LECTURE 1 (Company & its characteristics)

Significant cases

Salomon v Salomon & Co {page 27}

 Salomon’s case established that a company is a separate legal entity even though a
single person manages and control it.
 A one-person company may borrow money from its controller on a secured basis, who
will rank ahead of its unsecured creditors on company’s insolvency.
 A company is a separate legal entity even if a single person owns all its shares.

Lee v Lee’s Air Farming {page 29}

 A one-person company is a separate entity from its controller who may also be its sole
employee.

MacLeod v The Queen {page 30}

 A person who was the sole director and shareholder could be convicted under s 173 of
the Crimes Act 1914 of fraudulently applying company property for his own use, in a
case where the company is insolvent or in financial difficulties, and the conduct of the
sole director & shareholder in reducing value of the company’s assets is detrimental to
creditors.
 The self-interested “consent” of the shareholder, given in a furtherance of a crime
against the company, cannot be said to represent the company’s consent.

Gilford Motor Co v Horne {page 35}

 The courts may lift the corporate veil if a company has been used as a sham or to avoid
a legal obligation.

Re Darby {page 35}

 The corporate veil may be lifted if a company is used as a vehicle for fraud.

Walker v Wimborne {page 32}

 Directors of a company that is a member of the group cannot act in the best interests of
the group and disregard the interests of the company’s shareholders and creditors.

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Pioneer Concrete Services Ltd v Yelnah Pty Ltd {page 33}

 A holding company and its subsidiary are two separate legal entities.
 Corporate veil will be disregarded if there is evidence that companies in a group
operated in a partnership.

Smith, Stone & Knight Ltd v Birmingham Corporation {page 39}

 Corporate veil may be lifted where a subsidiary is an agent for its holding company
 6 requirements to establish that a subsidiary carried on business as agent for its holding
company (before disregarding Salomon principle):
 Subsidiary’s profits must be treated as holding company’s profits
 Holding company must appoint persons conducting the business
 Holding company must be the head & brain of the trading venture
 Holding company must govern the venture & decide what should be done &
what capital should be embarked on it
 Business’s profit must be made by holding company’s skill & direction
 Holding company must be in effectual & constant control

Briggs v James Hardie & Co Pty Ltd {page 40}

 The courts may be prepared to make a parent company liable for its subsidiaries’ tort.

CSR Ltd v Wren {page 40}

 A controlling company may owe a duty of care to its subsidiary’s employee if it has a
sufficiently strong degree of control over the subsidiary’s activities.

CSR Ltd v Young {page 41}

 A controlling company may owe a duty of care to its subsidiary’s employee if it has a
sufficiently strong degree of control over the subsidiary’s activities.

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LECTURE 2 (Company registration, company types, replaceable rules)
Significant cases

Ashbury Railway Carriage & Iron Co v Riche {page 89}

 Under the doctrine of ultra vires, companies were legally capable of engaging only in
businesses set out in the objects clause.
 Company contracts outside the objects’ scope were regarded as void and of no legal
effect.

Eley v Positive Government Security Life Assurance Co {page 92}

 Provisions in a constitution that give members rights in some other capacity than that of
a member do not have contractual effect (in other words, members only have right as
members, no more, no less).
 An employee should have entered into a separate contract independent of the
constitution

Forbes v New South Wales Trotting Club Ltd {page 92}

 A constitution does not have the effect of an enforceable contract between a company
and non-members, even if a constitution purports to give them rights.
 Spectators only have rights as a spectator.

Shuttleworth v Cox Bros & Co (Maidenhead) Ltd {page 94}

 If the constitution does not adequately provide a procedure for removal, the members
can resolve to alter it under s 136(1) without exposing the company to liability for
wrongful dismissal.
 The director should have had a separate contract independent of the constitution.

Gambotto v WCP Ltd {page 97}

 An alteration that involves an expropriation of shares is valid, only if the expropriation is

for a proper purpose and fair in all circumstances.

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LECTURE 3 (Corporate Management/Directors)
Significant cases

Automatic Self-Cleansing Filter Syndicate Co v Cunninghame {page 267}

 If the board has full management powers, shareholders cannot override the directors
and involve themselves in the management of their company.

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LECTURE 4 (Directors’ duties – Part 1)
Significant cases

Percival v Wright {page 324}

 Directors do not owe fiduciary duties to particular shareholders, except in special

circumstances.
 Directors only owe fiduciary duties to the company as a whole & not to individual
shareholders.

Coleman v Myers {page 324}

 A director may owe fiduciary duties to an individual shareholder when in close contact
with the individual member so that the director caused the member to act in a certain
way detrimental to them.
 Factors giving rise to a fiduciary duty to individual shareholders:
 Dependence upon information & advice
 Existence of a relationship of confidence
 Significant transactions for parties
 The extent of positive action taken by or on behalf of director

Brunninghausen v Glavanics {page 324}

 A fiduciary duty owed by directors to shareholders where there are negotiations for a
takeover/acquisition of the company’s undertaking, would require directors to loyally
promote all shareholders’ joint interests.
 Nature of a transaction may give rise to a director owing fiduciary duties to a
shareholder.

Walker v Wimborne {page 32/page 399}

 Directors prejudice creditors’ interests if they cause the company to enter into
arrangements that reduce the pool of company assets that would otherwise be
available to be shared among creditors.

Equiticorp Finance Ltd (in liq) v Bank of New Zealand {page 328}

 An intra-group transaction entered for the benefit of the (company) group may also
have collateral/derivative benefits for the subsidiary.
 There is no breach of duty if it’s proven that the 1 st company indirectly benefitted from
the assistance given to other companies in the group.

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Parke v Daily News {page 329}

 Directors should not consider employees’ interests at the expense of shareholders’

interests.
 A payment to employees will be in the company’s interests where their employment
continues because its industrial relations may be improved, but not in this case.

Kinsella v Russell Kinsela Pty Ltd {page 404}

 Shareholders cannot ratify a director’s breach of duty that involves prejudicing

creditors’ interests. (In other words, shareholders can only ratify directors’ breach of
duty when the company is going concern.

McNamara v Flavel {page 403}

 The director breached the equivalent of s 184(3) and was guilty of a criminal offence.
 The director made improper use of information that the company was in financial
difficulties when he transferred the business name to the advantage of his other
company, detrimental to creditors.

Spies v R {page 404}

 Creditors cannot bring a civil action to recover their losses against directors who are in
breach of duty.
 Fiduciary duties are owed to the company and only the company has the right to sue
directors who act in breach of their duties.

Ngurli Ltd v McCann {page 331}

 Directors breach their duty if they issue shares for the purpose of maintaining their
position of control.

Howard Smith Ltd v Ampol Petroleum Ltd {page 332}

 It is improper to issue shares for the purpose of creating a new majority shareholder, or
to manipulate voting control within the company.

Whitehouse v Carlton Hotel Pty Ltd {page 332}

 It is improper to issue shares for the purpose of creating a new majority shareholder, or
to manipulate voting control within the company.
 General rule was based on Howard Smith Ltd v Ampol Petroleum Ltd case.

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LECTURE 5 (Directors’ duties – Part 2)
Significant cases

Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co {page 346}

 A breach of duty arises whether the director’s undisclosed interest in the contract is
direct or indirect.
 Directors must disclose their interests in transactions with their company.

ASIC v Adler {page 337/page 351}

 A director who causes a company to enter into an agreement conferring unreasonable

personal benefits on the director and fails to make adequate disclosure of the conflict of
interests, acts “improperly” for the purposes of s 182 and also lacks good faith for the
purposes of s 181.
 A contravention of s 181 does not require a director to gain a benefit from the conduct.
It is sufficient to establish that the conduct was carried out in order to gain an
advantage.
 A person commits a criminal offence if their involvement in the contravention of s 208 is
dishonest: s 209(3).
 A proposed benefit to a related party that contravenes s 208 may be stopped by the
court where an application for an injunction is brought under s 1324.

Regal (Hastings) Ltd v Gulliver {page 353}

 Directors have a fiduciary duty to disclose personal profits that arise from their position,
regardless of whether the company had suffered any losses or benefitted from it.
 Directors cannot place themselves in a position where it may appear that they are
motivated by considerations other than what is in the company’s best interests.
 The directors, who personally profited, acted in good faith and the company had not
been deprived of a business opportunity because it did not have the required funds. The
successful action only benefited the purchasers of Regal (Hastings) Ltd who had
contracted to pay an agreed price. The return of profits to Regal (Hastings) Ltd meant
that they succeeded in obtaining a reduction from the contracted purchase price.
 Directors in similar circumstances may now be able to avail themselves of s 1318, which
permits the court to relieve an officer from any liability for negligence, default, breach of
trust/duty if it appears that they have acted honestly.

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Cook v Deeks {page 359}
 A breach of fiduciary duty regarding corporate opportunities occurs where a director,
while negotiating a contract for the company, without appropriate disclosure and
approval, arranges for the contract to be diverted from the company to the director
personally or to another company in which the director is involved.

Wright v Gasweld Pty Ltd {page 363}

 Confidential information includes trade secrets, customer lists and pricing information.
 5 factors to be considered in deciding whether information was confidential:
 Skill & effort expended to acquire information;
 The degree to which the information is jealously guarded by the employer, not
readily available to employees & could not be acquired by others without
considerable effort/risk;
 Whether it was plainly known to the employee that the material was regarded
by the employer as confidential;
 Industry usage & practices;
 Whether the employee in question has been permitted to share information only
by reason of their seniority or high responsibility within the employer’s
organization.

ASIC v Rivkin {page 590}

 A person is an “insider” for the purposes of s 1043A prohibitions if:

 The person possesses “inside information” (defined in s 1042A); &
 The insider knows or ought reasonably to know that the matters specified in s
1042A definition of “inside information” are satisfied in relation to the
information

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LECTURE 6 (Directors’ duties – Part 3)
Significant cases

ASIC v Rich {page 379/page 384}

 The chairman of a listed company has special responsibilities and is subject to a different
standard of care and diligence than is applicable to non-executive directors.
 Related to breach of s 180(1).

Daniels v Anderson {page 381}

 Directors are required to take reasonable steps to place themselves in a position to

guide and monitor management of a company:
 Directors must become familiar with the company’s business when they join the
board
 Directors have a continuing obligation to make inquiries and keep themselves
informed about all aspects of the company’s business operations, regardless of
their knowledge and experience level.
 Directors must also be familiar with their company’s financial position by
regularly reviewing its financial statements as they cannot avoid liability for
insolvent trading by claiming they do not know how to read financial statements.
 Directors must also pay attention to other aspects of the company’s business
which might reasonably be expected to attract inquiry (even if it is not their area
of expertise).
 Directors are allowed to make business judgments and take commercial risks,
but not on the basis that ignorance and a failure to inquire are protection against
liability for negligence.
 Directors cannot ignore corporate misconduct and then claim they did not see
the misconduct and did not have a duty to look

Sheahan v Verco {page 382}

 Directors are required to take reasonable steps to place themselves in a position to

guide and monitor management of a company.
 In this case, smaller minimum standards were applied to non-executive directors of a
smaller company.

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Gold Ribbon v Sheers {page 383}

 A non-executive director with special skills/experience in the company’s business has a

duty to give benefits of that skill/experience to the company.
 They cannot avoid liability for negligence simply by asserting that they relied on the
company’s executive directors & officers.

South Australia v Clark {page 386}

 Executive directors may breach their standard of care if they do not ensure that the
company has appropriate management systems in place & the systems are not
functioning properly.

ASIC v Adler {page 388/page 391}

 Executive directors may breach their duty of care by causing the company to enter into
transactions that exposes it to risks without producing any beneficial prospects.

Vines v ASIC {page 386}

 Executive directors may breach their duty of care if they fail to enquire and obtain
information in circumstances where a reasonable executive director occupying a similar
position would have done so.
 In relation to contravening s 180(1)

ASIC v Plymin {page 410/page 412}

 Section 588G(2) requires proof that a director failed to prevent the company from
incurring the debt.
 “Failing to prevent” covers inactivity or failure to attempt to prevent the company from
incurring debt.
 Section 588G(2)(a) requires proof that the director is aware that there are reasonable
grounds for suspecting the company’s insolvency. It is sufficient if the director was
aware of facts which would cause a reasonably competent non-executive director to
suspect that the company was insolvent at the time it incurred a debt.
 A director who has delegated the monitoring of the company’s financial position to
another person upon whom the director relies may have a defence under s 588H(3), but
not in this case.

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Tourprint International Pty Ltd v Bott {page 411}

 A director does not establish the s 588H(2) defence by showing that they were
completely unaware of the company’s financial position.
 Contravening of s 588G(1) for not informing himself about the company’s true financial
position either before becoming a director or while being a director.
 Under s 588H(2), it is a defence if the director proves that, at the time when the debt
was incurred, the director had reasonable grounds to expect, and did expect, that the
company was solvent at that time and would remain solvent even if it incurred that debt
& any other debts at the time.

Deputy Commissioner of Taxation v Clark {page 413}

 Directors who are absent from management because of illness or some other good
reason at the time when company incurs debt in question may have a defence [s
588H(4)]

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LECTURE 7 (Company’s relations with outsiders)
Significant cases

Royal British Bank v Turquand {page 115}

 The rule in Turquand’s case allows persons dealing with a company to assume that its
internal proceedings were properly carried out.

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd {page 128}

 The customary authority of a company secretary is limited to matters of an

administrative nature (ex employing staff & ordering cars)

Northside Developments Pty Ltd v Registrar-General {page 128/129}

 The rule in Turquand’s case does not apply if the person dealing with a company has
actual knowledge of an irregularity or is put on inquiry by the circumstances and fails to
make inquiries
 Customary powers of a secretary do not include authority to mortgage company’s land
 Common law rule could not be relied upon where outsiders actually knew of
irregularity, or circumstances were such that they were put on inquiry (related to s 129
assumptions)
 Customary powers of a director do not include making contracts for company

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd {page 118}
 A representation by a company that the agent had authority to contract on its behalf
must be made by a person(s) who had “actual” authority to manage company’s business
either generally or in respect of those matters to which the contract relates.
 For apparent authority to arise, the principal must represent/hold out to the outsider
that the agent had authority to contract for the principal.

Richard Brady Franks Ltd v Price {page 123}

 A person may assume that a company’s officers and agents properly perform their
duties.
 Common law rule – A company cannot avoid a contract entered into on its behalf by an
officer who has breached his/her fiduciary duty where the outsider acts in good faith
without noticing breach of duty.

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Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd {page 125}
 The s 129(5) & (6) assumptions may apply even if the officer who signs or witnesses a
document does not occupy the designated position.

Tesco Supermarkets Ltd v Nattrass {page 105}

 Senior managers may be the directing mind and will of the company.
 The board of directors may delegate some part of management, giving to their delegate
full discretion to act independently of instructions from them.
 Criticised for narrow approach in imposing criminal liability on companies.

Brambles Holding Ltd v Carey {page 107}

 Occasionally, more than one person may be regarded as a company’s directing mind &
will.
 In some situations, separate pieces of information known by several people can be
aggregated and attributed to their company.

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LECTURE 8 (Shareholders’ remedies)
Significant cases

Charlton v Baber {page 524}

 The court decided that leave (permission) could be granted to bring legal proceedings in
the name of a company in liquidation.

Scottish Co-operative Wholesale Soc Ltd v Meyer {page 515}

 Diverting corporate opportunities from the company may amount to oppressive or
unfair conduct

Sanford v Sanford Courier Service Pty Ltd {page 516}

 Paying very high director’s salaries and low dividends to shareholders may be oppressive
or unfair conduct.

Shamsallah Holdings Pty Ltd v CBD Refrigeration & Airconditioning Services Pty Ltd {page 516}
 Directors’ failure to review dividend policy in light of company’s changing and improving
circumstances is oppressive, especially when directors are increasing their own
remuneration at the same time.

Morgan v 45 Flers Avenue Pty Ltd {page 516}

 The mere fact that dividends were not as high as they could have been is not necessarily
an indication of unfairness.
 A decision by directors to pay themselves large bonuses and fees is not oppressive or
unfair if company’s profitability had increased significantly because of their efforts.

Dosike Pty Ltd v Johnson {page 516}

 There was no oppressive or unfair conduct if the company only paid salaries to directors
who worked in a business and not to a director who did not.

Re Spargos Mining NL {page 517}

 It may be oppressive or unfair if directors breach their fiduciary duties and do not
permit the company to take action against them.

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Jenkins v Enterprise Gold Mines NL {page 518}
 There was oppression or unfairness where the directors pursued to further their own
interests or others’ interests to the company’s detriment (or minority shareholders’
detriment).

Hannes v MJH Pty Ltd {page 518}

 Directors who have breached their duty & are also majority shareholders may act
oppressively or unfairly if, as shareholders, they vote to ratify their breaches.
 Ratification can only be made by disinterested shareholders.

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd {page 516}

 In family companies, it may be oppressive or unfair to exclude a family member from
the company’s management.

Ebrahimi v Westborne Galleries Ltd {page 529}

 It is just & equitable to wind up a company that is a “quasi-partnership” if there has
been a breakdown in mutual trust and confidence existing among shareholders.
 One “partner” attempted to “freeze out” the other from management of company’s
business.
 The minority shareholder was excluded from management of company affairs and lost
the right to share profits, leading to the winding up.

Re Yenidje Tobacco Co Ltd {page 530}

 The just and equitable ground is established where shareholders are “deadlocked” to
the extent that the company is unable to function properly.
 The company is wound up on just & equitable ground due to the continuing and
irresolvable deadlock.

Re Tivoli Freeholds Ltd {page 531}

 A company may be wound up on just & equitable ground where it ceases to carry on
business for which it was formed.

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LECTURE 9 (Share capital & dividends)
Significant cases

Salomon v Salomon & Co {page 27}

 Non-cash consideration must be consideration recognized by contract law.
 Partners or sole trader may sell their property to a newly formed company that they
control and in return it allots them shares.

Greenhalgh v Arderne Cinemas Ltd {page 181}

 Company subdivided all existing 10-shilling shares into 2-shilling shares, ranking equally
with subdivided shares held by Greenhalgh. The effect was to diminish Greenhalgh’s
proportion of votes and it meant that he does not have sufficient shares to block passing
of special resolutions.
 Greenhalgh argued that the voting rights attached to his shares were varied without the
shareholders’ consent as required by the articles.
 It was held that voting rights were not varied even though they were affected in a
business sense (in other words, increasing the number of shares in another class is not a
variation of class rights).

White v Bristol Airplane Co {page 182}

 A bonus issue to ordinary shareholders was held not to “affect, modify, vary, deal with
or abrogate” the rights of existing preference shareholders.
 Even though the bonus issue dilutes % of votes of preference shareholders at meetings,
it does not affect their strict legal rights, which is the right to have 1 vote per preference
share.

Trevor v Whitworth {page 183}

 A company is generally prohibited from reducing its issued share capital because this
may prejudice creditors’ rights. [The law does not expect capital to be returned to
shareholders ahead of creditors]
 The share capital reduction would diminish available funds of company to pay its
creditors.

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Examples of financial assistance:
 Company lends money to a person for acquiring company shares
 Company guaranteeing a person’s loan where it is used to acquire company shares
 Company providing its own assets as security for a person’s loan where proceeds of loan
are used to acquire company shares

Cases illustrating financial assistance:

 ASIC v Adler
 Hunters Products Group Ltd v Kindley Products Pty Ltd
 Independent Steels Pty Ltd v Ryan
 Darvall v North Sydney Brick & Tile Co Ltd
 ZBB (Aust) Ltd v Allen

Sanford v Sanford Courier Services Pty Ltd {page 516}

 Under s 232, failure to pay dividends to shareholders may be oppressive or unfair
conduct.
 A distribution of significant profits was made to majority shareholders while the
minority shareholder was excluded after he no longer remained as director.

Australasian Oil Exploration Ltd v Lachberg {page 228}

 It is improper to declare a dividend from the sale of its most valuable asset.
 A company has no capital profits available for dividend purposes, unless there has been
an accretion to the paid up capital.
 If a company wishes to pay a dividend from realised increases to its fixed assets, it has to
revalue all its fixed assets. If there is a surplus over paid up capital after revaluation, it
may be included in profits and distributed by dividends.

Hilton International Ltd v Hilton {page 231}

 A dividend should not be paid if the company is insolvent, or the payment results in the
company becoming insolvent.
 Payment of a dividend by an insolvent company may constitute a breach of duty by
directors, in which they may be held personally liable to repay the dividend amount to
the company.

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LECTURE 11 (Corporate insolvency)
Significant cases

Re Pacific Hardware Brokers (Qld) Pty Ltd {page 734/741}

 The sole director of an insolvent company used company funds to purchase an
engagement ring for his fiancée.
 The use of company funds in these circumstances amounted to an un-commercial
transaction under s 588FB and the director has to pay the ring’s purchase price to the
company under s 588FF(1)(a).
 The Court will not make orders that prejudice non-parties to a transaction.

Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd {page 736}
 A company does not have to be insolvent for an unreasonable director-related
transaction to be voidable.

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