LAWS4112 SHORT NOTES
INTRODUCTION
-
S57 A corporation includes a company, a body corporate or an unincorporated body
S113 Proprietary compaies – have no more than 50 non employee shareholders
o
o
S201A minimum of 1 director
May convert to public company under S165 by a special resolution and application lodged with ASIC.
S9 Registration of a company – separate legal ownership,
Two key organs:
o
o
Director s198A to control the company
Shareholders have right to vote, right to dividend and right to appoint and remove (203C & 203D)
▪
Liability is limited to capital they have contributed (516)
LIMITED LIABILITY
-
-
Registered companies are separate and distinct from directors and shareholders (Salomon)
o
Implications:
o
o
o
o
o
o
o
o
A company may commit an offence (Hamilton v Whitehead)
Property owned by a company does not belong to members (Macaura v Northern Assurance)
Interest in shares, not property (1070A(1)
Cause of action with company, not members
Company is party to contracts
Company can contract with shareholders (Lee v Lee’s Air Farming)
Tort (Williams)
A company is considered a person (S6 TAA)
Lifting the corporate veil: There is no common, unifying principle for lifting the veil (James Hardie)
o
o
o
o
o
o
o
-
The creditor had notice it was dealing with a company, the liability of the members which was limited (Salomon via Lord
Herschell)
Under 588G
Fraud (Re Darby)
Evading existing legal obligations (Dennis v Wilcox)
Avoiding contractual obligation (Gilford Motor CO v Horne, Jones v Lipman, Kuyong)
Avoidance of future obligations (Adams v Cape Industries)
Sham cases (Smith Stone & Knight)
▪
Agency test rejected in DHN v Borough of Tower Hamlets, Morgan v 45 Flers Avenue
Tort liability – may be scope, to lift the veil in torts cases to make the parent company liable for the torts of the subsidiary
(Briggs v James Hardie)
Corporate Groups
o
o
o
S46 - A subsidiary company exists where the parent company controls – composition of the board – this requires a legally
enforceable power and not a de facto or practical control of the board (Mount Edon Gold Mines v Burmine)
S47 – Control is where they hold more than half the votes in the general meeting, or holds more than half the issued share
capital carrying a right to share in profits (50% by value – Re Swan Brewery Co Ltd)
Companies within a corporate group remain separate entities (Industrial Equity v Blackburn)
▪
▪
Only owe duties to their own company, not the group as a whole (Walker v Winborne)
The interests of one member of the group of companies may lie in the continued viability of the other members of
the group (Equiticorp Finance v Bank of New Zealand)
▪
-
Holding company will be liable under S588
o
o
o
Subsidiary incurs debt or while insolvent becomes insolvent as a result; and
There are reasonable grounds for suspecting insolvency; and
The holding company of one or more of its directors is aware at the time that there were reasonable grounds for suspecting
and/or that the parent or its directors would be aware.
CORPORATE GOVERNANCE
Internal Structure of Governance:
Replaceable Rules
- S141 Replaceable Rules
- S135(2) May be modified by the constitution
- S135(3) Failure to comply with RR is not a breach
Constitution
-
Public company must have a constitution ASX Listing Rule 15.11
S136(1)(a) Constitution may be adopted on registration as long as it is signed by every member
o
S9 Requires special resolution to adopt after registration – must be passed by at least 75% of the votes cast by members entitled to
vote on the resolution
Has a Statutory Contract Been Formed?
S140(1) Form a statutory contract between
-
the company and each member; the company and each director and company secretary; and a member and another member
A member is confined to enforcing personal rights, including:
o
o
o
Right to vote and right to dividends
Must be enforced by the company
A member may be able to insist that the company’s organs be properly constituted (Kraus v JG Lloyd Pty Ltd – person rights had
been infringed by director exceeding their term limit and not calling a meeting for re election)
Implications:
-
Cannot be enforced by third parties (Eley v Positive Life, Marketing Advisory Services (MAS) v Football Tasmania Ltd)
Members are bound or entitled in their capacity as members – unenforceable outside of their capacity as members (Eley v Positive Life)
Members are bound by the statutory contract in any disputes arising in relation to the affairs of the association, ie. disputes must be
resolved by method proscribed in constitution (Hickman v Kent or Romney Sheep Breeders’ Association)
Breach of Constitution
Remedy for breach of the constitution by the company is injunction or declaration, not damages (Webb Distributors (Aust) v Victoria)
-
S563A postpones claims owed by a company to a member until after other creditors have been paid.
Sons of Gwalia v Maragaretic
o
Issue: damages for shares claimed under inducement were not subordinated by 536A, as it was not owed in their capacity as a
member.
However, this has been overruled by Corporations Amendment Act 2010 amends rights of those bringing claims for damages in relation to
shareholdings under Corps Act.
o
o
o
All claims of members ranked equally and after creditor claims
Removes right to vote as creditor in application for winding up or voluntary administration without permission of the court
No restriction upon capacity of shareholder to recover damages against company based on how they acquired the shares.
Alteration of the Constitution
-
S136(1)(b) A special resolution of members is required to repeal or alter the constitution (s9)
S136(1)(b) Notice of a meeting must be given (21 days – unlisted 249H(1), 28 days – listed (249HA(1))
S249L Notice must specify
-
o
Intention of resolution, place, time and date of meeting, general nature of meeting, proxies
S136(2) Corporation cannot contract out its right to amend either by a provision in the constitution or in some other agreement (Punt v
Symons)
However, alteration or repeal may result in a breach of separate contracts made on terms of the previous constitution (Bailey v New South
Wales Medical Defence Union)
o
o
o
Is the contract a limited statutory contract or a special contract
IF statutory contract under 140(1) then cannot alter as it does not breach 140(2)
▪
Each time a subscription is paid, a new contract is formed – therefore could change prospectively, but not retrospectively.
IF special contract, then not limited to members, and therefore able to recover.
Restrictions on Alteration
-
Shareholders can contract among themselves not to modify the constitution (Russell v Northern Bank)
Const can be entrenched by using weighted voting rights (Bushell v Faith)
S136(3) Const can make provision that modification or repeal be conditional upon further requirement
However modifications that are oppressive or unfairly prejudicial are prevented under Part 2.F.1
Company may sue to enforce provisions within constitution (Hickman v Kent)
Fraud on Minority Protection
-
-
Power to alter constitution is subject to equitable limitation on the voting power of the majority (Gambotto)
Does alteration give rise to conflict of interests and advantages between majority and minority shareholders (Gambotto)
o
o
NO – Amendment to constitution has to be BF in interests of company as a whole (Allen v Gold Reefs)
YES – onus on majority to establish that: secure the company from significant detriment or harm and that the process and terms of
the acquisition are fair (full disclosure, independent expert valuations of shares)
GAMBOTTO Relevance Today:
o
Compulsory acquisition of shareholdings is subsequent to Gambotto means that it is unlikely that a company would use alteration to
expropriate minority shareholdings
▪
-
GA.1 allows a company which acquires 90% of another company following a hostile takeover to force out remaining 10%
and 664A contains general power of SH who crosses 90% threshold to buy out remaining shares within 6 months.
Gambotto applies where:
o
o
Majority purports to alter the constitution to take away other valuable proprietary rights attaching to shares which falls short of
expropriation
It only applies to the extent that there isn’t some other mechanism to protect minority interest (Arakella) recently applied in
Bundaberg Sugar v Isis Central Sugar
The General Meeting
-
248C must give reasonable notice individually to every other director
248F Quorum is 2 directors (must be present at all times during meeting – Clampe v Fairway Investment)
248G Resolution of directors must be passed by majority of votes cast by directors
251A minutes must be kept, as well as resolutions passed without a meeting
o
Decisions made by ordinary resolution
o
o
o
-
290 director has right to inspect the financial records of the company
250L Voting may be by poll if demanded by shareholder with more than 5% of votes requests or written resolution may be required
S249A
s249X may vote via proxy
Voting may be informal Re Express Engineering, Re Duomatic)
▪
▪
IF member excluded from meeting, then informal vote not allowed (Re Compactation Systems)
1322 informal procedure may be allowed if no prejudice – but if statutory requirement to hold meeting, then no (Bodikian v
Sproule)
General meeting must deal with the following: altering const 136, reducing capital 256B 256C, altering company status and removing
director 203D
AGM must be held by public company (250N) and large proprietary companies (293)
Procedure
-
Meeting can be called by Director (249C), and must be called if requested by members with 5% votes or 100 members (249D(1)) (unless
issue not in competence of the general meeting NRMA v Parker)
Members with 50% of votes or more may call 249E(1), or members with 5% or more, but this is at their own expense (249F)
Court may call on application 249G (eg case of no directors Re Totex – Adon)
Residual Powers of General Meeting
-
Power to instigate action against directors is a management power of the board (John Shaw & Sons v Shaw)
195 Residual powers can be exercised by general meeting where board is unable to act
o
(eg deadlock – Barron v Potter, lack of quorum)
However if GM has power to appoint additional directors, then this method should be undertaken before residual powers are exercised
(Massey v Wales)
OR if const provides additional method of breaking deadlock, no residual power, such as in 203D
Shareholder Interference
-
One organ of the company cannot interfere with the workings of another organ (Automatic Self Cleaning Filter v Cuningham)
General meeting cannot ratify that which they did not have power over originally (Quin & Axtens v Salmon)
Voting may be undertaken informally (Re Duomatic)
Directors may make decisions against the majority of shareholders (Howard Smith v Ampol Petroleum)
Procedural Irregularities
S1322 Shareholders cannot complain of mere procedural irregularities:
o
o
-
PI include: the absence of a quorum at a meeting of a corporation; at a meeting of directors or creditors of a corporation, at a joint
meeting of creditors;
and for a defect, irregularity or deficiency of notice or time
A departure from the prescribed method will not be invalid unless they change the substance of the thing which is being done – must
establish a nexus between the irregularity complained of and the prejudice (Re Pembury)
Defective notice does not invalidate a meeting, however it may constitute misleading and deceptive conduct (Fraser v NRMA)
-
However, a deliberate decision to convene an invalid meeting was not a ‘procedural irregularity’ within 1322(1) P W Saddington Young
1322(4) The validation of other non procedural irregularities is possible
1322(6) the court must be satisfied that those concerned acted honestly and that it is just and equitable to make that order.
Procedural irregularities may elevate procedural requirements into enforceable personal rights (Ryan v South Sydney Junior Rugby Club)
CORPORATE CONTRACTING
-
S124: Companies have legal capacity to contract as natural persons (also issue shares and grant floating charges)
125(1) Company can state objectives and limit contracting powers
125(2) Breach will not render the contract void, however may be enforced by third parties.
o
May ratify act in GM unless creditors interests intrude (Kinsela v Russell Kinsela)\
127 Company may contract with or without a common seal if doc is signed by: 2 directors, a director and a secretary, or sole director for
pty ltd.
127(2) May execute with a seal if fixing is witnessed by (a)(b)(c) abaove
Act of the Company
-
125 must be an act of the company or an exercise of corporate power (organ = GM generally)
198D The act of a delegate may suffice as an act of the company
o
o
o
Governing director may act (Whitehouse v Carlton Hotels)
Directors are expected to take reasonable steps to put themselves in a position to ensure that delegation does not hurt the company
(Daniels v Anderson – CLERP Reform)
However, this approach was not taken in Crabtree Vickers or Brick & Pipe – Where the director was treated as an agent for the
company, rather than an agent (However distinction may only be important in rare situations).
Agency Relationship – Company may be bound in three ways:
1.
-
Actual Authority: If a person has actual authority, the company is bound.
Express or implied by acquiensence (consent of BM) Hely Hutchinson v Brayhead
261(1) Acting with E/I AA may make contracts without the common seal of the company
198A May arise under constitution or Corps Act
(a)
-
Express Actual Authority
If agent appointed – then authority will be to do whatever is necessary or normally incidental to perform tasks (incidental authority)
Appointment to a position grants authority to do things which are usually performed by a person in that position (usual authority)
o
Managing Director: Deal with everyday matters (Entwells v National and General Insurance) and do not have authority to enter into
transactions which are not in everyday running of business (Re Tummons)
▪
▪
o
o
o
May authorise agents to make contracts of kind that MD can make (Crabtree Vickers)
Can borrow money to deal with cash flow problems in scope of everyday running, but not capital purposes (Green v
Meltzer)
Individual Directors: Have power to join with other D and make decisions, no usual authority to bind company (Northside
Development). In absence of board authority, no individual authority to take action on behalf of the company. Chariperson has no
usual authority to bind (State Bank Vic v Perry)
Company Secretary: 188 Must keep records and ensure performance of statutory duties – has usual authority to make contracts
(administrative) (Panorama Developments)
Other agents: Question of fact – look to commercial practice to determine usual activities of person in these positions). Dependent
on particular positions (AWA v Daniels)
(b)
Implied Actual Authority
-
Where board acquiesces to a person acting as an agent, implied actual authority is awarded (Hely Hutchinson v Brayhead)
(c)
Application of Statutory Provisions
Provisions contained within 128 – 129 are a restatement of common law, with modifications, and therefore co-exist with common law
(Australian Capital TV Case)
-
S128(1) Can make assumptions in relation to ‘dealing with a company’
o
o
o
o
-
Includes purported dealings, whereby TP believes they are dealing with company itself (Story v Advance Bank)
Assumptions not independent, can still rely on assumption even if barred from using another because of knowledge or suspicion
(Brick & Pipe v Occidental)
Cannot rely upon assumptions where third party ‘knows or suspects’ (more difficult to satisfy than ‘put on enquiry’ in Freeman v
Lockyer
Court may have to determine what powers are customarily possessed by person in particular position (NCR Australia v Credit
Connection)
130 Constructive notice is not sufficient
129(7) nd 128(3) assumptions apply in context of forgery (Ruben v Great Fingal Consolidated)
129 Assumptions can be made that:
2.
-
3.
-
(1) RR and const complied with
(2) D and S recorded in public info, validly appointed and customary authority for position
(3) officers and agents have been validly appointed and have customary authority
(4) O & A properly perform their duties (Pico Holdings v Wave Vistas)
(5) document duly executed if signed in accordance with 137(1)
(6) O & A with authority to issue document have authority to warrant doc is genuine or true copy
Apparent or Ostensible Authority
Where the agent did not have actual authority, may enforce if four conditions are satisfied Freeman & Lockyer v Buckhurst (per Diplock LJ)
(No MD, K acted as one, hired Architects, held had ostensible auth)
a.
Representation must have been made to the contractor that the agent had authority to enter into a contract of the kind
being asserted
b.
The representation must have been made by a person with actual authority
c.
The contractor must have been induced by the representation to enter the contract
d.
Capacity is not longer relevant in Aus Law – However apparent authority will not operate if the third party knows something
which would put a reasonable person on inquiry as to whether the person with whom they are dealing lacks authority.
Four requirements were approved in Crabtree Vickers v Australian Direct Mail Advertising (Fam mem told TP to purchase copier, but no
authority as authorising member did not have power to do this, so could not delegate to agent, therefore no ostensible authority)
Ratification (SEE RELIEF OF DIRECTORS DUTIES)
Ratification by company will bind company to contract by a person with authority under 126 by an ordinary resolution and within a
reasonable time
A liquidator has power to ratify (Alexander Ward v Samyang)
IF there is an absence of actual authority – Indoor Management Rule
-
TP dealing with company entitled to assume that internal procedures have been complied with (Royal British Bank v Turquard) (seal
affixed but no resolution, considered internal matter and TP could assume)
-
If a party is ‘put on inquiry’ then cannot rely on IMR (Northside Developments) – Mortgage, seal not affixed, bank POI as money being
distributed to other companies, therefore IMR not apply.
-
Party on inquiry by circumstances surrounding transaction cannot presume in own favour that things rightly done (Morris v Kansen)
-
DIRECTORS DUTIES
Director
-
S9 A director is a person appointed, or acting in that capacity
o
o
Board of directors has exclusive management powers – shareholders cannot override this (Poliwka v Heven Holdings)
However issues arise whereby directors may pursue their own goals and the interests of the shareholders (AWA v Daniels)
S201A A director can be:
o
o
o
A natural person over 18 years old (201B) with signed consent (201C)
Not disqualified (201B)
Ordinarily reside in Australia (2 directors – public, 1 director pty ltd) (201A(1)(2)
o
o
-
o
Not auditor for at least 2 years (324C)
Defacto directors arise where not formally appointed by act in the position of the director (Dep Comm of Tax v Austin), or shadow
acting in accordance with instructions (Standard Bank of Australia v Antico)
Influence extends to entire board of directors (Kuwait Asia) and must have effectual control (SBA v Antico)
S198A Directors have power to manage company
Officer
-
S9 An officer includes: secretary, liquidator, person who makes or participates in making decisions affecting the whole or a substantial part
of the business. (ASIC v Adler – Director of holding company found to be officer of subsidiary company as had cap to affect corporations
financial standing)
Appointment
-
117 initial must be specified in registration
201G may appoint if passed by separate (201E) resolutions for each director, notice to ASIC (205B)
201H may be appointed subject to confirmation 2 months prior to agm, and must act for the benefit of the company as a whole
Must submit for re-election after three years (190(1))
Types
-
Managing Director (201J): board may delegate to MD. MD usually manage daily business (Shirlaw v Southern Foundaries)
Executive/Non Executive: Executives employed full time (daily management), non executive provide independent view at meetings
Chair: 248E appointed by directors – has casting vote (248G), signs minutes (251A(2)), exercises procedural control (Kelly v Wolstenholme),
ensures board is properly informed (AWA v Daniels)
o
IF no chair, then no valid meeting at which resolution can be passed, unless unanimously (Colardo Construction v Platus)
Remuneration
-
202A, 202B Renumeration must be provided in the constitution
300A disclosure requirements for pty ltd and public (Bushell v Faith)
Duties are Owed To:
-
Duties owed to company as separate entity, not shareholders (Percival v Wright)
Directors may assume a duty to another person if: (Glavanics v Brunninghausen – sale of business, did not inform P. Held duty as P entirely
dependant on D for information)
o
Shareholder dependency, relationship of trust and confidence and there was a significant transaction and positive action taken by
the directors.
Business Judgement Rule:
-
Courts will generally not involve themselves in questions of ordinary management of the company (Re Smith and Fawcett), but will review
whether the decision was made in good faith. IF under 198A action exercised in GF and for PP then court will not intervene. In place so
that the courts do not have to review every business decision made (Carlen v Durry)
180(3) Decision to take or not to take action in respect of a matter relevant to business operation of a company. Have exercised business
judgement if: (180(2)
o
o
o
o
-
Make judgement in GF and for PP
No material person interest in matter
Inform themselves about subject matter to extent that would be reasonably appropriate
Rationally believe that it is in the best interests of the company: Belief rational unless a decision that no reasonable director would
make (ASIC v Rich – need to show identifiable and arguable chain of reasoning)
Onus lies on defendant (ASIC v Adler)
-
DUTY OF CARE
DOC arises in common law and equity – exercising reasonable care and skill are the same (Permanent Building Society v Wheeler)
Statutory DOC
-
-
180 objective SOC – whether officer exercised degree of care and diligence that reasonable person in like position (same responsibilities,
office held) would exercise in similar circumstances to the corporation (ASIC v Vines)
Objective Minimum Standards (AWA v Daniels)
o
o
Obtain basic understanding of business and familiar with fundamentals; Keep informed of activities of company; Monitor activities;
regularly attend board meetings; maintain familiarity with financial status
Minimum SOC (ASIC v Adler) – familiar with general business, keep informed, general monitoring
Same responsibilities (ASIC v Rich) in same position as person – but considerations may place higher standard (auditor = higher standard)
Non executive directors – Standard not yet established (ASIC v McDonald) – however as objective standard should be no distinction
between exec/non exec (Daniels v Anderson – NE required to ask questions, keep up to date etc)
HOWEVER, Common law typically imposed lower fact centric subjective standard of care (Marquis of Bute’s Case)
-
Subjective SOC imposed (Romer J in Re City Equitable Fire Insurance Co)
o
o
o
Care: D take care such as RP on their own behalf
Skill: Assessed against skill standard – if possess special skills should use for benefit of C (Re Brazillian Rubber)
Diligence: Not bound to give continuous attention to the company (Comm Bank of Australia v Friedrich – keep abreast of affairs)
Skill
-
Standard of skill depends on whether person is Exec/Non exec, and whether person has special qualifications:
Exec: Skills of reasonably competent person with skills they possess – however if looking at areas outside of their expertise, then held to
NE standard (ASIC v Rich)
Non Exec: Unclear whether same standard applies as Exec (ASIC v Macdonald)
o
o
Basic standard is to place themselves in a position to guide and monitor management of the company (AWA v Daniels)
However duty may be more demanding: Chair of audit committee (ASIC v Rich), Experienced non exec directors (Vrisakis v ASC), only
director with lending experience (Gold Ribbon v Sheers)
Delegation and Reliance
Delegation
-
S198D Directors may delegate their powers to: committee of directors, director, employee or any other person
o
Must exercise power delegated in accordance with directions (198D(2)) and delegation must be recorded in minutes (251)
Some matters of operational responsibility must be delegated (ASIC v McDonald)
190(1) Where power is delegated, directors are responsible for actions of the delegate
o
-
190(2) Defence: If director believed on reasonable grounds that the delegate would act in accordance, and good faith after making
proper enquiry that the delegate was reliable and competent
D expected to take reasonable steps to put themselves in position where delegation does not hurt the company (Daniels v Anderson)
ASIC v McDonald; Morley & Ors v ASIC: Failure to delegate monitoring role = breach, failure to request draft copy of announcement =
breach as reasonable delegate in shoes would request. HELD in Morley however that duties should not have been delegated in the first
place, as it was an issue of high importance (considered at board level for majority of time)
Reliance
-
-
189 Directors can rely if reasonable (employees, prof advisors, experts, directors, officers:
o
o
o
Reasonable: Must be within professional competence of person providing info or advice
Relied on in GF
Must make independent assessment of information (consider whether should be relied upon)
Common law: entitled to delegate if no suspicion but need to identify dangerous situations (Re City Equitable Fire Insurance)
o
D expected to recognise situations where circumstances make it dangerous to rely (Dorchester Finance v Stubbins)
DUTY OF GOOD FAITH AND PROPER PURPOSE
Good Faith
The directors of a company must act ‘bona fide’ in what they consider is in the best interests of a company and not for a collateral purpose (Re
Smith and Fawcett)
-
181(a) A director or officer must exercise powers and discharge their duties in good faith for best interests of company and for a proper
purpose
The two tests are separate (Hogg v Crampton) however courts have not always made a clear distinction between the two (Ngurli v
McCann)
Act in Good Faith
-
Subjective: honest belief (Bell Group v Westpac Banking)
Objective element where decision so unreasonable that no reasonable person would have made it (Hutton v West Cork)
IF no regard given to best interests – objective approach – would intelligent and honest person RB dec in best int (Charterbrigde)(Lynton)
Best Interests
-
Members: best interests equated with collective interests of members (including existing members) – generally not to individual
shareholder (unless fiduciary duty)
o
o
-
-
Decision in favour of majority at expense of minority breaches this duty (Ngurli v McCann)
Employees: No stat duty to take account of employees best interests – although may if it is reasonably incidental to and within reasonable
scope of carrying on the business of the company (Bowen LJ Hotton v West Cork) Must be in best interests of the company as a whole
(Woolworths v Kelly)
However once company has no future this ceases to exist (Parke v Daily News – ex gratia payments to employees not in best
interest)
Creditors: duty to consider creditors where company is insolvent or nearing insolvency (Kinsela v Russell)
o
o
Only applies where no remote risk of insolvency (Grove v Flavel)
If no consideration of creditors, apply objective test of honest and intelligent person would have reasonably believed in BI (Linton v
Telnet)
Nominee Directors: Must act in best interests of the company he directs rather than those of his appointer (Bennett’s v Board of Fire
Commissioner). Bound to ignore interests of nominator (Kuwait Asia Bank v National Mutual Life Nominees)
o
Where interests conflict, must prefer the company’s interests or resign (Scottish Co Operative v Meyer).
Corporate Groups: Must be whether action is in the best interests of company, not corporate group as a whole (Walker v Wimborne)
o
o
Objectively would the decision have been in the interests of the company (Charterbridge v Lloyds). If objectively no damage caused
then no consequences flow from the breach (Equiticorp)
187 A director of corp that is a wholly owned subsidiary is taken to act in good faith and in the best interets of the subsidiary if: (a)
constitution of subsidiary expressly authorises director to act in best interests of the holding company, directors act in FG in best
interests of HC and subsidiary is not insolvent at time directors act and does not become insolvent because of directors act.
Consequences
-
IF an action is not taken in good faith the action is voidable, however a contract with TP will only be voidable if TP knew or had notice that
the contrcact was not in BI of company.
Proper Purpose – 181(b)
1.
-
Applies to exercises of corporate power and should not be exercised for a collateral purpose (Re Smith and Fawcett)
Two stage test (Howard Smith)
What is the purpose of the power (Advance Bank Australia v FAI Insurances – power to refuse registration of a transfer of shares)
If constitution does not deal with purposes – then court may draw its own conclusions
o
o
2.
3.
-
Proper Purpose Examples: Raise capital (Howard Smith v Ampol), Financial incentives for employees (commercial benefit to C) (Mills
v Mills); enter joint venture for long term stability (Davrall v Nth Sydney Brick & Tile); Raise capital to enter new venture (Harlows
Nominees)
Improper Purpose Examples: Attempting to defeat a hostile takeover (Hogg v Crampton); friendly takeover by altering majority
(Howard Smith); entrenching control in one shareholder at expense of other (Whitehouse v Carlton)
What purpose was power exercised: The court will not invalidate a decision if they believe it had a legitimate commercial motivation
(Davrall v North Brick)
Improper purpose may be voidable and can be challenged, and may also dilute voting interest (Hogg v Crampton)
Ratification by majority does not bar individual personal action (Residues Treatment). Complexity of inquiry faces courts in determining
questions of purpose (Advance Bank v FAI Insurance)
Mixed Purposes
If mixed purposes, must show that substantial purpose was improper (Mills v Mills) and that but for the improper purpose action would
not have been taken (Whitehouse v Carlton)
In Howard Smith substantial purpose test was regarded in Obiter as appropriate test, However in Whitehouse ‘But For’ test was regarded
in obiter as appropriate: Question is whether impermissible purpose was causative, but for its presence the power would not have been
exercised.
CURRENT: Court have adopted an approach that reconciled two tests – impermissible purpose must be significantly contributory so that
an improper consideration that is subordinate to proper consideration acceptable.
FIDUCIARY DUTY TO AVOID CONFLICT OF INTEREST
Directors owe FD to avoid placing themselves in position where duty and interest conflict (Boardman v Phipps)
-
The pursuit of conflict, rather than mere existence of conflict (Chan v Zachariah)
-
191 Director required to make disclosure to the general meeting where direct personal interest in transaction (Woolworths v Kelly)
o
-
-
At CL disclosure must be made to GM (Fur v Tomkies) however, if C has provision in const disclosure may be made to the board.
Proprietary Companies: 194 Disclosure may be made to the board in accordance with 191. IF disclosure is made per 191 then D may vote
on matters relating to the interest, and retain benefits from the transaction. The company cannot avoid transaction because of existence
of the interest
Public Companies: 195 to the general meeting – director with MPI must not be present at meetings where matter is being considered or
vote on the matter
Exceptions: If not required under 191(2) – interest held by all members, directors renumeration, contracts subject to member approval,
insurance
o
OR where directors resolve that they are satisfied that they should not disqualify the director from voting or being present – but may
be overridden by constitution. OR where ASIC makes a declaration under 196
Competing Interests: No absolute rule against directors holding dual directorships (London v Mashonaland) however this will lead to a conflict and
director will need to disclose under 191
Consequences
-
Failure to comply with const, make contract voidable at option of C (Camelot Resources v McDonald)
-
Voidable unless TP rights intervened, then D must compensate for loss (129(4) TP directors can assume D have performed duties properly)
-
When D is dominant may be necessary to go beyond compliance to ensure interests of C are protected (Permanent Building So v McGee)
DUTY NOT TO MISAPPROPRIATE COMPANY PROPERTY
-
Duty not to misappropriate money for their own or TP benefit (Cook v Deeks),
Damaging property cannot be included (Mordecai) including contracts not yet concluded (Cook v Deeks)
D cannot take remuneration or other benefits from C unless authorised by law, const or fully informed GM
o
RR 202 Remuneration to be determined by resolution
GM CANNOT ratify a breach of director’s duty where he misappropriates the company’s property
DUTY NOT TO PROFIT FROM POSITION
-
-
182(2) The director/officer/employee must not improperly use their position to: gain an advantage for themselves/someone else or cause
a detriment to the company
Assessed objectively (Chew v R) - There is no need for a gain to be made by a loss caused to the company
Civil penalties apply to anyone involved S182
o
o
o
o
79 Invoved: A person has aided, abetted, counselled or procured the contravention or has induced whether by threats or promises
or the contravention or has by act or omission directly or indirectly knowingly concerned n or party to the contravention or has
conspired with others to effect the contravention
184(2) Dishonest use of position intentionally or recklessly
R v Daswani: company funds to finance personal living
ASIC Aust Investors: Issue of shares for purpose of maintaining control of the general meeting
Director are liable to account for a profit if (Regal Hastings – Lord MacMillan) the opportunity arose out of the course of management,
utilisation of opportunity or special information arising from directorship (corporate directorship)
Even if director cannot exploit opportunity, the director cannot undertake it personally Regal Hastings v Gulliver
Breach does not have to cause loss (Regal, Gemstone Corp v Grasso). However in Chan it has been suggested that there should be no
liability to account where there is no possible conflict b/w personal interests and fiduciary duty.
Strict rule imposed to account profits, where making full and frank disclosure (Fur v Tomkies) Ratification must be from general meeting
(from chairman)
Financial Benefits to Related Companies: Public
-
208(1) For benefit to be given to related party, must obtain approval of members or fall within an exception
228 Related parties include controlling entities, directors and their spouses, parents and children of directors and spouses, entities
controlled by one of the above parties. OR was one of the above in the last six months.
-
229(3) Financial benefit includes: giving/providing finance, leasing asset, supplying/receiving services, issuing security/granting option,
taking up or releasing obligation
224 also applies to related parties and associates
Member approval is not required: will be reasonable where dealing at arms length (210) if small amounts (less than 5000 per financial
year) (213)
Consequences
-
A breach does not affect the validity of any transaction – not guilty of offence (209) (HIH)
1324 Injunction
IMPROPER USE OF INFORMATION
-
183(1) must not improperly use information obtained through position to gain advantage for themselves or someone else or cause
detriment to the company
No need for actual loss to be caused, or gain to be made (Chew v R) DUTY continues after the officer leaves the company (Cooley)
ENFORCEMENT BY ASIC
- 1317J ASIC bring application for declaration of contravention, declaration will be made where court is satisfied (1317E(1)) and or civil penalty
orders
Pecuniary Penalty Order
-
1317G pecuniary penalty order of up to 200 000
Company must be satisfied that the contravention materially prejudices either the interests of the company or its members, or the
company’s ability to pay its creditors
Disqualification Order
-
-
-
-
206C Disqualification order disqualifying person from managing corporation for period that court considers appropriate
Automatic Disqualification
o
o
o
o
206B(3) undisclosed bankrupt
206B(1)(a) indictable offence concerning making decision that effects business or financial affairs
206B(1)(b) punishable by 12 months or more, or involves dishonesty – under corps act
206B(1)(c) commits an offence against the law of another country
Court Ordered Disqualification
o
o
o
o
o
Can disqualify through application to ASIC for contravention of civil penalty provision (206C, 1317E)
206D being an officer of two companies which have become insolvent
206E repeated contraventions
▪
Court has broad discretion when determining what to take into account in deciding whether to disqualify (ASIC v Adler)
NOT punitive, designed to deter and protect creditors (Chew v NCSC(No 2))
Must be satisfied that disqualification is justified (Re Magna Alloys, ASIC v Adler)
Resignation and Removal
o
o
o
o
o
203 director can resign by written notice to registered office
203C/D Pty Ltd/Public may remove by resolution in general meeting
203D (3)-(6) Two months notice required (natural justice requirements to director)
Constitution may allow other directors to remove the director (Lee v Chou Wen Hsien)
Power to instigate action against directors is a management power of the board (John Shaw & Sons v Shaw)
Disqualified directors can apply for leave as director of specific companies under 206G (ASIC v Platcher(
A person who manages a company whilst disqualified may be personally liable for the company’s debts (206A)
Compensation Order
-
1317H court may order person to compensate the company for the damage resulting from the contravention.
o
Company has to show breach of duty, including profits made by the person as a result of the contravention
198A management power – power to bring civil action under 1317H is a management power
Enforcement by the Board
-
198A can enforce CL/E duties owed under general management power
1317J Board can decide that corp can seek compensation order, regardless of ASIC declaration under 1317E
Corp has to prove directors breached their duties to claim under 1317H
RATIFICATION
-
Court may excuse director/officer where they have acted honestly in all circs, and should be reasonably excused (1814(4))
Relief – 1318(1)
-
Applies in civil proceedings – excuse liability for conduct if demonstrate acted honestly in all circs
Extends to proceedings under 588G (Kenna & Brown v Kenna)
Exoneration – 1317S
-
For proceedings under civ pen provisions for breach of stat duty
Must positively show that acted honestly (not lack of mere dishonesty) – ASIC v Adler (court has discretion)
‘Act Honestly’ is where conduct is without moral turpitude (ASIC v MacDonald) - w/o deciept or conscious improprietary, w/o intent to
gain improper benefit or advantage, w/o carelessness or imprudence at a level that negates performance of the duty in question.
Must show were careful honest and prudent (ASIC v McDonald) or that a reasonable person in that position would regard conduct as
exhibiting moral turptitude (ASIC v Adler)
Ratification by General Meeting
-
Beneficiary of fiduciary can prospectively authorise or retrospectively ratify conduct that would otherwise amount to a breach of fiduciary
duty (Regal Hastings, Furs v Tompkins). RATIFICATION bars company’s cause of action against director, unless breach is deemed
unratifiable.
MUST occur in GM with ordinary resolution (Winthrop v Winno)
GM must be fully informed (full and frank disclosure) (Fur v Tompkins)
191 Can give general power to ratify to the board through Const.
Limits of Ratification
-
199A(1) Co cannot exempt person from laibility incurred as officer/auditor
199A(2) cannot indemnify a person against liability incurred as officer – owed to the company, pecuniary penalty or liability to 3rd party
arising out of bad faith or conduct
199A(3) cannot indemnify person from legal costs in certain matters - 199B(1) cannot pay liability from wilful breach
Misappropriation of property by director (Cook v Deeks) BUT in Regal Hastings court said that directors could protect themselves from
ratification.
Insolvent or nearing insolvency (Kinsela)
D benefitting personally at expense of company
Fraud on the minority - personal right under 140 (Mills v Mills)
The general meeting cannot ratify breaches of statutory duty – cannot enforce duties that are against public interest (Forge v ASIC)
MINORITY PROTECTION
Statutory Derivative Action (Part 2f. 1A)
-
-
Where member brings action on behalf of company (Compensation goes back to company, not shareholder who brings the action
o
o
o
198A confers power to bring action in company name
237(1) Members required to seek leave (236) member, former member, officer or former officer
An action cannot be brought when the company is in liquidation (Chawan v Euphoric)
237(2) Leave will be granted if there is:
o
(a) Probability that the company will not take action: must show that they asked the company to bring proceedings and company
declined. May also show that wrongdoer has dominant influence on board of directors (CLERP 6.34)
▪
o
Court may be able to ascertain that a copany is unlikely to take action (Charlton v Baber) or an event such as a deadlock on
the board may prevent them from taking action (Erykberg v Heaven) or where an alleged wrong doer controls the majority
(Cassegrain v Gerard Cassegrain)
(b) Good Faith: Two interrelated factors (Swanson v Pratt per Palmer J
▪
Applicant honestly believes that good cause of action exists and has reasonable prospect of success AND
▪
o
o
Whether applicant is seeking to bring action for collateral purpose that would amount to an abuse of process (Confirmed in
Charlton v Baber)
Prima Facie in good faith in a number of circumstances: (Swansson)
▪
▪
▪
▪
SH interest benefitted if acion successful (Chahwan)
Applicant is D with legit interest in welfare and good management of company
Creditor brings derivative action solely to place C in better financial position to repay debt = not GF (Swansson)
Where applicant is former SH/D with nothing obvious to gain, court will scrutinize GF carefully (Fiduciary v Morningstar)
(c) Best Interests of the Company
▪
▪
▪
▪
▪
Company may have sound reasons for not pursuing cause of action, C may have legitimately decided it wasn’t in their best
interests to pursue (Chanwah)
273(3) There is a rebuttable presumption that granting leave is not in the best interests of the company
IF claim is not against D, the D will be better placed to determine whether bringing the action is in best interests (ASIC v
Rich)
All D who participated in decision must have: acted in GF for PP, no material personal interest, informed themselves of
subject matter and reasonably believed the decision was in the company’s best interest.
237(4) Person is TP if not related party under 28
•
Former D is TP when hold office for more than 6 months before proceedings begun.
Ratification
-
Ratification does not preclude derivative action 239(1), however it is a factor that the courts take into account (239(2)). Court must have
regard to 239(2)(a)(b) how well informed members are when ratifying and whether members who ratified were acting for a proper
purpose.
Costs
-
242 Court has power to make any order it considers appropriate, including indemnification for costs – they follow the event (Fiduciary Ltd)
must have evidence of C’s financial position to order company to pay costs (Swansson)
Shareholder Litigation – S1324
-
1324(1) May seek injunction to restrain threatened breaches of the act against those knowingly concerned in contraventions
Person has standing as long as they can show that their interests have been affected in way that goes beyond general public (Broken Hill v
Bell Resources)
Common Law
-
Courts typically displayed reluctance to give Min SH derivative action because decision to litigate lies with board under 198A. As Company
is typically proper plaintiff under 198A.
Therefore issue may arise where individual shareholders utilise 1324 as it may cause statutory derivation redundant. MUST read 1324
narrowly.
o
o
Reservations about whether legislation intended every minor breach to be actionable (Mesenberg v Cord Industrial Recruiters)
Court needs to give individual claiming standing, and then exercise its discretion to deny a remedy in cases where SH/Cr usurping
role of the board (Premier Gold)
Personal Action
-
140 SH/members can enforce rights given to them in their capacity as members. Any other rights not within RR or Const are subject of
extrinsic contract (Norths v McCaughan)
Where SH suffers indirect loss through diminution of shareholdings – not personal action (Prudential Assurance v Newman Industries)
TWO SITUATIONS where they can sue in their personal capacity (Johnson v Gore Wood)
o
o
-
In circs where no personal right to sue, but company does not have cause of action against wrongdoer (George Fisher v Multi
Construction)
Where SH suffers a loss separate and distinct from company, caused by breach of duty independently owed to SH (Heron v Lord
Grade)
Court does not ordinarily interfere with respect to administration of C (Foss v Harbottle). However the court will look at circs of each case
and ask whether individual person can enforce the right (Norths v McCaugh)
Procedural irregularities may elevate procedural requirements into enforceable personal rights (Ryan v South Sydney Junior Rugby)
Personal Action in Equity
-
Established fiduciary relationship: Duties owed to C, not individual SH (Glavanics v Brunninghausen) may indicate fiduciary relationship
arising with Individual SH.
o
Where D deals directly with SH for purpose of sale of shres and where very few members and few members are not impersonal, but
close.
o
-
Coleman v Myers Factors: Family character of the company, position of directors in company, high degree of inside knowledge and
way they went around persuading shareholder to sell.
Allotment of Shares for Improper Purpose: Amounts to breach of duty to act for Proper Purpose (diminished Voting Power) (Residues
Treatment and Trading v Southern Resources)
-
Fraud on Minority
o
Shareholders generally do not owe fiduciary duties when voting (Peter’s American v Heath) SH can vote in self interested manner
(North West Transportation v Beatty)
o
Exception Fraud on Minority is exception to principle that SH in GM can act self interestedly (208 – 229)
▪
▪
-
Where majority passes resolution that no RP would consider within range of permissible uses of majority power – Individual
member has right to apply to court to have resolution set aside (Pavlides v Jensen)
IF ratification is used as securing personal or particular gain, equity may intervene if used for alterior power (Peter’s
American Delicacy v Heath)
Winding Up: A contributory can apply to the court to compulsorily wind up a company S461
o
o
o
o
-
if it is on just and equitable grounds S461(1)(k)
Where the directors are acting in their own, and not the company’s interests S461(1)(e)
Where there is oppressive conduct S461(f)(g)
S462 Those with standing include the company, creditors, a contributory, liquidator, ASIC, APRA3
Remedy is rarely available to solvent companies (ASIC v ABC Fund Managers).
S461(K) The court is of the opinion that it is just and equitable for the company to be wound up:
o
Loss of Confidence
▪
▪
o
There is a justifiable lack of confidence in the conduct and management of the company’s affairs (Loch v John Blackwood)
Company was a family affair, therefore just and equitable for the company to be wound up
Serious Fraud
▪
o
Order may be appropriate where there has been a serious fraud, misconduct or oppression, but removal of directors is
likely to result in their re-appointment (Macquarie University v Macquarie University Union
Deadlock
▪
▪
▪
o
Where there is a management deadlock, may be appropriate:
Deadlock at board and shareholder level, it was inequitable to allow the situation to endure (Clarke v Bridges)
Mutual distrust and complete breakdown in communication rendered the company unable to function, therefore company
to be wound up (Khama v XL Cleaning Services Pty Ltd)
Quasi Partnership
▪
Special considerations apply to quasi partnership companies (characterized by mutual confidence agreements about
participation in management and restrictions on share transfers) (Ebrahimi v Westbourne Galleries Ltd) Three Elements:
•
•
•
•
1. Mutual Confidence
2. Agreements about participation in management
3. Restrictions on Share transfers
FACTS: Two directors, one director invited his son to join the business. The son and father ‘ganged up’ on the
other director. HELD: allowed winding up as it intruded on the exercise of strict legal rights.
Oppression
Standing: Those with standing to bring an action for oppression S232
-
Member S231
Former member:
o
o
Where they have been removed because of selective reduction of capital S234(b)
Where the application relates to the circumstances in which they ceased to be a member S234(c)
A person who has received a share through will or operation of law
A person ASIC has deemed appropriate to bring an action
A member need not have been a member at the time of the oppression (Re Spargos Mining)
-
It need not have been in their capacity as a member S234(a)(ii)(iii)
No clean hands requirement, but improper conduct may affect relief (Re London School of Electronics)
Action may be brought by the majority: Vujnovich v Vujnovich
-
Broad interpretation: ‘a visible departure from the standards of fair dealing, a violation of the conditions of fair play on which every
shareholder who entrusts his money to a company is entitled to rely (Elder v Elder & Watson)
-
Court will examine the impact of the decision upon the member, as judged by a reasonable bystander who is imbued with special skills
or knowledge possessed by the alleged oppressors (Wayde v NSW Rugby League)
-
Quasi Partnership: Vujnovich: Family had three brothers (equal SH). One shareholder diverted profitable business to a company that the
other brothers had no interest in, both sued for oppression. HELD: company to be wound up.
Grounds for Oppression:
S232 Grounds for oppression if:
-
the conduct of a company’s affairs; or
an actual or proposed act or omission by or on behalf of a company; or
a resolution, or a proposed resolution, of members or a class of members of a company;
IS EITHER
-
contrary to the interests of the members as a whole; or
oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other
capacity.
Oppressive, unfairly prejudicial to, or unfairly discriminatory against
-
An objective test, the commercial fairness to be judged by a commercial bystander (Morgan v 45 Flers Avenue)
A common expression, not individual grounds for relief (Morgan v 45 Flers Avenue)
Separate and distinct grounds from “contrarty to the interests of members as a whole” Turnbull v NRMA
Conduct is contextual (O’Neill v Phillips)
Exercising a legal right can be oppressive – going against informal agreement can be oppressive (O’Neill v Phillips)
Test focuses on the effect on the applicant (Re M Daley & Co)
o
o
Conduct of other party may be relevant when making an order (Wayde)
Conduct of other party may also be relevant when making an order (RE HR Hamer)
Applicant’s conduct may be relevant when making an order RE RNA Noble
Dissatisfaction with management is not sufficient RE G Jeffrey
There is no unilateral right of exist at a fair price for a minority shareholder (Re G Jeffrey)
Common Situations
-
Exclusion from management (Eexuto v Boonjak)
o
Lack of provision of information (Re Back 2 Bay 2 Pty Ltd)
o
-
2 licenced directors, 3 non licensed. Wanted to issue more shares, but 2 license holders did not. Requirement for license was
revoked. License holders sought oppression – HELD oppressive (compulsory acquisition of shares ordered)
Misappropriation of company assets (Martin v Australian Squash Club Pty Ltd)
o
Executive director misappropriated and misused company funds and assets and breached fiduciary duty to the company:
Oppressive
Lack of Dividends
o
o
-
H&W owned 50%, other party owned 50%, but H&W had casting vote. Claimed oppression, but could not decide on a price. Held:
not deadlock, other party were being prejudiced and oppression was available.
Breach of fiduciary duty (Scottish Co-Op Wholesale Society v Meyer)
o
o
-
Corporate partnership between family members implied all were entitled to take part in decision making. Effective control does not
displace expectation.
Re City Meat: Large assets, small dividends, large director income. Claimed oppression due to actions of sole shareholder.
Shareholder was preferring his own business therefore oppressive (running business even though unprofitable)
Re G Jeffrey: Two companies founded by J. J died, sons R & A held 30% each, widow 20% two daughters 10% each. R MD of both,
ignored A. R made unrealistic offer to buy A’s shares. A sued for oppression. HELD: Not oppression, simply majority rules – needed
to show discrimination to the applicant.
Shamsallah: Where the directors did not review the dividend policy despite improving circumstances whilst they have reviewed and
improved their own payments (increasing their own salaries at the same time that they were not making dividend payments) =
oppressive.
Excessive remuneration for directors (Sanford v Sanford Courier Service)
o
Average profit of 9K after paying salaries of 51K to three people, remuneration was oppressive.
Oppressive conduct of board meetings (John J Sarr v Robert R Andrew)
o
Boardroom tactics aren’t of themselves oppressive, when constantly used to extent where they deprive the minority of their right
to participate in board meetings they were oppressive.
Decisions for the benefit of related companies (Re Spargos Mining)
o
Transactions to be judged according to the unfairness to the company at hand, not that of the group. If transactions don’t benefit
the original company, then oppressive (removed directors and replaced board, and amended constitution).
Remedies
-
Non-exhaustive list of remedies contained in s233(1)
o
o
o
o
o
o
o
o
o
Winding up
Modification of Constitution
Regulating Co’s conduct in the future
▪
NB court is unwilling to undertake an ongoing supervisory role.
Purchase of any shares by any member
Purchase of any shares by any member with an appropriate reduction of the Co’s share capital
Authorising a member to commence or prosecute proceedings in the Co’s name
Appointing a receiver
Injunction
Mandatory injunction
Valuing shares
-
Basic rule is valuation must be fair in the circumstances: Re London School of Electronics
No discount for minority: O’Neill v Phillips
Court has a discretion to determine the date of valuation: Foody v Horewood - starting point is value at time of order: Profinance Trust v
Gladstone
o
However, cases have valued shares before date of breaches of dirs: CVC/Opportunity Equity Partners Limited v Almeida; Dynasty
Pty Ltd v Coombs.
CAPITAL TRANSACTIONS
Share Issues
-
Co has the power to issue shares: s124(1), ncludes power to issue bonus shares, preference shares and partly paid shares: s254A
S254A Can only issue preference shares if following outlined in constitution: repayment of capital, participation in surplus assets and
profits, cumulative and non cumulative dividends, voting and priority of payment.
Offers in Proprietary Companies
-
Proprietary companies mustn’t make an offer of shares which requires disclosure, unless to existing shareholders or employees: s113(3)
Must offer to existing members first (right of pre-emption): s254D Must be proportionate to number of shares class already holds
o
Right of pre-emption can be revoked by general meeting ordinary resolution: s254D(4)
Public Offers
Disclosure must be made:
-
Wherever a company makes an offer of securities for issue, unless an exception applies S706
o
o
Includes invitation to treat: s700(2)(a)
“Securities” means shares, debentures and options: ss700, 761A
When a disclosure document is required, securities can only be issued by application form accompanied by disclosure document:
s723(1)
Disclosure is not necessary:
-
-
Small-scale offerings: s708(1)
o
o
o
o
The offer is a personal offer: May only be accepted by the person to whom it was made and who is likely to be interested in the
offer: s708(2)(b)
The offer has been made to 20 or less investors in the previous 12 months: s708(3)(a), (4)(a)
The offer does not raise more than $2 million in 12 months: s708(3)(b), (4)(b).
Offers that do not require disclosure, are not received in Australia or are made under a disclosure document do not count: s708(5)
Offers to sophisticated investors do not require disclosure: s708(8)
o
o
o
If the offer is greater than $500 000: s708(8)(a)
If the offeree has net assets and income above the limit: s708(c)
If the offeree is a professional investor: s708(11), s9
What must be disclosed:
-
Offer cannot be made without lodging a disclosure document with ASIC: s727(1)
Securities cannot be offered during an unsolicited meeting or telephone call: s736
Disclosure document valid only for 13 months: ss711(6), 714(2), 715(3)
Four different types of disclosure document:
Disclosure Document
Relevant Legislation
Prospectus
Standard full-disclosure document
Must be used unless offer information statement is allowed:
s709
Must contain all relevant information investors would
reasonably require: s710
Fraser v NRMA: Prospectus inadequate because it failed to
identify disadvantages of proposed restructure.
Content: ss710, 711, 713
Procedure: s717
Liability: ss728, 729
Defences: s712
Short-form prospectus
May be used for any offer. Full prospectus still prepared, and
must be supplied upon request.
Refers to material lodged with ASIC.
Content: s712
Profile Statement
Used in conjunction with prospectus. Prospectus is lodged
with ASIC, profile statement sent to investors.
Requires ASIC approval to be used: s709(2)
Content: s714
Procedure: s717
Liability: ss728, 729
Defences: s732, 733
Offer Information Statement
Information statement can be used instead of a prospectus if
offer is $5M or less.
Content: s715
Procedure: s717
Liability: ss728, 729
Defences: ss732, 733
Notice of share issue must be given to ASIC within 28 days of issuing the shares S254X, including:
-
number of shares issued, different classes of shares, the amount paid, the amount unpaid, if shares were issued for non cash
consideration
Consequences of Failing to Disclose
-
Offering securities in a body that has not been formed: s726
Offering securities or distributing an application form without the appropriate disclosure document: s727
Misleading or deceptive statement in a disclosure document or application form: s728
Investor can seek rescission for false or misleading document: Re Australian Slate Quarries
Damages for negligent misrepresentation: Hedley Byrne v Hedler
May give rise to an action under s180: ASIC v Vines
Variation of Class Rights
A class right can be identified in three categories (Cumbrian Newspapers v Cumberland & Westmorland Herald Newspaper, per Scott J:
-
Where one group of shares has different rights to another Crumpton v Morrie Hall
o
Despite the fact that there was no express reference to different classes of shares in the constitution, these were still class rights.
Conferred on individuals not as members but for other reasons, these are not class rights (Eley v Positive Life)
Conferred to individuals in their capacities as a member, these are class rights (Cumbrian Newspapers)
Variation occurs where:
-
Certain actions deemed to be variation: s246C
o
o
-
When Company with 1 class of shares issues a new class of shares, will be a variation if:
▪
The rights attaching to the new shares aren’t the same as existing shares OR The rights are not provided for in the Const or
other ASIC document.
Issue of new preference shares, unless authorised by:
▪
The terms of issue of the existing preference shares OR Co’s constitution in force when existing preference shares were
issued.
Where the deeming provisions don’t apply, the law draws a distinction between a variation of class rights, and a variation of an
enjoyment of class rights: White v Bristol Airplane
▪
o
o
Company had preference shares , wanted to issue more – would result in diminished voting power and value. HELD
diminishment of rights was not a variation.
However, the subsequent decision in Cumbrian Newspapers indicates a greater willingness to protect rights of members.
IF the deeming provisions don’t apply, oppression remedy may be available.
Procedure
-
Varying and cancelling class rights: s246B
o
o
If Const sets out procedure, must follow that procedure s246B(1)
If Const doesn’t set out procedure, then either: s246B(2)
▪
Special resolution of the members OR Written resolution of 75% of the votes in the class.
Challenging class right variation
-
Even if the procedure is followed, members with at least 10% of the votes in the class can apply to the court to have the variation set
aside if it unfairly prejudices them: s246D(1)
o
Court previously applied fraud on the minority (Re Holders) however now S246D is applied.
Application must be made within one month: s246D(2)
May attract an oppression remedy.
Dividends
Power to issue dividends
-
Determining whether dividend should be paid is a s198A power.
Directors have power to fix amount and time for payment of dividends: s254U(1)
When dividends can be paid
-
Dividends must not be paid unless: s254T
o
o
o
-
The Company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the
payment of the dividend AND
Payment of the dividend is fair and reasonable to the Company’s shareholders as a whole AND
The payment of the dividend does not materially prejudice the Company’s ability to pay its creditors
Relevance of profits test:
o
Commercial realities require a consideration of profits, particularly for s588G purposes: Ford
▪
▪
▪
Courts have considered profit to be gained between two dates: Re Spanish Prospecting
A dividend can be paid out of an unrealised capital gain: Dimbula Valley v Laurie
However, Dimbula has been given cautious approval in Blackburn v Industrial Equity.
Consequences of improper dividend
-
SH who disputes validity of dividend can obtain an injunction(1324): Darvall v North Sydney
Any person involved is liable for civil penalty, and dirs can be in breach of s180.
If SH knew dividend was improper, could be held as a constructive trustee: Segenhoe Ltd v Akins
Director may be personally liable to repay dividends as breach of trust Re Oxford Benefit Building and Investment Society
o
However, may be able to obtain an indemnity from shareholders who have knowingly received the dividend (Moxham v Grant)
Company may also be liable to compensate at common law (Re Oxford Benefit Building Society)
Maintenance of Capital
Reduction of capital
Requirements to reduce capital
-
Company can only reduce its capital in accordance with s256B: s256D(1).
-
Company can reduce its share capital if: s256B
o
o
o
o
Gambotto doesn’t apply: Winpar Holdings v Goldfields
It is fair and reasonable to the Company’s Shareholders as a whole AND
It doesn’t materially prejudice the Company’s ability to pay its creditors AND
Is approved by Shareholders under s256C (General resolution at GM, but SR for selective reduction by those whose shares are
to be cancelled)
▪
-
▪
No votes can be cast in favour of the resolution by anyone who is to receive consideration or whose liability will be
reduced
Must be a separate meeting: Winpar Holdings Ltd v Goldfields
For cancellation of shares, the second element is ignored: s256B
o
Co must lodge a copy of the resolution with ASIC: s256C(3)
Consequences of non-compliance
-
If Company does not comply, transaction is still valid and Co is not guilty of an offence: s256D(2)
Person involved is liable for civil penalty and criminal offence if dishonest: s256D(3), (4).
-
Gambotto doesn’t apply to reductions of capital: Winpar
Self-Acquisition
•
•
•
•
•
259A –company must not acquire shares in itself; anyone involved in contravention contravenes civil penalty provision: 259F(2)
259B –company must not take security over shares in itself or in a company which controls it
259C –company must not issue shares to a company it controls
259D –company must within 12 months cease to hold shares in company which controls it, or cease to be controlled
259F – Consequences of breach
Share buy-backs
-
Basic rule in 259A –company must not acquire shares in itself. Share buy-backs are an exception.
However, a Co may buy back its own shares if: s257A
o
o
The buy-back doesn’t materially prejudice the Co’s ability to pay its creditors AND
Co follows the procedures laid down in the Act
10/12 Limit
-
The 10/12 limit is 10% of the smallest number, at any time during the last 12 months, of votes attaching to voting shares of the Co:
s257B(4)
A buy back would exceed the 10/12 limit if the number of votes attaching to exceed the 10/12 limit, including: s257B(5)
o
o
All the voting shares in the Co that have been bought back during the last 12 months AND
The voting shares that will be bought back if the proposed buy back is made.
General Resolution
-
Procedure set out in s257C:
o
o
o
Buy-back must be conditional to ordinary resolution at general meeting
Co must disclose all info material to the decision, unless disclosed before.
Must lodge notice of meeting and info with ASIC
Special Resolution
-
Either: s257D
o
o
o
o
Special resolution, no votes can be cast by anyone whose shares are being bought
Resolution agreed to at general meeting by all ordinary SHs
Co must include with f info material to decision, unless disclosed before.
Must lodge with ASIC copy of notice of meeting and info documents.
Disclosure Required
Type of Scheme
Definition
Requirement
> 10/12
<10/12
Equal access scheme
s257B(2):
1. Offers relate only to ordinary shares
2. Offers to be made to every ordinary SH to BB same %
of their ordinary shares
3. All those persons have a reasonably opportunity to
accept
4. Terms of all offers are the same
None
Ordinary Resolution
Employee share scheme
BB
BB that involves acquisition of shares by employees or
dirs: s9
None
Ordinary Resolution
On-market BB
BB by listed Co on fin market: s257B(6)
None
Ordinary Resolution
Selective BB
Any other buy-back: s9
Special Resolution
Consequences of breach
-
Transaction remains valid: s259F
Can be subject of injunction or damages under s1324
o
Creditors have standing to sue: s1324(1A)(b)(i)
-
Co doesn’t commit an offence, but those involved can be liable: s259F(3)
Financial Assistance
A Company can financially assist a person to acquire shares in the Company only if: s260A(1)
o
o
o
Giving the assistance doesn’t materially prejudice:
▪
▪
Interests of Company or its Shareholders
Company’s ability to pay its creditors
The assistance is approved by Shareholders under s260B
The assistance is exempted under s260C
‘Financially Assist’
-
Requires impoverishment, rather than merely that the company have the purpose of assisting: ASIC v Adler
o
However, NSWCA followed Robson J in Kinarra Pty Ltd v On Q Group Ltd
Includes paying a dividend: s260A(2)(b)
Unclear whether this requires a causative link between the assistance and the purchase of shares.
Approval
-
SH approval requires: s260B
o
Special resolution with no votes cast by person acquiring the shares OR Resolution agreed to at general meeting by all
ordinary SHs.
Exemptions
-
Financial assistance is allowed where it is:s260C
o
o
o
o
o
o
A lien for unpaid amounts on partly paid shares
Finance provided by a financial institution in the ordinary course of business and on ordinary commercial terms
Given under an employee share scheme and approved by shareholder resolution
Reduction of share capital or buy-back made in accordance with the Act
Made under a court order
Discharge on ordinary commercial terms of a liability that the Co incurred as a result of a transaction entered into on ordinary
commercial terms.
Onus
-
Liquidator must prove impoverishment: ASIC v Adler
Defendant must prove either:
o
o
o
Lack of material prejudice, OR
Approval OR
Exception applies.
Debt and Charges
Registration of charges
-
Charges should be notified to ASIC: s262, 263(1), 266(4)
Failure to register doesn’t affect validity: s262(11)
Co must keep its own register of charges: s271
Charges that need to be registered: s262(1)
o
o
o
o
o
o
o
o
o
Floating charges
Charge on uncalled share capital
Charge on a call on shares
Charge on personal chattels
Charge on goodwill or IP
Charge on a book debt
Charge on a marketable security
Lien or charge on a crop or wool or a stock mortgage
Charge on a negotiable instrument other than a marketable security
Consequences of failure to register
-
Offence committed by Co and any officer in default: ss263, 264, 268, 270
Where there is competition in priority of charges:
o
o
If the charge sought to be enforced is unregistrable, the general law will determine which has priority
If it is a registerable charge, the priority regime of the Act will apply: ss278-282
Priority among charges
-
-
Registered charge has priority over: s280
o
o
o
Subsequent registered charge, unless chargee had notice of prior charge
Unregistered charge unless chargee had notice of the prior charge
If it can be shown the chargee had notice of a charge, the registered charge is postponed to that charge.
Unregistered charge has priority over: s281
o
o
A subsequent registered charge that was created with notice of the unregistered charge
Another subsequent unregistered charge
Notice includes constructive notice: s278(2)
Order of priority is subject to variation by agreement: s279(2)
Negative pledges
•
•
The Co may promise a creditor that it will not give security over its assets either at all or above a certain level to any other person
without consent
However, a later charge, if a charge is granted, will be able to enforce the charge provided they did not have notice of the pledge and
provided valuable consideration for the charge: Swiss Banking Corp v Lloyds Banking Limited
o
A party is deemed to have notice of anything registered with ASIC if the document relates to a registrable charge: s130(2)
Fixed charges
•
•
Fixed security attaches to a specific item of property and the chargeor is not permitted to dispose of the property free of the charge
without chargee’s consent.
“One that without more fastens on ascertained and definite property or property capable of being ascertained or defined.” Illingworth
v Houldsworth
Floating Charges
-
-
If a floating charge is created 6 months before relation back day, it is void, unless it is excepted: s588FJ
Employees claim before floating charges: s561
Indicators of a floating charge: Re Yorkshire Woolcombers Association
o
o
o
Charge on a class of assets of a company present and future
That class is one which, in the ordinary course of the business of the Co would be changing from time to time
By the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the Co
may carry on its business in the ordinary way.
Usually give the holder of the charge the right to appoint a receiver.
Holder of a charge can also seek injunction to prevent disposal of property other than in the ordinary course of business: Re Woodroffes
Crystallisation
-
-
Floating charges crystallise on the occurrence on events implies by law or defined in the charge instrument and become fixed charges.
At general law, a floating charge crystallizes when the Co is:
o
o
o
o
Wound up: Illingsworth v Houldsworth
Has a receiver appointed to it: Caratti v Grant
Ceases to carry on business: DCATA v Lai Corp Pty Ltd
Engages in conduct that threatens the utility of the creditor’s security
▪
For example, where there is an attempt to put the property outside reach of a receiver in order to defeat the
charge: Hamilton v Hunter
Usually however, crystallising events are specified in the loan agreement.
Charge in favour of officer or associate
-
Cos can grant charges in favour of officers
Charge to officer may be invalidated if: s267
o
o
A charge is granted to an officer AND
Within 6 months the charge is enforced without the leave of the court.
Highland v Exception Holdings Pty Ltd
- Charge given in favor to officers, 6 months later officers appointed a receiver. HELD that purpose of 267 is to be able to appoint friendly receivers.
Must apply to the court for leave so can be assessed.
Invalidation of charges
•
•
Generally void against liquidator or administrator unless a notice lodged with ASIC: s266(1)
During administration, cannot enforce the charge except with the administrators written consent, or leave of the court: s440B
o
If the enforcement of the charge commences prior to the Co going into administration, the charge can be enforced: s441B
INSOLVENCY
Determining Insolvency
Definition
•
•
A company is solvent when they are able to pay all their debts when they become due and payable: s95A(1)
A company is insolvent when they are not solvent: s95A(2)
Elements
•
•
•
“Debt”
“Due and payable”
o
o
Includes all debts that arise in the ‘immediate future’: Bank of Australia v Hall
Unclear whether leniency is relevant. One view is it isn’t unless it creates an estoppel: Carrier Air Conditioning. However
courts have sometimes been willing to include it: Re Newark Pty Ltd.
“Able to pay their debts”
o
Funds can include money that can be gained by sale or pledge: Sandell v Porter. Also seems to include unsecured funds since
no longer needs ‘from own money’.
Presumptions of Insolvency
•
•
Presumptions of insolvency listed in s459C:
o
o
o
o
o
o
Co failed to comply with a statutory demand
Execution of judgment or similar has been returned partly or wholly unsatisfied
Receiver has been appointed pursuant to a floating change
Court has appointed a receiver to enforce a floating charge
A person has taken possession or control of the company’ property OR
A person has been appointed to enter possession or assume control of Co property
Primary presumption is the failure to comply with a statutory demand:
o
o
o
o
o
Demand must be made in the prescribed form and signed by/for creditor: s459E
Demand must be met to the creditors reasonable satisfaction: s459E(2)
Demand must be above statutory limit of $2000
Cannot be unliquidated claim: First Line Distribution v Whiley
Company can apply to have the debt set aside: s459G
▪
▪
Application must be made within 21 days: s459G(2). This is a strict time limit, court can’t extend it: David Grant v
Westpac.
Grounds listed in s459H, s459J:
•
•
•
•
Dispute about existence/amount of debt
Co has c-claim that would reduce the debt below the statutory min.
Defect in the demand (such as irregularity or misdescription of debt: s9) causing substantial injustice.
‘Some other reason’ i.e. a mistake in accompanying affidavit
VOLUNTARY WINDING UP
•
•
Requires special resolution of members: s491
Can be either members or creditors winding up
o
o
Depends upon declaration of solvency: s494
Consequence is who appoints liquidator.
Declaration of Solvency: s494
Declaration Made: Members Winding Up
Declaration not made: Creditors Winding up
Members appoint liquidator: s495
Requires special res: s491
If company turns out to be insolvent, liquidator must call
creditors meeting, appoint liquidator or immediately apply for
winding up: s496
Creditors meeting must be called within 11 days: s497
Creditors can appoint the liquidator: s499 or can keep
members choice.
o
Insolvent Winding Up
Standing
•
Those who can apply for an order to wind up a company: s459P(1)
o
The company (rare, because voluntary winding up is easier), A creditor, A contributory (meaning a shareholder: s9), A
director, A liquidator, ASIC, A prescribed agency (such as APRA)
Grounds
•
Contained in ss459A and B
o
o
Sole ground is insolvency, which is proven using assumptions.
Order for winding up is made under s459A.
Consequences of Winding Up
Consequences for the Co
•
•
•
•
•
Even while being wound up, company remains a legal entity: s493(1)
Co can’t continue business except through liquidator during winding up: ss493(1), 477
Dispositions of property by Co are void except when approved by court or by a liquidator/administrator: s468(2)
Co retains title to its property, but holds it on trust
o
o
May be a trust in favour of creditors: Re Yagerphone Ltd
Not a traditional trust, a ‘statutory trust’: Ayerst v C&K
Officers continue to hold office (s471A) so their legal duties remain.
Consequences for creditors
•
•
•
•
Unsecured creditor loses its right to pursue its action against a company in liquidation.
o
Right is replaced by a collective right to prove in liquidation (s471(1))
Secured creditors can realise their security despite winding up: s471C
Existing proceedings are stayed and fresh proceedings prohibited without leave: ss471B and 500
o
This binds secured as well as unsecured creditors
The way creditors recover is liquidator assigns their claim, and creditor can appeal.
Consequences for members
•
•
•
•
Members in winding up proceedings are referred to as contributories: s9
Usually won’t receive a dividend from Co’s assets after creditors are paid
Any attempt to transfer shares after commencement of winding up is void, unless authorised by liquidator or the court: ss468A, 493A
Any alteration to status of members is void: Re National Bank of Wales
Consequences for employees
•
•
•
Pooling
Winding up is a repudiation of contract of employment: Re Associated Dominions Assurance Society Ltd
May entitle employee to claim compensation: Re R S Newman
Note however there are special rules around this.
•
•
For a group of companies, can pool a group of companies in liquidation.
The main impacts are that Cos:
o
o
•
•
Become jointly and severally liable for each other’s debts and
Have their claims against each other extinguished (s571(2)-(11))
A pooling determination can only be made where each member of the group is being wound up:s571(a)
A group in this context refers to Cos that are (s571(1)(b)):
o
•
‘Related’ to each other OR Jointly liable for claims OR Joint owners or operators of property OR Parties to a joint undertaking
in connection with property
Can only be made if the unsecured creditors approve it. Liquidator must convene separate meetings of Cos in the group: s574
o
•
•
Requires 75% in number AND 50% in value of votes cast at each meeting (s577)
Determination can be altered by court in some circumstances: s579A
Pooling order can be made by a court on application by liquidator: s579E
Liquidator
•
•
•
•
•
•
-
The liquidator acts as agent for the company
The liquidator may carry on the Co’s business only so far as necessary for the beneficial disposal or winding up of the Co’s business:
s477(1)(a)
Liquidator has a number of powers: s477
o
o
Bringing an action in the Co’s name
However, if the Co’s assets can’t meet the costs of the action, liq. will be personally liable for them: Re Speedifix Building
Products Pty Ltd
A provisional liquidator may be appointed by a court after a winding-up application has been made but before the application is heard:
s472(2)
o
o
Prov liq is different from actual liq in that their job is simply to maintain status quo: Re Carapark Industries
Still has power to continue business, but generally status quo is their role: Re Bayswood
A liquidator must be registered with ASIC before they can be appointed: s532
Liquidator may be disqualified from being appointed without the leave of the court: s532. Applies where liquidator:
▪
▪
▪
▪
is indebted to the Co or a related Co for $5000 or more (doesn’t apply in member’s voluntary winding up)
is a creditor of the Co or a related Co for at least $5000
is an officer or auditor of the Co or relative or a mortgagee. Extends to someone who is in a partnership or
employment relationship with an auditor or officer within the past two years.
is an ‘insolvent under administration’.
Liquidator must be independent and seen to be so: Re Stewden Nominees
ASIC Duties on Liquidators
•
•
•
•
•
•
•
•
Must notify ASIC of their appointment as liquidator: s537
Must notify the ATO of their appointment as liquidator: ITAA36 s215(1)(a)
Must lodge a preliminary report with ASIC about Co’s finances: s476
Must lodge a report if unlawful conduct is discovered.
Must state whether an examination is necessary where creditors are expected to receive less than 50 cents in the dollar: s533
Must keep proper books during liquidation: s531
Must lodge with ASIC an account of receipts and payments and six-monthly statements on the progress of the liquidation: s539
Must determine the Co’s liabilities and settle a list of contributories
Property Available for Creditors
•
•
•
The liquidator takes the Co’s property as it is at the time of winding up.
Generally, property available to creditors is that which:
o
o
o
o
is held by the Co at the commencement of the winding up.
is acquired by the Co after the commencement of the winding up.
has been transferred by the Co prior to winding up, but is recoverable by the liquidator.
is recovered by the liquidator from certain execution creditors.
‘Commencement of winding up’ is usually when liquidator is appointed. However, may be a different date: ss513A-513D
o
o
If a court-ordered winding up, s513A applies.
If a voluntary winding up, s513B applies
Insolvent Trading
If: s588G
-
A person is a dir when the Co incurs a debt AND
The Co is insolvent at the time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt AND
At that time there are reasonable grounds for suspecting the Co is insolvent,
The dir contravenes the section s588G(3)
“Incurs a debt”
•
“Incurs a debt”: s588G(1)(b)
o
o
o
Looking for positive action: Antico v Standard Chartered Bank
Contingent on voluntary action by directors, either incurring obligation or doing one of the things in s588G(1A).
Deemed debts:
ACTION OF COMPANY
WHEN DEBT IS INCURRED
Paying a dividend
When dividend paid, or if Const allows declaration of
dividends, when declared.
Reduction of capital
When reduction takes effect
Buying back shares
When buy-back agreement is made
Redeeming redeemable preference shares that are
redeemable at its option
When shares are issued
Financially assisting a person to acquire shares in itself
When the agreement to provide the assistance is made
Entering into an uncommercial transaction
When transaction is entered into.
“Insolvent at the time, or becomes insolvent”
-
-
Sandell v Porter: Must determine if the company is suffering from a temporary lack of liquidity or whether it suffers from an endemic
shortage of working capital
Bell Group v Westpac Banking: Bell Group issued bonds and had unsecured bank facilities. Bank called loans, BG went into liquidation.
Liquidators challenged securities granted to banks as they knew they were insolvent, therefore ignoring interests of other creditors.
HELD: Company insolvent at time of reference – looked to balance sheet test for contextual evidence, the court said that the company’s
assets and ability to borrow without security were relevant to the insolvency.
Lewis v Doran: Courts task is to decide whether the company is able to pay its debts as they become payable, by reference to
commercial realities of the situation.
“Reasonable grounds for suspecting Co was insolvent”
•
•
Question of fact to be assessed without the benefit of hindsight: ASIC v Plymin
What would a reasonably competent and reasonable director have suspected? ASIC v Plymin
Consequences of breach
•
•
•
A director contravenes s588G if they fail to prevent the Co incurring the debt if they are aware or a reasonable person would have been
aware: s588G(2).
If breach of s588G(2) or (3), liquidator can apply for compensation under s588M.
o
o
The directors are liable only for the amount of the debt less whatever they get out of liquidation: s588M(3).
Any amount recovered goes into the pool of assets for all creditors.
Creditor can apply for compensation: s588R.
o
o
o
o
Requires consent of liquidation: s588R(1).
Can give notice to liquidator of intent to sue: s588S.
▪
If liquidator doesn’t respond within 3 months then they can begin proceedings without the liquidators consent:
s588T.
Creditor cannot proceed if liquidator has applied in relation to the debt: s588U.
If the creditor recovers, they recover the money personally.
Defences
Contained in s558H
-
Reasonable grounds to expect Co was solvent: s588H(2)
If the dir. relied upon an advisor reasonably to believe Co was solvent: s588H(3).
Because of illness or some other reason person didn’t partake: s588H(4)
o
NB AJ says this is very, very narrow, not enough to just say “I wasn’t there”.
Reasonable steps to prevent incurring debt: s588H(5).
Relevant matters listed in s588H(6).
o
AJ says try to firstly stop board from incurring debt. If they won’t do that, try persuade them to appoint administrator, and then
you should resign if they don’t.
o
Elliot v ASIC: Must take positive steps, not enough to say ‘I had no authority to stop it’. Have to walk away.
Holding companies
•
•
•
•
NB Parent company exercising tight control could be shadow director, so s588G applies
s588V is equivalent of s588G for parent company.
Not a civil penalty provision.
Creditors can’t sue under this provision.
Misfeasance Proceedings
Liquidator can bring an action for breach of director’s duties.
•
NB Limits to ratification preventing the company bringing proceedings:
o
o
o
Cook v Deeks: Breach of duty not to misappropriate can’t be ratified.
Kinsela: Breach of duty to act in best interests can’t be ratified where creditors’ interests are relevant.
Forge v ASIC: ASIC can still bring civil penalty proceedings despite ratification.
Avoidance Actions
•
•
•
•
Two policy objectives:
o
o
Fair treatment of creditors as a group- if property is undervalued or sold on bad terms, the creditors as a whole are injured
Pari Passu- Creditors equal among themselves. Can’t preference some.
Some transactions are voidable: s588FE(1)
Orders about voidable transactions are set out in s588FF.
The point of these is to void transaction, get back money/assets and swell what is available to creditors.
Floating Charge Created Within 6 Months of Relation-back Day
•
•
If a Co is being wound up in insolvency and grants a floating charge within 6 months of relation-back day, the transaction is void.
o
o
“Relation-back day” is defined in s9. Usually is day winding up begins.
Exceptions to this listed in s588FJ(2).
Main defence is if Co was solvent immediately after creation of the charge: s588FJ(3).
Uncommercial Transactions and Unfair Preferences
•
•
Has to be a ‘transaction’, defined in s9.
An unfair preference is one given by a Co to a creditor if the Co and creditor are parties to the transaction and the transaction results in
the creditor receiving more than they would if it were set aside and the creditor was to prove for the debt in winding up: s588FA(1).
o
Note exception for ‘continuing business relationship’: s588FA(3).
▪
•
These will only be unfair preferences if, as a whole they give more than the creditor would have got from a
liquidation.
A transaction is an uncommercial transaction if, and only if, it may be expected that a reasonable person in the Co’s circumstances
would not have entered into the transaction: s588FB(1).
Insolvent Transactions
•
An insolvent transaction is one that is an unfair preference or an uncommercial transaction of the Co and was made when insolvent or
Co becomes insolvent because of it: s588FC.
Voidable Transaction
•
Transaction may be voidable if: s588FE(2)
o
o
It is an insolvent transaction AND
It was entered into:
o
o
o
▪
▪
During 6 months ending on the relation-back day OR
Between that date and when the winding up began.
If it is an insolvent and uncommercial transaction entered into 2 years before relation-back day: s588FE(3)
If it is an insolvent transaction to a related entity, 4 years before: s588FE(4).
If it is an insolvent transaction for the purpose of defeating creditors, 10 years before: s588FE(5).
Defence by Third Party
•
Defences in s588FG entitle third party to resist the 588FF order.
VOLUNTARY ADMINISTRATION
Aim of administration
•
The goal of administration is to maximize the chance of the Co continuing its business, or if this is not achievable, to ensure a better
return for members and creditors.
Process of administration
Stage 1: Entering voluntary administration
•
•
•
•
Commences when an administrator is appointed: s435C(1)(a)
Three ways to appoint an administrator:
o
o
o
By the Co itself. Done by dirs who pass a resolution to that effect.
Liquidator may appoint: s436B
A chargeee who is entitled to enforce a charge on the whole or substantially the whole of the Co’s property: s436C
Only a registered liquidator may be appointed as administrator: s448A
The administrator takes control of the Co’s affairs and prepares a report for creditors: s437A, 438A, 438D
Stage 2: Creditors meeting
•
•
First creditors meeting to be held within 8 business days: s436E
o
Allows creditors to appoint a committee of creditors and appoint a new administrator if they wish.
Second creditors meeting is called within five days before or after the end of the convening period: s439A(2)
o
o
o
Convening period is generally 20 business days from when the administration began.
Creditors can pass one of three resolutions at the meeting:
▪
▪
▪
Co execute a deed of Co arrangement
Administration should end
Co be wound up
Meeting requires a majority in number and value to be passed: Regulations
Consequences of administration
•
•
•
•
•
•
•
•
•
Moratorium on proceedings unless leave of court is obtained: Division 6
Chargeholder whose charge is not over the whole or most of the Co’s property usually cannot enforce their charge without leave of
administrator or the court: s440B
Chargeholder over the whole or most of the Co’s property has 13 business days after an administrator is appointed to decide whether
to enforce its charge.
Holders of liens are entitled to retain property, but cannot sell it without leave of the court: ss442C-CB
Owners or lessors of property that is in the possession of the Co cannot reposses without the leave of the court: s440C, unless recovery
was already underway prior
Where the property in question is perishable property, the chargeholder is entitled to enforce their rights over the property: ss441C,
441G.
Officers retain their position but cannot exercise their powers except with the administrator’s consent: s437D
Adminstrator has the power to terminate employment contracts: s437A(1)(d)
Members cannot transfer their shares without consent of administrator or approval of the court: s437F
Receivership
Definition
•
•
A receiver is someone whose role is to receive rent, income and other proceeds
Must gather in and realise the charged assets of the Co and realise them to satisfy the claims
Receiver
•
•
Only registered liquidators may be appointed receivers: s418(1)(d)
Receivers will be disqualified if:
o
o
o
o
Are a mortgagee or an officer of the mortgagee: Waldron v Bird
Are an auditor or officer of the Co: s418(2)
Are an officer of a related Co
Were within the previous 12 months an officer or promoter of the Co or related Co, unless ASIC waives this requirement:
s418(1)(f)
Appointment
•
•
Generally appointed by the secured creditor
Can be appointed by the court: ss233, 1323
Powers of receiver
•
•
Charge agreement usually contains powers
Court appointment has the power to do all things necessary: s420
Duties and liabilities
•
•
•
•
Receiver must exercise their powers bona fide in the interests of the appointor: Re B Johnson
Receiver is agent of appointor: Deyes v Wood
Not subject to liability for negligence: Downsview Nominees v First City Corporation
Usually entitled to an indemnity from the Co\
Consequences of receivership
On officers
•
•
Officers lose their power to manage the relevant property: Hawkesbury Development
Officers retain the capacity to bring proceedings in the Co’s name to challenge appointment of receiver: Newhart Developments
Co contracts
•
Receiver under no obligation to complete such contracts, and contracting party will have remedy against the Co: Airlines Airspares v
Handley