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B u s i n e s s
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N o t e s
Business
Associations Law
Cram Notes
2010
Edition 1
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B u s i n e s s
A s s o c i a t i o n s
L a w
in town!
N o t e s
Topics
1.
INTRODUCTION
How to use Cram Notes
Abbreviations
2.
BACKGROUND
A.
B.
Types of companies and corporations
i.
Proprietary companies
ii.
Public companies
iii.
Registration procedures
Decision to incorporate
i.
3.
Limited liability
IS THERE SEPARATE LEGAL PERSONALITY?
A.
Saloman’s Case
B.
Piercing the Corporate Veil
i.
Corporations Act
ii.
Avoidance of obligations
iii.
Fraud, Device or Sham
iv.
Agency, Under capitalisation and abuse of limited
liability
4.
5.
IS THE CORPORATE CONSTITUTION VALID?
A.
Nature and effect of the constitution
B.
Amendments to the constitution
C.
Implications for shareholder’s rights
D.
Replaceable rules and mandatory rules
HAVE MEETINGS AND BOARD POWERS PROCEDURES BEEN IMPLEMENTED
CORRECTLY?
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B u s i n e s s
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N o t e s
General meeting
i.
Requirements and Notice
ii.
Disclosure obligations (Common Law)
iii.
Decision making
iv.
Resolution
v.
Special Resolution
vi.
Shareholder approval
vii.
Residual control in general meetings (Doctrine of
Unanimous consent)
1) Where the board is unable to act
2) Ratification of directors’ acts
3) Informal corporate acts
B.
6.
Board of directors
i.
Powers of directors
ii.
Appointing directors
iii.
Removal of directors
iv.
Managing director
v.
Decision making
vi.
Single shareholder/director companies
ARE CONTRACTS WITH OUTSIDERS ENFORCEABLE?
A.
Did the person supposedly acting on behalf of the company have
i.
Actual authority?
ii.
Ostensible authority?
iii.
Protected under Indoor management rule or other
statutory assumption as to authority?
7.
DID DIRECTOR’S BREACH THEIR DUTY TO THE COMPANY?
A.
Duty to avoid conflicts
i.
Was there a personal interest?
ii.
Was there adequate disclosure of a material personal
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N o t e s
interest?
iii.
B.
Were statutory disclosure obligations satisfied?
Duty not to make secret profits
i.
Was there “secret profits”?
ii.
Was there a ratification of the breach?
iii.
Businesses started by former directors
iv.
Directors’ benefiting from opportunity turned down by
the company
v.
C.
D.
Statutory duty
Related party transactions
i.
Was the financial benefit given to a related party?
ii.
Was there shareholder approval?
iii.
Was there an exception?
iv.
Were procedural requirements followed?
v.
Application to private companies
Statutory duty to prevent insolvent trading
i.
Was the company insolvent?
ii.
Was the person a director at the time the debt was
incurred?
8.
Is there a debt?
iv.
Did the debt that was incurred cause insolvency?
v.
Are defences available?
vi.
Consequences of contravention
CAN THE DIRECTOR RELY ON AN INDEMNITY?
A.
9.
iii.
The test
IS THERE STANDING TO SUE THE DIRECTOR OR THE COMPANY?
A.
Who should sue and who should be sued? Other wrongs
committed by company to shareholder in a collateral capacity
B.
Suing the directors
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Shareholders suing directors for breach of director’s
fiduciary duty
1) Directors buying shares from shareholders
C.
ii.
Statutory derivative suit
iii.
The Board of Director’s decision to sue
Suing the company
i.
How to impute knowledge to the company
ii.
Shareholders suing company as a personal action
iii.
Shareholders suing company for other wrongs
committed by company to shareholder in a collateral
capacity
iv.
Shareholders suing company for fraud on the minority
1) Ratification
2) Constraints on exercise of power by special majority
in changing constitution
3) Infringement of personal rights by breach of
directors’ duty
v.
Shareholders suing company for fraud on the minority
vi.
Statutory oppression remedy
1) Unfairly prejudicial or discriminatory
vii.
Statutory winding up
viii.
Statutory injunction
10. REMEDIES
A.
B.
Common Law remedies
i.
Rescission of contract
ii.
Account of profits
iii.
Equitable compensation
ASIC Declaration of contravention
i.
Disqualification order
ii.
Pecuniary penalty order
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Compensation order
C.
Statutory injunction
D.
Statutory oppression
E.
Statutory winding up
i.
Just and equitable
ii.
Directors have acted in affairs of company in own or
others interests
F.
Statutory insolvent trading
A snippet from our Business Associations Law Cram Notes
Separate Legal Personality
Saloman’s Case
- As long as a company has been properly incorporated and validly
constituted pursuant to the Act, then it becomes a fully fledged legal
person, having a separate legal personality from the shareholders of the
company. The member’s liability is thus limited by statue.
- Doesn’t matter if bulk of capital issued to one person with the others
holding nominal amounts, as long as no fraud or deception.--> Inequality,
identity or connectedness of persons, interests and motivations are
irrelevant if the formalities are completed.
- This case also revealed that it was possible for a trader not merely to limit
his liability to the money which he put into the enterprise but even to
avoid any serious risk to the major part of that by subscribing for
debentures rather than shares.
[..]
Indoor management rule
- rule which protects third parties from the effect of irregularities in internal
management
Turquand’s case
- persons dealing with a company in good faith may assume that acts within
its constitution and powers have been duly performed and are not bound
to inquire whether acts of internal management have been regular
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Northside Developments
- IMR does not apply where there are suspicious circumstances sufficient to
put the person upon inquiry
- Put on inquiry where (cf s128(4))
Transaction unrelated to company’s business
It gains no benefit out of it (but see s124(2))
- IMR only applies where it is something for which ostensible/apparent
authority could be given – it does not create authority, merely allows third
party to presume that the authority has been acted upon without
irregularities.
If signed/sealed without authority, then it is a forgery and company is
not bound.
The IMR is supplemented by s128-129 of the Corporations Act.
Statutory assumptions as to authority
Section 128(4) exclusion
Generally the cases all seem to argue the 128(4) exclusion because the person
being held out had no authority of any kind, or that it was forged, which
should have been known to the third party.
‘Actual knowledge’ – If a company holds out a person to be the company
secretary after an ASIC search revealed that he was in fact not the secretary,
this will amount to a holding out by the company that the person could speak
on behalf of the company in that transaction. (Brick) A refusal at first not to
proceed because of the results of a company search does not constitute
‘actual knowledge’ of lack of authority in these circumstances (Brick and Pipe
Industries Ltd v Occidental Life Nominees).
‘Connection or relationship’ – Third party’s relationship with the company
prevents them from relying on the assumptions, because from their
connection/relationship they ought to have known there was no authority/it
was a forgery. (Story v Advance Bank). However here, because there was some
benefit to the company in entering the loan, it was different to Northside and
the bank would not be put on inquiry.
‘Ought to know’ – In considering whether s128(4) applies, the Court must
‘look at the person’s connection or relationship with the company in regard to
the particular matter and then decide whether in those circumstances that
person acting reasonably would know the true position about the matter
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assumed”: (Fiberi case). I.e. put a reasonable person in the position of the third
party and see whether they knew or suspected. Here no benefit at all to Fiberi,
and BNZ could not rely on assumptions.
Note: ‘suspected’ (subjective test) in s128(4) is narrower than ‘ought to have
known’ (objective test). Whether a benefit accrues to the company will be
important in establishing s128(4).
[..]
Directors’ duty to avoid conflicts
Adequate disclosure of material personal interest?
Imperial v Coleman
- Must state and identify the actual interest you have, not just a blank
statement that you have an interest in the transaction
Gray v Porcupine Mines
- Facts: crazy guy completely milking the company. Directors agreed not to
sue him.
- The release was singularly favourable to himself. Only he knew how much
he had appropriated.
- Thus, full disclosure is required – must make his fellow directors fully
informed of the real state of things.
Is it a personal interest?
Transvaal Lands (multiple duties owed to different entities)
- Holding shares as a trustee will still be a personal interest capable of giving
rise to a conflict of fiduciary duties.
- Conflict of duties as director and trustee
- A potential upcoming commitment (e.g. invitation to be director) may be
enough to raise question of personal interest.
Thorby v Goldberg
- Board can fetter exercise of discretion in advance.
London and Mashonaland
- Multiple directorships - mere existence of a conflict of interest because of
directorship in two companies does not give right to obtain a remedy.
[..]
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Other wrongs committed by company to shareholder in a collateral
capacity – Common law standing for shareholders
Sometimes the shareholder will want a remedy because the company has
done the shareholder wrong in some collateral capacity of the shareholder
(some other capacity the shareholder has).
Sons of Gwalia case
- Facts: Margaretic bought shares subject to prospectus. But he didn’t know
the company was nearly insolvent. When he bought shares, those funds
were already subject to the floating charges over SoG’s assets.
Shareholding virtually worthless!
- Normally, shareholders are residual claimants, after creditors.
- Persuade the court that the conduct of the company prior to him buying
the shares (surrounding conduct – prospectus, actions in allotment of
shares) caused him to become an outside creditor and not a shareholder.
- HCA
Margaretic can claim as a creditor, and establishes breach of
misleading and deceptive conduct. His status as shareholder doesn’t
affect, since he is not claiming on the basis of the s140 constitution
of company. He is a “tort” victim of the company. He has two
relationships with company. One as a shareholder qua shareholder,
and another as a person duped into buying shares.
i.e. two different capacities
- Held: Ranked alongside creditors in claim
We hope you have enjoyed this short preview of the Business Associations Law Cram Notes.
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