Professional Documents
Culture Documents
Facts:
i. Can Fred Nerks, the sole shareholder also be employed by the proprietary company?
ii. Should Fred invest extra share capital or lend it money?
Discussion
i. Fred Nerk’s position as shareholder does not impede his ability to be employed by Fred
Nerks Pty Ltd. He assumes simply assumes the rights and obligations of each position.
ii. There are benefits in both options:
a. Invest share capital – Investing further capital into the company may appear
favourably if Fred Nerks Pty Ltd were to apply for credit to fund further projects.
b. Lend money – By lending money to Fred Nerks Pty Ltd as a creditor, in cases of
insolvency or wind up Fred Nerks will rank ahead of suppliers and unsecured
creditors to settle existing debts. This follows the precedent set in Salomon v
Salomon (1897) which allows creditors (that are also shareholders) to be entitled to
priority claims (as per general order of payout) as controller and company are
separate legal entities.
Question 2
Facts:
Discussion:
Due to the liability element and the nature of the business (large cash flows) and possibly
high borrowing costs, a propriety company may be the most effective option
Issues:
i. How can Bugs (sole director and 40% shareholder) remove Daffy (shareholder and employee
from a position that is secured in the company’s constitution?
ii. What action can Daffy and Elmer (shareholders) take when the sole director (Bugs) breaches
the company’s constitution?
Discussion:
i. As Daffy’s position as sales manager is secured in the company’s constitution, Bugs would
need to amend the constitution under S136(2) of the CA. Under S136(2), a special resolution
must approve this change. This requires:
a. Proper notice of meeting where special resolution is proposed – Bugs must advise
both Elmer and Daffy of the nature of the meeting and they may attend or send a
proxy
b. An intention for special resolution must be set – Bugs must communicate the
intention of the special resolution to Daffy and Elmer.
c. Special resolution requires 75% of present votes – As a result, bugs is likely to
require Elmer’s vote as well to make this threshold.
If this passes, Daffy may claim unfair treatment (oppression). However, the success of this is
not guaranteed especially if Bugs can demonstrate this was in best interest of the company
as Daffy was “not doing a good job”.
ii. Daffy and Elmer will be able to enforce clause 1 as:
a. It is simply a constitutional breach. They are able to bring action against Daffy for a
contractual breach thus limiting his salary to the expressed value.
Shareholders: Directors:
Additionally:
S201G – says specifically election of directors proper purpose for shareholders – telling
board to use recycled paper is not shareholder matter (Parker case)
Shareholders:
Donald
Daffy
See:
Yes definitely:
Issue: Can Huey take the amendment to court, and ask the court to invalidate the resolution? He can
take the amendment, however unlikely to be succeed. There has been a procedural irregularity
under s 1322 (1) (b) (ii) because Huey has only received 20 days notice instead 21 which is required
more time under s 249H. Huey would need to persuade the court that if he had extra day, he would
been able to attend the meeting to vote against the resolution, or persuade others to vote with him.
Therefore he is suffered substantial injustice. However, it is unlikely that Huey would establish
substantial injustice. Because even if he had one more day, they all vote unanimously. So he
wouldn't be able to change the outcome. Is it valid? Gambotto 1
Do we have a proposal to amendment to the constitution? Yes Is the proposal dealing with
expropriation? Yes This amendment is only allowed if its being done for a proper purpose? It
is unlikely the resolution were hold, because there is nothing in the fact to suggest the Huey
is causing harm to the company (Gambotto). Even if the decision was for proper purpose,
the amendments was oppressive because there has been a defect in notice (Gambotto).
Question 1
Public company
Andrew CEO Y
Sam CFO Y
Paul Co Secretary ?
S 180 (ii) - Business judgement rule
Daniels v Anderson
ASIC v Rich
ASIC v Vines
ASIC v Healey
Discussion:
Executive directors - may larger punishment
Non-executive directors - still have obligation but still not large a punishment
BJR - does it apply? Approval of accounts is not a business judgement
Question 2
Yes
Directors have not made much effort to understand report - as they use big firm, can
directors believe on reasonable grounds this was legitimate? See section S189
Defence is not available as director must rely after making independent assessment of info
advise
In regards to the director knowledge about the corporation - they likely did not make an
independent assessment of FS and it was their obligation to do so
Rules
S588G (1-2)
S588H
S180(2)
Discussion
Concept of "holding out" - when Monica and Wendy as Michael and Jin ask to attend on
their behalf they ask to gain info, nothing else. Michael was complicit in his introduction of
director.
Other firm (Anne) assumes Michael and Jin are directors
Anne talks to Michael (who believes he should be a director) and Jin about new machine
Michael buy machine which is over the $40k threshold
Answer:
Michael does not have authority to make this decision
Michael does not have implied authority (as quality insurance officer) to make this decision
Michael has no apparent authority - even if Monica and Wendy sent him to the conference
delegating him this authority enabling "holding out", he would not have this power as even
Monica and Wendy do not have this authority under the constitution
If Anne suspects Michael diff position, contract is not enforceable. However it seems she did
not know and as a result, the contract is enforceable - S128(4)
However:
Some assumptions overcome Monica and Wendy's case - constitution was not complied
with:
o S129(1) -
o S129(4) -
They cover the scenario in hypothetical facts - thus they override and Monica and
Wendy's case is overruled
What if contract is only 40k?
Michael does not have authority to make this decision
Michael does not have implied authority (as quality insurance officer) to make this decision
Michael may have apparent authority - Monica and Wendy have actual authority to make
this contract (under 40k) and if Michael is given apparent authority, the contract is
enforceable.
o Question - were Monica and Wendy "holding out" that Michael was a director in this
situation because those with actual authority (Monica and Wendy) were "holidng out"
when he went to the chocolate conference?
o IF YES BY MONICA AND WENDY - Is the contact in a director's authority? According
to Brick and Pipe - single director doesn't have this authority unless small or single
director. This is a single director company so maybe yes.
o IF YES BY JIN @ AT CONFERENCE - Jin has no authority himself so he cannot give
Michael authority by "holding out."
o Maybe Michael held himself out as a director to Anne ???
Facts:
Directors:
General:
i. Are there grounds for ASIC to take action on the basis of insolvent trading?
ii. Can ASIC take action on the grounds of the duties of care and diligence owed by directors
under S180 of CA?
iii. Can any of the directors claim any defences on any of this action by ASIC?
Discussion
i. Under S588G of the CA, ASIC may have reasonable grounds to take the directors of Buns in
Tums Pty Ltd to court on the basis of insolvent trading. The following must be examined:
a. S588G1(a) – Lee, Kate and Louise were all directors at time the company incurred
the debt
b. S588G1(b) – As Buns was not meeting its present debts at the time in the form of
interest on the loans, this point may hold.
c. S588G1(c) – It must be found there are reasonable grounds to suspect insolvency. As
per the ratio in Queensland Bacon Pty Ltd v Rees, it was found that there should be
a ‘positive feeling of apprehension’ when the transaction was discussed. Louise’s
concern at the informal meeting is likely to meet this criteria as all directors were
aware of this.
d. S588G1(d) – Finally it is likely a reasonable director in a similar situation would be
aware of the company’s inability to pay interest on it’s large loan. Despite whether
the directors were aware of the severity of the situation, they “ought” to have
known. Under Metropolitan Fire Systems Pty Ltd v Miller and Commonwealth Bank
of Australia v Friedrich, directors should have a basic understanding of the financial
health of their company. However, different directors may be held to different
standards – Lee, due to his high level of involvement with the company may be
more liable tan Katie and Louise (who expressed her concern).
Additionally, it must be proved that contract entered into by Buns in Tums was classified as a
debt under S588 of CA. In ascertaining whether the debt meets the grounds for an
uncommercial transaction under S588G(1A)(7). The meaning of this ascertained in S588FB. It
is likely that these requirements will be satisfied as a reasonable person in these
circumstances are likely not to enter into the agreement in the best interests of the
company. This is due to the director’s awareness of the dire financial situation of the firm
and reliance on projections of growth rather than current cash levels when entering this
transaction.
ASIC is able to take both civil penalty action and criminal action under S588G(3) on the
directors of Buns in Tums Pty Ltd. However, due to the nature and intention of the case,
criminal action is less likely than the former.
ii. Under S180 of the CA, directors owe a duty of care and diligence to the standard a
reasonable person in the same situation would exercise. This is made in respect to the
business judgement rule S180(2). This aims to protect directors from investment decisions
leading to poor outcomes due to factors beyond their control. In some ways, the poor
reviews leading to loss of income may have been beyond director control.
Whilst the directors may be able to prove S180(a)(b)(d) are conformed to, it is unlikely
S180(c) has been met. This is further clarified by ASIC v Rich which puts focus on the
significance of the business decision. Though aware of the significant financial undertaking
of $80,000, it is probable they did not inform themselves of the current cash flow situation
and their inability to service their debt to an appropriate level.
It is likely ASIC will take civil penalty action based on directors duties established under
S1317DA of the CA.
iii. Many available to different directors. For insolvent trading under S55H of the CA:
a. Directors had reasonable grounds to believe the company would remain solvent –
though could not forecast drop in sales, in the current cash flow situation, they
could not finance current debts. Thus unlikely to have this defence.
b. For Louise, she may claim she took all reasonable steps to prevent incurring the
debt. By voting against the purchase and expressing her concern, Louise may have
grounds for this defence. However, she did not take reasonable steps to inform
herself of the situation thus this is unlikely to be successful. It may however, leave
her with a lower degree of liability than Lee who was pushing for the purchase and
ignoring her concerns.
c. Note: no evidence of safe harbor carve out or any other defences under S588H.
For the breach of S180 of the CA – the business judgement rule has in itself been used as a
defence as evident in ASIC v Mariner Corp on the basis of the fulfilment of director’s duties.
As discussed previously, it is unlikely any of the directors qualify for exemptions under this
rule.
Facts:
Issues:
Discussion:
ii. S140(1)(a) allows the constitution to have an effect as a contract between the company and
each member. As the dividend payment clause does not breach any of the exemptions
outlined in S140(2), it takes effect. This gives power to Sumo to take action against the
company Wambo to fulfil their legal obligations.
iii. Courts have the power to make an order in regards to oppressive conduct under S232 of CA.
Sumo may claim (a) the conduct of a company’s affairs is (e) oppressive to members.
a. Under Wayde v NSW Rugby league, oppressive conduct could be found by
examining whether a reasonable board of directors would reach the proposed
conclusion. It is unlikely a reasonable board of directors who adhere to their duties
would breach the constitution for personal gain.
b. Under Thomas v HW Thomas it clarified the conduct must also be unfair instead of
just prejudicial or discriminatory. These facts can be distinguished from the findings
of Thomas v HW Thomas due to the intention of directors on personal gain rather
than the best interests of the company.
The court may make an array of orders including winding up, changing the constitution along
side others as outlined in S233(1). However, it is likely it will S233(1)(d) regulate the
company’s affairs in the future to limit this behaviour.
iv. Company’s ability to pay dividends are limited by S254 of the CA. Though by law Wambo is
able to pay dividends as it doesn’t fit the criteria of S254T(1), S254U gives power to directors
to determine the amount, time and method in which dividends are paid. This however, is a
replaceable rule overridden by the amendment in Wambo’s constitution. Irrespectively, this
must be done in line with directors duties which were not fulfilled.
Issues (A)
i. Does the CA and general law give rise for the defective contract between Lesha and Major
events to be enforceable by law through implied authority of a director (Eddie) acting alone?
Discussion (A)
i. Under S127, in multi-director companies, two signatures are required to bind a company to
a contract unless there is a constitutional procedure that declares otherwise. Under the
precedent set in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd, the only
times a single director in a multi-director company has the authority to bind the company
contractually is when:
a. Authority been expressly granted – Eddie was on holidays and not sent by Major
Events for this contract to be entered.
b. Authority must have flowed from board as a whole – it appears no conduct of the
board has lead to establish grounds for this exemption.
It is likely Lesha’s management was aware of the need for dual signatures on contractual
documents thus they as the outsiders are likely to suspect Eddie did not have authority to
bind the company contractually.
Issues (B)
i. S182
ii. S183 – advantage
iii. Share buy back c- S257 (Insolvent trading?)
iv. Financial assistance capital S260D
Trumble Consulting Ltd is an unlisted company which provides financial and taxation advice. Its
managing director is Malcolm, a professionally qualified accountant, and its other two directors are
Lucy and Alex, who are both lawyers. All three directors work in the company. The company has
suffered a severe financial downturn as a result of increasing competition from other advisory
businesses. Confidentially, Malcolm tells his father, Bruce, that the company may not last until the
end of the year. Bruce, who owns 10% of the company’s share capital, wants to sell his shares and
threatens to go public with the news about the company’s financial situation. To keep him quiet,
Malcolm agrees that the company will buy back Bruce’sl shares. While the company will be solvent
immediately after the company buys back the shares, the payment to Bruce is likely to affect how
long the company will remain in business.
Advise ASIC whether Malcolm has committed any breaches of the Corporations Act 2001, and if so,
what action it can take against him. Do not discuss s 181 and s 182 of that Act or their general law
equivalents.
Acme Ltd’s share capital is made up of 100,000 ordinary shares and 1,000 preference shares which
come with a right to a 25% preferential dividend. Because of this large preferential dividend right,
Acme is having trouble raising much needed ordinary share capital, so its board proposes reducing
the company’s share capital by returning the preference share capital.
After giving 21 days’ notice to shareholders, it holds a general meeting of its shareholders but not all
of them attend. At the meeting, both the ordinary and preference shareholders who attend the
meeting vote unanimously to approve resolutions to return the preference share capital.
Rhonda holds 2% of the preference share capital. Unfortunately, her notice of meeting was lost in
the mail, so she did not receive it and she does not attend the meeting. If she had attended, she
would have opposed the resolutions.
Advise Rhonda what action, if any, she can take with respect to the return of preference share
capital. Would it have made a difference if Rhonda held 22% of the preference share capital? [30
marks]
Question Two
Kiran, Cindy and Yi are siblings who jointly own Grand Prix Cars Pty Ltd (GPC), a carsales business.
The managing director and chair of the board is Kiran, with Cindy (an accountant) and Yi (an
engineer) as non-executive directors. Kiran does not bother to hold regular board meetings, and
Cindy and Yi pay no attention to the business of the company.
GPC is not doing well financially. The company is often late in paying the mortgage on the company’s
showroom to YBank, and it has not paid wages for its employees for a month. Kiran has his own
financial problems. He sells an expensive car to a customer who is willing to pay $5,000 cash, and
pays himself a dividend with the money. He records these transactions in the company’s accounts
although he doesn’t tell Cindy or Yi about them. YBank then has GPC placed into liquidation because
of the non-payment of the mortgage.
Advise whether there have been any breaches of directors’ duties by any of the directors, and what
defences, if any, are available. Do not discuss s 181, s 182 or s183. [30 marks]
Nick, Pauline and Jacqui are directors of CrossBench Ltd, a fitness equipment business, and Pauline is
the managing director. The company is growing rapidly, and it needs to find a larger warehouse.
Jacqui is given the task of finding a suitable warehouse at less than $5,000 per month.
A company controlled by Jacqui’s son, Tasman Enterprises Pty Ltd, owns a warehouse and Jacqui
signs a lease to rent the warehouse at $6,000 per month. Jacqui then tells Nick and Pauline that she
has done a thorough search and that the warehouse owned by her son’s company is the cheapest
she could find, although this is not true. The warehouse owned by Tasman is normally leased for
$5,500 permonth.
(a) What actions, if any, can ASIC bring against Jacqui, Nick and Pauline? Do not discuss s 180of the
Corporations Act. [30 marks]
(b) Is the contract to rent the warehouse enforceable against CrossBenchLtd? [10 marks]
Jacqui has authority though she is director acting alone – as given the task
Was Jacqui’s son put on enquiry – she was a director acting alone usually not okay Brick and
Pipe. Should he have questioned?
End of examination
Pty Public
How can capital be raised Where share issues are exempt Via chapter 6D disclosure
from ch 6D disclosure = s 708 OR where share issue is
exempt from ch 6D disclosure
= s 708
How much disclosure by Small Pty ltd - s 292(2) S 292(1): also continuous
company is required annual Large Pty ltd - s 292(1) same as disclosure obligations for
public disclosing entities
Must the company allow Yes - s 249 X but a RR for pty ltd Yes - s 249X
proxy votes at company companies so can be replaces
meetings?
What disclosure is required by S191 - informal method of S191 note formal method of
directors at board meetings disclosure okay s 191(2a) disclosure s 191(3) but subject
to s191(2c)
How can the company give a In accordance with directors In accordance with directors
financial benefit to related duties - Ch 2E only applies if Pty duties and in compliance with
party? Ltd giving financial benefit is Ch 2E
controlled by ltd