Salomon v Salomon (1897) • Shares can be sold

LECTURE 1 Pty Ltd company required • Companies be shareholders of

CORPORATE LAW shareholders. Thus this exchange: other companies
BLAW20001 Limited liability company
Shoe
business • Company’s debts paid by
What is company law?
Salomon Pty company not shareholders
Describes legal rules in governing a Debenture:
Company • Shareholders only contribute to
company’s: with security
of shoe
the extent of their shares.
• Formation and termination
business • Any unpaid shares can be ‘called’
• Characteristics (e.g. pty/public)
+ by company
• Relationships between patrons
20,001 shares Classes of shares
(e.g. directors/officers)
Shares can have different rights
• Dealings with outsiders
6 shares • Dividend ‘rights’
Aims/purposes of company law Family
• Voting rights
• Investor protection
1. Salomon was director, • Rights & priorities on winding up
• Commercial stability and
shareholder, employee and • Directors have power to issue
consumer confidence
secured creditor (under shares but may require
• Balancing competing interests
debenture securing debt) shareholder approval
• Certainty in standards and rules
2. Company went broke – was Mr Preference shares
Sources of rules
Solomon entitled to priority Diff to ordinary shares Preference
• Corporations Act 2001
under the debenture over other shares usually carry rights to:
• Case law
unsecured creditors? Yes as • Fixed dividend
• Other sources – corporations
company and controller • Priority for repayment of capital
regulation, ASIC act, accounting
separate legal entities • Limited voting rights
standards, ASX listing rules
Capital Structure • No right to share in surplus on
Operation of company law
Equity capital: contributed by winding up
• Private law – (e.g. tort) disputes
shareholders (aka members)
between shareholders v company
• Not all companies have it
• Public law – (e.g. crim law) allows
• Equity generally not repaid
ASIC to punish wrongdoers and
during company’s life
seek compensation for company
Debt capital: owned to outside
What is a company?
creditors (e.g. employees, lenders)
An ‘artificial legal person.’ They are
• Can be secured debt (mortgage)
separate to the owners
• Debt paid irrespective of profits
• Can incur obligations and hold
• If company can’t pay debts it
rights (e.g. shareholder does not
becomes insolvent and is
own what company does)
liquidated - first secured creditors
• Contracts with controllers/others
recover, creditors, then members
• ‘Perpetual succession’ - continues
What are shares?
irrespective of owners
Claims against company with rights
• Separate tax payer
 Types of companies • Allowed unlimited shareholders Increasing share capital
LECTURE 2 By extent of liability: • Can raise funds from ‘public’ • Process of share issue – generally
CORPORATE LAW • Limited by shares • Subject to stricter rules decision of the board S198A for
BLAW20001 • Limited by guarantee (public only) • More procedure (e.g annual meeting) proper purpose
• Unlimited company (e.g. accounting) • More publicity (e.g. published FS) • Types of share issues: IPOs,
Choice of form of business
• No liability company (public only) • Aim greater shareholder protection private placements, rights issues,
• Unincorporated entity – no legal
Proprietary companies via transparency and accountability DRPs and bonus issues
personality separate from their
• S113: Periodic reporting by public and large pty • Restrictions on director’s and
participants (e.g. sole traders, clubs,
o No more than 50 non-employee companies: Ch 2M companies’ powers exist –
partnerships)
shareholders • Why disclose – investor protection, member approval, pty companies
• Incorporated entities – separate legal
o No fundraising activity requiring a market confidence in companies (50+ shareholders share limit)
persons (e.g. corporations and
disclosure document under chap 6D • Consists of financial report, director’s • Pty issuing shares - Corp Act Chap
companies)
o Must have 1+ director report and audit report 254D: Pty must issue share to
• Associations can be incorporated
• S112 - May be a company limited by • Yearly or half yearly original owners before to others
Advantages of incorporated entities
shares or an unlimited company with • Lodged with ASIC and sent to • CA S708 Share offers that don’t
• Can have more than 20 member
share capital shareholders need disclosure - small scale
(S115 prohibits outsize partnerships)
• Some different rules for proprietary • Applies to all public and large Pty and offers (below) and personal offer:
• May have limited liability – S516
companies under the Act or the small Pty on shareholder request o Doesn’t breach 20 investor
• May be easier raise capital – chap 6D
company’s internal governance rules Financial reports ceiling
• Diff tax action - dividend imputation
• More privacy and flexibility • Section 295 – comprises FS (BS, P&L, o Doei8isn’t breach $2 mil
• Corp law as standard form contract
Reporting by small pty company CF), disclosure and notes and ceiling Can be breached if:
Disadvantage of incorporated entity
Annual review – Chapter 2N director's declaration o Sophisticated investors
• More expensive in formation &
• Review date and extract of particular. • Compliance with accounting those investing $500,000+
compliance
Company must correct and respond to standards and true and fair view o Professional investor holds
• May have to reveal info to public
request for particulars Other reports gross assets of 10m+
Registering company
• S 348 - Solvency resolution for • Director’s report – S298
• Done through ASIC – S117
companies not reporting under 2M • Auditor’s report – purpose to provide
• Must have at least one member S 114
• Return of particulars for dormant assurance about integrity of financial
• Must have registered office – can
companies S 348A reporting
nominate lawyer or accountant S121
Large propriety company Reports by disclosing entities
• Names S 248 – Public (Ltd) propriety
For disclosure purposes only, two of All listed, companies with 100+ members
(Pty Ltd), no liability (NL) mining only
following three tests per FY: • Half year reports
Record keeping
• Gross operating revenue of $25 m + • Also continuous disclosure of certain
Financial records:
• Gross assets $12.5m info – ASX Listing rule
• S286 – all companies must keep
• 50 or more employees Continuous disclosure
sufficient records to enable FS prep
Still a Pty ltd company (e.g. 50 non- • What info concerning the company,
• Minute books – minutes of meetings
employee shareholders applies) of which it becomes aware, that a
and resolution of directors & member
Public companies reasonable person would expect to
• Registers S169, search of register S17
• Everything other than propriety S112 have material effect on share price
– must be related to shareholding
• Must have 3+ directors • Exception: confidential info,
• Diff rules for firms S254 (e.g dividends) incomplete agreements
 • Constitution applies only between o meeting, by other directors of De facto and shadow directors:
LECTURE 3 company and members, director, special powers Unless contrary intention appears, a
CORPORATE LAW secretary S:140 (e.g. Eley v Positive o De factor and shadow directors person who is not validly appointed as
BLAW20001 Govt Security Life – no relationship • Voting directors onto board: a director if:
with solicitor) o Members elect directors by i. They act in the position of a
Allocation of decision-making power
• Breach of contract – remedies can ordinary resolution (50%+) RR director (de facto) E.g.
Power divided by two organs:
be used but not damages (e.g. 201G (e.g. DVT Holdings v Chameleon mining
• Members voting together – in general
Houldsworth) Bigshop.com.au) ii. The directors of the company or
meeting
• Enforcement as a member: CALC 5- o Members must approve body are accustomed to act in
• Board of directors
640 Hickman, Bailey Smolarek appointments made by accordance with the person’s
Division depends on:
Single director/shareholder companies directors under casual vacancy instructions or wishes (shadow)
• The Corporations Act
• Only allowed for propriety power S201H RR E.g. Standard Chartered Bank v
• Internal governance rules
• RRs do not apply S 135(1) • Remove directors from board: Antico, Buzzle v Apple – causal
• Company law cases
• Special rules – S198E, 201F, 202C o Vote in general meeting via link between the instructions and
Internal workings
Day to day operations resolution the way the board acted
Companies decide how to manage their
• Board of directors have general o Public: s203D must be ordinary Operation of board of directors
companies based on:
management powers RR S198A resolution • Acts collectively: one vote per
• ‘Replaceable rules’ (RR) s114
• Board role is to direct management o Pty: RR s203C ordinary person regardless of shareholdings
o Apply post July 1998 unless
of company resolution but can be replaced • Majority vote and casting vote of
displaced by constitution
• Board can make all decisions except o Director resigns: S203A chair S248G (RR)
o Prior used old memorandum and
for those given to the members in • Directors control board composition • Managing director (CEO, chairman,
articles of association - many
general meeting by CA or RR o S203 – directors of public secretary and board committees
used Table A inserted into their
• Board may delegate power S198D company can’t be removed by • Executive v non-executive directors
constitution (can be repealed
• Can delegate to CEO/managing other directors (203C for Pty) • Directors vs officers – s 9
and use RR)
director RR 198C o S201K (alt director), 203F(2) • In small company, directory may
o Aren’t replaceable for all
Members clashing with board directors can revoke the MD, run the company’s business
companies (e.g. for public –
Members are able to: S248E directors elect board • Large company directors may have
proxies, removal of directors by
• Vote out board chair, disqualification @D.6, more supervisory, policy centred
members, pre-emption)
• Sell shares 250E and S249U casting vote role (E.g. ASIC v Healey)
• Company Constitution
• Change S198A or other rules Who can be appointed Board meetings
o Adopted during member
However, members cannot interfere • someone who consents – s201D • Directors must receive “reasonable
consent: s 136(1)
with the power of the board (e.g. • human not company – s201B(1) notice” – s 248C (RR)
o Amending after registration
Automatic Self-Cleansing Filter • minimum 18 years old – s 201B(1) • Chair of board elected – S248F (RR)
requires resolution of members:
Syndicate v Cunninghame; John Shaw • not disqualified –S 201B(2) • May have quorum requirement –
s136(2)
& Sons, Australasian Centre for • But note status as a director even min directors e.g. 248F (RR)
o Special resolution – s9: 75% of
Corporate Responsibility v without proper appointment • Sometimes voting not permitted
present voters - can use proxy
Commonwealth Bank of Australia) o De facto & shadow directors s9 • Use of technology permitted s248D
(person in place/send)
Directors o Duties and accountability of • Paper meeting possible s248A (RR)
o Entrenching a rule – require
• Minimum 1 (Pty) or 3 (public) S201A directors can be imposed on What can members decide?
extra requirement for changing
• Types of directors: non-director body • Member votes in general meetings
its rules: s136(3)
o Properly appointed - by general • CA internal management rules give
• Member approval required to:
o Control things: elect and remove
board, change constitution
o Approve or veto certain things:
share capital reductions,
variations of class rights
Member personal action
• Personal action = a legal action to
enforce a personal right
• A member may have a personal right:
o Contract
 Express contract – terms of
issue of the shares
 Statutory contract – s140:
company constitution and RR
that take place in contract
(can only be enforced in their
capacity as member e.g. 254D
o Statute
o General law
 Right to info to be discussed
at meetings: Kaye v Croydon
 The right to vote, unless
constitution says otherwise:
Pender v Lushington
 The right to be protected
against improper dilution of
shareholding: Residues
Treatment and Trading Co v
Southern Resources
 Brunninghausen - personal
duty – lecture 5
 Gambotto - equitable
limitation on the voting
power of shareholders – lec 9
 • Matters stated in s 250R don’t need to • Decision making without a meeting • ‘Curing’ declaration
LECTURE 4 be on the agenda (FS, directors) o In single member companies, • S1322 (4) - (6) – court can declare
CORPORATE LAW • The directors determine the agenda resolution is passed by the that an act, matter, or thing, or a
BLAW20001 when calling a meeting member recording and signing it proceeding, is not invalid so long as:
• Members can request the inclusion of (minutes): s 249B - notice to ASIC o it is procedural in nature
Types of members’ meetings
resolutions to be put to the members o Pty companies may use “flying o the person acted honestly
• Public companies should hold an
at next meeting: s 249N minutes”, where all members o it is just and equitable no
annual general meeting - AGM S250
• 5% of vote or 100 members entitled to vote must sign substantial injustice
• Other meetings named (EGM)
• Co must send out notice of member agreement to resolution: s 249A o Outcome of procedure WOULD
extraordinary general meeting
resolutions, statements - s 249O; 249P Voting have been different
• Governing rules in CA, RR, internal
Giving notice of the meeting • Members entitled to one vote per • Onus on party asserting validity
management rules – constitution
• General rule: 21 days share: S250E (RR) • Substantial injustice (e.g. Poliwka v
• Meetings often called by board or:
o Consent to short notice is • Voting by proxies – s 249Y Heven Holdings, MTQ Holdings)
o S 249C (RR) by single director
possible: s 249H – AGM’s where • Voting (show of hands and poll) – Members rights and remedies
o Listed company by single
all agree; EGMs where 95% agree s250J [RR]; s250K • Required to protect majority
director S 249 CA
o S 249H – no short notice where • Casting vote of chair –s 250E(3) [RR] shareholders or members cant exit
o Court on application if it is
resolution to remove public Irregularities Who can apply:
otherwise impractical S249G
company director. • S1322 – outcome of meeting may be • A member, even if oppression is to
• Can members call meeting:
• Listed companies - 28 days: s 249HA valid despite some irregularity (e.g. them in a capacity other member or
o Requisition by 5% of members
• Notice must be given to members and failure to follow procedure) another member as member S234a
S249D
directors - s 249J; and auditor - s 249K • Applies to “proceeding under the act” • A person removed from the register
o Directors need not convene if
• Notice of meeting must contain: s – includes meetings, mail, email etc of members because of a selective
the purpose is improper:
249L - Special resolutions – s 249L(1c) • Two mechanisms: capital reduction or oppressive
NRMA v Parker
• Sufficient info so shareholder can o Automatic validation (valid behavior S 234(b)
o s 249Q – meetings only for
decide whether to attend or proxy or unless a court says no) or Member’s statutory remedies:
proper purposes: NRMA v
ignore e.g. Residues Treatment & o Curing declaration (invalid until a • Procedural irregularity – s 1322
Scandrett - motive irrelevant
Trading v Southern Resources court says yes) • Oppression - s 232
o S 249E – where directors don’t
• Must “fully and fairly inform and • Section 1322(2) - includes absence of o In respect of company affairs
call meeting
instruct the shareholder about the quorum, defect of notice or time or actual/proposed act/unact
o Direct convening by 5%+
matter on which he or she will have to • Not invalid unless court is of the or resolution of members
members: s 249F
vote” (E.g. Devereaux Holdings) opinion (substantial injustice) results o Where conduct is either
o Constitution can’t take away
• Need to balance info presented, make or may result and declares it invalid contrary to all members
these statutory rights to call a
accessible; must not be misleading or Automatic validation interest or is oppressive,
shareholders meeting
deceptive (even unintentionally) • 1322(2) concerns complainers on the prejudicial to members
o Right to inspect minutes and
Conduct of meetings receiving end of a procedural • Court-ordered winding up - s 461
registers: s 251B and s 173
• Quorum – s 249T [RR] irregularity applying to the court to • Variation of class rights – s 246D
o Right to inspect ‘books’: s
• Use of technology – s 249S have the proceeding invalidated (e.g. Member’s derivative action – s 236
247D [RR]; court order: s 247A
• Proxies and corporate representatives no notice for meeting>loss as a result – where wrong done to company &
Members meeting agenda
– s 249X – RR for pty ltds only of decision>court can’t fix otherwise) remedy goes to company but
• Only matters in notice of meeting
• Directors elect the chair of the Court’s power to validate irregularities member starts legal action
can be considered
members’ meeting – s 249U [RR] • Statutory injunction – s 1324 –
Respective tests of oppressive conduct • regulating the company’s affairs hi hi
• Wayde v NSW Rugby League : Was • purchase of oppressed member
directors’ decision one that no board share
of directors acting reasonably would • order for the company to start legal
have made? Not here proceedings against someone
• Look at the unfairness to the member • Avoids members’ derivative action
– not enough just to be ‘prejudicial’ appointment of a receiver
(e.g. Thomas v HW Thomas – policy of • Restraining/requiring act or
low dividends not oppressive) omission
• Diff if there was a change of policy Winding up on just equitable ground
deliberately to exclude someone • Deadlock
Examples of oppressive conduct • Fraud or misconduct (e.g. Loch v
• Diversion of business opportunities John Blackwood)
(e.g. Scottish Cooperative v Meyer) • Failure of substratum (e.g. Tivoli
• Improper exclusion from manage - Freeholds)
Does member have a “reasonable • Breakdown in mutual trust (e.g.
expectation”? (e.g. Hogg v Dymock) Ebrahimi v Westbourne Galleries)
• Oppressive conduct of board
meetings – (e.g John J Starr estate)
• Share issue for improper purpose
(e.g. Kokotovich Construct v Walling)
• Breaches of directors’ duties (e.g.
Spargos Mining NL)
• Sale of company assets at undervalue
(E.g. Cassegrain v Gerard Cassegrain)
Orders court can make for S233
Any it thinks appropriate. Example:
• winding up company
o A member (or other) can apply
to have company wound up if:
 just & equitable s461(1k)
 directors acting in own
interest s461(1e)
o oppressive, unfairly prejudicial
conduct - (s 461(1)(f))
o Member’s right to apply
o S 462(2)(c) – ‘ a contributory’ –
ie, a member per s 515.
o BUT no winding up order under
(e) if some other remedy
available, AND Member acting

LECTURE 5
CORPORATE LAW
BLAW20001
Breaches, contraventions and rights
Contravene/breach are interchangeable
• What can be breached? (not ‘may’)
o General law – given right to sue
(cause of action)
o CA: criminal breaches, civil penalty
breaches, civil right of action
• Types of actions
Criminal breach
Civil rights of
Civil breach
action
• Civil right of action (doesn’t need
• Who brings these actions?
o ASIC – criminal actions, civil
penalty actions (as per S 1317E)
o Company – civil penalty actions,
civil actions per general law/CA
o Members – special provisions
under statute e.g. S232, 416, 140
ASIC criminal enforcement – ‘offences’
• For serious (S 184) and small (S 254)
• Punishment – maximum in schedule 3
use penalty units - unit $210/jail/both
Civil penalty provisions: Pt 9.B
Inc director’s duties, insolvent trading,
related party transactions, capital
maintenance, financial reporting S1317E
• Action by ASIC or company
• ASIC applies to court for a declaration
of contravention
• Civil – standard of proof, rules of
evidence and procedure
• Court can order (on ASIC application):
o Pecuniary penalty (>200k) s1317G
o Disqualification order: s 206C
o Compensation order: s 1317H
Company can apply for compensation
without ASIC action: s 1317H
Forgiving director for breach:
• YES: Civil penalty breach (S1317S),
civil liability – negligence, default,
breach of trust or duty (S1318)
• NO: Criminal breaches of CA
Requires:
i. The officer has acted honestly, and
ii. Considering all circumstances, it is
“fair” for the officer to be excused,
wholly or partly, from liability
Statutory injunction – S1324
• Only deals with breaches of CA –
not breaches of RR or case law
• Court order concerns past, present
future actions eg restrain, damages
• Who can apply?
o ASIC or the company
o Any party where “interests have
been affected”
 Creditor: Allen v Atalay, not
damages McCracken v Phoen
 Member? Airpeak v Jetstream
NO for Mesenberg v Cord
Member derivate action (SDA) 2F.1A
• Statutory derivative action (SDA)
o Action to enforce company right
o Though member brings action,
not for personal benefit of the
member but for whole co
o Remedies go to company
• Who may apply? (standing)
o member, former member, or
person entitled to be member
of this or related company
o Former or now company officer
• Criteria: court grant leave if all met:
o probable that company not sue
o applicant is acting in good faith
o company best interest if grant
o serious question to be tried
E.g. Swansson v RA Pratt Properties
Director and officers duties
• Core obligations – care & diligence,
loyalty & good faith
• General law origins –give company
right to action, case law evolution
• Statutory versions as well – uses
cases to explain what statute
requires, gives rise to ASIC as well as
company, with ASIC may be criminal
General law (case law) duties
Affects who can enforce duty
• Duties owed by:
o Directors
o Senior executive officers
o Fiduciary relo exists with
company due to their power &
company vulnerability to actions
• Duties owed to:
o Company
o Sometimes indv shareholder -
Brunninghausen v Glavanics
Ratification by the company
Resolution of member in GM may ratify
some breaches of general law duties:
• Members must be given full info
• result is director or officer cannot be
sued by the company
• Unavailable for statutory duties -
Miller v Miller
• Company can’t ratify where
o It is oppressive
o Virtually insolvent (Kinsella)
o Breaches the equitable limitation
o Takes member’s personal right
o company property is being taken
by directors/majority members
o Where directors are acting for an
improper purpose
Who owes statutory duties:
Directors includes de facto/shadow,
officers (191,588) employees (182,183)
Who enforces the duties?
Statutory duties
• Can be enforced by ASIC – criminal &
civil penalty (all civil penalty orders)
• Company can seek compensation (1/3
civil penalty orders a court can make)
• General law duties enforced by
company (or liquidator if being
wound up) – civil law
• Content of duties are same where
they overlap but:
o Statute allows ASIC to be involved
in enforcement
o Different remedies available under
statute and general
Civil penalty consequences
• Most statutory duties are civil penalty
provisions under P 9.B of CA
• On application by ASIC, court may:
o Make a declaration of
contravention: s 1317E
o Order a pecuniary penalty up to
$200,000: s 1317G
o Disqualify the directors for an
appropriate period: s 206C
o Order compensation be paid to
company: s 1317H.
• Right to seek compensation order:
o ASIC – s 1317J(1)
o Company – s 1317J(2).
Criminal consequences of duty breaches
• Disclosure duty – s 191 – (only) a
criminal offence -10 penalty units
($2,100); 3 months jail maximum
• Some civil penalty duty breaches also
have criminal equivalents
o breaches of duties with intent
dishonesty or reckless: s181-184,
S588 - criminal penalty of 5 years
jail +/- fine: $420k
o No crim breach duty of care s180

LECTURE 6
CORPORATE LAW
BLAW20001
Duty of care and diligence
• Sources of duty:
o General law negligence cases
o S 180(1) – duty to act w care etc
o Employment contract – executives
• If DOC is breached –negligence
• Standard of DOC director X required:
• A reasonable person
• Doing X’s job
• In X’s company
• Would exercise (largely objective test)
A director must
See Daniels v AWA Ltd. Every director:
i. obtain basic understanding of
their company’s business
ii. keep informed about and monitor
the company’s activities
iii. regularly attend board meetings
iv. monitor financial position
• Directors with special skills are held to
the standard of a person professing to
have those skills: ASIC v Vines – CFO
• More involved = more expected
• Exec directors’ greater involvement in
the business of the company leads to
an expectation of greater knowledge,
focus and awareness
Delegation and reliance defenses – S189
• Directors may delegate unless
constitution restrict delegation S198D
• If delegate is negligent, director will
be liable unless S190 satisfied –
director had reasonable grounds to
believe delegate was reliable
• When a director’s reliance on info
provided to them is reasonable
• Set in S189- good faith & independent
ASIC v Adler
Example of breach of DOC
• ‘Loan’ of $10m by HIHC to PEE;
partly used by Adler to buy HIH
shares to shore up HIH share price.
• Look at roles and actions of Adler,
Fodera and Williams
• Material prejudice to co’s interests
• Not disclosed to other directors; no
talk by investments committee
• No proper safeguards eg security
for the loan; no interest payable
• Companies had financial problems
Also, look at Re Onetel;ASIC v Rich;
ASIC v Hellicar (James Hardie case);
ASIC v Healey
Business judgement rule – S180(2)
• Designed to protect director from
negligent liability where properly
made decisions end badly
• Director has met S180(1) only
• Applies if met DOC in connection
with business judgement if:
o good faith for a proper purpose
o no material personal interest in
subject matter of judgment
o inform themselves
o rationally believe judgment in
best interests of the company
See ASIC v Rich
Insolvent trading
Directors have a duty to prevent their
company incurring debts when the
company is insolvent or would
become insolvent: s 588G
• Duty is owed by “directors” -
includes de facto/shadow (e.g.
Standard Chartered Bank v Antico)
• Requires:
1. Was director as debt incurred
2. Company was “insolvent” at
that time or became insolvent
by incurring that debt
3. When incurred, reasonable
grounds to suspect insolvency
Defining ‘incur a debt’
• The debt
o Must be specific amount
o must be incurred voluntarily
• When does a company incur a debt?
o Buys but doesn’t pay for it yet
o Has services performed but
doesn’t pay yet
• Some actions are deemed to be
debts not ‘true debts’ – 588G(1A)
o eg declaring a dividend – s 254U
o uncommercial transaction s588F
o share capital transactions – ch2J
• Why deem these as debts - Extends
ASIC’s ability to bring action – NB
not all debts are deemed debts!
Uncommercial transaction – S588G(1A)
• Entering into an uncommercial
transaction – s 588FB
1) A transaction of a company is an
uncommercial transaction of the
company if, and only if, it may be
expected that a reasonable person
in the company's circumstances
would not have entered into the
transaction, having regard to:
a) the benefits (if any) to the
company of entering into the
transaction; and
b) detriment to the company of
entering the transaction; and
c) the respective benefits to other
parties to the transaction of
entering into it; and
d) any other relevant matter.
Insolvency
Section 95A : insolvency worked out
using cash flow test (not BS test)
• Question is: Is company able to pay
all its debts, as and when they
become due and payable?
• So: What cash does company have?
What access to finance company has?
See: Queensland Bacon v Rees, Credit
Corporation v Atkins:
Liability for insolvent trading
• S 588G(2): Liability is imposed where:
o the director was aware of
reasonable grounds for suspecting
insolvency (subjective test), or
o a reasonable person doing that
director’s job in company would
have been aware that there were
reasonable grounds for suspecting
insolvency (objective test)
Safe harbor carve out - S588GA –
S558G(2) does not apply if after
realizing company is becoming
insolvent they take action reasonably
likely to lead to a better outcome
o Evidence burden on director,
S588G burden on ASIC/liquidator
o (2) – what director has to do
o (4) (5) –no carve out available
• S 588G(3) criminal liability where:
o (c) person suspected when company
incurred debt that company was
insolvent or would become
insolvent due to incurring that debt
or other debts (as para 1b) and
o (d) person's failure to prevent
incurring the debt was dishonest.
Defenses – S588H
• Director had reasonable grounds to
expect, and did expect, that company
was solvent and would remain solvent
• Delegation & reliance competent ppl
• Absence due to illness or other
• Director took all steps to prevent debt
Consequences
• Civil penalty +/- compensation
• Criminal liability S588G(3)

LECTURE 7
CORPORATE LAW
BLAW20001
“Best interests” duty
Director must act in good faith &
company best interest for proper
purpose
• 2 separate issues – both are statutory
duty (S181), 2 general law duties
• Enforcement – S181 (civil penalty by
company and ASIC), S184(1) (criminal
ASIC: dishonest), gen law (company)
“Best interest” for a company defined
• In a solvent company - for members
• Must look at company as whole (e.g.
Greenhalgh v Ardene Cinemas)
• Must balance competing interests
• Must act fairly but not identically to
members of diff classes (Mills v Mills)
• Balance between present and future
(e.g. climate change)
Creditors’ interest
• When is insolvent or near, creditors
interests become those of company
(e.g. Kinsella, Walker v Wimborne)
• Duty not enforceable by creditors but
company’s duty (Spies v The Queen)
Interests of other stakeholders
• Directors can account interests of
employees, customers, supplier &
other only if benefit comes back to co
• Consider ESR – doing well, doing good
• Outsiders cannot receive priority over
interests of members
Duty to act for a proper purpose
• S181 - also a general law duty
• Even if director’s actions are in
company’s best interests, it may still
be a breach of duty if a power is not
exercised for a proper purpose
• See Howard Smith case:
o Question of law – for what
purpose was power conferred?
o Question of fact – for what
purpose was power exercised?
• Mixed purpose: if >1 , use “but
for” test - Whitehouse v Carlton
• Can’t use company money to
campaign for director re-election:
Advance Bank v FAI Insurances
Examples
Share issue power
• Normally a power of the board of
directors
• Proper purposes include :
o to raise capital
o for an employee share scheme
o as consideration purchase asset
• Improper purposes include :
o entrench existing director board
o to fight off a hostile takeover
bidder – saving their own jobs
o make majority - a minority
member – Howard Smith
Permanent
• Improperly used power to enter
into contract to acquire land from
Tower. Purpose was to put Tower
in funds to purchase business from
JCLD (which benefited directors)
• Kokotovich Constructions v
Wallington: diluting another
shareholder’s holding
• Western Ventures: dilution to
defeat resolution to remove
directors - cheque for payment of
7m shares not deposited
• ASIC v Investors Forum: partly paid
shares - $0.0001 cent per share
paid – not to raise capital! 210,
shares raised $21k
Corporate groups
• Companies can be shareholders in
other companies
• Often different aspects of the
business are owned or carried out
by different companies in a group
• Holding companies/subsidiary (s46)
and related bodies corporate (s50)
• Controlled entities – s 50AA
• Law treats them as separate entities
with a few exceptions
• 2 corporate group issues
o Can directors of 1 company help
other companies in the group?
o When is the holding company
liable for subsidiary’s debts?
• Duty is to each company separately;
directors can’t just consider group
as a whole (Walker v Wimborne)
Test: whether an intelligent honest
person in the position of the director
could have reasonably believed the
decision would benefit the company
(Equiticorp Finance v BNZ)
• Section 187 - Subsidiary directors
are taken to act in the best interests
of the WHOLLY OWNED subsid
where:
o Subsidiary constitution expressly
authorises it; and
o Act in good faith in best interests
of holding company, and
o Subsid is not insolvent and is not
made insolvent by the action
Piercing the corporate veil
• Shareholders normally don’t have to
pay company debts as per S516 –
concept of ‘limited liability’
• Piercing the corporate veil means
making shareholders liable for
corporate debts – very rare
o Avoiding a legal duty
o Gilford Motor Company v Horne
o Jones v Lipman
• But note that statutes can expand this
liability:
• FYI only – 2017 Fair Work Act
amendments to impose liability on
holding companies and franchisors for
worker underpayments.
Holding company insolvent trading
liability – S588V
• Liability for holding company of
company that incurs debts
• Insolvent trading requirements –
insolvency, reasonable grounds to
suspect insolvency, then …
o (d) one or both of the following
subparagraphs applies:
i. the corporation, or one or
more of its directors, is or are
aware at that time that there
are such grounds for so
suspecting;
ii. having regard to the nature
and extent of the corporation's
control over the company's
affairs and to any other
relevant circumstances, it is
reasonable to expect that:
a) a holding company in
corporations circumstance
would be so aware; or
b) one or more of such a
holding company director
would be so aware; and..

LECTURE 8
CORPORATE LAW
BLAW20001
Duty to avoid conflict of interest
• Director must avoid actual or
substantial possibility of conflict b/w
personal and company interest
• Unless permission of company
obtained or constitution allow: breach
• Entrenched in general law:
o Hospital Products v US Surgical
o Phipps v Boardman
• Entrenched in statutory duties:
o S182-183 – civil penalty breaches
o S184 – criminal penalty where
dishonest (ASIC only)
General law and statutory duty differ:
o Statute has extra provisions re
conflict (S191,195)
o Statutory duty wider than general
law – general law for ‘fiduciaries’
statute – S182-3 directors, officers,
employees S191 directors
Cases vital in explaining breaches of
statute & separate method of action
General law conflict rule
• Very strict duty – designed to protect
shareholders. Can arise eg where
director contracts with the company
• Director's interest in transaction may
be direct or indirect eg via another
company/partnership (Aberdeen Rail)
• Take corporate opportunity/property:
o Furs Ltd, Cooks v Deeks, Peso
Silver Mines
o Director breach even if company
can’t take opportunity – unless
company agrees (Regal Hastings)
o When can resign to take
opportunity? (Canadian Aero Ser)
Conflict of duties
How to avoid? (South Aus v Marcus)
• Company consents – full disclosure
to members in GM and pass
ordinary resolution OR constitution
permits and full disclosure made
• Constitution modifies the duty
Disclosure of interest
• S 191 – Director must disclose
material personal interest unless:
o Failure to disclose is breach
o Criminal breach not civil
• Material personal interest –
defined in McGellin v Mount King
• S 192 - give stand notice of interest
• S 193 – disclosure is in addition to
disclosure duties + constitution
• S 194 (RR) – Pty Co directors have
interest & vote - breach unallowed
Voting restriction – public co directors
• S 195 – director with a material
personal interest must not be
present/vote at meeting – unless
other directors (or ASIC) allow
• Other director’s decision must be in
best interest of company
Improper use of position or info
Directors unallowed to use position
(S182) or info from position (S183) to
gain advantage for themselves or
other to cause detriment to company
• Civil penalty breach
• Position: Grove v Flavel, ASIC v Max
• Info: ASIC v Vizard
• Criminal breaches S 184(2)(3): R v
Heilbronn (illegal phoenix activity)
R v Byrnes (fraudulent sign of docs)
Accessory liability – S 79
Note accessory liability for s181-183:
Eg 182(2): ‘A person who is involved
in a contravention of subsection (1)
contravenes this subsection.
Note 1: Section 79 defines involved’
S 79:
• A person is involved in a
contravention if, and only if, person:
• (a) has aided, abetted, counselled or
procured the contravention; or
• (b) has induced, by threat, promises
or otherwise, the contravention; or
• (c) has been in any way, by act or
omission, directly or indirectly,
knowingly concerned in, or party to,
the contravention; or
• (d) has conspired with others to
effect the contravention.
Related party transactions – 2E
Five requirements:
• Public companies, or company
(public or pty ltd) controlled by a
public company – s 208
• Giving financial benefits - 229
• To related parties – 228
• Okay if member approval given –
special rules for this, OR
• the benefit is exempt
Defining financial benefit – S229
• Broad & can include interpose entity
(indirectly providing benefit)
• Includes buying, selling or leasing
assets or services, providing finance
or issuing shares
Who is a related party?
(1) Entities that control the public co
(2)(a) – directors of the public co
(2)(b) – directors of controlling entity
(2)(d) – spouses of directors of above
(3) parents or children of the above
(4) entities controlled by any above
(5) an RPT within last 6 months
(6) likely to be RPT at in the future
(7) in concert w RP for financial benefit
Exempt transactions include:
• benefits in wholly-own groups - S214
• remuneration for directors - S211
• on arm’s length terms - S210
o Same deal as public company
would do with a stranger
o OR more favourable to the public
company than arm’s length deal
o Not about price - does public
company give person opportunity
that is not available to others? Eg
to buy shares; sell back shares to
the company (selective buyback)
• benefits to related parties that not
discriminatory eg where the related
party gets benefit as member - S215
Voting required
Shareholder approval by ordinary
resolution, but not just any regular
company approval!
See s 217 – 227
• Material lodge with ASIC first – s 218
• Explanatory statement – S219, s 222
• Special notice requirement - s218-221
• Benefiter as related parties, or their
associates, can’t member vote - s224
• Vote is by public company members,
even where benefit given by
controlled entity.
Breach of related party transactions:
• Company contravenes but has no
penalty – that would hurt the
shareholders
• Persons involved in company’s
contravention liable for civil penalty
breach: s209(2) – accessory liability
• This is NOT a breach of duty
• Criminal offence: s 209(3) - ‘Commits
an offence if they are involved in a
contravention of S208 by a public co
or entity and involvement dishonest.’

LECTURE 9
CORPORATE LAW
BLAW20001
Maintenance of Capital
General principle: company maintain its
paid up share capital (Trevor Whitworth)
• Cannot give it back to shareholders
• Represented by CH 2J CA:
o Financial assistance
o Permitted share buy-backs
o Self-acquisition
o Reductions of capital
Dividends
• S 254 T – Dividends not paid unless:
o Assets exceed liabilities
o Fair & reason to shareholders
o No prejudice ability to pay
creditor
• Profit rule: “can pay dividend if earnt
profit” – not overridden as act
specifies when cannot pay
• Criminal provision for company
• Dividend payment may be insolvent
trading S558(1A) - director conseq.
• S254U – directors set dividend but
subject to S254T and director’s duties
• S254W – dividend right of shares per
ltd and pty ltd companies
Financial assistance capital – S 260D
Financial assistance by company for
acquiring shares in company/holding co
• (1) Contravention by company but no
penalty for co transaction (protect)
• (2) Persons involved liable for civil
penalty – all inc directors and others
• (3) Criminal consequence if dishonest
Permitted buy-backs - S257A – S257J
Can buy back own shares if doesn’t
prejudice ability to pay creditors and
follows procedures (table – S257B)
• Offer-shareholder accept or refuse
• Certain buy-backs (eg large) must
be approve by members resolution
Buy back approval rules:
• S257C – Equal access: only requires
ordinary resolution
• S257D – Selective buy back
o Special resolution w no votes
cast in favour by those whose
shares are being bought back
o 75% of those entitled to vote
o Aims protect those left behind
• No consequences for breach of
S257A as if does not meet
conditions, S259A breach applies
Prohibited self-acquisitions – S259A
S 259A prohibits company from
acquiring shares itself
• Failure to properly execute buy
back under S257 is breach of S259A
• Rationale for prohibition
• Does not extend to redeemable
preference shares – Part 2H.2
Consequence – 259F
(Same as for financial assistance)
• (1) No company offence
• (2) Persons involved liable for civil
penalty breach
• (3) Crim liability where dishonest
Permitted reductions of capital S256B
Reductions of capital may be made to
return excess capital, cancel uncalled
capital or cancel capital no longer
represented by assets (neaten up BS)
• If procedure followed properly no
Gambotto limitation
Company can reduce its capital if:
• Fair to shareholders as whole AND
• Does not materially prejudice the
company’s ability to pay creditors
• Approved by shareholders in S256C
Shareholder votes:
• Equal reduction S256C(1) – ordinary
resolution
• Selective reduction S256C(2)
o Special resolution with no
votes cast by anyone receiving
consideration from reduction &
o Separate special resolution of
whose shares are to cancelled
Consequences of reduction breach:
• (2) transaction still valid, company
not guilty of offence
• (3) Civil penalty liability for involved
persons
• (4) criminal liability if dishonest
Shareholders action: capital transaction
If Ch 2J complied with:
• Use oppression remedy if they have
been oppressed, unfairly prejudiced
or if transactions are contrary to
interests as a whole
• See if possible S260A, S257A
• Reduction must be fair and
reasonable to shareholders
as a whole – S256B
If 2J sections are contravened:
• S1323(1A) injunction available to
members or creditors where
insolvency is an element
Deemed debts – Insolvent trading
S588G(1A) includes:
• Paying dividend
• Reduction of capital
• Buying back shares
• Financial assistance to buy shares in
the company or its holding company
• Entering into an uncommercial
transaction S588FB
• There are another way that ASIC or
liquidator can enforce capital
breaches when company insolvent

LECTURE 10
CORPORATE LAW
BLAW20001
Variation of class rights
Class right: rights attached to shares
• Eg dividend ‘rights’, voting rights,
rights to return on capital when
company liquidated
• What is a variation (changing rights as
people hold them) of class rights?
o Greenhalgh v Arderne Cinema
White v Bristol Aeroplane
o General law test is narrow –
effect on enjoyment is not
enough; legal rights must vary
o However, the Act adds to
general law by deeming other
actions to be variations - S246C
Deemed variations of class rights - S246C
Certain actions may amount to
variations in class rights:
• Splitting class into two - S246C(1)
a) Rights of shares change
b) Form a separate class
• Varying the class rights of some
members only – S246(2)
• Co with 1 class propose 2nd – S246(5)
• New preference shares that rank
equally – S246(6)
How can a company vary its class rights
Section 246B: variation or cancellation
permitted only
• In accordance with procedure set in
constitution; or
• Where constitution silent to variation
procedure, by special resolution of co
and a separate special resolution of
each of the new classes (A B C vote)
If no procedure, rights not varied. If co
acts as rights varied - oppression remedy
Members unhappy with variation
Only applies where procedures
followed (eg shareholder outvoted).
• S246D: rights of dissenting
members where the variation,
cancellation or modification does
not have unanimous cancellation
• Members holding at least 10% of
class can apply for unfair prejudice
(upper 25%+1 as special resolution)
• Under 10% - oppression remedy
Can company’s constitution allow it to
acquire shareholder’s shares?
• Members have right to change
constitution – S136(2)
• Members may exercise voting
rights in their own self-interest
(even if also director) but limits
called ‘the equitable limitation’
o To stop unfair exploitation of
minority shareholders
o As not always possible for
minority shareholders to sell
Changing the constitution:
• Even where S136 complied with,
amend may be invalid due to
‘equitable limitation’
• Gambotto v WCP deal with:
o Amendments that expropriate
shares (category 1)
o Other constitutional amends
give rise to conflict (category 2)
Gambotto v WCP
• Majority passed a resolution for
compulsory acquisition by IEL of
other shares
• IEL did not vote
• Gambotto didn’t
attend or vote
He had 30% of
special resolution votes. Thus pass.
Gambotto establishes different tests X
for different amendments – (1) ratio
thus binding (2) obiter:
• Category 1 amendments: Amend to
allow expropriation of:
o Minority shares; or
o Valuable proprietary rights
attached to their shares (eg
vote/dividend)
Only valid if:
o Proper purpose; and
o No oppression of minority
shareholders
Proper purpose test: Is restrictive.
Advancing company’s commercial
interests insufficient. Only proper
purpose is to prevent harm to
company eg:
o Minority shareholder is
competing with company
o Removal of member necessary
to allow company to continue
in present business
Must show no oppression. Requires:
o Procedural fairness - fully
disclosed, independent valuate
o Substantial fairness – fair price
• Category 2 amendments: Other
amendments involving conflict of
interest between majority and
minority shareholders.
Are only valid if:
o Done for proper purpose and;
o No oppression of minority
shareholders
Broader than category 1: obiter only
Gambotto ‘equitable limitation’ only
. applies to constitution share change
. not statutory reduction of capital – see
. Winpar Holdings v Goldfields

LECTURE 11
CORPORATE LAW
BLAW20001
Corporate capacity
S 124 – companies have capacity to do
most natural legal persons can do plus:
• Issuing shares
• Anything authorised by other law
• Effect of internal limitations on
powers in co’s own constitution –
transactions w outsiders benefits co
• S125 – constitution may limit power
but acts outside those limitations are
invalid against third parties
• Internal remedies may be available
(eg directors act in improper purpose)
Company contracting
• How do companies enter contract?
o Contracting ‘directly’ – board
decision with contract executed by
people (eg directors/senior)
o Contracting ‘indirectly’ via agent
• Contract valid despite of how it made
• Real issue: is it made with authority?
Enforcing defective contracts
• What is a defect?
o Lack of actual authority to make
contact
o Defect in procedures eg wrong
person signs
• Company denies bound by a contract
• But outsider wants to enforce it
• Policy issue: Need to balance the
competing interests of
o outsiders dealing w cos; and
o innocent shareholders and
creditors of companies
Contracting directly
• Traditionally: by using its “common
seal” - seal no longer required: s 123
Three ways possible now:
1. execute the document with seal, &
necessary witnesses – s127(2), or
2. execute the document without seal
- signed as required by s 127(1), or
3. use procedure set out in your
company’s own constitution
Company contract via agent – S126
• Company is the ‘principal’
• Agent makes the contract on the
company’s behalf with an outsider
• Contract is then between the
company as principal & outsider
• but the agent must have
“authority” to act on behalf of co
• A person has authority to act for a
company if she or he has :
o Actual authority – express or
implied; OR
o Apparent authority
Actual authority
Express actual + implied actual –
express limitations = actual authority
• Express actual
o can arise from a provision in
CA or co’s constitution S198A
o Or when one with actual
authority delegates some of
their own actual authority
• Implied actual
o Can arise by implication eg
appointing to position
o Diff co officers have diff levels
of implied authority
o NOTE – express restrictions
LIMIT implied actual authority
o IAA by acquiescence –
‘ratifying’ past exceeding of
authority (eg allowing person
to exceed authority over time)
Officers’ implied actual authority (IAA)
• CEO: IAA to do all things that fall
within the usual scope of that office:
Hely-Hutchinson v Brayhead
• Other executive officers/director:
IAA for things usual to their job
• Director, acting alone - no implied
actual authority: Brick and Pipe
• Chairperson - same director alone
• Company secretary - administrative
matters: Panorama Developments
Defective contracts made by agent
Contract made via agent may be
defective as purport agent either has:
• no express actual authority, or
• too narrow express actual authority
• no implied actual authority
Outsider still wants to enforce contract
Common law rules to assist outsider
(1) Did purported agent have
apparent authority?
• Can arise even where principal has
not in any given agent actual
authority to make contact
• 3 requirements – must satisfy all:
o “holding out” (“representation”
made) - can be from words or
conduct: Freeman & Lockyer
o by one w actual authority -
apparent authority insufficient:
Crabtree-Vickers
o on which the outsider relied -
outsider must be “induced”
• See Pacific Carriers v BNP Paribas
(2) Will the “indoor management rule”
assist?: Royal British Bank v Turquand
• Outsider can assume that:
o no procedural defects in
appointment of directors
o board meetings properly held
o Any specific approvals obtained
But can’t rely on this rule if:
• Actual knowledge of lack of authority
• Or Outsider was ‘put on inquiry’:
Northside Developments
o has the outsider failed to make
inquiries that would usually be
made by a reasonable person?
o Story v Advance Bank- benefit co
mean outsider not put on inquiry
Statutory assumptions
S128: Helps enforce defective contracts
• Sees if any of the “statutory
assumptions” be made? s128, 129
• Overrides and add to common law
• S128(4) Invalid if the outsider actually
knew or suspected that the
assumption was incorrect
Entitlement to make assumption to s128
• S129(1) - Compliance with
constitution and RRs – slightly limited
than the indoor management rule.
• S129(2) - Assumption about officers
named with ASIC
o Properly appointed
o Customary powers
o Eg named company secretary
can execute documents
• S129(3)- Assume about officers of
a‘kind’ where company holding out
o Properly appointed
o Assume customary powers of
kind of officer that kind of co
o Then ask, is this contract within
those customary powers?
o Eg Marketing manager of small
co can make small advertising
contracts - does it look right? Yes
• S129(4) - Assumption that officers
properly perform their duties
• S129(5) - Assumption of due
execution without seal
 o ‘document appears to be • Eg, contract apparently signed hi hi
signed’ per s 127(1) is okay – s 129(5)
o 2 signatures as per S127(1) 4. Contract enforceable unless
o Forgeries and frauds? Don’t outsider actually knew or actually
matter: see s 128(3) suspected that the assumption was
• Section 129(6) - Assumption of not true – s 128(4).
due execution with seal
o ‘document appears to be
signed’
o 2 signatures as per S127(1)
o Forgeries and frauds? Don’t
matter: see s 128(3)
Limits on statutory authority
• Where outsider “knew” or
“suspected” assumption was
incorrect – s 128(4)
o narrower than “put on
inquiry” exception
o More favourable to outsider
• Read assumptions carefully –
only apply in their specified
circumstances
• Make sure you read the exam
question – is it only asking you
about enforcement under the
Corporations Act?
Four step process
1. Does agent have actual authority?
• Express actual
• Implied actual
• If yes, then contract enforceable;
discussion closed.
2. If no, then: what objection would
the company raise?
• Eg director breached their duty
• Eg contract wasn’t actually signed
by directors per s 127(1) etc
3. And the outsider responds with
assumption under s 129
• Eg can I assume director comply
with their duty – s129(4)