Monash Law Students’
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STUDENT TUTORIAL
PROGRAM 2014
SKETCH NOTES
Corporations Law
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If you have any questions, please do not hesitate to contact Geerthana Narendren, Tutorials Officer at tutorials@monashlss.com CORPORATIONS LAW SKETCH NOTES Tutor: Laura Ravanello Year and semester studied: Semester 1, 2013 Lecturer: Eric Windholz Topics covered in Semester 1, 2014 but not included in notes: • 2.6 Corporate Social Responsibility • 8.7 Duty to prevent insolvent trading Cases included in notes but not included in 2014 reading guide: • Ascot Investments Pty Ltd v Harper • Re Bugle Press • Barron v Potter • DFC v Austin • Merim Pty Ltd v Style Ltd • Catto v Ampol Cases included in 2014 reading guide but not included in notes: • Grey Eisdell Timms v Combined Auctions Pty Ltd [1995] 13 ACLC 965 • Standard Chartered Bank v Antico (1995) 18 ACSR 1 • Re Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203 • Re Hamilton-­‐Irvine (1990) 2 ACSR 616 • Weinstock & Anor v Beck & Anor [2013] HCA 14 • National Australia Bank Ltd v Sparrow Green Pty Ltd [1999] SASC 280 • Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 • Levin v Clark [1962] NSWR 686 • Transvaal Lands Co v New Belgium [1914] 2 Ch 488 • ASIC v Hellicar & Ors [2012] HCA 17 • Winthrop Investments Ltd v Winns [1975] 2 NSWLR 666 • Re Bellador Silk Ltd [1965] 1 All ER 667 • Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC 136 • Zempilas v J N Taylor Holdings Ltd (in liq) (No 6) (1991) 5 ACSR 28 • Mesenberg v Cord (1996) 39 NSWLR 128 • Pender v Lushington [1877] 6 Ch D 70 NB: Unless otherwise indicated, references to legislation in the sketch notes are to the Corporations Act 2001 (Cth) INTRODUCTION TO CORPORATIONS LAW 1. What is a company? • Artificial entity recognised by law as a legal person with its own rights and liabilities, treated like a person (can sue and be sued), companies = type of corporation; regulation by ASIC REGISTRATION AND EFFECTS 1. Pre-­‐Registration process • Undertaken by promoter, “who undertakes to form company” (Cockburn CJ in Twycross) • Promoter can enter into any Ks on behalf of [company] and organise all elements to register • Company can later ratify Ks, by holding a meeting once registered (s 131(1)) 2. Registering a company a) Registration process for applicant: 1. Apply for registration (s 117) following the prescribed form (s 117(4)) (ASIC Form 201) 2. The form must contain information per s 117(2) Once applicant signs form, ASIC may give the company ACN, register company, give certificate stating details of company such as name (s 118); company comes into existence on day registered (s 119) 3. Type of Company a) Proprietary company? -­‐ Denoted by ‘Pty’ -­‐ s 113 • Pty companies have no more than 50 non-­‐employee shareholders (s 113(1)) • Large or small? o s 45A(2) small if two of the following made out (large if below cannot be made out):  Revenue of company (and entities) less than $25 million;  Assets less than $12.5 million  Company (and entities) have less than 50 employees NB: Can only be limited by shares or unlimited liability b) Public company? = Any company other than a proprietary company (s 9) • Public companies are more heavily regulated – have a number of mandatory rules, have to have a secretary (s 204A(2)), have to have an AGM • ASX Listed/Unlisted? Listed must provide annual directors’ report; subject to ASX listing rules NB: Can be limited by shares, limited by guarantee, unlimited liability or no liability c) Classification according to liability of members •
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Limited by shares (most companies) -­‐ Denoted by ‘Ltd’ -­‐ s 148(2): Member liability limited to amount, if any, unpaid on shares held by member (s 9; s 516) Limited by guarantee? -­‐ Denoted by ‘Ltd’ -­‐ s 148(2): Member liability is limited to the amount of the guarantee given by the member (s 9; s 517) Unlimited liability?: Member liability is not limited (s 9) and will arise if the company is unable to meet liabilities on winding up; even past members may be liable for debt (s 515) No liability -­‐ Denoted by ‘NL’(s 148(4)) Only companies with mining purposes (s 112(2)) (can convert: s 162); no member liability beyond amounts paid, even unpaid amounts (s 9; s 254Q) 4. Separate Legal Entity • Companies are separate legal entities, separate and distinct from shareholders, directors, officers and employees (Saloman v Saloman) • The corporate veil shields: shareholders, directors, officers and employees from legal view a) Corporate Group? = a ‘number of companies which are associated by common, interlocking shareholdings, allied to unified control or capacity to control’ (Walker v Winbourne) • However, each company is still a separate legal entity • Profit earned by a subsidiary is not profit earned by the holding company (Industrial Equity v Blackburn); company’s property is its own, not its members (Macura) b) Subsidiary? A company will only be a subsidiary of a holding company if: • the holding company controls subsidiary company’s board composition -­‐ s 46(a)(i) • the holding company is in a position to cast or controls casting of more than 50% of maximum number of votes at subsidiary company’s GM -­‐ s 46(a)(ii) • the holding company owns more than 50% of subsidiary company’s shares -­‐ s 46(a)(iii) • the possible subsidiary is a subsidiary of a subsidiary of the holding company -­‐ s 46(b) 5. Common Law Protections of Holding/Subsidiary Companies 1. Directors only owe duties to the company on whose board they serve (Walker v Winborne) 2. Profits of subsidiary are NOT the profits of the holding company (Industrial Equity v Blackburn) 3. Holding company is not a party to an agreement between subsidiary and another company (Pioneer Concrete Services Ltd v Yelnah Pty Ltd) 4. Person/company bringing an action must be able to identify the particular company in the group which it contracted with (Qintex Australia Finance v Schroders Australia) 6. Piercing the Corporate Veil Corporate veil may be lifted so as to (although Australian courts reluctant to do so): • make subsidiary liable as an agent • allow benefits to be transferred amongst companies in the group •
make a holding company liable for tortious acts of subsidiary a) Lifting the veil in company groups i. Subsidiary as an agent of the holding company? The Soloman principle may be displaced as, as per Atkinson J in Smith, Stone and Knight Ltd v Birmingham Corporation, if following six requirements can be made out: • the profits of subsidiary are treated as the profits of the holding company • the persons conducting the business were appointed by holding company; • the holding company is considered the head and brain of the trading venture; • the holding company governs the venture, decides what is to be done; • the business profits were made by the holding company’s skill and direction; and • the holding company has effectual and constant control ii. Corporate veil lifted to allow benefits for the entire group? • Directors of company only owe duties to company in which they are director (Walker) • In some circumstances, the court will allow one company in a group to transfer money/assist another company in the group, provided the transfer is beneficial for all companies in the group (Equiticorp Finance Ltd (in Liq) v Bank of New Zealand) iii. Holding company liable for tortious acts by the subsidiary? • Australian courts have suggested that a holding company may be held liable for tortious acts by its subsidiary; if victim has no other recourse (Briggs v James Hardy & Co Pty Ltd) o Cf strict view in: James Hardie & Co Pty Ltd v Hall • A holding company may owe a DOC to the tort victim, if it is shown that: • holding company provides all the management staff of the subsidiary (CSR v Wren); & • the degree of control of the holding company over the subsidiary is so strong, that the subsidiary was merely a conduit of the controlling company (CSR v Young) b) Lifting the veil to make a person liable for avoiding existing obligations or fraud Re Obligations: The company cannot be a “a device” to mask the carrying on of a business by a person (Gilford Motor Co v Horne) or a puppet of controller (Ascot Investments Pty Ltd v Harper) Re Fraud: The company cannot be a “dummy” company to commit fraud (Re Darby) c) Lifting the veil to give effect to statute May be necessary to pierce corporate veil to ascribe actions of a company to members, if statute evinces a clear intention to do so; or policy demands this approach (Re Bugle Press) CONSTITUTION AND REPLACEABLE RULES 1. Internal Organisation of Companies a) Type of internal organisation Company incorporated post 1 July 1998/pre 1 July 1998 but repealed constitution: • A company’s internal management will be governed by RRs in the Act (s 135(1)) •
UNLESS: completely or partly displaced or modified by a constitution (s 135(2)) b) Adopting the constitution Constitution can be adopted: • on registration, with each member agreeing with Constitution’s terms (s 136(1)(a)); or • after registration, if company passes a special resolution (s 9: 75% of members entitled to vote to adopt it or a court makes an oppression order (s 136(1)(b)) If a public company: must lodge resolution adopting, modifying or repealing constitution with ASIC within 14 days after it is passed (s 136(5)); takes effect on day it is passed (s 137) c) Replaceable rules (“RRs”) – summarised in s 141 • RRs govern the company’s internal management • Failing to comply with RRs is not a contravention of the Corporations Act (s 135(3)) but will be a breach of statutory contract d) Mandatory rules • Must be complied with and companies cannot opt out of them • If public company: some RRs cannot be displaced by a constitution and will apply as mandatory rules such as s 249X which details who can appoint a proxy e) Exceptions • a one-­‐person proprietary company does not need RRs or a constitution (s 135(1)); • a no liability (NL) company must have a constitution (s 112(2)(b)); • companies limited by guarantee should have a constitution f) Objects clauses (now optional) • Company may have objects clause stating company's objects or restricting powers (s 125(2)) • An act of the company is not invalid if it is contrary to/beyond objects clause (s 125(2)) g) Consequences of failing to comply with constitution • The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution (s 125(1)) 2. Constitution as Statutory Contract s 140(1) sets out that a company’s constitution (if any) and any applicable RRs have effect as a K • between the company and each member (s 140(1)(a)); and • between the company and each director and company secretary (s 140(1)(b)); and • between a member and each other member (s 140(1)(c)) Under the contract, each person agrees to observe and perform the constitution and rules so far as they apply to that person a) Members enforcing the statutory contract Members have a personal right to enforce this statutory K against the company or another member Member must show: • That the rights attach to him/her in his/her capacity as a member (Eley; Hickman) • That the right attaches to all members equally b) Special Contract? (if person not a member or right doesn’t attach equally) A special contract may be in existence (Bailey v NSW Medical Defence Union Limited); governed by ordinary contract law c) Remedies for breach of a statutory K -­‐ (TOPIC LINK: members’ personal actions) Central remedy available for a breach of statutory K is an injunction (Webb Distributors (Aust) Pty Ltd v Victoria); Remedy will rarely be given as damages (Sons of Gwalia Ltd v Margaretic) 3. Altering the Constitution (including company name/type change) a) Alterations generally Company constitution can be modified or repealed by special resolution of members (s 9: 75% of members entitled to vote to alter it) voting at an AGM or EGM (s 136(2)) • Public company must lodge resolution adopting, modifying or repealing constitution with ASIC within 14 days after passed (s 136(5)); takes effect on day passed (s 137) b) Change of company name (see s 157) and type (see s 162-­‐4) c) Limitations on alteration i. Procedural Limitations • Manner and Form Requirements in Company Constitution: o Provided company can achieve a special resolution (s 9), company’s constitution can set further requirements that the special resolution doesn’t have effect unless another, further requirement in the constitution is complied with (s 136(3)) • Notice Requirements: o Company’s directors, who call an AGM or EGM to put a constitution alteration to vote, must comply with notice and meeting requirements • Re. Share Class Rights: (TOPIC LINK: Variation of class rights) o Class rights can only be varied or cancelled with approval of a special resolution of both the company and the holders of the affected class (s 246B) ii. Substantive limitation on taking up more shares; increasing share liability • Members must ‘agree in writing to be bound…by a modification of the constitution made after…they become members’ if the alteration of the constitution involves: o a member taking up additional shares (s 140(2)(a)); o an increase in a member’s liability to contribute to share capital (s 140(2)(b)); or o imposes or increases restrictions on the right to transfer the shares already held by the member (s 140(2)(c)) iii. Limitations in equity Company cannot allow alteration where it harms member/causes unfairness/deprives member’s rights Gambotto test: Step 1: Does the alteration create conflict of interest and advantage between majority and minority? If no, majority has the onus of proving that the alteration bona fide affects all shareholders equally (Allen v Gold Reefs of West Africa) If yes: Go to step 2 Step 2: Does the alteration involve an actual or effective expropriation of shares or rights attaching to shares? If no: alteration is valid unless ultra vires (against any purpose in constitution or oppressive) If yes: Go to step 3 Step 3: Is the alteration valid? The onus is on majority to demonstrate that appropriation is for proper purposes e.g intended to protect company from harm and alteration is fair in both process and terms Step 4: Consequences of invalid alteration: Equitable remedies will be available to member/s iv. Alteration cannot be oppressive (TOPIC LINK: Oppression) • An alteration will be valid if it is done for a company purpose and is not oppressive to the minority (Gambotto v WCP; Bundaburg Sugar Ltd v Isis Central Sugar Mill Co Ltd) DIRECTORS AND MEMBERS 1. (Board of) Directors’ Powers • The directors of a company manage the day-­‐to-­‐day business of the company, unless otherwise stated in the Act or the constitution (s 198A (RR)) • Other directors’ powers found at (for example) s 201J (RR); s 248C (RR); s 1072F a) Powers if a one-­‐person company? • Director exercises all the powers of the company (except those that the Act or the constitution requires to be exercised in company meetings) (s 198E) b) Delegation of directors’ power (TOPIC LINK: Delegation defence for DOCSD) Any directors’ power can be delegated to committee, director, employee (s 198D) or MD (s 198C) • NB: A director will be responsible for the actions of the delegate, as if the power had been exercised by the directors themselves (s 190(1)) 2. Members’ powers See (for example) appointment of directors at s 201G(RR); removal of directors by resolution at s 203C(RR) and s 203D; approval of remuneration at s 202A(RR); voting at company meetings at s 250E 3. Division of powers: Board of directors vs. shareholders a) Rules regarding division of power • Generally, the board of directors have full management power, usually prescribed by the Act (s 198A) or prescribed by the Constitution (Quin & Axtens Limited and Others v Salmon) • Shareholders cannot override the directors’ decisions or involve themselves in the management of the company (John Shaw & Sons [Salford] Ltd v Shaw) • Directors are in both a fiduciary and contractual relationship with shareholders (Automatic Self-­‐Cleansing Filter Syndicate v Cunningham) b) Exceptions where shareholders can manage the company: • there is no board of directors (Alexander Ward and Co Ltd v Samyang Navigation Co Ltd); • an effective quorum not obtained (Foster v Foster); quorum generally = 2 dirs (s 248F (RR)) • an effective board meeting could not be held (ie: due to deadlock) (Barron v Potter) • directors are unwilling to act (perhaps to avoid breaching directors’ duties) (Marshalls Valve) 4. Directors: Type, Appointment, Resignation, Removal and Disqualification a) Is X a director? Type of director? Examples: • Director = a person who is appointed to position of director (s 9(a)(i)) • Alternate director = acting in capacity of director, regardless of title of position (s 9(a)(ii)) • Defacto director: If no contrary intention appears, X is a defacto director even if s/he was not appointed but acts in the position of a director (s 9 director (b)(i)) o Must perform top level management functions or outside perception that person is acting as a director…is a question of degree (DFC v Austin) • Shadow director: if no contrary intention appears, [person] is a shadow director if the directors of the company are accustomed to act in accordance with that person’s instructions or wishes (s 9(b)(ii)); Often creditors are shadow directors (Buzzle Operations) • Executive director if a senior employees/executives of the company such as the MD (s 201J (RR)); MDs can have any powers directors can exercise (s 198C)), CEO, CMO, CFO. • Non-­‐executive director: NED by virtue of the fact that s/he is a director who is: o not an employee/executive of the company; and o not directly involved in company’s day-­‐to-­‐day management; but o has an important role in monitoring the company’s activities • Nominee director: X is a ND, as s/he has been appointed to represent a designated party’s interest (e.g a creditor or shareholder or holding company over subsidiary) • Independent director if not employed by company and is not a current or previous executive • Chair of directors: Person is the chair of directors and has been elected to this position by directors (s 248E(RR)); chair has the casting vote at directors’ meetings (s 248G(2)) b) Is X an officer? Defined under s 9 and includes those persons who make or participate in making decisions that affect the whole or substantial part of the corporation; or a person with capacity to affect significantly the corporation’s financial standing; or a person whose instructions or wishes the directors of the corporation are accustomed to act on c) Appointment of directors Pre-­‐conditions which must be met before X appointed as a director found at s 201A; s 201B; s 201D • For appointment before registration: s 117(2)(d) and (f) application for registration of a company must include the name, address, date and place of birth of each new person consenting to be a director • For appointment after registration (public and proprietary company): s 201G (RR) unless the constitution provides otherwise, directors are generally appointed at general meeting by passing an ordinary resolution (50% + 1 of voters present) • Public company: Directors can also be appointed by other directors, which is to be confirmed at the next AGM (s 201H(3)) – for proprietary companies see s 201H(2) d) Resignation of director Director can resign from by giving written notice to company at its registered office (s 203A (RR)) e) Removal of director • Proprietary company: Where the company constitution does not consider removal, s 203C(1) (RR) applies, setting out that directors can be removed by an ordinary resolution (50% + 1 of voters present) and may appoint another director instead (s 203C(2)(RR)) • Public company: s 203D(1) sets out that a public company, by ordinary resolution (50% + 1) may remove a director (despite anything in the constitution, or any agreements between the director and the company, or members and the director) f) Disqualification of directors i. Types of disqualification: • Automatic disqualification if director convicted of a criminal offence (s 206B) • Automatic disqualification if director is an undischarged bankrupt (s 206B(3)) • Automatic disqualification if director fails to pay creditors (s 206B(4)) • Disqualification by court if director contravenes civil penalty provision (s 206C) e.g breach of directors’ duty (s 180-­‐3) o D may be disqualified for a period the court considers appropriate (s 206C(1)), court will consider circumstances and conduct (Santow J in HIH Insurance Ltd; ASIC v Adler) • Disqualification by court is director is an officer of two or more failed companies (s 206D) o D may be disqualified for up to 20 years • Disqualification by court if director contravened Corps Act (also applies to officers) (s 206E) o D may be disqualified for a period the court considers appropriate (s 206E(1)), court will consider circumstances and conduct (Santow J in HIH Insurance Ltd; ASIC v Adler) •
Disqualification by court if director disqualified from managing corporations in foreign jurisdiction (s 206EAA) o D may be disqualified for a period the court considers appropriate (s 206EAA(1)) Disqualification by ASIC if director has a history of managing failed companies (s 206F) •
ii. Reason for disqualification Protect shareholders; Punish directors; Deter improper behaviour of director and others (Rich v ASIC) iii. Consequences of disqualification Director will cease to be a director of [company]; if director continues to participate in the management or decision making or exercises influence, this will constitute an offence (s 206A(1)) 5. Directors’ Remuneration • s 202A (RR): directors paid the remuneration that the company determines by resolution • s 202A is a replaceable rule, a company’s constitution may displace or modify this a) Non-­‐Executive Directors (Listed Companies): Must be paid a fixed sum (ASX Listing Rule 10.17) b) One person companies: The director is to be paid any remuneration for being a director that the company determines by resolution (s 202C) c) Disclosure s 300A: every year, companies are required to prepare a directors report containing a “Remuneration Report”, disclosing the remuneration of KMP d) Remuneration report Contents of remuneration report found at s 300A(1) e) Shareholder approval: Listed companies only (ASX Listing Rule 10.17) • Non-­‐Binding Vote (Listed Company): s 249L(2)(a), the notice of the AGM must inform members that a resolution that the remuneration report will be adopted will be put to shareholder vote (a non-­‐binding, advisory vote on remuneration report (s 250R(2) and (3)) • Two Strikes Rule (Listed Company): o Firstly, at an AGM, at least 25% of the votes cast on a resolution to adopt the remuneration report must be against the adoption of the report (s 250U(b)) = first strike o If at the company’s following AGM, at least 25% of votes cast on resolution to adopt this remuneration report must be cast against the adoption of the remuneration report (s 250U(a)) = second strike (triggering a spill resolution to be put to vote (s 250V(1)) o If the spill resolution is passed by a simple majority (50%+1), another meeting of the company’s members is to be held within 90 days (s 250V(1)(a)) where all directors who signed the remuneration report for that year cease office immediately and resolutions to appoint persons to vacated directors’ offices will be put to vote (s 250V(1)(b) and (c)) NB: Excessive remuneration may be oppressive (TOPIC LINK: Oppression) f) Calling Directors’ Meetings and decision-­‐making • Calling a board meeting: s 248C -­‐ meetings can be called by a single director giving reasonable notice of the meeting to other directors • Resolutions: s 248G (RR) a resolution must be passed by a majority of the votes cast by directors entitled to vote on the resolution (absolute majority) • Quorum: s 248F (RR) -­‐ quorum is usually two directors (Mancini v Mancini) Other sections: Tech: s 248D; Chairman: s 248E; Circulating resolutions: s 248A(RR); Minutes: s 251A(1) • Conflicts of interest? o Proprietary company: s 194(RR) director must disclose the interest but can still vote at meeting and retain any benefits flowing from that interest o Public company: s 195 prohibits a director from being present and voting where the director has a material personal interest g. Access to records -­‐ Directors have a right to inspect and take copies of comp’s docs (Edman v Ross) 6. Procedural irregularities – where procedural elements absent A proceeding in this Act is not invalidated because of a procedural irregularity (s 1322(2)) UNLESS the court views that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the court and the court orders the proceeding invalid (s 1322(2)) E.g: absence of quorum at dirs meeting (s 1322(1)(b)(i)) or deficiencies in notice (s 1322(1)(b)(ii)) • The court will only make an order if (s 1322(6)): • the act, matter or thing is procedural; the person acted honestly; it is just and equitable to make the order (s 1322(6)(b)); and substantial injustice is unlikely to be caused (s 1322(6)(c)) this is a question of fact 7. Company secretary (“CS”) • Public company must have at least one CS: s 204A(2) • Proprietary company not required to have a CS: s 204A(1) • CS responsible for ensuring company performs certain statutory obligations: s 188 • + duties under various Corps Act sections such as s 142; s 145; s 346C; s 205B; s 319(1) 8. Members a) A person is a member of a company if: • they are a member of the company on its registration (s 231(a)); or • agree to become member after registration and name entered on register (s 231(b)); or •
company converted from company limited by guarantee to limited by shares (s 231(c)) b) Share transfer • Person transferring shares remains the holder of the shares until the transfer is registered and name of the person to whom they are being transferred is entered on register (s 1072F) c) Share register • Companies must maintain a share register (s 168) including information such as the names and addresses of members and date on which member entered (s 169) i. Privacy (s 177) • s 177 protects the privacy of members on the register by prohibiting the use of the register to contact or send material to a shareholder (s 177(a)) or disclose any information on the register knowing it will be used to contact or send material to the shareholder (s 177(b)) • Using or disclosing info is a strict liability offence (s 177(1B)) ii. Other information regarding the share register • The register is proof of matters shown in it – it is taken as evidence at face value (s 176) • The register must be in a registered office in Australia (s 172(1)) • Court may order register to be corrected where company or person is aggrieved (s 175(1)) • A director may refuse to register a transfer of shares in the company for any reason (s 1072G(RR); Re Smith and Fawcett; refusal must not be without ‘just cause’ -­‐ Re Winmardun) d) Members’ Meetings (AGMs & EGMs) i. AGM (annual general meeting) – public companies Public company must hold AGM each year within five months after end of its financial year (s 250N) • Business of AGM set out in s 250R(1) incl. resolution for adoption of rem report (s 250R(2)(3)) • Members will be provided a reasonable opportunity for all members to ask questions about or comment on the management of the company (s 250S) ii. EGM (extraordinary general meeting) = is any other meetings called outside of the AGM cycle iii. Who can call a GM • A person has the right to call an GM if s/he/it is a director/a member/the board/the court Directors can call GMs: • on their own initiative (listed companies s 249CA; sole director/shareholder companies s 249C(RR)) and must be called at a reasonable place and time (s 249R) on the request of members (5% of members or 100 members) (s 249D(1)), the director must call the meeting within 21 days after request and must be held within 2 months (s 249D(5)) Members can call GMs: • if they have more than 50% of the votes of all members and directors fail to call a meeting when requested under s 249D (s 249E). The meeting must be held within 3 months (s 249E(2)). The company must pay reasonable expenses the members incurred (s 249E(4)) • if they have more than 5% of the vote but must pay expenses (s 249F(1)) Board can call GMs: • by resolving to do so; part of managing affairs of company (s 198A(RR)) Courts can call GMs: • if it is impractical for a meeting to be called any other way (s 249Q; Re Totex-­‐Adon) iv. Meetings must be for proper purpose (s 249Q) e.g amending the constitution (NRMA v Snodgrass); altering the division of power (NRMA v Snodgrass); putting forward legitimate resolutions (see Re Ariadne; NRMA v Parker) v. Conduct of meetings Notice to members must be given within 28 days for listed companies (s 249HA)/21 days for other companies (s 249H); Chair elected by 2 directors (s 249U(RR)) vi. Decisions at the GM • Voting by show of hands (usual way) – 1 member = 1 vote (s 250J (RR); s 250E(1)(a)) • Voting by poll – 1 share = 1 vote (s 250E(1)(b)) can be demanded on any resolution (s 250K) • Proxy voting: members vote without attending meeting by giving right to vote to proxy (ss 249X-­‐Z; ss 250A-­‐B) (NB: RR for proprietary comp and mandatory for public comp (s 249X)) vii. Members’ concerns: members’ resolutions and questions • Members with 5% of the vote or at least 100 members entitled to vote can put forward a valid resolution at a GM, with notice (s 249N(1)) • Members are also given a reasonable opportunity to ask questions/comment (ss 250S/SA) viii. Directors’ duty to give proper information at GM -­‐ Directors have fiduciary duty to inform (Fraser) viiii. Members’ right to inspect books (s 247D) • Books defined at s 9, including those regarding decisions to litigate (Merim) • Members must seek authorisation by directors or the company passes a resolution at GM to allow members to do so (s 247D (RR)) • Under common law, member must show some kind of dispute question with which they are interested (Edman v Ross) • Last Resort: Court Order To Inspect? (includes current & former members, officers (s 236(2)) •
x. Procedural Irregularities – Re GMs Proceeding in Act is not invalidated because of a procedural irregularity (s 1322(2)) unless the court views that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of court and court declares proceeding to be invalid (s 1322(2)) E.g: absence of quorum at GM (s 1322(1)(b)(i)); deficiencies in notice (s 1322(1)(b)(ii)), inability to access notice of meeting (s 1322(3)); no reasonable opportunity to participate in GM (s 1322(3A)); contravention of voting rights (s 1322(3B)) • The court will only make an order if (s 1322(6)): o the act, matter or thing is procedural; the person acted honestly; it is just and equitable to make the order (s 1322(6)(b)); and substantial injustice is unlikely to be caused (s 1322(6)(c)). Substantial injustice = question of fact (Bell Resources; Chew) xi. Decisions without a GM i. Proprietary companies can make (insubstantial) decisions without a GM Such decisions may be made where all members entitled to vote sign document in favour of a resolution (s 249A(2)) • All members bound by decisions (Duomatic) and cannot be passed where members’ substantial rights are varied/members aren’t aware of full effects of resolution (Re Compaction Systems) xii. Single member companies can make decisions without a GM (see s 249B(1)(2)) e) Ceasing to be a member Membership ceases when: 1) Shares are transferred and name of the new owner is registered (s 1072(F)(RR)) 2) Member dies. Shares transmitted to member’s personal reps e.g executor or trustee (s 1072A(RR)) 3) Company is de-­‐registered 4) Company compulsorily acquired e.g in winding up (s 556(1)(b) or administration (s 556(1)(c)) 5) Forfeiture due to non-­‐payment (on partly paid shares) 6) Forfeiture under company’s constitution CORPORATE FINANCE 1. Equity/share capital a) Nature of shares • A share is a personal and intangible property, allowing the shareholder to have a proportionate interest in the net worth (assets – liabilities) of a business • This is not a legal interest in assets, but a right to enforce rights attaching to shares b) How did the shareholder receive shares? (TOPIC LINK: Personal action if for an improper purpose) Member was allotted shares: i. On registration (NB: only ltd by shares & unlimited companies) On registration, company must register matters e.g number of class of shares members agree to take up; amount member agrees to pay; whether shares are full or partly paid (s 117(2)(k)) ii. After registration • Companies can issue new shares (s 124(1)(a)) • Including bonus (issued for free by company), partly paid and preference shares (s 254A) • Company determines terms on which shares issued & rights/restrictions attached to shares (s 254B) • Company can make public offerings and proprietary company may make private offerings of shares (process set out in s 254D (RR))  Member must give consideration for the shares (cash: Re Wagg; non-­‐cash: Re White Star Line Ltd) c) Classes of shares and rights/benefits attaching to them • Shares divided into classes and the company may define the terms on which they are issued and the rights/restrictions attaching to the shares (s 254B) • Stated in the constitution but need not be stated with any formality (Crumpton v Morrine) • Types of share classes: o Ordinary Shares o Preference shares o Redeemable preference shares o Deferred shares o Some other class, defined by the company, with certain rights and benefits attaching d) Altering/varying class rights The class right refers to the nature of voting powers, dividend payments or distribution of surplus on winding up for each, individual share class i. Is the company attempting a variation? • Under common law, variation strictly defined as varying LEGAL RIGHTS of shareholders of a class (not altering value of shares through dilution White v Bristol Aeroplane; Greenhalgh) • Under statute, certain situations are regarded as a variation of class rights such as: • Dividing class into further classes, varies rights so they are no longer same (s 246C(1)(a)) • Varying some rights attached to some shares in a class; varies the rights of the whole class (s 246C(2)(a)) • Issuing new preference shares; varies rights • If a company with one class: Issuing new shares; this is taken to vary the rights attached to shares already in issue if the rights of the new shares are not the same as already issued shares or the rights aren’t provided for in the constitution, notice, document lodged with ASIC (s 246C(5)) • Converting ordinary shares to preference shares (s 254G) • Converting preference shares to ordinary shares (s 254G) •
ii. Has the variation followed proper process? If no process in Constitution, company must follow the variation process in s 246B(2): Company must get a special resolution of the company (s 9), as well as a special resolution (s 9: 75% of all members) of members of the class whose rights are being varied iii. Right to set aside the change if no unanimity (s 246D) • Where a company has followed class variation procedure, if members do not agree to the variation, a member with 10% of shares/votes in that class can apply to the court to have the variation put aside (s 246D(1)) -­‐ If court agrees, then variation will be set aside (s 246D(5)) iv. Remedies for breach of variation process (in constitution or s 246B(B)) • Injunction is the correct remedy (TOPIC LINK: Statutory injunction) 2. Debt capital/debt finance a) Borrowing money Companies borrow money (and in turn, accrue “debt”) in the following ways: a) Issue debentures (s 124(1)(b)) which is a ‘chose in action that includes an undertaking to repay, as a debt, money that has been lent to a company’ (s 9); can be secured or unsecured b) Raise funds privately c) Raise funds publically by an issue of debt securities to the public d) Grant a security interest in uncalled capital (s 124(1)(e)) e) Grant a circulating security interest over property (s 124(1)(f)) b) Secured/Unsecured Debt? • Unsecured creditors: have no security over company property • Secured creditors: have a ‘personal property security interest’ in the company’s property. A secured creditor has a claim to the asset if the debt is not paid back • Floating security = Circulating security interests. The lender takes security over a pool of changing assets (Fire Nymph v Heating Centre) o Company can use the assets without the prior consent of the lender but only in the “ordinary course of business” (Reynolds Bros (Motors) v Esanda) o The security interest crystallises when the company is wound up (Fire Nymph) • Fixed security: Readily identifiable, discrete asset 3. Dividends = Payments to shareholders representing their return on their investment a) The right to dividends is created: • in public companies by s 254W(1) • in proprietary companies by s 254W(2) • in no liability companies by ss 254W(3) and (4) • in companies limited by guarantee by s 254SA The decision to pay dividends is often set out in the constitution or if not in consti at s 254U(1)(RR b) Payment of dividends •
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Dividends are payable out of profit, provided the company is solvent Company must not pay a dividend unless (s 254T(1)): o (a) companies’ assets exceed liabilities before the dividend is declared o (b) payment of the dividend is fair and reasonable to the shareholders as a whole and o (c) payment does not materially prejudiced the company’s ability to pay its creditors c) Debt incurred? • Company incurs debt for dividends only when the time fixed for payment arrives (s 254V(1)) • The decision to pay dividends can be revoked at any time before this date (s 254V(1)) d) If company refuses to pay dividend…shareholder cannot compel company to pay dividend; may be oppression in exceptional circumstances (Sanford v Sanford) 4. Maintenance of Equity Capital Rule: a company is generally prohibited from reducing its equity capital while the company is still operating, except in the ‘legitimate course of its business’ (Lord Watson in Trevor v Whitehead) a) Exception 1: Reduction of Share Capital -­‐ s 256B Company may be able to reduce its share capital if: • The reduction is fair and reasonable – s 256B(a) o The court will consider: the adequacy of consideration to shareholders; whether some shareholders will be deprived of their rights; whether the transaction is fair to both the majority and minority shareholder (Winpar Holdings); whether there was a better way to achieve the arrangement (Catto v Ampol); whether the reduction is consistent with winding up priorities (Fowlers Vacola Manufacturing) • The reduction does not materially prejudice company’s ability to pay its creditors (s 256B(b)) • The reduction is approved by shareholders under section 256C (s 256B(c)) i. Types of reductions: Equal reduction involving reduction of ordinary shares, proportionately for all shareholders, with the same terms for all (s 256B(2)) • Selective reduction = any reduction other than an equal reduction (s 256B(2)) • Cancellation of shares requires a special resolution of shareholders whose shares are to be cancelled (s 256C(2)), at a separate class meeting (Winpar Holdings) ii. Consequences for failing to comply: • The transaction remains valid and the company is not guilty of an offence (s 256D(2)(a)(b)) • Persons involved may be civilly liable for the breach (s 256D(3)) o “Involved”, per s 79, = aided/abetted/counselled/procured/induced by threat • If person dishonest in anyway, s/he will have committed an offence (s 256D(4)) b) Exception 2: Share Buybacks and Self-­‐Acquisition of Shares (company acquires shares in itself) Rule: s 259A is a general prohibition against companies purchasing shares in itself i. Types of self-­‐acquisitions: • Equal buyback scheme of ordinary shares, with same terms for all members (s 257B(2)(3)) • Selective buyback, offered to particular shareholders, to the exclusion of others • On market buyback, with offers make to a listed corporation of a financial market in the ordinary course of trading (s 257B(6)) • Employee share scheme buyback ii. Exception (per s 259A(a)) Under s 257A, a company may buy back its own shares if the buyback (a) does not materially prejudice the company’s ability to pay creditors; AND (b) company follows the procedures in this division (+ rules relating to share buyback in constitution) iii. “10/12 Limit” Rule (NB: Doesn’t apply to selective buybacks) • Company can buy back 10% of their shares within a 12-­‐month period without shareholder approval and with minimum procedure (s 257B(4)(5)) iv. Other procedures • If an equal buyback scheme: shareholders must accept the buyback via an ordinary resolution • If a selective buyback: shareholders must accept buyback through special resolution (not including voters who will gain) or unanimous resolution of ordinary shareholders (s 257D) • If an on market buyback: requires shareholders approval of the buy-­‐back by ordinary resolution only where the 10/12 limit is exceeded • If an employee share scheme buyback: requires shareholders approval of the buy-­‐
back by ordinary resolution only where the 10/12 limit is exceeded c) Exception 3: Financial assistance to acquire shares (NB: need not be money) A company may indirectly reduce its capital if it provides financial assistance to a person to acquire shares in the company under s 260A i. Has financial assistance occurred? Courts will consider the commercial realities and “interlocking elements” of the transaction to determine whether there has been financial assistance (Hanrahan, Ramsay and Stapledon) • E.g: lending money, making gift to person, guaranteeing loan, paying dividend (s 260A(2)(b)) • Can come before or after acquisition of shares -­‐ s 260A(2)(a)) ii. Rules (s 260A(1)) Company may financially assist a person to acquire shares in a company or holding company only if: •
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(a) giving of the assistance doesn’t materially prejudice either company or shareholders or ability to pay creditors; OR o Assistance refers to the furnishing of something which is needed or wanted in order for that transaction to be carried out (Burton v Palmer) o Materially prejudice? The onus is on company to demonstrate that the assistance does not materially prejudice the company, its shareholders and creditors (Kinarra)  RESULT of financial transaction will be considered in light of all circumstances  An ‘impoverishment test’ is to be applied (Burton, Adler) (b) assistance was approved by shareholders under s 260B; OR (c) assistance exempted under s 260C e.g in ordinary course of commercial dealing: s 260C(1) iii. Consequences of failing to comply • The transaction remains valid and the company is not guilty of an offence (s 260D(1)(a)(b)) • Persons involved may be civilly liable (s 260D(2)) o “Involved”, per s 79, = aided/abetted/counselled/procured/induced by threat • If dishonest: criminally liable for the breach (s 260D(3)) d) Consequences of breach of Trevor v Whitehead rule • If there is no applicable exception to the capital maintenance doctrine, company will be prohibited from reducing its share capital (Trevor v Whitehead) • Doing so is a breach of civil penalty provision and an injunction under s 1324 available CORPORATE CONTRACTING Companies enter contracts in 2 possible ways: 1. Direct: 2 directors or director & secretary signing document with or without company seal (s 127) 2. Indirect: The contract is signed by an agent, for and on behalf of the company (s 126) 1. Direct (s 127) Requires company seal (if company has one) and EITHER: 2 directors; or director + secretary signing 2. Indirect (by an agent) (s 126) Occurs where the contract is signed by an agent, acting with the company’s express or implied authority and acting “on behalf of the company”; can be with or without the company seal a) Actual authority Company must give the agent either express or implied authority to represent it i. Express actual authority Arises in a number of ways (either written or oral): • From the Constitution; Through delegations; From board resolutions ii. Implied actual authority Implied, either: 1. From the position held: • A person (agent) is presumed to have the authority that customarily attaches to his/her position in that type of company • e.g MD has customary authority to enter Ks relating to day-­‐to-­‐day management of company; individual directors have no contracting power – power to contract vests in board collectively (Northside); secretary can enter Ks re. admin of company (Panorama) 2. From acquiescence: • Occurs where a person has consistently engaged in conduct which allows them to enter into Ks on behalf of the company and people acting above them have knowledge of the person’s contracting but do nothing (Hely-­‐Hutchinson v Brayhead; Brick & Pipe) 3. Apparent (Ostensible) Authority 3 step test per Diplock LJ in Freeman v Lockyer (applied in Crabtree-­‐Vickers): For a third party to enforce against a company a contract entered into on its behalf by an agent with no actual authority, it must be shown that: 1. A representation that the agent had authority to enter into a contract of that kind was made to the third party (either words or actions); and 2. The representation was made by a person with actual authority (either generally or with respect to the matters to which the contract relates); and – NB: the person has to have the ability to contract; not enough if the person making the representation would not have the authority to do what they representing the agent can do (Crabtree-­‐Vickers) 3. The third party was induced by and relied upon the representation to enter into the contract (usually to his or her detriment) 4. Statutory Assumptions (ss 128-­‐30) (codification of the Indoor Management Rule from Turquand) a) Dealings (s 128) A third party is entitled to make the assumptions in relation to dealings with a company • ‘Dealings’ involve: reasonable basis for third party to have believed he/she was dealing with company; refers to a single dealing/transaction (Story v Advance Bank Australia Ltd) b) Assumption that the company’s constitution have been complied with (s 129(1)) • Do not need to seek evidentiary proof/documentary proof (Oris Funds Management; Fiberi) c) Assumptions relating to persons named as directors and company secretaries (s 129(2)) • Third party may assume that anyone (directors/) who appears in ASIC records to be: o duly appointed; and •
o has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company Third party does not have to search the ASIC records to rely on the assumption and can rely on the assumption even if unaware the information exists (Lyford) d) Assumptions relating to representations of authority as an officer or agent (s 129(3)) • Third party may assume that anyone who is held out by the company to be an officer or agent of the company to be: o duly appointed; and o has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company (Brick & Pipe) e) Assumptions that officers and agents perform their duties to the company (s 129(4)) • Company cannot avoid contractual responsibility by arguing that the officer breached his/her fiduciary or statutory duties (Richard Brady Franks) f) Assumptions that documents are duly executed (s 129(5)(6)) • If the document appears to be executed according to s 127, then a third party can assume it is validly executed (Brick & Pipe) g) Warranting documents genuine (s 129(7)) • A person may assume that an officer or agent of the company who has authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy 5. The effect of fraud and forgery on the assumptions (s 128(3) & (4)) a) Assumptions made out even if officer or agent of company acts fraudulently or forges doc (s 128(3)) b) Where assumptions do not apply (s 128(4)): If at time of dealings the third party knew or suspected that the assumption was incorrect • Apply a subjective test (Oris Funds Management; Sunburst Properties) 6. Indoor Management Rule (as a fallback only) • Allows a third party to assume matters of ‘internal management’ with respect to the company transactions have been satisfied (even if the facts later show otherwise) (Turquand) • A person cannot rely on the indoor management rule if they had actual knowledge of the irregularity or were “put on inquiry” and failed to make inquiries (Northside) DIRECTORS’ DUTIES 1. Duty of care, skill and diligence (“DOCSD”) NB: It is generally agreed that DOCSD at common law and under s 180(1) is the same (ASIC v Vines) • Applies to directors, secretaries, receivers, administrators, liquidators or officers (s 9) a) The duty -­‐ s 180 A director or other officer of a corporation must exercise their power and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation’s circumstance; and (b) occupied the office held by and had same responsibilities within corporation, as director or officer b) Standard of Care Standard to be applied to director is an objective reasonable person standard, in light of the “context” i. Objective Reasonable Person Test (s 180(1)) A reasonable person, when making business decisions, should consider: • the magnitude of risk of harm and probability of it occurring; seriousness of loss and consequences of harm; expenses; difficulty and any inconvenience of taking alleviating action ii. ‘Context’ Test What constitutes care, skill and diligence will be impacted by: • The Corporation’s Circumstances (s 180(1)(a)) • The office & responsibilities of director (s 180(1)(b)) o Office examples: executive directors held to a higher standard as s/he occupy a full time role and have a greater knowledge of company operations (Daniels v Anderson; Morel); NEDs held to a lower standard than executive directors (Daniels); Chair held to a higher standard because they are elected (s 248E(RR)) o Skills and experience also relevant to the standard (ASIC v Vines); particularly where the person holds themselves out to have particular skills and experience (incl. NEDs: Gold Ribbon; Re City Equitable Fire Insurance) o Delegation of task to particular officer or director is likely to heighten the standard c) Has Director met the standard? 1. Analyse based on above standard 2. Analyse whether director has met the minimum standard (Daniels v Anderson) such as: (a) Must generally monitor the business of the company (Re City Equitable) – not day-­‐
to-­‐day (b) Director has continuing obligation to keep informed on the company’s business (c) Have familiarity of /review/monitor financial status of Company (Healey) (d) Must be able to read and sign off financial statements (s 295(4)) (ASIC v Healey) (e) Regularly attend meetings (Gold Ribbon); unless exceptional circumstances prevents (Vrisakis) (f) Must make enquiries into financial statements that call for enquiry (Daniels) (g) Monitor management to ensure company is run properly  Ignorance, failure to inquire or shutting eyes to misconduct is no excuse (ASIC v Healey) d) Defences/Presumptions for DOCSD i. Presumption: Business Judgment Rule (s 180(2)) • If director makes a decision in good faith and not for irrelevant purposes, they are not open to review by the court (Barwick CJ, Kitto and McTiernan JJ in Harlowe’s Nominees) • Business judgment (s 180(3)) = ‘any decision to take or not to take action in respect of a matter relevant to the business operations of a corporation’. This requires a conscious decision to act or not act (ASIC v Adler) s 180(2) requires that: • The judgment/decision must be in good faith for a proper purpose (s 180(2)(a); cf: ASIC v Adler) • Director must not have a material personal interest (s 180(2)(b)) • Director must inform themselves about the subject matter of the judgment to an extent that they reasonably believed it to be appropriate (s 180(2)(c)) • Director must have a rational belief that the judgment is in the best interest of the corporation (s 180(2)(c)); Rational unless no reasonable person would hold this belief ii. Defence: Reliance on others (s 189) Where director relies on information/professional or expert advice given by an employee; a professional expert/adviser; another director/officer; or committee of directors… • It is presumed to be reasonable if the following is made out (per s 189): 1. Director must reasonably believe that: a. the matter relied upon is within the professional competence of [the employee, adviser/expert] (s 189(a)(i) and (ii)) OR b. the matter is within the area of authority of the director/officer or relevant board committee (s 189(a)(iii) and (iv)) 2. The reliance was in good faith (which is subjective per Daniels) (s 189(b)(i)) 3. Director must have made an independent assessment of the information or advice, having regard to the Director’s knowledge of the corporation and the complexity of its structures and operations (s 189(b)(ii); ASIC v Healey; ASIC v Vines) 4. The reliance of Director must have been reasonable (and will be reasonable unless the contrary is proved) (ASIC v Vines) iii. Defence: Reliance on delegate (s 190) (NB: delegation is only re. s 198D, not conferral of power on MD s 198C) Rule: Under s 190(1), Director is responsible for the exercise of the power by the delegate as if the power had been exercised by delegate Exception: Under s 190(2), Director is NOT liable for the delegate’s negligence if: (a) Director believes on reasonable grounds at all times that delegate would exercise the power in conformity with the duties imposed on directors of the company; AND (b) Director believed on reasonable grounds and in good faith and after making proper inquiries if the circumstances indicated the need for inquiry that delegate is reliable and competent in relation to the power delegated • Santow J in ASIC v Adler held that reasonableness of reliance on delegate only be made out where: o The function must be an appropriate one to delegate to that person so that it “may properly be left to such officers” (Re City Equitable Fire Insurance Co) o The extent to which the director is put on inquiry (Re Property Force Consultants Pty Ltd) o Level of risk involved in the transaction and the general nature of the transaction (Wheeler) o Director held honest belief that delegate is trustworthy, competent and reliable o Knowledge that the delegate is incompetent or dishonest (Biala v Mallina Holdings Limited) o The extent to which the directors check the delegate is competent o Whether director is an executive or non-­‐executive director? If Executive – courts are less inclined to view delegation as reasonable 2. Duty to Act in Good Faith and in the Best Interests of the Company • Applies to directors, secretaries, receivers, administrators, liquidators or officers (s 9) • There is no substantive difference between the equitable and statutory duty a) Rule: Under s 181(1)(a), a director or other officer must exercise their powers and discharge their duties in good faith in the best interests of the corporation b) The Test Whether Director was acting in good faith (and not in breach) will depend on whether a reasonable director would have held reached that conclusion (Santow J in ASIC v Adler) in those circumstances (Owen J in Bell Group v Westpac Banking) • NB: An objective good faith test cannot be the sole test (Bowen LJ in Hutton) c) Who are interests owed to? Generally: Best interests owed by director to company ie shareholders as collective (Greenhalgh) Duty to individual shareholders? A fiduciary duty may be owed by Director to an individual shareholder if: • the company is a small, family company; there is a relationship of trust and confidence (Brunninghausen v Glavanics; Coleman); director is the driving force in the company (Coleman v Myers); director has high degree of inside knowledge (Coleman v Myers); the transaction is between director and the shareholder (Brunninghausen v Glavanics). Duty to creditors? • A director will not owe duty to creditors EXCEPT when company is insolvent or near insolvent (Kinsela v Russell Kinsela Pty Ltd); Creditors cannot bring action for breach (Spies v R) Duty to corporate groups? • A director only owes duties to the company in which s/he is director (Walker v Winbourne) and director will only owe duties to another company within a corporate group if the interests of the two companies coincide. Duty to employees? • No duty is owed to employees except where the employee’s interest is consistent with the company’s interests as a whole/the shareholders (Parke v Daily News Ltd) 3. Duty to exercise powers for “Proper Purpose” (s 181(1)(b)) • Applies to directors, secretaries, receivers, administrators, liquidators or officers (s 9) • There is no substantive difference between the equitable and statutory duty a) Test (2 steps per Howard Smith Ltd v Ampol Petroleum): Director must exercise his/her powers and discharge duties for a proper purpose The onus is on party alleging breach to prove the following limbs: i. Is the purpose a proper purpose as a matter of law? • For what purpose was the power legally conferred by the company onto the director? • Examples of proper purposes: Share issue to raise capital to benefit company (Ngurli), share issue part of employee remuneration, to comply with statute (Whitehouse obiter), share issue to get the best agreement possible from another company (Teck) ii. Has the power been exercised for a proper purpose as a matter of fact? Sole improper purpose? Then there will be breach (Whitehouse) Mixed purposes? (Both improper and proper): Apply reconciliation of Substantial Purpose Test (Howard Smith) and the But-­‐For-­‐Test (Whitehouse) (NB: Ipp J in Wheeler prefers But-­‐For Test) b) Criminal liability (s 184) -­‐ if D was reckless/intentionally dishonest Failure to act in good faith (s 184(1)(c)), in the best interests of the corporation (s 184(1)(c)) and for a proper purpose (s 184(1)(d)) must also be made out 4. Duty not to fetter discretion (Applies to directors only) a) Duty Director under an obligation to make decisions based on what is in the best interest of the company • His/her discretion must always be unfettered and should be independent (Thorby v Goldberg) 5. Duty to Avoid (Undisclosed Conflicts) • Applies to directors/officers (and employees under statute) • The directors’ duty not to allow conflicts of interest to develop is a duty which arises concurrently in equity and under statute. Statute provides for additional regulation The Duty in Equity a) Conflicts Rule Director must not place him/herself in position where there is ‘real, sensible possibility of conflict’ between their personal interests and their duty to act in best interests of company (Chan v Zacheria) i. Possible conflicts: • Automatic breach -­‐ K between Director and Company (Aberdeen Railway) • Not automatic breach -­‐ Competing Directorships: There is no general prohibition however a director of two competing companies must not exercise powers for the benefit of one company, without disclosing his interest and obtaining consent from other company (Brynes) • Not automatic breach -­‐ Director on Opposite Sides of K (as D) Will not be a breach, provided director discloses the issue, is absent from discussion and refrains from voting (Fitzsimmons) • Not automatic breach -­‐ Director a Member of Contracting/Competing Company: Directors’ shareholding does not automatically create a conflict of interest except where D has a substantial adverse shareholding e.g directing mind on both sides of the transaction (Farrar) • Not automatic breach -­‐ Nominee directors: Nominee directors must keep information confidential and act in the best interests of the company in which s/he is a director ii. Exception to breach: Ratification Director may avoid liability where s/he discloses his/her interest in full and obtains the fully informed consent of the shareholders of the company (Queensland Mines v Hudson) b) Profits Rule • Director in a fiduciary capacity, ‘must not make a profit out of his trust’ (Chan v Zacheria) • Even if director acted bona fide, mere fact that profits were made in the course of the fiduciary relationship means director is in breach (Regal Hastings) i. Types of profits • Misappropriating company property (tangible or intangible such as information) o After resignation, employees are still bound by duties of confidentiality (Cott) • Gaining a personal profit from transacting company’s business (Furs v Tomkies) • Misappropriating business opportunity: director cannot exploit an opportunity belonging to the company and/or which came to his notice as a D of that company (Cook v Deeks) ii. Company unable to take up opportunity/suffered loss? (irrelevant) (Regal; Canadian Aero Service) • However, where the company, with fully informed consent rejects an opportunity, D may not be in breach (Peso Silver Mines) iii. Capacity of director obtaining information (irrelevant) • Director cannot claim that he was acting in a “personal capacity” (IDC v Cooley), as director still obtained the information while director of the other company • NB: may not be breach if Director resigns BEFORE pursuing other career opportunities (Cott) • NB: may not be breach if the information is “publically available” (Peso Silver Mines) iv. Resignation of Director after taking up opportunity = still breach v. Exception to breach: Ratification Director may not be in breach where s/he obtained fully informed consent by members at GM (Furs) •
Unless the constitution requires the board to give approval or all shareholders are represented on the board (Queensland Mines) The Duty Under Statute: Applies to Directors, officers and employees, even if no longer employee a) Improper use of position (s 182) Director is prevented from improperly using his/her position to gain an advantage for him/herself or someone else (s 182(1)(a)) or cause detriment to the corporation (s 182(1)(a)) i. Improperly using position • Will be determined objectively (R v Brynes), based on what a reasonable person would consider to be an improper use of position ii. Detriment/harm (even if it never materialised) • Whether Director used his/her position to “cause detriment” (s 182(1)(b)) will be determined according to a subjective, purposive standard (R v Chew, Doyle v ASIC): did D intend to cause detriment/harm? iii. Criminal liability (only for ASIC) Director/officer/secretary/employee commits an offence if they use their position dishonestly to: • Intentionally Directly/Indirectly Gain Advantage For Themselves Or Another (s 184(2)(a)) • Intentionally Directly/Indirectly Cause Detriment (s 184(2)(a)) • Recklessly Gain Advantage For Themselves Or Another (s 184(2)(b)) • Recklessly Cause Detriment (s 184(2)(b)) b) Improper use of information (s 183) Director is prevented from improperly using the information obtained because they are, or have been a director, officer or employee to gain an advantage for themself or someone else (s 183(1)(a)) or to cause detriment to the corporation (s 183(1)(b)); info need not be “confidential” or “private” (Vizard) i. Improperly using information • Determined objectively (R v Brynes), according to what a reasonable person would consider to be an improper use of information ii. If Director used information to cause detriment (even if the harm never materialised) Whether D used the information to “cause detriment” (s 182(1)(b)) will be determined according to a subjective, purposive standard (R v Chew, Doyle v ASIC): Did D intend to cause harm/detriment? iii. Criminal liability Director/officer/secretary/employee commits an offence if they use their position dishonestly to: •
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Intentionally Directly/Indirectly Gain Advantage For Themselves Or Another (s 184(3)(a)) Intentionally Directly/Indirectly Cause Detriment (s 184(3)(a)) Recklessly Gain Advantage For Themselves Or Another (s 184(3)(b)) Recklessly Cause Detriment (s 184(3)(b)) c) Disclosure of Directors’ Material Personal Interest Directors are required to disclose any material personal interests (MPIs) they may have (s 191(1)), irrespective of what the constitution requires i. Does D Have MPI? (s 191(1)) A material personal interest is a matter that relates to the affairs of the company; refers to the capacity to influence the vote of a director (McGellin v Mount King Mining) ii. The MPI must be related to affairs of the company per s 53 such as membership, control, business, trading, transactions and dealings, property iii. Exceptions To Disclosure (s 191(2)) -­‐ D need not disclose his/her interest if it falls under s 191(2) iv. Notice Requirements D must disclose in the notice: • The nature and extent of the interest (s 191(3)(a)) & the relation of the interest to the company’s affairs (s 191(3)(b)) (and provide sufficient detail Camelot) v. Consequences for Director’s Failure To Disclose • Director’s failure to give notice/disclose MPI will not affect any transactions, agreements, instruments (s 191(4)) but is a strict liability offence (s 191(1A)) vi. Voting Of Director (After disclosure by director) • Proprietary company: Director can still attend directors meetings and vote -­‐ s 194(RR) • Public company: Director must not be present at or vote at directors’ meetings considering their MPI (s 195(1)(a) & (b)). If present, this attracts 5 penalty units (Sch 3) d) Related party transactions (Ch 2E) (“RPT”) s 208(1) prohibits public companies (or related entities controlled by that company) from giving financial benefits to related parties, unless approved by meeting of shareholders (s 208(1)(a)(i)) i. A person/entity will be a related party to the company where: • Controlling entity of a public company (s 228(1)) will be a related party where entity determines the outcome of company’s finances and operation (s 50AA(1)), has practical influence over company (s 50AA(2)(a)) and has practices or patterns of behaviour affecting company’s finances/operations (s 50AA(2)(b)) •
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Person will be related where: A director of the public company (s 228(2)(a)); a director of a controlling entity (s 228(2)(b)), the spouse of a director (s 228(2)(d)), parents or children of director (s 228(3)(a)(b)) It is an entity controlled by a related party (s 228(4)) The person was a related party in previous 6 months (s 228(5)) The person is likely to become a related party in the future (s 228(6)) Is an entity acting in concert with a related party of public company on understanding that the related party will get financial benefit, if entity gets a benefit from public company (s 228(7)) ii. Has public company given related party a financial benefit? • “Financial benefit” not defined but intended to operate broadly (s 229(1)(a)) • Economic and commercial substance of conduct is the primary consideration (s 229(1)(b)) Examples: finance/property (s 229(3)(a)), buying/selling asset (s 229(3)(b)), leasing an asset (s 229(3)(c)), supplying or receiving services (s 229(3)(d)) iii. Is the RPT permitted? RPT will be permitted: • Where parties are at arms length: member approval is not needed for financial benefits that are reasonable and parties are at arms length (s 210(a)) • Where remuneration reasonable: member approval not needed where remuneration is reasonable in all circumstances for public company and the related party (s 211(b)(i)-­‐(ii)) • For indemnities, exemptions, insurance premiums & payment for officers’ legal costs (s 212) • For small amounts of $5K or less to related party per s 213 • Where financial benefits are given to a closely held subsidiary per s 214 • Where the financial benefit is given to the related party as a member and doesn’t discriminate between members per s 215 (e.g a dividend given to all members) • Where the financial benefit is given as part of a court order per s 216 iv. If no exceptions apply: Member approval required for a related party transaction • The RPT valid and legal if it has been approved by shareholders (per s 217-­‐227) v. Consequences of contravention of Ch 2E Contravention will not affect the validity of any K or transaction related to the benefit (s 209(1)(a)) • For an entity: will not be guilty of an offence (s 209(1)(b)) but an injunction may be ordered under s 1324 to stop the benefit passing to RP. Damages can be ordered in substitution or in conjunction with damages (s 1324(10)) • For persons “involved”: person will be considered “involved” under s 79, if s/he aided/abetted/counseled o If person involved was dishonest, s/he will have committed an offence (s 209(3)) o Person involved will be liable for a civil penalty (s 209(2)) CONSEQUENCES OF CONTRAVENTION AND RELIEF FROM LIABILITY 1. Bringing an Action Company is proper plaintiff to bring action (Foss v Hardbottle) at instigation of Board…HOWEVER: • ASIC can also bring an action in its own name (s 50 – if the matter is big); • A member can bring an action (TOPIC LINK: members’ remedies); and • Liquidator, sitting in the shoes of the company, can also bring an action 2. Equitable remedies (for: DOCSD; best interest; proper purpose; conflicts/profits rules in equity) Following breach of directors’ duties, court can craft a flexible and “just” outcome such as: Equitable compensation; Account of profits (Key remedy for breach of Profits Rule, Regal Hastings); Proprietary remedy of constructive trust over property (Boardman); Injunction; Specific performance; Declaration 3. Statutory remedies (for DOCSD; best interest; proper purpose; improper use of position and info s 182/3; RPT) a) Civil Penalty Provisions (Part 9.4B) If D has contravened civil penalty provision, on application by ASIC, court can make orders of: • Declaration of Contravention s 1317E, that direction has breached • Pecuniary Penalty Orders (payable to the Commonwealth): the court may require director to pay up to $200,000 for each contravention (s 1317G(1)) • Disqualification: ASIC may apply to the Court to have director disqualified from managing corporations for a period the court considers appropriate (s 206C(1)(a); ASIC v Vizard) b) Other Court Orders: • Compensation order (payable to Corporation): The court may order a compensation order for the damage suffered by corporation as a result of Director’s contravention (s 1317H(1)(a)(b)). o The court will specify the amount of the order (s 1317H(1)) o NB: there must be a connection between D’s breach and C’s loss • Injunction: The court may grant an injunction (on the request of ASIC or a person affected) to injunct the a person who has contravened the Act (s 1324(1)(a)) or attempted to contravene the Act (s 1324(1)(d)) or a person aided, abetted, counselled or procured contravention of the Act (s 1324(1)(c)); Damages may be ordered in substitution or in conjunction with damages (s 1324(10)) c) Criminal Liability (if dishonest) – see under relevant duties above for further information 4. Releases from liability for breaches of duty a) Court relief: The court can relieve the director from liability (wholly or partly) if the director ought to be fairly excused if Director acted honestly and taking into account all the circumstances of the case. b) Ratification (only re. equitable duties) While unlikely that ratification may be used as a relief for statutory duties, ratification may impact the content of the duty (Forge v ASIC; Angas Law Services v Carabelas) c) Indemnification of director by company for liability to 3rd party s 199A allows company to indemnify an officer for any penalty orders or compensation orders, provided the officer was acting in good faith (s 199A(2)) d) Insurance (not available for equitable duties s 182/3 or willful breaches) available under s 199B MEMBERS’ REMEDIES Shareholders typically cannot bring an action regarding irregularities in the management or operation of the company (the internal management rule). However, members have a number of personal and derivative actions available to him/her/them to enforce rights or remedy breaches 1. Statutory Derivative Action (“SDA”) – Governed by Part 2F.1A Members and officers can take action against another for a wrong done to the company, on behalf of the company, where the company is unwilling or unable to take action for itself a) Does member/officer have standing? (s 236(1)) YES: if person is a member, former member, person entitled to be registered as a member of the company or related body corporation, an officer or former officer b) Member must seek leave (s 237(2)) Member must apply to the court for leave to bring, or to intervene in, proceedings (s 237(1)) The court will only grant the leave application if the following conditions are satisfied: (a) Probable company will not bring proceedings (b) Applicant acting in good faith • Good faith factors set out by Palmer J in Swasson v R A Pratt Properties: the member must believe that a good cause of action exists with reasonable prospects of success, is not bringing the action for a collateral purpose that would be an abuse of process (c) Granting leave is in the best interests of the company • There is a rebuttable presumption under s 237 that granting leave is not in the best interest of the company if: i) proceedings are by the company against a third party or by a third party against a company (s 237(3)(a)) (third parties are NOT related parties -­‐ s 237(4)) ii) company has decided not to bring, defend, settle, compromise proceeding (s 237(3)(b)) iii) all of the directors who decided not to bring, defend, settle the proceeding acted in good faith, for a proper purpose, didn’t have an material personal interest in the decision, informed themselves about the subject matter of the decision and rationally believe the decision is in the best interest of the company (s 237(3)(c)) • May still be able to show that leave is in best interest (Palmer J in Swansson) if suing is in the best interest of the company in terms of its separate and independent welfare (Deangrove) (d) There is a serious question to be tried – member need only show that there is an arguable case (not frivolous or vexatious) (Explanatory Memorandum, para 6.46); Standard is low (Chahwan) (e) Member/officer provides written notice to company at least 14 days before applying for leave c) Costs Under s 242, a court may make any orders it considers appropriate about costs in relation to proceedings brought with leave under s 237 in relation to the applicant, the company or other persons involved – usually compensation orders in favour of company 2. Oppression (s 232) Member may look to the personal, flexible remedy of oppression in relation to unfair or prejudicial acts by or on behalf of company a) Standing – s 234 An application for oppression can be made by: • a member of the company (ie: anyone on the register per s 231, except where the conduct complained of is a refusal to register as in Re Independent Quarries), even if the application relates to an act or omission that is against: o the member in a capacity other than as a member (e.g a director; employee; creditor) o another member in their capacity as member • a person who has been removed from the register because of a selective reduction • a person who has ceased to be a member • a person whom ASIC thinks is appropriate b) Ground for Order – s 232 The court will make an order for oppression under s 233 if it relates to EITHER: a) the conduct of the company’s affairs (per s 53: matters affecting creation; ownership; management; control; business activities; properties; financial states); OR b) the actual or proposed act or omission is by or on behalf of the company; OR c) a resolution or proposed resolution of members or a class of members AND IS EITHER: d) contrary to the interests of the members as a whole (s 232(d)); OR e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or another capacity (s 232(e)) • The factors the court will consider include: o “Compound expression”: were alleged act/s of oppression “commercially unfair” in light of shareholders’ reasonable expectations (Fexuto), company’s background (Young J in Morgan v 45 Flers Avenue Pty Ltd) and interests of company (Wayde)? o Objective test and consider the impact of the decision upon the member/s, as judged by a reasonable bystander, with the skills and knowledge of the oppressors (Wayde). It will only be oppressive if no reasonable bystander would have committed the acts (Mason ACJ in Wayde) o Acts will be considered cumulatively (Sanford; Fexuto) o Mere discrimination is not enough (Brennan J in Wayde) o Dissatisfaction with management not enough (Re G Jeffrey) o Low dividends not enough (Morgan v 45 Flers Ave) o Analogies from other cases such as Re Bright Pine Mills; Fexuto Pty Ltd v Bosnjak; Sanford; Hogg v Dymock; Campbell; Re Dalkieth) c) Possible Orders where there is oppression -­‐ see s 233(1) Court has discretion to make any (broad and intrusive) orders it thinks fit and will look to s 233(1) 3. Statutory Injunction for contravention of the Act (s 1324) An injunction under s 1324 gives the court discretion to grant an injunction to restrain a person from engaging in conduct that contravenes the Act such as breach of directors’ duties (Airpeak) NB: Injunction can also be granted in relation to those who have: aided, abetted, counselled contravention (s 1324(1)(c)) a) Standing to apply ASIC/person whose interests have been, are or would be affected by conduct have standing (s 1324(1)) • The courts take a broad interpretation of “affected by” (Broken Hill Proprietary) • Interest of member must go beyond mere interests of the public b) Interests Insolvency must be an element of the contravention (s 1324(1A)(b)) OR the company has contravened share reduction scheme (s 256B)/share buy back (s 257A)/financial assistance (s 260A) c) Type of injunction Injunction may be interim (s 1324(5)), prohibitive (s 1324(6)) or mandatory (s 1324(7)) d) Damages may be ordered in substitution or conjunction (s 1324(10), Phoenix Constructions) 4. Winding up as a shareholder remedy (last resort) Member may apply to the court for an order for company to be wound up due to issues such as: directors’ breaches, breakdown in trust, deadlock in decisions, fraud, misconduct, oppression, failure of company purpose, in public interest a) Does Member have standing? Under s 461(2), any one or more of the following may apply for an order to wind up: • the company; a creditor of the company; a contributory; (a member is likely to be considered a contributory (s 461(2)(c)) which is a holder of fully paid shares (s 9)) a liquidator; ASIC; APRA b) Grounds for winding up The court may order the winding up of a company if it is of the opinion that: • Directors are acting in their own interest…that appears to be unfair/unjust (s 461(1)(e); Re Cumberland: unfairness only needs to be experienced by a significant body of members) • The affairs of the company have been conducted in a way which is oppressive, unfairly prejudicial or unfairly discriminatory against member/s in capacity as members (s 461(1)(f)) • The acts or omissions by or on behalf of the company have been conducted in a way which is oppressive, unfairly prejudicial or unfairly discriminatory against member/s (s 461(1)(g)) •
It is just and equitable that the company be wound up (s 461(1)(k)) (*most common*) o Ground is broadly interpreted and gives courts a wide discretion to order winding up o Conduct complained of may be legal but effect is unjust or inequitable (Ebrahimi) Examples: Fraud, misconduct and oppression (Loch v John Blackwood); A breakdown of mutual trust and confidence in small companies, where it is understood that all parties would participate in management (Carpenter v Carpenter); Deadlock in decision making, which makes it impossible to run the company properly (Re Yenidje Tobacco); Failure of the substratum/purpose for which the company, when the company is no longer able to carry on business, which must be demonstrated objectively (Re Tivoli) c) Exception to winding up (if s 461(1)(e) or s 461(1)(k) applies): if another remedy available (s 467(4)) 5. Members’ Personal Actions a) Personal Rights Conferred by the Act s 247A inspect books (see above); s 246B & s 246D unlawful variation of class rights (see above); s 232 oppression (see above); s 1322 procedural irregularities causing substantial injustice (see above) b) Personal Actions Conferred by Constitution or RRs -­‐ For breach of statutory contract (see above) c) Personal Actions Arising in Equity i. Special Fiduciary Relationship It may be possible to establish a fiduciary relationship between Directors and members/a member (Coleman, confirmed in Brunninghausen v Glavanics) • To establish a fiduciary relationship, the following must be made out: • Close relationship between a small number of shareholders and directors: e.g as in small, privately held proprietary companies (Coleman; Glavanics) • Shareholders are vulnerable and D/s have knowledge of this (Coleman) • There is a disparity of knowledge, used for benefit of the stronger party (Glavanics) • This is a share capital transaction, whereby members have been forced/convinced to sell his/her/their shares by director (Coleman; Glavanics) As a result the court may order equitable remedies such as: Equitable compensation; an account of profits; a proprietary remedy of a Constructive Trust over the property; an equitable injunction; specific performance; a declaration; OR some other remedy/resolution the court perceives as “JUST”? ii. Allotment of Shares for an Improper Purpose • A director may allot shares for the improper purpose of e.g to destroy the majority, dilute shareholding, diminish shareholding, prevent a person voting • This has a direct effect on shareholder by diminishing his/her voting power •
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As a result, shareholder has a personal, equitable right to ensure their voting power remains undiminished (King CJ in Residues Treatment and Trading v Southern Resources) It is likely that equitable remedies will be available to the shareholder (e.g equitable compensation or account of profits) iii) Altering the Constitution in a manner that harms some shareholders (fraud on minority) • See Gambotto discussion above CORPORATE MORTALITY/INSOLVENCY 1. Is the company insolvent or near insolvent? s 95A: company is solvent if person is able to pay back debts, as and when they become due & payable • Apply a balance sheet test and if company’s liabilities exceed its assets, the serious inability to pay debt means that it is likely insolvent or at the very least near insolvent 2. Receivership (TOPIC LINK: Most receiverships turn into liquidations) a) Who is the receiver? • Receiver appointed on behalf of a secured creditor to sell company’s property that was provided as security for the loan to the company b) When can receiver be appointed? A receiver will be appointed because: • the security agreement between creditor and company allows for this; and • company has breached a loan agreement obligation such as non-­‐payment c) Role of the receiver • Has the power to take possession of the property secured by the loan/security agreement and sell it to repay the debt due to creditor • Also has broad powers under s 420; allows the receiver to carry on the company’s business, convert property into money, appoint agents, borrow on security, and execute documents d) Duties owed by Receiver • Such duties are owed in contract, tort, fiduciary principles • Directors duties are owed by receiver under s 180-­‐4, as receiver considered an “officer” (s 9) • Also owes specific statutory duties such as a duty of care to get market value or the best price reasonably obtainable when selling company’s property (s 420A) • Is liable for debts incurred in course of receivership despite agreements to contrary (s 419) e) Termination • The receivership terminates when the secured property is sold and the debt is discharged 2. Voluntary Administration Voluntary administration is about maximising chance for company to continue in business (s 435A(a)) or if not possible, getting better returns for creditors and members in winding up (s 435(b)) a) Initiating Voluntary Administration Voluntary administration can be initiated by • Directors of company, if they conclude (by res) company likely to become insolvent (s 436A) OR • The liquidator if s/he thinks the company is or likely to become insolvent (s 436B) • Secured creditor who has enforceable security over whole/substantially whole of comp’s property b) Effect of Voluntary Administration • Everything becomes “frozen” during voluntary administration: directors powers are suspended (s 437C) and only the administrator deals with the company’s property (s 437D) • There is a stay on all legal proceedings against the company (s 440D) and a moratorium on all enforcement of rights (s 440A-­‐440J) c) Role of Administrators (registered with ASIC and independent) • The Administrator takes control of the company from directors of the company’s business, property and affairs and may carry on that business (s 437A(1)(a)(b)) • The administrator will investigate the company’s business, property, affairs, financial circumstances (s 438A(a)) and forms an opinion about what is in the best interest of the company’s creditors (s 438A(b)) An administrator also has the power to: • Remove a director from office (s 442A(a)); Appoint a person as director (s 442A(b)); Perform any function or exercise any power that company or officers could (s 437A(1)(d)); Terminate or dispose of all or part of that business and any property (s 437A(1)(c)) d) Administrator owes duties • Directors duties are owed by administrator under s 180-­‐4, as a receiver is an “officer” (s 9) • Administrator is liable for debts incurred in the course of administration such as: o General debt in performance or exercise of any of his/her functions and powers, goods bought, property hired or leased, or borrowing costs (s 443A(1)(a)-­‐(f)) o Debt for any property used or occupied by the property (s 443B(1)) • HOWEVER, Administrator has right to indemnity from company for duties (provided administrator acted in good faith, without negligence (s 443D(aa)) or debt liability per s 443D e) Process of Administration The administrator must meet with creditors at least twice: Meeting 1: must be within 8 days of administration commencement. Creditors can appoint a consultation committee of creditors and/or a new administrator (Creditors have $1 = 1vote) Meeting 2: within 20 days of administration commencement and decides the company’s outcome f) Outcome of voluntary administration Outcome is determined by the company’s creditors, after the Administrator has investigated the company’s affairs and made recommendations ($1=1 vote). Creditors can decide: • that a Deed of Company Arrangement be executed (DOCA) (s 435C(2)(a)) o DOCA requirements found at s 44A-­‐445J • that the administration should end (s 435C(2)(b); s 439C(b)) • that the company be wound up (s 435C(2)(c); s 439C(c)) 3. Winding-­‐Up (of an insolvent company) Winding up is a form of external administration; may involve voluntary winding up by members or creditors (ss 489-­‐511); winding up by ASIC (ss 489EA-­‐489EC) or compulsory liquidation (ss 459A-­‐459T) a) Compulsory liquidation (ss 459A – 459T) – if the company is hopelessly insolvent i. Applying for liquidation Under s 459P, eligible parties who can apply to court for company to be wound up: (a) company; (b) creditor; (c) contributory (e.g a member); (d) director; (e) liquidator, (f) ASIC; (g) prescribed agency ii. Presumption of Insolvency (s 459C) (Shortcut) Per s 459C(2): The Court must presume that the company is insolvent (and order winding up) if, during or after the 3 months (before application was made): (a) company failed to comply with a statutory demand; or • Statutory Demands requirements at s 459C(2)(a) and responses at s 459G; s 459H (b) company failed to fully satisfy judgment, decree or order of Australian court in favour of creditor (c) & (d) a receiver, or receiver and manager, was appointed under a power contained in an instrument or an order (e) & (f) a person entered into possession, or assumed control, of such property for such a purpose; or was appointed to enter possession iii. If presumption cannot be made out: Proving Insolvency s 95A: company is solvent if able to pay back its debts, as and when they become due and payable • Applying a balance sheet test, if company’s liabilities exceed its assets, a serious inability to pay debt means that it is likely insolvent or at the very least near insolvent • If insolvent, court will order winding up, commencing on date of the court order (s 513A(e)) iv. Appointing a liquidator: court will appoint a qualified, independent liquidator, registered by ASIC v. Role of Liquidator (ss 474-­‐9) • Liquidator takes custody over company’s assets (s 474(1)(a)) and realise them (s 477(2)(c)) • Company carries on business so far as necessary…in the winding up (s 477(1)(2)) • Liquidators have broad powers to do all things necessary for winding up comp. (s 477(2)(m)) • Directors’ and officers’ powers are suspended and they will effectively serve the liquidator • Secured creditors can realise their security (unsecured creditors cannot) vi. Duties of Liquidator Statutory directors duties are owed by the liquidator under s 180-­‐4, as a receiver is considered an “officer of the company” (s 9) + may also owe common law and fiduciary duties vii. Pursuing Pre-­‐Liquidation Improper Transactions – Maximising Profits? • Improper transactions reduce amount available for distribution upon company’s winding up • Liquidator may apply to court for making these transactions voidable and recover the value • Liquidators will usually pursue transactions in breach of directors’ duties OR a transaction made when insolvent or when insolvency is imminent Possible voidable transactions (which liquidator will seek to reverse): * Unfair Preference (s 588FA(1)) w/in 6 months of relation back day (= day winding-­‐up begun: s 9) • Occurs where company and creditors are parties to a transaction and the transaction results in the creditor receiving more than the creditor would receive if the transaction were set aside and the creditor were to prove for the debt in a winding up of company • This is contrary to the pari passu rule and liquidator will seek to reverse this transaction * Uncommercial transaction (s 588FB) w/in 2yrs of relation-­‐back day • Transaction is uncommercial where a reasonable person would not have entered the transaction when considering the benefits and detriment to the company, benefits to other parties and any other matters * Insolvent transaction (s 588FC) w/in 6 months of relation-­‐back day • Occurs where there was an unfair or uncommercial transaction and company was insolvent/became insolvent by doing so * Unfair to loan company (s 588FD) made before winding up began • Occurs where company has charged interest on a loan which is considered extortionate * Unreasonable director-­‐related transaction (s 588FD) w/in 4 years of relation-­‐back day • Occurs where the transaction has been made to director of the company or a close associate • This transaction will be reversed if it may be expected that a reasonable person in the company’s circumstances would not have entered the transaction taking into account the benefits to the company, detriment to the company, benefits to other parties and other relevant matters Court orders (s 588FF) where there is a voidable transaction: Court may order a person to pay the company some or all of the money the company paid in the transaction (s 588FF(1)(a)), direct a person to transfer the property which was transferred under the transaction (s 588FF(1)(b)) OR require the person to pay the company an amount that fairly represents the benefits they received (s 588FF(1)(c)) Defence for THIRD PARTY: Bona Fide Purchaser for Value, Without Notice (s 588FG) The court will not make an order in relation to the voidable transaction where: • The person was a party to the transaction in good faith (s 588FG(2)(a)) • At the time of becoming a party, the person had no reasonable grounds for suspecting the company was insolvent and a reasonable person in the person’s circumstance would have no such grounds for suspecting (s 588FG(2)(b)) • The person provided valuable consideration under the transaction (s 588FG(2)(c)) viii. Order of Distribution in Winding Up (s 556(1)) Once assets have been liquidated, interest holders get paid in accordance with their priority and in proportion to their interest: 1. (a) Liquidator’s costs 2. (b) Secured creditors – legal costs, in applying for winding up 3. (ba)-­‐(df) Other costs of liquidation 4. (e)-­‐(h) Employees (in the following order: wages, super, workers’ compensation, leave) 5. Unsecured creditors must prove their debt (s 553) and if they can do so, are paid pari passu according to the funds available (s 555) 6. Shareholders/members postponed until last (s 563A; per Sons of Gwalia v Margaretic) 4. Company de-­‐registration Where a company is being wound up, de-­‐registration is the final action that brings a company's existence to an end – property vests in ASIC • There are three types, deregistration initiated by ASIC, voluntary deregistration and for our purposes, deregistration following winding up