LAWS4112 Corporate Law Notes

ContentsI. Taxonomy and Typology of Business Structure5A. Non-Corporate Structures5B. Company Structures51) Proprietary Companies52) Public Companies73) Taxonomy Six Types of Australian Companies7C. Registration of Companies8II. Corporate Personality, Civil and Criminal Liability9A. Limited Liability9B. Separate Legal Entity9C. Piercing the Veil at Common Law101) Fraud102) Avoidance of Existing Legal Obligations103) Under-Resourced11D. Corporate Groups121) Definition and Rules122) Separate Legal Entity Groups13E. Tort Liability141) Subsidiaries and Lifting the Veil142) Tort Liability for Corporations15F. Criminal Liability15III Internal Structure and Corporate Constitution18A. Replaceable Rules18B. Corporate Constitution201) Constitution Rules202) Adoption of Constitution213) Alteration of the Constitution21C. Statutory Contracts22D. Organs and Division of Power251) General Meeting252) Board of Directors27IV Corporate Contracting31A. Corporate Capacity31B. Direct Contracting31C. Agent32a) Actual (express or implied) Authority32b) Apparent or Ostensible Authority33V Directors Duties37A. Application of the Duties371. Who Owes the Duty?372. To Whom is the Duty Owed?38B. Common Law Duties of Care, Skill, Diligence, and Delegation/Reliance391. Care392. Skill393. Diligence404. Delegation and Reliance40C. The Statutory Duties of Care under s 180401. The General Standard of Care412. The Standard of Care: Non-Executive Directors versus Executive Directors423. Delegation and Reliance under Statute434. The Statutory Business Judgement Rule44D. Duties of Good Faith and Proper Purpose451. 181(1)(a) The Duty to Act in Good Faith in the Interests of the Company462. 181(1)(b)The Duty to Act for a Proper Purpose48E. Fiduciary Duties511. No-Conflict Rule: Directors must not have a personal interest (or engagement with a third party) which conflicts with their duty to the company except with the companys fully informed consent512. Misappropriation Rule: Directors must not misappropriate the companys property for their own or a third partys benefit553. No Profit Rule: Directors must not misuse their position for their own or a third partys advantage except with the companys fully informed consent56D. Statutory duty not to profit from position or information591. Use of Position592. Use of Information603. Statutory Treatment of Benefits to Related Parties61E. Enforcement of Directors Duties631. Enforcement by ASIC632. Enforcement by the Board65F. Exoneration and ratification of Directors Duties651. Exoneration by the Court652. Ratification by the General Meeting68G. Statutory Limitations on Exemption, Indemnity, and Insurance70VI Minority Protection72A. Statutory Derivative Actions721. Application for Leave722. Prior Ratification, Costs, and ASIC75B. Section 1324 Injunctions761. Power to Grant Injunctions762. Standing for s 1324 Injunctions77C. Members Personal Actions771. General Rule as to members personal actions772. Actions to enforce the constitution783. Actions to enforce mere procedural irregularities784. Actions for diminished value of shares795. Actions for breach of fiduciary duty owed directly to the member796. Statutory members personal rights80D. Fraud on the Minority (Equitable Limitation on the Power of the Majority)801. The general rule of majority rule802. Equitable limitations to majority rule813. Statutory limitations on majority rule83E. Winding Up83A. Grounds for Winding Up and Standing83B. Self-interested director grounds under sub-s (e)84C. Just and equitable grounds under sub-s (k)85D. Discretion of the Court85F. The Oppression Action86A. Standing86B. Grounds of Opression87C. Oppression Remedies91VII Insolvency93A. Determining Insolvency93B. Liquidation931. Routes to Liquidation (Part 5.4Winding Up in Insolvency)932. Effect of appointment of liquidator993. Role of the Liquidator and Process of Liquidation1004. Statutory Actions by Liquidator1015. Order of Priority1176. Deregistration119C. Receivership1191. Powers of the Receiver and Appointment1192. Receivers Duties1203. Priority of Receiver121D. Administration1211. Entering Administration1212. Assuming Control1223. Enforcement of Charges under Administration1234. Investigation of Affairs (Division 4Administrator investigates company's affairs)1245. Decision Making Stage (Division 5Meeting of creditors decides company's future)1256. Entering a Deed of Company Arrangement (Division 10Execution and effect of deed of company arrangement)1267. Variation of Deed (Division 11Variation, termination and avoidance of deed)127

I. Taxonomy and Typology of Business StructureA. Non-Corporate StructuresSole trader No separation between the traders personal and business assets. Trader is liable personally, and subject to unlimited liability by default.Partnership Relationship between a number of persons (intermediate between a sole trader and a company) Partnership Act persons carrying on business contractual and fiduciary relationship. The terms are fixed by the Act, or by an express partnership deed/agreement (a contract of the uttermost good faith fiduciary duties owed, each the agent for the other and the actions of one are binding on the others). NOT a separate legal person, the partners bear unlimited liability. There are no publicity requirements. Limits on size: s 115(1) Corporations Act 2001 20 members (but see also Corporations Regulations 2A.1.01(3) for specific exceptions by profession).

Incorporated Association These are clubs or associations which choose to incorporate, to provide a less cumbersome corporate structure, being a separate legal person with limited liability. State law (Incorporated Associations Act 1981 (Qld)), not carried on for profit of members, and governed largely along same lines as proprietary companies.B. Company Structures1) Proprietary CompaniesDefinition Proprietary company: Defined in s 113(1) as having no more than 50 non-employee shareholders (this still allows some separation of ownership and control). Small proprietary company: s 45A(2)must satisfy two of the following: (a) the consolidated revenue for the financial year of the company and the entities it controls (if any) is less than $25 million; (b) the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million; or (c) the company and the entities it controls (if any) have fewer than 50 employees at the end of the financial year. Large proprietary company: s 45A(3)must satisfy two of the following: (a) the consolidated revenue for the financial year of the company and the entities it controls (if any) is $25 million or more; (b) the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $12.5 million or more; (c) the company and the entities it controls (if any) have 50 or more employees at the end of the financial year.Shareholding Requirements Section 113(3): cannot make an offer that needs disclosure under Chapter 6Dand essentially cannot offer shares to the public Section 708: Can make offers to existing employees and shareholders and personal offerswhich provides some scope to raise finance from investors without incurring the cost of preparing a disclosure document, or prospectus Section 165: Breach of that limitation is a criminal offence, which does not invalidate the transaction but ASIC may require it to convert to a public company under ASIC may impose a similar requirement if the company exceeds 50 non-employee shareholders.Rules relating to Control Minimum of one director (compared to three for public companies): s 201A Sole member-director (provisions made for this under s 198E(1),allowing that person to manage the business/exercise all powers; and ss 248B and 249Bact as general meeting passing all resolutions provided all are recorded and signed. Appoint a secretary not required (s 204A)an officer of the co who deals with ASIC, often combined with the role of general counsel. No need for an AGM (public company with more than one member must hold first one within 18 months of incorporation to allow members to consider audited accounts) Small proprietary companies (defined in s45A): Not required to produce annual financial reports or appoint an auditor unless shareholders holding 5% require it, or ASIC directs it to (ss 293-4); and Must maintain written financial records that correctly record its position and would enable true and fair financial reports to be prepared and audited, and to maintain them for 7 years (s 286). Large proprietary and public companies: Must produce an audited financial report and directors report on an annual basis. Aim of this distinction is to prevent public companies running business through a subsidiary and evading disclosure rules, and to allow small companies to avoid the estimated $60000 cost of producing an audited annual report. Removal of directors: s 203D(1) does not applyshareholders do not have a legally-entrenched right to remove directors Note that the constitution/shareholder agreement can entrench a director provided they replace the replaceable s 203C rule that the general meeting can remove the directors. This reflects the fact that proprietary companies are often like incorporated partnerships with the shareholders participating in risk-bearing and management. No automatic rule that one director cannot remove another: s 203E does not apply (although proprietary companies must still make positive provision in their constitution if directors are to be enabled to do this) Pty Ltd or Proprietary Limited: must be included at the end of their name: ss 148 and 149. Directors have the power to refuse to register a transfer of shares for any reason: A replaceable rule under s 1072Galthough equitable and statutory duties may require them to act for a proper purpose when exercising this power.Conversion to Public Company Sections 162-3: Must pass a special resolution (75% in favour) and lodge application with ASIC. Note how the requirement of special resolution protects the shareholders.2) Public CompaniesPublic companies Subject to stricter regulationseparation of ownership and control; the price for being able to offer shares to the public. Definitions of public offer contained in ch 6D Disclosure is required in the form of a prospectus or other disclosure document filed with ASIC, with certain carve-outs available for small-scale offerings, sophisticated investors, existing investors etc.Listed companies Subject to an additional layer of regulation over and above public companies: Soft law in the form of the ASX Principles of Corporate Governance (with which they must comply or explain) Quasi-soft law in the form of listing rules made by ASX with authority under CA. NOTE that not all public companies are listed.3) Taxonomy Six Types of Australian Companies1. Proprietary companies limited by shares pty The vast majority of companies in Australia, eg, four friends example, both small and large proprietary companies2. Proprietary companies unlimited by share capital Unlimited liability (unusual)3. Public companies limited by shares ltd Eg, large companies (though some proprietary companies may be large)4. Public companies limited by guarantee5. Public companies unlimited by share capital Only applies if a company is unable to meet liabilities on winding up6. No liability public company Confined to pure mining companies. The type of company was introduced in Victoria, which subjected NL companies to far-reaching information disclosure obligations: the Mining Companies Act 1871). There is no liability for the balance of the share.C. Registration of Companies

II. Corporate Personality, Civil and Criminal LiabilityA. Limited Liability516 Company limited by shares

[] if the company is a company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or past member.

B. Separate Legal EntitySalomon v Salomon & Co Ltd [1897] AC 22 [House of Lords]

FACTS: Salomon set up company, and sold his shoe manufacturing business to it, being the majority shareholder and a secured creditor (10,000 debenture). The company entered liquidation with 6000 available. Broderips (first ranking) claim was 5,000, followed by Salomons 10,000 debenture, with unsecured creditors owed 8,000. ISSUES: Who was paid out from the assets? Was Salomon entitled to monies after Broderip paid? Personally liable for the remainder? Was the company agent for Salomon? LOWER COURTS: Held for liquidatorSalomon & Co Ltd Co was agent for Salomon, and a fraud; Court of Appealalso held for liquidatorcompany was conducting business as Salomons trustee. HOUSE OF LORDS: The company was a separate legal entity, irrespective of size or ownership. Salomon was entitled as a secured creditor to receive 1,000 after Broderip was paid. Salomon was not personally required to indemnify the company for debts owing, he had the limited liability of shareholder.

ImplicationsMacaura v Northern Assurance Co Ltd [1925] AC 619 FACTS: Macaura owned land, with timber plantation, transferred business into company, which ran the business of felling and milling timber Fire destroyed all timber. Attempted to claim on insurance in his personal name. HELD: Macaura was a separate legal entity, and could not claim on the personal insurance. RULE: Property owned by company does not belong to its members, even where they have given it to the company in exchange for shares.

Lee v Lees Air Farming [1961] AC 12 FACTS: Lee was a pilot, conducting areal top dressing business, formed company to run this business. Lee was killed in an accident, wife made a compensation claim as an employee of the company. HELD: Company can make contracts with shareholders, even controlling ones. OUTCOME: This depended upon whether Lee was a worker within the meaning of the act. Company was a separate legal entity, thus Lee could enter into a contract of employment with the company. Thus the wife could make the claim.

Additional implications: Company can be a debtor or creditor of member or director. Company can be liable in tort, either directly or, more commonly, vicariously. Williams v Natural Life Health Foods (1998) 2 All ER 577. Company can act as trustee. Causes of action belong to the company and not to the members individually. Company is party to contracts, not its directors or members. Company are persons under s6 of the Income Tax Assessment Act 1936, although shareholders receiving dividends will receive credit for tax paid by the company.

C. Piercing the Veil at Common LawBriggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549, 567 (Rogers AJA) HELD: [T]here is no common, unifying principle, which underlies the occasional decision of courts to pierce the corporate veil.

1) FraudThe court will lift the veil where a company is used to perpetrate a fraud:Re Darby [1911] 1 KB 95 FACTS: Company set up and had asset transferred at over value. Company was then floated and controllers made large profit at the expense of shareholders. HELD: Veil was lifted to remedy fraud.

Re H [1996] 2 BCLC 500 FACTS: Defendants had been using companies to defraud tax office. HELD: Tax office was allowed to treat entire group as one entity.

2) Avoidance of Existing Legal ObligationsThe court will lift the veil where companies are used to evade existing legal obligations:Gilford Motor Co Ltd v Horne [1933] Ch 935 FACTS: Promised not to set up competing business, but in fact set up company which solicited former customers. This was a use of a company in order to avoid a contractual agreement not to solicit clients. HELD: Injunction allowed, preventing both the company and himself from dealing with former customers of the business.

Jones v Lipman [1962] 1 WLR 832. FACTS: To avoid an order for specific performance, the seller of land transferred the land to a company which he had incorporated. HELD: He had done so as a device or a sham in order to avoid completing the contract. Order for performance made against the company and the person.

Adams v Cape Industries [1990] 2WLR 657 HELD: As a matter of law, a court may not lift the corporate veil against a defendant company the member of a corporate group merely because the corporate structure has been utilised so as to ensure legal liability falls upon one member of the group and not the defendant company. NOTE: Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in the corporate law.

Note regarding the remedies imposed:Yukong Lines of Korea v Rendsburg Investments (No 2) [1988] 1 WLR 294 (Toulson J); ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd [1991] 2 Qd R 360 (McPherson J) NOTE: Note that in both cases an order was made against the company as well as the wrongdoer in control of it, suggesting that the veil has not really been lifted in these cases: NOTE: Arguably this is recognising the separate legal entity doctrine but acknowledging company is involved in the fraud. Essentially this is judges arguing we do not lift the veil.

3) Under-ResourcedWhere companies are under-resourced, the court might conclude that the company is the agent of its controller, or is a sham or device, justifying the lifting of the corporate veil:Re FG (Films) Ltd [1953] 1 WLR 483 FACTS: A movie company held only 100 pounds of capital and could not have funded a movie. HELD: If capital is so manifestly short, it could be argued that the company is an agent of the parent. OUTCOME: FG was an agent of the parent company as there were insufficient funds in the company to actually make movies thus it was a sham device. Order was given against the parent company.

Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 FACTS: Birmingham Corporation, a local council, compulsorily acquired premises owned by the Birmingham Waste Co Ltd which was a wholly owned subsidiary of Smith, Stone & Knight Ltd. The Waste Company had no staff, no separate books and on the evidence it was treated like one of Smith, Stone & Knight's departments. Accordingly a claim for compensation for loss of business was made by Smith, Stone & Knight Ltd. Birmingham Corporation argued that Smith, Stone & Knight Ltd could not succeed because the loss had been sustained by the waste companya separate legal entity. HELD: Compensation was payable as the Waste Company was carrying on no business of its own but was in fact carrying on the Smith, Stone & Knight business as agent for them. ATKINSON J: Held that six factors must be proven in order to show the requisite agency relationship to lift the corporate veil: (1) Profits of the subsidiary must be treated as profits of the holding company; (2) Those conducting the subsidiary's business must be appointed by the holding company; (3) The holding company must be the head and brain of the trading venture; (4) The holding company must be in control of the venture and must decide what capital should be spent and what should be done; (5) The profits made by the subsidiary's business must be made by the holding company's skill and direction; and (6) The holding company must be in constant and effective control.

DHN v Borough of Tower Hamlets (1976) 3 All ER 462 NOTE: Factually similar to Smith, Stone & Knight Ltd later described as turning on specific statutory interpretationOften the reality is that the subsidiary IS an agent for the holding company.

D. Corporate Groups1) Definition and Rules9 Definitions"holding company" , in relation to a body corporate, means a body corporate of which the first body corporate is a subsidiary."wholly-owned subsidiary" , in relation to a body corporate, means a body corporate none of whose members is a person other than:(a) the first-mentioned body; or(b) a nominee of the first-mentioned body; or(c) a subsidiary of the first-mentioned body, being a subsidiary none of whose members is a person other than:(i) the first-mentioned body; or(ii) a nominee of the first-mentioned body; or(d) a nominee of such a subsidiary.

46 What is a subsidiaryA body corporate (in this section called the first body ) is a subsidiary of another body corporate if, and only if:(a) 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 one-half of the maximum number of votes that might be cast at a general meeting of the first body; or(iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or(b) the first body is a subsidiary of a subsidiary of the other body.

50 Related bodies corporateWhere a body corporate is:(a) a holding company of another body corporate; or(b) a subsidiary of another body corporate; or(c) a subsidiary of a holding company of another body corporatethe first-mentioned body and the other body are related to each other.

NOTE: Where companies are related, they must produce consolidated accounts, and a number of regulations which we will look at later (such as financial assistance and companies acquiring shares in themselves) also apply to related companies. NOTE: Section 50AA refers to the broader notion of control by one entity of another in the sense of capacity to determine the outcome of decisions about the second entitys financial and operating policies This broader concept of control is used in Pt 2E of the Corporations Act 2001 which deals with financial benefits by a public company and extends to controlled as well as related bodies corporate.2) Separate Legal Entity GroupsCompanies in group remain separate entities:Industrial Equity v Blackburn (1977) 137 CLR 567 FACTS: The court had to determine whether the profits available for dividend should constitute the profits of the holding company, or the profits of the group as per the consolidated accounts. HELD: The court applied the separate legal entity doctrine and treated the profits of the holding company as distinct from the profits of the other companies in the group.

Walker v Wimborne (1976) 137 CLR 1 (Mason J) FACTS: The directors of a company nearing insolvency began to make payments to other companies in group. HELD: Directors owe their duties to that company alone because it is a separate legal entity from the other companies in the group. If they consider the interests of other companies in the group, they will be liable.

Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952 FACTS: The directors of a subsidiary acted to benefit the holding company. The payment meant that the whole group remained viable. HELD: There was no breach in the circumstances: If the transaction waswhen viewed objectivelyin the interests of the company, then no consequences would flow from the breach of duty. NOTE: The interests of one member of a group of companies may lie in the continued viability of other members of the group.

Statutory Liability of Holding Company for Insolvent Trading of Subsidiary: See below, part VII.B.4(b) Action against Parent Company 588VXE. Tort Liability1) Subsidiaries and Lifting the VeilBriggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 FACTS: Tort claim sought to be brought against Hardie Pty Ltd, for the actions of Malu Mining Pty Ltda wholly owned subsidiary of Hardie Pty Ltd which, prima facie, had limited liability under s 516. ISSUE: Was Hardie Pty Ltd liable for torts committed by the subsidiary? Was Malu Mining Pty Ltd the agent of Hardie Pty Ltd? Court rejected this argument. Should the veil be lifted in the case of tort creditors? HELD: Majority held that the veil could possibly lifted: (1) It is not possible to say what evidence would ultimately suffice to make out a case; (2) Only the High Court (and perhaps not even it) can alleviate the consequences of the decision in Salomon so as to adapt the principle of limited liability to the economic realities of today; (3) Arguable that employees have equal opportunity with a contracting corporation in determining whether or not to enter the employer/employee relationship out of which the injury arises; (4) However, whilst employee may be able to choose whether or not to be employed by the corporation, generally speaking, they have no real input in determining how the business will be conducted and whether reasonable care will be taken for their safety.

Adams v Cape Industries plc [1990] Ch 433 NOTE: The UK Court of Appeal examined similar questions but refused to lift the veil.

Arguments (economic) for Lifting the Veil for Subsidiary Tort Liability:1. Torts are externalities which must be internalized for the assumption of efficiency to hold. If this does not happen, the parent will obtain the benefits of the activities (in the form of dividends) but will not bear all the costs of the activity.2. Tort creditors cannot bargain ex ante with the tortfeasor, cannot obtain guarantees from the parent, and do not have the opportunity to check its solvency.3. It will be appreciated that as Rogers noted in Briggs these arguments do not apply quite as strongly to employees as other tort victims (who are also in a contractual relationship with the company).4. Reputation may compel companies to satisfy contractual liability, and it may also encourage companies which are not in their end game to satisfy employee claims in order to maintain their reputation for fair dealing with their employees.5. If a company does not put insurance in place then there might be a case for lifting the veil on the basis that the company is acting opportunistically in transferring risk of reasonably foreseeable losses to tort creditors (analogous to incurring contractual debts when insolvent): Millon, Piercing the Corporate Veil. Financial Responsibility, and the Limits of Limited Liability (Working Paper No 8, Wash and Lee, 2006) 4258.6. Limited liability should instead be limited to situations in which shareholders have managed the business with due regard for bargained-for expectations and potential victims of reasonably foreseeable accidents.

2) Tort Liability for CorporationsCivil Wrongs may be primary or derivative: Primary as though the actual corporate entity committed the wrong; or derivate where the act or omission was made by a natural person: NOTE: Vicarious liability of the company as employera tort committed by an employee in the scope of the employment, encompassing negligent and deliberate torts.Lennards Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 [House of Lords] FACTS: Lennard owned ship and was active director of company and manager of ship. The ship was carrying oil owned by Asiatic Petroleum Co Ltd, but the ship was unseaworthy, caught fire, and the cargo was destroyed. Merchant Shipping Act s 502Owner of ship not liable for any loss or damage occurring without the owners fault or privvity. ISSUE: Lennards Carrying Co Ltd sought to avoid liability by stating that it was the fault of Lennard, who knew of the fault, not the company. HELD: Lennards Carrying Co Ltd was primarily liability: Lennards fault was attributed to the company and thus unable to rely upon s 502. THE DIRECTING MIND AND WILL TEST: (Haldane Vc) a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. NOTE: Senior managers in this position not only act for the company, they act as the company itself.

F. Criminal LiabilityA company may be subject to primary criminal liability where the offence is committed by its directing mind. The prosecution must show that the natural person in question had the requisite mens rea for the offence, and this is then attributed to the company.Tesco Supermarkets v Nattrass [1972] AC 153 FACTS: Local manager charged for soap at the regular price, not the discounted price. NOTE: Statute provided a defence where: The commission of the offence was due to default of another person or mistake; and The company took all reasonable precautions and exercised all due diligence to avoid the commission look at the systems the company had in place. HELD: Tesco was not liable as could not argue store manager was directing mind and will of companystore manager controlled by the company not the other way around. Further, defence available as Tesco had done all it could do to implement a proper system. NOTE: Under this approach, the larger the company, the less likely the company will be liable.

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 (Privy Council) HELD: Although the offence was concealed from the company directors, the actions of the relevant officer were attributed to the company. (Hoffmann L): Primary rules of attribution: Will generally be found in its constitution and will say things such as the decisions of the board in managing the companys business shall be the decisions of the company. Primary rules of attribution may not expressly stated but implied by law, such as the unanimous decision of all the shareholders in a solvent company shall be the decision of the company. General rules of attribution: Like agency and vicarious liability (these will rarely apply to criminal liability unless the statute expressly says so),Special rules of attribution: Required when a rule of law expressly or impliedly provides that the primary and general rules do not apply. This turns on the courts interpretation of the statute, applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.

Criminal Code (Cth) Section 1308A Corporations Act 2001Criminal Code (Cth) applies to offences under the Corporations Act 2001 (except for offences under Ch 7 (Financial services and markets) where s 769B(3) attributes intention with regard to action within the actual or apparent authority of a director, employee or agent to the company essentially vicarious liability in order to satisfy any mental element). Section 12.1(2): Companies may be found guilty of offences, including those punishable by imprisonment (even though a company cannot be imprisoned) fines can be imposed for such offences. Physical Elements: Will be attributed to the corporation where the offence is committed by an employee, agent or officer acting within the persons actual or apparent scope of employment or authority (12.2). Mental Elements: Attributed where the corporation has expressly, tacitly or impliedly authorised or permitted the commission of the offence (12.3(1)), and this can be established in a number of situations. For instance, proof that a corporate culture existed within the company that encouraged or tolerated failure to comply with the statutory provision in question.

III Internal Structure and Corporate ConstitutionA. Replaceable RulesCorporations Act 2001 Ch 2BBasic features of a company; PART 2B.4Replaceable Rules and Constitution135 Replaceable rules

Companies to which replaceable rules apply

(1) A section or subsection (except subsection 129(1), this section and sections 140 and 141) whose heading contains the words:

(a) replaceable ruleapplies as a replaceable rule to:

(i) each company that is or was registered after 1 July 1998; and

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

(b) replaceable rule for proprietary companies and mandatory rule for public companiesapplies:

(i) as a replaceable rule to any proprietary company that is or was registered after 1 July 1998; and

(ii) as a replaceable rule to any company that is or was registered after 1 July 1998 and that changes or changed to a proprietary company (but only while it is a proprietary company); and

(iii) as a replaceable rule to any proprietary company that is or was registered before 1 July 1998 that repeals or repealed its constitution after that day; and

(iv) as an ordinary provision of this Act to any public company whenever registered.

The section or subsection does not apply to a proprietary company while the same person is both its sole director and sole shareholder.

Company's constitution can displace or modify replaceable rules

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

141 Table of replaceable rulesProvisionsthat apply as replaceablerules

Officersand Employees

1Voting and completion oftransactions--directors of proprietarycompanies194

2Powers ofdirectors198A

3Negotiable instruments198B

4Managingdirector198C

5Companymay appoint adirector201G

6Directorsmay appoint otherdirectors201H

7Appointment of managingdirectors201J

8Alternatedirectors201K

9Remunerationofdirectors202A

10Directormay resign by giving writtennoticetocompany203A

11Removal bymembers--proprietarycompany203C

12Termination of appointment of managingdirector203F

13Terms andconditionsof office for secretaries204F

Inspection ofbooks

14Companyordirectorsmay allowmemberto inspectbooks247D

Director's Meetings

15Circulating resolutions of companies with more than 1director248A

16Callingdirectors' meetings248C

17Chairingdirectors' meetings248E

18Quorum atdirectors' meetings248F

19Passing ofdirectors' resolutions248G

Meetings ofmembers

20Calling of meetings ofmembersby adirector249C

21Noticeto jointmembers249J(2)

22Whennoticeby post or fax is given249J(4)

22AWhennoticeunder paragraph249J(3)(cb) is given249J(5)

23Noticeof adjourned meetings249M

24Quorum249T

25Chairing meetings ofmembers249U

26Business at adjourned meetings249W(2)

27Who can appoint a proxy[replaceable rule forproprietarycompanies only]249X

28Proxy vote valid even ifmemberdies,revokes appointment etc.250C(2)

29How many votes amemberhas250E

30Jointly held shares250F

31Objections torightto vote250G

32How voting is carried out250J

33When and how polls must be taken250M

Shares

33APre-emption for existing shareholders onissueof sharesinproprietary company254D

33BOtherprovisionsabout paying dividends254U

34Dividendrightsfor shares inproprietarycompanies254W(2)

Transfer of shares

35Transmissionof shares on death1072A

36Transmissionof shares on bankruptcy1072B

37Transmissionof shares on mental incapacity1072D

38Registration of transfers1072F

39Additional general discretion fordirectorsofproprietarycompanies to refuse toregistertransfers1072G

B. Corporate Constitution1) Constitution Rules Constitution often adopted because some of the replaceable rules will be unsuitable. Public company must have a constitution: ASX Listing Rule 15.11. NOTE: Prior to Company Law Review Act 1998companies required to have Memorandum and Articles on registration. A "sample set" of Articles ("Table A") was provided. Companies registered before 1 July 1998 often have written constitution, made up of the Memorandum and Articles.2) Adoption of ConstitutionCorporations Act 2001 s 136 Constitution of a company

(1) A company adopts a constitution:

(a) on registrationif each person specified in the application for the company's registration as a person who consents to become a member agrees in writing to the terms of a constitution before the application is lodged; or

(b) after registrationif the company passes a special resolution [s 975 per cent vote] adopting a constitution or a court order is made under section 233 that requires the company to adopt the constitution.

3) Alteration of the ConstitutionA company may modify or repeal constitution by special resolutions 136(2).136 Constitution of a company

(2) The company may modify or repeal its constitution, or a provision of its constitution, by special resolution.

(3) The company's constitution may provide that the special resolution does not have any effect unless a further requirement specified in the constitution relating to that modification or repeal has been complied with.

(4) Unless the constitution provides otherwise, the company may modify or repeal a further requirement described in subsection (3) only if the further requirement is itself complied with.

Repeal may mean that new or default replaceable rules will apply: see ss 136(5) and 139.Alteration may result in the breach of separate contracts made on the previous terms of the constitution.Bailey v New South Wales Medical Defence Union Ltd (1995) 184CLR 399; 132ALR FACTS: Medical Defence Union provided indemnity insurance to doctors, including Bailey. Tort claim made against BaileyMedical Defence Union paying costs. Members voted to change Constitution, reducing the amount of insurance cover to which doctors were entitled. ISSUE: Did the change in the Constitution affect the statutory contract? Was the insurance available under s 140, or was there a separate or special side contract? HELD: (Minority): Rights to insurance were not insider rights, as they did not concern the governance of the Medical Defence Union. Section 140 is limited to regulations which apply alike to all shareholders. HELD: (Majority): (1) Non-members could have cover before they became members, therefore there was a side contract. (2) The precise terms of any special contractand the effect of any change to the constitution on that contractare questions of construction for the court. (3) The parties could not have intended the contract to vary with the Constitution. Changes in the constitution would therefore only apply prospectively. Baileys contract began when he applied to become a member. Insurance cover continued as long as he paid his subscription each year new contract each year. If the articles changed, the change would effect the renewal of the contract the following year only. NOTE: Minority and majority agreed that Bailey was covered however difficulties in this case arise regarding whether this should be s 140 or special contract.

Company cannot be deprived of its statutory power to alter its constitution by contracting that it will not change its constitution.Russell v Northern Bank [1992] 3 All ER 161 HELD: Members can make a contract between themselves, has all the features of a regular contract, will not automatically bind new members.

Bushell v Faith [1970] AC 1099 HELD: The constitution can also be entrenched by using weighted voting rights.

NOTE: Constitution can make for modification or repeal to be conditional on compliance with further requirements s 136(3)-(4). NOTE: Modifications cannot be oppressive or unfairly prejudicial to a member 140(2), variations of class rights have to comply with a special procedure prescribed by s 246B.C. Statutory ContractsThe replaceable rules and/or Constitution are a statutory contract, providing the legal basis for enforcement of the company constitution.Corporations Act 2001 s 140 Effect of constitution and replaceable rules

(1) A company's constitution (if any) and any replaceable rules that apply to the company have effect as a contract:

(a) between the company and each member; and

(b) between the company and each director and company secretary; and

(c) between a member and each other member;

under which each person agrees to observe and perform the constitution and rules so far as they apply to that person.

Outsiders cannot enforce rights under the statutory contract and members are bound or entitled only in their capacity as members.Eley v Positive Life Assurance Co Ltd [1875] 1Ex D 20 FACTS: Articles of Association drafted by Eley (a shareholder) which provided that he could not be dismissed as company solicitor (although he had no service contract with the company). Removed as solicitor, and tried to enforce Articles. HELD: The Articles conferred no rights upon Eley in any capacity other than that of a member and that these rights were not affected by the companys actions. In order for outsiders to enforce rights, they require a normal contract. AFFIRMED: Marketing Advisory Services (MAS) v Football Tasmania Ltd [2002] 42 ACSR 128.Hickman v Kent or Romney Sheep Breeders Association [1915] 1 Ch 881 HELD: (Astbury J): [A]n outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member, cannot sue on those articles treating them as contracts between themselves and the company to enforce those rights ... No right merely purporting to be given by any article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as solicitor, promoter, director, can be enforced against the company ... .

Members are bound by the statutory contract in any disputes arising in relation to the affairs of the association.Hickman v Kent or Romney Sheep Breeders Association [1915] 1 Ch 881 FACTS: The Company's Articles provided for any disputes between members and the company to be referred to an arbitrator before court proceedings could begin. Hickman began a court action without referring the dispute to an arbitrator. HELD: The Company successfully obtained a stay of proceedings.

Remedy for breach of the constitution by the company is injunction or declaration, not damages.Corporations Act 2001 s 563A Postponing subordinate claims

(1) The payment of a subordinate claim against a company is to be postponed until all other debts payable by, and claims against, the company are satisfied.

(2) In this section:

"subordinate claim" means:

(a) a claim for a debt owed by the company to a person in the person's capacity as a member of the company (whether by way of dividends, profits or otherwise); or

(b) any other claim that arises from buying, holding, selling or otherwise dealing in shares in the company.

Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 HELD: Section 563A postpones claims by a shareholder owed by a company to a person in the persons capacity as a member of the company until after other creditors have been paid. APPLIED: Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317.

Sons of Gwalia Ltd v Margaretic (2007) 81 ALJR 525 FACTS: Margaretic bought shares in company which became insolvent and brought an action for misleading and deceptive conduct (1041H Corporations Act 2001). The shares were bought from the secondary market (as was the case in Houldsworth and Webb). If successful, would have had a claim for damagesowed to Margaretic in his capacity as a member. HELD: A claim brought by a member against the company under s 1041H for false and misleading conduct did not fall within s563A, and thus could recover along with unsecured creditors. NOTE: Decision was influenced by the terminology of the consumer and investor protection statutes (which applied to the whole investing public, whether they were members or not at the time they relied on the statement made by the company) rather than an application of Houldsworth. It therefore does not clarify which rights will be considered outsider rights. NOTE: This case has been overruled by the legislature: the Corporations Amendment (Sons of Gwalia) Bill 2010.

One shareholder should be able to recover damages from another shareholder however members are confined to enforcing personal rights under s 140(1). This includes the right to vote and right to a dividend if one is declared.Kraus v JG Lloyd Pty Ltd [1965] VR 232 HELD: A member was able to obtain a declaration that a director was no longer entitled to act because the term had exceeded that permitted by the Articles. An injunction was ordered: (1) Preventing the director from acting; and (2) Preventing another director from treating as a director; and (3) Requiring a General Meeting be called to enable the shareholders to elect new directors in accordance with the articles. NOTE: While the court insisted that the plaintiffs personal rights had been infringed by this, it gave no further details.

A member will not be able to complain of mere procedural irregularitiesi.e. failure to give notice, defects in forum requirements for meetings.Corporations Act 2001 s 1322 Irregularities

(3) A meeting is not invalidated only because of the accidental omission to give notice of the meeting .

(3AA) A meeting is not invalidated only because of the inability of a person to access the notice of meeting .

(3A) If a member does not have a reasonable opportunity to participate in a meeting of members, or part of a meeting of members, held at 2 or more venues, the meeting will only be invalid on that ground if:

(a) the Court is of the opinion that:

(i) a substantial injustice has been caused or may be caused; and

(ii) the injustice cannot be remedied by any order of the Court; and

(b) the Court declares the meeting or proceeding (or that part of it) invalid.

(3B) If voting rights are exercised in contravention of subsection 259D(3) (company controlling entity that holds shares in it), the meeting or the resolution on which the voting rights were exercised will only be invalid on that ground if: [as above]

Re Pembury Pty Ltd (1991) 4 ACSR 759 HELD: The irregularity does not have to be accidental or inadvertent, but can still be declared invalid if a deliberate irregularity causes injustice. There must be a nexus between the irregularity complained of and the prejudice.

Re P W Saddington and Sons PtyLtd (1990) 2 ACSR 158; McGellin v Mount King Mining NL (1998) 144 FLR 288 HELD: If directors where aware and deliberately causing procedural breaches, this is not a mere procedural irregularity. Note the long distance travelled to meetings in the cases.

Validation of other, non-procedural irregularities is possible under 1322(4), although note the requirement in 6(a) that the court should not make an order unless satisfied that those concerned acted honestly and that it is just and equitable that the order be made.Rights which belong to the company must be enforced by the company. Directors can sue under 140(1) to enforce rights (probably).D. Organs and Division of Power1) General Meetinga) MajoritiesOrdinary majority Requires a simple majority of votes cast at common law in accordance with the company Constitution and the Corporations Act 2001.Special majority Defined in s 9 to mean 75% of the votes of those entitled to vote. Used to protect minorities.b) PowersPowerSectionResolution

Appointment/removal of directors (pty)203C (replaceable)Ordinary

Appointment/removal of directors (pub)203DOrdinary

Alterations of the constitution136(2)Special

Consolidating or subdividing companys shares254HOrdinary

Reducing the companys issued share capital256B/256COrdinary

Altering rights attached to sharesPt 2F.2

Altering companys statusPt 2B.7

elective buy-backs or buy-backs exceeding the 10/12 limit257COrdinary

Certain management decisions where there is a conflict of interestsPt 2D.2, Ch 2E

Sale of the companys main undertakingASX Listing Rules 11.2

Significant change to activitiesASX Listing Rules 11.1

c) Voting ProceduresVoting is typically performed by a show of hands.250J How voting is carried out (replaceable rulesee section 135)

(1) A resolution put to the vote at a meeting of a company's members must be decided on a show of hands unless a poll is demanded.

250L When a poll is effectively demanded

(1) At a meeting of a company's members, a poll may be demanded by:

(a) at least 5 members entitled to vote on the resolution; or

(b) members with at least 5% of the votes that may be cast on the resolution on a poll; or

(c) the chair.

Informal votingRe Express Engineering Works Ltd [1920] Ch 466; Re Duomatic [1969] 2 Ch 365 HELD: Members can vote informally if all agree.

Re Compaction Systems Pty Ltd (1976) 2 NSWLR 477 HELD: This does not apply if any member is excluded from the meeting, even if they are not entitled to vote. NOTE: Section 1322 may make the informal resolution valid in any event if there is no prejudice.

Bodikian v Sproule [2009] 72 ACSR 598 NOTE: Informal voting rule may not apply where there is a statutory requirement to hold a meeting (as opposed to a replaceable rule requiring that a meeting be held).

NOTE: Section 249X allows a member to appoint a proxy to vote at the general meeting.d) Types of General Meeting There are two types of general meeting: the AGM (Annual General Meeting) and the EGM (Extraordinary General Meeting). Public companies must hold AGMs because they have an important corporate governance function (they give shareholders the opportunity to call directors to account): s250N. Proprietary companies do not have to, although their constitution may oblige them to. Requirements: Both board and auditors must (in many cases) be present at the AGM. Annual reports must be made to the AGM (both financial and directors reports) by public companies and large proprietary companies. Small proprietary companies are exempt unless 5% of shareholders request it or ASIC directs it (293-4). Listed companies have more frequent disclosure obligations: they must prepared half-year financial report and directors report under s302 and note also their obligations of continuous disclosure to the market under the ASX Listing Rules, Chapter 3.e) Calling General MeetingsRuleSection

Calling of meetings of members by a director (replaceable)249C

Calling of meetings of members of a listed company by a director249CA

Calling of general meeting by directors when requested by members249D

Failure of directors to call general meeting249E

Calling of general meetings by members249F

Calling of meetings of members by the Court249G

PurposeA meeting of a company's members must be held for a proper purpose249Q

f) Notice of General Meetings Period: ss 249H and 249HA21 Days Means/to whom: ss 249J and 249K Contents: s 249L (AND ss 249O, 249P) Fiduciary duty of directors to inform members, and common law right to receive truly informative notice, s 52 TPAFraser v NRMA Holdings Ltd (1995) 127 ALR 543 FACTS: Challenge to the demutualization of NRMA. It was initially owned by its members, transferred to a corporate entity who then issued shares. Two directors challenged arguing that majority of directors were putting out misleading statements about benefits of demutualization without showing negative HELD: (1) When directors are causing corporation to communicate to shareholders, they have a fiduciary duty in giving notice of the meeting. (2) Must provide such information as to fully and fairly inform shareholders of the detail of the meeting. (3) Information must be such to enable members to judge whether or not to attend the meeting and vote or leave the matter to the majority attending the meeting.

2) Board of Directorsa) The directors have general power to manage the company.Corporations Act 2001

198A Powers of directors (replaceable rulesee section 135)

(1) The business of a company is to be managed by or under the direction of the directors.

Note: See section 198E for special rules about the powers of directors who are the single director/shareholder of proprietary companies.

(2) The directors may exercise all the powers of the company except any powers that this Act or the company's constitution (if any) requires the company to exercise in general meeting.

Note: For example, the directors may issue shares, borrow money, and issue debentures, employing people, suing in the companys name, deciding whether to defend proceedings, making contracts.

198D Delegation

(1) Unless the company's constitution provides otherwise, the directors of a company may delegate any of their powers to:

(a) a committee of directors; or

(b) a director; or

(c) an employee of the company; or

(d) any other person.

198E Single director/shareholder proprietary companies

Powers of director

(1) The director of a proprietary company who is its only director and only shareholder may exercise all the powers of the company except any powers that this Act or the company's constitution (if any) requires the company to exercise in general meeting. The business of the company is to be managed by or under the direction of the director.

Note: For example, the director may issue shares, borrow money and issue debentures.

AWA Ltd v Daniels [1992] 7 ACSR 759 HELD: A board's functions, apart from statutory ones, are said to be usually four-fold: (1) to set goals for the corporation; (2) to appoint the corporation's chief executive; (3) to oversee the plans of managers for the acquisition and organisation of financial and human resources towards attainment of the corporation's goals; and (4) to review, at reasonable intervals, the corporation's progress towards attaining its goals...

b) Board Composition Numbers Minimum number of directors (s201A): Proprietary company: 1 Public company: 3 (2 ordinarily resident in Australia) Maximum number? Usually stated in constitution. Who can be a director? Corporations Act: ss. 201A-B, D: Natural person (some companies can be directors of other companies, i.e. de facto and shadow directors), over 18 years old (201B); signed consent (201C) Not disqualified (201B) Some must ordinarily reside in Australia (at least 2 directors of public company; and at least one director of proprietary company: s 201A(1) and (2))) Who is not the auditor of the company, and hasnt been the auditor or a member of the audit firm for the last 2 years: s324CI (does not apply to small proprietary companies) Minimum shareholding? Check constitution this may be the case in order to incentivize the directors.c) Directors Rules

IV Corporate ContractingA. Corporate Capacity124 Legal capacity and powers of a company s124(1) states that companies have the legal capacity and powers of an individual, but note that powers set out therein include additional powers that are not applicable to humans security interests and issuing shares. s124(2) provides that a companys capacity to do something is not affected by the fact that it is not in the companys interests to do that thing.

125 Constitution may limit powers and set out objects

(1) If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company's exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company's constitution.

(2) If a company has a constitution, it may set out the company's objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company's constitution.

NOTE: Breach of constitutional limitations by directors is an irregularity which may be a breach of their duty of care and skill or their fiduciary duty to act in good faith for a proper purpose (given that the company constitution defines and sets limits to the companys interests). NOTE: Ratification of the breach by the shareholders in general meeting is possible unless the interests of creditors intrude: Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722.B. Direct ContractingA company contracts directly if the contract is made by one of its organs.127 Execution of documents (including deeds) by the company itself

(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).

NOTE: Section 198E(1)Sole director/shareholder is the organ of the companyC. Agenta) Actual (express or implied) AuthorityActual authority is an internal matter, and can be express or implied.126 Agent exercising a company's power to make contracts

(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.

i) Express AuthorityExpress actual authority may arise by expressly giving an individual power to enter into particular contracts or to carry out certain tasks.ii) Implied AuthorityImplied actual authority arises from the conduct and the circumstances, based upon the usual and incidental authority incurred.PositionRule

Managing Director Managing director can have powers delegated under 198C and can also be appointed under s201J. Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68 Usual authority to deal with everyday matters, to supervise the daily running of the co, to supervise the other managers and indeed, generally, be in charge of the business of the company.

Individual DirectorIndividual director has no usual authority to bind the company: Northside Developments Pty Ltd v Registrar General (1990) 170 CLR

Individual ChairpersonIndividual chair has no usual authority to bind the company: State Bank of Victoria v Parry (1990) 2 ACSR 15

Company SecretaryCompany secretary keeps records and ensures company performs statutory functions (s 188).

Previously limited to clerical duties; now has usual authority to enter administrative contracts: Panorama Developments (Guilford) Ltd v Fidelis Furnishing Fabrics Ltd (1971) 2 QB 711 and Donato v Legion Cabs (Trading) Co-op Society Ltd (1966) 2 NSWR 583

Executives below board levelAWA Ltd v Daniels (1992) 7 ACSR 759 HELD: The authority of executives below board level will depend on their particular position.

Other AgentHely-Hutchison v Brayhead (1968) 1 QB 549 HELD: Implied actual authority can also arise by the acquiescence of the board or other person with actual authority: (1) Acquiescence requires consent of all board members; and (2) Communication of that consent to each other and to the agent.

b) Apparent or Ostensible AuthorityFour Elements to be satisfied before a contract can be enforced against a company where the purported agent did not have actual authority.Freeman & Lockyer v Buckhurst Properties (Mangal) Ltd (1964) 2 QB 480(I) Representation: Representation must have been made to the contractor that the agent had authority to enter on behalf of the company a contract of the kind sought to be enforced(II) Authority to Represent: That representation must have been made by a person or persons who had actual authority to manage the business generally (normally the board) or specific matters to which the contract relates:a. (eg MD or company secretary or some other agent to whom authority has been delegated, whether expressly or impliedly): per Diplock LJ, the making of such a representation is itself an act of management of the company's business. In all the cases reviewed in Freeman, the representation was made by conduct in permitting the agent to act in the management and conduct of part of the business of the company.(III) Inducement: Contractor induced by the representation to enter the contract (this will not apply where the contractor knows of facts which suggest that the apparent agent did not have authority, because then they will not have relied on the representation).(IV) Reasonable Inquiry: A fourth condition laid down by Diplock LJ relating to capacity no longer applies. However some commentators take the view that there is a fourth condition that apparent authority will not operate if the third party knows something which would put a reasonable person on inquiry as to whether the person with whom they are dealing lacks authority. Alternatively, this might simply be an aspect of inducement: if the contractor knows about the lack of authority then the representation will not be an inducement. If the contractor ought to know about the lack of authority then it will be difficult to persuade the court that he relied on the representation.

Application of the Freeman TestFreeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) 2 QB 480 FACTS: Contract made, architects used sued for payment. HELD: Apparent authority as knowledgeable silence given by board. The company was bound under the contracts.

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72 FACTS: Director Bruce Jr has authority to act as managing director, however did not have actual authority. Held out authority to buy machinery. HELD: Apparent authority cannot derive from a person who only has apparent authority. NOTE: This principle may be relaxed, see s 129(3). Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 FACTS: Letters of indemnity, where a bank would indemnify the ship charterer in respect of loss or damage that the charterer might sustain as a result of delivering cargo to someone without documentation. This was made by the banks guarantee and loan department. Lacked express actual authority. HELD: court held that bank made a representation about the authority of Ms Dhiri to issue indemnities, through equipping her with a certain title (manager of the Documentary Credit Department), status and facilities, and also by failing to establish proper safeguards to protect itself and outsiders with whom it dealt- from unauthorised conduct. Court looked at failure of the bank to protect itself by putting in protective standards.

Corporations Act 2001Part 2b.2Assumptions People Dealing With Companies Are Entitled To Make128 Entitlement to make assumptions

(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.

129 Assumptions that can be made under section 128

Constitution and replaceable rules complied with

(1) A person may assume that the company's constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with.

Director or company secretary

(2) A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:

(a) has been duly appointed; and

(b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

Officer or agent

(3) A person may assume that anyone who is held out by the company to be an officer or agent of the company:

(a) has been duly appointed; and

(b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.

Proper performance of duties

(4) A person may assume that the officers and agents of the company properly perform their duties to the company.

Document duly executed without seal

(5) A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.

Document duly executed with seal

(6) A person may assume that a document has been duly executed by the company if:

(a) the company's common seal appears to have been fixed to the document in accordance with subsection 127(2); and

(b) the fixing of the common seal appears to have been witnessed in accordance with that subsection.

For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.

Officer or agent with authority to warrant that document is genuine or true copy

(7) A person may assume that an officer or agent of the company who has authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy.

(8) Without limiting the generality of this section, the assumptions that may be made under this section apply for the purposes of this section.

130 Information available to the public from ASIC does not constitute constructive notice

A person is not taken to have information about a company merely because the information is available to the public from ASIC.

The Indoor Management RuleNot entitled to make assumptions if had knowledge that the assumptionHoughton v Nothard Lowe and Wills Ltd (1927) 1 KB 246 HELD: A mere constitutional or statutory power to appoint agents will not suffice to trigger the Turquand rule; the company must do something to create an impression that the person was its agent or that approval was given.

Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 FACTS: Group of companies controlled by R, Northside purported to give mortgage over land to bank, in order to secure loan to companies owned by R. Witnessed by R (director) and G (secretary). Board had not delegated or authorized transaction. G had never formally been appointed as secretary. Financial difficulties, sought to enforce loan. Argued that mortgage was invalid as had not been approved by Northside. HELD: Mortgage invalid. Numerous reasons given. All agreed that the out on inquiry section applied the bank officers could see that the loan was being made to companies unrelated the group and Northside did not own any shares, and was taking on a large amount of risk for no apparent benefit. The bank should have made inquiries to satisfy themselves that the mortgage had been entered into correctly.Story v Advance Bank Australia Ltd (1995) 31 NSWLR 7 FACTS: Bank lent Ss company $1M arranged by S. As security, bank obtained mortgage over house property. The loan monies were used partly for personal purposes, the rest for business purposes. Executed under seal, witnessed by Mr and Mrs S her signature was forged. Company collapsed, bank sought to enforce. HELD: Mortgage document not properly executed, and the put on notice exception did not apply. Company did have interest in loan. On this basis, northside can be distinguished.

V Directors DutiesA. Application of the Duties1. Who Owes the Duty?a) General Law DutiesCAC (NSW) v Drysdale (1978) 141 CLR 236; 22 ALR 161; 3 ACLR 760 HELD: Fiduiariesdirectors and senior executive officers. NOTE: Content may vary depending on the nature of the office and service contract; also applies to persons who knowingly assume office of director without having been properly appointed.

b) Statutory DutiesDirectors"director" of a company or other body means:

(a) a person who:

(i) is appointed to the position of a director; or

(ii) 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; and

(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

(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.

Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1 FACTS: Hodgson was influenced by Pioneers effective control in the context of the size of other shareholdings (which were small). Note also Pioneers actual exercise of management and financial control over Giant and Pioneers requirement that Giant produce financial reports in line with own requirements. HELD: Although a body corporate cannot be a director, it can be a shadow director. One company was shadow director of another company. NOTE: This is important because shadow directors and officers are subject to s180-3 duties, while the duty not to trade while insolvent imposed by s588G insolvent trading duty only extends to directors (including shadows and de factos) but not officers.

Officers"officer" of a corporation means:

(a) a director or secretary of the corporation; or

(b) a person:

(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(ii) who has the capacity to affect significantly the corporation's financial standing; or

(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation); or

(c) a receiver, or receiver and manager, of the property of the corporation; or

(d) an administrator of the corporation; or

(e) an administrator of a deed of company arrangement executed by the corporation; or

(f) a liquidator of the corporation; or

(g) a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

ASIC v Adler (2002) 41 ACSR 72; 20 ACLC 576, 599 (Santow J) FACTS: HIHC (a wholly owned subsidiary of HIH) paid $10m in June 2000 to Pacific Eagle Equity (PEE). Adler, although a director of HIH, was not a director of HIHC. HELD: Adler was an officer of HIHC, see s 9a person who has the capacity to affect significantly the corporations financial standing. He participated in how funds in the group were invested. He also had the capacity to significantly affect HIHCs financial standing.

Morley v ASIC [2010] NSWCA 331 HELD: Morley (CFO) and Shafron (Co-Secretary and General Counsel) of James Hardie Industries Ltd were considered to be officers of the company.

Specific Duties Owed by Directors and OfficersDutySectionPersons under Duty

Duty of care180 (1)Directors and officers

Duty of good faith181Directors and officers

Duty not to make improper use of position182Directors, officers and employees

Duty not to make improper use of information183Directors, officers and employees

Duty to disclose material personal interests191Directors only

Duty to avoid insolvent trading588GDirectors only

2. To Whom is the Duty Owed?The Company as a Separate Legal EntityPercival v Wright (1902) 2 Ch 421 HELD: Duties are owed to the company as a separate legal entity. Generally, this means they can only be enforced by the company and not by individual shareholders.

Individual ShareholdersPeskin v Anderson (2001) 1 BCLC 372, (2001) BCC 874; Allen v Hyatt (1914) 30 TLR 444; Coleman v Myers (1977) 2 NZLR 225 HELD: Directors may come to owe a duty of care to persons other than the company, for example if they assume responsibility to individual shareholders.

Glavanics v Brunninghausen (1996) 19 ACSR 204 (2203); (1999) 32 ACSR 294, 304, 312 FACTS: Company, two directors and shareholders, B and Gone had secured deal to sell company to third party. Offered a very high price for the business. Bought out other director without disclosing the high price to be sold. HELD: One was directly reliable to the other, it was more akin to a partnership and thus the duty was owed. NOTE: This case is confined to its own facts.

The Test: (1) Shareholder dependency; (2) Relationship of trust and confidence (or position of advantage); (3) Significant transaction; and (4) Positive action taken by directors.

B. Common Law Duties of Care, Skill, Diligence, and Delegation/RelianceRe Cardiff Savings Bank [1892] 2 Ch 100 (Marquess of Bute's Case) HELD: The directors duties imposed by the general law are of a low standard, and are subjective, thus depending upon the facts of each individual case.

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

2. SkillRe City Equitable Fire Insurance Company Ltd (1925) Ch 407, 428-9 (Romer J) HELD: Conduct should be assessed against a skill standard: What would a reasonable person with the knowledge and experience of the defendant have done in the circumstances if acting on his own behalf?

Re Brazilian Rubber Plantations and Estates Ltd (1911) 1 Ch 425 HELD: No requirement that directors bring particular skills, but if they possess them, they should use them for the benefit of the company.

Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 117 FACTS: Board of Victorian Safety Council included a number of high profile doctors, lawyers, etc Board member named Friedrich apparently ran/controlled the company. Company became bankrupt and Friedrich disappeared. The remaining directors pleaded ignorance and stated that they left the running to Friendrich. HELD: The board members were liable, even though they did not act as Friedrich did. RULE: An objective standard of skill, albeit rather minimal, is expected of executive directors in relation to financial affairs of the company. NOTE: Controversial decision, made under the influence of s 588G (Director's duty to prevent insolvent trading by company).

3. DiligenceRe City Equitable Fire Insurance Company Ltd (1925) Ch 407 (Romer J) HELD: (1) Directors are not bound to give continuous attention to the affairs of the company. (2) His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. (3) He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so.

Minimum standards on directors to: (1) Obtain a basic understanding of their companys business and be familiar with the fundamentals of the companys business; (2) Keep informed the activities of the company continuing obligation; (3) Monitor the companys activities (although detailed inspection of day-to-day activities not required) and regularly attend board meetings; (4) Maintain familiarity with the companys financial status by a regular review of financial statements, ie, monitor the companys financial position.

4. Delegation and RelianceRe City Equitable Fire Insurance Company Ltd (1925) Ch 407 (Romer J) HELD: For all duties that may be properly delegated, in the absence of grounds for suspicion, a director is justified in trusting another to perform the duties honestly. APPLIED/APPROVED: Dorchester Finance v Stebbings (1989) BCLC 498; AWA Ltd v Daniels (1992) 7 ACSR 759, 868 (Rogers CJ); Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACSR 785, 856-8. NOTE: Daniels v Anderson (1995) 37 NSWLR 438 was widely viewed as having imposed a stricter standard on non-executives and this led to a statutory restatement of the rules on delegation and reliance.

C. The Statutory Duties of Care under s 180

180 Care and diligencecivil obligation only

Care and diligencedirectors and other officers

(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.

Note: This subsection is a civil penalty provision (see section 1317E).

1. The General Standard of CareVines v ASIC (2007) 62 ACSR 1; [2007] NSWCA 75 HELD: Objective standard of care.

ASIC v Rich (2003) 44 ACSR 341 at 352 HELD: The statutory responsibilities of a director include: (1) arrangements flowing from the experience and skills that the director brought to his or her office, and also any arrangements within the board or between the director and executive management affecting the work that the director would be expected to carry out. (2) The precise duty of care flowing from these arrangements would be subject, of course, to a minimum standard of care and diligence set by the statute in reflection of the common law position.

ASIC v Adler [2002] 41 ACSR 72 [372] (Santow J) HELD: (1) Adler in breach of s 180(1)Caused the $10m to be invested prejudicially to HIHCs interests: Did not follow the proper procedures in taking it to HIH investment committee; (2) Williams (former CEO) in breach of s 180(1)Also avoided the companys proper safeguards and allowed the investment to continue; (3) Fodera (former CFO) in breach of s 180(1)Failed to take steps to investigate the investment.

ASIC v Macdonald [No 11] (2009) 71 ACSR 368 [259][261], [333] (Gzell J) (1) Failure by the non-executive directors to discharge their monitoring role amounted to a breach of their duty under s 180(1), stating (261) that: It was part of the function of the directors in monitoring the management of the company to settle the terms of the draft ASX announcement to ensure that it did not assert that the Foundation had sufficient funds to meet all legitimate compensation claims. (2) US directors (Gillfillan and Koffel) participated in the relevant meeting by telephone but the draft ASX announcement was neither provided nor read to them and breached s 180(1) by voting in favour of the resolution: Applying an objective test under s 180(1), Gzell J concluded (261) that their failure to request a copy of the draft ASX announcement dealing with such a significant matter in the life of JHIL, to familiarise themselves with its terms, or to abstain from voting was inconsistent with the actions of a reasonable person in their shoes with their responsibilities.

Morley v ASIC (2010) 247 FLR 140 ; [2010] NSWCA 331 [831] (1) If Australian directors had voted in favour of the Draft ASX Announcement Resolution at the February board meeting, they would have been in breach of their duty of care and diligence since the draft announcement was misleading. (2) [867] The US directors who attended the meeting by telephone, would have breached their duty of care and diligence because they would have heard the discussion and were not excused from understanding the need not to issue misleading statements to the market and other interested stakeholders. (3) Market reaction to the announcement to them was critical. This was a matter within the purview of the Boards responsibility: what should be stated publicly about the way in which asbestos claims would be handled by the James Hardie group for the future [261].

Vines v ASIC (2007) 62 ACSR 1; [2007] NSWCA 75 FACTS: Takeover of GIO by AMP in 2000. Proceedings against, amongst others, Vines (CFO) under previous 180(1): Regarding preparation of a profit forecast for the company which failed to take into account certain matters (Vines against the takeover in forecast). HELD: In first instance, found that Vines had breached duties of standard of care without taking positive steps to inform of the assumptions underlying the forecast. He had a supervisory and operational responsibility there were signals which would have led a reasonable person to ensure that the forecast was accurate. This was on the basis of his special capabilities as CFO.

2. The Standard of Care: Non-Executive Directors versus Executive DirectorsPosition is not settled in the case law.ASIC v Macdonald [No 11] [2009] NSWSC 287 [250] (Gzell J) HELD: The law has not yet established the extent to which the position of a non-executive director shapes the content of the duty of care. OUTCOME: Statement to stock exchange was a breach made by the executive and non-executive directors.

The standard is not that of a manager but is proactive.AWA v Daniels (1992) 7 ACSR 759, 865-9 (Rogers CJ) FACTS: AWA (plaintiff company) suffered a loss when one of its employees, Koval (foreign exchange transactions), covered up a fraud reporting gains when he was actually making losses. Koval operated without effective control or supervision. ISSUES: AWA claimed that the auditor was negligent in failing to detect the loss. The auditor counterclaimed that it was the clients responsibility to manage its employees. HELD: AWAs contributory negligence reduced the auditors liability. The CEO as an executive director had breached his common law duty of care, and his negligence was attributed to AWA. ...The board of a large public corporation cannot manage the corporation's day to day business. The directors rely on management to manage the corporation. ... A non-executive director does not have to turn him or herself into an auditor, managing director, chairman or other officer to find out whether management are deceiving him or her ... .Daniels v Anderson (1995) 37 NSWLR 438 RULE: Non-executives to take a more proactive approach to monitoring by referring to what they ought to know: [I]n our opinion the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company. NOTE: The distinction between the standard owed by executive and non-executive directors was rejectedthe standard is objective.

3. Delegation and Reliance under Statute189 Reliance on information or advice provided by others

If:

(a) a director relies on information, or professional or expert advice, given or prepared by:

(i) an employee of the corporation whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned; or

(ii) a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person's professional or expert competence; or

(iii) another director or officer in relation to matters within the director's or officer's authority; or

(iv) a committee of directors on which the director did not serve in relation to matters within the committee's authority; and

(b) the reliance was made:

(i) in good faith; and

(ii) after making an independent assessment of the information or advice, having regard to the director's knowledge of the corporation and the complexity of the structure and operations of the corporation; and

(c) the reasonableness of the director's reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under this Part or an equivalent general law duty;

the director's reliance on the information or advice is taken to be reasonable unless the contrary is proved.

198D Delegation

(1) Unless the company's constitution provides otherwise, the directors of a company may delegate any of their powers to:

(a) a committee of directors; or

(b) a director; or

(c) an employee of the company; or

(d) any other person.

Note: The delegation must be recorded in the company's minute book (see section 251A).

(2) The delegate must exercise the powers delegated in accordance with any directions of the directors.

(3) The exercise of the power by the delegate is as effective as if the directors had exercised it.

Permissible delegation by non-executives and reliance upon management and/or experts:ASIC v Macdonald [No 12] (2009) 259 ALR 116 (Gzell J) HELD: The matter of the ASX announcement before the board was not an appropriate matter for delegation or reliance upon management, co-directors, or outside experts. NOTE: [I]t is the emphatic nature of the draft ASX announcement [with use of the term fully-funded] that is at fault. And that is not a matter for reliance upon management or outside experts. Furthermore, a more emphatic reason for its rejection was that the boards task of approving the draft ASX announcement involved no more than an understanding of the English language used in the document.

4. The Statutory Business Judgement Rule180 Care and diligencecivil obligation only

Business judgment rule

(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.

Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)it does not operate in relation to duties under any other provision of this Act or under any other laws.

(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.

Business judgement:ASIC v Fortescue Metals Group Ltd [No 5] (2009) 27 ACLC 1 HELD: The failure of a company to comply with disclosure obligations is not a decision related to business operationsthis is a decision not to comply with a requirement of the law.

Burden of proof:ASIC v Adler (2002) 41 ACSR 72 (Santow J) HELD: The burden of proof is on the defendant who wishes to benefit from the application of the statutory business judgement rule.

ASIC v Macdonald [No 11] (2009) 71 ACSR 368 [542] (Gzell J) HELD: The requirements for the operation of the business judgment rule in s180(2) are cumulative. The short answer is that there was no evidence that MrMacdonald rationally believed that a business judgment was in the best interests of the corporation. He gave no evidence. In the absence of evidence that MrMacdonald had a belief that a business judgment was in the best interests of JHIL, his appeal to s180(2) must fail.

Rational belief interests of the company:ASIC v Rich (2009) NSWSC 1229 at [7253][7289] (Austin J) HELD: Under s 180(2)(d),