Company Law LAWS2301

Contents 1.1 Sources of Company Law 1.2 Administration of the National Scheme (ASIC) 1.4 The decision to incorporate / Veil / Promoters

- Salomon v Salomon = Veil protects in personal capacity - Industrial Equity Ltd v Blackburn = separate legal entity applies to groups - Gilford Motor v Horne = restraint of trade - Re Darby = lifting the veil due to fraud - SSK v Birmingham Corp = agency - Equiticorp v Bank of NZ = benefit of group as a whole - Green v Bestobell = Breach of director duties, Account of profits

2.1 Who is a promoter? - Tracy v Mandalay = expectation of profits is promoter 2.2 Duties of Promoter / Remedies - Gluckstein = Recovery of secret profits made - Erlanger = Disclosure duty 2.3 Pre-registration Contracts 2.4 Ratification - Bay v Illawarra = Company failed to ratify 3.1 Company Constitution 3.2 Effects - Eley = Company can amend provisions, Contract in outside capacity 3.3 Breach 3.4 Statutory Contract Examples - Eley = Company can amend provisions, Contract in outside capacity - Forbes v NSW Trotting Club = non member has no rights - Shuttleworth v Cox Bros = unilaterally alter constitution valid - Carew-Reid = Share transfer void as breached constitution - Re Carratti Holdings = Compulsory acquire shares in constitution valid 3.5 Unilateral Alterations - Shuttleworth = 75% Special resolution required to alter 3.6 Restrictions on rights to alter 3.7 Oppression 3.8 Objects Clause 4.0 Management of Companies 4.1 Two organs of the Company 4.2 BOD vs. GM Conflict - Cunninghame = GM cannot usurp power after granting power to BOD - John Shaw & Sons (Salford) Ltd v Shaw = family example, principle as above

4.3 Directors / Appointment / Who 4.4 TYPES of Directors 4.5 REMOVAL OF DIRECTORS 4.6 Contract of Employment - Allen v Gold Reefs = separate contract can sue for damages 5.1 Company’s liability for Contracts 5.2 Execution of Contract 5.3 Agents Authority - Freeman and Lockyer = Ostensible authority requirements - Bay v Illawarra Stationery Supplies = ratification requirements 5.4 Customary Authority - Northside Developments = individual director contract restrictions - Hely-Hutchinson = Chairperson contract restrictions - Re Tummon = excess of day to day needs - British Thomson-Houston = MD enter into “ordinary business” contracts - Panorama Developments = Company Secretary administrative contracts 5.5 Statutory Assumptions - Re Madi – Company bound by act of person named in ASIC document - Story v Advance Bank = Assumption relied upon irrespective of forgery 5.6 Remedy 6.0 Company’s liability in Tort and Crime 6.1 Organic Theory - Lennards Carrying Co = loss was due to owners actual fault - Entwells = MD’s directing mind and will - Donato v Legion Cabs = defamation - Tesco Supermarkets = Not directing mind and will by huge company chain 6.2 Liability for Torts - Lloyd v Grace Smith = Principal liable for acts of agent within authority 6.3 The Criminal Code Act 1995(Cth) 7.1 Members 7.2 Members’ Register 7.3 Correction of Register - Carew-Reid = Register rectified after breach of constitution 7.4 Effect of Register 7.5 Transfer of Shares: s1070A 7.6 Procedure for Transfer + refusal 7.7 Refusal Continued - Exercise of Discretion - Re Smith and Fawcett = Applicant failed to prove directors acted in bad faith - AMLA v Ure = BOD refused appointment to protect reputation of company - Winmardun = Refusal of transmission invalidated as Dir not acting bona fide - Roberts v Coussens = Transferee prove wouldn’t interfere with management 8.1 Meetings 8.2 General Meeting 8.3 Who can call a GM 8.4 Notice Requirements 8.5 Resolutions

8.6 Voting 8.7 Board of Directors Meeting 8.8 Material Personal Interest in issue of discussion 8.9 Records of Meetings 8.10 - s 1322 – Procedural Irregularities - Re Pembury = No injustice as outcome would have been the same - Chew Investment = resolution invalidated as Poll would yield different result 9.0 Members’ Rights and Remedies 9.1 Balancing Company’s and Member’ Interests 9.2 Ratification of breach of Directors’ Duties - Hannes = Disinterested shareholders (minority) who ratify directors’ actions 9.3 Remedies Available – but see more below 9.4 Members’ Right to Inspect Books - Re Humes Ltd = Dominant purpose was valid 9.5 Correction of Register - Carew-Reid = Transferal void due to breach of constitution provision 9.6 Variation of Class Rights 9.7 Declaration that proceedings invalid 9.8 Statutory injunction for contravention of Corporations Act - 1324 - Broken Hill v Bell = Injunction granted due to improper swap of shares 10.1 Oppression s 232 10.2 Who can apply? 10.3 Orders from court - John J Starr = Court unlikely to wind up profitable company - Wayde = No oppression has decision made in good faith - Re G. Jeffrey = No oppression as was affecting everyone evenly - Hannes = Improper Share issue 10.4 Statutory Derivative Action - When company unlikely to bring action - Wayde’s Case = directors belief is rational unless no reasonable person test 10.5 Winding Up - Ebrahami = Successful, breakdown in trust and confidence - Re Yenidje Tobacco = deadlock in vote - Loch v John Blackwood = Fraud/Misconduct in denying information - Re Tivoli Freeholds = Failure of substratum however objects clause broken 10.6 Common law remedies where member’s personal rights are infringed - Residues Treatment = capital not required = improper issue of shares - Gambotto v WCP = Expropriation of shares requirements, See 3.7 11.0 Director’s Duties 11.1 Breach of Director’s Duties - Daniels v Anderson = Directors must exercise reasonable care in management - Permanent Building Society v Wheeler = MD/CEO higher responsibility - Gamble v Hoffman = lack of education irrelevant - ASIC v Vines = obtain up-to-date information, inform senior managers 11.2 Defences available 11.3 Duty to act in Good Faith and in the best interest of company i) Act in good faith

- Percival v Wright = duty owed to company not individual S/H - Jeffree v NCSC = if Co is insolvent, interest of creditors > S/H - Walker v Wimborne - conflict between interests of subsidiaries - Equiticorp Finance = Payment of loan for benefit of whole group ii) For a proper purpose – e.g. issuing shares - Whitehouse v Carlton Hotel = improper purpose, “but for test”, different classes - Howard Smith v Ampol = Improper purpose, create new majority shareholder - Pine Vale v McDonnell & East = avoid borrowings, proper purpose, “but for” test - Permanent Building Society v Wheeler – W knew of the improper purpose - AMLA v Ure = refusal to transfer to convicted criminal, proper purpose iii) Avoid conflict of interest - Cook v Deeks = contract diversion, minority S/H proving director conflict - Regal v Gulliver = taking up corporate opportunity, dir.’s liable to repay profits - Green v Bestobell = tender, account of profits, regardless of success - ASIC v Vizard = misuse of confidential information for personal advantage - Artedomus v Del Casale = suppliers, misuse of information for personal gain 11.4 Disclosure (Conflict of interest continued) - Furs v Tomkies = Disclosure to Chairman insufficient, must be to GM, Breach - QLD Mines v Hudson = sufficient disclosure to GM equivalent 11.5 Related Party Transactions (Conflict of interest continued) - ASIC v Adler = Breach of general duties under s 180,181,182,183 11.6 Insolvent Trading - Standard Chartered Bank v Antico = - Holding company liable under s 588G i) Defences - Tourprint v Bott = s 588H(2) defence NOT available as no active involvement - ASIC v Plymin = s 588H(3) defence n/a as failed reasonable person test - Metro Fire Systems = s 588H(3) defence n/a as no inquiries made - Dep. Commissioner of Tax v Clark = s 588H(4) absence defence n/a ii) ASIC Action 11.7 Criminal Liability 11.8 Breach of Civil Penalty Provisions - 1317 12.1 Auditors 12.2 Duties i) Statutory ii) Contract iii) To use reasonable care and skill - Pacific Acceptance Corp v Forsyth = auditors failed to discover fraud - Arthur Young & Co = Auditors negligent, failed to investigate/report to GM - Daniels = “but for” auditors negligence, contributory negligence defence - Alexander v Cambridge = Auditor’s negligence was not causative iv) To Outsiders: Tort - Esanda Finance = auditor no liability as didn’t know would be relying on info 13.1 Company Financing 13.2 Variation of class rights - Gambotto v WCP = onus on majority if expropriating shares, onus on minority for other changes. Variation of class rights is NOT expropriation. 13.3 Legal effect of variation

13.4 Debentures 13.5 Security Interest Definitions 14.1 Public Fundraising 14.2 Steps to offer securities 14.3 Disclosure Document and Requirements 14.4 Prohibitions and Liabilities -- look into book - Reiffell v ACN = Misleading and deceptive and pursued under s 729 14.5 Civil Liability 14.6 Defences 15.0 Transactions affecting Share Capital 15.1 Maintenance of Share Capital - Trevor v Whitworth = Company can not purchase its own shares 15.2 Exceptions i) Capital Reduction - Re Fowlers Vacola = unfair payment to ordinary shareholders ii) Share buy-back iii) Financial assistance - ASIC v Adler = Contravention as materially prejudice 16.0 Takeovers 16.1 Who is affected? 16.2 Exempted acquisitions 16.3 Takeover Bid

i) Off Market ii) On Market 16.4 Compulsory acquisition/buyout 16.5 Misleading or deceptive statements 16.6 Defences 17.0 External Administration 17.1 Receivership 17.2 Powers 17.3 Common Law Duties - Expo International = Act in good faith and for a proper purpose, Realise the assets of the co. and account to company with the surplus. - Forsyth v Blundell = Must take reasonable steps to ascertain value of property 17.4 Statutory Duties 17.5 Liabilities of Controller 17.6 Supervision of Receiver CONTINUED: 18.0 Liquidation and Voluntary Administration 18.1 Types 18.2 Presumptions of Insolvency 18.3 Role of Court Appointed Liquidator 18.4 Control of Liquidator 18.5 Voluntary Administration 18.6 Effect of Administration

18.7 Liabilities of Administrator 18.8 Deed of arrangement 18.9 Creditors’ Scheme of Arrangement

1.1 Sources of Company Law 1) Corporations Act 2001 (Cth) s 51 (xx) Australian Constitution “Foreign corporations and trading or financial corporations formed within the limits of the Commonwealth” - States referred power of formation to Commonwealth 2) Case Law

1.2 Administration of the National Scheme

- By ASIC ASIC Functions:

1. Enforce the law – civil and criminal 2. Ensure compliance – submit documents 3. Investigate – Federal Police 4. Law reform – response to exploitation of loopholes 5. Public access – information on companies

1.4 Decision to Incorporate: - Minimum no. of members (owners) is 1: s 114 If more than 20, must incorporate: s 115 Cannot form a partnership. NB Partnership number raised with respect to certain professions Eg Accountants 1000 Lawyers 400 Doctors 50 Liability: - Limited – up to the maximum you promised, by shares or guarantee - No Liability (mining) – Can lose only amount you’ve invested Types of Companies: s 112 1. PROPRIETARY COMPANY ss 9,45A, 113 · No more than 50 non-employee shareholders s 113(1) · No public fundraising only existing shareholders or employees s 113(3) Types: · Limited by shares · Unlimited with share capital Small: If: REVENUE LESS THAN $25 MILL PA? GROSS ASSETS LESS THAN $12.5 MILL? LESS THAN 50 EMPLOYEES? IF ANSWER TO 2/3 IS YES, SMALL s 45A(2) IF ANSWER TO 2/3 IS NO, LARGE s 45A(3) LARGE:

• Prepare annual financial report and director’s report – s 292 • Financial reports must be audited – s 301

SMALL PROPRIETARY CO • Requirement only if ASIC (s 294) or holder(s) of 5% of shares request (s 293)

PUBLIC - s 9 3 or more directors, Company Secretary, Audited - Limited by shares – pay amount agreed in purchasing shares - Limited by guarantee - Unlimited with Share capital – members willing to take on personal liability - No liability company s 112(2) – only lose what paid s 254Q, MINING PURPOSES ONLY s 112(3), typically smaller and prospective companies

Type Liability When

Limited by shares ABC Pty Ltd or ABC Ltd Amount unpaid (if any) on shares held Winding up or on a call

Limited by guarantee ABC Ltd Amount of guarantee Winding up

Unlimited

ABC Pty

ABC

Unlimited Winding up

No Liability

ABC NL

Nil NA

Incorporation Process: s 117, 118

1) Lodge Application · Type of Co · Proposed name or ACN · Details of member(s) who consent in writing · Details of DIR(s) and Co Secy who consent in writing.

- Pty Co does not need Co Secy · Registered office address

2) ASIC: · Gives Company ACN · Registers Company · Issues certificate Company comes into existence on registration: s119 On-going minimum requirements: · Keep financial records · Minute books · Registers of members, option holders and debenture holders

Changing Company Type: s 162-167 - Cannot always be done!

• Permitted Conversions: s 162 Eg Pty to Ltd, Ltd to NL

• Method: · Pass a “special resolution”: s 162(1)(a), s 9 · Lodge application with ASIC with copy of special resolution: s 163 · ASIC gives notice on ASIC database and in the Gazette: s 164(3) · After one month, ASIC alters details to reflect change: s 164(4) · Gives company new certificate: s 164(6) NB Does not create a new company: s 166 Consequences of Registration: - Separate legal entity - Corporate Powers s 124 – issue shares & grant floating charges (claim over future assets) Salomon v Salomon [1897] Sole trader Company – paid him in shares & secured debenture (loan owing) Argument by unsecured creditors - Company & Salomon were one & the same. Held: Company is a separate entity. Debt is the company’s responsibility. Veil protects Salomon in his personal capacity Groups of Companies: - “Holding co / subsidiary”: s 9, 46 - 3 situations covered in s 46 - Controls composition of Board, controls casting of more than 50% of votes, holds more than 50% of shares. - Control: s 47 control of appointment or removal of all or majority of directors. Separate legal entity does apply to Groups: cite this case Industrial Equity v Blackburn - Consolidated group accounts showed sufficient profits. Holding company wished to declare dividends even though subsidiary had not declared dividends to holding company. Held: Holding company could not declare dividends. Only subsidiary can. *Exception = Equity Corp ltd …see below Related Body Corporate: s 50 A Where a body corporate is: B C D - A holding company of another body corporate; - A subsidiary of another body corporate; or - A subsidiary of a holding company of another body corporate; All the companies are related to each other. Lifting the Veil: - A departure from Solomon v Solomon Lifted under Statute and Common Law to impose liability on: - Directors

- Controllers (members) - Holding Company Statutory Exceptions: 1) Insolvent trading – s 95A - definition – “pay debts as they fall due” s 588G – director would be liable personally

s 588V – holding company liable – liable to debts of subsidiary if key personal of holding company are knowledgeable

Defences 588H – see 11.6 2) Voidable Transaction – i.e. bad common sense deal - Liquidator may avoid an insolvent and un-commercial transaction.

- Longer claw-back period for related entity. Related Entity = e.g. promoter (company creator), director, member or spouse of these persons Uncommercial transaction = not in normal business

s 588FE(3) – within 2 years of application for winding up s 588FE(4) for related entity period = back 4 years before winding up 3) Company Officer Security Interest: s 588FP (previously s 267)

Void if security interest is enforced by officer within 6 months of the creation of the security interest. However may seek Court approval.

4) Financial assistance (s 260A) Where company provides financial assistance for the acquisition of its shares or its holding company’s shares in contravention of s 260A, company NOT guilty of offence, person involved in contravention is guilty of offence: s 260D

Lifting the Veil @ Common law: and company doesn’t protect individual 1) Avoidance of obligations / Fraud

Gilford Motor v Horne - Restraint of Trade Clause in employment contract. Horne set up company to carry on business as a way around the clause. Court granted an injunction against Horne and his Company. Fraud: Re Darby - Darby and Glyde formed a company in the Channel Islands as part of a fraudulent plan. The Channel Island company purchased a licence to work a quarry and then floated an English Company, Welsh Slate Quarries Ltd for the purpose of purchasing the licence at a gross overvalue. Welsh issued a prospectus and issued shares to the public. The money was used to pay the Channel Island Company. The liquidator of Welsh, the English Company claimed in Darby’s bankruptcy for the secret profit made by him as a promoter of Welsh. HELD: Court lifted the veil of the Channel Island Company and treated Darby and Glyde as promoters of the English Company. Account of Profits. 2) Agency/partnership SSK v Birmingham Corp - SSK owned factory in Birmingham. - Birmingham Waste Co Ltd (BWC) was subsidiary of SSK - BWC ostensibly carried on business in SSK's factory - Birmingham Corp resumed factory

- SSK claimed compensation for disturbance to its business at the factory - Birmingham Corp argued that it is BWC's business, not SSK's HELD: SSK may sue on BWC’s behalf, as BWC was SSK’s agent. 3) Benefit of group as a whole Equiticorp v Bank of NZ Bank loan to one company repaid by other companies’ in-group. The liquidator of the transferring companies sought to recover the funds from the bank on the basis that the transfer involved breach of duty by the directors to act in the best interests of those companies. The loan indirectly benefitted transferring companies. Had the transfer not taken place, companies would have lost the Bank’s support for their own funding arrangements. Held: As the transfer was for the benefit of the group as a whole, there was NO breach of duty 4) Company “knowingly” participates in breach of Director’s fiduciary duties Green v Bestobell Green was Manager of Bestobell Ltd. He incorporated Clara Pty Ltd. He made Clara Pty Ltd to submit tender prepared by himself for construction works, in competition with his employer. Clara Pty Ltd won the tender. Bestobell Ltd was the third lowest tender. Held: Bestobell could obtain an account of profits from Clara Pty Ltd.

2.0 Promoter Duties 2.1 Who is a promoter? Someone who is: - Actively involved in formation of a company (arranged for BOD)

- Passive S/H with expectation that will receive profits (Tracy v Mandalay) 2.2 Duties of Promoter Fiduciary Duties are owed to the Company, similar to directors: - No conflict of interest company and not personal interest - No secret profit (Gluckstein v Barnes) profit on discounted mortgage

Held: Liquidator was able to recover secret profits as not disclosed - Duty of disclosure Full disclosure to Shareholders and Board members

Typically sale below market value Erlanger v New Sombrero Phosphate – rescinded

Contract as must be an independent Board and full disclosure of promoters’ interest. Common Law Remedies:

1. Rescission – (Tracy and Mandalay) but if choose to not rescind then you can’t claim profits – different in cases where Rescission is not possible discretionary and therefore Bars to granting rescission e.g. - No delay in applying for rescission - No affirmation of contract - Innocent third party rights involved - Inability to restore parties to their original position

2. Account of profits (Gluckstein) 3. Constructive trust – promoter during course of promotion purchases property

for personal gain instead of for the company – may be liable in damages in the tort of deceit or for negligent misstatement

Statutory Remedies: 1) Recovery by liquidator as voidable transactions (uncommercial or insolvent) s588FH, s588FE - related entity 2) Recovery for false statements in disclosure document. (Public Companies ONLY)

• Promoter must disclose any property acquired by company and any offer of securities to company: s 711(2)

• Promoter must disclose any fees or benefits received: s 711(3) • Promoter must not offer securities if there are misleading statements in offer

document: s 728 • Person who suffers loss may seek compensation: s 729

2.3 Pre-Registration Contracts: S 133 replaces the Common Law – but can state relevant cases Outsider vs. Company or person who signed - Has been codified therefore don’t cite common law pre 1990 Only Cite Part 2B.3: s 131 (1) If a person enters into a contract:

1) On behalf of or 2) For the benefit of proposed company, company becomes bound by the contract

if the company is later registered and ratifies contract, within agreed or reasonable time

S131 (2) Where company is not registered or fails to ratify, person who signs liable to pay damages