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The University of Queensland Brisbane Qld 4072 Australia Telephone +61 7 3365 2206 Facsimile +61 7 3365 1454
LAWS4112/7234 – CORPORATIONS LAW Semester 1, 2013 St Lucia Campus
Teaching Staff Course Coordinator/Lecturer: Dr Vicky Comino Office: Forgan Smith, W308 Ph: +61 7 3365 2549 Consultation hours: Wednesday 10am -12noon Email: email@example.com
Dr Paul Harpur Email: firstname.lastname@example.org
Katie Johnston Alan Roberts Brie Weatherstone
Reading and Materials Students should note that the corporations legislation has been the subject of significant amendment over time. There are many up to date textbooks and updated legislation is readily available; these should be relied on in preference to earlier publications. You would be particularly unwise to rely on any version of the legislation, and any textbook published prior to, the CLERP (Audit Reform and Corporate Disclosure) Act 2004.
Required Resources: • • Corporations Act 2001 Boros, E & Duns, J, Corporate Law, (2nd ed, OUP, Melbourne, 2010).
The Corporations Act is a very large piece of legislation. It is essential that you have a copy of the legislation from the beginning of the course. It will be referred to frequently during all lectures and tutorials. Although it is heavy and bulky, you should bring it with you to both. Corporations law in Australia has become a largely statute based subject, and the only way you will gain sufficient familiarity to deal with the legislation in the exam is by referring to it throughout the course. Since you are allowed to take your copy of the legislation into the exam, it may be helpful to annotate your copy.
Lexis Nexis Butterworths publishes Australian Corporations Legislation 2013, and Thomson Reuters and CCH also publish their own versions. Lexis Nexis also publishes a student version of the legislation: this may be cheaper. Although the Thomson Reuters version includes a commentary, this is not a good reason to buy it: it is preferable to rely on Boros and Duns, Ford and Austin or one of the other books listed below for discussion of the legislation.
Boros and Duns has been recommended as the text because it is both concise and readable, and contains sufficient detail for you to get a good overview of the subject. Ideally you should read Boros and Duns before the relevant lecture, and certainly when preparing for tutorials. You should also read through the relevant sections of the legislation in advance. Although the course coordinator and tutors consider it to be the most suitable book for you, you can also use the other books listed below if you prefer.
Other Recommended Texts (general) • Lipton P, Herzberg A and Welsh M, Understanding Company Law, Lawbook Co, 16th ed, 2012 (this may provide a helpful alternative perspective if you need one)
• • • • •
Austin, R and Ramsay I, Ford’s Principles of Corporations Law, 15th ed, LexisNexis, 2012 (this is the most comprehensive textbook available and is recommended for when you want to go into a topic in more detail) Ciro T and Symes C, Corporations Law in Principle, Lawbook Co, 9th ed, 2013 Hanrahan P, Ramsay I and Stapledon G, Commercial Applications of Company Law, CCH, Sydney, 14th ed, 2013 (business oriented analysis, may offer clarity on more difficult points) Hinchy R and McDermott P, Company Law, 2nd ed, Pearson Prentice Hall, 2009 Cassidy J, Concise Corporations Law, Federation Press, 5th ed, 2006 Harris J, Hargovan A and Adams M, Australian Corporate Law, Lexis Nexis Butterworths, 2nd ed, 2009 Redmond P, Companies and Securities Law: Commentary and Materials, Lawbook Co, 5th ed, 2009 (Casebook with useful commentary) Chapple L, Company Law, 1st ed, Pearson, 2009
Other Resources: • • • • CCH, Australian Corporations Commentary (looseleaf service) Davies P, Gower and Davies' Principles of Modern Company Law, Sweet & Maxwell, London, 8th ed, 2008 (UK) Cheffins B, Company Law: Theory, Structure and Operation, Clarendon, Oxford, 1997 (UK) Grantham R & Rickett C, Company and Securities Law: Commentary and Materials, Brookers, Wellington, 2002 (NZ) (particularly Ch 2: Theories of the Company and the Nature of Company Law (online))
Journals • • • Australian Journal of Corporate Law Company and Securities Law Journal Journal of Corporate Law Studies
Government and Regulatory Bodies • • • • • Australian Securities and Investments Commission: www.asic.gov.au (general corporate regulator) Australian Securities Exchange: www.asx.com.au (Australian share market) Australian Accounting Standards Board: www.aasb.com.au (sets accounting standards which companies must comply with) Australian Takeovers Panel: http://www.takeovers.gov.au/ (regulates corporate takeovers) Corporations and Markets Advisory Committee (CAMAC): http://www.camac.gov.au/camac/camac.nsf (specialist law reform/advisory body)
• Treasury: www.uq.uq.cfm The Economist Magazine Definitions of Economic Terms: The Economist has a very long list of economic terms with readily understandable definitions.cfm Corporate Law Journals: • Journal of Corporate Law Studies: http://library. which contains brief information about the Financial System Division and the Corporations and Financial Services Division of the Treasury which are responsible for the development of policies which contribute to the efficiency and competitiveness of corporations and the securities markets in Australia and the development and review of national business laws including the Corporations Act.au/go/other-sites-of-interest/index.edu.edu.au (website of the Commonwealth Treasury.asp?sp =QLDUni%2D03&cbhf=none&DB=COMPLAW&rs=WDIR1.au/login?url=http://www.au/ CCLSR's Page of Links of Interest in Corporate and Securities Law: http://cclsr.westlaw.au/record=b2180232 The Company Lawyer http://ezproxy.uq.com/research/Economics/alphabetic.edu.0 Australian Journal of Corporate Law http://ezproxy. Research starting points: • • • Centre for Corporate Law and Securities Regulation (CCLSR) (University of Melbourne) (Research centre headed by Professor Ian Ramsay): http://cclsr.au/login?url=http://www.com/search/default.au/record=b1977146 • • • 4 .law.unimelb. then on "Business Law & Regulation" will take you to a page containing links to various publications of the Corporate Law Economic Reform Program (CLERP).lexisnexis. the source of many of our recent corporate reforms and a number of specific reform proposals and discussion papers.uq.treasury. Clicking on this link.library.library.com/au/legal/browse?cu iuser=true&cui_ind=true&mode=cuimode&csi=267866 International Corporate Law http://library.edu.edu.0&vr=1.law.economist. Useful if there is something you have read and not understood in any of the cases or materials: http://www.unimelb.edu.gov.
Civil and Criminal Liability Types of business associations and types of companies 3 (11 March) Internal Structure and Operations of the Company: the corporate constitution.Schedule of Lectures This course is lectured by Dr Vicky Comino and Dr Paul Harpur according to the following schedule: Week Lecture Topic Introduction and History of Business Organisations Tutorial Topic 1 (25 Feb) No tutorial 2 (4 March) Corporate Personality. Debt and Charges 11 (13 May) Winding Up . and meetings Separate Entity Principle and the Corporate Veil 4 (18 March) Corporate Contracting The Division of Power within the Corporation and Insider Rights No tutorials Corporate Contracting 5 (25 March) 6 (8 April) Directors’ Duties (1) Directors’ Duties (2) Directors’ Duties (3)/Minority Protection (1) Minority Protection (2) Shares and Capital Transactions 7 (15 April) Directors’ Duties 8 (22 April) 9 (29 April) No tutorials Minority Protection Shares and Capital Transactions Public Issues. Financial Assistance and Debt 5 10 (6 May) Public Issues. corporate ‘organs’.
Receivership and Administration Revision 13 (27 May) 6 .12 (20 May) Receivership & Voluntary Administration Revision consultations Insolvency.
attend lectures. To benefit fully you should undertake a regular reading program in advance of class (including reading a textbook. Assessment Details of the assessment regime are provided via the Electronic Course Profile and the Blackboard site associated with this course. Those discussions will be complemented by brief consideration of essay-type questions. The method is more important than the answer. some of the cases indicated in this guide and in lectures. Tutorials function to build knowledge and your capacity to apply it through discussion and participation in the resolution of particular problems. It is essential to note that the purpose of tutorials is for you to apply your knowledge to a series of questions. For this reason. The purpose is not for you to write down a comprehensive answer to the question. Testing your prepared answer against the tutorial outcome provides you with a means of regularly assessing your progress in this course and an opportunity to undertake remedial work on aspects of the course where your understanding is less than adequate. Most of the time in tutorials will be spent dealing with problem questions of the kind you are likely to have to answer in your exam. a passing reference in lectures. Transcribing detailed answers to the problem questions discussed in tutorials will not assist in the exam: the exam will not raise exactly the same issues that the tutorial problems have. you are encouraged to produce detailed attempts at the questions on the tutorial sheets which can be discussed in the tutorial. While they may be helpful in lectures. prepare answers to the tutorial questions and participate in class discussions. In addition. and the statute). Most of these topics will be lectured. They are not intended as a talking textbook. to draw your attention to difficult points and to analyse points of theoretical or practical controversy.How to use this Learning Guide This Learning Guide consists of 12 lecture handouts. many in some detail. Additional reading is necessary if you are to get the most out of tutorials. If you choose to use a computer in lectures. and 10 tutorial sheets. they are disruptive in tutorials because students tend to focus on writing down everything which is said rather than focus on the way in which the problem is being addressed. at most. What will assist is learning how to answer problem questions by participating fully in tutorials. You will be expected to be able to make close reference to legislative provisions in the final exam. you are encouraged not to use laptops in tutorials. 7 . In general the lectures will follow the outlines contained in this learning guide. Lectures function to give you an overview of the main subject areas of the course. which contain questions that you should prepare in advance of the tutorials. reflecting the 12 substantive lectures to be given in the course. and so attending lectures is not a substitute for reading a textbook and cases. You should always bring a copy of the legislation with you to tutorials: it is essential that you start becoming familiar with the legislation from the beginning of the course. you may find it convenient to type your notes into this document. Advance preparation of answers to the questions is therefore essential. but some topics and aspects of others that are either adequately explained in the textbook or scheduled for detailed tutorial treatment will receive.
Please note that all pieces of assessment will be given grades (from 1 to 7) rather than marks (out of 100). and each grade given will be weighted appropriately to produce your final grade for the course. 8 .
Further suggested reading: Redmond. History and Typology of Business Organisations Recommended preliminary reading: Boros and Duns Chapters 1 and 2. chs 1-3 P. Ireland. pages 27-50 Mickelthwait and Wooldridge. This is very common and corporate groups frequently have highly complex. committing torts. A company may also be a shareholder in another company. 9 • • • . Shareholder liability is limited to the capital they have contributed: s516. and. running a business: s124(1) CA Division of control rights between directors and the shareholders by the company’s constitution and the Corporations Act. owning property. Alternatively. shareholders provide capital to the company. or provision of financial or other information) on a case-by-case basis where they consider this necessary. fiduciary and statutory duties to the corporate entity (normally identified with the interests of the shareholders). the company may be put into administration with a view to enabling it to survive and so produce a better outcome for creditors. If company becomes insolvent (unable to pay debts as they fall due).Lecture one: Introduction. the shareholder is termed the ‘parent’ and the other company is termed a ‘subsidiary’. if owns sufficient shares to control that other company. by default. and the two companies form a ‘corporate group’. manage the company’s business: s198A CA 2001. transnational structures which manage risk and make their affairs opaque to outsiders (and perhaps also insiders(!)). making contracts. including to appoint and remove the board under 203C and D). ‘Company Law and the Myth of Shareholder Ownership’ (1999) 62 Modern Law Review 32 Brief introduction • • • Company as separate legal entity. Company directors owe legal. a liquidator may be appointed to take over control of the company with a view to maximizing the assets of the company which are available for distribution to creditors. Creditors might also contract for control rights (or security in the form of a fixed or floating charge. which give them a bundle of rights in relation to the company (including the right to a dividend if the board declares one and the right to vote. In return for their shares. ch2.
insolvency rules). to companies as concession of the state. shareholders and other groups dealing with companies by requiring information disclosure. conflicts of interest might arise between directors and shareholders. This historical evolutionary process still influences the form of companies and the division of power within them (i. conflicts of interest might arise between majority and minority. Companies Act 1962. Limited Liability Act 1855.The problem of conflicts of interest Contrast two ideal-types: small proprietary companies and large public companies (where there is a ‘separation of ownership and control’). to deed-of-settlement companies (essentially partnerships. Some important pieces of English legislation: Joint Stock Companies Registration and Regulation Act 1844. In all companies there is a risk of conflict between existing and new members: on what terms should the new members be allowed to enter? Company law has to deal with these conflicts by means of regulation (directors’ duties. In addition to this crucial function. shareholders and creditors (as the company nears insolvency). It should also facilitate self-protection of creditors. it should arguably also facilitate the operation of business by reducing transaction costs associated with incorporating. Lipton. see P. Australian developments For further detail on early Australian corporate law.e. ‘A History of Company Law in Colonial Australia: Economic Development and Legal Evolution’ (2007) 31 Melbourne University Law Review 805. In proprietary companies. In groups of companies where the subsidiaries are wholly owned. to joint stock companies. Historical emergence of the corporate form From (unincorporated) deed of settlement companies. with the addition of a separate legal entity). rules about capital. Companies Act 1948. but adopted by the legislation as the basis for modern company law. a conflict might arise between the parent company (the controlling shareholder) and the subsidiary’s contract or tort creditors. Companies Act 1862. and between shareholder-directors and non-director shareholders or creditors. operating and winding up companies. where the subsidiaries are not wholly owned the parent’s (majority shareholder’s) interest might also conflict with the interest of the minority shareholders. which gives rise to complex questions of enforcement. Companies Act 2006. 10 . the board and the general meeting). The danger is that the majority uses its control of the board and the general meeting to confer benefits on itself at the expense of minorities (or creditors in the case of excessive risk-taking). or controlling shareholders and minority shareholders. minority protection. In public companies. Companies Act 1985.
and trading and financial corporations formed within the limits of the Commonwealth. NSW v Commonwealth (1990) 169 CLR 482 Re Wakim. Further reforms have been 11 • • • • • . eg: • The Corporate Law Reform Act 1992. the Corporate Law Simplification Act 1995 (!). operational from 15 July 2001. but since then has become more autonomous and has introduced a number of distinctive innovations. Uniform Companies Acts 1961 Companies Act 1981 introduced under s122 of the Commonwealth Constitution Corporations Act 1989. which overhauled financial services regulation in line with the recommendations of the Wallis Committee. the Company Law Review Act 1998 which replaced the old articles and memorandum with the current constitution and replaceable rules and reformed capital rules (abolished par value and removed requirement of court approval of capital reductions). the Corporate Law Economic Reform Program Act 1999 which introduced statutory business judgment rule and derivative action. making it more coherent. Parker & Co Ltd v Moorhead (1909) 8 CLR 330. market integrity and consumer protection. requiring stricter auditor independence and greater disclosure of directors’ remuneration in listed companies. which simplified register and share buyback provisions and redefined the concept of proprietary company. and reconstituted the Takeover Panel. and giving ASIC responsibility for corporate regulation. which amongst other things. and the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004. In addition to these changes prompted by constitutional law. fundamentally reformed the regime of sanctions for enforcement of the statutory duties of company officers. s51(xx) of the Commonwealth Constitution empowers the Commonwealth to make laws with respect to ‘foreign corporations. regulation of financial service providers. we have had. dividing it up along functional rather than its former institutional lines. the Financial Services Reform Act 2001. financial market regulation. Ex Parte McNally (1999) 198 CLR 511 R v Hughes (2000) 202 CLR 535 Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001.Mirrored English law until the 1960s.’ Note the narrow interpretation of this in Huddard. which was introduced in response to collapses of Australian corporate groups such as HIH Insurance and in response to the US Sarbanes-Oxley Act 2002 (itself a response to Enron and WorldCom).
Two main kinds: public company and 12 . Proprietary companies unlimited by share capital 3. which subjected NL companies to far-reaching information disclosure obligations: the Mining Companies Act 1871). Companies Six kinds: 1. Incorporated Association State law (Incorporated Associations Act 1981 (Qld)). not carried on for profit of members.01(3) for specific exceptions by profession). Not considered further in this course.introduced recently in response to the ‘Global Financial Crisis’ and it is unlikely that the process will stop here! Types of business structure Sole trader Partnership Limits on size: s115(1) CA 2001 (but see also Corporations Regulations 2A. The type of company was introduced in Victoria. we are concerned with the two types of companies limited by shares which are the dominant corporate forms used in Australia. Public companies unlimited by share capital 6. Public companies limited by guarantee 5.1. governed largely along same lines as proprietary companies. Proprietary companies limited by shares 2. No liability public company (confined to pure mining companies. In this course. Public companies limited by shares 4. Described by Blainey as ‘one of the most radical experiments in company law in the English-speaking world’.
ASIC may impose a similar requirement if the company exceeds 50 non-employee shareholders. Breach of this limitation is a criminal offence. or ASIC directs it to (ss293-4). Definitions of public offer contained in Ch 6D of the CA: disclosure is required in the form of a prospectus or other disclosure document filed with ASIC. which does not invalidate the transaction but ASIC may require it to convert to a public company under s165. Proprietary companies are defined in s113 as having no more than 50 non-employee shareholders (this still allows some separation of ownership and control) and essentially cannot offer shares to the public (s113(3): they cannot make an offer that needs disclosure under Chapter 6D). Listed companies are subject to an additional layer of regulation over and above public companies: soft law in the form of the ASX Principles of Corporate Governance (with which they must ‘comply or explain’). with certain carve-outs available for small-scale offerings. although they must maintain written financial records that 13 • • . Proprietary companies outnumber public companies at least 50:1. Distinction introduced by state of Victoria in Companies Act 1896 (Vic). 248B and 249B allowing that person to manage the business and act as GM provided all resolutions recorded and signed). or prospectus). Public companies are subject to stricter regulation because there is often a separation of ownership and control and as the price for being able to offer shares to the public. sophisticated investors. existing investors etc. Proprietary companies are less stringently regulated: • • Minimum of one director (compared to three for public companies): s201A Can even have a sole member-director (provisions made for this under ss198E(1). A proprietary company can convert to public company by passing a special resolution and lodging application with ASIC: ss162-3. and quasi-soft law in the form of listing rules made by ASX with authority under CA. Note how the requirement of special resolution protects the shareholders. although they can make offers to existing employees and shareholders and personal offers under s708 (which gives them some scope to raise finance from investors without incurring the cost of preparing a disclosure document.proprietary company. No requirement to appoint a secretary (s204A) Small proprietary companies (defined in s45A) are not required to produce annual financial reports or appoint an auditor unless shareholders holding 5% require it.
number • of provisions applicable to public companies do not apply: A No need for an AGM (public company with more than one member must hold first one within 18 months of incorporation to allow members to consider audited accounts) s203D(1) does not apply. and to allow small companies to avoid the estimated $60000 cost of producing an audited annual report. so shareholders do not have a legally-entrenched right to remove directors (this means that in proprietary companies. Aim of this distinction is to prevent public companies running business through a subsidiary and evading disclosure rules. This reflects the fact that proprietary companies are often like incorporated partnerships with the shareholders participating in risk-bearing and management. s117. Pre-registration contracts Those who form a company may become subject to duties of ‘utmost candour and honesty’ as its ‘promoters’ (see Central Railway of Venezuela v Kisch (1867) LR 2 HL 99) and are also required to make disclosure to the company of any profits they make in connection with the sale 14 . and to maintain them for 7 years (s286). s1274(7A) (conclusive effect of certificate of incorporation). s203E does not apply so there is no automatic rule that one director cannot remove another (although proprietary companies must still make positive provision in their constitution if directors are to be enabled to do this). s119. • • They must include ‘Pty Ltd’ or ‘Proprietary Limited’ at the end of their name: ss148 and 149. Registration See Part 2A. • • Large proprietary and public companies must produce an audited financial report and directors’ report on an annual basis. They are subject to a replaceable rule under s1072G that their directors have the power to refuse to register a transfer of shares for any reason (although equitable and statutory duties may require them to act for a proper purpose when exercising this power: see lecture 6). s118(1)(c). the constitution or a shareholder agreement can entrench certain directors provided they replace the replaceable s203C rule that the general meeting can remove the directors).correctly record its position and would enable true and fair financial reports to be prepared and audited.2.
liability of agent/promoter and powers of the court. given the rules in Ch 6D on prospectuses (which will be discussed in outline in lecture 10). s119 for date of incorporation ss131-3 for current regime which replaces common law: ratification by company.of property to the company (see Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218). 15 . Rules were historically important as a mechanism for investor protection but are now far less so.
‘Limited Liability and the Corporation’ (1985) 52 University of Chicago Law Review 89 John Farrar. Ch 2 (‘Theories of the Company and the Nature of Company Law’ available as pdf from library website) Limited Liability s516 CA 2001: ‘if the company is a company limited by shares. limited liability may also be removed by law (either under the common law in those rare circumstances where the courts are prepared to ‘lift the veil’ or under statute where liability is imposed on directors or parent companies for causing a company to continue to trade when it cannot pay its debts: ss588G and 588V CA). Chapters 3 and 8 Further suggested reading: Easterbrook and Fischel. which the other party to the contract displace by contrary provision (for example by requiring the director-shareholders in a small proprietary company to give personal guarantees). the price of which was the obligation to make information disclosure. Civil and Criminal Liability Recommended preliminary reading: Boros and Duns.Lecture Two: Corporate Personality. Do you think this is convincing? In addition. Grantham and C Rickett. not least because of the relative lack of disclosure obligations on small proprietary companies under Australian law. 16 . Now under law and economics analysis limited liability is more commonly explained as a default rule inserted into every contract. Company and Securities Law: Commentary and Materials (2002). so the total amount of bargaining (transaction) costs is reduced by providing the most commonly chosen terms as default. Easterbrook and Fischel (leading exponents of a (neoclassical) law and economics approach to corporate law) offer a number of economic arguments in favour of limited liability in The Economic Structure of Corporate Law at 41-4. this view is losing persuasiveness. the parties would bargain for limited liability. a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or past member’. However. The choice of default rule is explained on the basis of hypothetical bargaining: in most cases. ‘Some Reflections on Company Law Reform’ (1944) 7 Mod LR 54 R. Traditionally viewed as a privilege. ‘Frankenstein Incorporated or Fools’ Parliament? corporation in corporate governance’ (1998) 10 Bond LR 142 Revisiting the concept of the Otto Kahn-Freund.
The Separate Entity Doctrine Limited liability and legal entity are two different issues: it is possible to have a company for which its members (shareholders) have unlimited liability. either directly or. Williams v Natural Life Health Foods (1998) 2 All ER 577. even controlling ones: Lee v Lee’s Air Farming  AC 12. and the creditors of individual shareholders cannot go after the company’s assets). • • • • • • • Departures from separate legal entity principle The actions of the shareholders in general meeting and the directors acting as the board are. as the actions of organs of the company. they are irrevocably committed to the purposes of the business. not its directors or members. the rights and liabilities of the company are ascribed to the members or directors. Others also argue that since the capital assets of the business are vested in the company. ascribed to the company. Statutory departure 17 . even where they have given it to the company in exchange for shares: see for example Macaura v Northern Assurance Co Ltd  AC 619 Causes of action belong to the company and not to the members individually. Company can be liable in tort. more commonly. although shareholders receiving dividends will receive credit for tax paid by the company. exceptionally. vicariously. which may be important in the case of companies which require heavy upfront spending on capital assets which have little value in other businesses (eg highly specialized businesses) or as scrap (eg mining). Company can be a debtor or creditor of member or director. Sometimes. Company can make contracts with shareholders. Company are persons under s6 of the Income Tax Assessment Act 1936. The value of the separate entity doctrine lies in its role in enabling limited liability to operate (claims are made against the company’s assets rather than those of the members) and in asset partitioning (the company’s creditors cannot go after the shareholders’ assets. Salomon v Salomon & Co Ltd  AC 22 The principle has a number of implications: • Property owned by company does not belong to its members. Company is party to contracts. Company can act as trustee. This is termed ‘lifting the corporate veil’ as the court looks past the separate legal personality of the company to the natural persons standing behind it.
the court might conclude that the company is the agent of its controller. See for example. We will look at 588G in more detail in lecture 11 on winding up and insolvency. The Salomon principle normally applies.S588G imposes a duty on directors to stop a company incurring debts when it is insolvent or which render the company insolvent. But was the veil really lifted in these cases? See judgments of Toulson J in Yukong Lines of Korea v Rendsburg Investments (No 2)  1 WLR 294 and McPherson J in ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd  2 Qd R 360. or is a ‘sham’ or ‘device’. emphasising that in both cases an order was made against the company as well as the wrongdoer in control of it. failing which the liquidator can apply to the court for an order that the directors contribute to the assets available for the company’s creditors (588J(1)). which underlies the occasional decision of courts to pierce the corporate veil. The court will lift the veil where a company is used to perpetrate a fraud. See Re FG (Films) Ltd  1 WLR 483. unifying principle. The court will lift the veil where companies are used to evade existing legal obligations. Re Darby  1 KB 95.’ 3. Whether or not this is desirable. the right to use a corporate structure in this manner is inherent in our corporate law. Note other exceptions contained in 588G(1A) and 254T. Where companies are under-resourced. note the comments of Slade LJ in CA in Adams v Cape Industries  2WLR 657: ‘… we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Smith. Common law departures This is a last resort and the case law is frequently unclear and inconsistent. 2. Stone & Knight Ltd v Birmingham Corporation  4 All ER 116 and the guidance offered by Atkinson J: o Were the profits of the business treated as profits of the parent? o Did the parent appoint the persons carrying on the business? 18 . Re H  2 BCLC 500. As regards using a corporate group to evade future obligations. Gilford Motor Co Ltd v Horne  Ch 935.’ 1. Insolvency is defined in s95A(2). Rogers A-JA said in Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 at 567 that ‘there is no common. Jones v Lipman  1 WLR 832.
In Morgan v 45 Flers Avenue Pty Ltd  10 ACLR 692. to insulate the parent from liability in relation to a particular (often highly risky) activity.o Was the parent the head and brain of the trading venture? o Did the parent govern the adventure. or holds more than half the issued share capital carrying a right to share in profits. Young J of Supreme Court of NSW said in response to a member’s request to lift the veil: ‘So long as the law permits people to erect structures which have meaningful legal consequences then if a person elects to erect such a structure he must take the consequences of such erection for better. For empirical analysis of veil-piercing by the Australian courts. liquidators of subsidiaries. This is especially the case today when the many collapses of conglomerates occasion many disputes. or of the holding company. for worse. These structures may be very complex: see for example Qintex Australia Finance Ltd v Schroders Australia Ltd  3 ACSR 267. and often do this as a means of dividing up the business conveniently among different management groups. Stone & Knight Ltd). 19 . See also Spreag v Paeson Pty Ltd  94 ALR 679 (following Smith. Rogers CJ suggested that: ‘It may be desirable for Parliament to consider whether this distinction between the law and commercial practice should be maintained.’ Statutory definitions of groups Definition of subsidiary in section 46: when the parent controls the composition of the board or has more than half the votes in general meeting. in commercial sickness or commercial health’. more importantly. ‘Piercing the Corporate Veil in Australia’  19 C&SLJ 250. Regularly. This definition applies for the purposes of s588V (liability of holding company for insolvent trading of subsidiary). come to court to argue as to which of their charges bears the liability. see IM Ramsay and DB Noakes. decide what should be done and what capital should be embarked on the venture? o Did the parent make the profits by its skill and direction? o Was the parent in effectual and consistent control? This case and the similar decision in DHN v Borough of Tower Hamlets (1976) 3 All ER 462 have since been explained on the basis that they turn on the provisions of the particular statute. and. for richer or poorer. The Specific Problem of Corporate Groups Companies can form wholly-owned subsidiaries or acquire them by means of takeover.
Per Mason J in Walker v Wimborne (1976) 137 CLR 1: ‘it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies.s50 of the CA uses the broader concept of ‘related bodies corporate’ (which encompasses holding and subsidiary relationships. continued bank funding is conditional on their survival: see Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952. and a number of regulations which we will look at later (such as financial assistance and companies acquiring shares in themselves) also apply to related companies. whether it be a member of a “group” of companies in the accepted sense of that term or not. The creditor of a company. Companies in group remain separate entities This is the basic legal principle.’ However. rather than of the group as a whole. for example. they must produce consolidated accounts. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. the interests of one member of a group of companies may lie in the continued viability of other members of the group if. must look to that company for payment. This broader concept of control is used in Pt2E of the CA which deals with financial benefits by a public company and extends to controlled as well as related bodies corporate. See for example Industrial Equity v Blackburn (1977) 137 CLR 567 In making management decisions. An important exception: statutory liability of holding company for insolvent trading by subsidiary s588V: holding company can be liable where: • • • its subsidiary incurs a debt while insolvent or becomes insolvent as a result and there are reasonable grounds for suspecting insolvency and the holding co or one or more of its directors is aware at the time that there were grounds 20 . His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent. Where companies are related. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. and grandparent relationships). s50AA refers to the broader notion of control by one entity of another in the sense of ‘capacity to determine the outcome of decisions about the second entity’s financial and operating policies’ (50AA). directors are supposed to take account of the interests of that company (including its creditors).
Moreover. it is not possible to say what evidence would ultimately suffice to make out a case.’ The UK Court of Appeal examined similar questions in Adams v Cape Industries plc  Ch 433 but refused to lift the veil. Reputation may compel companies to satisfy contractual liability. However. and it may also encourage companies which are not in their ‘end game’ to satisfy employee claims in order to maintain their reputation for fair dealing with their employees. If this does not happen. once the ‘endgame’ is reached – and asbestos liability has brought many companies and their insurers into their endgames! – there is a real danger that tort claims will go unsatisfied. the parent will obtain the benefits of the activities (in the form of dividends) but will not bear all the costs of the activity. cannot obtain guarantees from the parent. It will be appreciated that – as Rogers noted in Briggs – these arguments do not apply quite as strongly to employees as other tort victims (who are also in a contractual relationship with the company). It could be argued that such a person has equal opportunity with a contracting party in determining whether or not to enter into the employer/employee relationship out of which the injury arises. can alleviate the consequences of the decision in Salomon so as to adapt the principle of limited liability to the economic realities of today…it is possible to argue that the proposed general tort considerations should not be applicable in cases where the injured person is an employee. unlike many contract creditors. It may be that only the High Court and perhaps not even it. The law on the topic appears to be in a state of flux. whilst the employee may be able to choose whether or not to be employed by the particular employer. However.for so suspecting and/or looking at the nature and extent of control of parent. and do not have the opportunity to check its solvency. We will look at this section in more detail in lecture 11 The specific problem of tort liability Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 Rogers JA commented as regards lifting the veil to make the parent liable for the torts of the subsidiary: ‘In the present state of the law. it is reasonable to expect that parent or its directors would be aware. Torts are externalities which must be internalized for the assumption of efficiency to hold. Should the veil be lifted in tort cases? As regards parent liability for subsidiary torts. he has no real input in determining how the business will be conducted and whether reasonable care will be taken for his safety. The normal response to this from the perspective of law and economics is that companies will put in place adequate insurance arrangements to deal with the risk of extensive liability: see for 21 . tort creditors cannot bargain ex ante with the tortfeasor. generally speaking. there are good economic arguments for lifting the veil.
In the shadow of the corporate veil: James Hardie and asbestos compensation (Research Note no.au/public/campaigns/jameshardie/files/jh_parl_note.pdf). leaving the issue to individual statutes and common law. Millon. ‘Piercing the Corporate Veil. eg. that reporting on social responsibility issues should remain voluntary and that government should encourage socially responsible practices. 12 2004–05. CAMAC gave detailed consideration to the issues surrounding protection of unascertained future claimants (UFCs). available online at: http://actu. A CAMAC Report of December 2006 on The Social Responsibility of Corporations also recommended no change to directors’ duties. Civil and criminal liability of companies Wrongs committed by companies will always be ‘derivative’ in the sense of deriving from the act or omission of a natural person. S Dudley. In many cases liability will be vicarious. CSAC (the forerunner of CAMAC) recommended no general reform. based on the relationship between the company and the individual in question. preferring instead that specific legislation targeted at the problem area be introduced in areas where the market is judged unable satisfactorily to respond.asn. eg.’ A number of reports have dealt with this issue in Australia: In its Corporate Groups: Final Report. in its May 2008 report entitled Long-Tail Liabilities. the work of P Spender. Most recently. Australian Parliament. and P Prince. However in some cases the 22 . Millon concludes at 66: ‘Limited liability should instead be limited to situations in which shareholders have managed the business with due regard for bargained-for expectations and potential victims of reasonably foreseeable accidents.example Easterbrook and Fischel. For further discussion of James Hardie: see. and the Limits of Limited Liability’ (2006) Wash and Lee Working Paper No 8 at 42-58. J Davidson. A June 2006 report by the Parliamentary Joint Committee on Corporations and Financial Services on Corporate responsibility: managing risk and creating value recommended no change to directors’ duties. If they do not put insurance in place then there might be a case for lifting the veil on the basis that the company is acting opportunistically in transferring risk of reasonably foreseeable losses to tort creditors (analogous to incurring contractual debts when insolvent): see for example D. Financial Responsibility. “Blue Asbestos and Golden Eggs: Evaluating Bankruptcy and Class Actions as Just Responses to Mass Tort Liability” (2003) 25 Sydney Law Review 223.
Tesco Supermarkets v Nattrass  AC 153 An alternative. There are also primary rules of attribution that are not expressly stated… but implied by company law. Although developed in the context of civil liability. but company may be subject to primary criminal liability where the offence is committed by its ‘directing mind’: prosecution must show that the natural person in question had the requisite mens rea for the offence. they act as the company itself. but who is really the directing mind and will of the corporation. such as “the unanimous decision of all the shareholders in a solvent company… shall be the decision of the company”’. Viscount Haldane said in a very famous passage: ‘a corporation is an abstraction. and • 23 . more flexible approach was taken in Meridian Global Funds Management Asia Ltd v Securities Commission  2 AC 500. its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent. Civil Wrongs Vicarious liability of the company as employer: tort committed by an employee in the scope of the employment.’ This has been understood as elaborating an ‘organic’ theory of the corporation: senior managers in this position not only act for the company. PC. the very ego and centre of the personality of the corporation. which can be referred to as ‘direct’ or ‘primary’ liability. It has no mind of its own any more than it has a body of its own. and this is then attributed to the company. Criminal wrongs What is to be gained by imposing criminal liability? Criminal liability arises very rarely vicariously. and general rules of attribution. which is discussed next. this principle has been particularly useful in relation to criminal liability.company is treated (admittedly fictionally) as though it committed the wrong. which ‘will generally be found in its constitution… and will say things such as… “the decisions of the board in managing the company’s business shall be the decisions of the company”. like agency and vicarious liability (these will rarely apply to criminal liability unless the statute expressly says so). Lord Hoffmann on behalf of the Privy Council drew a distinction between • primary rules of attribution. encompassing negligent and deliberate torts. Primary liability: see Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd  AC 705.
employee or agent to the company – essentially vicarious liability – in order to satisfy any mental element). the physical elements of offence will be attributed to the corporation where the offence is committed by employee.2). Things may be changing in Australia towards making it easier for companies to be convicted. agent or officer in actual or apparent scope of his or her employment (12.1(2): companies may be found guilty of offences punishable by imprisonment (even though a company cannot be imprisoned) – fines can be imposed for such offences. Criminal Code) general model principles of criminal responsibility for companies: • s1308A CA provides that Criminal Code applies to offences under the CA (except for offences under Ch7 (Financial services and markets) where s769B(3) attributes intention with regard to action within the actual or apparent authority of a director.’ This creates greater uncertainty. eg. and this can be deemed in a number of situations. which are required when a rule of law expressly or impliedly provides that the primary and general rules do not apply. tacitly or impliedly authorized or permitted the commission of the offence’ (12. Criminal Code Act 1995 (Cth) contains (in Schedule to Act. Work Health and Safety Act 2011 (Qld). taking into account the language of the rule (if it is a statute) and its content and policy. • Where it applies. so far only the ACT has introduced industrial manslaughter laws which reflect the model law provisions: see the Crimes (Industrial Manslaughter) Amendment Act 2003. Note: As far as industrial manslaughter and directors’ liability is concerned. the law has substantially shifted under a harmonised scheme. which applies in the majority of States and Territories: see. and it is up to them to decide whether to adopt the model Criminal Code. but makes it easier for large companies to be convicted since it does not require that those at board level have knowledge of the wrongdoing: see further Ross Grantham. A failure to take positive steps is a breach of the Act. 24 . Fault can be attributed where the corporation has ‘expressly. Now directors have a positive duty to show that they have taken due diligence. The principal limitation of the 1995 Act is that more serious offences remain the province of the States.3(1)).• special rules of attribution. This turns on the court’s interpretation of the statute. ‘applying the usual canons of interpretation. s12. ‘Attributing responsibility to corporate entities: a doctrinal approach’ (2001) 19(3) Company and Securities Law Journal 168 at 175.
6 and 7.11. In smaller. R. In legal terms. 5. quasipartnership companies this distinction may seem artificial and the shareholder-managers may not make any such distinction if they are not legally advised! The Constitution and the ‘Replaceable Rules’ Corporate governance rules consist of two kinds of rules: special ‘replaceable’ rules contained in the CA which companies can adopt by default or replace with their own tailored rules. 25 . if adopted after registration. 1 Introduction Corporations law needs to deal with the separation of ownership (members in their capacity as risk-bearers or residual claimants) and control (directors in their function as management) which occurs in many companies. whilst a public company must have a constitution: ASX Listing Rule 15. at http://www.asx.com. a special resolution of the Members is required: s136(1)(b).Lecture Three: Internal Structure and Operations of the Company: the corporate constitution. corporate ‘organs’. Chapters 4.3.2 and 2. Almost every company will adopt a ‘constitution’ because some of the replaceable rules will be unsuitable for them. and. by the CA. Principles of Good Corporate Governance and Best Practice Recommendations. and meetings Recommended preliminary reading: Boros and Duns. A list of replaceable rules can be found in s141. s9 defines special resolution as requiring to be passed by the votes of 75% of the shares of Members entitled to vote. Boros. and a document which the CA calls the ‘constitution’ in which companies modify or replace the replaceable rules. where appropriate by the ASX Listing Rules. power is divided between these two groups by the corporate governance rules (that is the replaceable rules – note especially s198A(1) and the constitution). See s135(1) and (2). L. ‘Shareholder Litigation after Sons of Gwalia Ltd v Margaretic’ (2008) C&SLJ 235 ASX Corporate Governance Council. Further suggested reading: E. ‘Australia Inside-out: The Corporate Governance System of the Australian Listed Market’ (2004) 28 Melb U. Alan Dignam and Michael Galanis. Constitution can be adopted on registration as a long as signed by every member.au/supervision/governance/principles_good_corporate_governance.htm especially recommendations 2. March 2003 (available from ASX website.
However Sons of Gwalia Ltd v Margaretic (2007) 81 ALJR 525. Note however that this case has been overruled by the legislature: the Corporations Amendment (Sons of Gwalia) Bill 2010 passed the Senate on 26/11/2010 6. preventing another director from treating her as a director and requiring that a general meeting be called to enable the shareholders to elect new 26 . The middle view is that a member may be able to insist that the company’s organs be properly constituted: in Kraus v JG Lloyd Pty Ltd  VR 232. although there is no clear support for this in Australian law. Members are bound or entitled only in their capacity as members: Eley (above). 4. affirmed  1 Ex D 88. however. 5. whether they were members or not at the time they relied on the statement made by the company) rather than the technicalities of 19th Century English law cases. It is important to note that the Member had bought the shares on the open market from a third party. 3.  HCA 1 has given s563A a narrow scope. 7. ‘Sons of Gwalia Ltd v Margaretic: The Shifting Balance of Shareholders’ Interests in Insolvency: Evolution or Revolution?’ (2007) 31 Melb U L Rev 591. One shareholder should be able to recover damages from another shareholder. Hargovan and J. and an injunction preventing her from acting. Marketing Advisory Services (MAS) v Football Tasmania Ltd  42 ACSR 128. Contrast the broader view of Wedderburn in (1957) Cambridge Law Journal 194. For discussion of this case. Members are bound by the statutory contract in any disputes arising in relation to the affairs of the association: Hickman v Kent or Romney Sheep Breeders’ Association  1 Ch 881. They cannot be enforced by outsiders: see Eley v Positive Life  1Ex D 20. This has a number of important implications: 1. This certainly covers right to vote and right to a dividend if one is declared. rather than directly from the company (as was the case in Houldsworth and Webb). Rights which belong to the company must be enforced by the company. Harris. Member is confined to enforcing personal rights under s140(1). Remedy for breach of the constitution by the company is injunction or declaration. The court’s decision was influenced by the terminology of the consumer and investor protection statutes (which applied to the whole investing public. It therefore does not clarify which rights will be considered ‘outsider’ rights. The court held that a claim brought by a member against the company under s1041H for false and misleading conduct did not fall within s563A.The replaceable rules and/or Constitution are a statutory contract: see s140(1) CA (you should read this section carefully). see A. 2. a member was able to obtain a declaration that a director was no longer entitled to act because her term had exceeded that permitted by the articles. not damages: see Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 explaining Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 and that s563A CA 2001 postpones claims ‘owed by a company to a person in the person’s capacity as a member of the company’ until after other creditors have been paid.
McGellin v Mount King Mining NL (1998) 144 FLR 288. the constitution can make provision for modification or repeal to be conditional on compliance with a further requirement: s136(3) and (4). While the court insisted that the plaintiff’s personal rights had been infringed by this. Alteration of the constitution Special resolution of the members in general meeting: s136(2). There is authority that the irregularity need not be inadvertent: see Re Pembury Pty Ltd (1991) 4 ACSR 759 requiring a nexus between the irregularity complained of and the prejudice. Validation of other. 9. However there is also authority the other way: see eg Young J in Re P W Saddington and Sons Pty Ltd (1990) 2 ACSR 158. However the shareholders can make it more difficult for themselves to modify the constitution in a number of ways: • • • They can make a contract among themselves: Russell v Northern Bank  3 All ER 161. although note the requirement in 6(a) that the court should not make an order unless satisfied that those concerned acted honestly and that it is just and equitable that the order be made. Note that repeal may result in the replaceable rules becoming applicable to the company. 8. 10. Restrictions on alteration Company cannot be deprived of its statutory power to alter its constitution by contracting that it will not change its constitution. departures from the prescribed way of doing things will not be invalid unless they change the substance of the thing which is being done. See also s136(5) and 139. because it differs subtly from the text considered in many of the cases. The precise terms of any so-called ‘special’ contract – and the effect of any change to the constitution on that contract – are questions of construction for the court. Most importantly. The constitution can also be entrenched by using weighted voting rights of the kind recognized in Bushell v Faith  AC 1099. 27 .directors in accordance with the articles. non-procedural irregularities is possible under 1322(4). 132 ALR 1. Accordingly. See also Whitehouse v Capital Radio Network Pty Ltd  48 ACSR 569. Position of directors under s140? Ability to enforce rights in their capacity as directors and an obligation to observe the constitution? Make sure you read the text of s140 carefully. it gave no further details. It may also result in the breach of separate contracts made on the previous terms of the constitution: Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399. A member will not be able to complain of mere procedural irregularities at common law or under s1322.
ASX Listing Rules also make changes to the position of shareholders under the CA: see for example. Sometimes the CA requires a special resolution to protect minorities (defined in s9 to mean 75% of the votes of those entitled to vote). 11. have to comply with a special procedure prescribed by s246B which will be discussed in lecture nine. even if they are not entitled to vote: Re Compaction Systems Pty Ltd (1976) 2 NSWLR 477 although s1322 may make the informal resolution valid in any event if there is no prejudice. although their constitution may oblige them to. Alternatively a written resolution procedure is provided in 249A. Austin J hinted (obiter) in Bodikian v Sproule  72 ACSR 598 at  that the rule might not apply where there is a statutory requirement to hold a meeting (as opposed to a replaceable rule requiring that a meeting be held).2.1. Proprietary companies do not have to. 249X allows a member to appoint a proxy. that is special rights held by a class of members.1. Organs. Re Express Engineering Works Ltd  Ch 466 and Re Duomatic  2 Ch 365. which will be discussed in lecture 8. removing a director in a public company (203D) (this is a replaceable rule in private companies: 203C). 10. Annual reports must be made to the AGM (both financial and directors’ reports) by public companies and large 28 . Both board and auditors must (in many cases) be present at the AGM. members can vote informally if all agree. There are two types of general meeting: the AGM (Annual General Meeting) and the EGM (Extraordinary General Meeting). Public companies must hold AGMs because they have an important corporate governance function (they give shareholders the opportunity to call directors to account): s250N. altering company’s status. LR 7. modifications which are oppressive or unfairly prejudicial to a member or members may be prevented by the court under Part 2F. How do members vote? Normally by show of hands. 11. reducing capital (256B and C). General meeting Members in general meeting decide by simple majority of votes cast (‘ordinary resolution’. Some matters are expressly reserved to the general meeting by the CA eg altering constitution (s136). This does not apply if any member is excluded from the meeting.1. but note s250L allows a shareholder holding 5% of votes to demand a poll. a common law notion not defined in the statute) in accordance with CA and constitution. Similarly.1. Finally. Division of responsibilities and decision-making power Company in general meeting and board of directors are the principal organs of the company.Variations of ‘class rights’.
Remuneration of directors was not permissible at common law. Resignation (in outline): s203A-B. This is a replaceable rule but companies invariably adopt it. LR 14. chair. must be provided for in the constitution. Browne v Panga Pty Ltd (1995) 17 ACSR 75 No removal of director by other directors in public company: 203E. See s202A(1) and 202B.4 Removal by shareholders: 203C-D Bushell v Faith  AC 1099. issuing shares under 124(1) etc. Small proprietary companies are exempt unless 5% of shareholders request it or ASIC directs it (293-4). 29 . LR 6. suing in the company’s name. Companies which are obliged to produce a directors’ report under 298-300 (ie large proprietary and public companies) come under additional obligations under s300. they will be subject to statutory duties.proprietary companies. nominee. borrowing money. Listed companies have more frequent disclosure obligations: they must prepared half-year financial report and directors’ report under s302 and note also their obligations of continuous disclosure to the market under the ASX Listing Rules. alternate (s201K). Types of director: managing. Board of directors S198A(1) provides that ‘the business of the company is to be managed by or under the direction of the directors’. If so. Amalgamated Pest Control Pty Ltd v McCarron (1994) 13 ACSR 42. Formal requirements for appointment (outline only): CA ss201A-M. s201A-M Corporations can be shadow directors if the definition is satisfied: Standard Chartered Bank of Australia Ltd v Antico  38 NSWLR 290. executive and non-executive. Who can call general meetings and what notice must be given? See ss249C-O Fraser and anor v NRMA Holdings Ltd and ors (1995) 127 ALR 543 Directors’ fiduciary duty to disclose material information about what is to be discussed at shareholder meetings may trigger s52 of the Trade Practices Act 1974 (Cth).9. See definition in s9. Chapter 3. This includes making contracts. and listed companies come under still further obligations under 300A and 250R. de facto and shadow.8 and 6. deciding whether to defend proceedings. employing people.
Howard Smith v Ampol Petroleum  AC 821: ‘directors. while shareholders are dispersed and so do not monitor to check that the directors are adequately supervising management (they have a ‘collective action problem’). Note that directors remain responsible for action of the delegate: s190(1). Can the shareholders interfere with board management or give the board instructions? The basic answer to this is no. and the chair has a casting vote: replaceable rule in s248G. Where the board is deadlocked. Limited v. What about the position of creditors if the shareholders cause the company to trade while insolvent? An aside on corporate governance For an example of a failure of directorial oversight of management. Poliwka v Heven Holdings Pty Ltd (No 2) (1992) 8 ACSR 747 at 786-8. Clamp v Fairway Investments Pty Ltd (1971-3) CLC 40-077. and to others: 201J. The ASX’s response to this is the ASX Corporate Governance Principles and Recommendations (2nd edition). may take decisions against the wishes of the majority of shareholders.Board takes decisions by majority. See Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame  2 Ch 34. Quorum is two: 248F. Quin & Axtens Ltd v Salmon  AC 442. Bodikian v Sproule  72 ACSR 598 at . Peter Shaw and John Shaw  2 K. The board may delegate powers of management to committees of the board.’ Shareholders can use 203C/D or pass a special resolution to alter the articles under s136(2). see AWA Ltd v Daniels  7 ACSR 759. John Shaw and Sons (Salford). What about the Duomatic principle? See Re Express Engineering. Written resolution procedure: s248A. 198C. s198D (general power). see Barron v Potter  1 Ch 895. within their management powers. s1322(2). to individual executives. and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office. The ability of management to pursue their own goals and not further the interests of shareholders is referred to by economists (but not lawyers!) as an ‘agency problem’: shareholders depend on management but do not/cannot control them. although the scope of the principle was interpreted narrowly in Massey v Wales  47 ACSR 1. Many of the problems arise because the board contains many members aligned with – or part of – management. 113.B. which sets out best practice and endeavours to structure the board so that it operates 30 .
However. One of the key mechanisms is the presence on the board of a majority of independent.10. non-executive directors. As we will see in the lectures on directors’ duties. or a good explanation of why this is not the case (listed companies are subject to ‘comply or explain’ under LR 4. 31 .3). Another is the establishment of non-executive committees dealing with crucial areas such as audit and remuneration.in a way which is more likely to further shareholder interests. this development is causing considerable difficulties for the law in laying down the standard of care and skill expected of the different types of directors. there is good reason to be sceptical as to the effectiveness of nonexecutives in controlling executives and making them accountable to the shareholders.
Lecture Four: Corporate Contracting Recommended preliminary reading: Boros and Duns. s125(1) deals with other restrictions in the constitution.au/download. provide grounds for an oppression remedy for a minority shareholder or even justify winding up on the just and equitable ground.cfm?DownloadFile=C3706600-1422-207CBA0F653CE1CF7EFB) 1. 32 . They might also be in breach of their service contract. Ratification of the breach by the shareholders in general meeting is possible unless the interests of creditors intrude: Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722. Corporate capacity and powers s124(1) states that companies have legal capacity and powers set out therein. s129(1) and s130(1).law. in breach of an implied duty of care under the statutory contract. UK and New Zealand law impose a specific duty to act in accordance with the constitution: s134 Companies Act 1993 (NZ) and s171(a) CA 2006 (UK). An internal constraint only Breach of constitutional limitations by directors is an irregularity which may be a breach of their duty of care and skill or their fiduciary duty to act in good faith for a proper purpose (given that the company constitution defines and sets limits to the company’s interests). See also s128.edu. Corporate Authority and Dealings with Officers and Agents.unimelb. s124(2) provides that a company’s capacity to do something is not affected by the fact that it is not in the company’s interests to do that thing. Chapter 9 Further suggested reading: Chapple L & Lipton P. Centre for Corporate Law. 2002 (available online at http://cclsr. Statements of objects and limitations on powers Express statements and limitations Objects clauses? For their legal effect see s125(2). University of Melbourne.
that the corporators intended that it would be restricted forever to carry on that business. (On the compatibility of governing directors with s9. the identity of the organs of 33 . Boros and Duns argue (at 155-6) that an act of a delegate such as the managing director (and perhaps therefore also a committee (see ss198C and D)) would suffice to be an act of the company. It is widely accepted that the general meeting acts as an organ of the company. I do not think it should be readily assumed that where there is a small company and it in fact for a few years carries on one business alone.Implied limitations Implied limitations may be found in ‘the general intention and common understanding’ of the incorporators. but to move offices and to change the nature of business. or. citing Welch v Welch  CLC 40-068). we need to identify an act of an organ of the company. but that if one gets to the situation where one can say the substratum has gone. the dominant view is also that the board of directors exercising their management powers will act as an organ of the company. and could be enforced by ordering winding up on the ‘just and equitable’ ground under s461(k) or (more likely) in oppression proceedings under Pt 2F.’ When is there an act of the company? s125 is concerned with corporate capacity and requires an act of the company or an exercise of corporate power. Note s127 in this context. then any member can petition the court to wind it up and get his or her investment back on the basis that the corporate purpose has come to an end… It seems to me that the evidence in the instant case is not strong enough to demonstrate that the business of the company at Strathfield was. and to give any member the veto against the business moving. Since the company is a legal fiction. including changing the direction of the company. indeed. Presumably they are relying on s198D(3) which makes the ‘exercise of the power by the delegate… as effective as if the directors had exercised it. in the minds of the corporators. Moreover. the only business which would be carried out. it seems to me that the directors have the power [under the constitution]… to carry on the management of the company in a wide sense. see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 per Brennan J. the principal business that would be carried out by them… In modern business one tends not to stay in the one locality for the whole life of the corporate enterprise. When will the courts find such an intention? See Strong v J Brough & Son (Strathfield) Pty Ltd (1991) ACSR 296 esp at 300-2. or any member the right to withdraw his investment if the others took that course. It will also encompass a governing director. This will normally be either the board or the general meeting.’ This is highly questionable: s198D was introduced by CLERP in order to clarify the board’s ability to delegate following the NSWCA decision in Daniels v Anderson (1995) 37 NSWLR 438 and s190 sets standards of responsibility of the board for the actions of the delegate. Young J in the Supreme Court of NSW : ‘How does one get to the general intention and common understanding of the members? That is a very difficult question….1. the decisions of which will be treated as decisions of the company. Drawing these lines together.
generally. as we will see below. On their authority to authorize agents. both of which treated a single director as an agent rather than an organ of the company. If the agent is appointed to carry out certain tasks. 2. the authority will include authority to do whatever is necessary or normally incidental to those tasks (incidental authority). s126 allows an individual acting with authority to make. Actual authority can be express or implied by the acquiescence of the board or other person with actual authority (according to Hely-Hutchison v Brayhead (1968) 1 QB 549 acquiescence requires consent of all board members plus communication of that consent to each other and to the agent). this approach was not taken in Crabtree-Vickers or Brick and Pipe Industries. Green v Meltzer (1993) MCLR 289. Managing director can have powers delegated under 198C and can also be appointed under s201J.the company is arguably a matter for the company’s constitution. if a third party deals with a managing director or a Committee on a matter which lies beyond their usual authority.’ See Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68. In any event. to supervise the other managers and indeed. see Crabtree- 34 . be in charge of the business of the company. (NZ case). Company incurring obligations through actions of an agent 3 ways: a) Express or implied actual authority b) Company previously held out individual as its agent (apparent or ostensible authority) c) Company subsequently ratifies conduct of someone who presumed to act as its agent Actual authority Actual authority is an internal matter. ratify or discharge a contract on behalf of the company. Finally. Appointment to a position of a standard kind which involves acting for the appointor gives authority to do things usually done by a person in that position (usual authority). Re Tummon Investments Pty Ltd (in liq) (1993) 11 ACSR 637. and will have the usual authority ‘to deal with everyday matters. to supervise the daily running of the company. the distinction between an organ and an agent will only be important in rare situations: for example.
A fourth condition laid down by Diplock LJ relating to capacity no longer applies. Company secretary keeps records and ensures company performs statutory functions (s188).Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 33 CLR 72. Contractor induced by the representation to enter the contract (this will not apply where the contractor knows of facts which suggest that the apparent agent did not have authority. Individual director has no usual authority to bind the company: Northside Developments Pty Ltd v Registrar General (1990) 170 CLR at 205. because then they will not have relied on the representation). when ceased to be viewed as a ‘mere clerk’. The authority of executives below board level will depend on their particular position: see eg AWA Ltd v Daniels (1992) 7 ACSR 759 per Rogers CJ dealing with usual authority of money market managers and foreign exchange dealers. ‘the making of such a representation is itself an act of management of the company's business’. See also First Energy (UK) Ltd v Hungarian International Bank Ltd (1993) BCLC 1409 (the ‘self-authorising agent’). In all the cases reviewed in Freeman. Diplock LJ laid down four conditions in Freeman & Lockyer v Buckhurst Properties (Mangal) Ltd (1964) 2 QB 480 which must be satisfied before a contract can be enforced against a company where the purported agent did not have actual authority: 1. Limited authority until Panorama Developments (Guilford) Ltd v Fidelis Furnishing Fabrics Ltd (1971) 2 QB 711 and Donato v Legion Cabs (Trading) Co-op Society Ltd (1966) 2 NSWR 583. Alternatively. this might simply be an aspect of inducement: if the contractor 35 . the representation was made ‘by conduct in permitting the agent to act in the management and conduct of part of the business of the company’. 4. That representation must have been made by a person or persons who had actual authority to manage the business generally (normally the board) or specific matters to which the contract relates (eg MD or company secretary or some other agent to whom authority has been delegated. whether expressly or impliedly): per Diplock LJ. Likewise the chairperson: see State Bank of Victoria v Parry (1990) 2 ACSR 15 at 29. Apparent or ostensible authority This is an aspect of estoppel. Representation must have been made to the contractor that the agent had authority to enter on behalf of the company a contract of the kind sought to be enforced 2. and so is an external matter. 3. However some commentators take the view that there is a fourth condition that apparent authority will not operate if the third party knows something which would put a reasonable person on inquiry as to whether the person with whom they are dealing lacks authority. 7 ALR 527.
Ratification may be by ordinary resolution of the GM if – exceptionally – the subject matter lies outside the scope of the board’s management power. in a particular case. HCA. Freeman was approved in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72. Ratification can only cure an absence of excess of authority on the part of the agent. and will also presumably be needed to interpret the statutory provisions. If the contractor ought to know about the lack of authority then it will be difficult to persuade the court that he relied on the representation. then the relevant provision is s198A. Ratification must occur within a reasonable time. Authority of a sole director/shareholder Wide actual authority under s198E(1). Is the doctrine of apparent authority still needed? Will be needed if.knows about the lack of authority then the representation will not be an inducement. Sole director/shareholder is the organ of the company. Note the importance of earlier findings of fact as to the authority of the Managing Director to the outcome of this case. normally by means of board resolution. If company has gone into liquidation. 3. or ratified by an individual given authority under s126. Would 129(3) have affected the outcome in Crabtree-Vickers? Ex post ratification of unauthorized activities Ratification by the company. If there is more than one shareholder. Reduction of the burden of inquiry on third parties dealing with the company 36 . On the intersection between usual authority and apparent authority see Hely-Hutchison v Brayhead (1968) 1 QB 549. s129(3) does not apply. the liquidator can ratify: Alexander Ward v Samyang Navigation Co Ltd (1975) 1 WLR 673.
the rule is aimed at giving ‘sufficient protection to innocent lenders and other persons dealing with companies. 37 . on interaction with common law rules see Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119. and will be need for the purposes of interpreting the legislation. common law deployed the ‘indoor management rule’. Northside Developments Pty Ltd.’ The rationale is that outsiders do not have access to the internal machinery of the company. in my opinion. this rule will be need where the statutory assumptions do not apply. to strike a fair balance between the competing interests. A mere constitutional or statutory power to appoint agents will not suffice to trigger the Turquand rule. On the one hand. The precise formulation and application of that rule call for a fine balance between competing interests. You therefore need to be aware of it. Internal procedures may be required by law or the constitution. Northside Developments Pty Ltd (which predated ss128-9 CA) A key limitation is where the third party is put ‘on inquiry’ by circumstances surrounding the transaction. Under statute ss128-9. to hold that a person dealing with a company is put upon inquiry when the company enters into a transaction which appears to be unrelated to the purposes of its business and from which it appears to gain no benefit is. Custom Credit Holdings Ltd v Creighton Investments Pty Ltd (1985) 3 ACLC 248. Again. and is arguably relevant to interpretation of s129(1). thereby promoting business confidence and leading to just outcomes. the company must do something to create an impression that the person was its agent or that approval was given. an overextensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies. Then he ‘cannot presume in his own favour that things are rightly done if inquiry that he ought to make would tell him that they were wrongly done’: Morris v Kansen (1946) AC 459 at 475. Houghton v Nothard Lowe and Wills Ltd (1927) 1 KB 246. eg as to proper appointment of directors or general meeting approval of specific transactions. the rule has been developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. Agency principles aside. The common law indoor management rule continues to apply where the generally broader ss128-9 do not apply. as the case may be: see for example Diplock LJ in Freeman & Lockyer.At common law Before the doctrine of ostensible authority. otherwise known as the rule in Turquand’s case (1856) 6 El & Bl 327. On the other hand. Per Mason CJ in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 164-5.
and that an officer or agent with authority to issue a document (ie MD or CS) has authority to warrant that document is genuine or a true copy (129(7)). If 38 . that officers and agents held out as such by the company have been validly appointed and have customary authority (129(3)). and s128(3) which provides that the assumptions apply in the context of forgery. Forgeries Note s129(7). the court may have to determine what powers are customarily possessed by a person in a particular position: see for example Austin J in NCR Australia Pty Ltd v Credit Connection Pty Ltd (2004) NSWSC 1 at - determining the customary functions and authority of a ‘national credit manager’ to include deferring debt payments but not to institute litigation. If ss128-9 do not apply. Assumptions can be made that: • • • • • • • the company’s constitution and replaceable rules have been complied with (129(1)). See Ruben v Great Fingall Consolidated (1906) AC 439. As for the scope of customary authority. Kreditbank Cassel GmbH v Schenkers Ltd (1927) 1 KB 826. the company must show that the person dealing knew or suspected that the assumption was incorrect: s128(4). Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146. without more.s128 allows a person dealing with a company to make the assumptions set out in s129 as to regularity of procedures. directors and company secretary recorded in public information have been validly appointed and have customary authority for their position (129(2)). that a document under seal and witnessed in accordance with 127(2) has been duly executed by the company (129(6)). as having ‘authority to bind the company to the arrangement or to execute the deed on the company's behalf’. Dealing with problems which raise questions of authority of agents It is suggested that if you are dealing with a problem question which gives rise to questions of authority on the part of agents. that agents and officers properly perform their duties to the company (129(4)) (see Pico Holdings inc v Wave Vistas Pty Ltd (2005) 214 ALR 392). In order to assert that assumption is incorrect. ‘Dealing with’ was interpreted broadly in Story v Advance Bank (1993) 31 NSWLR 322. you should begin with an application of the statutory rules. that a document duly executed by company if signed in accordance with 127(1) (129(5)). the common law rules continue to apply. and not.
or if they do not apply. and finally. you should then proceed to consider questions of actual and ostensible authority.there is doubt as to their application. the Turquand rule. 39 .
market forces are the main constraint on directors. these doctrines have a similar thrust: they forbid directors… from entering unfair or illicit self-dealing transactions or otherwise misappropriating company assets… the standards strategy frequently operates in conjunction with the trusteeship strategy [i.pdf) Introduction: the nature and function of directors’ duties Directors have an opportunity for fraud or mismanagement (lack of care) by virtue of their position in controlling the company’s assets. Duties are a system of standards to be assessed ex post by the courts rather than attempting to create an exhaustive set of rules ex ante which may create loopholes etc.au/documents/283/PDF/full. In The Anatomy of Corporate Law.’ However. or for an action by the liquidator in the event that the company becomes insolvent. they are likely to be more passive.treasury. All jurisdictions impose standards – which we group under the umbrella phrase ‘duty of loyalty’ – to control management conflicts and limit the risk of managerial diversions of assets or information… whatever their labels. 1997) at 22-9 discussing the need for/form of a statutory business judgment rule (available online at http://www. Chapter Five. Chapter 10 Further suggested reading: Corporate Law Economic Reform Program.e. over time they have been complemented with specific (and increasingly complex) statutory rules.gov. 3: Corporate Governance and Directors’ Duties (AGPS. in large public companies. For a detailed and current summary of the law in this area and its development. In small proprietary companies breach of these duties may form the basis for a minority action. very important. and it will be difficult to coordinate action. common law and statutory duties on directors. Law imposes strict fiduciary. How important are they? In doctrinal legal terms. with duties operating as a ‘backstop against egregious wrongdoing’. but where they are dispersed and diversified. Proposals for Reform: Paper No. requiring disinterested board or general meeting approval of self-interested transactions].Lecture Five: Directors’ Duties (1) Recommended preliminary reading: Boros and Duns. 40 . Shareholders may be able to police the directors and use their powers to remove them. see Bell Group v Westpac Banking (No 9) (2008) 70 ACSR 1. In practice. standards are pervasive. at 114. Hertig and Kanda write: ‘If rules are rarely used to regulate most conflicted transactions today. paras - per Owen J. Juridification through statutory regulation coupled with gradual development of the common law duties has produced to a complex system of regulation of directors’ conflicts of interests and care and skill.
v. This is termed the ‘business judgement rule’. In some respects they resemble managing partners.’ Origins of the rule in the approach taken by the courts to reviewing business policy in partnerships: see Wedderburn (1957) Cambridge Law Journal at 197-8. Fiduciary duty gives directors the flexibility to manage the business. In some respects they resemble agents. Lord Eldon in Carlen v Drury (1812) 1 Ves & B 154 at 158: ‘This Court is not to be required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom. In some respects they resemble trustees. 159 (Clarendon 2002)). 41 . Introduction to Company Law.An overview of directors’ duties Fiduciary duties: imposed on directors by analogy with trustees and agents. take risks and respond to changes in the company’s environment. where they are acting for improper purposes etc. However. fiduciary duties should be understood in the context of the courts’ long-standing refusal to become involved in disputes over the day-to-day management of businesses. More recently the business judgement rule has been explained in terms of the limited resources of the courts compared with the vast number of companies and potential disputes. equitable and statutory duties of care and is discussed below. the more likely the court is to infer that the director in question did not take it in good faith or believe it was in the best interests of the company. in others they do not. Regal (Hastings) Ltd. A statutory business judgement rule (s180(2)) applies only to common law.’ Confirmed in Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493. in others they do not. This means that the courts will not review a decision just because it was highly eccentric. Gulliver (1942) 1 All ER 378. per Lord Russell: ‘Directors of a limited company occupy a position peculiar to themselves. but constrains them (or restricts their autonomy) where they are in a position in which their self-interest and the interests of their principal conflict. ‘Only the careless or naïve director is likely to leave direct evidence that he or she did not consider the interests of the company (shareholders). although the less reasonable the decision. but neither analogy precisely captures the relationship between director and company. Re Smith and Fawcett Ltd  Ch 304: the directors of a company must act ‘bona fide in what they consider – not what a court may consider – is in the interests of the company. and not for any collateral purpose. As Paul Davies puts it. in others they do not’ Directors are viewed as a sui generis fiduciary of the company as a separate legal entity. (1967) 2 AC 134 at 147.’ (Davies.
Interaction of statutory duties with common law duties: see s185. emphasising that the duties in equity and law ‘to exercise reasonable care and skill are. Like fiduciary duties. Statutory duties ss180-3 CA. Note also ASICA s 50 giving ASIC broad discretion following an investigation into the company’s affairs to bring proceedings in the company’s name (or in the name of one of the shareholders if they consent). and compensation order under 1317H. disqualification under 206C. For interpretation of the section see ASC v Deloitte Touche Tohmatsu (1996) 21 ACSR 332 at 352-63 Note also CA s 1330 allowing ASIC intervention in existing proceedings under the CA. Note: These provisions: ss 180-3 are civil penalty provisions under 1317E and ASIC can apply for: • • • • a declaration of contravention under 1317J(1). the same’. or to bring an application for compensation for breach of the statutory duties: s1317J(2) (regardless of whether ASIC is taking action) or plead both in the alternative. pecuniary penalty under 1317G. in content.Duty of care: arises in both common law and equity: judgment of Ipp J in Permanent Building Society v Wheeler (1994) 11 WAR 187. the duty of care is owed to the company as a separate legal entity. The company can choose whether to sue its directors under common law duties. 42 .
while the duty not to trade while insolvent imposed by s588G insolvent trading duty only extends to directors (including shadows and de factos) but not officers. This is important because shadow directors and officers are subject to s180-3 duties. or a substantial part. Coleman v Myers (1977) 2 NZLR 225. (2001) BCC 874. of the business of the corporation’ or have ‘the capacity to affect significantly the corporations’ financial standing’ and even ‘shadow officers’ (ie those in accordance with whose wishes the directors are accustomed to act). To whom to they owe them? Duties are owed to the company as a separate legal entity: Percival v Wright (1902) 2 Ch 421. Statutory duties sometimes apply to a ‘director’ and sometimes to an ‘officer’. 43 . Broadly speaking. Hodgson was influenced by Pioneer’s effective control in the context of the size of other shareholdings (which were small). Hodgson J in Sup Ct of NSW ruled that one company was shadow director of another company: Pioneer held 42% of Giant’s shares through subsidiaries. also persons who knowingly assume office of director without having been properly appointed: CAC (NSW) v Drysdale (1978) 141 CLR 236. 3 ACLR 760. it can be a shadow director: Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1. as is ‘officer’. receiver. Pioneer’s actual exercise of management and financial control over Giant and Pioneer’s requirement that Giant produce financial reports in line with own requirements.Who owes directors’ duties and to whom do they owe them? Who owes them? General law duties: directors and senior executive officers. Although a body corporate cannot be a director. Allen v Hyatt (1914) 30 TLR 444. Directors may come to owe a duty of care to persons other than the company. had three nominee directors on the board. Glavanics v Brunninghausen (1996) 19 ACSR 204 (esp at 220-3). on appeal (1999) 32 ACSR 294 esp at 304 and 312. The concepts of shadow and de facto directors play a similar role (preventing those who direct companies or influence their decision-making from escaping liability on a legal technicality). this means they can only be enforced by the company and not by individual shareholders: this will be discussed in more detail in lectures 7 and 8. but are considered mutually exclusive: Re Hydrodam (Corby) Ltd  2 BCLC 180 at 183 per Millett J. 22 ALR 161. persons who make or participate in decisions which ‘affect the whole. which includes directors and secretary. We have already seen that ‘director’ is defined in s9 to include shadow and de facto directors. but content may vary depending on the nature of the office and their service contract. for example if they assume responsibility to individual shareholders: Peskin v Anderson (2001) 1 BCLC 372. liquidator etc.
However. relationship of trust and confidence (or position of advantage). 44 . it is important to note that such cases are the exception rather than the rule. significant transaction and positive action taken by directors.What is required for a duty to arise on the fact is: shareholder dependency.
justified in trusting that official to perform such duties honestly. an objective standard of skill. is expected of executive directors in relation to financial affairs of the company: see Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 117.’ Delegation and reliance Romer J: ‘in respect of all duties that… may properly be left to some other official. More recently it seems that. skill and diligence The common law and equitable standards The common law and equitable duties of reasonable care and skill exist in addition to any contractual provision. Is there a difference between the legal and equitable duties in terms of quantum of damages? See Daniels t/as Deloitte Haskins & Sells v AWA Ltd (1995) 37 NSWLR 438 at 491 and Street J in Re Dawson (1966) 2 NSWR 211 at 215. in the circumstances. a director is. Skill Romer J then said that conduct should be assessed against a skill standard: what would a reasonable person with the knowledge and experience of the defendant have done in the circumstances if acting on his own behalf? Case law did not require that directors bring particular skills. under the influence of 588G. they should use them for the benefit of the company: Re Brazilian Rubber Plantations and Estates Ltd (1911) 1 Ch 425. and at meetings of any committee of the board upon which he happens to be placed. in the absence of grounds for suspicion. Contrast the argument of Boros and Duns at 252. His duties are of an intermittent nature to be performed at periodical board meetings. though he ought to attend whenever. see Dorchester Finance v Stebbings (1989) BCLC 498. Courts may draw on general law of torts. however. albeit rather minimal.Directors’ duties of care. but if they possess them. bound to attend all such meetings. Diligence As regards diligence. Romer J emphasised that directors are ‘not bound to give continuous attention to the affairs of the company. Care Requirement to take such care as a reasonable person would take on their own behalf: Re City Equitable Fire Insurance Company Ltd (1925) Ch 407 at 428-9 per Romer J. He is not.’ For an application of this. 45 . he is reasonably able to do so.
If the director of a large public corporation were to be immersed in the details of day to day operations the director would be incapable of taking more abstract.’ Some indicators can be found in recent case law. In AWA v Daniels t/a Deloitte Haskins & Sells (1992) 7 ACSR 759 at 865-9 Rogers CJ said: ‘. The precise duty of care flowing from these arrangements would be subject. the NSWCA in Daniels v Anderson was widely viewed as having imposed a stricter standard on non-executives and this led to a statutory restatement of the rules on delegation and reliance.. It was also approved in Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACSR 785 at 856-8 although some courts have taken a stricter approach... Developments under the statutory standard s180(1). However. of course.. The directors rely on management to manage the corporation.. A non-executive director does not have to turn him or herself into 46 . That function must by business necessity be left to the corporation's executives.’ See also ASIC v Adler  41 ACSR 72 at  per Santow J Executive Directors under s180 ASIC v Vines (2003) 48 ACSR 322 ASIC v Rich (2003) 44 ACSR 682 Permanent Building Society v Wheeler (1994) 11 WAR 187 What is the standard applicable to non-executives? This is a vexed question: as Gzell J noted in ASIC v Macdonald (No 11) at : ‘The law has not yet established the extent to which the position of a non-executive director shapes the content of the duty of care. to a minimum standard of care and diligence set by the statute in reflection of the common law position..Rogers CJ accepted the common law on delegation in AWA Ltd v Daniels (1992) 7 ACSR 759 at 868. The board does not expect to be informed of the details of how the corporation is managed. important decisions at board level. According to ASIC v Rich (2003) 44 ACSR 341 at 352. They would expect to be informed of anything untoward or anything appropriate for consideration by the board.The board of a large public corporation cannot manage the corporation's day to day business. and also any arrangements within the board or between the director and executive management affecting the work that the director would be expected to carry out. note extension to officers. the responsibilities of a director include ‘arrangements flowing from the experience and skills that the director brought to his or her office.
but note Gillfillan v ASIC  NSWCA 370 reduced the original civil penalties imposed on Hardie directors (extracts available on Blackboard)..’ In specific cases. Statutory provisions on delegation and reliance The apparently more demanding standard laid down by the NSWCA in Daniels v Anderson provoked the legislative response to be found in ss198D. introduced by CLERP. See also the treatment of the non-executive who was the only director with lending experience in Gold Ribbon (Accountants) Pty Ltd v Sheers (2002) QSC 400. See for example the discussion of the responsibilities of the non-executive Chairman of the listed One. and ASIC v Healey (No 2) (2011) 284 ALR 734. see CLERP Report No3: Corporate Governance and Directors’ Duties at 9-10.’ However. especially paras - and . notwithstanding the direction in s 1317L to apply civil rules of evidence and procedure in civil penalty proceedings. Expanded ASIC’s recognised duty of fairness to call all material witnesses. The statutory business judgment rule s180(2). a requirement which up until then had been the exclusive domain of the criminal law.  FCA 1003. or the experienced non-executive in Vrisakis v ASC  9 WAR 395 at 451. For the latest word on the limits of permissible delegation by non-executives. 47 . For the policy reasons behind the amendments. s189 (dealing with reliance) and s190 (dealing with delegation). Since then the High Court has overruled Morley and restored the Supreme Court finding on contravention: ASIC v Hellicar (2012) 286 ALR 501. on appeal (2006) QCA 335. Note: Morley & Ors v Australian Securities and Investments Commission  NSWCA 331 overruled ASIC v MacDonald (No 11) on the facts – different issue: NSWCA not convinced ASIC discharged its onus of proof.Tel.  HCA 17. the content of the duty of non-executives may be more demanding. ASIC v Healey (2011) 278 ALR 618. the judgment of the NSWCA in Daniels was perceived as requiring non-executives to take a more ‘proactive’ approach to monitoring by referring to what they ought to know: ‘in our opinion the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. See further. see CLERP Report No3: Corporate Governance and Directors’ Duties at 23-9. see ASIC v Macdonald (No 11) (2009) 71 ACSR 368 (Gzell J). Another response to the NSWCA in Daniels. managing director. For further discussion of the reasons behind its introduction. chairman or other officer to find out whether management are deceiving him or her. who was also chair of its audit committee in ASIC v Rich (2004) 50 ACSR 500.  FCA 717. rather than criminal rules of evidence and procedure..an auditor.
 HCA 39. (2009) 71 ACSR 368. The short answer is that there was no evidence that Mr Macdonald rationally believed that a business judgment was in the best interests of the corporation. He gave no evidence. see Australian Securities and Investments Commission v Maxwell  NSWSC 1052. ASIC v Adler (2002) 41 ACSR 72 per Santow J. and will be examined in more detail in lecture 11 on winding up. Causation On causation in relation to civil penalty proceedings brought by ASIC.’ Most recently in ASIC v Rich (2009) NSWSC 1229 at [7253-7289]. other cases against directors in high profile cases. and no defendant has yet successfully relied upon it: Re HIH Insurance Ltd (in prov liq). (2006) 59 ACSR 373. Forrest v ASIC (2012) 291 ALR 399. Austin J considered the scope of the statutory business judgement rule. Australian Wheat Board and Fortescue Metals cases: see. where alleged breaches of this duty of care have featured prominently include the Centro (discussed above).The statutory business judgement rule has been discussed in two notable cases. Some recent cases on s 180(1) In addition to James Hardie. cited with approval by Gzell J in Australian Securities and Investments Commission v Macdonald (No 11)  NSWSC 287. ASIC v MacDonald (No 11). 48 . In the absence of evidence that Mr Macdonald had a belief that a business judgment was in the best interests of JHIL. per Gzell J at : ‘The requirements for the operation of the business judgment rule in s 180(2) are cumulative. his appeal to s 180(2) must fail. eg. Directors’ duty to prevent insolvent trading s588G was discussed in outline in lecture 2 on lifting the veil.
aph. available at http://www. although note that in some earlier cases. The Social Responsibility of Corporations (December 2006).Lecture Six: Directors’ Duties (2) Recommended preliminary reading: Boros and Duns. 12 (pp 222-238 and 246-250) and 13 (pp254-256) Further suggested reading: Joel Bakan.gov. Chapters 11. and not for any collateral purpose. The test is ‘largely (though by no means entirely) subjective’: ‘the objective considerations relate back to the question whether the directors honestly believed the transaction to be in the best interests of the company. on consideration of the surrounding circumstances (objectively viewed). Owen J cited the ‘well-known statement of Bowen LJ’ in Hutton v West Cork Railway Co (1883) 23 Ch D 654 at 671 that ‘Bona fides cannot be the sole test. para . Two separate duties: good faith in the best interests of the company AND for a proper purpose. the assertion of directors that their conduct was bona fide in the best interests of the company and for proper purposes 49 .gov.htm Good faith and proper purposes rules General introduction Common law origin: Re Smith and Fawcett Ltd  Ch 304: the directors of a company must act ‘bona fide in what they consider – not what a court may consider – is in the interests of the company. The Corporation (book. Corporate Responsibility: Managing Risk and Creating Value (June 2006). otherwise you might have a lunatic conducting the affairs of the company. the courts did not always make a clear distinction between the two (see for example Ngurli v McCann (1953) 90 CLR 425). and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational.7. available at www. The duty to act in good faith in the interests of the company A subjective or objective test? The court will not assume impropriety.’ (per Owen J in Bell Group Ltd (in liq) v Westpac Banking Corp (No 9)  WASC 239.au/senate/committee/corporations_ctte/corporate_responsibility/index. Chapter 20.’ The objective aspect of the test ‘leaves open an avenue for judicial intervention if. not to whether (regardless of what the directors believed) it did not benefit the company.camac. and documentary.au (Reports) Commonwealth Parliamentary Joint Committee on Corporations and Financial Services.’ Now also embodied in s181 CA. both are available in the library) Corporations and Markets Advisory Committee (CAMAC).
What are the interests of the company? Clearly includes the interests of existing and future members. at least until the company becomes insolvent.should be doubted. It also encompasses the interests of the company’s creditors. but not necessarily to give priority to. are under the management of the directors pending either liquidation. Note however that it is a duty to consider. and that individual minority shareholders were permitted to bring actions in their own names to remedy the breach of trust. there is no subjective state of mind to discover and an objective test is required to fill the gap: see for example Pennicuick J in Charterbridge (below). a line of case law emerged to the effect that directors have a duty to avoid acting contrary to the interests of creditors where the company is insolvent or nearing insolvency. the interests of creditors. and have not paid attention to the interests of the company as a separate entity with its own creditors and shareholders. In that situation. or the imposition of some alternative administration.’ This extension of directors’ duties will help fill gaps in creditors’ contracts with companies. without reflection. In parallel. assumed that the interests of the company coincide with their own (or some other person such as a parent company). The reference to existing members includes both majority and minority shareholders. so a decision in favour of the majority at the expense of the minority will breach this duty: Ngurli Ltd v McCann (1953) 90 CLR 425. An objective test has sometimes been applied when it was clear that the directors had not considered the interests of the company at all: would an intelligent and honest person in the position of the directors have reasonably believed that the transaction was for the benefit of the 50 . Action taken other than in good faith in the interests of the company will be voidable at the instance of the company.’ The courts have also applied an objective test where the directors have. Note the elision of the proper purposes and interests of the company tests. This is reflected in a number of protective provisions statutory provisions eg action by liquidator for misapplication of corporate assets under s598 and under s588G for insolvent trading. See Bell Group at  per Owen J and Grove v Flavel  43 SASR 469. discounted or not accepted. although a contract made with a third party will only be voidable if the third party knew or had notice of the director’s breach of duty (ie that the contract was not in the interests of the company). See Walker v Wimborne (1976) 137 CLR 1 and Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. The economic rationale for this expansive conception of the interests of the company can be found in a dictum of Street CJ in Kinsela: ‘It is in a practical sense their assets and not the shareholders’ assets that. through the medium of the company. return to solvency.
A company may decide to be generous with those with whom it deals. will not allow.’ This is generally referred to as ‘enlightened shareholder value’ in debates about corporate governance. To adapt what was said long ago.’ This also appears to represent the law in Australia. There is no statute requiring this (contrast s171 UK CA 2006 which instructs directors to have regard to employees. essentially. Why should they not? It is for the directors to judge. in providing large fees or attractive pension funds or the like. but essentially only if it be the means adopted by it of attracting good directors to its service or securing the best performance by them or if otherwise it is for the benefit of the company that it do so.. suppliers. only to the extent that it is so. as in Parke v Daily News (1962) Ch 927.. the essence of the matter is this. and hence there is a possibility of commercial advantage to the company. The law does not say that there are to be no cakes and ale. and however enlightened from the point of view of industrial relations. unless labour was very much more easy to obtain in the market than it often is. contractors. a company which always treated its employees with Draconian severity. Stripped of all its side issues. or the directors of the company. It may be felt appropriate that the company acquire the reputation of being such. But – I put the matter in general terms – it may be generous or do more than it need do only if. Hutton v West Cork Railway Co (1883) 23 Ch D 654 clearly allows directors to take account of the interests of employees whilst the company is a going concern.. the directors may have cakes and ale and. In Woolworths Ltd v Kelly (1991) 4 ACSR 431 at 446 Mahoney JA stated: ‘I do not mean by this that a director must ensure that. were such as the law does not recognise as a sufficient justification.. it may be generous to its directors. where a company which was being wound up was proposing to make ex gratia payments to its employees out of the proceeds of the sale of its business. and within the reasonable scope of carrying on the business of the company. and never allowed them a single inch more than the strict letter of the bond. it be for the benefit or for the purposes of the company that it do such. now. bearing in mind the interests of the company’s creditors: see Linton v Telnet Pty Ltd (1999) 30 ACSR 465. And. in its dealing with its directors and with others.. would soon find itself deserted – at all events. It is also often accepted that directors should take account of the interests of employees (and perhaps also customers. that the directors of the defendant company are proposing that a very large part of its funds should be given to its former employees in order to benefit those employees rather than the company. Most business require liberal dealings. community etc). Plowman J said that ‘the defendants were prompted by motives which. as I understand it. A railway company.company. of course. Bowen LJ said ‘The test must be what is reasonable incidental to.’ 51 . but that there are to be no cakes and ale except such as are required for the benefit of the company. and that is an application of the company’s funds which the law. environment etc). Similarly. jet planes. however laudable.. his company must be mean or cheeseparing. Things change however once the company has no future. community. but they may have them only if it is for the benefit of the company that they have them. might send down all the porters at a railway station to have tea in the country at the expense of the company.
establish a code of conduct and disclose it or a summary of it as to ‘the practices necessary to maintain confidence in the company’s integrity’ and ‘the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders’ (see Recommendation 3.’ See also Kuwait Asia Bank EC v National Mutual Life Nominees Ltd  1 AC 187. Interests of the company in groups of companies Tension between objective and subjective approaches in this area: Charterbridge Corp Ltd v Lloyds Bank Ltd (1970) Ch 62: Pennicuick J recognised that decisions will tend to be taken in the interests of the group rather than the separate entities involved. PC. that they did nothing to defend the interests of the textile company against the conduct of the co-operative society. Note also the role of codes of conduct: a means of enhancing companies’ reputation with consumers and therefore making them more profitable beyond the short term. It is plain that. Lord Denning said: ‘so soon as the interests of the two companies were in conflict. In this they were wrong. at least. they conducted the affairs of the textile company in a manner oppressive to the other shareholders. The position of nominee directors A nominee director must act in the best interests of the company he directs rather than the best interests of his appointor: Bennett’s v Board of Fire Commrs of NSW (1967) 87 WN (pt1) NSW 307. in the circumstances. these three gentlemen could not do their duty to both companies.1). The implication is that this is best practice in terms of furthering the interests of investors. They put their duty to the co-operative society [the majority shareholder] above their duty to the textile company [the company they directed] in this sense. the nominees were placed in an impossible position. Where the interests of their appointor and the company conflict. By subordinating the interests of the textile company to those of the co-operative society.Note the implications of enlightened shareholder value: Hutton suggests that board decisions about employee (including executive) remuneration is an aspect of the board’s management power. They probably thought that ‘as nominees’ of the co-operative society their first duty was to the co-operative society. directors must either prefer the company’s interests or resign: Scottish Co-op Wholesale Society v Meyer (1959) AC 324. and they did not do so. The ASX Corporate Governance Principles and Recommendations (2nd ed) requires listed companies to promote ethical and responsible decision-making. and refused to strike down decisions simply on the basis that the directors had failed subjectively to consider the interests of the separate entity: he preferred an objective test asking whether an intelligent and honest person in the position of the directors could reasonably have believed that 52 .
then no consequences would flow from the breach. objectively viewed. it would accept that a finding of breach of duty flows from a failure to consider the interests of the company and would then direct attention at the consequences of the breach. In this context. although the twin requirements of a provision in constitution plus solvency mean it is unlikely to be of great practical application. the transaction was. S659B prevents the parties to a takeover bid from launching proceedings in relation to a takeover bid while the bid is underway (although ASIC can and questions about proper purpose can arise in those proceedings).see Guidance Note 12 available online at: 53 . Such an inquiry would not require the court to consider how the hypothetical honest and intelligent director would have acted. The duty to act for a proper purpose s181(1)(b). in the interests of the company. Contrast Walker v Wimborne (1976) 137 CLR 1: Mason J took a subjective approach. Most cases have concerned the use of directors’ fiduciary power (under 124(1) and 198A(1)) to issue shares in order to affect the outcome of an unwelcome takeover. On the contrary. and have issued guidance to the effect that frustrating action taken by the directors is likely to constitute ‘unacceptable circumstances’ . Disputes should be resolved in front of the Takeovers Panel. and the question of directors’ duties will not arise during the course of the takeover. Rather than look at the purpose for which the board acted. If. Followed in Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997) 26 ACSR 544 at 581.the transaction was for the benefit of the separate entity. the Panel reviews whether there were unacceptable circumstances under 657A(2).’ Note dissent of Kirby P. the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company. directors’ duties have been superseded by specific statutory regulation in relation to takeovers. however. insisting on the principle that ‘each of the companies was a separate and independent legal entity.’ A possible middle ground? See Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952 per Clarke and Cripps JJA. who suggested (obiter) that: ‘A preferable view may be that where the directors have failed to consider the interests of the relevant company they should be found to have committed a breach of duty. and that it was the duty of the directors of Asiatic to consult its interests and its interest alone in deciding whether payment should be made to other companies. Note also the possibility of a constitutional provision envisaged by s187. Even so.’ He recognised that ‘the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage. Takeovers now regulated under Chapter 6 CA 2001.
aspx?doc=guidance_notes/current/012. Lord Greene said in Re Smith and Fawcett that the directors should exercise their powers ‘not for any collateral purpose. Buckley J clearly distinguished the good faith and proper purposes tests for the first time. or to lend or borrow. and can be challenged by the company. or (exceptionally among the duties owed by directors to companies) by individual shareholders if it also affects their personal right not to have their voting interest diluted: see e. See Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464 for an example of the complexity of the inquiry facing the courts in trying to determine what the directors’ purposes were.gov. If the constitution does not deal with the matter – expressly or impliedly – then the court will have to draw its own conclusions based on the structure of the company etc. and to reach a conclusion whether that purpose was proper or not …[which] has to be as to the side of a fairly broad line on which the case falls. which the articles on their true construction permit them to take into consideration…’ In Hogg v Cramphorn Ltd  Ch 254. In this regard. They must have regard to those considerations. The leading case is Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821. PC.http://www.’ What were the purposes for which the power was actually used? This is a question of fact and the findings of the judge at first instance will be absolutely crucial. Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260. Lord Wilberforce emphasised that there are no precise rules about purpose.htm&p ageID=&Year= However. the principle applies to all exercises of a fiduciary power and so might be used to catch other exercises of management power which are aimed at affecting the control of companies.au/content/DisplayDoc. However. where the decision is improperly motivated. 54 .takeovers. Action taken for improper purposes will be voidable. as well as a decision to buy or sell assets. and those considerations only.g. ratification by the majority in general meeting will not operate to bar an individual shareholder’s personal action: see Residues Treatment and Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569. Was that purpose a proper purpose? There might be constitutional provision dealing with this: see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 292. Hogg v Cramphorn. the court will not invalidate the decision if they believe it had a legitimate commercial motivation: see for example Teck Corp Ltd v Millar (1973) 33 DLR (3d) 288. A two stage test: ‘…it is then necessary…to examine the substantial purpose for which it was exercised.
rather than the decision itself. an approach followed in Kokotovich and PBS v Wheeler. although they must still exercise their vote with a view to the interests of the company. Fiduciary duty to avoid conflicts of interest Rule 1: Directors must not have a personal interest (or engagement with a third party) which conflicts with their duty to the company except with the company’s fully informed consent. In his dissent in Darvall.Examples of proper purposes for issuing shares include raising capital and (perhaps) promoting an employee share scheme. improper purposes will include preventing the shareholders from deciding on the outcome of a takeover bid. and so additional constitutional provisions are usually included. The company is entitled to the advice and participation of every director in decision-making. This cannot occur where the director appears on both sides of the transaction in question. Note Mahoney JA in Darvall seems to have assumed that if an improper purpose merely affected the timing of the implementation of a decision. More recently courts have preferred the ‘but for’ test: see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 294. This concerns the relationship between the company and the director. In this situation. 4 ACSR 431. In practical terms disclosure to the general meeting is often inconvenient. the director should make disclosure of his interest in any contract to the general meeting who should approve the contract by ordinary resolution: see eg Woolworths Ltd v Kelly (1991) 22 NSWLR 189. The constitution of a small proprietary company will usually provide that a director can hold a paid office. provided they make disclosure of any interests. then the decision would not be voidable. The default rule is therefore that disclosure to the board will suffice in proprietary companies (s194). 55 . See for example Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478. retaining control of the company and diluting the value of another shareholder’s interest. What about mixed purposes? Widely accepted dictum of Dixon J in Mills v Mills (1938) 60 CLR 150 at 186 that the court should look for the ‘substantial object the accomplishment of which formed the real ground of the board’s action’. and allowing them to vote on contracts in which they are interested. whilst in public companies. disclosure to the general meeting will be required unless – as will inevitably be the case – the company’s constitution includes a specific rule allowing disclosure to the board instead (in which case s195 provides additional safeguards). in principle. Large public companies where shareholders are dispersed also normally adopt a constitutional provision allowing directors to contract with the company and to profit. Kirby P combined the ‘substantial purpose’ and ‘but for’ tests.
Note that director remuneration is different from executive pay (which is set by the board under 198A or the Remuneration Commitee of listed companies). 10. a breach of duty is likely to occur at some point. and s192(1) makes provision for standing notice. 56 . s191(2)(a) sets out a number of situations in which notice is not required. LR 10. eg if the constitution requires disclosure to the board. contrast s195(1) which regulates public companies far more strictly by imposing criminal liability. What are the limits of this rule? See Cook v Deeks. One key implication of this rule is that directors cannot take remuneration or other benefits from the company unless authorized by law.Failure to comply with the constitution in this regard. In this latter context. s250R and s250SA(for listed companies). service contracts of executives will normally forbid directors from holding directorships in competing companies.17. the constitution or the fully informed general meeting (see s202A(1) (replaceable rule)). recall s300A. where the director in question is ‘dominant’ it may be necessary to go beyond mere compliance with the constitution in order to ensure that the interests of the company are protected: see Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260. However. s191(3) sets out the details which must be provided. See eg Mordecai v Mordecai (1988) 12 ACLR 751. However. Rule 2: Directors must not misappropriate the company’s property for their own or a third party’s benefit.19. subject to criminal sanctions but without affecting the validity of the transaction (Schedule 3 specifies that this is a criminal section). Note also the replaceable rule for proprietary companies contained in s194. The civil law sanctions here have been supplemented (s193) by s191(1) which requires a director with a material personal interest to give notice to the other directors. Potential for a Rule 1 conflict: competing directorships There is no absolute rule against this: see for example London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd (1891) WN 165. will normally make the contract voidable at the option of the company: Camelot Resources Ltd v McDonald (1994) 14 ACSR 437 at 443. and disclosure may be required under s191 to both companies of a ‘material personal interest’. but note Ford’s criticism of it.
Rule 3: Directors must not misuse their position for their own or a third party’s advantage except with the company’s fully informed consent. This is referred to as the no-profit rule and applies to director-third party situations. Furs Ltd v Tomkies (1936) 54 CLR 582: ‘It was only because it fell to his lot to negotiate the sale on behalf of his company that he was able to demand and obtain the sum. His fiduciary character was alike the occasion and the means of securing the profit for himself.’ Note however that the general meeting could have exonerated his breach of duty if he had made full disclosure. The leading authority on the no-profit rule is Regal (Hastings) Ltd v Gulliver (1942) 1 All E R 378; (1967) 2 AC 134. Despite the fact that the claim was unmeritorious, the House of Lords held that the former directors had to account to the parent company for the profit they made on the basis of the strict rule (developed in the context of trustee liability) ‘that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is a director.’ (Lord Porter) Lord Macmillan said that the directors were liable to account once it is proved that ‘(i) what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in a profit to themselves.’ Note also that the HL emphasised that it had been open to the general meeting to ratify the breach of duty. However, since Regal, the courts have relaxed the ultra-strict formulation of these rules, and now look for a ‘real sensible possibility of conflict’: per Lord Upjohn in Boardman v Phipps (1967) 2 AC 46 at 124, applied by PC in Queensland Mines Ltd v Hudson (1978) 18 ALR 1, while Deane J in Chan v Zacharia (1984) 154 CLR 178 at 199 spoke of a ‘significant possibility’ of conflict. This apparent relaxation gives rise to a number of difficult issues: a) Is there a causation requirement? Does it matter that the company is unable to pursue the profit-making opportunity? In Regal v Gulliver, Lord Russell said that liability in equity to account ‘in no way depends on… whether the profit would or should otherwise have gone to the plaintiff… or whether the plaintiff has in fact been damaged or benefited by his action’. Contrast Chan v Zacharia (1984) 154 CLR 178. Deane J: ‘The principle is not, however, completely unqualified… It may still be arguable in this court that… the liability to account… will not arise in circumstances where it would be unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interest of the person to whom the
fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed.’ However other cases have adhered to the strict traditional line see eg Gemstone Corporation of Australia Ltd v Grasso (1994) 13 ACSR 695 per Prior J: ‘The judge was in error in finding no breach of a fiduciary obligation until a loss was caused and that no loss was caused.’ b) What should the effect of resignation of the director in question be? Industrial Development Consultants v Cooley (1972) 1 WLR 443: ‘When one looks at the way the cases have gone over the centuries it is plain that the question whether or not the benefit would have been obtained but for the breach of trust has always been treated as irrelevant…’. See also Canadian Aero Service v O’Malley  40 DLR (3d) 371, Canadian Supreme Court, where the court referred to a company ‘actively pursuing’ a ‘maturing business opportunity’ and emphasised that resignation from his position would not protect the director ‘where the resignation may fairly be said to be prompted or influenced by a wish to acquire for himself the opportunity sought by the company’, or where the opportunity came to him by virtue of his position with the company rather than fresh initiative (Laskin J). For Australian authority, see Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 110 at 141, emphasizing that allowances may be made for the efforts of the fiduciary in causing a business acquired in breach of fiduciary duty to expand. Contrast Island Export Finance Ltd v Umunna (1986) BCLC 460, QBD which dealt with a benefit that required ‘prolonged fresh initiative’. The court suggested that in each case there should be a full examination of the facts. To what extent should the law override strict fiduciary principles in order to accommodate a market for corporate executives? c) Can directors pursue opportunities of which they become aware in a ‘private’ capacity? In Regal, Lord Russell referred (at 149) to the directors having obtained their profit ‘by reason and only by reason of the fact that they were directors of Regal and in the course of execution of that office’. For examples of opportunities coming to directors in their private capacity, see Peso Silver Mines v Cropper (1966) 58 DLR (2d) 1 and SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552, where Cooper J found that there was not ‘a sufficient temporal and causal connection between the obligations and the opportunity’. d) Is it open to the director to prove that the transaction is ‘fair’ to the company? Note that, as Lord Wright emphasized in Regal, the facts are usually within the knowledge of the person who is being charged and therefore difficult to ascertain. See for example Furs Ltd v Tomkies (1936) 54 CLR 582. Note that Tomkies’ breach of duty could have been ratified by the general meeting if he had been prepared to make full disclosure, although on the facts he had not done so. Furs Ltd v Tomkies was distinguished in Framlington Group v Anderson (1995) 1 BCLC 475 at 499-501.
Statutory duty not to profit from position or information ss182-3 set out rules about use of information and position for personal advantage or corporate detriment which apply to directors, secretary, and other officers and employees. There will often be an overlap between the two main rules on a given set of facts. These provisions developed out of criminal law provisions introduced in Victoria. They sit uneasily alongside the common law fiduciary duties and may not be identical in scope. There is no need that a gain actually be made or a loss caused to the company: the key is the purpose of the director or other officer: see s184(2) and (3) and Chew v R (1992) 7 ACSR 481 (High Court interpreting a predecessor of these sections). ss182(2) and 183(2) apply them further to anyone who is ‘involved’, which is defined in s79, and is broader than the equivalent concepts in equity. Grove v Flavel (1986) 11 ACLR 161. ASIC v Vizard (2005) 54 ACSR 394. R v Byrnes (1995) 130 ALR 529. R v Daswani (2005) 53 ACSR 675 ASIC v Australian Investors Forum Pty Ltd (No2) (2005) 53 ACSR 305. Where these statutory ‘fiduciary duties’ are breached (also including s181, discussed in the last lecture), those involved contravene civil penalty provisions with the usual possible consequences (ASIC action as well as possible action for compensation by the company or liquidator under 1317J(2)).
Treatment of financial benefits to related parties, directors etc under the Corporations Act: Ch 2E s208 provides that member approval is required before a public company or a company it controls can give a financial benefit to a related party. s228 defines related party to include an entity which controls the public company (on the basis of the s50AA test of practical control), directors and their relatives (spouses, parents, children), and entities which act in concert with a related party (on the understanding that the related party will receive a financial benefit if the company confers a financial benefit on the entity). s229 gives examples of ‘financial benefit’ and offers guidance to the courts in determining whether a financial benefit is given. ss210-216 set out exceptions, including arms’ length terms, reasonable remuneration, indemnities, payments of small sums. However, note s230.
ASIC brought very few civil penalty proceedings. Enforcement by ASIC: CA s1317E states that ss180-183 and 588G (inter alia are civil penalty provisions). It can also seek a compensation order under s 1317H on behalf of a corporation which has suffered damage from the contravention.4B. and had some success in using the regime to deal with directors in high profile cases. Adler and a company controlled by Adler. or the corporation’s ability to pay its creditors. In the beginning. ASIC can enforce directors’ duties by applying to the court for a declaration of contravention under 1317J. the work of V. eg. But for a discussion of the problems that have emerged. Comino: eg.000 once a declaration of contravention has been made as long as to the contravention materially prejudices the interests of the corporation or its members. One. per Bergin J. see. ASIC can request a pecuniary penalty order under s 1317G of up to A$ 200. “Effective Regulation by the Australian Securities and Investments Commission: The Civil Penalty Problem” (2011) 33 Melb UL Rev 802. One example is Re HIH Insurance Ltd (in prov liq) (2002) 41 ACSR 72 at 172-3: Santow J held that payment of A$10m by HIHC to PEE. 60 . Ch2E has only rarely been considered by the courts. or minority shareholders under statutory derivative action (discussed below). a company controlled by Adler amounted to a financial benefit to PEE.ss217-227 set out requirements for the approval process (note s224(1)). There may also be criminal proceedings under specific statutory provisions. or by the liquidator bringing misfeasance proceedings (see lecture 11). and the public company or entity is not guilty of an offence.Tel v Rich (2005) 23 ACLC 556. currently contained in Pt 9.4B effectively: see Comino. eg. Note that certain people are excluded from voting by 224(1): related parties who might receive a benefit and their ‘associates’ (which are defined in 10-17 to include those acting in concert (15(1)). How are directors’ duties enforced? By ASIC. Consequences of breach set out in s209: the validity of the transaction is not affected. since 2000. the board. Note that ASIC cannot enforce the common law duties – the only person who can do that is the corporation or minority shareholders via a derivative action. s 184 which creates criminal offences requiring intentional dishonesty or recklessness in relation to the duties of directors to act in good faith and not to misuse position or information. which are undermining ASIC’s ability to continue use civil penalties under Pt 9. ASIC has made greater use of the civil penalty regime. “The Enforcement Record of ASIC Since the Introduction of the Civil Penalty Regime” (2007) 20 Australian Journal of Corporate Law 183. however a person who is involved (defined in s79) in the contravention of s208 by a public company contravenes a civil penalty provision. However. The duty of care in s 180(1) does not attract any criminal liability. For the history and theory of the civil penalty regime.
receiver or liquidator: s1318(4) Extends to proceedings under 588G: Kenna & Brown Pty Ltd (in liq) v Kenna (1999) 32 ACSR 430 It is very difficult to persuade the court to exercise its discretion in favour of granting relief: ASIC v Adler  NSWSC 483  NSWSC 714 per Gzell J at : ‘In my view a person acts honestly for the purposes of ss 1317S(2) and 1318(1). if that person’s conduct is without moral turpitude in the sense that it is without deceit or conscious impropriety. regardless of whether ASIC has sought and obtained a declaration under s1317E. In relation to statutory duties.Lecture Seven: Directors’ Duties (3)/ Minority Protection (1) Recommended preliminary reading: Boros and Duns. the board can enforce these as an aspect of its general management power under s198A(1). But a lack of such subjective intent will not lead the court to conclude that a person has acted honestly 61 . employee. why does the law leave this decision to the board? Exoneration of directors by court and ratification by general meeting Exoneration by court s1318 1317S creates a similar possibility of exoneration for contravention of a civil liability provision. That conclusion may be drawn from evidence of the person’s subjective intent. the board can decide that the corporation can seek a compensation order under s 1317J(2). without intent to gain improper benefit or advantage and without carelessness or imprudence at a level that negates the performance of the duty in question. The corporation will have to prove to the court that the directors breached their duties. Given the risk of a conflict of interest. including the statutory duties. Applies to officer. In relation to common law and equitable duties owed to the company as a separate legal entity. auditor. Chapters 13 (pp252-253 and 257-266) and 14 How are directors’ duties enforced (cont)? Enforcement by the board: a distinction should be drawn between statutory and common law duties. in the ordinary meaning of that term.
’  As for the effect of any GM resolution to ratify: it could be taken into account in considering relief under s1317S (evidence that the director has acted honestly and ought to be granted relief). In this sense civil penalty proceedings involve public rights. ratify the private law breaches of the directors’ duties. followed by Helsham J in Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR 666. although ratification will not prevent minority shareholders from bringing a statutory derivative action on behalf of the company: we will discuss later. ‘even if the shareholders could.if a reasonable person in that position would regard the conduct as exhibiting moral turpitude. the Court is entitled to act upon its finding to grant the relief ASIC seeks. or condone or ratify a breach of duty which has already occurred. provided the consent is fully informed. 62 . It is certainly safer to obtain ratification from the general meeting! Limits to the availability of ratification 1. Where action was for an improper purpose.’  He added. although they did not explain the basis for this. Forge v ASIC (2004) 213 ALR 574 at - per McColl JA with whom other judges agreed said: ‘Another important purpose of the proceedings was to ensure that officers of a company who contravene corporations legislation in the manner found by the primary judge are barred from having that opportunity again. contrary to what I have already found. the ratification resolutions were ineffective to cure the breaches of statutory duty. Ratification by general meeting In line with the general principle that a principal can authorise the fiduciary to engage in conduct which otherwise would be a breach of duty. The shareholders cannot remove the declaration of contravention by ratifying the original acts. but obiter suggestion in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 that a voidable allotment for an improper purpose could be later ratified by the board acting for a proper purpose. Once a declaration of contravention is made. GM cannot ratify breaches of statutory duties It is far from clear whether breaches of the statutory duties can be ratified by the shareholders. Bamford v Bamford (1968) 2 All ER 655. Once a breach is ratified the company can no longer bring proceedings. not only in relation to the company of which they were an officer at the time of the transactions. Note the curious. transaction will be voidable at the election of the company if the third party has notice of the abuse of power unless ratified by the general meeting: Hogg v Cramphorn (1967) Ch 254. the company in general meeting can authorise or ratify the breach of duty by ordinary resolution (see eg Furs or Regal). but also in relation to other companies.’See also Palmer J in Hall v Poolman (2007) 65 ACSR 123 at .
Alternatively it might be argued that the shareholders’ ratification can prevent the company from bringing proceedings in the future, but cannot prevent ASIC from bringing proceedings for a declaration of contravention etc in the public interest: reliance could be placed on the judgment of Debelle J in Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737 at 772, as well as Angas Law Services v Carabelas  226 CLR 507 at 523  per Gleeson CJ and Heydon J.
2. GM ratification without full information not valid Forge v ASIC at -. Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 110 Furs Ltd v Tomkies (1935) 54 CLR 583
3. GM cannot ratify where fraud on the minority Miller v Miller (1995) 16 ACSR 73 at 89: ‘Ratification is not available where it would constitute a fraud on the minority (Ngurli Ltd v McCann (1953) 90 CLR 425), or misappropriation of company resources (Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791), or was entered into by an insolvent company to the prejudice of creditors (Kinsella v Russell Kinsella Pty Ltd (in liq) (1986) 4 NSWLR 722), or defeated a member’s personal right (eg not to have their interest diluted for an improper purpose) (Residues Treatment and Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569) …, or was oppressive or where the majority in general meeting acted for the same improper purpose as directors (Residues).’ However, the cases have not always been consistent: Cook v Deeks took a hard line, while in Regal v Gulliver and Furs Ltd v Tomkies, courts found very similar breaches to be ratifiable. Cook v Deeks (1916) 1 AC 554, PC. How to distinguish Cook from Regal? There are a number of possibilities: • Regal only involved an opportunity, whereas in Cook it was property (the contract “belonged in equity” to the company, although the problem with this is that the contract only came into existence as a result of the breach), or The directors in Regal were acting honestly and in good faith throughout, whereas in Cook they were acting dishonestly The court thought in Cook that the circumstances were so extreme that it should substitute its opinion for that of the majority shareholders The contract in Cook was capable of being concluded and performed by the company for its benefit in the long-term, while in Regal the company could not exploit a mere opportunity
• • •
Sealy and Worthington (8th ed) suggest (at 316-7) that the directors were severally liable as debtors for what they had received, so ratifiability is consistent with other earlier authorities which allowed this.
Furs Ltd v Tomkies (1935) 54 CLR 583. We might note that there was no question that the company could have obtained the benefits that Tomkies did. This could be argued to make the case closer to Regal than Cook. While there was an element of dishonesty, that would have been cured if the full disclosure required had been made. Nor did the court treat this as misappropriation of company property. Pascoe Ltd (in liq) v Lucas (1999) 33 ACSR 357 at 384-8.
4. Ratification is not possible once interests of the company are identified with the interests of creditors Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
Statutory limitations on exemption, indemnification and insurance S199A(1) Distinction between exemption/indemnification and ratification: see Miller v Miller at 87 per Santow J. ss 199A(2) and (3) contain significant exceptions for third party liability and legal expenses. S199B prohibits companies from paying insurance premia for officers or auditors against liabilities arising out of ‘conduct involving a willful breach of duty in relation to the company’ or ‘a contravention of section 182 or 183’ (making improper use of information or position). Accordingly, the company can pay insurance premiums to cover directors for negligence liability to the company. 199C makes anything which contravenes 199A or B void.
Disqualification (CA Part 2D.6) (outline only) Note the broad definition to encompass decision-making, exercising capacity to affect the corporation’s financial standing, and communicating instructions or wishes to the directors, knowing or intending that they be acted upon (shadow director-type activities): ss 206F(5), 206G. Automatic disqualification for conviction for certain offences or bankruptcy: s206B.
DQ for involvement in two or more failed corporations: s206D. Disqualification for breach of civil penalty provisions: s206C. This requires a declaration under s1317E. Disqualification for repeated contraventions of the CA: s206E. Under either ss206C or 206E, court then has broad discretion as to what to take into account in deciding whether to disqualify for an appropriate period: S206C(2). See ASIC v Adler  42 ACSR 80 for Santow J’s detailed review of court practice under 206C and 206E. See also Re One.Tel Ltd (in liq); ASIC v Rich (2003) ACSR 682, in which the court emphasised the limited value of precedent because of the sheer number of possible forms of breach. ASIC can disqualify under s 206F. Disqualified directors can apply for leave to act as a director of specific companies or companies generally from ASIC (where ASIC disqualified them under s206F) and from the court under s206G. See eg ASIC v Platcher (2003) 44 ACSR 277; Re Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203. Offence unlikely to be recommitted. Allowed to take part in management as an employee under control of board. In the interests of the companies in question: their shareholders and employees will benefit. Anyone who acts in breach of a DQ order commits an offence: s206A. A person who manages a company while disqualified from doing so can be personally liable for the company’s debts: 588Z allows liquidator to apply to court for an order.
Minority Protection Introduction: Plight of minorities The principle of majority rule has to be subject to some limitations. It is effective in the ordinary course of decision-making because it prevents the minority from holding up the majority for extraneous reasons (e.g. personal disagreements). Law uses a variety of techniques to protect minorities. One example we have seen throughout this course is the requirement of a supermajority e.g. special resolution for key decisions e.g. alteration or repeal of the constitution under 136(2). This is a demanding hurdle because it requires 75% of the eligible votes, not just of those who turn up to the meeting. We will see in relation to some capital transactions that the law sometimes excludes those with an interest in the outcome from voting for the (special) resolution adding extra protection for the minority. Similarly we saw above that s224 does not allow potential beneficiaries to vote to give approval for a public company to confer a financial benefit on a related party. We will also see in lecture 9 that the law gives protection to class rights attaching to shares: it requires a special resolution of the members of the class.
66 . Complexity of common law now replaced by a statutory derivative action: s236(3) provides that the common law derivative action is abolished. Fiduciary Ltd and Others v Morningstar Research Pty Ltd and Others (2005) 53 ACSR 732. S237(3): rebuttable presumptions that granting leave not in best interests of the company Effect of ratification by general meeting: s239 Costs of the derivative action: s242. The thresholds are there to protect the majority from vexatious meeting convening.Minority shareholders (5% or 100 members) also have the right to require the board to convene a general meeting: 249D. Security for costs against the individual seeking leave? See Fiduciary Ltd. Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534. Shareholder litigation under the Corporations Act: s1324 s1324 allows ASIC as well as persons whose interests have been or would be affected by conduct in contravention of CA (including members and creditors). ASICA s50. ss236-7 s237(2): situation in which the court must grant leave ‘Good faith’: Charlton v Baber (2003) 47 ACSR 31. Shareholder litigation under the Corporations Act: the statutory derivative action (Part 2F. 20 ACLC 1502. and against those knowingly concerned in contraventions. Origin of statutory action: see CLERP Report No3 on Corporate Governance and Directors’ Duties at 29-40. In this lecture and the next we will look at the general ways in which the law protects the rights of minorities.  NSWSC 640 per Barrett J. 1A) Broad scope of s198A includes power to litigate in the company’s name. Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661. to seek an injunction to restrain threatened breaches of the CA. Note s135(3). . Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 at 320.
successful action by a shareholder for breach of the statutory provisions on capital reduction. How can this be reconciled with the stringent common law and statutory restrictions on derivative action and the rule in Foss v Harbottle (ie that the company is the proper plaintiff with regard to wrongs done to it)? For the balancing act developed by the courts.g. The courts have taken a liberal approach to standing but have refused a remedy where the plaintiff is seeking to usurp the board of directors’ 198A management function. Relatively low threshold for standing: simply have to show that your interests have been affected in a way which goes beyond those of the general public: Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984) 2 ACLC 157. 67 .This is a catch-all provision. (1984) 8 ACLR 609 at 613. see Idameneo (No123) Pty Ltd v Symbion Health Ltd (2007) FCA 1832. For an example of a recent. see e. Young J in Mesenberg v Cord Industrial Recruiters Pty Ltd (Nos 1 & 2) (1996) 19 ACSR 483 at 488-9 and Premier Gold NL v Ocean Resources NL (1994) 14 ACSR 695 . On creditor action under 1324 see Allen v Atalay  11 ACSR 753 and Airpeak Pty Ltd v Jetstream Aircraft Ltd  23 ACSR 715. 12 ACLC 931. (2007) 64 ACSR 680.
cfm?DownloadFile=8719A7BB-1422-207CBA39E852655EDD56 Shareholder litigation at general law: the members’ personal action Recall limits to scope of s140 contract. nonetheless the rule for the most part prevails. or (2) constitutional rights to have the company function properly in accordance with the basic statutory scheme. per Young J: ‘If one elevated every matter in the articles of association of a company to the status of a contractual right vested in each and every member the rule in Foss v Harbottle (1843) 2 Hare 461 would be able to be completely disregarded.edu.’ Similarly. s1322.unimelb. and if this means that the ‘qua member’ and ‘qua director’ … is not drawn in quite the same place every time. Note restrictive.’ See also Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739 at 743–745 per Young J approving Sealy’s pragmatic argument that ‘Company law has to have scope to reflect differences [in the size and nature of companies]. ‘Gambotto v WCP Ltd: Its Implications for Corporate Regulation’ (1996) (available online at http://cclsr. 68 . he approved Farrar’s argument that ‘A member qua member has rights which are either (1) personal rights covering the incidents of his shares. despite the growth of exceptions.au/download. but varies from case to case. and showing that it has the flexibility to meet the reality of the circumstances before them. Note however that the pragmatic approach discussed above may elevate apparently procedural requirements into enforceable personal rights: see for example Ryan v South Sydney Junior Rugby League Club Ltd (1975) 2 NSWLR 660. The whole effect of that rule.Lecture Eight: Minority Protection (2) Recommended preliminary reading: Boros and Duns. the judges are not necessarily applying a rule inconsistently: they may be demonstrating that it is wrong to regard the concept of a ‘membership’ right as having a unique content. approach in Stanham v National Trust of Australia (NSW) (1989) 15 ACLR 87 at 90. Chapters 15 and 16 Further suggested reading: Ian Ramsay (editor). is that ordinarily the court does not interfere at the suit of a member with an alleged wrong done with respect to administration of the company.’ Mere procedural irregularities: MacDougall v Gardiner (1875) 1 Ch D 13.law. (1974) ACLR 486. True it is that it is sometimes difficult to draw the line between an individual right and a representative right: see eg Kraus v JG Lloyd Pty Ltd  VR 232. Any other rights are not within [s140] and must be the subject of an extrinsic contract. albeit obiter.
Per Dixon J in Peter’s American Delicacy Co Ltd v Heath  61 CLR 457: ‘The shareholders are not trustees for one another.’ See also North-West Transportation Company Ltd v Beatty (1887) 12 App Cas 589. Where the majority passes a resolution that no reasonable person would consider within the range of permissible uses of majority power. having regard to the purposes of the company.’). which are property and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner’s personal advantage. 69 . Can shareholders sue in relation to wrongs which have diminished the value of their shares? In general no: see Prudential Assurance Co Ltd v Newman Industries (No 2) (1982) 1 Ch 204. However. unlike directors. because such loss is merely reflective of the loss recoverable by the company. General law personal action for ‘fraud on the minority’ (aka equitable limitation on the power of the majority) The general rule is that shareholders do not owe a fiduciary duty when voting.’ See also Pavlides v Jensen (1956) Ch 565. except a benefit solely in the capacity of a holder of ordinary securities. which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of the power. s256C(2) requirement of approval of selective capital reduction. The principle that self-interested voting is permitted has also been abrogated in a number of legislative and market rules which exclude those with an interest from voting on particular resolutions (eg s208 requirement of shareholder approval of conferral of benefits on related parties.Acts in disregard of restrictions in the constitution should be dealt with as breach of director’s duty. if the resolution is passed. whether pecuniary or otherwise. an individual member has an equitable right to apply to the court to have the resolution set aside. this principle has been qualified by equity and statute: Per Dixon J in Peter’s American Delicacy Co Ltd v Heath  61 CLR 457. or oppression (see below) or as the basis for a just and equitable winding up (see below). LR 11.2 resolution for shareholders to approve sale of company’s main undertaking must include a ‘voting exclusion statement’ excluding the votes of ‘A person who might obtain a benefit. and. and to allow an action by shareholders would create a risk of double recovery. There might be an exception where the company has no cause of action or where the claim is based on a duty owed directly to the shareholder: Johnson v Gore-Wood (2002) 2 AC 1 at 35-6. fraud on the minority is ‘a means of securing some personal or particular gain. They vote in respect of their shares. they occupy no fiduciary position and are under no fiduciary duties.
(2006) 62 ACSR 502.2 (664A et seq. Such a power could not be taken or exercised simply for the purpose of aggrandizing the majority. the court commented that: ‘The exercise of a power conferred by a company's constitution enabling the majority shareholders to expropriate the minority's shareholding for the purpose of aggrandizing the majority is valid if and only to the extent that the relevant provisions of the company's constitution so provide. The inclusion of such a power in a company's constitution at its incorporation is one thing. But it is another thing when a company's constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority. As regards amendments which allow expropriation (including forced transfer and cancellation) by the majority of the shares of the minority or of valuable proprietary rights attaching to their shares (eg the right to vote or to a dividend). they are prima facie valid unless they are ‘ultra vires. On the scope of application of the Gambotto principle see Arakella Pty Ltd v Paton (2004) NSWSC 13 at  per Austin J and Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 34 ACSR 318 per Santow J. For a recent application of Gambotto. see Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd (2006) QSC 358. and its exercise does not operate oppressively in relation to minority shareholders (meaning it is ‘fair in the circumstances’) As regards other amendments giving rise to a conflict of interests. 70 . which gives a person who has crossed the 90% threshold other than by means of a takeover a right to squeeze out the remaining shareholders. subject a number of strict conditions).’ Such an amendment will only be allowed where: • • the power is exercised for a proper purpose (which requires ‘exceptional circumstances’). Note the different approach taken by McHugh J. beyond any purpose contemplated by the articles or oppressive as that expression is understood in the law relating to corporations’. 16 ACSR 1 rejecting the requirement laid down in Allen v Gold Reefs of West Africa Ltd  1 Ch 656 that amendments should be ‘bona fide in the interests of the company as a whole’ in favour of a dual categorization where there is a conflict of interest between groups of shareholders.An application of ‘fraud on the minority’: Equitable constraints on altering the constitution Gambotto v WCP Ltd  182 CLR 432.1 (which allows a person who has acquired 90% of the company’s shares following a takeover to squeeze out the remaining 10%) and part 6A. who also held the amendment invalid. Now see Pt 6A.
Further reading: McNee. a strong case has to be made because winding up is a drastic step: ASIC v ABC Fund Managers (No 2) (2002) 20 ACLC 120. but see Vujnovich v Vujnovich (1990) BCLC 227. (g) and (k) Just and equitable ground (k): • • • Loss of confidence: Loch v John Blackwood Ltd (1924) AC 783. per Lander J. agreements about participation in management and restrictions on share transfers – note s1072G inserts a restriction as a replaceable rule): see Ebrahimi v Westbourne Galleries Ltd (1973) AC 360. ‘The Just and Equitable Ground: A Remedy of Last Resort’ (2001) 9 Insolv LJ 147. Khamo v XL Cleaning Services Pty Ltd (2004) 51 ACSR 397 Objects became impossible/failure of substratum: see Young J in Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 5 ACSR 296 at 300 For a review of the authorities see ASIC v International Unity Insurance Pty Ltd (2004) 22 ACLC 1416 at -. If company is solvent. Special considerations apply to quasi-partnership companies (characterised by ‘mutual confidence’. 71 . S. and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. (f). Application normally made by minority shareholder.’ (per Lord Cooper in Elder v Elder & Watson 1952 SC 49 at 55).Winding up s461(e). The ‘Oppression’ Remedy s232 CA. Management deadlock: Clarke v Bridges (2004) FCA 394. Now see s467(4) and Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160. see Nilant v RL & KW Nominees Pty Ltd (2007) WASC 105. For the relationship between 461(1)(k) and ss232 and 233. Broad interpretation of oppression: ‘a visible departure from the standards of fair dealing. Macquarie University v Macquarie University Union Ltd (No 2) (2007) FCA 844.
Campbell v Backoffice Investments Pty Ltd (2009) 257 ALR 610. or share issue for improper purposes. Oppressive conduct of board meetings (John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’asia) Pty Ltd (1991) 6 ACSR 63) Decisions for benefit of related companies (Re Spargos Mining NL (1990) 3 ACSR 1) Fraud on the minority in altering constitution or ratifying breach of duty.  HCA 25 at  per French CJ Wayde v New South Wales Rugby League Ltd (1985) 59 ALJR 798. Remedial advantages compared with personal action under s140. 73 ACSR 1. O’Neill v Phillips (1999) 2 All ER 961 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 s232 is most commonly used in the following situations: • Exclusion from management where it goes against an informal participation agreement • • Lack of provision of information (Re Back 2 Bay 6 Pty Ltd (1994) 12 ACSR 614) Breach of fiduciary duty (Scottish Co-Operative Wholesale Society v Meyer (1959) AC 324) Misappropriation of company assets: Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452 Lack of dividends where part of majority plan to conduct company in their own interests (contrast Re G Jeffrey Ltd (1984) 9 ACLR 193 with Re City Meat Company Pty Ltd (1983) 8 ACLR 673) or where the directors do not review dividend policy despite improving circumstances whilst they have reviewed their remuneration and revised it upwards (Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd (2001) 19 ACLC 517). Excessive remuneration for directors: Sanford v Sanford Courier Service Pty Ltd (1987) 10 ACLR 549 (although note Morgan v 45 Flers Avenue Ltd (1986) 10 ACLR 692). 72 • • • • • • .
There is no unilateral right of exit at a fair price for a minority shareholder in the absence of unfair prejudice: see for example Re G Jeffrey (Mens Store) Pty Ltd (1984) 9 ACLR 193. No requirement of clean hands although applicant’s conduct may affect the remedy awarded by the court: Re RA Noble & Sons (Clothing) Ltd (1983) BCLC 273. Re Elgindata Ltd (1991) BCLC 959.Mere negligence or mismanagement: Shirim Pty Ltd v Fesena Pty Ltd (2000) 35 ACSR 221. Lord Millett in CVC/Opportunity Equity Partners Limited v Almeida at - (2002) 2 BCLC 108. O’Neill. Basis for valuation: O’Neill v Phillips. 73 . Remedies: Non-exhaustive list remedies is contained in s233(1).
‘Preference shares’ versus ordinary shares. 332-3 and chapter 19. preference shares must have voting rights in relation to certain issues and no others: ASX LR 6. perhaps also a right to receive information. Further suggested reading: Redmond. repayment of capital sum at the end of the term. Preference shares are normally voteless. or in the constitution. Providers of share capital are viewed as internal to the company because of its evolution from partnership.3. chapter 9 pp587-605 and 623-671 Shares Share or loan capital? Capital can be provided internally by shareholders or externally by way of loan by creditors. ordinary shares – and preference shares with votes on the issue in question – must have one vote per share: LR 6. Rights attaching to shares may be set out in board or company resolution. If the company is insolvent and is wound up. the next at loan capital. Providers of loan finance receive the rights in their contract of loan (normally fixed interest. security over the company’s assets. or retain it for the use of the business (capital gain for the shareholders – the value of their shares increases).Lecture Nine: Shares and capital transactions Recommended preliminary reading: Boros and Duns. 74 . Nature of shares s9: ‘a share in the share capital of a body’: Not very helpful! Pennington’s definition: ‘a species of intangible movable property which comprises a collection of rights and obligations relating to an interest in a company of an economic and proprietary character. Company directors distribute this by way of dividends (income for the shareholders). providers of loan finance are entitled to be repaid in full before shareholders receive anything. but not constituting a debt’. In principle companies are free to create multiple classes of shares with different rights.9. This lecture will look at share capital. but are attached by the issue. even a right to appoint a director). although in listed companies. In listed companies. pp77-80. They are the residual claimants – they get whatever is left over after all fixed creditors have been paid their claims. a right to accelerate payment obligations in the event of a default.
asset value. note however the power in 254D(4) for the company in general meeting to pass a resolution authorising the directors to make an issue without complying with the pre-emption rights. However. Terminology: issue price.3.2 on class rights. so equitable doctrine unlikely to be explored further. Company therefore has an ‘issued share capital’. Disclosure to ASIC of issues required under 254X. ASX LR 6. but there are specific provisions Part 2F. s254M. Proprietary companies are subject to a replaceable rule in 254D requiring them to offer them pro rata to existing shareholders (this is referred to as a pre-emption right). ss515-6 CA. 75 . there may be further private issues for cash or non-cash consideration (property or promise of services to the company). public companies which aim to list on the ASX must have shares with an issue price of at least 20c and there must be at least 500 shareholders each having a parcel of shares with a value of at least $2000: LR 1. note s254X(1)(e) requiring disclosure by public companies of non-cash consideration. Variation of class rights Alteration of the rights attaching to shares may amount to fraud on the minority (somewhat uncertain scope). s120(2).9. The power to issue shares (s124(1)(a) and s254A) is normally vested by the constitution in the board of directors (s198A).10. with limited exceptions available in LR 8. note the effect of fiduciary duty: Ngurli Ltd v McCann (1953) 90 CLR 425 esp at 438-445.Interpretation of rights attaching to shares: s250E. The constitution may give the general meeting a concurrent power. No minimum share capital for proprietary or public companies (contrast many European jurisdictions).1.1-7. Constitutional restrictions on transfer are possible (and common in proprietary companies: see 1072G) but shares in companies listed on the ASX are required by the Listing Rules to be freely transferable. Listed companies have to offer new shares pro rata to existing shareholders unless they can come within one of the exceptions: LR 7. market value (does the efficient markets hypothesis hold?) After incorporation. Issue of shares s119.
Classic examples of rights of this character are dividend rights and rights to participate in surplus assets on a winding up. In fact the groups of shares are different. although not attached to any particular shares. If articles provide that particular shares carry particular rights not enjoyed by the holders of other shares. it is easy to conclude that the rights are attached to a class of shares… A second category of rights or benefits [which are not class rights]… would cover rights conferred on individuals not in the capacity of members or shareholders of the company. for ulterior reasons.What is a class? Crumpton v Morrine Hall Pty Ltd (1965) NSWR 240 per Jacobs J: ‘it seems to me that when you have a home unit company and the shares divided up into different groups so that one group has quite different rights from another group it makes no difference that the articles avoid the use of the word “class”. connected with the administration of the company’s affairs or the conduct of its business [here he referred to Eley v Positive Life]… the third category… would cover rights or benefits that. with the result that the capital is divided into different classes…’ Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper (1987) Ch 1 per Scott J: ‘First there are rights or benefits which are annexed to particular shares. were nonetheless conferred on the beneficiary in the capacity of member or shareholder of the company. s246D Is there still a role for Re Holders Investment Trust (1971) 1 WLR 583? 76 . does Cumbrian Newspapers suggest that the courts might take a more protective approach? Now see s246C Procedure to be followed s246B(1). the rights attaching to them are different. but. s246B(2).’ What is a variation? White v Bristol Aeroplane Co Ltd (1953) Ch 65 per Evershed MR However.
but persons who deal with and give credit to a limited company. and therefore a potential trigger for 588G. s180. that is a result which no legislation can prevent. except in the legitimate course of its business. Note also s256D which makes unlawful payment of dividend a contravention of civil penalty provisions. s254T s588G(1A) deems payment (or declaration) of a dividend to be incurring a debt. per Lord Watson at 423-4: ‘Paid up capital may be diminished or lost in the course of the company’s trading. as well as the responsibility of its members for the capital remaining at call.Maintenance of capital and dividends Maintenance of capital Trevor v Whitworth (1887) 12 App Cas 409. When are distributable profits available? Dimbula Valley (Ceylon) Tea Co Ltd v Laurie (1961) 1 Ch 353 at 372-3 Re Oxford Benefit Building and Investment Society (1887) LR 35 Ch D 502 Dimbula Valley has received cautious approval from NSWCA and HCA in Blackburn v Industrial Equity (1977) 137 CLR 567 at 580 per Jacobs J and Glass JA. naturally rely upon the fact that the company is trading with a certain amount of capital already paid. Dividends Dividend is distribution of profit to shareholders. and they are entitled to assume that no part of the capital which has been paid into the coffers of the company has subsequently been paid out. 77 .’ How effective is this as a means of creditor protection? Note Austin’s extra-judicial argument that the principle of maintenance of capital is better explained by reference to the doctrine of limited liability (which would become a rule of noliability if capital could be freely returned to shareholders). What about illegal dividends? A shareholder can rely on s1324 to prevent unlawful dividends: Darvall v North Sydney Brick and Tile Co Ltd (1988) 14 ACLR 474 affirmed (1989) 17 NSWLR 327. s254U.
Directors are also liable to compensate company at common law: Re Oxford Benefit Building Society (1886) 35 Ch D 502. (5). Reduction of capital Companies are not permitted to return share capital to shareholders. (4). 256B requires that reduction be fair and reasonable to shareholders as a whole. not materially prejudice ability to pay creditors. The information is then lodged by ASIC on its alert system to which creditors can subscribe. It may decide to cancel uncalled capital where it believes it will not need the balance. Full information disclosure required: s256C(3). Class rights may also be triggered. Validity is not affected but civil penalty regime may be triggered. CA draws a distinction between ‘equal reductions’ (256C(1)) and ‘selective reductions’ (256C(2)). Shareholders may be liable as constructive trustees if they have knowledge of the unlawfulness of the dividend. there must be a separate meeting of those whose shares are to be cancelled. Remember that the Gambotto principle does not apply to reductions of capital since it makes provision for adequate protection for minorities: see Winpar at  and -. Creditors thus alerted could seek a remedy under 1324(1) (note 1324(1A)). and be approved by shareholders under procedures in Pt 2J. 1 Div 1. But companies need to restructure and this does not always prejudice creditors. s256A sets out goals of the legislation. 78 . If directors have been ordered to compensate the company. If shares are to be cancelled. Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144 Sup Ct NSW: the requirement of a separate meeting is a strict one. they may be able to obtain an indemnity from shareholders who have knowingly received the dividend: Moxham v Grant (1900) 1 QB 88. and it must pass a special resolution. Before 1998 court approval was also needed. CA therefore permits reductions if notified to ASIC and approved by shareholders (256C). For example the company may have capital far in excess of its needs and wish to return surplus to members. Reduction cannot lawfully proceed unless it complies with these requirements: s256D(1). Directors’ duties might also be breached and the Takeover Panel might find ‘unacceptable circumstances’.
2 The prohibition: ss259A-C. S257H(2) and (3): no provision for ‘treasury shares’ (contrast US and UK position) Why buy back? Regulating buybacks CA identifies five types of buy back: categorised according to whether on-market buy back (which triggers few concerns). If s257C-H procedure not followed or creditors prejudiced. anyone involved contravenes a civil penalty provision under s259F(2). then the buyback is not authorised.Self-acquisition (prohibition on company acquiring shares in itself) Part 2J. Consequences of breach: s259F Buy back of shares A limited exception to the prohibition on self-acquisition Definition s9. Note also 588G(1A)(3). Since there is a contract. equal access (which treats shareholders equally and reduces their holdings proportionately: not many concerns) and selective buybacks (greatest concerns). Whilst valid and no offence by company. 257B table is helpful summary. . the shareholder can decide whether to sell or not. This makes it different from reduction of capital discussed above. 79 .
80 . there were two views about what was required to demonstrate financial assistance. if it fails. Public Issues. (b) or (c) are satisfied. its shareholders and creditors. ‘although their interests will have been subjected to an illegitimate risk. 1962 Jenkins Committee noted the danger that an acquisition of control using funds borrowed from the company makes it likely that ‘the company will be made to part with its funds either on inadequate security or for an illusory consideration’. The key was the company’s purpose in advancing the money. Further suggested reading: Nkala. even if there was no net diminution in the company’s assets per Buckley LJ in Belmont Finance Corporation v Williams Furniture Ltd (No 2) (1980) 1 All ER 393. Impoverishment or net transfer of assets per Mahoney JA in Burton v Palmer (1980) 2 NSWLR 878 at . the shareholders and creditors will have suffered no loss. 2. ‘Floating charges: the nature of the security’ (1988) 47 CLJ 213 Financial assistance s260A states that a company may financially assist a person to acquire shares in it or its holding company only in stated circumstances. Even without these provisions. Pre-1998 Rules Before 1998. ‘Some aspects of the jurisprudence of the floating charge’ (1993) 11 C&SLJ 301 Ferran.’ Now seen not simply in terms of maintenance of capital. Debt and Charges Recommended preliminary reading: Boros and Duns. Post-1998 Rules In 1998 the law was ‘simplified’ (ha!). 1. 260A allows financial assistance only if either 260A(1)(a). 1926 Greene Committee: financial assistance offends against ‘the spirit if not the letter of the prohibition against the company trafficking in its own shares’ and is ‘open to the gravest abuses’. pp333-348. financial assistance would be a breach of fiduciary duty and a misapplication of corporate assets. If the acquisition succeeds.Lecture Ten: Financial Assistance. but as preventing abuse by controllers: using company assets to finance an acquisition confers a benefit on the controllers but no benefit on the company. it may be little consolation for creditors and minority shareholders to know that the directors are liable for misfeasance.
from a commercial perspective. There are two possibilities: The first is that there will be financial assistance even if the purchase of the shares by the third party was purely coincidental. the provision of the assistance was not materially prejudicial to any of the interests referred to in s 260A(1). This interpretation was based on the Explanatory Memorandum for the Company Law Review Bill 1997 which stated that the section would prevent a company giving financial assistance ‘if the transaction would materially prejudice the interests of the company or its shareholders or materially prejudice the company’s ability to pay its creditors’. and then the defendant fails to prove either o a lack of material prejudice to the interests of the company or its creditors.’ This will be sufficient to exclude most coincidental purchases of shares. Of course. s260C(5)(d) creates an exception for ‘a discharge on ordinary commercial terms of a liability that the company incurred as a result of a transaction entered into on ordinary commercial terms. at -.’ If we adopt the impoverishment approach to FA. 81 . What about causation or purpose? Must there still be some link (in terms of causation or purpose) between the impoverishment of the company and the acquisition of the shares by the third party? This is arguably reflected in the words ‘assist’ and ‘to’ in s260A: ‘financially assist to acquire’.  NSWSC 171. or o that approval was given in accordance with 260B. The NSWCA did not disapprove of Santow’s approach (see ASIC v Adler (2003) 46 ACSR 504 at -) and it was followed by Robson J in the Supreme Court of Victoria in Kinarra Pty Ltd v On Q Group Ltd (2008) 65 ACSR 438. 41 ACSR 72 . or o that one of the exemptions in 260C applies. Santow J interpreted 260A as follows: ‘financial assistance’ requires ‘impoverishment’ rather than merely that the company have the ‘purpose’ of assisting. What is the effect of all of this? The LexisNexis commentary states that ‘whether one adopts the broad or narrow view of what is meant by “financial assistance”.In Re HIH Insurance Ltd (in liq): ASIC v Adler (2002) 168 FLR 253 . and presume material prejudice under (1)(a) then the financial assistance will be unlawful (with the consequences specified in 260D): • • if the liquidator proves impoverishment. s 260A will not be contravened if it is established that.
impoverishing transaction. Secondary Issues Once the shares have been made available to the public. 2 Ibid 1 • 82 .1B. Indeed.1 A reasonable person would not expect the information to be disclosed. disclosure document is not required because secondary purchasers are considered to be protected by the continuous disclosure requirements: see Ch 6CA and ASX Listing Rules esp 3. 3. the entity must immediately tell ASX that information.1A. ‘Regulating Financial Assistance: An Obsolete Regime’ (2008) 26 C&SLJ 7. impoverishing transactions which are followed by an acquisition of shares. ASIC has considerably fleshed out the basic provisions about prospectuses.1A Listing rule 3. However. Obiter dictum of Austin J in Law Society of New South Wales v Milios (1999) NSWSC 1272 at .1 Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities. it begs the question of why we need specific regulation of non-commercial.1A and 3. 3.It may be that the legislation intends to catch any purchase of shares which just happens to follow a non-commercial. Determining whether there has been a breach of the prohibition might involve revisiting ‘the old case law with respect to the requisite linking between acquisition and assistance’.1 does not apply to particular information while all of the following are satisfied: o 3. Most transactions in this category will amount to breaches of duty on the part of directors for which civil penalties can be imposed. Wellington. then the purpose requirement may once more be relevant to determining whether there is financial assistance within the scope of s260A. for example. there must still be some link between the impoverishing transaction and the acquisition of shares ‘which draws the transaction within the policy concerns which the section addresses’. Further reading: K. this is the thinking behind the UK’s abolition of the financial assistance prohibition for private companies. The second is that. Ch 6D CA. if the purchase of shares preceded the financial assistance by some time. Public Issues Introduction This will be an outline only because it is a complex regulatory area.1 This type of question might arise. • 3. See for example the Reports of the Greene and Jenkins Committees. even if there is a non-commercial transaction.2 If this interpretation is preferred.1.
2 The information is confidential and ASX has not formed the view that the information has ceased to be confidential.o 3. The regulatory scheme S113(3) provides that a proprietary company must not make an offer of shares which requires disclosure under Ch6D. with certain exceptions. Ch6D defines when an offer of securities ‘needs disclosure to investors’: s706 says that. with the exception of offers of shares to existing shareholders and employees. and suggests that they are available for payment. then a statement that there is no offer will be ‘as effective as hanging a sign on an elephant saying “Despite appearances this is really a duck”’! 83 . §The information comprises matters of supposition or is insufficiently definite to warrant disclosure. any offer needs disclosure.1A. §The information is generated for the internal management purposes of the entity. (s707(2)). §The information concerns an incomplete proposal or negotiation. price. ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305: if the statement identifies the company. §The information is a trade secret. and the nature of the securities. • ASX can require information to correct or prevent a false market (eg where rumours are circulating in the market): Rule 3. o 3. 707(3) contains anti-avoidance provisions by requiring disclosure to accompany a secondary sale where an issue was made within the previous 12 months with the purpose of a later resale by the issuee. When is an offer made? See s700(2). §It would be a breach of a law to disclose the information.1A. and in that situation a disclosure document is required where the sale is either of non-quoted securities or quoted securities being offered outside the ordinary course of trading on the relevant financial market.3 One or more of the following applies.1B Secondary sales are normally outside the disclosure requirements (because purchasers on the market are protected by market prices on efficient markets) with two exceptions: Occasionally a secondary seller will have access to information which purchasers do not (primarily where he controls the company in question in line with the 50AA conception of factual capacity to determine).
performance. status with regard to quotation) and in addition the s710 ‘reasonable investor’ test (including rights and liabilities attaching to securities. aimed at reducing volume of information. provided inter alia the shares are quoted (small investors believed to be protected by the prospectus plus the continuous disclosure obligation). 84 . professional connection or prior indication of interest offers made to professional or sophisticated investors (8-11) offers to people associated with the body (senior managers. Five types of disclosure document (see s705 for handy table summarising): full prospectus: principal form. assets and liabilities of company.The principal exceptions – which can be used by proprietary companies (as long as they remain below the 50 non-employee shareholder threshold) as well as by public companies which do not want to incur the costs of a disclosure document) are: • private or ‘small scale’ offering: s708(1)-(7). A personal offering can only be accepted by the addressee and must be addressed to persons likely to be interested having regard to previous contact. short form prospectus distributed to investors with incorporation by reference.e. but investors must have a right to a free copy of the prospectus on request (712(5)). a disclosure document must: • • • be prepared and used for the offer: s709. introduced under CLERP 99: s712. their spouses and relatives) and corporations they control (12) bonus shares issued fully paid up (i. profits and losses of company) unless satisfies reduced disclosure requirements under 713 for continuously quoted securities. Once disclosure is required. small scale offerings are issues to a maximum of 20 people in a 12 month period (20/12 rule). (727(1)). directors’ interests. be lodged with ASIC before offers made (718 and 727(1)). for a total consideration not exceeding $2m. even if renounceable: s9A defines rights issue) are also excluded under 708AA. required unless 709(4) allows an offer information statement. accompany offers. requires ASIC consent (714). capitalisation of dividends) (13) • • • Rights issues (offers made on the same terms to all holders of the company’s shares in proportion to their existing shareholdings. Must comply with the requirements of s711 (terms and conditions of offer. profile statement (with full prospectus lodged). Responses must be made on an application form which the issuer reasonably believes accompanied a disclosure document.
and defences in 731-3. If profits fall. From a corporate governance perspective. s728 introduces a reasonable care/due diligence regime for disclosure and omissions under the legislation.offer information statement where no more than $5m sought to be raised (under 709(4): this satisfies the disclosure obligation in place of a prospectus. omitted and new information disclosed in a supplementary document: s719 and 720 Liability for failure to produce prospectus or for misleading statements: s1311 and Sch 3 (item 329) provide that failure to produce a disclosure document in contravention of s727 is a criminal offence. Companies which rely heavily on debt and have little equity are said to be highly geared or leveraged.g. 729. and therefore excludes public offer documents from the strict liability regime under s52 Trade Practices Act 1974 (Cth) which is the principal regime of consumer protection. debt is considered desirable because it acts as a discipline on management because debtholders are more likely to monitor than dispersed shareholders. Contents required by s715 are less demanding than for a full prospectus. then ordinary shareholders will obtain higher returns than they would have if the company had relied entirely on share capital. Hedley Byrne). regardless of the success of the company. Relationship to equity and effect on decision-making Interest payments are tax deductible and expenses of borrowing also deductible. Debt and Charges Nature of debt Company creditors include banks and other suppliers of finance. and ‘trade creditors’ (unpaid suppliers of goods and services). and because managers have to make fixed payments to them. or omissions from. see ASIC v Karl Suleman Enterprises Pty Ltd (in liq) 45 ACSR 401 at - per Barrett J. a disclosure document under s728: see ss 728(3). on the civil consequences. If company can earn profits in excess of the costs of servicing the loans. as well as statutory civil and criminal liability for misleading and deceptive statements in. whereas dividends and expenses of shares issues are not. There may be common law liability (e. they will fall much faster per share. Public companies can solicit the public to invest in their debt securities and debentures. The higher the 85 . employees (who will be owed remuneration where they are paid in arrears). Misleading or deceptive information must be corrected.
the higher the leverage of a firm. which may be secured or unsecured. a debenture is documentary evidence of a debt. A later chargee will be able to enforce the charge provided they did not have notice of the pledge and provided valuable consideration for the charge. the greater the interest creditors should charge to compensate for the extra risk. other than having fixed returns. registration and priority of charges Aim is to avoid competing with the mass of unsecured creditors.leverage. it is called a ‘bare’ negative pledge. If they had notice. Charges Definition contained in s9. In principle. Public offers of debentures regulated under Chapter 2L (you don’t need to know the detail of this). Debentures At common law. Now defined in s9 as a ‘chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body’. s130(2). If given to an unsecured lender. Nature. Creditors do this by taking security over assets of the company. their risk profile is very similar to that of shares because most of the company’s outstanding debt will have priority. they may not be able to enforce the charge: there is authority that equity might prevent them from insisting on their strict legal rights: see Swiss Banking Corporation v Lloyds Bank Limited  Ch 548 although the case has been doubted outside the context of shipping counterparties. 86 . The lowest tranches of debt are termed junk bonds and carry high rates of return. Private equity transactions create(d) tiers of creditors with some portions of the debt subordinated by contract (and carrying higher returns to compensate for the greater risk). It can be sold or used as security for borrowing. the more risk there is for creditors too: equity provides a cushion in the event of insolvency. Negative pledges The company may promise a creditor that it will not give security over its assets either at all or above a certain level to any other person without consent.
the company may carry on its business in the ordinary way. and (iii) by the charge it is contemplated that. while a fixed charge is referred to as a security interest over a non-circulating asset.Fixed and Floating charges Fixed security attaches to a specific item of property and the chargeor is not permitted to dispose of the property free of the charge without the chargee’s consent. the Personal Property Securities (PPS) legislative scheme came into effect. Note: In January 2012. HL especially at  and . A floating charge. Now if banks want to have the protection of a fixed charge. It established a single harmonised national law designed to regulate the registration of “security interests” in personal property. As Lord Macnaghten said in Illingworth v Houldsworth (1904) AC 355 at 358: ‘A specific charge… is one that without more fastens on ascertained and definite property or property capable of being ascertained or defined. With the introduction of the PPS reforms. would be changing from time to time. on the other hand. until some future step is taken by or on behalf of those interested in the charge. 87 . a floating charge over property is now referred to as a security interest that has attached to a circulating asset. in the ordinary course of the business of the company. (ii) that class is one which. In contrast. Until then the chargeor is free to dispose of items in the class in the ordinary course of business so that the taker from the chargeor acquires the property free of the charge. hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp. A “security interest” is defined as including a fixed and floating charge: see Personal Property Securities Act 2009 (Cth) (PPS Act)). they have to prevent borrowers from dealing freely with book debts as they are paid. Only companies can grant floating charges.” Attempts to create fixed charges which give the borrower greater flexibility: see the treatment of ‘fixed’ charge over book debts in Siebe Gorman v Barclays Bank Ltd (1979) 2 Lloyd’s Rep 142 overruled in Re Spectrum Plus  4 All ER 211. a floating charge covers a class of property but does not attach to specific items in that class until some future event occurs. is ambulatory and shifting in its nature.’ Floating charges Three classic (non-exhaustive) factors to indicate that a charge may be floating were set out by Romer LJ in Re Yorkshire Woolcombers Association (1903) 2 Ch 284 at 295: “(i) a charge on a class of assets of a company present and future.
After crystallization the holder of a floating charge (and. That is. The terms of the charge are more significant because the chargeor can specify a wide range of events which will cause crystallization. not registered on the PPS register vests in the company: PPS Act. ceases to carry on business. in the event of a default. 88 . the secured property goes into the funds available for distribution by the liquidator. s 588FL (The PPS Act amended the CA by creating a new s 588FL. charges were registered under CA Ch 2K: ss 262 and 263. and they will define acts of default very widely. and engages in conduct which threatens the security. In effect.Crystallisation Floating charges ‘crystallise’ (mixed metaphor) on the occurrence on events implied by law or defined in the charge instrument and become fixed charges (for most purposes. The same generally applies to security interests registered in the six months before the start of the winding up: see CA. Registration of charges Previously. Receivership will be dealt with in lecture 12. with neither of them aware that they are subject to a (now) fixed charge. eg. Holder of charge can also seek injunction to prevent disposal of property other than in the ordinary course of business: Re Woodroffes (Musical Instruments) Ltd (1985) 2 All ER 908. although certain employee claims take priority over it which would not take priority over a fixed charge). allowing value of charged assets to fall below a fixed amount and ceasing to deal with assets in ordinary course of business. the creditor in whose favour the security was granted is treated as one of the company’s unsecured creditors. Under general law. this can cause difficulties in practice: neither party may know about it and may continue acting as though the charge remains floating. the security interest is void and cannot be enforced if the company goes into winding up or administration. The borrower may therefore dispose of assets to a third party. breaches of restrictions on further borrowing. 267A. Where there is such an automatic crystallization clause. the holder of a fixed charge) can appoint a receiver to realize the security and apply the proceeds to pay off the debt. ss 267. often including any lateness in interest payment. Section 588FL largely replicates the previous ss 266 and 267). has a receiver appointed by the holder of a fixed charge. or if a deed of company arrangement is executed. In these cases. A security interest that is not perfected. floating charges crystallize when the company is wound up. Charge in favour of officer or associate Company can grant charge in favour of officer. The PPS reforms repealed Ch 2K and replaced it with Ch 5 of the PPS Act.
Note the possibility of invalidity under CA s 588FP (formerly s267 (interpreted in Highland v Exception Holdings Pty Ltd (in liq) (2006) 60 ACSR 223 per Santow JA especially at . 89 . . ).
We will look at how companies go into liquidation (and administration and receivership). External administrators are officers of the company under s9 (so subject to statutory duties in 180-183). They will also be fiduciaries. which is where a person has an excess of assets over external liabilities. Introduction External administration: someone from outside is appointed to take over from the directors: either a receiver. This is the ‘commercial’ or ‘cash flow’ test of solvency. a liquidator or a provisional liquidator. and so subject to general fiduciary duties. ‘Insolvency: Problems of Concept. the powers of the liquidator to bring proceedings on behalf of the company in order to increase the assets available for distribution to creditors. and the order of priority for payment of creditors. (2) Relevance of bankruptcy precedents. s497 90 . so we will focus on a limited number of issues which relate to what we have already studied in this course. Routes to insolvent liquidation Part 5.4 CA Voluntary winding up (rare) s495. J. The cash flow test is adopted because the law is concerned with liquidity and the position of the company in its trading situation. Definition and Proof’ (2000) 28 ABLR 22. Chapter 21 The Priestley requirements state that insolvency must be included in this course. an administrator. When is a company insolvent? S95A(1). is the company viable? Re New World Alliance Pty Ltd (rec and mgr apptd) (1994) 51 FCR 425 at 435-6 Duns. It is a vast subject in itself. s491(1).Lecture Eleven: Winding up Recommended preliminary reading: Boros and Duns. Essentially. to be contrasted with the ‘balance sheet’ test of solvency.
The creditor should nominate a liquidator from the list of insolvency practitioners: see s532 for disqualifications. A liquidator can still be appointed despite the 91 . Application must be determined within 6 months: s459R. Certain presumptions are available to assist an application under 459P: see eg ss459C. they have a right to prove their claim (whether it is liquidated or unliquidated) under 553 and to participate in any distribution once the liquidator has gathered in the company’s property. David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265. 459E-G (statutory demand procedure). However their charge may be subject to challenge as discussed below. note that the rights of secured creditors to deal with the security are unaffected by the stay of proceedings and the suspension of officers’ powers: 471C. Effect of appointment of liquidator: • • officers must not exercise their powers without approval from the court or the liquidator (471A). the court can appoint a provisional liquidator under 472(2). At any time after the application has been filed. The stay aims to ensure that the liquidation proceeds in an orderly fashion and that no creditor obtains preferential treatment. Court appoints under s472. including launching an appeal against the making of the winding up order there is a stay on all current and future proceedings against the company (471B) unless the court gives leave. Court discretion under 467(1). and floating charge holders have their claims postponed to certain claims of employees under s561. any disposal of the company’s property other than by the liquidator is void unless the court orders otherwise: 468(1). they must follow the collective enforcement procedure unless court gives leave under 471B.Court ordered winding up s459P Certain applicants require leave of the court under s459P(2). employment contracts with the company are automatically terminated and transfers of shares without liquidator consent are also void: 468A floating charges will crystallise if they haven’t already unregistered but registrable charges will be invalid against the liquidator unless the time allowed for registration has not expired unsecured creditors can no longer enforce their debts. • • • • • However. s459S Creditor can then apply under 465A for the company to be wound up.
but the charged property will not be available to the liquidator. introduced in the current form on the recommendation of the General Insolvency Inquiry (the Harmer Report). s477 sets out further powers of the liquidator.au/download.appointment of a receiver by a chargeholder. Liquidator should collect company assets. the Insolvent Trading Provisions’ (1996) 5 Griffith Law Review 1. ascertain creditor claims and then apply available funds to creditor claims observing statutory priority then apply for deregistration of the company. if the company’s assets are inadequate to meet the costs of the action. ‘Company Directors’ Liability for Insolvent Trading’ (Centre For Corporate Law And Securities Regulation. Bring proceedings for insolvent trading under 588G ss588G H and M. see M. and that there were at the time reasonable grounds for suspecting insolvency.unimelb. Statutory actions by the liquidator 1. Liquidator should also report any misfeasance by directors to ASIC which can then decide whether to bring contravention proceedings: s533. a Transaction Cost Rationale for. Role of the liquidator The liquidator may carry on the company’s business only so far as necessary for the beneficial disposal or winding up of the company’s business: 477(1)(a). including a power to bring actions in the company’s name. 2000) available online at http://cclsr. They are to avoid unnecessarily protracting the liquidation: 480. sell them. bring any statutory actions (as below). ‘Taking the Corporate Contract More Seriously: The Economic Cases against. the liquidator will be personally liable for them: Re Speedifix Building Products Pty Ltd (1987) 11 ACLR 863 Directors to report to liquidator: 475(1) Liquidator to lodge preliminary report within two months (476) and audited accounts within six months (539) with ASIC. ‘The Economic and Strategic Structure of Insolvent Trading’ in I Ramsay (ed).cfm?DownloadFile=E80CBF3D-1422-207CBA7AB9ECBFC2B587 Liquidator to show that the director was a director at the time the company incurred a debt. that the company was insolvent at the time of incurring that debt or as a result of incurring that debt. Whincop.edu. M Whincop. 92 .law. However. For economic analysis of 588G.
Lewis v Doran (2005) 219 ALR 555 ‘reasonable grounds for suspecting’: see ASIC v Plymin (No 1)(2003) VSC 123 at ) Important note: certain transactions (including payment of dividend. Defences 588H Note the importance of appointing an administrator in good time. Possible criminal liability under 588G(3) if suspected insolvency and were dishonest in failing to prevent the company incurring the debt (dormant directors in family companies will not therefore be subject to criminal liability). Note that any money recovered under 588G is available to pay all unsecured creditors. Liability to be ordered to pay compensation to the company under 588J in proceedings brought by ASIC for a civil penalty order Consequences of contravention of 588G(3): 1. Tru Floor Service Pty Ltd v Jenkins (No 2)  FCA 632. including those who became creditors while the company was solvent: Whincop argues (at 16-19 of 5 93 . 2.‘incurred’: see Standard Chartered Bank v Antico (1995) 18 ACSR 1 at 57 ‘insolvent’: see Hall v Poolman (2007) 65 ACSR 123. Director is liable to civil penalty under Part 9. which leads to a presumption that the company was insolvent throughout the period. although they may be able to rely on the presumptions in 588E. Relief may be possible under 1318 or 1317S. Liquidator can apply under 588M (or creditor with liquidator’s consent under 588R) for compensation unless the director can prove a 588H defence. share buyback) are deemed to be the incurring of debts under 588G(1A). Consequences of contravention of 588G(2): 1. Quick v Stoland Pty Ltd (1998) 157 ALR 615 at 623. and a presumption of continuing insolvency throughout certain periods where earlier insolvency has been established.4B for contravention unless can prove one of the defences in 588H 2. The person bringing the proceedings bears the burden of proof. in particular where there is failure to keep accounting records in accordance with s286. Liabilty to be ordered to pay compensation to company under 588K in 588G(3) criminal proceedings Consequence of contravention of either 588G(2) or (3): 1. reduction of capital.
Recovery of unfair preferences and setting aside of uncommercial transactions: 588FA and 588FB McDonald v Hanselmann (1998) 28 ACSR 49) Re Emanuel (No 14) Pty Ltd (in liq) (1997) 147 ALR 281 at 288 VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) (1999) 3 VR 201. 2. now embodied in 588FA(3).e. To establish either an unfair preference (588FA(1)) or an uncommercial transaction (588FB). Note priority of unsecured claims over proceeds of liquidator’s action: 588Y 3. and notes that it does not fit comfortably with 588M(3). 588R. i. Bring misfeasance proceedings in the company’s name in relation to breaches of duty. Avoidance of certain floating charges: 588FJ. Note various decisions which prevent ratification from barring an action by liquidator: Cook v Deeks. Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 4. the liquidator has to prove • transaction was an ‘insolvent transaction’ under 588FC.Griffith LR) that this is inefficient. Bring action against parent company for insolvent trading by subsidiary: 588V-X Equivalent to 588G. T and U. company was insolvent at the time of the transaction or when act done to give effect to it. although 588V is not a civil penalty provision. ‘Relation-back day’ is defined in s9 and 513A. 5. Forge v ASIC. and that entry into transaction occurred within the ‘relation-back’ period so that it was voidable under 588FE (generally 6 months under 588FE(2) but can be extended to two years if insolvent transaction and uncommercial: 588FE(3). four years if with a related party: 588FE(4). note definitions of subsidiary in s9 and s46. and ten years if intended to defeat creditors: 588FE(5)). Liquidator may be able to rely on the presumptions set out in 588E to assist with proving insolvency. 94 • .
they should be paid rateably: s555. the liability for which arose before the relevant date (g) amounts due in relation to leave payments to employees before the relevant date (h) retrenchment payments to employees (excluding non-priority days for excluded employees). Generally speaking all unsecured debts rank equally and if assets insufficient. superannuation contributions and superannuation guarantee charge payable by company in respect of services rendered to the company by employees before the relevant date’ (556(1A) limits the amount payable to ‘excluded employees’ (defined in 556(2) as anyone who has been a director or spouse (including de facto) of director or other relative of a director during 12 months ending on the relevant date) and attributable to non-priority days (days on which the employees was an excluded employee) to a maximum of $2000. then (e) ‘wages. 6. Liquidation may be ongoing. costs of producing report for liquidator. Set aside unfair loans to a company: 588FD (note lack of time limits in 588FE(6)) Order of priority among creditors Once the liquidator has collected the assets. 7. 588FF(1). retrenchment defined in 556(2) as ‘an amount payable by the company to the 95 • • • • .Challenge unreasonable director-related transactions: 588FDA. Broadly speaking: • expenses of liquidation. certain debts of any administrator. for third parties under 588FG(1). time limits in 588FE(6A). Employee is defined for this purpose in 556(2) as a ‘person who has been or is an employee of the company whether remunerated by wages. he should pay them out to the creditors. in which case liquidator can make interim distribution referred to as ‘dividend’. and orders under 588FF. 588FF(4). S556 sets out the order for payment of priority or preferential creditors. salary. costs of ASIC audit of liquidator’s report. expenses of court order. commission or otherwise’. other expenses of relevant authority.Defences for other party under 588FG(2). (f) amounts due in respect of injury compensation.
Action to recover their entitlements is likely to be protracted. with leave from the liquidator or the court. Liquidator can bring proceedings. by virtue of an industrial instrument.8A makes provision to protect the entitlements of the company’s employees from agreements and transactions entered into with the intention of defeating those entitlements. on or after the relevant date’) Then payment of ordinary unsecured creditors. Then debts owed to persons in their capacity as members of the company: 563A (recall Sons of Gwalia Ltd v Margaretic). Then certain deferred creditors: subordinated debt under a contract or trust (holders of junk bonds!). 96 . Financial Review (20th January 2010). or employees can. Note that there is currently a federal proposal to reverse the decision. Finally anything left over will be paid to members in accordance with the rights attaching to the various classes of shares (if appropriate). This makes it a criminal offence for a person to enter into an agreement or transaction with the intention of either preventing the recovery of employee entitlements or of significantly reducing the amount of entitlements which can be recovered: s596AB. Protection of employee entitlements Part 5. Can also be ordered to pay compensation even if the criminal case is not made out provided loss is proved on the balance of probabilities: 596AC. in respect of the termination of the employee’s employment by the company. although no draft of the legislation is yet available: see ‘Gwalia Reversal gains industry approval’. an administrative measure).employee. available on blackboard site. These rights are now supplemented by the GEERS scheme (General Employee Entitlements Redundancy Scheme. whether the amount becomes payable before.
The receiver is also required by equity to exercise their powers not only in the interest of their appointor but also in good faith in the interests of the company. Nature and purpose of administration Part 5. the receiver must pay certain creditors who have preferential rights ahead of a floating charge or a fixed charge which was formerly floating under s433 (principally employee rights under 556(1)(e). Main power is to sell the charged asset. As an alternative to insolvent winding up. 97 .Lecture Twelve: Receivership and external administration Recommended preliminary reading: Boros and Duns. In doing so. to borrow money. Chapter 22 Definition. make or defend an application to wind up the company. Before he can appropriate the proceeds of the assets which were subject to a floating charge. See e. It was part of the same reform package as s588G which imposes liability for insolvent trading. the receiver will owe a duty of care under 420A. Administration was introduced in 1993 in response to recommendations from Australian Law Reform Commission by means of the Corporate Law Reform Act 1992 (Cth).g. carry on the business. prove for debts owing to the company etc.3A. which allows them – ‘for the purpose of attaining the objectives for which the receiver was appointed’ – to take possession of the property. Putting a company into administration is one of the ways in which company directors can avoid liability for insolvent trading: see 588H(6). This means the receiver is entitled to indemnity out of company’s assets for liabilities properly incurred. who can also be appointed to a company despite the fact that it is in liquidation. (g) and (h)). appointment. DCA provides for consolidation or postponement of debts while company continues to trade or its assets are sold off in an orderly (rather than panicked fashion). Failure to pay in the correct order will amount to the tort of breach of statutory duty. a company may continue trading under a Deed of Company Administration (DCA) which has been approved by the creditors. This linkage between administration and minimising the risk of personal liability may have contributed to the popularity of administration in Australia (compared to other common law jurisdictions). engage employees. Liquidator must stand aside for receiver to satisfy the claim of the secured creditor. The receiver will be the agent of the company under the charge instrument. but can exercise his powers without the company’s consent. process and duties of receivers Receivers get powers under the charge instrument and s420 CA. Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676.
Administrator may be appointed by directors (ss588H(6)). of the company’s property. Finally. C). S436A requires a resolution of the board that the company is insolvent or likely to become so and that administrator should be appointed. a chargee who has a charge on the whole. wind the company up or terminate the administration: s438A. Enforceability of charges: 440B makes charges unenforceable against the company except with the consent of the administrator or with the leave of the court. A meeting of creditors should be called within eight business days to allow them to approve the choice of administrator or appoint someone else: 436E. This allows the chargeholder not to have to rely on strict rights as a secured creditor to appoint a receiver and may result in a better outcome for all concerned. may make the appointment: 436C. Enforcement of personal guarantees from directors etc: 440J and 1323. Moratorium on all claims – including those of secured creditors – against company to allow an expert to assess creditor options: 440D. continuing in existence’ or.s435A sets out the aims of administration: to administer the affairs of the company in such a way that ‘maximises the chances of the company. the holder of a charge over the whole or substantially the whole of the business has a ‘decision period’ of 13 business days to enforce security after appointment of administrator (441A). Administrator will assume control of the company (437A. or as much as possible of its business. chargeholders who have begun enforcement may continue through the appointment of a receiver: 441B.’ Voluntary Administration First stage: VA Administration begins when the administrator is appointed: 435C. However. They may do this if they need the additional flexibility associated with administration compared with winding up. in a way that ‘results in a better return for the company’s creditors and members than would result from an immediate winding up of the company. Note treatment of floating charges: s442B and C. Court can restrain the exercise of rights by secured creditors if the assets are used in the business and the creditors’ rights can be adequately protected (441D(3)). Directors must 98 . However. Alternatively appointed by liquidator under 436B if they believe company is insolvent or likely to become insolvent. B. although note also 441D. Administrator’s task is to investigate the company and its affairs as soon as practicable and form an opinion on whether it would be in creditors’ interests to execute a deed of company arrangement. if this is not possible. or substantially the whole.
and (b) the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed to all the creditors voting (whether in person. misappropriation and breaches of duty to ASIC (438D). or to wind up the company or simply to end the VA: 439C. by attorney or by proxy) vote in favour of the resolution. S439A deals with the meeting and detailed provisions are contained in Corporations Regulations. the administrator should produce a statement setting out details of the proposed deed: 439A(4)(c). the company is deemed to be in creditors’ voluntary winding up unless it has applied for an extension: s446A(1)(b).3A. and some are default (s444A(5). 99 .6.6.21(2) provides: ‘A resolution is carried if: (a) a majority of the creditors voting (whether in person. Corporations Regulations Reg 5.6. Reg 5. If the company executes the instrument it ceases to be a company under voluntary administration and becomes a company under a deed of company arrangement. 444A deals with execution of the DCA.cooperate (438B) and the administrator should report offences. by proxy or by attorney). and if a deed is recommended. 444DA). If company fails to execute the deed within the 15 business days after the creditors’ meeting required by 444B(2). The administrator should prepare the DCA: 444A(3). in which case Reg 5.23 sets out rules which determine whether creditors can vote at the meeting. The administrator of the company will be the administrator of DCA by default: 444A(2). some are bespoke.06 specifies the default provisions are those contained in Corporations Regulations Sch 8A). Administrator will provide creditors with an opinion and a report on what is in the creditors’ interests (439A(4)).19 provides for a vote ‘on the voices’ (show of hands) but a poll can be requested. Contents of DCA Some are mandatory (s444A(4).’ Reg 5. Second stage: decision-making Creditors have a ‘proposal meeting’ within the period fixed by s439A to decide whether to enter a binding arrangement with the company (a deed of company arrangement: DCA).
subject to 444F Variation of DCA 445A-F 600A: court power to make order where vote determined by particular related creditors and contrary to creditor interests. ‘Drafting a Deed of Company Arrangement’  3 Insol LJ 15 GJ Hamilton. Termination of DCA By court order under 445D.3A to a particular company. and the court has interpreted this very broadly (although intervention must be in pursuit of the 435A aims of administration): see Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. Court has powers under 445D to terminate the DCA in a range of circumstances (including where the deed is oppressive or unfairly prejudicial to one or more creditors) and will normally find this where the deed departs from the order of priority under insolvency. Sch 8A provides for termination if not longer practicable or desirable to carry on the business. KJ Bennetts.Effect of DCA 444G. by resolution of creditors’ meeting (445F) or occurrence of circumstances specified in the deed: 445C. ‘Deeds of Company Arrangement: the Prescribed Provisions’  3 Insol LJ 67. Finally note broad power of court under 447A to alter the operation of provisions of Part 5. ‘Voluntary Administration: Shaping the Process through the Exercise of Judicial Discretion (1995) 3 Insol LJ 135 100 . Further references: P Lynch. 444D Secured creditors free to realise their security under 444D. Company can re-enter administration at any time in the future.
including allowing ASIC power to investigate liquidators’ breaches of duty to improve regulation of insolvency practitioners to finetune the VA process in light of market and developments and experience.Most recent reforms Corporations Amendment (Insolvency) Act 2007. facilitating informed creditor decision-making. streamlining external administration and reduce costs. Government’s stated aims in introducing the reforms were: • to improve outcomes for creditors. and allowing related companies to be administered as a single process (so-called pooling) to deter corporate misconduct. but required consideration in relation to DCAs – is mandatory regulation required to prevent them having to incur the expense of challenging a DCA? Now see s444DA which requires that employees have priority at least equal to that which they would have on insolvent liquidation). • • • An alternative: schemes of arrangement Possible under Part 5.1 CA but significant court involvement and delays. including enhanced protections for employee entitlement (this aspect already dealt with in the insolvency situation through GEERS. 101 . Administration is a more attractive option.
Tutorial 1: Types of business associations and types of companies Problem Question Julie and Tim are starting up their own small business. and any considerations they should take into account in making their choice. She has no registered trade marks. the assets of the business will likely consist of supply contracts with a number of restaurants. trading under the name Fabulous Concotions. The business now has well over a thousand employees. with a view to expanding into the restaurant supply market. and the business has proved highly successful. The expansion of the business has been funded in part through private investment. Julie has been making her ice-cream for friends. (b) Advise Julie and Tim regarding how these changes to their circumstances might lead to different advice concerning the appropriate legal structure for their business. What business structures can open up possibilities for outside investment in the business. with a view to later broader expansion. Five years down the track.000 each into leasing commercial scale equipment and some commercial space. her ice-creams have been mentioned in a few local newspapers. and Julie and Tim’s reinvestment of the profits of the business. although they are also open to investment from other sources. but has not incorporated. for serving in higher-end restaurants and cafes. school fairs and markets for some time. approximately 100 trusts and other investment vehicles have provided funds in return for shares. such as trade marks). Julie’s alreadyestablished recipes and the goodwill she has already built up (as well as any IP they choose to register. which involves the production and delivery of gourmet ice-creams in exotic flavours. with some success. they have also benefited from a line of credit from their local bank. Both Tim and Julie are planning to give up other employment and work full time in the business. The board has received proposals from management for a global expansion – starting in local markets such as Singapore and New Zealand. She has a registered business name and an ABN. They now have 50 employees and an annual turnover approaching $5 million. In order to fund further expansion of the business into other States. and have expanded into the retail market with 20 branded stores throughout Australia. some of whom are (generally small) shareholders. Apart from the equipment and premises leases. and what are the implications of these different structures? Another five years later. This success has been achieved through their efforts. and she is a wellknown figure around Brisbane. 102 . This will require major injections of funds to acquire the equipment and premises and secure deals in the target markets. have their ice-creams served on Qantas flights. of course. (a) Advise Julie and Tim regarding the options they have in terms of the legal form their business can take. Tim has experience as a business consultant and has proposed that they both invest $10. and Fabulous Concoctions is now serving the restaurant and café market. they are now interested in obtaining investment from other sources: possibly family members.
Is this how the corporate form is used today? 103 . The corporate form is said to have developed as a way to enable entrepreneurs with ideas for significant and risky ventures – like international trade or the building of major infrastructure – to gather the capital necessary to support those ventures. Discuss.What options does Fabulous Concoctions now have in terms of its legal structure? Advise the board of its options. The corporate form as it is known in Anglo-Australian law is as much an accident of history as it is a well-designed institution suited to its ends. Discussion questions 1. 2.
ERU Ltd.Tutorial 2: Separate Entity Principle and the Corporate Veil Problem question Greg and Mary are the shareholders in equal shares of Widget Pty Ltd (‘Widget’). The tangible assets of the business (manufacturing premises and equipment. which undertakes to repay the purchase price at a fixed rate over time. By this time Widget B is little more than a shell. 3 of the employees worked for Widget Pty Ltd prior to 104 . with the knowledge and consent of Mary. Several former employees of the Widget group have contracted the disease. Greg and Eric decide to restructure Widget’s business. Widget B has also undertaken to repay the purchase price of the business to Widget Pty Ltd over time. Widget takes a charge over Widget A’s assets. In response. Consider what the position would be in any of the following situations: (a) In June 2009 Widget B Pty Ltd fails to pay a major supplier of raw materials. Greg and Eric are the directors of both Widget A and Widget B. stock in trade) are transferred to Widget A. The employees in the manufacturing business become employees of Widget B. the government enacted a law that imposed additional reporting requirements on companies contracting with the Department of Defence which are owned 50% or more by any single foreign entity or person. it has no active business and no major assets. 12 months ago. Widget has successfully made the transition to major telecommunications equipment manufacturer. To secure payment. who place orders in the name of ‘Widget’. Mary is an American citizen. • Greg and Eric still hold directors’ meetings in which they make decisions for Widget. which operates a widget manufacture business. They establish two new corporate entities: Widget A Pty Ltd (‘Widget A’) and Widget B Pty Ltd (‘Widget B’). a terminal disease which does not manifest until years after exposure. The business is divided up: • Widget A is a wholly-owned subsidiary of Widget. For the last 10 years. Widget B is a separate company owned 75% by Widget Pty Ltd and 25% by Eric. The directors of Widget Pty Ltd are Greg and Eric. Widget A and Widget B. Widget B has few tangible assets. ERU Ltd knows that Widget B has few assets. mostly Eric and Greg. sometimes making little distinction between the companies. Can ERU sue Widget Pty Ltd to recover its debt? (b) Would your answer to (a) be different if the records showed that Eric and Greg discussed the benefits of the restructure in terms of shielding Widget Pty Ltd and the assets of the business from any major liabilities? (c) 20 years down the track it is discovered that exposure to the raw materials of widgets can cause laemopaethenia. Widget B leases equipment and premises from Widget A and manufactures and supplies widgets. Suppliers now formally contract with Widget B. Widget Pty Ltd has supplied widgets to the Department of Defence. although they still deal with the same people.
one shareholder company. Why do you think the James Hardie Group made provision for compensation to be paid to its tort victims when it was not obliged to do so under the law? Is it possible to make a general assumption that companies will voluntarily compensate their tort victims? 105 . Discuss. can the employees bring an action against Widget? Discussion questions 1. 3.the restructure. It has sometimes been suggested that tort creditors should –exceptionally – be permitted to pierce the corporate veil as between companies in a corporate group. 3 were only ever employed by Widget B Pty Ltd. 2. Explain the basis for this suggestion. and discuss the advantages and disadvantages of creating such an exception. There is little justification for observing a ‘corporate veil’ in a one director. Leaving to one side issues of the statute of limitations.
which commits members to pay an annual subscription of $1000 to support the work of the company. Clause 24. Is this a realistic threat? (b) The board wants to raise the annual subscription to $2000. Richard and Harry make up the board of directors. which states that the object of Greenbean is to promote environmentally-aware values and support only products with a low impact on the environment. Richard. Discuss. which provides that members who pay the annual subscription fee have a right to a free annual ‘environmental audit’ of their domestic and business interests. 106 . Pam and Mary-Jean with a view to bringing environmentally-friendly products to market. The centralisation of decision-making power in the board. reflected in the structure of the Corporations Act. a company which makes organic fertilisers. in light of the urgency of environmental issues today. If they do so. Pam has raised the possibility that she might sue to enforce the company’s objects clause. The board seeks your advice on the following: (a) The board recently decided to invest in Envirotek. The constitution of Greenbean contains the following constitutional provisions: • • • Clause 1. They believe that Pam is supportive. Shareholders’ limited powers to interfere with board decision-making are insufficient for them to exercise effective oversight over board decision-making. is not appropriate for all companies. Harry. Clause 33. How would the board go about changing clause 24. as they are not satisfied that Envirotek’s products are in fact ‘organic’ as they claim to be. 2. Tim. but are concerned that Mary-Jean may object based on past conversations. Pam and Mary-Jean do not approve of the investment. will Pam have any grounds for complaint? Discussion Questions 1. Discuss. The five friends are all shareholders (in equal shares). and what would be the impact of any change on Mary-Jean? (c) The board wants to remove clause 33 from the constitution because Pam’s extensive investment property interests are making the annual environmental audit extremely expensive. established by Tom.Tutorial 3: The Division of Power within the Corporation and Insider Rights Problem question Greenbean Pty Ltd is a small proprietary company.
Colin also decides that the company should purchase a fleet of cars for rental to the public. an old friend of his and Julie’s. which is also available to rent. The board has appointed Colin as the managing director subject to the proviso that he does not have authority to enter any contract valued at over $50. Emmanuel suggests that ‘just to be sure’ he could provide a mortgage over a waterfront property that Thunderclap has an interest in.Tutorial 4: Corporate Contracting Problem question 1 Dodge-O-Rental Ltd is a public company which operates in the car rental business. using the services of a recruitment consultant. and purports to enter into a contract with a car wholesaler – who has supplied individual cars to the company before – on behalf of the company. but Dodge-O-Rental Ltd also has a constitution which states that any contract valued at over $1 million requires the approval of the board. David has been acting as the company’s ‘finance director’. a company of which Julie and Emmanuel are the only directors and shareholders. As administrator. The board wants to know whether the company is bound by these contracts. Problem question 2 Emmanuel is the sole director and shareholder of Thunderclap Pty Ltd. Rhona (who happens to be a shareholder in the company). It has around 500 shareholders. The price of the cars is $2 million. Emmanuel has been dealing with Andrew. Finally. In addition to highlighting Dodge-O-Rental’s current special offers. and its board consists of 5 directors. 107 . The replaceable rules apply. One of Thunderclap’s major projects is the building of an eco-tourism resort in Northern Queensland.000. a property development and construction company through which Emmanuel carries on his property development business. and Emmanuel asks for their supply on credit. a qualified accountant. Andrew agrees that would be suitable. Emmanuel is married to Julie. The project requires significant supplies of certified ‘rainforest friendly’ wood for the building of the huts. identifies three suitable candidates. and the managing director of Woodpile Pty Ltd in order to obtain these supplies. which is the only asset of Emju Pty Ltd. who is employed as an administrator in Emmanuel’s business. interviews them and enters into a contract with one of the candidates. although he has not been formally appointed as such. including Colin and David. Andrew is reluctant to enter such a large transaction without any security. Colin decides that the company needs to employ another administrator and. Thunderclap cannot afford immediately to pay for the wood supplies. the advertisement suggests combining car rental with a vacation in David’s holiday home on the Sunshine Coast. she earns $70. Julie and Emmanuel live in a fine waterfront property south of the Gold Coast.000 per annum plus a pension contribution and subsidized private health care. David has made a number of contracts purchasing advertising space on behalf of the company. David purports to enter into a high value contract on behalf of the company for the purchase of advertising space in a number of local newspapers. In the past.
we just haven’t done the paperwork yet’. rather than third parties.Advise on the enforceability of the mortgage in the following scenarios: (a) Emmanuel turns up the next day in Andrew’s office with a mortgage apparently executed by Julie and Emmanuel as directors of Emju Pty Ltd. Discussion Questions 1. (b) Emmanuel turns up the next day in Andrew’s office with a mortgage executed by Emmanuel. It turns out later that Julie’s signature was forged. signing as sole director and sole company secretary of Emju Pty Ltd. Discuss. The rules relating to corporate contracting allocate most of the risk of misbehaving corporate officers on the company and its shareholders. When Andrew does a quick company search and finds that Julie is listed as a director. Julie’s not a director anymore. he is assured by Emmanuel that ‘Oh. Does the Act appropriately divide the risk. The needs of commerce would be better served if the law were to delineate clearly and exhaustively those who can bind companies to contracts. On the basis of his long friendship with Emmanuel. 108 . Andrew accepts this at face value. or should third parties contracting with companies have a greater ‘duty to inquire’ into officers’ authority to bind the company? 2.
the board of WW realise that the business is no longer viable. having launched a series of takeovers over a fairly short time period. and that all S&D’s suppliers be required to adopt similar packaging and branding (or cease to supply S&D). the S&D board received a report from a marketing consultant that indicated that S&D lacked a coherent brand identity in the market. S&D had become WW’s almost exclusive customer and distributor. the board of WW resolved (over the objections of Ness) to lend $10 million to S&D at half the market rate of interest. taking the view that the S&D range needed to supply a bottled water in its machines and branded stores. S&D has kept to the agreed payment schedule and will repay the money by the end of 2009. Two of the existing WW directors. Plans are made to wind up the company. the other member of the board after the takeover of WW is Chris. and in any event we might lose the supply contract otherwise’. The new requirement from S&D is passed on to the board and management of WW. 109 . The supply agreement is terminated. Negotiations occur. In the twelve months following the takeover. and preferring not to build a business from scratch. ran short of cash in September 2007. arguing that no independent valuation of the WW brands has been obtained and that the proposal may ‘lock WW in’ to an exclusive relationship. S&D’s board pass a resolution accepting a proposal that a single S&D brand identity be adopted. Richard announces that he will be taking up a highly remunerative executive Vice-President role within S&D. Shortly afterwards. At a subsequent board meeting of WW. To secure the debt WW was given a charge over certain manufacturing assets of S&D. Richard responds that ‘we’re part of the S&D group now. S&D launched a takeover of WonderWater Pty Ltd (WW). By January 2007. agreed to remain on the WW board for a transitional period of 4 years. as the time approaches for renegotiation of the WW-S&D supply contracts. but agreement cannot be reached. Without the supply contracts. At a meeting of the board of WW in October 2007. S&D. the WW board resolve to adopt the new brand identity. In January 2006. a small family business historically run by the Wonder family. Ness votes against the resolution. In December 2008. S&D purchased 70% of the issued shares in WW. and facing the prospect of having to invest significantly in a re-launch of the WW brands. S&D management write to WW management noting that they have located a supplier who can provide S&D-branded water at a significantly lower price than that quoted by WW. and cease to promote the independent WW brands. a nominee of S&D and member of S&D’s board. S&D purchased WW bottled water for sale.Tutorial 5: Directors’ Duties Problem question Sweets & Drinks Ltd (S&D) is a public (unlisted) company which manufactures and distributes soft drinks and various sweets products in Australia. Ness and Richard. to license the relevant packaging and trade marks from S&D. The remaining 30% is held by various Wonder family members. it makes sense to take the benefit of their branding campaign. In July 2007. WW however had significant cash reserves.
Ness. 110 . Comment on the strength of the case. and those areas where further information would be required. Advise Ness and the Wonder family. are distressed by the collapse of the business and concerned that there may have been breaches of duty by Richard and Chris. and the remaining members of the Wonder family.
Brian has also raised the possibility of Paul and David buying him out. Paul and Brian each hold 20% of the issued shares in the company. in response to these complaints. to provide a valuation of the shares. The business has been highly successful over time. David and Paul work in the business directly and. Brian considers that the valuation is low (although he acknowledges. profits have been reinvested in the business. only Brian voted against. The constitution of Koff Pty Ltd contains a provision giving the board the right of first offer if any shareholder proposes to sell their shares. Brian seeks your advice. The Corporations Act provides a range of remedies for shareholders. Paul. Paul and Brian are the three directors and three of the four shareholders (in equal shares) of Koff Pty Ltd. Recently. Advise Brian.Tutorial 6: Minority Protection Problem question David. Paul and David however have indicated that they would veto the transfer. and the right to veto any proposed transferee on reasonable grounds. Paul and David convened a meeting of the shareholders. Brian is not happy with what he has come to see as a stubborn refusal to pay dividends. David. Paul and David asked the company’s accountant. Paul and Brian are brothers. He has complained that Paul and David are ‘helping themselves to the profits’ via the high salaries and low-interest loans. David. the history of an absence of any dividends must make the shares less valuable to most people). As a second preference. Brian is a physiotherapist by training and has his own private practice. and their mother voted in favour of the resolution. are paid salaries above market rates and have the option of very low interest loans from the company. 111 . as Simon has pointed out. but not at Simon’s valuation: in his view. a company specialising in natural therapies. with the price to be set by an independent expert accountant. proposing a resolution to approve the management of the business and the benefits provided to employees. their (widowed) mother holds the remaining 40%. The company has steadily increased in value but has not declared any dividends for over 10 years. Seeing little likelihood of convincing his brothers. The business is a family business: David. like other long-term employees. he is prepared to be bought out. it has many long-term employees. Discussion Questions 1. but they are targeted at shareholders in small companies and will be ineffective to impose discipline on boards of larger concerns. Discuss. herbal remedies and related products. which Simon did. Simon. His first preference would be for the business to be run ‘more like a normal business’ – declaring dividends and perhaps being less obviously generous with its salaries. the value of the shares should reflect the value they would have in a ‘normal business as successful as Koff’. Brian’s cousin has offered a higher price than that nominated by Simon.
’ Discuss. 112 .2. ‘Section 1324 of the Corporations Act poses a threat to the carefully crafted and well justified restrictions on shareholder litigation.
owns some land with unused warehouse space which it has held onto almost from its inception. Groucho Ltd did not declare any dividend for the past three years. 113 . Groucho Ltd has been around for about 10 years. issued at a price of $1. Capital maintenance is an arcane doctrine which has no place in modern corporate regulation. Advise the board. cumulative dividend of 5% A right to share equally with ordinary shareholders in any distribution of surplus assets on winding up. They would prefer that the ordinary shareholders – many of whom have held the shares for as long as the company has existed – should benefit from the increase in value of land which was not an asset improved or contributed to by the preference shareholders. leaves Groucho $1 million better off. Groucho.000 fully paid ordinary shares. however. 2.000. The rights attaching to shares should be a matter entirely for companies and the market. and 500. Discuss.000 fully paid non redeemable preference shares.Tutorial 7: Shares & Capital Problem question The share capital of Groucho Ltd consists of 1. The provisions of Australian corporate law which seek to reflect the doctrine of capital maintenance are significantly more complicated than they need to be. The board of Groucho want to distribute most of this windfall. 5 years ago a special resolution was passed setting out the rights of preference shareholders – prior to those shares being issued. Discussion questions 1. Discuss. Groucho has not been doing spectacularly well over the last 3 years. Discuss. even after addressing costs and debt. there is no need for legal intervention in this area. issued at a price of $3 each. as it did not have any profit from which to pay dividends. The preference shares carry these rights: • • A right to a fixed. in fact. this land has suddenly become significantly more valuable. 3. Due to proposals to build a new train station in the area. The preference shares are held by 6 different investment trusts. the increase in value of the land. According to an independent valuation.
Commentators often talk about the ‘leverage’ or debt/equity ratio of a company. What are they talking about. Wetalk lacked the immediate cash to pay for the land. The land owned by Django was more expensive but better located than the alternatives. Due to rapid expansion. which was accepted. The other four directors pay for their shares immediately. Financial Assistance.000 ordinary shares issued at a price of $5 per share. They offered parcels of 20. Therefore the board decided to invite all the shareholders to subscribe for further shares in the company. Have the directors of Wetalk breached the Corporations Act? Discussion questions 1. Wetalk’s board was aware of David’s interest in Django Pty Ltd.Tutorial 8: Public Issues. and why does it matter? 3. The offer comes at a bad time and none of the other investors are in a position to invest. Wetalk Ltd made an offer to purchase the Django property. Wetalk Ltd did some research and settled on 3 possible sites. Wetalk needed new premises.000 of those shares. David). Do the rules on public issues of shares achieve an adequate balance between the interests of the company and the interests of prospective investors? 2.000 shares priced at $5 per share. David pays for the shares once Django receives the deposit (and immediately declares a dividend to its sole shareholder. is the sole director and shareholder of Django Pty Ltd. and Debt Problem question Wetalk Ltd is a telecommunications products manufacture company which has 200. one of Wetalk’s directors. There are five directors. but all of the directors decide to take up the offer. he did not participate in the board discussions and left the room during the discussion and vote. David. the remaining shares being owned by assorted investors. who between them own 50. issue new shares or retain earnings in order to meet its capital needs? 114 . What factors might influence a company’s decision whether to borrow money. one of which was owned by Django Pty Ltd.
another important corporate client has recently gone into liquidation. as to any risks they may face at this point. The liquidator of the corporate client has indicated that she does not think Bon Voyage can hope for much more than 10c in the dollar from the winding up. Uncommercial transactions (s588FB) c. and enforceable against any administrator or liquidator. If the board of Bon Voyage Pty Ltd are considering going into voluntary administration. the kinds of (voidable) transactions which the following categories are intended to cover. Do you agree with the Federal Government’s decision to reverse Sons of Gwalia by legislation? 7. What does it mean to say a transaction is voidable? Explain. receivership and administration 1. 5. Unfair loans to a company (s588FD) d. why would it be important to obtain the cooperation of Massive Bank? In a winding up. The charge is registered. Massive Bank has a fixed and floating charge over all of the assets of Bon Voyage Pty Ltd. owing Bon Voyage Pty Ltd a significant amount of money. 4. 2. and consider whether there are any common themes uniting the set: a. In addition. Unreasonable director-related transactions (s588FDA) 3. Just before hearing this news. Discuss. The directors of Bon Voyage Pty Ltd have recently learned that negotiations for a major exclusive contract to supply travel services to the University of Brisbane have fallen through. Bon Voyage took out a significant loan to fund acquisition of new premises in the Brisbane CBD: a transaction which even when it was entered they knew would strain Bon Voyage’s resources in the short-medium term. Discuss. Division 2 of the Corporations Act is unduly draconian.Tutorial 9: Insolvency. The main aim of the set of regulations governing companies in financial difficulty is to enable them to trade out of that difficulty: in other words. certain kinds of transactions will be voidable (Part 5. Advise the board of Bon Voyage: a. as to any steps they may take to reduce those risks. b.7B Division 2). The system of statutory demands under Part 5.4. the name of the game is corporate survival. Unfair preferences (s588FA) b. 6. 115 . in general terms and preferably giving examples.
116 . and they have made large profits. The board wants to know what steps it must take before the company can issue the shares to Passengers. It also wants to know whether Passengers will be able to ‘get rid of’ Liam. The board are also concerned that. Wotsits has adopted all the replaceable rules. The board are considering not giving him notice of future meetings. Niall and Owen who each hold five shares). who each own 20 shares) and four other shareholders (Liam. In return for its investment. together with a bank loan. two years ago. Micky. which wants to inject a large amount of share capital into the company. 1. Passengers will find out about three somewhat shady transactions in the company’s past. you should email them to your tutor before the tutorial. Niall and Owen once it has acquired its shareholding (Passengers intends to keep Ian. when the company was formed. Micky. Ian used that money. Third. If you have questions. The directors duly advanced their own funds to the company in question. Problem question Kevin is a director of a company called Wotsits Pty Ltd. and want to know whether this will have negative implications either for them or the company. The board has been approached by a venture capital company. James and Kevin on the board and to require them to retain their shareholdings as an incentive). Passengers Ltd. and caused the company considerable losses.Tutorial 10: Revision Students should note that the revision tutorial represents a chance to ask any remaining questions about the course. Liam is an exceptionally verbose character and has a tendency to prolong general meetings far beyond the tolerance of the directors and other shareholders. the directors were approached by another company which needed equity investment. At that time they paid him a ‘golden hello’ (bonus for signing an employment contract) of two years’ wages. Kevin comes to seek your advice on behalf of the board in relation to a number of matters. which has prospered since. and issued shares to him. to pay for his shares. James and Kevin introduced a line of beef-flavoured snacks which did very badly on the market (because Australians have a clear and well-known preference for cheeseflavoured snacks). First. Wotsits has three directors (Ian. only James and Kevin were its directors. in the first year of the company’s existence. After a couple of years they decided that they should bring in Ian – who worked for a rival firm –as an employee and director. 3. Second. it wants 1000 shares in Wotsits Pty Ltd. 2. James and Kevin. once they take control of the general meeting.
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