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TOPIC 2 Registration

Registration process

Process:
1.

A person may lodge an application with ASIC (s 117(1) Corporations Act 2001 (Cth));
s 117(2) outlines what the application must state (page Error: Reference source not found).

2.

ASIC may then register the company, give the company an ACN, and issue a certificate of
registration (s 118(1)).

Company names:
o

Must be stated on the application, unless the ACN is to be used (s 117(2)(b));

o

Requirements for a valid company name:

Name must be available (s 148(1)(a)).
A name is not available where it is identical to a name held or registered on the Business
Names Register (s 147(1)(b)) or it is unacceptable for registration under the regulations1 (s
147(1)(c)).

Name must contain “Limited” or “Proprietary Limited”, as appropriate (s 148(2) – or the
abbreviation, s 149).

o

A company must set out its name and ACN on all public documents (s 153).

o

A person may reserve a company name for 2 months (with 2 months extensions) (s 152).

Effect of registration

The company has a separate legal personality once it is registered (s 119 and Salomon).

The shareholders and directors are distinct from the company and can therefore also be secured
creditors (eg Salomon) or employees (eg Lee’s Air Farming) with respect to the company.

Corporate groups

A corporate group is not a separate legal entity – each company within the group has separate legal
personality, but not the group as a whole.

Consequences:
-

Duties are owed by directors to the company on whose board they sit. The question is what is in
the best interests of the individual company and not what is in the best interests of the corporate
group (Walker v Wimborne);

-

Profits of each company must be treated separately and a parent company cannot pay a dividend
based on the profits of the group as a whole (Industrial Equity);

-

A contractual promise made by a subsidiary does not bind the holding company to the contract
(Pioneer Concrete).

Corporate veil

1

The veil of incorporation recognises that a company is a separate legal entity distinct from its
shareholders. The liabilities of the company are not the liabilities of the shareholders. Therefore, a
shareholder’s liability for the company’s debts is limited to paying the full purchase price of shares taken.
A name is unacceptable if, in the opinion of ASIC, it is undesirable or likely to be offensive to members of the public OR it contains a restricted word or phrase.

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However, the veil can be lifted in certain circumstances:
i.

Where company is being used as a sham so as to avoid an existing legal obligation.
o

ii.

Examples:

In Gilford Motor Co, Mr Horne attempted to avoid a restraint of trade contract that
applied to him as an individual by setting up the company. The Court granted an
injunction against Mr Horne and his company (even though the company was not a party
to the contractual restraint) because “the company was formed as a device, a
strategem... to mask the effective carrying on of a business by Mr Horne... it was a cloak
or a sham”.

In Creasey, a company was wound up and assets transferred to new company to avoid
legal claim by dismissed employee. Mr Creasey commenced legal proceedings for
wrongful dismissal as manager of Welwyn Ltd. Prior to the hearing, W became insolvent
and its business and other assets were transferred to Breachwood Motors Ltd. B paid off
all of the debts of W, but made no allowance for C’s claim. C sought to substitute W with
B in the proceeding. The court held that B was liable for W’s debt, because it would be
unfair for B to honour all debts and obligations of W except for C’s claim.

In Jones v Lipman, a landowner transferred land to a company in order to avoid an order
for specific performance of the sale contract concerning the land (ie L agreed to sell to J,
L changed his mind and then transferred land to a new company). The Court treated the
contractual obligation of the landowner as the obligation of the company, because the
company was a sham used to avoid a legal obligation.

Where company was formed to perpetrate a fraud.
o

Example:

iii.

In Re Darby, Darby and Gyde formed a company (C). C purchased a licence to work a
quarry and sold it, at a substantial overvalue, to another company they set up (W). W
issued shares to the public and that money was paid to C for the licence, which was then
divided between Darby and Gyde. W became insolvent and the liquidator sought to
recover the profits from Darby. Darby argued that the profit was made by C and not
Darby himself. This argument was rejected, because C was a “dummy company” formed
as a front for Darby to perpetrate a fraud.

Corporate groups.
a.

Where the subsidiary is treated as agent of the holding company.
o

Where the court finds that a subsidiary has acted as an agent for its holding company,
the holding company is liable for the acts of the subsidiary.

o

In Smith, Stone & Knight, Atkinson J held that six requirements must be established
before finding that an agency arrangement exists:

o

1.

the profits of the S must be treated as the profits of the HC;

2.

the persons conducting the S’s business must be appointed by the HC;

3.

the HC must be the head and brain of the S;

4.

the HC must govern the S and decide what should be done and what capital
should be embarked on it;

5.

the profits of the S must be made by the HC’s skill and direction; and

6.

the HC must be in effectual and constant control.

On the facts, Birmingham Waste Co was a wholly owned subsidiary of SSK. Land was
owned by SSK on which BWC was run. The government wanted to compulsorily acquire

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the land. SSK could get compensation for dislocation of the business if it could show
that BWC was the agent of SSK. The Court held that they were.
b.

c.

iv.

Where the directors act for the benefit of the group as a whole.
o

According to Walker v Wimborne, directors must act in the best interests of the
individual company.

o

However, in some circumstances, a director will not breach their duty if they act for the
benefit of the corporate group as a whole, where it will indirectly benefit the individual
company on whose board they sit (Equiticorp Finance).

o

For example, in Equiticorp Finance, the Bank of NZ lent money to one company in the
Equiticorp group. The director of two other companies in the group agreed to provide
security for that loan. The majority of the NSWSC held that the transactions indirectly
benefited the two companies, because the Bank of NZ funded the entire group and
without that security the funding of every company in the group would be jeopardised.

Where the subsidiary commits a tort.
o

Different considerations apply in tort actions compared with other cases, because, as
Rogers AJA noted in Briggs v James Hardie, “The victim of the negligent act has no
choice as to the corporation which will do him harm [cf. contracting parties].”

o

A holding company may be liable to an employee of its subsidiary for negligence, on
the basis that the HC itself owed a duty of care to the employee. This DOC can arise
where the HC exercise a high degree of control over the day-to-day activities of its
subsidiary.

o

For example, in CSR v Wren, Wren developed mesothelioma after working for AP, a
subsidiary of CSR. The Court held that CSR owed Wren a DOC because CSR had
operational responsibility for the work conditions at AP (as the management staff at AP
were CSR staff). Similarly, in CSR v Young, the degree of control of CSR over the
activities of the subsidiary was so strong that CSR itself effectively conducted those
activities.

Where the veil is pierced by statute.
o

For example, ss 588V-588X (holding co liable for debts of subsidiary if holding co knew or
should have known subsidiary was trading whilst insolvent) and ss 588G-588H (director
personally liable to pay debts of the co if director knew or should have known co was trading
whilst insolvent).

o

See page Error: Reference source not found.

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TOPIC 3 Types of Companies

Classification (s 112)

First classification
Proprietary company
o

A proprietary company is a company that is registered as, or converts to, a proprietary company
under this Act (ss 9 and 45A(1));

o

Restrictions:

o

It must not have >50 non-employee shareholders (s 113(1)). “Employee” means an
employee of the company or of a subsidiary of the company (s 113(2)(b));

It must not engage in public fund raising (s 113(3)).

Can be either a small or large proprietary company:

Small proprietary company: A proprietary company is a SPC for a financial year if it satisfies
as least 2 of the following: consolidated revenue <$25 million, consolidated gross assets
value <$12.5 million, or <50 employees (s 45A(2)). A small proprietary company has
reduced financial reporting requirements.

Large proprietary company: All other proprietary companies (s 45A(3)).

Public company

o

A company other than a proprietary company (s 9).

o

It may be listed or unlisted.

Second classification
Public companies
Limited by shares:

The liability of members for the debts of the company is limited to
any amount that is unpaid on the shares that the member holds in
the company (ss 9 and 5162). Must have Ltd in name (s 148(2)).

Limited by guarantee:

The liability of members is limited to the amounts that they have
undertaken to contribute in the event of it being wound up (ss 9 and
5173). This type of company does not have shareholders. It does not
raise money from its members, nor does it return profits to its
members. Must have Ltd in name (s 148(2)).

Unlimited with share capital:
No liability company:

Members have no limit placed on their liability (s 9).

A company registered as, or converted to, a no liability company. It
must have solely mining purposes and have no contractual right to
recover unpaid calls (ss 9 and 112(2)). Must have No Liability or NL in
name (s 148(4)).

Proprietary companies
Limited by shares

Must have Pty Ltd in name (s 148(2)).

Unlimited with share capital

Must have Pty in name (s 148(3)).

2

s 516: If the company is a company limited by shares, 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.
3

s 517: If the company is a company limited by guarantee, a member need not contribute more than the amount the member has undertaken to contribute to the company's property if the
company is wound up.

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Related companies

Definitions (s 9)
o

Holding company means a body corporate of which the first body corporate is a subsidiary;

o

Subsidiary means a body corporate that is a subsidiary of the first-mentioned body by virtue of
Division 6.

Test
Under s 46, a company (AB) is a subsidiary of another company (A) if one of four tests is satisfied:
1.

2.

A controls the composition of AB’s board (s 46(a)(i));
o

Under s 47, A is deemed to have this control if it can appoint or remove all or the majority
of the directors of AB. A is deemed to have the power to appoint if a person cannot be
appointed as director of AB without the exercise by A of such a power, or a person’s
appointment as director of AB follows necessarily from them being director or officer of A;

o

“Control” means a legal power to control – practical or de facto control, in the absence of
any legally enforceable power, is not sufficient (Mount Edon). For example, it was not
enough in Mount Edon that the two companies thought they were holding and subsidiary
companies and one deferred to the other to determine board composition.

o

Where A holds >50% of the capital of AB, this gives A legal control (overlaps with (a)(iii)).
OR look for an enforceable and irrevocable agreement that AB’s members will vote
according to A’s directions.

A can cast, or control the casting of, more than one-half of the votes that might be cast at a
general meeting of AB (s 46(a)(ii));
o

“Control the casting” requires an actual power (revocable or not, legally enforceable or
not) to cast >50% of the votes (Bluebird Investments). It is enough if A has an
unenforceable agreement with AB’s shareholders to cast their vote (a proxy vote).

3.

A holds more than one-half of the issued share capital of AB (s 46(a)(iii)); or

4.

AB is a subsidiary of a subsidiary of A (s 46(b)).

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or a prohibition of. For example. o Examples of rights that attach to members in their capacity as members include: the right to inspect the register.  How can this contract be enforced?  4 o The company can take action against its members to force them to comply with the constitution (because of s 140(1)(a)). in Hickman. and the like (Bailey per McHugh and Gummow JJ). the exercise of power is not invalid (s 125). by lodging a copy with the application (ss 136(1)(a) and 117(3)). For example. (b) the company and each director and company secretary.  Under this contract. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company's constitution. 6/56 . the company's exercise of any of its powers. the constitution of the company has effect as a contract between: (a) the company and each member. there may be consequences against directors or agents who caused the clause to be breached (eg breach of duty). each person agrees to observe and perform the constitution so far as it applies to that person (s 140). Special resolution means a resolution of which notice has been given and that has been passed by at least 75% of the votes cast by members entitled to vote on the resolution (s 9). in Eley. However. and (c) the members. 5 s 125(1): The constitution may contain an express restriction on. the right to receive a share certificate. the court would not enforce a provision in the constitution that provided for him to be the company’s solicitor for life. if the company passes a special resolution 4 (s 136(1)(b)). to receive informative notice of meetings.blogspot. s 125(2): The constitution may set out the company's objects. The exercise of a power by the company is not invalid merely because it is contrary to an objects clause. o A member can only enforce rights in the constitution that attach to them in their capacity as a member of the company. o Its own constitution (s 136(1)).© Author of LawStudyNotes.com TOPIC 4 Company Constitution and Membership Constitution   A company may use: o The replaceable rules in the Act (s 135(1)). The constitution as a statutory contract  Per s 140(1). A company can adopt a constitution: o On registration. because the right he was claiming (to act as solicitor) was not a right that attached to him as a member. the court stayed Mr Hickman’s case on the basis that he was obliged to follow the dispute resolution procedure in the constitution (which prescribed arbitration and not judicial action). or o After registration. Objects clauses  The constitution may contain an objects clause that restricts the company’s powers (see s 1255). to vote. Members may also have contracts with the company that bind them as individuals (special contracts) (Bailey). to receive payment of duly declared and payable dividends. or o A combination of the two.  If the company breaches its objects clause.

o Alteration takes effect on the date on which the resolution is passed (s 137). or fraud on the minority). and Bundaberg for cancellation/extinction of shares): The expropriation must be: o 1. 3. an alteration of the provision in the constitution will vary the special contract prospectively (into the future) and not retrospectively (Bailey). in Bailey. o Where the alteration provides for the expropriation or compulsory disposal of a member’s shares. For a proper purpose. or (b) increases the member's liability to contribute to the share capital of. the company. The Union changed its constitution. Proper purpose 6 (2) Unless a member of a company agrees in writing to be bound. or otherwise to pay money to. and 2. a two-fold test must be satisfied (Gambotto and Bundaberg – *use Gambotto for acquisition of shares. or (c) imposes or increases restrictions on the right to transfer the shares already held by the member. Its purpose was to provide its members with insurance against negligence claims. 2.blogspot. 7/56 . Dr Bailey died and a claim was made against him. Limits on changing the constitution In addition to a special resolution 1. o Equitable restriction.  Where a special contract refers to the constitution. 1.  Effect of alteration  o Members are bound to changes even if they did not vote for them. Majority shareholders cannot use their voting power to unfairly deprive minority shareholders of their rights (also called oppression. The company must abide by any entrenching provisions in its constitution: s 136(3) (ie any additional requirements must be complied with – “The company’s constitution may provide that the special resolution does not have any effect unless a further requirement specified in the constitution relating to that modification or repeal has been complied with”).  For example. Fair in all the circumstances. o Special contracts  Generally. giving the directors the discretion to terminate assistance to any person who has ceased to be a member (eg through death). Changes that increase the liability of current members require their written agreement: s 140(2)6.com Alteration of constitution  The company may modify or repeal its constitution by special resolution (s 136(2)). they are not bound by a modification of the constitution made after the date on which they became a member so far as the modification: (a) requires the member to take up additional shares.© Author of LawStudyNotes. Dr Bailey was a member of the NSW Medical Defence Union. Was his estate entitled to be indemnified from the Union? The majority found that the contract of insurance was a special contract and therefore changes to the constitution could not have a retrospective effect to the contract. an alteration to the constitution will not alter a special contract unless the parties intended to the contrary (Bailey).

 In Bundaberg. a Trustee in Bankruptcy automatically becomes the registered owner of the shares of the bankrupt. rather it results in a gain to the majority). other considerations are relevant). and (2) the price to be paid for the expropriated shares must be fair (if the price is < market price. it is prima facie unfair – however.blogspot. The transferee must lead evidence showing bad faith or not in best interests (eg in Re Smith and Fawcett the applicant failed as he could not prove this). Note: under s 1072E(6). Fairness  Fairness has two elements: (1) the process must be fair (requires disclosure of all relevant information to the shareholders.  In Gambotto. or (b) agree to become a member of the company after its registration and their name is entered on the register of members.  General principles:  o Where the company’s constitution gives directors a discretion to refuse to register a transfer. Membership of companies How does a person become a member?  Under s 231. a person is a member of a company if they: (a) are a member of the company on its registration [a person becomes a member of a company on registration if the person is specified in the application with their consent as a proposed member of the company (s 120(1))]. Winmardun). as in Sidebottom). the alteration was invalid because it was oppressive. 8/56 . without need for registration. unless the constitution provides otherwise. McHugh J dissented because he thought that the substantial tax savings were sufficient to make it a proper purpose. o The power must be exercised in a reasonable time (16 months is unsatisfactory. and valuation by an independent expert). as the directors would not pay a market price for the shares. in good faith in the best interests of the company (Re Smith and Fawcett).  There must be a register of members (s 169. the court held that an extinction of shares to prevent a loss of valuable and existing long-term tax benefits was a proper purpose (how to reconcile with Gambotto? To protect benefits is acceptable. in Bundaberg. The replaceable rule in s 1072F(3) allows directors to refuse to register a transfer of shares if the shares are not fully paid up or the company has a lien over the shares. they must exercise this power consistent with their fiduciary obligations – that is. the majority held that an expropriation to secure taxation and administration advantages was not a proper purpose (it does not protect the company from harm. Refusal to register a transfer of shares  The proprietary company replaceable rule in s 1072G provides that directors of a proprietary company have the power to refuse to register a transfer of shares for any reason.  However. 2.com o  An expropriation will be for a proper purpose if it prevents the company from suffering significant detriment or harm (eg to remove shareholders who are competing with the company. o The directors do not have to give reasons.© Author of LawStudyNotes. see page Error: Reference source not found). but to gain them is not).

which requires particulars of the non-cash consideration or the contract to be included in the notice of share issue). What is a share?  Per s 1070A(1). lodge a notice of share issue with ASIC (s 254X(1)). Classes of shares  The company can issue shares with different rights (see s 254B(1)).  Consideration paid for share issue o A shareholder must pay the company the issue price of shares. The right to issue shares belongs to the Board. as the company is a separate legal entity. which is consideration for share issue. Shareholders get no automatic return on their investment as there is no right to a dividend. (c) capable of devolution by will or by operation of law.  Shareholders do not own the company’s property. a sole trader sold his property to the newly formed company in exchange for shares.  The power to issue shares includes the power to issue: bonus shares (shares for whose issue no consideration is payable to the company). where partnership assets were transferred to a company in exchange for shares. a share is: (a) personal property. within 28 days. whereas lenders do not have any say (in most circumstances). 9/56 .  A company may determine the terms on which its shares are issued. o Companies may issue shares for a non-cash consideration (eg in Salomon.  Rights of investor to have a say in company business: ordinary shareholders have a right to vote.  Tax advantages: loan and interest repayments are tax deductible. the consideration must not be merely colourable or illusory. and s 254X(1)(e). a company has the power to issue shares in the company.© Author of LawStudyNotes. Re Wragg.com TOPIC 5 Corporate Financing and Dividends Share capital Share capital vs loan capital  Flexibility for company: share capital is less flexible as it cannot be readily paid back (for non-listed companies). o The value of the consideration must represent money’s worth for the allotment of shares (Re White Star Line). and the rights and restrictions attaching to the shares (s 254B(1)). (b) transferable or transmissible as provided by: (i) the company’s constitution.blogspot. Raising share capital  Under s 124(1)(a).  A company must. That is. and partly-paid shares (s 254A(1)). whereas dividends paid to shareholders are not tax deductible. preference shares.

then the holders of existing preference shares are deemed to have had their rights altered (unless authorised by the terms of issue of the existing preference shares or the company’s constitution) (s 246C(6) cf. Common differences Ordinary shares Preference shares No right to vote. the dividend is in arrears) Fixed dividend. then this is action is taken to vary the rights attached to every share (s 246C(1)). There may be only one shareholder of a particular class of shares.© Author of LawStudyNotes. benefits or disabilities or other incidents that attach to the shares so as to make that class distinguishable from any other category of shares in the company (Crumpton). A class of shares is a category of shares that differs sufficiently in respect of the rights. White v Bristol Airplane). If a company has only one class of shares and issues new shares. If a company issues new preference shares ranking equally with existing preference shares. preference shareholders get a right to vote when they have not been paid a dividend – that is. the variation is taken to vary the rights attached to every other share in the class (s 246C(2)). No share of surplus assets.  Company with one class issues a new class with different rights. If shares in a class are divided into further classes and after the division the rights attached to all of the shares are not the same.blogspot. paid first. Right to return of investment after pref shareholders are paid Share of surplus assets after company has paid all debts and investments If company is wound up. if the rights attaching to the new shares are different to the rights attaching to the original shares then the rights of holders of existing shares are varied (s 246C(5)). Right to vote on general business (In many constitutions.  Company issues new preference shares that rank equally with existing preference shares.  Common classes are ordinary shares and preference shares o Preference shareholders are like financiers of the company (lenders). The following actions are not variations at common law (except in the above circumstances): 10/56 . Shares belong to the same class when there is commonality of interest between shareholders of a particular class. Variation of rights of class shareholders  Q1: Is there a variation or cancellation of rights attached to class shares? o o Section 246C sets out actions that are deemed to vary class rights:  Company divides existing shares into further classes with different rights. Priority return of investment. but the board will ensure that pref shareholders are paid dividends before ordinary shareholders. Right to dividend only if determined This still depends on whether the company is profitable. o The rights that attach to preference shares must be set out in the company constitution or approved by special resolution (s 254A(2)). pref shareholders get their investment (the purchase price of shares) paid out first.com  Shares can be divided into classes. Where the rights attached to some of the shares are varied.

8 The test under s 246D(5) is whether the variation would unfairly prejudice the applicant members. the rules governing capital reductions are designed to protect the interests of shareholders and creditors by: (a) addressing the risk of these transactions leading to the company’s insolvency. as members with at least 10% of the votes in the class may apply to the Court to have the variation set aside (s 246D8).  For example. Under s 256A. Maintenance of capital General position  General rule: Limited liability companies must maintain their issued share capital (Trevor v Whitworth). Under s 256B(1). Special resolution of members of the class whose rights are being varied (or the written consent of at least 75% of the members of the class). In addition. [Could be oppressive conduct.com   Dilution of voting power (eg the issue of new shares that dilutes the existing shareholders’ voting power does not vary a legal right [eg they can still vote]. Effectively. - Buy out retiring directors. a company may reduce its share capital if the reduction: (a) is fair and reasonable to the company’s shareholders as a whole. o Consider (EM): 7 If a company has a constitution that sets out the procedure for varying or cancelling rights attached to shares in a class of shares.  Q3: If the constitution does not set out a procedure: Two requirements under s 246B(2): i. it must be followed (s 246B(1)7). s 246C would not apply because G’s shares were not being divided.blogspot.] Q2: Does the constitution specify a procedure? If so. The procedure may be changed only if the procedure itself is complied with.© Author of LawStudyNotes. Permitted capital reductions Share capital reductions   Part 2J permits some reductions. Special resolution of the company. (b) seeking to ensure fairness between the company’s shareholders. AND o “Fair and reasonable” is a composite requirement (EM). The Court held there was no variation of a legal right.  A company may reduce its capital eg by purchasing shares from a shareholder. >90% vote is required. reduced performance). rather it varies the enjoyment of that right [their vote carries less weight] and this is not sufficient. White v Bristol Airplane). The only shareholder with 2 schilling shares. 11/56 . - Buy out retiring shareholders. in Greenhalgh v Arderne Cinemas. and (c) requiring the company to disclose all material information.  A company might want to reduce share capital for various reasons: - Business changes (eg sale of part of business. those rights may be varied or cancelled only in accordance with the procedure. the company resolved to subdivide all 10 schilling shares into 2 schilling shares (giving the holders a five-fold increase in voting power). This is because a reduction in share capital would prejudice the rights of creditors. G. and ii. argued this was a variation to his class rights.

AND s 256C disclosure requirements are satisfied o Disclosure to shareholders (the company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision on how to vote on the resolution. o If equal reduction. o Depends on type of reduction:  Equal reduction: only relates to ordinary shares and applies equally and in proportion to the # of ordinary shares the shareholder holds (s 256B(2)). This requires a class meeting (ie a meeting of just those shareholders) (Winpar Holdings). a reduction in capital that gives payment to ordinary shareholders and nothing to preference shareholders is not fair and reasonable. o If selective reduction.com (b) (c)  The adequacy of the consideration paid to shareholders.  If the company does not comply with the requirements. the company must lodge with ASIC a copy of the notice of the meeting and the information statement. o Disclosure to ASIC (before the above notice. or  Whether the reduction was being used to effect a takeover and avoid the takeover provisions.  Breach?  The company must not make the reduction unless it complies with the above requirements (s 256D(1)). or special resolution of all shareholders (no voting by those who stand to gain from the reduction) (s 256C(2)). o BUT if the reduction involves the cancellation of shares. AND o The company must ensure that it will remain solvent after the reduction. it must be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled: s 256C(2). s 256C(4)). 9 Ordinary resolution is a simple majority vote (MORE THAN 50%). o The reduction must be fair and reasonable “as a whole” – that is. s 256C(5)).blogspot. 12/56 .  Whether the reduction would have the practical effect of depriving some shareholders of their rights (eg by stripping the company of funds that would otherwise be available for distribution to preference shareholders). must be approved by an ordinary resolution9 (s 256C(1)). or  Selective reduction: all other reductions (s 256B(2)).© Author of LawStudyNotes. must be approved by either: unanimous agreement of ordinary shareholders. does not materially prejudice the company’s ability to pay its creditors. is approved by shareholders under section 256C. but it cannot prejudice significant groups of shareholders. so this requirement does not apply. because the company’s constitution gave the preference shareholders a priority to a return of capital on winding up (Fowlers Vacola). o For example. a reduction of capital that involves cancellation of shares for no consideration does not alter the company’s financial position. the validity of the reduction is not affected and the company is not guilty of an offence (s 256D(2)). the reduction need not be fair and reasonable for every individual shareholder. o For example.

10 s 79: A person is involved in a contravention if. Therefore. the assistance is approved by shareholders under section 260B. (s 260B(1)) o (c) The disclosure requirements are the same as in s 256C (ss 260B(4). the contravention. the contravention. there was material prejudice. OR o (b) See above. releasing person from a debt or other obligation already owed to the company. any person who is involved in the contravention is liable for a civil penalty (s 260D(2)). or (b) has induced. Independent Steels provided financial assistance. directly or indirectly.  However. If it lies against the company or its shareholders. or (d) has conspired with others to effect the contravention. whether by threats or promises or otherwise. by act or omission. or (c) has been in any way. or party to. the person: (a) has aided. 13/56 . paid part of the purchase price. knowingly concerned in. or an offence if their involvement is dishonest (s 256D(4)). abetted.(5)). any person who is involved10 in the contravention is liable for a civil penalty (s 256D(3)). counselled or procured the contravention. financial assistance is allowed if approved by:  A special resolution of all shareholders (with no votes being cast by those who stand to gain). and only if.© Author of LawStudyNotes. but it includes lending money. Therefore. taking into account its financial consequences for the interests of the company or its shareholders. or its holding company11 (see s 260A(1)). o For example. the assistance is exempted under section 260C. guaranteeing repayment of a loan. or  Unanimous resolution of all ordinary shareholders. Independent Steels. or o One assesses material prejudice by reference to the transaction with its interlocking elements giving rise to the financial assistance. the company's ability to pay its creditors.blogspot. then there is material prejudice (Adler per Santow J).  The financial assistance must assist a person acquire shares in the company providing the assistance. 11 Example: Independent Steels v Ryan. providing assets as security for a loan.  Breach?  The contravention does not affect the validity of the financial assistance and the company is not guilty of an offence (s 260D(1)). A company wanted to buy shares in Marlon and Marlon’s subsidiary. Financial assistance for purchase of shares  Financial assistance is not defined in the Act. a company may financially assist a person to acquire shares in the company (or a holding company of the company) only if: (a) giving the assistance does not materially prejudice: (i) (ii) the interests of the company or its shareholders. in Adler.com  However. or an offence if their involvement is dishonest (s 260D(3)).  Under s 260A(1). the financial assistance was in the form of an unsecured loan without any documentation and it was likely that only a small amount of the $10 million could be recovered. and acquiring assets at an inflated price. OR o Even if there is material prejudice. This is in order to determine where the net balance of financial advantage lies from the giving of the financial assistance.

a company must not pay a dividend unless: (a) Assets exceed liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend.  A debenture is a loan arrangement. Recommended by the board and declared by the members: The declaration by the members creates an enforceable debt by the company in favour of the shareholders (s 254V(2)).blogspot. (f) grant a circulating security interest over the company’s property. 14/56 .  Security interest can be either: o Non-circulating (NCSI): where the charge is taken over fixed. Any time before this. the directors may revoke the decision to pay the dividend (s 254V(1)). (e) grant a security interest in uncalled capital.  When can a dividend be paid?  o A company limited by guarantee must not pay a dividend to its members (s 254SA). The company cannot exercise any rights over that asset. and (c) The payment of the dividend does not materially prejudice the company’s ability to pay its creditors (eg if the company would become insolvent as a result of the payment). or o Circulating (CSI): where the lender takes security over a pool of assets owned by the company. A debt is only created when the time for payment of the dividend arrives. The chose in action may (but need not) include a security interest over property of the body to secure repayment of the money.© Author of LawStudyNotes. Determined by the board: The determining of a dividend does not create a debt. This affects when a dividend payment becomes a debt due to members (in turn affecting whether the directors may be liable for insolvent trading by paying a dividend). 2. or 2. o Under s 254T(1). Loan capital and debentures  Under s 124(1). How is a dividend paid? o o The company constitution may state that a dividend is: 1. If: 1. Determined by the board (eg RR s 254U). a company has the power to: (b) issue debentures. It is defined in s 9 as a chose in action that includes an undertaking by the company to repay as a debt money deposited with or lent to the company. Recommended by the board and declared by the members.com Dividends  Dividends are payments to shareholders and represent a return on the shareholder’s investment. (b) The payment of the dividend is fair and reasonable to the shareholders as a whole. valuable asset.

even if exceptional in nature (Reynolds Bros).  If a receiver is appointed or the loan agreement is breached (eg asset not dealt with in the ordinary course of ordinary business).blogspot.  Ordinary course of business?  The transactions must be made for the purpose of carrying on the business as a going concern. therefore the assets cannot be dealt with freely. 15/56 . but only in the ordinary course of ordinary business.© Author of LawStudyNotes.com  The company can use these assets without the prior consent of the lender. the charge agreement crystallises and the CSI turns into a NCSI.

with the other directors’ approval.com TOPIC 6 Directors Directors   Who are directors? Directors include: o Persons appointed to the position of director (s 9(a)(i)). Requirements of constitution: o Other requirements can be specified by company constitution.© Author of LawStudyNotes. Director must be at least 18 (s 201B(1)). Appointment   Requirements of the Act: 1. Types of directors: o Executive director (managing director): officer and employee of the company. in writing.(2)). RR s 198A: the business of a company is to be managed by or under the direction of the directors. 16/56 .  For example. 2. o For example. - To ensure there are systems in place to monitor compliance with business strategies and legal requirements. RR s 201G: a company may appoint a person as a director by resolution passed in general meeting. The appointing director can terminate the alternate’s appointment at any time. o Nominee director: represents a major creditor or shareholder on the board.blogspot. o Non-executive director: officer but not employee. There is a minimum number of directors (1 for a proprietary company. 3 for a public company. - To oversee the implementation of business strategies to achieve those goals.(2)). and 12 Eg RR s 201K: a director may appoint an alternate for a specified period. but who act in the position of a director (de facto director) or the other directors are accustomed to act in accordance with that person’s instructions or wishes (shadow director) (s 9(b)). Person must give the company a signed consent before being appointed (s 201D). o See page Error: Reference source not found for the provision. 2 for a public company. A minimum number of the directors must ordinarily reside in Australia (1 for a proprietary company.  This includes: - To set business goals. Any power exercised by the alternate is just as effective as if exercised by the director. and o Persons not appointed as directors. Functions  Functions include: o To manage the business of the company in the interests of its shareholders. s 201A(1). and 4. 3. o Alternate director: temporary appointee12 (eg if another director has taken a holiday). s 201A(1).

For public (Ltd) company: o s 203D (not a RR – must be complied with): Director may be removed by ordinary resolution. the directors are not agents of the members (Automatic Self-Cleansing Filter Co – hence.  A serious offence is one either in contravention of the Act and punishable by imprisonment for >12 months. then that power cannot be controlled by the members. - Appoint a Managing Director/CEO.  The director must receive a copy of the notice as soon as practicable (s 203D(3)). Disqualification  Directors will be disqualified if: o Convicted of a serious offence (s 206B(1)).© Author of LawStudyNotes.com To monitor the company’s financial position. where the constitution gives the power to manage the company to the directors. or distributed to members attending the meeting and read out at meeting (s 203D(5)) – unless the statement is >1. Resignation  RR s 203A: A director of a company may resign as a director of the company by giving a written notice of resignation to the company at its registered office. C. Removal by members  For Pty Ltd company: o  RR s 203C(a): Directors may be removed by ordinary resolution. Determine dividends. o However:  Notice of intention to move the resolution must be given to the company at least 2 months before the meeting (s 203D(2)). and Refuse to register a share transfer (Pty Ltd company). B. the members could not resolve to direct the directors to sell the company assets). o The members can also appoint the directors (RR s 201G). o Each organ of the company is separate and sovereign (John Shaw & Sons). involves dishonesty and punishable by imprisonment for ≥3 months (ss 17/56 . Removal A. o o o o o  Division of power between directors and members o The company belongs to the members (and directors do not have to be shareholders). o However. in particular to be aware of the company’s solvency. Issue new shares (to raise capital). The written statement must be sent to all members.blogspot. That is.  The director can put their case to members by giving a written statement or speaking at the meeting (s 203D(4)). Call and run board and company meetings.000 words or defamatory (s 203D(6)). despite anything in the constitution or employment contract (s 203D(1)).

and - Previous contraventions.  Managing13 a company whilst disqualified is an offence (s 206A(1)).blogspot. 18/56 . business or property of any corporation. or contravenes a law of a foreign country and punishable by imprisonment for >12 months (s 206B(1)(c)). or (c) they communicate instructions or wishes to the directors of the corporation: (i) knowing that the directors are accustomed to act in accordance with their instructions or wishes.  The disqualification is for 5 years – starting on the day they are convicted (if no imprisonment) or the day they are released (if imprisonment) (s 206B(2)). Santow J thought that the longest periods should apply where: - Large financial losses.com 206B(1)(b)(i). s 206C(2)). o The company may also pay the directors’ travelling and other expenses that they properly incur in attending directors’ meetings. - High likelihood that the defendant will continue to engage in similar conduct. Remuneration   Proprietary companies: o Remuneration is determined by resolution (RR s 202A(1)). ie to punish the director (Rich per McHugh J). o Contravened a civil penalty provision of the Act (s 206C).  The purpose of the provision is both protective. and punitive. Listed public companies: o The directors’ report for a financial year must also include a remuneration report.  For example. o Mismanaged corporations in the past (ss 206D.(ii)).© Author of LawStudyNotes.(4)). or fails to pay personal creditors (ss 206B(3). Mr Adler was disqualified for 20 years. - Disregard for the law. 13 Section 206A(1) A person who is disqualified from managing corporations under this Part commits an offence if: (a) they make. a company must disclose the remuneration paid to each director if directed to disclose the information by ≥5% of the votes of members at a general meeting (s 202B(1)(a)).  Under s 206C(1). - Activities were undertaken in areas where there was potential to cause great harm. o Is disqualified by ASIC (s 206F). o Generally. However. the remuneration of executive directors is set by contract. ie to protect individuals who deal with companies (Adler per Santow J). 206E). on application by ASIC the Court may disqualify a person from managing corporations for an appropriate period if the person has breached a civil penalty provision (eg directors’ duties) and the Court is satisfied that the disqualification is justified (looking at their conduct in relation to the management. in Adler. stating the remuneration policy of the board for key management personnel (s 300A). or (ii) intending that the directors will act in accordance with those instructions or wishes. or (b) they exercise the capacity to affect significantly the corporation’s financial standing. - Dishonesty and an intention to defraud. decisions that affect the business of the corporation. attending general meetings or in connection with company business (RR s 202A(2)). or participate in making. - Lack of contrition or remorse. o An undischarged bankrupt.  The court may grant permission to disqualified persons to manage a company (s 206G).

If the resolution receives a “no” vote of ≥25%. a meeting to elect the directors must be held within 90 days [see pages 328-9 of book].© Author of LawStudyNotes. two years in a row. then a resolution is put to the shareholders to determine whether the directors should stand for re-election. That is.com o There is a two-strikes and re-election process. If passed with ≥50% of the votes cast. 19/56 .blogspot. shareholders can vote on a non-binding resolution as to whether they adopt the remuneration report.

o (a) Company secretary. with the knowledge and experience of the Defendant. of the business of the corporation. or o A person who: (b)(i) Makes.© Author of LawStudyNotes. page 16). Corporations Act Who are subject to the duties?  Directors (see s 9. o (c) Receivers. and had the same responsibilities as. decisions that affect the whole. The statutory duty does not override the common law (s 185). or participates in making. and occupied the office held by. o Directors are under a continuing obligation to keep informed about the activities of the corporation (Daniels at 503). Section 180 – care and diligence  The substance of the common law and statutory duties is the same (Vines v ASIC). the director or officer.  The duty applies to directors (under the common law tort of negligence and the equitable duty of care) and to senior employees (as an express or implied term of their contract of employment). or (iii) Is a shadow director.14  ASK: What would an ordinary person.  Test: Section 180(1) provides that a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were in the position of that director or officer. the reasonable person: were a director or officer of a corporation in the corporation’s circumstances.com TOPIC 7 Duties of directors 1: Duty of care. or (ii) Has the capacity to affect significantly the corporation’s financial standing. 20/56 . or a substantial part.blogspot. o (d) Administrators. o (f) Liquidators. skill and diligence About competent management of the company Common law – duty of care  Directors and senior employees are under a duty to exercise a reasonable degree of care and diligence. be expected to have done in the circumstances if he or she was acting on their own behalf? (Adler)  Duties of the directors 14 (a) (b) o Directors must become familiar with the company’s business (Daniels v Anderson at 500). That is.  Officers: defined in s 9 to mean: o (a) Directors.

regardless of their background. Therefore. o Directors must ensure that the board has available means to audit the management of the company so that it can satisfy itself that the company is being properly run (Daniels at 500). and has the primary responsibility of selecting matters and documents to be brought to the board’s attention (Rich at [61]). They should bring an informed and independent judgment to bear on the various matters that come to the board for decision (CBA v Friedrich at 117).  Because executive directors are full-time employees of the company and have managerial responsibilities.  In ASIC v Hellicar.  This is because the chairman of listed companies settles the agenda of the meetings of the board. Daniels. The courts have rejected attempts by uneducated or inexperienced directors to lower the standard. o Directors must have a minimum degree of financial literacy (so that they can read and understand financial statements) (ASIC v Healey per Middleton J at [124]). Although the preparation can be delegated. o Directors are expected to attend all board meetings unless exceptional circumstances. 21/56 .  For example. they were assured that they would not have to do anything (DCT v Clark).com  o Directors must maintain familiarity with the financial status of the corporation by a regular review of financial statements (Daniels at 504). o Directors must institute inquiries. Directors occupying different positions o A relevant factor in assessing the degree of care and diligence which a reasonable person would exercise is the office held by the director or officer (s 180(1)(b)).  CEO and Managing Director “One might correspondingly expect that the standard for company chairmen has also been raised” (at [71]). and raise issues with the board (Daniels at 504).blogspot. even if. Dunn failed to ensure that the lending scheme complied with accepted practice. o Board chairman o o 15  It is arguable that the chairman of directors has additional responsibilities that are more than just procedural (Rich per Austin J at [70]15). They must also actually read and consider the company’s financial statements (CBA v Friedrich per Tadgell J at 126). they are subject to higher standards than non-executive directors. Non-executive directors  Reasonable person is attributed the particular skills and experience of the non-executive director (Daniels at 502). the seven non-executive directors of JHIL’s board failed to take reasonable care when they approved the ASX announcement that the foundation for compensation was fully funded. the chairman may have to take reasonable steps to ensure that the board is properly informed and takes appropriate action. a non-executive director who comes to the board with extensive lending experience must give the company the benefit of that experience (in Gold Ribbon. such as illness or they are not in the state. when appointed. failed to ensure that the company had appropriate procedures for making due diligence inquiries. the obligation to read them cannot (ASIC v Healey at [124]). The directors ought to have known that the statement was misleading and they were well aware of the damage that this false statement would cause.  But directors are subject to minimum standards. and failed to monitor the administration of the scheme).© Author of LawStudyNotes. Executive directors and senior employees  The skills and experience of the director are irrelevant – the director is held to the objective standard of a person in their position (Vines).

(c) Inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate. AND the reliance was made: 16 Note: Vines’ comment to the board that “Management remained confident of the profit forecast” was not a breach. the MD withdrew from making a decision on a transaction because of a conflict of interest. o A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1). provided: (a) a director relies on information. CFO  They must be proactive and take steps to ensure that the financial information is up to date and accurate. This includes planning. in respect of the judgment if they: o i. because it was a statement a reasonable person could have made given it reflected the majority opinion. It does not include monitoring the affairs of the company.© Author of LawStudyNotes. 22/56 . iii. or a committee of directors on which the director did not serve in relation to matters within the committee’s authority. another director or officer in relation to matters within the director’s or officer’s authority. DEFENCE 1: Business judgment rule o Section 180(2) provides a defence to s 180(1) and the common law duties.blogspot. a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence.com   They are under a continuing obligation to supervise management and seek satisfactory explanations regarding any deficiencies (Daniels).  Two requirements: i. but he was in breach because he did not alert the board to all information he knew about the transaction).  They must fully inform the board of all relevant facts within their knowledge (PBS v Wheeler – in this case. or professional or expert advice. The action must be in respect of a matter relevant to the company’s business operations. (a) Make it in good faith for a proper purpose. and iv. DEFENCE 2: Relying on information and advice from others  Under s 189. because there is no action in respect of business operations (Rich). (b) Do not have a material personal interest in the subject matter of the judgment. budgeting and forecasting (Rich). Adler). conscious decision to take or not take action (thus failure to do something is not sufficient. and their equivalent duties at common law and in equity. the director’s reliance on the information or advice is prima facie reasonable. and any assumptions or deficiencies are communicated to the board (Vines16). Must be a positive. The belief is rational unless it is one that no reasonable person in their position would hold (s 180(2)). Business judgment?  Onus on party evoking the rule to establish (Adler). given or prepared by: (i) (ii) (iii) (iv) (b) an employee whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned.  Defined in s 180(3) to mean any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. (d) Rationally believe that the judgment is in the company’s best interests. and ii. ii.

 The exercise of the power by the delegate is as effective as if the director had exercised it (s 198D(3)).  HOWEVER. . .The delegated function is such that “it may properly be left to such officers”. or should have been. having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation. they retain the responsibility to read.The extent to which the director is. o In ASIC v Macdonald. In assessing reasonableness.blogspot. Delegation of board powers  Under s 198D(1).com (i) (ii) in good faith. and 17 Sections 179-198F.  This applies to Part 2D. understand and question the contents.The steps taken by the director to ascertain relevant information about the delegate.  The delegate must exercise the powers in accordance with any directions of the director (s 198D(2)). despite the statutory provision. unless the company’s constitution provides otherwise.117 proceedings and equivalent general law proceedings (s 189(c)). and (b) o (i) On reasonable grounds and (ii) in good faith and (iii) after making proper inquiry if needed.  What if the delegate uses power negligently? o The director is prima facie responsible (s 190(1)). the directors of a company may delegate any of their powers to: (a) a committee of directors. (c) an employee of the company. put on inquiry. 23/56 . o BUT s 190(2) provides that the director is not responsible if they believed: (a) On reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on directors by this Act and the company’s constitution (if any).  Person alleging that reliance was unreasonable (eg ASIC) has the burden of proof. o For example. and after making an independent assessment of the information or advice. Gzell J found that s 189 did not apply because the non-exec directors were not entitled to rely on the exec directors because this was a key statement in relation to a highly significant restructure of the group.© Author of LawStudyNotes. or (d) any other person. . that the delegate was reliable and competent in relation to the power delegated.The relationship between the director and delegate (eg good friends vs virtually unknown). the court will consider (Adler per Santow J at [372]): . (b) a director. The delegation must be recorded in the company’s minute book. it was held that while directors are entitled to rely on others for preparation of financial statements. the court may still impose a higher standard. in Healey.

or o Disqualification (under s 206C.com . 24/56 .000 (under s 1317G). see page 18).blogspot. o Compensation to the corporation (under s 1317H). Consequences of breach  Section 180(1) is a civil penalty provision under s 1317E (but not an offence under s 184).The risk involved in the transaction.© Author of LawStudyNotes.  The Court may order: o A pecuniary penalty of up to $200.

and damages are payable to the company. agreed to sell his shares to the other director. Small family companies o A fiduciary relationship can arise in equity when a person in whom particular trust. however. Otherwise a company could be run by a “lunatic” (Hutton).19 o Director must consider the interests of present and future shareholders and the company as a commercial entity (Darvall v North Sydney per Hodgson J). because B possessed special knowledge about the third party offer (which G did not have. 18 If a business decision is made in good faith and for proper purposes. the court is assessing whether the director actually held that assertion. B. then the duty is breached (Adler). The court is not questioning the commercial justification for the decision – rather. just the legality. 18 o If no rational director would have considered the actions to be in the best interests of the company. and  In Brunninghausen v Glavanics. the MD arranged for the company to be taken over by a company controlled by him.com 2: Acting bona fide in the company’s interests and for proper purposes company’s interests About protecting the Common law Duty 1: Acting bona fide in the company’s interests (see s 181(1)(a))   Test: o Director must act honestly for the benefit of the company and not for some ulterior purpose. they must disclose this to the shareholders and not use it to the disadvantage of the shareholders:  In Coleman.blogspot. because the directors had inside knowledge of the true value of the shares. the Court will look for objective evidence of the director’s assertion (Bell Group per Owen J). The MD and the Chairman recommended that the shareholders accept a price per share that was a substantial undervalue. 25/56 . B then sold all the shares to a third party for a much higher price. Corporate groups o See page 2.© Author of LawStudyNotes. That is. because he did not participate in the management of the company). it will not be reviewed by the courts (Harlowe’s Nominees). a director and minority shareholder. What does “in the company’s interests” mean? o The duty is owed to the company (being the collective body of shareholders) and not to individual members (Percival v Wright). and they used this to the detriment of the shareholders. confidence and dependence has been reposed exploits this to achieve an improper benefit (Coleman v Myers). o For example. G. The Court held that B owed G a fiduciary duty. where a director possesses special knowledge. the courts do not assess the merits of a decision. o This is subjective. 19 Thus it is the company that brings proceedings for breach of duty. Exceptions to Percival: When are duties owed to individual shareholders?  Directors must act in the best interests of individual shareholders or groups of shareholders in some circumstances: 1. A fiduciary relationship was found to exist. 2.

However. 20 A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if: (a) the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company. At this time. 26/56 . o A payment to current employees may be in the interests of the company. o It is not necessary for the director to independently consider the interests of the company on whose board he sits. Held: Breach. because a reasonable person could not have believed that the lease transaction was for the benefit of the company. and (c) the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director's act. cf. where it will benefit the company on whose board they sit (Equiticorp). Creditors o Creditors’ interests must be taken into account when the comp is insolvent or near insolvency (Kinsela). and not in the interests of their nominator. o Can shareholders cure a breach? NO – since the duty is owed to the creditors. o For example. because industrial relations may be improved.com o A director will not breach their duty if they act for the benefit of the corporate group. the less risk the directors can take with the assets (Kinsela). Held: Breach. the shareholders cannot cure a breach by majority vote (eg in Kinsela. Nominee directors  Nominee director: represents the interests of a major creditor or shareholder on the board. 3. the shareholder value is almost nil and so the focus of the directors must shift. dissent of Kirby P).  Prima facie they must they act bona fide and in the company’s interests. Employees o Directors cannot favour the interests of employees at the expense of the shareholders.  See s 187 for a nominee director from the holding company on the board of a subsidiary. o *BUT this obligation does not give creditors an independent right to sue for breach (Spies v R). and (b) the director acts in good faith in the best interests of the holding company. because it does not serve the interests of the company). and ii.© Author of LawStudyNotes. DN closed down one branch of the company and gave the surplus from the sale to the dismissed employees. The benefit of the company as a whole. gratuitous payments cannot be made to ex-employees (in Parke v Daily News. on less than commercial terms. The purposes for which the power was given. the company constitution may provide otherwise. It is up to the liquidator to ensure fair proportional distribution to creditors. having regard to the interests of creditors – lease set aside). 4. 20 Duty 2: Acting for proper purposes (see s 181(1)(b))  Test: Directors must use their powers for: i. the directors caused the company nearing insolvency to lease its premises to the directors. o How close to insolvency? The greater the degree of financial instability. provided the decision benefits the company as well as the corporate group (Equiticorp.blogspot.

in Howard Smith. Improper purposes include: o To dilute the voting power of another shareholder (eg in Whitehouse. therefore primary purpose was to block takeover. The primary purpose of share issue is to raise capital). the directors decided to sell land. directors are not prohibited from acting in any way that benefits their interests as shareholders. wanted to make a hostile takeover bid for the minority (45%).  However. issued shares to his sons to dilute the voting power of his ex-wife and this was an impermissible purpose. See also PAGE 62 FOR REMEDY (in addition to members’ remedies). o To create a new majority shareholder. Is the actual purpose in (2) within the legal purposes in (1)? More than one purpose? If the Directors act for more than one purpose. there was no pressing need for the tankers and the need had been alleviated by the company raising loan capital. apply the ‘but for’ test (Whitehouse v Carlton Hotel): o “If not for the improper purpose. Darvall per Mahoney JA). the Miller’s board argued that the issue of shares to HS was primarily motivated by the fact that their company was in urgent need of funds to finance tankers (and the share issue indirectly blocked a takeover bid). or - As consideration for the purchase of assets.© Author of LawStudyNotes. for what purposes was the power actually used (subjective)? 3. o BUT not all transactions that defeat a takeover bid will be improper (for example. the father. For example. This was improper). and a term of the agreement was that another party would make a higher takeover bid of the company. The Court examined how real and pressing the proper purpose was – here. it will not be improper. who was the governing director with the sole power to issue shares. ask:  1. See but for test. what are the purposes for which the power may be used (objective)? 2.blogspot. would the directors still have acted that way?” If no. where the transaction both defeats the takeover offer and is in the best interests of the company. Ampol and Bulkships. the two majority shareholders of Miller. 27/56 . o The power to issue shares   Directors can issue shares for the following proper purposes: - To raise capital for the company. then breach of duty. agreed to make its own higher takeover bid. As a matter of law.  In determining proper purpose.com Proper purpose  A director who exercises their powers to secure some private advantage is acting for an improper purpose because such a purpose is outside the purpose of benefiting the company (Mills v Mills). - As part of an employee share scheme. As a matter of fact. to block takeover (eg in Howard Smith. To make this bid successful. - To foster business connections. A company friendly to Miller. This was not improper). HS. In this case. the Miller’s board issued sufficient shares to HS to reduce A and B’s majority to a minority.

© Author of LawStudyNotes.  Additional examples: o In Adler. because it purported to fetter their discretion.  The relevant time to judge the exercise of discretion is when the agreement is entered into. the directors entered into a contract whereby they agreed to vote in favour of a particular course of action in the future. and (b) for a proper purpose. o In PBS v Wheeler. It is a breach if the director binds himself in advance to vote in particular ways. Corporations Act – s 181 (1) A director or other officer must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation. 28/56 . if the director is reckless or intentionally dishonest – higher BOP). Mr Adler breached s 181 by using the loan from HIHC (where Mr A was a director) to purchase bad investments from his own company. The directors then sought to have the contract declared void. the MD was not in breach because he excused himself from the transaction because of the conflict of interest.com Duty 3: Not to fetter discretions  Directors must exercise an independent judgment when making decisions and not promise to act in accordance with the wishes of others.  Section 181(1) is a civil penalty provision under s 1317E (and is an offence under s 184. because at the time the contract was entered into the directors exercised their discretion). rather than when the terms of the agreement are to be performed (eg in Thorby v Goldberg.blogspot. Held: No breach.

 It must be given by the director (Camelot). Wheeler). or appropriate corporate opportunities. where the director has power and influence over the board and should use it to prevent a risky transaction going ahead. Disclosure of personal interests o o o Notice is required  Under s 191(1). 29/56 .  Material personal interest means a substantial interest. the director:  Discloses the conflict (R v Byrnes). Profits rule. A director must not make an undisclosed personal profit from his position.blogspot. holding more than one directorship is not a breach. Adler. and ii. in McGellin. No confidential information is divulged. and  May need to take positive steps to protect the company (for example.com 3: Fiduciary duties Common law – fiduciary duties  Directors and senior employees are fiduciaries. or where the director has special knowledge about the transaction. The test is whether a reasonable person would believe that the director might be influenced by the interest (McGellin). Requirements of notice  The notice must give details of the nature and extent of the interest and how it relates to the affairs of the company (s 191(3)(a)).© Author of LawStudyNotes.  Refrains from negotiating the contract and voting (Fitzsimmons v R). o 2. Conflicts rule. For example. and as soon as practicable after the director becomes aware of their interest in the matter (s 191(3)(b)).  The details must be recorded in the minutes of the meeting (s 191(3) and Camelot). and A director must not enter into engagements in which he has or can have a personal interest conflicting with the interests of the company (Aberdeen Railway). The disclosure must enable the board to understand the scope of the benefit and potential profit that the director will receive (Camelot per Santow J). Standing notice can be given  Notice is not required under s 191(1) if standing notice has been given (s 191(2)(d)). o Provided: i. a director was regarded as having a material personal interest in board discussions about whether the company should issue shares to him. If a transaction involves both companies. Mere suggestions are insufficient (Camelot).  This imposes a duty of absolute loyalty on the fiduciary: 1. a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest (there are exceptions – see page Error: Reference source not found). o Conflicts rule   Multiple directorships o Prima facie.

a director of a company who has an interest in a matter may give the other directors standing notice of the nature and extent of the interest in the matter.  The notice must be given to all directors at a meeting. receiving a personal incentive payment by the buyer for selling a part of the business (Furs v Tomkies). For example. and (b) states that those directors are satisfied that the interest should not disqualify the director from voting or being present. or there are not enough directors to form a quorum (4).  Fiduciary duties survive resignation of the fiduciary (Canadian Aero Service). In this case. or to all directors individually (s 192(2)).com o o  Under s 192(1). diversion of a contract from the company to the director is a breach (Cook v Deeks).  Does not need to be a material personal interest. ASIC makes a declaration or order (3).  It is irrelevant that the directors act in good faith and in the interests of the company (Regal (Hastings)).  Permitting the director to benefit o Profit can be permitted or ratified by the shareholders by ordinary resolution. unless the other directors pass a resolution to the contrary (2) 21. The notice may be given at any time and whether or not the matter relates to the affairs of the company at the time the notice is given.  Contravention does not affect the validity of any act. and retain benefits from. agreement. It must be recorded in the minutes of the meeting (s 192(4)). This was a breach. 192(7)). For example. Consequences of notice  Can the conflicted director vote on. o Permission of the board? 21 s 195(2): The director may be present and vote if directors who do not have a material personal interest in the matter have passed a resolution that: (a) identifies the director.  Breach of s 195(1) = 5 penalty units (Sch 3). That is. resolution or other thing (ss 191(4).blogspot. Profits rule  Prohibited activities o A director may not misappropriate business opportunities or confidential information belonging to the company. 30/56 . instrument. because the directors’ acted on knowledge that they acquired as directors of the company and they made profit without the consent of the company. transaction. the transaction if the directors go ahead with it?  Pty Ltd company = depends on the constitution.  Public company = the director must not vote or be present while the matter is being considered (s 195(1)). or both (Sch 3). Consequences of breach  Civil penalty offence. the nature and extent of the director's interest in the matter and its relation to the affairs of the company. These shares were later sold at a profit.  Further notice must be given if a new director is appointed (s 192(5)) or the interest materially changes (s 192(6)). o A director may not profit personally from transacting the company’s business. the directors bought shares in a subsidiary so it could fund the lease of cinemas. a director or senior employee cannot resign and then exploit a corporate opportunity – if the resignation was for the purpose of taking up that opportunity.  Breach of s 191(1) = 10 penalty units or imprisonment for 3 months.© Author of LawStudyNotes. BUT s 194 (RR) says that the director may vote and retain any personal benefits.

partnership. unincorporated body. - Buying or selling an asset. o Includes any financial advantage. - Parents and children of above (s 228(3)). because he had been approached in his capacity as a member of the public – he had no special information by virtue of his position as MD. 23 Entity is a body corporate. and spouses (inc de facto partners. trust. 22 Control is the capacity of a person or entity to determine the outcome of decisions about a second entity’s financial and operating policies ( s 50AA). o Examples in s 229(3)(a)-(f) include: - Giving or providing finance or property. - An entity controlled by someone above (s 228(4)). the company must obtain the majority vote of fully informed. The court held there was no breach of duty. Related party: o The following are related parties of the public company: - A controlling22 entity23 (s 228(1)). the company rejected to buy a mining claim. he was approached independently. or trustee/s of the trust (s 9).  However.  Such approval may also be oppressive under s 232. The MD. Cropper. all shareholders were represented on the board and therefore board’s consent was sufficient). 31/56 . the breaching directors were also majority shareholders. They passed a resolution to forgive the breach. for a public company (or an entity that the public company controls) to give a financial benefit to a related party of the public company. in Cook v Deeks. - Issuing securities or granting an option. s 9) (s 228(2)). - Directors. This resolution was found to be ineffective to validate the transactions. - Supplying or receiving services.com  Generally insufficient (eg Regal (Hastings)). individual. o  For example. - Leasing an asset. disinterested shareholders (by ordinary resolution). and - Taking up or releasing an obligation. o If there is no shareholder approval… o The director may still be able to take up the opportunity (eg in Peso Silver Mines.© Author of LawStudyNotes. and the company did not want to take up the offer). Consider – Related party benefit?  Only applies to public companies  Under Chapter 2E and s 208(1). it may be enough if board represents all SH interests (in Queensland Mines. directors of the controlling entity.blogspot. later purchased the claims. *Approval must not be a fraud on the minority. because it was a fraud on the minority. whether or not it involves payment of money.  Financial benefit:  o Is interpreted broadly (s 229(1)(a)).

Misuse of information – profits rule  Under s 183(1). a majority vote is required. See page 24 for remedies.000 (s 213).© Author of LawStudyNotes. o  - Consequences for breach o A contravention of s 208 does not affect the validity of any contract or transaction (s 209(1)). secretary. Corporations Act Misuse of position – conflicts and profits rule  Under s 182(1). a person who obtains information because they are. or the terms are less favourable to the related party than arm’s length terms (s 210). - Reasonable remuneration. OR (b) Cause detriment to the corporation.com  Anyone who satisfied above within the previous 6 months (s 228(5)) or will satisfy above in the future (if the person above believes or has reasonable grounds to believe this is likely. If an exception applies. other officer or employee must not improperly use their position to: (a) Gain an advantage for themselves or someone else. s 228(7)). or have been. a person who is involved in a contravention of s 208 is liable for a civil penalty (s 209(2) – see footnote Error: Reference source not found for definition of involved in). a director or other officer or employee must not improperly use the information to: (a) Gain an advantage for themselves or someone else. - Financial benefits given to members of the company. - Amounts of money given to a director or spouse of less than $5. OR (b) Cause detriment to the corporation. *This duty continues after the person stops being an officer or employee (Note 1 of s 183(1)). 32/56 . to an officer or employee (s 211). - Financial benefits to or by a closely held subsidiary (s 214).  There is no requirement for proof of gain or detriment – it is enough that this was the purpose (Chew v R). the directors control whether or not to give the financial benefit – otherwise. a director. might be an offence under s 184 if dishonest. without unfairly discriminating between members (s 215). o However. Exceptions Shareholder approval is not required if: o - The financial benefit is on terms that would be reasonable if the parties were dealing at arm’s length.  Objective test (R v Byrnes and Adler). or reimbursement of expenses.blogspot. Also. A person commits an offence if the involvement is dishonest (s 209(3)). and - An entity who acts in concert with a related party of the public company on the understanding that the related party will receive a financial benefit if the public company gives the entity a financial benefit (ie PCERP. A person who is involved in a contravention is liable for a civil penalty (s 182(2)). s 228(6)).

 Example: in ASIC v Vizard.© Author of LawStudyNotes. Mr Vizard was held to have breached his duty by making three share transactions based on confidential information he gained as a non-executive director of Telstra.blogspot.  The information does not need to be confidential. might be an offence under s 184 if dishonest. 33/56 . Also.com A person who is involved in a contravention is liable for a civil penalty (s 183(2)).

Incurred?  A debt is incurred when a company so acts to expose itself contractually to an obligation to make a future payment of a sum of money as a debt (Hawkins v Bank of China). eg a guarantee). when the assistance is provided 34/56 .blogspot. when the dividend is declared 2 making a reduction of share capital to which Division 1 of Part 2J.© Author of LawStudyNotes. eg statutory payments). if there is no agreement.1 applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration) when the reduction takes effect 3 buying back shares (even if the consideration is not a sum certain in money) when the buy-back agreement is entered into 4 redeeming redeemable preference shares that are redeemable at its option when the company exercises the option 5 issuing redeemable preference shares that are redeemable otherwise than at its option when the shares are issued 6 financially assisting a person to acquire shares (or units of shares) in itself or a holding company when the agreement to provide the assistance is entered into OR. if the company has a constitution that provides for the declaration of dividends.  Section 588G(1A) deems when a company incurs a debt: When debts are incurred Action of company When debt is incurred 1 paying a dividend when the dividend is paid OR. a breach occurs if: s 588G(1) (a) A person is a director at the time when the company incurs a debt. o o Debt?  A debt is an obligation by one person to pay a sum of money to another (Powell v Fryer).com Insolvent trading by directors The duty  Under ss 588G(1) and (2).  Includes a contingent debt (Hawkins v Bank of China.  Includes non-voluntary debts (Powell v Fryer.

o It is a defence if it is proved that.blogspot. Inability to raise further equity capital. Dishonoured cheques.com (b) The company is insolvent at that time. and Inability to produce timely and accurate financial information. A company is not insolvent simply because it is suffering a temporary lack of liquidity. or otherwise demanding special payments before supply. and o A company is insolvent if it is unable to pay all its debts. utilising the resources available to the company (Powell v Fryer per Olsson J). More liabilities than assets. o The expectation must be that the company can pay its debts at the present time (it is not sufficient if the expectation is that the company can trade out of its difficulty. possibility or optimism. Defences   General points: o Director has burden of proof on BOP. that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. Impending court action for debts. or would so become insolvent. or becomes insolvent by incurring that debt. and did expect. in all the circumstances of that company (ASIC v Plymin per Mandie J). o The conclusion of insolvency must be derived from a proper consideration of the company’s financial position. the person had reasonable grounds to expect.© Author of LawStudyNotes. Special arrangements with selected creditors. Issuing of post-dated cheques. It implies a measure of confidence that the company is solvent (MFS v Miller). o Satisfied where a reasonably competent and diligent director would have grounds to suspect insolvency. o Director can rely on more than one defence. at the time when the debt was incurred. there are reasonable grounds for suspecting that the company is insolvent. s 588H(2): Expectation of solvency. in its entirety. No access to alternative finance. based on commercial reality. Creditors unpaid outside trading terms. 35/56 . (c) At that time. o Common indicators of insolvency include (ASIC v Plymin per Mandie J): - Continuing losses. as and when they become due and payable (s 95A). Hall v Poolman). Insolvency is the inability of the company to meet debts. o The defences are designed to assist directors who have otherwise acted diligently. It must be certain or probable (Hall v Poolman). Suppliers requiring COD. Overdue taxes. There are four defences: 1. o Expect means a higher degree of certainty than mere hope. o Suspect means more than mere speculation. AND the director failed to prevent the company from incurring the debt (s 588G(2)). but less than actual belief or expectation – it is a positive feeling of apprehension or mistrust (Queensland Bacon). o Covers inactivity (ASIC v Plymin). Inability to borrow further funds from present bank.

it is a defence if it is proved that. o Requires strong and unequivocal action. s 588H(5): Reasonable steps to prevent the debt. that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. (a) Had reasonable grounds to believe. s 588H(4): Non-participation in management. (b) When that action was taken. o See the obligations to monitor the financial status of the company. that a competent and reliable person was providing them adequate information. s 588H(3): Reliance on another. o s 588H(5): It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt.  A director commits an offence if the failure to prevent the company incurring the debt was dishonest (s 588G(3)).  The court may also make a compensation order against the director: 36/56 . if a director cannot prevent the debt being incurred. (b) Expected. it is not sufficient to sit back and say that another director was responsible for the finances and not ask any questions of that director. o Under s 588H(6). 3. per Palmer J in Hall v Poolman. and did believe. 2. it was not sufficient that the wife simply deferred to her husband to make decisions). o It is a defence if it is proved that.blogspot. o “Some other good reason” does not include a total failure to participate in management. on the basis of that information. Simply telling the MD that you have reservations and do not agree with the company acquiring further debts is not sufficient (Byron v Southern Star Group). because of illness or for some other good reason. the court must consider: (a) Any action person took with a view to appointing an administrator [voluntary administration]. and ii. MFS v Miller). o Passive reliance is not sufficient – the directors must actually make inquiries about the company’s solvency from another (otherwise the expectation is not based on any information.com o The director can consider assets that could be sold and. he or she did not take part at that time in the management of the company. where one director defers to another (in DCT v Clark.© Author of LawStudyNotes. for example. Consequences of breach  A director who breaches s 588G(2) is liable for a civil penalty. As Ormiston J suggested in Morley. “a director would be justified in “expecting solvency” if an asset could be realised to pay accrued and future creditors in full within about ninety days”. the person: i. and o If the person was a director of the company at the time when the debt was incurred. and for min financial literacy. 4. and (c) The results of that action. they should seek to have the company wound up or they should resign. That is. at the time when the debt was incurred.

o The liquidator may recover from the director under s 588M(2) for the loss or damage of all unsecured creditors. and o Individual creditors may recover from the director under s 588M(3) an amount equal to their loss or damage.com o ASIC can seek recovery from the director under ss 588J or 588K (K for criminal proceedings) for the amount of loss or damage suffered by all unsecured creditors (“loss or damage” is generally the amount of the unpaid debt. Powell v Fryer).© Author of LawStudyNotes.blogspot. 37/56 .

ratify or discharge a contract on behalf of the company (s 126(1)).  Express actual authority Express authority can arise in a number of ways: i.  “Actual authority” is where the company is communicating to the individual that they have authority. Implied from position – see s 129(2) Implied from past behaviour Ostensible authority – see s 129(3) 3. Implied authority i. Company’s operational policies. 38/56 . The individual’s employment contract. Managing Director. or 2. A I. The directors’ execute the document so that the document is recognised in law as having the company’s signature on it. vary.com TOPIC 8 corporate contracting Flowchart 1.© Author of LawStudyNotes. c. s 129(5)/(6) and IMR (s 129(1)) 2. Was the document properly executed? s 127 a. If no. Constitutional provision stating the scope of an officer’s authority to contract for the company. iii. Express authority b. Did the person acting for the company have authority? s 126 a.blogspot. or iv. Q2: AGENCY Formalities  The contract may be signed by the 3rd party and the agent signs as follows: “Signed for and on behalf of ClayCo Pty Ltd Angela Ashworth Angela Ashworth. The document is signed by an agent for and on behalf of the company. Were they acting within their authority? s 129(4) Q1:  Entering into a contract A company enters a binding contract in two ways: 1. ClayCo Pty Ltd” A. ii. ii. A board resolution authorising the individual to contract on the company’s behalf eg for a particular contract (arising from s 198A). Actual authority  An agent with the company’s actual authority (express or implied) may make. see s 128(3).

39/56 . the Board knew that Mr Kapoor was acting as MD and they did nothing to prevent him). the agent has previously entered into contracts on behalf of the company and the company has treated those contracts as binding upon it.  Two requirements: 1. or ‘a person who has actual authority to manage that part of the business to which the contract relates’). because he himself did not have actual authority to enter into the transaction (he was MD.  For example. CEO. o For example.  Implied actual authority Two types: 1. Implied by acquiescence (need past behaviour). where the court said that there was no acquiescence. B. because the Board never communicated to the director their acceptance of his contracting). o For example. the chairman had no power to enter contracts. purchasing officer.© Author of LawStudyNotes. nonexecutive chairmen. CFO. then the company represents that the agent has the customary authority of a person in such position (eg in Freeman & Lockyer. but needed his father’s approval to enter contracts). How is the representation made?  Where the company permits the agent to occupy a particular position. Implied from the position in the company held by the agent. in Brick and Pipe Industries. because over many months the Board had given the impression that he could act as a de facto CEO and bind the company to transactions. Freeman. although there was no express communication by the Board to amount to implied actual authority. 2. and o The company must make a representation to the 3 rd party that the agent has authority. without sanctions (in Brayhead. the following do not usually have the authority: Individual non-executive directors. in Crabtree-Vickers. or the company secretary (Northside Developments).  But see Paribas. o Need communication by words or conduct – silence is not enough (Freeman & Lockyer). Representation. Bruce McWilliam Junior could not hold out Peter McWilliam (the agent) as having authority to enter into the transaction. or o Agent is presumed to have the usual authority that attaches to that position in that type of co.  Where the company arms an officer with a document and permits them to enter into the contract without taking proper safeguards against misrepresentation (in Paribas. but he was held to have actual authority. o Who must make the representation? o  The representation must be made by someone with the company’s actual authority to make the representation (eg the Board. o Authority is implied from the conduct of the parties and the circumstances. the following usually have the authority to enter contracts: Managing director. the bank gave a junior employee all of the documents for the 3rd party to sign and therefore held out that she had authority). Cf. and human resources manager. o Similarly.blogspot. Apparent or ostensible authority  The company is holding out the agent has having authority to contract – it creates an agency by estoppel.com A II. o BUT. a director was held to have implied actual authority because he assumed the role of MD with the acquiescence of other directors and he had entered into transactions without the prior approval of the Board.

40/56 .  See also ss 128.© Author of LawStudyNotes.com 2. Reliance. o  The 3rd party must rely on the representation when entering into the contract.blogspot. 129(3) assumptions.

it must set out the company’s name and ACN (s 123(1)). It is a strict liability offence if it does not comply (ss 123(3). the imprint of the company seal (note: use s 127(1) where no seal. which enables 3rd parties to assume that transactions evidenced by an executed document are authorised by the company if the company’s signature is on the document.© Author of LawStudyNotes. Statutory assumptions  General principles: o Under s 128(1). AND If the company has a seal. Having a seal is optional (s 123(1)). o EXCEPTION:  A person is not entitled to make an assumption if at the time of the dealings they knew or suspected that the assumption was incorrect (s 128(4)). if a shareholder meeting is required to authorise a transaction. Indoor Management Rule (IMR)  The Indoor Management Rule allows a 3rd party to assume that internal matters have been satisfied. 24 There are differing judicial views on the IMR. If the company does have a seal. and (2) where there is a seal). Dawson J said that where a 3rd party contracts with the company and has no reasonable grounds to suspect that the transaction is not properly authorised. (4)).blogspot. Mason CJ in Northside said that the IMR is a special rule of company law. if sole director and company secretary of the Pty company. 41/56 . 25 “Dealings with a company” extends to purported dealings (Story v Advance Bank – that is. it was a mortgage over a valuable asset. o Example:  Northside: The bank was put on inquiry by the nature of the transaction – that is. unless they are put on inquiry (preferred approach. the 3rd party is not required to investigate whether this meeting occurred – and therefore the contract is binding even if the meeting was not held. see eg Kirby J in Bank of NZ v Fiberi). it includes dealings with people who did not have actual authority from the company). s 127(1)(c)]. Signatures of one director and company secretary (s 127(1)(b)). and none of the funds lent by the bank went to the company itself.  This is a subjective test (Soyfer v Earlmaze). even if this is not true (Turquand’s case). Signatures of 2 directors (s 127(1)*(a)) [or 1 director. o The assumptions apply even if an officer or agent acts fraudulently or forges a document (s 128(3)). The forged document is not a nullity and can still bind the company (Story). o Note: a 3rd party is not required to read the Constn or other ASIC documents (s 130). a person is entitled to make the assumptions in s 129 in relation to dealings with a company25. 24  EXCEPTION o The 3rd party cannot rely on this assumption if a reasonable person would be ‘put on inquiry’ that the assumption was wrong (Northside).  See meaning of suspect on page 35. Thus grounded in agency and estoppel. an equitable estoppel arises. For example. OR B.com Q3: EXECUTED DOCUMENT Formalities  The document must have: 1 2  A. The company is estopped from asserting that the assumptions are incorrect. (The company constitution can provide additional requirements – s 127(4)).

(5)/(6) 3rd parties can assume company documents are properly executed.blogspot. but he had not been appointed. but he was never appointed as secretary and the 3rd party had searched the company records and knew that he had not been appointed. HELD: Bank could rely on s 129(1) – the Bank could assume that the relevant provisions of the Constn had been complied with.  Note: the sale of the whole business is something that only the whole Board can do. and attestation had to be signed by director and secretary. Mr Furst signed a guarantee as secretary. Mr Story forged her signature. CEO or director. and (6) for documents executed with seal. However. the company had held Mr Furst out as secretary – it was stated in the presence of Mr Goldberg. because Mr Furst was a director but signed as secretary. 42/56 . Therefore. (2) 3rd party can assume that officers whose details appear in ASIC records are duly appointed and have the usual authority. and the bank had not been put on notice.  For example.  Principle of apparent or ostensible authority. it needed to be authorised by the directors. (3) 3rd party can assume that a person held out as an officer or agent has been duly appointed and has the usual authority of someone in that position.  For example. non-executive directors and secretaries have narrow authority. the executed document described Mr Story’s wife as secretary. that Mr Furst was secretary and Mr Goldberg remained silent.  A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with s 127.  Use (5) for documents executed without seal. and so is not within the usual authority of a MD. See also Brick and Pipe Industries.  “Usual authority” – remember. (4) 3rd parties can assume compliance with fiduciary or statutory duties. company is bound by the guarantee. the husband arranged a mortgage and guarantee over the company (similar to Northside [son signed as sec] and Story [forged both sigs]). when she was actually a director.com  s 129 The assumptions are: o o o o (1) 3rd party can assume the company’s constitution is complied with. His son signed as secretary. who was effectively the MD. The Court held that a misdescription of a signatory does not prevent the assumption from being relied upon.© Author of LawStudyNotes.  The IMR. in Bank of NZ v Fiberi. company cannot argue that the officer breached their duties to avoid the contract (Pico Holdings).  What if the description of the signee is wrong? In Story.  o That is.  There is no obligation to check ASIC documents (s 130). in Brick and Pipe Industries. The Constn required safe keeping of the seal.

o BUT directors bear the cost of the meeting. The members calling the meeting must pay the expenses. and be given to company (s 249D(2)). Extraordinary general meetings Anything other than an AGM. AND Members with >50% of the votes may call a meeting if the directors do not do so within 21 days after the request is given (s 249E(1)). and (d) The fixing of the auditor’s remuneration. Members. The company must pay the expenses of the members (s 249E(4)). 43/56 . directors' report and auditor's report. state any resolution to be proposed. (c) The appointment of the auditor. o For a listed company. directors have the power to call meetings regardless of Constn (s 249CA). o Convening meetings  Meetings may be convened by: 1. members with at least 5% of the votes may call and arrange to hold a general meeting. even if not referred to in the notice of meeting: The consideration of the annual financial report. (b) The election of directors. be signed by the members.com TOPIC 9 Shareholders’ meetings Types of meetings   Annual General Meeting (AGM) o s 250N(1): A public company must hold an AGM within 18 months after its registration. or o A director may call a meeting of the company’s members (s 249C RR). o Members may requisition a meeting. the directors must hold a meeting on the request of members with at least 5% of the votes or at least 100 voting members. Directors. And it must hold an AGM annually.blogspot. 2. o OR members may arrange a meeting themselves. Under s 249F(1). within 5 months after the end of its financial year (s 250N(2)). o  (a) Meetings of classes of members See s 246B and page 11. A public company with 1 member does not have to hold an AGM (s 250N(4)). The request must be in writing.© Author of LawStudyNotes. Under s 249D(1). Failure to do so is a strict liability offence (s 250N(2A)). o s 250R(1): The business of an AGM may include any of the following.

o The information that must be disclosed goes beyond what the Board knows. may issue or make statements to be circulated to all members (s 249P). and o Directors must not ignore information that does not support their position on the resolution ( see the facts of the case). If the company is given notice. 44/56 . The quorum for a meeting is 2 members and the quorum must be present at all times during the meeting (s 249T(1) RR). 3. See extract of section below. The notice must be in writing. Meeting requirements Basic requirements  Notice: At least 21 days notice must be given (s 249H(1)). or at least 100 voting members.© Author of LawStudyNotes. For listed companies.  Electing a chair: The directors must elect a chair to be present at every meeting (s 249U(1)-(3) RR).com  A meeting must be for a proper purpose (s 249Q). o The information must be sufficient for members to decide whether they will attend the meeting and vote for or against the resolution. The chair must adjourn a meeting if the members present with a majority of votes agree (s 249U(4) RR). such as the process of demutualisation). 2.blogspot. Members’ resolutions: Members with at least 5% of the votes.  Technology: A meeting may be held at 2 or more venues using any technology that gives the members as a whole the reasonable opportunity to participate (s 249S). may give notice of a resolution that they propose to move (s 249N(1)). resolution is to be considered at the next general meeting that occurs >2 months after the notice is given (s 249O(1)). Members’ statements: Members with at least 5% of the votes. Failure to do so is a strict liability offence (s 250S(2)). at least 28 days notice must be given (s 249HA(1)). Duty to inform  General principles (Fraser v NRMA Holdings): o The directors have a fiduciary duty to ensure that members are fully informed about matters that appear on the agenda. See extract of section below. o The directors only need to provide information that is realistically useful (eg directors are not required to explain the detailed legal requirements underlying the resolution. Reasonable opportunity to ask questions at AGM: The chair of an AGM must allow a reasonable opportunity for the members as a whole at the meeting to ask questions about or make comments on the management of the company (s 250S(1)). and in some circumstances it must make further investigations. Member participation  How can members participate in the meeting? 1. Shorter notice may be allowed in some circumstances (see extract). set out the wording of the proposed resolution. Eg the meeting is not for a proper purpose if it is to decide a matter that is not within the powers of members to decide – such as directing the directors how to exercise their exclusive powers (NRMA v Parker). o The document must be intelligible to reasonable members (likely to assist rather than confuse). and be signed by the members proposing to move the resolution (s 249N(2)). or at least 100 voting members.  Quorum: A quorum is the minimum number of shareholders whose presence is necessary for a meeting to be able to validly transact business.

Failure to comply with this section is not an offence – but it is a civil penalty provision. regardless of # of shares held. or members with 5% of the votes. a poll may be demanded by at least 5 members entitled to vote. o This was breached in Fraser.  Duty not to mislead or deceive: o The information must. or through the acquisition of which. 9). makes a market for a financial product ( ss 766A(1). company’s name. o Undirected (open) proxy – where shareholder appointed proxy without specific voting instructions. before the results.  To appoint a proxy. unless Constn says otherwise (s 249Y(3)). in Fraser.  Proxy cannot exercise rights if member present. deals in a financial product. on an objective assessment. when this was not necessarily true. unless the Constn provides otherwise (s 250A(2)). (b)(iii) making. Constn may provide for lesser requirements [(2)].com  For example. because they failed to provide information about disadvantages. 26 Financial product is a facility through which. unless the Constn reduces this period (s 250B(5)). or making an evaluation of. The proxy must vote according to their instructions (eg s 250BB(1). 761A. The company sent out a prospectus that stated that the members would receive free shares in the new company. a person must not engage in conduct. vote and demand poll (s 249Y(1)). an offer under a takeover bid or a recommendation relating to such an offer s 1041H(2). Under s 250L. o Directed proxy – where shareholder has directed the proxy how to vote. including to speak. Proxy votes o Proxy voting allows member to vote without attending the meeting. the proxy need not vote on a show of hands or the poll (unless chair. Conduct in relation to a financial product includes: (a) dealing in a financial product. proxy’s name. 9). Financial service is provided if the person: provides financial product advice. or makes non-cash payments (ss 763A(1). and the meetings at which the appointment may be used [may be a standing appointment] (s 250A(1)). because the proxy can decide if and when to vote). (b)(i) issuing a financial product. Decisions at a meeting   How are votes counted? o Voting by show of hands – every shareholder has one vote. because the prospectus failed to identify the disadvantages of demutualisation to members – this left members with the dominant impression that they were better off.  Proxy has same rights as member. or o Voting on a poll – weighted voting (shareholders’ votes are weighted depending on # of shares held) and anonymous. (b)(ii) publishing a notice in relation to a financial product. or the chair [(1)(a)-(c)]. 761A. the document must be signed by the member and contain the member’s name and address. Therefore. that is misleading or deceptive or is likely to mislead or deceive. breach of the duty to inform. manages financial risk. constitute full and fair disclosure of all the facts that are material to enable members to make a properly-informed decision – failure to do so may also breach the misleading and deceptive conduct provision in the Act. the prospectus did not detail the benefits that the members were foregoing. but if they do vote they must follow instructions – allows for cherry picking. where they must vote on a poll). a person does one or more of the following: makes a financial investment. or immediately after the results on a show of hands are declared [(3)(a)-(c)].blogspot. The poll may be demanded before the vote. 45/56 . Appointment must be received at least 48 hours before the meeting (s 250B(1)). the members were to vote on whether or not the company should undergo demutualisation (co limited by guarantee  co limited by shares). o Summary of provisions:  Member can appoint a proxy (s 249X(1)).© Author of LawStudyNotes. in relation to a financial product or a financial service26.  Member can specify the # of votes that proxy may exercise (s 249X(2)). However. o Under s 1041H(1).

Circulating resolution (Pty companies) o A Pty company may pass a resolution without a general meeting if all the members entitled to vote on the resolution sign a document containing a statement that they are in favour of the resolution set out in the document (s 249A(2)). For example. o Bell Resources: the notice papers failed to state that the resolution was to reduce the number of directors. a proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid. in Re Compaction Systems.com Decisions without a meeting  Two ways: 1. or a defect. The court can excuse breaches of the Act 46/56 . if substantial injustice caused Under s 1322(2). The Duomatic principle o Where there is complete assent by all members on a particular matter.blogspot. The right to advance arguments and influence the course of discussion may have a decisive effect on the decision reached. Consequence of procedural irregularities?  May be invalidated. 2.   Substantial injustice o The court must balance the real prejudice suffered by a member. then no meeting be held (where every shareholder agrees to a particular resolution). Thus. because it deprived the members of the full exercise of their voting rights and the outcome would have been different if a poll was held. o The resolution is passed when the last member signs (s 249A(4)). because the Constn entitled non-voting shareholders to receive notice of and attend any general meetings of the company. The Court refused to apply the Duomatic principle. irregularity or deficiency of notice or time (s 1322(1)(b)(i)-(ii)). there was no meeting of members because all voting shareholders assented to the resolution.© Author of LawStudyNotes. o BUT this principle does not apply eg to deny a non-voting SH the right to attend meeting and participate in debate. one member with a non-voting share objected (Mr McDonald). against the prejudice to the company and other members in invalidating the resolution. o Chew Investment: the refusal to hold a poll when the Constn required it was held to be a substantial injustice. The right to attend a meeting is not an insubstantial right. substantial injustice (this was an important and fundamental resolution).  Procedural irregularity Not exhaustively defined – but defined to include the absence of a quorum. The votes of members who did not attend would have affected the outcome. The injustice to the member must be real and not theoretical or insubstantial – ie you need the injustice to affect the outcome of the resolution (Re Compaction Systems). However. The procedure for a nomination of a person for election as a director at a general meeting is not “a proceeding”.

47/56 . that it is just and equitable that the order be made [s 1322(6)(a)(i)-(iii)]. that the person/s concerned in the contravention acted honestly. Also use the oppression remedy in s 232.blogspot.com Under s 1322(4)(a). an interested person may apply to the court for an order declaring that any act or proceeding is not invalid because it contravened the Act [and an order relieving a person from civil liability as a result of this contravention. The Court must not make this order unless it is satisfied that the act or proceeding is essentially of a procedural nature. and that no substantial injustice has been or is likely to be caused to any person [s 1322(6)(c)].© Author of LawStudyNotes. (c)].

(h) circumstances under which a person acquired or disposed of shares.  Q2: Can the court make an order? s 232: The Court may make an order under s 233 if: (a) the conduct of a company’s affairs27. (c) internal management and proceedings. 48/56 .  Subjective motivations are relevant (Re Dalkieth). is either o (d) contrary to the interests of the members as a whole. if the application relates to them ceasing to be a member.  To prevent misleading and deceptive conduct: s 1041H (page 45). control and transactions of the body. or (ii) on behalf of another member). membership. Member need not be aggrieved (Jenkins). or the terms of the reduction are not the same for all ordinary shareholders: s 256B(2)]. or a proposed resolution. or unfairly discriminatory against.com TOPIC 10 Members’ remedies Other remedies for members  To have constitution observed: s 140 (page 6). 27 Defined very broadly in s 53. a member or members whether in that capacity or in any other capacity.blogspot. unfairly prejudicial to or unfairly discriminatory against a member?  Determined objectively – Would a reasonable board have acted in that way? If no.  Where duties are owed to individual shareholders: case law (page 25). Is conduct oppressive to. (c) a former member. (b) a former member. or (c) a resolution. removed from the register of members because of a selective reduction [a selective reduction is where the reduction in share capital either: did not relate to ordinary shares. of members or a class of members of a company. and  To prevent procedural irregularities occasioning substantial injustice: s 1322 (page 46). then there is a breach. and includes: (a) formation. It is irrelevant that the board acted honestly and in good faith (Wayde).© Author of LawStudyNotes. (e) ownership of shares in the body. did not apply to each holder of ordinary shares in proportion to the # of shares they hold. (i) in another capacity – eg as a director. (f) power to exercise the rights to vote attached to shares and to dispose of such shares. unfairly prejudicial to. Section 232 – Oppressive conduct  Q1: Who can make an application for an order? s 234: An application may be made by: (a) a member of the company (in their capacity as a member.  To prevent unlawful variations of class rights: s 246B (page 11). or (e) oppressive to. (b) an actual or proposed act or omission by or on behalf of a company.

× Where member is dissatisfied with management of co (eg in Re G Jeffrey Men’s Store. Q3: What remedies are available? o Under s 233(1). and not merely a source of revenue. against the objective of the Board (Wayde). Their refusal to pay dividends was oppressive. Wests was prejudiced because they were excluded from the League. the company was a family partnership. (See also Re HW Thomas. Eg in Fexuto. the Court can make the following orders: (a) Company be wound up. agreed that it should continue to operate in a financially conservative way. The company refused to buy out the shares of a minority member. (d) Purchase the shares of any member [most common] (if the oppressive conduct has decreased the value of the shares. the company was managed conservatively. Remedy: Co to buy minority’s shares). because it excluded the minority shareholder from a share of the profits of the company. except for the applicant. Remedy: Co to buy Mr Smith’s shares. where excessive benefits to directors (eg in Sanford. and  A refusal to pay dividends. This was oppressive. and all members were expected to be equally involved in management. (b) Company’s Constn be modified or repealed. Here. the prejudice was not unfair.  Unfair exclusion from management of a family company (family members have a reasonable expectation of participating in management.  Improper share issue to dilute minority shareholding (see page 27).com   Balance the disadvantage or burden to the member. Jenkins).  Breach of directors duties (can amount to oppressive conduct. Oppression involves some overbearing act or attitude on the part of the oppressor (Re Jermyn Street Turkish Bath Ltd). according to the Constn. the majority shareholders diverted business away from the company to another company they controlled and paid themselves high salaries and other benefits.  Examples – breach? × Where objective is reasonable (eg in Wayde. Therefore. the order may specify that the shares are to be 49/56 . who wanted out.  Unfairly prejudicial Conduct must be unfairly prejudicial (eg in Wayde v NSW Rugby League. However. (c) Regulate the conduct of company’s affairs in the future. Remedy: Bob can sell his shares to co). the focus was on capital profits.  Examine the company’s background and the reasonable expectations of its members (Re HW Thomas and Re G Jeffrey Men’s Store). harsh and wrongful (Scottish Co-operative Wholesale Soc). It was understood that the company would be a source of employment.© Author of LawStudyNotes. the decision was taken by the Board with the object of fostering the game of rugby league and serving its best interests).blogspot. therefore there was no breach). it was the subjective intentions of the majority to issue new shares for the purpose of diluting the shareholding of Mr Smith. paying only small profits to the members.  Oppressive Conduct is oppressive if it is burdensome. it was established to provide for the economic wellbeing of the family. In Re Dalkieth. it was oppressive and unfairly prejudicial to exclude one member Bob. and this was not oppressive or unfair). Note: the objective here was not proper (the money from share issue was not needed). where all the members of a family company. It is not oppressive or unfairly prejudicial just because the co is being managed in a way that the minority members do not agree).

AND all directors who participated in that decision acted in good faith for a proper purpose. prosecute. An intrusive remedy.  Under s 237(2). or an officer or former officer of the company AND the person is acting with leave of the Court (s 236(1)).© Author of LawStudyNotes. o Purpose: to redress the effects of the oppressive or unfair conduct (Re Hollen). Q2: Who has standing to sue? o The person must be a member or former member of the company. and ii. (b) Applicant is acting in good faith. AND the company has decided not to bring the proceedings. defend or discontinue proceedings. but needed to redress the conduct. in Jenkins. s 237(4)).  Good faith requires that: i.  Q1: What does the member want to sue on behalf of the company for? o  Eg breach of directors’ duties. The applicant honestly believes that a good cause of action exists and the company has a reasonable prospect of winning. (g) Member to institute. without a material personal interest.blogspot. (i) Injunction to stop a person from engaging in specified conduct. The Court appointed a receiver (s 233(1)(h)) to investigate the impugned transactions and to institute proceedings against the directors. the directors breached their duty to act in the best interests of the company. the Court will grant leave if it is satisfied that: (a) The company itself will probably not bring the proceedings. The applicant does not have any collateral purpose.  (e) Purchase shares with a reduction of company’s share capital. Section 236 – Statutory derivative action  It allows a member to take legal action in the name of the company for a wrong done to the company (cf s 232. o For example. were 50/56 . Scottish Co-operative Wholesale). the applicant may have benefitted from the breach and hence she would not be acting in good faith if her purpose was to seek a double recovery. in Swansson. (Swansson)  (c) For example. a rebuttable presumption that leave is not in the best interests of the company arises if the proceedings are against a 3 rd party (not related to the company. It is in the best interests28 of the company. where the majority is unwilling (eg breach of directors’ duties). or (j) Injunction to require a person to do a specified act.com purchased at the price that the shares would have been had the conduct not taken place. prosecute. The purpose is to enable an individual member to take action on behalf of the company. (h) Appoint a receiver. (f) Company to institute. Q4: Can the majority ratify the conduct? o NO (a fraud on the minority – Jenkins). 28 Under s 237(3). it is not a personal action). defend or discontinue proceedings on behalf of co. if necessary (s 233(1)(f)).

the Court may make: (a) Interim orders. (c) An order directing the company. or an officer of the company. the business of the company. Swansson per Palmer J). BUT the Court may take this into account in deciding what order or judgment to make – the Court must have regard to whether the members were fully informed and acting for proper purposes (s 239(2)). The Court may make any orders about costs. (b) Directions about the conduct of the proceedings. to do or not do any act. whether the applicant can sue in their own name. and it must be worth suing the defendant (they must have enough money and there must have been a loss to co) (Swansson).  Consider: The character of the company (private or public.© Author of LawStudyNotes. This person can inspect the books of the company (s 241(2)). if family. 51/56 .  Leave can be granted even if the company has ratified the breach (s 239(1)).  An application for leave cannot be made if the company is in liquidation (Chahwan).  It must be in the company’s best interests (not may be.blogspot. (d) There is a serious question to be tried. it will usually be appropriate to allow the complaining venturer to bring proceedings in the company’s name against the other venturer (Morningstar Research). or likely to be.  Where the company in question is a joint-venture vehicle and one of the venturers alleges that the other has acted unlawfully. including requiring mediation.  Consider the company’s separate and independent welfare (Jeans).com o   See s 237(3). or it is nevertheless appropriate to grant leave. and (e) Either the applicant gave the company written notice of their intention to apply for leave and the reasons why (at least 14 days before making application). including requiring the company to pay the applicant’s cost (s 242). Q3: What order can the Court make? o o Under s 241(1). This should be done to protect a bona fide shareholder where the company stands to gain if the action is successful. (d) An order appointing an independent person to investigate and report to the Court. and rationally believed it was in the best interests of the company (ie a business judgment rule). look at the purpose for which it was established).  Q1: What conduct does it cover? o Two types of conduct: reasonably informed. Proceedings are brought in the company’s name (s 236(2)). Section 1324 – Statutory injunctions  The Court has a discretion to grant an injunction restraining a person from engaging in conduct that contravenes the Act.

or is proposing to refuse or fail. has previously engaged in the conduct. or a person whose interests have been. Penalty provisions include:  Directors’ duties (s 180-183). Q3: What remedy will be granted? o The Court may grant an injunction to restrain the conduct or require the person to do any act (ss 1324(1). are or would be affected by the conduct (ss 1324(1). Where a person has engaged. counselling or procuring a contravention.   Where a person has refused or failed. is engaging or is proposing to engage in conduct that constitutes a contravention of the Act (civil penalty or offence). in Airpeak.  Presumption: A contravention is deemed to affect the interests of a member or creditor where it concerns the contraventions in s 1324(1B) (see above) (s 1324(1A)). For contraventions of s 588G (insolvent trading. in lieu of or in addition to an injunction (s 1324(10)). or that they suffered any injury.com i. Section 461 – Winding up  Q1: What can the Court order? o Under s 461(1). (2)). o Examples:  Do members have standing to restrain breaches of duty by directors? Unclear – in Mesenberg. o The person’s interests must go beyond the mere interests of members of the public (but no need to show that personal rights were affected.  Related party transactions (s 208). Bell Resources). (7)). to do an act or thing that the person is required by this Act to do (s 1324(2)). Q2: Who has standing? o An application can be made by ASIC. BUT damages must be a substitute for or supplementary to the injunction – it does not give creditors a general right to claim damages for breach (Phoenix Constructions). o The Court may award damages. is refusing or failing. aiding. attempting to contravene.blogspot. or there is an imminent danger of damage to any person (ss 1324(6).© Author of LawStudyNotes. the NSW SC expressed strong doubts and thought that only ASIC could apply. the FCA held that shareholders and creditors do have standing. o The Court may grant an injunction. o The Court may grant an interim injunction pending determination. being knowingly concerned in or party to the contravention by another. (2)).  Insolvent trading (s 588G). and  Reductions in share capital (s 256D) or financial assistance (s 260D). inducing or attempting to induce another to contravene. where insolvency was caused by ss 256B or 260A) or ss 256B or 260A (share capital reduction and financial assistance for share acquisition). the onus is on the company or person to prove that no contravention occurred (s 1324(1B)). if desirable (s 1324(4)). ii. whether or not the person would engage in the conduct again. abetting. the Court may order the winding up of a company if: 52/56 . However. or conspiring with others to contravene (s 1324(1)).

and there is a continuing and irresolvable deadlock. or in any other manner whatsoever that appears to be unfair or unjust to other members. Fraud on the minority. Unfair alteration of the constitution to expropriate shares (see page 7). The shareholder can seek an injunction to prevent the share issue. The Court will not make an order to wind up if another remedy is available (s 467(4)). a contributory (member). or unfairly discriminatory against. However. 2. it was taken over. a member or members or in a manner that is contrary to the interests of the members as a whole. and  Failure of substratum (ie the purpose for which co was established) (Re Tivoli Freeholds – in this case. and 3) restriction on share transfer. Special fiduciary relationship (see page 25). the company had been set up to provide entertainment. In order to ascertain the commonly understood purpose of a company. the company can be wound up). then the company can be wound up). and 70% of its assets were used for corporate raiding. Examples: Breakdown in mutual trust and confidence (Ebrahimi – a company can be wound up if: 1) company formed on the basis of mutual confidence from a personal relationship (ie a small company). o   Q2: Who has standing? o The following may apply for an order to wind up a company: the company. it is permissible to look beyond the objects clause to things such as a prospectus. by ratifying breaches by the majority (see page 31). 53/56 . or [s 232 remedy] (k) The Court is of opinion that it is just and equitable that the company be wound up. or (f) Affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to. and 4. 3. but this position is favoured by Residues Treatment and Ngurli). the liquidator. or ASIC (s 462(2)). the company’s course of conduct and even its name).  Deadlock in decision-making (Re Yenidje Tobacco – where the company Constn does not provide a casting vote to resolve deadlocks. An order under s 233 is usually preferable because the courts have a wider discretion.blogspot.© Author of LawStudyNotes. eg by excluding one member. a creditor. If mutual confidence is broken. Common law remedies  Four types: 1. o A shareholder may have a personal right to bring an action where it is alleged that an issue of shares was made for an improper purpose (uncertain. Thus it was wound up. Improper allotment of shares that dilute voting power: o Also see page 27 – an improper purpose of the power to issue shares is to dilute the voting power of a member.com (e) Directors have acted in their own interests rather than in the interests of the members as a whole. 2) agreement that all members should participate. o Anyone else is not entitled to apply (s 462(5)).

o Receivership terminates when the receiver achieves the object of the appointment. o The voluntary administrator quickly assesses the financial situation of the company. and a creditor’s meeting then decides the future of the company. sell it and repay the secured debt owed by the company out of the sale proceeds.© Author of LawStudyNotes. failure to maintain secured property). Receivership     What is a receiver? o A receiver is appointed by a secured creditor of a company. to result in a better return for the company’s creditors and members (s 435A). 54/56 . creditor’s petition.blogspot.com TOPIC 11 Corporate insolvency 1. o AND s 420(1): a receiver has the power to do all things necessary or convenient to be done to achieve the objective for which the receiver was appointed (eg. per s 420(2). Receiver’s duties o A receiver must take all reasonable care to sell property for not less than market value. A receiver can generally only be appointed if the loan agreement has been breached (eg default in payment. or if that is not possible. Voluntary administration   What is voluntary administration? o The object of voluntary administration is to maximise the chances of the company continuing in existence. see page 36). How does it commence? o Most common: The directors resolve in writing that the company is insolvent and that an administrator should be appointed (s 436A(1)). to take possession of the property secured by the creditor’s loan. or the best price that is reasonably obtainable having regard to the circumstances existing when the property was sold (s 420A(1)). o Where the security is over the whole undertaking. 2. When can a receiver be appointed? o As specified in the loan agreement between the creditor and company. o Receivers can be appointed by the Court (eg a remedy under s 233(1)(h) for oppressive conduct). the receiver may also have the power to manage. enter into possession and take control of property. o A receiver is an “officer” (s 9(c)) – hence subject to the duties in ss 180-183. o This protects the directors from liability for insolvent trading (under s 588H(5). and sell property). Receiver’s powers o Contained in the loan agreement.

com   What is the role of the administrator? o The role of the administrator is to investigate the affairs of the company and to report to creditors. the creditors may resolve (s 439C): 1. o Creditor’s can enforce their rights if: o o  They get the court’s consent or the administrator’s permission. Under s 444A(4). unsecured creditors cannot commence proceedings: s 440D). When can an insolvent company be wound up? 29 The deed of company arrangement binds all unsecured creditors (whether they voted in favour or not). The administrator must convene a meeting of the company’s creditors (s 439A(1)). the circumstances in which it terminates. or 3. 2. and secured creditors under court order. That the company be wound up (if the creditors cannot reach a compromise). execute a document or bring proceedings. or  The secured interest is over perishable property (s 441C). o Administration should run for 21-28 days.  The administrator is the only person who can deal with the company’s property (s 437D(1)). Administrator’s duties o   An administrator is an “officer” (s 9(d)) – hence subject to the duties in ss 180-183. o During administration: The administrator controls the company (s 437A(1)). What is the position of creditors? o There is a stay or moratorium on all claims against the company (secured creditors cannot enforce security interest: s 440B. the conditions if any for the deed to come into operation and continue. Liquidation  What is liquidation? o  The purpose of liquidation is to wind the company up and deregister it.  The administrator has the power to remove a director from office. the property of the company that is available to pay creditors. The administrator must give written notice to as many of the creditors as reasonably practicable and publish such a notice. to what extent the company is to be released from its debts. appoint a director. the instrument must specify the administrator of the deed. secured creditors who voted in favour (those who did not are free to enforce their securities).© Author of LawStudyNotes. That the company executes a deed of company arrangement29 (eg the creditors agree to accept payment of a lesser amount in final settlement of their debts – this may be beneficial if it results in the company continuing as a customer of the creditor). the nature and duration of any moratorium period. s 435C(1)). the priority order for distributing proceeds.  They have a security interest over most or all of the property (s 441A). 55/56 . At the meeting.  They began enforcement before voluntary administration commenced (commences the day an administrator is appointed. and the administrator must fully inform the creditors. and the day on or before which claims must have arisen if they are to be admissible under the deed.blogspot. That the administration should end (eg where they believe that the company can trade out of its difficulties). This resolution ends the administration (s 435C(2)). 3. or whatever else is necessary (s 442A).

 FINALLY return of members’ capital (Sons of Gwalia). The following can apply under s 459P for an order: company. Within 3 months. the creditors may all receive x cents for every dollar owed by the company. maximises the pool of funds available for distribution (by enforcing any debts owed by others to the company. o Secured creditors are free to take possession of and sell secured property (s 471C). or  By order of the Court (s 459A – winding up commences when order made.© Author of LawStudyNotes. Under s 556: - Liquidators and administrators get paid in full first. o Insolvency will be presumed in certain circumstances: for example. o A liquidator is an “officer” (s 9(f)) – hence subject to the duties in ss 180-183. they are repaid an equal proportionate amount).  By the company’s creditors (s 497). s 513A).  NEXT dividends are paid to members (s 563A).000 and the company fails to pay it (s 459C(2)(a)).  ONLY THEN can liquidator pay off all other creditors according to s 555. liquidator. if there is money left over. it is presumed to be insolvent. director.blogspot. member. wages and superannuation contributions of employees (if the funds are insufficient to pay everyone in this rank. there was a statutory demand for payment by a creditor of at least $2.  FIRST some creditors receive priority payment.  Unsecured creditors are paid proportionately according to the funds available (the pari passu rule: s 555) – eg if the funds are not sufficient. the liquidator must apply to ASIC to deregister the company. o The liquidator sells the unsecured assets of the company. The statutory demand must require the company to pay the amount within 21 days after service (s 459E) and if the company fails to comply. 506). o The company must be insolvent. challenging transactions that occurred when the company was insolvent. 56/56 . creditor – even if secured. o Process for distribution to unsecured creditors:  Creditors must prove their debts (s 553). s 491). Directors lose their power to manage the company’s affairs (s 471A). and pursuing directors who have breached the Act) and distributes the funds according to the rules. Appointment of a liquidator o The liquidator takes complete control of the company (ss 477.com     By the members (special resolution. or ASIC. How are the funds to be distributed to the company’s creditors? o Unsecured creditors cannot pursue their own legal action once liquidation commences (s 471B). and - THEN.