lOMoAR cPSD| 6970582
SEPARATE LEGAL ENTITY: LIABILITY OF COMPANY FOR CLAIMS OF OWNER/EMPLOYEE ....... 3
SEPARATE LEGAL ENTITY: PERSONAL LIABILITY OF OWNERS ........................................................ 4
SEPARATE LEGAL ENTITY: EXISTANCE OF COMPANY WITHOUT DIRECTORS ................................. 5
SEPARATE LEGAL ENTITY: LIFTING OF CORPORATE VEIL ................................................................ 6
SEPARATE LEGAL ENTITY: LIFTING OF CORPORATE VEIL IN CORPORATE GROUPS ...................... 7
PROMOTERS: CONSIDERATION .................................................................................................. 8
PROMOTERS: LIABILITY FOR PRE-REGISTRATION CONTRACT ...................................................... 9
PROMOTERS: FIDUCIARY DUTIES (SECRET PROFIT) ..................................................................... 10
CONSTITUTION: CONTRACT BETWEEN COMPANY AND MEMBERS....................................... 11
CONSTITUTION: CONTRACT BETWEEN COMPANY AND DIRECTORS .................................... 12
CONSTITUTION: OBJECT CLAUSE ............................................................................................. 13
DIRECTORS: CONSIDERATION ........................................................................................................ 14
MEMBERS’ POWERS TO MANAGE COMPANY ...................................................................................15
COMPANY’S LIABILITY UNDER CONTRACT ............................................................................... 16
COMPANY’S LIABILITY IN TORT ....................................................................................................... 17
COMPANY’S LIABILITY IN CRIME................................................................................................. 18
MEMBERS’ MEETING: ABILITY TO CALL MEETING.................................................................... 19
MEMBERS’ MEETING: IRREGULARITIES ................................................................................... 20
MEMBERS’ MEETING: REMOVING DIRECTORS ............................................................................ 21
DIRECTORS: DUTY OF CARE ............................................................................................................. 22
DIRECTORS: DUTY TO AVOID CONFLICT OF INTEREST (e.g. SECRET PROFIT) ............................ 23
DIRECTORS: RELATED PARTIES TRANSACTION .............................................................................. 24
DIRECTORS: DUTY TO PREVENT INSOLVENT TRADING ................................................................. 25
DIRECTORS: DUTY TO ACT FOR PROPER PURPOSE ...................................................................... 26
DIRECTORS: DUTY TO ACT FOR PROPER PURPOSE IN RELATION TO SHARE ISSUE.................... 27
MEMBERS’ REMEDIES: EXPROPRIATION OF SHARES .................................................................... 28
MEMBERS’ REMEDIES: DERIVATIVE ACTION ............................................................................ 29
MEMBERS’ REMEDIES: OPPRESSION ....................................................................................... 30
MEMBERS’ RIGHTS: ACCESS TO BOOKS .................................................................................. 31
CAPITAL MAINTENANCE: SHARE BUY-BACK AND REDUCTION OF CAPITAL ..............................32
CAPITAL MAINTENANCE: DIVIDENDS OUT OF DEBT ................................................................ 33
1
lOMoAR cPSD| 6970582
FUNDRAISING: PROPRIETARY COMPANY ................................................................................................................. 34
FUNDRAISING: PUBLIC COMPANY .......................................................................................................35
FUNDRAISING: MISLEADING INFORMATION IN DISCLOSURE DOCUMENTS ......................... 36
PRIORITY OF CHARGES ..................................................................................................................... 37
EXTERNAL ADMINISTRATION ..................................................................................................... 38
WINDING-UP .......................................................................................................................39
VOIDABLE TRANSACTIONS......................................................................................................... 40
2
lOMoAR cPSD| 6970582
SEPARATE LEGAL ENTITY:
LIABILITY OF COMPANY FOR CLAIMS OF
OWNER/EMPLOYEE
STEPS:
Apply principle of Separate Legal Entity first
Check any exceptions
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is <a company> liable for injuries of <owner/employees>?
Can <owners of a company> claim payment of debentures?
LAW:
- SOLOMON’S CASE states that a company is a separate legal entity different from its owners or
managers.
- s119 states that a company is a separate legal entity coming into existence on registration.
- s124(1) states that a company has full legal capacity.
APPLICATION:
<XYZ> is a registered company and therefore a separate legal entity different from <its owners>.
As such, <XYZ> has full legal capacity to contract: there is an employment contract between <XYZ> and
<its owner/employee> since <owner/employee> is an employee of <XYZ>. The courts do not regard
<XYZ> and <its owner/employee> as one due to the concept of separate legal entity. Since
<owner/employee> was injured during work, XYZ is liable for these injuries.
<XYZ> is a registered company and therefore a separate legal entity different from <its owners>.
As such, <XYZ> has full legal capacity to contract: there is debenture contract between <XYZ> and <its
owner/employee> since <owner/employee> holds debentures of <XYZ>. The courts do not regard <XYZ>
and <its owner/employee> as one due to the concept of separate legal entity.
CONCLUSION:
<XYZ> is liable for injuries of <owner/employees>.
<owners of a company> can claim payment of debentures.
3
lOMoAR cPSD| 6970582
SEPARATE LEGAL ENTITY:
PERSONAL LIABILITY OF OWNERS
STEPS:
Apply principle of Separate Legal Entity first
Check any exceptions
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Are owners of a company personally liable for debts of the company?
LAW:
- SOLOMON’S CASE states that a company is a separate legal entity different from its owners or
managers.
- s119 states that a company is a separate legal entity coming into existence on registration.
- s124(1) states that a company has full legal capacity.
APPLICATION:
<XYZ> is a registered company and therefore a separate legal entity different from <its owners>.
The courts do not regard <XYZ> and <its owners> as one due to the concept of separate legal entity.
CONCLUSION:
Creditors cannot hold <owners> of <XYZ> personally liable for debts of the company.
4
lOMoAR cPSD| 6970582
SEPARATE LEGAL ENTITY:
EXISTANCE OF COMPANY WITHOUT DIRECTORS
STEPS:
Apply principle of Separate Legal Entity first
Check any exceptions
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Does a company still exist if all of its directors die?
LAW:
- SOLOMON’S CASE states that a company is a separate legal entity different from its owners or
managers.
- s119 states that a company is a separate legal entity coming into existence on registration.
- s124(1) states that a company has full legal capacity.
APPLICATION:
<XYZ> is a registered company and therefore a separate legal entity different from <its directors>.
The courts do not regard <XYZ> and <its directors> as one due to the concept of separate legal entity.
CONCLUSION:
Even if the directors of a company die, the company remains in existence until it is deregistered since it is
a separate legal entity.
5
lOMoAR cPSD| 6970582
SEPARATE LEGAL ENTITY:
LIFTING OF CORPORATE VEIL
STEPS:
Apply principle of Separate Legal Entity first
Check any exceptions:
- Avoidance of legal obligation (GILFORD MOTOR LTD v HORNE)
- Involvement in director’s breach of duty (GREEN+CLARA v BESTOBELL)
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a person create a company to escape liability?
LAW:
- SOLOMON’S CASE states that a company is a separate legal entity.
- s119 states that a company is a separate legal entity coming into existence on registration.
- s124(1) states that a company has full legal capacity.
- The courts enforce the concept of separate legal entity however they are prepared to lift the corporate
veil in certain exceptions as in case of avoidance of legal obligation as in GILFORD MOTOR LTD v HORNE.
APPLICATION:
<A person> created a new company by registration and sold <the asset> to the company as a separate
legal entity. Since <the person> does not own <the asset> anymore, he/she will default on the contract.
However, the courts are prepared to ask why the company was created. <The person> created the
company to avoid his/her legal obligation (give reasons why he/she would do that). The courts in this
case lift the corporate veil and regard <the person> and <XYZ> as one.
CONCLUSION:
<The person> will still be liable.
6
lOMoAR cPSD| 6970582
SEPARATE LEGAL ENTITY:
LIFTING OF CORPORATE VEIL IN CORPORATE GROUPS
STEPS:
Apply principle of Separate Legal Entity first
Check any exceptions:
- Agency in Corporate Group (SMITH STONE+KNIGHT v BIRMINGHAM)
- Shell company in Corporate Group (BIRD CAMERON CASE)
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a court lift the corporate veil in a Corporate Group?
LAW:
- SOLOMON’S CASE states that a company is a separate legal entity.
- s119 states that a company is a separate legal entity coming into existence on registration.
- s124(1) states that a company has full legal capacity.
- WALKER v WIMBORNE CASE sets out that each company in a corporate group is a separate legal entity.
- The courts enforce the concept of separate legal entity however they are prepared to lift the corporate
veil in certain exceptions as in case of agency in corporate groups as in SMITH STONE+KNIGHT v
BIRMINGHAM. The courts look at the actual control the parent company has over its subsidiary.
- However, for some courts looking at control is not enough but the company has to be a shell company
as in BIRD CAMERON CASE.
APPLICATION:
<XYZ> is a company with full legal capacity and a separate legal entity within the corporate group. To
decide if they are prepared to lift the corporate veil, the courts look at the actual control the parent
company has over its subsidiary:
1. Are the profits treated as parent’s profits?
2. Are the managers appointed by the parent?
3. Is the parent the head and brain of the subsidiary company?
4. Is the parent in constant control of the subsidiary?
5. Did the parent make the profits by its skill and direction?
6. Is the parent company governing the subsidiary’s business?
Furthermore, some courts look for the subsidiary being a shell company:
1. No assets
2. No employees
3. No own business
The courts in this case lift the corporate veil and regard <the parent company> and <the subsidiary> as
one.
CONCLUSION:
The courts will be prepared to lift the corporate veil.
7
lOMoAR cPSD| 6970582
PROMOTERS: CONSIDERATION
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a person considered as a promoter of a company?
LAW:
- The term ‘promoter’ is not a term of law and is not defined in the Corporations Act.
- As in EMMA SILVER v LEWIS it describes persons involved in setting up a company, even if they are
passive beneficiaries as in MANDALAY CASE.
- Professionals are not considered promoters as set out in JUBILEE COTTON v LEWIS.
Who is a promoter is a question of fact.
APPLICATION:
Check for active involvement: planning the company, preparing registration, arranging for directors,
searching finance, arranging lease contracts.
Check for passive involvement: benefits from creation of company.
Check for exception: mere professionals acting purely in their professional capacity are not considered
promoters.
CONCLUSION:
Persons being actively involved in setting up a company or passive beneficiaries are considered
promoters.
8
lOMoAR cPSD| 6970582
PROMOTERS:
LIABILITY FOR PRE-REGISTRATION CONTRACT
STEPS:
Check if person is considered a promoter first
Check liability for pre-registration contract
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a promoter liable for contracts entered into on behalf of an unregistered company?
LAW:
- Under s131(1) a person who signed a contract on behalf of an unregistered company is liable for this
pre-registration contract if the company is not registered or does not ratify the contract by the time
agreed in the contract or within reasonable time. Reasonability is a matter of fact looking at the object of
the contract.
- s131(4) states that if company fails to perform the contract, promoter is still liable.
- s132(1) states that promoter can be released by the third party.
APPLICATION:
< A person> signed a contract on behalf of <XYZ> before it was registered so there is a pre-registration
contract.
Check if company was registered: if not, promoter is liable.
Check ratification: if not, promoter is liable.
Check reasonable time: if contracts nature is still binding for several months, time is reasonable. If not,
promoter is liable.
CONCLUSION:
<A promoter> is liable for pre-registration contracts.
9
lOMoAR cPSD| 6970582
PROMOTERS: FIDUCIARY DUTIES (SECRET PROFIT)
STEPS:
Check if person is considered a promoter first
Check liability for breach of fiduciary duty (e.g. Secret profit or competing with company)
Check disclosure
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
LAW:
-
Has a promoter breached his fiduciary duty?
- AEQUITAS v AEFC states that promoters owe a fiduciary duty to the company: they must act honestly, in
the best interest of the company and must avoid conflict of interest (until registration).
ERLANGER v NEW SOMBRERO sets out that promoters have to disclose secret profit.
GLUCKSTEIN v BARNES states that full disclosure has to be made to an independent board of directors.
APPLICATION:
<A person> is a promoter of <XYZ> and therefore owes a fiduciary duty to <XYZ>. He/she made a secret
profit without disclosing it to an independent board of directors therefore he/she breached his/her
fiduciary duty.
CONCLUSION:
A promoter is liable for breach of fiduciary duty.
Equitable Remedies: compensation, accounting for profit, rescission of contract, injunction, constructive
trust (return of property). [Textbook P456]
10
lOMoAR cPSD| 6970582
CONSTITUTION:
CONTRACT BETWEEN COMPANY AND MEMBERS
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can <a member/employee> prevent termination of service when mentioned in the constitution?
LAW:
- s140(1) states that a company’s constitution is a contract between the company and each member.
- The ELEY CASE sets out that the constitution looks at the capacity as a member not as an outsider. The
courts ask if the right given in the constitution is a right that comes with the shares.
APPLICATION:
<XYZ>’s constitution mentions <member/employee> as <employee> of <XYZ>. <Member/employee> is a
member of <XYZ> since he/she holds shares in the company, therefore the constitution is a contract
between <member/employee> and <XYZ>. The employment is not a right that comes with the shares
since rights of shareholders do not include employment, therefore <member/employee> is not in
capacity of a member but rather in capacity of an outsider.
CONCLUSION:
<A member/employee> cannot prevent termination of service on basis of the constitution.
11
lOMoAR cPSD| 6970582
CONSTITUTION:
CONTRACT BETWEEN COMPANY AND DIRECTORS
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a company sue its directors for breach of constitution?
LAW:
- s140(1) states that a company’s constitution is a contract between the company and its directors.
APPLICATION:
<The directors> failed to comply with the constitution, which is a contract between <XYZ> and its
directors.
CONCLUSION:
Action can be taken for breach of contract.
12
lOMoAR cPSD| 6970582
CONSTITUTION: OBJECT CLAUSE
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a contract invalid because of breach of constitution?
LAW:
- s124(1) states that a company has full legal capacity as a separate legal entity.
- As set out in s125(1) a company may place restrictions in its constitution, however this does not limit
the company’s powers as a separate legal entity.
APPLICATION:
<XYZ>’s constitution states <an object clause>. However, this does not limit the company’s power to
contract.
CONCLUSION:
The contract is valid.
13
lOMoAR cPSD| 6970582
DIRECTORS: CONSIDERATION
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a person considered a director?
LAW:
- s9 defines a director of a company as a person who is validly appointed or a person who is not validly
appointed but acts in the position of a director (‘defacto director’) or a person who controls the board of
directors (‘shadow director’).
- s201B(1) sets the minimum age of an director as at least 18 years.
- s201G states that a company may appoint a director by ordinary resolution in the general meeting.
- s201D states that the director has to consent to the appointment before becoming a director.
- CORPORATE AFFAIRS COMMISSION v DRYSDALE sets out that defacto directors are bound by director’s
duties.
- DEPUTY COMMISSIONER OF TAXATION v AUSTIN sets the test to be whether the person exercised
directorial powers.
APPLICATION:
Check for valid appointment.
Check for exercise of directorial powers.
Check for ability to control board of directors.
CONCLUSION:
A person who is a director, defacto director or shadow director is bound by directors’ duties regardless
whether he is n executive or non-executive director.
14
lOMoAR cPSD| 6970582
MEMBERS’ POWERS TO MANAGE COMPANY
STEPS:
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Does a board of directors have to follow the directions of a members meeting’s resolution?
LAW:
- s198A gives the power to manage the company to its directors unless the constitution says otherwise.
- AUTOMATIC SELF-CLEANSING CASE sets out that members cannot override decisions of the board of
directors.
APPLICATION:
Check if the type of decision is a management decision.
Check if constitution mentions power to manage the company.
CONCLUSION:
The board does not have to follow the resolution.
15
lOMoAR cPSD| 6970582
COMPANY’S LIABILITY UNDER CONTRACT
STEPS:
How did the company enter into contract? (Direct/indirect, express/implied/apparent, ratification?)
Check any irregularity about the way the contract is entered into. If yes, check if outsider is protected.
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a company liable under contract?
LAW:
- SOLOMON’S CASE states that a company is a separate legal entity.
- s119 states that a company is a separate legal entity coming into existence on registration.
- s124(1) states that a company has full legal capacity and can sign contracts.
- s127 states that a company can directly enter contracts by signature of common seal witnessed by 2
directors or director and secretary, or without common seal by signature of 2 directors or director and
secretary.
- s126 sets out that a company can indirectly enter contracts via an agent acting with the company’s
express or implied authority on behalf of the company.
- FREEMAN v BUCKHURST CASE sets out that a company can indirectly enter contracts via an agent
acting with apparent authority on behalf of the company if the person claims to be an agent or the
company represents the person as an agent and the third party relied on this representation (‘holding
out’).
- There is no reliance if the third party knows of the wrong representation (as set out in FREEMAN &
LOCKYER CASE) or the third party had reasons to be suspicious (as in PANORAMA DEVELOPMENTS CASE).
- Otherwise, the company can also ratify the contract.
- s128 and s129 as well as the TURQUAND CASE (‘indoor management rule’) set out that outsiders can
assume that the internal rules of a company are complied with, except for actual knowledge or suspicion
that this is not the case (as stated in s128(4) and the NORTHSIDE DEVELOPMENTS CASE)
APPLICATION:
<XYZ> is a company and therefore has full capacity to contract.
Check for direct contract by signature.
Check for irregularity in signature.
Check for indirect contract via agent on behalf of company.
Check for express authority: Was he asked to do so?
Check for implied authority: Is he limited by the constitution? Does he act within his implied powers?
- Managing director for day by day management of the company.
- Company secretary for administrative affairs.
- Head of Marketing Department for marketing affairs.
- Head of Financial Department for financial affairs.
Check if company represented him as an agent.
Is his action within his apparent authority?
Check if there is reliance (no knowledge, no suspicion)?
If not binding, check ratification.
Check for breach of constitution and apply indoor management rule.
CONCLUSION:
Company is liable for the contract directly or indirectly.
16
lOMoAR cPSD| 6970582
COMPANY’S LIABILITY IN TORT
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a company liable for damages under tort?
LAW:
- SOLOMON’S CASE states that a company is a separate legal entity.
- s119 states that a company is a separate legal entity coming into existence on registration.
- s124(1) states that a company has full legal capacity.
- A company can be PRIMARILY LIABLE as set out in BOLTON ENGINEERING CASE via managers acting as
the mind and will of the company (‘organic approach’).
- A company can be SECONDARILY LIABLE for its employees acting within scope of their employment as
set out in LLOYD v GRACE.
APPLICATION:
<A person> is a <senior manager> of <XYZ> responsible for <area of responsibility>. As such he/she is
responsible for <wrongs committed> in <area of responsibility>. When deciding to <commit the wrong>
he/she is acting as the mind and will of the company. His/her knowledge was the knowledge of the
company.
<A person> is an <employee> of <XYZ> responsible for <area of responsibility>. As such he/she is
responsible for <wrongs committed> in <area of responsibility>. When deciding to <commit the wrong>
he/she is acting within scope of his/her employment.
CONCLUSION:
<A company> has primary or secondary liability for damages under tort.
17
lOMoAR cPSD| 6970582
COMPANY’S LIABILITY IN CRIME
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a company liable for a criminal act?
LAW:
- SOLOMON’S CASE states that a company is a separate legal entity.
- s119 states that a company is a separate legal entity coming into existence on registration.
- s124(1) states that a company has full legal capacity.
- A company can be PRIMARILY LIABLE as set out in BOLTON ENGINEERING CASE via managers acting as
the mind and will of the company (‘organic approach’).
- In addition to primary liability for the guilty act, a guilty mind of a senior manager is the guilt of the
company as set out in TESCO SUPERMARKETS CASE.
- For strict liability offences you do not have to prove a guilty mind.
- A company can be SECONDARILY LIABLE for its employees acting within scope of their employment as
set out in LLOYD v GRACE.
APPLICATION:
<A person> is a <senior manager> of <XYZ> responsible for <area of responsibility>. As such he/she is
responsible for <wrongs committed> in <area of responsibility>. When deciding to <commit the wrong>
he/she is acting as the mind and will of the company. His/her knowledge was the knowledge of the
company.
<A person> is an <employee> of <XYZ> responsible for <area of responsibility>. As such he/she is
responsible for <wrongs committed> in <area of responsibility>. When deciding to <commit the wrong>
he/she is acting within scope of his/her employment.
CONCLUSION:
<A company> has primary or secondary liability for a criminal act.
18
lOMoAR cPSD| 6970582
MEMBERS’ MEETING: ABILITY TO CALL MEETING
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a member request a members’ meeting?
LAW:
- s249D(1) states that directors must hold a general meeting if a requesting member has 5 % of the votes
or at least 100 members request the meeting.
- s249Q stets out that the meeting must be held for proper purpose, ie. for purposes involving
shareholders rights.
- A meeting called to harass the company or the directors is not for proper purpose as set out in HUMES
CASE.
- A meeting called to interfere with the director’s power to manage the company’s business (except if
the constitution allows it) is not for proper purpose as set out in NRMA v PARKER.
- It is not relevant if the member calling the meeting acts in self-interest or by ill-will as set out in NRMA
v SCANDRETT.
- It is not relevant if the proposed resolution is likely to be defeated, causing inconvenience or expense
as set out in HUMES CASE.
- s249D(5) states that the directors must call the meeting within 21 days after request.
- s249F states that members can call a meeting at their own expense
APPLICATION:
<A member> holds <X%> of the shares of <XYZ> which is more than the required 5 % of the votes.
Check for proper purpose.
CONCLUSION:
<A member> can request a members’ meeting or call the meeting at his own expense.
19
lOMoAR cPSD| 6970582
MEMBERS’ MEETING: IRREGULARITIES
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a members’ meeting valid if there are irregularities?
LAW:
- s1322(2) states that a members meeting is not invalid due to procedural irregularities if there is no
substantial injustice since the outcome of the meeting would not be different.
APPLICATION:
Check for procedural irregularity: e.g. Absence of quorum, deficiency of notice, failure to call a poll…
Check for substantial injustice: Would the outcome of the meeting be different?
CONCLUSION:
The courts may render the meeting invalid if a substantial injustice is caused.
20
lOMoAR cPSD| 6970582
MEMBERS’ MEETING: REMOVING DIRECTORS
STEPS:
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can members remove a director?
LAW:
- s203C states that a proprietary company may remove a director by ordinary resolution; this is a
replaceable rule which can be changed in the constitution
- s203D states that a public company may remove a director by ordinary resolution despite anything else
in the constitution
APPLICATION:
Check type of company.
Check constitution in case of proprietary company.
Check 50 % of votes for ordinary resolution to be successful.
Check ability to call members meeting if needed.
CONCLUSION:
<Members> can remove directors by ordinary resolution.
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DIRECTORS: DUTY OF CARE
STEPS:
Law: Explain Duty of care under Common Law. Explain Duty of care under statute. Explain similarity of tests applied.
Explain all the defences available under this duty.
Application: Check if duty of care under common law has been breached. Check if duty of care under statute has been
breached. If there is a breach check if any defenses apply: Check easiest of the conditions and stop if failed!
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a director liable for breach of duty of care?
LAW:
COMMON LAW:
- DANIEL v ANDERSON (1995) states that both executive and non-executive directors owe a duty of care
to the company. Non-executive directors have to monitor the company’s business.
- The courts apply an objective test: Would a reasonable person act the same?
- The minimum standard is a person who is able to read and understand financial records.
STATUTE:
- s180(1) imposes a statutory duty of care on directors of a company.
- As in ASIC v ADLER the courts apply same objective test: Would a reasonable person act the same?
- The minimum standard is a person who is able to read and understand financial records.
DEFENSES:
- s180(2) sets out the Business judgment rule defense: Is there a (1) business decision made (2) in good
faith and for proper purpose (3) without material personal interest (4) being an informed decision (5) in
the best interest of the company?
- s189 sets out the Reliance defense: (1) Did the director rely on an employee, professional, other
director or a committee (2) in good faith and (3) with independent assessment?
- s190(2) sets out the Delegation defense: Was the decision delegated to (1) a delegate that the director
believed on reasonable grounds to act within his duties (2) and whom the director believed on
reasonable grounds, in good faith and with proper inquiry to be competent.
APPLICATION:
COMMON LAW:
<A person> is an executive director of <XYZ> involved in the day-by-day management of the company/a
non-executive director of <XYZ> who has the duty to monitor the company’s business. Would a
reasonable person act like that? Why not? If not, there is breach of duty of care under common law.
STATUTE:
Since <the director> breached his duty of care under common law he also breached his duty under
statute since the test is the same.
DEFENCES:
- Business judgment rule defense: Is there a (1) business decision made (2) in good faith and for proper
purpose (3) without material personal interest (4) being an informed decision (5) in the best interest of
the company?
- Reliance defense: (1) Did the director rely on an employee, professional, other director or a committee
(2) in good faith and (3) with independent assessment?
- Delegation defense: Was the decision delegated to (1) a delegate that the director believed on
reasonable grounds to act within his duties (2) and whom the director believed on reasonable grounds,
in good faith and with proper inquiry to be competent.
CONCLUSION:
<The director> is liable for breach of duty of care under common law and under statute.
Common law remedies: damages
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Statutory remedies: compensation (s1317H), declaration (s1317E) in combination with pecuniary penalty
(s1317G) and disqualification (s206C(2)). [Textbook P456]
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DIRECTORS: DUTY TO AVOID CONFLICT OF INTEREST
(e.g. SECRET PROFIT)
STEPS:
Law: Explain Duty to avoid conflict of interest under equity. Provide a definition and mention defenses available.
Explain Duty to avoid conflict of interest under statute (check type of company since statute may be different).
Application: Check if duty to avoid conflict of interest under equity has been breached. If there is a breach check if any
defenses apply: Check easiest of the conditions and stop if failed! Check if duty to avoid conflict of interest under
statute has been breached.
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Has a director breached his duty to avoid conflict of interest?
LAW:
EQUITY:
- ABERDEEN RAILWAY v BLAIKIE BROS states that directors breach their duty to avoid conflict of interest if
they enter into contract with their company because they are then in a position where their direct or
indirect personal interest is in conflict with the company’s interest.
- Diversion of business opportunity as in GREEN v BESTOBELL is an example of conflict of interest.
- Misappropriation of company property as in COOK v DEEKS is an example of conflict of interest.
- Secret profits as in REGAL v GULLIVER is an example of conflict of interest.
- This equitable principle applies even when a company has not suffered a loss.
DEFENCES:
- REGAL v GULLIVER states that members approval is a defense against breach of this duty.
- QLD MINES v HUDSON states that Board of Directors approval is a defense against breach of this duty.
STATUTE:
- s182(1) forbids directors to improperly use their position for personal advantage (as in ASIC v ADLER)
- s183 forbids directors to improperly use information for personal advantage (as in ASIC v VIZARD)
- There are no defenses for breach of statutory duty to avoid conflict of interest.
- s191(1) states that a director must disclose personal interests to the other directors unless excepted by
s192(2) e.g. awareness of other directors in proprietary company (strict liability offence)
- s194 states that directors of proprietary companies may vote on matters of material personal interest
- s195 states that directors of public companies must not vote on matters of material personal interest
APPLICATION:
EQUITY:
Check type of conflict of interest. If there is breach of duty to avoid conflict of interest under equity,
check for board of directors’ approval or members’ approval (safer option).
STATUTE:
Check abuse of position or information and disclosure of conflict of interest. If there is no disclosure in a
public company, and director votes on matters of material personal interest, this is a criminal action!
CONCLUSION:
<The director> is liable for breach of duty to avoid conflict of interest under equity and under statute.
Equitable Remedies: compensation, accounting for profit, rescission of contract, injunction, constructive
trust (return of property).
Statutory remedies: compensation (s1317H), declaration (s1317E) in combination with pecuniary penalty
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(s1317G) and disqualification (s206C(2)).
Criminal action: in case of dishonesty [Textbook P456]
25
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DIRECTORS: RELATED PARTIES TRANSACTION
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is the transaction to director related parties valid?
LAW:
- s208 states that for a public company members approval is needed to give a financial benefit to related
parties.
- s229 defines a financial benefit broad as something of value.
- s228 defines related parties as (1) controlling entities, (2) directors and their spouses (3) relatives.
- s210-216 states exceptions members approval to related parties transactions as (1) arm’s length
transactions, (2) remuneration, (3) indemnities, (4) small amounts, (5) benefits to closely-held
subsidiaries, (6) members of the public company and (7) court orders.
- s209(1)(a) states that contravention of s208 does not affect the validity of the transaction
- s209(2) states that a person involved in contravention of s208 contravenes a civil penalty provision.
APPLICATION:
Check if the company is a public company.
What is the financial benefit?
Is there a related party?
Do any exceptions apply?
CONCLUSION:
The transaction is valid but the directors involved commit a strict liability offence that attracts civil
penalties: declaration (s1317E), pecuniary penalty (s1317G), compensation (s1317H), disqualification
(s206C(2)).
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DIRECTORS:
DUTY TO PREVENT INSOLVENT TRADING
STEPS:
Law: Explain Duty to avoid insolvent trading under s588G and explain all the defenses available.
Application: Check if the elements of the duty to avoid insolvent trading are there:
- Was the person a director of the company at the time the debt was incurred?
- Was there a debt incurred? What is it?
- Is the company insolvent? Check s95A and s588E for presumptions of insolvency.
- Is there a reasonable ground to suspect insolvency: Check knowledge of director and apply objective test.
- Check that the director did not stop the company from trading.
- If there is a breach check if any defense under s588H may apply (in case of multiple directors each on its own).
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Has a director breached his duty to prevent insolvent trading?
LAW:
- s588G imposes a duty to prevent insolvent trading on directors.
- s588H(2) sets out the Reasonable grounds to expect solvency defense: the courts look for solid facts
not mere hope (as in METROPOLITAN FIRE SYSTEMS CASE) and a ignorance is no defense (as in
TOURPRINT INT v BOTT)
- s588H(3) sets out the Delegation and reliance defense: Did the director rely on a competent and
reliable person and did he expect solvency by independent assessment of that information?
- s588H(4) sets out the Absence from Management defense: Was the director severely ill?
- s588H(5) sets out the Reasonable steps to prevent insolvency defense: Did the director put the
company under voluntary administration?
APPLICATION:
<The director> was a director of <XYZ> when <the debt> was incurred.
Since the Cash Flow Test under s95 is hard to apply, there is presumption of insolvency under s588E as
<XYZ> has not kept proper financial records/as <XYZ> is continuously insolvent within the last 12
months.
<The director> had reasonable ground for suspicion of insolvency since he actually knew <XYZ>’s
financial difficulties/a reasonable person in the position of a director would have known <XYZ>’s financial
position.
<XYZ> kept trading so there is a breach of duty to avoid insolvent trading.
Check all defenses, in case of multiple directors each on its own!
CONCLUSION:
<The director> has breached the duty to avoid insolvent trading and defenses do not apply. <The
director> committed a strict liability offence that attracts civil penalties: declaration (s1317E), pecuniary
penalty (s1317G), compensation (s1317H), disqualification (s206C(2)).
27
lOMoAR cPSD| 6970582
DIRECTORS:
DUTY TO ACT FOR PROPER PURPOSE
STEPS:
•
•
❑
❑
Law: Explain Duty to act for proper purpose under equity. Explain the relevant statutory duty to act for proper
purpose. Mention similarity with fiduciary duty.
Application: Check if the fiduciary duty to act for proper purpose is there.
Check if s181 has been breached. Test under statute is the same as under equity so the outcome will be the same.
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Has a director breached his duty to act for proper purpose?
LAW:
EQUITY:
- Directors owe a fiduciary duty to act in the best interest of the company.
- PERSIVAL v WRIGHT sets out that the best interest of the company is the best interest of all present and
future shareholders, not individual members.
- However, in small closely-held family companies directors may owe a fiduciary duty to particular
members as in BRUNNINGHAUSEN v GLAVANICS due to special relationship of trust and reliance
- PARKE v DAILY NEWS sets out that directors do not owe a fiduciary duty to employees
- Re BROADCASTING STATION CASE sets out that nominee directors need to consider the interests of the
company as paramount.
- WALKER v WIMBORNE sets out that directors in a corporate group owe a fiduciary duty to the
subsidiary and not merely to the group.
- WALKER v WIMBORNE sets out that ordinarily directors do not owe a fiduciary duty to creditors other
than in case of insolvency as in SPIES v R.
STATUTE:
- s181(1)(a) states that directors must exercise their powers and discharge their duties in good faith and
in the best interest of a company for proper purpose, which is similar to the fiduciary duty owed under
equity
- s187 states that a director of a wholly-owned subsidiary acts in the best interest of the subsidiary if the
constitution allows him to act in best interest of the holding company and he acts in good faith while the
subsidiary is not insolvent.
APPLICATION:
EQUITY:
Check if the fiduciary duty to act for proper purpose is there.
Is the director acting for proper purpose?
STATUTE:
Check if s181 has been breached.
Test under statute is the same as under equity so the outcome will be the same
CONCLUSION:
<The director> has breached the duty to act for proper purpose. <The director> committed a strict
liability offence that attracts civil penalties.
Equitable Remedies: compensation, accounting for profit, rescission of contract, injunction, constructive
trust (return of property).
Statutory remedies: compensation (s1317H), declaration (s1317E) in combination with pecuniary penalty
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(s1317G) and disqualification (s206C(2)).
Criminal action: in case of dishonesty [Textbook P456].
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lOMoAR cPSD| 6970582
DIRECTORS: DUTY TO ACT FOR PROPER PURPOSE IN
RELATION TO SHARE ISSUE
STEPS:
Law: Explain Duty to act for proper purpose under equity. Mention MILLS v MILLS in relation to mixed purpose to issue
shares. Apply the ‘but for’-test. Explain the relevant statutory duty to act for proper purpose. Mention similarity with
fiduciary duty.
Application: Check if the fiduciary duty to act for proper purpose is there. What is the proper purpose for issuing
shares? Check what is improper purpose.
Check if s181 has been breached. Test under statute is the same as under equity so the outcome will be the same.
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Has a director breached his duty to act for proper purpose when issuing shares?
LAW:
- Directors owe a fiduciary duty to act in the best interest of the company.
- PERSIVAL v WRIGHT sets out that the best interest of the company is the best interest of all present and
future shareholders, not individual members.
- However, in small closely-held family companies directors may owe a fiduciary duty to particular
members as in BRUNNINGHAUSEN v GLAVANICS due to special relationship of trust and reliance
- PARKE v DAILY NEWS sets out that directors do not owe a fiduciary duty to employees
- Re BROADCASTING STATION CASE sets out that nominee directors need to consider the interests of the
company as paramount.
- WALKER v WIMBORNE sets out that directors in a corporate group owe a fiduciary duty to the
subsidiary and not merely to the group.
- WALKER v WIMBORNE sets out that ordinarily directors do not owe a fiduciary duty to creditors other
than in case of insolvency as in SPIES v R.
- NGURLI LTD v MCCANN sets out that share issue to maintain control is improper purpose
- MILLS v MILLS sets out that the ‘but for’-test should be applied when issuing shares for more than one
purpose
- HOWARD SMITH CASE sets out that share issue to create or destroy a majority of voting power is
improper purpose
STATUTE:
- s181(1)(a) states that directors must exercise their powers and discharge their duties in good faith and
in the best interest of a company for proper purpose, which is similar to the fiduciary duty under equity
- s187 states that a director of a wholly-owned subsidiary acts in the best interest of the subsidiary if the
constitution allows him to act in best interest of the holding company and he acts in good faith while the
subsidiary is not insolvent.
APPLICATION:
<The director> owes <XYZ> a fiduciary duty when issuing shares. Proper purpose for share issue is raising
capital, expanding business, paying debts, remuneration of employees, fostering business connections,
as consideration for purchase of an asset etc. Improper purpose is to entrench the existing board of
directors, discriminate against particular shareholders, etc. In case of multiple purposes, the ‘but for’test asks: if this purpose is not there, will company still issue shares?
CONCLUSION:
<The director> has breached the duty to act for proper purpose. <The director> committed a strict
liability offence that attracts civil penalties.
Equitable Remedies: compensation, accounting for profit, rescission of contract, injunction, constructive
trust (return of property).
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Statutory remedies: compensation (s1317H), declaration (s1317E) in combination with pecuniary penalty
(s1317G) and disqualification (s206C(2)).
Criminal action: in case of dishonesty [Textbook P456]
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MEMBERS’ REMEDIES: EXPROPRIATION OF SHARES
STEPS:
Is there a proposal to change the constitution to expropriate shares or voting rights?
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a minority shareholder sue using GAMBOTTO’S CASE?
LAW:
- GAMBOTTO’S CASE sets out that in order to expropriate shareholders of their shares or voting rights by
changing the constitution:
- A special resolution is needed in a members meeting
- The resolution has to be for proper purpose for everyone (e.g. due to breach of s113(1) when a
proprietary company would have more than 50 members or if the shareholder harms the company)
- The expropriation has to be fair (i.e. with full disclosure and fair compensation e.g. market price)
APPLICATION:
Check the above conditions.
CONCLUSION:
A minority member can sue using GAMBOTTO’S CASE.
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lOMoAR cPSD| 6970582
MEMBERS’ REMEDIES: DERIVATIVE ACTION
STEPS:
Can the person sue the directors in the name of the company? Check the categories under s236.
Are the elements to get leave from the court under s237 there?
Who pays the expense of the proceedings?
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a member sue the directors on behalf of the company?
LAW:
- s236 states that (1) members, (2) former members, (3) officers and (4) former officers of the company
can sue on behalf of the company.
- s237 sets out that leave will be granted if (1) it is probable that the company will not sue by itself, (2)
the applicant is in good faith, (3) he is acting in best interest of the company, (4) a serious question is
going to be tried and (5) he has served 14 days written notice or been granted exception.
- s242 states that the applicant pays court action unless the court decides otherwise
APPLICATION: <A person> is a member of <XYZ> and can therefore sue on behalf of the company. It is likely that <XYZ>
will not bring action by itself since the directors hold <X%> of the voting rights. It is presumed that <the
person> is acting in good faith. <It> is in <XYZ>’s best interest. <It> is a serious question.
<The person> has to notify <XYZ> 14 days before bringing action and has to be prepared to pay the
expenses unless the court decides otherwise.
CONCLUSION:
A member can sue the directors on behalf of the company.
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MEMBERS’ REMEDIES: OPPRESSION
STEPS:
Can the person sue the company for oppression? Check the categories under s234.
Is there a conduct? A conduct may be any actual or proposed act, or omission, or a resolution or proposed resolution.
Is the conduct in relation to the affairs of the company (s53)?
Is there oppression? Apply the objective test.
If there is oppression s233 may apply. The court will make any order it sees fit to stop the oppression.
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a member sue the company for oppression?
LAW:
- s234 states that a (1) member or (2) former member of a company can sue the company for oppression
if there is (1) a conduct (any actual or proposed act, or omission, or a resolution or proposed resolution)
(2) linked to the company’s affairs (3) that is oppressive.
- s53 sets out that a company’s affairs is interpreted broad as anything relating to the company.
- The courts apply an objective test if the conduct is commercially unfair: Would a reasonable person act
in this way? WAYDE v NSW RUGBY sets out that there is no oppression if the conduct is commercially
reasonable
- SCOTTISH CO-OPERATIVE CASE sets out that Diversion of business opportunity is oppressive & unfair
- ROBERS v WALTER sets out that Excessive remuneration for directors where previous profits had been
paid as dividend not remuneration is oppressive & unfair
- FEXUTO v BOSNJAK sets out that Exclusions from management are oppressive & unfair
- HANNES v MJH sets out that share issue for improper purpose is oppressive & unfair
- Changing the constitution to harm particular shareholders is oppressive & unfair
- s233(1) states that the court has wide powers to make any order it considers appropriate
APPLICATION:
Apply steps above. Check for specific conduct.
CONCLUSION:
<A member> can sue the company for oppression.
34
lOMoAR cPSD| 6970582
MEMBERS’ RIGHTS: ACCESS TO BOOKS
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Has a member the right to access the books of a company?
LAW:
- s247D states that directors may allow a member to inspect the books
- s247D states that a member may be allowed to inspect the books by an ordinary resolution
- s247A sets out that the court may allow a member acting in good faith to inspect the books if the
inspection is for proper purpose
APPLICATION:
Check the conditions above.
CONCLUSION:
Normally a member has no access to the books of a company, but he can seek authorization to inspect
the books.
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lOMoAR cPSD| 6970582
CAPITAL MAINTENANCE: SHARE BUY-BACK AND
REDUCTION OF CAPITAL
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can the directors buy back shares of a company or otherwise reduce its capital?
LAW:
- s259A and TREVOR v WHITWORTH set out that a company is prohibited from reducing its issued share
capital since this would harm the rights of creditors
- s260 prohibits financial assistance by a company for acquiring shares in the company with the
exceptions of (1) shareholder approval (s260B) (2) where it is not materially prejudicial to the interests of
the company, its members or creditors (s260A) or (3) when it is expressly permitted (s260C) e.g. for
financial institutions.
- s260D sets out that contravention of s260 does not affect the validity of the transaction, the company
is not guilty of an offence but persons involved commit a civil penalty offence if dishonest
- s257A states that company is permitted to buy back its shares if (1) the company remains solvent and
(2) it follows the procedures under s257B
- s257B sets out the procedures of shareholder approval, lodgment, disclosure and share cancellation for
(1) Equal access scheme (all members are treated equal), (2) Selective buy-back (selected members
shares are targeted), (3) On-market buy-back (in a listed company), (4) Employee Schemes and (5)
Minimum holdings.
- s256B states that a company can reduce its capital where (1) it is fair and reasonable to its shareholders
as a whole, (2) it does not materially prejudice its ability to pay creditors (i.e. it stays solvent) and (3) it
has shareholders approval under s256C.
APPLICATION:
Check kind of capital reduction.
Check solvency.
Check procedures required.
CONCLUSION:
The directors must take care that the company stays solvent and it follows the procedures.
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CAPITAL MAINTENANCE: DIVIDENDS OUT OF DEBT
STEPS:
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can the directors use borrowed money to pay dividends?
LAW:
- s254U states that directors decide on payment of dividends if the constitution is silent on this.
Members cannot force dividend payment other than by constitution or if there is oppression.
- s254T states that dividends may only paid out of profit
- There is no legal definition of profit.
- RE SPANISH CASE sets out that profit looks at the off-set amount of profits and losses over several years
whereas AMMONIA SODA CASE sets out that profit looks at the current year only.
- As a consequence of paying dividends without profit, directors may breach capital maintenance
provisions and may engage in insolvent trading and breach their duty of care.
- QBE INSURANCE v ASC states that a company may borrow money to finance dividend payments
provided it is not insolvent
APPLICATION:
Check decision to pay dividends.
Check if there is profit.
Check if capital maintenance provisions are breached.
CONCLUSION:
As long as the company stays solvent, directors may pay dividends with borrowed money.
37
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FUNDRAISING: PROPRIETARY COMPANY
STEPS:
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a proprietary company raise capital from the public?
LAW:
- s113(3) states that a proprietary company cannot issue securities to the public.
- s700/s761A set out that shares/debentures are securities.
- s113(3A) states that contravention of s 113(3) is a strict liability offence.
- s165 sets out that ASIC may direct the company to change to a public company.
APPLICATION:
<XYZ> is a proprietary company and therefore cannot issue securities to the public. <The board of
directors> decided to issue <shares/debentures> to the public and not only to existing members or
employees of <XYZ>. <Shares/debentures> qualify as securities. The board of directors therefore breach
the fundraising provisions under s113(3) which is a strict liability offence.
CONCLUSION:
The company committed a strict liability offence which attracts 5 penalty points ($550). ASIC can direct
the company to change to a public company.
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lOMoAR cPSD| 6970582
FUNDRAISING: PUBLIC COMPANY
STEPS:
Check type of company and kind of offer.
Check for exceptions that do not require disclosure.
Check type of disclosure document.
❑
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can a public company raise capital from the public?
Can a public company issue debentures without disclosure documents?
LAW:
- s706, s727 state that companies issuing securities need to disclose their offer.
- s208 sets out the exceptions as (1) small scale personal offer, (2) sophisticated investors, (3)
professional investors, (4) persons associated with the company, (5) investment plans and bonus shares,
(6) offers for no consideration and (7) special circumstances (e.g. takeover).
- s700/s761A set out that shares/debentures are securities.
- s705 notes the different disclosure documents which are defined in s9: (1) Prospectus as in s710/s711,
(2) short form Prospectus as in s712, (3) Profile Statement as in s709/s721 and (4) Offer information
statement for issues under $10 million as in s709/s715.
- s718 sets out that the disclosure document has to be lodged with ASIC.
APPLICATION:
Check type of company.
Check kind of offer and exceptions:
- (1) small scale personal offer = max. 20 persons and up to $2 million
- (2) sophisticated investors = (a) at least $500,000 investment or (b) wealthy investor with net assets of
$2.5 million or gross income for 2 years of $250,000 each or (c) trust/company controlled by wealthy
investor
- (3) professional investors = financial institutions as in s9
- (4) persons associated with the company = directors and their families
- (5) investment plans and bonus shares = existing shareholders
- (6) offers for no consideration
- (7) special circumstances (e.g. takeover)
Check kind of offer and related disclosure document.
CONCLUSION:
<A public company> can issue securities to the public but has to disclose the offer, otherwise it commits
a criminal offence that attracts 200 penalty points and/or 5 years imprisonment.
<A public company> can issue debentures to financial institutions without disclosure documents.
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lOMoAR cPSD| 6970582
FUNDRAISING: MISLEADING INFORMATION IN
DISCLOSURE DOCUMENTS
STEPS:
❑
n/a
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Are directors/experts liable for misleading information in disclosure documents?
LAW:
- s728(1) states that disclosure documents must not contain misleading or deceptive statements or
omissions.
- s728(3) sets out that contravention of s728(1) is a criminal offence only if the misleading or deceptive
statement or omission is materially adverse from the point of view of an investor
- s729 sets out the liability of (1) the company, (2) its directors, (3) underwriters, (4) experts for their
statements if (a) the statement is false and (b) they consented to being published
for compensation for loss or damage resulting from breach of s728(1)
- s739 states that ASIC can issue a stop order
- s719 sets out that a supplementary or replacement document may be lodged
DEFENSES:
- s731 sets out the Due diligence defense for Prospectuses
- s732 sets out the Lack of Knowledge defense for Offer information statements and Profile statements
- s733 sets out the Reliance defense, Withdrawal of consent defense and Unawareness of new
circumstances defense for all disclosure documents
APPLICATION:
Check type of disclosure document.
Check for breach of s728 and state if disclosure document is misleading.
Check the rights of the investors (s729).
Check the liability of people involved and their defenses (ss731-733) – each by themselves for each
misstatement or omission!
- Due diligence defense for Prospectuses: not liable if (1) made reasonable inquiries and (2) had
reasonable belief that statement is true.
- Lack of Knowledge defense for Offer information statements and Profile statements: not liable if not
knowing that statement is misleading
- For all disclosure documents:
(1) Reliance defense: not liable if reasonably relying on information of an outsider
(2) Withdrawal of consent defense: not liable if publicly withdrew consent to be published
(3) Unawareness of new circumstances defense: not liable if unaware of new circumstance
CONCLUSION:
<Directors/experts> are liable for loss or damage caused by misleading statements in disclosure
documents.
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lOMoAR cPSD| 6970582
PRIORITY OF CHARGES
STEPS:
Land is not a registered charge but goes by date of creation of charge under the Torrens scheme.
Always check the date of registration. Explain why this is the date of registration every time. Refer to the relevant
sections.
Check the order of priority with reference to the relevant sections.
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
What is the order of priority of the charges?
LAW:
s262 states that most charges need to be registered.
s265(4),(5),(6),(7) sets out that charges that are provisionally registered become registered on the day of
provisional registration if full lodgment is made within the deadline set by ASIC, otherwise they are
registered on the day of full lodgment.
s279(3) states that registered fixed charges have priority over registered floating charges unless there is a
negative pledge (s279(3)).
s280(1)(a) states that registered charges have priority in order of their registration.
s280(1)(b)(c) states that registered charges have priority over unregistered charges.
s281(b) states that unregistered charges have priority in order of their creation
s280(2) sets out that knowledge of existing charges postpones priority of new charges.
APPLICATION:
Check date of registration. Explain why this is the date of registration.
Check order of priority with reference to the correct sections.
CONCLUSION:
The order of priority of the charges is: first …, second …, third … […]
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lOMoAR cPSD| 6970582
EXTERNAL ADMINISTRATION
STEPS:
Law: Who can put the company under each type of external administration? What is the outcome of each type of
external administration? What are the advantages/disadvantages of each type of external administration?
Application: Check each party by itself! Check if the relevant party can use the type of external administration. What is
the possible outcome? Why is this the best type of external administration for the party?
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Which type of external administration will suit the interests of the creditors best?
LAW:
Initiation
Outcome
Advantages
Disadvantages
APPLICATION:
Winding-up
Receivership
Voluntary
Administration
Scheme of
Arrangement
COMPULSORY:
s459A Insolvency
s461 Other ground
s232(1) Court
s436A Directors
Creditors
ASIC
Secured creditor
s436B Liquidator
s439C Substantial
chargee
Members
Preservation of
assets/return to
trading
Sale of assets and
liquidation
Pays secured charge
No moratorium
s439C Deed of
company
arrangement
Voluntary liquidation
Return to trading
s411 Compromise
specified in scheme
document
VOLUNTARY:
s491 members
creditors in insolvency
Distribution of assets
and deregistration
Fate of company in
hands of creditors,
short time to
investigate
Flexible compromise
Slow, complex,
expensive due to
double majority and
multiple court action
Receivership
Available
Payment
Loose client
VA
Available
Deed of arrangmt
Inexpensive
SoA
Available
Payment
Expensive
Winding-up
Available
Get paid last
Slow
Receivership
Not available
VA
May convince BoD
May get paid
Inexpensive
SoA
Available
Compromise
Slow, expensive
Winding-up
Available
Prefred creditor
Terminates job
Receivership
Not available
VA
May convince BoD
May get paid
May keep job
SoA
Available
Compromise
Slow, expensive
Slow, expensive,
Employment
terminated,
offers low return
(1) For (substantial) secured chargees:
Initiation
Outcome
Dis/Advantages
Winding-up
Available
Payment
Expensive
(2) For unsecured creditors:
Initiation
Outcome
Dis/Advantages
(3) For employees:
Initiation
Outcome
Dis/Advantages
CONCLUSION:
(1) For secured chargees: First voluntary administration, second receivership, third scheme of
arrangement, fourth winding-up.
(2) For unsecured creditors: First voluntary administration (if they can convince Board of Management),
second scheme of arrangement, third winding-up.
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lOMoAR cPSD| 6970582
(3) For employees: First voluntary administration (if they can convince Board of Management), second
scheme of arrangement, third winding-up.
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lOMoAR cPSD| 6970582
WINDING-UP
STEPS:
❑
❑
n/a
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Can the members wind-up the company?
LAW:
s491 states that a company may be wound up voluntarily by special resolution as long as it solvent and
the directors issue a statutory declaration of solvency.
APPLICATION:
Check solvency.
Check statutory declaration of solvency.
Check special resolution of more than 75 % of the votes.
CONCLUSION:
Members can wind-up a company by special resolution as long as the company is solvent.
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lOMoAR cPSD| 6970582
VOIDABLE TRANSACTIONS
STEPS:
Check that the company is under liquidation since voidable transactions do not apply to voluntary administration or
scheme of arrangements.
Determine what type of voidable transaction you are dealing with since each type has different time limitations.
❑
❑
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
<XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE:
Is a transaction voidable?
LAW:
- s558FA(1) states that unfair preferential transactions that prefer one creditor over others in insolvency
are voidable up to 6 months
- s588FB(1) states that uncommercial transactions (e.g. sale of assets under value) in insolvency are
voidable up to 2 years
- s588FDA(1) states that unreasonable director-related transactions are voidable up to 4 years
- s588FD states that unfair loans are voidable without time limitation
APPLICATION:
Check the conditions above.
CONCLUSION:
<The transaction> is voidable/not voidable.
45