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LEARNING GUIDE
LAWS4112/7234 CORPORATIONS LAW Semester 1, 2014 St Lucia Campus

Teaching Staff Course Coordinator/Lecturer: Dr Vicky Comino Office: Forgan Smith, W308 Ph: +61 7 3365 2549 Consultation hours: TBA Email: v.comino@law.uq.edu.au

Tutors:

Dr Radha Ivory Denika Whitehouse

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Reading and Materials Students should note that the corporations legislation has been the subject of significant amendment over time. There are many up to date textbooks and updated legislation is readily available; these should be relied on in preference to earlier publications. You would be particularly unwise to rely on any version of the legislation, and any textbook published prior to, the CLERP (Audit Reform and Corporate Disclosure) Act 2004.

Required Resources: Corporations Act 2001 (Cth) Lipton P, Herzberg A & Welsh M, Understanding Company Law (Lawbook Co, 17th ed, 2014).

The Corporations Act is a very large piece of legislation. It is essential that you have a copy of the legislation from the beginning of the course. It will be referred to frequently during all lectures and tutorials. Although it is heavy and bulky, you should bring it with you to both. Corporations law in Australia has become a largely statute based subject, and the only way you will gain sufficient familiarity to deal with the legislation in the exam is by referring to it throughout the course. Since you are allowed to take your copy of the legislation into the exam, it may be helpful to annotate your copy.

Thomson Reuters, Lexis Nexis Butterworths and CCH publish Australian Corporations Legislation 2014. Lexis Nexis also publishes a student version of the legislation. However, it may be cheaper to buy the Thomson Reuters version of the legislation as it is sold as a package with the recommended textbook: Lipton et al.

Lipton et al has been recommended as the text because it is readable, and contains enough detail for you to get a good overview of the subject. Ideally you should read Lipton et al before the relevant lecture, and certainly when preparing for tutorials. You should also read through the relevant sections of the legislation in advance. Although the course coordinator and tutors consider it to be the most suitable book for you, you can also use the other books listed below if you prefer.

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Other Recommended Texts (general) Boros E & Duns J, Corporate Law, OUP, 3rd ed, 2013 (this may provide a helpful alternative perspective if you need one) Austin, R and Ramsay I, Fords Principles of Corporations Law, LexisNexis, 15th ed, 2013 (this is the most comprehensive textbook available and is recommended for when you want to go into a topic in more detail) Harris J, Hargovan A and Adams M, Australian Corporate Law, Lexis Nexis Butterworths, 4th ed, 2013 Ciro T and Symes C, Corporations Law in Principle, Lawbook Co, 9th ed, 2013 Hanrahan P, Ramsay I and Stapledon G, Commercial Applications of Company Law, CCH, Sydney, 15th ed, 2014 (business oriented analysis, may offer clarity on more difficult points) Hinchy R and McDermott P, Company Law, 2nd ed, Pearson Prentice Hall, 2009 Redmond P, Companies and Securities Law: Commentary and Materials, Lawbook Co, 6th ed, 2013 (Casebook with useful commentary)

Other Resources: The Understanding Company Law website at http://www.uclaw.com.au/resources/ which has links to a variety of resources relevant to corporate law CCH, Australian Corporations Commentary (looseleaf service) Davies P and Worthington S, Gower and Davies' Principles of Modern Company Law, Sweet & Maxwell, London, 9th ed, 2012 (UK) Cheffins B, Company Law: Theory, Structure and Operation, Clarendon, Oxford, 1997 (UK) Grantham R & Rickett C, Company and Securities Law: Commentary and Materials, Brookers, Wellington, 2002 (NZ) (particularly Ch 2: Theories of the Company and the Nature of Company Law (online))

Journals Australian Journal of Corporate Law Company and Securities Law Journal Journal of Corporate Law Studies

Government and Regulatory Bodies Australian Securities and Investments Commission: www.asic.gov.au (general corporate regulator) Australian Securities Exchange: www.asx.com.au (Australian share market) Australian Accounting Standards Board: www.aasb.com.au (sets accounting standards which companies must comply with)

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Australian Takeovers Panel: http://www.takeovers.gov.au/ (regulates corporate takeovers) Corporations and Markets Advisory Committee (CAMAC): http://www.camac.gov.au/camac/camac.nsf (specialist law reform/advisory body) Treasury: www.treasury.gov.au (website of the Commonwealth Treasury, which contains brief information about the Financial System Division and the Corporations and Financial Services Division of the Treasury which are responsible for the development of policies which contribute to the efficiency and competitiveness of corporations and the securities markets in Australia and the development and review of national business laws including the Corporations Act. Clicking on this link, then on "Business Law & Regulation" will take you to a page containing links to various publications of the Corporate Law Economic Reform Program (CLERP), the source of many of our recent corporate reforms and a number of specific reform proposals and discussion papers.

Research starting points: Centre for Corporate Law and Securities Regulation (CCLSR) (University of Melbourne) (Research centre headed by Professor Ian Ramsay): http://cclsr.law.unimelb.edu.au/ CCLSR's Page of Links of Interest in Corporate and Securities Law: http://cclsr.law.unimelb.edu.au/go/other-sites-of-interest/index.cfm The Economist Magazine Definitions of Economic Terms: The Economist has a very long list of economic terms with readily understandable definitions. Useful if there is something you have read and not understood in any of the cases or materials: http://www.economist.com/research/Economics/alphabetic.cfm

Corporate Law Journals: Journal of Corporate Law Studies: http://library.uq.edu.au/record=b2180232 The Company Lawyer http://ezproxy.library.uq.edu.au/login?url=http://www.westlaw.com/search/default.asp?sp =QLDUni%2D03&cbhf=none&DB=COMPLAW&rs=WDIR1.0&vr=1.0 Australian Journal of Corporate Law http://ezproxy.library.uq.edu.au/login?url=http://www.lexisnexis.com/au/legal/browse?cu iuser=true&cui_ind=true&mode=cuimode&csi=267866 International Corporate Law http://library.uq.edu.au/record=b1977146

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Schedule of Lectures This course is lectured by Dr Vicky Comino according to the following schedule:

Week

Lecture Topic Introduction and History of Business Organisations

Tutorial Topic

1 (3 March)

No tutorial

2 (10 March)

Corporate Personality, Civil and Criminal Liability

Types of business associations and types of companies

3 (17 March)

Internal Structure and Operations of the Company: the corporate constitution; corporate organs; and meetings

Separate Entity Principle and the Corporate Veil

4 (24 March)

Corporate Contracting

The Division of Power within the Corporation and Insider Rights Corporate Contracting Directors Duties

5 (31 March) 6 (7 April)

Directors Duties (1) Directors Duties (2) Directors Duties (3)/Minority Protection (1) Minority Protection (2) Shares and Capital Transactions

7 (14 April)

No tutorials

8 (28 April) 9 (5 May)

No tutorials Minority Protection Shares and Capital Transactions Public Issues, Financial Assistance and Debt

10 (12 May)

Public Issues, Debt and Charges

11 (19 May)

Winding Up

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12 (26 May)

Receivership & Voluntary Administration Revision consultations

Insolvency, Receivership and Administration Revision

13 (2 June)

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How to use this Learning Guide This Learning Guide consists of 12 lecture handouts, reflecting the 12 substantive lectures to be given in the course, and 10 tutorial sheets, which contain questions that you should prepare in advance of the tutorials. In general, the lectures will follow the outlines contained in this learning guide. If you choose to use a computer in lectures, you may find it convenient to type your notes into this document. Most of these topics will be lectured, many in some detail, but some topics and aspects of others that are either adequately explained in the textbook or scheduled for detailed tutorial treatment will receive, at most, a passing reference in lectures. To benefit fully you should undertake a regular reading program in advance of class (including reading a textbook, some of the cases indicated in this guide and in lectures, and the statute), attend lectures, prepare answers to the tutorial questions and participate in class discussions. Lectures function to give you an overview of the main subject areas of the course, to draw your attention to difficult points and to analyse points of theoretical or practical controversy. They are not intended as a talking textbook, and so attending lectures is not a substitute for reading a textbook and cases. Additional reading is necessary if you are to get the most out of tutorials. Tutorials function to build knowledge and your capacity to apply it through discussion and participation in the resolution of particular problems. Advance preparation of answers to the questions is therefore essential. Testing your prepared answer against the tutorial outcome provides you with a means of regularly assessing your progress in this course and an opportunity to undertake remedial work on aspects of the course where your understanding is less than adequate. Most of the time in tutorials will be spent dealing with problem questions of the kind you are likely to have to answer in your exam. Those discussions will be complemented by brief consideration of essay-type questions. You should always bring a copy of the legislation with you to tutorials: it is essential that you start becoming familiar with the legislation from the beginning of the course. You will be expected to be able to make close reference to legislative provisions in the final exam. It is essential to note that the purpose of tutorials is for you to apply your knowledge to a series of questions. The purpose is not for you to write down a comprehensive answer to the question. The method is more important than the answer. For this reason, you are encouraged to produce detailed attempts at the questions on the tutorial sheets which can be discussed in the tutorial. In addition, you are encouraged not to use laptops in tutorials. While they may be helpful in lectures, they are disruptive in tutorials because students tend to focus on writing down everything which is said rather than focus on the way in which the problem is being addressed. Transcribing detailed answers to the problem questions discussed in tutorials will not assist in the exam: the exam will not raise exactly the same issues that the tutorial problems have. What will assist is learning how to answer problem questions by participating fully in tutorials. Assessment Details of the assessment regime are provided via the Electronic Course Profile and the Blackboard site associated with this course.
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Lecture One: Introduction, History and Typology of Business Organisations

Recommended preliminary reading: Lipton et al, Chapters 1, 2 and 3. Further suggested reading: Boros and Duns, chs 1 and 2 Redmond, ch 2 P. Ireland, Company Law and the Myth of Shareholder Ownership (1999) 62 Modern Law Review 32

Brief introduction Company as separate legal entity; owning property, making contracts, committing torts, running a business: s124(1) CA Division of control rights between directors and the shareholders by the companys constitution and the Corporations Act. In return for their shares, which give them a bundle of rights in relation to the company (including the right to a dividend if the board declares one and the right to vote, including to appoint and remove the board under 203C and D), shareholders provide capital to the company. Shareholder liability is limited to the capital they have contributed: s516. A company may also be a shareholder in another company; if owns sufficient shares to control that other company, the shareholder is termed the parent and the other company is termed a subsidiary, and the two companies form a corporate group. This is very common and corporate groups frequently have highly complex, transnational structures which manage risk and make their affairs opaque to outsiders (and perhaps also insiders(!)). Company directors owe legal, fiduciary and statutory duties to the corporate entity (normally identified with the interests of the shareholders), and, by default, manage the companys business: s198A CA 2001. Creditors might also contract for control rights (or security in the form of a fixed or floating charge, or provision of financial or other information) on a case-by-case basis where they consider this necessary. If company becomes insolvent (unable to pay debts as they fall due), a liquidator may be appointed to take over control of the company with a view to maximizing the assets of the company which are available for distribution to creditors. Alternatively, the company may be put into administration with a view to enabling it to survive and so produce a better outcome for creditors.
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The problem of conflicts of interest Contrast two ideal-types: small proprietary companies and large public companies (where there is a separation of ownership and control). In proprietary companies, conflicts of interest might arise between majority and minority, and between shareholder-directors and non-director shareholders or creditors. The danger is that the majority uses its control of the board and the general meeting to confer benefits on itself at the expense of minorities (or creditors in the case of excessive risk-taking). In public companies, conflicts of interest might arise between directors and shareholders, shareholders and creditors (as the company nears insolvency), or controlling shareholders and minority shareholders. In groups of companies where the subsidiaries are wholly owned, a conflict might arise between the parent company (the controlling shareholder) and the subsidiarys contract or tort creditors; where the subsidiaries are not wholly owned the parents (majority shareholders) interest might also conflict with the interest of the minority shareholders. In all companies there is a risk of conflict between existing and new members: on what terms should the new members be allowed to enter? Company law has to deal with these conflicts by means of regulation (directors duties, minority protection, rules about capital, insolvency rules), which gives rise to complex questions of enforcement. In addition to this crucial function, it should arguably also facilitate the operation of business by reducing transaction costs associated with incorporating, operating and winding up companies. It should also facilitate self-protection of creditors, shareholders and other groups dealing with companies by requiring information disclosure.

Historical emergence of the corporate form From (unincorporated) deed of settlement companies, to companies as concession of the state, to joint stock companies, to deed-of-settlement companies (essentially partnerships, but adopted by the legislation as the basis for modern company law, with the addition of a separate legal entity). This historical evolutionary process still influences the form of companies and the division of power within them (i.e. the board and the general meeting). Some important pieces of English legislation: Joint Stock Companies Registration and Regulation Act 1844, Limited Liability Act 1855, Companies Act 1862, Companies Act 1948, Companies Act 1962, Companies Act 1985, Companies Act 2006.

Australian developments For further detail on early Australian corporate law, see P. Lipton, A History of Company Law in Colonial Australia: Economic Development and Legal Evolution (2007) 31 Melbourne University Law Review 805.
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Mirrored English law until the 1960s, but since then has become more autonomous and has introduced a number of distinctive innovations. s51(xx) of the Commonwealth Constitution empowers the Commonwealth to make laws with respect to foreign corporations, and trading and financial corporations formed within the limits of the Commonwealth. Note the narrow interpretation of this in Huddard, Parker & Co Ltd v Moorhead (1909) 8 CLR 330. Uniform Companies Acts 1961 Companies Act 1981 introduced under s122 of the Commonwealth Constitution Corporations Act 1989; NSW v Commonwealth (1990) 169 CLR 482 Re Wakim; Ex Parte McNally (1999) 198 CLR 511 R v Hughes (2000) 202 CLR 535 Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth), operational from 15 July 2001.

In addition to these changes prompted by constitutional law, we have had, eg: The Corporate Law Reform Act 1992 (Cth), which amongst other things, fundamentally reformed the regime of sanctions for enforcement of the statutory duties of company officers; the Corporate Law Simplification Act 1995 (Cth) (!), which simplified register and share buyback provisions and redefined the concept of proprietary company; the Company Law Review Act 1998 (Cth) which replaced the old articles and memorandum with the current constitution and replaceable rules and reformed capital rules (abolished par value and removed requirement of court approval of capital reductions); the Corporate Law Economic Reform Program Act (Cth) 1999 which introduced statutory business judgment rule and derivative action, and reconstituted the Takeover Panel; the Financial Services Reform Act 2001 (Cth), which overhauled financial services regulation in line with the recommendations of the Wallis Committee, dividing it up along functional rather than its former institutional lines, making it more coherent, and giving ASIC responsibility for corporate regulation, financial market regulation, regulation of financial service providers, market integrity and consumer protection; and the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth), which was introduced in response to collapses of Australian corporate groups such as HIH Insurance and in response to the Sarbanes-Oxley Act 2002 (US)
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(itself a response to Enron and WorldCom), requiring stricter auditor independence and greater disclosure of directors remuneration in listed companies. Further reforms have been introduced recently in the wake of the Global Financial Crisis and fall-out from it and it is unlikely that the process will stop here!

Types of business structure

Sole trader

Partnership Limits on size: s115(1) CA 2001 (but see also Corporations Regulations 2A.1.01(3) for specific exceptions by profession).

Incorporated Association State law (Incorporated Associations Act 1981 (Qld)), not carried on for profit of members, governed largely along same lines as proprietary companies. Not considered further in this course.

Companies Six kinds: 1. Proprietary companies limited by shares 2. Proprietary companies unlimited by share capital 3. Public companies limited by shares 4. Public companies limited by guarantee 5. Public companies unlimited by share capital 6. No liability public company (confined to pure mining companies. The type of company was introduced in Victoria, which subjected NL companies to far-reaching information disclosure obligations: the Mining Companies Act 1871). Described by Blainey as one of the most radical experiments in company law in the English-speaking world.

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In this course, we are concerned with the two types of companies limited by shares which are the dominant corporate forms used in Australia. Two main kinds: public company and proprietary company. Distinction introduced by state of Victoria in Companies Act 1896 (Vic). Proprietary companies outnumber public companies at least 50:1.

Public companies are subject to stricter regulation because there is often a separation of ownership and control and as the price for being able to offer shares to the public. Definitions of public offer contained in Ch 6D of the CA: disclosure is required in the form of a prospectus or other disclosure document filed with ASIC, with certain carve-outs available for small-scale offerings, sophisticated investors, existing investors etc.

Listed companies are subject to an additional layer of regulation over and above public companies: soft law in the form of the ASX Principles of Corporate Governance (with which they must comply or explain), and quasi-soft law in the form of listing rules made by ASX with authority under CA.

Proprietary companies are defined in s113 as having no more than 50 non-employee shareholders (this still allows some separation of ownership and control) and essentially cannot offer shares to the public (s113(3): they cannot make an offer that needs disclosure under Chapter 6D), although they can make offers to existing employees and shareholders and personal offers under s708 (which gives them some scope to raise finance from investors without incurring the cost of preparing a disclosure document, or prospectus). Breach of this limitation is a criminal offence, which does not invalidate the transaction but ASIC may require it to convert to a public company under s165. ASIC may impose a similar requirement if the company exceeds 50 non-employee shareholders.

A proprietary company can convert to public company by passing a special resolution and lodging application with ASIC: ss162-3. Note how the requirement of special resolution protects the shareholders. Proprietary companies are less stringently regulated: Minimum of one director (compared to three for public companies): s201A Can even have a sole member-director (provisions made for this under ss198E(1), 248B and 249B allowing that person to manage the business and act as GM provided all resolutions recorded and signed). No requirement to appoint a secretary (s204A) Small proprietary companies (defined in s45A) are not required to produce annual financial reports or appoint an auditor unless shareholders holding 5% require it, or ASIC
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directs it to (ss293-4), although they must maintain written financial records that correctly record its position and would enable true and fair financial reports to be prepared and audited, and to maintain them for 7 years (s286). Large proprietary and public companies must produce an audited financial report and directors report on an annual basis. Aim of this distinction is to prevent public companies running business through a subsidiary and evading disclosure rules, and to allow small companies to avoid the estimated $60000 cost of producing an audited annual report. number of provisions applicable to public companies do not apply:

No need for an AGM (public company with more than one member must hold first one within 18 months of incorporation to allow members to consider audited accounts) s203D(1) does not apply, so shareholders do not have a legally-entrenched right to remove directors (this means that in proprietary companies, the constitution or a shareholder agreement can entrench certain directors provided they replace the replaceable s203C rule that the general meeting can remove the directors). This reflects the fact that proprietary companies are often like incorporated partnerships with the shareholders participating in risk-bearing and management. s203E does not apply so there is no automatic rule that one director cannot remove another (although proprietary companies must still make positive provision in their constitution if directors are to be enabled to do this).

They must include Pty Ltd or Proprietary Limited at the end of their name: ss148 and 149. They are subject to a replaceable rule under s1072G that their directors have the power to refuse to register a transfer of shares for any reason (although equitable and statutory duties may require them to act for a proper purpose when exercising this power: see lecture 6).

Registration See Part 2A.2. s117, s118(1)(c), s119, s1274(7A) (conclusive effect of certificate of incorporation).

Pre-registration contracts: see Lipton et al, Chapter 6. Those who form a company may become subject to duties of utmost candour and honesty as its promoters (see Central Railway of Venezuela v Kisch (1867) LR 2 HL 99) and are also required to make disclosure to the company of any profits they make in connection with the sale
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of property to the company (see Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218). s119 for date of incorporation ss131-3 for current regime which replaces common law: ratification by company, liability of agent/promoter and powers of the court. Rules were historically important as a mechanism for investor protection but are now far less so, given the rules in Ch 6D on prospectuses (which will be discussed in outline in lecture 10).

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Lecture Two: Corporate Personality, Civil and Criminal Liability

Recommended preliminary reading: Lipton et al, Chapters 2 and 5 [5.05] - [5.105] Further suggested reading: Boros and Duns, chs 3 and 8 Easterbrook and Fischel, Limited Liability and the Corporation (1985) 52 University of Chicago Law Review 89 John Farrar, Frankenstein Incorporated or Fools Parliament? Revisiting the concept of the corporation in corporate governance (1998) 10 Bond LR 142 Otto Kahn-Freund, Some Reflections on Company Law Reform (1944) 7 Modern LR 54 R. Grantham and C. Rickett, Company and Securities Law: Commentary and Materials (2002), Ch 2 (Theories of the Company and the Nature of Company Law available as pdf from library website)

Limited Liability s516 CA 2001: if the 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. Traditionally viewed as a privilege, the price of which was the obligation to make information disclosure. However, this view is losing persuasiveness, not least because of the relative lack of disclosure obligations on small proprietary companies under Australian law. Now under law and economics analysis limited liability is more commonly explained as a default rule inserted into every contract, which the other party to the contract displace by contrary provision (for example by requiring the director-shareholders in a small proprietary company to give personal guarantees). The choice of default rule is explained on the basis of hypothetical bargaining: in most cases, the parties would bargain for limited liability, so the total amount of bargaining (transaction) costs is reduced by providing the most commonly chosen terms as default. Do you think this is convincing? In addition, limited liability may also be removed by law (either under the common law in those rare circumstances where the courts are prepared to lift the veil or under statute where liability is imposed on directors or parent companies for causing a company to continue to trade when it cannot pay its debts: ss588G and 588V CA). Easterbrook and Fischel (leading exponents of a (neoclassical) law and economics approach to corporate law) offer a number of economic arguments in favour of limited liability in The Economic Structure of Corporate Law at 41-4.

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The Separate Entity Doctrine Limited liability and legal entity are two different issues: it is possible to have a company for which its members (shareholders) have unlimited liability. The value of the separate entity doctrine lies in its role in enabling limited liability to operate (claims are made against the companys assets rather than those of the members) and in asset partitioning (the companys creditors cannot go after the shareholders assets, and the creditors of individual shareholders cannot go after the companys assets). Others also argue that since the capital assets of the business are vested in the company, they are irrevocably committed to the purposes of the business, which may be important in the case of companies which require heavy upfront spending on capital assets which have little value in other businesses (eg highly specialized businesses) or as scrap (eg mining). Salomon v Salomon & Co Ltd [1897] AC 22 The principle has a number of implications: Property owned by company does not belong to its members, even where they have given it to the company in exchange for shares: see for example Macaura v Northern Assurance Co Ltd [1925] AC 619 Causes of action belong to the company and not to the members individually. Company is party to contracts, not its directors or members. Company can make contracts with shareholders, even controlling ones: Lee v Lees Air Farming [1961] AC 12. Company can be a debtor or creditor of member or director. Company can be liable in tort, either directly or, more commonly, vicariously. Williams v Natural Life Health Foods (1998) 2 All ER 577. Company can act as trustee. Company are persons under s6 of the Income Tax Assessment Act 1936, although shareholders receiving dividends will receive credit for tax paid by the company.

Departures from separate legal entity principle The actions of the shareholders in general meeting and the directors acting as the board are, as the actions of organs of the company, ascribed to the company. Sometimes, exceptionally, the rights and liabilities of the company are ascribed to the members or directors. This is termed lifting the corporate veil as the court looks past the separate legal personality of the company to the natural persons standing behind it.

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Statutory departure S588G 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 companys creditors (588J(1)). Insolvency is defined in s95A(2). We will look at 588G in more detail in lecture 11 on winding up and insolvency. Note other exceptions in addition to directors liability for insolvent trading, eg, if they were involved in their companys contraventions of Corporations Act, s 260A, relating to financial assistance; and liability to pay the companys unremitted PAYG tax instalments under the Income Tax Assessment Act 1997 (Cth).

Common law departures This is a last resort and the case law is frequently unclear and inconsistent. The Salomon principle normally applies. Rogers A-JA said in Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 at 567 that there is no common, unifying principle, which underlies the occasional decision of courts to pierce the corporate veil. 1. The court will lift the veil where a company is used to perpetrate a fraud. Re Darby [1911] 1 KB 95; Re H [1996] 2 BCLC 500. 2. The court will lift the veil where companies are used to evade existing legal obligations. See for example, Gilford Motor Co Ltd v Horne [1933] Ch 935; Jones v Lipman [1962] 1 WLR 832. But was the veil really lifted in these cases? See judgments of Toulson J in Yukong Lines of Korea v Rendsburg Investments (No 2) [1988] 1 WLR 294 and McPherson J in ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd [1991] 2 Qd R 360, emphasising that in both cases an order was made against the company as well as the wrongdoer in control of it. As regards using a corporate group to evade future obligations, note the comments of Slade LJ in CA in Adams v Cape Industries [1990] 2WLR 657: we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law. 3. Where companies are under-resourced, the court might conclude that the company is the agent of its controller, or is a sham or device. See Re FG (Films) Ltd [1953] 1
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WLR 483; Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 and the guidance offered by Atkinson J: o Were the profits of the business treated as profits of the parent? o Did the parent appoint the persons carrying on the business? o Was the parent the head and brain of the trading venture? o Did the parent govern the adventure, decide what should be done and what capital should be embarked on the venture? o Did the parent make the profits by its skill and direction? o Was the parent in effectual and consistent control? This case and the similar decision in DHN v Borough of Tower Hamlets (1976) 3 All ER 462 have since been explained on the basis that they turn on the provisions of the particular statute. In Morgan v 45 Flers Avenue Pty Ltd [1986] 10 ACLR 692, Young J of Supreme Court of NSW said in response to a members request to lift the veil: So long as the law permits people to erect structures which have meaningful legal consequences then if a person elects to erect such a structure he must take the consequences of such erection for better, for worse, for richer or poorer, in commercial sickness or commercial health. See also Spreag v Paeson Pty Ltd [1990] 94 ALR 679 (following Smith, Stone & Knight Ltd). For empirical analysis of veil-piercing by the Australian courts, see IM Ramsay and DB Noakes, Piercing the Corporate Veil in Australia (2001) 19 Company and Securities Law Journal 250.

The Specific Problem of Corporate Groups Companies can form wholly-owned subsidiaries or acquire them by means of takeover, and often do this as a means of dividing up the business conveniently among different management groups, and, more importantly, to insulate the parent from liability in relation to a particular (often highly risky) activity. These structures may be very complex: see for example Qintex Australia Finance Ltd v Schroders Australia Ltd [1990] 3 ACSR 267. Rogers CJ suggested that: It may be desirable for Parliament to consider whether this distinction between the law and commercial practice should be maintained. This is especially the case today when the many collapses of conglomerates occasion many disputes. Regularly, liquidators of subsidiaries, or of the holding company, come to court to argue as to which of their charges bears the liability.
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Statutory definitions of groups Definition of subsidiary in section 46: when the parent controls the composition of the board or has more than half the votes in general meeting, or holds more than half the issued share capital carrying a right to share in profits. This definition applies for the purposes of s588V (liability of holding company for insolvent trading of subsidiary).

s50 of the CA uses the broader concept of related bodies corporate (which encompasses holding and subsidiary relationships, and grandparent relationships). Where companies are related, they must produce consolidated accounts, and a number of regulations which we will look at later (such as financial assistance and companies acquiring shares in themselves) also apply to related companies. s50AA refers to the broader notion of control by one entity of another in the sense of capacity to determine the outcome of decisions about the second entitys financial and operating policies (50AA). This broader concept of control is used in Pt2E of the CA which deals with financial benefits by a public company and extends to controlled as well as related bodies corporate.

Companies in group remain separate entities This is the basic legal principle. See for example Industrial Equity v Blackburn (1977) 137 CLR 567 In making management decisions, directors are supposed to take account of the interests of that company (including its creditors), rather than of the group as a whole. Per Mason J in Walker v Wimborne (1976) 137 CLR 1: it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. The creditor of a company, whether it be a member of a group of companies in the accepted sense of that term or not, must look to that company for payment. His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent. However, the interests of one member of a group of companies may lie in the continued viability of other members of the group if, for example, continued bank funding is conditional on their survival: see Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952.

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An important exception: statutory liability of holding company for insolvent trading by subsidiary s588V: holding company can be liable where: its subsidiary incurs a debt while insolvent or becomes insolvent as a result and there are reasonable grounds for suspecting insolvency and the holding co or one or more of its directors is aware at the time that there were grounds for so suspecting and/or looking at the nature and extent of control of parent, it is reasonable to expect that parent or its directors would be aware.

We will look at this section in more detail in lecture 11

The specific problem of tort liability Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 Rogers JA commented as regards lifting the veil to make the parent liable for the torts of the subsidiary: In the present state of the law, it is not possible to say what evidence would ultimately suffice to make out a case. The law on the topic appears to be in a state of flux. It may be that only the High Court and perhaps not even it, can alleviate the consequences of the decision in Salomon so as to adapt the principle of limited liability to the economic realities of todayit is possible to argue that the proposed general tort considerations should not be applicable in cases where the injured person is an employee. It could be argued that such a person has equal opportunity with a contracting party in determining whether or not to enter into the employer/employee relationship out of which the injury arises. However, whilst the employee may be able to choose whether or not to be employed by the particular employer, generally speaking, he has no real input in determining how the business will be conducted and whether reasonable care will be taken for his safety. The UK Court of Appeal examined similar questions in Adams v Cape Industries plc [1990] Ch 433 but refused to lift the veil.

Should the veil be lifted in tort cases? As regards parent liability for subsidiary torts, there are good economic arguments for lifting the veil. Torts are externalities which must be internalized for the assumption of efficiency to hold. If this does not happen, the parent will obtain the benefits of the activities (in the form of dividends) but will not bear all the costs of the activity. Moreover, 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. It will be appreciated that as Rogers noted in Briggs these arguments do not apply quite as strongly to employees as
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other tort victims (who are also in a contractual relationship with the company). Reputation may compel companies to satisfy contractual liability, and it may also encourage companies which are not in their end game to satisfy employee claims in order to maintain their reputation for fair dealing with their employees. However, once the endgame is reached and asbestos liability has brought many companies and their insurers into their endgames! there is a real danger that tort claims will go unsatisfied. The normal response to this from the perspective of law and economics is that companies will put in place adequate insurance arrangements to deal with the risk of extensive liability: see for example Easterbrook and Fischel. If they do not put insurance in place then there might be a case for lifting the veil on the basis that the company is acting opportunistically in transferring risk of reasonably foreseeable losses to tort creditors (analogous to incurring contractual debts when insolvent): see for example D. Millon, Piercing the Corporate Veil. Financial Responsibility, and the Limits of Limited Liability (2006) Wash and Lee Working Paper No 8 at 42-58. Millon concludes at 66: Limited liability should instead be limited to situations in which shareholders have managed the business with due regard for bargained-for expectations and potential victims of reasonably foreseeable accidents. A number of reports have dealt with this issue in Australia: In its Corporate Groups: Final Report (May 2000), CSAC (the forerunner of CAMAC) recommended no general reform, leaving the issue to individual statutes and common law. A June 2006 report by the Parliamentary Joint Committee on Corporations and Financial Services on Corporate responsibility: managing risk and creating value recommended no change to directors duties, that reporting on social responsibility issues should remain voluntary and that government should encourage socially responsible practices. A CAMAC Report of December 2006 on The Social Responsibility of Corporations also recommended no change to directors duties, preferring instead that specific legislation targeted at the problem area be introduced in areas where the market is judged unable satisfactorily to respond. Most recently, in its May 2008 report entitled Long-Tail Liabilities, CAMAC gave detailed consideration to the issues surrounding protection of unascertained future claimants (UFCs). *For further discussion of James Hardie: see, eg, P von Nessen and A Herzberg, James Hardies asbestos liability legacy in Australia: Disclosure, corporate social responsibility and the power of persuasion (2011) 26 Australian Journal of Corporate Law 55; P Spender, Blue Asbestos and Golden Eggs: Evaluating Bankruptcy and Class Actions as Just Responses to Mass Tort Liability (2003) 25 Sydney Law Review 223; and P Prince, J Davidson, S Dudley, In the shadow of the corporate veil: James Hardie and asbestos compensation (Research Note no. 12 200405, Australian Parliament, available online at: http://actu.asn.au/public/campaigns/jameshardie/files/jh_parl_note.pdf).
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Civil and criminal liability of companies Wrongs committed by companies will always be derivative in the sense of deriving from the act or omission of a natural person. In many cases liability will be vicarious, based on the relationship between the company and the individual in question. However in some cases the company is treated (admittedly fictionally) as though it committed the wrong, which can be referred to as direct or primary liability.

Civil Wrongs Vicarious liability of the company as employer: tort committed by an employee in the scope of the employment, encompassing negligent and deliberate torts. Primary liability: see Lennards Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705. Viscount Haldane said in a very famous passage: a corporation is an abstraction. It has no mind of its own any more than it has a body 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, the very ego and centre of the personality of the corporation. This has been understood as elaborating an organic theory of the corporation: senior managers in this position not only act for the company, they act as the company itself. Although developed in the context of civil liability, this principle has been particularly useful in relation to criminal liability, which is discussed next.

Criminal wrongs What is to be gained by imposing criminal liability? Criminal liability arises very rarely vicariously, but company may be subject to primary criminal liability where the offence is committed by its directing mind: prosecution must show that the natural person in question had the requisite mens rea for the offence, and this is then attributed to the company. Tesco Supermarkets v Nattrass [1972] AC 153 An alternative, more flexible approach was taken in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, PC. Lord Hoffmann on behalf of the Privy Council drew a distinction between

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primary rules of attribution, which will generally be found in its constitution and will say things such as the decisions of the board in managing the companys business shall be the decisions of the company. There are also primary rules of attribution that are not expressly stated but implied by company law, such as the unanimous decision of all the shareholders in a solvent company shall be the decision of the company; and general rules of attribution, like agency and vicarious liability (these will rarely apply to criminal liability unless the statute expressly says so); and special rules of attribution, which are required when a rule of law expressly or impliedly provides that the primary and general rules do not apply. This turns on the courts interpretation of the statute, applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.

This creates greater uncertainty, but makes it easier for large companies to be convicted since it does not require that those at board level have knowledge of the wrongdoing: see further Ross Grantham, Attributing responsibility to corporate entities: a doctrinal approach (2001) 19(3) Company and Securities Law Journal 168 at 175. Things may be changing in Australia towards making it easier for companies to be convicted. Criminal Code Act 1995 (Cth) contains (in Schedule to Act, Criminal Code) general model principles of criminal responsibility for companies: s1308A CA provides that Criminal Code applies to offences under the CA (except for offences under Ch7 (Financial services and markets) where s769B(3) attributes intention with regard to action within the actual or apparent authority of a director, employee or agent to the company essentially vicarious liability in order to satisfy any mental element). s12.1(2): companies may be found guilty of offences, including those punishable by imprisonment (even though a company cannot be imprisoned) fines can be imposed for such offences.

Where it applies, the physical element of an offence will be attributed to the corporation where the offence is committed by an employee, agent or officer acting within the persons actual or apparent scope of employment or authority (12.2) wider than the Tesco Supermarket directing mind and will principle (limits liability of company to senior managers who are its directing mind and will). Fault can be attributed where the corporation has expressly, tacitly or impliedly authorised or permitted the commission of the offence (12.3(1)), and this can be established in a number of situations. For instance, proof that a corporate culture existed within the company that encouraged or tolerated failure to comply with the statutory provision in question. The principal limitation of the 1995 Act is that more serious offences remain the province of the States, and it is up to them to decide whether to adopt the model Criminal Code; so far only the
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ACT has introduced industrial manslaughter laws which reflect the model law provisions: see the Crimes (Industrial Manslaughter) Amendment Act 2003. Note: As far as industrial manslaughter and directors liability is concerned, the law has substantially shifted under a harmonised scheme, which applies in the majority of States and Territories: see, eg, Work Health and Safety Act 2011 (Qld). Now directors have a positive duty to show that they have taken due diligence. A failure to take positive steps is a breach of the Act.

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Lecture Three: Internal Structure and Operations of the Company: the corporate constitution; corporate organs, and meetings
Recommended preliminary reading: Lipton et al, Chapters 4, 12, 13.1 and 14. Further suggested reading: Boros and Duns, Chs 4, 5, 6 and 7 E. Boros, Shareholder Litigation after Sons of Gwalia Ltd v Margaretic (2008) Company and Securities Law Journal 235 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations with 2010 Amendments 2nd ed, especially 2.2 and 2.3 (available from ASX website and are linked to the Understanding Company Law website at http://www.uclaw.com.au/resources/ ). Alan Dignam and Michael Galanis, Australia Inside-out: The Corporate Governance System of the Australian Listed Market (2004) 28 Melb Uni L R 1

Introduction Corporations law needs to deal with the separation of ownership (members in their capacity as risk-bearers or residual claimants) and control (directors in their function as management) which occurs in many companies. In legal terms, power is divided between these two groups by the corporate governance rules (that is the replaceable rules note especially s198A(1) and the constitution), by the CA, and, where appropriate by the ASX Listing Rules. In smaller, quasipartnership companies this distinction may seem artificial and the shareholder-managers may not make any such distinction if they are not legally advised!

The Constitution and the Replaceable Rules Corporate governance rules consist of two kinds of rules: special replaceable rules contained in the CA which companies can adopt by default or replace with their own tailored rules; and a document which the CA calls the constitution in which companies modify or replace the replaceable rules. See s135(1) and (2). A list of replaceable rules can be found in s141. Almost every company will adopt a constitution because some of the replaceable rules will be unsuitable for them, whilst a public company must have a constitution: ASX Listing Rule 15.11. Constitution can be adopted on registration as a long as signed by every member; if adopted after registration, a special resolution of the Members is required: s136(1)(b). s9 defines special
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resolution as requiring to be passed by the votes of 75% of the shares of Members entitled to vote. The replaceable rules and/or Constitution are a statutory contract: see s140(1) CA (you should read this section carefully). This has a number of important implications: 1. They cannot be enforced by outsiders: see Eley v Positive Life [1875] 1Ex D 20; affirmed [1876] 1 Ex D 88; Marketing Advisory Services (MAS) v Football Tasmania Ltd [2002] 42 ACSR 128. 2. 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 [1915] 1 Ch 881. 3. Members are bound or entitled only in their capacity as members: Eley (above). 4. Remedy for breach of the constitution by the company is injunction or declaration, not damages: see Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 explaining Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 and that s563A CA 2001 postpones claims owed by a company to a person in the persons capacity as a member of the company until after other creditors have been paid. 5. However Sons of Gwalia Ltd v Margaretic (2007) 81 ALJR 525; [2007] HCA 1 has given s563A a narrow scope. The court held that a claim brought by a member against the company under s1041H for false and misleading conduct did not fall within s563A. It is important to note that the Member had bought the shares on the open market from a third party, rather than directly from the company (as was the case in Houldsworth and Webb). The courts decision was influenced by the terminology of the consumer and investor protection statutes (which applied to the whole investing public, whether they were members or not at the time they relied on the statement made by the company) rather than the technicalities of 19th Century English law cases. It therefore does not clarify which rights will be considered outsider rights. For discussion of this case, see A. Hargovan and J. Harris, Sons of Gwalia Ltd v Margaretic: The Shifting Balance of Shareholders Interests in Insolvency: Evolution or Revolution? (2007) 31 Melb Uni L R 591. Note however that this case has been overruled by the legislature: the Corporations Amendment (Sons of Gwalia) Bill 2010 passed the Senate on 26/11/2010 6. One shareholder should be able to recover damages from another shareholder, however. 7. Member is confined to enforcing personal rights under s140(1). This certainly covers right to vote and right to a dividend if one is declared. Rights which belong to the company must be enforced by the company. Contrast the broader view of Wedderburn in (1957) Cambridge Law Journal 194, although there is no clear support for this in Australian law. The middle view is that a member may be able to insist that the companys organs be properly constituted: in Kraus v JG Lloyd Pty Ltd [1965] VR 232, a 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 articles, and an injunction
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preventing her from acting, preventing another director from treating her as a director and requiring that a general meeting be called to enable the shareholders to elect new directors in accordance with the articles. While the court insisted that the plaintiffs personal rights had been infringed by this, it gave no further details. 8. Position of directors under s140? Ability to enforce rights in their capacity as directors and an obligation to observe the constitution? Make sure you read the text of s140 carefully, because it differs subtly from the text considered in many of the cases. 9. A member will not be able to complain of mere procedural irregularities at common law or under s1322. Accordingly, departures from the prescribed way of doing things will not be invalid unless they change the substance of the thing which is being done. There is authority that the irregularity need not be inadvertent: see Re Pembury Pty Ltd (1991) 4 ACSR 759 requiring a nexus between the irregularity complained of and the prejudice. See also Whitehouse v Capital Radio Network Pty Ltd [2004] 48 ACSR 569. However there is also authority the other way: see eg Young J in Re P W Saddington and Sons Pty Ltd (1990) 2 ACSR 158; McGellin v Mount King Mining NL (1998) 144 FLR 288. 10. Validation of other, non-procedural irregularities is possible under 1322(4), although note the requirement in 6(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: s136(2). Note that repeal may result in the replaceable rules becoming applicable to the company. See also s136(5) and 139. It 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 Ltd (1995) 184 CLR 399; 132 ALR 1. The precise terms of any so-called special contract and the effect of any change to the constitution on that contract are questions of construction for the court.

Restrictions on alteration Company cannot be deprived of its statutory power to alter its constitution by contracting that it will not change its constitution. However the shareholders can make it more difficult for themselves to modify the constitution in a number of ways: They can make a contract among themselves: Russell v Northern Bank [1992] 3 All ER 161. The constitution can also be entrenched by using weighted voting rights of the kind recognized in Bushell v Faith [1970] AC 1099.

BAILEY: (i) Whilst the articles of association of a company regulate the relations of the members amongst themselves as members and with the company, they do not preclude a member from contracting individually with the company upon terms which may or may not be dened by reference to the articles (known as a special contract). :9"not (ii) Even if the terms of a special contract are to be determined by reference to the articles, an alteration to those articles will " necessarily mean an alteration to the terms of the contract. It depends upon the intention of the parties to the contract, namely, the member and the company. (iii) Where a special contract does import as a term one or more of the company's articles in an alterable form, an alteration to the articles will have the effect of varying the contract prospectively only, save perhaps in extraordinary circumstances.

Most importantly, the constitution can make provision for modification or repeal to be conditional on compliance with a further requirement: s136(3) and (4).

Variations of class rights, that is special rights held by a class of members, have to comply with a special procedure prescribed by s246B which will be discussed in lecture nine. Similarly, modifications which are oppressive or unfairly prejudicial to a member or members may be prevented by the court under Part 2F.1, which will be discussed in lecture 8.

Organs, Division of responsibilities and decision-making power Company in general meeting and board of directors are the principal organs of the company. General meeting Members in general meeting decide by simple majority of votes cast (ordinary resolution, a common law notion not defined in the statute) in accordance with CA and constitution. Sometimes the CA requires a special resolution to protect minorities (defined in s9 to mean 75% of the votes of those entitled to vote). How do members vote? Normally by show of hands, but note s250L allows a shareholder holding 5% of votes to demand a poll. Alternatively a written resolution procedure is provided in 249A. Finally, members can vote informally if all agree. Re Express Engineering Works Ltd [1920] Ch 466 and Re Duomatic [1969] 2 Ch 365. 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 (1976) 2 NSWLR 477 although s1322 may make the informal resolution valid in any event if there is no prejudice. Austin J hinted (obiter) in Bodikian v Sproule [2009] 72 ACSR 598 at [33] that the rule might not apply where there is a statutory requirement to hold a meeting (as opposed to a replaceable rule requiring that a meeting be held). 249X allows a member to appoint a proxy. Some matters are expressly reserved to the general meeting by the CA eg altering constitution (s136), reducing capital (256B and C), altering companys status, removing a director in a public company (203D) (this is a replaceable rule in private companies: 203C). ASX Listing Rules also make changes to the position of shareholders under the CA: see for example, LR 7.1, 10.1, 11.1, 11.2. There are two types of general meeting: the AGM (Annual General Meeting) and the EGM (Extraordinary General Meeting). Public companies must hold AGMs because they have an important corporate governance function (they give shareholders the opportunity to call directors
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to account): s250N. Proprietary companies do not have to, although their constitution may oblige them to. Both board and auditors must (in many cases) be present at the AGM. Annual reports must be made to the AGM (both financial and directors reports) by public companies and large proprietary companies. Small proprietary companies are exempt unless 5% of shareholders request it or ASIC directs it (293-4). Listed companies have more frequent disclosure obligations: they must prepared half-year financial report and directors report under s302 and note also their obligations of continuous disclosure to the market under the ASX Listing Rules, Chapter 3. Who can call general meetings and what notice must be given? See ss249C-O Fraser v NRMA Holdings Ltd and ors (1995) 127 ALR 543 Directors fiduciary duty to disclose material information about what is to be discussed at shareholder meetings may trigger s52 of the Trade Practices Act 1974 (Cth).

Board of directors S198A(1) provides that the business of the company is to be managed by or under the direction of the directors. This is a replaceable rule but companies invariably adopt it. This includes making contracts, borrowing money, employing people, suing in the companys name, deciding whether to defend proceedings, issuing shares under 124(1) etc. Types of director: managing, chair, executive and non-executive, alternate (s201K), nominee, de facto and shadow. See definition in s9, s201A-M Corporations can be shadow directors if the definition is satisfied: Standard Chartered Bank of Australia Ltd v Antico [1995] 38 NSWLR 290. If so, they will be subject to statutory duties. Formal requirements for appointment (outline only): CA ss201A-M. Remuneration of directors was not permissible at common law; must be provided for in the constitution. See ss202A(1) and 202B. Companies which are obliged to produce a directors report under 298-300 (ie large proprietary and public companies) come under additional obligations under s300, and listed companies come under still further obligations under 300A and 250R. Resignation (in outline): s203A-B, LR 14.4 Removal by shareholders: 203C-D Bushell v Faith [1970] AC 1099; Amalgamated Pest Control Pty Ltd v McCarron (1994) 13 ACSR 42; LR 6.8 and 6.9. Browne v Panga Pty Ltd (1995) 17 ACSR 75
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No removal of director by other directors in public company: 203E. Board takes decisions by majority, and the chair has a casting vote: replaceable rule in s248G. Quorum is two: 248F; Clamp v Fairway Investments Pty Ltd (1971-3) CLC 40-077; s1322(2). Written resolution procedure: s248A. The board may delegate powers of management to committees of the board, to individual executives, and to others: 201J, 198C, s198D (general power). Note that directors remain responsible for action of the delegate: s190(1).

Can the shareholders interfere with board management or give the board instructions? The basic answer to this is no. See Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34; Quin & Axtens Ltd v Salmon [1909] AC 442; John Shaw and Sons (Salford), Limited v. Peter Shaw and John Shaw [1935] 2 K.B. 113; Howard Smith v Ampol Petroleum [1974] AC 821: directors, within their management powers, may take decisions against the wishes of the majority of 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 a special resolution to alter the articles under s136(2). What about the Duomatic principle? See Re Express Engineering; Poliwka v Heven Holdings Pty Ltd (No 2) (1992) 8 ACSR 747 at 786-8; Bodikian v Sproule [2009] 72 ACSR 598 at [32]. Where the board is deadlocked, see Barron v Potter [1914] 1 Ch 895, although the scope of the principle was interpreted narrowly in Massey v Wales [2003] 47 ACSR 1. What about the position of creditors if the shareholders cause the company to trade while insolvent?

An aside on corporate governance For an example of a failure of directorial oversight of management, see AWA Ltd v Daniels [1992] 7 ACSR 759. It has been argued that many of the problems arise because the board contains many members aligned with or part of management, while shareholders are dispersed and so do not monitor to check that the directors are adequately supervising management (they have a collective action problem). The ability of management to pursue their own goals and not further the interests of shareholders is referred to by economists (but not lawyers!) as an agency problem: shareholders depend on management but do not/cannot control them.
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The ASXs response to this is the Corporate Governance Principles and Recommendations with 2010 Amendments 2nd ed, which sets out best practice and endeavours to structure the board so that it operates in a way which is more likely to further shareholder interests. One of the key mechanisms is the presence on the board of a majority of independent, non-executive directors, or a good explanation of why this is not the case (listed companies are subject to comply or explain under LR 4.10.3). However, there is good reason to be sceptical as to the effectiveness of non-executives in controlling executives and making them accountable to the shareholders. Another is the establishment of non-executive committees dealing with crucial areas such as audit and remuneration. As we will see in the lectures on directors duties, this development is causing considerable difficulties for the law in laying down the standard of care and skill expected of the different types of directors. But note developments overseas, eg, in the UK. The growing concentration of shareholdings in the hands of institutional investors (especially pension funds and insurance companies) and overseas investors led to The UK Stewardship Code 2010. Like the UK Corporate Governance Code, it applies on a comply or explain basis and was directed in the first instance to fund managers that is, firms who manage assets on behalf of institutional shareholders. The Code sets out good practice on engagement with investee companies with the goal of helping to improve long-term returns to shareholders and the efficient exercise of governance responsibilities. It requires that institutional investors should, eg, publicly disclose their policy on how they will discharge their stewardship responsibilities (Principle 1) and manage any conflicts of interest (Principle 2).

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Lecture Four: Corporate Contracting

Recommended preliminary reading: Lipton et al, Chapters 4 [4.60] [4.75] and 5 [5.110] [5.380]. Further suggested reading: Boros and Duns, ch 9 Chapple L & Lipton P, Corporate Authority and Dealings with Officers and Agents, Centre for Corporate Law, University of Melbourne, 2002 (available online at http://cclsr.law.unimelb.edu.au/download.cfm?DownloadFile=C3706600-1422-207CBA0F653CE1CF7EFB)

1. Corporate capacity and powers s124(1) states that companies have the legal capacity and powers of an individual, but note that powers set out therein include additional powers that are not applicable to humans. s124(2) provides that a companys capacity to do something is not affected by the fact that it is not in the companys interests to do that thing.

Statements of objects and limitations on powers Express statements and limitations Objects clauses? (Historically: doctrines of ultra vires and constructive notice applied) For their legal effect now, see s125(2). s125(1) deals with other restrictions in the constitution. See also s128, s129(1) and s130(1).

An internal constraint only Breach of constitutional limitations by directors is an irregularity which may be a breach of their duty of care and skill or their fiduciary duty to act in good faith for a proper purpose (given that the company constitution defines and sets limits to the companys interests). UK and New Zealand law impose a specific duty to act in accordance with the constitution: s134 Companies Act 1993 (NZ) and s171(a) CA 2006 (UK). They might also be in breach of their service contract, in breach of an implied duty of care under the statutory contract, provide grounds for an oppression remedy for a minority shareholder or even justify winding up on the just and equitable ground.
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Ratification of the breach by the shareholders in general meeting is possible unless the interests of creditors intrude: Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722.

Implied limitations Implied limitations may be found in the general intention and common understanding of the incorporators, and could be enforced by ordering winding up on the just and equitable ground under s461(k) or (more likely) in oppression proceedings under Pt 2F.1. When will the courts find such an intention? See Strong v J Brough & Son (Strathfield) Pty Ltd (1991) ACSR 296 esp at 300-2. Young J in the Supreme Court of NSW: How does one get to the general intention and common understanding of the members? That is a very difficult question. Drawing these lines together, it seems to me that the directors have the power [under the constitution] to carry on the management of the company in a wide sense, including changing the direction of the company, but that if one gets to the situation where one can say the substratum has gone, then any member can petition the court to wind it up and get his or her investment back on the basis that the corporate purpose has come to an end It seems to me that the evidence in the instant case is not strong enough to demonstrate that the business of the company at Strathfield was, in the minds of the corporators, the only business which would be carried out, or, indeed, the principal business that would be carried out by them In modern business one tends not to stay in the one locality for the whole life of the corporate enterprise, but to move offices and to change the nature of business. I do not think it should be readily assumed that where there is a small company and it in fact for a few years carries on one business alone, that the corporators intended that it would be restricted forever to carry on that business, and to give any member the veto against the business moving, or any member the right to withdraw his investment if the others took that course.

2. There are 2 ways that a company can enter into a valid contract. Either: 1) contracting directly with the third party; or 2) *contracting through an individual who acts as the companys agent.

1) Directly When is there an act of the company? s125 is concerned with corporate capacity and requires an act of the company or an exercise of corporate power. Since the company is a legal fiction, we need to identify an act of an organ of the company, the decisions of which will be treated as decisions of the company. This will normally be either the board or the general meeting. It is widely accepted that the general meeting acts as an organ of the company; the dominant view is also that the board of directors exercising their management powers will act as an organ of the company.
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*Note s127 in this context: A company may execute a document in accordance with the requirements of s 127, either by fixing its common seal to the document: s127(2) or without using a common seal: s127(1). It will also encompass a governing director. (On the compatibility of governing directors with s9, see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 per Brennan J, citing Welch v Welch [1973] CLC 40-068). Boros and Duns argue (at 160-1) that an act of a delegate such as the managing director (and perhaps therefore also a committee (see ss198C and D)) would suffice to be an act of the company. Presumably they are relying on s198D(3) which makes the exercise of the power by the delegate as effective as if the directors had exercised it. This is highly questionable: s198D was introduced by CLERP in order to clarify the boards ability to delegate following the NSWCA decision in Daniels v Anderson (1995) 37 NSWLR 438 and s190 sets standards of responsibility of the board for the actions of the delegate. Moreover, the identity of the organs of the company is arguably a matter for the companys constitution. Finally, this approach was not taken in Crabtree-Vickers or Brick and Pipe Industries, both of which treated a single director as an agent rather than an organ of the company. In any event, as we will see below, the distinction between an organ and an agent will only be important in rare situations: for example, if a third party deals with a managing director or a Committee on a matter which lies beyond their usual authority.

2) *Company incurring obligations through actions of an agent 2 main ways: a) Express or implied actual authority b) Company previously held out individual as its agent (apparent or ostensible authority) Note also c) Company subsequently ratifies conduct of someone who presumed to act as its agent

Actual authority Actual authority is an internal matter. s126 allows an individual acting with authority to make, ratify or discharge a contract on behalf of the company. Actual authority can be express or implied. Express actual authority may arise by expressly giving an individual power to enter into particular contracts or to carry out certain tasks. An individual may also have implied actual authority. The extent of this authority, though actual, is not expressly agreed upon, but may arise from the conduct of the parties and the circumstances. Most often it will arise when a person is appointed to a particular position.
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Appointment to a position of a standard kind which involves acting for the appointor gives authority to do things usually (customarily) done by a person in that position. Managing director can have powers delegated under 198C and can also be appointed under s201J, and will have the 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. See Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; Re Tummon Investments Pty Ltd (in liq) (1993) 11 ACSR 637; Green v Meltzer (1993) MCLR 289, (NZ case). On their authority to authorise agents, see CrabtreeVickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 33 CLR 72; 7 ALR 527. Individual director has no usual authority to bind the company: Northside Developments Pty Ltd v Registrar General (1990) 170 CLR at 205. Likewise the chairperson: see State Bank of Victoria v Parry (1990) 2 ACSR 15 at 29. Company secretary keeps records and ensures company performs statutory functions (s188). Limited authority until Panorama Developments (Guilford) Ltd v Fidelis Furnishing Fabrics Ltd (1971) 2 QB 711 and Donato v Legion Cabs (Trading) Co-op Society Ltd (1966) 2 NSWR 583, when ceased to be viewed as a mere clerk. The authority of executives below board level will depend on their particular position: see eg AWA Ltd v Daniels (1992) 7 ACSR 759 per Rogers CJ dealing with usual authority of money market managers and foreign exchange dealers. See also First Energy (UK) Ltd v Hungarian International Bank Ltd (1993) BCLC 1409 (the self-authorising agent). Implied actual authority can also arise by the acquiescence of the board or other person with actual authority (according to Hely-Hutchison v Brayhead (1968) 1 QB 549 acquiescence requires consent of all board members plus communication of that consent to each other and to the agent): see Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279.

Apparent or ostensible authority This is an aspect of estoppel, and so is an external matter. Diplock LJ laid down four conditions in Freeman & Lockyer v Buckhurst Properties (Mangal) Ltd (1964) 2 QB 480 which must be satisfied before a contract can be enforced against a company where the purported agent did not have actual authority: 1. Representation must have been made to the contractor that the agent had authority to enter on behalf of the company a contract of the kind sought to be enforced 2. That representation must have been made by a person or persons who had actual authority to manage the business generally (normally the board) or specific matters to which the contract relates (eg MD or company secretary or some other agent to whom authority has been delegated, whether expressly or impliedly): per Diplock LJ, the
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making of such a representation is itself an act of management of the company's business. In all the cases reviewed in Freeman, the representation was made by conduct in permitting the agent to act in the management and conduct of part of the business of the company. 3. Contractor induced by the representation to enter the contract (this will not apply where the contractor knows of facts which suggest that the apparent agent did not have authority, because then they will not have relied on the representation). 4. A fourth condition laid down by Diplock LJ relating to capacity no longer applies. However some commentators take the view that there is a fourth condition that apparent authority will not operate if the third party knows something which would put a reasonable person on inquiry as to whether the person with whom they are dealing lacks authority. Alternatively, this might simply be an aspect of inducement: if the contractor knows about the lack of authority then the representation will not be an inducement. If the contractor ought to know about the lack of authority then it will be difficult to persuade the court that he relied on the representation. On the intersection between implied actual authority/usual authority and apparent authority see Hely-Hutchison v Brayhead (1968) 1 QB 549. Freeman was approved in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975) 133 CLR 72, HCA. Note the importance of earlier findings of fact as to the authority of the Managing Director to the outcome of this case. Is the doctrine of apparent authority still needed? Will be needed if, in a particular case, s129(3) does not apply, and will also presumably be needed to interpret the statutory provisions. Would 129(3) have affected the outcome in Crabtree-Vickers?

Ex post ratification of unauthorised activities Ratification by the company, normally by means of board resolution, or ratified by an individual given authority under s126. Ratification may be by ordinary resolution of the GM if exceptionally the subject matter lies outside the scope of the boards management power. Ratification can only cure an absence of excess of authority on the part of the agent. Ratification must occur within a reasonable time. If company has gone into liquidation, the liquidator can ratify: Alexander Ward v Samyang Navigation Co Ltd (1975) 1 WLR 673.

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Authority of a sole director/shareholder Wide actual authority under s198E(1). Sole director/shareholder is the organ of the company. If there is more than one shareholder, then the relevant provision is s198A.

3. Reduction of the burden of inquiry on third parties dealing with the company At common law Before the doctrine of ostensible authority, common law deployed the indoor management rule, otherwise known as the rule in Turquands case (1856) 6 El & Bl 327. The common law indoor management rule continues to apply where the generally broader ss128-9 do not apply, and is arguably relevant to interpretation of s129(1). You therefore need to be aware of it. Per Mason CJ in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 164-5, the rule is aimed at giving sufficient protection to innocent lenders and other persons dealing with companies, thereby promoting business confidence and leading to just outcomes. The precise formulation and application of that rule call for a fine balance between competing interests. On the one hand, the rule has been developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. On the other hand, an overextensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies. Agency principles aside, to hold that a person dealing with a company is put upon inquiry when the company enters into a transaction which appears to be unrelated to the purposes of its business and from which it appears to gain no benefit is, in my opinion, to strike a fair balance between the competing interests. The 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, eg as to proper appointment of directors or general meeting approval of specific transactions. A mere constitutional or statutory power to appoint agents will not suffice to trigger the Turquand rule; 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: see for example Diplock LJ in Freeman & Lockyer; Houghton v Nothard Lowe and Wills Ltd (1927) 1 KB 246; Northside Developments Pty Ltd (which predated ss128-9 CA) A key limitation (in addition to actual knowledge by the outsider of the irregularity) is where the third party is put on inquiry by circumstances surrounding the transaction. Then he cannot presume in his 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 (1946) AC 459 at 475; Custom Credit
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Holdings Ltd v Creighton Investments Pty Ltd (1985) 3 ACLC 248; Northside Developments Pty Ltd. Again, this rule will be needed where the statutory assumptions do not apply, and will be needed for the purposes of interpreting the legislation.

Under statute ss128-9; on interaction with common law rules see Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119. s128 allows a person dealing with a company to make the assumptions set out in s129 as to regularity of procedures. Dealing with was interpreted broadly in Story v Advance Bank (1993) 31 NSWLR 322. In order to assert that assumption is incorrect, the company must show that the person dealing knew or suspected that the assumption was incorrect: s128(4). Assumptions can be made that: the companys constitution and replaceable rules have been complied with (129(1)); directors and company secretary recorded in public information have been validly appointed and have customary authority for their position (129(2)); that officers and agents held out as such by the company have been validly appointed and have customary authority (129(3)); that agents and officers properly perform their duties to the company (129(4)) (see Pico Holdings inc v Wave Vistas Pty Ltd (2005) 214 ALR 392); that a document duly executed by company if signed in accordance with 127(1) (129(5)); that a document under seal and witnessed in accordance with 127(2) has been duly executed by the company (129(6)); and that an officer or agent with authority to issue a document (ie MD or CS) has authority to warrant that document is genuine or a true copy (129(7)).

As for the scope of customary authority, the court may have to determine what powers are customarily possessed by a person in a particular position: see for example Austin J in NCR Australia Pty Ltd v Credit Connection Pty Ltd (2004) NSWSC 1 at [135]-[136] determining the customary functions and authority of a national credit manager to include deferring debt payments but not to institute litigation, and not, without more, as having authority to bind the company to the arrangement or to execute the deed on the company's behalf.

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Forgeries Note s129(7), and s128(3) which provides that the assumptions apply in the context of forgery.

If ss128-9 do not apply, the common law rules continue to apply. See Ruben v Great Fingall Consolidated (1906) AC 439; Kreditbank Cassel GmbH v Schenkers Ltd (1927) 1 KB 826; Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146.

Dealing with problems which raise questions of authority of agents It is suggested that if you are dealing with a problem question which gives rise to questions of authority on the part of agents, you should begin with an application of the statutory rules. If there is doubt as to their application, or if they do not apply, you should then proceed to consider questions of actual and ostensible authority, and finally, the Turquand rule.

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Lecture Five: Directors Duties (1)

Recommended preliminary reading: Lipton et al, Chapters 13.0 and 13.4. Further suggested reading: Boros and Duns, ch 10 Corporate Law Economic Reform Program, Proposals for Reform: Paper No. 3: Corporate Governance and Directors Duties (AGPS, 1997) at 22-9 discussing the need for/form of a statutory business judgment rule (available online at http://www.treasury.gov.au/documents/283/PDF/full.pdf)

Introduction: the nature and function of directors duties Directors have an opportunity for fraud or mismanagement (lack of care) by virtue of their position in controlling the companys assets. Shareholders may be able to police the directors and use their powers to remove them, but where they are dispersed and diversified, they are likely to be more passive, and it will be difficult to coordinate action. Law imposes strict fiduciary, common law and statutory duties on directors. How important are they? In doctrinal legal terms, very important. In practice, in large public companies, market forces are the main constraint on directors, with duties operating as a backstop against egregious wrongdoing. In small proprietary companies breach of these duties may form the basis for a minority action, or for an action by the liquidator in the event that the company becomes insolvent. Duties are a system of standards to be assessed ex post by the courts rather than attempting to create an exhaustive set of rules ex ante which may create loopholes etc. In The Anatomy of Corporate Law, Ch 5, at 114, Hertig and Kanda write: If rules are rarely used to regulate most conflicted transactions today, standards are pervasive. All jurisdictions impose standards which we group under the umbrella phrase duty of loyalty to control management conflicts and limit the risk of managerial diversions of assets or information whatever their labels, these doctrines have a similar thrust: they forbid directors from entering unfair or illicit self-dealing transactions or otherwise misappropriating company assets the standards strategy frequently operates in conjunction with the trusteeship strategy [i.e. requiring disinterested board or general meeting approval of self-interested transactions]. However, over time they have been complemented with specific (and increasingly complex) statutory rules. Juridification through statutory regulation coupled with gradual development of the common law duties has produced to a complex system of regulation of directors conflicts of interests and care and skill.

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For a detailed and current summary of the law in this area and its development, see Bell Group v Westpac Banking (No 9) (2008) 70 ACSR 1, paras [4362]-[4395] per Owen J.

An overview of directors duties Fiduciary duties: imposed on directors by analogy with trustees and agents, but neither analogy precisely captures the relationship between director and company. Regal (Hastings) Ltd. v. Gulliver (1942) 1 All ER 378, (1967) 2 AC 134 at 147, per Lord Russell: Directors of a limited company occupy a position peculiar to themselves. In some respects they resemble trustees, in others they do not. In some respects they resemble agents, in others they do not. In some respects they resemble managing partners, in others they do not 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 companys environment, but constrains them (or restricts their autonomy) 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 etc. However, fiduciary duties should be understood in the context of the courts long-standing refusal to become involved in disputes over the day-to-day management of businesses. This is termed the business judgement rule. Re Smith and Fawcett Ltd [1942] Ch 304: 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. Confirmed in Harlowes Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493. Lord Eldon in Carlen v Drury (1812) 1 Ves & B 154 at 158: This Court is not to be required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom. Origins of the rule in the approach taken by the courts to reviewing business policy in partnerships: see Wedderburn (1957) Cambridge Law Journal at 197-8. More recently the business judgement rule has been explained in terms of the limited resources of the courts compared with the vast number of companies and potential disputes. This means that the courts will not review a decision just because it was highly eccentric, although the less reasonable the decision, the more likely the court is to infer that the director in question did not take it in good faith or believe it was in the best interests of the company. As Paul Davies puts it, Only the careless or nave director is likely to leave direct evidence that he or she did not consider the interests of the company (shareholders). (Davies, Introduction to Company Law, 159 (Clarendon 2002)).
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A statutory business judgement rule (s180(2)) applies only to common law, equitable and statutory duties of care and is discussed below.

Duty of care: arises in both common law and equity: judgment of Ipp J in Permanent Building Society v Wheeler (1994) 11 WAR 187, emphasising that the duties in equity and law to exercise reasonable care and skill are, in content, the same. Like fiduciary duties, the duty of care is owed to the company as a separate legal entity.

Statutory duties ss180-3 CA. Interaction of statutory duties with common law duties: see s185. Note: These provisions: ss 180-3 are civil penalty provisions under 1317E and ASIC can apply for: a declaration of contravention under 1317J(1); disqualification order under 206C; pecuniary penalty order under 1317G; and compensation order under 1317H.

Note also ASICA s 50 giving ASIC broad discretion following an investigation into the companys affairs to bring proceedings in the companys name (or in the name of one of the shareholders if they consent). For interpretation of the section see ASC v Deloitte Touche Tohmatsu (1996) 21 ACSR 332 at 352-63 Note also CA s 1330 allowing ASIC intervention in existing proceedings under the CA. The company can choose whether to sue its directors under common law duties, or to bring an application for compensation for breach of the statutory duties: s1317J(2) (regardless of whether ASIC is taking action) or plead both in the alternative. Will discuss enforcement in more detail later in Lecture 6.

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Who owes directors duties and to whom do they owe them? Who owes them? General law duties: directors and senior executive officers, but content 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 (1978) 141 CLR 236; 22 ALR 161; 3 ACLR 760. Statutory duties sometimes apply to a director and sometimes to an officer. We have already seen that director is defined in s9 to include shadow and de facto directors; as is officer, which 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 and even shadow officers (ie those in accordance with whose wishes the directors are accustomed to act). Although a body corporate cannot be a director, it can be a shadow director: Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1. Hodgson J in Sup Ct of NSW ruled that one company was shadow director of another company: Pioneer held 42% of Giants shares through subsidiaries, had three nominee directors on the board. Hodgson was influenced by Pioneers effective control in the context of the size of other shareholdings (which were small), Pioneers actual exercise of management and financial control over Giant and Pioneers requirement that Giant produce financial reports in line with own requirements. This is important because shadow directors and officers are subject to s180-3 duties, while the duty not to trade while insolvent imposed by s588G insolvent trading duty only extends to directors (including shadows and de factos) but not officers. The concepts of shadow and de facto directors play a similar role (preventing those who direct companies or influence their decision-making from escaping liability on a legal technicality), but are considered mutually exclusive: Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 at 183 per Millett J.

To whom do they owe them? Duties are owed to the company as a separate legal entity: Percival v Wright (1902) 2 Ch 421. Broadly speaking, this means they can only be enforced by the company and not by individual shareholders: this will be discussed in more detail in lectures 7 and 8.

Directors may come to owe a duty of care to persons other than the company, for example if they assume responsibility to individual shareholders: Peskin v Anderson (2001) 1 BCLC 372, (2001) BCC 874; Allen v Hyatt (1914) 30 TLR 444; Coleman v Myers (1977) 2 NZLR 225; Glavanics v Brunninghausen (1996) 19 ACSR 204 (esp at 220-3), on appeal (1999) 32 ACSR 294 esp at 304 and 312.
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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.

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Directors duties of care, skill and diligence The common law and equitable standards The common law and equitable duties of reasonable care and skill exist in addition to any contractual provision. Courts may draw on general law of torts. Is there a difference between the legal and equitable duties in terms of quantum of damages? See Daniels t/as Deloitte Haskins & Sells v AWA Ltd (1995) 37 NSWLR 438 at 491 (Daniels v Anderson) and Street J in Re Dawson (1966) 2 NSWR 211 at 215.

Care Requirement to take such care as a reasonable person would take on their own behalf: Re City Equitable Fire Insurance Company Ltd (1925) Ch 407 at 428-9 per Romer J.

Skill Romer J then said that conduct should be assessed against a skill standard: what would a reasonable person with the knowledge and experience of the defendant have done in the circumstances if acting on his own behalf? Case law did not require that directors bring particular skills, but if they possess them, they should use them for the benefit of the company: Re Brazilian Rubber Plantations and Estates Ltd (1911) 1 Ch 425. More recently it seems that, 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: see Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 117.

Diligence As regards diligence, Romer J emphasised that directors are not bound to give continuous attention to the affairs of the company. His 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 Romer J: in respect of all duties that may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. For an application of this, see Dorchester Finance v Stebbings (1989) BCLC 498.

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Rogers CJ accepted the common law on delegation in AWA Ltd v Daniels (1992) 7 ACSR 759 at 868. It was also approved in Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACSR 785 at 856-8 although some courts have taken a stricter approach. However, the NSWCA in Daniels v Anderson was widely viewed as having imposed a stricter standard on non-executives and this led to a statutory restatement of the rules on delegation and reliance.

Developments under the statutory standard s180(1); note extension to officers. According to ASIC v Rich (2003) 44 ACSR 341 at 352, the responsibilities of a director include 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. See also ASIC v Adler [2002] 41 ACSR 72 at [372] per Santow J

Executive Directors under s180 Vines v ASIC (2007) 62 ACSR 1; [2007] NSWCA 75 ASIC v Rich (2003) 44 ACSR 682 Permanent Building Society v Wheeler (1994) 11 WAR 187

What is the standard applicable to non-executives? This is a vexed question: as Gzell J noted in ASIC v Macdonald (No 11) at [250]: The law has not yet established the extent to which the position of a non-executive director shapes the content of the duty of care. Some indicators can be found in recent case law. In AWA v Daniels (1992) 7 ACSR 759 at 865-9 Rogers CJ said: ...The board of a large public corporation cannot manage the corporation's day to day business. That function must by business necessity be left to the corporation's executives. If the director of a large public corporation were to be immersed in the details of day to day operations the director would be incapable of taking more abstract, important decisions at board level... The directors rely on management to manage the corporation. The board does not expect to be informed of the details of how the corporation is managed. They would expect to be informed of anything untoward or anything appropriate for consideration by the board... A non7>" "

executive director does not have to turn him or herself into an auditor, managing director, chairman or other officer to find out whether management are deceiving him or her... However, the judgment of the NSWCA in Daniels was perceived as requiring non-executives 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. In specific cases, the content of the duty of non-executives may be more demanding. See for example the discussion of the responsibilities of the non-executive Chairman of the listed One.Tel, who was also chair of its audit committee in ASIC v Rich (2004) 50 ACSR 500; or the experienced non-executive in Vrisakis v ASC [1993] 9 WAR 395 at 451. See also the treatment of the non-executive who was the only director with lending experience in Gold Ribbon (Accountants) Pty Ltd v Sheers (2002) QSC 400; on appeal (2006) QCA 335. Statutory provisions on delegation and reliance The apparently more demanding standard laid down by the NSWCA in Daniels v Anderson provoked the legislative response to be found in ss198D, s189 (dealing with reliance) and s190 (dealing with delegation), introduced by CLERP. For the policy reasons behind the amendments, see CLERP Report No3: Corporate Governance and Directors Duties at 9-10. For the latest word on the limits of permissible delegation by non-executives and reliance upon management and/or experts, see ASIC v Macdonald (No 11) (2009) 256 ALR 199; 71 ACSR 368 (Gzell J), especially paras [259]-[261] and [333], which reasoning was affirmed by the High Court in ASIC v Hellicar (2012) 286 ALR 501; [2012] HCA 17 (French CJ, Gummow, Hayne, Heydon, Crennan, Keifel and Bell JJ). Note main cases in James Hardie litigation (discussed in V. Comino, James Hardie and the Problems of the Australian Civil Penalties Regime (2014) 27 University of New South Wales Law Journal (forthcoming)): ASIC v Macdonald (No 11): The trial judge, Gzell J, gave judgment on contravention. ASIC v Macdonald (No 12) (2009) 259 ALR 116: Gzell J gave judgment on relief from liability for contravention, pecuniary penalties and disqualification. Morley v ASIC (2010) 247 FLR 140; [2010] NSWCA 331 (Spigelman CJ, Beazley and Giles JJA). Upheld appeal by non-executive directors against the Supreme Court finding that the directors were liable for misleading the market and breaching their duties. Morley overruled MacDonald (No 11) on the facts. NSWCA ruled that the draft ASX announcement (that stated that the foundation which had been established to deal with the Groups asbestos liabilities was fully funded) had been brought to the relevant board meeting. However, the Court was not satisfied that the non-executive director appellants voted in favour of the Draft ASX Announcement Resolution. This was mainly because ASIC did not call all material witnesses, which the Court said it should have as part of the duty of fairness ASIC owes to defendants in civil penalty cases. The High Court rejected this proposition and restored the Supreme Court finding on contravention: ASIC v Hellicar, but note

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NSWCA in Gillfillan v ASIC [2012] NSWCA 370 (Beazley, Barrett JJA, Sackville AJA) reduced the original civil penalties imposed on Hardie directors (extracts available on Blackboard).

The statutory business judgment rule s180(2). Another response to the NSWCA in Daniels. For further discussion of the reasons behind its introduction, see CLERP Report No3: Corporate Governance and Directors Duties at 23-9. The statutory business judgement rule has been discussed in two notable cases, and no defendant has yet successfully relied upon it: Re HIH Insurance Ltd (in prov liq); ASIC v Adler (2002) 41 ACSR 72 per Santow J. ASIC v MacDonald (No 11), per Gzell J at [542]: The requirements for the operation of the business judgment rule in s 180(2) are cumulative. The short answer is that there was no evidence that Mr Macdonald rationally believed that a business judgment was in the best interests of the corporation. He gave no evidence. In the absence of evidence that Mr Macdonald had a belief that a business judgment was in the best interests of JHIL, his appeal to s 180(2) must fail. Most recently in ASIC v Rich (2009) NSWSC 1229 at [7253-7289], Austin J considered the scope of the statutory business judgement rule.

Causation On causation in relation to civil penalty proceedings brought by ASIC, see ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, cited with approval by Gzell J in ASIC v Macdonald (No 11).

Some recent cases on s 180(1) In addition to HIH, One.Tel and James Hardie, other cases against directors in high profile cases, where alleged breaches of the duty of care in s180(1) have featured prominently include the Centro and Australian Wheat Board (AWB) cases: see, eg, ASIC v Healey (2011) 278 ALR 618; [2011] FCA 717 (Middleton J); and ASIC v Ingleby [2013] VSCA 49 (Weinberg, Harper JJA, Hargrave AJA).

Directors duty to prevent insolvent trading s588G was discussed in outline in lecture 2 on lifting the veil, and will be examined in more detail in lecture 11 on winding up.
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Lecture Six: Directors Duties (2)

Recommended preliminary reading: Lipton et al, Chapters 13.2, 13.3 and 13.5 [13.5.10] [13.5.50]. Further suggested reading: Boros and Duns, Chs11, 12 (pp 222-238 and 246-250) and 13 (pp254-256) Joel Bakan, The Corporation (book, and documentary; both are available in the library) Corporations and Markets Advisory Committee (CAMAC), The Social Responsibility of Corporations (December 2006), available at www.camac.gov.au (Reports) Commonwealth Parliamentary Joint Committee on Corporations and Financial Services, Corporate Responsibility: Managing Risk and Creating Value (June 2006), available at http://www.aph.gov.au/senate/committee/corporations_ctte/corporate_responsibility/index.htm

Good faith and proper purposes rules General introduction Common law origin: Re Smith and Fawcett Ltd [1942] Ch 304: 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. Now also embodied in s181 CA. Two separate duties: good faith in the best interests of the company AND for a proper purpose, although note that in some earlier cases, the courts did not always make a clear distinction between the two (see for example Ngurli v McCann (1953) 90 CLR 425).

The duty to act in good faith in the interests of the company A subjective or objective test? The court will not assume impropriety. The test is largely (though by no means entirely) subjective: the objective considerations relate back to the question whether the directors honestly believed the transaction to be in the best interests of the company, not to whether (regardless of what the directors believed) it did not benefit the company: per Owen J in Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239, Chapter 20.7, para [4598]. Owen J cited the well-known statement of Bowen LJ in Hutton v West Cork Railway Co (1883) 23 Ch D 654 at 671 that 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.

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According to Owen J, the objective aspect of the test leaves open an avenue for judicial intervention if, on consideration of the surrounding circumstances (objectively viewed), the assertion of directors that their conduct was bona fide in the best interests of the company and for proper purposes should be doubted, discounted or not accepted. Owen Js analysis that there is also an objective test was affirmed on appeal: Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157.The courts have also applied an objective test where the directors have, without reflection, assumed that the interests of the company coincide with their own (or some other person such as a parent company), and have not paid attention to the interests of the company as a separate entity with its own creditors and shareholders. In that situation, there is no subjective state of mind to discover and an objective test is required to fill the gap: see for example Pennicuick J in Charterbridge (below).

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 directors breach of duty (ie that the contract was not in the interests of the company).

What are the interests of the company? Clearly includes the interests of existing and future members. The reference to existing members includes both majority and minority shareholders, so a decision in favour of the majority at the expense of the minority will breach this duty: Ngurli Ltd v McCann (1953) 90 CLR 425. Note the elision of the proper purposes and interests of the company tests, and that individual minority shareholders were permitted to bring actions in their own names to remedy the breach of trust. It also encompasses the interests of the companys creditors. This is reflected in a number of protective provisions statutory provisions eg action by liquidator for misapplication of corporate assets under s598 and under s588G for insolvent trading. In parallel, a line of case law emerged to the effect that directors have a duty to avoid acting contrary to the interests of creditors where the company is insolvent or nearing insolvency. See Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; and more recently, Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157. The economic rationale for this expansive conception of the interests of the company can be found in a dictum of Street CJ in Kinsela: It is in a practical sense their assets and not the 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. This extension of directors duties will help fill gaps in creditors contracts with companies. Note however that it is a duty to consider, but not necessarily to give priority to, the interests of
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creditors, at least until the company becomes insolvent. See Bell Group at [4445] per Owen J and Grove v Flavel [1986] 43 SASR 469. An objective test has sometimes been applied when it was clear that the directors had not considered the interests of the company at all: would an intelligent and honest person in the position of the directors have reasonably believed that the transaction was for the benefit of the company, bearing in mind the interests of the companys creditors: see Linton v Telnet Pty Ltd (1999) 30 ACSR 465. It is also often accepted that directors should take account of the interests of employees (and perhaps also customers, contractors, community, environment etc). There is no statute requiring this (contrast s171 UK CA 2006 which instructs directors to have regard to employees, suppliers, community etc). Hutton v West Cork Railway Co (1883) 23 Ch D 654 clearly allows directors to take account of the interests of employees whilst the company is a going concern, and hence there is a possibility of commercial advantage to the company. Bowen LJ said The test must be what is reasonable incidental to, and within the reasonable scope of carrying on the business of the company... Most business require liberal dealings... A railway company, or the directors of the company, might send down all the porters at a railway station to have tea in the country at the expense of the company. Why should they not? It is for the directors to judge... a company which always treated its employees with Draconian severity, and never allowed them a single inch more than the strict letter of the bond, would soon find itself deserted at all events, unless labour was very much more easy to obtain in the market than it often is. The law does not say that there are to be no cakes and ale, but that there are to be no cakes and ale except such as are required for the benefit of the company. This also appears to represent the law in Australia. In Woolworths Ltd v Kelly (1991) 4 ACSR 431 at 446 Mahoney JA stated: I do not mean by this that a director must ensure that, in its dealing with its directors and with others, his company must be mean or cheeseparing. A company may decide to be generous with those with whom it deals. But I put the matter in general terms it may be generous or do more than it need do only if, essentially, it be for the benefit or for the purposes of the company that it do such. 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 or if otherwise it is for the benefit of the company that it do so. To adapt what was said long ago, the directors may have cakes and ale and, now, jet planes, but they may have them only if it is for the benefit of the company that they have them. And, of course, only to the extent that it is so. This is generally referred to as enlightened shareholder value in debates about corporate governance. Things change however once the company has no future, as in Parke v Daily News (1962) Ch 927, where a company which was being wound up was proposing to make ex gratia payments to its employees out of the proceeds of the sale of its business. Plowman J said that the defendants were prompted by motives which, however laudable, and however enlightened from the point of view of industrial relations, were such as the law does not recognise as a
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sufficient justification. Stripped of all its side issues, the essence of the matter is this, that the directors of the defendant company are proposing that a very large part of its funds should be given to its former employees in order to benefit those employees rather than the company, and that is an application of the companys funds which the law, as I understand it, will not allow. Note the implications of enlightened shareholder value: Hutton suggests that board decisions about employee (including executive) remuneration is an aspect of the boards management power. Note also the role of codes of conduct: a means of enhancing companies reputation with consumers and therefore making them more profitable beyond the short term. The ASX Corporate Governance Principles and Recommendations with 2010 Amendments 2nd ed requires listed companies to promote ethical and responsible decision-making, establish a code of conduct and disclose it or a summary of it as to the practices necessary to maintain confidence in the companys integrity and the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders (see Recommendation 3.1). The implication is that this is best practice in terms of furthering the interests of investors.

The position of nominee directors A nominee director must act in the best interests of the company he directs rather than the best interests of his appointor: Bennetts v Board of Fire Commrs of NSW (1967) 87 WN (pt1) NSW 307. Where the interests of their appointor and the company conflict, directors must either prefer the companys interests or resign: Scottish Co-op Wholesale Society v Meyer (1959) AC 324. Lord Denning said: so soon as the interests of the two companies were in conflict, the nominees were placed in an impossible position. It is plain that, in the circumstances, these three gentlemen could not do their duty to both companies, and they did not do so. They put their duty to the co-operative society [the majority shareholder] above their duty to the textile company [the company they directed] in this sense, at least, that they did nothing to defend the interests of the textile company against the conduct of the co-operative society. They probably thought that as nominees of the co-operative society their first duty was to the co-operative society. In this they were wrong. By subordinating the interests of the textile company to those of the co-operative society, they conducted the affairs of the textile company in a manner oppressive to the other shareholders. See also Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, PC.

Interests of the company in groups of companies Tension between objective and subjective approaches in this area:

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Charterbridge Corp Ltd v Lloyds Bank Ltd (1970) Ch 62: Pennicuick J recognised that 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. Followed in Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997) 26 ACSR 544 at 581. Contrast Walker v Wimborne (1976) 137 CLR 1: Mason J took a subjective approach, insisting on the 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 interest alone in deciding whether payment should be made to other companies. He recognised that the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company. A possible middle ground? See Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952 per Clarke and Cripps JJA, who suggested (obiter) that: A preferable view may be that where the 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. On the contrary, 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. Note dissent of Kirby P. Note also the possibility of a constitutional provision envisaged by s187, although the twin requirements of a provision in constitution plus solvency mean it is unlikely to be of great practical application.

The duty to act for a proper purpose s181(1)(b). Most cases have concerned the use of directors fiduciary power (under 124(1) and 198A(1)) to issue shares in order to affect the outcome of an unwelcome takeover. In this context, directors duties have been superseded by specific statutory regulation in relation to takeovers, and the question of directors duties will not arise during the course of the takeover. Takeovers now regulated under Chapter 6 CA 2001. S659B prevents the parties to a takeover bid from launching proceedings in relation to a takeover bid while the bid is underway (although ASIC can and questions about proper purpose can arise in those proceedings). Disputes should be resolved in front of the Takeovers Panel. Rather than look at the purpose for which the board acted, the
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Panel reviews whether there were unacceptable circumstances under 657A(2), and have issued guidance to the effect that frustrating action taken by the directors is likely to constitute unacceptable circumstances - see Guidance Note 12 available online at: http://www.takeovers.gov.au/content/DisplayDoc.aspx?doc=guidance_notes/current/012.htm&p ageID=&Year= However, the principle applies to all exercises of a fiduciary power and so might be used to catch other exercises of management power which are aimed at affecting the control of companies, as well as a decision to buy or sell assets, or to lend or borrow, where the decision is improperly motivated. Lord Greene said in Re Smith and Fawcett that the directors should exercise their powers not for any collateral purpose. They must have regard to those considerations, and those considerations only, which the articles on their true construction permit them to take into consideration In Hogg v Cramphorn Ltd [1967] Ch 254, Buckley J clearly distinguished the good faith and proper purposes tests for the first time. Action taken for improper purposes will be voidable, and can be challenged by the company, or (exceptionally among the duties owed by directors to companies) by individual shareholders if it also affects their personal right not to have their voting interest diluted: see e.g. Hogg v Cramphorn. In this regard, ratification by the majority in general meeting will not operate to bar an individual shareholders personal action: see Residues Treatment and Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569. The leading case is Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821, PC. Lord Wilberforce emphasised that there are no precise rules about purpose. A two stage test: it is then necessaryto examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not [which] has to be as to the side of a fairly broad line on which the case falls.

What were the purposes for which the power was actually used? This is a question of fact and the findings of the judge at first instance will be absolutely crucial. See Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464 for an example of the complexity of the inquiry facing the courts in trying to determine what the directors purposes were. However, the court will not invalidate the decision if they believe it had a legitimate commercial motivation: see for example Teck Corp Ltd v Millar (1973) 33 DLR (3d) 288; Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260. Was that purpose a proper purpose? There might be constitutional provision dealing with this: see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 292. If the constitution does not deal with the matter expressly or
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impliedly then the court will have to draw its own conclusions based on the structure of the company etc. Examples of proper purposes for issuing shares include raising 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 shareholders interest. See for example Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478.

What about mixed purposes? Widely accepted dictum of Dixon J in Mills v Mills (1938) 60 CLR 150 at 186 that the court should look for the substantial object the accomplishment of which formed the real ground of the boards action. More recently courts have preferred the but for test: see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 294. Note Mahoney JA in Darvall seems to have assumed that if an improper purpose merely affected the timing of the implementation of a decision, rather than the decision itself, then the decision would not be voidable. In his dissent in Darvall, Kirby P combined the substantial purpose and but for tests, an approach followed in Kokotovich and PBS v Wheeler.

Fiduciary duty to avoid conflicts of interest Rule 1: Directors must not have a personal interest (or engagement with a third party) which conflicts with their duty to the company except with the companys fully informed consent. This concerns the relationship between the company and the director. The 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, in principle, the director should make disclosure of his interest in any contract to the general meeting who should approve the contract by ordinary resolution: see eg Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431. In practical terms disclosure to the general meeting is often inconvenient, and so additional constitutional provisions are usually included. The constitution of a small proprietary company will usually provide that a director can hold a paid office. Large public companies where shareholders are dispersed also normally adopt a constitutional provision allowing directors to contract with the company and to profit, provided they make disclosure of any interests, and allowing them to vote on contracts in which they are interested, although they must still exercise their vote with a view to the interests of the company.

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The default rule is therefore that disclosure to the board will suffice in proprietary companies (s194), whilst in public companies, disclosure to the general meeting will be required unless as will inevitably be the case the companys constitution includes a specific rule allowing disclosure to the board instead (in which case s195 provides additional safeguards).

Failure to comply with the constitution in this regard, eg if the constitution requires disclosure to the board, will normally make the contract voidable at the option of the company: Camelot Resources Ltd v McDonald (1994) 14 ACSR 437 at 443. However, where the director in question is dominant it may be necessary to go beyond mere compliance with the constitution in order to ensure that the interests of the company are protected: see Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260. The civil law sanctions here have been supplemented (s193) by s191(1) which requires a director with a material personal interest to give notice to the other directors, subject to criminal sanctions but without affecting the validity of the transaction (Schedule 3 specifies that this is a criminal section). s191(2)(a) sets out a number of situations in which notice is not required, s191(3) sets out the details which must be provided, and s192(1) makes provision for standing notice. Note also the replaceable rule for proprietary companies contained in s194; contrast s195(1) which regulates public companies far more strictly by imposing criminal liability.

Potential for a Rule 1 conflict: competing directorships There is no absolute rule against this: see for example London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd (1891) WN 165. However, a breach of duty is likely to occur at some point, service contracts of executives will normally forbid directors from holding directorships in competing companies, and disclosure may be required under s191 to both companies of a material personal interest.

Rule 2: Directors must not misappropriate the companys property for their own or a third partys benefit. See eg Mordecai v Mordecai (1988) 12 ACLR 751. One key implication of this rule is that directors cannot take remuneration or other benefits from the company unless authorized by law, the constitution or the fully informed general meeting (see s202A(1) (replaceable rule)). Note that director remuneration is different from executive pay
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(which is set by the board under 198A or the Remuneration Commitee of listed companies). In this latter context, recall s300A, s250R and s250SA(for listed companies); LR 10.17, 10.19. What are the limits of this rule? See Cook v Deeks, but note Fords criticism of it.

Rule 3: Directors must not misuse their position for their own or a third partys advantage except with the companys fully informed consent. This is referred to as the no-profit rule and applies to director-third party situations. Furs Ltd v Tomkies (1936) 54 CLR 582: It was only because it fell to his lot to negotiate the sale on behalf of his company that he was able to demand and obtain the sum. His fiduciary character was alike the occasion and the means of securing the profit for himself. Note however that the general meeting could have exonerated his breach of duty if he had made full disclosure. The leading authority on the no-profit rule is Regal (Hastings) Ltd v Gulliver (1942) 1 All E R 378; (1967) 2 AC 134. Despite the fact that the claim was unmeritorious, the House of Lords held that the former directors had to account to the parent company for the profit they made on the basis of the strict rule (developed in the context of trustee liability) that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is a director. (Lord Porter) Lord Macmillan said that the directors were liable to account once it is proved that (i) what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in a profit to themselves. Note also that the HL emphasised that it had been open to the general meeting to ratify the breach of duty. However, since Regal, the courts have relaxed the ultra-strict formulation of these rules, and now look for a real sensible possibility of conflict: per Lord Upjohn in Boardman v Phipps (1967) 2 AC 46 at 124, applied by PC in Queensland Mines Ltd v Hudson (1978) 18 ALR 1, while Deane J in Chan v Zacharia (1984) 154 CLR 178 at 199 spoke of a significant possibility of conflict. This apparent relaxation gives rise to a number of difficult issues: a) Is there a causation requirement? Does it matter that the company is unable to pursue the profit-making opportunity?

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In Regal v Gulliver, Lord Russell said that liability in equity to account in no way depends on whether the profit would or should otherwise have gone to the plaintiff or whether the plaintiff has in fact been damaged or benefited by his action. Contrast Chan v Zacharia (1984) 154 CLR 178. Deane J: 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 or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed. However other cases have adhered to the strict traditional line see eg Gemstone Corporation of Australia Ltd v Grasso (1994) 13 ACSR 695 per Prior J: The judge was in error in finding no breach of a fiduciary obligation until a loss was caused and that no loss was caused. b) What should the effect of resignation of the director in question be? Industrial Development Consultants v Cooley (1972) 1 WLR 443: When one looks at the way the cases have gone over the centuries it is plain that the question whether or not the benefit would have been obtained but for the breach of trust has always been treated as irrelevant. See also Canadian Aero Service v OMalley [1973] 40 DLR (3d) 371, Canadian Supreme Court, where the court referred to a company actively pursuing a maturing business opportunity and emphasised that resignation from his position would not protect the director where the resignation may fairly be said to be prompted or influenced by a wish to acquire for himself the opportunity sought by the company, or where the opportunity came to him by virtue of his position with the company rather than fresh initiative (Laskin J). For Australian authority, see Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 110 at 141, emphasizing that allowances may be made for the efforts of the fiduciary in causing a business acquired in breach of fiduciary duty to expand. Contrast Island Export Finance Ltd v Umunna (1986) BCLC 460, QBD which dealt with a benefit that required prolonged fresh initiative. The court suggested that in each case there should be a full examination of the facts. To what extent should the law override strict fiduciary principles in order to accommodate a market for corporate executives? c) Can directors pursue opportunities of which they become aware in a private capacity? In Regal, Lord Russell referred (at 149) to the directors having obtained their profit by reason and only by reason of the fact that they were directors of Regal and in the course of execution of that office. For examples of opportunities coming to directors in their private capacity, see Peso Silver Mines v Cropper (1966) 58 DLR (2d) 1 and SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552, where Cooper J found that there was not a sufficient temporal and causal connection between the obligations and the opportunity. d) Is it open to the director to prove that the transaction is fair to the company? Note that, as Lord Wright emphasized in Regal, the facts are usually within the knowledge of the
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person who is being charged and therefore difficult to ascertain. See for example Furs Ltd v Tomkies (1936) 54 CLR 582. Note that Tomkies breach of duty could have been ratified by the general meeting if he had been prepared to make full disclosure, although on the facts he had not done so. Furs Ltd v Tomkies was distinguished in Framlington Group v Anderson (1995) 1 BCLC 475 at 499-501.

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Lecture Seven: Directors Duties (3)/ Minority Protection (1)

Recommended preliminary reading: Lipton et al, Chapters 13.3, 13.6, 13.7 and 17. Further suggested reading: Boros and Duns, chs13 and 14

Statutory duty not to profit from position or information ss182-3 set out rules about use of information and position for personal advantage or corporate detriment which apply to directors, secretary, and other officers and employees. There will often be an overlap between the two main rules on a given set of facts. These provisions developed out of criminal law provisions introduced in Victoria. They sit uneasily alongside the common law fiduciary duties and may not be identical in scope. There is no need that a gain actually be made or a loss caused to the company: the key is the purpose of the director or other officer: see s184(2) and (3) and Chew v R (1992) 7 ACSR 481 (High Court interpreting a predecessor of these sections). ss182(2) and 183(2) apply them further to anyone who is involved, which is defined in s79, and is broader than the equivalent concepts in equity. Grove v Flavel (1986) 11 ACLR 161. ASIC v Vizard (2005) 54 ACSR 394. R v Byrnes (1995) 130 ALR 529. R v Daswani (2005) 53 ACSR 675 ASIC v Australian Investors Forum Pty Ltd (No2) (2005) 53 ACSR 305. Where these statutory fiduciary duties are breached (also including s181, discussed in the last lecture), those involved contravene civil penalty provisions with the usual possible consequences (ASIC action as well as possible action for compensation by the company or liquidator under 1317J(2)).

Treatment of financial benefits to related parties, directors etc under the Corporations Act: Ch 2E s208 provides that member approval is required before a public company or a company it controls can give a financial benefit to a related party. s228 defines related party to include an entity which controls the public company (on the basis of the s50AA test of practical control), directors and their relatives (spouses, parents, children), and
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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). s229 gives examples of financial benefit and offers guidance to the courts in determining whether a financial benefit is given. ss210-216 set out exceptions, including arms length terms, reasonable remuneration, indemnities, payments of small sums. However, note s230. ss217-227 set out requirements for the approval process (note s224(1)). Note that certain people are excluded from voting by 224(1): related parties who might receive a benefit and their associates (which are defined in 10-17 to include those acting in concert (15(1)). Consequences of breach set out in s209: the validity of the transaction is not affected, and the public company or entity is not guilty of an offence; however a person who is involved (defined in s79) in the contravention of s208 by a public company contravenes a civil penalty provision. Ch2E has only rarely been considered by the courts. One example is Re HIH Insurance Ltd (in prov liq) (2002) 41 ACSR 72 at 172-3: Santow J held that payment of A$10m by HIHC to PEE, a company controlled by Adler amounted to a financial benefit to PEE, Adler and a company controlled by Adler.

How are directors duties enforced? By ASIC, the board, or minority shareholders under statutory derivative action (discussed below), or by the liquidator bringing misfeasance proceedings (see lecture 11). Enforcement by ASIC: CA s1317E states that ss180-183 and 588G (inter alia are civil penalty provisions). ASIC can enforce directors duties by applying to the court for a declaration of contravention under s 1317J. ASIC can request a pecuniary penalty order under s 1317G of up to A$ 200,000 once a declaration of contravention has been made as long as to the contravention materially prejudices the interests of the corporation or its members, or the corporations ability to pay its creditors, or is serious. ASIC can also apply for an order under s 206C disqualifying a person from managing a corporation for a period that the court thinks appropriate. The court must be satisfied that the disqualification is justified (see also below Disqualification (CA, Part 2D.2)). ASIC can also seek a compensation order under s 1317H on behalf of a corporation which has suffered damage from the contravention. One.Tel v Rich (2005) 23 ACLC 556, per Bergin J. For the history and theory of the civil penalty regime, currently found in CA, Part 9.4B (which was introduced in 1993 in the hope that ASIC could regulate directors duties more effectively than under the previous criminal regime): see, eg, the work of V. Comino: eg, The Enforcement Record of ASIC Since the Introduction of the Civil Penalty Regime (2007) 20 Australian Journal of Corporate Law 183. In the beginning, ASIC brought very few civil penalty proceedings. However, since 2000, ASIC has made greater use of the civil penalty regime and succeeded in obtaining civil penalties against directors in some high profile cases. But for a
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discussion of the problems that have emerged, which are undermining ASICs ability to continue to use civil penalties effectively: see, eg, Comino, Effective Regulation by the Australian Securities and Investments Commission: The Civil Penalty Problem (2011) 33 Melb Uni L R 802. There may also be criminal proceedings under specific statutory provisions, eg, s 184 which creates criminal offences requiring intentional dishonesty or recklessness in relation to good faith, improper purposes, dishonest use position or information. The duty of care in s 180(1) does not attract any criminal liability. Note that ASIC cannot enforce the common law duties the only person who can do that is the corporation or minority shareholders via a derivative action.

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 a compensation order under s 1317J(2), regardless of whether ASIC has sought and obtained a declaration under s1317E. The corporation will have to prove to the court that the directors breached their duties. In relation to common law and equitable duties owed to the company as a separate legal entity, the board can enforce these as an aspect of its general management power under s198A(1). Given the risk of a conflict of interest, why does the law leave this decision to the board?

Exoneration of directors by court and ratification by general meeting Exoneration by court s1318 1317S creates a similar possibility of exoneration for contravention of a civil liability provision, including the statutory duties. Both ss 1318 and 1317S confer judicial discretion to grant relief from liability where the court is satisfied that a person acted honestly and, in the circumstances, ought fairly to be excused for their contravention. Applies to officer, employee, auditor, receiver or liquidator: s1318(4) Extends to proceedings under 588G: Kenna & Brown Pty Ltd (in liq) v Kenna (1999) 32 ACSR 430 It is very difficult to persuade the court to exercise its discretion in favour of granting relief: ASIC v Adler (No 5) [2002] NSWSC 483 (Santow J). ASIC v Macdonald (No 12) [2009] NSWSC 714 per Gzell J at [22]:
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In my view a person acts honestly for the purposes of ss 1317S(2) and 1318(1), in the ordinary meaning of that term, if that persons conduct is without moral turpitude in the sense that it is without deceit or conscious impropriety, without intent to gain improper benefit or advantage and without carelessness or imprudence at a level that negates the performance of the duty in question. That conclusion may be drawn from evidence of the persons subjective intent. But a lack of such subjective intent will not lead the court to conclude that a person has acted honestly if a reasonable person in that position would regard the conduct as exhibiting moral turpitude. See also ASIC v Healey (No 2) (2011) 284 ALR 734; [2011] FCA 1003 at [88] (Middleton J); and Gillfillan v ASIC [2012] NSWCA 370 at [302].

Ratification by general meeting 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 (see eg Furs or Regal). 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: we will discuss later. Where action was for an improper purpose, transaction will be voidable at the election of the company if the third party has notice of the abuse of power unless ratified by the general meeting: Hogg v Cramphorn (1967) Ch 254; Bamford v Bamford (1968) 2 All ER 655, followed by Helsham J in Winthrop Investments Ltd v Winns Ltd (1975) 2 NSWLR 666. Note the curious, but obiter suggestion in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 that a voidable allotment for an improper purpose could be later ratified by the board acting for a proper purpose, although they did not explain the basis for this. It is certainly safer to obtain ratification from the general meeting!

Limits to the availability of ratification 1. GM cannot ratify breaches of statutory duties It is far from clear whether breaches of the statutory duties can be ratified by the shareholders. Forge v ASIC (2004) 213 ALR 574 at [370]-[404] per McColl JA with whom other judges agreed said: Another important purpose of the proceedings was to ensure that officers of a company who contravene corporations legislation in the manner found by the primary judge are barred from having that opportunity again, not only in relation to the company of which they were an officer at the time of the transactions, but also in relation to other companies. In this sense civil penalty proceedings involve public rights. The 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 the relief ASIC seeks. [381]
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He added, even if the shareholders could, contrary to what I have already found, ratify the private law breaches of the directors duties, the ratification resolutions were ineffective to cure the breaches of statutory duty. [384] As for the effect of any GM resolution to ratify: it could be taken into account in considering relief under s1317S (evidence that the director has acted honestly and ought to be granted 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 etc in the public interest: reliance could be placed on the judgment of Debelle J in Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737 at 772, as well as Angas Law Services v Carabelas [2005] 226 CLR 507 at 523 [32] per Gleeson CJ and Heydon J.

2. GM ratification without full information not valid Forge v ASIC at [390]-[402]. Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 110 Furs Ltd v Tomkies (1935) 54 CLR 583

3. GM cannot ratify where fraud on the minority Miller v Miller (1995) 16 ACSR 73 at 89: Ratification is not available where it would constitute a fraud on the minority (Ngurli Ltd v McCann (1953) 90 CLR 425), or misappropriation of company resources (Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791), or was entered into by an insolvent company to the prejudice of creditors (Kinsella v Russell Kinsella Pty Ltd (in liq) (1986) 4 NSWLR 722), or defeated a members personal right (eg not to have their interest diluted for an improper purpose) (Residues Treatment and Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569) , or was oppressive or where the majority in general meeting acted for the same improper purpose as directors (Residues). However, the cases have not always been consistent: Cook v Deeks took a hard line, while in Regal v Gulliver and Furs Ltd v Tomkies, courts found very similar breaches to be ratifiable. Cook v Deeks (1916) 1 AC 554, PC. How to distinguish Cook from Regal? There are a number of possibilities: Regal only involved an opportunity, whereas in Cook it was property (the contract belonged in equity to the company, although the problem with this is that the contract only came into existence as a result of the breach), or The directors in Regal were acting honestly and in good faith throughout, whereas in Cook they were acting dishonestly

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The court thought in Cook that the circumstances were so extreme that it should substitute its opinion for that of the majority shareholders The contract in Cook was capable of being concluded and performed by the company for its benefit in the long-term, while in Regal the company could not exploit a mere opportunity Sealy and Worthington (8th ed) suggest (at 316-7) that the directors were severally liable as debtors for what they had received, so ratifiability is consistent with other earlier authorities which allowed this.

Furs Ltd v Tomkies (1935) 54 CLR 583. We might note that there was no question that the company could have obtained the benefits that Tomkies did. This could be argued to make the case closer to Regal than Cook. While there was an element of dishonesty, that would have been cured if the full disclosure required had been made. Nor did the court treat this as misappropriation of company property. Pascoe Ltd (in liq) v Lucas (1999) 33 ACSR 357 at 384-8.

4. Ratification is not possible once interests of the company are identified with the interests of creditors Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722

Statutory limitations on exemption, indemnification and insurance S199A(1) Distinction between exemption/indemnification and ratification: see Miller v Miller at 87 per Santow J. ss 199A(2) and (3) contain significant exceptions for third party liability and legal expenses. S199B prohibits companies from paying insurance premia for officers or auditors against liabilities arising out of conduct involving a willful breach of duty in relation to the company or a contravention of section 182 or 183 (making improper use of information or position). Accordingly, the company can pay insurance premiums to cover directors for negligence liability to the company. 199C makes anything which contravenes 199A or B void.

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Disqualification (CA, Part 2D.6) (outline only) Note the broad definition to encompass decision-making, exercising capacity to affect the corporations financial standing, and communicating instructions or wishes to the directors, knowing or intending that they be acted upon (shadow director-type activities): ss 206F(5), 206G. Automatic disqualification for conviction for certain offences or bankruptcy: s206B. DQ for involvement in two or more failed corporations: s206D. Disqualification for breach of civil penalty provisions: s206C. This requires a declaration under s1317E. Disqualification for repeated contraventions of the CA: s206E. Under either ss206C or 206E, court then has broad discretion as to what to take into account in deciding whether to disqualify for an appropriate period: S206C(2). See ASIC v Adler [2002] 42 ACSR 80 for Santow Js detailed review of court practice under 206C and 206E. See also Re One.Tel Ltd (in liq); ASIC v Rich (2003) ACSR 682, in which the court emphasised the limited value of precedent because of the sheer number of possible forms of breach. But note light civil penalties (including disqualification orders) made in the James Hardie, Centro and AWB matters in recent years A troubling development? ASIC can disqualify under s 206F. Disqualified directors can apply for leave to act as a director of specific companies or companies generally from ASIC (where ASIC disqualified them under s206F) and from the court under s206G. See eg ASIC v Platcher (2003) 44 ACSR 277; Re Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203. Offence unlikely to be recommitted. Allowed to take part in management as an employee under control of board. In the interests of the companies in question: their shareholders and employees will benefit. Anyone who acts in breach of a DQ order commits an offence: s206A. A person who manages a company while disqualified from doing so can be personally liable for the companys debts: 588Z allows liquidator to apply to court for an order.

Minority Protection Introduction: Plight of minorities The principle of majority rule has to be 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 (e.g. personal disagreements). Law uses a variety of techniques to protect minorities. One example we have seen throughout this course is the requirement of a supermajority e.g. special resolution for key decisions e.g.

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alteration or repeal of the constitution under 136(2). This is a demanding hurdle because it requires 75% of the eligible votes, not just of those who turn up to the meeting. We will see in relation to some capital transactions that the law sometimes excludes those with an interest in the outcome from voting for the (special) resolution adding extra protection for the minority. Similarly we saw above that s224 does not allow potential beneficiaries to vote to give approval for a public company to confer a financial benefit on a related party. We will also see in lecture 9 that the law gives protection to class rights attaching to shares: it requires a special resolution of the members of the class. Minority shareholders (5% or 100 members) also have the right to require the board to convene a general meeting: 249D. The thresholds are there to protect the majority from vexatious meeting convening. In this lecture and the next we will look at the general ways in which the law protects the rights of minorities.

Shareholder litigation under the Corporations Act: the statutory derivative action (Part 2F. 1A) Broad scope of s198A includes power to litigate in the companys name. Complexity of common law now replaced by a statutory derivative action: s236(3) provides that the common law derivative action is abolished. Origin of statutory action: see CLERP Report No3 on Corporate Governance and Directors Duties at 29-40. ss236-7 s237(2): situation in which the court must grant leave Good faith: Charlton v Baber (2003) 47 ACSR 31; Fiduciary Ltd and Others v Morningstar Research Pty Ltd and Others (2005) 53 ACSR 732; . Goozee v Graphic World Group Holdings Pty Ltd F:88:G"7:";HIJ"@?7; 20 ACLC 1502; [2002] NSWSC 640 per Barrett J; Chahwan v Euphoric Pty Ltd F:88DG">@";HIJ">>!; Swansson v RA Pratt Properties Pty Ltd F:88:G"7:";HIJ" ?!? 3,"?:8K S237(3): rebuttable presumptions that granting leave not in best interests of the company Effect of ratification by general meeting: s239 Costs of the derivative action: s242. Security for costs against the individual seeking leave? See Fiduciary Ltd. ASICA s50.

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Shareholder litigation under the Corporations Act: s1324 s1324 allows ASIC as well as persons whose interests have been or would be affected by conduct in contravention of CA (including members and creditors), to seek an injunction to restrain threatened breaches of the CA, and against those knowingly concerned in contraventions. Note s135(3). This is a catch-all provision. Relatively low threshold for standing: simply have to show that your interests have been affected in a way which goes beyond those of the general public: Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984) 2 ACLC 157; (1984) 8 ACLR 609 at 613. How can this be reconciled with the stringent common law and statutory restrictions on derivative action and the rule in Foss v Harbottle (ie that the company is the proper plaintiff with regard to wrongs done to it)? For the balancing act developed by the courts, see e.g. Young J in Mesenberg v Cord Industrial Recruiters Pty Ltd (Nos 1 & 2) (1996) 19 ACSR 483 at 488-9 and Premier Gold NL v Ocean Resources NL (1994) 14 ACSR 695 ; 12 ACLC 931. The courts have taken a liberal approach to standing but have refused a remedy where the plaintiff is seeking to usurp the board of directors 198A management function. For an example of a recent, successful action by a shareholder for breach of the statutory provisions on capital reduction, see Idameneo (No123) Pty Ltd v Symbion Health Ltd (2007) FCA 1832; (2007) 64 ACSR 680. On creditor action under 1324 see Allen v Atalay [1993] 11 ACSR 753 and Airpeak Pty Ltd v Jetstream Aircraft Ltd [1997] 23 ACSR 715.

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Lecture Eight: Minority Protection (2)

Recommended preliminary reading: Lipton et al, Chapter 17. Further suggested reading: Boros and Duns, chs 15 and 16 Ian Ramsay (editor), Gambotto v WCP Ltd: Its Implications for Corporate Regulation (1996) (available online at http://cclsr.law.unimelb.edu.au/download.cfm?DownloadFile=8719A7BB-1422-207CBA39E852655EDD56

Shareholder litigation at general law: the members personal action Recall limits to scope of s140 contract. Note restrictive, albeit obiter, approach in Stanham v National Trust of Australia (NSW) (1989) 15 ACLR 87 at 90, per Young J: 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 (1843) 2 Hare 461 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 a representative right: see eg Kraus v JG Lloyd Pty Ltd [1965] VR 232; nonetheless the rule for the most part prevails. See also Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739 at 743745 per Young J approving Sealys pragmatic argument that 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 qua director is not drawn in quite the same place every time, but varies from case to case, the judges are not necessarily applying a rule inconsistently: they may be demonstrating that it is wrong to regard the concept of a membership right as having a unique content, and showing that it has the flexibility to meet the reality of the circumstances before them. Similarly, he approved Farrars argument that A member qua member has rights which are either (1) personal rights covering the incidents of his shares, or (2) constitutional rights to have the company function properly in accordance with the basic statutory scheme. Any other rights are not within [s140] and must be the subject of an extrinsic contract. Mere procedural irregularities: MacDougall v Gardiner (1875) 1 Ch D 13; s1322. Note however that the pragmatic approach discussed above may elevate apparently procedural requirements into enforceable personal rights: see for example Ryan v South Sydney Junior Rugby League Club Ltd (1975) 2 NSWLR 660; (1974) ACLR 486.
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Acts in disregard of restrictions in the constitution should be dealt with as breach of directors duty, or oppression (see below) or as the basis for a just and equitable winding up (see below). Can shareholders sue in relation to wrongs which have diminished the value of their shares? In general no: see Prudential Assurance Co Ltd v Newman Industries (No 2) (1982) 1 Ch 204, because such loss is merely reflective of the loss recoverable by the company, and to allow an action by shareholders would create a risk of double recovery. There might be an exception where the company has no cause of action or where the claim is based on a duty owed directly to the shareholder: Johnson v Gore-Wood (2002) 2 AC 1 at 35-6.

General law personal action for fraud on the minority (aka equitable limitation on the power of the majority) The general rule is that shareholders do not owe a fiduciary duty when voting. Per Dixon J in Peters American Delicacy Co Ltd v Heath [1939] 61 CLR 457: The shareholders are not trustees for one another, and, 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. See also North-West Transportation Company Ltd v Beatty (1887) 12 App Cas 589. However, this principle has been qualified by equity and statute: Per Dixon J in Peters American Delicacy Co Ltd v Heath [1939] 61 CLR 457, fraud on the minority is a means of securing some personal or particular gain, 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 the power. See also Pavlides v Jensen (1956) Ch 565. Where the majority passes a resolution that no reasonable person would consider within the range of permissible uses of majority power, having regard to the purposes of the company, an individual member has an equitable right to apply to the court to have the resolution set aside. The principle that self-interested voting is permitted has also been abrogated in a number of legislative and market rules which exclude those with an interest from voting on particular resolutions (eg s208 requirement of shareholder approval of conferral of benefits on related parties; s256C(2) requirement of approval of selective capital reduction; LR 11.2 resolution for shareholders to approve sale of companys main undertaking must include a voting exclusion statement excluding the votes of A person who might obtain a benefit, except a benefit solely in the capacity of a holder of ordinary securities, if the resolution is passed.).

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An application of fraud on the minority: Equitable constraints on altering the constitution Gambotto v WCP Ltd [1995] 182 CLR 432; 16 ACSR 1 rejecting the requirement laid down in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 that amendments should be bona fide in the interests of the company as a whole in favour of a dual categorization where there is a conflict of interest between groups of shareholders. As regards amendments which allow expropriation (including forced transfer and cancellation) by the majority of the shares of the minority or of valuable proprietary rights attaching to their shares (eg the right to vote or to a dividend), the court commented that: The exercise of a 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 the relevant provisions of the company's constitution so provide. The inclusion of such a power in a company's constitution at its incorporation is one thing. But it is another thing when a 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 or exercised simply for the purpose of aggrandizing the majority. Such an amendment will only be allowed where: the power is exercised for a proper purpose (which requires exceptional circumstances); and its exercise does not operate oppressively in relation to minority shareholders (meaning it is fair in the circumstances- involves both procedural and substantive fairness)

As regards other amendments giving rise to a conflict of interests, they are prima facie valid unless they are ultra vires, beyond any purpose contemplated by the articles or oppressive as that expression is understood in the law relating to corporations. Note the different approach taken by McHugh J, who also held the amendment invalid. Now see CA, Part 6A.1 (which allows a person who has acquired 90% of the companys shares following a takeover to squeeze out the remaining 10%) and Part 6A.2 (664A et seq, which gives a person who has crossed the 90% threshold other than by means of a takeover a right to squeeze out the remaining shareholders, subject a number of strict conditions): see Lipton et al, Chapter 18, especially [18.140] [18.145]. On the scope of application of the Gambotto principle, see Arakella Pty Ltd v Paton (2004) NSWSC 13 at [137] per Austin J and Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 34 ACSR 318 per Santow J. For a recent application of Gambotto, see Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd (2006) QSC 358; (2006) 62 ACSR 502.

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Winding up s461(e), (f), (g) and (k) Just and equitable ground (k):

Loss of confidence: Loch v John Blackwood Ltd (1924) AC 783; Macquarie University v Macquarie University Union Ltd (No 2) (2007) FCA 844. Management deadlock: Clarke v Bridges (2004) FCA 394; Khamo v XL Cleaning Services Pty Ltd (2004) 51 ACSR 397 Objects became impossible/failure of substratum: see Young J in Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 5 ACSR 296 at 300

For a review of the authorities see ASIC v International Unity Insurance Pty Ltd (2004) 22 ACLC 1416 at [136]-[142], per Lander J. If company is solvent, a strong case has to be made because winding up is a drastic step: ASIC v ABC Fund Managers (No 2) (2002) 20 ACLC 120. Now see s467(4) and Bernhardt v Beau Rivage Pty Ltd (1989) 15 ACLR 160. For the relationship between 461(1)(k) and ss232 and 233, see Nilant v RL & KW Nominees Pty Ltd (2007) WASC 105. Special considerations apply to quasi-partnership companies (characterised by mutual confidence, agreements about participation in management and restrictions on share transfers note s1072G inserts a restriction as a replaceable rule): see Ebrahimi v Westbourne Galleries Ltd (1973) AC 360. Further reading: McNee, S, The Just and Equitable Ground: A Remedy of Last Resort (2001) 9 Insolv LJ 147.

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The Oppression Remedy s232 CA. Application normally made by minority shareholder, but see Vujnovich v Vujnovich (1990) BCLC 227. Broad interpretation of oppression: a 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. (per Lord Cooper in Elder v Elder & Watson 1952 SC 49 at 55). Campbell v Backoffice Investments Pty Ltd (2009) 257 ALR 610; 73 ACSR 1; [2009] HCA 25 at [72] per French CJ Wayde v New South Wales Rugby League Ltd (1985) 59 ALJR 798. ONeill v Phillips (1999) 2 All ER 961 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692

s232 is most commonly used in the following situations: Exclusion from management where it goes against an informal participation agreement

Lack of provision of information (Re Back 2 Bay 6 Pty Ltd (1994) 12 ACSR 614) Breach of fiduciary duty (Scottish Co-Operative Wholesale Society v Meyer (1959) AC 324) Misappropriation of company assets: Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452 Lack of dividends where part of majority plan to conduct company in their own interests (contrast Re G Jeffrey Ltd (1984) 9 ACLR 193 with Re City Meat Company Pty Ltd (1983) 8 ACLR 673) or where the directors do not review dividend policy despite improving circumstances whilst they have reviewed their remuneration and revised it upwards (Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd (2001) 19 ACLC 517).

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Excessive remuneration for directors: Sanford v Sanford Courier Service Pty Ltd (1987) 10 ACLR 549 (although note Morgan v 45 Flers Avenue Ltd (1986) 10 ACLR 692). Oppressive conduct of board meetings (John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Aasia) Pty Ltd (1991) 6 ACSR 63) Decisions for benefit of related companies (Re Spargos Mining NL (1990) 3 ACSR 1) Fraud on the minority in altering constitution or ratifying breach of duty, or share issue for improper purposes. Remedial advantages compared with personal action under s140.

Mere negligence or mismanagement: Shirim Pty Ltd v Fesena Pty Ltd (2000) 35 ACSR 221; Re Elgindata Ltd (1991) BCLC 959. No requirement of clean hands although applicants conduct may affect the remedy awarded by the court: Re RA Noble & Sons (Clothing) Ltd (1983) BCLC 273. There is no unilateral right of exit at a fair price for a minority shareholder in the absence of unfair prejudice: see for example Re G Jeffrey (Mens Store) Pty Ltd (1984) 9 ACLR 193; ONeill.

Remedies: Non-exhaustive list remedies is contained in s233(1). Basis for valuation: ONeill v Phillips; Lord Millett in CVC/Opportunity Equity Partners Limited v Almeida at [36]-[49] (2002) 2 BCLC 108.

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Lecture Nine: Shares and capital transactions

Recommended preliminary reading: Lipton et al, Chapters 8, 9 and 10. Further suggested reading: Boros and Duns, chs 18 and 19. Redmond, ch 9.

Shares Share or loan capital? Capital can be provided internally by shareholders or externally by way of loan by creditors. This lecture will look at share capital, the next at loan capital. If the company is insolvent and is wound up, providers of loan finance are entitled to be repaid in full before shareholders receive anything. Providers of loan finance receive the rights in their contract of loan (normally fixed interest, repayment of capital sum at the end of the term, a right to accelerate payment obligations in the event of a default, perhaps also a right to receive information, security over the companys assets, even a right to appoint a director). Providers of share capital are viewed as internal to the company because of its evolution from partnership. They are the residual claimants they get whatever is left over after all fixed creditors have been paid their claims. Company directors distribute this by way of dividends (income for the shareholders), or retain it for the use of the business (capital gain for the shareholders the value of their shares increases).

Nature of shares s9: a share in the share capital of a body: Not very helpful! Penningtons definition: a species of intangible movable 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. See also Pilmer v The Duke Group [2001] HCA 31. In principle companies are free to create multiple classes of shares with different rights. Rights attaching to shares may be set out in board or company resolution, or in the constitution, but are attached by the issue. Preference shares versus ordinary shares. Preference shares are normally voteless, although in listed companies, preference shares must have voting rights in relation to certain issues and no others: ASX LR 6.3. In listed companies,
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ordinary shares and preference shares with votes on the issue in question must have one vote per share: LR 6.9.

Interpretation of rights attaching to shares: s250E; ASX LR 6.3. Constitutional restrictions on transfer are possible (and common in proprietary companies: see 1072G) but shares in companies listed on the ASX are required by the Listing Rules to be freely transferable, with limited exceptions available in LR 8.10.

Issue of shares s119, s120(2), s254M, ss515-6 CA. No minimum share capital for proprietary or public companies (contrast many European jurisdictions). However, public companies which aim to list on the ASX must have shares with an issue price of at least 20c and there must be at least 500 shareholders each having a parcel of shares with a value of at least $2000: LR 1.1. Terminology: issue price, asset value, market value (does the efficient markets hypothesis hold?) After incorporation, there may be further private issues for cash or non-cash consideration (property or promise of services to the company); note the effect of fiduciary duty: Ngurli Ltd v McCann (1953) 90 CLR 425 esp at 438-445; note s254X(1)(e) requiring disclosure by public companies of non-cash consideration. Listed companies have to offer new shares pro rata to existing shareholders unless they can come within one of the exceptions: LR 7.1-7.9. Proprietary companies are subject to a replaceable rule in 254D requiring them to offer them pro rata to existing shareholders (this is referred to as a pre-emption right); note however the power in 254D(4) for the company in general meeting to pass a resolution authorising the directors to make an issue without complying with the pre-emption rights. The power to issue shares (s124(1)(a) and s254A) is normally vested by the constitution in the board of directors (s198A). The constitution may give the general meeting a concurrent power. Disclosure to ASIC of issues required under 254X. Company therefore has an issued share capital.

Variation of class rights Alteration of the rights attaching to shares may amount to fraud on the minority (somewhat
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uncertain scope), but there are specific provisions Part 2F.2 on class rights, so equitable doctrine unlikely to be explored further. What is a class? Crumpton v Morrine Hall Pty Ltd (1965) NSWR 240 per Jacobs J:

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 the use of 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 classes Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper (1987) Ch 1 per Scott J: 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 of the company, but, for ulterior reasons, connected with the administration of the companys affairs or the conduct of its business [here he referred to Eley v Positive Life] 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 member or shareholder of the company.

What is a variation? White v Bristol Aeroplane Co Ltd (1953) Ch 65 per Evershed MR However, does Cumbrian Newspapers suggest that the courts might take a more protective approach? Now see s246C

Procedure to be followed s246B(1), s246B(2). s246D Is there still a role for Re Holders Investment Trust (1971) 1 WLR 583?

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Maintenance of capital and dividends

Maintenance of capital Trevor v Whitworth (1887) 12 App Cas 409, per Lord Watson at 423-4: Paid up capital may be diminished or lost in the course of the companys 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 assume 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. How effective is this as a means of creditor protection? Note Austins extra-judicial argument that the principle of maintenance of capital is better explained by reference to the doctrine of limited liability (which would become a rule of noliability if capital could be freely returned to shareholders).

Dividends Dividends are payments to shareholders and represent a return on their investment in the company. Prior to the amendments made by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth), a profits test applied that specified that dividends could only be paid out of the company profits. Now, a balance sheet solvency test applies. s254U; s254T s588G(1A) deems payment (or declaration) of a dividend to be incurring a debt, and therefore a potential trigger for 588G. When are distributable profits available? Dimbula Valley (Ceylon) Tea Co Ltd v Laurie (1961) 1 Ch 353 at 372-3 Re Oxford Benefit Building and Investment Society (1887) LR 35 Ch D 502 Dimbula Valley has received cautious approval from NSWCA and HCA in Blackburn v Industrial Equity (1977) 137 CLR 567 at 580 per Jacobs J and Glass JA.

What about illegal dividends?

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A shareholder can rely on s1324 to prevent unlawful dividends: Darvall v North Sydney Brick and Tile Co Ltd (1988) 14 ACLR 474 affirmed (1989) 17 NSWLR 327. Note also s256D which makes an unlawful payment of a dividend (which may amount to a reduction of capital) a contravention of civil penalty provisions by any director involved in the unlawful payment; s180. Reductions of capital are discussed further below.

Directors are also liable to compensate company at common law: Re Oxford Benefit Building Society (1886) 35 Ch D 502.

Shareholders may be liable as constructive trustees if they have knowledge of the unlawfulness of the dividend. If directors have been ordered to compensate the company, they may be able to obtain an indemnity from shareholders who have knowingly received the dividend: Moxham v Grant (1900) 1 QB 88.

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 wish to return surplus to members. It may decide to cancel uncalled capital where it believes it will not need the balance. CA therefore permits reductions if notified to ASIC and approved by shareholders (256C). Before 1998 court approval was also needed. s256A sets out goals of the legislation. CA draws a distinction between equal reductions (256C(1)) and selective reductions (256C(2)). 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 (2001) 166 FLR 144 Sup Ct NSW: the requirement of a separate meeting is a strict one. Full information disclosure required: s256C(3), (4), (5). The information is then lodged by ASIC on its alert system to which creditors can subscribe. Creditors thus alerted could seek a remedy under 1324(1) (note 1324(1A)). 256B requires that reduction be fair and reasonable to shareholders as a whole; not materially prejudice ability to pay creditors; and be approved by shareholders under procedures in Pt 2J. 1 Div 1. Reduction cannot lawfully proceed unless it complies with these requirements: s256D(1). Validity is not affected but civil penalty regime may be triggered. Class rights may also be
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triggered. Directors duties might also be breached and the Takeover Panel might find unacceptable circumstances. Remember that the Gambotto principle does not apply to reductions of capital since it makes provision for adequate protection for minorities: see Winpar at [60] and [95]-[96].

Self-acquisition (prohibition on company acquiring shares in itself) Part 2J.2 The prohibition: ss259A-C. Consequences of breach: s259F

Buy back of shares A limited exception to the prohibition on self-acquisition Definition s9. Since there is a contract, the shareholder can decide whether to sell or not. This makes it different from reduction of capital discussed above. S257H(2) and (3): no provision for treasury shares (contrast US and UK position) Why buy back?

Regulating buybacks CA identifies five types of buy back: categorised according to whether on-market buy back (which triggers few concerns), equal access (which treats shareholders equally and reduces their holdings proportionately: not many concerns) and selective buybacks (greatest concerns). 257B table is helpful summary. If s257C-H procedure not followed or creditors prejudiced, then the buyback is not authorised. Whilst valid and no offence by company, anyone involved contravenes a civil penalty provision under s259F(2). Note also 588G(1A)(3).

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Lecture Ten: Financial Assistance, Public Issues, Debt and Charges

Recommended preliminary reading: Lipton et al, Chapters 8 [8.325] [8.375], 7 and 11. Further suggested reading: Boros and Duns, chs 19, 19.6 and 18, 18.2 and 18.4 Nkala, Some aspects of the jurisprudence of the floating charge (1993) 11 C&SLJ 301 Ferran, Floating charges: the nature of the security (1988) 47 CLJ 213

Financial assistance s260A states that a company may financially assist a person to acquire shares in it or its holding company only in stated circumstances. 1926 Greene Committee: financial assistance offends against the spirit if not the letter of the prohibition against the company trafficking in its own shares and is open to the gravest abuses. 1962 Jenkins Committee noted the danger that an acquisition of control using funds borrowed from the company makes it likely that the company will be made to part with its funds either on inadequate security or for an illusory consideration. If the acquisition succeeds, the shareholders and creditors will have suffered no loss, although their interests will have been subjected to an illegitimate risk; if it fails, it may be little consolation for creditors and minority shareholders to know that the directors are liable for misfeasance. Now seen not simply in terms of maintenance of capital, but as preventing abuse by controllers: using company assets to finance an acquisition confers a benefit on the controllers but no benefit on the company, its shareholders and creditors. Even without these provisions, financial assistance would be a breach of fiduciary duty and a misapplication of corporate assets.

Pre-1998 Rules Before 1998, there were two views about what was required to demonstrate financial assistance. 1. Impoverishment or net transfer of assets per Mahoney JA in Burton v Palmer (1980) 2 NSWLR 878 at [8]. 2. The key was the companys purpose in advancing the money, even if there was no net diminution in the companys assets per Buckley LJ in Belmont Finance Corporation v Williams Furniture Ltd (No 2) (1980) 1 All ER 393.

Post-1998 Rules In 1998 the law was simplified (ha!).

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260A allows financial assistance only if either 260A(1)(a), (b) or (c) are satisfied. In Re HIH Insurance Ltd (in liq): ASIC v Adler (2002) 168 FLR 253; 41 ACSR 72 ; [2002] NSWSC 171, at [340]-[346], Santow J interpreted 260A as follows: financial assistance requires impoverishment rather than merely that the company have the purpose of assisting. This interpretation was based on the Explanatory Memorandum for the Company Law Review Bill 1997 which stated that the section would prevent a company giving financial assistance if the transaction would materially prejudice the interests of the company or its shareholders or materially prejudice the companys ability to pay its creditors. The NSWCA did not disapprove of Santows approach (see ASIC v Adler (2003) 46 ACSR 504 at [358]-[361]) and it was followed by Robson J in the Supreme Court of Victoria in Kinarra Pty Ltd v On Q Group Ltd (2008) 65 ACSR 438.

What is the effect of all of this? The LexisNexis commentary states that whether one adopts the broad or narrow view of what is meant by financial assistance, s 260A will not be contravened if it is established that, from a commercial perspective, the provision of the assistance was not materially prejudicial to any of the interests referred to in s 260A(1).

If we adopt the impoverishment approach to FA, and presume material prejudice under (1)(a) then the financial assistance will be unlawful (with the consequences specified in 260D): if the liquidator proves impoverishment, and then the defendant fails to prove either o a lack of material prejudice to the interests of the company or its creditors, or o that approval was given in accordance with 260B, or o that one of the exemptions in 260C applies.

What about causation or purpose? Must there still be some link (in terms of causation or purpose) between the impoverishment of the company and the acquisition of the shares by the third party? This is arguably reflected in the words assist and to in s260A: financially assist to acquire. There are two possibilities: The first is that there will be financial assistance even if the purchase of the shares by the third party was purely coincidental. Of course, s260C(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
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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 happens 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 an acquisition of shares. Most transactions in this category will amount to breaches of duty on the part of directors for which civil penalties can be imposed. Indeed, this is the thinking behind the UKs 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.1 This type of question might arise, for example, if the purchase of shares preceded the financial assistance by some time. Determining whether there has been a breach of the prohibition might involve revisiting the old case law with respect to the requisite linking between acquisition and assistance.2 If this interpretation is preferred, then the purpose requirement may once more be relevant to determining whether there is financial assistance within the scope of s260A. Further reading: K. Wellington, Regulating Financial Assistance: An Obsolete Regime (2008) 26 C&SLJ 7.

Public Issues Introduction This will be an outline only because it is a complex regulatory area. Ch 6D CA; ASIC has considerably fleshed out the basic provisions about prospectuses.

Secondary Issues Once the shares have been made available to the public, disclosure document is not required because secondary purchasers are considered to be protected by the continuous disclosure requirements: see Ch 6CA and ASX Listing Rules esp 3.1, 3.1A and 3.1B. 3.1 Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entitys securities, the entity must immediately tell ASX that information.

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1

Obiter dictum of Austin J in Law Society of New South Wales v Milios (1999) NSWSC 1272 at [25]. See for example the Reports of the Greene and Jenkins Committees. 2 Ibid

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3.1A Listing rule 3.1 does not apply to particular information while all of the following are satisfied: o 3.1A.1 A reasonable person would not expect the information to be disclosed. o 3.1A.2 The information is confidential and ASX has not formed the view that the information has ceased to be confidential. o 3.1A.3 One or more of the following applies. ! ! ! ! ! It would be a breach of a law to disclose the information. The information concerns an incomplete proposal or negotiation. The information comprises matters of supposition or is insufficiently definite to warrant disclosure. The information is generated for the internal management purposes of the entity. The information is a trade secret.

ASX can require information to correct or prevent a false market (eg where rumours are circulating in the market): Rule 3.1B

Secondary sales are normally outside the disclosure requirements (because purchasers on the market are protected by market prices on efficient markets) with two exceptions: Occasionally a secondary seller will have access to information which purchasers do not (primarily where he controls the company in question in line with the 50AA conception of factual capacity to determine), and 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. (s707(2)). 707(3) contains anti-avoidance provisions by requiring disclosure to accompany a secondary sale where an issue was made within the previous 12 months with the purpose of a later resale by the issuee.

The regulatory scheme S113(3) provides that a proprietary company must not make an offer of shares which requires disclosure under Ch6D, with the exception of offers of shares to existing shareholders and employees. Ch6D defines when an offer of securities needs disclosure to investors: s706 says that, with certain exceptions, any offer needs disclosure.

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When is an offer made? See s700(2); ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305: if the statement identifies the company, price, and the nature of the securities, and suggests that they are available for payment, then a statement that there is no offer will be as effective as hanging a sign on an elephant saying Despite appearances this is really a duck! The principal exceptions which can be used by proprietary companies (as long as they remain below the 50 non-employee shareholder threshold) as well as by public companies which do not want to incur the costs of a disclosure document) are: private or small scale offering: s708(1)-(7); small scale offerings are issues to a maximum of 20 people in a 12 month period (20/12 rule), for a total consideration not exceeding $2m. A personal offering can only be accepted by the addressee and must be addressed to persons likely to be interested having regard to previous contact, professional connection or prior indication of interest offers made to professional or sophisticated investors (8-11) offers to people associated with the body (senior managers, their spouses and relatives) and corporations they control (12) bonus shares issued fully paid up (i.e. capitalisation of dividends) (13)

Rights issues (offers made on the same terms to all holders of the companys shares in proportion to their existing shareholdings, even if renounceable: s9A defines rights issue) are also excluded under 708AA, provided inter alia the shares are quoted (small investors believed to be protected by the prospectus plus the continuous disclosure obligation).

Once disclosure is required, a disclosure document must: be prepared and used for the offer: s709; be lodged with ASIC before offers made (718 and 727(1)); accompany offers, (727(1)).

Responses must be made on an application form which the issuer reasonably believes accompanied a disclosure document. Five types of disclosure document (see s705 for handy table summarising): full prospectus: principal form, required unless 709(4) allows an offer information statement. Must comply with the requirements of s711 (terms and conditions of offer, directors interests, status with regard to quotation) and in addition the s710 reasonable investor test (including rights and liabilities attaching to securities, assets and liabilities of company, performance, profits and losses of company) unless satisfies reduced disclosure requirements under 713 for continuously quoted securities;

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profile statement (with full prospectus lodged), aimed at reducing volume of information, requires ASIC consent (714); short form prospectus distributed to investors with incorporation by reference, introduced under CLERP 99: s712, but investors must have a right to a free copy of the prospectus on request (712(5)); offer information statement where no more than $5m sought to be raised (under 709(4): this satisfies the disclosure obligation in place of a prospectus. Contents required by s715 are less demanding than for a full prospectus. Misleading or deceptive information must be corrected, omitted and new information disclosed in a supplementary document: s719 and 720

Liability for failure to produce prospectus or for misleading statements: s1311 and Sch 3 (item 329) provide that failure to produce a disclosure document in contravention of s727 is a criminal offence; on the civil consequences, see ASIC v Karl Suleman Enterprises Pty Ltd (in liq) 45 ACSR 401 at [16]-[17] per Barrett J. s728 introduces a reasonable care/due diligence regime for disclosure and omissions under the legislation, and therefore excludes public offer documents from the strict liability regime under s52 Trade Practices Act 1974 (Cth) which is the principal regime of consumer protection. There may be common law liability (e.g. Hedley Byrne), as well as statutory civil and criminal liability for misleading and deceptive statements in, or omissions from, a disclosure document under s728: see ss 728(3), 729, and defences in 731-3.

Debt and Charges Nature of debt Company creditors include banks and other suppliers of finance, employees (who will be owed remuneration where they are paid in arrears), and trade creditors (unpaid suppliers of goods and services). Public companies can solicit the public to invest in their debt securities and debentures.

Relationship to equity and effect on decision-making Interest payments are tax deductible and expenses of borrowing also deductible, whereas dividends and expenses of shares issues are not. From a corporate governance perspective, debt is considered desirable because it acts as a discipline on management because debtholders are
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more likely to monitor than dispersed shareholders, and because managers have to make fixed payments to them, regardless of the success of the company. Companies which rely heavily on debt and have little equity are said to be highly geared or leveraged. If company can earn profits in excess of the costs of servicing the loans, then ordinary shareholders will obtain higher returns than they would have if the company had relied entirely on share capital. If profits fall, they will fall much faster per share. The higher the leverage, the more risk there is for creditors too: equity provides a cushion in the event of insolvency. In principle, the higher the leverage of a firm, the greater the interest creditors should charge to compensate for the extra risk. Private equity transactions create(d) tiers of creditors with some portions of the debt subordinated by contract (and carrying higher returns to compensate for the greater risk). The lowest tranches of debt are termed junk bonds and carry high rates of return; other than having fixed returns, their risk profile is very similar to that of shares because most of the companys outstanding debt will have priority.

Debentures At common law, a debenture is documentary evidence of a debt, which may be secured or unsecured. It can be sold or used as security for borrowing. Now defined in s9 as a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. Public offers of debentures regulated under Chapter 2L (you dont need to know the detail of this).

Nature, registration and priority of charges Aim is to avoid competing with the mass of unsecured creditors. Creditors do this by taking security over assets of the company.

Negative pledges The company may promise a creditor that it will not give security over its assets either at all or above a certain level to any other person without consent. If given to an unsecured lender, it is called a bare negative pledge. A later chargee will be able to enforce the charge provided they did not have notice of the pledge and provided valuable consideration for the charge. If they had notice, they may not be able to enforce the charge: there is authority that equity might prevent them from insisting on their strict legal rights: see Swiss Banking Corporation v Lloyds Bank Limited [1979] Ch 548 although the case has been doubted outside the context of shipping counterparties. s130(2).

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Charges Definition contained in s9.

Fixed and Floating charges Fixed security attaches to a specific item of property and the chargeor is not permitted to dispose of the property free of the charge without the chargees consent. In contrast, a floating charge covers a class of property but does not attach to specific items in that class until some future event occurs, eg, failure to make a payment/s. Until then the chargeor is free to dispose of items in the class in the ordinary course of business so that the taker from the chargeor acquires the property free of the charge. Only companies can grant floating charges. As Lord Macnaghten said in Illingworth v Houldsworth (1904) AC 355 at 358: 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 and 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.

Floating charges Three classic (non-exhaustive) factors to indicate that a charge may be floating were set out by Romer LJ in Re Yorkshire Woolcombers Association (1903) 2 Ch 284 at 295: (i) a charge on a class of assets of a company present and future; (ii) that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (iii) by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way. Attempts to create fixed charges which give the borrower greater flexibility: see the treatment of fixed charge over book debts in Siebe Gorman v Barclays Bank Ltd (1979) 2 Lloyds Rep 142 overruled in Re Spectrum Plus [2005] 4 All ER 211, HL especially at [111] and [119]. Now if banks want to have the protection of a fixed charge, they have to prevent borrowers from dealing freely with book debts as they are paid. *Note: In January 2012, the Personal Property Securities (PPS) legislative scheme came into effect. It established a single harmonised national law designed to regulate the registration of security interests in personal property.
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Under s 10 of the Personal Property Securities Act 2009 (Cth) (PPS Act), personal property is property other than land. Personal property includes both tangible property (such as plant, equipment and inventory) and intangible property (such as shares and receivables). Building and fixtures on land are not personal property because they are regarded as part of the land. A security interest is defined as including traditionally recognised forms of security, such as charges, liens or pledges: see CA, s 51A and PPS Act, s 12(1). See further Lipton et al, [11.75]. With the introduction of the PPS reforms, the concepts of fixed and floating charges have been replaced with new terminology: non-circulating security interests and circulating security interests. See further Lipton et al, [11.105] [11.130]. Note important to determine whether the security interest is a circulating or non-circulating security interest because secured parties will have different rights in the event of default, where either receiver appointed or company goes into liquidation. In short, secured parties with noncirculating security interests are in a stronger position than secured parties with circulating assets. Claims of latter subject to claims of particular unsecured creditors (such as employees) under CA, ss 433 and 561). This will be discussed further in Lecture 11.

Crystallisation (old language) Floating charges crystallise (mixed metaphor) on the occurrence on events implied by law or defined in the charge instrument and become fixed charges (for most purposes, although certain employee claims take priority over it which would not take priority over a fixed charge). After crystallization the holder of a floating charge (and, in the event of a default, the holder of a fixed charge) can appoint a receiver to realize the security and apply the proceeds to pay off the debt. Receivership will be dealt with in lecture 12. Under general law, floating charges crystallize when the company is wound up, has a receiver appointed by the holder of a fixed charge, ceases to carry on business, and engages in conduct which threatens the security. The terms of the charge are more significant because the chargeor can specify a wide range of events which will cause crystallization, and they will define acts of default very widely, often including any lateness in interest payment, breaches of restrictions on further borrowing, allowing value of charged assets to fall below a fixed amount and ceasing to deal with assets in ordinary course of business. Where there is such an automatic crystallization clause, this can cause difficulties in practice: neither party may know about it and may continue acting as though the charge remains floating. The borrower may therefore dispose of assets to a third party, with neither of them aware that they are subject to a (now) fixed charge. Holder of charge can also seek injunction to prevent disposal of property other than in the ordinary course of business: Re Woodroffes (Musical Instruments) Ltd (1985) 2 All ER 908.

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Registration of charges, now security interests and failure or delay to register Previously, registration of charges was governed by CA, Ch 2K: ss 261-282. The PPS reforms repealed Ch 2K and replaced it with Ch 5 of the PPS Act. (However, Ch 2K continues to apply to companies that have a registrable charge (see ss 261-262, includes floating charges, now referred to as circulating security interests) that was created before 30 January 2012 and will continue to apply to these charges for 7 years from 30 January 2012.) While registration of a security interest on the PPS register is not compulsory, it is in the secured partys interest to register their security interest in personal property. Registration is the most common way of perfecting a security interest and by perfecting their security interest, a secured party may gain priority over competing security interests of third parties in the same collateral. See further discussion of priority rules in Lipton et al, [11.195]. In addition to priority issues, failure or delay in registering a security interest can have serious consequences if the company goes into a form of insolvency administration, such as liquidation voluntary administration, or if a deed of company arrangement is executed. Section 588FL of the CA (The PPS Act amended the CA by creating a new s 588FL, that largely replicates CA, s 266) provides that if secured parties do not perfect their security interest by registration by a certain time period prior to the company going into liquidation or voluntary administration or executing a deed of company arrangement, the security interest is unenforceable. The PPS Act security interest vests in the company and the secured party loses the right to enforce the security interest. In these cases, the creditor in whose favour the security was granted is treated as one of the companys unsecured creditors. That is, the secured property goes into the funds available for distribution by the liquidator.

Charge/ security interest in favour of officer or associate Company can grant charge/ security interest in favour of officer. Note the possibility of invalidity under CA, s 588FP (formerly s267 (interpreted in Highland v Exception Holdings Pty Ltd (in liq) (2006) 60 ACSR 223 per Santow JA especially at [69], [73][74], [86]).

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Lecture Eleven: Winding up

Recommended preliminary reading: Lipton et al, Chapter 25; Boros and Duns, ch 21. The Priestley requirements state that insolvency must be included in this course. It is a vast subject in itself, so we will focus on a limited number of issues which relate to what we have already studied in this course. We will look at how companies go into liquidation (and administration and receivership), the powers of the liquidator to bring proceedings on behalf of the company in order to increase the assets available for distribution to creditors, and the order of priority for payment of creditors. Introduction External administration: someone from outside is appointed to take over from the directors: either a receiver, an administrator, a liquidator or a provisional liquidator. External administrators are officers of the company under s9 (so subject to statutory duties in 180-183). They will also be fiduciaries, and so subject to general fiduciary duties.

When is a company insolvent? S95A(1), (2) Relevance of bankruptcy precedents. This is the commercial or cash flow test of solvency, to be contrasted with the balance sheet test of solvency, which is where a person has an excess of assets over external liabilities. The cash flow test is adopted because the law is concerned with liquidity and the position of the company in its trading situation. Essentially, is the company viable? Re New World Alliance Pty Ltd (rec and mgr apptd) (1994) 51 FCR 425 at 435-6 Duns, J, Insolvency: Problems of Concept, Definition and Proof (2000) 28 ABLR 22.

Routes to insolvent liquidation Part 5.4 CA

Voluntary winding up (rare) s495, s491(1), s497

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Court ordered winding up s459P Certain applicants require leave of the court under s459P(2). Application must be determined within 6 months: s459R. Certain presumptions are available to assist an application under 459P: see eg ss459C, 459E-G (statutory demand procedure). David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265. s459S Creditor can then apply under 465A for the company to be wound up. At any time after the application has been filed, the court can appoint a provisional liquidator under 472(2). Court discretion under 467(1). The creditor should nominate a liquidator from the list of insolvency practitioners: see s532 for disqualifications. Court appoints under s472. Effect of appointment of liquidator: officers must not exercise their powers without approval from the court or the liquidator (471A), including launching an appeal against the making of the winding up order there is a stay on all current and future proceedings against the company (471B) unless the court gives leave. The stay aims to ensure that the liquidation proceeds in an orderly fashion and that no creditor obtains preferential treatment. any disposal of the companys property other than by the liquidator is void unless the court orders otherwise: 468(1). employment contracts with the company are automatically terminated and transfers of shares without liquidator consent are also void: 468A floating charges will crystallise if they havent already unregistered but registrable charges will be invalid against the liquidator unless the time allowed for registration has not expired unsecured creditors can no longer enforce their debts; they must follow the collective enforcement procedure unless court gives leave under 471B; they have a right to prove their claim (whether it is liquidated or unliquidated) under 553 and to participate in any distribution once the liquidator has gathered in the companys property.

However, note that the rights of secured creditors to deal with the security are unaffected by the stay of proceedings and the suspension of officers powers: 471C. However their charge may be subject to challenge as discussed below, and floating charge holders/parties with circulating security interests have their claims postponed to certain claims of employees under s561. A
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liquidator can still be appointed despite the appointment of a receiver by a chargeholder, but the charged property will not be available to the liquidator.

Role of the liquidator The liquidator may carry on the companys business only so far as necessary for the beneficial disposal or winding up of the companys business: 477(1)(a). s477 sets out further powers of the liquidator, including a power to bring actions in the companys name. However, if the companys assets are inadequate to meet the costs of the action, the liquidator will be personally liable for them: Re Speedifix Building Products Pty Ltd (1987) 11 ACLR 863 Directors to report to liquidator: 475(1) Liquidator to lodge preliminary report within two months (476) and audited accounts within six months (539) with ASIC. Liquidator should also report any misfeasance by directors to ASIC which can then decide whether to bring contravention proceedings: s533. Liquidator should collect company assets, sell them, bring any statutory actions (as below which will increase the pool of assets/money available for distribution), ascertain creditor claims and then apply available funds to creditor claims observing statutory priority then apply for deregistration of the company. They are to avoid unnecessarily protracting the liquidation: 480.

Statutory actions by the liquidator 1. Bring proceedings for insolvent trading under 588G (see Lipton et al, Chapter 13.5) ss588G, H and M, introduced in their current form on the recommendation of the General Insolvency Inquiry (the Harmer Report). For economic analysis of 588G, see M. Whincop, Taking the Corporate Contract More Seriously: The Economic Cases against, a Transaction Cost Rationale for, the Insolvent Trading Provisions (1996) 5 Griffith Law Review 1; M Whincop, The Economic and Strategic Structure of Insolvent Trading in I Ramsay (ed), Company Directors Liability for Insolvent Trading (Centre For Corporate Law And Securities Regulation, 2000) available online at http://cclsr.law.unimelb.edu.au/download.cfm?DownloadFile=E80CBF3D-1422-207CBA7AB9ECBFC2B587 Liquidator 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.
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Duty owed by directors only (not officers). incurred: see Standard Chartered Bank v Antico (1995) 18 ACSR 1 at 57. Important note: certain transactions (including payment of dividend, reduction of capital, share buyback) are deemed to be the incurring of debts under 588G(1A). insolvent: see Hall v Poolman (2007) 65 ACSR 123; Powell v Fryer [2001] SASC 59; ASIC v Plymin (2003) VSC 123 per Mandie J for indicators of insolvency. reasonable grounds for suspecting insolvency: see ASIC v Plymin (2003) VSC 123 at [423]; Credit Corporation Australia Pty Ltd v Atkins (1999) 17 ACLC 756 judged according to a director of ordinary competence who is capable of having a basic understanding of the companys financial status. See also Queensland Bacon Pty Ltd v Rees (1996) 115 CLR 266 at 303 High Court suspicion requires more than mere speculation, must have a positive feeling of actual apprehension that there is insolvency. Consequences of contravention of 588G(2): 1. Director is liable to civil penalty under Part 9.4B for contravention unless can prove one of the defences in 588H 2. Liability to be ordered to pay compensation to the company under 588J in proceedings brought by ASIC for a civil penalty order Consequences of contravention of 588G(3): 1. Possible criminal liability under 588G(3) if suspected insolvency and were dishonest in failing to prevent the company incurring the debt (dormant directors in family companies will not therefore be subject to criminal liability). 2. Liability to be ordered to pay compensation to company under 588K in 588G(3) criminal proceedings Consequence of contravention of either 588G(2) or (3): Liquidator can apply under 588M (or creditor with liquidators consent under 588R) for compensation unless the director can prove a 588H defence.

The person bringing the proceedings bears the burden of proof, although they may be able to rely on the presumptions in 588E, in particular where there is failure to keep accounting records in accordance with s286, which leads to a presumption that the company was insolvent throughout the period, and a presumption of continuing insolvency throughout certain periods where earlier insolvency has been established. Defences s588H 4 defences, including reasonable grounds to expect solvency in s 588H(2). Use of term expect not suspect any significance? See Metropolitan Fire Systems v Miller (1997) 23 ACSR 699 at 711: To suspect something requires a lower threshold of knowledge or
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awareness than to expect it The expectation must be differentiated from mere hope in order to satisfy this defence It implies a measure of confidence that the company is solvent. Note the importance of appointing an administrator in good time: ss 588H(5) and (6). Relief may be possible under ss1318 or 1317S. Note that any money recovered under 588G is available to pay all unsecured creditors, including those who became creditors while the company was solvent: Whincop argues (at 16-19 of 5 Griffith LR) that this is inefficient, and notes that it does not fit comfortably with 588M(3), 588R, T and U.

2. Bring action against parent company for insolvent trading by subsidiary: 588V-X Equivalent to 588G, although 588V is not a civil penalty provision; note definitions of subsidiary in s9 and s46. Note priority of unsecured claims over proceeds of liquidators action: 588Y

3. Bring misfeasance proceedings in the companys name in relation to breaches of duty. Note various decisions which prevent ratification from barring an action by liquidator: Cook v Deeks; Forge v ASIC; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722

4. Avoidance of certain floating charges, now referred to as circulating security interests: 588FJ: see Lipton et al, [11.140] and [25.580]. Under s 588FJ, a circulating security interest created during the six months ending on the relation-back day (Relation-back day is defined in s9 and 513A) is void as against the companys liquidator.

5. Recovery of unfair preferences and setting aside of uncommercial transactions: 588FA and 588FB. McDonald v Hanselmann (1998) 28 ACSR 49) Re Emanuel (No 14) Pty Ltd (in liq) (1997) 147 ALR 281 at 288 VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) (1999) 3 VR 201, now embodied in 588FA(3).

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To establish either an unfair preference (588FA(1)) or an uncommercial transaction (588FB), the liquidator has to prove transaction was an insolvent transaction 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 the presumptions set out in 588E to assist with proving insolvency; and that entry into transaction occurred within the relation-back period so that it was voidable under 588FE (generally 6 months under 588FE(2) but can be extended to two years if insolvent transaction and uncommercial: 588FE(3); four years if with a related party: 588FE(4); and ten years if intended to defeat creditors: 588FE(5)).

Defences for other party under 588FG(2), for third parties under 588FG(1), and orders under 588FF. 6. Set aside unfair loans to a company: 588FD: see Lipton et al, [25.545] (note lack of time limits in 588FE(6))

7. Challenge unreasonable director-related transactions: 588FDA, 588FF(1), 588FF(4); time limits in 588FE(6A). 8. Set aside transactions to defeat creditors: 588FE(5).

Order of priority among creditors Once the liquidator has collected the assets, he should pay them out to the creditors. Liquidation may be ongoing, in which case liquidator can make interim distribution referred to as dividend. Generally speaking all unsecured debts rank equally and if assets insufficient, they should be paid rateably: s555. S556 sets out the order for payment of priority or preferential creditors. Broadly speaking: expenses of liquidation, expenses of court order, certain debts of any administrator, costs of producing report for liquidator, costs of ASIC audit of liquidators report, other expenses of relevant authority, then remuneration or fees of liquidator or, if applicable, the administrator, then

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(e) wages, superannuation contributions and superannuation guarantee charge payable by company in respect of services rendered to the company by employees before the relevant date (556(1A) limits the amount payable to excluded employees (defined in 556(2) as anyone who has been a director or spouse (including de facto) of director or other relative of a director during 12 months ending on the relevant date) and attributable to non-priority days (days on which the employees was an excluded employee) to a maximum of $2000. Employee is defined for this purpose in 556(2) as a person who has been or is an employee of the company whether remunerated by wages, salary, commission or otherwise. (f) amounts due in respect of injury compensation, the liability for which arose before the relevant date (g) amounts due in relation to leave payments to employees before the relevant date (h) retrenchment payments to employees (excluding non-priority days for excluded employees); retrenchment defined in 556(2) as an amount payable by the company to the employee, by virtue of an industrial instrument, in respect of the termination of the employees employment by the company, whether the amount becomes payable before, on or after the relevant date)

Then payment of ordinary unsecured creditors. Then certain deferred creditors: subordinated debt under a contract or trust (holders of junk bonds!). Then debts owed to persons in their capacity as members of the company: 563A (recall Sons of Gwalia Ltd v Margaretic (2007) HCA 1: High Court decision aroused debate about whether claims by shareholders who can show they have been misled by the company, prior to the company becoming insolvent, should rank equally with the claims of non-shareholder unsecured creditors argued that this outcome contradicts an underlying principle of insolvency law that shareholders rank after creditors.) For this reason, the government introduced amendments in 2010 that reversed the decision and provided that all claims of shareholders relating to the buying, selling, holding or otherwise dealing with shares are to be ranked equally and after all other creditors claims. Anything left over will be paid to members in accordance with the rights attaching to the various classes of shares (if appropriate).

Protection of employee entitlements Part 5.8A makes provision to protect the entitlements of the companys 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 of significantly reducing
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the amount of entitlements which can be recovered: s596AB. 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. These rights are now supplemented by the GEERS scheme (General Employee Entitlements Redundancy Scheme, an administrative measure) prompted by the problems highlighted by the waterfront dispute in 1998 between Patrick Stevedores and the Maritime Union of Australia (MUA) when the Patrick group of companies was controversially restructured so as to facilitate the sacking of its waterside workers and their replacement with non-union employees.

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Lecture Twelve: Receivership and external administration

Recommended preliminary reading: Lipton et al, Chapters 23 and 24; Boros and Duns, ch 22

Definition, appointment, process and duties of receivers Receivers get powers under the charge instrument and s420 CA, which allows them for the purpose of attaining the objectives for which the receiver was appointed to take possession of the property, to borrow money, carry on the business, engage employees, make or defend an application to wind up the company, prove for debts owing to the company etc. Main power is to sell the charged asset. In doing so, the receiver will owe a duty of care under 420A. The receiver is also required by equity to exercise their powers not only in the interest of their appointor but also in good faith in the interests of the company. See e.g. Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676. Before he can appropriate the proceeds of the assets which were subject to a floating charge/ circulating security interest, the receiver must pay certain creditors who have preferential rights ahead of a floating charge/circulating security interest (principally employee rights under 556(1)(e), (g) and (h)). Failure to pay in the correct order will amount to the tort of breach of statutory duty. Liquidator must stand aside for receiver to satisfy the claim of the secured creditor, who can also be appointed to a company despite the fact that it is in liquidation. The receiver will be the agent of the company under the charge instrument, but can exercise his powers without the companys consent. This means the receiver is entitled to indemnity out of companys assets for liabilities properly incurred.

Nature and purpose of administration Part 5.3A. As an alternative to insolvent winding up, a company may continue trading under a Deed of Company Administration (DCA) which has been approved by the creditors. DCA provides for consolidation or postponement of debts while company continues to trade or its assets are sold off in an orderly (rather than panicked fashion). Administration was introduced in 1993 in response to recommendations from Australian Law Reform Commission by means of the Corporate Law Reform Act 1992 (Cth). It was part of the same reform package as s588G which imposes liability for insolvent trading. Putting a company into administration is one of the ways in which company directors can avoid liability for insolvent trading: see 588H(6). This linkage between administration and minimising the risk of personal liability may have contributed to the popularity of administration in Australia (compared to other common law jurisdictions).
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s435A sets out the aims of administration: to administer the affairs of the company in such a way that maximises the chances of the company, or as much as possible of its business, continuing in existence or, if this is not possible, in a way that results in a better return for the companys creditors and members than would result from an immediate winding up of the company.

Voluntary Administration First stage: VA Administration begins when the administrator is appointed: 435C. Administrator may be appointed by directors (ss588H(6)). S436A requires a resolution of the board that the company is insolvent or likely to become so and that administrator should be appointed. Alternatively appointed by liquidator under 436B if they believe company is insolvent or likely to become insolvent. They may do this if they need the additional flexibility associated with administration compared with winding up. Finally, a chargee who has a charge on the whole, or substantially the whole, of the companys property, may make the appointment: 436C. This allows the chargeholder not to have to rely on strict rights as a secured creditor to appoint a receiver and may result in a better outcome for all concerned. Administrator will assume control of the company (437A, B, C). Moratorium on all claims including those of secured creditors against company to allow an expert to assess creditor options: 440D. Enforceability of charges/security interests: 440B makes charges unenforceable against the company except with the consent of the administrator or with the leave of the court. However, a secured creditor with a security interest in the whole, or substantially the whole, of the business has a decision period of 13 business days to enforce security after appointment of administrator (441A). Note also s 441C, which allows a secured creditor with security over perishable goods to enforce a charge despite the appointment of an administrator, as well as, the protection afforded to a secured creditor who has entered possession or assumed control of the property of the company (including starting to exercise the right to sell the property) before the administrator was appointed. The security interest may continue to be enforced after the administration has begun: s441B. In addition to restrictions on secured parties enforcing security interests in the companys property, owners and lessors of property used by the company cannot take possession or otherwise recover the property without the administrators written consent or the leave of the court: s 440B aimed at protecting property that is necessary for companys existence so that administration can continue. However, note similar protection afforded to owners and lessors who commence enforcement of rights before commencement of administration: s 441F.
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Moratorium provisions also prevent enforcement of personal guarantees from directors etc in respect of the companys liability: 440J and 1323. A meeting of creditors should be called within eight business days to allow them to approve the choice of administrator or appoint someone else: 436E. Administrators task is to investigate the company and its affairs as soon as practicable and form an opinion on whether it would be in creditors interests to execute a deed of company arrangement, wind the company up or terminate the administration: s438A. Directors must cooperate (438B) and the administrator should report offences, misappropriation and breaches of duty to ASIC (438D).

Second stage: decision-making Creditors have a proposal meeting within the period fixed by s439A to decide whether to enter a binding arrangement with the company (a deed of company arrangement: DCA), or to wind up the company or simply to end the VA: 439C. Administrator will provide creditors with an opinion and a report on what is in the creditors interests (439A(4)), and if a deed is recommended, the administrator should produce a statement setting out details of the proposed deed: 439A(4)(c). S439A deals with the meeting and detailed provisions are contained in Corporations Regulations. Reg 5.6.19 provides for a vote on the voices (show of hands) but a poll can be requested, in which case Reg 5.6.21(2) provides: A resolution is carried if: (a) a majority of the creditors voting (whether in person, by attorney or by proxy) vote in favour of the resolution; and (b) the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed to all the creditors voting (whether in person, by proxy or by attorney). Reg 5.6.23 sets out rules which determine whether creditors can vote at the meeting. 444A deals with execution of the DCA. The administrator of the company will be the administrator of DCA by default: 444A(2). The administrator should prepare the DCA: 444A(3). If the company executes the instrument it ceases to be a company under voluntary administration and becomes a company under a deed of company arrangement. If company fails to execute the deed within the 15 business days after the creditors meeting required by 444B(2), the company is deemed to be in creditors voluntary winding up unless it has applied for an extension: s446A(1)(b).

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Contents of DCA Some are mandatory (s444A(4), 444DA), some are bespoke, and some are default (s444A(5); Corporations Regulations Reg 5.3A.06 specifies the default provisions are those contained in Corporations Regulations Sch 8A).

Effect of DCA 444G, 444D Secured creditors free to realise their security under 444D, subject to 444F

Variation of DCA 445A-F 600A: court power to make order where vote determined by particular related creditors and contrary to creditor interests. Court has powers under 445D to terminate the DCA in a range of circumstances (including where the deed is oppressive or unfairly prejudicial to one or more creditors) and will normally find this where the deed departs from the order of priority under insolvency. Finally note broad power of court under 447A to alter the operation of provisions of Part 5.3A to a particular company, and the court has interpreted this very broadly (although intervention must be in pursuit of the 435A aims of administration): see Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270.

Termination of DCA By court order under 445D, by resolution of creditors meeting (445F) or occurrence of circumstances specified in the deed: 445C. Sch 8A provides for termination if not longer practicable or desirable to carry on the business. Company can re-enter administration at any time in the future.

Further references: P Lynch, Drafting a Deed of Company Arrangement [1995] 3 Insol LJ 15 GJ Hamilton, Deeds of Company Arrangement: the Prescribed Provisions [1995] 3 Insol LJ 67.
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KJ Bennetts, Voluntary Administration: Shaping the Process through the Exercise of Judicial Discretion (1995) 3 Insol LJ 135

Most recent reforms Corporations Amendment (Insolvency) Act 2007. Governments stated aims in introducing the reforms were: to improve outcomes for creditors, including enhanced protections for employee entitlement (this aspect already dealt with in the insolvency situation through GEERS, but required consideration in relation to DCAs is mandatory regulation required to prevent them having to incur the expense of challenging a DCA? Now see s444DA which requires that employees have priority at least equal to that which they would have on insolvent liquidation), facilitating informed creditor decision-making, streamlining external administration and reduce costs, and allowing related companies to be administered as a single process (so-called pooling) to deter corporate misconduct, including allowing ASIC power to investigate liquidators breaches of duty to improve regulation of insolvency practitioners to finetune the VA process in light of market and developments and experience.

An alternative: schemes of arrangement Possible under Part 5.1 CA but significant court involvement and delays. Administration is a more attractive option.

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Tutorial 1: Types of business associations and types of companies Problem Question Julie and Tim are starting up their own small business, which involves the production and delivery of gourmet ice-creams in exotic flavours, for serving in higher-end restaurants and cafes. Julie has been making her ice-cream for friends, school fairs and markets for some time, with some success; her ice-creams have been mentioned in a few local newspapers, and she is a wellknown figure around Brisbane, trading under the name Fabulous Concotions. She has a registered business name and an ABN, but has not incorporated. She has no registered trade marks. Tim has experience as a business consultant and has proposed that they both invest $10,000 each into leasing commercial scale equipment and some commercial space, with a view to expanding into the restaurant supply market. Both Tim and Julie are planning to give up other employment and work full time in the business. Apart from the equipment and premises leases, the assets of the business will likely consist of supply contracts with a number of restaurants, Julies alreadyestablished recipes and the goodwill she has already built up (as well as any IP they choose to register, such as trade marks). (a) Advise Julie and Tim regarding the options they have in terms of the legal form their business can take, and any considerations they should take into account in making their choice. Five years down the track, and the business has proved highly successful. They now have 50 employees and an annual turnover approaching $5 million. This success has been achieved through their efforts, of course, and Julie and Tims reinvestment of the profits of the business; they have also benefited from a line of credit from their local bank. In order to fund further expansion of the business into other States, they are now interested in obtaining investment from other sources: possibly family members, although they are also open to investment from other sources. (b) Advise Julie and Tim regarding how these changes to their circumstances might lead to different advice concerning the appropriate legal structure for their business. What business structures can open up possibilities for outside investment in the business, and what are the implications of these different structures? Another five years later, and Fabulous Concoctions is now serving the restaurant and caf market, have their ice-creams served on Qantas flights, and have expanded into the retail market with 20 branded stores throughout Australia. The business now has well over a thousand employees, some of whom are (generally small) shareholders. The expansion of the business has been funded in part through private investment; approximately 100 trusts and other investment vehicles have provided funds in return for shares. The board has received proposals from management for a global expansion starting in local markets such as Singapore and New Zealand, with a view to later broader expansion. This will require major injections of funds to acquire the equipment and premises and secure deals in the target markets.
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What options does Fabulous Concoctions now have in terms of its legal structure? Advise the board of its options.

Discussion questions 1. The corporate form as it is known in Anglo-Australian law is as much an accident of history as it is a well-designed institution suited to its ends. Discuss. 2. The corporate form is said to have developed as a way to enable entrepreneurs with ideas for significant and risky ventures like international trade or the building of major infrastructure to gather the capital necessary to support those ventures. Is this how the corporate form is used today?

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Tutorial 2: Separate Entity Principle and the Corporate Veil Problem question Greg and Mary are the shareholders in equal shares of Widget Pty Ltd (Widget), which operates a widget manufacture business. Mary is an American citizen. The directors of Widget Pty Ltd are Greg and Eric. For the last 10 years, Widget Pty Ltd has supplied widgets to the Department of Defence. 12 months ago, the government enacted a law that imposed additional reporting requirements on companies contracting with the Department of Defence which are owned 50% or more by any single foreign entity or person. In response, Greg and Eric decide to restructure Widgets business, with the knowledge and consent of Mary. They establish two new corporate entities: Widget A Pty Ltd (Widget A) and Widget B Pty Ltd (Widget B). Greg and Eric are the directors of both Widget A and Widget B. The business is divided up: Widget A is a wholly-owned subsidiary of Widget. The tangible assets of the business (manufacturing premises and equipment; stock in trade) are transferred to Widget A, which undertakes to repay the purchase price at a fixed rate over time. To secure payment, Widget takes a charge over Widget As assets. Widget B is a separate company owned 75% by Widget Pty Ltd and 25% by Eric. Widget B leases equipment and premises from Widget A and manufactures and supplies widgets. Widget B has also undertaken to repay the purchase price of the business to Widget Pty Ltd over time. The employees in the manufacturing business become employees of Widget B. Widget B has few tangible assets.

Greg and Eric still hold directors meetings in which they make decisions for Widget, Widget A and Widget B, sometimes making little distinction between the companies. Suppliers now formally contract with Widget B, although they still deal with the same people, mostly Eric and Greg, who place orders in the name of Widget. Consider what the position would be in any of the following situations: (a) In June 2009 Widget B Pty Ltd fails to pay a major supplier of raw materials, ERU Ltd. ERU Ltd knows that Widget B has few assets. Can ERU sue Widget Pty Ltd to recover its debt? (b) Would your answer to (a) be different if the records showed that Eric and Greg discussed the benefits of the restructure in terms of shielding Widget Pty Ltd and the assets of the business from any major liabilities? (c) 20 years down the track it is discovered that exposure to the raw materials of widgets can cause laemopaethenia, a terminal disease which does not manifest until years after exposure. By this time Widget B is little more than a shell; it has no active business and no major assets; Widget has successfully made the transition to major telecommunications equipment manufacturer. Several former employees of the Widget group have contracted the disease. 3 of the employees worked for Widget Pty Ltd prior to

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the restructure. 3 were only ever employed by Widget B Pty Ltd. Leaving to one side issues of the statute of limitations, can the employees bring an action against Widget?

Discussion questions 1. There is little justification for observing a corporate veil in a one director, one shareholder company. Discuss. 2. It has sometimes been suggested that tort creditors should exceptionally be permitted to pierce the corporate veil as between companies in a corporate group. Explain the basis for this suggestion, and discuss the advantages and disadvantages of creating such an exception. 3. Why do you think the James Hardie Group made provision for compensation to be paid to its tort victims when it was not obliged to do so under the law? Is it possible to make a general assumption that companies will voluntarily compensate their tort victims?

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Tutorial 3: The Division of Power within the Corporation and Insider Rights Problem question Greenbean Pty Ltd is a small proprietary company, established by Tom, Richard, Harry, Pam and Mary-Jean with a view to bringing environmentally-friendly products to market. The five friends are all shareholders (in equal shares); Tim, Richard and Harry make up the board of directors. The constitution of Greenbean contains the following constitutional provisions: Clause 1, which states that the object of Greenbean is to promote environmentally-aware values and support only products with a low impact on the environment; Clause 24, which commits members to pay an annual subscription of $1000 to support the work of the company; Clause 33, which provides that members who pay the annual subscription fee have a right to a free annual environmental audit of their domestic and business interests.

The board seeks your advice on the following: (a) The board recently decided to invest in Envirotek, a company which makes organic fertilisers. Pam and Mary-Jean do not approve of the investment, as they are not satisfied that Enviroteks products are in fact organic as they claim to be. Pam has raised the possibility that she might sue to enforce the companys objects clause. Is this a realistic threat? (b) The board wants to raise the annual subscription to $2000, in light of the urgency of environmental issues today. They believe that Pam is supportive, but are concerned that Mary-Jean may object based on past conversations. How would the board go about changing clause 24, and what would be the impact of any change on Mary-Jean? (c) The board wants to remove clause 33 from the constitution because Pams extensive investment property interests are making the annual environmental audit extremely expensive. If they do so, will Pam have any grounds for complaint?
Scenario of special contract? Prospective effect?

Discussion Questions 1. Shareholders limited powers to interfere with board decision-making are insufficient for them to exercise effective oversight over board decision-making. Discuss. 2. The centralisation of decision-making power in the board, reflected in the structure of the Corporations Act, is not appropriate for all companies. Discuss.

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Tutorial 4: Corporate Contracting Problem question 1 Dodge-O-Rental Ltd is a public company which operates in the car rental business. It has around 500 shareholders, and its board consists of 5 directors, including Colin and David. The replaceable rules apply, but Dodge-O-Rental Ltd also has a constitution which states that any contract valued at over $1 million requires the approval of the board. The board has appointed Colin as the managing director subject to the proviso that he does not have authority to enter any contract valued at over $50,000. David has been acting as the companys finance director, although he has not been formally appointed as such. In the past, David has made a number of contracts purchasing advertising space on behalf of the company. Colin decides that the company needs to employ another administrator and, using the services of a recruitment consultant, identifies three suitable candidates, interviews them and enters into a contract with one of the candidates, Rhona (who happens to be a shareholder in the company). As administrator, she earns $70,000 per annum plus a pension contribution and subsidized private health care. Colin also decides that the company should purchase a fleet of cars for rental to the public, and purports to enter into a contract with a car wholesaler who has supplied individual cars to the company before on behalf of the company. The price of the cars is $2 million. Finally, David purports to enter into a high value contract on behalf of the company for the purchase of advertising space in a number of local newspapers. In addition to highlighting Dodge-O-Rentals current special offers, the advertisement suggests combining car rental with a vacation in Davids holiday home on the Sunshine Coast, which is also available to rent. The board wants to know whether the company is bound by these contracts.

Problem question 2 Emmanuel is the sole director and shareholder of Thunderclap Pty Ltd, a property development and construction company through which Emmanuel carries on his property development business. Emmanuel is married to Julie, a qualified accountant, who is employed as an administrator in Emmanuels business. Julie and Emmanuel live in a fine waterfront property south of the Gold Coast, which is the only asset of Emju Pty Ltd, a company of which Julie and Emmanuel are the only directors and shareholders. One of Thunderclaps major projects is the building of an eco-tourism resort in Northern Queensland. The project requires significant supplies of certified rainforest friendly wood for the building of the huts. Emmanuel has been dealing with Andrew, an old friend of his and Julies, and the managing director of Woodpile Pty Ltd in order to obtain these supplies. Thunderclap cannot afford immediately to pay for the wood supplies, and Emmanuel asks for their supply on credit. Andrew is reluctant to enter such a large transaction without any security. Emmanuel suggests that just to be sure he could provide a mortgage over a waterfront property that Thunderclap has an interest in. Andrew agrees that would be suitable.

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Advise on the enforceability of the mortgage in the following scenarios: (a) Emmanuel turns up the next day in Andrews office with a mortgage apparently executed by Julie and Emmanuel as directors of Emju Pty Ltd. It turns out later that Julies signature was forged. (b) Emmanuel turns up the next day in Andrews office with a mortgage executed by Emmanuel, signing as sole director and sole company secretary of Emju Pty Ltd. When Andrew does a quick company search and finds that Julie is listed as a director, he is assured by Emmanuel that Oh, Julies not a director anymore, we just havent done the paperwork yet. On the basis of his long friendship with Emmanuel, Andrew accepts this at face value.

Discussion Questions 1. The rules relating to corporate contracting allocate most of the risk of misbehaving corporate officers on the company and its shareholders, rather than third parties. Does the Act appropriately divide the risk, or should third parties contracting with companies have a greater duty to inquire into officers authority to bind the company? 2. The needs of commerce would be better served if the law were to delineate clearly and exhaustively those who can bind companies to contracts. Discuss.

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Tutorial 5: Directors Duties

Problem question Sweets & Drinks Ltd (S&D) is a public (unlisted) company which manufactures and distributes soft drinks and various sweets products in Australia. In January 2006, taking the view that the S&D range needed to supply a bottled water in its machines and branded stores, and preferring not to build a business from scratch, S&D launched a takeover of WonderWater Pty Ltd (WW), a small family business historically run by the Wonder family. S&D purchased 70% of the issued shares in WW. The remaining 30% is held by various Wonder family members. Two of the existing WW directors, Ness and Richard, agreed to remain on the WW board for a transitional period of 4 years; the other member of the board after the takeover of WW is Chris, a nominee of S&D and member of S&Ds board. In the twelve months following the takeover, S&D purchased WW bottled water for sale. By January 2007, S&D had become WWs almost exclusive customer and distributor. In July 2007, the S&D board received a report from a marketing consultant that indicated that S&D lacked a coherent brand identity in the market. S&Ds board pass a resolution accepting a proposal that a single S&D brand identity be adopted, and that all S&Ds suppliers be required to adopt similar packaging and branding (or cease to supply S&D). The new requirement from S&D is passed on to the board and management of WW. At a subsequent board meeting of WW, the WW board resolve to adopt the new brand identity, to license the relevant packaging and trade marks from S&D, and cease to promote the independent WW brands. Ness votes against the resolution, arguing that no independent valuation of the WW brands has been obtained and that the proposal may lock WW in to an exclusive relationship. Richard responds that were part of the S&D group now; it makes sense to take the benefit of their branding campaign, and in any event we might lose the supply contract otherwise. S&D, having launched a series of takeovers over a fairly short time period, ran short of cash in September 2007. WW however had significant cash reserves. At a meeting of the board of WW in October 2007, the board of WW resolved (over the objections of Ness) to lend $10 million to S&D at half the market rate of interest. To secure the debt WW was given a charge over certain manufacturing assets of S&D. S&D has kept to the agreed payment schedule and will repay the money by the end of 2009. In December 2008, as the time approaches for renegotiation of the WW-S&D supply contracts, S&D management write to WW management noting that they have located a supplier who can provide S&D-branded water at a significantly lower price than that quoted by WW. Negotiations occur, but agreement cannot be reached. The supply agreement is terminated. Without the supply contracts, and facing the prospect of having to invest significantly in a re-launch of the WW brands, the board of WW realise that the business is no longer viable. Plans are made to wind up the company. Shortly afterwards, Richard announces that he will be taking up a highly remunerative executive Vice-President role within S&D.

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Ness, and the remaining members of the Wonder family, are distressed by the collapse of the business and concerned that there may have been breaches of duty by Richard and Chris. Advise Ness and the Wonder family. Comment on the strength of the case, and those areas where further information would be required.

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Tutorial 6: Minority Protection Problem question David, Paul and Brian are the three directors and three of the four shareholders (in equal shares) of Koff Pty Ltd, a company specialising in natural therapies, herbal remedies and related products. David, Paul and Brian each hold 20% of the issued shares in the company; their (widowed) mother holds the remaining 40%. The business is a family business: David, Paul and Brian are brothers. The constitution of Koff Pty Ltd contains a provision giving the board the right of first offer if any shareholder proposes to sell their shares, with the price to be set by an independent expert accountant, and the right to veto any proposed transferee on reasonable grounds. The business has been highly successful over time; profits have been reinvested in the business; it has many long-term employees. The company has steadily increased in value but has not declared any dividends for over 10 years. David and Paul work in the business directly and, like other long-term employees, are paid salaries above market rates and have the option of very low interest loans from the company. Brian is a physiotherapist by training and has his own private practice. Brian is not happy with what he has come to see as a stubborn refusal to pay dividends. He has complained that Paul and David are helping themselves to the profits via the high salaries and low-interest loans. Recently, in response to these complaints, Paul and David convened a meeting of the shareholders, proposing a resolution to approve the management of the business and the benefits provided to employees. Paul, David, and their mother voted in favour of the resolution; only Brian voted against. Seeing little likelihood of convincing his brothers, Brian has also raised the possibility of Paul and David buying him out. Paul and David asked the companys accountant, Simon, to provide a valuation of the shares, which Simon did; Brian considers that the valuation is low (although he acknowledges, as Simon has pointed out, the history of an absence of any dividends must make the shares less valuable to most people). Brians cousin has offered a higher price than that nominated by Simon; Paul and David however have indicated that they would veto the transfer. Brian seeks your advice. His first preference would be for the business to be run more like a normal business declaring dividends and perhaps being less obviously generous with its salaries. As a second preference, he is prepared to be bought out, but not at Simons valuation: in his view, the value of the shares should reflect the value they would have in a normal business as successful as Koff. Advise Brian.

Discussion Questions 1. The Corporations Act provides a range of remedies for shareholders, but they are targeted at shareholders in small companies and will be ineffective to impose discipline on boards of larger concerns. Discuss.

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2. Section 1324 of the Corporations Act poses a threat to the carefully crafted and well justified restrictions on shareholder litigation. Discuss.

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Tutorial 7: Shares & Capital Problem questions Question 1

Dante Ltd has an issued capital of $1 million consisting of 700,000 ordinary shares and 300,000 preference shares."The Dante family who comprise the majority of the companys directors owns the majority of the ordinary shares. Lee, a director of Dante Ltd, owns all of the preference shares. Under the constitution each share carries one vote irrespective of its class of shares. In addition, the constitution provides that any preference shareholder owning at least 25% of the companys issued share capital is entitled to be appointed as a director. At a recent board meeting, a majority of the directors decided:

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That the company should issue a further 1 million preference shares with a $1 issue price paid to 1 cent to the ordinary shareholders. These preference shares will rank equally with Lees preference shares; and To make a bonus issue of ordinary shares to the existing ordinary shareholders.

Lee believes that the share issues will adversely affect the value of her shares. Explain what rights, if any, she has under ss 246B 246E of the Corporations Act to prevent the company from carrying out the directors decisions.

Question 2 Ardvaark Ltds directors would like to return as much capital as possible to its shareholders. Its share capital consists of A class shares with a $10 issue price per share paid up to $6 and B class shares which are fully paid. Advise the directors of the legal requirements regarding the following proposals: (a) That the company cancels the $4 unpaid on each class A share; and (b) That the company buys back 15% of the class B shares.
" Would your advice be different if Ardvaark had financial difficulties? Explain.

Question 3 Gregory was recently appointed a director of Quick Fit Ltd. As part of his remuneration the company agreed to an arrangement whereby Gregory will borrow $3 million from Southward Bank and Quick Fit Ltd will guarantee this loan. This money will then be paid to Quick Fit Ltd in consideration for an issue if shares to Gregory at a 10% discount to the current market price of the shares. Advise whether this arrangement is permissible and if not, the consequences of these transactions proceeding and any steps the parties should take.
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Discussion questions 1. Capital maintenance is an arcane doctrine which has no place in modern corporate regulation. Discuss. 2. The provisions of Australian corporate law which seek to reflect the doctrine of capital maintenance are significantly more complicated than they need to be. Discuss. 3. The rights attaching to shares should be a matter entirely for companies and the market; there is no need for legal intervention in this area. Discuss.

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Tutorial 8: Public Issues, Financial Assistance, and Debt

Problem question Wetalk Ltd is a telecommunications products manufacture company which has 200,000 ordinary shares issued at a price of $5 per share. There are five directors, who between them own 50,000 of those shares; the remaining shares being owned by assorted investors. Due to rapid expansion, Wetalk needed new premises. Wetalk Ltd did some research and settled on 3 possible sites, one of which was owned by Django Pty Ltd. David, one of Wetalks directors, is the sole director and shareholder of Django Pty Ltd. The land owned by Django was more expensive but better located than the alternatives. Wetalks board was aware of Davids interest in Django Pty Ltd; he did not participate in the board discussions and left the room during the discussion and vote. Wetalk Ltd made an offer to purchase the Django property, which was accepted. Wetalk lacked the immediate cash to pay for the land. Therefore the board decided to invite all the shareholders to subscribe for further shares in the company. They offered parcels of 20,000 shares priced at $5 per share. The offer comes at a bad time and none of the other investors are in a position to invest; but all of the directors decide to take up the offer. The other four directors pay for their shares immediately; David pays for the shares once Django receives the deposit (and immediately declares a dividend to its sole shareholder, David). Have the directors of Wetalk breached the Corporations Act?

Discussion questions 1. Do the rules on public issues of shares achieve an adequate balance between the interests of the company and the interests of prospective investors? 2. Commentators often talk about the leverage or debt/equity ratio of a company. What are they talking about, and why does it matter? 3. What factors might influence a companys decision whether to borrow money, issue new shares or retain earnings in order to meet its capital needs?

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Tutorial 9: Insolvency, receivership and administration

1.

The directors of Bon Voyage Pty Ltd have recently learned that negotiations for a major exclusive contract to supply travel services to the University of Brisbane have fallen through. In addition, another important corporate client has recently gone into liquidation, owing Bon Voyage Pty Ltd a significant amount of money. The liquidator of the corporate client has indicated that she does not think Bon Voyage can hope for much more than 10c in the dollar from the winding up. Just before hearing this news, Bon Voyage took out a significant loan to fund acquisition of new premises in the Brisbane CBD: a transaction which even when it was entered they knew would strain Bon Voyages resources in the short-medium term. Advise the board of Bon Voyage: a. as to any risks they may face at this point; b. as to any steps they may take to reduce those risks.

2.

Massive Bank has a fixed and floating charge (now referred to as a non-circulating security interest and circulating security interest) over all of the assets of Bon Voyage Pty Ltd. The charge (security interest) is registered, and enforceable against any administrator or liquidator. If the board of Bon Voyage Pty Ltd are considering going into voluntary administration, why would it be important to obtain the cooperation of Massive Bank? In a winding up, certain kinds of transactions will be voidable (Part 5.7B Division 2). What does it mean to say a transaction is voidable? Explain, in general terms and preferably giving examples, the kinds of (voidable) transactions which the following categories are intended to cover, and consider whether there are any common themes uniting the set: a. Unfair preferences (s588FA) b. Uncommercial transactions (s588FB) c. Unfair loans to a company (s588FD) d. Unreasonable director-related transactions (s588FDA)

3. 4.

5. 6.

The system of statutory demands under Part 5.4, Division 2 of the Corporations Act is unduly draconian. Discuss. The main aim of the set of regulations governing companies in financial difficulty is to enable them to trade out of that difficulty: in other words, the name of the game is corporate survival. Discuss. Do you agree with the Federal Governments decision to reverse Sons of Gwalia by legislation?

7.

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Tutorial 10: Revision

Students should note that the revision tutorial represents a chance to ask any remaining questions about the course. If you have questions, you should email them to your tutor before the tutorial. Problem question Kevin is a director of a company called Wotsits Pty Ltd. Wotsits has three directors (Ian, James and Kevin, who each own 20 shares) and four other shareholders (Liam, Micky, Niall and Owen who each hold five shares). Wotsits has adopted all the replaceable rules. Kevin comes to seek your advice on behalf of the board in relation to a number of matters. 1. Liam is an exceptionally verbose character and has a tendency to prolong general meetings far beyond the tolerance of the directors and other shareholders. The board are considering not giving him notice of future meetings, and want to know whether this will have negative implications either for them or the company. 2. The board has been approached by a venture capital company, Passengers Ltd, which wants to inject a large amount of share capital into the company. In return for its investment, it wants 1000 shares in Wotsits Pty Ltd. The board wants to know what steps it must take before the company can issue the shares to Passengers. It also wants to know whether Passengers will be able to get rid of Liam, Micky, Niall and Owen once it has acquired its shareholding (Passengers intends to keep Ian, James and Kevin on the board and to require them to retain their shareholdings as an incentive). 3. The board are also concerned that, once they take control of the general meeting, Passengers will find out about three somewhat shady transactions in the companys past. First, two years ago, the directors were approached by another company which needed equity investment. The directors duly advanced their own funds to the company in question, which has prospered since, and they have made large profits. Second, when the company was formed, only James and Kevin were its directors. After a couple of years they decided that they should bring in Ian who worked for a rival firm as an employee and director, and issued shares to him. At that time they paid him a golden hello (bonus for signing an employment contract) of two years wages. Ian used that money, together with a bank loan, to pay for his shares. Third, in the first year of the companys existence, James and Kevin introduced a line of beef-flavoured snacks which did very badly on the market (because Australians have a clear and well-known preference for cheeseflavoured snacks), and caused the company considerable losses.

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