Contents Web viewSummary (s 141) Management: ... Part 2B.3 replaces the common law re pre-incorp...

All legislation refers to Corporations Act 2001 (Cth)

CONTENTS

MOD 1: CONTEXT OF AUS CORPS LAW................................................................................................3Introduction...............................................................................................................................................3

MOD 2: INCORPORATION PROCESS......................................................................................................3Incorporated Company – Fundamental Characteristics.......................................................................31. Pre-Incorporation Activities ~ Does [comp] have remedy against [promoter]?.......................52. Pre-Incorporation Contracts ~ Can [plaintiff] enforce contract?..............................................73. Aspects of the Incorporation Process..........................................................................................9

MOD 3: CORPORATE CONSTITUTION..................................................................................................131. Concept of Corporate Constitution & 2. Replaceable Rules.....................................................133. Legal Capacity of a Company ~ Has [comp] acted outside scope of its capacity?...............144. Alteration of Corporate Constitution...........................................................................................175. Effect of Constitution and Replaceable Rules...........................................................................22

MOD 4: CORPORATE PERSONALITY...................................................................................................23Principle of Veil of Incorporation..........................................................................................................23

MOD 5: CORPORATE GOVERNANCE...................................................................................................27Corporate Governance...........................................................................................................................271. Directors ~ Is [person] a director?................................................................................................272. Powers of Directors......................................................................................................................30

MOD 5A: DIRECTORS DUTIES - GENERAL..........................................................................................311. Director as a fiduciary..................................................................................................................312. Classification of director’s duties...............................................................................................31

MOD 5B: DUTY TO ACT BONA FIDE IN BEST INTERESTS OF COMP...............................................331. Nature of the Duty.........................................................................................................................332. Remedies for breach of duty........................................................................................................343. Corporations Act...........................................................................................................................34

MOD 5C: DUTY TO EXERCISE POWERS FOR PROPER PURPOSE...................................................351. Nature of the Duty.........................................................................................................................352. Remedies.......................................................................................................................................353. Corporations Act...........................................................................................................................36

MOD 5D: DUTY TO AVOID CONFLICTS OF INTEREST........................................................................371. General Law...................................................................................................................................372. Misuse Rule...................................................................................................................................373. Conflict Rule..................................................................................................................................41

MOD 5E: DUTY OF DUE CARE AND DILIGENCE.................................................................................431. Nature of the Duty.........................................................................................................................432. Remedies.......................................................................................................................................443. Corporations Act...........................................................................................................................45

MOD 5F: REMEDIES................................................................................................................................471. General Law...................................................................................................................................47

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2. Corporations Act...........................................................................................................................48

MOD 5G: RELIEF OF DIRECTORS FROM LIABILITY FOR BREACH..................................................491. General Law...................................................................................................................................492. Corporations Act...........................................................................................................................49

MOD 5H: MEMBERS................................................................................................................................511. Membership...................................................................................................................................512. Controlling Members....................................................................................................................52

MOD 5H: MEMBERS: MINORITY SHAREHOLDER PROTECTION.......................................................531. General Law – minority shareholder protection........................................................................532. Corporations Act – minority shareholder protection......................................................................55

MOD 6: COMPANY’S DEALINGS WITH OUTSIDERS...........................................................................611. How Does a Company Contract...................................................................................................612. Company’s Management..............................................................................................................623. Company Contracting Through Agent........................................................................................634. Sources of Protection of Outsiders.............................................................................................65

MOD 8: LOAN CAPITAL..........................................................................................................................691. Share Capital vs Loan Capital......................................................................................................692. Secured Borrowing.......................................................................................................................693. Receivership..................................................................................................................................72

MOD 9: VOLUNTARY ADMINISTRATION..............................................................................................771. Insolvent Corporations & Voluntary Administration Intro........................................................772. VA – Appointment.........................................................................................................................773. First Creditors’ Meeting................................................................................................................814. Second Creditors’ Meeting (s 439A Meeting).............................................................................815. Moratorium on Claims..................................................................................................................836. End of Administration...................................................................................................................847. DOCA NB. Completely separate from VA!..................................................................................858. Powers of the Court......................................................................................................................879. Transition from Admin to Creditors’ voluntary winding up......................................................87

MOD 10: LIQUIDATIONS.........................................................................................................................891. What is Liquidation?.....................................................................................................................892. Types of Liquidation.....................................................................................................................893. Compulsory Winding Up in Insolvency......................................................................................904. Voluntary Winding Up...................................................................................................................955. Commencement of Winding Up Part 5.6, Div 1A........................................................................956. Effects of Winding Up...................................................................................................................967. Appointment of Liquidators.........................................................................................................968. Powers of Liquidator.....................................................................................................................979. General Duties of Liquidator........................................................................................................9810. Specific Duties...............................................................................................................................99

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MOD 1: CONTEXT OF AUS CORPS LAW

INTRODUCTION

A company is:

o an artificial legal person created by law; and

o a company registered under the Corporations Act 2001 (Cth) (s 9).

The states have all referred power to Cth, so have Corporations Act 2001 (Cth) and ASIC Act 2001 (Cth)

MOD 2: INCORPORATION PROCESS

INCORPORATED COMPANY – FUNDAMENTAL CHARACTERISTICS

Separate legal entity: an inc company is a separate legal person in its own right – separate from its members and management (refer Mod 4)

Corporate constitution: is the internal governance rules: (refer Mod 3)

o Company constitution : (s 134, 135(2))

o Replaceable rules (RR) : (s 135(1) )

Default position

Summary (s 141 )

Management: company governance model (s 198A) (refer Mod 5)

Membership: (refer Mod 5)

o Company must have members, if share capital = shareholders

o Shareholders provide equity capital to company

o Shareholders are ultimate owners of company

Raising capital: (refer Mod 7-8)

Dissolution of company: (refer Mod 9-10)

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1. PRE-INCORPORATION ACTIVITIES ~ Does [comp] have remedy against [promoter]?

1.1 Law relating to promoters

Meaning of the term promoter

CA: has no definition

General law: o Defined broadly to cover wide range of persons involved in formation and initial operations

of company (Twycross v Grant)

Promoter is “one who undertakes to form a company with reference to given project and to sell it going, and who takes necessary steps to accomplish that purpose” (Twycross v Grant)

o Categories of promoter (Tracy v Mandalay):

Active promoter 1: Person, including a comp, who plays a central role in formation of company, includes (Tracy v Mandalay):

Person who has given instructions for prep and lodging of necessary docs Person who has organised first directors and officers

Person who has negotiated pre-incorporation contract

Active promoter 2: person instrumental in organising share capital or investors

Eg. issues disclosure doc / prospectus (Tracy v Mandalay)

Passive promoter: person content to leave others to do direct promotional work

Eg. knows plan of promotion and has understanding that he will share profit from carrying out plan or at least break even (NB. Tracy v Mandalay - broke even)

o Limits on concept of promoter : professionals like accountants, bankers etc are not promoters when they do no more than tasks of their profession on behalf of those seeking to incorporate (Emma Silver v Lewis)

1.2 Duties of promoters

Fiduciary duties

Promoters have a fiduciary obligations to the company to act in good faith and avoid conflicts of interest (Tracy v Mandalay; Gluckstein v Barnes)

o IF conflict: [promoter] must make full and fair disclosure of interest in any contract entered into by company. The disclosure must include all material facts (Tracy v Mandalay; Gluckstein)

Eg. sale of promoter’s property to the company

Discharging duty: Disclosure to BoD or to those who induced promoter to make company (Gluckstein) – eg. shareholders

o Disclosure can be in comp prospectus or in any other way as long as those who are becoming members are given full info (Gluckstein)

Duration: The obligations arise automatically one a person is identified as a promoter and are owed for the entire period during which a person is a promoter

o Goes as long as formation of company continues - could include the issue of prospectus, raising of funds by the public, performance of contracts impose upon the company by the promoters

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o After BoD appointed: Person may continue to be a promoter after BoD are appointed if directors are passive and act in the interests of the promoters (Twycross v Grant)

Corps Act duties General law duties have to some extent been superseded by CA where approaches to potential

investors are by offer of securities eg. shares for issue or sale

Ch 6D: requires [promoter] to make full disclosure where funds are being raised by offer of securities (ie. shares) unless an exception applies (s 706)

o Disclosure document will generally be a prospectus (s 709)

o Disclosure requirements : promoter must disclose (s 711): Terms and conditions of offer Interest of promoter in promotion of company etc Amount paid or payable for the promoter’s services

o Exceptions (s 708): Small scale offering: to less than 20 ppl and not exceeding $2mil in 12 month period Large offer: of at least $500,000 or person has assets of at least $2.5mil or has gross

income for last 2 financial years of at least $250,000 Offer to sophisticated investor: to professional investor (incl financial services

licences, trustee of super fund, listed entity, person who controls at least $10mil etc)

1.3 Remedies for breach of promoter’s duties - Eg. Where promoter has contracted to sell property to the company and makes a secret profit

General law

Rescission : common law remedy to rescind the contract for the sale of [item] and return parties to their pre-contractual positions (Tracy v Mandalay)

o Will not be available if: It is not possible to restore parties to pre-contractual position; Third parties have innocently acquired rights to property Rescission is not done promptly after failure of disclosure Company ratified contract

o If rescission is not available: equitable damages may be awarded against [measured] by profit they made (Tracy v Mandalay)

o If there is also fraudulent misrep: damages may also be awarded (Re Leeds)

Account of profits : Here, a distinction is made between promoter acquiring property as a fiduciary and on its own account:

o IF promoter acquires property on its own account : court will not hold promoter liable where promoter sells property to the company that was acquired prior to becoming a promoter and the company elects not to rescind (Tracy v Mandalay)

In some cases secret profit may be separate from contract price and [company] may be able to recover secret profit even if choose not to rescind (Gluckstein v Barnes)

NB. Where right to rescind is lost other remedies such as account of profits and equitable compensation may be available – not clear (Aequitas v AFEC – Austin J)

o IF promoter acquires property as a fiduciary : [company] will be entitled to an account of profits or constructive trust order (Gluckstein v Barnes)

Damages : Where there is fraud (fraudulent misrep) damages may be available in addition to the right to rescind the contract (Re Leeds)

Corps Act Loss or damage suffered: [promoter] will likely be liable for fraud / negligence / breach of duty (by

virtue of conflict) to [company] who has suffered loss or damage (s 598)

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Omission / misleading statements in disclosure doc: As [promoter] has made a misleading/deceptive statement / omitted require material / in a disclosure document, he will likely be liable for the loss of damage suffered by [person] (ss 728, 729)

2. PRE-INCORPORATION CONTRACTS ~ Can [plaintiff] enforce contract? Company exists only when CA is complied with and the company is registered

Pre-incorporation contract: one entered into by promoter on behalf of company being incorporated (eg. for office equipment)

2.1 General law

General law was unsatisfactory: prior to incorporation, company had no capacity to contract; had the following effects:

o Not binding on company (Kelner v Baxter)

o Not ratifiable by company after incorporation (Kelner v Baxter) – if no principal, no agent

o Company only bound if novation of contract after incorporation (Howard v Patent Ivory) – new contract after incorporation

Promoter’s liability: presumption that promoters personally liable where expressly contracted on behalf of proposed company (Kelner v Baxter)

o Rebuttable if wrong belief by both parties that company was in existence (Black v Smallwood)

o But if promoter signed to authenticate comp’s signature in belief comp formed, promoter liable in damages for breach of warranty or authority (Black v Smallwood)

2.2 Corps Act

Part 2B.3 drafted to overcome difficulties of common law; permits company to ratify a pre-incorporation contract and provides outside contractors with more remedies

Replacement of common law: Part 2B.3 replaces the common law re pre-incorp contracts (s 133)

Application of Pt 2B.3

Pre-conditions (s 131(1)): o Where person enters / purports to enter into a contract:

on behalf of company (covers agency as in Kelner v Baxter); OR

for benefit of company (in name of company as in Black v Smallwood – where false belief of existence of company)

o NB. Must be a company that is yet to be registered but can be identified – inapplicable where company existed at time or contract and later changes its name (CBA v Aus Solar; s 131(1))

o If pre-conditions met, section applies and ratification can occur

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Position of company and promoter under Pt 2B.3

1. Liability where company is registered and ratifies contract in time:

Company will have primary liability for the contract (s 131(1))

Promoter may have secondary liability: see below at 3

Ratification: company can ratify the pre-incorporation contract by:o Execution of document that ratifies contracto BoD passing a resolution; o Agent acting with express/implied authority and on behalf of company (s 126); ORo Conduct – eg. payment for goods purchased under pre-inc contract (Aztech Science)

NB. Where ratification occurs, if company fails to pay = breach of contract, can be sued for breach

2. Liability where company is NOT registered or does NOT ratify contract in time:

Promoter is primarily liable (s 131(2))

o Damages will be the company’s liability if ratified and total failure to perform

o If more than 1 promoter – only the promoter actually involved in the contract will be liable (Bay v Illawarra Stationery)

Contractor may release promoter from all/part of liability under s 131 by signing a release (s 132(1))

Company may have secondary liability if registered

o Court can do what it considers appropriate including ordering company to pay all/par of damages (s 131(3))

3. Liability where company ratifies but refuses / fails to perform:

Company will have primary liability for the contract (s 131(1))

Court can order promoter to pay all/part of the damages (s 131(4)) unless contractor releases promoter from all or part of liability by signing a release (s 132(1))

CASES

Tracey v Mandalay Pty Ltd (1953) A company purchased land on which it intended to construct a block of flats The land was sold at a profit to Mandalay Pty Ltd Mandalay advertised for applicants for parcels of shares, each which entitled the owner to sole use of a flat The flats were never built and Mandalay brought an action against the promoters and vendors of the land

to recover moneys paid by its shareholdersHeld the following were promoters

Various shareholders of the company that initially purchased the land and took part in the scheme Some were actively involved, others took no part but stook to profit and allowed the other promoters to act

on their behalf Some were held to be promoter even though they had fallen out with the active promoters and stook only to

recover their original contributions after commencing litigation

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3. ASPECTS OF THE INCORPORATION PROCESS3.1 Decision to incorporate Generally an optional decision, rationale = limited liability of members (Salomon v Salomon)

Mandatory if 20 or more persons wishing to carry on a business for gain (s 115(1))

Advantages of incorporation:o A company is a new legal entity that’s solely liable for its own debtso There is limited liability for members for the debts of a companyo A company has an indefinite existence (perpetual succession)o Business proprieties look for tax advantages. Eg, tax effective superannuation

Disadvantages of incorporation:o Limited role of shareholders in management structure of company, eg s 198A – BoD key manager o Increasing number of penalty provisions which apply to defaulting directors, including civil penalty

provisions (Pt 9.4B)o Fees associated with incorporation, and on filing various returns with ASIC, paperwork associated

with company registers, meetings and accounts

3.2 Procedure to obtain registration of a company

Incorporation is the process of registering a company - NB. Needs at least one member (s 114)

1. Check availability of proposed name with ASIC and on BNR (s 147), name will not be available if identical to name held/registered or if unacceptable for registration under Cops Regs

If available, option to reserve name under s 152 May be unacceptable for registration because offensive to a section of public (Reg

2B.6.01(2) – Little v ASIC: name was offensive to members of Christian and Muslim faith because it incorporated phrase “Jesus Christ”

Nature of company must be reflected in the name – eg. Ltd (ss 148(2), 149(1))

2. First members must sign agreement as to constitution where one is adopted instead of RR (s 136(1)), or if mandatory to have constitution (no liability comp) (s 112(2)(b); s 150(1))

3. First members must sign a consent to become members and take up shares and pay for them if comp has share capital (s 117(2), (5))

4. First directors and secretary must sign consent to act in that capacity on registration of company (s 117(3), (5))

5. Complete and lodge application form with ASIC (s 117), must include (s 117(2)):a) Type of company (NB. If public must lodge constitution with ASIC)b) Proposed namec) Name and address of membersd) Details of director/s (names / birth dates / place of birth)e) Details of company secretary/ies (names / birth dates / place of birth) / f) Address of director/s and secretary/iesg) Address of company’s proposed registered officeetc… NB. Form 201

6. Pay prescribed fee (ss 1351; Corps Fees Reg Item 5)

7. ASIC allots an ACN, registers company, issues certificate of registration (s 118)

Company comes into existence on date of registration (s 119)

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Certificate : conclusive evidence that company is duly incorporated (s 1274(7A))

Post-incorporation requirements

Obligation to establish register of members (s 168)

Company’s name must be publicised outside registered office and other public offices (s 144)

Notification to ASIC of any change in personal details of director or secretary (s 205B(4))

Foreign companies

A foreign company is an incorporated or unincorporated body formed outside Australia (s 9)

o There is no need to reincorporate in Australia to do business here

o Need for registration: business needs to register, as they cannot carry on business in Australia unless registered (ss 18-21)

Registration requirements: set out in s 601CD – When a foreign comp may carry on business in this jurisdiction

3.3 Types of registered companies

CA classifies registered companies according to:

1. Liability of members on winding up2. Public or pty status3. Holding and subsidiary companies

1. Classification according to liability of members on winding up

There are 4 companies that make up this classification – we consider 1 & 2

o Company limited by shareso Company limited by guaranteeo Unlimited company (very rare)o No liability company

Company limited by shares (s 112(1))

Def: the liability of shareholders to contribute to liabilities of company on winding up is limited to the amount, if any, unpaid on their shares (ss 9; 516 CA)

Name: must have “Ltd” or “limited” at end of its name (ss 148(2); 149)

Public or pty: can be either (s 112(1))

Use: exclusively used for trading

Prevalence: most common form of company in our society

Company limited by guarantee

Def: liability is limited to the amount members undertake to contribute in the winding up of the company (ss 9; 517)


Public or pty: can only be incorporated as a public company (s 112(1))

Share capital: NA because it is only limited by guarantee

Use: generally used as NFP eg. RACQ

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Public or pty status

Public Pty

Small Large


2. Classification according to public or pty status

Public company

Def: A company other than a pty company (s 9)

Name: must have “Ltd” or “limited” at end of its name

(ss 148(2); 149)

Shareholdings: public companies have shares spread amongst a large number of shareholders, to enable equity funding for large projects

NB. Needs at least 3 directors (s 201A) and directors can only be removed by members in general meeting passing ordinary resolution (ss 203D; 203E)

Proprietary company

Def: A company registered as a pty company (s 9; s 45A(1))

Requirements: o Must be limited by shares (s 112(1))

o Must not have more than 50 non-employee shareholders (excluded from calc are employees of subsidiary also) (s 113)

o Cannot engage in activities that require disclosure under Ch 6D (eg. prospectus) (s 113(3))

Breach : offence of strict liability (s 113(3A)) but offending act will not be invalid (s 113(4))

NB. ASIC can direct a pty company to change to a public company if it is satisfied the company has contravened s 113 and the company must comply within 2 months (s 165(1)-(2))


Nature of shareholding: held by small number of people

Prevalence: most common in our society (90% of companies)

Use: held closely by small number of persons, usually for small family business or JV

Advantages over public: o Only need min of 1 director (s 201A)

o Directors may be removed by BoD (director of public can only be removed by members in general meeting passing ordinary resolution) (ss 203D; 203E)

Small vs large pty company:

Distinction: small is one that satisfies 2 of 3 criteria (s 45A(2)):

a) Consolidated revenue for FY for comp and entities it controls is less than $25mil

b) Value of consolidated assets at end of FY of comp and entities it controls is less than $12.5mil

c) Comp and entities it controls have fewer than 50 employees at end of FY

A large pty company is a pty company that is not a small pty company (s 45A(3))

Advantages of small pty company: privacy – don’t have to prepare annual financial accounts and don’t have to have accounts audited (Pt 2N.3)

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3. Classification based upon holdings and subsidiary companies

A body corporate (X) will be a subsidiary of another body corporate (Y) it the other body (Y) (s 46(a)):

(i) Controls the composition of the BoD (s 46(a)(i));o Control : refers to control flowing from legally enforceable power of BoD and not some de facto

or physical control (Mount Edon; Bluebird Investments ; s 47 )

Eg. person cannot be appointed without exercise by holding company of power in that person’s favour

Eg. appointment as director follows from person being appointed director of holding company

(ii) Is in a position to cast/control more than 50% of the voting power at GM (s 46(a)(ii)); ORo Voting control : legally enforceable power or practical control whether revokable or not, provided

it is not under the legal control of another person

Won’t have voting control if hold an unrestricted revokable proxy – as can’t direct proxy how to vote (if could, would be directed proxy) (Bluebird Investments)

(iii) Holds more than 50% issues shares excluding preference shares (s 46(a)(iii))o Holds : on register of company – means more than 50% of share value, not of number of shares

(Re Swan)

(iv) Chain companies (s 46(b)): o A body corporate (X) will be the subsidiary of another body corporate (Y) if the first body (X) is

the subsidiary of a subsidiary (Z) of the other body (Y)

Y (holding company)

Z (subsidiary of Y)

X (subsidiary of Z, also subsidiary of Y)

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MOD 3: CORPORATE CONSTITUTION

1. CONCEPT OF CORPORATE CONSTITUTION & 2. REPLACEABLE RULES

Optional Constitution: constitutions are generally optional (s 136)

o Comp may adopt a constitution, either on registration (each person specified on the application for registration agrees to the terms) or after registration (s136) and that the company may modify or repeal its constitution, or provisions by special resolution (s136(2))

o Const may limit company’s exercise of powers and set out objects of a company: s125(1)(2)

o Const may govern the internal management of a company: s134

The rules that shareholders adopt to run the internal administration of the company (eg. appointment of directors etc) can be either:

o Company Constitution :

Applies if the company adopts its own rules (s 134)

They displace the Replaceable Rules (s 135(2))

o Replaceable Rules (RRs) :

Apply if the company does not adopt its own rules (s 134)

The RRs do not apply to single director/shareholder pty companies (s 135)

Table of rules – s 141

NB. A failure to comply with the RR is not of itself a contravention of the CA (s 135(3))

Note: No Liability Companies: Const must state its sole objects are mining purposes (s 112(2)(b))

Note: Contractual Effect of Constitution: the Const (and any RRs) have effect as a contract between the company and each member; the company and each director and company secretary; and between a member and each other member (s 140)

Replaceable rules and proprietary companies

Before issuing shares of a particular class, directors of a proprietary must offer them to the existing holders of shares of that class: s254D CA.

Directors in a proprietary company may pay dividends as they see fit: s254W(2) CA.

Directors of a proprietary company my refuse to register a transfer or shares in the company for any reason: s1091E CA.

Failure to comply with applicable replaceable rules is not of itself a contravention of Corporations Law. Therefore provisions relating to criminal and civil liability are inapplicable: s135(3) CA.

Examples of replaceable rules

Rules covering the appointment, removal, resignation and powers of directors: ss224C,D; s225A; s226A; s226E

Rules covering members’ meetings. Eg/ notice requirements, quorum requirements, rights to appoint a proxy, voting rights and voting: ss249J; s49T; s249X; s250E; s250J

Rules governing shares. Eg/ registration and transfer of shares and payment of dividends: s254U; s1091B

Mandatory Replaceable rule

A mandatory replaceable rule cannot be replaced by the company’s constitution. Section 249X, which provides for the appointment of proxies, is a mandatory replaceable rule for public companies.

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3. LEGAL CAPACITY OF A COMPANY ~ Has [comp] acted outside scope of its capacity?

Here, [plaintiff] is seeking to establish that [agent] was acting for [company] when he/she [entered into contract], making his/her actions those of the company.

**[Company] has all powers of an individual body corporate (s 124). o Individual powers include: to enter contracts, sue and be sued, acquire/hold/dispose of

property

o [Company’s] powers will only be restricted by its constitution (s 125)

3.1 Common Law Doctrine of Ultra Vires

Prior to 1984, court’s policy was to protect shareholders and outside users from improper use of company funds (Ashbury Railway), with 2 rules:

o Company required to include objects clause in Constitution (type of businesses/activities it could be involved in); and

o Doctrine of ultra vires

Doctrine of Ultra Vires

A registered company can only enter into a transaction that comes within its substantive objects, or is reasonably incidental to those objects.

o If not, the transaction is ultra vires = void (cannot later be ratified) (Ashbury Railway)

o Ashbury Railway : company formed to manufacture railway carriages had no power to construct a railway system

Substantive objects v Mere Powers

Substantive object : when constitution read as a whole, the object is capable of being pursued as an independent activity (an end in itself)

Mere power : when constitution read as a whole, the object could only be exercised in furtherance of, or as incidental to the substantive objects of the company.

o Eg. Ashbury Railway: substantive object “to make railway carriages”, a clause stating company could purchase land would be a mere power that could only be exercised in furtherance of making railway carriages.

Conclude – is the alleged transaction ultra vires (void) at common law? Here, the activity of … can be classified as causally connected with the object of …. Thus the activity will be ultra vires and void, and have no effect [or vice versa].

Conclusion on common law

Objects clauses would be drafted so widely so the Doctrine effectively frustrated and shareholders / creditors were not protected from misuse of company funds

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3.2 Corporations Act Effect of CA on doctrine of ultra vires

[Company] has all powers of an individual and body corporate (s 124(1)):s 124(1) Legal capacity and powers of a companyA company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to: (a) issue and cancel shares in the company; (b) issue debentures…;(c) grant options over unissued shares in the company; (d) distribute any of the company's property among the members, in kind or otherwise; (e) give security by charging uncalled capital; (f) grant a floating charge over the company's property; (g) arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction; (h) do anything that it is authorised to do by any other law (including a law of a foreign country).

The CA provides two ways in which power of a company can be restricted (ss 124 and 125):

o Objects clause in constitution (optional) (s 125(2)) NB. A constitution is optional and the RRs fill in any gaps (s 134); the RR operate

unless displaced by a constitution (s 135(2))

o Express prohibitions on the exercise of power in constitution (s 125(1)).

Effect of non-compliance : Such clauses are optional (except in the case of no liability companies (s 122(2)(b))) and where a company acts contrary to them there is no effect of invalidity on the company’s act (s 125). Therefore, the ultra vires doctrine is effectively abolished and the company cannot avoid liability.

Companies have unlimited power to do basic juristic acts (s 124(1)) - [ie. a company’s legal capacity is derived from statute, not from its own constitution]

o Eg. contract with third parties / deal with property etc

Do shareholders have any remedies? NA if employee!

No direct remedy under s 125 BUT do arguably do by virtue of:

o Breach of statutory contract : under s 140(1)(a) the company’s constitution (and/or RR) form a statutory contract between the shareholders and the company, shareholders can sue for breach of that contract if company acts outside the objects clause (ie. breaches the constitution)

BUT: members can only enforce what the constitution allows them to enforce; the breach must affect them as a member (eg. right to dividend)

Unlikely that a breach of objects clause will affect member in capacity as member

Would be seeking equitable injunction or declaration

o Application for winding up : under s 461(1)(k) – just and equitable grounds

Where there is a complete failure of the substratum of the company OR disappearance of the common intention of the members (ie. objects clause) (Re Tivoli Freeholds) very drastic remedy!

o Application for statutory injunction : under s 1324 for breach of acting honestly

Will have standing (Airpeak BHP v Vell cf Mesenberg )

o Breach of directors’ duty to act in good faith : under s 181

o Oppression / unfair conduct (s 232-234): court may grant relief under s 233 (s 232)

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Unlikely NB. Members will have standing (s 232(a))

Section 232 – Grounds for court orderThe court may make an order under s 233 if:

a) the conduct of a company's affairs; orb) an actual or proposed act or omission by or on behalf of a company; orc) a resolution, or a proposed resolution, of members or a class of members of a company;

is either:d) contrary to the interests of the members as a whole; ore) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members

whether in that capacity or in any other capacity.For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.Note: For affairs , see section 53.

Section 233 – Orders the court can make(1) The Court can make any order under this section that it considers appropriate in relation to the company, including an order:

a) that the company be wound up;b) that the company's existing constitution be modified or repealed;c) regulating the conduct of the company's affairs in the future;d) for the purchase of any shares by any member or person to whom a share in the company

has been transmitted by will or by operation of law;e) for the purchase of shares with an appropriate reduction of the company's share capital;f) for the company to institute, prosecute, defend or discontinue specified proceedings;g) authorising a member, or a person to whom a share in the company has been transmitted by

will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;

h) appointing a receiver or a receiver and manager of any or all of the company's property;i) restraining a person from engaging in specified conduct or from doing a specified act;j) requiring a person to do a specified act.

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4. ALTERATION OF CORPORATE CONSTITUTION

Can [party] alter [company’s] constitution and what is the validity of any changes?

4.1 Constitution as a variable contract

[Company] has wide power of altering its constitution (s 136(2))

Variable contract: as it binds even members who don’t vote in favour of the change (s 136(2))

Statutory contract: const is a statutory contract between (s 140(1)):o Company and each membero Company and each director and coseco A member and each other member

Can [company] contract out of statutory power of alternation?o No (Russell v Nth Bank)

o Agreement outside constitution between shareholders: if shareholders have a/ment as to how they will exercise voting rights on resolution to alter contract – not invalid (Russell)

4.2 Mechanics of alteration

Company can alter constitution by special resolution (s 136(2)); that is by resolution of at least 75% of members in general meeting (s 9)

Notice requirements re special resolution

Amount of notice:o At least 21 days’ notice of meeting must be given to members (s 249H(1));

o Or, if publicly listed company, at least 28 days’ notice must be given (s 294HA(1))

NB. If public company and alteration is made, ASIC must be notified of change within 14 days of alteration (s 136(5)) – either the day of special resolution or a date specified in the special resolution or date of court order… (s 137(a)-(b))

Content of notice: must set out (s 249(1)):

o Place, date, time of meeting

o Statement of general nature of meeting’s business

o Intention to propose special resolution, and state the resolution

NB. Constitution can provide for additional requirements which must be satisfied (s 136(3))

4.3 Limitations on power to alter corporate const & minority shareholder protection

4.3.1 CORPORATIONS ACT

Where a provision in const deals with ‘class rights’ a resolution to alter rights is subject to statutory limitations or minority shareholder protection (ss 246B & D)

o Class rights: ordinarily attached to classes of shares where company has share capital

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a) Pre-conditions for application of statutory limitations

All 3 pre-conditions must be met

1. Company has share capital consisting of ‘classes of shares’o Refers to category of shares in respect of rights, disabilities or something else which makes it

distinguishable from any other category of share (Clements Marshall – employee shares had different voting rights)

Eg. different voting rights, dividend rights, winding up rights etc

2. Rights attach to shareso Here, special rights attach to the class of shares by way of the constitution (Buckland v

Johnstone – in Buckland was the voting rights)

3. Variation or cancellation of class rights in proposed amendmentAt common law:o Meaning of variation: covers variations that affect strict legal rights attached to shares

(Buckland v Johnstone )

Where const is altered to change voting or dividend rights of a class of shares

Does not cover variation that as a matter of business affects the enjoyment of class rights or their commercial value

An issue of additional shares in once class, so that you have more shares in that class is not a variation of voting rights attached to the shares of other class/es even though its effect is to dilute relative voting power of shares in the other class/es

Under Corps Act:o Deeming provisions : certain actions taken by a company are deemed to be a variation of

rights attached to existing shares in the same class (s 246C)

If the rights attached to some of the shares in a class are varied (ie conferring rights on some but not all shares in particular class):

The variation is taken to vary the rights attached to every other share in that class before the variation; and the members who hold shares to which the same rights attached after the variation, form a separate class (s 246C(2))

If a comp issues new pref shares that rank equally with existing pref shares: Variation is taken to vary the rights attached to existing pref shares unless issue is

authorised by comp’s const or by terms of existing pref shares (s 246C(6))

Preference share : typically have certain rights:

o To div: normally have right to fixed div, eg. 20c per share per yr – right is in priority to ord shares provided a div is declared by the comp and requirements in s 254 are met

o To receive return in share cap in priority to ord shares on winding up

o No right to surplus asset share / no right to vote, unless divs are in arrears OR voting at a class meeting on matters that affect their class rights

Conclude

If all preconditions met: Here, all 3 preconditions have been met so the rights of the class have been varied. continue to next page

If all preconditions not met: Here, as the preconditions are not satisfied, the alteration is not varying class rights, and comp would not have to comply with any constitutional procedure for altering class rights, so amendment would be valid.

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b) (i) Limitation / protection where Comp’s const sets out procedure for varying class rights

[Comp] must comply with [procedure in constitution] to vary class rights (s 246B(1)). If this is not complied with, the variation will be invalid (Buckland v Johnstone)

Minority shareholder remedies where procedure not complied with:o Equitable injunction to prevent breach of statutory contract (s 140(1))

o Statutory injunction to prevent contravention of s 246B (s 1324)

o If variation already occurred: declaration of invalidity from court under gen law (Buckland v Johnstone)

o If variation amounts to unfair conduct: court has wide discretion to make orders on application of a member (ss 232-234)

(ii) Limitation / protection where Comp’s const does NOT set out procedure for varying rights

As [Comp] has no procedure in const, to vary class rights a special resolution must be passed at a meeting with written consent of members with at least 75% of votes in the class (s 246B(2))

(iii) Limitation / protection of Court app where variation is without unanimous support of class

Standing: minority of members with at least 10% of votes in the class may apply to court have the alteration set aside (s 246D(1))

o Court may order the alteration be set aside where satisfied the alteration would unfairly prejudice the applications (s 246D(5))

NB. Must be prejudice and app must be made within 1 month of variation (s 246D)

4.3.2 GENERAL LAW NB. Fraud on the minority

a) Limitation on alteration of const arising from Equitable limitation on majority voting power

Not based on fiduciary principle: as shareholders do not stand in a fiduciary position to other shareholders or to company (Peters v Heath; Ngurli v McCann)

o Therefore, not affected by the equitable conflict of duty and interest rule!

Refers to doctrine of fraud on the minority:

o Fraud: does not necessarily mean dishonest conduct; may merely be abuse of power

o Abuse of power: means power exercised for a purpose outside scope of majority’s voting power re purposes of company contemplated by constitution (Peters v Heath)

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“There are two types of “fraud on the power” amendments involving a conflict of interest between majority and minority shareholders…”


a) (i) Type 1 Amendment

Amendments to allow expropriation of shares or valuable proprietary rights attaching to shares

Test of validity: two limbs:

1. Proper purpose : An alteration will be for a proper purpose if its substantial purpose is to secure

company from significant detriment or harm (Gambotto v WCP) – eg:

Where minority shareholder competing with company

Where necessary to ensure compliance with a regulatory regime

Not proper purpose : an alteration will not be for a proper purpose if it is to:

Advance company as legal / commercial entity or of majority of members as this is the equivalent of permitting expropriation by the majority for the purpose some personal gain

2. Absence of oppression (ie. must be fairness in all the circumstances): will depend on:

Procedural fairness :

Majority shareholders must disclose all relevant info

Shares to be expropriated (taken) must be valued by an indpt expert Substantive fairness :

Terms of the expropriation must be fair, largely concerned with the price offered for the shares

o Eg. Expropriation at low market value is prima facie unfair, although one substantially above market value would not be prima facie fair

o Fairness of price cannot be assessed solely on current market value, depends on factors like assets, earnings, dividends, nature of company and future prospects

Onus of proof: on the majority

a) (ii) Type 2 Amendment

Amendments giving rise to other conflicts of interest between majority and minority

Test for validity: two limbs

1. Company purpose : Has to be for a company purpose – refers to equitable doctrine of fraud on minority

2. Not oppressive of minority : Cannot be oppressive of minority –same meaning of unfair conduct in CA (ss 232-234)

– objective test

Test is whether majority has passed a resolution that no body of reasonable persons could suppose was within scope of majority power having regard to purposes of company: Peters v Heath

The test is not what is bona fide for the benefit of the whole company (Gambotto)

Onus of proof: minority has onus of showing the alteration is invalid (Peters v Heath)

Eg. Amendment that all director expenses to be approved by shareholders in GM

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Buckland Pty Ltd v Johnstone The constitution of B Pty Ltd provided for the issue of A, B, and C shares . Certain rights privileges and

restrictions were attached to these shares. The A and B shares were issued to Mr B and Mrs B respectively but on their divorce Mrs B transferred her

shares to Mr B. The C shares were issued half each to the children of the B’s one of whom was J. Originally, the C shares held no voting rights until after the death of Mr B or Mrs B. Subsequently, however, a

special resolution was passed at a general meeting of B Pty Ltd which purported to alter its constitution by deferring or postponing the voting rights of the C shares until the death of both Mr & Mrs B.

The constitution of B Pty Ltd contained a procedure for the variation of class rights. This required a special resolution to be passed by the class of shareholders whose rights were to be varied in favour of the variation or alteration.

Mr B then died. J commenced an action to ascertain her rights whilst Mrs B was still living.Held: There were clearly classes of shares, voting rights were deferred until after death, previously ontil until death

or either or, not BOTH All 3 preconditions for application of statutory limitations were met Non-compliance with prescribed procedure Court made declaration that amendment of constitution invalid

Gambotto v WCP Ltd1. IEL Ltd (majority shareholder) held 99.7% of the issued share capital in WCP Ltd.2. IEL sought to alter WCP’s constitution to compulsorily acquire the minority shareholdings in WCP. The

amendment purported to give any shareholder entitled to more than 90% of the total issued share capital of the company power to compulsorily acquire any shares held by the other members. IEL Ltd proposed to compulsorily acquire at $1.80 per share where a formal valuation by an independent expert valued those shares at $1.36 per share.

3. IEL sought to acquire 100% of WCP in order to save administrative costs ( benefit to the company) and take advantage of grouping its significant tax losses with WCP’s expected profits. ( benefit to majority shareholder)

4. Gambotto and another minority shareholder did not wish to sell their shares. They commenced proceedings to prevent IEL from altering the constitution on the basis that the alteration was invalid. The majority shareholder did not vote on the resolution although it indicated to minority shareholders that it intended to vote if necessary. The remainder of the minority shareholders all voted in favour of the alteration at the general meeting and the resolution was passed unanimously.

Held Where alteration of constitution involved expropriation of shares owned by the minority will only be valid if

majority proved it was for a proper purpose and fair in all circumstances Expropriation for tax and admin purposes for majority was not a proper purpose and the alteration was invalid Expropriation would be valid if it prevented the company from suffering significant detriment or harm

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5. EFFECT OF CONSTITUTION AND REPLACEABLE RULES

5.1 Corps Act

Effect of constitution and replaceable rules (s 140)o A company’s constitution (and any RR) have effect as a contact between the company and

each member; the company and each director and company secretary; and between a member and each other member (s 140; Lion Nathan v Coopers)

o This has the ability to provide minority shareholder protection:

Provides a method for parties to statutory contract to enforce compliance with the comp’s const or RRs

SO: member can enforce against company where the const/RRs infer rights on the members in their capacity as a member

Eg. Enables members to enforce against comp payment of any dividends declared (Wood v Odessa)

Comp’s business : It does not mean shareholders have right to have comp’s business conducted in accordance with const (Stenham’s Case – that’s the internal m/ment of comp)

Act or omission is a wrong to company alone : doubtful whether members will have standing to sue (Smolarek)

5.2 Remedies

Declaration / equitable injunction to enforce compliance

Damages generally not available where claim bought by member against company (Houdsworth)

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MOD 4: CORPORATE PERSONALITY

PRINCIPLE OF VEIL OF INCORPORATION

Once a company is registered, it becomes a separate legal entity distinct from its directors and members (Saloman v Saloman); it will have all the powers of an individual and specific powers of a corporate body (s 124)

Note : especially power of an individual to sue and be sued, and to acquire, hold and dispose of property

Look out for :

o Related companies: Related companies are treated as separate legal entities unless legislation provides otherwise (Industrial Equity v Blackburn). Here…

o Company property: What is owned by the company is not owned by the shareholders (Macaura v Northern Assurance). Here…

o Company debtor/creditor of member or director: A company can be a debtor or creditor of a member or director (Salomon v Salomon). Here…

o Company commits offence: A company can commit an offence (Hamilton). Here…

o Company contracts with member: A company can contract with its own members (Lee v Lee’s Air Farming). Here…

o Company liable to member: A company can be liable in tort to a member (Lee v Lee’s Air Farming). Here…

o Director’s duties: directors only owe duties to the company of which they are a director (not to holding/subsidiary companies) (Walker)

Therefore, [company] is prima facie separate from [3rd party / director etc.] and thus [3rd party / director] is not liable for ________ unless an exception applies, that is [comp] is responsible.

Member’s Liability on Winding Up: Limited liability: Limited liability of shareholders for the debts and obligations of the company

follows from its separate legal status with s 112.

IF limited by shares: Members are not liable for company’s debts on winding up, only liable for the amount (if any) unpaid on the shares (s 516). Here…

IF limited by guarantee: Members are only liable for the amount guaranteed on winding up (s 117). Here…

EXCEPTIONS

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Exceptions – Lifting the Corporate Veil

Statutory

If director: A director will be personally liable for debts incurred by the company where:

o [Trustee] he/she is acting as trustee, for liabilities incurred, for which the company is not entitled to be indemnified by trust assets (s 197)

o [Company insolvent] debt was incurred when reasonable grounds for suspecting the company was insolvent; the director will be liable for loss/damage of unsecured creditors in relation to debts incurred (s 588G-U)

and also…o Liability of holding company for permitting a subsidiary company to trade while insolvent:

s588V CAo Liability of directors for debts incurred by body corporate acting as a trustee: s197 CAo Uncommercial Transactions: s588FB CA

The veil will be lifted for the purpose of treating corporate insiders (directors and related) differently from others who have dealings with the company. Designed to ensure directors do not gain preferential treatment at the expense of creditors

o Charging Company Officers: s267 CA Company officers who lend their company funds secured by a charge over its assets

are treated differently from arm’s length secured creditors.o Liability for Financial Assistance: s260A, 260D CA.

Pierced the veil to ensure that officers liable for civil penalties who were involved in their company’s contraventions of the CA.

Common Law

The courts will lift the corporate veil where the notion of the separate legal entity is used to defeat public convenience, justify a wrong, protect fraud or defend crime (Briggs v James Hardie)

Specific examples:

Fraud: Where a company is used as a cloak for fraud (Jones v Lipman). Here…

Evading legal obligation: Where a company is set up for the sole or dominant purpose of evading a legal obligation, a mere cloak or sham (Gildord Motor v Horne). Here…

Subsidiary acting as agent: Where a subsidiary is acting as agent of a holding company, the companies can be treated as one (Smith Stone). Here, if [subsidiary] is found to be acting as agent for [company], the veil will be lifted.

May need to look at s 46 (also see Smith Stone test below):

A body corporate is a subsidiary of another body corporate if:

the other body:

i. controls the composition of the first body’s board; or

ii. is in a position to cast or control the casting of more than ½ the max number of votes at a general meeting of the first body; or

iii. holds more than one half of the issued share capital of the first body; or

b) is a subsidiary of a subsidiary of the first body (s 46)

o Company knowingly involved in director’s breach of duty (Green v Bestobel)

Note: if commercial purpose for separate companies:

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The veil will not be lifted it is appears the entities are being used for separate functions for a good commercial purpose (ie. Each company in group performs separate function) (Pioneer Concrete – endorsed Smith Stone)

Cases

Salomon v Salomon – corporate veil principleFacts: Salomon owned business, whilst insolvent he sold the business to a company which himself and his family owned. He sold business at inflated figure taking shares and debentures. When the company fell into financial trouble Salomon assigned his dentures to B as security but reserved his reversionary interest. When the company failed and B was paid Salomon claimed his debt to be discharged. Other creditors claimed fraud.

Held: Court dismissed fraud confirming above mentioned principles.

Lee v Lee’s Air Farming – company contracts with member / is liable to memberFacts: Husband was director and shareholder of company, died in employment, widow claimed compensation.

Held: Company could enter into employment contract with husband – because company was a separate legal entity distinct from its founder.

Industrial Equity Limited v Blackburn A group of companies which Industrial Equity was the holding company of disclosed sufficient profits

from which a dividend could be paid The profits were made by the subsidiaries, and Industrial Equity asserted they could pay the

dividends from these profitsHeld Each company within a group is separate legal entity Just because the group’s accounting requirements treated teh group as a single entity, did not mean

the corporate veil could be lifted for other purposes.

Macaura v Northern Assurance Co Macaura owned land on which he sold timber, until he sold the land and timber to a company he

formed and was paid all the fully paid shares A fire destroyed the timber, and the insurance policy was still in Macaura’s own name, and had not

been transferred to the company Insurance company refused to pay citing that only persons with a legal or equitable interest in

property are regarded as having an insurable interestHeld Court agreed with insurance company that only the owner of the timber had the insurable interest Shareholders, have no legal or equitable interest in their company’s property

Pioneer Concrete Services Ltd v Yelnah An agreement between 3 independent parties One of the parties had subsidiaries that was meant to act in the best interest of Pioneer concrete The holding company entered into a contract with Yelnah in breach of the agreementHeld The holding company was not a party to the clause of the agreement, rather it was an undertaking

given by its subsidiary and the two were separate entities

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Smith Stone v Birmingham – piercing corporate veil, subsidiary acting as agentFacts: Holding company controlled all shares in subsidiary. Subsidiary had no staff or separate books of account. When subsidiary’s premises compulsorily acquired by council, holding company bought action for loss of business. Council argued that holding company had no standing as subsidiary was a separate legal entity.

Held: Subsidiary was carrying on the business of the holding company and compensation was awarded.

IF RELEVANT: Is [subsidiary company] a subsidiary of [holding company]?

Atkinson J applied 6 criteria necessary for the corporate veil to be lifted on the basis of an agency relationship:

1. Who was really carrying on the business?Yes. Profits of the [subsidiary] were treated as the profits of [holding], as shown by _____. profits treated as holding company’s: Smith Stone books and accounts together: Smith Stone subsidiary had no staff: Smith Stone no separate pay or superannuation arrangements: Adams v Cape Industries Q Does subsidiary enter into contracts in it’s own name?

2. Were the persons conducting the business appointed by the parent company?Yes. [Holding] controls the appointment of the [subsidiary]’s board of directors, by _____. all shares owned by holding: Smith Stone

3. Was the parent company the head and the brain of the trading venture?Yes. [Holding] was the head and brain of the trading venture, as shown by _____. Q Are day to day functions controlled by holding company?

4. Did the parent company govern the venture, decide what should be done and what capital should be embarked on the venture?

Yes. [Holding] made all decisions relating to capital expenditure, as shown by _____. undercapitalised subsidiary: Re FG Films Q Decisions referred to holding company?

5. Did the company make its profits by its skill and direction?Yes. All profits were made by [holding]’s skill and direction, as shown by ____.

6. Was the company in effectual and constant control?Yes. [Holding] was in constant and effective control of [subsidiary].

This agency exception has been accepted in Australia (Pioneer Concrete) and whilst the criteria is unclear (Briggs v James Hardie) the criteria was accepted by Sheppard J in Spreag v Paeson. Here [holding] will likely be found to have exercised complete control or dominion over [subsidiary], and the corporate veil will be lifted.

IF TORT action: However Rogers AJA held in Briggs v James Hardie that in a tort action (personal liability) different criteria would apply.

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MOD 5: CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

The systems and philosophy by which a corporation is governed

o including accounting, management, finance, organisational behaviour, legal rules

Legal rules and corporate governance: relevant legal rules in this context include:

o Constitutional division of power between BoD and GM of shareholders;

o Director’s duties to company

o Shareholder rights and remedies

o Others: meeting procedures, reporting requirements, Corps Act, ASX listing rules etc

Good corporate governance: manager controlling a company in ways that protect interests of all stakeholders – illustrations:

o Compliance with legal rules relating to management of company

o Annual reports of listed companies to disclose extent to which they have followed ASX Corp Gov principles

Recommendations: ASX Listing Rule 4.10.3:

majority of BoD should be non-exec directors, indpt of management (rec 2.1)

code of conduct for directors should be established to provide suitable ethical standards for the BoD (rec 3.1)

1. DIRECTORS ~ Is [person] a director?

1.1 Definition of director and officer

Director : means (s 9):

a) a person who:

i. is appointed to the position of a directorii. is appointed to the position of an alternate director and is acting in that capacity;

regardless of the name that is given to their position

b) unless the contrary intention appears, a person who is not validly appointed as a director if:i. they act in the position of a director; or orii. the directors of the company or body are accustomed to act in accordance with the

person’s instructions or wishes

NB. (b) = deeming provision

o (b)(i): covers de facto directors – eg. a person who resigns but continues to exercise top level management functions (DCT v Austin; Natcomp)

o (b)(ii): covers shadow directors – eg. holding company may be a shadown director of a subsidiary company (Standard Chartered v Antico)

DCT v AustinMadgwick J held that it is not practicable to formulate a general statement as to what constitutes acting as a director as it often involves a question of degree requiring a consideration of the duties performed in the context of the operations and circumstances of the company. However a necessary condition of acting as a director is that the person exercised top level management functions.

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Officer : means (s 9):

a) a director or secretary; or

b) a person:

i. who makes or participates in making decisions that affect the whole or substantial part of the business of the company; or

ii. who has the capacity to affect significantly the comp’s financial standing; or

c) a receiver, administrator, liquidator etc (paras (c) – (g))

o (b)(i): director of a holding company but not of a subsidiary still held to be an officer of subsidiary where acting in a management capacity re subsidiary (ASIC v Adler)

1.2 Eligibility and disqualification of persons to act as directors

Eligibility: persons who are not eligible to act as directors include:

o persons under 18 (s 201B(1))

o corporation (but NB. Can be deemed to be a director)

o ineligible persons – persons disqualified from management (Part 2D.6)

Disqualification: persons who are disqualified from acting as directors include:

o undischarged bankrupts (automatic disqualification)

o persons convicted of offences relating to management of a company (automatic disqualification (s 206B(1)) – see Hill 5A for more info

o Court has power of disqualification on application by ASIC (s 206C-E)

o ASIC has power of disqualification for up to 5 years under s 206F(1)

Policy of disqualification provisions: to protect creditors and the public by keeping out those who are likely to re-offence; not designed to be punitive (Chew v NCSC)

1.3 Appointment of directors

Required number:

Minimum:

o Pty company – 1 (s 201A(1) – and must ordinarily reside in Aus)

o Public company – 3 (s 201A(2) – and must ordinary reside in Aus)

Maximum : no max limit in CA; Constitution will usually deal with it

Appointment of first directors:

Appointed on registration where names and particulars were specified in application to register the company (ss 117(2), 120(1); Form 201)

o Consent forms must be attached (s 175(5))

Later appointment of directors:

Generally appointed by ordinary resolution of members in general meeting (s 201G – RR)

Casual vacancy : if a resignation results in a casual vacancy, the position can be filled by BoD’s choosing, subject to confirmation by members in GM (s 201H)

o Pty company : confirmation by GM within 2 months of appointment (s 201H(2))

o Public company : confirmation by next AGM (s 201H(3))

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1.4 Types of directors

Managing director Appointment permitted by BoD under RR (s 201J) or constitution Appointed under service agreement prescribing eg. remuneration, powers

Will be a director AND officer of the company (subject to duties in ss 180-183) Main function: to manage daily business of company

o Can be delegated any of the powers of the board (s 198C(1))

o Can have powers revoked by the board (s 198C(2))

Important matters reserved for BoD:o Dividend declaration; share issues (Shirlaw v Southern Foundries)

Governing director Appointment permitted under const of small family pty company which has several directors Granted broad powers for absolute control of comp’s business (Whitehouse v Carlton) – all powers

normally invested in the board

Executive directors Are not independent Full time employees under service contracts who carry out daily management of company (eg. MD;

Director of Finance)

Non-executive directors Not involved in day to day running of company; attend board meetings for a set fee Bring an independent view to board meetings

Chair of directors Appointed by other directors (s 248E – RR)

Exercises important governance functions – should ensure board is properly informed, is familiar with financial background of company, is properly meeting supervisory duties (ASIC v Rich)

Has casting vote if necessary in addition to vote they have in capacity as director (s 248G – RR) – but can be precluded from voting if, eg, conflict of interest (s 248G)

Must sign the minutes (s 251A(2))

Committee of directors BoD can delegate any of their powers to committee or directors, unless const provides otherwise

(s 198D(1))

o Effect of delegation - exercise of power is same as if directors were exercising it (s 198D(3))

o Purpose of delegation – to carry out particular management function

Alternate director When director is unable to attend board meetings due to, eg, illness – can appoint an alternate

Appointed with approval of other directors (s 201K – RR) Effect – exercise of power is as effective as if exercised by director

Alternate directors have the same duties of normal directors (Markwell Bros), however they only have the powers, rights and duties of a director when they’re acting in the place of a director (Strathmore Group)

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1.5 Vacation of office

Removal of director

Pty company – by resolution, and by resolution may appoint another person as director instead (s 203C)

Public company – by resolution, despite anything in constitution (s 203D)

o Directors cannot be removed by other directors (s 203E)

Disqualification

A person ceases to be a director if they become disqualified from managing corporations under Part 2D.6 (s 203B; s 206A(2))

Resignation by director

A director may resign by giving written notice of resignation to the company at its registered office (s 203A – RR)

2. POWERS OF DIRECTORS

2.1 Division of powers between BoD and members in GM

Normal division of powers: All management powers vested in BoD except for those reserved for members in GM (by CA or in const) (s 198A – RR)

2.2 Extent of powers of directors

Effect of directors acting within their powers: they can act against wishes of majority shareholders (Howard Smith v Ampol)

o Majority shareholders have power to remove directors – see above

2.3 Powers of general meeting

Powers given to members in general meeting include:

o Removal of directors (s 203C, D)

o Amending constitution (s 136(2))

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MOD 5A: DIRECTORS DUTIES - GENERAL

1. DIRECTOR AS A FIDUCIARY

Directors are fiduciaries as they are in a position of trust and confidence regarding the company (Hospital Products v USSC; Mills v Mills)

2. CLASSIFICATION OF DIRECTOR’S DUTIES

Directors owe duties under the general law and CA

Equitable duties include:o Duty to act bona fide in interests of company (5B)

o Duty to act for a proper purpose (5C)

o Duty to avoid conflicts of interest (5D)

Statutory duties include (ss 181-183):o Good faith – civil (s 181)

o Use of position – civil (s 182)

o Use of information – civil (s 183)

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MOD 5B: DUTY TO ACT BONA FIDE IN BEST INTERESTS OF COMP

Has [director] breached a duty to [company] in [exercising whatever power]?

1. NATURE OF THE DUTY

Courts are reluctant to review business judgments of directors and substitute their own judgments on merits unless there is a breach of duty or it is required by statute (Harlowe’s Nominees)

1.1 Duty owed

Directors are under a duty to act bona fide, that is in good faith in the best interests of the company as a whole (ASIC v Whitlam)

The duty is a subjective duty of honesty or good faith (Whitehouse; Walker v Wimborne )

1.2 Has the duty been breached?

General subjective test

The duty is breached when directors fail subjectively to give proper consideration to the company’s interests give proper consideration to company’s interests (Whitehouse). Here…

o A proper purpose may be the dominant purpose of exercise of power but if the power would not have been exercised but for an improper purpose – there will be a breach of the subjective element (Whitehouse; Darvall v North Sydney Brick)

o Walker: directors assumed the company’s interests corresponded with their own – therefore they were not considering company’s interests as a separate entity = breach of duty

Qualification – objective standard

Duty imports objective standard: There has been a move to an objective standard in addition to the subjective test:

o whether an intelligent and honest person in [director’s] position could in all the circumstances reasonably believe that the transaction is for the benefit of [company] (Charterbridge; ASIC v Adler; Farrow Finance)

Here…

There will not be a breach: where directors fail to consider the company’s interests but the transaction is for the benefit of the company (ie. fail subjective test, but pass objective test)

There will be a breach: where directors subjectively consider the company’s interests but objectively expend company’s money irrationally (ie. pass subjective test but fail objective test)

Onus

On persons alleging a breach of duty

1.3 What are the “interests of the company”

Means the interests of shareholders as a collective group (Greenhalgh), not individual shareholders or company as a commercial entity (Percival v Wright)

If company insolvent: the interests of creditors will prevail if the company is insolvent or a real risk of insolvency (Kinsela)

o Directors do no owe an independent duty to creditors like they do to shareholders as a group (Spies v The Queen)

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2. REMEDIES FOR BREACH OF DUTY If there is a breach, [director’s] act is voidable at instance of [company].

Other remedies:o Statutory derivative action (s 236)o Injunction (s 1324)o Oppression (individual shareholder right to pursue) (s 232)

3. CORPORATIONS ACTS 181 (1) A director or other officer of a corporation must exercise their powers…:

(a) in good faith in the best interests of the corporation; and

(b) for a proper purpose.

3.1 Relationship between statutory and common law duty Basically mirrors common law

The statutory duty has effect in addition to the common law (s 185)

3.2 Consequences of breach of s 181(a)

Only ASIC can seek relief as s 181(1) is a civil penalty provision (s 1317E(1)(a))

Court may:

o make declaration of contravention under s 1317E(1)(a)), then ASIC can seek pecuniary penalty order under s 1317G (s 1317E)

o make compensation order under s 1317H

Criminal offence: if reckless / intentionally dishonest (s 184(1))

Whitehouse v Carlton Hotel Pty Ltd Carlton Hotel was a family company controlled by the father who was its governing director, and had the sole

power to issue shares There were 3 classes of shares: A (the father held), B (his wife) and C (2 sons and 4 daughters), and only A

class shares had voting rights while the father was alive. When the family divorced, the daughters sided with mother, and sons with father To prevent losing control, the father issued B class shares to his son, and some time later sought to annul the

allotmentHeld The allotment was invalid as a result of the governing director’s breach of duty Father was motivated by purely selfish considerations, in the hope that after his death the company would be

controlled by those who he favoured Interestingly the decision to invalidate the share issued was advantageous to the director who issued them and

changed his mindNB. Objective test not around when Whitehouse decided

Kinsela v Russell Kinsela Coy (funeral director’s business) in financially precarious position Coy was insolvent, but directors not sure of that Entered into lease for premises it owned and ran business out of for 3 years w possible extension for 3 years

and an option to purchase Lessees were Mr and Mrs Kinsela – directors of coy Lease approved by shareholders who were all Kinsela family membersHeld by Street CJ

The lease was voidable at the instance of the coy Director’s duties to coy included not prejudicing creditor’s interests when coy is nearing insolvency Liquidator was able to request that lease be avoided

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MOD 5C: DUTY TO EXERCISE POWERS FOR PROPER PURPOSE

Has [director] exercised their power for a proper purpose?


1.1 Duty owed

Directors must exercise their powers for a proper purpose; they cannot be exercised for any purpose foreign to the power or to obtain some private advantage (Mills v Mills)

Here, [director] has exercised their power by [what they did] for the purpose of [why they did it].


Onus: on plaintiff to establish there was an improper exercise of power (Ascot Investments)

Test for determining breach (in the context of power to issue shares): 2 step objective test (Howard Smith v Ampol)

1. What are the purposes for which power may be exercised by directors?

2. Why was the power exercised by the directors?

Step 1: What are the purposes for which power may be exercised?

Question of law

Proper purpose (re power to issue shares – must be done in interests of company as a whole):

o Raising of capital (Howard Smith)

o Take advantage of a genuine commercially favourable opportunity (Pine Vale)

o Secure financial security of company (Harlowe’s Nominees)

Improper purpose : o Reducing shareholders to a minority position (Howard Smith)

Step 2: Why was the power exercised?

Objective question of fact (Howard Smith)

o Eg. directors may say something, but balance sheet shows otherwise – question of fact!

Perception of directors determines the purpose (rather than objective commercial justification) (Re Southern Resources)

Multiple purposes : if there are multiple purposes, “but for” test is used:

o If but for the improper purpose, the power would not have been exercised, the act (issue of shares) will be invalidated (Whitehouse)

Regardless of whether the improper purpose is dominant or merely one of a number of significant contributing causes, the issue of shares will be invalidated if the improper purpose is causative (Whitehouse)

Directors will argue some other motivating reason

2. REMEDIES

If there is a breach, [director’s] act is voidable at instance of [company].

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3. CORPORATIONS ACTS 181 (1) A director or other officer of a corporation must exercise their powers…:

(b) for a proper purpose.

3.1 Relationship between statutory and common law duty

Basically mirrors common law

The statutory duty has effect in addition to the common law (s 185)

3.2 Consequences of breach of s 181(b) Only ASIC can seek relief as s 181(1) is a civil penalty provision (s 1317E(1)(a))

Court may:




If the need for shares is finance based, the court will consider a variety of factors: IF defending hostile takeover bidHere, similar to Howard Smith, they sought to increase share numbers to defend a takeover bid. While it was conceded that capital was needed, no other means was sought, and it was held that, but for, the takeover, the share issue would not have happened. This is not considered an improper purpose if designed to maximise the value of members’ shares or advance the commercial interests of the company. IF no other sources of finance have been soughtHere, [directors] have not pursued any other means of raising capital, such as loan capital or selling assets. This would indicate that but for the improper purpose the shares would not have been issued: Howard Smith. IF other sources of capital pursedHere, [directors] have pursued other means of raising capital, such as loan capital or selling assets. This evidences that the financial factor was main reason behind the share issue, and the issuing would have occurred even without the effects on the majority voting control: Howard Smith. IF amount of share issue greater than 15%Here, the share issue is more than 15% which requires a resolution of support from members in the general meeting: ASX Listing Rules. Therefore, if the majority members were in danger of losing their majority, they would vote against such a proposal. IF Directors support the MajorityHere, it will be relevant that the directors support the majority voting power. This shows an intention to carry out the issuing despite the affect on the majority power.

Whitehouse v Carlton Hotel Pty Ltd Carlton Hotel was a family company controlled by the father who was its governing director, and had the sole power to

issue shares There were 3 classes of shares: A (the father held), B (his wife) and C (2 sons and 4 daughters), and only A class shares

had voting rights while the father was alive. When the family divorced, the daughters sided with mother, and sons with father To prevent losing control, the father issued B class shares to his son, and some time later sought to annul the allotmentHeld The allotment was invalid as a result of the governing director’s breach of duty Father was motivated by purely selfish considerations, in the hope that after his death the company would be controlled by

those who he favoured Interestingly the decision to invalidate the share issued was advantageous to the director who issued them and changed his

mind

Howard Smith Ltd v Ampol Petroleum Ltd A takeover of R W Mill (Holdings) Ltd, whose major shareholders (Ampol and Bulkships) owned 55% of the capital The 2 independent shareholders pooled their votes to make a joint takeover bid Howard Smith made a higher takeover bid and to ensure it succeed Miller issued sufficient shares to reduce Ampol-

Bulkships majorityHeld Miller had breached their duty and the share issued to Howard Smith was invalidated Directors were motivated to reduce the combined majority shareholding, and this was invalid.

MOD 5D: DUTY TO AVOID CONFLICTS OF INTEREST

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Has [director] breached the duty to [comp] to avoid a conflict of interest?

1. GENERAL LAW

General principle: [Director] must not place himself in a position where his duty to [company] conflicts with his own personal interests or a reasonable person would think there is a real possibility of such a conflict (Aberdeen Railway; Boardman v Phipps; Qld Mines)

o …unless there is fully informed consent of members in GM

The Rules: rules provide content to this general equitable duty

o Misuse rule (profit rule)

o Conflict rule

Corps Act: ss 181-186; 191-195

2. MISUSE RULE Rule: [Director] must account to [company] for any benefit or gain received by use or reason of his

position or of an opportunity ot knowledge resulting from it (Chan v Zachariah; Furs v Tomkies)

o … unless there is fully informed consent of members in GM

2.1 Elements To establish the rule, must show (Regal Hastings v Gulliver)

o act of director relates to affairs of company (that is, done in course of management and in utilisation of opportunities and special knowledge of director;

o act of directors results in personal profit; and

o company does not give fully informed consent.

E1: Act of director relates to affairs of company

The rule will not be breached if the opportunity falls outside the scope of trust and agency created by the relationship of director and company (Qld Mines)

There must be a sufficient temporal (time) and causal connection, relevant factors include (SEA Food v Lam):o circumstances of opportunityo nature of opportunityo nature and extent of company’s operationso anticipated future operations

Specific examples:o IF opportunity came to director by virtue of that office

Here there is a strong argument that the opportunity came about as a result of [director’s] position in [company], which would be a breach of their duty: Furs Ltd v Tomkies

o IF company has already considered opportunityHere the opportunity has previously been contemplated and rejected by [company]. Similar to Qld Mines v Hudson here it is likely that this will be favourable to director.

o IF company was unable to pursue the opportunityHere [Director] would argue [company] was not in the position to take advantage of the opportunity therefore the opportunity was beyond his fiduciary obligation. In Regal Hastings the court held that it does not matter that the company cannot pursue opportunity as to allow this argument would provide temptation for directors not to exercise their best efforts in their capacity. However this position may be relaxing in Australia: Per Deane J in Chan v Zacharia.

o IF director learned of opportunity in his personal/private capacity

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Here [director] would argue that there is an insufficient nexus as he gained the opportunity in his private capacity rather than in his capacity as a director of [company]. Providing [director] can prove this, there is a good chance the court will accept the argument: Lord Russel in Regal.

o If took the opportunity before becoming directorThe facts here resemble those in SEA Food International v Lam as the business opportunity arose before [director] was a director. In SEA the court held that an opportunity prior to the director being appointed was not in his capacity as director, however the court did note the future anticipated operations may be a relevant consideration. Therefore the court would examine [director’s] knowledge of him becoming a director and the anticipated future operations of [company] at that time.

o IF company not involved in that area at the timeHere [director] would be seeking to relying on the fact [coy] was not involved in the business area at the relevant time. In SEA Food International v Lam noted that the future anticipated operations may be a relevant consideration to whether there has been a conflict. In the present case [talk about likelihood of coy pursuing that business opportunity].

o Argument put forward by director that the transaction was fairHere [director] should attempt to argue that the transaction was fair by the company. Although not currently an established excuse: Regal; Parker v McKenna there does appear to be a shifting judicial attitude to a position in favour of such an argument: by analogy with Furs Ltd v Tomkies; Mills v Mills.

E2: Act of director results in personal profit

The rule will not be breached if a third party makes the profit (Regal Hastings)

o An issue of shares in a new company = personal profit (Furs v Tomkies)

E3: No fully informed consent

Looking at consent of members in general meeting after full and fair disclosure (Furs v Tomkies; Regal Hastins cf Qld Mines)

Qualification: comp’s const may leave it to the BoD to take/leave opportunity – no breach of misuse rule where bona fide resolution of directors after full and fair disclosure (Fexuto v Bosnjak)

If director is majority shareholder: [director] may be saved by fact he is a majority shareholder (Qld Mines = informal acceptance by members, but in the case shareholders were also directors)

2.2 Strictness of Misuse Rule

Strictly applies – where director breaches the fiduciary duty they cannot avoid liability by proving the company did not suffer any loss or that the transaction was fair to the company (Regal Hastings; Furs v Tomkies)

Where profit not available to company: it is no answer to breach of duty that profit made is of a kind the company could not have exploted for itself (eg. for financial capacity reasons) (Gemstone; Warman cf Chan v Zachariah)

2.3 Remedies

Account of profits (Regal Hastings)

Constructive trust over certain property

Equitable compensation where breach causes loss to company (Tavistock Holdings)

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2.4 Corporations Act

Misuse of position – s 182

S 182 (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

S 182 Elements : 1. [Def] was, at relevant time, a director of [company]; 2. [Def] made improper use of his position;

3. [Def] did this to gain an advantage (or cause detriment to comp);

4. Advantage was for himself or for some other person (NB. common law – can’t be for third party but can under CA)

Use of information – s 183

S 183 (1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

S 183 Elements :1. [Def] was, at relevant time, a director of [company]; 2. [Def] acquired relevant information, by virtue of position as director of [comp];

3. [Def] made improper use of information, to gain an advantage (or cause detriment);

4. Advantage was for himself or for some other person (NB. common law – can’t be for third party but can under CA)

Meaning of common terms

“improper use of” position or information:o Objective test : consists of a breach of standards of conduct that would be expected of a

director by reasonable persons with knowledge of duties, powers and authority of a director and the circumstances of the case (R v Byrnes)

Refers to directors abusing their powers or breaching their duties – covers directors exceeding their authority (covers agency)

o Director’s state of knowledge or purpose may also be relevant (R v Byrnes; R v Towey)

o The fact that the benefit received by director is reasonable does not prevent finding that he has made improper use of his position (Cummings v Claremont)

“to gain an advantage for themselves or someone else or to cause detriment to company”: o A breach can be proved by showing improper use for the purpose of gaining an advantage or

causing detriment without having to show the advantage was in fact gained, or detriment was in fact caused (Chew v R)

o Provisions are narrower than general fiduciary duty as proof of purpose is not necessary under common law but is under CA

But wider in sense that they apply to third parties

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Consequences of breach of s 182 or 183

Only ASIC can seek relief as civil penalty provisions (s 1317E(1)(a))

Court may:




Furs v Tomkies Furs manufactured fur coats – involved part tanning, drying and dressing skins FD&D sought to buy this part of the business for sale price of £8500 for P&E and £5500 for secret formula T, MD of Furs, conducted negotiations and during that T entered into service agreement with FD&D to

manage the business it was purchasing and disclose the formula of Furs Consideration was a salary but also shares inFD&D and payment of £4000 – service agreement not

disclosed to directors or any general meeting of members of Furs At conclusion of negotiations, Furs accepted offer of £8500 from FD&D

Held: Issue of shares = profit being made by T – 2nd issue made out Agreement not disclosed to directors or shareholders in GM – 3rd element made out Clear breach of misuse rule, under general law and under CA (misuse of info etc)

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3. CONFLICT RULE

Rule: [Director] has a duty not to have an interest in a contract, trust or other transaction with [company] unless the director makes full disclosure of the interest to members in general meeting, and they approve of it by ordinary resolution (Woolworths v Kelly; Aberdeen Railway)

Direct or indirect interest: [Director] will breach the duty whether their interest in the transaction is direct or indirect

o Direct : director contracts personally with company

o Indirect : directors is a director and substantial shareholder of another company (SA v Clark) or partner in p/ship (Aberdeen Railway) that contracts with the company

3.1 Strictness of Conflict Rule

Strictly applied – not necessary that a conflict cause a loss to company, or results in profit for director for there to be a breach of duty (Gemstone v Grasso)

Qualification : company may adopt a constitutional provision that lessens the general law rule and permits the director to have a conflicting interest (Woolworths v Kelly)

o Rationale that in large public companies not always possible to refer issues to members in GM to legitimise transactions)

o RR s 194 : typical provision in const (Woolworths v Kelly) / RR:

If there is a “conflict of interest”, provided the director discloses the nature/extend of interest and relation to affairs of [company] at director’s meeting (under s 191), the director may:

Vote on matters relating to the interest; and

Obtain benefit of transaction

and the company cannot avoid the transaction (s 194)

o Director must strictly comply with these provisions if equitable duty is to be prevented from operating with the director bearing onus of proof of compliance (Woolworths v Kelly)

Where directors have knowledge of facts already : Re disclosure of interest, no formal disclosure in required where the other directors are wholly aware of the facts and in the circumstances [director’s] interest is apparent (Woolworths v Kelly)

3.2 Remedies

Rescission of contract at instance of company (Transvaal; Woolworths v Kelly)

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Material personal interest

S 191 (1) A director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless subsection (2) says otherwise.

S 191(1) Elements : 1. [Director] has a material personal interest in matter:

“material interest” is one involving a relationship of some real substance to a contract or arrangement, so that it has the capacity to influence the vote of the particular director upon the decision to be made (McGellin; Grand Enterprises)

Doesn’t matter whether direct / indirect or contingent / vested

Less than 5%: interest of director will not be substantial enough if it is less than 5% of total voting shares (s 9)

2. Matter relates to affairs of [company]: Very broadly defined – internal and external matters (s 53)

Disclosure requirements (s 191(3)) : (3) The notice required by subsection (1) must:

(a) give details of: (i) the nature and extent of the interest; and (ii) the relation of the interest to the affairs of the company; and

(b) be given at a directors' meeting as soon as practicable after the director becomes aware of their interest in the matter.

The details must be recorded in the minutes of the meeting.

Exceptions to disclosure requirements (s 191(2)) (for others see Hill 5D) :o Comp is a pty comp and the other directors are aware of the nature and extent of the interest

and its relation to the affairs of the company (s 191(2)(b) – covers Woolworths v Kelly situation)

Consequences of non-compliance with disclosure requirement (s 191(1A)) :o Here, [director] has breached the duty by failing to give full and proper disclosure of their

interest in contravention of s 191. However, this does not affect the validity of the transaction (s 191(4)).

However, s 191(1A) imposes strict liability on [director] – max penalty of 10 PU or 3 months prison or both (Sch 3 CA)

Effect of CA on general law (s 193) :o Ss 191 and 192 have effect in addition to the common law (they do not derogate from general

law or comp’s constitution) (s 193)

Woolworths v Kelly Provision in const Kelly chairman, board resolved that it would establish pension fund, under fund entitled to $26 000 pa Board then resolved to increase K’s entitlements Change of control of Woolworths, new board wanted to reduce K’s entitlements Argued K made adequate disclosure even though no formal declaration of interests – no need to, quite clear

that K was interested in resolution to establish fundHeld – could rely on const & disclosure Samuels JA – no need for ritualistic disclosure, substance is important so if everyone on the Board knew, that

will be sufficient. no further information he could have given them

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Kirby P (dissent) – focussed on fact there was no actual disclosure (formalities)

MOD 5E: DUTY OF DUE CARE AND DILIGENCE

Has [director] breached the duty of due care and diligence to [comp] re action of…


Source of the duty:o Arises under contract (Daniels v Anderson) – generally express duty that director will act with

due care, skill and diligence

o Equitable obligation (PBS v Wheeler) – not to be equated with fiduciary duty Applies to exec and non-exec directors

o Common law duty of care – overlaps with equitable duty (Daniels v AWA) Applies to exec and non-exec directors

1.1 Duty owed [Director] is under a duty to take reasonable care in the performance of their office (Daniels v

Anderson; PBS v Wheeler)

Test: ultimately test is objective one, judged by reference to what a reasonable director would have done in the same position, with subjective considerations taken into account (Daniels v Anderson):o Type of company; o Size and nature of business;o Provision in constitution; o Composition of board;o Distribution of work between board members and other officers; ando Experience / skills director has held self out as having in support of appointment to the office

Test for executive vs non-executive directors: there is no clear distinction between obligations of exec and non-exec directors (Daniels v Anderson

1.2 Standards relating to skill and diligence

Minimum standard of skill : o All directors acting outside their area of expertise are expected to have a minimum standard

of financial literacy re the financial affairs of the company, irrespective of their own individual experience (AWA v Daniels; ASIC v Rich)

Ie. Must be able to read balance sheets; P&Ls etc

o Directors must inform themselves to the extent that each year they can form the opinion of solvency of their company – required for Director’s Declaration (s 295(4); CBA v Friedrich )

Minimum standard of diligence :o Directors must take reasonable steps to place themselves in the position to guide and monitor

the management of the company, encompasses (AWA v Daniels):

Directors should be familiar with fundamentals of comp’s business;

Under continuing obligation to make inquiries & keep informed re activities of comp;

Monitoring of corporate affairs and policies by regular attendance at board meetings;

Maintain familiarity with financial status of company by regular review of financial statements, and to have reasonably informed opinion of comp’s financial capacity

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o Must also pay attention to company’s affairs which might reasonably be expected to attract enquiry, even when those affairs are outside the area of director’s special expertise – have to keep asking questions even if outside area of competency (Re Property Force)


Necessary element: whether risk of harm is reasonably foreseeable, but that must be balanced against countervailing benefits that might reasonably be expected to accrue from the conduct in question (Vrisakis; Daniels v Anderson; ASIC v Rich)

Mere mistake or error in judgment: the duty of care directors owe recognises the distinction between mere mistake and negligence

o If mere mistake, there is no breach of common law or CA (ASIC v Rich)

1.4 Loss suffered

Director will not be personally liable if no loss was suffered in relation to the director’s conduct (Gold Ribbon (2006))

1.5 Causation

Question of fact to be resolved as a matter of common sense

But for test: Apply but fot test, but not exclusive test – value judgments and policy considerations relevant also (PBS v Wheeler)

2. REMEDIES

Damages for breach of common law duty, and equitable compensation (AWA v Daniels)

o Courts generally consider equitable compensation a more complete remedy (AWA v Daniels)

Sheahan (as liq)of SA v Verco L was MD of SA; as at 1989 company was insolvent, owed a lot to ANZ and had no income Despite the company's financial position, in 1990 L arranged for company to acquire two service stations.

ANZ allowed the purchases to proceed so that the company could earn income and pay interest on the ANZ loan. The purchases were in large part financed by the Bank of Singapore (BOS). Further finance was obtained from V and later H in return for a shareholding in the company.

Both V and H became non-executive directors of the company. Prior to becoming directors of the company: V told L that he did not want to be involved in management of the service stations; and H told L that he knew nothing about the running of service stations and would expect to be a ``sleeping partner''.

V and H took no steps to inform themselves about the affairs of the company, or to become familiar with the service station businesses and how they were run in a general sense.

L misled V and H as to the financial position of the company and the two service stations. He represented the business as profitable, in a sound financial position and with considerable potential. He did not tell V or H about the company's debt to ANZ.

In the trading sense, the company made a profit at all relevant times. However, the company had substantial liabilities which were never brought to account in the various profit and loss statements, or, if so, in a totally inadequate manner. Had those amounts been brought to account, it would have been evident that the company made substantial losses.

In 1992, BOS Ltd appointed receivers and managers to the company. The company was subsequently wound up in July 1992. The liquidator contended that V and H acted in

breach of their duties to the company under sec 232(4) ( predecessor to s 181CA) of the Corporations Law and at common law. The liquidator claimed damages for losses incurred by the company from 1 July 1991 until the receivers and managers were appointed.

Held: Did non-exec directors breach their duties to company re common law/equitable duty?o Min std of skill : reading financial statements – clearly not meto Min std of diligence : took no steps to inform selved of business – didn’t want to be involved, oversight

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duties not met! However, although breach of duty, not causative of losses incurred by the company so no liability on

V/H

3. CORPORATIONS ACT

S 180 (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

3.1 Relationship between statutory and common law duty

Stat duty essentially the same as general law duty, does not call for any higher order of negligence (AWA v Daniels; ASIC v Rich)

Objective standard, but consider subjective factors:

o comp’s circumstances (s 180(1)(a))

o director’s position and responsibilities within the company (s 180(1)(b))

Ie. would look at same sort of things as above (ASIC v Rich)

3.2 Elements of statutory duty

One point of difference from common law – may not have to prove loss/damage (ASIC v Rich)

Examples of breach of duty:o Director allows company to enter into transactions which produce no benefits for it (ASIC v

Adler; Adler v ASIC)

o Director fails to take part in active supervision of company’s management or fails to supervise comp’s accounts (Daniels v Anderson)

3.3 Defences to breach – BJ Rule

S 180 (2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a) make the judgment in good faith for a proper purpose; and

(b) do not have a material personal interest in the subject matter of the judgment; and

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

(d) rationally believe that the judgment is in the best interests of the corporation.

The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

(3) In this section: "business judgment" means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

Effect of defence

If the elements of the defence are made out, the director is taken to have complied with their statutory, common law and equitable duties (s 180(2))

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NB. If elements not satisfied, doesn’t necessarily mean director has breached duty (ASIC v Rich)

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Elements of s 180(2) BJ defence

1. Director or other officer (s 9)

2. Makes a business judgment:o Must be an actual business judgment made (Gold Ribbon v Sheers)

Gold Ribbon : director who takes no interest, by failing to attend board meetings etc, and is not given any tasks, cannot be said to have made BJ so as to come into the defence

BJ means any decision to take or not to take action in respect of a matter relevant to the business operations of the company (s 180(3))

3. In good faith for a proper purpose: o Subjective standard of good faith and objective standard of proper purpose

If director acts with subjective honesty in a way that objectively is regarded as in the best interests of the company, the director will have satisfied this element (ASIC v Rich)

4. No material personal interest in subject matter of judgment:

o Not defined in CA but could call it “no conflict” element of defence

o NB. Under s 191 section (above):

“material interest” is one involving a relationship of some real substance to a contract or arrangement, so that it has the capacity to influence the vote of the particular director upon the decision to be made (McGellin; Grand Enterprises)

Doesn’t matter whether direct / indirect or contingent / vested

Less than 5%: interest of director will not be substantial enough if it is less than 5% of total voting shares (s 9)

5. Inform to extent director reasonably believes is appropriate

o Reasonableness of belief must be assessed re 5 factors (objective standard, governed by subjective considerations) (ASIC v Rich)

importance of the business judgment to be made; time available for obtaining information; costs related to obtaining information; director or officer’s confidence in those exploring the matter; state of comp’s business at that time & nature of competing demands on board’s attention; whether or not material info is reasonably available to the director (Smith v Van Gorkom)

6. Rationally believe judgment is in best interests of corporation

o A director’s belief is a rational one unless it is one no reasonable person in their position would hold (ASIC v Rich)

3.4 Remedies and consequences for breach

Only ASIC can seek relief as s 180(1) is a civil penalty provisions (s 1317E(1)(a))

Court may:o make declaration of contravention under s 1317E(1)(a)), then ASIC can seek pecuniary penalty

order under s 1317G (s 1317E)o make compensation order under s 1317Ho disqualify director from bearing office (s 206C)o grant an injunction (on app by ASIC or person whose interests affected by conduct) (s 1324)


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NB. Even if there is a breach of duty, it does not appear shareholders have standing to bring action

MOD 5F: REMEDIES

1. GENERAL LAW

1.1 Rescission (Transvaal)

Where a breach has occurred with regard to a contract, the company may rescind the contract. This would enable [company] to avoid an unfavourable contract which the company no longer wishes to be bound. Any money paid or property transferred is returned.

IF directors profit: [Director] profited from contract and are liable to account for the profit.

IF not possible to restore the parties: Rescinding the contract will not be able if it is not possible to restore the parties to their original positions

1.2 Account of profits (Furs v Tomkies; Regal Hastings)

When [director] makes any undisclosed profit arising from a breach of conflict or interest, compensation may not be appropriate as the company has suffered no loss.

[Company] can obtain an order that the officer hand over the profit made in breach of the duty to the company: Regal (Hastings) Ltd.

IF breach of civil penalty provision as well: Here, [company] may seek compensation by way of a breach of a civil penalty provision. The amount of compensation will include any profits made from the contravention.

1.3 Equitable compensation (Tavistock)

Where [director] breaches the fiduciary duty owed to [company] and it suffers a loss as a result they company may apply for the equitable remedy of compensation.

The object of compensation is to place the company as near as possible in the position it would have occupied has the breach of duty not occurred. Here, all directors who participate in the breach will be liable.

IF breach of civil penalty provision as well: Here, [company] may seek compensation by way of a breach of a civil penalty provision.

Amount: Here, [company] may be compensated for the loss of the use of money of which it has been deprived.

1.4 Constructive trust (Cook v Deeks)

Where [director] acquires property as a consequence of a breach of duty, [company] may seek a declaration that the director holds the property on constructive or resulting trust for the company with the effect that the property is returned to the company.

This is most appropriate where [director] misappropriates property or misapplies money for their own purpose.

By way of a constructive trust, [company] may recover property which has come into the hands of third parties as a result of the breach.

1.5 Equitable injunction

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2. CORPORATIONS ACT

The civil penalty provisions are outlined in Pt 9.4B and provide three types of penalties to punish people who contravene designated civil penalty provisions

o Civil penalty provision: ss 180, 182, 183:

s 180. Care and diligence--civil obligation only

s 181. Good faith--civil obligations

s 182. Use of position--civil obligations

s 183. Use of information--civil obligations

Declaration of contravention: The court must make a declaration of contravention under s1317E(1). The matter must identify contravening person and conduct as well as the section contravened (s 1317E(2))

2.1 Pecuniary penalty orders

The courts may order a person to pay pecuniary penalty to the Commonwealth up to $200,000 if the contravention is serious or materially prejudices the corporations ability to pay its creditors.

If there is a contravention of a financial services civil penalty provision the maximum penalty for a body corporate is $1 million: s1317G(1B)(b) or $200,000 for an individual: s1317G(1B)(a).

2.2 Disqualification orders

If a declaration of contravention is made a person may be disqualified from being a director or managing a corporation. This will occur where the court believes that such an order is justified and will make the period it considers necessary: s206C(1) CA.

2.3 Compensation orders

The court may also order a person who contravenes a corporation/scheme civil penalty provision to compensate the corporation for the damage that resulted from the contravention: s1317H. The order must specify the amount.

A person may be relieved from compensation if the court is satisfied that the person acted honestly and ought fairly to be excused for the contravention.

2.4 Criminal penalties

[Director] may be liable for criminal penalties if the contravention of the civil penalty provisions in s181-183 was reckless or intentionally dishonest.

Criminal proceedings may commence even if the director has had a civil penalty order made against them.

Consequences: If found guilty of an offence under the CA, [director] may be liable for the maximum penalty outlined in Schedule 3. If the penalty is not outlined the maximum penalty is 5 penalty units ($500).

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MOD 5G: RELIEF OF DIRECTORS FROM LIABILITY FOR BREACH

1. GENERAL LAW

Directors owe duties to the company. Shareholders may excuse or ratify by ordinary resolution a breach of duty by directors prospectively or retrospectively where there is full and frank disclosure of all material facts to the company in general meeting (Regal Hastings; Winthrop v Winns)

1.1 Limitation on ratification

There can be no ratification where [director’s] act:o is illegal; o amounts to a fraud by the majority on the minority (Cook v Deeks)o infringes member’s personal rights (Residues Treatment)o intrudes on creditors’ interests (Kinsela; Grove v Flavel)o is a breach of a statutory duty (Angas Law Services; Forge v ASIC)

Ratification will not have properly occurred if majority of directors and shareholders and involved in the breach (Hannes v MJH)

2. CORPORATIONS ACT

2.1 Where honest and ought fairly be excused

Relief will be granted:

Where honest and ought fairly be excused (s 1317S) o only for civil penalty provisions not offences: s1317S(1)

o court has discretion to relieve person if it is believed that person acted honestly and having regard to all the circumstances they should be excused: s1317S(2)

o can excuse wholly or partly: s1317(2)

o for contravention of s588G, consider whether person took any steps toward appointing administrator: s1317(3)

o person has to apply to court: s1317S(4)

o court can grant relief: s1317S(5)

2.2 General Discretion to Grant Relief

General discretion to grant relief: s1318(1):o applies to any civil proceedingo court must be satisfied they acted honestly and in all the circumstances ought fairly be excusedo can be relieved in whole or in parto can apply to court for relief in anticipation of proceedings: s1318(2)

Company cannot restrict liability of directors in constitution or by contract:o cannot exempt director from liability to the company: s199A(1)o cannot give indemnity to director for liability to comp or under s1317G, H or HA: s199A(2)o cannot give indemnity for legal costs arising out of defending suits in 199A(2): s199A(3)

Company cannot pay insurance premiums: company cannot pay or agree to pay insurance premium for insurance against liability from wilful breach of duty or breach of ss182, 183: 199B(1)

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Anything that purports to indemnify / exempt / insure in violation of s199A & s199B is void: s199C(2)

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MOD 5H: MEMBERS

1. MEMBERSHIP

Members are the ultimate owners of the company

Limited comp (either pty limited or public limited): members are shareholders, they provide equity capital and receive shares in return

Who can be a member? o Any legal person – an individual OR another company

o Exceptions : persons who do not have the legal capacity to enter into contracts to acquire shares - Eg. under 18

Who is a member?o On registration : person becomes a member on registration of company, where specified in the

application to register, with their consent (ss 231(a); 120)

o After registration : persons becomes a member after registration by:

Subscribing for new shares or acquiring (by purchase or inheritance) issued shares, and will be entered on register of members kept by company (ss 231(b); 168)

What rights do members (shareholders) have?o Rights that attach to shares include:

Right to vote at GM – 1 vote per ordinary share (s 250E)

Right to distributions, eg. dividends (s 254T-W)

Right to info, eg. to inspect company’s books (Pt 2F.3)

Class rights where different classes of shares exist (Pt 2F.2 – see Mod 3)

Powers of members in general meetingo The business of the company is to be managed by the directors who may exercise all powers

of the company except any in the CA or company’s const required to be exercised in general meeting (s 198A - RR)

Powers reserved for members include:

Adopting and amending constitution (s 136(2))

Appointing and removing directors (ss 201G, 203C, 203D)

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2. CONTROLLING MEMBERS

2.1 Meaning of “controlling members”

Controlling members: means members who between them possess sufficient voting power to pass the appropriate resolution (usually ordinary – more than 50%) in GM

2.2 Equitable limitation on controlling members’ voting power

Nature of the limitation

The limitation is not based on fiduciary principle as shareholders do not stand in a fiduciary position to other shareholders or to the company, rather their right to vote is an incident of their property in the shares that they can use to advance their own personal interest (Peters v Heath; Ngurli v McCann)

o However, if [plaintiff] can show the resolution was oppressive, unfairly prejudicial or discriminatory to minority members, relief may be available in equity and under ss 232-234 (Peters v Heath)

Remedy for breach: liable to be declared void by the court (Peters v Heath)

Test – fraud on the minority

Fraud: does not necessarily mean dishonest conduct; may merely be abuse of power

Objective test: Whether a reasonable person would consider the resolution outside the scope of the majority’s voting power re purposes of company contemplated by constitution (Peters v Heath)

Onus: on plaintiff alleging the fraud on the minority (Winthrop Investments)

Common examples

Appropriation: Controlling members cannot appropriate to themselves property, advantages or rights which belong to the company (Menier; Peters v Heath; Ngurli McCann)

Legal proceedings: Can’t use voting power to prevent company from bringing legal proceedings against them where they are alleged to have committed some wrong to the company

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MOD 5H: MEMBERS: MINORITY SHAREHOLDER PROTECTION General law:

o Members personal actions

Corporations Act:

o Members derivative actions (Part 2F.1A - ss 236, 242)

o Oppression (Part 2F.1 – ss 232-235)

o Statutory injunction (s 1324)

o Statutory contract (s 140):

Breach of statutory contract : under s 140(1)(a) the company’s constitution (and/or RR) form a statutory contract between the shareholders and the company, shareholders can sue for breach of that contract if company acts outside the objects clause (ie. breaches the constitution)

BUT: members can only enforce what the constitution allows them to enforce; the breach must affect them as a member (eg. right to dividend)

Unlikely that breach of objects clause will affect member in capacity as member

Would be seeking equitable injunction or declaration

o Class rights (Part 2F.1 – ss 246B-D)

o Inspection of company’s books (s 247A)

o Winding up (ss 461-462) – last resort

3.

1. GENERAL LAW – MINORITY SHAREHOLDER PROTECTION

1.1 The rule in Foss v Harbottle

The rule : 2 aspects:

1. Proper plaintiff rule: where a wrong is done to a company, the company is the proper plaintiff – it is the entity that should be instituting proceedings (see ss 236-242)

If directors / promoters breach fiduciary duties – the duties are owed to the company2. Internal management rule: where members complaint is of an irregularity which can be

ratified by ordinary resolution of members in GM, court will be reluctant to grant leave to the minority shareholder to institute legal action (MacDougall v Gardiner; Burland v Earle)

Effect of the rule : rule severely limited the ability of an individual or minority members to redress wrongs done to the company, unless an exception applied

Power to bring legal proceedings : because it is the BoD who decides to bring proceedings against wrongdoers (s 198A), creates a problem where the directors are the wrongdoers

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Our focus


1.2 Exceptions to the rule in Foss v Harbottle

Exceptions: minority shareholder / member could only sue to enforce corporate right / rectify corporate wrong if could prove one of:

1. act of company is ultra vires or illegal2. act of comp requires special majority at GM (eg. special resolution) and comp does not comply

3. member’s personal rights were infringed4. fraud on minority and ‘fraudsters’ control the company; or

5. interests of justice required it (Aus exception only)

1.3 Common law derivative action

An action able to be brought by a member as an exception to the rule in Foss v Harbottle, derived from membership of the company; features:

o Cause of action belonged to company

o Instituted on behalf of company by member

o ‘Derived’ from membership of company

o Representative action because brought by member on behalf of all other members except wrongdoers, against def wrongdoers (usually directors) (Wallersteiner v Moir (No 2))

Exceptions enforceable : by this action were 1, 2, 4 and 5

Status now : action is now abolished by s 236(3), and with it exceptions 1, 2, 4 and 5; [pl] can now only bring an action of behalf of [company] with leave of the court (s 237(2))

1.4 Common law personal action

Where a company is the wrongdoer, its members are entitled to enforce their personal rights against the company

o Cf derivative action where company has suffered a wrong, rather than a member

o Personal action, but may also be representative if brought on behalf of other members

Exceptions enforceable : by this action is 3, where member’s personal rights are infringed

Sources : personal contracts (eg. shareholder agreements); equitable principle)

Examples : o Expropriation of a minority’s shares by the company amending the constitution (Gambotto)

o Share issue by directors for improper purpose of dilution of voting power of a minority shareholder (Residues Treatment; Ngurli v McCann)

o Company acts ultra vires – may be able to enforce personal right by virtue of statutory contract (s 140)

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2. CORPORATIONS ACT – MINORITY SHAREHOLDER PROTECTION

2.1 Statutory derivative actions – Part 2F.1A

Replaces the exceptions to the rule in Foss v HarbottleS 236 (1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:

(a) the person is:

(i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or

(ii) an officer or former officer of the company; and

(b) the person is acting with leave granted under section 237.

(2) Proceedings brought on behalf of a company must be brought in the company's name.

(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.

Elements

Standing : people who have standing to bring / intervene in proceedings on behalf of the company (s includes members, former members or persons entitled to be registered as member (s 236(1))

o Minority shareholders will have standing

Proceedings in company’s name : provision will be satisfied by joinder of company as defendant – not necessary that it be named as plaintiff (Keyrate v Hamrarc)

Effect on common law derivative action : The right of a person at general law to bring proceedings on behalf of a company is abolished (s 236(3); Karam v ANS; Advent Investors)

Criteria for leave

Pl must be granted leave under s 237 (s 236(2)); court must grant leave if satisfied (s 237(2)):

(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

Inaction can be inferred if proposed def controls the company, is supported by the BoD or is a majority shareholder (Swanson v Pratt )

(b) the applicant is acting in good faith; and

Applicant honestly and reasonably believes a good cause of action exists and has a reasonable prospect of success and app would suffer real / substantive injury if action not permitted (Swanson v Pratt)

Collateral purpose: If seeking some collateral purpose (eg. to put pressure on company to pay dividends), this will be abuse of court’s process (Swanson v Pratt )

(c) it is in the best interests of the company that the applicant be granted leave; and

Imports concept of “interest of company as a whole” (Maher v Honeysett)

Not necessary to undertake costs/benefit analysis of proposed litigation

Consider number of factors: Effects of proposed action/litigation on proper conduct of business Whether redress sought could be achieved by means other than litigation Whether decision of company is based on business reasons – do the costs outweigh

any proposed benefits

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Whether def can meet a substantial part of judgment so action would have a practical benefit for the company

(d) there is a serious question to be tried; and

Identify legal / equitable rights to be determined at trial ni respect of which final relief is sought (Ragless v IPA)

(e) 14 days’ notice has been given to the company or leave is otherwise appropriate

Purpose is to resolve dispute without resorting to court – tests whether comp will bring proceedings itself

Onus : on applicant to establish all requirements on balance of probabilities (Swanson v Pratt)

Residual discretion : court has no discretion to grant leave if any criteria not met (Goozee)

Rebuttable presumption that granting leave NOT in best interests of comp (s 237(3)) : A rebuttable presumption, that granting leave is not in the best interests of the company, arises if it is established that (s 273(3)):

a) the proceedings are by the company against a third party or vice versa; and

a third party means not a related party (s 237(4)) – directors = related parties

b) the comp decided not to bring or defend proceedings or to discontinue or settle; and

c) all of the directors who participated in that decision:

acted in good faith;

had no material personal interests in the decision;

informed themselves of the subject matter to the extent they reasonable believed to be appropriate; and

rationally believed the decision was in the best interests of the company

Effect of ratification

Effect of ratification by company in GM ( s 239): o Does not prevent person seeking leave under s 237

o Does not mean proceedings must be in favour of def or that app for leave must be refused

o Simply a factor court will take into account in deciding order / judgment – does not provide exoneration as such

General powers of the court

Court can make orders or give any directions it considers appropriate (ss 242, 242), eg:

o Directions regarding the conduct of the proceedings including mediation;

o Appoint an independent person as investigator

o Costs

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2.2 Statutory personal actions – Part 2F.1A

Action for oppression (Part 2F.1 ss 232-235)

Statutory injunction (s 1324)

Action for oppression

Standing (s 234):

People who have standing – members, even if app relates to them in a capacity other than as member or another member in their capacity as member (s 234(a))

o “member”: means registered member – holder of an equitable interest as an unregistered purchaser does not have standing (Niord v Adelaide Petrol; Titlow)

o “in capacity other than as member”: means app can complain of conduct such as, eg, removal of a director of company (s 234(a)(i); NSW Rugby v Wayde )

o “another member in capacity as member”: for a member who may not have been a member when the unfair conduct occurred (s 234(a)(ii); Re Spargos Mining )

o “person who has ceased to be a member”: for former members (s 234(c))

Grounds (s 232):

Ground 1 : The Court may make an order under s 233 if (s 232):

[Element 1]

(a) the conduct of a company's affairs; or

“conduct”: refers to a course of conduct, rather than some past isolated event (Re HR Harmer; Re Broadcasting Station)

“company’s affairs”: defined broadly in s 53 – will cover internal management, proceedings of comp, conduct of directors and majority shareholders etc

(b) an actual or proposed act or omission by or on behalf of a company; or

Covers single act, such as single resolution by BoD (Wayde v NSW Rugby)

Covers past conduct (Re Norvabron)

Covers omissions (eg. failure to pay a dividend) (Sanford v Sanford)

(c) a resolution, or a proposed resolution, of members or a class of members of a comp;

Modifying general law principle that shareholders are able to exercise voting rights in their own sel-interest (Peters)

[Element 2]

Is… (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

“prejudicial”: detrimental to rights and interests (NSW Rugby v Wayde)

“discriminatory”: acting in a manner than makes distinction between one shareholder and another, or between groups of shareholders (NSW v Wayde)

“unfair”: conduct can be prejudicial or discriminatory, but that doesn’t necessarily mean it is unfair (NSW Rugby v Wayde)

“unfair”:

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o Regard must be paid to the principles that govern directors duties and duties of majority shareholders such that where there is a breach, court will probably find unfair conduct (NSW Rugby v Waye; Jenkins v Gold Mines)

o May be unfairness where some invasion of legal rights of app who is a member/director where majority shareholder proceeds on strength of its contract to act contrary to decisions of duly constituted BoD (Re HR Harmer)

o Not necessary however to prove breach of duty or invasion of legal rights to show unfair conduct – lower threshold test of commercial fairness, judged objectively as by reasonably bystander;

if conduct complained of is conduct of directors, issue of considered from the point of view of a reasonable BoD

if conduct complained of is majority shareholder, point of view of body of shareholders

o Mere fact that member disapproves of conduct of comp’s affairs, on grounds of commercial policy or has been outvoted by majority, is not enough to be unfairness in this context (Re G Jeffrey)

Is a composite expression – not 3 distinct alternatives to allow court to intervene where visible departure from standards or fair dealing or commercial unfairness (NSW Rugby v Wayde)

Ground 2 : The Court may make an order under s 233 if (s 232):

[Element 1 – see previous]

[Element 2]

Is… (d) contrary to the interests of the members as a whole Operates as an alternative to a derivative action because conduct that amounts to a

wrong to the company affects the interests of the members as a whole (Re Spargos)

(cf ground 1 which is generally used to vindicate members personal rights)

Remedies (s 233):

Court has very broad discretion re what remedies it can order if s 232 grounds made out, incl (s 233):(a) that the company be wound up;(b) that the company's existing constitution be modified or repealed;(c) regulating the conduct of the company's affairs in the future; (d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;(e) for the purchase of shares with an appropriate reduction of the company's share capital;(f) for the company to institute, prosecute, defend or discontinue specified proceedings;(g) authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;(h) appointing a receiver or a receiver and manager of any or all of the company's property;(i) restraining a person from engaging in specified conduct or from doing a specified act;(j) requiring a person to do a specified act.

Examples :o Order that majority shareholder should not interfere in affairs of comp otherwise than in

accordance with valid decisions of BoD (s 233(c); Re HR Harmer )

o Removing incumbent directors and appointing particular persons in their place (Re Spargos)

o Purchasing shares of minority shareholder at fair price

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Statutory injunction

S 1324 (1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a) a contravention of this Act; or

(b) attempting to contravene this Act; …

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

Standing (s 1324):

People who have standing (s 1324):

o ASIC

o Persons whose interests have been, are or would be affected

Refers to interests of any person which go beyond mere interest of members of public

Not necessary to show rights of a proprietary nature are affected, nor do you have to show special injury

Courts have said this will cover shareholders, and therefore shareholders can use this section to prevent breaches of directors’ statutory duties in provisions such as ss 181-183 (Duties re good faith; use of position; use of information) (Airpeak; Emiem v St Barbara; cf Mesenberg (weak though))

Elements (s 1324):

“engaging in conduct that constitutes contravention of the Act”: very broad, essentially applies to any sort of contravention whether leading to criminal penalties or civil remedies

o Contravention of const or RR : Does not apply to a contravention of comp’s const or the RR – these are not contraventions of the Corps Act!

Breach of const / RR remedied by breach of statutory contract provision – s 140

S 234 An application for an order under section 233 in relation to a company may be made by:(a) a member of the company, even if the application relates to an act or omission that is against:

(i) the member in a capacity other than as a member; or(ii) another member in their capacity as a member; or

(b) a person who has been removed from the register of members because of a selective reduction; or

(c) a person who has ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member; or

(d) a person to whom a share in the company has been transmitted by will or by operation of law; or(e) a person whom ASIC thinks appropriate having regard to investigations it is conducting / has

conducted re:(i) the company's affairs; or(ii) matters connected with the company's affairs.

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MOD 6: COMPANY’S DEALINGS WITH OUTSIDERS

1. HOW DOES A COMPANY CONTRACT

1.1 Common law rules

Common seal: Corporation was only bound by contract if it used its common seal (AR Wright v Romford)


Companies can enter into contracts or other dealings by two methods:

o Directly – company itself does required act; or

o Indirectly – agent contracts with authority of the company

Company itself does required act:o A company contracts or otherwise deals by:

Proper execution of contract or other doc; and

Having substantive authority to enter contract or other dealing

What is proper execution?o S 127 overcomes common law rule of compulsory use of common seal – provides 3

procedures for proper execution:

1. Procedure of executing doc with common seal and having it witnessed (s 127(2))

Witnessed by 2 directors of comp / by director and cosec / sole director

Common seal – stamp that sets out comp’s name and ACN or ABN

2. Procedure of executing doc without common seal by having it signed by 2 directors / director and cosec or sole director (s 127(1))

3. By some other procedure in constitution (s 127(4 ); Jovista v Pegasus )

How does comp get substantive authority?o Comes from BoD passing formal resolutions – normally 2:

1. Company will enter particular transaction = substantive authority being given by BoD

2. Authorising execution of relevant docs – comp seal = formal authority given by BoD

(1) A company may execute a document without using a common seal if the document is signed by:(a) 2 directors of the company; or(b) a director and a company secretary of the company; or(c) for a proprietary company that has a sole director who is also the sole company secretary--that director.

Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company.(2) A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by:

(a) 2 directors of the company; or(b) a director and a company secretary of the company; or(c) for a proprietary company that has a sole director who is also the sole company secretary--that director.

Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company.(3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).(4) This section does not limit the ways in which a company may execute a document (including a deed).

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2. COMPANY’S MANAGEMENT

The organs for managing a company are the board of directors and the members in general meeting

IF BoD has all power: Here, pursuant to s 198A, the exclusive powers of management of [company] lies with [directors], the board of directors.

The business of a company is to be managed by or under the direction of the directors (s 198A(1)) The directors may exercise all powers of the company except any powers that the CA or the constitution requires the company to exercise in general meeting (s 198A(2))

IF managing director: Here, [agent] has been appointed managing director pursuant to RR s 198C which allows management powers to be delegated to a GM.

IF management powers given to members in general meeting: Here, exclusive powers of management of [company] have been given to the members in general meeting. This replaces the RRs in ss 198A and 198C.

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3. COMPANY CONTRACTING THROUGH AGENT

22.1 Operation of s 126 CA

S 126 (1) A company's power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company's express or implied authority and on behalf of the company. The power may be exercised without using a common seal.(2) This section does not affect the operation of a law that requires a particular procedure to be complied with in relation to the contract.

Purpose and effect of s 126

S 126 permits agent to exercise comp’s powers to contract without use of common seal (s 126(1))

Overcomes common law rule

Does not affect compliance with any other law requiring particular procedure (s 126(2))

o Eg. property requiring contracts to be in writing – not affected

2.2 Basic tents of agency rules

Contract or other dealing is binding on a principle, the company; agent acts on principle’s behalf with his/her authority

o Eg. would sign “Stan Parker, CEO, Tugan Pty Ltd, for an on behalf of Tugan Pty Ltd”

2.3 Protection of outsiders - common law rules of agency

Is [company] bound by [agent’s] action of [entering contract]?

Where [comp] claims that [officer] who entered into contract with [outsider] did not have authority, [outsider] may be able to prove officer had:

o Express actual authority;

o Implied actual authority; or

o Ostensible authority

Express actual authority

Comps often grant express actual authority by s198A RR:

o Here, [individual] has express actual authority because they acted on behalf of [company] within the scope of the oral/written authority conferred on them to undertake [specific act]

Eg. BoD will appoint CEO and delegate express actual authority in the service contract between the company and the CEO

Note: directors may exercise all powers of the company, eg. Issue shares, borrow money and issue debentures (s 198A – a RR – gives directors exclusive powers of management and is classified as an express grant of authority).

Note: check whether outside scope of authority

Implied actual authority

2 instances:1. Anything incidental to / necessary to carry out what is expressly authorised; or

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2. Agent appointed to specific office in the company, granted implied authority that accompanies that position.

o If single director : A single director has no implied authority to bind the company except when joined with the whole BoD in a general resolution (Northside Developments v RG)

If power delegated by BoD : However, here the BoD has delegated authority to [individual MD] to do [actions]. As such the general principle will not apply (s 198C).

If single director company : However, here the general principle is displaced because this is a single director company.

o If managing director : [Person], as managing director, has wide powers to run the day-to-day business of the company (Entwell v N&G Insurance). However, the powers are limited to ordinary trading transactions of [company] (Corpers v NZI Securities).

Ie. No usual power of MD to enter into a transaction that cannot be characterised as an ordinary trading transaction (Corpers v NZI)

o Inactive BoD : Here, [individual] has been acting as a de facto [eg. managing director] and the BoD has been completely inactive and acquiesced his/her actions (Hely-Hutchinson). Therefore, [individual] had implied authority to do all acts a person in such a position would normally do. Here...

Eg. Single director enters into number of trans on behalf of comp with the knowledge of BoD but they do not interfere – director has authority to bind company in similar transactions in future because BoD has acquiesced director’s conduct (Brick & Pipe; Equiticorp; Hely-Hutchinson)

o If secretary : Secretary has authority to sign contracts connected with the administrative side of the company such as employing staff and ordering (Panorama Development v Fidelis). Secretary has no implied authority to manage company (Club Flotilla v Isherwood).

No usual authority to commercially manage company, eg. cannot decide to institute proceedings in name of company for recovery of property, even if no BoD

Has usual authority to fix/witness fixing of comp’s common seal for execution

o If chairperson : Chairperson has no usual power to bind company such as by entering contracts with third parties (Hely-Hutchinson).

Apparent / ostensible authority

Where a person with actual authority allows the agent to occupy a particular position in the company, and they represent (by words or conduct) that the person has authority to bind the company (Freeman & Lockyer):

Elements ( Freeman & Lockyer):

1. Representation to contractor that agent has authority to enter into contract (of that kind) on behalf of company. Here...

2. Representation made by person/s with actual (express or implied) authority (to manage business of company) (Crabtree-Vickers). Here...

Outsider cannot rely on purported agent’s own representation as to authority (Crabtree-Vickers) – NB. Board may have acquiesced through conduct (Freeman)

3. Contractor induced by the representation to enter into contract (reliance) and suffered some detriment. Here...

o IF board represented that managing director ok to act: Here, like Freeman & Lockyer, the board of directors has represented (by knowing and not acting) by ____, that [agent] was authorised to act as managing director of [comp]. Therefore [comp] will be bound by the actions of [agent] in [actions done e.g. entering contract].

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Important limitation : outsider cannot rely on ostensible authority if they know the true extent of the agent’s authority – eg. if they have a copy of comp’s const and aware of limits on single director’s authority (NAB v Sparrow Green)

4. SOURCES OF PROTECTION OF OUTSIDERS

Common law rules of agency (see previous)

Statutory indoor management rules (ss 128-130)

Common law indoor management rule (RBB v Turquand)

4.1 Statutory Indoor Management Rule (SIMR)

S 128 (1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

(2) A person is entitled to make the assumptions in section 129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

(3) The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings.

(4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

Operation:

The rule operates where:

1. Outsider has dealings with company (s 128(1)); or2. Outsider has dealings with a third party who has/purports to have acquired property from

another company (s 128(2))

o “dealings”: has a broad definition:

Covers a person who contracts with the company (Barclays) but is not limited to contracts (Aus Capital TV)

It can include just one transaction and no prior relationship (Advance Bank Aus)

Covers negotiations carried out prior to execution of a deed (Brick & Pipe)

Covers purported dealings where person representing has no actual authority (Story v Advance Bank)

o “company”: one registered under CA (s 9)

Assumptions:

Once s 128(1) or (2) applies, the outsider can:

o make certain assumptions about [company] and [company] cannot assert otherwise (s 129(1), (2); Oris Funds v NAB – can’t assert otherwise in any legal proceedings);

o make assumptions even if agent acts fraudulently or forges a document (s 128(3)) – negates common law that IMR wouldn’t operate if there was a forgery (Story v Advance Bank)

o make assumptions even though info is available to public from ASIC (s 130)

The assumptions need not in fact be made (Brick & Pipe)

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Assumptions considered independently of others (if one doesn’t apply, another may) (BNZ v Fiberi)

Assumptions operate cumulatively (Sunburst Properties)

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Assumptions [outsider] is entitled to make under s 129 are:

1. that [company’s] const/RR have been complied with (s 129(1)): Reflects the common law indoor management rule (RBB v Tuquand)

eg. Outsider can assume any approval required by comp’s const from BoD / shareholders in GM has been obtained (RBB v Tuquand)

Cannot assume agency (Freeman & Lockyer)

2. that anyone who appears from information provided by [company], available to the public from ASIC, to be a director or secretary (s 129(2)):

has been duly appointed; and reflects common law agency principle of ostensible authority (Dawson v

WBC; Northside Developments)

has the customary authority of persons in such positions in a similar company reflects the common law agency principle of implied actual authority

(Northside Developments; EM to Corps Bill 1988)

[see Agency notes if needed]

The outsider need not have done an actual ASIC search (Re Madi)

3. that anyone held out by [company] to be an officer/agent of [company] has been (s 129(3)):

duly appointed; and authorised to exercise the powers and perform the duties customarily

exercised by that kind of officer/agent in a similar company reflects the common law agency principle of apparent/ostensible authority –

includes officers and agents

NB. No reference to reliance : may not have to prove reliance under statutory assumption, whereas you do at common law

4. that officers and agents of company properly perform their duties (s 129(4)): Restates common law rule in Brady v Price – that comp cannot avoid a contract

entered into on its behalf by an officer who has breached their fiduciary duty where the outsider acts in good faith, without notice of the breach (Aequitas v AEFC)

5. that a doc has been duty executed by the comp if it appears to have been signed in accordance with s 127(1) (s 129(5)):

Assumption assists outsider in contract made directly with company, in overcoming a defect in formal authority, not substantive authority

Operates when “director” or “secretary” words are there (Soyfer v Earlmaze)

S 129(2) can support s 129(50 – if doc appears to be signed by director who is named as a director in ASIC db – assumption can be made signatory = director

6. that a doc has been duty executed by the comp if (s 129(6)):

comp’s common seal is fixed in accordance with s 127(2); and

the fixing of the seal appears to have been witnessed in accordance with that subs– ie. in presence of 2 directors / director and cosec / sole director)

69Disentitlement from making assumptionsCommon law IMR


Disentitlement from making assumptions (s 128(4)):

An outsider will be disentitled from making the assumptions if they knew or suspected at the time of the dealing that the assumption was incorrect (s 128(4))

o Knowledge: where actual knowledge (hard to prove)

o Suspicion: requires a position feeing of actual apprehension or mistrust (Qld Bacon).

Test: Objective – whether reasonable person would have suspected something wrong /

amiss (EM to CL Reform Act 1988)

Subjective test may be applicable if circumstances surrounding dealing result in person actually suspecting that the assumption is incorrect (Soyfer; Oris Funds; Sunburst Properties)

Apply both

NB. Mere failure to inquire as to authority of purported agent is not of itself sufficient to activate s 128(4))

4.2 Common Law Indoor Management Rule

The statutory IMR to a large extent codifies the common law, but the common law rule still has some operation (Aus Capital TV)

Only applies where (Aus Capital TV):

o No s 9 company; OR

o No dealings under s 128(1) or (2)

o Third party dealings – person who asserts irregularity is not person who acquired property

o Ie. very limited application.

Persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to enquire whether acts of internal management have been complied with (RBB v Turquand; Northside Developments). Here,

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PPSA = Personal Property Securities Act 2009 (Cth) All legislation refers to Corporations Act 2001 (Cth)

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MOD 8: LOAN CAPITAL

1. SHARE CAPITAL VS LOAN CAPITAL

Company caise raise funds from:

o Issue of shares (share capital – Mod 7); or

o Borrowing from lenders (loan capital – this mod)

Most comps have a mix of funding

o Measurement of the mix is called “gearing” of comp (ratio of loan capital to share capital)

Advantages of borrowing : extra funds; tax advantages

Disadvantages of borrowing : not obliged to pay dividends but have to repay loans

Borrowing power of companies : o S 124 gives comps power to borrow by (s 124(1)):

Issuing debentures

Granting a SI over uncalled capital;

Granting a circulating SI over the comp’s property (prev fixed and floating charge)

o Board may borrow on behalf of comp through management power in s 198A – though may be limited by const

1.1 Debentures

A document that acknowledges the indebtedness of a company (Handevel)

“A chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a security interest over property of the body to secure repayment of the money” (s 9)

May be issued to public: and become securities under s 92(3); requires disclosure under Ch 6D and comp must keep register of debenture holders (s 168)

2. SECURED BORROWING

Charges: companies may grant a SI for borrowings they make (s 124)

2

2.1 Pre-PPSA

All types of security referred to as “charges”

o Definition: “charge” means a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise (s 9)

o Distinction was made between fixed and floating charges:

Fixed : attached to specific items of property such that comp could not dispose of that property without lender’s consent

now a non-circulating asset Floating : covered class of property but did not attach to specific items within class until

some future event (crystallisation) occurred (eg. failure to repay loan) – comp could sell property of that type

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now a circulating asset – something company deals with in normal course of business (eg. inventory, stock, cash at bank, debts owed on normal sale) (s 340 PPSA)

2.2 Post-PPSA

Company can provide security for a borrowing

Land : Where the secured asset is land or an interest in land, it will generally require registration under the land registration system to be effective against 3rd parties

Non-Land Assets : For assets other than land, it was always the case pre-PPSA, that ASIC maintained a register where security over non-land assets of a company would be registered

o The PPSA was introduced to provide a registration system for all security interests other those over land- there are some minor exceptions

o This meant that existing registration systems including for company charges were subsumed into the PPSA system

PPSA

Provides for the creation of PPSA security interests

o Definition: an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property) (s 12 PPSA)

Ie. Form of transaction does not matter

PPSA Terminology (s 10 PPSA)

Collateral: the property which is the subject of the security;

Grantor: the borrower, who gives or grants the rights to the collateral;

Secured party: the lender, who undertakes transaction on the strength of rights to collateral

Attachment

Under s 19 PPSA, a SI can only be enforced against the grantor if there is attachment of the collateralo Attachment occurs when the grantor effectively gives rights to the secured party for value

Perfection

To enforce SI against 3rd parties, interest must be perfected (or secured party can take control)

o Perfection will normally occur by registration of the security interest (s 21 PPSA)

o Perfection can also occur by the secured party taking possession (s 24 PPSA) eg a pledge, and for some assets by “control” eg shares, bank accounts (ss 25-29 PPSA)

o Priority depends generally on timing of “perfection” of security - except for PMSI

If a security is not perfected, it will lose out to perfected interests.

Title will not necessarily protect against the perfected security interest (Graham v Portacom )

Even owner needs to register! (Graham v Portacom)

PMSI: can be registered after someone else and you still have priority

o Leases : need to be registered as well

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2.3 Corporations Act and PPSA

CA has been amended to take account of new terminology and impact of PPSA

“PPSA SI”: CA refers to a PPSA security interest as a security interest under the PPSA (s 51)

o However a security interest in the CA is defined as to include both a PPSA security interest as well as a charge, lien or pledge: s 51A

This is so that the term security interest will include security over land which is not dealt with in the PPSA as it only deals with personal property.

“secured party”: secured party is defined to include both the PPSA meaning of the term and the chargee etc under a charge, lien or pledge: s 51B

“secured creditor”: secured creditor is defined in terms of the debt owing to the creditor being secured by a security interest: s 51E

“circulating SI”: CA also adopts the concept of a circulating security interest from the PPSA.

o Under s 51C a circulating security interest means one that is defined that way under the PPSA or a floating charge

o A circulating security interest under s 340 PPSA is one covering

Debts from sale of inventory or providing services in the ordinary course of business;

Inventory;

Currency;

A bank account (not a term deposit); or

Negotiable instrument

It will also include any other security interest where the property is allowed to be transferred in the ordinary course of the grantor's business free of the security.

Registration

Prior to the commencement of the PPSA, charges over non land assets of the company had to be registered with ASIC otherwise they may be void against a liquidator or administrator and in addition priority over other registered later charges would generally be lost

Since commencement of PPSA a similar set of principles applies (though the registration needs to be on the PPSA register). Priority of SIs depend on registration under the PPSA as explained earlier.

Under s 588FL, a PPSA Security Interest provided by a company must be registered within

o 20 business days of the security interest coming into force or

o at least 6 months before the commencement of the liquidation or administration; or

o Time extended by court under s 588FM

otherwise it will result in the SI vesting in the company immediately before the liquidation or administration.

The effect is to make the property available to the creditors generally under the liquidation or administration.

There are some exceptions for security interests of certain types of property S 588FN

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Retention of Title Property – PMSI

ROT Clause: Under PPSA, the effect of a ROT clause in a contract will be to create a security interest

o Hence to protect against 3rd parties the vendor needs to ensure that ROT is registered under the PPSA

o A ROT arrangement is part of a special category of SI known as Purchase Money Security Interests (PMSI) (s 14 PPSA)

o Generally there is a “super priority” over earlier perfected SI if the PMSI is registered before 15 business days after possession of goods by grantor or if inventory, when the grantor obtains possession: s62 PPSA.

o This is given effect to in CA in s 51F:

S 51F defines PPSA retention of title property and then excludes it from the meaning of the term property of the company under the Corporations Act: s 51F(2)

3. RECEIVERSHIP There are 2 types of receivership:

o court appointed; and

o privately appointed by lender

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3.1 Controllers and receivers

Controller : A controller is a receiver or receiver and manager, or anyone else in possession or control of property for the purposes of enforcing a SI (s 9)

Receiver : A receiver is appointed as an agent of [company] but is appointed by secured creditors and gives them preference

Receiver and manager : A receiver is also a manager if the receiver managers, or has power to manage, affairs of [company] (s 90)

3.2 Court appointed receivers

The equity courts traditionally exercised a right to appoint receivers to partnerships and this was later extended to companies.

Receiver was used to preserve assets and income whilst some other issue was litigated or resolved.

In Qld, the Supreme Court has jurisdiction to appoint a receiver (s 246 Supreme Court Act 1995 (Qld)). Similar provisions exist in other States and in the Federal Court.

Court will only use though in very limited circumstances (Bond Brewing v NAB)

o Receiver should not be appointed where comp doesn’t agree to it (Bond Brewing v NAB)

There is also a power in the CA for appointment to companies (and individuals associated with them): s1323.

o Can be used when ASIC is investigating to preserve value or protect assets.

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3.3 Private appointments – our focus

Receivership was adopted by creditors as a means of securing rights to property held by a comp

o This right was contractual in nature – had to have right to appoint receiver in the contract

Eventually the legislature included certain provisions in the companies legislation to cover this

o Now fairly extensive provisions in CA - Part 5.2 to cover this.

o Note that the CA refers to Receivers and “other controllers” of property

Receiver appointed as agent of company: but appointed by secured creditor and gives them preference

Controllers appointed as agent of lender: eg, as agent of mortgagee (leg extends to controllers)

Receivers and PPSA

Role of privately appointed receivers based on contractual agreement between lender & borrower

o Right to appoint receiver not recognised under PPSA legislation which is based on US

Generally secured party enforces rights in collateral under Chapter 4 PPSA.

PPSA recognises receivership by excluding it from Chapter 4 PPSA (s 116 PPSA)

o This exclusion only relates to receivers or receiver/manager. If appointed as another type of controller then will be subject to Chapter 4 PPSA!

Chapter 4 PPSA similar to what applies to receivers under Part 5.2 Corps Act

Appointment

How are receivers appointed? o ‘Private’ or ‘out of court’ appointments (.e. by secured creditors under an instrument)

Power to appoint must be in agreement (in security doc) (Canberra Advance Bank);

Contractual issues can arise (eg. misleading deceptive conduct - s 18 ACL)

Requires an event of default on part of borrower

Who can be appointed? o Receiver must be a registered liquidator (s 418(1)(d))

o Disqualifications: [person] cannot act as receiver if they are (s 418(1)):

Auditor, officer, employee of the company or related body corporate or have been so in last 12 months;

Mortgagee of company property nor officer, employee etc of mortgagee

S 418 (1) A person is not qualified to be appointed, and must not act, as receiver of property of a corporation if the person:(a) is a secured party in relation to any property (including PPSA ROT property) of the comp; or(b) is an auditor or a director, secretary, senior manager or employee of the corporation; or(c) is a director, secretary, senior manager or employee of a body corporate that is a secured party

in relation to any property (including PPSA retention of title property) of the corporation; or(d) is not a registered liquidator; or(e) is a director, secretary, senior manager or employee of body corporate related to the comp; or(f) unless ASIC directs in writing that this paragraph does not apply in relation to the person in

relation to the corporation--has at any time within the last 12 months been a director, secretary, senior manager, employee or promoter of the corporation or of a related body corporate.

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o Can have 2 or more receivers who share tasks (s 434D-G)

Method of appointment :o No prescribed method – depends on documents (what has been agreed regarding need to

notify default)

If demand issued then must allow reasonable time to comply (Bunbury Foods)

Bunbury: 3 days - $3 mil = reasonable

o No loss of right to appoint: even if a delay (CH McKay)

o May rely on defaults: even if appointer is unaware of them at time of appointment (Canberra Advance Bank)

o Right to challenge appointment: not only for directors but for other creditors (s 418A)

o Receiver can use s 418A to confirm appointment: on an application, the Court may make an order declaring whether or not appointment was valid (s 418(2))

If invalid, person could be liable for trespass / conversion if sold assets (Re Goldberg)

Effect of appointment :o Circular (floating) charges will crystallise and become fixed

SI will be enforceable by secured party against the company (right to “grab” assets)

o Directors retain positions but powers of management affected (Deangrove v CBA; s 418A )

Directors can’t interfere with assets receiver has control over – could be all assets

Directors role may be to merely lodge docs with assets, or to manage assets receiver does not have control over

Company is still legal owner of the secured property but receiver has control of it and can sell it etc

o Notification of appointment to ASIC: ASIC must be notified within 7 days after appointing receiver (s 427(1))

o Statement after company name: after name of comp must state that receiver / receiver and manager has been appointed (s 428(1))

If controller : must state after comp name that controller is acting (s 428(2))

o Report required by directors: Directors must, within 14 days of notice of appointment, provide controller (receiver etc) with report of affairs of comp (s 429(2)(b))

Power of receiver

Arises from documents allowing appointment (or court order)

Extensive powers (s 420)

o subject to provisions in the instrument of appointment or court order which can limit the receiver’s powers

o not for other controllers (only receivers!)

o Eg. power to institute legal proceedings

Controller may require reports (s 430)

Controller may inspect books (s 431; Re Jet Corp )

Controller may apply to court for directions (s 424)

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Controller may get declaration as to valid appointment (s 418A)

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Power of receiver to sell property secured by a prior SI :o A managing controller to apply to court to dispose of property secured by a prior SI (s 420B):

the Court may only make an order if satisfied that:

(a) apart from the existence of the prior security interest, the controller would have power to sell, or to so dispose of, the property; and

(b) the controller has taken all reasonable steps to obtain the consent of the secured party in relation to the prior security interest to the sale or disposal, but has not obtained that consent; and

(c) sale or disposal of the property under the order is in the best interests of the corporation's creditors and of the corporation; and

(d) sale or disposal of the property under the order will not unreasonably prejudice the rights or interests of the secured party in relation to the prior security interest.

(3) The Court is to have regard to the need to protect adequately the rights and interests of the secured party in relation to the prior security interest.

‘Managing controller’ – defined in s9

o Receivership undertaken to ensure obligations under borrowing agreement met so aim is to obtain funds for secured lender. Powers to be used for that purpose.

o ROT Property: a registered ROT arrangement will come within the PMSI super priority so as to not be available to a receiver; also it is not “property of the company” under s 51F(2)

Liabilities of receiver

Receivers are personally liable for debts incurred in course of receivership (s 419(1))

o Receiver usually obtains an indemnity from comp’s assets or from their appointer

o Possible relief where receiver’s appointment is defective from appointer, if court satisfied receiver believed on reasonable grounds had been properly appointed (s 419(3))

Pre-appointment contracts: Generally not liable for contracts entered into before appointment, unless adopted by the receiver

o Exception : s419A – may be liable for lease payments after 7 days if company continues to use property or fail to give notice of intention to disclaim

Supervision of receivers

By the court or ASIC (s423)

ASIC may also supervise through registration process as a registered liquidator

Duties of receiver:

Primary duty is to the secured creditor who appointed them (Expo Int v Chant - duty to obtain funds to repay lender)

Fiduciary duties to the company as its agent, officer (s 9 – def)

Receiver has both common law and statutory duties

Common law duties include :o exercise powers in good faith

o act within the terms of appointment – can’t exceed authority

o account to the company after the mortgagee’s security has been discharged – ie. give any $ leftover back to company at end of receivership period

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Statutory duties include :o Duties when selling assets (s 420A):

When selling assets of the company the receiver must take reasonable steps to sell for Market value or If no market value the best price reasonably obtainable.

Not entirely clear what is meant by market value or “best price” (Jeogla V ANZ)

Some of the likely issues though are: receiver must advertise the item in the market where it fits - this places emphasis on

the need to get the best price (Florgale Uniforms)

Under s420A must ensure that find out what the market is and what the property is worth - eg if specialised product must look for buyers in that market not just generally (Jeogla V ANZ)

o Jeogla : rec failed to identify right market to sell cattle in – sold to abattoir, should have sold to cattle collector

o Eg. Shares on ASX – easy to find market value

Cannot disregard offers or advice from those within the company eg directors (Kyuss Express v Sellers)

No obligation to wait until market improves however

If sell to a related party (eg mortgagee) then may be scrutinised by the courts. Can do so though if best price

NB. S 420A does not specify any remedy in respect of the duty- so must rely on other rights to enforce, eg as director / company – others may not have remedies

o Other statutory duties: [Receiver] must also:

Open bank account in their own name: s421(1) Notify [company] that they are receiver of property: s429(2)(a) Lodge director’s report with notice setting out comments within 1 month of receiving

report: s429(2)(c) Lodge notice in the prescribed form of the address of persons office, within 14 days of

becoming receiver: s427(2) Report possible breaches of duty by past/present officers to ASIC asap s422(1) Lodge accounts to ASIC every 6 months: s432 When appointed under circulating charge, pay priority debts first: s433

In addition, because of the definition of officer includes receiver, the duties of an officer may also apply in s180-184 CA (Re Neon Signs). These duties include:

Duty of due care and diligence Duty to act bona fide in the best interest of the company Duty not to misuse position

Effect of liquidation on a receiver Common law: receiver’s position as agent for the company ceases but controls secured property –

so becomes agent of mortgagee S 420C – if liquidator appointed first, receiver will never be agent of company

End of receivership Receivership ends when either debt has been repaid or all the secured assets have been realised Under circulating charge some priorities to be paid before returning funds to secured creditor (s 433

– eg. employee wages / entitlements) Company in receivership may also be in administration or liquidation

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MOD 9: VOLUNTARY ADMINISTRATION

1. INSOLVENT CORPORATIONS & VOLUNTARY ADMINISTRATION INTRO

Insolvency: being able to pay all debts as and when they become due and payable (s 95A)

Consequence of insolvency: eg. 588G – Director’s duty to prevent insolvent trading

Procedures to deal with insolvent companies: contained in Ch 5; procedures re:

o Collective in nature – put all creditors into pool and split money

o Involve appointment of an independent outsider to undertake procedure

VA Scheme (Part 5.3A) enables a comp which is/might be insolvent to be brought under the control of an independent outsider who takes control and investigates comp’s affairs.

Object of VA: is to (s 435A):

(a) maximises the chances of the company continuing in existence; or

(b) if not possible – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

Administration: o During the administration period there is a moratorium on claims against the company.

o Administrator convenes two meetings of creditors.

o In the second creditors’ meeting a decision is made regarding the company’s future:

execute deed of company arrangement; or

end the administration; or

resolve to wind up company.

1.2

2. VA – APPOINTMENT

2.1 Appointment of administrator

Administration begins when administrator is appointed under s 436A, B or C (s 435C(1)(a)):

o Appointment by company by resolution of the BoD resolving in writing that (s 436A(1)):

(a) the company is insolvent, or is likely to become insolvent at some future time; and

(b) an administrator of the company should be appointed.

NB. Cannot appoint if comp already in liquidation / provisions liquidation (s 436A(2))

o Appointment by liquidator (s 436B):

A liquidator or provisional liquidator of a company may by writing appoint an administrator of the company if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time (s 436B(1))

With the leave of the Court or a meeting of creditors, a liquidator or provisional liquidator may appoint himself/herself as administrator, or a partner or employee (s 436B(2))

Example : Re Depsun: suggested a strict approach - administrator’s independence may be compromised - interests that a liquidator must protect may conflict with an administrator’s duties

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o Appointment by person entitled to enforce security interest (s 436C):

A person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company’s property may by writing appoint an administrator of the company if security interest is enforceable (s 436C )

Recall a ‘security interest ’ defined in s 51A – see Mod 8

No defn of “the whole or substantially the whole”

NB. Cannot appoint if comp already in liquidator / provisional liquidation (s 436C(2))

Secured creditor usually appoint receiver, but may appoint admin for strategic reasons:

Receiver : acts in interests of secured credit

Administrator : acts in interests of all creditors

2.2 Who can be an administrator?

Must be a registered liquidator (ss 448B(1), (2))

Disqualifications : [person] cannot, without leave of the court, seek or consent to be appointed as, or act as, administrator if they are (s 448C(1)):

o Director, secretary, senior manager or employee of the company (s 448C(1)(c));

o Auditor of company (s 448C(1)(e))

o An insolvent under administration (s 448D) - bankrupt

Relevant relationships :o Admin must make declaration of relevant relationships in last 2 years as well as any

indemnities that have been provided to him or her (s 436DA)

“relevant relationships” mean administrator, or their firm, with (s 60(1)):

the company; or

an associate of the company; or

a former liquidator, or former provisional liquidator, of the company; or

a person who is entitled to enforce a security interest in the whole, or substantially the whole, of the company's property (including any PPSA retention of title property); and

If there are relevant relationships, must stating the administrator's reasons for believing that none of the relevant relationships result in the administrator having a conflict of interest or duty (s 60(1)(b))

“indemnities” (s 9)

o Court will also disqualify for lack of independence beyond this (Cth v Irving)

2.3 Consent and removal

Consent of admin required : person must consent in writing to appointment and must not have withdrawn consent (s 448A)

o Once appointed, appointment cannot be revoked (s 449A)

Removal of admin : court can remove an administrator and appoint someone else, on application of ASIC or a creditor of the company (also a liq / prov liq may apply) (s 449B)

Declaration of invalid appointment : court also has powers to declare appointment valid or invalid (s 447C) – and can make variety of orders including ending the administration (s 447A)

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2.4 Notification of appointment NB. All business days

Notification of appointment to ASIC : Admin must, within 1 day of appointment, lodge with ASIC a notice of appointment and within 3 days of appointment publish the notice on the ASIC Insolvency Notice website (s 450A(1)); Reg 5.3A.07A)

Statement after company name : Company must set out in every public doc (ss 9, 88A) and negotiable instrument (s 9) after name of comp the expression “administrator appointed” (s 450E(1))

If appointment by secured creditor (under s 436C) : admin must give notice to company before end of next business day (s 450A(2))

For any type of appointment : Admin must give notice to any person having a charge over the whole or substantially the whole of comp’s assets (s 450A(3))

Contravention : does not affect validity of things done unless court orders otherwise (s 450F)

2.5 Investigation of company’s affairs

After administration begins - the administrator must investigate company’s business, property, affairs and financial circumstances (s438A(a))

On the basis of investigation, the administrator forms an opinion about whether it would be in the interests of the company’s creditors (s 438A(b)):

o for the company to execute a deed of company arrangement;

o for the administration to end; or

o for the company to be wound up

To help the administrator to be properly informed:

o company’s directors must deliver to admin all books in their possession that relate to the company (s 438B(1)(a))

“books”: includes a register; any other record of information; financial reports or financial records, however compiled, recorded or stored; and documents (s 9)

o if the directors know where other books relating to the company are, directors must tell the administrator (s 438B(1)(b))

o within 5 bus days after administration begins - directors must give to admin a statement about the company’s business, property, affairs and financial circumstances (s 438B(2))

Past indiscretions of employees / officers etc : admin must lodge with ASIC reports on past indiscretions of employee, officer, member of the company (s 438D(1)) + other reports (s438D(2))

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2.6 Powers of administrator

See s437A(1): Role of administrator:(1) While a company is under administration, the administrator:

(a) has control of the company's business, property and affairs; and (b) may carry on that business and manage that property and those affairs; and (c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and (d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.

(2) Nothing in subsection (1) limits the generality of anything else in it.Note: A PPSA security interest in property of a company that is unperfected (within the meaning of the Personal Property Securities Act 2009 ) immediately before an administrator of the company is appointed vests in the company at the time of appointment, subject to certain exceptions (see section 267 of that Act).

The administrator when performing a function or exercising a power - taken to be acting as the company’s agent (s 437B )

During administration - powers of the company’s officers are suspended (s 437C(1) ), unless administrator gives written approval (s437C(1A))

Other wide powers listed (s442A):

Without limiting section 437A, the administrator of a company under administration has power to do any of the following:(a) remove from office a director of the company;(b) appoint a person as such a director, whether to fill a vacancy or not;(c) execute a document, bring or defend proceedings, or do anything else, in the company's name and on its behalf;(d) whatever else is necessary for the purposes of this Part.

Eg of admin’s powers: administrator sold all of the company’s business before the second meeting of creditors (Brash Holdings v Shafir)

Court reluctant to interfere with commercial decisions: (Patrick Stevedores No 2)

2.7 Administrator’s liabilities and right of indemnity

Personal liability: admin personal liable for (s 433A(1)):

o debts incurred in the course of the administration for services rendered, goods bought or property leased or used

o for money borrowed, interest and costs

Indemnity: Admin entitled to be indemnified out of comp’s property for debts incurred in exercising his/her powers during admin along with money borrowed, costs interest etc (s443D); and

o Any other debts liabilities, damage or losses in good faith and without negligence

o Right to be indemnified for remuneration as fixed under s 449E

Remuneration: fixed by agreement between admin and any committee of creditors or by resolution of creditors or by court (s 449E(1))

o NB. Resolution must deal with admin’s remuneration only (s 449E(1B))

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3. FIRST CREDITORS’ MEETING Admin required to convene a meeting of comp’s creditors (s 436E(1)) within 8 business days after

administration begins, to determine whether to (s 436E(2))o appoint a committee of creditors, and if so to determine its membership (s 436E(1)); ando remove administrator and appoint another (NB. No choice to end administration) (s 436E(4))

Meeting convened by (s 436E(3)), at least 5 business days before the meeting (so 3 days after appointment):o giving written notice to as many of the company’s creditors as reasonably practical; ando publishing the notice on ASIC Insolvency Notice website

NB. Admin must also send out with notice of meeting and table at the meeting the declaration of relevant relationship and any indemnities received to show independence

Committee of creditors’ role: consultative: s436F(1); cannot give directions: s436F(2); but can require administrator to report to the committee: s436F(3)

o Membership : creditor / someone authorised in writing by a creditor / body corporate (s 436G)

Curing procedural defects: court can remedy defects such as incorrect timing / notice (s 1322(4)) if satisfied (s 1322(6)): (NB. Could also remedy under s 447A – General power to make orders)o The thing meant to be done is of a procedural natureo Persons concerned in or party to the contravention acted honestlyo It is just and equitable for the order to be madeo No substantial injustice would be caused

Re Vanfox - failure to publish notice of first creditors’ meeting may be validated under s1322(4))

4. SECOND CREDITORS’ MEETING (S 439A MEETING) Most important meeting – decides future of company

After forming opinion on whether it would be in the interests of the company’s creditors (s 438A(b)):o for the company to execute a DOCA;o for the administration to end; oro for the company to be wound up

the administrator must convene the meeting, report to creditors and then hold a second meeting of creditors to present the results of the investigation

3

4

4.1 When must meeting be convened?

Admin must convene meeting of the company’s creditors within the convening period (s439A(1))

Meeting can be held within 5 business days before or after the convening period (s 439A(2))

Convening period: within 20 business days after the day administration begins (s439A(5)(b))

o If admin begins in Dec or within 25 days of Good Friday: convening period is extended to 25 business days after the day admin begins (s 439A(5)(a))

o Calculate from day after admin begins: since 1 Jan 2008 – reverses Cawthorn v Keira

Eg. admin appointed 10 Nov, admin has 20 bus days starting 11 Nov = convening period to 7 Dec so meeting can be held 5 days either side – between 3rd to 14th Dec

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Extension of convening period [see below for case examples]

The Court may extend the convening period on an application made during, before or after the convening period (s 439A(6))

o If applying before or after the convening period: ss 439A(7) and (8) apply and the extension will only be granted if in best interests of the creditors (s 439A(7))

4.2 How is meeting convened?

Admin convenes meeting by, at least 5 business days before the meeting (s 439A(3)):

o giving written notice of the meeting to as many of the company’s creditors as reasonably practicable and

o publishing the notice on the ASIC Insolvency Notices website

Accompanying reports : notice given to creditors (s 439A(3)) must be accompanied by (s 439A(4)):

o Report on comp’s business, property, affairs and financial circumstances;

o Statement setting out admin’s opinion, reasons and other relevant info on whether it would be in the interests of the company’s creditors:

for the company to execute a DOCA; for the administration to end; or for the company to be wound up

o If DOCA proposed – a statement setting out details of proposed deed

Curing procedural defects in notice : court can remedy defects such as incorrect timing/notice (s 1322(4)) if satisfied (s 1322(6)): (NB. Could also remedy under s 447A – General power to make orders)

o The thing meant to be done is of a procedural nature

o Persons concerned in or party to the contravention acted honestly

o It is just and equitable for the order to be made

o No substantial injustice would be caused

Re Vanfox - failure to publish notice of first creditors’ meeting may be validated under s1322(4))

4.3 When must meeting be held?

Meeting can be held within 5 business days before or after the convening period (s 439A(2))

If meeting held too early or too late: s 447A can be used to alter how s 439A is to apply to particular company, so can be used to extend time for convening the meeting or when the meeting is held too early or too late (s 447A; Australasian Memory v Brien )

4.4 Adjourning meeting

A meeting convened under s439A may be adjourned, but cannot be adjourned to a day that is more than 45 business days after the first day on which the meeting was held (s 439B(2))

o Extension of time : Court can extend time fixed by s 439B(2) (& power under s 447 to extend time)

Re Taylor o 60 day period (now 45 business days) fixed by s439B(2) was due to expire, administrator applied

for an order extending the period set by s439B(2)o extension of 60 days granted: administrator not able to learn enough about the company’s financial

affairs to provide meaningful advice to creditors about their options + evidence showed that no person would be prejudiced by extending the time by further 60 days.

4.5 Outcome of meeting

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Three possible outcomes: creditors’ may resolve that (s 439C):o the company execute a DOCA;o the administration should end; oro the company be wound up.

Any of the s 439C outcomes will end the administration (s 435C(1)(b), (2) ) though note that if DOCA chosen administration continues until DOCA executed by comp and admin (s 435C(2)(a))

5. MORATORIUM ON CLAIMS During admin there is a moratorium on claims against comp – creditors etc cannot enforce rights as

they usually can

Company under admin cannot be wound up voluntarily except under 446A (s 440A)

S 446A Administrator becomes liquidator in certain cases(1) This section applies if:

(a) the creditors of a company under administration resolve at a particular time under paragraph 439C(c) that the company be wound up; or

(b) a company under administration contravenes subsection 444B(2) at a particular time; or(c) at a meeting convened under section 445F, a company's creditors:

(i) pass a resolution terminating a deed of company arrangement executed by the company; and(ii) also resolve at a particular time under section 445E that the company be wound up.

(2) The company is taken:(a) to have passed, at the time referred to in paragraph (1)(a) or (b) or subparagraph (1)(c)(ii), as the case

may be, a special resolution under section 491 that the company be wound up voluntarily; and(b) to have done so without a declaration having been made and lodged under section 494.

Secured parties : During admin, secured party cannot enforce a security interest over the property of the company except (s 440B):o With the admin’s written consent (s 440B(2)(a)); or

o With leave of the court (s 440B(2)(b))

Owner / lessor of property : During admin, owner or lessor of property used by the company cannot take possession of the property or recover it except (s 440B):o With the admin’s written consent (s 440B(2)(a)); or

o With leave of the court (s 440B(2)(b))

Civil proceedings cannot be brought against the company or in relation to any of its property except with the administrator’s written consent or the leave of the Court: s440D.

5.1 Exceptions to moratorium provisions

[1] Secured party

Where a person has a security interest over the whole, or substantially the whole, of the property of a company under admin – that person may enforce the security interest within the decision period (s 441A)

o Decision period : 13 business days after secured creditor was given notice of appointment of the admin under s 450A(3) or otherwise 13 business days after the administration begins (s 9)

o Enforce : enter into possession; appoint a receiver etc (s 9)

[2] Secured party who has already enforced security interest

Moratorium (ie. s 440B) does not affect a secured party, receiver etc who has entered into possession or assumed control of the property before the beginning of the administration of the company for the purposes of enforcing a charge on the property (s 441B(1)-(2))

o Entered into possession : eg, changed locks

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Also applies if owner or lessor enters into possession etc of property used or occupied by the company before the beginning of administration (s 441F)

[3] Perishable property

Where perishable property of comp under admin is subject to a security interest, the secured party, receiver etc can enforce the charge, so far as it is a charge on perishable property (s441C(1))

Also applies to owner taking possession of perishable property (s 441G)

5.2 Court’s power to limit chargee

Court may order a secured party, receiver etc to refrain from performing a function or exercising a power that would otherwise be permissible under s 441B(1) (SP who already enforced SI) (s441D)

Who can apply for such an order? Administrator (s 441D(2))

When will Court make such an order? If Court satisfied that the administrator proposes to act in a way that will adequately protect the secured party’s interests (s 441D(3))

NB. Does not apply to holder of a charge over the whole, or substantially the whole of the company’s property under s441A (s 441D(1))

6. END OF ADMINISTRATION

Administration ends on the happening of whichever event of a kind referred to in s435C(2) or s435C(3) (s 435C(1)(b)):

o S 435C(2) events :

A vote by creditors at the 439A meeting to enter into liquidation, or to end the administration or when a DOCA is entered into

NB. If DOCA - administration continues until DOCA executed by comp and admin (s 435C(2)(a))

o S 435C(3) events:

court orders, under s447A or otherwise, that the administration is to end;

convening period ends without meeting being convened;

court does not extend convening period;

convening period, as extended, ends, without the meeting being convened;

meeting convened under s439A ends without a resolution under s439C being passed;

company fails to execute deed of company arrangement;

court orders winding up.

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7. DOCA NB. Completely separate from VA!

At the s439A meeting (2nd cred meeting), creditors may resolve that comp execute a DOCA (s 439C):

o Administration ends on its execution (s435C(2)) so this establishes a separate set of conditions under which the company will operate

o Company’s admin usually becomes admin of the DOCA but can be replaced by creditors at 439A meeting (s 444A(2) )

o Administrator of company must prepare an instrument setting out the terms of the deed (s 444A(3))

o Until a DOCA terminates, the company must set out, in every public document, and in every negotiable instrument, of the company, after the company’s name where it first appears, the expression “subject to deed of company arrangement” (s 450E(2))

7.1 What must DOCA contain?

Mandatory provisions: including (s 444A(4)):

administrator of the deed;

property of the company available to pay creditors claims

nature and duration of any moratorium

Employees entitled to priority unless employees vote to approve or court orders (s 444DA)

Default provisions: DOCA is deemed to contain unless it provides otherwise (s 444A(5); Reg 5.3A.06 and Sch 8A):

o Eg. Powers of administrator

7.2 Execution of DOCA

DOCA must be executed by the company and the administrator (s 444B(2), (5))

o NB. Administration continues until DOCA executed by comp and admin (s 435C(2)(a))

o Company : must execute within 15 business days after the end of creditors’ meeting (s 444B(2))

o Administrator of DOCA : execute before / asap after company executes it (s 444B(5))

Effect of failure to execute (= contravention of s

o Administration ends (s 435C(3)(f)), comp deemed to have entered into creditors’ voluntary winding up (s 446A(1), (2))

Administrator becomes liquidator (s 499(2B));

Deed’s admin must lodge notice & send to creditors (s 450C)

7.3 Nature of DOCA

Not required to be executed as a deed (ie. doesn’t need to be sealed / signed in any particular way (MYT Engineering)

o MYT Engineering : creditors of the company resolved - company should execute DCA company seal affixed to the DOCA and the affixation of the seal was witnessed by one director. other director was overseas at that time. before leaving overseas, directors agreed that director remaining should sign all necessary docs company’s articles of association required that every document to which the company’s seal was

affixed should be signed by a director and countersigned by another director or secretary.

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Held at [14] – no “inference can be drawn from the use of the word ‘deed’. When Pt 5.3A is read as a whole, its provisions do not require that a DOCA should be executed as a deed”

7.4 Notices to be given

ASAP after execution of DOCA: deed’s admin must (s 450B):

o Send a written notice of execution to each creditor; and

o Lodge copy of the deed with ASIC

Failure to comply does not affect validity of the process unless court orders otherwise (s 450F)

7.5 Effect of DOCA

Binds all unsecured creditors of the company (s 444D(1))

o Does not bind secured creditors or owners of property used by the company (s444D(2)) unless agree to do so by voting for deed or court orders under s 444F

Binds company, its officers and members, and the deed’s administrator (s 444G )

Does not bind creditors re action against third parties in related matters (Lehman Bros v Swan)

7.6 Termination of DOCA

Termination occurs where (s 445C) :o Court orders under s445D;

Variety of grounds (see below)

Eg. if Court satisfied that info about the company’s business, property, affairs or financial circumstances was false and misleading and can reasonably be expected to have been material to creditors in deciding whether to vote in favour of the deed

Who can apply : ASIC, a creditor, the comp or other interested person (s 445D(2))

o Company’s creditors pass a resolution terminating the deed; or

Creditors may, at a meeting convened under s 445F, pass a resolution terminating the deed and resolve that company be wound up if deed in material breach (s 445CA)

The winding up = creditors’ voluntary winding up

o DOCA specifies circumstances in which it is to terminate and those circumstances exist

DOCA provides that it is to terminate on the happening of certain prescribed events - DOCA terminates if those circumstances exist

DOCA must specify the circumstances in which the deed terminates (s 444A(4)(g))

NB. Default provision in para 3 of Sch 8A to the Corps Regs:

Termination where no longer practicable or desirable either to continue to carry on the company’s business or to implement the deed

S 445D – When Court may terminate deed(1) The Court may make an order terminating a deed of company arrangement if satisfied that:

(a) information about the company's business, property, affairs or financial circumstances that:(i) was false or misleading; and(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;

was given to the administrator of the company or to such creditors; or(b) such information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or(c) there was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or(d) there has been a material contravention of the deed by a person bound by the deed; or(e) effect cannot be given to the deed without injustice or undue delay; or(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission

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proposed to be so done or made would be:(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or(ii) contrary to the interests of the creditors of the company as a whole; or

(g) the deed should be terminated for some other reason.

8. POWERS OF THE COURT

Powers of the court include:

o Power under Pt 5.3A, especially ss 447A-447E

o Powers conferred otherwise than under Pt 5.3A – eg s 1322(4) (see Re Vanfox)

8.1 Power under s 447A Court may made order it thinks appropriate about how Part 5.3A is to operate in relation to a

particular company (s 447A(1))

Who can seek order under s447A?

o An order may be made on the application of (s 447A(4)): the company; or a creditor of the company; or in the case of a company under administration--the administrator of the company; or in the case of a company that has executed a DOCA -the deed's administrator; or ASIC; or any other interested person.

Broadly interpreted:

o Convening period under s 439A can be extended (Australasian Memory v Brien; Re Madden)

Aus Memory : S439A meeting held too early; HC considered whether s447A permitted a court to make

an order altering the times fixed by those provisions of Pt 5.3A which contain express provision for variation of the time so fixed (eg: s439A);

Held: s447A permits the making of orders which would alter the way in which “this Part is to operate in relation to a particular company”;

Hence permits the making of orders which would alter how s439A is to apply to a particular company.

o Adjournment of meetings (Cawthorn v Keira - used to order that the meeting of creditors held under s439B had not terminated but was treated as having been adjourned)

o Dispensing with first meeting of creditors and permitting second meeting to be held at any time during convening period (Re Sims)

8.1 Power under s 1322(4)

Court has certain powers (s 1322(4)), eg.

o power to make validating orders (s 1322(4)(a))

o power to extend the time for doing any act (s 1322(4)(d))

Who can apply? Any interested person (s 1322(4))

o Eg. Re Vanfox: failure to publish notice of first creditors’ meeting validated under s1322(4))

9. TRANSITION FROM ADMIN TO CREDITORS’ VOLUNTARY WINDING UP

Comp’s creditors can resolve that the company be wound up in insolvency [creditors’ voluntary winding up] (s 446A(1)):

o at the s 439A (second creditors’) meeting (s 446A(1)(a))

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o where company under administration contravenes s444B(2) [ie company fails to execute DOCA within 15 business days] (s 446A(1)(b)); or

o If under a DOCA at meeting convened under s445F where comp’s creditors pass a resolution terminating the DOCA and also resolve that the company be wound up (s 446A(1)(c))

Case Examples

Extreme extensions: Rivercity: Administrators appointed 25 February 2011, convening period extended up to 18

December 2012; ABC Learning Centres: Administrators appointed 6th November 2008, one extension up to 31

March 2009, then another granted to 30 September 2009 then finally up to 31 March 2010.

Re Tracker Software• The administrator sought order extending the convening period for the second creditors’ meeting• Basis:

– further investigations required;– complexities;– various proposals were being considered;– more time needed to make a recommendation regarding the company’s future.

• Extension granted - if the investigations were not allowed to continue and an informed decision not able to be made, employees of the company may be severely adversely affected in the future.

• Also evidence that committee of creditors consented to the application.• “Notwithstanding the desire of the legislature that there be speed, in my view speed

unaccompanied by any useful gathering of intelligence to guide the company into the future is undesirable, and speed for its own sake is something that should not be paramount”:

Re Geraldton Building Co• Relevant factors:

– difficulties experienced by the administrators in establishing the accurate financial position of the companies;

– complex negotiations were taking place with a prospective purchaser;– committee of creditors had resolved to support the administrators’ application for an extension

of the convening period.• Extension granted – 45 days.• “the discretion whether or not to extend the time is to be exercised bearing in mind the spirit and the

object of Div 6 of Pt5.3A of the Law, namely, to maximise the chances of the company continuing in existence or, alternatively, terminating its existence in the most appropriate way”: at [6].

Mann v Abruzzi• Extension granted:

– on the evidence administrator doing the best he can do to deal speedily with negotiations to enable the company to go back into survival mode;

– no prejudice to creditors or to members in extending the time;– if a meeting of creditors was convened without the extension of time, the administrator would

not have sufficient material to be able to give a meaningful account of his administration to the creditors.

Re Vanfox• No newspaper advertisement as required by s436E(3) for first creditors’ meeting;• Second creditors’ meeting convened 6 business days later than the time prescribed by s439A;• No application made to the court to extend the convening period;• Second creditors’ meeting convened by a notice dated 18 February 1994, sent by post and

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Go to Mod 10 – 4.2 Creds voluntary winding up


advertised in a newspaper stating that the meeting would be held on Monday 1 March 1994, but 1 March 1994 was a Tuesday.

• Held: s1322(4)(a) gives a “clear power to declare an act or proceeding to be not invalid by reason of any contravention of any provision of the Corporations Law”: at 217; s1322(4) used to cure all these irregularities.

MOD 10: LIQUIDATIONS

1. WHAT IS LIQUIDATION?

Also referred to as ‘winding up’.

Process where:

o the company’s assets are collected;

o company’s property sold;

o debts owed to creditors repaid so far as possible along with the costs of procedure;

o surplus (if any) distributed among company’s members;

Following the liquidation process, comp is usually deregistered (can de-register without liquidation under certain conditions)

ASIC also has direct power to order the winding up of a comp under Part 5.4C (inserted from 1 July 2012 ) – see particularly s 489EA(1):

o ASIC may order the winding up of a company if (s 489EA(1)):

the response to a return of particulars given to the company is at least 6 months late; and

the company has not lodged any other documents under this Act in the last 18 months; and

ASIC has reason to believe that the company is not carrying on business; and

ASIC has reason to believe that making the order is in the public interest.

2. TYPES OF LIQUIDATION

Compulsory winding up by the court (court ordered)o in insolvency (Part 5.4)

o on other grounds (Part 5.4A)

Voluntary winding up o members’ voluntary winding up

o creditors’ voluntary winding up

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Liquidation

Voluntary

Members' voluntary

winding up

Creditors' voluntary

winding up

Court ordered

In insolvency

On other grounds


3. COMPULSORY WINDING UP IN INSOLVENCY

Part 5.4 – ss 459A – 459T

On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency (s 459A)

3.1 Who can apply?

Any one or more of the following may apply to the Court for a company to be wound up in insolvency (s 459P(1)):

o (a) the company;

o (b) a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor);

o (c) a contributory [s9 definition];

o (d) a director;

o (e) a liquidator or provisional liquidator of the company;

o (f) ASIC

An application made by any of the following…may only be made with leave of the Court (s 459P(2))

o (a) a person who is a creditor only because of a contingent or prospective debt;

o (b) a contributory;

o (c) a director;

o (d) ASIC

3.2 Insolvency

Definition : a person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable (s 95A(1))

o A person who is not solvent is insolvent (s 95A(2))

Test : o ‘Cash-flow’ test rather than ‘balance sheet’ test of insolvency (Duncan v CT; Re Trader )

just because company’s assets > liabilities does not mean it is solvent

just because company’s liabilities > assets does not mean it is insolvent

o Assets and liabilities are useful indicators, but the ability of a company to pay its debts as they fall due is crucial

o “It comes down to a question of fact, in which the key concept is ability to pay the company’s debts as and when they become due and payable” (Lewis v Doran)

o Temporary lack of liquidity does not necessarily mean the company is unable to pay its debts (Sandell v Porter)

o Whether a company is insolvent or not is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole (Sandell v Porter)

have regard to commercial realities - what resources are available to the company to meet its liabilities as they fall due;

whether resources other than cash are realisable by sale or borrowing upon security;

whether such realisations are achievable.

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o Can take into account funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings (Lewis v Doran)

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3.3 Presumptions of Insolvency NB. Just presumptions – can be rebutted!

Court must presume [comp] insolvent if, during or after the 3 months ending on the day when application was made, [comp] meets any of the requirements listed below (s 459C(2)):

o S 459C(2)(a) the company failed (as defined by s 459F) to comply with a statutory demand;

o (b) execution or other process issued on a judgment, decree or order of an Australian court in favour of a creditor of the company was returned wholly or partly unsatisfied;

o (c) a receiver, or receiver and manager, of property of the company was appointed under a power contained in an instrument relating to a circulating security interest in such property;

ASIC v Lanepoint

o (d) an order was made for the appointment of such a receiver, or receiver and manager, for the purpose of enforcing such a security interest;

o (e) person entered into possession, or assumed control, of such property for such a purpose; or

o (f) a person was appointed so to enter into possession or assume control (whether as agent for the secured party or for the company).

Company failed to comply with a stat demand (s 459C(2)(a))

A person may serve on comp a demand relating to a debt/s that comp owes to the person, that is due and payable and whose amount is at least the statutory minimum (s 459E(1))

o Statutory minimum : $2,000 (s 9)

Demand must (s 459E(2)):

o specify the debt and its amount; and

o require the company to pay the amount of the debt within 21 days after the demand is served on the company; and

o be in writing; and

o be in the prescribed form [Form 509H]; and

o be signed by or on behalf of the creditor.

Serving stat demand

For the purposes of any law, a document may be served on a company by (s 109X):

o (a) leaving it at, or posting it to, the company’s registered office; or

o (b) delivering a copy of the document personally to a director of the company who resides in Australia or in an external Territory; or

o (c) if a liquidator of comp has been appointed – leaving it at, or posting it to, the address of the liquidator’s office in the most recent notice of that address lodged with ASIC; or

o (d) if an administrator of comp has been appointed – leaving it at, or posting it to, the address of the administrator in the most recent notice of that address lodged with ASIC

Case examples : if it comes to attention of a party, however served, there has been service

o In my opinion, s109X of the Act is facultative and not exclusive or mandatory and the s should not be construed so as to exclude any means of service which is proved to have brought a document to the actual attention of a company” (Emhill v Bonsoc)

o “Has been personal service, that is has the doc come to the notice of the resp” (Howship)

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o “If a demand comes to the attention of a party, whether by service on the registered office or otherwise, there has been service of the document” (Carlino Enterprises)

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Failure to comply with stat demand

If, as at the end compliance period, comp has not complied, comp is taken to fail to comply with the demand at the end of that period (s 459F(1))

Extension of time for compliance: not possible!o Court cannot extend the time to comply with a stat demand after the time for compliance has

ended (Aussie Vic Plant Hire) – cannot use ss 70 or 1322

Aussie Vic Plant Hire v Esanda : Debtor comp applied to court to have demand set aside. It was dismissed and time for compliance extended but debtor sought to appeal dismissal; Before appeal was heard time for compliance expired without it having been complied with or extended. Prior to the appeal being heard Esanda sought to have the appeal dismissed as being too late. HC agreed

Period for compliance:

o Generally 21 days after the demand is served (s 459F(2)(b))

o but if demand challenged under s 459G (can challenge within 21 days), period for compliance is either (s 459F(2)(a)):

as the court orders; or 7 days after the s 459G application is finally determined

Setting aside stat demand

A company may apply to the Court for an order setting aside a statutory demand served on the company (s 459G(1))

o Time limit : application must be made within 21 days after demand served (s 459G(2))

o Extension of time ? NO! Time cannot be extended, the requirements of s 459G must be strictly complied with (David Grant v WBC)

Court does not have power under s 1322(4) to extend time

o Federal court : if in Fed Court, need to consider impact of Civil Dispute Resolution Act 2011 – requires anyone who instigates proceedings in Fed Court to file genuine steps statement with application

Some exclusions (winding up app) but stat demand set aside apps not excluded – so need genuine steps statement (Superior IP)

Grounds for setting aside stat demand

S 459H: On s459G application, Court is satisfied of either or both of the following (s 459H(1)):

o (a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;

“genuine dispute” : Need to show a “bona fide dispute” Spencer Constructions Do not need to establish case but will fail to show genuine dispute if claim so devoid

of substance that no further investigation is warranted: Roadships Logistics No genuine dispute if appealing tax assessment: DCT v Broadbeach

o (b) that the company has an offsetting claim

“offsetting claim” : genuine claim comp has against resp by way of counterclaim; set-off etc – even if doesn’t arise out of same trans (s 459H)

court can set aside if under limit but if not just vary the amount.

PTO 2nd ground for setting aside stat demand (s 459J)101


S 459J: On s 459G app, Court may set aside demand if satisfied (s 459J(1)):

o (a) because of a defect in demand, substantial injustice will be caused unless demand set aside; or

o (b) there is some other reason why demand should be set aside

“defect” in demand (s 459J(1)(a)) ^^^:

o Defined re stat demand (s 9): (a) an irregularity (b) a misstatement of an amount or total (c) a misdescription of a debt or other matter; (d) a misdescription of a person or entity

o Topfelt; s 9 is an inclusive definition; “The notion of ‘defect’ is not confined to a misstatement of an amount of a debt to a small or minor misstatement or to an immaterial or minor misdescription of a debt or a person or entity. Misdescriptions of debts, persons, entities or amounts all fall within the statutory definition of “defect”, whether large or small”

o Demand must not be set aside merely because of defect (s 459J(2))

If the defect is ‘in the demand’, it is only to be set aside if substantial injustice will be caused by the defect unless demand is set aside (Spencer v G&M : s 459J(1)(a) )

o NB. May be consequences if the effect of the misdescription of the company’s name + ACN reveals that no such company exists – can’t have been properly served (B&M Quality v WG)

“some other reason” (s 459J(1)(b)) ^^^:

o Other reason : must be something other than a defect (Spencer v G&M)

o “If there is any other defect, including a defect in relation to the demand rather than the demand itself, then the demand may only be set aside if the court is satisfied that there is some reason why the demand should be set aside” (Spencer v G&M)

o Eg. abuse of process / service problems

Effect of setting aside stat demand

Stat demand has no effect while there is in force under section 459H or 459J an order setting aside the demand (s 459K)

3.4 Obtaining a winding up order [once stat demand NOT complied with]

If insolvency is shown or can be presumed, applicant generally entitled to winding up order

BUT: court retains a discretion – may order that insolvent comp be wound up in insolvency (s 459A)

If failure to comply with stat demand :

o Company restricted, without leave of the court, from opposing an application to wind up in insolvency that is based on its failure to comply with a statutory demand (s 459S(1))

Purpose : for debtor company to dispute stat demand [ie s459H or s459J] during the time for contesting [ie 21 days: s459G(2)] so that winding up apps proceed smoothly

Court not to grant leave : unless satisfied that the ground is material to proving that the company is solvent (s 459S(2))

NB. Can’t at this point challenge stat demand, all can do is prove solvency!

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CASES

Statutory demand cases

Carlino Enterprises• Statutory demand not served on the company’s registered office but served at an address which

was formerly the company’s registered office.• Statutory demand forwarded onto the company and came to the company’s attention.• Held: the demand came to the actual notice of the company, so there has been service of the

demand.

Emhill v Bonsoc• Original statutory demand handed to a director of Emhill Pty Ltd• Held: though s109X(1)(b) uses the word “copy”, there was good service of the statutory demand

B&M Quality v WG – defect, not substantial injustice• Stat demand referring to W G Brady Pty Ltd ACN 063 937 995 was served on B Pty Ltd• B Pty Ltd owed money to W&J Brady Pty Ltd ACN 063 937 995• So the correct name of the creditor = W&J Brady Pty LtdHeld:• This was a defect in the statutory demand• Court may disregard trivial misdescriptions of company names• But could be further consequences if effect of the misdescription of the comp’s name + ACN

reveals no such company exists.

Spencer Constructions v G & M – defect, not substantial injustice• failure to specify the correct registered office of the company = a defect in the demand• Held: as no injustice was caused by the defect, the court could not set aside the demand.

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4. VOLUNTARY WINDING UP

Part 5.5 CA: 2 types:

o Members’ voluntary winding up – where comp is solvent

o Creditors’ voluntary winding up – where company is insolvent

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2.2

3.2

4.1 Members’ voluntary winding up

Initiated by special resolution of company (s 491)

Declaration of solvency by directors : o Majority of directors may make written declaration to the effect that they have made an inquiry

into affairs of comp and formed the opinion that comp will be able to pay its debts in full within a period of 12 months after the commencement of the winding up (s 494(1))

Appointment of liquidator :o If company resolves by special resolution (>75%) to wind up the company, the company in

general meeting must appoint a liquidator (s 495(1))

o Company insolvent : If liquidator forms the view that comp is insolvent, they must (s 496(1)):

(a) apply under s 459P for comp to be wound up in insolvency;

(b) appoint an administrator under s 436B; or

(c) convene a meeting of the company’s creditors and winding up may become a creditors’ voluntary winding up

4.2 Creditors’ voluntary winding up

May commence if directors cannot make declaration of solvency (s 497)

Can stem from VA (s 446A(1)): (a) under s439C(c), company’s creditors resolve that the company be wound up;

(b) company under administration contravenes s 444B(2) ie failing to execute a DOCA that was approved by its creditors; or

(c) at a meeting convened under s 445F, company’s creditors pass a resolution terminating a DCA and resolves that the company be wound up.

Can stem from members’ voluntary winding up (s 446A(1)): Liq appointed by comp (after declaration of solvency) forms the opinion that the company is

insolvent even though the directors make a declaration of solvency – liquidator can convene meeting of company’s creditors [see s 496(1)(c)]

5. COMMENCEMENT OF WINDING UP PART 5.6, DIV 1A

Winding up ordered by court (compulsory liquidation): o Generally winding up commences when the winding up order was made (s 513A)

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o If VA or another winding up in place before the order, winding up deemed to have commenced on the day administration or other winding up began

Voluntary winding up: o Generally voluntary winding up commences on the day on which the special resolution for

winding up of the company is passed (s 513B)

o If VA or DOCA in place beforehand, winding up deemed to have commenced on the day administration began

6. EFFECTS OF WINDING UP

On the company : o Compulsory winding up – comp retains legal ownership of its property unless court

specifically vests in the hands of the liquidator; liq takes control of property though on behalf of comp (s 474(1))

o Voluntary winding up - company must cease to carry on business except for what is needed for the winding up; liquidator takes control of company (s 493(1))

On directors : o Compulsory winding up - a person cannot perform or exercise and must not purport to

perform or exercise, a function or power as an officer of the company (s 471A(1))

o Voluntary winding up - on appointment of a liquidator, all powers of the directors of the company cease (ss 495(2), 499(4))

o “officer” defined in s9 – includes directors

On employment contracts : o Compulsory winding up - publication of the winding up order serves as a notice of dismissal

to the company’s employees

o Unclear for voluntary winding up - need to look to circumstances

On members : o Share transfers made after commencement void unless authorised by liq (ss 468A, 493A )

On proceedings : o Compulsory winding up - proceedings are stayed (s 471B );

o Voluntary winding up – proceedings are stayed (ss 500(1), (2) )

7. APPOINTMENT OF LIQUIDATORS

Compulsory winding up : official liquidator appointed by the Court when the Court makes the order for winding up the company (s 472(1))

Members’ voluntary winding up : liquidator appointed by the company in general meeting (s 495)

Creditors’ voluntary winding up under s 496(1)(c) (where liq finds comp insolvent and convenes meeting of creditors):o company’s creditors may appoint some other person to be liquidator (s 496(5))

o if creditors do not nominate a liquidator, the person appointed by the company remain as liquidator (s 496(8))

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Creditors’ voluntary winding up under s 497 (if directors can’t make declaration of solvency):o Creditors may remove liq appointed by the members and appoint another liquidator (s 497(11))

Creditors’ voluntary winding up from VA (s 446A(1)) (if creditors resolve to wind up after VA): Admin of comp is taken to be nominated by the creditors unless resolve to appoint another.

Failure to sign DOCA : Same for where the liquidation results from a failure to sign DOCA (s 446A(1)(b)) or from resolution by creditors to terminate the deed (s 446(1)(c)) except it is the administrator of the DOCA (s 499(2A))

7.1 Who may be appointed as liquidator?

Compulsory winding up (by court) : must be liquidator registered with ASIC as an official liquidator (ss 532(8), 1283)

Voluntary winding up : must be a registered liquidator (ss 532(1), 1282(2)) – doesn’t need to be official liquidator

Disqualifications (s 532(2)): person must not seek to be appointed or act as liquidator:

o (a) if the person, or a body corporate in which the person has a substantial holding, is indebted in an amount exceeding $5,000 to the company or a body corporate related to the company; or

o (b) if the person is, otherwise than in his or her capacity as liquidator, a creditor of the company or of a related body corporate in an amount exceeding $5,000; or

o (c) if:

(i) the person is an officer or employee of the company (otherwise than by reason of being a liquidator of the company or of a related body corporate); or

(ii) the person is an officer or employee of any body corporate that is a secured party in relation to property of the company; or

(iii) the person is an auditor of the company; or

(iv) the person is a partner or employee of an auditor of the company; or

(v) the person is a partner, employer or employee of an officer of the company; or

(vi) the person is a partner or employee of an employee of an officer of the company.

8. POWERS OF LIQUIDATOR

Compulsory winding up : Court appointed liq has powers listed in ss 477(1), (2)

Voluntary liquidations : authorises liquidator to exercise any of the powers CA confers on a liquidator in a compulsory winding up (s 506) (so the powers is ss 477(1), (2))

Powers given to liquidator under s 477(1):o to carry on the business of the company so far as is necessary for the beneficial disposal or

winding up of that business [s 477(1)(a)];

o to make any compromise or arrangement with creditors [s 477(1)(c)];

o to pay any class of creditors in full (subject to the provisions of s 566) [s 477(1)(b)].

Powers given to liquidator under s 477(2):o to bring or defend any legal proceedings in the name and on behalf of the company [s477(2)

(a)];

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o to sell or otherwise dispose of, in any manner, all or any part of the property of the company [s477(2)(c)];

o to do all such other things as are necessary for winding up the affairs of the company and distributing its property [s477(2)(m)].

NB. Exercise of s 477 powers is subject to control of the court (ss 477(6), 1321)

Liquidator must use own discretion : in the management of affairs and property of the company and the distribution of its property (s 479(4))

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9. GENERAL DUTIES OF LIQUIDATOR

General law: o Regarded as agent of the company

o Liquidator in fiduciary relationship with the company, similar duties to fiduciary duties imposed on directors

o Act impartially, act honestly, exercise due care and skill

Corps Act :o “officer” : liq is an officer (s 9) so duties in Ch 2D.1 apply eg:

s 182: must not improperly use position to gain an advantage for self or someone else

o Vs Directors Duties : Liquidator’s obligations are wider and stricter than the duties imposed upon directors nature of the liquidator’s position – officer of the court in court ordered winding up and officer of the company (Comm for Corp Affairs v Harvey)

Comm for Corp Affairs v Harvey :

Duties of a liquidator – “he must administer the estate strictly in accordance with the duties and obligations specifically imposed on him by the Companies Act and its Rules” at p691.

This includes:o preserving the assets;o giving proper attention to the administration;o acting with due despatch; ando ensuring adequate knowledge and understanding of the affairs of the

companies

“If there is a difficulty at any stage of the administration then it is the clear duty of the liquidator to inform the Court and take directions” at p691

o Applying to court for directions :

For both compulsory and voluntary winding ups, liq may apply to the court for directions (s 479(3) – compulsory; s 511 – voluntary)

Generally Court will not interfere with liquidator’s exercise of power unless liquidator acted unreasonably and absurdly, see:

Court “will not interfere with bona fide exercise of discretions which are not beyond acts or omissions of a reasonable man” (Com for Corp Affairs v Harvey)

Court will not interfere unless what liquidator is doing is so utterly unreasonable and absurd that no reasonable person would so act (Re Mineral Securities)

o Convening meeting to ascertain creditors’ wishes :

Liq can convene general meeting of creditors to ascertain their wishes (s 479(2) – compulsory; s 506(1)(f) – voluntary)

PTO Specific duties of liquidator

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10. SPECIFIC DUTIES

Collecting the company’s assets Preserving the company’s assets Selling the assets Distributing proceeds of the sale Proper administration Acquaintance with company’s affairs (know what’s going on with comp) Effecting deregistration

10.1 Collecting company’s assets

Liquidator required to take into personal custody or control all the property to which the company is, or appears to be entitled (s 474(1))

o Assets available include all property owned by the company at the date of the commencement of the winding up

o In some circumstances the liquidator can take action to recover property disposed of before commencement of winding up – antecedent transactions

Antecedent transactions

Antecedent transactions entered into before commencement of the winding up (also called voidable transactions)

Part 5.7B, Division 2 - applies only to insolvent company liquidation.

Liquidator can apply to Court to make such transactions voidable + recover value of any property lost because of the transaction.

Example of types of antecedent transactions covered in CA:

o Unfair preferences (s 588FA);

o Uncommercial transaction (s 588FB).

Defences - s588FG(2)

10.2 Preserving company’s assets

Liquidator under duty to preserve company’s assets until they can be realised.

o liquidator can carry on the business of the company: s477(1)(a).

But business can only be carried on for the purpose of a beneficial winding up, not with a view to its continuance (Re Wreck Recovery )

Creditors who supply essential services : o Suppliers of essential services cannot refuse services to a company that is being wound up

because of a debt owing to the supplier by the company + cannot make further supply conditional on payment of an outstanding debt (s 600F)

Essential services – electricity, gas, water, telecommunications

10.3 Selling assets

Purpose of a winding up = distribute the proceeds of sale of the company’s assets to creditors.

o liquidator under a duty to sell the company’s assets.

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Powers under ss 477(2)(c) and (d) enable the liquidator to sell all the company’s property + execute documents in the company’s name.

10.4 Distributing proceedings of sale

Liquidator finally has duty to repay the company’s debts

Creditors paid first, surplus distributed among the company’s members

Proof of debts :

o Unsecured creditors

Must prove their debts in order to have any entitlements

What debts are admissible to proof?

All debts incurred before the relevant date (s 553(1)) (s 9 – when the WU began)

If there was a DOCA – debts are admissible to proof if they occurred during DOCA period, relevant date becomes date DOCA terminates (there was a previous VA) ss 553(1A) & (1B))

Liquidator decides whether to accept or reject a proof of debt

If proof of debt is accepted - creditor entitled to be repaid (dividends)

If proof of debt is rejected - creditor may appeal liq’s decision under s 1321

o Secured creditors

process for proof of debts in ss 554D – 554J

options are for the secured creditor to (s 554E):

(1) retain the security; or

(2) give it up and prove in the winding up for the value of the debt; or

(3) retain the security and prove the difference between the debt and the value of the security

For (2) and (3), the secured creditor ranks equally with unsecured creditors

Repayment of debts :o From commencement of winding up: follow the pari passu principle – s 555

Ie. except for certain priority payments, all debts proved in a WU rank equally and, if the property of the comp is insufficient to meet them in full, they must be paid proportionately

o Priority payments – s 556(1) lists debts which must be paid before all other unsecured debts

eg: employees of the company [s 556(1)(e), (g) & (h)]

Division of surplus assets :o Compulsory winding up - liq cannot distribute surplus assets without special leave of the court:

(s 488(2))

o Voluntary winding up - no equivalent requirement.

10.5 Proper administration

Duty to maintain a proper record of the winding up.

o Eg: to keep proper books and records (ss 531, 542 )

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PTO Acquaintance with comp’s affairs and Effect deregistration

10.6 Acquaintance with company’s affairs

Duty to know the affairs of the company – how?

o Liquidator has the power to inspect any books of the company: s 477(3)

o Persons who were directors and secretary at the time of the winding up order must submit a report to the liquidator as to the affairs of the company: s 475(1)

o Each officer of the company must deliver to the liquidator all books in the officer’s possession that relate to the company: s 530A(1)

o Liquidator’s rights to company’s books: s 530B

o Liquidator can apply to the Court for a warrant to search for and seize company’s property or books: s 530C.

Duty to report breaches of the law: s 533

10.7 Effect deregistration

Compulsory winding up : o Once comp’s property has been realised + distributed to creditors and members - liq may apply

to the court for an order that the liq be released and that ASIC deregister comp (s 480 )

Voluntary winding up – s 509: o Liquidator to make up an account

o Convene general meeting

o Lodge a return of the holding of the meeting

o ASIC deregisters company.

Can do so informally without these steps

Effect of deregistration - the company ceases to exist on deregistration, all its property (there should not be any) vests in ASIC, which has all the powers of an owner: s 601AD.

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