a general power of investigation with respect to potential breaches of the corporations legislation and may also investigate a potential contravention of any other law that concerns the management or affairs of a body corporate or managed investment scheme: ASICA s 13.

The minister may also issue a direction for ASIC to undertake a particular investigation: ASICA s 14. In addition, ASIC may undertake an investigation based on a report by a liquidator or receiver: ASICA s 15.

ASIC has the power to conduct an examination as part of an investigation, which includes the power to:

require a person to appear before ASIC to give information relevant to an investigation: ASICA s 19.

require that books and records of a body corporate (or the responsible entity for a managed investment scheme) be provided: ASICA s 30

conduct public and private hearings in relation to any of its functions under the corporations legislation: ASICA s 51.

commence civil proceedings on behalf of a person to seek recovery of property or damages: ASICA s 50.

accept an enforceable undertaking from the persons (including corporations) involved in a matter within ASICs jurisdiction, under ASICA s 93AA (individuals or companies) and ASICA s 93A (entities responsible for registered managed investment schemes).

Other regulators

ASX

The Australian Prudential Regulation Authority (APRA)

The Australian Competition and Consumer Commission (ACCC)

The Australian Taxation Office (ATO)

Week two: business structure

Different business structures

0000Factors to consider when determing a business structure

The size of the business and the ability to expand the business.

Establishment and operating costs involved.

Exposure to individual liability if the business fails.

The ability to participate in management and the scope for managerial control.

The treatment of profits.

The concerns for taxation liabilities.

The need for, and scope of, financial privacy.

Sole Trader

A sole trader is the person carrying on business as an independent individual.

The business is not a separate legal entity.

The owner bears personal liability for the actions of the business.

Formation for those not wishing to trade under their own name:

National Business Names Registration Act 2011 (Cth).

Register business name with ASIC.

Australian Business Number (ABN).

National register of names.

Sole Trader trading under own name

Display business name at business.

Attach to all paperwork.

Renew every three (3) years.

Inform authorities of changes.

No governing law re structure.

Subject to regulation by respective professional bodies (e.g. accountants, solicitors and migration agents).

Australian Consumer Law and Fair Trading Act applies.

Still required to register for an ABN and GST with ATO.

Regulatory approvals are still expected eg liquor licences etc.

Sole traders advantages and disadvantages

0-508000for example

Jack loves food. He decides to open a restaurant business. He leases a place and decides to call his business Good Food. Jack hires Paul to prepare food and pays him a monthly salary. Jack makes all decisions about the business and at the end of the month he pockets the profit of the business.

Rahim goes to Good Food and orders lunch. After having his meal at Good Food, Rahim suffers from severe food poisoning.

Partnership

A partnership is essentially a group of two or more persons who work together in a common business enterprise for their mutual gain.

Partnerships are regulated by

Largely uniform, state and territory based Partnership Acts (e.g Partnership Act 1892 (NSW)

Common law

Law of Equity

The creation of a partnership is based on an understanding between the partners. It can be established under a contract (generally called Partnership Agreement or Deed).

However, a partnership can be established even without any express oral or written statement.

Section 115 of the Corporations Act 2001 (Cth) limits the number of partnerships formed to gain a profit and limits them to 20 partners.

Except for Professional Partnerships: Accountants allowed up to 1000 partners, Lawyers allowed up to 400 partners, Doctors allowed up to 50 partners

Creation of a partnership

Definition of a partnership under the Partnership Act

the relation which exists between persons carrying on a business in common with a view of profit s 1 Partnership Act 1892 (NSW))

The Partnership Acts provide a number of rules that provide guidelines on the existence or non-existence of a partnership in certain situations involve the sharing of profits (s 2 of the Partnership Act 1892 (NSW))

Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511.

Badeley v Consolidated Bank (1888) 38 Ch D 238

Essential elements of a partnership

There must be a valid agreement between the parties as required by the word relation.

There must be a business being carried on.

Include every trade, occupation and profession.

Excludes domestic transactions and the conduct of hobbies.

A continuing activity over a period of time, or it may involve a single event: see Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321

Preparatory actions to get the project off the ground not sufficient to be considered as carrying on a business : Goudberg v Herniman Associates Pty Ltd [2007] VSCA 12

There must be two or more persons working in the business together (in common). Cox v Hickman (1860) 8 HL Cas 268

Is there an agency relationship which can bind the parties?

Are there mutual rights and obligations between the parties on whose behalf the business is being carried on?

There must be a motivation to run the business so as to generate a profit, even if the business is ultimately unsuccessful in making a profit (view of profit).

The nature of the partnership relationships

A partnership involves a relationship of mutual trust and confidence.

Fiduciary relationship - partners must act with honesty, loyalty and put the interests of the partnership ahead of personal interests.

Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384.

Dean v Macdowell (1878) 8 Ch D 345

The fiduciary obligations held by partners continue even after the firms business has ceased trading: Chan v Zacharia (1984) 154 CLR 178.

Fiduciary duties of a partner.

render accounts and full information: s 28(1).

account for any benefit: s 29(1)

not to compete with the firm (s 30(1)):

Section 24 provides a default set of internal rules to govern partnerships.

Partners liability to third parties

Each partner is both principal and agent of the firm: s 5

This agency relationship only extends to acts that are carrying on the business in the usual way.

Partners are bound by the acts of their partners on behalf of the firm: s 6 .

Partners are jointly liable with other partners for debts of the firm incurred during the partnership: s 9.

Partners are jointly and severally liable for civil wrongs committed by any partner during the course of the partnership: ss 10, 12.

Cox v Hickman (1860) 8 HL Cas 268

Polkinghorne v Holland (1934) 51 CLR 143

It is possible for the firm to notify third parties about limitations of a partners authority and thereby manage the risk to the firm: s 8.

There are rules for addressing liability of new partners and former partners in s 17.

Partnerships- property, termination and taxation

Partnership property

Partners must hold and apply the property for the exclusive purposes of the partnership: s 20(1)

Harvey v Harvey (1970) 120 CLR 529

Termination of partnership

The death, retirement or bankruptcy of a partner results in the termination of the partnership unless there is an agreement to the contrary: Pt 2 Div 4.

The court also has the power to dissolve a partnership: s 35

Taxation

Each partner is responsible for their own tax affairs and payment.

A partnership tax return is filed with the ATO for administrative purposes.

-16204628641700Partnership advantages and disadvantages

Limited lability partnership

It is possible to form

limited partnerships that confer limited liability on limited partners.

incorporated limited partnerships that provide both limited liability for limited partners as well as a separate legal entity.

As a separate legal entity, incorporated limited partnerships have the powers of a natural person: s 53A.

Both of these forms need to be registered (s 50A).

Both incorporated limited partnerships and limited partners have at least one limited partner and at least one general partner: s 51.

Limited partners have liability limited to their capital contribution, while the general partner carries unlimited liability.

Only the general partner is permitted to manage partnerships in these types of structures: ss 67, 67A.

The creation of a limited partnership will change the taxation treatment of the business from a partnership to that of company.

Joint ventures

Joint ventures involve two or more parties (which may involve individuals and/or companies) cooperating with each other to undertake a particular project.

Commonly used in high risk capital, or high risk enterprise, activities.

e.g., mine explorations, property development, construction, manufacturing, publishing, entertaining, hospitality management, share farming ventures.

Definition of a joint venture

Brian Pty Ltd v United Dominions Corporations Ltd [1983] 1 NSWLR 490 at 506 as:

an association of persons, natural or corporate, who agree by contract to engage in some common, usually ad hoc undertaking for joint profit by combining their respective resources, without, however, forming a partnership in the legal sense (of creating that status) or corporation; their agreement also provides for a community of interest among joint venturers each of whom is both principal and agent as to the others within the scope of the venture over which each venturer exercises some degree of control.

Establishing joint ventures

Establishment of a Joint Venture

No formal requirements or legislation.

Registration of a business name.

Laws

Common to have written contracts to avoid uncertainty, difficulties in resolving differences.

Each person intending to enter into a joint venture must make themselves aware of any legislation governing that activity.

A joint venture is not a separate legal entity in its own right, although it may acquire separate status depending on how it is structured.

incorporate a joint venture vehicle using a company, with each joint venture participant taking shares and having rights to make appointments to the board of directors.

Joint venture functions

Control

Joint venturers bring different benefits such as skills and working capital

Management vehicle (e.g. management committee)

Liability of joint venturers

Not a separate legal entity

Shared liability based on agreement

May become jointly and severally liable

Fundraising

Pooling physical, financial and human capital between participants

Unincorporated Joint Ventures reliant on loans & trading profit

Incorporated joint ventures can utilise a public company to fundraise from public

Relationship between joint venturers

Ordinarily, not in a fiduciary relationship

Determined by their relationship

United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1

Continuity and Termination

Not a separate legal entity

Distribution of rights to products and intellectual property generated by the JV.

Privacy

Financial privacy

No public disclosure necessary

Taxation

Each party enjoys privacy and is responsible for their own accounting procedures.

However if JV is using a company as the management vehicle, then the taxation characteristics of a company will apply.

The difference between partnerships and joint ventures

[T]he important distinction between a partnership and a joint venture is, for practical purposes, the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants.

United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 15, Dawson J

The activities are of a specific duration or for a limited purpose, whereas the activities of a partnership are often continuing and indefinite.

The liability is individual rather than joint and several as in a partnership.

Joint venturers can, subject to agreement, freely dispose of their interest (property or share) in the joint venture, whereas partners need to assign their interest and do not enjoy this general freedom.

The parties are not necessarily in a fiduciary relationship, whereas partners owe each other fiduciary duties.

The joint venture is a separate venture for each party.

The joint venturers receive a share of the product, whereas partners share profits.

032495100Advantages and disadvantages of joint ventures

Trusts

A trust is an equitable relationship that involves the holder of a legal or equitable proprietary interest (trustee) who is under an obligation to hold (and possibly manage) the property for the benefit of another person or class of persons (beneficiary).

The legal ownership of the trust property (which is held by the trustee) is separated from the beneficial interest (otherwise called the equitable interest) in the trust property.

In practice, a trust is usually created, as a commercial structure to exploit the benefits they provide, such as tax minimisation, asset protection and reducing asset levels for income thresholds.

-11574732893000Types of trusts

Formation

Trusts can be formed for public or private purposes, either intentionally or not.

Essential Elements of a Trust:

Settlor

Trust Property

Trustee

Beneficiary

Each trust must satisfy the three certainties rule.

Certainty of intention

Certainty of subject matter

Certainty of Objects

If the trust is a non-charitable trust it must not infringe the rule against perpetuities. This means that, in most cases, the trust must be terminated within 80 years of its creation.

Governing law

Equitable principles imposing fiduciary relationships on trustee

Trustee Acts in each state and territory (e.g. Trustee Act 1925 (NSW)).

Control

Management undertaken by trustee.

Beneficiaries cannot interfere with management.

Fundraising

Easy to accumulate significant amounts of money by attracting an unlimited number of investors.

However of the public are invited to contribute, then the trust is usually regulated as a managed investment scheme under the Corporations Act.

Trusts may also obtain debt finance.

Termination

Revocation

Beneficiaries consent

Court Order

Distribution of trust property

Privacy and Taxation

No obligation to disclose to public depending on the type of trust

Trust income is assessed in the hands of the trustee or if fully distributed in the hands of the beneficiary.

Rights and Obligations of trustees

Trustee is legal owner of the property. However, trust deed may limit this.

Trustee Acts statutory rights.

Trustees right of indemnity - trustee may use trust property to pay debts arising in ordinary course of managing trust

Law of fiduciary obligations duties of trustees

keep proper financial records

give full and frank disclosure

act only within the terms of the trust deed

exercise due care and diligence

act fairly between beneficiaries

act only in the interests of the beneficiaries within the terms of the trust

If a trustee acts in breach of their obligations, a beneficiary may seek relief from the court including:

replacing trustee

winding up the trust

an injunction against further breaches

the rescission of a contract entered into by trustee

imposition of a constructive trust over property improperly obtained

account of profits improperly made by trustee

Rights of beneficiaries

right to apply for a court order under Trustee Acts of each state and territory

the right to enforce the proper administration of the trust

the right to inspect trust documents and receive information from trustee

no right to receive distribution

beneficiaries may terminate the trust by asking the trustee to transfer the trust property to them according to the trust deed however this right only applies if all beneficiaries agree, and are over 18 and are absolutely entitled to the property. (rule of Saunders v Vautier (1841) 4 Beav 115

Obligations of beneficiaries

to indemnify the trustee for debts properly incurred

029702800trusts advantages and disadvantages

Companies

What we know so far?

As noted above corporation, body corporate and company used interchangeably.

Corporations Act 2001 (Cth), s57A(1): corporation includes companies as well as other body corporates.

Focus of this unit company: company registered under the Corporations Act 2001 (Cth).

Types of companies listed under section 112 of the Corporations Act.

A company is a legal person and is considered to be distinct from its owners, directors, members, employees and agents.

As a consequence of this unique feature, a company has the powers of an individual and is able to do the following under its own name:

own and dispose of property and other assets;

enter into contracts; and

sue and be sued.

Companies continues even if its members die, retire or resign (perpetual succession).

Limited liability.

Establishments of companies

Incorporation of a company proceeds by registration with ASIC.

The registration procedure is set out in section 117 of the Corporations Act 2001 (Cth).

Form 201.

The company is then registered by ASIC and this registration will be recognised by the issue of a certificate of registration: ss 118 and 1274.

The company comes into existence beginning on the day of registration, and remains in existence until it is deregistered: s 119.

Once registered, the company can conduct business throughout Australia without the need to register in individual state and territory jurisdictions.

A company name

If a company conducts a business under a name that is different from the companys name, it must register the name under the Business Names Registration Act 2011 (Cth).

A person may choose, to propose, and reserve for a fee, a company name with ASIC so long as the name is not already registered or offensive or suggestive of illegal activity: s 147.

It is not necessary to give a company a distinctive name. Instead, a unique nine-digit number known as the Australian Company Number (ACN) can be used as the name of the company.

E.g. the companys name might be ACN 123 456 789 Pty Ltd.

Name must also include status or type s 148(2)-(5) (i.e. limited public company or limited proprietary company).

S 149 includes acceptable abbreviations (i.e. Pty, Ltd).

Post registration tasks

Once the company has been registered, a number of tasks need to be completed before it can commence trading:

the consent forms from the members and directors must be retained by the company;

the statutory registers must be established; i.e., register of members, register of debentures etc;

the companys registered office must be open at the stated times;

the initial directors must be appointed by the procedure set out in the companys constitution; and

a meeting of the companys board of directors needs to be organised so that the directors can approve of contracts entered into before registration

constitution or replaceable rules or both

A person may choose to draw up the companys own constitution to provide for internal management rules.

Not necessary for a company to prepare its own constitution.

A company may choose to take advantage of the basic replaceable rules in the Corporations Act 2001 (Cth) dealing with internal governance or adopt a combination of both replaceable rules and a constitution: s 135.

List of provisions of the Corporations Act 2001 (Cth) that apply as replaceable rules: s 141

Control of companies

The management of the company is separated from ownership in a company.

All companies have a board of directors.

The board is charged with the management of the company and the running of its day-to-day activities.

The boards powers may be either limited or expanded by the companys constitution.

The directors owe duties to the company and have been recognised in the general law and the Corporations Act.

The owners of the company are generally referred to as members.

They generally hold ordinary shares in the company which entitles them to voting rights.

These voting rights enable the members to provide influence on the actions undertaken by the board of directors.

Members do not have a direct say in the management of the company.

The members are entitled to exercise certain rights under the Corporations Act.

E.g., oppression of a minority interest, actions of directors detrimental to members of the company

Limited liabilities

The effect of limited liability is that members are not generally liable for the companys debts.

The doctrine of limited liability makes members only liable to pay the issue price of the share.

In the absence of any proven wrongdoing, neither the directors nor the members will become liable for the companys debts.

Ordinarily, directors personal assets and wealth are not at risk.

Limited Liability achieves various economic roles:

Facilities investment.

Promotes market efficiency.

Reduces monitoring.

Encourages equity diversity.

Classification of different types of companies

S 112 of sets out different types of companies that can be registered under CA.

Proprietary companies Limited by shares

Unlimited with share capital

Public companies Limited by shares

Limited by guarantee

Unlimited with share capital

No liability company

Proprietary companies Limited by shares

Unlimited with share capital

Public companies Limited by shares

Limited by guarantee

Unlimited with share capital

No liability company

2 different ways of classifying companies:

Liability of members; or

Public or private/proprietary. (less than 50 employee)

Members liability can be limited in one of two ways:

to the value of the shares issued to them by the company.

to the limit of a guarantee given by a member.

Classification according to members liability

Company limited by shares

Can be registered as either proprietary companies or public companies.

A company limited by shares: a company formed on the principle of having the liability of its members limited to the amount (if any) unpaid on the shares respectively held by them: s 9.

If the shares are fully paid shares, members have no further liability.

Members personal assets are not at risk in order to satisfy payment of the companys debts.

However, creditors can take steps to negate the benefits of limited liability. (e.g. personal guarantees, mortgage over personal assets).

Company limited by guarantee

Must be registered as public companies: s 112(1).

The liability of members is limited to the amount of money owed under the guarantee.

The members guarantee will be for a fixed amount generally specified in the companys constitution (for example, $20): s 517.

Often used for not-for-profit activities and large non-trading organisations (e.g., charities, recreational and sporting clubs and associations by religious, educational or community-based groups).

Law reform in 2010 a three-tier reporting framework.

2 Types:

Section 45B: small company limited by guarantee is one with revenue of less than $250,000 per annum with some exclusions.

Lower reporting obligations than large companies limited by guarantee ss 292, 294 and 294B.

Can not distribute profits as a dividend to members: s 254SA.

Can not issue shares: s 124.

Unlimited liability company

Unlimited companies can be registered as proprietary or public companies: s 112(1).

Unlimited company must have a share capital but whose members have no limit placed on their liability: s 9.

During winding up,

first the companys assets are used to satisfy any outstanding liabilities.

If the assets are inadequate, members will have to make an equal financial contribution to meet the shortfall.

No liability company

No liability companies must be registered as public companies: s 112(1).

A company may be registered as a no liability company only if that company:

has share capital;

has a constitution which must state that its sole objects are mining purposes; and

has no contractual right under its constitution to recover calls made on its shares from a shareholder who fails to pay them: s 112(2).

No liability companies are used exclusively for mining purposes.

Classification according to public or private/proprietary

Proprietary company

A proprietary company is most suitable for use by a small business.

It forms the majority of Australian companies.

Section 113 contains the defining characteristics of a proprietary company. A proprietary company:

must have no more than 50 non-employee shareholders; and

prohibited from offering shares to the public.

If the above limitations are breached, ASIC has the power to require the company to convert into a public company: s 165.

A company needs to have at least one member: s 114.

A proprietary company must have at least one director who must ordinarily reside in Australia: s 201A(1).

Proprietary company

The Corporations Act provides a size test to distinguish between small and large proprietary companies.

A proprietary company is classified as small if it satisfies at least two of the following tests (s 45A):

gross operating revenue of less than $25 million for the financial year;

gross assets of less than $12.5 million at the end of the financial year; or

fewer than 50 employees at the end of the financial year.

A company that does not satisfy at least two of these tests is classified as a large proprietary company. Has higher reporting requirements which means a lesser degree of commercial privacy.

Public company

s 9 defines a public company as a company other than a proprietary company.

A public company has unlimited membership and greater access to raise funds from the public.

Financial disclosure and more regulation than proprietary companies.

Option to list on the Australian Stock Exchange.

Must:

Prepare annual financial reports s 292 and have such reports audited s 301.

Have at least three directors of whom at least two must ordinarily reside in Australia: s 201A(2).

Statutory obligations - public v private companies

02103600

Parent and subsidiary companies

Businesses conducted through a network of companies that share common directors.

Parent/subsidiary companies have as many as they like.

A company is considered as a parent company under s 46 of the Corporations Act if one of the following test are satisfied:

control the composition of the subsidiarys board of directors (for example, by appointing or removing all or a majority of the directors);

be in a position to cast or control more than half of the maximum votes at the subsidiarys general meeting; or

hold more than half of the issued share capital of the subsidiary company.

Large v Small

section 45A Large proprietary company

the consolidated revenue for the financial year of the company and any entities it controls is $50 Million or more

the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more, and

the company and any entities it control have 100 or more employees aat the end of the financial year.

Anything below is a smaller proprietary company

Companies advantages and disadvantages

Associations

A structure used by groups of people wishing to pursue charitable, religious, educational or sporting interests with like-minded people.

The committee members can choose for the association to remain unincorporated or to form an incorporated association under the relevant Associations Incorporations Act of the states and territories.

Establishment

The unincorporated association is not a separate legal entity

An incorporated association can be established by registration under the Associations Incorporation Act of a particular state or territory.

Governing Law

No specific law for unincorporated associations

Incorporated associations are governed by the Associations Incorporation Act of the respective state or territory

Control

The management committee is responsible for administering the rules and the general running of the association

Liability:

Unincorporated association not a separate legal entity

Liability will accrue to members of the management committee

This can be avoided by incorporation

Fundraising:

Pooling of resources from members

Dependent on membership fees and fundraising activities

No limitation on the number of members in an association.

Continuity of existence

Unincorporated associations are not recognised as separate legal entitys so their existence continues so long as members are participating in the activities of the association.

Privacy & Taxation:

As associations are run not-for-profit, and frequently take the form of registered charities under state, territory and federal law, they are normally exempt from tax.

No requirement to disclose information for unincorporated associations.

However incorporated associations have various disclosure and reporting requirements under Associations Incorporation Acts.

037252000Association advantages and disadvantages

Summary of Cases

Partnership

Smith v Anderson (1880) 15 Ch D 247

Trust vs partnership: single venture trust agreement made to invest in companies.

Held to be a trust as it was unlikely to be repeated, and the carrying on of business element was not upheld.

Checker Taxicab v Stone [1930] NZLR 169

Partners or separate businesses: Relationship between a taxi driver and taxi owner.

Not a partnership, lacked the in common requirement, as the businesses operated separately.

Keith Spicer v Mansell [1970] 1 WLR 333

Does a partnership include events preparatory to setting up a business in a partnership?

It does not.

Canny Gabriel v Volume Sales (1974) 131 CLR 321

Promoters partnership or joint venture: promoters of Elton John and Cilla Blacks tour management entered into a joint venture by splitting profits, agreeing all matters and splitting losses (though not evenly).

Held that it was a partnership, despite express agreement to the contrary, as all the elements of partnership were there.

Mercantile Credit v Garrod [1961] 3 All ER 1103

Power to bind: was the selling of a car fraudulently enough to bind the innocent partner?

Held: yes, even though it wasnt in the scope of the agreement, selling cars was and thus the silent partner was liable for the other partner.

United Dominions Corp. v Brian (1985) 157 CLR 1

Fiduciary duties in a joint venture/partnership.

Held that UDC and Brian were in a partnership, as they were involved in negotiations towards a potential partnership, and thus a fiduciary duty existed.

Re Megevand: Ex parts Delhasse (1878) 7 Ch.D. 51 1

Creditor or partners: loan agreement with a partnership.

Held to be a partnership, as it exhibited all the features of one, including right to inspect books, right to profits, and right to losses, exhibiting a silent partner nature.

Week 2 tutorial:

Activity 1

Nina runs a small catering business which has so far been managed and run by herself, along with some casual staff whom she employs. Ninas business so far has been self-managed, apart from the annual visits to the accountant to prepare the tax returns. However, Nina believes that she needs professional advice as she can see great growth opportunities for her business. Nina consults you as a business adviser and seeks advice on the following issues:

Nina is unsure of the type of business format she currently operates or what risks are involved.

Ninas business has been growing, and her partner has expressed his willingness to join the business and seek ways to develop it together. Nina wants to know what business structure might work best for them and whether there are any legal implications in doing business together.

Simon, a friend of Nina, has expressed his willingness to join the business to expand it as an event organising business. Simon has a great deal of experience in running businesses and has considerable personal assets (over $50 million) due to his recent sale of a tech start-up business. Simon is concerned about exposing his assets to a new business venture but does want to have an opportunity to invest in Ninas business. Simon has agreed to invest $1 million through his trust Simon Trust No 1 (which has Colin Pty Ltd as trustee), with Simon being one of two beneficiaries (the other is his daughter, Sarah). Simons accountant Kim is the sole director of Colin Pty Ltd (acting as trustee of Simon Trust No 1). The trust assets include a building in Parramatta (worth $20 million) that can be used as the head office and main operational centre of Ninas business.

Nina is a member of the local country cricket club, which is not incorporated in any way and has functioned as a club with club rules and various members, the number of which fluctuate from time to time. The club holds cricket matches on weekends, charging an entrance fee to the ground and selling food and drink, mainly supplied by Nina, to those who visit. Nina is in the committee that runs the club and is increasingly concerned about various liability issues, including the recent incident a member of the public had been injured in an accident while they were climbing the stairs of the club venue.

Discuss the following:

Advise Nina as to the issues (1-2) highlighted above, discussing the legal differences between different business structures.

Sole trader currently limited liability

Small pripoiertary company

Partnership elements to fufill (acting in common, viewing to profit, carrying out a business)

Elements need to be fulfilled with respect to common law

Agency principle acting as an agent

Mutual rights and oblication , motivation to run

Liability joint liability severally or jointly liable

Partners involvement bounds by the acts of the partners importance of partnership deed even when spouses are involved (what if divorce)

Possible limited by partnership but may no be worthy considering the size

Small proprietary company (protection by incorporation, but then considerations of directors duty and compliance obligations)

Draw up a list of at least five questions you would want to ask Nina before giving your opinion as to the most suitable business structure for issue 3.

The size of the business and ability to expand

Establishment and operating cost

Exposure to individual liability if the business fails

The ability to participate in management and the scope of managerial control

Treatment of profits

Concerns for tax liabilities

Need for finical privacy

Copy of the trust deed

Advise Nina on how she might structure the business with Simon by discussing the legal differences between different business structures.

Simon is wealthy entrepreneur likely to be interested in asset protection for his personal assets.

Liability, managerial control, taxation and how existing liabilities may be prioritised.

May wish to consider a limited liability partnership (Simon to protect assets)

Small/large proprietary company (due to personal investment in the business)

Outline the possible current legal status of the Cricket Club and the potential liabilities of the committee members like Nina.

Incorporate the association by the incorporation and association act

Week three: incorporation and its effects

After completing this module, you should:

understand the significance of the difference between the separate legal entity principle and limited liability;

be able to explain some of the advantages and disadvantages of limited liability;

appreciate and understand the legal significance of the Salomon decision for modern company law; and

be able to explain how various legal doctrines may allow for the separate status of a company to be disregarded for limited purposes.

Summary of module 1

companies are created after they are registered by Asik

there is a comprehensive regulatory scheme to regulate corporations in Australia

there are different business structures that can be used to conduct business activities in Australia

corporate theories can be used to understand the nature of corporations the role of corporations in society and how should corporations be regulated

The corporate value an limited liabilities

separate legal personality and limited liability

separate legal entity doctrine and limited liability are two separate doctrines. Former does not automatically mean the latter.

Separate legal personality

a company is a separate legal entity that is distinct from its member and from those who work for it including employees executives officers and directors

the separate legal status makes it impossible to limit liability.

Limited liability

the liability of the company is unlimited.

a company is responsible for the debts and obligations incurred by the company.

whose liability is limited?

liability of members in limited company with share capital is limited to the unpaid value of the shares if any section 516

members with some portion of the price remaining on the shares are liable to pay those amounts if the company or its liquidator makes a call on them

once shares are fully paid members are no longer liable for the debts of the company.

The corporate veil

members limited liability + the company's separate legal status = the corporate veil

the corporate veil is a shield for business owners to protect their personal assets from business debts

this is as if the owner and managers of the company are hiding behind a veil - the veil of incorporation for example Kathy sciences contract with Sam the general manager on behalf of Sam Pty Ltd . If there is a breach of contract Sam pty LTD will be responsible for breach as it is being treated in law as a real person.

Salomon v A Saloman & Co Ltd [1897] AC 22

Most famous an important case in corporate law

not the first case to confirm separate legal personality doctrine however the most significant case with long lasting effect

historical context - companies were not pervasive throughout society

unfortunate condition of middle class investors in mid 19th century for example banking collapses value way mania and stock market crashes

limited liability a rogue charter

Facts of the case

Salomon v A Salomon & Co Ltd [1897] AC 22

Aron Salomon was a sole trader who operated a business which manufactured boots.

He joined with his wife and five adult children to register a limited liability company (A Salomon & Co Ltd) under the Companies Act 1862 (UK).

A Salomon & Co Ltd registered with 40,000 shares with his wife, daughter and four sons took one share each. Salmon also took one share and then later issued 20,000 more share to himself - the only shareholders were Salomon and his family.

Salmon was the chairman of the board of directors and the managing director.

Through a series of transactions, Salomon gave a loan to A Salomon & Co Ltd, thereby becoming a creditor of the company secured by way of a company charge.

This meant that Salomon had security over the assets of the company and would have to be paid back in full before any other unsecured creditors.

So he was both a controller and a creditor of the company.

The company business failed and the creditors argued that Salomons formation of the company and sale of the business to the company were fraudulent. Also, that Salomon should not receive the benefit of the charge as in fact he controlled the company. Rather, the company should be treated as an agent or trustee of Salomon in the conduct of the business. Salomon should be required to indemnify the company for the debts it had incurred.

Outcome

Trial judge, Vaughan Williams J

dismissed the claim for fraud the members consented to Salomons conduct.

the company had been some servant or agent of Mr Salomon.

held that Salomon should indemnify the company:

Otherwise it would be defeating and delaying his creditors.

A Salomon & Co Ltd was Mr. Salomons business and no one elses.

There is a relationship of principal and agent existed between Mr. Salomon and the company.

The company as agent entitled to a lien on the assets which overrides his claims.

On appeal the Court of Appeal took a different view.

Lindley JA

the company was trustee for the benefit of Salomon and was entitled to be indemnified by him for the debts that were incurred on his behalf.

The company was created for an illegitimate purpose, that is, the purpose of running a sole person company (which the Companies Act did not permit).

Salomon had control of the business and the other members were merely his nominees, necessary to ensure the companys registration.

Mr. Aron Salomons scheme is a device to defraud creditors.

Lopes LJ

Salomons conduct scandalous and a perversion of the statute.

Kay LJ

the sale of the business to the company as an utter fiction.

The House of Lords held that:

the motivations of the persons incorporating the company were irrelevant.

dealing with a registered company should put external creditors on notice.

the company was not Salomons agent or trustee.

the company operated the business in its own right and was separate from its controller.

the charge given was valid and Salomon should be paid his debt even though other creditors would not be paid because the company had insufficient assets.

Lord Macnaghten (at 51)

I cannot understand how a body corporate thus made capable by statute can lose its individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment.

Application of Salomon v A Salomon

R v Portus; Ex parte Federated Clerks Union of Australia (1949) 70 CLR 428.

First Hight Court decision in Australia to cite the Salomons case with approval.

Industrial Equity Ltd v Blackburn (1977) 137 CLR 567.

A parent company could not draw upon the profits of its subsidiary to pay a dividend to its members each company in the group have separate legal personality.

Hamilton v Whitehead (1988) 166 CLR 121

Directors and shareholders separate from the company a natural consequence of the Salomon case.

Consequences of Salomon v A Salomon

Recognition of the possibility of registered company with one owner.

All of the Australian states and Territories amended the company law to include provisions for private or proprietary companies with a minimum of two members (except for Victoria which had already passed legislation).

The emergence of one person companies in Australia did not occur until 1995.

Ability of an individual to act in different legal capacities at the same time.

E.g., Salomon being the owner, chair and the managing director, employee and secured creditor.

Passive investors are encouraged to invest.

Diverse shareholders.

Efficient management.

Risks shifted to creditors.

Limited recognition of different types of creditors?

Incentive for excessive risk taking?

Encouragement of fraud?

Application of the separate legal entity principle

the application of the separate legal entity principle will be discussed under the following topics:

ownership of property

employment

civil rights

distinguishing the conduct of a director from the company's conduct

corporate groups

Ownership of property

the company as a separate legal entity can own property in its own name

a company is given all of the powers of a natural person which includes the power to own and dispose of property under section 124

Macaura v Northern Assurance Co Ltd [1925] AC 619.

Mr Macaura owned a timber plantation and assigned all the timber to a company for 42.000.

He had insured the timber in his own name but had failed to transfer the insurance policy to the company.

The timber was destroyed by fire.

The insurance company refused to pay because Mr Macaura did not have an insurable interest in the timber which belonged to the company.

The House of Lords agreed that the insurance company did not have to pay.

Even a member holding 100% of shares in a company have no proprietary rights in the companys assets.

Macaura has been applied in numerous Australian cases, including the case of Associated Newspapers Ltd v FCT (1944) 69 CLR 257.

Employment

A shareholder or director may also be an employee of the company.

Control, even overwhelming control by one person, will not be enough to equate (for legal purposes) the company with the individual.

Lee v Lees Air Farming Ltd [1961] AC 12

Mrs Lees husband was the controlling shareholder of a company which operated an aerial top-dressing of farm land.

Mr Lee died in a flying accident and his widow sought compensation.

The insurer denied liability on the basis that Mr Lee could not be a servant because he was a shareholder and governing director of the company.

Mrs Lee appealed to the Privy Council against the decision of the NZ Court of Appeal that she was not entitled to workers compensation.

The Judicial Committee of the Privy Council firmly disagreed with the insurers argument.

Distinguishing the conduct of a director from the companys conduct

A company may use following methods to undertake actions:

utilise agents to conduct its business for it (just as an individual may).

rely upon one or more individuals to act not as a separate agent of the company but rather as the company itself .

Hamilton v Whitehead [1988] HCA 65

Whitehead was charged with being knowingly concerned in the commission of offences by Establish Pty Ltd.

Whitehead was the managing director of Establish and had been the person whose acts had been the actions of the company that gave rise to the commission of the criminal offences.

Could Whitehead be prosecuted for being an accessory to the companys conduct that constituted an offence, when that conduct was also his acting as the directing mind and will of the company?

Mason CJ and Wilson and Toohey JJ

the logical consequence of Salomons Case ... is that the company, being a legal entity apart from its members, is also a legal person apart from the legal personality of the individual controller of the company, and that he in his personal capacity can aid and abet what the company speaking through his mouth or acting through his hand may have done.

Civil rights

A company has the power to enter into contracts in its own name: s 127.

There are some rights which are not available to a company:

right to silence.

right to privacy.

The issue of corporate personality and civil rights in the United States.

Companies have long been recognised as persons for the purposes of the Fourteenth Amendment.

Fourteenth Amendment to the Constitution, which was enacted in 1868 to provide protection for African-Americans by prohibiting states from depriving any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws:

Santa Clara County v Southern Pacific Railroad Company (1886) 118 US 394.

Citizens United v Federal Election Commission [2008] SC 205

The United States Supreme Court held, in a 5:4 majority, that companies had the right to freedom of speech under the First Amendment.

Burwell v Hobby Lobby Stores Inc (2014) 134 S Ct 2751

Closely held corporations (called LLCs in the United States) can rely upon religious freedom to resist requirements relating to health care and contraceptive medication for employees under federal law.

Corporate groups

The expression corporate group is used to describe the situation where control of one or more companies is in the hands of another company.

There are organizational benefits of separating the management of different aspects of the enterprise and conducting them as separate companies.

Can use the doctrine of limited liability to quarantine the risk of one part of the enterprise from the assets of the remainder.

A company is a separate entity from its controllers also applies to corporate groups.

Thus, each company is itself a separate legal person: Walker v Wimborne (1976) 137 CLR 1.

However, there are exceptions to this under piercing of veil.

Subsidiary company holding company relationship.

Subsidiary

Section 46

a company is a subsidiary of another company if, and only if:

(a) the other company:

(i) controls the composition of the first companys board (s 47); or

(ii) is in a position to cast, or control casting of more than 50% of the votes that might be cast at the first companys general meeting; or

(iii) owns more than 50% of the shares of the first company; or

(b) it is a subsidiary of a subsidiary of the other company

Section 47 - control of the composition of the board- if the majority of the directors can be appointed or removed.

Section 9 - a wholly-owned subsidiary.

Holding company (s 9)

a company of which another company is a subsidiary.

Related Companies (Sections 46-50)

Related bodies corporate (s 50)

Where a body corporate is:

a holding company of another body corporate; or

a subsidiary of another body corporate; or

a subsidiary of a holding company of another body corporate;

the first-mentioned body and the other body are related to each other.

For example

Company A is a holding company of Companies B,C,D and E.

Companies B, C and D are subsidiaries of Company A.

Company B is a holding company of Company E.

Company E is a subsidiary of Company A and of Company B.

Company A,B, C, D and E are related bodies corporate.

018542000

Strict application of the principle of separate legal personality.

Industrial Equity Ltd v Blackburn (1977) 137 CLR 567

profits in a corporate group could not be consolidated to allow for the payment of a dividend, and each company had to base its dividends on its own profit.

Walker v Wimborne (1976) 137 CLR 1

the group funds could not be used to pay the debts of a particular company.

Common commercial practice and reality

Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549

Rogers AJA (at 577): The law pays scant regard to the commercial reality that every holding company has the potential and, more often than not, in fact, does, exercise complete control over a subsidiary.

Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267

Rogers CJ (Comm Div) stated (at 269):It may be desirable for parliament to consider whether this distinction between the law and commercial practice should be maintained.

Lifting and piercing the corporate veil

Introduction:

lifting the corporate veil and piercing the corporate veil.

Atlas Maritime Co SA v Avalon Maritime Ltd [1991] 4 All ER 769, Staughton LJ (at 779):

To pierce the corporate veil is an expression that I would reserve for treating the rights or liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose.

The external operation of corporations and the corporate veil jurisprudence.

Legal responsibility and liability shifting through law of agency, vicarious liability, law of negligence.

Exceptions to limited liability/ piercing the corporate veil

The following areas provide examples where the courts have been prepared to lift the corporate veil.

Equitable remedies

The corporate form is used to avoid existing legal obligations

Fraud

Agency

Group enterprises

Statutory powers

The insolvent trading provisions

Equitable remedies

Gilford Motor Co Ltd v Horne [1933] 1 Ch 935

The Court issued an injunction to prevent the company engaging in conduct that would breach the restraint of trade contract if conducted by the sole director/shareholder himself.

Did not establish a general rule that the corporate veil may be disregarded whenever a company is used as a cloak to conceal a sham or fraud.

Jones v Lipman [1962] 1 All ER 442

An order for specific performance made against the company.

Piercing veil for avoiding existing legal obligations?

Prest v Petrodel Resources Ltd [2013] 2 AC 415

The avoidance of existing legal obligations could support veil piercing but only where no other cause of action was available, and even then the court will generally be reluctant to pierce the veil.

Fraud

Fraud may allow the court to disregard the corporate veil.

If a company is used as a sham in order to conceal and perpetuate a fraud conducted by the controllers of the company, and the court will not recognise or enforce transactions entered into for a fraudulent purpose.

Re Darby; Ex parte Brougham [1911] 1 KB 95

Incorporated company was identified as a mere trading name used to conceal the identity of the promoters of the company.

Incorporating companies to conceal the true identity of the controllers = sham ??

Proving a sham will require not only improper purpose, but also intention to deceive.

Heavy evidentiary burden.

Commr for Fair Trading v TLC Consulting Services Pty Ltd [2011] QSC 233

Agency

A company may be an agent of its controller.

The mere fact that a company is dominated by a particular shareholder will not, in and of itself, create an agency relationship.

Express or implied agency?

Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116.

The City of Birmingham wanted to compulsorily acquire certain business premises. Birmingham Waste Co Ltd (S) carried out a waste business and was a wholly owned subsidiary of Smith, Stone and Knight (H), a paper manufacturing company.

Was the parent company entitled to claim compensation for the disruption to the business carried on by the subsidiary?

Were profits of S treated as those of H?

Were persons conducting business for S appointed by H?

Was H head and brain of trading venture?

Did H govern adventure, decide what should be done and determine capital?

Did H make the profits by its skill and direction?

Was H in effectual & constant control?

Agency

Control as a factor in veil lifting

Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549

Rogers AJA accepted (at 575):

There are some propositions that may safely be accepted. Thus, the potential only to exercise control over the subsidiary is insufficient. The exercise in fact of some control over the subsidiary is insufficient. Thereafter one enters the uncertain.

Agency may not be founded on only dominion and control of a company by its shareholders.

Statutory powers

Statutory provisions may ignore the veil of separation between the company and its directors.

E.g., Corporations Act 2001 (Cth) s 197 (directors of trustee companies).

s 588G (insolvent trading).

Rules of attribution allow for the determination of the acts, knowledge and intention of individuals to be treated as those of the company.

Use of practice and procedure in veil-piercing context.

Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549

Attorney-General v Equiticorp Industries Group Ltd [1996] 1 NZLR 528 at 541:

The phrase to lift the corporate veil is a description of the process by which in certain situations the Courts can look behind the corporate facade and identify the real nature of a transaction and the reality of the relationship created. It is not a principle. It describes the process, but provides no guidance as to when it can be used.

Piercing the corporate veil by statue insolvent trading

Duty to prevent insolvent trading

Directors Pt 5.7B. Division 3 of the Corporations Act

Holding Company Pt 5.7B. Division 5 of the Corporations Act

Require companys directors or any holding company to prevent incurring further debt if the company is insolvent.

If not, the companys directors or the holding company may be liable for the debts of the company.

Separate legal personality protection given to controllers of companies insolvent trading a moral hazard protection for creditors.

Limited number of cases.

May discourage corporate rescue attempts.

Insolvent trading: directors

S 588G(1) requires that:

(a) a person be a director of a company at the time when the company incurs a debt; and

(b) the company is insolvent at that time, or becomes insolvent by incurring that debt; and

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent or would so become insolvent.

S 588G(2) director is liable if they:

fail to prevent the company from incurring the debt; and

they are aware at that time that there are such grounds for so suspecting (that the company is insolvent or would become so); or

a reasonable person in a like position in the company in the companys circumstances would be so aware.

The elements of s 588G(1) are that the person (that is, the defendant):

is a director of the company;

at the time the company incurs a debt;

at the time that the company is insolvent or likely to become insolvent; and

at the time there are reasonable grounds for suspecting that the company is insolvent.

Section 588H provides four (alternative) defences.

Section 588GA contains a safe harbour for civil liability.

Consequences of breaching s 588G includes compensation for loss or damage, civil and criminal penalties and disqualification orders.

A detailed discussion will be done in Topic 5 as to s 588G.

Insolvent trading: holding companies

The holding company may incur liability to pay compensation for subsidiarys unpaid debt if the subsidiary being insolvent at the time of incurring the debt and the holding company being aware of that fact: s 588V and s 588W.

Section 588X provides defences available to a holding company (similar to directors).

Liquidator can seek compensation from the holding company (s 588W).

The holding company is not guilty of an offence for insolvent trading (s 588V(2)).

Civil penalties do not apply in relation to a holding company.

Critical perspectives on the corporate veil

The corporate veil a legal wall which illegitimately shields company owners from their legal and moral obligations.

The role of closely-held companys human agents may cause confusion to third parties.

James Hardie Group of Companies.

Use of separate legal personality and the limited liability to avoid legal obligations for asbestos claims.

Involuntary creditors (i.e., tort victims) Needs reform??

Theatrical perspective on the corporate veil

Economic Perspectives

Value-enhancing device.

Without limited liability no incentive for diversification of investment.

Decrease cost of capital.

Efficient use of resources.

Progressive Perspectives

Create negative externalities for society.

Limited protection for vulnerable stakeholders.

Feminist Perspectives

Entrench existing inequalities in society.

The role of company as a social institution in brining people together.

Corporations exist in society as an important source of rights but with that comes some concomitant special obligations as the price to be paid for recognition of those rights.

Week four: corporate governance, ASIC and managing companies

Companies are regulated through the corporate act

Corporate governance:

What is corporate governance?

There is no universal definition.

Corporate governance can be understood as describing the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.

Justice Neville Owen in the HIH Royal Commission report

Factors affecting corporate governance:

internal corporate culture

social expectations

political expectations and

expectations of capital markets

The role of law in corporate in governance

Corporations Act

Legal regulation of corporate groups, roles of the board of directors, general meetings, directors duties, the conduct of general meetings, shareholders rights and remedies, mandatory corporate disclosure, the role of auditors and the role of ASIC.

Corporate law decisions handed down by the courts.

Quasi-legal rules

ASX listing rules.

ASIC Regulatory Guides.

International and domestic advisory and harmonisation bodies.

Soft law - codes of conduct which companies may choose to adopt.

Australian accounting standards board (AASB): s 296.

Hybrid law (arises when there is enforced self-regulation, e.g. the disciplinary action taken by ASX in the removal of a listed company due to that companys non-compliance with the ASX rules).

ASX Corporate Governance Principles and recommendations

Listed companies are required to report on their compliance with the guidelines set out in the Principles and Recommendations on an if not, why not basis.

ASX Corporate Governance Principles and Recommendations, 4th ed, 2019

Principles and Recommendations are structured around, and seek to promote, 8 central principles:

Lay solid foundations for management and oversight.

Structure the board to add value.

Instil a culture of acting lawfully, ethically and responsibly.

Safeguard integrity of corporate reports.

Make timely and balanced disclosure.

Respect the rights of security holders.

Recognise and manage risk.

Remunerate fairly and responsibly.

Corporate governance issues

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

https://financialservices.royalcommission.gov.au/Pages/default.htmlAMP

Charging customers fees for services that had never been delivered.

Alteration of independent reports.

Intentional misconduct portraited as an administrative error.

Provision of uncompetitive returns.

Charging excessive management fees.

AMP apologises unreservedly and acts to accelerate change

https://corporate.amp.com.au/newsroom/2018/april/amp-ceo-announcementThe internal management of companies

Decision-making mechanisms within a company.

Resolutions of the board of directors.

Resolutions of the members in a general meeting.

The companys internal management rules provide

guidelines and procedures to facilitate decision making in companies, and

the legal framework that allows a company to act.

No single source. However, the starting point should be Corporations Act 2001 (Cth).

Historical background

Prior to 1998

Memorandum of association (explained to the outside world the companys purpose and objectives).

Articles of association (internal rules regulating the operation of the business).

Memorandum of association

Purpose and powers of the company were declared to the public.

The object clausepermitted purposes of trade.

The ultra vires rule .

Major reform initiative - Company Law Review Act 1998 (Cth).

Internal management rules post 1998

Internal management rules post-1998

The ultra vires rule was abolished in 1984.

Sections 124 and 125 of the Corporations Act.

However, No Liability companies must have an object clause limiting the companies activities to mining: s 112(2).

Section 134 of the Corporations Act.

The companys internal management rules are provided under section 134.

a companys internal management may be governed by provisions of Corporations Act that apply to the company as replaceable rules, by constitution or by a combination of both.

The Company Law Review Act 1998 (Cth) has impacted the following way:

Companies that existed or incorporated prior to 1 July 1998 had three choices:

Do nothingso that the existing memorandum and articles of association are consolidated and become the corporate constitution;

Choose to repeal their corporate constitution and accept the replaceable rules of the Corporations Act; or

Adopt a corporate constitution by passing a special resolution. The constitution adopted may include replaceable rules and/or their own draft individual provisions.

For companies registered after 1 July 1998, there are just two choices:

Do not register a corporate constitution and allow the replaceable rules to automatically apply; or

Create a specific corporate constitution that will automatically displace the replaceable rules in their entirety or in part (if so expressly stated).

The replaceable rules and the corporate constitution

The replaceable rules (RR)

The RR, like a company constitution governs the activities and operation of companies. The RR dealing with internal management are located in Corporations Act, which a company is free to adopt or reject in preference for drafting its own set of internal rules.

RRare found in the Corporations Act and will apply unless they are displaced or modified by a company's constitution.

The RR are not mandatory unless where stated to be mandatory for public companies: s 135(2).

Section 141 provides a complete list of RR, which will be found throughout the Act.

NOTE: Cannot contract out of the Corporations Act when making a corporate constitution, one can either adopt the RR or may replace them or change them when drafting the constitution.

The RR do not apply to sole member/sole director proprietary companies.

If the same person is both a member and director of the company, then the replaceable rules do not apply (s135(1)). Such companies with only one member and director have their own specific provisions in the Corporations Act (Such as ss 198E, 201F and 202C)

A contravention of the RR is not itself a breach of the Corporations Act (so the provisions about criminalliability, civilliabilityand injunctions do not apply): s 135(3).

WHY?

Replaceable rules that apply to a company have the effect as a contract (see s140).

The company adopts the RR or replaces them, therefore they become a contract between the company and its members, directors etc it does not, therefore, constitute a breach of the Corporations Act.

Mandatory rules and replaceable rules

Some rules which are designated as RR for proprietary companies however, are mandatory for public companies.

Mandatory rules cannot be displaced or modified.

E.g.,

Who can appoint a proxy?

Section 249X (replaceable rule for proprietary companies and mandatory rule for public companies).

Do mandatory rules provide an exclusive procedure?

E.g., Removal of Directors by Member (s203D) (Mandatory rule -public)

Section 203D empowers the members in a public company to pass an ordinary resolution removing a director but imposes certain procedural requirements, including giving the company two months special notice of the intention to move the resolution and a right for directors to put their case to members.

NOTE: the power of the general meeting to remove a director from office by ordinary resolution is designed as a replaceable rule for proprietary companies [s 203C].

Scottish Colonial Ltd v Australian Power and Gas Co Ltd [2007] NSWSC 1266

The corporate constitution

A document which sets out the internal operating procedures of the company.

Only public companies are required to lodge their constitution: s 136(5).

ASIC can request a copy of the corporate constitution from a proprietary company to be lodged with ASIC (s 138), or a member of the company may request a copy (s 139).

Following companies must have a constitution:

No liability companies -requirement for a mining purposes objects clause: s 112(2).

Listed companies - as the ASX Listing Rules require certain provisions to be contained within a corporate constitution, these companies cannot rely solely on RR.

Companies limited by guarantee and want to remove the word limited from their name must have a constitution.

Corporate decision making and dividon of powers

The power to make decisions may be divided into the following:

the management of the affairs of the company board of directors (s 198A).

control of the company members in a general meeting.

Once the distribution of these powers is established in the constitution it can only be altered by changing the constitution itself.

Once the board of directors is given the management power, then the members in a general meeting cannot usurp that power by passing resolutions directing the board on management issues.

Automatic Self-Cleansing Filter Syndicate Company Ltd v Cuninghame [1906] 2 Ch 34

Division of powers between company organs

Once the board of directors is given the power to make management decisions, it is very difficult to take that power away.

It is clear that, in general, a power vested by the constitution of a company exclusively in the directors cannot be effectively exercised, nor can its exercise by the directors be effectively controlled or interfered with, by a resolution of members in general meeting.

National Roads and Motorists Association v Parker (1986) 6 NSWLR 517, McLelland J (at 521)

A corporation may not be effectively managed if the directors were required to comply with directions from members under the terms of the constitution.

Capricornia Credit Union Ltd v ASIC (2007) 159 FCR 69

Management and control decisions

Management decisions matters related to the day-to-day running of a company and business operations.

Examples of management decisions.

Decisions on matters such as staffing, finance and trading operations

How to use the companys surplus funds (whether to purchase new assets, invest funds, retain funds for future use, increase wages for employees, distribute dividends to members, or buy back shares from members).

Selection of the chair of the board of directors.

Selecting/removing the CEO or other senior executives.

Examples of control decisions.

Appointment and removal of directors.

Powers given to founders in a family company.

Member approval in terms of decisions affecting companys share capital, executive an director remunerations.

Listed companies (ASX LR) making a major change or issue more than 15% of shares in a particular 12-month period.

Division of powers between company organs theoretical perspectives

Members are not able to issue directions to the board as to how to manage the company.

Members may include procedural requirements into the constitution. E.g., approval of members in a general meeting.

Economic and communitarian perspectives.

Social benefit clauses in corporate constitutions.

Low-profit, limited liability companies.

The constitution a statutory contract

Section 140 of the Corporations Act

A company's constitution and any replaceable rules that apply to the company have effect as a contract:

between the company and each member; and

between the company and eachdirectorand company secretary; and

between a member and each other member.

The parties are bound by the terms of the constitution, just like in commercial contracts, and ignorance of the terms is no excuse.

Statutory contract created under s 140 is different to normal contracts.

Limits on enforceability.

Change of contractual terms without the consent of every party.

Members, directors and secretaries can enforce provisions that affect them in those capacities.

E.g., a member can enforce the constitution only if member rights such as right to vote, right to attend meetings, right to receive information, right to receive dividends are affected.

A member cannot enforce the constitution if the breach of it affects a members rights in some third party capacity, such as employees, creditors or agents of the company.

Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88

Company solicitor an outsider right not related to the capacity as a member

The limitations of the operation and enforcement of the constitution may be addressed by the creation of shareholder agreements.

Shareholder agreements

A contract between some or all of the companys shareholders as to how they will exercise their rights in relation to the company.

Shareholder agreements are private documents.

Common provisions in a shareholder agreement are tag along or drag along clauses.

Company can also become a party to the agreement.

Bailey v NSW Medical Defence Union Ltd (1995) 184 CLR 399

Alteration of the constitution

The constitution can be legally altered by passing a special resolution (75% majority vote): s 136(2).

A sole member and director company wishing to amend its constitution need only sign a record of the amendment, which will become the minutes of the deemed meeting: s 249B.

Alterations are allowed subject to a number of statutory provisions and common law safeguards to protect minority shareholders from minority shareholders.

Procedure involved in alteration of the constitution

The notice proposing the resolution to state the change of the resolution and set out an intention to propose it as a special resolution: s 249L.

If a public company adopts or amends its constitution, it must lodge a copy of the special resolution and constitution or amendment with ASIC within 14 days: s 136(5).

Legislative restrictions on alteration of the constitution.

Section 140(2) prohibition of any imposition of further liability on members by requiring them to take up of more shares, increase their liability or agree to increased restrictions on share transfer unless a member agrees in writing.

Sections 232-234 protection of minority members against oppression or the majority acting in an unfairly prejudicially manner. (the sections afford a variety of remedies to a member in the event that the affairs of the company or an act are unfairly oppressive).

General law restrictions on alteration of the constitution.

Power to alter must be exercised bona fide in the interests of the company as a whole: Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656.

Problematic test?

Gambotto v WCP Ltd (1995) 182 CLR 432

Gambotto v WCP Ltd (1995) 182 CLR 432

The test of bona fide in the best interests of the company was not appropriate for alterations where the interests of shareholders could conflict, particularly where the purpose of the alteration was to expropriate minority shares.

The constitutional alterations should be assessed based on the nature of the proposed change.

Where an alteration did not affect the property rights of members, the alteration should be assessed according to whether the requirements of the Corporations Act were followed.

Where an alteration sought to take away property rights,

A two-step test was suggested by the majority, which was explained as constituting both procedural and substantive fairness:

Was the exercise of the power to amend the constitution taken for a proper purpose?

Would the exercise of the power operate oppressively in relation to minority shares?

A reverse onus of proof.

Gambotto v WCP Ltd has received mixed reactions.

Gambotto v WCP Ltd does not apply to:

situations where the conduct affects all members equally: Heydon v NRMA Ltd (2000) 51 NSWLR 1;

alterations made by court order: Arakella Pty Ltd v Paton (2004) 60 NSWLR 334; [2004] NSWSC 13;

schemes of arrangement (which require court approval): Re Australand Holdings Ltd (2005) 54 ACSR 687; [2005] NSWSC 835;

statutory procedures that involve capital alterations under Ch 2J of the Corporations Act: Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 40 ACSR 221; [2001] NSWCA 427;

trust arrangements: Cachia v Westpac Financial Services Ltd (2000) 33 ACSR 572; [2000] FCA 161;

joint venture agreements: King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172; [2008] NSWCA 344 (by a 2:1 majority).

The board of directors

A board is an organised group of people with the collective authority to control and foster an institution that is usually administered by a qualified executive and staff.

Corporate governance laws, e.g. are the duties and obligations imposed on company directors and officers by the corporations Act (s180-184, 588G) and by general law.

Boards are required to independently monitor management as part of their duties of care and diligence, and they are expected to become familiar with the company and how it is run and must ensure that the board is able to effectively audit the management of the company so that it can satisfy itself that it is properly run.

Functions

Overseeing the company .

Appointing and removing CEO.

Ratifying the appointment /removal of senior executives.

Input and approval of corporate strategy and performance objectives.

Reviewing and monitoring risk management and internal controls.

Monitoring senior executives.

Requirement for directors

Public companies: s 201A(2) - minimum 3 directors (2 residing in Australia).

Proprietary companies: s 201A(1) minimum 1 director (residing in Australia).

Qualifications (s 201B)

an individual who is at least 18

a disqualified director can be re-appointed with the permission of the ASIC (s 206F) or with the leave granted by the court (s 206G).

Appointments

A company may appoint apersonas adirectorby resolution passed in general meeting: s 201G (replaceable rule--see section 135).

Directors may appoint other directors: s 201H (replaceable rule--see section 135).

Special rules applied to public and proprietary companies: s 201E (public companies) and s 201F (single director/shareholder; Pty Ltd).

De facto and shadow directors

Decision making by the board of directors

Directors are to make decisions collectively by voting on resolutions at director's meetings.

S 248G resolutions passed by the majority of votes.

Delegation of board powers

Managing Director

1 or more directors can be appointed as the managing director of the company: s 201J

the managing director can be conferred of any of the powers that the directors can exercise: s 198C

the directors of a company may delegate any of their powers to a committee of directors or a director or an employee of the company or any other person: S 198D

An individual will cease to be a director if they resign, their term expires, by death, mentally incapacitated, by disqualification, automatic termination or removal.

Inspection

Section 198F(1) gives currently serving directors (but not their agents) the right to inspect books, other than financial records, at all reasonable times for the purposes of a legal proceeding to which they are a party or wish to bring against others or believes may be brought against them.

Section 290 of theCorporations Act 2001outlines the right of access for a currently serving director to financial records (which are defined in a relatively limited way in s 9) at all reasonable times.

Former directors have the right to inspect books, including financial records, for up to seven years after ceasing to be adirector. Again, this only applies for the purpose of a legal proceeding. See 198F(B)

Members of a company

Members

Members and shareholders are they the same?

A person becomes a member

At the point of registration if the person is specified in the application with their consent as a proposed member: s 120

Subsequently by agreeing to become members and have their name entered in the companys register of members.

Company meetings

The usual way in which decisions are made in companies

There are two main categories of meetings:

Directors meetings

Ordinary meetings

Extraordinary meetings

Meetings of members

Ordinary meetings

Extraordinary meetings

Ordinary meetings An ordinary meeting is usually scheduled at a regular time and is held to keep the participants informed and make decisions on particular matters.

E.g., Directors meetings (once a month) and members (an annual members meeting).

Extraordinary meetings An extraordinary meeting is held to consider some urgent matter that cannot wait until the next ordinary meeting.

Key principles for meetings

Fundamental principles of the law of meetings:

A meeting will not be valid unless it has been called on proper notice.

Meetings must only be held for a proper purpose.

The chair of the meeting must conduct the meeting in an unbiased and professional manner.

A meeting will only be properly constituted if a quorum is present at all times during the meeting .

While meetings may be held formally, it is also possible for resolutions to be passed via a circulating resolution (but not for meetings of the members of public companies) : s 249A and s 249B

Directors meetings

Part 2G.1 of the Corporations Act contains provisions that apply to directors meetings.

However, these are almost all replaceable rules.

The conduct of directors meetings will be determined largely by the terms of the companys constitution.

A proprietary company with only one director can make decisions by signing resolutions: s 248B. The resolution must still be recorded in the companys minute book for directors meetings: s 251A.

Notice

Some level of informality allowed in relation to notice for regular meetings.

Section 248C (a replaceable rule) specifies that a directors meeting may be called by any director giving reasonable notice individually to each other director.

Sliteris v Ljubic [2014] NSWSC 1632, notice sent to a directors fax number of a meeting coming up in several days time was reasonable notice.

Use of technology

Possible to use video or tele-conferencing, or to pass circulating resolutions: s 248A.

Directors meetings may be held using technology, provided that all directors agree: s 248D.

Voting

Each director will usually have one vote, with resolutions passed by the majority: s 248G.

If there is no majority, the chair of the board may or may not have a casting vote depending on what is in the constitution: s 248G.

However, once a decision is made by the board, all members are usually expected to support the decision in public, as the board acts as a collective

Quorum for a directors meeting at least two directors. Conflict of interests situation can be addressed by constitutional provisions.

Members meetings

Who are members?

members at registration of the company and people who subsequently agree to become members and have entered their names in the members register; s 231/s 1072F(1)

Two types of meetings:

Annual general meetings (AGMs):

Public companies must hold an AGM within 5 months of the end of their financial year: s 250N(2).

In an AGM, annual accounts are presented, together with directors and auditors reports, directors are appointed, and remuneration of auditors are determined: s 250R.

Members can ask questions about remuneration reports (s 250SA), from auditors (s 250T), and management of the company (s 250S).

Proprietary companies (not mandatory, but most do)

Other General Meetings (called extraordinary general meetings)

Who may call a members meeting?

The board of directors

A director of the company: s 249C

Director of a listed company: s 249CA (mandatory rule)

Members can convene or requisition a meeting

Section 249D members with at least five per cent of votes in a general meeting.

Section 249E members with more than 50% of the votes of all of the members who make a request under section 249D may call and arrange to hold a general meeting if the directors do not do so within 21 days after the request is given to the company.

Section 249F members with at least 5% of the votes that may be cast at a general meeting of the company may call, and arrange to hold, a general meeting. Members incur costs of the meeting.

The Court: s 249G.

Meeting members under s249D

Members requisition of a meeting under s 249D

The company will pay the expenses and organise the meeting

The request for a meeting must:

be in writing; and

state any resolution to be proposed at the meeting; and

be signed by the members making the request; and

be given to the company.

The directors must call the meeting within 21 days after the request is given to the company: s 249D(5)

The meeting is to be held not later than 2 months after the request is given to the company: s 249D(5)

Members statements

Members can request that the company distribute a statement to members regarding the proposed resolution or any other matter that may be properly considered at a general meeting: s 249P(1).

The request must be made by: members with at least 5% of the votes that may be cast on the resolution; or at least 100 members who are entitled to vote at the meeting: s 249P(2).

The company need not comply with the request if the statement is more than 1,000 words long or defamatory; or if the members making the request are responsible for the expenses of the distribution--unless the members give the company a sum reasonably sufficient to meet the expenses that it will reasonably incur in making the distribution: s 249P(9).

Members meetings notice

Notice of meetings

The general notice period is 21 days. However, the constitution can specify a longer minimum period: 249H(1).

Members can agree to a shorter notice period unanimously for an AGM and for other meetings with members with 95% of the votes: s249H(2).

Shorter notice is not permitted for removal of directors under s 203D or removal or auditors under s 329: s 249H(3)

Written notice must be given individually to each member entitled to vote and to each director and to the auditor (in person, by post, fax or email or any other way permitted by the Constitution): s 249J-K.

If a meeting convened to consider removing directors from their position on the board of a public company must comply with the requirements of s 203D.

Public listed companies must provide at least 28 days and must comply with ASX LR 14: s 249HA.

Deveraux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956.

Contents of a notice

Section 249L(1) sets out the requirements for the contents of the notice of meeting:

the time and location for the proposed meeting;

the general nature of the business to be conducted at the meeting;

any special resolutions that will be voted on (including copies of the proposed resolutions); and

details on proxy voting.

The content of the notice of the meeting must be worded and presented in a clear, concise and effective manner: s 249L(3).

Steps involved in convening a meeting are:

determine the agenda for the meeting.

determine a reasonable time and place: s 249R.

organise for the notice of meeting to be sent to members within the required time: the content of the notice s 249L

distribute the notice of meeting to members, including proxy forms and any other relevant material to members for their consideration at the meeting.

prepare material for the chair to discuss during the meeting;

receive the proxy forms at least two days before the meeting (s 250B) (not a replaceable rule);

hold the meeting and verify there is a quorum present (see s 249T);

record resolutions and keep informal minutes of the proceedings;

and enter the minutes in the companys official minute book after approval from the chair of the meeting within one month of the conclusion of the meeting: s 251A.

members meeting proper purpose

Holding a meeting for a proper purpose

Section 249Q requires that a meeting only be held for a proper purpose.

If the only resolutions proposed for a members meeting consist of management matters, then the meeting itself would be void as improper.

National Roads and Motorists Association v Parker (1986) 6 NSWLR 517

the board of directors may ignore a resolution proposed by members that cannot properly be voted upon by the meeting.

Where a meeting has multiple purposes, including both proper and improper, it may still be held in order to pursue the proper purpose

Dhami v Martin [2010] NSWSC 770; (2010) 79 ACSR 121.

ACCR v Commonwealth Bank of Australia [2016] FCAFC 80

Voting

Voting at members meetings: s 250J(1)

By show of hands with each member having one vote

By a poll of members votes

Voting by proxy

Where company members with votes in a general meeting are unable to physically attend the meeting, they may appoint a proxy.

Any member entitled to vote at a meeting may appoint a proxy holder to vote in their place for some or all of their shares.

The rules for appointing a proxy are set out in ss 250A 250BA.

A proxy holder has the same rights to participate in a meeting as the member who appointed them as a proxy (s 249Y).

Members meeting decision making without having a meeting

Decision making without meetings

A single member of a one-member company may pass a resolution by recording it and signing the record: s 249B

All members of a proprietary company may sign a document instead of passing a resolution at a meeting: s 249A.

Public companies may provide for circulating resolutions in their constitution.

Procedural irregularities

Directors meetings

Breach of directors duties

Minority oppression: s 232.

Members meetings

Courts dispensatory powers : s 1322.

Minority oppression: s 232.

Week five: duties and liabilities of directors and officers framework of duty, duty to act in good faith and duty to act for a proper purpose.

Whom directors duties owed?

Difference between fiduciary duties and other equitable duties that are not fiduciary in nature

Understand how good faith and proper purposes are assessed by the courts

Be able to identify what interests will be relevant in assessing whether conduct is in good faith in the best interests of the company; and

Be able to assess whether conduct was for a proper purpose when there are multiple potential purposes.

Framework of directors and officers duties

Power to manage the companies vested in the board of directors. This present an opportunity for fraud, mismanagement and personal gains. The way in which a company is managed will have an impact on a number of people such as employees, shareholders, creditors and general public. Decisions of directors and other officers can result in significant losses of other peoples money and thereby creating the agency problem that we discuss in module one. The governance mechanisms presented by corporations tattooed an and also the other sources include a balance between giving directoes. And managers the freedom to manage the company and also holding them accountable for decisions made in doing so.

Overview of directors and other officers duties

The duties of directors and officers arise under

common law (for example in contracts or tort of negligence, the care aspect is highlighter)

duty of care, skill and diligence

Equity and including fiduciary duties

duty of loyalty and good faith

exercise power for a proper purpose

act in good faith in the best interest of the company

Other equitable duties

confidentiality

retain discretion

duty of care

Statue

section 180 - duty of care and diligence

section 181 - duty to act in good faith and proper purpose

conflict management

section 182 - duty to not misuse position

section 183G duty not to misuse information

materials personal interest section 191 section 94 and section 195

section 588G

Source of directors duties and other officers duties

There are different sources which imposed duties on directors

common law: law of contract or that of negligence

Equity including fiduciary duties

for example, duty to act in good faith and for a proper purpose, duty to avoid conflicts of interest and duty to not make any secret profits.

Statue

Corporation Act

section 180 to 183 impose duties on directors and officers while

section 191 and 194 and 195 and 588 G applied to directors only.

Fiduciary duties

The relationship between directors and their company is classified by the law as a fiduciary relationship: hospital products Ltd v United States surgical corporation (1984) 156 Seattle 141 CLR

direct is another officer control the company and make decisions for the company. the company is therefore vulnerable to their actions and relies on the directors and officers to act properly.

equitable duties are largely reproduced in section 181-183 of the Corporations Act 2001 (Cth)

You may wonder why we can see that the relationship between the directors and officers and the company as a fiduciary relationship, a fiduciary someone who was expected to act in the interest of another person. fiduciary cannot use their knowledge or position to benefit themselves rather than the person on whose behalf the fiduciary is required to act directors and other officers controlled the company and make decisions for the company. the company is therefore vulnerable to the actions and relies on these directors and officers to act properly. the fiduciary duty stems from equitable principles developed through case law. the fiduciary duties include duty to act in good faith, in the best interest of the company, duty to exercise powers for proper purposes, duty to retain discretion. discretionary powers and duty to avoid undisclosed conflict of interest also a duty of care, that directors owe to the company but make note that this is not the fiduciary duty. These duties are supplemented by various territory duties in the Corporations Act amended in chapter 2 section 182 and 183. Now whats been done by these statutory duties is they often restate but do not replace or override fiduciary duties.

Difference between fiduciary and statutory duties

Fiduciary duties Statutory duties

The treaties are generally enforced by the company or the liquidator.

remedies include compensation or damages, account of profits, recession of contract, injunction, constructive trust and other equitable orders. Generally the directors and offices are duties to the company not to individual shareholders, classes of shareholders or other individuals.

codified in section 181 183

ASIC or the company can enforce the duties

designated civil penalty provisions

remedies include pecuniary penalty order, disqualification order, contravention order or civil penalty compensation order.

criminal liability where after dishonestly for some civil penalty breaches.

insolvency provisions

Directors and officers duties to whom

Duties owe to the company.

Economic communitarian and feminist perspectives

to the company as a whole

Bell Group Ltd (in liq) v Westpac Banking Corp (no9) (2008) WASC 239 [AT[4939]

The general principle stated in Greenhalgh does not mean that the general body of shareholders is always and for all purposes the same embodiment of the company as a whole. it will depend on its context, including the type of company and the nature of the impugned activity or decision. And it may also depend on whether the company is thriving ongoing entity or whether its continued existence is problematic. in my view the interests of shareholders and the interests of the company may be seen as correlative not because the shareholders are the company but, rather, because the interests of the company and the interests of the shareholders in intersect.

GENERAL PRINCPLES

But what about individual shareholders, employees, nominee directors, corporate groups and creditors?

Duties are not allowed to

individual shareholders

Percival v wright [1902] 2 Ch 421

however individual directors may act in such a way as to generate an independent finisher E duty being over to a particular shareholder

potential investors

creditors

employees

Individual shareholders

Duties are owed to collective bodies of shareholders not to particular shareholders individually: Percival v Wright [1902] 2 Ch 421.

Exceptions to the general rule based on the nature of the relationship between the particular directors in particular shareholders (fiduciary relationship)

Coleman v Myers [1977] 2 NZLR

in this case the purchase of shares by a director in a closely held family company (that is a company with few shareholders) was found to give rise to fiduciary relationship between purchaser (director) and the seller (shareholder) because of the trust and reliance elements in the relationship.

Instances in which a special fiduciary relationship will be recognised

Brunninghausen v Glavanics [1999] NSWCA 199

Brunninghausen is the sole director

Crawley v Short [2009] NSWCA 410 at [22] - the following All the circumstances in which a special fiduciary relationship between a shareholder and a director can arise:

one shareholder undertakes to act on behalf of another shareholder

one shareholder is in position to have special knowledge and knows that another shareholder is relying on her to use that knowledge for the advantage of another shareholder as well as herself and

where the company is in reality air partnership in corporate guise

the duties are not owed to potential investors: ASIC v Maxwell [2006] NSWSC 1052

Employees

Directors and officers do not owe a duty to consider the companys employees ahead of shareholder interests.

Parke v Daily New Ltd [1962] Ch 927

Bonus payments to employees as compensation for their dismissal following a sale of the companys business.

Held: Not a proper use of company funds. The company may provide extra benefits to employees but only if it delivers a benefit to the company.

Part 5.8A of the Corporations Act 2001 (Cth)

Directors liability for transactions defeating worker entitlements.

Holyoake industries (Vic) Pty Ltd v V-Flow Pty Ltd (2011) 86 ACSR

Parke v daily news ltd [1962]

Nominate directors

Nominee Directors

Appointed to represent the needs and interests of a particular stakeholder group. E.g., a major shareholder, a large creditor or joint venture representatives.

Nominee directors can act in the best interests of his or her appointing shareholder, providing that the interests of that shareholder do not conflict with the best interests of the company.

Re Broadcasting Station 2GB Pty Ltd [1964-1965] NSWR 1648

The directors conduct would have been in breach of duty had it been proven that the directors would have acted for the nominee even if that would have harmed the companys interests.

Broadcasting station 2GB Pty ltd NSWR 1648

Corporate groups

Directors of subsidiary companies must act in the best interests of those companies and not merely for the benefit of the larger corporate group.

Walker and Wimbourne (1976) 137 CLR 1

Chaterbridge Corp Ltd V Lyoyds Bank [1970]

the court held that where there is no evidence of actual consideration of the subsidiarys interests, the directors may be found to have acted properly provided thats:.an intelligent and honest man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company.

Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 11 ACSR 642

Section 187 directors of wholly owned subsidiaries.

Creditors

Creditors interests must be taken into account in insolvency situations.

Walker v Wimborne (1976) 137 CLR 1

Any failure by the directors must take into account the interests of its shareholders and its creditors will have consequences for the company as well as for them.

However, creditors have no independently enforceable duty against directors.

Kinsela v Russell Kinsela Pty Ltd ( in liq) (1986) 4 NSWLR 722

as the company enters insolvency, the primary beneficiaries of directors duties change from the shareholders as a whole, to that of the creditors as a whole.

the fiduciary duty to consider creditor interests during insolvency cannot be relaxed or removed by the shareholders.

Westpac Banking Corporation v The Bell Group Ltd (In Liq) [No 3] [2012] WASCA 157

Corporate Social Responsibility

The normative question of to whom should directors of a company may owe a duty?

The use of Corporations Act to facilitate socially responsible behaviour

S 181 duty to act in the best interest of the company.

Company?

Can we use directors duties to achieve better CSR practices?

Corporations and Markets Advisory Committee, The Social Responsibility of Corporations , December 2006.

Parliamentary Joint Committee on Corporations and Financial Services, Corporate Responsibility: Managing Risk and Creating Value , June 2006.

Lessons from other jurisdictions

Companies Act 2006 (UK).

Enforcement Of Directors And Officers Duties

General law (common law and equitable) duties: The company has standing to enforce

Foss v Harbottle (1843) 67 ER 189

Statutory duties

Company has the standing to apply for compensation orders for breach of civil penalty provisions: s 1317H

Company can seek an injunction: s 1324

Board of directors has the authority to pursue litigation on behalf of the company not individual directors.

What about creditors and shareholders?

Statutory derivative action under Pt 2F:1A

Section 1324 or minority oppression provisions under s 232

ASIC

Criminal and civil proceedings (e.g., civil penalty provisions, section 1323)

Directors duties: who is a direct? Who is an officer?

Section 9 - "director" of a company or other body means:

(a) a person who:

(i) is appointed to the position of a director; or

(ii) is appointed to the position of an alternate director and is acting in that capacity;

regardless of the name that is given to their position; and

(b) unless the contrary intention appears, a person who is not validly appointed as a director if:

(i) they act in the position of a director; or

(ii) the directors of the company or body are accustomed to act in accordance with the persons instructions or wishes.

Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body.

Note: Paragraph (b)--Contrary intention--Examples of provisions for which a person referred to in paragraph (b) would not be included in the term "director" are:

* section 249C (power to call meetings of a company's members)

* subsection 251A(3) (signing minutes of meetings)

* section 205B (notice to ASIC of change of address).

Asic v Macdonald (no11) (2009) NSWSC 287; (2009) 259 ALR 199 (James Hardie Original case)

The decision: found non executive directors of James Hardie industries ltd (JHIL) breached their duties as directors in approving a misleading announcement to the ASX, while the shafron decision (of vital interest for all general counsel and company secretaries) found that peter

Shafron v ASIC (2012) 247 CLR 465 [2012] HCA 18

Issue was shafron an officer of James Hardie industries? Did he act in two different and separate roles?

He made significant decision which made it an officer

Participate in making decision court explains the meaning of the phrase.

Gillfillan v Asic [2012] NSWCA 370 (the importance of minutes)

Put false ASX report and failed to record minutes

Court found: Barret JAs observation

ASIC v Vines (2005) 55ACSR 617; [2005] NSWSC 738 AT [1049]

The definition of executive officer is to identify

Buzzle operations Pty Ltd (in liq) v Apple

Capacity of member and found shadow directors

Who is a director under section 9?

Officially appointed as directors

De facto directors

(para (b)(i)) - a person who acts as if they were a director even though they are not properly appointed.

Grimaldi v Chameleon Mining NL (N o 2) [2012] FCAFC 6

to be a de facto director one must be shown to have assumed or performed functions which only a de jure director or board can properly perform; or which are the sole responsibility of a director or board.

Participation in the decision making process.

Shadow directors

(para (b)(ii)) - a person who most likely does not believe they are a director of the company, but who has a measure of control over the board.

A company cannot be appointed as a director. However, a company may act in such a way as to render itself a shadow director: Standard Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) (1995) 38 NSWLR 290

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 82 ACSR 703

Pattern of behaviour, influence over the behaviour of majority of the board, no need to seek to control every facet of the company.

Section 9 states 3 possible directors

Officers of a company

Section 9 - officer" of a corporation means:

(a) a director or secretary of the corporation; or

(b) a person:

(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(ii) who has the capacity to affect significantly the corporation's financial standing; or

(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation); or

(c) a receiver, or receiver and manager, of the property of the corporation; or

(d) an administrator of the corporation; or

(e) an administrator of a deed of company arrangement executed by the corporation; or

(ea) a restructuring practitioner for the corporation; or

(eb) a restructuring practitioner for a restructuring plan made by the corporation; or

(f) a liquidator of the corporation; or

(g) a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

Note: Section 201B contains rules about who is a director of a corporation.

Who is an officer under section 9?

A director or secretary of the corporation.

Anyone qualified under para (b)

the capacity to affect corporations financial standing must be exercised as part of the companys governing structure.

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010) 77 ACSR 410; [2010] NSWSC 233

Active participation in policy and decision making = taking part in management

Commr for Corporate Affairs v Bracht [1989] VR 821

Shafron v ASIC (2012) 247 CLR 465

General Counsel and Company Secretary of James Hardie Industries Ltd.

Australian Securities and Investments Commission v King [2020] HCA 4

Types of directors and officers

Types of directors

Executive director

Non-executive director

Chair of the board

Alternative director

Nominee director

Managing director

Governing director

Types of officers

Chief executive officer

Chief financial officer

Company secretary (panorama developments (Guilford) ltd v fidelis furnishing court of appeal) automatically a officers. S188 (1)

General counsel

Directors duties and role and powers of ASIC

Directors owe a duty not only to the company, but also to the state.

ASIC can bring civil proceedings against directors even when company may not have a claim.

Contravention of directors duties can be both a private and a public wrong.

Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023

ASICs approach to regulation

Responsive regulation.

Enforcement pyramid.

Risk based approach to regulatory resource allocation.

Report card of ASICs enforcement of civil penalty provisions.

Failure to comply with Corporation Act

Contravention failure to observe provisions of the Corporations Act.

Contravention

can be an offence contravention punishable by criminal sanctions of imprisonment or fine (pecuniary penalty), or

leads to an offence if additional elements are proved.

Contraventions with only civil consequences.

Failure to comply with provisions of the Corporations Act can results in only void or voidable transactions.

Failure to comply with provisions of the Corporations Act can results in void or voidable transactions + a contravention.

ASIC Investigation

ASICs role and powers in relation to defective corporate governance

Criminal prosecutions

Three main types of criminal prosecution

Corporate office commits a crime under the Corporations Act or ASIC Act in relation to the management of the company affairs.

Simple summary offenses.

Serious offences (i.e., breach of ss 184, 344(2) and prosecuted by Commonwealth Director of Public Prosecution (CDPP).

Corporate office commits a crime of general application. (i.e., offences under Pt 9.4, Ch2E and Ch2J of the Corporations Act, bribery, corruption etc.)

The corporation commits a crime and officers are personally made responsible. (Directors Liability Provisions - Council of Australian Governments, Personal Liability for Corporate Fault: Guidelines for Applying COAG Principles, 23rd July 2012)

Civil penalty proceedings

Civil penalty provisions (includes sections 180 183).

Enforcement of civil penalty provisions through Pt.9.4B of the Corporations Act.

Declaration of contravention: s 1317E(1).

Further relief may be sought by way of

a pecuniary penalty order: s 1317G.

a compensation order: s 1317H.

a disqualification order: s 206C.

Pecuniary penalties

Section 1317G(1) pecuniary penalty limits for individuals and companies.

In order to satisfy s 1317G(1) the contravention must

materially prejudices the interests of the corporation, scheme or fund, or its members; or

materially prejudices the corporation's ability to pay its creditors; or

is serious

Section 1317G(1)(IA) pecuniary penalty for continuous disclosure breachers.

The principal purpose of a pecuniary penalty is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct.

Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80; [2002] NSWSC 483 at [125]

Treasury laws amendment (strengthening corporate and financial sector penalties) Act 2019 commenced on 13 March 2019

Maximum prison penalties for the most serious offences have increased to 15 years including breaches of directors duties, false or misleading disclosure and dishonest conduct.

Increased civil penalties for individuals and companies

Under the new penalty provisions, the maximum civil penalty for individuals is the greater of 5,000 penalty units (currently $1.11 million) or three times the benefit obtained and detriment avoided.

The maximum civil penalty for companies is the greater of:

50,000 penalty units (currently $11.1 million)

three times the benefit obtained and detriment avoided, or

10% of annual turnover, capped at 2.5 million penalty units (currently $555 million).

The value of a penalty unit is prescribed by the Crimes Act 1914 and is currently $222 for offences committed on or after 1 July 2020.

Compensation order

ASIC has standing under s 1317J to apply for compensation order under ss 1317H and s 1317HA.

Court can make a compensation order whether or not a declaration of contravention has been made.

but for test for causation: Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102

Only damages that has resulted from the defendants contravention can be subject of a compensation order.

The corporation may apply for a compensation order; s 1317J(2)

Disqualification

Disqualification may occur in one of the three ways:

automatically on the happening of certain events

by order of a court

by ASIC order

Under s 206A, if disqualified, it would be an offence to do the following without obtaining leave of the court to,

make or participate in decision making of the corporation, or

exercise the capacity to affect significantly the corporations financial standing, or

communicate instructions or wishes to directors if they knew directors are accustomed to follow such instructions or wishes or intended them to do so.

Automatic disqualification

Section 206B convictions, personal insolvency or foreign court order.

Convictions s 206B (1-2)

(1) A person becomes disqualified from managing corporations if the person:

is convicted on indictment of an offence that:

concerns the making, or participation in making, of decisions that affect the whole or a substantial part of the business of the corporation; or

concerns an act that has the capacity to affect significantly the corporation's financial standing; or

is convicted of an offence that:

is a contravention of this Act and is punishable by imprisonment for a period greater than 12 months; or

involves dishonesty and is punishable by imprisonment for at least 3 months; or

is convicted of an offence against the law of a foreign country that is punishable by imprisonment for a period greater than 12 months.

The offences covered by paragraph (a) and subparagraph (b)(ii) include offences against the law of a foreign country.

(2) The period of disqualification under subsection (1) starts on the day the person is convicted and lasts for:

if the person does not serve a term of imprisonment--5 years after the day on which they are convicted; or

if the person serves a term of imprisonment--5 years after the day on which they are released from prison.

Personal insolvency (s 206B(3-5))

(3) A person is disqualified from managing corporations if the person is an undischarged bankrupt under the law of Australia, its external territories or another country.

A person is disqualified from managing corporations if:

(a) the person has executed a personal insolvency agreement under:

(i) Part X of the Bankruptcy Act 1966 ; or

(ii) a similar law of an external Territory or a foreign ; and

(b) the terms of the agreement have not been fully complied with.

(5) A person is disqualified from managing corporations at a particular time if the person is, at that time, disqualified from managing Aboriginal and Torres Strait Islander corporations under Part 6-5 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006.

Foreign court orders (s 206B(6))

(6) A person is disqualified from managing corporations if the person is disqualified, under an order made by a court of a foreign jurisdiction that is in force, from:

(a) being a director of a foreign company; or

(b) being concerned in the management of a foreign company; or

(c) being a director of a passport fund, or of an operator of a passport fund; or

(d) being concerned in the management of a passport fund.

Disqualified by the court

On the application of ASIC and only if the court is satisfied that the disqualification is justified.

Circumstances in which court may exercise its powers are listed under Pt 2D.6 of the Corporations Act.

Contravention of civil penalty provision: 206C.

Insolvency and non-payment of debts of two or more corporations within 7 years: 206D.

Repeated contraventions of Corporations Act: 206E.

Disqualification under a law of a foreign jurisdiction: 206EAA.

Relevant factors in determining whether to make an order and the period of disqualification

Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80; [2002] NSWSC 483 Santow J at [56].

The disqualification orders can be imposed not only to protect shareholders against further abuse, but also by way of punishment, for general deterrence.

ASIC v Vizard (2005) 54 ACSR 394

Disqualified by ASIC

Section 206F

ASIC may disqualify an individual from managing a corporation for up to 5 years, if, within seven years immediately before ASIC gives a notice under s 206F, the person has been an officer of two or more corporations that have been wound up and liquidator lodged a report under s 533(1) of the Corporations Act about the corporations inability to pay its debts.

Notice of disqualification and opportunity to be heard.

Grounds for disqualification are provided under s 206F(2).

Other civil proceedings

Other civil proceedings

ASIC may intervene in corporate affairs under

s 50 of the ASIC Act when it is in the public interest.

s 234(e) of the Corporations Act nominee to bring proceedings under the statutory minority shareholder remedies.

s 1324 of the Corporations Act statutory injunction.

Enforceable undertakings

Section 93AA an alternative to civil proceedings.

Enforcement of the undertaking is possible under section 93AA(4).

ASIC Regulatory Guide 100 Enforceable Undertakings (February 2015).

Enforceable undertakings

Relief from liability

The court may relieve the person either wholly or partly from liability for negligence, default, breach of trust or breach of duty: s 1318.

Broad powers to grant relief from liability for contravention of civil penalty provisions (and other specified provisions Including proceedings under sections 588M, 588W) under s 1317S.

Ratification

The shareholders of a company may ratify the actions of directors.

Shareholders may by passing an ordinary resolution excuse the directors from liability.

However, not breach of statutory directors duties under Part 2D.

Either prospective or retrospective, but must be with full disclosure .

Accessorial liability, insurance and indemnification

Accessorial liability

accessorial liability - liable for helping someone else contravene the law

Civil penalty provisions that provide for accessorial liability

s 181(2)) , ss 182, 183 (which deal with improper use of position and improper use of information); s 209 (which deals with contravention of the related party transaction provisions in Ch 2E); s 260D (which deals with a breach of s 260A, relating to the unauthorised giving of financial assistance to acquire shares in the company); and s 674(2A) (which deals with accessories to a disclosing entitys breach of continuous disclosure laws).

Insurance and indemnification

Prohibition on giving an exemption from liabilities owed to the company: s 199A(1).

Prohibition indemnifying current or former officers and auditors from liabilities they owe to the company, for contraventions of civil penalty provisions, or to someone other than the company, for conduct that was not in good faith: s 199A(2)

Prohibition on a company from paying insurance premiums for current or former officers for liability (except legal costs) arising out of a wilful breach of duty in relation to the company of s 182 or s 183: s 199B

Duty to act in Good Faith in companys best interest and for a proper purpose

Duty to act in Good Faith in companys best interest

All fiduciaries (including company directors) have an obligation to act in good faith and in the best interests of their principal (for directors and officers, the principal is the company).

Who is the company is for the purpose of this duty?

the body of shareholders, rather than specific shareholders and not creditors or employees (shareholder supremacy).

Good faith is generally taken to refer to an obligation to act honestly.

Acting for an improper purpose may also constitute a failure to act in good faith in the interests of the company as a whole .

The duty to act in good faith a subjective test?

Good faith what is the test?

Not sufficient for a director to honestly believe what they were doing was for the benefit of the company (subjective to director).

Amiable lunatic test: Hutton v West Cork Railway Co (1883) 23 Ch D 654 at [671]:

bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational.

Subjective test with objective overlay.

Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157 at [1979][1988]

The courts will look for objective evidence that the directors actually held the belief that they were trying to benefit the company.

It may also be easier to bypass the subjective element by suggesting that such conduct is in fact a failure to act for a proper purpose.

The interest of the company what is the test?

Generally,

Interests of the company = interests of the members as a group.

Discussion under the Framework of Duties (week 4).

What about other stakeholders?

Individual shareholders

Employees

Nominee directors

Creditors

Corporate groups

Mills v Mills (1938) 60 CLR 150

Proper purpose

As part of their fiduciary duty, directors must exercise their powers for a proper purpose.

The general rule is that directors, as fiduciary agents of the company are required to exercise their powers only for the benefit of the company.

Any use of power by directors that is not undertaken for the benefit of the company is an improper use of that power and therefore a breach of fiduciary duty.

An exercise of power that is designed to secure some private advantage for the director is considered to be an improper purpose because it is outside of the purpose of benefiting the company: Mills v Mills (1938) 60 CLR 150

Improper purpose how to determine ?

Approach 1 But for test (Mills v Mills (1938) 60 CLR 150)

This approach asks whether the power would still have been exercised if the improper purpose had not existed (if the directors were not going to receive the benefit would they have acted the same way?)

Approach 2 Two step process (substantial purpose) (Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821)

Determining what the purpose of the power is (that is, why does the power exist?).

Deciding (as a matter of fact) what purpose the director had for exercising the power and whether that purpose is within the range of permissible purposes.

Applicable test

Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109 at 137,

Fiduciary powers granted to directors are to be exercised for the purpose for which they were given, not collateral purposes.

It must be shown that the substantial purpose of directors was improper or collateral to their duties as a director. The issue is not whether business decisions were good or bad; it is whether directors have acted in breach of their fiduciary duties.

Honest or altruistic behaviour does not prevent a finding of improper conduct. Whether acts were performed for the benefit of the company is to be objectively determined (that is, a proper purpose being a purpose to benefit the company). However, evidence as to the subjective intentions or beliefs is nevertheless relevant.

The court must determine whether, but for the improper or collateral purpose, the directors would have performed the act in dispute.

Mixed purposes

Mere possibility of an improper purpose does not render the exercise of power improper.

The determining consideration is what actually motivated the exercise of power.

If the directors were not going to receive the benefit would they have acted the same way?

Objective determination based on evidence of the surrounding circumstances (e.g., minutes of board meetings and internal corporate communications).

The but for test was described as follows in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285

Regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the [share] allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence the power would not have been exercised.

Directors power to issue shares

Directors have a power to issue shares

Companies have the power to issue shares under s 124.

Company affairs are managed by the board of directors under s 198A.

Power to issue shares can not be used to manipulate control of the company: Ngurli Ltd v McCann (1953) 90 CLR 425

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

Proper and improper use of power to allot shares

Proper uses of the power of allotment include:

to raise capital (Ngurli v McCann (1953) 90 CLR 425);

to foster business connections (Harlowes Nominees Pty Ltd v Woodside (Lake Entrance) Oil Co (1968) 121 CLR 483);

for an employee share scheme; and

as consideration for the purchase of an asset (Winthrop Investments Ltd v Winns Ltd (No 2) (1979) 4 ACLR 1).

Improper purposes may include:

to entrench the existing board of directors (Whitehouse v Carlton);

to fight off a hostile takeover bidder (Howard Smith);

to discriminate against particular shareholders or classes of shareholders (Mills v Mills);

to reconfigure the majority shareholdings in the company (Howard Smith); and

to issue shares as part of a remuneration scheme which the director knows he or she is not entitled to (Groeneveld Australia Pty Ltd v Wouter Nolten (No 3) [2010] VSC 533).

Statutory duty good faith and proper purpose (s181)

Section 181 elements

Act in good faith and in the best interests of the company: and

Act for a proper purpose.

The above elements are defined by reference o the fiduciary duties discussed in previous slides.

ASIC v Maxwell (2006) NSWSC 1052 at [106]

The duty is there to prevent abuses of directors powers for their own or collateral purpose.

Director must have engaged deliberately in conduct, knowing that it is not in the interests of the company.

Some positive knowledge by the director, objectively assessed, is required and will amount to an awareness that their conduct is not in the best interest of the company: ASIC v Flugge [2016] VSC 779

ASIC v Adler (2002) 41 ACSR 72

Did Adler, Williams and Foderas conduct in facilitating the $10 million loan contravene s 181?

Decision:

Adlers conduct was in breach of his duties under s 181.

The purpose of the loan was to allow Adler and entities associated with him to purchase shares in HIH so as to prop up the share price. The purpose of this transaction was not to benefit HIH (on the contrary, the company suffered a loss of $10 million) but rather to confer a private benefit on himself, which was an improper purpose and a failure to act in good faith in the best interests of HIH.

Adler, through his family company Adler Corporation, made a profit by selling its shares in HIH during this time.

Williams and Fodera were not, however, liable for breach of s 181. Although he was aware of the purpose of the transaction, Williams played a passive role in the share trading and despite the opportunity for substantial profits did not sell his shares in HIH while the share price was artificially high.

ASIC did not prove that Fodera knew about the improper purpose of the loan (although his conduct was negligent under s 180).

Remedies for breach of s181

Civil remedies at general law

Only the company not ASIC can seek remedies.

Equitable compensation, rescission of the contract, an account of profits, constructive trust, and injunction.

Section 181 is a civil penalty provision.

ASIC can seek

Declaration order

Pecuniary penalty order

Disqualification order

Compensation order

Company can only seek - A compensation order.

Section 184(1) criminal offence reckless or intentionally dishonest.

ASIC can seek

Enforcement of the criminal penalties.

R v Wilkie (2008) 220 FLR 2230: no requirement that the prosecution prove that the defendant derived any benefit from their breach of duty.

Defences and relief

Disclosure

Full disclosure and consent obtained to act under the conflict

Groenveld Australia Pty Ltd v Wouter Nolten (No 3) (2010) 80 ACSR 562

The court found that there had been insufficient disclosure to excuse the bad faith.

Relief from liability: ss 1317S and 1318

Indemnification and Insurance: s 199A

Types of directs

De-facto directors

Corporate affairs commission v Drysdale (1978) 141 CLR 236

Issue: can he be prosecuted?

Court found yes he is a de facto director.

How to establish defacto director

Grimadi v chameleon mining NL (No 2) Chameleon Minig NL v Murchison Metals Ltd (2012) 200 FCR 296; [2012]

In this case the court set out a summary of principle applicable

Shadow director

A shadow director is person who , although no formerly appointment as director, is able to exert significant influence over the

Week six: duties and liabilities and officers duty of care

Duty of care and diligence

The duty of care and diligence is imposed under both general law and statute law.

The duty of care is directed at a failure to work at a sufficient standard as expected by the community.

Directors and officers are judged by the standard of a reasonable person in the same position.

Need for accountability and dampening entrepreneurial risk-taking.

Focus on the decision making process rather than the decisions that turn out badly.

Sources of duty of care

Common Law

based in the law of torts.

a duty to act as a reasonable person would act in response to the foreseeable risks faced by the company.

the standard is not that of a reasonable director , but that of a reasonable person in the circumstance: Daniels v Anderson (1995) 37 NSWLR 438.

Equity

described as the duty of care, skill and diligence.

derived from the important role directors and managers have in the company.

the equitable duty imposed on directors is similar to the duty imposed on trustees: Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109.

skills and knowledge inherently required for the job.

Statutory duty

section 180.

based on common law and equitable duties and is no more onerous or lenient than those duties.

The statutory duty of care, skill and diligence is s 180(1) of the Corporations Act (Cth) and provides:

(1)A director or other officer of a corporation must exercise their powers and discharge their duties with a degree of care and diligence that a reasonable person would exercise if they:

(a)were a director or officer of a corporation in the corporations circumstances; and

(b)occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Traditional standard

Re City Equitable Fire Insurance Co Ltd [1925] Ch 407

Romer J (at 428-9)

A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience directors are not liable for mere errors of judgment.

A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so.

In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.

Modern standard

The AWA Litigation (two most important cases)

AWA v Daniels (1992) 9 ACSR 383

Daniels v Anderson (1995) 37 NSWLR 438

Summary of the AWA Litigation

There is a common law duty of care imposed on directors.

That duty is to be objectively assessed.

The circumstances of the company and the internal distribution of work and responsibilities are relevant in assessing the scope and content of the duty.

Both non-executive directors and corporate executives are required to monitor the performance of the company. The duty is not of a lower standard for non-executive directors, but their role within the company will be different to executives and hence will shape the requirements of their duty.

The duty applies to what a reasonable person would do in the circumstances, not simply to what the directors actually did (for example, a failure to attend meetings may be a breach of the duty. The failure to attend meetings cannot be used as an excuse to avoid liability).

Duty of care and diligence establishing liability

What would a reasonable person have done in similar circumstances?

Vrisakis v ASC (1993) 11 ACSR 162 at 212, Ipp J

[T]he question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.

Vines v ASIC [2007] NSWCA 75 at [600], Santow JA

In balancing reasonably foreseeable risk of harm against potential benefits, the starting point is to identify the powers being exercised and the duties being discharged by the officer concerned in the context of the corporations circumstances.

ASIC v Rich [2009] NSWSC 1229, (at [7201]) Austin J

The reference in s 180(1)(a) of the Corporations Act to the companys circumstances requires an assessment of:

the type of company (including whether or not it is listed on a licensed financial market);

the size and nature of its business;

the terms of its constitution;

the composition of the board;

the distribution of work and responsibility between executives and the board members; and

whether or not the company is controlled by a parent company.

Deputy Commissioner of Taxation v Clark [2003] NSWCA 91 at [108].

What constitutes breach of the standards of care and of diligence, in a particular case, will depend on a wide variety of circumstances including the precise nature of the business conducted by the company and the composition of its board. However, the case law indicates that there is a core, irreducible requirement of involvement in the management of the company.

Specific positions

The nature of the duty of care imposed on directors and officers is shaped by the nature of the role they perform.

Common roles performed by directors and officers.

Chair of the board of directors

Chief executive officer

Chief financial officer

Audit committee members

Company secretary

General counsel

Non-executive directors

Specific positions chair of the board of directors

Chair of the board of directors in charge of supervising the information flow between management and the board.

ASIC v Rich [2003] NSWSC 85

The position of chairman is not purely a ceremonial position.

The duty to keep informed exists for all directors, including the chairman.

The onerous community expectations in relation to directors must be applied to the role of company chairman as well.

ASIC v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934

Failure to understand the documents and the disclosure requirements for a publicly listed company.

Breach of duty of care and diligence as provided in s 180(1).

Specific positions chief executive officer

CEO + Chair = Good idea?

The Australian Securities Exchange (ASX) Principles of Corporate Governance recommend the roles of chair and CEO not be held by the same person.

AWA v Daniels (1992) 7 ACSR 759

Lack of full communication of information.

Permanent Building Society ( in liq ) v Wheeler (1994) 14 ACSR 109

in acting in the position as CEO and managing director of a company, a person has a positive obligation to protect the interests of the company which is not discharged by abstaining from the vote due to his perceived conflict.

ASIC v Macdonald (No 11) [2009] NSWSC 287

Specific positions chief financial officer (CFO)

The CFO is primarily responsible for the generation and distribution of financial information regarding the company, and for maintaining adequate financing for the companys operations and future plans.

ASIC v Macdonald (No 11) [2009] NSWSC 287

James Hardies CFO, Morley, was aware of relevant information regarding the limitations of the economic modelling, which he did not draw specifically to the boards attention, which was held to contravene s 180(1).

Vines v ASIC [2007] NSWCA 75

Specific Position Audio committee members

All directors have a personal responsibility to take an active role in monitoring the financial performance of the company.

Directors cannot simply trust that an internal or external auditor will adequately perform their role.

ASIC v Rich [2003] NSWSC 85

the position of Greaves as chair of the finance and audit committee imposed a special obligation on him to actively monitor the companys financial performance.

ASIC v Healey (2011) 83 ACSR 484

directors have an obligation to actively engage with the companys auditors regarding the accuracy and flow of financial information inside the company.

members of the audit committee have an obligation to keep the board informed of important matters they were aware of, such as errors in the accounts.

Specific positions company secretary

Company secretary is the most senior administrative officer within the company.

The role of company secretary may include;

helping prepare for meetings of the company

designing and overseeing compliance programs;

risk management;

investor relations (particular information releases);

organising training for directors and senior executives;

negotiating insurance coverage for the companys directors and officers; and

dealing with regulators and financial market operators.

The duty of care of a company secretary is shaped by what each particular company secretary is responsible for, and actually undertakes, inside their company.

Shafron v ASIC [2012] HCA 18 and Morley v ASIC [2010] NSWCA 331.

Specific positions general counsel

The following are important to ascertain the role of general counsel:

the tasks undertaken by the person fulfilling it,

the mutual expectations of responsibility as set out in the contract of employment,

the companys constitution, and

any direct instructions from the company.

Shafron v ASIC [2012] HCA

Shafron could not segregate his legal responsibilities between work as a general counsel and work as company secretary as Shafron did not work that way. He was appointed to perform both roles and did perform both roles

Specific positions non-executive directors

As conglomerates get larger and more complex it becomes almost impossible for the non-executive director to discharge directorial duties in any detailed and knowledgeable manner.

Rogers CJ in the AWA trial decision (at 865)

Re City Equitable Fire Insurance Co [1925] Ch 407

non-executive directors could not be held to the same standard as executive directors.

AWA v Daniels (1992) 9 ACSR 383

all directors, whether executive or non-executive, owe a fundamental duty to monitor the companys performance.

The duty is measured by what the defendant does and was supposed to do in the circumstances.

ASIC v Macdonald (No 11) (2009) 71 ACSR 368

Responsibility for defective disclosure

Defective disclosure practices.

James Hardie litigation.

ASIC v Citrofresh International Ltd [2010] FCA 27

Reasonable reliance on others

Section 189

A director can rely on information, or on professional or expert advice, provided by

an employee,

professional advisor or expert

another director or an officer

a committee of other directors

The director must in good faith bring an active and inquisitive mind to assessing the information, and cannot blindly rely on information provided by others.

Summary of factors to assess the reasonableness of reliance.

Santow J ASIC v Adler (2002) 41 ACSR 72 at [372]

Delegation of authority

Section 198D and section 190

ASIC v Healey [2011] FCA 717

Directors reliance on auditors to ensure accuracy of financial accounts.

Held: directors must ensure critical and detailed attention, and not just going through the motions or sole reliance on others, no matter how competent or trustworthy they may appear to be.

James Hardie litigation

Summary of the duty of care

Summary of the principles regarding the duty of care

In Re HIH Insurance Ltd (in liq); ASIC v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 at [372], Santow J

Pages 511 to 514 of the prescribed textbook.

The business judgement rule

The general law business judgment rule.

Harlowes Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493

Directors in whom are vested the right and the duty of deciding where the companys interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.

The statutory business judgement rule

s 180(2)

ASIC v Rich [2009] NSWSC 1229

The business judgement rule: s180 (2)

S 180(2) provides a defence for all director and other officers who make a business judgment are to be taken as complying with the duties under s 180(1) and the common law equivalent, if all the following conditions are satisfied:

make the judgment in good faith for a proper purpose; and

do not have a material personal interest in the subject matter of the judgment; and

inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

rationally believe that the judgment is in the best interests of the corporation.

Use of reasonable persons test.

In this section "business judgment" means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

ASIC V Rich [2009] NSWSC 1229

Austin J

the business judgment rule is only engaged where the conduct goes beyond a mere mistake: at [7242].

a business judgment includes steps involved in making business decisions such as matters of planning, budgeting and forecasting: at [7274].

that the concept of a business judgment is to be interpreted broadly: at [7276].

a business judgment must involve an actual decision rather than a general neglect of duties: at [7277][7278] e.g., not a defence against a failure to monitor the companys financial performance.

Section 180(2) (c) - the reasonableness of the level of information relied upon by the defendants is to be assessed according to:

the importance of the business judgment to be made;

the time available for obtaining information;

the costs related to obtaining information;

the director or officers confidence in those exploring the matter;

the state of the companys business at that time and the nature of competing demands on the boards attention; and

whether or not material information is reasonably available to the director: at [7283].

the requirement of reasonableness in relation to the level of information relied on by the defendants was not objectively assessed so as to include information that a reasonable person would have taken into account: at [7284]

Section 180(2)(d) rational requirement the director or officer knew only the things that he or she reasonably believed to be appropriate to find out.

Consequences of contravention of duty of care and diligence

General law

May give rise to a right on the part of the company to seek damages.

The company must demonstrate it has suffered loss as a result of the breach of duty.

Statutory duty

ASIC can apply for a declaration of contravention of a civil penalty provision under s 1317E, as s 180(1) is designated as a civil penalty provision.

Obtaining a declaration from the court will allow ASIC to seek a pecuniary penalty order under s 1317G, a compensation order under s 1317H (on behalf of the company) and/or a disqualification order against the individual defendant under s 206C.

The company also has the standing to seek a compensation order under s 1317H: see s 1317J.

Ratification and relief from liability

Can members ratify what would otherwise be a breach of the duty of care under the common law?

Would not act as a binding decision on the company.

a deed of release?

the minority oppression remedy.

Can members ratify what would otherwise be a breach of the duty of care under the statute law?

ratification by members cannot cure a breach of the statutory duties of company directors: Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23.

the fully informed consent of the members is relevant for the court when determining whether to give relief from liability under s 1317S or s 1318.

ASIC v Vines [2005] NSWSC 1349

Theoretical perspectives

The duty of care and diligence why?

Economic perspectives

managers, as rational economic individuals, will act to gain for themselves rather than work for the benefit of shareholders.

Shareholders bargain for a duty of care by way of voluntary economic contracting.

Possibility of duty to be contracted out ??

Who should have the right to enforce the duty?

Communitarian perspectives

the duty of care should be used to promote the interests of stakeholders, and not merely shareholders.

directors must fairly balance the interests of different stakeholders.

Lacks accountability mechanism??

Feminist perspectives

In adequacy of the individual, rights-based concepts underpinning economic and communitarian discussions regarding the duty of care.

the role of corporate law as supporting and facilitating the relationships involved in and around the corporation, including family relationships impacted by the corporation.

asking the wrong question may be??

Week seven: duties and liabilities of directors and officers loyalty

Duty of care, skill and diligence

Duty of care, skill and diligence:

theoretical perspectives.

historical standards.

current standards.

Specific positions.

The statutory business judgment rule.

Reliance/Delegation.

Insolvent trading:

director, incur a debt, insolvency, reasonable grounds, defences, safe harbour).

Conflicts of interest: nature of the directors duties

Conflicts of interest an individual director proposes to exploit an opportunity personally or for the benefit of someone other than the company.

Conflicts of interest

directors = fiduciaries.

fiduciaries are those who in service of anothers interests.

those who in service of anothers interests must avoid placing themselves in a position of conflict.

if fiduciaries place themselves in a position of conflict must disclose and obtain principals fully informed consent.

The fiduciary rules

The conflict rule

company directors must not, in any matter falling within the scope of their service, have a personal interest or inconsistent engagement with a third party, except with the companys fully informed consent.

The profit rule

company directors must not misuse their position for their own or a third partys possible advantage, except with the companys fully informed consent, and therefore they must account to the company for any gain which they make in connection with their fiduciary office.

The misappropriation rule

company directors must not misappropriate the companys property for their own or a third partys benefit

Framework for analysis

The subject of fiduciary duties

directors and other officers

executive and non-executive directors.

To whom are the duties owed?

Duties are owed to the company.

Refer to the discussion on Framework of duties in week 4 for a detailed discussion.

The topics for analysis

Conflicts of interest

The general conflict rule (see [9.060]ff):

general equitable considerations of directors conflict of interest in transactions (see [9.110]ff);and

statutory provisions regarding interested directors (see [9.130]ff).

The duty not to misappropriate corporate property.

The duty not to profit at the companys expense.

Statutory provisions regarding the improper use of information or office.

Consent to breaches of duty.

Remedies for breaches of duty.

Special cases

Multiple and nominee directorships

Financial benefits to related parties

Insider trading

The general conflict rule (pp 555- 562)

Scope of the conflict rule

Strict formulation

Boardman v Phipps [1966] 3 All ER 721

Lord Upjohn the fundamental rule of equity that a person in a duciary capacity must not make a prot out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and interest may conict.

The principal is entitled to the advice of the duciary unpolluted by the mere possibility that the advice or decision might have been inuenced by the extraneous loyalty.

Practical Approach

a director can act with a personal interest even though the director cannot be shown to have freed his or her mind of that personal interest when acting.

a conflict can be established only if personal interest was the actuating motive: Mills v Mills (1938) 60 CLR 150.

Real sensible possibility of conflict

Is the duciary in breach as soon as an abstract or theoretical conict between interest and duty arises, or must the possibility of conict be more real?

a real sensible possibility of conict: Boardman v Phipps [1966] 3 All ER 721.

signicant possibility, a real or substantial possibility of a conict, a real sensible possibility of conict, a real or substantial possibility of conict.

Alternative interpretations of real sensible possibility of conflict.

The director who is in a position of conict, or possible conict, does not have to actually pursue or prefer their personal interest. All that is required is the possibility of conict between the personal interest and duty: Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 at [263][275].

The director must pursue the personal interest: Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789 at [351][360].

Test to be applied

An objective test.

Boardman v Phipps [1966] 3 All ER 721.

Relevant factors

Activities of the company.

Canberra Residential Developments Pty Ltd v Brendas (2010) 188 FCR 140

Functions or responsibilities of directors.

Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd [2016] NSWCA 347 at [136].

Expectant or non-pecuniary interest may give rise to conflict.

Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22 .

The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239.

Extent of interest

Unlike earlier cases, the degree of interest will be considered by the courts: The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239512].

Shareholding directing mind on both sides of the transaction.

Indirect interests

The conict rule may apply to indirect forms of conicting interest: Walker v Nicolay (1991) 4 ACSR 309.

Conflict of duties

A person holding more than one fiduciary position there must be an actual conict between the duties owed in each relationship.

Fitzsimmons v R (1997) 23 ACSR 355

Full disclosure by the director and, in some cases, maybe obliged to abstain from taking part in the negotiations or voting on the transaction.

Duke Group Ltd (in liq) v Pilmer [1999] SASC 97

Non improvident transactions v improvident transactions.

Statutory provisions regarding interested directors (pp 562-576)

Disclosure Obligations: Statutory provisions

Statutory provisions regarding voting by directors who are in a position of conict.

proprietary and public companies: s 191

only public companies (listed and unlisted): s 195

Section 191

Section 191(1) Directors must disclose material personal interests in matters that relates to the affairs of the company.

s 191(1) + constitutional provisions.

Section 191(2) situations in which notice is not required.

Section 191(3) how interests are to be disclosed.

Notice must give details of nature and extent of interest and its relation to company affairs.

Notice must be given at director meeting as soon as practicable after the director becomes aware of the interest and must record interest in minutes.

Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437:

disclosure must be in sufficient detail for the board as a whole to understand the scope of benefit and potential profit to the director. Mere suggestions at a meeting are insufficient.

Groeneveld Australia Pty Ltd v Nolten (No 3) [2010] VSC 533.

Section 191(1) does not apply to a proprietary company with only one director: s 191(5).

Disclosure obligation: section 191

Section 191 (cont.)

Material personal interest

an assessment of the relationship between the advantage which the director personally expects, and the matter being considered.

Material personal interest an interest which has the capacity to inuence the vote of the particular director upon the decision to be made: McGellin v Mount King Mining NL (1998) 144 FLR 288.

Financial as we as non-financial interests.

Direct and indirect interests.

Independent legal advice to the director concerned.

Drillsearch Energy Ltd v McKerlie [2009] NSWSC 517.

Section 192

Section 192 (1) A director may give other directors standing notice about an interest.

Section 192 (2)-(5) Nature and the manner in which standing notice may be given.

Standing notice may be given before the interest becomes a materials personal interest.

Effect of disclosure under s 191

Proprietary companies section 194 (replaceable rule) (the director may vote, transaction will proceed, the director may retain the benefit and the company cannot avoid the transaction).

Public companies section 195

Consequences of breach of s 191

Breach of statutory provisions may result in criminal sanctions.

Unlike common law, statutory provisions do not affect the validity of contract or transaction: s 191(4)

Sections 191 and 192 have effect in addition to, and not in derogation of any general law rule about conflicts of interest and the companys constitution: section 193.

Disclosure Obligations: Section 195

A director of a public company must

not vote or

be present at director meeting considering matter in which director has a material personal interest.

There are three exceptions (s 195(2)):

Where interest doesnt require disclosure under s 191;

Where directors who do not have material personal interest resolve that they are satisfied that the interest shouldnt disqualify director voting/being present (subject to the constitution);

Where ASIC makes declaration or order under s 196.

Counting interested directors in a quorum.

When having an interest director results in not having quorum:

One or more directors can call GM to deal with the matter; or

If urgent or not appropriate for GM, ASIC can, under s 196, make an order or declaration to allow interested directors to vote/be present.

Consequences of breach of s 195

Breach of statutory provisions may result in criminal sanctions.

Unlike common law, statutory provisions do not affect the validity of contract or transaction: s 195(5)

Sections 195 has effect in addition to, and not in derogation of any general law rule about conflicts of interest and the companys constitution.

Misappropriation of property and information (pp 576 578)

The misappropriation rule

A director may not

apply company property for the directors personal benet.

apply company property for the benet of any other person without the authority of the company.

improperly destruct company property.

Directors remunerations only if

authorised by law;

authorised by the companys constitution; or

with the fully informed consent of the company in general meetings.

Listed companies (ASX Listing Rules)

the approval of the general meeting in respect of:

fees payable to directors (LR 10.17);

employee incentive schemes beneting directors (LR 7.37); and

termination benets exceeding a prescribed amount: LR 10.19.

Property v opportunities and information

Non-identiable property of the company.

Cook v Deeks [1916] 1 AC 554

directors who were negotiating a new contract on the companys behalf entered into the contract in their own names.

Privy Council the contract belonged in equity to the company.

Misappropriation of corporate opportunity best to be discussed under conflict and profit rules.

The misappropriation rule should be conned to cases where the directors wrongdoing relates to something which is identified conventionally property independently of the remedial circumstances of the case.

Misuse of corporate information

duciary principles v the law of breach of condence.

the duciary duty with respect to information does not depend on showing that the information is condential: Green v Bestobell Industries Pty Ltd [1982] WAR 1.

The profit rule and corporate opportunities (pp.578 589)

The profit rule

A duciary is accountable for prots made in connection with his or her duciary ofce.

The strict application of the profit rule

the duciarys liability to account is not reduced or eliminated by demonstrating that the transaction was fair to the principal or that the principal was unable to exploit the prot-making opportunity for itself.

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378.

Lord Russell said that a duciary is accountable for prot arising by reason of and in the course of his duciary ofce (at 145, 147).

Special problems of strict application of the profit rule.

Diversion of corporate opportunity

Directors are accountable to the company if they divert business opportunities away from the company and into their own business.

Chan v Zacharia (1984) 154 CLR 178

Cook v Deeks [1916] 1 AC 554

Canadian Aero Service Ltd v OMalley [1974] SCR 592

Pacica Shipping Co Ltd v Andersen [1986] 2 NZLR 328

Not to divert corporate opportunity rule applies in respect of

business opportunities that the company is actively pursuing

opportunities in which the company might reasonably be expected to be interested, given its current line of business.

SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552

need to establish a sufcient temporal and causal connection between the directors duciary duty and the business opportunity in order to establish a breach of duty.

a sufcient connection will depend upon a number of factors including, the circumstances in which the opportunity arises and the nature of it, and the nature and extent of the companys operations and anticipated future operations.

Does the companys inability to exploit the opportunity make any differences?

The answer to this question depends on whether the impediment is one which the director could possibly assist to remove.

Even if there is no reasonable prospect of the removal of the barrier facing the company, the director will still be unable to take the opportunity personally.

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378

Lord Russell of Killowen:

The rule of equity which insists on those, who by use of a duciary position make a prot, being liable to account for that prot, in no way depends on fraud, or absence of bona des; or upon such questions or considerations as whether the prot would or should otherwise have gone to the plaintiff, or whether the proteer was under a duty to obtain the source of the prot for the plaintiff, or whether he took a risk or acted as he did for the benet of the plaintiff, or whether the plaintiff has in fact been damaged or beneted by his action. The liability arises from the mere fact of a prot having, in the stated circumstances, been made. The proteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.

A more relaxed approach: Chan v Zacharia (1984) 154 CLR 178.

However, recent cases have adopted a strict approach: Warman International Ltd v Dwyer (1995) 182 CLR 544

Can directors exploit corporate opportunities which come to them in their private capacity?

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378

Lord Russell the directors of Regal obtained their prot by reason and only by reason of the fact that they were directors of Regal and in the course of the execution of that ofce.

Directors can avoid liability because the prot-making opportunity has come to them in their non-directorial or private capacity or after the termination of the duciary ofce: Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1.

Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162.

However, subsequent cases have indicated that it may be difcult to show that opportunities arose in a private, not duciary capacity.

Can the director retain The benefit of a transaction, stablishing that the transactional fair to the company?

Neither the conict nor the prot rule makes any allowance for the director to avoid liability by proving that the transaction from which he or she has beneted was fair to the company: Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378.

A director is under a duty not to disable himself or herself from making impartial decisions for the benet of the company. A director who is personally interested in a proposed transaction cannot make an impartial decision as to whether it is a fair transaction from the companys point of view.

Tribunals lack condence in its own processes as a means of assuring itself that the duciary has not taken advantage of the company.

Furs Ltd v Tomkies (1936) 54 CLR 583.

Directors resigning to exploit corporate opportunity

A director is still precluded from exploiting the opportunity

where the resignation may fairly be said to have been prompted or inuenced by a wish to acquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired: Canadian Aero Services Ltd v OMalley (1973) 40 DLR (3d) 371 at 382.

CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704.

Remedies for breach of additional duties (pp610 614)

Application of civil remedies for breach of fiduciary duties

The principal remedies are:

rescission

account of prots

equitable compensation

constructive trust

injunction

other remedies (Pt 5.7B, tracing, termination of service agreement, and tort of deceit for bribery)

Example use of available remedies depends on the nature of the breach of duty.

Where the breach relates to a contract or disposition by the company rescission coupled with orders for restitution in integrum.

Where the breach of duty involves the making of an unauthorised prot duciary account to the company for that prot.

If the breach of duty has caused loss to the company equitable compensation.

Where the duciary misappropriates company property the duciary holds the property as a constructive trustee.

Statutory provisions or garden Brighton proper use of information or position (pp 589 606)

Statutory provisions

There are two legislative provisions:

Section 182: prohibits improperly using position.

Section 183: prohibits improperly using information acquired because of position.

S182 improper use of position

Section 182(1) provides that a director or other ofcer or employee of a corporation must not improperly use their position to:

gain an advantage for themselves or someone else; or

cause detriment to the corporation.

Contravention of s 182 could be proved by demonstrating that the defendant made improper use of his or her position for the purpose of gaining an advantage (or causing detriment to the company), without showing that his or her conduct in fact caused an advantage to be gained (or detriment to be caused).

R v Byrnes (1995) 183 CLR 501.

The test of impropriety is objective, although the defendants state of mind may be relevant.

Conicts of interest may constitute improper use of position.

Re Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250.

Diamond Hill Mining Pty Ltd v Huang Jin Mining Pty Ltd (2011) 84 ACSR 616.

S183 improper use of information

Section 183(1) provides that a person who obtains information because they are, or have been, a director or other ofcer or employee of a corporation, must not improperly use the information to:

gain an advantage for themselves or someone else; or

cause detriment to the corporation.

An objective standard is used when determining if there is a contravention of s 183(1).

Section 183 can apply to information which is not condential: McNamara v Flavel (1988) 13 ACLR 619

Use of information in breach of a contractual obligation can constitute improper use of that information: Armstrong World Industries (Australia) Pty Ltd v Parma (2014) 101 ACSR 150.

The fact that the benets received by a director was reasonable does not preclude a nding that the directors made improper use of their position or information: Cummings v Claremont Petroleum NL (1992) 9 ACSR 583.

Australian Securities and Investments Commission v Somerville [2009] NSWSC 934.

Australian Securities and Investments Commission v Vizard [2005] FCA 1037.

Consequences of contravention of ss 182 or 183

ss 182 or 183 are civil penalty provisions.

Once the court makes a declaration of contravention, ASIC can then seek a pecuniary penalty order, a disqualication order or a compensation order.

A company may also seek a compensation order but not a pecuniary penalty order or a disqualication order.

A person who is involved in a contravention of section 182(1) and section 183(1) can also be held responsible.

Section 79 defines involved. A person is involved in a contravention if, and only if, the person:

has aided, abetted, counselled or procured the contravention; or

has induced, whether by threats or promises or otherwise, the contravention; or

has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

has conspired with others to effect the contravention.

Section 184 provides director will commit an offence if sections breached if use position or information obtained through position dishonestly:

With the intention of directly/indirectly gaining advantage for selves or someone else or causing detriment to the corporation; or

Recklessly as to whether the use may result in selves or someone else directly/indirectly gaining an advantage or in causing detriment in the corporation.

R v Howard [2003] NSWSC 1248.

Injunction: s 1324

Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 144 ALR 448; 23 ACSR 715

Mesenberg v Cord Industrial Recruiters Pty Ltd (Nos 1 & 2) (1996) 39 NSWLR 128

Damages pursuant to s 1324(10) not available.

Relationship between statutory provisions and fiduciary duties

Fiduciary duties are reflected in the statutory rules.

Section 182 overlaps with Regal Hastings.

Section 183 overlaps with the fiduciary duty to not misuse confidential information.

However, statutory duties are directed at specific applications of the duty.

Statutory duties do not attempt to replicate general law duty.

ss 182 and 183 are narrower than the general law principles in the following respects:

the statutory provisions apply only where the improper use of information or position is done for the purpose of gaining an advantage for the ofcer or employee or any other person or causing a detriment to the company. The general law duties do not require either a loss or detriment to the company or a prot or advantage to the ofcer; and

the statutory provisions apply only where use is made of the directors position or of information acquired by virtue of that position, whereas cases on the general law principles indicate a movement away from a strict causality requirement.

The statutory provisions are wider than the general laws rules in the following respects:

statutory provisions apply to any ofcer or employee, apparently including junior employees who would probably not be regarded as duciaries at general law;

liability arises under the statutory provisions if an advantage is gained for any other person, whereas it appears that under the general law principles, the director is not required to account for prots made by others (and thus in the Regal (Hastings) case, Gulliver was not required to account for prots made by companies in which he was interested);

the statutory provisions are civil penalty provisions, and therefore the civil consequences of contravention apply;

by virtue of ss 182(2) and 183(2), the statutory provisions are taken to apply to anyone involved in the contravention, whether or not that person is an ofcer or employee, whereas the general law principles apply only to duciaries and those who knowingly assist them;

section 183 constrains former ofcers and former employees without any time limit; while the general law principles can apply after termination of the ofcers employment, it is questionable whether they continue indenitely thereafter;

under the statutory provisions the company may recover, as a debt due to it, an amount equivalent to prot made by the person contravening the section, or by any other person;

at general law, the company can recover prot from the duciary and may be able to impose a constructive trusteeship on a third party who assists the duciary with knowledge of the breach, but the general law doctrine does not allow the company to recover from the duciary an amount equal to the third partys prot.

Caring of breaches of duty by company consent (pp606 610)

Curing breaches of duty by company consent

There are two ways a breach of duciary duty may be cured by company consent, namely:

(1) members authorisation or ratication; or

(2) consent of the board (though this is frequently inadequate).

Members authorization or ratification

Unless the constitution provides otherwise, the company in general meeting can with full knowledge of the directors interest:

authorise an interested director to act in what would otherwise be a breach of duty; or

ratify a completed act in breach of duty: Regal (Hastings) Ltd v Gulliver.

Members should be informed of both the nature and extent of the conicting interest or duty or the prot-making opportunity.

There should be a disclosure of information that the average commercial man in the street would think the members should have.

Constrains as to member approval

shareholders cannot vote in such a manner as to perpetrate a fraud on the minority.

where approval may amount to oppression, unfair prejudice or unfair discrimination.

attempt to authorise or ratify a breach of duty where the breach is tantamount to theft of the companys property, contrary to the misappropriation rule (Regal (Hastings) case, Furs Ltd v Tomkies, Cook v Deeks)

shareholders cannot ratify breaches of the statutory duties imposed upon directors: Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 215 ALR 110.

Consent of the broad

The consent of the remaining disinterested directors will not sufce to remove the companys right to complain of a breach of duty on the part of the interested director.

Co-directors can be authorised by the constitution to consent to a director being interested in a transaction or acting while having a conict of duties.

Re Gladstone Pacic Nickel Ltd [2011] NSWSC 1235 at [89]

the court would not allow a constitutional provision that allowed the board to authorise conduct which would otherwise be a breach of duty by the director to relieve the director.

Queensland Mines Ltd v Hudson (1978) 18 ALR 1

Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d)

Special cases (pp 614-625)

Multiple directorships in competing companies

The law dealing with multiple directorships has evolved. It is possible to view this evolution in three stages.

The rst stage is the 1891 judgment in London & Mashonaland Exploration Co v New Mashonaland Exploration Co [1891] WN 165, where it was stated that a person could be a director of two companies that compete with each other.

The second stage is a series of cases in which courts accepted the principle expressed in Marshonaland but expressed reservations about the principle.

The third and most recent stage is a series of cases in which courts have stated that traditional duciary principles apply where a person is a director of two companies which compete with each other such that the person will be in breach of duty where there is a real or substantial possibility of conict.

Nominee directors

A nominee director is not permitted to disregard the interests of the company: SGH Ltd v Commissioner of Taxation [2002] HCA 18.

A nominee director could be excluded from access to information where the other directors believed that the nominee would misuse the information.

Nominee directors must exercise discretion or volition of their own and cannot be puppet directors.

Companies may be vicariously liable for the negligence of their nominee directors.

The nominee directors duty to avoid conicts can be attenuated by unanimous agreement of shareholders or by a provision in the companys constitution, subject to the limitation imposed by s 199A.

A nominee director may consider the groups interests so long as an intelligent and honest man in the position of a director could reasonably have believed that the transaction was for the benet of the subsidiary.

Financial benefits to related parties of public companies (pp 625 638)

Scope of Ch 2E

The object of Ch 2E

to protect the interests of a public companys members as a whole, by requiring member approval for giving nancial benets to related parties that could endanger those interests: s 207.

According to section 208 For a public company, or an entity that the public company controls, to give a financial benefit to a related party of the public company:

the public company or entity must:

obtain the approval of the public company's members in the way set out in sections 217 to 227; and

give the benefit within 15 months after the approval; or

the giving of the benefit must fall within an exception set out in sections 210 to 216.

A shortlist of some potential practical applications of Ch 2E:

intra-group loans and loans to directors;

intra-group guarantees and indemnities;

management and consulting agreements with director-controlled entities;

supply or trading contracts with director-controlled entities;

housing loan schemes and staff discount schemes, if directors may participate;

employee share and option schemes, if directors may participate;

professional fees to a rm, if a partner is on the board; and

benets to spouses of directors.

Related party transactions: important elements

related party

Section 228(1) Controlling entities.

Section 228(2) Directors and their spouses (directors of the public company; directors (if any) of an entity that controls the public company; if the public company is controlled by an entity that is not a body corporate each of the persons making up the controlling entity; and spouses and de facto spouses of the persons referred to above).

Section 228(3) Relatives of directors and spouses (parents and children of persons referred to in s 228(2)).

Entities controlled by other related parties: s 228(5).

Related party in previous 6 months: s 228(5).

Entity has reasonable grounds to believe it will become related party in future: s 228(6).

Acting in concert with related party: s 228(7).

give a nancial benet

Section 229(1) matters to be considered when determining whether a financial benefit is given.

Section 229(2) what may consist giving a financial benefit.

Section 229(3) examples of giving a financial benefit to a related party.

entity that the public company controls

An entity controlled by a related party referred to in s 228(1), (2) or (3) is a related party of the public company unless the entity is also controlled by the public company: s 228(4).

Control under s 208 and s 228(1) and (2)

Section 50AA an entity controls a second entity if the rst entity has the capacity to determine the outcome of decisions about the second entitys nancial and operating policies.

Exemptions from s 208

Do not need shareholder approval if an exception in sections 210-216 applies. If the exception applies, directors decide whether to give a financial benefit. Exceptions include:

Arms length transactions: Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305.

Remuneration of officers or reasonable indemnities etc for legal costs/liabilities: Randall v Aristocrat Leisure Ltd [2004] NSWSC 411

Financial benefits of small amounts.

Financial benefit to closely-held subsidiaries where 100% common ownership of voting shares.

Benefits to members in capacity as members that are not discriminatory.

Benefits under court order.

Adler v ASIC (2003) 46 ACSR 504.

RG 76 Related party transactions (https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-76-related-party-transactions/)

Insider trading (pp 644-650)

Insider trading

Statutory provisions re insider trading no longer depend on the establishment of a duciary or similar connection between the trader and a relevant company.

Insider trading is now about trading with informational advantage.

Structure of Pt 7.10 Div 3 creates three prohibitions, all contained in s 1043A:

the trading prohibition;

the procuring prohibition; and

the communicating prohibition.

There are nine defences under s 1043B-M.

Consequences of contravention of Pt 7.10 Div 3 includes liability under the civil penalty provisions as well as criminal liability.

Section 182 use of position civil obligation

183 use of information civil obligation

Dont quote 184 as it is a criminal offence not civil *

Statutory Elements

Not to improperly use of position or information to

1) gain advantage or

To determinant of the company

Cases

R v Byrnes

(Definition of proper and advantage) case involved a complex situation where D was an officer of 2 companies H/C found 1. There does not need to be proof of that advantage has been gained by the D or any other person, or that detriment has been caused to corporation. 2. Improper use can exist without a purpose to cause detriment to corporation. 3. An objective to gain advantage can exist without purpose

Regal v Hastings

Cooks v Deeks

Peso silver mines v Cropper

ASIC v Aler

Defences

Reliance s189

Dlegation 190 (2)

Remedies

Company common law and equity

ASIC statutory civil penalties

S588G (not to trade insolvent) civil and criminal s588G (3)

Elements

Director at the time

Insolvent or incur debt to become insolvent

Reasonable suspicion of insolvency

Cases

Hall v Pool Man

Tovrquandss case

OCT V Clark

Defences

Reasonable grounds of solvency 588 (H) (2)

COMPETENT AND RELIABLE PERSON 588H (3)

Nonparticipation 588 (H) (4)

Remedies statutory only civil penalties 588M

S191 (Conflict of interest)

Material personal interest directors duty to

S192 (conflict of interest)

S193- Interaction of sections 191 and 192 with other laws etc. exists in addition to any rights under general law for conflict of interest or any provision of the constitution

Contravention is a civil penalty

Defences:

Arms lengths s210

Remuneration/ expense s211

Indemnity insurance s212

Small amounts

Benefit that is not discrimination s 215

Court order s16

Is the transaction invalidated s290-NO

Relief a director may request relief from liability

Civil and criminal liability

Directors can be criminally prosecuted

Defences: reliance s189

Apply the evidence on this section

Corporation act 2001 section 189

Delegation 190 (2)

Responsibility for actions of delegate

Business judgement rule (common law) s180 (2)

S182 use of position civil obligations

183 use of information civil obligation

Elements

No to improperly use position or information to

Gain advantage or

To the detriment of the company

Cases

R v Byrnes (definition of proper and advantage) case involved a complex situation where D was an officer of 2 companies H/C found.

There does not need to be proof that an advantage has been gained by D or any other person or that detriment has been caused to corporation.

Improper use can exist without a purpose to cause detriment to corporation.

An objective to gain advantage can exist without a purpose to cause detriment to the corporation, impropriety does not depend on an alleged offenders consciousness of impropriety. It consists in a breach of standard of conduct that would be expected of person in the position of the alleged offender by reasonable persons with the knowledge of the dutys powers and authority in the position and circumstances of the case.

Regal v Hastings (secret profit) issue was whether there was a breach of fiduciary duty the D because they acquired personal financial benefit. Director argued that without them, Regal would not have acquired their competitors. However, court invalidated their standby sitting that the person who has gained profit must account for these profits. This is even if the profit acquisition is not made through a fraudulent act, without bonafide reasons or only carried out for their benefit. Cannot use their position to gain personal profit in anyway.

Cook v Deeks 1916 (misappropriation of company property) issue was whether the company can claim the benefit of the contract from the defendants held the defendants while entrusted with the cs affairs had deliberately excluded and used their influence and position to exclude the company, whose interests it was their duty to protect, cannot divert in their own favour business which should properly belong to the company hey represent.

Peso silver mines v Cropper court found that Cropper was not in breach of fiduciary duty to Peso the Defender had acting in good faith and best interests of the company in rejecting the offer. The information that cropper received as a board member was in no way confidential that it was unavailable to any prospective purchaser, The C received offers to sell on a regular basis and the offer at issue was not different from any other offer. The offer wa made to Cropper as a private individual and was entirely seprate from his role as Defender therefore there was no breach found Board member that takes a change but in good faith with not breach fiduciary duty.

ASIC v Adler 2002 the court held that Adler the controller of PPE and non-executive director of HIH through making an undocumented and unsecured loan of 10 million to PPE in conjunction with insurance Ltd HIH had breached s182 as the loan was done merely to increase HIH shares incurring a loss and to the detriment of PPE Adler used his position to make the loan go ahead he knew PPE were going to suffer a loss at HIH looking better one of the directors Williams was found to have breach s180 by undertaking a contract and failing to ensure that proper safeguards were in place.

S191 (conflict of interest) Material personal interest directors duty to disclose Directors duty to notify other directors of material personal interest when conflict arises.

Must disclose material interest

Strict liability (absolute legal responsibility for an injury that can be imposed on the wrongdoer without proof of carelessness or fault. Strict liability , sometimes called absolute liability, is the legal responsibility for damages, or injury, even if the person found strictly liable was not at fault or negligent.)

No need to give notice see 8 defences s191 (2)

Doesnt apply to proprietary company with 1 director

Liability see b.1 of criminal code

S192 (Conflict of interest) Director may give other directors standing notice about an interest Power to give notice

A director of a company who has an interest in a matter may give the other directors standing notice of the nature and extent of the interest in the matter in accordance with subsection (2). The notice may be given at any time and whether or not the matter relates to the affairs of the company at the time the notice given.

Note: the standing notice may be given to the other directors before the interest becomes a material personal interest.

The notice under subsection (1) must:

Give details of the nature and extent of the interest and

Be given:

At directors meeting (either orally or in writing); or

To the other directors individually in writing. The standing notice is given under subparagraph (b) (ii) when it has been given to every director.

193 Interaction of sections 191 and 192 with other laws etc.

Exists in addition to any rights under general law for conflict interest or any provision of the constitution.

194 voting and completion of transactions directors of proprietary companies (replaceable rule see section 135)

195 restrictions on voting directors of public companies only

S208 need for member approval

Need for member approval for financial benefit

For a public company, or an entity that the public company controls, to give a financial benfit to a related party of the public company:

The public company or entity must:

Obtain in the approval of the public companys members in the way set out in sections 217 to 227; and

Give the benefit within 15 months after the approval; or

The giving of the benefit must fall within an exception set out in section 210 to 216.

Relief a director may request relief from liability

1317S (2) If:

Eligible proceedings are brought against a person; and

In the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:

The person has acted honestly; and

Having regard to all the circumstances of the case (including, where applicable, those connected with the persons appointment as an officer or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;

The court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.

See 1318- power to grant relief.

Civil

And criminal liability S184

Corporations Act 2001 Section 184

Good faith, use of information criminal offences. Good faith directors and other officers

A director or other officer of a corporation commits an offence if they:

Are reckless; or

Are intentionally dishonest; and fail to exercise their powers and discharge their duties;

In good faith in the best interests of the corporation; or

For a proper purpose

Note: section 187 deals with the situation of directors of wholly-owned subsidiaries,

Use of position directors, other officers and employees.

A director, other officer or employee of a corporation commits an offence if they use their position dishonestly:

With the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or

Recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.

Use of information directors, other officers and employees

A person who obtains information because they are, or have been, a director or other officer or employee of a corporation commits an offence if they use the information dishonestly:

With the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or

Recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.

Directors can be criminally prosecuted under s184 (1) if they breach their duties under s181, in a manner that is intentionally dishonest or reckless. There is no requirement that the prosecution prove that the defendant derived any benefit from their breach of duty (R v Wilkie 2008)

ASIC with the aid of AFP will conduct the criminal investigation following strict procedures as to how evidence is collected and making determinations as to whether a prosecution should completed. If it is minor contravention of the law, ASIC will conduct the actual prosecution in the lower criminal courts. If the matter is more serious, with the potential for an officer being sent to jail, the case will be passed to DPR.

All the provisions of the CA contain criminal sanctions for breach unless specific provision in question sates otherwise s1311. A list of criminal penalties is provided in sch 3 of the Act.

Defences

Reliance: s189

Corporation act 2001 section 189

Reliance on information or advice provided by others if:

A director relies on information, or professional or expert advice, given or prepared by:

An employee of the corporation whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned; or

A professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the persons professional or expert competence; or

Another director or officer in relation to matters within the directors or officers authority; or

A committee of directors on which the director did not serve in relation to mattrs within the committees authority; and

The reliance was made;

In good faith; and

After making an independent assessment of the information or advice, having regard to directors knowledge of the corporation and the complexity of the structure and operations of corporation; and

( c) the reasonableness of the directors reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under this part or an equivalent general law duty the directors reliance on the information or advice is taken to be reasonable unless the contrry is proved.

Delegation 190 (2)

Responsibility for actions of delegate

If the directors delegate a power under section 198D, a director is responsible for the exercise by the delegate as if the power had been exercised by the directors themselves.

A director is not responsible under subsection (1) if:

The director believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on directors of the company by this Act and the companys constitution (if any); and

The director believed on reasonable grounds; and

In good faith; and

After making proper inquiry if the circumstances indicated the need for inquiry;

That the delegate was reliable and competent in relation to the power delegated.

Business judgement rule (common law) s180 (2)

(2)A director or other officer of corporation who makes a business judgement is taken to meet the requirements of subsection (1), and their equivalent duties at. Common law and in equity, in respect of the judgement if they;

Make the judgement in good faith for a proper purpose; and

Do not have a material personal interest in the subject matter of the judgement; and

Infrom themselves about the subject matter of the judgement to the extent they reasonably believe to be appropriate; and

Rationally believe that the judgment is in the best interests of the corporation.

The directors of officers belief that the judgement is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Note: this subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) it does not operate in relation to duties under any other provision of the Act or under any other laws.

Four central obligations governing corporate behaviour (law of equity fiduciary obligations):

To act in good faith, in the best interests of the company

To act for proper purpose

To avoid conflicts of interests

Not to make a secret profit

Need to consider:

Ratification by shareholders (that a majority vote shareholder in favor or ratification would bind the company and the minority)

Defences

Relief from liability (s1318)

Equitable remedies

Compensation

Account of profits

Injunction

Constructive trust

Recission of contract

Statutory (week 5)

Good faith and proper purpose s181 (also common law)

Elements:

Act in good faith and in the best interests of the company

Act for a proper purpose

Cases:

Hutton v West Cork Railway (best interests: 2 step test 1 Bonafide 2 benefit of company as a whole)

Walker v Wimbourne 1976 (duty to act in the best interest of creditors in case of insolvency)

Percival v Wright 1902 (for the best interests of shareholders only in some instances that the duty was to apply to individual circumstances)

Parke v Daily (did not find the best interest of employees company first)

Duty to act in good faith and in the companys best interests

All fiduciaries (including company directors) have an obligation to act in good faith and in the best interests of their principal (for directors officers, the principal in the company)

The meaning of the term best interests of the company involves a consideration of who the company. Is for the purpose of the law. (directors owe their duties to the company as a whole, and this phrase refers to the body of shareholders, rather than specific shareholders and not creditors or employees)

The requirement to act in good faith is a common element of corporate regulation and is generally taken to refer to an obligation to act honestly.

Acting for an improper purpose may also constitute a failure to act in good faith in the interests of the company as a whole

It has been held that one difference between the duty to act in good faith and the duty to act for a proper purpose is that the former is based on subjective analysis while the latter is concerned with an objective test.

Note: it should not assumed that the honest director will necessarily be able to avoid liability simply by believing that what they were doing was for the benefit of the company (subjective to director).

Hutton v west cork railway co 1883 at [671]:

.. bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational.

The courts will look for objective evidence that the directors actually held the belief that they were trying to benefit the company

It may also be easier to bypass the subjective elements by suggesting that such conduct is in fact a failure to act for a proper purpose.

Proper purpose rule

As a part of their fiduciary duty, directors must exercise their powers for a proper purpose.

The general rule is that directors, as fiduciary agents of the company are required to exercise their powers only for the benefit of the company.

Any use of power by directors that is not undertaken for the benefit of the company is an improper use of that power and therefore a beach of fiduciary duty.

An exercise of power that is designed to secure some private advantage for the director is considered to be an improper purpose because it is outside of the purpose of benefiting the company (Mills v Mills (1938).

The real question is what actually motivated the exercise of power. Dixon j in Mills v Mills used an approach known as the but for test. This approach asks whether the power would still have been exercised if the improper purpose (if the directors were not going to receive the benefit would they have acted the same way?)

The court will use evidence of the surrounding circumstances, such as minutes of board meetings and internal corporate communications to assist in objectively determing the actual purpose of the directors.

But for test was described as follows in Whitehouse v Carlton Hotel Pty Ltd

. Regardless of whether the impermissible purpose was the domiant one or but one of a number of significantly contributing causes, the [share] allotment will be invalidated if the imperssible purpose was causative the sense that, but for its for presence the power would not have been exercised.

Significance: that the power to issue shares may not be used to manipulate control of the companys voting rights.

Remedies

Company can sue directors common law and equity (for e.g. injunction, recission etc discussed already)

ASIC statutory civil penalty (compensation orders and pecuniary penalties)

If a director breaches statutory duty they may face:

S1317E (1) Civil Penalty

Pecuniary order s1317G requires declaration under s1317e

Disqualification order s206C requires declaration of contravention under s1317e

Compensation 1317H

S180 care and diligence civil obligation only

Elements

To act with reasonable care and diligence

Objective test (Daniel v Anderson)

Cases

Daniel v Anderson -imposed a higher standard of care than the statutory duty, the court applied an objective duty applicable to both executive and non-executive directors. There is not a single standard of care and higher standards may be expected by those having special skills and executive directors in relation to time spent on company matters compared to non-executive members. Must have fundamental knowledge of business and keep up to date.

ASIC v Adler (14 points)

Asic v Healy 2011 each of the directors failed to: take all reasonable steps to focus and consider for themselves the content of the financial statements, failed to make enquires of management, the board audit committee or other D as to proposed statements in the statements it was found they breached their duty of care.

ASIC v Rich 2009 ASIC alleged D failed to exercise due care and diligence by failing to keep Onetells board of D informed about the true conditions, performance, prospects of Onetell especially in the period leading up to the cancellation of proposed rights issue. HELD ASIC wanted a banning order, chairman failed to advise non-executive D, found not in breach of s180 as chairman in certain circumstances had special responsibilities above those of non-executive directors.

Permanet building society wheelers case standard of care is to be measured by what a reasonable person could have done with skill and knowledge and in experience if acting for themselves. Foreseeable risk of harm has to be balanced against the potential benefits.

Defences

Business judgement rule s180 (2)

Reliance: s189

Delegation: s190 (2)

Note: directors liability for Misleading, depictive market announcements can give rise to a breach of s180 (1) see s1041H continues disclosure and prohibition against misleading or deceptive conduct in relation to financial services.

S182 Use of position civil obligations (week 6)

183 use of information vivil obligation

Elements

Not to improperly use position or information to

Gain advantage OR

To detriment of the company

Cases

R v Byrnes (definition of proper and advantage) case involved a complex situation where D was an officer of 2 companies H/C found

1. There does not need to be proved that an advantage has been gained by the defender, or any other person. All the detriment has been caused to the corporation.2. Improper use can exist without a purpose to Coles, detriment to the corporation.3. An objective to gain advantage can exist without a purpose to Coles, detriment to the corporation. Improperity does not depend on an alleged offender consciousness of impropriety. It consist in a breach of the standard of conduct that would be expected of a person in the position of the alleged offender by reasonable persons, with the knowledge of the duties powers in authority, in the position and circumstances of the case.Regal v Hasting (secret profits)Issue was the weather. There was a bridge of additionally duty of the defender because they acquired personal financial benefit. Director argued that without them Regal would not have acquired their competitors however, Court invalidated there, standby stating that the person who has gained profit must account for these profits. This is even if the profit acquisition is not me through a fraudulent act without bonafide reason, or only carried out for their benefit. Cannot use their position to gain personal profit in anyway.Cook v Deeka 1916- misappropriation of come to the propertyThe issue was whether the company can claim the benefit of the contract from the defendants. It held the defendant while interested with the companies affairs are deliberately excluded and use their influence and position to exclude the company who is interested. It was their duty to protect cannot divert in their own favour business, which should properly belong to the company, they represent.Peso silver mines v cropper - call found the Cropper was not in breach of his fiduciary duty to Peso the defendant, had acting in good faith and the best interest of the company in rejecting the offer. The information that Cropper received as a board member was in no way confidential that it was unavailable to any prospective purchaser. The company received offers to sell on a regular basis, and the offer at issue was not different from any other offer. The offer was made to copper as a private individual, and was entirely separate from his role as the definite, therefore, was no bridge found. Board members that takes a change, but in good faith, with not breaching fiduciary duties.ASIC v Adler 2002The court held that Adler the controller of PPE and non-executive director of HIH through making an undocumented, an unsecured loan of 10 million to PPE in conjunction with insurance LTD HIH had bridge section 182 as the loan was done, nearly to increase HIH is shares incurring a loss, and to the detriment of PPE. Adler used his position to make the loan go ahead, and he knew PPE were going to suffer a loss at HIH looking better one of the directors William was found to have breach section 180 by undertaking a contract and failing to ensure the proper safeguards were in place.

Defences

Reliance s189

Delegation 190 (2)

Remedies

Company common law and equity

ASIC Statutory civil penalties

Week 8 no class

Summary of week 7

Duty of Loyalty

Conflict rule

Profit rule

Misappropriation rule

Disclosure

Statutory duties re conflict (ss 182 and 183)

Related party transactions

Consent of the company as a cure

Week 9 shareholders rights and remedies

Learning objectives

After completing this topic, you should:

understand the difference between personal remedies and derivative remedies that are available to members;

be able to recognise when conduct affects a person in their capacity as a member and what remedies may be available based on that conduct;

appreciate the overlapping relationship between members remedies and the regulation of directors duties;

be able to explain how the courts assess management conduct in the context of applications for relief by members; and

be able to apply the elements of ss 232, 237 and 461 to a factual scenario.

Overview

Who is a member?

Section 231 provides: A person is a member of a company if they:

are a member of the company on its registration;

or agree to become a member of the company after its registration and their name is entered on the register of members; or

become a member of the company under section 167 (membership arising from conversion of a company from one limited by guarantee to one limited by shares).

Why do we need members remedies?

The division between decision making organs of the company.

What have we discussed so far as to the balance?

Limited resources available to ASIC.

Propriety v Public Listed companies

Different types of remedies

Remedies based on the constitution

Equitable principles

Statutory remedies

Derivative action

Minority Oppression

Winding up

Statutory injunction

Other

Theoretical perspectives

Theoretical perspectives as to members remedies

Economic perspectives

Identification of a corporation as a nexus of contracts.

Minority protection as one of choice and opportunity.

Should the court interfere with the exercise of contractual freedom?

Diversified portfolio of investments sell your shares v. fight for your rights.

Minority protection may discourage entrepreneurial risk-taking.

Communitarian and feminist perspectives

Minority members may not be able to make an effective bargain (due to information asymmetries, cognitive bias, open-ended relationships created within a corporation and the transaction costs involved).

Reinforce the dominant proprietary focus of corporate law.

Fails to the address relationship of trust and legitimate expectations between stakeholders.

The existing law reinforces a hierarchical power relationship that separates stakeholders rather than bringing them together.

Member remedies based on the company constitution

Statutory contract: s 140

Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch 881)

Breach of the statutory contract

An injunction to restrain the continuing breach.

A declaration to invalidate a resolution passed at a company meeting.

Overturn an amendment to the constitution or order that a meeting be reconvened.

Damages.

Protection from

alteration of the constitution: s 140(2).

alteration of class rights: ss 146B-246G.

Amendments authorising expropriation of shares (pp 709-714)

Gambotto v WCP Ltd (1995) 182 CLR 432

The power to alter the constitution to expropriate the share of the minority only if:

(i) it is exercisable for a proper purpose; and

(ii) its exercise will not operate oppressively in relation to minority shareholders [this was later equated with the phrase fair in the circumstances].

Limb one: proper purpose

Substantial purpose = secure the company from signicant detriment or harm.

E.g.,

Where the minority shareholder is competing with the company: Sidebottom v Kershaw Leese & Co Ltd [1920] 1 Ch 154.

To ensure the company could continue to comply with regulations governing the principal business which it carries on.

Purposes which are likely to fail the proper purpose limb, even if the expropriation satises the fairness limb:

expropriation to secure for the majority a new corporate structure or new commercial advantage.

expropriation to advance the interests of the company as a legal and commercial entity.

Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch 290.

Limb two: absence of oppression (fair in the circumstances)

Fairness contains both procedural and substantive elements.

Procedural fairness was said to require two matters:

(1) full disclosure of all material information leading to the alteration; and

(2) an independent experts valuation of the shares to be expropriated.

Substantive fairness

the price at which the shares are expropriated.

an expropriation below market price is prima facie unfair.

market price is not determinative of fairness and a variety of factors must be considered when assessing fairness, including the assets of the company, market value, dividend,; the nature of the company and its likely future.

The majority, rather than for the plaintiff minority shareholder, to prove that the amendment to the constitution is valid.

Member remedies: equitable protection

Equitable protection

Shares are treated as personal property in company law: s 1070A.

The members may exercise the votes attaching to their shares as they see fit.

Distinction between an individual members exercise of their voting rights in a meeting and the majority votes in that meeting.

The majoritys power to vote is a corporate power and must be exercised in good faith and for a proper purpose.

Gambotto v WCP Ltd (1995) 182 CLR 432

Equitable principle of fraud on a power.

Member remedies: derivative actions

A derivative action involves a member seeking to take or continue legal action in the name of the company.

The members right to sue is derived from rights held by the company but which are not being exercised.

The rule in Foss v Harbottle (1843) 2 Hare 461.

company is the proper plaintiff in a suit to enforce breaches of duties owed to it.

members may not bring a derivative suit in the name of the company in respect of matters that could be ratified by the members.

Common law exceptions to the rule in Foss v Harbottle:

the members meeting was controlled by the persons in breach of their duties;

the conduct was undertaken using an ordinary resolution but was required by the constitution or by the statute to be approved by a special resolution;

the member relied on personal rights to bring the action (such as statutory rights to sue as individual members); or

the conduct was ultra vires the company (as the members could not, therefore, ratify the conduct).

The reflective loss principle.

The statutory derivative action (SDA)

The SDA is contained in Pt 2F.1A of the Corporations Act and replaces the common law derivative action: s 236(3)

The SDA involves a person being given permission by the court to bring court proceedings or intervene in or take over existing court proceedings on behalf of the company: s 236(1).

Standing

Standing to apply for court permission under the SDA is limited to current or former members, persons entitled to be registered as members and current or former officers: s 236(1)(a).

Benefit

Given the action is derivative of the companys rights, it is the company that will receive any benefit from a successful derivative action, while the applicant may be required to bear the costs of an unsuccessful action, although the court may order that the company pay the costs of the applicant (whether successful or not): ss 241, 242

The court has the power to make a broad range of orders once permission to bring an SDA has been granted: s 240 and 241.

Ratification by the members does not prevent the SDA from being undertaken: s 239.

Ratification may be relevant, however, for assessing any final relief after permission to bring the SDA has been granted: s 239(2).

Obtaining permission to bring an SDA

The SDA procedure involves two steps:

obtaining permission to commence or take over proceedings in the name of the company; and

undertaking those substantive proceedings.

The court must grant permission to an applicant under s 236 if all of the criteria in s 237(2) are satisfied.

(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

(b) the applicant is acting in good faith; and

(c) it is in the best interests of the company that the applicant be granted leave; and

(d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and

(e) either:

(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.

Section 237(2)(b) the applicant is acting in good faith

Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583 restrictive interpretation.

Chahwan v Euphoric Pty Ltd (t/as Clay & Michel) [2008] NSWCA 52 Swansson was not an exclusive explanation.

Section 237(2)(c) it is in the best interests of the company that the applicant be granted leave.

The interests of the company as a whole or the companys separate and independent welfare: Charlton v Baber NSWSC 745 at [52].

The lack of support by other members is relevant but not determinative: Coeur de Lion Investments Pty Ltd v Kelly [2014] 1 Qd R 296.

Proceedings may be in the best interests of the company where the bringing of the proceedings may produce a benefit to the company that would outweigh the cost and risk to the company arising from the proceedings: Oates v Consolidated Capital Services Ltd [2009] NSWCA 183 at [119].

The effect of the action on the companys resources and the operation of its business is an important consideration in determining whether leave was in the best interests of the company: Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235.

Section 237(2)(c) it is in the best interests of the company that the applicant be granted leave (cont.)

Pt 2F.1A intended to apply only to company as a going concern and not one under control of a liquidator: Chahwan v Euphoric Pty Ltd (trading as Clay & Michel) [2008] NSWCA 52.

Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90 at [35] per Debelle J

Evidence required to prove leave is in the best interests of the company:

the character of the company: that is, the nature of the companys operations;

the business of the company so that the effects of the proposed litigation on the conduct of the business may be appreciated;

whether there are other means of obtaining the same redress so that the company does not have to be brought into litigation against its will; and

the ability of the defendant to meet at least a substantial part of any judgment in favour of the company so that the court may ascertain whether the action would be of practical benefit to the company.

Section 237(2)(d) there is a serious question to be tried.

to identify the legal or equitable rights to be determined at trial in respect of which the final relief is sought: Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90.

Section 237(3) provides a rebuttable presumption that the proceedings are not in the best interests of the company if the action involves the companys rights against a third party who is not related to the company (that is, not an action by the company against its directors).

Member remedies minority oppression

Operation of oppression remedy

The minority oppression remedy is found in Pt 2F.1.

Section 233 allows the court to make any number of a broad range of orders where there is a contravention of s 232.

Standing (s 234)

Following are permitted to bring an oppression action:

current members of the company;

persons who have shares transferred to them by will or operation of the law;

persons removed from the register of members because of a selective capital reduction;

former members if the application related to the circumstances that caused them to cease to be members; and

a person whom ASIC thinks is appropriate having regard to an investigation it has conducted or is conducting into the companys affairs.

Ground for court order s232

Section 232

The Court may make an order under section 233 if:

(a) the conduct of a company's affairs; or

(b) an actual or proposed act or omission by or on behalf of a company; or

(c) a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d) contrary to the interests of the members as a whole; or

(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

Section 232 (d) conduct that is contrary to the interests of the members as a whole

The concept of the members as a whole similar to the concept of the interests of the company as a whole.

Where there are competing membership interests, the conduct of the company must operate fairly between the competing interests: Peters American Delicacy Co Ltd v Heath (1939) 61 CLR 457.

Need for the conduct of the company to be in good faith in the interests of the members as a whole.

However, the court would generally substitute its opinion to that of directors and members.

Mere doubts about the benefit to members is not sufficient to establish that conduct is contrary to the members as a whole: Zephyr Holdings Pty Ltd v Jack Chia (Aust) Ltd (1989) 14 ACLR 30.

Conduct that is in breach of directors duties, such as ss 181, 182, 183, can constitute conduct contrary to the members as a whole: HNA Irish Nominees Ltd v Kinghorn (No 2) FCA 228.

Section 232 (e - oppression, unfair prejudice, or unfair discrimination

Oppression, unfair prejudice or unfair discrimination is the most common ground relied upon in s 232.

There is no requirement that the conduct affects the applicant in their capacity as a member.

Commonly used for actions by the companys directors that may constitute a breach of their directors duties.

Oppression, unfair prejudice, or unfair discrimination composite phrase that involves a test of commercial unfairness: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692. (Young J at 704)

whether objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair.

Family companies

Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332 at [178]

fairness must be considered against the background of the fair treatment of the whole body of shareholders, in the light of the history of the company and the family and the purpose for which the company was formed.

A shareholders agreement as a solution that sets out the rights and obligations of the main shareholders in the company/group of companies.

oppression

burdensome, harsh and wrongful: Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324.

Oppression is something done against a persons will and in his despite: John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Aasia) Pty Ltd (1991) 6 ACSR 63.

The concept of oppression includes an element of unfairness: Wayde v NSW Rugby League Ltd (1985) 180 CLR 459

Unfair prejudice and unfair discrimination are both concerned with how the conduct affects the minority members: that is, the conduct must be unfair.

A refusal to allow proper access to the books and records of the company may amount to oppressive conduct: Solanki v Cufari [2014] VSC 345

The courts use an objective test to determine whether conduct contravenes s 232(e).

Wayde v NSW Rugby League Ltd (1985) 180 CLR 459

The minority oppression provision does not require evidence that there has been a contravention of the companys internal rules, the Corporations Act or any other law: Thomas v HW Thomas Ltd (1984) 2 ACLC 610.

Conduct may be in breach of s 232(e) even where the defendants have acted in good faith: Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104.

The ability of a majority member to bring oppression proceedings under s 232

Re Polyresins Pty Ltd [1999] 1 Qd R 599

Watson v James [1999] NSWSC 600

Examples of minority oppression

(1) Management decisions

It is not a contravention of the oppression provision for the board to make management decisions with which the members disagree.

Shelton v NRMA Ltd [2004] FCA 1393

Payment of dividends

the failure to pay a dividend or increase the rate of dividend distributions is not, of itself, a breach of the oppression provision: Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692.

the failure to increase dividend payments in circumstances where the members had formed the company with a legitimate expectation of mutual benefit and during long-term increased profitability could amount to oppression: Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326.

(2) Supporting related companies

Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539

(3) Conduct to benefit the directors or controlling members personally

Examples of pursuit of personal gain to the detriment of the company

Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97

Vadoori v AAV Plumbing [2010] NSWSC 274

(4) Conduct that frustrates mutual expectations

the opportunity to participate in the companys management.

Exclusion from participation in management could form the basis of a contravention of s 232: Campbell v Backoffice Investments Pty Ltd [2009] HCA 25

John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Aasia) Pty Ltd (1991) 6 ACSR 63

legitimate expectation?

Remedies to minority oppression

If the court determines that a contravention of s 232 has occurred, it has a broad discretion as to what order it may make: Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd [2004] FCAFC 153.

A range of orders are provided in s 233, including orders:

that the majority buy out the minority;

winding up the company;

changing the companys constitution;

appointing a receiver to take over the management of the company; or requiring or prohibiting a person from doing an act.

The most common order is a buy-out order based on a fair price for the shares.

The goal of making orders under s 233 is to remove the oppression, and the court will seek to grant an order that achieves this goal: Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539.

Solanki v Cufari [2014] VSC 345

the court ordered the removal of a director of a company involved in a property development and the appointment of one of the two shareholders as a replacement director. A receiver was not appointed because of the adverse effect it would have had on security entered into by the company and on the sale process involving the companys properties.

Member remedies: winding up the company

Section 461 of the Corporations Act provides a range of grounds upon which the court may order a company be wound up.

The grounds specified in s 461 are concerned with circumstances where

the company is either not operating (s 461(1)(a) or (c)) or

is unable to operate (s 461(1)(d)) or

where there is some element of fraud or unfairness in its operation that justifies a winding up order: s 461(1)(e), (f) and (g).

application by ASIC to the court for a winding up order: s 461(1)(h).

Standing (Section 462(2)

the company, a creditor (including a contingent or prospective creditor) of the company, a contributory, the liquidator of the company, ASIC pursuant to section 464, ASIC (in the circumstances set out in subsection (2A)) and APRA.

The most commonly used basis for a winding up order under s 461 is s 461(1)(k), which allows the court to order winding up where it is just and equitable to do so.

Winding up the company: just and equitable grounds

The historical relevance of quasi-partnerships and irrevocable breakdown in the relationship between the controlling members.

The categories recognised by the courts are for convenience only and the equitable basis of relief allows for circumstances outside them.

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.

Common situations where wining up is just and equitable

Quasi-partnership

Where the controllers of the company can no longer work together.

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.

factors that support a winding up on the just and equitable ground

mutual trust and confidence forming the basis of the relationship between the members;

a mutual expectation of shared control and access to the commercial benefits of running the company; and

limitations on the ability of a member to exit the company, so that they may be effectively locked in even if there is a breakdown in the commercial relationship.

Justifiable lack of confidence (lack of probity)

The members lack confidence in the management of the company, usually because of some fraudulent activity.

Loch v John Blackwood Ltd [1924] AC 783

ASICs use of the justifiable lack of confidence argument where repeated contraventions of provisions in the Corporations Act: ASC v AS Nominees Pty Ltd (1995) 62 FCR 503.

Failure of substratum

The fundamental failure of the basic purpose of the company.

Re Tivoli Freeholds Ltd [1972] VR 445

Winding up for directors misconduct (p 731)

Section 461(1)(e) an order can be made where the directors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole, or unfair or unjust to other members.

Important points as to the application of section 461(1)(e).

Re Cumberland Holdings Ltd (1976) 1 ACLR 361.

it is not limited to cases where the board has acted as a whole;

the words the affairs of the company are not limited to trade or business matters, but encompass capital structure, dividend policy, voting rights, consideration of takeover offers, etc;

directors may be held to have acted in their own interests if they act in the interest of another company of which they are directors and shareholders;

the nature of the injustice or unfairness, and the extent to which this prejudices members, are matters for the court to consider in the exercise of its discretion.

Member remedies: statutory injunction

Section 1324 (1) of the Corporations Act allows the court to order an injunction restraining a persons actual or proposed conduct that does or may breach the Act.

The court may also grant a mandatory injunction requiring the person to do any act or thing: s 1324(1).

Interim injunctions are available under s 1324(4).

Section 1324(10) allows the court to grant an award of damages either in addition to or in substitution for the grant of the injunction.

Standing

Standing to apply for an injunction is given to ASIC and to any person whose interests are or may be affected by the conduct: s 1324(1).

Broken Hill Pty Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609, Hampel J stated (at 613) that the requisite interests the section requires are those:

of any person (which includes a corporation) which go beyond the mere interest of a member of the public. It is not necessary that personal rights of a proprietary nature or rights analogous thereto are or may be affected nor need it be shown that any special injury arising from a breach of the Act has occurred.

Creditors can also have standing: Allen v Atalay (1993) 11 ACSR 753

Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128

Airpeak Pty Ltd v Jetstreat Ltd (1997) 15 ACLC 715:

Statutory injunctions and directors duties

Separate legal entity principle rule in Foss v Harbottle the SDA

Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128

Young J members could not obtain relief under s 1324 for a breach of directors or officers duties under the Act because these provisions were civil penalty provisions which the Act provided as a complete code for the enforcement of civil penalty provisions, and this did not include enforcement by members.

McCracken v Phoenix Constructions [2013] Qd R 27

Restricted the availability of damages under s 1324(10), particularly in circumstances where standing to pursue damages for breaches of directors duties is limited under the civil penalty regime.

Member remedies: other

Investor class actions

Class actions are not members remedies as such, but rather provide a procedural mechanism to address similar claims from multiple plaintiffs against one or more defendants

Common areas in which investor class actions have been used:

defective corporate disclosure laws such as misleading or deceptive conduct in relation to financial services or financial products (ss 1041H and 1041I), or

breaches of continuous disclosure obligations: ss 674, 1325 (the Treasury Laws Amendment (2021 Measures No. 1) Bill amends the Corporations Act 2001).

A tool that aims to promote efficiency in civil dispute resolution by consolidating claims into a class.

Role of third party litigation funders (p742-3).

Securities class actions may be undertaken using specific class action legislation contained in Pt IVA of the Federal Court of Australia Act 1976 (Cth), with similar legislation operating in New South Wales 46 and Victoria.

Week 10: Corporate liability, promoters, pre-registration contracts and corporate contracting

Learning objectives

After completing this topic, you should:

understand how civil and criminal liability may be imposed on companies;

be able to explain the contractual capacity of companies;

be able to explain the difference between direct and vicarious liability of companies;

appreciate the different policies underpinning the imposition of civil and criminal liability on companies; and

be able to apply the statutory third party assumptions to a fact situation.

Introduction

Civil and criminal wrongs

Liability for civil wrongs

Vicarious liability

Nationwide News Pty Ltd v Naidu; ISS Security Pty Ltd v Naidu (2007) Aust Torts Reports 81-928

Primary liability

Common law

Statute law

Liability of agents to third parties

Liability for criminal wrongs

Vicarious criminal liability (common law and statute law)

Fault, strict or absolute criminal liability

Primary criminal liability by attribution

Corporate mind and will

Separate legal entity principle

Decision making organs and human intervention.

H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159 at 172

A company may in many ways be likened to a human being. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such. So you will find that in cases where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of the company So also in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or managers will render the company itself guilty.

Tesco Supermarkets Ltd v Nattrass [1972] AC 153

A living person has a mind which can have knowledge or intention to be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the companys servant or agent. In that case any liability of the company can only be a statutory or vicarious liability

The contractual capacity of companies

Corporate contracting:

Contracts can be made either

directly with the company where the person acting on behalf of the company was exercising the companys mind and will.

by an individual acting on the companys behalf was its agent.

Section 124 of the Corporations Act.

Powers of corporations

Section 125 of the Corporations Act.

Section 181 of the Corporations Act.

A company can be bound to a transaction which was entered into on its behalf when:

the transaction was entered into by someone who was acting as the company itself;

Company as a legal fiction.

Recognition that humans do not act as individuals by are exercising the companys mind and will, then it is as if the company is acting directly in the transaction.

E.g., when a companys board of directors acts collectively, or if a managing director acts on behalf of the company.

Richardson v Landecker (1950) 50 SR (NSW) 250

the Corporations Act states that a person can contractually bind the firm; or

an administrator under a scheme of arrangement;

a provisional liquidator; and

a liquidator

a person was acting as an agent and that person was acting within their authority.

Acting as an agent of the company

An individual acting on the companys behalf as its agent.

An agent may have

Actual authority

Express actual authority

Implied actual authority

Apparent authority

Section126(1) of the Corporations Act.

(3.1) Express actual authority

An individual acting on behalf of a company may be conferred with authority to undertake specific acts.

Express actual authority may be conferred in writing or made orally.

The agreement between the parties will provide the nature and scope of the authority.

(3.2) Implied actual authority

Implied actual authority will arise when an individual is given express actual authority.

Implied actual authority can arise from

if individuals have been given express actual authority, they will have implied authority to do whatever is necessary to carry out what they are expressly authorised to do.

if an individual is appointed to a position in the company, then they will have whatever implied authority accompanies that position.

The company will be liable to a third party whether or not the third party knew that the individual representing the company had authority or not.

Implied authority of an individual director

generally individual directors have no implied authority to bind the company: Re Haycraft Gold Reduction and Mining Co [1900] 2 Ch 230

Implied authority of a managing director (MD)

implied authority to do all such things that fall within the usual scope of his or her office.

E.g., MD of a trading company may employ staff, borrow money and give security over the companys property, guarantee loans and delegate some functions: Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68: British Thomson-Houston Co Ltd v Federated European Bank Ltd [1932] 2 KB 176.

Implied authority of the chair of the board

generally, the chair has no more authority to bind the company than any other director acting singly: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549

Implied authority of the secretary

implied authority to make statements and to make contracts connected with the administrative conduct of the companys business: Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711

(3.3) Apparent and Ostensible authority

Apparent authority =where a person appears to have a certain authority.

If a person appears to have a certain authority and if this appearance is created by the words or actions of another, then an agency relationship may be created.

The party who gives the appearance that another has a certain authority must themselves have actual authority to manage the business of the company.

Apparent or ostensible authority can be inferred from general law principles or from the statute.

holding out

are where the principal allows the agent to occupy a particular position within the company and where the principals conduct acts as a representation that a person has authority to bind the firm.

Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

According to Diplock LJ (at (QB) 506), following four conditions must be fulfilled to entitle a person dealing with a company to enforce a contract with the company when the contract was entered into on behalf of the company by an agent who had no actual authority to do so.

(1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;

(2) that such representation was made by a person or persons who had actual authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

(3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and

(4) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced orto delegate authority to enter into a contract of that kind to the agent.(no longer relevant in view of s125)

A representation of authority cannot be made by a person who as only apparent authority

A representation of authority can only be made by a person with actual authority.

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72.

Representations of authority can be made by either the board of directors or the shareholders at a general meeting.

Individuals cannot make a representation as to their own authority which will be tantamount to a representation of the company unless, that is, the company has stood by in circumstances where they would be estopped by their conduct: Corpers (No 664) Pty Ltd vNZI Securities Australia Ltd (1989) ASC 55-714.

Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 6ACSR 353

A person who assumes office of their own volition can be regarded as being held out by the company by acquiescence: Mahony v East Holyford Mining Co Ltd (1875) LR 7 HL 869

The indoor management rules

Common law:

The indoor management rule (IMR) entitles a person dealing in good faith with a company to make certain assumptions.

Royal British Bank vTurquand (1855) 5 El &Bl 248

A presumption of regularity.

IMR applies in relation to

appointments

conferring of authority

satisfaction of conditions

Northside Developments Pty Ltd vRegistrar-General(1990) 170 CLR 146 at 1767 (Brennan J)

The presumption might reasonably be made when the officers or agents of a company engage in a transaction for the purpose of a companys business or otherwise for the benefit of the company and the transaction is one that officers or agents in their respective positions would ordinarily be expected to have the companys authority to undertake. In that situation, a party dealing with a company in good faith is entitled to presume that the officers and agents had that authority Being a presumption of fact, the indoor management rule is displaced when the circumstances put on inquiry the party seeking to rely on the rule.

Doctrine of constructive notice (no longer applicable as s 130 abolishes doctrine of constructive notice).

Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722; 10 ACSR 699 at 7056, Gleeson CJ

provided a certain method of dealing is not inconsistent with limitations on authority and procedural requirements set out in the public documents of the company, a person dealing with a company is, as a general rule, and subject to certain qualifications, entitled to assume the regularity of the internal proceedings behind the conduct of those who appear to act on behalf of the company.

Circumstances where the IMR does not apply

Company itself seeks the benefit of the rule

The IMR does not operate in favour of the company concerned: Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653

Forged instruments

the IMR does not apply to a forged instrument, namely an instrument bearing a false seal or signature (forgery in the strict sense): Ruben v Great Fingall Consolidated [1906] AC 439

the IMR may apply to a situation where the instrument bears a genuine seal and a genuine signature but is executed without due authority (forgery in a loose sense): Northside Developments Pty Ltd vRegistrar-General (1990) 170 CLR 146

Persons aware of irregularities or put on inquiry

the IMR does not protect a person dealing with a company who knows of the irregularity in question or who, being put upon inquiry, fails to make a due inquiry: Kanssen vRialto (WestEnd) Ltd [1944] Ch346

Northside Developments Pty Ltd vRegistrar-General (1990) 170 CLR 146

factors to consider when determining whether parties were put on inquiry - the powers of the company (if relevant), the nature of its business, the apparent relationship of the transaction to that business, and the actual or apparent authority of those acting or purporting to act on behalf of, the company. Much will depend upon representations about the transaction made by, such persons, for the party dealing with the company may often find protection in the principles of agency or the doctrine of estoppel.

Statutory indoor management rule

The rules which operate at common law are supplemented, and in some respects supplanted, by general principles of agency and the Corporations Act.

Corporations Act has adopted the IMR in s129.

However, the common law rule can still operate in cases not reached by s129.

E.g., no dealings

Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 7 ACSR 387 at 399

Assumptions that can be Made Pursuant to section 129

Section129 of the Corporations Act sets out the assumptions that a person dealing with a company can make.

Section 129 (1) Compliance with the constitution and replaceable rules

Section 129(2) Person named as director or secretary in lodged documents

Section 129 (3) Persons held out by the company as officer or agent

Section 129 (4) Proper performance of duties by officers and agents

Section 129 (5) Due execution of documents without seal

Section 129 (6) Due execution of documents with the seal

Section 129 (7) Authority to warrant documents as genuine

Section129(8) permits the assumptions listed in s129 of the Corporations Act to operate cumulatively: Sunburst Properties Pty Ltd (in liq) vAgwater Pty Ltd [2005] SASC 335

Assumption relating to companys constitution section 129 (1)

Any internal restrictions and procedures provided in the constitution or the replaceable rules could be assumed to have been complied with by the company.

Correa vWhittingham (2013) 278 FLR 310

Director or company secretary section 129 (2)

A person may assume that anyone who appears, from information provided by the company that is available to the public from the Australian Securities and Investments Commission (ASIC), to be a director or a company secretary of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily executed or performed by a director or company secretary of a similar company.

Information provided to ASIC by a companys directors who were not validly appointed did not amount to information provided by the company: Wood vInglis (2008) 68 ACSR 420.

There is no necessity for the party seeking to rely upon the assumption to show that the information provided on ASIC records has in fact been seen: ReMadi Pty Ltd (1987) 12 ACLR 45.

Dr Andrew RobertsSzudzinski Pty Ltd v .au Domain Administration Ltd [2006] NSW

Some of the factors identified in order to determine a similar company included the nature of the business, how the board of directors of the company was constituted, and the nexus between any of the directors of the board and the conduct of the business of the company.

What is customarily done by a director or secretary of a company is a matter of evidence to be determined by examining the custom of a similar company.

Officer or agent section 129 (3)

A person may assume that anyone who is held out by the company to be an officer or agent of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.

A codification of the principles enunciated in Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.

There must be a holding out by the company: ANZ Banking Group Ltd vAustralian Glass & Mirrors Pty Ltd (1991) 9 ACLC702

Proper performance of duties section 129 (4)

A person may assume that the officers or agents of the company properly perform their duties to the company.

The conduct to which s 129(4) is directed is not whether acts are authorised or not but whether the acts involve a breach of duty.

Majesty Restaurant Pty Ltd (inliq) v Commonwealth Bank of Australia Ltd (1998) 47 NSWLR 593

Documents duty executed with and without seal section 129 (5) and (6)

A person may assume that a document has been duly executed by the company if the document:

appears to have been signed in accordance with s127(1) of the Corporations Act; or

if the companys common seal appears to have been affixed to the document and the fixing of the common seal appears to have been witnessed in accordance with s127(2).

Caratti vMammoth Investments Pty Ltd (2016) 50 WAR 84

Brick & Pipe Industries Ltd vOccidental Life Nominees Pty Ltd [1992] 2 VR279; (1991)6 ACSR 464

Soyfer vEarlmaze Pty Ltd [2000] NSWSC 1068

A document bearing a company seal with signatures, respectively, above the words director and secretary does objectively appear to be so witnessed.

The assumptions in s129(5) and (6) may be relied upon in respect of a document notwithstanding that the person signing the document was not a director or a person appearing on the ASIC register: Esperance Cattle Company PtyLtd vGranite Hill Pty Ltd (2014) 47 WAR 318.

Section127(1) and (2) are not mandatory and do not describe the only ways in which a company can execute documents and make a valid contract: McDonald vTinbilly Travellers Pty Ltd (2008) 168 IR 468

Officer or agent with authority to warrant that document is genuine or true copy

A person may assume that an officer or agent of the company who has authority to issue a document or a certified copy of the document on its behalf also has authority to warrant that a document is genuine or is a true copy.

Ruben vGreat Fingall Consolidated [1906] AC 439

The assumption is confined to documents that are issued on behalf of the company.

E.g., prospectuses and debentures, but not contracts made with third parties.

Dealings section 128 (1)

Section128(1) of the Corporations Act provides that a person is entitled to make the assumptions in s129 in relation to dealings with the company.

Section 128(2) provides that a person is entitled to make the assumptions in s129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company.

The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. The assumptions become incontrovertible facts.

Soyfer vEarlmaze PtyLtd [2000] NSWSC 1068

The phrase dealings can include only a single transaction: Brick & Pipe Industries Ltd vOccidental Life Nominees Pty Ltd [1992] 2 VR 279

The word dealings is used in the sense of negotiations or other steps in relation to a contemplated transaction: Soyfer vEarlmaze Pty Ltd [2000] NSWSC 1068

Examples of the term dealing within the meaning of s128(1):

a person who lodges a proxy with a company: Vero Insurance Ltd v Kassem (2010) 79 ACSR 330;

steps in the appointment of a liquidator: Correa vWhittingham (No3) (2012) 267 FLR 120.

Story vAdvance Bank Australia Ltd (1993) 31 NSWLR 722

It should be added, since the subject matter of [Corporations Act s128(1)], by hypothesis, includes dealings with purported company agents who lack actual authority, and, by virtue of [Corporations Act s128(3)], extends to forged instruments, the concept of having dealings with a company must embrace, subject to the qualifications contained in the legislation, purported dealings. Ifthe statutory provisions only extended to cases where the person representing the company had actual authority then they would be largely unnecessary.

New ZealandBanking Group Ltd vFernmast Pty Ltd (2013) 282 FLR 351

Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068

the relevant person had the companys] authority to commit it to the relevant transaction or execute the relevant documents, and the section can extend to conduct of a person who purports to have, but does not have, authority to represent that company in a particular transaction the relevant person had authority to take some step such that the dealing is properly treated as one with the company

Re Matlic Pty Ltd (in liq) (2014) 102 ACSR 602

Fraud and Forgery section 128 (3) and (4)

An outsider who deals with a company can still make the assumptions in s129 even if the relevant company officer or agent acted fraudulently or forged a document: s128(3).

An outsider is not entitled to make any of the assumptions in s129 if, at the time of the dealings, the outsider knew or suspected that any of the assumptions were incorrect: s128(4).

Soyfer vEarlmaze Pty Ltd [2000] NSWSC 1068 at [69][71], Hodgson CJ (in Eq)

the onus of proof in relation to S 128(4) lies on whoever is challenging the persons entitlement to make the assumption

the words are plainly not apt to cover the case where circumstances are such as to put a reasonable person upon enquiry, but where the person in question has no actual knowledge or actual suspicion.

Sunburst Properties Pty Ltd (in liq) vAgwater Pty Ltd [2005] SASC 335 at [178],36 Gray J

a person does not lose the benefit of the assumptions in s129 merely because the persons suspicions, in the circumstances, should have been aroused. In this respect, the operation of s128(4) can be contrasted with the put on inquiry test that applies when a person seeks to enforce a defective contract at common law.

Eden Energy Pty Ltd v Drivetrain USA Inc (2012) 90 ACSR 191; [2012] WASC 192 the court at [83][85] Summary of principles related to s 128(4).

Corporations Amendment (Meetings and documents) Act 2022

Section 126 is amended to give effect to the following:

allows an agent to sign on behalf of a company using technology-neutral methods.

overrides the common law by allowing an individual with actual authority to execute a deed in the companys name and abrogates the common law requirement that only an agent appointed by a deed could execute a deed.

delivery of the document is no longer required if it is executed as a deed.

Modernising the manner in which documents may be signed and executed.

Part 1.2AA Electronic signatures (technology-neutral signing) can be used to sign documents under s 127.

Split signing of documents Officers can execute documents separately by signing different copies of the document.

Sole director of a company, where there is no company secretary, can execute documents on behalf of the company.

Contracts with promoters

(reading 21 and 23)

The person responsible for the formation of the company, referred to as the promoter.

Definition of a promoter

Emma Silver Mining Co vLewis & Son (1879) 4 CPD 396

Tracy vMandalay Pty Ltd (1953) 88 CLR 215 at 242, the High Court stated:

It is not only the persons who take an active part in the formation of the company and the raising of the necessary share capital to enable it to carry on business who are promoters Persons who leave it to others to get up the company upon the understanding that they will profit from the operation may become promoters.

the definition does not include persons employed in their professional capacity (e.g., solicitors and accountants).

Duties of a promoter

Promoters are in a fiduciary relationship with the company and owecertain duties to the company and to its shareholders: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218.

Duty to make disclosure

Gluckstein v Barnes[1900] AC 240

Remedies for breach of duties

Recession of contract

Gluckstein v Barnes[1900] AC 240

Recession of contract and damages

Constructive trust order

Re- registration contracts (reading 21 and 23)

A person acting on behalf of a company which, at the date of the contract, did not exist can make contracts on companys behalf.

Difficulties of recognition under common law

Statutory approach

Common Law

Kelner v Baxter [1866] LR 2 CP 174

Section131-133 of the Corporations Act.

It is possible for a company, when it comes into existence, to ratify or adopt the contract which had been made on its behalf and therefore take over the rights and obligations inherent in the contract.

Section 131-133 of the corporation Act

Section131-133 of the Corporations Act.

Ratification by the company: s 131(1)

Commonwealth Bank of Australia vAustralian Solar Information Pty Ltd (1986) 11 ACLR 380

Personal liability for non-ratification or non-registration of the company: s 131(2)

Responsibility of the company under section 131(2): : s 131(3)

Responsibility of the person if company ratifies but fails to perform the contract: s 131(4)

Release from liability: s 132(1)

Bay vIllawarra Stationery Supplies Pty Ltd (1986) 4 ACLC 429

Corporate authority and directors

Relationships between corporate capacity and authority of directors

Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464

Australian Securities Commission vMultiple Sclerosis Society of Tasmania (1993) 10 ACSR 489

The companys liability in tort

A company will be vicariously liable for any torts which are committed in the following circumstances:

where a tort is committed by the companys employees in the course of their employment;

where a tort is committed by its agents who are acting within their actual or apparent authority; and

where s 128(3) of the Corporations Act applies. This section prevents a company avoiding liability in circumstances where its representatives were fraudulent in their dealings with third parties.

Private Parking Services (Vic) Pty ltd v Huggard [1996] Aust Torts Reports 81-397

H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159

The criminal liability of a company

A company may be criminally liable for the actions taken by its human representatives in much the same way as it was tortiously liable.

The crime must be of a type which the corporation can commit and it needs to be proven that the action was committed with a guilty intent.

Presidential Security Services of Australia Pty Ltd vBrilley (2008) 67 ACSR 692 at [141],

There are two classes of criminal offences that a company cannot commit. Thefirst class arises by virtue of a companys status as an unnatural or artificial person. For example, a company cannot commit suicide or bigamy. The second class arises by virtue of the companys inability to be punished. Thus, a company cannot commit a crime where the only punishment is a term of imprisonment.

There may be primary and secondary liability.

Strict liability offences

Mousell Bros Ltd vLondon and North-Western Railway Co [1917] 2 KB 836

Offences where the crimes which are constituted by acts of agents with a guilty state of mind, and where it is appropriate to impute this state of mind to the company.

R vICR Haulage Ltd [1944] KB 551

Vicarious criminal liability

Criminal Code Act 1995 (Cth) only applies to Commonwealth statutes.

Chapter 2 of the Criminal Code is titled General Principles of Criminal Responsibility.

Section 1308A of the Corporations Act makes this chapter relevant and applicable to corporate law in that this chapter of the Code applies to all offences against the Corporations Act.

Pt 2.5 of the Criminal Code imposes direct liability on corporations for the criminal acts of its employees, agents or officers committed within the course of their employment.

The Criminal Code therefore goes further than the common law, which only found the company directly liable for the criminal acts of those people in a sufficiently senior position to be considered the embodiment of the company.

Part 2.5 of the criminal code

Section 12.2 - Straightforward attribution test

If a physical element of an offence is committed by an employee,agent or officer of a body corporate acting within the actual orapparent scope of his or her employment, or within his or heractual or apparent authority, the physical element must alsobe attributed to the body corporate.

Section 12.3(1)

If intention, knowledge or recklessness is a fault element in relation to a physical element of an offence, that fault element must be attributed to a body corporate that expressly, tacitly or impliedly authorised or permitted the commission of the offence.

Section 12.3(2)

The means by which such an authorisation or permission may be established include:

(a) proving that the body corporates board of directors intentionally, knowingly or recklessly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or

(b) proving that a high managerial agent of the body corporate intentionally, knowingly or recklessly engaged in the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or

(c) proving that a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance with the relevant provision; or

(d) proving that the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision.

Australian law reform commission report on corporate criminal responsibility (2020)

Corporate attribution

Recommendation 5

Commonwealth statutory provisions that displace Part 2.5 of the schedule to the Criminal Code Act 1995 (Cth) should be repealed, unless an alternative attribution method is necessary in the particular instance.

Recommendation 6

Section 12.2 of the schedule to the Criminal Code Act 1995 (Cth) should be amended such that a physical element of an offence is taken to be committed by a body corporate if committed by:

a. an officer, employee, or agent of the body corporate, acting within actual or apparent authority; or

b. any person acting at the direction, or with the agreement or consent (express or implied), of an officer, employee, or agent of the body corporate, acting within actual or apparent authority

Recommendation 7 (option 1)

Section 12.3 of the schedule to the Criminal Code Act 1995 (Cth) should be amended to:

a. replace commission of the offence with relevant physical element;

b. replace high managerial agent with officer, employee, or agent of the body corporate, acting within actual or apparent authority (with consequential amendments to s 12.3(4));

c. replace due diligence with reasonable precautions (with consequential amendments to s 12.5);

d. pluralise the terms attitude, policy, and rule in the definition of corporate culture and replace takes withtake; and

e. repeal s 12.3(2)(d).

Recommendation 7 (option 2)

Section 12.3 of the schedule to the Criminal Code Act 1995 (Cth) should be replaced with a provision to the effect that if it is necessary to establish a state of mind, other than negligence, of a body corporate in relation to a physical element of an offence, it is sufficient to show that:

a. one or more officers, employees, or agents of the body corporate, acting within actual or apparent authority, engaged in the relevant conduct, and had the relevant state of mind; or

b. one or more officers, employees, or agents of the body corporate, acting within actual or apparent authority, directed, agreed to or consented to the relevant conduct, and had the relevant state of mind.

It is a defence, if the body corporate proves that it took reasonable precautions to prevent the commission of the offence

Recommendations as to sentencing

Statutory guidance for the court on factors that should be taken into account when sentencing corporations

The option of non-monetary penalties as sentencing options for corporations

The exclusion of convicted corporations from government contracts

Specially designed pre-sentencing reports and victim impact statements

Power of the court to dissolve convicted companies

Power of the court to make management disqualification orders against individuals who have been involved in corporate breachers

Week 11 share capital and corporate fundraising

Learning objectives

After completing this topic, you should:

Identify the sources of corporate capital.

Describe the legal nature of a share and distinguish between different classes of shares.

Explain the manner in which the class rights of shareholders are protected.

Explain the maintenance of capital rule and its contemporary relevance.

Identify the various types of share capital transactions available.

Explain the statutory provisions governing share capital transactions and the protection of creditors and shareholders.

Discuss the consequences of breach of the statutory provisions affecting share capital transactions.

Explain the general purpose and role of disclosure obligations during corporate fundraising.

Understand the compliance obligations under Ch 6D of the Corporations Act 2001 (Cth) during corporate fundraising.

Discuss the types of disclosure documents and the circumstances where they are used.

Discuss the required content for disclosure documents.

Explain the role and powers of ASIC during corporate fundraising.

Explain the liability provisions for defective disclosure documents and defences.

Shares and shareholders (reading 24)

Introduction

There are two basic sources of corporate funding:

Equity (or share) finance

Debt finance

Equity The total amount of money representing what members have paid or are contractually bound to pay in cash or other value.

Debt Money borrowed by the company.

The form of finance chosen will raise legal issues regarding the nature of the finance itself and the regulation regarding raising such finance.

Gearing

The proportion of debt to share finance used is called gearing.

What is debt capital?

Companies have the power to borrow funds: s 124

Creditors those who lend money to a company

E.g., banks or other financial institutions, suppliers of goods and services to a company (trade creditors)

Companies are also able to raise loan finance from the investing public by issuing debentures: Ch 2L

Unsecured loans/Secured loans

Secured loans loans that are guaranteed/secured by an asset

In the event of a default, lender will take over the possession of the secured property and sell it in order to recover the debt owed

Personal property securities Act (Cth) 2009

This legislation applies to all security interests in personal property.

Personal property includes things like cars, company assets, boats, used goods and intellectual property; it doesn't include land or fixtures.

PPSR Overview: https://www.ppsr.gov.au/ppsr-overviewAll transactions under which a borrower grants a lender an interest (a security interest) in the borrowers personal property are now regulated the same way.

As a lender, to protect the security, one must perfect it by: (s 21)

Registering an interest in the collateral; or

Taking possession of the collateral; or

Taking control of the collateral.

Interests are registered on the Register of Personal Securities this is an online register (see www.ppsr.gov.au)

What is share capital?

Fords Principles of Corporations Law

A companys share capital is the total amount of money representing what members, or persons proposing to be members of the company, have provided, or contractually bound themselves to provide, to the company, in cash or other value, for the company to use in its undertaking, they having done so in their character of members or intending members and not as creditors.

Share Capital

A contribution in exchange for shares which represent a proportion of the share capital

A contribution by way of a promise to pay money in certain circumstances such as insolvency (a guarantee)

Companies cannot have both forms of share capital.

Share capital

Amy incorporates A Pty Ltd by investing $100,000.

Assets:100,000 = Share Capital:100,000 + Liabilities: 0

Amy incorporates A Pty Ltd by investing $100,000. Next, she orders $10,000 worth stock on credit.

Assets:110,000 = Share Capital:100,000 + Liabilities: 10,000

Amy incorporates A Pty Ltd by investing $100,000. Next, she orders $10,000 worth stock on credit. Thereafter, Amy withdraws $5000 from the business.

Assets:105,000 = Share Capital:95,000 + Liabilities: 10,000

Par value of shares (not applicable anymore) and issuing shares at a premium.

Share capital

Fully-paid

Partly paid

Classes of shares

Ordinary shares

Preference Shares: s 254A(2)

Variation of class rights

Sections 246B 246G protect rights of holders of particular classes of shares against attempts by the directors or controlling members to vary or cancel those rights.

Protection of class rights

The procedure in s 246B(2) for variation or cancellation must be followed, where the companys constitution is silent. This procedure requires

a special resolution passed by the company, and

a special resolution passed at a meeting of the holders of the affected class, or

the written consent of members with at least 75 per cent of the votes of the affected class.

Remedies for shareholders where the class provisions are not complied with include:

a statutory injunction: s 1324

an application to set aside: s 246D

oppression remedy: s 232.

What are shares?

Shares are recognised by the Corporations Act as being items of personal property: s 1070A.

Gambotto v WCP Ltd (1995) 182 CLR 432

Shares as a personal property

Shares contain a bundle of rights enforceable against the company.

Shares are transferable as provided by the companys constitution or by the rules of the ASX.

Members rights are participatory in nature rather than fixed to tangible assets.

Share register: s 169 of the Corporations Act

The capital maintance rule

A company must not reduce its share capital because to do so would prejudice the interests of creditors.

Why?

Remember Amy incorporates A Pty Ltd by investing $100,000. Next, she orders $10,000 worth of stock on credit.

First - Assets:110,000 = Share Capital:100,000 + Liabilities: 10,000

Thereafter, Amy withdraws $5000 from the business.

Assets:105,000 = Share Capital:95,000 + Liabilities: 10,000

Trevor v Whitworth (1887) 12 App Cas 409 at 423 4:

the effect of these statutory restrictions is to prohibit every transaction between a company and a shareholder, by means of which the money already paid to the company in respect of his shares is returned to him, unless the Court has sanctioned the transaction. but persons who deal with, and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of its members for the capital remaining at call; and they are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business.

The need for capital maintenance rule

Improved methods of evaluating risks in corporate credit provisions.

Exceptions to capital maintenance rule. E.g., Ch 2J I

Companies need not have any minimum amount of share capital ($1 may suffice).

Use of other provisions, such as insolvent trading liability, provide better protection for creditors against impecunious trading.

Share capital and transactions affecting

Share capital (reading 25 and 28)

Authorised share capital reductions: overview

Companies may want to reduce share capital without sacrificing creditor and shareholder protection.

Why may a company want to reduce its share capital?

return surplus capital in excess of its commercial needs to shareholders

bolster earnings per share

eliminate small shareholdings by buying out the shareholders

Section 256A

rules to be followed by a company for reductions in share capital and for share buy-backs. The rules are designed to protect the interests of shareholders and creditors by:

(a) addressing the risk of these transactions leading to the company's insolvency

(b) seeking to ensure fairness between the company's shareholders

(c) requiring the company to disclose all material information.

Statutory provisions as to share-capital reductions

Part 2J.1- Share capital reductions and share buy-backs

Division 1-Reductions in share capital not otherwise authorised by law (ss 256B-256E)

Division 2-Share buy-backs (ss 257A-257J)

Division 3-Other share capital reductions (ss 258A-258F)

Part 2J.2-Self-acquisition and control of shares (ss 259A-259F)

Part 2J.3-Financial assistance (ss 260A-260DA)

Reduction in share capital not otherwise authorised by law (ss256B 256E)

Section 256B(1) permits an authorisation for reduction of capital if the reduction satisfies the following three criteria:

(1) It is fair and reasonable to the companys shareholders as a whole

The decision of an informed shareholders meeting: Re Allas Energy Pty Ltd (1998) 27 ACSR 729

The term fair and reasonable is intended to be a composite requirement

Re Campaign Holdings Pty Ltd (1989) 15 ACLR 762; 8 ACLC 64

Consideration of fairness of the proposed reduction as between the classes

Reduction may be a variation of rights attached to a particular class of shares requiring separate class meeting

(2) Not materially prejudice the companys ability to pay its creditors

Re CSR Ltd (2010) 265 ALR 703

materially = substantially

Protection through disclosure and creditor complaints to the ASIC

Reduction in share capita not otherwise authorised by law (ss256B 256E)

(3) It is approved by shareholders

The type of shareholder approval required depends on whether the reduction is an equal reduction or a selective reduction.

Equal reduction reduction to be approved by a resolution passed at a general meeting of the company : s 256C(1)

Selective reduction- reduction to be approved by a special resolution or a resolution passed by all ordinary shareholders at a general meeting of the company : s 256B(2) and s 256C(2)

Section 256B(2) states that the reduction is an equal reduction if:

it relates only to ordinary shares;

it applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and

the terms of the reduction are the same for each holder of ordinary shares.

Re ETRADE Australia Ltd (1999) 30 ACSR 516

Section 256(C)(a) no votes can be cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates.

Certain capital reductions are permitted without shareholder approval when there is no risk of material prejudice to the interests of creditors.

ss 258A 258F recognise the need to exempt compliance with s 256B procedure in the following circumstances:

capital reductions undertaken by unlimited companies;

capital reductions resulting from the cancellation of forfeited shares;

capital reductions arising from the cancellation of shares bought back by the company under the buyback provisions of ss 257A 257J;

capital reductions arising from the redemption of redeemable preference shares out of the proceeds of a new issue of shares made for the purposes of redemption; and

capital reductions arising from lost capital for example, where assets are stolen or destroyed by fire.

Disclosure and notice requirements

material information must be conveyed to shareholders: section 256C(4)

a copy of the notice and any document relating to the reduction to be sent to shareholders must be lodged with ASIC: s 256C(5).

selective reduction company must lodge with ASIC notice of the resolution within 14 days after it is passed: s 256C(3).

Notice to ASIC ASIC enters the information into its Alert system, to which creditors may subscribe. In turn, this provides either ASIC or creditors with an opportunity to oppose the reduction.

Consequences for breach of s 256B(1)

Contravention does not affect the validity of the reduction or any connected transaction s256D(2).

The company is not guilty of any offence.

Civil penalty: s 256D(2) and (3)

Insolvent trading liability for directors

Criminal liability: s 256D(4)

Statutory injunction

Financial assistance (ss260A 260DA)

Section 260A states that a company may financially assist a person to acquire shares in the company or a holding company only if:

(a) giving the assistance does not materially prejudice:

(i) the interests of the company or its shareholders; or

(ii) the companys ability to pay its creditors; or

(b) the assistance is approved by shareholders under s 260B; or

(c) the assistance is exempted under s 260C.

What is financial assistance?

Not defined in the Corporations Act.

Includes payment of dividend: s 260A(2)

Direct and indirect forms of assistance including where a company:

making a loan ( ASIC v Adler [2002] NSWSC 171)

making a gift ( Re VGM Holdings Ltd [1942] Ch 235)

giving security over the companys assets ( Firmin v Gray & Co Pty Ltd (1984) 8 ACLR 865); and

releasing a debt owed to the company ( E H Dey Pty Ltd (in liq) v Dey [1966] VR 464).

the commercial realities of the transaction is important when deciding if financial assistance has been given: Connective Services Pty Ltd v Slea Pty Ltd [2017] VSC 182.

What is financial assistance? (cont.)

The term assistance involves something in the nature of aid or help; it cannot exist in a vacuum but must be given to someone: Sterileair Pty Ltd v Papallo (1998) 29 ACSR 461.

Darvall v North Sydne Brick and Tile Co Ltd (1987) 16 NSWLR 212

Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33

Best to be cautious? High Court decision on the operation of s260A and what constitutes financial assistance https://www.minterellison.com/articles/summary-high-court-financial-assistance-case-connective-services-pty-ltd-v-slea-pty-ltd-2019(a) Material prejudice to interests of shareholders and creditors

impoverishment approach or facilitation approach

Adler v ASIC (2003) 179 FLR 1;

Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33

the issue of material prejudice to the interests of the company or its shareholders or creditors requires an assessment of and comparison between the position before the giving of the financial assistance and the position after it to see whether the company or its shareholders or its ability to pay its creditors is in a worse position. It does not assist to gloss the concept of material prejudice by the introduction of further concepts, which themselves require further explanation, such as whether there has been a diminution of the assets of the company, whether there has been a transaction, or whether there was a net transfer of value to the person acquiring the shares.

(b) Shareholder approval

financial assistance must either be approved by:

a resolution agreed to by all ordinary shareholders at a general meeting; or

a special resolution passed at a general meeting of the company (with no votes being cast in favour of the resolution by the person acquiring the shares or by their associates): s 260B(1).

(c)Statutory exemptions

Section 260C excludes certain transactions from the prohibition on financial assistance.

E.g.,

finance assistance given on ordinary commercial terms where the companys ordinary business includes providing finance and the assistance is in the ordinary course of that business (s 260C(2));

finance assistance given to enable company employees to acquire fully paid shares under an employee share scheme approved by the company in a general meeting (s 260C(4));

financial assistance in a reduction of capital in accordance with Pt 2J.1 (s 260C(5)(a)); and

financial assistance in a share buy-back in accordance with Pt 2J.1 (s 260C(5)(b)).

Consequences for breach of s 260A

Civil penalty: s 260D(1) and (2) ; ASIC v Adler [2002] NSWSC 171)

Insolvent trading liability for directors

Criminal liability: s 260D(3)

Statutory injunction

Share buy-backs

Permitted share buy-backs are an exception to the maintenance of capital rule and the rule in s257A which prohibits a company from acquiring its own shares.

Why would a company wish to buy back its own shares?

Chapter 2J of the Corporations Act regulates five types of share buy-back activity.

Minimum holding buy-backs (or odd-lot buy-back)

Employee share scheme buy-backs

On-market buy-backs: s 257B(6)

Equal access buy-back scheme: s 257B(2)

Selective buy-back schemes: s 257D.

A company must advise ASIC of its intention to buy-back its shares, unless it is a minimum holding buy-back: s 257F.

Note 10/12 limit: s 257B(4).

All shares bought back under any type of buy-back scheme must be cancelled: s 257H.

A contravention of the buy-back provisions, does not affect the validity of the buy-back and the company does not commit an offence: s259F(2).

A person involved in the companys breach of s 259F(2) is subject to civil penalties. ASIC may be able to apply to court under Pt 9.4B to seek disqualification orders, compensation orders and pecuniary penalties.

If a person is a director and the company becomes insolvent as a result of the buy-back activity, then the directors may be personally liable to compensate the company under the insolvent trading provisions: s 588G.

A breach of s 259A accompanied by dishonesty, risks a fine or imprisonment or both.

Statutory injunction and damages under s1324.

Dividends (reading 26 and 27)

A monetary payment to a member as reward for investing in the company and thus contributing to the companys success.

Public as well as proprietary companies.

Companies limited by guarantee are not permitted to pay dividends to members: s 254SA.

Dividend payments are regulated by both the company constitution and the Corporations Act (Pt 2H.5).

Section 254U (replaceable rule) provides the board of directors with the power to determine:

that a dividend is payable;

when the dividend amount is due to be paid; and

how the dividend will be paid (for example, in cash, shares or options).

Dividends cannot be paid inconsistently with the requirements of the companys constitution: BTR Nylex Ltd v Churchill International Inc (1992) 9 ACSR 361.

Types of dividends

Interim dividends

a dividend payment based on the anticipated profit that will be disclosed in the annual accounts which have not been finalised at the time of the interim dividend.

directors may withdraw an interim dividend at any time before payment is due: s 254V

ICM Investments Pty Ltd v San Miguel Corp (2013) 96 ACSR 358; [2013] VSC 528

Final dividends

a dividend that is payable on the basis of profits disclosed in the companys finalised annual accounts as presented to the members in the annual general meeting.

Declaration of final dividends without a specified date immediate debt due to the members.

Bonuses

a higher dividend for a given year alone.

to avoid shareholder expectation that the increase will be repeated in later years the directors may call it a bonus or a special dividend.

same as any other regular dividend: Picken v Lord Balfour of Burleigh [1945] Ch 90

declaration of dividends

A declaration of dividends is where a company announces to the members that a dividend is payable to the members before the dividend is due to be paid.

The constitution will ordinarily provide rules for such a declaration.

No constitutional provision

Section 254U (a replaceable rule) provides directors with the power to pay a dividend without a prior declaration.

Members right to payment of dividends

Members have no general right to the payment of dividends.

The directors are not bound to use the companys profits to pay a dividend: QBE Insurance Group Ltd v ASC (1992) 38 FCR 270.

Section 254W

Public companies equal treatment concerning members of the same class of shares in a company with respect to dividend rights: s 254W(1)

Private companies the directors may pay dividends as they see fit: s 254W(2)

Dividends are to be paid to shareholders in a public company proportionally to the number of shares they hold, rather than proportionally to the amount paid up on their shares, unless the constitution or a special resolution provides otherwise.

Dividends are payable to the persons registered as members as at the date of the declaration.

Section 254T

Payment of dividends

Prior law on payment of dividends

Dividends cannot be paid otherwise than from profits.

Section 254T

removes the profit rule and replace it with an asset-based test and requirements to be fair and reasonable to members as a whole and not materially prejudice the companys ability to pay creditors.

An asset-based test/balance sheet test

the test must be satised immediately before the dividend is declared

use of accounting standards

satisfactory evidence

Fair and reasonable to members as a whole

KGD Investments Pty Ltd v Placard Holdings Pty Ltd (2015) 110 ACSR 379; [2015] VSC 712

must be satised at the time of payment rather than at the time of the decision to make dividends

Not materially prejudice the companys ability to pay creditors

The companys ability to pay will be materially prejudiced if the company becomes insolvent as a result of payment of the dividend

It can also result in other circumstances short of insolvency

DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts [2022] NSWCA 165

Declaration of dividends and insolvency

The duty of company directors to prevent the company from incurring a debt that leads to, or is incurred during, the companys insolvency.

Declaration of dividends = incurring a debt???

If the companys constitution contains a provision for declaration of dividends debt will be incurred by the company when the dividend is declared: s 254V(2).

If the companys constitution DOES NOT contain a provision for declaration of dividends debt will be incurred when the time for payments arises: s 254V(1).

For the purposes of the insolvent trading prohibition, where the company does not have an express constitutional provision for the declaration of dividends, then the debt is only incurred when the dividend is actually paid : s 588G(1A).

Payment of dividends and consequences for invalid dividend payment

Payment

the actual method of payment may be determined by the board of directors under s 254U or in accordance with the companys constitution.

dividend reinvestment plan.

Invalid dividend payments

the directors will most likely be in breach of their statutory and common law duties of care owed to the company;

the company will be in breach of the authorised capital reduction provisions in Pt 2J.1;

the directors may be forced to pay the invalid dividend themselves; or

a party whose interests are affected by the improper dividend payment may seek to have the payment prevented by seeking a statutory injunction under s 1324.

Moxham v Grant [1900] 1 QB 88

Week 12

Part 2 of Share capital and corporate fundraising

Learning objectives

After completing this topic, you should:

After completing this topic, you should:

Identify the sources of corporate capital.

Describe the legal nature of a share and distinguish between different classes of shares.

Explain the manner in which the class rights of shareholders are protected.

Explain the maintenance of capital rule and its contemporary relevance.

Identify the various types of share capital transactions available.

Explain the statutory provisions governing share capital transactions and the protection of creditors and shareholders.

Discuss the consequences of breach of the statutory provisions affecting share capital transactions.

Explain the general purpose and role of disclosure obligations during corporate fundraising.

Understand the compliance obligations under Ch 6D of the Corporations Act 2001 (Cth) during corporate fundraising.

Discuss the types of disclosure documents and the circumstances where they are used.

Discuss the required content for disclosure documents.

Explain the role and powers of ASIC during corporate fundraising.

Explain the liability provisions for defective disclosure documents and defences.

Corporate fundraising (reading 29)

Overview

Fundraising

Debt capital (loans, debentures)

Equity capital (shares)

Factors to consider when determining gearing ratio

Payment

Repayment of principal and priority

Taxation

Corporate control

Shares, securities, security, debentures, derivatives and financial products.

General regulation of capital raising

Disclosure as the most important means of regulation

Disclosure regulation

Ch 6D

Constitution

Ch 2H (equity capital)

Ch 2L (debt capital)

ASX Listing Rules

Regulatory Guides (No 254, 228, 107 and 261)

Purpose and role of disclosure documents

Information asymmetry

Mandatory disclosure v Voluntary disclosure

Disclosure regulation

promote disclosure of information that investors reasonably require in order to make informed investment decisions

protect investors from exploitation

Hurst v Vestcorp Ltd (1988) 12 NSWLR 394

Chapter 6D

Achieve a fair and well-informed market

Assist investors in identifying risks

Promote cost-effective access to information

Deter unscrupulous practices

Types of disclosure documents

Ch 6D the Corporations Act: ss 709, 713 and 713A.

a prospectus (standard full disclosure document)

a short form prospectus

a transaction specific prospectus (adopting special content for continuously quoted securities)

a two-part simple corporate bonds prospectus

an offer information statement

a profile statement

Prospectus

Most common form of disclosure document and must generally be prepared for an offer of securities under Ch 6D of the Act: s 709(1).

A prospectus need not be prepared if the capital raising fits within one or more of the exceptions in s 708 or if the amount of money to be raised is $10 million or less: s 709(4).

Prospectus is a detailed, and often lengthy full-disclosure document.

A prospectus is required for listing.

Transaction-specific prospectuses: s 713

Used by disclosing entities offering continuously quoted securities.

Includes only specified limited content.

Specific disclosures required are set out in ss 711 and 713.

Two-part simple corporate bonds prospectus: s 713A and s 713B

A specific disclosure regime applies to offers of simple corporate bonds.

Addresses what retail investors perceived to be a regulatory bias

Aims to simplify disclosure obligations for companies issuing corporate bonds.

A simple corporate bond is a debenture with terms of that issue that meet certain criteria set out in s 713A. These include:

quotation of the securities on a prescribed financial market; and

the issuer is a body with continuously quoted securities.

A two-part simple corporate bonds prospectus consists of:

(a) a base prospectus with a life of three years, which must include general information about the issuer that is unlikely to change over the three-year life of the document; and

(b) an offer-specific prospectus that must include details of the offer.

Short form prospectus

Section 712

Why?

reduce the length and complexity of prospectuses that are distributed to potential investors.

presentation of prospectuses to retail investors in a manner best suited to their needs

make available a more technical analysis to investors, professional analysts and advisers who wish to seek further information.

Refers to material already lodged with ASIC instead of including it or summarising it in the prospectus.

Investors are entitled to a copy of the lodged documentation from the company, at no cost, upon request: s 712(5).

The material incorporated by reference is deemed to be disclosed, whether or not investors choose to access it: s 712(3).

Offer information statements

Section 709 allows for an offer information statement to be used, instead of a prospectus , for an offer of securities if the amount to be raised from the issue of securities (and combined with all previous equity capital raisings that have used an offer information statement) is $10 million or less: s 709(4).

Aimed to facilitate more efficient capital raising, particularly for start-up companies and small and medium-sized enterprises (SMEs).

The disclosure requirements for an offer information statement are simplified, less demanding and lower than for a prospectus.

The required contents of an offer information statement are stated in s 715.

Profile statements

Section 709(2) allows for a brief summary statement, known as a profile statement, to be prepared in addition to a prospectus.

Aims to simplify and reduce the volume of disclosure material.

The company is still obliged to prepare and lodge a prospectus with ASIC.

Section 721 allows for a profile statement, rather than the prospectus, to be sent out with offers with ASIC approval.

Investors are entitled to a copy of the prospectus, at no cost, upon request: s 721(3).

The required content of a profile statement is set out in s 714.

Offers exempt from disclosure

What are disclosure documents required?

Section 706 of the Corporations Act

an offer of securities for issue needs disclosure to investors unless s 708 or s 708AA provides otherwise.

Offer includes inviting applications for the issue of securities: s 700(2).

any written or oral invitation designed to induce investors to buy securities falls within the concept of offer

ASIC v Australian Investment Forum Pty Ltd (No 2) (2005) 53 ACSR 305

an offer will still be regarded as being made by the company even if funds were not solicited: ASIC v Great Northern Developments Pty Ltd [2010] NSWSC 1087

Section 700(4) provides that Ch 6D of the Act also applies to securities that are received in Australia, regardless of where any resulting issue, sale or transfer occurs.

Securities

Section 92(4) states that, for purposes of Ch 6D, the term securities has the same meaning as it has in Ch 7 of the Corporations Act: s 700(1).

In Ch 7, a security is defined in s 761A as:

a share in a body;

a debenture in a body;

a legal or equitable interest in shares or debentures; or

an option to acquire shares or debentures.

Offer exempt from disclosure

Section 708 of the Corporations Act provides a number of specific exemptions from the requirement to use a disclosure document when issuing securities.

Section 708AA exempts certain rights issues from the need to prepare a disclosure document.

Aims to ensure that the operation of the securities markets is not unreasonably hampered by the costly requirement to prepare and use a disclosure document.

The following are exempted from the need for disclosure documents when an offer of securities is made:

Small-scale, personal offers

Disclosure is not required when personal offers are made to a maximum of 20 investors in any 12-month period and with no more than $2 million being raised: s 708(1).

To prevent abuse by a person making offers to retail investors at large, a personal offer is defined in s 708(2) as one that:

may only be accepted by the person to whom it is made; and

is made to a person who is likely to be interested in the offer because:

of some previous contact with the offeror;

of some professional or other connection between those parties; or

of statements or actions by that person that indicate they are interested in offers of that kind.

This exception is designed to facilitate small-scale capital raisings without the costs of preparing a disclosure document which can sometimes be prohibitive.

Issues of securities that are exempted by other provisions in s 708 are not counted in calculating these amounts and issues of securities: s 708(5).

Sophisticated investors

The Corporations Act permits offers to be made to sophisticated investors without a disclosure document: s 708(8).

This exception applies to investors in any of the following categories:

the minimum amount payable for the securities on acceptance of an offer by the person to whom the offer is made is at least $500,000;

a person whom a qualified accountant certifies to have net assets of at least $2.5 million or a gross income for each of the previous two financial years of at least $250,000 a year (see Corporations Regulations 2001 (Cth) reg 6D.2.03), or the offer is made to a company or trust controlled 12 satisfies these financial requirements; or

a person who receives an offer through a licensed dealer who believes on reasonable grounds that they have previous experience in investing in securities which allows them to assess the merits of the investment.

Section 708(10) imposes stringent requirements and obligations on the financial services licensee certifying the exemption: ASIC v Maxwell (2006) 59 ACSR 373.

3. Professional investors: s 708(11)

4. Offers to persons associated with the company: s 708(12)

5. Offers made to existing security holders: s 708(13)

6. Offers for no consideration: s 708(15)

7. Offers under schemes, takeovers or deeds of company arrangement: s 708(17, 17A, 18)

7. Debentures of certain companies: s 708(19)

8. Offers by exempt bodies and public authorities: s 708(20, 21)

Procedure, content and presentation

Lodgement of disclosure documents

A disclosure document to be used for an offer of securities must be lodged with ASIC prior to distribution: s 718.

A person must not distribute an application form for an offer of securities that needs disclosure unless the application form is included in, or accompanied by, the disclosure document: s 727.

Consent is required of any person, such as directors, professionals and experts, whose statements are included in the disclosure document: s 716(2).

Disclosure documents no longer require registration with ASIC.

When the disclosure document is lodged with ASIC, the company can immediately distribute it.

An exception arises in the case of an offer of unlisted securities where the Corporations Act requires a waiting period, also known as exposure period, of 7 14 days after lodgement: s 727(3).

Disclosure documents found to be defective during the exposure period can become subject to a stop order issued by ASIC: s 739.

Contents of disclosure documents

There are several standards of disclosure for prospectuses imposed by the Corporations Act:

general disclosure test (s 710);

specific disclosure (s 711);

alternative disclosure test for an offer of listed securities (s 713); and

disclosure provisions for two-part simple bonds prospectus (ss 713C, 713D and 713E).

General disclosure test

Checklist approach to reasonable investor approach.

Section 710 of the Act places the responsibility on the offeror to decide what information is material to the decision of prospective investors and therefore needs to be disclosed.

Section 710(1) requires the prospectus to provide all the information that investors and their professional advisers would reasonably require to make an informed assessment of:

the rights and liabilities attaching to the securities offered;

the assets and liabilities of the body; the financial position and performance of the body; the profits and losses of the body; and

the prospects of the body.

Section 710(2) sets out the matters to have regard to in deciding what information should be included in a prospectus. These are:

the nature of the securities and of the body;

if the securities are investments in a managed investment scheme the nature of the scheme;

the matters that likely investors may reasonably be expected to know; and

the fact that certain matters may reasonably be expected to be known to professional advisers of investors.

Due diligence

Presentation of disclosure documents

The information in a disclosure document to be worded and presented in a clear, concise and effective manner: s 715A.

Regulatory Guide 228: Prospectuses: Effective disclosure for retail investors (RG 228)

The application money received from people applying for securities under the disclosure document must be held in trust until the securities are issued or transferred or the money is returned to the applicants: s 722.

ASIC v Warrenmang Ltd (2007) 63 ACSR 623;

Minimum subscriptions

Section 723(2)

If a disclosure document for an offer of securities states that the securities will not be issued or transferred unless:

applications for a minimum number of the securities are received; or

a minimum amount raised.

The person making the offer is prohibited from issuing or transferring any of the securities until that condition is satisfied.

Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025

Prospectus offerings and ASX listing: ss 723(3), s 724

Role of ASIC in fundraising

All disclosure documents must be lodged with ASIC prior to public distribution.

Regulatory Guide 152: Lodgement of disclosure documents (RG 152)

Power to issue stop orders

Interim stop order if sections 728, 715A or 734 is contravened.

The lodgement of a supplementary or replacement disclosure document by the company ASIC may revoke the stop order if its concerns are met, otherwise a meeting will be held to determine whether a final stop order should be made.

ASICs stop order powers allow it to intervene in cases of misleading and deceptive advertising of securities: s 739

ASIC may exempt a person from a provision of the fundraising provisions or it may modify the application of Ch 6D: s 741.

Prohibitions, liabilities and defences

It is an offence to offer securities that require a disclosure document (that is, that are not exempt under ss 708 or 708AA) without the lodgement of a disclosure document with ASIC: s 727.

Criminal penalties and civil remedies in respect of, defective disclosure documents.

A disclosure document would contravene s 728 if there is:

a misleading or deceptive statement in the disclosure document;

an omission from the disclosure document of material required by the disclosure requirements set out in ss 710 715 (as outlined at 9.33 9.37 ); or

a new circumstance that has arisen since the disclosure document was lodged and, if it had arisen before the disclosure document was lodged, the circumstance would have been required to have been included in the disclosure document.

ASIC v Sino Australia Oil and Gas Ltd (in liq) (2016) 115 ACSR 437; [2016] FCA 934

Misleading and deceptive conduct

Examples of misleading or deceptive statements include:

circulation of false reports of increased sales;

circulation of false reports of mineral strikes;

circulation of inflated profit forecasts without reasonable grounds; or

circulation of a prospectus with incomplete material information that can be described as tricky.

Fraser v NRMA Holdings Ltd (1995) 127 ALR 543

GIO Australia Holdings Ltd v AMP Insurance Investment Holdings Pty Ltd (1998) 30 ACSR 102

Supplementary and replacement disclosure documents: s 719

Civil and criminal liability

Section 729 states that any person who has suffered loss or damage because of defective disclosure can claim a civil remedy from persons identified in s 729.

An investor may bring a recovery claim for a misleading statement or material omission or failure to include a new matter in the disclosure documents against:

the company;

the directors;

any proposed director named with their consent;

an underwriter named with their consent;

a person named with their consent as having made a statement that is included or on which a statement made in the disclosure document is based.

a person who contravenes, or is involved in the contravention, of s 728(1)

Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 56 ACSR 309

ASIC v Axis International Management Pty Ltd (No 5) (2011) 81 ACSR 631

A breach of s 728 is an offence and can also give rise to criminal liability if the defect is materially adverse from the point of view of an investor: s 728(3)

Statutory defences

Defendants identified in s 729 as liable for defective disclosure documents may avoid their civil and criminal liability if they can satisfy one of the following defences set out in ss 731 733.

Due diligence defence for prospectuses: s 731

Lack of knowledge defence for offer information statements and profile statements: s 732

Reasonable reliance defence: s 733(1), (2)

Withdrawal of consent defence: s 733(3)

Unawareness of new matter defence: s 733(4)

Regulated conduct during fundraising

Restrictions to protect investors

Restrictions on advertising: s 734

Prohibitions against securities hawking: s 736

Fundraising in the digital age: RG 107 Fundraising: Facilitating electronic offers of securities.

Crowd-funding

the use of the internet and social media to raise funds in support of specific project or business idea.

Corporations Amendment (Crowd-sourced Funding) Act 2017

Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018

Crowd-sourced funding

Crowd-sourced funding: eligible unlisted public companies

Part 6D.3A of the Corporations Act

provide a disclosure regime that can be used for certain offers of securities for issue in small unlisted companies, instead of complying with the requirements of Part 6D.2: s 738A

Reduced regulatory requirements

Offers that are eligible to be made as crowd-source funding: s 738G

To qualify as an eligible company, the following requirements in s 738H(1) need to be satisfied. The company ( public or proprietary) must:

be a public company limited by shares or a proprietary company having at least two directors and satisfy all requirements made under the regulations;

have its principal place of business in Australia;

have the majority of its directors (excluding alternate directors) living in Australia;

not exceed the assets and annual revenue cap of $25 million (including the assets and revenue of its related parties);

not be a listed company (including its related parties); and

not have a substantial purpose of investing in other companies, entities or schemes (including its related parties), for example, a managed fund.

Eligible companies can raise up to $5 million in any 12-month period.

Retail investors have an investment cap of $10,000 per company in any 12-month period (the investor cap) and a cooling-off period allowing them to withdraw from a crowd-sourced funding offer up to five days after making an application: s 738ZC, s 738ZD.

CSF intermediary

The crowd-sourced funding (CSF) intermediary is required to host the crowd-funding offer and to publish it on its online platform.

CSF must have an Australian financial services (AFS) licence authorising it to provide crowd-funding services.

Gate-keeper role: s 738J, s 738K, s 738U, s 738Q

Civil and criminal liabilities for defective CSF offer document

A person who suffers loss or damage because an offer of securities under a CSF offer document may recover the amount of the loss or damage from a person identified in s 738Y(5).

Criminal liability arises when the statement, omission or new circumstance which led to the document being defective is materially adverse from the point of view of an investor: s 738Y(4).

ASICs power to make stop orders: s 739

Defences are provided under s 738Z

A general prohibition against advertising and share hawking with limited exceptions.

Example Guide as to how to answer the tutorial question (This document provides only an outline of matters to be discussed for the question)

Problem Question 1: corporate Fundraising

Flywell Ltd is the owner of an Australian domestic airline. The Australian travel market is very competitive. The management of Flywell Ltd is concerned about the plans of a rival airline company intending to expand its Australian domestic operations. The board of directors of Flywell Ltd decides to revamp its fleet of aircraft and purchase extra planes, but the company does not have the capital. Flywell Ltd wishes to induce each investor to invest $10,000 with the company in exchange for shares in the company. The company aims to raise between $9 million and $11 million in new funds. The company has approached you for advice.

1. Advise Flywell Ltd of its fundraising obligations under the Corporations Act, paying particular attention to the specified facts.

Fundraising obligations: What are the fundraising obligations of the company?

2. Refer to the facts above. Assume that Flywell Ltd has issued and lodged a prospectus with ASIC. The prospectus contains a totally unrealistic profit forecast made by the directors and supported by a quote from an independent industry expert. Flywell Ltds expansion was a disaster because market demand for domestic travel slumped unexpectedly soon after the prospectus timeframes closed.

The investors have commenced legal action on the basis that the profit forecast statements in the prospectus were misleading or deceptive. Assuming this to be the case, advise the following parties on their respective rights and liabilities:

a.the investors of Flywell Ltd;

b.Flywell Ltd; and

c.Flywell Ltds directors.

Answer Outline Part 1

Flywell is a public company planning to issue shares to the public. As shares fall under the definition of securities under s 761A, the fundraising provisions in Ch 6D will apply. Accordingly, the company may issue securities to the public. However, it needs to issue a disclosure document to be able to do so. Disclosure documents are required under s 706 of the Corporations Act when an offer of securities for issue to investors is being made. There are, however, some specific exemptions in s 708.

A company does not need to issue a disclosure document, when issuing securities to the public, if one of the following exemptions noted under s 708 is present:

Small scale personal offer: A company does not require t a disclosure document, if the person offer targets no more than 20 people and the company is raising no more than $2 million in any 12-month period. It is also important to remember that a personal offer is one that can only be accepted by the person to whom it is made and it is made to a person, who is likely to be interested in such an offer: s 708(2).

In this case, this exception does not apply, as the company is raising a larger amount than $2 million.

Sophisticated investors: If a company makes an offer to sophisticated investors, it does not need a disclosure document. Sophisticated investors are investors that fall under any one of the following categories:

The minimum amount payable for the securities on acceptance of an offer by the person to whom the offer is made is at least $500,000: s 708(8)(a).

Wealthy investor: This is a person, who a qualified accountant certifies has net assets of at least $2.5 million or a gross income for the two previous financial years of at least $250,000: s 708(8)(c); Corporations Regulations 2001 (Cth) reg 6D.2.03. Where the offer is made to a company or trust controlled by a person, who meets the requirements of a wealthy investor, and the company or trust satisfies the financial requirements above: s 708(8)(d).

Experienced investor: This is a person, who receives an offer through a licensed dealer, who believes on reasonable grounds that the person has previous experience in investing in securities, which allows him/her to assess the merits of such an investment: s 708(10)). The financial service licensee, who certifies that a person falls under this exemption needs to act with care and due diligence as held in ASIC v Elm Financial Services (2005) NSWSC 1065 and endorsed in ASIC v Maxwell (2006) 59 ACSR 373.

In this case, none of the categories of sophisticated investors is available here because the company is targeting people to invest $10,000 (which is very different to the requirement of $500,000). Additionally, the question does not mention that they are targeting any specific type of investor.

Professional investors: If a company makes an offer to professional investors, it does not need a disclosure document. Professional investor is defined in s 9 to include:

a person, who has or controls gross assets of at least $10 million (including any assets held by an associate or under a trust that the person manages) for the purposes of investment in securities.

In this case, there is no indication that the company is targeting professional investors only.

Offers to persons associated with the company: If a company makes an offer to a person associated with the company, it does not need a disclosure document: s 708(12). A person associated with the company may be a senior manager of the company, a senior manager of a related company or the spouse, parent, child, brother or sister of a senior manager or a company controlled by those closely related people.

In this case, the company is not targeting persons associated with the company.

Offers made to existing security holders: An offer does not need disclosure, if it is an offer to an existing security holder under a dividend reinvestment plan or bonus share plan (s 708(13)) or to existing debenture holders: s 708(14).

In this case, the company is not targeting persons associated with the company.

Offers for no consideration: If an offer is in relation to the issue or transfer of free securities, then the company does not need to issue any disclosure document.

This is not the case here as the company is attempting to raise funds from the public.

Offers under a scheme or takeovers: A disclosure is not required in these instances because there is a set procedure to deal with a scheme of arrangement (s 411) and with takeovers (Ch 6), which would deal with and protect the interest of the relevant people that are interested in the securities.

This is not relevant in this case.

Debentures of certain companies: The issue of debentures usually requires a disclosure document, because debentures are a type of security. However, if the issue of debentures is made by specified companies (an Australian authorised deposit-taking institution or a body registered under the Life Insurance Act 1995), the company does not need to issue any disclosure document.

In the scenario, the company is not issuing any such debentures.

Offers by exempt bodies and public authorities: An offer does not need disclosure, if it is an offer made by exempt public authorities or exempt bodies, such as co-operative societies, friendly societies and incorporated associations.

In this case, this is not applicable.

(Make a note the the detailed explanation is provide in the previous section to help your understanding that why each of the exceptions do not apply in the current scenario. In an examinable context, it is not necessary to go through such a detailed explanation rather a simple explanation why the exceptions do not apply).

As none of the exceptions apply, a disclosure document is needed.

Under s 709, the types of disclosure documents that may be used for offering securities to prospective purchasers are:

a prospectus;

a short form prospectus;

an offer information statement; or

a profile statement.

A prospectus

This is the most common form of disclosure document and must generally be prepared for an offer of securities under Ch 6D: s 709(1), unless it is a small capital raising of under $10 million or falls within one of the exceptions in s 708.

A short form prospectus

This prospectus refers to material already lodged with ASIC; for instance, the financial reports of the company. The aim is to present a shortened and simplified form of information to retail investors, while still enabling technical details to be revealed to advisers and others. Investors may obtain a copy of the full documentation on request: s 712(5).

Offer information statements

An offer information statement may be used instead of a prospectus for an offer of securities of $10 million or less: s 709(4). This document has fewer disclosure requirements than a prospectus.

Profile statements

These documents are a brief summary statement prepared in addition to a prospectus. Section 721 allows for a profile statement to be sent out to investors with offers, provided ASIC has approved. A prospectus must still be lodged with ASIC and investors are entitled to a free copy of the prospectus on request.

Section 710 requires a prospectus to contain all information that would enable investors and their professional advisers to make an informed assessment of the issuers prospects.

Section 715 requires an offer information statement to contain minimal information compared to a prospectus. Such information includes the following: :

identify the company and the nature of securities on offer;

describe the companys business and the purpose for the funds raised;

state the nature of the risks involved in investing in securities;

state that investors should obtain professional advice ; and

state that it is not a prospectus and that it has a lower level of disclosure.

Consent is required, if any persons name is going to be included in the disclosure document: s 716(2).

Section 727 provides that securities must not be offered, unless there exists a current disclosure document that has been lodged with ASIC. Offers of securities (which include shares: s 761A) need disclosure (ss 706, 707) unless exempted under s 708.

After the document is created, the disclosure document should be lodged with ASIC (s 718).

Application: The facts indicate that the amount to be raised is between $9 million and $11 million. As the company aims to raise more than $10 million, an offer information statement is not available. Accordingly, it would be necessary for Flywell to provide investors with a prospectus: s 709(1). A short form prospectus may be adequate, provided that the material is already with ASIC (s 712). After obtaining the consent of the relevant parties, the company may lodge the document with ASIC.

Conclusion: Flywell Ltd will have to provide investors with either a prospectus or a short form prospectus.

Refer to the facts above. Assume that Flywell Ltd has issued and lodged a prospectus with ASIC. The prospectus contains a totally unrealistic profit forecast made by the directors and supported by a quote from an independent industry expert. Flywell Ltds expansion was a disaster because market demand for domestic travel slumped unexpectedly soon after the prospectus timeframes closed.

The investors have commenced legal action on the basis that the profit forecast statements in the prospectus were misleading or deceptive. Assuming this to be the case, advise the following parties on their respective rights and liabilities:

a.the investors of Flywell Ltd;

b.Flywell Ltd; and

c.Flywell Ltds directors.

Answer Outline Part 2

What are the rights available to the investors?

Under s 728(1), a disclosure document must not contain any misleading or deceptive information and it must not contain any omission of information required under the legislation.

If a disclosure document is misleading and as a result contravenes s 728(1), s 729 notes that investors may recover the loss or damage they suffered from any of the following:

the company;

the directors;

any proposed directors named with their consent;

underwriters named with their consent;

a person named in the disclosure document, with their consent, as having made a statement that is included in the disclosure document or on which the disclosure document is based. Such a person is only liable for the loss or damage caused by the inclusion of his or her statement; and

a person, who contravenes or is involved in the contravention of s 728(1).

Application: In this case, the company issued a prospectus, which was a disclosure document. However, the information contained in the prospectus in relation to profit forecast was extravagant. This means that the information could be deemed misleading and deceptive because a profit forecast should be based on reasonable grounds. Accordingly, there is a possible breach of s 728.

Since the investors invested in the company based on this information, and as the companys expansion was disastrous and resulted in a loss, the investors may sue the company, the directors and any other person that was involved in the contravention, for compensation. This would include the industry expert, providing this persons statement was included in the prospectus document with their consent. This person will only be liable for the loss or damage cause by the inclusion of their statement.

Conclusion: Investors have a right to receive compensation from the company, the directors and the industry expert, providede the experts statement is misleading and was included in the prospectus with their consent.

b. What are the rights and liabilities of the company?

The parties that may be liable under s 729 may avoid any civil or criminal action for a misleading prospectus, if they can use any one of the following defences:

Section 731: Due diligence is a defence available in cases where a prospectus is misleading. Those liable under s 729 may avoid such liability, if they can prove that the following elements are present:

The person made all inquiries that are reasonable in the circumstances of the case. Accordingly, the person needs to make inquiries to verify that the information in the prospectus is correct.

After making the necessary inquiries, the person must believe on reasonable grounds that the statement was not misleading or deceptive. Further, the person must believe on reasonable grounds that there is no omission.

In determining if this defence is available, the court is likely to consider the way in which the prospectus was prepared: was the preparation of the document guided by best practice? This has led to the establishment of due diligence committees. The aim of these committees is to ensure that all the information in the prospectus is accurate and that the prospectus is complete.

Section 733: There are defences under s 733 for all types of disclosure documents as follows:

Reasonable reliance defence: s 733(1) and (2). A person can use this defence if he/she can prove that there was reasonable reliance on information supplied by:

someone other than a director, employee or agent of the company (if the defendant is a company); or

someone other than an employee or agent of the individual (if the defendant is an individual).

Therefore, if the reliance, even if it is reasonable, is on a director or an employee, for example, this defence will not be available.

Withdrawal of consent: s 733(3). A person, who is named in the disclosure document, may avoid liability if he/she can prove they publically withdrew their consent to being named in the disclosure document.

Unaware of new circumstances: s 733(4). If the defendant can prove that he/she was unaware of new circumstances arising after the disclosure document was made, then liability may be avoided. However, if he/she becomes aware of such new circumstances, which may affect the information in the disclosure document, a supplementary or replacement document must be lodged with ASIC.

Section 732, which notes that lack of knowledge is a defence, is not a defence for a prospectus. It only applies for offer information statements and profile statements.

Application: As noted in Question a, the prospectus is misleading and as a result the company is liable to compensate the investors for their loss.

However, does the company have any defences?

Section 731: The due diligence defence may apply here ,as the disclosure document is a prospectus. However, in this case this defence is not available because the information is extravagant. This suggests that the company did not take care to verify or make inquiries in relation to such a profit forecast.

Section 732: A lack of knowledge defence does not apply here because the company issued a prospectus and not an offer information statement or a profile statement.

Reliance defence: The company may have relied in this case on the directors or other employees of the company. However, where there is reliance on directors or employees, then this defence will not apply, as the company should rely on a person other than a director, employee or agent of the company. This is not the case here.

Withdraw consent: This is irrelevant in the case of a company, which does not fall under any of the categories of s 733(3).

Unaware of new circumstance: This defence is not relevant because the prospectus was originally misleading. No new information appeared after the issue of the prospectus to make it misleading.

Conclusion: The company is liable to compensate the investors and does not have any defences.

c. What are the directors rights and liabilities?

Law: Same as in Question b.

Application: As noted in Question a, the prospectus is misleading and, as a result, the directors are liable to compensate the investors for their loss.

However, do the directors have any defences?

Section 731: The due diligence defence may apply here, as the disclosure document is a prospectus. However, in this case this defence is not available because the information is extravagant. This means that the directors did not take care to verify or to make inquiries in relation to such a profit forecast.

Section 732: A lack of knowledge defence does not apply here because the company issued a prospectus and not an offer information statement or a profile statement.

Reliance defence: The question did not mention in this case that the directors relied on anyone. Accordingly, this defence is not relevant.

Withdraw consent: The directors did not withdraw their consent.

Unaware of new circumstance: This defence is not relevant because the prospectus was originally misleading. No new information appeared after the issue of the prospectus to make it misleading.

Conclusion: The directors are liable to compensate the investors and do no

Week 13 Takeovers and External Administration

Learning objectives

After completing this topic, you should:

be able to explain the methods by which a takeover of a company may take place.

be able to explain the advantages and disadvantages of each type of external administration for insolvent companies (winding up also called liquidation, receivership, voluntary administration and scheme of arrangement).

be able to outline the main procedures involved in each type of external administration, including the timelines and outcomes.

understand who may appoint each type of external administrator.

be able to discuss how each type of external administration impacts the companys stakeholders including creditors and employees.

outline the role and powers of the court in external administration.

Introduction

What is a takeover?

The word takeover refers to the position whereby a company undergoes a change of control.

This will take place when there has been a transfer of voting shares in the company sufficient to enable the purchaser of the shares to control the decisions made at a general meeting.

One company (the bidder) makes an offer to the shareholders of another company (the target).

Hostile takeover where the takeover bit is made over the head of the existing management.

Terminology

Takeover, reconstruction and amalgamation, scheme of arrangement

Ch 6, 6A, 6B and 6C of Corporations Act 2001(Cth)

Regulation of takeovers improves market efciency, achieving an appropriate balance between encouraging efcient management and ensuring sound investor protection, particularly for minority investors.

Takeovers Panel

Control transactions in Australia most commonly involve a bidder acquiring all (or at least a majority) of the voting securities in the target and the target becoming a subsidiary of the bidder.

Regulatory policy

The Corporations Act imposes an additional layer of regulation, constraining and requiring disclosure by the buyer rather than the seller, where the buyer seeks to acquire control.

Additional layer of protection

Arguments for

Protection of small shareholders

Prevent acquisition of control at a price less than the full value of assets

Arguments against

Interfere with the efficient operation of the market for corporate control

Australia level of takeovers are too low for increased regulation

Intermediate position takeover law should be optional, to the limited extent that shareholders should be entitled to decide whether their company should be subject to particular mandatory takeover rules.

Company Law Advisory Committee Second Interim Report to the Standing Committee of Attorneys-General, Disclosure of Substantial Shareholdings and Takeovers (February 1969).

Australian statutory regulations

Summary of statutory provisions:

Section 602 the purpose of Chapter 6

Section 606 prohibition on certain acquisitions of relevant interests in voting shares

Section 608 relevant interest in securities

Section 611 exceptions to s 606

Sections 616 off-market bids and market bids

Sections 661A and Section 664AA compulsory acquisition

Section 662A(1) compulsory buy-out

External administration introduction

Overview

A company the board of directors for the benefit of the company as a whole maximise shareholder wealth.

Times of financial trouble

the best interests of the company an external person appointed to manage the company rather than the directors and officers.

External administration

a situation where an external person is appointed (in one of several ways either by the company, or its creditors, or the court) to manage the company and, in particular, its financial affairs with a view to either:

rescuing the company; or

providing a fair and orderly process for dealing with its property during insolvency.

Ch 5 of the Corporations Act 2001 (Cth).

There are four main types of external administration

Winding up (also called liquidation)

Receivership

Voluntary administration

Scheme of arrangement

Purpose of external administration

To ensure companys assets are used in a way that is fair to all the creditors.

Centrally control the repayment of debts on the basis of pari passu principle.

Investigate and report on the causes of corporate insolvency.

Winding up is different to other methods as the purpose of winding up is to terminate the companys business, distribute all of the companys assets and, ultimately, deregister the company so that it no longer exists.

Other types of external administration have the purpose of either preserving assets (for example, receivership) or of restructuring the company and its debt repayment obligations to save it from liquidation (voluntary administration and scheme of arrangement).

Insolvent trading

Purpose of Australian insolvency law

The Australian Law Reform Commission General Insolvency Inquiry (commonly known as the Harmer Report)

Insolvency law should provide mechanisms that enable both debtors and creditors to participate with the least possible delay and expense.

An insolvency administration should be impartial, efficient and expeditious.

The law should provide a convenient means of collecting or recovering property that should properly be applied toward payment of the debts and liabilities of the insolvent company.

The principle of equal sharing between creditors ( pari passu ) should be retained.

Insolvency law should support the commercial and economic processes of the community.

Insolvency law should harmonise with the general law.

Insolvent trading

Refer to Week 5 materials as to insolvent trading.

Duties of directors and management of distressed companies

Directors must ensure that restructuring proposals are in line with the fiduciary obligations o the directors.

Section 180(1) and (2)

Section 181

Sections 182 and 183

Section 588G

Continuous disclosure

Winding up

Also called liquidation.

Appointment of liquidator sell all of companys assets and distribute to creditors.

Surplus, if any, goes to the shareholders in accordance with companys constitution.

Liquidators can undo previous corporate transactions; sue directors for insolvent trading.

Deregistration of the company.

Winding up is a form of external administration under the IPS (Corporations) and so Part 3 of the Insolvency Practice Schedule (IPS) (Schedule 2 of the Corporations Act) does apply to liquidation.

Different types of winding up

Compulsory winding up

Court order under Pt 5.4 of the Act, on the basis of insolvency (under s 459A)

Some other ground (under s 461), which includes the just and equitable ground.

Voluntary winding up

Members voluntary winding up

Creditors voluntary winding up (ASIC can put a company into creditors voluntary winding up)

Compulsory winding up standing to apply

Section 459P (for insolvency)

e.g. company, creditor, ASIC, liquidator, contributory

Section 462 (for other grounds)

e.g. company, creditor, ASIC, liquidator, contributory.

Section 459P (for insolvency) most common ground.

Section 95A = inability to pay debts as and when they become due and payable.

The fact that the company has not paid its debt is not proof of insolvency. The company may dispute the existence or quantum of the debt.

Presumptions of insolvency: s 459C

e.g. failure to comply with a statutory demand: s459C(2)(a).

Failure to comply with a statutory demand: s459 C (2) (a)

Failure to comply with statutory demand gives rise to the presumption of insolvency.

Debtor company receiving a statutory demand only has 21 days to comply, otherwise presumption of insolvency arises: David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265.

The debtor company may apply to set aside the statutory demand on the basis of

defect causing substantial injustice: s 459J(1)(a)

genuine dispute about amount owed: s 459H

the offsetting amount owed by the creditor to reduce amount below $2,000: s 459H

some other reason: s 459J(1)(b)

John Holland Construction & Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250.

Two court hearings

to determine whether to set aside the statutory demand

to determine whether to appoint a liquidator, dismiss or adjourn proceedings: s 467.

Company can oppose winding up application by establishing its solvency.

Companys creditors also can oppose the making of a winding up order.

Members voluntary winding up

Can only arise if the company is solvent.

The process involves

Directors declaration that the company is solvent and will remain solvent for at least 12 months (s 494)

The members passing a special resolution to wind up the company voluntarily

Appointment of the liquidator (providing they consent), who takes control of the company: s 493

If the directors fail to make a declaration of solvency, or if a liquidator appointed by the members determines that the company is insolvent, then the voluntary winding up may only be undertaken with the permission of the creditors creditors voluntary winding up.

Creditors voluntary winding up

If the directors fail to make a declaration of solvency, or if a liquidator appointed by the members determines that the company is insolvent

Creditors meeting will be called.

Creditors must pass an ordinary resolution to wind up the company.

Creditors vote at the end of a voluntary administration: s 446A.

Members special resolution at members meeting the starting point

Creditors meeting: s 497

resolution to wind up + appoint a liquidator

ASIC also has the power to order a company to be wound up under Pt 5.4C.

Section 489EA sets out a number of reasons that may allow ASIC to wind a company up.

Commencement of winding up

Important as it is the time for voidable transactions to be assessed by liquidator.

Commencement date.

Court ordered winding up begins date of the court order: s513A(e).

Members voluntary winding up begins the date the special resolution passed by members at members meeting.

Creditors voluntary winding up begins date of creditors meeting: s513B(e).

Companies already in external administration process

if a company goes from voluntary administration to liquidation, then the commencement date of the liquidation is generally the date the administrator was appointed.

Liquidation

A person must not work as a liquidator unless they are registered with ASIC: s 532(1).

Who may work as a liquidator?

Qualifications

have certain educational qualifications (essentially an approved undergraduate degree in accounting);

be a fit and proper person;

maintain adequate professional indemnity insurance; and

demonstrate sufficient experience in insolvency work.

Prohibitions from acting as a liquidator

they are a creditor of the company (or of a related company) for more than $5000; or

own a substantial shareholding in a company (or related company) that is owed more than $5000 by the company in liquidation: s 532(2)(a) and (b).

officers, employees and auditors of the company in liquidation are prohibited from working as the companys liquidator: s 532(2)(c).

Duration of liquidation.

Liquidation ends with the deregistration of the company

Time-consuming process

Liquidators role

Ascertain the extent of companys assets and liabilities.

Determine the most efficient method of realising the cash value of companys assets.

Distribution of the companys assets to the companys creditors under priority payment provisions: Pt 5.6, especially s 556.

Employees have a special ranking under s 556

Where insufficient funds, employees may claim against the Fair Entitlements Guarantee (FEG).

Section 563A claims by shareholders for statutory misleading or deceptive conduct or defective disclosure (subordinate claims) are postponed until all other debts of the company have been paid in full.

Once all of the companys assets have been realised and the proceeds distributed to creditors, the liquidator will send copies of their final report to creditors and to ASIC, which will then deregister the company, ending the companys separate legal existence.

Power of the liquidator

Main powers are under s 477

Manage the companys affairs

Take and defend legal action on behalf of the company, including to sue directors for breach of duties , insolvent trading (s 588G) and to recover voidable transactions, and

Make compromises with the companys creditors.

Liquidators have the power to sue directors for breach of duties owed to the company under Pt 2D.1 and for insolvent trading: s 588G

Liquidators may also reclaim property disposed of by the company prior to its liquidation under the voidable transaction provisions in Pt 5.7B Div 2.

Conduct public examinations before the court of officers and former officers of the company: s596A.

Apply to the court to examine a person with information relating to the affairs of the insolvent company: s 596B.

Disclaim onerous property or contracts: s 568; Re Real Investments Pty Ltd [2000] 2 Qd R 555.

Applying for directions.

Statutory responsibilities of liquidation

Duty to

Collect the debtor companys assets: s 478

Keep various books and accounts: ss 531, 539

Report to ASIC on possible breaches of the law: s 533.

Section 9 definition of an officer includes liquidators statutory duties of company directors and officers.

If a liquidator has not performed their role appropriately, for example by being biased towards one particular creditor, then the court may replace them under IPS (Corporations) Div 90.

Liquidators may also be removed by the creditors at any time and without any particular reason: IPS (Corporations) s 90-35.

The court and ASIC also have the power to conduct an investigation into the liquidators conduct: IPS (Corporations) ss 90-5, 90-10.

The Insolvency Law Reform Act 2016 (Cth) also introduced a power for the court, ASIC or the creditors to appoint a liquidator to review the conduct of the liquidation: IPS (Corporations) ss 90-23, 90-24. 7

Impact of liquidation on creditors

Appointment of liquidator imposes a moratorium on the enforcement of claims by creditors: s 471 B.

Commencement of liquidation creditors have a right to lodge a claim (proof of debt) with the liquidator attend and vote at creditors meetings to receive a share of the distribution of the companys assets (pari passu).

Creditors are also given rights to require the liquidator to provide information, documents or reports in relation to the external administration, and rights to require the liquidator to convene creditor meetings: IPS (Corporations) Div 70.

Secured creditors not impacted by liquidation.

Common characteristics of compulsory and voluntary liquidation

In both cases:

the liquidator takes control of the company and analyses the companys financial position;

the liquidator must keep the creditors, and members of the company informed of the progress of the liquidation (see IPS (Corporations) Divs 70, 75);

the liquidator must attempt to satisfy all of the companys liabilities and then distribute any remaining assets of the company to the members in accordance with the statutory priorities and corporate constitution;

the liquidator may engage in litigation on behalf of the company;

the liquidator comes under the supervisory power of the court (see IPS (Corporations) Div 90); and

the final result is ordinarily the deregistration of the company.

Advantages and disadvantages

Advantages

Liquidators have extensive powers of investigation, and they have the time to determine why the company failed and whether any action should be taken against the directors and officers.

Liquidators may sue the directors for insolvent trading and claim back property transferred by the company prior to liquidation under the voidable transaction provisions.

Disadvantages

Liquidation effectively kills the companys separate existence and terminates its workforce.

The appointment of a court ordered liquidator acts as an automatic notice of termination of their employment: McEvoy v Incat Tasmania Pty Ltd (2003) 130 FCR 503

Receivership

Usually involves secured creditors.

Appointment of a receiver to take possession of secured property and

sell it to repay secured debt, or

manage the business until the threat posed to security can be removed.

Receiver owes the company a duty of care (s 9: definition of officer).

Court can appoint a receiver if the companys assets are in danger.

Private appointment and public appointment of receivers.

Receivership is not a form of external administration under the IPS (Corporations) and so Part 3 of the IPS does not apply to receivers.

Receivers are still required to be registered liquidators and so Parts 1 and 2 of the IPS (Corporations) apply.

Receivership how o sot commenced?

A receivership may be commenced by either:

A secured creditor (for example, bank or finance company or trustee acting on behalf of debenture holders) appoints a receiver to take possession of the secured property.

Court appointment.

Who can be a receiver (s 418)?

A person must be a registered company liquidator: s 418.

There are also specific limitations on particular persons working as receivers in respect of certain companies: s 418.

These exclusions are based on the requirement for insolvency practitioners to remain independent of the company.

The independence requirements expected of privately appointed receivers are different from those expected of liquidators and voluntary administrators.

Privately appointed receivers owe their duties to the appointing creditor and not to the creditors as a whole.

Receivers role and powers

Primarily to protect the companys assets.

Power to manage the corporations' affairs: s 420

power to control the property in accordance with the appointment instrument

carry on the business of the company engage or discharge employees

directors are not removed from their position. However, limited powers to the extent conferred upon the receiver.

Powers under the Act are not a complete code need to consider the appointment instrument.

Duties of receivers

Section 9 definition of an officer includes receivers thus, have duties under ss 180184 of the Corporations Act.

Common law

Receivers must perform their function at a level of reasonable skill and diligence

Receivers owe duties to the appointing creditor, the general creditors and the debtor company.

Nonetheless, the duty owed to the appointing creditor is treated as paramount.

Duty not to recklessly disregard the debtor companys interests, when selling the companys assets and to account to the company for the surplus.

Receivers: the power of sale

Section 420A(1) provides that in exercising a power of sale in respect of property of a corporation, a controller must take reasonable care to sell the property for:

market value, or

the best price that is reasonably obtainable.

A receiver who sells the debtor companys property without reasonably attempting to obtain the best price in the circumstances may be liable to pay compensation.

Must obtain the best price reasonable in the circumstances: Florgale Uniforms Pty Ltd v Orders (2004) 11 VR 54.

Liability of receivers

Receivers are agents for the debtor company

Therefore, where they continue to rent a property or continue to employ workers, and they are not personally liable. The company is.

Where a receiver enters into new contracts, they are personally liable: s 419.

Generally will seek indemnity from appointing secured creditor before they accept the appointment.

Impact of appointment or receivers on directors

Varies with the type of appointment and terms of the appointment.

Court appointed receiver

appointed to control and manage the debtor companys business leaves little for the directors to do in terms of managing the company + no powers unless granted by the receiver.

Privately appointed receiver terms are set out in the security instrument.

Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782

A valid receivership and management will ordinarily supersede, but not destroy, the companys own organs through which it conducts its affairs. The capacity of those organs to function bears an inverse relationship to the validity and scope of the receivership and management.

Board can challenge the appointment of the receiver or acts of the receiver: ss 418A, 434A.

Directors have an obligation to report to the receiver about the companys affairs: s 429.

Directors general and statutory duties continue.

Rosetex Co Pty Ltd v Licata (1994) 12 ACLC 269

Impact of receivership on the company, creditors and employees

Company

The appointment of a receiver or other controller will significantly impact the companys business and commercial reputation.

Public notification of the appointment of a receiver: s 428

More likely to be a triggering event for ther other security agreements.

Creditors

Does not terminate the contracts entered into by the company.

Private appointment of a receiver does not impose a moratorium on the enforcement of claims by other creditors usually few claims, as the assets are owned by the secured creditor, not the company and its unlikely the company could pay a judgment debt.

Employees

Receivers have the power to hire and fire employees.

Limited protection when compared to voluntary administration or liquidation.

Overlap of receivership with other types of external administration

Liquidation

the private appointment of a receiver is not prevented by the fact that the debtor company is already in liquidation.

a company that is currently in receivership may still be placed into liquidation.

the agency status of a receiver is protected after the appointment of a liquidator provided that the receiver obtains the permission of the court or the liquidator when taking action on behalf of the company: s 420C

Voluntary Administration

A large secured creditor (that is, a creditor with an enforceable security over the whole or substantially the whole of the companys property) is allowed to enforce its security within the decision period of a voluntary administration: s 441A.

Where a receiver is already in control of the secured assets of a company, the appointment of a voluntary administrator will not prevent the receiver from acting.

Advantages and disadvantages

Advantages

the receiver replaces the debtor companys management and thus safeguards the companys assets from further depletion.

a privately appointed receiver works for the benefit of the appointing secured creditor and provides an efficient way to maximise their interests.

Disadvantages

the privately appointed receiver does not act for the benefit of creditors, generally not generally directly liable to the general creditors.

the lack of a moratorium, particularly with regard to property that is leased by the debtor company.

the almost exclusive focus of private receivership is on protecting the rights of secured creditors to the exclusion of other stakeholders.

Voluntary administration

Overview

The aim is to rehabilitate the company.

Appointment of an independent external person (voluntary administrator), who takes control of the company.

End of administration, the options are

place company in liquidation

end the administration (rare), or

enter into a deed of company arrangement (DOCA).

Voluntary administration is a form of external administration under the IPS (Corporations) and so Part 3 of the IPS does apply to administrators.

Purpose of voluntary administration

The purpose of voluntary administration is to assist insolvent companies to trade out of their difficulties: s 435A(a).

The object of Pt.5.3A is stated in s 435A as being to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of the business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence results in a better return for the companys creditors and members than would result from an immediate winding up of the company.

Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509

How is voluntary administration connected?

Three ways to commence voluntary administration:

Section 436A by the company (except where the company is in liquidation).

Most common.

Section 436B by the liquidator.

Section 436C by a secured creditor (except where the company is in liquidation)

a secured creditor with an enforceable security interest over the whole or substantial whole of the companys property.

Who may work as a voluntary administrator

Only a registered company liquidator can work as a voluntary administrator: s 448B.

Independence of voluntary administrators.

voluntary liquidators must declare all previous relationships with the company and its directors at the time of appointment: s 436DA.

creditors can remove, assist and advise and replace administrators.

Duration

Commences when the administrator is appointed.

Ends after the final creditors meeting: s435C(1).

This meeting determines the companys fate.

Section 439A states that there are three possible outcomes for this meeting:

Terminate the administration and return control to the directors

Enter into a deed of company arrangement, or

Wind up the company.

Once appointed, the voluntary administrator takes control of the company, and the directors powers of management are frozen: s 437 D.

Role of administrator during creditors meeting

Must call a second creditors meeting within five business days after the end of the 20-business-day convening period: s 439 A (5).

Purpose of this meeting is to decide the companys future: s 439C.

To vote at a creditors meeting, a creditor must have a proof of debt accepted by the administrator.

Voting is usually on a show of hands.

Defects in procedures at creditors meetings can be cured by the court: s 447A and s 1322.

Mighty River International Limited v Hughes [2018] HCA 38

Administrators powers

Section 437A gives administrators the power

to control company business, property and affairs

carry on that business and manage that property and those affairs

terminate and dispose of all or part of that business, and may dispose of any of that property

perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company was not under administration.

A secured creditor with security over all or substantially all of the companys assets can take enforcement action within 13 days of the appointment of the administrator: s 441B

Administrators duties and liabilities

A voluntary administrator is an officer of the company: s 9

Duties of company officers in ss 180184 apply to voluntary administrators.

Acts as an agent of the company: s 437B no personal liability

There are some limited exceptions (s 443A):

a voluntary administrator will incur personal liability for rent payable by the company from five business days after their appointment, although the administrator may disclaim liability under the lease by serving a notice on the lessor (in which case the administrator is bound to return the property to the lessor); and

a voluntary administrator will also incur personal liability for contracts entered into by the administrator during their appointment.

May claim indemnity over the companys assets to satisfy their personal liability: s 443D.

Must report breaches by company officers to ASIC: s 438D.

Impact of voluntary administration

On the company and its directors

Power of the board is suspended, and the administrator takes control of the company: s 437 C.

Directors must assist the administrator: s 438 B.

provide the administrator with a report regarding the companys affairs

give the administrator any company books that the directors have in their possession

attend on (that is, assisting) the administrator

provide any information concerning the companys affairs that is required by the administrator

Directors cannot deal with the companys property unless the administrator consents.

Where a person suffers damages due to directors not obtaining consent, then such directors may be liable to personally compensate that person: s 437E.

Personal guarantees given by the companys officers for the companys debt cannot be enforced during the period of administration: s 440J.

Impact of the administration on creditors and employees

Moratorium on creditors claims (s 440D), including secured creditors, unless approved by the court: s 440.

During the moratorium period:

judgment creditors may not seek to enforce the payment of debts ordered by the court; and

court officers (sheriffs etc) may not execute repayment for judgments debts.

Secured creditors who commenced enforcement prior to administration can proceed: s 441B.

Secured creditors with security over all or substantially all of the companys assets can enforce their security up to 13 business days after the administrators appointment: s 441A.

Impact of the administration on employees

Appointment of administrator does not automatically terminate the employees contract.

Administrator may elect to terminate some or all of the employees contracts: s 437A.

Deed of company arrangement (DOCA)

After the end of voluntary administration, the companys creditors may agree to execute a deed at the final creditors meeting held under s 439A.

If the creditors fail to make a decision, the company automatically goes into a creditors voluntary liquidation: s 446A.

A DOCA is an arrangement between the company and its creditors whereby the creditors agree not to pursue their otherwise legally enforceable rights against the company in order to give the company a better opportunity to meet its liabilities.

A deed only requires a simple majority of creditors to pass a resolution to approve a deed proposed by the administrator at the final creditors meeting.

DOCA may include any number of changes to business

Sell assets

Alter company management, or

Change to business leading up to liquidation.

Effect of DOCA on creditors

Binds all unsecured creditors and company officers: s 444D.

Creditors retain rights against the directors and related companies: Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509.

Secured creditors are bound by the DOCA ONLY if they voted for the deed.

An unsecured creditor concerned about the impact of the deed on their rights may apply to the court to have the deed set aside: see s 445D.

Until the deed terminates, creditors may not:

make or prosecute an application for the winding up of the company; or

take any action against the company or its property without the courts leave.

Contents of a deed and variation and termination of a deed

The contents of a deed of company arrangement (a deed) are prescribed under s 444A(4), reg 5.3A.06 and Sch 8A.

Summary of matters that must be disclosed in a deed:

the property covered by the deed;

the impact of the deed on the pre-existing debts of the company;

who shall administer the deed;

whether the deed is subject to any conditions;

the duration of the deed; and

how the deed may be terminated.

Employees must be given priority for their statutory entitlements otherwise they must approve of the DOCA under a resolution at a separate meeting: s 444DA.

Variation and termination of a deed

Can be altered by an ordinary resolution at a creditors meeting: s 445A.

A creditor who is dissatisfied with the variation of the deed may apply to the court for an order setting aside the variation: s 445B.

Can be terminated, by

the terms of the deed

a creditors resolution passed at a meeting

court order: ss 445D, 447A.

The court also has the power under s 445G to make an order concerning the validity.

Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612

Role of the court during a voluntary administration

General powers: S 477A

The court does have a general supervisory power with respect to voluntary administrations under s 447A(1).

The power of the court to make orders regarding the operation of voluntary administration has been interpreted very broadly.

Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270

Examples of where s 447A has been used include:

removing an administrator;

amending or terminating a deed of company arrangement;

extending time periods under Pt 5.3A;

approving a proposed deed of company arrangement;

curing procedural defects in meetings held under Pt 5.3A; and

invalidating the resolutions of a creditors meeting under Pt 5.3A.

Re Strawbridge, Virgin Australia Holdings Ltd (admins apptd) [2020] FCA 571

Specific powers

The court has the following specific powers:

making orders to protect creditors (IPS (Corporations) s 90-15);

declare the validity of an administrators appointment (s 447C); and

give directions to the administrator about the conduct of the administration (IPS (Corporations) s 90-15).

Advantages and disadvantages

Advantages

Provides a very extensive moratorium over claims against the company, which gives the company time to formulate a restructuring process.

Where the company enters into a deed of company arrangement, there is a considerable amount of flexibility in the deed procedure.

The coverage of the moratorium over secured creditors as well as owners and lessors of property used (but not owned) by the debtor company provides considerable leverage for the administrator to continue trading the business or to sell the business as a going concern.

Quicker and cheaper to implement than a scheme of arrangement.

Disadvantages

The time limits imposed on administrators are, in complex cases, highly unrealistic.

In some cases, it may be that directors appoint a voluntary administrator to delay the winding up of the company or to frustrate (because of the moratorium) litigation against the company.

The directors appoint the administrator in the vain hope of saving the company, when in fact the business is hopelessly insolvent and should be wound up without further delay.

Scheme of arrangement

Overview

An arrangement between the company and its creditors.

Section 411 of the Corporations Act.

Rare since the introduction of voluntary administration, as more complex and expensive than voluntary administration and requires court approval.

A scheme of arrangement is not a form of external administration under the IPS (Corporations) and so Part 3 of the IPS does not apply to administrators.

How is it connected?

A scheme of arrangement is commenced by the debtor company formulating a debt reorganisation with its creditors.

The company must prepare an explanatory statement (s 412) which details the nature of the scheme.

The content of the explanatory statement is prescribed under s 412 of the Corporations Act and Sch 8 of the Corporations Regulations.

Once the company has prepared the scheme proposal and explanatory statement, it must seek the courts permission to hold a creditors meeting to vote on the scheme proposal.

In deciding whether to grant permission to hold the creditors meeting, the court will examine:

whether the explanatory statement complies with the law;

whether the court would approve of the scheme if creditors did vote for the proposal; and

whether the scheme proposal is commercially fair and reasonable.

Once court approval to hold the meeting has been obtained, the company must hold a creditors meeting.

Creditors meeting: s411 (4)

The creditors meeting may approve of the scheme proposal by passing a resolution of creditors with a majority constituting 75% of the value of debts owed by the company.

However, that 75% majority must comprise at least 50% of the creditors of the company who are eligible to vote at the meeting.

One difficulty with schemes of arrangement is that the creditors meeting must be divided up into different classes of creditors, where the interests of creditors are different.

Final court approval

Protection of commercial morality of the scheme provisions

Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509

Different aspects of a scheme of arrangement

Who may work as a scheme administrator?

Scheme administrators are required to be independent of the company and must be registered company liquidators.

While acting as a scheme administrator, the person will be considered an officer of the corporation under s 9 of the Corporations Act and, therefore will come within the duties and obligations of company officers under the Act.

Duration

There are no legislative prescriptions as to the duration of a scheme of arrangement.

Scheme administrators role and powers

These are provided under the terms of the scheme proposal, further demonstrating the flexibility of a scheme of arrangement.

Impact on creditors

The impact of the scheme on creditors rights will be determined by the proposals documented in the scheme.

Dissenting creditors are bound by the terms of the scheme if the required majority approves the scheme at the creditors meeting and the court grants final approval to the scheme.

dissenting creditor may seek to oppose the scheme by giving evidence in court or complain to ASIC.

A scheme may be used to require creditors to give up their rights against third parties (such as directors or related companies) where the scheme is being funded by the third party and there is a sufficient connection between the purposes of the scheme and the claims of creditors.

Fowler v Lindholm (2009) 178 FCR 563

Advantages and disadvantages

Advantages

the flexibility of the scheme proposal.

a scheme of arrangement is able to bind dissenting creditors

Disadvantages

a scheme is a time-consuming process that requires both court and creditor approval.

the requirement to seek court approval twice (first to hold the creditors meeting and second to implement the scheme) is overly expensive

the process to implement a scheme is cumbersome compared with the process of voluntary administration.

Summary of Cases

David Grant & Co Pty Ltd v Westpac (1995) 184 CLR 265

John Holland Construction & Engineering Pty Ltd v Kilpatrick Green Pty Ltd (1994) 14 ACSR 250

Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785

Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160

Florgale Uniforms Pty Ltd v Orders (2014) 11 VR 54

Mighty River International Limited v Hughes [2018] HCA 38

Re Strawbridge, Virgin Australia Holdings Ltd (admins apptd) [2020] FCA 571

Week 14 revision

topics

Directors' duties

Duty of care and diligence

Insolvent trading

Loyalty

Shareholder Rights and Remedies

Corporate Liability, Promoters, Pre-registration Contracts and Corporate Contracting

Share Capital and Corporate Fundraising

External Administration

How to answer

First thing to do is find out if this person is a director?

Use the elements of a director to identify

What duties have they breach?

Then what would be the consequences for that breach?

Finally, whether they are remedied, are there defences available for these breaches?

Duty of loyalty or conflict of interest is one of the very important duties, simply because know directors are fiduciary. Directors are fiduciary in the sense that are having this special relationship with the company. And therefore, we expect these directors to have certain duties towards the company because of the special relationship they have. And one of the very important duties of a fiduciary, whether its a direct and or any other fiduciary. Its important to note that a director is not put themselves in a situation of conflict. Simply, because he/she are working for and on behalf of someone else when it is a fiduciary relationship. So, whatever the actions may be, it should be taken in that entitys or persons interest. So in order to make sure this happens, we need to force these fiduciaries by enforcing a duty. That is dont put yourself in a position of conflict. And thats so important classically, because if you put yourself in a position of conflict, you cannot do things in the best interest of the person that you are acting behalf. So this is the simple rule of fiduciary relationship. Then we translate this into directors. What is simply means is as a director, it there will be ample opportunity for a director to exploit opportunities for their personal benefit because of the fiduciary relationship. Because directors acting on behalf of the company and simply what this fiduciary duty is trying to do is you cannot do that. If you look at Broadman v Pitt, you will see that this fiduciary relationship or this duty of loyalty was constructed very strictly so simply that early stages, you will see in 1966 the advice that even the existence of mere possibility of conflict would be sufficient. So, it was not that you had acted upon it, that there was motivation for it. So, its going back to equitable principle, simply do not put yourself in a position where there is a conflict. Now as we progress through and as you know a company go through these complexities of commercial life, you will see that kind of approach might not be really possible to be followed in the modern context. And that is why we see little bit of flexibility and now the test that we used to understand a situation of conflict is, is there a real sense about a possibility of conflict? Now, when discussing or identifying director duties we must look at what is the standard that will be used by the court when it comes to assessing the conduct of directors?

We dicussed good faith that it is subjective.

We then object when we discuss in due diligence that it is an objective standard, a reasonable director in position.

So same way, when it comes to a conflict, we are going to talk about is there a real sensible possibility of conflict.

Application

How do we apply this test? OBJECTIVE TEST

The interplay between fiduciary duties and the statutory duties.

Corporation Act includes specifically the directors duties. Part of it is a quantification of common rights, so it exists in addition to what is being common law.

So the common law fiduciary duty of conflict has three main part

Simply do not put yourself in a position of conflict

Do not make secret profits.

Do not misappropriate companies, property or opportunities.

Those are the thee elements. Three broad elements of fiduciary duty.

And if you look into this statute, you will see that there are two very specific duties that actually correspond to the fiduciary duties here.

Section 182 talks about not using a position to gain an advantage or cause detriment to the company.

Because here we were not just interested in whether you gain a personal advantage or interest. We are also concerned about whether this caused a detriment to the company because do remember, there can be situation where it will be no benefits to the person who was actually doing this, but it will be detrimental to the company.

These are the link between these two propositions

Statutory duties are now empowered by the consequences which are there and the ability of the ASIC to step in. therefore the enforcement part of it is much more comprehensive than the fiduciary duties, because fiduciary duties, meaning the company needs to actually involve and enforce these duties.

There not separate duties, these are just different formulations of the same duty.

Conflict of interest ( question)

Have to discuss both aspects because were talking about the statutory duty, you then refer to the case law that has gone in to explaining the scope of the duty and some situations you will find that application of the fiduciary duties are very easy because of the facts that have been given to. So it is not to separate duties or two separate or two types of duties. Its just the same duty expressed in different ways.

So first

Start with fiduciary aspects then statutory duties to say whether there has been a breach of statutory duties that could result in the statutory consequences that are provided. So the will make a director responsible for much stringent enforcement provisions, then the fiduciary duties.

Please do remember when we are talking about fiduciary duties asked to conflict. There are two other aspects you must know because its simply provided in that in the statute.

Party transactions because it is part of misusing your position. Misappropriating your position. So you need to know about related party transactions and

then you need to know about disclosure, because disclosure is the way which you can get out of a conflict situation. Fully informed consent of the board of directors.

so these two aspects are provided in the statute, in addition to s182 and 183

you also need to know the provision as to related parties for public companies and disclosure is applicable to both private companies and public companies.

For example

A person thats a director has gained a secret commission by a secret fee, as it has not been disclosed to the company and should have been given to the company as a benefit. But the director has taken it right through.

What fiduciary rule applicable?

Conflict rule?

Profit?

Misappropriation?

Profit yes

Simply, a director should not obtain advantage for himself or herself, except with the companys fully informed consent. And if you do that, you need to account for that secret profits that you have made.

(thats the fiduciary part)

Now if the director whos definitely breached its fiduciary duties however its acts do not make secret profits. This can also be a breach of fiduciary duty.

This can also be a breach of directors duties to statutory provided under section 182 because the director has used the position of a director to obtain benefit. Obtaining the benefit parties already done as indeed because we know there was a secret commission and that is the satisfaction of that second part.

Then the director has obtained a personal benefit to himself. And the question is has this been obtained because of the position that this person holds?

Right so if thats is the case, if this was an opportunity came to this person because he/she was a director. So then yes you will be looking at section 182. It doesnt really matter how because it depends on how you want to formulate your answer, whether you discuss the stability provisions first. It doesnt matter only thing that matter is why you were told to discuss standard provisions in class. As the first option is practically none of the directors duties cases without a statutory introduction. What I need to do is show how fiduciary duties are linked to statutory provision. But how you to discuss it. It doesnt really matter but practically, if you look into any brief as to the breach of directors duties. You can see it start with the statutory provisions because its a qualification of common law. For example

Answer the exam with section 182 then move to fiduciary duties and case law.

Must identified the relationship

So if there is more then two directors then it means to focus on the presentation.

Begin with proving section 182 and 183

In section 182 it is about directors or other officers or employees of a corporation.

What is required prove of of statutory provisions:

improperly use of their position. (objective test)

To gain advantage to themselves or someone else or cause detriment to the company

These two elements are looked upon when identifying a directors breach

We could bring in the facts of case law to prove this element of particularly the improper use.

Yes because have conflict lead to it can be one of the elements of using a position for improper purpose.

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. (loyalty)

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.

How to answer:

First thing to be aware of LTD is a public compny therefore Green LTd is public compay,so special suties that applicable in public company situation.

Has three directors

There is constitution

There is a constitution about how to pass a resolution.

So there are majority shareholders

Why the managing directrs important?

Because ethere appointed to the board and theres nothing to prove. Its just section 9 that they are properly appointed as directors of the company. Yes duties apply.

What does this mean?

So I need to compare ryan with not just another director, not with non-executive directors. But what a directors in a managing position would have done in a similar situation. That is the the objective standard that I will try to measure him my view.

Remember

Objective test is all about what a director in these particular circumstances would do.

So hes not just merely a director but a managing director.

Being a managing director means you are the one who is entrusted wit the day to day operations of the company.

Its not just for duty of care and diligence. Its for loyalty aswell because the that we are using hes object. And that is when it comes to the assessment of whether these directors have performed their duties right, and we use an objective teast, it is very improtnt for us to understand what is their position.

The most important

You need to know a few things because when we look into what are the relevant factors, when you use an objective test, what kind of company use and the functions and responsibilities of the directors and what kind of expectations or interest might give rise to confict in a company like this. Your allowed to refer to the textbook for anything.

For instance

You can compare Ryan with any other director who is not managing director or non-executive director for that month.

Now Ryan becomes aware about a tender and he got exposed to report. Construction consultancy.

So theres another party Construction Consultany the facts show be aware Ryan obtaining a report, it is just telling you to be aware this might be a real sensible possibility of conflict because the relationship these two parties are having.

Getting to the stage where the material benefit or interest not happened.

But the moment you see that something I am director of this company and I am getting someone who is relatedto do something for the company. It should instantly make you connect that dfact with well conflict because you are a fudiciary to the company.

So whenever you introduce people who are related to you, this might lead to conflict.

Purpose of the report is t see whether the

Company is in a position to branch out, sothey can start the tender process. So it says dont expand.

It's not a good idea to expand. So he has information which is telling him don't expand . This company is in a struggling position and might prove distraous. And if things you know the things that are happening in external environment might affect the ability of the company to compete in this climate so Ryan decided to take the risk anyway and present the option to the moon.

is this about conflict or is this about diligence ? this is about diligence how did we come to that conclusion remember yes same with Alex right so yeah Ryan agrees without reading the report so so this directs you to conflict and so if the director's have not provided proper care diligence into things I mean there's nothing wrong with director's taking a risk don't get me wrong that's a part of their job but when you're taking a risk it has to be a risk that a reasonable director in a similar position would have taken. That's what we need to see whether that's what happened here so we are not these two tendencies so proper is not about conflict it's about diligence just seeing how it's very easy for an examiner to blend in facts that are relevant for two judy's right Alex is on their behalf the context of the reports but trust Ryan will do the right thing again and not exercising independent judgement but again facts that just highlight these indifferent it's just not relevant for Judy that we're discussing that is loyalty this is full diligence right now non executive director why is that important because we discuss about the directores and non executive director's and how they were treated historically because previously wasn't required them to be held to the same standard as executive director's. But after Daniels it's not possible anymore right there hold to the same standard and that one sentence is telling you quite a bit more she was indeed she's not turning up for meetings as usual and this is not just one situation this is a pattern and this can really affect her ability to prove that she has been diligent and she has been exercising duty of care towards the company since the resolution was to stop the manufacturer of materials immediately without being contingent acceptance of the grant Ann Ryan contracts contacts and partners to source the raw materials it did not . Is this conflict related or is this vengeance related ? Yes this is about conflict it is about disclosure right that single fact is given to you to say there is a conflict and it has not been disclosed to the company. Right now this is very obvious fact. one does this place in term of conflict we have a director he has his own company And then go to know something correct and then resign from the position to tender for the same contract so we have the directorsduty you know very general question because it contains more than one duty. So it has been asking you to discuss you know any breach of director's duties so let's look into the loyalty because you had a problem with how to formulate the question I am an answer to this kind of question let's start with loyalty aspect of it right now.

Obviously if you look into fiduciary junis the aspects that are relevant definitely the conflict rule has been breached . Corporate opportunity has been diverted. And they use misappropriation of companies information. For both directores it's quite clear that the fiduciary Judy has been breached if you look into section 182 there is a misuse of position because a contract has been given to a parent and a contract has been given to an in law . And both of these situation as a managing director you have substantial opportunity to make these decisions and that position has been improperly used .

And then there's another aspect in the new debate that this has caused detriment to the company but we don't have enough facts about whether this has actually detrimental.

Duties and Liabilities of Directors and Officers Framework of Duties, Duty to Act in Good Faith and Duty to Act for a Proper Purpose

Summary of Cases

Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6

De facto Directors

Grimaldi, although officially an external consultant, was given such power as an agent (and other ways) of the company that he was a de facto director

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109 19

Concerned whether Apple was an officer of Buzzle

Held that because they werent part of the company and that Apple had not exercised extreme influence over Buzzle and had merely given them directions to protect its own interests

Also not held to be shadow directors, as they were not proven to exercise direct influence, and while Buzzle did not feel they could have disobeyed Apple, they ultimately did it as it was in their own best interests

Shafron v ASIC [2012] HCA 18 (James Hardie Litigation)

Shafron had roles as co-company secretary and general counsel

These roles were held to be not easily mixed for the purposes of impugned decisions and breaches, and he was acting in his capacity as one of the most senior executives, and was hence an officer

CAC v Drysdale (1978) 141 CLR 236

De facto director category established for director not re-elected validly who continued to act as a director

ASIC v Adler (2002) 42 ACSR 80

20y disqualification

Factors

Specific and general deterrence

Dishonest conduct

Amount of loss

Abuse of a position of trust

History of similar breaches

ASIC v Vizard [2005] FCA 1037

Penalty decision, banned from director for 10y, and $390 mil fine showing that the deliberateness couldnt be mitigated

ASIC v Macdonald [No 11] [2009] NSWSC 287; (2009) 259 ALR 199 (James Hardie case Original decision)

ASIC v Hellicar [2012] HCA 17; Shafron v ASIC [2012] HCA 18 (James Hardie High Court case)

Gillfillan v ASIC [2012] NSWCA 370 (James Hardie case NSW Appeal Court Penalty decision))

Australian Securities and Investment Commission v Healey [2011] FCA 717

Westpac v The Bell Group Ltd (in liq) [2008] WASC 239

Nature of the company and the shareholders interests intersecting

Brunninghausen v Glavanics (1999) 46 NSWLR 538

Nature of shareholders as fiduciaries to each other in specific circumstances

In this case where one shareholder, B had not taken an active role due to a falling out, could G then ask B to sell shares to G when B was unaware of a mission to sell elsewhere afterwards for higher value?

No, it was a breach of fiduciary duty, the nature of which was due to the locking out of B as a director, who couldnt then know the value of the shares.

Parke v Daily News Ltd [1962] Ch 927 (not contemporary)

Companies owe a duty to the shareholders first, and then to employees

Case concerned the payment of benefits to employees as compensation for their dismissal during a business sale

Held it wasnt in the companys best interests, and therefore was invalid

Re Broadcasting Station 2GB Pty Ltd [1964-1965] NSWR 1648

Nominee directors (on behalf of majority shareholders)

Did these directors breach their duty by acting for the majority shareholders (or, was it oppressing the minority)?

No, because the action was still in the best interests of the company as a whole

Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722

Rights of creditors re directors duties

Directors of funeral company ratified an uncommercial lease while company was trading insolvent, was this a breach (to creditors)?

When trading insolvent, duty is to creditors and not to shareholders and the directors could therefore not approve the lease

Relevant cases

Walker v Wimborne (1976) 137 CLR 1 contains original statement that creditors are owed a duty during insolvency

Spies v The Queen (2000) 201 CLR 603 Clarifies that the right of creditors is not a general right to enforce against directors and only arises during insolvency

Howard Smith v Ampol Petroleum (1974) AC 821

Director relationship is a recognised case of fiduciary relationship

Duties to act for the company and

Not to act for personal benefit

Avoid conflicts of interest (third party benefit)

Relevant Case

Hospital Product Ltd v US Surgical Corp (1984) 156 CLR 41 original authority on fiduciary duties

ASIC v Adler (2002) 20 ACLC 576

Key case on directors duties they came close to breaching them all!

In relation to conflicts of interest, Adler and Williams gave Adler and unsecured loan from HIH so that Adler could firstly buy shares in a company he was involved in, and secondly use part of those funds to buy personal shares in HIH to inflate the value of them for Williams and himself

All held to breach the duty to avoid conflicts of interest and self-benefit

Mills v Mills (1938) 60 CLR 150

Proper purpose

Company resolved to give a benefit to ordinary shareholders (of which they were) giving themselves a benefit

Court held that this was in the best interests of the company and just because directors are shareholders doesnt automatically mean a breach of the duty to act for a proper purpose

Whitehouse v Carlton Hotel Pty Ltd (1987) 5 ACLC 421

Test for multiple purposes: If the conduct wouldnt have happened but for the improper purpose

In this case, after a divorce a Whitehouse decided to issue shares to come into force after his death to his sons, in addition to wife and daughters, diluting the power share

Held to be an improper purpose

Ngurli Ltd v McCann (1953) 90 CLR 425

Cant create new shares to dilute the voting power of shareholders or creating a new majority

Howard Smith v Ampol Petroleum (1974) AC 821 (again)

Improper purpose by using share issue to combat a hostile takeover

Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co (1968) 121 CLR 483

Shares were issued to a business partner to consolidate the relationship, held to be a proper purpose as it related to the companys interests and not to the directors themselves or their friends

Australian Securities and Investments Commission v King [2020] HCA 4

Duties and Liabilities of Directors and Officers Duty of Care and insolvent trading

Duty of care, skill and diligence The Basic (subjective) test (pp433-434)

The common law duty of care, skill and diligence was originally deemed to be a very subjective test, that is, what the directors actually thought rather than what a court would think in the particular circumstances. Historically, directors were viewed as country gentleman and were not expected to realise the significance of certain information in the financial accounts or to be aware of the companys affairs.

Basic (subjective) test In the case, Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 Chancery Court (UK), Justice Romer discussed principles for assessing the duty of care and diligence - this former approach can now be compared with the current objective test, or objective statutory standard of care that was introduced into the corporations legislation in 1993: see now s180(1).

Directors need to exercise reasonable care, as if the business were their own but need not exhibit in the performance of their duties a greater degree of skill that may reasonably be expected from a person of their particular knowledge and experience;

Directors are not bound to give continuous attention to the affairs of the company because the duties of directors are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee to which the directors may be appointed;

Directors may properly rely on the actions of company officials, unless there are reasonable grounds for suspecting that the officials are not adequately performing their roles.

Trend toward higher standards for the duty of care, skill and diligence (p434-435)

Metal Manufacturers Pty Ltd v Lewis (1988) 13 NSWLR 315 at 318-19 - Kirby P stated:

The time has passed when directors and other officers can simply surrender their duties to the public and those with whom the corporation deals by washing their hands, with impunity, leaving it to one director or a cadre of directors or to a general manager to discharge their responsibilities for them

Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 126 Tadgell J stated:

[P]arliaments and courts have found it necessary in legislation and litigation to refer to the demands made on directors in more exacting terms than formerly; and the standard of capability required of them has correspondingly increased

Corporate Governance standards increased after the UK 1992 Cadbury Report and Australian Bosch Report.

Centro Case (ASIC v Healey (2011) 196 FCR 291; [2011] FCA 7171 at [14]) Middleton J noted:

A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors

Modern (objective test) Duty of Care demanding a higher standard of care (p435-438) also in reading 16 on (pp 474-475)

Changing community expectations of corporate responsibility see a discussion of the history of the duty of care in ASIC v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023.

Corporate Scandals and Corporate Law Reform The corporate greed and excesses of the 1980s resulted in spectacular corporate collapses which put the retirement savings of millions of Australians at risk. Tapping into community sentiment, the judiciary and parliament subsequently refashioned and elevated the standards of care and diligence expected of directors and other officers.

Corporate Collapses in 2001 HIH Insurance, One.Tel and the takeover of GIO by AMP. After these collapses, it became unacceptable to simply claim that one did not have the experience or skills needed to manage a company.

AWA Litigation created a fundamental shift in the assessment of common law directors duties of care, skill and diligence in Australia the appellate court decision in Daniels v Anderson is of particular importance for this reason. (see case summary in reading 16 on pp 476-481)

Assessing whether a breach has occurred (p439)

The standard of care will be influenced by the size and nature of the company, and the directors position and responsibilities within that type of company. It is important to determine:

The size and complexity of the company;

What the defendant director did within the company; and

Whether a reasonable director would have done the same thing in that situation (this may be based on evidence of what other directors within similar companies typically do).

Standard of care non-executive directors (p440-441)

James Hardie (pp442-445)

Misleading and deceptive market announcements (p445-446)

Common law vs statutory negligence (pp454-456)

Defences (pp456-465)

Delegation of responsibility to others;

Reliance on others; and

The business judgment rule.

Prescribed Text: Reading 16: J Harris, Company Law: Theories, Principles and Applications, 2nd ed, 2015 (Chapter 9) The Duty of Care and Diligence

Liability for insolvent trading (pp524-527)

Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699.

Case Readings

Re City Equitable Fire Insurance Co [1925] 1 Ch 407

Traditional subjective test for directors based on their skill (now overruled by legislation)

AWA Limited v Daniels (trading as Deloitte Haskins & Sells) (1992) 10 ACLC 933 Rogers, CJ/ Daniels v Anderson (1995) 37 NSWLR 438

Involving Daniels, an auditor who informed the Managing director but not the whole board of unauthorised transactions by Koval

Daniels and the board were found negligent, and the case espouses many relevant principles

CBA v Friedrich (1991) 5 ACSR 115 VSC

Key statement of directors liability to understand the nature of the business in the economic climate, where they must provide this level of duty of care to their duties

ASIC v Healey [2011] FCA 717 [Centro case - liability decision]

Puts a focus on particularly understanding financial statements

DCT v Clark (2003) 57 NSWLR 113 [2003]

Although directors bring particular skills, there is a core irreducible requirement to monitor the performance of the company

ASIC v Rich & Ors (No2) (2003) 21 ACLC 672

Holds that non-executive directors are not held to a lesser standard than executive directors

Board chairpersons are similarly not ceremonial

Permanent Building Society (in liq) v Wheeler (1994) 14 ASCR 109

Managing director standard

High standard

ASIC v McDonald (No 11) (2009) 71 ASCR 368

CFO standard, knowledge and understanding of financial limitations

Non-exec cannot simply rely on management and external advisors but must make their own decisions re misleading ASX statement

See also ASIC v Vines (2005) 55 ASCR 617

ASIC v Adler (2003) 21 ACLC 1810

Guidelines for the reasonableness of delegation

ASIC v Flugge (2016) 119 ACSR 1 [2016] VSC 779

Requirement to look into matters if a prudent director would be likely to

Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699

Insolvent trading

Accruing significant debts without the capital to repay them from other wok bringing in income was insolvent trading

Duties and Liabilities of Directors and Officers Loyalty

Prescribed Text: Reading 17: R Austin & I Ramsay, Ford, Austin and Ramsays Principles of Corporations Law, 17th ed, 2018 (Chapter 9) Conflicts of Interest and Special Cases

Conflicts of interest: Nature of the directors duties (p547)

Though they sometimes refer affirmatively to the duty of loyalty, Australian courts generally formulate the fiduciarys duties in terms of avoidance of conflicts of interest. The rules concerning conflicts of interest typically arise for consideration when an individual director proposes to exploit an opportunity personally, or for the benefit of someone other than the company.

The fiduciary rules: (p548)

The conflict rule;

The profit rule;

The misappropriation rule.

Corporate opportunity doctrine (p548)

Overlapping of conflict and profit rules (p549)

Consent by company (p549)

Statutory reinforcement of fiduciary doctrine (p549)

Who is subject to fiduciary responsibilities? (p550)

The conflict rule: (p555-559)

Real sensible possibility of conflict

An objective test

Extent of interests

Indirect interest

Statutory provisions regarding interested directors (p562-575)

Section 191 statutory requirement for both proprietary and public companies

Material personal interest

When notice not required

To whom must notice be given

Director may give standing notice

Effect of disclosure for proprietary companies

Consequences of breach of s191

Section 195 additional statutory requirement for a public company

Directors may authorise voting by interested director

ASIC waiver

Consequences of a breach of s195

Misappropriation of property and information (p576-578)

The misappropriation rule;

Property v opportunities and information

Misuse of corporate information

The profit rule and corporate opportunities (pp578-587)

The profit rule;

Diversion of corporate opportunities;

Breach of duty by appropriating a corporate opportunity

Does the companys inability to exploit the opportunity make any difference?

Can directors exploit corporate opportunities which come to them in their private capacity?

Can the director retain the benefit of a transaction by stablishing that the transaction was fair to the company?

Statutory provisions: Improper use of information or position (pp589-598)

Improper use of information

Examples of improper use of information

Improper use of position

Examples of improper use of position

Person involved in a contravention of ss182 or 183 can be liable (pp599-604)

Consequences of contravention of statutory provisions

Civil penalties

Pecuniary penalty offer

Disqualification order

Compensation order

Criminal offences

Other consequences: injunction

Other consequences: Damages pursuant to s1324(10) not available

Other consequences: Other laws continue to apply

Relationship of ss182 and 183 to other fiduciary principles

Curing breaches of duty by company consent (pp606-609)

Members authorisation or ratification

Consent of board is usually inadequate

Civil remedies for breach of fiduciary duty (pp610-614)

Remedies generally

Rescission

Account of profits

Equitable compensation

Constructive trust

Injunction other remedies

Application of fiduciary principles in special cases (pp 614-620)

Multiple directorships in competing companies

Nominee directors

Access to corporate information

Puppet directors

Shadow directors

Vicarious liability of the appointer for the negligence of its nominee director

Conflict of interest and duty

Nominee directors: (pp621-624)

conflict between duty and duty

attenuation of duty by constitution

corporate groups

law reform?

Financial benefits to related parties of public companies (pp625-638)

Ch 2E

give a financial benefit

Related parties

Control

2E application by courts

Exemptions from s208

Benefits on arms length terms

Consequences of contravention of Ch 2E

Penalties for a contravention of s199A or 199B.

Exoneration by court (pp638-643)

Statutory power to excuse breach s1318

Statutory power to excuse breach s1317S

Insider Trading (p644-650).

The communicating prohibition

The seven ingredients of the insider trading offences

The three prohibitions

Defences

Consequences of contravention of Pt 7.10 Div 3

Summary of Cases

Bell Group v Westpac (No 9) (n21) 573-4 [4575]. See also Westpac v Bell Group (No 3) (n 16) 349 [1972] (Drummond AJA).

Justice Owen examined the connection between the best interests rule and fiduciary loyalty in light of the proscriptive model and opined:

What does it mean to be loyal? According to the Oxford Dictionary the word loyal means faithful or steadfast in allegiance [I]f the company bestows powers on the directors to be exercised in the best interests of that company, an exercise of the powers that is in the interests of someone other than that company and (or) is not in the best interests of that company is, once again, redolent with disloyalty. There is a lack of fidelity to the allegiance that underpins the relationship between the director and the company. The duty to act in the interests of the company is one that involves honesty. And honesty is a component of bona fides. To exercise powers in a way that is not in the interests of the company betrays a fundamental part of that obligation. In my view, such conduct can be regarded as antithetical to the maintenance of a steadfast and faithful allegiance and thus as disloyal.

Percival v Wright [1902] 2 Ch 421

Directors owe their duty to the company not the individual members

In this case, it related to shareholders and a failed sale of shares to directors, held not to be a breach of duty for not fully disclosing to an individual shareholder

Exceptions see

Allen v Hyatt (1914) 30 TLR 444 for specific circumstantial exception with inducement to buy shares

Brunninghausen v Glavanics (1996) 56 NSWLR 538 and related discussion

Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488

Astbury J found that Harvey was in a position of conflict, the conflict being between his duty as trustee to act in the interests of the beneficiary, and his duty as director to act in the interests of the company.

It was found that where a director of company A is engaged in a transaction with company B of which he or she is also a director, the director must make full disclosure of his or her interests, and in some cases, may be obliged to abstain from taking part in the negotiations or voting on the transactions.

Glandon Pty Ltd v Stratta Consolidated Pty Ltd (1993) 11 ACSR 543

Phipps v Boardman [1967] 2 AC 46

Original authority for managing conflicts of interest

Green v Bestobell Industries Pty Ltd [1982] WAR 1

After leaving Bestobell, Green attempted to win a tender process with a new company, using his knowledge to undercut his former employer (at which he was a senior manager)

Held to be a breach of fiduciary duty

Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17

Directors started up a new company as part of a venture capital project formulated out of the dealings at work but resulting in another company being formed and prospecting rights from their original company being sold to the new company. Some years later a different venture became successful and action for breach arose

Court held that either the length of wait was too long (minority) or that the capacity of the directors was in their personal capacity as the prospect had originally been offered to the original company and rejected

Cook v Deeks [1916] 1 AC 554

Directors of a company made a new company for a venture to exclude Cook after a tender process

Court held it was a breach of fiduciary duty and a conflict of interest not acting for the whole companies interests

Furs Ltd v Tomkies (1936) 54 CLR 583

Statement on prohibition of secret profits

Regal Hastings Ltd v Gulliver [1942] 1 ALL ER 378

Directors of the company put personal money into a transaction that made them shareholders in a subsidiary company, hence making secret profits, as they sold those shares

Held that the directors breached their duty by doing this in secret, needed fully informed consent of the company, even though the transaction couldnt have gone ahead without them

ASIC v Vizard [2005] FCA 1037

Vizard used his knowledge of Telstras business plans to personally invest in businesses that Telstra was going to takeover

Held that even though it didnt damage Telstra it was still a conflict of interest

ASIC v Adler (2002) 20 ACLC 1146

Adlers loan to himself and his company without approval of $10mil held to be a related party transaction

Canadian Aero Service Ltd v OMalley [1974] SCR 592

ASIC V Mitchell (No 2) [2020] FCA 1098

Forge v ASIC [2004] NSWCA 448

INSTRUCTIONS

Read all the information below and follow any instructions carefully before proceeding.

This exam is printed on both sides of the paper ensure you answer all the questions.

Clearly indicate which question you are answering on the Word document used to answer the questions.

SUBJECT NAME: Law of Associations

SUBJECT NUMBER: LAWS3045

NUMBER OF QUESTIONS: Three (3)

VALUE OF QUESTIONS: Question 1 is worth 25 marks

Question 2 is worth 13 marks

Question 3 is worth 7 marks

The total value is 45 marks

ANSWERING QUESTIONS: Answer all questions.

GENERAL FACTS: RELEVANT TO ALL QUESTIONS

Cold Coolers was founded in 2002 in a growing industrial town in New South Wales, Australia. It started as a small business producing high-quality frozen foods using locally sourced ingredients, such as tropical fruits, seafood, and native herbs. Comi and Hema, two wealthy business persons, invested equally in the business, managing the day-to-day business. In the early days, Cold Coolers operated out of a small production facility, and its products were sold at local markets and small retail outlets. However, as the demand for convenient and nutritious frozen foods grew, the company expanded its operations. In 2011, Cold Coolers launched its first website and started selling its products online, which allowed the company to reach a wider audience across Australia. The online sales channel proved successful, and the companys revenue and customer base grew rapidly. Over the next decade, Cold Coolers continued to invest in research and development, expanding its product range to include a variety of frozen meals, snacks, and desserts. The company also focused on sustainable and ethical sourcing of ingredients, further enhancing its brand reputation. In 2022, Cold Coolers decided to enter the international market, exporting its products to countries in Asia and Europe. In view of the rapid growth witnessed and the proposed international expansion, Comi and Hema decided to incorporate the business as a public company limited by shares.

Prior to the incorporation, Comi was negotiating with Creamy Milk Pty Ltd to source organic milk for their organic product line. Creamy Milk Pty Ltd was one of the most sought-after organic milk suppliers owned by Comis family friend, Namin. Creamy Milk Pty Ltds decision to discuss the possibility of supplying organic milk to Cold Coolers was only because of the owners relationship with each other. Given the sensitive nature of the relationship and the negotiations conducted so far, Comi and Hema decided not to disturb the negotiations already conducted by the change of business nature. Therefore, Comi and Hema agreed that it would be best to continue the negotiations and final contract under Comis name, and the company would adopt the contract after details of incorporation were finalised. Given that Comi was taking a risk by entering into the contract under his name, both agreed that the company should pay a 5% commission to Comi when it is incorporated for his trouble.

Comi and Hema appointed Fund Assurance as the consultants to guide them through the incorporation process. Cold Coolers decided to go public to raise capital and issued an initial public offering (IPO). Cold Coolers aimed to raise $400 million by issuing shares to the public and used a prospectus to provide the relevant information to the public. The prospectus had a section on the existing contracts and liabilities of the business. However, this section did not include any information as to the agreement between Comi and Hema regarding the Creamy Milk Pty Ltd negotiation and the assurance Hema gave regarding the 5% commission.

Comi and Hema were appointed as directors of Cold Coolers PLC when it was incorporated together with two non-executive directors, Jegan, an expert and a veteran director in the frozen food industry and Laila, the proud owner of LA Investment Pty Ltd and an international business consultant. Comi and Hema invited Namin to become a director of the company. However, Namin did not want to accept an official role given the commitments to his company and promised to assist Cold Coolers PLC whenever it needed his expertise.

Once the company was incorporated, the directors of Cold Coolers PLC had their first meeting to discuss the international expansion and the contract entered into by Comi. The board was happy to ratify the contract, and Hema and Comi did not think it was necessary to reveal the 5% commission. To ensure that expansion is carried out effectively, the board also decided to incorporate a fully owned subsidiary, Cold Coolers Asia Pty Ltd, with directors of Cold Coolers PLC also becoming directors of Cold Coolers Asia Pty Ltd. Comi asked Namin to join them when he was free as he has extensive experience working with business partners in the Asian region. Namin, who had recently become increasingly bored by the day-to-day operations of his own company, was thrilled to be part of something new and exciting.

The Cold Coolers Asia Pty Ltd board instructed Laila to prepare a business plan for the proposed expansion. Laila had extensive expertise in similar projects. Laila obtained several recommendations for potential business partners in Asia from Namin, and the board requested Laila to oversee the preliminary negotiations and meet the potential business partners representing the company. Laila travelled for over two months in Asia to understand the potential partners and the market conditions of the preferred destinations. During one of her meetings, Laila was introduced to Jaqui, one of the local government representatives of the investment division of the Local Council, where a potential Cold Coolers Asia Pty Ltd warehouse might be located. Jaqui was very interested in the potential investment in his Council area and, during the discussion, revealed to Laila the Councils plan to demarcate an investment zone that would permit foreign investors to buy land at a concessional rate. Laila invited Jaqui to further chat about the matter over dinner at an expensive restaurant and paid the bill for dinner using her corporate credit card. After dinner, Jaqui, grateful for Lailas hospitality, shared confidential details about an early release opportunity that would substantially discount the concessional rate, which was not advertised publicly. Jaqui also advised Laila that he could process the application if she could make an application before 5.00 p.m. the next day. Laila immediately called Ameen, the chief investment strategist, to instruct her to apply on behalf of LA Investment Pty Ltd to purchase a plot of land in the proposed investment zone before the information became public and prices increased. Laila called Comi to inform the company about this opportunity. However, she could not reach Comi, who was busy playing golf with his buddies.

Upon her return, Laila prepared a business plan and expansion strategy based on the information she gathered from her travels. Laila proposed to the board of directors that Cold Coolers Asia Pty Ltd should apply to obtain a plot of land at a concessional rate, reducing the operational cost significantly. The investment opportunity required a significant upfront investment, which exceeded Cold Coolers Asia Pty Ltds current budget allocation for the expansion project. Furthermore, given the time and the cost involved with the lengthy and bureaucratic land purchase process, the board was not convinced that Cold Coolers Asia Pty Ltd would be quick enough to secure the concessional rates before they expired. Laila disclosed to the board that she had already commenced the process as an individual investor and was willing to transfer the application to Cold Coolers Asia Pty Ltd at the market rate. Laila, however, did not reveal to the board that she received a substantial discount due to her early application. All directors, except Jegan, were delighted to receive the opportunity. Even after the payment was made to Laila, the price was quite preferable to obtaining it through the formal land release process. Jegan asked the board to put this to approval by the members as he believed the members of the company should decide on the matter. Namin weighed into the discussion by stating that there was nothing unusual about the business transition and that he would have done the same if he was in Lailas position. The other directors, including Laila, were happy with Namins assurance and agreed that LA Investment Pty Ltd would proceed with the application with financial assistance from Cold Coolers Asia Pty Ltd by way of a substantive short-term loan to LA Investment Pty Ltd to finalise the land transaction application. Upon the completion of the transaction, the land was to be transferred to Cold Coolers Asia Pty Ltd at the market price.

After a few months, Jaquis actions were investigated by the governments anti-corruption agency, which received an anonymous tip about his interactions with Laila and launched an investigation. The investigation revealed that Jaqui had shared confidential information with Laila without authorisation. The investigation also found that the dinner paid by Laila amounts to providing a bribe to a public official. Laila was investigated in Australia for bribing foreign public officials under section 70.2 of the Schedule to the Criminal Code Act 1995 (Cth), and the court was satisfied that she had committed the physical act of providing a benefit and that she had the intention to influence Jaqui to obtain a business advantage. Bribery could be punished with imprisonment for not more than 10 years. The application of LA Investment Pty Ltd for the purchase of land was rejected, and the company was subject to a substantial fine. The failure of the land transaction application process put a significant financial strain on Cold Coolers Asia Pty Ltd as it could not recover the loan granted to LA Investment Pty Ltd.

Question 1 (25 marks)

Advise Cold Coolers Asia Pty Ltd as to the following, referring to relevant case law and statutory provisions in your answer:

Whether Laila contravened her duties as to loyalty to Cold Coolers Asia Pty Ltd and whether Laila could be disqualified from her position as a director of Cold Coolers Asia Pty Ltd? (15 marks)

Could Namin be held responsible for a breach of director duties? (5 marks)

Could Cold Coolers Asia Pty Ltd be imposed with direct criminal liability for the actions of Laila? (This question does not require additional research into bribery) (5 marks)

Question 2 (13 marks)

The media attention to the events related to Cold Coolers Asia Pty Ltd put Cold Coolers PLC under the spotlight, and shareholders of the company became aware of missing information in the prospectus as to the agreement between Comi and Hema as to the Creamy Milk Pty Ltd negotiation and the assurance given by Hema as to the 5% commission. A small group of shareholders had received information about the companys ratification of the contract. The contract with Creamy Milk Pty Ltd not only resulted in the payment of a 5% commission to Comi but also agreed terms had not been in the companys best interest. The price charged from Cold Coolers PLC was way above the market rate, and the restrictive trade clauses in the contract prohibited Cold Coolers PLC from engaging any other organic milk suppliers. This group of shareholders had repeatedly written to the board of directors about the matter. First, the board had been unresponsive, and then, the board put this matter to the members at a general meeting and obtained the majority approval from the shareholders, where this particular group voted against the resolution. The group believed that the directors had breached their duties and that the contract was detrimental to Cold Coolers PLC.

Answer the following questions by referring to relevant case law and statutory provisions in your answer:

What rights and remedies are available to the shareholders of Cold Coolers PLC under the Corporations Act 2001 (Cth)? (5 marks)

Could Comi be responsible for the damages to Creamy Milk Pty Ltd if the company set aside the contract with Cold Coolers PLC? (5 marks)

What are the legal implications of the missing information in the prospectus? (3 marks)

Question 3 (7 marks)

Cold Coolers PLCs troubles with the bribery scandal and the recent litigation by a group of shareholders had made the companys creditors uneasy due to the constant negative press and the financial implications of recent litigations. These issues had been further aggravated by the recent contamination of product claims and the collapse of a frozen food giant in the market, leading to a market-wide decline for frozen products. As a result, the company has been finding it increasingly difficult to meet its financial obligations to creditors. One of the major creditors of Cold Coolers PLC, CAM Bank, had provided a substantial loan to the company secured by a charge over a considerable part of the companys property. Due to the financial issues faced by Cold Coolers PLC, the company defaulted on its loan payments to CAM Bank, triggering the terms of the loan agreement. As part of the loan agreement, CAM Bank had the right to appoint a receiver to the company in the event of a default on the loan payments. CAM Bank exercised its right under the loan agreement and appointed a receiver to Cold Coolers PLC to take control of the companys assets and manage its affairs for the benefit of CAM Bank. The appointment of the receiver has caused significant concern among the other creditors, employees, and shareholders of Cold Coolers PLC, as the receivers actions may impact their interests.

Advise CAM Bank what further options are available in this situation under the external administration procedures under the Corporations Act 2001 (Cth). Your answer must address the following concerns of the CAM Bank. (7 marks)

CAM Bank believes that current circumstances are temporary and the market conditions will change when the investigation into product contamination is addressed.

However, CAM Bank is aware of the volatility of the frozen food industry and the rapid change in market conditions. Therefore, CAM Bank requires an option that would protect the ability of the bank to enforce its security within the next two weeks if needed.

However, CAM Bank is not satisfied with the current board of directors and believes there needs to be a change in the top management of Cold Coolers PLC.

CAM Bank requires assurance as to the payment of debt and how the payments would be made.

CAM Bank also requires the flexibility to change its position if the conditions of the Cold Coolers PLC do not improve as expected.