THE CORPORATION

S57A A corporation includes:- A company- Any body corporate- An unincorporated Body

A company is any company registered under S 9 CA- S124(1) The company is a separate legal entity – can own property, enter into

contracts, commit torts and conduct business operations. - The company is controlled by two distinct organs:

o The Directors (S198A) have capacity to control the company and owe legal, fiduciary and statutory duties

o The Shareholders receive a bundle of rights in relation to the company:▪ The right to vote▪ The right to a dividend▪ The right to appoint and remove the board (S203C and 203D)

o Creditors may contract for control rights (security in the form of a fixed or floating charge) where necessary.

Limited Liability- Shareholder liability is limited to the capital they have contributed (S516)- A company may be a parent company if they own shares in another company

“subsidiary”- When a company falls insolvent a liquidator is appointed to control the company

with a view to maximizing the assets of the company in favor of creditors. Alternatively the company my be put into administration.

- The Business Judgment Rule has been introduced to protect directors from honest decisions which turn out to be wrong.

Types of Companies- Proprietary companieso S113 have no more than 50 non employee shareholders, and cannot confer

shares to the public, and cannot make an offer which would require disclosure under Chapter 6D

o Minimum of one director S201A (including capacity for a sole member – director under Ss198E(1)

o They can however make offers to existing shareholders and personal offers under S708

o A proprietary company may convert to a public company under S165, by passing a special resolution and lodging an application with ASIC.

- Public companies o Stricter regulation in Australia of Public Companies as there is a greater

separation of ownership and control and therefore require greater accountability. o Companies listed on the ASX are subject to greater regulation over public

companies – as they are subject to ASX principles of corporate governance.

LIMITED LIABILITY

Once a company is registered, it becomes a separate legal entity distinct from its directors and shareholders (Salomon v Salomon)

The separate entity doctrine enables limited liability to operate and asset partitioning to be undertaken.

Salomon v Salomon – Salomon operated a leather business with his four sons (he was managing director and majority shareholder). Salomon entered an agreement to sell his business in exchange for debentures, purchase of share capital, repayment of business debt and cash. The company then became insolvent. The liquidator brought an action to set aside the transaction, claiming the company was formed fraudulently, and as a mere agent of Salomon. - HELD: The company is not in law the agent of the subscribers or trustee for them.

As such the transaction and issue of debentures secured by mortgage was not able to be set aside.

Implications:o Property owned by a company does not belong to its members (Macaura v

Northern Assurance Co Ltd)▪ Macaura owned a timber plantation, and transferred it into the name of

another company – the name of the company was not registered with the insurance company. There was a fire and the insurance company denied liability as the contract was not with the newly named company. The company is deemed separate and distinct from its owners, and therefore the insurance company did not have to compensate.

o shareholders may have an interest in shares, but not in the company ’s property (S1070A(1))

o A cause of action belongs to the company, and not its members individually.o A company, not its members or directors are party to a contract.o A company can contract with shareholders, even controlling ones (Lee v Lee’s Air

Farming)▪ Mr Lee passed in flying accident – widow made claim under a workers

compensation policy. The insurance company stated that they would not make payment as it was a company. However it was argued that Mr Lee was an employee, and therefore distinct from the company (therefore, separate legal entity doctrine)

o A company can be liable in tort, either directly or vicariously (Williams v Natural Life Health Foods

o A company is considered a person (S6 Income Tax Assessment Act 1936)

A company can commit an offence (Hamilton v Whitehead)- S516IF a company is limited by shares, a member need not contribute more than

the amount contributed.- A court may lift the veil under statute where liability is imposed upon directors

for allowing their company to incur debts/ trade whilst insolvent

Lifting the Corporate Veil

The corporate veil may be lifted upon contravention of S588G. - (1)(a) If a person is a director of a company at the time when the company incurs

a debt; and- (1)(b) the company is insolvent at the time, or becomes insolvent by incurring

that debt, or by incurring at the time debts including that debt; - (1)(c) at that time, there are reasonable grounds for suspecting that the

company is insolvent, or would so become insolvent, as the case may be; and- (1)(d) that time is at or after the commencement of this act- Exceptions contained within 588G(1A)

Solvency (S95A) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. (2) A person who is not solvent is deemed insolvent.

Common Law Departures

There is no common, unifying principle, which underlines the occasional decision of courts to pierce the corporate veil at common law (Rogers AJA [567] Briggs v James Hardie & Co

The corporate veil will be lifted where special circumstances exist indicating the company is a façade concealing the true facts (James Hardie v Hall)- Fraud: Re Darby: A company was set up and an overvalued asset was

transferred, when the asset was floated it made a profit at the expense of the shareholders.

- Evade Existing Legal Obligations : The veil will be pierced where a company has been created or used for the sole or dominant purpose of enabling a legal obligation to be evaded, or fraud penetrated (Dennis v Wilcox Pty Ltd)

Avoidance of a contractual obligation:- Gilford Motor Co v Horne: Horne sold his garage business and agreed not to

solicit existing customers from the business. He then set up a newly incorporated company and solicited customers. HELD: That the new company was Horne’s device to evade his existing legal obligation not to solicit customers, and could therefore pierce the veil.

- Jones v Lipman: Property was sold to Jones who conveyed the land to avoid specific performance. HELD: This was to avoid an existing legal obligation, therefore specific performance was awarded.

- Kuyong Lines of Korea v Rendsburg Investments (No 2) – It was argued that the veil was not really lifted because an order was made against a company as well as the wrongdoing shareholder/director.

Avoidance of future obligations: - Adams v Cape Industries:

‘… we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a

corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law.’

- Under Resources/Sham Cases: The court might conclude that the company is the agent or its controller, that a company has been created as a ‘sham’ or ‘device’

- Agency: Smith, Stone & Knight (Atkinson J): Where an agency exists between companies in a group – may be grounds to pierce the veil?

- Compulsory purchase situation – the court found that the council must pay compensation to the parent for the interruption of the business on the basis that the subsidiary was an agent for the parent.

- Test of determining agency: o Were the profits of the business treated as profits of the parent?o Did the parent appoint the persons carrying on the business?o Was the parent the head and brain of the trading venture?o Did the parent govern the adventure, decide what should be done and what

capital should be embarked on the ventureo Did the parent make the profits by its skill and directiono Was the parent its effectual and consistent control

- Spreag v Paeson Confirmed application of Smith, Stone & Knight- REJECTED IN AUSTRALIA DHN v Borough of Tower Hamlets: Compulsory

acquisition of land held by a subsidiary. The parent company wanted compensation for disturbance of business – The holder of the land was the only one able to be compensated. HELD: That the veil was lifted, and all were treated as one enterprise Decision turns on the legislation in question – and is therefore not always considered to be authority that the veil will be lifted.

- Morgan v 45 Flers Avenue Pty Ltd - ‘So long as the law permits people to erect structures which have meaningful legal consequences then if a person elects to erect such a structure he must take the consequences of such erection for better, for worse, for richer or poorer, in commercial sickness or commercial health.’

Corporate Groups

Companies can form wholly owned subsidiaries or acquire them by means of takeover, and do so as a means of dividing up the business conveniently among different management groups – to isolate parent companies from liability in relation to risky activities. - A subsidiary in relation to a body corporate, means a body corporate that is a

subsidiary of the first – mentioned body by virtue of Division 6: s 9 Corporations Asct

- S46 A subsidiary company exists where the parent company controls:o Controls the composition of the board; oro Control requires a legally enforceable power and not a de facto or practical

control of the board (Mount Edon Gold Mines v Burmine)- S47 Control is where a company can:

o Appoint or remove a majority of the directors of another company;o Veto appointments; oro Being a director of one necessarily flows to being the director of another o Has more than half the votes in the general meeting; oro Holds more than half the issued share capital carrying a right to share in

profits; o More than 50% of the issued share capital means 50% by value, not 50% of

the shares: Re Swan Brewery Co Ltd - S50 ‘related body corporates’ encompasses holding and subsidiary company

relationships. There may be a need to produce consolidated group accounts- S50AA control is interpreted broadly in the sense that the controlling company

has: - the capacity to determine the outcome of decisions about the second entity’s

financial and operating policies can be extended to controlled companies as well as body corporate.

- Pt 2 E Companies are prohibited from giving financial benefits to companies which they control without shareholder approval

- Companies within a corporate group remain separate entities (Industrial Equity v Blackburn) o Even within a corporate group, directors owe duties only to the company to

which they are a director, and not to the group as a whole (Walker v Winborne)

o Where there is a conflict between the interests of subsidiaries and the corporate group as a whole, directors must act in the subsidiaries best interests.

o A director breaches their duty when the fail subjectively, to give proper consideration to the companies interest

o Mere ownership and control of a company will not in itself create an agency relationship between the shareholder and the company.

o The interests of one member of a group of companies may lie in the continued viability of other members of the group (eg bank funding is conditional upon their survival) (Equiticorp Finance v Bank of New Zealand)

Statutory Liability of Holding Companies- S588V A holding company can be liable where:

o its subsidiary incurs a debt while insolvent or becomes insolvent as a result; and

o there are reasonable grounds for suspecting insolvency; ando the holding company or one or more of its directors is aware at the time that

there were grounds for suspecting and/or through the level of control exercised by the parent, it is reasonable to expect that the parent or its directors would be aware.

Tort Liability- There may be scope to lift the veil in torts cases to make the parent company

liable for the torts of the subsidiary (Briggs v James Hardie) o Briggs developed asbestosis and commenced a negligence for compensation.

The court held that it was arguable that the veil should be pierced as Briggs was a tort victim and different policy issues should be considered.

o The law on this issue is in a state of ‘flux’ and it is questionable whether even the High Court could alleviate the consequences of Salomon to adopt the principle of limited liability despite the current economic reality.

- A number of policy arguments exist for lifting the veil, including:o Parent companies obtain benefits from corporate group activities, but do not

bear any costs or risks associated with the activity. o Tort creditors cannot bargain ex ante with the tortfeasor, cannot obtain

guarantees from the parent and do not have the opportunity to check for solvency of the companies

o If a company has not adequately insured (and thus has adequately protected themselves from the risk of extensive liability), then there may be a case for lifting the veil as the company has acted opportunistically by transferring risk of reasonably foreseeable loss to tort creditors

o Limited liability should be limited to situations in which shareholders have managed the business with due regard for bargained for expectations and potential victims of reasonably foreseeable accidents

Civil and Criminal Liability- Liability may be vicarious or derivative. - Primary liability is based upon the belief that a company is an abstraction;

directors act as the company itself (Lennard’s Carrying Co Ltd v Asiatic Petroleum Co)

- Must demonstrate that they are the directing mind and will of the company

Criminal Liability- Criminal liability can be imposed vicariously if an offence is committed by a

‘directing mind.’ - Must demonstrate requisite mens rea, which can be attributed to the company.

(Tesco Supermarkets v Nattrass) - Must distinguish between primary, general and special rules of attribution:

(Meridian Global Funds Management Asiat Ltd v Securities Commission) o Primary: found in documents such as the constitutiono Special: Where a rule of law expressly or impliedly provides that the primary

and general rules do not apply. o General model for criminal responsibilities of companies contained within

Criminal Code Act 1995 (Cth)- The physical elements of an offence may be attributed to the corporation where

the offence is committed by an employee, agent or officer in the actual or apparent scope of his or her employment.

- Fault can be attributed where the corporation has expressly, tactically or impliedly authorized or permitted the commission of the offence (S12.3(1))

CORPORATE GOVERNANCE - Corporate governance is the system by which companies are directed and

managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed and how performance is optimized” (ASX)

- Separation of Control is governed under The Replaceable Rules and the Constitution of the company. Corporations must deal with the separation of ownership (members in their capacity as risk bearers) and control (directors in their function as management).

- Corporate governance principles are regulated under the coporations act and a variety of soft law mechanisms such as the ASX Listing Requirements and Codes of Conducts and Guidelines for best practice.

- Corporate governance rules consist of ‘replaceable rules’ which companies can adopt by default or replace with their own tailored rules; and the ‘Constitution’ in which companies modify or replace these rules.

Replaceable Rules - S135(1)(a) A replaceable rule applies to: (i) each company that is or was

registered after 1 July 1998; and (ii) and company registered before 1 July 1998 that repeals its constitution after that day.

- S135(2) A provision of a section or subsection that applies to a company as replaceable rule can be displaced or modified by the company’s constitution.

- S135(3) Failure to comply with RR is not a breach of the Corporations Act- S141 Contains list of replaceable rules

Table of Replaceable Rules: S 141 Corporations ActOfficers and employees

Voting and completion of transactions 194 Alternate directors 201K

Powers of directors 198A Remuneration of directors 202A

Negotiable instruments 198B Director may resign by written notice 203A

Managing director 198C Removal by members (proprietary co) 203C

Company may appoint director 201G Termination of managing director 203F

Directors may appoint other directors 201H Terms and conditions for secretaries 204F

Appointment of managing directors 201J

Inspection of books

Company or directors may allow members to inspect books 247D

Directors’ meetings

Circulating resolutions (1 director) 248A Quorum at directors’ meetings 248F

Calling directors’ meetings 248C Passing of directors’ resolutions

248G

Chairing directors’ meetings 248E

Meetings of members

Director may call members’ meeting 249C Appointing a proxy (proprietary only)

249X

Notice to joint members 249J(2) Proxy vote valid if member dies, etc.

250C

When notice by post or fax is given 249J(4) How many votes a member has

250E

When notice under s 249J(3)(cb) given 249J(5) Jointly held shares 250F

Notice of adjourned meetings 249M Objections to right to vote 250G

Quorum 249T How voting is carried out 250J

Charing meetings of members 249U When and how polls must be taken

250M

Business at adjourned meetings 249W(2)

Shares

Pre-emption for existing shareholders on issue of shares (proprietary only) 254D

Other provisions about dividends 254U

Dividend rights (proprietary only) 254W

Transfer of shares

Transmission of shares on death 1072A

Transmission of shares on bankruptcy 1072B

Transmission of share on mental incapacity 1072D

Registration of transfers 1072F

General discretion for directors to refuse to register transfers (proprietary only) 1072G

Company Constitution- The majority of companies adopt a constitution because some of the replaceable

rules will be unsuitable for them- A public company must have a constitution (ASX Listing Rule 15.11)

o S136(1)(a) A constitution may be adopted on registration as long as signed by every member. However if a constitution is adopted after registration a special resolution of the members is required

o S9(a) A special resolution mean a resolution of which (i) notice as per S249L(1)(C) has been given, and (ii) the resolution has been passed by at least 75% of the votes cast by members entitled to vote on the resolution

o S140(1) The replaceable rules/constitution form a statutory contract:▪ Between the company and each member; and▪ Between the company and each director and company secretary; and▪ Between a member and each other member;

o S140(1) Implications: 1. They cannot be enforced by outsiders (Eley v Positive Life confirmed in

Marketing Advisory Services (MAS) v Football Tasmania Ltd) 2. Members are bound or entitled only in their capacity as members (Eley v

Positive Life) a. A constitutional provision made one member the corporations

solicitor for life. The company tried to change the solicitor, and a member tried to enforce the contract. HELD: The right to be solicitor for life was not related to his position as a member, it was an outside right – and was therefore unenforceable.

3. Members are bound by the statutory contract in any disputes arising in relation to the affairs of the association (Hickman v Kent or Romney Sheep Breeders’ Association)

a. The court stayed proceedings commenced by Hickman on the basis that the company constitution provided for disputes to be resolved by arbitration.

4. Remedy for breach of the constitution by the company is injunction or declaration, not damages: (Webb Distributors (Aust) v Victoria)

a. S563A postpones claims owed by a company to a member until after other creditors have been paid.

b. In Webb the member had brought shares directly from the company5. Must distinguish from Sons of Gwalia Ltd v Maragaretic

a. The High Court decided that shareholders claiming damages for statutory misrepresentation which induced their purchase of shares over the secondary market were not owed a debt in their capacity as a member, and therefore not subordinated by S563A

b. The member of the company had brought shares on open market from a third party – and not directly from the company.

c. This decision allows shareholders of companies that breach the corporate disclosure requirements to claim status as contingent creditors in corporate insolvency

d. OVERRULED BY Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) which amends the rights of those bringing claims for damages in relation to shareholdings under the Corporations Act. The bill provides three key measures:

i. All claims in relation to the buying, selling and holding or otherwise dealing with shares are to be ranked equally and after all other creditors claims

ii. Removes the right of persons bringing claims regarding shareholdings to vote as creditors in a voluntary administration or a winding up unless they receive permission from the court.

iii.Eliminates any restriction on the capacity of a shareholder to recover damages against a company based on how they acquired the shares or whether they still hold the shares.

6. One shareholder should be able to recover damages from another shareholder, however:

7. S140(1) A Member is confined to enforcing personal rights, including:a. The right to vote and right to dividendsb. These rights must be enforced by the companyc. A member may be able to insist that a company’s organs be properly

constituted (Kraus v JG Lloyd Pty Ltdi. A member was able to obtain a declaration that a director was

no longer entitled to act because her term had ended, a meeting had to be called for the shareholders to elect a new director. The court insisted that the plaintiff’s personal rights had been infringed by this.

8. S140 allows directors to enforce rights in their capacity as directors under the observation of the constitution.

9. A shareholder cannot complain of mere procedural irregularities at common law, or under S1322.

a. 1322(1) A procedural irregularity includes a reference to:

i. (i) Absence of a quorum at a meeting of a corporation; at a meeting of directors or creditors of a corporation, at a joint meeting of creditors; and

ii. (ii) a defect, irregularity or deficiency of notice or time10. The irregularity need not be inadvertent (Re Pembury Pty Ltd): A

departure from the prescribed method of doing things will not be invalid unless they change the substance of the thing which is being done.

a. A nexus must be established between the irregularity complained of and the prejudice.

11. However, there is authority to the contrary: In Re P W Saddington Young J concluded that a deliberate decision to convene an invalid meeting was not a ‘procedural irregularity’ within S1322(1).

12. Validation of other, non-procedural irregularities is possible under S1322(4).

a. Court must be satisfied that those concerned acted honestly and that it is just and equitable to make the order (S1322(6))

Alteration of the Constitution- S136(1)(b) A special resolution of members is required to alter or repeal the

constitution (S9 – 75% of members)- S136(1)(b) Notice of meeting must be given:

o For an unlisted company – 21 days prior to the company, or a longer period where the company constitution specifies (S249H(1)

o For a listed company – 28 days prior to the meeting, or a longer period, where the company constitution specifies (S249HA(1) and (3)

S9 & S249L Notice given must specify: - If a special resolution is proposed, intention to propose the resolution and state

the resolution; - The place, date and time of meeting; - General nature of the meeting’s business; - If a member is entitled to a proxy, a statement setting out their rights to a proxy. - S136(2) A corporation cannot contract out its right to amend either by a provision

in the constitution or in some other agreement (Punt v Symons)- Alteration or repeal may result in breach of separate contracts made on terms of

previous constitution (Bailey v New South Wales Medical Defence Union) o In the companies constitution applicants for membership had indemnity and

insurance from the date of application until the date of becoming a member. Members were also indemnified while still members. Bailey became a member and was sued for malpractice. Members voted to reduce the amount of insurance cover. Issue was whether Bailey could enforce insurance.

o ISSUE: Whether the contract was a limited statutory contract, or a special contract. IF a contract under S140 then it cannot be altered as it does not breach S140(2), therefore Bailey should be able to recover under the original contract. However, an alternative for it to be a special contract which operates concurrently with the statutory contract.

o HELD: That it was a special contract – and whether Bailey could recover was a matter of construction:

o Cover was available to people before they became members, therefore not a right limited to members.

o There could not have been intention that cover could be unilaterally altered. o Therefore Held that an actual contract existed between Bailey and the

company. Each time a subscription was paid, a new contract was formed. Therefore change could occur prospectively, but not retrospectively.

Restrictions on Alteration- A company cannot be so deprived of its statutory power to alter its constitution

by contracting that it will not change its constitution.- However shareholders may modify the constitution to limit modifications being

made: o Shareholders can contract among themselves not to modify the constitution

(Russell v Northern Bank) o The constitution can be entrenched by using weighted voting rights (Bushell v

Faith) o The constitution can make provision for modification or repeal to be

conditional upon compliance with a further requirement (S136(3))o Variation of class rights must comply with S246Bo Modifications which are oppressive or unfairly prejudicial to a member or

members may be prevented under Part 2F.1 o Modifications which offend the equitable limitation on the majority (Gambotto

v WCP)o Company may sue to enforce provisions within constitution (Hickman v Kent) o A dispute arose between parties, but as the constitution specified that

arbitration must be undertaken – the members were bound to undertake arbitration

General Meeting

Must ensure that: - that sufficient notice is given so that members can decide whether to attend; - that sufficient information is provided as the basis for decisions- that fair voting procedures exist

Decisions are made by simple majority vote (“ordinary resolution”)- Normally by show of hands, but S250L allows a shareholder with 5% of votes to

demand a poll. Alternatively a written resolution procedure may be provided in S249A.

- S249X A member may vote via proxy- Voting may be informal if all agree (Re Express Engineering Works Ltd, Re

Duomatic)o However if a member is excluded from a meeting then an informal vote will

not be allowed (even if that member is not entitled to vote (Re Compaction Systems Pty Ltd)

o However S1322 may make the informal resolution valid if there is no prejudice. However this rule may not apply where there is a statutory requirement to hold a meeting (Bodikian v Sproule)

A number of matters are expressly reserved for the general meeting: - Altering the constitution (S136)

- Reducing capital (S256B, 256C)- Altering company status and removing a director in a public company (S203D)

S250N Public companies must hold AGMs as they are a forum for directors to account to shareholders- Annual reports must be made to the AGM (financial and directors reports) by

public and large proprietary companies S293 – 294- Including half yearly reports S302

A meeting may be called by:- S249C A director

o Directors must call on request of members with 5% votes or 100 members (S249D(1))

o Unless futile to do so because resolution is not within the competence of the General Meeting (NRMA v Parker)

- S249E(1) If not called by a director, members with 50% of votes may call- S249F Members with 5% votes may call (but at their own expense)- S249G The court may call on application from a director or member

o Eg. Where there are no directors (Re Totex – Adon Pty Ltd)

Defective notice does not invalidate a meeting (S1322) However it may constitute misleading and deceptive conduct under S52 TPA (Fraser v NRMA)- A directors fiduciary duty to disclose material information about what is to be

discussed at shareholders meetings may trigger s 52 of the TPA. Fraser claimed that NRMA’s prospectus was misleading and sought an injunction.

- HELD: That the prospectus was misleading, and therefore invalid as it failed to represent disadvantages.

Board of Directors- S198A(1) The business of the company is to be managed by or under the

direction of the directors - Including the power to make contracts, borrow money, employ people, sue

in the companies name, issuing shares under S124(1)- S9 A director is:

- (A) a person who (i) is appointed to the position of director; or (ii) is appointed to the position of an alternate director and is acting in that capacity.

- (B) unless contrary intention appears, a person who is not validly appointed as a director if: (i) they act in the position of a director; or (ii) the directors of the company or body are accustomed to act in accordance with the persons instructions or wishes.

- S201A – B A director can be: o A natural person, over 18 years old (S201B) with signed consent (201C)o Not disqualified (201B) o Some must ordinarily reside in Australia (2 directors of a public company, one

director of a proprietary company S201A(1) & (2) o Not the auditor of the company, hasn’t been the auditor or a member of the

audit firm for at least 2 years (S324C)

o Types of directors include: managing, chair, executive, non executive, alternate (S201K), nominee, de facto and shadow- De facto: Not appointed by acts in the position of a director (eg. where a

valid appointment ceases but they stay involved in a certain way – Deputy Commissioner of Taxation v Austin)

- Shadow Director – Not appointed formally, but acts in accordance with instructions and wishes of the company.

o Must be a company – have effectual control (SBA v Antico)o Influence must extend to the entire board of directors (Kuwait Asia Bank)

Appointment of Directors- S117 Initial appointment must be specified in application for registration- S201G A company may appoint a person as director by resolution passed in

general meeting- S201H Directors may appoint a person as a director subject to confirmation

within two months (proprietary) or at next agm (public) AND must be for the benefit of the company as a whole.

- S201E Each appointment requires a separate resolution, and all appointments must be notified to ASIC (S205B)

- S201H For casual vacancies, by resolution of the board, subject to later ratification by members in a general meeting (S201H)

- No director is to hold office for more than 3 years without submitting for re election.

- S190(1) Directors remain responsible for the responsibilities that they delegate.

Types of Directors

Managing Directors- S201J The board of directors may appoint a managing director - S198C The board may delegate any powers of the board to the Managing

Director - Managing directors usually manage the daily business of a company, however

important matters are reserved to the board (Shirlaw v Southern Foundaries (eg dividend declaration)

Executive/ Non executive directors- Executive directors are employed full time under service contracts and carry out

daily management of the company’s business. - Non executive directors attend board meetings for a set fee, and are to bring an

independent view to board meetings. (necessary for good corporate governance principles)

- Chair of directors- S248E The chair is appointed by other directors- S248G The chair has the casting vote- S251A(2) Chair signs minutes- Exercises procedural control over meetings (Kelly v Wolstenholme)

- Ensures the board is properly informed, is familiar with the financial background of the company and is properly meeting its supervisory duties (AWA v Daniels, ASIC v Rich)

- Where there is no chair appointed, there is no valid meeting at which resolutions can be passed (unless those present are unanimous) (Colardo Construction v Platus)

Automatic Disqualifications- S206B(3) An undischarged bankrupt- S206B(1)(a) Someone who commits an indictable offence concerning making a

decision that affects a substantial part of a corporations business or its financial affairs

- S206B(1)(b) Someone who commits an offence under the Corporations Act which is punishable by 12 months or more, or involves dishonesty

- S206B(1)(c) Someone who is convicted of an offence against the law of another country

Court power of disqualification - The court has the power to disqualify a person on application of ASIC

for: o Contravention of a civil penalty provision (such as directors duties in ss

180 – 183) ss206C and s1317E o S206D Being an officer of 2 companies which have failed (insolvent

companies) o S206E Repeated contraventions of the Corporations Act o These are not punitive punishments, they are designed to deter offenders and

protect creditors (Chew v NCSC (No 2))o The court must be satisfied that the disqualification is justified (Re Magna

Alloys; ASIC v Adler)

Resignation & Removal- S203 A director of a company may resign as director of the company by giving a

written notice of resignation to the company at its registered office - S203C A proprietary company may by resolution remove a director from office

and may by resolution appoint another person as director instead. - S203D A director of a public company can be removed by resolution in a general

meeting- S203D(3) – (6) Two months notice is required, with certain natural justice

requirements to be given to the director. - The constitution of a private company may allow the other directors to remove

the director (Lee v Chou Wen Hsien)

Decision Making- S248C To call a meeting a director must give reasonable notice individually to

every other director - S248F The quorum for a directors meeting is 2 directors which must be present

at all times during the meeting. (Clampe v Fairway Investments Pty Ltd) - 248G A resolution of the directors must be passed by a majority of the votes cast

by directors entitled to vote on the resolution

- S251A The minutes of a meeting must be kept, as well as the resolutions passed without a meeting.

- Right to Information- S290 A director has the right to inspect the financial records of the company, and

a common law right to inspect the company documents more readily

Renumeration - S202A, S202B Renumeration was not permissible at common law, it must be

provided for in the constitution S300A certain disclosure requirements are applicable for large proprietary and public companies Bushell v Faith [1970] AC 1099; Amalgamated Pest Control Pty Ltd v McCarron (1994) 13 ACSR 42; LR 6.8 and 6.9.Browne v Panga Pty Ltd (1995) 17 ACSR 75

Shareholder Interference- A shareholder cannot interfere with board management or give the board

instructions: One organ of a company cannot interfere with the workings of another organ (Automatic Self Cleaning Filter Syndicate v Cuningham) o Management had power to manage the business – however shareholders

believed that the business should be sold. The directors however did not believe that it would be in the best interests of the company. HELD that the shareholders did not have the power to enforce this against the directors wishes.

- The General meeting cannot ratify that which they did not have power over originally (Quin & Axtens v Salmon)

- However, voting may be undertaken informally by a unanimous agreement. (Re Duomatic) o Liquidators wishes to receive compensation from directors as they passed

resolution without a meeting (as all meetings were undertaken informally). HELD: That this was sufficient to validate an action.

- The power to instigate an action against directors is power of the management board (John Shaw & Sons (Salfrod) Ltd v Shawo The shareholders passed a resolution that they would not take action against

directors, however the court said that it had the power to instigate proceedings.

- S195 Residual power/ Reserve powers can be exercised by the general meeting where the decision would normally be a management matter, where the board is unable to act (eg where the board is deadlocked or incapable of exercising power – ie if there is a lack of quorum).

- However, if the General Meeting has the power to appoint additional directors – then this should be the method undertaken (Massey v Wales)o If the constitution provides for a method of breaking the deadlock, then the

power will not revert to the general meeting. In a public company S203D provides a procedure for breaking the deadlock, so power will not revert to the general meeting.

o Directors may pass a special resolution to alter the articles under S136(2) - Directors, within their management powers, may take decisions against the

wishes of the majority of shareholders, and the majority of shareholders cannot

control them in exercise of these powers while they remain in office.’ (Howard Smith v Ampol Petroleum)

- The board of directors has exclusive management powers – even informally as shareholders cannot override this (Poliwka v Heven Holdings Pty Ltd (No 2)

- Where the board is deadlocked, the General Meeting has power (Barron v Potter)

Failure of management oversight- Problems arise where the board contains many members who are aligned with or

a part of management. As shareholders are dispersed they do not monitor directors adequately, and thus management often pursues their own goals and not the interests of the shareholders. (AWA v Daniels) o AWA had an employee and GM. The GM was inexperienced and exercised

inadequate control over the employee. The employee was relied upon by the chairman, CEO and non executive directors. The employee entered into a series of misguided foreign transactions and AWA suffered large losses. AWA sued auditors for negligence for failing to find out employee was doing this and auditors claimed contributory negligence.

o HELD that the directors had a duty to take reasonable steps to place them in a position to guide and monitor the management of the company.

- The ASX Corporation Governance Principles sets out best practice principles and endeavors to structure the board so that it operates in a way which will further shareholder interests. One method of achieving this is through a majority of independent non executive directors.

CORPORATE CONTRACTING

Corporate Capacity and Powers- Companies can contract directly or through an agent- S124 companies have legal capacity to contract as a natural person, with

additional powers too:o Issue shareso Grant a floating charge or security interest over a circulating asset

- S124(2) A company’s capacity is unaffected by the act if it is not in the company’s interest to do that thing

- S125(1) A company’s capacity may be limited by its constitution. However if limits are breached then it does not render the contact void, a contract is not invalidated because of inconsistency with an objects clause (S125(2).

A company can state their objects and limit contracting powers (S125) - S125(1) The constitution may place limits on powers and objects, however acting

outside of these limits will not invalidate as against third parties. - S125(2) A breach will not render the contract void, however it may be enforced

by outsiders against the company. - Internal remedies may be appropriate- Ratification of the breach by a shareholder in a general meeting is possible

unless the interests of creditors intrude (Kinsela v Russell Kinsela)

Implied Intentions- Implied limitations may be found in ‘the general intention and common

understanding of the incorporators, and may give rise to winding up on ‘just and equitable grounds’ (S461(k)) or via oppression proceedings under Pt 2F.1

- A general intention and common understanding will be found on the following grounds: (Strong v J Brough & Son (Strathfield) Pty Ltd o Directors have the power to carry on the management of the company in a

wide sense (S198A), including changing the direction of the company – however if one can say that the substratum has gone, then a member may petition the court to wind it up, or get their investment back.

o Companies tend to not stay in one locality – the nature of business changes. o Facts: Shareholders were seeking an injunction to prevent board meeting to

consider the sale of a company’s real estate business. It was argued that the members understood the company to only carry on a real estate business. HELD: That evidence was not strong enough to indicate that the business of real estate was the sole or primary purpose of the business. No injunction granted.

Act of the Company- S125 requires an act of the company or an exercise of corporate power.

o Must identify an organ of the company (typically the general meeting), therefore its decisions are the acts of the company

- S127 A company may contract with or without a corporate seal: o S127(1) A company may execute without a common seal if the document is

signed by: (a) 2 directors (b) a director and secretary (c) or the sole director for a proprietary company

o S127(2) A company may execute with a seal if the fixing of the seal is witnessed by (a)(b)(c) as above.

- The constitution can also give power to a ‘governing director’ to act as a company (Whitehouse v Carlton Hotel Pty Ltd)

- S198D the act of a delegate (such as managing director) may suffice as an act of the company. o S198D was introduced as a CLERP reform measure after the decision in

NSWCA Daniels v Anderson, as directors were expected to take reasonable steps to put themselves in a position to ensure that the delegation does not hurt the company.

o However, this approach was not taken in Crabtree-Vickers or Brick and Pipe Industries – where a director was treated as an agent for the company, rather than an organ.

o However, the distinction between an organ and an agent may only be important in rare situations.

Contract Obligations through Agency- The company may be bound in three ways:

o 1. Actual Authority – express or impliedo 2. Apparent or Ostensible Authority - The company has previously held out

the individual as an agent o 3. Ratification – The company subsequently ratifies conduct of someone who

presumed to act as an agent for the company.

Actual Authority- If a person has actual authority, the company is bound- Can be express or implied by the acquiescence of the board or other person with

actual authority (Hely-Hutchison v Brayhead) o Acquiescence requires consent of all board members plus communication of

that consent to each other and to the agent

Express Actual Authority:

- S261(1) An individual acting with express or implied actual authority may make contracts without using the common seal for the company

- S198A Can arise from a provision in the Corporations Act or the Company’s constitution

- May also arise where an agent is appointed to carry out certain tasks – authority will be to do whatever is necessary or normally incidental to perform those tasks. (“Incidental Authority”)

- Appointment to a position of a standard kind grants authority to do things usually performed by a person in that position (“Usual Authority”)

Managing directors - Have the usual authority to deal with everyday matters, supervise the daily running of the company, supervise other manages, and be in charge of the business of a company. (Entwells v National and General Insurance Co) - Do not have authority to enter into transactions which are not in the everday running of the business (Re Tummons) - Borrowing money to deal with cash flow problems is within the scope of the everyday running of the company, however cannot borrow for capital purposes (Green v Meltzer) - They have the authority to authorize agents to make contracts of the kind a managing director can make (Crabtree Vickers)

Individual Directors- Their only power is to join with other directors to make decisions- They have no usual authority to bind the company (Northside Developments)- In the absense of actual authority from the board, they do not have individual authority to take action on behalf of the company - The chairperson has no usual authority to bind the company (State Bank of Victoria v Parry)

Company Secretary- S188 Keeps records and ensures that the company performs their statutory duties - Previously had limited authority (viewed as a mere clerk) but now has usual authority to make contracts to do with the administrative side of the business (Panorama Developments, Donato v Legion Cabs)

Other Agents- Involves a question of fact, when the court is approaching the question of authority, they will draw on commercial practice to determine usual activities of persons in these positions- Authority of those below board level will depend on their particular position (AWA v Daniels) - First Energy (UK) Ltd v Hungarian International Bank Ltd??

Implied Actual Authority- Where a person acts as an agent, and the board acquiecces, then they will have some implied actual authority (Hely-Hutchinson v Brayhead)

Statutory Assumptions

- The provisions contained within Ss 128 – 129 are a statutory restatement, with modifications, of the common law and therefore co exist with the common law (Australian Capital TV Case)

Application of Statutory Provisions- S128(1) Can make assumptions in relation to ‘dealings with a company’

o Dealings has been interpreted broadly, including purported dealings, whereby the third party believes that they are dealing with the company (Story v Advance Bank)

- The statutory provisions are nota code, and the common law still operates where statute does not assist the claimant third party (Australian Capital Television v Minister for Transport and Communications)

- The assumptions are not independent. You can rely on the assumption even if barred from using another because of knowledge or suspicion (Brick & Pipe Industries v Occidental)o O provided funds to S with a guarantee from BP. S defaulted, and O sued BP.

BP argued that the contract was not executed properly as there was no resolution as there was no company secretary to witness. However O obtained assurance that F was secretary at the time that it was signed. HELD: That BP had made the representation that F was secretary by MD failing to state otherwise. O had knowledge that the internal procedures had not been complied with, but did not know that the seal had not been properly affixed. THEREFORE as the assumptions operate independently, they were able to rely on S129(6)

- S128(4) You cannot rely upon assumptions where the third party ‘knows or suspects.’ Which is harder to satisfy than the ‘put on enquiry’ requirement from Freeman v Lockyer.

Statutory Assumptions- S129 Assumptions can be made that:

o S129(1) The company’s constitution and replaceable rules have been complied with

o S129(2) Directors and company secretary recorded in public information, have been validly appointed and have customary authority for their position.

o S129(3) The officers and agents held out by the company have been validly appointed and have customary authority

o S129(4) The agents and officers properly perform their duties to the company (Pico Holdings v Wave Vistas)

o S129(5) That a document duly executed by a company if it is signed in accordance with S127(1)

o S129(6) A document under seal and witnessed in accordance with S127(2) has been duly executed by the company

o S129(7) An officer or agent with authority to issue a document has authority to warrant that document is genuine or a true copy.

The court may have to determine what powers are customarily possessed by a person in a particular position (NCR Australia v Credit Connection) - National credit manager included the power to defer debt payments but not to

institute litigation, and did not have the authority to bind the company to the arrangement or to execute a deed on the company’s behalf.

Forgery- S129(7) and 128(3) provide that the assumptions apply in the context of forgery.- However if S128 – 129 do not apply, then the common law rules continue to apply

(Ruben v Great Fingall Consolidated) - S130 Constructive notice is no longer sufficient.

Apparent or Ostensible Authority- There are four conditions which must be satisfied before a contract can be enforced against a company where the purported agent did not have actual authority ( Diplock LJ in Freeman & Lockyer v Buckhurst Properties (Mangal) Ltd)

1. The representation must have been made to the contractor that the agent had authority to enter into a contract of the kind being asserted

2. The representation must have been made by a person with actual authority3. The contractor must have been induced by the representation to enter the

conract4. The fourth condition of capacity no longer applied in Australian law – However

there has been commentary where it has been put forward that apparent authority will not operate if the third party knows something which would put a reasonable person on inquiry as to whether the person with whom they are dealing with lacks authority (issue of inducement)

- Freeman & Lockyer v Buckhurst Properties: A company was set up to develop property – however it was contemplated that MD was never formally appointed. However K acted as one, and contracted with architects to draw plans. The relationship deteriorated and one party did not want to pay so argued that the company was never bound as K was not an agent. o HELD: That there was ostensible authority present (based on four

requirements). o These requirements were approved in Crabtree Vickers Ptd Ltd v Australian

Direct Mail Advertising and Addressing Co Pty Ltd ▪ There was a two member board of a family company, with the third

family member acting as an employee. The board decided to buy office equipment however all board members had to agree to purchase. One family member told the third member to get office equipment so purchased equipment using the board members order book. The company attempted to exit the purchase contract by stating that the third person to order was not an agent.

▪ It was held that there was no apparent authority present – as the family member who gave the instruction did not have the actual authority to purchase the copier (only the board had this power). Therefore, his representation could not give rise to ostensible authority.

Ratification- Ratification by the company will bind the company to the contract- Is performed by the board of the company or someone with authority under S126

o may be by ordinary resolution of the General meeting o Must occur within a reasonable time

- If the company is in liquidation, the liquidator has power to ratify (Alexander Ward v Samyang Navigation Co Ltd)

Binding the Company in Absence of Actual Authority

Indoor Management Rule - Third parties dealing with the company are entitled to assume that internal

procedures have been complied with (Royal British Bank v Turquard) o A loan agreement had company seal affixed – however as per the constitution

the company was required to have a shareholder resolution. Despite the fact that the resolution had not taken place, it was considered to be an internal matter and therefore third parties could assume that it had been properly executed.

- Rule continues to apply where Ss128 – 129 does not apply (relevant to interpretation of S129(1).

- However, if a party is put on inquiry, you cannot rely on the indoor management rule (Northside Developments) o Contract for mortgage was granted over property. The mortgage was under

seal, but it was not affixed properly as the board had not given resolution, nor had it been properly witnessed. HELD: That the bank was put on notice as the money was being distributed to other companies (not in line with terms of properly sealed mortgage) – therefore the indoor management rule did not apply.

- If a party is put on inquiry by the circumstances surrounding the transaction he cannot presume in his own favour that things are rightly done (Morris v Kansen)

- Indoor management rule is onerous on the person attempting to rely.

DIRECTORS DUTIES

General law duties are owed by fiduciaries (directors, senior executive officers and employees)

- S9 A director is:o A person who is duly appointed to the position of a directoro A person acting in that capacity, regardless of the name given to their

position (De Facto Director)o A person who is not validly appointed as a director if they act in the position

of a director (Shadow Director) – Standard Bank of Australia v Anitco▪ Pioneer held 100% of shares in A, which held 100% shares in K which

held 42% shares in G. P had the right to nominate 3 directors of G.

HELD: The mere fact that P had directors on the board didn ’t make them a shadow director, however based on the facts that other shareholders were small, actual financial management and control were exercised.

- S9 Officer includes: o Secrtary, receiver, liquidator, a person who makes or participates in making

decisions affecting the whole or a substantial part of the business. o ASIC v Adler – HIHC (subsidiary of HIH) made payment to PEE. PEE was a

trust controlled by Rodney Adler. He was a director of HIH, but was found to be an officer of HIHC as he was a person who ‘has the capacity to affect significantly the corporations financial standing’

Duties are owed to:- Duties are owed to the company as a separate entity, not shareholders

(Percival v Wright)o Shareholder sold his shares to chairman and directors. Seller discovered

that directors were considering a proposal from a third party to buy at higher price. Shareholder sought to have sale revoked due to non disclosure (breaching fiduciary duty). HELD unsuccessful as directors owed duty to the company, not to the shareholders.

- Directors may assume a duty to another person IF: (Glavanics v Brunninghausen)o 1. Shareholder dependencyo 2. Relationship of trust and confidenceo 3. Significant transaction and positive action taken by directorso P was the director of two corporations, two companies were competing after

a break down in relationship. D agreed to sell business but did not inform P. HELD: That here P was entirely dependent on D for information.

Business Judgement Rule- This rule provides that courts will not get involved in questions of the ordinary

management of the company (Re Smith and Fawcett) (Harlowe’s Nominees)o The court will not review the substance of the directors’ decisions, but

whether the decision was made in good faith. o S198A is a broad management power and it is exercised in good faith and

for proper purpose, then there will be no breacho The common law business judgement rule applies only to protect directors

against actions for breach of fiduciary duty.- This rule is justified on the following grounds:

o The courts would be overloaded if they had to judge the substance of every business decision (Carlen v Drury)

DUTY OF CAREA duty of care arises in both common law and equity – to exercise reasonable care and skill are, in context, the same (Permanent Building Society v Wheeler)

Statutory Duty of Care- S180 implies an objective standard of care – it must be ascertained whether an

officer exercised the degree of care and diligence that a reasonable person in a

like position in a corporation would exercise in similar circumstances (ASIC v Vines) o S180(1)(a) as if they were in the corporations circumstances; ando S180(1)(b) occupied the office held by, and had the same responsibilities

within the corporation as the director or officer. o ASIC v Vines: CFO was in charge of preparing profit forecast, and relied upon

wrong information. HELD: that the circumstances placed an obligation on Vines to be proactive and monitor the financial situation.

- Minimum Standard of care for directors and officers of a company (ASIC v Adler) o Santow J: Minimum standard is for the director to ensure they are familiar

with the general business, to keep informed, to undertake general monitoring and remain familiar with what is going on.

- Same Responsibilities and in the same position as the person (ASIC v Rich) o Non executive chairman, but also chairman of audit committee. As he was on

audit committee the standard was higher. - Skill remains a component of statutory duty – despite the fact that S180 omits

the word “skill” (Daniels v Anderson) o Will be held to have the same responsibilities as a person in the same

position – considerations may impose a higher standard of care on a director (ASIC v Rich – audit committee = higher responsibility)

- Non Executive directors: o Law has not yet established extent to which position of non executive

director shapes the content of the duty of care (ASIC v McDonald)o Objective standard – therefore no distinction between executive and non

executive (Daniels v Anderson) ▪ Rogers J held that non directors were not liable as senior management

controlled day to day management. However NSWCA rejected the distinction and stated that non executive members are required to ask questions

AWA v Daniels – Statutory Duty of Care- AWA v Daniels has imposed new objective minimum standards upon directors, to:

o Obtain a basic understanding of their company’s business and be familiar with the fundamentals of the business

o Keep informed of the activities of the company (a continuing obligation)o Monitor the company’s activities, and regularly attend board meetingso Maintain familiarity with the company’s financial status by a regular review of

financial statements. - AWA suffered loss when an employee (K) covered up a fraud (reported gains

when receiving losses). K operated without effective control or supervision. HELD: contributory negligence from company to auditor as breached common law duty of care to monitor company

Statutory Duty of Care: Skill

The standard of skill expected of a director depends upon whether the person is an executive or non executive director, and whether said person has special qualifications: Executive Directors

- Are expected to have skills of the reasonably competent person with the skills they have. However, where the person is also a director looking at areas outside of their expertise, they will be held to the standard of non executive directors (ASIC v Rich)

Non Executive Directors- Unclear whether the same standard applies to non executive directors or not

(ASIC v Macdonald (No 11) - The basic standard is to take reasonable steps to place themselves in a

position to guide and monitor the management of the company (AWA v Daniels)

- However, the duty may be more demanding in specific cases: o Chair of audit committee (ASIC v Rich) o Experienced non executive executive (Vrisakis v ASC) o The only director with lending experience (Gold Ribbon v Sheers)

Statutory Duty of Care: Delegation and Reliance

- S198D Directors may delegate their powers to: o a committee of directors, a director, an employee of the company, any

other person. o Must be recorded in minutes S251o Must exercise powers delegated in accordance with directions of directors

S198D(2) and the power is effective as if the directors had exercised S198D(3)

- Certain matters of ‘operational responsibility’ cannot be brought before the board and must be delegated. (ASIC v McDonald)

- S190(1) Where a power is delegated under S198(1) the directors are responsible for the actions of the delegate. o S190(2) Defence – A defence is available where a director believed on

reasonable grounds that the delegate would act in accordance, and in good faith and after making proper enquiry that the delegate was reliable and competent.

- S189 Directors are able to rely on information by certain categories of people if reasonable (including employees, professional advisors, experts, other directors or officers). Must comply with: o Reasonableness : The matter relied upon must be within the professional

competence of the person providing the information or adviceo Good Faith : The information or advice must be relied upon in good faitho Independent Assessment: The director must make an independent

assessment of the information or advice: ▪ Independent Assessment requires directors to consider whether the

information or advice should be relied upon.

ASIC v McDonald & Morley & Ors v ASIC- A public press release was sent out which stated that James Hardie was fully

funded (false). - It was initially that the non executive directors failure to discharge their

monitoring role amounted to a breach of duty. An objective test was applied and Gzell J found that failure to request a copy of the draft ASX announcement

a breach of the duty as a reasonable person in their shoes would have sought the copy.

- Morley & Ors v ASIC: Overruled the decision of ASIC v McDonald: However, the responsibilities were not delegable as it was an issue of high importance, was considered at board level over a long period of time, and could therefore not be discharged.

Statutory Business Judgement Rule- S180(3) Business judgement is any decision to take or not to take action in

respect of a matter relevant to the business operations of the company. - S180A director is taken to meet the requirements of S180(1) if they meet the

four criteria contained within S180(2) o 1. Make judgement in good faith and for proper purposeo 2. Do not have a material personal interest in the subject mattero 3. Inform themselves about subject matter to the extent they reasonably

believe to be appropriateo 4. Rationally believe that the judgement is in the best interest of the

company▪ S180(2) They deem the belief to be rational under (d) unless it was a

decision that no reasonable director would make: • Austin J in ASIC v Rich: A directors belief that a particular course

of action was in the interests of the company must be supported by an identifiable chain of reasoning, an arguable chain of reasoning, even if that chain of reasoning is not convincing to the judge.

- Failure to comply with disclosure obligations is not a decision related to the business operations (ASIC v Metal Group) o This is a decision to not comply with the requirement of the law, as opposed

to a business judgement. - The onus lies with the defendant (ASIC v Adler)

Common Law- Common law has historically imposed a low standard of care, which was

subjective depending on the facts of the case (Marquis of Bute’s Case)- A subjective standard of care is imposed (Romer J in Re City Equitable Fire

Insurance Co) o Care: A director should take such care as a reasonable person would on

their own behalf; o Skill: The conduct should be assessed against a skill standard. Does not

require them to bring specific skills, but if they possess them they should use them for the benefit of the company (Re Brazillian Rubber; CBA v Friedrich)

o Diligence: Directors duties are of an intermittent nature – they are not bound to give continuous attention to the affairs of the company

▪ Commonwealth Bank of Australia v Friedrich: The director is required to be capable of keeping abreast of the company’s affairs, and sufficiently abreast of them to act appropriately if there are reasonable grounds to expect the company will not be able to pay all its debts in due course as he had reasonable grounds to expect it.

o Delegation and Reliance: A director is entitled to trust a delegate (in absence of grounds for suspicion), but should identify dangerous situations (Re City Equitable Fire Insurance).

▪ Directors are expected to recognise situations where the circumstances make it dangerous to rely (Dorchester Finance v Stebbings)

• A director who was not qualified was left to make loans without supervision and allowed them to sign bank cheques. This was a breach of duty, as it was ‘dangerous’

▪ Directors are expected to take reasonable steps to put themselves in a position to ensure delegation does not hurt the company (Daniels v Anderson)

Remedies- Provisions within S180 – 183 are civil penalty provisions under S1317E and ASIC

can apply for: o A declaration of contravention under S1317J(1)o Disqualification under S206Co Pecuniary penalty under S1317G; ando Compensation order under S1317H

- S50 After investigation ASIC may bring proceedings in the company’s name (ASC v Deloitte Touche Tahmatsu)

GOOD FAITH

The directors of a company must act ‘bona fide in what they consider – not what a court may consider – is in the interess of the company, and not for a collateral purpose.’ (Re Smith and Fawcett Ltd)

S181 A director or other officer of a corporation must exercise their powers and discharge their duties:

(a) in good faith in the best interests of the corporation; and(b)for a proper purpose

The two tests are considered separate (Hogg v Cramphorn), however courts have not always made a clear distinction between the two (Ngurli v McCann)

Duty to act in good faith Subjective Test

- Director must honestly believe it was in the best interests of the company (Bell Group v Westpac Banking)

- However, objective element where the decision was so unreasonable that no reasonable person would have made it (Hutton v West Cork Railway)

- IF director gives no regard to the best interests of the company – an objective test can be used to determine whether an intelligent and honest person would reasonably believe the decision was in the best interests of the company (Charterbridge – on facts where the director gave no consideration)

Best interests of the companyMembersThe interests of the company as an entity can be equated with the collective interests of members:

- Existing members include shareholders as a whole (including both majority and minority shareholders)o A decision in favour of the majority at the expense of the minority will breach

this duty (Ngurli v Mcann) - Generally, this does not encompass an individual shareholder – however, it may

on the facts establish a fiduciary duty to an individual shareholder.

Employees- There is no statutory duty for directors to take account of the interests of

employees – however a director may take account of the interests of employees if it is reasonably incidental to, and within the reasonable scope of carrying on the business of the company (Bowen LJ in Hutton v West Cork Railway)

- The company may be generous or do more than it need do only if, essentially, it be for the benefit or for the purposes of the company that it do so. (Woolworths v Kelly)

- However, once the company has no future duty ceases to exist (Parke v Daily News) o Company was being wound up and proposed to make ex gratia payments

to its employees out of the proceeds of the sale. HELD that this would not benefit the company and therefore the payments would be illegal.

Creditors- The directors have a duty to the company to consider the interests of

creditors where the company is insolvent or nearing insolvency (Kinsela v Russell) o Directors granted a lease to themselves and used control of meeting to

unanimously ratify the decision. The company was insolvent at the tme. HELD: That the duty had been breached – the shareholders could not ratify as it was at the expense of the creditors.

- applies where there is no remote risk of insolvency (Grove v Flavel) - If there is no consideration of creditors, the court will apply an objective test

of whether an intelligent and honest person would have reasonably believed it was for the company’s benefit: bearing creditors in mind (Linton v Telnet)

Nominee Directors- Nominee director must act in the best interests of the company he directs

rather than those of his appointor (Bennett’s v Board of Fire Commissioner) - Where interests of the appointor and the company conflict, then the directors

must either prefer the company’s interests or resign (Scottish Co Op Wholesale v Meyer)

- Nominee directors are bound to ignore the interests of their nominator (Kuwait Asia Bank v National Mutual Life Nominees)

Corporate Groups- Primary considerations for directors must always be whether the action in

helping your own company, you can then consider whether helping another company helps the one you are directing (Walker v Wimborne; Equiticorp) o HELD: No interlocking shareholdings, therefore not a part of the corporate

group. - The proper test is whether, viewed objectively the decision could have been

in the interests of the company (Charterbridge Corp v Lloyds)o Inappropriate to invalidate a decision where directors failed to consider the

interests of the separate entity. Court should consider whether an objectively intelligent and honest person could have reasonably believed that it was for the benefit of the separate entity.

- Two separate approaches are resolved as saying if there is no subjective consideration of the subsidiary alone, then there is a breach, but if objectively no damage was caused, no consequences flow from the breach (Equiticorp)

- S187 A director of a corporation that is a wholly owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if: o (a) The constitution of the subsidiary expressly authorises the director to

act in the best interests of the holding company; and

o (b) the director acts in good faith in the best interests of the holding company; and

o (c) the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director’s act.

ConsequencesIF an action is not taken in good faith the action is voidable, however a contract with a third party will only be voidable if the third party knew or had notice the contract was not in the interests of the company.

PROPER PURPOSE – S181(1)(b) - Applies to the exercise of corporate power (including powers aimed at affecting

the control of companies, as well as decisions to buy or sell assets, or to lend and borrow, where the decision was improperly motivated).

- Powers should not be exercised for a collateral purpose (Re Smith and Fawcett)

Two stage test (Howard Smith)

What is the purpose of the power?- Is a question of fact (Advance Bank Australia v FAI Insurances)

o Power in the board to refuse registration of a transfer of shares was given for the purpose of ensuring insolvents and other people would not be admitted as shareholders

- Where there is a mixed purpose, complainant must show that the substantial purpose was improper (Mills v Mills) and also that but for the improper purpose it wouldn’t have been taken (Whitehouse v Carlton Hotel)

- Where there is a constitutional provision dealing with proper purposes, the governing director can exercise all the power of the company. If the constitution does not deal with purposes, then the court may draw its own conclusions: o Merely conferring all the powers of a board on the governing director did not

of itself change the permissible purposes for the use of those powers.

Proper Purpose ExampleDirectors are usually given the power to issue shares, a proper purpose for this issue includes:

- To raise capital (Howard Smith v Ampol) - To provide employees with a financial incentive to work in the interests of the

company, by a commercial benefit flowing to the company (Mills v Mills) - To enter into a joint venture with another company by issuing shares to that

company where it ensures long term stability for the company (Davrall v Nth Sydney Brick and Tile Co)

Improper Purpose Examples- Attempting to defeat a hostile takeover (Hogg v Cramphorn)- Facilitating a friendly takeover by destroying an existing majority, or creating a

new majority that did not previously exist (Howard Smith

- Entrenching control of the company in one group of shareholders at the expense of others (Whitehouse v Carlton)

For what purpose was the power exercised?- The court will not invalidate a decision if they believe that it had a legitimate

commercial motivation (Davrall v North Brick)- An action taken for an improper purpose will be voidable, and can be challenged

by the company, or by individual shareholders if it also affects their personal right not to have their voting interest diluted (Hogg v Cramphorn)

- Ratification by the majority in the general meeting will not operate to bar an individual shareholder’s personal action (Residues Treatment and Trading Co v Southern Resources

- Complexity of the inquiry facing courts in determining the question of purposes (Advance Bank v FAI Insurance)

Mixed Purposes- Substantial purpose test was regarded in Obiter as the appropriate test (Howard

Smith) - The ‘But For’ test was regarded in obiter as the appropriate test (Whitehouse)

o The question is whether the impermissible purpose was causative in the sense that but for its presence the power would not have been exercised, notwithstanding other legitimate purposes.

- The court adopted an approach that recognciled the two tests – the impermissible purpose must be significantly contributing so that an improper consideration that is subordinate to a proper consideration that triggered the action would be acceptable.

Fiduciary Duty to Avoid Conflicts of Interest

Directors owe fiduciary duties to avoid placing themselves in a position where the duty and interest conflict (Boardmann v Phipps)

- Concerns the relationship between the company and director- Generally, it is the pursuit of a conflict, rather than the mere existence of a

conflict, that would constitute a breach (Chan v Zachariah)

Direct Interest & Disclosure- S191 A director must make disclosure where they have a direct personal

interest in the transaction going ahead. o Directors must disclose to the general meeting, where it must be approved

by an ordinary resolution (Woolworths v Kelly) o Common Law: Disclosure MUST be made to the general meeting to be

effective (Fur v Tomkies) o HOWEVER companies may have a provision within their constitution allowing

disclosure to the board.

Proprietary Companies: Disclosure may be made to the board under S194, disclosure must be made in accordance with S191

o S194 If a director of a proprietary company has a material personal interest in a matter that relates to the affairs of the company, and has disclosed in accordance with S191 then:▪ The director may vote on matters that relate to the interest; and any

transactions which relate to the interest; and retain benefits under the transaction

▪ The company cannot avoid the transaction merely because of the existence of the interest.

Pulbic Companies: Disclosure must be made to the general meetingo S195 A director of a public company who has a material personal interest in

a matter that is being considered at a directors meeting must not: ▪ (1)(a) be present while the matter is being considered▪ (1)(b) vote on the matter

Exceptions to S 195▪ Where disclosure is not required under S191▪ Where the directors without a material personal interest resolve that they

are satisfied that the interest should not disqualify the director from voting or being present (interested director cannot vote in resolution or be present). However, this can be overridden by the constitution; and

▪ Where ASIC makes a declaration or order under S196

Consequenceso Failure to comply with the constitution will make the contract voidable at the

option of the company (Camelot Resources v McDonald) o Contract voidable unless third party rights have intervened, then the director

must compensate the company for any loss caused by the breach of duty. ▪ S129(4) Third parties can assume directors have performed their duties

properlyo Where the director is ‘dominant’ it may be necessary to go beyond mere

compliance with the constitution in order to esure that the interests of the company are protected (Permanent Building Society (in liq) v McGee)

Competing Interestso There is no absolute rule against holding competing directorships (London v

Mashonaland), however seems inevitable that this will lead to conflicts and the director will have to disclose (S191)

Content of the Statutory Duty o S191(1) Material personal interests must be disclosed to the board. Failure to

do so attracts criminal sanctions▪ S191(4) Contravention does not invalidate the action ▪ Exceptions (191(2))

• Interest arises because the director is a member of the company, and interest is held by all members

• With regard to directors renumeration• Contract which is subject to member approval• Director’s insurance

- S192 Standing notice can be given- S193 applies in addition to general rules- S194 (RR) For proprietary companies, disclosure to the board is sufficient- S195(1) For public companies, director must absent themselves from discussion

or voting on the issue of material personal interest and cannot vote on it.

Duty Not to Misappropriate Company Property

Directors are under a duty not to misappropriate money for their own or a third party’s benefit (Cook v Deeks)

- Directors cannot take renumeration or other benefits from the company unless authorised by law, the constitution or the fully informed general meeting. o S202 (RR) The directors of a company are to be paid the renumeration that

the company determines by resolution. - Damaging a company’s property can be included (Mordecai) - Contracts which have not yet been concluded may form the property of the

company (Cook v Deeks) The general meeting cannot ratify a breach of director’s duty where he misappropriates the company’s property.

Duty Not to Make a Profit From Position

Directors are liable to account for a profit if: (Lord MacMillan in Regal Hastings)- The opportunity arose out of course of management, utilisation of opportunity

and special information arising from directorship (“corporate opportunity”)- As it resulted in a profit

Regal Hastings v Gulliver: Even if for some reason the company is unable to exploit the opportunity, the director cannot undertake it personally

o Irrelevant that the directors were helping the company by buying shares in the subsidiary

o IF full and frank disclosure were made to the general meeting, they could have ratified the breach of duty.

Strict rule is imposed on directors to account for profits made by virtue of their position and they will be liable to account where they make full and frank disclosure

- Fur v Tomkies: MD acting in fiduciary capacity when he made a profit for himself , in the absense of full disclosure to the general meeting and ratification he was liable to account for the profit to the company.o The fact that he received ratification from the chairman was not sufficient –

must be from the general meeting.

HOWEVER, courts now look for a ‘real sensible possibility of conduct’ (Boardman v Phipps, QLD Mines v Hudson). This relaxation gives rise to a number of issues: 1. Is there a causation requirement? Does it matter that the company is unable to

pursue the profit making opportunity?- Generally, there is no requirement that the breach of duty must cause a loss to

the company (Regal, but Australian courts have adhered to a strict traditional line Gemstone Corp v Grasso)

- However, Deane J obiter in Chan v Zachariah where it was suggested that the rule be relaxed – it may be arguable that there should be no liability to account where there is no possible conflict between personal interest and fiduciary duty.

2. What should the effect of resignation of the director in question be?- Where a director finds out about the opportunity in their capacity as director

and then they resign and take up the opportunity, they must account for profits – the director embarked on a deliberate policy and course of conduct which put his personal interest in conflict with his pre existing and continuing duty as MD. (Industrial Development Consultants v Cooley – confirmed in Canadian Aero Service v O’Malley)

- The court is not to punish the fiduciary, but tries to make the fiduciary prefer the company’s interest over his own; the aim is to deter people from breaching fiduciary duty. Allowances were made for time and effort by the fiduciary (Natural Extracts v Stotter)

3. Can directors pursue opportunities which they become aware of in a ‘private capacity?’

- General Rule: If a person finds out about something in their personal capacity, they will not have to account for profits to the company (Rega)

- There is no sufficient temporal and casual connection between the obligations and the opportunity. Involves a factual question of whether the opportunity came to the director in a time, place or circumstance sufficiently closely connected to their function as director (SEA Food v Lam

4. Is it open to the director to prove that the transaction is ‘fair’ to the company?- No – they must make full and frank disclosure to the general meeting and it is

up to the general meeting to ratify the breach (Furs v Tomkies) - The facts are usually within the knowledge of the person who is being charged

and therefore difficult to ascertain (Lord Wright)

Statutory Duty Not to Profit from Position or Information

Improper Use of Position

S182(1) Director/Officer/Employee must not improperly use position to: o (a) gain an advantage for themselves or someone elseo (b) cause detriment to the company

- An objective test (R v Byrnes): improper is judged on an objective basis and dishonesty is not necessarily required

- There is no need for the gain to be made by a loss caused to the company (Chew v R)

- Civil penalty provisions apply to anyone ‘involved’ S182(2) defined in S79 o S184(2) An offence occurs where there has been a dishonest use of position

intentionally or recklessly- For Example:

o R v Daswani: the officer used company funds to finance personal living expenses and escape from creditors – therefore improper purpose

o ASIC v Aust Investors Forum: Issue of shares for the purpose of maintaining control of the general meeting – was an improper purpose

Improper Use of Information- S183(1) Must not improperly use information obtained through position to:

o a. gain an advantage for themselves or someone elseo cause detriment to the company

- There is no need that a gain was actually made or a loss was caused to the company (Chew v R)

- The duty continues after the officer leaves the company (Cooley) - Information need not be confidential – it may be used for the internal company

finance records to favour one creditor over another (Grove v Flavel) - Civil penalty provisions apply (S183(2), S79, S184(3))

Financial Benefits to Related Companies: Public Companies- S208(1) For a company to give a financial benefit to a related party, must (a)

obtain approval of members or (b) fall within an exception- S228 Related parties include:

o Controlling entities – capacity to determine outcome of decisions about the company’s financial and operating policies S50AA)

o Directors and their spouseso Parents and children of directors and spouseso Entities controlled by one of the above related partieso One of the above in the last six months

- S229 Giving a financial benefit includes:o Indirect through interposed parties S229(2)(b)o informal/non binding agreements S229(2)(b)o financial advantage S299(2)(c)o EG: 229(3)

▪ Giving/providing finance or property▪ Buying/selling asset▪ Leasing asset▪ Supplying/receiving services▪ Issuing security or granting option▪ Taking up or releasing obligation

- S224(1) Related parties who may benefit & their associates (acting in concert S12(2) cannot vote on resolutions)

- Member approval is not needed: o S210 reasonable terms if dealing at arms lengtho S211 remuneration o S211 reimbursements o S213 small amounts (less than 5000 per financial year) IF none of the exceptions apply then member approval must be obtained and benefit must be given within 15 months of passing the relevant resolution. Consequences

- Breach does not affect the vailidity of any transaction, the company will not be guilty of an offence S209

- S1324 A person may receive an injunction to prevent - S209(2) A person involved in the breach may be liable under a civil penalty

provision. - Re HIH Insurance: Santow J held that the payment of 10m by HIHC without

shareholder approval, amounted to a financial benefit.

Enforcement by ASIC1. Declaration of contravention

- ASIC can bring an application for declaration of contravention under S1317J(1)

- The court must make the declaration where it is satisfied that a person has contravened a civil penalty provision 1317E(1)

- This is a prerequisite to making a pecuniary penalty or disqualification order

2. Pecuniary Penalty Order- ASIC may apply to the court for a pecuniary penalty order (person pay a

penalty of up to 200 000) S1317G- The court must be satisfied that the contravention materially prejudices

either the interests of the company or its members, or the company’s ability to pay its creditors

3. Disqualification Order- ASIC can apply to the court under S206C for a disqualification order

disqualifying the person from managing corporations for a period that the court considers appropriate. ASIC can disqualify under S206F

o Disqualification for repeated contraventions S206Eo S206E, 206C the court has a broad discretion as to what to take into

account in deciding whether to disqualify (Santow in ASIC v Adler)o Disqualified directors can apply for leave to act as a director of specific

companies or companies generally from ASIC S206F and from the court S206C/206G

o Anyone who acts in breach of a disqualification order commits an offence S206A

o A person who manages a company while disqualified from doing so can be personally liable for the company’s debts S588Z (liquidator can apply for an order)

4. Compensation Order

- ASIC can apply for an order that the person who has contravened the civil penalty provision compensate the company for damage resulting from the contravention S1317H(1)

o can include profits made by the person as a result of the contravention in S1317H(2)

o A compensation order is not dependant on whether a declaration of contravention has been made under S1317E

o One Tel v Rich

Breaches of Common Law Duties1. Compensation Order

- Company can apply for an order that the person who has contravened the civil penalty provision compensate the company for damage resulting from the contravention S1317H

o Company has to show breach of dutyo Includes profits made by the person as a result of the contravention

S1317H(2) 2. 198A Management Power

- Whether the board brings proceedings against a director for breach of duty or breach of civil penalty provision S1317H is as aspect of the 198A management power

o Damages for breach of common law duty and equitable compensation for breach of equitable duty. An account of profits may be appropriate.

Enforcement by the Board- S198A The board can enforce common law and equitable duties owed under its

general management power. - S1317J The board can decide that the corporations can seek a compensation

order, regardless of whether ASIC has sought and obtained a declaration under S1317E.

- The corporation will have to prove to the court that the directors have breached their duties – the compensation order will be made under S1317H.

RATIFICATION

Relief/Exoneration by the court under S1317S or S1318- Court has power to excuse a director or officer (including employee, receiver or

liquidator S1814(4)) from liability where they have acted honestly and in all circumstances the court thinks they ought to be fairly excused.

S1318(1) Relief- Applies in relation to civil proceedings against a person for negligence, fault,

breach of trust or breach of duty and allows the court to excuse the person from liability for the conduct if they can demonstrate that they have acted honestly and in all circumstances ought to be excused

- Relevant to breaches of directors general law duties - Extends to proceedings under S588G (Kenna & Brown Pty Ltd (in liq) v Kenna)

S1317S Exoneration- Proceedings under civil penalty provision for breach of statutory duties.

- Must positively show that they acted honestly (not a mere lack of dishonesty), but even if this is proven then the court has discretion (ASIC v Adler per Gzell J)

- ‘Act Honestly’: o Conduct is without moral turptitue (ASIC v MacDonald (No 11)) o w/o deceipt or conscious improprietaryo w/o intent to gain improper benefit or advantageo w/o carelessness or imprudence at a level that negates the performance

of the duty in questiono Encompasses negligence where no genuine attempt is made to carry out

the duty/obligation of the officeo Must show that they were careful, honest and prudent (ASIC v McDonald

(No 11))o If no subjective intent, then not an honest act if a reasonable person in

that position would regard the conduct as exhibiting moral turpitude. (ASIC v Adler)

Ratification by General Meeting Effect of Ratification: The beneficiary of a fiduciary can prospectively authorize or retrospectively ratify conduct that would otherwise amount to a breach of fiduciary duty. (Regal Hastings, Fur v Tomkies)

o Ratification must occur in the general meeting by an ordinary resolution (Wintrhrop v Winno)

o The general meeting must be fully informed (full and frank disclosure), for the ratification to be valid (Fur v Tomkies)

- Ratification by the general meeting bars the company ’ s cause of action against the direction, unless the breach is one that was unratifiable.

- S191 the general provision may be modified by the company’s constitution so that the board are given the power to ratify.

Examples - If director profits from his position, but makes full disclosure then the general

meeting can ratify (Furs v Tomkies, Regal v Gulliver) - Ch 2E GM can rafity a financial benefit to a related party of a public company- Where the action was for an improper purpose the transaction will be voidable

at the election of the company unless ratification by the general meeting (Whitehouse v Carloton)

Limits to Ratification 1. Where the breach involves misappropriation of the company’s property by the

director- Cook v Deeks: However not always applied consistently, in Regal & Furs court

said in obiter that directors could protect themselves from ratification. 2. Where the company is insolvent or nearing insolvency

- Kinsela: unratifiable when insolvent or approaching insolvency as creditor interests intrude

3. Where the directors are benefiting themselves at the expense of the company- Negligence is ratifiable, however where directors are negligent in a way that

benefits themselves at the expense of the company it will be unratifiable. 4. Where the member has a personal right (fraud on the minority)

- S140 where breach of members personal rights, members gets cause of action. Ratification is only relevant to wrongs of the company. (Miller v Miller)

- Distinguish Cookes from Regal o R involved an opportunity, C involved propertyo R directors acted honestly, C acted dishonestlyo C circumstances were so extreme that it should substitute its opinion for

that of the majority shareholders o C contract capable of being concluded and performed by the company for

its benefit in the long term, R was a mere opportunityo Directors were severally liable as debtors for what they had received, so

ratifiability is consistent with other earlier authorities. 5. General meeting cannot ratify breaches of statutory duty

- The general meeting cannot bar ASIC from brining contravention proceedings, enforcing duties in public interest (Forge v ASIC)

- Shareholders cannot remove declarations of contravention by ratifying the original acts.

- Shareholder ratifications of private law breaches would be ineffective to cure the breaches of statutory duty.

Statutory Limitations- S199A(1) A company cannot exempt a person from liability to the company

incurred as an officer/auditor- S199A(2) The company cannot indemnify a person against liability incurred as

an officero Owed to companyo For a pecuniary penalty order or compensation ordero Liability to 3rd party arising out of bad faith conduct

- S199A(3) A company cannot indemnify a person fro legal costs in certain matters

- S199B(1) Company cannot pay insurance covering liability from a willful breach of duty or a breach (S182/3)

- S199C Any transaction contravening ss199A or B is void.

Disqualification - S206B A person becomes disqualified from managing corporations if the

person is convicted of an offence or bankruptcy. - S206D A person may become disqualified for up to twenty years if within the

last 7 years the person has been an officer of more than 2 corporations when they have failed and the court is satisfied that the manner in which the corporation was managed was wholly or partly responsible for the corporation failing, and the disqualification was justified.

- S206C Disqualification for breach of civil penalty provisionso S206C Court has the broad discretion as to what to take into account in

deciding whether to disqualify for an appropriate period. - S206E Disqualification if person has at least twice been an officer has at least

contravened the act twice, and the court is satisfied that this disqualification is justified.

- S206F ASIC has power to disqualify

- S206G Disqualified directors can apply for leave to act as a director of specific companies or companies generally from ASIC, and from the court under S206G (ASIC v Platcher)

- A person who manages a company while disqualified from doing so can be personally liable for the company’s debts. (S588Z, S206A)

MINORITY PROTECTION

Statutory Derivative Action (Part 2F. 1A) A statutory derivative action is where a member brings an action on behalf of the company. Therefore, any compensation goes back to the company, not the shareholder who brings the action.

- S198A Management confers power to commence proceedings in the company name.

- S237(1) members are required to seek leaveo S236 A member, former member, officer or former officer (director,

shareholder, officer or former) may bring proceedings if granted leave.

- S236(3) Common law statutory abolished- An action cannot be brought when the company is in liquidation (Cahakwan v

Euphoric)

S237(2) Leave will be granted if: 1. Probability that the company will not take action

- The applicant must show that they asked the company to bring proceedings and the company declined

- May show that wrongdoer has dominant influence on board of directors CLERP 6.34

o Charlton v Baber: Court inferred from the admnisitrator’s report that the company was unlikely to take action

o Erykberg v Heaven: Deadlock on the board meant that company would never bring action (derivative action was allowed)

o Cassegrain v Gerard Cassegrain: Where the alleged wrongdoer controls the majority

2. Good Faith - In Swanson v Pratt Palmer J held that good faith involves two interrelated

factors:o 1. That the applicant honestly believes that a good cause of action exists

and has a reasonable prospect of success ANDo 2. Whether the applicant is seeking to bring the action for a collateral

purpose that would amount to an abuse of process. Confirmed in Charlton v Baber

- Prima Facie in good faith where: (Swansson) o Where the shareholders interest will be benefitted if the action is

successful (not in good faith if this is not the case) (Chahwan, Swansson) o The applicant is a director with a legitimate interest in welfare and good

management of the company in prosecuting litigation. o A creditor who brings a derivative action solely to place the company in a

better financial position to repay the debt is not acting in good faith (Swansson, Chahwan)

- Where the applicant is a former shareholder/director with nothing obvious to gain, the court will scrutinize good faith carefully (Fiduciary Ltd v Morningstar)

3. Best interest of the company - CLERP Paragraph 6.8: The company may have sound business reasons for not

pursing a cause of action and management might have legitimately decided that the interests of the company might best be served by not brining proceedings

- Chanwah: Applicants personal interest would preclude a company and unsecured creditors from benefitting.

S273(3) There is a rebuttable presumption that granting leave is not in the best interests of the company: - If the claim is not against one of the directors, the directors will generally be

better placed than the court to determine whether bringing the action is in the company’s best interests (ASIC v Rich)

o Therefore if the directors have taken a good faith business judgment not to bring proceedings, it is extremely unlikely that the court will grant leave.

- All directors who participated in the decision must have: o Acted in good faith for a proper purposeo Didn’t have a material personal interest in the decisiono Informed themselves about the subject mattero Reasonably believed the decision was in the company’s best interest

- S237(4) A person is a third party under 273(3) if they are not a related party under S28.

o A former director will become a third party where they cease to hold office more than six months before the proceedings were begun.

4. Serious question to be tried - The applicant does not have to prove the substantive issues, only that

proceedings should be commenced (prevention of frivolous and vexatious claims) (Goozee, Chahwan)

5. Notice of proceedings to the company - Allows company to address the applicant’s concerns prior to the court hearing

the matter. - Failure by the company to take action may support the court arriving at the

conclusion that if probable the company would not itself take proceedings (CLERP P 6.49)

Ratification - Ratification does not preclude the derivative action S239(1) - Ratification is a factor the court can take into account in deciding whether an

application should be allowed S239(2)- The court must have regard to: S239(2)(a)(b)

o How well informed the members are when ratifyingo Whether members who ratified were acting for a proper purpose

Costs- S242 the court has power to make any order it considers appropriate, including

indemnification for costs - Costs follow the event, and applicants are required to provide security for costs

(Fiduciary Ltd) - IF the court is to order the company to pay costs, it must have evidence of the

company’s financial position (Swansson)

Shareholder Litigation under S1324 S1324(1) ASIC as well as persons whose interests have been, or would be affected by conduct in contravention of the corporations act, to seek an injunction to restrain threatened breaches of the act, and against those knowingly concerned in the contraventions.

- Catch All provision: A person has standing under S1324 so long as they can show that their interests have been affected in a way which goes beyond those of the general public (Broken Hill Pty Ltd v Bell Resources)

- S1353 a failure to comply with RR is not itself a contravention of the act.

Reconciliation with Common Law

- Foss v Harbottle: Majority rules – courts displayed a reluctance to give a minority shareholder a derivative action because the decision to litigate lies with the board under S198A.

o A company (S198A) is the proper plaintiff to enforce wrongs done to it, not an individual shareholder.

o Therefore issue arises where an individual shareholder uses S1324 to prevent a breach, as it could make an application for statutory derivation reducndant.

o Therefore must read S1324 narrowly otherwise it would displace majority rule and allow shareholder to litigate.

- Mesenberg v Cord Industrial Recruiters – Young J: expressed reservations about whether the legislation intended for every minor breach to be actionable because this would undermine Foss v Harbottle.

o S1324 should not apply for breaches of S181- Courts need to give individual claiming to be affected broad standing, and then

exercise its discretion to deny a remedy in cases where shareholders/creditors are usurping the role of the board. (Premier Gold)

Members Personal Action

Shareholders can enforce personal rights- S140 members can enforce rights given to them in their capacity as members- Members have rights which are either personal or constitutional; any other

rights are not within S140 and must be the subject of an extrinsic contract (Norths v McCaughan approving Farrar)

Diminished value of shares- Where a shareholder suffers an indirect loss in the form of diminution of their

shareholdings they do not have standing to bring a personal action for the wrong because this creates a risk of double recovery. (Prudential Assurance v Newman Industries)

Personal Capacity There are two situations where the shareholder may be able to sue in their personal capacity: (Johnson v Gore Wood)

- 1. In circumstances where there is no personal right to sue, but the company does not have a cause of action against the wrongdoes (George Fischer v Multi Construction)

- 2. Where the shareholder suffers a loss separate and distinct from the company, caused by a breach of duty independently owed to the shareholder (Heron v Lord Grade)

Does a Personal Right Exist?Can a member sue to have the company’s business conducted in accordance with the constitution?

- Ordinarily the court does not interfere at the suit of a member with respect to the administration of the company (Applying Foss v Harbottle). It may be difficult to distinguish between an individual and representative right, but generally the rule in Foss will prevail (Stanham v National Trust)

- Company law must have the flexibility to meet the reality of the circumstances before it. The court will look at the circumstances of each case and ask

whether the individual is the right person to enforce the right (Norths v McCaugh)

Mere Procedural Irregularities- Generally, members cannot enforce a mere procedural irregularity (Prudential

Assurance) - However, a procedural irregularity may elevate procedural requirements into

enforceable personal rights (Ryan v South Sydney Junior Rugby Club)

Personal Action in Equity

1. Established Fiduciary Relationship Directors owe their duties to the company, not to individual shareholders. Two factors were recognized in Glavanics v Brunninghausen by Bryson J, which may indicate a fiduciary relationship arising in relation to an individual shareholder

a. Where the director deals directly with the shareholder for the purpose of sale of shares; andb. Where there are very few members, very few directors and their relationships are not impersonal, but close.

- In this case the plaintiff was entirely dependant on the defendant for information and advice. The fact that the defendant failed to reveal the negotiations for the sale of the business amounted to a breach of fiduciary obligation.

Factors determined in Coleman v Myers: - family character of the company- position of the directors in the company - high degree of inside knowledge, and- the way they went about persuading the shareholder to sell.

2. Allotment of Shares for an Improper Purpose An allotment of shares for an improper purpose amounts to a breach of duty to act for a proper purpose (as this has a direct effect on shareholders by diminishing their voting power (Residues Treatment and Trading Co v Southern Resources (No 4)).

3. Fraud on the Minority – Alteration of Constitution

General rule is that shareholders do not owe fiduciary duties when voting (Dixon J in Peter’s American Delicacy Co Ltd v Heath)

- Shareholders in a general meeting can vote in a self interested manner (North West Transportation v Beatty)

Exception: Fraud on the minority is an exception to the principle that shareholders in the GM can vote self interestedly

- Where the majority passes a resolution that no reasonable person would consider within the range of permissible uses of majority power, having regard to the purposes of the company, an individual member has an equitable right to apply to the court to have the resolution set aside. (Pavlides v Jensen)

o Therefore any member (even one without voting power, can challenge a majority decision on this basis)

- Where the power to ratify is used as a means of securing some personal or particular gain, equity will intervene if that power is being used for a purpose that is outside the scope of the range of purposes contemplating when the power was conferred (Peter’s American Delicacy v Heath)

Limitations on Self Interested Voting- S208 – 229 limits voting where a financial benefit will be conferred on a related

party of a public company- Those benefiting from a reduction in capital cannot vote in favor of it

Alteration of the ConstitutionGeneral rule that a company can alter its constitution or the replaceable rules by a special resolution under S135, 136(2). However this is subject to exceptions: GAMBOTTO PRINCIPLE

- The power to alter the constitution is subject to an equitable limitation on the voting power of the majority (Gambotto)

- 1. Does the alteration give rise to a conflict of interest and advantages between the majority and minority shareholders?o No – Amendment to the constitution has to be bona fide in the interests of

the company as a whole (Allen v Gold Reefs) o Yes – Does it involve an actual or effective expropriation of shares or

valuable proprietary rights attaching to shares?▪ No – Alteration is not valid unless it is ultra vires, beyond any purpose

contemplated by the constitution, or oppressive▪ Yes – Onus is on the majority to establish that:

• It will secure the company from significant detriment or harmo Narrow: examples include where a shareholder sets up a

business in competition or to ensure that the company complies with regulations, or where a financial or commercial advantage is not enough.

• Both the process and terms of the acquisition are fairo Full disclosure, independent expert valuation of shares

IS GAMBOTTO STILL RELEVANT?- Compulsory acquisition of shareholdings subsequent to Gambotto means that

it is unlikely that a company would use alteration to expropriate minority shareholdings – o Part 6A.1 allows a company which aquires 90% of another company

following a hostile takeover to force out the remaining 10%; ando S664A contains the general power for a shareholder who crosses the 90%

threshold to buy out the remaining shares within 6 months. - GAMBOTTO applies where:

o The majority purports to alter the constitution to take away other valuable proprietary rights attatching to shares (vote, dividends) which falls short of expropriation

o It will only apply to the extend that there isn’t some other mechanism to protect the minority interest (Arakella)

o Recently applied in Bundaberg Sugar v Isis Central Sugar

Winding UpA contributory can apply to the court to compulsorily wind up a company S461

- if it is on just and equitable grounds S461(1)(k)- Where ther directors are acting in their own, and not the company’s interests

S461(1)(e) - Where there is oppressive conduct S461(f)(g)- S462 Those with standing include the company, creditors, a contributory,

liquidator, ASIC, APRA3Remedy is rarely available to solvent companies (ASIC v ABC Fund Managers).

S461(K) The court is of the opinion that it is just and equitable for the company to be wound up: Loss of Confidence

- There is a justifiable lack of confidence in the conduct and management of the company’s affairs (Loch v John Blackwood) o Company was a family affair, therefore just and equitable for the company

to be wound up.Serious Fraud

- Order may be appropriate where there has been a serious fraud, misconduct or oppression, but removal of directors is likely to result in their re-appointment (Macquarie University v Macquarie University Union)

Deadlock- Where there is a management deadlock, may be appropriate:

o Deadlock at board and shareholder level, it was inequitable to allow the situation to endure (Clarke v Bridges)

o Mutual distrust and complete breakdown in communication rendered the company unable to function, therefore company to be wound up (Khama v XL Cleaning Services Pty Ltd)

Quasi Partnership- Special considerations apply to quasi partnership companies (characterized by

mutual confidence agreements about participation in management and restrictions on share transfers) (Ebrahimi v Westbourne Galleries Ltd) Three Elements:o 1. Mutual Confidenceo 2. Agreements about participation in managemento 3. Restrictions on Share transfers o FACTS: Two directors, one director invited his son to join the business. The

son and father ‘ganged up’ on the other director. HELD: allowed winding up as it intruded on the exercise of strict legal rights.

OPPRESSION Standing: Those with standing to bring an action for oppression S232

- Member S231- Former member:

o Where they have been removed because of selective reduction of capital S234(b)

o Where the application relates to the circumstances in which they ceased to be a member S234(c)

- A person who has received a share through will or operation of law- A person ASIC has deemed appropriate to bring an action

A member need not have been a member at the time of the oppression (Re Spargos Mining)

- It need not have been in their capacity as a member S234(a)(ii)(iii)- No clean hands requirement, but improper conduct may affect relief (Re

London School of Electronics)

Applications are normally made by a minority shareholder, however an action may be brought by the majority: Vujnovich v Vujnovich

- Broad interpretation: ‘a visible departure from the standards of fair dealing, a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely (Elder v Elder & Watson)

- Court will examine the impact of the decision upon the member, as judged by a reasonable bystander who is imbued with special skills or knowledge possessed by the alleged oppressors (Wayde v NSW Rugby League)

- Quasi Partnership: Vujnovich: Family had three brothers (equal SH). One shareholder diverted profitable business to a company that the other brothers had no interest in, both sued for oppression. HELD: company to be wound up.

Grounds for Oppression: S232 Grounds for oppression if:

- the conduct of a company’s affairs; or- an actual or proposed act or omission by or on behalf of a company; or- a resolution, or a proposed resolution, of members or a class of members of a

company; IS EITHER

- contrary to the interests of the members as a whole; or- oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a

member or members whether in that capacity or in any other capacity.

Oppressive, unfairly prejudicial to, or unfairly discriminatory against- A common expression, not individual grounds for relief (Morgan v 45 Flers

Avenue) - Separate and distinct grounds from “contrarty to the interests of members as a

whole” Turnbull v NRMA- An objective test, the commercial fairness to be judged by a commercial

bystander (Morgan v 45 Flers Avenue) - Conduct is contextual (O’Neill v Phillips)- Exercising a legal right can be oppressive (O’Neill v Phillips) - Test focuses on the effect on the applicant (Re M Daley & Co)

o Conduct of other party may be relevant when making an order (Wayde) o Conduct of other party may also be relevant when making an order (RE HR

Hamer)- Applicant’s conduct may be relevant when making an order RE RNA Noble- Dissatisfaction with management is not sufficient RE G Jeffrey

- There is no unilateral right of exist at a fair price for a minority shareholder (Re G Jeffrey)

Common Situations- Exclusion from management (Eexuto v Boonjak)

o Corporate partnership between family members implied all were entitled to take part in decision making. Effective control does not displace expectation.

- Lack of provision of information (Re Back 2 Bay 2 Pty Ltd) o H&W owned 50%, other party owned 50%, but H&W had casting vote.

Claimed oppression, but could not decide on a price. Held: not deadlock, other party were being prejudiced and oppression was available.

- Breach of fiduciary duty (Scottish Co-Op Wholesale Society v Meyer) o 2 licenced directors, 3 non licensed. Wanted to issue more shares, but 2

license holders did not. Requirement for license was revoked. License holders sought oppression – HELD oppressive (compulsory acquisition of shares ordered)

- Misappropriation of company assets (Martin v Australian Squash Club Pty Ltd) o Executive director misappropriated and misused company funds and assets

and breached fiduciary duty to the company: Oppressive- Lack of Dividends

o Re City Meat: Large assets, small dividends, large director income. Claimed oppression due to actions of sole shareholder. Shareholder was preferring his own business therefore oppressive (running business even though unprofitable)

o Re G Jeffrey: Two companies founded by J. J died, sons R & A held 30% each, widow 20% two daughters 10% each. R MD of both, ignored A. R made unrealistic offer to buy A’s shares. A sued for oppression. HELD: Not oppression, simply majority rules – needed to show discrimination to the applicant.

o Shamsallah: Where the directors did not review the dividend policy despite improving circumstances whilst they have reviewed and improved their own payments = oppressive.

- Excessive remuneration for directors (Sanford v Sanford Courier Service) o Average profit of 9K after paying salaries of 51K to three people,

remuneration was oppressive. - Oppressive conduct of board meetings (John J Sarr v Robert R Andrew)

o Boardroom tactics aren’t of themselves oppressive, when constantly used to extent where they deprive the minority of their right to participate in board meetings they were oppressive.

- Decisions for the benefit of related companies (Re Spargos Mining) o Transactions to be judged according to the unfairness to the company at

hand, not that of the group. If transactions don’t benefit the original company, then oppressive (removed directors and replaced board, and amended constitution).

Remedies- Non-exhaustive list of remedies contained in s233(1)

o Winding up

o Modification of Constitutiono Regulating Co’s conduct in the future

▪ NB court is unwilling to undertake an ongoing supervisory role.o Purchase of any shares by any membero Purchase of any shares by any member with an appropriate reduction of

the Co’s share capitalo Authorising a member to commence or prosecute proceedings in the Co’s

nameo Appointing a receivero Injunctiono Mandatory injunction

Valuing shares- Basic rule is valuation must be fair in the circumstances: Re London School of

Electronics- No discount for minority: O’Neill v Phillips- Court has a discretion to determine the date of valuation: Foody v Horewood- Starting point is value at time of order: Profinance Trust v Gladstone

o However, cases have valued shares before date of breaches of dirs: CVC/Opportunity Equity Partners Limited v Almeida; Dynasty Pty Ltd v Coombs

o Principle is subject to overriding fairness requirement.

CAPITAL TRANSACTIONS

Share Issues- Co has the power to issue shares: s124(1)- Includes power to issue bonus shares, preference shares and partly paid shares:

s254A

Offers in Proprietary Companies- Proprietary companies mustn’t make an offer of shares which requires

disclosure, unless to existing shareholders or employees: s113(3)- Must offer to existing members first (right of pre-emption): s254D

o Right of pre-emption can be revoked by general meeting ordinary resolution: s254D(4)

Public OffersDisclosure must be made:

- Wherever a company makes an offer of securities for issue, unless an exception applies S706o Includes invitation to treat: s700(2)(a)o “Securities” means shares, debentures and options: ss700, 761A

- When a disclosure document is required, securities can only be issued by application form accompanied by disclosure document: s723(1)

Disclosure is not necessary:

- Small-scale offerings: s708(1)o The offer is a personal offer

▪ A personal offer is one that may only be accepted by the person to whom it was made and who is likely to be interested in the offer: s708(2)(b)

o The offer has been made to 20 or less investors in the previous 12 months: s708(3)(a), (4)(a)

o The offer does not raise more than $2 million in 12 months: s708(3)(b), (4)(b).

o Offers that do not require disclosure, are not received in Australia or are made under a disclosure document do not count: s708(5)

- Offers to sophisticated investors do not require disclosure: s708(8)o If the offer is greater than $500 000: s708(8)(a)o If the offeree has net assets and income above the limit: s708(c)o If the offeree is a professional investor: s708(11), s9

What must be disclosed:- Offer cannot be made without lodging a disclosure document with ASIC:

s727(1)- Securities cannot be offered during an unsolicited meeting or telephone call:

s736- Disclosure document valid only for 13 months: ss711(6), 714(2), 715(3)- Four different types of disclosure document:-

Disclosure Document Relevant Legislation

ProspectusStandard full-disclosure documentMust be used unless offer information statement is allowed: s709Must contain all relevant information investors would reasonably require: s710Fraser v NRMA: Prospectus inadequate because it failed to identify disadvantages of proposed restructure.

Content: ss710, 711, 713Procedure: s717Liability: ss728, 729Defences: s712

Short-form prospectusMay be used for any offer. Full prospectus still prepared, and must be supplied upon request.Refers to material lodged with ASIC.

Content: s712

Profile StatementUsed in conjunction with prospectus. Prospectus is lodged with ASIC, profile statement sent to investors.Requires ASIC approval to be used: s709(2)

Content: s714Procedure: s717Liability: ss728, 729Defences: s732, 733

Offer Information StatementInformation statement can be used instead of a prospectus if offer is $5M or less.

Content: s715Procedure: s717Liability: ss728, 729

Defences: ss732, 733-

Notice of share issue must be given to ASIC within 28 days of issuing the shares S254X, including:

- number of shares issued, different classes of shares, the amount paid, the amount unpaid, if shares were issued for non cash consideration

Consequences of Failing to Disclose- Offering securities in a body that has not been formed: s726- Offering securities or distributing an application form without the appropriate

disclosure document: s727- Misleading or deceptive statement in a disclosure document or application

form: s728- Investor can seek rescission for false or misleading document: Re Australian

Slate Quarries- Damages for negligent misrepresentation: Hedley Byrne v Hedler - May give rise to an action under s180: ASIC v Vines

Variation of Class RightsA class right can be identified in three categories (Cumbrian Newspapers v Cumberland & Westmorland Herald Newspaper, per Scott J:

- Where one group of shares has different rights to another Crumpton v Morrie Hallo Despite the fact that there was no express reference to different classes of

shares in the constitution, these were still class rights.- Where rights are conferred on individuals not as members but for other

reasons, these are not class rights (Eley v Positive Life) - Where rights are conferred to particular individuals in their capacities as a

member, these are class rights (Cumbrian Newspapers)

Variation occurs where: - Certain actions deemed to be variation: s246C

o For Company with share capital:▪ When a class of shares is divided further into classes and have different

rights afterwards▪ When the rights attached to some shares are varied

o For Company without share capital:▪ When a class of members is divided further into classes and have

different rights afterwards▪ When the rights of some members are varied

o When Company with 1 class of shares issues a new class of shares, will be a variation if:

▪ The rights attaching to the new shares aren’t the same as existing shares

▪ The rights are not provided for in the Const or other ASIC document.

o Issue of new preference shares, unless authorised by:▪ The terms of issue of the existing preference shares OR▪ Co’s constitution in force when existing preference shares were

issued.

- Where the deeming provisions don’t apply, the law draws a distinction between a variation of class rights, and a variation of an enjoyment of class rights: White v Bristol Airplane

▪ Company had preference shares , wanted to issue more – would result in diminished voting power and value. HELD diminishment of rights was not a variation.

o However, the subsequent decision in Cumbrian Newspapers indicates a greater willingness to protect rights of members.

o Additionally, even if the deeming provisions don’t apply, oppression remedy may be available.

Procedure- Varying and cancelling class rights: s246B

o If Const sets out procedure, must follow that procedure s246B(1)o If Const doesn’t set out procedure, then either: s246B(2)

▪ Special resolution of the members OR▪ Written resolution of 75% of the votes in the class.

Challenging class right variation- Even if the procedure is followed, members with at least 10% of the votes in

the class can apply to the court to have the variation set aside if it unfairly prejudices them: s246D(1)o Court previously applied fraud on the minority (Re Holders) however now

S246D is applied. - Application must be made within one month: s246D(2)- May attract an oppression remedy.

DividendsPower to issue dividends

- Determining whether dividend should be paid is a s198A power. - Directors have power to fix amount and time for payment of dividends:

s254U(1)

When dividends can be paid- Dividends must not be paid unless: s254T

o The Company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend AND

o Payment of the dividend is fair and reasonable to the Company’s shareholders as a whole AND

o The payment of the dividend does not materially prejudice the Company’s ability to pay its creditors

- Relevance of profits test:o Whether or not the Companys have profits to pay dividends out of is no

longer a part of the legal test, however the commercial realities require a consideration of profits, particularly for s588G purposes: Ford

▪ Courts have considered profit to be gained between two dates: Re Spanish Prospecting

▪ A dividend can be paid out of an unrealised capital gain: Dimbula Valley v Laurie

▪ However, Dimbula has been given cautious approval in Blackburn v Industrial Equity.

Consequences of improper dividend

- SH who disputes validity of dividend can obtain an injunction: Darvall v North Sydney

- Can also seek an injunction under s1324- Any person involved is liable for civil penalty, and dirs can be in breach of

s180.- If SH knew dividend was improper, could be held as a constructive trustee:

Segenhoe Ltd v Akins- Director may be personally liable to repay dividends as breach of trust Re

Oxford Benefit Building and Investment Society- However, may be able to obtain an indemnity from shareholders who have

knowingly received the dividend (Moxham v Grant) - Company may also be liable to compensate at common law (Re Oxford Benefit

Building Society)

Maintenance of Capital

Reduction of capitalRequirements to reduce capital

- Company can only reduce its capital in accordance with s256B: s256D(1).o Gambotto doesn’t apply: Winpar Holdings v Goldfields

- Company can reduce its share capital if: s256Bo It is fair and reasonable to the Company’s Shareholders as a whole ANDo It doesn’t materially prejudice the Company’s ability to pay its creditors

ANDo Is approved by Shareholders under s256C

- For cancellation of shares, the second element is ignored: s256B- Approval by SHs: s256C

o Ordinary resolution of the general meeting required for equal reductiono Special resolution required for selective reduction

▪ No votes can be cast in favour of the resolution by anyone who is to receive consideration or whose liability will be reduced

▪ A resolution agreed to at a general meeting by all ordinary SHs▪ If it involves cancellation of shares, reduction must be approved

by a special resolution by those whose shares are to be cancelled.• Must be a separate meeting: Winpar Holdings Ltd v

Goldfieldso Co must lodge a copy of the resolution with ASIC: s256C(3)

Consequences of non-compliance- If Company does not comply, transaction is still valid and Co is not guilty of an

offence: s256D(2)- Person involved is liable for civil penalty and criminal offence if dishonest:

s256D(3), (4).

- Gambotto doesn’t apply to reductions of capital: Winpar

Self-Acquisition• 259A –company must not acquire shares in itself; anyone involved in contravention

contravenes civil penalty provision: 259F(2)• 259B –company must not take security over shares in itself or in a company which

controls it• 259C –company must not issue shares to a company it controls• 259D –company must within 12 months cease to hold shares in company which

controls it, or cease to be controlled• 259F – Consequences of breach

Share buy-backs- Basic rule in 259A –company must not acquire shares in itself. Share buy-backs are an

exception.- However, a Co may buy back its own shares if: s257A

o The buy-back doesn’t materially prejudice the Co’s ability to pay its creditors AND

o Co follows the procedures laid down in the Act

10/12 Limit- The 10/12 limit is 10% of the smallest number, at any time during the last 12

months, of votes attaching to voting shares of the Co: s257B(4)- A buy back would exceed the 10/12 limit if the number of votes attaching to

exceed the 10/12 limit, including: s257B(5)o All the voting shares in the Co that have been bought back during the

last 12 months ANDo The voting shares that will be bought back if the proposed buy back is

made.

General Resolution- Procedure set out in s257C:

o Buy-back must be conditional to ordinary resolution at general meetingo Co must disclose all info material to the decision, unless disclosed

before.o Must lodge notice of meeting and info with ASIC

Special Resolution- Either: s257D

o Special resolution, no votes can be cast by anyone whose shares are being bought

o Resolution agreed to at general meeting by all ordinary SHso Co must include with f info material to decision, unless disclosed before.o Must lodge with ASIC copy of notice of meeting and info documents.

Disclosure Required

Type of Scheme Definition Requirement

> 10/12 <10/12

Equal access scheme

s257B(2):1. Offers relate only to ordinary shares2. Offers to be made to every ordinary SH to BB same % of their ordinary shares3. All those persons have a reasonably opportunity to accept4. Terms of all offers are the same

None Ordinary Resolution

Employee share scheme BB

BB that involves acquisition of shares by employees or dirs: s9

None Ordinary Resolution

On-market BB BB by listed Co on fin market: s257B(6) None Ordinary Resolution

Selective BB Any other buy-back: s9 Special Resolution

Consequences of breach- Transaction remains valid: s259F- Can be subject of injunction or damages under s1324

o Creditors have standing to sue: s1324(1A)(b)(i)- Co doesn’t commit an offence, but those involved can be liable: s259F(3)

Financial Assistance

A Company can financially assist a person to acquire shares in the Company only if: s260A(1)

o Giving the assistance doesn’t materially prejudice:▪ Interests of Company or its Shareholders▪ Company’s ability to pay its creditors

o The assistance is approved by Shareholders under s260Bo The assistance is exempted under s260C

Prior to 1998 needed to establish two elements for financial assistance: 1. Impoverishment or net transfer of assets (Burton v Palmer)2. The key was the ocmpany’s purpose in advancing the money, even if there

was no net diminution in the company’s assets (Belomont Finance)

Current Law – Post 1998

‘Financially Assist’- Requires impoverishment, rather than merely that the company have the

purpose of assisting: ASIC v Adlero However, NSWCA followed Robson J in Kinarra Pty Ltd v On Q Group Ltd

- Includes paying a dividend: s260A(2)(b)- Unclear whether this requires a causative link between the assistance and the

purchase of shares.

Approval

- SH approval requires: s260Bo Special resolution with no votes cast by person acquiring the shares ORo Resolution agreed to at general meeting by all ordinary SHs.

Exemptions- Financial assistance is allowed where it is:s260C

o A lien for unpaid amounts on partly paid shareso Finance provided by a financial institution in the ordinary course of

business and on ordinary commercial termso Given under an employee share scheme and approved by shareholder

resolutiono Reduction of share capital or buy-back made in accordance with the Acto Made under a court ordero Discharge on ordinary commercial terms of a liability that the Co

incurred as a result of a transaction entered into on ordinary commercial terms.

Onus- Liquidator must prove impoverishment: ASIC v Adler- Defendant must prove either:

o Lack of material prejudice, ORo Approval ORo Exception applies.

Debt and Charges

Registration of charges- Charges should be notified to ASIC: s262, 263(1), 266(4)- Failure to register doesn’t affect validity: s262(11)- Co must keep its own register of charges: s271- Charges that need to be registered: s262(1)

o Floating chargeso Charge on uncalled share capitalo Charge on a call on shareso Charge on personal chattelso Charge on goodwill or IPo Charge on a book debto Charge on a marketable securityo Lien or charge on a crop or wool or a stock mortgageo Charge on a negotiable instrument other than a marketable security

Consequences of failure to register- Offence committed by Co and any officer in default: ss263, 264, 268, 270- Where there is competition in priority of charges:

o If the charge sought to be enforced is unregistrable, the general law will determine which has priority

o If it is a registerable charge, the priority regime of the Act will apply: ss278-282

Priority among charges- Registered charge has priority over: s280

o Subsequent registered charge, unless chargee had notice of prior charge

o Unregistered charge unless chargee had notice of the prior chargeo If it can be shown the chargee had notice of a charge, the registered

charge is postponed to that charge.- Unregistered charge has priority over: s281

o A subsequent registered charge that was created with notice of the unregistered charge

o Another subsequent unregistered charge - Notice includes constructive notice: s278(2)- Order of priority is subject to variation by agreement: s279(2)

Negative pledges• The Co may promise a creditor that it will not give security over its assets

either at all or above a certain level to any other person without consent• However, a later charge, if a charge is granted, will be able to enforce the

charge provided they did not have notice of the pledge and provided valuable consideration for the charge: Swiss Banking Corp v Lloyds Banking Limited

o A party is deemed to have notice of anything registered with ASIC if the document relates to a registrable charge: s130(2)

Fixed charges• Fixed security attaches to a specific item of property and the chargeor is not

permitted to dispose of the property free of the charge without chargee’s consent.

• “One that without more fastens on ascertained and definite property or property capable of being ascertained or defined.” Illingworth v Houldsworth

Floating Charges- If a floating charge is created 6 months before relation back day, it is void,

unless it is excepted: s588FJ- Employees claim before floating charges: s561- Indicators of a floating charge: Re Yorkshire Woolcombers Association

o Charge on a class of assets of a company present and futureo That class is one which, in the ordinary course of the business of the Co

would be changing from time to time o By the charge it is contemplated that, until some future step is taken by

or on behalf of those interested in the charge, the Co may carry on its business in the ordinary way.

- Usually give the holder of the charge the right to appoint a receiver.- Holder of a charge can also seek injunction to prevent disposal of property

other than in the ordinary course of business: Re Woodroffes

Crystallisation- Floating charges crystallise on the occurrence on events implies by law or

defined in the charge instrument and become fixed charges.

- Upon crystallization, the charge stops ‘floating’ and ‘crystallises’ on property in the specified class or category, at which point the charge becomes fixed.

- At general law, a floating charge crystallizes when the Co is:o Wound up: Illingsworth v Houldswortho Has a receiver appointed to it: Caratti v Granto Ceases to carry on business: DCATA v Lai Corp Pty Ltdo Engages in conduct that threatens the utility of the creditor’s security

▪ For example, where there is an attempt to put the property outside reach of a receiver in order to defeat the charge: Hamilton v Hunter

- Usually however, crystallising events are specified in the loan agreement.

Charge in favour of officer or associate- Cos can grant charges in favour of officers- Charge to officer may be invalidated if: s267

o A charge is granted to an officer ANDo Within 6 months the charge is enforced without the leave of the court.

Highland v Exception Holdings Pty Ltd - Charge given in favor to officers, 6 months later officers appointed a receiver. HELD that purpose of 267 is to be able to appoint friendly receivers. Must apply to the court for leave so can be assessed.

Invalidation of charges• Generally void against liquidator or administrator unless a notice lodged with

ASIC: s266(1)• During administration, cannot enforce the charge except with the

administrators written consent, or leave of the court: s440Bo If the enforcement of the charge commences prior to the Co going into

administration, the charge can be enforced: s441BINSOLVENCYDetermining InsolvencyDefinition

• A company is solvent when they are able to pay all their debts when they become due and payable: s95A(1)

• A company is insolvent when they are not solvent: s95A(2)

Elements• “Debt”

o Two views• “Due and payable”

o Includes all debts that arise in the ‘immediate future’: Bank of Australia v Hall

o Unclear whether leniency is relevant. One view is it isn’t unless it creates an estoppel: Carrier Air Conditioning. However courts have sometimes been willing to include it: Re Newark Pty Ltd.

• “Able to pay their debts”o Funds can include money that can be gained by sale or pledge: Sandell

v Porter. Also seems to include unsecured funds since no longer needs ‘from own money’.

Presumptions of Insolvency

• Presumptions of insolvency listed in s459C:o Co failed to comply with a statutory demando Execution of judgment or similar has been returned partly or wholly

unsatisfiedo Receiver has been appointed pursuant to a floating changeo Court has appointed a receiver to enforce a floating chargeo A person has taken possession or control of the company’ property ORo A person has been appointed to enter possession or assume control of

Co property• Primary presumption is the failure to comply with a statutory demand:

o Demand must be made in the prescribed form and signed by/for creditor: s459E

o Demand must be met to the creditors reasonable satisfaction: s459E(2)o Demand must be above statutory limit of $2000o Cannot be unliquidated claim: First Line Distribution v Whileyo Company can apply to have the debt set aside: s459G

▪ Application must be made within 21 days: s459G(2). This is a strict time limit, court can’t extend it: David Grant v Westpac.

▪ Grounds listed in s459H, s459J:• Dispute about existence/amount of debt• Co has c-claim that would reduce the debt below the

statutory min.• Defect in the demand (such as irregularity or misdescription

of debt: s9) causing substantial injustice.• ‘Some other reason’ i.e. a mistake in accompanying

affidavit.

WINDING UP• Two stages:

o Winding up (liquidating and distributing property)o De-registration

• Different types of winding up which depends on:o Solvent (Pt5.4A) or insolvent (Pt 5.4)o Compulsory (Pt 5.4, Pt 5.4A) or voluntary (Pt 5.5), (Pt 5.6 common to

both).• These types aren’t mutually exclusive, so insolvent winding up could be vol.

or invol.

Voluntary Winding Up• Requires special resolution of members: s491 • Can be either members or creditors winding up

o Depends upon declaration of solvency: s494o Consequence is who appoints liquidator.

Declaration of Solvency: s494

Declaration Made: Members Winding Up Declaration not made: Creditors Winding up

Members appoint liquidator: s495Requires special res: s491If company turns out to be insolvent, liquidator must call creditors meeting, appoint liquidator or immediately apply for winding up: s496

Creditors meeting must be called within 11 days: s497Creditors can appoint the liquidator: s499 or can keep members choice.

o

Insolvent Winding Up

Standing• Those who can apply for an order to wind up a company: s459P(1)

o The company (rare, because voluntary winding up is easier)o A creditoro A contributory (meaning a shareholder: s9)o A directoro A liquidator o ASICo A prescribed agency (such as APRA)

Grounds • Contained in ss459A and B

o Sole ground is insolvency, which is proven using assumptions.o Order for winding up is made under s459A.

Consequences of Winding Up

Consequences for the Co• Even while being wound up, company remains a legal entity: s493(1)• Co can’t continue business except through liquidator during winding up:

ss493(1), 477• Dispositions of property by Co are void except when approved by court or by

a liquidator/administrator: s468(2)• Co retains title to its property, but holds it on trust

o May be a trust in favour of creditors: Re Yagerphone Ltdo Not a traditional trust, a ‘statutory trust’: Ayerst v C&K

• Officers continue to hold office (s471A) so their legal duties remain.

Consequences for creditors• Unsecured creditor loses its right to pursue its action against a company in

liquidation.o Right is replaced by a collective right to prove in liquidation (s471(1))

• Secured creditors can realise their security despite winding up: s471C• Existing proceedings are stayed and fresh proceedings prohibited without

leave: ss471B and 500o This binds secured as well as unsecured creditors

• The way creditors recover is liquidator assigns their claim, and creditor can appeal.

Consequences for members• Members in winding up proceedings are referred to as contributories: s9• Usually won’t receive a dividend from Co’s assets after creditors are paid• Any attempt to transfer shares after commencement of winding up is void,

unless authorised by liquidator or the court: ss468A, 493A• Any alteration to status of members is void: Re National Bank of Wales

Consequences for employees

• Winding up is a repudiation of contract of employment: Re Associated Dominions Assurance Society Ltd

• May entitle employee to claim compensation: Re R S Newman• Note however there are special rules around this.

Pooling• For a group of companies, can pool a group of companies in liquidation.• The main impacts are that Cos:

o Become jointly and severally liable for each other’s debts ando Have their claims against each other extinguished (s571(2)-(11))

• A pooling determination can only be made where each member of the group is being wound up:s571(a)

• A group in this context refers to Cos that are (s571(1)(b)):o ‘Related’ to each other ORo Jointly liable for claims ORo Joint owners or operators of property ORo Parties to a joint undertaking in connection with property

• Pooling determination is made by the liquidator• Can only be made if the unsecured creditors approve it. Liquidator must

convene separate meetings of Cos in the group: s574o Requires 75% in number AND 50% in value of votes cast at each

meeting (s577)• Determination can be altered by court in some circumstances: s579A• Pooling order can be made by a court on application by liquidator: s579E

Liquidator

• The liquidator acts as agent for the company ie when selling assets.o Usual incidences of agency apply to them

• The liquidator may carry on the Co’s business only so far as necessary for the beneficial disposal or winding up of the Co’s business: s477(1)(a)

• Liquidator has a number of powers: s477o This includes bringing an action in the Co’s nameo However, if the Co’s assets can’t meet the costs of the action, liq. will

be personally liable for them: Re Speedifix Building Products Pty Ltd• A provisional liquidator may be appointed by a court after a winding-up

application has been made but before the application is heard: s472(2)o Prov liq is different from actual liq in that their job is simply to maintain

status quo: Re Carapark Industrieso Still has power to continue business, but generally status quo is their

role: Re Bayswood• A liquidator must be registered with ASIC before they can be appointed: s532

o Must meet specified minimum qualifications and lodge a security with ASIC to perform their duties: ss1282-1284

o May be a registered liquidator or an official liquidator (registered and with two years experience). Court appointed liquidator must be an official liquidator: ss472(1), (2) and 532(8)

o Liquidator may be disqualified from being appointed without the leave of the court: s532. Applies where liquidator:

▪ is indebted to the Co or a related Co for $5000 or more (doesn’t apply in member’s voluntary winding up)

▪ is a creditor of the Co or a related Co for at least $5000▪ is an officer or auditor of the Co or relative or a mortgagee.

Extends to someone who is in a partnership or employment relationship with an auditor or officer within the past two years.

▪ is an ‘insolvent under administration’.o Liquidator must be independent and seen to be so: Re Stewden

Nominees

ASIC Duties on Liquidators• Must notify ASIC of their appointment as liquidator: s537• Must notify the ATO of their appointment as liquidator: ITAA36 s215(1)(a)• Must lodge a preliminary report with ASIC about Co’s finances: s476• Must lodge a report if unlawful conduct is discovered.• Must state whether an examination is necessary where creditors are expected

to receive less than 50 cents in the dollar: s533• Must keep proper books during liquidation: s531• Must lodge with ASIC an account of receipts and payments and six-monthly

statements on the progress of the liquidation: s539• Must determine the Co’s liabilities and settle a list of contributories

Property Available for Creditors• The liquidator takes the Co’s property as it is at the time of winding up.• Generally, property available to creditors is that which:

o is held by the Co at the commencement of the winding up.o is acquired by the Co after the commencement of the winding up.o has been transferred by the Co prior to winding up, but is recoverable

by the liquidator.o is recovered by the liquidator from certain execution creditors.

• ‘Commencement of winding up’ is usually when liquidator is appointed. However, may be a different date: ss513A-513D

o If a court-ordered winding up, s513A applies.o If a voluntary winding up, s513B applies

Insolvent TradingFor directors

• If: s588Go A person is a dir when the Co incurs a debt ANDo The Co is insolvent at the time, or becomes insolvent by incurring that

debt, or by incurring at that time debts including that debt ANDo At that time there are reasonable grounds for suspecting the Co is

insolvent,• The dir contravenes the section s588G(3)

Directors • Applies to directors

o Defined in s9 to include shadow directors and also includes de facto dir.

“Incurs a debt”• “Incurs a debt”: s588G(1)(b)

o Looking for positive action: Antico v Standard Chartered Banko Contingent on voluntary action by directors, either incurring obligation

or doing one of the things in s588G(1A).o Deemed debts:

ACTION OF COMPANY WHEN DEBT IS INCURRED

Paying a dividend When dividend paid, or if Const allows declaration of dividends, when declared.

Reduction of capital When reduction takes effect

Buying back shares When buy-back agreement is made

Redeeming redeemable preference shares that are redeemable at its option

When shares are issued

Financially assisting a person to acquire shares in itself

When the agreement to provide the assistance is made

Entering into an uncommercial transaction When transaction is entered into.

“Insolvent at the time, or becomes insolvent” - Bell Group v Westpac Banking: Bell Group issued bonds and had unsecured

bank facilities. Bank called loans, BG went into liquidation. Liquidators challenged securities granted to banks as they knew they were insolvent, therefore ignoring interests of other creditors. HELD: Company insolvent at time of reference – looked to balance sheet test for contextual evidence, the court said that the company’s assets and ability to borrow without security were relevant to the insolvency.

- Sandell v Porter: Must determine if the company is suffering from a temporary lack of liquidity or whether it suffers from an endemic shortage of working capital

- Lewis v Doran: Courts task is to decide whether the company is able to pay its debts as they become payable, by reference to commercial realities of the situation.

“Reasonable grounds for suspecting Co was insolvent”• Question of fact to be assessed without the benefit of hindsight: ASIC v Plymin • What would a reasonably competent and reasonable director have suspected?

ASIC v Plymin

Consequences of breach• A director contravenes s588G if they fail to prevent the Co incurring the debt

if they are aware or a reasonable person would have been aware: s588G(2).

• If breach of s588G(2) or (3), liquidator can apply for compensation under s588M.

o The directors are liable only for the amount of the debt less whatever they get out of liquidation: s588M(3).

o Any amount recovered goes into the pool of assets for all creditors.• Creditor can apply for compensation: s588R.

o Requires consent of liquidation: s588R(1).o Can give notice to liquidator of intent to sue: s588S.

▪ If liquidator doesn’t respond within 3 months then they can begin proceedings without the liquidators consent: s588T.

o Creditor cannot proceed if liquidator has applied in relation to the debt: s588U.

o If the creditor recovers, they recover the money personally.

Defences• Contained in s558H

o Reasonable grounds to expect Co was solvent: s588H(2)o If the dir. relied upon an advisor reasonably to believe Co was solvent:

s588H(3).o Because of illness or some other reason person didn’t partake: s588H(4)

▪ NB AJ says this is very, very narrow, not enough to just say “I wasn’t there”.

o Reasonable steps to prevent incurring debt: s588H(5).▪ Relevant matters listed in s588H(6).

• AJ says try to firstly stop board from incurring debt. If they won’t do that, try persuade them to appoint administrator, and then you should resign if they don’t.

• Elliot v ASIC : Must take positive steps, not enough to say ‘I had no authority to stop it’. Have to walk away.

Holding companies• NB Parent company exercising tight control could be shadow director, so

s588G applies• s588V is equivalent of s588G for parent company. • Not a civil penalty provision.• Creditors can’t sue under this provision.

Misfeasance Proceedings

Liquidator can bring an action for breach of director’s duties.• NB Limits to ratification preventing the company bringing proceedings:

o Cook v Deeks: Breach of duty not to misappropriate can’t be ratified.o Kinsela: Breach of duty to act in best interests can’t be ratified where

creditors’ interests are relevant.o Forge v ASIC : ASIC can still bring civil penalty proceedings despite

ratification.

Avoidance Actions• Two policy objectives:

o Fair treatment of creditors as a group- if property is undervalued or sold on bad terms, the creditors as a whole are injured

o Pari Passu- Creditors equal among themselves. Can’t preference some.• Some transactions are voidable: s588FE(1)• Orders about voidable transactions are set out in s588FF. • The point of these is to void transaction, get back money/assets and swell

what is available to creditors.

Floating Charge Created Within 6 Months of Relation-back Day• If a Co is being wound up in insolvency and grants a floating charge within 6

months of relation-back day, the transaction is void.o “Relation-back day” is defined in s9. Usually is day winding up begins.o Exceptions to this listed in s588FJ(2).

• Main defence is if Co was solvent immediately after creation of the charge: s588FJ(3).

Uncommercial Transactions and Unfair Preferences• Has to be a ‘transaction’, defined in s9.• An unfair preference is one given by a Co to a creditor if the Co and creditor

are parties to the transaction and the transaction results in the creditor receiving more than they would if it were set aside and the creditor was to prove for the debt in winding up: s588FA(1).

o Note exception for ‘continuing business relationship’: s588FA(3).▪ These will only be unfair preferences if, as a whole they give more

than the creditor would have got from a liquidation.• A transaction is an uncommercial transaction if, and only if, it may be

expected that a reasonable person in the Co’s circumstances would not have entered into the transaction: s588FB(1).

Insolvent Transactions• An insolvent transaction is one that is an unfair preference or an

uncommercial transaction of the Co and was made when insolvent or Co becomes insolvent because of it: s588FC.

Voidable Transaction• Transaction may be voidable if: s588FE(2)

o It is an insolvent transaction ANDo It was entered into:

▪ During 6 months ending on the relation-back day OR▪ Between that date and when the winding up began.

o If it is an insolvent and uncommercial transaction entered into 2 years before relation-back day: s588FE(3)

o If it is an insolvent transaction to a related entity, 4 years before: s588FE(4).

o If it is an insolvent transaction for the purpose of defeating creditors, 10 years before: s588FE(5).

Defence by Third Party• Defences in s588FG entitle third party to resist the 588FF order.

VOLUNTARY ADMINISTRATION

Aim of administration• The goal of administration is to maximize the chance of the Co continuing its

business, or if this is not achievable, to ensure a better return for members and creditors.

Process of administration

Stage 1: Entering voluntary administration• Commences when an administrator is appointed: s435C(1)(a)• Three ways to appoint an administrator:

o By the Co itself. Done by dirs who pass a resolution to that effect.o Liquidator may appoint: s436Bo A chargeee who is entitled to enforce a charge on the whole or

substantially the whole of the Co’s property: s436C• Only a registered liquidator may be appointed as administrator: s448A• The administrator takes control of the Co’s affairs and prepares a report for

creditors: s437A, 438A, 438D

Stage 2: Creditors meeting• First creditors meeting to be held within 8 business days: s436E

o Allows creditors to appoint a committee of creditors and appoint a new administrator if they wish.

• Second creditors meeting is called within five days before or after the end of the convening period: s439A(2)

o Convening period is generally 20 business days from when the administration began.

o Creditors can pass one of three resolutions at the meeting:▪ Co execute a deed of Co arrangement▪ Administration should end▪ Co be wound up

o Meeting requires a majority in number and value to be passed: Regulations

Consequences of administration• Moratorium on proceedings unless leave of court is obtained: Division 6• Chargeholder whose charge is not over the whole or most of the Co’s property

usually cannot enforce their charge without leave of administrator or the court: s440B

• Chargeholder over the whole or most of the Co’s property has 13 business days after an administrator is appointed to decide whether to enforce its charge.

• Holders of liens are entitled to retain property, but cannot sell it without leave of the court: ss442C-CB

• Owners or lessors of property that is in the possession of the Co cannot reposses without the leave of the court: s440C, unless recovery was already underway prior

• Where the property in question is perishable property, the chargeholder is entitled to enforce their rights over the property: ss441C, 441G.

• Officers retain their position but cannot exercise their powers except with the administrator’s consent: s437D

• Adminstrator has the power to terminate employment contracts: s437A(1)(d)• Members cannot transfer their shares without consent of administrator or

approval of the court: s437F

Receivership

Definition• A receiver is someone whose role is to receive rent, income and other

proceeds• Must gather in and realise the charged assets of the Co and realise them to

satisfy the claims

Receiver• Only registered liquidators may be appointed receivers: s418(1)(d)• Receivers will be disqualified if:

o Are a mortgagee or an officer of the mortgagee: Waldron v Birdo Are an auditor or officer of the Co: s418(2)o Are an officer of a related Co o Were within the previous 12 months an officer or promoter of the Co or

related Co, unless ASIC waives this requirement: s418(1)(f)

Appointment• Generally appointed by the secured creditor• Can be appointed by the court: ss233, 1323

Powers of receiver• Charge agreement usually contains powers• Court appointment has the power to do all things necessary: s420

Duties and liabilities• Receiver must exercise their powers bona fide in the interests of the

appointor: Re B Johnson • Receiver is agent of appointor: Deyes v Wood• Not subject to liability for negligence: Downsview Nominees v First City

Corporation• Usually entitled to an indemnity from the Co\

Consequences of receivership

On officers• Officers lose their power to manage the relevant property: Hawkesbury

Development• Officers retain the capacity to bring proceedings in the Co’s name to

challenge appointment of receiver: Newhart Developments

Co contracts• Receiver under no obligation to complete such contracts, and contracting

party will have remedy against the Co: Airlines Airspares v Handley