Introduction

TERMINOLOGY

WORD MEANING
Companies  Are an artificial person created by law;
 Carry on a business or other activity as an entity separate from the participants in that business
or activity;
 Are created through a process of registration;
 Australian Securities and Investments Commission (ASIC) are responsible for the formation
and regulation of companies and the registration of new companies;
 Do not exist once it is de-registered;
 Are a type of Corporation.

Corporation or Body  General terms used to describe all artificial legal entities that have the attribute of a separate
Corporate legal personality
 Most corporations that are used to carry on business in Australia are companies, that is,
corporations formed or treated as being formed by being registered under the Corporations Act
2001 (Cth).

Separate Legal  In brief, means that a company is treated as a separate person form those who participate in the
Personality company.
 Because it is a separate person, it has its own legal identity or personality which means that it
can, for example, hold property in its own name and enter into contracts in its own name.
 It can commence or defend legal proceeding in its own name.
 Importantly, its liabilities are its own and not those of its members or officers

Limited liability  In brief, limited liability means that even if a company is unable to pay all of its liabilities, then
those participants who have invested money in the company are not liable to contribute any
more than what they have paid (or agreed to pay) to acquire their shares in order for the
company to meet those liabilities.
 Because liabilities incurred in running the enterprise are the company’s own, and not the
participants’, the participants generally would not be required to provide any more than their
initial or agreed contribution to the company to meet those liabilities.

Company Law:  Company law developed alongside the company to regulate the relationship between:
o The participants in the company;
o The company and the state;
o The company and those with whom the company had dealings.

In Australia, companies are used for small and large business.

Australian Securities  ASX

Exchange  Often, shares in large companies are quoted on the ASX and can be bought and sold through
ASK by investors
 If a company is listed on ASX, investors can buy and sell the company’s shares on the stock
market conducted by the ASX

Structure of  All companies have at least 1 member

Companies  In the case of a company limited by shares, the member will hold a share or shares in the
company
 All companies must have at least 1 director, who is responsible for managing or directing the
management of the company’s business.
 Most proprietary companies and all public companies have a secretary, who has certain
administrative responsibilities to fulfil.
 Larger companies may also have other officers involved in management.

Capital Structure In most cases, the commercial activities of companies require the use of a fund or money or
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 property that belongs to the company. The sources of that fund:
 Contributions of capital made by the persons who form the company and persons who
become members after the company is formed
 Amounts of credit advanced to the company by creditors, including those who lend money
to the company and those who supply goods and services on credit
 Profits (if any) not distributed to members.

Debt Capital  Like any other legal person, companies are able to borrow money, and typically, a
company may borrow money from a bank or other credit provider to fund its operations
 The loan may be secured (by a charge over some or all of the company’s assets or
business) or unsecured.
 Suppliers may supply goods and services to companies on credit
 Persons who lend or advance credit to companies are not members of the company.
Instead, they are in a contractual relation with it.
 Company law does contain particular provisions that affect the relationship between debtor
and creditor where the debtor is a company (these include rules designed to protect the
interests of creditors when the company become insolvent (that is, when the company is
unable to meet its debt requirements when they come due for payment)).

‘Creditors’ vs Creditors and shareholders are two different types of investors in a company. Creditors lend money
‘Shareholders’ to the company, while shareholders buy shares in the company.

Creditors:
 Are owed money by the company.
 Have a legal right to be repaid the money they lent, plus interest.
 Are paid first if the company goes bankrupt.
 Have no ownership rights in the company.

Shareholders:
 Own a part of the company.
 Are not owed money by the company.
 Are paid last if the company goes bankrupt.
 Have certain ownership rights, such as the right to vote on company matters.

In general, creditors have a higher priority than shareholders in terms of getting paid back. This is
because creditors have lent money to the company, and they are entitled to be repaid before
shareholders. However, if the company goes bankrupt, shareholders may still be able to get some of
their money back, depending on the assets that the company has left.

Here is a table that summarizes the key differences between creditors and shareholders:

What is a share?  A share represents a number of rights that may or may not (depending on the
terms issue of the share) include control rights (such as voting rights and rights to
receive information) and distribution rights (such as a right to receive dividends or
to share in the assets of the company on a winding up of the company)

Members of  A person who holds shares in a company is a member of a company

Company  Have particular rights in relation to the administration of the company’s affairs
that depend on the law ad the terms of the issue of the share.
 Company’s members generally are:
o It’s owners; and
o Proprietors
 Any legal person can be a member of a company
 This means that the member does not have to be a natural person (that is, a human
being) but may itself be a company.

Directors  Where a company has more than one director, the directors are collectively
referred to as the board of directors.
 May be executive or non-executive.
 Executive: are those who are employed by the company and devote all or
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 substantially all of their working time to managing the company’s affairs.
 Non-executive: are not employed in the company’s business and provide an
‘outsider’s’ contribution and oversight to the board of directors.

Equity Capital  The capital contributed by the members of the company is sometimes referred to
as Equity Capital.
 In the case of a company limited by shares, the members provide money or
property to the company and receive a share or shares in return.

INTRODUCTION

What is a Company? Corporations Act 2001 (Cth) s9 (definition section)

company means a company registered under this Act and:
(c) in Parts 5.7B and 5.8 (except sections 595 and 596), includes a Part 5.7 body;
and
(d) in Part 5B.1, includes an unincorporated registrable body.
(1) The definition refers to s57A which states that corporations include companies as well
as body corporates and certain unincorporated associations
Corporations Act 2001 (Cth) s57A – Meaning of Corporations
(1) Subject to this section, in the Act, corporation includes:
a. A company; and
b. Any body corporate (whether incorporated in this jurisdiction or elsewhere;
and
c. Any unincorporated body that under the law of its place of origin may sue or
be sued, or may hold property in the name of its secretary or of an office
holder of the body duly appointed for that purpose.
(2) Neither of the following is a corporation
a. An exempt public authority
b. A corporation sole
 In Australia a company has to be registered to be a company. An exception to this is
provided by s1378 of the Act.
o No common law company with the exception of s1378.
(1) If:
a. before the commencement, a company was registered under Part 2A.2 of the old
Corporations Law of a State or Territory in this jurisdiction; and
b. that registration was still in force immediately before the commencement; the
registration of the company has effect (and may be dealt with) after the
commencement as if it were a registration of the company under Part 2A.2 of this
Act as a company of whichever of the company types listed in subsection (2)
corresponds to its previous class and type.
(3) The application of subsection (1) in relation to the registration of a company does not
have the effect of creating that company as a new legal entity. Rather, it has
the effect of continuing the existence of the legal entity that is that company with
the same characteristics and attributes as it had immediately before the
commencement. The date of the company’s first registration remains the same (see
subsection 1402(2)), and a new certificate of registration does not need to be
issued.
A company is a legal device, which is artificially created legal entity which has legal
rights, powers, privileges, immunities, duties and liabilities
Benefits of Setting up Separate Legal Entity
a Company In certain forms of companies there is limited personal liability for owners/shareholders
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 It is a vehicle which enables large numbers of people to participate in a joint business
venture
It makes it possible to raise large amounts of capital
The Corporations  The current scheme aims to remedy the constitutional defects of the old scheme
(Commonwealth o S51 of the constitution allows the states to refer powers to the Commonwealth
Powers) Act 2001 In WA the conferral of power was by the Corporations (Commonwealth
(WA) Powers) Act 2001 (WA)
Commonwealth The parliament shall, subject to this Constitution, have power to make laws for the peace,
Constitution s51 order and good government of the Commonwealth with respect to:
Legislative powers of (xxxviii) the exercise within the Commonwealth, at the request or with the
the Parliament concurrence of the Parliaments of all the States directly concerned, of any power
which can at the establishment of this Constitution be exercised only by the
Parliament of the United Kingdom or by the Federal Council of Australasia

 The states have permitted the Commonwealth to legislate in the area of corporation’s
law and while it is possible to withdraw this power restrictions, four states must vote
to terminate before it will be effective
o The Commonwealth have agreed to restrictions on the use of power, the
conferred powers cannot be used in: The realm of industrial relations
(Corporations (Commonwealth Powers) Act 2001 (WA) s1(3)); or
o Amendments to the Corporations Act require consultation with the states
 Constitutional problems are addressed now as:
o The Commonwealth was validly exercising it constitutional powers; and
o Federal courts and officers are exercising federal power.
Other Sources of Law  Legislation is the most important source of law but it is regularly reviewed and is in a
constant state of flux
 There is a Joint committee on corporations and financial services whose mandate
includes inquiring into and report to both Houses of Parliament on both the
corporations legislation and ASIC
 Thecorporationsandmarketsadvisorycommitteemakesrecommendationstothe Minister
on issues relating to the Corporations Law and its administration.
 Hansard debates can be useful to ascertain the reasons for changes in legislation.
 Prosecution of breaches of the Act are overseen by ASIC = Australian Securities and
 Investments Commission.
 ASIC is set up under the ASIC Act, which was overhauled after the constitutional
crisis and re-enacted after the referral of power to the Cth.

WHY  There are two main characteristics of why it is an attractive vehicle to use to undertake
INCORPORATE? business ventures of hold assets
 These being (1) separate legal entity; (2) limited liability

The decision to incorporate is generally an optional decision, however, where there are 20
or more persons wishing to carry on a business for gain, it is mandatory: s115CA.

There are advantages and disadvantages of incorporation, which include:

Advantages
 A company is a new legal entity that’s solely liable for its own debts
 There is limited liability for members for the debts of a company
 A company has an indefinite existence (perpetual succession)
 Business proprieties look for tax advantages. Eg, tax effective superannuation
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 3 main advantages
(1) Encourages Investment
o Investor protection
o Transferable shares
o Do not need to be afraid that they are the first target for creditors
o Ease of transferability
(2) No disincentive to diversify
o Without speculative investment commerce and innovation will grind to a
halt
(3) No need to be involved in the management
o Investors are secure in how much they can lose and is able to leave
management of the business to the people best suited to do so

Disadvantages:
 Limited role of shareholders in management structure of company, eg s198A CA
 Increasing number of penalty provisions which apply to defaulting directors, including
civil penalty provisions
 Fees associated with incorporation, and on filing various returns with ASIC,
paperwork associated with company registers, meetings and accounts
Separate Legal Entity Able to own property at law
 A company as a separate legal entity is able to own property at law
o This makes it easier for a company to transact with the world at large
 Easier than various owners, managers and other participants in the running of the
company
Perpetual succession
 A company is seen as existing separate from the shareholders it means that it
continues to exist unchanged despite changes in ownership or membership
 This means that property and assets do not need to be transferred nor do contracts
need to be re-executed when there are changes in management or ownership
 Having to undertake this would be expensive, time consuming and essentially bring
commerce to its knees
Company can sue and be sued in its own name
 As a result of being a separate legal entity, a company can sue and be sued in its own
name
 Without this the individual entering into a transaction on behalf of the business
association would have to take legal action against a debtor in his own name and then
account to the other members
Limited Liability Differentiate the company from a partnership
 Unlike a partnership where all the partners are jointly and severally liable in a
company, members are not generally jointly and severally liable for the debts of the
company
 Simply because the company or a member goes under it does not mean that all
members are necessarily dragged down with them

Creditor vs Individual
 It is an advantage to the individual forming a company
 Can result in creditors losing out and recovering a small proportion of the money
owed to them
 There are ways for the creditor to mitigate this with proper due diligence and the use
of guarantees
 The measures do not fully protect the creditor in many cases.
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 Limited liability is beneficial and essential to the functioning of economy:
(1) Encourages investment in business ventures.
 Wealthy investors are able to invest without being afraid that they will be the first
target for company creditors.
 If there was unlimited liability--the effective value of the share would be based on the
wealth of the shareholder and how much the shareholder was risking.
 If there was unlimited liability--Trading in shares would be difficult and investors
would be less likely to invest without the relative ease of transferability that exists.

(2) There is no disincentive to diversify investments

 If an investor could potentially lose all his wealth if the company has invested in gets
into financial difficulties then the smart investor would limit his investment to only
one company.

(3) Removes the need for investors to be involved in the management of the company.
 If no limited liability- prudent investor would want to be involved in the management
of the company to protect his total fortune.
 Would also have co-investors wanting control but with limited liability the investor is
secure in how much he could potentially lose and is able to leave the management of
the business to others better suited.

Disadvantages of The establishment and administrative costs

Incorporation  Various costs in time, professional fees and compliance to set up and administer a
company.
 Greater costs etc. for public companies over private companies

Publicity
 All companies are required to make certain disclosures about participants to ASIC.
 Apart from small proprietary companies, companies are required to make certain key
financial disclosures to ASIC.
 Certain companies are required to disclose certain information about itself and its
members as the information becomes available.
 Anything disclosed to ASIC is essentially public knowledge and the information can
be obtained by the public.
 These disclosures make it difficult to keep certain information private from
competitors and may be to the detriment to the company.
Public Law Obligations
 Companies are created by statute and through the legislation have obtained special
powers and privileges that a company has.
 The company and its participants are subject to the public law and many of the
obligations placed on them are subject to public law sanctions
o Breach of certain obligations may result in them being enforced via criminal
sanctions
o Breach of a partner of his duty to avoid a conflict of interest would not attract
public law sanctions but would be a civil matter between the partners whereas
a breach of a director of this duty could result in a fine or imprisonment on the
breach.

Limited Liability  Not all companies limit the liability of the participants.
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  The most type of company is one that has been limited by shares but it is also possible
to limit companies by guarantee.
Companies limited by S 516 CA: states the liability of a shareholder is limited to the amount (if any) that is
shares unpaid on the shares.

Section 516 Subject to sections 518 and 519, if the company is a company limited by
shares, a member need not contribute more than the amount (if any) unpaid on the shares
in respect of which the member is liable as a present or past member.

 This gives rise to two types of companies, depending on whether the shares that are
issued are fully paid or not.
 Fully paid shares: Where shares are full paid for at the time of purchase = no further
liability will arise under those shares.
 Partly paid shares: require part-payment for the shares in the beginning. The
shareholder is liable for the unpaid portion of the share price, at the call of the
company.
o The word ‘limited’ must appear at the end of a company’s name if the liability
has been limited by shares under s148.
o S149 permits it to be limited to Ltd.

Companies limited by No shares are issued

guarantee  S124: states a company limited by guarantee does not have the power to issue shares.
 S517 provides that each member undertakes to contribute a specified amount of
money if the company is wound up and there are insufficient existing assets to meet
the debts.

Section 517 Company Limited by Guarantee

Subject to sections 518 and 519, if the company is a company limited by guarantee, a
member need not contribute more than the amount the member has undertaken to
contribute to the company's property if the company is wound up.

 Companies limited by guarantee = don’t need to have ‘limited’ or ‘ltd’ appearing in

their name under s 148 & s 149.
 Exception to this is s 150 which states that ‘where the company is solely for charitable
purposes and has constitutional limitations on distributions to members and payments
to directors.’
 The doctrine of limited liability: does not prevent members from being personally
liable in all circumstances--if directors or members of a company commit a tort they
can be generally liable for the tort even if the tortious conduct was on behalf of the
company.
Separate Legal  The legal doctrine of the company being a separate legal entity from:
Entity o The people who created the company (the promoters);
o The people who own it (the shareholders); and
o The people who manage it (the directors).
 The idea of a company as a separate legal entity is enacted in the Corps act through
s124 which gives rise to a corporate veil, which often shields the promoters, directors
and shareholders from personal liability for debts of the company.

Section 124 Legal capacity and powers of a company

(1) A company has the legal capacity and powers of an individual both in and
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 outside this jurisdiction. A company also has all the powers of a body corporate,
including the power to:
(a) issue and cancel shares in the company;
(b) issue debentures (despite any rule of law or equity to the contrary, this
power includes a power to issue debentures that are irredeemable,
redeemable only if a contingency, however remote, occurs, or
redeemable only at the end of a period, however long);
(c) grant options over unissued shares in the company;
(d) distribute any of the company's property among the members, in kind or
otherwise;
(e) grant a security interest in uncalled capital;
(f) grant a circulating security interest over the company's property;
(g) arrange for the company to be registered or recognised as a body
corporate in any place outside this jurisdiction;
(h) do anything that it is authorised to do by any other law (including a law
of a foreign country).

 Corporate veil = shields the promoters, directors and shareholders from personal
liability for debts of the company. Affirmed in House of Lords decision of Salomon v
Salomon [1897].
o Held: Found that Mr Salomon and the company were distinct legal entities
and the company was not an agent or trustee to Mr Salomon. Mr Salomon
was not responsible for the debts of the company and it was possible to
create the debenture, so Broderip had first priority against the assets of the
company.
 A properly constituted company is separate from the individuals who set up, own and
manage the company even in instances where there is really only one person involved
in the company: Macaura v Northern Assurance Co [1925]; Lee v Lee’s Air Farming
Ltd [1961].
Salomon v Salomon — sole trader
& Co Ltd [1897] AC — Incorporated – required a minimum of seven members
22 — registered a limited company - shareholders being himself, his wife and his five
children
— voted as directed by Mr Salomon
— sold business to the company, part of payment was by debenture
o cash and 20,001 shares
o debenture works like an ‘I owe you’
— business in financial trouble, debenture sold
— business was not saved and liquidator was appointed
— sufficient funds to pay debenture, but not the other creditors.
— liquidator refused to pay Broderip the money.
— Company had enough money to pay Broderip but not the other members

Liquidator argued:
 Argued the company was a sham
 Salomon should be personally liable for the debts
 Refused to pay Broderip any money

COURT AT FIRST INSTANCE:

 Was an agency arrangement - personally liable
 Salomon was personally liable

COURT OF APPEAL:

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  Trust relationship – Salomon should indemnify
 Under laws of trust, the trustee should be indemnified by the beneficiary for
expenses incurred by administration of the trust
 Nothing to indicate sale of business was a fraud

HOUSE OF LORDS:
— Separate legal entities
— Debenture valid
— Mr Salomon and the company were distinct legal entities
o Mr Salomon was not in debt in relation to the company
Corporate Groups  A corporate group exists where there a number of companies that are interrelated.
 Subsidiary body: a body will be a subsidiary of a second body corporate (holding
company under s9) if one for the following three criteria is met under s46:
o The second body corporate controls the composition of the board of the first
body corporate.
o (s47 defines this as including the power to appoint or remove more than half of
the directors);
o The second body corporate can cast or control more than half of the votes that
can be cast at a general meeting;
o The second body corporate holds more than half of the issued share capital.
 S50 states that two companies are related if they are:
o In a holding/subsidiary relationship; or
o If one company is a holding company for another company, which acts as a
holding company for the third company. (i.e grandparent relationship).
 Corporate groups may still exist even if these definitions are not met.
o s50AAA defines when entities are associated and s50AA defines when entities
are being controlled.
o The things to look for are common directors and shareholders and the ability of
one company to influence the decisions of another company.
Application and  Generally, the separate legal doctrine applies completely, for example:
degree of separate o Walker v Wimborne: It was held that, in the absence of a guarantee, a creditor
legal doctrine to
who contracts with one member of a corporate group (Co. A) cannot in general
corporate groups
pursue another member of the corporate group (Co. B);
o Pioneer Concrete Services v Yelnah: It was held that this works in the other
direction as well – a contract made with a subsidiary cannot be enforced by the
holding company.
o Adams v Cape Industries PLC: On occasions it is possible for a corporate
restructuring to limit liability. In this case the company had consolidated its
holdings in the USA after successful negligence claims. The Court held that
even though there were moral objections, providing the restructuring
was legal, it would be effective to defeat future negligence claims.

Types of registered (i) Classification according to the liability of members on winding up

companies The classification of these companies is found in s112(1) – division into 4 types; company
limited by shares, company limited by guarantee, no liability company, unlimited
company (very rare).

Company Limited by Shares

Definition – One where the liability of a shareholder is to contribute to the liabilities of the
company on winding up but limited to the amount, if any, that’s unpaid on shares: s9 &
516 CA
Liability of shareholders: s516 CA;
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 Characteristics:
Name – It must have Ltd at the end of its name: s148(2) CA;
Public or proprietary status: s112(1) CA;
Use – exclusively used for trading
Prevalence – the most common form of company in our society

Company Limited by Guarantee

Definition – Liability is limited to the amount its members undertake to contribute in the
winding up of the company: s9 & 517 CA
Liability of members: s517 CA;
Characteristics:
Name – must have Ltd at the end of its name: s148(2), s149 CA;
Public or proprietary status - Can only be incorporated as a public company s112(1) CA;
Share capital – No share capital cause it is only limited by guarantee
Use – generally used as NFP (Not for Profit), eg RACQ

No Liability Company
Definition – One where there is no contractual right under its constitution to recover calls
made upon its shares from a shareholder who fails to pay for it: s112(2)(c), s254M(2) CA
Liability of members – as above sections – if a shareholder does not pay its calls the
shares are subject to forfeiture: s154Q, also the shareholder is not entitled to the dividend:
s254W CA
Characteristics:
Name – Must have NL (No Liability) at the end of its name: s148(2), s149 CA;
Public or proprietary status – Can only be a public company: s112(1) CA;
Share capital – It must have a share capital: s112(2)(a) CA
Use – Find that they must state in their constitution their sole purpose is for mining
purpose: s112(2)(b), mining purposes defined in s9 CA (mining purpose objects) – must
not engage in activities outside those mining purposes: s112(3) – the contravention of this
provision does not invalidate any act or transactions: s112(5).

(ii) Classification according to Public or Proprietary Status

Public Company
How is a public company defined – A company other than a proprietary company: s9 CA
What are its characteristics
Name – Must have Ltd at the end of its name: s148(2), s149 CA;
Shareholdings – public companies have shares spread amongst a large number of
shareholders, to enable equity funding for large projects the company may enter into

Proprietary Company
What is the definition of a proprietary company – One registered as a proprietary
company s9, s 45A(1) CA
Real definition comes from the restrictions which apply set out in s112 & 113 CA – it
must be a company limited by shares: s112(1), not have more than 50 non-employee
shareholders: s113 (excluded are people who are employees of a subsidiary: s113(3)),
cannot engage in activities that require the disclosure of a lodgement document, eg
prospectus: s113(3)

What are its characteristics?

Name - Must have Pty Ltd in its name: s148(2) CA;
Nature of shareholdings – Held by a small number of persons (s 112(1))
Prevalence – Most common in our society
Use – Its use is primarily for small family business or joint venture companies set up for a
limited project
Does a private  Minimum number of directors s 201A
company enjoy o Private comp can have 1, public must have 3
privileges a public  Removal of directors (s 203D + E)
company does not o In a Pty Ltd, the board of directors can remove a fellow director. In a Ltd, only
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 the members can remove a director.
Small vs Large Pty  small proprietary company is one that satisfies two of following criteria:
Ltd. o (a) consolidated revenue for financial year for company and any entities it
controls is less than $25 million; or
o (b) value of consolidated assets at end of financial year of company and entities
it controls is less than $12.5 million; or
o (c) company and the entities it controls have fewer than 50 employees at end of
financial year: s 45A(2) CA
 large proprietary company is a proprietary company that is not a small proprietary
company: s 45A(3) CA
 Advantages of Small Pty Ltd
o Not required to prepare annual financial accounts or disclose financial
information to ASIC (Part 2M.3)

Piercing the Corporate Veil and Partnerships

Piercing the Corporate Veil

 Corporate veil: separate limited liability protects the promoters, directors and shareholders from the debts of the
company.
 To ensure fairness to people dealing with companies, there are a number of ways to go about piercing the
corporate veil to get to the people behind the company.
 The sources of the rights include:
o Rights which are conferred under legislation; and
o Rights under the common law

Piercing the veil There are a number of statutory provisions that make individuals liable for some of the debts
on statutory of the company
grounds 1. Insolvent trading under s588G
2. Voidable transactions under s588FA-s588FJ
3. Taxation legislation
1. Insolvent  A company cannot trade while the company is insolvent.
trading under  A person or company is solvent if it can pay its debts when they become due
s588
 If a person or company cannot pay their debts, then it is insolvent (s9 definition which
takes to s95A)
 The specific sections for insolvent trading are under Section 588G
 In relation to liability, insolvent trading will hold the director personally liable for
transactions entered into on behalf of the company while he knew or should have known
that the company either was insolvent or would become insolvent as a result of the
transaction.

Who can pursue action on this basis and how?

 [COMPANY] This action would be taken by the company (or by the liquidator acting on
behalf of the company) and the order would be for the company to recover any loss from
the director.

 [CREDITOR] Alternatively, it is also possible for a creditor to directly pursue the

director for insolvent transactions, through section 588M.

Here, it must be determined whether insolvent reading occurred due to the director’s
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 actions, and who has the right to pierce the veil to recover such debts.

STEP 1: Application of the section

Section 588g will apply if the elements in s 588g(1) are met being:
a) The person was a director of the company at the time when the company incurred the
debt;
b) The company is insolvent or becomes insolvent by incurring debts;
c) at that time, there were reasonable grounds for suspecting that the company is
insolvent, or would so become insolvent; and
d) that time is at or after the commencement of the Act.

There are both civil and criminal penalties for insolvent trading by the director.
Take note:
(1A) For the purposes of this section, if a company takes action set out in column 2 of the
following table, it incurs a debt at the time set out in column 3.

These elements will need to be considered to try to pierce the corporate veil to hold
[PERSON] accountable for the debts of [COMPANY].
STEP 2: Debt and when it occurred
The time at which the company incurs debt after an action is outlined in the table in section
558g(1A) of the Act.

1. As per the table, the action of the company through [(A) DOING THE
ACTION] as outlined in column 2 [ROW X] provided that the debt was
incurred upon [(B)WHEN THE DEBT WAS INCURRED], as per column 3
[ROW X].

2. it can therefore be proven that the debt was incurred when [WHEN THE DEBT
WAS INCURRED].

3. At that time, it is uncontentious that [PERSON] was a director of the company,

and therefore there is potential for them to be held liable under this section.

See below table for ease of reference:

Action of company When debt is incurred

1 paying a dividend when the dividend is paid or, if
the company has a constitution
that provides for the
declaration of dividends, when
the dividend is declared
2 making a reduction of share capital (other than a when the reduction takes effect
reduction that consists only of the cancellation of a
share or shares for no consideration)

3 buying back shares (even if the consideration is not when the buy-back agreement
a sum certain in money) is entered into

4 redeeming redeemable preference shares that are when the company exercises
redeemable at its option the option
5 issuing redeemable preference shares that are when the shares are issued
redeemable otherwise than at its option

6 financially assisting a person to acquire shares (or when the agreement to provide
units of shares) in itself or a holding company the assistance is entered into
12
 or, if there is no agreement,
when the assistance is
provided
7 entering into an uncommercial transaction other than when the transaction is entered
one that a court orders, or a prescribed agency into
directs, the company to enter into

STEP 3: Insolvency
 It must now be considered whether the company was insolvent or became insolvent
through incurring debts.
 Generally, there is a prohibition on a company trading while the company is insolvent.
 As per s 9, which leads to s 95A of the Act, a person/company is solvent if, and only if, it
can pay its debts as and when they become due. If it cannot then it is insolvent.

95A Solvency and insolvency

(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and
when they become due and payable.

(2) A person who is not solvent is insolvent.

STEP 4: When it is a Civil Penalty (Section 588(2)).
Application:
 s588G(2) prohibits a director from incurring a debt for the company if he suspects, or
ought to have reasonable suspected that the company is insolvent (or will become
insolvent due to the transaction about to be completed).

Here, [PERSON] in doing [SOMETHING] should have suspected [OR KNEW] that the
transaction would make the insolvent due to [EXAMPLE]. because of this breach, it is
likely that the company will be able to seek remedies.

 The Corporations Act has a number of sections (of which s588G is one) that enable
ASIC to pursue people and impose sanctions (including fines and disqualifications
from holding offices in companies for a period of time) for breaching the sections.
 This subsection is a civil penalty provision (588(2)).

If the court is satisfied that a person has contravened a civil penalty provision, the court must
make a declaration of contravention. A list of these provisions is contained in s1317E (page
931 of Hanharan 2022).

Remedies:
 If there is a breach of s588G(2), a compensation order can be made by the Court in favour
of the company under s588J (or, indeed, under s1317H).
 The company is then compensated for losses that were incurred as a result of the action of
the individual who has breached the provisions of the Corporations Act.

STEP 5: When is it a Criminal Penalty (Section 588(3)).

A number of sections also allow criminal prosecution in certain circumstances.

 Section 588G(3) prohibits a director from incurring a debt for the company if he
suspects, or a person in their position ought to have reasonably suspected that the
company is insolvent (or will become insolvent due to the transaction about to be
completed) and the person’s failure to prevent the company incurring the debt
was dishonest.

13
 Application:
 Section 588G(3) creates a criminal offence relating to insolvent trading.
 This is actioned through the criminal courts and can lead to “normal” criminal
sanctions, including a fine and possibly prison.
 Section 1311 makes a direction to Schedule 3 for a list of penalties for various
offences.
 A “penalty unit” is $222, based on the indexed value of penalty units under section
4AA Crimes Act 1914 (Cth) before 1 January 2023.
 Note that this was increased to $275.00 from 1 January 2023.
Because [PERSON] has acted dishonestly through [ACTIONS] it is likely that they will
incur [FINE] or imprisonment under.

STEP 6: Liability of the Director

COMPANY Because of the above (INSOLVENT TRADING), this action would

be taken by the company and the order would be for the company to
recover any loss from the director.

CREDITORS It is also possible for a creditor to directly pursue the director for
insolvent transactions, through s588M.
 Creditor has to wait before requesting leave from liquidator
to seek debts (6 months from the winding up of the
company)
 Liquidator has three months to reply to this request.

The procedures relating to this are in s588R – s588U which I

suggest you read for yourself (see end of this week’s notes for
pasted sections)
CONCLUSION The end result of either action is that the Corporate Veil is pierced.
The [DIRECTOR OR DIRECTORS] are ultimately held liable
for the debts of the company, either by:

a) The creditors recovering from the company and the

company recovering from the director(s); or by directly
pursuing the director.

14
 2. Voidable  When a company is being wound up, it is possible for a Court to retrospectively make
Transactions orders relating to certain transactions, having them effectively set aside.
Under S588fa
- S588fj To understand these voidable transactions, we must first distinguish between secured
and unsecured debt:

 Secured debt: where the debtor provides the creditor with security which can be taken and
sold should the debtor default.
o This security takes the form of a charge against an asset of the debtor.
o A holder of security has first rights to the proceeds of the sale of the charged
property.

 Unsecured debt: where there is no security provided to secure payment of a debt, simply
share in the balance of the estate once all secured creditors have been paid. Examples of
the types of transactions that are covered include:

In this situation, it is evident that the debt owed by [COMPANY] to [PERSON] is

[SECURED/UNSECURED] this is because [ACTION – how is it secure or unsecured?]

 Unreasonable payments made to directors.

 Covers monetary payments, issuing of securities and transfer of property.
 This was inserted in 2003 in reponse to companies who had authorised
huge payments to directors while teetering on the brink of insolvency.

 The Court can make various orders under s588FF with respect to voidable transactions.
 If a director was a party to the voidable transaction, he may have to repay money to the
company to satisfy creditors.
Unfair preferences-- s588FA
 The granting of unfair preferences to creditors under s588FA of the Act may allow
the corporate veil to be pierced.
 This occurs when unsecured creditor/s gain an advantage over other unsecured
creditors for example - the unsecured creditor receives more than they would have
they had to prove their debt in the winding up of the company.
 So, if a company become bankrupt and there are a number of people with unsecured
debentures, you cannot preference one of those people over another.
 In Australia – Unsecured debentures are called unsecured notes.

In this situation, [PERSON] was preferenced over [PERSON] which resulted in

[RESULT]. Therefore, it is likely that this may bring rise to an unfair action under S
588FA
Uncommercial transactions-- s588FB
 Uncommercial transactions under s 588FB may allow the corporate veil to be
pierced.
 These are transactions that a reasonable person in the company’s position would
not have entered into.
 It Is essentially a weighing up of the benefit vs cost to the company and the other
party and other relevant information.

Here, a reasonable person in the position of the company would not have entered into to
transactions such as [TRANSACTION] and therefore it is likely that this may bring rise
to uncommercial transaction under s 588FB of the act.

Insolvent transactions-- s588FC

 Essentially the same requirements as those seen in s588G in relation to Director’s
duties.

15
 Unfair loans-- s588FD
 Unfair loans under s 588FD may allow the corporate veil to be pierced. The terms of
the loan effectively are extortionate.

In this situation, it is unreasonable and unfair that the loan states [WHAT IT STATES]
this essentially [DOES THIS THING] and therefore it is likely that this may bring rise
to unfair loan under s 588fd of the act.

Unreasonable director-related transactions-- s588FDA

 Unreasonable director-related transactions under s 588FDA of the act may allow the
corporate veil to be pierced.
 This includes unreasonable payments made to directors include monetary payments,
issuing of securities and transfer of property.
 This was inserted in 2003 in response to companies who had authorised huge
payments to directors while teetering on the brink of insolvency.

In this situation, [director] received [amount] for [work/thing]. this can not be said to be
reasonable renumeration for the work that was being committed. because of this, it is
likely that this may bring rise to an unreasonable director related transaction under s
588fd of the act.

Remedies
 The Court can make various orders under s588FF with respect to voidable
transactions.
 If a director was a party to the voidable transaction, he may have to repay money to
the company to satisfy creditors.
 See end of this week’s notes for pasted section.
Here, [DIRECTOR] was a party to the transaction and therefore the veil is likely to be
pierced to hold them accountable for the transaction.

3. Offences  s260A states a company may give financial assistance to a person in order for that person
by a company to acquire shares in the company or in a holding company of the company provided that:
under s260D o The assistance does not materially prejudice the interests of the company or
shareholders or the company’s ability to pay creditors; or
o The assistance is approved by shareholders to s260B (requires prior notice to
ASIC); or
o The assistance is exempted under s260D

These conditions are not met then an offence is committed BUT the company is not liable – it
is anyone (the directors or shareholders) who is involved in the company’s offence.

 There are civil penalties (see s260D(2) anyone who contravenes the subsection) and
criminal sanctions (see s260D(3) DISHONESTY) for both of which the Court will make
orders against the individuals involved.

Here it is evident that the decision of the company to [ACTION] was in order for
[PERSON] to acquire shares in the company.
 did it materially prejudice the interest to pay creditors?
 was the assistance approved by the shareholders?
 was the assistance exempted

4. Taxation  Under the tax laws, directors of a company are personally liable for the group tax of the
Legislation company.
 There are other statutes which enable the courts to pierce the veil too.

16
 Lifting the Veil Under General Law

 Courts have been reluctant to pierce the corporate veil in the absence of statutory provisions, preferring instead
for Parliament to explicitly create exceptions.
 There are a couple of categories of cases in which the veil has been pierced.

When can it be pierced??

If the sole purpose of creating the company is to avoid the existing legal duties, then the veil is able to be pierced.

1. To avoid  If the company has been set up solely to get around an existing legal duty, then the
an existing corporate veil can be pierced.
legal duty  The legal duty being avoided is generally a duty that arises under a contract or under a
statute.

For example, in … [choose one of the cases below].

Avoiding Contact
Gilford Motor Co Ltd v Horne (UK) [1933]
 HELD: The Court decided that on the evidence, the separate legal entity doctrine did not
apply.
 The company was formed for the sole (or dominant) purpose of defeating the contract
which Horne had signed and, in those circumstances, the injunction against the company
was granted.

(Court of Appeal):
 The Court decided that on the evidence, the separate legal entity doctrine did
not apply.
 The company was formed for the sole (or dominant) purpose of defeating the
contract which Horne had signed and, in those circumstances, the injunction
against the company was granted.

In these circumstances, it is evident that through doing [ACTION] [PERSON] sought to

avoid the obligations as outlined in [CONTRACT] as such, it may be appropriate to
pierce the corporate veil and hold [PERSON] accountable for their actions.

[if you are intending to apply the case, just keep in mind the following…]

[ALTERNATIVELY] Ford, a corporations law academic, states that this may be a case of
where the company is purported to be formed for an unlawful purpose and he is restrained
from implementing that purpose – therefore not piercing the corporate veil (he stated that it
is not necessary to see this case as an example of lifting/piercing the corporate veil) [APPLY
THIS LOGIC]
Sham
Jones v Lipman [1962]
 HELD: As the sole purpose was to prevent the Court from ordering specific performance
of the contract, the company was seen as a sham and the order for specific performance
was granted against both Lipman and the company.

In this situation, it is evident that through [ACTIONS] the company was a sham to [DO
THE THING] because of this, and in accordance with the ruling of Jones v Lipman, it is
likley that the corporate veil may be pierced to hold [PERSON] and the company
accountable.

Where the Veil is NOT PIERCED:

Electric Light and Power Supply Corporation Ltd v Cormack (1911)
 HELD: There were no facts to show that the sale was made with the object of avoiding

17
 the obligation.

CONCLUSION ON AVOIDING EXISTING LEGAL DUTIES:

Thus it can be seen that where the sole or dominant purpose is to avoid a legal duty, the
new company made will generally not be seen as a separate entity from the person seeking to
take advantage of the separate legal entity doctrine.
***Also, remember the case of Salomon that we looked at last week. There, it was not
established that the sole or dominant reason for the creation of the company was to avoid
liability and there the Court did not pierce the corporate veil despite the seemingly unfair
result to the other creditors.

2. When a  It is narrowly applied.

law  It is limited to situations, in order to give proper effect to a law, the company can’t be
requires it viewed as a separate entity.

Fraud
Re Darby
 The Court found that the sole purpose of the Channel Island company was to perpetrate
the fraud.
 To then find that the company was a separate legal entity from Darby would defeat the
laws of fraud.
 Darby’s argument was rejected.

Giving effect to Provisions of the Act

It was held that to give effect to provision of an act, sometimes a company could not be
held to be a separate legal entity from the individuals. See facts below.

In this situation, to give effect to [act] it must be found that the company is not separate
from [PERSON/PEOPLE].

Re Bugle Press ltd [1961]

 The Court held that in order to give proper effect to the provisions of the Act, the
takeover bid had to be made by an independent entity.
 This was not the case and the compulsory acquisition of the shares was not permitted
under the Act.
 In order to give effect to the law, the company was not a separate legal entity
from the individuals.

Corporate Groups: Lifting/Piercing the Veil

Lifting the veil of The provisions in in section 588V – section 588X make a holding company liable for
corporate groups insolvent trading by its subsidiary which means if the subsidiary continues to trade during
on statutory insolvency, the assets of the holding company can be used to satisfy the debts. The claim
grounds must be brought within 6 years of the beginning of the winding up

In this situation, [COMPANY B] is a holding company of [COMPANY A]. [COMPANY

A] continued to trade, and therefore the assets of [COMPANY B] may be used to pay
the debts.

There are 4 defences:

 2 Statutory
 1 relating to director issues
 1 relating to reasonable steps

18
 Defences to Statutory Grounds
588H(2) – There were reasonable grounds on which to believe the company was
Reasonable solvent and would remain so s588H(2).
Grounds
This is a defence if it is satisfied by virtue of s 588(3) that:
At the time the debt incurred, the person had reasonable grounds to believe,
and did believe:

(a) Reliance was being placed on a competent person to provide info on

the solvency of the company
(b) that this person was fulfilling that responsibility

ANDOn the basis of the info provided it was believed that the company was
solvent and would remain so.

** NOTE: This cannot be used by a director who is ignorant of the

financial affairs of the company: Morley v Statewide Tobacco Services Ltd
(1992) 8 ACSR 305
In this situation, it was reasonable for [PERSON] to believe that the
company was solvent in that [ACTION OF PERSON PROVIDING
INFORMATION] it is therefore likely that they will have a defence to
being held accountable.
588H(4) – In s588H(4) it is a defence if the director did not take part in the management
Directors of the company at the time of insolvent trading if he/she was suffering from
Excuse an illness or other good reason.

In this situation, [PERSON] was dealing with [THING] and therefore it

is likely that they will be able to raise this defence.
588H(5) – In s588H(5) it is a defence if all reasonable steps were taken to prevent the
Reasonable company from incurring the debt.
Steps
1. And those reasonable steps have to be more than just voicing
displeasure (going to ASIC and seeking an authority will be
sufficient) (Byron v Southern Star Group [1997] FCA 151) and
those reasonable steps have to be

2. Director may have to resign or attempt to have co wound up

(suggested obiter in Morley v Statewide Tobacco Services)

In this situation, [PERSON] could have done [THING] which would

have been reasonable to not incur the debt. instead they did [THIS]
which means they may not be able to rely on this defence.
Defences to General Law Grounds
NOTE: that avoiding an (1) existing legal duty and (2) when the law requires it above is
also applied]
There are a few ways in which the veil of corporate groups can be pierced. The two means
that we discussed earlier in the context of individuals will also apply when it comes to
corporate groups.

***[RESTRUCTURING COMPANIES]
Remember the case of Adams v Cape Industries Plc. There it was argued that the
restructuring of the companies was to avoid an existing legal duty and to defeat
justice. However, the veil was not pierced there because there were other reasons for
the corporate restructuring so it could not be said that the sole or even dominant
purpose was to limit liability.

There are two other main ways in which the veil can be pierced for corporate groups:
a. through tortious liability; and
19
 is if an agency or partnership is implied between two members of the corporate group.
Tortious Liability It is possible that a parent company will be liable for the torts of its subsidiary. This was
glimpsed in: Briggs v James Hardy and Co Pty Ltd (1986) 16 NSWLR 549:
FACTS:
 James Hardy was the holding company for a wholly owned subsidiary
 Briggs was employed by that subsidiary
 Briggs alleged that he had contracted asbestosis while working for the subsidiary
company
 Briggs sued both the subsidiary and James Hardy
Preliminary Hearing:
 Was held that the issue relating to piercing the corporate veil should be decided at
trial, because the law in the area was uncertain.
 Rogers AJA stated that control and dominance by the holding company was, in
general, not enough to pierce the corporate veil but he suggested that the degree of
dominance of James Hardy over the subsidiary might be why the subsidiary had
not taken enough precautions or adequately insured itself
 This argument would only be available in the context of tortious liability

Unfortunately, the issue did not go to trial and so has never been officially resolved.We thus
have the possibility that a holding company will be liable in tort for the actions of at
least a wholly owned subsidiary.

In this situation, it is possible to argue that the degree of dominance that [COMPANY
A] held over [COMPANY B] was the reason they were negligent in failing to [DO AN
ACTION]. Therefore, it may be possible for the corporate veil to be pierced.

[CONSIDER HOW HIGH THE BAR HAS BEEN SET] James Hardie & Co Pty Ltd v
Putt (1998) 43 NSWLR 554
HELD (Court of Appeal):
 Control and influence by the parent company was insufficient to lift the veil
 What was required was to show that the subsidiary company was a mere façade.

However, in conjunction with the decision in James Hardie v Putt (1998), the degree of
control and influence by [COMPANY A] was/was not of such nature as to consider
[COMPANY B] a mere façade and is therefore insufficient/sufficient for the corporate
veil to be pierced.

Agency or The case of Smith, Stone and Knight Ltd v Birmingham Corp [1939] outlined six factors
partnership implied which resulted to a company acting as an agent for another, which can bring rise to the
corporate veil being pierced. These elements were affirmed in the Federal Court by Shepherd
J in Spreag v Paeson.

Atkinson J held that there were six factors that pointed towards it being an agency:
1. The profit of the subsidiary was treated as the profit of the parent.
2. The people running the business were appointed by the parent.
3. The parent was the “head and brains” of the operation.
4. The parent was making all of the decisions regarding the venture.
5. The profits were made because of the skill of the parent.
6. The parent was in effectual and constant control of the operation.

Smith, Stone and Knight Ltd v Birmingham Corp [1939] 4 All ER 116
FACTS:
 Smith, Stone and Knight were a paper manufacturing company
 They had a wholly owned subsidiary, Birmingham Waste Co Ltd, who were running
a business buying and sorting waste
 The business was run on land owned by Smith, Stone and Knight, who had granted a
short- term lease to Birmingham Waste

20
  The local council wanted to compulsorily acquire the land, and did so.
 The council generally had to pay compensation to businesses that were being run on
the land, but not if the lease was only a short-term lease, as in that case termination of
the lease could be on short notice anyway
 Smith, Stone and Knight argued that Birmingham Waste were running the business as
an agent for them and so the veil should be pierced and they should get compensation
for the business that was being run on the land.
HELD:
 Atkinson J held there were six factors that pointed towards it being an agency.
 As a result, Birmingham Waste were running the business as an agent for Smith,
Stone and Knight.

***NOTE: That if these tests are applied to Salamon, only the first test fails. That would
tend to indicate that the first factor is very important.

In this situation, it is evident that [COMPANY B] was [X, Y, Z WITH EXAMPLES] for
[COMPANY A] as such, it is likely that the corporate veil will be able to be pierced to
hold [PEOPLE] accountable for compensation.

CORPORATE LIABILITY

So far we have dealt with the issue of looking behind the corporation and holding its
participants liable for the debts of the corporation. As I have said this is not something that
the courts will do lightly and it does not happen often.

As a legal person, it is possible that a corporation may be held liable for its wrongs.
[ISSUE] The challenge is that a company, while a legal person, is also an artificial person
which can only act through the conduct of it officers.

TORIOUS The legal principles and doctrines of ‘torts’ give people a right to bring a civil action for
LIABILITY compensation where the security of their person or property is invaded. Examples of
torts include: negligence, nuisance, passing off, trespass (to goods, land or person),
defamation, injurious falsehood, deceit, conspiracy and breach of statutory duty.

The person who commits a tort against another is called a ‘tortfeasor’. Companies can be
treated as the ‘tortfeasor’ through vicarious liability or direct liability.

Direct/Primary liability
• Lennard’s Carrying Company v Asiatic Petroleum Company Limited [1915] AC 705
• ‘directing mind and will’ of the company
• HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] QB 159 at 172
• Depends on the specific conduct, nature of the matter, position and other
relevant facts and circumstances
• Statute
• may make it an offence (not a crime) to breach a provision
• Includes a provision that the company is deemed to have carried out the
conduct

Vicarious The first way in which companies have been held liable for civil wrongs is through vicarious
Liability liability and this is where the company is held liable for the conduct of its employees who
have committed the civil wrong when acting within the course and scope of their
21
 employment.

NOTE: under this doctrine, there is no suggestion that the company committed the tort but it
is still held liable for the actions of its employees.

In this situation, [EMPLOYEE] has undertaken [WRONGFUL ACTION/DOING –

ANY OF THE ABOVE SUGGESTED ACTIONS] which constitutes a civil wrong by
virtue of [COMMON LAW PRINCIPLE]. Therefore, on this basis, [COMPANY] will
be held vicariously liable.

Direct Liability Direct liability or primary liability has also been attributed to the company via both the
common law and statute.

In contrast to vicarious liability, courts, and more recently legislatures, have developed
mechanisms under which a company is treated as having committed a tort (or other civil
wrong) itself. In some cases, it is the common law that attributes fault to the company,
and in other cases, it is a statute that does this.

In Lennard’s Carrying Company v Asiatic Petroleum Company Limited [1915] AC 705:

 the courts acknowledged that a company has no mind or body of its own and
distinguished between persons who are agents for the company and those who are
known as the directing mind and will of the company.
 The actions of the directing mind and will of a company must be the acts of the
company itself unless the company is not to be held liable at all.
 This case and idea of the directing mind and will be revisited in this course when we
look at the authority a person has for acting for a company.
 (Case summary: page 63 of Hanrahan)

Company’s fault under Statute

Under statute the position is usually easier to determine. Certain statutes make it an offence
(not a crime) for a certain provision to be breached. This means that those affected by the
breach can seek compensation.

The statute then provides that when certain officers have carried out that conduct on
behalf of the company, within the scope of their authority, the company is deemed to
have carried out that conduct and is liable. This removes the need to look for the directing
mind and will.

An example of this is s769B Corporations Act which provides that the principle that
persons are generally liable for the act of their agents applies to companies.

In this situation, [PROVISION & ACT] provides that [COMPANY] is liable on for the
wrongful acts on behalf of [PERSON/OFFICER OF COMPANY] as an officer for
[COMPANY]. [VICTIM/s] will thus be entitled to compensation.

Under this you do not have to look to the directing mind and will of the company, just
company will be sue whereas …

Company’s fault under Common Law

Under the common-law, fault has been attributed by stating that the directing mind and
will of a company represents the state of mind of the company.

As was stated by Denning LJ in HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd
[1957] QB 159 at 172 those that are considered the directing mind and will of a company are
distinct from those who carry out the functions of a company, they are the ones that control
the company.

22
 In establishing whether or not someone is the directing mind and will of a company for a
specific action:
 the nature of the matter;
 the person’s position in the company; and
 all other relevant facts and circumstances
must be taken into consideration.

In this situation, [PERSON] holds the position of [POSITION] in [COMPANY] in

conjunction with the fact that [CIRCUMSTANCES WHICH SUGGEST THEY ARE
DIRECTING MIND/WILL OF COMPANY] strongly suggests that [PERSON] is the
directing mind and will of the company. This means that [COMPANY] is directly liable
for [WRONGFUL ACTION/S]. [VICTIM/S] will thus be entitled to compensation.

CRIMINAL Depending on the jurisdiction, crimes may be entirely spelt out in statutes, or partly spelt out
LIABILITY in statutes and partly in common law. For example, in some places, murder and manslaughter
are matters of common law.

Often crimes defined by statute will specifically state that the references to a ‘person’
includes a company in that Act or an Acts Interpretation Act. Clearly, those crimes are
ones that a company can be liable for.

It is clear that a company cannot be liable for a crime for which imprisonment is the only
punishment. So, if in a certain jurisdiction imprisonment is the only punishment for
murder then a company could not be convicted of murder in that jurisdiction.

However, manslaughter often has alternate punishment to imprisonment and in those

instances, it is possible to have ‘corporate manslaughter’.

Vicarious It is possible for a company to be held vicariously liable for the criminal act carried out
Liability by an employee when acting within the course and scope of his/her employment.

For statutory offences, you would need to look at the legislation to see whether the Act
allows for companies to be held liable for the acts or omissions of its employees.

For example:
 Mousell Bros Ltd v London and North Western Railway Co [1917] 2 KB 836 at 845
– 846
 R v Australian Films Ltd (1921) 29 CLR 195.
Direct Liability The principle that the directing mind and will of a company can be held civilly liable has been
extended into the area of criminal law.

It is also recognised that in many companies there is a complex hierarchical structure with
power being exercised over those who actually carry out the functions of the company.

Attribution of fault under Common Law

In certain circumstances the court has held in common law that it is appropriate to hold the
company liable for these acts.

An example is that of ABC Developmental Learning Centres Pty Ltd v Wallace [2006] VSC
171.
FACTS:
 Here it was alleged that two sections of the Children’s Services Act 1996 (Vic) had
been breached when a toddler escaped the childcare centre and was found in the
streets unharmed by a neighbour.
 When the neighbour returned the child, the staff had not been aware that the child
was missing.
 The company was charged with breaching the Act in that the company and staff had
23
 failed to take reasonable precautions to protect the child from harm and for failing to
ensure that the child was adequately supervised.
 The company argued that since there was no allegation of systemic failure against it
(ie. the required protocols and procedures where in place), the failure of the staff
could not be attributed to the company.
HELD:
 Bell J disagreed and stated that where legislation was regulatory in nature and
typically in the area of social or economic activity in the public interest, where
those regulations are breached those breaching will be liable and where
appropriate this liability can be extended to the company.
 In this instance the regulations were for the protection of children, a particularly
vulnerable group in society, these children had been entrusted into the custody of the
childcare centre.
 In these instances where the staff fail to perform these obligations owed, the
company can be held liable as well.

[LARGE COMPANIES HAVE EXTENSIVE DELEGATION] Tesco Supermarkets Ltd

v Nattrass [1972] AC 153 (at 171) it was recognised that sometimes the amount of authority
delegated to a person lower down the management chain will mean that:
 their acts will be treated as the company’s own;
 their intention (state of mind) in carrying out those acts, can be treated as the
company’s own.

[RELATIVELY LOW LEVEL EMPLOYEES MAY BE ATTRIBUTED TO A

COMPANY] Meridian Global Funds Management Asia Ltd v Securities Commission
[1995] 2 AC 500; [1995] 3 AII ER 918 (decision of the Privy Council on appeal from NZ
concerning a company’s liability for a contravention of the NZ securities laws) recognised
that in certain circumstances, the actions of relatively low-level employees may be attributed
to a company.

Attribution of fault under State

 Criminal liability may also be attributed to a company in legislation.
 There are a few of examples of this in the textbook on p67.
 The details of these is not specifically relevant for us in this course.

In April 2020, the Australian Law Reform Commission (ALRC), quoting Prof Visse, noted
that the attribution of criminal liability to corporations is one of the blackest holes in
criminal law. It recommended that there be a single method for attributing criminal liability
and that legislation be drafted neutrally so that it applied to natural persons and corporations
equally. So far this recommendation has not been adopted.

Different Types of There are basically two different ways in which you can categorise companies
Companies  according to the liability of the members; or
 according to whether they are public companies or proprietary companies

Liability of 1. Company limited by shares

Members 2. Company limited by guarantee
3. Unlimited company
 s9 – “a company in which no limitation has been placed upon the liability of the
membersis generally used by members of a profession as an alternative to forming a
partnership in circumstances when the number of people involved means that a
partnership is not permitted, but the professional rules do not permit liability to be
limited.
4. No liability company:
 s9 – “company that is either registered as, or is converted to, a no liability
company”
 s112(2) gives the defining characteristics of a no liability company
24
 o The company must be solely for mining purposes
 (which includes any or all of prospecting, mining, selling or doing
anything else incidental to or necessary for any of those things)
o Have shares but have no ability to force shareholders to pay calls on unpaid
shares
o A no liability company must have “No Liability” or NL in the name in terms
of s148(2) and s149.

Public or
Proprietary
Proprietary  This is defined in s9, which takes you to s45A(1) and states that a proprietary
Company o company is one that is registered as such under the Act.
 A proprietary company has the following characteristics:
o Have less than 50 non-employee shareholders (s113(1)).
o Cannot attempt to raise money by issuing a prospectus and selling
 shares (s113(3)).
o Have between 1 and 49 members inclusive at all times (s113, s114)
o Must have at least one director (s201A(1)).
 The company name must have Proprietary or Pty in the name (s148, s149) and can be
either a small or large proprietary company as defined in s45A, based on:
o gross revenue per financial year (less/more than $25 million);
o assets owned (less/more than $12.5 million);
o and number of employees (less/more than 50).

Public Company  Defined under s9.

 The most important part of the definition is that it is any company which is not a
proprietary company.
 There is no upper limit to the number of shareholders (s114 there must be at least one)
and there must be at least three directors under s201A(2).

25
 Lifting the Corporate Veil
Issue Can [company’s] corporate veil be lifted, and [party] recover costs from [company] or
[director]?

What is the The corporate veil refers to a company being a separate legal entity from members and
corporate veil? directors. In Saloman v Saloman Lord MacNaughten held that a company is a different
person from the subscribers, even where incorporation occurs from earlier business, and it
is substantially the same, the company is not at law, an agent of the original party.

This is reflected in s124(1) CA which gives a company all the legal capacity and powers
of a legal person plus all the powers of the body corporate.

Here, [company] is considered a separate legal entity from [directors/members]

Saloman v Saloman  S had a leather business that he operated together with his 4 sons.
 Under the Companies Act (Eng) he incorporated the business as A S Co Ltd, a private
company. S was the only substantial shareholder. He and his 2 sons were directors.
 S entered into an agreement (deed) with the company to sell his business to the
company for 39,000 pounds and to apply the money towards: debentures secured by a
mortgage (10,000 pounds); purchase of share capital (20,000 pounds) ; repayment of
business debts and cash.
 After some time the company became insolvent. Upon a sale of the assets, the sum
realised was less than the amount of the mortgage held by S and the unsecured
creditors received nothing. The liquidator brought an action to set aside the
transaction. It was claimed that the company was formed in fraud of the unsecured
creditors that it was a mere agent of S.
Held
 Providing the formalities of incorporation were observed it was not contrary to the
Companies Act for a trader to gain limited liability and obtain priority as a debenture-
holder over other creditors
 A separate entity is formed under incorporation even if all the shares are owned by
one person
 Lord Macnaghten:
 “The company is at law a different person altogether from the subscribers to the
memorandum, and, though it may be that after incorporation the business is precisely
26
 the same as it was before, and the same persons are managers, and the same hands
receive the profits, the company is not in law the agent of the subscribers or trustee
for them”

What is the effect of Here, the effect of the corporate veil is that [company] will be responsible for its own
the corporate veil? debts. Additionally incorporation means that:
 Holding and subsidiary companies are treated as separate legal entities: Industrial
Equity Limited v Blackburn
 Even within a corporate group, such as holding/subsidiary, directors owe duties only
to the company in which they are a director: Walker
 A company may contract with its controlling members: Lee v Lee’s Air Farming Ltd
 Controlling members can be a secured member of the company and have preference
over unsecured members: Saloman v Saloman
 A member has no legal or equitable interest in the property of the company: Macaura
v Northern Assurance Co
 A company can commit an offence (Hamilton v Whitehead)
 A company can be liable in tort to a member: Lee v Lee’s Air Farming Ltd
 Company has legal capacity of an individual and powers of a body corporate (s
124(1))
 Company is liable for own debts – not directors and not shareholders who are only
liable on a winding up of the company to the extent of any amount left unpaid on
shares
 Holding companies and subsidiary companies (related companies under s 50) are
treated as separate legal entities (Industrial Equity v Blackburn)
 Even within a corporate group, directors owe duties only to the company of which
they are a director (Walker v Wimborne)
 Members have no legal or equiatable interest in the company’s property (Macura v
Northern Assurance; cf shares being personal property of the shareholder, have
proprietary interest: s 1070A(1))
 Once a company is registered under the Corps Act, it is a separate legal entity,
separate from its members and from those who manage it (the directors).
 Salomon v Salomon Ltd established that:
o Company is a principal – not agent of or trustee for its shareholders in
absence of facts showing agency or trustee relation
o Company is separate from and can contract with its controlling shareholder
o Company is separate from its managing director
o Irrelevant under the Corporations Act to investigate motives of a sole trader
for incorporating a business (eg limiting liability of members)

Here, [company] will be responsible for [act] unless there is a relevant exception to pierce
the corporate veil.

Industrial Equity  A group of companies which Industrial Equity was the holding company of disclosed
Limited v Blackburn sufficient profits from which a dividend could be paid
 The profits were made by the subsidiaries, and Industrial Equity asserted they could
pay the dividends from these profits
Held
 Each company within a group is separate legal entity
 Just because the group’s accounting requirements treated teh group as a single entity,
did not mean the corporate veil could be lifted for other purposes.

Lee v Lee’s Air  Lee was a pilot who operated a business and owned 2,999 of the 3,000 shares
Farming Ltd  Lee was killed in a workplace accident and his wife sought payment under the
workers compensation scheme
 Initially the claim was rejected because Lee was not a ‘worker’ under the definition
because he had control of the company
Held by the Privy Council
27
  The company was a separate legal entity from its founder and it could enter into a
contract of employment with him

Macaura v Northern  Macaura owned land on which he sold timber, until he sold the land and timber to a
Assurance Co company he formed and was paid all the fully paid shares
 A fire destroyed the timber, and the insurance policy was still in Macaura’s own
name, and had not been transferred to the company
 Insurance company refused to pay citing that only persons with a legal or equitable
interest in property are regarded as having an insurable interest
Held
 Court agreed with insurance company that only the owner of the timber had the
insurable interest
 Shareholders, have no legal or equitable interest in their company’s property

Pioneer Concrete  An agreement between 3 independent parties

Services Ltd v Yelnah  One of the parties had subsidiaries that was meant to act in the best interest of Pioneer
concrete
 The holding company entered into a contract with Yelnah in breach of the agreement
Held
 The holding company was not a party to the clause of the agreement, rather it was an
undertaking given by its subsidiary and the two were separate entities

Can the Corporate Here, [plaintiff] may be able to pierce the corporate veil, which would make any act or
Veil be lifted/pierced omission of the company, an act by its members, and therefore escheat responsibility to
under the members.
Corporations Act?
Note that under the Common Law, the courts were reluctant to pierce the veil. (See 8)

Here, the relevant exceptions may be:

 Duty of directors to prevent insolvent trading by the company: s588G-U CA
 Liability of holding company for permitting a subsidiary company to trade while
insolvent: s588V CA
 Liability of directors for debts incurred by body corporate acting as a trustee:
s197 CA
 Uncommercial Transactions: s588FB CA
o The veil will be lifted for the purpose of treating corporate insiders
(directors and related) differently from others who have dealings with the
company. Designed to ensure directors do not gain preferential treatment
at the expense of creditors
 Charging Company Officers: s267 CA
o Company officers who lend their company funds secured by a charge
over its assets are treated differently from arm’s length secured creditors.
 Liability for Financial Assistance: s260A, 260D CA.
o Pierced the veil to ensure that officers liable for civil penalties who were
involved in their company’s contraventions of the CA.

Directors’ Duty to This exception is designed to ensure directors are attentive to the situation in the
prevent Insolvent corporations, and to protect creditors who cannot otherwise get payment for the company
Trading by the debt: Woodgate v Davis.
Company
Here, [director] in acting as director, is under a duty to prevent the company from trading
while insolvent: s588G CA

(i) Standing (NOT AN ELEMENT, JUST AN EXTRA BIT)

Only certain people can institute proceedings against [director]. [Plaintiff] bears the onus
of proof, on the balance of probabilities as they are seeking to make [director] liable:
ASIC v Plymin.
28
 IF Liquidator is Plaintiff
Here, [plaintiff] is a liquidator, and therefore can institute proceedings, against
[director]: s558G CA.

IF a Creditor is Plaintiff
Here, [plaintiff] is a creditor of [company], and therefore can institute proceedings
against [director]: s588R-U.

IF Other Plaintiff
Here, [plaintiff] does not fall within one of the categories of people who can
institute proceedings, and therefore would not have standing. However, we will
proceed as if they did.

(ii) Did [Company] Incur a Debt after 23 June 1993?

The company must have incurred:
 An ordinary debt: s255G CA, OR
 Be deemed to have incurred a debt where company enters into certain transactions
adversely affecting its share capital or misapplies its assets: s588G(1A) CA.

A debt is generally accepted to mean an obligation by one person to pay a sum of money
to another.

Here [loan etc] would be considered a debt, under general law. However, when
[company] incurred the debt is also relevant, as the debt must have been incurred after 23
June 1993: s588G(1)(d) CA.

Here, [Company] will incur a debt when it, by choice, does or omits to do something
which as a matter of substance and commercial reality renders it liable for a debt:
Standard Charter Bank v Anitco, or an obligation imposed by law: Shepherd v ANZ.

The date will vary depending on the terms of agreement: Taylor Module Engineering,
however, when a company has no real chance to avoid the debt the obligation will be
incurred when the contract was made: Standard Charter Bank v Antico. Other situations
include.

IF there is a Lease involved

Here, the date involves the breaking of a lease. It was held that date incurred was: Antico:
 For normal rent – At the beginning of the tenancy
 Period Lease – At the end of the term

IF lease contained a break clause

Here, the lease contains a break clause. The better view is that after a break option has
passed, the rent was incurred on the date the option expired: Shepherd v ANZ.

IF person demanding repayment of an amount previously paid

Here, [plaintiff] is seeking repaying of [money] under the contract as [company’s]
consideration failed. The debt is incurred at the time of the demand: Shepherd v ANZ.

IF Money Borrowed
Here, the debt incurred is money borrowed. The date the debt is incurred is the date of the
contract: Hawkins v Bank of China.

IF Paying a Dividend
Here, [company] is paying a dividend. The debt is taken to have been incurred when the
dividend is paid or, if the company has a constitution that provides for the declaration of
dividends, when the dividend is declared: s588G(1A)(1) CA.

29
 IF making a reduction of share capital, otherwise authorised by law
Here, [company] is making a reduction of share capital, otherwise authorised by law in
Division 1 of Part 2J.1. The debt is taken to have been incurred when the reduction takes
effect: s588G(1A)(2) CA.

IF Buying Back Shares

Here, [company] is buying back shares (does not matter is the consideration is not a sum
certain in money). The debt is taken to have been incurred when the buy-back agreement
is entered into: s588G(1A)(3) CA.

IF redeeming redeemable preference shares that are redeemable at its option

Here, [company] is redeeming redeemable preference shares that are redeemable at its
option. The debt is taken to have been incurred when the company exercises the option:
s588G(1A)(4) CA.

IF issuing redeemable preference shares that are redeemable otherwise than at its
option
Here, [company] is issuing redeemable preference shares that are redeemable otherwise
than at its option. The debt is taken to have been incurred when the shares are issued:
s588G(1A)(5) CA.

IF financially assisting a person to acquire shares for themselves or for a holding

company
Here, [company] is financially assisting a person to acquire shares for themselves or for a
holding company. The debt is taken to have been incurred when the agreement to provide
the assistance is entered into or, if there is no agreement, when the assistance is provided:
s588G(1A)(6) CA.

IF entering into an uncommercial transaction

Here, [company] has entered into uncommercial transaction, other than one that a court
orders, or a prescribed agency directs. The debt is taken to have been incurred when the
transaction is entered into: s588G(1A)(7) CA.

Therefore, the date the debt was incurred would be [date of contract, when dividend
declared etc]. This date is [before/after] 23 June 1993.

(iii) Was [director/s] a director at the relevant time?

Here, [director] needs to have been a director at the time the debt was incurred: s588G(1)
(a) CA. [Director] will be considered a director if they are: s 9 Defn.
a) A person who:
i. Is appointed to the position of a director; or
ii. Is appointed to the position of an alternate director and is acting in that
capacity, regardless of the name that is given to their position
b) Unless contrary intention appears, a person who is not validly appointed as a
director if:
i. They act in the position of a director; or
ii. The directors of the company or body are accustomed to act in
accordance with the person’s instructions or wishes

IF person is CEO or Managing Director

Here, [director] hold the office of [CEO; s198C(i)] and is therefore a director under s9(a)
(i) CA.

IF person is part time chair person

Here, [director] is a part time chairperson: s248E(1)) and is therefore a director under
s9(a)(i) CA.

IF person is not a director but acts in the capacity as one

30
 Here, [director] does not meet the clear definition of director, however they may still fall
within s9(b). [Director] will only be classified as a director if they acted in that capacity
and the board accepted the advice, and acted on it without their own discretion: Re
Hydrodam.

Therefore, [director] [was/was not] a director at the time the debt was incurred.

(iv) Was [company] insolvent at the relevant time?

Whether [company] was insolvent will depend on if they were solvent: s95A(2) CA. A
person is solvent if and only if they are able to pay all their debts when they become due
and payable: s95A(1) CA.

The test of insolvency is an objective test. The court will use the commercial test of
insolvency, as distinct from the balance sheet test: Sandell v Porter. This test relates to
the overall liquidity of the company, and consideration is given to the whole financial
position, not just the temporary lack of liquidity.

Indicia of the test include:

 Appropriate calculation to determine if solvent is to weight up company debts
against its good debts and case resources readily available assets: Sandell v
Porter
 Companies financial position must be examined in its entirety and not viewed as a
temporary issue of liquidity: Sandell v Porter
 Readily realisable assets including mortgaging or selling property, but not
terminating companies business: Re Timbatec Pty Ltd.

IF assets fundamental to the operations of the business

Here, [company] intends to sell assets that are not readily realisable as they are
fundamental to the operations of the business. Therefore on the balance of probabilities, it
is likely that the court would find [company] insolvent at the relevant time.

IF Assets not fundamental

Here, [company] intends to sell assets which are not fundamental to the operations of the
business and would probably be considered as realisable.

IF company has unsecured credit it can use to pay

Here, [company] has a resource in credit. [Plaintiff] would argue that this does not
constitute a realisable asset, however, in Lewis v Doran the court held that it did not
matter that as a commercial reality the company had a resource such as an unsecured
borrowing or voluntary extension of credit by another party, as long as the court was
satisfied that the resource allowed it to pay its debts as they become payable.

Therefore, on the facts it appears that [company] was [solvent/insolvent] at the time the
debt was incurred.

Presumptions of Insolvency
However, there are rebuttable presumptions as to insolvency: s588E CA. If either
presumption is proved, the onus will be on [director] to demonstrate otherwise: s588E(9)
CA.

IF Company Being Wound Up

Here, [company] is being wound up, therefore is presumed to be insolvent: s588E(3)(a)
CA. If it can be proved that the company was insolvent for any time within a 12 month
period from the date of filing of the application for winding up, it is assumed to be
insolvent for the whole time thereafter: s588E(3)(b) CA.

IF there has been a failure to keep records

Here, [company] has [failed to keep proper accounting records/have improperly disposed
31
 of the company books], and a presumption of insolvency will attach if: s588E(4) CA.
a) The company has failed to keep financial records for a period required by
s286(1): s588E(4)(a) CA. Must keep financial records that:
i. Record, explain its transactions and financial positions and performance:
s286(1)(a) and
ii. Would enable true and fair financial statements to be prepared and
audited: s286(1)(b)
b) The company has failed to retain financial records for 7 years as required by
s286(2): s588E(4)(b) CA.

IF minor contravention of failure to keep financial records

Here, [director] would argue that the contravention of s588E(4)(a) CA is only minor or
technical and the presumption should not apply: s588E(5) CA.

IF Presumption would prejudice a right or interest of a person

Here, [director] would argue that the presumption of insolvency would prejudice a right or
interest of a person under s588E(4) CA. The presumption will not apply if:
 The contravention was due solely to someone destroying, concealing or removing
financial records from the company: s588E(6)(a) CA.
 The records were not destroyed, concealed or removed by the director: s588E(6)
(b) CA.
 The person was not directly or indirectly involved or reckless: s588E(6)(c) CA.

IF proof of insolvency in other proceedings

Here, [company] was proven to be insolvent in previous proceedings, there will be a
presumption of insolvency in those proceedings: s588E(8) CA.

Therefore, on the balance of probabilities it is likely that [company] was

[solvent/insolvent] at the time the debt was incurred.

(v) Did [director] have reasonable grounds of suspecting [company] was

insolvent?
The question is whether, at the time the debt was incurred, did [director] have reasonable
grounds of suspecting that [company] was insolvent, or was going to become insolvent:
s588G(1)(c) CA. Need to establish:
 Reasonable Grounds
 Suspect

Reasonable Grounds
The test for reasonable grounds is an object test, judged according to the standard of a
reasonably competent and diligent director in the proper discharge of their duties within
the Corporations Act and common law: ASIC v Plymin.

Suspect
Suspect means a positive feeling of actual apprehension of mistrust that the company is
insolvent, which includes a slight opinion without sufficient evidence of the matter, but
requires more than idle wondering: Queensland Bacon Pty Ltd v Rees.

In ASIC v Plymin, the court stated 14 indicators which indicate reasonable grounds to
suspect insolvency. Here, [plaintiff] would be relying on [indicia from below] to
demonstrate a reasonable grounds of suspecting [company] was insolvent.

Indicators of Insolvency
1. Continuing losses. (present in ASIC v Plymin)
2. Liquidity ratios below 1.
3. Overdue Commonwealth and State taxes (present in ASIC v Plymin)
4. Poor relationship with present Bank, including inability to borrow further funds.
((present in ASIC v Plymin)
32
 5. No access to alternative finance.
6. Inability to raise further equity capital.
7. Suppliers placing [company] on COD, or otherwise demanding special payments
before resuming supply.
8. Creditors unpaid outside trading terms.
9. Issuing of post-dated cheques (present in ASIC v Plymin)
10. Dishonoured cheques. ((present in ASIC v Plymin)
11. Special arrangements with selected creditors.
12. Solicitors' letters, summons[es], judgments or warrants issued against the
company. (present in ASIC v Plymin)
13. Payments to creditors of rounded sums which are not reconcilable to specific
invoices. (present in ASIC v Plymin)
14. Inability to produce timely and accurate financial information to display the
company's trading performance and financial position, and make reliable
forecasts.

IF the director signed financial reports

Here, it will also be relevant that there was a financial report signed by [director],
as [director] has a duty to disclose solvency: s295(4) CA. Here, the auditor’s
report would show that reasonable grounds.

Here, [director] on balance was likely to have had reasonable grounds to suspect that
[company] was [solvent/insolvent].

(vi) What was the directors state of mind?

For a contravention to occur:
a) The director was ‘aware’ that there are grounds for suspecting: s588G(2)(a)CA or
b) A reasonable person in a like position in a company in the company’s circumstances
would be so aware: s588G(2)(b) CA.

IF director was ‘aware’

Here, [director] would need substantive awareness that there were reasonable
grounds for suspecting insolvency: ASIC v Plymin. This does not require an
actual suspicion of insolvency, but does require an awareness of facts which
would reasonably support insolvency.

IF a reasonable person would be so aware

This is judged by the standard appropriate for a director with varying competence,
however, if there are special skills present, they will be considered: 3M Australia
v Kemmish. Here, [plaintiff] would argue that while the director was unaware, a
reasonable person in their position would have been aware of the reasonable
grounds for suspecting insolvency: ASIC v Plymin.

Therefore, based on [director] state of mind, the director [should/should not] have been
reasonably aware of the grounds for suspecting insolvency.

(vii) Did the director fail to prevent the company from incurring the debt?
There is no obligation on [plaintiff] to prove that [director] was under a duty to take a
particular step which would have been effective to prevent [company] from incurring the
debt: Elliot v ASIC.

Prevention is extended to include inactivity or omission as well as acts by [director]:

ASIC v Plymin.

Here, [director] has failed in preventing [company] from incurring the debts by [doing/not
doing] [act].

Therefore, if all 6 elements are established, [director] would prima facie be liable for the

33
 consequences that follow, unless there is a defence.

Are there defences The defences available to [director] apply to Alleged contraventions of s588G(2) CA, in
available? relation to incurring a debt, and includes proceedings under s588M CA in relation to the
director incurring the debt: s588H(1).

(i) Reasonable grounds to expect that the company was solvent

Where a person had reasonable grounds to expect, and did expect the company to be
solvent, even when incurring the new debt: s588H(2) CA. The test requires an objective
consideration of all information that was available at the time: 3M Australia v Kemish.

Expectation means ‘regarded as likely’: CBD v Fredrich, and here, [director] would have
to demonstrate a measure of confidence, greater than a mere hope of possibility that the
company was solvent: Tourprint International v Bott.

IF director does not inform themselves of the true financial position

Here, [director] has not sought to inform themselves of the true financial position
of the company either before being director, or while acting as director.
Therefore, this defence will not be available: CBA v Fridrich.

(ii) Reliance on information as to solvency from another competent person

Here, [director] may be able to establish a defence on the basis that they placed reliance
on information provided by [person]: s588H(3) CA. In order to establish this [director]
would need to show they had reasonable grounds to believe and did actually believe:

a. That a competent and reliable person was responsible for providing adequate
information about the company’s solvency: s588H(3)(a)(i) CA.
Here, [person director got information from] was [qualifications, expertise of person etc]
which [would/would not] be considered a competent and reliable person for providing
information about the company’s solvency.

b. That the person was fulfilling that responsibility: s588H(3)(a)(ii) CA.

Here, [director] had confidence in [person] in such a way which gave them reasonable
grounds for believing that the responsibilities were being performed: ASIC v Plymin.

c. That on the basis of the information provided, the company was solvent at the
relevant time: s588H(3)(b) CA.
Here, [director] believed the information presented by [person] which held that at the
relevant time [date from earlier] [company] was solvent.

(iii) Director was Ill or did not take part in the management of company
Here, [director] was [ill/good other reason/not take part in management of company] at
the time the debt was incurred, and can raise the defence in s588H(4) CA.

IF director excluded or Deceived from management by co-director

Here, [director] has been [excluded/deceived] from management by a co-director.
This will not be sufficient for the defence where [director] has not demonstrated a
proper degree of commitment to become involved in the management of the
company. Here [director] [has/has not] demonstrated commitment to becoming
involved.

IF director abdicates duties to a co-director

Here, [director] has abdicated his duties as director to a co-director, [co-director].
This is not sufficient as it is inconsistent with the duties imposed on all directors
by both statute and common law.

(iv) Director took all possible steps to prevent company from incurring the debt

34
 Here, [director] will argue that [action] was all he could do to prevent [company] from
incurring the debt: s588H(5). In assessing the action, the court may have regard to:
a. Any action with a view to appointing an administer of the company: s588H(6)(a)
CA.
b. When the action was taken: s588H(6)(b) CA.
c. Results of the action: s588H(6)(c) CA.

If director resigns
Here, [director] has resigned from their position in an attempt to prevent
[company] from incurring the debt. Arguably this may suffice, however, the vote
may still proceed without [director].

IF Reservation by executive director to a Managing Director re solvency

Here, [director] may argue that they expressed reservation to the managing
director about the company’s decision to continue trading when the solvency was
doubted. This is not likely to be sufficient steps: Burrron?

Therefore, [director] may rely on [defence #1,2,3, or 4] regarding their breach of duty.

What are the If [director] is found to have traded while insolvent, the corporate veil will be lifted and
consequences for [director] will be liable. In addition to compensation, s588G CA is a civil penalty
breach? provision under s1317E CA and may attract criminal penalties under s588G(3) CA.

(i) Compensation
The court may, on application for a civil penalty order, make an order requiring [director]
to pay compensation: s588J CA. The court must be satisfied that:
a) The person committed the contravention in incurring the debt: s588J(1)(a) CA.
b) The debt is wholly unsecured: s588J(1)(b) CA.
c) The person the debt is owed suffered loss or damage as a result of company’s
insolvency: s588J(1)(c) CA.

The value of compensation is equal to the amount of that loss or damage.

IF company that incurred the debt is in liquidation

Here, [company that incurred the debt] has been placed in liquidation; however, the
liquidator may still be able to seek compensation from [director] who contravened s588G
CA: s588M CA.

The liquidator can still mount compensation recovery proceedings whether or not ASIC
has commenced an application for a civil penalty order or criminal proceedings: s588M(1)
(e) & (f). Further ASIC will bear the cost of proceedings as part of the civil penalty order
or criminal proceedings.

Here, [director] would be liable to [company that incurred the debt] to the amount of loss
or damage suffered.

IF Creditor initiated Compensation

Here, [plaintiff] is a creditor, who may also be able to bring a compensation claim:
s588R-588U CA. The provisions provide time for liquidators to decide whether to initiate
their own proceedings. [Plaintiff] must wait 6 months after the beginning of winding up,
and give notice to the liquidators stating:
a. Creditor intends to begin proceedings under s588M CA: s588S(a) CA.
b. Asking the liquidator to give, within 3 months of the notice:
i. A written consent to begin proceedings: s588S(b)(i) CA. or
ii. A written statement of reason why the liquidator thinks creditor should
not pursue the action: s588S(b)(ii) CA.

If after the 3 months, the liquidator has not consented, [plaintiff] may be able to apply to

35
 the courts to begin proceedings: s588T(2) CA.

However, a creditor will not be able to bring proceedings against the director where the
liquidator has:
a) Applied under s588FF in relation to the debt; s588U(1)(a) CA. or
b) Applied begun proceedings under s588M CA; s588U(1)(b) CA. or
c) Intervened in an application for a civil penalty order against the director for
breach of s588G CA: s588U(1)(c) CA.

Therefore, [plaintiff] [may/may not] be able to apply for compensation under s588M CA.
If they are successful, the amount recoverable is the amount of the loss or damage
suffered by the individual creditor: s588M(3) CA.

(ii) Civil Penalty Provisions

In addition to compensation orders under s588J CA, the court may impose pecuniary
orders: s1317G CA, or disqualify [director] from managing companies: s206C CA.

Pecuniary Orders
Only ASIC (s1317J(1)) or the responsible corporation (s1317J(2)) may apply for a
declaration or pecuniary order. The court may order a pecuniary penalty payable to the
commonwealth if a declaration is made under s1317E, and the contravention is of a civil
penalty provision, and is materially prejudice against the company or its ability to pay
creditors: s1317G(1) CA.

Here [director] [would/would not] be required to pay a pecuniary order. The maximum
payable is $200,000 for an individual: s1317G(1B)(a) CA, or $1 million for a body
corporate: s1317G(1B)(b) CA.

Disqualification from Managing Companies

Here, in addition to compensation orders, [director] may be disqualified from managing
any corporation for a number of years: s206C CA. The court must be satisfied that
disqualification is justified: s206(1)(b) CA.

(iii) Criminal Offences

Here, the contravention of s588G CA, has been done dishonestly. [Director] would be
liable for compensation equal to the amount of that loss or damage: s588K CA, or
imprisonment, or both.

Can the corporate Australian courts have been reluctant to lift the corporate veil, unless legislation allows
veil be pierced at for it. The courts have however lifted the corporate veil in some cases where there is:
common law?  Fraud – When the company uses a company as a vehicle for fraud: Re Darby
 Avoidance of legal obligations – where a company has been used as a sham so as to
avoid a legal obligation under contract or statute: Gilford Motor Co Ltd v Horne.
 Involvement in director’s breach of duty – Where a company knowingly participates
in a director’s breach of fiduciary duties: Green v Bestobel Industries Ltd.

36
 FINANCING A COMPANY
CLASSIFYING COMPANIES

Different Types of There are two ways to categorise companies, being:

Companies  According to the liability of the members; and
 According to whether they are public or proprietary companies.

Liability of Members There are four types of companies which are classified on the basis of liability:
1. Company limited by shares (as explained in Week 2);
2. Company limited by guarantee (as explained in Week 2);
3. Unlimited Company; and
4. No Liability Company.
IN THIS SITUATION [COMPANY] IS A COMPANY [TYPE OF LIABILITY].

Unlimited Company

37
 An unlimited company is defined under s9 as - “a company in which no limitation has
been placed upon the liability of the members”.

This type of company is generally used by members of a profession as an alternative to

forming a partnership in circumstances when the number of people involved means
that a partnership is not permitted, but the professional rules do not permit liability
to be limited.

In this situation, it is evident that [COMPANY] is an unlimited company as per the

section 9 definition, based on the fact that …

Even though the shareholders are still liable for the debts, the separate legal entity still
applies and thus contracts can be entered into under the company’s name. It helps you to
avoid registering information with a regulator (ASIC) – this is based on information from
the UK [only use to help you understand]

No Liability Company
A no liability company is defined under s9 as - “company that is either registered as, or is
converted to, a no liability company”.

s112(2) gives the defining characteristics of a no liability company:

 The company must be solely for mining purposes (which includes any or all
of prospecting, mining, selling or doing anything else incidental to or necessary
for any of those things)
 have shares but have no ability to force shareholders to pay calls on unpaid
shares

[ALSO INCLUDE] A no liability company must have “No Liability” or “NL” in the
name in terms of s148(2) and s149.

In this situation, it is evident that [COMPANY] is a no liability company as per the

section 9 of the Corporations Act definition, based on the fact that ___ . These are
defining characteristics of a no liability company as per section 112(2) of the
Corporations Act.

Size of Company The second way of classifying companies is based on the size of the company. Being a
(Public or Proprietary) proprietary or public company.

Proprietary Company
The definition of a proprietary company can be found in s9, which leads to to s45A(1) and
states that a proprietary company is one that is registered as such under the Act. A
proprietary company has the following characteristics:
 Have less than 50 non-employee shareholders (s113(1)).
 Cannot attempt to raise money by issuing a prospectus and selling shares
(s113(3)).
 Have between 1 and 49 members inclusive at all times (s113, s114)
 Must have at least one director (s201A(1)).
 The company name must have “Proprietary” or “Pty” in the name (s148, s149)
In this situation, it is evident that [COMPANY] is a proprietary company, based on
the fact that…

A small proprietary company is outlined in s45A, based on:

 gross revenue per financial year (less/more than $25 million);
 assets owned (less/more than $12.5 million);
 and number of employees (less/more than 50).

38
 In this situation, it is likely that [COMPANY] is a small proprietary company based
on the fact that ...

Public Company
This is defined in s9. The most important part of the definition is that it is any company
which is not a proprietary company.
 There is no upper limit to the number of shareholders (although s114 says that
there must be at least one); and
 There must be at least three directors under s201A(2).
 Public companies can be listed or unlisted companies. Listed means that the
shares are traded on a stock exchange such as the ASX.

In this situation, it is likely that [COMPANY] is a public company based on the fact
that ...

HOW COMPANIES ARE FINANCED

There are two main ways to finance a company:

4. a) through issuing of shares (share capital); or
5. b) by borrowing money (debt capital).

Both means of raising capital can be used at the same time and it is up to the directors to
decide the proportion. This proportion or ratio of loan capital to share capital is known as
the gearing of the company.

[A THIRD METHOD TO CONSIDER] Hybrid Securities: are securities that combine

characteristics of both debt and equity and may be listed on the ASX or be unlisted. ASIC
has warned that these types of securities are higher risk than vanilla corporate debt.
These are the more complex side of capital raising and usually used in more complex and
specialised corporate organisations. For the purposes of this course I simply want you to
be aware of their existence. A brief list of these types of securities and a brief definition is
found at 18-140 (p414) of the textbook.

Share Capital 1. Share capital or equity capital (sale of shares): is money raised from the sale of
shares issued by the company.
**NOTE: that this is different to the subsequent trading in those shares where the
purchase price is received by the owner of the shares and not the company (A
company can issue shares but not own them in itself).

2. Shares are sold to raise money for the company and each share grants the owner of
the share ownership rights in the company. Even if the shares are only partially
paid, the entire amount is the share capital, as the company can call on the unpaid
portion whenever It wants.

3. The paid portion is called paid up capital and the unpaid portion is called reserve
capital.

4. Section s1070A(1) states that

A. shares are personal property that can be transferred as provided by the
companyconstitution;
B. can also be transferred by will; or
C. or by operation of law.

5. HOWEVER, s1070A(2) provides that the constitution can expressly alter the
rights relating to transfer by will or by operation of law.

6. In general, all of the laws relating to personal property and equitable interests
39
 relate to shares s1070A(3).

Transferring shares in the absence of authority by a company constitution:

 ALTERING CONSTITUTION: We will discover that it is possible for a

company to alter its constitution after the formation of the company. It is
possible that any alteration will affect the ability of shareholders to transfer their
shares.

 WRITTEN AGREEMENT: The effect of s140(2)(c) is that in general this will

require the written agreement of the shareholders affected.

 [THERE ARE RESTRICTIONS] However, in Gambotto the High Court held

that s140(2)(c) did not override the provisions relating to expropriation of shares,
which we will be looking at later in the semester. The position is thus that shares
are generally going to be transferable, but that you need to look at the
company constitution to see if there are any restrictions.

o The New Zealand case of Wellington Bowling Club v Sievwright [1925]

GLR 227 seems to indicate that the wording in s1070A(1)(b) would
prevent the company imposing a complete prohibition on the transfer of
shares ie. the wording is such that shares are transferable but that the
constitution may provide how.
 A company can call on those shares at any time.

in this situation, it is evident that [PERSON] has bought [HOW MANY] shares to
help finance the company. [PERSON] will then be considered to be a shareholder of
the company. There are factors that need to be considered in terms of their rights
within the company.
Authorised Share (Theoretical)
 Up until June 1998, it was required that a company stipulate in its memorandum of
association the maximum amount of share capital the company proposed to be
registered with and that capital had to be divided into shares of fixed amount (PAR
VALUE).
 Section 254C now abolishes par value shares and a company is no longer required
to stipulate its authorised share capital.

Issued (real)
Issued share capital, as per s117(2)(k) is the amount of capital actually raised by the
issue of shares. In terms of s169 the company must keep a register of the members’
details and the number of shares they hold in the company.

The share capital consists of

a) PAID UP CAPITAL: s117(2)(k) - ie, the money which has actually been
received by the company for those shares.
b) RESERVE OR UNCALLED CAPITAL: s254M - money that is owing on those
shares and which has not yet been called by the directors.

What happens if a person takes transfer of a share in a no liability company and later the
company issues a call or a there is a demand for a contribution towards the debts of the
company? No liability shareholders are not required to pay calls in respect of the shares or
the debts of the company as per s s245M(2)

POWER TO: Allotment & Issue of Shares

Section s124(1)(a) gives a company the power to issue and cancel shares. Section

40
 198A(1) gives the directors the power to do this on behalf of the company. This is a
replaceable rule.

[A REPLACEABLE RULE] is basically the default rules of internal

governance ie. how the company is to be run (see s141 for the list – pasted
below). Failure to comply with replaceable rule is not necessarily an offence
(criminal or civil) (see (s135(3)). The default rule can be varied by a company
constitution (s135(2)).

Chapter 2H (s254A – s254Y): governs/deals with shares.

 254F – H: Allows for the converting of ordinary shares into differential shares or
larger shares into smaller shares by following the procedure set out.

Reinstatement of STATUTORY] It should be noted that s254D, which allows anyone whose interests may
Shares have been affected (typically the company, a shareholder or a creditor) to apply to the
Court to validate any invalidly issued shares.

[COMMON LAW] As per Re Swan Brewery No 2, the Court will consider what is just
and equitable for all of the parties and will consider, amongst others, the following factors:
 expectations of innocent parties;
 business difficulties if the shares are not validated;
 reliance on the issue of the shares by people associated with the company;
 public policy considerations.

Re Swan Brewery No 2:
FACTS:
Swan Brewery arranged for a subsidiary to construct buildings and then purchased the
buildings from the subsidiary with the payment being an allotment of shares. The issuing
of these shares was contrary to a provision similar to the current s259C. Many of these
shares were sold through the Stock Exchange before this issue came to light and an
application was made by Swan Brewery for the validation of the shares
HELD:
In this case while there was some concern regarding the secrecy in which the allotment
was made to the subsidiaries and that the Brewery not those affected by holding such
shares was making the application, other factors were taken in to consideration, namely:
 the actions were taken based on erroneous legal advice received by the Brewery;
 the company was a reputable one;
 innocent parties would be severely prejudice in that they had paid good money for
shares they believed to be valid
 the difficulty in segregating those shares issued to the subsidiaries from the validly
issued shares especially if acquired in consolidated parcel on the stock exchange
Ordered that the shares be validated.

In this situation, it should be considered whether the shares can be reinstated as

[REASON], [REASON], [REASON]

DIVIDENDS
Dividends are returns on shares that have been purchased. They are not automatic but
are only paid if the company is running profitably and if it is in the best interests of
the company to issue the dividends.

S254U provides that the directors decide if, when and how dividends are paid (this is a
replaceable rule) (so this is just replace by a constitution if you have one).

Read part 2H.5 (s254T – 254W) which deals with dividends. It’s basically saying you
can’t pay dividends to some people and not others.

41
 [NO APPLICATION  RESTRICTIONS]

Restrictions on s254T provides 3 restrictions on whether dividends can be paid or not, beings that:
payment of dividends 1. The company assets must exceed liabilities immediately before dividends are
declared AND the excess is enough to pay dividends
2. The payment is fair and reasonable to shareholders as a whole;
3. In paying the dividend the company’s ability to pay creditors is not materially
prejudiced

IN THIS SITUATION [RELATE TO THREE POINTS ABOVE] AND

THEREFORE THE COMPANY [IS/ISN’T] IN A POSITION TO PAY THE
DIVIDENDS TO THE SHAREHOLDERS.

CLASSES OF SHARES

Unless there are special constitutional provisions all shareholders will have the same rights
relating to voting and the right to receive dividends.

However, sometimes it will be beneficial for different shares to have different rights, for
example:
a) when it comes to voting – this allows the control of the company to be
concentrated;
b) rights to receive dividends – most likely to be used or tax purposes.

This leads to different classes of shares (s254A, s254B and s254D) allow directors to
create different types of shares.

Constitutional In terms of Part 2F.2 it is possible to alter the class rights of shares. Section 246B(1)
Alteration provides that if the constitution sets out a procedure for making the changes, then that
procedure must be strictly followed.

In this situation, the constitution of [COMPANY] stipulates that [PROCEDURE]

must be followed to change the class rights of shares. As such...

Non-constitutional However, if there are no constitutional provisions for changing the class right of shares,
provisions then s246B(2)(d) provides the rights can only be altered with the written consent of at
least 75% of the members of the affected class or by a special resolution of the affected
class.

A special resolution means that will need 75% of the affected class who vote, voting in
favour as per the definition in s 9.

In this situation, there is not constitutional provisions. Therefore, to change the class
right of the shares there must be a special resolution or written consent of
[AFFECTED CLASS].

Minority not happy As per section s246D(1) If a minority members of a class are not happy with the alteration
with change? of their rights as long as at least 10% of the votes in the class are represented an
application can be made to Court to cancel the alteration.

However as per s246D(2) this needs to be done within 1 month.

Consequences:
Under section 246D(5) the Court can only set the alteration aside if it unfairly prejudices

42
 the applicants
s246D(3)(a) – Due to the 1 month time limit to apply to the Court, any variation can only
take effect 1 month after it is passed.

ISSUING OF SHARES

FIRST SHARE On formation of a company, those registering the company decide on the number and
ISSUE type of shares to be issued in the company and the application for registration of a
company limited by shares lodged with ASIC must include information on:

1. NUMBER OF: the number and class of shares each member agrees to take up in
writing;

2. COST OF: how much they have agreed to pay for each share in writing;

3. PORTION OF: what portion has been agreed, in writing, to be paid and unpaid
on each share; Following registration of the company and the initial share issue
the company may decide to issue further shares.

ISSUING FURTHER [DECISION] The decision to issue further shares is made by the Board of Directors and
SHARES they will decide how many shares to issue, at what price and on what terms.

[APPROVAL OR CONSENT MAY BE REQUIRED] Depending on the class of

shares to be issued and whether the rights of existing members or a class of members
are to be affected (we will be looking at this a later in the course when looking at
members’ rights), approval or consent of the existing members may be required. If so, the
company must ensure that if required the consent of the members has been obtained and
ensure that shares are only being issued to persons permitted to hold shares.

[NOTIFICATION] Prior to the issuing of the new shares the company must provide the
required notifications to ASIC.

[ISSUES TO CONSIDER] Relevant issues to be borne in mind when ascertaining

whether or not the proposed members are entitled to hold shares are the following:

i. In a proprietary company, the issue of share is practically limited to existing

members, employees and certain professional or sophisticated investors.

ii. If there is a shareholder’s agreement or internal governance rules that provide

members with pre-emption rights, then these will have had to have been
complied with.

• A pre-emptive right provides a shareholder the right to obtain existing or

freshly issued shares in the company (on a pro-rata basis to their existing
holdings) in priority to a third-party acquirer;

iii. There are restrictions on shares being issued to those who lack legal capacity
due to age or other reason;

iv. Certain companies restrict who may own shares in that company. This is rare
and generally only found in privatised government businesses and media
ownership. For example, there is a limit on percentage of Telstra shares that may
be foreign owned.

v. Finally, the provisions against self-acquisition of shares must be complied

with.

43
 Maintenance of Share Capital

This is known as the rule in Trevor v Whitworth, which stated that the pool of capital that
was raised by the issuing of shares could not be diminished or reduced except by trading
losses or with the approval of the Court. This principle is still present in the Corporations
Act, but it has been watered down a little bit.

So, overall, the rule in Trevor v Whitworth is still the general position, but there are some
carefully regulated exceptions that have been created under the Corporations Act.
Dividends only As per section 254T dividends are only payable if they are not detrimental to the
payable if not company. Original position was that the company could not pay dividends out of the initial
detrimental to capital raised however now companies have to adhere to the three restrictions (AS
ABOVE).
company
[FOLLOW THE APPLICATION OF THE RESTRICTIONS OF DIVIDENDS
ABOVE]

No reduction of capital Prior to June 1998, there was a complex process by which a company could return share
capital by buying back shares. This has been diminished to some extent and the current
scheme is contained in s256A – s256F

s256A states the purposes for the regulation as, generally, being to protect the interests of
shareholders and creditors. Basically, only by following a particular procedure will a
company be able to reduce its share capital.
The procedure ensures that:
1. shareholder approval is obtained;
2. it is fair and reasonable; and
3. it doesn’t materially prejudice creditors.

IN THIS SITUATION – IT IS EVIDENT THAT [COMPANY] IS LOOKING TO

BUY BACK SHARES FROM [INDIVIDUALS] IN THESE CIRCUMSTANCES, IT
IS NECESSARY THAT PERSON FOLLOWS THE PROTOCOLS BEING...

Shares not issued at a In June 1998, the requirement that company had to state a par value for all shares that
discount were issued was abolished – that was effectively the abolition of this aspect of the rule.

Company cannot We have already mentioned the fact that a company is not allowed to:
own shares in itself o own shares in itself (or its holding company); or
o provide financial assistance to others in order for that other person to purchase
shares.

This effectively means that, in general, a company will have to go through the
authorised share buyback scheme in order to reduce capital.

[NOTE: EXCEPTION TO THIS^] However, s259A – s260E provide some specific

circumstances in which a company will be permitted to get around this rule.**Note: that it
was the permissible exception in s259C that the Swan Brewery had not complied with and
an application to court was required to have the shares held valid.

DEBT CAPITAL (Borrowing Money)

This is money that the company borrows from some source.

s124(1) provides the company with the power to do this in stating that a company has all
of the powers of an individual.
44
 s124(1)(b), (c), (e) and (f) all explicitly give the power to create certain forms of securities
over company assets. Let’s have a look at these securities in more detail.

IN THIS SITUATION IT IS EVIDENT THAT [PERSON] HAS LOANED

[MONEY] TO HELP FINANCE THE COMPNAY. [PERSON] WILL THEN BE
CONSIDERED TO BE A CREDITOR OF THE COMNPAY IF THE COMPANY
GOES INTO LIQUIDATION.

Debentures

Debentures are a form of “IOU” (I owe you).

s9 defines a debenture as a chose in action that includes an undertaking to repay money.

The holder of the debenture is lending money to the company on the terms which are set
out in the debenture trust deed.

The debenture represents the right of the holder to the interest payments that are set
out in the debenture trust deed. Sometimes, the debenture itself is listed with the
Australian Stock Exchange and so this right to the income can be traded.

IN THIS SITUATION, IT IS EVIDENT THAT [PERSON] IS TO REPAY MONEY

TO [PERSON]

Security of Debentures
Debentures can be either secured or unsecured but s283BH requires that if they are
unsecured they be called an “unsecured note” or an “unsecured deposit note” and not a
debenture.
 Secured: backed by assets of the company (say you own a property, the holder of
the debenture would get the property when your company goes bankrupt)
 Unsecured: loan the money to the company, you’re entitled to the company’s
assets over the shareholders but there is no specific asset your loan is backed by.

s283BH(1A) provides that there is a possible penalty of 200 PU (penalty units) or 5 years
imprisonment for intentionally or recklessly mis-describing the debenture.

In this situation, the debenture is secured through…

ASX Debentures
The debenture is listed with the Australian Stock Exchange so this right to income can be
traded. If the debentures are to be offered to the public, there must be a trust deed
created and a trustee appointed as per Chapter 2L. The trustee then holds the security
property for the benefit of the debenture holders.

There are also disclosure requirements in Chapter 6D, which are the same as those
requirements on a company issuing shares, as these debentures are considered to be
“securities”. Essentially, it is the reasonable information required for an investor to
make an informed decision. These disclosures need to be made by the company to the
potential investors, if they are not the transaction is void.

Company Charges [DEFINITION] Company charges are a specific form of security in which particular
property is identified as being the security for the debt owed.

The general law definition of a company charge is:

o a form of security not involving the transfer of title of property
o where the company retains ownership of the property, subject to certain
45
 restrictions on the use of that property.

Section 9 of the Act defines it as, apart from including general law charges, explicitly
includes mortgages and agreements to create a charge or mortgages Historically there
WERE been two types of charges: fixed charges and floating charges.

Company retains ownership over the property, but will have restricted use of the property.
Example: you can have a charge on the whole of a property, you can have on certain
capital

Internal Management of Companies

PRE-JUNE 1998 (CONSIDER)

Pre-June 1998  Companies prior to June 1998 were required to have a constitution.
(NOT CURRENT)  Companies registered before 1998 are likely to still have a constitution
 Where that constitution has not been repealed, it will still govern the company
 There were 2 documents that a company needed to lodge with ASIC at registration:
o The memorandum of association
o The article of association
 If these documents were changed, once given appropriate permissions, ASIC had to
have been notified. Both are public docs which can be viewed at ASIC.
Memorandum of  The memorandum of association was signed by the people wishing to form the
Association company and set out information about the structure of the company.
(NOT CURRENT)  There were a number of required clauses:
o The Company name
o An association clause, which was a statement by the subscribers
o Full name, address and occupations of the subscribers
 If the company was limited by shares it also needed to contain:
o a capital clause setting out the authorised share capital; and
o a limited liability clause
 The memorandum might have an objects clause setting out the purposes for which the
company was formed. (Compulsory until 1984- when limited liability came in).

Post 1984  Object clauses became optional: s125(2)

(CURRENT) o Which states that if a company has a constitution, it may set out the
 s125(2) provides that an act of the company is not invalid just because it is contrary to
or goes beyond any objects in the constitution.
 Narrow ultra vires has been abolished.
 Wide ultra views exists: the idea that directors and shareholders can be constrained in
what they can do by the objects of the company. Seen in ANZ Executors v Qintex
Australia (1990)
 The Court stated that wide ultra vires had not been abolished by s125(2) and the
doctrine would still operate to prevent the directors and shareholders acting in such a
manner, even if they had wanted to.

In this situation, it can be said that through the act of [DOING ACT] was outside of
the objects of the association. However, it was be said that it was within the power of
the directors or participants in the company and therefore...

Articles of Association  Were regulations relating to the internal workings of the company- i.e management &
(NOT CURRENT) operation of the company.
 Used to be compulsory.
46
  Three options for a company:
o Draft its own
o Adopt Table A or Table B (occurred in the schedules)
o Modify table A or Table B
 Table B was for no liability companies.
 Table A was for all other types of company.
 If the constitution did not expressly adopt a table or create its own, the appropriate
table was automatically adopted.
Summary  All companies registered before 1998 will have had a constitution, they may have an
objects clause (before 1984, it was mandatory).
 s135(1)(a)(ii) implies that this constitution will continue to operate unless it is
repealed by the company.
 Even if the company has an objects clause, the narrow doctrine of ultra vires will not
apply, even if the company was registered prior to 1984.
 However, that objects clause could operate through wide ultra vires to constrain the
directors and shareholders.
Post June 1998  Companies do not have to have a constitution
 Existing companies could repeal their constitutions
 Companies without constitutions were governed by replaceable rules
o Replaceable rules = basic set of rules necessary for the internal
management of the company.
o Mirror old articles of association
 Is a replaceable rule is changed by the legislature, it is automatically passed on to all
companies who are governed by the RR.
 S135 defines replaceable rule and set out to which company it applies
 A replaceable rule is any section which has ‘replaceable rule’ in its title
 S141 provides list of all RR
 S136: states a company can adopt a constitution – but requires written agreement of all
the members who are listed in the application for company registration.
 A company can adopt a constitution after registration by either:
o Special resolution (s9 definition)
 Requires 21 days notice in writing to members
 75% of the votes at the meeting
o By court order (s233 or under s136(1)(b)).
 A company exiting today can be governed by:
o Replaceable rules
o A constitution or
o A combination of the two under s134.
Companies (i) Status of memorandum and articles of association
Registered After the CLERP provides the memorandum of association is abolished and articles of association
Company Law are not necessary: s134 CA:
Review Act 1998 Provides that a company is not required to have a constitution and introduces the concept
of replaceable rules which establish basic rules of internal management  effect that a
company may be governed by a constitution, replaceable rules, or a combination of both.

(ii) Optional Constitution

A company may adopt a constitution, either on registration (each person specified on the
application for registration agrees to the terms) or after registration: s136 CA and that the
company may modify or repeal its constitution, or provisions by special resolution:
s136(2) CA.

A constitution may limit a company’s exercise of powers and set out the objects of a
company: s125(1)(2) CA. A constitution may govern the internal management of a
company: s134 CA.

(iii) Mandatory Constitution

47
 It is option for a company to have a constitution unless: s136 CA:
No liability companies are required to have a constitution which states that the company’s
sole objects are mining purposes: s112(2)(a) CA.
A company limited by guarantee which wishes to remove the word “limited” from its
name must have a constitution: s150 CA.

Effect of constitution s135 defines “replaceable rule” as being any section, which has “replaceable rule” in its
and replaceable rules title. s141 provides a complete list of all of the replaceable rules.

As per s 134 of the Act, a company may be governed by:

 the replicable rules; or
 a constitution, or both.

IN THIS SITUATION, IT IS EVIDENT THAT [COMPNAY] IS GOVERNED BY

THE [REPLACABLE RULES] AND A CONSTITUTION. THIS IS ABLE TO
OCCUR AS... GO TO ADOPTING A CONSTITUTION.

REPLACABLE LAWS

Replaceable rules (i) Nature of Replaceable rules

The replaceable rules are rules that govern the internal administration and management of
companies.

(ii) Application of Replaceable rules

The replaceable rules will apply to all new companies, unless the company displaces or
modifies these rules by its constitution: s135(2) CA. Where the company adopts the
replaceable rules, they are subject to amendment by enacted law. As a general rule
replaceable rules apply to all companies.

(iii) Replaceable rules and single director/shareholder companies

Proprietary companies where the same person is both its sole director and sole shareholder
are an exception to this general rule: s135 CA.
 The business of the company is to be managed by or under the direction of the director
who may also exercise all the powers of the company such as the power to issue
shares, borrow money and issue debentures (s 198E(1)).
 The director may execute a negotiable instrument (s 198E(2))
 The director may appoint another director by recording the appointment and signing
the record (s 201F)
 The director is to be paid remuneration for being a director that the company
determines by resolution (s 202C).

Only apply to single director or shareholder Pty Ltd. The replaceable rules become
applicable as soon as shares issued to another person or appoints additional directors.

(iii) Replaceable rules and proprietary companies

Before issuing shares of a particular class, directors of a proprietary must offer them to the
existing holders of shares of that class: s254D CA.

Directors in a proprietary company may pay dividends as they see fit: s254W(2) CA.

Directors of a proprietary company my refuse to register a transfer or shares in the

company for any reason: s1091E CA.

Failure to comply with applicable replaceable rules is not of itself a contravention of

Corporations Law. Therefore provisions relating to criminal and civil liability are
inapplicable: s135(3) CA.

(iv) Examples of replaceable rules – see s 141, page 125 Corps Legislation
48
 Rules covering the appointment, removal, resignation and powers of directors: ss224C,D;
s225A; s226A; s226E

Rules covering members’ meetings. Eg: notice requirements, quorum requirements, rights
to appoint a proxy, voting rights and voting: ss249J; s49T; s249X; s250E; s250J

Rules governing shares. Eg: registration and transfer of shares and payment of dividends:
s254U; s1091B

(v) Mandatory Replaceable rule

A mandatory replaceable rule cannot be replaced by the company’s constitution. Section
249X provides for the appointment of proxies, is a mandatory replaceable rule for public
companies.

Employment Contracts  It is binding on whoever comes into the company

under the
Constitution?  Even if that person was not present at the creation of the company).

Differences between  It can be amended without unanimous consent.

s140 contract and
ordinary contract
 It can only be enforced in a limited way

o Members can only enforce provisions which affect them as members

o Directors can only enforce provisions which affect them as directors and

o Company secretaries can only enforce provisions which affect them as

company secretaries.

 Eley v Positive Govt Security Life assurance held

o Eley could not enforce the clause in the constitution because it was not a
membership right.

o His contractual right with the company was as a member, so he could only
enforce rights against the company that were directly related to his status as a
member.

Employment Contracts  Where there is a conflict between an employment contract and replaceable rules.
and Replaceable  For example: a managing director appointed under s198C, where s198C(2) permits a
Rules. revocation or variation of the powers that are granted. Thus the company could
affect /terminate the managing directors employment under the constitution.
 EG/a managing director appointed under s198C where s1198(2) permits a revocation
or variation of the powers that are granted. Thus the company could affect/ terminate
the managing directors employment under the constitution.
 Allen v Gold Reefs of West Africa Ltd held the directors are permitted to revoke the
power under the constitution (or a replaceable rule). However, the company can then
be liable for breach of the employment contract.

ALTERING THE CONSITUTION

Altering the  Legislation governs the changing or revoking of the company constitution.
Constitution  s136(2) states that a special resolution is required to modify or repeal the constitution
 S9 provides that special resolution requires notice be given.
 Notice must comply with requirements under s249L
o Details of the meeting
49
 o Special resolution
o Proxy information
 Motion to modify/ repeal must have 75% of the votes at the meeting
 Entrenchment: s136(3) and s136(4) makes it possible for the company to provide
additional requirements in the constitution that will need to be adhered to if the
constitution is to be changed.
Limitations on  Even if all the constitutional requirements have been met; there are some limitations
altering the on what is allowed when altering the constitution.
constitution  Includes:
o s140(2) where a company is limited by shares.
o Doctrine of fraud on the minority (Gambatto)
o Part 6A.2 compulsory acquisition of shares.
Corporations s140(2)  In a company limited by shares, a member will only be bound if they agree in writing
– A company limited to the changes that will:
by shares o Require them to take more shares;
o Require them to increase their liability;
o Impose restrictions or additional restrictions on the transfer of shares
Doctrine of fraud on  A majority vote may be invalid even it complies with the requirements of the
the minority constitution-- comes from equity.
 Allows Ct to interfere with a majority decision if it can be shown that the majority
voted for a purpose which was outside an implied range of purposes for which the
power to vote is conferred.
 If the voting power of the majority is used in such a way as to be fraud against the
minority shareholders-- can apply to Ct for the majority decision to be set aside.
 The tests than need to be satisfied include Gambotto test:
o HC Held: The amendment was not valid based on fraud on the minority.
o Set out two tests, based on the two types of amendments that might give rise
to a conflict of interest on the part of the majority shareholders.
 Expropriation of shares
 Amendments giving rise to a conflict of interest

Expropriation of  Court rejected the suggestion that when it came to expropriation of shares, it was
shares prima facie valid.
 HC said that the onus of proof was on the majority to show that two requirements
are satisfied.
1. Acquisition must be for a proper purpose
 Defined as something which saved the company from harm and detriment.
 Here the alleged tax and administrative benefits of the acquisition were not
sufficient because that was a benefit to the company and not an avoidance of a
detriment.
2. It must be fair. Must be:
 procedural fairness (full disclosure, independent valuation of the
o shares); and
 actual fairness (the price that is to be paid must actually be fair).

Other amendments  The onus of proof is on the minority to prove it was either:
giving rise to a o Ultra vires;
conflict of interest o Beyond a purpose that was contemplated by the constitution or
o That it was oppressive.
Part 6A.2  In 2000 legislation was amended to permit compulsory acquisition of shares: Part
Compulsory share 6A.2.
acquisition  s664A provides that a person must have at least 90% of the shares
 s664AA states that the power must be exercised within 6 months of the person
o acquiring the required number of shares (ie. 90% or more of the shares).
 In general terms:
o a notice in prescribed form needs to be lodged with ASIC, given to all
50
 affected
 shareholders, specifying cash sum for which the shares are to be
acquired.
o The shareholders have 1 month to return an objection form to the person
 seeking to acquire the shares, must then lodge all of the forms with
ASIC.
o If at least 10% of people object, the acquisition will not take place unless the
 acquirer applies to Court under s664F.
Conclusion  The current position is that the tests from Gambotto would usually only be required in
the case of a:
o compulsory acquisition;
o where the majority shareholder has between 75% and 90% of the shares; and
o seeks to use that power in such a way as to adversely affect the minority
shareholders.
 Where the person has more than 90% of the shares, the statutory mechanism is the one
that should be followed. If the person does not exercise his/her rights within the 6
months required by s664AA, the Gambotto solution would be an alternative.

WHICH TEST SHOULD YOU APPLY? GAMBOTTO or STATUTE?

The Test in Gambotto will be used in a case where:
1. There has been compulsory acquisition of shares; and
2. where the majority shareholder has between 75% (powers of special
resolution s 9) and 90% (right to compulsory acquire shares under s
644A); and
3. Seeks to use that power in such a way as to adversely affect the
minority shareholders.

STATUTE Where the person has more than 90% of the shares, the statutory mechanism is
the one that should be followed. If the person does not exercise his/her rights within the 6
months required by s664AA, (but tries to alter the constitution) the Gambotto solution
would be an alternative.

Promoters
Promoters  The s9 definition only applies to prospectuses
 A promoter is ‘one undertakes to form a company with reference to a given project
and to set it going, and who takes the necessary steps to accomplish that purpose’:
Twycross v Grant (1877); Tracy v Mandalay Pty Ltd (1953)
Duties of promoters  Promoters are in a fiduciary relationship with the company and so must act bona fide
and avoid conflict of interest
 Promoters duties don’t necessarily stop with the appointment of a board of directors
(Twycross v Grant (1877))
 Promoters must disclose any interests that they have in a contract entered into by the
company (Erlanger v New Sombrero Phosphate Co (1878))
 Promoters must disclose any profits made to either an independent board of directors
or the general meeting (Gluckstein v Barnes [1900])
Pre-incorporation  A company could not enter into a contract prior to its incorporation - because it is only
contracts at common upon incorporation that the company becomes a separate legal entity.
law  A company could not ratify a contract made before its incorporation after it became
incorporated. Therefore, any contract entered into before incorporation could not be
enforced by or against the company: Black v Smallwood (1966)
 In some limited cases, the promoter who signed the contract on behalf of the non
existent company could be made liable on the contract, but this was the exception
rather than the rule: Kelner v Baxter (1866)

51
 Pre-incorporation  ss131 -133 (previously s183) empower a company to ratify a pre incorporation
contracts under contract “within a reasonable time”
Corporations Act  If the company does not ratify the contract (or the company is not registered) - the
person who signed the contract is liable to pay damages (although the court has a
range of powers and orders it can make with respect to the non ratifying company:
s131(3)).

Companies Relations with Outsiders

Introduction  Pre-incorporation contracts: the company is not a separate legal entity until
incorporation, the common law position is that a contract which is signed prior to
incorporation will not bind the company
o However, under s131-s133, it is possible for a company to ratify pre-
incorporation contracts

CONTRACTS WITH A COMPANY

Corporate capacity Section 124 provides that a company has the power to enter into contracts and do various
other acts. This provides that a company’s ability to enter into a contract is exactly the
same as that of a natural person. [It should be noted that s125 provides that an act
which is outside the objects clause of a company will not automatically be ultra
vires.]

We already know that in terms of:

 s124 - a company has the power to enter into contracts and do various other acts.
 s125 - an act which is outside the objects clause of a company will not
automatically be ultra vires.

[WHAT DOES THIS MEAN IN THE PRESENT CONTEXT] It means that a

company’s ability to enter into a contract is exactly the same as that of a natural person
and from that the general proposition will be that as long as a natural person could enter
into a particular contract without it being void, a company can do so too.

HERE IT IS EVIDENT THAT [PERSON] ENTERED INTO A CONTRACT FOR

[ACTION] WITH [COMPNAY]. [NOTE S 125 IF NECESSARY]. IT MUST
THEREFORE BE CONSIDERED IF THAT CONTRACT IS A VALID
CONTRACT THAT THE PARTIES ARE BOUND BY.
52
 Contracts with a  There are two ways in which a company can be bound by a contract:
Company  Direct way, by
o The company itself signing the document OR
o Through the directing mind and will of the company,
 Indirect way, by
o A person who is acting as an agent for the company

Direct (Company Itself)

Company itself Common Seal

signing
s127(2) provides that a company may execute a document by affixing the common
seal in the presence of either:
 two directors;
 a director and a secretary; or
 in the case of a company with a sole director who is also the company secretary,
that person.

The effect of this is that the company itself has signed the document. As per s123 The
company seal needs to include the company’s Australian Company Number (ACN) or, in
some circumstances, the Australian Business Number (ABN).

IN THIS SITUATION, IT IS EVIDENT THAT THE COMPANY ITSELF HAS

ENTERED INTO THE CONTRACT THROUGH AS PER S 127 WITH THE
[COMMON SEAL/SIGNING]. THEREFORE IT IS LIKELY THAT THE
PARTIES WILL BE BOUND BY THE TERMS OF THE CONTRACT.
No Common Seal
In terms of s123 a company may have a common seal, so it is not mandatory. If the
company is to have a seal, it is prepared upon registration and it needs to include the
company’s Australian Company Number (ACN) or, in some circumstances, the Australian
Business Number (ABN).

Covid 19

53
 A number of accommodations were made during the pandemic to facilitate the execution
of documents while people were in lockdown. Initially we had the Corporations
(Coronavirus Economic Response). Determinations made by the Treasurer which made it
possible to sign documents in counterpart and electronically. Then an amendment was
made to the Corporations Act 2001 (Cth) through the Treasury Laws Amendment (2021
Measures No. 1) Act 2021 (Cth).

[NOT APPLICABLE ANYMORE] These lapsed on 31 March 2022 as provided for in

s1679F. The temporary amendments expressly envisage and facilitate the execution of
documents in counterpart:
 where there are two physical copies (s127(3A)) signed in different places at
different times; and
 where one of the copies may be electronic (s127(3B)):
ESSENTIALLY:
 All copies must include the full contents of the document.
 Need not have the signatures of the other parties on it
 Method of electronic communication allowed must allow for the reliable
identification of the persons and indicate their intentions in regards the document

EXAMPLES:
Examples of signatures that are anticipated:
 Pasting of a copy of the signature on the document
 Signing a PDF on a smart device or laptop using a finger or stylus
 Cloud-based signature platforms such as DocuSign
 What must be satisfied is the method used is reliable and appropriate in the
circumstances?

Similar accommodations allow for a person to observe the affixing of the company seal by
electronic means. Here the person observing the affixing must sign the document which
must include a statement that the person observed the affixing of the seal by electronic
means.

The Treasury Laws Amendment (Measures for Consultation) Bill 2021: Use of technology
for meetings and related amendments has been before both Houses but I could not find
anything confirming that legislation has been passed at the time I was preparing the lecture
notes. The aim of the Bill, amongst other things, is to have these changes made permanent.
Note that s127 was subsequently amended to facilitate other methods of execution
permanently as such the ss127(3A) and (3B) discussed above have been amended. All this
is now incorporated in Div 1 Part 1.2AA of the Act. Remember that this does not change
who is required or authorised to execute for or on behalf of a company, it only increases
the valid methods of execution by those persons.

Now we need to look at other ways in which the company might be indirectly bound by
the acts of people within the company.

Directing mind and  Certain people involved with a company are seen as the personification/embodiment
will of company The key issue is who has power to influence decisions for the company. People
who have substantial power in the decision-making process can often be seen as the
directing mind and will of the company and can therefore directly bind the company.

Determining the power of an individual to sign

It is also possible for an individual high up in the hierarchy or management of the
company to bind the company, again there is the provision that he/she is acting within the
scope of his/her power. [People who have substantial power in the decision-making
process can often be seen as the directing mind and will of the company and can
54
 therefore directly bind the company].

IN THIS SITUATION, THE CONTRACT HAS BEEN ENTERED INTO BY THE

DIRECTING MIND AND WILL OF THE COMPNAY THROUGH [ONE OF THE
ABOVE] THROUGH A [MEETING] THEREFORE IT IS LIKLEY THAT THE
CONTRACT WILL BE BINDING UPON THE PARTIES.

Question OF FACT:
The decision of whether or not the directing mind and will of the company is involved in
the creation of a contract is a question of fact. It is necessary to look at the decision
making and the power division within the company by examining:
 the constitution, and
 any formal or informal processes relating to the making of decisions within the
company.

 Supporting Factors

As per the ruling in Lennard’s Carrying Co v Asiatic Petroleum Co [1915] AC 705

Supporting factors for an individual being the directing mind of a company are:
 being a director,
 taking an active part in management
 registered as the manager, and
 failing to lead any evidence to rebut the conclusion.

IN THIS SITUATION IT IS EVIDENT THAT [PERSON] WAS THE DIRECTING

MIND OF THE COMPANY AS...

FACTS:
 Lennard’s owned a ship and that ship was chartered to carry benzene.
 The ship was unseaworthy, caught fire and ran aground or maybe ran aground and then
caught fire.
 The problem was with the boilers of the ship and it had ran aground a few times in bad
weather due to the lack of working capacity of the boilers.
 The third time the ship ran aground, a container of benzene ruptured and a fire started.
 The end result being that the cargo (benzene) was lost as a result of the faulty boilers.
 The owners of the benzene, Asiatic Petroleum, sued Lennard’s for the loss.

Lennard’s relied on a provision in the Merchant Shipping Act (s502) which stated that: “a
ship owner is exempt from loss occurring without the owner’s actual thought or privity”ie.
that the owner (the company, Lennard’s Carrying Co) had to have actual knowledge
of the condition/circumstance which caused the loss. Mr Lennard was both the captain
of the ship and a director of the company and he knew that the ship was not seaworthy.

The House of Lords held that Mr Lennard was the directing mind and will of the
company and thus the knowledge that he had was imputed to the company. [the
factors listed above supported this finding].

HELD:
As a result, the company has “actual thought” about the condition of the ship and the
company could be held liable for the loss.
 Little Supervision
Denning CJ said that: in circumstances, such as “the state of mind of [the agent] is the
state of mind of the company”

As per Denning LJ in H L Bolton (Engineering) Co v T J Graham & Sonsin order to be

seen as the “directing mind and will” of the company, the person will have to be
exercising the powers with little supervision.

55
 IN THIS SITUATION, [PERSON] CAN BE SEEN TO BE THE DIRECTING MIND
OF THE COMPANY AS WHEN MAKING DECISIONS IN RELATION TO
[ACTION] THEY HAD LITTLE SUPERVISION.
 Complete Discrection
In Tesco Supermarkets v Natrass, the court held that a manager of a store was not the
“directing mind and will” of the company when it came to pricing policy, because he did
not have complete discretion when it came to pricing policy. As such he could not be
seen as the embodiment of the company as there were other people who were involved
in decisions relating to pricing policy.

The key issue is who has power to influence decisions for the company.
[PEOPLE WHO HAVE SUBSTANTIAL POWER] in the decision-making process can
often be seen as the directing mind and will of the company and can therefore directly
bind the company.

HERE, ALTHOUGH PERSON MAKES DECISIONS IN RELATION TO [THING]

THEY CAN NOT BE SAID TO HAVE COMPLETE DISCRETION AND
THEREFORE CAN NOT BE SAID TO BE THE DIRECTING MIND AND WILL
OF THE COMPANY.
Through Company  Usually a director, manager or a company secretary
Agent  Can also be someone acting in other capacity who has explicitly been given power to
act as a company’s agent by someone who has the authority to give the power.
 Need to establish:
o The person must actually be acting as an agent of the company,
o The extent of the authority that has been given by the company to determine
whether the act is within the authority that has been granted.
 Implied agency can exist: a company can be bound by the acts of a person who has
not formally been given authority to act as an agent for the company:
o where actual authority is given
o where apparent authority is given and
o where statutory authority is given.

It is only necessary to prove one form of agency, not all three.

[CONSIDER] It is also possible that some acts of the agent will be done under one
authority while other acts are done under another source of authority.

HERE IT IS LIKELY THAT PERSON HAS BEEN GRANTED [TYPE OF

AUTHORITY] TO ENTER INTO THE [CONTRACT] AS AN AGENT FOR
[COMPANY].

Actual authority  Actual authority: authority that the company actually confers upon the agent.
 I.e the authority that the company intends the agent to have.
 Two types exist: express and implied.
Express  Express: the company expressly states, in writing or verbally, that a particular person
is acting as an agent for the company.
 The only restriction is that the person must have the authority to create an agency.
Implied  Implied: it is authority that the company intended the agent to have, but didn’t
expressly state
 Hely v Hutchinson v Brayhead: Held authority to act can be express of implied.
o It is implied when it can be inferred from the conduct of the parties and the
circumstances of the case.
o eg/ when board of directors appoint one of them as managing director it
impliedly authorises him to do all that normally falls within the scope of that
position.
56
 o If a person is appointed as a manger, there is implied authority to do things
like enter into contracts and employ staff on behalf of the country.
o These powers do not need to expressly stated.
o If intention is not clear, it will be presumed that the person will have these
powers.
o Agency can be implied from conduct of the parties & surrounding
circumstances.
 Brick and Pipe industries v Occidental Life Nominees: held that when the other
directors did not interfere with the use of the power in that fashion, there was an
implied authority for that director to act for the company.
o implied actual authority can exist where the company wanted a person to have
the authority, either because:
 of the nature of the position to which the person was appointed, or
 the person was permitted to use the powers without complaint.

 Focus on what the company intended when you are looking at actual authority
Apparent Authority  The focus shifts to the “other” party to the contract; that is, the party who is not in the
company
 not dependant on any agreement between the company and the agent, but instead on
the authority that the person appears to have to the third party
 argument runs something like an estoppel argument:
o If the company represents that the agent has authority and
o a third party relies on the representation by entering into a contract with the
person who they think is an agent, then
o the company is estopped from denying that the person is the agent for the
company and
o the person has apparent authority to enter into the contract on the company’s
behalf
 The representation must in some way come from the company itself and
o would involve either the representation being made by the directing mind and
will of the company or
o by someone who is acting with actual authority from the directing mind and
will of the company.
 The representation itself can be either express or implied.
o The representation will be implied where the company permits a person to act
in a particular way or the person is appointed to a position that ordinarily
carries with it the power to make such contracts.
 Northside Developments: directors acting on their own have no power to bind the
company
 Hely-Hutchinson: the Chairperson of the Board of Directors acting by himself/herself
does not have the power to bind the company
 Panorama Developments (Guildford) Ltd: Company Secretaries have the ability to
make administrative contracts to do with the day-to-day running of the company.
 Freeman and Lockyer (approved by HC in Crabtree Vickers): says that a managing
director has full authority to manage the company and to make all types of contracts.

In this situation, there has been a representation made to [PERSON] by [OTHER

PERSON] who can said to be the directing mind and will of the company in their
position as [THING]. the representation was [REPRESENTATION]. person relied
on the representation to [DO THING] and therefore entered into the contract.
[PERSON] relied on the representation believing that [OTHER PERSON] had
apparent authority. because of this, it is likely that [COMPANY] will be estopped
from denying that [OTHER PERSON] was an agent of the company as it was
apparent to [PERSON] that they were acting as an agent.

Statutory Authority  s128 and s129 set out the assumptions that a third party can make when dealing with a
company.
57
  s129(2) states that a person can assume that every person who is listed
at ASIC as a director or a company secretary has been duly appointed and has
authority to exercise powers that would be expected in a similar position
 in a similar company.
 s129(3) provides that similar assumptions can be made about anyone who is held out
by the company as being an officer or an agent
 look at the statutory provisions like apparent authority:
o the company, by having the person registered to the particular position, is
holding out that the person has authority to do certain things
o When deciding the powers that are ordinarily present in a particular position,
we can look at the cases mentioned earlier under the heading of apparent
authority.
 s130(1): says that a person is not taken to have information about the company simply
because the information is available to the public at ASIC.
 In most circumstances a person will not be deemed to have constructive notice of
exactly who the officers of a company are.

Problems / limitations for third parties

Current Position:  s128(4) and says that a person cannot make the assumption if, at the time of the
Suspicious dealings they knew or suspected that the assumption was incorrect.
 Oris Funds Management v National Australia Bank [2003]: held that the effect of
the statutory presumption was such that NAB were not required to know the content if
Oris’ constitution. They were entitled to assume that if one director was endorsing the
cheque the constitution permitted one director to do so.
o Thus it is accepted that the meaning of “suspect” in s128(4) is: “A suspicion
that something exists is more than a mere idle wondering whether it exists or
not; it is a positive feeling of actual apprehension or mistrust, amounting to ‘a
slight opinion, but without sufficient evidence, as Chambers Dictionary
expresses it. Consequently, a reason to suspect that a fact exists is more than
a reason to consider or look into the possibility of its existence”
 Errichetti Holdings v Western Plaza Hotel [2006]: Federal Court held that a failure to
enquire, even where a reasonably prudent person would have made inquiries, was not
an automatic bar to relying on the s129 assumptions. Further the ct stated the
possibility that a person may suspect that a fact exists and therefore fails to make
inquiries because (s)he does not want those suspicions confirmed.

128(4) A person is not entitled to make an assumption in section 129 if at the time of the
dealings they knew or suspected that the assumption was incorrect.

 s128(4) will apply if a reasonable person had any reason for thinking that the
assumption that had been made was false.

Conclusion Checklist:
 If the assumption that has been made by the third party is not covered by
o s129 (which would be rare), then you can only use the common law test and
you should ignore the statutory test.
 If, however, the assumption is covered by s129, you should go through the statutory
test, but you can use the common law test as a point of comparison.
Summary of Topics  The company can be directly bound where:
 the company is seen to have signed the document (via the company seal or via the acts
of particular company officers) or
 where “the directing company.
 The company can be indirectly bound where:
o someone can be seen to have acted as an agent of the company.
o This can occur where:
 the person has actual authority (the authority that the company wants
the person to have) OR
58
 o apparent authority (the authority that the person appears to have to a third
party).
 There are assumptions upon which a third party can generally rely when dealing with
a company. Practically, the most important ones are the ones contained in s129.
 A third party will not be permitted to rely upon these assumptions is some cases.
o The statutory test in s128(4) states that a person will not be able to rely on the
(statutory) assumptions where they know or suspect that those assumptions
are not true.

Issue [Plaintiff] will be seeking to establish that [agent] was acting for [company] when s/he
[entered into contract] thus making his/her actions those of the company.

Company’s IF management powers given to Board of Directors

management Here, exclusive powers of management of [company] have been given to [directors] who
comprise the board of directors: s198A CA.

IF there is a Managing Director

Here, [managing director] has been appointed managing director: s198C CA. The
appointment is made under the replaceable rules and provides that the power of
59
 management can be delegated to a general manager.

IF management power given to members in General Meeting

Here, management powers have been given to members in General Meeting. This
replaces the replaceable rules in s198A&C CA, which provide that the management
powers are vested in the board of directors, or delegated to a general manager.

Is a company bound [Company] must rely on human agents to bind it. The liability of [company] will depend
by an agent’s action? on whether [agent] is seen to be acting as an agent for [company]. [Agent] may act as
agent by way of:
 The Common Law rules of Agency
 The Statutory Indoor Management Rules (SIMR) (ss128-130 CA)
 The Common Law Indoor Management Rules (CLIMR)

Common law rules of Agency is the relationship between two parties whereby [agent] is authorised by the
agency principal to do, on the principals behalf, certain acts which affect the principals rights and
duties in relation to 3rd parties.

[Company] has the power to enter into contracts through an agent, granted either actual
express or implied authority: s126(1) CA. This does not require the use of [company’s]
common seal: s126(1) CA.

The agency relationship may be conferred by way of:

1. Actual Authority
2. Apparent or Ostensible Authority

Actual Authority When [agent] enters into a contract on [company’s] behalf, to an outsider, the contract is
valid if [agent] acts within the scope of their express or implied authority.

(i) Express Authority

Express authority arises where an individual acting on behalf of a company is conferred
with authority to undertake specific acts. It is reflected to some degree in s126(1) CA.

IF express authority
Here, [agent] is given the express authority by [company] to [acts]. [Agent] has
acted according to this authority and [company] would be bound to the contract.

IF exceeded express authority

Here, [agent] was given express authority to [contract with certain supplier etc],
however they have exceeded this authority by [contracting with a different
supplier etc]. Therefore [agent] has no express authority and acted outside the
scope of their agency. However there may be some implied authority.

IF no express authority
Here, [agent] has not been given any express authority to [contract with supplier].
However there may be some implied authority.

(ii) Implied Authority

Implied authority stems from what is reasonably necessary to:
1. Carry out an authorised activity
2. To carry out a specific office in the company

Authorised Activity
IF act reasonably necessary for authorised activity
Here, [agent] was authorised to [order supplies etc]. In achieving that purpose
[agent] [contracted for transport for supplies]. It is likely that this would be
considered reasonably necessary to [receive the supplies] and therefore,
[company] will be bound.
60
 IF act not reasonably necessary for authorised activity
Here, [agent] was authorised to [order supplies etc]. In achieving that purpose
[agent] [went on tours of supply factories etc]. It is likely that this would not be
considered reasonably necessary to [order supplies] and therefore, [agent] acted
outside the scope of agency.

Agent holds a specific office in the company

Authority can arise by way of the office a person holds in [company]. Unless limited
expressly, the implied authority will extend to all those acts that are customarily exercised
by someone of that position. Regard must be had to the type of company, kind of
business, and similar companies.

IF individual directors
Here, [agent] is one of many directors in [company]. The function of an individual
director is to participate in decisions, and they have no authority to bind [company]:
Northside Developments. However, this may be altered depending on circumstances.

IF a single director
Here, [agent] is the single director and shareholder of [company]. The power of a
single director is equivalent to the authority of a board, and larger than the usual
authority of a managing director. Therefore, [company] is bound to the contract:
Northside Developments.

IF Delegation of powers by board of directors

Here, [agent] has been given authority to [get supplies] by the board of directors. In
this case [company] will be bound by [agents] actions: s198C CA.

IF neither situation occurs

Here, neither of the qualifications apply and [agent] will have no implied authority
to [get supplies]. Accordingly their acts are outside the scope of their office, and
have no authority to bind [company]: Re Haycraft Gold Reduction and Mining Co.

IF a managing director
Here, [agent] holds the position of managing director in [company]. As managing director
[agent] has an implied authority to supervise the daily running of the company, other
managers and the general business of the company: Entwells Pty Ltd v N & G Insurance
Co.

They can generally:

 Make contracts on behalf of the company that corporations would make: Crabtree
Vickers v Australian Direct Mail Advertising & Addressing Co Pty Ltd
 Engage others to provide services for the company: Freeman & Lockyer v Buckhurst
Park
 Entering into a loan contract, for small amounts of money, but wouldn’t have the
authority to make big loans in the course of ordinary business: Re Tummon
investments

However, [Agent’s] implied authority is limited to the carry out transactions that can be
categorised as an ordinary trading transaction: Corpers Pty Led v NZI Securities Ltd.

Crabtree Vickers Pty  ADM was a family coy

Ltd v Australian  Directors were Bruce McWilliam Snr & Jnr and wives
Direct Mail  Peter McWilliam was also a son who was an employee but was not a director
Advertising and  Bruce Jnr acted as managing director of coy but had never been formally appointed
Addressing Co Pty  Peter was involved in negotiations for purchase of machinery from C-V and signed
61
 Ltd contract
 Bruce Jnr had held out Peter as having authority
 ADM finally refused to honour obligations
Held:
 Only people in coy who had actual authority could do the holding out
 Only people were board of directors or three man committee of father and 2 son
 Neither of those bodies had made those representations
 A person with ostensible authority cannot hold out another person as having ostensible
authority

IF company is a trading company

Here, [company] is a trading company, [agent] has the implied authority to pledge the
credit and give security over the company’s property in the course of normal trading
activities: Biggerstaff v Rowatt Wharf

IF Transaction was an ordinary trading transaction

Here, the subject transaction can be clearly classified as a day to day transaction for
a [type of company] company. It is likely [agent] would be deemed to hold the
implied authority to [activity] by virtue of his office as managing director.
Therefore [company] would be bound to [the contract].

IF transaction not an ordinary trading transaction

Here, it is unlikely that [the transaction] would be considered an ordinary trading
activity of [company]. It therefore stands that [agent] was acting outside the scope
of his implied authority.

IF borrowed money for personal purpose

Here, [agent] has used his position to borrow money for his personal purposes. In
Tummon Investments this was held to be outside the scope authority of a managing
director.

IF a secretary
Here, [agent] is a secretary of [company]. According to older cases a company secretary
had a very limited authority to make any contract or representations on behalf of the
company: Reben v Great Fingall Consolidated.

However, it has been decided that a secretary usually has authority to sign contracts
connected with the administrative side of a company’s affairs, such as employing staff and
ordering: Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd.

Therefore, [secretary] in [ordering supplies] has acted within the scope of their authority,
and [company] would be bound to the contract.

IF chairperson
In Hely-Hutchinson v Brayhead it was said a chairman has the same customary authority
as any other individual director.

IF acquiescence occurs
Where the agent presumes to act for another without the express grant of authority and the
other person then ratifies the contract.

Continuing ratifications of transactions, will mean that the corporations has allowed the
agent to enter into transactions of the type (and so will have actual authority for the future)

There are two requirements: Freeman v Lockyer

1. Acquiescence of individual board members;
2. Communicating consent to one another (whole board) and agent through words or
conduct
62
 IF other company executive
Particular executives below board level may have an implied actual authority arising from
the usual authority of their office.

IF Manager of Insurance Company

Here, [agent] is the manager of an insurance company. The manger is impliedly
authorised to carry on all those classes of insurance business in which the company has
been writing business or holding itself out as willing to write: Wilson v Gilber.

IF Bank manager
Here, [agent] is a bank manager. While being below the level of managing director or
general manager. They may have a usual authority to communicate to a customer such
things as head office approval of a loan: First Energy (UK) Ltd v Hungarian
International Bank.

Apparent or ostensible ‘“Apparent” authority…is a legal relationship…created by a representation, made by the

authority principal to the contractor, intended to be and in fact acted on by the contractor, that the
agent has authority to enter on behalf of the principal…’: Freeman & Lockyer v Buckhurst
per Diplock LJ.

There are 3 requirements which [plaintiff] would need to show:

1. representation
2. made by person or persons who had “actual” authority
3. Reliance as to change position.

(i) Representation
‘Permitting the agent to act in some way in the conduct of the principal’s business with
other persons’ will constitute a representation: Freeman & Lockyer per Diplock LJ.

In the present case there appears to be a representation through [words/conduct] in the

form of [business card, conversation etc] that [what was represented?]

IF the effect of the representation is that agent is represented as Managing

Director.
Here, [agent] is represented as a managing director, even though they have not
been appointed as such, however the board of directors permit him to so act.

A Managing director, [agent], has an implied authority to supervise the daily

running of the company, other managers and the general daily business of the
company: Entwells; Corpers. Further these powers are usually delegated from the
board of directors: s 198C. Therefore the effect of the representation ordinarily is
that [agent] was managing director and therefore had authority to enter into these
contracts.

IF there is a constitutional limitation on transactions

Here the constitution places a limit on ordinary transactions that [details]. In
Camelot Resources v McDonald a limitation applied and it was held that the
managing director lacked authority to commit the co to almost 10% of its capital
and substantial payments.

In this case [plaintiff] may try to distinguish Camelot on the basis of the amount of
capital pledged.

(ii) Made by Authorised person

IF there has been no authorised person
Here there has been no express authorisation by the board: Crabtree Vickers.
However, there may be an argument here that the board acquiesced [agent] as in

63
 the position of managing director through [conduct]: Freeman v Lockyer.

IF representation made by authorised person

In the present case clearly the representation was made by board, clearly this
would be enough to satisfy this element: Crabtree Vickers

IF authorisation by own representation

Here the representation has been made by [unauthorised person] relying on
[agent’s] own representation. In Crabtree Vickers the court held that an outsider
cannot rely on agent’s own representation as to authority. In this case therefore
there would be no valid authorisation. However, there may be an argument here
that the board acquiesced [agent] as in the position of managing director through
[conduct]: Freeman v Lockyer.

Freeman & Lockyer v Buckhurst Park Properties [1964]

 Kapoor was a property developer who entered into a contract to purchase a property,
and obtained some finance from Hoon and formed Buckhurst Park Properties
company to buy the estate, and both held half the issued shares.
 The board of directors was Kapoor, Hoon and 2 nominees
 Quorum was four people, but Hoon was overseas
 Power under articles of association to appoint a managing director – they failed to do
so
 Kapoor acting like he was the managing director for purchases of real estate including
hiring other agents etc, and board were aware of his activities
 engaged architects on behalf of company
 company refused to pay
Held:
 3 elements of test:
 Company held him out to be managing director and bound
 They had the authority to make the representation,
 Outsiders had relied on this apparent authority by entering into the contract
 Kapoor had apparent authority to appoint architects (as his was within customary
authority of managing director, within the authority that was represented)
 Was not a case of actual authority b/c directors did not communicate their
acquiescence to each other and the agent

(iii) Reliance
[Plaintiff] would have to demonstrate reliance on the representation.

IF no reliance on representations
Here there does not appear to be reliance on the [conduct/words] and therefore this
element would not be satisfied.

IF reliance
Here there appears to be reliance by [plaintiff] on [representation] and clearly as a
result there has been a change in position as [a contract was entered into].
Therefore here this element would be made out.

The statutory indoor Under s128(1) & (2) CA a person who has ‘dealings’ with a company or dealings with a
management rules 3rd party who has or purports to have acquired property of the company is able to make
(Restriction) the assumptions in s129 CA.

‘Dealings’ has been widely defined and includes ‘source of the transaction (eg, making the
contract): Barclays Finance Holdings v Sturgess. It has been suggested that ‘dealings’ is
not limited to contractual dealings: Australian Capital Television v Minister for
Transport.

64
 IF signing a contract or entering into an agreement
Here, there clearly is a dealing being the making of the agreement/signing of the
contract: Barclays.

IF dealings are negotiations

Here [plaintiff] would argue that the pre-contract negotiations constituted
dealings. In Brick and Pipe Industries negotiations carried out prior to execution
of the deed were characterised as a series of dealings. The same would apply to
our facts.

IF only one transaction

Here, there is only one transaction. This does not matter, as in Advanced Bank
Aust v Fleetwood, Studdert J held that there is no need for multiple transactions or
previous legal relationships.

IF there are no dealings

In the present case there does not appear to be any dealings between [plaintiff] and
[agent]. As the SIMR is not a code: Aust CT v Minister for Transport, it is
therefore necessary to consider the CL IMR.

Therefore, there appears to be dealings and the assumptions need to be considered: s129
CA.

In the present case [plaintiff] would be seeking to rely on s129 subsection:

1. That [company’s] constitution and CA have been complied with.
2. That as [agent] appears on the ASIC register as a [director] he is duly appointed
has authority to exercise the powers customarily to that office
3. That as [agent] was held out to be an [officer/agent] of [company] he is duly
appointed has authority to exercise the powers customarily to that office
4. That [agent] as and officers/agent of the company has properly perform the duties
of [company].

(i) Company’s Constitution has been complied with

Person has a right to assume that a companies constitution and the Act’s replaceable rules
have been complied with: s129(1)
This includes the provisions relating to the company seal: Bank of New Zealand v Fiberi

(ii) People appearing on the ASIC register as directors are duly appointed and
have authority to exercise the powers of the office
Person can assume that anyone who appears from information provided publicly to ASIC
to be a company’s secretary or director has:
 Been properly appointed: s129(2)(a); and
 Authority to exercise those powers and perform those duties customarily exercised
by people in that position: s129(2)(b) [see positions of people above]

Person can rely on this even where they have not seen information contained in ASIC
notices: Re Madi Pty Ltd
Applies to cover people who are named as directors or secretaries, where they have been
improperly appointed or not appointed: Re Madi

(iii) Anyone held out as being an officer/agent of the company is duly appointed
and has authority to exercise the powers of the office
Person can assume that anyone who is held out by the company as an officer or agent of
the company has:
 Been properly appointed: s129(3)(a); and
 Authority to exercise those powers and perform those duties customarily exercised
by people in that position: s129(3)(b).

65
 s129(3) and CL: This appears to restate the representation element at common law
However, there appears to be no need for reliance to allow for an assumption: Re Madi

s129(3)(a): Holding out

Must be done by someone with actual authority: Brick & Pipe;
Can use s129(2) so third party can assume person named in ASIC papers has authority to
hold out another as having authority (overlap: s129(8))
s129(3)(b) Then person has the authority to do things customarily exercised or performed
by a similar company
Must consider the similar company – must analyse the kind of business conducted vs what
is customarily conducted by companies in this position [see roles of officers above]

Brick & Pipe Industries

 A company fixed its seal to a guarantee witnessed by two directors, one of who was
incorrectly described as the company secretary
Held
 The other party to the guarantee could assume the guarantee was duly executed
notwithstanding the incorrect designation
 The guarantor company had held out the secretary as secretary

(iv) The agent has properly performed the duties of the company
Here, [plaintiff] may assume that officers and agents who owe duties to the company are
properly performing them: s129(4) CA. This would include fiduciary and statutory duties,
administrative tasks delegated under the constitution and any other tasks delegated by the
board.

(v) Documents is duly executed without a seal

Here, [person] can assume that a document has been duly executed by the company
without the seal where the company’s officers have appeared to sign the document in
accordance with s127(1): s129(5).

Company can execute a seal with:

 The signatures of 2 directors: s127(1)(a);
 Directors and company secretary: s127(1)(b); or
 Where proprietary company has a sole director and secretary – that director:
s127(1)(c).

Person can also assume that someone who signs as the sole director and secretary next to
their signature – can assume they hold both offices: s129(5)

This section can be interpreted in 2 ways:

 Broadly – that this section contemplates people who purport to be in the position
of 2 directors etc
 Narrow – that this section requires witnessing by the actual 2 directors and or
company secretary etc.

(vi) Documents duly executed with seal

Person may assume that the document has been duly executed if:
 The company’s common seal appears to be fixed to the document: s129(6)(a)
AND
 The doc appears to have been duly executed with the company seal, under the
procedures prescribed in s127(2): s129(6)(b)

With fixing of the common seal is witnessed by:

 2 directors of the company: s127(2)(a);
 Director and company secretary: s127(2)(b); or
 The sole director of a proprietary company: s127(2)(c)

66
  Person can also assume that someone who witnesses fixing of the common seal as
the sole director and secretary next to their signature – can assume they hold both
offices: s129(6)

This section can be interpreted in 2 ways:

 Broadly – that this section contemplates people who purport to be in the position
of director or company secretary
 Narrow – that this section requires witnessing by the actual directors and or
company secretary etc.

(vii) Warranting documents are genuine

Here, [plaintiff] can assume that an officer or agent of company who has authority to issue
a document or a certified copy of a document also has authority to warrant that the
document is a genuine or true copy: s129(7) CA.

This would include a secretary lodging a document with ASIC, per Brick & Pipe, where a
lender could rely on execution assumptions notwithstanding incorrect statement on
documents.

Common law indoor The CLIMR has a restrictive application due to the operation of the SIMR. The CLIMR
management rules will only apply where there are no dealings as per s128(1) & (2) CA.

IF there are dealings

In this case it does not apply as there are dealings, refer above.

IF there are NO dealings

The CLIMR applies in this case.

(i) What is the CLIMR

The rule assumes that persons dealing with the company in good faith may assume that its
constitution and powers have been properly and duly performed and are not bound to
inquire whether acts of internal management have been regular: Northside Developments

If the rule applies in this case, it will mean that [company] is bound by the acts of [agent]
as if he were their [director/agent]. The rule however will not apply if there is an
exception.

IF no exception
On the facts there is no exception and the rule applies.

IF actual knowledge of irregularity

Here, [plaintiff] will not be able to rely on the CLIMR as he had actual knowledge
of the irregularity in the management procedure. Northside Developments.

IF put on notice
Here, there is a strong argument [plaintiff] should have made further inquiry as he was
aware of [certain facts]. If this can be successfully argued then the CLIMR will not apply:
Northside Developments

67
 Management of Companies
Division of Power  There are two relevant groups of people who have power within the company:
o The group with ownership of the company (the shareholders);
o The group responsible for the management (the directors).
 A person can be a member of both groups
 There is no requirement that a director be a shareholder or vice versa.

Power of board of  The degree of power held by board of directors is not the same in all companies 􏰠
directors look to constitution; replaceable rules.
 s198A (a replaceable rule) - the business of the company is to be managed by or under
the direction of the directors.
 s198A(2)- the director's can exercise all of the powers of the company except those
powers that are given to the General Meeting either through:
o a) the Corporations Act or
o b) through the Constitution.
 Other sections do give more specific powers to directors, but all are replaceable rules
and can be overridden by the Constitution.
 Individual directors do not have the power to bind the company.
 Powers given to directors need to be exercised by the Board as a group rather than
each director individually.

Specific powers in the  s201H permits directors to appoint another director, but it must be ratified by
Act include: resolution within 2 months (Pty) or at the next AGM (public).
 s201J permits the appointment of a managing director on any terms. The managing
director can be given any powers that the directors can exercise under s198C. The
appointment and the conferral of power are revokable.
 s198D permits directors to confer any of their powers to any person (including a
committee, an individual director, a company employee, or any other random person).
 Not RR, but applies unless it is overridden by the constitution.
 If single director who is only shareholder, s198E allows that person to exercise all
powers of the company EXCEPT the powers requiring a general meeting.
 The definition of “replaceable rule” in s135 explicitly states that the replaceable rules
do not apply to single director, single shareholder companies: s198D still applies.

Summary Decisions relating to the managing of the business are generally made by the Board of
Directors and it is common for the Board of Directors to authorise individuals or groups to
exercise some or all of these powers on their behalf.
Powers of the general  The general meeting of shareholders is given a number of powers explicitly by the
meeting Corporations Act (through replaceable rules).
 S136: gives the power to the General meeting to modify or repeal the constitution by
special resolution.
 s201G: gives the power to appoint a director by resolution (just a simple majority)
 There is a power to remove a director from office by resolution:
o Proprietary company, the power is contained in s203C
o Public company it is contained in 203D

Clash between  In certain circumstances, there will be a conflict between the powers of the directors
shareholders and and the powers of the shareholders.
directors  The general rule is that the directors win out, as they are given the job of managing the
business.
 When the directors are acting within their powers, they cannot be dictated to by
members in the General Meeting.
 Automatic Self Cleansing Filter Syndicate Co Ltd v Cunningham: held that the
Directors were not bound by the resolution. The decision related to the management of
68
 the business, so the powers of the directors to oversee the management of the
company could not be overruled.
 John Shaw and Sons (Salford) Ltd v Shaw: held that the decision whether or not to
continue with the legal proceedings was a management decision, so the General
Meeting couldn’t force the directors to discontinue the action

There are only three  Dismiss the directors under s203C or s203D.
things that  Amend the constitution by special resolution through s136 to limit the future power of
shareholders can do to Directors.
limit the powers of  Use minority shareholder rights
directors:
Board of Directors  The definition of a director is in s9 and includes three different classes of people:
o People appointed as directors.
o People appointed as alternate directors and are acting in that capacity
o People who are occupying or acting in the position of director, regardless of
whether the person is called a director or has been properly appointed.
o People whose directions or instructions are customarily acted on by directors

People appointed as Someone who has been properly appointed as a director is a director.
directors or alternate In regards to alternate directors, they must also be acting as such.
directors

People who are Principle is:

occupying or acting in It is the substance of the situation which is important, not the terminology or the
the position of mechanics of the appointment.
director, regardless of
whether the person is
called a director or has
been properly
appointed.

People whose  People are often called shadow directors and are effectively “controlling” what the
directions or directors are doing
instructions are  They will also be viewed as directors of the company and, importantly, will be subject
customarily acted on to the duties which are imposed on directors.
by directors.  Standard Chartered Bank of Australia v Antico: A Holding company was seen as a
shadow director of its subsidiary due to the degree of control that was exercised over
the company.
o While a company cannot be the director of a company, it can be seen as a
shadow director if it exercises sufficient control over the actions of the
company.

Appointment of  proprietary companies must have at least one director and

Directors  public companies must have at least three directors under s201A.
 s201G - Appointment of directors can be made by resolution of the general meeting
 s201H – Appointment can be made by the directors (but needs to be approved by
resolution).
Restrictions on  s201B: Directors must be over the ages of 18
becoming a director  s206A – s206G: deals with people who are disqualified from directing companies and
include:
o undischarged bankrupts,
o perpetrators of fraud, and
o court ordered disqualifications for breaches of civil penalty provisions,
amongst other things

Removal of directors  the General Meeting can remove a director by resolution under s203C for proprietary

69
 companies (replaceable rule)
 and under s203D for public companies (can’t be constitutionally altered).
 A director can resign by giving notice in writing under s203A.

Meetings of the  s248C - s248G: replaceable rules relating to meetings

board of directors o Quorum for the meetings is 2 directors
o Decisions are by simple majority with the chair having the casting vote in the
case of tie.
 s248A: allow resolutions to be passed without a meeting if all directors sign a
document saying that they are in favour.
 s248D: permits the use of technology if all the directors consent
 s251A: all resolutions that are passed by the board must be noted in the minute book.
 These rules allows for the running of the business can be make quickly and effectively
without having a Board Meeting.

The general meetings  S113 and s114: Proprietary companies can only have between 1 and 50 non- employee
shareholders and the only restriction on public companies is that there must be at least
one shareholder.
 S231: there are two ways in which a person can be a member of the company
o Upon the registration of the company &
o After registration of the company
 A company limited by guarantee may convert to a company limited by shares

On registration  S120: A person will be a member up on registration if their name is on the registration
form as a member & consent is given.
o This is the only way to be a member of the company from inception of
company.

After registration  S231: a person can become a member after registration if they agree to become a
member and their name is entered on the registry.
 Number of ways to agree:
o New issue or allotment of shares: Company is entitled to new shares at any
time. The person pays money to the company, and receives shares in return
(s254A).
o Transmission of shares: This is a transfer of shares by operation of law. For
example:
 s1072A: On death
 s1072B: On bankruptcy
 s1072D: Where the shareholder is mentally incapable.
o Transfer of shares from one shareholder to another:
 s1072A: Shares are personal property that can be transferred. This is a
transaction between the vendor & buyer, the company is not involved
in the transaction.
 s1072F: legal title in the shares does not transfer until the buyer is
registered as the owner.
 Proprietary companies have the ability to refuse to transfer the
shares: RR s1072G
o The refusal to transfer the shares can be for any
reason (not broad);
o Fiduciary and statutory duties placed upon directors
mean that power must be exercised in good faith and
best interests of the company.
o s1071E: If transfer is not registered, notice must be given to transferee within
2 months.
o s1071F: transferee can then apply to Ct to force registration (not easy to
satisfy Ct).

70
  Onus of proof: on transferee to prove refusal was without cause; and
 There is no right to reasons for initial decision.
o Amla v Ure held that silence was not enough to show that there was a lack of
cause and in the absence of any direct evidence, onus of proof was not
satisfied.

General points to  a person will not be a member of the company until registration has taken place (s231)
remember in relation  the company is required to keep an up-to-date registry of current members (s168 &
to transfer of shares: s169)
 all members have a right to inspect the register without charge
 anyone else can inspect the register for a fee (s173).
 The fee is up to $5 if the register is not kept on a computer and up to the marginal
 cost to the company if the register is kept on a computer (Schedule 4 of the
Regulations).

Meetings of  RR s249C: Directors can call General meetings for a proprietary company and
Members  s249CA: Directors can call General meetings for a public company (cannot be
constitutionally altered).
 249D: Members who have at least 5% of the votes or 100 different members can
request a director call a general meeting.
 s249F: A member with at least 5% of the votes can also call a general meeting
themselves.
 s249G: The Court can call a general meeting if no other way of calling the meeting is
practicable.
 Once the meeting has been called, Bell Resources suggests that the meeting cannot be
cancelled. The correct procedure is for the meeting to take place and then to be
adjourned.

Go through  S251: Book of minutes must be kept by the company

procedural details  S1322: gives a shareholder the right to appeal to Court.
relating to giving of o Procedural irregularities does not necessarily invalidate proceedings
notice and running of o Ct must be of opinion that a substantial injustice occurred as a result
meetings  Chew Investments v General Corporation: Where the proxy votes had not been
counted at the meeting, the court held that there was no substantial miscarriage of
justice, because even if the proxy votes had been counted, it would not have made any
difference to the outcome of the vote. The result of the vote stood.
 Bell Resources Ltd v Turnbridge (1988): A resolution that was passed to reduce the
number of directors was overturned by the Court, because insufficient notice was
given. Court opined that this meant that shareholders did not have sufficient notice of
the resolution that was important to the workings of the company, and so it was
deemed to be invalid.

71
 Directors and Officers
Issue Is [director] a validly appointed director?

FOR NOTE USER – NO ISSUE WITH VALIDITY OF DIRECTOR

IF there are no issues with validity of appointment of directors, re who can be director,
disqualification, appointment process etc and ONLY issues with duties owed by directors
proceed to 8. Directors duties for Beginning information regarding Fiduciary duties.

What are directors (i) Directors

and officers? Director is defined in s9 CA as
(a) a person who:
(i) Is appointed to the position of a director
(ii) Is appointed to the position of an alternate director and is acting in that
capacity; regardless of the name that is given to their position
(b) Unless the contrary intention appears, a person who is not validly appointed as a
director if:
(i) They act in the position of a director or
(ii) The directors of the company or body are accustomed to act in accordance
with the person’s instructions or wishes

IF De facto Director
Here, [director] is a de facto director in that they have resigned as a director but
continue to exercise top level management functions: DCT v Austin; Natcomp
Technology Australia Pty Ltd v Graiche. Therefore, [director] is a director.

IF Shadow Directors
Here, [director] is a shadow director as they are part of a holding company which
acts as a shadow director of its subsidiary: Standard Chartered Bank of
Australia Ltd v Antico. Therefore, [director] is a director

IF person is CEO or Managing Director

Here, [director] hold the office of [CEO; s198C(i)] and is therefore a director
under s9(a)(i) CA.

IF person is part time chair person

Here, [director] is a part time chairperson: s248E(1)) and is therefore a director
under s9(a)(i) CA.

IF person is not a director but acts in the capacity as one

Here, [director] does not meet the clear definition of director, however they may
still fall within s9(b). [Director] will only be classified as a director if they acted
in that capacity and the board accepted the advice, and acted on it without their
own discretion: Re Hydrodam.

DCT v Austin
Madgwick J held that it is not practicable to formulate a general statement as to what
constitutes acting as a director as it often involves a question of degree requiring a
consideration of the duties performed in the context of the operations and circumstances
72
 of the company. However a necessary condition of acting as a director is that the person
exercised top level management functions.

(ii) Officer
Unless contrary intention appears, an officer is defined in s9 CA as a:
(a) director or secretary
(b) person who
(i) participates in making decisions that affect the whole or substantial part of the
business of the company;
(ii) has the capacity to affect significantly the company’s financial standing;
(iii) the directors of the coy are accustomed to act under instruction from
(excluding professional advice)
(c) receiver or receiver and manager
(d) administrator of coy
(e) administrator of deed of company arrangement
(f) liquidator of corporation
(g) trustee or other person administering compromise or arrangement between coy and
someone else

IF officer is a person who makes or participates in making decisions which

affect the whole or substantially part of the business of the corporation
Here, [officer] is someone who [makes or participates in making decisions which
affect the whole or substantially part of the business of the corporation]. This
would include a director of a holding company, but not the director/officer of a
subsidiary as they basically participated in the management operations of the
subsidiary and had an effect on the whole business organisation: ASIC v Adler.

ASIC v Adler
The court held that Adler, a director of HIH was an officer of a wholly-owned HIH
subsidiary under the s 9 Definition, even though Adler had not been appointed a director
or officer of the subsidiary. Adler’s role as director of HIH, the subsidiary holding
company, and a member of HIH’s investment committee indicated that he participated in
making decisions that affected the whole or a substantial part of the subsidiary’s business.
Adler also had the capacity to significantly affect the subsidiary’s financial standing
because of his role on the holding company’s board and investment committee

Was director eligible Only certain people can be appointed as director. To be appointed the person must be
to be appointed as over 18: s201B(1) CA, and be a natural person (eg, not a company). However, this doesn’t
director? stop a person or corporation being deemed to be a director under the CA.

Here, [director] meets those requirements, however they may be disqualified from being
appointed if they fall under any of the categories in Part 2D.6 CA, unless the appointment
is made with the permission of ASIC or the courts under s206G: s201B(2) CA.

Disqualifications [Director] may be disqualified from acting in the capacity of director via:
which would  Automatic Disqualifications – s206B CA.
disqualify director  The court’s power of Disqualification: s206C CA.
from acting?  ASIC’s power of disqualification: s206F(1) CA.

The disqualification provisions are not designed to be punitive, more of a deterrent and to
protect creditors and the public from those who have offended and may offend again:
Chew v NSCS.

Automatic A person is automatically disqualified from managing corporations if they are convicted:
Disqualifications s206B(1) CA.

IF convicted on indictment of an offence affecting a company.

Here, [director] has been convicted on indictment of an offence that:
73
 (a) Concerns the making, or participation in making of decisions which affect
the whole or a substantial part of the company: s206B(1)(a)(i) CA.
(b) Concerns an act that has the capacity to significantly affect the company’s
financial standing: s206B(1)(a)(ii) CA.
Therefore, [director] would be disqualified from holding office.

IF convicted of an offence in contravention of CA and punishable by

imprisonment for 12 months or more, or an offence involving dishonesty and
punishable by imprisonment for 3 months or more.
Here, [director] has been convicted of an offence that:
(a) Is a contravention of this act and is punishable by imprisonment for a
period greater than 12 months: s206B(1)(b)(i) CA.
(b) Involves dishonesty and is punishable by imprisonment for at least 3
months: s206B(1)(b)(ii) CA.
Therefore, [director] would be disqualified from holding office.

IF convicted of an offence against the law of a foreign country punishable by

imprisonment of greater then 12 months.
Here, [director] has been convicted of an offence against the law of a foreign
country that is punishable by imprisonment for 12 months or more: s206B(1)(c)
CA. Therefore, [director] would be disqualified from holding office.

The disqualification period will start the day the person is convicted and will last for 5
years.

IF person does not serve a jail term

Here, [director] did not serve a jail term, and the period of disqualification will
end 5 years after the day on which they were convicted: s206B(2)(a) CA. Here,
[director] [has/has not] satisfied the time requirements, and [could/could not] act
in the capacity of director.

IF person does serve a jail term

Here, [director] did serve a jail term, and the period of disqualification will end 5
years after the day on which they are released from prison: s206B(2)(b) CA.
Here, [director] [has/has not] satisfied the time requirements, and [could/could
not] act in the capacity of director.

A person is also automatically disqualified from managing corporations if they have an

undischarged bankruptcy: s206B(3) CA. [Director] would be disqualified if they have
executed a person insolvency agreement under Part X of the Bankruptcy Act 1966, or a
similar law of an external territory or foreign country, and the terms have not been
complied with.

Courts power of The court on the application of ASIC, the court may disqualify a person from managing
disqualification corporations for a period that the court considers appropriate in three situations.

IF person contravened a Civil Penalty Provision

Here, [director] has contravened a civil penalty provision. The court will
disqualify the person if the contravention has occurred: s206C(1)(a) CA, and the
court is satisfied the disqualification is justified: s206C(1)(b).

Rich v ASIC
McHugh J commented that the approach of the courts in determining the period of
disqualification is similar to that adopted in sentencing in criminal cases, considering
Elements of:
 Retribution
 Deterrence
 Reformation
74
  Mitigation
Factors such as:
 Size of any loss suffered by corporation, its creditors and consumers
 Legislative objectives of personal and general deterrence
 Contrition on the part of the defendant
 Gravity of the misconduct
 Defendants previous good character
 Prejudice to the defendants business interest
 Personal hardship and willingness of the defendant to render assistance to statutory
authorities and administrators

Re HIH Insurance Ltd; ASIC v Adler

Santow J set out the factors which have led to the longest period of disqualifications.
These included:
 Large financial losses
 High likelihood that the defendant will continue to engage in similar conduct
 The activities were undertaken in areas where there was postential to cause great harm
 Lack of contrition or remorse
 Disregard for the law
 Dishonesty and an intention to defraud
 Previous contraventions

IF person has been an officer of 2 or more failed corporations

Here, [director] has been an officer of 2 or more failed corporations in the past 7 years at
the time they failed: s206D(1)(a) CA. The court must also be satisfied that the failure of
the company was due to its management: s206(1)(b)(i) CA, and that the disqualification is
justified: s206(1)(b)(ii) CA.

For the purposes of this section a corporation fails if:

(a) a Court orders the corporation to be wound up under:
(i) section 459B of this Act; or
(ii) section 526-1 of the Corporations (Aboriginal and Torres Strait
Islander) Act 2006 ; because the Court is satisfied that the
corporation is insolvent; or
(b) the corporation enters into voluntary liquidation and creditors are not fully paid or
are unlikely to be fully paid; or
(c) the corporation executes a deed of company arrangement and creditors are not
fully paid or are unlikely to be fully paid; or
(d) the corporation ceases to carry on business and creditors are not fully paid or are
unlikely to be fully paid; or
(e) a levy of execution against the corporation is not satisfied; or
(f) a receiver, receiver and manager, or provisional liquidator is appointed in relation
to the corporation; or
(g) the corporation enters into a compromise or arrangement with its creditors under
Part 5.1 (including that Part as applied by section 45-1 of the Corporations
(Aboriginal and Torres Strait Islander) Act 2006 ); or
(h) the corporation is wound up and a liquidator lodges a report under subsection
533(1) (including that subsection as applied by section 526-35 of the Corporations
(Aboriginal and Torres Strait Islander) Act 2006 ) about the corporation's inability
to pay its debts.

IF director has repeatedly contravened the act

Here, [director] has:
(a) Twice been an officer of a company which breached acts and failed to take
reasonable steps to stop the breach: s206E(1)(a)(i) CA.
(b) Twice contravened the act while officer of a company: s206E(1)(a)(i) CA
Therefore, [director] would be disqualified from holding office.

75
 ASIC’s power of ASIC can disqualify a person from managing a company for up to 5 years in three
disqualification situations.
IF within 7 years director was officer of 2 or more companies which were
wound up within 12 months of officer leaving
Here, [director] was an officer of 2 or more companies in the past 7 years, and
either during their tenure as officer or within 12 months of leaving, the company
was wound up and a liquidation report lodged: s206F(1)(a) CA. Therefore,
[director] may be disqualified from acting as director.

IF ASIC has given the person notice to demonstrate why they should not be
disqualified
Here, [director] has been given notice by ASIC requiring them to demonstrate
why they should not be disqualified, and an opportunity to be heard on the matter:
s206F(1)(b) CA. Therefore, [director] may be disqualified from acting as
director.

IF ASIC satisfied disqualification is justified

Here, ASIC is satisfied that the disqualification of [director] is justified for
[reasons]. Therefore, [director] may be disqualified from acting as director.

Cullen v Corporate Affairs Commission

It was appropriate to disqualify a person under the predecessor of s206F CA. It was
established that the director of four failed companies
 Had not met standards that community expects
 Did not remit group tax
 Failed to take appropriate action to minimise losses
 Intermingled the affairs of different companies
Period of disqualification was fixed for 2 years, with 5 years reserved for the worst case
involving dishonesty or a large number of defaults

Delgona v ASC
A disqualification of 2.5 years was imposed. Matters considered included that the
transgressions were serious and the director showed a lack of understanding of the way a
company should operate including:
 Lack of knowledge of accounts requirements
 Failure to hand over books to liquidator
 Lack of knowledge that a company of which the person was a director was insolvent

Appointment of A company must have a minimum number of directors.

directors IF Proprietary Company
Here, [company] is a proprietary company and must appoint at least 1 director. The
director must ordinarily reside in Australia: s201A(1) CA.
IF Public Company
Here, [company] is a public company and must appoint at least 3 directors. The directors
must ordinarily reside in Australia: s201A(2) CA. There is no maximum number of
directors required by the CA, however, the constitution will usually deal with it.

The first directors are appointed by putting the names in the application form to register
the company: s120(1) CA. Consent forms must be attached to the application: s117(5)
CA, and if there is not consent, company commits an offence: s201D(1) CA.

IF later directors
Here, [director] is being appointed after the first directors have been appointed. They will
be appointed by a general meeting by ordinary resolution under the replaceable rules:
s201G CA or a method specified in the constitution.
IF casual vacancy
Here, [director] is being appointed to a casual vacancy because of a resignation of a
76
 previous director. The position can be filled by the board of directors, but it is subject to
consent by members at a general meeting: s201H(1) CA.
(i) IF Proprietary Company
Consent needs to be given by the general meeting within 2 months of the
appointment: s201H(2) CA.
(ii) IF public company
Consent needs to be given at the next annual general meeting: s201H(3) CA.

 Vacation of Office
o Removal of director of public company
 Any resolution to remove by board of directors is void s 203E
Removal by ordinary resolution of members in general meeting on 2 months
Powers of Directors Generally the board has exclusive management power of the company: s198A CA, except
for some residual powers under the CA, constitution of company or the ASX.
 Division of powers between BoD and members in general meeting
o Normal division of powers
 Replaceable rule s 198A or company’s constitution normally vests all
management powers in the BoD except powers that CA, constitution
or ASX listing rules (if pub comp) gives to members in general
meeting
o Extent of powers
 Effect of directors acting within their powers
 Directors acting within powers may act against the wishes of
the majority shareholders who cannot control the board
whilst in office (Howard Smith v Ampol Petroleum @ 837).
o Powers of general meeting
 Powers under CA
 Altering constitution s 136(2)
 Removing director s 203C,D

Duties of Directors Directors owe duties under the general law and under the CA. The general fiduciary
duties owed by directors include:

The general fiduciary duties owed by directors include:

1. Duty to act bona fide in the interests of the company
2. Duty to exercise powers for proper purpose
3. Duty to avoid conflicts of interest
4. Duty not to misuse position or information
5. Duty to act with due care and diligence
6. Duty to retain discretionary powers

Here, it is necessary to consider [duty #1-6]. The statutory duties are contained in ss180-
184 CA in addition to general law duties in s185 CA.

Fiduciary Duties There is no accepted legal definition of ‘fiduciary’; however the preferable one is from
Generally Hospital Products v USSC, which states that, a fiduciary is ‘someone who undertakes to
act on behalf of, or for the benefit of another in some particular matter’.

The existence of a fiduciary relation is determined according to the nature and scope of
the relationship between the parties and this is a question of fact for each case: Hospital
Products v USSC.

Who owes the duty? The relationship between director and company is established as giving rise to a fiduciary
duty, but only between the director and their company: Mills v Mills.

Under the general law both directors and senior executives are subject to fiduciary
obligations: Drysdayle. However, under the CA directors and officers are subject to the
duties.
77
 INFORMATION FOR NOTE USER:
Need consider whether the person is actually a director  2. What are Directors and
Officers and work through the sections that you need.

This section (8. Directors Duties) is the beginning point of ALL directors duties, so there
is no need to go through who is a director/officer for each of the duties you are
considering  proceed directly to specific duty requirements.

Duty to Act Bona Fide in the Best Interest of the Company

Issue Has [director] breached a duty to [company] in [exercising powers of management to
issue shares]?
Duty owed Directors are under a duty to act bona fide (in good faith) in the best interest of the
company as a whole: ASIC v Whitlam. While the courts are reluctant to review business
judgements of directors and substitute their own judgements on merits unless required by
statute: Harlowe’s Nomines Pty Ltd v Woodside (Lakes Entrance) Oil Co NL, they will
interfere when a director fails to act bona fide in the best interests of the company.

Duties are owed under the general law and the Corporations Act.

Here, [plaintiff] would argue that the [decision] of [director] was not in the best interest of
[company] as a whole.

Who is the duty owed Generally, the duty will be owed to the members as a collective whole (not a minority)
to? that should be considered by directors: Kinsela v Russell Kinsela.

IF company is solvent
Here, [director] would owe the duty to the members as a collective group or
whole, as [company] is solvent and has no real risk of insolvency - does not
include the interests of the company as a commercial entity (Ngurli v McCann).

IF company is insolvent
Here, [director] would be more interested in the interest of the creditors as
[company] is insolvent or there a real risk of insolvency: Kinsela v Russell
Kinsela. This does not mean that the directors owe a separate duty to creditors:
Spies v The Queen.

Generally there will be no duty owed to individual shareholders Percival v Wright. The
director needs to have been in direct and close contact with the individual member so that
the director caused the member to act in a certain way which turned out to be detrimental
to them: Peskin v Anderson.

IF company retains a family nature

Here, the facts are similar to Coleman v Myers, where a fiduciary relationship
arose to the individual because of the family character of the company, position of
directors in the family and company, a high degree of inside knowledge and the
way the shareholders were convinced to sell. Our situation is similar in that
[reasons] and therefore [director] may owe [individual] a fiduciary duty.

IF only 2 shareholders
Here, the facts are similar to Brunninghausen v Glavanics, where a fiduciary
78
 arose to the individual. In that case there were only 2 shareholders (both were
directors also), and B convinced G to sell their shares and resign as director so
that B could act on an offer of sale (unknown to G). An individual fiduciary duty
was found because G was the company, aside from B, and G relied on B for
information about the company. Our situation is similar in that [reasons] and
therefore [director] may owe [individual] a fiduciary duty.

Kinsela v Russell  Coy (funeral director’s business) in financially precarious position

Kinsela  Coy was insolvent, but directors not sure of that
 Entered into lease for premises it owned and ran business out of for 3 years w possible
extension for 3 years and an option to purchase
 Lessees were Mr and Mrs Kinsela – directors of coy
 Lease approved by shareholders who were all Kinsela family members
Held by Street CJ
 The lease was voidable at the instance of the coy
 Director’s duties to coy included not prejudicing creditor’s interests when coy is
nearing insolvency
 Liquidator was able to request that lease be avoided

Has the duty been It is necessary to consider both primary subjective test, and the objective standard which
breached? has been applied in some situations.

(i) Subjective Test

Regard must be had to the specific case law, but generally the test of whether the duty to
act bona fide in the best interest of the company is a subjective duty of honesty or good
faith: Whitehouse v Carlton Hotel.

May need to consider:

 If failed subjectively to give proper consideration to the company’s interest –
breach of subjective duty: Whitehouse v Carlton Hotel.
 Directors assume companies interest corresponds with their own and fails to
consider company’s interests: Walker v Wimborne
 Payment to employees when employment continues is not usually a breach as
industrial relations may be improved: Parke v Daily News Ltd.

(ii) Objective Standard

Some cases have placed an objective standard qualification on the subjective test. This is
called the ‘commercial benefit’ test:

‘Whether an honest and intelligent person in the position of [director] of [company

concerned] could have reasonably believed in all circumstances that the transaction was
for the commercial benefit of [company]’: Charterbridge Corp Ltd v Lloyd’s Bank Ltd;
Farrow Finance Co Ltd (in Liq) v Farrow Properties Pty Ltd (in Liq).

IF Breach
There will be a breach of this standard where [director] considers the company interest but
expends [company’s] money irrationally (referred to as the honest lunatic director).

There will also be a breach when the director acts in a way that no reasonable director
would have considered to be in the best interests of the company: ASIC v Adler.

IF no Breach
There will not be a breach of this standard even if [director] subjectively failed to consider
[company’s] interest, if objectively it was for the commercial benefit of [company]. Here
this is applicable as [director] [acts done].

Therefore, on balance it would seem that there [is/is not] a breach by [director] to act bona
fide in the best interests of [company].
79
 NB: directors are presumed to have acted in good faith and in the best interest of their
company and those persons alleging a breach of duty bear the onus of proving that this is
in fact, not the case.

Remedies If there is a breach, [directors] action is voidable at the instance of [company].

Other remedies may be available to members including:

 Statutory Derivative Action: s236 CA
 Injunction: s1324 CA.
 Oppression (individual shareholder right to pursue): s232 CA.

Breach under the [Director] may also be liable under a breach of s181(1)(a) CA, which mirrors the general
Corporations Act law above, and requires directors to act in good faith in the best interest of the
corporation, and has no effect on the equitable duties: s185 CA.

Section 181(1)(a) mirrors the general law or equitable duty – everything is the same.

The section is a civil penalty provision, so only ASIC can enforce it: s1317E(1)(a) CA.
The court may:
 Make a declaration of contravention: s1317F CA.
 Impose a pecuniary Penalty: s1317G CA
 Disqualify [director] from bearing office:
 Make a compensation order, for any loss or damage resulting from the breach:
s1317H CA.

IF action is reckless or intentionally dishonest

Here, [director] has acted recklessly or intentionally dishonest, which would also make
them criminally liable for their actions: s184(1) CA. However, ASIC will address civil
penalty provisions before considering criminal action.

Therefore, [director] [may/may not] be liable under the Corporations Act for the breach if
ASIC choose to begin proceedings.

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 Duties to exercise powers for a proper purpose
Issue Did [director] exercise their power for a proper purpose?
Duty Owed As director [director] must exercise their powers for a proper purpose, not for a purpose
foreign to the power or to obtain some private advantage: Mills v Mills.

The onus of establishing that there was an improper exercise of power rests on [plaintiff]
as they are asserting misuse: Ascot Investments v Harper.

Duties are owed under the general law and under the Corporations Act.

Here, [director] has exercised their power for [purpose]. In considering this purpose an
objective test is used involving 2 steps: Howard Smith v Ampol Petroleum.
1. What are the purposes for which the power may be exercised?
2. Why was it exercised by the directors?

What are the The court will examine the purposes for which the power may be exercised. This is a
purposes for which question of law.
the power may be
exercised? The court will need to ascertain the nature of the power and the purpose for which it was
conferred: Howard Smith.
 This is a question of law for the courts
 Must be exercised in the proper interests of the members generally

There is no set test as to what is a proper and improper purpose, however, the court will
try to identify some objective purpose to the power and will be guided by the constitution
of the company: Whitehouse v Carlton Hotel.

The board of directors has an unfettered power to issue shares: s124(1)(a) RR. Unless
there is a restriction on this power in the constitution, the board and [director] are
generally free to issues shares; however the issuing of shares is not always done for a
proper purpose.

IF purpose to raise capital required by company

Here, [director] would argue that the purpose was to raise capital required by the
company. It has been held that this is a proper purpose, but it would be too
narrow a purpose to be the only reason to issue shares: Howard Smith

IF purpose to secure the financial security of company

Here, [director] would argue that the purpose was to secure the financial security
of the company. It has been held that this is a proper purpose: Harlowe’s
Nominees.
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 IF purpose a good commercial opportunity to issue shares
Here, [director] would argue that the purpose was a good commercial opportunity
existed by issuing shares. It has been held that this is a proper purpose: Pine Vale
Investments v McDonnell.

IF power manipulates voting power in favour of one shareholder or group

Here, [plaintiff] would be arguing that the purpose was to manipulate the voting
power in favour of one shareholder or a group of shareholders. This has been
held to be an improper power: Whitehouse v Carlton Hotel.

IF power destroys a majority interest

Here, [plaintiff] would be arguing that the purpose was to destroy a majority
voting power. If the directors are motivated by a desire to relegate a majority
interest into a minority power by issuing more shares it will be held to be an
improper power: Ngurli v McCann and Howard Smith.

Therefore on balance, the purpose of the power exercised [may/may not] have been done
for a proper purpose.

Why was the power The reason the power was exercised is an question of fact, tested objectively: Howard
exercised? Smith. It is the perception of the directors, rather than the objective commercial
justification which will determine the purpose: Re Southern Resources.

Here, [director] would argue that the power was exercised to [raise capital/secure financial
security/good commercial opportunity], however, [plaintiff] would argue that the purpose
was to [destroy a majority interest/manipulate voting power].

IF more than one purpose

Where there is more than one purpose the court will not intervene unless it is established
that [directors] motivating purpose is improper. The ‘but for’ test is used: Whitehouse v
Carlton Hotel. The test is ‘but for’ the presence of the improper purpose, the power
would not have been exercised. Here, [directors] would argue that the motivating purpose
was [reason].
 Regardless of whether the improper purpose is dominant or but one of a number
of significantly contributing causes, the issue of shares is invalidated if
improper purpose is causative in the sense that, but for its presence, the power
would not have been exercised (Whitehouse v Carlton Hotels @ 426-27)

If the need for shares is finance based, the court will consider a variety of factors.

IF defending hostile takeover bid

Here, similar to Howard Smith, they sought to increase share numbers to defend a
takeover bid. While it was conceded that capital was needed, no other means was sought,
and it was held that, but for, the takeover, the share issue would not have happened. This
is not considered an improper purpose if designed to maximise the value of members’
shares or advance the commercial interests of the company.

IF no other sources of finance have been sought

Here, [directors] have not pursued any other means of raising capital, such as loan capital
or selling assets. This would indicate that but for the improper purpose the shares would
not have been issued: Howard Smith.

IF other sources of capital pursed

Here, [directors] have pursued other means of raising capital, such as loan capital or

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 selling assets. This evidences that the financial factor was main reason behind the share
issue, and the issuing would have occurred even without the effects on the majority voting
control: Howard Smith.

IF amount of share issue greater than 15%

Here, the share issue is more than 15% which requires a resolution of support from
members in the general meeting: ASX Listing Rules. Therefore, if the majority members
were in danger of losing their majority, they would vote against such a proposal.

IF Directors support the Majority

Here, it will be relevant that the directors support the majority voting power. This shows
an intention to carry out the issuing despite the affect on the majority power.

Howard Smith Ltd v  A takeover of R W Mill (Holdings) Ltd, whose major shareholders (Ampol and
Ampol Petroleum Ltd Bulkships) owned 55% of the capital
 The 2 independent shareholders pooled their votes to make a joint takeover bid
 Howard Smith made a higher takeover bid and to ensure it succeed Miller issued
sufficient shares to reduce Ampol-Bulkships majority
Held
 Miller had breached their duty and the share issued to Howard Smith was invalidated
 Directors were motivated to reduce the combined majority shareholding, and this was
invalid.

Whitehouse v Carlton  Carlton Hotel was a family company controlled by the father who was its governing
Hotel Pty Ltd director, and had the sole power to issue shares
 There were 3 classes of shares: A (the father held), B (his wife) and C (2 sons and 4
daughters), and only A class shares had voting rights while the father was alive.
 When the family divorced, the daughters sided with mother, and sons with father
 To prevent losing control, the father issued B class shares to his son, and some time
later sought to annul the allotment
Held
 The allotment was invalid as a result of the governing director’s breach of duty
 Father was motivated by purely selfish considerations, in the hope that after his death
the company would be controlled by those who he favoured
 Interestingly the decision to invalidate the share issued was advantageous to the
director who issued them and changed his mind

Hannes v MJH Pty  The motivating purpose and the real reason for the governing director’s actions to
Ltd issue shares to himself and enter into a serve agreement was self-interest and desire to
derive additional personal benefits
 These motives overshadowed the directors duty to act in the interests of the company
and to act for a proper purpose

Kokotovich  An issue of shares by a governing director to his children was invalid even though one
Constructions Pty Ltd of the purposes of the issue was to raise capital
v Wallington  Concluded that but for the governing directors improper purpose of manipulating
voting power, the share issue would not have been made

Remedies If there is a breach, [directors] action is voidable at the instance of [company].

Damages/Compensation; Account of profits; Rescission of contract;

Return of Property; and Constructive trust

Other remedies may be available to members including:

 Statutory Derivative Action: s236 CA
 Injunction: s1324 CA.
 Oppression (individual shareholder right to pursue): s232 CA.
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  Disqualifying the person from managing companies for a specified period of time;
 An order to pay a penalty of up to $200,000, and/orAn order to pay compensation
to the company for any loss or damage it has incurred due to the breach of the
duty.

Duty under [Director] may also be liable under a breach of s181(1)(b) CA, which mirrors the general
Corporations Act law above, and requires directors to exercise their power for a proper purpose and has no
effect on the equitable duties: s185 CA.

The section is a civil penalty provision, so only ASIC can enforce it: s1317E(1)(a) CA.
The court may:
 Make a declaration of contravention: s1317F CA.
 Impose a pecuniary Penalty: s1317G CA
 Disqualify [director] from bearing office:
 Make a compensation order, for any loss or damage resulting from the breach:
s1317H CA.

IF action is reckless or intentionally dishonest

Here, [director] has acted recklessly or intentionally dishonest, which would also
make them criminally liable for their actions: s184(1) CA. However, ASIC will
address civil penalty provisions before considering criminal action.

Therefore, [director] [may/may not] be liable under the Corporations Act for the breach if
ASIC choose to begin proceedings.

Duty to Avoid Conflict of Interest

Issue Has [director] breach a duty to [company] to avoid a conflict of interest.

Principle and scope [Directors] duty is not to have an interest in a contract, trust or other transaction with a
company, unless the director makes full disclosure of the nature of the transaction to the
members of the company in general meeting, and they approve of it by ordinary
resolution: Aberdeen Railway Co v Blaikie Bros; Woolworth’s v Kelly.

The test of whether it is a breach is an objective test, generally tested by considering

whether a reasonable man, looking at the circumstances of the case could see a ‘real
sensible possibility of conflict’: Phipps v Boardman.

A breach may occur where the contract is direct or indirect.

 Direct vs indirect interests (SA v Clark)

o Director breaches duty whether the interest in the contract is direct or indirect
o Direct = where director contracts personally with the company
o Indirect = where director is director and shareholder of another company (SA v
Clark) or partner in partnership that contracts with the company (Aberdeen)

IF director contracts personally with company

Here, the breach would be a direct breach as [director] has contracted personally with
[company] and has obtained a direct benefit. [Director] may be liable unless full
disclosure has been given.

IF director is a shareholder as well and contracts with company

Here, the breach would be an indirect breach as [director] is also a shareholder, and
contracts with [company]: South Australia v Clarke. An indirect breach will still be
considered a breach of conflict. [Director] may be liable unless full disclosure has been
given.

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 IF director is a partner in a partnership which contracts with company
Here, the breach would be an indirect breach as [director] is a partner in a partnership
which is contracting with [company]: Aberdeen Railway Co v Blaikie Bros. An indirect
breach will still be considered a breach of conflict. [Director] may be liable unless full
disclosure has been given.

IF director receives a salary from the other company

Here, [director] receives a salary from the other company; however this in itself will be
insufficient to constitute a conflict: Baker v Palm Bay. There needs to be something
more than an ephemeral association and [director] being personally involved in both
transactions would suffice: QLD Mines v Hudson.

IF there is a real possibility of conflict

Here, [director] has dealings with [company], which is contracting with [contracting
company], which may result in an indirect benefit from the contract: QLD Mines v
Hudson. Whether this conflict is sufficient will depend on the extent of [directors]
interest. Generally the more involved [director] is the more likely there will be conflict:
ANZ v Bangadilly.

It is not necessary for conflict to cause either a loss to the company, or a profit to the
director for there to be a breach: Gemstone v Grasso. There are qualifications on the
strictness of the application of the conflict rules.

Qualifications on While [director] may have breached the duty to avoid conflict of interest, there are
strictness of qualifications which may lessen the general rules and permit [director] to have a
application conflicting interest, if [director] can show:
(a) They have been given authority by the company’s constitution to proceed with
involvement in the transactions
(b) There has been full disclosure

 Effect of s 194 (voting and completion of TX – directors of proprietary companies)

o Director of Pty ltd:
 Is permitted to vote
 Can retain benefits of TX and company cannot avoid it
provided that the director discloses nature and extent of interest in relation to
affairs of company at directors’ meeting.
o Legal effect is that:
 Lessens director’s fiduciary duty to a degree; but
 Must be strictly complied with if equitable duty is to be prevented
from operating (Guinness Plc v Saunders)
 Interested director can vote but still subject to a duty to vote in
interests of company as a whole (Aust Growth Resources v Van
Reesema)
 Disclosure of interest = no formal disclosure of facts to directors is
required where directors are wholly aware of facts and in
circumstances where relevant director’s interest is apparent
(Woolowrths v Kelly)
 So don’t need some dogmatic declaration of interest where
the director’s interest is apparent etc

(i) Full The precise requirements for full disclosure under the general law are unclear. It has been
Disclosure generally accepted that full disclosure and consent must be given to members at a general
meeting: Regal Hastings Ltd v Gulliver.

IF no disclosure
Here, [director] has failed to make any disclosure to the members in general meeting or
the board of directors. Therefore, [director] would likely be found to have breached their
duty of conflict of interest.
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 IF partial disclosure
Here, [director] has only disclosed part of the interest. This is unlikely to be sufficient
because it fails to give members all the information needed to identify risks and whether
the transaction is in the best interests of the company: Pilmer v Duke Group. Therefore,
[director] would likely be found to have breached their duty of conflict of interest.

IF full disclosure and no consent at General Meeting

Here, [director] has made full disclosure of their interest to members at a general meeting;
however, the members have not given their consent for the transaction to continue.
Therefore this is unlikely to be sufficient and [director] would likely be found to have
breached their duty of conflict of interest.

IF full disclosure and consent at General Meeting

Here, [director] has made full disclosure of their interest to members at a general meeting
and the members have consented for the transaction to continue. This is likely to be
sufficient disclosure and lessen [directors] duty: Furs Ltd v Tomkies.

IF disclosure only to Board of Directors

Here, [director] has made full disclosure of their interest only to the board of directors
who have given their consent. Unless there is a provision in the constitution allowing for
this disclosure, it is unlikely that this will be sufficient to attenuate [directors] duty:
Woolworths v Kelly.

Woolworths v Kelly  Provision in const

 Kelly chairman, board resolved that it would establish pension fund, under fund
entitled to $26 000 pa
 Board then resolved to increase K’s entitlements
 Change of control of Woolworths, new board wanted to reduce K’s entitlements
 Argued K made adequate disclosure even though no formal declaration of interests –
no need to, quite clear that K was interested in resolution to establish fund
Held – could rely on const & disclosure
 Samuels JA – no need for ritualistic disclosure, substance is important so if everyone
on the Board knew, that will be sufficient. no further information he could have given
them
 Kirby P (dissent) – focussed on fact there was no actual disclosure (formalities)

(ii) Authority by Here, [director] would argue that they cannot be disqualified because they have acted in
Company’s accord with clause # of [company’s] constitution.
Constitution
A typical provision would be similar to:
Where a director has an interest in a contract with the company:
(a) The contract cannot be voided
(b) The director is not disqualified from office
(c) The director is not liable to account for any profit realised
(d) The director can be accounted for in quorum (minimum number of people needed
to start the meeting) at any meeting where the contract was considered
Providing the director makes full disclosure of the interest at the first relevant meeting of
the board of directors.

[Director] is still able to vote on matters relating to the contract with [contracting
company], however, [director] must still meet the fiduciary duties to act honestly for the
company as a whole etc: Australian Growth Resources Corp Pty Ltd v Van Reesema.

IF director has complied with requirements (inc. disclosure as above)

Here, [director] would argue that they have fully complied with the requirements in the
constitution as they have [set out things they’ve done], which is sufficient to less or
attenuate the duty to a degree: Guinness Plc v Saunders.
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 IF director has complied with some requirements
Here, [director] would argue that they have complied with the requirements in the
constitution as they have [set out things they’ve done]. However, [director] has failed to
[meet requirement #], and therefore this will not lessen or attenuate the duty as the
provisions need to be strictly complied with to prevent the equitable principle from
operating: Guinness Plc v Saunders.

IF Board of Directors already aware of the interest

Here, the board of directors were already aware of the interest of [director] with regard to
the contract with [contracting company]. In this case there does not need to be explicit
disclosure of the interest: Woolworths v Kelly.

Duty under In addition to the common law duty, [director] may also be liable under s191(1) CA, for
Corporations Act failing to give notice of a material personal interest in a matter which relates to the affairs
of [company].

At a meeting of directors, [director] must give details of:

(a) The nature and extent of their personal interest
(b) The relation of the interest to the affairs of the company

(i) Material The interest must involve a relationship of some real substance, to the contract or some
Personal Interest in the arrangement proposed so that it has the capacity to influence the vote of the director upon
matter the decision to be made: McGellin v Mount King Mining NL. It does not matter whether
the interest is direct, indirect or continuing.

Here, the interest is [state interest] which clearly [is/is not] a relationship of real substance
which has the power to influence the voting.

(ii) Affairs of the Affairs of the company are defined in s53 CA, which provides an extensive definition.
company
Any dealings by a body: s53(a)
This category covers:
(a) Promotion
(b) Formation
(c) Membership
(d) Control, business
(e) Trading
(f) Transactions
(g) Dealings, property
(h) Liabilities
(i) Profits
(j) Receipts
(k) Losses
(l) Outgoings
(m) Expenditure
of the body corporate.

Where the body is a trustee, matters concerned with the identification and rights of
any beneficiaries under the trust: s53(b)
This category applies without limiting the generality of this sub-section and involves any
rights or payments made under the trust that any beneficiary has received or is entitled to
receive.

The internal management and proceedings of the body: s53(c)

Any act done by or on behalf of or in relation to the body corporate, its business or

87
 property when: s53(d);
(a) a receiver is in possession of or has control over the body's property;
(b) the body is under administration;
(c) a deed of company arrangement executed by the body corporate has not yet
terminated;
(d) a compromise or arrangement between the body and any other person or persons
is being administered;
(e) the body is being wound up

Ownership of a body's securities: s53(e)

This includes:
(a) Shares
(b) Debentures
(c) Interests in a managed investment scheme.

Powers over voting rights and the disposal of shares in the body corporate: s53(f)
This includes the power to exercise or control the exercise of voting rights attached to the
shares or their disposal.

Matters concerned with the ascertainment of persons financially interested in the

body's success or failure, or able to control or materially influence its policy: s53(g)
There appears to be no distinction in this category between people who influence directly
and those who do so indirectly. Neither is there any distinction between people who
influence from within the company structure (such as directors and shareholders) and
those from without. As the category is very wide, it will clearly be a question of fact as to
whether or not a person falls into it.

Dealings in the body's securities: s53(h)

The circumstances under which a person acquires or disposes (or becomes entitled so to
do) of shares in, debentures of or interests in a managed investment scheme made
available by the body. As with sec 53(e) and (f), information acquired under this clause is
important in determining who holds and deals with the securities of the body corporate.

Schemes for the sale of interests in a managed investment scheme: s53(i).

Matters arising out of an audit or relating to an auditor's report: s53(j)

(iii) Exemptions [Director] will be exempt from giving notice of an interest is it falls within one of the
from notice categories of s191(2) CA. These categories include:

IF information about the interest: s191(2)(a)(i)-(viii) CA.

If the interest:
i. arises because the director is a member of the company
ii. arises in relation to the director's remuneration as a director of the
company; or
iii. relates to a contract the company is proposing to enter subject to approval
by the members
iv. arises because the director is a guarantor, has given an indemnity or
security for all or part of a loan to the company; or
v. arises because the director has a right of subrogation to matters in (iv); or
vi. relates to a contract that insures, or would insure, the director against
liabilities
vii. relates to any payment by the company or a related body corporate in
respect of an indemnity permitted under section 199A or any contract
relating to such an indemnity; or
viii. is in a contract, or proposed contract, with, or for the benefit of, or on
behalf of, a related body corporate and arises merely because the director
is a director of the related body corporate;

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 [Director] will not be required to give notice.

IF the company is Proprietary

Here, [company] is a proprietary company and the other directors are aware of the nature
and extent of the interest and its relation to the affairs of the company (191(3) CA)
therefore, notice will not need to be given: s191(2)(b) CA. And director can vote,
maintain benefits and company can’t avoid transaction: 191(4) CA.

IF certain conditions are satisfied: s191(2)(c)(i)-(iii) CA.

If [director] has already given notice of the interest under s191(1) CA, and notice also
given to any new directors, and the nature or extent of the interest has not materially
changed above that disclosed, they will be exempt from the need to give notice of the
interest.

IF director has given standing notice under s192 CA

Here, [director] has given a standing notice of the nature and extent of the interest under
section 192 and the notice is still effective in relation to the interest. [Director] will be
exempt from giving additional notice: s191(2)(d) CA.

(iv) Has notice Notice:

been given o must give details of; and
 the nature and extent of the interest; and
 the relation of the interest to the affairs of the company; and
o be given at a directors’ meeting as soon as practicable after the director becomes
aware of their interest in the matter.
o The details must be recorded in the minutes of the meeting.

IF notice given
Here, [director] has provided the board of directors with the required notice at the first
available directors meeting. The notice included the required information. Therefore,
[director] may not be liable for breach of duty.

IF notice given but incomplete

Here, [director] has given some notice to the board of directors, but failed to provide all
the required information. It is likely that this is insufficient and [director] would be liable
for breach of duty.

IF no notice given
Here, [director] has failed to give notice to the board of directors regarding their interest
in [company]. Therefore, [director] may be liable for a breach of their duty.

Remedies A breach of the statutory requirements does not derogate from the general law or the
company’s constitution: s193 CA.

 Avoidance or recession of the K at the option of the company (Woolies v Kelly)

 Account of profits - Furs Limited v Tomkies (1936) 54 CLR 583; Regal (Hastings) Ltd
v Gulliver
 Equitable compensation - Tavistock Holdings Pty Ltd v Saulsman (1990) 3 ACSR 502;
 Constructive trust - Cook v Deeks [1916] 1 AC 554;
 Equitable Injunction

IF Breach of Corporations Act.

Here, [director] has breached their duty by failing to give full and proper disclosure of
their interest. The contravention of s191 CA, does not affect the validity of any
transaction, act or agreement: s191(4) CA.

Section 191(1A) CA, imposes strict liability on [director], who may face a maximum
penalty of a fine of 10 penalty units ($1,100) or 3 months imprisonment, or both: Sch 3
89
 CA.

Duty of Due Care and Diligence

Issue Has [director] breached the duty of due care and diligence to [company] regarding
conduct surrounding [takeover by company]?
General Law Duty Here, [director] is employed by [company] in the capacity of [director/non-executive
director]. A duty of carer can arise: Daniels v AWA Ltd.

IF non-executive director
Here, [director] is a non-executive director and is also subject to the duty of care and
diligence. The basis for the duty arises through equitable obligations, and also under the
tort of negligence: Permanent Building Society (in liq) v Wheeler.

IF Executive Director
Here, [director] is an executive director. Generally the duty of care arises through
[directors] employment contract; however, a duty also arises through equitable obligations
and under the tort of negligence.

General Principles [Director] is under a duty to take reasonable care in the performance of their office. The
test is an objective standard judged by reference to what a reasonable director in the same
position would have done, and also any skills [director] had at the time of taking office:
Daniels v AWA Ltd.

‘Same position’ will vary depending on the type of company, the size, nature of business
and enterprise, and board composition.

There is no clear distinction between the obligations of Executive and non-executive

directors, as each situation must be considered individually, as more or less may be
required of non-executive directors, depending on the circumstances: Daniels v
Anderson.

[Director] must take reasonable steps to place themselves in a position to guide and
monitor the management of the company. More particularly:
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  Directors must familiarise themselves with the company’s business when they join the
board;
 Directors need not have equal knowledge and experience, but they are under a
continuing obligation to make inquiries and keep themselves informed about the
company’s business operations;
 Directors must be familiar with the company’s financial position;
 Directors appointed because they have special skills or experience in an aspect of the
business of the company must pay attention to other aspects of the business which
might reasonably be expected to attract inquiry, even if this is outside their area of
expertise;
 Directors must be allowed to make business judgments and take commercial risks, but
can’t safely proceed on the basis that ignorance and failure to inquire are protection
against liability for negligence;
 Directors can’t shut their eyes to corporate misconduct and then claim they didn’t see
the misconduct and didn’t have a duty to look.

IF director has a special skill

Here, [director] has specialist skills, [lawyer/accountant etc]. Therefore [director] will be
held to a higher standard of care for decisions within the scope of their expertise: Gold
Ribbon (Accountants) Pty Ltd v Sheers. In ASIC v Rich the qualifications of a chartered
accountant together with broad financial experience was relevant to finding a higher level
of duty.

IF director argues that subjective considerations should be made

Here, [director] is arguing that the fact they were not qualified should be considered. In
Gamble v Hoffman, the court held that subjective characteristics did not affect the
subjective standard.

IF director absent from board meetings

Here, [director] has been absent from board meetings, which may be argued as a breach of
directors duty to pay proper attention to the affairs of [company]. In Vrisakis v ASIC it
was held that a director is expected to attend all meetings unless exceptional
circumstances, such as illness or absence from the state. The recent trend of high
accountability would mean that [directors] absence without good reason would likely be a
breach of duty.

IF director was not paying attention but relying on other directors

Here, [director] would be seeking to argue that his function only required him to attend
the meetings and be concerned about things in his field. However, in Re Property Force
Consultants the court held that the fact a director is appointed for specialised skill does
not relieve him of his duty to pay attention to the company’s affairs which might be
reasonably expected to attract inquiry.

CBA v Friedrich A director is obliged to inform himself as to the financial affairs of the company and to
the extent necessary to form each year, the opinion of solvency required for the directors
under s259(4) CA, and this obligation cannot be avoided by claiming that they never read
the financial statements

Daniels v Anderson  AWA made losses on foreign exchange transactions

 Deals were not adequately supervised – there weren’t adequate internal controls to
enable deals to be monitored
 Director able to conceal losses he was making on deals
 Audits took place – Daniels was the audit partner
 Real situation did not come to light notwithstanding audits – Daniels was aware of
internal control defects, mentioned to CEO but warnings never taken up
 Sued auditors for negligence – for failing to bring defects to board’s attention
 Auditors argued company & directors had been negligent

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 Held
 auditors had been negligent, so had company
 Executive directors were held negligent, but non-executive directors were not – had
requested information but full details were concealed from them

Gold Ribbon  Director with special skills didn’t use them for the benefit of the coy
(Accountants) Pty Ltd  Non-executive director had extensive commercial lending experience
v Sheers  Company he sat on board of was making unsecured loans to accountant’s service coy
at very high interest rates
 Directors set up operation and administration of loan scheme which was very high
risk, the administrator in change inexperienced and incapable of filling role, and
standard due diligence procedures not carried out on borrowers
Held QCA
 director had breached his duty of care:
 Didn’t involve himself in lending scheme and ensure it worked properly when he had
special skills that made him capable
 However held that his breach of duty did not cause the loss as the other directors were
also involved in scheme

General law remedies Here, [director] has breached the common law duty of care and may be liable for
equitable compensation: AWA Ltd v Daniels.

Breach under Section 180(1) contains the statutory duty of care and diligence. The duty mirrors the
Corporations Act general law: Re HIH Insurance Ltd; ASIC v Adler; Daniels v Anderson.

Examples of a breach of this duty include:

 Where the director allowed the company to enter into transactions that produce no
benefits for it: ASIC v Adler (2002) (on appeal Adler v ASIC (2003).
 Where the director fails to take part in active supervision of the company’s
management, or fails to supervise the company’s accounts: Daniels v Anderson.

Defences to Breach Here, [director] may be able to raise a defence to the duty. [Director] would argue that the
decision was a business judgement. A director or other officer who makes a business
judgement is taken to meet the obligations of the duty of due care and diligence under the
common law, equity and statute if:
(a) The judgement was made in good faith and for a proper purpose: s180(2)(a) CA.
(b) They do not have a material personal interest in the subject matter of the
judgement: s180(2)(b) CA.
(c) They inform themselves about the subject matter of the judgement to the extent
they reasonably believe to be appropriate: s180(2)(c) CA.
(d) They rationally believe that the judgement is in the best interests of the company:
s180(2)(d) CA.
A business judgement is any decision to take or not to take action in respect of a matter
relevant to the business operations of the company: s180(3) CA.

There is next to no case law interpreting the decision, and it has not been used as a
successful defence.

IF director takes no interest in board of directors

Here, [director] may argue that as they took no part in the decisions of the board, and were
not allocated specific tasks, then they can raise the defence, as they meet the requirements.
However, in Gold Ribbon (Accountants) Pty Ltd v Sheers, it was held that such a
situation does not give rise to the defence as it is outside its scope.

Statutory remedies Section 180(1) and (2) are civil penalty provision: s1317E(1) CA.
Therefore the court may:
 Make a declaration of contravention, then

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  Impose a pecuniary penalty: s1317G CA.
 Disqualify director from bearing office: s206C CA
 Make a compensation order: s1317H CA

IF Plaintiff is a shareholder
Here, even if there is a breach of duty it does not appear that [plaintiff] would
have standing to bring an action

Duty to retain discretionary powers

Issue Has [director] breached their duty to retain discretionary powers.
Duty Directors have a duty to retain their discretionary powers. Here, [director] [has/has not]
breached this duty by entering an agreement with [outsider] that they will vote in a certain
way at future board meetings.

IF Breach duty
Here, the duty has been breached. The result is that the contract is ineffective, even if
[directors] are not otherwise in breach of their duties, such as acting for a proper purpose.

IF enter into agreement in the best interest of company

Here, [director] has entered into an agreement to vote in a particular way. However this
will not be a breach where [director] has properly considered the act and it is in the best
interests of [company] at the time of the agreement: Thorby v Goldberg.

IF nominee director appointed

Here, [director] has nominated [nominee director] to represent their interests and act on
their instructions. Here, [nominee director’s] power may be fettered where the
constitution allows the appointor to remove the nominee

Consequences If there is a breach, the contract will be ineffective.

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 Directors relief from liability for breach of duty
Ratification at Generally, the duties are owed by directors to the company. The company in general
general law meeting may condone a breach of duty by directors either prospectively or retrospectively
where there is full and frank disclosure of all material facts to the company in general
meeting: Regal (Hastings) Ltd v Gulliver

Limitations on There can be no ratification where:

ratification  director’s act is illegal;
 director’s act amounts to a fraud by majority on minority: eg Cook v Deeks
 personal rights: Residues Treatment and Trading Co Ltd & Anor v Southern
Resources Ltd & Ors
 Intrusion of creditors’ interests: Kinsela v Russell Kinsela

Ratification will not have properly occurred when both majority of directors &
shareholders are involved in the breach: Hannes v MJH

Under the (i) Where honest and ought fairly be excused

Corporations Act Where honest and ought fairly be excused: s1317S
 only for civil penalty provisions not offences: s1317S(1)
 court has discretion to relieve person if it is believed that person acted honestly
and having regard to all the circumstances they should be excused: s1317S(2)
o can excuse wholly or partly: s1317(2)
o for contravention of s588G, consider whether person took any steps
toward appointing administrator: s1317(3)

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 o person has to apply to court: s1317S(4)
o court can grant relief: s1317S(5)

(ii) General Discretion to Grant Relief

General discretion to grant relief: s1318(1)
 applies to any civil proceeding
 court must be satisfied they acted honestly and in all the circumstances ought
fairly be excused
 can be relieved in whole or in part
 can apply to court for relief in anticipation of proceedings: s1318(2)
Company cannot restrict liability of directors in constitution or by contract
 cannot exempt director from liability to the company: s199A(1)
 cannot give indemnity to director for liability to the coy or liability under s1317G,
H or HA: s199A(2)
 cannot give indemnity for legal costs arising out of defending suits in s199A(2):
s199A(3)
Company cannot pay insurance premiums
 coy cannot pay or agree to pay insurance premium for insurance against liability
from wilful breach of duty or breach of ss182, 183: 199B(1)

Anything that purports to indemnify or exempt or insure in violation of s199A and s199B
is void: s199C(2)

Ratification, relief, indemnity and insurance

Introduction This topic includes situations in which directors may be able to dodge some or all of the
consequences of their conduct that was in breach of duty

Protection from  The source of the power to grant the protection is the general principle that a
liability beneficiary can indemnify or excuse a fiduciary
 These are only way of protecting directors from liability to the company
 Or others where those parties would have a fiduciary or equitable cause of
 action against the directors.
 Protection from ASIC: requires to prove that one of the elements of the civil penalty
provision has not been made out, or an explicit statutory defence will need to be made
out.
 Only possible exception to this is ratification which may protect a director from ASIC.

Pre breach  Number of things a director might try before the breach occurs:
o Get authority from the members before the act which is in breach of a duty is
done
 The act of director can be seen as being done based on an exercise of
the shareholders judgment
 Winthrop Investments v Winns: held that if this was to occur, the same
procedure would have to be followed as if the director was seeking
ratification by the members of a breach that already occurred.
o Ensure that either indemnity or insurance is in place to cover any breach that

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 may occur.
 There are statutory limits to the extent to which indemnity or
insurance will be available: s199A and s198B.

Post breach After a breach has occurred, there are basically four things that a director can do:
1. Have the breach ratified by the members;
2. Apply to the court for relief;
3. Invoke an indemnity agreement with the members; &
4. Claim on an insurance policy.

A – ratification  Where the members of the company (shareholders) explicitly condone certain
behaviour by a director passing a resolution in a general meeting.
 This can prevent the director from being sued both by company and by minority
shareholders for breach of either equitable of fiduciary duties.
o Cannot be done if interferes with the rights of a minority shareholders.
o Requirements given in Winthrop investments v Winns:
 Need complete disclosure to the shareholders prior to meeting in
which breach is to be ratified;
 Disclosure needs to cover the nature of the breach--
 needs to state that the directors are seeking absolution &
 explicitly ask the meeting to authorise the breach &
 Waive consequences of breach.

Exceptions & limitation

Misappropriation of  Cook v Deeks – held if the directors’ act involves the misappropriation of company
company property or property, it will not be possible for the general meeting to ratify the breach of duty
rights  As it is the company’s property, all of the shareholders as individuals are potentially
damaged by the misappropriation of that property because of the ownership interests
that they have in the company
 Thus, it is not a case where the majority shareholders can dictate what is permitted
Fraud on minority  Two situations this may occur:
o Alteration of the constitution covered by principles from Gambotto;
o Explicit ratification of a breach of duty by the general meeting.
 The ratification will not be valid if three things are satisfied:
o The directors are the wrongdoers.
o The directors are in control of the general meeting.
o The directors in the general meeting ratify the breach.
 If this occurs the ratification = fraud = invalid.
 Daniels v Daniels: held that the transaction ratified in the general meeting though their
voting power was invalid. The court suggested it would not be possible for there to be
ratification of a breach of skill, care and diligence where the directors made some
personal gain.
 Hannes v MJH Pty Ltd: held the major purpose behind all this was self-interest
(Hannes with another director issued shares to Hannes, large termination payment &
superannuation fund for Hannes). Hannes knew relationship with shareholders was
deteriorating and was providing himself with additional financial benefits. As Hanens
was majority shareholder he could not ratify his own breach. If ratification was to
occur, it could only occur if interested shareholders did not take part in vote.
 Grey Eisdale TImms v Combined Auctions: managing director was going to obtain a
controlling interest in the company by expropriating the shares of the non- pawnbroker
shareholders. It was held that even if the director is not the majority shareholder, if the
General Meeting acts for the same improper purpose, it can result in fraud on the
minority.

Disregard of creditors Kinsela v Russell Kinsela: the court held that because the wrong is not done to the
when company shareholders, the shareholders will be unable to exonerate the directors for their actions.
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 verging on insolvency
Defeating a members  A share holder may hold personal rights against the directors.
personal right  To be distinguished from the situation in which the rights of the shareholder are
 merely derivative from the rights of the company.
 Wrong is against the shareholder personally = likely to be a personal action that can be
brought by the shareholder against the director who has done the wrong
 Wrong against company = an individual shareholder who wants to pursue the director
will to do so through a derivative action on behalf of the company.
 Ratification of a violation of a personal right will not be valid: Residues Treatment
and trading v Southern Resources.
o On appeal, it was held that shareholders have a personal right
against directors who are improperly seeking to dilute their voting rights in the
company.
o Furthermore, it would not be possible for the breach to be ratified to defeat the
personal action.
 Similarly, cases such as Colarc v Donarc, Miller v Miller and Grey Eisdale Timms,
held that ratification would not be possible for the infringement of a personal right.

Statutory Limits  S232-234: relevant sections dealing with oppressive conduct.

o Grey Eisdale Timms: indicated oppressive conduct cannot be ratified to avoid
the consequences.
o Unclear ratification of a breach of statutory duty will be effective in warding
of ASIC.
o Pascoe Ltd (in liq) v Lucas: suggested that it would be effective, providing it
would be possible for a breach of the associated equitable or fiduciary duty to
be ratified. Even if ratification would not be effective on a legal technicality, it
would be possible for The Court to exercise its discretion under s1317S to
relieve a person from liability for his/her actions.

B – Relief by the  s1317S: raises the possibility that the Ct can excuse a director for breach of any civil
court penalty provision.
 If a director can convince the Ct they have acted honestly, in the case it would be fair
to excuse them, the Ct can relieve the person of liability in whole or part for civil
penalty provision.
 S1318: provides the same discretion to the Court where there are civil proceedings
brought against the director for negligence, default, breach of trust or breach of duty.
o Thus discretion of the Court can be exercised where the allegation pertains to
breach of a General Law duty as well as for breach of a statutory duty.

C – indemnity by the  Exemption: where the liability to the company has already accrued because of an act
company done by the director.
 Indemnity: the act giving rise to the liability has not yet been done.
 In general, a company is not permitted to indemnify a director for breaches against the
company.
 s199A(a): prohibits exemptions
 s199A(2):prohibits indemnity
 s199A(3): prohibits indemnity in defending legal proceedings based on a breach of
duty.
D – insurance  In general, the company cannot pay the premium for insurance covering a wilful
breach of duty or any breach of s182 (improper use of position) or s183 (improper use
of information).
 s199B: a company must not pay a premium to insure an officer or auditor of the
company against liability involving conduct where there has been:
o A wilful breach of duty to the company; or
o A breach of Corporations Act 2001 (Cth) s182 or s183.
 Insuring against legal costs is not prohibited.

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 Members Remedies
Introduction  Members Remedies: where a wrong has been done to the company, it is the company
who will be the proper plaintiff.
 The internal management rule states that an individual member cannot bring an action
if the act being complained of has been or is capable of having its validity confirmed
by the majority of shareholders.
 Foss v Harbottle (1843): The power to bring legal action on behalf of the company
generally resides with the board of directors.
 John Shaw and Sons (Salford) v Shaw [1935]: A “derivative action” is where the
member is suing on behalf of the company

Statutory derivative  s236(3): abolishes the common law derivative action.

action  Karam v ANZ Banking Group Ltd, Chapman v E-Sports Club Worldwide Ltd and
Advent Investors Pty Ltd v Goldhirsch: An action commenced before that date is likely
to be able to continue.
 Cadwallader v Bajco (2001): The statutory derivative action allows eligible people to
commence proceedings on behalf of a company where the company is unwilling or
unable to do so.

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 Leave  s236(1)(a): Application for leave to bring or intervene in proceedings can be made by
current or former members of the company, and current or former officers of the
company
 The court will be required to grant leave if 5 criteria have been satisfied:
o Inaction by the company – s237(2)(a).
o Applicant is acting in good faith – s237(2)(b)
o Action appears in the best interests of the company – s237(2)(c)
o There is a serious question to be tried – s237(2)(d)
o Applicant gave written notice to the company of the intention to apply for
leave, and of the reasons for applying, at least 14 days before making the
application, or circumstances are such that it is appropriate to grant leave in
any case – s237(2)(e)

Effect of ratification  s239: Ratification of a breach of duty does not prevent an applicant from applying for
leave and nor does it mean that the application must be denied.
 s239(2): The court may take into account the ratification in making its determination
and orders, but it must consider whether the members who ratified the breach were
well informed and were acting for proper purposes.
General powers of  s241: Court can make any orders that it considers appropriate in relation to the
the court proceedings brought before it (including the appointing of an independent
investigator).
 s242: Court can make any orders it considers appropriate about the costs of the
applicant, the company or any other party to the proceedings.
o Court can only award costs to the parties to the action.
o S237- derivative proceedings commenced under this section.
 the company will be the party to the proceedings 􏰜 not the
applicant, so this section is needed to enable the applicant to be
awarded costs.

Personal Action  The right to bring a personal action can arise under the company constitution, the
Corporations Act or under the common law.
 Requires a wrong done against the shareholder personally rather than a wrong being
done against the company.
 Can arise in situations where there is a derivative action arising on the facts. In those
cases, argue both, but double recovery will be excluded.
 s236: abolishes the general law derivative action.
 Eley v Positive Government Security Life Assurance (1876): that he did not have
standing to bring the action as a shareholder, because the breach of the constitutional
provision did not affect him as a shareholder. So, even if the shareholder wants to
bring an action against the company or against another shareholder, (s)he will still
need to show that the breach of the constitution or the replaceable rule affected their
rights in their capacity as a shareholder in order to have standing to bring the action.
 Hurley v BGH Nominees Pty Ltd (1982): where there is also a derivative action arising
on the facts, a person will not be barred from pursuing their personal right.

Injunction under  Requires past, present or future conduct relating in some way to a contravention of the
s1324 Corporations Act.
 An action can be commenced by ASIC or people whose interests have been, are, or
will be affected by the conduct.
o Creditors: Airpeak Pty Ltd v Jetstream Aircraft Ltd and Anor (1997);
o Company target of takeover: BHP v Bell Resources Ltd (1984)
 It is uncertain whether an individual can bring an action based on s1324 when the
wrong is done to the company.
 Dempster v Mallina Holdings Ltd (1994): suggested that a minority share holder can
only bring a s1324 action with respect to a personal wrong, not a wrong against the

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 company.
 Mesenberg v Cord Industrial Recruiters (1996): the power in s1324 cannot be used by
a shareholder where there has been a breach of a civil penalty provision.
 Emlen Pty Ltd v St Barbara Mines Ltd (1997): questioned Mesenberg and them stating
It is only ASIC who would be able to use the section when a civil penalty provision is
breached.
 s1324(10): permits the Court to order a person to pay damages to any person, either in
addition to or in substitution for the injunction.

Oppressive or unfair  s232: can be used to challenge management decisions and behaviour, regardless of
conduct s232-234 whether the wrong was done to the corporation or to a shareholder.
 Distinctive about this, is that we consider the cumulative effect.
 ARGUE THIS WITH EVERYTHING ELSE.

Standing  S234: Any member or other person permitted to do so by ASIC.

 Re Spargos Mining NL (1990): held that a member can bring an action under the Act
for oppression even if the action that is the subject of the complaint was taken before
the person was a member. It is not even necessary to prove that they have been
personally affected in some way by the action.
 Martin v Australian Squash Club (1996): held even if there is an element of bad faith
in the application to the court, it is not necessarily an abuse of process
 Morgan v 45 Fleurs Avenue (1986), however limits this to some extent by saying that
a remedy may be denied if the applicant has not gone to court “with clean hands”
 A majority shareholder should not be automatically excluded from claiming
oppression. However, a majority shareholder will have other avenues available
through the General Meeting in order to end the conduct. It will only be situations in
which those avenues are not going to be available or effective in which a majority
shareholder can be oppressed.

Decisions that are  S232: set out the types of actions by decision makers within the company which are
covered covered by the sections.
 Covers conduct of company affairs:
o s232(b): actual or proposed act or omission by or behalf of the company
o s232(c): a resolution of members or a class of members
 S53: company affairs is defined in wide terms.
 Re Spargos (1990): the conduct does not need to be continuing at the time of the
application to Court or at the time of the hearing.
 Martin v Australian Squash Club (1996): while an individual act be oppressive, this
case says that is possible to consider the cumulative effect of actions in deciding
whether it has been oppressive.

Conduct  S232: Conduct which is “oppressive, unfairly prejudicial, or unfairly discriminatory

against a member or members, whether in that capacity or in any other capacity
 Morgan v 45 Fleurs Avenue Pty (1986)
 Re Spargos Mining NL (1990)
 Wayde v New South Wales Rugby League (1985):
o Ask whether the conduct is fair “according to ordinary standards of
reasonableness and fair dealing. Determine whether “reasonable directors with
such skills as directors should have, acting bona fide, would think that the
conduct was fair”.
o Fairness is to be assessed at the time at which the conduct takes place.
o It is not necessary for the directors to intend to be unfair.
o It is not necessary to prove a breach of fiduciary duty.
o Something can be unfair even if it is endorsed by the constitution.
o Just because a member is unable to dispose of his/her shares, it is not of itself
enough to attract the relief of the Court.

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 Remedies s233: A wide range, including winding up the company, modifying or repealing the
constitution, requiring or prohibiting certain actions and ordering particular share
transactions to take place.
Case Examples  John J Starr (Real Estate) v Robert R Andrew (Australasia) (1991):
o Managing director with substantial influence over some members of the
board:
 Held mini-board meetings to determine the way in which the
board would vote.
 Brought serious matters before the board without adequate notice.
 Delayed dealing with particular matters by referring them to a
sub-committee.
 Refused to provide a budget to the board.
 Refused to leave the meeting when his remuneration was being
discussed.
o The court felt that despite the fact that, in themselves, none of these were
sufficient to amount to oppression, the fact that these tactics were
continually employed meant that the members were being deprived of
their statutory right to participate and therefore the conduct was
oppressive.
 Wayde v New South Wales Rugby League Ltd (1985):
o NSWRL ran the Sydney Rugby competition, which involved 13 clubs.
They decided to reduce the number to 12, which was permitted under their
constitution. They decide to get rid of “Wests”/ Wayde was a member of
NSWRL as the representative of Wests. He tried to restrain the directors
from doing this under the oppression sections.
o The High Court held that the directors were allowed to exclude Wests.
The decision was taken honestly by the directors with the object of
fostering Rugby League and serving its best interests.
o Because this was done through an express constitutional power, this was
not unfair. Effectively, Wayde could not show that it was a decision that
no reasonable board of directors could make, even though it did appear to
single out Wests.
 Martin v Australian Squash Club (1996):
o ASC was incorporated to purchase North Sydney squash courts. Harte
was the prime mover. He had met Martin at a number of functions and
was Martin’s sister’s agent. Harte encouraged Martin to become a
shareholder. Harte had 65% of the shares and Martin had 5%, with the
other 30% being held by two unrelated people. Harte ran the company.
Martin commencing an action in 1995.
o Court held that it did not matter that Martin was at least partially
motivated by a burning desire to take revenge against Harte. There were
many breaches of fiduciary duty by Harte, including inadequate disclosure
and the improper use of company property. Although each breach was on
its own not sufficient to amount to oppression, the cumulative effect was
sufficient. Because Martin owned only 5% of the shares, Hodgson J felt
that it would not be appropriate to remove Harte from management. He
ordered a meeting of the non-Harte shareholders. If the breach was
ratified, Martin could either remain or sell his shares at a price fixed by
Hodgson J. If the breaches were not ratified by these people, then Harte
was to be excluded.

Winding up Winding up is liquidation. It can be enforced by the court, ASIC or voluntary liquidation.
Standing  S462: states the people who will have standing to make the application for the winding
up of a company.
o Application can be made by the company, a creditor, a contributory, a
liquidator and ASIC
 s462(5): states there will be no other way to wind up the company.
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 Circumstances in  S461: sets out the circumstances where the Ct can order winding up of the company.
which the court will  s461(1)(e): where directors have acted in their own interests rather than the interests of
wind up a company the members as a whole or in a manner that appears to be unjust or unfair to other
members;
 s461(1)(f): affairs being conducted in a manner that is oppressive or unfairly
prejudicial to or unfairly discriminatory against a member or members or in a manner
that was or would be contrary to interests of the members as a whole;
 s461(g): a proposed or actual act, omission or resolution that is or would be
oppressive; and
 s461(k): the Court is of the opinion that it is just and equitable for the company to be
wound up.
 There are a number of categories that have been recognised by the Ct as being
sufficient to permit winding up. i.e quasi-partnership and there is a breakdown of trust
& confidence.
 Ebrahimi v Westbourne: held that Ebrahimi could have the company wound up.
Originally they were partners, so the relationship of mutual confidence was essential
to the relationship. This confidence had ended by denying Ebrahimi management
rights, and so the relationship (ie the company) should be ended.

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