Corporate Social Responsibility principle rep of the company in dealings with landlord, insurers, suppliers, legal advisors and

dealings with landlord, insurers, suppliers, legal advisors and Note: Can’t place proxy votes @ directors meetings.
1. Starting Point – Dodge v Ford Motors regulating authority. Held to be Director Committees
Where company had surplus capital and decided it would give back to the community and to Austin  Claim against Austin in his capacity as a director of the company. A claimed he S198D  Directors an delegate their powers to a committee of directors
employees. Held: Directors had to operate company in the interests of its shareholders, resigned as a director. Hadn’t technically resigned - He had failed to inform ASIC Held: General Meetings of Shareholders
rather than in a charitable manner for the benefit of his employees or customers. “A business Even though he said he had resigned, he was still acting like a director. His behaviors Calling Shareholder Meetings
corporation is organised and carried on primarily for the profit of stockholders".  Courts included: Negotiated on behalf of the company the repayment of a tax debt with the ATO, S249C (RR)  Any director of the company can call an AGM
hesitant to interrupt businesses. Co-signed agreements, Arranged a sale of the business, Counter-signed cheques. No fixed S249CA (Public Companies)  Any director can call meetings.
2. However, can be legal and allowed in certain circumstances, Consider: test, but is a question of degree of the duties performed in the context of the company. S249D  Directors can call a meeting at the request of 5% of the shareholders Must be in
Hutton v West Cork Railway  Company sold much of it’s assets, was nothing more than Drysdale  Term as a director had expired. Company secretary messed up and he writing, state resolution and be signed (s249D(2) & Must be held for a proper Purpose
a company for the purposes of winding up. Used the profits of the transfer to compensate continued to operate as a director. Things in the company blew up, he claimed to be off the (NRMA v Parker + SEE OTHER CASES)
officials for loss of employment and to remunerate directors. Held: Payments Invalid. hook as he was expired. Court looked at what he had done: Continued to attend board S249D(5)  Directors must call meeting within 21 days of request and hold within 2 months
Miles v Sydney Meat-Preserving Co Ltd  Large stock of animals from graziers – instead meetings, voted on resolutions, Participated in the management of the company. Court S249E(1)  If directors fail to call the meeting within 21 days, 50% of those shareholders
of lowering the prices, they kept them the same. Held to be valid as there was an confirmed that he was acting in the position of a director. who initially voted for the meeting can call and arrange for meeting to be held  Company
agreement not to undercut graziers, and consequently a future benefit to the company. S9(b)(ii)  Shadow Directors must pay reasonable expenses (s249E(4)) and provide a copy of register of members
A.P Smith v Barlow  Donation to Princeton University held to be valid. Re Hydrodam  If a person “Does not claim or purport to act as a director.  On the (s249E(3)).
Separation of Power within a Corporation contrary, he claims not to be a director.  He lurks in the shadows, sheltering behind others S249F  Shareholders can call a meeting without reference to the board (must be funded
1. Starting Point: s198A Corps Act (RR)  Consider if opted out. who, he claims, are the only directors of the company to the exclusion of himself.”  by shareholders)
The directors of the company have the power to manage the business of the company. Buzzle  Buzzle was a supplier of apple products. Apple gave Buzzle instructions, which S249G  Court can order a shareholder meeting where impracticable to call a meeting
John Shaw & Sons (Salford) Ltd v Shaw Shareholders cannot do what is reserved to forced them what to do, and threatened they wouldn't supply to them. When things blew up, any other way (RARE).
the powers of the board. Buzzle sued Apple as a shadow director. Court said no, the board at Buzzle had no Shareholder Resolutions
2. Further Expansions Re: Calling Meetings representation from apple. It was a board decision to follow the instructions apple gave. S249N  5% of the shareholders (or 100 members) can give notice to the company of a
Therefore, as it was merely a creditor request, Apple wasn't liable. resolution they propose to move at the meeting.  Must be in writing, set out wording and
Automatic Self-Cleansing Filter Syndicate Co v Cuninghame  Even when the
Antico  Parent company had 42% shareholding. Were telling the subsidiary what to do, be signed.
shareholders have passed a resolution the board can ignore that resolution.
and other company knew they had to do as they were told. Held to be a shadow director: S249O  Company must give notice to all members of the resolution at same time or a
NRMA v Parker  If shareholder requisition a general meeting and the only resolution to
they were accustomed to do what they were told. Note also Representation on the board. soon as practicable after notice of meeting. Company responsible for cost of members
be considered at the meeting would be void as an improper infringement on the board's
Akai  Need not exercise influence or control over all of the company’s activities. Akai notice. However, company need not give notice of the resolution if > 1,000 words or
management power, the board need not even call the meeting.
entered into Gh to provide a rescue package in return to take over the management of defamatory.
Stanham v The National Trust of Australia  "it is also clear that if persons requisition a
business. Mr Ho was Ceo and 75% shareholder. Directors of Akai acted on instructions S249P  Members can request company to provide members with a statement about a
meeting for the purpose of dealing with a matter that is ultra vires the meeting, there is no
from GH and GGl, which was effectively from Mr Ho. resolution (sub 1). Can be made by members with at least 5% votes or at least 100
obligation on those responsible for calling the meeting to include the matter in the notice of
meeting.” Other Types of Directors members (sub 2). Must be in writing and signed (sub 3) and company need not give notice
3. Exceptions where Shareholders Can Take Action Exec vs non-Exec  Contrast workload (full vs part-time)(day-to-day management), and of > 1,000 words or defamatory (sub 9).
standard by which they are held to as well as actions (monitoring vs acting) Notice of Meetings
Corporate Litigation  Marshall's Valve Gear Co Ltd v Manning, Wardle & Co  M
Managing Directors  S249H (RR)  Company must give 21 days notice of a meeting. Can be called in shorter
invented a valve and got it patented. Was both a director and shareholder. M had a falling
S201J (RR)  Directors can appoint managing directors notice if all members agree (AGM) or 95% of votes agree (EGM) (sub 2). Can’t be less than
out with the other directors. Allowed the case to go ahead even though M didn't have
S198C (RR)  Can be conferred with any (or all) of Directors’ power 21 days if voting to remove or appoint a director (sub 3).
authority. The 3 directors were acting in their own interests, not in the interests of the
S203F(1)  A person ceases to be an MD if they cease to be a director. S249HA (Listed Companies)  Must give at least 28 days notice.
company. M brought the claim in his own name as a shareholder.
S203F(2)  the Directors may revoke or vary the appointment of a managing S249J  Notice must be given to each member personally (usually done through email)
Contrast with Kraus v JG Lloyd Pty Ltd  K was a director and majority shareholder of
director S249L  Notice must contain place, date and time, technology, general nature, resolutions
JG Lloyd. Widdow thought she deserved a seat as she acquired this holding, however
Nominee Directors  Represent interests of shareholder(s) or creditor(s) that intend to be passed, and whether members entitled to proxy voting.
directors refused this. Court held: The woman had a claim in a personal matter (under
Chairman of the Board  manages the Board (Colorado Constructions) Proceedings of Meetings
consti), but not one in the company name. "Ordinarily, however, the power to decide whether
S248E (RR)  customary function to chair directors meeting
to initiate corporate litigation is a management power reserved to the board that cannot be S249U(1) (RR)  Directors may elect a chairman
S248G(2)  Casting Vote at directors meeting
overridden by the general meeting" S249U(3) (RR)  Shareholders must elect chair if directors fail to do so, or chairman of
Deadlock  Barron v Potter (Train Case)  Essentially, where there is a deadlock Termination of Directors board is unavailable.
between directors and a decision cannot be made: particularly here were it comes to the Gosford Christian School  If term until next AGM and none held, expiry when AGM due S249Q  Meetings must be held for proper purpose  Consider Cases as per above.
matter of appointing or removing a director, the vote will be passed onto the shareholders S203A (RR)  Directors may resign by written notice S249R  Meetings must be held at a reasonable time and place
at a general meeting to make such decisions. "If directors having certain powers are unable Removal of Directors S249S  Company can hold meeting at 2 or more venues using any technology that gives
or unwilling to exercise them - are a non-existent body for the purpose - there must be some S203C (RR)  Shareholders may vote to remove director and appoint someone else. members as a whole opportunity to participate (Consider ASICS suggestion and appreciation
power in the company to do itself that which under other circumstances would be done." S203D (Mandatory for Public C’s)  Directors can only be removed by resolution  See of the new Direct Voting system where participants can post their votes online before the
Ratification  North-West Transportation Co Ltd v Beatty  (1887) 12 App Cas 589; Requirements in Act. meeting).
Forge v ASIC (2004) 52 ACSR 81-2.  If directors have breached their duties, you cannot Directors Renumeration  Excessive pay may be unfair or oppressive under s232. Shareholders Say on Directors Remuneration
ratify. S202A(1) (RR), Guinness  Payment can be authorised by shareholders, constitution or S250SA (Public Companies)  Chair of AGM must allow a reasonable opportunity for
Consider also Role of the Constitution, Corps Act or ASX Rules RR’s members to ask questions about the remuneration report
Directors: ASKING: Is _____ a director? Sali  If Consti permits, directors can set their own remuneration S300A (Public Companies)  Must provide a report on the directors remuneration
Number of Directors See also below on voting at AGM. S250R(2)  Resolution on the remuneration report must be put to the vote. However, isn’t
PTY Companies  s201A(1)  Minimum 1 residing Director Disclosure binding (only advisory)(sub 3),
Public Companies  s201A(2)  Minimum 3, 2 Residing Directors Note that while all companies disclosure must comply with accounting standards (s296(1)), Note however amendments in 2011 Amendment Act introducing 2 strike rule
S 1322(4)  If number not met, board resolutions invalid subject to Court Order. public and listed companies have a hirer standard (see ASX Listing Rules) S250V  First strike occurs of 25% or more members vote against adopting remuneration
Appointment Meetings report.
S120(1)  Names on Registration deemed to be directors Board (Directors) Meetings S300A(1)(g)  If obtain first strike, next years company annual report must explain the
S201G (RR)  Ordinary resolution of shareholders required to appoint Directors Procedure boards proposed actions in response to the ‘no’ vote or explain why no action taken.
S201H  Board can appoint casual directors (Must be ratified by Company within 2 months S248G (RR)  Resolutions can be passed by a majority of votes cast by directors entitled to S250U  Second strike occurs if subsequent remuneration report also gets 25% or more no.
(pty) or at next AGM (pub)). vote. S250V  if you get second strike, a resolution must be put to that AGGM to determine if
Types of Directors S248A (RR)  Directors can pass a resolution by circulating resolution board should be required to stand for re-election. If yes vote, entire board up for re-election
S9(a)(i) & (ii)  Validly appointed & alternate Directors S248B  A single director proprietary company does not have directors’ meetings S250W(2)  If the board spill resolution passes, company has 90 days to hold election (at
S9(b)(i)  De Facto Directors S248C (RR) Any director can call a board meeting by giving reasonable notice to all of an EGM).
Grimaldi  Mining company with a proper and operational board in place. Grimaldi was a the other directors  What is reasonable will be a question of context (e.g normal Procedural Irregularities in Directors and Shareholder Meetings
consultant to the board. Court found the company was very lose in the way they procedure + extreme circumstances)(Consider e.g Barron v Potter) 1. Starting Point  Meeting is still valid if procedure not followed
operated and disregarded lots of formalities. Grimaldi did a lot of things in the company S248F (RR)  Quorum for directors is two directors. 2. Must be challenged under s1322(2) where court won’t deem result of meetings
without authorization or board approval. This led the court to believe you are a director. S248D  Directors meeting can be held using any technology consented to by all invalid unless a substantial injustice has occurred.
While he wasn't authorized to be a director, he was given function in the affairs of the directors (can be standing consent)(e.g continuing) – Can only withdraw consent within a Disqualification of Directors
company that would usually be reserved for a director. reasonable period before the meeting. Automatic Disqualification
Mistmorn  Sole Director Duty free store where husband (not listed as director) was the S251A  Minutes of the meeting must be kept and signed by the chair. S206B  automatically disqualification if convicted of serious offences or bankrupt.
Court-Ordered Disqualification  COURT HAS DISCRETION WHERE:
S206C  A director has been found liability for contravention of a civil penalty provision
(usually directors duties)  ASIC must establish disqualification is justified. Court will
examine nature and seriousness of the contraventions (Rich v ASIC)
S206D  if the person was the officer of 2 or more failed companies within the last 7
years (25 year ban)
S206E  If the person has repeatedly contravened the Corporations Act (CAC v Ekamper)
S206EAA  if the person is disqualified under the law of a foreign jurisdiction.
S206EA  ACCC can seek disqualification under CCA for attempted or actual breaches.
Managing Companies while disqualified
S206A  Generally an offence
S206G  May seek leave to manage (have to apply to court or ASIC). Must notify ASIC, and
court may grant leave with restrictions;
Directors Duties
1. Who owes the corporations a duty?  See Section 9
Remedies for Breaches of Directors Duties
If a duty is breached, the company is the plaintiff. Remedies for the company include:
damages; account of profits; rescission of contract; injunction; or an order requiring the
return of property. ASIC can also sue for penalties for breaches of s 181-183 and 588G.
Some breaches attract criminal penalties if they are reckless or intentionally dishonest
(s183).
The Duty of Care, Skill and Diligence – Section 180(1) & Daniels v Anderson
Historically
“Figurehead” directors (celebrities, actors, really there to endorse the business).  Early
common law looked only at subjective qualities tied to the director’s skill.  A director needed
not exhibit a greater degree of skill than might reasonably have been expected of a
person of that director’s knowledge and ability:
Turquand v Marshall ; Barnes v Andrews  “it was the misfortune of the company that
they chose such unwise directors”
Re City Equitable Fire Insurance Co Ltd  These old cases did not require directors to
possess minimum levels of skill. Standard of care was measured subjectively by
reference to the particular director’s knowledge and experience.
Change in Cases such as Commonwealth Bank v Friedrich  Where individual director
went to the bank to get a loan to ‘buy helicopters’ however took the money for himself. Held
that the directors had a duty to understand the companies financials. Directors, such as Mr
Eies, attempted to defend themselves by claiming that they had previous professsions and
had no business or financial knowledge. This wasn’t allowed.
Answering Questions relating to the current standard of care.
1. Explain duty of care for directors is based off the common law negligence
model. Thus, There is a Duty, Breach, Causation and Foreseeabiltiy – Focusing
on the established standards for each case
2. Outline the Issue: Did the director breach their standard of care?
3. Set out the Law  Section 180(1)  See Legislation.
4. Outline the Elements for a breach of s180(1):
a. Exercise pours and discharge duties with a degree of care and diligence that a
reasonable person would exercise (Objective)
Daniels v Anderson  Company –A junior employee went against explicit orders,
which resulted in an unpredicted and ignored profit. After a while, the trades become
detrimental to the company. Company sued Auditors for their failure to pick up on the
trades, who counter-claimed against the CEO, MD and Directors. Court held that the
executive directors had failed to take steps to understand the transactions and to
potentially stop them. Non-executive directors however didn’t breach their duties as
they had ask questions.
 ‘The days of sleeping, or passive, directors are well and truly over.’
 Directors have a duty greater than what their particular field of expertise
might be.
 Directors should acquire at least a rudimentary understand of the business
of the corporation
 Directors cannot ignore red flags – cannot rely on the judgement of others.
 Directors cannot shut their eyes to what is going on around them
 ‘Directors are under a continuing obligation to keep informed about the
activities of the corporation.’
 Directors should maintain familiarity with the financial status of the
corporation.
 Directors ought to assume that everyone will do the wrong thing. Thus, they
need to put effective systems in place to prevent issues.
b. If they were a director or officer of a corporation in the Corporations
Circumstances (Subjective)
ASIC v Rich  A company with rapidly deteriorating circumstances ought to
have directors meetings on a greater frequency. Consider: Type of Company,
Constitution, Size and Nature of the Company, The Composition of the Board,
Directors position and responsibilities, The Particular function of the director,
The manner in which responsibility within the company is distributed company to make such a misleading statement. Anyone who knew anything knew this
Gold Ribbon Accounting v Sheers  Company was engaged in High Risk would not be a sufficient compensation amount.
Loan Facilities – Sheers had the knowledge in this area yet still stuffed up. No 5. Apply the Law in a long paragraph addressing everything
procedures for checking who was taking their loan or assessing their ability to  “A reasonable ___ in ___’s position would have ____”
get a loan. Note Causation issues (friends) High risk companies have greater  Consider what the director/officer will claim.
requirements than low-risk companies. 6. Do Any Defences Apply?
c. And they occupied the office held by, and had the same responsibilities within Defences to Duty of Care Claims
the corporation as, the director or officer (Subjective) Business Judgement Rule – Section 180(2)
Non Executive Directors  Minimum Standard (Daniels v Anderson) See Section for Requirements.
Non-Executive Directors with a particular skill  A director who has special skills 1. Business Judgement:
or experience in the company’s business has a duty to give the company the benefit Consider Brehm v Eisner  Walt Disney Director payout  Even massively bad decisions
of that skill or experience (Gold Ribbon Accounting) can be protected under the business judgement rule.
Executive Directors  Held to a higher standard due to their involvement in the day Smith v Van Gorkom Similar to ASIC v Healy
to day running of the company. Director making up fake cost of shares for buyout. Held: Rubber stamping something that
Chairman  The chair of a listed company has special responsibilities to liaise with comes without investigating is such a mindless decision that there is no business judgement.
management and ensure that board meetings are called when necessary.  The chair ASIC v Adler  There must be an actual decision to do something or to refrain from
is therefore subject to a higher standard of care and diligence, to the extent that those doing something. Neglecting to do something or to turn your mind to something is not a
special responsibilities are implicated, than is applicable to non-executive directors business judgement.
(ASIC v Rich [2003] NSWSC 85) ASIC v Rich  Doesn’t cover the failure to monitor the company’s affairs or a failure to
Managing Directors  Must establish appropriate & functioning management maintain familiarity with the company’s financial position
standards (Daniels, South Australia v Clark) Gold Ribbon Accountants v Sheers  A director who takes no interest in the affairs of
CFO  Special duties regarding financial Reports  Failure to inquire & obtain the board cannot be said to have made a business judgement.
information that is pertinent to preparing statements and forecasts (Vines v ASIC) 2. Good Faith and proper Purpose:
Officers appointed for special skills  Consider e.g in-house counsel  Held to
Bell Group, Re S & D International  A director must act bonda fide in what
the same standard as a reasonable person with that skill (Shafron v ASIC) they believe is in the best interests of the company as a whole.
3. No Material Person Interest:
Note: Attendance at board meetings is required: ASIC v Adler  Director had interest in the company HIH was to invest in
Daniels v Anderson  An aspect of the obligation is to keep informed and to meet as
ASIC v Fortescue Metals  Director’s personal shareholding was a material
often as necessary personal interest.
Gold Ribbon (Accountants) Pty Ltd v Sheers [2005] QSC 198  Unable to participate
4. Was the director informed:
in management unless you attend ASIC v Rich  Director must be informed about the subject matter of the
Vrisakis v ASC (1993) 9 WAR 395  Should attend all board meetings except in certain
decision prior to making it. Must be to the amount they believe reasonable.
circumstances (e.g sickness) 5. Rational Belief:
ASIC v Rich  Not rational if no arguable reasoning process to support it.
Examples of Breaches Reliance on Others – Section 189  See Legislation.
ASIC v Adler [2002] NSWSC 171  Adler, a non-exec of HIH, also had a large stake in
The limits of the defence:
HIH. HIH's share price fell after the company entered into bad transactions. Adler
Daniels v Anderson (1995)  37 NSWLR  438  Positive obligation to keep informed
convinced 2 other exec directors to grant a loan of $10 million from HIH. Purpose was to
about corporate activities and satisfy themselves that the person they’re relying on is
purchase shares in HIH to attempt to trick the market  would announce this to the public
competent and reliable
and tell them it was his own funds. Court noted that companies shouldn't 'prop up' the
Duke Group Ltd v Pilmer (1999) 73 SASR 64  Directors actually knew the report in
share prices. A reasonable director would not have put the company at risk by entering
question was wrong. Need to use what you've got for the benefit of the company.
into the transaction.
ASIC v Healy [2011] FCA 717 (The Centro Case)  While directors are entitled to rely
Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577  MD breached
upon the information of others, still need to read it. Didn’t mention 189, however still
duty when allowed customer to exceed credit limits where he knew the customer
relevant. Really obvious errors. Reliance on accounts will fail where obvious error.
could not meet its obligations, in defiance of not only normal industry practice but of a
Sheahan v Verco  Directors who fail to inform themselves about the affairs of the
board resolution. Court held that he acted unreasonably and put the company at risk
company cannot seek relief under the reliance defence.
Permanent Building Society v Wheeler (1994) 12 ACLC 674  MD breached duty
The Delegation Defence
when failed to make inquiries into an unusual transaction that was capable of causing
harm to the company and failed to ensure the other directors were aware of the potential Starting Point  Section 190  See Legislation.
harm.  ASIC v Adler  Factors to be taken into account when deciding whether reliance was
ASIC v Healey & Ors [2011] FCA 717 (the Centro case) – $2 billion worth of debts reasonable.
misclassified on Centro’s financial statements.  S295 -- all directors must sign off to  Function that is delegated is such that it “it may properly be left to such officers”
ensure the company is solvent. S298 -- audit committee is usually given the job of  The extent to which the director is put on inquiry, or given the facts of the case,
checking the financials (delegation). PWC was hired to do the audit and presented the should have been put on inquiry
draft financials -- audit committee failed to recognize that a $2 million debt was classified  Relationship between director and delegate must be such that the director
as a future rather than a current liability. Directors argued that they delegated the functions honestly holds the belief that the delegate is trustworthy (Dempster)
to PWC and therefore weren't liable. Court held that the corps act requires directors to  Risk involved in transaction and the nature of the transaction
sign off under s295 to ensure that the numbers are true and fair. This requires the  Extent of steps taken by director (including inquiry)
directors to have a sufficient understanding of the finances of the debt. “… the objective  Whether director is executive or non-executive.
duty of competence requires that the directors have the ability to read and understand ASIC v Healy  Singing off on financials is something that cannot be delegated.
the financial statements, including the understanding that financial statements Other Relief From liability
classify assets and liabilities as current and non-current, and what those concepts mean.” S 1317S(2)  person may be relieved in whole or in part from liability for contravention of
James Hardie Cases  ASIC v Hellicar, ASIC v Shafron, etc. civil penalty provision if it appears to the court that the person has acted honestly and,
Misleading press release: Proceedings against James Hardie Industries and its directors having regard to all the circumstances of the case, the person ought fairly to be
concerned a single press release made to the ASX in 2001 – stating that a trust fund excused from liability. 
set up for asbestos victims of JHI products was fully-funded (fund contained $293 S 1318  Court has the power to grant relief in any civil proceeding for negligence, default,
million). But a Special Commission of Inquiry found that, by the end of 2003, the trust breach of trust or breach of duty where it appears to the court that the person may be liable
would need $1.5 billion to provide for all the asbestos-related claims against JHI. The JHI for the above but acted honestly and ought fairly to be excused for the negligence, default or
NV (parent company, which had moved to the Netherlands) continued to assert that the breach – may relieve the person either wholly or partly from liability on such terms as the
trust was fully funded.  This was false and misleading to investors of JHI. court thinks fit. 
The executive directors (CEO – Macdonald; company secretary/general counsel – McLellan, in the matter of The Stake Man Pty Ltd v Carroll [2009] FCA 1415  Brought
Shafron; and CFO – Morley) and non-executive directors were all found in ASIC v in external insolvency professionals to asses that he hadn't crossed the line. After a period,
Macdonald (No 11) to be in breach of their duty of care under s 180(1) for approving the these professionals determined he was insolvent. Admitted he did engage in insider trading.
However, argued that he had tried so hard to avoid it. Defences to s588G claims director would have considered to be in the best interests of the company.
1. Argue that the company was not actually insolvent when the debt was The Bell Group Ltd v Westpac Banking Corporation (No 9) [2008] WASC 239 – ask if
occurred directors’ assertion that their conduct was bona fide “should be doubted, discounted, or not
Consequences of Breach 2. Reasonable Expectation company Solvent – s588H(2)  See Leg. accepted.”
Breach of the common law duty of care: Company can sue the director or officer for Tourprint International v Bott [1999] NSWSC 581  Tourprint. Director Botts was dir for
damages. SHs may bring derivative action in company’s name (if court allows) if company less than 1 year before co went into VA and ultimately liq. He was held liable under 588G as ‘Best Interests of the Company’
does not sue. he did not inform himself of the co’s true financial position either before becoming a dir or Solvent Company
Breach of the Corps Act s 180(1):  Per s 1317E, s 180(1) is a civil penalty provision. while a dir. He made no inquiries of the accountant or other dir and did not inspect the co’s Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286  Best interests of the shareholders
Breach of a civil penalty provision may result in: Pecuniary penalty up to $200,000 (s 1317G) books. Botts therefore did not have reasonable grounds to expect that the co was solvent at as a collective group.
or Compensation to the corporation for damage suffered by it (s 1317H). or Disqualification the time the debt was incurred for purposes of 588H(2). Essentially, need to have some Darvall v North Sydney Brick & Tile Co Ltd (No 2) (1987) 6 ACLC 154  Includes
under s 206C. Company or ASIC can sue (s 1317J), but only ASIC can apply for a reason to believe that you are insolvent. Higher Standard than Suspect. Present and future shareholders. ‘Company’s interests may extend to who the
declaration of contravention under s 1317E.  SHs may bring derivative action if court allows shareholders are, the price of its shares, and achieving a proper understanding of the
where co does not sue. 3. Reliance – s588H(3)  See Leg. company’s business in the investment community.’
No criminal liability since dishonesty is irrelevant to the concept of negligence.  Cf ss 181, Metropolitan Fire Systems Pty Ltd v Miller [1997] 23 ACSR 699  2 directors of a co Exception: Individual Shareholders?
182, 183 and 184. asserted that they had relied on the third dir who had the responsibility for running the Starting Point  Duty Only owed to shareholders as a whole  Percival v Wright [1902]
Insolvent Trading  Section 588G  See Legislation. co and for providing them with all necessary info about its finances and that as far as 2 Ch 421  Shareholder looking to sell shares back not informed of potential sale. Held: The
Elements: they were aware, the 3rd dir was fulfilling those responsibilities. Held: NO 588H(3) defence directors do not owe a duty to an individual shareholder. There was no breach as there was
1. Must be a director at the time the debt was incurred (s588G(1)(a)) b/c the two dirs made no inquiries of the 3rd dir as to the state of the co’s finances. no obligation to tell that shareholder anything.
Note: This includes shadow & de-factor directors. Therefore, their belief that the co was solvent was not based on information provided by Exception in special circumstances  Peskin v Anderson  In order for a duty to arise
2. Company insolvent at time debt incurred, or becomes insolvent as a result the third dir. Directors are under an obligation to take an interest in and demand to the individual shareholder, the director must have been in direct and close contact with
Meaning of ‘Debt’ and ‘Time Incurred’: information on the financial state of their company. They can’t rely on 588H(3) if they the individual member so that the director caused the member to act in a certain way which
Hawkins v Bank of China  debt is incurred when company contractually exposes fail to demand information when suspicions about the co’s financial viability and turned out to be detrimental to them.
self to obligation to pay the amount; includes contingent debt such as a guarantee survival should and would have been aroused. Coleman v Myers [1977] NZLR 225  MD of a family company arranged for a take over at
(e.g signing to buy something). an under-value by a new company which he controlled. Held that MD breached duty to
CBA v Friedrich  Includes not just amounts due to suppliers for items bought on 4. Non Participation in companies management at the time – s588H(4) minority shareholders. Failed to disclose material information concerning his potential profits
credit, but loans from banks DCT v Clark [2003] NSWCA 91: Married woman could NOT rely on the absence from and misled on the true price of the company assets.
Russell Halpern Nominees Pty Ltd v Martin  entering into a lease (would be full management defence where she had taken no part in the management of the company Brunninghausen v Glavanics [1999] NSWCA 199  Where company with 2 directors who
amount over the lease term). Is incurred day the lease is entered into, not they date the because she had deferred to her husband, the MD. The legislative policy underpinning s were also shareholders. Both were brothers in law. Had a falling out. B was a majority while
rent becomes payable. 588G was that a person should not become a director unless they were prepared to G was a minority shareholder. B pushed G out, while G managed to hold a minority
Powell v Fryer  incurring obligation to pay taxes. assume the obligations and duties of such an office. shareholding. G wouldn't let B do anything in the company. Agreed that G would sell to B
(Minority to Majority). B Failed to disclose key information -- that they were selling the
Meaning of ‘Insolvent’ 5. Reasonable Steps to prevent the debt – s588H (5) & (6)  RARE. business. G argued that there was a duty owed to him. HELD: the nature of the transaction
95A(1)  a person is solvent if, and only if, the person can pay all their debts as and 6. Safe Harbour Provision gave rise to a duty.
when they become due and payable: s 95A(1).  This provision was received royal assent on 18 September 2017 as part of the Treasury Insolvent Companies
95A(2)  A person who is not solvent is insolvent. Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) and went into effect on Ring v Sutton (1979) 5 ACLR 546   When company is in financial difficulties, interests of
s 588E(3)  Presumption of insolvency if: Failure to comply with accounting standards; 19 September 2017, so BRAND NEW. creditors become increasingly important.
Continuing insolvency -- If you were insolvent at one point, will be presumed. When company is insolvent, interests of creditors become paramount:
Powell v Fryer  cash flow test, not just looking at surplus of assets over liabilities. S 588GA(1)(a): provides that there will be no director liability for debts incurred when the Walker v Wimborne  (1976) 137 CLR 1  loans made to other companies in group with no
But look at COMMERCIAL REALITY. Not just a temporary lack of liquidity. Look not company may be insolvent where a person “starts developing one or more courses of prospect of repayment -- Breach
only at cash resources immediately available, but also to moneys which it can procure action that are reasonably likely to lead to a better outcome for the company” even if Bell Group Ltd v Westpac Banking Corp (No 9) [2008] WASC 239  prejudicing creditors
by realization by sale, or borrowing against the security of tis assets, or otherwise have not entered the company into an insolvency regime (eg, voluntary administration).  So of individual companies in corporate group -- Breach
reasonably raise from those associated with, or supportive of, the company. It is allows insolvent companies to attempt to restructure without needing to formally When do the interests of creditors overtake those of shareholders? Courts have been
the INABILITY, UTILIZING SUCH RESOURCES AS ARE AVAILABLE THROUGH THE enter voluntary administration. deliberately vague on this point:
USE OF ASSETS OR WHICH MAY OTHERWISE REALISTICALLY BE RAISED TO Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 172  must take creditors’ interests into
MEET DEBTS AS THEY FALL DUE WHICH INDICATES INSOLVENCY. S 588GA(1)(b): lists situations where the safe harbour ends: account if company is insolvent or of doubtful solvency, or if a contemplated payment or
(i) the person fails to take any such course of action within a reasonable period other course of action would jeopardise its solvency (Think e.g 588G)
3. Reasonable Grounds for suspecting Insolvency of time; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722  followed Permakraft, but no
ASIC v Plymin [2003] VSC 123 (ii) the person ceases to take any such course of action; bright line rule
Whether a reasonably competent and diligent director would have had grounds for (iii) when any such course of action ceases to be reasonably likely to lead to a Note: SHs cannot ratify breach of duty involving prejudice to creditors:  Kinsela v
suspecting insolvency in the circumstances. better outcome for the company; or Russell Kinsela Pty Ltd (1986) 4 NSWLR 722.
Indicators that were common features in insolvency situations: (iv) the appointment of an administrator, or liquidator, of the company. Creditors have no standing to sue for a breach of duty (Spies v R). Liquidator can sue on
Continuing Losses; Liquidity ratios below 1; Overdue Cth and State taxes; Poor relationship (i)  amounts to less than substantial compliance with the matter concerned; winding up or ASIC or Company before them. Would also pursue claim under s588G
with present BANK, INCLUDING INABILITY TO BORROW FURTHER funds; No access to or Nominee Directors
alternative finance; Inability to raise further equity capital; Suppliers placing company on (ii)  is one of 2 or more failures by the company to do any or all of those Re Broadcasting Station 2GB Pty Ltd [1964-65] NSWR 1648  May [not “Must”!!] act in
COD, or otherwise demanding special payments before resuming supply; Creditors unpaid matters during the 12 month period ending when the debt is incurred; the best interests of their appointor, provided that the nominee honestly and reasonably
outside trading terms; Issuing of post-dated checks; Dishonored checks; Special believes that there is no conflict with the interests of the company. If it does come to a point
arrangements with selected creditors; Solicitors’ letters, summonses, judgments or warrants Duty to Act in Good Faith and Proper Purpose  s181 where you have to chose between director and appointer - you need to focus on the
issued against the company; Payments to creditors of rounded sums which are not S181 company. Where Fairfax purchased the company and decided to put 5 people on the board.
reconcilable to specific invoices; Inability to produce timely and accurate financial info to (1)  A director or other officer of a corporation must exercise their powers and discharge their Had to make decisions on a licence -- to be able to broadcast. During this process, minority
display the co’s trading performance and financial position, and make reliable forecasts duties: shareholders argued that they were victims of oppression. Held: There was no divergence of
                     (a)  in good faith in the best interests of the corporation; and interest It was completely unrealistic that the shareholders would consider what their
Williams v Scholz [2007] QSC 266                       (b)  for a proper purpose. nominees wanted to do. There was no breach of duty, as it was in the best interests to get
Reasonable grounds for suspecting insolvency b/c the company traded unprofitably and Duty to Act in Good Faith and Best Interests of the Company the licence.
accumulated losses continuously; the co frequently exceeded its overdraft facility and the You must honestly believe that it was in the best interests of the company (Subjective) and it Scottish Co-operative Wholesale Soc Ltd v Meyer [1958] 3 All ER 66  Fabric
dirs negotiated with the bank to increase the limit on 3 occasions, the co’s bank sent must be something a reasonable director would believe was for the companies benefit prosumption in the Uk following the war where there was a shortage and laws to limit and
monthly statements to the directors indicating that the co was exceeding its overdraft (Objective). protect raw materials. Scottish Co-Op sought to get involved in the creating of a certain fabric
limit, a bank officer regularly telephoned the dirs when the account exceeded its Entered into an agreement where Meyer (expert) was a 49% minority shareholder. Board
approved limit and when checks were dishonoured, and eventually the bank told the dirs Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] 1 Ch 62, 74 – Whether an had 3 from co-op parent company and 2 from meyer. Co-op had excess space and provided
that no further increase to the overdraft facility would be approved. intelligent and honest man in the position of a director of the company concerned could, in a factory. After things got better, licences were no longer required. Parent company sought
the whole of the existing circumstances, have reasonably believed that the transactions were to shut down the subsidiary by undercutting them. Meyer brought claim for oppression.
4. Failure to Prevent the debt being incurred for the benefit of the company.” Argued: Board did nothing to protect the subsidiary from the parent company. Held: Where
Includes Acquiescence in letting business continue operating as normal. ASIC v Adler [2002] NSWSC 171  Duty breached if director acts in a way that no rational the interests of holding and subsidiaries do not coincide, nominee directors appointed by
the holding company are bound to put the interests of the subsidiary's shareholders
ahead of the interests of the majority shareholders.
Levin v Clark [1962] NSWR 686  Constitution may provide for appointment to represent
the interests of a specific shareholder or creditor.
Corporate Groups Context
Walker v Wimborne (1976) 137 CLR 1  Where there is a conflict between the interests of
a subsidiary and the group, nominee directors must act in the subsidiary's best
interests and not the interests of the group as a whole.
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 Funds
transferred from two companies in a group to satisfy the debt of a related company. Held:
The dominant director was justified in considering that the welfare of the group was
intimately tied up with welfare of individual companies. Interests of two companies were
considered because provision was made for compensating them for the loss of the funds.
Holding company had guaranteed the debt which was repaid. Alternate was possible
disaster.
Re Spargos Mining NL (1990) 3 WAR 166  Where directors of company diverted
substantial assets for the benefit of other companies in the group which caused considerable
losses to the other companies in the group. Transaction was of no commercial benefit.
Minority shareholder successful in obtaining remedies under s232 equiv.
Note Section 187:
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; and
(b)  the director acts in good faith in the best interests of the holding 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.
Proper Purpose
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 .RW Miller had 2 shareholders
-- Ampol (28%) and bulk ships (21.5% of the shares). Board got sick of these two
companies running the company. Board decided to issue shares to a person who could
come into the company to 'save' it and become the majority shareholder -- this was Howard
Smith. A and BS sued under the breach of proper purpose. Argued that they were simply
doing it to raise money.
Held: The main purpose was to dilute the holdings of Ampol and Bulk Ship
Test: To analyze if there is a breach
1. Look at the power being exercised (here, the power to grant shares --
purpose is to make money)
2. Identify the objective purpose by which the power is granted.
3. Look at why the power is being exercised -- is there a collateral purpose
4. If the purposes are different, there is a breach.
Never a proper purpose to entrench someone in control or to change control.
Permanent Building Society v Wheeler (1994) 12 ACLC 674  Duty can be breached by
inaction – where inaction was in not speaking up when a risky transaction was on the table.
There is a positive duty to take steps to protect.
Improper Purposes
Ngurli v McCann (1953) 90 CLR 425 – shares issued to maintain control
Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 – creating or destroying a
majority voting power
Whitehouse v Carlton Hotel Pty Ltd (1986) 162 CLR 285 – creating or destroying a
majority voting power. Mr & Mrs whitehouse owned the Carlton Hotel & had 6 kids - broke up
w/ a bitter divorce. Boys sided with boys and girls with mum. Mr Whitehouse maintained
running the pub. Was it to raise money or to change control of the company? Here, he was
clearly trying to change control and was therefore in breach of the proper purpose. High
Court agreed that even though you're acting in the best interests of the company, there were
no special circumstances and you were breaching proper purpose.
If Mixed Purposes:
Whitehouse v Carlton Hotel Pty Ltd: “but for” test (Based off Mills v Mills) If you have 2
purposes and they are both motivating causes - this is bad. If there is 2 purpose and 1 is
good -- ask: but for the bad purpose, would you have gone ahead with the transaction
Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 (applied
Whitehouse). K owned a construction company and had an affair with W. W was a senior
exec at the bus. And K's sons who were involved in running of the business wanted to
remove W from her position (was also a shareholder). K issued shares to his sons which
removed W as a majority. Said that he was doing it to make money. W proved that the
money didn't make a difference and that the money was not ever collected from the sons.
Ask: Did the shares raise sufficient funds?
Proper Purposes:
 Raise capital for the company – Ngurli Ltd v McCann.
 Provide consideration for purchase of property (eg, acquisitions).
 To remunerate employees and directors. the nature and extent of the interest and its relation to the affairs of the company;
Other Examples of Improper Purposes or
Defending hostile takeovers?  (d) the director has given a standing notice of the nature and extent of
Improper exercise of management powers: Permanent Building Society v Wheeler (1994) the interest under section 192 and the notice is still effective in relation to the interest.
12 ACLC 674 (3) The notice required by subsection (1) must:
Use of company funds to promote re-election of directors: Advance Bank Australia Ltd v (a) give details of:
FAI Insurances Ltd (1987) 9 NSWLR 464 (i) the nature and extent of the interest; and
Exercise of powers for the benefit of third parties: The Bell Group Ltd v Westpac Banking (ii) the relation of the interest to the affairs of the company; and
Corp (No 9) [2008] WASC 239 (b) be given at a directors' meeting as soon as practicable after
Improper refusal to register a share transfer: Australian Metropolitan Life Assurance Co the director becomes aware of their interest in the matter.
Ltd v Ure (1923) 33 CLR 199
Consequences of Contravention The details must be recorded in the minutes of the meeting.
 Civil penalty provisions: Part 9.4B
o Declaration of contravention: s 1317E Section does not apply to single director proprietary company
o Pecuniary penalty orders: s 1317G (5) This section does not apply to a proprietary company that has only 1 director.
o Disqualification
What is a ‘Material personal Interest’?
o Compensation to company: s 1317H
Grant Enterprises Pty Ltd v Aurium  Needs to be of some substance or value, not
o BUT NOTE COURT’S ABILITY TO EXCUSE: ss 1317S and 1318
merely a slight interest
 Criminal liability: s 184(1) McGelling v Mount King Mining  Director must derive some personal benefit, financial
Conflicts of Interest or otherwise.
1. Types of Potential Conflicts (At Common Law)
Self-Interested Transactions with the Company Consider Section 192 Standing notice could’ve been given (informally)
Direct: Where A is director of X Ltd and A enters into Contract with X Ltd.
Indirect: Where A is director of X and major shareholder of Y. 4. Can the Director be Present while the Board votes on a transaction?
Aberdeen Railway Co v Blaikie Bros  A was railway company which required new seats. Section 194 (RR)(PTY Companies ONLY!)  If a director has a material interest and
B was chairman of company which Aberdeen sought to purchase of. Held: Irrelevant discloses under s 191 or doesn’t need to, then: (c) the director may vote on the matters that
whether director actually profited, but whether director was in a position to profit. relate to the interest (d) any transactions relating to that interest may proceeds (e) the
ASIC v Adler  Director may not promote his or her personal gain by making or pursuing a director may retain benefits under the transaction even though the director has the interest (f)
gain in circumstances where there is a conflict or a real substantial possibility of a conflict. the company cannot avoid the transaction.
Phipps v Boardman  Even if there is no harm to the company, there will still be a breach. Section 195 (Public Companies)  Director who has a material personal interest must not
Regal (Hastings) v Gulliver)  Where cinema sought to lease through subsidiary but be present or vote on the matter, unless exceptions apply. Exceptions: (2) director may be
needed more capital. Directors put up own funds through purchasing shares and didn’t go to present and vote if directors who don’t have interest have passed resolution identifying the
shareholders. Held: Doesn’t matter if company has made a profit. director and stating that the director should not be disqualified from voting. Can also get
Financial Benefits to Related Parties permission from ASIC.
Undisclosed Personal Profits 5. Are the related party transaction rules under ss208-229 Triggered?
Taking a corporate business opportunity or company property for oneself S208  For a Public Company to give a financial benefit to a related party (Director,
Cook v Deeks  Fallout between 4 shareholder/directors resulting in 3 of them going away Spouses, Directors of Controlling companies, parents, children(per s228)) they must obtain
to form a new company to get a construction company. Held: Fraud on minority. approval of members in ways set out in s217 to 227, give the benefit in 15 months or benefit
Shareholders acted unfairly, ratification invalid. Directors and officer may not use their must be a s210-216 exception.
position to take away business opportunities that belong to the company. S210  arms length exception
Green v Bestobell Industries Pty Ltd  G was managing director of B. G put in own bid S211  remuneration exception
for stage 2 of a contract. G was successful and B sued. G argued B wouldn’t have gotten 6. Are the Actions a breach of any other duties? S181, 182, 183.
contract anyway Held: absolute liability. Irrelevant that B wouldn’t have gotten contract, G Shareholder Remedies  If there is a breach, what can be done?
had still breached. ALWAYS BRIEFLY DISCUSS DIRECTORS DUTIES.
Pacifica Shipping Co Ltd v Andersen  Irrelevant that company decided to hold off, 1. Oppression  s232
director had only heard about opportunity due to position in company. Requirements:
Peso Silver Mines Ltd v Cropper  Held no breach where party got their position because a. Standing to Sue
an individual had come to him. Peso rejected the opportunity bonda fide and Cropper Section 234  NOT directors (Except where shareholder)
accepted after being offered. b. Grounds  Need:
Misuse of Confidential Information i. (a) Conduct of the company’s affairs or (b) actual or proposed act or omission by
Undiscovered Personal Profits or on behalf of company or (c) a resolution, or proposed resolution of members.
Bribes or secret Commission Will almost always be (a)  do discuss all.
Furs Ltd v Tomkies  T was MD of F and had an understanding of it’s ‘secret formula.’ ii. (d) Contrary to the interests of the members as a whole; OR (e) oppressive to,
Company wanted T as a staff member, and T was to be payed secret amounts of shares and unfairly prejudicial to, or unfairly discriminatory against, a member or members
other profits through the transaction. F agreed, without knowing T’s Profits. whether in that capacity or otherwise.
Duty not to misuse company funds or mix company and personal funds ALWAYS LOOK AT BOTH.
2. Has the Necessary Disclosure been Made?
Starting Point  Regal (Hastings)  Must make full disclosure to the General Meeting of 1. ‘Contrary to the interests of the members as a whole’
Shareholders AS WELL AS DIRECTORS. NOTE CONSTI AS WELL. Turnbull v NRMA  (2004) 186 FLR 360  “An action is capable of being 'contrary to the
Exception  Queensland Mines Ltd v Hudson  QM was formed to do mining in Tas. interests of the members as whole' in ways other than being commercially unfair.  Being
When company fell apart, Hudson, a director, purported to go ahead on his own. Disclosed pointlessly wasteful is one example …The ground of being 'contrary to the interests of
to Directors who were also the Directors of the companies which were shareholders. Held: the members as a whole' in s 232 is intended to be an independent one to the ground
Because of the companies structure, the board was also the shareholders. Therefore, had of being oppressive to, unfairly prejudicial to or unfairly discriminatory against, a member
gained both a board and shareholder vote. or members whether in that capacity or any other capacity”.
3. Is disclosure to the board of a material personal interest in a matter relating
the affairs of the company necessary pursuant to s 191? 2. ‘Oppression’  Look for analogy.
Re Jermyn St Turkish Baths   “oppression must, we think, import that the oppressed
(1) A director of a company who has a material personal interest in a matter that relates
are being constrained to submit to something which is unfair to them as the result of
to the affairs of the company must give the other directors notice of the interest unless
some overbearing act or attitude on the part of the oppressor”
subsection (2) says otherwise.
Wayde v NSW Rugby League Ltd  Rugby League board reduced the number of
(2) The director does not need to give notice of an interest under subsection (1) if:
(b) the company is a proprietary company and the other directors are aware of teams in the league from 13 to 12.  Western Suburbs Club (Wests) was left out.  Wests
 alleged oppression. NOT unfair. Was done under a proper analysis -- based on the best Section 436E(1)  Purpose is to appoint a committee or remove administrator (4)
interests of the corporation. Weren't unfairly harmed -- there were various things which 3.Expulsion from Office  See Ebrahimi Above. Section 436F  Functions of committee to consult, receive and consider reports and to
were going to be considered. 4.Failures of Substratum  Where the company is unable or compel admin to report.
Morgan v 45 Flers Avenue Pty  Business which had low directors’ fees. Had been unwilling to carry out the objects for which it was formed. Second Meeting:
increasing profits and increased their fees however didn't increase dividends. Held: No   Section 439A(5)  Notice requirements.
unfair oppression. Increase linked to income. b. There must be no other reasonable remedy available to the applicants: s
Re George Raymond Pty Ltd (2000) 18 ACLC 85  undisclosed loans on 467(4), Lock v John Blackwood Ltd  [1924] AC 783. Section 439A(6)  Can apply for extention of time periods. Must show good cause (7)
uncommercial terms ($1.7 million at zero interest rate and unsecured) to a company (in Section 447A  Possible further extensions available.
which the dominant director of the loaning company had a material personal interest) was 3. Derivative Suit  S236  ONLY FOR INTERESTS OF COMPANY AS WHOLE Section 439B(2)  Resolution of creditors to adjourn for not more than 45 days.
oppressive.  1. Briefly discuss nature  usually a decision for directors.
Diligenti v RWMD Operations Kelowna Ltd (1976) 1 BCLR 36  A founding member 2. Standing  s236(1)
“lawfully” removed from the board and as manager, could not take part in the Must be a member, former member, or person entitled to be registere as a
company's affairs in accord with his reasonable expectations.   This was unfairly member OR an officer or former officer of the company OR apply for leave. Creditors must then decide from:
prejudicial - even though his fellow members may be entitled as a matter of strict law 3. Requirements  s236(2) 1. Company execute a deed of company agreement
to remove him as a director. LAWFUL ACTIONS CAN BE OPPRESSIVE. (a)  it is probable that the company will not itself bring the proceedings, or Section 450B  Must notify creditors & lodge
Sanford v Sanford Courier Service Pty Ltd  There is no obligation to pay dividends. properly take responsibility for them, or for the steps in them; and Section 450E(2)  Company name must include ‘subject to deed of company
Where large pay to directors and refusing to pay dividends. C.f to Morgan where there (b)  the applicant is acting in good faith; and arrangement
was a large profit. (c)  it is in the best interests of the company that the applicant be granted leave; Usually includes provisions to compromise on debts, disposal of assets over
and time.
Examples of Oppressive Conduct: (d)  if the applicant is applying for leave to bring proceedings--there is a serious 2. Administration should end
Diversion of corporate opportunity  
Cook v Deeks  Where 3 directors who wanted question to be tried; and 3. Company should be wound up.
to push 4th out took contract in own name. (e)  either: Receivers
Diversion of profits  Sanford v Sanford Courier Service Pty Ltd (i)  at least 14 days before making the application, the applicant gave What is a receiver
Exclusion from management  Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd written notice to the company of the intention to apply for leave and of the A person appointed to take possession of secured property and to sell it to satisfy the debt of
Director’s failure to act in interests of company  Re Spargos Mining NL reasons for applying; or another.
Shares issued for an improper purpose  Hannes v MJH Pty Ltd (ii)  it is appropriate to grant leave even though subparagraph (i) is not Types of Receivers
satisfied. Difference between receiver and receiver manager (Section 9 & 90)
c. Orders/Remedies  Section 233 4. Note Also Section 247A  Can apply for access to books. Distinction between receiver and controller  See s 9 definition of controller.
Share buy-out, Replacement of directors, Appointment of receiver, Authorisation 5. Note Expenses  Practically, the person bringing the claim would have to pay. Appointment of Receivers
of legal action (eg, derivative suit), Order that director not participate in However, under s 241(1) court can make interim costs orders. Results of claim Appointed by secured creditors or under section 1323 by court upon application by ASIC or
management, Alteration of constitution, Winding up. Essentially anything. will be distributed between shareholders equally. aggrieved person.
6. Statutory Injunction  S1324 Beach Petroleum  Considered to be a grastic move.
2. Winding Up on ‘Just and Equitable’ Grounds  S461(1)(k) Statutory injunction available to prevent a breach of the Corporations act. Note also Receivers Powers
a. Grounds: access to books under s247A and standing is for anyone who may be affected by the breach Power stems from security instrument or terms of the court order.
i. Directors acting in their own interests rather than in the interests of including ASIC.
Section 420  Broad powers to do all things necessary or convenient for the attainment of
the members as a whole – s 461(1)(e), Re William Brooks & Co Ltd   Insolvency
the objectives for which the receiver was appointed.
ii. Remedy under s 232 established – s 461(1)(f) and (g) Kokotovich Aims of Insolvency Law
Recievers Duties
Construction Pty Ltd v Wallington  
iii. Just and equitable – s 461(1)(k)  Usually requires Quasi. At CL
Options for Insolvent Companies: Forsyth v Blundell  Common law duty not to sell secured property at gross undervalue.
1.Breakdown of Trust
Voluntary Administration Corps Act
Ebrahimi v Westbourne Galleries Ltd   Mr Nazar, founder,
Purposes  See s 435A As an officer, section 180-184 duties apply.
entered into partnership with Ebrahimi.  They shared the
management and profits equally.  A company was formed – each Appointing an Administrator Section 420A  Duty to take reasonable car in selling companies assets. Must take
held 500 one pound shares.  Later, Nazar's son was made a Section 436A  By Directors reasonable care to sell property for not less than market Value
director.  Each of the original shareholders transferred 100 shares Section 436B  By Liquidator Fortson Pty Ltd v Commonwealth Bank  Market value ordinarily means price obtainable
to him.  Shares now split 400, 400 and 200. Nazars used their Section 436C  By party with security interest in the whole or substantially whole of the on the open market.
dominant power (600 votes). The court is able "to subject the Co’s property  (1) Must be perfected and continuously enforceable. Deangrove Pty Ltd v Buckby  Consider receivers entire sale process.
exercise of legal rights to equitable considerations:  Who can be an Administrator Section 424  To protect against breach, can apply to court for directions
considerations, that is, of a personal character arising between Section 448B  Must be registered Deputy Commissioner of taxation v Best & Less  Court will not make commercial
one individual and another, which may make it unjust, or Section 448C  Must be independent decisions.
inequitable, to insist on legal rights or to exercise them in a Section 451A  Can appoint 2 or more joint administrators. Section 422  Duty to report misconduct to ASIC.
particular way”. Effect of VA Termination of receivership
Re City Meat Co Pty Ltd (1984) 2 ACLC 149. The managing Section 437A  Administrator controls the business, property and fairs of Co Terminated when debt discharged or can be by debenture holder or by court.
director resisted passing over control of the affairs of the Section 437C(1)  Officers lose Power, However aren’t removed from office (2) Winding Up (Liquidation)
company;  "no intention whatever of relaxing his grip on the Sections 440A-440J  Moratorium on enforcement of debts  Attempts to provide Forms of Liquidation:
affairs of the business until he is obliged to do so by ill-health, breathing space for administrator and prevent break up of property. Cannot enforce security Compulsory Liquidation:
death - or by the Court”.   interests without court/administrators consent (440B), cannot bring civil proceedings without  Based on Insolvency (ss 459A-T); Or
Carpenter v Carpenter Grazing Co  Held not to be a quasi- consent (440D), Cannot enforce guarantees of directors without consent (440J(1)).  Solvent Companies (e.g s461(1) just & equitable)
partnership even though family. Roles of Administrator Voluntary Liquidation
Section 438A  To investigate the company’s affairs and consider possible courses of  Members voluntary winding-up (Solvent Company)
Note ‘Quasi-Partnerships’  Look for the expectation and action.  Creditors Voluntary winding-up (Insolvent Company)
relationship of the founders of the business at the time the Explore options of restructuring, investigate legal action, report to creditors. Compulsory Winding Up of an Insolvent Company
business was founded.  See O’Neill v Phillips Powers of Administrator Section 459A  Court can make an order that a company be wound up
Section 437A  Broad powers to take control of business, property and affairs, to carry on, Section 459P  Standing to bring an application  Company, Creditor, Contigent Creditor
2.Deadlock terminate or dispose of the business (including sale before 2nd creditors meeting) (leave required)(someone who could become a creditor), Contributory (shareholder or
Re Yenidje Tobacco [1916] 2 Ch 426: two tobacco businessmen Section 442A  Additional powers to remove or appoint directors and execute documents
member)(leave required)(e.g partly paid shares), Director, Liquidator, ASIC (Leave
formed a company.  They were the only shareholders and or do anything in companies name. Required), APRA.
directors.  Creditors Meetings
Pham Thai Duc v PTS Australian Distributor Pty Ltd [2005]  Grounds for Winding up an Insolvent Company
First Meeting: 1. Proving Insolvency  DIFFICULT.
NSWSC 98,  Barratt J:  “As far as the just and equitable ground is Section 436E(2)  Must Convene within 8 days of appointment
concerned, it is clear that the relationship between Mr Pham and Section 436E(3)  Must give notice of at least 5 business days Must be able to prove insolvency (on same grounds as s588G).
Mr Tang, the only shareholders and only directors of PTS, has long Section 436E(3)(a)  notice must be to as many creditors as practicable. Melbase Corporation Pty Ltd v Segenhoe Ltd  Cash flow test applied
been in a state of irretrievable breakdown.”  Leslie v Howship Holdings Pty Ltd  Relevant to consider assets, availability of credit,
Section 1322(4)  Procedural defects may be validated.
future events.
Austin Australia Pty Ltd v De Martin & Gasparini Pty Ltd  Indicia of insolvency 
History of dishonoured cheques; Suppliers insist on “cash on delivery” terms; Post-dated
or “rounded-sum” cheques; Special arrangements with creditors;Inability to produce timely,
audited accounts; Unpaid taxes, workers compensation premiums or super contributions
Demands from bankers to reduce overdraft; Other evidence of deteriorating relations
with bankers; Letters of demand, statutory demands and/or court processes for debt
2. Presumption of Insolvency  EASIER.  Section 459C
(2) The Court must presume that the company is insolvent if, during or after the 3 months
ending on the day when the application was made:
(a) the company failed (as defined by section 459F) to comply
with a statutory demand; or
(b) execution or other process issued on a judgment, decree or order of
an Australian court in favour of a creditor of the company was returned
wholly or partly unsatisfied; or
See legislation for further…
Statutory Demands
Section 459E Requirements  Served by creditor or company, Must specify amount of the
debt, require the debt to be payed within 21 days, be in writing, be in prescribed form (Form
509H – Schedule 2 of Corps Regulation), be signed on or behalf of the creditor, be
personally served, be suppored by a verifying affidavit (Section 459E(3)). MUST BE ABOVE
THE STATUTORY MINIMUM ($2000)(Section 9, Regulations).
Setting aside a statutory Demand:
Section 459G  Court can set aside a statutory demand  must apply for this within the 21
days, must be accompanied by an affidavit, must highlight defects in the damand.
Section 459J(2)  Court will not set aside demand for a mere defect.
Topfelt Pty Ltd v State Bank of NSW (1994)  Will be set aside where a defect causes a
substantial injustice if demand not set aside  demand for money & interest which didn’t
specify amount of interest, terms of interest or compounding. This was sufficient to set aisde.
Section 459H  Court to set aside where there is either a genuine dispute about the
existence of the dept or an offsetting claim that reduces the amount below the statutory
minimum. Consider e.g disputes as to damaged goods. Court will send away for resolution
first.
Effect of winding up
Unsecured creditors lose right to bring individual actions; Secured creditors can enforce
rights (take possession and sell secured property (s471)); Company cannot carry on
business except for winding up; Members lose rights to transfer shares (s468(1)); Can’t pass
special resolutions; Members may bring action in name of company w/ leave of court 
usually go to liquidator first.
Powers of Liquidators
Section 471A  Replace directors as organs of company, Access to books
Section 477, 488, 506  Carry on business, pay in full any class of creditors, make
compromises with creditors, sell or dispose property of company, make calls on shares,
execute documents, appoint and agent and delegate tasks, do all things necessary to effect
winding-up
Section 486A and 486B  Seek court order preventing officers from fleeing Australia.
Liquidator is agent of the company, have duties of care (s180), must act in good faith and
proiper purpose (181) may seek direction of court (s479(3), must act impartially.
Must open separate bank account and maintain proper record
Section 474(1)  must gather companies assets
Section 477(1)(a)  can preserve assts, including carrying on business.
Section 477(2)(c) & (d)  Sell assets
Harry Goudias Pty Ltd v Port Adelaide Freezers  Distribute proceeds
Section 533(1)  Report breaches of law
Section 480  Deregister the company.
Voluntary Liquidation
Solvent Companies
Section 491  Members application on a special resolution.
Section 495  Members to appoint a liquidator.
Insolvent Companies
Section 497-500  Creditors can make an application.