Corporations Law Summary for End of Semester

-ASIC primary body for administration of company law

-Acts as a registry for companies, auditors and liquidators

-Provides information about companies discloses documents lodged by companies

-Administrating corporations Act investigating and prosecuting breaches

Concession Theory

-Corporation is an artificial entity privileges granted by the state, argued this is more appropriate when state played greater role in incorporation

Aggregate Theory

-Another view of the corporation is that it is essentially a group of individuals. This is the predominant view of modern corporations. State is limited to assisting the efficient implementation of private dealings

Corporate Realism

-Sees the corporate as a real person significant role of the state in regulating. Argues that criminal liability and sanctions should be imposed on corporations but also rights

Types of Corporation

Limited Liability

-Almost all companies

-Liability of a member is limited by either amount owing on shares of the guarantee given by the member, once the company has received full payment for shares there is no other liability owing to shareholders

No Liability

-Unique to Australia, members are not even liable for amounts owing on shares, available only to mining companies

Unlimited Liability

-Shareholders do not have limited liability only applies if a company is unable to meet liabilities on winding up

-Proprietary company

-No more than 50 non-employee shareholders, cannot offer shares to the public s 113(3)

-Can make offers to exiting employees and shareholders and personal offer under s 708

-Breaching this may require conversion to a public company under s 165

-Can convert by passing a special resolution and lodging application with ASIC

-Less stringently regulated

-Can have sole member-director s 198E(1)

-No requirement to appoint secretary s 204A

-Large proprietary companies must produce an audited financial report and directors report on an annual basis

-Small PC 1) Consolidated revenue of less than $25M per year 2) Value of consolidated assets less than $12.5M 3) Company and entities it controls has fewer than 50 employees

-Must satisfy 2 out of 3 criteria

Small Proprietary Company

-Must meet requirements ins s 45A

-Not required to produce reports or appoint an auditor unless shareholders holding 5% require it or ASIC directs

-Do need to maintain written financial records that correctly record its position that could be audited maintained for 7 years s 286

-Aim of this distinction is to prevent public companies running business through a subsidiary and evading disclosure rules

-Proprietary companies do not need to hold an AGM

-Shareholders do not have a legally-entrenched right to removed directors (s203D does not apply). Directors can be entrenched provided replaceable rules are replaced

-Directors have a power to reuse to register a transfer of shares for any reason s 1072G (this rule is replaceable)

Limited liability

-s 516: If a company is a company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or past member

-This is explained by as a default rule inserted into every contract which the other party to the contracts can displace by contrary provisions i.e. getting a personal guarantee from directors

Separate Entity

-The separate entity doctrine enables limited liability to operate

-Assists in partitioning the company’s assets (which it can own in its own right) from the assets of shareholders and vice versa

Salomon v Salomon

-Property owned by company does not belong to its members even where they have given it to the company in exchange for shares: Macaura v Northern Assurance Co Ltd

-Causes of action belong to the company and not to the members

-Company is party to contracts, not its directors or members

-Company can make contracts with shareholders, even controlling ones Lee v Lee’s Air Farming

-Company can be a debtor or creditor of member or director

-Company can be liable in tort, either directly or vicariously Williams v Natural Life Health Foods

-Company can act as trustee

-Company are persons under s6 of the Income Tax Act

Lifting the Veil

-s 588G imposes a duty on directors to stop a company incurring debts when it is insolvent or which render the company insolvent, failing which the liquidator can apply to the court for an order that the directors contribute to the assets available for the company’s creditors 588J(1)

-s 588V applies essentially the same test to corporate groups were parent can be liable for subsidiary

Common Law

Briggs v James Hardie& Co Pty Ltd: ‘There is no common, unifying principle, which underlies the occasional decision of courts to pierce to the corporate veil’

Fraud

Re Darby: Company set up and had asset transferred at over value. Company was then floated and controllers made large profit at the expense of shareholders. Veil was lifted to remedy fraud

Re H: Defendants had been using companies to defraud tax office. Tax office was allowed to treat entire group as one entity

Evade Existing Legal Obligations

-Acceptable in law to use a company to conduct an activity that may contract future liabilities i.e. subsidiary is used to protect assets of company, cannot establish a company to evade existing legal obligations

Adams v Cape Industries: Do not accept can lift the veil in a corporate group because a group has been structured so that one member of the group may attract liability, whether or not it is desirable it is inherent in corporate law

- 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 a member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability in respect of a particular future activities of the group (and 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 matter is inherent in our corporate law

-Arguably this was not inherent in the corporate law because Adam v Cape industries was first case dealing with this issue, decided as if he was already bound Gilford Motor Co Ltd v Horne: Mr Horne had agreed when selling business he would not solicit former customers if he carried on another business. He then incorporated a company with wife and one employee as directors and then solicited customers from former business. Court found that company was formed as a device or sham to hide the fact that Horne was running company. Injunction was granted against Horne and company

Jones v Lipman: Lipman sought land and the transferred land to a company he had incorporated in order to avoid specific performance being awarded. Court held that this was a device and an order was made against the company and the defendant

ANZ Executors: Argued these cases did not lift the veil because order was made against both companies as well as the individual. Arguably this is recognising the separate legal entity doctrine but acknowledging company is involved in the fraud. Essentially this is judges arguing we do not lift the veil

Company is Under Resourced

-If capital is so manifestly short could be argued that company is an agent

Re FG Films Ltd: Company held only 100 pounds of capital could not have made movie and order was given against the parent company

Smith Stone & Knight Ltd v Birmingham Corporation: Compulsory acquisition of land, compensation was paid to the parent for the land. A subsidiary company was running a business on the land and sought compensation for the interruption to its business, despite the fact it was a separate legal entity. Court rules that had to pay compensation to the parent on the basis the subsidiary was an agent of the parent. Wrong decision Aitkens test for lifting the veil

DHN v Borough of Tower Hamlets: Factually similar to SSK later described as turning on specific statutory interpretation

Spreag v Pasen: Followed decision in Smith Stone and Knight but applied to other way to make parent liable for statements of the subsidiary, Shepherd J was at least by analogy and agent of the parent. This is wrong

Adams v Cape Industries: If you want to say subsidiary is an agent for parent must how evidence, otherwise you can always find analogy to agency that will justify lifting the veil. Simply arguing analogy would destroy separate legal personality doctrine

Statutory Interpretation

Re Bugle Press: Two majority shareholders holding 90% of shares create a new company then sell shares to the new company to take advantage on the compulsory acquisition legislation. Court reject this and make it part of interpretation to look behind new company to see who the new shareholders are.Corportate Groups

-Companies can form wholly-owned subsidiaries or acquire them, this has the effect of insulating the parent from liability in relation to business activities

Qintex Australia Finanace Ltd v Schroeders Australia Ltd

-Subsidiary definition s 46: When the parent controles the composition of the board or has more than half the votes in general meeting, or holds more than half of the issued share capital carrying a right to share in profits (this applies for the purposed of s 588V)

-Related bodies corporate s 50: Encompasses holding and subsidiary and grandparent relationships. Where companies are related they must produce consolidated accounts

-Control s 50AA: capacity to determine the outcome of decisions about the second entity’s financial and operating policies

-Companies in a group remain separate legal entities directors are supposed to take account of the interests of that company rather than the group as a whole Walker v Wimborne

Tort Liability

Briggs v James Hardie & Co Pty Ltd: It is possible to argue that the proposed general tort considerations should not be applicable in cases where injured person is an employee. It could be argued that such a person has the ability to contract around this, however, generally an employee will have no real input in determining how the business will be conducted and whether reasonable care will be taken for his safety

-Torts are externalities which must be internalised for the assumption of efficiency to hold. If this does not happen, the parent will obtain the benefits of the activities but will not bear the costs of the activity. Morever, unlike many contract creditors tort creditors cannot bargain ex ante with the

tortfeasor, cannot obtain guarantees from the parent and do not have the opportunity to check its solvency.

-General response to this is that companies will put in place adequate insurance arrangements to deal with the risk of extensive liability. If they do not put insurance in place then there might be a case for lifting the veil in the basis that the company is acting opportunistically in transferring risk of reasonably foreseeable losses to tort creditors (analogous to incurring debts when insolvent Millon Peircing the Corporate Veil. Financial Responsibility and the Limits of Limited Liability 2006

-Millon argues that limited liability should instead be limited to situations which shareholders have managed the business with due regard for bargained-for expectations and potential victims of reasonably foreseeable accidents

Civil and Criminal Liability

-Wrongs committed by companies will always be derivative in coming from an act or omission of a natural person, generally liability will be vicarious, base don the relationship between the company and the individual in question sometimes it can be held that the company acted as though it committed the wrong, which can be referred to as direct of primary liability

Civil Wrongs

-Vicarious liability of the company as an employer

-Primary Liability: Lennard’s Carrying Co Ltd v Asiatic Petroleum: A corporation is an abstraction. It has no mind of its own, its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation (organic theory)

Criminal Liability

-Rarely vicarious, can be primarily liable where the offence is committed by the directing mind and will prosecution must show that the person in question had the requisite mens rea for the offence

Tesco Supermarkets v Nattrass: Store manager incorrectly labelled goods which breached regulation. Company was not liable as could not argue store manager was directing mind and will, store manager controlled by the company not the other way around

Meridian Global Funds Management Asia Ltd v Securities Commission-Primary rules of attribution: which will generally be found in its constitution i.e. the decisions of the board in managing the company’s business shall be the decisions of the company-General rules of attribution: Like an agency and vicarious liability-Special Rules of Attribution: Required when a rule of law expressly or impliedly provides that the primary and general rules do not apply. This turns on the court’s interpretation of the statute

-This creates uncertainty but makes it easier for large corporations to be convicted does not require those at board level to have knowledge of wrongdoing

Lecture 3 Structure and Operations

-Corporate governance rules consist of two kinds of rules replaceable rules which are adopted by default and a document called the Constitution which companies can use to modify or replace replaceable rules

-Public companies must have a constitution

-Constitutions form a statutory contract (s 140(1) CA)

-135(3) Breach of replaceable rules as they apply to a company is not a contravention of the act it is contractual rather than statutory

-This cannot be enforced by outsiders Eley v Positive Life

-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

-Members are bound or entitled only in their capacity as members

-Remedy for breach of the constitution by the company is injunction or declaration not damages: Webb Distributors v Victoria

-Sons of Gwalia v Margaretic: Held that a claim brought by a member against the company under s 1041H for false and misleading conduct did not fall within the scope of s 563A. Member had bought shares in the open market from a 3rd party not from the company (as was the case in Webb). Decision was influenced by the terminology of the consumer and investor protection statutes (which applied to whole investing public) rather than technicality of case law. This decision was overruled by legislation

-One shareholder should be able to recover damages from another shareholder

-Member is confined to enforcing personal rights under s 140(1). The covers a right to vote and a right to a dividend if one is declares. Right which belong to the company must be enforced by the company. Member may be able to insist that the company’s organs be properly constituted Krans v JG Lloyd Pty Ltd: Member was able to obtain a declaration that a director was no longer entitled to act because her term had exceeded that permitted by the constitution and an injunction preventing her from acting, preventing another director treating her as a director and that a general meeting be called to enable shareholders to elect a new director

Cannot Complain About Mere Procedural Irregularity

-Procedural irregularities are generally binding because a majority in general meeting to ratify a procedural irregularity and thus Courts will not intervene

-s 1322: Procedural irregularities are prima facie valid, unless a court declares them to invalid. Will be invalid if it causes substantial injustice, if prejudiced by an irregularity can bring an action

-Defects in Quorum, defects of time i.e. not giving sufficient notice

Re Pembery: Nothing in 1322 to say that irregularity has to be accidental or inadvertent, but can still be declared invalid if a deliberate irregularity causes injustice. Do not want to encourage the notion that shareholders with control can always have irregularity

PW Saddington & Sons: If directors actually know the meeting they are convening is actually invalid it will not be a mere procedural irregularity, note long distance travelled to meetings

-Member will not be able to complain of mere procedural irregularities at common law or under s 1322. Accordingly, departures from the prescribed will not invalid unless that change the substantial way of doing things will not bce of the thing being done. The irregularity does not have to be inadvertent: Re Pembury Pty Ltd

-Validation of irregularities is possible under s 1322(4) but must meet requirement in s6(a) that the court should not make an order unless satisfied that those concerned acted honestly and that it is just and equitable that the order be made

Alteration of the Constitution

-Special resolution of the members in general meeting s 136(2), repeal may result in the replaceable rules becoming applicable to the company

-May also result in the breach of separate contracts made on the previous terms of the constitution Bailey v New South Wales Medical Defence Union

Restrictions on Alteration

-Company cannot be deprived of statutory power to alter its constitution by contracting it will not change it

-Can be made more difficult for themselves to modify the constitution in a number of ways

-Make a contract between themselves, has all the features of a regular contract, will not automatically bind new members: Russell v Northern Bank

-Using weighted voting rights Bushell v Faith

-Constitution can make for modification or repeal to be conditional on compliance with further requirements s 136(3) (4)

-Modifications cannot be oppressive or unfairly prejudicial to a member 140(2), variations of class rights have to comply with a special procedure prescribed by s 246B

Organs and Division of Responsibility

--s 198A(1) business of the company is managed by or under the directions of directors: John Shaw and Sons Ltd v Shaw

-General meeting cannot interfere in the exercise of powers vested by the Constitution in the directors. Freeing the board from shareholders facilitates more expert and efficient management does reduce accountability ‘agency problem’

General Meetings

-Members in general meeting decide by simple majority of votes cast (ordinary resolution) can require a special resolution s9 75% of votes of those entitled to vote

-Members can vote informally if all agree Re Express Engineering Works Ltd; Re Duomatic

-This does not apply if any member is excluded from the meeting even if they are not entitled to vote: Re Compaction Systems Pty Ltd s 1322 may make the informal resolution valid in any event if there is no prejudice

-Matters expressly reserved to the General Meeting altering the constitution s 136, reducing capital s 256B and C) altering company’s status, removing a director in a public company s 203D (replaceable in private companies s 203D)

-Public companies must hold AGM’s because they have an important corporate governance function s 250N. Proprietary companies do not have to but may be obliged to by their Constitution Annual reports must be made to the AGM by public companies and large proprietary companies. Small companies are exempt unless 5% of shareholders request it or ASIC directs it

Fraser and Anor v NRMA Holdings Ltd and OrsChallenge to the demutualization of NRMA. It was initially owned by its members, transferred to a corporate entity who then issued shares. Two directors challenged arguing that majority of directors were putting out misleading statements about benefits of demutualization without showing negativeWhen directors are causing corporation to communicate to shareholders, they have a fiduciary duty in giving notice of the meeting. Must provide such information as to fully and fairly inform shareholders of the detail of the meeting. Information must be such to enable members to judge

whether or not to attend the meeting and vote or leave the matter to the majority attending the meeting.

Board of Directors

-s 198A(1) provides that the business of the company is to be managed by or under the direction of directors. This is a replaceable rule includes making contracts, borrowing money, employing people, suing in the company’s name s 124(1)

-Corporations can be shadow directors if the definition is satisfied Standard Chartered Bank of Australia v Antico

-Remuneration was not provided for by Common Law must be in constitution s 202A(1) and 202B

-Directors cannot be removed by other directors in public companies s 203E

-Board takes decision by majority, and the chair has a casting vote: replaceable rule in s 248G-Quorum is two s 248F Clamp v Fairway Investments Pty Led

-Board may delegate powers of management to committees of the board to individual executives and to other s 201J 198C 198D directors remain responsible for actions of delegate

Shareholder Interference

-Generally no Automotic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame; Quin & Axtens Ltd v Salmon; John Shaw and Sons Ltd v Peter Shaw and John Shaw;

Howard Smith v Ampol Petroleum: Directors within their management powers, may take decisions against the wishes of the majority shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office

-Shareholders can use 203C/D or pass special resolution to alter ConstitutionAutomatic Self Cleansing Filter System v Cunningham: Shareholders passed ordinary resolution to sell the company’s business. The board refused to sell. Held a majority at the general meeting could not force directors to act they are not the agents of the shareholders

Proliwka v Heven Holdings no 2: Power of members to bind the company rests on the Constitution board is given management power, general meeting cannot take on this power even if they act informally and with unanimity

Bodikian v Sproule: Members acting unanimously do not have any more power than they have under the Constitution

-If the directors are deadlocked general meeting gets power to decide: Barron v Potter

-This has been interpreted narrowly Massey v Wales: If a general meeting has power to appoint directors or remove directors there will not be deadlocked must appoint or remove director

Corporate Contracting

-Corporate capacity s 124(1) company has legal capacity and power of individual exercised via s 198A

-s 124(1) legal capacity is not affected by the fact that it is not in the interest of the company to do something (reflects a removal of the ultra vires requirement 3rd parties don’t have to inquire into operations of a company)

-Object clause s 125(2): Act of company is not invalid if it is contrary to actions outside of the object clause-s 130(1) abolishes doctrine of constructive notice-Constitution operates as an internal constrain i.e. directors act outside of the objects clause could lead to 1) Breach of duty of care could be sued by company (s 198A)2) Breach of duty to act in good faith / proper purpose3) Implied duty of care under statutory contract4) breach of s 141(b) contractual duty to observe constitution as it applies to them5) oppression s 232

-Implied limitation based on intention of parties in establishing the company this can lead to winding up or oppression Strong v J Brough and Son: will not infer common understanding just because a single type of business had been conducted for years.

-Common understanding: Substratum of the company’s affair is gone then any member could partition the company for winding up. Should not be readily assumed that company will stick to one business model

-Resolution of the general meeting is a resolution of the company historically based-Decision of the board under s 198A is a decision of the company, action of the board becomes action of the company. Little difference between saying directors are an organ or are agents with unlimited authority

-Constitution may also give power to a governing director means they can act as the company Whitehouse v Carlton Hotel

-s 198C directors may delegate control to a managing director -s 198D may delegate any powers to any other person-Act of delegate would suffice to be an action of the company-Managing director has to be an agent as they cannot unlimited authority. If managing director is an agent then company only bound by actions within the power of a managing director

-Third party dealing with a managing director need to be sure transaction is authorised by the board

-Generally a question of agency does not cause problem as long as acting within the normal practice of an agent in that role activity will be authorised

-Company can be bound by express or implied actual authority.-s126 Allows company power to contract to be made by an individual acting with express or implied authority of the company

Actual Authority

Actual authority is an internal matter-s 126 allows an individual acting with authority to make, ratify or discharge a contract on behalf of the company, this can be express or implied by the acquiescence of the board or other person with actual authority

Implied Actual Authority

Healey Hutchinson v Brayford

-Consent of board members + communication by words or conduct of consent to each other + agent

-The authority that is delegated depends on what was being said/done during the consent of directors, could be implied authority to do task or act in a position (i.e. Managing Director)-Appointment to a position of a standard kind i.e. MD will have the authority usually given to that position

-If an agent is appointed to carry out certain tasks, the authority will include authority to do whatever is necessary or normally incidental to those (incidental authority)

-Appointment to a position of a standard kind which involves acting for the appointor gives authority to do things usually done by a person in that position (usual authority)

-Managing Director: s 198C, 201J usual authority to deal with everyday matters, to supervise the daily running of the company, to supervise the other managers and indeed generally be in charge of the business of the company’: Entwells Pty Ltd v National and General Insurance Co

Green v Meltzer: MD has authority to borrow to deal with cash flow problems, not authority to invest in large capital procedures, instruct solicitor to act in a trading dispute not an internal corporate dispute

-Individual Director: No usual authority to bind the company Northside Developments Pty ltd v Registrar-General

-Only have power to join with other directors to make decisions. To bind company need either express authority or acquiescence

-Company Secretary: Usual authority to make contracts with respect to the administrative needs of the corporation Donato v Legion Cabs (trading) Co-Op Society

-Other Agents: Question of fact draw on evidence of commercial practice to see what other people in similar role customarily do AWA Ltd v Daniels

Apparent or Ostensible Authority

-Operates as a form of estoppel, where a company has made a representation to a party that an agent has authority cannot later deny this

-Actual authority is an internal matter ostensible authority is an external matter

Freeman & Lockeyer v Buckhurst Properties (Magnal) Ltd-Company has 4 directors, get property for development. Kapur (director) engaged architects without board approval. Company was still bound because board knew that Kapur had effectively been running the company, employing agents etc. By its conduct in allowing this to happen company showed that Kapur was effectively the Managing Director

-Diplock J: 1) Representation must be made to the contractor that agent had authority to enter into a contract of the kind entered. Conduct of company over a course of dealings

2)The representation must have been made by a person or persons who have actual authority to manage business generally or specific matters to which the contract relates. ‘The making of such a representation is itself an act of management of the company’s business.

3) 3rd party must be induced by representation / rely on representation

4) Was a condition about capacity of 3rd party but really part of inducement would a reasonable person rely on the representation

-Arguably apparent authority will still be needed in situations where s129(3) does not apply, and will also presumably be needed to interpret the statutory provisions

-Difference between acquiescence and ostensible authority is positive communication between the board. Generally these two will both occur. Generally ostensible authority is broader than actual authority. Actual authority may be X but is acting in the world as managing director gives all usual authority of a managing director which may exceed X

Crabtree Vickers v ADMA-Peter Mcwilliam purports to enter into contract on behalf of ADMA to purchase printing press from Crabtree. PW was no longer a director of the company as he had declared bankruptcy and had no

designated place in company. Question was did the MD have the actual authority to make representation that PW had authority to enter into the contract. MD had made this representations and the contract was of the type one would assume the MD would have authority to enter. -Finding of fact in a lower court that MD did not have actual authority and the 2nd leg of the test in Freeman & Lockeyer was not satisfied-On the facts the directors had authority but did not make representation as one did not consent-Did not have Ostensible authority and claim by Crabtree failed

-s 129(3) person may assume that any one held out to be an officer or agent of the company has been duly appointed and has authority to perform duties customarily carried out by an officer or agent in that role enacted after Crabtree Vickers and would have changed decision in that case

-s 198E sole director or shareholder can bind company to anything

Indoor Management Rule-Before doctrine of ostensible authority-Basically aimed at giving protection to innocent 3rd parties Turquonds Case-Company held to be bound by bond signed by 2 directors + company secretary. Argued that could not be bound as it was not allowed under the company’s constitution-Lender relied on documentary evidence saying had been approved by the General meeting-Someone dealing with the company had to do no more than read the Constitution to understand further stipulations-Allows third parties to assume that internal rules have been complied with provided that there is some evidence of procedure being followed-Could be documentary record or representation of someone with actual authority (Northside)

-Rationale is that outsiders do not have access to the internal machinery of the company. Internal procedures may be required by law or the constitution e.g. as to proper appointment of directors or general meeting approval of specific transactions.

-The company must do something to create an impression that the person was its agent or that approval was given as the case may be

Houghton v Northard Lowe & Wills-Ordinary director cannot make binding contract with 3rd party cannot assume that director has actual authority. Mere possibility of having authority is not enough

Put on Inquiry

-Cannot presume in own favour that things are rightly done if inquiry that he ought to make would tell him that they were wrongly done Morris v Kansen

Northside Developments v Registrar-General

-Director of company Y and Directors Son witness seal, not in compliance with constitution-Lender could not rely on the indoor management rule because it was put on inquiry because transaction was not in interest of Y unrelated to Y’s business and of no benefit to Y

Statutory Limitations

-s 128-129-Statutory restatement + modification of the common law (exists alongside common law) -s 128(1): Person is entitled to make assumptions in s 129 in relation to dealings with a company. Dealings dealt with broadly in Story v Advance Bank

-s 128(3) 3rd party can make assumption even if officer or agent acts fraudulently or forges a document (changes common law)

-s128(4) Not entitled to make assumption if at the time of dealing they knew or suspected assumption was incorrect. This is more generous than common law

-s 129(1): Can assume that constitution/corporations as have been complied with (still need some evidence of this)

-s 129(2): Any persons provided by the company that is available to public from ASIC to be a director has (a) been duly appointed (b) has customary authority of that position-This won’t apply to people who have not been held out but by allowing the person to act

-s 129(4): A person may assume the officers and agents of the company properly perform their duties in relation to the company Pico Holdings Inc v Wave Vistas Pty Ltd

-s129(7): Officers or agent with authority to warrant that document is a genuine or true company document

Lecture 5 Directors’ Duty

-Under 198A directors have power to control assets which gives scope for fraud or mismanagement

Director Fiduciary Duty (by analogy with trustees) The

Director Duty of Care (Negligence) Corporate

Director Statutory Duties (s180-183 doesn’t limit CL) Entity

-Duties are owed to the company not to the shareholders individually**

-Company has cause of action against director/s

-Rare for directors duties to come into play in relation to large Public Companies. Generally only when ASIC brings an action against directors for harming the public interest

-In small companies more likely to be raised as an issue of minority oppression, breach of duty will be the substance of the complaint. Directors ignoring duties will be evidence of oppression

-Duties are a system of standards imposed on actors, beneficial because they do not require exhaustive lists of do’s and don’ts allows directors to have a broad discretion against which actions can be judged

-Statute imposes standards as well as specific and detailed rules, which arguably have already been dealt with under directors duties

-Arguably detailed rules provide better guidance as to what is and is not acceptable

-Cases tend to be fact heavy long exercises in fact finding and little on application, don’t really set precedents

Corporate Litigation

Director Breaches Fiduciary Duty Company Should Board sue under 198A

Company Sues Director for loss Remedy Company

Breach of Statutory Duty

-Company sues director for compensation under s 1317J(2)

-Director then has to pay remedy under s 1317H

-Generally you would sue under common law or equity only under statute when involving ASIC generally

Minority Shareholder Action

Director Breaches Fiduciary Duty Company Board Decides not to Sue

Minority Shareholder Applies to court Brings a derivative action in company’s name If successful then director remedy Company

-If director is negligent majority of shareholders can ratify negligence

-Any remedy goes to the company not to the minority shareholder, minority shareholder more likely to bring action for oppression under s 232 (allows buying out)

Fiduciary Duty

-Imposed on directors by analogy with Trustees and Agents

-Fiduciary duties arise where one party is acting for another and has power to harm the Principal

Regal v Gulliver

-Directors of a limited company occupy peculiar position, some respects resemble trustees, some respects agency, some respects managing partner

-Directors are viewed as a sui generis fiduciary of the company as a separate legal entity. Fiduciary duty gives directors the flexibility to manage the business, take risks and respond to changes in the company’s environment, but constrains them where they are in a position in which their self-interest and the interests of their principal conflict, where they are acting for improper purposes.

-Directors are expected to take entrepreneurial risks but may be liable if the misapply corporate assets

-This duty is different though because they should take some risks to produce return on investment: Daniels v AWA

-Individual directors are not automatically authorized to act as agents

-Directors are a sui generis fiduciary of the company

-This duty gives the directors flexibility to take risks restricts them where they are acting for improper reasons or for personal reward

Business Judgment Rule

-Courts will not get involved in the ordinary decisions of the company

-Directors must act bona fide in what they may consider in the interests of the company not what a court considers in the interests of the company: Good faith requirement

-Courts do not review substantive merits of a decision

Re Smith and Fawcett Ltd: The directors of a company must act ‘bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose

Harlow Nominees: Directors may be concerned with a wide range of considerations and as long as judgment is exercised in good faith and for proper purposes the court will not review the decision

-Carlen v Drewery 1812: Court’s not to be required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom

-Lord Wedderburn: Majority rule is the justification of the courts not to interfere, whatever the ordinary majority of members can ratify is outside the scope of the court

-If a decision is completely eccentric and one that not any board would take the Court may decide it was not taken to be in good faith. Only the careless or naïve director is likely to leave evidence of this

-s 180(2): Business judgment rule, applies only to statutory and common law duty of care

Common Law Duty of Care

-Arises in common law and in equity

-When they owe a duty of care in equity it is not a fiduciary duty, it just means that if it is breached directors pay equitable compensation

Permanent Building Society v Wheeler: Not part of a duty of loyalty, in content the duty to exercise reasonable care and skill are, in content, the same

Statutory Duties

-Co-exist with common law duties

-Arguably may be more visible to directors…

-Form part of a regulatory scheme which is enforced by ASIC

-Company can chose whether to sue its directors under common law duties, or to bring an application for compensation for breach of the statutory duties: s 1317J(2)

Action by ASIC

-If there are large numbers of dispersed shareholders then ASIC can step in to enforce duties in the public interest

-Director Breaches Statutory Duty Company s 50 ASICA brings action in company name Director Compensates Company

-ASIC 1317J action declaration of contravention Director

-IF a contravention of civil provision found director may be disqualified s 206C ordered to pay pecuniary penalty s 1317J or ordered to pay compensation to company 1317J

-Company can apply for compensation under s 1317J(2) whether or not a declaration is made, will still have to prove statutory duty has been breached

Who Owes Duties

-Duty’s are owed by directors and senior executives. This may vary depending on the nature of the office and their service contract; also persons who knowingly assume office of director without having been properly appointed CAC (NSW) v Drysdale

-CAC v Drysdale: Applies to de facto directors who accept the position of director without being appointed

-This is not always straightforward, what functions are essence of a director

Grimaldi v Chameleon Mining: Can be very difficult on the facts to decide if someone has been behaving as a director. In this case had unlimited discretion to negotiate a large contract, engaged in board meetings involving restructuring etc

-Statutory duties apply to directors (s 9 includes de facto and shadow directors. Officer s 9 includes directors and secretary, receiver, liquidator etc, persons who make or participate in decisions which

‘affect the whole, or a substantial part of the business of the corporation’ or have ‘the capacity to affect significantly the corporations’ financial standing’

-Do not apply in common law, common law does recognize de facto directors

-s 588G applies to directors only

-s 180-183 applies to directors and officers

Australian Standard Bank v Antico

-One company was shadow director of another company. Pioneer through its group arrangement was the largest shareholder of giant. It was allowed to put 3 of its nominees on the board of Giant. This on its own was not sufficient to make a shadow director (National Mutual Life). Pioneer was found to be liable for Giant trading while insolvent. Pioneer had effective control given others only had small shareholdings. Had actual control over management and funding, had power of approval over payments, also required that Giant produced financial reports in line with Pioneer’s own requirements.

-Pioneers level of control after funding Giant should willingness to and actual control over the board of Giant.

-Directors are customized to follow decisions of a shadow director

Who do they Owe Duties To?

-Directors owe duties to company as a separate legal entity: Percival v Wright

-This means that they can only be enforced by the company and not by individual shareholders:

-Directors may come to owe duties to other people if they assume responsibility to them, may incur a duty of care to a shareholder or a creditor Peskin v Anderson; Allen v Hyatt; Coleman v Myers;

-What is required for a duty to arise on the fact is: shareholder dependency; relationship of trust and confidence (or position of advantage); significant transaction and positive action taken by directors. However, it is important to note that such cases are the exception rather than the rule

Glavanics v Brunninghausen

-Mr. Glavanics owed 1/6th of shares Brunninghausen owned 5/6th of shares. B was actively involved in management. Mr. B was approached by a third party to buy companies business B did not disclose this to G. G then sold his shares to B without knowing that company was going to be sold. It was held that in the circumstances there was a fiduciary relationship B owed to G based on the personal dealings between them. Sale was a personal dealing, fact there were only two shareholders. G was totally dependant on B for information and management.

-On Appeal held that fiduciary duty to a shareholder can exist as long as duty to company is not conflicted. If there is conflict duty to company must come first. B preferred own interest over G by not disclosing negotiations about sale

-Shareholder dependence

-Trust and confidence, reliance for information

-Personal relationship

-Action taken by the director

-Directors have a position of privileged position of information and should share this information.

-These cases are exceptional very rare for a director to hold a personal fiduciary to a shareholder

Duty of Care Skill and Diligence

-Before 1990’s it was rare for directors to be held liable where companies were solvent

-Since 1990’s there have been cases brought by ASIC which have changed this

-As directors have become more professionalized the standard of care and skill has increased

-This question is further complicated by the idea of Executive and Non-Executive directors

-The law sets a clear standard difficulty is finding the fact to determine if standard has been breached

Re City Equitable Fire Insurance

-Managing Director committed fraud and caused losses to the company, other directors sued for lack of care and diligence

-Director should take such care as a reasonable person would on their own behalf. What would a reasonable person with the knowledge and skill of the defendant have done when acting on their own behalf (Re Brazilian Rubber Plantations)

Skill: Conduct should be assessed against a skill standard: what would a reasonable person within the knowledge and experience of the defendant have done in the circumstances if acting on his own behalf . Do not have to have particular skills but if they do they should use them for the benefit of the company (Re Brazilian Rubber Plantations and Estates Ltd). Under the influence of 588G an objective standard of skill, albeit rather minimal, is expected of executive directors in relation to financial affairs of the company (Commonwealth bank of Australia v Friedrich)

-Diligence: not bound to give continuous attention to affairs of the company. Duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so’

Delegation and Reliance: In respect of duties which may be properly left to some other official the director is unless grounds for suspicion justified in trusting that official to perform such duties honestly. Have to rely on the conduct of others but should identify situations where this is dangerous

-Since company size has increased delegation has increased

Commonwealth Bank v Friedrick

-Objective standard for skill: Director is to be expected to understand company’s affairs to reach a reasonable opinion as to company’s financial state, should be reasonably abreast of company’s affairs and reasonably abreast of the actions the company is taking

-s 588G seems to be influencing the standard expected from directors

Dorchester Finance v Stebbings

-Two non-executive directors who were chartered accountants were liable for leaving an employee in charge of signing black cheques

AWA v Daniels

Rodgers relied on test of Roma J in city finance for delegation

Daniels v Anderson

-NSWCA found a more onerous duty on non-executives in terms of relying on delegates

-Developments under the Statutory Duty

-Extension to officers 180(1)

-ASIC v Rich: ‘arrangements flowing from the experience and skills that the director brought to his or her office, and also any arrangements within the board or between the director and executive management affecting the work that the director would be expected to carry out. The precise duty of care flowing from these arrangements would be subject, of course, to a minimum standard of care and diligence set by the statute in reflection of the common law position’

ASIC v Rich: Responsibilities include the factual arrangements operating within the company includes arrangements flowing from the experience and skill director bought to office

ASIC v Adler: Under statutory standard directors are to be expected with business of the company, stay informed, remain familiar with financial position of the company with regular review of the statements

-Statutory standard doesn’t use the word skill but this should not make any difference: Anderson v Daniel

Non-Executives

-In listed companies ASX principles require that majority of the board should be non-executive, chairman and chief executive should be different people, should monitor what the executives are doing, contribute to high level policy formation

-Law has found them difficult to deal with because distinction between executive and non-executive is not a legal distinction, duties are owed whether part-time or full time

-Executives work full time they will have the skills of a reasonably competent person in that category ASIC v Vines there is a minimum implied standard which may be raised by the employment contract.

ASIC v McDonald (no 11): Law has not yet established the extent to which non-executive director shapes level of care and skill

Daniels v Anderson; AWA v Daniels

-Employed a person trading in foreign exchange trading and causes significant loss. Company also employed Managing director who was inexperienced who do not effectively oversee the employee. Another full time executive Hook and Non-executives who relied on MD to exercise oversight over the employee.

-Company auditors failed to bring to the boards attention the inadequate controls over the employee which if they had brought to the attention of the directors they may have changed position. Sued Auditors for failing to raise this, auditors claimed contributory negligence on part of non-executive directors and a claim for contribution form chairman and non-executive that there lack of skill caused loss

-Question for the court was were the non-executives liable, the chairman chief executive was liable was not able to rely upon MD. The non-executives were able to rely on the senior managers and were not liable. Board of a large corporation cannot manage the day to day business they rely on managers to do this, business could not to this if directors cannot trust those employed to do the job. If they had check everything there would be no delegation

-Executives were supposed to make enquiries and report to the board and to the auditors

-NSWCA reject distinction between non-executives and executives, found the non-executives to be not liable however said directors should be familiar with how the company is run directors should take reasonable steps to be put in the position to guide and monitor the management of the company. The board of AWA met only once per month for half a day, should meet as often as required to carry out function. S 1318 gives court ability to relieve directors, in this case it was not unreasonable for the Non-Executives to rely on senior management.

-Non-executives perceived as needing to take a more proactive approach to monitoring by referring to what they ought to know: ‘in our opinion the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company’

-s 198D: brought in to allow delegation

-s190: executives responsible for the actions of delegates

-s190(1): If directors delegate power director is responsible as if they have exercised themselves

-s190(2): Will not be liable if they believed on reasonable grounds that duty would be exercised lawfully by the delegate. They believed on reasonably grounds and good faith and after making reasonable inquiry that the delegate was competent

-s189: Directors will have acted reasonably if they rely on information given by employees etc. To rely they have to act in good faith make an independent assessment of the information or advice.

-s189 provides stronger defence to directors

-Independent assessment: as long as they have thought about it that will suffice, unless there are situations indicating they should look into further

ASIC v Rich: Responsibilities went further position he was in and the skills he brought raised his standard

-s 189 – 190: Introduced after NSWCA decision, 189 deals with reliance, allows director to rely on information or advice provided by others and if the reliance was in good faith and after making an independent assessment the reliance is deemed to reasonable unless contrary is proved.

-s 190: If you delegate power under s189D you are responsible defence s 190(2) believe on reasonable grounds and in good faith after making proper inquiry delegate was liable

ASIC v McDonald; Morley v ASIC

-ASIC brought proceedings against non-executive directors of James Hardie for approving a press release which said that the James Hardie Foundation was fully funded. This was not correct.

-ASIC brought negligence proceedings for approving a statement which they should not have done if they were acting reasonably. Gazelle J argued that there are matters which the board cannot delegate. This statement was crucial to the re-structuring of the James Hardie Group. This prevented delegation to expert advisors, employees etc.

-Board could not rely on this as management had sought the board’s approval. None of the board were entitled to abdicate responsibility

On appeal Morley v ASIC

-ASIC failed to call a key witness Court was not convinced that Board had actually approved

-Dicta: If this had gone before the board it was a board matter for James Hardie, non-executives had to turn their mind to the press release. While the case was overruled on the facts, the principle of some non-delegation was affirmed

Statutory Business Judgment Rule

-s180(1): Duty of care

-s180(2): Business Judgment Rule (applies to all duty of care)

(a) Make judgment in good faith for a proper purpose

(b) Do not have a material personal interest in the subject matter of the judgment

(c) Inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate

(d) Rationally believe that the judgment is in the best interest of the corporation (belief will be rational unless it is one that no reasonable person in their position would hold)

ASIC v Adler

-Directors of HIH attempted to rely on 180(2) all failed

-1st had a material interest

-2nd did not act in good faith

-3rd

-Santow J: It would be strange if ASIC had to prove negligence and also show that the decisions was not in good faith etc. The burden of proof is on the defendant seeking to gain the benefit of s 180(2)

ASIC v Macdonald: The provisions act cumulatively when attempting to rely on the business judgment rule. Mr Macdonald gave no evidence to show he rationally believed in that the judgment was in the best interests of the company and appeal to s 180(2) must fail.

-ASIC v Rich: Does not entirely replace common law business judgment rule which is an inherent part of determining when there is a breach, the reference in (d) to rationally believes may be viewed as exonerating decisions which may not be considered reasonable at common law. A decision could be rational if it is based on reason or

-Directors belief that a particular cause of action was in the interest of the company must be supported by a chain of reasoning even if the reasoning is floored

ASIC v Fortescue Metals Groups

-ASIC alleged that disclosure had not been made by Twiggy Forrest.

-The decision not to disclose elements of a contract is not a business decision it is a breach of listing rules, which is of itself illegal

Directors Duties 2: Equitable or Fiduciary Duties

Re Smith and Fawcett: Directors must act bona fide in what they consider to be in the interests of the company and not for any collateral purpose. Now embodied in s 181

-Directors were refusing to register a share transfer, court found they were acting in the interests of the company

-s1072(g): replaceable rule which allows directors of prop company to refuse transfer of shares for any reason

-s 181: Codification of good faith and proper purposes at common law, removal of the words ‘in what they consider’ and insertion of the words ‘best’ interest of the corporation

-Common law is subjective and even the re-wording of s 181 will not allow objective review of ‘best’ interests

Lagoorley v McCan: Court did not distinguish between good faith and interests of the company

Good Faith

-Genuine belief that a decision is in the interest of the company

-Test is largely (though by no means entirely) subjective. Objective considerations relate back to the question whether the directors honestly believed the transaction to be in the best interests of the company, not whether (regardless of what the directors believed) it did not benefit the company: Bell Group v Westpac Banking Corp

-If it can be shown that it is totally unreasonable for directors to make that decision court may overturn it

Hutton v West Cork Railway Co: Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational

-Bell Group: Owen J, decision is one no reasonable director could make, court may draw the conclusion they were not acting in good faith

-An action taken other than in good faith in the interests of the company will be voidable at the instance of the company, although a contract made with a third party will only be voidable if the third party knew or had notice of the director’s breach of duty

Interests of the Company

-This includes the interest of current shareholders as well as future shareholders, this allows companies to make long term investments i.e. re-investment. Current members include both majority and minority shareholders decision in favour of the majority at the expense of the minority will breach this duty: Ngurli Ltd v McCann

-Interests of business are almost entirely aligned with the interests of the shareholders as a whole

-A decision to benefit majority at expense of minority will be a breach of this duty

Interests of Creditors

-Liquidator can bring proceedings for insolvent trading

-Action for misfeasance (breaches of duty)

-Company has a duty to consider creditors when company is nearing insolvency Walker v Wimborne, Kinsela v Kinsela

Walker v Wimborne: Company must take account interests of shareholders and creditors, failing to take into account interests of creditors will have adverse consequences

-Directors 198A Asiatic Pyt Ltd Payments to other companies which directors also controlled

-Asiatic did not own any shares in the other companies, simply in return for an implied promise to repay.

-Directors were not respecting the separate legal entity of the companies

-Asiatic became insolvent, liquidator brought misfeasance proceedings

-Directors must take account of interests of shareholders and creditors, this policy was based on total disregard for the interests of the company and to its creditors

Kinsela v Russell Kinsela Pty Ltd

Directors of company were Mr and Mrs K transferred property to company Company grants lease to Mr and Mrs K

-Mr and Mrs K as shareholders ratify the decision to transfer lease

-Company becomes insolvent Liquidator brings misfeasance action

-Shareholders cannot ratify decision to act not in the favour of the company where this could affect creditors. Where the loss would only affect the shareholders they could unanimously ratify

-Duty can only be enforced by the company, creditors cannot sue directors

-Duty is defined in broad terms: insolvent when it granted the lease, the lease was granted for the purpose of moving assets out of the reach of creditors. The plainer it is that the creditors money is at risk the more likely directors will be in breach of duty

‘It is in a practical sense their assets and not shareholders assets that, through the medium of the company are under the management of the directors pending either liquidation return to solvency or the imposition of some alternative administration

Grove v Flavel: Duty to consider creditors when company is approaching insolvency, must take care of creditors when directors have information that company faces a ‘real’ risk of insolvency

Chater Bridge v Lloyd’s Bank: Where directors have not applied their mind to the interests of the company the court will use an objective test

-Directors can take account of the interests of employees as long as the company is a going concern. This can be done because it is capable of producing a return for shareholders

Hutton v West Cork Railway: Directors decided to take all employees to the zoo, this was challenged as not in good faith, was this reasonably within the incidental interests of the company. The law does not say there is to be no cakes and ales, but there can be cake and ale to the extent it will be in the interest of the company

-Employees are not an end in themselves but an aspect of producing profitability

Woolworths v Kelly: Company may be generous with whom it deals, it can do more than it need do if it is for the benefit or the purposes of the company, it may allow company to attract better directors etc. It may be felt appropriate that the company acquire the reputation of being such. Similarly, it

may be generous to its directors, in providing large fees or attractive pension funds or the like, but essentially only if it be the means adopted by it of attracting good directors to its service or securing the best performance by them.

-Essentially this is a business judgment

Park v Daily News: Company was being wound up and it proposed to make an ex gratia payment to employees who were going to lose their jobs. Motivations were not recognized as being within the interests of the company. Not possible that the payment to the employees could be a benefit for the company because company was being wound up

-If there is no possibility of a benefit to the company there will be a breach of the duty to act in good faith

Nominee Directors

-s203(c) is a replaceable rule, i.e. holders of a class of shares may be able to appoint, creditor may be able to appoint a director

-A nominee director must act in the best interests of the company rather than in the interests of his appointor: Bennett’s Board of Fire Commissioners NSW

-A nominee director has to act in the interests of the company, subject to the same duties as other directors, where there is conflict have to prefer the company or resign Scottish Co-op Whole Sale Society v Mayor

Kuwait Asia Bank EC v National Mutual Life Nominees Ltd: Nominated to employees to board of another company, they had to fulfil duties could not plead duties given by bank as defence. Appointer would not be vicariously liable for actions of nominees (exceptions for fraud or bad faith)

-On the facts if a nominator is exercising enough influence could be a shadow director (s9)

Corporate Group

-Each company has its own interests, even if it is wholly owned by another company, the interests of the company are those of the shareholder, if a shareholder is parent company can run the subsidiary in the interests of the parent.

-This will only be a problem where creditors become involved. If subsidiary is not wholly owned could raise minority issues

Charterbridge Corp Ltd v Lloyds Bank Ltd: Decisions will tend to be taken in the interests of the group rather than the separate entities involved, and refused to strike down decisions simply on the basis that the directors had failed subjectively to consider the interests of the separate entity: he preferred an objective test asking whether an intelligent and honest person in the position of the directors could reasonably have believed that the transaction was for the benefit of the separate entity

Walker v Wimborne: Subjective approach, insisting on principle that ‘each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult

its interests and its interests alone in deciding whether payment should be made to other companies. Transactions should be viewed from the standpoint of company to which duty was owed and judged according to the criterion of the interests of that company

Equiticorp Finance Ltd v Bank of NZ

-Equiticorp Payment Uruz Pty paid bank

-Liquidator brought action against directors for not acting in good faith in the interest of equiticorp

-Directors argued they didn’t think about, objectively it could be that the payment was for the benefit of the company because bank finance was made available by the payment. It was in the interests of Equiticorp to pay money to ensure it would have access to bank finance

-NSWCA: Transaction benefited group as a whole, Walker v Wimborne principal can be removed where interests of the group are taken into account

-Where directors have failed to consider the interests of the relevant company they should be found to have committed a breach of duty. If, however, the transaction was, objectively viewed, in the interests of the company then no consequences would flow from the breach. Such an inquiry would not require the court to consider how the hypothetical honest and intelligent director would have acted. It would accept that a finding of breach of duty flows from a failure to consider the interests of the company and would then direct attention at the consequences of the breach

-This case is a relaxation of the idea that each company has its own interests

Proper Purpose

- s 181(1)(b): Most cases have concerned the use of Directors fiduciary powers 124(1) and 198A to issue shares in order to affect the outcome of an unwelcome takeover

This is now regulated by chapter 6 of the CA. S 695B prevents parties to a takeover bid from launching proceedings in relation to a takeover bid while the bid is underway. Disputes resolved by the takeovers panel, rather than looking for the purpose for which the board acted the panel reviews whether there were unacceptable circumstances under 657A(2)

-Most of the cases in this context arise because of issuing of shares to someone who will not sell to a takeover

-Takeover: One company attempts to buy all the shares in one company to then replace the directors and control the company

-Acting for the purpose of defeating a takeover would not be a proper purpose

-What was the purpose of making a decision using 198A power?

Re Smith v Fawcett: Directors should not exercise their powers for any collateral purpose. They must have regard to those considerations and those considerations only, which the article on their true construction permit them to take into consideration

Hogg v Cramphorn Ltd

Target Board Target

Bidder Hostile Bid Target Shareholders

Target Board Management power Target issue shares to employee trust

-Generally there is probably nothing wrong with establishing an employee trust (Kelly v Woolworths)

-Board then appointed themselves as trustees of the employee trust, this was challenged by a shareholder as being for an improper purpose (i.e. preventing bidder from taking control of general meeting)

-Buckley: Directors were not motivated by personal advantage; they had an honest belief that establishing a trust would benefit the company as would avoiding the hostile takeover. On the facts, however, manipulating the voting procedures to ensure that directors retained control. It was not open for the directors to argue that giving themselves a majority shareholding .

-Directors were not acting dishonestly but the primary purpose for creating the trust was to defeat the takeover, which was interfering with the general meeting. An action for an improper purpose is voidable, and exceptionally it is a duty also owed to individual shareholders as it affects s 140 right of not having their voting rights diluted

-Clearly distinguished proper purposes test and the good faith test

-This means that breach of this duty can be sued by individual shareholders as it infringes s 140 right to have voting right undiminished by improper action: Residues Treatment v Southern Resources no 4

-Rights will be diluted if it is in the interests of the company, not because the directors deem it necessary for some other purpose

Howard Smith v Ampol Petroleum

Bidder Hostile Bid Target Shareholders

Target Board Target Issues Share Friendly shareholder

-Board knew that the friendly shareholder would not accept the bid and would side with the directors. Impossible to list proper purposes but each case must be examined with hindsight

1) What was the purpose for which the power was actually used? On the face of the transaction it is totally legitimate, this is a question of fact. Not what effect did the power have but what was the purpose for doing it

-At first instance Judge found that this was exercised to avoid take over would need some documentary evidence as to the intention of the directors

2) Is that purpose a proper purpose? Too narrow to say only valid purpose for issuing shares is to raise capital, but it is one proper purpose. Another may be promoting an employee share scheme (if

that was your purpose) Improper Purposes: preventing decision of takeover bid, retaining control of the company, gaining control of the company, diluting shareholding

Purposes for which the Power was actually used?

-Question of fact and the findings of the judge at first instance will be crucial Advance Bank Australia Ltd v Fai Insurances Ltd

-Court will not invalidate the decision if they believe it had a legitimate commercial motivation Teck Corp Ltd v Millar; Darvall v North Sydney Brick and Tile Co Ltd

Was that Purpose a Proper Purpose?

Kokolavic v Wellington: MD issues shares to dilute holding of Wellington

Might be Constitutional provision dealing with it Whitehouse v Carlton Hotels: Articles of company could be so framed they conferred on governing directors a purpose for diluting shareholders. If a constitution does not provide Court will have to draw own conclusions based on conduct of the company

-Proper purposes can include; raising share capital and (perhaps) promoting an employee share scheme; improper purposes will include preventing the shareholders from deciding on the outcome of a takeover bid, retaining control of the company and diluting the vale of another shareholder’s interest.

Advance Bank Australia v FAI: NSWCA Kirby J, question about motivation is not immediately obvious, here directors were restricted from using companies resources to have themselves re-elected. They were acting in good faith throughout, they believed it was in the interest of the company for them to be re-elected. Requires scrupulous conduct where there could be a risk between improper purpose. Directors used emotive language which was not factual

-Based on conduct it was not something which could achieve the purpose of the company

Mixed Purposes

Mills v Mills: Court should look to the substantial object the accomplishment of which formed the real ground of the board’s action

Whitehouse v Carlton: allotment will be invalidated if the impermissible purpose was causative. If the power would not have been exercised but for the improper object

Fiduciary Duty To Avoid Conflict of Interest 1: Direct Interest

-Directors must not have a personal interest (or engagement with a third party) which conflicts with their duty to the company except with the company’s fully informed consent.

-A company director enters into a contract with a company they direct

-Company is entitled to the advice and participation of every director in decision-making, This cannot occur where the director appears on both sides of the transaction in question. In this situation the

director should make disclosure of his interest in any contract to the general meeting who should approve the contract by ordinary resolution Woolworths v Kelly

-Directors must not have a personal interest or an engagement with a third party which conflicts with their duty to the company except with the company’s fully informed consent

-s 194 (replaceable rule): Disclosure to the board will suffice in proprietary companies, public companies disclosure to the general meeting will be required, unless constitution provides specific rule allowing disclosure to the board instead s 195

-s 191 imposes criminal liability to a director if they do not disclose to the board

-At common law has to be disclosure to the General meeting for a Pty Ltd

Indirect Interest

Director of X Ltd Shareholder in Y Pty Ltd Y pty Ltd Contracts with X Ltd

-Director has interests on both sides of the transaction as a director of X and shareholder of Y

-s 195: Director of public company with a material personal interest must not vote on the matter or be present when it is discussed. Breach of s 195 does not end the agreement. Public companies need to have a written element of their constitution requiring disclosure to the board (do not get benefit of s 194)

-If they do not have a provision common law disclosure to the general meeting

Competing Directorship

-No requirement that a person cannot be a director of two competing companies Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd.

-If you do direct two competing companies making a decision for one may detriment the other, executive directors are generally banned by service contract, non-executive generally will have to resign from one company s 191 disclosure obligations

Rule 2: Cannot Misappropriate

-Director must not misappropriate the company’s property for their own or a third party’s benefit

Mordecai v Mordecai

-Directors cannot take remuneration or other benefits from the company unless authorised by law, the constitution of the fully informed general meeting 202A(1). Director remuneration is different from executive pay (which is set by the board under 198A)

-Duty only really becomes problematic at boundary, how do we know when directors have taken the company’s property

Cook v Deakes

-Court treated contract which had not been concluded as the property of the company which had been misappropriated by the directors

-General meeting cannot ratify misappropriation

Rule 3 Not Misusing possession for own or third party advantage

Directors must not misuse their position for their own or a third party’s advantage except with the company’s fully informed consent

Furs Ltd v Tomkies: Tomkies acting as MD contracting for sale of the company’s business to a third party. During the course of this negotiation made limited disclosure to Chairman that the third party wanted to employ him after the deal. He did not disclose the provision that this would have made Furs trade secrets essentially worthless

-Tomkies caused harm by disclosing formulae of Furs Ltd. Court held that if full disclosure had been made to the GM it could have ratified the actions of Tomkies. He did not do this which amounted to a breach of fiduciary duty he was liable to make account of profit to Furs Ltd

-He was only able to get the benefits he got because he was in the position to negotiate for the company

-Directors must not misuse their position for their own or a third party’s advantage except with the company’s fully-informed consent

Regal v Gulliver

-Regal wanted to establish a subsidiary to purchase two more cinemas. Regal did not have quite enough money and the directors of regal put in the rest of the amount. Eventually Regal and the Subsidiary are sold to a third party. The new owners using s 198A make regal sue the previous directors for profit from position. Court ordered that previous directors had to make an account of profit to the third party (new owners) this is essentially gave the purchasers a reduced price.

-General meeting could have ratified the directors actions if they made full disclosure to the GM

-Directors must not misuse their position for their own or a third party’s advantage except with the company’s fully informed consent

1) What the directors did so related to the affairs of the company that it can be properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors

2) That what they did resulted in a profit to themselves

Causation requirement

In Regal v Gulliver no loss was suffered, loss does not have to occur from the directors making an improper profit

Chan v Zachariah Deane J argued that rule could be relaxed where there is not conflict between individual profit and misuse of position ‘The principle is not, however, completely unqualified it may still be arguable in this court that the liability to account will not arise in circumstances where it would be unconscientious to assert it or in which for example there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interest of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights of benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed

-Not about punishing the directors forcing fiduciary to put company’s interest before their own

Resignation of Directors

IDC v Cooly: Company was bidding for work which it was unlikely to obtain. Director resigned so that he could then go and work for the company that won the work. Resignation was prompted by the knowledge that he knew that company had only a slim chance of winning the bid. If you find out about opportunity as a director resign and then take up opportunity will still be breach of fiduciary duty

Stotter v Natural Extracts Pty: Company formed to farm tea trees and lavender in NSW and Tas. Stotter sold land to the company and then resigned and then started up a rival company with another party to farm tea trees. He started planning this while a director for Natural Extracts. Held he held the new business on constructive trust for Natural Extracts, however, allowances were made for Stotter’s time and effort put into the rival company

Director Finds Out About Opportunity in Private Capacity

SEA Food International v Lam: Sufficient temporal and causal connection between obligations and the opportunity. It is a factual question as whether or not the opportunity came in role of director or as individual

-Director does not have opportunity to argue that it was fair, if this is the case should plead full and frank disclosure to the GM

Enforcement of Directors’ Duties

-s 180, 181: Codifications of the common law and equity duty of care and good faith are the same under statute and common law

-s 182: Officer employee etc cannot use position to make an improper benefit

-s 183: a person who obtains information because they are a director must not misuse that information for an improper purpose

-Potentially 182 and 183 could be broader than equity

-s182(2) and 183(2) apply them further to anyone who is ‘involved’ which is defined in s 79 and is broader than the equivalent concepts in equity

-ASIC v Australian Investors Forum: Issue of shares for the purpose of preserving majority in the GM was improper use of position,

R v Byrnes: Objective standard it does not necessarily involve dishonesty, can arise where they know or ought to know they have no authority

S 183 ASIC v VIsard: Used information obtained as director of Telstra to make share trades

-Duties are enforceable by ASIC and by the company

Chapter 2E Financial Benefits to Directors of Public Companies

S 208: Member approval is required before a public company or a company it controls can give a financial benefit to a related party

-Members have to approve giving of financial benefit in advance of giving it to a related party

-s 228: Related parties includes an entity which controls the public company (on the basis of the s 50AA test of practical control), directors and their relatives (spouses, parents children) and entities which act in concert with a related party (on the understanding that the related party will receive a financial benefit if the company confers a financial benefit on the entity).

-Directors of public companies, directors of entity controlling public company, spouses etc, parents and children of directors, entities controlled by any of these people

-s 229 Giving Financial benefit

-Broad interpretation to financial benefit s 229(3) examples of financial benefit

-ss210-216 set out exceptions including arms length terms, reasonable remuneration, indemnities, payments of small sums

-ss217-227 set out requirements for the approval process certain people are excluded from voting s 224(1) related parties who might receive a benefit and their associates

-s 224(1): Any vote to approve must not be cast by a person as a proxy appointed by writing that specifies how the proxy is to vote on the proposed resolution (b) not cast on behalf of a related party or associate

225: Voting on resolution, if there is a contravention of 224(1) vote must still be passed even without counting the votes contravening s 224(1)

-Exceptions 210-216

-s 210: member approval not needed to give financial benefit on terms than would be reasonable if dealing at arms length

-s 211: members do not need to give approval for reasonable remuneration for an officer or employee

-s 209: Consequences for breach

-Does not affect validity of any contract, company is not guilty of any offence. Anyone who is involved in the contravention can be pursued by ASIC (civil Penalty Provision)

Re HIH Insurance ASIC v Adler

Enforcement of Director’s Duties

-Oppression Remedies, derivative actions 236-239

-Company sues director for breach of duty

-Liquidator brings misfeasance proceedings in companies name against directors

-All three of these groups can bring actions for breach of duty

Civil Penalty Provisions

-Where there is a breach of a civil penalty ASIC can bring an action by applying for declaration of contravention under 1317J

-s 1317J(1): Application for declaration of contravention (enforcing in public interest, harm will generally have to go beyond company to justify ASIC acting)

-s1317G pecuniary penalty order for breach of civil penalty provisions

-s206C disqualification order

-s 1317H compensation order on behalf of the company

-Board under s 198A can bring proceedings under s 1317J(2) compensation order can do this regardless of what ASIC does

-s 1317H(2): In making a compensation order in determining the damage suffered should include profits made by the person (account of profits falls under s 1317J)

-s 1318: Allows court to relieve defendant from liability (director) if they acted honestly and ought to be excused.

-s 1317S: Exoneration for contravention for a civil penalty provision, difficult to persuade the court to relive liability

ASIC v Adler: If the court is unable to reach conclusion as to the appearance of honesty, but can’t rule out dishonesty, provision will not be applied. Have to persuade the court of honesty

ASIC v Macdonald (no 11): Gazelle J a person acts honestly for the purposes of 1317S in the ordering meaning of the term if conduct is without moral turpitude, carelessness or imprudence

Enforcement by the Board

-a distinction should be drawn between statutory and common law duties. In relation to statutory duties, the board can decide that the corporation can seek compensation order under 1317J(2) regardless of whether ASIC has sought and obtained a declaration under 1317E.

Exoneration by Court

-s 1318, 1317S applies to officer, employee, auditor, receiver or liquidator s 1318(4)

-Difficult to persuade the court to exercise its discretion if favour of granting relief ASIC v Adler

Ratification

-In line with the general principle that a principal can authorise the fiduciary to engage in conduct which otherwise would be a breach of duty, or condone or ratify a breach of duty which has already occurred, provided the consent is fully informed, the company in general meeting can authorise or ratify the breach of duty by ordinary resolution. Once a breach is ratified the company can no longer bring proceedings, although ratification will not prevent minority shareholders from bringing a statutory derivative action on behalf of the company

Director breaches Duty Company GM can ratify if they have full information about the breach

-If action is ratified the board or a liquidator cannot sue for the ratified breach

-Is the breach unratifiable?

GM Cannot Ratify Breaches of Statutory Duty

-GM cannot prevent ASIC from bringing contravention proceedings by ratifying as ASIC is acting in public interest

-Cases are unclear on this point

Forge v ASIC: Civil penalty proceedings involve public rights because they can result in disqualification, ratification does not apply. Ratification was invalid, emphasized the fact this was brought by access. ‘Shareholders cannot remove the declaration of contravention by ratifying the original acts. Once a declaration of contravention is made, the Court is entitled to act upon its finding to grant relief’

Alternatively it might be argued that the shareholders’ ratification can prevent the company from bringing proceedings in the future, but cannot prevent ASIC from bringing proceedings for a declaration of contravention in the public interest. Pascoe v Lucas: As statutory duties reflect duties of common law and equity and can ratify a breach of statutory duty

GM Ratification without full information invalid

-Cannot ratify when the general meeting does not have full information (Regal v Gulliver Furs v Tomkins)

-When creditor interests become part of the ‘interests of the company Kinsela v Kinsela

-Where the breach infringes a members personal right Hogg v Cramphorn GM can ratify improper allotment of shares this may prevent company from bringing an action against the directors, provided the GM does not share improper purpose. It should not bar an individual shareholder from bringing an action for improper dilution Residues Treatment

-When it involves a misappropriation of company resources

-When there is a fraud on the minority Miller v Miller

-Basically GM is ratifying for a purpose falling outside the scope for the purpose for which it has the ability to ratify

Cook v Deeks

-4 directors of a company, 3 of the directors were negotiating a contract with a third party based on previous relationship with the third party (history between parties). 3 directors transferred benefit to another company which they held and deliberately excluded Cook and the company. The three directors then used their majority in the GM to ratify their breach of duty. Court held that the controlled company held the benefit of the contract on constructive trust for the first company. Contract belonged to the company in equity, it was the companies property, could not use votes as shareholders to ratify as it would have amounted to forfeiting property of the minority to the majority

-Regal involved only an opportunity in cook it was property, contract did not have the property before the breach

-In regal the directors were acting honestly and in good faith, in Cook they were acting dishonestly

-Residual discretion for courts to give no effect to ratification where it would be a fraud on the minority (however, can now bring action under s 232)

Minority Protection

-The principle of majority rule has to subject to some limitations. It is effective in the ordinary course of decision-making because it prevents the minority from holding up the majority for extraneous reasons

-Supermajority requirements (special resolution s 9 to change the Constitution s 140 etc.)

-Class rights

-s 1324(1) allows ASIC or an interested party to bring an injunction preventing a threatened breach of Corporations this is a catch all provision relatively low threshold for standing simply have to show interests have been effected in a way which goes beyond the general public Broken Hill Proprietary Co Ltd v Bell Resources Ltd

-Fraud on the minority restriction on majority voting (e.g. altering the Constitution good faith)

-Statutory exclusion of interested parties from voting for example s 224

-Winding up on the just and equitable ground

-Minority shareholders can force the a general meeting to be held 5% or 100 members s 249D

-s 232 Oppression remedy

-Statutory derivative action

S 236 -239

-Under 198A board decides to sue a director for breach, controlled by the majority, generally litigation decisions are controlled by the majority

-Where the majority is ‘colluding’ with directors minority should have some say

-Court rarely allows derivative action

-s236(1): Can bring proceedings as a member or former member or officer can bring proceedings in companies name if acting with leave granted under 237

-s236(3)

237(2): Situation where a court must grant leave

23793): Rebuttable presumptions that granting leave not in best interests of the company

S239: effect of ratification

-s242: Costs of derivative action, court is unlikely to award costs to the individual seeking leave to bring the derivative action as it would involve a ‘determination’ of the action in a sense. Been used as a way for the courts to disincentives the use of the derivative action

Minority Protection

-s1324: person who would be affected by a threatened breach of legislation can sue for an injunction or get damages. How does this fit with the rule of majority rule, i.e. directors duties are in the legislation can a single member get an injunction preventing directors from acting undermines 198A

-s1324: Allows ASIC as well as individuals who have been or will be affected get an injunction Broken Hill Pty Ltd v Bell Group: Not necessary to show personal rights have been affected, have to show interests are affected, do not need to show any special injury has occurred

-s1324(1A): A contravention of the act affects the interests of a creditor or a member of a company if the insolvency of the company is an element of the contravention (b) contravention share buy-back , share capital reduction or financial assistance for share acquisition

-s1353: failure to comply with replaceable is not a contravention cannot use 1324 to bring an action for breach of constitution

1324(10): Court may order payment of damages in lieu of an injunction

-Director threatens to breach directors duty’s normally company will have to sue, or apply for derivative action. A broad reading of this section would remove majority rule Mesenberg v Cord Industrial Recruiters Pty ltd: Expressed reservations about every minor breach being able to be prosecuted by minority replace Foss v Harbottle (majority rule). S 1324 should not apply to s 181 this was all obiter.

Premier Gold v Ocean Services: Give plaintiff broad right to bring action but use courts discretion to deny injunction if merely attempt to usurp the directors rule

Creditor action: Allen v Atalay; Airpeak Pty ltd v Jetstream Aircraft

Members Personal Action

-S 140 members can enforce rights given in their capacity as members, cannot enforce rights which are outsider rights or rights of the company

-Generally cannot sue to enforce Constitution

Stanham v National Trust of Australia: Obiter ‘’if one elevated every matter in the articles of association of a company to the status of a contractual right vested in each and every member the rule in Foss v harbottle would be able to be completely disregarded. The whole effect of that rule, despite the growth of exceptions, is that ordinarily the court does not interfere at the suit of a member with an alleged wrong done with respect to administration of the company. True it is that it is sometimes difficult to draw the line between an individual right and representative (Kraus v JG Lloyd Pty Ltd) nonetheless the rule for the most part prevails

-Norths Ltd v McCaughan Dyson Capel Cure: Pragmatic in deciding if a membership right, personal right or corporate right. Keep in mind different types of corporations SPC vs PL should be variance in cases, not applying rules inconsistently, membership rights do not have fixed content should fit reality of the circumstances

-Young J ‘Company law has to have scope to reflect differences [in the size and nature of companies] and if this means that the qua member and the qua director... is not drawn in quite the same place every time, but varies from case to case, the judges are not necessarily applying the rule inconsistently; they may be demonstrating that it is wrong with regard the concept of a ‘membership’ right as having a unique content, and showing that it has flexibility to meet the reality of the circumstances before them’

-Right to vote, notice of meeting dividend are all personal rights. Individual shareholders holding these rights cannot be barred by the company.

-Beyond these ordinary instances it becomes very difficult to recognize rights viewed narrowly

-Wrongs harming the value of shares: generally no Prudential Assurance v Newman Industries No 2 loss in value is reflective of loss suffered by the company, if the company sues money will be recovered and shares will rise in value, if shareholders could sue could be double claiming. Johnson v Gore-Wood: possible exception where company may not have action

Fraud on the Minority

-Can exercise share rights in a self interested manner, shareholders in exercising right to vote in GM can do so in a self-interested matter. This becomes important where they are director-shareholders where they are a director must act in interest of company

Peters Amercian Delicacy v Heath: Shareholders are not under fiduciary duties vote in relation to shares which is an incidence of property and can be exercised self-interestedly. Fraud on the minority is committed by the GM exception to rule to vote self-interestedly. Power is used to get a personal gain which does not arise out the subject of the power and is outside or inconsistent with the power. Equitable idea of fraud of power being used outside its scope, not anticipated the power would be used to take company’s property.

‘The shareholders are not trustees for one another, an, unlike directors, they occupy no fiduciary position and are under no fiduciary duties. They vote in respect of their shares, which are property and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owners personal advantage’ ‘a means of securing some personal or particular garn, whether pecuniary or otherwise which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of power’

Northwest Transportation v Beatty

-Director and shareholder contracts to sell a large boat to the company. Personal interest in the contract but finding of fact that there was no impropriety or oppression of the minority. Director used votes a GM to ratify the contract which the court then upheld. Individual can vote as shareholder to confer benefit on themselves as a director, in this case there was no fraud or over-value if there had been would not have recognized the ratification

-Any member can challenge a decision in this manner relates to personal equitable rights, if successful the vote will be void

-Residual power allows GM to be controlled when it goes beyond what a GM should do.

-Also been limited by legislation

-s208-229 conferring financial benefit on a related party of a public company, those associated cannot vote to approve benefit if you have interest

-Those benefiting from reduction of capital cannot vote on it

-People benefiting from sale of company’s main undertaking must be excluded from the vote

-Gambotto v WCP ltd: Power to alter constitution is subject to equitable limitation power for GM to alter constitution is to change because circumstances have changed. Cannot be exercised for other purposes. WPC is a large company part of a corporate group majority shareholder had 99.7% of shares (industrial equity ltd). With control of GM altered constitution to allow majority to buy out minority. Minority shareholders holding the remaining shares brought a personal action as fraud on the minority.

-High Court Held: Alteration was invalid rejected previous tests bona fide in the interest of company as a whole new test dual categorization.

-Majority: does the amendment to the constitution allow expropriation of shares or valuable proprietary rights attaching to shares purpose of aggrandizing the majority

-If not amendment must not be oppressive (not so unreasonable no GM would do it)

-If so the power to amend must be exercised for proper purposes (protect company from harm, for example shareholder is competing with company, or expropriation was necessary to ensure company could continue to comply with essential regulation) and must not be oppressive (must be fair in the circumstances s 232, procedural fairness (full disclosure) substantive fairness independent evaluation of shares). Rejected argument that taxation administration benefits could be a proper purpose

‘The exercise of power conferred by a company’s constitution enabling the majority shareholders to expropriate the minority’s shareholding for the purpose of aggrandizing the majority is valid if and only to the extent that that the relevant provision of the company’s constitution so provide. The inclusion of such a power in the company’s constitution at its incorporation is one thing. It is another thing when the company’s constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority. Such a power could not be taken to be exercised simply for the purpose of aggrandising the majority’

Such an amendment will only be allowed where

1) The power is exercised for a proper purpose (which requires exceptional circumstances)2) Its exercise does not operate oppressively in relation to minority shareholders (meaning it is

fair in the circumstances)

-High Court favours property rights rather than commercial reality

Minority McHugh J

-Did the majority act fairly, procedurally and substantively?

-Taxation was a benefit that could be a proper purpose but no evidence that substantively fair

-Gambotto replaced by takeovers legislation hostile takeover of over 90% can remove minority

-s 664A general power for shareholder who crosses 90% to buy out shares within 6 months

-Gambotto will still apply where constitution attempts to remove other rights attached to shares falling short of expropriation

Arakela: Gambotto principle are to be applied except where there is some other mechanism to protect the minority i.e. reduction of capital rules.

Bundaberg Sugar Ltd v Isis Central Sugar Milling Co: Co-operative wanted to change constitution to remove member who was no longer contributing to the production without compensation. In this case articles allowed directors to differentiate between producers of sugar and those who don’t. Held purpose was proper, because Bundaberg sugar would lose co-operative status and tax benefit if it had non-supplier members. Continued shareholding would be detrimental. Failure to provide compensation made the amendment oppressive.

Winding Up

-s461 Court may order winding up is; (a) the company has by special resolution resolved that it be wound up by the Court

(c) the company does not commence business within 1 year from its incorporation

(d) The company has no members

(e) directors have acted in affair of the company in their own interests rather than in the interests of the members as a whole, or in any other matter whatsoever that appears to be unfair or unjust to other members

(f)affairs of the company are being conducted in a manner that is oppressive or fairly prejudicial to or unfairly discriminatory against a member or members or in a manner that is contrary to the interests of the members as a whole (similar to oppression)

(g) an act or omission or a proposed act or omission or a resolution or a proposed resolution of a class of members of the company was or would be oppressive or unfairly discriminatory against a member or members or was or would be contrary to the interests of the members as whole

(k) court is of the opinion that it is just and equitable that the company be wound up

-461(k): long standing power for protecting minority shareholders

Loch v John Blackwood: If there is justifiable lack of confidence in management of company’s affairs

Macquarie University v Macquarie University Union: Serious fraud misconduct or oppression but directors likely to re-appointed by majority, leads to a loss of confidence

Camo v Excel Cleaning Services: Breakdown of communication and deadlocked company was wound up

Strong v J Brough and Son (Strathfield): Failure of the purpose of the company or purpose becomes impossible, generally commercial companies will not have only a singular purpose

ASIC v International Unity Health Insurance: For an order to be made against a solvent company it would be an extreme step for winding up to be ordered

-ASIC v ABC Fund managers; Bernhardt v Beau Rivage Pty Ltd: Where a company is solvent a very strong case has to be made to order winding up which is an extreme remedy

-S467(4): Court must decline to order winding up if some other remedy is available and plaintiff is acting unreasonably in seeking winding up rather than other remedy, refusing a buy out order under 232 will be acting unreasonably

Nyland v RL & KW Nominees pty ltd: family company owned two properties, husband went bankrupt and his share passed to director in bankruptcy wife was sole director. This justified winding up as wife was a creditor to the tune of $1M as a result of this trustee had lost confidence in the wife’s management ability. She would not allow the properties to be valued etc. only way to deal with this

was to wind up the company. Where the company’s affairs are a mess winding up can be a more appropriate remedy. Liquidator can make findings of fact more easily than the court

-Where there is a quasi-partnership company winding up can be ordered rather than oppression equitable considerations may prevent exercise of strict legal rights Ebrahimi v Westbourne Galleries. Two men ran company allowed son to join three shareholders holding 1/3 each. Removed the over director and paid all the profits to the other director. Informal understanding that none of them would be removed from the board equity intruded close relations, agreed understanding that shareholders would participate in company, restrictions on share transfer making it impossible of expensive (1072G pty company may refuse transfer of shares for any reason). Majority acted in accordance with strict legal rights, however, wound up on the basis of equitable considerations

-This principle also applies to oppression remedies

Oppression

-Generally application made by minority shareholder but not Vujnovich v Vujnovich

-s232: Court can make an order under section 233 if: (a) the conduct of a company’s affair (defined s 53) (b) an actual or proposed act or omission by or on behalf of a company (c) a resolution, or a proposed resolution of members or a class of members of a company is either (d) contrary to the interests of the members as a whole or (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or any other capacity

-This has been interpreted broadly wider than condition of good faith Elder & Elder v Watson ‘visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely’

-Fairness is a question of commercial fairness (i.e. large company v family company)

-Generally treated as a compound statement unjustly detrimental to interests of member Campbell v Back Office Investments: Imposition of limits on the remedy is to be approached with caution

Wayde v NSW Rugby League: NSW rugby league decided to reduce competition and had to exclude one club. NSW Rugby had a constitution dealing with clubs, conceded by Wests that decision was made in good faith and they had no secure right to participate. Had not been shown that the decision to exclude Wests that no board acting reasonably would have made the decision. Runs close to the business judgment rule which court will not overrule

-If it can be shown there is an informal understanding that majority will not remove minority can be oppressive O’Neil v Phillips 1) informal understanding proven on facts 2) exclusion from management, 3) absence of reasonable offer to buy the shares.

-As long as you offer to buy at a reasonable price you can be as oppressive as you want as long as fair price is offered. Moving away from seeing company as property right

Commonly Used Situations

-Exclusion from management where it goes against an informal participation agreement

Re Back 2 Bay 6 Pty Ltd: Failure to provide information

Scottish Co-Op v Meyer: Breach of fiduciary duty diverted company’s business to partnership they controlled

-Martin v Australian Squash Club Pty Ltd: Misappropriation at the expense of the minority of company assets

Sanford v Sanford Courier Service: Excessive remuneration (note Morgan v 45 Flers Avenue)

John Jay Starr (Real Estate) Pty Ltd v Robert R Andrews (A’asia) Pty Ltd: Oppressive conduct in board meetings

-Re Spargos Mining NL: Decisions for the benefit of related companies

Re G Jeffrey: Lack of dividends where part of majority plan to conduct business in their own interests or where directors have not reviewed dividend policy but have reviewed their remuneration and revised it upwards Shamsallah Holdings Pty ltd v CBD Refrigeration and Air conditioning Services

-In larger companies it will be difficult to establish informal agreements and virtually impossible in public companies

Failure to pay dividend

Re G Geoffrey: Majority shareholder paid himself very generously, but found that was not excessive, as well as this ran the business very conservatively company was retaining profits rather than paying dividend. Have to show that not paying dividend is outside of business judgment rule

Shamseller: expert evidence about level of salary concluded they were not oppressive, but they should have reviewed the dividend policy to ensure it was still relevant. Failure to review in light of changing circumstances, while continuing to raise their pay was oppressive

Re City Meet Company: Dividends were ‘miserable’ no proportion to company’s profit. Directors paid themselves profit by remuneration, this is not a problem while all members are directors. Majority shareholder had taken active steps to ensure exclusion of minority. Using control to benefit themselves but keeping dividends very low

Not Oppression

-Mere negligence, or mere mismanagement are not oppressive, however, if it is part of a broader pattern of incompetence Shirim v Fesena

-No requirement for ‘clean hands’ can be wrongdoing on both sides

-Ratification has not effect on the availability if the oppression remedy

-S232 does not offer a unilateral right of exit, generally buy-out is ordered, doesn’t mean majority will always have to buy out need to prove oppression

Re G Geoffrey: Minority shareholder complained that brother was running companies to conservatively, minority shareholder was merely being made to abide by majority decision. This was not prejudicial, simply looking for a way out

-S 232 is not available once company is in liquidation

-s 233: Orders can make (a) company be wound up (b) constitution be modified or repealed (c) regulating the conduct of the company’s affairs in the future (d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law (e) for purchase of shares with a appropriate reduction of share capital (f) for company to institute, prosecute, defend or discontinue specific proceedings (g) authorizing a member or a person to whom a share in the company have been transmitted by will to institute proceedings

-Buy-outs a generally caused by a breach of duty, company is being run in the interest of the majority at the expense of the minority. Shares have to be valued at the time before the breaches had been occurred. Value of shares if oppression had not occurred. This can be very difficult in fact, there should be no minority discount in these cases analogy of buying as a ‘going concern’ O’Neil v Phillips

-Court has a very broad power almost always a buy-out power

Lecture 9 Shares and Capital

Shares vs. Debt

-Companies finance their activities through capital which is generally used to purchase assets, which are things that produce a return to those people who own them. Capital money cannot be returned to the shareholders, it is meant to be available to the creditors. However, could invest poorly in assets and lose the capital.

-Company has money or monies worth (i.e. going concern of a business). Company owned the business which generated a return for the business

-Capital does not have to be kept as cash, it can invest in assets which is fine as long as it doesn’t reduce the capital, or hand capital back to the shareholders. Capital is a measurement of the company’s assets

-Share capital: Shareholders invest money for shares and they get a residual claim to whatever is left after the company’s creditors, distributed as a dividend or the company retains earning and invests in assets making it more valuable which increases the value of shares in the company

-Debt capital: Lend money for the rights specified in the loan contract i.e. interest rate, rights of the lender etc. If the company borrows money it has to make regular payments under the loan if it does not lender can have the company wound up

-Issuing shares does not involve having to make continual repayments. Company can declare a dividend if it has surplus money but it does not have to

-Can make capital gains as opposed to making regular payments of dividends

-Company’s can also use money to buy back shares from shareholders

-It can retain money for capital growth

-Shares provide a bundle of rights (i.e. right to vote, right to dividend shares a property not ownership of the company)

What Rights Attach to Shares

-‘A species of tangible moveable property which comprises a collection of rights and obligations relating to an interest in a company of an economic and proprietary character, but not constituting a debt

-To some extent rights are by default, however, rights can be changed

-Company can attach whatever rights they want to the shares to encourage investment, i.e. provide a bundle of rights that is more attractive than holding capital

Preference Shares: Normally have a right to be paid a fixed dividend, i.e. 6% cumulative dividend if company does not provide dividends in a year it has to be 12% to the preferences

-Normally preference shares have no right to vote, the right is excluded preference to payment but surrender right to vote. Closer to debts, they get fixed return no votes etc. People who control a company may not want to give up to much control, issuing shares is giving up control of the company

-Ordinary shareholder takes more risk in return for voting rights

-s 250E one share one vote replaceable rule

-Transferability determined by Constitution s 1072G for pty companies can refuse share transfer for any reason. It is also common to have a clause making anyone wishing to sell shares offer to other shareholders first

Issue of Shares

-No minimum share capital for proprietary or public companies; Listing Rule 1.1. requires at least $1M

-This tends to be a unique common law feature

-Issue Price: extent of members liability to contribute – this does not vary

-Asset value: Company’s net worth attributable to each share – varies with success of company

-Market Value: How much people are prepared to pay for shares – varies based on many factors

-Power to issues share s 254A 124(1)(a)

-Private issues fall within 198A and are subject to directors duties should be issued in good faith, in the best interests of the company, for proper purposes

-s254D replaceable rule giving pre-emption in relation to new share issues in pty ltd’s can pass an 254D(4)ordinary resolution disallowing pre-emption rights . This can prevent the board from diluting the shares of any specific share issue

-Company can issue bonus shares if it wants to capitalize its profits s 254S. If company decides to retain profit they are capitalizing the profits and therefore becomes subject to the rule about maintaining capital value of shares increase. Can issue ‘bonus’ shares which keeps asset value the same, and prevents share value from increasing

-Public offer may require a prospectus

Variation of Class Rights

-Way of protecting members of a class, i.e. preference shares and ordinary shares

-Essentially different classes if different rights attach to shares Crumpton v Morrine Hall shares in a unit complex assorted in groups which allowed access, it group was held to be a different class ‘it seems to me that when you have a home unit company and the shares divided up into different groups so that one group has quite different rights from another group it makes no difference that the articles avoid using the word ‘class’. In fact the groups of shares are different the rights attaching to them are different, with the result that the capital is divided into different share classes’

-Cumbrian Newspapers Group Ltd v Cumberalnd & Westmorland Herald Newspaper

-Shares can be divided into a class where rights are held by a particular individual other than a class of shares. For example being paid a fixed dividend is a class right attached to preference shares. In this case Mr X was allowed to appoint director so long as he held 10% of shares in the company. 3 types of rights 1) rights or benefits which are annexed to particular shares (preference shares etc) 2) Rights conferred on individuals not in the capacity as member or shareholder, not enforceable not a class right 3) Rights or benefits though not attached to particular shares were conferred on a member in their capacity as a member i.e. rights in Bushell v Faith special rights to a special class of members these rights cannot be taken away by changing the Constitution

‘first there are rights or benefits which are annexed to particular shares. Classic examples of rights of this character are dividend rights and rights to participate in surplus assets on a winding up. If articles provide that particular shares carry particular rights not enjoyed by the holders of other shares, it is easy to conclude that the rights are attached to a class of shares...A second category of rights or benefits [which are not class rights]...would cover rights conferred on individuals not in the capacity of members or shareholders, but, for ulterior reasons, connected with the administration of the company’s affairs or the conduct of its business...the third category...would cover rights or benefits that, although not attached to any particular shares, were nonetheless conferred on the beneficiary in the capacity of a member or shareholder of the company

Have Rights Been Varied

Wright v Bristol Aeroplane: Preference and ordinary shares held, directors purported to give preference shares to ordinary shareholders. There was no variation as the rights of preference shareholders would be the same before, but they would not be enjoyed as much. Without this narrow scope every share issue would involve the consent of all classes of share holders

S246C: Deems a number of transactions to be variations s 246C(6) effectively reverses Wright v Bristol Aeroplane

-If the constitution sets out procedure it has to be followed

S 246B(2): Requires a special resolution to be passed in general meeting and in a separate meeting of the class to consent to having their rights varied. For example removing cumulative dividend would need special resolution at GM and a special resolution of preference shareholders only. Where it attaches to an individual essentially means the right cannot be removed

-s246D A member of a class holding 10% can challenge a decision as unfairly prejudicial

-Fraud on the Minority Re Holders Minority Trust possible constraint on class meetings.

Maintenance of Capital

Trevor v Whitworth: Once capital is committed to the company it is locked in to the company and can be paid out to shareholders. Argued this was for creditors, made more sense when there was minimum capital requirements ‘Paid up capital may be diminished or lost in the course of the company’s trading; that is a result which no legislation can prevent; but persons who deal with and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid as well as the responsibility of its members for the capital remaining at call; and they are entitled to assumption that no part of the capital which has been paid into the coffers of the company has subsequently been paid out, except in the legitimate course of its business’

-Austin J: should be viewed as an aspect of the rule of limited liability

-Implications: Dividends can only be paid out of distributable profits

-Financial assistance should be prohibited (giving shareholders money to buy shares)

-Company cannot buy its own shares

Dividends

-s 254U: distribution of profit to shareholders if directors decide, they decide time and method of payment

-s254T: Assets must exceed liabilities; payment must be fair and reasonable to shareholders as a whole, must not materially prejudice company’s ability to pay creditors, it would prejudice if company became insolvent as a result of paying dividends

-This brings rules about dividends in line with all the other rules about capital

Dimbula Valler (Ceylon) Tea Co Ltd v Laurie

Re Oxford Benefit Building and Investment Society

-s 588 via 588(1A) paying a dividend is deemed to be incurring a debt for the purposes of 588G

-Breach of 254T

-Dividend is illegal and shareholder could seek injunction under s 1324 or common law injunction Darvall v North Sydney Brick and Tile Co Ltd

-Dividend is unauthorized reduction of capital under 256D, civil penalty provision ASIC (compensation 1327J(2)

-Breach by directors of duty of care

-Directors will be liable to compensate company at common law Re Oxford Benefit Building Society

-Knowing receipt could make shareholder a constructive trustee for the dividend Moxham v Grant

Reduction of Capital

-Companies are not permitted to return share capital to shareholders. But companies need to restructure and this does not always prejudice creditors. For example the company may have capital far in excess of its needs and which to return surplus to members. It may decide to cancel uncalled capital where it believes it will not need the balance

-s256A goals of legislation: protect shareholders and creditors from insolvency requires disclosure of information

-s256B: Reduction must be fair and reasonable to shareholders and not materially prejudice creditors and approved under s 256C

-Contravention of 256B contravenes civil penalty provision (256D(3)) and a reduction of capital is deemed to be incurring a debt under 588G(1A)

-Is the reduction: An equal reduction order resolution under 256C(1) unless Constitution says otherwise, pro rata return of capital

-If it is a selective resolution special resolution under 256C(2) excludes the votes of any receiving capital and a special resolution of all those shares who will be cancelled

-If shares are to be cancelled, there must be a separate meeting of those whose shares are to be cancelled and it must pass a special resolution Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd this is a strict requirement

-Full information disclosure is required s 256C(3),(4),(5) information then lodged with ASIC which can alert Creditors who make seek a remedy under 1324

-s 256B requires the reduction to be fair and reasonable to shareholders as a whole; not materially prejudice ability to pay creditors; and be approached by shareholders

Prohibition on Self Acquisition

-Company must acquire shares in itself, cannot use assets to buy its own shares

-s 259A self acquisition will contravene a civil penalty provision

-s 259B cannot take security over shares in itself or in a company which controls it

-s 259C company must not issue shares to a company it controls i.e. parent to subsidiary

- s 259D if a company does obtain these shares it must within 12 months cease to hold shares or cease to be controlled

-These rules prevent companies from buying shares in itself, this allows special rules for buying back shares

Buy Back

S 257A-J

-limited exception to company acquiring shares in itself

-If a company does buy back shares directors are not allowed to vote with shares and must be immediately cancelled after transfer 257H

-Buying back shares could bring share price closer to asset value, if it does this it reduces the number of shares available, shrinks the pool of shares and increases their price. Irrelevant to small pty company for a listed company it has a large interest in buying back shares 1) reducing shares on the market increases price, (executive pay linked with share options) 2) way of returning money to the shareholders, i.e. capital goes to the shareholders

-This enables shareholders to be taxed as a capital gain rather than income and can give them a tax advantage

-Removing ‘odd lots’ of shares tidying share register, buy out retiring proprietor

-Buy back shares to increase leverage debt to equity ratio makes the business more risky but makes earnings greater per share.

-These rules are generally available for listed companies executive make more money buying back than paying dividend

-Buy backs can occur out of income which makes them like a dividend, company can use surplus assets to buy back shares, can be done through capital which makes them more like reduction in capital

Mechanism of Buy Backs

-257B Must not prejudice creditors and procedures laid down must be followed (tabular summary in 257B)

-Real question is whether shareholder approval needed? Generally do not need consent for equal access scheme with 10/12 limit. Company can buy back 10% of shares within 12 months

On market

-Shares are listed and company goes to broker to buy shares from the market arms length

Equal Access

-Company offers to all shareholders to buy back shares pro rata. Directors can’t do this to benefit themselves or manipulate general meeting

-If the 10/12 limit is passed then need an ordinary resolution

Selective buy back

-Not equal access choosing who you are buying back from requirement of special resolution 257D excluding votes of those who are going to benefit

-Selective buy back defined s 9

Breach of Buy back Rules

-Where procedure is not followed or creditors are prejudiced 257A

-Breach of 259A (company acquires shares in itself) anyone involved contravenes civil penalty provision 1317J

-Breach of section 256D if buy back occurs out of capital civil penalty provision

-Possible 1324 injunction by ASIC, creditor or shareholder

-Deemed to be incurring debt un 588G(1A)

*Link this to understanding of 588G and questions of enforcement, don’t be put off by length of legislation

Lecture 10 Financial Assistance, Public Issues, Debt and Charges

260A – A company may financially assist a person to acquire shares in it only if (a) no material prejudice to company or shareholders as a whole or the assistance is approved by shareholders per 260B (c) The assistance is exempted under 260C

*Andrew’s opinion is different from that of Borris and Dunn

-Financial assistance generally means helping someone with money to buy shares in the company

-Prohibited since 1926 offends against the spirit of self-acquisition, open to the gravest abuses i.e. people buying up companies with large amounts of cash, then using the companies money to pay for the acquisition

-Jenkins committee 1960’s getting control of the money through the company’s own funds mean that consideration will be illusory or exposing itself to illegitimate risk

-It would be a breach of Director’s duty i.e. proper purposes

-Now financial assistance it not viewed as like maintenance of capital but preventing abuse of corporation from directors

-May be a concern that financial assistance can be used to manipulate stock markets ASIC v Adler artificially increased share price through financial assistance and then sold shares at a premium

-There is no certain foundation as to why there is a specific rule about the prohibition of financial assistance instead of just dealing with it as part of directors duty, it will almost always be a breach of fiduciary duty’s

-Rules about financial assistance have been relaxed to allow Private equity investments

What is financial assistance

-Pre 1998 there were two views as to what constituted FA

1)Impoverishment / net transfer of assets Mahoney J Burton v Palmer : Has the company diminished its net assets through the transfer

2)Company’s purpose was to assist the acquisition even if this do not involve a net loss or diminution of assets. Purpose involves evidence and can be very expensive Belmont Finance Corporation v Williams Furniture Ltd (No 2)

Post 1998 ‘Simplification’

-Reference to ‘material prejudice’ means impoverishment is required

Re HIH Insuranc Ltd (in liq); ASIC v Adler: Santow J argued this required impoverishment based on memorandum for the amendment, would the transaction materially prejudice shareholders, or ability to pay creditors. Read this as requiring impoverishment. This assumes that impoverishment is a part of definition of 260A. Santow argued that no material prejudice to company and shareholder as a whole would be a defence.

-This is odd would argue that impoverishment would materially prejudice shareholders

-Once impoverishment has been shown go to 1324(1B): if using an injunction to try and prevent 260A(1)(a) the court must assume the conduct constitutes or would constitute a contravention of that provision unless the company or person proves otherwise

-Essentially this reverses burden of proof and forces the company to prove that there is no material prejudice

ASIC v Adler: NSWCA did not disapprove of this and was used in Kinarra Pty Ltd v On Q Group Ltd this makes purpose no longer relevant financial assistance is linked to material prejudice, net value is given the acquirer and this may be prejudicial to the company

Law Society of NSW v Millios: Austin J intention of the drafter that judges looking at this rule should focus intention on whether the transaction would materially prejudice the company, if material prejudice does occur would then look to shareholder ratification as a defence. This leaves the question of financial assistance as separate

Actions Under 260A-D

1) Liquidator proves impoverishment then onus passes to the defendants

2) Defendants then have to prove either (i) Lack of material prejudice (260A(1)(a) or Shareholder approval given under 260B or One of the 260C exemptions applies

3) Failure by defendant to do so: breach of 260D(2) Civil penalty provision deemed incurring a debt under 588G(1A)

260B(1): Shareholder approval must be given by special resolution at GM and those being assisted cannot vote in favour of this (in line with other requirements about capital)

260C: Exemptions discharge on ordinary commercial terms of liability entered into on normal commercial terms will be a defence, i.e. paying back debt to a shareholder which was entered into normally

-Reduction of capital or a buy-back this is also an exemption to 260C (approved under 256B)

-Company hands over value to a shareholder it makes itself poorer by giving away its money (impoverishment) if money is simply being given away which is a breach of duty. If they use this money to then buy more shares it will become financial assistance

-Lexis Nexis argues that the effect of this ‘whether one adopts the broad or narrow view of what is meant by “financial assistance” s 206A will not be contravened if it is established that, from a commercial perspective, the provision of assistance was not materially prejudicial to any of the interests referred in s 260A(1)

Purpose

-Must there still be some link (in terms of causation of purpose) between the impoverishment of the company and the acquisition of the shares by a third party? Arguably this is reflected in the words assts and to in s 260A ‘financially assist to acquire’

1) There will be financial assistance even if the purchase of the shares by the third party was purely coincidental. Of course s 260C(5)(d) creates an exception for a ‘discharge on ordinary commercial terms of a liability that the company incurred as a result of a transaction entered into on ordinary commercial terms’ this will be sufficient to exclude most coincidental purchases of shares

It may be that the legislation intends to catch any purchase of shares which just happen to follow a non-commercial impoverishing transaction. However, it begs the question of why we need specific

regulation of non-commercial impoverishing transactions which are followed by the acquisition of shares. Most transactions in this category will amount to breaches of duty on the part of the directors for which civil penalties can be imposed. Indeed, this is the thinking behind the UK’s abolition of the financial assistance prohibition for private companies.

The second is that, even if there is a non-commercial transaction, there must still be some link between the impoverishing transaction and the acquisition of shares ‘which draws the transaction within the policy concerns which the section addresses. This type of question might arise, for example, if the purchase of shares preceded the financial assistance by some time. Determining whether there had been breach of the prohibition might involve revisiting the ‘old case law with respect the requisite linking between acquisition and assistance. If this interpretation is preferred, then the purpose requirement might once more be relevant to determining whether there is financial assistance within the scope of 260A

*s260A-260D read through 260E* complying with capital rules does not mean no breach of directors duty i.e. improper purpose remains improper even if everything is approved

Public Issues

-Proprietary company cannot make an offer of shares which would require disclosure under chapter 6D

-Secondary sales are excluded in most cases (purchases on market from other shareholders are protected by continuous disclosure obligations applied to listed companies) exception 707(2) and (3)

707(2): A secondary seller will have access to information which purchasers do not (primarily where the secondary seller controls the company in question in line with 50AA conception of factual capacity to determine), an in that situation a disclosure document is required where the sale is either of non-quoted securities or quoted securities being offered outside the ordinary course of trading on the relevant financial market

707(3): Anti avoidance provisions by requiring disclosure to accompany a secondary sale where an issue was made with the previous 12 months with the purpose of later resale by the issue.

Company Shareholder primary sale disclosure required

Shareholder Shareholder secondary sale no disclosure required

S 113(3) Pty company can offer to employees and existing shareholders, no need for disclosure no regulation

-Pty Companies and public companies which don’t want to produce disclosure document can use 708 exceptions (expensive to produce disclosure document especially if only raising small amounts)

-Offer of securities s 700(2) ASIC v Australian Investors Forum (no 2): Pragmatism and common sense should be used to decide when securities are offered i.e. invitation to treat, identification of the company, the price, the nature of securities (preference, ordinary) suggestion they are available for purchase, a statement that it is not an offer will have no effect (sign on an elephant)

Exceptions

-s708(1)-(7): Small scale offerings 20/12 rule can issue to a maximum of 20 people not exceeding 2M within 12months (20/12 rule), must be a personal offering accepted by addressee, must be to person who are likely to be interested (cannot advertise broadly), offers made to professional or sophisticated investors (708(8)-(11), people related to company, includes senior managers, their spouses and relatives (708(12)) Bonus share issued fully paid up (capitalisation of dividends) 708(13)

-Public companies may be able to use the 708AA exception for rights issues (note requirement that shares be quoted) right issue is an offer to existing shareholders, do not need disclosure document…but…if you are a public company who is not listed, need a disclosure document

-The logic of this is listed public companies get extra protection by listing rules, shares are already priced and quoted on the market

No exception available

-709 prospectus required must comply with 710, 711

-Must be lodged with ASIC before offer is made 718 and 727(1)

-Prospectus must accompany offers 727(1)

-Prospectus must be sent to people who shares are being offered to

-s 705 summarizes 5 types of disclosure documents prospective become expensive started developing shorter documents to avoid costs

-709 prospectus is required unless exception, s 711 must include offer, directors interests in the company etc. s 710 must comply with the reasonable investor test, must contain all the information investors and advisors would require to make an informed decision assets and liabilities, performance and loss etc.

-Profile statement in addition to prospectus (reduce number of documents printed)

-712 short form prospectus, investors still have right to full prospectus

-Offer information statement 709(4) raising no more than $10M, must comply with 715 (less demanding than 710

-Corrections and updates must be made 719

-727 criminal offence to fail to produce disclosure document where required s 1311 schedule 3 item 389

-728 criminal offence to fail to update/correct where materially adverse to investors

-728(3) contravention is criminal offence if adverse to investors

Remedies

-Where there is no disclosure or misrepresentation can have rescission

-Fraudulent negative misrepresentation can get damages

-729: Where investor can show loss or damage because of contravention by a director or other person can claim damages

-731: Due diligence defence 733(1) reasonable reliance defence

-1324 to prevent false or misleading prospectus

*Do not need to know this in great detail

Debt and Charges

-This area has been changed by the PPSA will learn on the basis of the old rules

-Non-circulating fixed charge, circulating is a floating charge

-Choice between debt and equity, ‘gearing’ of the company

-Company can owe money to ‘trade creditors’ non secured short term

-Secured creditors who provide finance i.e. banks

-Interest payments are tax deductable as is expense occurred in borrowing, dividends and expenses of share shares issues are not. From a corporate government perspective debt is considered desireable because it acts as discipline on management because debtholders are more likely to monitor than dispersed shareholders and because managers have to make fixed payments to them regardless of company’s success.

-Over the last decade companies and households have taken on more debt and are in inherently riskier position

-Debt to equity ratio company’s which have little shareholder value compared with debt they are highly leverage or geared, makes company more risky, however, greater potential returns to smaller shareholders, more profitable per share

-Higher levels of equity will provide a buffer when times may not be successful debate at the moment is what to do with leverage, higher leverage more likely to go bust

-Debenture: A debenture is a debt security, corporate bonds, a share is a document showing you contributed equity capital a debenture is evidence that you leant money to a company which can be transferrable and gives right to interest payment in the debenture. Can be secured or unsecured more or less transferrable. If selling securities in the company may have to produce disclosure documents

-Corporate bonds have never been significant in Australia until the early 90’s essentially bond market was for the government. More recently in the last 5 years or so Corporate bonds have started being used growing corporate bond market. Now $220B of corporate bonds on issue

- Lack of securitization markets may make debentures more attractive in the future

Charges

-s 9 is a charge created in anyway including a mortgage

-Fixed (non-circulating) attaches to a specific item of property and the charger (company charge giver) is not permitted to dispose of the property free of the charge without the chargee’s consent.

-Floating charge (circulating asset) covers a class of property but does not attach to specific items in that class until a specific event occurs. Only a corporation can give a floating charge, it allows a corporation to give more security and always to borrow larger amounts. Property can change over the time of the business can give a floating charge over stock-in-trade.

Illingworthv Houldsworth: ‘A specific charge is one that without more fastens on ascertained and definite property or property capable of being ascertained or defined. A floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.

-Can take a charge against book debts owing at any particular time. Important cases about distinction between fixed and floating charges have turned on book debts

-Another reason a company may incorporate is access to floating charges

Re Yorkshire Wool Combers: LJ Roma non-exhaustive factors to determine if charge is floating 1)Charge on a class of assets present and future 2)Class is one that in the ordinary course of the business the class will change 3)Until some further step is taken by those with the interest in the charge the company can continue trading normally

-If you have a fixed charge you are outside of insolvency i.e. receiver goes in sells asset and pays creditor, floating charge is not outside of floating charge can have other creditors take priority. Battle between secured creditors and preferential creditors

-There is no way for creditor to determine exactly at any one point how much property is available, ranks behind employee debts and can be challenged by liquidator

Siebe Gorman v Barclays’ Bank: Company was allowed to put fixed charge on future book debts, they would be paid into a separate account and would have limited ability to deal with those debts without consent of bank. Essentially it was an overdraft account which could not be used while overdrawn. It was a fixed charge because the bank had an entitlement to prevent chargee from using the account

Spectrum Plus: Charge over book debts and other debts owing to company, had to be paid into overdraft account and while company could not assign the debts, it was free to collect the debts and draw on the account for its business purposes. HL held key consideration is whether company can carry on business in ordinary way. Essential element is that asset is not appropriated until some future in the meantime the charger is able to use the asset until it crystallizes. If the account had been blocked it would have been a fixed charge

-Court pushing back fixed charge and a move in favour of preferential creditors, courts being encouraged to look into charges cannot turn a floating charge into a fixed charge by saying its fixed

Crystallization: Charge crystallizes when company is wound up, when receiver is appointed by owner of the fixed charge the floating charge will crystallize. IF the company ceases to carry on business or threatens the security

-The terms of the charge are normally more important, chargor can define a large range of events as causing crystallization i.e. breaches on restrictions on further borrowing, allowing asset value to fall below a certain amount, late payment of interest. It may not be clear to everybody when floating charge crystallize

Registration of Charges

Need to be registered under 262 and 263 (no longer the case instead have to be registered under the PPSA 262 and 262 have been repealed)

Priority Among Registrable Charges

S278-282 have been repealed but have not been replaced and are still applied even though they have been repealed

-This is important where there are competing charges over the same property

-Generally first registered charge takes priority with certain exceptions

-Can have a race to register, i.e. second created charge which is first registered, a charge which is created later but first registered will not take priority if they had notice of the earlier created but later registered charge

S 280(1)(a): Registered charge priority over a later registered charge or (b) an unregistered charge (c) even if the later registered charge was created earlier, unless the holder of the later charge proves the holder of the earlier registered charge had notice of earlier charge at the time the charge was created

Company A gives floating charge to B on 1st Jan and then a floating charge to C on the 4th. C then registers first C will take priority unless B can prove that C had notice of its earlier created charge

S280(2): A registered charge is postponed to a subsequent registered but prior created charge where the holder of the prior created subsequently registered charge can show that the later created charge had notice of the earlier created charge

-If B fails to register altogether B can still take priority if B can show the C had actual or constructive knowledge of B’s earlier created Charge

Invalidation of Charges

S266: If charge is not registered with ASIC it may be void against a liquidator or administrator turning you into an unsecured creditor now s 588FL-FO

-Charge has to be lodged within 45 days or not later than 6 months before appointment of administrator

-s267 Charges in favour of director (now s 588FP) should be interpreted in the same way as 267. Floating charge in favour of director or officers. Where charge given to person who 6 months prior to the creation of the charge was an officer or an associate of the officer and takes steps to enforce the charge without leave of the court cannot enforce without leave of the court

-s267(3): Court will give leave if at the time of the charge the company was solvent and it is just and equitable. Even if charge is invalidated debt is not

Hyland v Exception holdings: Charge will be valid until chargee purports to take step in enforcement without leave of the court

Santow J: Aim of the section is to prevent company giving charge to an insider so a friend receiver may be appointed to head off insolvency, leave should be determined according to this

Charges under the PPSA

-All charges are to be registered on the PPSA

-Circulating assets defined in part 9.5 to include accounts arising in ordinary course of business and inventories as well as where secured party has given express or implied authority to grantor to transfer the asset in the ordinary course of business

-Crystallization no longer occurs (the charge attaches at the time value is given 19(2) and (4) but a charge over circulating assets can cover after acquired property, so presumably enforcement is against assets matching the description on the date the receiver goes in

-Questions of priority remain the same; charges over non-circulating are outside the insolvency process, charges over circulating assets must give priority to employee and other interests

Lecture 11 Insolvency, Winding up, Administration and Receivership

-Not focusing on procedural complexities will focus on

1) How a company goes into liquidation, statutory demand liquidator appointment

2) Actions liquidator can bring in relation to things done before company entered liquidation (misfeasance) 588G and 588V, other transactions that liquidator can challenge 588F-588FG

3) Order in which creditors can be paid

Insolvency

-Just because a company comes into financial difficulty does not mean they will become insolvent, can bargain their way out

-Once this fails however must turn to external administration s 198A power comes to an end and they are replaced by another person (liquidator). Liquidator is about winding the company up and

maximise assets to pay creditors. Administrator is about taking control of the business to try and ensure corporations survival.

-Any of these people will become an officer of the company under s 9 and duties will apply to them s 180 etc. Can breach duties and be liable to pay compensation 1317J(2). They will also owe fiduciary duties to the company

Is the Company Insolvent

S95A(1): A company is solvent if the it is able to pay all of its debts as and when they become due and payable (cash flow test for solvency)

-s95A(2): A person who is not solvent is insolvent

-This is the same test applied to personal bankruptcy

-This is different from a balance sheet test of solvency this means assets must exceed liabilities. Generally these two tests will overlap, however, they can diverge when they do cash flow test used

Re New World Alliance Pty: s 95A requires the court to ascertain what are the company’s existing debts, debts due in the near future, the date each will be due for payment, the company’s present and expected cash resources date items will be received

-Is this a temporary liquidity problem or is this an endemic shortage of capital

-Court can take account of assets i.e. selling assets to pay for debts, assets which can be easy to sell vs. assets which are difficult to sell i.e. sub-prime derivatives

-Solvency is a question of fact, court will determine a date at which the company became insolvent

Voluntary Winding Up

-s 495: Members enforce winding up happens very rarely

Insolvent Winding Up

-459P: Allows people to apple to the court for a winding up order under 459A. Company can apply, a creditor can apply, a contributory (shareholder) a director etc.

-Application by creditor serve a statutory demand and if this is not met creditor can apply for a winding up order. Application by a creditor has to be determined within 6 months of application.

-Creditor uses the statutory demand procedure to create a rebuttable presumption that the company is insolvent s 459(3)(c) if the company does not comply with the statutory demand procedure David Grant & Co Pty Ltd v Westpac Banking Corp

-s 459E-G creditor can serve statutory demand where the demands are more than the statutory minimum ($2000) payment within 21 days, if it is not a judgment debt has to be accompanied by an affidavit swearing debt is payable

-459F: company will be not in compliance if not paid within 21 days or if the company applies to have the demand set aside 7 days after the application is determined

-459G: Company can apply to have demand set aside must prove solvency, if it does not winding up order will be made

-The only way to challenge the statutory demand is under 459G cannot wait until the liquidation procedure begins to attempt to have it set aside

-459C(2)(b): Execution of a judgment

-Once this has been dealt with can apply under 465A to have the company wound up

-Court will hear the petition and court has discretion to dismiss application, however, if you prove you are a creditor (459 standing) and the company does not comply with statutory demand court will order

-Discretion may matter if other creditors oppose the bringing of an insolvency action might also deny application if voluntary administration is likely or if the creditor is abusing the process

-Creditor will then nominate a liquidator court will then approve

-Liquidator must be listed with ASIC and the with the Court must be independent of company, creditor and its members not in debt to the company etc.

Effect of Liquidator Appointment

-Once L appointed company’s officers must not exercise powers without approval of L or the court 471A

-Stay on all proceedings against the company, no future proceedings will be heard 471B this is to ensure that there is no preferential treatment of creditors

-Disposal of property other than by the liquidator is void unless court orders otherwise 468(1)

-Employment contracts terminated and transfer of shares without liquidator consent are also void 468A

-Floating charges crystallize

-Unsecured creditors can no longer enforce debts against company; they have to prove in liquidation; key point is that this is a collective enforcement procedure unless court gives leave under 471B

-Unsecured creditors have to give the liquidator evidence of the debt s 553 and they can then participate proportionally in disbursement of company’s assets

-Secured creditors are unaffected s 471C charge holder appoints receiver to take control of secured assets. Fixed charges can be subject to challenge and floating charge holders may be postponed to claims of certain employees under 561

Role of the Liquidator

-Liquidator can only carry on business in a limited way 477(1)(a): only so far as necessary for the beneficial disposal of the company’s business

-Other powers set out in 477, can pay creditors in full (order or priority) can make compromises with creditors, can bring or defend proceedings in the name of the company (477(2)(a)). Duty of care owed to the company should not bring proceedings unless reasonably sure of success and considering likely costs of proceedings winning must be likely to produce a surplus for creditors. If company’s assets cannot meet costs of bringing actions liquidator can be liable, significant disincentives to bringing proceedings. May sell or otherwise dispose of company assets

-If the company’s assets are inadequate to meet the costs of the action, the liquidator will be personally liable for them re Speedifex Building Products Pty Ltd

-Can make calls on contributories

-Can act as and on behalf of the company, can obtain credit on behalf of the company

-Appoint agents and all such other things as are necessary for winding up affairs of the company and distributing its property

-Directors have to help and produce report under 475 and report to ASIC under 476 and misfeasance discovered should be reported to ASIC s 533. Audited accounts should be lodged within 6 months

Liquidator should 1) collect assets 2) actions for breach of duty and statutory actions (seeking recover against directors and 3rd parties 3)ascertain creditors claim (proved in insolvency) 4)distribute in line with statutory priority 5)apply for deregistration of the company

-They are to avoid unnecessarily prolonged the liquidation 480

Actions Liquidator can Bring

Insolvent trading: s 588G, 588H and 588M

-Aims are to encourage directors to be aware of financial position, to protect creditors

-Applies to directors as defined in s 9 includes shadow and de-facto

-Liquidator has to show that the director was a director at the time the company incurred a debt, that the company was insolvent at the time of incurring that debt or as a result of incurring that debt and that there were at the time reasonable grounds for suspecting insolvency

-‘Incurred’: requires a positive a direction must be a choice by the company to do or omit to do something which as a matter of substance and commercial reality renders it liable for a debt that it would not otherwise have been liable Standard Chartered Bank v Antico

-‘debt’ is an obligation to pay a liquidated sum (an amount that is ascertained) note s 588G(1A) includes things like buy-backs, reduction of capital etc.

-Insolvent: s 95A cash flow test insolvent at the time or by incurring the debt Hall v Poolman, Trul Floor Service Pty Ltd v Henkins, Lewis v Doranm Quick v Stoland

-Reasonable grounds for suspecting ASIC v Plymin No 1

-Remember certain transactions (payment of dividend, reduction of capital, share buyback) are deemed to be incurring debts 588G(1A)

-s 588E: number of presumptions which can be made, 588E(4) if the company failed to keep financial records as required the company is presumed to be insolvent for the period, absence of accounting can be used as proof for insolvency to bring action under 588G and V. Otherwise L has to prove Company was insolvent at the time

-Reasonable grounds for suspecting company was or would become insolvent, director was either subjectively aware, or that a reasonable person in that position would be so aware. Reasonable grounds is a question of fact, without reference to hindsight what would a reasonable and competent director have suspected about Company’s ability to pay debts as the fell due ASIC v Plyman

Contravention of 588G

-Civil penalty provision,

-Can be liable to pay compensation to the company under 588J if ASIC attempts to get a compensation order

-Criminal liability under 588G(3) if suspected insolvency and were dishonest in failing to prevent the company incurring the debt

-Compensation order under 588K

-Liquidator can apply for compensation under 588M ‘equal to the amount of loss or damage’ this is recovered on behalf of all the unsecured creditors (including all those who become creditors while the company was solvent) arguably the creditors who were creditors while solvent are making a gain while creditors who suffer real damage may lose out

-Creditor can apply under 588R with L consent, following 588S notice, or without liquidator consent under 588T, or if liquidator does not respond. If creditor recovers they can keep the money as opposed to all the money being shared. Creditor may want creditor to go after the director because they get to keep all the damages that they would have suffered

-Individual creditor can’t sue if L has brought action under 588M, or if ASIC pursuing civil penalty provision of if transaction has begun under 588FF

Defences

-Director to show they had reasonable grounds to expect and di expect that the company was solvent at the time the debt was incurred (588H2)

-Reasonable reliance to a person to whom monitoring company’s solvency had been delegated 588H(3)

-No participation in management because of illness or other good reason positive reason not to take part in management (588H(4))

-All reasonable steps taken to prevent company from incurring the debt, including appointing an administrator (588H(5)(6)). Court can specifically take into account attempts to appoint an administrator. If company is continuing to incur debt they should appoint an administrator.

Elliot v ASIC: Even Non-Executives most not be supine must not be complacent if they cannot stop a director from incurring debts should resign or appoint an administrator

-Relief from liability under 1318 or 1317S show that director acted fairly and honestly

588 V-X Action against Parent Company

-Equivalent to 588G for parent companies and not a civil penalty provision

-If you cannot prove that a parent company was not a shadow director

-Impose liability on holding company where it or its directors were aware that subsidiary was insolvent when in incurred a debt or it became insolvent by incurring a debt or where a reasonable person looking at the level of control would expect the holding company or one of the directors to have knowledge

-s 9 A company of which another company is a subsidiary

-s 46: a holding company controls the composition of its board, position to cast majority of votes at GM, holds more than half of the share capital, or where there is a subsidiary of a subsidiary

-588V is much narrower than originally recommended to bring in whole group only applies to holding company

-588WL Liquidator can recover from parent sum equal to the amount of loss or damage

-No possibility for individual creditors to sue parent

-Defences are the same about 588H

Misfeasance Proceedings

-Remember the limits to ratification preventing the company (through the liquidator) bringing proceedings

-if a breach of duty action that has been lawfully ratified action is lost under 198A liquidator will not be able to challenge

-The company through the GM gives up its right of action against a director

Cook v Deeks: Where directors misappropriate company’s property cannot ratify this, liquidator will be able to claim

Kinsela: interests of creditors become more relevant as company nears liquidation is not ratifiable liquidator will be able to challenge under common law

Forge v ASIC: Breach of statutory duty, ASIC can still bring civil penalty proceedings even if there has been a ratification but Court may take account of this in deciding. Ratifying can work in relation of preventing directors from bringing proceedings under s 198A therefore liquidator would be prevented

-Directors are rarely sued when in charge of a solvent company

Avoidance of Floating Charges

-s 588FJ: Floating charge given within 6 months of ‘relation back-day’ is void if does not secure an advance paid or property or services supplied at or after the creation of a charge

-Creditor is owed money by company, company later gives charge to the creditor this gives preference to a creditor. The debt proceeds the creation of the charge

-Relation back day s 9 and 513A day on which application for winding up order made, unless company was already administration

-Charge is not void if proved on balance of probabilities that company was solvent immediately after charge given 588FJ(3)

Preferences/Uncommercial Transactions

-Unfair Preference (588FA) creditor receives more under transaction than would on winding up

Transaction includes payment, releases, loans, guarantees etc. s 9

-To establish either unfair preference (588FA(1)) or an uncommercial transaction 588FB the liquidator has to prove

1)Transaction was an insolvent under 588FC i.e. company was insolvent at the time of the transaction or when act done to give effect to it. Liquidator may be able to rely on presumptions set out in 588E to assist with proving insolvency

2) Entry into transaction occurred within the ‘relation-back’ period so that it was voidable under 588FE

McDonald v Hanselmann

Re Emanuel (No 14) Pty Ltd in liq

VR Dye & Co v Peninsula Hotels Pty Ltd in Liq

Unfair Preference (588FA) creditor receives more under transaction than would on winding up

Uncommercial transaction 588FB – transaction that a reasonable person in the company’s

Unfair loan to company 588FD loan is unfair where interest of charges are extortionate taken

Unreasonable director-related transaction 588FDA, can recover unreasonable bonuses etc.

circumstances would not have entered (examine things like did company examine other options) difficult to prove

account risk, value of security, terms etc

Was the transaction an insolvent transaction (588FC) (does not apply to 588FDA, or 588FD). Liquidator may rely on 588E presumptions to prove whether company was insolvent on the date it entered the transaction or became insolvent because of entering the transaction (588B). Unreasonable loans and director related transactions can be challenged despite solvency at the timeDid transaction occur within the relation back period (s 9 513A)? Relation back period is the period six months ending on the day of application for winding up order 588FE(2); extended to two years where transaction was uncommercial (588FE(3) four years if transaction was with a related entity (588FE(4) and (6A); ten years if transaction intended to defeat creditors (588FE(5)). Unfair loans can be challenged regardless of when they were madeIf all of the above is satisfied, the transaction is voidable and the liquidator can apply for relief on behalf of the company under 588FF – court can make a wide range of orders (including transfer of property and payment of money to the companyThe other party has a defence under 588FF order if can show 588FG(2), they became a party to the transaction in good faith …handout

Order of Priority Among Creditors

-Any distribution (aka dividend) by liquidator must follow the statutory order

-All unsecured debts rank and equally an must be paid proportionately s 555

-Statutory order s 556:Priority Creditors 1) Expenses of liquidation 2) Expenses of the Court order 3) Certain costs of administrator producing reports etc costs of ASIC (these all connected to insolvency) 4) Wages, superannuation contributions payable by the company to employees before the relevant date, certain employees are excluded (556(2) anyone who has been a director, spouse of a director or relative limited to $2,000 beyond this ordinary unsecured creditor 5) Injury compensation 6)leave payments to employees 7)retrenchment payments to employees

-If there are insufficient liquid sums to pay employees liquidator can sell assets, even assets subject to a circulating charge

Ordinary Creditors

8) ordinary unsecured creditors 9) deferred creditors 10) debts owed to persons in their capacity as members 11) members paid in accordance with their rights (never anything left for these groups)

-Ordinary unsecured creditors will get paid proportionately from what remains very unlikely to be paid in full

-Members paid in accordance to rights according to rights of members i.e. preference shareholders vs. ordinary shareholders

Protection of Employee Entitlements

-Makes provision to protect the entitlements of the company’s employees from agreements and transactions entered into with the intention of defeating those entitlements. This makes it a criminal offence for a person to enter into an agreement or transaction with the intention of either preventing the recovery of employee entitlements or significantly reducing the amounts of entitlements which can be recovered 596AB. Can also be ordered to pay compensation even if the criminal case is not made out provided loss is proved on the balance of probabilities 596AC, liquidator can bring proceedings, or employees can, with leave from the liquidator or the court. Action to recover their entitlements is likely to be protracted

Receivership

-Liquidation is (generally) a court order appointing a liquidator to wind up company. At the same time a secured creditor can appoint a receiver to go in take charge of secured assets, right of priority over the liquidator

-Chargeholders stand outside of liquidation

-Receivers get powers under the charge instrument and s 420

-They appoint receiver to enforce their charge; powers set out in charge instrument and 420. Section 420 allows them for obtaining the objectives for which the receiver was appointed to 1) Take possession of property 2) Borrow Money 3) Make or defend application to wind up 4) hire employees etc.

-The main power is to sell asset, other things they can do are incidental to the objects of the charge

-Before receiver can appropriate proceeds of the assets which were subject to a floating the receiver must pay certain creditors who have preferential rights ahead of a floating charge or a fixed charge which was formerly floating under 433. Failure to pay in correct order will amount to the tort of breach of statutory duty

-If the charge is over essentially all of the company’s assets will have duties to the company generally

-If company is not also in liquidation (which will be rare) the receiver goes in under a floating charge must pay employee rights under 556(1)(e)(g) and (h). S 433 receiver under floating charge must pay priority creditors first. If you do not pay in the right order tort of breach of statutory duty

-Receiver is an agent of co under charge instrument, and so owe fiduciary duty to company to exercise powers in good faith in interests of company, can exercise power without consent of the company, entitled to indemnity for liabilities properly incurred.

-Like liquidator, they are also an officer of the company s 9, this means that even though they can exercise power without consent, they can get indemnity out of the company’s assets, and will owe fiduciary duty to exercise power in interests of chargeholder and company. This means they should not sacrifice the assets act in good faith Pendlebery

-Receiver should study the market, sell goods separately, sell in a way that is efficient, no power to postpone sale in hope price will rise Pendlebery

-If they breach this duty possibility of rescission, but generally will have sold to good faith party. Generally receiver will be taken to have sold the property at the price it should have been sold (good faith duty)

-s420A duty of reasonable care of receiver

-Receivers, administrators and liquidators all owe statutory duties as they are officers of the company s 9

-Company can complain about breaches of duty, subsequent Chargeholders and anyone who has guaranteed the charge

-Generally after receivership company will go into insolvent liquidation or administration

-If a secured creditor is not fully covered by sale of assets they become unsecured creditor in relation to amount outstanding

Administration

-Liquidation does not always produce best outcomes for creditors (fire sale of assets). The assets are worth less if they are liquidated than if business is being sold as a going concern

-Administration procedure was brought in 1993 part of the same reforms brought in which enacted s 588. Administration provides defence under 588H(6) this linking between administration and minimising the risk of personal liability may have contributed to the popularity of administration in Australia

-Administration is an alternative procedure; company continues trading under Deed of Company Arrangement (DCA) approved by creditors. Administration creates breathing space for the company and allows advice to be given to creditors. Allows for the postponement or consolidation of debts while company continues to trade or its assets are sold off in an orderly (rather than panicked fashion)

-Company directors tend to prefer administrators as they seem more ‘pliant’ administrators cannot bring 588G proceedings, no enforcement of personal guarantees during administration s440J

-s435A: Aim of administration is to administer affairs in a way which 1) Maximizes its chances of survival 2) Results in a better return for creditors than immediate winding up

First Stage Administration

-Voluntary administration stage administrator appointed s 435C can be appointed by directors s 436A (this will require resolution by board that company is insolvent, or is likely to be insolvent 588H(6)), by a liquidator under s436B (liquidator might do this if they need extra flexibility), by a holder of a charge on whole, or substantially the whole of the company’s property under 436C

-Directors are able to be involved in the rescue of the company, even though creditors make key decisions

-Administrator takes control of company under 437A directors can no longer act without written approval of the administrator, not totally removed as in liquidation

-Moratorium on all claims 440D allows administrator to make assessment

-Charges cannot be enforced once administration starts 440B. Exceptions to this 1) If there is a charge over the whole or substantially the whole of the business have a decision period of 13 days to decide whether to enforce the charge 441(a). If they enforce the charge receiver can sell as normal, if they do not enforce the charge, cannot enforce until the end of the administration period. 2) Chargeholders who had already appointed a receiver may continue s441(b), Court can prevent enforcement under certain circumstances 441(d)

-Enforcement of personal guarantees from directors 440J and 1323

-Administrator can ignore the crystallization of any floating charge which has not been brought about by enforcement. They can continue to deal with property as if it was still floating

-Creditors then meet to approve administrator s 436E

-Administrator then begins job of assessing the assets and reporting to creditors best way of moving forward, have a deed of company arrangement, wind up company, or terminate the administration s 438A. Directors must cooperate 438B

-Administrator has a duty to inform ASIC of breaches of duty and or criminal actions 438D

Second Stage

-Creditors have proposal meeting to respond to administrator’s report; requires a majority by number and value 439C

If the administrator’s report is to enact a deed of company arrangement should have draft deed and proposal report should tell creditors in their interests 439A(4) If a deed is recommended, the administrator should produce a statement setting out details of the proposed deed 439A(4)(c). Avoidance of preference, challenging transactions and 588G can only be challenged under insolvency will weigh heavily on decision

-Generally administrator will offer some sought of restructure which may give better returns, in the future but would take time

-Detailed rules in s 439A and corporations regulations provide detailed rules about how meeting is to be conducted 5.6.19 of Corporations regulations, vote taken on voices unless poll is required

-444A execution of deed of company arrangement, company will continue to operate under that deed and in accordance with it

-If a company executes a deed it is no longer a company under voluntary administration becomes a company under a deed of administration

-If a company fails to execute a deed within 15 days of the meeting goes into creditors voluntary winding up, going in to liquidation is generally what happens

-Similarly creditor may just vote for liquidation, or it may be recommended by the administrator

Contents and Effect of Company Arrangement

-Mandatory contents 444A and 444D (i.e. have to allow for employees unless they waive this as creditors

-Other contents bespoke and some default 444A(5)

-DCA binds company, officers, members, administrator and creditors before date specified in DCA 444G

-Secured creditors can enforce under 444D, unless court orders otherwise or they voted for the DCA

-Termination of deed, when purpose is achieved or when company goes into liquidation, death of a company

Duty of Care Statutory Business Judgment Rule makes it difficult to find directors guilty of breach

Good faith/interests of Company Decisions should make returns for shareholdes, take account of other companies in group, creditors (approaching insolvency), employees

Proper Purpose generally takeovers can apply to any power, improper dilution of shares is a personal right of members

Profit from position not being on both sides of a transaction

Misappropriation Don’t steal

Corporate opportunities Can’t take opportunities for yourself when for the company

Ratification When will ratification not be appropriate

ASIC enforcement Statutory duties are all civil penalty provisions, company can claim compensation

Minority protection Majority not taking action in regards to breaches of duty

Directors may be able to prevent themselves from being sued in pty company may be restriction on share transfer 237G

Derivative action very difficult to get up

Oppression remedy generally the best 232

Equitable winding up

Fraud on the minority Preventing majority acting outside of their power, using their power for improper purposes

Focus on the remedy sought Work through possibilities for achieving desired remedy

Corporations Law End of Semester Law Case List

Salomon v Salomon: Establishes separate legal personality foundation case of corporate law

Macaura v Northern Assurance Co Ltd: Property owned by companies even where given in return for shares

Lee v Lee’s Air Farming: Company can make contracts with shareholders, even controlling ones

Williams v Natural Life Health Foods: Company can be liable in tort, either directly or vicariously

Re Darby: Companies established to conduct fraud can lift the veil to make individuals behind company liable

Re H: Corporate group used to defraud tax office, could view entire group as one entity

Adam v Cape Industries: Similar to Briggs v James Hardie, cannot lift veil because a group has been structured so one member will attract liability in the future at the expense of other groups

Gilford Motor Co Ltd v Horne: Company used as a device to evade existing legal obligations Court lifted the veil

Jones v Lipman: Lipman sold land, then incorporated company and transferred to evade specific performance

ANZ Executors: argued Lipman and Gilford cases are not examples of the veil being lifted as orders were against company and individual

Re FG Films Ltd: Company had no assets parent was held liable

Smith Stone & Knight v Birmingham Corporation: Compensation given to parent for subsidiary losing ability to conduct business as subsidiary was held to be an agent of parent

DHN v Borough of Tower Hamlets: Factually similar to SSK later described as turning on statutory interpretation

Spreag v Pasen: Followed decision in SSK but applied to make parent liable based on analogy with agency

Re Bugle Press: Two majority shareholders holding 90% of shares create a new company then sell shares to the new company to take advantage of legislation. Court looked behind statute to who was effecting takeover

Qintex Australia Finance Ltd v Schroeders Australia Ltd: Creditor was unable to identify the particular company in a large group with which it had contracted

Walker v Wimborne: Number of companies operated as a group when one of the companies (Asiatic) went into liquidation, these payments were made as part of the group’s practice of ‘shuffling’ funds. HC found that there was no formal group even if there was directors owed duties to their company alone in deciding if payments should be made to other companies

Briggs v James Hardie & Co Pty Ltd: Judgment of Rodgers came close to lifting the veil for tort victims based on the fact that tort victims cannot bargain around limited liability

Lennard’s carrying co v Asiatic Petroleum: Corporation is an abstraction must look to the directing mind and will of the corporation

Tesco Supermarkets v Nattrass: Affirmed test in Lennard’s bigger the corporation less likely to be convicted

Meridian Global Funds Management Asia Ltd v Securities Commission: Special rules of attribution proposed based in statutory interpretation more flexible approach large companies more likely to be found liable changes who can be directing mind and will

Eley v Positive Life: Outsider member rights cannot be enforced under s 140 only rights flowing from membership can be enforced i.e. voting rights and dividends

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

Webb Distributors v Victoria: Remedy for breach of the Constitution by the company is injunction or declaration not damages

Sons of Gwalia v Margaretic: Member bought shares from 3rd party claim for misleading and deceptive conduct which was found to be a non-member right and able to be enforced before creditors. This was changed by legislation

Krans v JG Lloyd Pty Ltd: Member may be able to insist that the company’s organs be properly constituted

Re Pembury Pty Ltd: May still be a procedural irregularity even if deliberate

PW Saddington and Sons: Deliberate irregularities may not be irregularities if they cause substantive injustice

Bailey v New South Wales Medical Defence Union: Separate contracts can exist alongside s 140 contracts which can be enforced despite alterations to s 140 contracts

Russell v Northern Bank: Make a contract between themselves, has all the features of a regular contract, will not automatically bind new members

Bushell v Faith: Can use weighted voting rights entrench constitution and directors (not in public companies s 203D)

John Shaw and Sons Ltd v Shaw: s 198A business of the company is managed under or by the directors

Re Express Engineering Works Ltd, Re Duomatic: Members can vote informally if unanimous consent

Re Compaction Systems Pty Ltd: This does not apply if any member is excluded from the meeting even if they are not entitled to vote

Fraser and Anor v NRMA Holdings Ltd and Ors: Duty to ensure that members have adequate information to decide whether or not they should attend the meeting or leave it for the majority to decide.

-Standard chartered bank of Australia v Antico

-Clamp v Fairway Investments Pty Ltd: Quorum for directors meetings is two

Automatic Self Cleansing Filter Syndicate Co Ltd v Cunninghame: General meeting cannot force directors to take a particular course of action

Howard Smith v Ampol Petroleum: Directors with their management powers may take decisions against the wishes of majority shareholders, majority cannot control exercise of 198A powers while directors in office

Proliwka v Heven Holdings No 2: Power of members to bind company based on Constitution even if acting unanimously and informally cannot take on management power

Bodikian v Sproule: Members acting unanimously do not have any more power than they have under the Constitution

Barron v Potter: If directors are deadlocked general meeting gets power to decide

Massey v Wales: If general meeting has power to appoint of remove directors there will not be deadlock must appoint or remove a director

Strong v J Brough and Son: Implied limitation based on intention of parties in starting company if this disappears any member can apply for winding up.

Re Tivoli Freeholdings: Similar to Strong case involved winding up of company who had moved beyond common intention of the company when established

Whitehouse v Carlton hotel: Conferring power on a governing director means they can act as the company

Healey Hutchinson v Brayford: Implied actual authority requires consent of the board members who communicate this with each other by words of conduct and then communicate this to the agent

Entwells Pty Ltd v National and General Insurance Co: managing director has usual authority to deal with everyday matters, generally in charge of the company

Green v Meltzer: MD has authority to borrow money to deal with cash flow problems, not the authority to invest in large capital procedures, could instruct solicitor to act in trading dispute not an internal dispute

Northside Developments Pty Ltd v Registrar-General: Individual directors have no usual authority to bind the company

Donato v Legion Cabs (Trading) Co-Op Society: Company secretary has usual authority to make contracts with respect to the administrative needs of the corporation

AWA v Daniels: Question of fact to determine what the usual authority of other agents will be

Freeman & Lockeyer v Buckhurst Properties: 1) representation made to 3rd party that agent had authority to enter into the contract of the kind entered 2) Representation made by a person who had actual authority 3) 3rd party must be induced to act because of the representation

Crabtree Vickers v ADMA: Did a MD have authority to make a representation that another agent could enter a contract, if MD did not have actual authority representation had to come from the board as a whole, no ostensible authority. Based on a finding of fact in a lower court

Turquonds Case: If 3rd party relies on actual evidence (documentary, representation by someone with actual authority) that Constitution has been complied with allows third party to assume that stipulations have been complied with

Houghton v Northard Lowe & Wills: Ordinary director cannot make binding contract with 3 rd party cannot assume that director has actual authority. Mere possibility is not enough

Morris v Kansen: Cannot presume in own favor that things have been done correctly if you should make inquiry that would reveal otherwise

Northside Developments v Registrar-General: Transaction was not related to the company the company got no benefit from the transaction should have been put on notice

Story v Advance Bank: s 128(1) dealings should be dealt with broadly

Pico Holdings Inc v Wave Vistas Pty Ltd: case test of s 129(4)

Director’s Duties

Regal v Gulliver: Directors cannot profit from position, Directors used own funds to take up an opportunity because company could not afford to take up opportunity still a breach of duty

AWA v Daniels: Employed a person trading in foreign exchange trading and caused significant loss. Company also employed a MD who was inexperienced and who do not effectively oversee employee. Another full time executive (Hook) and non-executive relied on MD to exercise oversight. Company auditors failed to bring to the boards attention the inadequate controls over the employee which if they had brought to the attention of the directors they may have changed position. Sued auditors for failing to raise this, auditors claimed contributory negligence on part of Non-executive and directors claim for contribution from chairman and non-executive that their lack of skill caused loss

-Question for the court was were the non-executives liable, the chairman chief executive was liable was not able to rely upon MD. The non-executives were able to rely on the senior managers and were not liable. Board of a large corporation cannot manage the day to day business they rely on

managers to do this, business could not to this if directors cannot trust those employed to do the job. If they had check everything there would be no delegation

-Executives were supposed to make enquiries and report to the board and to the auditors

-NSWCA reject distinction between non-executives and executives, found the non-executives to be not liable however said directors should be familiar with how the company is run directors should take reasonable steps to be put in the position to guide and monitor the management of the company. The board of AWA met only once per month for half a day, should meet as often as required to carry out function. S 1318 gives court ability to relieve directors, in this case it was not unreasonable for the Non-Executives to rely on senior management.

-Non-executives perceived as needing to take a more proactive approach to monitoring by referring to what they ought to know: ‘in our opinion the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company’

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

Harlow Nominees: Directors may be concerned with a wide range of considerations and as long as judgment is exercised in good faith and for proper purposes the court will not review the decision

Carlen v Drewery: Court is not required on every occasion to take the management of the every playhouse and brewhouse. Court will not review primarily business decisions

Permanent Building Society v Wheeler: Not part of a Duty of loyalty, in content the duty to exercise care and skill are the same

CAC (NSW) v Drysdale: Duties are owed by directors and senior executives. This may vary depending on the nature of the office and their service contract, also includes person who knowingly assume office of director without being properly appointed (de facto directors)

Grimaldi v Chameleon Mining: Can be very difficult on the facts to decide if someone has been behaving as a director. In this case had unlimited discretion to negotiate large contract, engaged in board meetings involving restructuring etc.

Australian Standard Bank v Antico: One company was shadow director of another company. Pioneer through its group arrangement was the largest shareholder of giant. It was allowed to put 3 of its nominees on the board of Giant. This on its own was not sufficient to make a shadow director (National Mutual Life). Pioneer was found to be liable for Giant trading while insolvent. Pioneer had effective control given others only had small shareholdings. Had actual control over management and funding, had power of approval over payments, also required that Giant produced financial reports in line with pioneer’s own requirements

Percival v Wright: Directors owe duties to the company as a separate legal entity

Peskin v Anderson; Allen v Hyatt; Coleman v Myers: Directors may come to owe duties to other people if they assume responsibility to them, may incur a duty of care to shareholder

Glavanics V Brunninghausen: Glavanics owed 1/6th of shares Brunninghausen owed 5/6th of shares. B was actively involved in management. Mr. B was approached by a third party to buy companies business B did not disclose this to G. G then sold his shares to B without knowing that company was going to be sold. It was held that in the circumstances there was a fiduciary relationship B owed to G based on the personal dealings between them. Sale was a personal dealing, fact there were only two shareholders. G was totally dependent on B for information and management

Re City Equitable Fire Insurance: Managing Director committed fraud and caused losses to the company, other directors sued for lack of care and diligence

-Director should take such care as a reasonable person would on their own behalf. What would a reasonable person with the knowledge and skill of the defendant have cone when acting on their own behalf (Re Brazillian Rubber Plantations)

-skill: Conduct should be assessed against a skill standard: what would a reasonable person within the knowledge and experience of the defendant have done in the circumstances if acting on his own behalf . Do not have to have particular skills but if they do they should use them for the benefit of the company (Re Brazilian Rubber Plantations and Estates Ltd). Under the influence of 588G an objective standard of skill, albeit rather minimal, is expected of executive directors in relation to financial affairs of the company (Commonwealth bank of Australia v Friedrich)

-Diligence: not bound to give continuous attention to affairs of the company. Duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so’

Delegation and Reliance: In respect of duties which may be properly left to some other official the director is unless grounds for suspicion justified in trusting that official to perform such duties honestly. Have to rely on the conduct of others but should identify situations where this is dangerous

Commonwealth Bank v Friedrick: Objective standard for skill: Director is to be expected to understand company’s affairs to reach a reasonable opinion as to company’s financial state, should be reasonably abreast of company’s affairs and reasonably abreast of the actions the company is taking (influence of 588G)

Dorchestor Finance v Stebbings: Two non-executive directors who were chartered accountants were liable for leaving an employee in charge of signing blank cheques

Daniels v Anderson: NSWCA found a more onerous duty on non-executives in terms of relying delegates

ASIC v Rich: ‘arrangements flowing from the experience and skills that the director brought to his or her office and also any arrangement within the board or between the director and executive management affecting the work that the director would be expected to carry out. The precise duty of care flowing from these arrangement would be subject, of course, to a minimum standard of care and diligence set by the statute in reflection of the common law position’

ASIC v Adler: Under statutory standard directors are to be expected with business of the company, sat informed, remain familiar with financial position of the company with regular review of the statements

ASIC v Vines: Executives work full time they will have skills of a reasonably competent person in that category there is a minimum implied standard which may be raised by contract of employment

ASIC v Macdonald (no 11): It is still not clear the extent to which non-executive director will owe a duty of care and skill

ASIC v McDonald; Morley v ASIC

-ASIC brought proceedings against non-executive directors of James Hardie for approving a press release which said that the James Hardie Foundation was fully funded. This was not correct.

-ASIC brought negligence proceedings for approving a statement which they should not have done if they were acting reasonably. Gazelle J argued that there are matters which the board cannot delegate. This statement was crucial to the re-structuring of the James Hardie Group. This prevented delegation to expert advisors, employees etc.

-Board could not rely on this as management had sought the board’s approval. None of the board were entitled to abdicate responsibility

On appeal Morley v ASIC

-ASIC failed to call a key witness Court was not convinced that Board had actually approved

-Dicta: If this had gone before the board it was a board matter for James Hardie, non-executives had to turn their mind to the press release. While the case was overruled on the facts, the principle of some non-delegation was affirmed

ASIC v Adler

-Directors of HIH attempted to rely on 180(2) all failed

-1st had a material interest

-2nd did not act in good faith

-3rd

-Santow J: It would be strange if ASIC had to prove negligence and also show that the decisions was not in good faith etc. The burden of proof is on the defendant seeking to gain the benefit of s 180(2)

ASIC v McDonald: Provisions of 180(2) act cumulatively, Mr McDonald gave no evidence to show he rationally believed in the judgment therefore defence under 180(2) had to fail

ASIC v Rich: Does not entirely replace common law business judgment rule which is an inherent part of determining when there is a breach the reference to rational belief may be viewed as exonerating decisions which may not be considered reasonable at common law. A decision could be rational if It is based on reasoning

ASIC v Fortescue Metals Group: ASIC alleged that disclosure had not been made by Twiggy Forrest, The decision not to disclose elements of a contract is not a business decision it is a breach of listing which of itself is illegal

Lagoorley v McCan: Court did not distinguish between good faith and the interests of the company

Bell Group v Westpac Banking Group: Test of good faith is largely subjective. Objective elements relate back to the question whether the directors honestly the believed the transaction be in the best interests of the company, not whether (regardless of belief) it did not benefit the company. If the decision is one no reasonable director could take may conclude not acting in good faith

Hutton v West Cork Railway: Bona Fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company and paying away its money in matter perfectly bona fide yet perfectly irrational

Ngurli Ltd v McCan: Interests of current and future shareholders is relevant, this allows company to make long term investments (i.e. not paying dividend) Current members include minority and majority preferring majority at expense of minority will breach good faith duty

Kinsela v Kinsela: company has a duty to consider creditors when it is nearing insolvency. Directors of company were Mr and Mrs K transferred property to company Company grants lease to Mr and Mrs K, Mr and Mrs K as shareholders ratify the decision to transfer lease Company becomes insolvent Liquidator brings misfeasance action Shareholders cannot ratify decision to act not in the favour of the company where this could affect creditors. Where the loss would only affect the shareholders they could unanimously ratify

Walker v Wimborne: Company must take account interests of shareholders and creditors, failing to take into account interests of creditors will have adverse consequences

-Directors 198A Asiatic Pyt Ltd Payments to other companies which directors also controlled

-Asiatic did not own any shares in the other companies, simply in return for an implied promise to repay. Directors were not respecting the separate legal entity of the companies Asiatic became insolvent, liquidator brought misfeasance proceedings Directors must take account of interests of shareholders and creditors, this policy was based on total disregard for the interests of the company and to its creditors

‘It is in a practical sense creditor assets and not shareholder assets that, through the medium of the company are under the management of the directors pending liquidation or administration’

Grove v Flavel: Duty to consider creditors when company is approaching insolvency, must take care of creditors when directors have information that company faces a ‘real’ risk of insolvency

Chater Bridge v Lloyd’s Bank: Where directors have not applied their mind to the interests of the company the court will use an objective test

Hutton v West Cork Railway: Directors decided to take all employees to the zoo, this was challenged as not in good faith, was this reasonably within the incidental interests of the company. The law

does not say there is to be no cakes and ales, but there can be cake and ale to the extent it will be in the interest of the company

Woolworths v Kelly: Company may be generous with whom it deals, it can do more than it need do if it is for the benefit or the purposes of the company, it may allow company to attract better directors etc. It may be felt appropriate that the company acquire the reputation of being such. Similarly, it may be generous to its directors, in providing large fees or attractive pension funds or the like, but essentially only if it be the means adopted by it of attracting good directors to its service or securing the best performance by them

Park v Daily News: Company was being wound up and it proposed to make an ex gratia payment to employees who were going to lose their jobs. Motivations were not recognized as being within the interests of the company. Not possible that the payment to the employees could be a benefit for the company because company was being wound up

-If there is no possibility of a benefit to the company there will be a breach of the duty to act in good faith

Bennett’s Board of Fire Commissioners NSW: A Nominee director must act in the best interests of the company rather than in the interests of his appointor

Scottish Co-op Whole Sale Society v Major: A nominee director has to act in the interests of the company, subject to the same duties as other directors, where there is conflict have to prefer the company or resign

Kuwait Asia Bank EC v National Mutual Life Nominees Ltd: Nominated to employees to board of another company, they had to fulfill duties could not plead duties given by bank as defence. Appointer would not be vicariously liable for actions of nominees (exceptions for fraud or bad faith)

Charterbridge Corp Ltd v Lloyds Bank Ltd: Decisions will tend to be taken in the interests of the group rather than the separate entities involved, and refused to strike down decisions simply on the basis that the directors had failed subjectively to consider the interests of the separate entity: he preferred an objective test asking whether an intelligent and honest person in the position of the directors could reasonably have believed that the transaction was for the benefit of the separate entity

Walker v Wimborne: Subjective approach, insisting on principle that ‘each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payment should be made to other companies. Transactions should be viewed from the standpoint of company to which duty was owed and judged according to the criterion of the interests of that company

Equiticorp Finance Ltd v Bank of NZ

-Equiticorp Payment Uruz Pty paid bank

-Liquidator brought action against directors for not acting in good faith in the interest of equiticorp

-Directors argued they didn’t think about, objectively it could be that the payment was for the benefit of the company because bank finance was made available by the payment. It was in the interests of Equiticorp to pay money to ensure it would have access to bank finance

-NSWCA: Transaction benefited group as a whole, Walker v Wimborne principal can be removed where interests of the group are taken into account

-Where directors have failed to consider the interests of the relevant company they should be found to have committed a breach of duty. If, however, the transaction was, objectively viewed, in the interests of the company then no consequences would flow from the breach. Such an inquiry would not require the court to consider how the hypothetical honest and intelligent director would have acted. It would accept that a finding of breach of duty flows from a failure to consider the interests of the company and would then direct attention at the consequences of the breach

-This case is a relaxation of the idea that each company has its own interests

Re Smith v Fawcett: Directors should not exercise their powers for any collateral purpose. They must have regard to those considerations and those considerations only, which the article on their true construction permit them to take into consideration

Hogg v Cramphorn Ltd

Target Board Target

Bidder Hostile Bid Target Shareholders

Target Board Management power Target issue shares to employee trust

-Generally there is probably nothing wrong with establishing an employee trust (Kelly v Woolworths)

-Board then appointed themselves as trustees of the employee trust, this was challenged by a shareholder as being for an improper purpose (i.e. preventing bidder from taking control of general meeting)

-Buckley: Directors were not motivated by personal advantage; they had an honest belief that establishing a trust would benefit the company as would avoiding the hostile takeover. On the facts, however, manipulating the voting procedures to ensure that directors retained control. It was not open for the directors to argue that giving themselves a majority shareholding .

-Directors were not acting dishonestly but the primary purpose for creating the trust was to defeat the takeover, which was interfering with the general meeting. An action for an improper purpose is voidable, and exceptionally it is a duty also owed to individual shareholders as it affects s 140 right of not having their voting rights diluted

-Clearly distinguished proper purposes test and the good faith test

Residues Treatment v Southern Resources: breach of good faith duty where shareholder interest is dissolved can be sued by individual shareholders as it infringes 140 right

Howard Smith v Ampol Petroleum

Bidder Hostile Bid Target Shareholders

Target Board Target Issues Share Friendly shareholder

-Board knew that the friendly shareholder would not accept the bid and would side with the directors. Impossible to list proper purposes but each case must be examined with hindsight

1) What was the purpose for which the power was actually used? On the face of the transaction it is totally legitimate, this is a question of fact. Not what effect did the power have but what was the purpose for doing it

-At first instance Judge found that this was exercised to avoid take over would need some documentary evidence as to the intention of the directors

2) Is that purpose a proper purpose? Too narrow to say only valid purpose for issuing shares is to raise capital, but it is one proper purpose. Another may be promoting an employee share scheme (if that was your purpose) Improper Purposes: preventing decision of takeover bid, retaining control of the company, gaining control of the company, diluting shareholding

Advance Bank Australia Ltd v FAI Insurance: In determining proper purpose the findings of the judge at first instance will be crucial. NSWCA Kirby J, question about motivation is not immediately obvious, here directors were restricted from using companies resources to have themselves re-elected. They were acting in good faith throughout, they believed it was in the interest of the company for them to be re-elected. Requires scrupulous conduct where there could be a risk between improper purpose. Directors used emotive language which was not factual

Teck Corp Ltd v Millar; Darvall v North Sydney Brick and Tile: Court will not invalidate decision if they believe it had a legitimate commercial motivation

Whitehouse v Carlton Hotels: Articles of company could be so framed they conferred on governing directors a purpose for diluting shareholders. If a constitution does not provide Court will have to draw own conclusions based on conduct of the company

-Proper purposes can include; raising share capital and (perhaps) promoting an employee share scheme; improper purposes will include preventing the shareholders from deciding on the outcome of a takeover bid, retaining control of the company and diluting the value of another shareholder’s interest.

-Allotment will be invalidated if the impermissible purpose was causative. If the power would not have been exercised but for the improper object

Kokolavic v Wellington: MD issuing shares to dilute holding will not be a proper purpose

Mills v Mills: Court should look to the substantial object the accomplishment of which formed the real ground of the board’s action

Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd: Person can be a director of competing companies. However when making a decision for one company that causes detriment to the other will be breach, generally will be banned from doing this by service contract

Mordecai v Mordecai: Directors cannot take remuneration or other benefits from the company unless authorized by law, the constitution or the fully informed consent of general meeting

Cook v Deakes: Court treated contract which had not been concluded as the property of the company which had been misappropriated by the directors. General meeting cannot ratify misappropriation -4 directors of a company, 3 of the directors were negotiating a contract with a third party based on previous relationship with the third party (history between parties). 3 directors transferred benefit to another company which they held and deliberately excluded Cook and the company. The three directors then used their majority in the GM to ratify their breach of duty. Court held that the controlled company held the benefit of the contract on constructive trust for the first company. Contract belonged to the company in equity, it was the companies property, could not use votes as shareholders to ratify as it would have amounted to forfeiting property of the minority to the majority

-Regal involved only an opportunity in cook it was property, contract did not have the property before the breach

-In regal the directors were acting honestly and in good faith, in Cook they were acting dishonestly

-Residual discretion for courts to give no effect to ratification where it would be a fraud on the minority (however, can now bring action under s 232)

Furs Ltd v Tomkies: Tomkies acting as MD contracting for sale of the company’s business to a third party. During the course of this negotiation made limited disclosure to Chairman that the third party wanted to employ him after the deal. He did not disclose the provision that this would have made Furs trade secrets essentially worthless

-Tomkies caused harm by disclosing formulae of Furs Ltd. Court held that if full disclosure had been made to the GM it could have ratified the actions of Tomkies. He did not do this which amounted to a breach of fiduciary duty he was liable to make account of profit to Furs Ltd

-He was only able to get the benefits he got because he was in the position to negotiate for the company

-Directors must not misuse their position for their own or a third party’s advantage except with the company’s fully-informed consent

Regal v Gulliver

-Regal wanted to establish a subsidiary to purchase two more cinemas. Regal did not have quite enough money and the directors of regal put in the rest of the amount. Eventually Regal and the Subsidiary are sold to a third party. The new owners using s 198A make regal sue the previous directors for profit from position. Court ordered that previous directors had to make an account of profit to the third party (new owners) this is essentially gave the purchasers a reduced price.

-General meeting could have ratified the directors actions if they made full disclosure to the GM

-Directors must not misuse their position for their own or a third party’s advantage except with the company’s fully informed consent

1) What the directors did so related to the affairs of the company that it can be properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors

2) That what they did resulted in a profit to themselves

Chan v Zachariah Deane J argued that rule could be relaxed where there is not conflict between individual profit and misuse of position ‘The principle is not, however, completely unqualified it may still be arguable in this court that the liability to account will not arise in circumstances where it would be unconscientious to assert it or in which for example there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interest of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights of benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed

-Not about punishing the directors forcing fiduciary to put company’s interest before their own

IDC v Cooly: Company was bidding for work which it was unlikely to obtain. Director resigned so that he could then go and work for the company that won the work. Resignation was prompted by the knowledge that he knew that company had only a slim chance of winning the bid. If you find out about opportunity as a director resign and then take up opportunity will still be breach of fiduciary duty

Stotter v Natural Extracts Pty: Company formed to farm tea trees and lavender in NSW and Tas. Stotter sold land to the company and then resigned and then started up a rival company with another party to farm tea trees. He started planning this while a director for Natural Extracts. Held he held the new business on constructive trust for Natural Extracts, however, allowances were made for Stotter’s time and effort put into the rival company

SEA Food International v Lam: Sufficient temporal and causal connection between obligations and the opportunity. It is a factual question as whether or not the opportunity came in role of director or as individual

-Director does not have opportunity to argue that it was fair, if this is the case should plead full and frank disclosure to the GM

-ASIC v Australian Investors Forum: Issue of shares for the purpose of preserving majority in the GM was improper use of position,

R v Byrnes: Objective standard it does not necessarily involve dishonesty, can arise where they know or ought to know they have no authority

ASIC v Visard: Used information obtained as director of Telstra to make share trades

ASIC v Adler: If the court is unable to reach conclusion as to the appearance of honesty, but can’t rule out dishonesty, provision will not be applied. Have to persuade the court of honesty

ASIC v Macdonald (no 11): Gazelle J a person acts honestly for the purposes of 1317S in the ordering meaning of the term if conduct is without moral turpitude, carelessness or imprudence

Forge v ASIC: Civil penalty proceedings involve public rights because they can result in disqualification, ratification does not apply. Ratification was invalid, emphasized the fact this was brought by access. ‘Shareholders cannot remove the declaration of contravention by ratifying the original acts. Once a declaration of contravention is made, the Court is entitled to act upon its finding to grant relief’

Pascoe v Lucas: As statutory duty reflects duties of common law and equity and can ratify a breach of statutory duty, ratification may prevent company from bringing an action but will not prevent ASCI bringing an action

Broken Hill Proprietary Co Ltd v Bell Resources Ltd: s 1324(1) allows ASIC or an interested party to bring an injunction preventing threatened breach of Corporations this is a catch all provision relatively low threshold for standing simply have to show interests have been effected in a way which goes beyond the general public

Mesenberg v Cord industrial Recruiters Pty Ltd: Broad reading of 1324(1) would seem allow person to sue when normally would have to apply for derivative action could undermine rule in Foss v Harbottle

Premier Gold v Ocean Services: Broad right should be given to plaintiff to bring action under 1324 but courts use discretion to deny injunction attempt to usurp directors rule

Stanham v National Trust of Australia: Obiter ‘’if one elevated every matter in the articles of association of a company to the status of a contractual right vested in each and every member the rule in Foss v harbottle would be able to be completely disregarded. The whole effect of that rule, despite the growth of exceptions, is that ordinarily the court does not interfere at the suit of a member with an alleged wrong done with respect to administration of the company. True it is that it is sometimes difficult to draw the line between an individual right and representative (Kraus v JG Lloyd Pty Ltd) nonetheless the rule for the most part prevails

-Norths Ltd v McCaughan Dyson Capel Cure: Pragmatic in deciding if a membership right, personal right or corporate right. Keep in mind different types of corporations SPC vs PL should be variance in cases, not applying rules inconsistently, membership rights do not have fixed content should fit reality of the circumstances

-Young J ‘Company law has to have scope to reflect differences [in the size and nature of companies] and if this means that the qua member and the qua director... is not drawn in quite the same place every time, but varies from case to case, the judges are not necessarily applying the rule inconsistently; they may be demonstrating that it is wrong with regard the concept of a ‘membership’ right as having a unique content, and showing that it has flexibility to meet the reality of the circumstances before them’

Peters Amercian Delicacy v Heath: Shareholders are not under fiduciary duties vote in relation to shares which is an incidence of property and can be exercised self-interestedly. Fraud on the minority is committed by the GM exception to rule to vote self-interestedly. Power is used to get a

personal gain which does not arise out the subject of the power and is outside or inconsistent with the power. Equitable idea of fraud of power being used outside its scope, not anticipated the power would be used to take company’s property.

‘The shareholders are not trustees for one another, an, unlike directors, they occupy no fiduciary position and are under no fiduciary duties. They vote in respect of their shares, which are property and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owners personal advantage’ ‘a means of securing some personal or particular garn, whether pecuniary or otherwise which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of power’

Northwest Transportation v Beatty

-Director and shareholder contracts to sell a large boat to the company. Personal interest in the contract but finding of fact that there was no impropriety or oppression of the minority. Director used votes a GM to ratify the contract which the court then upheld. Individual can vote as shareholder to confer benefit on themselves as a director, in this case there was no fraud or over-value if there had been would not have recognized the ratification

-Gambotto v WCP ltd: Power to alter constitution is subject to equitable limitation power for GM to alter constitution is to change because circumstances have changed. Cannot be exercised for other purposes. WPC is a large company part of a corporate group majority shareholder had 99.7% of shares (industrial equity ltd). With control of GM altered constitution to allow majority to buy out minority. Minority shareholders holding the remaining shares brought a personal action as fraud on the minority.

-High Court Held: Alteration was invalid rejected previous tests bona fide in the interest of company as a whole new test dual categorization.

-Majority: does the amendment to the constitution allow expropriation of shares or valuable proprietary rights attaching to shares purpose of aggrandizing the majority

-If not amendment must not be oppressive (not so unreasonable no GM would do it)

-If so the power to amend must be exercised for proper purposes (protect company from harm, for example shareholder is competing with company, or expropriation was necessary to ensure company could continue to comply with essential regulation) and must not be oppressive (must be fair in the circumstances s 232, procedural fairness (full disclosure) substantive fairness independent evaluation of shares). Rejected argument that taxation administration benefits could be a proper purpose

‘The exercise of power conferred by a company’s constitution enabling the majority shareholders to expropriate the minority’s shareholding for the purpose of aggrandizing the majority is valid if and only to the extent that that the relevant provision of the company’s constitution so provide. The inclusion of such a power in the company’s constitution at its incorporation is one thing. It is another thing when the company’s constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority. Such a power could not be taken to be exercised simply for the purpose of aggrandising the majority’

Such an amendment will only be allowed where

1) The power is exercised for a proper purpose (which requires exceptional circumstances)2) Its exercise does not operate oppressively in relation to minority shareholders (meaning it is

fair in the circumstances)

-High Court favours property rights rather than commercial reality

Minority McHugh J

-Did the majority act fairly, procedurally and substantively?

-Taxation was a benefit that could be a proper purpose but no evidence that substantively fair

-Gambotto replaced by takeovers legislation hostile takeover of over 90% can remove minority

-s 664A general power for shareholder who crosses 90% to buy out shares within 6 months

-Gambotto will still apply where constitution attempts to remove other rights attached to shares falling short of expropriation

Arakela: Gambotto principle are to be applied except where there is some other mechanism to protect the minority i.e. reduction of capital rules.

Bundaberg Sugar Ltd v Isis Central Sugar Milling Co: Co-operative wanted to change constitution to remove member who was no longer contributing to the production without compensation. In this case articles allowed directors to differentiate between producers of sugar and those who don’t. Held purpose was proper, because Bundaberg sugar would lose co-operative status and tax benefit if it had non-supplier members. Continued shareholding would be detrimental. Failure to provide compensation made the amendment oppressive.

Loch v John Blackwood: If there is justifiable lack of confidence in management of company’s affairs

Macquarie University v Macquarie University Union: Serious fraud misconduct or oppression but directors likely to re-appointed by majority, leads to a loss of confidence

Camo v Excel Cleaning Services: Breakdown of communication and deadlocked company was wound up

Strong v J Brough and Son (Strathfield): Failure of the purpose of the company or purpose becomes impossible, generally commercial companies will not have only a singular purpose

ASIC v International Unity Health Insurance: For an order to be made against a solvent company it would be an extreme step for winding up to be ordered

-ASIC v ABC Fund managers; Bernhardt v Beau Rivage Pty Ltd: Where a company is solvent a very strong case has to be made to order winding up which is an extreme remedy

Nyland v RL & KW Nominees pty ltd: family company owned two properties, husband went bankrupt and his share passed to director in bankruptcy wife was sole director. This justified winding up as wife was a creditor to the tune of $1M as a result of this trustee had lost confidence in the wife’s

management ability. She would not allow the properties to be valued etc. only way to deal with this was to wind up the company. Where the company’s affairs are a mess winding up can be a more appropriate remedy. Liquidator can make findings of fact more easily than the court

Ebrahimi v Westbourne Galleries. Two men ran company allowed son to join three shareholders holding 1/3 each. Removed the over director and paid all the profits to the other director. Informal understanding that none of them would be removed from the board equity intruded close relations, agreed understanding that shareholders would participate in company, restrictions on share transfer making it impossible of expensive (1072G pty company may refuse transfer of shares for any reason). Majority acted in accordance with strict legal rights, however, wound up on the basis of equitable considerations

Elder & Elder v Watson ‘visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely’

Campbell v Back Office Investments: Generally treated as a compound statement unjustly detrimental to interests of member, imposition of limits on the remedy is to be approached with caution

Wayde v NSW Rugby League: NSW rugby league decided to reduce competition and had to exclude one club. NSW Rugby had a constitution dealing with clubs, conceded by Wests that decision was made in good faith and they had no secure right to participate. Had not been shown that the decision to exclude Wests that no board acting reasonably would have made the decision. Runs close to the business judgment rule which court will not overrule

O’Neil v Phillips: If it can be shown there is an informal understanding that majority will not remove minority can be oppressive 1)informal understanding proven on facts 2) exclusion from management 3)absence of reasonable offer to buy shares

Re Back 2 Bay 6 Pty Ltd: Failure to provide information

Scottish Co-Op v Meyer: Breach of fiduciary duty diverted company’s business to partnership they controlled

-Martin v Australian Squash Club Pty Ltd: Misappropriation at the expense of the minority of company assets

Sanford v Sanford Courier Service: Excessive remuneration (note Morgan v 45 Flers Avenue)

John Jay Starr (Real Estate) Pty Ltd v Robert R Andrews (A’asia) Pty Ltd: Oppressive conduct in board meetings

-Re Spargos Mining NL: Decisions for the benefit of related companies

Re G Geoffrey: Majority shareholder paid himself very generously, but found that was not excessive, as well as this ran the business very conservatively company was retaining profits rather than paying dividend. Have to show that not paying dividend is outside of business judgment rule

Shamseller: expert evidence about level of salary concluded they were not oppressive, but they should have reviewed the dividend policy to ensure it was still relevant. Failure to review in light of changing circumstances, while continuing to raise their pay was oppressive

Re City Meet Company: Dividends were ‘miserable’ no proportion to company’s profit. Directors paid themselves profit by remuneration, this is not a problem while all members are directors. Majority shareholder had taken active steps to ensure exclusion of minority. Using control to benefit themselves but keeping dividends very low

Shirim v Fesena: Mere negligence, or mere mismanagement are not oppressive, however, if it is part of a broader pattern of incompetence

Re G Geoffrey: Minority shareholder complained that brother was running companies to conservatively, minority shareholder was merely being made to abide by majority decision. This was not prejudicial, simply looking for a way out

shares Crumpton v Morrine Hall shares in a unit complex assorted in groups which allowed access, it group was held to be a different class ‘it seems to me that when you have a home unit company and the shares divided up into different groups so that one group has quite different rights from another group it makes no difference that the articles avoid using the word ‘class’. In fact the groups of shares are different the rights attaching to them are different, with the result that the capital is divided into different share classes’

-Cumbrian Newspapers Group Ltd v Cumberalnd & Westmorland Herald Newspaper

-Shares can be divided into a class where rights are held by a particular individual other than a class of shares. For example being paid a fixed dividend is a class right attached to preference shares. In this case Mr X was allowed to appoint director so long as he held 10% of shares in the company. 3 types of rights 1) rights or benefits which are annexed to particular shares (preference shares etc) 2) Rights conferred on individuals not in the capacity as member or shareholder, not enforceable not a class right 3) Rights or benefits though not attached to particular shares were conferred on a member in their capacity as a member i.e. rights in Bushell v Faith special rights to a special class of members these rights cannot be taken away by changing the Constitution

‘first there are rights or benefits which are annexed to particular shares. Classic examples of rights of this character are dividend rights and rights to participate in surplus assets on a winding up. If articles provide that particular shares carry particular rights not enjoyed by the holders of other shares, it is easy to conclude that the rights are attached to a class of shares...A second category of rights or benefits [which are not class rights]...would cover rights conferred on individuals not in the capacity of members or shareholders, but, for ulterior reasons, connected with the administration of the company’s affairs or the conduct of its business...the third category...would cover rights or

benefits that, although not attached to any particular shares, were nonetheless conferred on the beneficiary in the capacity of a member or shareholder of the company

Wright v Bristol Aeroplane: Preference and ordinary shares held, directors purported to give preference shares to ordinary shareholders. There was no variation as the rights of preference shareholders would be the same before, but they would not be enjoyed as much. Without this narrow scope every share issue would involve the consent of all classes of share holders

Trevor v Whitworth: Once capital is committed to the company it is locked in to the company and can be paid out to shareholders. Argued this was for creditors, made more sense when there was minimum capital requirements ‘Paid up capital may be diminished or lost in the course of the company’s trading; that is a result which no legislation can prevent; but persons who deal with and give credit to a limited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid as well as the responsibility of its members for the capital remaining at call; and they are entitled to assumption that no part of the capital which has been paid into the coffers of the company has subsequently been paid out, except in the legitimate course of its business’

Darvall v North Sydney Brick and Tile Co Ltd Where dividend is illegal shareholder could seek an injunction under 1324

Re Oxford Benefit Building Society: At common law directors will have to compensate company for illegal dividend

Moxham v Grant: Knowing receipt of an illegal dividend could make shareholder a constructive trustee for the dividend

Burton v Palmer: Showing financial assistance would involve showing actual impoverishment in terms of net asset loss

Belmont Finance Corporation v Williams Furniture Ltd (no 2): Company’s purpose was to assist the acquisition even if this does not involve a net loss of diminution of assets.

Re HIH Insuranc Ltd (in liq); ASIC v Adler: Santow J argued this required impoverishment based on memorandum for the amendment, would the transaction materially prejudice shareholders, or ability to pay creditors. Read this as requiring impoverishment. This assumes that impoverishment is a part of definition of 260A. Santow argued that no material prejudice to company and shareholder as a whole would be a defence.

ASIC v Adler: NSWCA did not disapprove of this and was used in Kinarra Pty Ltd v On Q Group Ltd this makes purpose no longer relevant financial assistance is linked to material prejudice, net value is given the acquirer and this may be prejudicial to the company

Law Society of NSW v Millios: Austin J intention of the drafter that judges looking at this rule should focus intention on whether the transaction would materially prejudice the company, if material prejudice does occur would then look to shareholder ratification as a defence. This leaves the question of financial assistance as separate

ASIC v Australian Investors Forum (no 2): Pragmatism and common sense should be used to decide when securities are offered i.e. invitation to treat, identification of the company, the price, the nature of securities (preference, ordinary) suggestion they are available for purchase, a statement that it is not an offer will have no effect (sign on an elephant)

Illingworthv Houldsworth: ‘A specific charge is one that without more fastens on ascertained and definite property or property capable of being ascertained or defined. A floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.

Re Yorkshire Wool Combers: LJ Roma non-exhaustive factors to determine if charge is floating 1)Charge on a class of assets present and future 2)Class is one that in the ordinary course of the business the class will change 3)Until some further step is taken by those with the interest in the charge the company can continue trading normally

Siebe Gorman v Barclays’ Bank: Company was allowed to put fixed charge on future book debts, they would be paid into a separate account and would have limited ability to deal with those debts without consent of bank. Essentially it was an overdraft account which could not be used while overdrawn. It was a fixed charge because the bank had an entitlement to prevent chargee from using the account

Spectrum Plus: Charge over book debts and other debts owing to company, had to be paid into overdraft account and while company could not assign the debts, it was free to collect the debts and draw on the account for its business purposes. HL held key consideration is whether company can carry on business in ordinary way. Essential element is that asset is not appropriated until some future in the meantime the charger is able to use the asset until it crystallizes. If the account had been blocked it would have been a fixed charge

Hyland v Exception holdings: Charge will be valid until chargee purports to take step in enforcement without leave of the court

Santow J: Aim of the section is to prevent company giving charge to an insider so a friend receiver may be appointed to head off insolvency, leave should be determined according to this

Re New World Alliance Pty: s 95A requires the court to ascertain what are the company’s existing debts, debts due in the near future, the date each will be due for payment, the company’s present and expected cash resources date items will be received

David Grant & Co Pty Ltd v Westpac Banking Corp: Creditor uses the statutory demand procedure to create a rebuttable presumption that the company is insolvent if demand is not complied with

Speedifex Building Products Pty Ltd: If a liquidator brings an action and the assets of the company are not enough to meet the costs liquidator will be personally liable

Standard Chartered Bank v Antico: Incurred requires a positive direction must be choice by the company to do or omit to do something which as a matter of substance and commercial reality renders it liable for a debt that is would not otherwise have been liable

Hall v Poolman, Trul Floor Service Pty Ltd v Henkins, Lewis v Doranm Quick v Stoland: Cash flow test for insolvency

ASIC v Plymin No 1: Reasonable grounds for suspecting company was or would become insolvent, director was either subjectively aware, or that a reasonable person in that position would be so aware. Reasonable grounds is a question of fact, without reference to hindsight what would a reasonable and competent director have suspected about Company’s ability to pay debts as the fell due

Elliot v ASIC: Even Non-Executives most not be supine must not be complacent if they cannot stop a director from incurring debts should resign or appoint an administrator

McDonald v Hanselmann

Re Emanuel (No 14) Pty Ltd in liq

VR Dye & Co v Peninsula Hotels Pty Ltd in Liq

Re Pendlebery: Receiver should study the market, sell goods separately, sell in a way that is efficient, no power to postpone sale in hope price will rise, should not sacrifice assets have to act in good faith