Corps Revision Lecture
LSS Tutorials
Overview
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Intro: Formation/Types of Company/Corporate veil/BoD/GM
Directors’ duties:
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Related party transactions
Financial assistance
Consequences of breach/relief from liability
Remedies
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DCSD
Insolvent trading
BF/GF/proper purpose
Director must not fetter discretions
Conflicts
Derivative/personal actions
Oppression
Continuous disclosure requirements
3P/company
Directors
Remedies
Piercing corporate
veil
s180-DCSDbusiness judgment
rule-reliancedelegation
SDA s236/s237
Insolvent trading
s588v-g
S181-GF/proper
purpose-collateral
purposes?
Oppression
s232/233
Financial assistance
s260A
Conflicts s9,
s182/183/191/195,
member approval,
financial benefit
s229
Injunction
Corporate
contracting
Related party
s228/50AA
Winding up
Problem Solving
Who are the parties and in what capacity can we advise
them?
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5.
Director, officer, shareholder, corporation, holding co, ASIC,
creditors, liquidator, employees
What is their complaint?
Legal issue: breach?
Resolve
Remedies
Intro
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SLP – Salomon
Corporate Groups
BoD/GM
Calling a meeting – SH rights
Directors’ duties questions
Intro
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5.
Parties?
Grievance?
Breach of directors duties (analysis)
Defences/presumptions
Consequences of breach/relief from liability
Remedies
Duty of DCSD s180(1)
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CL/equity/statute?
S180(1) X as a director or other officer, must exercise their powers and discharge their
duties with the degree of care and diligence that RP would exercise if they
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What would a RP in [D’s] position with [D’s] knowledge and experience, exercising
[D’s] responsibility, in that type of company, have done? Daniels; Wheeler (objective
test)
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Were a director or officer of a corp in the corp’s circumstances; and
Occupied the office held by, and had the same responsibilities within the corp as X
Size of company?
What experience and skills did the director hold himself out to have?
The court in Daniels discussed the following factors:
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Continuing obligation to keep informed about the company’s business
Must generally monitor corporate affairs, policies
Familiar with financial status
Attend company meetings; bring informed independent judgment to bear on matters
Can’t hide behind duty of confidentiality to one company to avoid obligations to another
DCSD: defences/presumptions
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Delegation of powers s190
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Reliance on information and advice from others s189
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s198D allows director to delegate powers
Director responsible for exercise of power by delegate s190(1)
Director not liable if reasonably believed delegate reliable/ competent
s190(2)
Santow J in Adler factors
Reliance presumed reasonable if matter relied upon is within
professional competence; in good faith; Director made independent
assessment
Statutory business judgment rule s180(2), (3)
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Charterbridge Corp v Lloyds Bank
Business judgment: any decision to take or not take action in respect of
a matter relevant to the business operations of the corporation s180(3)
S180(2)
DCSD: policy?
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AWA case p181
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Diligence and reliance
Executive vs non-executive directors
Rogers CJ
Clarke & Sheller JJA
Duty to prevent insolvent trading
Holding
co
liability
Duty holding
company to prevent
subsidiary company
trading while
insolvent Div 5
s588V
Director
liability
Duty directors to
prevent insolvent
trading Div 3
s588G
Insolvent trading
Does the applicant have standing?
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Unsecured creditor
ASIC
Liquidator
Unsecured creditor – personal claim for debt – is there
a HC/SUB relationship s588V?
If no HC/SUB relationship – can we find a director
liable? s588G
Holding co liability for insolvent trading
X can seek compensation from holding co if can prove
company (holding co) contravened s588V
1. Corporation is a holding co of subsidiary
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Subsidiary is insolvent/becomes insolvent by incurring a
debt
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3.
s46
s95A definition insolvent not being able to pay debts as they
fall due
Reasonable grounds to suspect the subsidiary is or
would be insolvent
Director liability for insolvent trading
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Directors of co may be liable for debts of co if they permit co to trade while
insolvent s588G
Director will be liable for debts of co if:
Person is director (or shadow director) at the time the debt incurred AND
Co trades while insolvent AND
There were reasonable grounds for questioning co solvency or that it would
become insolvent when the debt was incurred AND
Director was aware that there were grounds for suspecting or a reasonable
person in the position of the director would have been aware of insolvency
under test s95A
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2.
Defences s588H
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QLD Bacon v Rees
ASIC v Plymin
Expect solvency
Reasonable reliance
Illness
Director took all reasonable steps to prevent co incurring debt
Consequences of breach
Insolvent trading: policy?
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Deterring directors from taking business risks
Creditor protection
Balance between protecting creditors vs entrepreneurial
activity by directors
P.61-62 Boros & Duns
Duty of good faith/proper purpose
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Equity/statutory duty
S181(1) a director or other officer must exercise powers
and discharge duties:
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In good faith in the best interests of the corp; and
For a proper purpose
Company’s best interests = shareholders’ best interests
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EXCEPT: when company is approaching insolvency  creditors
best interests (Kinsela)
Does not include individual SH interests EXCEPT if it’s a
special fact fiduciary relationship (Coleman v Myers)
No special obligation to consider employees (Parke v Daily
News)
Corporate group s187?
Duty of good faith/proper purpose cont.
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Proper purpose?
2 step test: (Howard Smith)
What is the legal purpose of the company giving the director
the power? (question of law)
What is the actual reason that the directors exercised the
power? (question of fact)
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2.
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List potential purposes
Courts have 2 different tests (do both):
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2.
Substantial purpose test (Howard Smith)
‘But for’ test (Whitehouse)
Director must not fetter discretions
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Director retains discretion if makes decision based on his
own judgment and what’s in the best interests of the co
Breach: if director promises always to follow the
directions of another person
Thorby
Duty to prevent conflict s182, 183
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Duty not to profit from the [position/use of information]
s182/183
Statute broader than fiduciary/equity as it applies to all
employees
Advantage extends beyond gains made by the officer to gains
made by 3P
Use of position s182
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Officer must not improperly use their position to
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Gain advantage for themselves or someone else; or
Cause detriment to the corp
Use of information s183
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person who obtains info because they are or have been an officer
must not improperly use information to
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Gain advantage for themselves or someone else; or
Cause detriment to the corp
Related party transactions (public co only)
s207/208
Member approval is required for decisions to give
financial benefits to related parties that could endanger
SH interests
1. Is the entity a related party? Note: broad definition of
related entity
2. Is there a financial benefit? S229
3. Does it fall under an exempt transaction? S210-216
4. If no exceptions apply, must seek member approval…
5. Disclosure
6. Consequences: civil penalties
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Financial assistance s260A
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ASIC v Adler – Santow J – focus on prejudicial impact on
creditors/SH
Consequences of breach/relief from liability
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Civil penalty s1317E
Criminal penalty
Relief/indemnification of directors
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Relief by court s1317S, s1318
Ratification at GM
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Full and frank disclosure of all material facts to GM + approval 75%:
Winthrop Investments v Winns
Indemnification s199A
Insurance s199B
Remedies
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SDA
Injunction
Oppression
Winding up
Continuous disclosure
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Chapter 6CA ss674 – 678
ASX LR 3.1 (public/listed)
Non listed s675
Any questions – email me
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emboo2@student.monash.edu.au