Business Organisations

1
Business Organisations Notes
Table of Contents
Summary of the course ……………………………………………………………………………………….. 4
Week 1 ……………………………………………………………………………………………………………………… 4
Week 2 ……………………………………………………………………………………………………………………… 4
Week 3 ……………………………………………………………………………………………………………………… 4
Week 4 ……………………………………………………………………………………………………………………… 4
Week 5 & 7………………………………………………………………………………………………………………… 5
Week 6 ……………………………………………………………………………………………………………………… 5
Week 7 ……………………………………………………………………………………………………………………… 5
Week 8-10 …………………………………………………………………………………………………………………. 6
Week 9 ……………………………………………………………………………………………………………………… 7
Week 10 ……………………………………………………………………………………………………………………. 7
Week 11 & 12 …………………………………………………………………………………………………………….. 7
Corporate life cycle……………………………………………………………………………………………………… 7
Week 1: Conservative tour of the theory behind the corporation ……………………………….. 8
Week 2: Conservative tour of the theory behind the corporation ……………………………….. 9
Week 3: Partnership & history of the corporation ………………………………………………….. 10
What is a partnership?……………………………………………………………………………………………….. 10
The requirement of profit ………………………………………………………………………………………………11
Indicators for determining the existence of partnership …………………………………………………….11
Principal characteristics of partnership …………………………………………………………………………. 14
Not a separate legal person ……………………………………………………………………………………………14
Partners bear unlimited liability………………………………………………………………………………………14
Unincorporated association………………………………………………………………………………………… 15
Unincorporated joint venture ……………………………………………………………………………………… 15
Regulatory history of corporations ………………………………………………………………………………. 15
Week 4: Types of Business Entities ………………………………………………………………………. 16
Unincorporated associations ………………………………………………………………………………………. 16
Non-profit association……………………………………………………………………………………………………16
Trusts ……………………………………………………………………………………………………………………… 17
Sole trader……………………………………………………………………………………………………………….. 17
Co-operative…………………………………………………………………………………………………………….. 17
Incorporated associations…………………………………………………………………………………………… 18
Factors affecting the decision to incorporate ……………………………………………………………………18
Week 5: Corporations………………………………………………………………………………………… 18
Registration……………………………………………………………………………………………………………… 18
Practical alternatives and formalities……………………………………………………………………………. 19
Shelf companies ……………………………………………………………………………………………………………19
Company types……………………………………………………………………………………………………………..19
Shares and share capital…………………………………………………………………………………………………19
Week 6: Separate legal personality **** ………………………………………………………………. 20
The nexus between corporate personality and limited liability …………………………………………. 20
The merits and costs of limited liability…………………………………………………………………………. 20
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Merits ………………………………………………………………………………………………………………………..20
Costs………………………………………………………………………………………………………………………….21
Corporate personality ……………………………………………………………………………………………21
Piercing the corporate veil………………………………………………………………………………………22
Common law exceptions ………………………………………………………………………………………………..22
Corporate personality within corporate groups ……………………………………………………………… 24
Week 7: Corporate Governance…………………………………………………………………………… 25
The effective board……………………………………………………………………………………………………. 25
The formal primacy of the board …………………………………………………………………………………….25
What is the proper role of the board? …………………………………….. Error! Bookmark not defined.
Directors and officers ………………………………………………………………………………………………… 26
The distribution of corporate powers between shareholders and directors ………………………… 26
The derivation of the corporate organs ……………………………………………………………………………26
Original Powers of the General Meeting…………………………………………………………………………..27
***Appointment and removing directors ……………………………………………………………………… 28
Appointment of directors:………………………………………………………………………………………………28
Disqualification from office and from managing companies: ………………………………………………29
Termination of office……………………………………………………………………………………………………..29
Functioning of board of directors…………………………………………………………………………………. 30
Need for collective action: ……………………………………………………………………………………………..30
Convening directors meetings…………………………………………………………………………………………30
Conduct of director’s meetings……………………………………………………………………………………….30
Director’s access to corporate information……………………………………………………………………….31
Week 8: Authority of corporate agents to bind the company……………………………………. 31
Problems facing those who deal with companies……………………………………………………………. 31
***Bases for corporate contractual responsibility ………………………………………………………….. 31
Actual Authority ……………………………………………………………………………………………………………31
Ostensible Authority ……………………………………………………………………………………………………..32
Indoor Management Rule ………………………………………………………………………………………………33
Statutory assumptions protecting those dealing with companies ……………………………………… 34
Liabilities for directors and managers …………………………………………………………………………… 34
Treating directors as fiduciaries ………………………………………………………………………………………34
The scope of directors’ personal liabilities………………………………………………………………………..35
The statutory definition of officer……………………………………………………………………………………35
The statutory definition of director………………………………………………………………………………….35
Range of civil penalty provisions ……………………………………………………………………………………..36
Consequences of contravening a civil penalty provision: ……………………………………………………36
Directors Duty to act bona fide for the benefit of the company as a whole …………………………. 36
Individual subjects of the duty ………………………………………………………………………………………..37
Duty of Good faith (statutory)…………………………………………………………………………………………37
Fiduciary loyalty within corporate groups…………………………………………………………………………38
Week 9 – Duty of Care, Skill and Diligence…………………………………………………………….. 39
Common law duty – Most commonly looked at from this perspective ……………………………….. 39
What is the standard of care? …………………………………………………………………………………………39
What will breach a general law duty of care? ……………………………………………………………………40
Why are there so few cases for breach of duty of care?……………………………………………………..40
Equitable-based duties – generally NOT argued……………………………………………………………… 40
Statutory duty (s 180) – MOST IMPORTANT…………………………………………………………………… 41
CORPORATIONS ACT 2001 – SECT 180……………………………………………………………………………..41
Business judgment rule………………………………………………………………………………………………. 44
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Problems when facing those who deal with companies ……………………………………………….45
Week 10 – Insolvent Trading ………………………………………………………………………..45
Duty to prevent insolvent trading:……………………………………………………………………………45
If director meets below elements, it will be contravention of s 588G(2). ………………………..45
1 – PERSON WAS DIRECTOR WHEN DEBT OCCURRED. ……………………………………………………….45
2 – COMPANY WAS INVOLVENT OR BECAME INSOLVENT BY OTHER DEBTS AT SAME TIME ……46
4 – REASONABLE GROUNDS FOR SUSPECTING INSOLVENCY……………………………………………….46
5 – DIRECTOR’S AWARENESS OF THE COMPANY’S FINANCIAL POSITION………………………………46
Defences to liability for failure to prevent insolvent trading: ……………………………………………. 47
Compensation remedies with respect to insolvent trading: ……………………………………………… 47
Duty for holding company to prevent insolvent trading by subsidiary………………………………… 47
Recovery of compensation by liquidator of subsidiary from holding company:……………………..47
Defences available (s588X 2, 3,4,5)………………………………………………………………………………….48
Directors interests in transactions with their company ……………………………………………………. 48
Statutory disclosure obligations with respect to director’s interest in matters affecting their
company …………………………………………………………………………………………………………………. 48
Related Party Transactions: ………………………………………………………………………………………… 49
Secret profits: the appropriation of corporation property, information and opportunity ………. 50
Statutory Duties …………………………………………………………………… Error! Bookmark not defined.
Conflict avoidance obligations: fettering board discretions…………………………………………………50
Week 11 – Meeting Convening ……………………………………………………………………………. 50
Director’s right to convene a meeting…………………………………………………………………………… 51
Member’s right to convene a meeting. …………………………………………………………………………. 51
Proper Purpose……………………………………………………………………………………………………………..52
Constitutional limitations……………………………………………………………………………………………….52
Convening general meeting by court order ……………………………………………………………………. 52
Notice of meetings ……………………………………………………………………………………………………. 53
Member’s rights to put resolutions and circulate statements …………………………………………… 53
Conducting a meeting:……………………………………………………………………………………………….. 53
Voting at meetings ……………………………………………………………………………………………………. 54
The functions of voting rights………………………………………………………………………………………….54
Voting Rights and their exercise………………………………………………………………………………………54
Proxy Voting …………………………………………………………………………………………………………………54
Disclosure obligations………………………………………………………………………………………………… 54
The range of disclosure obligations………………………………………………………………………………….54
Expropriation……………………………………………………………………………………………………………. 56
Statutory Derivative Action ………………………………………………………………………………………… 56
Shareholders Personal Action ……………………………………………………………………………………… 57
Compulsory liquidation remedies ………………………………………………………………………………… 58
Quasi-Partnership analogy ……………………………………………………………………………………………..58
Directors acting in their own interests……………………………………………………………………………..58
Statutory remedy for oppression…………………………………………………………………………………. 58
Modern grounds of relief ……………………………………………………………………………………………….58
Range of orders …………………………………………………………………………………………………………….58
Week 12: Winding up of a company …………………………………………………………………….. 58
Insolvency ……………………………………………………………………………………………………………….. 58
Voluntary administration……………………………………………………………………………………………. 59
When administrator comes in…………………………………………………………………………………………59
Deed of company arrangement ………………………………………………………………………………………60
Receivership** …………………………………………………………………………………………………………. 60
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Winding up the company ……………………………………………………………………………………….61
Liquidation………………………………………………………………………………………………………………….61
Of a liquidator and its consequences: …………………………………………………………………………….61
Most common form of liquidation:………………………………………………………………………………..61
The order of application of company assets ……………………………………………………………………..61
Recovering property and compensation for the benefit of creditors ……………………………………61
Summary of the course
Week 1
• Understanding why we study corporate law and why it is so important
• Broader economic and social context
• If we focus on what we are good at, we will all be better off à specialisation
Week 2
• Conceptions of the corporation – theoretical framework to think about what companies are
and what they are used for
• The way you see a corporation has implications on the roles and responsibilities of
stakeholders incl. managers, shareholders, creditors, public, government
o Property model
o Contract model
o Power model
o Social entity model
• When the people change what they want a company to be, the law changes in line with that
• All of the subsequent material should be considered in the context of weeks 1 & 2
Week 3
• Types of business associations
• Different legal structures that can be used to conduct business activities
• Understand pros and cons of each structure
• Unincorporated structures
o Partnerships
o Associations
o Joint ventures
o Sole trader
• Incorporated à legal personhood & limited liability
o Company
o Partnership
o Association
o Co-operative
Week 4
• Factors to consider when choosing between business structures
o Size of business
o Purpose of business
o Governance/decision making
o Liability of participants
o Tax considerations
o Funding requires
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o Formalities & compliance costs
o Succession & transfer
Week 5 & 7
• Types of Companies
• Companies limited by shares
• LIMITED LIABILITY & SEPARATE LEGAL PERSONALITY
• Everything from here on is about companies limited by shares
• A company limited by shares will have
o Shares and shareholders
o Directors
o Constitution
o Constitution – tripartite contract between shareholders, directors and the company
o Corporate organs
§ Board of directors
§ Shareholders (as a group)
o Corporate governance
§ Study of the relationship between the stakeholders of the company
§ Understand broadly
Week 6
• Limited liability
• Understand the cases that gave rise to the concept of separate personality, esp. Salomon
• Understand the meaning of limited liability & the pros and cons
• Piercing the corporate veil
o Exception rather than the rule
o Uncertainty in Australia – the application of the law is in a state of flux
o Statutory grounds
§ Duty to prevent insolvent trading
• Imposed on directors or the parent entity of a subsidiary – you can
pierce the corporate veil by going after the director or the parent
company, not the shareholders
§ Consolidated financial reporting
o Common law grounds
§ Fraud/improper purpose – sham
• The law on this is quite settled
• If something doesn’t seem right, go for this ground
§ Agency
• UK authority – application may not be certain due to corporate
groups
• Use this ground with caution
§ Corporate groups
• Doesn’t apply in Australia
Week 7
• Directors
o Who are they?
§ Definition in s 9
§ Eligibility – s 201B
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§ Consent
§ Executive (someone who holds a management position within the company
as well as being a director, e.g. MD, CEO) v non-executive
§ Appointment – rules depend on public vs pty
§ Removal or retirement
§ Disqualification – ASIC applies to court for a director to be banned
o Board of directors
§ What is the role? To exercise director powers as a group, since individual
directors can’t make decisions on their own
§ How does it make decisions?
§ Board meetings/resolutions
o They are fiduciaries
o Powers of directors
§ Distribution of powers between shareholders and directors – this will be in
the constitution
§ Degree of independence of directors from shareholders when exercising their
powers – understand the cases on this
§ Authority of agents to bind the company
• To what extent to people within the company have the power to bind
the company by their own actions?
• Actual vs ostensible
• Indoor management rule
o They owe duties to the company
• Shareholders
o Own shares
o They can exercise powers in accordance with the constitution
o They cant directly control the company, but can do so by amending the constitution
& appointing/removing shareholders
Week 8-10
• Directors duties
• General law and statutory duties
o Duty to exercise care and diligence (general law & s 180)
o Duty to act in good faith (general law and s 181)
o Prohibition on improper use of position
o SEE PHOTO FOR THE OTHERS….
o Duty to disclose material personal interests – not civil penalty provision
o For breach of civil penalty provisions
§ ASIC can go to the court and seek a declaration of contravention
• Then they can ask for:
o Disqualification – have them banned from being a director for
XX years
o Pecuniary penalty order – fine
o Compensation order – the director compensates the persons
they have caused loss to as a result of their breach of duties
§ Company can ask for compensation
• General law remedies
o Compensation
o Equitable account for profits
o Rescission of contracts
• Duties
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o SEE SLIDES FOR OTHERS
Week 9
• Duty of care and diligence
• Standard of care required – case law
• Defences
o Delegation
o Business judgment rule
o Reliance
• Causation – the loss was caused as a result of the breach
o For all the other duties, you don’t need to prove causation
• Remedies
Week 10
• Duty to avoid insolvent trading
• Meaning of debt and insolvency
• Duty is imposed on directors & parent company
• Defences
o S 588H – 4 grounds – KNOW THESE
• Consequences of breach
o Same as breach of other duties
o Also liquidator can be appointed – they can claim from the directors or the parent
entity for loss suffered
o Unsecured creditors can do the same à extra brownie points for this in the exam
Week 11 & 12
• Exercise of powers and shareholders remedies
o Convening meetings to exercise voting power
o Statutory derivative action – allows them to go to the court and argue that something
bad is happening. The individual shareholder doesn’t have standing to commence
proceedings on their own, but the company isn’t going to sue itself, so the
shareholder can get permission from the court to sue on the company’s behalf
o Statutory remedy for oppressions
§ General unfairness – you will be able to satisfy the elements for both of these.
The court had a wider range of
o Statutory compulsory liquidation remedies
§ If the company is insolvent, or in significant financial difficulties, the court will
choose this remedy
Corporate life cycle
• Starting a company – week 5
• Ending a company – week 12
o Different mechanisms depending on solvency
§ Solvent
• Voluntary winding up by shareholders– the shareholders can passa
resolution for this
• Voluntary winding up by creditors – very rare as if they are paid they
don’t need to do this
§ Insolvent
• Voluntary administration
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o Role of administrator: try bring the company back up, and if
not, they will sell assets
• Receivership
o Role of receiver: get money for the secured creditors
o If CBA appoints a receiver: they need to get money for CBA
and no one else, e.g. not other banks or creditors, or
shareholders
• Creditor’s scheme of arrangement
• Compulsory winding up for insolvency
o Option for unsecured creditors (i.e. normal supplier) – they
draft a statutory demand. If the company doesn’t pay within
the time frame, it becomes evidence of insolvency since it is
a debt which is formally issued and cannot be paid and they
can ask the court to make an order to have the company
wound up. This is the only way for them to get back the
money they are owed
o All company’s assets are sold and reduced to cash and distributed to
1. Secured Creditors
2. Unsecured creditors
3. Shareholders
Week 1: Conservative tour of the theory behind the corporation
• How do we make sure that managers who are self-interested do what’s best for the
shareholders, who are also self-interested?
• For society to work based on specialisation, it is essential for the functioning of society for
trade to occur
Adam Smith – The Wealth of Nations
• About the division of labour – example of a pin factory – if we take a pin and we manufacture
it, there are several processes involved. Each of the processes requires using people. The
whole idea is slow and inefficient, but the person who has made the pins can come home at
the end of the day knowing that they completely made pins. We can make this process better
by making each person complete 1 repetitive task, e.g. rolling the wire, cutting to size, shining,
etc. – you get very good at doing something very meaningless
• This system (capitalism) comes from a question of how we satisfy unlimited desires with
limited resources, or creating the maximum benefit for the maximum number of people, or
even a certain number of people
• It comes to a time when someone needs to own the factory and someone needs to become
the pin manufacturer. The person who owns the factory takes a huge amount of gains
compared to each person working in the factory
• Capitalism harnesses the worst of human nature, to create good things. We could power our
system on anything we wanted to, such as a belief in love, but that would probably not work.
We have harnessed the greed, and fear, and aggression, and other bad things of man, to lead
to really nice things and to create efficiency – a process that produces more
• There is a chapter dedicated to the fact that we should never allow anyone to separate
ownership and control and we should not allow limited liability since we need direct
accountability
Kose – The Nature of the Firm
• About the division of labour
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• 1 analysis – looks at a number of really large firms and asks whether capitalism is working
within the firms
• He sees that processes are inefficient – there are too many staff in one area and not enough
in another. Workplaces are bureaucratic nonsense since managers run workplaces. The
allocation of resources has less to do with supply and demand and more to do with people’s
preferences
• Capitalism is not working within the firms
Milton Friedman
• Firm defence of capitalism – we are trying to achieve the best we can and trying to make the
best we can from what we have
• What we are dealing with is not aiming for perfection, but live in the best of all possible worlds
• If you pick any period in time over history, you will find one group of people in power
oppressing another group. There has never been a period of time where people have been
fair and equitable to everyone
• The market system is one of coercion without violence and is the best we can have because it
doesn’t discriminate and is fully informed by consent (i.e. contracts)
• There is an unusual amount of resistance, e.g. “I don’t have a choice, I have to go to work
every day”. One the one hand, we were made as working machines, and on the other hand,
you can choose not to work, and not to have money. You will only take a contract, for work
or anything else, if it is better than the alternative of not entering into the contract. But since
we want the things this system offers, we choose to stay in it
Galbraith
• Looks at capitalism when it is applied to some organisation. If we look at a large corporation
and ask whether it has an efficient allocation of resources
Lewis – Liar’s Poker
Carl Marx – Capital Volume 1
• Marx is dismissed by most people since the Soviet Union tried his system and it failed
• The firm/corporation is the problem – it is not doing capitalism right
• All things are in a constant state of transition
Week 2: Conservative tour of the theory behind the corporation
• What do we do with the corporation?
• The corporation is meant to be a legal person – what sort of person do we want it to be?
Allan
• Schizophrenic view of the corporation ?
• Two contrasting views on what the corporation is meant to be
o Historically supported view – the property conception – the shareholders own the
corporation and the sole purpose is to maximise profit for the shareholders, at any
cost as long as it is within the realm of the law. Ford Pinto Case
o Presently supported view – entity conception – the corporation is a social entity and
is afforded a great deal of privilege – limited liability – the corporations have to act in
the public interest.
• The entity conception is not sustainable à we moved back towards the property type view of
the corporation
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Butler
• The contractual theory of the corporation – the proprietary conception and the contractual
theory are very much the same thing. Contractual theory – the corporation is just a chain of
contracts
• What we do not need is what Berle-Means suggested
Dallas
• Models of corporate governance
• Suggests the power model – trying to suggest rather than looking at things as they currently
are, we should understand the historical/contextual/socioeconomic features of the
corporation
Dodd
• We have the managerial class who are professionals governing organisations and they are
increasingly becoming a professional class. The owners of a corporation have to give the
managers a level of trust for them to make decisions on their own, which may not necessarily
be only based on maximising profit
Kasen
• The time horizon of maximising profit – what exactly is it that makes profit maximisation
happen and when?
Friedman
• Main man for a conservative perspective
Week 3: Partnership & history of the corporation
What is a partnership?
• A partnership is a relationship founded upon the agreement of the parties, express or implied
• The partners may be either natural or corporate persons
• The parties must be carrying on business in common – “carrying on business” implies a
repetition of acts, not just a one-off project which will not be repeated. “In common” reflects
the requirement that each partner must be a principal in the business (however it is possible
to be a dormant partner and be inactive in the business activities)
• Partners have a fiduciary relationship to one another
o Birtchnell: “a stronger case of fiduciary relationship cannot be conceived than that
which exists between partners”
• Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384, HCA
o The appellants had been partners in a real estate agency with Porter. After Porter’s
death, the surviving partners discovered that he had been sharing in the profits from
PARTNERSHIP ACT 1892 – SECT 1
Definition of partnership
1 Definition of partnership
(1) Partnership is the relation which exists between persons carrying on a business in common with
a view of profit and includes an incorporated limited partnership.
(2) But the relation between members of any company or association which is:
(a) incorporated under the Corporations Act 2001 of the Commonwealth, or
(b) Formed or incorporated by or in pursuance of any other Act of Parliament or Letters
Patent or Royal Charter,
is not a Partnership within the meaning of this Act.
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speculative land deals with a client of the firm, who sold land through the firm.
Commission was paid to the firm, but Porter also received profits as principal with the
client. The appellants claimed an account of the profits Porter had derived from his
partnership with the client.
o The court held the plaintiffs were entitled to an account of profits. The deceased
partner had made the profits by using a business connection of the partnership – one
of its clients, in breach of his fiduciary duty to the partnership. The transactions of the
land development business also concerned the partnership because the partnership
was involved in the same business as the land development enterprise, being the subdivision and sale of land
The requirement of profit
• The objective of profit is an essential feature of partnership – this distinguishes them from
other associations, non-profit organisations and joint ventures
• United Dominions Corporation Ltd v Brian Pty Ltd: “the important distinction between a joint
venture and a partnership is … the distinction between an association of persons who engage
in a common undertaking for profit and an association of those who do so in order to generate
a product to be shared among the participants”
Indicators for determining the existence of partnership
• There is no set test, there are only a series of factors that can be considered
• [Jurisprudence] – pure science theory of law – if the courts say something is true, then that is
true in law
o Under this theory, defining a partnership is easy à as long as the boxes are ticked, it
will be a partnership (the boxes are the indicators below)
• S 2 Partnership Act 1982
• These rules are not conclusive but are indicators to provide guidance for determining the
existence of a partnership
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The parties’ characterisation of their relationship
• The legal status which partners have sought to assign for their relationship is relevant but not
decisive
Sharing net profits
• This is prima facie evidence of a partnership
• Partnership Act s 2(1)(3) – “the receipt by a person of the profits is prima facie evidence that
he is a partner in the business” but does not of itself make her or him a partner in the business
o This reflects the common law rule in Cox v Hickman (1860), House of Lords
• The Partnership Act s 2(1)(3) lists 5 specific instances where receipt of a share of profits does
not of itself make the recipient a partner:
a) Payment of a debt paid out of accruing profits of the partnership
b) Remuneration of services or agents by a share of profits
PARTNERSHIP ACT 1892 – SECT 2
Rules for determining existence of partnership
2 Rules for determining existence of partnership
(1) In determining whether a partnership does or does not exist, regard shall be had to the
following rules:
(1) Joint tenancy, tenancy in common, joint property, or part ownership does not of itself
create a partnership as to anything so held or owned, whether the tenants or owners do
or do not share any profits made by the use thereof.
(2) The sharing of gross returns does not of itself create a partnership, whether the persons
sharing such returns have or have not a joint or common right or interest in any property
from which or from the use of which the returns are derived.
(3) The receipt by a person of a share of the profits of a business is prima facie evidence
that the person is a partner in the business, but the receipt of such a share, or of a payment
contingent on, or varying with the profits of a business does not of itself make the person
a partner in the business; and in particular:
(a) The receipt by a person of a debt or other liquidated demand by instalments or
otherwise out of the accruing profits of a business does not of itself make the
person a partner in the business or liable as such:
(b) A contract for the remuneration of a servant or agent of a person engaged in a
business by a share of the profits of the business does not of itself make the
servant or agent a partner in the business or liable as such:
(c) A person being the widow, widower or child of a deceased partner, and
receiving by way of annuity a portion of the profits made in the business in which
the deceased person was a partner, is not by reason only of such receipt a partner
in the business or liable as such:
(d) The advance of money by way of loan to a person engaged or about to engage
in any business on a contract with that person, that the lender shall receive a rate
of interest varying with the profits, or shall receive a share of the profits arising
from carrying on the business, does not of itself make the lender a partner with
the person or persons carrying on the business or liable as such: Provided that the
contract is in writing and signed by or on behalf of all the parties thereto:
(e) A person receiving by way of annuity or otherwise a portion of the profits of a
business in consideration of the sale by the person of the goodwill of the business
is not by reason only of such receipt a partner in the business or liable as such.
(2) This section does not apply to or in respect of an incorporated limited partnership.
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c) Annuities to the widower children of a deceased former partner paid from
partnership profits
d) The advance of money by way of loan to a person carrying on a business with interest
varying with the profits or a share of profits of the business provided that the contract
is in writing and signed by the parties
e) Receipt of a portion of profits in consideration of the sale of goodwill of a business
• Re Megevand; Ex parte Delhasse and Badely v Consolidated Bank are examples of
transactions that sought the protection of s 2(1)(3)(d) but were found to be partnerships
• Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511, England and Wales Court of Appeal
o Delhasse agreed to advance a sum to M and S who were partners by a written
agreement which referred to the then equivalent s 2(1)(3)(d) and stated that it was
by way of loan and was not to make Delhasse a partner. Under the agreement,
Delhasse was to share in profits, have the right to inspect partnership accounts and
the option of dissolving the partnership in certain circumstances. The sum advances
to Delhasse was not repayable until after dissolution. The advance was the only
“capital” of the partnership.
o James LJ: “There is every element of partnership. There is the right to control the
property, the right to receive profits, and the liability to share in losses. But it is said
that there are other provisions in the contract which prevent its having this operation,
and which shew clearly that the parties meant the relation of lender and borrower,
and not the relation of partnership. …. The loan is a mere pretence, the object being
to enable the so-called lender to be, not only a dormant partner, but the real and
substantial owner of the business”
• Badely v Consolidated Bank (1888) 38 Ch D 238, England and Wales Court of Appeal
o Badely advanced money to a railway construction contractor (Smith). By deed, the
contractor assigned to the plaintiff his plant, machinery and other items as security
for the advance. The plaintiff was to receive 10% interest and 10% of the profits. The
contractor covenanted to apply the moneys advanced in the carrying out of the work.
The plaintiff could enter and complete them even if the contractor became bankrupt
o Lindley LJ: “when you look at the whole of the evidence it appears that the formal
document expresses the real truth, namely that this was a contract of loan upon
security. … it was a bona fide loan upon security, and not a participation in profits with
a view to create a partnership either secret or open.
Sharing of losses
• S 24(1)(1) provides for equal contribution to losses in the absence of agreement to the
contrary
• There is authority that the sharing of losses is not essential to a finding of partnership o that
a partnership may exist even if some partners are indemnified against loss
Status of principal
• This is based on the principle in the definition of a partnership that the parties must be
carrying on business in common – “carrying on business” implies a repetition of acts, not just
a one-off project which will not be repeated. “In common” reflects the requirement that each
partner must be a principal in the business (however it is possible to be a dormant partner
and be inactive in the business activities)
Right to participate in the management of the company
• The role in management or decision making can be influential in indication the existence of a
partnership
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• It is not essential since there may be dormant partners who remain principals in relation to
external dealings but take no part in the management of the partnership
Mutual trust & confidence
• “Mutual confidence of partners is the life blood of the concern” – Birtchnell
• the way in which people deal with each other and the arrangements they create to make
decisions or settle disputes may indicate the absence of such trust
• this is not strictly essential for finding of a partnership
Contribution to capital
• If you give money to set up the business, it is likely that you’re a partner
• Again, not strictly essential
• It is quite common to find no capital contribution by a partner but only a contribution of knowhow or an agreement to work full-time in the business
Principal characteristics of partnership
Not a separate legal person
• Apart from accountants and lawyers, you can’t have more than 20 partners
o The legal profession is allowed up to 400 partners in a partnership, the medical
profession is allowed 50 and accountants are allowed 1000 partners
• The firm does not have a distinct entity status and cannot acquire legal rights or obligations
on its own, independent of the partners – unlike a corporation, a firm cannot be convicted of
a crime or commit a tort, however the individual members may be personally liable
• Although a firm’s name may be used to purchase company property, etc. it is merely a
shorthand expression for the purpose of convenience
• If partners purchase land, their individual names will appear on the title deed – not the firm’s
• A partner cannot also be an employee of a firm
• Ss 26, 32-34
• S 20 (don’t stress about understanding this section) à property is not owned by the
partnership, it is owned by the partners and the ownership is governed by a certain set of
complex rules
Partners bear unlimited liability
• Each partner has unlimited liability to the creditors of the partnership – this is not affected by
any private agreements between the parties, such as apportioning liability or indemnifications
• Cox v Hickman – IMPORTANT
• Jointly liable – every partner has joint responsibility for debts à s 9 Partnership Act
• Severally liable – individually responsible for all the debts of the business. Is there are 10
partners and 9 are bankrupt, you must pay the total debt
o One way around this à own nothing, put everything into your family’s name. Who
do you trust more? Your spouse or your legal partners?
• Authority to bind fellow partners
o Actual authority vs ostensible authority à s 5
Limited liability partnership
• Different to a partnership
• The principle feature of a limited liability partnership is the creation of 2 classes of partner –
general and limited partners. Limited partners contribute to capital and share profits but have
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no right to participate in the management of the partnership, while the general partners have
unfettered control
•Uncommon – much more expensive than a normal partnership, a cheaper option would be to
establish a company. The only time you would want to go for a limited liability partnership is if
you are in a profession that doesn’t allow you to set up a company
• It has to be registered, and the world must know that you are a limited partnership
Unincorporated association
• Looks like a partnership, but is not
• History – clubs in the UK for sports such as polo or croquet. Requires membership (rigid)
• NOT FOR PROFIT
• Pekham v Moore [1975] 1 NSWLR 252, NSWCA
o Football employment contract to play for 3 years for Centerbury Bankstown Rugby
League Football Club. He gets injured during practice and decides to sue the
unincorporated association. He fails since no one is responsible. There was a board of
members in charge of the association and they were the ones who gave him the
employment contract. He takes them to court. The court says he is suing the wrong
people, he mustn’t sue people who WERE directors of the club, he has to sue the
people who currently ARE directors of the club, because it is the position of director
and not the individual that should be held liable
• Being a board member of an unincorporated association is terrifying as they are liable, other
than the cost there is no good reason to not incorporate
Unincorporated joint venture
• Very difficult to distinguish from a partnership
• Example: 2 mining companies – one owns a plot of land who has found gold. The other
company has a whole bunch of mining equipment but no mines. They agree to come together
to get the gold as it makes sense. It is not ongoing business. Once the project is over they go
back to being competitors. During the project, they also still compete for selling their gold in
the market
• United Dominions Corporation Ltd v Brian Pty Ltd (1985) 59 ALJR 676, HCA
o The term “joint venture” is not a technical one with a settled common law meaning.
It connotes an association of persons for the purposes of a particular trading,
commercial, mining or other financial undertaking with a view to mutual profit. Each
participant usually contributes money, property or skill. Such a joint venture will often
be a partnership
Regulatory history of corporations
• We have a national framework with the Corporations Act and ASIC Act – no state legislation
• Corporate law came from England and was adopted by Australia at the state level
• Each state/territory had its own set of rules with regard to the corporation – this creates a
competition of laws, e.g. more freedom & less tax makes it better to do business. To do
business in more than 1 state, you had to register in each state
• They came up with a cooperative scheme where they adopted uniform laws and recognised
registrations from other states – much more efficient than all the states being in competition
with each other
• This still wasn’t great as it didn’t encourage international investment, with still slightly
different state laws and complexity
• Victoria has less stamp duty still, so many businesses like to make Victoria the place of primary
business
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• Logic behind it all:
o Primary focus on making things efficient and making things easy for international
investment
o Regulation is not there to stop/slow corporations, it is there to facilitate the ease with
which corporations can do things
• Not examinable, but useful:
o Regulation extends far beyond a system of rules
o A system of rules governs behaviour
o Two schools of thought – pure legal & sociological (it is all about socially acceptable
behaviour)
o Dirkhime – if you took away the law against murder, most of us wouldn’t go and
murder people because of social pressures. To gain the benefits of human community,
you need to restrain your behaviour, which can be more powerful than regulations
with sanctions
o The regulation of corporations in every decade, in every country is sub-optimal à e.g.
ford pinto case (in the course reader)
o Regulation needs to be considered in a much wider sense than just rules, and a focus
needs to be put on social pressure
o The purpose of regulation à to facilitate rather than restrain – argument that it
doesn’t need a social element, we just need to better understand the purpose
o SOCIAL REGULATION
§ Argument that the corporation is not a social creature and does not bow
down to morals. This is impossible to adopt in the modern Australian
landscape
§ ASIC v ACCC = facilitating vs restriction
Week 4: Types of Business Entities
• A flexible group of people who work together for a common cause – a lot of people coming
and going with no fixed membership
• Limited to a maximum of 20 people – the reason for this is transparency, as it can become too
difficult to work out who is part of the association à s 115 Corporations Act
Unincorporated associations
Non-profit association
• Non-profit doesn’t mean the business makes a loss, it means the business can’t distribute
profits to the owners/members of the association
• When it ceases to exist, the money is not to be distributed to the owners, it must remain
within the corporation or go to an organisation with a similar purpose to the one that is
currently functioning
• Non-profit associations can be incorporated, becoming a incorporated cooperative or a
incorporated association
• Wise v Perpetual Trustee Co Ltd, Lord Lindley: “[associations] are societies the members of
which are perpetually changing. They are not partnerships; they are not associations for gain;
and the feature which distinguishes them from other societies is that no member as such
becomes liable to pay to the funds of the society or to any one else any money beyond the
subscriptions required by the rules of the club to be paid so long as he remains a member…”
• Peckham v Moore [1975] 1 NSWLR 353
o A professional football player entered into a contract to play football at an
unincorporated association with over 1000 members. The contract purported to be
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between the player and the club and was signed by the club secretary with authority
for an on behalf of the club. The committee was elected annually, and 2 years in the
committee had changed. The player applied for workers compensation, naming those
of the earlier committee as respondents.
o The court held that he could not hold the original committee liable
5 types of non-profits
1. Charitable objects
2. Educational activities
o E.g. private schools
3. Sports, social or cultural clubs
4. Furthering profession and trade
o E.g. NSW Law Society
5. Mutual benefit of members
o E.g. cooperatives and credit unions
o Dying breed
Trusts
• A trust is an agreement between 3 people – settlor, trustee and beneficiary
• Once the trust has been set up, the settlor has very little to nothing to do with the trust, it is
about the relationship between the trustee and the beneficiary
• People can make a corporation and register the corporation as trustee for a trust of which
they are the beneficiary
o E.g. David Mullan created David Pty Ltd. David Pty Ltd becomes trustee for the David
Trust, to which David Mullan is the beneficiary
o If anyone were to sue the corporation, there would be added complexity since the
company assets are held legally by the company but beneficially by the individual. It
makes it very easy for people to rort the system using trusts. They hide people and
create legal headaches. They don’t make it impossible to access the assets, they just
make it more expensive
o A trust can also be used to divert income – you can distribute $1 million income to
multiple family members and make it look like smaller incomes. THIS IS NOW ILLEGAL
• Being able to use trusts is a misconception often used by accountants, who are not aware of
corporations law à a properly structured corporation can achieve any tax advantage than a
trust can
• Unit trusts
o It looks almost like a corporation
Sole trader
• The trader is personally liable, including for actions incurred by employees within the scope
of their authority
• All income received by the business is taxable on an individual basis and there are minimal tax
minimisation opportunities available, compared with a corporation
Co-operative
• Dying breed
• They look like a corporation and become a separate legal entity
• Limited liability
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• E.g. Dairy Farmers co-operative – all Dairy Farmers milk used to come from a co-operative.
Local dairy markers came together to increase their supply from 100 litres of milk to tonnes
and tonnes of milk. They would be able to market as a collective and could attract large clients.
They could also ensure a stable supply which would allow them to get into Coles/Woolworths
and supply a certain amount each week. Each farmer gets one share – they collect their milk
and pour it into a giant VAT, and the amount you provide is recorded. When the milk is sold,
they work out how much profit it make and divide it per litre of milk and distribute to each
farmer accordingly
Incorporated associations
• There is no national law for incorporated associations
• Has similar obligations to companies
o The committee must appoint a public officer who acts as a point of liaison between
the association and the Commissioner – s 34
o The committee must convene a general meeting of members each year – s 37
o The members enjoy limited liability for corporate obligations – s 26
Factors affecting the decision to incorporate
• Limited liability
• Perpetual succession – it is unaffected by the death or bankruptcy of one member
• Financing – unincorporated forms can’t create floating assets or make a public issue of shares
or debt interests
• Cost, formality and continuing obligations – partnership is very flexible and inform, with
internal structure not requiring registration or reporting obligations. Incorporation imposes
continuing obligations to disclose information
• Tax benefits
Week 5: Corporations
Registration
• The Corporations Act allows you to register a company
• When you apply for registration, you fill out ASIC form 201, with information including
address, directors, shareholders and what they paid, secretary, etc.
• S 114 à requires you to have one person who is a member and an Australian resident who is
a director
• You don’t need a constitution anymore
• S 117 à sets out requirements
• Once you’ve registered a company, no one can use your company name, either another
company or a business. If you want to use a name that another ABN (not ACN) is using, you
just need consent from the business-name holder
• Within 48 hours of registration, you will receive a certificate of incorporation in the mail, and
under s 1274 CA, your business will be incorporated
• Bureaucratic twist – you have to pay by cheque or money order, which means you have to
have an Australian bank account which ensures a certain degree of Australian connection and
makes it inconvenient for foreigners to start an Australian corporation
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Practical alternatives and formalities
Shelf companies
• Shelf companies – someone might register 100 companies with ASIC and call them Shelf
Company 1 P/L, Shelf Company 2 P/L, Shelf Company 3 P/L, etc. and register themselves as
sole director and sole shareholder. Then, if someone wants to start a corporation, they can
buy one of the shelf companies by selling ownership of the single share and retire as a director.
The ease and convenience would cost the purchaser a few hundred dollars more than
registration.
• Most of the current shelf company registrations come from either the fact that its easier (it
comes with all the corporate documents attached and only costs a few hundred $$ extra), or
alternatively, corporate law firms use shelf companies when someone asks them to help set
up a company so they don’t have to waste time with the small steps and can then have access
to the more valuable work that follows
• Incorporation may take such a long time that it is prohibitive, thus people might buy a shelf
company
• There are numerous companies around Australia which sell shelf companies
Company types
• 98.8% of all companies are proprietary and limited by shares
Shares and share capital
• The centre of registration and company law
• A member is another word for shareholder
• If you are 1 of 100 shareholders, and you technically own 1/100th of a company, it is incorrect
to think you own 1/100th of the assets of the company since they are held by a separate legal
entity (the legal fictional individual who holds all of the asset in its own right)
Bundle of rights
• What you own is a bundle of rights
o The right to distribution of the surplus in the winding up of the company (after the
secured and unsecured creditors and everyone else is paid) à this rarely happens to
a profitable company, and only really happens for insolvent companies, where there
is very little, if any, surplus to pay to the shareholders
o The right to receive notice of meetings
o The right to attend, speak at and demand a poll ballot at shareholder meetings
o The right to vote to remove directors
o The right to vote in general at shareholder meetings
o The right to dividends (if the company chooses to distribute profits)
Unpaid & paid share capital
• When you buy your share, the company decides how much the share is worth
• Nearly every company now issues fully paid share capital
• The reason we still talk about it even though it isn’t used anymore is because this share capital
should be the value of the company, but the amount of money that the owners put into the
company, it makes sure that everyone is protected. Unpaid share capital is meant to protect
the creditors.
• Capital maintenance rules make it difficult for a company to reduce the number of shares they
have to get rid of unpaid share capital, to protect creditor’s interests.
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• A company can buy its own shares, but with a great deal of difficulty and with knowledge of
advanced corporate law
• S 129 CA
• We know exactly how much lability there is in a company by adding together the called and
uncalled share capital. If you put $1 into a company and it is a fully paid share, that is the limit
of your liability. If you put in $1 and there is $99 of unpaid capital, the limit of liability is $100.
• Companies can also be limited by guarantee instead of a shareholder – i.e. one person says
that if the company enters into financial difficulties, they guarantee that they will contribute
$1 million to the company
Week 6: Separate legal personality ****
The nexus between corporate personality and limited liability
• Corporate personality serves the function of marking out an asset pool against which creditors
of the enterprise have prior claims. This asset pool is separate from the personal assets of the
stakeholders à piercing the veil involves breaking the partition to expose the personal assets
of shareholders and directors to the claims of creditors in very special circumstances
• Absent special circumstances, shareholders and directors are not liable for the debts of the
corporation – this is limited liability
• Thus, corporate personality and limited liability are closely tied although they are not the
same
• The Americans enacted limited liability in order to put as many middle class people as possible
in the way of enterprise. Why? To make them feel like they’re owners of the company so they
identify with the company rather than the unions – put them in the way of capitalism. It wasn’t
created to achieve a particular end, it was simply a particular reaction to a particular social
reality in a particular point in time and it was created in order to allow a particular group of
people to achieve their ends.
• Exceptions to limited liability are extremely limited, they are referred to as “piercing the
corporate veil”
The merits and costs of limited liability
Merits
• It encourages investment by those who have no interest in or capacity for management
participation
• Relieves shareholders from the burden of monitoring fellow shareholders’ capacity to
contribute proportionately to company failure under a regime of joint and several unlimited
liability
• Encourages free liquidity of share capital which not only reduces the cost of capital to the
company but also insinuates an accountability mechanism for management through the
threat that poor performance reflected in stock price decline will stimulate the acquisition of
control by a party which believes it can achieve superior returns through management
replacement
• The market pricing mechanism for shares is effective only if that price reflects the worth of
the share itself and not in any degree its holder’s financial capacity to contribute to the
company’s deficiency
• Encourages entrepreneurial risk taking by companies since they may safely invest in projects
with prospects of positive returns but also those with significant risk exposure as members
are insulated from loss
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Costs
• Benefits to shareholders are matched by risks to creditors
• Tort claimants against a company may be more vulnerable than contract creditors who can
bargain for desired protections and a rate of return commensurate with the risks they are
assuming
• Shifts the risk of enterprise operations away from shareholders and onto stakeholders and
wider society
Corporate personality
• Recognition of corporate personality is a pre-condition to a legal structure for limited liability
• Despite its soulless condition, a corporation may commit both crime and tort. In addition,
corporate reputation may be damaged through defamation and compensation will be
available for any financial losses
• Any reference to a person in the legislation includes a body corporate, subject only to a
contrary intention appearing in the same statute à Acts Interpretation Act 1901 (Cth) s 22
• The separate personality doctrine and its consequences rest fundamentally on judicial
decision
• Salomon’s case marks the beginning of modern company law
• Salomon v Salomon & Co Ltd [1897] à establishes the notion of limited liability and separate
legal personhood
o Salomon had a business making shoes and he incorporate the business for $39,000
and the business issues 20,001 fully paid shares to Solomon and 5 shares to each of
his wife and sons. In addition $10,000 in debentures was issued to Solomon (being
debt, this will be paid before any equity is paid).
o Salomon then goes and borrows $5,000 from Broderip and takes security over that
much worth of Solomon’s debentures in the company
o The company eventually goes bankrupt and it can’t pay back its debts. Roderick gets
his $5,000. Solomon is left with $5,000 in debentures. There is also $7,000 worth of
debt to the company generally but there is only $1,055 left in the company. The issue
was where should that $1,055 go?
o In the ordinary state of working out priorities in insolvency, the debenture holder
should be paid out before the other lenders. They claimed that he owns 20,001 shares
and he has also given a loan to himself and because he is the creator of all the mischief
we should get the $1,055
o Salomon decided to argue that he should get all the leftover money because the
company is a separate legal person and his ownership of the company is not to be
considered because even though he owns 20,001 shares, he is a separate person and
he is not responsible for the company’s wrongdoings and if he has put money into the
company or been issued debentures, that should be seen as a separate legal contract
ad it should be treated on equal terms – he succeeded
• Lee v Lee’s Air Farming [1961] à upheld Solomon
o About whether someone can have a valid contract of employment with a company
they own
o Lee formed a company as sole director and sole shareholder, in the business of aerial
soil top-dressing. Lee was also employed at a salary as the company’s chief pilot. 2
years later he crashes the plane and his killed.
o His widow sued the company for compensation under the workers comp act, which
requires the injured person to be a “worker”.
o The question was whether you could legitimately work under an employment
contract for a company you own – YES
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o The NZ court of appeal rejected the claim on the basis that since he was governing
director with full control of the company, he could not also be its servant.
o The Privy Council held that he was a worker as the company had separate legal
personality and Lee had entered into a contractual relationship with the company.
“The mere fact that someone is a director of a company is no impediment to his
entering into a contract to serve the company [25]”
o Contractual obligations are not invalidated if the circumstance is that the contractor
is vested with full government and control of the company
Piercing the corporate veil
• Piercing the corporate veil means going after the owners of the company for debts
• There are cases where the courts have ignored the separate personality of the company under
the force of some conflicting principle of policy. In these situations it may be said that the
otherwise opaque and impassable veil has been pierced
• S 588G Corporations Act will hold directors personally liable for debts of the company that
are incurred when the company is insolvent à this is piercing it not to get to the owners, but
to get to the directors
• Ss 588V 588X – a parent company can be held responsible for the actions of a subsidiary
company à These only apply in an insolvency situation
Common law exceptions
Fraud/Improper conduct exception
• Gilford Motor Co Ltd v Horne à fraud/improper contract
o E B Horne was appointed director of the plaintiff company, in his contract was a clause
that after the term of his office, he would not go into competition with Gilford Motor
Co
o Horne was dismissed and he decides to breach the clause. He argued that although
he was restricted from opening a business or working for a company that is in conflict,
his wife was not. He registered company J M Horne & Co (J M was his wife’s name)
and he becomes the director. He argued that the clause could not be enforced against
the company because it was owned by his wife.
o He moved into the same street as Gilford and wrote to all of the Gilford customers
and said they have moved address
o Gilford argued that he specifically did that to avoid the restraint of trade and it was
despicable conduct and he should be responsible that the restraint was breached
o The judges upheld Solomon and said they can’t go against that decision, but
considered the meaning of being “properly incorporated” à if the company has been
established for fraudulent or illegal purposes, like the selling of drugs, it is considered
as not properly incorporated and therefore the separate legal personality doesn’t
actually exist – in these instances the court will pierce the corporate veil and look to
the owner
o Farwell J said “the defendant company is obviously carried on wholly by the defendant
Horne”. Lord Hanworth “I am quite satisfied that this company was formed as a
device, a stratagem, in order to mask the effective carrying out of business by Mr E B
Horne.”
o Held: the company was a mere device for enabling Mr E B Horne to commit breaches
of his clause and under those circumstances the injunction must go against both
defendants.
• Jones v Lipman [1962]
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o Lipman had contracted to sell land to Jones. Before the completion of the contract
Lipman sold the land to a company which he newly acquired in which he and a clerk
hired by his solicitor were the only shareholders. The Joneses brought an action for
specific performance of the contract against both Lipman and the company
o It was held that: 1) the company was, and at all material times had been, under the
complete control of the first defendant and 2) the acquisition of the defendant
company by the first defendant and the transfer to it of the real property comprised
in the contract with the plaintiffs… was carried out solely for the purpose of defeating
the plaintiff’s right to specific performance.
o Lipman has to specifically perform his contract and sell the property to Jones.
Agency exception
• Smith Stone & Knight Ltd v Birmingham Corporation (1939) à agency exception
o Background: You can’t set up a company for the purpose of avoiding liability, but you
can structure it in a way that if a liability may or may not arise, you are able to avoid
that liability à you can set up 2 companies, one being a subsidiary and at the end of
each year, the subsidiary can put all of its money up into the parent company and it
can keep all the contracts and liabilities. If the libilities get too much, you can declare
the subsidiary insolvent, all of the money has been sent up to the parent company so
there are minimal assets to lose, and all of the lenders simply go without. The parent
company can then set up a new subsidiary and start all over again
o A company is not set up for the purpose of avoiding liability, but for the purpose of
trade. It just so happens that it is set up in a way that if anything goes wrong they are
protected. Courts don’t like this avoidance and will try to find a way to pierce the
corporate veil
o The agency exception comes out of equity, the fiduciary duty. Under this exception,
the subsidiary can be considered as an agent and the principal the parent company.
As such, the principal can be held liable for the actions of the agent. It recognises
that there are 2 different people, and rather than piercing the corporate veil, they are
simply following the rules of equity and fiduciary duties.
o Even if there is no express agency, courts can construct an agency. They look at who
was really controlling the subsidiary and who was really carrying on the business. 6
questions to answer this:
§ Were the profits treated as profits of the parent company?
§ Were the persons conducting the business appointed by the parent
company?
§ Was the company the head and brain of the venture?
§ Did the company govern the venture, decide what was to be done and what
capital to embark on the venture?
§ Did the company make the profits by its skill and direction?
§ Was the company in effectual and constant control?
o If most of these answers were yes, it will be an agency. The most important questions
are who makes the decisions and where the money goes. However, none of these are
really yes/no questions – they are complex shades of grey presented as binary options
which gives the allusion of a clear rule of law
• Re FG (Films) ltd [1953]
o FG was a company incorporated in the UK and agreed to produce a film, the rights of
which had been acquired by an American film company whose president was the
holder of 90% of the 100 $1 shares issued by FG. The British director held 10 and
another director held 0. FG sought to register the film as a British film, which would
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give them access to a subsidy for local film makers. The licensing authority refused to
register the film on the ground that it was not made by FG.
o The question before the court was whether FG was the “maker” of the film
o HELD the applicants participation in making the film was so insignificant it may be
considered negligible and merely acted as a nominee of and agent for an American
company. The applicants were brought into existence for the sole purpose of
qualifying the film as a British one and the judge upheld the previous decision as not
qualifying it as British.
Corporate personality within corporate groups
• Briggs v James Hardie (1989)
o James Hardie produced fibro, which comes from asbestos.
o The company that took the asbestos out of the ground was called James Hardie
Asbestos, and then James Hardie Manufacturing took the asbestos and turned it
into Fibro. These 2 companies belonged to a larger group of companies, the head
of which was called James Hardie Australia. Underneath that was James Hardie
International, then underneath that was a series of subsidiaries of which Asbestos
and Manufacturing were 2.
o This case was about finding liability higher up in the chain where the money is
o Briggs attempted to sue not only his former employer (Asbestos Mines) but its
holding company Hardies and Wunderlich claiming Asbestos mines was an agent.
This was because Asbestos mines had run out of money. The action was brought
on the basis that Asbestos was acting as an agent for Hardies or for the purpose
of the proceedings that the plaintiff was entitled to pierce the corporate veil.
o HELD that there was no evidence that Hardie could be held negligent, or that the
significant control he had over the subsidiary was enough to argue for an agency
principle (see SSK case). They recognized that there was no overarching principle
to situations whereby veil can be pierced. No precedent to decide the case and
the corporate veil was not pierced; leading authority is not sure what it is. This
is the death of piercing the corporate veil.
• Quintex Australia Finance Ltd v Schroders Australia Ltd
o Schroders sold 1.2 billion Yen for $11 million and drew a cheque in favour of
Quintex Television Ltd, a member of the Quintex group of companies. The cheque
was paid into the account of Quintex Australia Finance with CommBank. A second
deal for the sale of Yen made a loss. Different companies in the group were
conducting the buying and selling of currency. The issue was to identify the
member of the Quintex group of companies on whose behalf the futures
exchange contract had been purchased by the defendant
o Held (Rogers CJ): Quintex Television Limited was the party to the contract, not
Quintex Australia Finance.
o There is a tension between the realities of commercial life and the applicable law
in this circumstance – in everyday commercial life, participants in contractual
transactions involving conglomerates rarely consider which of the subsidiaries
should become the contracting party. Thus, the principles on which Salomon was
based did not take into account the fact individuals do not calculate the respective
risk of the individuals they are operating with. There is a great deal to be said for
the proposition that the assets and liability of holding companies should be
made available to the creditors of their subsidiaries. Shows tension in policy
about what the law tries to do in this area. Doesn’t add anything to the law itself
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Week 7: Corporate Governance
• At one level corporate governance refers to the complex of legal rules and constitutional
provisions that regulate the internal affairs of the company as distinct from the external
regulation of corporate behaviour by the state and its agencies
• The degree of moral hazard varies with the opacity and specialised nature of the agent’s
functions
• In a corporate context the risk is that directors and managers may take imperfectly observable
actions in their own interest rather than in shareholder’s interests. These dangers principally
compromise those of looting, shirking and empire building that secures executive vanity or
indirect personal gain rather than advances of the shareholder benefit
• Corporate governance systems typically provide for a number of measures that seek to make
management accountable to shareholders or which seek to reduce agency costs that arise
from the delegation of authority to managers to run the business in the interests of
shareholders
The effective board
The formal primacy of the board
The board of directors is central to corporate governance, if only because the bulk of corporate powers
are vested in directors, placing them, formally at least, at the apex of its power system. Shareholders
power primarily is in appointing the board of directors and the board of directors take it from there.
Non-Executive director – they are not an employee of the company other than in their directorial role
so they are employed to bring an outside voice to things they do not go into work every single day in
the company they usually turn up between 4 and 12 times a year and they attend meetings and help
to make decisions. They do have access to accounts and board papers and they do not get to walk
around the factory or make decisions on the day by day basis. Don’t need non-executive directors
unless you list on the ASX. Usually start with 3 executives and add on one or two non-executives when
you list.
S 198A – The business of the company is to be managed by or under the direction of directors. S
198A(2)Directors have complete control except where we specify otherwise.
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Directors and officers
The distribution of corporate powers between shareholders and directors
The derivation of the corporate organs
The general meeting has generally been the primary corporate organ.
The Corporations Act:
• stipulates a minimum number of directors – three for public companies (two of whom must
be Australian residents) and one for proprietary companies (who must be Australian
residents): s 201A.
• Must be natural persons aged at least 18 years: s 201B.
CORPORATIONS ACT S 9 – DEFINITIONS
“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.
Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person
in the proper performance of functions attaching to the person’s professional capacity, or the
person’s business relationship with the directors or the company or body.
Note: Paragraph (b)–Contrary intention–Examples of provisions for which a person referred to
in paragraph (b) would not be included in the term “director” are:
* section 249C (power to call meetings of a company’s members)
* subsection 251A(3) (signing minutes of meetings)
* section 205B (notice to ASIC of change of address).
“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.
Note: Section 201B contains rules about who is a director of a corporation.
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Original Powers of the General Meeting
• Where no provision is made by the Act or a company’s constitution as to which organ shall
exercise a particular corporate power, the rule remains from the general law of corporations
that shareholders assembled in general meeting may act by ordinary resolution for the
company.
• When trying to divide up what the powers are, in the absence of a constitution that clearly
spells it out, most of the power is vested in the board.
• At a general meeting shareholders are required to vote, they are special resolutions and
require 75% of the shareholders to agree to this:
o The company’s name may be altered (s 157)
o Adopt a constitution for the company and repeal or modify its terms (s 136)
o Change the company’s type (s 162(1))
• As regard to capital structure, while directors commonly retain the power to issue shares, the
general meeting may:
o Convert all or any of its shares into a larger or smaller number of shares by ordinary
resolution (s 254H).
o Reduce share capital or approve a buy-back share of shares (ss 256B, 256C, 257A,
257C, 257D)
o Alter rights attached to shares (Pt 2F.2)
o Under the standard constitutional arrangements reflecting the prior Table A
provisions, the general meeting may declare dividends and capitalise profits but
such resolutions require prior recommendations by directors and, in the case of
dividends, must not exceed the amount recommended.
• The general meeting doesn’t deal with the company’s business but does so indirectly through
the appointment of directors:
o s 201G – allows the general meeting to appoint a director and
o ss 203C-203D – allow them to remove a director at any time.
o s 202A – allows the general meeting to determine the remuneration of directors.
• Shareholder approval is required to;
o ss 327A, 327B and 329 – Appoint and remove company auditors.
o S 491 – by special resolution, resolve or wind up the company voluntarily
o S 491(1)(a) – resolve it be wound up by the court.
o S 208(1)(a) – that financial benefits be allowed to be given to parties related to the
public company or directors.
o S 200B & 200C – approve termination payments of company officers.
• Shareholders are not at the general meeting to deal with shareholders in its standard
operations, only there to make the very highest level decisions.
• Automatic Self-Cleaning Filter Syndicate v Cuninghame [1906]
o 1502 votes were cast to 1198 in favour of the company selling its assets. Practically all
1502 votes were cast in respect of shares held by McDiarmid and his friends. Issue
arises as they have 50% of the votes not the 75% required to change the constitution.
The directors considered the agreement not to be in the best interests of the company
and refused to comply with the resolution. McDiarmid brought suit in his own name
and that of the company seeking orders that the directors were bound by resolution.
o In the court of appeal it is determined the directors are not just agents of the
shareholders they have to make their own evaluation of these things and they ought
to make their own evaluation of these things. The shareholders are within their right
to demand what they want but within the proper mechanism. They could have
removed the board of directors and gone about their actions that way.
o HELD the directors are not agents of the shareholders and were right in not selling the
assets if they believed it was not in the best interests of the company.
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• Shaw v Shaw [1935]
o minority shareholders decided they want to sue the majority shareholders. The
majority called a meeting and tried to call a meeting directing the directors not to sue
them. The directors decide to sue them anyway, and then the majority shareholders
take them to court. The majority shareholders attempted to challenge being sued
saying we passed a resolution saying they couldn’t sue us.
o HELD a company is distinct from its shareholders and its directors, if powers of
management are vested in the directors they and they alone can exercise these
powers. The only way the general body of shareholders can control the exercise of
the powers is by altering their articles or if the opportunity arises refusing to re-elect
the directors of whose actions they disapprove.
• Ratification of Directors Acts – The general meeting’s power to ratify director’s acts which are
in abuse or excess of their powers vests shareholders with further residual authority.
• Re Express Engineering Works [1920] – Constitution of the company provided that no director
should vote as a director in respect of a contract in which he might be interested
***Appointment and removing directors
General rules: Basically shareholders appoint directors and directors may not appoint other directors.
• Need 3 directors for Pub co, 1 for Private (s201A)
• Directors can appoint:
o Managing directors and give them any powers (s198C). Managing director is not an
official position and does not have any inbuilt power legally.
o Alternative director to exercise some powers for specific period (s201K). Alternate
director takes over from the standard director and they usually there to take the role
of director in the meantime.
• Most day to day running left to exec director and staff, other directors non-exec directors
• Public companies need one resident secretary (s204A), must be 18 years old. Not necessary
in proprietary.
• S 9 defines who directors are, they are a person who is appointed as director, but also if a
person acts as a director then they may be considered a defacto director or if they are a
person whom everyone else is used to following the direction off then they may be a shadow
director. ‘Officer’ means not only directors, but also those affecting decisions fundamentally
talking about top levels of management.
Appointment of directors:
• First directors appointed by naming, with consent, in application to register co (s120)
• Under replaceable rules:
o Directors can be appointed in general meeting (s201G)
o By directors themselves (s201H) (proprietary company)
§ Note: in a public company directors cannot appoint other directors, if they
appoint someone under 201H that is acceptable up until the next general
meeting within 2 months to be confirmed.
o Generally 1/3 directors terms expire at annual meeting but go up for re-election
• Public companies:
o Generally directors are voted for individually Motion to appoint 2 or more directors
by single res can’t be made unless meeting resolves without any dissenting votes to
do so (s201E).
Restrictions on appointment of directors:
• No minimum standard of training/knowledge etc, but must be 18 (s201B1). Must also be
human, company cannot be a director of another company.
• No requirement of shareholding but may be required by Co. constitution.
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Disqualification from office and from managing companies:
• Undischarged bankrupt cannot manage a company (s206B(3)).
• Those convicted of an offence including decisions affecting substantial part of companies
business, offence involving dishonest (imprisonable for 3 months +) or offence punishable
by 12 months imprisonment are disqualified (s206B). Disqualification is automatically 5 years
but may be overturned by the court under s206B(2) (not easy to get) and ASIC may apply for
it to be extended under s206BA.
• Discretionary power by court to disqualify someone directing/officer of co that contravened
act twice and failed to take reasonable steps to prevent it, or themselves contravened act
twice and the court is satisfied the disqualification is justified (s206E)
• Discretionary power for court to disqualify those who were involve in management of
company that failed (s206) – largely relating to their fault in the failure
• ASIC: if past companies (past 7 years) didn’t pay creditors more than 50c in the dollar or
other offence (s206F)
• Application by ASIC: for court to stop person directing due to contravention of civil penalty
provision and the court is satisfied that it is justified (s206C1)
• As a result of order made by FC due to app by ACCC under the TPA (s206EA)
• ASIC v Adler (2002): Disqualification orders protect the public from harmful use of the
corporate structure, designed to safeguard the public interest in transparency and
accountability. It depends on the seriousness of the contraventions, but the balance must
be weighed against the personal hardship to the defendant and the public interest. No
distinction between public and proprietary companies here. In this case Adler was
disqualified for 20 years.
Seeking relief from disqualification:
• Seek relief from the court (s206G) not an easy thing to do.
o Applicant bears onus of establishing they should make an exception, given that the
legislature is to protect public, to deter others, and is aware it may cause hardship.,
therefore hardship alone is not enough to allow relief. The legislation is not there to
punish you but to protect the public. Adams v ASIC.
o Court will consider nature of offence, involvement, character of applicant, conduct
after removal from board (Re Magna Allows and Research Pty Ltd).
o Failure to demonstrate contrition was fatal (Miller v CAC)
Termination of office
• Resignation (s203A): Can resign at any time with written notice to the company. Can replace
this rule but cannot force a director to do their job and there is no enforcement for contracts
of service.
• Retirement: Annual retirement by replaceable rules
• Removal (s203B)
o If they are disqualified from managing corporations
o Can be removed by ordinary resolution (s203D1). Notwithstanding anything in the
company’s constitution or in agreement in the company and directors if the director
was appointed to represent the interests of a particular shareholder the resolution
does not take effect until they replacement has been appointed.
o Directors can’t be removed from public companies by fellow directors (s203E)
o Co constitution can allow for removal under different rules
o Directors have employment contract so removal may lead to compensation.
o In proprietary companies we look to s 203C, a replaceable rule confers power to
remove a director from office and to appoint another person in their place without
the protections afforded to directors of public companies under s 203D.
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o What happens if we have a contract of director and they are an employee and we
get rid of them as a director? They will have other roles.
Read v Astoria Garage [1952]: Appeal held that the terms of a director’s appointment as its
managing director, which the articles empowered the Board to so appoint to him, governed the
terms of his appointment in the absence of a service contract, with the result that he was bound by
the articles which also provided for the terms of his dismissal from that position.
Someone is appointed managing director and who the company wants to get rid of. They decide they
can terminate his directorship, his money doesn’t come from being a director, the employment
contract gets him money being a managing director. They tried to remove his directorship and
therefore he was unable to be a managing ‘director’. HELD you can get rid of him as a director as that
is every company’s right. The service contract however still exists and you can’t simply undo the fact
that the service contract is there by making it impossible through some kind of fanciful regulation.
Damages still awarded.
Functioning of board of directors
Directors can only act collectively as a board and the function of an individual director is to participate
in decisions of the board (Northside Developments v Registrar General 1990)
Need for collective action:
• Directors may be granted limited power (express or implied) to act on behalf of co in a
particular function/transaction
• May only act at a meeting unless const makes other provision (Brick and Pipe v Occidental
Life)
o Can pass resolution if all those entitled to vote sign document saying they are in favour
of resolution set out in document (s248A)
o Sole director can pass resolution by signing and recording document (s248B)
Convening directors meetings
• Usually convened by giving reasonable notice to every other director (s248C)
o Usually business is only valid if reasonable notice given of meeting (Harben v Phillips)
• Notice
o Need not be given in writing and may be oral (Browne v La Trinidad)
o Period of notice depends on circumstances of the individual co/director
Conduct of director’s meetings
• 2 directors must be present at all times during meeting (s248F)
• If you do not have the necessary number of people then you cannot convene a meeting.
• Resolution of directors must be passed by majority of votes case (s248G)
• Replaceable rule that any technology can be used agreed to by directors (s248D)
o Does not allow voting by proxy, or a series of telephone conversations
• Director (even without shares) has right to be present and to vote at meetings
• Minutes must be recorded in book within one month and signed at next meeting (s251A)
• Usually at the start of a meeting someone is appointed chair of the meeting, each meeting
must be chaired by a member of the board (s248(E)). Chair usually has the casting vote s
248G.
• S 198 D allows directors to delegate their power to a committee, still fully responsible for
the decisions made by the committee.
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• Pulbrook v Richmond Consolidated Mining – if you are a director you are entitled to attend
a meeting and others cannot stop you doing so and you can seek a court order to force
yourself into the meeting.
Director’s access to corporate information
• Director common law right to access company info for exercise of their office
• Former directors can only inspect information for legal proceedings (s198F).
• Directors have a right of access to the financial records of their company at all reasonable
times (s 290(1)).
Week 8: Authority of corporate agents to bind the company
Problems facing those who deal with companies
• Where an organ contracts in the name of the company, its act is the act of the company itself
which contracts directly by its organ
• S 126 permits persons acting under the express or implied authority of a company to contract
in the name or on behalf of the company in the same manner if that contract were made by
a natural person
***Bases for corporate contractual responsibility
KNOW THE DIFFERENCES BETWEEN THESE
Actual Authority
• Directors can act on behalf of a company and they can authorise other people to act on behalf
of the company
• Most of what directors are actually allowed to do is based on actual implied authority, based
on their actual position it is implied powers come with it
• If dealing with individuals within the business they have full knowledge they don’t need to
rely on ostensible authority, they would know where the bounds of actuality are
• Freeman and Lockyer v Buckhurst Park Properties [1964]
o An “actual authority” is a legal relationship between principal and agent created by a
consensual agreement to which they alone are parties. Actual authority is the
authority that exists apart from ostensible authority
o “Ostensible authority” is what a third party independent of the company may believe
this person is authorised to do. Contractors rely on information provided by the agent
or principle, they can only know what they are told
o people usually rely on ostensible authority, and don’t enquire as to whether there is
actual authority
• Hely-Hutchinson v Brayhead [1968]
o Suirdale was a major shareholder/director of the company Perido. Another company
called Brayhead buys shares in Perido. These relationships often extend beyond
buying shares, and as part of the arrangement, Suirdale becomes a director of
Brayhead, where he sits on the board with Richards (essentially the sole operator).
o Richards, the chair of Brayhead urged Suirdale to put more money into Perdio and he
agreed on two conditions: 1) Brayhead indemnify him from liability on a guarantee he
given of Perdio’s indebtedness to another lender 2) Brayhead guarantee payment of
moneys which Suirdale would lend to Perdio.
o Richards got Brayhead to provide the indemnity and guarantee, he didn’t do it
himself. They were given in letters signed on Brayhead’s behalf as Richards as chair.
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They were not pursuant to a board resolution, Richards just does it on behalf of
Brayhead.
o Suirdale claimed indemnity and guarantee on the agreement, and Brayhead refused
o Brayhead denied liability, alleging that Richards had no actual authority to write
letters and that Suirdale also had no ostensible authority, being himself a director of
Brayhead, had notice of that want of authority
o HELD: actual authority may be express or implied – it is express when it is given by
express words, it is implied when it is inferred from the conduct of the parties and the
circumstances of the case.
o The judgment had very little by way of explanation, so it was appealed
o At appeal, they decided it was both. Question: how did he have actual authority if
there was no board meeting to resolve that he had authority? Richards had ostensible
or apparent authority to make the contract, but the findings carry with it the
necessary inference that he had also actual authority, such authority being implied
from the circumstance that the board by their conduct over many months had
acquiesced in his acting as their chief executive and committing Brayhead to contract
without the necessary sanction of the board. He had done it so often without board
approval that it had become the natural course, by the board not doing anything
about it they had granted authority to this person and it was implied he could enter
contracts without convening a board meeting.
• Smith v Butler [2012]
o Co owners of a company; Butler was the managing director had 31% and Smith has
69%. Butler was the Managing Director and Smith was Chair. Butler attempted to ban
Smith from entering the premises in his capacity as managing director, because he
alleged that Smith had misused the company credit card. Smith sues.
o Question is what is the actual authority as Butler as managing director? There is no
direction on what a managing director does. Butler should have convened a board
meeting – by making him chair, he had clearly intended for him to be part of the
decision-making process, and thus Butler overstepped his authority. Test for
ostensible authority is the same for actual implied actual authority
o People within an organisation should have the knowledge about authority that they
don’t have to rely on ostensible authority
o HELD Butler should have held a board meeting and wasn’t allowed to ban him from
the premises.
Ostensible Authority
• Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]
o Kappor was a property developer who operated a number of projects out of one
office. Her personally entered into a contract to purchase the Buckhurst Park Estate
for $75,000. He wasn’t able to finance the purchase on his own so he agreed to form
Buckhurst Park Properties Ltd with Hoon with a nominal capital of $35,000 each. Hoon
played a silent role and despite the formal arrangements, the agreement was seen as
a loan from Hoon to Kapoor
o Hoon goes overseas almost immediately, and even when he is in the country, he
doesn’t attend the meetings
o Kapoor instructed the plaintiffs, an architectural firm, to develop the Buckhurst Park
Estate. On the face, it seemed like they were acting for Kapoor personally, but a
partner in the firm argued that he was instructed by Kapoor on behalf of the company
o The plaintiff contended that Kapoor had actual authority to act on behalf of the
company, or that Kapoor had ostensible authority
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o An “apparent” or “ostensible” authority is a legal relationship between the principal
and the contractor created by representation, made by the principal to the
contractor, intended to be and in fact acted upon by the contractor, that the agent
has authority to ender on behalf of the principal liable to perform any obligations
imposed on him by such contract
o A member of the board has actual authority to make representations
o Four conditions necessary:
1. Representation that agent had authority to enter into a contract on behalf of
the company
2. Made by someone with actual authority to manage the business of the
company, either generally or specifically to which the contract relates
3. Contractor induced to enter contract
4. Constitution did not prevent such an action (corporation is allowed to deny
authority of agent to do something that corporation is not permitted by its
constitution to do)
o We don’t want to say that anyone who enters into a contract with the company knows
of the terms of the constitution or ought to; constructive notice is a negative doctrine.
Constructive notice operates to prevent someone saying they did not know of the
constitution when they did, not to place an onus on people to find things in the
constitution.
• Crabtree-Vickers Ltd v Australian Direct Mail Advertising and Addressing Co Pty Ltd (1975)
o Goes into the use of the above 4 conditions
o
Indoor Management Rule
• A third basis for corporate contractual responsibility for acts professing agents is under a rule
which protects third party contractor from the effect of irregularities in the internal
management of the company.
• Rule: parties dealing with a company in good faith are entitled to assume that the internal
policies of the corporation have been complied with
• It is not ostensible authority and it is a separate doctrine that has arisen in relation to
corporations which looks like ostensible authority but is not
• Actual and ostensible authority come from partnership law, whereas the indoor management
rule doesn’t
• Ss 128-9 à essentially try to sum up the common law
o There is a series of assumptions you can make when dealing with a company
• Royal British Bank v Turquand (1956)
o Does someone dealing with a corporation have to go and seek proof of authorisation
for individual decisions, answer is no.
o Do not have to go beyond checking that the business is doing what it’s doing by the
people who are authorised to do such things. Not to concern yourself with the internal
management of a corporation.
• Northside Developments Pty Ltd v Registrar General (1990)
o Indoor management rule was held to not apply in this case
o Whilst a person dealing with a company in good faith may assume that it acts within
constitution and powers and are not bound to inquire whether internal management
is regular, WHEN the nature of dealing puts contractor on inquiry, reliance on the rule
may facilitate fraud. ALSO a forgery of seal has no authority at all.
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Statutory assumptions protecting those dealing with companies
• A series of assumptions that a person dealing with a company or acquiring title to property
from it is entitled to make
• S128
o (1) Person entitled to make assumptions in dealings with company (co has no right in
proceedings to assert such assumptions are not correct)
o (2) Person is entitled to make assumptions in dealings with persons (co has no right in
proceedings to assert such assumptions are not correct) purporting to have
directly/indirectly title to property from co.
o (3) Assumptions may be even if officer or agent acts fraudulently, or forges document
in connection with the dealings
o (4) Person not entitled to make assumptions if knew/suspected not true (requires
‘reason to suspect’ more than idle wondering (QLD Bacon)
o These assumptions can be made even for someone who does not have authority, as
long as there is no notice of the lack of authority
• S129
o (1) Person may assume constitution has been complied with
o (2) Person may assume (by info from co/ASIC) that anyone who appears to be director
etc has been duly appointed, and has authority for their position
o (3) May assume anyone held out to be officer/agent has been duly appointed and has
necessary customary authority to perform position
o (4) May assume offices/agents properly perform their duties
o (5) May assume document duly executed if appears signed per s127 (1)
o (6) May assume document duly executed if common seal is there and fixing of seal
appears to be witnessed in accordance with s127 (2)
o (7) May assume officer/agent that has authority to issue document or certified copy
also has authority to warrant doc is genuine or true copy
Liabilities for directors and managers
Treating directors as fiduciaries
• Question whether directors owe a fiduciary duty to shareholders
• In modern legal language directors are fiduciaries, one of several categories of office or
occupation which enquiry has fixed with more or less rigorous obligations of disinterested
conduct
• Not all of the duties of directors and senior executives are fiduciary in character. The duty to
exercise care, diligence and skill is one imposed both in equity and at common law but may
not be fiduciary in character. The common law is only concerned with compensating loss, not
penalising benefit, it lies in equity. If you are the director in a corporation and you come across
information, even if it would not hurt the corporation, you cannot act on it if it benefits
yourself. Forbidden by the fiduciary duty and s 183 and 182
• The general law duties are supplemented by statutory duties contained in Ch 2D of the Act
imposing civil obligations upon directors and officers:
o To exercise care and diligence (s 180)
o To act in good faith in the interests of the company and for a proper purpose (s 181)
o Not to improperly use their position to gain an advantage or cause detriment to the
company (s 182)
o Not to improperly misuse information obtained as a director, officer or employee (s
183)
o Directors and officers who breach the statutory duties either recklessly or
intentionally commit an offence (s 184).
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•Directors stand in a fiduciary relationship with their company and, save for exceptional
circumstances they do not owe fiduciary duties to individual shareholders, creditors or other
persons in the company. JUST KNOW A FIDUCIARY DUTY EXISTS, NOT HOW.
•Duties that come from strictly equitable principles:
o Not to misuse profit
o Not to gain a personal advantage – even if the decision would benefit the company,
and it also benefits you, you can’t do it because of the fiduciary duty and ss 183 &
182. You can’t benefit yourself with the knowledge you get from the corporation
The scope of directors’ personal liabilities
• In general, directors will not be personally liable for acts or omissions of their company,
including those of the board or performed by individual directors on the company’s behalf.
There are a number of exceptions under general law, the Corporations Act and other statutory
provisions.
• Held personally liable for debts obtained whilst insolvent or reasonable grounds for suspecting
insolvency (s588G)
• Other personal liabilities
• The imposition of legal duties upon directors protects against hazards inherent in a firm
structure that has one group managing the funds of another – the dual dangers of self-dealing
and shirking. Protection against management self-dealing is afforded by fiduciary duties of
loyalty which impose obligations of good faith and conflict avoidance upon directors and senior
officers.
The statutory definition of officer
• A person who acts as a director or senior manager without legal authority cannot escape
liability under statute or the general law by denying that they are a director or officer. The
definition of officer and director are overlapping; the category of officer extends the reach of
regulation to company executives in recognition of the managerial revolution that has seen
power flow to those managing the affairs of the large corporation. Officer defined to mean
those:
o Who make or participate in making decisions that affect the whole or a substantial
part of the business of a company
o Who have the capacity to affect significantly the company’s financial standing.
o In accordance with those instructions or wishes the directors of the company are
accustomed to act: s 9.
• Kelloggs case
o Rice Bubbles cooker – cleaner died in the cooker cause he was told to go in and clean
it and the door sealed behind him and he was cooked alive.
o It settled for $2,000
o Issue: shareholders can’t be held responsible as they simply own property. The people
that should have done something about this are the directors.
• Are the directors the right people to hold responsible?
The statutory definition of director
• Defined as those who are validly appointed as director or alternative director but also those
appointed to the position of director and acting in that capacity regardless of the name that is
given their position. Also includes those; who act in the position of director (de facto) and in
accordance with whose instructions or wishes the directors of the company are accustomed
to act.
• s 9(b)(i) à De facto directors
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o A person who is not validly appointed as a director will nonetheless be treated as such
under the Act if that person “acts in the position of a director”, it is dependent on the
particular role they play in the company. Whether they have acted as a director a
number of factors are considered:
§ The size of the company, smaller more likely
§ Internal practices and structure of the company, specific responsibilities are
less likely to be a director
§ How putative director was viewed by outsiders who deal with the company.
o Grimaldi v Chameleon Mining NL (No 2) (2012)
• s 9 (b)(ii) à Shadow Directors
o Those persons who are the real, though not the nominal, controllers of the company,
the person “in accordance with whose directions or wishes the directors are
accustomed to act s 9(b)(ii). Not sufficient that executives who are not directors are
accustomed to act on a third party’s instructions or wishes: what is needed is a “board
of directors claiming and purporting to act as such” Re Hydrodam (Corby) [1994].
Range of civil penalty provisions
• ASIC can take action even if the shareholders don’t want to
• S 1311 à you are not guilty of an offence unless the act says it is an offence. If it is an offence,
there is a schedule of penalties in the back of the act
• P 423 – [7.60]
• Ss 180, 183 à Directors and officers’ duties
• S 588G à Insolvent trading
• S 209 à Involvement in the giving of an unsanctioned financial benefit to a related party of a
public company
• S 254, 256, 259, 260 à Share capital transactions
• S 344(1) à Requirements for financial reporting
• S 131 à Measures relating to managed investment schemes
Consequences of contravening a civil penalty provision:
1. Declaration of contravention – can only be sought by ASIC, need this before they can seek
other penalties
2. Pecuniary penalty order
3. Compensation
4. Limitation period
5. Criminal liability
6. Civil standard, evidence rules and procedure
7. Civil proceedings may not follow criminal
8. Criminal proceedings stay earlier civil proceedings
Directors Duty to act bona fide for the benefit of the company as a whole
1. Duty of good faith – Fundamentally involves the court second guessing the decisions of the
business. “are you acting in the best interests of the company as a whole?” A subjective
element of good faith, as long as you thought you were doing the right thing, then the court
will not challenge that. The court does not want to intervene in the way people think their
businesses should be run. The process of judicial review is otherwise confined to inquiry as to
each director’s subjective intent.
o Marquee & Bute re Carde Savings Bank à Starting point for subjectivity
§ Child inherited a serious of board memberships and he doesn’t want to do
this business type of stuff, and whenever there was a board meeting he was
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off playing horse polo. He turned up to 1 meeting in 27 years. The bank
engaged in fraud, and he did nothing to detect this very obvious fraud
§ He was contacted and asked why he did nothing to stop the court and that he
would be liable
§ He argued that he can’t be liable because he genially didn’t know about the
fraudulent activities and only ever had good intentions, he honestly believed
the company was doing the right thing. The court agreed
o The duty of good faith is purely subjective, but an objective element is growing – an
element of objectivity is developing to prevent people from wilful blindness, etc.
2. Duty to exercise powers for proper purpose (objective duty) – Duty only to exercise
corporate powers for purpose for which they were granted to directors, bona fide. Court can
invalidate decisions that go beyond this power or do not benefit company generally. Moving
cause test, what was the moving cause of the action of the directors? If the moving cause was
bone fide that is good enough: Mills v Mills (1938)
3. Duty to consult and act by reference to company interests (objective duty) – the interests
that the law identifies as the interests of the company. Hutton v West Cork Railroad “Bona
fide cannot be the sole test, otherwise we could have a lunatic acting in a manner perfectly
bona fide but perfectly irrational”. Where directors act by reference to interests extraneous
to those recognised by the law as the interests of the company, their action will not be saved
by their honest belief that they are acting for the company’s benefit.
Individual subjects of the duty
• The duty is owed by directors individually, whether the duty has been breached and the
consequent validity of the directors’ decision, is tested by inquiry as to each individual
director’s intention and purpose. Does not have to be all directors, but where relevant it is
the director individually.
Duty of Good faith (statutory)
• Re Smith and Fawcett Ltd**
o Bona fide discretion is a subjective test and is what the director considers, not what
the court considers, is in the interests of the company and not for any collateral
purpose.
• Australian Metropolitan Life Assurance Company v Ure**
o Where directors act entirely within their scope of power, honestly basing a decision
on their own business opinion, they are exercising a power in which no court can
interfere (FACTS: article gave power to refuse transfer of shares without reason,
looked at nature/structure/reputation etc to determine bona fide act), no right to
interfere if honest/not injuring co
• Harlowe’s Nominees v Woodside (Lakes Entrance) Oil Company
CIVIL: (s181)(1): Director or other officer must exercise powers and discharge their duties:
(a) In good faith in best interest of corporation:
(b) For a proper purpose.
CRIMINAL: (s184)(1): Director or other officer commits an offence if they:
(a) Are reckless or
(b) Are intentionally dishonest in failure to exercise powers/discharge duties with respect
to the above.
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o It was questioned whether shares could only be used to raise capital (said this was
improper purpose), but courts said if decision exercised in good faith and not for
irrelevant purpose then they won’t review the power. Negative test.
• Ngurli v McCann
o Co as whole means co as general body not commercial entity. Court will interfere to
prevent abuse by majority shareholders/directors powers, but more willing to do in
case of directors as shareholders are not trustees. Court will interfere if default in
exercising power for benefit of co as whole
• Hogg v Cramphorn
o The Court held that corporate directors who dilute the value of the stock in order to
prevent a hostile takeover (the poison pill) are breaching their fiduciary duty to the
company. Power can’t be used just to retain control over company.
• Teck Corp v Millar 1973
o director may resist a take-over so long as they are acting in good faith, and they have
reasonable grounds to believe that the take-over will cause substantial harm to the
interests of the corporation. The case represented a major change away from the
standard set in the English case of Hogg v. Cramphorn Ltd. TODAY: consider interests
of employees and consequences to community.
• Howard Smith v Ampol Petroleum 1974
o Case restating that directors must act for proper purpose – this case was a takeover
bid. Creating shares purely for voting power has been condemned: Mills v Mills (HC)
• Cayne v Global Natural Resources
o If to prevent co being reduced to impotence and beggary, and the only method of
doing so is retaining control, there is no improper purpose. Mills v Mills also says that
if it also helps the director, this is not a problem
• Whitehouse v Carlton Hotel
o You can create classes of shares which have different rights attached to them
o Allotment is invalid if the impermissible purpose was causative in the sense that, but
for its presence, the power would not have been exercised. Can create classes of
shares which have different rights attached to them (e.g. voting rights or rights to
appoint directors).
• Parke v Daily News
o Money can only be spent by directors if it is for the purpose of running the company;
here the company was winding up, so they couldn’t make a payment to the
employees. It must be reasonably incidental to the carrying on of the company’s
business
Fiduciary loyalty within corporate groups
• What happens if a company is almost 100% owned by another company? Does the subsidiary
owe a duty to the parent company; does parent owe a duty to subsidiary? Where does the
liability fall in all of this?
• Financial integration is likely to involve occasional and regular transactions by individual group
of companies which are not in the best interests of that company, such as loans or guarantees
to other companies in the group, or the sale or transfer of goods or property at less than the
optimal price in order to produce the most advantageous level of profit or loss in particular
companies.
• Managerial integration is likely to involve the issuing of orders to the directors individual of
the subsidiaries by group managers and the appointment of representatives in the group or
boards of those subsidiaries to ensure that all relevant information is passed on to group
headquarters
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• Smith Stone & Knight à the companies don’t want there to be a sense of the greater group,
they want the atomization of these individual companies, otherwise the corporate veil is going
to disappear
• Now, you can put into the constitution of a subsidiary that by acting in the best interests of
the parent company, that they are in fact acting in the best interests of the subsidiary. This
can only apply where the company is solvent (this is in Aus only). The parent company can do
anything and can destroy the subsidiary if it wants because it is the shareholder
• Walker v Windborne (1967) ***
o There was a group of companies, but not in the traditional sense where they were
owned by one another and shareholding was tied up, the directors were common to
multiple companies. So the directors would engage in uncommercial conduct with the
other companies they were directors of
o The primary judge thought that this was okay and acting against the interests of one
of the companies was okay because it was for the benefit of the larger corporate
group. Mason J: the primary judge concluded that the liquidator has not made out.
The primary judge did not give an adequate explanation for his decision.
o Held: it is okay to do something to the detriment of your company to support another
one if you are a shareholder in the company. In this case, there was not really a
corporate group, the companies must be seen individually and it was clear that the
directors did not act in the best interests
Group of Companies:
• The general rule is that it is only the interests of the company that are relevant to the fiduciary
duty (Walker v Windborne (1967)
• Where, however, the company is one of a group of companies and the Director considers the
interest of the group, they will not be in breach of the fiduciary duty unless the interests
conflict (Equiticorp (1993)
Subsidiary:
• A director is acting in good faith in the interests of the subsidiary if: s187
o The const. of the subsidiary expressly authorises the director to act in the best
interests of the holding company; and
o The director acts in good faith in the best interests of the holding company; and
The subsidiary must be solvent.
Parent company can destroy subsidiary if it wants, as it is effectively a shareholder.
Walker v Wimborne (1976) – directors were common to multiple companies. Cannot see them as a
group of companies must look at them individually and the directors had not acted in the best
interests.
Week 9 – Duty of Care, Skill and Diligence
Common law duty – Most commonly looked at from this perspective
• These duties help the shareholders get what they want
• Directors duties can be likened to a tort à who is the duty to, what is the breach, and what
harm was caused by the breach?
• Duty: Directors owe a common law, tortious duty to the company to act with care, skill and
diligence: Daniels v Anderson.
What is the standard of care?
• Daniels v Anderson
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o At common law, the requirement of skill adds a duty to conform with ‘professional
standards and… an objective standard of care which would not yield to considerations
such as a lack of knowledge or lack of experience:’, p.662
• Re Brazilian Rubber Plantations and Estates [1911] à standard of care
o Standard of care is measured by the care an ordinary man might be expected to take
in the circumstances on his own behalf. The elements of general standard of care was
that which was reasonably to be expected of each director, having regard to their own
knowledge and experience not by considering what the court itself would consider
reasonable
• There is judicial reluctance to second-guess business judgements taken without suggestion of
bad faith, and an explicit understanding that it is undesirable for courts to attempt to
formulate general principles in this area
• S 189 à If directors rely on information or advice provided by an employee, professional
advisor or expert who the director reasonably believes to be reliable and competent then they
are entitled to rely on that information or advice
• Directors are also relieved of responsibility of acts to those that they have delegated powers
and the director believes on reasonable grounds that the delegate would exercise the power
in conformity with the directors’ duties and in good faith after making proper enquiry
• Morley v ASIC and ASIC v Healey
o Particular board functions are not delegable to management and remain the
responsibility of the board itself. These cases have the idea that a board of directors
cannot rely on a lawyer for legal advice and cannot rely on an actuary for actuarial
advice etc. Lecture believes this eliminates the purpose of S 189 and 198D. At the
moment 189 and 198D are muted provisions.
What will breach a general law duty of care?
• Directors can and should engage in risky behaviour, and these duties should not stifle
entrepreneurial efforts. The duty is not there to prevent failure, but to prevent unacceptable
risk-taking
• ASIC v Doyle (2001)
o the standard of care and diligence can only be answered by balancing the foreseeable
risk of harm against the potential benefits that could reasonably have been expected
to accrue by the company from the conduct in question. The duty does not impose
on directors a general obligation to ensure that the company does not contravene the
Act or other legislation.
Why are there so few cases for breach of duty of care?
• Suing the company of which you are a shareholder, then the company you are a shareholder
of has to pay for the legal defence of the director
• Very time consuming, outlay a significant amount of money.
• Judgment is uncertain
• Not worth it
Equitable-based duties – generally NOT argued
• Directors owe the company an equitable obligation to exercise care, skill and diligence, which
are the same, in content, as the tortious duty: PBS v Wheeler, Daniels v Anderson.
• This is not a fiduciary duty: PBS v Wheeler.
• Directors also owe company fiduciary obligations, which are distinct from the equitable duty
of care, skill and diligence: see good faith.
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Statutory duty (s 180) – MOST IMPORTANT
• S 180(1) à
• S 180(2) à business judgment rule: subjective exception to an objective duty (complete
equivocation of the law)
• 181(3) à different to an act or omission, it is the DECISION
S 181 à duty of good faith
• It is upon the director to prove they acted in good faith etc… Proven through board minutes
• Non-executive and executive directors are not held to the same standard of care, executive
directors have a higher standard of care
• The objective standard of minimum skill and competence expected of non-executive directors
may not extend much beyond financial matters; in the case of an executive director the
statutory standard seems generally to reflect what is objectively expected of a person
appointed to the designated executive office held by the director or officer and also any
additional responsibilities they have acquired.
• The standard of care is not breached by mere errors of judgement
• It is on the director to prove they acted in good faith etc.
• Daniels v Anderson (1995) 37 NSWLR 438
CORPORATIONS ACT 2001 – SECT 180
Care and diligence–civil obligation only
Care and diligence–directors 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).
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.
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o An Electronics Company (AWA) ventured into foreign exchange hedging as a result of
moving their manufacturing overseas. There was an assumption that the general
manager and financial manager had been negligent. DHS were the auditors
o AWA sued DHS for negligent auditing. DHS counter-sued for contributory negligence
o RULE: The responsibility of directors is that they take reasonable steps to place
themselves in a position to guide and monitor the management of the company but
it is unreasonable to expect every director will have an equal knowledge and
experience of every aspect of the company’s activities. However, a director cannot go
with the basis that they are ignorant and don’t understand and therefore will not
inform themselves of it and therefore not be found negligent. A director needs a
rudimentary understanding, of what the corporation is doing. Directors found to have
contributory negligence, just because you are a nonexecutive director you need to be
basically informed of what is going on.
o Held: DHS were negligent in failing to find the issues in their audit. Costs were
apportioned to 1/3 AWA and 2/3 DHS.
• Permanent Building Society (in Liq) v Wheeler (1994)
o PBS attempted to sue its former directors for compensation for breach of their duties
as directors, inter alia, for failing to exercise a reasonable degree of care, diligence
and skill.
o Objective test, balance risk of harm with potential benefits, may consider whether a
nonexecutive or executive director matters but its dependant on particular
circumstances.
o Rule: Directors owe a duty of care at common law and in equity. This duty is not
properly classified as fiduciary. In determining whether a director has exercised
reasonable care and diligence one must ask what an ordinary person, with the
knowledge and experience of the defendant might be expected to have done in the
circumstances if they were acting on their own behalf.
o Implied term in contract of executive director that they have the skills of a reasonably
competent person in their category of appointment and will act with care, diligence
and skill.
• ASIC v Adler (2002)
o This is the case post Corporations Act – now there is statutory guidance.
o If short of a case ASIC v Adler is good for summing it up à common law extrapolation
of the statute
o Summary of s 180
§ Directors owe a duty of care and skill at common law and in equity
§ The equitable duty is not properly classified as a fiduciary duty
§ The statutory duty is essentially the same as the duties under common law
§ In determining whether a director has exercised reasonable care and
diligence, one must ask what an ordinary person, with the knowledge and
experience of the defendant might be expected to have done in the
circumstances if s/he was acting on their own behalf
§ Under the implied term in a contract of employment of an executive director,
the director will be taken to have promised the company that he/she has the
skills of a reasonably competent person in his/her category of appointment
and that he/she will act with reasonable care, diligence and skill
§ Directors of a professional trustee company owe a higher duty of care
§ In determining whether the director has breached the statutory duty, the
court will have regard to the company’s circumstances and the director’s
position and responsibilities within the company
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§ Directors are required to take reasonable steps to place themselves in a
position to guide and monitor management of the company à they should
be familiar with the business fundamentals, they must keep informed about
the business activities, they must regularly attend board meetings, and
regularly review company financial statements
§ A director with one area of special expertise (e.g. lawyer/accountant) is not
relieved of paying attention to other areas which reasonably require
attention
§ Reliance on other officers is not reasonable where something is questionable
and they should have reasonably picked up on it
§ Failing to ensure that a company makes loans within its authorised practices
and failing to maintain a proper system of controls amounts to a breach
§ Where there is a potential for conflict of interest, the duty of care is higher.
Duty falls to be exercised in context requiring special vigilance calling for
scrupulous concern on the part of the officer
§ While primary responsibility falls on the director proposing to take the action,
the other directors will not be excused just because one person has taken the
reins and this is even more so when that person has a conflict of interest
o A subsidiary of HIH Insurance provided an undocumented and unsecured $10 million
loan to Pacific Eagle Equity Pty Ltd, a company controlled by Adler. He was also a NED
and through Adler Corporation, a substantial shareholder in HIH. PEE became a
trustee of another company controlled by Adler Corporation, and under the trust
Adler gained 10% of the income, even though the $10 million was contributed by HIH.
The funds were used to buy shares (which sustained substantial losses), and loaned
to Adler and other his other interests.
o RULE: directors are required to take the reasonable steps to put them in a position to
guide and monitor the management of the company. If a director has special expertise
in one area of business, they are not relieved of their duties to oversee other areas of
the business (you still need to make enquiries into those areas to gain at least a
rudimentary understanding). Reliance on an expert, e.g. lawyer or accountant will not
be justified if there is anything that raises alarms (ss 189 & 198D)
o Couldn’t use business judgment rule as he had no personal interest.
o DECISION: Adler breached his duties as an officer under s181 to act in good faith and
in best interest of the company, as the interests of the company were but at risk by
his dealings that breached other statutory provisions (such as related party
transactions s208). Even if he didn’t get a benefit it still would have been a breach. He
also breached s182 for using his position improperly, and s183 for using information
improperly
• ASIC v Healey (2011) à your obligation to make sure accounts are correct is not resolved
when you delegate the work to an accountant
o 2 executives and 6 non-executive directors of a series of companies (Centro). The
directors attended a board meeting and resolved to approve the consolidated
financial statements and to make the declarations that they were compliant with laws
etc, and gave a true and fair view of the financial position of the companies. They
classified $2.6billion of debt as “non-current liabilities” and failed to disclose
$1.75billion in guarantees
o ASIC applied for declarations of contravention against the directors in relation so ss
180(1) and 344 which sanctions compliance with the financial reporting audit
provisions and for orders that the directors [ay pecuniary penalties and be disqualified
from managing corporations
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o Defence of directors was that PWC had audited accounts and they had relied heavily
on these audits and no one had raised any issues.
o Is a director required to second guess accounts that have been audited by an
independent 3rd party? They are required to inform themselves of the account, to
make enquiries into the account and to second guess accounts
o Court held: that the directors failed to take all reasonable steps required of them, and
acted without the required care and diligence of a director. The duty of competence
requires that they can read and understand the financial statements
o As to s 180: the circumstances of the corporation are relevant to the content of the
duty, including the type of company, the provisions of its constitution, the size and
nature of business, the composition of the board, the directors’ responsibilities, the
competence of management, the distribution of responsibilities, etc.
o Cannot delegate accounting to an accountant and not look over the results à
Something major should be picked up by the directors
Business judgment rule
• Realistically it provides an out
• S 180(2) à is an exception to liability under s 180 and it is relied on in common law and equity
if a director is found to have breached their duty.
• If they can prove that they thought they were acting in the best interests of the company then
they will be let off
• Rationale: courts will not substitute their own opinion of the wisdom of a business decision
for that of the directors who originally made it
• In order to claim they were acting in the best interest of the company they must meet four
criteria:
o Make judgement in good faith for a proper purpose
o Must not have a material personal interest in the subject matter of the judgment
o Must inform themselves of the subject matter of the judgement to the extent they
reasonably believe to be appropriate
o Must rationally believe judgement in best interests of the company. Only means it’s
not irrational.
• Onus of the director to prove belief, proving belief is a complex matter.
• Same standard of care seen in the general law, a director in that corporation that is the type
of director that director is. Subsection two is the test for the duty of care.
• Daniels v Anderson (1995) 37 NSWLR 438 à executive and nonexecutive directors are held
to the same standard of care particularly regarding disclosure.
• A breach of judgement Look to the type of company
• ASIC v Rich (2009) 75 ACSR 1 at [7242]
o ASIC applied for declarations of contravention of s 180(1) against several of the
directors of One.Tel on the basis that they knew or ought to have known that financial
information provided to the board did not accurately reflect
o The statutory issue under s180(1) is not whether the defendants made mistakes in
the process of financial forecasting, and a fortiori, it is not whether they formed
opinions different from the opinions of ASIC or even of the court. It is whether they
failed to meet the standard of care and diligence that the statute lays down. The
statute requires the court to apply a standard defined in terms of degree of terms of
degree and diligence that a reasonable person would exercise taking into account the
corporation’s circumstances, the offices occupied by the defendant, and their
responsibilities within the corporation
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o If it is found to be a mere error of judgment, the statutory standard under s 181 is not
contravened and is unnecessary to advert to the special business judgment rule in
180(2)
o If you are the director, you have the onus to prove the business judgment rule applies
Problems when facing those who deal with companies
• Since the company is an abstraction, commitments may only be entered into through the
mediation of natural persons – its organs
• Where an organ contracts in the name of the company, its act is the act of the company itself
which contracts directly by its organ. The position is different however when the company
contracts through an agent whose act is an act for but not of the company
• The Act, in s 126, permits persons acting under the express or implied authority of a company
to contract in the name or on behalf of the company in the same manner as if that contract
were made by a natural person.
Week 10 – Insolvent Trading
Duty to prevent insolvent trading:
• This is a necessary element of creating a corporate veil. Corporate veil being where the
corporation is a separate legal person, this person has limited liability and shareholders were
not responsible for the debts of the company.
• Broad overview: if you are the director of a company and you know or ought to have known
that either; the company is insolvent or the company will go insolvent based on a transaction
and you enter into this transaction nonetheless then you are personally liable for the
transaction.
If director meets below elements, it will be contravention of s 588G(2).
1. Person must have been director when debt occurred (s588G1a). S 9 tells us that a director
may be a shadow director, defacto director or anyone that may be defined as a director.
2. Company must have been insolvent or become insolvent by debt or other debts at the same
time (s588G1b).
3. Debt incurred after 23 June 1993 (s588G1d).
4. At time, reasonable grounds for suspecting company insolvent/or would become insolvent by
incurring debt (s588G1c). If directors had no way of knowing then they cannot be held to
account.
5. Director aware that such grounds existed for suspecting insolvency, or reasonable person in
like position would be so aware (s588G2). This means the director must either have subjective
knowledge of the insolvency or a reasonable person in that company at that time in the
circumstances would (objective test).
Will be held liable unless establishes one of the defences available (s588H)
1 – PERSON WAS DIRECTOR WHEN DEBT OCCURRED.
• Debt: Must be ascertained or able to be ascertained (Odgens Ltd v Weinberg), and signifies
an obligation resulting in the requirements that a sum of money or money’s worth is paid.
Must be ascertainable, must be distinct from equitable obligation to pay e.g. damages or
compensation (Hawkins)
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2 – COMPANY WAS INVOLVENT OR BECAME INSOLVENT BY OTHER DEBTS AT SAME TIME
• A company is deemed to be solvent if it is able to pay all its debts as and when they become
due and payable (s95A1). A company that is not solvent is said to be insolvent (s95A2)
• Do not assume a company is insolvent if they cannot pay all debts as they fall due all the time.
A company may be in a temporary lack of liquidity if it cannot pay the odd debt as it falls due,
when a company borrows to repay borrowed money it may be in an endemic shortage of
working capital.
Six Factors to consider insolvency (Redman is a satisfactory citation)
1. Question of fact on looking at company’s financial position as a whole.
2. Must have regard to commercial realities (resources other than cash available)
3. Must consider that creditors do not always insist on payment strictly on time
4. Commercial reality that creditors will normally allow some leeway in payments (overlap
between 3 and 4)
5. A contract debt is payable on date unless evidence of extension, estoppels, or
understanding in the industry or between creditor and company. Estoppel is where a
company has been engaging in conduct for so long that being denied it now would be
inequitable.
6. Company must satisfactorily prove that there is an extension/leeway
The availability of loan funds, adequacy of such funds to pay debts, promise to lend and reliability of
such promises are also relevant to the issue of ability to pay.
Terms to be familiar with:
• Balance sheet: assets on one side and liabilities on the other side. Can be insolvent even if the
balance sheet is showing strength.
• Company’s cash flow is more important to solvency
• Companies with a temporary lack of liquidity would not be insolvent.
4 – REASONABLE GROUNDS FOR SUSPECTING INSOLVENCY
• Reasonable grounds: Suspicion is placed between circumstances which prompt idle
wondering or the mere possibility, and those that amount to actual expectation. It is said to
be slight opinion but without sufficient evidence (Qld Bacon v Rees 1966)
• Objective test: Means that the state of knowledge of the director is irrelevant, Court must
make judgement on facts present at that time without hindsight (Powell v Fryer 2001). Must
be judged by the standard appropriate to a director of ordinary competence (3m Australia v
Kemish 1986). Mere idle wondering with some evidence.
5 – DIRECTOR’S AWARENESS OF THE COMPANY’S FINANCIAL POSITION
• This is actual or imputed awareness of the company’s actual or impending insolvency. By
failing to prevent the company from incurring debt, the director contravenes the section if:
o The director is aware at the time there are grounds for suspecting the company is
insolvent
o A reasonable person in a like position in a company in the company’s circumstances
would be so aware s 588G(2).
• FIRST LIMB – If a director is provided with information that a reasonable person would create
a reasonable suspicion of insolvency based on then the director is imputed to have had
reasonable grounds for suspecting insolvency, even if they did not come to that conclusion (s
588G(2)(a)).
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•SECOND LIMB – Objective person is the same objective person from 180, in the director’s
position in the type of company the company is.
Defences to liability for failure to prevent insolvent trading:
• Defences are listed in s581H:
(2) Director had reasonable grounds to expect, and did expect company solvent at
that time, and would remain solvent even if it incurred debt/other debts. Subjective
element, had to believe company was solvent as well as having reasonable grounds
that a reasonable person would conclude the company was solvent. Up to director
themselves to prove. Statute but also in Tourprint International v Bott (1999).
(3)(a) Person had reasonable grounds and did believe
(i) that a competent and reliable person was providing adequate info about
whether co was solvent, and
(ii) other person was fulfilling that responsibility, AND
(iii) expected on basis of said info that co would remain solvent even with
debt/other debts
(4) If person was director when debt incurred but was sick/etc
(5) If person took all reasonable steps to prevent co. from incurring debt
(6) Whether the person appointed an administrator/when/effectiveness
• Need to establish 2 things:
o The director has to have a belief that there is an adequate system for monitoring
company solvency this does not need to be true as long as they actually believe.
o Director has to establish an expectation of continuing solvency founded on the basis
of information provided by the delegate. If information is unreliable or of a nature
that would cause an ordinary person to doubt it this would affect the first limb.
• Manpac Industries v Ceccattini (2002) à if a director gives information to an account who
then feeds it back then the director has not been misled by the accountant.
Compensation remedies with respect to insolvent trading:
S588 (2) – Civil Penalty Provision imposing civil liability for directors.
1. Part 9.4B – Civil Consequences (fines etc) for contravening other provisions
2. Part 5.7B Division 4 – Enables compensation for loss from insolvent trading (only when debt
is wholly or partially unsecured.)
Recovery may be through civil penalty proceedings (s588J), in criminal proceedings – where director
is guilty of an offence of failing to prevent insolvent trading (s588K) by direct recovery by liq (s588M)
or cards (s588R/588T). Be aware of the mechanisms a director can be held personally liable.
Duty for holding company to prevent insolvent trading by subsidiary
Holding company may be held liable where it allows a subsidiary company to trade whilst insolvent
(Pt 5.7B Division 5)
1. Co. must be the holding co. for subsidiary at time debt is incurred (s588v1a)
2. Subsidiary must be insolvent/become insolvent by debts (s588V1b)
3. At time must be reasonable grounds for suspect insolvency etc (s588v1c)
4. Director is aware of grounds (v1di) or reasonable to expect (V1d)
Recovery of compensation by liquidator of subsidiary from holding company:
• Holding company contravened above section in relation to incurring debt
• Person to whom debt owed by subsidiary incurred loss/damage due to insolvency
• Debt must have been wholly or partly unsecured when loss or damage suffered +
• Subsidiary company must be in process of being wound up.
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• If satisfied, liquidator can recover amount equal to loss or damage suffered (s588W1), but
must be within 6 years of beginning of winding up (s588W2)
• Defences available (s588X 2, 3,4,5)
LOOK AT HALL v POOLMAN 483 and DEPUTY COMMISSIONER V CLARK 484
Directors interests in transactions with their company
• Fiduciary situation includes avoiding circumstances of conflicting interests and where a
conflict may arise. Not enough that the company not cause harm to the company, the director
cannot possibly benefit from the activity.
• Three tiers of legal rules:
o The equitable principle enjoining conflict avoidance which makes such transactions
voidable at the suit of the company irrespective of the fairness of the transaction from
the company’s perspective provided it is possible to restore parties to their original
position.
o Provisions in company constitution modifying the equitable rules or its consequences
usually by relieving against its rigour.
o The statutory duty of disclosure imposed by the Act
Statutory disclosure obligations with respect to director’s interest in matters affecting
their company
• Directors who have a material AND personal interest in a matter that relates to the affairs of
the company must give other directors notice of the interest (s191) Strict liability (1A)
• They do not need to give notice if:
o Interest falls within an exempted category (2a)
o Company is Pty co and the other directors are aware of nature of interest (2b)
o Director has given a standing notice of the interest under s192 (2d)
• Proprietary (PTY): If such an interest is disclosed, or it need not be, the director can vote,
transact, retain benefits, and the company cannot avoid the transaction merely due to the
interest (s194)
• PUBLIC: If such an interest is disclosed, director can’t be present at meetings related to the
matter/voting, UNLESS it is exempted, or other directors pass resolution identifying
nature/scope of interest and undisqualifying him from voting/being present (s195.2) S 195
which is not a replaceable rule and cannot be displaced. ASIC can approve that director sitting
in if there is insufficient numbers in an emergency.
• S 191 does not displace the equitable rules on conflict of interest, does not displace any
constitutional provision that may say something to the contrary.
• S 194 overrides the equity in statute but is a replaceable rule so we can do away with it if we
want to.
• Material personal interest: not defined in statute so need to look at case law McGellin v Mt
King Mining nature of the interest should have the capacity to influence the vote of the
particular director. It is the substance of the interest, its nature and capacity to have an impact
upon the ability of the director to discharge his or her fiduciary duty which will be important.
• Aberdeen Railway v Blaikie Bros (1854)
o Mr Blaikie was required to make the best bargains he could for the benefit of the
company, it makes no difference if they are only one of a body of directors or a sole
trustee or manager.
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Related Party Transactions:
• s 208(1) à Chapter 2E prohibits the giving of financial benefits to related parties of public
companies unless the benefits are covered by particular exceptions or are disclosed to and
approved by shareholders in general meeting
• A like prohibition applies to an entity that the public company controls giving a financial
benefit to a related party of the public company
• Entity defined by s 9 (corporation, partnership, unincorporated body, individual or trust) and
controlled defined by s 50AA(1) as company with capacity to determine the outcome of
decisions about the entity’s financial and operating policies. This requires two terms to be
established;
o what is a related party (s 229)
o what is a financial benefit (s 228).
• If you can find both of these in a public company then you have a breach of Chapter 2E. Then
you need to find an exception, this is a pragmatic provision not a duty provision.
Contravention of s 208(1) does not invalidate a contract or transaction that gives the
unauthorised benefit, in this context certainty is preferred to invalidity à Re Summit
Resources (2012). Not a replaceable rule and not something that is modified by equity or
common law.
• When is a financial benefit given? (s 229) It can be anything of value, no threshold level so it
can even be a single dollar.
• Who is a related party? (s 228) includes directors, other people that can influence company’s
decision, and those within defined familial relationships.
• Exceptions to the prohibition upon giving financial benefit:
o approved by shareholders
o Wages paid to a related party as an officer or employee of the public company
o payment or reimbursement expenses
o An indemnity
o Reasonable legal costs of an officer
o Internal affairs of a company, parent and subsidiary.
o Dividends etc.
o Benefits given pursuant to a court order
• Adler v ASIC
o HIHC paid $10 mill to PEE under the effective control of Adler who had a 10% interest
in the AEUT trust of which PEE later became trustee. ASIC claimed the payment
involved a contravention of s 208 by HIHC and HIH on the basis that PEE was a related
party of PEE
o Did not matter whether this was an interest free loan or a payment on trust, the fact
is they got $10 mill and it was not an arm’s length transaction, highly unusual and
there was a benefit to having the 10 mill. Have a benefit therefore contravene s 208.
• Arm’s length – transaction is entered into that is not advantageous to anybody. If you’re a
related party and something is entered into on commercial terms (same rate you would enter
into for a non-commercial party) then there is no breach of s 208, likewise if you enter into
terms which are favourable to the public company s 208 is not concerned. This is about
protection of shareholders, if they have not lost anything then there is no need for action.
• Shareholder approval: Director can give themselves or a related party a benefit if they have
the approval of shareholders. Class or kind of benefit can be approved (s 217).
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Secret profits: the appropriation of corporation property, information and
opportunity
• While directors are not generally trustees of company property, they are treated as trustees
of company funds in their hands or under their control: accordingly, if directors misapply
company funds, they are liable to make good the money upon the same footing as if they
were trustees
• Furs v Tomkies is main case to define secret profits and Regal (Hastings) v Gulliver.
• Not a provision of loss, but a duty based provision. Anything that is gained is a profit that the
director is not allowed to make
• Rule against secret profits is a rule against the director being in a position where they are
entitled to make money and that is not known by the beneficiaries of this duty. Prohibition is
not against director obtaining the benefit, but against the director being in a position where
they are entitled to obtain the benefit if they took the action necessary to do it.
• If you use your position to gain an advantage for anyone you have breached the provision s
180.
Conflict avoidance obligations: fettering board discretions
• Directors must bring to bear an independent judgement in their exercise of power, they
cannot fetter their discretion or delegate their power to other individuals. Director cannot
jeopardise their independence
• If a director is bound into a long-term contract they are not necessarily bound to fulfil it, they
may be required due to the rule against fettering board discretion to breach the contract.
• Thorby v Goldberg –
• Competing directors – directors cannot be directors of companies in competition with each
other
• Directors duties are owed to the company which is the primary agent for their enforcement.
The duty is first of all to the body of shareholders as a whole, if it is then consistent to act in
the interest of individual shareholders they should, and if this is not inconsistent with acting
in the best interests of the company then the directors should act in the best interests of the
shareholder as well. Secondary duty but a duty nonetheless à Coleman v Myers.
If appointed director demand two things:
• The company pay for directors insurance policy (pays legal costs for breach of duties)
• Indemnification so company pays for legal fees not covered by legal fees.
• S 199A – a company or related company must not exempt a person from a liability the
company incurred as an officer or auditor of the company. Can indemnify them though.
A company must not pay a premium for a contract insuring a person who is an officer of a company
against a liability arising out of:
• Conduct involving a wilful breach of duty in relation to the company
• A contravention of ss 182 or 183 (improper use of position or information from office for
game; s 199B
Week 11 – Meeting Convening
• Shareholders can bring an action against directors for breach of:
o Ss 180, 181, 182, 183, 184
o Ss 191, 192, 193,194, 195
o Chapter 2E
• Bringing these actions are very costly
• Easiest mechanism of power that shareholders have is a general meeting.
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Director’s right to convene a meeting
• Directors have the power to call a general meeting, they also have the obligation. Can be
called by:
o An individual director
o Board of directors à general meetings are usually convened by a notice signed by the
company secretary pursuant to a resolution of the directors
o Member or group of members satisfying a minimum or voting standard or;
o A court order
• S 249C à replaceable rule – authorises a director to call a general meeting, however in the
case of a stock exchange listed company incorporated in Australia the rule is mandatory (s
249CA)
• S 249Q à a general meeting must be held for a proper purpose.
• S 249R à must be held at a reasonable time and place.
• Smith v Sadler (1997) à reasonable time and place
o AGM was convened to be held on premises licensed under the Liquor Act 1982, of
which the defendant was licensee. Sadler would not permit Smith to enter the
premises because he was apprehensive about Smith’s conduct and owed a duty under
the Liquor Act to prevent disturbances on the premises. Smith sought to restrain his
exclusion from the AGM
o Young J held: when the meeting was convened, it was known that Smith could not go
onto the premises, and because this was known, the convening of the meeting was
invalid
o Directors have a fiduciary duty to convene meetings at a time and place where all
members of the company present in the state will be able to attend
Member’s right to convene a meeting.
• Members have 2 statutory rights to convene a meeting:
1. Convene a meeting at their own expense à s 249F(1)
2. Requisition directors to call a meeting
§ s 249D(1) à The directors must call and arrange to hold a general meeting
on the request of Members with at least 5% of the votes that may be cast at
the meeting
• This has been criticised in that a small number of shareholders
without any significant economic interest in the company can validly
requisition a general meeting at the company’s expense
§ s 249D(2) à The request must be in writing, signed by the members, state
any resolution to be proposed and be given to the company
§ S 249D(5) à Directors on receipt of request must call the meeting within 21
days for a date within 2 months of the requisition
§ s 249E(1) à If the directors do not call the meeting, then members with more
than 50% of the votes of those who issued the request, who originally called
for the meeting may organise their own meeting
§ s 249E(3), (4) à the company must give the requisitioning members a copy
of the register of members and must pay the reasonable expenses in
convening the meetings
§ s 249E(5) à The company may recover these expenses from the directors
who are individually liable unless they can prove they tried everything in their
power to convene the meeting
§ If 1 person has 3% vote and 10,000 people collectively have 2% vote, they
requisition the meeting and the directors don’t call it, the 3% guy can call the
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meeting and send the bill to the directors. If everyone except the 3% guy say
lets call it anyway, the directors don’t have to pay for it, they will just have to
pay under s 294F
Proper Purpose
• s 249Q à sums up a common law proposition that shareholders right of requisition must be
exercised bona fide and for a proper purpose à NRMA Ltd v Snodgrass (2001)
o Used more often in limiting shareholders requisitioning a meeting rather than
directors
• Where the shareholder requisitionists proceed to convene a meeting they must exercise their
rights in a manner that has regard to the best interests of the company as a whole
• As long as there is one proper purpose, improper purpose is fine.
• These laws are set up to protect the shareholders from directors
Constitutional limitations
• Members can’t convene a meeting that is for a purpose beyond the constitutional power of
the general meeting, e.g. call a meeting then do something you are not constitutionally
authorised to do you cannot
• If shareholders call a meeting to exercise anything other than residual power then it is likely
to be ineffective
• NRMA v Parkin
o Shareholders constantly called meetings, the directors would say no. Meeting was
called by shareholders to change the company constitution
o NRMA alleged that meeting was called for an improper purpose and it was
uncertain/ambiguous
o At first instance, the court held that it was certain, unambiguous and for a proper
purpose.
Convening general meeting by court order
• s 249G à A meeting may be convened by court order if it is impracticable to call the meeting
in any other way
• s 249G à Court can make the order on application of a director or any member who would
be entitled to vote at the meeting. Can be used if minimum number of members necessary
refuse to attend meeting
• Re El Sombrero Ltd [1958]
o One shareholder held 90% of the company and the other 2 held 5% each (they were
directors). Under the constitution, the quorum for a general meeting was 2 people.
No general meeting had ever been held.
o The majority shareholder requisitioned a meeting for the purposes of passing
resolutions for the removal of the directors. The directors deliberately did not attend,
since there were less than 2 people, the meeting was dissolved
o The majority shareholder applied for a court order under the equivalent of s 249G –
the court made the order
• Re Totex-Adon Pty Ltd (1980)
o Application for an order under s 249G to call a general meeting with all members
holding A class shares in the company
o The court held it was not necessary to call a meeting of only A class sahreholders –
the members not entitled to vote are also entitled to notice of the meeting and to
attend the meeting
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Notice of meetings
• s 249H(1) à General rule is that at least 21 days notice of a general meeting must be given,
constitution may specify a longer minimum period of notice
• Two exceptions – can call a general meeting on shorter notice if:
o 95% of the votes that may be cast at the meeting agree before hand or if all members
so agree s 249H(2)
§ The exceptions do not apply to public companies at which a resolution will be
moved to remove a director or, for all companies, to remove an auditor à s
249H(3), (4) – they need a fair chance to respond after being given notice
o S 249HA à at least 28 days’ notice must be given of a general meeting for an
Australian incorporated listed company regardless of anything in the company’s
constitution
• S 249J(1) à Notice to be given individually to each member entitled to vote at the meeting
and each director
• s 1322 à Accidental omission to give notice or defect in notice does not invalidate the
meeting, a court may make the decision void
• s 249L(1) à the notice of a general meeting must (at a minimum):
a) set out the place, date and time of the meeting and the technology to be used if the
meeting is to be held at more than one venue at the same time
b) state the general nature of the meeting’s business
c) if a special resolution is to be proposed at the meeting, state that intention and the
text of the resolution
d) inform members of their proxy appointment rights
Member’s rights to put resolutions and circulate statements
• Directors control the dissemination of information, and do not have to include information
sent to them by the shareholders– they have the advantage of propagandising the members
who will vote in resolutions à Campbell v Australian Mutual Provident Society (1908)
• S 249O à members’ proposed resolutions will be considered at the next general meeting held
2 months after the request is served on the company, and the company must give notice of
the resolution at the same time as it gives notice of the meeting or as soon as practicable
afterwards
• Ss 249O(5) à Resolution or statement does not have to be circulated if it is over 1,000 words
or defamatory
Conducting a meeting:
• s 249S à Can be held at 2 or more venues as long as there is technology to allow members a
reasonable opportunity to participate in the meeting
• Quorum for a meeting under general law: Two people have to turn up to the meeting à Sharp
v Dawes
• s 249T à (replaceable rule) the quorum for a general meeting is 2 members who must be
present throughout the meeting. If no quorum is present within 30 minutes of the meeting, it
can be postponed or dissolved
• s 249U à the directors may elect an individual to chair the meetings of members, this may
not necessarily be the chair of the board
• s 250S à the chair must allow a reasonable opportunity for the members to ask questions or
make comments about the management of the company
• s 250T à if the auditor is present, there must be a reasonable opportunity for the members
to ask questions of the auditor
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• it’s okay if you don’t remember all the sections, as long as you understand that the minimum
for a meeting is 2 people and if that doesn’t happen within 30 minutes, you can postpone and
try again
Voting at meetings
The functions of voting rights
• Arguments for the attachment of voting rights to ordinary shares:
o The reduction of agency costs through shareholder monitoring of management
o The utility of voting rights as a device to fill gaps in the necessarily incomplete
contracting between shareholders and management
Voting Rights and their exercise
• s 250E(1) à (replaceable) each shareholder in a company has one vote in each vote taken by
a show of hands, and by a poll one vote for each share they hold
• s 250E(3) à Chair of the meeting has a casting vote in addition to any vote as held by the
members (solves a deadlock)
• s 250J(1) à (replaceable) A resolution put to vote at a general meeting is decided on a show
of hands unless a poll is demanded
• s 250K à Constitution of a company may preclude a poll being called on two matters; the
resolution concerning the election of the chair or the adjournment of a meeting
• s 250L à a poll may be demanded by either 5 voting members, members with 5% of the votes
or by the chair, however a company’s constitution may lower the threshold
• s 250D
Proxy Voting
• A company may adopt in its constitution a mechanism for direct voting by lodging a voting
form – this is not specifically referred to in the Act or the ASX listing rules, but its adoption is
increasing
• Absentees can also vote by proxy if this is in the company’s constitution
• S 249X à (replaceable for proprietary companies, not public) allows a person to appoint a
proxy to vote one or more of their shares.
• Corporate shareholder may appoint an individual as a representative to exercise its powers at
company meetings or under resolutions that may be passed without meetings s 250D.
Disclosure obligations
The range of disclosure obligations
• S 249L(b) à requires that a notice of meeting state the general nature of business at a
meeting – at general law there is a bit more
• 2 common law obligations
o Duty to frame proper notices à In framing notice of shareholders meeting you can
only have the meeting if the notice of the meeting is properly notified to members in
the notice convening it. Surprises in a meeting can be held invalid Holmes v Life Funds
of Australia [1971].
§ If there are surprise notices, the resolution can be deemed invalid
o Equitable duty to inform and advise members à directors have to provide members
with information material to shareholder judgment à Bulfin v Bebarfield’s Ltd (1938)
§ This requires directors to fully and fairly inform and instruct the shareholders
upon what is proposed in the resolutions put before them, e.g. where
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directors intend to urge, recommend or advise members to exercise their
powers in general meeting in a particular way
§ Does not require directors to give every piece of information which might
conceivably affect their voting, only the information that would be obvious to
the average commercial reader
§ Information provided to members should be clear, able to be “read on the
run” à Alexander v Simpson (1889).
§ Fraser v NRMA Holdings Ltd (1995)
o NRMA (the Association) had 1.8 million members, of whom 1.3
million were also members of NRMA Insurance Limited (Insurance)
with whom they had current contracts of insurance. Both companies
were limited by guarantee
o The directors of both companies resolved to propose to members
that the group be restructured by demutualisation. NRMA Holdings
(Holdings) was incorporated as a company with the intention that all
members of the group would become shareholders of Holdings.
Holdings would then become the shareholder of the Association, and
Holdings and the Association would become the sole members of
Insurance
o Individual members of the Association and Insurance were asked to
vote on constitutional alterations which would extinguish individual
membership in those companies, in exchange for shares in Holdings,
which would then seek ASX listing
o A prospectus was sent to all members of the Association and
Insurance, which was essentially 2 documents in 1, proposing to
amend the constitutions of each company
o 2 members (both directors) of the Association claimed that members
of both companies were not fully informed of the resolutions to be
put before them in the AGM, and that the information was
misleading and deceptive in certain particulars
o The court held that the adequacy of the information provided by the
prospectus and supporting documents must be assessed in a
practical, realistic way having regard to the complexity of the
proposal. The court upheld that members were not fully informed,
but dismissed that the information was misleading
§ ENT v Sunraysia Television Ltd (2007)
o Sunraysia is a listed Australian company and its principal asset is its
wholly owned subsiaidary Swan TV, operating Channel 9 in Perth.
Sunraysia and PBL Ltd entered into an agreement for the sale of Swan
TV’s capital conditional upon approval by Sunraysia shareholders. In
effect, the transaction is a takeover
o The Sunraysia directors unanimously recommend shareholder
approval and they control 49.8% of voting power. ENT is a
shareholder in Sunraysia, holding 44.6%
o ENT sought to restrain the holing of the meeting to approve the sale,
claiming that the explanatory materials accompanying the notice of
meeting were inadequate
o The court held that the shareholders do not need to have all the
information required by the directors, e.g. the range of alternative
propositions available, as the shareholder’s task is limited to
approving or rejecting the proposal at hand. However, the court held
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that they are entitle to receive all information that is material to the
approval or rejection of the transaction, including commercial
information known by the directors
o The explanatory materials did not make clear the whole proposal, left
the reader in doubt as to how the amount to be distributed would be
calculated, and did not address the tax effect of the proposal on
members à thus the deficiencies would cause the shareholders to
vote under a serious misapprehension of the actual position, so the
court made orders for a corrective disclosure, in the absence of which
the meeting would not proceed
Expropriation
• Gambotto v WCP Ltd (1995) HCA:
o Expropriation of minority shares is only valid if it is included in the Company’s
constitution, or an amendment is introduced. The amendment is valid if such
expropriation is for a proper purpose and will not operate oppressively in relation to
minority shareholders.
o 4 Joint judges rejected the English test of expropriation of shares only when ‘it is for
the benefit of the company as a whole’, and inserted the above test. They said:
a) Proper purpose: such things as their continued minority shareholders
putting the business activities at risk, or the requirement of 100%
ownership for a regulatory regime were valid, whilst administrative and
taxation benefits were not.
b) Operating oppressively: Generally it would be fair if the shares were bought
at market value and it didn’t cheat the minority shareholders at all.
o The judges held that taxation benefits of $4 million were not a proper purpose, whilst
McHugh said it was
Statutory Derivative Action
• Allows an individual shareholder to bring an action on behalf of the company, where the
company is unwilling or unable to litigate istelf
• For the shareholder to bring action on behalf of the company, the wrong must have been
done to the company
• Shareholder cannot bring individual action for a wrong done to the company as it would result
in the shareholder bring paid as an individual and then a shareholder
• s 237(1) à Individual shareholders can apply for leave to commence proceedings on behalf
of a company
• S 237(2) The court must grant an application if it is satisfied: (holistic view)
a) Probable company won’t bring proceedings itself
b) Applicant acting in good faith (low threshold)
c) Best interests of the company
d) There is a serious question to be tried à Oates
e) Company has been given 14 days notice.
• Oates v Consolidated Capital Services (2008)
o Oates, Tyne & Hawkins formed a group of companies for the purpose of a business
venture. The parent company was incorporated in Ireland for tax benefits. All equity
was held in CCAust, incorporated in Australia, which owned CCEng. CCI was dissolved
as it did not propser and its holdings in CCAus were vested in the Irish state. Oatees,
as a former director of CCAust sought leave to bring derivative proceedings under s
237 against Tyne & Hawkins as continuing directors of CCAus and also CCEng for the
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unauthorised diversion of valuable opportunities belonging to CCAus and CCEng to
companies controlled by the 2 directors.
o A grant of leave under s 237 would allow Oates to assert for the benefit of CCAust a
cause of action belonging to CCAust itself. The court did not grant leave since Oates
sought remedies for CCEng, which was beyond his standing, and the proceedings
would not be “on behalf of” CCAus
o As to s 237(2)(d) – Oates argued that CCEng acted as an agent for CCAust as an
undisclosed principle. This was the question to be tried. The court held there was no
plausible evidence from which an inference of the existence of the agency could be
drawn. As such, he failed to provide any form of foundation for a finding that it was
CCAust, rather than CCEng which “owned” the commercial advantages said by him to
have been wrongfully diverted by Hawkins and Tyne to themselves or their associated
interests
o For leave to be granted, all the requirements in subs 2 must be satisfied. If any of
them is not satisfied, leave must be refused.
• S 241(1) à The court can make orders and give directions in relation to the proceedings,
including an order appointing an independent person to investigate and report to the court
on the:
o Financial affairs of the company
o Facts giving rise to the cause of action
o Costs incurred in the proceedings
• Swansson v Pratt (2002)
o Swansson was a director and shareholder of RAPP (first defendant) and the former
wife of Highland (second defendant). Swansson sought leave under s 237 to bring
proceedings to have Highland compensate RAPP for a payment made by Highland
from RAPP’s funds for his own benefit in breach on his duties as it’s director. Swansson
held 25% of the capital of RAPP and the balance was held by her mother and brother,
Pratt. Pratt was the only other director of RAPP. Swansson’s mother and Pratt
opposed commencing proceedings against Highland
o Court held that leave to bring derivative action must not be granted lightly. However,
due to the possibly serious consequences to the company if the application is allowed,
and the fact that the company will have to engage in litigation against its will, all facts
and circumstances relevant to s 237(2) will be considered
o Requirements of s 237(2)
§ The company will not probably take proceedings
§ The applicant is acting in good faith
§ The applicant is acting in the best interests of the company
§ There is a serious question to be tried
§ Company has been given 14 days’ notice
o In this case, the court was not satisfied that it was in the best interests of the company
for leave to be granted for Swansson to bring an action
Shareholders Personal Action
• Shareholders may not bring an action in their own interest in respect of a wrong done to their
company, even when it reduces the value of their shareholding
• Where the company suffers loss but has no remedy in respect to that loss, a shareholder who
has a personal right of action may sue in respect of loss suffered even though it merely
reflects the diminution in the value of their shareholding à Johnson v Gore Wood [2001]
• Statutory contract arising from the constitution
o S 140 à the constitution of a company when registered binds the company and each
member, the company and each director and company secretary, and each member
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and other members, to observe and perform the rules in the constitution as they
apply to themselves.
• Personal rights recognised by statute and constitution
• Rights given to affected parties to seek injunctions and damages re: Act
• Hickman v Kent 657.
Compulsory liquidation remedies
Quasi-Partnership analogy
• S 461E à permits the making of a winding up order where the director have acted in the
affairs of the company in their own interest rather than interests of members as a whole or
any matter whatsoever that appears unfair or unjust to other members.
Directors acting in their own interests
•
Statutory remedy for oppression
Modern grounds of relief
Range of orders
• If one of the grounds in s 232 is established the court can order
o Company be wound up
o Existing constitution be repealed or modified etc
RECAP
• Ability of directors, shareholders and court to call meetings, also need to call a meeting for a
proper purpose.
• Shareholders oppressing one another through Gambotto, then directors doing something that
oppressed shareholders.
• S 232 has a range of remedies available and must be to achieve justice
Week 12: Winding up of a company
• Court is extraordinary reluctant to wind up a solvent company – it is a drastic measure and
there would have to be a degree of great injustice
Insolvency
• The difference between insolvency bankrupt – a natural person becomes bankrupt when they
can’t pay their debts, while a company becomes insolvent. They are essentially the same
thing.
• What we know already:
o s 95A (2) à Company is insolvent when it can’t pay its debt as and when they fall due.
Endemic shortage of capital when can’t pay debt again and again.
o s 588G à Directors cannot trade while insolvent
• If you’re a director and you think the company is insolvent, what do you do? Can’t incur debt,
don’t just ‘down tools’, wisest thing to do is enter voluntary administration.
• 4 options:
• Voluntary administration
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•Liquidation – appointed by the people who are owed money and they have an official duty to
get all of the creditors paid. Likely to make claims against the directors if they can get money
from it.
•Receivership – appointed by a secured creditor, credit may be secured by mortgage or by way
of charge.
• Winding up – External administration for insolvent companies, the terminal mode
Voluntary administration
• Friendliest of the options, the company appoints someone to take care of the company.
Directors hand over the company to someone else and say you look after the company.
• Purpose: to try and get the company out of financial trouble; they get it solvent and hand back
to directors. The goal is to pay the creditors in full and keep the company afloat
• They don’t have a vested interest in suing you, but they will if they have to
• S 435A à the voluntary administration procedure seeks to maximise the chances of an
insolvent company, or as much as possible of its business, surviving, or if it cannot be saved,
to achieve a better return to the creditors and members than would result from an immediate
winding up of the company
• Usually initiated by directors when:
o In their opinion the company is insolvent or about to be insolvent
o An administrator should be appointed s 437C(2).
• s 437A à The administrator has control of the company, only creditors can director the
administrator.
• s 437C à Officers lose their power but not their office. As they lose their power, they can’t
trade insolvent and this eliminates any prospect of liability for insolvent trading under s 588G
• ss 448B and C à Administrator has to be a registered liquidator independent of the company.
• s 437A-D à Once administrator is appointed you cannot be liable for debts incurred when
insolvent
When administrator comes in
• The administrator is the first party to get paid
• As soon as practicable but no longer than the next business day administrator must notify
substantially secured parties of their appointment s 450A(3). A secured creditor, not a trivial
security.
• Within 13 days of this they may enforce their charge or mortgage and appoint a receiver S
441A
• When appointed they are appointed for all of the company’s property subject to the charge
and not just part of the company’s property s 441A(1)(b), all or nothing rule – you either
enforce your charge pver everything in the company, or you don’t
• Then the administrator becomes subject to the receivers powers s 442D.
• As soon as practicable administrator investigate company’s business, property and financial
position s 438A
• Within 5 days of appointment administrator convene a meeting of creditors to determine
whether to appoint a committee of creditors to consult with the administrator ss 436E-F.
Committee does not give directions, only advice.
• Creditors can change administrator and appoint someone of their choosing s 436E(4).
• S 439A – Within 21 days a second meeting is held to determine whether:
o The company execute a deed of company arrangement to be specified in the
resolution
o The administration should end and company returned to directors
o Company be wound up – ews 439C.
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o Court can intervene and terminate voluntary administration because provision of Pt
5.3A are being abused or the company is solvent s 447A(2).
o Administrator is personally liable for debts incurred in the administration but has a
right of indemnity out of company property for debts occurred in good faith, without
negligence and in the performance of functions as an administrator s 443D.
o Administrator does not have the power a liquidator does to pursue remedies against
directors.
Deed of company arrangement
• Sometimes referred to as moratorium deeds or compromise deeds
• The idea is to work out how debts will be paid
• It is ok if these deeds do not treat everyone equally, if however distribution is significantly
different than from an order of application of assets under a winding up it is likely to prompt
an application for its termination by the court s 445D.
• Employee creditors have a fairly good priority, can’t make them worse off in a deed of
company arrangement.
• If a company is wound up, everything becomes very procedural
• The deed is not entered into with everyone on agreement, it is done by vote, so someone is
likely to be significantly disadvantaged
• If directors resolve to accept the deed of company arrangement the administrator draws the
deed for execution for the company within 21 days of the resolution s 444(2)(b). Once
company becomes subject to the deed of company arrangement administration ends s
435(1)(b), (2)(a).
• Anyone who agreed to the deed is bound by it ss 44D and 444G and the court may order that
where there would be a material adverse effect on the achievement of the deeds purpose
those who voted against it are still bound s 444D (2)(3).
• The administrator is personally liable for debts while the company is in administration
• The administrator does not have the same powers to seek remedies as a liquidator – there is
a smaller chance for a director to get away with insolvent trading if they use an administrator
since they are not actively looking for a reason to sue
Receivership**
• A receiver is appointed by a secured creditor to recover the security
• Strictly has the power to receive property & income and not to take over the management
tasks that may be necessary for this purpose – they just ‘receive the asset’
• Unsecured debt – there is no security apart from the trust between parties that the loan will
be repaid
• Secured debt – take ownership of the goods and you agree to give it back, and the agreement
is secured by you giving the lender something of value which they can keep if you do not pay
back your loan. Includes a mortgage and charge
• A receiver has the power to strictly receive property and income and not to undertake the
management tasks such as asset disposal that may be necessary for this purpose. Manager
can do something with it, sell e.g.
• Where a receiver is appointed under powers contained in a private instrument, director’s
powers are displaced but only to the extent of inconsistency with the receiver’s powers.
Directors aren’t completely displaced.
• Receiver needs to be careful not to go past their actual authority.
• They can only act within the powers that the instrument granting the charge gives them,
otherwise they will be abusing their power
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Winding up the company
• In most instances, a compulsory winding up order Is make upon the grounds of the company’s
insolvency – s 459A
An application for winding up may be brought by a wide range of parties specified in s 249P
Liquidation
• The appointment Liquidator is appointed by the people who are owed money
• They have an official duty to try get all the creditors paid, but the commercial reality is that
the creditor which appoints the liquidator is usually the largest creditor or the largest nonsecured creditor. Realistically, if they want to keep getting work, the goal of the liquidator is
to pay back the creditor who appointed them
• They will assess how much money the company is worth at the time of entry into liquidation
and see if that will pay off the creditor/s
• They will look to try get money out of the directors by suing them
Of a liquidator and its consequences:
• Winding up is the company’s death, can be done through order of court or voluntarily through
company’s members or creditors
• Company has to be solvent to be wound up voluntarily by members s 491(1)
Most common form of liquidation:
• Compulsory winding up order made on grounds of company insolvency.
• Applications to the court usually rely on resumed insolvency arising from non-compliance
with a statutory demand.
• A statutory demand is one made in the prescribed form requiring payment of a debt minimum
$2000 that is presently due and payable to the company s 459E.
• Presumed to be insolvent if not paid within 21 days or without court having set aside the
demand s 459C (2).
• Directors powers and office are brought to an end by the making of a winding up order and
they may no longer make decisions concerning company assets or the conduct of its business
s 471A.
• After commencement of a winding up, any disposal of property made otherwise than by
liquidator or administrator is void unless Court orders otherwise s 468(1).
The order of application of company assets
• After liquidator has realised the assets of the company the funds are applied to discharging
the claims of creditors.
• Pari passu principle that all debts and claims in winding up rank equally, and if funds from
liquidation are insufficient to meet in full then funds paid proportionately s 555.
• Funds available for distribution are determined after enforcement of their securities. If the
secured property is not sufficient to pay the debt, they have priority in the rest of the debt
distribution s 561.
Recovering property and compensation for the benefit of creditors
• Under 588G can claw back money from the director. Can also get it back if company enters
into a voidable transaction, this is where the company has specifically entered into a contract
to get rid of assets in anticipation of insolvency.
• Categories of voidable transactions s 588E
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o Insolvent transactions that give an unfair preference and uncommercial transactions
of the company, made within 6 months of the commencement of winding up and
where the preference or transaction contributes to the company’s insolvency ss
588FE.
o Unfair preference when an unsecured creditor receives a greater sum than if they had
had to wait with other unsecured creditors in
o Uncommercial transaction objectively measured s 588FB – enter into an agreement
with someone not at arms length
o If transaction is both of the above you can look 2 years back ss 588FE(3)
o Four year clawback period applies to insolvent transactions in two situations
§ First, in respect to insolvent transaction with a related entity to which the
company is party.
§ Second, an unreasonable director director related transaction of the
company s 588FE(6A). Reasonableness measured objectively regarding
benefits and detriments of parties to transaction
o Ten year claw back in respect to an insolvent transaction purpose of defeating,
delaying or interfering of the creditors in a winding up s 588 FE(5).
o Unfair loan is voidable whenever it is made s 588FE(5). It is unfair if the interest rate
or loan charges have become extortionate by reference to specified considerations s
588FD.
o If someone deals with the company and think everything is fair and nothing to ring
alarm bells, they won’t have their transaction brought back s 588FG(1) à same as
bone fide purchase for value (equity’s darling)
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