1 – Introduction to Australian corporate law. .............................................................................

4
1.1 – The legal and economic ideas behind company law. ....................................................... 4
1.2 – Companies versus other common business forms. .......................................................... 5
1.3 – The types of companies under the Corporations Act 2001 (Cth). .................................. 6
2 – Corporate formation and its implications. ............................................................................ 9
2.1 – The principle of corporate personality and limited liability. .............................................. 9
2.2 – Piercing the corporate veil. ................................................................................................. 10
2.2.1 – Solvent companies. ...................................................................................................... 10
2.2.2 – Insolvent companies. .................................................................................................... 13
3 – Regulating the internal functioning of companies. .......................................................... 13
3.1 – The company’s constitution. ............................................................................................... 13
3.1.1 – Background. ................................................................................................................... 13
3.1.2 – Directors. ........................................................................................................................ 14
3.1.3 – Alteration of the company’s constitution. ................................................................... 18
3.1.4 – Effect of the company’s constitution. ......................................................................... 20
3.2 – Corporate organs. ................................................................................................................ 21
3.2.1 – The division of powers between directors and members. ...................................... 21
3.2.2 – Members’ meetings. ..................................................................................................... 23
3.2.3 – Reporting and access................................................................................................... 28
3.3 – Directors’ duties. ................................................................................................................... 29
3.3.1 – Who owes duties?......................................................................................................... 29
3.3.2 – Care, skill, and diligence. ............................................................................................. 30
3.3.3 – Good faith. ...................................................................................................................... 33
3.3.4 – Proper purpose.............................................................................................................. 34
3.3.5 – Conflicts of interest and disclosure. ........................................................................... 36
3.3.6 – Directors of insolvent companies. .............................................................................. 40
3.3.7 – Remedies and penalties for breach of duty. ............................................................. 44
3.3.8 – Exoneration and relief for breach of duty. ................................................................. 46
4 – Mechanisms for shareholders to protect their investment. ........................................... 47
4.1 – The actions of the majority constitute fraud on the minority. ......................................... 47
4.2 – s 1324 Corporations Act 2001 (Cth) injunctions. ............................................................. 48
4.3 – Proceedings on behalf of a company (or a statutory derivative action). ...................... 49
4.4 – Oppressive and unfair conduct. ......................................................................................... 50
4.5 – Winding up. ........................................................................................................................... 52
4.6 – Variation of class rights. ...................................................................................................... 54

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 4.7 – The rule in Foss v Harbottle. .............................................................................................. 55
5 – Holding companies responsible to outsiders.................................................................... 56
5.1 – Powers of a company. ......................................................................................................... 56
5.2 – Contracts with the company. .............................................................................................. 56
5.2.1 – Execution of documents directly. ................................................................................ 56
5.2.2 – Execution of documents by agents. ........................................................................... 56
5.2.3 – The indoor management rule (or rule in Turquand’s case). ................................... 59
5.3 – Statutory assumptions an outsider is entitled to make. .................................................. 59
5.3.1 – Operation........................................................................................................................ 59
5.3.2 – The statutory assumptions. ......................................................................................... 60
5.3.3 – Limitations. ..................................................................................................................... 61
5.4 – Criminal liability of companies. ........................................................................................... 61
5.5 – Tortious liability of companies. ........................................................................................... 63
5.6 – Promoters and pre-registration contracts. ........................................................................ 63
5.6.1 – Promoters. ...................................................................................................................... 63
5.6.2 – Pre-registration contracts............................................................................................. 65
6 – Financing the company’s operations. ................................................................................. 65
6.1 – Fundraising............................................................................................................................ 65
6.1.1 – Issue offers of securities (primary issues). ................................................................ 65
6.1.2 – Sale offers of securities (secondary trading). ........................................................... 68
6.1.3 – Restrictions on selling securities. ............................................................................... 68
6.1.4 – ASIC’s power to exempt and modify. ......................................................................... 69
6.1.5 – Misstatements and omissions. .................................................................................... 69
6.1.6 – Crowd-sourced equity funding. ................................................................................... 70
6.2 – Share capital. ........................................................................................................................ 72
6.2.1 – Definitions. ..................................................................................................................... 72
6.2.2 – Issue of shares. ............................................................................................................. 72
6.2.3 – Classes of shares. ........................................................................................................ 73
6.2.4 – Reducing share capital................................................................................................. 74
6.2.5 – Financial assistance. .................................................................................................... 78
6.3 – Dividends. .............................................................................................................................. 80
6.4 – Debentures. ........................................................................................................................... 81
7 – Corporate insolvency. .............................................................................................................. 82
7.1 – Receivership. ........................................................................................................................ 82
7.2 – Voluntary administration...................................................................................................... 84
7.2.1 – Deeds of company arrangement. ............................................................................... 85

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 7.3 – Liquidation (or winding up).................................................................................................. 86
7.4 – Schemes of arrangement.................................................................................................... 89
8 – Regulating transactions in corporate securities. ............................................................. 89
8.1 – Disclosure. ............................................................................................................................. 89
8.2 – Prohibited conduct. .............................................................................................................. 91
8.2.1 – Market misconduct........................................................................................................ 91
8.2.2 – Insider trading. ............................................................................................................... 93
8.2.3 – Financial services civil penalty provisions. ................................................................ 95
8.3 – Takeovers. ............................................................................................................................. 96
8.3.1 – General. .......................................................................................................................... 96
8.3.2 – Prohibited acquisitions. ................................................................................................ 96
8.3.3 – Permitted acquisitions. ................................................................................................. 97
8.3.4 – Takeovers Panel. .......................................................................................................... 99
8.3.4 – Defensive strategies and tactics. .............................................................................. 100

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1 – Introduction to Australian corporate law.

1.1 – The legal and economic ideas behind company law.

 What is a Company?
o An artificial entity recognised by the law as a legal person with its own rights and liabilities.
o A company has its own corporate personality and is a separate entity distinct from its owners (shareholders or
members) and managers (directors and officers).
o Limited liability means shareholders are not personally liable for the company’s debts.
o A company has transferable shares.
o A company has delegated management under a board structure.
o A company has investor ownership.
 Theories of the corporation.
o Managerialist theory.
 Those who own the corporation do not control it, and conversely, those who control the corporation do
not have significant ownership interests in it.
 Views the corporation essentially as hierarchy and senior management, at the apex of the hierarchy, as
the principal subject of legal regulation.
 Accountability is secured by the imposition of mandatory legal duties upon directors and senior
management and the requirement of shareholder approval for a wider range of corporate transactions.
o Contractual theory.
 The corporation is a “nexus of contracting relationships” characterised by reciprocal relations and
behaviour between shareholders, managers, other employees, lenders, suppliers, and other
stakeholders.
 The choice between contracting alternatives is determined by that which secures the lowest agency
costs (i.e. the monitoring expenditures by the principal to detect self-dealing or shirking by the agent;
non-compete agreements offered as an assurance of fidelity to the principal; the residual loss for the
principal resulting from divergence between the agent’s decisions and those which would maximise the
principal’s welfare). The optimal form of agency cost reduction is that determined by market exchanges
between corporate issuers and investors.
 The role of corporate law and state regulation declines since the contracting parties, as rational
utilitarians, are entitled to structure their relations as they wish, and doctrinal constraints upon
management should be left to the invisible hand of market forces.
 The duty of management is to maximise the wealth of their principals—the shareholder owners of the
firm—and that the function of corporate law is to promote that end.
o Concession theory.
 The grant of incorporation is within the exclusive gift of the state, and therefore a group has no rights
unless the state chooses to grant it legal personality.
 The grant of a general right to incorporate under legislation means that the Concession theory has lost
its relevance.
o Stakeholder approach.
 A duty is owed by corporate managers to all stakeholders in the company and not merely to
shareholders.
o Organic Theory
 A company is bound by the acts of its board of directors because those acts are treated as acts of the
company itself.

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1.2 – Companies versus other common business forms.
 Business structures.
o Company.
 Limited liability: Shareholders are not personally liable for the company’s debt, and the extent of
shareholder liability depends on the type of company (s 112 Corporations Act 2001 (Cth)). The liability of
shareholders of a company limited by shares is limited to the amount, if any, unpaid of the issue price of
their shares (s 516 Corporations Act 2001 (Cth)).
 Perpetual succession: The company’s status is unaffected by the death or bankruptcy of a member or
the transfer of ownership interests.
 Financing: The company has the power to make floating security over its assets and to make public
issue of its shares or debt interests.
 Income is taxable on the company.
 s 45A(1) Corporations Act 2001 (Cth): A proprietary [limited] company must not have more than 50 non-
employee shareholders. [A limited company has no limit on the number of non-employee shareholders.]
o Sole trader.
 An individual conducting business alone, without the benefit of any legal structure or entity status distinct
from that of the individual.
 Income is taxable on an individual basis.
o Co-operative.
 Regulated by State and Territory legislation.
 A legal entity owned by a group of people who come together voluntarily for their mutual benefit.
 Offers limited liability to its members.
o Incorporated association.
 Regulated by State and Territory legislation.
 Must not conduct its affairs so as to provide pecuniary gain for its members.
 Incorporation in one jurisdiction secures no recognition in another.
o Partnership.
 s 1(1) Partnership Act 1892 (NSW): Partnership is the relation which exists between persons carrying on
a business in common with a view of profit.
 A partnership is founded upon the contract between business associates, and requires no registration or
other formality for its formation, conduct, or dissolution.
 The objective of profit is an essential feature of a partnership that distinguishes it from non-profit clubs,
associations, and joint ventures.
 The firm and its members collectively are not endowed with a distinct entity status.
 Partners bear unlimited liability for debts and obligations incurred by the partnership.
 s 516 Corporations Act 2001 (Cth): A partnership must not have more than 20 members.
 Income is taxable on an individual basis (unless a limited partnership exists, in which case the
partnership is taxed as a company).
 How do you form a company?
o s 114 Corporations Act 2001 (Cth): A company needs to have at least 1 member.
o s 117 Corporations Act 2001 (Cth): A person must lodge an application with ASIC using Form 201 and pay the
appropriate fee, stating: (1) the type of company; (2) the company’s name; (3) the name and address of each
member; (4) the name, address, and date and place of birth of each director and company secretary; (5) the
address of the company’s registered office; (6) for a company limited by shares or an unlimited company, the
number and class of shares each member agrees to take up and for what price; etc.
 s 117(3) Corporations Act 2001 (Cth): If the company is to be a public company and is to have a
constitution, a copy of the constitution must be lodged with the application.

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  s 204A Corporations Act 2001 (Cth): A proprietary company is not required to have a secretary, but if it
chooses to appoint one or more secretaries, at least one must ordinarily reside in Australia. A public
company must have at least one secretary and at least one must ordinarily reside in Australia.
o s 152(1) Corporations Act 2001 (Cth): A person may lodge an application with ASIC to reserve a name for a
company. If the name is available, ASIC must reserve it.
 s 147(1) Corporations Act 2001 (Cth): A name is available to a company unless the name is identical to
a name that is reserved or registered, or is unacceptable for registration.
o s 118(1) Corporations Act 2001 (Cth): If an application is lodged under s 117, ASIC may: (1) give the company an
ACN; (2) register the company; and (3) issue a certificate that states the company’s name, the company’s ACN,
the company’s type, that the company is registered as a company under this Act, the State or Territory in which
the company is taken to be registered, and the date of registration.
o s 1274(7A) Corporations Act 2001 (Cth): A certificate issued by ASIC stating that a company has been registered
is conclusive evidence that all requirements for its registration have been complied with, and the company was
duly registered.
o s 119 Corporations Act 2001 (Cth): A company comes into existence as a body corporate on the day it is
registered.
o s 124(1) Corporations Act 2001 (Cth): Upon registration, a company has the legal capacity and powers of an
individual [e.g. own assets, assume liabilities, hold licenses, sue] and a body corporate [e.g. issue and cancel
shares, issue debt, grant share options].
 s 124(2) Corporations Act 2001 (Cth): A company can do an act even if their interests are not served by
doing it.
 s 124(3) Corporations Act 2001 (Cth): A company cannot do an act that is illegal.
o s 601CD Corporations Act 2001 (Cth): A foreign company must not carry on business (i.e. offer, or be a
guarantor for, debt securities) unless it is, or has applied to be, registered.
 Australian Securities and Investments Commission (ASIC)
o The regulatory authority charged with implementation of the Corporations Act 2001 (Cth). Under s 11(1)
Corporations Act 2001 (Cth), it has such functions and powers as are conferred on it under this Act, such as:
 Registering companies.
 Granting Australian financial services licences.
 Registering auditors and liquidators.
 Granting relief from compliance with various provisions of the Act.
 Maintaining publicly accessible registers of information about companies and financial services
licensees.
 Investigating suspected breaches of the law, including requiring the production of books and answering
questions at an examination.
 Advising the Minister responsible of any changes to the Act that are needed to overcome problems of
which ASIC has become aware.
 Banning people from providing financial services.
 Seeking civil penalties from the courts.

1.3 – The types of companies under the Corporations Act 2001 (Cth).
 Corporation vs. Company.
o Corporation: Under s 57A(1) Corporations Act 2001 (Cth): (1) a company; (2) any body corporate (whether
incorporated in this jurisdiction or elsewhere); and (3) an 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 appointed for
that purpose.
 A company registered under s 9 Corporations Act 2001 (Cth). (Under s 112(1) Corporations Act 2001
(Cth), 6 types of companies can be registered.)
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  Proprietary company (Pty Ltd).
 Limited by shares (98.8%).
 Unlimited with shares (0%).
 Public company (Ltd).
 Limited by shares (0.65%).
 Limited by guarantee (0.7%).
 Unlimited with shares (0%).
 No liability with shares (0.1%).
 Other corporation (e.g. incorporated association; statutory corporation).
o Share Capital
 All companies, except company limited by guarantee, have share capital. It is the amount which
members of the company agree to contribute permanently to the company, in their capacity as
members, to fund the joint enterprise or activities. Upon winding up, shareholders are the lowest ranked
claimants to assets of the company.
o Shares
 The proportionate interest in the net worth of the business.
 The power to issue shares is vested in the company’s directors. First, the intending member submits to
the board an application. Second, if the application is accepted, shares are allotted. Third, the
transaction is completed by issuing the shares, entering the name of the member into the share register,
and delivering the share certificate.
 s 254D(1) Corporations Act 2001 (Cth): Before issuing shares, the directors of a proprietary company
must offer them to existing shareholders in proportion to the number of shares of that class that they
already hold (as far as practicable).
 Shareholders are entitled to: (1) receive dividend payments and receive a proportion of the company’s
surplus assets; and (2) receive notice of meetings, speak and demand votes at meetings, elect and
remove directors; vote at meetings.
 Classification according to liability of members.
o Each member’s liability for company debts is limited in some way.
 Company limited by shares (public or proprietary).
 Definition.
 s 9 Corporations Act 2001 (Cth): The liability of its members is limited to the amount (if
any) unpaid on the shares held by them.
 Obligations.
 s 254M(1) Corporations Act 2001 (Cth): The shareholder is liable to pay calls made by
the directors on the shares.
 s 516 Corporations Act 2001 (Cth): The shareholder is liable to pay calls if made by
the liquidator.
 s 148(2) Corporations Act 2001 (Cth): A limited public company must have the word
“Limited” at the end of its name (unless the company is a charity).
 Use.
 Used as a vehicle for trading activity.
 Company limited by guarantee (public only).
 Definition.
 s 9 Corporations Act 2001 (Cth): The liability of its members is limited to the amounts
that the members undertake to contribute to the property of the company if it is wound
up.
 Obligations.

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  ss 521 and 522 Corporations Act 2001 (Cth): Current members and past members
(i.e. members within 1 year of the commencement of the winding up) will be liable if
the company is wound up.
 s 254SA Corporations Act 2001 (Cth): Dividends must not be paid to members.
 Use.
 There is no share capital, so it is typically used for not-for-profit activities (e.g.
charities, clubs, community centres).
 No liability (mining) company (public only)
 Definition.
 s 9 Corporations Act 2001 (Cth): A company that is registered as, or converts to, a no
liability company under this Act.
 Obligations.
 s 112(2) Corporations Act 2001 (Cth): The company must have: (1) share capital; (2)
a constitution that states that its sole objects are mining purposes; and (3) no
contractual right under its constitution to recover calls made on its shares from a
shareholder who fails to pay them (if a call is not answered, the shares are forfeited).
 s 148(4) Corporations Act 2001 (Cth): The words “No Liability” must be at the end of
its name.
o Each member’s liability for company debts is unlimited.
 Unlimited liability company (public or proprietary).
 Definition.
 s 9 Corporations Act 2001 (Cth): A company whose members have no limit placed on
their liability.
 Obligations.
 s 515 Corporations Act 2001 (Cth): A present or past member is liable to contribute to
the company’s property to an amount sufficient to pay the company’s debts and
liabilities and the costs, charges, and expenses of the winding up.
 s 258A Corporations Act 2001 (Cth): Share capital may be reduced in any way (e.g.
without formal approval).
 Use.
 Used by professional services firms (e.g. law firms, accountancies).
 Classification according to listing.
o Public company (s 9 Corporations Act 2001 (Cth)): A company other than a proprietary company).
 General information.
 s 114 Corporations Act 2001 (Cth): Must have at least 1 member.
 No maximum number of non-employee shareholders.
 s 201A(2) Corporations Act 2001 (Cth): Must have at least 3 directors, 2 of whom reside in
Australia.
 ss 45A(1) and 113 Corporations Act 2001 (Cth): Can obtain funds from the public (via
disclosure).
 ss 45A(1) and 113 Corporations Act 2001 (Cth): Can be listed or unlisted.
 s 250N Corporations Act 2001 (Cth): Must hold an annual general meeting (AGM) at least once
in each calendar year.
 Listed public company.
 Unlisted public company.
o Proprietary company (s 45A(1) Corporations Act 2001 (Cth)): A company that is registered as, or converts to, a
proprietary company under this Act.
 General information.

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  s 114 Corporations Act 2001 (Cth): Must have at least 1 member.
 ss 45A(1) and 113 Corporations Act 2001 (Cth): Must have no more than 50 non-employee
shareholders.
 s 201A(1) Corporations Act 2001 (Cth): Must have at least 1 director who resides in Australia.
 ss 45A(1) and 113 Corporations Act 2001 (Cth): Cannot obtain funds from the public.
 ss 45A(1) and 113 Corporations Act 2001 (Cth): Cannot be listed.
 s 112 Corporations Act 2001 (Cth): Can be limited by shares or unlimited with shares.
 s 45A(1) Corporations Act 2001 (Cth): Must not engage in any activity (e.g. issuing shares or
debentures) that would require disclosure to investors under ch 6D Corporations Act 2001
(Cth).
 s 250N Corporations Act 2001 (Cth): Need not hold an AGM.
 s 249A(2) Corporations Act 2001 (Cth): May pass a resolution without a general meeting being
held if all the members entitled to vote on the resolution sign a document containing a
statement that they are in favour of the resolution set out in the document.
 Small proprietary company.
 s 45A(2) Corporations Act 2001 (Cth): To qualify as a small proprietary company for a financial
year, 2 of the following criteria must be satisfied: (1) the consolidated revenue for the financial
year of the company and the entities it controls is less than $25 million; (2) the value of the
consolidated gross assets at the end of the financial year of the company and the entities it
controls is less than $12.5 million; or (3) the company and the entities it controls have fewer
than 50 employees at the end of the financial year.
 s 50AA(1) Corporations Act 2001 (Cth): An entity controls a second entity if the first
entity has the capacity to determine the outcome of decisions about the second
entity’s financial and operating policies.
 s 292(1) Corporations Act 2001 (Cth): All non-small proprietary companies must prepare, for
each financial year, an audited financial report and a directors’ report, to be lodged with ASIC
and made publically accessible.
 s 292(2) Corporations Act 2001 (Cth): A small proprietary company only needs to do
so if, either: (1) shareholders with at least 5% of the votes request it; (2) ASIC directs
it to; or (3) it was controlled by a foreign company for part of the year, and it is not
consolidated for that year in financial statements lodged with ASIC.
 Large proprietary company.
 s 45A(3) Corporations Act 2001 (Cth): To qualify as a large proprietary company for a financial
year, 2 of the following criteria must be satisfied: (1) the consolidated revenue for the financial
year of the company and the entities it controls is $25 million; (2) the value of the consolidated
gross assets at the end of the financial year of the company and the entities it controls is $12.5
million; or (3) the company and the entities it controls have 50 or more employees at the end of
the financial year.

2 – Corporate formation and its implications.

2.1 – The principle of corporate personality and limited liability.

 Corporations are invested with artificial personality (i.e. their assets, liabilities, rights, and duties are distinct from their
members and directors). This principle is recognised under s 124(1) Corporations Act 2001 (Cth), which states that upon
registration, a company has the legal capacity and powers of an individual [e.g. own assets, assume liabilities, hold
licenses, sue] and a body corporate [e.g. issue and cancel shares, issue debt, grant share options]. Consequently, in most
cases, members and directors are not liable for the liabilities of the corporation.
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 o In Salomon v A Salomon and Co Ltd, Salomon, a sole proprietor, sold his business to a company for £39,000. He
received 20,000 shares, £1,000 in cash, and a £10,000 secured debt, and his family members each received one
share. Soon after, industrial unrest caused business to slow down, and so Salomon transferred his £10,000
secured debt to Broderip in return for £5,000 and immediately invested this in the company. Nevertheless, the
company became insolvent. The liquidator determined that the company could pay the secured debts, but
nothing would be left for the unsecured creditors. The liquidator claimed that, either: (1) Broderip should not be
paid ahead of the unsecured creditors, because the company was a sham designed to defraud the unsecured
creditors; or (2) Salomon was under a duty to indemnify the company for any losses sustained and that this sum
should be offset against any amounts due under the secured debt. It was held that since the preconditions set by
parliament for incorporation were satisfied, the company existed as a separate legal entity. Accordingly, Salomon
had no liability to indemnify the company for any losses, and the secured debt had to be repaid first in priority.
o In Lee v Lee’s Air Farming Ltd, Lee established a company to conduct his crop dusting business. He held 2,999
shares, and one share was held by his solicitor as his nominee. Lee was governing director of the company and
chief pilot for the business. The company’s workers’ compensation insurance was taken out, naming Lee as an
employee. Lee died in a workplace accident and his widow sought workers compensation. The insurance
company claimed that the company was a fraudulent pretence, since the owner of a company could not be an
employee. However, it was held that the widow was able to claim workers’ compensation as the husband was
regarded as an employee of the company.
o In Macaura v Northern Assurance Co Ltd, Macaura, the owner of a timber business sold the business to a
company he formed and in which he was the controlling member. Prior to the sale, the business was insured
against loss by fire and the insurance policy was in his name. After the sale, when the timber was destroyed by
fire, the insurance company refused the company’s claim on the basis that the company, as owner of the timber,
was uninsured. It was held that the insurance company could refuse to pay, because the property owned by a
company is not owned by its members.

2.2 – Piercing the corporate veil.

 The recognition that a company is a separate entity is often depicted as the ‘veil of incorporation’, because it is as if a veil
hides and separates the shareholders and the directors from the company. In certain cases, however, the court may lift
the ‘corporate veil’, such that either: (1) the corporation’s liabilities may be placed on onto its members and directors; or (2)
the intention of the corporation’s members and directors may be attributed to the corporation.

2.2.1 – Solvent companies.

 The company is used to evade an existing (not future) legal obligation.
o In Gilford Motor Co Ltd v Horne, Horne was the managing director of GMC, and had a non-compete clause in his
employment contract, prohibiting him from soliciting its customers after leaving. Shortly after resigning, he
arranged for his wife to incorporate a company with his wife and friend as its sole shareholders and directors. The
newly formed company, managed by Horne, carried on business in competition with GMC, who sought an
injunction to restrain Horne from breaching his contractual agreement. An injunction was granted against both
Horne and the new company, because the company was being used to evade a legal obligation.
o In Jones v Lipman, Lipman contracted to sell land to Jones. He then sought to avoid the contract by forming a
company (in which he and a nominee were the only directors and shareholders), and selling the land to the
company, in order to defeat Jones’ right to seek an order for specific performance of the contract. It was held that
Jones could obtain an order for specific performance against both Lipman and the company, because Lipman
had absolute ownership and control of the company, which was “a device and a sham”.
 The company is used to perpetrate fraud.
o In Re Darby, ex parte Brougham, Darby and Gyde formed a company of which they were sole directors and,
together with 5 nominees, were the shareholders. The company purchased a licence to work a quarry and then

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 floated another company, Welsh Slate Quarries Ltd, for the purpose of purchasing the licence at a substantial
overvalue. The new company issued a prospectus and issued shares to the public. With the money thus
obtained, Welsh Slate Quarries Ltd paid the company formed by Darby and Gyde for the licence. The profits
were then divided between Darby and Gyde. Welsh Slate Quarries Ltd then failed and the liquidator claimed in
the bankruptcy of Darby for the secret profit made by him, on the basis that Darby was in breach of his duty as a
promoter of Welsh Slate Quarries Ltd. It was argued that the profit was made by the company formed by Darby
and Gyde and not by Darby himself. However, it was held that Darby had to disgorge his profit, because the
company he set up was a “dummy company” formed for the purpose of enabling him to perpetrate a fraud.
 The company can be said to be acting as an agent for the parent company.
o In Smith, Stone and Knight Ltd v Birmingham Corporation, the Birmingham Corporation, a local government
authority sought to compulsorily acquire land owned by Smith, Stone & Knight Ltd. To all outward appearances,
the land was occupied by Birmingham Waste Co Ltd, a wholly owned subsidiary of Smith, Stone & Knight. The
Birmingham Corporation was refused a compensation claim because the subsidiary’s tenancy of the land from its
parent company was for less than a year, and hence under legislation, it was not entitled to compensation. It was
held that the subsidiary carried on a business as agent for its holding company (and thus Smith, Stone & Knight
were entitled to compensation) because: (1) the profits of the subsidiary were treated as the profits of the holding
company; (2) the persons conducting the business were appointed by the holding company; (3) the holding
company was the head and brain of the trading venture; (4) the holding company governed the venture; (5) the
profits of the business were made by the holding company’s skill and direction; and (6) the holding company was
in effectual and constant control. A further consideration that led to these conclusions was that the subsidiary was
undercapitalised and had no bank account or available funds. A creditor of the subsidiary therefore had no
chance of successfully recovering money owed unless the parent company agreed to fund the liability.
o However, courts are reluctant to infer agency, and in Briggs v James Hardie & Co Pty Ltd, it was stated that
“mere dominance in and of itself is not enough in and of itself to establish agency”.
 The company is part of a group of companies.
o Terminology (s 9 Corporations Act 2001 (Cth))
 Holding company: A body corporate of which another body corporate is a subsidiary.
 Wholly-owned subsidiary: A body corporate whose share capital is 100% owned by a holding company.
 Ultimate holding company: A body corporate that is a holding company of another body corporate, and
is not itself a subsidiary of a body corporate.
o In the UK, courts have been prepared to lift the veil to give access to the assets of the group.
 In DHN Food Distributors Ltd. v Tower Hamlets London Borough Council, DHN, a parent company, ran
a food distribution business from a warehouse. It held all the shares in 2 other companies, Bronze and
Transport. Bronze had no other function than to hold title to the land on which the warehouse stood.
Transport owned all the vehicles. The Borough Council compulsorily acquired the land and refused to
provide compensation because the owner, Bronze, conducted no business. It was held that the
companies as a group were entitled to compensation. The 2 subsidiaries and their parent were treated
as one entity for compensation purposes.
o In Australia, courts haven’t been prepared to lift the veil to give access to the assets of the group in cases
involving non-tortious duties.
 In Industrial Equity Ltd v Blackburn, the consolidated accounts of a group of companies of which
Industrial Equity was the holding company disclosed sufficient profits from which a dividend could be
paid. These profits were actually made by the subsidiaries. Industrial Equity argued that it could pay
dividends to its own shareholders from the profits made by its subsidiaries notwithstanding that the
subsidiaries had not paid dividends to the holding company. However, it was held that each company
within the group was a separate legal entity, and a subsidiary’s profits could not be regarded as the
profits of its holding company available for payment of the holding company’s dividend.

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  In Qintex Australia Finance Ltd v Schroders Australia Ltd, Schroders, a merchant banking firm, acted on
instructions from the Qintex group of corporations to purchase a foreign exchange contract, doing so in
the name of one of the Qintex group corporations. The contract resulted in a loss, and the Schroders
sought to appropriate moneys in an account which it held on behalf of the Qintex Australia Finance
(QAF), another corporation in the Qintex group, to meet the debt of the first-mentioned Qintex
corporation. The issue for the court was to determine which Qintex corporation had incurred the debt. It
held that QAF had not been party to the contract.
o In Australia, courts have been prepared to lift the veil to give access to the assets of the group in cases involving
tortious duties.
 In Briggs v James Hardie & Co Pty Ltd, Briggs suffered from asbestosis which he alleged he contracted
while being employed by a subsidiary of James Hardie. In a negligence action against both his employer
and the holding company, Briggs argued that the corporate veil of the subsidiary could be lifted to make
the holding company liable. It was held that given the uncertainties of the law, lifting the corporate veil
was a possibility and that the issue should be determined at a trial of the negligence action (however,
the case was subsequently settled). Rogers AJA suggested that in deciding whether to lift the corporate
veil in actions in tort, different considerations should apply from the criteria applied to actions in contract,
taxation or compensation cases, especially where the subsidiary is under-capitalised and cannot meet
its tort liabilities. This is because “generally speaking, a person suffering injury as a result of the tortious
act of a corporation has no choice in the selection of the tortfeasor”.
 The controlling company owed a duty of care to the employee of its subsidiary under the law of negligence.
o In CSR Ltd v Wren, it was held that CSR owed a duty directly to Wren because even though he was employed by
AP, a subsidiary of CSR, all the management staff who had operational responsibility for AP’s enterprise and
therefore Wren’s work conditions were CSR staff. CSR failed in its duty to provide a safe system and place of
work.
 A shadow director whose instructions or wishes are customarily followed by the directors of a company (s 9 Corporations
Act 2001 (Cth)).
o In Standard Chartered Bank of Australia Ltd v Antico, Pioneer International Ltd held 42% of Giant Resources Ltd.
Pioneer had 3 nominee directors on the board of Giant Resources out of 11. It was held that Pioneer was a
shadow director of Giant Resources, because Pioneer: (1) had effective control of Giant Resources by virtue of
its 42% shareholding where the only other significant shareholders held approximately 10%, 6%, 6% and 3% of
the shares; (2) exercised management and financial control of Giant Resources; and (3) imposed on Giant
Resources requirements for financial reporting consistent with its own financial reporting requirements.
o In Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd, Buzzle was a company formed by the
merger of several Apple resellers who accounted for almost half of the Apple products sold in Australia at the
time. As the major supplier and also the major secured creditor, Apple’s consent was needed in order to merge
the businesses and eventually list on the ASX. The negotiations between Apple and Buzzle were so detailed that
Apple’s finance director kept an office inside Buzzle’s headquarters and regularly attended meetings with the
directors and senior managers. It was held that: (1) a secured creditor that imposes conditions on continuing to
provide financial support for a debtor company is not a shadow director—even if the debtor’s directors felt that
they practically had no choice but to agree to the creditor’s demands—because the creditor is not acting as part
of the governing structure of the debtor company, and hence is making demands or imposing conditions to
protect its own independent commercial interest; (2) there be a pattern of compliance by the board with the
shadow director’s wishes; (3) there must be a causal connection between the instruction or wish of the shadow
director and the act taken by the directors; and (4) there was no proof by the liquidator that Apple or its finance
director had exercised influence over a majority of directors so that they could be held to be shadow directors,
because only 2 members of the board were in regular contact with Apple and its finance director.
 A de facto director who acts in the position of a director, even though they have not been appointed to that position (s 9
Corporations Act 2001 (Cth)).

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 o In Grimaldi v Chameleon Mining NL (No 2), the court stated that: (1) whether a person has acted in the position
of a director is a question of substance and not simply of how that person has been denominated by the
company; (2) the relationship of a person with a company can evolve over time into that of a de facto director; (3)
the person does not need to be “in ultimate control” of the company; and (4) the person may still be subject to the
direction and control of the board. Consequently, it was held that Grimaldi, a consultant to Chameleon Mining,
was a de facto director, because he: (1) was integrally involved in Chameleon’s management; and (2) had a high
degree of autonomy to enter into various key transactions on behalf of the company.

2.2.2 – Insolvent companies.

 Holding companies are liable for the debts incurred by their insolvent subsidiaries.
o ss 588V and 588W Corporations Act 2001 (Cth): If a holding company fails to prevent one of its subsidiaries from
incurring a debt while there were reasonable grounds to suspect that the subsidiary was insolvent, the
subsidiary’s liquidator may recover from the holding company amounts equal to the amount of loss or damage
suffered by the subsidiary’s unsecured creditors.
 Directors are liable for the debts incurred by their insolvent company.
o ss 588G and 588M Corporations Act 2001 (Cth): It is an offence for a director to fail to prevent their company
from incurring debts when there are reasonable grounds for suspecting that the company is insolvent. When the
company is wound up, directors may be personally liable to either the company’s liquidator or particular
unsecured creditors for any loss or damage suffered because of the company’s insolvency
 It is an offence to enter into an agreement with the intention of reducing employees’ entitlements.
o ss 596AB(1) and 596AC(1) Corporations Act 2001 (Cth): It is an offence for a person to enter into an agreement
with the intention of either preventing the recovery of employees’ entitlements or significantly reducing the
amount of employees’ entitlements. As well as being guilty of a criminal offence, a person is liable to pay
compensation if the company is being wound up and employees suffer loss or damage because of the
contravention.
 s 596AA(2) Corporations Act 2001 (Cth): Employee entitlements include wages, employer
superannuation contributions, amounts due for employees’ leave of absence, and retrenchment
payments.

3 – Regulating the internal functioning of companies.

3.1 – The company’s constitution.

3.1.1 – Background.
 Pre-Company Law Review Act 1998 (Cth) (July 1, 1998).
o All companies were required to have a constitution consisting of 2 documents:
 Memorandum of association.
 Set out a company’s (unalterable) objects, powers, name, share capital, and liability for its
members.
 Articles of association.
 Set out a company’s internal rules.
 While every company had to have articles of association, companies limited by shares and no
liability companies did not have to register them by lodging the articles with the ASC (now
ASIC). If these companies did not register articles, they were deemed to have adopted the
regulations in Table A and Table B, respectively, as their articles of association, unless they
were specifically excluded or modified by their own constitution.

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  A company limited by guarantee and an unlimited company had to register their articles of
association, but from 1990 onwards, this only applied to public companies.
 Post-Company Law Review Act 1998 (Cth) (July 1, 1998).
o Under s 135(1) Corporations Act 2001 (Cth), if a pre-1998 company has retained its memorandum of association
and articles of association, these documents are still regarded as comprising the company’s constitution
(provided they are not inconsistent with any mandatory rules). However, under s 134 Corporations Act 2001
(Cth), companies formed post-1998 have a choice regarding the rules governing their internal administration:
 Constitution specially drafted to suit a company’s particular needs.
 s 136(1) Corporations Act 2001 (Cth): A company adopts a constitution either: (1) on
registration, if each person specified in the application who consents to become a member
agrees; or (2) after registration, if the company passes a special resolution adopting a
constitution (i.e. passed by at least 75% of the votes cast).
 s 117(3) Corporations Act 2001 (Cth): A public (but not a proprietary) company that has a
constitution on registration must lodge a copy with their application.
 s 139(1) Corporations Act 2001 (Cth): A proprietary company must send a copy of its
constitution to a member of the company within 7 days if the member so requests.
 s 125 Corporations Act 2001 (Cth): If a company has a constitution, it may contain an express
restriction on the exercise of any of its powers or set out its objects, but the exercise of a power
by, or an act of, the company is not invalid because it is contrary to provisions in the company’s
constitution.
 Replaceable (default) rules in the Corporations Act 2001 (Cth).
 s 135(1) Corporations Act 2001 (Cth): The replaceable rules only apply to a pre-1998 company
if they repeal both their memorandum of association and articles of association.
 Combination of both.
o s 135(1) Corporations Act 2001 (Cth): A proprietary company where the same person is both its sole director and
sole shareholder does not require formal rules governing its internal administration (i.e. the replaceable rules do
not apply, nor does the company need a constitution).

3.1.2 – Directors.
 Types.
o Executive or managing director.
 A director who is also employed by a company under a contract of service.
 Typically, they are a full-time employee of the company and are generally involved in the day-to-day
management of the company.
 s 201J (RR) Corporations Act 2001 (Cth): The directors of a company may appoint 1 or more of
themselves to the office of managing director of the company for the period, and on the terms they see
fit.
 s 198C (RR) Corporations Act 2001 (Cth): The directors of a company may confer on a managing
director any of the powers that the directors can exercise, and may revoke or vary a conferral of powers
on the managing director.
o Non-executive director.
 A director who is not normally employed by a company under a contract of service.
 Typically, they are not a full-time employee of the company and are instead required to provide an
independent view in board meetings.
o Chair of the directors.
 s 248E (RR) Corporations Act 2001 (Cth): The directors may elect a director to chair their meetings.
o Alternate directors.

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  s 201K(1) (RR) Corporations Act 2001 (Cth): With the other directors’ approval, a director may appoint
an alternate to exercise some or all of the director’s powers for a specified period.
o Governing director.
 A director who is granted almost total control of the company.
o Nominee director.
 A director who is appointed by, and to represent the interests of, a person or group of persons.
o A person acting as a director.
 A director who makes, or participates in making, decisions that affect the whole, or a substantial part, of
the business of the corporation (s 9 Corporations Act 2001 (Cth)).
 In Shafron v ASIC, Peter Shafron performed a dual role as the co-company secretary and group general
counsel. Shafron was clearly an officer of the company as company secretary, but he claimed that his
impugned conduct related to his role as general counsel and he did not act as an officer of the company
in that role because he was not the ultimate decision maker. It was held that it was inappropriate to
consider the responsibilities associated with an officer’s various positions separately. Shafron was the
second or third most senior executive in the company, and occupying such a role meant that he
participated in making significant decisions that made him an officer of the company
o Shadow director.
 A director whose instructions or wishes are customarily followed by the directors of a company (s 9
Corporations Act 2001 (Cth)).
o De facto director.
 A director who acts in the position of a director, even though they have not been appointed to that
position (s 9 Corporations Act 2001 (Cth)).
 Requirement.
o s 201A(1) Corporations Act 2001 (Cth): A proprietary company must have at least 1 director who resides in
Australia.
o s 201A(2) Corporations Act 2001 (Cth): A public company must have at least 3 directors, 2 of whom reside in
Australia.
o s 201D Corporations Act 2001 (Cth): A person must give the company a signed consent to act as a director of the
company before being appointed, and the company must keep the consent.
 Eligibility.
o s 206B Corporations Act 2001 (Cth): A person is disqualified from being a director if they are: (1) convicted of an
indictable offence that concerns the making of decisions that affect a substantial part of the business of the
corporation, or concerns an act that has the capacity to affect significantly the corporation’s financial standing; (2)
convicted of an offence that is punishable by imprisonment for a period greater than 12 months; (3) convicted of
an offence that involves dishonesty and is punishable by imprisonment for at least 3 months; and (4) an
undischarged bankrupt.
 Appointment.
o Initial directors.
 s 117 Corporations Act 2001 (Cth): A person must lodge an application with ASIC using Form 201 and
pay the appropriate fee, stating the name, address, and date and place of birth of each director.
o Subsequent directors.
 s 201G (RR) Corporations Act 2001 (Cth): A company may appoint a person as a director by resolution
passed in general meeting.
 s 201F(1) Corporations Act 2001 (Cth): The director of a proprietary company who is its only
director and only shareholder may appoint another director by recording the appointment and
signing the record.

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  s 201H(2) (RR) Corporations Act 2001 (Cth): If a person is appointed as a director of a
proprietary company, the company must confirm the appointment by resolution within 2
months.
 s 201H(3) (RR) Corporations Act 2001 (Cth): If a person is appointed by the other directors as
a director of a public company, the company must confirm the appointment by resolution at the
company’s next AGM.
o s 201M Corporations Act 2001 (Cth): An act done by a director is effective even if their appointment, or the
continuance of their appointment, is invalid because the company or director did not comply with the company’s
constitution or any provision of this Act.
 The defective appointment itself is not validated.
 The act must have been done before discovery of the defect.
 Remuneration.
o Determination.
 It is common for constitutions to provide that the remuneration of a managing director or executive
directors employed by the company will be fixed by the board of directors under a contract of
employment.
 s 202A (RR) Corporations Act 2001 (Cth): The directors of a company are to be paid the remuneration
that the company determines by resolution.
 s 232 Corporations Act 2001 (Cth): The Court may make an order under section 233 if the conduct of a
company’s affairs, an actual or proposed act or omission by or on behalf of a company, or a resolution
of members of a company is either contrary to the interests of the members as a whole, or oppressive
to, unfairly prejudicial to, or unfairly discriminatory against, a member [e.g. excessive remuneration].
o Remuneration report.
 s 300A Corporations Act 2001 (Cth): The annual directors’ report of a listed disclosing entity must
provide remuneration disclosures.
 s 250R(2) Corporations Act 2001 (Cth): At a listed company’s AGM, a resolution that the remuneration
report be adopted must be put to the vote.
 s 250R(3) Corporations Act 2001 (Cth): Even if a majority shareholders’ vote is against the
adoption of the remuneration report, the vote is advisory only and does not bind the directors or
the company.
 Shareholders have the right to vote on a resolution requiring the directors to stand for re-election if the
shareholders’ concerns on remuneration issues are not adequately addressed over 2 consecutive years.
 s 300A(1)(g) Corporations Act 2001 (Cth): A “first strike” occurs if the non-binding resolution as
to whether the shareholders should adopt the remuneration report receives a “no” vote of 25%
or more. If this occurs the company must include in its remuneration report in the following year
an explanation of the board’s proposed actions in response to the “no” vote or an explanation
of why no action has been taken.
 ss 250U and 250V Corporations Act 2001 (Cth): A “second strike” occurs if the subsequent
remuneration report also receives a “no” vote of 25% or more. Where a second strike occurs, a
resolution must be put to the shareholders at the same AGM to determine whether the
directors are required to stand for re-election.
 Meetings.
o Format.
 s 248C (RR) Corporations Act 2001 (Cth): A directors’ meeting may be called by a director giving
reasonable notice individually to every other director.
 s 248E (RR) Corporations Act 2001 (Cth): The directors may elect a director to chair their meetings.
o Quorum.

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  s 248F (RR) Corporations Act 2001 (Cth): Unless the directors determine otherwise, the quorum for a
directors’ meeting is 2 directors.
 s 1322(2) Corporations Act 2001 (Cth): Procedural irregularities are not invalidated, unless the
court is of the opinion that the irregularity has caused or may cause substantial injustice which
may not otherwise be remedied by order of the court [in which case, the court has power to
declare the proceedings invalid].
o Voting.
 s 195 Corporations Act 2001 (Cth): A director of a public company who has a material personal interest
in a matter that is being considered at a directors’ meeting must not be present while the matter is being
considered at the meeting vote on the matter (unless directors who do not have a material personal
interest in the matter have passed a resolution that states they are satisfied that the interest should not
disqualify the director from voting or being present).
 s 191 Corporations Act 2001 (Cth): A director of a company who has a material personal
interest in a matter that relates to the affairs of the company must give the other directors
notice of the interest.
 A material personal interest has been defined as being “seen to have a capacity to influence
the vote of the particular director upon the decision to be made” (Murray J in McGellin v Mount
King Mining NL).
 s 194 Corporations Act 2001 (Cth): If a director of a proprietary company has a material personal
interest in a matter that relates to the affairs of the company and under section 191 the director
discloses the nature and extent of the interest, the director may vote on matters that relate to the
interest.
o Resolutions
 With meetings.
 s 248G (RR) Corporations Act 2001 (Cth): A resolution of the directors must be passed by a
majority of the votes cast by directors entitled to vote on the resolution, and the chair has a
casting vote if necessary, in addition to any vote they have in their capacity as a director.
 Without meetings.
 s 248A (RR) Corporations Act 2001 (Cth): A resolution of directors can be passed if all the
directors entitled to vote on the resolution sign a document containing a statement that they are
in favour of the resolution set out in the document.
 s 248B (RR) Corporations Act 2001 (Cth): In a single director proprietary company, the sole
director may pass a resolution by recording it and signing the record.
 Delegation of powers.
o s 198D(1) Corporations Act 2001 (Cth): Unless the company’s constitution provides otherwise, the directors of a
company may delegate any of their powers to: (1) a committee of directors [e.g. audit, risk management,
remuneration]; or (2) a director; or (3) an employee of the company; or (4) any other person.
 Removal.
o The company complies with the removal procedure in their constitution.
o The company complies with the statutory conditions.
 s 203C (RR) Corporations Act 2001 (Cth): A proprietary company may by resolution remove a director
from office, and by resolution appoint another person as a director.
 s 203D(1) Corporations Act 2001 (Cth) (MR–Public Company): A public company may by resolution
remove a director from office despite anything in the company’s constitution, an agreement between the
company and the director, or an agreement between any or all members of the company and the
director.
 s 203D(2) Corporations Act 2001 (Cth): Notice of intention to move the resolution must be
given to the company at least 2 months before the meeting is to be held.

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  s 203D(4) Corporations Act 2001 (Cth): The director is entitled to put their case to members by
giving the company a written statement for circulation to members and speaking to the motion
at the meeting.
 In Link Agricultural Pty Ltd v Shanahan & Ors, it was held that if a public company has
a provision in its constitution providing for the removal of a director by shareholders,
and the requirements in the constitution are different to those in s 203D, the
shareholders can decide whether to use the provision in the constitution or s 203D.
 In Scottish & Colonial Ltd v Australian Power and Gas Co Ltd, it was held that
compliance with s 203D is mandatory, given the “emphatic nature” of the language
used.
 s 203E Corporations Act 2001 (Cth): A resolution of any or all of the directors of a public company is
void to the extent that it purports to remove a director from their office.
 s 203F (RR) Corporations Act 2001 (Cth): A person ceases to be managing director if they cease to be
a director, and the directors may revoke or vary an appointment of a managing director.
o The director resigns.
 s 203A (RR) Corporations Act 2001 (Cth): A director of a company may resign as a director of the
company by giving a written notice of resignation to the company at its registered office.
o The director becomes disqualified.
 s 203B Corporations Act 2001 (Cth): A person ceases to be a director of a company if the person
becomes disqualified from managing corporations under Part 2D.6.
 s 206C Corporations Act 2001 (Cth): A person has contravened a civil penalty provision.
 s 206D Corporations Act 2001 (Cth): Within the last 7 years, the person has been an officer of
2 or more corporations when they have failed.
 s 206E Corporations Act 2001 (Cth): The person has at least twice been an officer of a body
corporate that has contravened this Act.
 s 206F Corporations Act 2001 (Cth): ASIC may disqualify a person from managing corporations for up to
5 years if, during the preceding 7 years, the person has been an officer of 2 or more companies that
were wound up and a liquidator lodged a report under s 533(1).

3.1.3 – Alteration of the company’s constitution.

 The power to alter a company’s constitution is mandatory (Peters’ American Delicacy Co Ltd v Heath).
o A company’s constitution cannot state that it will not be altered, nor can a company enter contracts to that effect
(Russell v Northern Bank Development Corp Ltd).
o It is irrelevant that alteration may harm the rights of some shareholders (unless it amounts to fraud of the
minority).
 In Peters’ American Delicacy Company Limited v Heath, an amendment to a company’s constitution had
the effect of disadvantaging holders of partly paid shares to the advantage of holders of fully paid
shares. It was held to be valid.
 Method.
o s 136(2) Corporations Act 2001 (Cth): A company may modify or repeal its constitution, or a provision of its
constitution, by special resolution (i.e. passed by at least 75% of the votes cast).
o ss 136(3) and 136(4) Corporations Act 2001 (Cth): Further requirements specified in the constitution relating to
the modification must be complied with.
o ss 136(5) and 136(6) Corporations Act 2001 (Cth): A public company must lodge with ASIC a copy of a special
resolution modifying its constitution within 14 days after it is passed. A failure to do so is a strict liability offence.
o s 137 Corporations Act 2001 (Cth): If an existing constitution is modified, that modification takes effect, if it is the
result of a special resolution: (1) on the date on which the resolution is passed, if it specified no later date; or (2)
on a date specified in the resolution.
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 Limitations.
o Entrenched requirements.
 ss 136(3) and 136(4) Corporations Act 2001 (Cth): Further requirements specified in the constitution
relating to the modification must be complied with.
o Weighted voting rights.
 In Bushell v Faith, a provision of a constitution provided that in the event of a resolution being proposed
at a general meeting for the removal from office of a director, any shares held by that director would on
a poll in respect of such resolution carry the right to 3 votes per share. The provision was held to be
effective.
o Statutory entrenchment.
 s 140(2) Corporations Act 2001 (Cth): After becoming a member, a member is not bound by a
modification of the constitution if it: (1) requires the member to take up additional shares; (2) increases
the member’s liability to contribute to the share capital of the company; or (3) imposes or increases
restrictions on the right to transfer the shares already held by the member.
o Class rights.
 s 246B Corporations Act 2001 (Cth): Class rights are rights attached to shares in a class of shares.
 If the constitution sets out the procedure for varying and cancelling class rights:
 Rights may be varied or cancelled only where the procedure in the constitution is
followed.
 If a company does not have a constitution or the constitution does not set out the procedure for
varying and cancelling class rights:
 Rights may be varied or cancelled only by either: (1) a special resolution of the
company and by special resolution passed at a meeting of the holders of the affected
class; or (2) with the written consent of members with at least 75% of the votes of the
affected class.
o Oppressive to members.
 s 232 Corporations Act 2001 (Cth): The Court may make an order under section 233 if the conduct of a
company’s affairs, an actual or proposed act or omission by or on behalf of a company, or a resolution
of members of a company is either contrary to the interests of the members as a whole, or oppressive
to, unfairly prejudicial to, or unfairly discriminatory against, a member.
 In Gambotto v WCP Ltd, Mr Gambotto, a shareholder with a 0.1% interest in WCP, sought to
prevent an amendment to WCP’s constitution which would permit Industrial Equity, which
owned 99.7% of WCP, to compulsorily purchase (expropriate) Mr Gambotto’s shares. It was
held that the amendment of WCP’s constitution was invalid, because: (1) it was not for a proper
purpose, even though WCP Ltd could show it would save money in taxation and financial
arrangements; and (2) it was not fair in the circumstances, because while the price offered for
the shares was fair, the purpose of taking away Gambotto’s shares to obtain tax and other
financial benefits for the majority through 100% ownership was not a ‘proper purpose’. It is for
the majority shareholders to prove that the amendment to the constitution is valid. (A proper
purpose would have been to save the company from significant detriment or harm, such as
where the shareholder to be bought out was competing with the company or where the
shareholder’s membership of the company would result in the loss of its business.)
o Shareholder agreements.
 Members of the company may make an effective contract among themselves outside the constitution as
to how they shall exercise their voting rights on a resolution to alter the constitution (Russell v Northern
Bank Development Corp Ltd). However, the contract between members cannot be binding on
transferees from any contracting shareholders, other new members, or on non-assenting members.

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3.1.4 – Effect of the company’s constitution.
 s 140(1) Corporations Act 2001 (Cth): A company’s constitution (if any) and any replaceable rules that apply to the
company have effect as a contract between [Note: Members may only enforce those provisions in a company’s
constitution or replaceable rules that confer rights on members in their capacity as members, because only those have
effect as a contract.]:
o The company and each member.
 In Hickman v Kent or Romney Marsh Sheep-Breeders’ Association, Hickman was a member of the Kent
or Romney Marsh Sheep-Breeders’ Association, an incorporated non-profit company. He began a court
action complaining of various irregularities in the affairs of the association. A clause in the association’s
constitution, however, provided that disputes between it and its members should be referred to
arbitration. It was held that Hickman’s court case should be stayed, because by virtue of the English
equivalent of s 140(1), Hickman was obliged to refer his disputes to arbitration.
 In Eley v Positive Government Security Life Assurance Co Ltd, the company’s constitution, drafted by
Eley, provided that he was to be its permanent solicitor and could only be dismissed for misconduct. He
acted as solicitor for some time, though no separate employment contract was entered into.
Subsequently, the company ceased to employ him, and Eley brought an action for breach of contract
against the company. It was held that the constitution conferred no rights on a member where the
member seeks to enforce a right in a capacity other than as a member (i.e. Eley was seeking to assert a
right in his capacity as solicitor of the company, and so he should have entered into a separate contract
independent of the constitution).
o A member and each other member.
o The company and each director and company secretary.
 The director or company secretary has no independent contract.
 In Shuttleworth v Cox Bros & Co (Maidenhead) Ltd, the company’s constitution contained a
provision that appointed a person director for life, and specified certain grounds for removal.
The company altered its constitution to add that a director could be removed upon a written
request signed by all other directors. Such a request was signed and the director dismissed. It
was held that the clause in the constitution appointing the director created a contract that was
still subject to the statutory power given to companies to alter their constitution, and thus could
be varied without his consent. (The director had no separate contract independent of the
constitution.)
 The director or company secretary has an independent contract.
 In Shindler v Northern Raincoat Co Ltd, a company’s articles of association stated that the
board could appoint one of their directors to be a managing director. Shindler was appointed,
by a service contract, to be the managing director of the corporation for 10 years.
Subsequently, the corporation was taken over, and the new controlling shareholder used the
company’s constitution to terminate the plaintiff’s services as a director, and also terminated
the service agreement, removing him as managing director. It was held that, although the
corporation could run its affairs as it saw fit in accordance with the articles, if in so doing it
breached an outside contract, it was liable in damages.
 The contract and constitution are interdependent.
 In Read v Astoria Garage (Streatham) Ltd, the company’s constitution provided that managing
directors could be appointed by a resolution of the directors and that appointment could be
terminated by a resolution of the general meeting. Read was appointed and dismissed by these
procedures, and he sought damages on the basis that there was a contract between him and
the company, one of the terms of which was that his employment should not be terminated
without reasonable notice. It was held that there was no breach of the contract of service,

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 because the contract made no provision for notice of any termination of the office, so the
exercise of the removal power under the constitution was valid.
 Remedies for breach.
o As it concerns: (1) the company and each member; and (2) a member and each other member.
 An injunction or declaration to enforce compliance with the constitution or applicable replaceable rules
may be sought on the basis of a breach of the statutory contract established by s 140(1).
o As it concerns: (1) the company and each director and company secretary.
 Injunction and specific performance are not generally granted to enforce employment contracts on
unwilling parties. Thus, directors and company secretaries cannot prevent the company from terminating
their appointment, but can only obtain damages for wrongful dismissal.

3.2 – Corporate organs.

3.2.1 – The division of powers between directors and members.

 Persons authorised to act on a company’s behalf are an organ of the company. Each organ has the power to make
particular decisions, and is sovereign with respect to those decisions. The powers of each organ are determined by the
Corporations Act 2001 (Cth) and internal governance rules. The organs of most companies will be:
o Board of directors (deciding in accordance with law and the company’s constitution).
 The internal rules usually provide that the main organ of the company is the board of directors.
 s 198A (RR) Corporations Act 2001 (Cth): The business of a company is to be managed by or
under the direction of the directors, and the directors may exercise all the powers of the
company, except any powers that this Act or the company’s constitution requires the company
to exercise in general meeting.
 If a company’s internal rules include s 198A (RR) Corporations Act 2001 (Cth) or a similar rule,
the members in general meeting cannot give directions to the board on how to exercise its
powers of management.
 In Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame, a company’s
constitution gave management powers to the board of directors, which included the
power to sell the company’s property. The directors of a company were ordered by a
general meeting to sell the company’s property, but they refused to do this. The
members argued that the constitution was subject to the overriding rule that the
directors, as agents of the company, were obliged to follow the instructions of their
principal, the company (the will of the company being a resolution of the general
meeting). However, it was held that the directions of the general meeting were a
nullity that could be ignored by the directors. The members could not interfere with the
directors in this respect, as they were contractually bound by the constitution.
 In John Shaw & Sons (Salford) Ltd v Shaw, the general meeting attempted to override
a decision of the board to bring legal action against some of the directors. It was held
that the board of directors was properly exercising the powers of management vested
in it by the constitution and the general meeting could not usurp this power.
 If members disagree with the directors on management matters, they can either change the
allocation of power by altering the constitution, or appoint new directors.
 Under s 249D(1) Corporations Act 2001 (Cth), the directors of a company must call
and arrange to hold a general meeting on the request of shareholders holding at least
5% of the voting shares that may be cast at the general meeting. However, directors
may also validly refuse to call a meeting requested by shareholders if its sole purpose

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 is to pass a resolution that interferes with the directors’ exclusive power to manage
the company’s business (NRMA v Parker).
 In Australasian Centre for Corporate Responsibility v Commonwealth Bank of
Australia, it was held that there was no basis to imply a term into the constitution of
the Commonwealth Bank of Australia allowing members to make an advisory
resolution to the board about how management reported on carbon emissions
generated by projects funded by the CBA.
 Unless the company’s constitution provides otherwise, directors are members of a collegial body whose
powers are to be exercised collectively, and they may only enact resolutions at a meeting.
 Powers.
 Any powers under the company’s constitution.
 s 201J (RR) Corporations Act 2001 (Cth): The directors of a company may appoint 1 or more of
themselves to the office of managing director of the company for the period, and on the terms
they see fit.
 s 249C (RR) Corporations Act 2001 (Cth): A director may call a meeting of the company’s
members.
 s 249U (RR) Corporations Act 2001 (Cth): The directors may elect an individual to chair
meetings of the company’s members.
 s 204F (RR) Corporations Act 2001 (Cth): A company secretary holds office on the terms and
conditions (including as to remuneration) that the directors determine.
 s 254U (RR) Corporations Act 2001 (Cth): The directors may determine that a dividend is
payable.
o Members in general meeting (deciding by a majority of votes permitted by law and the company’s constitution).
 The general meeting becomes the organ of the company when the company’s powers are expressly
granted to the general meeting by either:
 Corporations Act 2001 (Cth). (Powers vested in the general meeting are exclusive to that organ
and do not revert to the board.)
 s 157 Corporations Act 2001 (Cth): If a company wants to change its name, it must
pass a special resolution adopting a new name, and lodge an application in the
prescribed form with ASIC.
 s 136 Corporations Act 2001 (Cth): A company may adopt, modify, or repeal its
constitution by special resolution.
 ss 256B and 256C Corporations Act 2001 (Cth): Shareholder approval is required for
reductions in share capital.
 s 208 Corporations Act 2001 (Cth): For a public company to give a financial benefit to
a related party of the public company, the public company or entity must obtain the
approval of the public company’s members.
 s 327A(1) Corporations Act 2001 (Cth): The directors of a public company must
appoint an auditor of the company within 1 month of registration, unless the company
at a general meeting has appointed an auditor.
 s 491 Corporations Act 2001 (Cth): A company may be wound up voluntarily if the
company so resolves by special resolution.
 s 203D(1) Corporations Act 2001 (Cth) (MR–Public Company): A public company may
by resolution remove a director from office despite anything in the company’s
constitution, an agreement between the company and the director, or an agreement
between any or all members of the company and the director.
 The company’s own internal rules. (The general meeting is given qualified powers over the
composition of the board of directors.)

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  s 201G (RR) Corporations Act 2001 (Cth): A company may appoint a person as a
director by resolution passed in general meeting.
 s 203C (RR) Corporations Act 2001 (Cth): A proprietary company may by resolution
remove a director from office, and by resolution appoint another person as a director.
 s 202A(1) (RR) Corporations Act 2001 (Cth): The directors of a company are to be
paid the remuneration that the company determines by resolution.
 s 247D (RR) Corporations Act 2001 (Cth): The directors of a company, or the
company by a resolution passed at a general meeting, may authorise a member to
inspect books of the company.
 s 201H(3) (RR) Corporations Act 2001 (Cth): If a person is appointed by the other
directors as a director of a public company, the company must confirm the
appointment by resolution at the company’s next AGM.
 If a listed public company, the ASX Listing Rules. (It restricts directors from exercising
particular powers without the approval of the company in general meeting.)
 LR 7.1: Issuing new shares greater than 15% of issued share capital over a twelve
month period.
 LR’s 10.1 and 10.2: Acquiring or disposing of an asset whose value is greater than
5% of the equity interests of the company.
 LR 11.1: The transaction triggers significant changes to the nature of a company’s
activities.
 LR 11.2: Disposing of a company’s main undertaking.
 Reserve power.
 If either the directors are deadlocked and incapable of exercising their exclusive
power, or the number of directors in office has fallen below the number required for a
quorum, the members in general meeting may appoint additional directors.
 The members in general meeting may condone a breach of duty by the directors (so
long as their decision to do so does not constitute fraud or oppression of the minority).
 Residual power.
 If the constitution is silent as to who can exercise a particular power of the company,
under the general law of corporations, shareholders in general meeting may act by
ordinary resolution for the company.

3.2.2 – Members’ meetings.

 Terminology.
o The members of a company with a share capital are its shareholders. To become a shareholder of such a
company it is first necessary to become a member. The members of a company limited by guarantee are not
shareholders because the company does not have a share capital. Similarly, since an unlimited company could
be formed without a share capital before 1998, its members are not necessarily shareholders.
 Becoming a member.
o Being a member on the registration of the company (s 231(a) Corporations Act 2001 (Cth)).
o Arising from conversion of a company from one limited by guarantee to one limited by shares (s 231(c)
Corporations Act 2001 (Cth)).
o Applying for and receiving an issue of shares.
o Accepting a transfer of shares from a present member.
o Receiving shares by transmission on the death or bankruptcy of a member.
o Exercising an option over shares and requiring the company to issue the shares.
o Buying shares at the strike price under a call warrant.
o Holders of convertible notes may exercise their right to convert them into shares in the company.
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 Purpose of meetings.
o s 249Q Corporations Act 2001 (Cth): A meeting of a company’s members must be held for a proper purpose [e.g.
vote on resolutions to remove directors, elect new directors, change the company’s constitution].
 Directors may refuse to call a general meeting requested by shareholders if: (1) its sole purpose is to
pass a resolution that interferes with the directors’ exclusive power to manage the company’s business
(NRMA v Parker); or (2) the purpose of calling the meeting is to harass the company and its directors,
but not just because a proposed resolution is likely to be defeated and cause inconvenience and
expense to the company, its directors, and majority shareholders (Humes Ltd v Unity APA Ltd).
 Provided the purpose of the meeting is proper, it is irrelevant that the shareholders requesting the
meeting are motivated by ill will or self-interest (NRMA v Scandrett).
 Types of meetings.
o Annual general meeting (AGM).
 s 250N Corporations Act 2001 (Cth): A public company that has more than 1 member must hold an
AGM within 18 months after its registration, and at least once in each calendar year within 5 months
after the end of its financial year.
 A proprietary company need not hold an AGM unless their constitution requires it.
 The AGM is a forum for: (1) reporting (i.e. to inform shareholders about various financial and other
matters concerning the company); (2) questioning (i.e. to provide an opportunity for shareholders to ask
questions or make comments on various matters); (3) deliberating (i.e. to provide an opportunity for
shareholders to discuss the matters on which they will be called to vote at the meeting); and (4) decision
making (i.e. to enable shareholders to vote on a limited range of matters).
 Alternatives.
 s 249B Corporations Act 2001 (Cth): A company with only one shareholder passes a resolution
if the shareholder records the resolution and signs the record.
 s 249A(2) Corporations Act 2001 (Cth): A proprietary company may pass a resolution without a
general meeting being held if all the members entitled to vote on the resolution sign a
document containing a statement that they are in favour of the resolution set out in the
document.
o Extraordinary general meeting (EGM).
 If there is urgent business that requires shareholders to pass resolutions, an EGM may be called before
the next AGM to, for example: (1) enable shareholders to vote on motions to replace one or more
directors; (2) change the company’s constitution; or (3) in the case of public companies, to approve
giving a financial benefit to related parties as required by s 208 Corporations Act 2001 (Cth).
o Class meeting.
 If a company has different classes of shares, meetings of classes of shareholders may be called, for
example, to initiate and approve a scheme of arrangement (i.e. a re-organisation of share capital that
affects the rights of holders of classes of shares in different ways).
 Calling meetings.
o By the board.
 s 198A (RR) Corporations Act 2001 (Cth): The business of a company is to be managed by or under the
direction of the directors, and the directors may exercise all the powers of the company, except any
powers that this Act or the company’s constitution requires the company to exercise in general meeting.
o By a director.
 s 249C (RR) Corporations Act 2001 (Cth): A director may call a meeting of the company’s members.
 s 249CA Corporations Act 2001 (Cth): A director of a listed company has the right to call a shareholders’
meeting despite anything in the company’s constitution to the contrary.
o At the shareholders’ request.

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  s 249D(1) Corporations Act 2001 (Cth): The directors of a company must call and arrange to hold a
general meeting on the request of shareholders holding at least 5% of the voting shares that may be
cast at the general meeting.
 s 249E Corporations Act 2001 (Cth): If the directors do not do so within 21 days, members with
more than 50% of the votes who made a request may call and arrange to hold a general
meeting.
o By the shareholders.
 s 249F Corporations Act 2001 (Cth): Shareholders with at least 5% of voting shares may call a general
meeting without first requesting the directors to call the meeting.
o By a court order.
 s 249G Corporations Act 2001 (Cth): On application by any director or any member who would be
entitled to vote at the meeting, the Court may order a meeting of the company’s members to be called if
it is impracticable to call the meeting in any other way [e.g. management deadlock, inability to form a
quorum, extreme inconvenience].
 In Re Totex-Adon Pty Ltd, it was held to be “impracticable” to call a meeting because one of the 2
shareholders entitled to vote at meetings refused to co-operate in calling a meeting. It was ordered that
a meeting be called and that the presence of one shareholder holding voting shares would constitute a
quorum despite a provision in the constitution that required a quorum of 2 shareholders.
 Notice of meetings.
o Location.
 s 249R Corporations Act 2001 (Cth): A meeting of shareholders must be held at a reasonable time and
place.
o Receiving notice.
 s 249J(1) Corporations Act 2001 (Cth): Written notice of a meeting of shareholders must be given
individually to each shareholder entitled to vote and to each director.
o Amount.
 Listed companies.
 s 249HA Corporations Act 2001 (Cth): Must give 28 days’ notice [unless a company’s
constitution specifies otherwise].
 Non-listed companies.
 s 249H Corporations Act 2001 (Cth): Must give 21 days’ notice [unless a company’s
constitution specifies otherwise].
 s 249H(2) Corporations Act 2001 (Cth): If the meeting is an AGM, all shareholders entitled to
attend and vote at the AGM can agree beforehand to call a meeting on shorter notice than 21
days, while in the case of other general meetings, the holders of at least 95% of votes must
agree beforehand.
o Content.
 s 249L Corporations Act 2001 (Cth): A notice must clearly, concisely, and effectively include: (1) the
place, date and time of the meeting; (2) the general nature of the meeting’s business; (3) the intention to
propose a stated special resolution; and (4) if a shareholder has a right to appoint a proxy.
o Misleading information.
 Directors have an obligation to ensure that the content of notices of meetings and accompanying
explanatory documents sent to shareholders contains full and fair disclosure and is not misleading. The
courts judge whether the information is misleading from the perspective of an ordinary shareholder who
scans the documents quickly (Devereaux Holdings Pty Ltd v Pelsart Resources NL).
 In Fraser v NRMA Holdings Ltd, it was held that held that satisfactory disclosure may be achieved
without setting out the “no case” on a proposal for demutualisation, but it was inadequate for the

Page 25 of 100
 disclosure document to acknowledge that the proposal had disadvantages which were not identified,
explained, or compared with the perceived advantages.
 In ENT Pty Ltd v Sunraysia Pty Ltd, the directors of the company proposed to dispose of the main
undertaking of the company, which required shareholder approval. It was held that although
shareholders needed to be provided with all the information material to the question whether the
transaction proposed by directors should be approved, the shareholders did not require information
about the range of alternative proposals that would need to be considered before a particular transaction
was chosen, as this was a task for the directors.
 Proceedings at meetings.
o Quorum.
 A quorum is the minimum number of shareholders whose presence is necessary for a meeting to be
able to validly transact business.
 s 249T(1) (RR) Corporations Act 2001 (Cth): The quorum for a meeting is 2, and the quorum must be
present at all times during the meeting.
 s 249T(2) Corporations Act 2001 (Cth): In determining whether a quorum is present, proxies and body
corporate representatives are counted, but if a shareholder has appointed more than one, only one is
counted.
o Chairing meetings.
 s 249U(1) (RR) Corporations Act 2001 (Cth): Directors may elect an individual to chair shareholders’
meetings.
 s 249U(3) Corporations Act 2001 (Cth): If the directors do not elect a chair for the shareholders’ meeting
or the chair is unavailable, the shareholders elect the chair.
o Voting.
 s 250E(1) (RR) Corporations Act 2001 (Cth): In the case of a company with a share capital,
shareholders have one vote per person.
 s 250J(1) (RR) Corporations Act 2001 (Cth): A resolution put at a general meeting must first be decided
on a show of hands unless a poll is demanded.
 s 250L(1) Corporations Act 2001 (Cth): A poll may be demanded by either at least 5
shareholders entitled to vote, shareholders with at least 5% of votes, or the chair.
o Proxies.
 Concept.
 Even if shareholders are unable to attend general meetings, they can exercise their voting
rights by appointing a proxy, who is authorised to vote on behalf of the appointing shareholder.
 s 249X(1A) Corporations Act 2001 (Cth): A proxy may be an individual or a body corporate.
 Appointment.
 s 249X(1) (MR–Public Company/RR–Proprietary Company) Corporations Act 2001 (Cth): A
shareholder who is entitled to vote may appoint a proxy to attend and vote for the shareholder
at the meeting.
 s 250B(1) Corporations Act 2001 (Cth): The company must receive details of a
proxy’s appointment at least 48 hours before the meeting.
 s 249Y(1) Corporations Act 2001 (Cth): A proxy has the rights of the appointing
shareholder to speak at the meeting, to vote in accordance with the appointment, and
to join in the demand for a poll.
 When appointing a proxy, a shareholder may either direct how the proxy should vote (“directed
proxy”) or not (“open/undirected proxy”).
 s 250BB(1)(a) Corporations Act 2001 (Cth): The directed proxy need not vote on a
show of hands, but if the proxy does so, the proxy must vote as instructed.

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  s 250BB(1)(c) Corporations Act 2001 (Cth): If the directed proxy is the chair of the
meeting, the proxy must vote on a poll and must vote as directed.
 In Whitlam v ASIC, Whitlam, as chair of NRMA, was appointed by about
4,000 shareholders as their proxy with instructions to vote against a
proposed resolution to increase the directors’ remuneration. He omitted to
sign the poll papers, which resulted in disenfranchising the shareholders who
appointed him. It was held that Whitlam: (1) did not contravene the
predecessor of s 250BB(1)(c), because there was insufficient evidence to
conclude beyond reasonable doubt that Whitlam’s omission to sign was
deliberate; and (2) was not exercising director’s powers or discharging a
director’s duty in his capacity as proxy (and thus a contravention of s
250BB(1)(c) does not mean that the director also breached the statutory
duties under s 181 or s 182).
 s 250BB(1)(d) Corporations Act 2001 (Cth): If the directed proxy is not the chair, the
proxy need not vote on a poll, but if the proxy does vote, it must vote as directed.

o Conduct.
 s 250S Corporations Act 2001 (Cth): The chair of an AGM must allow a reasonable opportunity for the
shareholders as a whole at the meeting to ask questions or make comments regarding the management
of the company
 s 250SA Corporations Act 2001 (Cth): At a listed company’s AGM, the chair must allow a reasonable
opportunity for shareholders to ask questions about or make comments on the remuneration report.
 s 250T Corporations Act 2001 (Cth): Shareholders have a reasonable opportunity to direct questions to
the auditor on matters relevant to the audit and auditor’s report.
o Resolutions.
 A company’s board of directors usually sets the agenda for its AGMs and other general meetings.
However, minority shareholders also have the right to require the company to circulate their own
proposed resolutions and statements.
 s 249N(1) Corporations Act 2001 (Cth): Shareholders with at least 5% of the votes that may be cast, or
at least 100 shareholders entitled to vote, may give a company notice of a resolution that they propose
to move at a general meeting.
 Shareholders cannot require a resolution that interferes with the directors’ management power
to be put to the vote at a general meeting (NRMA v Parker). However, if a proposed resolution
under s 249N does not interfere with the directors’ powers, the directors are permitted to
express an opinion on the proposed resolution and advise shareholders to vote against it
(Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia).
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  s 249P(1) Corporations Act 2001 (Cth): Shareholders with at least 5% of the votes that may be cast on a
resolution, or at least 100 shareholders who are entitled to vote at the meeting, may request their
company to distribute a statement to all shareholders about a proposed resolution to be moved at a
general meeting or about any other matter that may properly be considered at a general meeting.
However, a company need not comply with a request if the statement is more than 1,000 words long or
defamatory.
o Irregularities.
 ss 1322(2) and 1322(4) Corporations Act 2001 (Cth): Procedural irregularities are not invalidated, unless
the court is of the opinion that the irregularity has caused or may cause substantial injustice which may
not otherwise be remedied by order of the court, in which case, the court has power to declare the
proceedings invalid.
 Includes: Absence of a quorum; deficiency of notice or time.
 Excludes: Failure to give notice to half the shareholders of a proposal to amend the company’s
constitution and to resolving to amend the constitution without the knowledge of those
shareholders (Jordan v Avram).
 French CJ in Weinstock v Beck: “s 1322(4) is to be construed broadly and applied
pragmatically, principally by reference to considerations of substance rather than those of
form”.
 s 1322(6) Corporations Act 2001 (Cth): The court may validate proceedings at meetings if the
irregularity is essentially of a procedural nature and the parties to the contravention acted honestly, or it
is just and equitable that the order be made.
 Principle of informal unanimous consent (“Duomatic principle”).
 If all shareholders entitled to attend and vote at a general meeting of a company assent with
full knowledge of the effect that the matter agreed to will have on their rights, to some matter
that could have been carried into effect at a general meeting, that assent is as binding as a
resolution in a general meeting would have been (i.e. it is open to all the shareholders to agree
to disregard the formalities associated with the calling of a meeting) (Herrman v Simon; Re
Duomatic Ltd).
 In Re Duomatic Ltd, the company had 2 classes of shares: (1) ordinary shares with a
right to vote; and (2) preference shares with no right to vote. It was held that it was
sufficient for all the shareholders with a right to vote to reach unanimous agreement in
order to bind the company to some matter which a general meeting could carry into
effect, and the agreement of the non-voting shareholders was not necessary.
 The Duomatic principle does not enable shareholders to exercise a power that they do not
have under the constitution (i.e. only procedural, not substantive, requirements can be waived)
(Bodikian v Sproule).

3.2.3 – Reporting and access.

 s 251A(1) Corporations Act 2001 (Cth): A company must keep minute books in which it records proceedings and
resolutions of meetings of the company’s shareholders and directors, including meetings of committees of directors.
 ss 168(1)(a) and 169 Corporations Act 2001 (Cth): All companies must set up and maintain a register of members
containing prescribed information about the shareholders and the shares they own.
o s 173(1) Corporations Act 2001 (Cth): A company must allow anyone to inspect its share register.
 s 286 Corporations Act 2001 (Cth): A company must keep and maintain sufficient financial records to allow true and fair
financial statements to be prepared.
o s 290(1) Corporations Act 2001 (Cth): Directors have a right to access the financial records at reasonable times.

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  s 247A Corporations Act 2001 (Cth): On application by a member, a court may make an order authorising the member or
another person to inspect books of the company if it is satisfied that the member is acting in good faith and the inspection
is to be made for a proper purpose.
o The rationale is to enable a shareholder who has identified an appropriate case for investigation to determine
whether that case has any substance or prospects.
 Non-small proprietary companies.
o s 292(1) Corporations Act 2001 (Cth): Must prepare, for each financial year, an audited financial report and a
directors’ report, to be lodged with ASIC and made publically accessible.
 Small proprietary companies.
o s 292(2) Corporations Act 2001 (Cth): Must prepare a financial report and directors’ report if, either: (1)
shareholders with at least 5% of the votes request it; (2) ASIC directs it to; or (3) it was controlled by a foreign
company for part of the year, and it is not consolidated for that year in financial statements lodged with ASIC.

3.3 – Directors’ duties.

3.3.1 – Who owes duties?

 Common law.
o Directors and senior managers have a fiduciary relationship with their company and owe various fiduciary duties
to it.
 Corporations Act 2001 (Cth).
o The fiduciary duties are supplemented by various statutory duties contained in the Corporations Act 2001 (Cth),
which largely restate, but do not replace or override, the fiduciary duties. The duties in ss 180-184 are imposed
on both directors as well as other “officers of a corporation”. (Employees of a corporation are also subject to the
duties in s 182 (improper use of position) and s 183 (improper use of information).)
 s 9 Corporations Act 2001 (Cth): A “director” includes a person: (1) who has been appointed to the
position of director; (2) who has not been validly appointed but acts in the position of director (a de facto
director); and (3) on whose instructions or wishes the directors of a company are accustomed to act (a
shadow director).
 s 9 Corporations Act 2001 (Cth): An “officer of a corporation” includes: (1) the directors or secretary of
the corporation; (2) in an insolvency context, a receiver, administrator, and liquidator; and (3) company
executives who hold senior positions below board level, but who make or participate in making decisions
that affect the whole or a substantial part of a company’s business, or who have the capacity to affect
significantly the company’s financial standing, or in accordance with whose instructions or wishes the
directors are accustomed to act (a “shadow” officer).
 In 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 a director of HIH, the subsidiary’s 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.
 Excludes middle managers of a company who do not report directly to the board. Their
responsibilities are usually confined to segments of the company’s business or financial affairs,
and therefore are unlikely to be involved in making decisions that affect the whole or a
substantial part of the company’s business. Middle managers are also unlikely to have the
capacity to significantly affect the company’s financial standing. This means that while middle
managers may have a contractual duty to the company to exercise their powers with a

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 reasonable degree of care and diligence and to act in good faith in the best interests of the
company, they cannot be liable for civil penalties or criminal offences for contravening ss 180
(care and diligence) or 181 (good faith, best interests of the company) of the Corporations Act
2001 (Cth).

3.3.2 – Care, skill, and diligence.

 The duty.
o Directors and other officers are under a duty to exercise a reasonable degree of care and diligence. These duties
are imposed by s 180(1) Corporations Act 2001 (Cth) as well as the common law tort of negligence and the
equitable duty of care. The substance of these duties is the same (Vines v ASIC).
o Under the general law, directors and other officers who breach their duties of care and diligence will be liable to
pay damages to the company if it is proved that: (1) they breached their standard of care and diligence (in other
words they were not careful enough in the circumstances); (2) their carelessness caused the company’s loss or
damage; and (3) the kind or type of loss suffered by the company was reasonably foreseeable. However, the
requirements of causation and foreseeability are not applicable to a breach under statute.
o The court may impose civil penalty orders on directors or officers who contravene the statutory duty of care and
diligence in s 180(1).
 The standards of care, skill, and diligence.
o s 180(1) Corporations Act 2001 (Cth): A director or other officer of a corporation must exercise their power and
discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
 Were a director or officer of a corporation in the corporation’s circumstances (e.g. the type of the
company, the size and nature of its enterprise, the provisions of its articles of association, the
composition of its board and the distribution of work between the board and other officers).
 In ASIC v Rich, while the case dealt only with the adequacies of ASIC’s pleadings against
One.Tel’s chairman, it was noted that the One.Tel group’s financial position and performance
progressively deteriorated in the months prior to its May 2001 collapse. ASIC argued that a
reasonable chairman of a company in One.Tel’s circumstances would have: (1) known about
the group’s financial position and performance and would have ensured that the board was
informed about this on a month-by-month basis; (2) promptly recommended to the board that
the group cease trading or appoint an administrator unless a significant cash injection was
obtained.
 Occupied the office held by, and had the same responsibilities within the corporation as, the director or
officer.
 Non-executive directors (i.e. those not directly involved in the daily management of the
company’s business).
 In Daniels v Anderson, AWA, a listed company, incurred large losses from foreign
exchange transactions carried out by one of its middle level managers. The foreign
exchange dealings were not adequately supervised by senior AWA executives who
did not put in place adequate internal controls to monitor foreign exchange activities,
and the auditor failed to inform AWA’s board of the full extent of the inadequacies
even though he knew that the senior executives had not acted on his warnings. It was
held that AWA’s non-executive directors did not breach their standard of care because
on the facts of the case they had made inquiries and requested information about the
foreign exchange dealings from senior management and the auditor but the full details
were concealed from them. More generally, it was held that:
 Directors must become familiar with the company’s business when they join
the board.

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  While directors need not have equal knowledge and experience of every
aspect of the company’s activities, they are under a continuing obligation to
make inquiries and keep themselves informed about all aspects of the
company’s business operations.
 Directors must also be familiar with their company’s financial position by
regularly reviewing its financial statements as they will be unable to avoid
liability for insolvent trading by claiming that they do not know how to read
financial statements.
 Directors who are appointed because they have special skills or experience
in an aspect of the company’s business must also pay attention to other
aspects of the company’s business which might reasonably be expected to
attract inquiry even if this is outside their area of expertise.
 Directors are allowed to make business judgments and take commercial
risks. However, they cannot safely proceed on the basis that ignorance and a
failure to inquire are protection against liability for negligence.
 Directors cannot shut their eyes to corporate misconduct and then claim that
they did not see the misconduct and did not have a duty to look.
 Chair.
 In ASIC v Rich, it was held that Greaves had special responsibilities beyond those of
the other non-executive directors by reason of his position as chairman of the board,
chairman of its finance and audit committee, and also because of his high
qualifications, experience and expertise relative to the other directors. ASIC argued
that these special responsibilities meant that Greaves had a higher standard of care
which he failed to meet in the circumstances. More generally, it was held that:
 The word “responsibilities” is not limited to legal duties.
 A chairman has the primary responsibility of selecting matters and
documents to be brought to the board’s attention, in formulating the policy of
the board, and in promoting the position of the company.
 Executive directors and officers.
 Executive directors and other officers who are appointed to positions requiring the
exercise of skill are subject to more stringent standards of care and diligence than
non-executive directors, such that they must exercise objective standards of skill even
though s 180(1) does not use the word “skill” (ASIC v Vines).
 In Daniels v Anderson, it was held that AWA’s CEO breached his duty to act with
reasonable care because he failed to make inquiries of the company’s senior
executives that would have led to a better appreciation of the risks and dangers of the
foreign exchange dealings. As CEO, he was under a continuing obligation to
supervise management.
 In Vines v ASIC, AMP made a takeover offer for GIO, which GIO thought was
inadequate. GIO’s directors responded to AMP’s takeover bid by giving a target’s
statement to their shareholders, including a profit forecast which indicated that GIO
was “well on track to achieve a significant profit”. The forecasted profit did not
eventuate because it did not take into account material underwriting losses arising
from a hurricane that occurred shortly before the forecast was finalised. Vines, while
not a director, was GIO’s CFO and also had a prominent role in relation to GIO’s
forecast and provided the GIO board’s due diligence committee an unqualified
assurance of its reliability. It was held that Vines breached his standard of care when

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 he signed off on GIO’s profit forecast without taking steps to ensure that the
monitoring process about the hurricane claims was up to date.
 The duties.
o All directors have a continuing obligation to familiarise themselves with the company’s financial position by
regular review and understanding of its financial statements (Daniels v Anderson).
 In ASIC v Healey, the balance sheet of the Centro Properties Group failed to disclose billions of dollars
of short-term liabilities and guarantees of liabilities of an associated company, and the balance sheet of
the Centro Retail Group failed to disclose short-term liabilities. It was held that the directors of both
groups had contravened s 180(1) by approving the 2007 financial reports of the 2 groups. Even though
directors were entitled to delegate to others the preparation of the books and accounts, this did not
absolve them of the responsibility to read and understand the content of the financial statements and
make further enquiries if necessary. The directors should have queried the reports because, at the time,
they were aware of the volatile market conditions caused by the onset of the GFC, and there had been
extensive boardroom discussions about the need to convert billions of dollars of short-term debt to
longer-term borrowings.
o A director may breach the duty of care by causing the company to enter into transactions that exposes it to risks
without the prospect of producing any benefit for the company.
 In ASIC v Adler, it was held that Adler, a non-executive director, breached s 180(1) because a
reasonably careful and diligent director of HIH and HIHC in Adler’s position would not have caused or
procured the $10 million payment by HIHC to PEE, a company controlled by Adler.
o Directors may breach their duty of care if they permit the company to contravene the Corporations Act 2001
(Cth).
 In ASIC v Hellicar, JHIL underwent a restructure in which MRCF was established, with a board
independent of JHIL, to act as trustee of a trust fund established to compensate asbestos victims. JHIL
issued press releases about the restructure that gave the false and misleading impression that an effect
of the restructure was that MRCF would have access to sufficient funds to meet current and future
asbestos-related claims. It was held that JHIL’s managing director, CFO, GC, and non-executive
directors failed to take reasonable care when they approved the ASX announcement with too emphatic
terms.
 Defences
o The business judgment rule defence.
 s 180(2) Corporations Act 2001 (Cth): A defence that provides that a director or other officer who makes
a business judgment is taken to meet the requirements of s 180(1) and their equivalent duties at
common law and in equity if they: (1) make the judgment in good faith for a proper purpose; (2) do not
have a material personal interest in the subject matter of the judgment; (3) inform themselves about the
subject matter of the judgment to the extent they reasonably believe to be appropriate; and (4) rationally
believe that the judgment is in the best interests of the corporation.
 Directors and officers have the onus of proving the 4 elements, which if satisfied, means that
they are shielded from personal liability for any breach of their duty of care and diligence.
 s 180(3) Corporations Act 2001 (Cth): A business judgment is any decision to take or not take action in
respect of a matter relevant to the business operations of the corporation.
 Includes matters of planning, budgeting, forecasting, the setting of policy goals, the
apportionment of responsibilities between the board and senior management relating to
corporate personnel, and the termination of litigation (ASIC v Rich).
 A director or officer must make a conscious decision to take or refrain from taking action, so
that a director who “simply neglected to deal with proper safeguards, with no evidence that he
even turned his mind to a judgment of what safeguards there should be”, has not made a
business judgment (ASIC v Adler).

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 o Reliance on others.
 s 189(a) Corporations Act 2001 (Cth): A director may rely upon information or advice provided by: (1) an
employee whom the director believes on reasonable grounds to be reliable and competent in relation to
the matters concerned; (2) a professional adviser or expert in relation to matters that the director
believes on reasonable grounds to be within the person’s professional or expert competence; (3)
another director or officer in relation to matters within the director’s or officer’s authority; and (4) a
committee of directors on which the director did not serve in relation to matters within the committee’s
authority.
 s 189(b) Corporations Act 2001 (Cth): The reliance must be made in good faith and after making an
independent assessment of the information or advice, having regard to the director’s knowledge of the
corporation and the complexity of its structure and operations.
 Responsibility for actions of delegates.
o s 190(1) Corporations Act 2001 (Cth): States the general rule that if directors delegate a power under s 198D,
they are responsible for the exercise of power by the delegate as if the power had been exercised by the
directors themselves.
 s 198D Corporations Act 2001 (Cth): Authorises the directors of a company to delegate any of their
powers to: (1) a committee of directors; (2) a director; (3) an employee of the company; or (4) any other
person.
o s 190(2) Corporations Act 2001 (Cth): A director will not be responsible for the acts of a delegate if the delegate
acts fraudulently, negligently, or outside the scope of their delegation if the director believed on reasonable
grounds that the delegate would exercise the power in conformity with the duties imposed on directors by the
Corporations Act 2001 (Cth) and the company’s constitution, in good faith, after making proper inquiry if the
circumstances indicated the need for inquiry, and the delegate was reliable and competent in relation to the
power delegated and would exercise the power in conformity with the duties imposed on the directors by the
Corporations Act 2001 (Cth).
 Consequences of contravention.
o Since the common law duty of care is owed to the company, it can sue a director or officer for damages if their
breach of the common law standard of care causes loss. Shareholders may bring proceedings in the name of the
company under s 236 if they obtain prior leave of the court.
o Section 180(1) is a designated civil penalty provision under s 1317E. A person who contravenes a civil penalty
provision may be ordered to pay a pecuniary penalty of up to $200,000 under s 1317G, compensation to the
corporation for damage suffered by it under s 1317H, or be disqualified from management under s 206C.
Contravention of s 180(1) is not a criminal offence as criminal liability requires the existence of dishonesty, so it is
deliberately excluded from s 184.

3.3.3 – Good faith.

 The duty.
o Directors are under a fiduciary duty to act in good faith and in the best interests of the company. Section
181(1)(a) Corporations Act 2001 (Cth) sets out the same requirements.
 The standard.
o A breach occurs if a director acts in a way that no rational director would have considered to be in the best
interests of the company (ASIC v Adler).
 The test is both an objective (Hutton v West Cork Railway Co) and subjective (Re Smith & Fawcett Ltd)
one.
 The “best interests of the company” are the best interests of the shareholders as a collective group
(Evershed MR in Greenhalgh v Arderne Cinemas Ltd).
 Directors are presumed to have acted in good faith and in the best interests of their company and those
persons alleging a breach of duty bear the onus of proving that this is in fact not the case.
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  Scenarios.
o Company groups.
 A holding company will usually appoint its nominees as directors of subsidiaries. If there is a conflict
between the interests of a subsidiary and the group, nominee directors must act in the subsidiary’s best
interests and not in the interests of the group as a whole.
 In Walker v Wimborne, the liquidator of an insolvent company, which was one of a group of
companies, brought an action against its directors under a predecessor of s 598, to recover
money disposed of by the company prior to its winding up. The directors caused the company
to make loans to other companies in the group in circumstances where there was no prospect
of repayment. It was held that the directors were liable.
 s 187 Corporations Act 2001 (Cth): In situations where the subsidiary is solvent at the time the director
acts and does not become insolvent because of the director’s action, a director of a wholly-owned
subsidiary will be taken to act in good faith in the best interests of the subsidiary where: (1) the
constitution of the subsidiary expressly authorises the director to act in the best interests of the holding
company; and (2) the director in fact acted in good faith in the best interests of the holding company.
o Employees.
 Directors should not consider the interests of employees at the expense of the interests of the
company’s shareholders.
 In Parke v Daily News Ltd, a company that controlled 2 newspapers sold one of them. The
directors intended to distribute surplus proceeds from the sale among its employees by way of
compensation for dismissal. A shareholder brought an action to prevent these payments. It was
held that the directors breached their fiduciary duties to act in the best interests of the company
because the proposed payments were not reasonably incidental to the carrying on of the
company’s business. They were gratuitous payments to the detriment of shareholders and the
company as a whole. (However, in Re Cummings Engineering Holdings Pty Ltd, the court said
that a redundancy payment paid to a departing employee may be in the interests of the
company if it preserves goodwill, avoids disputation, and encourages continuing employees.)
 Consequences of contravention.
o Under s 1317E, s 181 is a designated civil penalty provision. A person is involved in a contravention in the
circumstances described in s 79 (i.e. a person aids and abets, induces or is knowingly concerned in, or party to
the contravention).
o Criminal liability may be imposed under s 184(1) if a director or other officer of a corporation is reckless or
intentionally dishonest and fails to exercise their powers and discharge their duties in good faith in the best
interests of the corporation or for a proper purpose.

3.3.4 – Proper purpose.

 The duty.
o The fiduciary duty of directors requires them to exercise their powers for proper purposes. Section 181(1)(b)
Corporations Act 2001 (Cth) sets out the same requirements.
 The standard.
o If it is alleged that the directors have exercised their powers for improper purposes, the courts consider (Howard
Smith Ltd v Ampol Petroleum Ltd): (1) the objective purpose for which the power was granted; and (2) the
purpose which actually motivated the exercise of the power.
 The onus of establishing that the directors acted improperly rests with those alleging the breach of duty.
o Directors may breach this duty even if they honestly believe their actions are in the best interests of the company
as a whole.
 Scenarios.
o Issue of shares.
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  The power to issue shares is ordinarily conferred for the purpose of: (1) raising capital for the company;
(2) providing consideration for the purchase of property; or (3) as a means of remunerating employees
of a company. However, directors breach their fiduciary and statutory duties to exercise their powers for
a proper purpose if they issue shares to: (1) maintain control of the company’s management or majority
shareholding; (2) defeat a takeover bid; or (3) create or destroy the voting power of majority
shareholders.
 If there was more than one purpose for a share issue (one of which is in the interests of the
company, and the other which promotes the directors’ own interests as shareholders to the
detriment of other shareholders), an allotment of shares will be invalidated if, but for the
presence of the impermissible purpose, no allotment would have been made (Whitehouse v
Carlton Hotel Pty Ltd).
 In Howard Smith Ltd v Ampol Petroleum Ltd, there was a takeover battle for control of Miller. 2
independent companies, Ampol Petroleum and Bulkships, controlled a combined 55% of
Miller’s issued capital, and decided to make a joint takeover bid for all the other Miller shares.
Soon after, Howard Smith, a company friendly to Miller’s board, made its own takeover bid
offering a higher price. To give Howard Smith’s takeover bid a chance of success, Miller’s
directors issued sufficient shares to it so as to reduce the Ampol-Bulkships majority
shareholding to a minority position. When Ampol and Bulkships challenged the validity of the
share issue, Miller’s directors argued that they were primarily motivated by the fact that their
company was in urgent need of funds to finance tankers then under construction and to ease
other existing financial problems. It was held that Miller’s directors had breached their duty and
invalidated the share issue to Howard Smith. It did not believe the directors’ explanation of their
reasons for the share issue.
 Remedies.
 A shareholder may apply for court leave under s 236 to sue the directors in the name of the
company if it is unwilling rescind the share issue.
 May constitute oppressive or unfair conduct and enable a shareholder to obtain a remedy
under s 232.
 Directors can protect themselves by obtaining shareholder approval at a general meeting.
 The ASX Listing Rules ensure that directors of listed companies do not make significant share
issues without obtaining shareholder approval. Under LR 7.1 share issues exceeding 15% of a
listed company’s issued capital in a 12-month period require shareholder approval. In addition,
LR 10.11 requires shareholder approval for share issues to related parties of a listed company
such as directors.
o Permitting the corporation to contravene the Corporations Act 2001 (Cth).
 Directors will breach their duty to exercise their powers and discharge their duties in good faith in the
best interests of the corporation and for a proper purpose pursuant to s 181(1) if they permit or allow the
corporation to contravene the Corporations Act 2001 (Cth) and: (1) the corporation’s interests were
jeopardised; (2) the risks to the corporation outweighed any potential countervailing benefits to the
corporation; and (3) there were reasonable steps that could have been taken to avoid those risks.
 In ASIC v Sydney Investment House Equities Pty Ltd, it was held that Goulding, one of the
directors of various companies in the SIH Group, had contravened ss 180 and 181 by causing
or permitting some of the companies in the SIH Group to: (1) conduct an unregistered
managed investment scheme; (2) carry on an unregistered financial services business; and (3)
engage in misleading and deceptive conduct.
o Retaining their discretion.

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  Directors have a fiduciary duty to retain their discretionary powers. Directors will breach this duty if they
enter into an agreement with outsiders that requires them to vote in a certain way at future board
meetings or to follow directions from another person.
 A nominee director may be appointed to represent the interests and act on the instructions of the
appointor. In such cases, the nominee director’s discretion may be fettered.
 Consequences of contravention.
o Under s 1317E, s 181 is a designated civil penalty provision. A person is involved in a contravention in the
circumstances described in s 79 (i.e. a person aids and abets, induces or is knowingly concerned in, or party to
the contravention).
o Criminal liability may be imposed under s 184(1) if a director or other officer of a corporation is reckless or
intentionally dishonest and fails to exercise their powers and discharge their duties in good faith in the best
interests of the corporation or for a proper purpose.

3.3.5 – Conflicts of interest and disclosure.

 The duty.
o All fiduciaries are under a duty to avoid situations where they put or may put their personal material interests of a
contractual nature ahead of their duties to the person for whose benefit they act, and they neither disclose the
details of their personal material interest, nor obtain the company’s fully informed consent. The duty to avoid
conflicts of interest is also governed by s 181 Corporations Act 2001 (Cth), which is breached when an officer
fails to act in good faith in the best interests of the company or for a proper purpose.
 A material personal interest has been defined as being “seen to have a capacity to influence the vote of
the particular director upon the decision to be made” (Murray J in McGellin v Mount King Mining NL).
 For example, a director of a proprietary company who owns a relatively small parcel of shares
in a large public company does not have a material interest in any contract between the
companies merely because of that shareholding.
 Directors cannot avoid liability by claiming they did not make a profit, their company did not suffer any
loss (Green v Bestobell Industries Pty Ltd), or that the contract was a fair one.
 In Aberdeen Railway Co v Blaikie Bros, a railway company entered into a contract with a
partnership for the supply of a large quantity of iron seats. The company sought to avoid the
contract on several grounds, including that at the time the contract was entered into, one of the
partners was a director of the company. It was held that the company could avoid the contract
even though its terms were fair.
 Scenarios.
o Self-interested transactions with the company.
 Fiduciary duties.
 Directors breach their fiduciary duty if they have undisclosed interests in transactions with their
company, either directly (i.e. the director contracts personally with the company) or indirectly
(i.e. the director is a director or shareholder of another company that contracts with the
company).
 A company has a variety of remedies available, with rescission of the contract being the usual
one.
 Related party transactions (only applies to public companies).
 Prior shareholder approval needed.
 s 208(1)(a)(i) Corporations Act 2001 (Cth): A public company may give a financial
benefit to a related party if it obtains the approval of its shareholders in accordance
with ss 217-227 (it is agreed to by a majority vote of disinterested shareholders who
are fully informed about the financial benefit and its impact on the company).

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  s 208(1)(a)(ii) Corporations Act 2001 (Cth): Shareholder approval must be obtained
no more than 15 months before the public company gives the financial benefit.
 s 208(1) Corporations Act 2001 (Cth): Public company shareholder approval is
required where an entity controlled by a public company gives a financial benefit to a
related party of the public company.
 s 230 Corporations Act 2001 (Cth): Directors are not relieved of any of their duties
under the Corporations Act 2001 (Cth) or fiduciary duties merely because
shareholders authorise a transaction.
 Giving a financial benefit.
 s 229(1) Corporations Act 2001 (Cth): Determining whether a financial benefit is given
requires a broad interpretation, the economic and commercial substance of conduct to
prevail over its legal form, and any consideration that is or may be given for the
benefit to be disregarded.
 s 229(3) Corporations Act 2001 (Cth): Examples of giving a financial benefit include:
(1) giving or providing finance or property (s 229(3)(a)); (2) buying or selling an asset
(s 229(3)(b)); (3) leasing an asset (s 229(3)(c)); (4) supplying or receiving services (s
229(3)(d)); (5) issuing securities or granting an option (s 229(3)(e)); and (6) taking up
or releasing an obligation (s 229(3)(f)).
 Related parties.
 s 228 Corporations Act 2001 (Cth): A related party of a public company can be an
individual as well as an “entity” (e.g. company, partnership, the trustee of a trust)
 s 228 Corporations Act 2001 (Cth): The following people are related parties of a public
company: (1) directors of the public company (s 228(2)(a)); (2) the spouses, de facto
spouses, parents and children of public company directors (s 228(2)(d) and (3)); and
(3) directors of an entity that controls the public company as well as the spouses, de
facto spouses, parents and children of the controlling entity’s directors: s 228(2)(b)
and (3).
 s 228 Corporations Act 2001 (Cth): The following entities are related parties of a
public company: (1) an entity that controls the public company (s 228(1)); (2) an entity
controlled by a related party referred to in s 228(1), (2) or (3) (s 228(4)); (3) an entity
that was a related party of the kind referred to in s 228(1), (2), (3) or (4) during the
previous 6 months (s 228(5)); or (4) an entity that acts in concert with a related party
of a public company on the understanding that the related party will receive a financial
benefit if the public company gives the entity a financial benefit: s 228(7).
 When shareholder approval not required.
 s 208(1)(b) Corporations Act 2001 (Cth): A financial benefit to a related party does not
need the approval of the public company’s shareholders if the financial benefit falls
within an exception set out in ss 210-216 (e.g. transactions that would be reasonable
in the circumstances if the parties were dealing at arm’s length; reasonable
remuneration as an officer or employee of the public company).
 Voting exclusions.
 s 224(1) Corporations Act 2001 (Cth): A related party or associate to whom the
proposed resolution would permit a financial benefit to be given cannot cast a vote on
the resolution.
 Consequences of contravention.
 s 209(1) Corporations Act 2001 (Cth): A contravention of s 208 does not affect the
validity of any contract or transaction connected with the giving of the benefit, and the
public company or entity that it controls is not guilty of an offence.

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  s 1317E Corporations Act 2001 (Cth): Any person involved in a contravention of s 208
by a public company contravenes s 209(2), which is a civil penalty provision.
 s 209(3) Corporations Act 2001 (Cth): A person commits a criminal offence if their
involvement in the contravention of s 208 is dishonest.
 A proposed benefit to a related party that contravenes s 208 may be stopped by the
court where an application for an injunction is brought under s 1324.
o Personal profits arising from acting as director.
 Directors are under a fiduciary duty not to make undisclosed personal profits while acting in their
position.
 This applies even where the company has not suffered any loss (it may even have benefited),
or even if the transaction was fair from the company’s point of view.
 In Regal (Hastings) Ltd v Gulliver, Regal (Hastings) Ltd owned a cinema in Hastings. The
directors wished to lease 2 other cinemas in the town and sell the whole business. A subsidiary
company was formed for this purpose, with a capital of 5,000 £1 shares. It was originally
intended that Regal (Hastings) Ltd would own all the shares in the subsidiary. However, it was
only able to contribute £2,000, and so the directors contributed to make up the balance. When
the business was sold, the directors made a profit of nearly £3 per share. It was held that
although the transactions were honestly made, the 4 directors were liable to repay the profits
they had made on the sale of the shares.
 s 1318 Corporations Act 2001 (Cth): Permits the court to relieve an officer from any liability for
negligence, default, breach of trust, or breach of duty if it appears that they acted honestly and
having regard to the circumstances of the case, they ought fairly to be excused
o Improper use of position.
 s 182 Corporations Act 2001 (Cth): Prohibits officers or employees of a corporation from improperly
using their position to gain an advantage for themselves or for any other person or to cause detriment to
the corporation.
 It is the statutory version of the fiduciary principle applied in Regal (Hastings) Ltd v Gulliver, but
wider in that it applies to employees as well as officers, and is breached if officers or
employees improperly use their position to gain an advantage for others.
 s 1317E Corporations Act 2001 (Cth): It is a designated civil penalty provision.
 The term “improper” means conduct “inconsistent with the proper discharge of the duties of the office in
question” (e.g. a breach of fiduciary duties) (Toohey J in Chew v R).
 “To gain an advantage for themselves or for another person or to cause detriment to the corporation”
does not require that the accrual of an advantage or suffering of a detriment actually occur.
o Bribes and other undisclosed benefits.
 When a director is paid a bribe or secret commission in order to procure a particular course of action by
the company or to influence the director in a particular way.
 In Furs Ltd v Tomkies, Furs Ltd processed furs for the manufacture of coats. Tomkies was its
managing director and had special knowledge of the operations of the business, including
secret formulae. Tomkies was instructed by the Furs Ltd board to negotiate the sale of the
business for the company for an initial asking price of £8,500 plus £4,500 for the formulae. The
purchaser agreed to hire Tomkies, issue him shares in the purchasing company, and pay him
£5,000. In exchange, Tomkies promised to provide his knowledge of the secret formulae to the
purchaser for fee, and so the purchaser offered to pay only £8,500 for the business, which
Furst Ltd accepted. It was held that Furs Ltd could recover from Tomkies the amount of profit
he made by reason of his breach of duty.

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  Directors who derive an undisclosed personal benefit breach their fiduciary and statutory duties
irrespective of whether the company suffered loss as a result. In such cases, the director can be ordered
to account to the company for the personal benefit derived.
o Misuse of company funds.
 Directors are under a fiduciary duty to act in their company’s interests with respect to the use of the
company’s funds, which must be used for the company’s legitimate business purposes.
o Taking up a corporate opportunity.
 A director breaches the duty to avoid a conflict of interests where the director, without appropriate
disclosure or approval: (1) takes up an opportunity that should have been taken up by the company; (2)
negotiates the diversion of a business opportunity from their company to themselves or others, even if
the negotiations have not concluded or the company was not able to take up the business opportunity;
or (3) arranges for the company to shut down its own business.
 In such cases, the director may be liable to account to the company for any profit. The
company may instead seek a constructive trust order, the effect of which is that the company
takes the business opportunity for itself.
 In Cook v Deeks, several directors of the Toronto Construction Company had a disagreement
with one of the other directors, Cook. The directors then negotiated a major construction
project on behalf of the company, but diverted that project to a new company that they had
established in an attempt to exclude Cook from the project. The directors then used their
shareholdings to pass a resolution at a members’ meeting declaring that the Toronto
Construction Company had no interest in the project. The resolution was held to be invalid.
 In both Furs Ltd v Tomkies and Regal (Hastings) Ltd v Gulliver, the courts indicated that disclosure by a
director must be made to the general meeting of shareholders. However, it may not be necessary to call
a general meeting as long as shareholders are kept fully informed of the relevant circumstances and
give their informed consent.
 In Queensland Mines Ltd v Hudson, Hudson was the managing director of Queensland Mines.
He took up mining exploration licences in circumstances where the company was financially
unable to do so. Hudson made full disclosure of his intention to personally take up the licences
and then resigned as managing director. The rights were then sold to an American company
with Hudson being entitled to royalties. It was held that: (1) Hudson fully informed Queensland
Mines shareholders as to his interest in the licence, and the company renounced its interest
and assented to Hudson proceeding with the venture alone; and (2) the disclosure by Hudson
to the board of directors, who were nominees of the respective shareholders, was sufficient.
o Misuse of confidential information.
 Directors have a fiduciary duty not to misuse confidential company information (e.g. trade secrets, lists
of customers) for their own benefit without appropriate disclosure and approval. The duty often arises
when a director leaves one company to commence work for a competitor. A director or an employee,
after ceasing employment, is not permitted to use confidential information obtained in the course of that
employment for the purpose of competing with their former employer (Faccenda Chicken Ltd v Fowler).
 s 183 Corporations Act 2001 (Cth): Supplements the fiduciary duty but is wider, in that it also applies to
employees.
 There are 5 factors to be considered in deciding whether information was confidential (Kirby P in Wright
v Gasweld Pty Ltd): (1) the skill and effort expended to acquire the information; (2) the degree to which
the information is jealously guarded by the employer, is not readily made available to employees and
could not, without considerable effort or risk, be acquired by others; (3) whether it was plainly known to
the employee that the material was regarded by the employer as confidential; (4) the usages and
practices of the industry; and (5) whether the employee in question has been permitted to share the
information only by reason of their seniority or high responsibility within the employer’s organisation.

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 o Competing with the company.
 Fiduciaries are not permitted to enter into competition with the persons for whom they act.
 In Bell v Lever Bros Ltd, it was held that non-executive directors of a company cannot be
prevented from acting as a director of a competing company, but they cannot divulge
confidential information obtained by them as director of one company to the other company, or
use for their own purposes information entrusted to them while acting as a director.
 Hivac Ltd v Park Royal Scientific Instruments Ltd appears to suggest that an executive director
employed under a service agreement at least owes an employees’ duty of fidelity preventing
the employee competing with the company.
 In Southern Real Estate Pty Ltd v Dellow, it was held that a director who forms an undisclosed
intention to resign and set up a competing business is not permitted to actively solicit the
company’s customers for the competing business prior to the resignation or for a reasonable
period of time thereafter.
 Disclosure of interests.
o Under constitution and replaceable rules.
 A company’s constitution may require a director’s material interest to be disclosed to and approved by
the company’s directors, instead of the general meeting of shareholders (Woolworths Ltd v Kelly).
 s 194 (RR) Corporations Act 2001 (Cth): Permits directors of proprietary companies to have an interest
in contracts with the company provided that the director discloses the nature and extent of the material
personal interest and its relation to the affairs of the company at a meeting of the directors.
Consequently: (1) the director may vote on matters that relate to the interest; (2) any transactions that
relate to the interest may proceed; and (3) the director may retain benefits under the transaction; and (4)
the company cannot avoid the transaction merely because of the existence of the interest.
o Common law.
 Directors’ fiduciary obligations require them to make full disclosure of their potential conflicts of interest
to the company’s shareholders at a general meeting and obtain their consent (Furs Ltd v Tomkies;
Regal (Hastings) Ltd v Gulliver).
 However, it may not be necessary to call a general meeting as long as shareholders are kept fully
informed of the relevant circumstances and give their informed consent.
 In Queensland Mines Ltd v Hudson, it was held that the disclosure by Hudson to the board of
directors, who were nominees of the respective shareholders, was sufficient, because the 2
companies had very few shareholders.
o Corporations Act 2001 (Cth).
 s 191(1) Corporations Act 2001 (Cth): Requires a director who has a material personal interest in a
matter that relates to the affairs of the company to give notice of the interest to the other directors.
 s 191(3)(a) Corporations Act 2001 (Cth): Must give details of the nature and extent of the
interest and the relation of the interest to the affairs of the company.
 The requirement to give notice under s 191(1) does not apply in the circumstances specified in
s 191(2) (e.g. the interest is part of the director’s remuneration).
 ss 191(4) Corporations Act 2001 (Cth): A contravention of s 191 does not affect the validity of any act or
transaction. However, a breach constitutes an offence.
 s 205G Corporations Act 2001 (Cth): Directors of listed companies must notify the ASX of relevant
interests they hold in securities of the company or a related body corporate, within 14 days.
 LR 3.19A requires disclosure by a listed company of this information within 5 business days of
a director acquiring a security holding or changing an existing holding.

3.3.6 – Directors of insolvent companies.

 Interests of creditors.
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 o Duty not to prejudice creditors’ interests.
 When the company is insolvent or of doubtful solvency, directors must act in the interests of the
company’s creditors. The statutory duty of care is contained in s 180: the duty of care may be breached
where directors act contrary to the interests of creditors.
 Directors prejudice creditors’ interests if they cause their company to enter into arrangements
that reduce the pool of company assets that would otherwise be available to be shared among
creditors when the company is wound up.
 In Walker v Wimborne, the liquidator of an insolvent company, which was one of a group of
companies, brought an action against its directors under a predecessor of s 598, to recover
money disposed of by the company prior to its winding up. The directors caused the company
to make loans to other companies in the group in circumstances where there was no prospect
of repayment. It was held that the directors were liable.
 Shareholders cannot ratify a directors’ breach of duty that involves prejudicing the interests of creditors.
 In Kinsela v Russell Kinsela Pty Ltd, the directors of a family company in financial difficulties
arranged for the company to transfer its business and lease its building to themselves on
advantageous terms. This meant that when the company went into liquidation the directors
could continue to carry on the family business but the company could not easily sell the
property. It was held that the liquidator could invalidate the lease because the directors had
breached their duty. The company’s shareholders had no power to ratify the directors’ breach
of duty since it involved their failure to take account of the creditors’ interests.
 Creditors themselves cannot bring a civil action against the directors to recover their losses (Spies v R).
 The fiduciary duties are owed to the company, and consequently it is only the company that
has the right to sue directors who act in breach of their duties. However, when the company is
wound up, its liquidator can take action against directors in breach of duty and any amount
recovered from them is available for distribution to creditors.
 Breach of the statutory duties attracts the civil penalty provisions.
 Duty to prevent insolvent trading.
o Section 588G.
 Who is liable?
 s 588G Corporations Act 2001 (Cth): A director is under a duty to prevent the company
incurring debts if there are reasonable grounds for suspecting that it is insolvent. (Persons who
act as either “de facto” or “shadow” directors are also subject to the duty because they come
within the wide definition of “director” in s 9.)
 Incurring a debt.
 s 588G(1A) Corporations Act 2001 (Cth): A company incurs a debt if it: (1) pays a dividend; (2)
buys back its shares; or (3) enters into an uncommercial transaction (e.g. borrows money from
a bank or other lender; leases business premises from a landlord).
 When is a debt incurred?
 The time when a debt is incurred is when, in “substance and commercial reality”, the company
is exposed to the unavoidable liability to pay the debt for which it otherwise would not have
been liable (Leigh-Mardon Pty Ltd v Wawn).
 Insolvency.
 s 95A Corporations Act 2001 (Cth): A person is insolvent if it is unable to pay its debts as and
when they become due and payable.
 Presumptions of insolvency.
 2 presumptions of insolvency are available under s 588E to assist in proving that a company
was insolvent at the relevant time. The presumptions do not apply in connection with criminal
proceedings for contravention of s 588G.

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  s 588E(3) Corporations Act 2001 (Cth): If it can be proved that a company was insolvent at a
particular time during the 12 months ending on the “relation-back day”, it is presumed that the
company remained insolvent thereafter. The relation-back day in the case of a compulsory
winding up is the date that the application to wind up the company was filed.
 s 588E(4) Corporations Act 2001 (Cth): There is a presumption of insolvency where the
company has for a time contravened either ss 286(1) or (2) by failing to keep or retain
adequate financial records. In such cases, it must be presumed that the company is insolvent
during the period of contravention.
 Reasonable grounds for suspecting.
 Reasonable grounds for suspecting insolvency arise when a reasonably competent and diligent
director would have had grounds for suspecting insolvency in the circumstances (ASIC v
Plymin). It is not necessary for a plaintiff to prove that the director actually suspected
insolvency.
 Failure to prevent incurring of debt.
 A director fails to prevent the company incurring a debt if the director acquiesced in the
company continuing to incur all such debts as it would incur in the ordinary course of business
(ASIC v Plymin). It is not necessary for a plaintiff to prove that a director had the power to
prevent the company incurring debts or continuing to trade.
o Defences.
 Reasonable grounds to expect solvency.
 s 588H(2) Corporations Act 2001 (Cth): The director had reasonable grounds to expect, and
did expect, that the company was solvent at that time and would remain solvent even if it
incurred that debt and any other debts that it incurred at that time.
 “To expect implies a measure of confidence that the company is solvent. The directors
must have reasonable grounds for regarding it as likely that the company would at the
relevant date have been able to pay its debts as and when they fall due” (Metropolitan
Fire Systems Pty Ltd v Miller).
 A company that experiences a temporary lack of liquidity is not regarded as being insolvent.
Directors may seek to rely on expectations of additional external financial support from the
company’s bank or major creditors, but these must be objectively reasonable in the
circumstances.
 Delegation and reliance on others.
 s 588H(3) Corporations Act 2001 (Cth): (1) The director had reasonable grounds to believe,
and did believe, that a competent and reliable person was responsible for providing the director
with adequate information about whether the company was solvent and that the other person
was fulfilling that responsibility; and (2) the director expected, on the basis of information
provided to the director by the other person, that the company was solvent and would remain
solvent even if it incurred that debt and any other debts that it incurred at that time.
 In Metropolitan Fire Systems Pty Ltd v Miller, 2 directors asserted that they had relied
on the third director who had the responsibility for running the company and for
providing them with all necessary information about its finances. It was held that: (1) s
588H(3) did not apply, because the directors made no inquiries of the third director as
to the state of the company’s finances, and so their belief that the company was
solvent was not based on information provided by the third director; and (2) directors
are under an obligation to take an interest in and demand information on the financial
state of their company when suspicions about the company’s financial viability and
survival should and would have been aroused.
 Absence from management.

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  s 588H(4) Corporations Act 2001 (Cth): The director was absent from management because of
illness or for some other good reason at the time when the company incurs the debt in
question.
 In Deputy Commissioner of Taxation v Clark, it was held that a married woman who
was a director of a family company run by her husband and who had deferred to her
husband, could not rely on the absence from management defence (because a
person should not become a director unless they were prepared to assume the
obligations and duties of such an office).
 All reasonable steps to prevent debt being incurred.
 s 588H(5) Corporations Act 2001 (Cth): The director took all reasonable steps to prevent the
company from incurring the debt.
 A court might require unequivocal action on the part of those directors seeking to rely on the
defence to exercise what powers and functions they possess, either to prevent the incurring of
the debt directly or to bring the matter to the attention, either of an officer with the necessary
authority to prevent the incurring of the debt or to the board of directors where that is required.
o Consequences of contravention.
 Compensation.
 ss 588J and 588K Corporations Act 2001 (Cth): Compensation orders can be made in the
context of an application for civil penalty orders and as part of proceedings for the criminal
offence (whether or not the court imposes a civil penalty order or a criminal penalty, and
whether or not the company is in liquidation).
 s 588M Corporations Act 2001 (Cth): If the company that incurred the debt has been placed in
liquidation, the liquidator can seek compensation from a director who contravenes s 588G
(whether or not ASIC has commenced an application for a civil penalty order or criminal
proceedings).
 Amount of compensation.
 Under ss 588J, 588K and 588M, directors are liable to pay compensation equal to the amount
of loss or damage suffered (i.e. the amount of the unpaid debt) by all unsecured creditors
whose debts were incurred in contravention of s 588G because of the company’s insolvency.
 Who receives the benefit of compensation?
 An amount recovered from directors pursuant to an application for a civil penalty order, a
criminal proceeding, or a liquidator-initiated proceeding is payable to the company and is
available for distribution to all unsecured creditors, including those creditors whose debts were
incurred before reasonable suspicions of insolvency arose.
 Court relief.
 s 1317S(2) Corporations Act 2001 (Cth): The court may relieve a person, either wholly or
partly, from a liability for contravention of s 588G if it appears that the person has acted
honestly and having regard to all the circumstances of the case ought fairly be excused.
 s 1317S(3) Corporations Act 2001 (Cth): In determining whether a person ought fairly be
excused, the matters to which regard is to be had include any action the person took, with a
view to appointing an administrator of the company, when that action was taken and the results
of that action.
 Fraudulent conduct.
o s 592(6) Corporations Act 2001 (Cth): It is an offence for any person to be knowingly concerned in the doing of
an act by a company with the intent of defrauding creditors of the company or any other person or for any other
fraudulent purpose.
 An intention to defraud is an intention to deprive creditors, or some creditors, of an economic advantage
or inflict upon them some economic loss (Coleman v R).

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  s 593(2) Corporations Act 2001 (Cth): Where a person has been convicted of an offence under s 592(6),
the court may, on application by the Commission, creditors, or members order that that person be
personally liable to the company without limitation of liability for an amount up to the whole of its debts
as the court thinks proper.

3.3.7 – Remedies and penalties for breach of duty.

 Company’s remedies.
o Damages or compensation.
 If a director breaches the fiduciary duties owed to the company and it suffers loss as a result, the
company may apply for the equitable remedy of compensation. This is similar to the common law
remedy of damages. If the officer is fraudulent, the company has a common law action for the tort of
deceit and may recover damages. If the breach of duty arises from a failure to exercise reasonable care,
the company has an action for negligence and can recover damages for any loss that results. The object
of compensation or damages is to place the company, as near as possible, in the position it would have
occupied had the breach of duty not occurred.
 All directors who participate in the breach of duty are jointly and severally liable. This means that the
company can sue any one of several directors for the full amount of the damages or compensation. That
director then has a right to seek contribution from the others who participated in the breach of duty.
o Account of profits.
 When the officer makes undisclosed profits arising from a conflict of interest situation, the company may
obtain an order that the officer hand over the profit made in breach of duty to the company (Regal
(Hastings) Ltd v Gulliver).
 s 1317H Corporations Act 2001 (Cth): If a director breaches the statutory duties contained in ss 180-183
and the company suffers loss as a result, the company may apply for a civil penalty compensation order
(whether or not a declaration of contravention has been made).
 A person who is found to have contravened the statutory directors’ duties may be ordered by
the court to pay compensation to the company for any loss suffered by the company, and any
profits made by the person resulting from the contravention.
o Rescission of contract.
 Directors breach their duties if they have an undisclosed interest in a contract with the company. Subject
to the company’s constitution, the company may, at its option, rescind the contract (Kinsela v Russell
Kinsela Pty Ltd). Thus, any money paid or property transferred is returned.
 If the directors profited from the contract, they are liable to account for the profit, irrespective of whether
the company exercises its right to rescind.
o Injunctions.
 Where directors or officers breach or threaten to breach any of their fiduciary duties, the company can
apply to the court for an injunction. It is a useful remedy if the breach by the director is of a continuing
nature or if the directors are proposing to engage in activity which will constitute a breach of duty.
 s 1324 Corporations Act 2001 (Cth): ASIC, or a person whose interests are affected by conduct that
constitutes a contravention of the Corporations Act 2001 (Cth) (e.g. company, shareholder, creditor),
may apply to the court for an injunction restraining the person from engaging in the contravening
conduct.
o Return of property and constructive trusts.
 Where a director acquires property as a consequence of a breach of duty, the company may seek a
declaration that the director holds the property on a constructive or resulting trust for the company with
the effect that the property is returned to the company. This remedy is most appropriate where the
director misappropriates property or misapplies money belonging to the company for their own
purposes.
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 Civil penalties.
o What are civil penalty provisions?
 Certain provisions of the Corporations Act 2001 (Cth) are deemed to be civil penalty provisions. If a civil
penalty provision is breached, the civil penalty regime applies. Under that regime, ASIC may apply to
the court for a declaration of contravention, a pecuniary penalty, a disqualification order, and/or a
compensation order.
 Officers’ duties.
 ss 180(1), 181(1) and (2), 182(1) and (2), 183(1) and (2).
 Related parties rules.
 s 209(2).
 Share capital transactions.
 ss 254L(2), 256D(3), 259F(2) and 260D(2).
 Insolvent trading.
 s 588G(2).
 There are 3 types of civil penalty orders to punish people who contravene designated civil penalty
provisions:
 A pecuniary penalty of up to $200,000 (s 1317G(1)).
 Disqualification from management (s 206C).
 Compensation for damage suffered (ss 1317H, 1317HA and 1317HB).
 s 79 Corporations Act 2001 (Cth): A person is “involved” in a contravention if the person has: (1) aided,
abetted, counselled or procured the contravention; (2) induced the contravention; (3) been in any way,
by act or omission, knowingly concerned in or party to the contravention; or (4) conspired with others to
effect the contravention.
o Declaration of contravention.
 s 1317E(1) Corporations Act 2001 (Cth): If a court is satisfied that a person contravened a designated
civil penalty provision, it must make a declaration of contravention.
 s 206C Corporations Act 2001 (Cth): ASIC has the power to initiate civil penalty proceedings by applying
to a court for a declaration of contravention, a pecuniary penalty order, a compensation order (s
1317J(1)), or a disqualification order.
o Pecuniary penalty orders.
 s 1317E(1) Corporations Act 2001 (Cth): The court may order a person to pay a pecuniary penalty to the
Commonwealth of up to $200,000 if the contravention is: (1) serious; (2) materially prejudices the
interests of the corporation or its members; or (3) materially prejudices the corporation’s ability to pay its
creditors.
o Disqualification orders.
 s 206C(1) Corporations Act 2001 (Cth): If a declaration is made under s 1317E that a person has
contravened a civil penalty provision, ASIC may seek an order disqualifying (banning) that person from
being a director or managing a corporation, which the court may make if it is satisfied that the
disqualification is justified and for such period as the court considers appropriate
 Longer periods of disqualification are appropriate for contraventions which are of a serious
nature, such as where (Santow J in ASIC v Adler): (1) dishonesty is involved; (2) the
contraventions are recurring and large financial losses have occurred; and (3) there is a
likelihood of similar conduct in the future which is likely to be harmful to the public.
o Compensation orders.
 s 1317H Corporations Act 2001 (Cth): The court has the power to order a person who contravenes a
civil penalty provision to compensate a corporation for the damage that resulted from the contravention.
 s 1317J Corporations Act 2001 (Cth): Applications for compensation orders may be made by
the corporation (whether or not ASIC has obtained a declaration of contravention) or ASIC.

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  s 1317H(2) Corporations Act 2001 (Cth): The damage suffered by a corporation for purposes of a
compensation order includes any profits made by any person resulting from the contravention.
 Criminal penalties.
o Relationship between civil penalties and criminal penalties.
 s 184 Corporations Act 2001 (Cth): A contravention of the civil penalty provisions contained in ss 181-
183 (i.e. good faith; proper purpose; conflicts of interest and disclosure) may constitute a criminal
offence if a director or officer was reckless or intentionally dishonest, and failed to exercise their powers
in good faith in the best interests of the corporation..
 “Dishonesty is judged objectively by the standard of ordinary decent people” (R v Fodera).
 Contravention of s 180(1) (i.e. care, skill, and diligence) cannot give rise to criminal sanctions.
 s 209(3) Corporations Act 2001 (Cth): It is a criminal offence to be dishonestly involved in a
contravention of the related party transactions provisions.
 s 1317P Corporations Act 2001 (Cth): Criminal proceedings may be started against a person even
though a civil penalty order has been made against that person.
 A court hearing a criminal prosecution cannot make civil penalty orders if the defendant is found not
guilty. ASIC must bring fresh civil penalty proceedings if it wishes to pursue civil penalty orders following
an unsuccessful criminal prosecution.
o Penalty notices.
 s 1313 Corporations Act 2001 (Cth): Minor offences under the Corporations Act incur an “on the spot”
fine. ASIC is able to serve a penalty notice if it has reason to believe that a person has committed a
prescribed offence.
 Statutory injunctions.
o s 1324 Corporations Act 2001 (Cth): ASIC, or a person whose interests are affected by conduct that constitutes a
contravention of the Corporations Act 2001 (Cth) (e.g. company, shareholder, creditor), may apply to the court for
an injunction restraining the person from engaging in the contravening conduct.

3.3.8 – Exoneration and relief for breach of duty.

 Exoneration by the company.
o Shareholder ratification.
 Directors who breach their fiduciary duties to a solvent company may be excused from liability if
shareholders pass an ordinary resolution to ratify their actions, either prospectively or retrospectively.
 This excludes: (1) a breach of directors’ statutory duties under ss 179-206M Corporations Act
2001 (Cth) (Angas Law Services Pty Ltd v Carabelas); and (2) situations where it would
constitute a misappropriation of company resources (Bell Group Ltd (in liq) v Westpac Banking
Corp (No 9)).
 However, ratification may be ineffective if it amounts to oppressive or unfair conduct for
purposes of a remedy under s 232 (Hannes v MJH Pty Ltd). This will be the case if the
directors who breach their duty control the majority of votes at the general meeting and vote in
favour of their own ratification.
 Under s 239(1) Corporations Act 2001 (Cth), merely because conduct has been ratified or approved by
a general meeting does not mean that a person cannot bring the legal proceedings or apply to the court
for leave to do so under ss 236-242 Corporations Act 2001 (Cth). Under s 239(2) Corporations Act 2001
(Cth), however, the court may take the ratification or approval into account in deciding what order or
judgment to make.
o Ratification invalid where company insolvent.
 Shareholders of an insolvent company are unable to ratify breaches of duty where directors fail to take
into account the interests of creditors (Kinsela v Russell Kinsela Pty Ltd).
o Ratification by the board.
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  A board is generally unable to ratify what would otherwise be a breach of directors’ duty as this must
usually be done by the shareholders. (An exception is Queensland Mines Ltd v Hudson).
 Exemption from liability and indemnification.
o By the company.
 s 199A(1) Corporations Act 2001 (Cth): A company or related body corporate must not exempt an officer
or auditor, directly or through an interposed entity, from liability to the company.
 s 199A(2) Corporations Act 2001 (Cth): A company or related body corporate must not indemnify an
officer or auditor against a liability owed to the company, under a civil penalty order, or owed to
someone else and which did not arise out of conduct in good faith.
o By the court.
 s 1318(1) Corporations Act 2001 (Cth): Officers of a corporation may be relieved from liability if in any
civil proceedings against them for negligence, default, breach of trust or breach of duty, it appears to the
court that they acted honestly and ought fairly to be excused either wholly or partly.
 There is a similar corresponding power of the court to grant relief from liability under s 1317S where a
civil penalty provision is contravened.
 In determining whether a person ought fairly to be excused under s 1317S for a contravention
of s 588G (insolvent trading), the court should consider any action the person took with a view
to appointing an administrator of the company, when that action was taken, and the results of
that action (s 1317S(3)).
 Directors’ and officers’ insurance.
o s 199B Corporations Act 2001 (Cth): A company is prohibited from paying premiums insuring directors and
officers against liability arising out of conduct involving a wilful breach of duty in relation to the company or
improper use of their position or information under ss 182 and 183.

4 – Mechanisms for shareholders to protect their investment.

4.1 – The actions of the majority constitute fraud on the minority.

 Expropriation of shares.
o Majority shareholders may use their voting power so as to deprive a member of their shares in the company or
the voting rights attaching to a member’s shares, provided the power is (Gambotto v WCP Ltd): (1) exercised for
a proper purpose; and (2) fair in all the circumstances (i.e. both procedurally, such as disclosing all reasoning and
obtaining an expert valuation of the price of the shares, and substantively, such as paying the market price).
 In Gambotto v WCP Ltd, Mr Gambotto, a shareholder with a 0.1% interest in WCP, sought to prevent an
amendment to WCP’s constitution which would permit Industrial Equity, which owned 99.7% of WCP, to
compulsorily purchase (expropriate) Mr Gambotto’s shares. It was held that the amendment of WCP’s
constitution was invalid, because: (1) it was not for a proper purpose, even though WCP Ltd could show
it would save money in taxation and financial arrangements; and (2) it was not fair in the circumstances,
because while the price offered for the shares was fair, the purpose of taking away Gambotto’s shares
to obtain tax and other financial benefits for the majority through 100% ownership was not a ‘proper
purpose’. It is for the majority shareholders to prove that the amendment to the constitution is valid. (A
proper purpose would have been to save the company from significant detriment or harm, such as
where the shareholder to be bought out was competing with the company or where the shareholder’s
membership of the company would result in the loss of its business. The expropriation must have then
been a reasonable means of eliminating or mitigating that detriment and not oppressive to the minority
shareholders.)

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 o The principles stated in Gambotto v WCP Ltd are not applicable where the Corporations Act 2001 (Cth) provides
protection to minority shareholders and sets out prescribed procedures in cases such as selective reductions of
capital or compulsory acquisitions (Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd).
 Fraud on the minority.
o The majority must use its voting power (Gambotto v WCP Ltd): (1) for either a purpose contemplated by the
replaceable rules, or company’s constitution; and (2) not oppressively. If the majority breaches this duty, it is
regarded as having committed a fraud on the minority.
 “Fraud” means an abuse of power whereby the majority secures an unfair gain at the expense of the
minority. Despite the fact that the expression refers to the “minority”, the injured party need not actually
be the minority shareholders. The injured party may also be the company itself, in which case, members
have a right to bring legal proceedings on behalf of the company with the leave of the court.
 The persons who abused their power need not actually be the majority shareholders in numerical terms.
Rather, it applies to those who actually control the majority of votes at a general meeting.
 The onus of showing an abuse of power is on the minority shareholder.
 Shareholder consent at a general meeting can never cure a breach where corporate property, rights, or an opportunity
have been misappropriated for gain (Cook v Deeks).
o In Cook v Deeks, several directors of the Toronto Construction Company had a disagreement with one of the
other directors, Cook. The directors then negotiated a major construction project on behalf of the company, but
diverted that project to a new company that they had established in an attempt to exclude Cook from the project.
The directors then used their shareholdings to pass a resolution at a members’ meeting declaring that the
Toronto Construction Company had no interest in the project. The resolution was held to be invalid.
o In Regal (Hastings) Ltd v Gulliver, the directors did not misappropriate company property, but instead received an
incidental profit. It was held that while the directors were still in breach of their duties and were liable to repay the
profits they had made, the company would have been able to waive their breach by a resolution of shareholders
in a general meeting.
 Decisions in breach of a duty are voidable, not void.
o Breaches of a duty to avoid a conflict of interest, a duty to avoid incidental profits (provided it does not amount to
misappropriation), and a breach of a duty of care, skill, and diligence can be ratified by a resolution of
shareholders in a general meeting (either retrospectively or prospectively), provided they are fully informed.
 In Winthrop Investments Ltd v Winns Ltd, the directors asked the general meeting to allow them to
engage in defensive conduct to defeat a takeover. This was in breach of a duty to act for proper
purposes, but they did not make this clear to the general meeting, and thus consent was ineffective.
o However, ratification by a general meeting cannot cure a breach of a concurrent statutory duty (ASIC v Forge).

4.2 – s 1324 Corporations Act 2001 (Cth) injunctions.

 s 1324(1) Corporations Act 2001 (Cth): The court has a discretion to grant an injunction restraining a person from
engaging in conduct that contravenes the Corporations Act 2001 (Cth), or requiring that person to do any act.
o s 1324(10) Corporations Act 2001 (Cth): In addition to granting an injunction, the court may also order that the
person pay damages to another person.
 Contravention of the Corporations Act 2001 (Cth).
o Includes.
 Conduct that is a criminal offence under the Corporations Act 2001 (Cth).
 Conduct that is not a criminal offence under the Corporations Act 2001 (Cth).
 For example, a company may only reduce its capital if the reduction complies with the
requirements in s 256B(1). If a company contravenes these requirements, under s 256D(2), the
contravention does not affect the validity of the reduction and the company is not guilty of an
offence. However, s 1324 enables the court to restrain such conduct.

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  Conduct that is a contravention of a section of the Corporations Act 2001 (Cth) that is a designated civil
penalty provision.
 For example: ss 180-183 (statutory duties of officers); s 588G (insolvent trading), s 208 (related
party transactions); and the various sections that deal with share capital transactions.
o Excludes.
 Conduct that contravenes a provision in a company’s constitution or the replaceable rules.
 However, it may be remedied as a breach of contract under s 140(1).
 Who can apply?
o s 1324(1) Corporations Act 2001 (Cth): Only ASIC or a person whose interests have been affected by the
conduct (excluding shareholders and creditors) can apply to the court for a s 1324 injunction.

4.3 – Proceedings on behalf of a company (or a statutory derivative action).

 Application to bring proceedings.
o s 236(1) Corporations Act 2001 (Cth): The following persons may bring proceedings on behalf of a company: a
member; former member; person entitled to be registered as a member of the company or of a related body
corporate; and present or former directors and officers of the company.
o s 236(1)(b) Corporations Act 2001 (Cth): Eligible applicants must obtain leave from the court before commencing
a proceeding on behalf of a company or intervening in proceedings to which the company is a party. (The court
must grant an application for leave if it is satisfied that each of the requirements in s 237(2) is met.)
 Requirements.
o s 237(2)(a) Corporations Act 2001 (Cth): It is probable that the company will not bring the proceedings.
 This may occur because a majority of shareholders or a liquidator have indicated an unwillingness to
bring the action, the company has insufficient funds to bring the action, or the company is deadlocked by
shareholder divisions.
o s 237(2)(b) Corporations Act 2001 (Cth): The applicant is acting in good faith.
 Requires the court to be satisfied that the applicant (Swansson v RA Pratt Properties Pty Ltd): (1)
honestly believed that a good cause of action existed; (2) had a reasonable prospect of success; (3)
applicant was not seeking to bring the action for some collateral purpose that would amount to an abuse
of process; and (4) would suffer a real and substantive injury if the action were not permitted (Chahwan
v Euphoric Pty Ltd (trading as Clay & Michel)).
o s 237(2)(c) Corporations Act 2001 (Cth): It is in the best interests of the company.
 Granting leave is unlikely to be in the best interests of the company where the plaintiff is able to pursue
a claim via another cause of action and the relief sought under the alternative cause of action is the
same as the relief sought under the proposed derivative action (Hackett v Nambucca Valley Quarries
Pty Ltd).
 Where the company’s decision not to bring legal proceedings is made by its directors, s 237(3) creates a
rebuttable presumption that granting leave is not in the best interests of the company if the directors: (1)
who participated in the decision not to bring, defend, or settle proceedings made the decision in good
faith for a proper purpose; (2) did not have a personal material interest in the decision; (3) informed
themselves about the subject matter of the decision to the extent they reasonably believed to be
appropriate; and (4) rationally believed the decision was in the best interests of the company. Such a
belief is a rational one unless the belief is one that no reasonable person in the position of the directors
would hold.
o s 237(2)(d) Corporations Act 2001 (Cth): There is a serious question to be tried.
 Requires the applicant to show an arguable case, by providing the court with sufficient material to make
a decision.

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 o s 237(2)(e) Corporations Act 2001 (Cth): The applicant gave notice to the company at least 14 days before
making the application of the intention to apply for leave and the reasons for applying, or it is appropriate to grant
leave even though notice was not given.
 Ratification by general meeting.
o s 239(1) Corporations Act 2001 (Cth): Conduct that is ratified at a general meeting of shareholders does not
prevent a person bringing proceedings on behalf of the company or applying for leave to do so.
 s 239(2) Corporations Act 2001 (Cth): The court may, however, take ratification into account in deciding
what ultimate order it should make.
 Costs.
o s 242 Corporations Act 2001 (Cth): The court a broad discretion to make any order it considers appropriate about
the legal costs of the applicant, the company, or any other party to the proceedings (e.g. requiring indemnification
by the company for the applicant’s costs).
 The court should protect a bona fide shareholder against liability for costs where the company stands to
gain considerable benefit if the action is ultimately successful.

4.4 – Oppressive and unfair conduct.

 Eligible applicants.
o s 234(a) Corporations Act 2001 (Cth): A member of the company (even though the application relates to an act or
omission that is against either the member in a capacity other than as a member, or another member in their
capacity as a member).
o s 234(c) Corporations Act 2001 (Cth): A past member, if the application relates to the circumstances in which
they ceased to be a member.
o s 234(d) Corporations Act 2001 (Cth): A person to whom a share in the company has been transmitted by will or
by operation of law. (Such a person does not have to be registered as a member.)
o s 234(e) Corporations Act 2001 (Cth): A person whom ASIC thinks appropriate having regard to investigations it
is conducting, or has conducted, into the company’s affairs or matters connected with the company’s affairs.
 Conduct where a remedy may be sought.
o Company’s affairs.
 s 232(a) Corporations Act 2001 (Cth): The conduct of a company’s affairs is contrary to the interests of
the members as a whole, oppressive, unfairly prejudicial, or unfairly discriminatory against a member or
members.
 s 53 Corporations Act 2001 (Cth): “Company’s affairs” includes: (1) the conduct of the
directors, majority shareholders, substantial shareholders, and the company itself; (2) the
promotion, formation, membership, control, business, trading, transaction and dealings,
property, liabilities, profits and the income, receipts, losses, outgoings and expenditure of the
body; (3) the internal management and proceedings of the body; and (4) the power of persons
to control the exercise of the rights to vote attached to shares in the body corporate or to
exercise control over the disposal of such shares.
 There is no requirement to prove that the company or its officers intended to cause harm to the
members (Re Spargos Mining NL).
o Acts or proposed acts (and omissions or proposed omissions).
 s 232(b) Corporations Act 2001 (Cth): An actual or proposed act (or omission or proposed omission) by
or on behalf of a company is contrary to the interests of the members as a whole, oppressive, unfairly
prejudicial, or unfairly discriminatory against a member or members.
 For example, where: (1) where the controllers repeatedly refuse to call directors’ meetings; (2)
a company with sufficient profits persistently refuses to pay dividends; or (3) the directors
refuse to register a transfer of shares.

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  In Wayde v New South Wales Rugby League Ltd, it was held that a single resolution of the
board of directors could be an oppressive or unfair act on behalf of the company.
o Resolutions or proposed resolutions.
 s 232(c) Corporations Act 2001 (Cth): A resolution, or a proposed resolution, of members or a class of
members of a company is contrary to the interests of the members as a whole, oppressive, unfairly
prejudicial, or unfairly discriminatory against a member or members.
 Meaning of conduct contrary to the interests of the members as a whole.
o In Re Spargos Mining NL, Spargos was part of the IRL group, and shareholders representing this group
controlled Spargos’ members’ meetings and the composition of the board of directors. The board caused the
company to enter into several risky transactions that were for the benefit of the group, such as giving loans and
issuing new shares. These were held to constitute clear cases of conflicts of interest that were detrimental to the
company, its shareholders generally, and the minority shareholders.
 Meaning of oppressive and unfair.
o Determined objectively in the sense that a director’s conduct could be regarded as oppressive or unfair if no
reasonable director would have acted in that way (Brennan J in Wayde v New South Wales Rugby League Ltd).
 Insufficient: (1) mere prejudice or discrimination (Brennan J in Wayde v New South Wales Rugby
League Ltd); or (2) simple subordination of the wishes of the minority by the exercise of the voting power
of the majority.
 Oppression may occur even though all members of a company are treated equally (Young J in John J
Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia)).
 A court must balance the conflicting interests of majority and minority shareholders by examining the
company’s background and the reasonable expectations of its shareholders.
 In Thomas v HW Thomas Ltd, except for the minority shareholder, it was accepted by all
members of a family company that the company should continue to operate in the financially
conservative way it always had, and to be a source of employment for its shareholders and not
merely a means of providing dividends. It was held that the minority shareholder was not
unfairly prejudiced by being required to abide by the decision of the majority of shareholders.
o Examples.
 The majority shareholders divert a corporate opportunity to themselves or their associates (Cook v
Deeks).
 Where a minority shareholder is removed as a director and a significant proportion of profits is used for
generous payments to directors, while modest or no dividends are paid to shareholders (Scottish Co-
operative Wholesale Society Ltd v Meyer).
 However, it is not sufficient if: (1) dividends are not as high as they could have been; or (2) the
directors pay themselves large bonuses and fees because the company’s profitability has
increased significantly due to their efforts.
 In companies that run a family business, where a particular family member is excluded from the
company’s management when they have a reasonable expectation of participating in the management
of the business (Campbell v Backoffice Investments Pty Ltd).
 Where directors issue shares for improper purposes (Re Dalkeith Investments Pty Ltd).
o Not examples.
 In Wayde v New South Wales Rugby League Ltd, the NSW Rugby League sought to remove a club,
Wests, from its competition to reduce the number of clubs to 12. Wests brought an application for a
remedy under the equivalent of s 232 to restrain the League from proceeding with the exclusion. It was
held that the League was entitled to exclude Wests, because the decision was taken by the League’s
directors honestly in pursuit of the object of fostering the game of rugby league and serving its best
interests, and was one that a reasonable board could have made.
 Remedies.

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 o In determining an appropriate remedy the courts may take into account the conduct of both the applicant and
respondent (Ubertini v Saeco International Group SpA (No 4)).
o s 233(1) Corporations Act 2001 (Cth): The court has wide powers to make any order it considers appropriate.
 For the purchase of the shares of any member by other members or a person to whom a share has
been transmitted by will or by operation of law (s 233(1)(d)).
 This is the most common order made.
 In Scottish Co-operative Wholesale Society Ltd v Meyer, the court ordered that the majority
shareholders purchase the shares of the minority members at a price based on the value the
shares would have had, had the oppressive conduct not taken place.
 Regulating the future conduct of the company’s affairs (s 233(1)(c)).
 In Re Spargos Mining NL, it was ordered that 2 directors of the company be replaced by a
newly constituted board, comprising people who were independent of the controlling
shareholders. The new board was ordered to investigate certain transactions entered into by
the company and cause the company to commence proceedings against the former directors if
that was appropriate.
 Appointing a receiver or a receiver and manager (s 233(1)(h)).
 Done in order to safeguard the company’s assets and investigate alleged breaches of directors’
duties and, where necessary, institute proceedings against the directors (Jenkins v Enterprise
Gold Mines NL).
 That the company institute or defend legal proceedings or authorise a member to institute or defend
legal proceedings in the name of the company (ss 233(1)(f) and 233(1)(f)).
 Appropriate in cases where a company ratifies a breach of duty by directors or if it fails to bring
an action against a director for breach of duty.
 May be granted even though the particular conduct may also give rise to an action by the
company against its directors. In such a case, a member may seek a remedy under s 233 and
may also apply for leave to bring proceedings on behalf of the company under s 236 as these
sections are not mutually exclusive.
 Restraining a person from engaging in specified conduct or from doing a specified act (s 233(1)(i)).
 Appropriate where a particular act or conduct has not yet been carried out but has been
proposed, and where the conduct is of an ongoing nature.
 That the existing constitution be modified or repealed (s 233(1)(b)).
 That the company be wound up (s 233(1)(a)).
 The courts are generally reluctant to wind up a solvent company as an alternative remedy will
usually be of greater benefit to members as a whole.
 Appropriate where the parties are unable to arrive at a commercial resolution, there has been
an irretrievable breakdown of the relationship between shareholders causing a deadlock, and
where both parties have engaged in oppressive conduct.
 Where an order to wind up is made, the Corporations Act 2001 (Cth) provisions apply as if the
winding up was ordered under s 461 (s 233(2)).
 For the purchase of the shares with an appropriate reduction of the company’s share capital (s
233(1)(e)).
 Requiring a person to do a specified act (s 233(1)(j)).
 This remedy enables omissions to be rectified.

4.5 – Winding up.

 s 467(4) Corporations Act 2001 (Cth): The court will not make a winding up order under s 461(1)(e), (f), (g) or (k) if it is of
the opinion that the applicants have some other available remedy or that they are acting unreasonably in seeking the
winding up order instead of pursuing that other remedy.
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 Directors act in their own interests.
o s 461(1)(e) Corporations Act 2001 (Cth): The directors have acted in affairs of the company in their own interests
rather than in the interests of the members as a whole, or in any other manner that is unfair or unjust to other
members.
 Will also typically give a shareholder a remedy under s 232.
 Will also satisfy the ground for winding up under s 461(1)(k).
 In Re Cumberland Holdings Ltd, it was held that: (1) it is sufficient if a majority of directors have acted in
their own interests, or even if one director has caused his personal interests to be preferred; (2) the
affairs of the company are not limited to business or trade matters, but include all matters that come
before the board for consideration, including dividend policy, voting rights, capital structure of the
company etc.; and (3) it is sufficient if the directors prefer their own interests to those of the members,
even though the directors’ interests may coincide with those of the majority shareholders.
 Oppressive and unfair conduct.
o ss 461(1)(f) and 461(1)(g) Corporations Act 2001 (Cth): Similar to the grounds for a remedy under s 232.
 Just and equitable ground.
o s 461(1)(k) Corporations Act 2001 (Cth): The court is of opinion that it is just and equitable.
 Breakdown of mutual trust and confidence.
 In the case of small companies that have evolved from partnerships or that operate in a similar
manner to partnerships, it has been held just and equitable to wind up the company when the
relationship between the “partners” breaks down (e.g. misuse of proceeds from the sale of
company assets; exclusion of a director from access to the company’s books; failure to comply
with tax obligations; failure to maintain company records; intermingling of company and
personal funds) and the commercial viability of the company is frustrated (Tomanovic v Argyle
HQ Pty Ltd).
 In Ebrahimi v Westbourne Galleries Ltd, Ebrahimi and Nazar were partners in a rug
business. They formed a company to take over the business, of which each was a
director and each held 500 shares. Subsequently, Nazar’s son became a director and
each of the 2 shareholders transferred 100 shares to him. Disputes arose between
Ebrahimi on the one hand and Nazar and his son, who then passed an ordinary
resolution at a general meeting to remove Ebrahimi from his position as director and
excluded him from the conduct of the company’s business. It was held that the
company should be wound up, even though Nazar’s son could have been removed.
This was because the company was in substance a “quasi-partnership”, and the
majority shareholders had to act with mutual confidence, which had been repudiated.
 Deadlock.
 The shareholders are unable to resolve a deadlock, leaving the company unable to function
properly. (It is not necessary for the applicant to show that other members acted oppressively
or unjustly.)
 Fraud, misconduct, or oppression.
 There has been fraud, misconduct or oppression. (This ground has been largely incorporated
into s 232.)
 Failure of substratum.
 The company ceases to carry on the business for which it was formed, as determined by
reference to its prospectus, course of conduct, and name (Re Tivoli Freeholds Ltd).
 In Re Tivoli Freeholds Ltd, Tivoli Freeholds was formed for the purposes of hosting
theatrical activities. Its main asset was land upon which theatres were built. The
company came under the control of Industrial Equity, which appointed its own
nominees to the board of directors. A fire damaged the buildings and the theatrical

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 activities ceased. Tivoli Freeholds then sold the land with the approval of the general
meeting, and the board resolved to lend the surplus funds to Industrial Equity Ltd,
which were largely used to acquire shares in other public companies. It was held that
the company should be wound up, because the company was acting entirely outside
what could fairly be regarded as having been within the general intention and common
understanding of the members when they became members.

4.6 – Variation of class rights.

 The right to vary.
o s 246B Corporations Act 2001 (Cth): Class rights are rights attached to shares in a class of shares.
 If the constitution sets out the procedure for varying and cancelling class rights:
 Rights may be varied or cancelled only where the procedure in the constitution is followed.
 If a company does not have a constitution or the constitution does not set out the procedure for varying
and cancelling class rights:
 Rights may be varied or cancelled only by either: (1) a special resolution of the company and
by special resolution passed at a meeting of the holders of the affected class; or (2) with the
written consent of members with at least 75% of the votes of the affected class.
 Deemed variations of class rights.
o Corporations Act 2001 (Cth).
 Company with share capital.
 s 246C(1)(a): If the shares in a class are divided into further classes and after the division the
rights attached to all those shares are not the same → The division is taken to vary the rights
attached to every share in the class existing before the division.
 s 246C(2)(a): If the rights attached to some of the shares in a class are varied → The variation
is taken to vary the rights attached to every other share that was in the class before the
variation.
 Company without share capital.
 s 246C(3)(a): If the members in a class are divided into further classes and after the division
the rights of all those members are not the same → The division is taken to vary the rights of
every member in the class existing before the division.
 s 246C(4)(a): If the rights of some of the members in a class are varied → The variation is
taken to vary the rights of every other member who was in the class before the variation.
 Company with one class of shares.
 s 246C(5): If new shares are issued → The issue is taken to vary the rights attached to the
shares already issued if: (1) the rights attaching the new shares are not the same as the rights
attached to shares already issued; and (2) those rights are not provided for in the company’s
constitution (if any) or a notice, document, or resolution lodged with ASIC.
 Preference shares.
 s 246C(6): If new preference shares are issued that rank equally with existing preference
shares → The issue is taken to vary the rights attached to the existing preference shares
unless the issue is authorised by: (1) terms of the issues of the existing preference shares; or
(2) the company’s constitution (if any) as in force when the existing preference shares were
issued.
o Common Law
 Includes.
 A variation that affects the strict legal rights of the member of the class (e.g. the right to a
specified rate of dividend; the right to appoint directors to represent a particular class of
shareholders).
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  Excludes.
 A variation that affects the value of the shares of a class member.
 A variation that indirectly reduces voting rights.
 Remedies
o Corporations Act 2001 (Cth).
 s 246D(1): Within 1 month after the variation, cancellation, or modification is made, members of a class
holding at least 10% of the votes of the class have the right to apply to the court to set aside a variation
or cancellation of their rights, or a modification of the constitution to allow their rights to be varied or
cancelled, if the members in a class do not all agree to the variation, cancellation, or modification.
 s 246D(5): The court may set aside the variation, cancellation, or modification if it is satisfied
that it would unfairly prejudice the applicants.
 If a company attempts to vary or cancel class rights in contravention of s 246B, affected members of the
class can apply for an injunction under s 1324 to prevent the contravention.
 A single member of a class may also apply for a remedy under s 232 if the variation, cancellation or
modification is oppressive or unfair.
o General law.
 If the company does not comply with the procedures in its constitution for varying or cancelling class
rights, this constitutes a breach of the s 140(1) Corporations Act 2001 (Cth) contract between the
company and its members, and affected members of the class can apply for an injunction or declaration
to enforce compliance with the constitution or applicable replaceable rules.
 A special resolution to vary or cancel a class right contained in a company’s constitution may be invalid
if the alteration is beyond any purpose contemplated by the constitution or is oppressive (Gambotto v
WCP Ltd).
 In Gambotto v WCP Ltd, Mr Gambotto, a shareholder with a 0.1% interest in WCP, sought to
prevent an amendment to WCP’s constitution which would permit Industrial Equity, which
owned 99.7% of WCP, to compulsorily purchase (expropriate) Mr Gambotto’s shares. It was
held that the amendment of WCP’s constitution was invalid, because: (1) it was not for a proper
purpose, even though WCP Ltd could show it would save money in taxation and financial
arrangements; and (2) it was not fair in the circumstances, because while the price offered for
the shares was fair, the purpose of taking away Gambotto’s shares to obtain tax and other
financial benefits for the majority through 100% ownership was not a ‘proper purpose’. It is for
the majority shareholders to prove that the amendment to the constitution is valid. (A proper
purpose would have been to save the company from significant detriment or harm, such as
where the shareholder to be bought out was competing with the company or where the
shareholder’s membership of the company would result in the loss of its business.)

4.7 – The rule in Foss v Harbottle.

 The common law right of a member to bring a legal action in the name of a company to remedy an internal irregularity or a
wrong committed against the company is limited by 2 aspects:
o The internal management rule.
 Legal actions cannot be brought against internal irregularities (e.g. improper appointments of directors;
improper conduct of general meetings, such as a refusal to recognise the voting rights of a particular
shareholder) that are capable of being ratified by ordinary resolution of a general meeting of members.
o The proper plaintiff rule.
 Where a wrong is done to the company, it is the proper plaintiff in any legal proceedings which seeks to
remedy it. (It applies whether the wrong against the company is caused by the directors, the controlling
members, or outsiders.)
 Exceptions to the rule.
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 o A member can complain of an infringement of personal rights as a member (as conferred by the Corporations Act
2001 (Cth) or the company’s constitution).
o s 236(3) Corporations Act 2001 (Cth): The right of a person at common law to bring proceedings on behalf of a
company has been abolished.

5 – Holding companies responsible to outsiders.

5.1 – Powers of a company.

 s 124(1) Corporations Act 2001 (Cth): Upon registration, a company has the legal capacity and powers of an individual
[e.g. own assets, assume liabilities, hold licenses, sue] and a body corporate [e.g. issue and cancel shares, issue debt,
grant share options].
o s 124(2) Corporations Act 2001 (Cth): A company can do an act even if their interests are not served by doing it.
o s 124(3) Corporations Act 2001 (Cth): A company cannot do an act that is illegal.
 s 125 Corporations Act 2001 (Cth): If a company has a constitution, it may contain an express restriction on the exercise
of any of its powers or set out its objects, but the exercise of a power by, or an act of, the company is not invalid because it
is contrary to provisions in the company’s constitution.

5.2 – Contracts with the company.

5.2.1 – Execution of documents directly.

 With a common seal.
o s 127(2) Corporations Act 2001 (Cth): May execute a document by affixing its common seal to a document, which
is witnessed by either: (1) 2 directors of the company; (2) a director and a company secretary; or (3) for a
proprietary company that has a sole director who is also the sole company secretary—that director.
 s 123(1) Corporations Act 2001 (Cth): The common seal of a company must set out the company’s
name and its ACN or ABN.
 Without a common seal.
o s 127(1) Corporations Act 2001 (Cth): May execute a document if it is signed by either: (1) 2 directors; or (2) a
director and a company secretary.

5.2.2 – Execution of documents by agents.

 s 126 Corporations Act 2001 (Cth): A company can contract through an agent acting with the company’s express or
implied authority and on behalf of the company.
 Actual authority.
o Express (i.e. the principal expressly gives the agent authority to enter into particular contracts on the principal’s
behalf).
 s 198D(1) Corporations Act 2001 (Cth): Unless the company’s constitution provides otherwise, the
directors of a company may delegate any of their powers to: (1) a committee of directors [e.g. aufit, risk
management, remuneration]; or (2) a director; or (3) an employee of the company; or (4) any other
person.
 s 198A(2) Corporations Act 2001 (Cth): The business of a company is to be managed by or
under the direction of the directors, and the directors may exercise all the powers of the
company, except any powers that this Act or the company’s constitution requires the company
to exercise in general meeting.

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  A common example is a person to whom a power of attorney has been granted. A power of attorney is
the appointment of an agent by deed. The extent of the attorney’s actual authority is usually set out in
the document that creates the power.
o Implied (i.e. the extent of the authority as between the agent and the principal is not expressly agreed upon, but
is implied from the conduct of the parties and the circumstances).
 Appointment to a position.
 CEO or managing director.
 Usual task is “to deal with every day matters, to supervise the daily running of the
company, to supervise the other managers and indeed, generally, be in charge of the
business of the company” (Entwells Pty Ltd v National and General Insurance Co Ltd).
 Individual director.
 Unless expressly authorised by the company, a director acting individually has no
authority to bind a company, and binds the company only by joining with other
directors in a collective resolution of the board of directors (Brick and Pipe Industries
Ltd v Occidental Life Nominees Pty Ltd).
 Chairman of the board.
 Has no more authority to bind the company than has any other director acting
individually (Hely-Hutchinson v Brayhead Ltd).
 Company secretary.
 Responsible for: (1) all the record-keeping within a company (e.g. maintenance of the
registers, preparation and keeping of minutes of meetings of directors and members);
(2) sending out notices of directors’ meetings and of meetings of members; (3) signing
documents or witnessing the affixing of the company’s seal to a document for
execution; (4) ensuring that the company performs its statutory obligations to manifest
its existence and to provide information for the benefit of the public; and (5) to sign
contracts connected with the administrative side of a company’s affairs (Panorama
Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd).
 Company executives below the board level.
 The usual authority attached to their office (e.g. in AWA Ltd v Daniels, it was held that
a person appointed by an electronics company to be a foreign exchange dealer had
the authority to enter into contracts to borrow foreign currency from banks.)
 Acquiescence of the board.
 By acquiescing, the board is treated as: (1) having ratified the unauthorised actions of the
agent so that the company is a valid party to the transactions that have occurred so far; and (2)
giving the agent implied authority to bind the company in similar transactions in the future.
 In Hely-Hutchinson v Brayhead Ltd, Richards had been expressly appointed as the chairman of
Brayhead Ltd, and to the knowledge and acquiescence of the board, also acted as the
company’s managing director, even though he had not been expressly appointed as such.
Richards made a promise on behalf of Brayhead to indemnify Hely-Hutchinson against any
losses incurred in lending money to Perdio (which Brayhead held shares in). Subsequently,
Perdio went into liquidation, and Hely-Hutchinson sued on the indemnity. It was argued that
Richards was not the agent of Brayhead, since he had not been expressly appointed as
managing director. However, it was held that Richards had implied actual authority to act as
managing director, because he had entered into transactions of a financial nature on the
company’s behalf in the past, and these had gone unchallenged.
 In Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd, a director was taken to
have implied actual authority to act as the company in the circumstances because he held a
controlling shareholding and assumed the role of managing director with the acquiescence of

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 the other directors. Transactions were generally entered into without prior reference to the
board, and no attempt was made to interfere with this assertion of control.
 Apparent or ostensible authority (i.e. the principal gives the impression to an outsider that an agent has authority to act on
the principal’s behalf).
o It creates an agency by estoppel (i.e. the principal is prevented (or estopped) from asserting that the agent lacked
authority) (Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd).
o Elements (Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd).
 A representation (by words or conduct) was made that the agent had the authority to enter, on behalf of
the company, into a contract of a kind sought to be enforced.
 The representation was made by a person who had actual authority (either express or implied) to
manage the business of the company (either generally or in respect of those matters to which the
contract relates).
 A principal is not liable merely because the agent has represented that he or she has authority.
 The contractor was induced by the representation to enter into the contract.
o Examples.
 In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd, Kapoor and Hoon formed a
company for the purpose of purchasing and reselling a large estate. The directors of the company were
Kapoor and Hoon, together with 2 other directors who were their nominees. The quorum of the board
was 4, but Hoon was often overseas, so Kapoor acted as managing director with the board’s approval,
even though he had not actually been appointed to that position. Kapoor engaged architects on behalf
of the company, and they brought an action claiming payment for work carried out. It was held that the
company was bound by Kapoor’s actions, because: (1) the board permitted Kapoor to act as a
managing director and thus held him out to engage the architects; (2) the company’s constitution
conferred full powers of management on the board; and (3) the architects were induced to believe that
Kapoor was authorised to enter into contracts on behalf of the company as managing director and relied
upon his position to enter into the contract.
 Kapoor did not have: (1) ‘express actual authority’, because the board had not passed a
resolution conferring authority; (2) ‘implied actual authority’ by ‘appointment to a position’
because he was an individual director; or (3) ‘implied actual authority’ by ‘acquiescence of the
board’ because Hoon was overseas.
 In Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd, an
employee purported to sign a purchase order on the authority of a person who had been appointed
managing director, but who did not have actual authority to make the purchase in question. It was held
that because the managing director lacked actual authority to sign the purchase order, he could not
represent that anybody else had the company’s authority to sign, and so the company was not liable on
the purchase order. (If the purchase order had been signed by the managing director, the company
would have been liable because of his apparent authority.)
 In Hely-Hutchinson v Brayhead Ltd, Richards had been expressly appointed as the chairman of
Brayhead Ltd, and to the knowledge and acquiescence of the board, also acted as the company’s
managing director, even though he had not been expressly appointed as such. Richards made a
promise on behalf of Brayhead to indemnify Hely-Hutchinson against any losses incurred in lending
money to Perdio (which Brayhead held shares in). Subsequently, Perdio went into liquidation, and Hely-
Hutchinson sued on the indemnity. It was argued that Richards was not the agent of Brayhead, since he
had not been expressly appointed as managing director. However, it was held that Richards had
apparent authority to act as managing director, because by allowing Richards to act as managing
director, the board of directors of Brayhead had represented to Hely-Hutchinson that Richards was the
managing director.
 No authority to act.

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 o The authority is granted in retrospect by the company’s subsequent ratification of the contract.

5.2.3 – The indoor management rule (or rule in Turquand’s case).

 States that even though persons dealing with a company are taken to have constructive notice of the contents of the
company’s public documents, they can assume that the internal proceedings of the company have been properly carried
out, even if this is not true, and so hold the company liable under the contract.
o This protects an outsider from issues which are not apparent just from reading the constitution, such as: (1) there
was an irregularity concerning the proper holding of a meeting (e.g. a quorum was not present, inadequate notice
was given, a voting irregularity occurred); (2) the common seal was not affixed in accordance with the
constitution; or (3) the board was not properly constituted.
o s 130(1) Corporations Act 2001 (Cth): A person is not taken to have information about a company (e.g. the
content of its constitution) merely because the information is available to the public from ASIC. (Thus, the
doctrine of constructive notice has been abolished.)
 The most significant exception to the rule is where either: (1) the outsider had actual knowledge of the irregularity; or (2)
was put upon inquiry by the circumstances of the case and failed to make inquiries. If so, the outsider loses the protection
of the rule and cannot assume that the constitution had been complied with.
o In Northside Developments Pty Ltd v Registrar General, the common seal of the company, Northside
Developments, was affixed to a mortgage document in breach of its constitution. The mortgage was over a piece
of land owned by Northside, its only major asset, and was an instrument to guarantee a loan from Barclays Bank
to one of the directors of Northside. Northside would gain no advantage from entering into the mortgage, and the
loan was unrelated to the purpose of its business. It was held that Barclays could not rely on the indoor
management rule because it was put on inquiry by knowing that the company was entering into a transaction
which appeared to be unrelated to the purposes of its business and from which it appeared to gain no benefit.
o In Bank of New Zealand v Fiberi Pty Ltd, Fiberi Pty Ltd had 2 directors, both of whom were equal shareholders in
the company. The company’s only significant asset was a property it owned in which the 2 directors lived as a
married couple. One director, Doyle, had many other business interests with his son, and used the common seal
of Fiberi to guarantee loans made by BNZ to their group of companies. The common seal was witnessed by
Doyle, as director, and by his son in his capacity as secretary of Fiberi, even though he had not been appointed
as secretary. Subsequently, the companies owned by the Doyles collapsed. It was held that Fiberi was not bound
to the guarantee loans, because BNZ should have known through its relationship with Fiberi that the Doyles did
not have the authority to execute these guarantees on behalf of Fiberi.

5.3 – Statutory assumptions an outsider is entitled to make.

5.3.1 – Operation.
 The effect of fraud or forgery.
o 128(3) Corporations Act 2001 (Cth): A person may rely on the assumptions in s 129 even if an officer or agent of
the company acts fraudulently, or forges a document in connection with the dealings (e.g. where a company seal
or signatures attesting its application are not genuine but are forged).
 “Dealings”.
o Includes negotiations and written communications (e.g. the signing and return of finance documents) (Australia
and New Zealand Banking Group Ltd v Frenmast Pty Ltd).
o Can apply to a single transaction.
 In Story v Advance Bank Australia Ltd, a bank took a mortgage over property owned by a company
whose directors and shareholders were a husband and wife. The husband forged his wife’s signature as
director to the affixing of the company’s common seal without her knowledge of the mortgage

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 transaction. It was held that because part of the loan moneys was in fact applied for the purposes of the
company, the bank’s negotiations with the husband constituted “dealings” with the company.
 Cumulative operation.
o The effect of s 129(8) Corporations Act 2001 (Cth) is to give cumulative operation to the assumptions.
 For example, a person may assume that an officer properly performs their duties under s 129(4)
Corporations Act 2001 (Cth) and in order to make this assumption may rely on the assumption under s
129(3) Corporations Act 2001 (Cth) that the officer has been duly appointed and has the authority to
perform those duties.
o It is not necessary for an outsider to have actually made these assumptions in order to rely upon them (Lyford v
Media Portfolio Ltd).

5.3.2 – The statutory assumptions.

 s 129(1) Corporations Act 2001 (Cth): A person may assume, in relation to dealings with a company, that its constitution
and any applicable replaceable rules have been complied with.
o Adopts the indoor management rule (or rule in Turquand’s case).
o This does not require the person to have knowledge of the constitution or replaceable rules (Oris Funds
Management Ltd v National Australia Bank Ltd).
 s 129(2) Corporations Act 2001 (Cth): A person may assume, in relation to dealings with a company, that anyone who
appears (from information provided by the company that is available to the public from ASIC) to be a director or a
company secretary: (1) has been duly appointed; and (2) has authority to exercise the powers and perform the duties
customarily exercised or performed by a director or company secretary of a similar company.
o This does not require the person to have knowledge of the information contained in the ASIC notices or returns
lodged by the company (Lyford v Media Portfolio Ltd).
o By naming particular people as directors and secretary in documents lodged with ASIC, a company in effect
holds out that those named people occupy the stated positions and have the authority that is customary for such
officers. In this respect, there is an overlap between the ss 129(2) and 129(3) Corporations Act 2001 (Cth)
assumptions.
 s 129(3) Corporations Act 2001 (Cth): A person may assume, in relation to dealings with a company, that anyone who is
held out by the company to be an officer or agent has: (1) been duly appointed; and (2) the authority to exercise the
powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.
o The statutory equivalent of apparent or ostensible authority. However, there is no requirement that the outsider
relies on the representation made by the company (Re Madi Pty Ltd).
o s 9 Corporations Act 2001 (Cth): An “officer of a corporation” includes the directors, company secretary, and
executives (i.e. makes or participates in making decisions that affect the whole or a substantial part of a
company’s business; has the capacity to affect significantly the company’s financial standing; or whose
instructions or wishes the directors are accustomed to act) who hold senior positions below board level.
o This means the outsider must establish:
 A holding out by the company that a person is an officer or agent.
 Can be made only by a person who had actual authority (either express or implied) to manage
the business of the company (either generally or in respect of those matters to which the
contract relates) (Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd).
 That the particular power exercised by the person so held out is within the scope of the powers
customarily exercised or performed by an officer or agent of a similar company.
 s 129(4) Corporations Act 2001 (Cth): A person may assume, in relation to dealings with a company, that the officers and
agents of the company properly perform their duties to the company.
 s 129(5) Corporations Act 2001 (Cth): A person may assume, in relation to dealings with a company, that: (1) a document
has been duly executed by the company if the document appears to have been signed in accordance with s 127(1); and

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 (2) anyone who signs the document and states next to their signature that they are the sole director and secretary of the
company, occupies both offices.
 s 129(6) Corporations Act 2001 (Cth): A person may assume, in relation to dealings with a company, that a document has
been duly executed if, in accordance with s 127(2): (1) the company’s common seal appears to have been fixed to the
document; and (2) the fixing of the common seal appears to have been witnessed.
 s 129(7) Corporations Act 2001 (Cth): A person may assume, in relation to dealings with a company, that an officer or
agent of the company who has authority to issue a document or certified copy of a document on its behalf, also has
authority to warrant that the document is genuine or is a true copy.
o Therefore, a company secretary may be assumed to have the requisite authority to warrant that a share
certificate is genuine.

5.3.3 – Limitations.
 s 128(4) Corporations Act 2001 (Cth): A person cannot rely on any of the assumptions set out in s 129 if either:
o The person actually knew that a particular assumption was incorrect at the time of the dealings.
 The knowledge of an agent (e.g. solicitor) may be taken to represent the actual knowledge of the
outsider (Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd).
 A person would not be regarded as knowing a piece of information merely because the information was
on the public record or if a reasonable person would have known the information (Oris Funds
Management Ltd v National Australia Bank Ltd).
o The person suspected that a particular assumption was incorrect at the time of the dealings.
 The circumstances surrounding the dealing must result in the person actually suspecting that the
assumption is incorrect. (Consequently, a person could rely on a s 129 assumption if the person did not
in fact form such suspicions, even though a reasonable person would have.)
 “Suspect” means “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” (Oris
Funds Management Ltd v National Australia Bank Ltd).

5.4 – Criminal liability of companies.

 Common law.
o A company will be liable for criminal offences committed by its directing mind and will because under the “organic
theory” of corporate personality, the acts of the organs of a company (i.e. its board of directors and the members
in general meeting) within the ambit of the powers conferred on them by the company’s constitution or
replaceable rules, are treated as the acts of the company itself and the organ is regarded as the directing mind
and will of the company (Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd). Whether a particular person
represents the directing mind and will of a company depends on the circumstances.
 Directors.
 In HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd, one of the issues raised was
whether a company could be said to have formed an intention to occupy certain premises for
its own business. The intentions of the general meeting or the board of directors could not be
attributed to the company in this case as these organs had not formally met to consider the
question. The company’s business was, however, managed by various directors. It was held
that their intention was the intention of the company, as they were the brains of the company.
 Senior management.
 In Tesco Supermarkets Ltd v Nattrass, a Tesco store displayed an advertisement stating that a
particular item was on sale at a reduced price. When the reduced-price items had all been sold,
a shop assistant—unbeknownst to the store manager—put out on display the same items
marked at the normal, higher price. A customer saw the advertisement and tried to buy the item

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 at the reduced price, but was informed that there were none available, so he paid the normal
price. Tesco was prosecuted for making of false or misleading statements, and claimed as a
defence under the legislation that the commission of the offence was due to the act or default
of another person. It was held that the store manager was “another person” because he did not
have the necessary responsibility or control of the company’s operations to be identified as the
controlling mind and will of the company. Thus, Tesco was not liable.
 Company secretary.
 The company secretary may be regarded as an organ of the company when acting in relation
to the company’s day-to-day affairs and administration.
 Change in control.
 Where control of the company changes, the company may be taken to have changed its mind
and adopted the intention and purpose of its new controllers (Federal Commissioner of
Taxation v Whitfords Beach Pty Ltd).
 The mind and will of more than one person.
 In Brambles Holdings Ltd v Carey, Brambles was a trucking company, and the responsibility for
ensuring that the company’s vehicles complied with the relevant legislation had been delegated
to 3 employees: the company’s main driver, the heavy haulage supervisor, and the operations
manager. The company was charged with offences relating to the maximum loads of its
vehicles. Even though the main driver was on sick leave and the heavy haulage supervisor
honestly believed the vehicles were correctly loaded, the operations manager knew, or ought to
have known, that proper loading instructions had not been given to the drivers. Thus, it was
held that the operations manager was the directing mind of the company, and his belief could
be attributed to the company.
 Statute.
o Standard offence.
 ss 3.1(1) and 12.1(2) Criminal Code: A criminal offence consists of physical elements (i.e. conduct or
the result of conduct) and fault elements (i.e. intention, knowledge, recklessness, or negligence), and a
body corporate may be found guilty of any offence. (While a company cannot be imprisoned, it can be
fined.)
 s 12.2 Criminal Code: A physical element of an offence is attributed to a company if it is committed by
an employee, agent or officer of the company acting within the actual or apparent scope of their
employment or within their actual or apparent authority. (This is wider than the Tesco Supermarkets Ltd
v Nattrass directing mind and will principle which limits a company’s liability where the physical element
of a criminal offence was committed by a senior manager who is its directing mind and will.)
 ss 12.3(1) and (2) Criminal Code: A fault element of an offence must be attributed to a company that
expressly, tacitly or impliedly authorised or permitted the commission of the offence, either by way of
proving that:
 The board of directors or a high managerial agent (i.e. an employee, agent or officer with duties
of such responsibility that their conduct may fairly be assumed to represent the body
corporate’s policy): (1) intentionally, knowingly, or recklessly carried out the relevant conduct,
or expressly, tacitly, or impliedly authorised or permitted the commission of the offence; and (2)
the body corporate did not exercise due diligence to prevent the conduct, authorisation, or
permission of the high managerial agent.
 A corporate culture (i.e. an attitude, policy, rule, course of conduct, or practice) existed within
the body corporate that directed, encouraged, tolerated or led to non-compliance with the
relevant provision.
 A body corporate failed to create and maintain a corporate culture that required compliance
with the relevant provision.

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 o Strict liability offence.
 s 6.1(1)(a) and (b) Criminal Code: One that has no fault elements for any of the physical elements, but
does have a defence of mistake of fact.
 s 12.5(1) Criminal Code: A company can only rely on the mistake of fact defence if both:
 The employee, agent, or officer of the company who carried out the conduct was under a
mistaken but reasonable belief about the facts that (had they existed) would have meant that
the conduct would not have constituted an offence.
 The company proves that it exercised due diligence to prevent the conduct. A failure to
exercise due diligence may be evidenced by the fact that the prohibited conduct was
substantially attributable to inadequate corporate management, control or supervision of the
company’s employees, agents or officers or the failure to provide adequate systems for
conveying relevant information to relevant people in the company.
o Absolute liability offence.
 s 6.2(1) Criminal Code: One that has no fault elements for any of the physical elements and the defence
of mistake of fact is unavailable.

5.5 – Tortious liability of companies.

 Common law and s 128(3) Corporations Act 2001 (Cth).
o A company is vicariously liable for the negligence and fraud committed by its: (1) employees in the course of their
employment; and (2) agents acting within the scope of their actual or apparent authority (Lloyd v Grace Smith
and Co).
o Damages in favour of a company may be reduced on the grounds of contributory negligence by the company
where its directors or management were negligent.
 In Daniels v Anderson, a company was awarded damages arising from the negligence of its auditors.
The auditors obtained a reduction of damages because the company’s directors almost wholly
delegated the task of setting up and operating a foreign exchange operation to management, and failed
to monitor and control this operation.

5.6 – Promoters and pre-registration contracts.

5.6.1 – Promoters.
 Definition.
o Active promoters.
 A person who actively undertakes the formation of a company (public or proprietary) by carrying out the
procedure necessary for incorporation (e.g. registering the company, paying registration and legal fees,
preparing the company’s constitution, appointing directors and shareholders, raising capital, negotiating
preliminary agreements and acquisitions of assets and preparing a prospectus).
 Those acting merely in a professional capacity on behalf of a promoter are not promoters (e.g.
solicitors, accountants)
o Passive promoters.
 A person who takes no active part in the formation of a company and the raising of its share capital, but
leaves this to others on the understanding that they will profit from the enterprise.
 In Tracy v Mandalay Pty Ltd, RSC purchased land which was to be developed for residential
purposes. The company, as promoter, sold the land for a substantial profit to a newly formed
development company (Mandalay) for the purpose of building the ten-storey block of home
units. The purchase of the land was funded by Mandalay through selling units off the plan. The
investors who were persuaded to take shares in Mandalay were ignorant of the profit involved
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 in the purchase. It was held that the inactive participants in RSC were promoters on the basis
that they left it to others to form the company (Mandalay) on the understanding that they were
to profit from the construction project.
 A promoter stands in a fiduciary relationship with the company and is therefore under an obligation to the promoted
company to act bona fide (in good faith) and to avoid conflicts of interest with the company for the entire period during
which a person is a promoter (i.e. for as long as the formation of the company continues). Thus, a promoter has a duty to:
o Disclose their interest in any contract entered into by the company.
 In Erlanger v New Sombrero Phosphate Co, a syndicate purchased an island, and a company was
formed for the purpose of purchasing the island from the syndicate. The head of the syndicate
nominated the directors of this company, who contracted to purchase the island at a price far exceeding
its value. It was held that the promoters were under a duty when forming the company to provide it with
an independent board of directors, and to disclose their interests in contracts with the company.
Because the promoters made a profit to the detriment of the company and its shareholders, the
company could rescind the contract.
o Disclose personal profits that may arise from their position.
 In Gluckstein v Barnes, a syndicate was formed to purchase a property being sold by a liquidator. The
syndicate repaid a debt owing to mortgagees of the property at a discount of £20,000, and then
purchased the property for £140,000. A company formed for the purpose of buying the property bought
it for £180,000. The profit of £40,000 was revealed but no mention was made of the profit of £20,000. It
was held that the company could recover this sum from the promoters of the syndicate.
o Not to disclose confidential information.
o Avoid taking up a contract or opportunity that belongs to the company (e.g. if, during the course of a promotion,
they purchase property that ought to have been acquired by the company).
o Ch 6D Corporations Act 2001 (Cth): Companies that seek to raise funds by the offer of securities must provide
investors with a disclosure document, a copy of which has been lodged with ASIC.
 ss 709 Corporations Act 2001 (Cth): A prospectus is the main type of disclosure document.
 s 711(2) Corporations Act 2001 (Cth): A prospectus must set out the nature and extent of the interests
that a promoter had in: (1) the formation of the company; (2) property proposed to be acquired by the
company in connection with its formation; or (3) the offer of the securities.
 s 711(3) Corporations Act 2001 (Cth): A prospectus must set out the amount agreed to be paid for the
promoter’s services in connection with the formation of the company.
 Remedies for breach of a promoter’s fiduciary duties.
o Availability.
 The remedies are available to the company and not its shareholders.
 In circumstances where promoters control the company (e.g. through control of the board of directors or
the general meeting), the company will not usually choose to exercise any rights available to it against
its promoters, but minority shareholders may still have rights.
o Rescission.
 The company may rescind the contract (whether or not the promoter made no profit or had no dishonest
motive in respect of the contract), such that the promoter must return any consideration received and
the company must return the property. however, this is not available if:
 The company does not rescind reasonably promptly after becoming aware of the
misrepresentation.
 The company, after becoming aware of the misrepresentation, does something which indicates
that it has affirmed the contract.
 It is not possible to restore the parties to their original positions (e.g. if the property purchased
from the promoter has undergone a substantial alteration in the hands of the company).

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  Prior to the rescission of the contract, innocent third parties acquire some interest in the
property.
o Recovery of secret profits.
 In Gluckstein v Barnes, the court ordered that the company could recover the secret profit even though it
chose not to rescind the contract.
o Constructive trust order.
 If the promoter, during the course of promotion, acquires property for personal gain instead of for the
company, the company may obtain a constructive trust order and require the promoter to hand it over at
cost.
o Loss or damages.
 ss 728(1) and 729 Corporations Act 2001 (Cth): Any person who suffers loss or damage in relation to
misstatements or omissions in relation to ss 711(2) and (3), may recover that loss or damage from the
promoter under.

5.6.2 – Pre-registration contracts.

 s 131(1) Corporations Act 2001 (Cth): An outsider can enforce a contract made before a company is registered (a pre-
registration contract) if the company ratifies the contract after it is registered.
o A company ratifies a contract if: (1) it signs a document to that effect; (2) its directors pass a resolution ratifying
the contract; (3) under s 126(1) Corporations Act 2001 (Cth), it is ratified by an individual acting within the
company’s express or implied authority and on behalf of the company; or (4) it is implied from the company’s
conduct (e.g. if a pre-registration contract involved a purchase of goods, then payment of the purchase price or
use of the goods by the company after it is registered would constitute evidence that it has ratified the contract).
 s 131(2) Corporations Act 2001 (Cth): If registration does not occur within either an agreed time or reasonable time after
the contract is entered into, or the company does not ratify the pre-registration contract, the person who entered the
contract on its behalf becomes personally liable to pay damages to the other contracting party (even if that person acted
on behalf of others).
o The amount of damages is the amount the company would be liable to pay if it had ratified the contract but did
not perform it at all (including any lost profits the other contracting party expected to make on the contract, and
wasted expenditure incurred in reliance of the contract being performed).

6 – Financing the company’s operations.

6.1 – Fundraising.

6.1.1 – Issue offers of securities (primary issues).

 s 706 Corporations Act 2001 (Cth): An offer of securities for issue (in the contractual sense and as an invitation to treat)
needs disclosure to investors, unless either:
o The issue is a small scale offering.
 Requirements (s 708(1)-(7) Corporations Act 2001 (Cth)).
 The offer must only be accepted by the person to whom it was made.
 The offer must only be made to a person who is likely to be interested in the offer as a result of
previous contact, professional or other connection with the offeror, or statements or action by
the investor that indicate they are interested in offers of that kind.
 The number of people to whom securities have been issued must not exceed 20 in any 12-
month period.

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  The offer must not result in the amount raised by the issuing body to exceed $2 million in any
12-month period.
 Other.
 s 734(1) Corporations Act 2001 (Cth): Advertising or publicity is prohibited.
 s 708(5) Corporations Act 2001 (Cth): Securities issued and amounts raised as a result of
offers under other s 708 exemptions are disregarded in counting the 20 investors ceiling and
the $2 million ceiling. (Issues made under a disclosure document are also not counted.)
o Sophisticated investors.
 Large offers.
 The minimum amount payable for the securities on acceptance of the offer is $500,000 or
more, whether payable by instalments over a period of time or not (ss 708(8)(a) and (b)
Corporations Act 2001 (Cth)).
 Offers to wealthy investors.
 A “qualified accountant” certifies that the investor (individual, company, or trust) had either: (1)
a gross income of $250,000 over each of the previous 2 financial years; or (2) net assets of at
least $2.5 million (ss 708(8)(c) and (d) Corporations Act 2001 (Cth)).
 Offers to experienced investors.
 The offer is made through a financial services licensee who is satisfied on reasonable grounds
that the investor has previous experience in investing in securities that allows them to assess
such matters as the merits of the offer, the value of the securities, the risks involved in
accepting the offer, and the adequacy of the information given by the person making the offer
(s 708(10) Corporations Act 2001 (Cth)).
 Offers to professional investors.
 The offer is made to a “professional investor”, such as a: (1) financial services licensee (e.g.
stock broker); (2) body regulated by APRA (e.g. bank, insurance company); (3) trustee of a
superannuation fund that has net assets of at least $10 million; and (4) a person who has or
controls gross assets of at least $10 million (s 708(11) Corporations Act 2001 (Cth)).
o Senior managers.
 The offer is made to either a: (1) senior manager (i.e. a person other than a director or secretary who
makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of
the corporation) of the body or a related body, or their spouse, parent, child, brother, or sister; or (2)
body corporate controlled by senior managers or their specified relatives (s 708(12) Corporations Act
2001 (Cth)).
o Existing security holders.
 The offer of debentures is made to existing debenture holders (s 708(14) Corporations Act 2001 (Cth)).
o Rights issues.
 The offer: (1) is made to existing shareholders in proportion to their holdings; (2) the offer concerns
quoted securities (e.g. shares in ASX listed companies); and (3) the company gives the ASX a
“cleansing notice” stating that it has complied with its financial reporting obligations under Ch 2M as well
as the continuous disclosure obligations in s 674 Corporations Act 2001 (Cth), and stating the potential
effect the issue of the shares will have on the control of the company (s 708AA Corporations Act 2001
(Cth)).
 Lodgment of disclosure documents.
o ss 718 and 727(1) Corporations Act 2001 (Cth): A disclosure document used for an offer of securities must be
lodged with ASIC in order to make an offer of securities.
 ss 1311 and Sch 3 Corporations Act 2001 (Cth): Contravention of s 727 is a criminal offence punishable
by a fine of 200 penalty units or 5 years’ imprisonment or both.

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 o s 727(2) Corporations Act 2001 (Cth): Offers of securities that need disclosure to investors must be included in
the appropriate disclosure document or accompanied by a copy of the disclosure document.
 Contents of disclosure documents.
o Full prospectuses.
 Listed and unlisted companies
 s 715A Corporations Act 2001 (Cth): The information in a prospectus and other disclosure
documents must be worded and presented in a clear, concise, and effective manner.
 While contravention is not an offence, ASIC may make a stop order to prevent further
offers of securities being made.
 s 711(1) Corporations Act 2001 (Cth): There must be disclosure of: (1) the terms and
conditions of the offer; (2) the interests, fees, and benefits of certain people involved in the
offer; (3) quotation of securities on a financial market; (4) the expiry date; (5) ASIC lodgment;
and (6) information prescribed by the regulations.
 Listed companies.
 s 713 Corporations Act 2001 (Cth): Since listed companies are required, on a continuing basis,
to disclose information to the ASX that would be likely to have a material effect on the price of
their securities, much of the information that s 710(1) would normally require to be included in a
prospectus is already known to the market. Thus, an offer of continuously quoted securities of
a body (i.e. quoted enhanced disclosure securities at all times in the 3 months before the date
of the prospectus) must only contain the information investors and their professional advisers
would reasonably require in order to make an informed assessment of such matters as the
effect of the offer on the body and the rights and liabilities attaching to the securities offered.
 Unlisted companies.
 s 710(1) Corporations Act 2001 (Cth): There must be disclosure of: (1) the rights and liabilities
attaching to the securities offered; and (2) the assets and liabilities, financial position and
performance, profits and losses, and prospects of the body that is to issue the shares,
debentures, or interests.
 s 728(2) Corporations Act 2001 (Cth): While the decision whether or not to include
forward looking statements is left to the body issuing the prospectus, a disclosure
document that contains a forward-looking statement is regarded as being misleading if
the person making it does not have reasonable grounds for making the statement.
(The onus of proving the absence of reasonable grounds rests on the person who
alleges the forward-looking statement was misleading.)
 A person who omits information required by the s 710 general disclosure test
contravenes s 728(1). This is a criminal offence if the omission is materially adverse
from the point of view of an investor (s 728(3) Corporations Act 2001 (Cth)). If an
investor suffers loss or damage because of the omission they can recover
compensation from the people listed in s 729.
o Offer information statements (OIS).
 s 709(4) Corporations Act 2001 (Cth): An OIS may be used instead of a prospectus if the amount of
money to be raised by the issuer, when added to all amounts previously raised by it, its related bodies or
controlled entities, is $10 million or less.
 s 715 Corporations Act 2001 (Cth): An OIS must: (1) identify the issuing body and the nature of
the securities; (2) describe the body’s business and what the funds sought to be raised are to
be used for; (3) state the nature of the risks involved in investing in the securities; (4) give
details of all amounts payable in respect of the securities; (5) state that a copy of the OIS has
been lodged with ASIC; (6) state that investors should obtain professional advice before
investing; and (7) include a copy of the body’s financial report.

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  Restrictions on issuing securities.
o Minimum subscription.
 ss 722 and 723(2) Corporations Act 2001 (Cth): If a disclosure document states that the securities will
not be issued unless applications for a minimum number of securities are received or a minimum
amount is raised, the application money received from investors must be held in trust, and the person
making the offer must not issue any of the shares until that minimum subscription condition is satisfied.
 s 724 Corporations Act 2001 (Cth): If the minimum subscription condition is not satisfied within 4 months
after the date of the disclosure document, the company must either: (1) repay the money received; (2)
give the applicants a supplementary or replacement disclosure document that changes the terms of the
offer and 1 month to withdraw their application and be repaid; or (3) issue the securities to the applicants
and give them a supplementary or replacement disclosure document that changes the terms of the offer
and 1 month to return the securities and be repaid.
o Stock exchange listing.
 ss 722 and 723(3) Corporations Act 2001 (Cth): If a corporation states in a disclosure document that it
will apply for stock exchange listing of its securities, the application money received from investors must
be held in trust, and the securities must be listed within 3 months from the date of the disclosure
document, or else the issue is void and the corporation must repay the money received.
o Expiration of disclosure document.
 ss 711(6), 714(2), and 715(3) Corporations Act 2001 (Cth): Disclosure documents must specify an
expiry date no later than 13 months after the date of the document.
 s 725(3) Corporations Act 2001 (Cth): If the application is received after the expiry date, the company
must, either: (1) repay the money received from the applicants; (2) give the applicants a new disclosure
document and 1 month to withdraw their application and be repaid; or (3) issue the securities to the
applicants and give them a new disclosure document and 1 month to return the securities and be repaid.

6.1.2 – Sale offers of securities (secondary trading).

 Subsequent offers for the sale of listed securities quoted on the stock exchange only require disclosure to investors if
either:
o The person making the offer controls (i.e. an entity has the capacity to determine the outcome of decisions about
the second entity’s financial and operating policies) the body whose securities are being offered and the
securities are not quoted (s 707(2) Corporations Act 2001 (Cth)).
 This does not apply if both the controller as well as the entity that issued the securities give the ASX a
“cleansing notice” that discloses: (1) that there has been compliance with the financial reporting
obligations under Ch 2M as well as the continuous disclosure obligations in s 674 Corporations Act 2001
(Cth); and (2) the potential effect the sale of the shares will have on the control of the company and the
consequences of that effect.
o The sales amounted to an indirect issue (s 707(3) Corporations Act 2001 (Cth)).
 A body issuing securities must have avoided disclosure to investors by issuing securities to an investor
under one of the s 708 exemptions.
 The securities must have been subsequently sold, or offered for sale, within 12 months after their issue.
 The issuer or the investor must have had the purpose of on-selling the securities to others. (This can be
rebutted if the circumstances of the issue and the subsequent sale are not such as to give rise to
reasonable grounds for concluding that the securities were issued or acquired with that purpose.)

6.1.3 – Restrictions on selling securities.

 Securities hawking.
o s 736(1) Corporations Act 2001 (Cth): A person is prohibited from making unsolicited offers of securities for issue
or sale in the course of a meeting or telephone call with a prospective investor.
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  s 738 Corporations Act 2001 (Cth): If securities are issued or transferred to an investor in contravention
of the securities hawking prohibition, the investor has the right to return the securities within 1 month
after the issue, or transfer and obtain a refund of the amount paid for the securities.
 This does not apply if the offer either: (1) does not need a disclosure document because of the
sophisticated investor exemptions in ss 708(8) and (10) Corporations Act 2001 (Cth), or the professional
investor exemption in s 708(11) Corporations Act 2001 (Cth); (2) is an offer of listed securities made by
telephone by a licensed securities dealer; or (3) is made to an established client by a licensed securities
dealer.
 Advertising restrictions.
o Before lodgment of a disclosure document.
 Listed companies.
 s 734(5)(a) Corporations Act 2001 (Cth): In the case of securities of a class already listed on
the ASX, it is permitted to advertise before lodgment of a disclosure document if the advertising
includes a statement stating: (1) the identity of the issuer of the securities; (2) that a disclosure
document will be made available; (3) that a person should consider the disclosure document in
deciding whether to acquire the securities; and (4) that anyone who wants to acquire the
securities must do so using the application form in the disclosure document.
 Unlisted companies.
 s 734(5)(b) Corporations Act 2001 (Cth): Advertising unlisted securities prior to lodgment of a
disclosure document is limited to a statement: (1) identifying the offer or the securities; (2) that
a disclosure document will be made available when the securities are offered; and (3) that
investors will have to complete an application form in or attached to a disclosure document.
o After lodgment of a disclosure document.
 s 734(6) Corporations Act 2001 (Cth): After a disclosure document has been lodged with ASIC,
advertisements are permitted that: (1) identifies the issuer of the securities or the seller of the securities;
(2) indicates that the disclosure document for the offer is available and where it can be obtained; (3)
states that a person should consider the disclosure document in deciding whether to acquire the
securities; and (4) states that anyone who wants to acquire the securities will need to complete the
application form that will be in or will accompany the disclosure document..

6.1.4 – ASIC’s power to exempt and modify.

 741(1) Corporations Act 2001 (Cth): ASIC has the power to exempt a person from a particular provision of the fundraising
provisions.

6.1.5 – Misstatements and omissions.

 Stop orders.
o s 739(1) Corporations Act 2001 (Cth): ASIC has the power to make a stop order that prevents any further offers,
issues, sales, or transfer of the securities from being made, if it is satisfied that the disclosure document either:
 Contains a misleading or deceptive statement or omits information required by the fundraising
provisions (a contravention of s 728 Corporations Act 2001 (Cth)).
 Contains information is not worded and presented in a clear, concise, and effective manner (a
contravention of s 715A Corporations Act 2001 (Cth)).
o s 739(2) Corporations Act 2001 (Cth): Before issuing a stop order, ASIC must hold a hearing at which any
interested person is given an opportunity to make representations about whether a stop order should be made.
 Supplementary and replacement documents.
o s 719 Corporations Act 2001 (Cth): Either a supplementary or replacement document must be lodged to correct a
deficiency in the original disclosure document, such as where a person becomes aware that a disclosure
document: (1) contains misleading or deceptive statements; (2) has omitted required information; (3) new
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 circumstances have arisen since lodgment that are materially adverse from the point of view of an investor; or (4)
not worded and presented in a clear, concise, and effective manner.
 Liability for misstatements or omissions.
o The rule.
 s 728(1) Corporations Act 2001 (Cth): A person is prohibited from offering securities under a disclosure
document if there is a misleading or deceptive statement in, or an omission from, a disclosure
document.
 s 728(3) Corporations Act 2001 (Cth): This is a criminal offence only if the misleading or
deceptive statement or omission is materially adverse from the point of view of an investor.
o The right to compensation.
 s 729(1) Corporations Act 2001 (Cth): The right to compensation requires proof of causation in that the
loss or damage suffered was because of the misleading or deceptive statement in, or omission from, a
disclosure document (e.g. by showing reliance on the document containing the misleading and
deceptive statement, or that the investor would have acted differently if the material omission had been
disclosed).
 s 729(1) Corporations Act 2001 (Cth): The issuer of a disclosure document, its directors, and
its underwriters are liable for loss or damage caused by any contravention of s 728(1) in the
disclosure document. Other people (e.g. experts) named with their consent in the disclosure
document, are liable only for their own statements in the disclosure document.
 The right to recover compensation may be exercised where the shareholder has not rescinded
the contract to acquire the shares (Cadence Asset Management Pty Ltd v Concept Sports Ltd).
o Defences.
 s 731 Corporations Act 2001 (Cth): The person made all reasonable inquiries and believed on
reasonable grounds that the statement was not misleading or deceptive, or that there was no omission.
 s 733(1) Corporations Act 2001 (Cth): The person reasonably relied on information given by someone
else (other than a director, employee, or agent).
 s 733(3) Corporations Act 2001 (Cth): The person publicly withdrew their consent to being named in a
disclosure document.

6.1.6 – Crowd-sourced equity funding.

 Applicability.
o s 738A Corporations Act 2001 (Cth): The requirements for crowd-sourced equity funding do not have to comply
with the requirements applicable to disclosure documents generally (above).
 An offer is eligible to be made under the CSF regime if (where an offer does not satisfy these eligibility criteria, it will be
deemed to be an offer of securities requiring disclosure under the general fundraising provisions):
o It is expressly stated to be made under the CSF regime (s 738B Corporations Act 2001 (Cth)).
o The offer is for the issue (not the sale) of securities in the company making the offer (s 738G(1)(a) Corporations
Act 2001 (Cth)).
o The company offering its securities satisfies the conditions of s 738H(1) to be an “eligible CSF company” at the
time of the offer (s 738G(1)(b) Corporations Act 2001 (Cth)).
 It must be an unlisted public company limited by shares.
 Its principal place of business and majority of directors must be in Australia.
 Its gross assets and annual revenue must each be less than $25 million.
 It must not have a substantial purpose of investing in other entities.
 It must not have a related party that is listed.
o The securities that are the subject of the CSF offer must be of a class prescribed in the regulations (i.e. fully paid
ordinary shares) (s 738G(1)(c) Corporations Act 2001 (Cth)).

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 o The maximum amount sought to be raised by the new offer and all amounts raised in the 12 months prior
pursuant to CSF offers does not exceed $5 million (excluding offers to sophisticated or professional investors) (ss
738G(1)(d) and s 738G(2) Corporations Act 2001 (Cth)).
 CSF intermediaries.
o s 738L Corporations Act 2001 (Cth): A CSF offer can only be made by publishing a CSF offer document that
complies with s 738J on a platform of a CSF intermediary.
 CSF offer document.
o ss 738J(1) and 738L(1) Corporations Act 2001 (Cth): A CSF offer document must be prepared for each CSF
offer, and be published on the platform of a single CSF intermediary.
o s 738J(2) Corporations Act 2001 (Cth): A CSF offer document must contain information about the company and
its business, the securities on offer, and how the proceeds from the offer will be used. (It does not need to be
lodged with ASIC, but if the CSF offer document does not comply with the legislative requirements, ASIC has the
power to make a stop order.)
 Defective CSF offer document.
o The rules.
 s 738Y(1) Corporations Act 2001 (Cth): The offer of CSF securities under a defective offer document is
prohibited.
 ss 738U(1) and (2) Corporations Act 2001 (Cth): An offer document is defective if either: (1) it
contains a misleading or deceptive statement; (2) there is an omission of required information;
(3) since the document was published, a new circumstance has arisen that would have been
required to have been included in the document had it arisen prior to the document’s
publication; or (4) it includes a statement about a future matter where the person making the
statement did not have reasonable grounds for making it.
 ss 738Y(3) and 738Q(4) Corporations Act 2001 (Cth): An intermediary is prohibited from publishing or
continuing to publish a CSF offer document if the intermediary knows the document is defective (i.e. if
they would have had such knowledge had they conducted prescribed checks to a reasonable standard).
o Liability.
 s 738V Corporations Act 2001 (Cth): The issuer company, the intermediary, and any other persons who
may become liable on the offer document are under an obligation to provide written notification to the
company and intermediary as soon as practicable if they become aware the offer document is defective
while it is still open. Failure to do so is a strict liability offence.
 Notification that an offer document is defective triggers the intermediary’s obligation to remove the offer
document from the platform.
 s 738Y(4) Corporations Act 2001 (Cth): Persons associated with a defective offer may be criminally
liable or exposed to action by an investor for recovery of loss or damage where the offer document is
defective and the statement, omission, or new circumstance that caused the document to be defective is
materially adverse from the point of view of an investor.
o Defences.
 s 738Z(1) Corporations Act 2001 (Cth): Where a person did not know the offer document was defective.
 s 738Z(3) Corporations Act 2001 (Cth): Where the person placed reasonable reliance on information
provided by another person apart from an agent, employee or director in the case of company.
 s 738Z(6) Corporations Act 2001 (Cth): Where a person named in an offer document publicly withdrew
their consent to being named in the document.
 Investor protection provisions.
o ss 738ZC(1) and 738ZD(1) Corporations Act 2001 (Cth): A retail client: (1) can only invest a maximum of $10,000
in relation to CSF offers by a particular issuer, within a 12 month period via the same intermediary; and (2) who
has made an application has an unconditional right to withdraw their application within 48 hours of it being made.

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  An investor is assumed to be a retail client unless: (1) the value of the financial product exceeds
$500,000; (2) the crowd funding is provided for a business employing less than 20 people or 100 people
in the case of a manufacturer; (3) the investor has net assets of more than $2.5 million or gross income
of more than $250,000; or (4) the person is a professional investor.

6.2 – Share capital.

6.2.1 – Definitions.
 Shares.
o A chose in action that represents a proportionate interest in the net worth of a company. Ownership of a share
gives the shareholder proprietary rights, as defined by the company’s constitution and the law (e.g. the right to
participate in the payment of a dividend, the right to vote at a general meeting) and may also impose obligations
(e.g. to pay calls on partly paid shares).
o ss 124(1) and 254A(1)(c) Corporations Act 2001 (Cth): A company may issue shares either:
 Fully paid.
 The shareholder has paid the entire issue price of the shares and has no further obligation to
contribute money to the company.
 Partly paid.
 s 254M Corporations Act 2001 (Cth): A shareholder holding partly paid shares is liable to pay
calls on the shares unless the company is a no liability company.
 ss s 515 and 516 Corporations Act 2001 (Cth): On a winding up, a member is liable to
contribute the amount unpaid on the shares to pay the company’s debts and the costs of the
winding up.
 s 169(3)(f) Corporations Act 2001 (Cth): The amount unpaid on shares must be stated in the
register of members.
 Share options.
o Entitles the holder to buy or sell a stock at an agreed-upon price within a certain period of time.
o s 170 Corporations Act 2001 (Cth): Companies must maintain a register of option-holders and copies of option
documents containing the required particulars.
o Listed companies.
 LR 7.1: A listed company must obtain shareholder approval when granting options, which if exercised,
would result in an issue of shares exceeding 15% of the company’s capital.
 s 300A(1) Corporations Act 2001 (Cth): The share options granted to directors and other key
management personnel must be disclosed.
o Unlisted companies.
 s 300 Corporations Act 2001 (Cth): The share options granted to directors and the 5 most highly
remunerated officers other than directors must be disclosed in the company’s annual directors’ report.
 Convertible debenture or note.
o Entitles the holder to convert a loan to the company into shares at a future date.

6.2.2 – Issue of shares.

 Contractual rules.
o Usually, an investor makes an offer for shares by sending the company an application form and paying the issue
price. This offer is accepted when the company, through its directors, decides to allot the shares and sends the
notice of allotment.
o A rights issue is made when a company offers to issue shares to existing shareholders in proportion to shares
held. A contract is formed when the shareholder accepts the company’s offer.

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 o Application forms for share issues usually provide that the applicant agrees to take the number of shares applied
for or any lesser number that is allotted.
o An allottee must pay the company the issue price of the shares which is the consideration for the share issue.
 s 117(2)(k)(ii) Corporations Act 2001 (Cth): The application for registration of a company limited by
shares must set out the amount each member agrees in writing to pay for each share.
 s 254X Corporations Act 2001 (Cth): A company must lodge a notice of share issue with ASIC.
 Restrictions on issuing securities.
o See ‘6.1 – Fundraising’.
 Validation of improper issue of shares.
o s 254E Corporations Act 2001 (Cth): The court has wide powers to validate or confirm a purported issue of
shares which is invalid for any reason.
 In Kokotovich Constructions Pty Ltd v Wallington, an allotment of shares was validated because the
parties had proceeded for 20 years on the basis that shares had been properly issued and an order
validating the issue was just and equitable.

6.2.3 – Classes of shares.

 s 246F(1) Corporations Act 2001 (Cth): A company must lodge a notice with ASIC setting out particulars of any division of
shares into classes, if the shares were not previously so divided, or the shares were converted into shares in another
class.
 Preference shares.
o Definition.
 Holders of preference shares have preferential rights to receive dividends (usually at a fixed percentage
of the issue price of their shares) and to be repaid their capital if the company is wound up, ahead of
ordinary shareholders.
o Voting rights.
 Preference shareholders usually can vote only either: (1) during a period when dividends are in arrears;
(2) on a proposal to vary class rights; (3) on a proposal for reduction of capital; or (4) on a proposal to
wind up the company.
o Setting out preference shareholder rights.
 ss 254A(2) and 254G(2) Corporations Act 2001 (Cth): A company that issues preference shares, or
converts ordinary shares into preference shares, must set out in its constitution, or otherwise approve by
special resolution, the rights of preference shareholders with respect to: (1) the repayment of capital; (2)
participation in surplus assets and profits; (3) cumulative or non-cumulative dividends; (4) voting; and (5)
priority of payment of capital and dividends in relation to other shares or other classes of preference
shares. Failure to comply with these requirements renders the issue or conversion void (though
shareholders can seek to validate their rights under the shares by applying to the court under s 254E
Corporations Act 2001 (Cth), or suing on the corporate contract under s 140(1) Corporations Act 2001
(Cth)).
 Redeemable preference shares.
o ss 254A(1)(b) and 254A(3) Corporations Act 2001 (Cth): A company may issue redeemable preference shares,
which allow the company to pay back the issue price of the shares to the shareholder on the terms on which they
were issued (e.g. at a fixed time or at the option of the company or shareholder).
o Shares may be redeemable preference shares even though no ordinary shares are issued and the redeemable
preference shares therefore do not have a preference over any other class of shares.
 In Beck v Weinstock, it was held that the question whether shares are preference shares does not
depend on whether the company has issued ordinary shares at the time. (The company in question had
none.) Instead, it is answered by reference to whether or not the putative preference shares confer
preferential rights as to one of the matters listed in s 254A(2); if so, they are preference shares.
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 o s 254K Corporations Act 2001 (Cth): A company may only redeem redeemable preference shares: (1) if the
shares are fully paid; and (2) out of profits, or the proceeds of a new share issue made for the purpose of the
redemption.
 If a company does not redeem redeemable preference shares out of profits, the redemption involves a
reduction of capital and the requirements of ss 256B and 256C Corporations Act 2001 (Cth) must be
complied with.
 The company’s directors may contravene the insolvent trading provision in s 588G Corporations Act
2001 (Cth) and be personally liable under s 588M Corporations Act 2001 (Cth) if the company becomes
insolvent when it redeems any redeemable preference shares.

6.2.4 – Reducing share capital.

 The power to reduce a company’s share capital.
o A company’s power to reduce its share capital is vested in the directors and cannot be decided or proposed by
shareholders. Shareholders only have the statutory right under s 256B Corporations Act 2001 (Cth) to approve a
capital reduction put forward by directors (Re Molopo Energy Ltd).
 A company can reduce its share capital by either:
o With the consent of shareholders.
 s 259A Corporations Act 2001 (Cth): Buying back its shares under s 257A Corporations Act 2001 (Cth).
o Without the consent of shareholders.
 s 259A Corporations Act 2001 (Cth): Acquiring an interest in its fully paid shares for no consideration
(e.g. when shares are forfeited as a result of non-payment of a call by a shareholder).
 s 259A Corporations Act 2001 (Cth): Court order.
 In U and D Coal Ltd v Australian Kunqian International Energy Co Pty Ltd, AKIE took up shares
in UDC following its IPO, but later sought repayment of the amount it had paid for the shares,
alleging that the prospectus was defective. Under the terms of a settlement, UDC agreed to
acquire and cancel the shares acquired by AKIE and applied to the court for an order to this
effect. The court approved the settlement for UDC to acquire shares in itself.
 In the matter of Wollongong Coal Ltd, it was held that the power of the court to make an order
in relation to a share buy-back was limited to buy-backs made under another part of the
Corporations Act 2001 (Cth), such as an order under oppression proceedings.
 Making a payment to its shareholders for the return of the shares to the company, and then cancelling
some or all of the shares.
 Cancelling or reducing the amount unpaid on partly paid shares.
 Requirements where the company reduces its share capital with the consent of shareholders.
o s 257A Corporations Act 2001 (Cth): (Contrary to the rule in Trevor v Whitworth) a company can buy back its own
shares if:
 The buy-back does not materially prejudice the company’s ability to pay its creditors.
 The company follows the procedures laid down in ss 257A-257J Corporations Act 2001 (Cth).
 The 10/12 limit means that companies are able to buy back up to 10% of their shares within a
12-month period without shareholder approval and with minimum procedural requirements.

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  (Note: s 258E(1)(b) Corporations Act 2001 (Cth): If the shares are paid for out of share capital, the
requirements set out in s 256B(1) do not need to be complied with. However, if they are not paid for out
of share capital (e.g. they are paid for out of retained earnings or some other reserve), they do need to
be complied with).
o Types of buy-backs.
 Equal access scheme.
 Definition.
 ss 257B(2) and (3) Corporations Act 2001 (Cth): Offers must only be made to ordinary
shareholders to buy back the same percentage of shares from each and every
shareholder, on the same terms.
 Requirements.
 s 257C(1) Corporations Act 2001 (Cth): Where the 10/12 limit is exceeded, an
ordinary resolution of the general meeting must approve the terms of the buy-back
agreement before it is entered into, or the agreement must be conditional on such an
approval.
 ss 257C(2) and 257G Corporations Act 2001 (Cth): The notice of meeting must
include all material information known to the company and not previously disclosed, to
enable the shareholders to decide whether to vote in favour of the resolution.
 s 257F Corporations Act 2001 (Cth): Notice of an intended buy-back setting out the
terms of the offer and any accompanying documents must be lodged with ASIC
irrespective of whether the 10/12 limit is exceeded.
 Selective buy-backs.
 Definition.
 s 9 Corporations Act 2001 (Cth): Offers made to either: (1) particular shareholders to
the exclusion of others; or (2) to holders of shares other than ordinary shares.
 Requirements.
 s 257D(1) Corporations Act 2001 (Cth): Shareholders must approve the selective buy-
back either unanimously or by special resolution. Selling shareholders or their
associates cannot vote in favour of this resolution.
 ss 257D(2), 257D(3), and 257G Corporations Act 2001 (Cth): Material information
must accompany the notice of meeting, and the documents must be lodged with
ASIC.
 ss 257E, 257F and 254Y Corporations Act 2001 (Cth): ASIC must be notified at
prescribed times both before and after the buy-back.
 On-market buy-backs.
 Definition.

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  s 257B(6) Corporations Act 2001 (Cth): An offer made by a listed corporation on the
ASX (or other prescribed financial market) in the ordinary course of trading on that
market.
 LR 7.33: A company may only buy back shares at a price not more than 5%
above the average of the market price for shares in that class.
 Requirements.
 s 257C(1) Corporations Act 2001 (Cth): Where the 10/12 limit is exceeded, an
ordinary resolution of the general meeting must approve the terms of the buy-back
agreement before it is entered into, or the agreement must be conditional on such an
approval.
 Notice must be lodged with ASIC before the buy-back is entered into (s 257F
Corporations Act 2001 (Cth)) and after cancellation of the shares (s 254Y
Corporations Act 2001 (Cth)).
 Employee share scheme buy-backs.
 Definition.
 s 9 Corporations Act 2001 (Cth): The acquisition of shares in a company by or on
behalf of employees or directors who hold salaried employment in the company or a
related body corporate.
 Requirements.
 The required procedure is identical to that of on-market buy-backs.
o Result.
 Once a buy-back agreement has been entered into, the shares no longer carry voting rights and the
company cannot deal in the shares.
 s 257H Corporations Act 2001 (Cth): Upon registration of the transfer to the company, the shares must
be cancelled.
 s 254Y Corporations Act 2001 (Cth): Within 1 month after the shares are cancelled, the company must
lodge a notice with ASIC stating the number and class of shares transferred and the consideration paid.
o Failure to comply with reduction requirements.
 ss 257J and 256D Corporations Act 2001 (Cth): If the requirements are not complied with, the
contravention does not affect the validity of the reduction (i.e. once it is made, the reduction is regarded
as valid and cannot be reversed), and the company is not guilty of an offence. However, any person
who is involved in a company’s contravention is subject to the civil penalty provisions. Furthermore, a
person commits a criminal offence if their involvement in the company’s contravention is dishonest.
o Other relevant provisions.
 s 588G(1A) Corporations Act 2001 (Cth): A company that buys back its shares is deemed to have
incurred a debt at the time the buy-back agreement is entered into. [This may result in a director being
made personally liable for insolvent trading.]
 s 588FF Corporations Act 2001 (Cth): Where a buy-back causes a company to become insolvent, the
liquidator of the company may seek a court order to recover the consideration paid to vendor
shareholders for the buy-back as a voidable transaction.
 s 1324(1A) Corporations Act 2001 (Cth): Where a share buy-back constitutes a contravention of the
Corporations Act 2001 (Cth), it is deemed to affect the interests of creditors and shareholders if the
insolvency of the company is an element of the contravention. This enables a creditor or member to
apply to the court for an injunction or damages under s 1324(1) and (10).
 Requirements where the company reduces its share capital without the consent of shareholders.
o s 256D(1) Corporations Act 2001 (Cth): A limited liability company must not reduce its capital unless it complies
with the requirements set out in s 256B(1):
 The reduction must be fair and reasonable to the shareholders as a whole.

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  Relevant factors include: (1) the company’s high level of gearing; (2) the company’s inability to
maintain and grow the business in the absence of the capital reduction; (3) the non-payment of
dividends; and (4) the limited ability of the minority shareholders otherwise to sell their shares.
 In Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd, GKL called a shareholders’ meeting to
approve a selective reduction of capital that involved the cancellation of the shares held by
GKL’s minority shareholders in consideration of a payment that was $0.08 in excess of the
amount determined by an independent expert as a fair and reasonable price per share. The
effect of the capital reduction was to give GKL’s majority shareholder 100% ownership of the
company, and to reduce operating costs at the head office. It was held that the buy-back was
fair and reasonable, because the minority shareholders received an enhanced price for their
shares, and the reduction in operating costs would provide a benefit to all shareholders.
 In Re Fowlers Vacola Manufacturing Co Ltd, it was held that a reduction of capital that involved
a payment only to the company’s ordinary shareholders was not fair to the company’s
preference shareholders, because the company’s constitution gave the preference
shareholders a priority to a return of capital in the case of a winding up.
 The reduction must not materially prejudice the company’s ability to pay its creditors.
 A reduction of capital that involves a cancellation of shares for no consideration does not
require consideration of creditors’ interests as the company’s financial position remains
unaltered.
 The reduction must be approved by shareholders under s 256C Corporations Act 2001 (Cth).
 Equal reduction.
 s 256B(1) Corporations Act 2001 (Cth): Must be approved by ordinary resolution
passed at a general meeting of the company.
 Selective reduction.
 s 256C(2) Corporations Act 2001 (Cth)
 Must be approved by either: (1) special resolution, though no votes in favour
of the reduction may be cast by any person (including their associates) who
would receive payment or other consideration as part of the reduction, or
whose liability to pay unpaid amounts on their shares is to be reduced; or (2)
resolution at a general meeting of all ordinary shareholders.
 If the reduction involves the cancellation of shares, the reduction must be
approved by: (1) a special resolution passed at a meeting of the
shareholders whose shares are to be cancelled; and (2) a special resolution
passed at the general meeting.
 In Re Tiger Investment Co Ltd, MetalsEx become the sole shareholder in Tiger as a
result of cancellation of the minority Tiger shareholdings in consideration of the issue
of shares in MetalsEx to the former Tiger shareholders. There was concern as to
whether the Tiger shareholders could vote on the first resolution, because the Tiger
shareholders were receiving consideration from MetalsEx, even though they received
no consideration directly from Tiger. Santow J thought there was merit in the
argument that where the consideration moves from a third party, none of the
company’s shareholders is prevented from voting on the first resolution
 Notice requirements.
 The shareholders’ meeting that considers a proposed reduction of capital must
comply with the usual notice requirements.
 s 256C(4) Corporations Act 2001 (Cth): The company must provide a statement with
the notice of the shareholders’ meeting, setting out all known information that is

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 material to the decision on how to vote on the resolution to approve the capital
reduction.
o Failure to comply with reduction requirements.
 Effect of non-compliance.
 s 256D Corporations Act 2001 (Cth): If the requirements are not complied with, the
contravention does not affect the validity of the reduction (i.e. once it is made, the reduction is
regarded as valid and cannot be reversed), and the company is not guilty of an offence.
However, any person who is involved in a company’s contravention is subject to the civil
penalty provisions. Furthermore, a person commits a criminal offence if their involvement in the
company’s contravention is dishonest.
 Injunctions.
 A shareholder who alleges that a reduction of capital is not fair and reasonable has the right to
apply for a s 1324 Corporations Act 2001 (Cth) injunction to restrain the contravention. At the
hearing of the application, the company has the onus of proving otherwise.
 ss 1324(1A) and (1B) Corporations Act 2001 (Cth): Creditors have standing to apply for an
injunction to prevent a reduction of capital if the reduction would materially prejudice the
company’s ability to pay its creditors. At the hearing of the application, the company has the
onus of proving otherwise.
 Insolvent trading.
 s 588G(1A) Corporations Act 2001 (Cth): A reduction of share capital is deemed to be the
incurring of a debt by the company under the insolvent trading provisions in s 588G
Corporations Act 2001 (Cth). [Therefore, if the reduction of capital of a company takes effect
when the company is insolvent or it becomes insolvent because of the reduction, the directors
may be liable under s 588M. An action under s 588M may be brought against the directors by
the liquidator of the company or proceedings may be brought under the civil penalty provisions
(i.e. s 1317E) that apply to a contravention of s 588G.]
o Other relevant provisions.
 ch 6CA Corporations Act 2001 (Cth): A disclosing entity is required to disclose information about its
securities that is material and not generally available. A listed company must disclose information
regarding a reduction so as to keep the market informed.
 ch 2E Corporations Act 2001 (Cth): A reduction may confer a financial benefit on directors.
 s 125 Corporations Act 2001 (Cth): A company’s constitution can restrict the exercise of the company’s
powers and this may include the power to reduce share capital.
 ss 246B-246G Corporations Act 2001 (Cth): Protects holders of classes of shares from a variation of
their class rights.
o Permitted share capital reductions.
 The following types of share capital reductions are specifically permitted and therefore are not subject to
the s 256B(1) requirements:
 Share buy-backs under ss 257A-257J where the shares are paid for out of share capital (s
258E(1)(b) Corporations Act 2001 (Cth)).
 Share capital reductions by unlimited companies (s 258A Corporations Act 2001 (Cth)).
 Cancellations of shares forfeited under the terms on which they were issued. The cancellation
must be by resolution of the general meeting (s 258D Corporations Act 2001 (Cth)).
 Redemptions of redeemable preference shares out of the proceeds of a new issue of shares
made for this purpose (s 258E(1)(a) Corporations Act 2001 (Cth)).

6.2.5 – Financial assistance.

 The rule.
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 o s 260A Corporations Act 2001 (Cth): A company may financially assist a person to acquire shares in the
company or its holding company, if either:
 Giving the assistance does not materially prejudice the interests of the company, its shareholders, or the
company’s ability to pay its creditors.
 In ASIC v Adler, HIHC, a subsidiary of HIH, provided an unsecured $10 million loan to PEE, a
company controlled by Adler. Adler was a non-executive director of HIH and, through Adler
Corporation Ltd, a substantial shareholder. PEE used about $4 million of the $10 million to buy
HIH shares—in order to give the stock market the false impression that Adler was supporting
HIH’s falling share price by personally buying its shares—thereby shoring up the HIH share
price for the benefit of Adler Corporation Ltd’s substantial shareholding in HIH. PEE later sold
its HIH shares for a loss, but only after Adler had caused Adler Corporation first to sell its HIH
shareholding, thus accentuating the loss for PEE. It was held that both HIHC and HIH suffered
material prejudice as a result of the financial assistance, because it exchanged $10 million
cash for either an unsecured loan to PEE, or obtained equitable rights against PEE which were
of less value than the cash handed over.
 The assistance is approved by shareholders under s 260B.
 Shareholder approval for financial assistance must be given by special resolution passed at the
general meeting or by resolution agreed to by all ordinary shareholders. The person acquiring
the shares or an associate may not cast votes in favour of the resolution.
 Where meetings are convened for the purpose of passing a special resolution under s 260B, a
statement must accompany the notice of meeting that sets out all known information material to
the decision on how to vote on the resolution.
 The notice of meeting and accompanying documents must be lodged with ASIC before being
sent to members. A special resolution approving the financial assistance must also be lodged
with ASIC within 14 days of being passed.
 The assistance is exempted under s 260C.
 The definition of financial assistance.
o “Financial assistance” is not defined in the Corporations Act 2001 (Cth), but the case law reveals that it includes
the company:
 Lending a person money to be used to acquire shares in the company (Hunters Products Group Ltd v
Kindley Products Pty Ltd).
 Guaranteeing a person’s loan, where the proceeds of the loan are used to acquire shares in the
company.
 Providing its own assets as security for a person’s loan, where the proceeds of the loan are used to
acquire shares in the company.
 Causing a net transfer of value to the person acquiring the shares (Kinarra Pty Ltd v On Q Group Ltd).
 Exempted financial assistance.

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  Consequences of failing to comply with s 260A.
o s 260D Corporations Act 2001 (Cth): A contravention of s 260A does not affect the validity of the transactions
concerned and the company is not guilty of an offence. However, any person who is involved in a company’s
contravention is subject to the civil penalty provisions.

6.3 – Dividends.
 Definition.
o Dividends are payments to shareholders (e.g. cash payment, bonus share issue, granting share options,
transferring assets, paying up an amount unpaid on partly paid shares).
 Deciding to pay dividends.
o Replaceable rules.
 s 254U(1) (RR) Corporations Act 2001 (Cth): Directors have the power to determine that a dividend is
payable, fix the amount, determine the time for payment, and the method of payment.
 s 254V(1) Corporations Act 2001 (Cth): If the company does not have a constitution that provides for the
declaration of dividends, then a debt to shareholders entitled to the dividend is not incurred until the time
fixed for payment arrives, and the decision to pay the dividend may be revoked at any time before then.
(Shareholders may enforce payment of the dividend as any other contractual debt if the dividend is not
paid on the date fixed for payment.)
o Company’s constitution.
 s 254V(2) Corporations Act 2001 (Cth): If the company has a constitution that provides for the
declaration of dividends, the company incurs a debt when the dividend is declared.
o General.
 Shareholders cannot force a company to pay dividends even if it has sufficient surplus assets to do so
(Burland v Earle).
 A decision to pay interim dividends (i.e. which reflect what is anticipated to be the position at the end of
the year) can be revoked or amended before the dividend is paid and so does not create an enforceable
right to payment until the time for payment arrives (Brookton Co-Operative Society Ltd v FCT).
 Rights to dividends.
o General.
 Dividends are payable to those entered on the company’s share register as members at the time the
dividend is payable or is declared.
o Public companies.
 s 254W(1) Corporations Act 2001 (Cth): Each share (of a different class) has the same dividend rights,
unless the company’s constitution provides for the shares to have different dividend rights, or different
dividend rights are provided for by special resolution of the company.
o Proprietary companies.
 s 254W(2) (RR) Corporations Act 2001 (Cth): Directors can pay dividends as they see fit, subject to the
terms on which the shares were issued.
 Ability to pay dividends.
o s 254T(1) Corporations Act 2001 (Cth): A company can only pay a dividend if:
 The company’s assets exceed its liabilities immediately before the dividend is declared, and the excess
is sufficient for the payment of the dividend.
 The payment is fair and reasonable to the company’s shareholders as a whole.
 This will be satisfied if it is commercially justifiable and makes due allowance for risk, even
though it involves the adoption of a higher risk strategy by the company’s directors than was
previously the case (KGD Investments Pty Ltd v Placard Holdings Pty Ltd).
 The payment does not materially prejudice the company’s ability to pay its creditors.

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  This would not be satisfied if the company would become insolvent as a result of the payment.
 Remedies for improper dividend payments.
o Unauthorised reduction of capital.
 If dividends are paid when there is not a sufficient excess of assets over liabilities, this amounts to a
reduction of capital. Under s 256D(1) Corporations Act 2001 (Cth), a limited liability company must not
reduce its capital unless it complies with the requirements set out in s 256B(1):
 The reduction must be fair and reasonable to the shareholders as a whole.
 The reduction must not materially prejudice the company’s ability to pay its creditors.
 The reduction must be approved by shareholders under s 256C Corporations Act 2001 (Cth).
 If the reduction does not satisfy these requirements, the dividend payment is not invalidated, but any
director involved in the contravention may be liable for a civil penalty order.
o Insolvent trading.
 Directors contravene s 588G Corporations Act 2001 (Cth) if they fail to prevent their company from
incurring debts when there are reasonable grounds for suspecting that the company is insolvent.
 s 588G(1A) Corporations Act 2001 (Cth): A company is regarded as having incurred a debt
when a dividend is paid or, if the company has a constitution that provides for the declaration of
dividends, when the dividend is declared.
 s 588M Corporations Act 2001 (Cth): When the company is wound up, directors who contravened s
588G may be personally liable to either the company’s liquidator or particular unsecured creditors for
any loss or damage suffered because of the company’s insolvency.
 ss 1317E and 1317G Corporations Act 2001 (Cth): A court may make civil penalty orders against
directors who contravene s 588G Corporations Act 2001 (Cth).
o Breach of directors’ duties.
 s 254T(1)(c) Corporations Act 2001 (Cth): A dividend payment must not materially prejudice the
company’s ability to pay its creditors (i.e. result in the company becoming insolvent).
 Contravention may trigger an application for a s 1324 injunction (by ASIC or any other person
whose interests are affected) to restrain the company from paying the dividend. (Creditors
would have standing where a dividend payment materially prejudices the company’s ability to
pay them.)
 Directors who authorise a dividend payment in such circumstances breach their fiduciary duties
and may be held personally liable to repay the amount of the dividend to the company (Hilton
International Ltd v Hilton).

6.4 – Debentures.
 Borrowing powers of companies.
o ss 124(1) and 125(1) Corporations Act 2001 (Cth): A company, despite any express restriction contained in its
constitution, has the power to borrow money.
 Definition.
o s 9 Corporations Act 2001 (Cth): A debenture is a chose in action that includes an undertaking by a body to repay
as a debt, money deposited with or lent to the body (whether or not a security interest is granted over property of
the body to secure repayment of the money).
o s 283BH Corporations Act 2001 (Cth): A borrower may describe a debenture in a disclosure document as either
a:
 Debenture: Where repayment of the borrowings is secured by a security interest in favour of the trustee
for debenture-holders over the tangible property of the borrower or guarantors.
 Mortgage debenture: Where repayment of the borrowings is secured by a first mortgage given to the
trustee for debenture-holders over land vested in the borrower or in any of the guarantors.
 Unsecured note or unsecured deposit note: In any other case.
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  Issuing requirements.
o Disclosure.
 A person making offers of debentures or distributing application forms for debenture offers must comply
with the relevant disclosure requirements (see ‘6.1 – Fundraising’).
o Trust deed and trustee.
 s 283AA Corporations Act 2001 (Cth): A borrowing company must enter into a trust deed and appoint a
trustee, before it either: (1) makes an offer of debentures that needs disclosure to investors under Ch
6D; (2) makes an offer of debentures as consideration for the acquisition of securities under an off-
market takeover bid; or (3) issues debentures under an approved compromise or arrangement under Pt
5.1.
 s 283AB Corporations Act 2001 (Cth): The trust deed must provide that the following are held in trust by
the trustee for the benefit of the debenture-holders: (1) the right to enforce the borrower’s duty to repay;
(2) any charge or security for repayment; and (3) the right to enforce any other duties that the borrower
and guarantor have under the terms of the debentures, the provisions of the trust deed, or Ch 2L.
o Borrower’s and guarantor’s duties.
 ss 283BB (Borrower) and 283CB and 283CC (Guarantor) Corporations Act 2001 (Cth): The general
duties of a borrower and guarantor include the duty to: (1) carry on its business in a proper and efficient
manner; and (2) make all its financial and other records available for inspection by the trustee and give
the trustee any information, explanations, or other assistance required about the matters relating to
those records.
o Trustee’s duties.
 s 283DA Corporations Act 2001 (Cth): A trustee must exercise reasonable diligence to ascertain
whether: (1) the property of the borrower and of each guarantor will be sufficient to repay the amount
deposited or lent when it becomes due; and (2) the borrower or any guarantor has committed any
breach of the terms of the debentures, the provisions of the trust deed.
o Statutory rights of debenture-holders.
 s 318 Corporations Act 2001 (Cth): A borrower must give the trustee for debenture-holders a copy of its
annual financial report, directors’ report, and auditor’s report by the deadline for the financial year.
 s 313(2) Corporations Act 2001 (Cth): The auditor must also provide a report on any matters prejudicial
to debenture-holders’ interests within 7 days of the auditor becoming aware of the matter
 s 283EB(1) Corporations Act 2001 (Cth): The trustee also call a meeting of debenture-holders if the
borrower or guarantor has failed to remedy a breach of the terms of the debentures or provisions of the
trust deed. (The purpose is to inform the debenture-holders of the failure and submit proposals for
protection of the debenture-holders’ interests.)
o Register of debenture-holders.
 s 168(1)(c) Corporations Act 2001 (Cth): A company that issues debentures is required to set up and
maintain a register of debenture-holders.

7 – Corporate insolvency.

7.1 – Receivership.
 Definition.
o Receivership involves the appointment of a receiver by a secured creditor (e.g. debenture-holders) of a company
(or to a lesser extent, partnerships and individuals) to take possession of the secured property, sell it, and repay
the secured debt owed by the company out of the sale proceeds.
 Appointment.
o By secured creditors.
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  A secured creditor’s right to appoint a receiver arises from the terms of the loan agreement or debenture
(e.g. a breach of the obligation to pay interest or principal; the debtor company’s business is operating at
a loss; the debtor company’s business ceases to operate; another creditor files an application to wind up
the company).
 Where the secured property includes the business of the company, the loan agreement also gives the
receiver the power to manage the business.
o By the court.
 s 1323(1)(h) Corporations Act 2001 (Cth): The court may appoint a receiver over the property of a
person or a company that is the subject of an ASIC investigation of a suspected contravention of the
Corporations Act 2001 (Cth). (The purpose is to prevent the company’s property from being dissipated
during the course of the investigation.)
 Duties of receivers.
o Property secured by a non-circulating (i.e. fixed charge) security interest.
 The role of a receiver is to take possession of the property secured by the security interest, sell it, and
repay the debt due to the secured creditor. Any surplus after the sale of the property subject to the non-
circulating security interest is returned to the company.
o Property secured by a circulating (i.e. floating charge) security interest.
 s 433 Corporations Act 2001 (Cth): Before the creditor is repaid, proceeds from the sale of the secured
property must first go to paying the debts owed to certain unsecured creditors who are given priority in a
winding up (e.g. unpaid wages, superannuation contributions, leave entitlements).
o General.
 s 420A Corporations Act 2001 (Cth): Receivers are required to exercise reasonable care in selling the
secured property for not less than its market value.
 Effect of receivership.
o On the company and its directors.
 Receivership does not displace the company’s board of directors, who are still subject to their various
fiduciary and statutory duties (e.g. to ensure that the company prepares its annual financial reports).
 If a receiver and manager is appointed to take control of the company’s business, the directors’
management powers are superseded by the powers of the receiver and manager.
o On unsecured creditors.
 Unsecured creditors of a company in receivership retain their rights to sue the company for non-
payment of their debts. However, their rights in respect of the secured property are subordinated to the
secured creditor who appointed the receiver.
 Impact on receivership.
o Of voluntary administration.
 s 440B Corporations Act 2001 (Cth): During voluntary administration, secured creditors cannot enforce
their security interests by appointing a receiver over the company’s property, except with the
administrator’s or court’s consent.
 s 441A Corporations Act 2001 (Cth): However, a secured party who has a security interest in
the whole, or substantially the whole, of the property of a company under administration may
enforce the security interest within a “decision period” (i.e. 13 business days after the secured
party was given notice of the appointment of an administrator).
 Secured creditors’ rights to enforce their security interests and appoint a receiver resume after
voluntary administration ends, unless they have agreed to a DOCA.
o Of liquidation.
 A company may be in liquidation and receivership at the same time. Unsecured creditors may apply to
wind up a company on the ground of insolvency even though a secured creditor has appointed a
receiver. Similarly, a secured creditor may appoint a receiver even though the company is being wound

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 up. A liquidator’s role is to look after the interests of unsecured creditors, while the receiver represents
the secured creditor who made the appointment. A receiver’s right to take possession and sell the
secured property continues despite the liquidation of the company.
 Termination of receivership.
o Receivership terminates when the secured property is sold and the debt due to the secured creditor is discharged
and the debts of the receivership (e.g. the receiver’s cost and fees) are paid. If the company is not in liquidation,
the directors’ control of the company’s affairs resumes.

7.2 – Voluntary administration.

 Initiating voluntary administration.
o s 436A(1) Corporations Act 2001 (Cth): Directors may appoint an administrator if they believe that the company is
insolvent or is likely to become insolvent.
 Directors may decide to put their company into voluntary administration because:
 Under the insolvent trading provisions, directors’ personal liability to pay compensation for
breaching s 588G arises only if their company goes into liquidation.
 Even if a company is wound up, directors may avoid personal liability for contravening s 588G
if, pursuant to s 588H(5), they can establish that they took all reasonable steps to prevent the
company from incurring debts when there were reasonable grounds to suspect that it was
insolvent. In determining whether the defence has been proved, s 588H(6) directs the court to
have regard to any action the director took with a view to appointing an administrator, when
that action was taken, and the results of the action.
 s 440J Corporations Act 2001 (Cth): Creditors cannot enforce personal guarantees against
directors made for their company’s debts.
o ss 436B and 436C Corporations Act 2001 (Cth): While it is relatively rare, a company may also be put into
voluntary administration by its liquidator or a creditor who has an enforceable security interest over the whole, or
substantially the whole, of a company’s property.
 Duties of the administrator.
o As is the case with a liquidator, an administrator must be independent of the company, its officers, creditors, and
auditor. A person connected with the company in these respects is disqualified from being appointed as an
administrator of the company under s 448C Corporations Act 2001 (Cth) without leave of the court.
o s 436DA Corporations Act 2001 (Cth): Administrators must declare any relevant relationships that they have had
with the company, or its officers, within the preceding 24 months, and any indemnities that they have been
provided with. If there is such a relationship, the declaration must state the administrator’s reasons for believing
that the relationship does not result in the administrator having a conflict of interest or duty.
o s 447E(1) Corporations Act 2001 (Cth): The court may make an order as it thinks just where it is satisfied that the
administrator has conducted the administration in a manner that is prejudicial to the interests of some or all of the
company’s creditors or members.
 s 447C Corporations Act 2001 (Cth): The court may declare whether the appointment of the
administrator was valid.
 Role of the voluntary administrator.
o Administrators take control of the company’s affairs when they are appointed and directors lose their powers to
manage, even though they retain their office.
o s 436E Corporations Act 2001 (Cth): An administrator must convene a first creditors’ meeting within 8 business
days of appointment. The administrator must give written notice of the meeting to as many of the company’s
creditors as reasonably practicable at least 5 business days before the meeting. At this meeting, creditors have
the opportunity to remove the administrator appointed by the directors and appoint someone else as a
replacement.

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  reg 5.6.21 Corporations Regulations 2001 (Cth): Voting is by simple majority (50%) of those present (in
person and by proxy) and voting by poll. If the vote is tied, the Chair (usually the administrator) has the
casting vote.
o s 439A(5) Corporations Act 2001 (Cth): An administrator must convene a second creditors’ meeting within ± 5
business days before or after 20 business days after appointment of the voluntary administrator (or 25 business
days if the day after the administration begins is in December, or is less than 25 business days before Good
Friday (19 April)).
 s 439C Corporations Act 2001 (Cth): At this meeting, creditors are given the opportunity to decide
whether: (1) the company enters into a DOCA; (2) the company is wound up; or (3) administration is
terminated.
 reg 5.6.21 Corporations Regulations 2001 (Cth): Voting is by simple majority (50%) of those
present (in person and by proxy) and voting by poll. If the vote is tied, the Chair (usually the
administrator) has the casting vote.
 ss 438A and 439A(4) Corporations Act 2001 (Cth): The administrator must investigate the financial
position and circumstances of the company, and then submit a report to creditors detailing his or her
opinion as to whether it would be in the creditors’ interests that the company enter into a DOCA, end the
administration or wind up the company.
 s 439A(6) or s 447A Corporations Act 2001 (Cth): The court may extend the convening period.
 Decision of the creditors.
o If the creditors resolve that the company should be wound up or if they decide to end the administration,
voluntary administration ends on the date of the creditors’ meeting.
o If creditors decide that the company should execute a DOCA, the deed must be executed by both the company
and the administrator within 15 business days, whereupon voluntary administration ends and the company
becomes subject to the terms of the deed (s 444B(2) Corporations Act 2001 (Cth)).
 If the company fails to execute the deed within 15 business days, voluntary administration ends and the
company is deemed to have entered into a creditors’ voluntary winding up (s 446A(2) Corporations Act
2001 (Cth)).
 Effect of voluntary administration on creditors.
o ss 440A-440J Corporations Act 2001 (Cth): During voluntary administration, there is a moratorium or stay of all
claims or legal proceedings against the company and guarantors of its debts.
o s 440B Corporations Act 2001 (Cth): During voluntary administration, secured creditors cannot enforce their
security interests by appointing a receiver over the company’s property except with the administrator’s or court’s
consent.
 s 441A Corporations Act 2001 (Cth): However, a secured party who has a security interest in the whole,
or substantially the whole, of the property of a company under administration may enforce the security
interest within a “decision period” (i.e. 13 business days after the secured party was given notice of the
appointment of an administrator).
 Secured creditors’ rights to enforce their security interests and appoint a receiver resume after voluntary
administration ends, unless they have agreed to a DOCA.

7.2.1 – Deeds of company arrangement.

 Definition.
o A deed of company arrangement (DOCA) is one of the possible outcomes for a company that is put into voluntary
administration.
o ss 435C(2)(a) and 444A(2) Corporations Act 2001 (Cth): If creditors vote in favour of a DOCA, and the company
and the voluntary administrator execute the deed, voluntary administration ends, and the company’s voluntary
administrator becomes the administrator of the deed unless the creditors appoint someone else.
 Types of DOCA’s.
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 o Deeds of company arrangement may have any one or more of the following features:
 The company has additional time to pay debts incurred prior to the commencement of voluntary
administration, and is permitted to continue operating its business.
 The creditors agree to accept payment of a lesser amount in final settlement of their debts.
 An orderly sale of all the company’s property over an agreed period of time.
o ss 444DA(1) and (2) Corporations Act 2001 (Cth): Unless waived by a meeting of employee creditors or by the
court, the DOCA must contain a provision which enables employee creditors whose claims would be entitled to
priority over other unsecured debts and claims in a liquidation, to have at least an equal priority under the deed.
 Effect of deeds of company arrangement on creditors.
o The moratorium that operates during voluntary administration terminates when a DOCA is executed, and the
creditors become subject to the provisions of the deed.
o ss 444D(1) and (2) Corporations Act 2001 (Cth): In relation to any claims that arose on or before the
commencement of voluntary administration, a DOCA binds: (1) all unsecured creditors; and (2) secured creditors
who voted in favour of the deed.
 s 444E Corporations Act 2001 (Cth): Thus, while the deed is in force, unsecured creditors are not
permitted to apply to wind up the company, or begin legal action to recover their debts without leave of
the court.
 It cannot, however, limit the rights of creditors to make claims against third parties.
 In Lehman Brothers Holdings Inc v City of Swan, creditors of Lehman Brothers Australia voted
in favour of a deed that was passed primarily due to the votes of 2 associated Lehman
Brothers companies. It was held that provisions in the deed that purported to prevent Lehman
Brothers Australia’s creditors from pursuing claims against the 2 associated Lehman Brothers
companies were invalid.
o The rights of secured creditors to enforce their security and take possession of, and sell, secured property
resume with the end of the voluntary administration moratorium.
 The reasons creditors agree to a DOCA.
o Creditors who supplied goods and services to a company prior to its voluntary administration may be induced to
vote in favour of a deed if this results in the company continuing as a customer.
o Creditors may also vote in favour of a deed if they perceive that the company can trade its way out of financial
trouble with more competent management provided by the deed administrator or a purchaser of the company’s
business.
 Setting aside a DOCA.
o s 445D Corporations Act 2001 (Cth): On the application of a creditor, the company, ASIC, or any other interested
person, the court may terminate a DOCA if satisfied that either:
 Information about the company's business, property, affairs or financial circumstances that was false or
misleading, and can reasonably be expected to have been material to creditors of the company in
deciding whether to vote in favour of the resolution that the company execute the deed, was given to the
administrator of the company or to the creditors.
 The DOCA involves an act or omission that is either oppressive to, unfairly prejudicial to, or unfairly
discriminatory against, one or more creditors.
 The DOCA involves an act or omission that is contrary to the interests of the creditors of the company
as a whole.
 The deed should be terminated for some other reason.

7.3 – Liquidation (or winding up).

 Types of liquidation.
o Compulsory liquidation (by order of the court).
 Solvent companies.
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  Usually involves disputes between shareholders.
 s 489EA Corporations Act 2001 (Cth): ASIC may order the company to be wound up.
 Insolvent companies.
 Applying for a winding up order.
 s 459P Corporations Act 2001 (Cth): Either creditors, the company, a director, or
ASIC may apply to the court for a winding up.
 The most common applicant who initiates a winding up is an unsecured
creditor who has been unsuccessful in obtaining payment of a debt from the
company. It is rare for secured creditors to apply to the court, because they
are able to sell the secured property and repay their debt out of the
proceeds.
 s 489EA Corporations Act 2001 (Cth): ASIC may order the company to be wound up.
 Obtaining a winding up order.
 s 459R Corporations Act 2001 (Cth): An applicant must file an application to wind up a
company with the court, who will set a date for the application to be heard within 6
months.
 The applicant must serve a copy of the application on the company, lodging a copy of
the application with ASIC, and advertising the filing of the application in the prescribed
manner.
 The court must be satisfied that the company is insolvent before it will make an order
to wind the company up in insolvency.
 s 459C(2)(a) Corporations Act 2001 (Cth): The court must presume that the
company is insolvent if the company failed to comply with a statutory
demand.
s 459E(2) Corporations Act 2001 (Cth): A statutory demand is a
formal document signed by a creditor that specifies the amount of
the debt (at least $2,000) owed by the company. It must require the
company to pay the amount demanded within 21 days after the
demand is served on it.
s 459F Corporations Act 2001 (Cth): If the company fails to comply
with the demand 21 days after it is served, it is presumed to be
insolvent for the purposes of the creditor’s subsequent application
for winding up in insolvency.
ss 459G and 459H Corporations Act 2001 (Cth): Within 21 days
after service, a company may apply to the court for an order setting
aside a statutory demand served on it. The court may set it aside if
satisfied that there is a genuine dispute about the existence or
amount of the debt.
 If the presumption does not apply, an applicant can prove insolvency using
the s 95A Corporations Act 2001 (Cth) test (i.e. the company is unable to pay
its debts as and when they become due and payable).
This is often difficult to prove in practice, because the conclusion
that a company is insolvent requires an examination of its entire
financial position and ought not to be drawn simply from evidence of
a company’s temporary lack of liquidity.
o Voluntary liquidation.
 s 491 Corporations Act 2001 (Cth): If the directors have not made a solvency declaration, the company’s
members in a general meeting may pass a special resolution that the company be wound up.

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  s 439C Corporations Act 2001 (Cth): Creditors of a company under administration may resolve that the
company be wound up.
 s 446A(1)(b) Corporations Act 2001 (Cth): If the company fails to execute the deed within 15 business
days, voluntary administration ends and the company is deemed to have entered into a creditors’
voluntary winding up.
 s 446A(1)(c) Corporations Act 2001 (Cth): The creditors of a company that is subject to a DOCA may

pass a resolution terminating the deed and that the company be wound up.
 Effects of winding up.
o On a liquidator.
 ss 477 and 506 Corporations Act 2001 (Cth): When a company is placed in liquidation, the liquidator
takes control of the company and has the power to: (1) carry on the company’s business so far as is
necessary; (2) sell all or any part of the company’s property; and (3) bring or defend legal proceedings in
the name of the company.
 In Patrick Stevedores v MUA, it was held that it is for the administrator (and not the judge) to
decide whether or not to carry on the business of the company and the form in which it should
be carried on during the administration.
 ss 477(3), 483(1), and 530A Corporations Act 2001 (Cth): Liquidators are given extensive powers to
access company books and obtain information from the officers and employees.
 A liquidator is regarded as an agent of the company, and thus imposes upon the liquidator fiduciary
duties and duties of care under ss 180-184 Corporations Act 2001 (Cth). A liquidator is also required to
act impartially in the conduct of the winding up. Under the civil penalty provisions, liquidators in breach
of their duties be liable to disqualification, imposition of a pecuniary penalty, payment of compensation
to the company, or criminal liability.
o On directors.
 s 471A Corporations Act 2001 (Cth): Directors lose their powers to manage the company’s affairs.
o On shareholders.
 Shareholders lose their right to transfer shares and cannot pass resolutions at general meetings.
o On creditors.
 The division of assets occurs as follows:
 s 471C Corporations Act 2001 (Cth): Secured creditors’ rights to take possession and sell
secured property are unaffected.
 s 556 Corporations Act 2001 (Cth): The expenses of recovering, preserving, and realising the
property of the company or carrying on its business; the costs of the application for the winding
up order; various expenses that are also necessary for an orderly winding up; the remuneration
for service of the liquidator; and employee entitlements.
 s 555 Corporations Act 2001 (Cth): Unsecured creditors must lodge a proof of debt and are
entitled to a distribution on the basis of receiving equal proportions of their debts (the “pari
passu rule”).
 s 563A Corporations Act 2001 (Cth): Debts to a member in the capacity of a member (e.g. a
claim for payment of a declared dividend).
 s 501 Corporations Act 2001 (Cth): Members of the company.
 Recovery of pre-liquidation uncommercial transactions.
o On application to the court, a liquidator can avoid a transaction of the company if:
 s 588FB(1) Corporations Act 2001 (Cth): A reasonable person in the company’s circumstances would
not have entered into the transaction (e.g. gifts made by the company, sales of company property for
significantly less than market value, company purchases at significantly more than market value).
 s 588FC Corporations Act 2001 (Cth): It was entered into at a time when the company was insolvent or
the company became insolvent because of entering the transaction.
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  s 95A Corporations Act 2001 (Cth): A person is insolvent if it is unable to pay its debts as and
when they become due and payable.
 s 588FE Corporations Act 2001 (Cth): It was entered into 2 years prior to the relation-back day (i.e. in
the case of a compulsory winding up, the date that the application to wind up the company was filed).
 588FG(2) Corporations Act 2001 (Cth): The other party to the transaction: (1) did not become a party to
the transaction in good faith; (2) had reasonable grounds for suspecting that the company was insolvent;
and (3) did not provide valuable consideration under the transaction, or did not change their position in
reliance on the transaction.
 s 588FF Corporations Act 2001 (Cth): The court may make an order an order requiring a person to pay
to the company an amount that fairly represents some or all of the benefits that the person has received
because of the transaction (e.g. return of money or property).

7.4 – Schemes of arrangement.

 Definition.
o A binding agreement that modifies, reorganises or alters the legal rights of creditors and shareholders. For
example a scheme may: (1) involve a moratorium or compromise of creditors’ claims against a debtor company
with the company being managed by an independent insolvency practitioner as scheme administrator; or (2)
provide for a “debt for equity swap”, in which creditors take up shares in a debtor company.
o (Note: To a large extent, the voluntary administration provisions, particularly those that deal with DOCA’s, can
achieve similar outcomes for insolvent companies and their creditors.)
 Initiating a scheme of arrangement.
o ss 411(2) and 412 Corporations Act 2001 (Cth): A company, liquidator, member, or director may apply to the
court for an order to convene meetings of shareholders and creditors. A draft explanatory statement that explains
the effect of the proposal must be provided to the court and a copy given to the company’s shareholders and
creditors and ASIC.
o s 411(4) Corporations Act 2001 (Cth): The scheme must be approved by the required majority of creditors
(usually 75%).
o s 411(6) Corporations Act 2001 (Cth): At second court hearing, the scheme approved by creditors is put to the
court for approval. The court considers whether the proposed scheme is fair and equitable between the different
classes of shareholders and creditors.
 A scheme of arrangement may be approved by the court even though it may be inconsistent with and
overrides the constitution of the company. However, a scheme will not be approved where it is
inconsistent with the Corporations Act 2001 (Cth).
 In Re White Horses Pty Ltd (No 2), the court refused to approve a scheme of arrangement that would
have had the effect of varying class rights without affording particular classes of shareholders the
protection of s 246B(2) Corporations Act 2001 (Cth).

8 – Regulating transactions in corporate securities.

8.1 – Disclosure.
 Definition of a disclosing entity.
o ss 111AA-111AX Corporations Act 2001 (Cth): A disclosing entity is one either:
 Whose securities are listed on a financial market such as the ASX.
 That raises funds pursuant to a disclosure document lodged with ASIC under Ch 6D Corporations Act
2001 (Cth). (See ‘6.1 – Fundraising’.)

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  That offers securities other than debentures as consideration for an acquisition of securities in a target
company under an off-market takeover bid.
 Disclosure requirements.
o Half-year financial report and directors’ report.
 s 292(1)(a) Corporations Act 2001 (Cth): Disclosing entities are required to prepare annual financial
reports and directors’ reports.
 s 302 Corporations Act 2001 (Cth): A disclosing entity must prepare half-year financial reports (which
must be audited or reviewed, and lodged with ASIC) and half-year directors’ reports.
o Continuous disclosure.
 Listed disclosing entities.
 LR 3.1 and s 674 Corporations Act 2001 (Cth): A listed disclosing entity must notify the market
operator of information that: (1) is not generally available; and (2) is information that a
reasonable person would expect, if it were generally available, to have a material effect on the
price or value of the securities of the entity.
 A reasonable person includes frequent investors and infrequent investors (Grant-
Taylor v Babcock and Brown Ltd).
 ASX Guidance Note 8: Companies should make immediate disclosure upon becoming
aware that there will be a material change in revenue and profit for a financial period
compared with the previous corresponding period, forecast projections in a
prospectus, information previously provided to the market, or consensus estimates
made by analysts.
 LR 3.1A: There is no obligation to comply with LR 3.1 if:
 The information is confidential and the ASX has not formed the view that the
information has ceased to be confidential.
 A reasonable person would not expect the information to be disclosed.
 At least one of the following situations applies: (1) it would be a breach of a
law to disclose the information; (2) the information concerns an incomplete
proposal or negotiation; (3) the information comprises matters of supposition
or is insufficiently definite to warrant disclosure; (4) the information is
generated for the internal management purposes of the company; or (5) the
information is a trade secret.
 Consequences of contravention.
 s 674 Corporations Act 2001 (Cth): Failure to comply with LR 3.1 is a
criminal offence and also a financial services civil penalty provision under s
1317DA Corporations Act 2001 (Cth). A serious contravention enables the
court to impose a maximum pecuniary penalty of $200,000 for an individual
and $1 million for a body corporate (ss 1317G(1A) and (1B) Corporations Act
2001 (Cth)). ASIC can seek civil penalty orders against persons such as
directors, executives, and advisers who participated in, and had actual
knowledge of, the contravention.
Factors which are relevant in considering the appropriateness of a
penalty include: (1) the size of the company and the likelihood of the
penalty acting as a deterrent; (2) the market impact and prejudice to
investors; (3) the involvement of senior management; and (4) the
likelihood the contravention would cause confusion and loss of faith
in market integrity. Mitigating factors include that the company: (1)
did not knowingly contravene its continuous disclosure obligations;
(2) had co-operated with ASIC and admitted the contraventions;

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 and (3) took steps to improve its disclosure and investor relations
practices (ASIC v Newcrest Mining Ltd).
 1317DAC Corporations Act 2001 (Cth): ASIC can issue an infringement
notice containing a financial penalty of up to $100,000 and a requirement to
remedy the inadequate disclosure (usually in cases involving less serious
contraventions). Compliance with the infringement notice means that the
entity is not subject to further civil or criminal proceedings in relation to the
contravention. Where the entity fails to comply with the infringement notice,
ASIC may bring civil penalty proceedings.
 Unlisted and other disclosing entities.
 s 675(2) Corporations Act 2001 (Cth): An unlisted disclosing entity (or listed disclosing entity
which is listed on a market which does not have a continuous disclosure listing rule) that
becomes aware of price-sensitive information that is not generally available and which is not
required to be included in a supplementary or replacement disclosure document, must lodge a
document containing the information with ASIC.
 Consequences of contravention.
 Failure to comply with this provision is an offence.
 This section is also a financial services civil penalty provision and the
Criminal Code applies to an offence under the section (s 678 Corporations
Act 2001 (Cth)).

8.2 – Prohibited conduct.

8.2.1 – Market misconduct.

 Short selling.
o Covered short selling.
 Rule.
 s 1020B(2) Corporations Act 2001 (Cth): A person can only sell securities if, at the time of sale,
the person has a presently exercisable and unconditional right to vest the products in the
buyer, or the person has reasonable grounds for believing they have such a right.
 Procedure.
 The short seller borrows the securities from an owner under a securities lending agreement.
 The short seller uses the borrowed securities to settle the short sale.
 s 1020AB Corporations Act 2001 (Cth): The short seller must announce that it is
selling short to the executing broker.
 s 1020AC Corporations Act 2001 (Cth): The broker is required to make disclosure of
specified matters to the market operator.
 s 1020AC Corporations Act 2001 (Cth): The market operator must disclose aggregate
short sale information to the market.
 (Note: ss 1020AB(3), 1020AC(2), and 1020AE Corporations Act 2001 (Cth): Failure to
comply with these disclosure requirements is an offence.)
 The short seller must subsequently buy similar securities on the market and return them to the
owner at an agreed later date.
o Naked short selling.
 Rule.

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  s 1020F Corporations Act 2001 (Cth): If the seller has no prior interest in the shares which are
short sold, and has not made arrangements at the time of sale to borrow the shares, the sale of
securities is prohibited.
 Market manipulation.
o s 1041A Corporations Act 2001 (Cth): A person is prohibited from taking part in a transaction that has, or is likely
to have, the effect of creating an artificial price for trading in financial products on a financial market.
 An artificial price is one that does not reflected the forces of genuine supply and demand (Mason J in
North v Marra Developments Ltd).
 In ASIC v Soust, Soust was the CEO of SVL, and was entitled to a bonus if the company’s share price
outperformed a particular share price index at the end of a calendar year. Just before the end of a year,
Soust purchased SVL shares, and as a result of that trade, the share price increased so that the bonus
became payable and was later paid to Soust. It was held that Soust was not a genuine buyer because
his purpose was to increase the market price of the shares so he could obtain his bonus. (This conduct
also contravened s 1041B, and the directors’ duties in ss 181 and 182.)
o Consequences of contravention.
 s 1317DA Corporations Act 2001 (Cth): s 1041A is a designated financial services civil penalty
provision.
 False trading and market rigging.
o s 1041B(1) Corporations Act 2001 (Cth): A person is prohibited from doing or omitting to do something that has,
or is likely to have, the effect of creating a false or misleading appearance of either: (1) active trading; or (2) the
price for trading in financial products on a financial market.
 Examples.
 A person enters into transactions of acquisition or disposal that do not involve a change of
beneficial ownership of the financial products.
 A person makes an offer to acquire or dispose of financial products at a specified price
knowing that a matching transaction at substantially the same price will be made.
 In North v Marra Developments Ltd, a firm of stockbrokers acting on behalf of a client carried
out a number of transactions designed to increase the price of the client’s shares, as part of a
proposed reconstruction. The stockbrokers subsequently sued for their fees in relation to these
transactions. It was held that they were unable to recover the fees as the transactions they
carried out were illegal and therefore the agreement was unenforceable.
o Consequences of contravention.
 s 1041B(1A) Corporations Act 2001 (Cth): Criminal liability for a breach requires an intention to do a
particular act (e.g. entering into a transaction) and the requisite intention, knowledge, or recklessness
with respect to creating a false or misleading appearance.
 ss 1311 and Sch 3 Corporations Act 2001 (Cth): A person in breach can be punished by a
penalty of: (1) the greater of 4,500 penalty units or 3x the value of the profit gained or loss
avoided as a result of the contravention; and (2) imprisonment for up to 10 years.
 ss 1311 and Sch 3 Corporations Act 2001 (Cth): A body corporate in breach can be punished
by a penalty of: (1) 45,000 penalty units; or (2) 3x the value of the profit gained or loss avoided
as a result of the contravention or 10% of the body corporate’s annual turnover.
 s 1317DA Corporations Act 2001 (Cth): s 1041B(1) is a designated financial services civil penalty
provision.
 False or misleading statements.
o s 1041E(1) Corporations Act 2001 (Cth): A person must not make a statement or disseminate information that is
materially false or misleading and is likely to either: (1) induce persons to apply for, dispose of, or acquire
financial products; or (2) have an effect on the market price of a financial product.

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  The person must either: (1) not care whether the statement or information is true or false; or (2) know or
ought reasonably to know, that the statement or information is false or misleading in a material respect.
 The term “likely to induce” means that there is a real and not remote chance.
 In ASC v McLeod, a geologist prepared a report for a mining company that claimed that, based on
samples, a particular annual profit would be made. However, the sample was too small to draw such
conclusions, and the exploration results proved otherwise. It was held that the geologist contravened s
1041E as the likely effect of the statement would have been to induce a reader to purchase shares in
the belief that the company had a basis for predicting the profitability of the venture.
o Consequences of contravention.
 s 1041I(1) Corporations Act 2001 (Cth): A person who suffers loss or damage by conduct of another
person that was engaged in the contravention may recover the amount of loss or damage by action
against any person who was involved in the contravention.
 Misleading or deceptive conduct.
o s 1041H(1) Corporations Act 2001 (Cth): A person must not engage in conduct in relation to a financial product or
a financial service that is either: (1) misleading or deceptive; or (2) likely to mislead or deceive.
 s 1041H(2) Corporations Act 2001 (Cth): Conduct is defined to include dealing, issuing, publishing a
notice, making or evaluating an offer under a takeover bid, or any related negotiations or arrangements.
 Conduct is misleading or deceptive, or likely to mislead or deceive, if it tends to induce error (Australian
Competition and Consumer Commission v TPG Internet Pty Ltd).
 In National Exchange Pty Ltd v ASIC, National Exchange offered to purchase shares in
OneSteel for $2.00 (when the market price was $1.93), but failed to highlight in a conspicuous
manner that the $2.00 was to be paid in annual instalments over 15 years. It was held that the
offer, while literally true, was still misleading.
 It is not necessary to prove that the defendant intended to mislead or deceive, or that the plaintiff was
actually misled or deceived (Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd).
 It is relevant to consider who is the audience to whom the statement is directed, and how such an
audience would have understood the statement.
 In Forrest v ASIC, Fortescue and Forrest announced that Fortescue had entered into binding
contracts with large Chinese corporations to build and finance a mine, railway, and port (even
though the agreements were not actually binding). It was held that the announcements were
not misleading and deceptive as they were directed at investors who would most likely have
understood the statements as something the parties had intended would happen in the future,
and they would not have asked the lawyer’s question of whether the agreement would be
legally enforceable.
o Consequences of contravention.
 s 1325 Corporations Act 2001 (Cth): The court can set aside a contract if: (1) a person entered into a
contract in reliance on another party’s misrepresentation; and (2) it is just and fair to do so.
 s 1041I(1) Corporations Act 2001 (Cth): A person who suffers loss or damage by conduct of another
person that was engaged in the contravention, may recover the amount of loss or damage by action
against any person who was involved in the contravention.
 (Note: Misleading and deceptive conduct in the context of takeover documents is instead governed
under ss 670A-670F, and in the context of fundraising documents under s 728(1)).

8.2.2 – Insider trading.

 The prohibitions.
o Trading for one’s own account (s 1043A(1)(c) Corporations Act 2001 (Cth)).
 The person possesses “inside information”.

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  The person either: (1) knows that the information is “inside information”; or (2) ought reasonably to know
that the information is “inside information”.
 The person must not either: (1) apply for, acquire, or dispose of securities; or (2) enter into an
agreement to apply for, acquire, or dispose of securities.
o Procuring another person to trade (s 1043A(1)(d) Corporations Act 2001 (Cth)).
 The person possesses “inside information”.
 The person either: (1) knows that the information is “inside information”; or (2) ought reasonably to know
that the information is “inside information”.
 The person must not incite, induce, or encourage another person to either: (1) apply for, acquire,
dispose of securities; or (2) enter into an agreement to apply for, acquire, dispose of securities.
o Tipping information about listed companies (s 1043A(2) Corporations Act 2001 (Cth)).
 The person possesses “inside information” on financial products which can be traded on an Australian
financial market (i.e. a listed company).
 The person either: (1) knows that the information is “inside information”; or (2) ought reasonably to know
that the information is “inside information”.
 The person knows, or ought reasonably to know, that on the basis of the “inside information”, the other
person would, or would be likely to, either: (1) apply for, acquire or dispose of, or enter into an
agreement to apply for, acquire, or dispose of, a tradable financial product; or (2) procure a third person
to apply for, acquire, or dispose of, or enter into an agreement to apply for, acquire, or dispose of, a
tradable financial product.
 The person must not communicate the “inside information” to another person, or cause the “inside
information” to be communicated to another person.
 To establish a breach, it is not necessary to prove that there was actually an arrangement
between the insider and the person receiving the tip with a view to dealing in the particular
financial product. It is only necessary to show a communication of inside information.
 Definition of “inside information”.
o s 1042A Corporations Act 2001 (Cth): “Inside information” is information that:
 Is not generally available.
 s 1042C(1)(a) Corporations Act 2001 (Cth): Information is generally available if it consists of
readily observable matter.
 In R v Firns, a subsidiary of a listed public company engaged in gold exploration in
PNG successfully challenged in a PNG court the validity of a government regulation
which had restricted exploration rights. As a result, it could be expected that the
company’s share price would increase. The defendant purchased parcels of shares in
the names of his wife and a friend after hearing of the outcome of the case. The ASX
was notified of the court’s decision 3 days later. It was held that the judgment was
readily observable and therefore generally available, because it was accessible to a
significant number of the public.
 s 1042C(1)(b) Corporations Act 2001 (Cth): Information is generally available if: (1) it has been
made known in a manner that would, or would be likely to, bring it to the attention of persons
who commonly invest in the security; and (2) since it was so made known, a reasonable period
for it to be disseminated among such persons has elapsed.
 If it were generally available, a reasonable person would expect it to have a material effect on the price
or value of a security.
 s 1042D Corporations Act 2001 (Cth): Information has a “material effect” only if the information
would, or is likely to, influence persons who commonly acquire securities, to decide whether to
acquire or dispose of those securities.
 Definition of “possession of information”.

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 o s 1042A Corporations Act 2001 (Cth): Information includes matters of supposition.
 In Hannes v DPP (No 2), Hannes was a director of MCF, which was advising TNT Limited on a friendly
takeover by a Dutch company. Even though Hannes was not part of the MCF team advising TNT, and
was not told about the team’s activities in relation to TNT, he drew an inference based on: (1) one of his
junior staff telling him that TNT would be valued at a price which he thought rather high; (2) attending a
board meeting where he was told that TNT was undergoing a major restructure; and (3) attending a
company conference which referred to a project with a possible $5-$10 million fee. It was held that
Hannes possessed “information” for the purposes of insider trading laws.
 Consequences of contravention.
o Criminal penalties.
 ss 1311 and Sch 3 Corporations Act 2001 (Cth): A person in breach can be punished by a penalty of: (1)
the greater of 4,500 penalty units, or 3x the value of the profit gained or loss avoided as a result of the
insider trading; and (2) 10 years imprisonment.
 In Director of Public Prosecutions (Cth) v Hill, Hill (an analyst at the ABS) provided confidential
ABS economic data to his friend Kamay (a director at NAB) who used it to profit from trading
FX contracts. Hill netted a profit of $195,000, and he was sentenced to 3 years and 3 months’
imprisonment. Kamay netted a profit of $8 million, and he was sentenced to 7 years and 3
months’ imprisonment.
o Compensation liability.
 s 1043L(2) Corporations Act 2001 (Cth): An insider who applied for, or procured another person to apply
for, financial products is liable to pay compensation to the issuer of the products for any damage
suffered by it.
 The amount of the compensation is the difference between the price at which the financial
products were acquired by the insider from the disposer, and the likely price for which they
would have been acquired if the information had been generally available.
 s 1043L(3) Corporations Act 2001 (Cth): Where an insider acquired financial products from the disposer
who did not possess the inside information, the disposer may recover compensation from the insider.
 The amount of the compensation is the difference between the price at which the financial
products were acquired by the insider from the disposer, and the likely price for which they
would have been acquired if the information had been generally available.
 s 1043L(4) Corporations Act 2001 (Cth): Where an insider disposed of financial products to the acquirer
who did not possess the inside information, the acquirer may recover compensation from the insider.
 The amount of the compensation is the difference between the price at which the financial
products were disposed of, and the likely price for which they would have been disposed of had
the information been generally available.
 1043O Corporations Act 2001 (Cth): A court can restrain the exercise of voting or other rights attached
to the security.
o Financial services civil penalty.
 s 1317DA Corporations Act 2001 (Cth): s 1043A is a designated financial services civil penalty
provision.

8.2.3 – Financial services civil penalty provisions.

 On the application of ASIC, a court may make the following orders if, on the balance of probabilities, the relevant provision
is contravened seriously:
o s 1317G(1B) Corporations Act 2001 (Cth): A pecuniary penalty order of $200,000 for an individual and $1 million
for a body corporate.
 A contravention is more likely to be serious if either: (1) it was the result of deliberate or reckless
conduct; (2) it was systematic and occurred over a period of time; or (3) in the case of a corporation, its
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 officers responsible for the contravention were relatively senior and there was an absence of a culture of
compliance.
o s 1317HA Corporations Act 2001 (Cth): A compensation order compensating another person (including a
corporation) for damage suffered by that person (including profits made by any person resulting from the
contravention) which resulted from the contravention.
 s 1317J(3A) Corporations Act 2001 (Cth): The application for a compensation order may also be
brought by the corporation and any other person who suffered damage as a result of the contravention.

8.3 – Takeovers.

8.3.1 – General.
 Definition.
o A takeover occurs when the target’s shareholders sell sufficient shares to a bidder, so as to give the bidder
control of the voting power attaching to the target company’s share capital. The consideration for an acquisition of
shares may comprise shares in the bidder company, or a mixture of cash and shares.
 Applicability.
o s 602(a) Corporations Act 2001 (Cth): The takeover provisions under ch 6 Corporations Act 2001 (Cth) apply to
listed companies and unlisted companies with more than 50 members.
 Disclosure of ownership of shares in listed companies.
o Substantial holding provisions.
 s 671B(1) Corporations Act 2001 (Cth): Shareholders who have a relevant interest in not less than 5%
of the voting shares of a listed company must disclose to the company and the relevant market operator
(e.g. ASX) full particulars of their relevant interest in the shares.
 s 671C(1) Corporations Act 2001 (Cth): A person in breach is liable to compensate a person
who suffers loss or damage as a result of the contravention.
 s 671C(2) Corporations Act 2001 (Cth): It is a defence if the person who contravened
the section did so mistakenly.
o Tracing beneficial ownership.
 ss 672A-672F Corporations Act 2001 (Cth): The company and ASIC may direct a registered shareholder
to disclose information as to the identity of persons who control or have a beneficial ownership in voting
shares.
 s 672B(3) Corporations Act 2001 (Cth): A person does not need to comply with a direction if
the person can prove that the giving of the direction is vexatious.
 s 672F(1) Corporations Act 2001 (Cth): A person in breach is liable to compensate a person
who suffers loss or damage as a result of the contravention.
 s 672F(2) Corporations Act 2001 (Cth): It is a defence if the person who contravened
the section did so mistakenly.

8.3.2 – Prohibited acquisitions.

 s 606(1) Corporations Act 2001 (Cth): A person is prohibited from acquiring a relevant interest in voting shares in a
company that would increase their voting power in the company from either: (1) 20% or below, to more than 20%; or (2)
from a starting point that is above 20% and below 90%.
o The definition of “relevant interest”.
 s 608(1) Corporations Act 2001 (Cth): A person has a relevant interest in securities if they either: (1) are
the holder of the securities (including options); (2) have the power to exercise, or to control the exercise
of, voting rights attached to the securities; or (3) have the power to dispose of, or control the exercise of
a power to dispose of, the securities.

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 o Associates.
 s 610 Corporations Act 2001 (Cth): A person’s voting power comprises the sum of votes of the person
and their associates as a percentage of the total votes in the body corporate.
 s 12 Corporations Act 2001 (Cth): “Associates” includes: (1) companies that the person
controls or that control the person; and (2) a person with whom the other person is acting, or
proposing to act in concert in relation to the company’s affairs.
o Exemptions.
 s 611 Corporations Act 2001 (Cth): A person does not breach the section if an acquisition:
 Resulted from acceptance of an offer under a takeover bid.
 Resulted from an on-market transaction where the acquisition is by a takeover bidder during
the bid period.
 Was by creeping takeover whereby the acquirer held voting power in the company of at least
19% and no more than 3% was acquired in the previous 6 months.
 Consequences of contravention.
o s 607 Corporations Act 2001 (Cth): A transaction is not invalid merely because it involves a breach.
o s 606(4A): A breach is an offence of absolute liability.
 s 606(5) Corporations Act 2001 (Cth): It is a defence if the person who contravened the section did so
mistakenly.
o The Takeovers Panel has broad discretionary powers to make declarations of unacceptable circumstances under
s 657A.

8.3.3 – Permitted acquisitions.

 A person may acquire a relevant interest in voting shares beyond the 20% threshold in the target company by way of
either an:
o Off-market bid (for quoted or unquoted securities).
 s 618(1) Corporations Act 2001 (Cth): An off-market bid is an offer to buy all or a specified proportion of
all the securities in the bid class.
 ss 619(1) and 621(1) Corporations Act 2001 (Cth): All offers must be the same, although they may
include alternative forms of consideration of cash and securities.
 s 621(4) Corporations Act 2001 (Cth): Where the consideration is cash only, the price must be
at least the highest price paid by the bidder or an associate for securities in the bid class in the
4 months prior to the date of the bid.
 ss 620(1)(c) and 624 Corporations Act 2001 (Cth): Each offer must state that, unless withdrawn, it will
remain open until the end of the offer period (at least 1 month and up to 12 months).
 An off-market bid may be subject to conditions, but the following types are prohibited:
 s 626 Corporations Act 2001 (Cth): Offers which will terminate if the number of securities for
which the bidder receives acceptances exceeds a particular number.
 s 627 Corporations Act 2001 (Cth): A bid which allows the bidder to acquire securities from
some, but not all, of the people who accept the offers.
 s 628 Corporations Act 2001 (Cth): A condition that payments, or other benefits to officers of
the target, as compensation for loss of office, be approved by the offerees.
 s 629 Corporations Act 2001 (Cth): A condition that depends on the bidder’s opinion or belief or
the occurrence of an event that is within the sole control of the bidder or an associate.
 s 618(1) Corporations Act 2001 (Cth): Partial takeovers by way of proportional bids are permitted (e.g.
an offer for the same proportion of each shareholder’s holding in the target company).
o Market bid (for quoted securities).
 s 617(3) Corporations Act 2001 (Cth): A market bid must relate to securities in a class of quoted
securities (the bid class).
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  s 618(3) Corporations Act 2001 (Cth): An offer must be an offer to buy all the securities in the bid class.
 s 625(1) Corporations Act 2001 (Cth): A market bid must be unconditional.
 ss 621(3) and (4) Corporations Act 2001 (Cth): Market bids must be made for cash only, and for an
amount at least equal to the maximum price that the bidder or an associate provided for the bid class
security in the 4 month period prior to the date of the bid.
 s 624(1) Corporations Act 2001 (Cth): Market bids must be unconditional.
 Bidder’s statement.
o s 636 Corporations Act 2001 (Cth): A takeover bidder must prepare a bidder’s statement to be lodged with ASIC
and sent to the target and to the shareholders in the bid class, disclosing, among other things:
 The identity of the bidder.
 Details of the bidder’s intentions regarding any changes to the target company’s business.
 Any other information that is material to the making of the decision by a holder of bid class securities
whether to accept an offer under the bid.
 Target’s statement.
o s 638 Corporations Act 2001 (Cth): A target’s statement is the response to the bidder’s statement and must
contain:
 All the information that holders of bid class securities and their professional advisers would reasonably
require to make an informed assessment whether to accept the offer under the bid.
 A recommendation by each of the target’s directors that the offers under the bid be accepted or not
accepted, and reasons for the recommendation.
 s 640 Corporations Act 2001 (Cth): If either the bidder’s voting power in the target is 30% or greater, or
a director of the bidder is a director of the target, an expert’s report stating whether the takeover offers
are fair and reasonable, and the reasons for this opinion.
 Compulsory acquisitions.
o The rule.
 s 661A(1)(b) Corporations Act 2001 (Cth): Under a takeover bid, a bidder may compulsorily acquire any
securities in the bid class if, during or at the end of the offer period, the bidder and associates have
relevant interests in at least 90% of the bid class securities, and the bidder and associates have
acquired at least 75% of the securities that the bidder offered to acquire under the bid.
 s 661C Corporations Act 2001 (Cth): The terms of a compulsory acquisition must be the same
as those under the takeover bid.
 s 661B(1) Corporations Act 2001 (Cth): A bidder must give a notice to holders of securities in
the bid class informing them that the bidder is entitled to acquire their securities, and of their
right to apply to the court for an order preventing the compulsory acquisition. This notice must
be lodged with ASIC and a copy given to the relevant market operator.
 Exceptions.
 s 661A(3) Corporations Act 2001 (Cth): The court may allow compulsory acquisition even if the
thresholds have not been reached (e.g. where the bidder falls marginally short of the 90%
threshold).
o Preventing compulsory acquisition.
 s 661E Corporations Act 2001 (Cth): Within 1 month after the notice of acquisition was given, the
holders of securities covered by a compulsory acquisition notice may apply to the court for an order that
the securities not be compulsorily acquired.
 s 661E(2) Corporations Act 2001 (Cth): The court may order that the securities not be
compulsorily acquired if it is satisfied that the consideration is not fair value for the securities.
(A high level of acceptances will generally indicate that an offer is fair.)
 Prohibited conduct.

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 o s 654A(1) Corporations Act 2001 (Cth): The bidder must not dispose of any securities in the bid class during the
bid period.
o s 623 Corporations Act 2001 (Cth): A bidder is prohibited from giving a benefit to a person during the offer period,
if the benefit is likely to induce the person to accept the bid offer, and is not offered to all holders of securities in
the bid class.
o s 631 Corporations Act 2001 (Cth): It is an offence for a person to publicly propose to make a takeover bid if the
person: (1) does not make offers for the securities within 2 months of the proposal; and (2) knows the bid will not
be made, is reckless as to whether it will be made, or is reckless as to whether they will be able to fund their
obligations under the bid.
 s 1325B Corporations Act 2001 (Cth): If a person is in breach, the court, on an application by ASIC, has
the power to order the bidder to send out offers to the target’s shareholders.
 Misleading or deceptive statements.
o The rule.
 670A(1) Corporations Act 2001 (Cth): A person must not include a misleading or deceptive statement, or
make an omission of required information, in a bidder’s statement, a target’s statement, takeover offer
documents, or compulsory acquisition notice.
 s 670A(2) Corporations Act 2001 (Cth): A statement about a future matter (e.g. profit forecast),
or future act, may be misleading if it is made without reasonable grounds.
o Liability.
 s 670A(3) Corporations Act 2001 (Cth): A contravention is an offence if the misleading or deceptive
statement or omission is materially adverse from the point of view of the holder of securities to whom the
document is given.
 670D Corporations Act 2001 (Cth): Defences include: (1) proof of lack of knowledge that a
statement was misleading or deceptive or that there was an omission; (2) proof of reasonable
reliance on information given by someone else; (3) withdrawal of consent by a person named
in a document as making a statement; and (4) where a new circumstance has arisen of which
the person was unaware.
 s 670B Corporations Act 2001 (Cth): A person who suffers loss or damage that results from a
contravention may recover the amount of the loss or damage from:
 The bidder and its directors.
 The target and its directors.
 A person giving a compulsory acquisition notice.
 A person who consented to have a statement included in a takeover document, or on which a
statement made in the document is based (e.g. experts).

8.3.4 – Takeovers Panel.

 Role.
o s 659AA Corporations Act 2001 (Cth): The Takeovers Panel takes the place of the courts as the main forum for
resolving disputes arising from a takeover during the bid period.
 Powers.
o s 657C(2) Corporations Act 2001 (Cth): The bidder, target, ASIC, or any other person whose interests are
affected by the relevant circumstances, may apply to the Panel to make a declaration.
o s 657D(1) Corporations Act 2001 (Cth): Before making an order, the Panel must give affected persons an
opportunity to make submissions and it must be satisfied that the order would not unfairly prejudice any person.
o s 657A(1) Corporations Act 2001 (Cth): The Panel has the power to make a declaration of unacceptable
circumstances if it appears that the circumstances either:
 Are unacceptable, having regard to the effect of the circumstances on the control or potential control of
the company, or the acquisition or proposed acquisition of a substantial interest in the company.
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  Are otherwise unacceptable, having regard to the purposes of ch 6 Corporations Act 2001 (Cth) (e.g. an
information deficiency, the lockout of rival bids, failure to disclose the intentions of the bidder, deflating
the price for shares that are the subject of the bid):
 The acquisition of control over voting shares in a company, takes place in an efficient,
competitive, and informed market.
 The shareholders and directors of a target company: (1) know the identity of any person who
proposes to acquire a substantial interest in the company; (2) have a reasonable time to
consider the proposal; and (3) are given enough information to enable them to assess the
merits of the proposal.
 As far as practicable, shareholders all have a reasonable and equal opportunity to participate in
any benefits accruing to the holders through any takeover proposal.
 Constitute, or are likely to constitute, or give rise to, a contravention of the takeovers provisions.
o s 657D Corporations Act 2001 (Cth): If the Panel makes a declaration of unacceptable circumstances, it has the
power to make any order, including:
 Restraining the exercise of voting or other rights attached to securities.
 Restraining an acquisition of securities.
 Directing a person to dispose or not dispose of securities.
 Cancelling an agreement relating to a takeover bid or acquisition of securities.
o s 657G Corporations Act 2001 (Cth): Orders of the Panel may be enforced by the court.
 Powers of the court.
o s 659C Corporations Act 2001 (Cth): After the end of the bid period, the court may make certain orders if the
Panel has refused to make a declaration of unacceptable circumstances. If the court finds that the conduct
contravenes the legislation, it may: (1) impose a penalty; and (2) order the person to pay money to another by
way of damages, account of profits, or pecuniary penalty.

8.3.4 – Defensive strategies and tactics.

 While the directors of a target company are not expressly prohibited from engaging in acts to frustrate hostile takeover
bids, they must still comply with their fiduciary and statutory duties (e.g. to act in good faith, in the best interests of the
company, and for proper purposes).
o Frustrating actions that could give rise to unacceptable circumstances (Takeovers Panel Guidance Note 12).
 Issuing a significant number of new shares.
 Acquiring or disposing of a major asset.
 Undertaking significant liabilities.
 Declaring an abnormally large dividend.
o Permitted defensive tactics (NCSC Defensive Schemes and the Duties of Directors Report (1986)).
 Branding the bid inadequate.
 Criticising the bidder (though not as such to involve a misleading statement in breach of s 670A).
 Releasing favourable information (though not as such to involve a misleading statement in breach of s
670A, if shareholders’ expectations are raised and the information ultimately proves to be unfounded).
o Other legislation.
 s 50 Competition and Consumer Act 2010 (Cth): Prohibits a corporation from acquiring shares or assets
of a body corporate if the acquisition will have the effect of substantially lessening competition in a
market.

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