Corporations law 9780409338799, 0409338796

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LexisNexis Case Summaries

Corporations Law An1I Hargovan Concise summary of the key teaching cases in corporations law in Australia LexisNexis Case Summaries - Corpo;(l)tions Law provides a concise summary of the key cases in Australian corporations law. The design of this popular book highlights catch words, the facts, issue and decision in each case so that the principles can be readily understood and memorised . This structure reflects modern case analysis.

The cases have been selected to align with current teaching in corporations law in all Australian jurisdictions. An excellent study and revision resource for students, this book is a great quick reference for anyone wanting to understand the case law in this area .

Related LexisNexis Titles • Anderson. D1ckfos. Nehme. Hyland & Dahdal. Corporations Law, 4th ed, 2013 • Fitzpatrick, Symes, Veljanovsk1 & Parker Busmess and Corporations Law, 2nd ed, 2013 • Harris, Lex1sNex1s Ouest10ns and Answers ISBN 978-0-409-33878-2 Corporations Law. 4th ed. 2013 • Hams. LexisNexis Study Guide Corporations Law, 3rd ed. 2014 [email protected] www.lexisnexis.com.au

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Contents Case Number

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8 9 10 11 12 13 14

National Library of Australia Cataloguing-in-Publication entry Author: Title: Edition: ISBN: Series: Notes: Subjects: Dewey Number:

Hargovan, Anil. Corporations law. I st edition. 9780409338782 (pbk). 9780409338799 (ebk). LexisNexis Case Summaries. Includes index. Corporations law -Australia - Cases. 346.066

© 2015 Reed International Books Australia Pty Limited trading as LexisNexis. This book is copyright. Except as permitted under the Copyright. Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. N~1t?er may information be stored electronically in any form whatsoever without such perm1ss1on. i; ...1 Inquiries should be addressed to the publishers. Typeset in Goudy and Helvetica. Printed in Australia. Visit LexisNexis Butterworths at www.lexisnexis.com.

15 16 17 18 19 20 21 22 23 24 25

Case Name ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron ASIC v Axis International Management Pty Ltd (No 5) Re ASIC v Franklin (Liquidator); Walton Constructions Pty Ltd ASIC v Healey ASIC v Hellicar ASIC v Macdonald (No 11) ASIC v Maxwell ASIC v Plymin ASIC v Rich ASIC v Rich ,;ASIC v Somerville ASIC v Vizard Aussie Vic Plctht Hire Pty Ltd v Esanda Finance Corp Ltd Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame Bailey v NSW Medical Defence Union Ltd Bank of New Zealand v Fiberi Pty Ltd • Brunninghausen v Glavanics Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd Cadence Asset Management Pty Ltd v Concept Sports Ltd Campbell v Backoffice Investments Pty Ltd Chahwan v Euphoric Pty Ltd t/as Clay & Michel Commissioner of Taxation v BHP Billiton Finance Ltd Cook v Deeks Daniels v Anderson Re Darby; EX Pane Brougham

1

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2 3 4 6 7 11 11 12 13 15 16 16 17 18 19 20 20 21 22 23 24 25 26 28

LexisNexis Case Summaries

Case Number 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54

Contents

Case Name

Case Number

David Grant & Co Pty Ltd v Westpac Banking Corp Deputy Commissioner of Taxation v Clark Re Duomatic Ltd Ebrahimi v Westbourne Galleries Ltd Eley v Positive Government Security Life Assurance Co Ltd Erlanger v New Sombrero Phosphate Co Forrest v ASIC Freeman and Lockyer (a Firm) v Buckhurst Park Properties (Mangat) Ltd Furs Ltd v Tomkies Gambotto v WCP Ltd Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain Gilford Motor Co Ltd v Horne Gluckstein v Barnes Green v Bestobell Industries Pty Ltd Grimaldi v Chameleon Mining NI (No 2) Hall v Poolman Hamilton v Whitehead Harlowe's Nominee Pty Ltd v Woodside (Lake Entrance) Oil Co Hickman v Kent or Romney Marsh Sheep Breeders' Associaton HIH Insurance Ltd and HIH Casualty and General Insurance Ltd, Re; ASIC v ADLER Holyoake Industries (VIC) Pty Ltd v V-Flow Pty Ltd Hodgson v Amcor Ltd; Amcor v Barnes Howard Smith Ltd v Ampol Petroleum Ltd Industrial Equity Ltd v Blackburn Kinsela v Russell Kinsela Pty Ltd (in liq) Lee v Lee's Air Farming Ltd Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd Macaura v Northern Assurance Co Ltd Re Mclellan; Stake Man Pty Ltd v Carroll iv

29 30 30 31 32 32 33 34 35 36 38 39 39 40 40 42 42 43 44

55 56 57 58 59 60 61 62 63 64 65

66 67 68 69 70 71 72 73

44 74 46 47 48 49 50 50 51 52 52

75 76 77 78 79 80

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Case Name Meridian Global Funcfs'1v1anagement Asia Ltd v Securities Commission 53 Northside Developments Pty Ltd v Registrar-General 54 Panorama Developments (Guildford) 55 v Fidelis Furnishing Fabrics Ltd 55 Parke v Daily News Ltd 56 Peso Silver Mines Ltd (N.P.L) v Cropp,i;,_ 57 Peters' American Delicacy Co Ltd v Heath 58 Regal (Hastings) Ltd v Gulliver 58 Royal British Bank v Turquand 59 Salomon v 'Salomon & Co Ltd 60 Shafran v ASIC Smith Stone & Knight Ltd v Lord Mayor, Aldermen and Citizens of The City 61 of Birmingham 62 Spies v R Streeter v Western Areas Exploration 64 Pty Ltd (No 2) 65 Swannson v RA Pratt Properties Pty Ltd 66 Statewide Tobacco Services v Morley 67 Tesco Supermarkets Ltd v Nattrass Tivoli Freeholds Ltd, Herald & Weekly Times Ltd, 67 In The Matter of Tivoli v Freeholds Ltd 68 Tracy v Mandalay Pty Ltd Transvaal Lands Co v New Belgium (Transvaal) 69 Lands & Development Co Vasudevan & Ors v Becon Constructions 70 (Australia) Pty Ltd & Anor 71 Vines v ASIC 72 Walker v Wimborne 73 Wayde v NSW Rugby League Ltd Westpac Banking Corporation v The Bell Group 74 (in liq) (No 3) 77 Whitehouse v Carlton Hotel Pty Ltd 78 Re Yenidje Tobacco Co Ltd

v

Corporations Law [1]

ACN 007 528 207 PTY LTD (in liq) v BIRD CAMERON (2005) 91 SASR 570 South Australian Supreme Court

Corporate groups - Agency relationship

..

~

A professional negligence claim was made against two firms of accountants (Bird Cameron (Reg) and Bird Cameron Partners) by one of their former clients (ACN 007 528 207 Pty Ltd (in liq)) in relation to advice provided by the firm through a limited liability company controlled by the partners (BPM). The former client claimed that they had relied on incorrect advice and suffered substantial financial losses. BPM had very little assets. The client sought to establish that an agency relationship existed between BPM and the partnership so that the partners could be liable as principals. FACTS

ISSUE

Wa~ there an agency relationship between BPM and the

partnership? DECISION The court held there was no agency relationship. Basenko J held that BPM operated its own independent business despite the control exercised by the partners. His Honour was influenced by the fact that the profits made by BPM were not owned by the partners of the firm. S ignificantly, the profits, instead, were received and owned by BPM and distributed to the partners as franked dividends. Relying on this key fact, his Honour distinguished this c se from Smith Stone & Knight Ltd v Lord Mayor, Aldermen and Citizens of the City of Birmingham (193 9) 4 ALL ER 116 (65) where the profits in that case were transferred directly to the parent company.

Besenko J was critical of the six-point test formulated in Smith, Stone & Knight Ltd v Lord Mayor, Aldermen and Citizens of the City of Birmingham to establish an agency Telationship. His Honour accepted the first criteria, dealing with the treatment of profits as being relevant, but queried the relevance of the remaining criteria on the basis that they all related to control. It was held that control itself cannot be a decisive indicator of agency.

Corporations Law

LexisNexis Case Summaries

[2]

ASIC v AXIS INTERNATIONAL MANAGEMENT PTY LTD (No 5) (2011) 81ACSR631; [2011] FCA 60 Federal Court of Australia

Corporate fundraising -

Prospectus liability

FACTS Section 727(1) of the Corporations Act 2001 (Cth) ('the Act') prohibits the making, in certain circumstances, of an offer of securities or the distribution of an application form for an offer of securities that needs disclosure to investors under Pt 6D.2 unless a disclosure document for the offer has been lodged with ASIC and none of the statutory exemptions (ss 708, 708A) apply. The securities, in this case, comprised shares in Firepower Holdings Group Ltd (Firepower BVI).The case arose from the company's failure to issue a prospectus when raising funds via related entities from the public. None of the statutory exemptions for a disclosure document under Ch 6D of the Act applied to the company. ASIC alleged that the company sold shares to the Australian public in breach of the anti-avoidance provisions ins 707(3 ). That section applies to the resale of securities and prohibits offers for the sale of securities by an intermediary within one year of their issue unless a prospectus is lodged with ASIC. Mr Johnston was the controlling mind not only of the other related entities but also Firepower BVI (as director and executive chairman), the ultimate beneficiary of the funds raised by the sale of its shares. ISSUE Did the companies and its directors breach the disclosure provisions under Ch 6D of the Act during corporate fundraising? DECISION The court found the company and its directors to be in breach of s 727 of the Act due to the failure to lodge a prospectus with ASIC. The court made declaration orders and granted publicity orders to bring this case to the attention of the members of the general public, some of whom who may have been unaware of this case and may have had a cause of action. In civil penalty proceedings in ASIC v Axis International Management Pty Ltd (No 6) (2011) 84 ACSR 703; [2011] FCA 811, Ward (a director of a related entity) was disqualified from management for a period of six years. Johnson was disqualified from managing a corporation for 20 years. The court held that the evidence revealed a reckless disregard by

2

Mr Johnston for legal requirements concerning corporate fund raising and corporate governance generally. Thi\ court explained: [the evidence] reflect the most serious departure by Mr Johnston from standards of conduct and statutory compliance required of a director of a public company. It is the kind of conduct which diminishes investor and public confidence in the commercial markets ... The irrecoverable losses to shareholders and creditors have been very substantial ... Mr Johnston should be excluded for a very long period of time from having access to or control over shareholders investments and the interests of creditors within a corporate structure.

....

[3]

Re ASIC v FRANKLIN (LIQUIDATOR); WALTON CONSTRUCTIONS PTY LTD [2014] FCACA 85 Full Court Federal Court

Insolvency -

Liquidators independence; apparent bias

FACTS Liquidators were appointed to two construction companies, following thj.ir earlier appointment as administrators of the companies. Pre-administration, the companies entered into a series of transactions with companies owned or associated with the Mawson Group (MG), a business advisory and restructuring company. ASIC considered that these prior transactions required investigation by the liquidators as they may have been phoenix transactions. MG referred the construction companies' sole director to LDD, the liquidators' firm, for the purposes of appointing voluntary administrators. MG regularly referred work to LDD which derived a significant amount of fee income from MG. Relying upon s 503 of the Corporations Act 2001 (Cth), ASIC applied to the Federal Court to have the liquidators removed and replaced on the grounds of: • a reasonable apprehension they lacked independence and impartiality; and • their fai lure to disclose to creditors the previous relationship between the construction companies and MG in their declaration of independence and relevant relationships (DIRRI requirements under ss 436DA and 60 of the Corporations Act). At first instance, Justice Davis of the Federal Court rejected the application. ASIC appealed the court's decision.

3

LexisNexis Case Summaries

Corporations Law

ISSUE Was there a real apprehension of bias warranting the removal of the liquidator? Did the liquidator make proper disclosure of their independence and relevant relationships?

ISSUE Did the board, CFO and MD (the defendants) breach their duty of care and diligence and, if so, w&"they entitled to rely on others?

DECISION The Full Federal Court unanimously upheld part of the appeal. It agreed with the primary judge that the liquidators had complied with their DIRR! requirements under s 60 of the Corporations Act but found that there was a real apprehens ion of bias warranting the removal of the liquidators. The court held that the primary judge erred in principle by relying on the word 'would' instead of 'might' when testing for bias. The question was held to be one of possibility of bias, not probability. The Appellate Court held that a fair-minded observer would not regard the remuneration received by LDD from MG's referral as modest. Such an observer might apprehend that LDD may not wish to put their continued receipt of income of significant amounts in jeopardy. Thus, ASIC had established that such an observer might consider that LDD had an interest which conflicted with their duties. The court ordered the removal of the liquidators.

[4]

ASIC v HEALEY

(2011) 83 ACSR 484 Federal Court of Australia

Directors -

Duties of care and diligence

FACTS The board of directors of the Centro companies approved the consolidated financial statements and declared, under s 295(4) the Corporations Act 2001 (Cth) ('the Act'), that the financial statements complied with the Act and Australian Accounting Standards. It was later discovered that the financial statements misclassified $1.5 billion of borrowings as non-current when it should have been classified as current liabilities (due within 12 months) under the accounting standards. The directors had knowledge of guarantees of short-term liab ilities, but the financial statement fai led to disclose this material information. It took Centro several months to correct these errors.

DECISION The defendants failed to take all reasonable steps required of them and performed their duties without the requisite degree of care and diligence the law required of them. The court said: . .. the objective duty of competence requires that the directors have the ability to read and understand the fin ancial statements, including the understanding that fin ancial statements classify assets and liabi lities as current and non-current, and what those concepts mean.

On the issue of delegation, the court said:

....

. . . s 295( 4) .. . imposes ultimate responsibility for those matters [directors declaration) upon the directors in a way that they cannot delegate ... it is apparent [read together with the director's obligation under s 344 to take all reasonable steps to secure compliance with financial reporting) that the [Act) imposes overall responsibility for the financial report and the directors' report upon the directors ...

In finding liability for breach of duty and care, the court explained: . .. each director armed with information available to him was expected to focus ct matters brought before him and to seriously consider such matters ... this task demands critical and detailed attention, and not just 'going through the motioni ' or sole reliance on others, no matter how competent or trustworthy they may appear to be. Directors cannot substitute reliance upon the advice of management fo r their own attention and examination of an important matter that falls specifically within the Board's responsibilities as with the reporting obligations. The Act places upon the Board and each director the specific task of approving the financi al statements. Consequently, each member of the board .. . could not delegate or 'abdicate' responsibility to others.

The court accepted that, to a degree, directors can rely on others and the processes they put into place to assist them. However, the court held that this is not exclusively the situation in the case of financial accounts for reasons given above

ASIC took action against the board of directors of Centro, its Chief Financial Officer (CFO) and its Managing Director (MD) under s 180(1) of the Act, alleging breach of duty of care and diligence. The defendants argued that they were entitled to rely upon the external auditors and the knowledge and expertise of Centro's audit committee.

In the penalty decision in ASIC v Healey (No 2) (2011) 196 FCR 430, the court refused to grant judicial forgiveness under s 1317S to all the defendants despite finding that they all acted with honesty. The contraventions were considered to be serious. The CFO was banned from management for two years; the MD received a pecuniary penalty of $30,000 but no penalties were imposed on the non-executive directors. The court considered that a declaration of contravention of law, and the shame resulting from the widespread publicity of the case, was an adequate sanction in the specific circumstances of this case.

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5

Corporations Law

LexisNexis Case Summaries

[5]

ASIC v HELLICAR [2012] HCA 17 High Court of Australia

Directors' duties of care and diligence ASIC as model litigant

Meetings, minutes -

FACTS In 2007, ASIC brought civil penalty decisions in the Supreme Court of New South Wales against the seven directors and three officers of James Hardies Industries Ltd (JHIL) alleging they breached their statutory duty of care and diligence under s 180(1) of the Corporations Act 2001 (Cth) by approving at a board meeting a defective draft ASX announcement that was misleading. The primary judge (Gzell J) found that the board had approved the draft announcement in spite of the board's 'chorus of denial of recollection', made declarations of contraventions, imposed penalties and made disqualification orders: ASIC v Macdonal.d [No 12] (2009) 259 ALR 116. The New South Wales Court of Appeal allowed the appeal, holding that ASIC did not prove that the board approved the draft announcement: Morley v ASIC (2010) 81 ACSR 285. Further, the Court of Appeal held that ASIC owed a 'duty of fairness', similar to that owed by a Crown Prosecutor, which it had breached by not calling a key witness present at the board meeting of JHIL when the draft announcement was under board consideration. The witness had drafted the minutes of that key meeting. The court held that ASIC's failure to do so significantly undermined the cogency of its case on this key legal issue. ASIC appealed to the High Court of Australia. ISSUE (1) Did the Court of Appeal properly conclude that ASIC had fai led to prove that the directors voted in favour of the misleading ASX announcement? (2) Did ASIC breach its 'duty of fairness' by not calling a key witness present at the board meeting to give evidence?

meeting. In spite of some inaccuracies in the minutes, the High Court accepted that the minutes were 'a for~ near-contemporaneous record' and evidence of the matters recorded in them - the inaccuracies did not render the entire minutes inaccurate. (2) The High Court held that ASIC's failure to call the key witness caused no unfairness to the directors because there was no basis for inferring that the witness may have given evidence favourable to them. On the issue whether ASIC has a duty to act as a 'model litigant', the High Court held:

....

For the purposes of deciding these matters, it is convenient to assume, without deciding, that ASIC is subject to some form of duty, even if a duty of imperfect obligation, that can be described as a duty to conduct litigation fairly.

The High Court remitted the case to the Court of Appeal for cons ideration on claims to be excused from liability, penalty and disqualification. The civ il penalty decision in Gillfillan v ASIC (2012] NSWCA 370, the final outcome of the mammoth James Hardie litigation, is discussed under the decision in ASIC v Macdonal.d (No 11) (2009) 71 AfSR 368 [6]. It is useful to note that the CEO (Macdonald) and CFO (Morley) of JHIL did not appeal to t1'e High Court. The appeal by the company secretary and general counsel of JHIL (Shafron) was heard separately in Shafran v ASIC [2012] HCA 18 (64] .

[6]

ASIC v MACDONALD (No 11) (2009).71 ACSR 368 New South Wales Supreme Court

Directors and officers: duties of care and diligence; continuous disclosure obligations Company: continuous disclosure obligations

Not.e: It is re levant to note that this complex case in the James Hardie

DECISION (1) The seven non-executive directors of JHIL each breached their duties of care and diligence under s 180(1) by approving the company's release of a misleading announcement to the ASX. The High Court accepted that each director voted in favour of the draft announcement. It reached this finding by placing significant reliance on the minutes of the board meeting which indicated that the directors approved the draft announcement. The Chair had signed the minutes as a correct record and the directors subsequently approved of the minutes at the next

The discussion below is confined to a breach of s 180(1) of the Act arising from the approval of a defective ASX announcement by the directors and officers of James Hardie - a central finding in this case, as subsequently affirmed by the High Court decisions in ASIC v Hellicar (2012] HCA 17 [5] and in Shafran v ASIC (2012] HCA 18 (64] and relied upon in the civil penalties judgment in Gillfillan v ASIC (2012]

6

7

litigation considered multiple breaches of law based on multiple sections of the Corporations Act 2001 (Cth) ('the Act').

LexisNexis Case Summaries

Corporations Law

NSWCA 3 70; and to the breach of continuous disclosure obligations by James Hardie.

. . . it was part of the function of the directors in monitoring the management ... to settle the terms of J:bf draft ASX announcement to ensure that it did not [mislead] ...

FACTS James Hardie Industries Ltd (JHIL) restructured in 2001 as part of a strategy to quarantine itself from legal responsibility for its subsidiaries' asbestos liabilities and to obtain tax benefits by relocating to the Netherlands. The litigation arose from events which centred on the board and management's involvement in a complex divesture plan which involved the formation of a foundation trust known as the Medical Research and Compensation Fund (MRCF) which was separate to the JHIL group. A deed of covenant and indemnity (DOCI) entered into by JHIL and its two subsidiaries with asbestos claims ensured that the subsidiaries would not make any asbestos compensation claims against JHIL. MRCF, instead, was set up to receive and pay out asbestos claims from victims of this deadly disease.

The formation of the [MRCF] and the [restructure of the relevant entities] were potentially explosive steps. Market reaction to the announcement of them was critical. This was a matter within the purview of the board's responsibility ...

Contrary to claims in an ASX announcement by JHIL that the MRCF was 'fully funded' and would provide 'certainty' for legitimate claimants, in reality, the MRCF had a shortfall in excess of $1 billion to meet all claims. In civil penalty proceedings brought by ASIC in 2007, ASIC alleged that the seven non-executive directors and three officers of JHIL breached their statutory duty of care and diligence under s 180(1) of the Act by approving at a pivotal board meeting a defective draft ASX announcement that was misleading. Management had sent that document to the board for consideration and approval. ISSUE (1) Did the approval of the misleading draft ASX announcement by the ten defendants [seven non-executive directors, the CEO (Macdonald), the CFO (Morley) and the company secretary and general counsel (Shafron)] result in breach of their statutory duty of care and diligence? (2) Did the fai lure by JHIL to disclose information to the ASX in relation to the DOCI result in breaches of the company's continuous disclosure obligation under the ASX Listing Rule 3.1 and the statutory equ ivalent to s 674 of the Act? DECISION The primary judge (Gzell J) held all the defendants breached s 180(1) of the Act and were liable under the civil penalties regime. JHIL had failed to inform the market. (1) (a) Non-executive directors (Australia): The five non-executive directors, based in Australia, had failed to discharge their monitoring role and their conduct in approving the draft ASX announcement fell short of the standards required under s 180(1) for the following reasons: 8

The non-executive directors', who had relied upon management and experts, had their reliance defence rejected by the court for the following reasons: ·• ~ ... it is the emphatic nature of the draft ASX announcement [use of 'fully funded'] that is a fault. And this is not a matter for reliance upon management or outside experts ... [the] task of approving the draft ASX announcement involved no more than an understanding of the English language used in the documents. This decision was affirmed by the High Court decisions in ASIC v

Hellicar [2012] HCA 17. In the civil_penalty decision in Gillfillan v ASIC [2012] NSWCA 370, it was held tkat the actions of the five directors in Australia constituted 'a glaring fai lure to discharge their responsibilities on a matter of very great significance to the company and the wider community' and was 'a serious departure from the required standard of care and diligence' . Each director was disqualified from management for a period of two years and three months and were liable to pay a pecuniary penalty of $25 ,000. (b) Non-executive directors (USA): Turning attention to the two non-executives directors based in the USA, who participated in the board meeting by telephone and claimed that the draft ASX announcement was neither provided nor read to them, the court held that both directors breached s 180( 1) by voting in favour of the resolution. Applying the objective test under s 180(1 ), it was held their failure to request a copy of that announcement or to abstain from voting was inconsistent with the actions of 'a reasonable person in their shoes with their responsib ilities'.This decision was affirmed by the High Court decisions in ASIC v Hellicar [2012] HCA 17. In the civil penalty decision in Gillfillan v ASIC [2012] NSWCA 370, it was held that a disqualification period was warranted for both the US directors because they abdicated their responsibility at the board meeting and that: [It] is necessary to drive home the importance of a director paying attention to each significant item of business at a meeting and ensuring 9

Corporations Law

LexisNexis Case Summaries that he or she does not vote in favour of a motion on an important matter without having sufficient material to make an informed judgment. The USA based non-executive directors were disqualified from management for a period of 1 year and 11 months each and each were liable to pay a pecuniary penalty of $20,000. (c) CEO: The court held that a reasonable person in the position of the CEO of JHIL would not have voted in favour of a resolution to approve the draft ASX announcement when he knew or ought to have known it was misleading. The CEO was also found to have committed multiple contravention of s 180(1), based on other legal issues arising from the restructure. The CEO was disqualified from management for a period of 15 years and was liable to pay a pecuniary penalty of $350,000: ASIC v Macdonald [No 12] (2009) 259 ALR 116. The CEO did not appeal. (d) Company secretary and general counsel: The court held that the company secretary and general counsel (in-house lawyer) had breached s 180( 1) through fa ilure to warn the board of the emphatic terms concerning the adequacy of funding and to protect JHIL from legal risks flowing from the draft ASX announcement. An appeal to the High Court was unsuccessful: Shafran v ASIC [2012] HCA 18 [64] . Based on these facts, and on other contraventions under s 180(1 ), Shafran was disqualified from management for a period of 7 years and liable to pay a pecuniary penalty of $75,000: Gillfillan v ASIC [2012] NSWCA370. (e) CFO: The court held that a reasonable person in the position of the CFO would have explained to the board that the funding of the MRCF was based on a very limited analysis of the cash flow review undertaken by external consultants. The fa ilure by the CFO to say anything to the board to dispel the board's erroneous belief that the cash flow analyses were more significant than they were was held to be material omission by the CFO to do more and a breach of s 180(1). The appeal by the CFO to the New South Wales Court of Appeal on the issue of liability was unsuccessful but his disqualification period was reduced from five to two years and the pecuniary penalty from $35,000 to $20,000: Morley v ASIC (2010) 81 ACSR 285. The CFO did not appeal to the High Court. (2) The failure of]HIL to disclose the DOCI information to the ASX in a timely manner and to achieve an informed market for its securities was held to be a flagrant breach of ASX Listing Rule 3.1 and the 10

statutory equivalent to s 674 of the Act. The court rejected the view that a complex series of filings wi~ASIC discharges the statutory duty of disclosure under s 64 7. It cannot be said, on the basis of such a convoluted filing practice (and given the need to pay a search fee to access fi led information), that the information is generally available and readily observable to the public. The appeal by JHIL was unsuccessful: Morley v ASIC (2010) 81 ACSR 285.

[7] ASIC v MAXWELL (2006) 59 ACSR 373; [2006] NSWSC 10~2 New South Wales Supreme Court Corporate fundraising -

Sophisticated investor exemption

FACTS The case arose out of two failed property schemes which raised funds from the public. ASIC brought proceedings against Coakley, an accountant and financial planner, for breach of duties under the corporate fundraising provisions of the Corporations Act 2001 (Cth) ('the Act'). Coakley was retained by a group of companies involved in fundraising for purposes of claiming the s 708(10) sophisticated investor exemption (~xperienced investors) from the need to issue a fundraising disclosure document. ASIC alleged that Coakley had not met many of the investors, nor invest.gated their financial circumstances before certifying them as sophisticated investors. ISSUE Did Coakley's conduct breach the corporate fundraising prov isions under the Act? DECISION It could not be said that Coakley had reasonable grounds to issue written certification that tA.e investors were sophisticated investors. He fa iled to comply with his duty to inquire and acted in breach of the requirements of s 708(10). His conduct also contravened the misleading and deceptive conduct provisions under the Act (s 1041H) and under the Australian Securities and Investments Commission Act 2001 (Cth) (s 12DA). He was disqualified from managing corporations for two years.

[8] ASIC v PLYMIN (2003) 46 ACSR 126; [2003] VSC 123 Victorian Supreme Court Directors liability for insolvent trading -

Defence

FACTS The Water Wheel companies were placed into voluntary administration. ASIC commenced civil proceedings against the managing director (Plymin), chairman of the board (Harrison) and Elliott 11

LexisNexis Case Summaries

Corporations Law

(as a non-executive director) for orders that they had contravened the insolvent trading provisions. Harrison admitted liability, while Elliot and Plymin defended their actions. Elliot argued in defence that he was unable to prevent the insolvent trading because he was a non-executive d irector.

ISSUE Did the chairman of the board, in the particular circumstances of this case, have special responsibiliti.tiSa;above and beyond that of the other non-executive directors?

ISSUE Should a non-executive director be excused from liability on the basis that they owe lesser duties to the company? DECISION Section 588G of the Corporations Act 2001 (Cth) imposes a positive obligation on all directors to stop the company's insolvent trading, including non-executive directors. The court was of the view that Elliott had turned a blind eye to Water Wheel's financial difficulties and this was no defence to the claim against him. The court found that the directors took no steps to prevent Water Wheel from continuing to trade. Both directors were fined and banned from management.

[9] ASIC v RICH (2003) 44 ACSR 341 ; [2003] NSWSC 85 Supreme Court of New South Wales Chairman -

Duty of care and diligence

DECISION The court accepted ASIC's claims and held that the conduct of Greaves, in fai ling to remain informed about the company's financial position and to be more vigilant, was capable of giving rise to a breach of duty and diligence claim. The court rejected the contention by Greaves that, except with respect to 'ceremonial or procedural matters' (such as chairing of meetings), a company chairman has no greater responsibilities or duties than other directors. Austin]' e~ lained: ... the Court's role, in determining the liability of a defendant fo r his conduct as company chairman, is to articulate and apply a standard of care that reflects contemporary community expectations. It is now commonplace to observe that the standard of care expected of company directors, both by the common law (including equity) ... and under [the Corporations Act], has been raised over the last century or so ... if the duty to keep informed exists for all company directors, it must be a duty imposed on the company chairman, whose 'responsibilities' may be enhanced.

The court concluded that ASIC's claim disclosed a reasonable cause of action agaolnst Greaves under s 180(1) and dismissed the strike out application by Greaves.

FACTS ASIC sued three executive directors (Rich, Keeling and Silberman) and one of the four non-executive directors (Greaves) of One Tel Ltd, the fai led telecommunications company which collapsed into liquidation in 2001, for breach of statutory duties. This case arose from an application by the chairman (Greaves), who was an nonexecutive director, for an order striking out before trial ASIC's claim against him for an alleged breach of the duty of care and diligence under 180(1) of the Corporations Act 2001 (Cth).

Note: Greaves (together wit:h Keeling, the joint CEO of One Tel Ltd)

ASIC alleged that Greaves, a qualified chartered accountant with substantial commercial experience in listed public companies, was better qualified and had more experience that all of the other One Tel directors as regards board supervision of the financial management of the company. ASIC alleged that Greaves had special responsibilities beyond those of the other non-executive directors, by reason of his position as chairman of the board and the Finance and Audit Committee, and also by reason of his high qualifications and experience. Those responsibilities led to a higher standard of care and diligence, accord ing to ASIC, which Greaves fai led to meet.

Directors duties: duty of care and diligence rule

Greaves argued that his roles as chairman and committee member were essentially the same as the three other non-executive directors of One Tel (Packer, Murdoch and Adler) who were not sued by ASIC in this proceeding. 12

later settled the proceedings with ASIC and accepted liability for breach ofs 180(1).

[10] ASIC v RICH (2009) 75ACSR.1; [2009] NSWSC 1229 New South Wales Supreme Court Business judgment

FACTS In civil penalty proceedings, ASIC claimed that the executive directors One Tel Ltd, the fa iled telecommunications company which collapsed into liquidation in 2001, breached their the duty of care and diligence under s 180(1) of the Corporations Act 2001 (Cth) ('the Act'). ASIC alleged that Rich (joint CEO) and Silberman (Finance Director) of One Tel Ltd had fai led to disclose the true and poor financial position of the company to the board, and that they knew or should have known the true position. ISSUE If the directors did breach their duty of care and diligence, could they rely upon the business judgment rule defence ins 180(2) of the Act? 13

LexisNexis Case Summaries

Corporations Law

DECISION In a judgment in excess of 3,000 pages, the court held that ASIC had failed to prove its case. The court was critical of the broad way in which ASIC presented its case, in which ASIC presented extensive, but insufficient, evidence to support its allegations.

[11] ASIC v SOMERVILLE (2009) 77 NSWLR 110; 259Al-R 574; 74 ACSR 89; [2009] NSWSC 934 New South Wales Supreme Court

The court held that the directors could rely upon the defence. The judgment by Austin J offered a detailed analysis on the duty of care and diligence, concluding that the statutory duty of care and diligence is essentially the same as the duty of care and diligence of a director or officer at general law. Austin J also analysed and offered guidance on the operation of the business judgment rule ins 180(2) of the Act - his Honour considered the statutory language in that section to be 'profoundly ambiguous.' On the important question relating to the onus of proof, his Honour concluded that the Australian statute (unlike the US approach) casts the onus of proving the four criteria ins 180(2) on the directors. His Honour defined a 'business judgment', with reference to s 180(3 ), as involving a decision to take or not to take action in respect of matters relevant to the business operations of the corporation, including matters of planning, budgeting and forecasting. Failure by a director to undertake proper oversight of the company's affairs was held not to be business judgment. His Honour held that the following factors are relevant when considering whether a director's belief that they are properly informed is reasonable: • • • •

the importance of the business judgment to be made; the time available for obtaining information; the costs related to obtaining information; the state of the company's business at that time and the nature of competing demands on the board's attention; and • whether or not material information is reasonably available to the director.

Directors' duties -

Accessorial liability

FACTS ASIC alleged that the directors of companies engaged in illegal 'phoenix' activity (by stripping assets from an insolvent company and transferring them to a new company) and that their legal adviser, Mr Somerville, also contravened the Corporatl'tlns Act 2001 (Cth) ('the Act') by being involved in the directors' breaches of duties (ss 181, 182 and 183). Liabilities from the old company were not transferred to the new company. The evidence showed that the legal adviser, by his advice and conduct, was instrumental in facilitating the conduct of the phoenix activity. Thus, ASIC also alleged that legal adviser was involved in contraventions within the meaning of s 79 of the Act. As such, ASIC alleged he had also breached ss 181, 182 and 183. ISSUE Did ~he directors breach their statutory duties? Did their legal adviser also breach the Corporations Act by being involved, pursuant to s 79, in the directors' breaches? DECISION The directors ~reached s 182 by using their position to obtain an advantage for themselves and the new company, in preserving the assets, whilst inflicting harm on the old company by leaving the liabilities behind. The directors breached s 181 by failing to consider the interests of the old company when they transferred the assets. The directors also breached s 183 by using company information and acting in detriment to the creditors. The court was satisfied on the evidence that that there was a direct causal connection between the legal adviser's involvement and the breach of directors duties. The court found that the legal adviser aided and abetted the directors in their breaches and was therefore also liable for such misconduct under s 79 of the Act.

Austin J held: 'the qualifying words, "to the extent they reasonable believe to be appropriate" convey the idea that protection may be available even if the director was not aware of available information material to the decision, if he reasonably believed that he had taken appropriate steps on the decision-making decision to inform himself about the subject matter.'

In the civil penalty proceedings, the solicitor was disqualified from managing companies for a period of six years and the each director was disqualified for a period of two years: Australian Securities and Investment Commission (ASIC) v Somerville (No 2)[2009] NSWSC 998.

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15

LexisNexis Case Summaries

Corporations Law

[12] ASIC v VIZARD (2005) 145 FCR 57; [2005] FCA 1037 Federal Court of Australia

period for compliance, and if no extension is ordered the period ends seven days after the application under ~59G is finally determined.

Directors' duties -

No conflict rule

FACTS Vizard was a non-executive director of Telstra Ltd. Vizard had access to confidential Telstra information acquired from board meetings about proposed financial dealings between Telstra and other companies. Using his personal funds and armed with confidential information, Vizard traded in the shares of three listed public companies. The share purchases were made for his and his family's benefit by his accountant, on behalf of Vizard's family trust. Most of these share purchases ultimately resulted in losses. Vizard admitted liability for breach of directors' duties in a case brought against him by ASIC under s 183 of the Corporations Act 2001 (Cth) [prohibits improper use of information]. ISSUE How significant is white collar crime and the role of general deterrence when determining penalties for breach of directors' duties? DECISION The court held that general deterrence is of primary importance in cases of this kind. The court took the view that a message must be sent to the business community that for white collar offences 'the game is not worth the candle'. Vizard was ordered to pay a pecuniary penalty of $130,000 for each contravention (totalling $390,000) and was disqualified from management for a period of ten years - the court rejected ASIC's recommendation of five years as lenient. The director's conduct was held to be both dishonest and a gross breach of trust.

[13]

AUSSIE VIC PLANT HIRE PTY LTD v ESANDA FINANCE CORP LTD [2008] HCA 9 High Court of Australia

Pursuant to s 4590 Aussie applied to the Supreme Court of Victoria for an order setting aside the demand. A master of the Supreme Court dismissed Aussie's application but extended the time for compliance with the demand. After the time for compliance had passed, but before the appeal was heard, Aussie appl ied for a further extension of time to comply with the demand. A Supreme Court judge refused to give an exte~ion of time. The Victorian Court of Appeal, constituting five judges, upheld that decision: Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd (2007) 63 ACSR 300; [2007] VSCA 121. Aussie appealed to the High Court. ISSUE Does the Act permit the making of an order extending the time for compliance with a statutory demand where the period for compliance contemplated bys 459F(2)(a)(i) has expired? DECISION ]he majority of the High Court (Gleeson CJ, Hayne, Crennan and Kiefel]]) confirmed that courts do not have the power to extend time for compliance with a statutory demand after the period for compliance with the demana has expired. The majority held that the evident purpose of Pt 5.4 included speedy resolutions of applications to wind up insolvent companies.

[14] AUTOMATIC SELF-CLEANSING FILTER SYNDICATE CO -LTD v CUNNINGHAME [1906] 2 Ch 34 England and Wales Court of Appeal (Civil Division) Directors -

Management powers

FACTS A creditor, Esanda, served a statutory demand on a debtor, Aussie Vic Plant Hire (Aussie) alleging that Aussie owed it more than $400,000 under several hiring and chattel mortgage contracts. A statutory demand is a demand served on a company under s 459E of the Corporations Act 2001 (Cth) ('the Act') to pay a debt or debts within 21days. Section 459F(2) provides that if the company applies pursuant to s 459G for an order to set aside the demand, a court may extend the

FACTS At a general meeting of shareholders, a resolution was passed by the majority of shareholders for the company to sell its assets pursuant to a sale agreement reached with the purchaser. The directors refused to comply with the resolution. The directors were of the opinion that the proposed course of action was not in the best interests of the company. The directors supported their decision by relying upon the articles [constitution] which delegated to them all powers of management. A shareholder sought a court order that the directors were bound by the resolution.

16

17

Statutory demand -

Insolvency

LexisNexis Case Summaries

Corporations Law

ISSUE Can shareholders override management powers given to the board of directors?

the MDU to indemnify against the professional negligence claim. It was held that the articles of association o~the MDU created special contracts between the MDU and each of the members that could not be amended unilaterally. As a matter of construction, it was held that the parties could not have intended that the MDU's duty to indemnify could be unilaterally withdrawn years after the injury has arisen.

DECISION The directors were entitled to ignore the resolution. The court held that the articles were contractually bind ing and that it was agreed that the directors alone were to manage the company. The court observed that if the shareholders wished to change the mandate given to directors, they could do so by altering the articles under the process spelt out in its constitution. Note the following passage from John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 which reinforces the principle that if powers of management are vested in directors, they and they alone can exercise the powers: The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.

[15]

BAILEV v NSW MEDICAL DEFENCE UNION LTD (1995) 184 CLR 399 High Court of Australia

Alteration of the corporate constitution FACTS Dr Bailey was a member of the NSW Medica l Defence Union (MDU), a company which had an objects clause stating that the purpose of the MDU was to indemnify its members against professional negligence claims. The constitution of the MDU, however, was later amended to give the MDU discretion to refuse to provide assistance to its members at any time. The estate of Dr Bailey was defend ing a large malpractice claim, and it requested indemnity from the MDU . The malpractice claim arose before alteration of the MDU constitution. The MDU argued that the altered rules were automatically binding on its members and refused the member's request for assistance. The estate of Dr Bailey argued that the original rules were still binding on the MDU. ISSUE Can a separate 'special contract' be implied under the company's rules? DECISION The High Court found that the MDU and Dr Bailey were parties to a contract of insurance (a special contract) that required 18

[16]

BANK OF NEW ZEALAND v FIBERI PTY LTD (1993) 14 ACSR 736 ·•.., New South Wales Court of Appeal

Contractual liability -

Statutory assumptions

FACTS Fiberi Pty Ltd (F) had two directors, both of whom were equal shareholders. The only significant asset held by the company was a residential property. D, a director, h ad many other business interests and controlled other companies in which the other director of F held no financial or managerial interest. D and his son used the common seal of F to guarantee loans made by the Bank of .iqew Zealand (BNZ) for the benefit of their group of companies. The common seal was witnessed by D and his son in his capacity as company secretary of~ a position he did not hold. The other director ofF only became aware of these financial obligations undertaken by F when the companies controlled by D collapsed. The innocent director challenged the authenticity of the loan documents. BNZ sought to rely on the equivalent statutory assumptions under ss 128-129 of the Corporations Act 2001 (Cth) to enforce its security. Note: This case was decide~under the predecessor provisions in s 68A of the Companies Code. ISSUE Was the company bound to an unauthorised loan transaction, not for its benefit, in which a director had a self-interest? DECISION The company (F) was not bound to these financial obligations. BNZ was denied the benefit of the statutory assumptions based on the limitation found in the equivalent of s 128(4). It was held that BNZ should have known through its relationship with F that the D and his son lacked authority to execute the guarantees on behalf of F. BNZ, in these circumstances, should have made independent inquiries and not merely relied on oral assurances given by D. It was held that a reasonably competent and prudent bank official, in similar circumstances, would have taken steps to verify the information before acting on it. 19

Directors -

LexisNexis Case Summaries

Corporations Law

[17] BRUNNINGHAUSEN v GLAVANICS (1999) 46 NSWLR 538; [1999] NSWCA 199 New South Wales Court of Appeal

imposed various conditions on Buzzle for its continued support of the business prior to its collapse. Apple's-4\nance director kept an office insider Buzzle's headquarters and regularly attended meetings with directors and senior managers of Buzzle.

Duty to act in good faith in best interests of company

FACTS A family company had issued 6,000 shares, of which 5,000 was held by Band 1,000 by G . Both Band G were the only shareholders and directors, with B playing a major role in management following a dispute between the parties. Effectively, B was the governing director with G entirely dependent on B for information. During negotiations to resolve their dispute, G agreed to sell his shares to B. G was unaware that B was negotiating to sell the company to a third party for a higher price per share than B was offering G . B sold the company and profited from the higher price. G sued B for breach of fiduciary duty. ISSUE Does a director owe fiduciary duties to individual shareholders in a closely-held company? DECISION Directors can owe a fiduciary duty to individual shareholders in cases where a director occupies a position of special advantage over a shareholder, as in this case. The relationship between B (as director) and G (as shareholder) was fiduciary in nature because G had been effectively locked out of the company and had no way of verifying the true value of his shares. These elements of vulnerability and control in a private company gave rise to a fiduciary duty on B to provide full disclosure to G regarding the sale of the company.

[18]

BUZZLE OPERATIONS PTY LTD (in liq) v APPLE COMPUTER AUSTRALIA PTY LTD (2011) 277 ALR 189; [2011] NSWCA 109 New South Wales Court of Appeal

Directors -

Shadow director

ISSUE Was Apple and/or its finance director liable for insolvent trading as shadow directors of Buzzle? DECISION Neither Apple nor its finance director were shadow directors. The Court of Appeal upheld the decision at first instance that, notwithstanding Apple's influence over Buzzle's businesa, iuzzle was not accustomed to act in accordance with the directions or wishes of Apple. The court held that Apple was acting to protect its own independent commercial interests. The Appellate Court emphasised that the evidence must show something more than just being in a position of control. The power to control must be put into practice. This vital factor was missing.

[19]

CADENCE ASSET MANAGEMENT PTY LTD v CONCEPT SPORTS LTD (2005) 56 ACSR 309; [2005] FCAFC 265 ' Full Federal Court

Corporate fundraising -

r.rospectus liability

FACTS Concepts Sports Ltd (CSL) issued a prospectus offering 24 million shares at an issue price of $0.50 each. The prospectus addressed the strength of the company's business and its future prospects. It included forecasts on sales revenue and on earnings before interest and tax. In June 2004, the plaintiff C adence Asset Management (CAM) subscribed for 100,000 shares in CSL based on the contents of the prospectus. In September 2005, the plaintiffs sold their shares to a third party at a considerable loss - at an average price of 11.5 cents per share. The sale of the shares was prompted by the revised financial outlook issued by CSL, after the float, which predicted a loss.

FACTS Six retailers of Apple products merged to create a new entity called Buzzle which granted a charge [security interest] over its assets to Apple. Some months later Buzzle was in financial difficulties but continued to trade. Upon the collapse of Buzzle, the liquidator sought to hold Apple liable for insolvent trading on the basis that it was a shadow director of Buzzle.

Houldsworth v City of Glasgow Bank ( 1880) 5 App Cas 317 (Houldsworth)

Evidence showed that Apple had various representatives who participated in key management meetings of Buzzle. Apple had also

which requires a purchaser (CAM) to renounce their share purchase before claiming damages. CAM, however, had already sold their shares and were unable to fulfil the rule.

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21

CAM brought proceedings against CSL for damages, under ss 728729 of the Corporations Act 2001 (Cth), ('the Act') based on the misleading and deceptive statements in the prospectus. The trial judge rejected the claim by CAM on the basis of the rule in

LexisNexis Case Summaries

Corporations Law

CAM appealed to the Full Federal Court, arguing that the old rule in Houklsworth had no application for a damages claim under s 729 of the Act.

By majority, the NSW Court of Appeal allowed Campbell's appeal against the compulsory buy back order-4 rejected the oppression claim but ordered, instead, that Campbell pay damages of $850,000 to Weeks and Backoffice on the basis of misleading and deceptive conduct: Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359.

ISSUE Must an investor first rescind their share purchase before relying on the protection given to investors under the fundraising provisions in Ch 6D of the Act? DECISION The Full Federal Court overturned the original decision and held that the rule in Houklsworth does not apply to the Act. The court held that Ch 6D of the Act, dealing with corporate fundraising, is a complete code designed for investor protection. Thus, CAM was entitled to proceed with its recovery action against CSL, under ss 728-729, for losses suffered without the need to rescind its contract to acqu ire the shares.

Note: In a subsequent class action joined in by other aggrieved investors who also suffered loss through reliance on the prospectus, CAM entered into a confidential out-of-court settlement with such investors. Note also that statutory reform (s 24 7E) has reinforced the decision by the Full Federal Court.

[20]

CAMPBELL v BACKOFFICE INVESTMENTS PTY LTD (2009) 73 ACSR 1; [2009] HCA 25 High Court of Australia

Members -

Oppression

FACTS Campbell established a business which he later incorporated and undertook a cap ital restructure. Mr Weeks' company, Backoffice Investments (Backoffice), entered into a share sale agreement under which Backoffice purchased one of the two issued shares in the company from Campbell fo r $850,000. The relationship between Campbell and Weeks quickly broke down. A provisional liquidator was appointed who later sold the company's assets to another company controlled by Campbell for nearly $200,000. That money was used to pay the company's liabilities and the provisional liquidator's fee and expenses. The company was left an empty shell and its shares were worthless. Backoffice and Weeks brought proceedings against Campbell and the company alleging, among many other legal causes of action, oppression by Campbell pursuant to s 232 of the Corporations Act 2001 (Cth) ('the Act').

Campbell and the company appealed to the High Court. Weeks and Backoffice sought special leave to cross-appeal to reinstate the remedy granted by the trial judge. ISSUE

Did Campbell engage in oppressive conduct? . • •

DECISION The High Court held that wrongful exclusion from management may be a form of oppression. The court affirmed that there is no need to examine the motives of a person alleged to have engaged in oppressive conduct as there can be oppressive conduct even when a person thinks they are acting rightly. The court affirmed that s 232 should not be read narrowly through judicial constraint. The High Court, however, refused leave for the cross-appeal on the basis that a compu lsory order to repurchase the shares of an innocent party, i.n the circumstances of this case, was not an appropriate remedy. -' Given that the company ~as in provincial liquidation, and that it had no business or assets, it was held that the s 232 conduct was brought to an end on the appointment of the provisional liquidator. Consequently, it was held that the only order that should have been made under s 233 was a winding up order. The High Court remitted the case to the Court of Appeal to consider the other legal issues arising.

CHAHWAN v EUPHORIC PTY LTD t/as CLAY & MICHEL (2008) 65 ACSR 661; [2008] NSWCA 52 New South Wales Court of Appeal

[21]

Statutory derivative action -

Liquidation

The trial judge allowed the oppression claim and ordered Campbell, under s 233 of the Act, to buy back the company share for $853,000.

FACTS Chahwan, the appellant, was a director of Bycoon Pty Ltd. Chahwan applied to court for leave under s 237 of the Corporations Act 2001 (Cth) ('the Act') to commence proceedings in the name of, and on behalf of, Bycoon Pty Ltd (in liquidation) against Europhic Pty Ltd. Chahwan alleged that Europhic Pty Ltd held properties in which Bycoon had a beneficial entitlement and sought a court declaration to

22

23

LexisNexis Case Summaries

Corporations Law

that effect. The liquidator ofBycoon Pty Ltd declined to be involved in any proceedings against Europhic Pty Ltd.

Finance Ltd had no individual employees, with its workers drawn from other companies within the BHP .gf()Up. Finance Ltd paid for these services with its own funds. Its directors were appointed by the parent company, which also provided final-sign off on strategic matters such as overall borrowing and lending arrangements within the group. The board of the parent company made decisions as to the appropriate capital structure maintained by companies in the group.

ISSUE Is the statutory derivation action available to a company that is in liquidation (whether voluntary liquidation or court ordered liquidation)? A series of first instance decisions of the Supreme Court of New South Wales held that Pt 2F. lA of the Act (dealing with the statutory derivative action) was available to companies in liquidation. DECISION The Court of Appeal (Tobias, Beazley and Bell JA) unanimously held that the statutory derivative action is not available once a liquidator is appointed to a company. The court exp lained: ... the context as well as the extrinsic materials identifying the mischief wh ich Pt 2ElA was intended to remedy, namely, the restrictions relating to the exceptions to the rule in Foss v Harbottle, are indicative of an intention that the statutory derivative action was intended to apply only to a company as a going concern and not one under the control of a liquidator. This is because the rule in Foss v Harbottle and its exceptions did not app ly and were irrelevant to a company in liquidation.

Note: Courts in other Australian jurisdictions are divided on the issue whether Pt 2.F.lA is applicable to company in liquidation. Inherent jurisdiction of the court: Under the court's inherent jurisdiction, it appears that only creditors or members of a company in liquidation may, with the court's leave, be allowed to institute proceedings in the name of the company: Carpenter v Pioneer Park Pty Limited (2008) 71 NSWLR 577; [2008] NSWSC 551. Creditors do not have standing to apply under Pt 2.F.lA.

[22] COMMISSIONER OF TAXATION v BHP BILLITON FINANCE LTD [2010] FCAFC 25 Full Federal Court Corporate groups -

Agency relationship

A legal dispute arose when Finance Ltd wrote off large portions of its debt owned by BHP Billiton as bad and claimed tax deductions. The debt write-off occurred as a result of two failed comth~rcial projects undertaken by BHP Billiton. The Commissioner of Tax disallowed the tax deductions on the basis that Finance Ltd was not really operating a business of lending money but rather as a conduit for the parent company's investment activities. The trial judge rejected the claims of the Commissioner of Tax: BHP

Billiton Finance Ltd v Commissioner of Taxation [2009] FCA 276. The Commissioner of Tax appealed to the Full Court of the Federal Court. ISSUE Wa{ the subsidiary company (Finance Ltd) conducting its activities independently or as a mere conduit for its parent company (BHP Billiton)? • DECISION The Full Court unanimously held that the subsidiary had an independent separate legal existence and allowed the tax deduction. The court held that the facts did not support the Tax Commissioner's claim that the subsidiary was merely an appendage to, or agent of, the business of the corporate grouE. The undisputed facts led the court to conclude there was a legitimate and independent in-house finance business being conducted by the subs idiary. In light of these facts, the Full Court was critical of the Tax Commissioner's claims which were held to be 'perverse'.The High Court refused leave to appeal on the issue of the legal treatment of corporate groups, but allowed the Tax Commissioner leave to appeal on other grounds involving interpretation of tax law.

FACTS BHP Billiton Ltd, one of the largest resources in the world, established a wholly owned subsidiary company, BHP Billiton Finance Ltd (Finance Ltd) in 1995 for a legitimate business purpose - to meet the financing needs of all the members of this large corporate group. Finance Ltd borrowed a sign ificant amount of funds at commercial interest rates, totalling billions of dollars, from a wide range of external creditors from all around the world. Over a lengthy period, Finance Ltd earned billions in interest from its lending activities to other companies in the group, as an in-house finance company, and paid tax accordingly.

FACTS Three directors of the Toronto Construction Co (TCC), who held three quarters of the shares, had a disagreement with the fourth director (Cook). The directors then negotiated a major construction

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25

COOK v DEEKS [1916] 1 AC 554 Privy Council (UK)

[23]

Directors' duties -

No conflict rule

LexisNexis Case Summaries

Corporations Law

contract on behalf of TCC, but later diverted the contract to a new company they formed and excluded TCC and Cook from the benefit of the contract - Cook was neither shareholder nor director in the new company.

and the three non-executive directors) for contributory negligence, alleging that their neglect of oversight""< duty contributed to the loss suffered by AWA Ltd.

The directors of TCC held a general meeting. As majority shareholders, the three directors forced a resolution declaring that TCC had no interest in the contract. The resolution also authorised them to defend any legal action brought by Cook. ISSUE Did the directors breach their fiduciary duty? Was the resolution passed by the majority shareholders valid? DECISION The directors breached their fiduciary duty through diversion of corporate opportunity away from TCC and into their own business. The directors had to account for profits to TCC due to the ir conflict of interest by putting their own interests ahead of TCC. The court found that the new company held the contract as constructive trustee for TCC. The court also held that the directors' purported ratification of their breach of fiduciary duty to TCC was invalid. The resolution amounted to an oppression on the minority shareholder (Cook) because it was an expropriation of company property.

[24]

DANIELS v ANDERSON

(1995) 37 NSWLR 438 New South Wales Court of Appeal Directors' duty of care, skill and diligence -Auditors' duty of care

The trial judge (Rogers CJ) in AWA v Daniels (1992) 7 ACSR 463 found the auditors and the managing director of AWA Ltd liable in negligence. Both parties appealed. The non-executive directors of AWA Ltd were held not to have acted in breach of their duty of care, skill and diligence. ISSUE (1) Directors duties - Did all of the director Qf.,/\WA Ltd act in breach of their duty of care, skill and diligence? (2) Auditors duties Was the auditor liable in negligence to their client, AWA Ltd? DECISION The majority of the Court of Appeal (Clarke and Sheller JJA) upheld the primary judge's finding of negligence. ( 1) Directors duties: The managing director was held to have breached his duty of care, skill and diligence by failing to communicate the serious deficiencies in internal controls to the board. It was held that it was not unreasonable for the non-eiecutive directors to accept and rely upon the assurances given to them by the managing director and the auditor. The majority judgment, drctw ing upon legal principles from Australian insolvent trading case law and US case law, established the following principles governing the performance expectation of the modem director:

AWA Ltd sued the aud itors in contract for negligence, alleging that the losses could have been minimised if the auditors had communicated their findings to the board who could have then taken remedial action. The auditors counter-sued the directors of AWA Ltd (both executive

• directors should acquire at least a basic understanding of the company's business and should become fa miliar with the fundamentals of the business; • directors are under a continuing duty to keep informed about the company's activities, including its financial activities; • directorial management does not require a detailed inspection of dayto-day activities, but rather a general monitoring of corporate affairs and policies; • directors may not shut their eyes to corporate misconduct and then claim that because they did not see the misconduct, they did not have a duty to look; • a director cannot rely blindly on the judgment of others. • a director is not an ornament, but an essential component of corporate governance. Thus, a director cannot seek protection behind a paper shield bearing the motto 'dummy director'; • the concept of a sleeping or passive director is over and is inconsistent with modern law;

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27

FACTS K, an employee of AWA Ltd, engaged in foreign exchange (FX) currency trading without any effective supervision by the company. Initial success from this FX trading activity later turned to large losses which K concealed from the company. The aud it conducted by Daniels (on behalf of the auditing firm Deloittes) revealed major deficiencies in internal records and control in AWA Ltd and, in particular, over K's trading activities. This vital information was conveyed by the auditor to Hooke, the managing director of AWA Ltd. Both Hooke and the auditor, however, fa iled to convey this key information to the board of AWA Ltd who were unaware of the deficiencies in internal control. Meanwhile, AWA Ltd continued to lose substantial sums of money through the unsupervised FX transactions conducted by K.

LexisNexis Case Summaries

Corporations Law

• a director's duty of care is not merely subjective, limited by the director's knowledge and experience or ignorance or inaction;a director, whatever their background, has a duty greater than that of simply representing a particular field of expertise; andthe law of negligence can accommodate different degrees of duty owned by people with different skills but that does not mean a director can safely proceed on the basis that ignorance and a failure to inquire are a protection against liability for negligence.

Upon the collapse of WSQ, Darby and Gyde were convicted of making false statements in the prospectus. The~uidator sought to recover the secret profits from the true promoters. Darby objected on the basis that CUC made the profit, not him.

The Court of Appeal held that the performance expectation is the same for all directors, and unlike the trial judge, did not draw a distinction and entertain a lesser standard for non-executive directors. (2) Auditors duties: The auditors were negligent in failing in its duty to report to the board on the internal deficiencies that left AWA Ltd at risk of substantial losses. The Court of Appeal found that: ... in accordance with their own audit manual, the standard practices and procedures of the auditing profession and common prudence, [the auditors] were under a duty to report the acknowledged absence of proper records and the weakness in internal controls to the management and then, in the absence of appropr iate and timely action by management, to the board.

ISSUE Can a person, purporting to act in the name of a company, retain any of the profit made due to concealment? DECISION The corporate veil was ignored on the basis the company was used to conceal a fraudulent operation. The court looked into the company and found that CUC was a 'dummy' company, ~ed by Darby and Gyde to conceal their identities and to perpetuate fraud. They were the true promoters and had failed to make proper disclosure of their identity and profits. The court allowed the liquidator to prove in Darby's bankrupt estate and to recover the secret profit he made by hiding behind the company.

[26]

DAVID GRANT & CO PTY LTD v WESTPAC BANKING CORP {1995) 184 CLR 265; [1995] HCA 43 High Court of Australia

>

Statutory demand The auditor's liability in negligence was, however, reduced by the contributory negligence of the executive director of AWA Ltd. The Appellate Court apportioned damages, with one third borne by AWA Ltd and two thirds by the auditors.

[25]

Re DARBY; Ex parte BROUGHAM [1911] 1 KB 95 King's Bench Division (UK)

Lifting the corporate veil -

Fraud

lnsoltency

FACTS Westpac served a statutory demand on David Grant & Co (DGG) that DGG applied to the court to have set aside. The court application was outside the 21 days statutory period imposed under s 459G of the Corporations Act 2001 (Cth) {'the Act'), giving rise to the presumption of insolvency. DGG sought to extend the time limit for opposing the statutory demand under the remedial provision in s 1322(4). ISSUE Can a statutory demand be set aside if challenged outside the 21 day statutory period?

FACTS Darby and Gyde, both undischarged bankrupts, formed a company called City of London Investment Corporation (CUC) in which they were shareholders and the only directors. They were entitled to all profits. After they purchased a licence to work a quarry, they caused CUC to promote another company, Welsh Slate Quarries Ltd (WSQ), to which the public subscribed to debentures via a prospectus. CUC then sold the licence to WSQ at a grossly inflated price. Although the purchase price was paid to CUC, Darby and Gyde ultimately received the monies and shared the large profits from the sale. None of this material information was disclosed to the public in the prospectus.

DECISION The High Court held that the 21 day time limit is strictly enforceable and cannot be exceeded once it expired. Gummow J explained:

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29

The provisions of the new Pt 5.4 constitute a legislative scheme for quick resolution of the issue of solvency and the determination of whether the company should be wound up without the imposition of disputes about debts, unless they are raised promptly ... the new Pt 5 may appear to operate harshly. But that is a consequence of the legislative scheme which has been adopted to deal with perceived defects in the preexisting procedure in relation to notices of demand.

LexisNexis Case Summaries

Corporations Law

Note: An extension of time can only be sought, under s 459R of the Act,

was invalid due to the absence of a formal general meeting and the fa ilure to show that all shareholders cot:l.l\ented.

but only if such an application was made within 21 days of the service of the statutory demand.

[27]

DEPUTY COMMISSIONER OF TAXATION v CLARK (2003) 57 NSWLR 113 New South Wales Court of Appeal

Directors liability for insolvent trading -

Defence

FACTS A husband and wife were the two directors of a small family company, with Clark being the 'paper' director (in name only). She accepted directorship in mistaken belief to satisfy the statutory requirement of minimum of two directors (but the law at the relevant time allowed one person companies). Clark had no business experience. The company incurred debts whilst insolvent. The creditor sued Clark for breaching her statutory duty under s 588G of the Corporations Act 2001 (Cth) . C lark relied on statutory defence under s 588H(4), arguing she had 'some other good reason' to be excused from absence from management- namely, she relied on her husband to manage the business due to her love and faith in him as a director. ISSUE Can delegation by a director of the entire management of the company constitute 'some other good reason' for purposes of s 588H( 4) defence against insolvent trading liability? DECISION A total failure to participate, for whatever reason, should not be regarded as a 'good reason' under the statutory defence. The director's excuse was held to be in conflict with the basic expectation of all directors to ordinarily participate in management. The court concluded that the statutory defence operates on the assumption that every director will be involved in the management of the company. The director was held personally liable to creditors for insolvent trading.

[28]

Re DUOMATIC LTD [1969] 2 Ch 365 England and Wales High Court (Chancery Division)

ISSUE Can a decision be reached without a formal general meeting of the company? DECISION Based on the spec ific circumstances of this case, the court held there was no need for a formal resolution of a meeting of shareholders. The decision was valid as it was based on the unanimous consent of all the voting shareholders. The court was satisfied that all of the voting shareholders applied their minds to the dec4ii'ifi made. This was seen as being tantamount to a resolution of a general meeting of the company. Given that the preference shareholders had no right to vote, the lack of approval by them was considered to be irrelevant.

[29]

EBRAHIMI v WESTBOURNE GALLERIES LTD [1973] AC 360; [1972] 2 WLR 1289 House of Lords (now Supreme Court UK)

Winding up -

Just and equitable ground

FACTS E anti N were business partners with equal rights of management. Later, they incorporated their business and were the only shareholders and directors of the compan'l' They were equal shareholders. Thereafter, G, the son of N was appointed director. E and N transferred an equal amount of shares to G. The company's profits were distributed as directors' remuneration in lieu of dividends. After a dispute between E and N, N and G combined and used their majority voting power to pass a resolution to remove E as a director. Consequently, Eno longer sharectin the profits as director. The company's constitution conferred the power to remove a director. E petitioned the court to wind up the company on the just and equitable ground. ISSUE Was it just and equitable to wind up the company on the basis of a breakdown in mutual trust and confidence in a closely held company, in spite of the absence of illegal conduct ?

FACTS Shareholders, with voting shares in a company, had informally approved the payment of salary to a director. There was no evidence of agreement to do so by the holders of non-voting shares (preference shareholders). The liquidator of the company argued that the decision

DECISION It was held that the company be wound up. The court granted relief on the basis that equ ity allows the court to impose equitable considerations onto the management of the company particularly where the management involves a close personal relationship of mutual confidence. In this case, where a pre-existing partnership had been converted into a limited company, the exclusion of E from management breached equitable principles of good faith and allowed for the dissolution of the company. Based on the facts of this case, it was held to be inequitable to insist on enforcement of strict and legal rights.

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31

Shareholders -

Meetings

LexisNexis Case Summaries

[30]

ELEY v POSITIVE GOVERNMENT SECURITY LIFE ASSURANCE CO LTD (1875) 1 Ex D 20 England and Wales High Court (Chancery Division)

Statutory contract -

Company and outsiders

FACTS Eley was appointed as solicitor to the company for life under the company's articles of association. He later became a member of the company when he was awarded shares. Later, he was removed as the company's solicitor by the company. Eley viewed the contents of the articles as contractually binding on him in his capacity as a solicitor. Thus, Eley sued the company for breach of contract. ISSUE Can a member enforce the company's rule in a different capacity (in this case, in a non-member capacity as solicitor)? DECISION The court held that the articles conferred no rights upon Eley in any capacity other than that of a member and that these were unaffected, therefore his action failed. The court viewed Eley as suing in his capacity as an 'outsider', unrelated to his status as a member.

[31]

ERLANGER v NEW SOMBRERO PHOSPHATE CO (1878) 3 App Cas 1218 House of Lords UK (now Supreme Court UK)

Promoter -

Duty of disclosure

FACTS A syndicate, headed by Erlanger, acquired a lease for an island thought to be rich in minerals (phosphate deposits) for £55,000. The syndicated then formed a company (New Sombrero Phosphate Co) and appointed its directors which included puppets of Erlanger. The syndicate then sold the lease, via a nominee, for an inflated price of £110,000 to the company. The company directors approved the purchase without enquiry into the facts or the true value of the lease. Erlanger personally profited in this way to the detriment of the interests of the company and its shareholders. Members of the public who bought shares in the company were unaware of the material facts surrounding the purchase of the lease. Later, a new board of directors took legal action to have the sale rescinded.

Corporations Law decision as to whether the purchase ought or ought not to be made. Erlanger was held to have abused hi~ower for the advancement of his own interests and to have acted in breach of fiduciary duty. The court rescinded the contract. The parties were restored to their precontractual position.

FORREST v ASIC [2012) HCA 39 High Court of Australia

[32]

•••

Company misleading or deceptive conduct (s 1041 H) Continuous disclosure obligations (s 674) - Directors' duties of care and diligence FACTS Fortescue Metals Group Ltd (Fortescue) issued a series of market announcements via the ASX about agreements it made with Chinese state-owned entities to build, finance and transfer the railway, port and mine components ofFortescue's proposed infrastructure project in Western Australia. Each of the agreements was headed 'Framework Agreement'. It stated that it was to become binding upon approval by the parties' rlspective boards and that the parties were to jointly agree to develop further conditions of contract at a later date. The respective boards approved the agreements. Fortescue, and its CEO Andrew Forrest, made public statements that the company had entered into a 'binding contract' for these infrastructure projects. ASIC brought proceedings in the Federal Court against Fortescue alleging that the agreements were not binding and therefore the public announcements were misleading or deceptive under s 1041H of the Corporations Act 2001 (Cth) . ('the Act'). ASIC also alleged that Fortescue and Forrest had breach continuous disclosure requirements under s 674 by failing to correct the misleading information, and that Forrest breached his duty of care and diligence under s 180(1) in such circumstances. The trial judge dismissed ASIC's claims. The court held that the announcements were not misleading on the basis that they were statements of opinion that were reasonably and honestly held by the directors: ASIC v Fortescue Metal Group Ltd (No 5) (2009) 76 ACSR 506.

DECISION As a promoter, Erlanger owed fiduciary duties to the company - which includes the duty of care to make full disclosure to an independent board of directors to enable them to make an impartial

The Full Court of the Federal Court unanimously allowed ASIC's appeal. It held that ordinary and reasonable readers of the unequivocal announcements made by the company would not regard it as merely conveying an opinion on issues of law and, instead, would regard the agreements as legally enforceable in Australia. Furthermore, it was held that the company's fail ure to correct the misstatements resulted in

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33

ISSUE

Was the promoter's disclosure, as a fiduciary, adequate?

LexisNexis Case Summaries

Corporations Law

breach of s 674 and in the director's breach of s 180(1 ): ASIC v Fortescue

company's constitution allowed for the appointment of a managing director, but no one was appointed t~hat position. K acted as the managing director and, in the absence of express authority, contracted with a firm of architects to perform serv ices for the company. The firm sued the company for non-payment of fees. At trial, the company was held to be bound by the contract. The company appealed on the basis that K lacked authority to contract on the company's behalf.

Metal Group Lui (2011) 81ACSR563. Fortescue and Forrest appealed to the High Court. ISSUE (1) Did the company engage in misleading or deceptive conduct? (2) If so, did the director breach their statutory duty of care and diligence? DECISION The statements were neither misleading or deceptive, thus the company and the director had not failed to meet their obligations under the Act. The High Court rejected ASIC's claim that the term 'binding contract' implied that the agreement would be governed by the laws of Australia, noting that the contracts involved Chinese parties and were executed in China. The High Court (French CJ, Gummow, Hayne, Heydon and Kiefel J]) rejected the approach adopted by the Full Federal Court which sought to classify the market announcements as either statements of fact or opinion. Instead, for the plurality, the determinative issue was: 'what did the impugned statements convey to their intended audience when they sa id that the parties had made a "binding contract"?'. The plurality explained: The intended audience can be sufficiently identified as investors (both present and possible future investors) and, perhaps, a wider section of the commercial or business community. It is not necessary to identify the audience more precisely ... what would that audience make of the [announcement] ... would they, as the Full Court assumed, ask a lawyer's question and look ... to what would happen in a court if the parties to the agreement fell out at some future time? Or would they take what was said as a statement of what the parties ... understood that they had done and intended would happen in the future? The latter understanding is to be preferred.

In a separate judgment, Haydon J also allowed the appeal. The High Court reinstated the primary judge's decision.

[33]

FREEMAN AND LOCKYER (A FIRM) v BUCKHURST PARK PROPERTIES (MANGAL) LTD [1964] 2 QB 480 Court of Appeal (UK)

Contractual liability -

Ostensible/apparent authority

ISSUE Was the company bound to the contract on the basis of ostensible/apparent authority?

..

~

DECISION The company was bound to the contract on the basis of K's appearance as managing director. K was held out by the board to have authority and the outsider relied on that representation to contract with the company. The board was aware of, and had acqu iesced in, K acting as managing director in relation to the transaction. By such conduct, the board represented to an outsider that K had authority to enter into contracts of a kind which a managing director would in the normal course be authorised to do so on the company's behalf. Diplock LJ explained: An 'apparel)!' or 'ostensible' authority ... is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agerlt has authority to enter ... into a contract of a kind within the scope of the 'apparent' authority, so as to render the principal liable . .. that representation . .. operates as an estoppel, preventing the principal from asserting that he [or she] is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

•

FURS LTD v TOM KIES (1936) 54 CLR 583 High Court of Australia

[34]

Directors' duties -

No conflict rule

FACTS Tomkies, the managing director of a company, Furs, was authorised to negotiate a sale of part of the company's business. He obtained a secret commission for himself when he divulged confidential business information to a purchaser of the company's business. Upon discovery, Furs sought remedies for breach of fiduciary duties. ISSUE Did the director breach his fiduciary duty even though no loss may have been caused to the company?

FACTS K and H were equal shareholders in a property development company. They, together with two others, were the directors. The

DECISION An undisclosed profit which a director gets as a result of their fiduciary duties belongs in equity to the company. The court held

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35

LexisNexis Case Summaries

Corporations Law

that it does not matter that the profit was of a kind which the company could not have ever itself have obtained, or that no loss is caused to the company by the gain of the director. Tomkies had to account to the company for the profit he made. The court noted that Tomkies could have kept the profit upon disclosure of all material facts to the shareholders and upon their approval.

DECISION The High Court held that the alterat ion was invalid as it was made for an improper purpose~ even though the alteration was motivated by substantial financial savings and costs which would advance the commercial interests of the company.

[35) GAMBOTTO vWCP LTD (1995) 182 CLR 432; 16 ACSR 1 High Court of Australia Members' alteration of constitution -

Minority rights

FACTS The case arose from the majority's attempt to acquire 100 per cent ownership in WCP Ltd. The majority of shareholders in Industrial Equity Ltd (IEL) held nearly 99.7 per cent of the shares in WCP Ltd. Gambotto, a minority shareholder, held nearly 0.1 per cent of the shares in WCP Ltd. The majority of shareholders in IEL sought to alter the company's constitution to enable any member who held more than 90 per cent of the shares to compulsorily acquire all the issues shares in WCP at a price of $1.80 per share. An independent expert had valued the shares at $1.36 per share. The evidence showed that IEL wished to obtain 100 per cent ownership of WCP in order to achieve significant tax savings (over $4 million annually) and administrative savings (nearly $3,000 annually) . Gambotto refused to sell his shares and challenged the alteration of the constitution which sought to expropriate his shares. The trial judge held that the purpose and effect of the alternation amounted to unjust oppression to minority shareholders who objected to the alteration: Gambotto v WCP Ltd (1992) 8 ACSR 141. On appeal, the NSW Court of Appeal overturned the decision on the basis that considerable benefits from the expropriation would accrue to the company, that the price payable for Gambotto's shares was fair and found no was reason for the court to intervene: WCP v Gambotto ( 1993) 30 NSWLR 385. Gambotto appealed to the High Court. ISSUE Was the alternation of the company's constitution made for a proper purpose?

36

The majority of the High Court (Mason CJ, Brennan, Deane and Dawson JJ) rejected the 'bona fide for the benefit of the court as a whole' test for alteration decided in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656. The latter test was considered by the High Court to be inappropriate when dealing with competing rights and interests of members. The High Court majority, instead, favou~e~ a two-stage test approach when determining whether alternations involving expropriation of share are valid - namely: ( 1) Was the power to airer exercised for a proper purpose and not oppressive to minority shareholders (proper purpose test)? (2) Was the expropriation fair and not oppressive (fairness test)? The fairness test has two aspects to it - that of procedural fairness (proper disclosure of all relevant information) and substantive fairness (in relation to the.price to be paid for the shares) ,#

Applying this legal test to the facts, the High Court majority held that the company had satisfier the fairness test but had fai led the proper purpose test. An expropriation of shares made to advance the interests of the company or to secure some commercial advantage was considered by the majority to be insufficient justification. The High Court majority defined proper purposes narrowly and explained: [expropriation is justified] where it is reasonably apprehended that the continued shareholding of cl;i.e minority is detrimental to the company, its undertaking or the conduct of its affairs ... and expropriation is a reasonable means of eliminating or mitigating that detriment.

The approach adopted by the High Court majority can, perhaps, be explained by its conception of shares as property. In discussing the nature of shares, the High Court viewed shares as more than a 'capitalised dividend stream' with 'proprietary rights' conferred on the investor.

Note: The stringent test in Gambotto decision has proved to be controversial. Since the Gambotto decision, and in partial response to that decision, parliament has amended Corporations Act 2001 (Cth) [Part 6A.2] to facilitate the compulsory acquisition of the shares.

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Corporations Law

LexisNexis Case Summaries

[37]

[36] GERARD CASSEGRAIN & CO PTY LTD (in liq) v CASSEGRAIN

[1933] Ch-Q\35 England and Wales Court of Appeal (Civil Division)

(2013) 97 ACSR 283; [2013] NSWCA 455 New South Wales Court of Appeal Directors duties -

Judicial forgiveness

FACTS Two directors of the appellant company arranged for a third party (F), who was also their wife/daughter, to loan a sum of money to the company in which receivers were appointed. As repayment for the loan, the two directors caused the appellant company to transfer shares it held in two other companies to F. The appellant company claimed that the transfer of shares were effected at undervalue. It alleged that both directors had breached their fiduciary and statutory duties to the company (ss 180, 181 and 182 of the Corporations Act 2001 (Cth)). The New South Wales Supreme Court held that both directors had breached their duties by: • transferring the shares at undervalue without an independent valuation and the consent of minority shareholders (breach of s 180); transferring the shares for an improper purpose of removing assets out of the reach of unsecured creditors (breach of s 181 ); and preferring their own interests to those of the company (breach of s 182 - due to the conflict of interest). Relying upon s 1318 for judicial relief, the directors pointed out the need for quick decision making in a pressured environment involving insolvency. This excuse was dismissed by the trial judge as irrelevant. lt was held that directors acting under pressure, by reason of financial or other circumstances, must still adhere to their fiduciary duties.

GILFORD MOTOR CO LTD v HORNE

Lifting the corporate veil -

Evasion of existing legal obligation

FACTS Home was the managing director of Gilford Motor Co (GMC). Home had signed a non-compete clause in his employment contract with GMC which prohibited him from soliciting its customers after leaving its employment. Shortly after his resignatit>~, he arranged for his wife to incorporate a company with his wife and friend as its sole shareholders and directors. The newly formed company, managed by Home, carried on business in competition with GMC. An injunction was sought by GMC to restrain Home from breaching his contractual agreement. ISSUE Could the court treat the newly formed company, a separate legal entity, and its controller (Home) as a single person? DECISION The court lifted the corporate veil. An injunction was granted agail}St both Home and the newly formed company on the basis the new company was being used to evade a legal obligation. The court was satisfied that the new company was formed as a device, or as a strategy, in order to mask \ he effective carrying on of a business by Home.

A cautionary note: The Supreme Court in the UK in Prest v Petrodel Resources Ltd [2013] UKSC 34, in an influential judgment, queried the existence of the concept of veil piercing and found that it was unnecessary to rely on veil piec~ng to reach the decision in the Gilford Motor case, or in any of the other decided cases on veil piercing to date.

The directors appealed.

[38]

GLUCKSTEIN v BARNES

[1900] AC 240 House of Lords UK (now Supreme Court UK)

ISSUE Did the breaches of directors' duties in relation to a transaction that involved conflict of interests, improper purpose and transfer of assets at significant undervalue warrant judicial forgiveness under the Corporations Act?

Promoter -

DECISION The Court of Appeal unanimously dismissed the appeal, on the basis that the directors failed to challenge the findings of breach of duties made by the trial judge. Although the court disagreed with the trail judge's assessment of the extent of the undervalue of the shares, it was held that no case was made out by the directors for the grant of relief.

FACTS Gluckstein, together with three others, bought a property for £140,000 and then resold the property for £180,000 to a company that they promoted for this purpose. The four persons in this syndicate were the only directors. The prospectus disclosed the profit of £40,000 to the public, but made no mention of a further £20,000 profit made by the syndicate from the accompanying purchase of a discounted mortgage

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39

Duty of disclosure

LexisNexis Case Summaries

Corporations Law

on the property. The newly formed company went into liquidation. The liquidator sought to recover the undisclosed profit from Gluckstein.

important transactions from which he received extensive private benefits. The board of Chameleon Mi~g allowed him to negotiate for, and to acquire, mining tenements for the company but did not confer authority on him to formally bind the company. G rimaldi attended board meetings by invitation. The evidence showed the board authorised him on occasion to perform functions expected of a director, such as fund raising and share placements under a prospectus. When transacting for Chameleon Mining for some major acquisitions, he appeared to stand on equal footi ng with directors in directing the affairs of the company. The evidence showed that often Grimaldi benefited m9~eJ.rom the some of the transactions he was involved in than Chameleon Mining.

ISSUE

What constitutes proper disclosure?

DECISION A partial or incomplete disclosure by a promoter as fiduciary was held to be inadequate. The company lacked an independent board of directors, thereby comprising whatever disclosure may have been made to the board. The promoters put into their own pocket the difference between the real and pretended price without full disclosure. The promoters were held to have practised an elaborate system of deception on the shareholders. Gluckstein, as promoter, was held to have breached his fiduciary duty and liable to account to the company for the secret profit.

[39]

GREEN v BESTOBELL INDUSTRIES PTY LTD (1982) 1 ACLC 1 West Australian Supreme Court

Directors' duties -

No conflict rule -

Corporate veil

FACTS Green, managing director of Bestobell, set up his own private company (Clara Pty Ltd) and caused it to submit a tender for a commercial construction project in direct competition with Bestobell. C lara was the successful tenderer and performed the construction contract. Upon discovery, Bestobell sued both Green and C lara for an account of profits on the basis of Green's breach of fiduciary duty. ISSUE Was the director who benefited from a confl ict of interest protected by the corporate ve il ? DECISION Green had breached his fiduciary duty to Bestobell by placing himself in a position where his duty to it conflicted with his own interests. The corporate ve il was lifted and Greed and C lara were treated as the same person on the basis that C lara knowingly assisted in Green's breach of fiduciary duties. Clara was ordered to account to Bestobell for the profits it derived, notwithstanding that Bestobell's tender ranked third in priority.

[40]

GRIMALDI v CHAMELEON MINING NL (No 2) (2012] FCAFC 6 Full Court of Federal Court

Grimaldi, together with some of the directors of Chameleon Mining, was sued by the company fo r breach of fiduciary duties and the equ ivalent duties (ss 181-1132) under the Corporations Act 2001 (Cth) ('the Act'). Grimaldi argued that he was not appointed as a director and that his real status was that of consultant. In determining the company's claim against Grimaldi, the court had to first work out the legal status of Grimaldi in relation to the company. ISSUE Was the 'consultant' or adv iser (Grimaldi) a de facto director of Chameleon ~ining within the meaning of s 9 of the Act? . DECISION Grimaldi was a de facto director of Chameleon Mining. Whether or not a person wih be a director will tum on the nature and extent of the functions to be performed. The evidence showed that he was doing the work of a director. The Full Court (Finn, Stone and Perram]]) explained: .. . Even though not authorised to be a director, Mr Grimaldi was either given, or had arrogated to himself with the acquiescence of at least the two executive directors ...• funct ions in the affairs of Chameleon which wou ld properly be expected to be performed by a director of that corporation ... given the extent and significance of those functions, he so acted in the position of a director as to warrant the imposition on him of the liabilities, statutory and fiduciary, of a director.

In an extensive discussion on the legal principles governing the definition of directors, the Full Court's observations included the fo llow ing salient points:

FACTS Grimaldi was not appointed as a director of Chameleon Mining but was involved with the company as 'consu ltant' in several

• there is no reason why the relationship of a person with a company may not evolve over time into that of de facto director; it also may be the case that the person only performs the role and functions that constitute him or her a director for a limited period of time; whether a person has acted in the position of a director is a question of substance and not simply how that person has been denominated in, or by, the company;

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Directors -

Definition

LexisNexis Case Summaries

Corporations Law

• a rigid distinction between a de facto and a shadow director cannot be maintained; a shadow director whose wishes or instructions need not relate to all facets of management of the company's business, similarly, the functions assumed by a de facto director likewise may be limited in scope; the fact that a company has an active director or directors apart from the alleged de facto director, or has a properly constituted and apparently 'functioning' board does not preclude a finding that the person in question was a director.

interests' under the predecessor to the Corporations Act 2001 (Cth). Only a public company was allowe~to issue such securities. He was charged as an accessory, with being knowingly concerned in the company's commission of the offences. It was argued that Whitehead had committed the criminal acts on behalf of the company, therefore he could not also be an accessory to his own acts.

[41] HALL v POOLMAN (2007) 65 ACSR 123 New South Wales Supreme Court

DECISION The High Court accepted that it was a logic;,a!;.consequence of the separate legal entity rule in Salomon v Salomon & Co Ltd [1 897] AC 22 [63] that it is poss ible for a company to be the principal offender (direct liability) and for the director to be liable as an accessory to a corporate crime. The court affirmed that an individual controller of a company can in their personal capacity aid and abet what the company has done.

Directors liability for insolvent trading -

Discretionary judicial relief

FACTS Both directors of the Reynolds group of wine companies were sued for insolvent trading after the companies continued to trade while they were severely insolvent. The company managed its creditors through delayed and non-payment of creditors, and had a large tax debt of over $17 million. The companies attempted to resolve the tax debt with the Australian Taxation Office (ATO) over a period of ten months. The companies were ultimately placed into liquidation. The liquidator sued one of the directors (the other became bankrupt), who sought relief under the judicial forgiveness provision in s 1317S of the Corporations Act 2001 (Cth) . ISSUE

Should a director be given relief from personal liability?

DECISION Partial relief from liability was granted to the director. In seeking to save the company from liquidation by negotiating with the ATO in a genuine and reasonable manner, the director was found to have acted reasonably. However, once it became clear that the ATO was unlikely to resolve the dispute within a reasonable time (three months), it was held that the director should have stopped the company from trading and incurring further debts. The director was found liable for insolvent trading past that critical point.

[42]

HAMILTON v WHITEHEAD (1988) 166 CLR 121 High Court of Australia

ISSUE Can a director be an accessory to a crime committed by a company?

[43]

HAR LOWE'S NOMINEE PTY LTD v WOODSIDE (LAKE ENTRANCE) OIL CO > (1968) 121 CLR 483 High Court of Australia

Directors duties -

Power fo issue shares

FACTS Woodside (Lake Entrance) Oil Co (Woodside), a company involved in oil and gas exploration, entered into a joint venture with another company (Burmah) and sought to further consolidate that business relationship by issuing shares to Burmah. Harlowe's Nominee Pty Ltd (a substantial share~lder in Woodside) sought a court declaration that the share issue was not done for a proper purpose on the basis that Woodside did not have an immediate need for further capital. ISSUE Were the shares issued for an improper purpose? DECISION The shares were issued for a proper purpose. It allowed Woodside greater flexibility to pursue its beneficial commercial relationship with Burmah. Barwick CJ, McTieman and Kitto ]] explained:

FACTS Whitehead was the managing director of a proprietary company charged with a criminal offence dealing with 'prescribed

... although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fa irly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefitting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends.

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43

Corporate liability -

Accessorial liability

LexisNexis Case Summaries

[44]

HICKMAN v KENT OR ROMNEY MARSH SHEEP BREEDERS' ASSOCIATON (1915] 1 Ch 881 Chancery Division UK

Statutory contract -

Company and members

FACTS The articles of association of the company stated that any dispute between a member and the company must first be solved by arbitration, as opposed to litigation. A dispute arose from the expulsion of a member (Hickman) from the company. The member sought to take the dispute to court. The company sought to enforce its dispute resolution provision by applying for the litigation to be stayed. ISSUE Are company members bound by the rules of the company's constitution? DECISION Stay granted because the memorandum and articles constituted a contract between the company and each member - a contract which is enforceable by both the company and the members. The company rules required arbitration.

Note: This legal principle is codified ins 140( 1) of the Corporations Act 2001 (Cth).

Corporations Law high risk unlisted technology stocks. The rest of the funds were used by Adler to make unsecured loans to enti~ related to himself. In civil penalty proceedings, ASIC sought declarations against Alder, Williams and Fodera for contraventions of directors' duties under the Corporations Act 2001 (Cth) ('the Act') - namely: s 180(1) duty of care and diligence; s 181 duty to act in the company's best interests; s 182 duty not to make improper use of position; and related party transaction provisions under Ch 2E of the financial assistance provisions under s 260A. In addition, ASIC also alleged that Alder had breached s 183 (duty not to make improper use of information). · • ., ISSUE Did Alder, Williams and Fodera engage in multiple breaches of the Act identified above? If so, did the business judgment rule in s 180(2) protect the directors from breach of duty of care and diligence liability arising from the loan transaction? DECISION In procuring the loan transaction in the circumstances described above, each of the directors (Alder, Williams and Fodera) had breached their duties under s180 (1) (duty of care and diligence). A reasonable director acting in their position would not allow the company ma~ such a highly speculative and risky loan without at least making sure that proper safeguards were put in place - such as receiving an independent appra isal of the loan through proper due diligence and by getting board approval. the directors failed to ensure that HIH followed authorised investment practices. Their failure to safeguard HIH interests fell short of the standard of a reasonably competent person in their position.

An

[45] HIH INSURANCE LTD AND HIH CASUALTY AND GENERAL INSURANCE LTD, Re; ASIC v ADLER (2002) 41 ASCR 72; (2002] NSWSC 171 New South Wales Supreme Court Directors' duties -

Business judgment rule

FACTS Alder was non-executive director and shareholder of HIH Ltd prior to the company's spectacular collapse into liquidation in 2001. Williams was the CEO and founder of HIH. On behalf of a private company (PPE) controlled by Adler, and with the knowledge of Williams and Fodera (Finance Director), Adler obtained a $10 million unsecured, interest-free loan that was inadequately documented ('the loan transaction') from a subs idiary of HIH. Shareholder disclosure was not made. Nor was the loan disclosed to other members of the board of HIH.

Business judgment rule defence - Adler and Williams both had a 'material personal interest' in -11.e loan transaction which precluded successful reliance on s 180(2). Williams also fa iled under this defence due to his neglect to deal with proper safeguards surround ing the loan transaction. The court held that there was no reason to infer that Williams properly informed himself about the subject matter of any judgment he made (as required under s 180(2)(c) ), for example by obtaining proper independent advice on behalf of HIH.

Alder used $4 million of these funds to buy more shares in HIH with the purpose of stabilising the fa lling share price and giving the impression of confidence in the company. The shares were subsequently sold at a substantial loss. He also used $4 million of the loan to acquire

In addition, with reference to the loan transaction, the court held that Alder had also breached s 181 (to act in the company's best interests - he put his personal interest before the company's interest), s 183 (improper use of information) and, together with Williams, s 182 (improper use of position - both directors sought to benefit from the use of the loans in the belief that the HIH share price would increase). Note that on appeal, the decision was largely confirmed except for the liability under s 183: Adler v ASIC (2003) 46 ACSR 504.

44

45

LexisNexis Case Summaries Each of the directors (Adler, Williams and Fodera) were also held to be in breach of s 209(2) (related party transactions) and s 260D(2)

(financial assistance) respectively. Related party transaction breach - the court found that the $10 million loan was a financial benefit provided to Adler and his related entities in breach of s 208, because no member approval was obtained prior to the payment. The loan transaction could not be said to be an 'arms length transaction' because it was extraord inary generous (unsecured, inadequately documented and interest free). Financial assistance breach- the court held that the result of the loan transaction was to diminish the financial resources ofHIH- it acqu ired no enforceable rights to secure payment of the loan. HIH suffered material prejudice as result of the financial assistance, thereby resulting in a contravention of s 260A. The three directors were involved in the company's contravention of s 260A and were therefore liable under the civil penalty provision in s 260D(2). In the civil penalty decision in ASIC v Adler (2002) 42 ACSR 80, the court examined the .role played by each of the three directors in their contraventions of the Corporations Act 2001 (Cth) and imposed the following sanctions: • Alder - disqualified from management for a period of 20 years; liable to pay a pecuniary penalty of $450,000 and ordered to pay compensation {jointly with Williams) of nearly $8 million. • Williams - disqualified from management for a period of ten years; liable to pay a pecuniary penalty of $250,000 and ordered to pay compensation {jointly with Adler) of nearly $8 million. • Fodera - liable to pay a pecuniary penalty of $5,000. The appeal to the NSW Court of Appeal was largely dismissed, except for upholding that Adler did not breach s 183 of the Act (improper use of information): Adler v ASIC (2003) 46 ACSR 504. The Court of Appeal upheld the civil penalties, subject to recalculation of interest.

[46)

HOLYOAKE INDUSTRIES (VIC) PTY LTD v V-FLOW PTY LTD [2011] FCA 1154 Federal Court of Australia

Corporations Law competitor Variflow Melbourne Pty Ltd (Vari flow) looking to sell its business. Holyoake had the opport~ty to purchase Variflow but declined to do so. The executives relied on internal information on Variflow's business held by Holyoake and decided to purchase the business in their own name without disclosure to Holyoake. The executives obtained bank finance for this purpose by explaining that their acquisition would benefit from their experience and customer links - the latter being confidential information belonging to Holyoake - and by encouraging Holyoake's customers to shift their business to the newly acqu ired VariFlow. Upon rec~ipt of finance, the executives resigned from Holyoake without offering a reason. They incorporated V-Flow Pty Ltd, used it to purchase the business from VariFlow, and began to compete with Holyoake. In an action by Holyoake for breach of fiduciary duties, the executives claimed that they only worked on the purchase transaction after work hours and therefore were not in breach of fiduciary duties. ISSUE Did the executives pursue a business opportunity independently of their employment? DECISION J'he executives conduct was a breach of fiduciary duties. The court held that fiduciary duties do not stop at the end of the work day for opportunities obta ined while acting as a fiduciary. Attempts by the executives, and some the employees who resigned and joined V-Flow, to place themselves outside the scope of their contractual, fiduciary and statutory obligations (s 182 of the Corporations Act 2001 (Cth)) to Holyoake were rejected by the court. The managing director of Holyoake breached s 181 due to deliberate steps taken to advance his own interests at the company's expense. The executives' reliance on Holyoake's confidential infottnation to assist them in acquiring the competing bus iness was held to breach s 183.

at

[47)

HODGSON v AMCOR LTD; AMCOR v BARNES (2012) vsc 94 Victorian Supreme Court

Company officers -

Definition

FACTS A number of executives of Holyoake received information, during the course of their employment, about the company's major

FACTS Hodgson was a senior manager at Amcor Ltd and responsible for the largest division of Amcor A ustralasia. The latter had an annual turnover of nearly $970 million with an annual profit of about $70 to $80 million, employing over 2,600 people. Furthermore, Hodgson was the Group General Manager of Amcor businesses. Hodgson did not participate in the making of board decisions, but was subject to them.

46

47

Directors duties -

Conflict of interest

LexisNexis Case Summaries

Corporations Law

The facts showed that the Amcor board had practical control of the company's finances and strategic direction. Hodgson managed only part of the company and was required to follow the direction of the board.

Smith. The effect of the share issue was to dilute the share capital of Milter and to tum the majority shareh~ng of Ampol into a minority interest. Ampol sought a court declaration that the share issue was done for an improper purpose and a court order for the share issue to be set aside. The directors of Miller stated that the purpose of the share issue was to raise capital.

Hodgson sued Amcor for amounts owing to him on termination of his employment contract. Amcor counterclaimed against Hodgson for breach of fiduciary duties for acting in his own personal interest when selling two of Amcor's businesses. Hodgson denied he was a company officer and therefore argued that the officers' statutory duties (ss 180-183 of the Corporations Act 2001 (Cth) ('the Act') did not apply to him. ISSUE

Was Hodgson a company officer as defined under s 9 of the Act?

DECISION Hodgson satisfied the statutory description of officer in s 9(b)( i) of the Act because it was recognised that a company's business is not governed entirely by the decision of the board. Hodgson was found to be part of the highest level of senior management within Amcor and to have participated in decisions that affected the business of Amcor at a high level. The court explained: Senior management may fulfil a critical role in determining the business processes, commercial direction and ultimately the profit achieved by the div isions of an enterprise. So much is reflected in [s 9]. Unless senior management at this level within a corporate organisation are also regarded as relevant 'officers' for the purposes of the Act, there wou ld be little point in extending the definition beyond company directors and secreraries.

Despite the absence of exercising ultimate control, the court held that Hodgson's participation in the management of Amcor was real and direct. Furthermore, it was also found that he h ad the capacity to affect significantly Amcor's financial standing which is addressed in s 9(1)(b)(ii) of the statutory definition of officer.

[48]

HOWARD SMITH LTD v AMPOL PETROLEUM LTD [1974) AC 821 Privy Council (UK)

Directors duties -

Power to issue shares

ISSUE Did the directors of Miller use their power to issue shares for a proper purpose? DECISION The shares were issued for an improper pui;p~e - it was done mainly to dilute the majority shareholding of Ampol. In reaching this conclusion, the court focused on the substantial purpose for which the power to issue shares was exercised. In adopting this approach, and based on the evidence, the court was not convinced that the primary purpose was to raise capital. Lord Wilberforce observed: 'so far as (legal) authority goes, an issue of shares purely for the purpose of creating voting power has repeatedly been condemned.'

[49]

INDUSTRIAL EQUITY LTD v BLACKBURN > (1977) 137 CLR 567 High Court of Australia

Corporate group -

Separate legal entity

FACTS A holding company sought to treat the profits earned by one of its subsid iaries as its own prior to the profits being passed to the holding company by way of dividend. Given that the holding company was required to prepare group accounts for itself and its subsidiary, the holding compan.y took the view that the corporate group should be treated as a single entity and therefore their course action was permissible. A shareholder challenged the va lidity of the d istribution. ISSUE Can a holding company treat the profits of its subsidiary as its own profits before the subsidiary formally distributes those profits to the holding company?

FACTS Howard Smith and Ampol were involved in a takeover battle for R W Miller Holdings Ltd (Miller). Ampol (and its associate) owned nearly 55 per cent of the shares in Miller. The majority of the directors in Miller favoured the takeover bid by Howard Smith but this had little prospect of success due to Ampol's refusal to accept the offer. To faci litate the favoured outcome, the directors of Miller issued shares to Howard

DECISION The holding company cannot treat the profits of its subsid iary as its own profits before a formal distribution of those profits by way of dividend from its subsid iary. Relying upon Salomon v Salomon & Co Ltd [1 897] AC 22 [63] and Walkerv Wimbome (1976) 137CLR1 [76] , it was held that each company within the corporate group is a separate legal entity - notwithstanding that the Corporations Act 2001 (Cth) permits the preparation of group accounts.

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Corporations Law

LexisNexis Case Summaries

[50)

KINSELA v RUSSELL KINSELA PTY LTD (in liq) (1986) 4 NSWLR 722 New South Wales Court of Appeal

Directors duties -

Creditors; insolvency

FACTS The case involved an insolvent company that had leased two premises to two of its directors for rent far below market value when the company was in a doubtful position of solvency. The liquidator argued that despite the knowledge and unanimous approval of the shareholders, the directors had acted in breach of their duties to the company. ISSUE Did the directors breach their duties to the company, in spite of shareholder ratification? DECISION Once the company becomes insolvent, the director no longer owes duties solely to the shareholder but also to the creditors of the company. Street CJ for the Court of Appeal held that while shareholder interests ordinarily hold primacy, different considerations apply in the context of corporate insolvency. The court held that creditors become entitled to deal with the company's assets as it is 'in a practical sense their assets' and the director's duty extends in an insolvency context to not prejudicing the interests of creditors.

[51)

LEE v LEE'S AIR FARMING LTD [1961] AC 12 Privy Council

Company can contract with its controlling member legal entity

Separate

FACTS Lee was a controlling shareholder and governing director of a company he formed for the purpose of conducting a crop dusting business. Lee was employed by the company as its chief pilot and paid wages for his work. Lee died during employment, in an air crash, and his widow sought workers' compensation. The insurance company denied the claim on the basis that Lee was a director and not a worker (as defined) under the relevant workers' compensation legislation. ISSUE Can a person who owns, operates and is employed by their own company (in effect, a one person company) have a dual status as director and employee? DECISION As a separate legal entity, a company can make a valid and effective contract with one of its members. It is a logical

50

consequence of the decision in Salomon v Salomon & Co Ltd (1897] AC 22 [63] that one person may fun~on in dual capacities. It is possible to have a contractual relationship between the two parties (a director and a company), providing that the company is not a sham. Thus, Lee was a worker and his widow succeeded in the workers' compensation claim.

LENNARD'S CARRYING CO LTD v ASIATIC PETROLEUM CO LTD ·•., (1915] AC 705 House of Lords UK (now Supreme Court UK)

[52)

Corporate liability -

Directing mind

FACTS An explosion in an unseaworthy ship caused the loss of the ship and the cargo. The owner of the cargo (Asiatic) sued the owner of the ship for damages. The shipowner relied on a statutory defence, under shipping law, which allowed the avoidance of liability for damages arising without their 'fault'. Alternatively, the shipowner argued that ev~ if the loss of cargo occurred with the knowledge or as a result of the 'fault' of Mr Lennard, the managing director of another company which managed the ship on behalf of the owner, this was not the fault of the shipowner. T~e evidence showed that the ship had a history of problems with its boiler engines which led to the shipping disaster in this case. ISSUE Could the fault of Mr Lennard be imputed to the shipowner so as to deny reliance on the shipowner's statutory defence? DECISION Mr Lennard was helcT to be the directing mind and will of the shipowner company, therefore his knowledge of the unseaworthy condition of the ship was imputed to the shipowner. Thus, the statutory defence did not apply and Asiatic was entitled to damages. Viscount Haldane LC explained the court's reasoning as follows: ... a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing mind must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation ... if Mr Lennard was the directing and mind of the company, then his action must ... have been an action of the company itself.

51

LexisNexis Case Summaries

[53]

Corporations Law

MACAURA v NORTHERN ASSURANCE CO LTD (1925] AC 619 House of Lords UK (now Supreme Court UK)

Company's property is not property of its members legal entity

Separate

FACTS Macaura, owner of a timber business, sold the business to a company he formed and in which he was the controlling member. Prior to the sale, the business was insured against loss by fire and the insurance policy was in his name. After the sale, when the timber was destroyed by fire, the insurance company refused the company's claim on the basis that the company as owner of the timer was uninsured. ISSUE Does a person who owns, controls and operates a company (in effect, a one person company) retain any legal or equitable interest in the asset transferred to the company? DECISION .The insurance company's refusal to pay was upheld by the court on the basis that property owned by a company is not owned by its members. Upon the transfer of assets into the company's name, the former owner (Macaura) did not retain any legal or equitable interest in those assets. As a separate legal entity, the company was the owner of the asset. It did not have an insurance policy.

[54]

Re McLELLAN; STAKE MAN PTY LTD v CARROLL (2009) 76 ACSR 67 Federal Court of Australia

Directors liability for insolvent trading - Discretionary judicial relief FACTS The company operated a timber business profitably for many years until it embarked on an expansion plan which proved to be costly, troublesome and ultimately affected the company's cash flow. The director acted on professional advice (a specialist accountant, an insolvency practitioner and business restructure specialist) but ultimately the company was placed into external administration. The liquidator pursued the director for insolvent trading for company debts totalling nearly $357,000. The director relied on statutory defences and, in the alternative, sought relief from the court under the judicial forgiveness provision ins 1317S of the Corporations Act 2001 (Cth)

judicial relief from personal liability for the company's debts based on considerations involving honestly, dili§l(nce and fairness. The court found that the director did not profit personally, nor did he disregard professional advice during the period of insolvent trading. The director had taken quick and positive steps to try and solve the company's financial problems and had acted reasonably in the circumstances of the case.

[55]

MERIDIAN GLOBAL FUNDS MANAGEMENT ASIA LTD v SECURITIES COMMISSION . • ., (1995] 2 AC 500 Privy Council (UK)

Corporate liability -

Special rules of attribution

FACTS An investment management company (Meridian) was prosecuted by the NZ Securities Commission for failure to comply with statutory disclosure provisions under securities law (New Zealand Securities Amendment Act 1988 ). An investment officer of Meridian, with authority. to purchase shares, bought a substantial quantity of shares in a co1'1.pany (ENC) in the name of Meridian but which was in fact done for his own purpose without the knowledge of management at Meridian. As a substantial shareholder in ENC, Meridian had a statutory obligation under securities law to notify ENC of this fact. Due to the concealed nature of this transaction, this disclosure did not happen. Upon prosecution, Meridian argued that the investment officer, who exercised this authority improperly, worked under the supervision of the managing director and cotild not be said to represent the mind of Meridian. If successful, it would mean that the knowledge of the investment officer could not be attributed to Meridian and thus the prosecution for breach of securities law would fail. ISSUE Can the actions and knowledge of a person who is not the company's directing mind still be attributed to the company? If so, on what basis can the attribution be made?

DECISION The company traded whilst insolvent and the director's statutory defences failed. Yet, the court granted the director complete

DECISION Meridian was liable for breach of statutory disclosure requirements under securities law but not on the basis of the directing mind approach to corporate liability. Instead, the court examined the statutory context of the offence. In considering the purpose and policy of the statute, the court held that parliament intended to attribute the state of knowledge by the investment officer to Meridian. It was held that if this was not the case, then the objectives of the statute could be

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ISSUE Should a director be given relief from personal liability?

LexisNexis Case Summaries

Corporations Law

[57]

easily sidestepped by delegating tasks involving knowledge of substantial shareholdings to others. The court recognised the need for the courts to develop special rules of attribution in criminal cases where failure to do so would frustrate the policy of the statute under consideration. Lord Hoffman explained:

Company secretary - Authority

In exceptional cases, however, [the company's primary rules of attribution based on the identification approach) will not provide an answer ... the court must fashion a special rule of attribution for the particular substantive ru le. This is always a matter of interpretation ...

FACTS A company secretary hired cars, purportedly on behalf of the company in their capacity as secretary. The cars were purportedly required fo r the purpose of transporting important company customers. The cars, however, were used for the secretary's priva~ ~ urpose. The company resisted payment for the hire charges on the basis that the secretary lacked authority to enter into such contracts.

... [in intended to apply to a company, how was it intended to apply ? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act of the company? One finds the answer ... by ... taking into account the language of the rule (if it is a statute) and its content and policy.

[56]

DECISION The company was bound to the contracts. A modern company secretary has ostensib le authority to enter into contracts connected with the administrative side of the company's affairs (such as employing staff and ordering cars) . The modern company secretary is no longer a mere clerk, but an officer of the company with extens ive duties and re§t'lonsibilities. They are the chief administrative officer of the company and can enter into transactions of an administrative kind required for the day-to-day running of the company's affairs.

Limits to indoor management rule

FACTS Northside, which owned land, was a passive investment company with three directors. Northside purported to grant a bank a mortgage over its land to secure a loan for the benefit of unrelated companies controlled by one of its directors (S). The common seal of Northside was affixed to the loan document by S and witnessed by his son who purported to be the company secretary, but who was not appointed to that position. The articles required the board's authority for the loan transaction which did not occur. Northside claimed that the mortgage was invalid due to non-compliance with its articles. ISSUE

ISSUE What is the authority of a company secretary?

NORTHSIDE DEVELOPMENTS PTY LTD v REGISTRAR-GENERAL (1990) 170 CLR 146 High Court of Australia

Validity of company acts -

Did the indoor management rule apply to benefit the lender?

PANORAMA DEVELOPMENTS (GUILDFORD) v FIDELIS FURNISH!~ FABRICS LTD [1971] 3 All ER 16 Court of Appeal UK

•

•

PARKE v DAILY NEWS LTD [1962] Ch 927 England and Wales High Court (Chancery Division)

[58]

Directors -

•

Duty to act in good faith in best interests of company

FACTS The directors of a newspaper publisher so ld off some of its assets and used part of the sale proceeds to make ex-grat ia payments to those employees made redundant as a result of the sale. These bonus payments were over and a bove all of the lawfu l entitlements due to the redundant employees. Parkes, a shareho lder, sought an injunction to restrain the company from making the bonus payment to employees.

DECISION The unauthorised loan was not binding on the company. The bank cou ld not benefit from the indoor management rule. The circumstances surrounding the loan transaction, and the nature of the transaction, should have put the bank on inquiry. The loan was of no commercial benefit to Northside, nor was it related to the company's business (a non-trading company). Such factors shou ld have made the bank suspic ious and make inquiries which it fa iled to do.

ISSUE Can directors' put the interests of their employees ahead of the interests of the company's shareholders when there is no prospect of commercial advantage to the company?

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LexisNexis Case Summaries DECISION The shareholder's objection to the payment was upheld. The generous payments did not deliver a benefit to the company and therefore were not considered to be in the best interests of the company. Relying upon the precedent in Hutton v West Cork Railway Co (1883) 23 Ch D 654, it was held that 'the law does not say there is to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.'

[59]

PESO SILVER MINES LTD (N.P.L) v CROPPER {1966) 58 DLR (2d) 1 Supreme Court of Canada

Directors duties -

Conflicts of interest

FACTS Cropper was the managing director of the Peso Silver Mines Ltd (Peso). He passed on corporate opportunities to exploit mining claims to Peso. The availability of the mining claims was public knowledge. Peso had fully considered and rejected the mining claims largely on the basis of a lack of funding. Later, when Cropper was reapproached with the opportunity to exploit the mining claims, he personally took up those opportunities. Upon change in control of Peso, the company alleged that Cropper acted in breach of his fiduciary duty. Peso sought a court order declaring that Cropper held his successful commercial interests on trust for Peso and was therefore accountable to the company. ISSUE Did the corporate opportunity exploited by the director come to him as a fiduciary or in his private capaciry? DECISION Cropper did not breach his fiduciary duty to Peso. The facts showed that he exploited corporate opportunities, based on public information, in a private capacity. The court held that Cropper had discharged his fiduciary when he previously presented the opportun ity to Peso and the board specifically rejected it in good faith for sound business reasons. When Cropper was reapproached with the commercial opportunity, it was held that he was approached in his capacity as an individual member of the public. Cartwright J explained: \ On the facts of the case at bar I find it impossible to say that [Cropper] obtaining the interests he holds .. . by reason of the fact that he was a director of [Peso] and in the course of the execution of that office. There is no suggestion in the evidence that the offer to [Peso] was accompanied by any confidential information unavailable to any prospective purchaser or that [Cropper] as director had access to any such information by reason of th is office.

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Corporations Law

[60]

PETERS' AMERICAN DELICACY CO LTD v HEATH (1939) 61 CL~57 High Court of Australia

Members' alteration of company's constitution -

Minority rights

FACTS Special resolutions were passed at a members' meeting of Peters' to alter the articles (constitution) which dealt with the methods of making a bonus issue of shares. The majority of members favoured a method of dividend distribution which saw an increase in dividends to those who held fully paid shares and passed a resolutiolll to achieve this result. The holders of partly paid shares opposed the resolution and challenged the validity of the alteration. The plaintiffs argued that the majority favo ured the interests of fully paid shareholders and, in reliance upon the legal test in Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, argued that the majority had 'failed to act bona fide for the benefit of the company as a whole' to the detriment of the partly paid shareholders. ISSUE Did the majority of members fail to act bona fide for the benefit of the company,:as a whole when altering the constitution? DECISION No. The High Court held that in voting for the resolution the majority of shareholders ~ere not bound to disregard their own interests. The court was satisfied that the resolution did not involve oppression, nor was its purpose outside the scope and purpose of the power to alter the constitution. The High Court was critical of the legal test which said that an alteration must be 'bona fide for the benefit of the company as a whole' adopted in Allen v Gold Reefs of West Africa Ltd. Dixon J explained: • To say that the shareholders forming the majority must consider the advantages of the company as a whole ... seems inappropriate, if not meaningless, and not all events start at such an impossible enquiry. The 'company as a who le' is a corporate entity consisting of all the shareholders ... No-one supposes that in voting each shareholder is to assume an inhuman altruism ...

Note that these critical remarks on the 'bona fide for the benefit of the company as a whole' approach to determine the validity of alternations to the corporate constitution was endorsed by the High Court in Gambotto v WCP Ltd (1995) 182 CLR 432; 16 ACSR 1 [35] which rejected this test and substituted it for the 'proper purpose' test.

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LexisNexis Case Summaries

Corporations Law

REGAL (HASTINGS) LTD v GULLIVER [1967] 2 AC 134 House of Lords UK (now Supreme Court UK)

to enforce payment. The company resisted payment on the basis that the bank should have been aware of the~ternal irregularity within the company.

[61]

Directors' duties -

No conflict rule

FACTS Regal owned a cinema. A subsidiary, Hastings, was set up to buy the leases of two other cinemas with the ultimate aim of selling all three cinemas as a going concern. A precondition of the lease sale was for Hastings to either have its capital fully paid up to a value of £5,000 or for the directors to give personal guarantees for its rent. Regal, however, could only contribute £2,000 to its subsidiary and its directors were unwilling to offer personal guarantees. Four of the directors of Regal, persons nominated by chairman and the company's solicitor subscribed to shares in Hastings to the value of £3,000 and voluntarily provided this extra capital in their personal capacity. Their actions allowed for the lease deal to go through and, later, for all the shares in both companies to be sold. The subscribers to the shares made substantial profits. Regal, under new controllers, claimed that the subscribers were liable to account for their personal gains. ISSUE Did the directors, who acted with honesty and whose actions benefitted the company, act in breach of the no-conflict rule? DECISION The four directors were in a fiduciary position to Regal and made personal profits. They breached their fiduciary duties. It was irrelevant that they acted in good faith and that the company could not take advantage of the opportunity itself. Directors were liable to account to Regal for the profits made upon the sale of their shares. It was held the profiteer as fiduciary, however honest and well-intentioned, cannot escape the risk of being called upon to account under equity. The directors could have protected themselves by obtaining the consent of the Regal shareholders at a general meeting.

[62]

ROYAL BRITISH BANK v TURQUAND (1856) 119 ER 886 Court of Appeal (UK)

Validity of company acts -

Indoor management rule

ISSUE Can an outsider acting in good faith assume that all internal procedures within a company have been complied with? DECISION The loan was binding on the company. An outsider dealing with a company in good faith, and without any knowledge of irregularity, is entitled to assume that internal acts of management have been complied with and is not bound to enquire whetheriilJl\,:h acts have been irregular or not. This is now known as the indoor management rule - designed to give sufficient protection to innocent outsiders dealing with companies. The indoor management rule is codified in s 129 of the Corporations Act 2001 (Cth).

SALOMON v SALOMON & CO LTD [1897] AC 22 House of Lords UK (now Supreme Court UK)

[63]

Separate legctl personality -

Separate legal liability

FACTS Salomon, a sole trac;ler, operated a leather business for over 30 years. He sold the solvent business to a limited company he formed (Salomon & Co Ltd) for nearly £39,000. The company issued shares to seven subscribers, satisfying the statutory requirements of the Companies Act 1862 (UK). Salomon held 20,001 shares, his wife and five children each subscribed to one share. Part of the purchase price was paid by the issue of fully paid shares but the company still owed Solomon £10,000 the balance of the purchase price. 1'he company agreed to pay this amount over time and, to secure this obligation, granted security to Salomon via a floating charge (non-circulating security interest) over its assets. Salomon became a large secured creditor of the company, as well as a controlling major shareholder and managing director. Due to a downturn in the leather industry, the business failed and the company's assets were insufficient to pay all the creditors in full. Salomon, in his capacity as secured creditor, sought priority payment of the company's debt owed to him.

FACTS A bank loaned money to Turquand (a mining company) following the signing of the loan agreement and attachment of the common seal by two of the company directors. Contrary to the requirement in the company's deed of settlement (similar to articles of association), the loan was not approved and passed by resolution of the shareholders at a general meeting. Upon default, the bank sought

On behalf of the unsecured creditors who stood to get little or no payment, the company's liquidator objected to Salomon's priority claim. The liquidator argued that the company and Salomon were one and the same, with Salomon under a duty to personally indemnify (reimburse) the company for its debts.

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LexisNexis Case Summaries

Corporations Law

ISSUE Is a person who owns, controls and operates a company (in effect, a one person company) liable for the debts of the company?

held that the following is the proper approach to determine whether a company secretary, as officer, has breach~s JSO(l):

DECISION So long as a company is not a sham, the company has an existence separate from that of its members and officers. The incorporation of a company as a separate legal entity means that the debts of the company are the company's debts, and not the debts of its members or officers. A legally incorporated company is treated as an independent person, with its own rights and liabilities.

[T]he relevant statutory enquiry [is] what were the responsibilities he [Shafran] had within JHIL [as company secretary], [it is] not an inquiry which [seeks] to divide the capacities in which those responsibilities were undertaken: whether between a role of company secretary and some other role, or otherwise. ·

Thus, Salomon & C o Ltd was neither agent nor trustee for Salomon and thus he was entitled to be paid as a secured creditor, ahead of the other unsecured creditors. The court was satisfied that Salomon & Co Ltd was ~1ot a sham intended to defraud creditors.

SHAFRON v ASIC [2012] HCA 18 High Court of Australia

[64]

Officer -

Duties of care and diligence

FACTS Shafron was general counsel (in-house lawyer) and company secretary of James Hardies Industries Ltd (JHIL). He played an active role in shaping and developing the restructure of the company which occurred in 2001. ASIC alleged that he was involved in multiple breaches of his duty of care and diligence under s 180(1) of the Corporations Act 2001 (Cth) ('the Act') by, inter alia, fa iling to advise the board that a draft ASX announcement was misleading and by omitting to advise the board to consider whether information about a key document (deed of covenant and indemnity entered into by JHIL and its two subsidiaries) needed to be disclosed to the ASX. Shafron argued that his duties of care under s 180(1) were limited to his role as company secretary, as officer, and did not extend to the situations above when he performed in his role as general counsel. Consequently, when performing the latter role, he argued that he was not an officer. In this way, Shafron sought to distinguish the capacities in which he worked and limit his exposure to s 180(1) liability.

The court held that the responsibilities of an officer, such as Shafron, are not confined to statutory responsibilities; they include 'whatever responsibilities the officer had within the corporation, reg"a~ less of how or why those responsibilities came to be imposed on that officer.' In obiter statements, the court held that the key role played by Shafron in the restructure of JHIL and his participation in decision making that affected the whole or a substantial part of the business meant that his conduct satisfied the statutory definition of officer under s 9 of the Act. The court accepted that this conclusion could be reached without the person making the actual decision. The High Court remitted the case to the Court of Appeal for consideration .#in claims to be excused from liability, penalty and disqualification. In the civil penalty decision*in Gillfillan v ASIC (2012] NSWCA 370, Shafron was disqualified from management for a period of seven years and a pecuniary penalty of $75,000 was imposed. This result affirmed the penalty order imposed by the primary judge in ASIC v Macdonald [No 12] (2009) 259 ALR 116.

•

[65] SMITH STONE & KNIGHT LTD v LORD MAYOR, ALDERMEN AND CITIZENS OF THE CITY OF BIRMINGHAM [1939] 4 ALL ER 116 King's Bench Division (UK) Lifting the veil in corporate group -

Agency

DECISION Shafron was held to have breached his duties of care and diligence under s 180( 1) on the basis that it is not possible to sever duties and responsibilities into watertight compartments. The High Court

FACTS Smith, Stone & Knight Ltd (SSK), a paper manufacturer, was the parent company of a wholly owned subsidiary company, Birmingham Waste Co Ltd (BWC) which conducted a paper waste removal business. BWC carried on business using the assets and many other resources of its parent company. The local council compulsorily acqu ired the land occupied by BWC. Due to technical reasons under statute law, BWC cou ld not sue the local council for compensation for disturbance caused

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ISSUE Can the tasks undertaken by a person with a joint title of general counsel and company secretary be compartmentalised when determining liability for breach of officer's duties?

LexisNexis Case Summaries

Corporations Law

to their business. Instead, SSK sought compensation from the local council for the cost of moving the business of its subsidiary company to new premises. The local council objected on the basis of the separate legal nature of companies.

against Spies under s 229( 4) of the Companies (NSW) Code (equivalent to s 182 of the Corporations Act 20'*< (Cth) which prohibits the improper use of position by directors).On appeal, the NSW Court of Criminal Appeal set aside the conviction under s l 76A but exercised its statutory power to convict Spies in respect of the s 229( 4) offence.

ISSUE Can the two separate companies in the corporate group be treated as a single entity and have the corporate veil lifted on the basis of agency? DECISION The corporate veil was lifted on the basis of an agency relationship between the parent company and the subsidiary, entitling SSK to compensation. The court identified an agency relationship between the parent company and the subsidiary by formulating a sixpoint test (below) and answered them in the affirmative with reference to the facts of the case:

Spies appealed to the High Court. ISSUE The key legal issues in this case centred on the interpretation and operation of various criminal law statutes (that are not relevant for purposes of the discussion below). However, in • 11taking that determination, the High Court did consider the nature of directors' duties to creditors in powerful obiter dicta statements that are generally regarded as being authoritative. DECISION

• • • •

Were the profits treated as the profits of the parent? Were the persons conducting the business appointed by the parent? Was the parent the head and brain of the trading venture? Did the parent govern the venture, decide what should be done and what capital should be used in the venture? • Did the parent make the profits by its skill and direction? • Was the parent in effectual and constant control?

[66] SPIES v R (2000) 201 CLR 603; [2000] HCA 43 High Court of Australia Directors duties -

Creditors -

Insolvency

FACTS The case arose in the context of a sale of shares by a company (Holdings Pty Ltd), in which Spies was a major shareholder and director, to another company (Sterling Nicholas) where Spies served in a similar capacity and was one of two directors. The latter company operated at a loss. Spies owed substantial sums of money to Sterling Nicholas. He had also guaranteed the bank overdraft of Sterling Nicholas and had given a mortgage over his home as security. Spies caused both companies to enter into a series of transactions with each other (sale and purchase transaction of shares) with the result Spies ended up selling shares in an apparently worthless company for $500,000 and changed his position from a substantial debtor of Sterling Nicholas to become a substantial secured creditor of that company. At trial, Spies was charged and convicted with defrauding creditors of a company contrary to s l 76A of the Crimes Act 1900 (NSW). Consequently, no verdict was taken in the alternative charge brought 62

The High Court upheld the appeal and ordered a new trial.

In considering the nature of directors' duties to creditors, the majority judgment (Gaudron, McHugh, Gummow and Hayne JJ) of the High Court: (1) analysed .the dicta of Mason J in Walker v Wimbome ((1976) 137 CLR 1 [76f'on directors duties to creditors and endorse the view of commentators that it is 'extremely doubtful' whether Mason J intended to suggest that directors owe a.n independent duty directly to creditors; and

(2) affirmed that directors owe a duty of imperfect obligation to creditors - a duty that is incapable of being enforced directly by creditors. The majority judgment in Spies relied on the judgment of Gummow J in Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51FCR425 and explaine~ Where a company is insolvent or nearing insolvency, the creditors are seen as having a direct interest in the company and that interest cannot be overridden by the shareholders. This restriction does not, in the absence of any conferral of such a right by statute, confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors ... the result is that there is a duty of imperfect obligation owed to creditors, one which creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator.

The majority judgment in Spies concluded: In so far as remarks in Grove v Flavel suggest that the directors owe an independent duty to, and enforceab le by, the creditors by reason of their position as directors, they are contrary to principles and later author ity and do not correctly state the law.

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LexisNexis Case Summaries

[67]

STREETER v WESTERN AREAS EXPLORATION PTY LTD (No 2) (2011) 82 ACSR 1; [2011] WASCA 17 Western Australian Court of Appeal

Directors duties -

Conflicts of interest

FACTS Western Areas Exploration Pty Ltd (WAE) was a dormant company with no capital, employees or income. WAE approached Streeter (S), a regular investor in junior exploration companies, to invest capital in WAE. S became a large shareholder and was appointed to the board as one of three directors of WAE, of which Brailey (B) was the chairman. B, in his capacity as a stockbroker, referred a business proposal to develop a start-up nickel prospecting company to S. S met the proponents of the business proposal and suggested the use ofWAE as the listing vehicle. The proponents rejected this idea for various commercial reasons.

An agreement was reached:

Corporations Law DECISION The West Australian Court of Appeal overturned the decision of the trail judge by a 2:1 maj~y. The majority held that S did not breach his fiduciary duty. The rejection of the initial offer to use WAE as the listing vehicle meant that the subsequent offer was made to S in his private capacity as a venture capital investor. S was approached because the business proponents were seeking seed capital for the nickel project, not because he was a director ofWAE. Although the minority judge found a breach of fiduciiery duty, the Appellate Court unanimously held that WAE was not ent itled to remed ies due to the unsatisfactory explanation for the six year delay in taking legal act ion. Evidence showed that the WAE shareholders were aware of the circumstances surrounding the nickel project proposal at the time but had failed to act. WAE was seen to be exploiting the subsequent changes in economic circumstances fo llowing the extraordinary delay.

[68]

• for S to provide cap ital for the nickel project; • for WAE to receive shares in the new company, Western Areas NL (WANL), in exchange for its shareholder base and its 70 per cent holdings of a gold mining tenement; and • for S to be appointed to the Board of WANL. S purchased the other 30 per cent of that tenement (from an unrelated party) and sold it to WANL without informing WAE. Several years later, WANL discovered large nickel deposits and its share price and fortunes increased dramatically. None of the shareholders of WAE subscribed for shares in WANL despite receiving the prospectus. S was removed from the board of WAE via a resolution at the shareholders meeting. The new management at WAE caused the company to take legal action against S for breach of his fiduciary duty based on conduct which occurred almost six years previously. The trial judge held that S had breached his fiduciary duty to WAE by wrongfully taking up and exploiting the nickel project business opportunity for his private benefit. It was held that S, and his company, held shares in WANL on trust for the benefit of WAE. S appealed. ISSUE Did the director, operating in multiple capacities, wrongfully divert a business opportunity to himself in breach of fiduciary duty?

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SWANNSON v RA PRATT PROPERTIES PTY LTD (i002) 42 ACSR 313; [2002] NSWSC 583 New South Wales Supreme Court

Members -

Statutory deri~ation action

FACTS Swannson (S) was a shareholder and director of RA Pratt Properties (RAPP). S sought court leave under s 237 of the statutory derivative action provisions of the Corporations Act 2001 (Cth) {'the Act') to bring proceedings in the name of RAPP against a former d irector (his divorced wife, Higl;iland) for alleged breach of directors duties. S sought to have Highland compensate RAPP for payments made by Highland out of RAPP's funds to S for his own benefit. ISSUE Did the applicant satisfy the statutory requirements for leave under s 23 7 of the Act? DECISION The court refused to grant leave on the basis that S fai led to show that he was acting in good faith or that the legal action was in the best interests of the company. Palmer J explained the approach to establishing the 'good fa ith' requirement under s 237(2)(b) by noting there are two interrelated factors involved: The first is whether the applicant honestly believes that a good cause of action ex ists and has a reasonable prospect of success ... [this) wou ld

65

LexisNexis Case Summaries

Corporations Law

not simply be a matter of bald assertion ... The second factor is whether the applicant is seeking to bring a derivative suit for such a collateral purpose as would amount to an abuse of process.

affairs, including its financial affairs. Appellate Court decision affirms that the days of the sleeping or passive cHi"-fCtor are over.

Palmer J explained the approach to establishing the 'best interests of the company' requirement under s 237(2)(c):

[70] TESCO SUPERMARKETS LTD v NATTRASS [1972] AC 153 House of Lords UK (now Supreme Court UK)

... it is important to note [this section] requires the Court to be satisfied, not that the proposed derivative action may be, appears to be, or is likely to be, in the best interests of the company but, rather, that it is in its best interests ... [this] is a far higher threshold for an applicant to cross.

The court made a number of valuable observations on the purpose and operation of the statutory derivation action: • it is intended to keep a careful balance between facilitating the bringing of derivative actions and protecting the company from too ready and unwarranted interference in its internal management; • it is clearly the intent of Pt 2F.1A that leave to bring a derivative action must not be given lightly; • an application under s 237(2) is not interlocutory in character; the relief sought is fina l and the applicant bears the onus of establishing the requirements under s 23 7.

[69]

STATEWIDE TOBACCO SERVICES v MORLEY (1990) 2 ACSR 405 Victorian Supreme Court

Directors liability for insolvent trading -

Defence

FACTS Morley was a 'paper' director (in name only) of a small family company who did not partake in management for several decades. When her husband (a director) died, the son took over the management of the business. He caused the company to incur debts to a creditor when the company was insolvent. The cred itor sued Morley for breaching her statutory duty under s 588G of the Corporations Act 2001 (Cth). Morley relied on the statutory defence under s 588H(2), arguing she had reasonable grounds to expect solvency. Evidence showed she did not monitor financial performance of the company. ISSUE Does ignorance of the company's affairs satisfy the s 588H(2) defence against insolvent trading liability? DECISION Directors are personally liable to creditors for insolvent trading. Each company director is expected to take a diligent and intelligent interest in the company's affairs. Ignorance of the company's affairs of the director's own making is no excuse. Morley's ignore arose largely by her own fai lure to make necessary inquiries on the company's

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Corporate liability -

Directing mind

FACTS Tesco Supermarkets was prosecuted for a statutory offence under consumer law for failing to sell goods (washing 'P'oider) at the widely advertised discounted price. Upon depletion of the discounted stock, the shop assistant at a Tesco branch had restocked shelves with washing power at a higher price. The store manager, who had received instruction, training and supervision from the board of directors of Tesco, was unaware of the actions of the shop assistant. Tesco relied on the statutory due diligence defence by argu ing that they took all reasonable care and that the commission of the offence was due to the actions of another person - namely, the branch manager who had fai led to supervise the actions of the store assistant. ISSUE Coulcf'the branch manager, based on these facts, be said to be represent the mind and will of Tesco? If so, the due diligence defence • will fail. DECISION Tesco succeeded under the due diligence defence because the branch manager was held not be part of directing mind of the company. Based on the chain of command set up in this case, the branch manager could not be identified with the company because the board did not delegate any of its functions to the store managers. Tesco's board of directors were found to have retairt\:!d control and that the store managers had to follow their orders. Thus, the actions of the store managers could not be imputed to the company. Lord Reid explained the identification approach in attributing primary corporate liab ility as follows: [the person representing the company's mind] is an embodiment of the company ... and his [or her] mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company.

[71] TIVOLI FREEHOLDS LTD, HERALD & WEEKLY TIMES LTD, In the matter of TIVOLI v FREEHOLDS LTD [1972] VR 445 Supreme Court of Victoria Winding up -

Just and equitable ground

FACTS The company operated theatres. The main purpose of the company, as stated in its objects clause, was to carry on an entertainment 67

LexisNexis Case Summaries

Corporations Law

business. Following the damage to one of its theatres by Ii.re, the company sold its theatres and used its funds to acquire shares in other public companies. It engaged in the practice of corporate-raiding. A minority shareholder objected to the use of the company's fund in this way and petitioned the court to wind up the company on the just and equitable ground.

company (Mandalay) on the understanding that they were to profit from the construction project. Dix~ CJ, Williams and Taylor ]] exp lained:

ISSUE Was it just and equitable to wind up the company on the basis that its funds were used for purposes inconsistent with the company's objects? DECISION It was held that the company be wound up. The company's funds were being committed to other purposes (corporate raiding) which was entirely different from its objects (entertainment business), and outside the general intention and common understanding of its members. In this way, the company's substratum had failed.

[72] TRACY v MANDALAY PTY LTD (1953) 88 CLR 215 High Court of Australia

Promoters -

Definition

FACTS A company, RSC Trading Co Pty Ltd (RSC), purchased land which was to be developed for residential purposes. The company, as promoter, sold the land for a substantial profit to a newly formed development company (Mandalay) for the purpose of building the ten-storey block of home units. The purchase of the land was funded by Mandalay through selling units off the plan. The investors who were persuaded to take shares in Mandalay were ignorant of the profit involved in the purchase. A change in the law prevented the proposed construction from proceeding. An action was brought against the promoters (RSC) by the new management in Mandalay to recover the moneys paid by its shareholders. Some of the sh areholders in RSC took no active part in this project but stood to benefit financially by allowing others in to act on their behalf. ISSUE Could the inactive participants in the company who stood behind the active promoters be deemed to be promoters? DECISION High Court held that the inactive participants in RSC were promoters on the basis that they left it to others to form the

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The word 'promoter' has been said on many occasions to be a word which has no very definite meaning. . .. [it would be] an entire mistake to suppose that after a company is registered its directors are the on ly persons who are in such a position towards it as to be under fiduciary relations to it. A person not a director may be a promoter of a company which is already incorporated, but the capita l of which has not yet been 'ta'-en up, and which is not yet in a position to perform the obligations imposed upon it by its creators ... But it is not only the persqns who take an active part in the formation of a company and the rais ing of the necessary sh are capital to enable it to carry on business who are promoters ... persons who leave it to others to get up the company upon the understanding that they also will profit from the operation may become promoters.

[73] .TRANSVAAL LANDS CO v NEW BELGIUM (TFfANSVAAL) LANDS & DEVELOPMENT CO (1914] 2 Ch 488 England antl Wales Court of Appeal (Civil Division) Directors' duties -

No conflict rule

FACTS Harvey was a director of Transvaal Land Co (TLC) and a trustee for shares in the New Belgium company (NB), with his wife holding the beneficial interest. "'TLC bought a block of shares in NB. Harvey failed to disclose his legal interest in NB (the selling company) and the benefit he obtained from the purchase transaction. Harvey had taken part in the purchase decision by TLC. ISSUE Was Harvey in a position of conflict between his duty as trustee and his duty as director? DECISION A director cannot, on behalf of the company, buy shares or other property for themselves, or from a company in which they have a financial interest. Harvey was held to have a conflict of interest between his duty as trustee to act in the interests of the beneficiary and his duty as director to act in the interests of TLC. Harvey should have disclosed his interest in NB before TLC purchased the property. The contract was voidable due to the conflicting interests.

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LexisNexis Case Summaries

[74]

VASUDEVAN & ORS v BECON CONSTRUCTIONS (AUSTRALIA) PTY LTD & ANOR (2014) 97 ACSR 627; [2014] VSCA 14 Victorian Court of Appeal

Insolvency -

Unreasonable director-related transaction

FACTS The sole director of W Pty Ltd (W) caused W to enter into a deed under which it assumed joint liability for obl igations owed by its director to a third party, B Pty Ltd (B). W also granted a mortgage to B as security for W's obligations under the deed. In exchange, B covenanted not to sue the director for guarantees he had given for the debt. W was later wound up in insolvency. The liquidators found that W had received no benefit from these transactions, but had suffered a substantial detriment. The liquidators applied to court to set aside these transactions on the basis that it would not been entered into by a reasonable person. At first instance, the Victorian Supreme Court found that the transaction was not an unreasonable director-related transaction within the meaning of s 588FDA(l)(b) of the Corporations Act 2001 (Cth). The court held that the fact that a transaction may be in the financial interest of a director is insufficient to bring it within the description of one 'for the benefit of' the director within the meaning of the section. The liquidators appealed the court's decision.

Corporations Law

[75] VINES v ASIC (2007) 62 ACSR 1; [20~] NSWCA 75 New South Wales Court of Appeal Officers (CFO) -

Duty of care and diligence

FACTS Vines, a chartered accountant and former auditor, was the chief financial officer (CFO) of GIO Australia Holdings Ltd (GIO) and had responsibility for the financial affairs of the GIO group. He played a key role in the due diligence process for the profit forecast prepared by GIO in response to a hostile takeover bid launched by A~ for GIO in 1998-1999. GIO forecasted a business profit of $80 million. ASIC alleged that Vines breached his duty of care and diligence, under the precursor to s 180( 1.) of the Corporations Act 2001 (Cth) ('the Act'), as he knew or should have known of relevant facts at that time (the adverse impact of Hurricane Georges on the insurance industry) that should have led him to make a downward revision of the profit forecast. The hurricane struck North and Central America a month after the takeover bid was announced. GIO subsequently announced a loss. The trial judge, Austin J, found seven breaches of the duty of care by Vines: (2005) 55 ACSR 619. In that case, two other executives ofGIO were also found to have breacl\ed their duty of care but did not appeal. Vines appealed to the NSW Court of Appeal.

ISSUE Does the unreasonable director-related transaction provision of the Corporations Act cover both direct and indirect benefits to directors?

ISSUE Did Vines, as a company officer, breach his statutory duty of care and diligence when in respect of profit forecasts made during a takeover bid?

DECISION The Court of Appeal unanimously overturned the decision and ordered that the deed and mortgage be declared void due a breach of s 588FDA. The court held that the natural and ordinary meaning of 'for the benefit of' accords to the objective of the section of preventing directors stripping benefits out of companies to their own advantage

DECISION Three of the seven breaches of the duty of care by Vines were upheld by a majority of the Court of Appeal. The majority (Spigelman CJ and Ipp J) upheld the following contraventions of duty of care by Vines:

The Appellate Court disagreed with the more restricted meaning of 'for the benefit of' given by Brereton J in Re Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354 and accordingly declined to follow that approach.

70

•

• When he signed the management sign-off having failed to take positive steps to advise the Due Diligence Committee of the basis of the assumptions underlying the profit forecast which he knew or ought to have known was improbable. • When he supported the integrity of the GIO profit forecast to the Due Diligence Committee when he knew or ought to have known it was improbable. • When, in the period after the Part B statement (as required then under the old law on takeovers) was issued by GIO, he failed to

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Corporations Law

LexisNexis Case Summaries give attention to whether the GIO Re profit forecast would be achieved.

The court held that the directors misapplied the company's funds and were in breach of their duties. ~ ,

Civil penalties: As a result of these findings, the majority judgment of the Court of Appeal upheld the decision by Justice Austin to deny Vines relief from liability (ss 1317S and 1318 of the Act). However, the penalty of $100,000 imposed by the trial judge was reduced to $50,000 by the Court of Appeal. The disqualification order imposed by the trial judge, which banned Vines from managing a corporation for three years, was set aside by the Court of Appeal: Vines v ASIC [2007] NSWCA 126.

Mason J noted, in obiter statements, that creditor interests were entitled to consideration because the transaction offered no advantage to Asiatic and exposed the company to substantial loss with potential prejudice to its unsecured creditors. Mason J explained: [In respect of the duty of directors to consider the best interests of the company] it should be emphasized that the directors of a company in discharging their duty to the company must take into accour:it t~e interest of its shareholders and its creditors. Any failure by the directors to taken into account the interests of creditors will have adverse consequences for the company as well as for them.

Justice Santow, in dissent, held that relief should be granted given the nature of the contraventions as no more than errors of judgment, as not being flagrant, as involving no dishonesty on the Appellant's part, and where only three out of seven contraventions were upheld on appeal.

See Spies v R (2000) 201 CLR 603; [2000] HCA 43 [66] for the significance of these ob iter statements.

[76] WALKER v WIMBORNE (1976) 137 CLR 1 High Court of Australia

[77] WAYDE v NSW RUGBY LEAGUE LTD (1985) 180 CLR 459; 10 ACLR 87 High Court of Australia

Corporate group as separate legal entity creditors - Insolvency

,

Directors duties:

Shareholder remedies - Oppressive, unfairly prejudicial or unfairly discriminatory cond~ct

FACTS Several companies in a group had common directors who transferred funds within the group to satisfy some debts. The directors did not specifically consider the abi lity of the borrower to repay the debts. The case concerned the propriety of that corporate policy under which the directors of Asiatic shifted funds among companies in the group. The companies went into liquidation. The liquidator of Asiatic took action against the former directors of Asiatic to recover the amount of loss caused to the company as a result of the directors' misfeasance.

FACTS The directors of the NSW Rugby League Ltd (NSWRL) passed a resolution which eliminated a team called Wests from the rugby competition. The articles of association (constitution) of NSWRL allowed the board to determine the number of teams in the competition. The board's decision was based on the need to reduce the number of the teams from 13 to 12 in order to make the competition more attractive to the teams (shorter playing season and potentially less injuries to players) and the public. Wayde, on behalf of Wests, applied for a court order that the actions ofNSWLR was a breach of the predecessor of s 232(e) of the Corporations Act 2001 (Cth).

ISSUE Must directors think about their own company individually in a group or can they prefer group interests? DECISION The High Court held that each company within a group is a separate and independent legal entity and therefore a director has a duty to consider its interests alone when deciding whether payments should be made to other companies. Mason J explained:

ISSUE Was the board's decision oppressive, unfairly prejudicial or unfairly discriminatory to a member?

[I]n the absence of contract creating some additional right, the creditors of company A, a subsidiary company within a group, can look only to that company fo r payment of their debts. They cannot look to company B, the holding company, for payment.

DECISION The board's decision did not breach the equivalent of s 232 of the Corporations Act. The decision to exclude Wests was made in good faith and did not constitute oppression. Although the effect of the decision was harsh on Wests, the board acted within their powers and their decision was made for the overall benefit of the competition. The board had reasonably balanced the interests of NSWRL against the detriment caused to Wests. Applying an objective test, it was held

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LexisNexis Case Summaries

Corporations Law

that the decision reached was not one that no reasonable director would have made. Thus, Wests had failed to show that the prejudice or discrimination suffered by the club was unfair, as required under s 232 . Brennan J exp lained:

Following the stock market crash of 1987, the banks were concerned about the repayment of their unsecured~ns . In 1998, it became clear that BGL had insufficient funds to make the loan repayments. The banks refused to grant further funding and could call for full repayment 'on demand'. This left BGL little choice but to pursue workout negotiations.

Where the directors of a company are empowered to discriminate among its members and to prejudice the interests of one of them, the adoption of a resolution which has that effect and which is made in good faith and for a purpose within the power is not, without more, [in breach of s 232). Prima facie, it is for the directors and not for the co urt to decide whether the furthering of a corporate object which is inimical to a member's interest should prevail over those interests or whether some balance should be struck between them.

[78] WESTPAC BANKING CORPORATION v THE BELL GROUP (in liq) (No 3) (2012) 89 ACSR 1; [2012] WASCA 157 West Australian Court of Appeal Directors duties: creditors - Insolvency - Duty to act in the best interests of the company in corporate group context

Note: It is relevant to note that this complex and mammoth case in the Bell litigation (litigated over 1 7-year period and generating over 2,600 pages of judgment) considered multiple breaches of law by the company directors. The discussion below is confined to two significant aspects of this case, namely: (1) the directors' duty to act in the best interests of the company in the context of corporate groups; and (2) the scope and ambit of the common law fiduciary duty of directors to consider creditor interests during insolvency. It should also be noted that the reasoning of the majority judgment in this case, on the latter issue, has been criticised by academics and by senior members of the judiciary writing extracurially. The High Court of Australia granted leave to appeal. The case, however, was settled out-of-court on the eve of the High Court hearing in 2013. FACTS The litigation arose from a refinancing (workout) arrangement undertaken by the directors of the Bell Group Ltd (BGL) to avoid impeding liquidation. There were more than 100 companies, domestic and international, in BGL that were connected through interlocking loans. BGL had raised finance from a number of banks in Australia and the UK. At the time of the refinancing, the loans were unsecured and several subsidiaries in BGL had assets that were not exposed to the parent company's debt obligations.

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The directors of BGL, in the context of financial distress, took action to convert the unsecured loans into secured obligations and to bring all the companies in BGL into the security agreement so that their assets could be used to pay down the secured debts. This was done to give BGL some breathing space and to try and restructure its affair~ ~ ensure the survival of the group of companies. This attempt at corporate rescue ultimately fa iled 12 months later and the companies in BGL were placed in liquidation. The banks realised their security and recovered A$283 million from asset sales. The liquidator commenced proceedings against the banks to recover the proceeds on the basis of various claims, including a breach of directors' duties because the directors knew the companies were insolvent and that the refinancing benefited the banks to the prejudice of other (nonbank) creditors . Relying on the rule in Barnes v Addy ( 1874) LR 9 Ch App 244 (dea1'ing with accessorial liability), the liquidator sought to prove that the banks knowingly participated in breaches of directors' duties and knowingly received assets resu lting from these breaches.

It was common ground in the litigation that the directors of BGL did not act for any dishonest or fra udulent reason, or to gain any personal advantage from the refinancing transaction. The trial judge (Owen J) held that the conduct of the directors had failed to demonstrate consideratioR of the interests of the creditors of the group companies that were pledging their otherwise unsecured assets for the benefit of the parent company (BGL). His Honour, however, noted that the relevance of cred itors interests would wax and wane depending upon the circumstances and the significant of the risk to creditors and that this called for a balancing exerc ise when determining breach of directors' duties to consider cred itor interests: Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR l. All the banks appealed to the Western Australian Court of Appeal (originally on 144 grounds). ISSUE ( 1) Did the directors of BGL breach their fiduciary companies by fa ilure to consider the interests of each company in BGL separately; (2) and by causing detriment to the creditors of the other companies in the group?

75

LexisNexis Case Summaries

Corporations Law

DECISION The appeal judgment, by a 2:1 maionty (Lee and Drummond AJJA; Carr AJA) confirmed the bank's liability but adopted a different approach to the trial judge on the issue concerning directors' duties to consider interests.

This approach seems to elevate the duty to a direct one to creditors, or at a minimum makes them the sole st~eholder group, rather than including their interests as merely one of a number that must be considered by directors. It appears to depart from orthodox authorities (Walker v Wimbome (1976) 137 CLR 1 [76]; Spies v R (2000) 201 CLR 603 [66]).

(1) Lee AJA held that the failure of the Australian directors to consider at all whether participation in the refinancing transactions was in the best interests of each company individually, meant that the Australian directors could not be heard to say that they had a bona fide belief that they had so acted. Consequently, both the trial judge and the majority in Bell held that it was unnecessary to apply the Charterbridge test in Charterbridge Corp Ltd v Lloyds Bank Ltd [1 970] Ch 62 (were the directors' decisions to enter into the transactions such that no intelligent and honest director could have made in the interests of each company in that group?).

In dissent, Carr AJA was critical of the judicial approach adopted by the trial judge and the majority in Bell on the basis that it was 'impossible or at the very least totally unrealistic commercially to isolate the interests of one company in the group from another'. His Honour held it was appropriate to apply the objective test in Charterbridge in default of any actual consideration by the directors of the interests of other creditors. Adopting this approach, his Honour held that the directors did not breach their fiduciary duties and explained: The [refinancing] transactions provided the opportunity to continue in business and allowed some time in which to achieve a restructure of the Bell group ... it cannot be said that the decisions to [do so] were such that no intelligent and honest director could have made them in the interests of each company in that group. ... it is helpful to stress that this was not a case of giving security simply and merely to avoid liquidation of the Bell group; it was to avoid those liqu idations and the consequent very substantial losses of asset values ... The Bell directors' decision cannot ... be characterised as irrational in the Charterbridge sense. It simply cannot be the law that in those circumstances, contrary to commercial reality, they [the Bell directors) were obliged solemn ly to sit down and work their way through the balance sheets of some 70 subsid iaries nearly all of whom were basically shells. (2) On the legal treatment of directors' duties to creditors, unlike the balancing exercised advocated by the trial judge, Drummond AJA held: Directors ... must, if the company is sufficiently financially distressed, have regard and give proper effect to the interests of creditors ... courts will now intervene in a appropriate case, irrespective of the directors' beliefs and business judgments, to ensure that creditors are properly protected. 76

The approach adopted by Drummond AJA in Bell is also questionable in light of the long standing judicial practice of non-interference with directors' business decisions and the general undesirability of judging commercial decisions via a rear-view mirror. In dissen~ Carr AJA warned against 'the legally impermissible procedure of looking over the directors' shoulders as they made the business decision'.

[79] WHITEHOUSE v CARLTON HOTEL PTY LTD (1987) 70 ALR 251 High Court of Australia Directors duties -

Power to issue shares

FACTS Mr Wiitehouse was the governing d irector of Carlton Hotel. Control over the voting in the company was achieved by maintaining three classes of shares: • • C lass A shares - unrestricted voting rights; issued to Mr Whitehouse; • C lass B shares - deferred voting rights arising upon death of Mr Whitehouse; issued to Mrs Whitehouse; • C lass C shares - no voting rights but with rights to share in profits and surplus capital only; issued to the two sons and four daughters

•

Upon divorce, the sons aligned themselves with their father and the daughters with their mother. Mr Whitehead issued C lass B shares to his sons in order to prevent his daughters exercising control over the company. Later, after Mr Whitehead fe ll out with his sons, he directed the company to challenge the share issue as being invalid as it was done for an improper purpose. ISSUE Was the share allotment made by the director for a proper purpose? DECISION The share allotment was invalid. It was done for an improper purpose - to manipulate control and take control away from his wife after his death. Mason, Deane and Dawson JJ explained: The reason why ... it is impermissible for the directors ... to exercise a fiduciary power to allot shares for the purpose of destroying or creating a majority voting power ... [lies in the fact that) it is simply no part 77

LexisNexis Case Summaries

Index

of the function of the directors as such to favou r one shareholder or group of shareholders ... fo r the purpose of diluting the voting power attached to the issued shares held by some oth er shareholders or group of shareholders.

"""'"(

References are to case numbers A

[80]

Re YENIDJE TOBACCO CO LTD

[1916] 2 Ch 426 England and Wales Court of Appeal (Civil Division) Winding up -

Just and equitable ground

company officer, of .... 64 directors' duties of .... 4, 5, 6, 10, 24,3 2, 45

Agency existence of .... 1, 22, 65 lifting the corporate veil .... 65 Alteration of company constitution .... 15 members, by .... 60 minority rights on .... 35, 60 proper purpose, for .... 35, 60 '

A profitable company had two shareholders who were also the only directors. Both of them had equal rights of management and voting. Both were not on speaking terms following prior hostilities in their relationship. There was no provision in the company's constitution for resolution of dead locks following their constant disagree ments. A ll correspondence between them was passed through the company secretary. One sh areh older petitioned the court to wind up the company on the just and equitable ground.

Assets, company not property of members .... 53

Was it just and equitable to wind up the company on the basis of complete deadlock in management?

Australian Secyrities and Investments Commission (ASIC) model litigant, as .... 5

FACTS

ISSUE

DECISION It was held that the company be wound up. The refusal to meet on business matters, the continued quarrelling and the state

of animos ity between the two directors made it impossible for each to have confidence in each other. Their working relationship, predicated on mutual co-operation, trust and confidence had broken down, giving rise to the ground for dissolution of the company.

Chairman care and diligence, duty of .... 9 ·~ (CFO) Chief Financial Officer care and diligence, duty of .. .. 75 Companies assets of are not assets of members .... 53 company acts, validity of .... 56, 62 continuous disclosure obligations

Auditors duties of .... 24

.... 6 directing mind of .... 52, 70 dual status as employee and director .... 51 outsiders and .... 30 separate legal entity .... 63 , 76 separate legal liab ility .... 63 statutory contracts .... 30

•

Authority apparent or ostensible .... 33

Company in liquidation statutory derivative action, availability to .... 21

B Bias liquidators, of .... 3

•

Company officer care and diligence, duty of .... 64 CFO, duty of care and diligence .... 75 company secretary, authority of ... . 57 definition .... 47

Breach of duties directors, where shareholders rat ified .... 50 Business judgment rule .... 10 defence, as .... 10, 45

c

Company secretary authority of .... 57 care and di ligence, duty of .... 64

Care and diligence business judgmen t rule as defence .... 10, 45 Chai rman's duty of .... 9 CFO duty of .... 75

78

Conflicts of interest .... 59 director acting in multiple capacities .... 67

79

Index

LexisNexis Case Summaries

Conflicts of interest - cont'd director's duties and .... 67 no conflict rule .... 12, 23, 34, 39, 46, 59, 61, 73

Definitions company officers .... 4 7 director .... 40 promoters .... 72

Continuous disclosure obligations directors' duty of .... 6, 32

Directing mind of corporation .... 52, 70 liability and .... 70 special rules of attribution of .... 55

Contractual liability apparent/ostensible authority .... 33 loan guarantees where no authority to execute .... 16

Directors accessory to company crime, as .... 42 acting in multiple capacities .... 67 business judgment rule .... 10 care and diligence, duties of .... 4, 5, 6, 10, 24, 32, 45 care, skill and diligence, of .... 24 continuous disclosure obligations .... 6, 32 creditors, duties to .... 66, 76, 78 discretionary judicial relief, where .... 41, 54 employee, dual status as .... 51 group interests over individual corporations, preferring .... 76, 78 management powers .... 14 no conflict rule .... 12, 23, 34, 39, 46,59,61, 73 oppressive, unfairly prejudicial or discriminatory conduct .... 77

Corporate constitution alteration .... 15, 35, 60 enforcement of .... 44 members bound by .... 44 Corporate groups agency relationship, existence of .... 1, 22, 65 duty to act in best interests of company .... 76, 78 group interests over individual corporations .... 76, 78 lifting the corporate veil and .... 65 separate legal identity .... 49, 63, 76, 78 subsidiary, profits of .... 43 Creditors directors duties to .... 66, 76, 78 Crime director as accessory to corporate .... 42

Directors' duties .... 11, 24, 43, 45, 48,69, 79 act in good faith in best interests of company .... 17, 58 acting in mu ltiple capacities, where .... 67 breach and shareholder ratification .... 50 care and diligence .... 4, 5, 6, 10, 24,32,45 care, skill and diligence, of .... 24

D Defences business judgment rule .... 10 directors, to insolvent trading .... 8, 27, 69 ignorance of company's affairs .... 69 'some other good reason' defence

.... 27

G

conflicts of interest .... 67 continuous disclosure obligations .... 6, 32 creditors, to .... 66, 76, 78 definition .... 40 judicial forgiveness for breach .... 36 legal adviser, accessorial liability .... 11 no conflict rule .... 12, 23, 34, 39, 46,59,61, 73 'phoenix' activity of ... . 11

~dfaith

directors' duty to act in .... 17, 58

Indoor management rule .... 56, 62 limits to .... 56 Insolvency liquidators, independence of .... 3 statutory deman