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Company Law
Company Law (University of Otago)
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Company Law
Lecture 1
Some common forms of business organisation
- Sole trader
o All assets under the owner’s name.
o Advantages – complete boss, however may have to fund the
venture. Would have to borrow from the bank, PERSONALLY liable
(risk). May be sued personally if the company incurs debts.
- Partnership
o Allows for investors to become involved. Collective business
agreement.
o Advantages, more of them, more money to contribute, however all
individually liable if the business incurs debts.
o Partner A may become liable for partner B’s debts (risk).
o Fiduciary obligations/relationship – may turn out to be
cumbersome.
o Partnership may terminate if a partner dies.
- The incorporated company
o Corporate personality
 Company becomes a distinct legal entity.
 Ramifications - company owns its own assets. One may be a
shareholder, but that doesn’t mean you hold the assets. You
can only incur a dividend, appoint directors, if company is
liquidated, then you have the right to incur any surplus
assets.
 If company doesn’t pay its debts, the company itself is sued,
not the shareholder.
 If it makes a profit, the company incurs tax, not the
shareholders.
 The company sues an individual, not a shareholder. Legally
the company is distinct.
 Company will only cease if it is liquidated.
 Perception that a bank is more willing to lend money to
incorporated companies.
 An individual may guarantee the companies debts.
o Limited liability of shareholders
 Shareholder personal liability is generally limited to any
unpaid amount owing on shares, ss97, 21.
 Unless guaranteed.
o Separation of ownership and control
 Larger companies; individuals can be shareholders, but they
also can be a part of the day to day management. Others
may just be investors.
o Transferability of shares
 A public company can sell its shares within a day through a
share broker.
 Private companies’ shares are not publicly traded.
N.B – an ‘incorporated company’ is legally distinct from its shareholders,
managers.
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1. Shaw & Sons (Salford) Ltd. v Shaw [1935] 2 K.B. 113 at 134, per, Greer
LJ:
“A company is an entity distinct alike from its shareholders and its
directors. Some of its powers may, according to its articles [in NZ the
Companies Act 1993/constitution], be exercised by directors, certain
other powers may be reserved for the shareholders in general meeting. If
powers of management are vested in the directors [which in NZ they are],
they and they alone can exercise these powers. The only way in which the
general body of the shareholders can control the exercise of the powers
vested by the articles in the directors is by altering their articles, or, if
opportunity arises under the articles, by refusing to re-elect the directors
of whose actions they disapprove. They cannot themselves usurp the
powers which by the articles are vested in the directors any more than
the directors can usurp the powers vested by the articles in the general
body of shareholders”.
The Board of Directors
The board of directors hold the power of the shareholders. This is the modern
situation. The directors are appointed by the shareholders, and then at this
point, that is the end of the shareholders control.
- Do not confuse these with an individual director. The board delegates
individual powers to directors.
- A board CAN have one director.
- Companies Act 1993 sets out the guidelines and rules for the board of
directors. S 128
o (1) The business and affairs of a company must be managed by, or
under the direction or supervision of, the board of the company
o (2) The board of a company has all the powers necessary for
managing, and for directing and supervising the management of,
the business and affairs of the company.
o Subsections (1) and (2) of this section are subject to any
modifications, exceptions, or limitations contained in this Act or in
the company’s constitution.
R v Moses (High Court Auckland, CRI 2009-004-1388, 8 July 2011, Heath J) at
[74]
“Directors direct; managers manage. That is the essential difference between
governance and management. Directors establish the policy or rules that are to
be implemented by management and put systems in place to ensure their
instructions are carried out. In Dairy Containers Ltd v NZI Bank Ltd [[1995] 2
NZLR 30 at 79] Thomas J expressed this idea as follows:
‘It should not be necessary to restate that it is the fundamental task of the
directors to manage the business of the company. Theirs is the power and
responsibility of that management. To manage the company effectively, of
course, they must necessarily delegate much of their power to executives of the
company, especially in respect of its day to day operations. Although constantly
referred to as ‘the management’, the executives’ powers are delegated powers,
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subject to the scrutiny and supervision of the directors. Responsibility to
manage the company in this primary sense remains firmly with the directors.’”
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S 130 allows the board to delegate power.
o (1) subject to any restrictions in the constitution of the company,
the board of a company may delegate to a committee of directors,
a director or employee of the company, or any other person, any
one or more of its powers other than its powers under any of the
sections of this Act set out in Schedule 2 to this Act.
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Shareholders do not have many rights. They can appoint directors and
remove directors via a democratic process. S 109 also allows a meeting of
shareholder(s) to pass a resolution.
o Management review by shareholders
 (1) notwithstanding anything in this Act or the constitution
of the company, the chairperson of a meeting of shareholders
of a company must allow a reasonable opportunity for
shareholders at a meeting to question, discuss, or comment
on the management of the company
 (2) Notwithstanding anything in this Act or the constitution
of the company, but subject to [subsections (2A) and (3)], a
meeting of shareholders may pass a resolution under this
section relating to the management of a company.
 (2A) The provisions of Schedule 1 govern proceedings
at a meeting of shareholder at which a resolution
under this section is passed except to the extent that
the constitution of the company provides for matters
that are expressed in the schedule to be subject to the
constitution of the company.
 (3) Unless the constitution provides that the resolution
is binding, a resolution passed pursuant to subsection
(2) of this section is not binding on the board.
N.B we must assess what legal entity/function an individual is acting under –
employee, director, manager, shareholder?
Public/private companies
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Public companies have to follow certain list rules about how their shares
are maintained on the stock exchange.
o These do not apply to private companies
Shareholder agreements are common amongst private companies,
allowing a strategic plan between shareholders/directors in how the
company is upheld/maintained.
Internal rules:
- The constitution
- Shareholder agreements
- Listing rules
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Lecture 2
Salomon v Salomon (case summary from LexisAdvance)
- Each court, on and off appeal agreed that the company of Salomon Ltd
was in fact an incorporated company, and not just an alias of Salomon
himself. It was itself a legal entity (validly constituted corporation).
- The Court of Appeal worried that many industrial and banking concerns
of the highest standing and credit had been converted into joint stock
companies and often into “private” companies, where the whole of the
share were held by former partners. The CoA believed all these might be
pronounced “schemes” to enable them “to carry on business in the name
of the company with limited liability”. This would hence limit the liability,
and it would not be unlimited.
o This Court being of opinion that the formation of the company, the
agreement od August 1892, and the issues of debentures to Aron
Salomon pursuant to such agreement, were a mere scheme to
enable him to carry on business in the name of the company, with
limited liability, contrary to the true intent and meaning of the
Companies Act, 1862, and further to enable him to obtain a
preference over other creditors of the company by procuring a first
charge on the assets of the company by means of such debentures.
- There was no difference between a so-called “one man” company and a
company where three or more persons formed a company for the purpose
of trading with limited liability, provided the statutory requirements were
complied with. The CoA had declared that the formation of the company
was a scheme contrary to the intention of the Act.
- If, therefore all the requirements of the Act had been complied with and
the company had been validly constituted, how could it be said that what
was done was contrary to the intention of the Act?
- Due to the fact that there were no inconsistencies with the Act, the House
of Lords reversed the Court of Appeal decision.
Salomon v Salomon (lecture notes)
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Legally distinct entity to Salomon. Assets and debts are the companies,
not his personally.
Managing director would have delegated power (Mr. S).
Liability limited to the initial amount paid of the share – therefore 1
pound initially.
Mr. S goes to sell the company – Mr. S is now the vendor of his original
business. Mr. S on behalf of the company decided to buy for $40,000.
They paid $30,000 upfront, where $9000 would pay off existing debts.
$20,000 used to subscribe for more shares. Still has $10,000 to pay, so
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they place a security over the company for $10,000. Mr. S is not a
secured creditor.
Company is now needing some money as it lost clients, Mr. S signed his
debenture to Mr. Broderip who gave him $5000 – went back into the
company. B has first claim over the security.
Company fails, and it was put in liquidation (ceases to exist). This could
be voluntary or insolvent, in this case it was an insolvent liquidation.
Mr. B gets back his $5000
Mr. S gets $1050
Unsecured creditors ($7,733) got nothing
Shareholders got nothing either
The question is, why isn’t Mr. S personally liable for the debts, and
therefore why does he get anything (from unsecured creditor
perspective).
Now in NZ, a company only needs one shareholder.
HOL upheld that Mr. S’s company was a valid company under the Act.
Why was the company incorporated?
- He wanted limited liability
- Good control to transfer to any son that may want it
- Wanted a good name for himself
Unsecured Creditor arguments:
- Creditors argued fraud, that Mr. S paid too much, conflict of interest
- It is not a legitimate company since Mr. S is the dominant shareholder
- Because of his dominance, there were no independent Board of Directors.
He was the Board.
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Assumed the company is an agent of Mr. S. He shouldn’t walk away
without paying any of the debts. (trial court)
COA – believed the company was a sham, therefore Mr. S was liable
HOL:
o Did the company pay too much for the business? All the
shareholders ratified the purchase.
o Was the company validly incorporated, yes, the shareholders had
complied with the statutory requirements. Received a certificate of
incorporation. HOL held the motives of the shareholders is
irrelevant. Mr. S wanted limited liability, the statute allows for this
to happen without having to look to motives.
o There can be nominal shareholders, they satisfy the requirements
of the Act.
o It is not fraud to be a major shareholder in a limited liability
company (HOL). A major shareholder may also be a debenture
holder.
Salomon is ratified in the Companies Act 1993 s 15 (not directly ratified).
S 301 – when it has completed liquidation, if a director has breached duties,
they can attract personal liabilities, and the money they pay goes back to the
company to distribute to e.g. unsecured creditors.
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Objects doctrine – historically, the company can only do what it sets out to do. If
not, they would be acting ultra vires, it doesn’t have the legal capacity to act
outside their realm. Abolished in NZ, s 16 Companies Act, once incorporated,
company can do whatever it wants to do.
Lecture 3
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Since Salomon, Directors now have many duties.
Lee v Lee’s Air Farming Ltd
- Individual acting in a dual capacity
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Mr. Lee was the governing director but was also a worker. Mr. Lee had
2,999/3000 shares, and the solicitor held 1 share on trust for Mr. Lee
At this time, there needed to be 2 shareholders to be directors. To get
around this, can confer all the power into one individual (governing
director).
Mr. Lee was the chief pilot (only pilot) – company’s main employee
He dies, can his widow gain compensation (case predated ACC) – there
was a Workers Compensation Act – employees must have insurance via
company.
Was he employed under a contract of service (worker), or by a contract
for services (director) (as an employee, or an independent contractor)?
o Could be a ‘worker’ if under a contract of service
Problem here was that he was a governing director. He had full governing
control, essentially the ‘governing board’.
COA – legally it was inconsistent that one could be a governing director
and an employee (couldn’t give orders to himself as an employee) –
essentially not a worker
Privy Council believed he could be both.
o Looked to Salomon v Salomon – one person can have many
personalities inside a company (board member, employee etc…)
o Lee’s Air Farming Ltd is legally distinct from Mr. Lee himself.
o Normal view - A director is not an employee (is an agent of the
company).
o When Mr. Lee was acting as a governing director, he was acting as
an agent of the company
o An agent of the company, an individual can create a contractual
relationship between the company and themselves in another
capacity.
 Mr. Lee as an agent could conclude an employment contract
with Mr. Lee the pilot
o He is the company’s agent through negotiations, and under the
employment of the topdressing pilot.
 Under today’s Companies Act – we only need one
director
o Mr. Lee was covered as a worker under the Act
What happens if something goes wrong and a third party wants to sue?
- Could bring in a liability issue of vicarious liability towards a company as
employer.
- This is not always the case 
Trevor Ivory Ltd v Anderson
- One-person company, Mr. Ivory was shareholder, director, employee.
- Gave advice on the spraying of crops. Was wrong advice, negligent.
- More solvent was Mr. Trevor Ivory himself, not the company.
- COA held that the correct defendant was the company. When he gave the
advice, Mr. Ivory did not assume any personal liability under that advice,
rather it was the company giving that advice.
- If we impose personal liability on him, we would undermine the whole
rationale of a company.
- “When it comes to assumption of responsibility, I do not accept that a
company director of a one-man company is to be regarded as
automatically accepting tort responsibility for giving advice on behalf of
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the company by himself. There may be situations where such liability
tends to arise, particularly perhaps where the director as a person is
highly prominent and his company is barely visible, resulting in a focus
predominantly on the man himself. All will depend upon the facts of
individual cases, and the degree of implicit assumption of personal
responsibility, with no doubt some policy elements also applying.”
Dicks
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v Hobson Swan Construction Ltd
Leaky home negligence
Director was the one to install windows negligently
Court held the home-owner could sue the builder personally
o (The case may turn on the facts of a case – compare with Trevor)
Mahon v Crockett
- Company agent on behalf of the company
- Agent employee would not assume personal liability, was the company’s,
unless they unequivocally assume it.
Macaura v Northern Assurance Company Ltd
- Mr. M created a company to fell the trees on the land – sells the timber
and milling rights to the company.
- Number of shareholders – dominant one is Mr. M – other nominees are
holding on trust for Mr. M
- When he sells the timber and rights, gains shares in return. Company
needs extra money, so he buys some more shares, and also lent money to
the company (unsecured creditor).
- Mr. M obtains insurance (fire) from Northern Assurance Co.
- Fire occurs, timber destroyed, insurance company doesn’t want to pay.
- Their argument is that Mr. M doesn’t have an insurable interest in the
timber. Must show a recognised interest that is vulnerable to loss.
- Irish Canadian Sawmills (the company) has the insurance – it is its
timber. Mr. M sold it, therefore how is he affected.
- Mr. M claims 1) because he has so many shares in the company, and 2)
that he is a creditor, he has an insurable interest in the timber.
- Privy Council said no. They said if he was a secured-creditor he would
have a vulnerable interest for insurance, but he was unsecured.
- “Now, no shareholder has any right to any item of property owned by the
company, for he has no legal or equitable interest therein.” A shareholder
does not share in the company’s assets.
- Mr. M can still sue the company for the balance of money lent. Same with
the shares, but they may be worthless since there is now no timber.
Mahon v The Station
- “If a commercial party chooses to hold through a company, then that is
the choice that they have made and by which they must be bound. A party
cannot utilize an incorporated structure for the benefits it brings them
and then disavow the necessary legal consequences of the use of that
structure when it suits”
- Case involved a shareholder in a company attempting to lodge a caveat in
the selling and purchasing of land
- COA – that’s fine, however the company was purchasing the land, the
company can lodge the caveat, but the shareholder can’t.
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Lecture 4
Pre-registration / incorporation
Registration process (of a company)
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Only has a legal identity once incorporated
Special rules for a public company
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Pre-incorporation contracts
o ss 182 – 185 allows for a pre-incorporation contract.
o The key is the definition for a pre-incorporation contract. If it isn’t
a pre -incorporation contract. The act doesn’t worry about it.
 Has to be a contract purporting to be made by a company
before its incorporation; or
 A contract made by a person on behalf of a company before
and in contemplation of its incorporation
S 182 (1) In this section and in sections 183 to 185 of this Act, the term preincorporation contract means –
a. A contract purporting to be made by a company before its
incorporation; or
b. A contract made by a person on behalf of a company before and in
contemplation of its incorporation
(2) Notwithstanding any enactment or rule of law, a per-incorporation
contract may be ratified within such period as may be specified in the
contract, or if no period is specified, then within a reasonable time after
the incorporation of the company in the name of which, or on behalf of
which, it has been made.
(3) A contract that is ratified is as valid and enforceable as if the company
had been a party to the contract when it was made.
S 183 –
(1) Notwithstanding any enactment of rule of law, in a pre-incorporation
contract, unless a contrary intention is expressed in the contract, there is
an implied warranty by the person who purports to make the contract in
the name of, or on behalf of the company a. That the company will be incorporated within such period as may
be specified in the contract, or if no period is specified, then within
a reasonable time after the making of the contract; and
b. That the company will ratify the contract within such period as may
be specified in the contract, or if no period is specified, then within
a reasonable time after the incorporation of the company.
(2) The amount of damages recoverable in an action for breach of a warranty
implied by subsection (1) of this section is the same as the amount of
damages that would be recoverable in an action against the company for
damages for breach by the company of the unperformed obligations
under the contract if the contract had been ratified and cancelled.
Taylor v Todd
- Involved the sale of a high-country farm
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Solicitor acting for individual purchaser, entered into the sale as ‘an
agent for a company/ companies, and or trust/trusts’ to be formed.
A complication was that the farm was in the process of being converted
to a free-hold estate from a lease hold (contract was conditional on this
occurrence) – this took 4 years.
Over the 4 years, prices had dramatically increased. In the end, the
vendor is trying to get out of the contract, and argued it is not a preincorporation contract.
One the freehold was complete; the solicitor specified a particular
company as purchaser. That company had been incorporated prior to the
conversion.
Does it meet the definition of pre-incorporation contract? Court held it
wasn’t a pre-incorporation contract. Vendor could walk away.
Judge gave a test for a viable incorporation.
“There was no ascertainable company in mind when the agreement…was
completed…That was a fundamental defect. An agent cannot enter into a
contract on behalf of a company to be formed to ratify the agreement,
unless there is an unidentified or ascertainable company in mind when
the contract is made”
This failed since trusts were included.
What may have also been fatal is the 4-year delay between conversion
and the ‘ratification’ of the contract.
DFC v McSherry case said we need an Act ratification
Torbay View says this can be easily satisfied, we do not need a formal
document.
Then entered into another. Contract to on sell to another purchaser – the
commitment to on sell allowed for ratification.
Taylor v Todd – “There was no ascertainable company in mind when the
agreement…was completed… That was a fundamental defect. An agent cannot
enter into a contract on behalf of a company to be formed to ratify the
agreement, unless there is an identified or ascertainable company in mind when
the contract is made.” At [70] per Panckhurst J.
Torbay View Trustee Ltd v Glenvar Everuni Ltd - company’s entry into preincorporation sub-purchase agreement had effectively been ratified by its
subsequent entry into an onward sub-sale agreement
S 183 – for solicitors (or agent), one must guarantee that the company will be
incorporated, and that it will ratify the contract. If not, the agent will become
primarily liable. Acts as a warranty.
Registration and Incorporation
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Company name, online application, then the registrar must ratify and
incorporate the company.
Prerequisites:
- Under our Act, we only need one share, and therefore one shareholder
and one director, and a name. (s 10)
o Company must have
 Name
 One share, at least
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 One shareholder, at least
 One director, at least
We also need a registered office and address for service (ss 186, 192)
(may be different)
S 12: the application:
The company name: ss 20-25
o S 22: Registrar must reserve a name… etc.
 (2) The Registrar must not reserve a name –
 The use of which would contravene an enactment; or
 That is identical or almost identical to the name of
another company; or
 That is identical or almost identical to a name that the
Registrar has already reserved under this Act and that
is still available for registration
 That, in the opinion of the Registrar, is offensive
o Cases on handout deal with unique names, and if they are unique
or not.
o Some words have protected use. – ‘bank, ANZAC’.
Flight Centre (NZ) Ltd v Registrar of Companies and Rotorua Flight Centre Ltd
- “Names which are almost identical are those in which the key
words and order in which they appear make them virtually
indistinguishable from one another” per Blanchard J.
Stanley-Hunt Earthmovers Ltd v Registrar of Companies
“[I]n enacting the present provision, the legislature intended to remove from
consideration more general issues such as whether the name was for any
reason undesirable or whether it was calculated to deceive members of the
public. ... [W]hen applying subs (2)(b) or (c) all the Registrar is required to do to
look [sic.] at the letters or figures that make up the name and to decide, having
regard only to those letters and figure, whether or not the two names are
identical or almost identical. Other considerations such as the nature of the
businesses carried on, or the place where the companies operate, are
irrelevant. ...
In considering how the phrase ‘almost identical’ should be interpreted, regard
should be had to the statutory purpose of subs (2)(b) and (c). ... Another
[purpose] is to ensure that the names are sufficiently dissimilar that person
[sic.] can recognise that the companies are distinct. If names are identical or
almost identical, members of the public in dealing with the companies are
unlikely to distinguish them. So in considering whether two names are almost
identical, the Registrar should have regard to the extent to which, if at all, any
distinguishing feature is likely to result in members of the public distinguishing
between the two companies, that is, recognizing that they are separate and
distinct entities.” At 261,405 per Tompkins J
Dr Rust Limited v Registrar of Companies – ‘Dr Rust limited c.f The Rust Doctor
Limited’
The Paint Factory Limited v The Registrar of Companies - ‘The paint Factory
Limited c.f The Paint Factory (PN) Limited’
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“With great respect ... this Court has some difficulty with the dicta in StanleyHunt Earthmovers that a test can be whether members of the public would
recognise the two companies as different entities or would think they were
connected. If those observations were intended by the learned Judge to do no
more than state the objective test in different words, then this Court would
respectfully agree, but if they were intended, as on one view of them they
might, to suggest that the correct test is the likelihood of mistake by members
of the public in similar names used by different companies then, with respect,
this Court would find itself unable to follow such a test. ... Further, whilst words
such as Stanley-Hunt may have been important in that case, this Court has
difficulty accepting that the distinctiveness of individual words in the names of
companies is decisive. The statutory task is for the Registrar and for this Court
on appeal to consider the whole name of each of the two companies in contest
and form an objective view as to whether they are "almost identical". The test
does not vary according to whether the two names under consideration contain
commonplace words or words which are striking because they are arcane,
dramatic, made up or outlandish. Finally, this Court departs from Stanley-Hunt
in formulating a test that names can be ‘almost identical’ if they describe the
activities of the two companies since there is no general statutory proscription
(other than Flags Emblems and Names Protection Act 1981, Reserve Bank of
New Zealand Act 1989, Co-Operative Companies Act 1996 and see Anderson
Company & Securities Law para 22.05(1) p 1-66(a)) on a company selecting any
name it chooses, whatever its field of business and however large or small the
company or however grandiose or bland the name.” at [18]
“[I]t is, of course, axiomatic that the Court should focus on the sole relevant
statutory test as to whether or not the names in question are ‘almost identical’.
That, as other Judges have observed, is largely a matter of both objective
impression and analysis. Applying those tests names which look or sound
markedly different are unlikely to be regarded as ‘almost identical’. Names
which look or sound ‘almost identical are likely to be found to infringe s 22 (2)
(b). This is particularly the case if the only differences in the names are in
definite and indefinite articles, pronouns, conjunctions, punctuation marks and
other differences likely to go unremarked.
In other cases a test of distinctiveness has been discussed. In this area,
distinctiveness and identicalness are virtually antonyms but, apart from the
well-known danger of glossing plain words of statutes, this Court accepts that
balancing one against the other may be helpful.
With more direct reference to the matter in issue in this appeal, when any of the
tests discussed are applied, it follows that names where the differences under
consideration are geographical, numerical or date markers, ought not to be
regarded as ‘almost identical’ unless there are other factors about the names
which lead to that conclusion. On objective impression and analysis, names
containing such differences look and sound different from each other.” at [21][23] per Williams J.
Incorporation process – s 13 –
S 13 – As soon as the Registrar receives a properly completed
application for registration of a company, the Registrar must –
(a) Register the application; and
(b)Issue a certificate of incorporation
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Once the name is ratified, that is not the end of the story
- Use of a similar name may encounter liability under the Fair-Trading Act.
Once incorporated, certificate is awarded.
Constitution
Constitution (ss 26-28)
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S 26: A company does not need a constitution. Constitution sets out all
the rules a company must need/abide.
Includes director rules, and also some default rules. A company may
modify these default rules.
o These may be implied (if not removed); the Act allows for the
company to negotiate and contract with the director.
Some things cannot be changed however. (See hand-out)
S 27: If a company has a constitution, the company, the board, each director,
and each shareholder of the company have the rights, powers, duties, and
obligations, set out in this Act except to the extent that they are negated or
modified, in accordance with this Act, by the constitution of the company.
S 28: If a company does not have a constitution, the company, the board, each
director, and each shareholder of the company have the rights, powers, duties
and obligations set out in this Act.
S 31: constitution cannot contravene the Companies Act.
S 31(2)
- Constitution was always seen as a contract between director and
shareholders, not new shareholders. 31 says it is binding upon all
shareholders (in accordance with its terms)
S 32 allows for alterations.
In the shareholder agreement, they agree upon the business that the
shareholders will undertake, their rights, how they will resolve disputes
amongst themselves. Because these agreements are not public and are
contracts, they will not bind new shareholders unless they ratify themselves
bound.
Who is a director?
Full power is invested in the Board of Directors (under the Act) – comprised of
individual directors. Who is a director?
- De jure directors – individuals who are qualified to be directors, and
have been validly appointed by the company, have to be 18, might have to
be citizen, and not bankrupt.
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De facto directors – “…is one who claims to act and purports to act as
director, although not validly appointed as such” (Re Hydrodam Ltd) at
183 per Millett J – might not be qualified or are bankrupt.
o De facto directors – (Finnigan v Ellis) [112] per Wylie J – “A de facto
is a director, although not actually appointed as such, who is held
out by the company, and purports to act, as a director.”
o De facto directors are caught by s 126(1)(a)
 Director, in relation to a company, includes –
 (A) a person occupying the position of director of the
company by whatever named called.
-
A shadow director – “does not claim or purport to act as a director. On
the contrary, he claims not to be a director. He lurks in the shadows,
sheltering behind others who, he claims, are the only directors of the
company to the exclusion of himself. He is not held out as a director by
the company” – (Re Hydrodam)
o Finnigan v Ellis confers [113] per Wylie J – “A shadow director is a
person who does not openly adopt the role of director, but who,
from the wings, controls the persons who purport to act as
directors. Shadow directors are caught by s 126(1)(b)(i) and/or (ii).
Whether or not a person is a shadow director is a question of fact –
the question in each case being whether or not the person
occupying the position of a director, by whatever name called, is
required or is accustomed to act on the direction or instructions of
the shadow director. It is sufficient that the de jure director may be
required or is accustomed to act in accordance, with the directions
or instructions of a shadow director, so that the de jure director is
in effect the puppet of the shadow director”
When is a person a de facto director?
- Smithton Ltd v Naggar at [48] – [53] per Rose J (EWHC)
- [48] – “The leading authority on the circumstances in which a person
should be regarded as a de facto director of a company is the decision of
the Supreme Court in HMRC v Holland (UKSC) and another [2010] UKSC
51. There the question arose in proceedings against Mr. Holland alleging
misfeasance in his conduct as de facto director of an insolvent company.
Lord Hope of Craighead reviewed the authorities and concluded:
o “It is plain from the authorities that the circumstances vary widely
from case to case. Jacob J declined to formulate a single decisive
test in Secretary of State for Trade and Industry v Tjolle, as he saw
the question very much as one of fact and degree. He was
commended by Robert Walker Lj in Re Kaytech International plc,
for not doing so, and I respectfully agree that there is much force
in Jacob J’s observation. All one can say, as a generality, is that all
the relevant factors must be taken into account. But it is possible
to obtain some guidance by looking at the purpose of the section.
As Millett J said in Re Hydrodam, the liability is imposed on those
who were in a position to prevent damage to creditors by taking
proper steps to protect their interests. As he put it, those who
assume to act as directors and who thereby exercise the powers
and discharge the functions of a director, whether validly
appointed or not, must accept the responsibilities of the office. So,
one must look at what the person actually did to see whether he
assumed those responsibilities in relation to the subject company”.
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Mentions the leading authority on de facto directors (HMRC v
Holland)
 Holland was a director, and the company acted as a director
of another company
 Both companies fail, and creditors are trying to place the
weight and liability on Mr. Holland.
 Can company 2 sue Mr. H. by making him a direct director to
company 2?
 There is no decisive test, always a question of fact and
degree. What exactly did the defendant do? - Quote from
Holland.
 Looks to case law in Secretary of state v Tjolle
 Did they use the title of a director?
 Did they advise the company?
 Did they make major decisions?
 Are they the sole person directing affairs?
 Were they on equal footing in meetings?
 Were they apart of the corporate governing structure?
Jacob J in Secretary of State for Trade and Industry v Tjolle – (accepted by Lord
Hope)
- “For myself I think it may be difficult to postulate any one decisive test. I
think what is involved is very much a question of degree. The court takes
into account all the relevant factors. Those factors include at least
whether or not there was a holding out by the company of the individual
as a director, whether the individual used the title, whether the individual
had proper information (e.g. management accounts) on which to base
decisions, and whether the individual had to make major decisions and so
on. Taking all these factors into account, one asks ‘was this individual
part of the corporate governing structure’, answering it as a kind of jury
question.”
Lord Collins in Holland –
- The first case in which a person who had not been appointed a director
was held to be a de facto director because he took part in the
management of the company was in Re Lo-Line Electric Motors Ltd. His
Lordship referred to the courts being confronted thereafter with ‘the very
difficult problem of identifying what functions were. In essence the sole
responsibility of a director or board of directors. He went on to say:
o ‘A number of tests have been suggested of which the following are
the most relevant. First, whether the person was the sole person
directing the affairs of the company (or acting with others equally
lacking in a valid appointment), or if there were others who were
true directors, whether he was acting on an equal footing with the
others in directing its affairs: Re Richborough Furniture Ltd.
Second, whether there was a holding out by the company of the
individual as a director, and whether the individual used the title:
Secretary of State for Trade and Industry v Tjolle. Third, taking all
the circumstances into account, whether the individual was part of
"the corporate governing structure": Secretary of State for Trade
and Industry v Tjolle, at pp 343-344, approved in Re Kaytech
International plc [1999] 2 BCLC 351, 423, where Robert Walker LJ
also approved the way in which Jacob J in Tjolle had declined to
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formulate a single test. He also said that the concepts of shadow
director Page 3 of 12 and de facto director had in common "that an
individual who was not a de jure director is alleged to have
exercised real influence (otherwise than as a professional adviser)
in the corporate governance of a company" (at p 424). … In fact it
is just as difficult to define "corporate governance" as it is to
identify those activities which are essentially the sole responsibility
of a director or board of directors, although perhaps the most
quoted definition is that of the Cadbury Report: "Corporate
governance is the system by which businesses are directed and
controlled" (Report of the Committee on the Financial Aspects of
Corporate Governance, 1992, para.2.5).'
(Subsequent to Holland) - Ardern J in The Matter of Mumtaz Properties Ltd –
(EWCA)
- She said that the first step in approaching the question of whether a
person is a de facto director is to examine the governance structure of
the company. That case concerned a family company which was:
o ‘…run with a high degree of informality with decisions not
necessarily being taken at board meetings but whenever relevant
family members were in communication with each other.’
o Ardern J held that the judge had been entitlted to be satisfied
looking at the evidence as a whole that the respondent was part of
the corporate governance structure of the company. In her words
he was ‘one of the nerve centres from which the activities of the
company radiated’ [47].
o These authorities show that in so far as earlier cases such as Re
Hydrodam Ltd suggested that the de facto director needed to have
held himself out to third parties as being the director of the
company, or to have been held out by the management of the
company as being a director, that is now relegated to being one of
a number of factors to consider rather than an essential element in
the test.
Hildyard J in Re UKLI Ltd –
- [40] A matter of debate has been whether it is a necessary ingredient of
de facto directorship that the person in question should have been held
out by the company as a director, as Millett J considered in Re Hydrodam
(that being the essential difference, on that analysis, between a de facto
and a shadow director). Authorities subsequent to Re Hydrodam have
tended to downplay this ingredient to being a useful indicator, but not an
essential requirement: see, for example, the decision of Etherton J (as he
then was) in Secretary of State for Trade and Industry v Hollier at
paragraphs 61 to 81.
- [41] There is a valuable review and summary of the effect of these
authorities in the (unreported) decision of Chief Registrar Barrister in the
UKPFM Ltd proceedings in which Mr. Chohan was disqualified. Although
I have introduced some small variations, I agree with the Chief Registrar
that the following characteristics are all relevant, though not everyone is
required to be established, and there is inevitably some overlap between
them:
o 1. A de facto director must presume to act as if he were a director
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o
o
o
o
o
o
o
o
o
2. He must be or have been of fact part of the corporate governing
structure and participated in directing the affairs of the company
in relation to the acts or conduct complained of.
3. He must be either the sole person directing the affairs of the
company or a substantial or predominant influence and force in so
doing as regards the matters of which complaint is made. Influence
is not otherwise likely to be sufficient.
4. I am not myself persuaded that an “equality of footing” test is
required: I prefer the looser fact-based approach advocated by
Jacob J, and consider the indicia to be whether the person
concerned has undertaken acts or functions such as to suggest that
his remit to act in relation to the management of the company is
the same as if he were a de jure director.
5. The functions he performs, and the acts of which complaint is
made must be such as could only be undertaken by a director, not
ones which could properly be performed by a manager or other
employee below board level.
6. It is relevant whether the person was held out as a director or
claimed or purported to act as such: but that, and/or use of the
title, is not a necessary requirement, and even that may not always
be sufficient.
7. His role may relate to part of the affairs of the company only, so
long as that part is the part of which complaint is made.
8. Lack of accountability to others may be an indicator; so also,
may affect the involvement in major decisions
9. The power to intervene to prevent some act on behalf of the
company may suffice
10. The person concerned must be someone who was more than a
mere agent, employee or advisor.
What are directorial functions?
Dairy Containers Ltd v NZI Bank
- [BB] handout
- And handout 2 (concept of a de facto)
o Differentiate this from valid appointment/invalid appointment
- You can become a de facto director for a particular time or decision
(temporary appointment)
When is a person a Shadow director
- Smithton Ltd v Naggar at [54] – [55] per Rose J –
o [54] “The leading authority on shadow directors is Secretary of
State for Trade v Deverell. The principles set out in the judgment
of Morritt Lj can be summarised as follows:
 i) The definition of a shadow director is to be construed in
the normal way to give effect to the parliamentary intention
ascertainable from the mischief to be dealt with and the
words used. It should not be strictly construed; ii) The
purpose of the legislation is to identify those, other than
professional advisers, with a real influence in the corporate
affairs of the company. But it is not necessary that such
influence should be exercised over the whole field of its
corporate
activities;
iii)
whether
any
particular
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-
-
communication from the alleged shadow director, whether
by words or conduct, is to be classified as a direction or
instruction must be objectively ascertained by the court in
the light of all the evidence; iv) Non-professional advice may
come within the statutory description; v) it is sufficient to
show that in the face of “directions or instructions” from the
alleged shadow director the properly appointed directors or
some of them case themselves in a subservient role or
surrendered their respective discretions. But it is not
necessary to do so in all cases.
 When in contemplation of a ‘direction or instruction’ shall be objectively ascertained
o [55] In Hydrodam Millet J said:
 ‘To establish that a defendant is a shadow director of a
company it is necessary to allege and prove: (1) who are the
directors of the company, whether de facto or de jure; (2)
that the defendant directed those directors how to act in
relation to the company or that he was one of the persons
who did so; (3) that those directors acted in accordance with
such directions; and (4) that they were accustomed so to act.
What is needed is, first, a board of directors claiming and
purporting to act as such; and secondly, a pattern of
behaviour in which the board did not exercise any discretion
or judgment of its own but acted in accordance with the
directions of others”.
o Make a distinction between following good advice/following advice
because that is what they are used to.
Hydrodam test
o Who are the directors?
o Did the defendant directed those directors?
o Did those directors acted in accordance with such directions?
o Did they act?
S 126 has the meaning of a ‘director’ (non-exhaustive “includes”)
o Each subsection attracts different duties
o (a) attracts our de jure directors and typically our de facto
directors. ‘name called’ – a manager but acting as a director.
It is important to define whom is a ‘director’ for the purposes of the company
and the companies act, as specific duties and restrictions can be placed on
them, and noncompliance may bear a penalty in accordance with the Act.
Lecture 5
S 126 –
- 1 (a) is directed towards de jure and de facto (“whatever name they are
called”)
o Clark v Libra Developments [169] – [180] CoA and SC
 Browne-Wilkinson VC held that the “words ‘by whatever
name called’ show that the subsection is dealing with
nomenclature”, and continued:
 “Since the definition of director is inclusive and not
exhaustive its meaning has to be derived from the
words of the act as a whole. In my judgment it is not
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possible to treat a de facto director as a ‘director’ for
all the purposes of the [Companies Act] …”
 “It follows that the word ‘director’ is capable of
including de facto directors but may not do so. The
meaning of ‘director’ varies according to the context
in which it is to be found”.
 Despite his disqualification (bankruptcy) and the
prohibitions statutorily imposed on him, he was still
“occupying” the position as Libra’s director. It was
therefore plainly Parliament’s intention that no
company could operate without a board. Accordingly,
Libra was required to act through Mr. Hyslop and he,
as the sole occupant of the position of director,
remained such despite his disqualification and the
other impediments to his continuing in that role.
 Was a director (although defacto)
o Mistmorn Pty Ltd (in liq) v Yasseen
 Was enough for defacto due to the duties he performed
1 (b) – (d) tries to impose different sorts of duties onto shadow directors
o (b)(i)-(ii)
 Classic shadow director case:
 Krtolica v Westpac Banking
o Wondering whether a bank could come within
this section
 Bankers attending weekly management
meetings
 Was the bank a shadow director? Court
held no. Carried out duties not because
the bank said so, but because there was
no other option.
 Delegat v Norman (NZHC)
o “The words ‘accustomed to act’ in s 126(1)(b)
suggests some sort of ongoing control or
influence in a company’s affairs”
 Australian Securities
o “The reference… to a person in accordance with
whose directions or instructions the directors
are ‘accustomed to act’ does not in my opinion
require that there be directions or instructions
embracing all matters involving the board.
Rather it only requires that, as and when the
directors are directed or instructed, they are
accustomed to act as the section requires”
o “… [it] does not, in my opinion, require it to be
shown that formal direction or instructions
were given in those matters in which [the
alleged shadow director] involved himself.
Formal command is by no means always
necessary to secure as of course compliance
with what is sought…”
 Buzzle Operations Pty (in liq) v Apple Computer
Australia
o “If a person has a genuine interest of his or her
or its own in giving advice to the board, such as
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
o
o
a bank or mortgage, the mere fact that the
board will tend to take that advice to preserve it
from the mortgagee’s wrath will not make the
mortgagee, etc a shadow director”
o “The vital factor is that the shadow director has
the potentiality to control. The fact that he or
she does not seek to control every facet of the
company or the fact that from time to time the
board disregards advice is of little moment.”
 Re Tasbian Ltd
o Held to be a shadow director, accountant was
introduced to company via a major creditor.
o Accountant negotiated amongst other creditors,
did trading, became a signatory on the bank
account, managed finances (key directorial
function). Held he had the ability to control.
Nominee directors (sometimes directors can be appointed) –
 Dairy Containers Ltd at 90-91 per Thomas J
o Dairy board nominated some of their employees
to be directors, was the employee a shadow
director, because the de jure directors were the
employees. As employees they had to follow
instructions, but as directors, they had to make
individualised decisions.
 N.B – Look at what capacity the employee
is acting under, they may also have some
directorial obligations
o “As employees of NZDB I do not doubt that they
were accustomed to act in accordance with
their employer’s directions or instructions, but
as directors of DCL they did not as a matter of
fact receive directions or instructions from the
parent company. They were, as directors of
DCL, standing (or sitting) in the shoes of NZDB
at the board table, but they had not and did not
receive directions or instructions from their
employer. Even when a firm instruction from
NZDB was made, it was directed at the
company and not at the directors.”
(b)(ii)
 Shadow director who instructs the board
 Buzzle Operations at 76 per Young JA
o “Although there are problems with cases where
the board of the company spits into a majority
and minority faction, so long as the influence
controls the real decision makers, the person
providing the influence may be a shadow
director”
(b)(iii)
 Background to this subsection - Some shareholders and
companies may regard it inappropriate that the Act confers
all powers on the Board. They may want to remove some
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o
power from the board and give it to an individual or group of
shareholders. They do this through the/a constitution.
 Fatupaito v Bates
o Got
business
advice,
sometime
during
November ‘97, he started doing some stuff with
Metalsmiths, in Feb ‘98, company appears to be
insolvent, then suggests to the sole director,
that Mr. Bates be appointed as a company
receiver.
o Mr. Bates can never be a receiver. Receiver can
only be a debenture holder. So, it is impossible
for him to be one.
o He obtained sole signing authority over the
company’s bank account.
o He decided to continue trading, but then the
company’s financial position deteriorated.
o S 135 – do not trade recklessly (when going
insolvent)
o S 136 – Not to agree to the company incurring
certain obligations
 Arguing Mr. Bates is a director and is
breaching these duties, under the statute,
and is liable to pay compensation.
 One ground they argued, (b)(iii) – Mr.
Bates is a director because he is
exercising power that is not held by the
board (Mr. Maloney).
 Liquidator cannot win under (b)(iii) as
these powers were not conferred by the
constitution.
 Powers to have signing authority,
trade
etc…And
because
the
constitution did not allow for him
to have these powers, cannot come
within jurisdiction of s 126 (1)(b)
(iii).
 More to this life Ltd v Arcadia Homes Ltd (in liq)
[NZCA] 286
Subsection (2)
 Also deals with constitutions conferring powers onto
shareholders
 “If the constitution of a company confers a power on
shareholders which would otherwise fall to be
exercised by the board, any shareholder who exercises
that power or who takes part in deciding whether to
exercise that power is deemed, in relation to the
exercise of the power or any consideration concerning
its existence, to be a director for the purposes of
section 131 – 138.
o Not the same as (b)(iii) – (2) imposes more
narrow duties. (2) composes the general duties,
whereby (b)(iii) comprises all the other duties
on the [handout] list. (2) only applies to those
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o

More
o
o
o
o
o
o
o
o
o
shareholders taking part in that particular
decision.
Shareholders in general meeting, might become
shadow directors, however under (b)(iii) is
targeted at individuals, as they become shadow
directors.
to this Life Ltd v Arcadia Homes
One-person company, one sole de jure director,
he enters an agreement by real estate, as an
agent of the company, conditional of the
consent of the board.
Wants to cancel the agreement, and he argues
his brother was a shadow director, and the
older brother disagrees.
Argues (b)(i) – accustomed to follow the
decision of his brother, and therefore he had the
power to decide if the company was to enter the
contract.
Concludes, all 126(b) is doing is conferring
obligations/duties on the shadow directors, not
powers. Only imposes liability.
Even if brother was shadow director, he has no
power to approve.
 Remember, power is in the board, not
individual directors, however individual
directors may be delegated power
126(c)
 Board has delegated power or duty(s) to another individual,
by acquisition of the board.
 Delegate not has directorial duties, but they may also have
the authority that was delegated to them.
 This is where Mr. Bates attracted liability (Fatupaito v Bates)
 The board (Mr. Moon) was intending to delegate all
his powers to Mr. Bates, Mr. Bates consented that
transfer. Mr. Bates controlled the company’s funds,
this was seen as a directorial function, and was
recognised as a shadow director, and incurred liability
of not trading whilst under the threat of insolvency.
126(1a)
 Receivership Act governs receivers; therefore, directors
cannot be receivers.
126(1)(d)
 Second layer of shadow directors
 “Persons referred to in (1)(a)-(c) of this subsection
may be required or is accustomed to act in respect of
his or her duties…”
Subsection (3)
 “If the constitution of a company requires a director or the
board to exercise or refrain from exercising a power in
accordance with a decision or direction of shareholders, any
shareholder who takes part in -- …”
 constitution gives shareholders the power to direct
the board to do something or to veto some decision.
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

o
Duties imposed are the general duties, the key ones
on handout
Directed to shareholders in general meeting
Subsection (4)
 Professional advisors are excluded from being a director
provided they are only acting in a professional capacity
 Prime example – Fatupaito v Bates
o Started off as a professional advisor, the
moment he thought he controlled, he ceased
being a professional advisor and became a
director
Lecture 6
Appointment and Removal of Directors
Appointment of De Jure Directors (Genuine appointed)
Either
1. By shareholders in general meeting; or
2. Individual shareholder with power to nominate; or
3. The court has the residual power to appoint.
Shareholders in general meeting
-
Meeting open to shareholders who are to advise on the scope of the
matter (definition under the Act)
Appointment by Shareholders
Qualifications to be a director (s 151)
-
-
(1) Natural person
(2) Cannot be disqualified
o (a) At least 18 years old
o (b) Can’t be undischarged bankrupt
 An undischarged bankrupt is, in general, disqualified from
holding certain public and private offices such as that of a
member of the legislature or of a director of a firm. He or
she may not obtain credit beyond a certain limit without
informing the creditor of his or her undischarged status.
Constitution may have a requirement to become a director.
Constitution will provide the term of directorship, unless die, resign or
become disqualified.
If a director becomes disqualified but continues to act, they are now de facto
directors.
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If company becomes insolvent, could be personally liable to liquidator for
all debts owing (s 348, 346)
You only gain power if you’re validly appointed. If they become disqualified,
there will be an argument over which power they did have.
-
ss 158, 18 targets defective appointment
o 158 – The acts of a person as a director are valid even though
 (a) The persons appointment was defective; or
 (b) The person was not qualified or bankrupt
 They are thus not retrospectively revoked.
S 18 – protects third parties in some situations whereby the de facto director
has made a decision without holding power.
S 156(1) targets removal
- (1) Subject to the constitution of a company, a director of the company
may be removed from office by ordinary resolution passed at a meeting
called for the purpose or the purposes that include the removal of the
director. (meeting thus must be for the purpose(s) of removing a
director).
o Ordinary resolution: s 105(2) – an ordinary resolution is a
resolution that is approved by a simple majority of the votes of
those shareholders entitled to vote and voting on the question.
Procedure
S 152 – Director’s consent required
- A person must not be appointed a director of a company unless he or she
has [consented in writing] to be a director and certified that he or she is
not disqualified from being appointed or holding office as a director of a
company.
S 153 – Appointment of first and subsequent directors
- (1) A person named as a director in an application for registration or in
an amalgamation proposal holds office as a director from the date of
registration or the date the amalgamation proposal is effective, as the
case may be, until that person ceases to hold office as a director in
accordance with this Act.
- (2) All subsequent directors of a company must, unless the constitution of
the company otherwise provides, be appointed by ordinary resolution.
o N.B Amalgamate = Amalgamation is the merging of assets and
liabilities of 2 or more companies that become 1 amalgamated
company. As part of the process, we remove companies that aren't
continuing from the Companies Register.
155 – Appointment of directors to be voted on individually
- (1) Subject to the constitution of the company, the shareholders of a
company may vote on a resolution to appoint a director of the company
only if –
o (a) The resolution is for the appointment of one director; or
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(b) The resolution is a single resolution for the appointment of 2 or
more persons as directors of the company and a separate
resolution that it be so voted on has first been passed without a
vote being case against it.
(2) A resolution moved in contravention of subsection (1) of this section is
void even though the moving of it was not objected to at the time.
(3) Subsection (2) of this section does not limit the operation of section
158 of this Act.
(4) No provision for the automatic reappointment of retiring directors in
default of another appointment applies on the passing of a resolution in
contravention of subsection (1) of this section.
(5) Nothing in this section prevents the election of 2 or more directors by
ballot or poll.
o
-
-
158, 18 – Defective appointment
- S 158: Validity of director’s acts
o The acts of a person as a director are valid even though –
o The person’s appointment was defective; or
o The person was not qualified for appointment.
- S 18: Dealings between company and other persons –
o (1) A company or a guarantor of an obligation of a company may
not assert against dealing with the company or with a person who
has acquired property, rights, or interests from the company that –
 (a) this Act or the constitution of the company has not been
complied with
 (b) A person named as a director of the company in the most
recent notice received by the Registrar under section 159 of
this Act
 (i) Is not a director of a company; or
 (ii) Has not been duly appointed; or
 (iii) Does not have authority to exercise a power which
a director of a company carrying on business of the
kind carried on by the company customarily has
authority to exercise:
 (c) A person held out by the company as a director,
employee, or agent of the company  (i) has not been duly appointed; or
 (ii) Does not have authority to exercise a power which
a director, employee, or agent of a company carrying
on business of the kind carried on by the company
customarily has authority to exercise.
 (d) A person held out by the company as a director,
employee, or agent of the company with authority to
exercise a power which a director, employee, or agent of a
company carrying on business of the kind carried on by the
company does not customarily have authority to exercise,
does not have authority to exercise that power:
 (e) A document issued on behalf of a company by a director,
employee, or agent of the company with actual or usually
authority to issue the document is not valid or not genuine –
 Unless the person has, or ought to have, by virtue of
his or her position with or relationship
to the
company, knowledge of these matters referred to in
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
any of paragraphs (a), (b), (c), (d), or (e), as the case
may be, of this subsection.
(2) Subsection (1) of this section applies even though a
person of the kind referred to in paragraphs (b) to (e) of
that subsection acts fraudulently or forges a document that
appears to have been signed on behalf of the company,
unless the person dealing with the company or with a person
who has acquired property, rights, or interests from the
company has actual knowledge of the fraud or forgery.
S 154 – Court may appoint directors
- (1) If –
o (a) There are no directors of a company, or the number of directors
is less than the quorum required for a meeting of the board; and
o (b) it is not possible or practicable to appoint directors in
accordance with the company’s constitution  A shareholder or creditor of the company may apply to the
Court to appoint one or more persons as directors of the
company, and the Court may make an appointment if it
considers that it is in the interests of the company to do so.
o (2) An appointment may be made on such terms and conditions as
the Court thinks fit.
S 157 – Director ceasing to hold office
- (1) the office of director of a company is vacated if the person holding
that office –
o (a) Resigns in accordance with subsection (2) of this section; or
o (b) Is removed from office in accordance with this Act or the
constitution of the company; or
o (c) Becomes disqualified from being a director pursuant to section
151 of this Act; or
o (d) Dies; or
o (e) Otherwise vacates office in accordance with the constitution of
the company.
- (2) …
- (3) Notwithstanding the vacation of office, a person who held office as a
director remains liable under the provisions of this Act that impose
liabilities on directors in relation to acts and omissions and decisions
made while that person was a director.
S 157(2) - Resignation
- A director of a company may resign office by signing a written notice of
resignation and delivering it to the address for service of the company.
The notice is affected when it is received at that address or at a later time
specified in the notice.
156(1) – Removal of directors
- (1) Subject to the constitution of a company, a director of the company
may be removed from office by ordinary resolution passed at a meeting
called for the purpose or for purposes that include the removal of the
director.
- Decade Holdings Ltd v Zeitler
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Disqualification
- S 151(4) – A person who is disqualified from being a director but who acts
as a director is a director for the purposes of a provision of this Act that
imposes a duty or an obligation on a director of a company.
- Ss 348 and 386 – personal liability to liquidator (and to creditors) if
contravenes any notice under s 385 - (if disallowed by the Registrar from
managing a company).
- Clark v Libra Developments, CA and SC.
Duties of a director
-
For a long time, directors are in a fiduciary relationship with the
company, according to equity.
Therefore, equity imposed certain duties on them – no profit, no conflict,
self-dealing.
Re Coomber
- Just because a person is a fiduciary, doesn’t mean that rule operates the
same way for a trustee.
- They are modified for a commercial context.
- The principal can always vary these duties.
- The constitution could authorise said duties that are not already
prevalent.
Re Coomber [1911], at 728-9 per Fletcher Moulton LJ:
“Fiduciary relations are of many different types; they extend from the relation of
myself to an errand boy who is bound to bring me back my change up to the
most intimate and confidential relations which can possibly exist between one
party and another where the one is wholly in the hands of the other because of
his infinite trust in him. All these are cases of fiduciary relations, and the Courts
have again and again, in cases where there has been a fiduciary relation,
interfered and set aside acts which, between persons in a wholly independent
position, would have been perfectly valid. Thereupon in some minds there arises
the idea that if there is any fiduciary relation whatever any of these types of
interference is warranted by it. They conclude that every kind of fiduciary
relation justifies every kind of interference. Of course that is absurd. The nature
of the fiduciary relation must be such that it justifies the interference. There is
not a class of case in which one ought more carefully to bear in mind the facts
of the case, when one reads the judgment of the Court on those facts, than
cases which relate to fiduciary and confidential relations and the action of the
Court with regard to them.”
The Companies Act 1993 started to add statutory duties. Equitable duties are
now codified.
Percival v Wright
- Established the general rule that directors owe fiduciary duties to the
company and not to the shareholders
- The company complains, not the shareholders. (liquidator may represent
company if this is the case)
Coleman v Myers
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-
Confirmed that the relationship between director and shareholder is not
inherently fiduciary but recognises that in special circumstances a
director may owe a fiduciary duty to a shareholder.
o Established family company
o Mr. Myers Snr – chairman of board, son was the managing director.
o All shares owned by family
o But son had a relatively small shareholding
o Son found that company owned valuable land in AKL – he
suggested to shareholders that he buys their shares, with
borrowed money, once he had a controlling interest with his dad,
and then he would sell the land and make profit, then pay a special
dividend to the shareholders at a profit.
o Court held on these circumstances, there was a fiduciary duty on
the son and dad not to deliberately or carelessly make misleading
statements upon the sale of the shares. Were successfully sued
over this fiduciary duty.
The mere status of a company director should not produce that sort of
[fiduciary] responsibility to a shareholder and in my opinion it does not do
so. The existence of such a [fiduciary] relationship must depend, in my
opinion, upon all the facts of the case.
While it may not be possible to law down any general test as to when the
fiduciary duty will arise for a company director or to prescribe the exact
conduct which will always discharge it when it does, there are
nevertheless some factors that will usually have an influence upon a
decision one way or the other. They include, I think, dependence upon
information and advice, the existence of a relationship of confidence, the
significance of some particular transaction for the parties, and of course,
the extent of any positive action taken by or on behalf of the director or
directors to promote it. At 324-5 per Woodhouse J.
Companies Act
-
Commission wanted to make key duties more accessible
They proposed all duties be codified. (131 – 137)
Warnings
-
We are not looking at all the duties directors are subject to
There is an overlap in some of the duties we consider. This encourages
some lawyers to plead breach of multiple duties arising from the same
fact situation.
Madsen-Reis. And Levin v Grenhill
- “Alternative pleading should not be encouraged, especially when it
introduces complexity in what is otherwise a routine case. Moreover,
plaintiffs should select their best cause of action, not every cause of
action.”
And do not forget
- Third parties may be implicated in company or directorial misconduct
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The company may sue a third party 
Royal Brunei Airlines v Tan
- Sue third party for a dishonest breach of duty
Charter Holdings
- Knowing receipt case
Singularis Holdings
- Liquidator suing bank for breach of mandate claim. One of the directors
(of bank) didn’t have signatory power, signed off to someone who wasn’t
entitled to the money.
Companies Act should infer a wide discretion on business decisions (Long Title
of the Act)
- ‘An Act to reform the law relating to companies, and, in particular –
- …
- (d) To encourage efficient and responsible management of companies by
allowing directors a wide discretion in matters of business judgment
while at the same time providing protection for shareholders and
creditors against the abuse of management power; and …
- Business judgment rule (subject to limits)
o Courts will start reviewing it if they believe it. Was in bad faith,
self-interest, improper purpose, no reasonable considerations etc.
1. Governance duty (act in best faith/interest of company)
a. S 131 – Duty of directors to act in good faith and in best interests
of company – (1) Subject to this section, a director of a company,
when exercising powers or performing duties, must act in good
faith and in what the director believes to be the best interests of
the company.
i. good faith, best interest. By deciding not to do something
may constitute an act.
b. Duty is owed to the company (what does the company mean?)
i. Equated to the interests of the shareholders.
c. S 132 – employees are to be considered?
d. When the company is insolvent, company is not equated with the
creditors, not the shareholders. Same if they are NEAR insolvency.
e. What does good faith/best interest mean?
i. Directors must act for a proper motive what the director
honestly believes is in the company’s best interests.
Suggests a subjective test (might be able to justify this by
the business judgment rule). However, even subjective
decisions are subject to review by the court,
ii. Before codification, there was support of an objective test 
1) S 131
Hutton v West Cork
- “Bona Fides jor good faith cannot be the sole test, otherwise you might
have a lunatic conduction the affairs of the company and paying away its
money with both hands in a manner perfectly bona fide yet perfectly
irrational.”
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Fletcher v National
- Must be some objective gloss over this test.
“What the director believes on reasonable grounds” was removed on the
drafting on the bill, despite that, the courts are still reading an objective gloss.
Can take a number of different forms, at the widest, the court would will take
into account “if it was in the company’s best interests” (widest) or, what would a
reasonable board member do. Making this decision, or is this a decision would
no reasonable director would make? (narrowest).
Vercauteren v B-Guided
- One-person company, the shareholder suggests they are paid dividend.
Court accepted an objective gloss.
- “Unless the action was one that no director with any understanding of
fiduciary duties could have taken” – sole shareholder shouldn’t be paying
out dividends to himself if they are also the director.
“The subjective nature of the duty reflects the reluctance of the Courts to –
second-guess directors’ commercial decisions. The Courts will generally
presume that acts have been done in good faith, unless the action was one
that no director with any understanding of fiduciary duties could have taken:
Australian Growth Resources Corp Pty Ltd v Van Reesema. Where a director
acts in a way that no director with any understanding of fiduciary duties
would act, that director’s belief that an action was in the best interests of the
company will not prevent a finding of a breach of duty: Shuttleworth v Cox
Bros & Co.
-
The standard under s 131 is a combination of subjective and objective
standards [see Sojourner v Robb at [102]]
Hedley v Albany
- Designing products, for investing in commercial property.
- Albany power was really successful.
- The other company wasn’t (Another Co).
- Proposal was “why don’t we merge companies together, so the success of
Albany would enable all shareholders to get a return”.
- Complete disaster, merged company failed. We now have very unhappy
shareholders and are looking to sue directors for a breach of s 131 (not
acting in good faith or best interests of Albany Power)
- Objectively – directors should have look at prospects, assessed options of
both company’s (risks), should have compared each option. No evidence
directors have done that, arguable breach.
- In the second Hadley case, liquidators thought about this, they thought it
was impossible to prove a breach of s 131.
- Court reviewed process, held directors were under a conflict of interest,
and because this was here, they were able to form a judgment for what
was in each companies’ best interests. They doubted if they had disclosed
the conflict it would have been enough. Court directed liquidators to sue,
Directors settled.
Sojourner v Robb
- Company had few debts, also entered into bad contract with Mr. S.
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-
-
-
What the directors proposed to do, was to sell all Assets to a new
company they formed. This was enough to repay all debts, but apart from
Mr. S for breach of contract.
Put first company in liquidation.
Objective test and confirmed when a company are near insolvency, the
interests turn to the interests of creditors (Mr. S). Trial judge found a
breach of s 131
Confirmed by CoA.
“[98] Directors of a company who are also the only shareholders of the company
do not naturally believe that the best interests of the creditors of the company
are the best interests of the company. ...
[102] In this context, the standard in s 131 is an amalgam of objective standards
as to how people of business might be expected to act, coupled with a subjective
criterion as to whether the directors have done what they honestly believe to be
right. The standard does not allow a director to discharge the duty by acting
with a belief that what he is doing is in the best interest of the company, if that
belief rests on a wholly inappropriate appreciation as to the interests of the
company. If a director believes that the duty to act in the best interests of the
company is a duty always to act in the best interests of the shareholders, and
never in the interests of the creditors, in a situation of doubt as to the solvency
of the company, the director cannot be said to be acting in good faith. Creditors
are persons to whom the company has ongoing obligations. The best interests of
the company include the obligation to discharge those obligations before
rewarding the shareholders.”
Mr and Mrs. R were the directors and shareholders of Company A, a boatbuilding and engineering company. Upon realising that Company A would be
unable to complete two large contracts to build luxury yachts for the plaintiffs,
the R’s sold the assets of Company A to Company B. Company B was a
phoenix company that the R’s also owned and controlled. Company A
subsequently went into liquidation. The plaintiffs bought an action against the
R’s for breach of their s 131 duty owed to Company A. The plaintiffs alleged
that the assets of Company A were sold to avoid liability to the plaintiff’s as
contingent creditors. The Rs claimed that the ‘hiving down’ was in the best
interests of the Company A as a legitimate alternative to liquidation.
The plaintiffs’ claim was upheld. Fogarty J noted that directors’ duties are owed
to the company, and that typically means the shareholders. However, as a
company nears insolvency, the interests of shareholders should be replaced with
the interests of creditors (in line with Nicholson v Permakraft). This is because
shareholders are unlikely to receive a distribution on liquidation and so
creditors have the keenest interest in a company’s performance.
Fogarty J stated that the standard in s 131 is an amalgam of objective standard
as to how people of business might be expected to act, coupled with a subjective
criterion as to whether the directors have done what they honestly believe to be
right. Section 131 does not allow a director to discharge the duty by acting in
the belief that what he or she is doing is in the best interests of the company, if
that belief rests on a wholly inappropriate appreciation of the interests of the
company. As the Rs mistakenly did not consider the interests of Company A’s
creditors, they were not acting in good faith even though they thought they
were acting in the best interests of Company A. The Court also found that
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Company A had been sold at an undervalue, as the purchase price did not
account for goodwill.
In relation to remedies, the court confirmed that the equitable remedy of
account of profits is available against the directors for breach of s 131.
Madsen-Reis
- Company’s assets included money that it had lent to a director.
- Included in its debts – money that it owed to a family trust
- Decided to put in liquidation – liquidator would have sued to repay the
debt, and the director’s family trust would have been an unsecured
creditor and would have got what is left over.
- However, this money owed was used to remove the debt that the director
(personally) had accumulated.
- Court held this was a breach of s 131 – acting in his own personal
interests (also lent money to family etc other further breaches)
Lecture 7
Superior Blocklayers v Bacon
- One-person company
- Sole director paying wages to himself, unfortunately company was
insolvent at the time. Creditor interests are paramount.
Fassihi v Item Software (EWCA)
- Equitable duty of good faith
- Item was seeking to renew contract. It managing director was confident
company would be successful. Took hard approach to negotiations.
- Mr. F was a senior executive, and in a fiduciary relationship, he entered
the negotiations. He was unsuccessful, if he was successful, he would be
breaching duties.
- Item didn’t get renewal of the contract, and it was suing Mr. F.
- Court held that Mr. F was under a fiduciary duty to advise his own
company of his misconduct in the negotiations. s131 is wide, must tell
company of breaches made.
S 131 (2) (3) (4) …
- (2) – wholly owned subsidiary – if constitution, can act in the parent
companies’ best interest, not subsidiary.
- (3) – partially owned subsidiary – can act in the interest of the company
who owns most shares
- (4) – act in the interest of one of the shareholders.
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If breach of 131 – director may be personally liable, if insolvent – liquidator can
enforce that right – s 301. May be able to get an injunction (s 164) or get an
order for the director to carry out an act. S 174 – prejudice to act?
2) S 133
- Director must exercise their directorial powers for a proper purpose.
- Stems from an equitable doctrine.
Piercy v S Mills and Hogg v Cramphorn
- Issuing to many shares – to raise more capital
- In Piercy was misused – issued shares to themselves to increase their
voting division
- In Hogg, issues to friendly shareholders for a takeover.
o Both improper purposes.
Hogg v Cramphorn Ltd –
- As this and the following cases illustrate, the question of what a proper
purpose is commonly arises in the circumstances of a takeover bid
- B made a bid to takeover C Ltd by buying a majority of C Ltd’s shares.
Honestly believing the takeover was not in the best interests of C Ltd, its
directors devised a scheme to thwart the bid. They set up a trust and
issued preference shares with ten votes per share to the trust, giving it
more votes than majority shareholders. This meant the directors would
retain control of C Ltd even if B obtained a majority of the shares. B,
through his accomplice the plaintiff, applied to have the share issue
declared void. He alleged the directors had used their power to issue
shares for an improper purpose, namely, to defeat the bid.
- The Court agreed with B. Directors have a duty to use their powers for
the purpose for which they were intended (that is, a proper purpose). An
exercise of powers for an improper purpose will be set aside even if the
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directors act in good faith and what they believed to be the interests of
the company. Acting to avoid a takeover was not a proper purpose to
exercise the power to issue shares, even though the directors believed
they had acted in the best interests of the company. Directors are entitled
to manage the company, even to make decisions that the majority of the
shareholders are opposed to. However, they may not interfere with the
shareholders’ constitutional rights. In this case, the directors have
interfered with the constitutional rights of the majority shareholders by
diluting their voting power
Howard v Ampol and Eclair Group v JKX Oil
This is the leading case [before Eclairs?] on the duty of directors to act for a
proper purpose. The defendant and another company collectively owned around
55 per cent of the shares in M Ltd. Both the plaintiff and the defendant wanted
to take over M Ltd and made bids for its shares. The plaintiff’s bid was higher
and was supported by the directors of M Ltd. However, as long as the
defendant and its associate had a majority of the shares, the plaintiff could
never succeed. The director’s issues 4.5 million shares to the plaintiff,
purportedly to raise capital for M Ltd. This increased the number of M Ltd
shares, removed the defendant’s majority shareholding and put the plaintiff in a
position to buy a majority of M Ltd shares. The defendant applied to have the
share issue set aside on the grounds that it was improper use of the directors’
power to issue shares.
In the Supreme Court of NSW, Street J held that the actual purpose for which
the shares were issued was not to raise capital, but to assist the plaintiff in its
takeover. As such, it was an improper use of the power to issue shares.
The Privy Council agreed. It set down the following test for determining when a
power has been exercised for a proper purpose. First, the court must look at the
nature of the power and the limits on its use (generally ascertained from the
company’s articles of association). Secondly, the court will objectively examine
the substantial purpose for which the power was actually exercised (recognizing
that there may be more than one purpose). If this purpose does not fall within
the limbs of its use, it is an improper purpose. In this case, there were a number
of valid purposes for which M Ltd’s directors could exercise their power to issue
shares, including to raise capital. However, the substantial purpose was to
destroy the defendant’s majority shareholding and assist the plaintiff’s takeover.
This was not a proper purpose for exercising the power to issue shares. It was
not relevant that the directors had acted in good-faith: Hogg v Cramphorn.
-
Mixed Purposes
Eclairs – UKSC disagrees on the appropriate test. [2016].
The Supreme Court held that the proper purpose rule is concerned with abuse
of power: a company director must not, subjectively, act for an improper reason.
Under article 42 of the company’s articles of association, the power to restrict
the rights attaching to shares is ancillary to the statutory power to call for
information under s 793 of the Companies Act (UK). Article 42 has three closely
related purposes:
1. To include a shareholder to comply with a disclosure notice;
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2. To protect the company and its shareholders against having to make
decisions about their respective interests in ignorance of relevant
information; and
3. As a punitive sanction for a failure to comply with a disclosure notice.
Seeking to influence the outcome of shareholders’ resolutions or the company’s
general meetings is no part of those proper purposes. The proper purpose rule
applies to article 42. It was irrelevant whether Eclairs and Glengary could have
averted the imposition of restrictions on their rights as shareholders by giving
different answers to questions. The proper purpose rule is the principal means
by which equity enforces directors’ proper conduct and is fundamental to the
constitutional distinction between board and shareholder.
Lord Sumption was concerned about the position where: “there are multiple
purposes, all influential in different degrees but some proper and others not”.
His preferred solution (with which Lord Hodge agreed) was that a causation
based “but for” test should be applied to whether the improper purpose caused
the exercise of power. In his view “if there were proper reasons for exercising
the power and it would still have been exercised for those reasons even in the
absence of improper ones, it is difficult to see why justice should require the
decision to be set aside. He cited with approval the HCA’s test that the improper
purpose must be ‘causative’. He also drew support from obiter dictum of Lord
Wilberforce in the leading case of Howard Smith Ltd v Ampol Petroleum Ltd.
3) S 134
Director to comply with Act and constitution –
- Director of company must not act, or agree to the company acting, in a
manner that contravenes this Act or Constitution of the company.
o Section imposed statutory duty of compliance.
4) S 137
- Duty of care of the director
o Traditional view shareholders are responsible for their choice of
director (must be best director)
Re City Equitable Fire Insurance
- Court concern was that directors acting honestly, must acquire some skill
of diligence, but court didn’t expect much.
- Court took subjective approach from what to expect from the director.
- Don’t have to attend board meetings.
- Must be a degree of trust to act honestly. At 427 – 430
Largely due to the nefarious activities of its managing director, City Equitable
went into liquidation. The company had suffered massive losses through bad
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loans, poor investments, and the paying out of dividends from its capital. The
liquidator sued the remaining directors of the company to recover the losses.
He alleged that although the directors had acted honestly, they had been
negligent in allowing these transactions to proceed and were liable for the
subsequent losses. City Equitable’s articles of association contained a clause
‘exempting’ the directors for willful neglect or default.
Ultimately, the directors were found not liable in negligence or, if negligent,
were protected by the exemption clause. However, the case is invariably cited
for the following propositions formulated by Romer J on the duty of care, skill
and diligence owed by directors to the company:
1. A director must take the ‘reasonable care’ an ordinary person would take
in managing his or her own affairs. So long as a director acts honestly, he
or she will only be liable for gross negligence. In effect this means a
director is not required to take all possible care and will not be liable for
mere errors of judgment;
2. The degree of skill required from a director is that which ‘may reasonably
be expected from a person of [the director’s] knowledge and experience’;
and
3. The degree of diligence required is low. A director is not required to give
continuous attention to the affairs of the company nor to attend all
meetings.
“In discharging the duties of his position thus ascertained a director must, of
course, act honestly; but he must also exercise some degree of both skill and
diligence. To the question of what is the particular degree of skill and diligence
required of him, the authorities do not, I think, give any very clear answer. It
has been laid down that so long as a director acts honestly he cannot be made
responsible in damages unless guilty of gross or culpable negligence in a
business sense. ...
There are, in addition, one or two other general propositions that seem to be
warranted by the reported cases: (1.) A director need not exhibit in the
performance of his duties a greater degree of skill than may reasonably be
expected from a person of his knowledge and experience. A director of a life
insurance company, for instance, does not guarantee that he has the skill of an
actuary or of a physician. In the words of Lindley M.R.: "If directors act within
their powers, if they act with such care as is reasonably to be expected from
them, having regard to their knowledge and experience, and if they act honestly
for the benefit of the company they represent, they discharge both their
equitable as well as their legal duty to the company": see Lagunas Nitrate Co. v.
Lagunas Syndicate [(1866) L. R. 1 C. P. 600, 612] ... (2.) A director is not bound
to give continuous attention to the affairs of his company. His duties are of an
intermittent nature to be performed at periodical board meetings, and at
meetings of any committee of the board upon which he happens to be placed.
He is not, however, bound to attend all such meetings, though he ought to
attend whenever, in the circumstances, he is reasonably able to do so. (3.) In
respect of all duties that, having regard to the exigencies of business, and the
articles of association, may properly be left to some other official, a director is,
in the absence of grounds for suspicion, justified in trusting that official to
perform such duties honestly.” At 427 – 430 per Romer J
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Present view is
professionalism…
that
directors
must
show
some
degree
of
skill
and
Daniels v Anderson
- Company audited lack of proficiencies of internal results.
- Auditors wanted to cross claim against directors, for contributory
negligence on their own oversight of the company.
- First, directors owe a duty of care must be established, which extended to
having proper records and controls, and also the monitoring of those
records.
- Because this was a contributory negligence claim, auditors argued that
the director’s duty was tortious (historically is was equitable – problem)
- All directors subject to a duty of care which require positive acts, subject
to a duty of diligence, and that some directors there would be a duty of
skill.
o Page 47 – Francis v United Jersey Bank – gave meaning to what is
expected for a duty of care. “Should acquire a rudimentary
understanding of the business.”
o “Continuing obligation to keep informed about the activities of the
corporation.”
o “Directors may not shut their eyes to corporate misconduct”
o “Directors monitor corporate affairs and policies.”
o “If director does not correct an illegal action, he must resign.”
o “Actively partake in decision making”
This Australian case is the leading case on director’s common law duty of care.
The Court made important observations about delegation and non-delegable
obligations of the board.
AWA was an importer of electronic goods. To protect itself against currency
fluctuations it began to ‘hedge’, that is, purchase foreign currency in advance. K
was given responsibility for the hedging operation. There was inadequate
supervision and control of K and proper records were not kept. While it
appeared that AWA was making massive profits, in fact K was hiding loses of
$49.8 million. AWA’s auditors warned management about the lack of
supervision, but not the board. AWA sued the auditors for negligence. In turn,
the auditors sued the chief executive of AWA and three non-executive directors,
claiming they were contributorily negligent and also liable for the loss.
In the first instance, Rogers CJ held that the auditors had been negligent, and
that AWA’s own negligence in failing to control K had also contributed to the
loss. Both parties appealed. The issues on appeal included:
1. Whether the directors owed a common law duty of care to the company
(requiring an objective ‘reasonable person’ standard, rather than a more
lenient standard set down in Re City Equitable); and
2. Whether the directors were entitled to rely on the advice of senior
management, who failed to control K or advise the board of the lack of
controls on K.
By a 2:1 majority, the Court held that the subjective test was outdated.
Directors are now required to take reasonable steps to place themselves in a
position to guide and monitor the management of the company, evaluated
objectively. A director may not rely on the judgment of others, including that of
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senior management and auditors. Where directors elect to delegate powers,
sufficient controls must be put in place to ensure that power is not abused and
that problems can be identified. Ignorance or failure to inquire will not protect
directors against liability for actions taken by delegates which they failed to
supervise, especially where the director has notice of mismanagement.
Executive and non-executive directors were under the same duty and standard
of care.
The Court held that the executive and non-executive directors of AWA, and
AWA’s auditors, had been negligent.
Sections 137/138 of the CA93 set down the duty of care, skill and diligence
required of directors, and the extent to which they can rely on the advice and
information supplied by others.
Commr of Taxation v Clark
- Family building business
- Mrs. C was sole director – left every decision-making opportunity to her
husband.
- Husband – de facto director – Mrs. C was in breach of s 137.
- Applicable to every director
Page 48 (Daniels) – may be appointed based on skill – not the same test for
every director in regard to a duty of care/awareness.
- However, they have to display that special skill they are appointed for.
(a) – clear distinction between private and public
companies. Director of public company is a
professional director – has special skills. More support
services are available to a director of a public
company. Actual business the company is involved in
will be important. Have different risks.
(b) Importance to the company – continue to trade even
though facing financial difficulties.
(c) Executive and our non-executive directors. Executive
are employed by the company and will bear certain
skills. Not only delegated, but tasks that they actually
must perform day-to-day.
R v Moses (HC AKL)– confirming importance between executive and nonexecutive (handout quote)
“Any director, when exercising powers or performing duties as a director, is
required to exercise the care, diligence and skill that a ‘reasonable director’
would exercise in the same circumstances [s137]. At face value, the notion of a
‘reasonable director’ does not draw any distinction between those who act in
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executive or non-executive capacities. However, in determining whether the
appropriate degree of care has been applied, ‘the nature of the responsibilities
undertaken by’ the particular director can be taken into account [s 137(c)].”
Grant & Khov v Johnston [NZCA]
- Company was placed in liquidation. Owed significant debts to the IRD.
Liquidator arguing many breaches – company had been insolvent since 1 st
Feb 2008 – directors have no reasonable grounds the company would
become solvent again.
- Also arguing directors failed to take steps to guide management of
company (Mr. Andrews – sole shareholder)
- Mr. J was investment banker – purchased shares end of 2009.
- COA focused on actual role Mr. J performed. Court found individual
directors were responsible in individualised ways. [46] Standard is
objective – performance measured by reference to the reasonably
competent director.
- [60] Mr. J was a non-executive director. COA held initially he made
careful inquiries in purchasing shares, but was misled by Mr. A on the
state of the business. No way of knowing company wasn’t paying PAYE.
- 6 months later, mid 2010, Mr. J was aware of company’s difficulties,
aware of Mr. A’s managerial weaknesses. He was entitled to believe…
- 6 months later, start 2011, court concluded Mr. J was in breach of s 137 –
had been a director for a year – he was aware Mr. A made false promises,
was aware he was getting misleading advice, knew enough to be
suspicious on any advice that tax was being paid.
- Court held Mr. J should have known the company cannot incur more
debts, and that either he should have sought Mr. A’s resignation, or he
should have resigned as director, so he was no longer controlling the
company.
- Even though Court found breach of 137, court made no award against
him (s 301). Reason – he had already lost a lot of money, was too trusting
in Mr. A, suggested IRD knew enough so they should have taken action.
Lecture 8
Delegation of powers
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-
Under s 130
o Gives power of Board to delegate ‘board-type’ powers to other
individuals.
o There are some restrictions however, those being things like –
name change, issuing shares etc.
S 130 (2)
 Pima facie imposing responsibility on the board of the
delegates, unless (a) and (b) – compliance/conformity and
monitoring. (b) – influence of Daniels on our law.
Under s 138
o More on ability of directors to rely on information that they are
given.
o Must rely on reasonable grounds that they are reasonable and
competent advisors (objective test).
o (2) – act in good faith, makes proper inquiries (monitoring), has no
knowledge that such reliance is unwarranted.
 Good faith here is different in regard to 131 than this ‘good
faith’ in s 138.
o
-
R v Moses (HC AKL)
- Failed finance company, false statements
- Similar obligations about due diligence and reliance
- Ability to rely on senior management, negates the idea that you can
automatically rely on a decision from a senior management.
- “Clients instruct, advisers advise.”
- Some assessment must be made of the primary information.
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“Senior management will be delegated tasks by the directors. Subject to
adequate monitoring of management by the directors or anything that may
put a director on notice of the need for further inquiry, [see s 138(2)(b) and
(c)] reliance on information provided by management in their delegated
areas of authority will generally be appropriate. But every reliance inquiry
will be fact specific, taking into account both the obligations and
responsibilities of particular directors and the nature of the tasks delegated
to members of the management team.”
“Professionals such as solicitors, accountants and valuers respond to
instructions provided by a client. Clients instruct; advisers advise. The
quality of any advice is only as good as the information provided to the
professional, on the basis of which he or she is asked to advise. In
considering the extent to which directors are entitled to rely on external
advice, some assessment must be made of the prime information on which
the adviser acted and whether he or she was on inquiry as to the accuracy of
that information.”
AWA v Daniels - Rogers CJ
- We expect more from the chair more than other directors. Primary
obligations are more serious for the chair.
“The chairman is responsible to a greater extent than any other director for the
performance of the board as a whole and each member of it. The 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. In discharging his or her responsibilities the
chairman would cooperate with the managing director if the two positions are
separate or otherwise with senior management ... .”
R v Moses (HC AKL)
- Chair is not just a figurehead, more is required.
“A chairman is not just a figurehead. His or her role involved leadership. A
chairman has the primary obligation of ensuring that the agenda for a meeting
is properly formulated, guiding discussion and ensuring that the meeting is
conducted efficiently and effectively.”
“The term ‘non-executive director’ is used to refer to a person who has no
executive functions to fulfil, in relation to the company‘s day-to-day operations.
Nevertheless, in carrying out his or her duties as a director, the non-executive
must ensure that he or she has enough information on which to make an
informed decision. It is not enough to rely on an executive director to bring
something to the attention of the board, if it is clear that information on a
particular point is relevant to a decision. Once sufficient information is
available, the non-executive director‘s duty will be discharged through the
provision of ‘independent judgement and outside experience and objectivity, not
subordinated to operational considerations, on all issues which come before the
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board’ [see: The Institute of Directors in New Zealand (Inc), Code of Practice
for Directors (2005) at para 3.7].”
What about non-executive employees – brought in externally. (R v Moses) – they
have to make independent judgements, cannot rely on executive directors to
bring all information to them.
ASIC
-
-
-
v Macdonald
James Harvey group of companies in AUS.
Used asbestos in the 60’s/70’s – have claims against them
Uncertainty surrounding the quantum of damages was causing
uncertainty for the share price.
Directors decided it was in the interest of the company to resolve this
uncertainty, funded foundation to deal with the claims.
Gave press release, which was later found misleading because they
indicated they have enough funds to compensate each claimant. But the
foundation money wasn’t enough.
CEO was found to be breaching a duty of care, should have picked up on
the misleading press release.
All directors had been advised on how important this press release was,
so they would have all known if it was misleading, company would be
sued. (reputational damage). [260] – this was not a matter in which a
director was entitled to rely upon those of his co-directors.
[261] – can’t rely on management, all they had to do was read the press
release
[333] – This was a board matter, not a management matter.
[335] – no reasonable director would have voted for this.
Went to COA
- Upheld appeal on evidentiary matters.
“[258] The directors ... had been alerted to the potential liability of a company
making statements, false in a material particular or materially misleading under
Section 999 ... .
[259] All of the non-executive directors including Mr O’Brien knew or should
have known that if JHIL made the statements as to the sufficiency of funding of
the Foundation in the Draft ASX Announcement there was the danger that JHIL
would face legal action for publishing false or misleading or misleading or
deceptive statements, its reputation would suffer and there would be a market
reaction to its listed securities.
[260] This was not a matter in which a director was entitled to rely upon those
of his co-directors more concerned with communications strategy to consider
the Draft ASX Announcement. This was a key statement in relation to a highly
significant restructure of the James Hardie group. Management having brought
the matter to the board, none of them was entitled to abdicate responsibility by
delegating his or her duty to a fellow director.
[261] Nor was this a case of reliance upon management, a co-director or expert
adviser. Management had sought the board’s approval and the task of approving
the Draft ASX Announcement involved no more than an understanding of the
English language used in the document. ....”
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...
[332] ... Management having indicated that it would bring a draft
announcement to the board in January 2001 and having done so at the 15
February 2001 Meeting, it was part of the function of the directors in
monitoring the management of the company to settle the terms of the Draft ASX
Announcement to ensure that it did not assert that the Foundation had sufficient
funds to meet all legitimate compensation claims; that it did not state that the
Foundation provided certainty for people with a legitimate claim against Coy
and Jsekarb [the subsidiary companies]; and that it did not state that the
Foundation was fully funded.
[333] This was not a matter of operational responsibility. These directors had no
qualms about a request from management to consider the content of a press
statement announcing the formation of the Foundation. And nor should they
have had. The formation of the Foundation and the separation of Coy and
Jsekarb from JHIL were potentially explosive steps. Market reaction to the
announcement of them was critical. This was a matter within the purview of the
board’s responsibility: what should be stated publicly about the way in which
Asbestos Claims would be handled by the James Hardie group for the future.
[334] ...
[335] A reasonable person, if a director of a corporation in JHIL’s circumstances
who occupied the office of non-executive director and had the same
responsibilities within the corporation, would not have voted in favour of a
resolution that JHIL approve the Draft ASX Announcement and JHIL authorise
the execution of the Draft ASX Announcement and send it to the ASX.
[336] Mr Brown, Ms Hellicar and Mr Willcox [non-executive directors] failed to
discharge their duties to JHIL with the degree of care and diligence that a
reasonable person would exercise, if they were a director of a corporation in
JHIL’s circumstances and occupied the office of non- executive director, and had
the same responsibilities within the corporation, by voting in favour of the
above resolutions in the manner voting was conducted by the board of directors
of JHIL. That failure constituted a breach of Section 180(1).”
Peoples Department v Wise (Canada)
- Talk about a reasonable prudent director (in their act)
- Make the point – we don’t accept perfection, can make the wrong
decisions, all we want for them is to make reasonable business decisions.
Or not such an unreasonable decision that no-one would have made it.
“Directors ... will not be held to be in breach of the duty of care ... if they act
prudently and on a reasonably informed basis. The decisions they make must be
reasonable business decisions in light of all the circumstances about which the
directors .. knew or ought to have known. In determining whether directors
have acted in a manner that breached the duty of care, it is worth repeating
that perfection is not demanded. Courts are ill-suited and should be reluctant to
second- guess the application of business expertise to the considerations that
are involved in corporate decision making, but they are capable, on the facts of
any case, of determining whether an appropriate degree of prudence and
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diligence was brought to bear in reaching what is claimed to be a reasonable
business decision at the time it was made.”
Hedley v Albany Power Centre / FXHT Fund Managers v Finnigan (COA)
- Because 137 is common law and statutory based, issues of causation and
remoteness will be determined in a common law fashion.
- Need to show causation
- [30] Hedley, [28] FXHT – common law notions of causation.
In this case on the same matter at (82 – previous Hedley case), the Court was
asked to give guidance to APC’s liquidators on the correct approach to
causation and the assessment of loss in relation to the alleged breaches of ss
131 and 137.
Wild J confirmed that, as the s 131 duty to act in good faith is fiduciary in
nature, the remedies are similar to those available for breach of trust, that is,
equitable compensation and account of profits. A director is liable to
compensate for all losses that would have occurred ‘but for’ the breach and all
gains made as a result of the breach. The onus is on the director to prove the
lack of a causal link between the breach and the loss or gain.
Section 137, on the other hand, is more akin to obligations in tort. To assess
loss, causation and remoteness will be determined in the same way as in tort,
though with appropriate case. The onus is on the plaintiff to prove the
necessary causal link between the breach and the loss.
However, with equitable sections (s 131 and the like, consequences follow with
an action.)
FXHT Fund Managers Ltd (in liq) v Finnigan
- This case illustrates that non-executive directors not involved in the dayto-day running of the company are still required to take positive steps to
discharge their obligations under CA93.
- FXHT was a company that managed private investments in foreign
exchange markets. O agreed to act as a non-executive director for FXHT
while H, another director, made the day-to-day management decisions of
the company. H was responsible for the financial affairs of the company
and ran the business without needing authorisation from O. For his part,
O inquired weekly as to the company’s performance and H always
assured him that things were going well. In 2006, O discovered that H
had been fraudulently misappropriating client funds. FXHT was
subsequently put into liquidation. Here, the liquidators contended that O
had breached ss 131, 133, 135, 136 and 137 of the CA93.
- The Court rejected the claims that O had breached ss 131, 133 or 136. O
had acted in good faith. He incorrectly but genuinely believed there were
limited risks with the business and, once he discovered H’s indiscretions,
he acted swiftly to protect investors’ funds. Nor had O acted for an
improper purpose. The Court was careful to distinguish this case from the
narrow set of facts under which breaches of s 133 typically arise.
Furthermore, O had not breached s 136 because he had no reason to
believe that H would misappropriate client funds.
- However, the Court agreed that O had breached ss 135 and 137. The test
under both duties is objective. O had allowed H to operate the business
without adequate supervision and failed to ensure proper reporting
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systems were put in place and this created a serious risk of substantial
loss. Even accepting reasonable constraints on a non-executive director
of a small business with only two directors, and allowing for a degree of
informality, O’s actions fell well short of what could reasonably be
expected of a director. O was ordered to contribute to the assets of FXHT
in liquidation.
S 138(A) –
- Criminalizes some breaches of s 131
- Hard to prosecute on.
I. Self-Interested Transactions
Duties – self-interest behaviour (transactions where director contract with
company etc.)
-
Trustees cannot contract with themselves (conflict of interest)
o Ex p James
 It is not permitted. (Background case)
 “This doctrine as to purchases by trustees, assignees, and
persons having confidential character, stands much more
upon general principle than upon the circumstance of any
individual case. It rests upon this; that the purchase is not
permitted in any case, however honest the circumstances;
the general interest of justice requiring it to be destroyed in
every instance; as no Court is equal to the examination and
ascertainment of the truth in much the greater number of
cases. The principle has been carried so high, that where a
trustee in a renewable lease, endeavored fairly and honestly
to treat for a renewal on account of the beneficiary, and, the
lessor positively refusing to grant a renewal for his benefit,
the trustee, as he very honestly might under these
circumstances, took the lease for himself, it was held, that
even in such a case it is so difficult to be sure there was not
mismanagement, a difficulty, that might exist in much
greater degree in many other cases, having the same aspect,
that the lease taken by the trustee from a person who would
not renew for the benefit of the beneficiary, should be
considered taken for his benefit; and should be destroyed
rather than that the trustee should hold it under those
circumstances.”
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Aberdeen v Blaikie
- Company case, not trust
- Director is a fiduciary; self-dealing rule applies to them.
- Cannot buy from the company
- No reason for the company to change these ‘default rules’ in the
constitution.
“A corporate body can only act by agents, and it is of course the duty of those
agents so to act as best to promote the interests of the corporation whose
affairs they are conducting. Such agents have duties to discharge of a fiduciary
nature towards their principal. And it is a rule of universal application, that no
one, having such duties to discharge, shall be allowed to enter into
engagements (i.e., contracts made with the beneficiary] in which he has, or can
have, a personal interest conflicting, or which possible may conflict, with the
interests of those whom he is bound to protect. So strictly is this principle
adhered to, that no question is allowed to be raised as to the fairness or
unfairness of a contract so entered into.”
B Bros had a contract to supply with 400 0 tonnes of railway chairs. It had
supplied 2700 tones when A Co refused to take any more. B bros sued for
specific performance, or alternatively, damages for breach of contract. T was
the chairman of directors of A Co when it entered into the contract – he was
also a partner in B Bros. In its defence, A Co claimed that T had a conflict of
interest which made the contract invalid.
The House of Lords held for A Co. Lord Cranworth set out the duty of directors
not to conflict their personal interests with those of the company in this classic
statement.
… it is a rule of universal application that no one having such duties to
discharge shall be allowed to enter into engagements in which he has or
can have a personal interest conflicting, or which may possibly conflict
with the interests of those whom he is bound to protect.
T had a clear conflict in the transaction. On the one hand, he had a duty to get
the chairs for A Co at the lowest price. On the other hand, he had a personal
interest, as a partner in B bros, to see the chairs sold for the highest price. The
two interests were incompatible. The rule is applied strictly. It did not matter
that T was only one of a number of directors of A Co and others may have
believed the price was fair. T having breached his duty; the contract was
voidable at the option of the company.
The CA93 now allows directors to transact with the company if they disclose
their interest in the transaction and restricts the right of the company to avoid a
transaction a director is interested in: ss 139-144.
Interested director can vote upon transactions (s 144). But these must be
disclosed to shareholders (s 140). Under 141 – have a 3-month period to avoid
the transaction if it doesn’t bear fair value.
S 139 – “Interested” definition
- ‘Interested if and only if’ (narrow), but then widens.
- Is a party to, or will derive a material financial benefit from the
transaction?
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o
Other list under this section that defines ‘interested’.
“A corporate body can only act by agents, and it is of course the duty of
those agents so to act as best to promote the interests of the corporation
whose affairs they are conducting. Such agents have duties to discharge
of a fiduciary nature towards their principal. And it is a rule of universal
application, that no one, having such duties to discharge, shall be allowed
to enter into engagements (i.e., contracts made with the beneficiary) in
which he has, or can have, a personal interest conflicting, or which
possible may conflict, with the interests of those whom he is bound to
protect. So strictly is this principle adhered to, that no question is
allowed to be raised as to the fairness or unfairness of a contract so
entered into.”
If interested, disclosure regime applies.
S 140 –
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S 373(2) - liable to a fine not exceeding $10,000 (to the company?)
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Lecture 9
Sojourner v Robb (read)
-
-
Sold assets of aeromarine 1 to aeromarine 2
With money they had, they paid off the key liabilities of aeromarine
1(bank debt)
Trade creditors were paid off (wanted them to be happy)
Debt to related companies
They ran out of money from the sale of the business for Mr. S and Mr. H
Have a claim against the company but the company has no assets.
Mr. S unhappy, employed council to look at dealings, found an asset that
was not paid for (in the good will of the company)
o Seek to bring a claim against the directors
[24] – Must look at each of their roles to determine liability (directors,
shareholders etc).
As directors could have walked away
As shareholders hold no obligations to anyone (could have put company
in liquidation if they chose to)
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-
As financial backers, no obligation to lend money, could have walked
away
If shareholders decided to liquidate, wouldn’t have been a director’s
decision, but they didn’t.
Robb’s become liable to Mr. S. (personally liable)
o What did Robb’s do wrong?
 Unsecured creditors should be equal (to trade creditors)
 Company was inherently profitable, could have continued to
trade with aeromarine 1, and paid back Mr. S
 Inherent conflict of interest – transferred wealth to
aeromarine 2 without paying all debts.
 However, preserved a valuable business, kept employees in a
job, and have paid most of creditors.
 [26] preserving value which would likely be lost in
liquidation. Able to pay trade creditors. Should be
looked at positively.
How can S preserve claim?
- All directors’ duties are owed to company, but not company that is suing
the Robb’s, it is S
- S 301 –
o Procedural section
o Arises when company in liquidation
o Liquidator and/or creditor to bring a claim (or shareholder if
director has wrongly breached duties or wrongly obtained
property)
o 301(b)(i) –
 Order defendant to repay or restore that money
 301(b)(ii) –
 Order director to pay compensation to company
(companies’ property) – company then pays who is
entitled.
 Typically, liquidator brings claim, typically for breach
of duty. Money will be distributed to unsecured
creditors
 301(c) –
o Payments can be made directly to the creditor if
the application is made by that individual
creditor. (Only applies to a (b)(i) type claim –
court gloss since duties are only owed to the
company therefore a (b)(ii) wouldn’t be
accurate)
o Liquidator didn’t bring claim as no money in the company’s
account to pay for litigation. S became plaintiff, wants money to be
distributed to creditors via company (him), or be paid directly to
him.
High Court
- Was a breach of 131 – not in good faith to sell company, or best interests
because whole scheme was designed to effectively allow the company to
still have debts, but no assets to repay the debts. Made the company
insolvent. Liabilities to Mr. S would exceed the assets.
- Scheme was designed to protect shareholders not creditors.
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-
-
CoA
-
P 97 – Goodwill definition – ‘benefit and advantage of the good name,
reputation and connection of a business. It is the attractive force which
brings in custom. It is the one thing that distinguishes an old established
business from a new business at the start’.
[34] – Mr. S thought goodwill was about $700,000 – evidence of third
party to make claim also bumped up to $900,000.
Breach as selling for undervalue therefore creditor had a worthless claim
Did breach actually cause a loss to the company though?
- Onus of proof is on S
- To show someone else would have paid more for the company. S
couldn’t do that, but court used a trust analogy, and in regard to
trustees, the onus is on them to prove the loss wasn’t caused by
them (or they hadn’t caused loss – prove they couldn’t sell to
anyone else for what they paid for it)
Robb’s status as shareholders
o As shareholders they could have made a resolution to say the
company is now in liquidation
 If they had done this, Robb’s would have been able to go to
liquidator and buy assets. (at best price e.g., lowest price
they could get)
 [63] – liquidation of company would have destroyed the
companies good will – no longer an ongoing concern, people
would just be buying tangible assets. No good will because
Mr. Robb’s expertise allowed for success. Sellers must assist
the new owner, won’t start competing business, and will
hand over expertise.
 If liquidated, there would be no obligation on Mr. R to hand
over these things, and could start a competing company
 There was no loss as Robb’s could have sought liquidation of
the company. One weakness of this argument is the Robb’s
as shareholders did nothing, but as directors they decided
the future of the business.
 As shareholders they could have done this, but they didn’t.
(we still need a breach)
o S 131 breach – self dealing (conflict of interest)
 Their role was to get the most for the business (A1), but for
A2, they wanted to get the least
 Why didn’t they bring a 139 claim? The plaintiffs would have
been A1 or A2. Mr. S doesn’t have the authority to say this is
a self-interested transaction.
o S 141 – do not remove equitable jurisdiction to remove self-interest
transactions
 Under equitable rules, sale could be voidable, must
therefore account for their profits
 Key consideration – fair value – 139 would therefore
protect the Robb’s. If they didn’t pay good value, selfinterest would account for their gain of A2.
 [31] – Must prove they paid fair value (139 – 141
regime)
Onus
on
directors
–
need
a
contemporaneously independent valuation
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Robb’s didn’t obtain valuation. Creditor claim
suggests company is worth more.
[42] – Robb’s had no entitlement of taking the assets
of A1 on a concessionary basis.
Equity – bring it under 131 – gives obligation to
compensate for any losses, and account for any profits
they made (A2 was profitable in the next year)
o


o
o
o
o
Ratification
 Duties under 131 are owed to company
 Shareholders in general meeting can ratify breaches
of director duties.
 Robb’s as shareholders couldn’t give excuse to the
Robb’s as shareholders. Once insolvent, the company
is the creditors, and the shareholders lack the
ratification ability.
S 301 – extends to gain-based remedies
 (b)(ii) – ‘compensation’ – would suggest for a loss opposed to
an account for profits. CoA held it could cover account of
profit not just for losses. Allows S to recover gains.
Valuing the profit
 [78]-[80] – talking about the fact that a director can’t go out
on a business venture himself, must be in best interest to
company. If happened, could hold on trust for company, or
sell but reimburse director for expertise. A2 gained profits of
$240,000
Valuing the goodwill
 Profit made on A2 and loss that A1 incurred was more than
what was owed to Mr. S.
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Arataki Properties Ltd (in liq) v Craig, CA Lecture 10
II. The Corporate Opportunity Doctrine:
Corporate Opportunities
1. What do we expect of Directors/senior managers?
-
To act in good faith for proper purposes
To display a standard of competency and diligence
Not to self-deal
What about competition?
-
Not supposed to compete unless authorization by company (general
presumption)
Can you act personally without authorization?
2. Advancing the company – complicating variables
-
What is the director’s (or senior executives) role in the company (should
the law expect more of some directors esp. executive directors?)
How did they learn of this opportunity?
o Through their Company
o As a conduit of the company
o Personal approach/public information
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-
Relevance of the opportunity to the Company
o Company already considering that opportunity
o Can the Company acquire/exploit the opportunity (“impossibility”
arguments)?
 Didn’t have resources
Can a director get around all this by resigning?
- Reason for resignation?
- Companies claim to the opportunity?
How
-
do we explain the result? (possible legal concepts)
No conflict rules
No profit rules
The opportunity was/or should be regarded as the company’s property
The information about the opportunity was/or should be regarded as the
company’s property
- Improper competition
- Other?
Possible remedies?
- Constructive trust (the opportunity is the company’s/allowance for skill)
- Account of profits/allowance for skill
- Damages for loss
Canadian Aero Service Ltd v O’Malley [1973] –
- O and V were senior associates in C Ltd. They were both heavily involved
in C Ltd’s bid to contract for the topographical mapping of Guyana.
However, both resigned from C Ltd and set up their own company, which
also sought the Guyana contract. Their company won the contract. Their
company won the contract. C Ltd sued O and V, alleging they had
breached their fiduciary duty to it by taking the contract opportunity for
themselves. In their defence, O and V argued that as executives (as
opposed to directors) they did not owe fiduciary duties to C Ltd. Further,
they had not sought the contract while working at C Ltd, and there was
no guarantee that C Ltd would win the contract, so it had not been
deprived of an opportunity.
- The Supreme Court of Canada held O and V liable to account to C Ltd for
their profits. Senior company officers as well as directors could owe
fiduciary duties to the company, particularly, as here, when acted as the
company’s agents in contractual negotiations. Delivering the Court’s
judgment, Laskin J noted that authorities such as Aberdeen Railway Co
and Regal and Industrial Development disclosed a rule prohibiting
directors and senior officers from usurping maturing business
opportunities which the company is actively pursuing and which they
have a fiduciary duty to acquire for their company. Importantly, his
honour held that this rule continued after the director or senior officer
had resigned if:
1. The resignation was promoted or influenced by the wish to
acquire the opportunity themselves; or
2. If it was the director’s or officer’s position with the company
rather than a fresh initiative that led him to the opportunity.
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-
O and V fell into both categories. The opportunity for the contracts arose
while they were employed by C Ltd. They had resigned to pursue the
contracts for themselves. The authorities established that a company
does not have to prove it could have acquired an opportunity to establish
liability. In any event, C Ltd had not given up hope of obtaining the
contract before it was awarded to O and V.
Keech v Sandford [1726]
-
Involves a business opportunity
Trustee held a lease or market site for an infant beneficiary
Lease was going to. Expire, trustee unsuccessfully applied to renew lease
Infant beneficiary couldn’t pay rent, neither could trustee.
Trustee acquired lease personally
Lord King said no, trustee will hold renewal on trust for infant. Became
absolute rule.
Rule must be strictly followed
English approach to absolutism. Trustee ‘must not’…
Right of renewal should be seen as trust property. Trustee
misappropriated trust property…
Conflict of interest, if trustee wanted to get lease personally, he. Wouldn’t
try renew lease for trust.
“I must consider this [renewal] as a trust for the infant; for I very well see, if
a trustee, on the refusal to renew, might have a lease to himself, few trust
estates would be renewed to beneficiaries; though I do not say that there is
fraud in this case, yet he should rather have let it run out, than to have had
the lease to himself. This may seem hard: but it is very proper that rule
should be strictly pursued, and not in the least relaxed, on refusal to renew
to beneficiaries.”
Regal (Hastings) v Gulliver
-
-
Applied Keech v Sandford
Regal’s directors sought to make Regal more. Attractive takeover target
but a larger business
Regal operated movie theatres. Plan was to acquire more theaters.
Through a wholly owned subsidiary company
Theatre’s said they’d only work with subsidiary if they could prove they
had enough money to continue to pay rent (finance worth 5000 pound)
Regal only had 2000 pound. Theatre’s said fine, only if you personally
guarantee the remaining 3000. Directors decided they didn’t want
personal guarantees. Rather some directors, a solicitor and some
outsiders subscribed for the extra 3000 shares.
Regal was therefore taken over by new shareholders. Bought all shares,
and in subsidiary too.
Shareholders made almost a 3-pound profit on each share (a lot) through
sale.
New shareholders, once they find out the other shareholders profited,
they sue that they misappropriated a corporate opportunity.
Pleaded old shareholders account for profit to new shareholders.
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-
-
-
Regal was actively exploring new subsidiary agreements, accepted in
board room. Old shareholders only got the opportunity to buy shares
because they were directors. They decided to acquire them personally.
Lord Russell – “The director must acquire the information about the
opportunity “by reason and only by reason of the fact” that he or she was
a director of the company.”
Irrelevant if fiduciaries acted in good faith
Irrelevant if Regal may or may not have been able to finance their shares.
R H Ltd owned a cinema. The directors of RH Ltd decided to acquire two other
cinemas and sell all three together. They formed a subsidiary company H Ltd to
acquire the other two cinemas. H Ltd’s directors were the RH Ltd directors with
the addition of Garton, RH Ltd’s solicitor. The owners of the two cinemas
required the H Ltd directors to personally guarantee the acquisition of the
cinemas. Initially it was planned that RH Ltd would be the sole shareholder in H
Ltd, holding all 5000 $1 shares, but RH Ltd was only able to afford $2000. The
H Ltd directors did not want to give guarantees, so RH Ltd took 2000-paid-up
shares and the H Ltd directors and their associates took the remainder between
them.
Later, the deal to sell all three cinemas fell through. Instead, the shares in both
RH Ltd and H Ltd were sold (so the companies changed hands). The H Ltd
shareholders received a handsome profit. The new owners of RH Ltd sued the H
Ltd directors for the profit made on the sale. They claimed the H Ltd directors
had used their position as RH Ltd directors to acquire the H Ltd shares and
male the profit for themselves. At first instance and in the CoA, RH Ltd’s claim
was dismissed.
The HOL unanimously reversed those findings. Strictly applying the principle
that a fiduciary may not use his or her position to make a personal profit, they
held the H Ltd directors liable to account to account to RH Ltd for the profit.
The H Ltd directors had used their position to acquire the shares, and as a
result received a profit. It was irrelevant to the application of the principle that:
the H Ltd directors acted in good faith; H Ltd could not have taken all the
shares, and that H Ltd also made a profit.
Boardman v Phipps.
-
-
Family company owned by family trust
Family company owns shares in AUS company, with another shareholder.
Mr. Boardman (solicitor) to trust - fiduciary
Tom Boardman (youngest son) of the trust. Manager of the family
company, and a residual beneficiary under family trust.
Mr. B’s job was to give business advice to trust.
Other shareholder in AUS company, approached trust, will you consider
selling your shares?
Mr. B concludes that the AUS company is underperforming, has. Valuable
assets that could. Be exploited. Discussions with family accountant, plan
was to get Tom appointed as director of AUS company. Other
shareholders rejected that.
Maybe trust should acquire another shareholding. Rejected by
accountant trustee, wasn’t an authorised investment, need court consent,
and trust might not have enough funds to buy other shares.
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-
One of shareholders lacked capacity.
Mr. B and Tom – if trust won’t do it, we will do it personally.
Made personal offers to buy some.
Shareholders decide to sell all shares to Mr. B and Tom. They agreed.
Mrs. Phipps passed away (life tenant in trust) only beneficiaries were
residual beneficiaries.
Mr. B wrote to other beneficiaries, can I buy them, however wasn’t full
disclosure.
Mr. B and Tom rationalize AUS company, sell assets, and made significant
capital dividends to trust and personally. Tom’s brother John came along,
found out how much they made, claimed they took a business opportunity
that was the trusts to take.
Court agrees, have to account for profit to trust.
-
Defaulting trustee can get allowance for skill.
Mr. B learned of information of AUS company in a role as trustee.
Legal whether John could advise whether the trust could get consent.
-
Industrial Development Consultants Ltd v Cooley - IDC employed C as its managing director. C pursued work for IDC,
including contract with the Eastern Gas Board (EGB). The EGB told C
that it would not award its contract to IDC and, instead, offered the
contracts to C personally. C resigned from IDC on the false grounds of
poor health. Shortly afterwards, he took up the contracts. IDC sued,
claiming C had breached his fiduciary duties and had made a profit. C
denied this, arguing he had received the offer privately (a similar defence
in Peso Silver Mines, although that case was not cited in argument), so
had no duty to disclose the offer to IDC. Further, the contract was never
available to IDC, so they had not suffered any loss.
- The Court held for IDC. Applying the principles established in Aberdeen
and Regal Hastings, the court found that C had breached his duty of good
faith not to conflict his personal interest with the company’s. He has
received information about the contracts and the offer while still being
the managing director of IDC. He had kept that information to himself
and taken the contract for his own purposes. It was irrelevant that IDC
may not have been able to obtain the contract (and the profits) for itself,
even though this would seem to give a windfall gain to the company. If C
was allowed to keep the profits, he would have benefited from
deliberately putting himself in a position where his duty to the company
and his personal interests conflicted. The principle against profiting from
self-interest is applied strictly. C was therefore liable to account to IDC
for his profits.
Bhullar v Bhullar “Like the defendant in Industrial Development Consultants Ltd v Cooley, the
appellants in the instant case had, at the material time, one capacity and one
capacity only in which they were carrying on business, namely as directors of
the company. In that capacity, they were in a fiduciary relationship with the
company. At the material time, the company was still trading, albeit that
negotiations (ultimately unsuccessful) for a division of its assets and business
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were on foot. As Inderjit accepted in cross-examination, it would have been
'worthwhile' for the company to have acquired the property. Although the
reasons why it would have been 'worthwhile' were not explored in evidence, it
seems obvious that the opportunity to acquire the property would have been
commercially attractive to the company, given its proximity to Springbank
Works. Whether the company could or would have taken that opportunity, had it
been made aware of it, is not to the point: the existence of the opportunity was
information which it was relevant for the company to know, and it follows that
the appellants were under a duty to communicate it to the company.”
Guth v Loft (US case) – not law
- Guth owned business that manufacture soft drinks
- Approached by Loft that made confectionary etc. Was asked to be CEO
etc. Can keep old company too
- As CEO he pitched – we need a substitute for coca cola. Other directors
found Pepsi (was going under at the time) – Guth purchased it personally.
- Guth was very entrepreneurial
- Need’s cash flow to fund manufacturing process – chemists (of Loft)
helped with the ingredients.
- Is this corporate opportunity?
o Court looked at policy
 Is it essential to corporation?
 Interest or expectancy? Had they been pursuing it
previously?
 Were corporate resources used?
 Was it in their line of the corporation’s business? Yes
 Guth CEO – he is paid to advance company
 Held constructive trust
Lecture 11
Recap –
Corporate opportunity doctrine:
- Excluded from personal exploitation, might resolve to be held on trust or
account for profit
-
Prohibition – learn about opportunity in course of fiduciary relationship
Qualified (Regal) – can have different capacities – only applies to the
extend under fiduciary capacity.
Absolute – fiduciary can’t argue the company would never had got the
opportunity
S 145
-
Misuse of confidential information
There may be precedent to suggest that some corporate fiduciaries have one
capacity
- Directors role importance
- Opportunity relevant to company (corporate or not?)
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If true, English doctrine much wider than s 145. Each fiduciary relationship
must be looked at individually.
Underlying these cases – focus on executive directors and their absolute role is
to advance the company.
III Misuse of Corporate Information
Section 145 –
(3) – authorises board for use of corporate information
Thexton v Thexton CA
-
Looks at 149 with similar provisions – restrictions on share dealing.
A director buying shares must not pay less than their fair value
Must not receive more than the fair value of the shares.
CA o Would not apply to confidential, non-public information.
Father selling shares of company, son purchased shares at substantial
discount.
Son knew there was a proposed merger takeover which would drastically
increase the value of the shares.
Father dies, executor wants to get back value of the shares to distribute
between family
Son acknowledged as capacity as a director he had information of the
merger takeover.
It was material to the value of the shares
He argued Dad knew it as well, therefore transaction was a fair bargain.
Court disagreed with this argument, what was important was – was it
publicly available.
Shares got revalued and had to pay true market value.
Therefore, s 145 applies to information that is not publicly available.
- Business opportunity will be a corporate opportunity… [Regal]
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-
-
Considering and exploring the opportunity for the company and they
learn about it [Boardman]
What if learns through third party as a conduit to the company? Designed
to become corporate information… specific to that company. Will be
caught by s 145.
S 145 won’t apply if director learns by private capacity or making their
own inquiries, or is just public information
Industrial Development Consultants Ltd v Cooley
- Architect in gas industry
- Consultants provided service in private sector, but wished to expand to
public sector, in particular gas industry, head hunted Mr. Cooley. He
became managing director
- Another company sought Mr. Cooley – personally manage a large-scale
project. Approached by own personal skills.
- Undertook some preparatory work, then resigned. Offered a contract
personally
- He argued - I was approached due to personal attributes
He was not a conduit to the company. He had one capacity and one only,
he was managing director, information came to him when he was
managing director. His duty to pass on to the company
- Corporate opportunity
o We wouldn’t get this result in s 145 (not pre-existing, approached
in private capacity, arguably public information).
o Must look at role of fiduciary – senior employee? Director, senior
executive?
Impossibility argument (in Cooley – hasn’t been accepted yet in courts)
- I was never going to get the contract – look at his role in the company
- His duty to persuade them to change their mind
- Conflict of interest
What if director resigns?
- Cooley
o Said he was sick, and company released him – deceitful.
Bhullar v Bhullar (EWCA)
- Family company, incorporated by 2 brothers, later their children became
involved. 2 dominant shareholders.
- Expanded from grocery business, to investment properties
- One property was leased as a bowling alley
- Discovers the adjacent site is for sale – perfect for car parks etc
- Was it a corporate opportunity?
- Directors all involved in day-to-day life of the company
- Although learnt about prospect when bowling in private capacity, role
was to still look out for profitable business opportunities.
o S 145 wouldn’t catch this – no confidential information whatsoever.
Was public, however corporate information.
- May include opportunities that are public knowledge – look to what the
role is in the company
“Like the defendant in Industrial Developments Consultants Ltd v Cooley, the
appellants in the instant case had, at the material time, one capacity and one
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capacity only in which they were carrying on business, namely as directors of
the company. In that capacity, they were in a fiduciary relationship with the
company. At the material time, the company was still trading, albeit that
negotiations (ultimately unsuccessful) for a division
NZ precedent not that helpful.
Back to Corporate Opportunity Doctrine Kingsley IT Consulting Ltd v McIntosh EWHC
- Mr. D and Mr. M – computer engineers, project managers and consultants
- Industry practice – people want to contract with a company
- Mr. D and Mr. M sell services to Kinsley Ltd. They are shareholders, key
employees and directors.
- Mr. M went to bank and made software for bank, contract renewed for
Kingsley IT. Mr. M concerned about how much work he is doing, heard
that bank is thinking about renewing again, tries for a personal renewal
- Is this a corporate opportunity?
o Held it was corporate opportunity, but what was his role?
o Director or employee?
 If employee - ROT argument
o Mr. M was predisposed to the bank through the company – created
the relationship.
No conflict rule applies when director is director [52]
- No profit rules?
- What if company incurs contract before resignation?...
- Incur ROT clauses.
Lecture 12
S 161 - directorial remuneration.
 Special procedure that must be followed, directors must accept that there
is compliance and fairness
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The Solvency Test


Creditor protection (through insolvency)
What constitutes solvency? S 4
o Cash flow (able to pay its debts as they become due in the normal
course of business)
o Balance sheet solvency (assets must exceed liabilities, including
contingent liabilities)
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-
Vercauteren v B-Guided Media Ltd
o “The solvency test is to be applied with a sense of commercial
reality so that the directors may look to the immediate future and
past, as well as the present, in determining whether the test is
satisfied. Existing and/or contemplated demand for the company’s
goods and services are relevant factors. I also agree…that it is
mandatory for the Board to have regard to the most recent
financial statements of the company and that, for practical
purposes, the grounds on which the board relied in determining
that the solvency test is met should be stated clearly in board
resolutions and solvency certificates, along with any reports,
financial statements, and valuations or estimates relied on. This
will ensure that, if solvency is later disputed, these records can be
used to absolve directors of liability.”
o Can’t just say you’re solvent, must have proof.
‘Suspect’ Transactions
Secured creditors paid first in liquidation, then leftover goes to unsecured
creditors.
- Unsecured creditors treated equally
- ss 292 – 299 – provisions for treatment of unsecured creditors
o s 292: (insolvent transactions)
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Payments for 2 years up to the date of insolvency can be
reviewed. If company is unable to pay these debts, …
S 293 – (voidable charges) - catches transactions of securities
bound to unsecured securities. Can set this security aside within 2
years…
S 297 – Transactions at an undervalue – can be satisfied
S 298 – Transactions for inadequate/excessive consideration
S 299 – Securities and charges that can be set aside

o
o
o
o
Suspect trading
-
-
ss 135, 136
o Moral hazard – if the company is in poor financial health, the
directors will be more willing to take risks, as shareholders will
only be able to be advantaged (so why not).
Nicholson v Permakraft
o “The duties of directors are owed to the company. On the facts of
particular cases this may require the directors to consider inter
alia the interests of creditors. For instance, creditors are entitled to
consideration, in my opinion, if the company is insolvent, or nearinsolvent, or of doubtful solvency, or if a contemplated payment or
other course of action would jeopardise its solvency …
o The recognition of duties to creditors…is justified by the concept
that limited liability is a privilege. It is a privilege healthy as
tending to the expansion of opportunities and commerce, but it is
open to abuse.”
o Directors duties are not to the shareholders but to the creditors (in
some cases) - due to this moral hazard
o On insolvency, should be thinking about the creditors
o Idea became incorporated into the Companies Act 1993 – enforced
through s 301 – liquidator on behalf of company to sue director for
breach of duties
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S 135 (reckless trading) – can’t carry on if there is serious risk or
serious loss likely to happen. Allow = don’t object (does this
require a positive response to say no?)
 Didn’t refer to insolvency test, more regarding serious loss
o S 135 was previously in the Companies Act 1955 (s 320)
 Liability incurred for knowingly carrying on in a reckless
manner [any business]
 S 230 (1)(b):
 Thompson v Innes
o What is a reckless manner?
 Objective test – ‘ordinary prudent
director’
 Test: Was there a serious loss
(probability) to creditors?
 If so, be put in liq.
 Law commission didn’t like this test from Thompson,
shouldn’t be focused on loss, should be focused on
inappropriate
risk
taking;
suggested/proposed
“unreasonable risks causing the Company to fail to
satisfy the solvency test” – in the new Act (s 135).
 This wasn’t accepted:
o Unreasonable risks analogous to negligence. It
should be reckless risk, not unreasonable.
 When it got to P, P didn’t like either. P enacted s 135,
they say in codifying Thompson test – serious loss; can
see it in the section itself.
Thompson v Innes –
- “Was there something in the financial position of this company which
would have drawn the attention of an ordinarily prudent director to the
real possibility not so slight as to be a negligible risk, that his continuing
to carry on the business of the company would cause the kind of serious
loss to creditors of the company which sec 320(1)(b) was intended to
prevent.”
o
Mason v Lewis (CA)
“As to what is meant by “substantial risk” and “serious loss”, Ross, Corporate
Reconstructions: Strategies for Directors suggests at p 40:
- ‘The first phrase, ‘substantial risk’ requires a sober assessment by
directors as to the company’s likely future income stream. Given current
economic conditions, are there reasonable assumptions underpinning the
director’s forecast of future trading revenue? If future liquidity is
dependent upon one large construction contract or a large forward order
for the supply of goods or services, how reasonable are the director’s
assumptions regarding the likelihood of the company winning the
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contract? Even if the company wins the contract, how reasonable are the
prospects of performing the contract at a profit?’”
Mr. and Mrs. L were directors of GPS Ltd, a print brokering business. G was the
manager of GPS Ltd, the L’s left the affairs of the company to be handled
entirely by G. Quite unknown to the L’s, G was a crook. G had arranged for false
invoices to be made out by GPS Ltd to third parties. The company was insolvent
from at least March 2000 but continued to trade until Feb 2002. G was
ultimately convicted of five charges of fraud. These proceedings were brought
by the liquidators of GPS against the L’s, alleging breach of s 135 of the CA93.
Salmon, J of the HC, held that the L’s were not liable. The judge found that there
must be a conscious decision to allow the business to be conducted in a way
that creates a substantial risk of serious loss to the company creditors or a
willful or grossly negligent turning of a blind eye to the particular situation, in
effect, the test was subjective.
[51]. The CoA disagreed. Hammond J hopefully set out the ‘essential pillars’ of s
135:
1. The duty which is imposed by s 135 is one owed by directors to the
company (rather than to any particular creditors);
2. The test is an objective one;
3. It focusses not on a director’s belief, but rather on the manner in which a
company’s business is carried on, and whether that modus operandi
creates a substantial risk of serious loss; and
4. What is required when the company enters troubled financial waters is an
ongoing sober assessment by the directors as to the company’s likely
future income and prospects.
On that basis, the Court found the Ls in breach of s 135 in what it described as
a ‘paradigm case of reckless trading’. The Court decided that any reasonable
and prudent director would have known that the company was in deep financial
trouble, that even radical surgery might not save it, and the cessation of trading
had to be contemplated. The Ls were not aware of this, however, because they
paid little or no proper attention to the financial affairs of the company.
Directors must take reasonable steps to out themselves in a position not only to
guide but to monitor the management of a company. By failing to do so, the Ls
allowed G to take advantage of the company for his own fraudulent purposes.
-
-
Liquidator sued Mr. L – reckless trading.
Carried on in a manner likely to cause serious risk.
p 85 – refers to Nippon Express (case) – issues of cashflow – court held
once hopelessly insolvency occurred, can assume reckless trading
insisted. “We are not concerned with mere risk, but substantial risk of
serious loss”
What does illegitimate risk mean?
o [63] – section imposed stringent test on directors to escape risk of
loss
o Court does allow some risk taking.
o Illegitimate/legitimate dilemma:
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
Re South Pacific Shipping Limited
 Shipping line, never profitable, undercapitalized,
always had funding by major shareholders (lent
money).
 Shipping industry deregulated, company expanded on
the basis of inaccurate projections, lost more money
 Conflict of interest too, major shareholder – one of his
business’s was chartering ships overseas.
 Propping up company to charter ships through other
company
 Held - illegitimate risk, no obligation on shareholder
to spend money, held no meetings to try to stop
shareholders taking exponential risks.
 Court suggested this is the test under s 135 (although
under 320(1)(b)).
[50] Thirdly, in addition to the risk being a substantial and illegitimate one, the
weight of authority is that in deciding whether particular conduct is
inappropriate under s 135, New Zealand courts will take an objective approach:
see, in particular Fatupaito v Bates. There O’Regan J pointed out that where a
company has little, or no equity directors will need to consider very carefully
whether continuing to trade has realistic prospects of generating cash that will
service both pre-existing debt and meet the commitments that such trading
inevitably attracts.
The issues are twofold; should there be liability, then, what is the appropriate
relief.
Re South Pacific Shipping Limited – at [120] –
- “Despite the judicial and legislative approval of the … [approach in
Thompson v Innes], it is perfectly clear that…[it] cannot sensibly be
regarded as expressing the whole test for determining whether trading is
reckless for the purposes of s 320(1)(b) … Risk is implicit in business and
the chance of business failure is seldom ‘so slight as to be a negligible
risk’. Business failure is likely to cause serious loss to the creditors. It is
unlikely therefore that Bisson J was intending to suggest that directors
would necessarily be liable under s 320(1)(b) in any case where there had
been more than a negligible risk of business failure, which, if it
crystallized, would cause serious loss to creditors.”
L was the director of SPS, a company that provided trans-Tasman shipping
services. By 1998, SPS was ‘hopelessly insolvent’. Liquidators brought this case
against L, alleging that he caused the company to trade recklessly in breach of
his duties as director. Notwithstanding the fact that this decision was made
under the Companies Act 1955, the Court discusses s 135 of the CA93 at length.
The Court held that s 135 presupposes a distinction between ‘illegitimate’
business risks, which will attract liability for reckless trading, and ‘legitimate’
business risks, which will not. This is because risk is inherent in business
trading. It would be commercially impractical if directors would be liable in any
case where there had been more than a negligible risk of business failure
which, if crystallized, would cause serious loss to creditors.
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In determining whether a business risk is legitimate, there are a number of
material considerations –
1. Whether the risk was fully understood by those whose funds were in
peril;
2. The obligations directors have to creditors when a company is insolvent
(or near insolvency);
3. How long trading should continue after a company becomes insolvent, (in
a balance sheet sense). A company is not required to cease trading the
moment it becomes insolvent as such cessation of business might inflict
serious loss on creditors and unnecessarily limit the possibility of salvage.
However, only a limited time will be available for directors to trade out of
difficulties in the hope that things will improve. In most cases, this will be
a matter of months; and
4. Whether the conduct of the director(s) in question was in accordance
with orthodox commercial practice. If not, liability for reckless trading is
likely.
The Court held that L had breached the duty against reckless trading. His
behaviour departed so markedly from orthodox business practice and involved
such extensive and unusual risks to creditors that it could be fairly stigmatized
as reckless. A number of factors were particularly significant to this finding: L
was receiving a number of collateral benefits in the form of fees, which no
doubt motivated him to continue trading; L continued to trade at a loss for a
number of years; trade creditors were not aware of the risk they faced; the
lamentable governance style adopted by directors, and the directors’ failure to
put strategies in place to overcome insolvency.
Mountfort v Tasman:
 “A legitimate risk is one [where] it was open to a
reasonable director to believe amounted to a
reasonable business prospect:
 Re South Pacific Shipping Limited
 Were directors following orthodox business and
commercial practice?
Imposed the test is objective
 How would an ordinary prudent director act in these
circumstances?
 Re Hilltop Group v Jacobson
 Clothing manufacturer – operated in partnership –
husband and wife.
 Business loses major customer
 Incorporated company, got loans from bank, company
buys company from partnership?
 Partners used purchase money to pay off first debtors
 Court held clearly illegitimate
 Incorporation was simply a device to remove
liability/risk
 Re BM & CB Jackson
 Building company, general downturn of economy
 Company struggling, but carried on as usual
 Bank not willing to help – had to use own money
 Extended period that they would pay back creditors
 Build up debtors

o
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Although acting in good faith (by putting own money
in) – acting recklessly.
o c.f. Cooper v Debut Homes Limited (CA)
 Building developer, in financial problems
 Decide best thing to do – stop any new
contracts, but complete 4 homes they
were working on; greater profit for
company
 To complete houses was in good faith, to
maximize capital top repay creditors,
however unforeseen cost increases.
 Company didn’t make as much profit on
sales as anticipated.
 Most get paid off, except IRD – can’t pay
GST.
 IRD suing for reckless trading.
Duty is owed to company not just to creditor(s)

o
Goatlands Ltd (in liq) v Borrell at [46] per Lang J:
- If, as in the present case, the directors are considering whether the
company should enter into a single transaction that has the potential to
cause its complete demise, they must reach their decision after a ‘sober
assessment’ of the level of risk that the transaction entailed for the
company and its creditors. They should only proceed to commit the
company to the transaction if, objectively viewed, the risk of
failure is sufficiently small to warrant the company taking it. If the
risk of failure is substantial, in the sense of real and significant, it
should not be taken.”
Lecture 13
Key points from Mason –
1. Substantial risk of serious loss c.f mere risk of loss
2. Illegitimate risk c.f legitimate risk (Re South Pacific)
3. Objective test – how would an ordinary, prudent director be expected to
act in these circumstances?
Goatlands Ltd (in liq) v Borrell
- Single transaction can be reckless trading.
- Small farm, farming goats
- Wanted to expand
- Entered contract to buy farm, formed the company (Goatlands)
nominated it as purchaser
- ASAP had long settlement (landholder subdividing land)
- Could apply for GST refund immediately, used this GST to pay deposit on
the purchaser and through finance improvements (new shed etc)
- Downturn in market for small farms, unable to sell subdivided original
land (1st small farm)
- Contract got cancelled, liability to repay GST refund – couldn’t repay,
ultimately IRD appointed liquidators and IRD was main creditor
- Trade in question: spending GST refund – this was risky, too illegitimate.
- Borrell’s liable for breach of s 135.
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Mainzeal Property and Construction Limited (in liq) v Yan
- Maybe s 135 is wider
- Member of a group of companies – wholly owned subsidiary
- Made loans to related company to enable them to buy rights in land in
china.
- Board got no legal advice, Mainzeal was an unsecured creditor.
- Company went through reconstruction; new company took over Mainzeal,
but this new company had no assets
- Mainzeal relied on promises, never formalized, no legal obligation for
board of Mainzeal???
- Chinese investments profitable, but territorial problems getting money
back into the country.
- On balance sheet – (-$10 millions of loans) – but can they get the money
back?
- Mainzeal cashflow solvent – but… near the end, had a dispute over large
contract, went to arbitration, wasn’t in Mainzeal’s favour. Reduced M’s
cashflow. Board was worried as they wanted formal support from parent
company, never came. Independent directors resigned, Mainzeal into
receivership. Loss of $3m plus.
“Mr Hodder [counsel for some of the defendant directors] argued that there
should be no liability under s 135 unless the insolvency of the company is
imminent or unavoidable. That was at the heart of his argument that the section
only applies to circumstances where directors should cease trading, but
continue to trade, creating further loss to creditors. I do not accept that this is
so. That situation is the usual reckless trading scenario, but it is not the only
situation contemplated by s 135. Indeed, the wording of s 135 suggests the
opposite, as the “manner” in which the business of the company is being
“carried on” more naturally applies to the way the business is being conducted
on an on-going basis rather than the decision whether to trade at all. There can
be a substantial risk of serious loss to creditors arising from trading a
substantial company in a manner where it is vulnerable to collapse with a
serious deficiency on liquidation. That is exactly the risk that eventuated. In
terms of the apparent policy of the provision, this is just as unjustified as
causing loss by trading on companies destined to fail. Both involve illegitimate
harm to the creditors. In the end, it is a matter of applying the words of the
provision in light of their purpose. Section 135 is not limited to liability arising
from continuing to trade a company that is hopelessly insolvent in a cash flow
sense. It can apply to other situations.”
-
Argued not typical situation as cashflow solvent – can still pay creditors
to very end. S 135 targeted at cashflow insolvency.
o However, this isn’t an accurate reading of s 135 – just talks about
serious loss, not solvency.
- Couldn’t sue lended company as insolvent themselves.
Liquidator – s 301 mechanism to establish breach of s 135
- Just because breach, doesn’t mean all directors liable
- Amount of liability
 Starting point – companies can fail – s 135 creates room for
deterioration of company.
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

Court then has a discretion to work out if that reckless
trading is fully culpable
 Unreasonably optimistic director / directors who do
nothing – both these are caught
 Punitive punishment
Duration?
 Months of trading? Might point to liability/damages
(Re South Pacific Shipping)
Mason v Lewis
- No intent to work out information said to them – just believed what was
said to them
- Insolvency should have been obvious to a reasonable prudent director.
- Directors had no control over Mr. Grant. Responsibility of board to
control manager.
- Effectively, breach started from AUG – SEPT 2000.
Sojourner v Robb
- This approach (duration) is directed at s 135 breaches, not every breach
of directors’ duty.
S 136 –
- Director agreeing to incur an obligation when there are no reasonable
grounds to believe the company can perform that obligation
o Refers to s 320 of old act. New section wider.
- Capricorn Soc Ltd v Linke
o Agree wide enough to incur ‘passive consent’
- Fatupaito v Bates
o Subjective/objective test
 Did or did not believe that aspect on reasonable grounds
o Bates didn’t take into account if the company could take on such
work
- Mainzeal Property
o Argued s 136 – didn’t apply
o Objective/subjective aspects – subjectively believe on reasonable
grounds.
 Sufficient knowledge of companies positions etc.
o S 136 based on specific obligations, whereby s 135 general
deterioration.
Mainzeal at [295] – [298] per Cooke J:
- [295] – In describing the requirements for liability under s 136, Clifford J
held in Jordan v O’Sullivan at [54]-[56]:
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o
o
o
[54] Turning to s 136, I note that there, directors have a duty not to
agree to the company incurring an obligation unless they believe
on reasonable grounds that the company will be able to meet that
obligation.
[55] Section 136 therefore entails a mixed, objective-subjective
approach. The director will breach the duty unless he or she
subjectively believes, at the time the obligation was entered into,
that the company will be able to meet the obligation incurred when
it was required to do so. That subjective belief must, however, be
based on objectively reasonable grounds.
[56] The need for the director’s belief to be based on objectively
reasonable grounds means the director must have sufficient
knowledge of the company’s position and ability to meet the
obligation so as to give rise to reasonable grounds. It is implicit
that the director must take sufficient steps to obtain this
knowledge – claiming ignorance will not be a defence.
Goatlands
- Argued s 136
- S 136 – for stand-alone transactions, whereby s 135 for trading position
Mainzeal [296] pre Goatlands, per Lang J:
- [113] Like claims under s 135, claims under s 136 are often brought in
circumstances where the directors of a company have permitted the
company to incur liabilities to trade creditors at a time when the
company is insolvent.
- In principle, however, there is nothing to prevent the section being
applied in relation to standalone, or “one-off”, transactions. The wording
of the section is such, in fact, that it may be or particular utility where the
directors of a company have permitted it to incur liability in relation to a
single transaction in circumstances where they did not believe on
reasonable grounds that it could meet that obligation.
[297] In my view s 136 involves a materially different question from s 135. The
requirements of s 135 involve questions of risk taking to the standards
prescribed by the section. Section 136 is not based on directors taking risks. It
is based on the performance of specific obligations and the associated beliefs of
the directors. To establish a breach of s 136, it must be established that, at the
time the obligation was entered into, the director did not believe that the
company would be able to meet its obligation; or, if it is established that the
director did believe that the company would be able to meet its obligation, that
his or her belief was not based on reasonable grounds.
[298] It is important that the objective component of the test in s 136 is directed
to the grounds that the directors had for their belief. It focusses in on the
grounds that the directors had for believing that the company would be able to
meet its obligations as entered, and whether those grounds were reasonable. It
does not involve a more general question whether the directors were acting
reasonably or were exposing creditors to unreasonable risk.
Peace and Glory Society Ltd v Samsa –
S was the sole director of P&G Ltd, a company whose sole asset was a property
that S intended to develop. Unfortunately, S later realised that the company had
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insufficient funds to develop the property. S, in his personal capacity, purchased
the property from P&G to alleviate its financial difficulties, which caused a GST
obligation to arise for the company. P & G was subsequently placed in
liquidation on application of the IRD. The liquidators’ claimed that S had
breached s 136, and that the Court should order S to make a contribution to the
assets of the company under s 301.
The Court found that S had breached s 136. There are three key elements to a
claim for breach of s 136: (1) that the defendant was a director of the company;
(2) that an obligation was incurred by the company; and (3) that, at the time of
incurring the obligation, the defendant did not honestly believe on reasonable
grounds that the company would be able to perform the obligation when it was
required to do so. S 136 therefore entails a mixed subjective-objective
approach. S, as director, caused P & G Ltd to incur the GST obligation knowing
it could not be met.
However, the Court did not order S to contribute to the assets of the company.
The Court followed the two-stage approach to s 301 set down in Mason v Lewis
(i.e whether there is a breach of duty, followed by the s 301 determination). It
held that it was at the second stage that matters regarding S’s culpability could
be taken into account. The Court found that S chose the least unattractive of the
few choices available to the company. It was relevant that S had paid fair value
for the property; took on additional debt to purchase; and made a genuine
attempt to settle the GST with the IRD. This choice could not attract liability.
S 131(2)
- Modification of ‘best interests of company’ for parent subsidiary.
- May act an interest of subsidiary (has to be expressly permitted by the
constitution of the company)
- Mountfort v Tasman
o Implicit limitation on s 131(2)
 That is when the company is insolvent
 Therefore, only applies when company is solvent.
- While s 131(2) will relieve directors of the obligation to put the interests
of the subsidiary ahead of those of the holding company, such a sidewind
cannot relieve them of the fundamental obligation to cease trading upon
insolvency.
Duties in regard to accounting records
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S 194 –
- Must have accurate accounting records, if failed, breach.
- S 300 –
o Liability provision, liability if accounting records not kept.
S 10 Financial Reporting Act 2013
- This Act binds the Crown. (Crown must keep accurate accounting
records?)
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IV Restrictions on Distributions
Another protection mechanism for creditors
- Restrictions and distributions
o Restrictions on a company to pay shareholders – aim to preserve
money for creditors.
Company can gain money by:
1. Equity capital
a. Shareholder equity
b. Retained profits
2. Loan capital
a. Loans (banks, shareholders)
i. Shareholder may loan - comes before creditors
b. Trade creditors
Capital maintenance doctrine preserved loan capital (history)
- Lose own shareholder equity first
- Dividends had to come from retained profits (illusory) – share capital
minimal, could be eroded through loses
- Company could not buy its own shares.
- Company could not lend money to someone wishing to by its shares.
o 1993 Act changed all of this
 Focus on solvency test
Solvency test (s 4)
- If solvent, it should be able to do whatever it wants to. Pay shareholders
and of the like (buy its own shares)
- MUST BE SOLVENT.
o Subject to this test, sub rules – (appropriate accounting records
etc.)
- Act then creates specific rules for distributions
o Distributions - “Paying a dividend to shareholders” (s 2)
 Bottom statement regards both (a) and (b)
 Must look to what ‘hat’ the shareholder is wearing, might be
employee too.
- Sub rules for purchasing own shares
o Solvency and certification requirement.
o If insolvent and pays dividend, directors become personally liable,
for their wrongful certification, and the company has the ability to
recover distributions paid to shareholders.
4(1)(a) – The company is able to pay its debts as they become due in the normal
course of business; and
4(1)(b) – The value of the company’s assets is greater than the value of its
liabilities, including contingent liabilities.
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Lecture 14
Distributions
Distributions: general: s 2
Shareholders do not get anything when the solvency of the company is
questionable. Must go to secured creditors and creditors first.
- Capacity of the shareholder is important, must be acting under
shareholder ‘hat’.
Distributions: dividends: ss 52, 53, 56
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-
Must satisfy on reasonable grounds the solvency test (immediately after
distribution) – balance sheet and cashflow solvent.
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-
Regarding shareholder distributions.
Width of distribution –
Kitchener Nominees Ltd v James Products Ltd
- JPL, KNL was shareholder, is solvent and declares a dividend. Sometimes,
instead of paying to shareholder, their amount can be credited to their
account (looks like JPL owes KNL a debt)
- KNL demands repayment, JPL encounters some liquidity problems.
- If they pay KNL they won’t be able to pay creditors and vice versa.
- KNL can make a demand, and if company doesn’t make payment within
time period, this is a ground for automatic liquidation of the company.
- JPL is saying this is not an act of liquidation, they ‘actually do not owe a
debt to KNL’ – they argue the payment to KNL would constitute a
distribution and the company is no longer solvent and therefore the
company is not authorised to pay it.
- Argue – no reasonable grounds to make payment to KNL.
-
Concludes it is a distribution, thus, not payable. It is a transfer of money,
a payment to the shareholder, and amount paid is determinative by their
individual shareholding.
o P 109 (judgment) [46] – direct transfer of money for the benefit of
the shareholder.
o [50] – policy would be undermined if payments could be changed
between credit payments of dividends (as KNL tried to say they are
a creditor too, therefore it’s a debt).
o [57] – However, there are situations where at arm’s length, a
shareholder can be a creditor, if say, they lent money, therefore
they would be owed money as a creditor.
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Re DML Resources
- P 120 judgment – [66] – A distinction must be drawn between the transfer
of wealth to a shareholder in its capacity as a shareholder and a bona fide
transfer of wealth to that shareholder in some other capacity
- Must look to valuable consideration to determine whether debt or
distribution.
- [72] – valuable consideration – benefit gained by shareholder…
Transactions involving broadly equal consideration are not intended to
fall within the distribution provisions.
S 52(3): authorization of distribution and delay of payment
- Cancels retrospectively the authority to distribute monies which had been
given at an earlier time.
- P 119 [58] (DML) – On reflection, the concept of cancellation is inapt.
Rather, the ability to distribute is suspended until such time as the
company is solvent…
- Suspension of the authority to distribute is all that is necessary to give
effect to the policy underpinning s 52(3).
What if the company makes a distribution and the company isn’t solvent?
S 56 –
- Obligations on distributer and shareholder.
- It may be recovered from the shareholder if they are not entitled to
receive it.
- There is a change of position defence for shareholders, if they change
something (that is not reasonable e.g. buy groceries with dividends) they
can’t claim back.
- Must receive it in good faith with no knowledge of the failure.
o Good faith – no intention to undermine position of creditors
- Has to be unfair to require a payment – why should a shareholder gain if
the creditor doesn’t
Director liability – s 56(2)(c)-(d)
- If they
o Failed to follow procedure or
o Signed a certificate (for solvency)
 They become personally liable to the company to repay the
company so much of the distribution as is not able to be
recovered from shareholder’s
DML
-
–
Have group of companies
Whole number of wholly owned subsidiary companies
In background, another company.
DML is subsidiary
Skellerup (main company) and subsidiary companies all lended money to
each other, either directly liable or guaranteed it.
- Skellerup wants to borrow more money, plan to remove DML from the
charging group. DML would stand alone and wouldn’t be responsible for
the debts to the other companies.
- DML had to transfer some assets to companies of subsidiary group
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…
Both transactions conferred benefits on the shareholders
-
DML ends up in liquidation
Liquidator looking for people to sue, argued these transactions were
distributions when DML was not solvent.
o Went after directors (personally liable for shortfall) – s 56
 For value of assets
o Directors had solicitors, so sued solicitors on reliance.
o Solicitors argued that liquidator can’t prove these are distributions
o Liquidators argued not distributions, there was valuable
consideration, therefore was released from securities (must be
something of value)
 Sold assets, therefore no longer liable for associated debts
 Judge agreed, not a distribution
 [64]-[65] – positive value on the net profit to the
shareholder
 [76] – substance of the transaction – return wealth to
a shareholder
 Both sides of the transaction calculated in the same
manner
Lecture 15
Distributions: Share Buy-Back (ss 58-67)
-
-
Law responded with a prohibition on companies buying back their own
shares.
o Insider trading etc
However, could be beneficial with surplus capital, and allow minority
shareholder to sell their shares
Under the new Act, share buy-back is now available
Buy-back must be authorised by the Constitution
o Buy back is also subject to the solvency test
There is a separate process whereby one shareholder wants to exit the
company and can’t find a buyer.
Process to follow in regard to Board
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Distributions: financial assistance to buy shares:
What about a company lending money or guaranteeing the purchasers debt?
- Allowed by way of ss 76-81
- Financial assistance includes a loan, a guarantee, and a provision of
security (76(6))
3 types of providing financial assistance
1. With the consent of all shareholders
2. If the assistance less than 5% of company funds and without shareholder
consent
3. Assistance more than 5% without shareholder consent
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V Prohibition of directors
S 382 – Automatic Prohibition
- Period of 5 years
- Arises where individual has been convicted of certain offences
- Cannot take part in any management of the company, unless with leave of
the Court
o Court’s discretion
Minimix
- Earlier equivalent section to s 382
- Application to be a manager
- Applicant was one of three shareholders
- He was its sole office staff
- Convicted of offences, however not relevant to the company
- “Substantial onus on the applicant” p124
- Approval granted, but no cheque signing authority (as offence concerns
cheques)
Ramsay v Sumich
- Relevant factors in the exercise of the court’s discretion:
o Protecting the public
o Protecting creditors
o Protecting shareholders
o Protecting employees
o Protecting investors
o Protecting other’s dealing with the company
o Nature of the offence
o Nature of the applicant’s involvement in the company
o Applicant’s character
o Applicant’s conduct since disqualification
o Nature of the business or proposed business
o Structure of the Company or proposed company
o Risk of or actual injury to the public
o The nature of the application – to be a director or to be involved in
the Company’s management
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Re Weston
- Balancing exercise
- Car sales person for 30 years
- Had profitable business
- Substantial burglary
o Business became insolvent and he became bankrupt
- While bankrupt, established number of new business’s, all failed and left
considerable debts.
o This was an offence (being a director while bankrupt)
- However, became successful again
- But then, official assignee learnt of trading whilst bankrupt, and he was
convicted of this, so gained an automatic disqualification to be a director
for the next 5 years.
- In this case he is seeking leave to be a director and a manager for new
company
Re Weston per Asher J at [8]-[10]
[8] The fundamental question that the Court must ask is whether the public will
be at risk if leave is granted. The onus of satisfying the Court is on the
applicant. The presumption behind s 382 is that those convicted of the
particular stated offences will pose an unacceptable risk to the public if they
have a significant role in companies. The logic is that if they have been guilty of
misconduct in the recent past, there is a risk that they will be guilty of
misconduct in the future. The nature of the particular qualifying offence is
relevant. If the offence has involved a deliberate act of dishonestly, this may
indicate more of a propensity towards offending than if the misconduct has been
of a lesser standard of culpability. While errors due to deliberate dishonesty
generally indicate a disposition not suited to a managerial role errors due to
poor judgment or greed that fall short of dishonesty may not carry the
implication with same force.
[9] Weight can be given to the personal position of the applicant, and any
hardship to him or third parties. However, this is to be balanced against the
primary object of protecting the public. The Court is unlikely to be particularly
swayed by circumstances particular to an applicant, that might otherwise
provoke sympathy, if the public remains at clear risk. The exercise that the
Court carries out is different from a sentencing exercise. Protection of the
public is the object, and not punishment or deterrence. Factors personal to an
offender that might persuade a Court to impose a lesser penalty may not be
persuasive if the public remain at significant risk. Even if innocent third parties
may suffer as a consequence of leave not being granted, this may not prove
persuasive. The Court still has an overriding concern that the public are
protected. The Court may consider the business history of the applicant to see
whether fraud or losses to the public are a feature of that business history. The
Court will also look at the most recent conduct of the applicant. That is also
relevant to see whether the qualifying offending is likely to reoccur. In the end
the Court must look forward and consider whether the applicant has satisfied it
that there is an acceptable prospect of rectitude on the part of the applicant or,
to put it the other way, no unacceptable risk of misconduct.
[10] In reaching its decision the Court will take into account that the protection
of the public can be achieved or assisted by the imposition of conditions under s
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382(1) which provides for leave being given on such “... terms and conditions as
the Court thinks fit.” Such conditions can include provision for the withdrawal
of the leave, if there is a breach.
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Balancing test
o Protection of public
o Any imposition of risk?
o Nature of disqualification or dishonesty
 Dishonest, not poor judgment
o Personal position of applicant
o Hardship to employees
o Business history of applicant
o Most recent conduct
In favour of him
o Good business prospects
o While he had traded as bankrupt there was no fraud involved
o His latest business was a success
o No significant misconduct since last act
o Employing others, and had current creditors, (negatively affected
if business ceased)
Against him
o Did trade whilst bankrupt
Court concluded this was deliberate trading
o False advice to official assignee
o Left substantial creditors that hadn’t been paid
o Not remedied this when he started his new business
Court concluded he failed to appreciate he did something wrong
(important distinction for the court)
Court discharged application.
He was allowed to reapply in the future
Approval can be subject to conditions
Hattie
- Disqualified director had fraud convictions
- Granted admission, on the condition that company hired an auditor to
audit certificates that company was being properly run.
S 383 – Court Ordered Disqualification
- Up to 10 years, or permanent disqualification (1(a))
- NB: (1)(e) - person of unsound mind
-
(3) – range of parties can apply for such disqualification
Can apply to the court to be released
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Permanence must be of serious circumstances –
First City Corporation Ltd v Downsview Nominees Ltd [1989]
- Mr. R company acquired a first ranking security over another company in
difficulty.
- Pursuant, he was appointed as the receiver
- Companies fortune deteriorated, thus second debenture holder exercised
equity of redemption and bought out first ranking equity.
- Court ordered this sale, Mr. R failed to stand down as receiver.
- Application for Mr. R to be prohibited as director for up to 10 years (HC
accepted this)
- COA overturned this result, sections didn’t apply to receivers, only to
directors
Is the section penal or protective?
- Although penal in nature, it is protective (Civil standard of proof),
however because of penal nature, a higher probability of proof is
required.
- Breaches
o No accounting records
o Reckless trading
 Should have closed company down
- Motives of court
o Deliberate acts (negligent)
o How serious was the misconduct – was serious
o Previous instances, had history
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o
o
Frequent association with failed companies
Failure to hold accounting records (subject to solvency test)
Registrar v Blake
- HC emphasized we are protecting public
- Disqualified as directors under 382 (automatically)
o Had been acting as directors whilst bankrupt
- Mr. B had history of bankruptcy
- History of failed companies
o Caused significant losses
- Had a long history of acting as a de facto director or manager whilst
bankrupt
- Court disqualified for 12 years
o Looked at amount of losses
o High likelihood he would act as director is, he could
o Lack of remorse
- However, no suggestion of intend to defraud and dishonesty
- Mr. R was permanently disqualified
o Had assisted Mr. B
o But he had history of dishonesty offences
 Social welfare benefits
o Ponzi Scheme – $1.4m shortfall
 “Persistent and dishonest behaviour to raise money from the
public”
 Permanent disqualification
S 385 – Registrar ordered disqualification
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-
Concern not wrongdoing, but mismanagement
Applies when companies are in financial difficulties and failed because
the way they are managed.
o Inability to pay debts
o Failure to cease to stop trading and thus inability to pay debts
o Etc…
Disqualification up to 5 years
(4) deals with onus in two different situations
o (a) earlier failure within 5 years, one company, onus is on the
Registrar to prove it was mismanagement
o (b) in 5-year period, two or more failures of companies
 Onus shifts to person who is director of those companies,
they must prove it wasn’t because of management
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Davidson v Registrar of Companies
- Mr. D former corporate solicitor, chair of board of directors of company
[X]
- Realised problems with these companies but argued he had not breached
any duty and stayed on as director because of loyalty to the company.
Company would be prejudice of chair resigned.
- To be prohibited, director does not have to breach any duties personally.
[98]
- If they had opportunity to resign, they should, and if they can’t do
anything about mismanagement, they should resign
- Each respondent must be examined independently, on all circumstances
of the case
Brand v Registrar of Companies
- Must assess the risk to the public of the person remaining as director
- Standard of proof – balance of probabilities (civil), but giving
consequences, higher quality may be required.
Mani v Registrar of Companies
-
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Disqualification with respect to ‘Phoenix’ Companies
(ss 386A – 386E)
- Concern – prejudice creditors
- May also mislead creditors to new company
- Applies to individuals to act as directors who act as director to phoenix
company
o Or become involved in management
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S 386(C) – Liability
- Personal liability to all debts of the phoenix company; or
- If you act innocently, but gain knowledge – will attract liability
Groves v TSSN
- Explains rationale behind section
- [27]-[32] per Mackenzie J
o [27] The phoenix company provisions apply only in a quite specific
set of circumstances. Counsel for the applicant referred to some
academic comment about the targeting of these provisions, and the
mischief which they are intended to address
o [28] The phoenix company provisions are engaged when:
 The name of the former company is used; and
 There are common directors or managers in both companies
o [29] One of the purposes of the enactment of the provisions was to
address the risk that the assets available in the liquidation of a
failed company might be reduced by the sale of the business of the
failed company at less than market value to persons associated
with the failed company. That purpose was stated in the executive
summary of the report by the Minister of Commerce to the Cabinet
Economic Committee in these terms:
 ‘A phoenix company is a business that has been sold as a
going concern to another company or to its directors and/or
managers usually soon after its failure. Provided the
business is sold at a market value, the phoenix arrangement
will be in the interests of creditors, including employees.
Where, however, the sale price is less than could have been
realised outside the phoenix arrangement, the legitimate
interests of creditors will be compromised.
 Beside disadvantaging creditors, use of phoenix companies
in this way would allow directors who mismanaged the
original company to retain control of the business to their
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o
o
o
benefit but to the detriment of the new company and other
businesses that deal with that company’
[30] A second purpose identified for the provisions is to address the
risk that creditors may extend credit to the new company without
being fully informed of the risk. Those two elements of mischief
have also been identified in cases on the equivalent English
legislation.
[31] The two features in [29] are not, of themselves, objectionable.
Indeed, they may be beneficial. If the business of a failing company
can be sold at market value, that will generally be in the interests
of creditors. It is not unusual, in the sale of a business, for the
purchaser to be granted the right to use the business name, as part
of the goodwill of the business which is being purchased.
Sometimes, too, the involvement of key personnel may contribute
value to the business, which a purchaser will wish to retain. There
may accordingly be good commercial reasons, and commercial
value to the vendor of the business, in making arrangements which
come within the scope of the phoenix company provisions.
[32] The phoenix company provisions contain mechanisms to allow
such beneficial arrangements to be entered into, under appropriate
supervisions and controls. Those controls include the ability to
apply for sanction of the Court, either under the exemption in s
386E or by permission under s 386A. There is also the ability,
under s 386D, to make such arrangements in recognised insolvency
situations.
De facto director still caught under Act
S 386A Director of failed company must not be director, etc, of phoenix
company with same or substantially similar name
1. Except with the permission of the Court, or unless 1 of the exceptions in
sections 386D to 386F applies, a director of a failed company must not,
for a period of 5 years after the date of commencement of the liquidation
of the failed company, a. Be a director of a phoenix company; or
b. Directly or indirectly be concerned in or take part in the
promotion, formation, or management of a phoenix company; or
c. Directly or indirectly be concerned in or take part in the carrying
on of a business that has the same name as the failed company’s
pre-liquidation name or a similar name
S 386B Definitions for purpose of phoenix company provisions
1. In sections 386A to 386F, a. Director of a failed company means a person who was a director
of a filed company at any time in the period of 12 months before
the commencement of its liquidation, and director of the failed
company has a corresponding meaning
b. Failed company means a company that was placed in liquidation
at a time when it was unable to pay its due debts
c. Phoenix company means, in relation to a failed company, a
company that, at any time before, or within 5 years after, the
commencement of the liquidation of the failed company, is known
by a name that is also –
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i. A pre-liquidation name of the failed company; or
ii. A similar name
d. Pre-liquidation name means any name (including any trading
name) of a failed company in the 12 months before the
commencement of that company’s liquidation
e. Similar name means a name that is so similar to a pre-liquidation
name of a failed company as to suggest an association with that
company
Lecture 16
Attribution
Acts or knowledge of individuals is attributed to the company.
When does a company do things, and when do they know things.
What individuals do we associate that with? A person with certain knowledge
must disclose that knowledge. Whose knowledge should the board attribute it
to?
Paul Davies, Introduction to Company Law at 52 –
“It is clear that the attribution rules for companies are complex, mainly because of the
range of situations with which it is necessary to deal. However, they are fundamental.
Whenever a statement is made about a company ‘doing x’ or ‘deciding y’, it is probable
that there is an implicit reference to one or more of the rules of attribution. They form
the bedrock of company law, even if their structure is still not fully defined. With
hindsight, it can be seen that giving the company separate legal personality was the
bold and imaginative but technically easy conceptual step. Giving that person the means
of thought and action has proved a legally much more complex undertaking.”
Meridian
- P 137 – primary rules of attribution –
o Hoffman – refers to the rules in the company’s act that provides the
default constitution.
o Under Companies Act, primary rules are under
 S 128 – board of directors must manage company and has all
powers. What the board does is the act of the company.
 S 130 – rely on the board delegating authority to individuals.
 Are common law rules – classic one – duomatic rule –
 Unanimous decision of the shareholders in general
meeting is of the company. – can bypass board of
directors.
Thus, the primary rules are that the decision of the Board is the decision of the
company unless power has been delegated, or there is a unanimous decision of
the shareholders in general meeting which may take over. One situation where
shareholders have more power than Board. S 129 - major transactions. Where
the transactions involve more than half the company’s assets. Nature of
company would thus change.
Primary rules of attribution
S 128 – Board of directors must manage the company and holds all
powers.
S 130 – rely on the Board delegating authority to individuals
S 129 – in regard Downloaded
to major
transactions,
when the transaction
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Next layer of rules – Hoffman refers to the general rules of attribution. Applies
in every situation on where another person is acting on behalf of someone else.
General rules of attribution
Agency rules –
- Employees of the company are agents of the company. Has the board
given agency authority to employees?
- Estoppel may apply – ostensible authority.
Vicarious liability rules. Company can become liable for employees in the course
of their employment. Secondary liability for those torts.
Agency
Primary and secondary rules are all we need for contractual issues.
Have problem though for regulatory offences. Sometimes agency will work,
sometimes not.
Meridian –
- Special rule of attribution that applies to that particular legislation.
- Always a matter of interpretation for that particular legislation.
If the rule applies to a company, which individual does it apply to?
Prior to Meridian, there was a case called Lennard’s, had a test of directing
mind and will. COA applied this in Meridian. PC was unhappy about this test,
formula could be misleading in that it suggests it focusses on one key person in
the company.
Meridian –
- Investment company, Board and Mr. A who is managing director. Others
are looking after investments.
- Busy buying and selling shares, they see Neuronational corp. and is cash
rich.
- They view that their shares are selling not at an appropriate value and
they seek a controlling stake in the company. But they don’t have the
funds themselves. Devise plan whereby effectively they would use their
power in meridian (wrongly) to buy shares from Neuronational.
- There was a payment of 21 million, Meridian buying shares for that
much. Had an agreement that in 2 weeks later, if Meridian wants to sell
shares back, they can (more than the 21 mil).
- Gave use for the 21 mil for short amount of time. Contracts were made,
meridian paid the money, share brokers keep the money and they use it to
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buy shares in Neuronational (on behalf of investors) to be a controlling
stake.
Independent directors wanted to put a stop to this. Whole scheme came
to an end. On the 19th when they were supposed to buy back shares, they
couldn’t, meridian suffered losses and had to reimburse losses
Things were getting worse for Meridian, completely unauthorised, under
the Securities Act, page 136, there is a rule of disclosure. Anyone who
becomes a substantial holder, shall give notice they are acquiring these
shares.
Notice has to be given as soon as they know they are a substantial
security holder. By buying all these shares, they were a substantial
security holder. No notice was given.
Meridian now being sued for non-disclosure.
When legislation talks about ‘the person’ who in meridian is that
referring to? If Board, Meridian didn’t know. If investors, company does
know.
Can’t use primary rules to answer, neither the board or shareholders
knew nothing. Secondary applies to make Meridian liable under the
purchase contracts.
COA said who is the directing will and mind of the company, and it was
Mr. Coo and Wing (investors)
PC suggests a special rule of attribution and must interpret this section to
define Parliament’s intention of ‘the person’.
Held: the company did know, and the key people were Coo and Wing.
Applying rule of attribution depends on the legislation.
New test of attribution (In Meridian (PC))
We must define ‘the person’ in regard to Parliaments
intention. Thus, ‘the person’ will differ depending on the
circumstances
Tesco –
- Legislation created an offence for misleading advertising. But there was a
defence if the shop owner could show the advert was caused by another
and the shop owner took all reasonable precautions.
- Who was the shop owner? Was it the board of Tesco supermarkets? Or
was it the supermarket branch manager?
- Held: It was the board of directors
- In this legislation, it’s the Board, it may be a reasonable step of the
employee to instruct… p 138
- Failure of the branch manager was irrelevant. Shop owner was the Board.
- The HOL held that the precautions taken by the board were sufficient for
the purposes of section 24(1) to count as precautions taken by the
company and that the manager’s negligence was not attributable to the
company. It did so by examining the purpose of section 24(1) in providing
a defence to what would otherwise have been an absolute offence: it was
intended to give effect to “a policy of consumer protection which does
have a rational and moral justification” This led to the conclusion that the
acts and defaults of the manager were not intended to be attributable to
the company.
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Ready Mix Concrete
- Company executives acting within their authority had entered into
restrictive trade practice (price fixing).
- Board knew nothing about it. They said we do not price fix.
- For this legislation, the focus was not on the Board, but on whether
senior executives had price fixed.
- Public policy, we want to restrict such practices, if the focus was on the
Board, the legislation wouldn’t work. Its focus must be on those making
the prices (the senior executives).
Lennard’s
- Directing mind and will test.
- Fire on a ship and a defence that the fire wasn’t a direct offence from the
ship owners’ fault. But who is the ship owner? In corporate context?
- Board? Master of ship? It was held that it meant the executive who was in
charge to maintain conditions on the fleet of ships.
- PC: did use ‘directing mind and will’ but it described the ships conditions
overall. Who was responsible for the overall condition of the ship? That
makes the most sense.
Result in Meridian
- Meridian did know, page 139, the policy is to give public disclosure of
purchasers. Company knew of the purchase. Get caught for breach of
regulation.
- Of that warning, whenever a servant of a company has authority to do an
act, knowledge of that act will be attributed to that company. A question
of construction in each case.
NZ example –
Lineworks –
- Applying Meridian
- Electrical distribution networks.
- Had one team working near pylons and decided to remove a disconnected
cable.
- In the process one of the linesmen was electrocuted.
- The company is being prosecuted under an Act. Act required employers
must take all steps to ensure safety of employees. Did they do this?
- Board had given direction to employees and knew it was dangerous work.
Foreman of team was supposed to be supervising team at all time and
had to warn them if they were getting too close to the lines.
- In this case, the foreman got distracted at the wrong time. Question is,
was the directions of the Board enough? Or are we focusing solely on the
foreman?
- Held: was on the foreman.
- Difficult to conclude that Parliament intended that the acts or omissions
should not be attributed to the employer. What more could they have
done?
[23] – An employer which is a corporation can discharge its statutory duties
under the Act only through a human agent. The Act is concerned with safety of
the employees at work – for example, on the floor of the factory, on building
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sites, and while operating vehicles, plant and machinery. In practical terms this
is a world far removed from administrative offices upon an employer and, in
particular, its obligation to provide on-the-job supervision of safety practices,
must be viewed with this setting in mind. It is difficult to believe that Parliament
would have intended that the relevant acts and omissions of the person in
charge of a work site should not be attributable to the employer. To ask, as the
appellant’s counsel did, what more the employer could have done, is to beg the
questions: whose acts and omissions are to be attributed to the employer?
[24] - … We agree with the lower courts that the acts and omissions of the
person in effective charge of a work site, in this case the foreman who had a
supervisory capacity, should be attributed to Linework. In applying the test
proposed by the Judicial committee in Meridian at p [419], it was the
foreman’s…actions or inactions that, for the purpose of taking all practicable
steps to ensure the safety of employees, were “intended to count” as the acts of
the company.
The naughty director (only UK cases)
-
Directors who undertake illegal acts.
Typically, it would incorporate a company. Usually the sole shareholder.
Company is a vehicle to perform the illegal act.
Meridian at 419 per Lord Hoffman: “whose act (or knowledge, or state of mind)
was for the purpose intended to count as the act etc. of the company?”
Bilta
- Two directors, one Mr. S and was sole shareholder.
- Devised scheme to fraud GST returns. Effectively purported to import
carbon credits, but all profits were on VAT that government was paying
them? Getting tax rebate that they weren’t entitled to get.
- IRD puts company in liquidation, and trying to sue directors (kinda like
reckless trading)
This might be different if there was just one rogue director amongst many.
Illegality doctrine or defence – matter of public policy that a claimant is
prevented from pursuing a civil claim if in connection with an illegal act.
- If you are involved in an illegal act, you can’t sue someone else who was
involved in it.
Bilta –
- Directors who devised the scheme, argued illegality defence applies as
they were the company.
- Therefore, the company is bad, and thus they can’t sue the directors in
the scheme.
[7] per Lord Neuberger - “Where a company has been the victim of wrongdoing
by its directors, or of which its directors had notice, then the wrongdoing, or
knowledge, of the directors cannot be attributed to the company as a defence to
a claim bought against the directors by the company’s liquidator, in the name of
the company and/or on behalf of its creditors, for the loss suffered by the
company as a result of the wrongdoing, even where the directors were the only
directors and shareholders of the company, and even though the wrongdoing or
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knowledge of the directors may be attributed to the company in many other
types of proceedings.”
Earlier case and built upon Meridian –
- Lord Hoffman – attribution will build upon the purpose in which it seeks
to remedy
- Conclusion of this case is that the director’s illegal motives couldn’t be
attributed to the company purely to protect the directors from being sued
by the company
- BUT in other situations, attribution and the illegality defence may apply.
o Let’s say the company wishes to sue the auditors for failure to
detect the scheme, then at that point, the auditors have a defence.
Company is pursuing an illegal matter as the directors are the
company (attributed to the company)
Attribution applies to the context.
Lecture 17
Delegated authority
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-
-
Must act through human beings.
How can someone who wishes to contract with the company, have the
authority to enter that transaction on behalf of the company?
S 128 – authority vests in the board of directors. If dealt with the Board
should be fine.
Maybe constitution says the shareholders do instead, or maybe the Act
does (major transactions)
Don’t expect board to make every decision, and thus must delegate (s
130) can delegate.
Next step, the general rules of attribution (agency rules). Individual
acting on behalf, and thus must look to agency rules to find authority to
bind the company.
S 18 - In some situations, a company may be precluded from denying the
delegated authority.
Sometimes also, they cannot deny someone a director if they are valid
directors. And also, can’t deny that that director doesn’t have authority
that a general director would.
Focus is on (c) and (d). (s 18)
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Principles of s 18
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Expressed in Freeman case – this branch of the law has developed
pragmatically rather than logically.
At common law there are three different sorts of authority –
o 1. Actual authority
 Express - Company has conferred actual authority to enter
that transaction upon that individual. Actual = (Freeman
quote) = agreement between company and agent –
contractor doesn’t know anything of that agreement.
 Implied – scope ascertained through ordinary principles of
construction. Contractor may have no knowledge of the
terms of authority.
 “An actual authority is a legal relationship between principal
and agent created by a consensual agreement to which they
alone are parties. Its scope it to be ascertained by applying
ordinary principles of construction of contracts, including
any proper implications from the express words used, the
usages of the trade, to the course of business between the
parties. To this agreement the contractor is a stranger, he
may be totally ignorant of the existence of any authority on
the part of the agent. Nevertheless, if the agent does enter
into a contract pursuant to the ‘actual’ authority, it does
create contractual rights and liabilities between the
principal and the contractor”
o 2. Apparent (ostensible) authority
 Exceeded actual authority. But in some situation, the
company is precluded from arguing that.
 Freeman quote – “An apparent or ostensible authority… is a
legal relationship between the principal and the contractor
created by a representation, made by the principal to the
contractor, intended to be and in fact acted upon by the
contractor, that the agent has authority to enter on behalf of
the principal into a contract of a kind within the scope of the
apparent authority, so as to render the principal liable to
perform any obligations imposed upon him by such contract.
To the relationship so created the agent is a stranger. He
need not be (although he generally is) aware of the existence
of the representation but he must not purport to make the
agreement as principal himself. The representation, when
acted upon by the contractor by entering into a contract
with the agent, operated as an estoppel, preventing the
principal from asserting that he is not bound by the contract.
It is irrelevant whether the agent had actual authority to
enter into the contract”.
 Representation from the company to the contractor that the
agent has authority to enter into it.
 If enters the contract, the company is estopped from arguing
a lack of authority.
 Agent is a stranger in this situation, not the contractor
 Freeman pg. 142/143 CM – key requirements for apparent
authority and thus which must be fulfilled to entitle a
contractor to enforce against a company a contract entered
into on behalf of the company by an agent who had no actual
authority to do so:
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




1. Representation by the company that the agent had
authority. (by a human being) – do they have to intend
to make a representation, or is an inferred intention
enough to the reasonable recipient?
2. Representation must have been made by someone
who had authority to make it
o Has to have actual authority to make it.
(conferred from board to that person)
o Later cases have extended this principle.
 ING – extended reasoning saying they
has to have authority, but why can’t it be
apparent authority?
3. Have to have a contractor being induced by it
(acting to our detriment)
4. Ultra vires - legally company only has authority that
is vested in shareholders. If outside that, it is ultra
vires. Thus, has to be a contract that the company
could have entered into. (Illegal contract would be an
example of acting ultra vires)
5. Person making representation has to intend it be
relied upon.
o ING – on intention – no subjective approach, it
is an objective test. How would the reasonable
person interpret what they’re saying.
o ING - “…the statement that the representation
must be intended to be acted on is “too
narrow”. Intention in the formation of contracts
has to be approached objectively, that is, as it
would appear to a reasonable person in the
circumstances of the parties. It is undoubtedly
the case that many instances of ostensible
authority arise by implication from acts of a
quite general nature, typically putting an agent
in a position which may normally be expected to
carry a certain level of authority. Ordinarily if a
person makes a representation by words or
conduct, whether to an individual, a group or to
the public at large, that another person has
authority to enter into a contract on the
representor’s behalf, his intention on an
objective view would be that a person to whom
the representation is made should be able to
deal with the person represented as having
authority to deal with him as if he were dealing
with the principal. It would be no answer for the
person making the representation to say that
this was not his subjective intention. If,
however, the circumstances are such that the
person dealing with the supposed agent knew
or ought reasonably to have appreciated that
the representation relied upon was not intended
to be made to him or for his benefit, then there
is no good reason in principle why that person
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o
should be entitle to rely on the representation
to create a contract.”
o Struan – it would come under heading 1) was a
representation made? The issue is must the
maker intend to make a representation or is it
enough that a reasonable recipient would
regard it was such? (representation as per ‘a
representation as to whether an employee has
authority or not)
3. Usual or customary authority
 Subset of apparent – based on a representation
 Most common authority that contractors rely upon
 Representation arises by virtue of the role or position/title
that the employee has in the organisation.
 Implicit representation that that employee has the
reasonable authority associated with that position generally.
 Unless contractor knows to the contrary, they are entitled to
assume that the individual has the authority normally
associated with that sort of role in that sort of company.
 This was the position in Freeman itself – “The representation
which creates ‘apparent’ authority may take a variety of
forms of which the commonest is representation by conduct,
that is, by permitting the agent to act in some way in the
conduct of the principal’s business with other persons. By so
doing the principal represents to anyone who becomes
aware that the agent is so acting that the agent has
authority to enter on behalf of the principal into contract
with other persons of the kind which an agent so acting in
the conduct of his principal’s business has ‘actual’ authority
to enter into”
Freeman K, a director of the defendant company, purported to act as its managing
director and entered into a contract with a firm of architects on its behalf.
Although the company’s board of directors had the power to appoint a
managing director, K had not formally been appointed to the position. When the
time came to pay, the company baulked, claiming the liability was K’s alone. The
plaintiff architects argued that liability lay with the company on the grounds
that:
1. K had acted with actual authority, or alternatively
2. The company had held K out as having ostensible authority (apparent
authority)
The judgment of Diplock LJ in the English Court of Appeal is regarded as the
locus classicus on the subject of ostensible authority. His lordship drew a
careful distinction between the two types of authority. ‘Actual’ authority is
created by a consensual agreement between the principal and agent, to which
they alone are parties. Its scope is ascertained by ordinary principles of
contract construction, for example, the express words of the contract, usages of
trade or course of business between the parties.
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‘Ostensible’ authority, on the other hand, is created by a representation by the
principal to a third party that the agent has the relevant authority. The
representation, when relied upon by a third party, operates as an estoppel,
precluding the principal from claiming he or she is not bound. The most
common form of representation that creates ostensible authority is
representation by conduct. This occurs where the principal’s business with
others as to represent that the agent has authority that an agent so acting
would usually have. Four conditions must be fulfilled before a company can be
bound by a contract made by an agent with no actual authority. It must be
shown that:
1. A representation that the agent had authority to enter that kind of
contract on behalf of the company was made to the third party;
2. The representation was made by a person with ‘actual’ authority to
manage the business of the company (this condition has since been
disapproved of in New Zealand: see Cromwell Corporation)
3. The third party was induced by the representation to enter into the
contract; and
4. Under its memorandum or articles of association the company had the
capacity to enter the contract or to delegate authority to enter a contract
of that kind to the agent (this has little practical relevance in NZ: see ss
16 and 17 CA93)
The Court held that K had acted without actual authority, as there was no
evidence he was expressly or impliedly authorised by the company to enter into
such a contract on its behalf. However, he had acted within the scope of his
ostensible authority. There was ‘abundant evidence’ to suggest the board had
known K was acting as managing director and permitted this. In doing so they
represented that K had authority to enter into contracts of a kind which were
within the ordinary ambit of the authority of a managing director. The board
had authority to make such a representation and the plaintiffs had relied on the
representation in entered into the contract. By acquiescing in his actions, the
board had given K ostensible authority to bind the company and the company
was therefore bound.
Board has actual authority to delegate by allowing Mr. K to act as managing
director. Representing he had that authority. Company thus estopped.
Limits to usual or customary authority –
- If the contractor knows that despite the individuals title or position, they
don’t actually have authority then they cannot rely on their usual or
customary authority
- Criterion Properties - “apparent authority can only be relied on by
someone who does not know that the agent doesn’t have actual or known
authority” – can’t act to your detriment if you know the true position.
- If the agent has entered into a poor transaction, then suspicions may be
aroused to your knowledge of lacked authority. What is a bad contract
though? Contrary to commercial interests?
- Criterion at [31] per Lord Scott – “If a person dealing with an agent
knows that the agent does not have actual authority to conclude the
contract or transaction in question, the person cannot rely on apparent
authority. Apparent authority can only be relied on by someone who does
not know that the agent has no actual authority. And if a person dealing
with an agent knows or has reason to believe that the contract or
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transaction is contrary to the commercial interests of the agent’s
principal, it is likely to be very difficult for the person with any credibility
that he believed the agent did have actual authority. Lack of such belief
would be fatal to a claim that the agent had apparent authority”
Section 18 – (c) and (d) tries to incorporate all this.
- Doesn’t worry about actual, because then you have a valid contract
- (c)(2) is about usual or customary authority.
- (d) is apparent or ostensible authority – arise when employee has
exceeded their usual authority, and but the company has held them out to
have additional authority.
o Must be able to make fine distinctions between authority to
contract, and authority to give authority.
o Under (d) agent themselves cannot represent their own authority.
Lecture 18
Common law principles of authority are codified in s 18. (Cromwell)
What is the authority for? Delegated authority per se.
S 18 (c) (d) – (blurry boundary between them) – courts have an intention to
protect bona fide contractors
Levin Meats –
-
-
-
Company had a turnover of about 80mil a year. Have individual, Mr. G,
enters a contract with contractor to acquire meat packaging equipment.
Represents himself as a director (CEO)
Later, shareholders they get out of this agreement as he lacks authority.
District Court:
o Didn’t come within (c) and didn’t have usual authority to enter
such contract
HC:
o concludes that he did. [56] – CEO’s normally have authority to
enter into contracts for the acquisition of capital items
[59] may have authority under 1(d). No direct oral representation from
anyone else in the company.
Directors didn’t even know he was calling himself a CEO.
Mr. G appeared to be the manager however. And Board did nothing to
affect that perception.
These actions have allowed him to act in this way.
He had done other deals like this without the Board objecting.
Company was representing that he did have that authority to enter
contracts of that type 1(c).
Mr. Grey was the CEO and general manager of LM Ltd. He entered into an
agreement on behalf of LM Ltd to purchase a wrapping machine from PP Ltd for
$203,000, indicating to PP Ltd that he had actual authority to do so when he
was asked. LM Ltd disputed the contract as G did not in fact have authority to
acquire significant capital items without board approval.
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The issue addressed in the HC was in what circumstances a company will be
bound by a contract entered into by its agent without the authority to do so.
This was addressed in the context of CA93 s 18(1). The Court found that, even if
it was not customary for an agent to have this authority under s 18(1)(c), LM
Ltd by its conduct held out G as having the authority under CA93 s 18(1)(d). G
had significant company autonomy with little oversight, was the only person
available to be contacted, appeared to exercise complete control over the
running of the business and significantly had entered into similar contracts in
the past. The proviso to CA93 s 18(1), that the third party does or should have
had knowledge of the lack of authority, was held not to be applicable in this
situation as the only query raised was whether G had authority to sign the
personal guarantee, not whether or not he had authority to enter the contract.
Green v Meltzer –
-
Company was a public listed company
It was a property development company.
CEO purported to borrow 100,000 for the company.
Because within 1(c) and it is usual authority to do so.
From an outsider’s perspective a small loan, and thus he should have this
authority for this loan.
He was the chair of the Board. Arranging temporary finance was an
ordinary instance upon management.
Valid contract
Equiticorp –
-
-
-
Sale of NZ steel
Owned by Crown
Crown decided to sell this company to Equiticorp, purchase price was to
be largely paid by the issuing of shares in the related company to
Equiticorp.
They thought they would find a buyer of these shares at a certain price
On settlement, it was the share market crash of ‘97.
Equiticorp’s share price decreased and they become insolvent.
The shares the Crown was gaining were decreasing in value. However,
Equiticorp managed to find a buyer at the agreed price.
Liquidator looked into this transaction and concluded that this was
contrary to the Act.
In these circumstances, the agreement did not bind the subsidiary
company because the directors who entered this agreement did not have
authority to do so.
P 181 – matter of practice. How you describe the transaction. This will
decide the power. Breaching s 40 if you do not describe it correctly. It
changes the nature.
Freeman –
- Requirements of a representation. Relevance of point 4 to Equiticorp.
Equiticorp cont. –
- This authority was outside the power.
Kop-Coat –
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-
Usual authority can be negated or withdrawn for a particular transaction.
Former agreement created in that the company executed it through 2
directors. Was signed by general manager. To have such slot for 2
directors, it would displace any authority of the general manager. Clear
wording of ‘directors’ only.
Application to an individual director
Bishop v Autumn –
-
Individual director has little power unless they are the only director in
the company. Power is held within the Board.
Autumn had one director and agreed to sell land from the company at a
discounted price.
Few hours before sale, hired another director who sought to get rid of
Tina, the initial director.
At appointment, was certified in company’s office. But Tina’s removal
hadn’t.
Two directors comprising the Board, and thus Tine had no authority to
sign the agreement.
Bishop [27] per Thomas J – “Authority to bind a company to contracts is primarily
reserved to the Board of Directors. Whether an agreement entered into by a
director is valid depends upon whether the director had actual or apparent
authority to enter into the agreement on behalf of the company. The customary
authority of one director of a board acting alone (as opposed to a sole director)
is very limited. As was said by the High Courts of Australia in Northside
Developments Pty Ltd v Registrar-General:
‘… ordinary directors may have quite significant functions entrusted to
them by the company, although usually these are of a more or less formal
nature, such as affixing the company seal to documents which the
company requires to be excluded… [but] the position of director does not
carry with it any ostensible authority to act on behalf of an individual
director is to participate in decisions of the Board. In the absence of some
representation made by the company, a director has no ostensible
authority to bind it”
Royal British Bank v Turquand –
- “We may now take for granted that the dealings with these companies are
not like dealings with other partnerships and that the parties dealing with
them are bound to read the statute and the deed of settlement. But they
are not bound to do more. And the party here, on reading the deed of
settlement, would find not a prohibition from borrowing, but a permission
to do so on certain conditions. Finding that the authority might be made
complete by a resolution, he would have a right to infer the fact of a
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resolution authorizing that which on the face of the document appeared
to be legitimately done”
Problem areas
1. Knowledge
a. If contractor has actual knowledge of lack of authority, it is the end
of the contract.
b. Lack of knowledge can be inferred (Kop Coat)
c. Should constructive knowledge apply?
i. Because people (agents) were deemed to have knowledge of
documents, they were deemed to know of any qualifications
or requirements on the agent’s authority.
ii. Court concluded, subject to exceptions, the contractor was
not required to see if the qualification had been complied
with. Can make reasonable assumptions 
iii. Royal British Bank v Turquand – indoor management rule –
1. Company was bank, but Board had no independent
power to borrow from bank. The power to borrow
came from prior authorization from shareholders in
general meeting.
2. Board did borrow some money, and fixed the
company’s seal to loan documents, but loan had never
been authorised by shareholders.
3. Since constitution provided that the Board could
borrow, if step were taken, the contractor is entitled
to assume the Board went to the shareholders in
general meeting. Right to assume that had been
complied with.
iv. Try to get around this in s 19 – Removed the doctrine of
constructive knowledge, even if there is a constitution. We
are not held to have deemed to know what it says.
v. However, aspects of the prior rule still apply – The exception,
where the rule wouldn’t apply, arose when the contractor
had knowledge that the internal things have not been
complied with, or there were suspicious circumstances that
put the contractor on enquiry and thus should have known.
d. What about ‘insiders’?
i. Deemed to know the constitution, and there is uncertainty
about outside directors.
e. All of this comes back through the proviso in s 18 –
i. S 18 (e) – ‘has’ is actual, but ‘ought to’ is realm of
constructive knowledge.
S 18:
Ought to have knowledge
- Equiticorp – the Crown ought to have known that the directors didn’t
have authority.
o “Position with or relationship to”
 Insiders
 On-going relationship
 Relationship is created by the transaction
o “Ought to have knowledge”
 Provides more protection than the ‘put on inquiry’ test
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

Same as ‘put on inquiry’, should be more than just on
inquiry.
What a reasonable person would have known
 Should be able to rely on a representation if
reasonable.
 Equiticorp held that these terms must be interpreted
together.
o Their relationship with the company proves
what they ‘ought to know’
o History may be an important factor. Knowledge
must come through the relationship with the
company however.
2. Doing act through an improper purpose
a. Whether the misuse of the power automatically removes the
agent’s authority. Thus, the question is can you only have authority
is you use if for a proper purpose, or whether the contractor was
aware of the misuse.
b. MacMillan Inc – suggest misuse of the authority will still result in
contract but all depends on whether the contractor was aware of
that misuse.
c. Hopkins – Mr. T was deputy managing director of couply
companies for insurance brokers.
i. Mr. T was responsible for the marine insurance department.
ii. Had authority to pay payments for grievance and hurt.
iii. Dismissed for dishonesty. Agreed to pay 2mil € of admitted
dishonesty.
iv. Mr. T hadn’t been completely honest in disclosing his
dishonesty. Done more than thought
v. Had actually paid 1mil € to third party. All for fraudulent
purposes.
vi. Court concluded that we were dealing with actual authority,
but because he was using it for an improper purpose, he lost
his actual authority and thus no contracts.
vii. Restrict MacMillan to cases of apparent, (c) or (d), authority.
[88], [89]
d. Capitol Films – agreed with Hopkins
Hopkins at [88]-[89] – “The grant of actual authority to an agent will normally
include authority to act for the agent’s benefit rather than that of his principal
and therefore, without agreement, the scope of actual authority will not include
this. The grant of actual authority should be implied as being subject to a
condition that it is to be exercised honestly and on behalf of the principal:
Lysaght Bros & Co Ltd v Falk. It follows that, if an act is carried out by an agent
which is not in the interests of his principal, for example signing onerous
unconditional undertakings, then the act will not be within the scope of the
express or implied grant of actual authority. As a result, there cannot be actual
authority: “the agent is simply not authorised to act contrary to his principal’s
interests: and hence that an act contrary to those interests is outside his actual
authority. The transaction is therefore void unless the third party can rely on the
doctrine of apparent authority (Bowstead para 8-218)
[89] – In the case of MacMillan Inc v Bishopgate…Millet J (as he then was)
stated that “English law…recognises the distinction between want of authority
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and abuse of authority”. He then went on to approve the statement that “an act
of an agent within the scope of his actual or apparent authority does not cease
to bind his principal merely because the agent was acting fraudulently and in
furtherance of his own interests”. Bowstead suggests that this statement of law
should be limited to apparent authority i.e. that acting fraudulently or in
furtherance of own interests will by its very nature nullify actual authority, but
not apparent authority. I respectfully agree.”
Lecture 19
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The Self Authorising Agent
-
Agent tells the contractor they have the authority to do [X].
o They may be mistaken
o Or knowingly exceeding their authority
Freeman – self-serving statements do not confer authority. Personal liability
could arise.
- Some think Freeman is too narrow and thus provides too much protection
for the company. Should be a case of vicarious liability.
- We must protect the reasonable expectations of contractors. If in line
with certain expectations, the contractor should be protected. However,
contractors have the onus to establish a binding contract.
- Freeman is the rule under a contractor believing the agent?
Are there principled rules around Freeman?
- We must be careful when talking about what authority we are talking
about. It’s not just the authority to contract. It may be the authority to
confer someone else’s contractual authority. It might also be authority to
affirm a third person’s contractual authority. Do they have authority to
make that representation?
- What about advising decisions/confirming decisions have been made?
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o E.g. “Board had an appropriate quorum to enter that contract…”
“I have been given the authority to make this contract” – looks like a selfAuthorising agent. However, it could say to the contractor “the company
accepts and thus will enter a binding contract with you”. The agent who thus
didn’t have authority to enter contracts but had the authority to give messages
of the company, it would result in a binding contract.
Armagas Ltd v Mundogas
- Illustrates confusion between giving authority to your offer has been
accepted.
- Gas ships, Mr. M (VP) – has the authority to sell the ship, through Mr. J
(ship broker) and sell the ship to Armagas.
- Armagas only will buy the ship if it can enter into another agreement to
hire it back for 3 years with Mundogas.
- Mr. M didn’t have authority to enter into a long-time hire (to lease the
ship back) – Armagas gets to know this.
- Mr. M said he will confer with head office to see what they say.
- Mr. J represents to Armagas that Mr. M has gone to company, and he
sought and gained authority to hire and enter into this contract
o What authority does Mr. J have to give this representation?
- The documentation didn’t represent this agreement, was only for one
year and was not signed. Market then crashed, and Mr. M returned the
ship. Armagas said they have 2 more years.
- Armagas brings proceedings to qualify their 3-year agreement.
Analysis
- Clear Mr. M lacked any authority to enter into the hire contract. He knew
that he couldn’t. He was the VP but implicitly Armagas knew he doesn’t
bear authority to enter into hire agreements.
- Wrong representation from Mr. J put false authority onto Mr. M.
- J is not authorised to make this representation.
- It was alleged Mr. M had actual authority to enter into this hire
agreement. Is this true?
- Trial judge: Mr. M had no actual or ostensible authority to enter
agreements but had ostensible authority to communicate company
decisions.
- HOL: trial judge must have been influenced by Mr. M’s title of VP –
ostensible authority to communicate.
- Is falsely stating you have authority the same as communicating that you
have the authority?
o Berryere v Firemans
 Insurance agent, lacks the authority to approve this specific
insurance contract
 Contractor comes, agent says contract had been approved
and register document of insurance (cover note)
 Argument: because he had the booklet of cover notes, does
he have the authority to communicate an insurance policy
(on behalf of the company).
o On Berryere – believes this is still saying “I have been given the
authority to make this contract”
- Case confirms Freeman – can’t have a self-authorising agent.
o Going to need an external affirmation that the agent has authority
and would thus lead to ostensible authority.
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“In the commonly encountered case, the ostensible authority is general in
character, arising when the principal has placed the agent in a position which in
the outside world is generally regarded as carrying authority to enter into
transactions of the kind in question.”
First Energy (UK) Ltd v Hungarian International Bank Ltd –
- How to deal with Armagas, does it preclude its argument or not – in that
there was no actual ostensible authority to contract, but can have
ostensible authority to communicate
1. What is the authority for?
2. What is the representation?
Lecture 20
First Energy v Hungarian (HIB) (on ostensible authority by virtue of a
managerial position) –
Is there a distinction between
communicate? Armagas says yes.
-
-
-
self-authorisation
and
authorisation
to
Mr. J senior manager who purports to enter a contract (line of credit)
with First Energy.
First Energy knew he lacked authority to grant this line of credit.
For the intermediate between the contract’s ratification, First Energy
enter into a hire agreement with HIB, and thus need finance. They
approach Mr. Jamieson, who discusses this with the London branch
manager.
On behalf of HIB, Mr. Jamieson offered these 3 hire agreement contracts.
First Energy accepts. HIB now are reluctant to contract with First
Energy, and thus argue no value offer was made as Mr. Jamieson lacked
authority to enter.
First Energy have been acting to their detriment and have started work.
Did Mr. Jamieson have authority by virtue of his position to enter into a
hire agreement?
COA
o Mr. Jamieson had ostensible authority (usual) to communicate to
First Energy that head office had approves these loans.
Consistency with Armagas?
Kelly
-
v Fraser (PC)
Supports First Energy, and thus distinguishes Armagas.
Mr. F appointed president and CEO of a company.
He has an already pension plan, and he wants to transfer this plan into
the scheme operated by the company.
Scheme ran by independent trustees. (Principals)
Scheme – can’t transfer plans, but it needed the approval of the trustees
Independent trustees allowed an employee (vice president…) to actually
do the paper work
Mr. F writes to this person and that administrator said yes you can.
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-
Mr. F makes payments into the pension scheme.
Later, independent trustees seem to tie up the scheme and every
contributor would be paid out (with profits)
Mr. F was told that the independent trustees never authorised his
transfer, and thus would be paid but not with contributions of profit
PC:
o Valid contract
o VP had actual/usual authority to communicate
o Armagas distinguished.
“[12] [Armagas Ltd v Mundogas SA (The “Ocean Frost”] was a decision on
complex and extraordinary facts. Armagas was a vehicle company formed by
two Danish shipowners to buy a ship from Mundogas, on the basis that
Mundogas would then charter it back from them for three years. Negotiations
for the deal were conducted between Armagas's broker, who had been promised
a substantial interest in Armagas if the deal went through, and a Mr Magelssen,
who was a Vice-President and the chartering manager of Mundogas. The broker
bribed Mr Magelssen to sign a spurious three year charter, purportedly on
behalf of Mundogas. Mundogas had not authorised Mr Magelssen to do this,
and indeed were unaware that he done it until much later. For their part,
neither Armagas nor its two principals had any contact with any representative
of Mundogas other than Mr Magelssen. They knew that Mr Magelssen had no
authority to enter into the charterparty on behalf of Mundogas without the
specific and express approval of his superiors, but they believed that he had
obtained it because their own broker told them so. Armagas sought to hold
Mundogas to the three-year charterparty, on the footing that although Mr
Magelssen had neither actual nor ostensible authority to enter into it, they were
entitled to rely on his execution of the agreement and his expression of
Mundogas's satisfaction that it had been concluded as constituting implied
representations that he had obtained express authority from the top
management of Mundogas. The trial judge had upheld that submission. He had
held that by appointing Mr Magelssen as Vice-President and chartering
manager, Mundogas had ostensibly clothed him with authority to make
representations about his own authority to sign such agreements. The Court of
Appeal did not agree. Goff LJ, delivering the leading judgment, considered that
there was no basis for concluding on the facts of that case that, by appointing
him as Vice-President and chartering manager, Mundogas had held him out as
having power to make the particular representations relied upon … . This was
because the only authority of Mr Magelssen that would serve Armagas's
purposes was authority to enter into the charterparty, as he had purported to
do. The principals of Armagas knew that Mr Magelssen was not authorised to
do that without the specific and express authority of his superiors. He cannot
therefore have had any ostensible authority to do it simply by virtue of the
appointments that he held in Mundogas. To say that he had ostensible authority
by virtue of those appointments to communicate that he had express authority
to contract, was only another of saying he had ostensible authority to contract.
Every agent who enters into a contract thereby asserts that he has authority,
but that alone cannot be enough to bind his principal. The House of Lords
affirmed the decision of the Court of Appeal and endorsed Goff LJ's analysis.
Lord Keith, who delivered the sole reasoned speech, declared … that he was not
willing to accept “the general proposition that ostensible authority of an agent
to communicate agreement by his principal to a particular transaction is
conceptually different from ostensible authority to enter into that particular
transaction.” Like Goff LJ, Lord Keith thought that while it was conceptually
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possible to have a case of “ostensible specific authority to enter into a particular
transaction”, such cases were bound to be rare … . It is clear that the whole of
this analysis is dependent on the fact that in the Ocean Frost the agent was in
reality holding out himself as having authority to do a specific thing that the
third party knew that he had no general authority to do. Such cases are
necessarily fact-sensitive. The Ocean Frost is not authority for the broader
proposition that a person without authority of any kind to enter into a
transaction cannot as a matter of law occupy a position in which he has
ostensible authority to tell a third party that the proper person has authorised
it.
[13] To take an obvious example, the company secretary does not have the
actual authority which the board of directors has, but he is likely to have its
ostensible authority by virtue of his functions to communicate what the board
has decided or to authenticate documents which record what it has decided.
The ordinary authority to communicate a company's authorisation of a
transaction will generally be more widely distributed than that, especially in a
bureaucratically complex organisation and in the case of routine transactions. It
is not at all uncommon for the authority to approve transactions to be limited to
a handful of very senior officers, but for their approval to be communicated in
the ordinary course of the company's administration by others whose function it
is to do that. Browne-Wilkinson LJ was referring to situations of that kind when
he said in Ebeed (ta Egyptian International Foreign Trade Co) v Soplex
Wholesale Supplied Ltd, The Raffaella , [1985 BCLC 404 at 414:
“It is obviously correct that an agent who has no actual or apparent
authority either (a) to enter into a transaction or (b) to make
representations as to the transaction cannot hold himself out as having
authority to enter into the transaction so as to effect the principal's
position. But, suppose a company confers actual or apparent authority on
X to make representations and X erroneously represents to a third party
that Y has authority to enter into a transaction; why should not such a
representation be relied upon as part of the holding out of Y by the
company? By parity of reasoning, if a company confers actual or apparent
authority on A to make representations on the company's behalf but no
actual authority on A to enter into the specific transaction, why should a
representation made by A as to his authority not be capable of being
relied on as one of the acts of holding out?”
[14] In First Energy (UK) Ltd ... the Plaintiff's representative negotiated a credit
agreement with the regional manager of a bank, who had authority to negotiate
the terms but told him that he had no authority to sanction the final deal, which
was a matter for the bank's head office. The regional manager eventually wrote
a letter amounting to an offer which was capable of immediate acceptance and
was in fact accepted by the Plaintiff. The Court of Appeal held that that was an
implicit statement that head office had sanctioned the deal, which the regional
manager had ostensible authority by virtue of his position to communicate.
There is, as Evans LJ said in that case … “no requirement that the authority to
communicate decisions should be commensurate with the authority to enter into
a transaction of the kind in question on behalf of the principal.”
[15] It is clear from the judgments in the First Energy (UK) case that the Court
of Appeal regarded their approach in that case as being wholly consistent with
the law stated by Lord Keith in The Ocean Frost. In the Board's opinion, they
were right to regard them as consistent. Lord Keith's speech remains the classic
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statement of the relevant legal principles. An agent cannot be said to have
authority solely on the basis that he has held himself out as having it. It is,
however, perfectly possible for the proper authorities of a company (or, for that
matter, any other principal) to organise its affairs in such a way that
subordinates who would not have authority to approve a transaction are
nevertheless held out by those authorities as the persons who are to
communicate to outsiders the fact that it has been approved by those who are
authorised to approve it or that some particular agent has been duly authorised
to approve it. These are representations which, if made by someone held out by
the company to make representations of that kind, may give rise to an estoppel.
Every case calls for a careful examination of its particular facts.”
Pacific Carriers
- Authority can come through the corporate structure
- Shipping contract, when you put goods on a ship, you get a bill
(document)
- Whoever has this bill has entitlements to pick up the goods.
- Exporter of the goods was asking the shipper to release the goods
without the bill.
- Shipper said we will do this if you release us from any liability, and if
someone sues us you must identify us, and if the bank guarantees this
indemnity.
- Bank thought all they were being asked to do was to confirm the
signature of their client
- Bank mistaken, and thus signed by the manager of the documentary
creditor department. This person lacked authority to sign an indemnity
- HC:
o If a bank has an internal structure with various departments, then
contractors should be able to rely on that organisation structure
and that authority.
[36] … “[Following Freeman & Lockyer] It is not enough that the representation
should come from the officer alone. Whether the representation is general, or
related specifically to the particular transaction, it must come from the
principal, the company. That does not mean that the conduct of the officer is
irrelevant to the representation, but the company's conduct must be the source
of the representation. In many cases the representational conduct commonly
takes the form of the setting up of an organisational structure consistent with
the company's constitution. That structure presents to outsiders a complex of
appearances as to authority. The assurance with which outsiders deal with a
company is more often than not based, not upon inquiry, or positive statement,
but upon an assumption that company officers have the authority that people in
their respective positions would ordinarily be expected to have. In the ordinary
case, however, it is necessary, in order to decide whether there has been a
holding out by a principal, to consider the principal's conduct as a whole. …
[38] A kind of representation that often arises in business dealings is one which
flows from equipping an officer of a company with a certain title, status and
facilities. …
[40] … Commercial documents, such as the letters of indemnity in the present
case, are commonly relied upon, and intended to be relied upon, by third parties
who act upon an assumption of authenticity created or reinforced by their mode
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of execution, and by the fact and circumstances of their delivery. Within a
commercial enterprise, such as a bank, there will normally be internal lines of
authority, and procedures, designed to ensure that, when documents issue to
third parties, appearances are reliable. Such an enterprise might induce or
assist an assumption, not only by the representation conveyed by its
organisational structure, and lines of communication with third parties, but also
by a failure to establish appropriate internal procedures designed to protect
itself, and people who deal with it in good faith, from unauthorised conduct.”
-
Bank was thus bound.
ING Re (UK)
- A company can ratify authority if they choose to/have to
- For this to be effective, they must have full knowledge of all material
circumstances
Structure
Did they have actual authority?
If not, s 18 – look at (c) and (d)
Did they have usual authority to contract? (carried on by that company – in
statute) (secretary etc would have usual)
Was there a representation from someone else that the agent had the authority
(ostensible)
- Go through ostensible test of representation, intention and reliance
If not, is there a way around this? First Energy, maybe they didn’t enter the
contract, maybe they are just communicating the decision
Under the proviso, if they knew they didn’t have authority shall be the end. We
must look to the nature of the person, e.g. should they have ought to have had
knowledge that the agent lacked authority?
Lecture 21
Shareholders and shareholder remedies
-
Act confers some matters of shareholder power
Re Duomatic principle
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Unanimous decision of the shareholders will bind the company
Duties
-
Share is a personal piece of property, they can vote in any way they wish
to, in their own personal self-interest.
Baker
- Personally entitled to vote in the personal self-interest
Fraud on minority exception - some things a majority just can’t do.
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When majority shareholders are also directors, there may be a conflict, and thus
minority shareholders can be protected.
Derivative action: shareholder can sue on behalf of the company.
-
Action brought by shareholder on behalf of the company for the wrong
done by the company (generally directors)
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Duty is owed to the company, not to the shareholder. Shareholder can’t
complain, the company must.
Rule in Foss v Harbottle
o Company was incorporated to buy certain land
o Mr. F (plaintiff), found a scheme, the promoters had sold land to H
and then once the company was incorporated, H sold the land to
the company at an inflated price, then H because a director.
o Company incurred losses (inflated price purchase), thus Mr. F
brought a claim against Mr. H for self-interest dealing.
o Court:
 Action had to fail
 Company was the right plaintiff
 Mere shareholder, F had no authority to sue H. Should have
approached and gained majority shareholder vote to sue
 Policy: to stop vexatious litigation by disgruntled
shareholders
 Shareholders with majority, or by vote of majority, can
overthrow minority decision.
Exceptions to the rule – s 165:
- Individual shareholder or director can get court ordered authority to
represent the company
- (6) – reinforces Foss principle.
- (3) main subsection
- (2) gives us a range of factors to take into account
- Assuming leave is granted, proceedings remain subject to court
supervision (s 168)
- Any settlement or discontinuance needs courts acceptance.
McFarlane v Barlow
- Family company, 77% owned by B and they are in day to day control.
Rest owned by M. Family business. B’s sole directors
- Profitable company but the B’s got very nice salaries.
- Rented space from another company who in turn was owned by B’s
- B’s had advanced money, and loaned money to the company who bought
the place, and the loan was interest free
- Company didn’t pay much by way of dividend
- M’s argued B’s taken advantage to pay excessive salaries, and also in
making the interest free loan
o Diverting profits to themselves
o Under s 165(3) – condition easily satisfied generally
o 165(2)(a) – likelihood of success of proceeding
 Key case: Vrig v Boyle: accepted TEST
 Would a prudent business person in the conduct of his
or her own affairs when deciding whether to bring a
claim
o Prudent person would consider amount at
stake, the apparent strength of claim etc
 Mowlem v Keach
 “[T]he prudent person of business through whose lens
the issue must be analysed, is not the holder of a
crystal ball. Routinely, prudent people of business
bring proceedings which do not, for one reason or
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o
o
another, ultimately succeed. The question is therefore
whether the company has a sufficiently good and
arguable case that having regard to the sums
involved, the costs of prosecuting it, the likelihood of
success of any counterclaim and the prospect of
ultimately recovering a judgment, such a hypothetical
prudent person of business would consider the claim
properly brought.”
B’s argue no claim against salaries - had been approved
specifically by the shareholders in a financial plan.
Interest free advance was not approved, but everyone had
knowledge. They could use their 77% majority to approve the loan
anyway.
Brings us to the issue of ratification –
-
Wrongful acts (define ratification) – imposes 2 definitions
o 1. Simply a decision where the company is not going to sue
o 2. Company saying we forgive you
 S 177 –
 Deals with the authority point generally
 (4) – confirms the common law rules apply
 Common law distinguishes between those than can
and cannot be ratified
o Pavlides v Jenson
 Negligence action (s 137 duty) – alleging
the company had sold the company
undervalue – court concluded this can be
ratified
o Regal (Hastings)
 Breach of loyalty, acquiring an
opportunity that should have gone to the
company
 Court said they could have ratified
it.
o Robb v Sojourner
 Some acts that cannot be ratified by the
R’s as shareholders. As shareholders they
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

-
couldn’t ratify the plan to sell assets.
Company was becoming insolvent, and
thus the interests of the creditors should
be weighted with the company, not the
shareholders.
o Cook v Deeks
 Corporate opportunity case
 4 directors, existing contract to lay
railway lines
 3 directors go off and take the contract
on their own
 Can they ratify it? PC: said they can’t:
 Corporate property, and thus they
were making a gift of this property
to themselves (fraud on the
minority)
 Majority giving property to themselves,
thus affects minority share value.
 Orthodox position
 “If, as their Lordships find on the facts,
the contract in question was entered into
under such circumstances that the
directors could not retain the benefit of it
for themselves, then it belonged in equity
to the company and ought to have been
dealt with as an asset of the company.
Even assuming it be not ultra vires of a
company to make a present to its
directors, it appears quite certain that
directors holding a majority of votes
would not be permitted to make a present
to themselves. This would be to allow a
majority to oppress the minority”
 Tension with Regal:
 Is Regal obiter?
 Regal was more concerned with
loyalty, not corporate opportunity
 C.f s 145
o Millers Limited v Maddams
 Excessive directorial fees
 Couldn’t be ratified
Back to McFarlane
o Salary can’t be ratified: giving property to
themselves
o Interest free loan was in a similar fashion, can’t
be ratified
Would a prudent business person pay for litigation?
Court held yes they would. Arguable case they
couldn’t be ratified, statutory criteria was satisfied.
Thus s 165 reflects upon other sections provided by the Act that may
have been breached.
S 169:
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-
Remember: duties owed to the company, and thus the shareholders
shouldn’t be concerned with a breach, the company should.
Lecture 22
Protecting minority shareholders cont.
Anything recovered will go back into the company’s asset funds.
Minority buy-out: s 110-15
- Fundamental change in circumstances of the company, and the
shareholders are locked into the company (not public company)
shareholder must go looking for someone to purchase.
- S 110:
o (a) – must be certain changes, and the shareholders must vote
against them
o (a)(i) – company pursues only that line of activity, but wants to
change their line of target, or vice versa in restriction.
o (a)(ii) – major transactions – asset worth half the company’s net
value – minority may have knowledge to pursue that.
o Shareholder may vote for or against depending on the nature of
the shares
o 114:
 Company can apply for an exemption to acquire the minority
shares.
 114(b): 115:
 If they fail the solvency test, it is not required??
Pacific Lithium
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-
-
Company involved in producing lithium based batteries
Company still at a developmental stage, it was hemeraging money.
Shareholders had to provide more funds to the company
Defendant shareholders wanted to exit the company, and wanted to find a
buyer for the shares – the majority proposed a change in the constitution,
which enhanced shareholder rights.
Lawyer said if they vote against it, they provoked the company to acquire
and purchase their shares.
Change in the constitution within s 110.
Court:
o Onus is on the company to prove why they shouldn’t, and the court
has a wide discretion
o Looked at the nature of the change, whether it was detrimental –
and looked at the expectations of the shareholders – they’d have to
find the development of these products.
o Prompted by commercial opportunism, rather than by a bona fide
claim.
o If it ordered a buy-out – company funds would be diverted from
producing business products, to buying shares
Relief against oppression, unfair prejudice and unfair discrimination: ss 174 –
175
- 174:
o If the company underwent an oppressive etc act, the court, with its
discretion may make an order of: (N.B – a former shareholder can
apply, and an entitled person (defined s 2)).
 Acquire the shareholders shares etc…
o Could be a shareholder acting as an employee – wide discretionary
section.
[62] –
There does not have to be wrongdoing by the majority, just a falling out. S
174(2):
- Discretionary powers of the court
Section 175:
- Specifies certain conduct as being prejudicial
Vujnonich v Vujnonich
- Shareholders were brothers (3 of them), were all successful property
developers, with a number of companies
- Family relationship broke down, Tony complained he was the only one
working full time. Frank had withdrawn for inactive involvement, and
Steven was unwell. Because of this illness, when he did come to the
office, he was abusive to staff.
- Frank and Steven were refusing to execute any mortgages on behalf of
the company. Couldn’t buy any new property. Tony offered to buy shares,
but they won’t sell them. Argued he was putting pressure on them to sell
their shares. He is thus diverting opportunities to himself to grow other
corporate opportunities. Also argued Tony was gaining funds to give to
family?
- Court:
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o
Faults on both sides, breakdown inevitable. Court ordered the
company to be wound up.
Thomas v H W Thomas
- Interpretation of s 174
o Minority shareholder couldn’t find buyer – locked to company
 Argued companies dividends were too low.
 Court said:
 You have to prove that you’ve taken reasonable steps
to sell shares. And although dividend was law, it
wasn’t unreasonable, it was appropriate in line with
business ambition of the company; conservative
approach.
o Court is interested in a balancing test when
exercising discretionary power. – history,
structure and reasonable expectations.
Latimer Holdings v SEA Holdings
- Property owning company (public listed), had a major shareholder SEA
which held 55% of shares.
- Directors decided on a policy of capital growth, not dividends.
- Share price was dropping, disagreement amongst shareholders via
direction and performance of the company. Majority wanted to buy
remaining shares, but there was complication in the price.
- There was a valuation gap – the shareholder will get a greater return if
bought all shares, than what they’re worth.
- Argued SEA should buy them out, and they shall pay the real net value
(asset value) not the market price of the shares. Companies policy has
eroded shareholder wealth, and the expectations of the shareholders was
that the company would be managed prudently
- Shareholders voted against liquidation of the company.
- Argued they couldn’t exercise the company as share price was too low
- Case confirmed:
o Errors of judgment are irrelevant, must show bad faith and selfinterest – errors cannot amount to oppression.
o Business judgment rule [70]
o [72] – shareholders just disagreeing about company strategy –
remedy not appropriate
O’Neill v Philips (in Latimer)
- HOL:
o Asbestos removal company
o Shareholder was a passive holder
o Mr. O shall become owner, shareholder (50:50 shareholder). Mr. O
was under the impression he would eventually take over
management, and his shareholding capacity was to be raised to
50% - (was only given 25%).
o Company went into decline, he was demoted, and argued unfair
and prejudicial conduct.
o Thomas: reasonable expectations, O’Neill: legitimate expectations
 Legitimate: what the parties had actually agreed to, or
whether the companies rules were being used in a way,
where equity would regard this not in good faith.
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

Mr. O may have had a reasonable expectation, but it was not
legitimate, because nothing was in writing. Narrow test.
Latimer confirmed we still use reasonable expectation test
[113] doesn’t have to be actual wrongdoing, the test is objective.
- Relief was denied to the minority – saw this action as opportunist – they
already bought the shares at a discount and thus are trying to make an
extra gain
Sturgess v Dunphy
- Minority may oppress the majority
- Oil drilling case, and 3 major individuals involved
- Lawyers for each shareholder realised there could be disagreement
between them
- Each shareholder would have a veto if disagreement arose. Must all
agree to make a decision.
- If a veto was used, there shall be a period of time for them to suss it out,
otherwise it would end in liquidation.
- Mr. S owned another company that provided management services to this
oil company.
o Majority started having concerns about some of the management
decisions made.
o This management company was making decision without the
consent of all 3 people.
o Majority seek to terminate this management contract.
o There is a right to veto in these particular circumstances.
o Veto invoked, and thus non-compliance led to liquidation – thought
the liquidation of the company would be of less loss than the
lucrative contract.
o This was oppressive – CoA:
 Reasonable expectations that the veto would be used in
appropriate ways, and thus it wasn’t, and thus oppressive.
 Minority can oppress the majority.
Lecture 23
Looking beyond corporate identity
-
3rd party wants to impose liability beyond the company, on a shareholder.
Salomon v Salomon & Co Ltd [1987] AC 22 at 30-31, per Lord Halsbury LC. [I]t
seems to me impossible to dispute that once the company is legally
incorporated it must be treated like any other independent person with its
rights and liabilities appropriate to itself … whatever may have been the ideas
or scheme of those who brought it into existence.”
Situations
1. Company incurs debts to a third party, but the shareholder guarantees
the company’s performance.
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2. Shareholder can be an agent of the company – also, the company can act
as an agent for the shareholder, and thus the shareholder would assume
liability
a. Smith, Stone & Knight v Birmingham
i. Parent company it owned land with a subsidiary on the
parent company land to conduct certain business.
1. Subsidiary paid no rent
2. Land was compulsory acquired by the local council
3. Owner got compensation from loss of land and for
disruption of business. Parent owns land, but
subsidiary owns business. Can parent get
compensation for land and disruption?
a. CoA: subsidiary was carrying on the business as
an agent for the parent company. Thus the
parents business was affected, and gained
compensation.
b. Why is the subsidiary an agent? Treated as part
of the parent. Parent had full and exclusive
access to their books, shared the same
premises, subsidiary only had one employee.
Only evidence they were distinct was that the
subsidiary was included on the land premise
title. Separate legal entities, but they were
solely as an agent for the parent.
c. There is no reason why we couldn’t also assume
a trust relationship between the two. Carrying
on business as a trustee, beneficiary is the
shareholder.
3. Can also assume it through attribution of knowledge
a. Tan case (property law)
i. Breach of dishonest assistance to the trust (company)
Exceptions (lifting the corporate veil)
-
History: Maybe the company was a sham and acting as an alter ego for
the shareholder.
o Gilford Motor Co
 Mr. H was managing director of company – sold car parts,
made their own brand of cars.
 Mr. H entered into a restraint of trade clause to the
company, not personally solicit the company’s clients, on his
own behalf or as an employee on behalf of someone else.
 Mr. H’s employment terminated, he then starts selling car
parts on his own – Gilford says hang on, restraint of trade
clause invoked.
 JM Horne and co, new company incorporated. Solicitor and
wife shareholders
 Company sold parts of Gilford cars.
 Gilford motors sues, Mr. H said it wasn’t him, it was the
company selling them, not me as a legal entity.
 Trial judge: the company was just a sham, and it really was
Mr. H selling.
 Thus, JM Horne was bound by the restraint of trade.
o Jones v Lipman
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



Mr. L owns land, entered into ASAP with Mr. J.
Mr. L got second thoughts, didn’t want to sell, needed an
escape route, incorporated a company, and before settlement
he resold the land to this company (Alamed Ltd). Jones could
not get specific performance of the land, but could sue
Court looked beyond this, and beyond Solomon, they are not
separate entities, ordered specific performance on the
company to sell to Mr. L
Also was an innocent third party who lend money to Alamed.
 Loan was an unsecured loan – bank still had a promise
to repay, however must be cautious as it may affect an
innocent third party
These cases started getting criticised –
VTB Capital plc – per Lord Neuberger
The ‘façade’ [reasoning] … is often regarded as something of a touchstone in
the cases …. Words such as ‘façade’, and other expressions found in the cases,
such as ‘the true facts’, ‘sham’, ‘mask’, ‘cloak’, ‘device’, or ‘puppet’ may be
useful metaphors. However, such pejorative expressions are often dangerous, as
they risk assisting moral indignation to triumph over legal principle, and, while
they may enable the court to arrive at a result which seems fair in the case in
question, they can also risk causing confusion and uncertainty in the law
-
-
Case looks at Gilford and Jones – looks at alternative reasoning that
would get the same result, but wouldn’t upset Solomon.
Gilford - Restraint of Trade still bound when he is an employee of
someone else (JM Horne) – attract personal liability. Same result
honouring Solomon
Jones – First in time equity, attribute Mr. L’s knowledge to the company
since shareholder and director, thus Mr. L would win. Don’t have to lift
any veil, simple property law equity principle reasoning.
The high point – when companies comprise a ‘single economic unit’
Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners [1969] 1
WLR 1241, CA, at 1254 per Lord Denning MR –
“I decline to treat the Fork Manufacturing Co. Ltd. [the subsidiary] as a
separate and independent entity. The doctrine laid down in Salomon has to be
watched very carefully. It has often been supposed to cast a veil over the
personality of a limited company through which the courts cannot see. But that
is not true. The courts can and often do draw aside the veil. They can, and often
do, pull off the mask. They Page 2 of 7 look to see what really lies behind. … I
think that we should look at the Fork Manufacturing Co. Ltd. and see it as it
really is -- the wholly-owned subsidiary of Littlewoods. It is the creature, the
puppet, of Littlewoods, in point of fact: and it should be regarded so in point of
law
Littlewoods –
- Denning believed subsidiary was not distinct from parent – attacks legal
personality of subsidiary.
DHN Food Distributors Ltd –
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-
DHN parent sold groceries – created 2 wholly owned subsidiaries – one
owned all land, the other owned all delivery trucks
Council compulsory acquires the land –
o Compensation paid to land owner, and if land owner carrying on a
business they get compensation for that. However, land owner isn’t
carrying out business, DHN is.
o Denning – Single economic unit, treated as one entity
Reconsideration (by the HOL) – (is the parent distinct or not from the
subsidiary?)
Adams v Cape –
-
-
Cape was involved through its subsidiaries in mining etc.
Worked through NAAC – quite a few of the employees became ill of
asbestos and are suing.
Want to go beyond Cape and to target the whole corporate group
Cape argued jurisdiction problem, but US court didn’t care.
Cape still wanted to work in US, so it puts NAAC in liquidation, and funds
the former manager on NAAC to incorporate a new company CPC (Cape
can buy all shares if it wants to)
Creates another layer of companies too (AMC)
o In AMC – works in the US, and thus continues to work through CPC
in the US, an thus still tries to sue in US
o CoA rejects such argument – confirms that a wholly owned
subsidiary is legally distinct from its shareholder.
This case recognises exceptions
- 1. A statute may actually require a different result in particular
circumstances
o DHN – result may be right, because we correctly interpreted the
compensation statute, not because they were one economic unit.
(can get land and business compensation)
- 2. Reinforced sham exception – the motive for the incorporation must be
relevant. Look at purpose or incorporation of subsidiary.
o To void future obligations, not pre-existing obligations. That is
legitimate. Entitled to organise such a business in this matter
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3. Agency exception – CPC legally distinct from Cape – isn’t intending to
carry on business in the US, and thus English assets are safe.
Lecture 24
New Zealand cases (lifting the veil)
Chen v Butterfield –
- Furniture business owned by Mr. and Mrs. B
- Developer who is encouraging them to relocate a new premise owned by
the developer
- Have concerns for the rental and didn’t want personal liability for it
- They incorporated Christchurch Furniture Ltd – was merely a sublease to
them
- Developer sells to Mr. Chen (new landlord)
- B’s didn’t guarantee the lease to Developer
- Solicitor of Mr. Chen approved them as the tenant
- Business thus in arrears into rent – Chen sued company (not worth suing)
– cant directly sue B’s as no guarantee
- Trying to argue that Christchurch Furniture is just a sham to place
liability on B’s
- Court accepts argument
o Chen’s solicitor sued for professional negligence (should have
secured the guarantee)
o Chen’s however lose – company has separate legal personality,
claim solely against the company
- Court defines Sham or Façade
o Deliberately drawn to give a different form from what was intended
to avoid legal consequences
o No corporate structure to protect, and thus the company wasn’t a
deliberate façade against personal liability
o Company wasn’t to conceal any facts as Chen’s knew of situation at
hand
- Tipping J:
o What are grounds for lifting the veil?
 Fraud, share practice, unconscionable conduct
McNamara v Malcolm (follows Chen) –
McNamara v Malcolm J Lusby Limited (High Court Auckland, CIV-2006-4042967, 18 August 2009, Sargisson AJ) at [34] – [37] [34] In New Zealand the
courts have traditionally been reluctant to lift the corporate veil. Case law
reflects that the courts are hesitant to interfere with commercial activity as the
doctrine of separate legal identity is fundamental to company law. The
reluctance of the courts to interfere with the protection affirmed in Salomon is
clearly expressed in Chen v Butterfield where Tipping J stated at 261,092: ‘In
essence the corporate veil should be lifted only if in the particular context and
circumstances its presence would create a substantial injustice which the Court
simply cannot countenance. Whether this is so must be judged against the fact
that corporate structures and the concept of separate corporate identity are
legitimate facets of commerce. They are firmly and deeply ingrained in our
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commercial life. If they are genuinely and honestly used they should not be set
aside. In any event something really compelling must be shown to go behind
them.’ [35] There are a variety of possible reasons for lifting the corporate veil
making it difficult to identify the precise circumstances in which a Court is
likely to do so. Numerous authorities demonstrate that general unfairness or
inequity suffered by a third party will not be sufficient: see … Saville v Chase
Holdings (Wellington) Ltd [1989] 1 NZLR 257 … .. [36] Circumstances where
the courts have shown their willingness to look behind the corporate veil
include those where the persons controlling the company have acted
fraudulently; where the company is regarded as “sham”; and where a company
is used to avoid an existing legal duty (see: Adams v Cape Industries Plc [1990]
Ch.433, Scott J. and CA (pet. dis. [1990] 2 W.L.R. 786. HL))….
[37] In Saville v Chase Holdings the Court considered in order to justify lifting
the corporate veil there must be some element of fraud or sharp practice or
where it would otherwise be unconscionable if strict adherence to the principle
of separate corporate identity were maintained. Likewise, in Adams v Cape
Industries the Court accepted “there is one recognised exception to the rule
prohibiting the piercing of the corporate veil”. Today, this exception is generally
expressed as permitting disregard of the company when the corporate structure
is a “mere facade concealing the true facts”. In Cape the Court observed that
there was relatively little in the way of guidance for determining whether or not
a corporate group structure involved a facade. As expressed in Gower & Davies
Principles of Modern Company Law at 204 “[t]he difficulty is to know what
precisely may make a company a mere facade”. It does appear at the very least
that the answer is not simply dependent upon the facts of each individual case
but the facts would need to be compelling.
Façade would be to hide pre-existing defects, not future ones.
Prest
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v Petrodel (more recent judicial reconsideration) - UKSC
Matrimonial property dispute
Wealth owned by company
Husband controller of company
Relationship breaks down, trying to gain share of company
Company is a separate legal person
All analysis is obiter:
o Even though company was legal owner, company was holding them
on trust for husband and wife. Didn’t have to lift the veil, just
imposed trust. Focus solely on beneficial ownership then division
of property.
o And thus, the analysis of veil was in obiter – lifting would be
problematic, and in the rare cases.
o Theoretical basis of why we should/would lift the veil –
 Concealment and evasion
 Concealment may allow for a lifting of the veil
(Gilford)

Court
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(above) used the example of Gilford
Injunction for imposition of restraint of trade
Company was just trying to conceal the fact he was selling parts
Was thus in breach of restraint of trade
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Also applied in Jones v Lipman:
o Lipman controls the company. Because of his control, he could do
certain things?
o Based on the evasion principle
 Defeat the right or frustrate the enforcement – to evade –
pre-existing claim hidden.
 Jones v Lipman (again):
 Lipman had already agreed to sell to Jones.
Incorporates Alamed to defeat this pre-existing right.
 Court recognised this façade, and thus lifted the veil.
o Evasion works on particular transactions –
Alamed can be lifted for the purposes for the
sale, but not for anything else
 Look at what is trying to be evaded
 What about the bank in this case? Granted a loan –
how does this evasion principle effect the bank?
o Adversely affecting the bank by not allowing it
existence, and thus no assets, and no
guarantee, however they are an unsecured
creditor so it didn’t matter.
o Lord Neuberger:
 Court can compel Lipman, when paid by
Jones, to acquire it to the company, and
thus would account for assets, and this
would be repayable to the bank.
 Agrees with the evasion and compelling
principle
o Lord Clarke – reminds us this is obiter.
o Walker – thought that lifting is just a label.
English view –
- Power exists, however rare.
- Must look beyond company – you must look to other doctrines (trust or
agency or attribution (what the director knows the company knows))
Statutory exceptions for s 15 –
- S 271 – Pooling orders (of assets of related companies)
o Ratification of single unit ideology
o Holding company – parents and subsidiary in which has control of
board of subsidiary
o (a) Most situations – subsidiary in liq thus parent becomes liable
for debts to the creditors (liability of shareholders)
o (b) when parent and subsidiary in liq – court has the power to
merge companies as if they’re one for distribution.
- S 272 –
o Factors the court must have regard to
o (1) one company insolvent
o (2) both companies insolvent
Mountford v Tasman Pacific Airlines
- On s 271
- TPA owned airlines – parent company – did the main trunk line of planes
(main route)
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Wholly owned subsidiary (Regional Airlines) owned regional routes
TPA had long line of liquidity problems
RA makes a loan of $600,000 to TPA
Next day ball calls in receivers
TPA is going to be wholly insolvent
RA was solvent
o However, 98% of its business was with TPA so would thus
consequentially fail. Also, this loan would disallow any creditors to
gain any money through liquidation
o However it gets money somehow? In a claim against TPA. Regional
creditors were thus in a worse position.
o Both companies now in liq
o Court made a pooling order – treated as one – pooled their assets
to repay creditors.
Court emphasised importance of solvency test – incorporation depends on the
company being solvent. Otherwise would lose its ‘separate person identity’.
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Directors argued s 131 – however there is an exception for wholly owned
subsidiaries.
S 131 is dependent on the company being solvent – RA were insolvent (or
had a questionable solvency) – so disregarded argument
[82] Since the subsection requires that recourse to it be “expressly permitted”
by the constitution of the company, which was not produced, the point is
academic. But since it was discussed in argument and may be germane to the
perspective of the legislation, I discuss it briefly. In cases where it applies it
legitimates the settled commercial practice of sweeping cash from subsidiaries
into the financing member of a group. In Dairy Containers Ltd v NZI Bank Ltd
at p 87 Thomas J referred to an observation of the Privy Council in Kuwait Asia
Bank EC v National Mutual Life Nominees Ltd at p 534 as having in effect: “. . .
recognised the commercial reality that nominee directors do at times respond to
instructions from their appointers in a manner which makes the appointer
directly liable . . .” in tort. No doubt in cases to which s 131(2) applies that
statement requires modification. But s 131(2) is an ancillary rather than a core
provision of the scheme of the Companies Act and cannot be permitted to
override the fundamental requirement of solvency.
While s 131(2) will relieve directors of the obligation to put the interests of the
subsidiary ahead of those of the holding company, such a sidewind cannot
relieve them of the fundamental obligation to cease trading upon insolvency.
[83] Regional did not seek pooling on a more extensive basis than equality of
treatment. If the constitution of Regional did engage s 131(2), such a claim
would have raised an interesting question as to that subsection’s effect on such
fundamental failure of the Regional directors, by advancing the $650,000 to its
insolvent parent, to act in the best interests of Regional. But the answer may be
left to another case.
Lewis Holdings Ltd v Steel & Tube
- ST parent company – acquires business called Healing (Stube – S) –
metallisation plant
- Lewis (the landlord) that S operates from.
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Metal contaminated the land. ST undertook decontamination work, plant
was removed, all that was left was bare land.
Then transferred the business assets of S to other subsidiaries within the
corporate group
Lease was coming up for renewal, directors of the group believed the
lease wouldn’t be carried on, however in fine print, it was automatically
renewed and thus needed to continue to pay rent.
ST wanted to terminate all future liability (of paying) – put S in liq
o Lewis could sue S but they had no assets and were insolvent
Lewis applies for a pooling order under s 271(a) –
o One company in liq – claim now against parent
o ST may become liable for all rent owed – court reasoned the
interests of subsidiary must be recognised
o Lease imposed liability to directors to both companies – subsidiary
was dependant on the parent paying the lease – reasonable
expectation that the parent would continue to pay rent.
[13] It is convenient to discuss the application of the legislation to the facts of
this case by addressing each of the four matters listed in s 272(1). Before doing
so, some broader comments on the approach to pooling orders under the
legislation are appropriate. [14] Our company law is firmly grounded in the
principle that a company is a legal entity in its own right separate from its
shareholders. That principle is expressly stated in s 15 of the Act. It continues
the well-established common law principle first established in Salomon v A
Salomon & Co Ltd, and confirmed in New Zealand in Lee v Lee’s Air Farming
Ltd. It is a corollary of that principle that the shareholders are not generally
liable to meet the obligations incurred by the company beyond the extent of
their liability to the company for payment of the share capital. [15] Section 271
creates an exception to that general principle. It had its origin in a
recommendation in the 1973 Macarthur Committee Final Report of the Special
Committee to Review the Companies Act, responding to a submission that in at
least two recent cases well-known public companies had abandoned
subsidiaries … [19] I do not propose to embark on a detailed analysis of the
competing principles involved. In the end, what is required is an application of
the statutory criteria in s 272(1) to the facts of this case as I determine them to
be. In applying the criteria I must balance two policy considerations inherent in
the legislation which weigh on different sides of the scales. The first is that the
separate corporate identity of the company in liquidation is to be respected. The
second is that s 271 is directed to the mischief that an overly strict application
of that separate corporate identity may cause. [20] In applying the first policy
consideration, that the separate corporate identity of the company in liquidation
is to be respected, I must bear in mind the rationale for the provision in our law
that a company is a legal entity separate from its shareholders. That rationale is
to enable a business to be carried on by a separate legal entity, so as not to
expose the shareholders (be they one or many) to the liabilities which the
business may incur. It is inherent in that rationale that the company will be not
only a separate legal entity, but also a separate commercial entity. Its business
will be conducted in such a way that the company is not a mere
“front” for a business actually carried on by others. The “corporate veil” shields
the substance of the company and its business from the shareholders who own
the company. It does not, if the company is a mere facade, shield that facade
from the operators of the business which is carried on in its name. [21] A
particular aspect of the separate corporate identity of a company which must be
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taken into account in the balancing exercise is the common business practice of
using the principle of separate corporate identity in the creation of group
structures. The evidence shows, if indeed evidence was necessary, that it is
common practice in company groups that a range of services are undertaken
centrally, group staff are used to manage subsidiaries, and senior officers of the
parent act as directors of the subsidiary. STH places considerable reliance on
such matters. Those propositions are largely uncontroversial as statements of
general practice. What is required is a factual assessment of the practices
adopted in this case, to determine whether there is some conduct or other
circumstance falling within the s 272 guidelines that disentitles STH from
relying on the separate legal existence of Stube. … [33] A provision in a
constitution that a director of a subsidiary may prefer the interests of the
holding company to those of the subsidiary does not mean that the interests of
both companies can be conflated, or that the interests of the subsidiary can be
ignored. The proper application of such a provision requires the directors to
recognise that there are different interests involved, and to decide which are to
be preferred in the issue under consideration. … They [the directors] saw only
one set of interests involved, the overall interests of the group. [34] The
directors did not structure their decision-making to that end. They did not hold
formal board meetings for Stube. Nor did they sit down together to discuss
matters with a conscious appreciation that they were doing so with their Stube
directors’ hats on. Their interactions appear, from their oral evidence and the
contemporary documents, to be dealings between the CEO and CFO of the STH
group, not dealings between Stube board members … [65] Counsel for STH
submits that there is nothing of substance in this allegation and that Stube was
a shell company that was managed, as per common practice, as part of the
group, and maintained as a separate entity. I reject that submission. Stube was
not a shell company. It owned a significant property interest, which was both an
asset and a liability. I find no evidence of any exercise of management functions
concerning that property interest which was independent of STH, to any
material extent. The evidence, including but not limited to the examples I have
given, satisfies me that, in the relevant period, extending from about 2003 to
the date of liquidation, STH took part in the management of Stube to an extent
which was total in all essential respects. Mr Crossland describes Stube as a
“slave” of STH. Another metaphor might be “puppet”. The separate legal entity
which was Stube was devoid of any capacity to conduct its own affairs. … [72]
What is in issue here is whether, given Lewis’ clear knowledge of the identity of
its lessee, that conduct of STH should support the making of a s 271 order, to
convert STH’s longstanding assumption of responsibility for the property into a
legal obligation. … [82] To the extent that s 271 is directed at circumstances
where the related company deprives the company in liquidation of assets to the
detriment of creditors in disentitling circumstances, the consideration of the
Court should not be confined to actions in the period just prior to the
liquidation. Over the long run, the evidence does not establish that STH has
been a net contributor to Stube.
[83] In any event, s 271 is not limited to situations where there has been a
deprivation of assets from the company in liquidation. There may be other
disentitling circumstances. I consider that STH’s actions in relation to the lease
fall within that description. [84] Stube had for many years been unable to pay
the rent without STH’s support. It had no legally enforceable arrangements for
support. If the directors of Stube had consciously entered into a contract to
renew the lease, they would have been incurring an obligation, which the
directors could not have had reasonable grounds to believe Stube would be able
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to perform from its own resources or by recourse to legally enforceable
financial arrangements, as required by s 136 of the Act. Furthermore, the
renewal of the lease was a major transaction which should not have been
entered into unless approved by a special resolution, under s 129 of the Act.
STH, as shareholder, did not pass a resolution authorising the transaction. Nor
did it take any steps to put in place legally enforceable funding arrangements to
enable Stube to meet its obligations. Sections 129 and 136 apply to a
transaction deliberately entered into. They do not cease to apply, even if I was
to accept the proposition that the renewal was the result of a mistake by Stube.
[85] STH and the directors of Stube did not comply with those provisions, and
STH continued to pay the rent. Its conduct towards Lewis in relation to the
renewal was such as would reasonably lead Lewis to believe that Stube was not
treated as a legal entity distinct from STH. That conduct is directly relevant to s
271(1)(b). It weighs in favour of an order. … [88] So far as s 272(1)(c) is
concerned, I find that the circumstances that gave rise to the liquidation of
Stube are attributable entirely to the actions of STH
Parent shareholder liable for this particular debt – reasonable
expectation of landlord and pooling order
Lecture 25
Recognition of main issues
Logical place to start analysis
Depth of analysis - analogise with cases on important points
2017 Exam Q
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